{"id":"crs_RS22398","pid":"crs_RS22398_0","input":"During the 112 th Congress, Members faced the issue of whether to extend permanent normal trade relations (PNTR) status to Russia and Moldova. On November 16, 2012, the House passed (365-43), and on December 6, 2012, the Senate passed (92-4) H.R. 6156 , which did just that, among other things. President Obama signed the legislation into law ( P.L. 112-208 ) on December 14, 2012. The 113 th Congress may face the issue of authorizing PNTR for at least two other countries\u2014Tajikistan and Kazakhstan.\n\n\tMFN\/NTR and the GATT\/WTO\n\nMost-favored-nation (MFN) treatment is a fundamental principle of the General Agreement on Tariffs and Trade (GATT 1994), which governs trade in goods; of the General Agreement on Trade in Services (GATS); and of the agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs). In essence, the principle requires that each WTO member treat the product of another member no less favorably than it treats a like product from any other member. If a member country lowers a tariff or nontariff barrier in its trade with another member that \"concession\" must apply to its trade with all other member countries.\nThe United States grants all but a few countries, namely Cuba and North Korea, normal trade relations (NTR), or MFN, status. In practice, duties on the imports from a country that has not been granted NTR status are set at much higher levels\u2014rates that are several times higher than those from countries that receive such treatment. Thus, imports from a non-NTR country can be at a significant price disadvantage compared with imports from NTR-status countries.\nThe WTO agreements also require that MFN treatment be applied \"unconditionally.\" However, when a WTO member determines that it cannot, for political or other reasons, accede to this or any other GATT\/WTO principle toward a newly acceding member, it can \"opt-out\" of its obligations toward that member by invoking the non-application provision (Article XIII of the WTO or Article XXXV of the GATT). In so doing, the WTO member is declaring that the WTO obligations and mechanisms (e.g., the dispute settlement mechanism) are not applicable in its trade with the new member in question. \nInvoking the non-application clause is a double-edged sword. Although it relieves the member invoking the provision of applying MFN or any other obligations toward the new member, it also denies the benefits and protections that the WTO would provide to the former in its trade with the latter.\n\n\tJackson-Vanik Amendment and Communist and Former Communist Country GATT\/WTO Members\n\nIn 1951, the United States suspended MFN status to all communist countries (except Yugoslavia) under Section 5 of the Trade Agreements Extension Act. That provision was superseded by Title IV of the Trade Act of 1974.\nSection 401 of Title IV requires the President to continue to deny nondiscriminatory status to any country that was not receiving such treatment at the time of the law's enactment on January 3, 1975. In effect, this meant all communist countries, except Poland and Yugoslavia. Section 402 of Title IV, the so-called Jackson-Vanik amendment, denies the countries eligibility for NTR status as long as the country denies its citizens the right of freedom of emigration. These restrictions can be removed if the President determines that the country is in full compliance with the freedom-of-emigration conditions set out under the Jackson-Vanik amendment. The Jackson-Vanik amendment also permits the President to waive full compliance with the freedom-of-emigration requirements if he determines that such a waiver would promote the objectives of the amendment, that is, encourage freedom of emigration. While Title IV addresses only freedom of emigration, Congress has used the law to press the subject countries on a number of economic and political issues. Removal of a country from Jackson-Vanik restrictions requires Congress to pass legislation.\nCzechoslovakia was an original signatory to the GATT in 1947. In 1951, the United States suspended MFN treatment because it had become communist. Because Czechoslovakia was an original signatory to the GATT and not a newly acceding member, the non-application provision did not apply. Instead, the United States sought and obtained from the other GATT signatories approval for the suspension of MFN treatment.\nThe United States invoked the non-application provision when Romania and Hungary became GATT signatories in 1971 and 1973, respectively. These restrictions no longer applied after the United States, through legislation, extended unconditional MFN, or permanent normal trade relations (PNTR), status to Czechoslovakia (later the Czech Republic and Slovakia), Hungary, and Romania after the fall of the communist governments in those countries.\nThe United States granted PNTR to Albania, Bulgaria, and Cambodia before these countries acceded to the WTO, making it unnecessary to invoke the non-application provision. This was also the case for the former Soviet republics of Estonia, Latvia, and Lithuania.\nMongolia joined the WTO on January 29, 1997, more than two years before the United States granted it PNTR. During that time, the United States invoked the non-application provision. It also invoked the provision with Armenia when it joined the WTO on February 5, 2003, and received PNTR on January 7, 2005, and with Kyrgyzstan when it joined the WTO on December 20, 1998, before receiving PNTR on June 29, 2000. Each bill authorizing PNTR for Mongolia, Armenia, Kyrgyzstan, and Georgia contained a \"finding\" that extending PNTR would enable the United States to avail itself of all rights within the WTO regarding that country. The United States invoked Article XIII also in its trade relations with Vietnam on November 7, 2006, before PNTR for Vietnam went into effect, but had granted Ukraine PNTR status in 2006 prior to that country's accession to the WTO. It invoked non-application regarding Moldova and Russia prior to thsoe countries receiving PNTR status. \n\n\tThe Case of China\n\nAs with the other communist countries, China was subject to the provisions of the Jackson-Vanik amendment. The United States denied China MFN status until October 1979, when it was granted conditional MFN under the statute's presidential waiver authority. China acceded to the WTO on December 11, 2001. Congress passed legislation ( P.L. 106-286 ) removing the Jackson-Vanik requirement from U.S. trade with China and authorizing the President to grant PNTR to China, which he did on January 1, 2002. However, in the legislation, Congress linked the granting of PNTR to U.S. acceptance of conditions for accession to the WTO. It states that prior to making a determination on granting PNTR, \"the President shall transmit to Congress a report certifying that the terms and conditions for the accession\" of China to the WTO \"are at least equivalent to those agreed to\" in the bilateral agreement the United States and China reached as part of the accession process.\nChina's bilateral agreement with the United States, which is contained in the final accession agreement, contains provisions for special safeguard procedures (codified in U.S. law as Sections 421-423 of the Trade Act of 1974) to be used when imports cause or threaten to cause market disruption in the United States. It also provides for a separate safeguard procedure in the case of surges in imports of textiles and wearing apparel from China, as well as special antidumping and countervailing duty procedures. All of these provisions have time limits. The legislation authorizing PNTR for China also provided for the establishment of a congressional-executive commission to monitor human rights protection in China to replace Congress's focus on this issue that occurred during the annual NTR renewal debate.\n\n\tProspective WTO Accessions\n\nCountries that are still subject to the restrictions have also applied for membership to the WTO and are at various stages of the accession process: Azerbaijan, Belarus, Kazakhstan, Tajikistan, and Uzbekistan. Congress usually has no legislative role in the accession of countries to the WTO. However, the legislative requirement for repeal of Title IV provides a role, albeit indirectly, in the cases of the above-mentioned affected countries by giving Congress leverage on the negotiation of conditions for WTO accession.\nCongress has several options. It could repeal the restrictions before the country(ies) actually enter(s) the WTO, completely separating the issues of Title IV repeal and WTO accession. This is the course that Congress has followed in most cases to date and would allow the United States to fulfill the unconditional MFN requirement prior to the country acceding to the WTO. Many of the countries in question, view the Jackson-Vanik requirements and the rest of the Title IV restrictions as Cold War relics that have no applicability to their current emigration policies and, more generally, to the types of governments they now have. They assert that their countries should be treated as normal trade partners and, therefore, that the restrictions should be removed unconditionally. \nA second option would be for Congress to link the granting of PNTR with the country's accession to the WTO. For example, Congress could follow the model established with PNTR for China by requiring the President to certify that the conditions under which the country is entering the WTO are at least equivalent to the conditions that the United States agreed to under its bilateral accession agreement with the country. It can be argued that in this way, Congress helped define, at least indirectly, the conditions under which China entered the WTO. However, the candidate countries would probably bridle at such treatment, asserting that they would be asked to overcome hurdles that are not applied to most of the other acceding countries, especially countries not subject to Jackson-Vanik.\nDuring the debate on PNTR for Russia, some Members of Congress raised concerns about Russia's fulfillment of commitments in certain areas and wanted some assurances. H.R. 6156 , which authorized PNTR for Russia, contained provisions that required \nthe USTR report annually to the Senate Finance Committee and the House Ways and Means Committee on Russia's implementation of its WTO commitments, including sanitary and phytosanitary (SPS) standards and IPR protection and on acceding to the WTO plurilateral agreements on government procurement and information technology; the USTR report to the two committees within 180 days and annually thereafter on USTR actions to enforce Russia's compliance with its WTO commitments; the USTR and the Secretary of State report annually on measures that they have taken and results they have achieved to promote the rule of law in Russia and to support U.S. trade and investment by strengthening investor protections in Russia; the Secretary of Commerce to take specific measures against bribery and corruption in Russia, including establishing a hotline and website for U.S. investors to report instances of bribery and corruption; a description of Russian government policies, practices, and laws that adversely affect U.S. digital trade be included in the USTR's annual trade barriers report (required under section 181 of the Trade Act of 1974); and the negotiation of a bilateral agreement with Russia on equivalency of SPS measures. \nA third option would be for Congress to not repeal Title IV at all. This option would send a strong message to the partner country of congressional concerns or discontent with its policies or practices without preventing the country's entrance into the WTO. At the same time, the United States would have to invoke the non-applicability provision (Article XIII) in its trade relations with that country. The United States would not benefit from the concessions that the partner country made in order to accede to the WTO. The United States would not be bound by WTO rules in its trade relations with the country, nor would that country be so bound in its trade with the United States. For example, the WTO dispute settlement body mechanism would not be available to the two countries in their bilateral trade relationship.\nIn determining which option to exercise, Congress faces the balance of costs and benefits of each. In addition, how Congress treats each of the countries relative to the others could have implications for U.S. relations with them. \nThe 113 th Congress may face the issue of extending PNTR to at least two r countries. On December 10, 2012, WTO members invited Tajikistan to join, subject to that country's ratification of its accession package. In addition, Kazakhstan may accede to the WTO in 2013. Both countries are currently subject to Title IV of the Trade Act of 1974.","output":"Unconditional most-favored-nation (MFN) status, or in U.S. statutory parlance, normal trade relations (NTR) status, is a fundamental principle of the World Trade Organization (WTO). Under this principle, WTO members are required unconditionally to treat imports of goods and services from any WTO member no less favorably than they treat the imports of like goods and services from any other WTO member country. Under Title IV of the Trade Act of 1974, as amended, most communist or nonmarket-economy countries were denied MFN status unless they fulfilled freedom-of-emigration conditions as contained in Section 402, the so-called Jackson-Vanik amendment, or were granted a presidential waiver of the conditions, subject to congressional disapproval. The statute still applies to some of these countries, even though most have replaced their communist governments. The majority of these countries have joined the WTO or are candidates for accession. Several countries are close to completing the accession process, and Congress could soon face the issue of what to do about their NTR status to ensure that the United States benefits from those accession agreements.\nDuring the 112th Congress, Members faced the issue of whether to extend permanent normal trade relations (PNTR) status to Russia and Moldova. On November 16, 2012, the House passed (365-43), and on December 6, 2012, the Senate passed (92-4) H.R. 6156, which did just that, among other things. The legislation also included provisions\u2014the Magnitsky Rule of Law Accountability Act of 2012\u2014that impose sanctions on individuals linked to the incarceration and death of Russian lawyer Sergei Magnitsky. President Obama signed the legislation into law (P.L. 112-208) on December 14, 2012.\nThe 113th Congress may face the issue of extending PNTR to at least two other countries. On December 10, 2012, WTO members invited Tajikistan to join, subject to that country's ratification of its accession package. In addition, Kazakhstan may accede to the WTO in 2013. Both countries are currently subject to Title IV of the Trade Act of 1974."}
{"id":"gao_GAO-05-249","pid":"gao_GAO-05-249_0","input":"\tBackground\n\nThe federal government acquires a wide variety of capital assets for its own  use including land, structures, equipment, vehicles, and information  technology. Large sums of taxpayer funds are spent on these assets, and  their performance affects how well agencies achieve their missions. To  directly acquire an asset, agencies generally are required to have full up- front BA for the total asset cost\u2014usually a sizable amount. This  requirement allows Congress to recognize the full budgetary impact of  capital spending at the time a commitment is made; however, it also means  that the full cost of an asset must be absorbed in the annual budget of an agency or program, despite the fact that benefits may accrue over many  years. This up-front funding requirement has presented two challenges for  capital planning and budgeting at the federal level.\nOne challenge is how to permit \u201cfull cost\u201d analysis and to promote more  effective capital planning and budgeting by allocating capital costs on an  annual basis to programs that use capital. Allocating capital costs over the  assets\u2019 useful lives ensures that the full annual cost of resources a program  uses is considered when evaluating the program\u2019s effectiveness. It can  make program managers more aware of on-going capital costs, thus  promoting more effective decision making for capital. It may also  contribute to equalizing comparisons across different programs or different  approaches to achieving similar goals.\nA second challenge is how to address the possible bias against the  acquisition of necessary capital assets that may be created by spikes (large,  temporary, year-to-year increases in BA), which can make capital assets  seem prohibitively expensive in an era of resource constraints. GAO has  reported in the past that agencies view up-front funding as an impediment  to capital acquisition because of the resulting spike in BA. CAFs have  been suggested as a capital asset financing approach that would benefit  federal departments and their subunits by addressing both of these  challenges. CAFs would be department-level funds that use annually  appropriated authority to borrow from the Treasury to purchase federally- owned assets needed by subunits of the department. These subunits  would then pay the CAF a mortgage payment sufficient to cover the  principal and interest payment on the Treasury loan. The CAF would use  those receipts only to repay Treasury and not to finance new assets.\nThe CAF concept was formally proposed in the February 1999 Report of the  President\u2019s Commission to Study Capital Budgeting as a mechanism  that would help improve the process by which annual budget decisions are  made by promoting better planning and budgeting of capital expenditures  for federally owned facilities. The report states that by ensuring that  individual programs are charged the true cost of using capital assets, the  CAF encourages managers to make more efficient use of those assets. The  Commission report also argues that CAFs could help smooth out the spikes  in BA experienced by subunits with capital project requests. By aggregating  all up-front BA for capital requests at the department level, subunit budgets  would reflect only an annual payment for capital. Since the Commission  report, CBO, GAO, and the National Research Council (NRC) have all  agreed that CAFs should be explored as a capital financing mechanism.\nCAFs were also discussed in the President\u2019s Fiscal Year 2004 Budget  issued in February 2003. The section on \u201cBudget and Performance  Integration\u201d briefly described the concept and reports that draft legislation  creating CAFs has been developed, discussed with agencies, and improved.  It said that CAFs would be one way to show the uniform annual cost for the  use of capital without changing the requirement for up-front  appropriations. At this time, OMB\u2019s interest in CAFs appears to have  waned. CAFs were not mentioned in the President\u2019s Budget in either  fiscal year 2005 or 2006 and the CAF legislation described has not been  introduced.\n\n\tScope and Methodology\n\nTo address our objectives, we reviewed the available literature describing  the CAF concept. We also interviewed budget experts at OMB and CBO to  gain a more thorough understanding of how CAFs would operate and  discuss issues involved with their implementation. This permitted us to  describe a theoretical CAF with some operational detail. Additionally, we  sought the views of the many parties that would be affected if CAFs were  established. Since agency and congressional officials were generally  unaware of the CAF concept, we developed a brief summary describing the  general mechanics of a CAF and shared that summary prior to interviews in  order to generate discussion.\nTo get the department perspective, we chose USDA and DOI as case  studies. Both of these departments have substantial and varied capital  needs. Capital assets acquired by USDA and DOI include land, buildings,  research equipment, laboratories, quarantine facilities, dams, bridges,  parklands, roads, trails, vehicles, aircraft, and information technology  (hardware and software). In addition, each department has multiple  subunits that use capital assets to achieve their missions\u2014important for  examining the question of subunit spikes. We interviewed officials at the  department and subunit levels to gather their opinions and insights on the  operation, benefits, and difficulties of CAFs. Specifically within USDA we  spoke with officials in the Animal and Plant Health Inspection Service  (APHIS), the Agricultural Research Service (ARS), and the Forest Service  (FS). Within DOI, we spoke with officials in the National Park Service  (NPS) and the Bureau of Land Management (BLM). During these  discussions, agency officials also compared CAFs (as described in our  summary) with current practices used for planning, budgeting, and  acquisition of capital assets.\nSince congressional approval would be necessary for the creation and  operation of CAFs, we spoke with staff on the House and Senate Budget  Committees, the House and Senate Appropriations Subcommittees on the  Interior, and the House Appropriations Subcommittee on Agriculture to  get their opinions on the proposed CAF mechanism. We also interviewed  officials at Treasury, which would be responsible for managing the  borrowing authority. In addition, we spoke with officials at GSA to discuss  how a CAF might affect the FBF, used by some federal agencies to acquire  federal office space and the FTS, used by some federal agencies to  acquire IT.\nFinally, we reviewed agency documents including asset management plans,  accounting system descriptions, capitalization policies, and working  capital fund information. We also examined our prior work, financial  accounting standards, and various legal and budgetary sources specifically  related to federal property management.\nWe recognize that our findings on agency perspective, which are based on  interviews with five subunits within two departments, may not be  applicable to all agencies within the federal government. However, we were  struck by the consistency in department and subunit reaction to the  concept, especially when followed by comparable reactions from  congressional officials. Our work was conducted in Washington, D.C., from  May 2004 through January 2005 in accordance with generally accepted  government auditing standards.\n\n\tCAF Operations Would Create a New Financing System and New Oversight Responsibilities\n\nImplementing CAFs would change the current process for financing new  federal capital projects. In addition, if all existing capital assets of a  department and its subunits were transferred to the CAF, the CAF would  impute an annual capital usage charge on those assets to using agencies.  This additional complication could be avoided if CAFs were limited to new  assets. However, this would mean it would be decades before all programs  showed the full annual cost of capital in their budgets.\nAlthough in many respects CAFs are accounting devices to record financial  transactions, their creation would create new management and oversight  responsibilities for many federal entities. Treasury would have primary  responsibility for administering the borrowing authority. Both Treasury and  those departments with CAFs would be required to keep track of the many  CAF transactions. The management and oversight responsibilities of the  departments would need to be clearly spelled out in order for CAFs to  operate effectively. OMB would likely have to issue guidelines on operation  specifics and OMB and the congressional appropriations committee staff  would have to review the CAFs to ensure they were operating properly.  OMB and CBO would score (estimate) the CAFs\u2019 and subunits\u2019 BA\u2014both  the initial authority to borrow and the subsequent appropriations used for  repayment. The scoring of the annual capital usage charges, if CAFs were  applied to existing capital, has not yet been developed.\n\n\t\tCAFs Would Be Positioned at the Department Level and Create a More Complex Process for Financing Capital\n\nAlthough CAFs do not currently exist, we can describe how they would  likely operate based on written proposals and our discussions with budget  experts. CAFs would be established at the department level as separate  accounts that would receive up-front authority to borrow (provided in  appropriation acts) on a project-by-project basis, for the construction and  acquisition of large capital projects for all of the subunits within a  department. For those departments with subunits split between two  appropriation subcommittees, it is likely that two CAFs would be  necessary. For example, DOI receives appropriations through two  subcommittees:  the Energy and Water Development Subcommittee, which  is responsible for Bureau of Reclamation (Reclamation) programs; and the  Interior and Related Agencies Subcommittee, which is responsible for all  other Interior programs. CBO, OMB, and agency officials we spoke with  generally believed that having a CAF that crossed subcommittee  jurisdictions would create many problems, thus it would likely be  necessary for departments to have a separate CAF for each subcommittee  with which they work. Using the example above, DOI would have one CAF  for Reclamation and a second for the remaining subunits within DOI.  Alternatively, CAFs could be situated at the appropriation subcommittee  level rather than the department level, with each of the 13 subcommittees  appropriating to their respective CAF for the agencies under their  jurisdiction. Some congressional officials did not seem to think that this  would be the most effective arrangement and raised the point that  increased resources might be needed at the subcommittee level to manage  CAF transactions. In addition, OMB argued that CAFs should be located at  the department level because the department is the focus of accountability  for planning and managing programs and capital assets, as well as for  budget execution and financial reporting.\nThe CAF would receive appropriations for the full cost of an asset (or  useful segment of an asset) in the form of borrowing authority. Like all BA,  the borrowing authority for each CAF-financed project would specify the  purpose, amount, and duration of the authority. Unless the asset is to be  available for use in the same fiscal year, the subunit itself would receive no  appropriations. The CAF would use its authority to borrow from the  Treasury\u2019s general fund to acquire the asset for the subunit. When the asset  became usable, the subunit would begin to pay the CAF an amount equal to  a mortgage payment consisting of interest and principle. These equal  annual payments would consist of the principal amortized over the useful  life of the asset and include interest charges at a rate determined by  Treasury (based on the average interest rate on marketable Treasury  securities of comparable maturity). The CAF would use these mortgage  payments to repay Treasury for the funds borrowed plus interest. Unlike a  revolving fund, the mortgage payments collected by the CAF would be used  only to repay Treasury and could not be used to finance new assets.\nFor each project funded through the CAF, the subunit\u2019s annual budget  request would need to include the annual mortgage payment in each year,  for the useful life of the asset (or until the asset was sold or transferred).  The subunit would need annual appropriations for these payments, along  with its other operating expenses. On the basis of our discussions, we  conclude that the appropriations from which the payments are made would  be discretionary as opposed to mandatory. They would not be provided as a  line item for mortgage payments to the CAF, but would be part of the  subunit\u2019s total appropriation. While the subunit would be required to make  the annual payment, there would be no guarantee that Congress would  include the additional amounts to cover the payment in the subunit\u2019s  appropriation.\nAt some point, the mortgage on an asset would be \u201cpaid off.\u201d However, if  annual capital usage charges on existing capital were established,  payments would continue, although the amount of the payments would  depend on the method used to calculate the charges for existing capital.  Any imputed charges collected by the CAF would be transferred to the  general fund of Treasury and not be available to finance new assets. Later  in this report we discuss in more detail the idea of imputing a capital usage  charge on existing capital.\n\n\t\tTreasury Would Oversee Borrowing Authority Used to Acquire Capital Assets\n\nTreasury is responsible for administering and managing borrowing  authority. Treasury officials explained that within the department, the  Financial Management Service (FMS) would have responsibility for setting  up the accounts to correspond with each CAF created. Before a CAF could  actually borrow from Treasury, an agreement would have to be signed  establishing the interest rate and repayment schedule. Treasury officials  recommended that OMB establish guidelines to specify the useful life of  capital assets so departments would abide by an appropriate amortization  schedule and not attempt to lower payments by lengthening the asset\u2019s useful life. The standards issued by the Federal Accounting Standards  Advisory Board (FASAB) on how to account for property, equipment, and  internal-use software could be useful in developing these guidelines.  According to Treasury officials, FMS would also be responsible for  preparing the warrants, an official document that establishes the amount of  monies authorized to be withdrawn from the central accounts maintained  by Treasury, and would report annually on account activity. The Bureau of  Public Debt would have the most day-to-day interaction with the CAF. It  would be responsible for transferring the borrowed funds to the  department and for receiving payments. Although Treasury officials did not  think it would be an unmanageable task, they said that tracking individual  transactions could become complicated, depending on the level of detailed  reporting required, and would certainly require additional staff time. To  cover these costs, they would want to charge an administrative fee, as they  do for trust funds.\n\n\t\tCAFs Would Add Complications to Oversight and Scoring\n\nA CAF is an additional layer of administration that could complicate  program management rather than streamline it. At the department level,  the chief financial officer would likely be responsible for the financial  operation of the CAF. Department heads would need to specify duties for  those with capital asset management and oversight responsibilities  according to the unique needs of the department. Oversight functions  would include accounting for all the transactions between the CAF and  Treasury as well as between the CAF and the subunits. In addition, the  managerial relationship between the CAF and individual subunits would  have to be worked out. OMB would also likely have new responsibilities.  For example, OMB would probably have to develop guidelines on issues  such as (1) the types of assets to include in the CAF, (2) the amortization  schedule for various types of assets, (3) the method for calculating a capital  usage charge on existing capital (along with CBO and Congress), and  (4) the relationship between a CAF and FBF. Indeed, the NRC report  argued that oversight and management of CAFs should actually reside at  OMB. Although OMB officials provided no details, they agreed that they  would have some responsibility for reviewing CAFs, as would  congressional committees.\nAs they do for all appropriation actions, CBO and OMB would score the  CAF and subunit BA\u2014both the initial authority to borrow and the  subsequent appropriations used for repayment. Although the net amounts  of BA and outlays for capital acquisitions would not change, the type of BA  would. Currently, annual appropriations, which allow program managers to  incur obligations and make outlays with no additional steps, are provided  for most capital acquisitions. A CAF, however, would be appropriated  up-front borrowing authority. On a gross basis, the BA would have to be  appropriated twice, once as up-front borrowing authority and  incrementally over time through appropriations for the annual mortgage  payment. Since the annual mortgage payment is purely intragovernmental,  the subunit\u2019s BA and outlays are offset by receipts in the CAF, so the total  BA and outlays are not double-counted. Therefore, appropriation  subcommittee allocations would not need to be adjusted if a CAF were  used for new assets.\nThe initial borrowing authority would be equal to the asset cost and would  be scored up front in the CAF budget. When the annual mortgage payments  begin, the amount provided in the subunit\u2019s budget would equal the  mortgage payment and would be scored as discretionary BA. The mortgage  payment would then be transferred to the CAF and, as a receipt, be  considered mandatory BA. However, according to OMB, it would be treated  as a discretionary offset for scoring purposes. The payment and receipt  would completely offset each other within the appropriation  subcommittees\u2019 totals and in the BA and outlay totals for the federal budget  as a whole.\nWhen the CAF repays Treasury using the mortgage receipts, scoring would  follow the current guidelines for debt repayment transactions. The  mortgage receipt would be considered mandatory BA and be used to repay  Treasury; however, the portion of the mortgage payment that corresponds  to the amortization of the asset cost would be deducted from the BA (and  outlay) totals. When collections are used for debt repayment, they are  unavailable for new obligations, and therefore are not BA. If they were  counted, the BA and outlay totals would be overstated over the life of the  loan. According to OMB, the remaining mandatory BA would be obligated  and outlayed for interest payments to an intragovernmental receipt  account in Treasury, but would not be scored. At this time, the scoring of  annual capital usage charges on existing capital assets has not been  determined.\n\n\tCAF Benefits Can Be Achieved through Alternative Means Without the Added Budget Complexity\n\nCAFs have been proposed as a way to address two challenges that arise  from the full up-front funding requirement for capital projects. The first  challenge is to facilitate program performance evaluation and promote  more effective capital planning and budgeting by allocating capital costs on  an annual basis to those programs using the capital. By having annual cost  information, managers can better plan and budget for future asset  maintenance and replacement. During our interviews, we learned that asset  management and cost accounting systems are currently being implemented  that could be used to address this problem. These systems are designed to  provide the information necessary for improved priority setting and better  decision making, although we found that many agencies are still working to  fully implement and use these systems. The second challenge\u2014managing  periodic spikes in BA caused by capital asset needs\u2014if considered a  problem at all, is managed by our case study agencies through existing  entities and practices, such as the use of WCFs. Consequently, CAFs appear  to offer few benefits over and above those provided by other mechanisms  being put into place or in use. In addition, officials at the department and  subunit level and key congressional staff we spoke with have a number of  concerns about adopting CAFs as an alternative financing method. Most of  those we spoke with said CAFs sounded like a complicated mechanism to  achieve benefits that can be achieved in simpler ways and some worried  that implementation of CAFs could distract from current efforts to improve  capital decision making.\n\n\t\tAllocating Annual Capital Costs and Improving Decision Making for Capital Assets May Be Achieved through Existing Initiatives\n\nOfficials we interviewed reacted to our presentation of the CAF mechanism  by describing current agency initiatives and existing mechanisms that they  believe can better achieve the ultimate goal of improving budgeting and  decision making for capital. We found that some agencies currently make  use of asset management plans to collect, track, and analyze cost  information and to assist management in budget decisions and priority  setting. Accounting systems that report full costs are also being developed  that will include the cost of capital assets in total program costs and will  provide a tool for agency managers to make better decisions and use  capital more efficiently. Once fully implemented, these methods will  provide agencies with the ability to assign costs at the program level and  link those costs to a desired result. The information provided should lead  agencies to consider whether they will continue to need the current  quantities and types of fixed assets they own to meet future program needs.\n\n\t\t\tThe Departments of the Interior and Agriculture Are Implementing Asset Management Systems to Make Informed Decisions on Capital Investment\n\nAs we have reported in previous work, leading organizations gather and  track information that helps them identify the gap between what they have  and what they need to fulfill their goals and objectives. Routinely  assessing the condition of assets and facilities allows managers and their  decision makers to evaluate the capabilities of current assets, plan for  future asset replacements, and calculate the cost of deferred maintenance.  We found that asset management systems are being developed and  implemented at some agencies as a mechanism to aid in the identification  of asset holdings and prioritization of maintenance and improvements.\nFor example, we reported in 2004 that NPS, within DOI, is currently  implementing an asset management process. If it operates as planned, the  agency will, for the first time, have a reliable inventory of its assets, a  process for reporting on the condition of those assets, and a systemwide  methodology for estimating deferred maintenance costs. The system  requires each park to enter all of its assets and information on its condition  into a centralized database for the entire park system and to conduct  annual condition assessments and regular comprehensive assessments.  This new process will not be fully implemented until fiscal year 2006 or  2007, and will require years of sustained commitment by NPS and  other stakeholders.\nAccording to NPS documents, this approach and the information captured  in the asset management plan provides Grand Canyon National Park  managers with the knowledge and specifics to make informed capital  investment decisions and to develop sound business cases for funding  requests. The appropriators for NPS that we spoke with agreed that the  additional funding they have provided for condition assessments and asset  management has improved planning and decision making at NPS.  Department officials told us that these types of asset management plans  would eventually be completed for all capital-holding subunits within DOI.  The completion of this management system is especially important for DOI  because much of its mission is the upkeep and improvement of its capital  for use by the public.\nFS, whose capital includes numerous trails, roads, and recreation facilities,  has implemented and is continuing to enhance its asset management  system referred to as Infrastructure (INFRA). INFRA has been in  production since 1998 and served as the agency\u2019s primary inventory  reporting and portfolio management tool for all owned real property until  May 2004. FS officials said that they have used INFRA to assist  management in prioritizing backlogs of maintenance and renovations.  According to these officials, INFRA allows for the transfer of FS asset  inventory data directly into USDA\u2019s asset inventory system known as the  Corporate Property Automated Information System (CPAIS). CPAIS, which  agency officials said was modeled after INFRA and further enhanced to  include leased property and GSA assignments, was implemented in May  2004 and maintains data elements necessary to track and manage owned  property, leased property, GSA assignments, and interagency agreements.  The system will provide the department and its subunits with the capability  to increase asset utilization and cost management and to analyze and  reduce maintenance expenses. The primary users of the system are those  subunits with considerable capital needs, according to agency officials.  ARS\u2019s capital is mostly high-priced laboratories, specific scientific  equipment, and research facilities, and officials are confident that CPAIS  will provide the information needed to ensure accountability over its real  property. ARS also has its own facilities division made up of contractors  and engineers that are equipped with the experience and expertise to  manage and oversee their specialized capital projects. APHIS officials said  they are in the process of doing facility condition assessments and hope to  use the information in order to better align its mission with its strategic  plan.\nThe need for asset management systems to aid agency officials in making  informed decisions was underscored in our report designating federal real  property as a new high-risk area in 2003. The report highlighted the fact  that in general, key decision makers lack reliable and useful data on real  property assets. In February 2004, the President issued an Executive  Order for Federal Real Property Asset Management. The order requires  designated agencies to have a real property officer and to implement an  asset management planning process. Its purpose is to promote the efficient  and economical use of America\u2019s real property assets and to assure  management accountability for implementing federal real property  management reforms.\n\n\t\t\tSome Agencies Are Beginning to Use Full Cost Information to Make Budget Decisions, Although Much Work Needs to Be Done\n\nWe found that some agencies are currently implementing cost accounting  methods, such as activity-based costing (ABC), to help determine the full  cost of a product or service, including the annual cost of capital, and using  that information to make budgeting decisions. For example, BLM has  implemented a management framework that integrates ABC and  performance information. We have previously reported that BLM\u2019s model  fully distributes costs and can readily identify, among other things, (1) the  full costs of each of its activities and (2) what it costs to pursue each of its  strategic goals. The system provides detailed information that facilitates  external reporting and can be used for internal purposes, such as  developing budgets and analyzing the unit costs of activities and outputs.  Integrating cost and performance information into one system helped BLM  become a finalist for the President\u2019s Quality Award in 2002 in the  \u201cperformance and budget integration\u201d category. The bureau was recognized  for implementing a disciplined approach that allows it to align resources,  outputs, and organizational goals, and can lead to insights to reengineer  work processes as necessary. Among the results of its ABC efforts, BLM  has reported increased efficiency and success in completing deferred  maintenance and infrastructure improvement projects. BLM was at the  forefront of this cost management effort, which began in 1997 and has now  been adopted departmentwide as part of DOI\u2019s vision of effective program  management.\nIn another report, we described how the National Aeronautics and Space  Administration (NASA) is beginning to use accounting information to help  make decisions about capital assets. NASA\u2019s \u201cFull Cost\u201d Initiative  involves changes to accounting, budgeting, and management to enhance  cost-effective mission performance by providing complete cost information  for more fully informed decision making and management. The accounting  changes allow NASA to show the full cost of related projects and  supporting activities while the \u201cfull cost\u201d budgeting uses budget  restructuring to better align resources with its strategic plan. The  accounting and budgeting portions of the initiative support the  management decision-making process by providing not only better  information, but also incentives to make decisions on the most efficient use  of resources. For example, NASA officials credited \u201cfull cost\u201d budgeting  with helping to identify underutilized facilities, such as service pools\u2014the  infrastructure capabilities that support multiple programs and projects.  NASA\u2019s service pools include wind tunnels, information technology, and  fabrication services. If programs do not cover a service pool\u2019s costs, NASA  officials said that it raises questions about whether that capability is  needed. NASA officials also explained that when program managers are  responsible for paying service pool costs associated with their program,  program managers have an incentive to consider their use and whether  lower cost alternatives exist. As a result, NASA officials said \u201cfull cost\u201d  budgeting provides officials and program managers a greater incentive to  improve the management of these institutional assets. Although accounting  changes alone are not sufficient to improve decision making and  management, it is clear from discussions with NASA officials and agency  documentation that the move to full costing is a critical piece of the  initiative.\nSome agencies still need to make more progress before their cost  accounting can more fully inform their decision making, including  decisions on capital planning and budgeting. In a 2003 report looking at the  financial management systems of 19 federal departments, we found that  although departments are required to produce information on the full cost  of programs and projects, some of the information is not detailed enough to  allow them to evaluate programs and activities on their full costs and  merits. For example, the Department of Defense (DOD) does not have the  systems and processes in place to capture the required cost information  from the hundreds of millions of transactions it processes each year.  Lacking complete and accurate overall life-cycle cost information for  weapons systems impairs DOD\u2019s and congressional decision makers\u2019 ability  to make fully informed decisions about which weapons, or how many, to  buy. DOD has acknowledged that the lack of a cost accounting system is its  largest impediment to controlling and managing weapon systems costs.  Our report states that departments are experimenting with methods of  accumulating and assigning costs to obtain the managerial cost information  needed to enhance programs, improve processes, establish fees, develop  budgets, prepare financial reports, make competitive sourcing decisions,  and report on performance. As departments implement and upgrade their  financial management systems, opportunities exist for developing cost  management information as an integral part of the systems to provide  important information that is timely, reliable, and useful.\n\n\t\tCAFs Might Smooth Budget Spikes, but Benefit May Be Minor\n\nThe President\u2019s Commission to Study Capital Budgeting and NRC have  suggested that a CAF might help ameliorate the spikes in agency budgets  that often result from large periodic capital requests by smoothing capital  costs over time and across subunits. Our analysis of recent trends in BA for  capital acquisitions clearly shows the presence of spikes at the subunit  level. See figure 3 for an illustration of budget spikes and potential  smoothing effects of a CAF at ARS.\nHowever, these spikes did not appear to be a major concern to the case  study subunits we spoke with nor did they consider them a barrier in  meeting capital needs. Given current practices for financing capital assets,  it seems that some program managers and Congress have found ways to  cope with spikes in the absence of CAFs. As a result, the benefit of  smoothing costs with a CAF would be minimal.\n\n\t\t\tSome Spikes May Be Created by Congressional Funding Decisions\n\nOur prior work indicates that some agencies have complained that large  spikes in their budget hinder their ability to acquire the needed funding to  complete capital projects and reveals that some agencies have turned to  alternative financing mechanisms, such as incremental funding, operating  leases, and public-private partnerships, that allow them to obtain assets  without full, up-front BA. A few agency officials we spoke with said that  because of the up-front funding requirement, they have sometimes opted  for operating leases instead of capital leases or constructing buildings.  Operating leases are generally more expensive than construction,  purchase, or capital leases for long-term needs but do not have to be  funded up front. Nevertheless, the agencies we spoke with reported that  spikes are often created by the changing priorities of Congress and its  willingness to provide up-front funding for favored capital projects. For  example, ARS officials reported that appropriators have increased the  agency\u2019s budget in a given year to fund a new or expanded facility that the  subcommittee considered a priority. Historically, the appropriations  subcommittee for ARS (and all USDA agencies except FS) has been active  in initiating capital projects and following through with the up-front  funding necessary to build or acquire assets. From ARS\u2019s perspective,  budget spikes are not problematic because of the perceived ease in  obtaining needed funds. DOI also reported that some of its subunits have  received \u201cwaves\u201d of funding for capital projects largely dependent upon the  priorities of Congress and the President. Within DOI, BLM officials agreed  that budget spikes were mostly a result of congressional add-ons. On the  other hand, NPS reported that most of its capital projects are just not large  enough to cause a noticeable budget spike.\nStaff from the congressional budget committee suggested that  deliberations during the appropriations process result in some smoothing  at the subcommittee level. The smoothing effects may not be apparent to  agencies when they review their individual budgets, but they are evident  from a governmentwide perspective. Historical analysis shows that federal  nondefense capital spending has remained relatively constant over the past  30 years.\n\n\t\t\tSpikes Are Being Managed by Funding Useful Segments or Using No-Year Authority\n\nWhen spikes might be a problem, the departments and subunits we spoke  with have been able to manage them by dividing projects into useful  segments and accumulating funds with no-year authority. USDA and FS  reported that they have broken capital projects into useful segments and  requested the funding accordingly to minimize dramatic fluctuations in  capital costs. For example, USDA is currently renovating its headquarters  in Washington, D.C., and is using funds the department receives every other  year to finance the overhaul of one discrete section of the building at a  time. APHIS and BLM have also broken up large projects by funding the  survey and design phases in the first year and requesting funds for  construction in subsequent years. In addition, ARS and APHIS have  authorities that allow them to accumulate a specified amount or  percentage of unobligated funds until the amount is sufficient to cover the  full up-front costs of the desired asset. For example, ARS is building an  animal health center in Iowa, which costs an estimated $460 million. ARS  received $124 million in fiscal year 2004 towards the project and can  accumulate that money in its no-year account until the total amount to  cover the costs is collected. In its efforts to consolidate field offices, APHIS  officials told us they were granted authority to convert $2 million in  unobligated balances into no-year money each year for 3 years. The  $6 million it was able to accumulate allowed it to fund the consolidation  with up-front funding. The bureau hopes to expand this authority to apply  to other capital, including helicopters and airplanes.\n\n\t\t\tWCFs and FBF Can Be Used Both to Finance Capital Assets Without Spikes and to Allocate Capital Costs\n\nWCFs, a type of revolving fund, are a mechanism that can be used both to  spread the cost of capital acquisition over time and to incorporate capital  costs into operating budgets. As reported previously, we found that WCFs  can be effective for agencies with relatively small, ongoing capital needs  because the WCFs, through user charges, spread the cost of capital over  time in order to build reserves for acquiring new or replacement assets.  Also, WCFs help to ensure that capital costs are allocated to programs that  use capital by promoting full cost accounting. Since WCFs are designed to  be self-financing, the user charges must be sufficient to recoup the full cost  of operations and include charges, such as depreciation, to help fund  capital replacement.\nSome we spoke with use WCFs to finance capital assets such as  IT initiatives and equipment. For example, USDA\u2019s WCF provided funds to  the National Finance Center, one of its activity centers, to purchase and  implement a financial system. Department officials explained that after the  system became operational, the Finance Center charged the 28 user  entities a depreciation expense to recoup the costs of purchasing the  system so it could repay the WCF. In another example, the FS\u2019s WCF  purchases radio equipment, aircraft, IT, and other motor-driven equipment.  The equipment is rented out to administrative entities within the agency,  such as the National Forests and Research Experiment Stations, and to  outside agencies for a charge that recoups the costs of operation,  maintenance, and depreciation. The user charge is adjusted to include  sufficient funds to replace the equipment. Agency officials would like to  expand the WCF beyond just equipment and establish a facilities  maintenance fund. Through this fund, they would apply a standard charge  per square foot plus a replacement cost component. The charges would be  used for ongoing maintenance and replacement and they believe would  help influence line officers to reexamine capital needs. BLM\u2019s WCF  functions similar to that of the FS\u2019s WCF. BLM\u2019s WCF purchases vehicles,  then charges fees to users of the vehicles and uses the revenue to buy  replacement vehicles. In both of these examples, the WCF is designed to  accumulate the funds to absorb the up-front costs of the capital while the  user entities incur the annual costs of using the capital.\nThis mechanism operates similarly to a CAF, but with more flexibility in  the funding requirements. First, since WCFs are revolving funds, they  allow agencies to purchase new capital without a specific congressional  appropriation whereas a CAF would require a new appropriation to  purchase new capital. Second, WCFs are not subject to fiscal year  limitations (they have no-year authority) while CAFs would have  project-by-project borrowing authority specified in appropriation acts.  Third, WCFs reflect annual capital costs through a depreciation charge  whereas CAFs would reflect this cost through an annual mortgage payment  of principal and interest. Hence, both would reflect the annual cost of  capital in the subunits\u2019 budgets.\nTo obtain federal office space, many agencies lease from and make rental  payments to GSA, which deposits those funds into the FBF. Although  leasing is recognized as being more expensive in the long run than  ownership, some agencies lease because it does not require as much  up-front funding as ownership (i.e., to avoid spikes). Although a CAF is  conceptualized to reduce the amount of up-front funding needed by  subunits when acquiring capital assets (while still requiring up-front  funding at the department level), it is not clear that having a CAF would  encourage subunits to build rather than lease office space. Two agency  officials we spoke with said that they would likely continue leasing and one  commented that if planning outright ownership, it would be easier to deal  with obtaining the traditional up-front funding than worry about the annual  mortgage payments required by a CAF. Through their charges, both WCFs  and FBF spread the cost of capital over time and ensure that capital costs  are properly allocated to the user programs.\n\n\t\tAgency Officials, Congressional Staff and Other Key Players Have Numerous Concerns About CAFs\n\nAgency officials, congressional staff, and other key players raised  numerous concerns about CAFs. For example, department and subunit  officials are concerned that there is no guarantee or assurance that the  annual mortgage payments to be collected by the CAF will be adequately  funded in annual subunit appropriations. In addition, some subunits and  appropriators are reluctant to shift more control for capital planning and  budgeting to the department level. Congressional staff also raised concerns  about the feasibility of the congressional mind shift that would be required  to fund capital through a mechanism such as a CAF, especially if a charge  on existing capital is included, and questioned the value that a CAF would  really add to agency planning and budget decision making that could not be  obtained through other means. CBO and GSA were also apprehensive and  cautious about the usefulness of the CAF concept when operating details  were described in full. Most budget experts and agency officials we spoke  with agreed that the complexities involved in operating a CAF would likely  outweigh the possible benefits. A few worried that CAFs might even divert  attention from the current initiatives under way to improve asset  management and full costing.\n\n\t\t\tConcerns over Receipt of Annual Mortgage Payment\n\nTreasury, which would assume responsibility for collecting debt  repayments, was concerned that there would be no guarantee that future  appropriations would finance the mortgage payments, nor would there be  any enforcement mechanism by which Treasury could enforce repayment.  Treasury officials feared that over time other types of spending would take priority over debt repayment. They based their concerns on the record of  some other programs that have struggled to repay debt or for which debt  has been \u201cforgiven\u201d or otherwise excused. For example, the Black Lung  Disability Trust Fund, which provides disability benefits and medical  services to eligible workers in the coal mining industry, has growing debt  and will never become solvent under current conditions. Although Black  Lung Disability Fund revenues are now sufficient to cover current benefits,  they do not cover either repayment of the over $8 billion owed the Treasury  or interest on that debt. Another example is the Bonneville Power  Administration (BPA), which is a federal electric power marketing agency  in the Pacific Northwest with authority to borrow from Treasury on a  permanent, indefinite basis in amounts not exceeding $4.45 billion at any  time. BPA finances its operations with power revenues and the loans from  Treasury, and has authority to reduce its debt using \u201cfish credits.\u201d This  crediting mechanism, authorized by Congress in 1980, allows BPA to  reduce its payments to Treasury by an amount equal to mitigation  measures funded on behalf of nonpower purposes, such as fish mitigation  efforts in the Columbia and Snake River systems. BPA took this credit for  the first time in 1995 and has taken it every year since that time. The annual  credit allowed varies, but has ranged between about $25 million and  $583 million, including the use in 2001 and 2003 of about $325 million total  unused \u201cfish credits\u201d that had accumulated since 1980.\nSome officials at the department and subunit level also raised concerns  about the long-run feasibility of fulfilling their mortgage payments over the  entire repayment period given that the payments are made from their  annual appropriations, which they expect to become increasingly  constrained. The mortgage payments would be relatively uncontrollable  items within an agency\u2019s budget, to the detriment of other, more  controllable items, such as personnel costs. Because the mortgage costs  would not change unless the asset is sold, managers would have less  flexibility in making budgeting decisions within stagnant or possibly  declining annual budgets that occur in times of fiscal restraint. BLM  officials said this type of fixed obligation, which could consume an  increasing share of its budget, could hinder its ability to address emergency  needs that arise during the year. For example, they cited a case in which the  agency reprogrammed resources to deal with a landslide that occurred on  the Oregon coast in late 2003. BLM delayed other projects in order to  redirect funds for the removal and stabilization of the landslide and to  reopen Galice Creek Road, which is a major artery for public access,  recreation, and commercial activity such as timbering, as well as BLM and  FS administration. BLM officials questioned whether the fixed payment to  the CAF would constrain their ability to make adjustments such as this.  Many agency officials were skeptical of the idea that they could fulfill  annual mortgage payments to a CAF without squeezing program operations  and some said they would rather deal with the up-front funding  requirement than have to worry about annual mortgage payments.\nThe alternative to force-fitting a mortgage payment within agencies\u2019 annual  appropriations is to adjust agency budgets with an automatic add-on equal  to agencies\u2019 mortgage payments. While this would relieve budget pressures  at the agency level, it would probably not provide incentives or influence  managers to improve capital asset management and decision making.\n\n\t\t\tConcerns About Shifting More Control over Capital Assets to the Department Level\n\nUnder the CAF concept, requests for capital projects would come from the  department level and the CAF would own all capital assets. This would  shift more control of capital planning and decision making from the subunit  to the department level. Some agencies and one appropriation  subcommittee staffer said they would not favor this shift. Several agencies  feel that they have the expertise and experience to better assess their own  capital needs, which are often mission specific. For example, ARS\u2019s capital  consists of mostly scientific equipment, laboratories, and research facilities  designed for conducting agricultural research in various climates. In fact,  the agency has its own facilities division consisting of contractors and  engineers who are involved in the management and oversight of capital  projects. Similarly, APHIS\u2019s facilities are mission specific. BLM\u2019s use of  activity-based costing allows it to assign capital costs to the program level  and track those costs to desired outputs. Consequently, the bureau has a  more intimate understanding of its capital needs and how capital  contributes to carrying out its mission. One agency raised the point that  departmental management might force bureaus to share facilities or later  decide to use an asset for purposes other than those originally intended.  While some of these departmental decisions might be beneficial, some  agencies were skeptical of departmental decision making.\n\n\t\t\tConcerns over Problems Not Addressed, Additional Complexity, and Limited Benefits\n\nThe officials we interviewed stated that there are important problems in  capital budgeting that CAFs do not address. Before the smoothing effects  of a CAF can be realized in the out years, the department must still receive  full up-front funding to begin new capital projects or acquire new assets.  And as noted above, some agency officials stated that the annual mortgage  payments may be even more of a dilemma than the up-front funding  requirement. Since a CAF assumes up-front funding, some agencies may  still seek to use some of the alternative financing mechanisms that they  already use, such as operating leases or enhanced-use leases, to meet  capital needs without first having to secure sufficient appropriations to  cover the full cost of the asset. As currently envisioned, CAFs would  probably not help improve capital planning concerns, such as the need for  improved budgeting and management of asset life-cycle costs. According to  the NRC report, operation and maintenance costs are typically 60 to 85  percent of the total life-cycle costs of a facility while design and  construction typically account for only 5 to 10 percent of those costs.  For example, agencies must properly determine the funds needed for  increasing staff in new and expanded facilities in order to avoid staffing  shortages.\nAlmost everyone we spoke with agreed that CAFs sounded complicated  and many questioned whether the challenges in budgeting for capital that  CAFs were designed to address were great enough to warrant CAFs as a  solution. Congressional budget committee and appropriations  subcommittee staff agreed that CAFs might be beneficial in theory but  were probably not worth the additional budget complexity they would  create. Budget committee staff considered the proposed benefits of a CAF  to be abstract and uncertain coupled with a sizeable likelihood for  repayment problems in the out years. In addition, they saw no obvious  dilemma prompting the need for CAFs. While this capital financing  approach may be appealing in theory since it promotes strategic planning  and broadened, forward-looking perspectives, budget practitioners  cautioned the adoption of an approach involving such layers of complexity  in the absence of a clearly stated, agreed-upon problem that the new  approach is expected to address. Further, they saw a need for agencies to  complete their implementation of capital asset management and cost  accounting systems, which can help achieve some of the same benefits that  CAFs were meant to achieve. A good asset management system including  inventories and asset condition would likely be a necessary precursor to  successfully implementing CAFs. All of these factors weaken the case for  CAFs as an improved approach to current capital financing practices.\n\n\tSeveral Issues to Weigh When Considering Implementation of CAFs\n\nWhile in theory CAFs could be implemented at most agencies, there are  several complex issues that Congress would need to consider before  adopting such a mechanism. For example, proposals to apply CAFs to  existing capital would require the development of a formula to calculate an  annual capital usage charge, which is likely to be a difficult and contentious  undertaking. Key players including OMB, CBO, and Congress would need  to work together to develop an agreed-upon method to estimate an  appropriate capital usage charge for various types of assets. And even if the  full cost of programs, including the cost of existing capital, was more  accurately reflected in the budget through the use of CAFs, incentives to  cut capital costs may not materialize except in times of severe budget cuts.  Even then, managers\u2019 abilities to eliminate unneeded capital assets would  probably be limited given mission responsibilities and legal requirements  that dictate the disposal of surplus federal property. To remedy this,  additional funding or agency flexibilities would be needed, as would  provisions to ensure debt repayment if CAF-financed assets were  transferred or sold. Additionally, it is likely that some capital projects for  federal office space, IT, and land would continue to be financed outside of  the CAF through mechanisms such as the FBF, WCFs, or the GSA IT Fund.\n\n\t\tImputing an Annual Capital Charge on Existing Capital May Offer Benefits but Would Be Difficult and Contentious\n\nThere are arguments that the CAF concept be applied to existing capital  assets as well as new capital assets to ensure that the full costs of all  programs are reflected in the budget. OMB points out that if CAFs were not  applied to all capital, it would be many decades before programs reflected  full annual costs and before the cost of alternative inputs could be  compared. Developing an annual capital usage charge for existing assets  would establish a level playing field for federal capital investment and  allow for comparisons across programs. In addition, this new charge could  influence agency managers to get rid of excess capital assets.\nAccomplishing these goals would require developing a standard method of  computing an appropriate annual capital usage charge. Subunits would pay  these charges to the department\u2019s CAF using appropriated funds, which  would then be transferred to Treasury\u2019s general fund. In other words,  agencies would receive appropriations to pay for the use of capital assets  they already own and would not retain any of the funds to maintain or  replace assets. Imputing such a charge on existing capital is likely to be  difficult and very contentious given questions about how to estimate the  charge and the fact that the assets were already funded.\nBefore imputing an annual capital usage charge, key players, including  OMB and Congress, would need to agree on some type of standard formula  to estimate the charge. Three possible approaches to compute annual  capital usage charges would be to (1) use historical cost for the asset by  applying a charge as though the original cost had been financed by  borrowing from Treasury, (2) use market rental rates, or (3) devise a  calculation incorporating asset replacement cost, depreciation rates, and  interest rates. There are arguments for and against each of these options.  For example, while using historical cost would make the charge congruent  with accounting data; the charge would not reflect the current cost of using  capital and so might be less meaningful for evaluating costs. Although  using market rates would theoretically be the right measure for comparing  the cost of using resources for federal versus private purposes, the fact that  many government assets fill unique purposes means there is not a measure  of market value for them. For example, some agencies occupy historic  buildings, such as the Old Executive Office Building, for which a  comparable market-based value would be difficult to determine. The third  approach might be considered an agreeable middle ground, but applying  depreciation rates poses problems since they are largely arbitrary.  Agreement on whether to apply Treasury or market interest rates would be  necessary.\nSome agency officials and congressional staff suggested that any charges  on existing capital should reflect the life-cycle costs of maintaining assets  and, similar to a WCF, receipts collected should be made available for  future maintenance and renovation costs. We have reported that repair and  maintenance backlogs in federal facilities are significant and that the  challenges of addressing facility deterioration are prevalent at major real  property-holding agencies. However, research and discussions on CAF design indicate that CAF receipts could only go to Treasury and not for  future projects. Officials were also skeptical about how to accurately  charge for highly specialized capital. For example, ARS has more than  100 laboratories located in various regions of the country, as well as  abroad, which are designed to carry out mission responsibilities ranging  from the study of crop production to human nutrition to animal disease  control. The highly technical and diverse nature of its objectives requires  capital assets that are suitable for varied climates, soils, and other  agricultural factors, which pose unique and difficult challenges in  establishing capital usage charges that would be viewed as acceptable by  agency officials.\nIf key players were able to agree on the method for calculating usage  charges on existing capital assets, they would also have to examine the  budgetary effects of such charges. Budget scorekeepers\u2014OMB, CBO, and  the budget committees\u2014would need to develop additional scoring rules to  clarify how the usage charges would be treated in the budget. Unlike  charges on new capital, there is no corresponding debt to repay. As a result  scorekeepers would have to specify how to score the usage charges as they  are transferred from the CAF to Treasury. Although these charges would  not change agency or government outlays or the deficit, they could require  a permanent increase in agencies\u2019 total BA, which would require Congress  to consider adjustments of appropriations subcommittee allocations.  Oversight would be especially important for these transactions since CAF  collections would be greater than needed to repay Treasury loans, creating  a temptation to use accruing balances for other purposes.\nSimilar questions about how to charge for and how to score capital usage  charges for existing assets would eventually pertain to new capital funded  through the CAF. Once an asset is fully \u201cpaid off\u201d through the CAF, it is  comparable to existing capital and would similarly incur an annual capital  usage charge. Some might argue that payments should continue in the  same amounts as before, while others may call for the calculation of a new  capital usage charge for \u201cpaid off\u201d assets based upon the formula used for  capital that existed before the creation of CAFs. In any case, numerous  decisions on capital usage charges for existing capital would need to be  made prior to implementing CAFs.\nAside from the specifics of how to develop appropriate capital usage  charges, most agency officials and congressional staff with whom we  spoke were skeptical of the need for such a charge. Many said that the cost  of maintaining capital assets\u2014which is reflected in agency budgets\u2014and  depreciation expenses\u2014which are reflected in agency accounting systems  along with asset maintenance costs\u2014sufficiently represent the cost of  existing capital assets and help inform managers. As discussed earlier,  asset management systems and full cost accounting approaches are also  beginning to provide the information managers need to make better  decisions about the maintenance or disposal of existing assets and the need  for new capital. Some congressional staff thought the mind shift required  for Congress to agree to impute this new charge on existing capital assets  would be even more difficult than that required for purchasing new capital  using borrowing authority.\nIn the countries of New Zealand, Australia, and the United Kingdom,  charges on existing capital are being used to encourage the efficient use of  assets. These charges, similar to interest charges, are generally used to  reflect the opportunity cost of capital invested. In New Zealand,  departments are appropriated a capital charge based on their asset base at  the beginning of the year; at the end of the year they must pay the  government a capital charge based on their year-end asset base. If a  department has a smaller asset base at the end of the year than the asset  base for which the appropriation was made, the department is permitted to  keep part of the appropriation made for the capital charge. This spurred the  New Zealand Department of Education to sell a number of vacant sites that  it had acquired in the 1960s but that were no longer needed. However,  officials in New Zealand\u2019s Office of Controller and Auditor General were  uncertain about the effectiveness of having a charge for capital in changing  behavior significantly. In addition, some analysts in New Zealand expressed  concern that capital charging could drive department executives to  decisions that are rational in the short term but damaging in the long term.  For example, an audit official suggested that a department might have an  incentive to try to operate with obsolete and fully depreciated assets in  order to avoid a higher capital charge.\n\n\t\tCost Allocation Efforts May Have Limited Effect on Agency Decision Making\n\nAlthough one goal of CAFs is to ensure the allocation of full costs to  programs in the budget and thereby encourage managers to make more  informed decisions about capital assets, additional incentives to evaluate  new or existing asset needs are unlikely to be created except during times  of severe budget cuts or downsizing. For new assets funded through the  CAF, the mortgage payments made out of the subunits appropriations  would be equal to those received by the CAF and thus the payments would  offset each other within the department budget and at the appropriations  subcommittee level and would not affect the deficit. Although the  information on total program costs might be made more transparent, it is  not clear that this would create stronger incentives for more careful  deliberation on future asset needs than having these costs shown through  available methods such as cost accounting systems or the use of working  capital funds.\nA charge on existing assets might also have limited impact. If appropriation  subcommittee allocations were simply raised to accommodate new capital  usage charges, programs would appear more expensive but perhaps not  differentially so. As with new assets, the capital charge on existing assets  would not affect the deficit. As a result, incentives for rationalizing existing  capital would not necessarily be created. Even during tight budget years,  when mandatory CAF payments would squeeze operating budgets and be  most likely to force trade-offs among capital assets, managers may be  constrained by mission responsibilities, legal requirements, or the cost of  disposing of assets. Consequently, agencies might have to argue for  increased funding or case-by-case exemptions, which Congress has granted  in the past.\nSome agencies questioned the effectiveness of applying a charge to  influence managers\u2019 decision making given the unique locations or types of  assets required to accomplish mission goals. BLM officials said an annual  capital usage charge would have a limited impact on their ability to dispose  of capital assets because of its stewardship role over the nation\u2019s public  lands. Similarly, ARS officials justified having locations dispersed all over  the country because its research activities are diverse and require facilities  in various climates and environments. As discussed, Congress also plays a  role in determining where ARS will conduct its research. Likewise, many of  APHIS\u2019s capital assets are mission specific, including animal quarantine  stations, sterile insect-rearing facilities, and laboratories, and typically do  not have a comparable counterpart in the commercial sector. APHIS  officials said this limits managers\u2019 abilities to sell or transfer assets because  the land often must be converted to original condition, a costly  undertaking. For some subunits we spoke with, destruction of certain  assets, which also has an up-front cost, is the only viable option for  eliminating unneeded assets. For example, NPS and FS have many facilities  located on public land. If no longer needed, some of these facilities cannot  be sold or transferred and would have to be demolished. According to FS  officials, when they determine that an asset has exhausted its useful life  and needs to be disposed of, the agency will incur the cost for removal and  recover the salvage value.\nMany agencies are subject to certain legal requirements that create  disincentives for disposing of surplus property. In these cases, agencies  would need additional funding or more flexibility to modify asset holdings  if improved decision making were to be realized. For example, under the  National Environmental Policy Act, agencies may need to assess the  environmental impact of their decisions to dispose of property. In general,  agencies are responsible for environmental cleanup of properties  contaminated with hazardous substances prior to disposal, which can  involve years of study and amount to considerable costs. Agencies that  own properties with historic designations\u2014which is common in the federal  portfolio and certainly within the inventories of USDA and DOI\u2014are  required under the National Historic Preservation Act to ensure that  historic preservation is factored into how the property is eventually used.  The Stewart B. McKinney Homeless Assistance Act, as amended, sets forth  a requirement that consideration be given to making surplus federal  property, including buildings and land, available for use by states, local  governments, and nonprofit agencies to assist homeless people.\nIf none of these restrictions apply and an agency is able to sell an asset,  most cannot retain the proceeds from the sale of unneeded property even  up to the cost of disposal. However, Congress has granted special  authorities in some cases. For example, FS officials told us it owned a  number of trails and roads on public lands that ran through the city of Los  Angeles, California. When the city expanded, it was no longer feasible to  maintain the roads and trails. As a result, the agency was granted authority to sell the land and use the proceeds to build a new ranger station. We  have said that agencies be allowed to retain enough of the proceeds from  an asset sale to recoup the cost of disposal, and that in some cases it may  make sense to permit agencies to retain additional proceeds for  reinvestment in real property where a need exists.\n\n\t\tIssues Regarding Property Sales Would Further Complicate CAF Implementation\n\nProvisions would also need to be established to ensure the full repayment  of CAF debts in the event that an agency sells or transfers a capital asset  before it reaches the end of its useful life (the repayment period). Two  possible options would be to (1) transfer the outstanding debt to a new  \u201cowner\u201d agency of the asset or (2) allow the \u201cseller\u201d agency to sell the asset  and use the proceeds from the sale to repay the outstanding CAF debt.  Both of these options would produce complications and issues to resolve.  For example, transferring the asset would require all parties involved,  including Treasury, to record adjustments to their CAF accounting systems  and oblige subunits to adjust their budget requests accordingly. After the  transfer, it is not clear whether the \u201cseller\u201d agency\u2019s budget would be  reduced by an amount equal to the asset\u2019s mortgage payment. However, if  that was done, it would lessen or eliminate the incentive for the \u201cseller\u201d  agency to sell or transfer the asset. If the asset was sold instead of  transferred, an appropriate \u201csale price\u201d would need to be determined as  well as the appropriate disposition of the sale proceeds. For example, if the  asset was sold for an amount that is greater than the outstanding CAF debt,  the Treasury general fund would receive full repayment on the asset plus  excess revenue. On the other hand, if an asset was sold for an amount less  than the outstanding debt, the CAF would default on the loan unless  additional receipts for debt repayment were appropriated. Finally, some  subunits may argue to refinance their mortgage if a lower Treasury interest  rate became available and lower payments would result. Again, before  CAFs are implemented, proposals on how to handle such circumstances  would need to be addressed.\n\n\t\tSome Capital Would Likely Continue to Be Obtained through Existing Means\n\nThe CAF\u2019s scope of coverage would need to be addressed by any CAF  proposal. Capital assets are generally defined as land, structures,  equipment and intellectual property (such as software) that are used by the  federal government and have estimated useful lives of 2 years or more.  However, departments have some discretion in defining capital. The  Commission report suggested that OMB issue guidance on which capital  items belong in the CAF to ensure uniform implementation of the CAF  proposal. Alternatively, each department could use its current department  guidelines and definitions to determine which capital to fund through the  CAF. Whatever parameters are put in place, some capital assets would  likely continue to be funded outside the CAF through existing mechanisms.\nFor example, for federal office space, the Commission and NRC reports  state that agencies would generally continue to lease space from GSA and  pay rent to FBF. FBF, a governmentwide revolving fund, is used to acquire  office buildings and the space is then rented out to federal agencies. Most  agencies are not allowed to lease their own office space unless GSA  delegates its authority to do so to that agency, which GSA has done in the  past. Under the CAF mechanism, if GSA were to delegate this authority, the  CAF would lease the office space. The NRC report recommends that  agencies should use their CAF for office space acquisition only if it could  be done more effectively and efficiently than through GSA. GSA would  negotiate the acquisition of space for multiple agencies that seek to  collocate in a single facility.\nAgencies also have the option to purchase IT through FTS and its IT Fund.  For a fee, FTS provides expertise and assistance in acquiring and managing  IT products. Those agencies that chose to use this service may argue for  continuing to finance these projects outside of the CAF so that they are not  paying a fee to FTS as well as interest on the borrowed funds. Some  officials also questioned the effectiveness of using borrowing authority to  finance IT purchases when their useful life is typically no more than  10 years and is often 5 years or less, thus indicating that officials may argue  to fund some IT projects outside the CAF. Departments and subunits would  also likely continue to rent certain capital assets from WCFs or to use their  WCFs to purchase some capital. As discussed, WCFs rely on user charges  to fund ongoing maintenance and replacement of capital assets and the  collections are used by some departments and subunits to finance capital  assets, such as vehicles and IT.\nLand, such as wilderness areas, is also likely to remain outside the CAF.  Land retains its value so concepts such as depreciation and amortization do  not apply to it. However, one subunit official stated that using borrowing  authority to buy land might be beneficial if it meant that land could be  purchased at a faster rate to obtain environmentally sensitive land before it  is damaged.\n\n\tConclusion\n\nThere is little doubt that in the mechanical sense CAFs could work as a new  system for financing capital assets. However, the implementation and  operation of the CAF concept would be complicated. Managing the extra  layer of responsibilities for CAF administration and oversight would  require the devotion of resources within departments, subunits, and  Treasury and to a lesser extent, OMB, CBO, and Congress. Accounting for  CAF transactions would be complex and burdensome. The annual debt  repayment would be a source of concern for Treasury and agency officials,  especially as more assets were financed through the CAF and mortgage  payments became a larger percentage of agency appropriations.\nBeyond the complexities inherent in financing capital assets using  borrowing authority is a list of difficult issues that would have to be  resolved before benefits could be realized. The most difficult of these  issues, applying a capital usage charge to existing capital, would also be the  most important to address if annual capital costs were to be allocated to  program budgets. If CAFs were applied only to new assets going forward,  programs would not reflect the full annual cost of capital for decades and  programs purchasing new capital would appear more expensive than those  using existing capital. Even if this and other issues were tackled and  improved information about capital costs was provided to managers, there  is little assurance that CAFs alone would create incentives for programs to  reassess their use of capital. Even in times of severe budget constraints, it  is probable that managerial flexibility to adjust the amount of assets used  by a program would continue to be limited by agency missions, legal  restrictions, and limited funds for asset disposal. Given the execution  complexities and implementation concerns, the ensuing question seems to  be whether there are simpler methods that can be used to achieve the same  benefits as CAFs.\nWe believe there is strong evidence that both benefits attributed to CAFs  could be more easily obtained through existing mechanisms. Asset  management and cost accounting systems, when fully implemented, will be  important tools for promoting more effective planning and budgeting for  capital. Cost accounting systems can provide the same information on  capital costs as CAFs are intended to provide, while the information  provided by asset management systems could be even more crucial for  helping managers with limited budgets prioritize capital asset maintenance  and replacement. For existing capital, incentives to rationalize assets might  be created if agencies were allowed to retain proceeds to recoup the cost of  disposal, or in some cases, for reinvestment in real property. While some of  our case study agencies did not view spikes as a problem, those that did felt  they were managing them well through the use of WCFs, no-year authority,  and acquiring assets through useful segments. In any case, spikes in  spending for capital assets are likely to continue as congressional and  presidential priorities change over time.\nWhen described in detail to executive branch and congressional officials,  we learned that the CAF proposal would likely have few proponents.  Almost everyone we consulted concluded that implementation issues  would overwhelm the potential benefits of a CAF. More importantly,  current efforts under way in agencies would achieve the same goals as a  CAF without introducing the difficulties. Given this, as long as alternative  efforts uphold the principle of up-front funding, then a CAF mechanism  does not seem to be worth the complexity and implementation challenges  that it would create.\n\n\tAgency Comments and Our Response\n\nWe obtained comments on a draft of this report from OMB, Treasury, GSA  and our case study agencies\u2014USDA and DOI. Treasury, GSA, USDA and  DOI generally agreed with the report. Treasury, USDA, DOI and OMB  provided technical comments, which have been incorporated as  appropriate. OMB agreed with our description of the mechanics of CAFs  and concurred that spikes in BA for capital assets could be alleviated  through other means. OMB also acknowledged the problems with CAFs  that are highlighted in this report, including those related to existing  capital, and agreed that the complications of designing and operating CAFs  might outweigh the benefits. However, they disagreed with our description  of the primary goal of CAFs and therefore do not believe alternative  mechanisms achieve the same goal.\nOMB supports having program budgets reflect full annual budgetary costs  in order to change incentives for decision makers. In addition to proposing  to budget for accruing retirement benefit costs, OMB has suggested  budgeting for accruing hazardous waste clean-up costs and budgeting for  capital through CAFs. Budgeting for full annual budgetary costs should  facilitate decision makers\u2019 ability to compare total resources used with  results achieved across government programs. For capital, OMB has  suggested CAFs as a possible method to allocate and embed the cost of  capital assets at the program budget level. OMB recognizes the usefulness  of asset management and cost accounting systems regardless of whether  CAFs are adopted. It is OMB\u2019s opinion that these tools do not ensure that  the costs of capital are captured in individual program budgets and  therefore do not affect incentives for decision makers in allocating  resources among and within programs. We disagree on several points.\nWe recognize that if the sole or primary purpose of a CAF is to embed costs  in the program budgets, then the alternatives discussed in this report do  not achieve that purpose. However we believe, as highlighted in the Report  of the President\u2019s Commission to Study Capital Budgeting, that the  primary goal of CAFs is to improve decision making for capital. We are not  convinced that CAFs and the annual mortgage payments they would  require would achieve this more effectively than other mechanisms. We  argue instead that the information provided by asset management and cost  accounting systems, when fully implemented, could assist decision makers  in efficiently allocating budgetary resources. While this information may  not necessarily be reflected in program budgets, it is available to aid in  budget and program decision making. The fact that many of these systems  are in relatively early stages of development also increases our concern  about CAFs. In a recent report, we noted the belief among some agency  officials, congressional appropriations committee staff, and budget experts  that improving underlying financial and performance information should  be a prerequisite to efforts to restructure program budgets. We argue this  would also be true for CAFs, since without adequate measures of program  costs and an ability to identify capital priorities, a new financing  mechanism would do nothing to address the basic challenges of  determining how much and what types of capital are needed.\nIt is also unclear that CAFs would create new incentives as OMB argues. As  we describe in the section titled \u201cCost Allocation Efforts May Have Limited  Effect on Agency Decision Making,\u201d if the annual mortgage payments offset  each other within the department budget and at the appropriations  subcommittee level, the deficit would not be affected, and it is unlikely  incentives would be changed. Even during tight budget years, when CAF  payments would squeeze operating budgets, managers may be unable to  change the amount of capital assets they use because of mission  responsibilities, legal requirements, or the cost of disposing of assets.\nWe also recognize the value of linking resources to results in comparing  programs; however, it is unclear that CAFs are necessary or would even  work to accomplish this. Institutionalizing CAFs could permit program  comparison, but fair evaluations would only be possible if existing capital  were included. Therefore, the difficult issue of including existing capital  would have to be addressed. Alternatively, we believe that cost accounting  systems, when well developed within and across agencies, provide a  similar opportunity for comparing programs. In conclusion, we remain of  the view that the operational challenges of CAFs outweigh the benefits and  that alternative mechanisms described in this report can more simply  accomplish the goals of CAFs.\nAs we agreed with your office, unless you publicly announce the contents  of this report earlier, we plan no further distribution of it until 30 days from  its issuance date. At that time we will send copies of this report to the  Director of the Office of Management and Budget, the Administrator of the  General Services Administration, the Secretary of the Department of the  Interior, the Secretary of the Department of Agriculture, and the Secretary  of the Department of the Treasury. We will also make copies available to  others upon request. This report will also be available at no charge on the  GAO Web site at http:\/\/www.gao.gov. If you or your staff have any  questions regarding the information in this report, please contact me at  (202) 512-9142 or Christine Bonham at (202) 512-9576. Key contributors to  this report were Jennifer A. Ashford, Leah Q. Nash, and Seema V. Dargar.\n\nComments from the Department of the Treasury\n\n\tGAO\u2019s Comments\n\nWe believe that the discussion of BPA\u2019s use of \u201cfish credits\u201d is an  appropriate example for the section on agencies\u2019 repayment of their  borrowing from Treasury. Although these credits were provided by  Congress, their use for offsetting payments on Treasury debt has been  controversial and opposed by some members of Congress and other  interested parties. However, we have made technical changes to the section  based on Treasury\u2019s comments.\n\nComments from the Department of the Interior\n\n\tGAO\u2019s Mission\n\nThe Government Accountability Office, the audit, evaluation and  investigative arm of Congress, exists to support Congress in meeting its  constitutional responsibilities and to help improve the performance and  accountability of the federal government for the American people. GAO  examines the use of public funds; evaluates federal programs and policies;  and provides analyses, recommendations, and other assistance to help  Congress make informed oversight, policy, and funding decisions. GAO\u2019s  commitment to good government is reflected in its core values of  accountability, integrity, and reliability.\n\n\tObtaining Copies of GAO Reports and Testimony\n\nThe fastest and easiest way to obtain copies of GAO documents at no cost  is through GAO\u2019s Web site (www.gao.gov). Each weekday, GAO posts  newly released reports, testimony, and correspondence on its Web site. To  have GAO e-mail you a list of newly posted products every afternoon, go to  www.gao.gov and select \u201cSubscribe to Updates.\u201d\n\n\t\tOrder by Mail or Phone\n\n\tTo Report Fraud, Waste, and Abuse in Federal Programs\n\n\tCongressional Relations\n\n\tPublic Affairs","output":"Why GAO Did This Study\n\nCAFs have been discussed as a new mechanism for financing federal capital assets. As envisioned, CAFs would have two goals. First, CAFs would potentially improve decision making by reflecting the annual cost for the use of capital in program budgets. Second, they would help ameliorate at the subunit level the effect of large increases in budget authority for capital projects (i.e., spikes), without forfeiting congressional controls requiring the full cost of capital assets to be provided up-front. Through discussions with budget experts and by working with two case studies, the Departments of Agriculture and of the Interior, we are able to describe in this report (1) how CAFs would likely operate, (2) the potential benefits and difficulties of CAFs, including alternative mechanisms for obtaining the benefits, and (3) several issues to weigh when considering implementation of CAFs.\n\nWhat GAO Found\n\nCapital acquisition funds (CAF) have been suggested as department-level funds that would use appropriated up-front borrowing authority to buy new departmental subunit assets. These subunits would then pay the CAF a mortgage payment sufficient to cover the principal and interest payment on the Treasury loan. The CAF would use those receipts only to repay Treasury and not to finance new assets. If existing capital assets were transferred to the CAF, subunits would pay an annual capital usage charge to the CAF. CAFs might achieve the goals intended, but these goals can be achieved through simpler means. Alternative mechanisms, such as asset management systems, cost accounting systems, and working capital funds may achieve the goal of allocating annual capital costs and improving decision making for capital assets. Our case study agencies generally did not indicate problems with budget authority spikes. They budget in useful segments, use accumulated no-year authority, or finance capital assets using working capital funds. Many concerns about CAFs were raised, including the long-term feasibility of making fixed annual mortgage payments and the added complexity CAFs would create. Implementation would raise a number of issues. If CAFs were applied only to new assets going forward, all programs would not reflect the full annual cost of capital for decades. Yet the difficulties of including existing capital are numerous. Even if these issues were tackled, there is little assurance that CAFs alone would create new incentives for programs to reassess their use of capital since CAF payments would not affect the deficit. Implementation issues could overwhelm the potential benefits of a CAF. More importantly, current efforts under way in agencies would reflect asset costs as part of program costs without introducing the difficulties of a CAF. As long as alternative efforts uphold the principle of up-front funding, CAFs do not seem to be worth the implementation challenges they would create. Except for OMB, agencies generally agreed with our conclusions."}
{"id":"crs_R42467","pid":"crs_R42467_0","input":"\tIntroduction\n\nThis report examines several legislative options to help finance water infrastructure that have recently received attention in Congress. The options discussed here are intended to address capital needs for building and upgrading wastewater and drinking water treatment systems and improving water quality in order to meet requirements under federal law. At issue for Congress is whether the federal government should assist water infrastructure projects and, if so, what form or forms of assistance should be provided.\nLocalities are primarily responsible for providing water infrastructure services. According to the most recent estimates by states and the Environmental Protection Agency (EPA), funding needs for such facilities total $655 billion over a 20-year period. \nSome analysts and stakeholders take issue with such estimates. Some say that EPA's needs estimates are too low because they do not fully reflect types of projects not currently eligible for federal assistance, such as repair and replacement of aging systems, or needs that currently are not well met by existing programs, such as security-related projects; on-site treatment systems in small, dispersed communities; and projects that include mixed elements such as developing and treating new water supply, especially in rural areas. Other estimates much larger than EPA's have been made by a number of groups. For example, the American Water Works Association estimated that investment needs for \"buried drinking water infrastructure\" total more than $1 trillion over the next 25 years. \nHowever, assessing \"need\" is complicated by differences in purpose, criteria, and timing, among other issues. One of the major difficulties is defining what constitutes a \"need,\" a relative concept that is likely to generate a good deal of disagreement. In the infrastructure context, funding needs estimates try to identify the level of investment that is required to meet a defined level of quality or service, but this depiction of need is essentially an engineering concept. It differs from economists' conception that the appropriate level of new infrastructure investment, or the optimal stock of public capital (infrastructure) for society, is determined by calculating the amount of infrastructure for which social marginal benefits just equal marginal costs.\nWhether the estimates made by states and EPA understate or overstate capital needs, communities face formidable challenges in providing adequate and reliable water infrastructure services. Congress has considered ways to help meet those challenges.\nCapital investments in water infrastructure are necessary to maintain high-quality service that protects public health and the environment. Capital facilities are a major investment for water and wastewater utilities. Almost all capital projects are debt-financed (i.e., they are not financed on a pay-as-you-go basis from ongoing revenues to the utility). The principal financing tool that local governments use is issuance of tax-exempt municipal bonds\u2014at least 70% of U.S. water utilities rely on municipal bonds and other debt to some degree to finance capital investments. In 2014, bonds issued for water, sewer, and sanitation projects totaled $34 billion, 10.2% higher than the 2013 volume. Beyond municipal bonds, federal assistance through grants and loans is available for some projects, but is insufficient to meet all needs. Finally, public-private partnerships, or P3s, which are long-term contractual arrangements between a public utility and a private company, provide limited capital financing. While they are increasingly used in transportation and some other infrastructure sectors, P3s are uncommon in the water sector, especially P3s that involve private-sector debt or equity investment in a project. Most P3s for water infrastructure involve contract operations for operation and maintenance.\n\n\tSix Policy Options\n\nThis report addresses several financing options intended to address overall needs and decrease or close the funding gap. Some of the options exist and are well established, but they are under discussion for extension or modification. Other innovative policy options have been proposed in connection with water infrastructure, especially to supplement or complement existing financing tools. Some are intended to encourage private participation in financing of drinking water and wastewater projects. Some are intended to provide robust, long-term revenue to support existing financing programs and mechanisms. This report analyzes six policy options, including their federal budgetary implications, related to financing water infrastructure that were reflected in legislation in the 114 th Congress.\nIncrease funding for the State Revolving Fund (SRF) programs in the Clean Water Act (CWA) and the Safe Drinking Water Act (SDWA). Some propose increasing federal appropriations for these existing programs, under which federal capitalization grants are provided to states for the purpose of making loans to communities for water infrastructure and other eligible projects. Create a \"Water Infrastructure Finance and Innovation Act\" Program (WIFIA). Modeled after the existing Transportation Infrastructure Finance and Innovation Act (TIFIA) program, a WIFIA program is intended to provide federal credit assistance in the form of direct loans and loan guarantees to finance water infrastructure projects. Create a federal water infrastructure trust fund. Establishing such a fund could help to provide a dedicated source of federal funding for water infrastructure. Create a national infrastructure bank. This federal entity would provide low-interest loans, loan guarantees, and other types of credit assistance to stimulate investments by states, localities, and the private sector in a variety of infrastructure projects. Lift restrictions on private activity bonds for water infrastructure projects. This proposal would eliminate the limit on the amount of tax-exempt private activity bonds issued by states and localities to provide financing for privately owned water infrastructure facilities. Reinstate authority for the issuance of Build America Bonds (BABs). BABs are taxable bonds for which the U.S. Treasury pays a direct subsidy of the interest costs to the issuer (a state or local government), thus helping finance capital projects with lower borrowing costs.\nSince the 112 th Congress, a number of these options have been examined by congressional committees, including the House Transportation and Infrastructure Committee and the Senate Environment and Public Works Committee. A pilot program for one of them\u2014WIFIA\u2014was enacted during the 113 th Congress and is discussed below. Nevertheless, interest in other financing options continues, in part due to long-standing concerns with the costs to repair aging and deteriorated U.S. infrastructure generally, and also in response to events in individual regions and cities, such as Flint, MI, where problems of elevated lead levels in its drinking water distribution system have recently drawn public attention.\n\n\t\tIncrease Funding for the SRF Programs\n\nThe most prominent source of federal financial assistance for municipal water infrastructure projects is the SRF programs, which can assist a variety of types of projects, including building new and improving existing wastewater treatment and drinking water treatment facilities needed to comply with standards and requirements of the CWA and SDWA. Clean water and drinking water SRFs have been set up in all 50 states, and the programs are widely supported. The programs' principal strengths are that they are well established; project selection criteria are well known; states have considerable flexibility in selecting which projects to assist; and operations and procedures are familiar to stakeholders.\nEstablished by Congress in the 1987 CWA amendments ( P.L. 100-4 ), the clean water SRF program provides seed money to states in the form of capitalization grants, which are matched by states at least by 20%. A state, in turn, uses the combined federal-state monies to provide various types of assistance, including making low- or no-interest loans, refinancing, purchasing or guaranteeing local debt, and purchasing bond insurance. Loan recipients repay assistance to the state, under terms set by the state. In 1996, Congress enacted a similar drinking water SRF program in the SDWA ( P.L. 104-182 ). At the federal level, the SRF programs are administered by EPA, but actual implementation is done by states. \nBoth programs allow federal, state, and local agencies to leverage limited dollars. According to EPA, because of the funds' revolving nature, the federal investment can result in the construction of up to four times as many projects over a 20-year period as a one-time grant. Further, to the extent that a state uses monies in its SRF to secure bonds and then lends proceeds from the bonds for SRF-eligible activities, loan funding is increased. This financing technique, called leveraging, is used by 28 states and provides funding that exceeds the contribution from federal capitalization grants. In total, leveraged bonds and state contributions have comprised 52% of total SRF investment, while federal capitalization grants have comprised 48%. \nFrom the federal budgetary perspective, the SRF programs are grants , and federal appropriations are fully scored against the budget; none of the funds provided to states as capitalization grants are returned to the U.S. Treasury. However, from the local government or utility's perspective, SRFs are loans , which are repaid to states and are intended to be sources of long-term assistance for water infrastructure projects.\nAlthough the SRF programs are considered to be highly successful in addressing water quality problems, several concerns and criticisms of them have been raised.\nFirst, although the SRF is a loan program, some communities have long favored grants, which the CWA (but not the SDWA) previously provided. The cost burden per customer of capital projects tends to be greater in small communities, and rural and disadvantaged communities prefer grants because many of them lack the tax base needed to repay a loan. Congress has responded to this concern in several ways, including providing earmarked grants in appropriations acts until recently and authorizing a separate CWA grant program for \"wet weather\" projects to address sewer overflow problems (although it never received appropriations). Further, Congress specified in recent appropriations acts (such as EPA's FY2016 appropriation, P.L. 114-113 ) that states shall use a portion of both programs' capitalization grants to provide subsidy in the form of principal forgiveness, negative interest loans, or grants. Critics of the latter point out that, to the extent SRF assistance is partially subsidized and not fully repaid, the corpus of the state's loan fund is diminished, along with its capacity to make future loans.\nSecond, the potential for leveraging to increase overall funding is limited, because nearly half of the states do not use that financing technique. \nThird, some stakeholders\u2014especially large cities\u2014contend that the SRF programs favor small and medium communities. According to this view, the programs do not benefit large projects, because in many cases assistance to individual projects is limited to $20 million. However, the general validity of that concern is unclear, because where limits are imposed, this results from state policies, not federal. Neither the CWA nor the SDWA requires a state to limit SRF assistance, and states establish their own criteria for selecting projects, which are identified annually in Intended Use Plans (IUPs). In order to extend aid to more communities, some states may adopt dollar limits by rule or practice, but this is not universally the case. \nFourth, the CWA restricts most SRF assistance to municipal, intermunicipal, interstate, and state agencies, thus generally barring private utilities from the program. Some in the private sector contend that this restriction provides an advantage to publicly owned utilities. Modifying the CWA in that manner would conform the clean water program to its counterpart in the Safe Drinking Water Act. However, critics of providing federal assistance to private utilities contend that the credit subsidies have the potential of offering windfalls to those companies. Bills to allow clean water SRFs to assist nonpublic entities have been proposed. In 2014, Congress enacted amendments to the SRF provisions of the CWA to allow privately owned projects to be eligible for SRF assistance for certain types of projects, but not all (Section 5003 of P.L. 113-121 ).\nFifth, some are critical that Congress imposes restrictions on states' use of SRF capitalization grants in order to achieve broad policy objectives beyond clean and safe water. Examples include Buy America or Davis-Bacon prevailing wage requirements. According to this view, by mandating that all funded projects meet certain nonwater quality requirements, or that states use a percentage of funds for \"green\" infrastructure such as energy efficiency projects (a requirement in recent appropriations acts), Congress adds to project costs and limits state flexibility. \nPerhaps the most critical concern is the fact that federal capitalization grants are entirely subject to appropriations, which generally have been flat or declining for more than a decade, as shown in Figure 1 . The FY2009 exception to this trend reflects temporary funding under the American Recovery and Reinvestment Act of 2009 (ARRA; P.L. 111-5 ). The President's FY2016 budget request for capitalization grants for the two SRF programs was 2.3% below the $2.36 billion total appropriated in FY2015. Similarly, the FY2017 request for the two programs totaled $2.0 billion and was nearly 13% below the FY2016-appropriated amount. \nSecuring SRF appropriations has become more difficult in recent years, under general deficit reduction pressures and specific discretionary spending caps imposed by the debt agreement embodied in the Budget Control Act of 2011 (BCA; P.L. 112-25 ), as amended by the American Taxpayer Relief Act of 2012 (ATRA; P.L. 112-240 ), the Bipartisan Budget Act of 2013 (BBA 2013; P.L. 113-67 ), and the Bipartisan Budget Act of 2015 (BBA 2015; P.L. 114-74 ). \nIn a multistep process, the BCA, as amended, set caps on discretionary budget authority (appropriations) that began in FY2012 and an automatic spending reduction process that began in FY2013, which together will reduce the deficit by roughly $2 trillion over the FY2012-FY2021 period. The spending caps essentially limit the amount of spending through the annual appropriations process and affect decisions by Congress and the President concerning spending on clean water and drinking water SRF capitalization grants (and most other discretionary programs in the budget, as well). Cap levels are enforced through a process called sequestration, spending cuts that are automatically triggered if discretionary cap levels are breached. This sequestration process has not been used to date, as Congress has enacted budgets with spending amounts consistent with the cap levels. \nFurther, the BCA requires that if the appropriations process does not result in spending levels that adhere to the BCA cap levels and the cap levels are breached, a specified enforcement process\u2014also called sequestration\u2014follows. That is, in addition to the deficit reduction achieved through the statutory caps on discretionary spending, the BCA put in place an automatic process in the event a special joint committee failed to reach an agreement on spending reductions. The BCA \"Super Committee\" announced in November 2011 that it had failed to reach such an agreement. As a result, a $1.2 trillion automatic spending reduction process was triggered, beginning in January 2013, to continue through FY2021. ATRA, BBA 2013, and BBA 2015 modified this process, easing the required reductions in defense and nondefense spending from FY2013 through FY2017 (i.e., raising the discretionary spending caps for those years), but extending the mandatory sequestration process through FY2025. Although some discretionary programs are exempt from this sequester process, the SRF programs are not.\nWhile the BCA caps represent the upper limit of spending that will meet the act's deficit reduction targets, some Members of Congress favor even lower levels of spending than the BCA allows. Some would like to redistribute reductions in order to protect some accounts, especially defense. Congress has debated whether to maintain scheduled spending cuts in future years. As noted above, Congress has increased the discretionary spending caps on three occasions and could debate whether to modify the caps again\u2014by increasing or reducing them. Overall, no matter how much support there may be for more SRF spending, Congress faces many competing needs, priorities, and difficult choices.\nAuthorization of appropriations for clean water SRF capitalization grants expired in FY1994 and for drinking water SRF capitalization grants in FY2003. Congress has considered water infrastructure funding issues several times since the 107 th Congress, including provisions for more robustly funded SRFs, but until recently, no legislation other than appropriations had been enacted. In 2014, Congress enacted a number of amendments to Title VI of the CWA, the SRF provisions, as part of P.L. 113-121 . The 2014 amendments, for example, expanded the types of projects that are eligible for SRF assistance and imposed \"Buy America\" requirements on SRF recipients. However, the amendments did not reauthorize appropriations for clean water SRF capitalization grants, nor have appropriations for drinking water SRF capitalization grants been reauthorized.\nIn the 114 th Congress, legislation was introduced to reauthorize capitalization grants for both the CWA and SDWA SRF programs. S. 2532 and S. 2583 would have authorized $34.9 billion over a five-year period for the CWA program (increasing from $5.2 billion in FY2016 to $9.1 billion in FY2020) and $21.2 billion over a five-year period for the SDWA program (increasing from $3.1 billion in FY2016 to $5.5 billion in FY2020). Reportedly, the intention of the legislation was to restore SRF funding to 2009 spending levels, with adjustment for inflation. A bill introduced in the House, H.R. 4954 , would have authorized $20 billion for the CWA SRF program over a five-year period (increasing from $2 billion to $6 billion). Another House bill, H.R. 2653 , would have reauthorized the SDWA SRF program at the same levels included in S. 2532 and S. 2583 .\nLegislation reported by congressional committees typically is \"scored\" by the Congressional Budget Office (CBO) for the effects on discretionary and mandatory, or direct, spending and by the Joint Committee on Taxation (JCT) for effects on revenues. Discretionary spending is the part of federal spending that lawmakers generally control through annual appropriation acts. In general, legislation that authorizes future appropriations for discretionary programs, by itself, does not increase federal deficits or decrease surpluses. Any subsequent discretionary appropriation to fund the authorized activity would affect the federal budget and would be subject to spending limits under a budget resolution or the BCA. \nEnacting legislation that only authorizes future discretionary appropriations would not result in an increase in CBO's projection of the federal deficit under its baseline assumptions and would not implicate pay-as-you-go rules or the Statutory Pay-As-You-Go Act ( P.L. 111-139 ), or PAYGO, which generally require that direct spending and revenue legislation not increase the federal deficit or that the spending be offset. However, authorizing legislation that affects direct spending or federal revenues is subject to budgetary rules. Direct spending is provided in or controlled by authorizing laws, generally continues without any annual legislative action, and includes spending authority provided for in such programs as Medicare and unemployment compensation. Direct spending also includes many offsetting collections, such as Medicare premiums, which are treated as negative spending instead of as revenues.\nPerspective on how legislative proposals to reauthorize SRF capitalization grants likely would be scored is provided by CBO's report on H.R. 1262 in the 111 th Congress, a bill that would have authorized appropriations totaling $13.8 billion for clean water SRF capitalization grants. The CBO report stated that certain provisions of the bill would affect direct spending and revenues, and it cited the JCT's estimates that by increasing funds available under the clean water SRF, H.R. 1262 would result in some states leveraging SRF grants by issuing additional tax-exempt bonds to finance water infrastructure projects. The JCT estimated that those additional bonds would result in reductions in federal revenue totaling $700 million over 10 years. To offset the reduced revenue, H.R. 1262 included offsetting receipts resulting from an increase in per-ton duties imposed on vessels arriving at U.S. ports from foreign ports. These receipts were intended to offset direct spending in the bill. The significance of needing to include the offsetting receipts in the legislation was that, if states were to increase leveraging and issue more tax-exempt bonds\u2014such as might also occur if the state volume cap on private activity bonds were lifted (see below)\u2014additional offsetting receipts likely would be required in SRF reauthorization legislation.\n\n\t\tCreate a \"Water Infrastructure Finance and Innovation Act\" Program (WIFIA)\n\nOne option for supporting investment in water infrastructure is the creation of a program modeled on the Transportation Infrastructure Finance and Innovation Act (TIFIA) Program. As the name suggests, only transportation projects are eligible for TIFIA assistance, but operation of the TIFIA program has generated interest in creating a similar program for water infrastructure, a so-called Water Infrastructure Finance and Innovation Act (WIFIA) Program. The 113 th Congress enacted legislation to create a pilot WIFIA program ( P.L. 113-121 ), as described in this section.\nTIFIA, enacted in 1998 as part of the Transportation Equity Act for the 21 st Century (TEA-21; P.L. 105-178 ), was reauthorized in 2012 in the Moving Ahead for Progress in the 21 st Century Act (MAP-21; P.L. 112-141 ). TIFIA provides federal credit assistance up to a maximum of 49% of project costs in the form of secured loans, loan guarantees, and lines of credit (23 U.S.C. 601 et seq.). Transportation projects costing at least $50 million (or at least $25 million in rural areas) are eligible for TIFIA financing. Projects must also have a dedicated revenue stream to be eligible for credit assistance. TIFIA can provide senior or subordinated debt. With the enactment of MAP-21, funding authorized for the TIFIA program increased from $122 million annually to $750 million in FY2013 and $1 billion in FY2014. However, the Fixing America's Surface Transportation Act (FAST Act; P.L. 114-94 ), enacted in 2015, reduced the amount available to support loans and other credit assistance under TIFIA. Under the FAST Act, the annual amount is $275 million each of FY2016 and FY2017, $285 million in FY2018, and $300 million in each of FY2019 and FY2020.\nTIFIA assistance is provided based on a project's eligibility. One of the key eligibility criteria is the creditworthiness of the project. To be eligible, a project's senior debt obligations and the federal credit instrument must receive an investment-grade rating from at least one nationally recognized credit agency. The TIFIA assistance must also be determined to have several beneficial effects: fostering a public-private partnership, if appropriate; enabling the project to proceed more quickly; and reducing the contribution of federal grant funding. Other eligibility criteria include satisfying planning and environmental review requirements and being ready to contract out construction within 90 days after the obligation of assistance.\nSince TIFIA's beginning in 1998, it has provided assistance to 65 projects, mostly in the form of direct loans. Loan amounts ranged from $42 million to $1.9 billion. Total credit assistance provided over the life of the program amounts to $25.7 billion, as of December 2016. The amount of credit assistance is much larger than the appropriated amount over this period because the appropriated funds need only cover the subsidy cost of the program (this point is discussed further below). Projects involving TIFIA financing amount to $92.5 billion in total costs. TIFIA typically provides financing to fill a gap in a much larger financial package that sometimes involves private equity and private debt. \nThe 113 th Congress agreed to include a WIFIA pilot program as part of H.R. 3080 , the Water Resources Reform and Development Act of 2014 (WRRDA). Title X of Senate-passed S. 601 included a five-year pilot program, while House-passed H.R. 3080 included no similar provisions. Under the legislation as enacted ( P.L. 113-121 ), Title V, Subtitle C, authorized a five-year WIFIA pilot program. EPA was authorized to provide credit assistance (secured loans or loan guarantees) for drinking water and wastewater projects, and the U.S. Army Corps of Engineers was authorized to provide similar assistance for water resource projects, such as flood control or hurricane and storm damage reduction. \nEPA and the Corps each were authorized a total of $175 million over five years (beginning with $20 million for each agency in FY2015 and increasing to $50 million in FY2019) to provide assistance. Projects must be $20 million or larger in costs to be eligible for credit assistance, except that projects in rural areas (population 25,000 or less) must have eligible projects costs of $5 million or more.\nActivities eligible for assistance under the legislation include project development and planning, construction, acquisition of real property, and carrying costs during construction. Categories eligible for assistance by EPA include projects at wastewater treatment and community drinking water facilities, projects for enhanced energy efficiency of a public water system or wastewater treatment works, repair or rehabilitation of aging wastewater and drinking water systems, desalination or water recycling projects, or a combination of eligible projects. The Secretary of the Army or EPA Administrator, as appropriate, is to determine eligibility based on a project's creditworthiness and dedicated revenue sources for repayment. Selection criteria include the national or regional significance of the project, extent of public or private financing in addition to WIFIA assistance, use of new or innovative approaches, the amount of budget authority required to fund the WIFIA assistance, the extent to which a project serves regions with significant energy development or production areas, and the extent to which a project serves regions with significant water resources challenges. \nFrom the federal perspective, an advantage of TIFIA is that it can provide a large amount of credit assistance relative to the amount of budget authority provided. The volume of loans and other types of credit assistance that TIFIA can provide is determined by the size of congressional appropriations and calculation of the subsidy cost. The subsidy cost largely determines the amount of money that can be made available to project sponsors. Currently in the TIFIA program, the average project subsidy cost is approximately 10%. Proponents of a WIFIA argued that loans for water projects could be even less risky than transportation projects, because water rates are an established repayment mechanism, thus the subsidy cost would be lower and the amount of credit assistance higher (per dollar of budget authority). The Office of Management and Budget will establish a subsidy rate for the entire WIFIA program, but individual subsidy rates also will be determined for each project that is approved to receive credit assistance. Some analysts note that, even with stable rate mechanisms, a few communities and water utilities have recently experienced problems with borrowing and bond repayments, so repayment of a WIFIA loan is not a certainty.\nOne of the main perceived benefits of the TIFIA program is that it provides capital at a low cost to the borrower. Moreover, TIFIA financing is often characterized as patient capital because loan repayment does not need to begin until five years after substantial completion of a project, the loan can be for up to 35 years from substantial completion, and the amortization schedule can be flexible. The WIFIA legislation likewise is intended to provide these benefits. As total TIFIA assistance cannot exceed 49% of project costs, it is intended to encourage nonfederal and private sector financing. WIFIA, with a similar 49% cap on assistance (and an overall cap on all federal assistance of 80% of a project's cost), would likely encourage some nonfederal financing, including from the private sector, but how much is unclear. \nA major source of debate among opponents and proponents has been and continues to be potential adverse impacts of WIFIA on funds for the Clean Water Act and Safe Drinking Water Act SRF programs. Several groups representing state environmental officials opposed the WIFIA provisions in the 113 th Congress because, they contended, it could result in reduced spending on the SRF programs, which are capitalized by federal appropriations. States are concerned that WIFIA would likely be funded through congressional appropriations to the detriment of the SRF programs. On the other hand, water utility groups argued that WIFIA would complement, not harm, existing SRF programs. In their view, WIFIA will provide a new funding opportunity for large water infrastructure projects that are unlikely to receive SRF assistance. In part to address concerns about impacts of WIFIA on the SRF programs, P.L. 113-121 gave state infrastructure financing authorities a \"right of first refusal\" to provide SRF funds for a project when EPA receives an application for WIFIA assistance. \nAnother perceived benefit of the TIFIA program from the federal perspective is that it potentially limits the federal government's exposure to default by relying on market discipline through creditworthiness standards and the encouragement of private capital investment. WIFIA supporters see the same benefits for it. On the other hand, the Congressional Budget Office argues that the federal government underestimates the cost of providing credit assistance under programs like TIFIA. This is because it excludes \"the cost of market risk\"\u2014the compensation that investors require for the uncertainty of expected but risky cash flows. The reason is that the FCRA (Federal Credit Reform Act) requires analysts to calculate present values by discounting expected cash flows at the interest rate on risk-free Treasury securities (the rate at which the government borrows money). In contrast, private financial institutions use risk-adjusted discount rates to calculate present values.\"\nEnacting a WIFIA program raised another federal budgetary and revenue issue. The initial CBO cost estimate for S. 601 concluded that the WIFIA provisions would cost $260 million over five years. In addition, it would result in certain revenue loss to the U.S. Treasury\u2014thus, pay-as-you-go procedures would apply to the bill. CBO cited the Joint Committee on Taxation's (JCT's) estimate that enactment of the bill would reduce revenues by $135 million over 10 years, because states would be expected to issue tax-exempt bonds in order to acquire additional funds not covered by WIFIA assistance. To avoid the pay-as-you-go problem in the bill, the Senate committee added a provision to S. 601 to prohibit recipients of WIFIA assistance from issuing tax-exempt bonds for the non-WIFIA portions of project costs. CBO reestimated the bill and concluded that, because the change would make the WIFIA program less attractive to entities, most of whom rely on tax-exempt bonds for project financing, the cost of the bill would be $200 million less over five years but would have no impact on revenues, because the demand for federal credit would be lower without the option of using tax-exempt financing. P.L. 113-121 retained the bar on tax-exempt financing for WIFIA-assisted projects. Thus, the apparent solution to one problem in the legislation\u2014potential revenue loss\u2014raised a different kind of problem for entities seeking WIFIA credit assistance.\nAfter enactment, the restriction was widely criticized by potential users of WIFIA assistance. In their view, the bond financing restriction, together with the 49% cap on WIFIA assistance in the law, make it very difficult to finance needed projects, which rely heavily on tax-exempt financing for costs not covered by WIFIA or other funds. Congress responded to this concern with a provision in the 2015 surface transportation legislation, the FAST Act ( P.L. 114-94 ), that repealed the tax-exempt bond financing restriction on WIFIA assistance.\nImplementation of WIFIA\u2014i.e., making project loans\u2014was delayed for more than two years but can now occur following enactment of the Further Continuing and Security Assistance Appropriations Act, 2017 ( P.L. 114-254 ) in December 2016, providing the first appropriation of funds to cover the subsidy cost of the program. P.L. 114-254 appropriates $20 million to EPA to begin making loans and allows the agency to use up to $3 million of the total for administrative purposes. Under the legislation, these funds are available to subsidize not to exceed $2.1 billion in WIFIA assistance. EPA now expects to make the first WIFIA loans in 2017. Congress has not yet appropriated funds that would allow the Army Corps to begin preparations or begin making WIFIA loans under the authority in the 2014 statute.\nAlthough implementation of the WIFIA program was delayed until appropriations were provided, interest in using WIFIA as a model for other infrastructure financing programs is apparent. For example, several legislative proposals in the 114 th Congress would have established a similar program for water reclamation and reuse projects in western states. These proposals, referred to as \"Reclamation for WIFIA,\" or RIFIA, were included in H.R. 291 \/ S. 176 (the Water in the 21 st Century Act), S. 1837 (the Drought Resiliency and Recovery Act of 2015), S. 1894 (the California Emergency Drought Relief Act of 2015), and S. 2533 \/ H.R. 5247 (California Long-Term Provisions for Water Supply and Short-Term Provisions for Emergency Drought Relief Act). None of these bills was enacted.\n\n\t\tCreate a Federal Water Infrastructure Trust Fund\n\nOne of the most common criticisms of the SRF programs, that capitalization grants are subject to annual appropriations, is the focus of proposals to create a federal water infrastructure trust fund modeled after existing mechanisms for other types of infrastructure such as the Airport and Airway Trust Fund and the Highway Trust Fund. A trust fund supported by dedicated revenues would be intended to provide sustainable and reliable long-term financing of water infrastructure projects. Proponents contend that trust fund expenditures would not impact the federal deficit (assuming that revenues are at least as large as program spending), because they would be drawn from collections that are dedicated by law for specified purposes. Whether the mechanism is created as a trust fund per se is not the critical issue; rather, the critical issue is creation of a dedicated revenue stream and how it is recorded in the budget.\nThis idea is not new: legislation was introduced in the House in 1993 to support clean water infrastructure by creating a fund that would accrue $6 billion annually in revenues through a combination of user fees and excise taxes. In 1996, EPA issued a report, requested by Congress, on alternative financing options for water infrastructure, including a trust fund, and a 2009 Government Accountability Office (GAO) report, also requested by Congress, similarly assessed options to generate revenue for a clean water trust fund. Legislation has been introduced in several Congresses, including H.R. 4468 , H.R. 5313 , and S. 2848 in the 114 th Congress. Issues associated with alternative financing options have been explored by the House Transportation and Infrastructure Water Resources and Environment Subcommittee in several hearings since 2005.\nThe legislative intent is to create a dedicated revenue source that would be counted as an offsetting receipt or collection and would be recorded in the budget as reducing or netting out outlays for water infrastructure projects. Proponents contend that such proposals would be deficit-neutral (again assuming that new revenue sources match or exceed program outlays) and would be a consistent and protected source of revenue to help states replace, repair, and rehabilitate critical water infrastructure facilities. Both the 1996 EPA and 2009 GAO reports identified a number of issues that would need to be addressed in establishing a clean water trust fund, including how it should be administered, whether it would be used to fund the clean water SRF or a separate program, what type(s) of financial assistance should be provided for projects (grants or loans), and what activities should be eligible for funding. These design issues are necessary, but they are relatively straightforward to resolve legislatively.\nThe most difficult issues conceptually and politically concern how to generate the revenues. Clean water lacks as clear a basis for charging or taxing a set of users as exists for either the highway or aviation trust funds. As GAO observed, \"[E]ach funding option poses various implementation challenges, including defining the products or activities to be taxed, establishing a collection and enforcement framework, and obtaining stakeholder support.\" Consensus on these issues has been elusive. Revenue options proposed in the past include excise taxes on water-based beverages, pharmaceutical products, and items disposed in wastewater (such as cosmetics and toilet paper); fees on industrial discharge of toxic pollutants; or an excise tax on the active ingredients of pesticides and fertilizers. In the 114 th Congress, H.R. 4468 and S. 2848 would have supported a trust fund through revenue from voluntary labeling of consumer products. Under the proposal, businesses could choose to place a label on their products indicating support for clean water, contributing $0.03 for each unit bearing the label to the trust fund. In turn, the trust fund would be used to fund CWA and SDWA SRF capitalization grants. It is unclear how much revenue could be realized from such an approach.\nA third bill in the 114 th Congress, H.R. 5313 , also would have established a water infrastructure trust fund to provide dedicated funding for the CWA and SDWA SRF programs. It also would have provided funding for projects in Native American communities, technical assistance for rural and tribal communities, and grants for residential onsite disposal systems. Funding for this bill would have come from ending deferral on income taxes on offshore corporate profits. According to sponsors, this change to the Internal Revenue Code would generate more than $60 billion per year, nearly $35 billion of which would be dedicated to public water and sewer infrastructure systems.\nFrom a budgetary perspective, there are no hurdles to enacting legislation to collect revenues for a water infrastructure trust fund. That is, assuming that the policy issues of who pays and at what levels are resolved, budget rules do not prohibit enacting a measure to collect new revenues. However, most programs with dedicated revenues, including most trust funds, are not set up to be spent without authorization or appropriation by Congress, making it difficult to assure that all revenues and interest will be spent each year for water infrastructure purposes. Accomplishing the objectives laid out by proponents of the clean water trust fund would involve complicated steps: creating dedicated revenue that is classified in the budget so that it will net out the outlays, preventing spending on the program from being reduced by the congressional authorization and appropriation process, and setting up the program to ensure that it does not count against congressional budget rules such as PAYGO and discretionary spending caps.\nIn the past, Congress has sought to create a mechanism to guarantee spending for some existing infrastructure trust funds. For example, since 2000, legislation authorizing appropriations from the Airport and Airway Trust Fund included a provision making it out of order in the House or Senate to consider legislation that fails to use all aviation trust fund receipts and interest annually. The 2012 FAA reauthorization act, P.L. 112-95 , modified this guarantee to restrict the amount made available for each fiscal year to 90% of the receipts of the aviation trust fund plus interest credited for the respective year as estimated by the Secretary of the Treasury. Further, since 1998, House rules effectively created funding guarantees for transportation activities within the highway and mass transit categories by making any legislation that would cause spending to be less than the amount authorized subject to a point of order. This rule, in clause 3 of Rule XXI, was amended at the beginning of the 112 th Congress to allow an appropriations measure to reduce spending for highway and mass transit activities below the authorized level, as long as those funds were not made available for a purpose not authorized in the surface transportation act. These two examples illustrate the difficulty of assuring that trust fund revenues that are subject to appropriations are spent fully. Moreover, spending guarantees can still be trumped by broader budget policy goals (such as deficit reduction) or by the spending priorities of appropriators\u2014that is, points of order can be waived.\nConceptually, creating a mechanism to protect spending could be done by amending the Balanced Budget and Emergency Deficit Control Act of 1985 to create a separate budget category for water infrastructure programs. Funding from within this category could not be used to, in effect, offset increased spending elsewhere in the budget, thereby removing any incentive for restraining the spending of available trust fund revenues. However, this option reduces the appropriations committees' influence on spending, which they could be expected to vigorously resist, and also would involve amending the Budget Act, thus requiring the acquiescence of the House and Senate budget committees.\n\n\t\tCreate a National Infrastructure Bank\n\nAnother idea for improving the nation's investment in infrastructure is the creation of a national infrastructure bank. An infrastructure bank is a government-established entity that provides credit assistance to sponsors of infrastructure projects. An infrastructure bank can take many different forms, such as an independent federal agency, a federal corporation, a government-sponsored enterprise, or a private-sector, nonprofit corporation. Under most infrastructure bank proposals, the bank would be authorized to help finance the construction or reconstruction of infrastructure in several areas including energy, water and wastewater, telecommunications, and transportation.\nAccording to proponents, a national infrastructure bank would provide several major benefits for infrastructure projects, including water and wastewater capital projects. An infrastructure bank might help facilitate water infrastructure projects by providing large amounts of financing on advantageous terms, including low interest rates and long maturities. This might encourage investment that would otherwise not take place, particularly in large, expensive projects whose costs are borne locally but whose benefits are regional or national in scope. On the other hand, an infrastructure bank may not be the lowest-cost means of achieving that goal. The Congressional Budget Office has pointed out that a special entity that issues its own debt would not be able to match the lower interest and issuance costs of the U.S. Treasury.\nWhether providing financing on advantageous terms by a national infrastructure bank would lead to an increase in the total amount of capital devoted to infrastructure investment, as some believe, is unclear. Another purported advantage of certain types of infrastructure banks is access to private capital, such as pension funds and international investors. These entities, which are generally not subject to U.S. taxes, may be uninterested in purchasing the tax-exempt bonds that are traditionally a major source of project finance, but might be willing to make equity or debt investments in infrastructure in cooperation with a national infrastructure bank. If this shift were to occur, however, it could be to the detriment of existing investment, as the additional investment in infrastructure may be drawn from a relatively fixed amount of available investment funds.\nAnother putative benefit of a national infrastructure bank is that it might improve project selection. A frequent criticism of current public infrastructure project selection is that it is often based on factors such as geographic equity and political favoritism instead of the demonstrable merits of the projects themselves. In many cases, funding goes to projects that are presumed to be the most important, without a rigorous study of the costs and benefits. Proponents of an infrastructure bank assert that it would select projects based on economic analyses of all costs and benefits.\nSelecting projects through an infrastructure bank has possible disadvantages, as well as advantages. First, some assert that it would likely direct financing to projects that are the most viable financially rather than those with the greatest social benefits. Unless there were set-asides for particular types of projects, water and wastewater projects would be in competition with infrastructure projects across a wide spectrum of sectors. Second, financing projects through an infrastructure bank might serve to exclude small urban and rural areas because infrastructure banks would likely focus on large, expensive projects that tend to be located in major urban centers. This may be true even without a minimum project cost threshold set in law. A third possible disadvantage is that a national infrastructure bank may shift some decisionmaking from the state and local level to the federal level.\nOnce established, a national infrastructure bank might help accelerate worthwhile infrastructure projects by bearing more of the financial risk. Large projects are often slowed by funding and financing problems given the degree of risk. These large projects might also be too large for financing from a state infrastructure bank or from a state revolving loan fund. Moreover, even with a combination of grants, municipal bonds, and private equity, mega-projects often need another source of funding to complete a financial package. Financing is also sometimes needed to bridge the gap between construction and when the project generates revenues. Although a national infrastructure bank might help accelerate projects over the long term, it will likely take several years for a bank to be fully functioning after enactment. \nOne attraction of national infrastructure bank proposals is the potential to encourage significant nonfederal infrastructure investment over the long term for a relatively small amount of federal budget authority. Ignoring administrative costs, an appropriation of $10 billion for the infrastructure bank could provide $100 billion of credit assistance if the subsidy cost were similar to that of the TIFIA program (see above).\nThe federal government already has a number of programs to support water and wastewater infrastructure projects. But a national infrastructure bank could provide assistance to infrastructure projects that currently are too large to be financed using existing mechanisms. The creation of an infrastructure bank might provide another mechanism for financing drinking water and wastewater projects, but would set those projects in competition with projects in energy, transportation, and telecommunications. A national infrastructure bank is probably most like the existing TIFIA program. Hence, the creation of both a national infrastructure bank in addition to the WIFIA pilot program that Congress created in 2014 would likely be duplicative.\nBills to establish a national infrastructure bank or a bank-like entity have been introduced in several recent Congresses. All include water and wastewater facilities as eligible projects. Bills in the 114 th Congress included the Partnership to Build America Act ( H.R. 413 ); the Infrastructure 2.0 Act ( H.R. 625 ); the Building and Renewing Infrastructure for Development and Growth in Employment Act (the BRIDGE Act, S. 1589 ); the National Infrastructure Development Bank Act of 2015 ( H.R. 3337 and S. 268 ); and the Jobs! Jobs! Jobs! Act of 2015 (subtitle E of H.R. 3555 ). An infrastructure bank proposal also was included in the Obama Administration's FY2017 budget.\nH.R. 413 and H.R. 625 would have created a wholly owned government corporation called the American Infrastructure Fund (AIF). It would be headed by a board of trustees whose mission would be to operate the AIF to be a low-cost provider of bond guarantees, loans, and equity investments for projects sponsored or owned by state or local governments or submitted by state or local governments on behalf of nonprofit infrastructure projects provided by private parties. Eligible projects would include transportation, energy, water, communications, or educational facilities. At least 35% of its assistance was to be provided to projects for which at least 10% of the project financing comes from private debt or equity. The bank would initially be capitalized with proceeds from $50 billion in American Infrastructure Bonds to be issued by the U.S. Treasury. Proponents estimated that the AIF would leverage the $50 billion at a 15:1 ratio to provide up to $750 billion in assistance.\nThe proposed BRIDGE Act, S. 1589 , would have established a government-owned Infrastructure Financing Authority (IFA) to facilitate investments in transportation, water, and energy infrastructure projects that are economically viable, in the public interest, and of regional or national significance. Funded projects were to be at least $50 million in size, or $10 million in size in rural areas. The authority would provide loans and loan guarantees and would receive initial seed funding of up to $10 billion, which supporters say could incentivize private-sector investment and make possible up to $300 billion in total project investment. IFA funding would be limited to 49% of a project's costs.\nA bill similar to the BRIDGE Act was H.R. 3555 . The wholly owned government corporation created by the infrastructure bank provisions of this bill would be called the American Infrastructure Financing Authority (AIFA). AIFA would be governed by seven presidentially appointed board members. AIFA would be authorized to provide loans and loan guarantees to eligible transportation, water, and energy infrastructure projects. To be eligible for assistance, a project would have to cost at least $100 million, or at least $25 million in rural areas. Loans from the bank may not exceed 50% of eligible costs. The bank would be capitalized with a $10 billion appropriation.\nH.R. 3337 and S. 268 would have created a National Infrastructure Development Bank (NIDB), governed by seven presidentially appointed directors. The NIDB would be able to issue public benefit bonds (PBBs) to help finance infrastructure, as well as make loans and loan guarantees. Funded projects could include transportation, telecommunications, energy, and environmental infrastructure. The bank would be capitalized by Congress with $5 billion annually for five years. Among the criteria for evaluating projects for assistance from the NIDB would be the extent to which assistance will maximize private investment in the project while providing a public benefit.\nIn addition, the FY2017 budget renewed a request made in previous Obama Administration budgets to create an independent National Infrastructure Bank (NIB). According to budget documents, the NIB would provide direct and guaranteed loans for transportation, water, and energy infrastructure projects. Interest rates on loans would be indexed to U.S. Treasury rates, with maturity up to 35 years. The NIB would finance no more than 50% of total costs of any project. Funding for the bank would initially require $167 million to cover subsidy cost and administrative expenses, which the Administration estimates would support $1.2 billion in loan activity. It also projected that the NIB would increase the federal deficit by $1.98 billion over the initial five years of activity and $7.7 billion over 10 years.\nSeparate from its proposal for a NIB, the Administration's FY2017 budget proposed to establish a new federal credit program within the Treasury Department to provide direct loans to infrastructure projects developed through a public-private partnership (P3). Eligible projects were to include water, transportation, energy, and broadband sectors, as well as certain social infrastructure (e.g., educational facilities). The program was estimated to provide $15 billion in direct loans over 10 years with no subsidy, or cost, to taxpayers. It was intended to reduce the financing cost gap between P3s and traditional project procurement, thus encouraging the public sector to evaluate potential P3 arrangements.\n\n\t\tLift Private Activity Bond Restrictions on Water Infrastructure Projects\n\nWater infrastructure can be owned and operated by the private sector, a governmental entity, or through a so-called partnership between a government and a private entity. A partnership could involve a private entity investing in water infrastructure and receiving a market rate of return on that investment. This investment could be an equity share (part ownership) or some other agreement that provides a stream of revenue generated by the facility. Or, the partnership could be the government issuing tax-exempt debt on behalf of the private entity with so-called \"private activity bonds\" (PABs). Through PABs, tax-exempt financing is granted to the private sector for public-purposes projects, such as water infrastructure.\nAmong the options to modify the existing framework for federal assistance for investment in water infrastructure, one option for greater federal involvement includes expanding the availability of tax-exempt financing to private entities, for example, through PABs.\nGenerally, under current law, privately owned water furnishing and water treatment facilities are not eligible for tax-exempt financing. The tax code, however, does provide that privately owned water furnishing facilities that (1) are operated by a governmental unit or (2) charge rates that are approved by a political subdivision of the host community, can issue qualified PABs that are tax-exempt. Most qualified PABs, including bonds for water furnishing and water treatment facilities, are subject to a state volume limit. In 2016, the volume cap was either the greater of $100 multiplied by the state's population, or $302.88 million. As determined by the Internal Revenue Service, the total volume cap for the 50 states, the District of Columbia, and Puerto Rico was $32.5 billion.\nTraditional tax-exempt bonds provide for lower borrowing costs for state and local governments indirectly through a federal tax exemption to investors for the interest income received on the bonds. The opportunity to use bonds whose interest payments are exempt from federal income taxation confers a considerable subsidy to bond issuers and to investors who buy the bonds. The FY2017 federal budget estimated that the federal tax expenditure for \"water, sewage, and hazardous waste disposal facilities\" would be $3.1 billion over the 2016 to 2020 budget window and $7.7 billion between 2016 and 2025.\nThe private activity bond volume limit noted above originated in the Deficit Reduction Act of 1984 ( P.L. 98-369 ). The limit was implemented because \"Congress was extremely concerned with the volume of tax-exempt bonds used to finance private activities.\" The limit and the list of qualified activities were both modified again under the Tax Reform Act of 1986 (TRA 1986; P.L. 99-514 ). At the time of the TRA 1986 modifications, the Joint Committee on Taxation identified the following specific concerns about tax-exempt bonds issued for private activities:\nthe bonds represent \"an inefficient allocation of capital\"; the bonds \"increase the cost of financing traditional governmental activities\"; the bonds allow \"higher-income persons to avoid taxes by means of tax-exempt investments\"; and the bonds contribute to \"mounting [federal] revenue losses.\"\nThe inefficient allocation of capital arises from the economic fact that additional investment in tax-favored private activities will necessarily come from investment in other public projects. For example, if bonds issued for water infrastructure did not receive special tax treatment, some portion of the bond funds could be used for other government projects such as schools or other public infrastructure.\nThe greater volume of tax-exempt private activity bonds then leads to the second Joint Committee on Taxation concern listed above: higher cost of financing traditional government activities. Investors have limited resources; thus, when the supply of tax-exempt bond investments increases, issuers must raise interest rates to lure them into investing in existing government activities. In economic terms, issuers raising interest rates to attract investors is analogous to a retailer lowering prices to attract customers. The higher interest rates make borrowing more expensive for issuers.\nThe final two points are less important from an economic efficiency perspective but do cause some to question the efficacy of using tax-exempt bonds to deliver a federal subsidy. Tax-exempt interest is worth more to taxpayers in higher brackets; thus, the tax benefit flows to higher-income taxpayers, which leads to a less progressive income tax regime.\nThe revenue loss generated by tax-exempt bonds also expands the deficit. A persistent budget deficit ultimately leads to generally higher interest rates as the government competes with private entities for scarce investment dollars. Higher interest rates further increase the cost of all debt-financed state and local government projects.\nThe implicit assumption of several recent proposals has been that the current cap is binding, preventing the investment in needed water infrastructure projects. Proponents have argued that the opportunity for more private entities to meet the requirements for tax-exempt bond financing could induce additional infrastructure investment. What is unclear is how much new investment will be undertaken with PABs if these restrictions were relaxed. Underlying the estimates of potential new investment is demand for new water infrastructure.\nDemand for the use of PAB capacity for water infrastructure has been relatively low. The Internal Revenue Service (IRS) reports that for the 2011 tax year, new money bonds (in contrast to refunding bonds) were issued for 22 private water furnishing, sewage, and solid waste disposal facilities projects accounting for $453 million of the $40.5 billion of new money long-term, tax-exempt PABs issued that year (about 1% of total new money PABs). An additional $1.7 billion in PABs were spent refunding 29 prior bond issues for water, sewage, and solid waste disposal facilities.\nThe IRS data also provide information on the issuance by state. In 2010, 30 states did not commit any volume capacity to water, sewage, and solid waste disposal facilities. Two states, California (13 projects) and Texas (six projects), combined for $792 million of the $2.7 billion in new money issuance in that year. The limited number of states using PABs may reflect lack of demand for privately owned water infrastructure or may reflect the relative size of water projects limiting the use of PABs. The average PAB new money amount issued for water, sewer, and solid waste was $57.8 million in 2010, whereas the average PAB new money issuance for all types of eligible bond purposes was smaller, at $25.2 million. The remainder in 2010 included qualified mortgage revenue bonds, which typically have a smaller average issue size. In 2011, nearly one-half of the states did not commit any volume capacity to water, sewage, or solid waste disposal facilities.\nPrivate entities also invest in water infrastructure beyond partnerships with governments through PABs. For example, the largest investor-owned U.S. water and wastewater utility company, American Water, reported investing $1 billion in water infrastructure capital in 2014 and projected that it will make $6.0 billion in capital investment through 2019. Private entities like American Water use a mix of current revenue and debt, including PABs, corporate debt, and equity investment, to finance this capital spending. \nThe President's FY2017 budget request (like several previous budgets) supported eliminating the volume cap for PABs for water infrastructure. This proposal would have created a new category of tax-exempt qualified PABs called \"Qualified Public Infrastructure bonds\" (QPIBs) that would be eligible to finance categories of infrastructure projects that now are subject to bond volume cap, including water, sewage, and solid waste disposal facilities. The proposal would have made the bond volume cap requirement inapplicable to QPIBs. Treasury estimated that this proposal would increase the federal deficit by $4.9 billion between 2017 and 2026.\nThree bills in the 114 th Congress proposed to permanently exclude water infrastructure from the volume cap ( H.R. 499 , S. 2606 , and S. 2821 ). As the data above suggest, excluding PABs for water infrastructure from state volume caps would likely generate marginally more investment in water infrastructure. The private entities that already have used PABs in conjunction with other financial tools would likely increase the use of PABs. What is unclear, however, is if the expanded use of PABs would necessarily reflect substantially new infrastructure investment or just change the mix of financing tools employed for already planned projects. If the latter, then the potential revenue loss may not achieve the intended policy objective of increasing investment in water infrastructure.\nThe proposed PAB expansion may also be a limited success, as many communities have chosen government provision of water infrastructure. In 2011, long-term tax-exempt PAB issuance for water, sewage, and solid waste disposal facilities totaled $2.2 billion. By comparison, approximately $28 billion in governmental bonds (i.e., non-PAB tax-exempt bonds) were issued for 1,244 water, sewer, and sanitation projects in 2011. The reliance on government provision may reflect market conditions that make private provision infeasible or public preference for government owned and operated water infrastructure.\n\n\t\tReinstate Authority for Issuance of Build America Bonds (BABs)\n\nAnother option that has been under discussion to modify the existing framework for federal assistance for water infrastructure investment is expansion or extension of the use of Build America Bonds (BABs).\nBABs were created by the American Recovery and Reinvestment Act of 2009 (ARRA). The volume of BABs was not limited (unlike qualified Private Activity Bonds), and the purpose was constrained only by the requirement that \"the interest on such obligation would (but for this section) be excludible from gross income under section 103.\" Thus, BABs could have been issued for any purpose that would have been eligible for traditional tax-exempt bond financing other than private activity bonds ; thus, they did not allow for private-sector participation (unlike PABs). The authority under ARRA to issue BABs expired on December 31, 2010.\nBABs were modeled after the \"taxable bond option,\" which was first considered in the late 1960s. In 1976, the following was posited by the then-president of the Federal Reserve Bank in Boston, Frank E. Morris:\nThe taxable bond option is a tool to improve the efficiency of our financial markets and, at the same time, to reduce substantially the element of inequity in our income tax system which stems from tax exemption [on municipal bonds]. It will reduce the interest costs on municipal borrowings, but the benefits will accrue proportionally as much to cities with strong credit ratings as to those with serious financial problems.\nOne benefit of the BAB program was that it tapped into a broader market for investors without regard to tax liability (such as pension funds, which typically do not invest in tax-exempt bonds). Traditional tax-exempt bonds have a narrow class of investors, generally consisting of individuals and mutual funds. BABs offered an issuer a credit equal to 35% of the interest rate established between the buyer and issuer of the bond. The Treasury Department estimated that the $181 billion in BABs issued from April 2009 through December 2010 will allow state and local governments to save an estimated $20 billion in borrowing costs, in present value savings, as compared to issuing traditional tax-exempt bonds.\nOne option would be to extend BABs to investment in privately owned water infrastructure. Many of the disadvantages cited for PABs identified earlier could be avoided, such as the windfall gain for high-income investors and the economic inefficiency of using a third party to deliver a federal subsidy. The President's FY2017 budget suggested that the BAB program \"has a potentially more streamlined tax compliance framework focusing directly on governmental issuers who benefit from the subsidy, as compared with tax-exempt bonds and tax credit bonds, which involve investors as tax intermediaries.\" The partner government or water authority would \"issue\" bonds at the low rate and pass through the value of the subsidy to the private entity. The private entity would own and operate the water infrastructure. \nIn the 114 th Congress, H.R. 2676 was introduced to extend and expand a modified version of BABs. The President's FY2017 budget (like requests since FY2012) proposed to reinstate BABs\u2014now to be called America Fast Forward Bonds\u2014as an alternative to traditional tax-exempt bonds at a 28% credit rate. The Administration's proposal would have allowed eligible use of America Fast Forward Bonds to include financing of all qualified PAB program categories. Treasury estimated that the proposal would increase the federal deficit by $71 billion over 10 years, but the 28% federal subsidy level was intended to be approximately revenue neutral, relative to the estimated future federal tax expenditures for tax-exempt bonds.\nAccording to CBO, the interest subsidy of BABs would be recorded in the federal budget as outlays, like other payments to state and local governments. At the same time, by substituting taxable for tax-exempt bonds, the program would increase taxable interest income. CBO analyzed a similar proposal in the FY2013 budget and estimated that it would increase subsidy payments to state and local governments, thus boosting federal outlays by $70 billion over 10 years and would raise revenues by $63 billion, with a net effect of increasing the cumulative deficit by $7 billion.\n\n\tConclusion\n\nConsensus exists among many stakeholders\u2014state and local governments; equipment manufacturers, construction companies, and engineers; and environmental advocates\u2014on the need for more investment in water infrastructure. Many in these varied groups support one or more options for doing so. There is no consensus supporting a preferred option or policy, and many advocate a combination that will expand the financing \"toolbox\" for projects. Some of the options discussed in this report may be helpful in addressing financing problems, but there is no single method or \"silver bullet\" that will address needs fully or close the financing gap completely. For example, some, such as a WIFIA or a national infrastructure bank, may be helpful to projects in large urban or multijurisdictional areas, while others, such as expanded SRF programs, may be more beneficial in smaller communities. Even with enactment of the WIFIA pilot program in P.L. 113-121 , at least for the near term, most communities will continue to rely on the existing SRF programs, tax-exempt governmental bonds, and available tax-exempt private activity bonds to finance their water infrastructure needs. \nThrough its budget requests, the Obama Administration expressed support for the SRF programs and the new WIFIA program, and it endorsed excluding water infrastructure PABs from the state volume cap and reinstating Build America Bonds.","output":"This report addresses several options considered by Congress to address the financing needs of local communities for wastewater and drinking water infrastructure projects and to decrease or close the gap between available funds and projected needs. Some of the options exist and are well established, but they have been under discussion for expansion or modification. Other innovative policy options for water infrastructure have been proposed, especially to supplement or complement existing financing tools. Some are intended to provide robust, long-term revenue to support existing financing programs and mechanisms. Some are intended to encourage private participation in financing of drinking water and wastewater projects.\nSix options reflected in legislative proposals in the 114th Congress, including their federal budgetary implications, are discussed.\nIncrease funding for the State Revolving Fund (SRF) programs in the Clean Water Act and the Safe Drinking Water Act (S. 2532\/S. 2583, H.R. 4653, and H.R. 4954). Create a \"Water Infrastructure Finance and Innovation Act\" Program, or WIFIA (P.L. 113-121 in the 113th Congress; several bills in the 114th Congress that proposed to establish a similar program for water reclamation and reuse projects in western states are H.R. 291\/S. 176, S. 1837, S. 1894, and S. 2533\/H.R. 5247). Create a federal water infrastructure trust fund (H.R. 4468, H.R. 5313, and S. 2848). Create a national infrastructure bank (included in the Administration's FY2017 budget request and H.R. 413, H.R. 625, H.R. 3337, H.R. 3555, S. 268, and S. 1589). Lift restrictions on private activity bonds for water infrastructure projects (included in the Administration's FY2017 budget request and H.R. 499, S. 2606, and S. 2821). Reinstate authority for the issuance of Build America Bonds (included in the Administration's FY2017 budget request and H.R. 2676).\nA number of these options have been examined by congressional committees since the 112th Congress. A pilot program for one of them\u2014WIFIA\u2014was enacted in 2014. Nevertheless, interest in other financing options continues, in part due to long-standing concerns regarding the costs to repair aging and deteriorated U.S. infrastructure generally, and also in response to events in individual regions and cities, such as Flint, MI, where problems of elevated lead levels in its drinking water distribution system have recently drawn public attention.\nConsensus exists among many stakeholders\u2014state and local governments, equipment manufacturers and construction companies, and environmental advocates\u2014on the need for more investment in water infrastructure. There is no consensus supporting a preferred option or policy, and many advocate a combination that will expand the financing \"toolbox\" for projects. Some of the options discussed in this report may be helpful, but there is no single method that will address needs fully or close the financing gap completely. For example, some may be helpful to projects in large urban or multijurisdictional areas, while others may be more beneficial in smaller communities. At least for the near term, communities will continue to rely on the existing SRF programs, tax-exempt governmental bonds, and tax-exempt private activity bonds to finance their water infrastructure needs."}
{"id":"gao_GAO-11-596","pid":"gao_GAO-11-596_0","input":"\tBackground\n\n\t\tOverview of DHS Acquisition Process\n\nDHS acquisitions support a wide range of missions and investments  including ships and aircraft, border surveillance and screening equipment,  nuclear detection equipment, and systems to track the department\u2019s  financial and human resources. In support of these investments, DHS, in  2003, established an investment review process to help reduce risk and  increase the chances for successful acquisition outcomes by providing  departmental oversight of major investments throughout their life cycles  and to help ensure that funds allocated for investments through the budget  process are being spent wisely, efficiently, and effectively.\nOur work over the past several years has consistently pointed to the  challenges DHS has faced in effectively managing and overseeing its  acquisition of programs and technologies.\nIn November 2008, we reported that DHS had not effectively  implemented its investment review process, and as a result, the  department had not provided the oversight needed to identify and  address cost, schedule, and performance problems for its major  acquisitions. Specifically, we reported that of the 48 major  investments reviewed requiring milestone or annual reviews, 45 were  not reviewed in accordance with the departments\u2019 investment review  policy, and 18 were not reviewed at all. Four of these investments had  transitioned into a late acquisition phase\u2014production and  deployment\u2014without any required reviews. We recommended and  DHS concurred that DHS identify and align sufficient management  resources to implement oversight reviews in a timely manner  throughout the investment life cycle.\nIn June 2010, we reported that over half of the 15 DHS programs we  reviewed awarded contracts to initiate acquisition activities without  component or department approval of documents essential to planning  acquisitions, setting operational requirements, and establishing  acquisition program baselines. Our work noted that without the  development, review, and approval of these key acquisition documents,  agencies are at risk of having poorly defined requirements that can  negatively affect program performance and contribute to increased  costs. In January 2011, DHS reported that it has begun to implement an  initiative to assist programs with completing departmental approval of  acquisition program baselines.\nIn our February 2011 biennial update of the status of high-risk areas  needing attention by Congress and the executive branch, we continued  to designate DHS\u2019s implementation and transformation, which includes  the department\u2019s management functions, as a high-risk area. For  example, because of acquisition management weaknesses, major  programs, such as SBInet, have not met capability, benefit, cost, and  schedule expectations. Further, DHS had not fully planned for or  acquired the workforce needed to implement its acquisition oversight  policies as we previously recommended. As of January 2011, DHS  reported that it had increased its acquisitions management staffing and  planned to hire more staff to develop cost estimates.\nDHS has taken several actions to address these recommendations and  implement more discipline and rigor in its acquisition processes.  Specifically, DHS created the Acquisition Program Management Division  in 2007 to develop and maintain acquisition policies, procedures, and  guidance as a part of the system acquisition process. DHS also issued an  interim acquisition directive and guidebook in November 2008 for  programs to use in preparing key documentation to support component  and departmental making. In January 2010, DHS finalized the acquisition  directive which established acquisition life-cycle phases and senior-level  approval of each major acquisition program at least three times at key  acquisition decision events during a program\u2019s acquisition life-cycle. This  directive established the acquisition life-cycle framework with four  phases:   (1) identify a capability need (need phase);  (2) analyze and select the means to provide that capability (analyze\/select  phase);  (3) obtain the capability (obtain phase); and   (4) produce, deploy, and support the capability (produce\/deploy\/support  phase).\nEach acquisition phase culminates in a presentation to the Acquisition  Review Board (ARB), which is to review each major acquisition (that is,  those designated as level 1 or level 2 programs) at least three times at key  acquisition decision events during a program\u2019s acquisition life cycle. The  acquisition decision authority\u2014the Chief Acquisition Officer or other  designated senior-level official\u2014is to chair the ARB and decide whether  the proposed acquisition meets certain requirements necessary to move on  to the next phase and eventually to full production. The directive outlines  the extent and scope of required program, project, and service  management; level of reporting requirement; and the acquisition decision  authority based on whether the acquisition is classified as level 1, 2, or 3.  The acquisition decision authority for major acquisitions\u2014level 1 and level  2\u2014is to be at the department or component level and the acquisition  decision authority for nonmajor acquisitions\u2014level 3\u2014is to be at the  component level.An acquisition may be raised to a higher level  acquisition level by the ARB. The ARB supports the acquisition decision  authority in determining the appropriate direction for an acquisition at key  Acquisition Decision Events.\nFollowing an ARB meeting, the Acquisition Program Management Division  is to prepare an acquisition decision memorandum as the official record of  the meeting to be signed by the acquisition decision authority. This memo  is to describe the approval or other decisions made at the ARB and any  action items to be satisfied as conditions of the decision. The ARB reviews  are to provide an opportunity to determine a program\u2019s readiness to  proceed to the following life-cycle phase. However, we reported in March  2011 that the ARB had not reviewed most of DHS\u2019s major acquisition  programs by the end of fiscal year 2009 and programs that were reviewed  had not consistently implemented action items identified as part of the  review by established deadlines. Our prior work has shown that when  these types of reviews are skipped or not fully implemented, programs  move forward with little, if any, early department-level assessment of the  programs\u2019 costs and feasibility, which contributes to poor cost, schedule,  and performance outcomes.\nAs a part of its responsibilities, the Acquisition Program Management  Division has identified major DHS acquisition programs, projects, or  services for oversight through the ARB process. According to Acquisition  Program Management Division officials, beginning in fiscal year 2009, the  list was to be updated on a yearly basis through interviews with and  documentation from component program offices. In May 2010, the  Undersecretary for Management identified 86 programs on DHS\u2019s major  oversight list for fiscal year 2010, 62 of which TES and component officials  determined required T&E oversight\u2014that is programs that were in an  acquisition phase where T&E was being planned or conducted. Several of  the 62 programs consisted of multiple subprojects, such as TSA\u2019s  Passenger Screening Program. For more information on these 86 major  acquisition programs, see appendix II.\nDHS\u2019s 2010 acquisition directive also includes guidance for preparing  documentation to support component and departmental decision making  and specifies requirements for developmental and operational T&E as a  part of the acquisition review process. Developmental T&E may include  a variety of tests, such as system qualification testing, system acceptancetesting, and software testing. Developmental testing may be carried out by  the user and may be conducted in simulated environments, such as  laboratories, test facilities, or engineering centers that might or might not  be representative of the complex operational environment. Operational  T&E is a field test, performed under realistic conditions by actual users in  order to determine the operational effectiveness and suitability of a  system, and the corresponding evaluation of the data resulting from the  test.\n\n\t\tTES\u2019s Role in Overseeing Component Testing and Evaluation\n\nTo carry out its responsibilities for overseeing T&E, S&T established TES  in 2006 and created the position of Director of TES in June 2007. TES\u2019s  mission is to establish and manage DHS T&E policies and procedures and  to oversee and coordinate T&E resources to verify attainment of technical  performance specifications and operational effectiveness and suitability.   To carry out its T&E oversight, in fiscal year 2010, TES had a budget of  about $23 million and as of February 2011 had a staff of 26, which includes  the TES Director, 19 staff dedicated to T&E activities, and 6 dedicated to  developing standards.\nIn May 2009, DHS issued a delegation which specified the responsibilities  and duties of the Director of Operational Test & Evaluation. The TES  Director and Director of Operational Test and Evaluation, while distinct  positions in the T&E directive, share some advisory, review, and oversight  responsibilities.  For example, both are responsible for advising program  managers in developing T&E documentation and approving test and  evaluation master plans. The TES Director is responsible for developing  DHS T&E policy and the Director of Operational Test and Evaluation is to  approve operational test plans and report to the ARB after assessing  operational test reports.  Since May 2009, the Director of Operational Test  and Evaluation position has not been continuously filled according to the  current TES Director. In a November 2010 memo, the Under Secretary  for Science and Technology designated one person as both the director of  TES and the Director of Operational Test and Evaluation until further  notice.\nThe T&E directive outlines the responsibilities of the TES Director and the  Director of Operational Test and Evaluation. According to the directive,  the TES Director is to establish the department\u2019s testing and evaluation  policies and processes and the Director of Operational Test and  Evaluation is to administer those policies and processes. The directive  also outlines TES\u2019s responsibilities in overseeing T&E across DHS  components and its role in the acquisition review process. Table 1  describes TES\u2019s T&E responsibilities as outlined in the T&E directive for  all level 1, level 2, and special oversight acquisition programs.\nThe T&E directive requires TES to review and approve required  component acquisition documentation before an ARB meets for an  acquisition decision event.  These documents are meant to be reviewed  and, if required, approved in a sequential order associated with the  acquisition phase, because these documents build upon one another.  Figure 1 presents TES\u2019s responsibilities throughout the four DHS  acquisition phases as defined in the acquisition directive.\nTo carry out these responsibilities for the 62 acquisition programs under  its oversight in fiscal year 2010, TES has test area managers who assist  component officials in fulfilling their T&E responsibilities and provide  guidance and clarification in regard to the requirements in the T&E  directive.  According to TES, each major acquisition program is assigned a  test area manager and as of February 2011, TES employed nine test area  managers.\n\n\tTES Met Some Oversight Requirements for T&E of Acquisition Programs Reviewed; Additional Steps Needed to Ensure That All Requirements Are Met\n\nTES met its oversight requirements when approving test plans and test  reports in accordance with DHS acquisition and T&E directives for the 11  major acquisition programs we selected for review.  However, TES did not  consistently document its review and approval of operational test agents  or its review of other required acquisition documentation, which could  provide more assurance that components were meeting T&E directives  when TES reviewed these documents. Further, TES does not plan an  independent assessment of TSA\u2019s Advanced Spectroscopic Portal\u2019s  operational test results, as required by the T&E directive.\n\n\t\tTES Oversight of Components\u2019 Test Plans and Test Reports\n\nTES is to oversee T&E of major DHS acquisition programs by ensuring  that the requirements set forth in the T&E directive are met and by  working with component program officials to develop T&E  documentation, such as test and evaluation master plans, as required by  DHS\u2019s acquisition directive. TES\u2019s T&E oversight responsibilities set forth  in the T&E and acquisition directives pertain to programs primarily in the  analyze\/select and obtain phases of the acquisition process because most  testing and evaluation efforts occur in these phases. As a result, the  requirements of the T&E directive and TES\u2019s oversight vary depending on  when a program progresses through certain phases of the acquisition  process. For example, when a program is in the produce\/deploy\/support  phase there is usually little to no T&E activity, so TES\u2019s involvement is  limited.\nWe reviewed TES\u2019s T&E oversight efforts for 11 DHS programs and found  that TES had conducted oversight of components\u2019 test plans and test  reports, as set forth in the acquisition and T&E directives, as it asserted.  The 11 programs, each managed by different DHS components, were in  one phase of the acquisition process or had two or more subprojects  simultaneously in different phases of the acquisition process. For example,  Coast Guard\u2019s H-65 helicopter program has 6 discrete subprojects, each  with its own completion schedule, including 4 subprojects in the  Produce\/Deploy\/Support phase and 2 subprojects in the Obtain phase.  Acquisition Program Management Division, TES, and component officials  determine if subprojects need to develop separate sets of acquisition  documents as they progress through the acquisition process. Figure 2  provides an overview of these programs and their associated acquisition  phases. Additional details on these programs can be found in appendix I.\nAs shown in figure 3, for the 11 selected DHS programs, TES reviewed and  approved test and evaluation master plans for 6 of the 7 programs that  were required to develop such plans by the T&E and acquisition directives  and had documented their approval of these plans. For the one program  that was in the phase that required such a plan\u2014ATLAS Tactical  Communications\u2014the program had not yet drafted its test and evaluation  master plan. The remaining  4 programs had plans in draft form that had  not yet been submitted to TES for review. As a result, TES was not yet  required to review these plans.\nComponent officials from each of these six programs stated that TES  provided input to the development of the test and evaluation master plans.  For example, Office of Health Affairs officials stated that TES officials  suggested that the BioWatch Gen-3 program office incorporate an  additional test event to ensure that the program was tested under specific  environmental conditions described in the program\u2019s operational  requirements document, which resulted in more tests.  In addition, U.S.  Customs and Border Protection (CBP) officials stated that TES  participated in a line-by-line review of the SBInet test plan and provided  detailed suggestions. Further, TES suggested that the criteria used for  operational testing in the test and evaluation master plan needed to be  expanded, and that an update may be required for SBInet to progress to  the next acquisition phase. All of the component program officials who  had undergone TES review or approval told us that TES test area  managers provided their input in a variety of ways, including participating  in T&E working groups, in specific meetings to discuss T&E issues, or by  providing written comments culminating in TES\u2019s approval of the plan.\nAfter the test and evaluation master plan is developed, the test agent is to  develop operational test plans, which detail field testing of the system  under realistic conditions for determining that the system\u2019s overall  effectiveness and suitability for use before deployment of the system. As  shown in figure 4, of the 11 selected acquisition programs, TES reviewed  and approved operational test plans for the 4 programs that were required  to develop such plans by the acquisition directive and documented their  approval of these plans.\nComponent officials from these 4 programs said that TES provided input  into their test plans.  For example, National Protection and Programs  Directorate officials from the National Cybersecurity Protection System  program stated that TES had significant comments on their operational  test plan, such as including confidence levels associated with the syste key performance requirements and helping program officials select a  sample size necessary to measure statistically significant results. In  addition, TES officials requested that the plan include different testing  scenarios in order to demonstrate a varied use of the system. In a officials from the Transportation Security Administration\u2019s (TSA)  Advanced Technology-2 program indicated that TES provided significan input to their plan through a working group. The remaining 7 of the 11  programs had not yet begun to develop their operational test plan.\nAt the conclusion of operational testing, the test agent is to write a re on the results of the test. The T&E directive specifies that TES is to  receive the operational test report, which is to address all the critic issues and provide an evaluation of the operational suitability and  operational effectiveness of the system. After reviewing the operatio test report, TES then is to write a letter of assessment\u2014which is an  d  independent assessment of the adequacy of the operational test an provides TES\u2019s concurrence or nonconcurrence on the test agent  evaluation of operational suitability and operational effectiveness. TES is  to provide the letter of assessment to the ARB as it is determining whe a program should progress to the production and deployment phase.\nOf the 11 programs we selected to review, TES developed a letter of  assessment for the 1 program\u2014 TSA\u2019s Advanced Technology 2 \u2014that had completed operational testing and had a written operational T&E report  on the results. The assessment concluded that while the T&E activities  were adequate to inform the ARB as to system performance, TES did not  concur with TSA\u2019s test agent\u2019s assessment as to system effectiveness  because the system did not achieve a key performance parameter during  testing. The ARB considered the letter of assessment and TES\u2019s input and  granted TSA permission to procure and deploy a limited number of  screening machines. TSA will have to go before the ARB again to  determine if full-scale production can proceed after TSA has provided the  ARB with a business case and risk mitigation plan related to testing issues.  The remaining 10 selected programs had not completed operational testing  and thus, were not ready for letters of assessment.\nIn addition to letters of assessment, TES officials told us that they  regularly discuss T&E issues and concerns either verbally or through e- mails with Acquisition Program Management Division officials, who are  responsible for organizing ARB meetings. For example, Acquisition  Program Management Division officials stated that they rely on TES to  provide candid information about the suitability of various programs\u2019 T&E  and whether these issues impact their program\u2019s readiness to go before  the ARB.  Further, the officials told us that TES\u2019s input at the ARBs, if any,  is to be documented in acquisition decision memorandums.  Acquisition  Program Management Division officials also noted that TES\u2019s input may be  used in making the decision about when to hold an ARB for a particular  program. T&E input from TES is one of many factors the ARB uses in  overseeing acquisitions. For example, according to S&T officials, the ARB  considers the current threat assessments and the extent to which the  program, if implemented sooner, would help to address that threat. The  ARB also considers factors such as the cost of the program and potential  costs of conducting more testing and whether the results of operational  testing were sufficient to achieve the intended benefits of the program. As  a result, the ARB may accept a higher level of risk and allow a program to  proceed even if testing concerns have been raised, if it determines that  other reasons for quicker implementation outweigh these concerns.\nTES officials also stated that they work extensively with components prior  to ARB meetings to ensure that T&E issues are addressed, with the goal to  address these issues before going before the ARB. TES meets with  component officials during regular acquisition review team meetings to  resolve various issues before ARB meetings are convened. For example,  due to concerns about the results of system qualification tests, TES  recommended to SBInet program and ARB officials that the program  should not proceed to the next milestone\u2014site preparation, tower  construction, and sensor and communication equipment installation at the  Ajo, Arizona test site\u2014until after operational testing was completed at the  Tucson, Arizona test site. In May 2009, the ARB authorized SBInet to  proceed with plans for the Ajo, Arizona site despite TES\u2019s advice to the  contrary, and directed TES to work with component officials to revise test  plans, among other things.\n\n\t\tAdditional Steps Needed to Ensure that T&E Requirements Are Met\n\nWhile TES\u2019s oversight of the test plans and reports for major acquisition  programs selected for review is in accordance with provisions in the T&E  directive, it did not consistently document its review and approval of  certain acquisition documentation or document the extent to which  certain requirements in the T&E directive were met.\n\n\t\t\tTES Did Not Consistently Document the Extent to which Criteria Used in Its Approval of Operational Test Agents Were Met\n\nThe T&E directive requires that an operational test agent\u2014a government  agency or independent contractor carrying out independent operational  testing for major acquisition programs\u2014is to meet certain requirements to  be qualified and approved by TES, but does not specify how TES\u2019s  approval is to be documented. According to the T&E directive, the test  agent may be within the same component, another government agency, or  a contractor, but is to be independent of the developer and the  development contractor. Because the responsibilities of a test agent are  significant throughout the T&E process, this independence is to allow the  agent to present objective and unbiased conclusions regarding the  system\u2019s operational effectiveness and suitability to DHS decision makers,  such as the ARB. For example, some the test agent\u2019s responsibilities in the  T&E directive include:     Being involved early in the acquisition cycle by reviewing draft  requirements documents to help ensure that requirements are testable  and measurable.\nAssisting the component program manager in the preparation of the  test and evaluation master plan.\nPlanning, coordinating, and conducting operational tests, and  preparing the operational T&E report.\nReporting operational test results to the program manager and TES.\nAccording to TES officials, the test agent is also to meet other  requirements in order to be approved by TES, such as having the expertise  or knowledge about the product being tested and having the capacity and  resources to execute the operational tests. To ensure that criteria for test  agents are met, the T&E directive requires TES to approve all agents for  major acquisition programs. As shown in figure 5, of the 11 programs we  reviewed, 8 programs had selected a test agent and the others were in the  process of selecting a test agent. TES provided documentation, such as  memoranda, of its approval for 3 of these 8 programs. For the remaining 5  programs, there was no documentation of the extent to which these test  agents had met the criteria and that TES had approved them. According to  TES officials, they did not have a mechanism in place requiring a  consistent method for documenting their review and approval of  component agents or the extent to which criteria used in reviewing these  agents were met.\nIn the absence of such a mechanism in fiscal year 2010, TES\u2019s approval of  test agents was not consistently documented. TES and component officials  stated that the approval for the five programs was implicit or provided  verbally without documentation regarding whether the test agent met the  T&E directive requirements. The T&E directive states that the test agent is  to be identified and approved as early as possible in the acquisition  process to, among other things, assist the component program officials in  developing the test and evaluation master plan and review draft  requirements documents to provide feedback regarding the testability of  proposed requirements. TES and component officials stated that they  assumed that test agents were approved using various approaches.  Specifically, of the five programs that had test agents sign the test and  evaluation master plan, one program had documented approval from TES.  For example, Coast Guard and Office of Health Affairs officials stated that  they did not have explicit documentation of TES\u2019s approval of their agents;  however, they believed that TES\u2019s approval was implicit when TES  approved their test and evaluation master plan since the test agent and  TES are both signatories on the plan. CBP and National Protection and  Programs Directorate officials told us that TES provided verbal approval  for their test agents. Since there is no mechanism requiring TES to  document its approval of the agent, and approval was granted verbally,  there is no institutional record for DHS or an independent third party to  validate whether TES followed its criteria when approving these test  agents and whether the test agent was identified and approved before the  test and evaluation master plan and requirements documents were  finalized, as outlined in the T&E directive.\nWith regard to the three programs in which TES had documented its  approval in memoranda, these memoranda detailed TES\u2019s agreement or  nonagreement with a particular agent and highlighted whether the agent  met the criteria outlined in the T&E directive. For example, TES provided  interim approval to all three of the programs with the conditions that the  programs prove at a later date that the test agents met all the  requirements.  For example:  In April 2010, TES wrote a memo and granted interim approval with  \u201cserious reservations\u201d for 1 year to TSA\u2019s test agent for the Passenger  Screening program. In the memo, TES cited concerns about the  organizational structure and the lack of independence of the test agent  since the test agent was part of the same TSA office responsible for  managing the program.  The memo outlined several steps that TSA  should take, including the implementation of interim measures, such as  new procedures, to ensure the necessary independence critical to  testing and evaluation efforts as required by DHS directives. TES  officials told us that by documenting TES\u2019s interim approval in a memo,  they were able to communicate their concerns about the test agent\u2019s  independence to TSA and DHS decision makers and set forth interim  measures that TSA needed to address regarding their concerns.\nIn July 2010, TES granted conditional approval to the test agent for the  U.S. Citizenship and Immigration Services\u2019 (USCIS) Transformation  program\u2019s test agent. TES made its approval contingent on the program  developing a plan to ensure that the test agent was familiar with the  component\u2019s business practices. According to TES officials, after  component officials gave a briefing to TES, they determined that the  test agent met the requirements and it was approved.\nIn January 2011, TES granted conditional approval for the U.S. Secret  Service\u2019s Information Integration and Transformation program to bring  its selected test agent on board.  TES\u2019s final approval will be given after  program officials brief TES on the test agent\u2019s operational testing  approach, which is to demonstrate that the test agent has knowledge of  the product and has the capacity to execute the tests.\nTES officials told us that they do not have approval memos for all of the  test agents that have been hired by program offices since the T&E  directive was implemented in May 2009.  Because TES did not consistently  document their approvals of test agents, it is unclear whether TES has  ever disapproved a test agent. TES officials acknowledged that they did  not consistently document that the test agents met T&E requirements and  did not document their approval of test agents. TES officials said that it  would be beneficial to do so to ensure that agents met the criteria required  in the T&E directive. In addition, Standards for Internal Control in the  Federal Government and associated guidance state that agencies should  document key decisions in a way that is complete and accurate, and that  allows decisions to be traced from initiation, through processing, to after  completion. These standards further state that documentation of key  decisions should be readily available for review. Without a mechanism for  documenting its review and approval of test agents for major acquisition  programs, it will be difficult for DHS or an independent third party to  validate TES\u2019s decision-making process to ensure that it is effectively  overseeing component testing.  Moreover, it will be difficult for TES to  provide reasonable assurance that these agents met the criteria outlined in  the T&E directive, such as the requirement that they be independent of the  program being tested.\n\n\t\tTES Did Not Consistently Document the Extent to Which Certain Acquisition Documents Met T&E Criteria\n\nIn addition to reviewing and approving test plans, under the T&E directive,  TES is required to review certain component acquisition documents,  including the mission need statements, operational requirements  document, concept of operations, and developmental test reports,  amongst others. These documents, which are required at the need,  Analyze\/Select, and Obtain phases of the acquisition process, are to be  reviewed by TES to assist component program managers in identifying  and resolving technical, logistical, and operational issues early in the  acquisition process and to ensure that these documents meet relevant  criteria.\nSpecifically, as outlined in the T&E directive, TES is to review the mission  need statement to establish awareness of the program and help ensure  that the required standards are developed and that the component has  identified the appropriate resources and support needed to conduct  testing. TES is also to review the operational requirements document,  including the key performance parameters and critical operational issues  that specify the operational effectiveness and operational suitability issues  that the test agent is to examine in order to assess the system\u2019s capability  to perform the mission. Further, TES is to review the concept of  operations, since this document describes how the technology or  equipment will be used in an operating environment. TES is to review the  developmental test reports to maintain knowledge of contractor testing  and to assist in its determination of the program\u2019s readiness to progress to  operational testing. We have previously reported that inadequate attention  to developing requirements results in requirements instability, which can  ultimately cause cost escalation, schedule delays and fewer end items.  Further, we reported that without the required development and review of  key acquisition data, DHS cannot provide reasonable assurance that  programs have mitigated risks to better ensure program outcomes.\nTES officials stated that they do not have a mechanism to document or  track those that they did review, what criteria they used when reviewing  these documents, and the extent to which the documents reviewed met  those criteria. For the 11 DHS programs that we reviewed, 8 programs had  component-approved mission need statements; 2 programs, Atlas Tactical  Communications and Transformation, had not yet completed such  statements; and 1 program, the initial SBInet program, had completed a  mission need statement in October 2006 before the T&E directive was  issued and did not develop a separate mission need statement for the  Block 1 increment of the program. Of the 8 programs that had mission  need statements, 6 components told us that they did not have evidence  that TES reviewed the mission need statement in accordance with the  T&E directive. Further, TES could not demonstrate that it had received or  reviewed these documents. Since TES did not have documentation of its  review, it is difficult to determine the extent to which the documents were  reviewed and the extent to which these documents met the review criteria.  TES officials told us that they do not usually provide substantial input into  the mission need statements and that they receive these documents to  establish awareness of a new program. Further, while one TES test area  manager told us that he reviews all developmental test reports, another  test area manger told us that some programs do not routinely send him  developmental test reports.\nAlso, for example, Secret Service officials said that for the Information  Integration and Transformation program they provided the operational  requirements document, concept of operations, and integrated logistic  support plan to TES. Specifically, the officials said that TES officials were  very helpful in providing input on draft documents and made  improvements to the documents by suggesting, for example, that the tests  be more realistic by including personnel from field offices, headquarters,  and external agencies in the live\/production test environment. In contrast,  officials from TSA stated that while they provided their mission need  statement, concept of operations, integrated logistics support plan, and  acquisition program baseline documents for the Advanced Technology 2  (AT-2) program to TES, TES officials did not provide input or comments  on any of those documents.  TES officials told us that the AT-2 program  was initiated and developed some acquisition documentation prior to May  2009 when the T&E directive was issued. Specifically the operational  requirements document was approved and finalized by TSA in June 2008  prior to the T&E directive and provided later to TES in February 2010  when the program was being reviewed. When TES reviewed the  operational requirements document along with other documents such as  the test and evaluation master plan, TES wrote a memo to TSA in March  2010 requesting that detection performance requirements be clarified and  that users concur with the requirements. After several months of  discussion, TSA and TES agreed on an approach which was used as the  basis for initial operational T&E.\nStandards for Internal Controls in the Federal Government, as outlined  earlier, state that agencies should document key decisions, and further  that documentation of key decisions should be readily available for  review. TES officials stated that they do not have a mechanism requiring  that they document their review of certain acquisition documentation or  the extent to which the document met the criteria used in reviewing these  documents, and recognized that doing so would be beneficial. Developing  a mechanism for TES to document its review of key acquisition documents  could better position TES to provide reasonable assurance that it is  reviewing key documentation and providing input that is important for  determining the outcome of future testing and evaluation efforts, as  required by the T&E directive. Moreover, such a policy could help to  ensure that an institutional record exists for DHS or an independent third  party to use in determining whether TES is effectively overseeing  component T&E efforts and assisting in managing DHS major acquisition  programs.\n\n\t\tTES Does Not Plan an Independent Assessment of ASP\u2019s Operational Test Results as Required by the T&E Directive\n\nAccording to the T&E directive, TES is to conduct an independent  assessment of the adequacy of an operational test, provide a concurrence  or nonconcurrence on the test agent\u2019s evaluation of operational suitability  and operational effectiveness, and provide any further independent  analysis it deems necessary for all major DHS acquisition programs. TES is  to document this independent assessment by writing a letter of assessment  within 30 days of receiving the operational test report from the  components\u2019 test agent and provide the letter of assessment to the ARB,  who then uses the assessment in making its determination of whether the  program can proceed to purchase and implementation.\nWhile TES has developed a letter of assessment for the two other  programs undergoing an ARB decision to enter into the production and  deployment phase since the T&E directive was issued in May 2009, TES  officials told us that they do not plan to write such an assessment for the  Advanced Spectroscopic Portal (ASP) program because they are the test  agent for ASP and thus, are not in a position to independently assess the  results of testing that they conducted.\nIn April 2008, over a year before the T&E directive was issued, senior level  executives from DHS, S&T, CBP, and the Domestic Nuclear Detection  Office (DNDO) signed a memorandum of understanding regarding  arrangements for ASP operational testing. The memo designated Pacific  Northwest National Lab, a U.S. Department of Energy laboratory, as the  test agent. However, the memo also outlined the roles and responsibilities  of TES, many of which reflected the duties of a test agent, such as  developing and approving all operational test plans, responsibility for the  management of testing and field validation, and developing and approving  operational test reports. TES officials told us that they were using Pacific  Northwest National Lab staff to carry out the operational tests, but are  acting, for all intents and purposes, as the test agent for ASP. TES and  DNDO officials told us that this arrangement was made after repeated  testing issues arose with the ASP program.\nIn September 2008, we reported that ASP Phase 3 testing by DNDO  provided little information about the actual performance capabilities of  ASP and that the resulting test report should not be used in determining  whether ASP was a significant improvement over currently deployed  equipment. Specifically, we found that the ASP Phase 3 test results did  not help determine an ASP\u2019s \u201ctrue\u201d level of performance because DNDO  did not design the tests to assess ASP performance with a high degree of  statistical confidence.  In response to our report, DHS convened an  independent review team to assist the Secretary in determining whether he  should certify that there will be a significant increase in operational  effectiveness with the procurement of the ASP system. The independent  review team found that the test results and measures of effectiveness were  not properly linked to operational outcomes.\nIn May 2009, we reported that DHS had increased the rigor of ASP testing  in comparison with previous tests. For example, DNDO mitigated the  potential for bias in performance testing (a concern we raised about prior  testing) by stipulating that there would be no ASP contractor involvement  in test execution. However, the testing still had limitations, such as a  limited set of scenarios used in performance testing to conceal test objects  from detection. Moreover, we also reported that TES was to have the lead  role in the final phase of ASP testing. As of February 2011, TES officials  told us that the final phase of testing, consisting of 21 days of continuous  operation, had not yet been scheduled.\nWith TES acting as the test agent, it is not in a position to exercise its  responsibilities during the operational testing phase, such as approving the  operational test plan or writing a letter of assessment of the final results of  operational testing.  As it has done for two other recent DHS acquisition  programs, TES was able to confirm through its independent assessment  whether the test agent conducted operational testing as described in the  test and evaluation master plan and operational test plan. For example,  TES outlined concerns in its letter of assessment to the ARB that the AT-2  system did not meet a stated operational requirement key performance  parameter\u2014a throughput measure of bags per hour\u2014for the majority of  the time under test which resulted in a \u201cnot effective\u201d determination by  TES.\nTES officials recognized that, as the test agent, they are not in a position to  conduct an independent assessment of operational test results and write a  letter of assessment for ASP and that they are the highest level  organization within DHS for both T&E oversight and operational test  expertise. They further stated that the decision to have TES serve as the  test agent was made prior to the issuance of the T&E directive and that it  was too late in the program\u2019s development to go back and select another  agent. Nevertheless, TES officials recognized that this one-time situation  would result in the lack of an independent assessment of ASP test results  and there were no plans to conduct or contract for such an independent  assessment. While we acknowledge that this decision was made prior to  the T&E directive and the requirement that TES write a letter of  assessment of all major acquisition programs, it is nonetheless important  that ASP undergo an independent assessment of its test results since its  operational test plan, which was developed by TES, was not subject to  oversight.  Because ASP has faced testing issues, many of which we have  reported on in past years, it is important that this program undergo  oversight to help avoid similar problems from reoccurring. Without an  independent assessment of ASP\u2019s operational test results, it will be  difficult to ensure that operational testing was properly planned,  conducted, and that the performance results are useful.  In addition,  arranging for an independent assessment of operational tests results could  provide the ARB with critical information on testing and evaluation efforts  to help it determine whether ASP should be approved for purchase and  implementation.\n\n\tTES and Component Officials Cited Challenges in Coordinating and Overseeing T&E across DHS; Efforts Are Underway to Address Some Challenges\n\nTES and component officials reported challenges faced in coordinating  and overseeing T&E across DHS components that fell into four primary  categories: (1) ensuring that a program\u2019s operational requirements\u2014the  key requirements that must be met for a program to achieve its intended  goals\u2014can be effectively tested; (2) working with DHS component  program staff that have limited T&E expertise and experience; (3) using  existing T&E directives and guidance to oversee complex information  technology acquisitions; and (4) ensuring that components allow sufficient  time and resources for T&E while remaining within program cost and  schedule estimates. Both TES and DHS, more broadly, have begun  initiatives to address some of these challenges, but it is too early to  determine their effectiveness.\n\n\t\tEnsuring Operational Requirements Can Be Tested and Are Suitable to Meet Mission Needs\n\nBoth TES and component officials stated that one of their challenges is  developing requirements that are testable, consistent, accurate, and  complete. Specifically, six of the nine TES test area managers told us that  working with DHS components to ensure that operational requirements  can be tested and are suitable to meet mission needs is important because  requirements development is one of the biggest challenges facing DHS.  For example, one TES test area manager described the difficulty in  drafting a test and evaluation master plan if operational requirements are  not testable and measurable. Another TES test area manager indicated  that programs\u2019 operational requirements documents often do not contain  user needs or operational requirements for system performance. This  leads to difficulties in testing those requirements later.  Further, six of the  nine TES test area managers cited that some components\u2019 operational  requirements are difficult to test as written, which results in delays in  drafting T&E documents as well as impacting the program cost and  schedule parameters.\nOur prior work has found that program performance cannot be accurately  assessed without valid baseline requirements established at the program  start. According to DHS guidance, the baseline requirements must include  a threshold value that is the minimum acceptable value which, in the  user\u2019s judgment, is necessary to satisfy the need. In June 2010, we reported  that if threshold values are not achieved, program performance is  seriously degraded, the program may be too costly, or the program may no  longer be timely. In addition, we reported that inadequate knowledge of  program requirements is a key cause of poor acquisition outcomes, and as  programs move into the produce and deploy phase of the acquisition  process, problems become much more costly to fix. To help remedy these  issues, we have made a number of recommendations to address them.   DHS has generally agreed with these recommendations and, to varying  degrees, has taken actions to address them. For example:  In May 2010, we reported that not all of the SBInet operational  requirements that pertain to Block 1\u2014a surveillance, command,  control, communications, and intelligence system being fielded in two  portions of the international border in Arizona\u2014were achievable,  verifiable, unambiguous, and complete. For example, a November 2007  DHS assessment determined that 19 operational requirements, which  form the basis for the lower-level requirements used to design and  build the system, were not complete, achievable, verifiable, or  affordable. Further, the DHS assessment noted that a requirement that  the system should provide for complete coverage of the border was  determined to be unverifiable and unaffordable because defining what  complete coverage meant was too difficult and ensuring complete  coverage, given the varied and difficult terrain along the border, was  cost prohibitive. To address these issues, we recommended that the  currently defined Block 1 requirements, including key performance  parameters, are independently validated as complete, verifiable, and  affordable and any limitations found in the requirements are  addressed. Furthermore, CBP program officials told us that they  recognized the difficulties they experienced with requirements  development practices with the SBInet program. Within CBP, the  Office of Technology, Innovation, and Acquisition has responsibility for  managing the SBInet program. Office of Technology, Innovation, and  Acquisition officials told us that their office was created to strengthen  expertise in acquisition and program management of SBInet.\nIn May 2009, we reported that ASP testing uncovered multiple  problems in meeting the requirements for successful integration into  operations at ports of entry. As a result, we recommended that DHS  assess ASPs against the full potential of current equipment and revise  the program schedule to allow time to conduct computer simulations  of ASP\u2019s capabilities and to uncover and resolve problems with ASPs  before full-scale deployment.\nWe also reported that other TSA technology projects were delayed  because TSA had not consistently communicated clear requirements in  order to test the technologies. We recommended that TSA evaluate  whether current passenger screening procedures should be revised to  require the use of appropriate screening procedures until it is  determined that existing emerging technologies meet their functional  requirements in an operational environment.\nIn March 2011 testimony, the Under Secretary for S&T stated that S&T had  begun working with the DHS Under Secretary for Management to use their  collective expertise and resources to better address the \u201cfront end\u201d of the  acquisition cycle, namely, the translation of mission needs into testable  requirements. Further, in response to this challenge, S&T has reorganized  and established an Acquisition Support and Operations Analysis Group,  which is to provide a full range of coordinated operations analysis,  systems engineering, T&E, and standards development support for DHS  components. In addition, TES\u2019s T&E Council is currently focusing on the  challenges related to requirements development. Specifically, TES test  area managers have presented specific briefings to component officials at  council meetings which provide information on how to better generate  requirements. Further, in response to our previously mentioned report  designating DHS on the high-risk list, DHS developed a strategy to, among  other things, strengthen its requirements development process. DHS\u2019s  January 2011 strategy describes the establishment of a capabilities and  requirements council to evaluate and approve operational requirements  early in the acquisition process. Specifically, the capabilities and  requirements council is to, among other things, reconcile disagreements  across program offices and approve analyses of alternatives and  operational requirement documents. We stated in a March 2011 response  to DHS on its strategy that it was unclear how the introduction of new  governance groups will streamline the process and address previously  identified issues because it appeared that the governance groups are  chaired by the Deputy Secretary and have many of the same participants.   Since the S&T reorganization has only recently taken place and the T&E  Council and the department\u2019s strategy have only recently begun to address  the challenge of requirements generation, it is too soon to determine the  effectiveness of these actions in addressing this challenge.\n\n\t\tT&E Experience and Expertise within DHS Components Varies\n\nTES officials told us that T&E experience and expertise within DHS  components varies, with some components possessing staff with extensive  T&E experience and expertise and others having relatively little. For  example, TES officials noted that the Coast Guard and TSA have T&E  policies and procedures in place, as well as staff with extensive T&E  experience, which limited their dependence on TES for T&E expertise.   Other components in DHS told us they rely more on TES or contractors  for T&E expertise. For the 11 DHS programs we reviewed, officials from  components which do not have many acquisition programs, such as the  Office of Intelligence and Analysis, reported needing more assistance from  TES in identifying and selecting appropriate and qualified test agents, for  example. Conversely, components with more acquisition programs, such  as the Coast Guard, told us that they have well-established test agents and  procedures in place, and require little guidance from TES. For example,  we reported in April 2011 that most Coast Guard major acquisition  programs leverage Navy expertise, in some way, to support a range of  testing, engineering, and other program activities.\nFurthermore, CBP recently established a new office whose goal is to  strengthen expertise in acquisition and program management, including  T&E, and ensure that CBP\u2019s technology efforts are focused on its mission  and integrated across the agency.\nIn response to this challenge, TES has worked with DHS\u2019s Acquisition  Workforce Office to develop T&E certification requirements and training  for components. TES officials told us that they have worked with the  Acquisition Workforce Branch and developed pilot courses on T&E for  component T&E staff, including Fundamentals of Test and Evaluation,  Intermediate Test and Evaluation, and Advanced Test and Evaluation.  In  April 2010, DHS issued an acquisition workforce policy which establishes  the requirements and procedures for certification of DHS T&E managers.  The policy allows T&E managers to be certified at a level that is  commensurate with their education, training, and experience. Component  staff from 6 of the 11 programs we reviewed said they participated in  TES\u2019s certification training program and believed that the training would  assist them in carrying out their T&E responsibilities. In addition, TES is in  the process of hiring four additional staff to assist the test area managers  in their T&E oversight responsibilities and hoped to have the additional  staff hired by the end of fiscal year 2011.\nLack of DHS staff to conduct acquisition oversight, including T&E, is a  departmentwide challenge. In our previous reports, DHS acquisition  oversight officials said that funding and staffing levels have limited the  number of programs they can review. We recommended that DHS  identify and align sufficient management resources to implement oversight  reviews in a timely manner. DHS generally concurred with the  recommendation and, as of January 2011, has reported taking action to  address it by identifying needed capabilities and hiring staff to fill  identified gaps.\nFurther, to address this challenge, in 2009 and 2010, T&E Council  representatives from the Acquisition Workforce Branch made  presentations at council meetings to update members on the status of  various acquisition workforce issues, including T&E certification.  For  example, presenters asked T&E Council members to inform their  respective components about new T&E certification courses and to  provide information on how to sign up for the courses.  In 2010, the  Acquisition Workforce Policy was implemented by DHS, which allowed  the department to begin to certify T&E acquisition personnel. While DHS  has undertaken efforts to help address these challenges, it is too soon to  evaluate the impact that these efforts will have in addressing them.\n\n\t\tUsing Existing T&E Directives and Guidance to Oversee Information Technology Acquisitions\n\nEffectively managing IT acquisitions is a governmentwide challenge. TES  and component officials we interviewed told us that T&E guidance, such  as specific guidance for integrating developmental testing and operational  testing, may not be sufficient for the acquisition of complex IT systems.  Specifically, component officials stated that the assessment of risks and  environmental factors are different for IT programs than other acquisitions  and that conducting testing in an operational environment may not be  necessary for IT programs because the operational environment is no  different than the test environment.  In addition, four of the nine test area  managers told us that aspects of the existing T&E guidance may not  directly apply to IT acquisitions.\nThe department is in the process of making modifications to its  acquisitions process to better accommodate information technology  acquisitions. According to the previously mentioned January 2011 strategy  submitted to GAO, DHS is piloting a new model for IT acquisitions. This  model, which is to be consistent with the department\u2019s overall acquisition  governance process, is to have many of the steps in the modified process  that are similar or the same as what currently exists but time frames for  different types of acquisitions would be instituted.  For example,  acquisition programs designated as IT programs may go through a more  streamlined acquisition process that may better fit the rapidly changing IT  environment, and the ARB would have the option to delegate oversight  responsibilities to an executive steering committee. In other cases, TES  and component officials are investigating the possibility of conducting  integrated testing\u2014the combination of developmental and operational  testing\u2014for some programs although this process may take longer to plan  and pose greater risks because testing is being done simultaneously.  Further, the T&E Best Practices Integrated Working Group, a subgroup of  the T&E Council, including TES, Acquisition Program Management  Division, and Office of Chief Information Officer officials, was working to  identify and promote T&E best practices for IT system acquisition. This  group drafted an operational test agent risk assessment process to validate  the streamlining process approach while adhering to acquisition and T&E  policy and directives, and as of March 2011, one component, USCIS, has  made use of this process. Additionally, three other programs are  investigating the possible use of this process and the possibility of  tailoring or eliminating T&E deliverables or operational T&E requirements  for IT programs, with the approval of TES. The group has identified three  IT acquisition programs to serve as a pilot for this effort.\nAs DHS considers modifications to its T&E process for IT programs, it also  must consider the effect such a change could have on determining a  system's technical performance and evaluating the system's operational  effectiveness and suitability. For example, we have previously reported on  testing problems with SBInet, a CBP program designated as an IT  program.  We found that SBInet testing was not performed in a manner  that would adequately ensure that the system would perform as intended.  Among the factors contributing to these problems was insufficient time for  reviewing and approving test documentation, which in part, led to test  plans and test cases not being well-defined. As a result, we recommended  that test schedules, plans, cases, and procedures are adequately reviewed  and approved consistent with the revised test and evaluation master plan.  Since the efforts DHS is taking to address this challenge have only recently  been initiated, it is too early to tell what impact they will have on the  overall challenges of T&E for IT programs.\n\n\t\tAllowing Appropriate Time for T&E within Program Cost and Schedule\n\nBoth TES and component officials stated that balancing the need to  conduct adequate T&E within the confines of a program\u2019s costs and  schedule is a recurring challenge, and a challenge that is difficult to solve.  We have previously reported on the challenges associated with balancing  the need to conduct testing within program cost and schedules. Our past  review of the Department of Defense\u2019s  (DOD) Director of Operational  Test and Evaluation found that while the acquisition community has three  central objectives\u2014performance, cost, and schedule\u2014the Director of  Operational Test and Evaluation has but one--operational testing of  performance. We reported that these distinct priorities can lead to  testing disputes. We reported that these disputes encompassed issues such as (1) how many and what types of test to conduct; (2) when testing  should occur; (3) what data to collect, how to collect them, and how b to analyze them; and (4) what conclusions were supportable, given th e  analysis and limitations of the test program. The foundation of most of  these disputes laid in different notions of the costs and benefits of testing  and the levels of risk that were acceptable when making full-rate  production decisions. The DOD Director of Operational Test and  Evaluation consistently urged more testing (and consequently more time,  resources, and cost) to reduce the level of risk and number of unknowns  before the decision to proceed to full-rate production, while the services  consistently sought less testing and accepted more risk when making  production decisions. These divergent dispositions frequently led to  est  healthy debates about the optimal test program, and in a small number of  cases, the differences led to contentious working relations.\nTES and DHS component officials expressed views similar to those  expressed in our past work at DOD. Of the nine TES test area managers  we talked with, four told us that allowing appropriate time and resources  for T&E within program cost and schedule is a challenge. According to the  test area manager\u2019s, component program management officials often do  not incorporate sufficient time within their schedule for T&E or reduce the  time allowed for T&E to save time and money. In one test area managers\u2019  view, doing so can reduce the effectiveness of testing or negatively impact  the results of the tests. However, TSA officials told us that TES wanted to  insert new test requirements for the AT-2 program\u2014including the  involvement of more TSA staff in the tests\u2014after the program schedule  was established and it was difficult to accommodate the changes and  resulted in some delays. TES officials told us that these test requirements  were in lieu of other planned field testing, which were not consistent with  the program\u2019s concept of operations and that TSA officials agreed with the  new test requirements. According to TES and component officials we  spoke with, both the program officials and TES understand the views and  perspectives of one another and recognize that a balance must be struck  between effective T&E and managing programs within cost and schedule.  As a result, TES is working with program officials through the T&E  Council or T&E working groups to discuss these issues early in the  acquisition cycle (before it is too late), particularly while developing the  test and evaluation master plan, which outlines the time allowed for  testing and evaluation.\n\n\tConclusions\n\nTimely and accurate information resulting from T&E of major acquisitions  early in the acquisition process can provide valuable information to DHS\u2019s  senior level managers to make informed decisions about the development,  procurement, deployment, and operation of DHS\u2019s multibillion dollar  portfolio of systems and services. Improving the oversight of component  T&E activities is but one part of the significant challenges DHS faces in  managing its acquisitions. Components themselves are ultimately  responsible for the management and implementation of their programs  and DHS senior level officials are responsible for making key acquisitions  decisions which lead to production and deployment. TES helps support  acquisition decisions by providing oversight over major acquisitions\u2019 T&E,  which can help reduce, but not eliminate, the risk that new systems will  not be operationally effective and suitable.\nSince the Homeland Security Act creating DHS was enacted in 2002, S&T  has had the responsibility for overseeing T&E activities across the  department. However, S&T did not have staff or the acquisition and T&E  directives in place to conduct such oversight across DHS components  until May 2009 when DHS issued its T&E directive. Since then, TES has  implemented some of the requirements and overseen T&E of major  acquisitions we reviewed, as well as provided independent assessments of  operational test results to the ARB. However, TES has not consistently  documented its compliance with the directives. Documenting that TES is  fulfilling the requirements within DHS acquisition and T&E directives and  the extent to which the criteria it is using to review and approve these  documents are met, including approving operational test agents and  reviewing key acquisition documentation, would assist TES in  demonstrating that it is conducting T&E oversight and meeting  requirements in these directives. Furthermore, without an independent  assessment of operational test results for the Advance Spectroscopic  Portal program, a key T&E oversight requirement in the T&E directive, the  ARB will lack T&E oversight and input it needs to determine whether ASP  is ready to progress toward production and deployment. This is especially  important, given that program\u2019s troubled history, which we have  highlighted in a series of prior reports.\n\n\tRecommendations for Executive Action\n\nTo better ensure that testing and evaluation requirements are met, we  recommend that the Secretary of Homeland Security direct the Under  Secretary for Science & Technology to take the following two actions:    Develop a mechanism to ensure that TES documents its approval of  operational test agents and the extent that the test agents meet the  requirements in the T&E directive, and criteria that TES use in  reviewing these test agents for major acquisition programs.\nDevelop a mechanism to ensure that TES documents its required  review of component acquisition documents, including the mission  need statements, concept of operations, operational requirements  documents, developmental test reports, test plans, and other  documentation required by the T&E directive, the extent that these  documents meet the requirements in the T&E directive, and criteria  that TES uses in reviewing these documents.\nTo ensure that the ARB is provided with an independent assessment of the  operational test results of the Advanced Spectroscopic Portal program to  help determine whether the program should be approved for purchase and  implementation, we recommend that the Secretary of Homeland Security  take the following action:     Arrange for an independent assessment, as required by the T&E  directive, of ASP\u2019s operational test results, to include an assessment of  the adequacy of the operational test and a concurrence or  nonconcurrence on the operational test agent\u2019s evaluation of  operational suitability and operational effectiveness.\n\n\tAgency Comments and Our Evaluation\n\nWe received written comments on a draft of this report from DHS on June  10, 2011, which are reproduced in full in appendix III. DHS concurred with  all three of our recommendations.\nDHS concurred with our first recommendation (1) that S&T develop a  mechanism to ensure that TES documents its approval of operational test  agents, (2) the extent that the test agents meet the requirements in the  T&E directive, and (3) the criteria that TES uses in reviewing these test  agents for major acquisition programs. Specifically, DHS stated that the  Director of TES issued a memorandum to test area managers and TES  staff regarding the operational test agent approval process which  describes the responsibilities, considerations for selection, and the  process necessary to select an operational test agent. In addition, DHS  stated that TES is drafting memos approving operational test agents using  the new test agent approval process.\nDHS also concurred with our second recommendation that S&T develop a  mechanism to ensure that TES documents (1) its required review of  component acquisition documents required by the T&E directive, (2) the  extent that these documents meet the requirements in the T&E directive,  and (3) the criteria that TES uses in reviewing these documents. DHS  stated that the Director of TES issued a memorandum to test area  managers and TES staff detailing the role of TES in the document review  process and the process that TES staff should follow for submitting their  comments to these documents.\nFinally, DHS concurred with our third recommendation that S&T arrange  for an independent assessment of ASP\u2019s operational test results. DHS  stated that the ASP program is under review and does not have an  operational test scheduled. However, TES is investigating the option of  using a separate test agent to conduct operational testing of ASP, which  would allow TES to perform the independent assessment and fulfill its  independent oversight role as outlined in DHS policy. Such actions, if  taken, will fulfill the intent of this recommendation. DHS also provided  technical comments on the report, which we incorporated as appropriate.\nAs agreed with your offices, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days from the  report date. At that time, we will send copies of this report to interested  congressional committees and the Secretary of Homeland Security. The  report will be available at no charge on GAO\u2019s Web site at  http:\/\/www.gao.gov.\nIf you or your staff have questions regarding this report, please contact me  at (202) 512-9627 or at maurerd@gao.gov. Contact points for our Offices of  Congressional Relations and Public Affairs may be found on the last page  of this report. Key contributors to this report are listed in appendix IV.\n\nAppendix I: Descriptions of Selected Major Acquisition Programs\n\nAn effort to develop nd deploy technologie to llow Custom nd Border  Protection to detect ncler or rdiologicl mteri from conveynce, such  as trck, entering the United Ste t lnd nd  port of entry.\nU.S. Immigrtion  nd Custom  Enforcement  (ICE)\nAn effort to modernize ICE\u2019scticl commniction tem nd equipment,  tht Ice gent nd officer use to support mission-criticl commniction from otdted log tem to modern nd ndrdized digittem. Project  25 pgrde will modernize tcticl commniction nd deploy ite  infrastrctre nd end-user subscrier rdio. Interoperable Rpid Deployment  Stem (IRDS) will otfit ICE with trportable commniction tem to  support rpid deployment requirement fro rotine, emergency nd disaster  repone, nd pecil opertion. The progrm i divided into ix egment,  inclding: (1)  P25 pgrde for the Atlnt Region, (2)  P25 pgrde for the Boton Region,  ()  P25 pgrde for the Denver Region,  (4)  P25 pgrde for the centrl hub infrastrctre,  (5)  IRDS moile rdio commniction kit thsupport disaster nd emergency   repone opertion, nd  (6)  IRDS Moile Commniction Stem (MCS) moile commniction   vehicle thsupport disaster nd emergency repone opertion. In Mrch 2011, the Component Acquition Exective determined tht the  TACCOM progrm wold e conolidted with other ICE infrastrctre progr  nd tht the progrm wold e required to submit quition docmenttion to  the ARB prior to Aust 2011.\nSegment 1:  Prodce\/ Deploy\/ Support Segment 2-6:  In the  process of  eing pdted.\nA ntionwide, interoperting network of detector\/identifier tht i to provide  autonomous ir-sampling ly of the environment for iologicgent of  concern. The tem i to enable detection, identifiction, nd reporting of  recognized orgni within  6-hor period. (4)  Obsolete Component Moderniztion (OCM) \u2013 Replce obsolete   component nd substem;  (5)  Ship Helicopter Secre Trvere & Stem (SHSTS) \u2013 Provide the   ability to automticlly ecre the ircrft to the flight deck nd   trvere it into the hnger; nd,  (6)  Atomtic Flight Control Stem (AFCS\/Avionic) Modernize digitl    Common Avionic Architectre Stem (CAAS) common with the    H-60T pgrde nd digitl Atomtic Flight Control Stem.\nAn effort to modernize Secret Service\u2019s IT infrastrctre, commniction  tem, ppliction, nd process. The progrm i divided into for dicrete  egment:  (1)  Enabling Cabilitie: IT Infrastrctre Moderniztion\/Cyer Secrity\/  Dabase Architectre; (2)  Commniction Cabilitie; ()  Control Cabilitie; nd, (4)  Mission Support Cabilitie.  In Feuary 2011, the ARB grnted quition deciion event 2A nd  quition deciion event 2B deciion for the Enabling Cabilitie egment.  The remining three egment remined in the Anlyze\/Select phase.\nAn integrted tem of intrusion detection, lyticl, intrusion prevention, nd  informtion-ring cabilitie thre to used to defend the federl civilin  government\u2019s informtion technology infrastrctre from cyer thre. Inclde  the hrdwre, oftwre, supporting process, trining, nd ervice thre to  e developed nd quired to support the mission. The inititem, known as  Eintein, was renmed as Block 1.0 nd incldeabilitie such as  centrlized d torge.  (1)  Block 2.0 i to dd n Intrusion Detection Stem (IDS) which i to         assss network trffic for the preence of mlicious ctivity; (2)  Block 2.1 i to provide  Secrity Incident nd Event Mgement         which i to enable d ggregtion, correltion, nd visualiztion.  ()  Block .0 i to provide n intrusion prevention cability.\nA joint inititive etween Intelligence nd Anly (I&A) nd the Office of the  Chief Informtion Officer which i to ring  nified, enterpripproch to the  mgement of ll classified informtion technology infrastrctre inclding: (1)  Homelnd Secre D Network (HSDN) for ecret level commniction   infrastrctre; (2)  Homelnd Top Secret Network (HTSN) for top ecret commniction   infrastrctre; nd ()  Homelnd Secre Commniction (HSC) for classified voice nd video   teleconference cabilitie.\nA next genertion of x-ry technology tht i to complement the trditionl x-ry  technology nd provide new technicl cabilitie, such as automted detection  lgorithm, thret imge projection, lternte viewing tion, bulk exploive  lgorithm, nd expnded thret lit tht incorporte emerging thre to  vition ecrity. A tem which i to provide Trporttion Secrity Officerability to creen passenger' crry-on baggge irporttionwide.\nA progrm which i to deliver surveillnce nd deciion-support technologie  tht crete  virtual fence nd ituationreness long the U.S. order with  Mexico nd C. The firSBInet deployment of the Block I tem took  plce in the Ton, Arizon tion. The econd deployment of the Block I  tem took plce in the Ajo, Arizon tion.  In Juary 2011, the SBInet  progrm ended as originlly conceived; however, limited deployment of  technology, inclding 15 enor tower nd 10 commniction tower, remined  deployed nd opertionl in Arizon. The T&E result on thee tower were to  e reported ometime in April 2011.\nTASC i to develop nd field n integrted finncil mgement, asset  mgement, nd procrement mgement tem oltion. The progrm i  to usndrd business process nd  ingle line of cconting complint  with the common governmentwide cconting classifiction trctre. The TASC  Exective Steering Committee determined tht the Federl Emergency  Mgement Agency will e the firt DHS component to migrte to TASC.\nU.S. Citizenhip  nd Immigrtion  Service  (USCIS)\nAn effort to move immigrtion ervice from per-based model to n  electronic environment. The progrm i to deliver  implified, We-based  tem for enefit eeker to submit nd trck their ppliction. The new,  ccont-based tem i to provide customer with improved ervice.\n\nAppendix II: DHS\u2019s Fiscal Year 2010 Major Acquisition Programs\n\nIn fiscal year 2010, there were 86 acquisition programs on the Acquisition  Program Management Division\u2019s oversight list, which included the  acquisition level and designation as an information technology acquisition.  Table 2 lists information on these 86 acquisition programs, and in addition,  includes information on the acquisition phase for each program as of April  2011 and whether the program was subject to the test and evaluation  (T&E) directive. For example, some programs, such as Customs and  Border Protection\u2019s acquisition of Border Patrol Facilities would not  involve any T&E activities and therefore would not be subject to the  requirements in the T&E directive or DHS Science and Technology  Directorate\u2019s Test and Evaluation and Standards office (TES) oversight.\n\nAppendix III: Comments from the Department of Homeland Security\n\nAppendix IV: GAO Contact and Staff Acknowledgments\n\n\tStaff Acknowledgments\n\nIn addition to the contact named above, Christopher Currie (Assistant  Director), Nancy Kawahara, Bintou Njie, Melissa Bogar, Jessica Drucker,  Caitlin White, Richard Hung, Michele Fejfar, Labony Chakraborty, Tracey  King, Paula Moore, Dan Gordon, Michele Mackin, Molly Traci, and Sean  Seales made significant contributions to this report.","output":"Why GAO Did This Study\n\nIn recent years, GAO has reported on challenges the Department of Homeland Security (DHS) has faced in effectively managing major acquisitions, including programs which were deployed before appropriate testing and evaluation (T&E) was completed. In 2009 and 2010 respectively, DHS issued new T&E and acquisition directives to address these challenges. Under these directives, DHS Science and Technology Directorate's (S&T) Test & Evaluation and Standards Office (TES) is responsible for overseeing T&E of DHS major acquisition programs--that is, those with over $300 million in life-cycle costs--to ensure that T&E and certain acquisitions requirements are met. GAO was asked to identify (1) the extent to which TES oversees T&E of major acquisitions; and (2) what challenges, if any, TES officials report facing in overseeing T&E across DHS components. GAO reviewed DHS directives and test plans, interviewed DHS officials, and reviewed T&E documentation from a sample of 11 major acquisition programs from each of 11 different DHS components. The results of the sample cannot be generalized to all DHS programs, but provided insights.\n\nWhat GAO Found\n\nTES met some of its oversight requirements for T&E of acquisition programs GAO reviewed, but additional steps are needed to ensure that all requirements are met. Specifically, since DHS issued the T&E directive in May 2009, TES has reviewed or approved T&E documents and plans for programs undergoing testing, and conducted independent assessments for the programs that completed operational testing during this time period. TES officials told GAO that they also provided input and reviewed other T&E documentation, such as components' documents describing the programs' performance requirements, as required by the T&E directive. DHS senior level officials considered TES's T&E assessments and input in deciding whether programs were ready to proceed to the next acquisition phase. However, TES did not consistently document its review and approval of components' test agents--a government entity or independent contractor carrying out independent operational testing for a major acquisition--or document its review of other component acquisition documents, such as those establishing programs' operational requirements, as required by the T&E directive. For example, 8 of the 11 acquisition programs GAO reviewed had hired test agents, but documentation of TES approval of these agents existed for only 3 of these 8 programs. Approving test agents is important to ensure that they are independent of the program and that they meet requirements of the T&E directive. TES officials agreed that they did not have a mechanism in place requiring a consistent method for documenting their review or approval and the extent to which the review or approval criteria were met. Without mechanisms in place for documenting its review or approval of acquisition documents and T&E requirements, such as approving test agents, it is difficult for DHS or a third party to review and validate TES's decision-making process and ensure that it is overseeing components' T&E efforts in accordance with acquisition and T&E directives and internal control standards for government entities. TES and DHS component officials stated that they face challenges in overseeing T&E across DHS components which fell into 4 categories: (1) ensuring that a program's operational requirements--the key performance requirements that must be met for a program to achieve its intended goals-- can be effectively tested; (2) working with DHS component program staff who have limited T&E expertise and experience; (3) using existing T&E directives and guidance to oversee complex information technology acquisitions; and (4) ensuring that components allow sufficient time for T&E while remaining within program cost and schedule estimates. Both TES and DHS, more broadly, have begun initiatives to address some of these challenges, such as establishing a T&E council to disseminate best practices to component program managers, and developing specific guidance for testing and evaluating information technology acquisitions. In addition, S&T has reorganized to assist components in developing requirements that can be tested, among other things. However, since these efforts have only recently been initiated to address these DHS-wide challenges, it is too soon to determine their effectiveness.\n\nWhat GAO Recommends\n\nGAO recommends, among other things, that S&T develop mechanisms for TES to document its review or approval of component acquisition documentation and T&E requirements, such as approving operational test agents. DHS agreed with GAO's recommendations."}
{"id":"gao_GAO-17-36","pid":"gao_GAO-17-36_0","input":"\tBackground\n\nThe National Flood Insurance Act of 1968 created NFIP. According to  FEMA, NFIP was designed to address a number of policy objectives,  including offering affordable insurance premiums to encourage program  participation and community-based floodplain management and reducing  the reliance on federal disaster assistance. The act provided the federal  government with the authority to work with the private insurance industry,  and since its inception NFIP has largely relied on the private insurance  industry to sell and service flood policies.\nIn 1983, FEMA established the WYO program with the goals of increasing  the NFIP policy base and geographic distribution, improving service to  policyholders, and providing the insurance industry with direct operating  experience with flood insurance. FEMA also sells and services flood  insurance through the DSA, which a contractor operates. Private insurers  become WYO companies by signing a Financial Assistance\/Subsidy  Arrangement with FEMA under which the insurers agree to issue flood  policies in their own name, adjust flood claims, and settle and defend all  claims arising from the flood policies. Private insurers must meet  FEMA\u2019s established criteria for becoming a WYO company.  Requirements for a company to participate in the WYO program include,  among others, 5 years of experience in property and casualty insurance  lines, good standing with state insurance departments, and the ability to  meet NFIP reporting requirements to adequately sell and service flood  insurance policies.\nEach year, FEMA publishes in the Federal Register the terms for  participation in the WYO program, including amounts WYO companies  will be paid to sell and service flood policies and adjust and pay claims.  The compensation FEMA pays WYO companies is one factor it considers  in setting premium rates for flood policies. This Federal Register notice  also states that WYO companies are to comply with the provisions of  NFIP\u2019s WYO Financial Control Plan Requirements and Procedures  (Financial Control Plan). The Financial Control Plan outlines WYO  companies\u2019 responsibilities for program operations, including  underwriting, claim adjustments, cash management, and financial  reporting, as well as FEMA\u2019s responsibilities for management and  oversight.\n\n\t\tOther Parties Involved in Day-to-Day Processing of Policies and Claims\n\nWYO companies employ, contract, or work with other parties to sell and  issue flood policies and receive, process, and pay claims. Insurance  agents for one or more WYO companies are the main point of contact for  most policyholders seeking to purchase an NFIP policy, find information  on coverage, or file a claim. Based on information the insurance agents  submit, the WYO companies issue policies, collect premiums from  policyholders, deduct an allowance for expenses from the premium, and  remit the balance to the National Flood Insurance Fund\u2014into which  premiums are deposited and from which claims and expenses are paid.  WYO companies typically contract with flood insurance vendors to  conduct some or all of the day-to-day processing and management of  flood insurance policies.\nWYO companies work with certified flood adjusters to settle NFIP claims.  When flood losses occur, policyholders report them to their insurance  agent, who notifies the WYO company. To assess damages, the WYO  company assigns a flood adjuster, who may be independent or employed  by an insurance or adjusting company. The adjuster is responsible for  assessing damage; estimating losses; and submitting required reports,  work sheets, and photographs to the WYO company, where the claim is  reviewed and, if approved, processed for payment. FEMA reimburses the  WYO company from the National Flood Insurance Fund for the amount of  the claims and expenses paid. Claim amounts may be adjusted after the  initial settlement is paid if claimants submit documentation that costs were  different than estimated.\n\n\t\tWYO Compensation\n\nCurrent WYO compensation is structured primarily as allowances to pay  for policy sales and servicing, claims adjusting and processing, and other  services FEMA requires that participating companies provide. This  service-oriented compensation structure, with uniform rates generally  based on insurance industry average expense ratios (proxies) and fee  schedules, allows WYO companies to earn a profit to the degree that  compensation exceeds their actual expenses. Most of FEMA\u2019s payments  to WYO companies under the current compensation structure are not  reimbursements of actual expenses incurred, but allowances on which  the companies can either make a profit or incur a loss. Since the  inception of the WYO program, FEMA has generally used proxies to  determine the rates at which it pays WYO companies, and the payments  FEMA makes are determined by applying these proxy rates to either  premiums written or claim losses (see table 1).\nCommission and operating expenses are based on a proxy of a WYO  company\u2019s net written premiums. FEMA established a commission  expense allowance at 15 percent in 1983 after consulting with industry  representatives. This percentage has not changed since and is written  into the Financial Assistance\/Subsidy Arrangement. The percentage used  for calculating operating expenses is generally provided annually to WYO  companies as part of the compensation package (see table 1). The  percentage is determined annually based on A.M. Best Company\u2019s  aggregates and average industry operating expenses for five lines of  property insurance\u2014fire, allied lines, farm owners multiple peril,  homeowners multiple peril, and commercial multiple peril.\nFurther, WYO companies receive payment for three types of claim  adjustment expenses.\nAllocated loss adjustment expenses (ALAE). These are claim  expenses to adjust specific claims. FEMA determines payment for  ALAE based on information it periodically collects from independent  adjusting firms on the cost of adjusting losses in other lines of  insurance business, and presents the payment amount to WYO  companies through a fee schedule.\nUnallocated loss adjustment expenses (ULAE). These are claim  expenses that are incurred by the WYO company for routine  operations not associated with a specific claim such as salaries,  overhead, and maintenance. FEMA bases payment for ULAE on a  percentage of net written premiums and a percentage of claim losses.  Before May 2008, FEMA calculated the amount for ULAE as 3.3  percent of claim losses but changed its methodology to 1.5 percent of  claim losses plus 1 percent of net written premium, which was further  reduced to 0.9 percent in fiscal year 2013. According to FEMA\u2019s  statements in the Federal Register, the flat rate of 3.3 percent of claim  losses resulted in payments far greater than expenses during  catastrophic loss years and payments below actual expenses during  low-loss years.\nSpecial allocated loss adjustment expenses (SALAE). These are  claim expenses related to litigation, engineering, appraisals, other  experts, and additional claim adjustments. FEMA calculates SALAE  based on actual expenses. In March 2015, FEMA eliminated the  previous $2,500 approval threshold for SALAE expenses for experts  (Type 1) and required WYO companies to submit specific information  to FEMA, including information on the claim, policy limits, and an  explanation and justification for the reimbursement. FEMA staff must  review the information submitted and approve the expenditure before  the WYO is allowed to incur any Type 1 expenses. In July 2016,  FEMA removed the $5,000 threshold for Type 3 expenses (litigation- related) and required WYO companies to seek approval for  reimbursement of such expenses and pre-approval if they wished to  take more than three depositions in a case.\nIn addition, FEMA pays WYO companies that meet certain policy growth  goals a percentage of net written premiums as a marketing bonus. In  2009, we found that FEMA\u2019s marketing goals were not aligned with  FEMA\u2019s NFIP goals. As a result, FEMA changed the formula for how  WYO companies earn bonuses in the fiscal year 2013 compensation  arrangement. A growth bonus is intended to provide an incentive for WYO  companies to continue to grow the NFIP program by adding new policies.  FEMA officials told us that the agency changed the program\u2019s growth  bonus to better link it to new business\u2014if a WYO company acquires  another company\u2019s business, the number of transferred policies is added  to the company\u2019s beginning number of policies and the total merged  number of policies is used when calculating aggregate growth for the  purposes of the bonus. Therefore, the WYO company is receiving a  growth bonus based only on new business since the number of  transferred policies is added to the existing policies in place before the  percentage of growth is calculated. This allows FEMA to recognize WYO  companies for actual growth and not for transferring policies from one  company to another. With the new formula, WYO companies can receive  a higher percentage of net written premiums as a growth bonus when the  policy growth is tied to three supporting goals for selling policies: (1) in  underserved areas, (2) for residential preferred risk policies, and (3) for  nonresidential policies.\n\n\t\tFEMA Management and Oversight of WYO Companies\n\nWithin FEMA, the Federal Insurance and Mitigation Administration (FIMA)  manages NFIP. According to FEMA staff, about 70 staff within FIMA are  dedicated to managing and overseeing the WYO program and claim  processes. Their management responsibilities include establishing and  updating NFIP regulations, analyzing data to actuarially determine flood  insurance rates, and offering workshops and conferences to insurance  agents and adjusters to explain NFIP requirements. In addition, FEMA is  responsible for monitoring and overseeing the performance of the WYO  companies to ensure that NFIP is administered properly.\nFEMA has processes for monitoring and providing oversight of NFIP  claims that are outlined in its Financial Control Plan. Under the current  plan, the processes include triennial claims operation reviews, biennial  financial statement audits, and underwriting reviews. The agency also is  responsible for reinspecting claims and monitoring company performance  as needed.\nClaims operation reviews. FEMA is to conduct these reviews at  every WYO company on a 3-year rotating basis, according to the  Financial Control Plan. The stated purpose of these reviews is to  evaluate a WYO company\u2019s processes for administering flood claims,  NFIP data reporting, and the accuracy and service the company  provides customers when handling claims. As part of the review  process, FEMA officials are to review the entire claim file including  coverage, policy compliance, and whether coverage limits are within  NFIP statutory allowances. FEMA notes findings as critical and  noncritical errors.\nImproper payment reviews. DHS is required to conduct annual  reviews by the Improper Payments Information Act (IPIA), as  amended. Such reviews identify a statistically valid sample of  payments done annually to estimate the percentage of improper  payments.\nReinspection of claims. While the claims operation review is meant  to focus on transactions at WYO companies or groups of WYO  companies selected by FEMA for review, the selection for  reinspection of claims is to be based on specific events or large  losses. Until 2015, all claim files were subject to FEMA\u2019s reinspection  process outlined in the Financial Control Plan, which included routine  reinspections as well as special assist reinspections, which are  inspections of claims requested by Congress, a policyholder, a WYO  company, or the DSA. Starting in 2015, FEMA discontinued routine  reinspections but continued special assist reinspections.\nBiennial audits. According to the Financial Control Plan, the biennial  audit is to provide an independent assessment of a WYO company\u2019s  financial controls relating to its participation in NFIP and the integrity  of the financial data it reports to FEMA. The audits provide an opinion  on the fairness of a WYO company\u2019s financial statements, the  adequacy of its internal controls, and the extent of its compliance with  relevant laws and regulations, including reporting any discrepancies  found in the claims process.\nAudits for cause. According to WYO Financial Control Plan  Monitoring procedures, FEMA can conduct these audits as a last  resort if other remedies in its oversight of WYO companies have been  exhausted, or at the request of OIG. The monitoring procedures also  state that there have been fewer than five such audits during the  program\u2019s history.\n\n\t\tNAIC and FEMA WYO Company Reporting\n\nInsurance is primarily regulated by the states, unless federal law  specifically relates to the business of insurance (as in the cases of flood  and terrorism insurance). Requirements and processes for regulating  insurance may vary from state to state, but state regulators generally  license insurance companies and agents, review insurance products and  premium rates, and examine insurers\u2019 financial solvency and market  conduct. According to NAIC, state regulators monitor an insurers\u2019  compliance with laws and regulations and a company\u2019s financial condition  through solvency surveillance and examination mechanisms. Insurance  regulators use insurance companies\u2019 financial statements and other  information as part of their continuous financial analysis, which is to be  performed at least quarterly, to identify issues that could affect solvency.\nThrough NAIC, the regulators also collect financial information from  insurers for ongoing monitoring of financial solvency, including  information on their federal flood line of insurance. NAIC\u2019s statutory  accounting principles prescribe standards for insurer accounting and  reporting of financial information, which are intended to, among other  things, ensure the consistent reporting of financial information. NAIC  also issues instructions for completing annual statements and related  schedules and exhibits, including the Insurance Expense Exhibit, which  provides premium, loss, expense, reserve, and profit data for each line of  property and casualty business, including the federal flood line of  insurance, and is presented both for the direct insurance written by  insurers and net of reinsurance. The exhibit provides a statutory  allocation of income to lines of business and may be used to measure  underlying profitability of insurance operations. Each WYO company  determines its own method for allocating revenues and expenses, which  may vary from company to company. WYO companies have been  reporting this information to NAIC annually since 1997.\nFEMA\u2019s National Flood Insurance Program Write-Your-Own Accounting  Procedures Manual prescribes the financial reporting requirements for all  WYO companies. This manual is part of the NFIP WYO Program  Financial Control Plan, which also includes transaction record reporting  and reconciliation procedures. These procedures describe, among other  things, expectations for the timeliness of reporting and elements of the  quality review that FEMA performs on submitted data.\n\n\t\tFEMA Compensation and Oversight of the Direct Program\n\nAs previously discussed, FEMA\u2019s DSA serves as the insurer of last resort  when a WYO company is unable or unwilling to write a flood insurance  policy. Through the Direct Program, the DSA services both standard  policies and other types of policies, including repetitive loss and group  flood policies. According to FEMA officials, as of August 2016, the DSA  administers 15 percent of FEMA flood insurance policies.\nFEMA pays the DSA contractor for selling and servicing flood insurance  and for adjusting and processing claims after a flood event through a  competitively awarded predominantly fixed-price contract. The contractor  has calculated its cost to sell and service policies as well as adjust claims  following a noncatastrophic event based on its prior experience as a  vendor for WYO companies. Based on this experience, the contractor  charges a flat price per policy type that is not based on the premium  amount. The DSA contractor also has the ability to withdraw funds on  behalf of the agency from the Department of the Treasury to pay for  certain actual costs, such as overhead costs for mailing and printing.\nFEMA oversees the DSA contractor and conducts operation reviews on  the DSA\u2019s underwriting and claims operations annually versus triennially  for the WYO companies. According to FEMA officials, DSA financial- related information is subjected to the annual audit of the Department of  Homeland Security\u2019s consolidated financial statements that an  independent certified public accountant performs.\n\n\tFEMA Still Relies on Insurance Industry Proxies for Setting Compensation and Has Not Yet Revised Its Practices in Response to the Biggert-Waters Act\n\nFEMA continues to lack the information it needs to determine whether its  compensation payments are appropriate and how much profit is included  in what it pays WYO companies. Efforts by FEMA, NAIC, and WYO  companies have resulted in some improvements to federal flood financial  data reported to NAIC. But we found inconsistencies in how companies  reported federal flood data to NAIC, which limits the usefulness of the  data for setting compensation rates. Our analysis also shows that the  manner in which WYO companies operate has an effect on their  expenses and profits, which FEMA may find relevant when developing a  WYO compensation methodology and rates. However, FEMA has made  limited progress toward revising its WYO compensation methodology as  required by the Biggert-Waters Act.\n\n\t\tEfforts Have Resulted in Some Improvements to Federal Flood Financial Data Critical to Revising Compensation\n\nEfforts by FEMA, NAIC, and WYO companies have resulted in some  improvements to federal flood financial data reported to NAIC that are  critical to a revised compensation methodology. FEMA officials told us  that since our 2009 report they have worked with NAIC and WYO  companies to help ensure that reasonable and accurate operating  expenses for the federal flood insurance line are being reported to NAIC.  In addition, FEMA officials told us that FEMA has analyzed WYO  company financial data since 2009 to monitor improvements in the  companies\u2019 federal flood data, but has found mixed results.\nA FEMA official told us that after issuance of our 2009 report, the agency  conducted site visits to four WYO companies to review the actual flood  insurance data the companies submitted to NAIC. The official said that  they found the visits helpful in understanding how the companies were  reporting the financial results of their flood insurance lines. However, this  official explained that it would require too many resources to meet with all  the WYO companies individually and FEMA has not made any further  company-specific inquiries or visits. As a result of these initial efforts,  NAIC amended its guidance in 2011 on the reporting of WYO commission  and fee allowances in response to FEMA\u2019s request. According to FEMA,  this change was intended to address one issue we found during our 2009  engagement\u2013-specifically, that WYO companies were subtracting  (netting) WYO compensation from expenses. Reporting expenses net of  compensation instead of reporting expenses gross for the flood insurance  they wrote resulted in higher calculated profits. We found that 2 of the 10  companies whose data we analyzed for this report changed from net to  gross expense reporting in the first year in which the NAIC guidance was  effective or at some point before 2014, and 7 WYO companies reported  expenses gross, not net, during the 2008\u20132014 period. Only one  company from those we selected to review continued to report a portion  of its expenses net of compensation in 2014.\nIn addition, WYO companies have made other improvements to the  federal flood insurance financial data they report to NAIC beyond  reporting expenses. For example, our analysis confirmed that one WYO  company revisited how certain expenses for servicing flood policies were  allocated and reported to NAIC. Two other companies made changes in  how they report losses\u2014one changed its method for estimating losses  reported to NAIC to be consistent with the method it used to report such  losses to FEMA, while another said it changed its policy of reporting  certain loss adjustment expense reimbursements as an offset to incurred  losses reported to NAIC. These reporting changes collectively improved  the quality of the NAIC financial data necessary to ensure comparability  with financial data the WYO companies submit to FEMA, which is  important to determining the amounts to be built into compensation rates  for estimated expenses and profits.\nTo verify the accuracy of the NAIC data, FEMA officials told us that they  request and analyze the federal flood insurance data that WYOs report to  NAIC around April or May of each year. FEMA officials explained that the  benefit of using NAIC data is that the data are reported on WYO  companies\u2019 annual statements and it is more cost efficient to get all the  data from one source than for FEMA to independently collect and verify  the data from each WYO company. WYO companies\u2019 financial  statements are submitted to both NAIC and state regulators. A FEMA  official told us that its analysis, which it has periodically performed since  2009, has included comparing each WYO company\u2019s premiums and  losses reported to NAIC to the figures the companies report on the  financial statements they submit to FEMA. FEMA has also compared the  aggregate homeowners\u2019 underwriting and loss adjustment expense ratios  of the WYO companies to non-WYO companies. FEMA officials told us  that for the largest 8 to 10 WYO companies, FEMA has also compared  their underwriting and loss adjustment expense ratios (expenses  expressed as a percentage of written premiums) for flood to the same  ratios for their homeowners lines for a 5-year period to determine if a  correlation exists between the companies\u2019 costs of operating these two  lines of business. FEMA has prepared a report showing underwriting  expenses and loss adjustment expenses grouped into various ranges,  such as negative expense ratios, \u201c0-5 percent\u201d, and \u201c5-10 percent\u201d to  assess the trend in WYO company expenses over time.\nIn September 2016, FEMA officials estimated that WYO companies that  make up about 80 percent of the net written premiums reported had  adequately improved the quality of the underwriting expense data  reported to NAIC. FEMA officials also said that these companies usually  have underwriting expenses between 20 percent and 30 percent of their  net written premium or an average expense ratio of 25 percent. By using  that information as a model and excluding WYO companies with  expenses that fall outside that range, FEMA officials stated that they may  be able to use data from these companies to set future commission and  operating expense allowances for all WYO companies. However, FEMA  officials noted that the loss adjustment expense ratios varied much more  significantly from company to company than did underwriting expense  ratios. They also observed negative loss adjustment expense ratios for  some WYO companies, although they added that such ratios can occur  as a result of changes in loss reserve estimates. FEMA officials also said  that they generally found great inconsistency in how WYOs were  reporting expenses between two categories of loss adjustment expenses,  which affected their ability to assess the reasonableness of the expense  ratios of a single year, but had greater success in doing so when the  ratios were calculated based on total loss adjustment expenses for a 5- year period.\nAccording to an August 2016 WYO Bulletin, beginning with the fiscal year  2017 arrangement year, FEMA intends to require that WYO companies  provide to FEMA copies of all data submissions to NAIC related to their  flood insurance activities and to attest to the accuracy of those  submissions. FEMA stated in the bulletin that this requirement would be  aligned with the arrangement\u2019s specification that, upon request, WYO  companies supply FEMA with a true and correct copy of a WYO  company\u2019s property and casualty annual financial statement filed with  state insurance regulatory agencies and the arrangement\u2019s requirement  that provides access to all records of WYO companies pertinent to the  arrangement. FEMA also stated in the bulletin that this requirement will  support FEMA\u2019s efforts to pay WYO companies based on actual  expenses incurred by companies.\n\n\t\tInconsistencies in WYO Company Reporting Continue to Limit Its Usefulness in Setting Compensation Rates\n\n\t\t\tReporting Inconsistencies\n\nWe found that WYO companies were not consistently reporting their  federal flood financial data to NAIC. The inconsistencies we found in the  data WYO companies reported to NAIC resulted in unreported  underwriting and loss adjustment expenses of varying amounts and  significance by 8 of the 10 companies we reviewed. Further, we found  that some WYO companies reported different loss and related reserves to  NAIC and FEMA.\nMore than half of the companies we reviewed did not report to NAIC all of  their adjuster fees and other expenses incurred on the companies\u2019 flood  losses and provided a variety of explanations for their accounting  practices. Nearly all of the WYO companies we reviewed told us that they  reported adjuster fees as a direct expense of the flood insurance line, but  one WYO company told us that their interpretation of the NAIC rules was  that adjuster fees should be reported as an expense ceded to FEMA and,  thus, not reported as a direct expense to its flood line. Similarly, four  WYO companies told us that they did not record reimbursable legal,  engineering, appraisal, and other adjuster fees as direct expenses of their  flood lines because, among other reasons, some viewed these as  FEMA\u2019s expenses and not the company\u2019s, although this was not the  practice for the remaining companies we reviewed. Still another WYO  company told us that it reports policy or claim-specific expenses to the  flood line, but does not report indirect expenses, such as claim handling  fees paid to their vendor. Collectively, based on our analysis, these  unreported loss adjustment expenses amounted to about $14 million.  Also, some companies did not report certain related operating expenses  for their federal flood line. These expenses included fees paid to flood  vendors, premium taxes, and internal company overhead expenses that  would normally be classified as a type of underwriting expense. However,  due to the WYO companies\u2019 established practices at the time and their  interpretation of NAIC\u2019s rules, these expenses were either not allocated to  the federal flood line or were reported on the books of an affiliated  company. Collectively, based on our analysis, these unreported operating  expenses amounted to approximately $52 million. As discussed below,  these unreported expenses had a significant effect on the combined  profits of these companies.\nThe inconsistencies we found in how premiums are reported to FEMA  and NAIC had little effect on individual company profit calculations. For  nearly all companies we reviewed, differences in premiums WYO  companies reported to FEMA and NAIC in 2014 were negligible (less  than plus or minus 1 percent) and had a negligible effect on reported  commission and underwriting expenses, and profit. Any differences that  existed were generally attributable to timing differences\u2014linked to a lag in  WYO companies receiving financial data from vendors that, in turn,  affected the companies\u2019 reporting to NAIC. Also, some of the differences  we identified in incurred losses reported to FEMA and NAIC were also  due to this reporting lag, but as the timing of floods and the payment of  claim losses are less predictable than premium payments, the lag in  reporting had a more significant effect on reported losses and loss  adjustment expenses. For example, we determined the effect of the lag  for one company was about 5 percent of incurred losses reported to  FEMA, whereas for another company the effect was greater than 25  percent of incurred losses.\nHowever, the inconsistency with the greatest effect on individual  company-reported losses was related to how certain companies  estimated incurred but not reported losses and related adjustment  expenses. Three of the WYO companies told us that the actuarial  methodology they used to develop incurred but not reported loss  estimates for NAIC reporting purposes was different than the  methodology their vendor used to develop the estimates submitted to  FEMA. Another company told us it accounted for its federal flood activity  entirely on a cash basis and did not, therefore, report any unpaid loss and  loss adjustment expense reserves to NAIC. In order to compare loss  adjustment compensation with actual expenses, we adjusted these  companies\u2019 reported expenses to remove the effect of these differences  and substituted expense estimates we developed based on the loss and  loss adjustment expense reserves the companies\u2019 vendors reported to  FEMA. Collectively, the net effect of our adjusting for these differences in  reported losses and loss reserves (some companies reported significantly  higher losses and loss reserves to FEMA than to NAIC while others  reported significantly lower estimates) was a net increase in reported loss  adjustment expenses of more than $5 million. These adjustments are  reflected below along with the unreported expenses noted above.\n\n\t\t\tEffects of Inconsistent Reporting on Expenses and Profit for 10 WYO Companies\n\nWe performed additional analyses and comparisons for 10 selected WYO  companies to adjust for inconsistencies (discussed previously) and  determine the effect of the revised amounts on expenses and profits. The  10 companies we selected accounted for a majority of net written  premiums, net paid losses, and total compensation paid for calendar year  2014 (see table 2). For more details about our methodology and the  limitations of our analysis, see appendix I.\nAn initial comparison of selected WYO company compensation with the  expenses the companies reported to NAIC appears to show that the  companies collectively earned a profit of 25 percent in 2014 (as illustrated  in table 3). However, after we adjusted the reported expenses for the  effects of inconsistent reporting described previously, we estimated that  the companies earned a profit of approximately 15 percent on the flood  insurance line (see table 3).\nWhile an aggregate measurement of profitability for all selected WYO  companies can be calculated, this calculation is significantly influenced by  a few WYO companies that dominate the flood insurance market and  whose business model and cost structure may be different from that of  the majority of insurers that participate in the WYO program. The 2014  flood insurance profits of the companies we reviewed, after our  adjustments, ranged from approximately 2 percent to 38 percent.  Removal of the two WYO companies that represent the outliers of this  range would result in total profit of approximately 18 percent and a profit  range that still varies significantly between 7 percent and 28 percent for  the remaining eight companies. Importantly, our analysis and ability to  estimate WYO company expenses and profit were subject to certain  limitations (see app. I for details on these limitations and their potential  effects), which included limiting our analysis to 1 year (2014). In addition,  our 2014 estimates of company expenses and profit are an outcome of  our effort to understand the issues surrounding the inconsistent financial  reporting by the selected WYO companies and the various factors that  can affect company expenses and profit. For these reasons, these  estimates should not be taken to be a static or predictable indicator of  WYO company profits.\n\n\t\tWYO Company Operations Can Affect Flood Line Expenses and Profits and Are Relevant When Developing Compensation Methodology and Rates\n\nAside from the inconsistencies in reporting financial data, other factors  specific to how WYO companies operate their flood line of business also  can affect a company\u2019s expenses and profits. These company-specific  factors, coupled with the inherent uncertainty of the frequency and  severity of loss events, the overall market for flood insurance, and  changes to the flood insurance program\u2019s design and requirements, can  present challenges in developing the WYO compensation methodology.  Further, these factors can also present challenges in setting rates that  appropriately compensate WYO companies over time for providing  services to policyholders.\n\n\t\t\tEffects of WYO Company Operations on Flood Line Expenses and Profit\n\nBased on our analysis of the costs of operating their flood lines of  business in relation to expenses and profits, we found that companies\u2019  operating characteristics could in part explain the significant variance in  expenses and profits. One way to understand the amount of WYO  company expenses and profits is in relation to the premiums paid by  policyholders. As noted in table 2, total compensation paid to the WYO  companies we reviewed represented approximately 35 percent of net  written premiums. That is, 35 cents of every premium dollar paid by  policyholders went toward compensation for the selected companies. As  shown in table 4, by breaking down compensation into expense and profit  components, slightly more than 5 percent of every dollar of premium  written by the 10 WYO companies went to their profit.\nAs demonstrated previously, WYO company expenses and profit vary  significantly and those variances can be explained in part by the  companies\u2019 operating characteristics. For example, some WYO  companies we interviewed told us that they used independent agents and  generally paid these agents a commission higher than the 15 percent  allowance FEMA provides. Further, the companies we selected for review  had commission expenses of 17.7 percent of net written premiums on  average (see table 4). Some WYO companies attributed the higher  commission to stiff competition in writing new business or keeping current  policies in place in certain markets. Agent commissions can vary not only  from company to company, but also by volume of sales, across lines of  property and casualty insurance, and between new business and renewal  of existing policies. However, we did not determine whether agents\u2019  commissions for selling NFIP policies were affected by how insurers  compensated agents for selling other lines of property and casualty  business. Also, nearly all of the WYO companies we reviewed told us that  they pay adjusters the same amount that FEMA provides as an adjuster  fee allowance and, thus, do not earn a profit on this category of  compensation.\nThe operating expense allowance, including policy growth incentive  bonuses, and the ULAE allowance are the remaining categories of  compensation on which WYO companies can earn a profit and, thus,  offset losses on agent compensation. The operating and ULAE  allowances compensate WYO companies for the expenses incurred to  operate and administer their flood lines and fulfill the companies\u2019  obligations under their agreements with FEMA, but are not directly  associated with selling specific policies or adjusting specific claims. It is in  these areas that the companies\u2019 operating characteristics and their  compensation of vendors can more directly affect the expenses they incur  and the profits they earn on the federal flood line. In addition to premium  taxes and fees, these allowances cover such insurer expenses as  salaries and benefits of company personnel, printing and postage,  advertising, equipment, training and travel, audit and legal services, and  other expenses. The expenses are incurred to fulfill company obligations,  such as to underwrite and issue policies; collect, remit, and account for  funds; submit financial and statistical reports; conduct audits and reviews;  and manage all aspects of the claims process.\nAll of the WYO companies we reviewed use vendors to some extent to  operate their flood lines. Most of the WYO companies used third-party  vendors, while the others used an affiliated company to provide various  services. Many of the companies that used third-party vendors told us  that they generally outsource policy, claims, reporting, and other functions  to their vendor, although some use a vendor\u2019s systems software and  retain responsibility for underwriting policies and adjusting claims.  Vendors we interviewed said that they offer a variety of service levels that  WYO companies can choose from depending on the degree of control  they want over the underwriting and claims processes and, thus, the  customer service experience of their policyholders and agents.\nWYO companies and vendors told us vendors are paid a percentage of  gross or net written premiums and ULAE allowances and may be paid for  additional expenses incurred in providing services above what is provided  for in the base contract. Third-party vendors with whom we spoke said  that the amount WYO companies pay depends on the nature and extent  of the services provided and the volume of premiums and losses. We  were not able to obtain information from all WYO companies about how  much they pay their vendor, but from the information we were able to  obtain from some WYO companies we were able to estimate the amount  paid. We noted that the difference between what the WYO companies  paid third-party vendors varied by 2 percent or more of net written  premium. In addition, we observed that some companies paid up to twice  the amount of incurred loss ULAE compensation to their vendors as  others. Such differences in vendor compensation can affect WYO  company flood line profits. And because vendor compensation is based in  large part on FEMA\u2019s allowances or the written premiums and losses on  which those allowances are based, changes in those allowances will,  absent changes to the vendor contracts, carry through to the vendors.\nWe identified expenses of approximately $80 million in aggregate that  three WYO companies paid to their affiliated vendors in 2014; this amount  represents approximately 12 percent of total adjusted expenses (see  table 3 above). Company representatives told us that the affiliated  vendors provided policy administration, claims processing, cash  management, reporting, and other services that third-party vendors  typically offer and may include additional management, financial, and  legal and regulatory services commonly performed by an insurer\u2019s  employees. Some companies told us that the fee charged was either  intended to cover only the affiliate\u2019s expenses or was equivalent to what  they would expect to pay a third-party vendor for the same services. We  did not determine the amount of intercompany profits or losses reflected  in the expenses these WYO companies reported and one company told  us that this information is not made public. Without more specific  information on the affiliated vendors\u2019 activities and intercompany profits  and losses, it would not be possible to determine how the fees charged  by these affiliated vendors compare to what a third-party vendor  otherwise would charge in an arms-length transaction. Excluding  intercompany profits and losses (or a portion thereof) from expenses  would increase or decrease, respectively, the profit shown in tables 3 and  4.\nIn addition to vendor fees, some of the WYO companies whose data we  analyzed allocate internal company overhead expenses for corporate- wide support functions to their flood lines. Companies told us that they  allocate overhead expenses in accordance with the methods prescribed  by NAIC. In some cases companies told us that expenses were allocated  based on the results of cost studies for those functions that support the  federal flood line or were allocated to each line of property and casualty  business in proportion to factors such as head count, salaries, and  premiums written or earned. In the cases in which we were able to obtain  sufficient information to determine how much of the WYO companies\u2019  expenses were allocated to overhead, we observed that overhead as a  percentage of net written premium ranged from less than 1 percent to  almost 3 percent. The amount of overhead allocated to the flood line can  affect the company\u2019s profit on this line and the variances we observed  may reflect the relative significance of the federal flood line to the WYO  companies\u2019 total property business and the extent that certain activities  are performed by internal WYO company personnel versus their vendors.\n\n\t\t\tWYO Company Perspectives on Factors That Can Affect Their Expenses and Profit\n\nAggregate industry average expense ratios and WYO company flood line  expenses and profit are both historical in nature and, as such, may not  fully account for current conditions and the effects that changes to the  flood program\u2019s design and requirements may have on WYO companies\u2019  expenses and profits in the future. The 10 WYO companies whose  reporting we reviewed cited a number of factors that they consider when  evaluating the WYO arrangement in relation to their financial and  strategic goals. Some WYO companies told us that their goals can be met  as long as they are able to offer flood insurance as part of a full menu of  products that help meet the financial needs of their customers without  undue financial and reputational risks being placed on the company.  Some companies specifically cited as a concern the mandates imposed  by Congress and FEMA as part of recently enacted legislation (Biggert- Waters Act and the Homeowners Flood Insurance Affordability Act of  2014) that the companies said imposed significant unreimbursed costs on  them. Some WYO companies also stated that additional fees,  assessments, and surcharges imposed by this legislation added to  customers\u2019 out-of-pocket costs. According to the WYO companies, these  additional costs to consumers resulted in some property owners dropping  their flood coverage and leaving the WYO companies with a smaller  policy base.\n\n\t\tFEMA Has Not Yet Revised Its Compensation Methodology\n\nFEMA has not yet revised its compensation methodology in response to  section 224 of the Biggert-Waters Act or our prior recommendations and  continues to rely on insurance industry proxies for other lines of insurance  for setting compensation rates (see table 1 for FEMA\u2019s compensation  practices). The Biggert-Waters Act built on our 2009 recommendations  and required that FEMA take into account actual expenses and determine  in advance the amount of profit built into its compensation rates when  determining compensation. FEMA officials told us that the agency  began the rulemaking process in late 2014 in response to the Biggert- Waters Act requirements, but that its progress had slowed as litigation  over Hurricane Sandy claims escalated and more resources were  assigned to that issue. As of September 2016, FEMA was unable to  provide a timeline for completing its rulemaking required under section  224. One FEMA official explained that it is difficult to determine a timeline  for rulemaking since some elements of the process, such as economic  analysis and the concurrence process through FEMA and DHS, are  beyond the agency\u2019s control. In September 2016, FEMA officials told us  that an upcoming regulatory action in response to section 224 of the  Biggert-Waters Act would address FEMA\u2019s new methodology for  compensating WYO companies, as well as fully address our open  recommendation from the 2009 report related to compensation and data  quality.\nHowever, FEMA has not made clear whether its expense ratio analysis,  planned data requests, and WYO company attestations of the accuracy of  their financial data (as discussed previously) represent the entirety of the  agency\u2019s plan to ensure the accuracy of the data WYOs submit to NAIC.  FEMA also has not made clear whether\u2014in light of its own observations  on unusual expense ratios and our findings of inconsistent WYO  company reporting\u2014it intends to make other inquiries and perform other  analyses that will fully address our recommendations. Among the 10  recommendations in the report, we made the following five relating to  compensation methodology and data quality that have not been fully  addressed:\nWe recommended that FEMA (1) determine in advance the amounts  built into the payment rates for estimated expenses and profit; (2)  annually analyze actual expenses and profit in relation to the  estimated amounts used in setting payment rates; and (3) consider  the results of the analysis of payments, actual expenses, and profit in  evaluating methods for paying WYO companies.\nWe also recommended that FEMA increase the usefulness of the data  WYO companies report to NAIC by (1) taking actions to obtain  reasonable assurance that expense data can be considered in setting  payment rates and (2) developing data analysis strategies to annually  test the quality of flood insurance data the companies report to NAIC.\nFederal managerial cost accounting standards state that reliable cost  information is critical to the proper allocation and stewardship of federal  resources and that actual cost information is an important element  agency management should consider when setting payment rates.\nOur 2009 recommendations to FEMA remain relevant as FEMA seeks to  develop a compensation methodology as required by the Biggert-Waters  Act. They included that the agency should determine whether data  reported to NAIC could be used to set WYO compensation rates and that  FEMA develop comprehensive analysis strategies to annually test the  quality of the data. Although FEMA has reported improvements to data  that WYO companies submit, FEMA stated that although it has compared  underwriting expense ratios to the related allowances it pays insurers, it  has not yet compared WYO companies\u2019 reported expenses to the  payments it makes to the WYO companies and determined the  companies\u2019 profits due to resource limitations. As a result, and as we  noted in 2009, FEMA does not have the information it needs to determine  whether its payments are appropriate and how much profit is included in  its compensation of the WYO companies. In addition to being helpful in  identifying potential inconsistencies in expense reporting, such a  comparison of compensation payments and actual expenses would help  FEMA to identify differences in how individual companies operate and the  related effects on company expenses and profit. As discussed previously,  we found that the manner in which a WYO company operates has an  effect on its expenses and profits and is thereby relevant for FEMA to  take into consideration as it develops its new compensation methodology.  FEMA\u2019s completion of additional actions to improve data quality and  transparency and accountability over compensation will help it meet  Biggert-Waters Act requirements.\n\n\tData and Views on Over- and Underpayment of NFIP Claims\n\nData on over- and underpayment of claims in fiscal years 2008\u20132015  varied in over- and underpayments identified, depending on the type of  review conducted as part of FEMA\u2019s NFIP claims oversight. FEMA  officials, some WYO company representatives, and some stakeholders  agreed that over- and underpayment of NFIP claims were not widespread  and cited several factors that contributed to over- and underpayment  issues. A recent DHS OIG report found that, among other things, FEMA  was unable to ensure that WYO companies were properly implementing  NFIP and unable to identify systemic problems in the program. Currently,  a FEMA working group is developing a new WYO oversight plan to  address financial oversight, claims, underwriting, appeals, and litigation.\n\n\t\tFEMA Data on Over- and Underpayment of Claims\n\nTo obtain information about over- and underpayments of NFIP claims, we  reviewed available data from FEMA documenting triennial claims  operation reviews, improper payment reviews, claims reinspections,  biennial audits, and audits for cause for fiscal years 2008\u20132015. We  found that the extent of over- and underpayments varied, depending on  the type of review conducted.\n\n\t\t\tClaims Operation Reviews\n\nThe vast majority of WYO companies received satisfactory ratings in  FEMA\u2019s recent claims operation reviews and overpayments by  companies and the DSA ranged from 2.7 percent to 6.7 percent of claim  amounts reviewed. Between fiscal years 2008 and 2015, the number of  WYO companies that received unsatisfactory ratings on their claims  operation reviews ranged from zero to three each year. Under the current  Financial Control Plan, FEMA reviews samples of WYO claim files during  claims operation reviews. FEMA reviewers note findings as critical and  noncritical errors and allow a 19 percent error rate under the current  Financial Control Plan; an overall error percentage of 20 percent or higher  is a basis for an unsatisfactory rating. According to an August 2016  WYO bulletin, FEMA planned to reduce the acceptable error percentage  for claims operation reviews to 10 percent starting in fiscal year 2017 to  better encourage WYO companies to adopt policies and practices  designed to more accurately handle flood insurance claims and ensure  that WYO companies pay all claims authorized by the Standard Flood  Insurance Policy. Examples of critical errors in files include claim  payments that exceed the policy terms, incorrect payments, and  significant payment delays. FEMA\u2019s review steps provide an opportunity  for WYO companies to respond to and resolve errors before the agency  issues a final report.\nIn fiscal year 2015, FEMA\u2019s claims operation review of 866 claims found  23 overpayments totaling $80,202 and 15 underpayments totaling  $93,256. The percentage of overpayments in 2015 was lower than in  previous years, while the number and percentage of underpayments was  higher than in previous years (see table 5). FEMA officials said that for  2013, the particular companies selected for review or lower losses overall  might have contributed to fewer overpayments compared to other years.  FEMA officials noted that although claims operation reviews required  identifying a selection of claim files for review, results were not  generalizable to the larger population of claim files for a WYO company or  across NFIP.\nUnder the current Financial Control Plan, FEMA can refer WYO  companies with unacceptable performance to the Standards Committee,  which can recommend appropriate remedial actions for companies with  performance issues. For example, the committee can require WYO  company managers to address performance issues at a committee  meeting, require a WYO company to develop and satisfy a plan to  remedy its performance issues, monitor performance until the WYO  company achieves acceptable levels of performance, and recommend  that FEMA not renew a company\u2019s WYO arrangement. In 2002, the  Standards Committee recommended that FEMA not renew one  company\u2019s WYO arrangement. According to FEMA officials, the  company\u2019s inability to resolve underwriting errors contributed to its  departure from the WYO program. Since 2008, five WYO companies  have appeared before the Standards Committee to address performance  issues.\nOne WYO company appeared in 2011 to address unsatisfactory  underwriting and claims operation reviews.\nThree other WYO companies appeared between 2008 and 2010 to  address unsatisfactory underwriting operation reviews; one of these  companies was among the largest group of writers of flood insurance  from 2008 to 2014.\nThe other company, also among the largest group writers of flood  insurance from 2008 to 2014, appeared before the Standards  Committee in 2014 to address its administrative processes for debt  collection.\n\n\t\t\tImproper Payment Reviews\n\nAccording to FEMA officials, DHS\u2019s Office of the Chief Financial Officer  conducts improper payment reviews annually. These reviews examine  NFIP policies written by WYO companies as well as those written by the  DSA. Under IPIA, an improper payment is any payment that should not  have been made or that was made in an incorrect amount (including  overpayments and underpayments) under statutory, contractual,  administrative, or other legally applicable requirements. According to  FEMA officials, improper payment reviews identify a statistically valid  sample and the results are generalizable to the entire population,  whereas FEMA\u2019s claims operation review results, as discussed  previously, are not generalizable. They said another difference is that  the claims operation reviews select entire claim files for review, while the  improper payment review tests individual payments; a claim file can  include multiple payments.\nFEMA\u2019s most recent improper payment reviews found that improper  payments in NFIP claims for fiscal years 2012\u20132014 occurred less than  0.2 percent of the time, well below FEMA\u2019s threshold of 1.5 percent (see  table 6). For example, the fiscal year 2014 review of 338 payments  found two improper payments (one overpayment and one underpayment),  for an error rate of approximately 0.16 percent. According to a recent IPIA  audit report, errors can be typographical such as inconsistencies in  recording payment amounts across building estimates, final reports,  claims summaries, or checks issued. Errors can also derive from the  estimation of recoverable depreciation. For example, an adjuster might  not have included replacement cost value in the final claims payment  calculations.\nAs previously discussed, until 2015, FEMA conducted routine  reinspections of claims files, randomly selected by flood event, size of  loss, or class of business. In addition, FEMA selected claims for  reinspection in response to requests from within the agency, WYO  companies, appeals from policyholders, and requests from Congress  (special assist reinspections).\nStarting in 2015, FEMA discontinued the routine reinspections. According  to agency officials, they discontinued this type of review because the  annual IPIA review provided comparable information. In August 2016,  FEMA officials confirmed that the agency planned to continue conducting  special assist reinspections, and also was piloting a random claims  quality check to review and analyze NFIP claims early in the claims  process to identify any systemic claims processing issues associated with  particular flood events. From 2010 to 2015, the agency reviewed from  around 50 to more than 2,400 claim files each year through a combination  of routine reinspections and special assist reinspections. In this period,  FEMA\u2019s reinspections identified underpayments totaling more than $5.95  million and overpayments of about $2.34 million (see table 7). According  to FEMA officials, heightened interest in claim underpayments following  Hurricane Sandy might have led to an increased interest in reviewing for  possible underpayments in recent years.\nThe total number of claims reinspected increased in 2013, after Tropical  Storm Isaac and Hurricane Sandy in 2012, which as of July 31, 2016,  caused more than $555 million and $8.3 billion in NFIP losses,  respectively. The number of claims FEMA reinspected generally declined  between 2013\u20132015. A FEMA official noted that the decline was due to  the fact that FEMA bases the number of reinspections it conducts on the  number of claims received as a result of flooding events and that there  were no significant flooding events during this time period. Table 8 shows  the numbers and types of claims reinspections initiated from fiscal years  2010 through 2015.\nNo WYO companies received unsatisfactory biennial financial audit  ratings during fiscal years 2010\u20132015; prior to that, two WYO companies  received unsatisfactory ratings in 2009. Most recently, in fiscal year 2015,  FEMA conducted 37 biennial audits, which resulted in 36 satisfactory  ratings and 1 nonrating for which FEMA planned to follow up in its 2016  review. According to FEMA officials, a WYO company receives a  satisfactory rating from FEMA when it receives an unqualified opinion  from the auditor. Normally, every company receives a rating but might  receive a nonrating if a company was exempt from the biennial audit in  the reporting year.\nAccording to the current Financial Control Plan, FEMA\u2019s biennial audits of  WYO companies include claims, underwriting, and financial reviews. For  the claims portion of the audits, FEMA identifies a random sample of a  WYO company\u2019s claim files for an independent auditor to verify, among  other things, that adjuster reports contain adequate evidence to  substantiate the payment or denial of claims, including the amount of  losses and that building and contents allocations are correct. DSA  financial-related information is handled differently. It is subject to the  annual audit of DHS\u2019s consolidated financial statements performed by an  independent certified public accountant. FEMA officials told us that, as of  December 2015, the contract officer responsible for managing the DSA  contract met with the DSA contractor biweekly to discuss any issues with  the company\u2019s data submissions to the agency.\n\n\t\t\tAudits for Cause\n\nIn addition to the oversight processes described above, according to the  current Financial Control Plan, FEMA can conduct audits for cause on its  own initiative or upon the recommendation of the Standards Committee or  OIG when certain criteria are met. According to FEMA\u2019s Financial Control  Plan Monitoring procedures, an audit for cause is a last resort if other  remedies available to the Standards Committee are exhausted, OIG  requests one, or agency officials believe immediate action is necessary.  For example, FEMA could determine an audit for cause was necessary  based on claims reinspection results showing consistent overpayments or  biennial audits showing significant problems.\nAccording to agency officials, FEMA has not conducted any audits for  cause as a result of biennial audits since 2007. The officials also were  unaware of any audits for cause having been conducted as a result of  claims reinspections.\n\n\t\tFEMA, WYO Company, and Stakeholder Views on Over- and Underpayment of Claims\n\nFEMA officials, some WYO company representatives, and some  stakeholders agreed that over- and underpayment of NFIP claims were  not widespread. We asked stakeholders about their perspectives on any  over- or underpayment of NFIP claims and none who responded on this  issue described NFIP over- or underpayments as widespread. Some  WYO company representatives said companies do not typically consider  claim over- and underpayments a significant issue because companies or  their vendors have procedural safeguards to help ensure they pay claims  appropriately. Some WYO company representatives said over- and  underpayments of NFIP claims were caused by similar factors as over-  and underpayments in other property and casualty lines.\nAccording to FEMA officials, lack of documentation was the main cause  of overpayments. For example, they said overpayments could happen  when the contents of a policyholder\u2019s home were not adequately  documented or an adjuster did not correctly calculate losses (use of  actual cash value and incorrect depreciation figures). According to FEMA  officials, WYO companies generally have reimbursed FEMA for any  overpayments they identified, and the companies would request  reimbursement from the insured in cases of large or potentially fraudulent  overpayments. For example, FEMA recovered the $61,439 overpayment  from fiscal year 2014 identified in the IPIA review. The officials said that  when the DSA has identified overpayments, it also has sought to recoup  the money from the recipient insureds.\nRepresentatives of several WYO companies and two stakeholders said  that companies lacked incentives for underpayments and FEMA officials  said underpayments were generally small and typically resulted from  mathematical errors. Representatives from most WYO companies with  whom we spoke said that companies typically did not track  underpayments. According to FEMA officials, representatives of two WYO  companies, and two stakeholders including a vendor, some policyholders  lack an understanding of the terms of NFIP coverage. They said  policyholders sometimes expect to be made whole after a flood event, but  the NFIP standard flood insurance policy coverage is limited to direct  physical losses by or from flood, depending on the type of insured  property and the amount of coverage obtained. In a 2014 report, we  found that homeowners may not understand their insurance coverage  well enough to know what is covered, what is excluded, and what loss  events and circumstances might result in paid, partially paid, or denied  claims, and disaster events could highlight differences between  consumers\u2019 expectations for insurance and their actual coverage,  resulting in added frustrations.\nRepresentatives of some WYO companies and a few stakeholders said  factors related to the nature of the claims process and large loss events  contributed to over- and underpayment issues, including the following:\nNature of the claims adjustment process. The claims adjustment  process can lead to differences across claims. Representatives of one  WYO company said that claim adjusters must make judgment calls  with respect to calculating depreciation. For example, three  experienced adjusters might calculate three slightly different estimates  for the same claim, according to representatives of another WYO  company.\nLarge claims volume. According to two stakeholders, processing a  large volume of claims can contribute to claims processing errors and  lead to increased perceptions that over- and underpayments are an  issue.\nInexperienced adjusters. Lack of qualified adjusters after large  storms can lead to claims processing errors. Representatives of a  WYO company said public adjusters often lacked NFIP experience.  To meet immediate needs for assessing damage caused by recent  large storm events, FEMA provided a limited waiver of claim adjuster  certification. According to a stakeholder, this practice led to hiring  claim adjusters who otherwise would not have met FEMA\u2019s  qualifications. Representatives of the WYO company said  inexperienced adjusters might give claimants false hope for the  amount of claims they might receive, leading to perceptions of  underpayments. A representative from another WYO company said  adjusters learn on the job, and having a few errors was not unusual  for a complex line of business like NFIP. In addition, representatives  of the WYO company said streamlining adjusting software could help  address this issue. The WYO company representatives and a  stakeholder said training and additional oversight of adjusters was  needed.\nChanges by FEMA to the Standard Flood Insurance Policy claims  process. In the 4 years following Hurricane Sandy, FEMA issued  several bulletins outlining processing changes for claims associated  with the loss event, which may have further complicated what some  described as already a complex process. Among these changes,  FEMA allowed WYO companies to pay claims after receiving an  adjuster\u2019s estimate but before a policyholder provided all necessary  paperwork, with the expectation that additional payouts would be  required once the losses were fully documented. FEMA issued three  extensions to the 60-day filing window for policyholders to submit  proof of loss information to their WYO insurer, extending the filing  window to 1 year, then 18 months, and finally, 24 months after the  event.\nMarket fluctuations. Replacement cost calculations in the data might  change between the time an adjuster develops an estimate and a  contractor begins repairs.\n\n\t\tRecent OIG Report Identified NFIP Oversight Deficiencies\n\nIn March 2016, a DHS OIG report found that although FEMA performed  the required oversight reviews of WYO companies in accordance with the  agency\u2019s Financial Control Plan, it could improve its processes. For  example, the OIG report stated that FEMA was not using the results from  its Financial Control Plan reviews\u2014including claims operation reviews,  biennial audits, and claims reinspections\u2014to make WYO program  improvements because the agency lacked adequate guidance, resources,  or internal controls. Among other findings, OIG found that FEMA was  unable to ensure that WYO companies were properly implementing NFIP  and unable to identify systemic problems in the program. FEMA  management acknowledged that NFIP lacked a consistent or reliable  method to identify systemic problems or recognize patterns or warning  signs. The OIG report recommended that FEMA develop and implement  procedures to evaluate the results of the oversight under the Financial  Control Plan and determine the overall effectiveness of established NFIP  internal controls. In response, the agency planned to evaluate the  Financial Control Plan review process and make recommendations to  improve its oversight of WYO companies, which are expected by  December 30, 2016.\nAs of August 2016, a FEMA working group was developing a new WYO  oversight plan to address financial oversight, claims, underwriting,  appeals, and litigation, to be completed by January 2017. According to  FEMA officials, the working group would update the Financial Control  Plan after developing the WYO oversight plan. They said FEMA  planned to monitor WYO company error rates on claims and underwriting  operation reviews as part of its WYO company oversight, and its  oversight would include performance measures.\nPrior to the issuance of the OIG report, FEMA had begun evaluating the  customer experience to further identify ways to align NFIP and FEMA\u2019s  processes around the policyholder. For example, according to agency  officials, in 2015 FEMA surveyed approximately 2,000 policyholders to  understand customers\u2019 priorities and found, among other things, that  customers would prefer a simplified program and more coverage  choices.\nFurthermore, FEMA has begun reorganizing FIMA, including separating  the department into two branches\u2014one to oversee the WYO program  and the other to oversee the DSA\u2014and establishing separate claims and  claims appeals processes. To improve claims processing, FEMA planned  to gather more real-time claim data from WYO companies and the DSA to  enhance the customer experience and detect problems or errors as they  occur. To improve the claims appeals process, the agency established a  new appeals branch within FIMA\u2019s Policyholder Services Division devoted  to redesigning and overseeing the appeals process and planned to  implement changes by December 30, 2016. According to FEMA officials,  these changes would help address a March 2016 OIG recommendation  that the agency properly document and update existing procedures for  the claims appeal process. In addition, in an effort to understand how  policyholders move through the claims process after flood events and  possible issues with that process, FEMA began obtaining detailed claims  information from WYO companies on a weekly basis. According to  agency officials, the data, while unverified and unedited, provided insights  into the claims process not previously available to FEMA following large  loss events.\n\n\tCurrent WYO Arrangement and Potential Alternatives Involve Trade-offs\n\nAccording to our analysis and interviews, the current WYO arrangement  provides advantages to consumers and insurers but disadvantages to  FEMA in overseeing a large number of companies. While potential  alternatives involving fewer participating WYO companies could ease  oversight for FEMA, these alternatives could lead to reduced market  penetration, among other trade-offs. Most WYO companies we  interviewed preferred the current WYO arrangement over any of the three  potential alternatives we identified. All the potential alternatives involve  FEMA contracting with participating companies, a status that most WYO  company representatives cited as creating more regulatory burden  because of federal contract requirements.\n\n\t\tTrade-offs of Current Arrangement Include Advantages for Consumers and Insurers from WYO Company Competition but Disadvantages for FEMA Oversight\n\nBased on our analysis and interviews with FEMA, WYO companies, and  stakeholders (relevant organizations and vendors), the current WYO  arrangement has trade-offs (see table 9). For example, while competition  among the approximately 75 companies under the current arrangement  may lead to improvements in customer service, the large number of  companies increases the amount of oversight FEMA must provide.  Representatives of most WYO companies and several stakeholders with  whom we spoke preferred the current arrangement over adopting an  alternative structure for the program. Representatives of some WYO  companies said the current approach is predictable. This stability could  continue to encourage WYO participation.\nHowever, a few stakeholders and representatives of a few WYO  companies said costs for WYO companies had increased with recent  legislation, which could discourage WYO participation in the future. Under  the DSA contract, FEMA may direct changes within the general scope of  the contract regarding the description of services to be performed, time of  performance, and the place of performance of the services, but it must  compensate the contractor for these changes. For example, if there is a  change in law or regulation after the execution date of the contract that  affects the contractor\u2019s performance of the services, FEMA must  compensate the contractor, through an equitable adjustment, for the  changes. We discuss federal contract requirements and differences  between the DSA contract and the WYO arrangement in more detail in  appendix II. While FEMA uses proxies to compensate WYO companies, it  compensates the DSA based on a predominantly fixed-price contract (tied  to a fixed-price per policy, based on policy type). Our review of contract  modifications showed an example in which the DSA sought equitable  adjustments from FEMA for changed work caused by implementation of  the Biggert-Waters Act and the Homeowner Flood Insurance Affordability  Act of 2014 (HFIAA). In the modifications we reviewed, the DSA generally  was compensated for its estimated additional costs imposed by the  change if it could prove the changes affected the work under the terms of  the original contract. For example, in December 2014 FEMA equitably  adjusted the DSA contract to pay an additional $830,070 to implement the  Biggert-Waters Act and $125,531 to implement HFIAA, which repealed  and modified certain provisions of the Biggert-Waters Act. WYO  companies also were affected by these changes but representatives of  two WYO companies and a stakeholder said WYO companies were not  able to request additional compensation to recoup additional costs.\nIn other comments about the current arrangement, FEMA officials and  representatives of one WYO company said FEMA oversight of vendors  that administer policies was needed. FEMA\u2019s current oversight processes  do not include direct oversight of vendors. According to FEMA officials,  nine vendors serviced about 85 percent of NFIP policies as of May 2015.  One stakeholder\u2014a vendor\u2014noted that FEMA auditors frequently visited  the vendor to conduct triennial claims operation reviews and biennial  financial audits of the WYO companies that the vendor serviced. FEMA  officials noted that the agency\u2019s relationship is with the WYO company  and, therefore, its oversight was specific to WYO companies and did not  include any requirements for vendors.\n\n\t\tPotential Alternatives to the Current WYO Arrangement Each Involve Trade-offs\n\nThree potential alternatives to the current structure for the WYO program  each involve trade-offs, although WYO company representatives and  stakeholders generally preferred the third alternative that would maintain  a WYO network. All three potential alternatives involve FEMA contracting  with participating companies (WYO companies or vendors), a status that  most WYO company representatives cited as creating more regulatory  burden because of federal contract requirements. (We discuss federal  contract requirements and the views of WYO companies about the  program being premised on contracting in more detail in app. II.)\nMore specifically, we identified the following three potential alternatives  (see fig. 1):\nAlternative 1: FEMA contracts with one or more insurance  companies. FEMA would solicit offers for a contract with one or more  insurance companies to sell and service flood policies and adjust  claims.\nAlternative 2: FEMA contracts with one vendor. FEMA would  solicit offers for a contract with a flood insurance vendor to service  flood policies. The arrangement would be similar to the NFIP Direct  program. The vendor would sell flood insurance policies through  independent insurance agents, and insurance companies would not  be involved.\nAlternative 3: FEMA contracts with multiple vendors and  maintains the WYO network. The WYO companies would sell flood  policies, while one or more vendors would service the policies. FEMA  would solicit offers for contracts from multiple flood insurance vendors  to service flood policies. Insurance companies that wanted to sell  flood insurance would contract with one or more of the vendors to  service flood policies sold by insurance company agents. Because  FEMA would pay vendors to administer the flood policies, participating  insurance companies would not incur any operational expenses for  their flood line; rather, FEMA would pay the insurance companies a  sales bonus for performance.\nWe previously reported that the three alternatives had advantages and  disadvantages in terms of the potential impact on the basic operations of  administering flood insurance policies and adjusting claims, as well as on  FEMA\u2019s oversight of the program and its contractors. In the following  analysis, we discuss the trade-offs of each alternative based on four  factors that we identified: the cost to WYO companies, oversight by  FEMA, market penetration, and WYO company participation.\nAlternative 1, in which FEMA would contract with one or more insurance  companies to sell and service flood policies and adjust claims, would  maintain the WYO company network to some extent but likely would  involve fewer participating WYO companies (see table 10).\nSome stakeholders said that many current WYO companies would  elect not to participate in a bid process because they opposed  becoming federal contractors. However, representatives of one WYO  company said that by not participating, these companies would lose a  competitive advantage. That is, offering flood insurance in addition to  home, life, and automobile insurance allows participating multiline  insurers to address multiple insurance needs of their customers.  Representatives of another WYO company said that WYO companies  with in-house servicing capabilities would have a competitive  advantage over other companies that use third-party vendors.\nFewer WYO companies could or could not represent an advantage for  FEMA. Oversight might be easier than that required for the  approximately 75 WYO companies in the current arrangement as of  September 2016. Representatives of one WYO company said FEMA  could collaborate more closely with WYO companies if fewer were  involved in the program. However, one stakeholder said overseeing  federal contracts could require expanded oversight processes and  additional resources from the agency.\nResponding to large loss events could be more challenging with fewer  WYO companies. Furthermore, a change in the composition of WYO  companies could affect market penetration. (We discuss geographic  concentration of market share for WYO companies later in this report.)\nAlternative 2, in which FEMA would contract with one vendor to service  policies and sell them via independent insurance agents, similar to the  NFIP Direct program, largely would eliminate insurance companies\u2019  involvement in NFIP (see table 11).\nRepresentatives of one WYO company said transitioning to this model  would be a step backward for the WYO program, which evolved from  a single entity in the 1980s. In addition, representatives of another  WYO company pointed out that no single insurer or vendor had the  infrastructure needed to deliver NFIP coverage on such a large scale.\nSimilar to Alternative 1, in which FEMA would contract with one or  more insurance companies, representatives of a few WYO companies  and a stakeholder said handling a large storm event could be even  more challenging for a single entity and could have a negative effect  on the customer experience generally, and after large-loss events.\nFurthermore, according to representatives of another WYO company  and a few stakeholders, selling policies through independent agents  only, rather than through independent agents and the network of  agents affiliated with WYO companies currently in the program, could  adversely affect market penetration.\nLastly, representatives of some WYO companies said competition  could be an issue under this option. For example, if one vendor won a  long-term contract, the companies not selected might not maintain the  ability to service the flood business, which could create a cycle in  which the same vendor has a competitive advantage and is  repeatedly selected.\nMany stakeholders generally said that Alternative 3, in which FEMA  would contract with multiple vendors (to service NFIP policies) and  maintain the WYO network (to sell NFIP policies), was the most appealing  option of the three alternatives we identified because it would involve  multiple vendors and maintain the existing WYO network (see table 12).  However, this option also has significant trade-offs.\nThis arrangement would maintain competition among vendors and  WYO companies, but could lead to declines in customer service.  Representatives of a few WYO companies said that by having FEMA  set requirements for vendors that deliver customer service\u2014rather  than having WYO companies contract with vendors as is the current  practice\u2014WYO companies would have less control over customer  service quality and could face reputational risks.\nHowever, according to representatives of two WYO companies and a  stakeholder, competition among participating vendors could drive  down program costs or improve customer service quality.\nSome WYO companies and stakeholders considered the possible impact  on responses to large loss events and effects on customer service quality  as important factors in evaluating potential changes to the WYO program.  As mentioned previously, each alternative we identified could involve a  decrease in the number of participating WYO companies.  Representatives of some WYO companies and a few stakeholders said  decreasing the number of WYO companies could negatively affect  customer service and market penetration.\n\n\t\tWYO Companies and Stakeholders Suggested Possible Improvements to the Current Arrangement and Other Potential Alternatives\n\nMost WYO company representatives we interviewed preferred the current  arrangement to any of the potential alternatives, while most stakeholders  did not state a preference between the current arrangement and the  alternatives we identified. Many WYO company representatives and  several stakeholders provided suggestions for improving the current  arrangement.\nImprove guidance for WYO companies. Representatives of several  WYO companies said better communication was needed from FEMA,  including following large loss events. For example, representatives of  one WYO company and a stakeholder said that FEMA should post  questions from the companies and the agency\u2019s responses online.  This would help standardize information that WYO companies  received, and address the problem of getting different answers from  different FEMA officials through more informal communication  channels. According to FEMA officials, the agency plans to create  standards-based guidance for WYO companies and reduce the  amount of prescriptive guidance FEMA provided to WYO companies.\nSimplify the program. Some WYO company representatives and  some stakeholders said NFIP coverage is more complicated to write  and adjust than other property and casualty insurance coverage.  Several suggested that FEMA take steps to make it easier for agents  to write policies and adjust claims. According to agency officials,  FEMA planned to enhance the consistency and simplicity of the NFIP  product and simplify NFIP policy language within the current  legislative framework, among other changes, during 2016.\nReconsider agent commissions. As discussed previously, based on  our data analysis and interviews with WYO companies, some WYO  companies pay more to agents than the 15 percent of net written  premiums that FEMA provides in compensation. Some WYO  company representatives and two stakeholders said increases in  agent commissions led to higher costs for WYO companies. Among  these stakeholders, one vendor said that FEMA should develop better  incentives for insurance agents to address this issue and increase  market penetration. For example, representatives said that FEMA  could establish agent compensation based on the percentage of  homeowners insurance policyholders that have flood insurance or  other metrics. In addition, they said FEMA could standardize agent  commissions so independent agents would focus more on selling new  policies rather than transferring NFIP policies from one WYO to  another that pays higher commission. As previously discussed, FEMA  is currently in the process of developing a new compensation  methodology through rulemaking but could not provide a timeline on  when this rulemaking would be complete.\nProvide vendor oversight. FEMA officials said it was widely  acknowledged that FEMA must address its lack of vendor oversight,  and said the agency was taking steps to determine how to address  this issue in any changes to its WYO program oversight. In July 2015,  the agency began requesting WYO companies to submit, through  their vendors when applicable, sample files demonstrating the  implementation of NFIP program changes 30 days before a program  change became effective.  While not direct oversight of vendors,  FEMA officials stated that this change was part of its efforts to better  ensure that system updates for implementing NFIP program changes  were properly implemented. As of July 2016, FEMA officials did not  identify any other plans for addressing vendor oversight.\nOther suggestions. In addition to suggestions on ways to improve  the WYO program, two WYO companies and some stakeholders  suggested other ways to improve NFIP. For example, representatives  of two WYO companies and some stakeholders suggested  encouraging private-sector participation in flood insurance (including  eliminating a noncompete clause for WYO companies from the  current arrangement, discussed later). In addition, one stakeholder  suggested making flood coverage a mandatory component of  homeowners insurance, establishing a different scale for quantifying  flood risk, expanding policy choices through NFIP or private-sector  coverage, and more closely coordinating NFIP and disaster  assistance.\nFEMA officials told us they plan to reexamine and improve the WYO  arrangement to allow for greater flexibility in the relationship between  FEMA and WYO companies. In May 2016, FEMA issued a proposed rule  to remove the WYO arrangement from regulation to make operational  adjustments and corrections to the arrangement more efficiently. FEMA  officials told us that the agency does not plan to make changes to the  arrangement for fiscal year 2017.\nAdditionally, several stakeholders and WYO company representatives  with whom we spoke suggested other possible alternative structures for  the WYO program. These included increasing requirements for WYO  companies, removing a noncompete clause in the WYO arrangement,  and adopting the federal crop insurance program model, which shares  some similarities with NFIP but has some notable differences.\nLimiting WYO participation or increasing WYO company  requirements. Representatives of several WYO companies  suggested that maintaining the current WYO arrangement but limiting  the number of WYO companies allowed to participate was another  option. Under this option, according to WYO representatives, WYO  companies would not necessarily become federal contractors, but  would compete, in a sense, for available spots in the program. FEMA  officials said adding other requirements for WYO companies\u2014rather  than determining the number of WYO companies allowed to  participate\u2014would be another way to achieve fewer participating  companies.\nRemoving noncompete clause. Three stakeholders, including two  industry groups representing insurance companies and a vendor, said  removing a noncompete clause from the arrangement (which  generally prevents WYO companies from selling private flood policies)  would encourage continued participation in the program and also  encourage greater private-sector involvement in insuring flood risk.  The noncompete clause was also cited as a potential barrier to  increased use of private flood insurance by various industry  stakeholders with whom we spoke as part of work we completed in  July 2016 on private sector involvement in flood insurance.\nAdopting crop insurance model. One stakeholder suggested the  federal crop insurance model as a possible alternative structure for  the WYO program. Similar to the agreements between FEMA and  WYO companies, companies participating in the crop insurance  program\u201417 as of September 2016\u2014have a 1-year agreement with  the Federal Crop Insurance Corporation to sell and service policies.  The crop insurance agreement is not considered a contract for the  purposes of the Federal Acquisition Regulation. But unlike in the WYO  program, these companies share a percentage of the risk of loss (and  opportunity for gain), and the Department of Agriculture reinsures their  losses, a significant structural difference between the two programs.  The Federal Crop Insurance Corporation accounted for about 1.1  million policies and $9.26 billion in premiums written as of October  2016, whereas according to the most recent data available, NFIP  accounted for 5.1 million policies and about $3.4 billion in federal flood  earned premiums. Similar to the WYO arrangement, companies in  the crop insurance program receive a percentage of the premium on  policies sold to cover the administrative costs of selling and servicing  these policies. In turn, insurance companies use this money to pay  commissions to their agents who sell the policies and fees to  adjusters when claims are filed. Unlike NFIP, the Federal Crop  Insurance Corporation requires that companies submit expense  amounts on a standard form, but these amounts are not audited. The  Department of Agriculture considers the expense information when it  renegotiates its standard agreement with insurers.\n\n\t\tLarge WYO Companies Wrote the Majority of NFIP Residential Policies at the State and County Levels\n\nOur analysis of three potential alternatives to the current WYO  arrangement found that each alternative could decrease the number of  participating WYO companies. We analyzed NFIP policy data to  understand the geographic concentration of WYO company market share  under the current arrangement. Specifically, we analyzed residential  policy data to understand the geographic concentration of residential  NFIP coverage and the role that large and small writers of NFIP coverage  and the DSA played in different states and counties. We found that  large WYO companies wrote the majority of NFIP residential policies  across states and counties (see fig. 2). We considered large WYO  companies as the top 10 companies in terms of NFIP market share in  2014.\nOverall, large WYO companies accounted for the largest share of  written NFIP residential policies across states, territories, and the  District of Columbia (70 percent), while small WYO companies and  the DSA accounted for smaller shares of the market (16 and 14  percent, respectively).\nAt the state level, large WYO companies wrote more than half of all  NFIP residential policies in every state, while the share of policies  written by small WYO companies (2 percent\u201338 percent) and the DSA  (4 percent \u201328 percent) varied more.\nAt the county level, we found that large WYO companies wrote more  than half of all NFIP residential policies in 83 percent of counties  across the states, territories, and the District of Columbia.\nSee appendix III for additional analysis.\n\n\tConclusions\n\nFEMA has yet to implement Biggert-Waters act requirements to develop a  methodology for compensating WYO companies using actual flood  insurance expenses. For example, FEMA has not completed the  rulemaking process and we found the flood insurance financial data WYO  companies reported to NAIC are inconsistent, which limits the data\u2019s  usefulness to FEMA in setting compensation rates. Additionally, FEMA  currently does not systematically consider actual flood expenses and  profit when establishing WYO compensation, and has yet to compare  WYO companies\u2019 actual expenses and compensation. As recommended  in 2009, FEMA should (1) determine in advance the amounts built into the  payment rates for estimated expenses and profit; (2) annually analyze  actual expenses and profit in relation to the estimated amounts used in  setting payment rates; and (3) consider the results of the analysis of  payments, actual expenses, and profit in evaluating methods for paying  WYO companies. Additionally, FEMA should (4) take actions to obtain  reasonable assurance that flood insurance expense data reported to  NAIC can be considered in setting payment rates and (5) develop data  analysis strategies to annually test the quality of flood insurance data the  companies report to NAIC. Fully addressing these recommendations will  help FEMA meet the Biggert-Waters Act requirement to develop a  methodology for determining appropriate compensation for WYO  companies that uses the companies\u2019 actual flood expenses.\nFEMA is still in the process of revising its compensation methodology.  Based on our analysis, how a WYO company operates has an effect on  its expenses and profits. For example, company-specific factors such as  compensating independent agents to sell policies or third-party vendors to  service policies, and the manner in which a company allocates overhead  expenses, can result in varying expenses and profit. Gaining such an  understanding of the WYO companies\u2019 operations, which can contribute  to year-to-year fluctuations in expenses and profit, would allow FEMA to  more effectively revise its compensation methodology. Moreover, this  understanding, coupled with improved data on WYO company expenses,  also would facilitate any future consideration that FEMA might make of  alternative structures for the WYO program. Finally, considering that the  compensation of WYO companies is a significant part of the total  premiums policyholders pay, FEMA may seek to achieve the program\u2019s  objective of making flood insurance available at affordable rates in part by  establishing reasonable compensation rates that appropriately consider  WYO company expenses, profits, and operating characteristics.\n\n\tRecommendations for Executive Action\n\nTo improve the transparency and accountability over the compensation  paid to WYO companies and set appropriate compensation rates, the  FEMA administrator should take into account WYO company  characteristics that may impact companies\u2019 expenses and profits when  developing the new compensation methodology and rates.\n\n\tAgency Comments\n\nWe provided a draft of this report to FEMA within the Department of  Homeland Security, NAIC, and FIO within the Department of the Treasury  for review and comment.\nDHS and NAIC provided technical comments, which we incorporated, as  appropriate. DHS also provided a written response, reproduced in  appendix IV, in which FEMA concurred with our recommendation and  agreed that fully understanding the characteristics of the insurance  companies that participate in the WYO program can help in determining  compensation. FEMA responded that it intends to comply with the  rulemaking requirement of section 224 of the Biggert-Waters Act and,  when completed, will implement a new compensation methodology to  track, as closely as practicably possible, the actual expenses of the WYO  companies. Agency officials noted that as FEMA must implement this  recommendation via rulemaking, it is unable to provide more specific  information or a time frame at this time.\nAs 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 DHS, NAIC, and  Treasury, and interested congressional committees and members. In  addition, the report will be available at no charge on the GAO website at  http:\/\/www.gao.gov.\nIf you or your staff have any questions about this report, please contact  me at (202)-512-8678 or cackleya@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 V.\n\nAppendix I: Objectives, Scope, and Methodology\n\nOur objectives in this report were to describe the (1) Federal Emergency  Management Agency\u2019s (FEMA) current compensation practices for Write- Your-Own (WYO) companies and the extent to which FEMA revised its  practices in response to the Biggert-Waters Flood Insurance Reform Act  of 2012 (Biggert-Waters Act); (2) information on over- and  underpayments of National Flood Insurance Program (NFIP) policy  claims; and (3) the trade-offs of selected potential alternatives to FEMA\u2019s  current arrangement with WYO companies for selling and servicing flood  insurance policies.\nTo address all three reporting objectives, we reviewed our prior reports  and reports from the Office of Inspector General (OIG) of the Department  of Homeland Security; relevant laws and regulations; and FEMA  documentation and guidance. We also interviewed officials from FEMA  and representatives from 10 WYO companies with varying NFIP premium  bases. Specifically, we selected a non-generalizable, purposive sample of  10 WYO companies, selected based on net premiums written to capture  companies with a large market share of premiums written, as well as to  obtain the opinions of different sized WYO companies on their  involvement in NFIP. Also, to obtain a broader range of perspectives, we  included two WYO companies in this group of 10 because they did not  use subcontractors (vendors) to service policies. This is the first group of  10 WYO companies we selected. We later identified a second and third  group of 10 WYO companies to address other aspects of our reporting  objectives.\n\n\tStatus of FEMA Revisions to Compensation Methodology\n\nFor our first objective, we reviewed the Biggert-Waters Act, other laws  and regulations relevant to FEMA\u2019s compensation practices, and FEMA  documentation, such as WYO Bulletins (which FEMA publishes to inform  WYO companies, and the public, of updates or changes to NFIP,  including compensation practices). To identify any changes FEMA made  to its compensation methodology since our August 2009 report, we  reviewed WYO Company Bulletins issued between January 2008 and  August 2016. We also obtained and reviewed FEMA\u2019s compensation  packages for WYO companies for fiscal years 2010\u20132016. To understand  the status of FEMA\u2019s implementation of recommendations from our 2009  report and section 224 of the Biggert-Waters Act, which built on our  recommendations, we interviewed FEMA officials on any steps the  agency had taken to improve the quality of WYO company expense data  and on its progress in implementing related Biggert-Waters Act  requirements. We also interviewed National Association of Insurance  Commissioners (NAIC) officials about expense data WYO companies  report to NAIC. In addition, we interviewed the first group of 10 WYO  companies (discussed at the start of this appendix) on compensation  issues, including how expenses were incurred and reported.\nTo compare FEMA compensation paid to WYO companies to actual  expense data WYO companies reported to NAIC, we obtained and  analyzed premium, loss, and compensation data for all WYO companies  for fiscal years 2008\u20132014 from FEMA and premium, loss and expense  data for all WYO companies from SNL Financial and NAIC for calendar  years 2008\u20132014.  For purposes of our analysis, we retrieved federal  flood line data reported to NAIC from SNL Financial. To make the FEMA  and NAIC data comparable, we converted FEMA\u2019s fiscal year data to a  calendar-year basis to match the period for reporting to NAIC. We also  converted FEMA reported paid losses and loss adjusted expenses to an  accrual basis to be able to appropriately compare loss adjustment  compensation and actual expenses. We then calculated estimated profit  for each WYO company as the difference between the calendar year  compensation reported to FEMA and calendar year expenses reported to  NAIC. The estimated profits, calculated using the data provided by FEMA  and NAIC data obtained from SNL Financial, did not correspond to our  expectations of profits from our 2009 work.\nTo better understand WYO companies\u2019 accounting and reporting of  federal flood data, we made another (second) selection of 10 WYO  companies that comprised the majority of net written premiums (about 60  percent), paid losses (about 52 percent), and total compensation (about  60 percent) during 2008\u20132014. Specifically, we selected a  nongeneralizable, purposive sample of 10 WYO companies, selected  based on net premiums written during 2008\u20132014. We overselected WYO  companies with a larger share of the market because of their relevance in  the flood insurance market. We interviewed these WYO companies and  requested and examined additional information and data they provided.\nWe used this additional information and data to evaluate the causes of  differences in reported premiums and losses and estimate the effect  those differences had on the companies\u2019 compensation and expenses.  We also used this information and data to estimate various underwriting  and loss adjustment expenses to corroborate statements the companies  made to us regarding the amount they pay their vendors and adjusters.  We analyzed the companies\u2019 commission, underwriting, and loss expense  ratios, profits as a percentage of total compensation, and reported loss  and loss adjustment expense reserves to corroborate statements the  companies made regarding changes in their accounting and reporting  practices between 2008 and 2014. Based on the additional information  and data provided and our analyses, we made adjustments to the  expenses reported to NAIC for unreported expenses, reclassifications of  expenses, and the effects of different loss adjustment expense estimates  and recalculated estimated profit (on a pre-tax basis) for these 10 WYO  companies for calendar year 2014.\nOur analysis and ability to estimate WYO company expenses and profit  were subject to a number of limitations.\nFirst, the adjustments we made to the companies\u2019 reported expenses  were based on information provided by the WYO companies. WYO  company representatives provided supplemental financial data and  made various representations to us, and while we reviewed the data  and representations for reasonableness in relation to other  information we had, we did not obtain all evidence necessary to fully  validate this additional information.\nSecond, we initially sought information from the 10 selected WYO  companies that would allow us to compare compensation and actual  expenses and estimate profit for each company for the years 2008-\u2013 2014. However, due to challenges in obtaining sufficient information  and documentation from all companies to support their accounting  and reporting practices for each of those years and assess the  consistency of such reporting from company to company and year to  year, we limited our calculation of profit to a single year\u20142014.  Further, as our 2014 estimates of company expenses and profits are  an outcome of our effort to understand the issues surrounding the  inconsistent financial reporting by selected WYO companies and the  various factors that can affect company expenses and profit, these  estimates should not be taken to be a static or predictable indicator of  WYO company profits.\nThird, two WYO companies stated that only expenses that could be  specifically identified as flood-related, including vendor fees, were  reported to NAIC on their Insurance Expense Exhibits. One WYO  company said that overhead expenses were not allocated to the  federal flood line because this line of business was not considered as  significant relative to the company\u2019s other property insurance lines.  We did not obtain information from the companies that would allow us  to assess the significance of these unallocated overhead expenses to  our estimates of flood line profits.\nFourth, some of the companies we reviewed use affiliated companies  as vendors to service flood policies. As information on the affiliated  companies\u2019 activities and profits was not available to us, we could not  determine the extent to which intercompany profits were reflected in  the expenses reported by these WYO companies and the extent to  which fees charged by these affiliated vendors might have exceeded  what otherwise would be charged by a third-party vendor.\nWe assessed the reliability of the FEMA data by reviewing audit  documentation from prior GAO engagements; and audit documentation  from and related reports issued by the Department of Homeland  Security\u2019s external auditor supporting its work on WYO program financial  data included in the department\u2019s fiscal year 2014 financial statements. In  addition, we performed electronic and manual data testing for missing  data, outliers, and other obvious errors, recalculated various types of  WYO compensation paid to WYO companies, and spoke with  knowledgeable agency officials about the data. For the NAIC data, we  reviewed related documentation and interviewed knowledgeable officials.  We assessed the reliability of the SNL Financial data by comparing it to  NAIC data to ensure its accuracy and consistency. We confirmed the  accuracy of the FEMA and NAIC data for the 10 selected companies by  requesting additional information from the companies. However, we did  not audit whether the FEMA and NAIC data were in accordance with  financial reporting standards and requirements. We determined that these  data were sufficiently reliable for the purpose of assessing the alignment  of compensation amounts with actual expenses and for estimating the  profits of a selection of WYO companies.\n\n\tInformation on Over- and Underpayments\n\nFor our second objective, we reviewed data from FEMA documenting its  WYO company oversight processes. The data we reviewed pertain to the  triennial claims operation reviews, improper payment reviews (which the  agency conducts as required by the Improper Payments Information Act  of 2002, as amended), reinspection of claims, and biennial audits. We  assessed the reliability of the data by reviewing related FEMA  documentation on the data and interviewing knowledgeable agency  officials. We determined that these data were sufficiently reliable for the  purpose of reporting on FEMA\u2019s oversight of claims and the results of  these reviews. We also reviewed other FEMA documentation on its  oversight of the claims process (such as FEMA\u2019s Financial Control Plan  and Financial Control Plan Monitoring Procedures) to understand FEMA\u2019s  oversight processes; a recent Senate Banking Committee investigation  report; and an OIG report that discussed issues associated with over- and  underpayment of claims. We interviewed FEMA officials about the  agency\u2019s oversight of the claims process, potential causes for over- and  underpayments, and how they are resolved. We also interviewed the first  group of 10 selected WYO companies as well as stakeholders on their  views about the over- and underpayment of claims. Specifically, we  selected and interviewed 14 stakeholders representing a variety of  organization types with knowledge of flood insurance and the WYO  program. These stakeholders included three vendors with whom WYO  companies contract, and officials from 11 organizations comprised of  industry groups representing insurance companies and agents, and  academics. We interviewed officials from these entities to obtain diverse  perspectives on the possible extent and potential causes of over- and  underpayments of claims. Our work focused on over- and underpayments  and did not examine specific claims related to any specific event.\n\n\tTrade-offs of Potential Alternatives to WYO Arrangement\n\nFor our third objective, we reviewed a prior GAO report and conducted a  literature review to identify potential alternative approaches to FEMA\u2019s  agreements with WYO companies for selling and servicing flood  insurance policies and examine trade-offs for these approaches. We  targeted our literature review to identify academic research and published  studies on flood insurance, broadly, and those that discussed alternatives  to the WYO arrangement. Our query identified around 60 document  summaries, from which we identified 19 for further analysis. Of the 19, all  provided background information on flood insurance and the NFIP  program, but none presented clear alternatives to the WYO arrangement.  From our prior work, we identified three potential alternative approaches  to the current WYO arrangement: (1) FEMA contracts with one or more  insurance companies; (2) FEMA contracts with one vendor; or (3) FEMA  contracts with multiple vendors and maintains the WYO network.\nAfter initial interviews with WYO company representatives and  stakeholders indicated that alternatives to the current arrangement could  decrease the number of participating WYO companies, we analyzed  FEMA NFIP policy data to understand the geographic concentration of  NFIP policies written for homeowners by WYO companies. Our analysis  looked at policy data for residential policies under the current WYO  arrangement and the geographic concentration of market share for large  and small writers of NFIP coverage and the Direct Servicing Agent (DSA)  in different states and counties. As part of the analysis, we reviewed the  proportion of residential policies written by WYO companies and the DSA  in counties by population, based on county population categories used by  the Department of Agriculture\u2019s Economic Research Service. For  purposes of this analysis, we considered large companies as those  among the 10 insurance groups whose members wrote the greatest  amount of NFIP coverage in 2014, the most recent year of available data  (our third group of 10 WYO companies selected). The methodology for  selecting these 10 WYO companies differed from the methodologies for  the previous two selections discussed. This third group of 10 insurers we  identified as large WYO companies accounted for an 80 percent  cumulative share of the federal flood market in 2014 (not including DSA  policies), with individual market shares ranging from approximately 2  percent to 20 percent. We considered all other insurers as small WYO  companies, with market shares ranging from 0 to 1.5 percent and a  cumulative market share of 20 percent. We tested the reliability of the  NFIP policy data by reviewing related documentation, conducting  electronic and manual data testing, and reviewing prior GAO  assessments of the data. We included only residential NFIP policies in  our analysis to focus our analysis on the market penetration related to  homeowners. In addition, we excluded from our analysis 1,506 policies  the geographic location of which could not be determined from FEMA\u2019s  data. These policies accounted for 0.03 percent of the total number of  policies in the data set. We found these data reliable for the purpose of  identifying the geographic location of policies written by WYO companies  and the DSA.\nIn addition, we analyzed the proportion of NFIP residential policies written  by WYO companies and the DSA on a statewide basis for five states with  the highest total NFIP payments since 1978. Based on FEMA data as of  June 30, 2016, the five states with the highest total loss payments were  (in order of magnitude) Louisiana, Texas, New Jersey, New York, and  Florida. We assessed the reliability of these data by reviewing FEMA  data definitions and previous GAO assessments of the data. We  determined that these data were sufficiently reliable for the purpose of  identifying states with the highest total NFIP loss payments.\nWe also compared requirements of NFIP\u2019s WYO arrangement and  FEMA\u2019s DSA with some federal contract requirements. As previously  noted, we included several vendors among the 14 stakeholders with flood  insurance expertise we selected and interviewed to understand the trade- offs for the program being run by one vendor (the second alternative  approach we previously identified). Furthermore, we compared the  general structure of the insurance arrangement under the Department of  Agriculture\u2019s Federal Crop Insurance Corporation with the WYO  arrangement, based on our prior work reviewing the crop insurance  program. We obtained perspectives from FEMA officials, representatives  of WYO companies (those selected based on net premiums written),  stakeholders with flood insurance expertise, and the Federal Insurance  Office of the Department of the Treasury on potential alternative  structures for the WYO program. We analyzed the tradeoffs of the  alternatives based on four primary factors: potential costs to participating  insurers, FEMA oversight, market penetration, and WYO company  participation. We identified these four factors based on our prior work  evaluating these arrangements and initial interviews with industry  participants. We also obtained their perspectives on other possible  improvements to NFIP.\nWe conducted this performance audit from April 2015 to December 2016  in accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.\n\nAppendix II: Federal Contract Requirements and Write-Your-Own (WYO) Company and Stakeholder Views\n\nIn 2009 and again for this report, we identified potential alternative  administrative structures for the National Flood Insurance Program\u2019s  (NFIP) Write-Your-Own program, which, if possible, could replace the  WYO arrangement, each of which involve participating companies (WYO  companies or vendors) becoming federal contractors. In the WYO  program, private insurers sell and service flood insurance policies and  adjust claims for NFIP under an arrangement with the Federal Emergency  Management Agency (FEMA). In general, executive agencies must award  contracts using full and open competition. In addition, contracts generally  must include certain clauses related to contract administration, such as  those that provide the government the ability to terminate contracts, as  well as those required by statute and executive orders that implement  U.S. policy.\nThe following analysis discusses requirements that generally apply to  contracts under the Federal Acquisition Regulation (FAR) and how they  compare to the WYO arrangement and FEMA\u2019s contract with the Direct  Servicing Agent (DSA). The DSA is a FEMA contractor that writes NFIP  policies and provides an alternative when a WYO company is unable or  unwilling to write a flood insurance policy. The analysis also includes the  views of WYO companies about changing the WYO program  arrangement to a contract subject to the FAR.\nOpen competition. Executive agencies generally must seek to obtain  \u201cfull and open competition\u201d in the contract award process (subject to  exception). This means that all responsible sources are permitted to  compete. The DSA selection process includes full and open  competition, but insurance companies do not compete to participate in  the WYO program. Instead, companies must apply to participate, and  FEMA approves the participation of companies that meet certain  criteria, rather than selecting companies based on their bids for a  contract. Requirements for a company to participate in the WYO  program include their experience in property and casualty insurance  lines, good standing with state insurance departments, and ability to  meet NFIP reporting requirements to adequately sell and service flood  insurance policies. FEMA officials told us that the agency does not  track how many companies failed to gain approval to participate in the  program, but noted that many companies failed to obtain approval  because they did not meet the requirement for having 5 years of  experience as a property and casualty insurer.\nBid protests and dispute processes. Federal acquisition regulations  and statutes provide for bid protests\u2014where interested parties can,  for example, protest the award of a contract (e.g., if company A wins  the contract, company B can challenge the award). In addition, federal  acquisition statutes and regulations provide procedures and  requirements for resolving claims and disputes that arise during  contract performance. DSA contract awards can be thus protested.  The current WYO arrangement does not include a process to protest  FEMA\u2019s selection of WYO companies, but if any misunderstanding or  dispute arises between a WYO and FEMA about any factual issue  under the arrangement or in relation to FEMA\u2019s nonrenewal of a WYO  company\u2019s participation in the program, the company can submit the  dispute to arbitration.\nGovernment as a party to a contract. Federal contracts generally  provide an agency the right to unilaterally terminate the contract\u2014 either for the convenience of the government or for the default of the  contractor. Under a termination for convenience, the government can  completely or partially terminate the work under a contract when it is  in the government\u2019s interest. Agencies generally can make certain  unilateral modifications to a contract during performance as long as  those changes fall within the contract\u2019s scope. The DSA contract  allows the Department of Homeland Security to terminate the contract  if it would be in the best interest of the government in the event that a  contractor discovers a conflict of interest, or in the event a contractor  intentionally did not disclose a conflict of interest. In contrast, the  WYO arrangement does not explicitly provide agency control over  termination, but in the event that a company is unable or otherwise  fails to carry out its obligations under the arrangement, the company  must transfer the NFIP policies it issued to FEMA or propose that  another WYO company assume responsibility for those policies.\nContract type and contractor costs. Depending on the contract  type, the government may or may not have insight into contractor  costs. For example, a cost reimbursement type contract\u2014where the  government pays for allowable incurred costs to the extent prescribed  in the contract\u2014can only be used if the contractor\u2019s accounting  system is adequate for determining costs applicable to the contract.  For fixed-price-type contracts, where full responsibility for all costs is  placed on the contractor, the government would not have visibility into  contract costs. For example, the DSA has a hybrid firm-fixed-price  and time-and-materials contract with FEMA with a 1-year base period  and 4 one-year option terms. FEMA pays a fixed price per policy on a  monthly basis based on the type and number of policies the company  services (standard, group flood, and severe repetitive loss), as long as  the company meets the performance requirements included in the  contract. FEMA also pays the DSA for line items based on the  amount of time and materials the company spends on certification and  accreditation activities. The contract allows the contractor to recoup  cost increases stemming from changes to the contract. For example,  the DSA sought and obtained a series of payments from FEMA for  extra work the contractor conducted as part of implementing the  Biggert-Waters Act and the Homeowner Flood Insurance and  Affordability Act. As discussed in more detail in the report, the WYO  arrangement does not prescribe detailed cost and pricing guidance to  companies but generally compensates WYO companies using proxies  to determine rates at which it pays them. For example, the  arrangement provides that WYO companies may retain 15 percent of  net written premiums as the allowance for insurance agent  commissions.\nEthical practices and statutory compliance. Depending on the type  of contract, there are also a variety of requirements imposed under  statutes and executive orders that can have major effects on business  practices. These include provisions related to bribery, false claims,  false statements, conflicts of interest, and kickbacks; lobbying  restrictions; equal opportunity and affirmative action requirements;  subcontracting and sourcing; small business and veteran  participation; and compliance with labor standards and drug-free  workplace requirements. For example, the DSA contract requires the  company to use Department of Labor wage determinations and  outlines the types of benefits employees must receive, including  health and welfare benefits, paid vacation, and paid holidays. The  current WYO arrangement does not speak to all of the factors outlined  above, but provides that a WYO shall not discriminate against any  applicant for insurance because of race, color, religion, sex, age,  handicap, marital status, or national origin.\nRepresentatives of seven of 10 WYO companies we interviewed (for all  three objectives, as described in app. I) opposed WYO companies  becoming federal contractors, citing burdensome requirements. Of the  other three, one said the costs of becoming a federal contractor would  depend on the structure of the contract, and the other two did not  comment. Representatives of one WYO company said a positive aspect  of having a contract is that it could provide a mechanism for establishing  an annual maximum to FEMA\u2019s possible changes to the contract for NFIP  regulatory changes. This could allow WYO companies or vendors to  recoup some costs of implementing unexpected changes to the program.  The DSA contractor has the ability to recoup the expenses it incurs in  response to changes, for example to law or regulation, which affect its  performance of the services under the contract.\nFEMA officials said WYO companies historically had opposed structuring  the WYO program as a federal contractual relationship between FEMA  and WYO companies since the WYO program was established and said a  federal contract might not be compatible with the structure of the  insurance industry and how WYO companies deliver coverage. In  addition, they said that as a federal contractor, a WYO company or  vendor would need to convert its information technology systems to  accommodate new federal security requirements, which would be time  consuming and costly.\nStakeholders who commented about the use of a federal contract for the  WYO program had mixed perspectives. We selected and interviewed 14  stakeholders with flood insurance expertise, based on their knowledge of  flood insurance and the WYO program. One stakeholder said FEMA\u2019s  oversight might improve because the agency would have more authority  to direct how WYO companies administered claims. One stakeholder\u2014a  vendor\u2014said that although the current arrangement is not a federal  contract, it can feel like a contractual agreement for WYO companies  because the financial control plan outlines requirements for participating  companies. Another stakeholder said that use of a federal contract for the  WYO program could create more stringent requirements for WYO  companies and could lead to declines in their participation and NFIP  market penetration, and result in the DSA having to administer more  policies.\n\nAppendix III: Geographic Concentration of National Flood Insurance Program (NFIP) Residential Policies Written by Write-Your- Own (WYO) Companies\n\nOur analysis of three potential alternatives to the current WYO  arrangement found that each alternative could decrease the number of  participating WYO companies. We analyzed NFIP policy data to  understand the geographic concentration of WYO company market share  under the current arrangement, including what proportion of NFIP  residential coverage large and small WYO companies and the Direct  Servicing Agency (DSA) wrote in counties and in states with high NFIP  losses. We included only residential NFIP policies in our analysis to focus  on market share related to homeowners. We classified WYO companies  as large or small, with large companies being the top 10 WYO companies  in terms of NFIP market share in 2014. The DSA is a Federal  Emergency Management Agency (FEMA) contractor that writes NFIP  policies and provides an alternative when a WYO company is unable or  unwilling to write a flood insurance policy.\nWe compared the share of NFIP residential policies written by WYO  companies nationwide to those written by the DSA. As shown in figure 3,  in more than 83 percent of counties where residential NFIP coverage was  present, WYO companies wrote more than half of all policies.\nIn contrast, the DSA wrote at least 50 percent of NFIP residential policies  in 1.8 percent of counties, as shown in figure 4. In 17 counties across 11  states, the DSA wrote 100 percent of the NFIP residential policies, which  accounted for 21 policies total.\nAs shown in table 13, 81 percent of NFIP residential policies were written  for properties in metropolitan counties (areas with populations of 250,000  or more). Large WYO companies accounted for the majority of the  policies in states, territories, and the District of Columbia (70 percent),  while small WYO companies and the DSA accounted for smaller shares  of the market (16 percent and 14 percent, respectively). We also  analyzed the proportion of residential policies written in counties by  different categories (population and urban and rural). Large WYO  companies wrote more than half of all policies in each category. The  share for small WYOs ranged from 15 percent to 23 percent (with the  highest share in sparsely populated rural counties) and the DSA\u2019s share  ranged from 13 percent to 18 percent in the different areas.\nIn addition to reviewing the data on a nationwide basis, we analyzed the  proportion of NFIP residential policies written by WYO companies and the  DSA for five states with the highest total NFIP payments according to  FEMA historical claims data since 1978. Based on FEMA data as of June  30, 2016, the five states with the highest total loss payments were (in  order of magnitude) Louisiana, Texas, New Jersey, New York, and  Florida.\nIn each of these states, at least 95 percent of NFIP residential policies  were located in metropolitan areas, with the majority of policies located in  counties in metropolitan areas with a population of 1 million or more.\nIn Louisiana, large WYO companies had 55 percent market share of  residential policies, the DSA had 27 percent (its highest share among  the five states), and small WYO companies had 18 percent.\nIn New York and New Jersey, large WYO companies achieved their  highest market share of NFIP residential policies among the five  states\u201478 percent and 81 percent respectively. Additionally, county- level shares for large WYO companies in New York ranged from 60  percent to 93 percent (small WYO companies had 3 percent\u201321  percent and the DSA had 4 percent\u201327 percent).\nIn Florida, large WYO companies had 70 percent of the NFIP  residential market and small WYOs had 22 percent (their highest  share among the five states). Large WYO companies wrote NFIP  residential coverage in all Florida counties, with county-level shares  ranging from 39 percent to 88 percent, (and from 11 percent to 50  percent for small WYO companies and from 2 percent to 20 percent  for the DSA).\n\nAppendix IV: Comments from Department of Homeland Security\n\nAppendix V: GAO Contacts and Staff Acknowledgments\n\n\tGAO Contacts\n\n\tStaff Acknowledgments\n\nIn addition to the contact named above, Allison Abrams (Assistant  Director); Rhonda Rose (Analyst-in-Charge); Christina S. Cantor; Heather  Chartier; Pamela R. Davidson; May M. Lee; Scott E. McNulty; John  Mingus; Marc W. Molino; Patricia Moye; and Barbara Roesmann made  key contributions to this report.","output":"Why GAO Did This Study\n\nPrivate insurers (WYO companies) sell and service flood policies and adjust claims for NFIP under an arrangement with FEMA. In GAO-09-455 , GAO made recommendations on FEMA's WYO compensation methodology and data quality. The Biggert-Waters Act built on these recommendations and required FEMA to develop a methodology for determining appropriate amounts WYO companies should be reimbursed. GAO was asked to review the status of FEMA efforts. This report examines, among other issues, (1) the extent to which FEMA revised compensation practices, and (2) trade-offs of potential alternatives to the WYO arrangement. GAO reviewed laws and regulations, analyzed FEMA data and data on expenses reported to NAIC for 2008\u20132014 (most recent available), and interviewed FEMA and NAIC officials, stakeholders (11 organizations with flood insurance expertise, three vendors), and 10 selected WYO companies with varying NFIP premium bases. To compare FEMA compensation with actual expenses, GAO examined information on accounting and reporting practices from a second selection of 10 WYO companies (in this case, insurers wiithin10 insurance groups) that received about 60 percent of compensation in 2008\u20132014.\n\nWhat GAO Found\n\nThe Federal Emergency Management Agency (FEMA) has yet to revise its compensation practices for Write-Your-Own (WYO) companies to reflect actual expenses as required by the Biggert-Waters Flood Insurance Reform Act of 2012 (Biggert-Waters Act), and as GAO recommended in 2009. FEMA continues to rely on insurance industry expense information for other lines of property insurance to set compensation rates for WYO companies. Efforts by FEMA, the National Association of Insurance Commissioners (NAIC)\u2014which collects data by line of insurance from insurance companies\u2014and the WYO companies have resulted in some improvements to financial data on National Flood Insurance Program (NFIP) expenses that WYO companies report to NAIC. But GAO found inconsistencies among how 10 selected WYO companies (which received about 60 percent of the compensation FEMA paid in 2008\u20132014) reported federal flood data to NAIC that limit the usefulness of these data for determining expenses and setting compensation rates. For example, GAO analysis showed that adjusting for inconsistencies due to unreported expenses significantly reduced WYO company profits. Consequently, without quality data on actual expenses, FEMA continues to lack the information it needs to incorporate actual flood expense data into its compensation methodology as well as determine how much profit WYO companies make and whether its compensation payments are appropriate. FEMA has not clarified what other analyses it will undertake to address GAO 2009 recommendations concerning data quality. GAO also found the ways in which WYO companies operate, including how companies compensate agents and third-party vendors (with which some companies contract to conduct some or all of the management of their NFIP policies) can affect a company's expenses and profits. Considering company characteristics would allow FEMA to more effectively develop its compensation methodology and determine the appropriate amounts to reimburse WYO companies as required by the Biggert-Waters Act.\nAccording to WYO companies and stakeholders, the current WYO arrangement and three potential alternatives GAO identified all involve trade-offs. Private insurers become WYO companies by signing a Financial Assistance\/Subsidy Arrangement with FEMA and FEMA annually publishes terms for participation in the WYO program, including amounts companies will be paid for expenses. The current arrangement includes benefits for consumers from competition among approximately 75 WYO companies, but poses oversight challenges for FEMA due to the large number of companies. The three potential alternatives involve FEMA contracting with (1) one or more insurance companies to sell and service flood policies; (2) one vendor that would sell policies through agents and insurance companies would not be involved; or (3) multiple vendors to service policies while maintaining the WYO network to market and sell flood policies. All three potential alternatives would involve FEMA contracting with either WYO companies or vendors as federal contractors, a status that most WYO company representatives cited as creating more regulatory burden because of federal contract requirements. Representatives of most WYO companies and several stakeholders GAO interviewed preferred the current arrangement because of its predictability and noted that this characteristic would continue to encourage WYO company participation.\n\nWhat GAO Recommends\n\nGAO maintains that its 2009 recommendations remain valid and will help FEMA meet Biggert-Waters Act requirements. In this report, GAO recommends that FEMA take into account company characteristics when developing the new WYO compensation methodology. FEMA agreed with the recommendation."}
{"id":"gao_GAO-16-151","pid":"gao_GAO-16-151_0","input":"\tBackground\n\n\t\tTaxpayer Services and Tax Return Process\n\nIRS uses multiple channels to provide customer service to taxpayers and  process tax returns:  Telephone service for tax law and account questions: Taxpayers can  speak with IRS staff to obtain information about their accounts throughout  the year or to ask basic tax law questions during the filing season.  Taxpayers can also listen to recorded tax information or use automated  services to obtain information on the status of refund processing as well  as account information such as balances due. Taxpayer access to  telephone assistance has declined for the past several years, and we  have made recommendations for IRS to improve its performance. For  example, in 2010, we recommended that IRS determine a customer  service telephone standard based on the quality of service provided by  comparable organizations and what matters most to the customer, and  resources required to achieve this standard. In 2014, we again reported  that IRS was missing an opportunity to improve its customer service by  not systematically comparing its telephone service to the best in business  in order to inform Congress about gaps in actual and desired service and  resources needed to improve the level of service provided to taxpayers.\nCorrespondence: Taxpayers may also use paper correspondence to  communicate with IRS, which includes responding to IRS requests for  information or data, providing additional information, or disputing a notice.  Assistors in IRS\u2019s Accounts Management office respond to taxpayer  inquiries on a variety of tax law and procedural questions, and handle  complex account adjustments such as amended returns and duplicate  filings. IRS tries to respond to paper correspondence within 45 days of  receipt; otherwise, such correspondence is considered \u201coverage.\u201d  Minimizing overage correspondence is important because delayed  responses may prompt taxpayers to write again, call, or visit walk-in sites,  and IRS would be required to pay interest on refunds owed to taxpayers if  it did not process amended returns within 45 days.\nOnline services: IRS\u2019s website is a low-cost method for providing  taxpayers with basic interactive tools to, for example, check refund status,  make payments, and apply for plans to pay taxes due in scheduled  payments (installment agreements). Taxpayers can use the website to  print forms, publications, and instructions, and can use IRS\u2019s Interactive  Tax Assistant application to get answers to tax law questions without  calling or writing to IRS.\nFace-to-face assistance: Face-to-face assistance remains an important  part of IRS\u2019s service efforts, particularly for low-income taxpayers.  Taxpayers can receive face-to-face assistance at IRS\u2019s walk-in sites or at  thousands of sites staffed by volunteer partners. At walk-in sites, IRS staff  provide services including answering basic tax law questions, reviewing  and adjusting taxpayer accounts, taking payments, authenticating  Individual Taxpayer Identification Number applicants, and assisting  identity theft victims. At sites staffed by volunteers, taxpayers can receive  free return preparation assistance as well as financial literacy information.\nTax return processing: IRS processes millions of paper and  electronically filed (e-filed) returns and issues billions of dollars in refunds  each year. A key step in the process is identifying and correcting millions  of errors that taxpayers make on their returns or that occur during  processing. IRS expends significant resources correcting errors and the  process can affect how long it takes IRS to issue refunds.\n\n\t\tBudget and Service Changes\n\nIRS\u2019s annual appropriations declined from a high of $12.1 billion in fiscal  year 2010 to $10.9 billion in fiscal year 2015, a reduction of about 10  percent. In our prior work, we reported that despite regularly realizing  efficiency gains, IRS was struggling to provide taxpayers access to  services, and IRS\u2019s performance would likely continue to suffer unless it  made tough choices about what services to provide. For fiscal years  2014 and 2015, IRS implemented service initiatives that included  reducing or eliminating certain telephone and walk-in services, and  redirecting taxpayers toward other service channels such as IRS\u2019s  website. See appendix II for more details on these service initiatives.\n\n\t\tTax Law Changes\n\nA major challenge for IRS is responding quickly, accurately, and  effectively to tax law changes, some of which can be extensive. For  example, IRS has been preparing to implement provisions of PPACA for  several years and carrying out these provisions has been a significant  undertaking. The 2015 filing season was the first that taxpayers were  required to report health care coverage information on their tax returns.  IRS began processing these returns in January 2015. Individuals could  purchase health insurance through state or federally-facilitated  marketplaces, and some of those who did so were eligible for the  premium tax credit (PTC), an advanceable, refundable tax credit  designed to help eligible individuals and families with low or moderate  income afford health insurance. Taxpayers can have the PTC paid in  advance to their insurance company, and those who do so must reconcile  the amount of advance PTC received with the PTC they are eligible for  based on their actual income reported on their tax return.\n\n\tIRS\u2019s Customer Service Continued to Decline in 2015 and IRS Has Not Developed a Comprehensive Service Strategy\n\n\t\tIRS Reduced Resources for Answering Telephones and Correspondence in 2015 in Order to Meet Other Responsibilities\n\nOverall, as mentioned above, annual fiscal year 2015 appropriations were  reduced by 10 percent compared to fiscal year 2010 (from $12.1 billion to  $10.9 billion), with appropriations for taxpayer services remaining level  with the previous year. However, resources allocated by IRS to taxpayer  services decreased in fiscal year 2015 from about $2.4 billion to $2.3  billion (or about 4.7 percent). IRS has statutory authority to supplement its  annual appropriations with user fee receipts from various services it  provides. IRS allocated approximately $45 million of user fee receipts to  taxpayer services\u2014about 76 percent less than the $183 million it  allocated to taxpayer services in fiscal year 2014. See appendix III for  details on IRS resource allocation for taxpayer services.\nIRS allocated most user fee receipts in fiscal year 2015 to fund  information technology (IT) investments to implement PPACA  requirements and other services, and support for mainframes and  servers, which can help IRS better respond to taxpayers in the future. IRS  officials also said they shifted user fee funds to combat identity theft- related refund fraud, strengthen cybersecurity, and implement tax  provisions from other recently enacted legislation such as the Foreign  Account Tax Compliance Act (FATCA).\nAs a result of these trends, IRS reduced staff answering both telephones  and correspondence by about 9 percent (from about 12,500 to 11,400  full-time equivalents (FTE)) between fiscal years 2014 and 2015 (see  figure 1). Moreover, IRS eliminated most overtime for IRS assistors until  after the end of the filing season, resulting in fewer total hours worked by  assistors to answer telephones and correspondence. Early in the 2015  filing season, IRS officials said they devoted a higher percentage of  assistor FTEs to answering correspondence than telephones to prevent a  growing inventory of correspondence that they estimated could have  taken over a year to work through if they did not take this action. IRS\u2019s  action in fiscal year 2015 continues a trend of shifting more assistors to  answering correspondence; the percentage of FTEs used for working  correspondence cases increased from 32.6 to 45 percent between fiscal  years 2010 and 2015.\n\n\t\tIRS Provided Taxpayers with Poor Telephone Service and Encountered Difficulties in Answering Correspondence and Providing Other Assistance\n\nTelephone: A reduction of about 34 percent in the number of assistors  answering telephone calls between fiscal years 2010 and 2015  contributed to the lowest level of telephone service in fiscal year 2015  compared to recent years. The number of calls from customers seeking to  speak to an assistor decreased about 6 percent (from about 54.3 million  to 51.1 million) between fiscal years 2010 and 2015. However, as figure 2  illustrates, IRS answered about 50 percent fewer calls from taxpayers  seeking an assistor (from about 36.7 million to about 18.2 million) during  the same period, while about 73 percent more calls were abandoned,  disconnected by IRS, or met with a busy signal (from about 32.4 million to  56.2 million).\nCalls answered by assistors also took longer to complete with average  times of about 13.4 minutes, which is about 2 minutes more (a 13 percent  increase) compared to fiscal year 2010. While the increase in the length  of a call was small, in total IRS spent more than 476,000 additional hours  on telephone calls than it would have with average times from fiscal year  2010. According to IRS officials, IRS assistors are handling calls that are  more complex to resolve\u2014including calls pertaining to PPACA and  identity theft\u2014while IRS is diverting calls with less complex inquiries to  self-service options. IRS officials also noted that assistors are taking  additional time on the calls to explain self-service options to taxpayers,  while taxpayers can spend up to 15 seconds discussing issues with wait  times or disconnected calls, thus driving up time needed to complete  calls. To reduce call lengths, IRS officials said they are taking steps to  expand the authority of assistors to abate penalties rather than taking  time to request documentation from callers. These officials also said they  are studying the reduction or elimination of assistor-answered calls on tax  law questions. They are considering deploying subject-matter experts to  help assistors become more efficient and resolve issues from callers  more quickly.\nIRS answered about 7 percent more calls using automated assistance  (from 35.1 million to 37.5 million) between fiscal years 2010 and 2015.  Answering as many calls as possible through automation is a significant  efficiency gain because IRS estimates that in 2015 it cost an average of  51 cents per call to provide an automated answer compared to an  average of about $55 per call with a live assistor, which was about an 85  percent increase from 2010. IRS implemented service changes in fiscal  year 2015 to drive demand for customer service from the telephone to  IRS\u2019s website, such as directing taxpayers who met Online Payment  Agreement qualifications to apply for and set up installment payments  online instead of calling or visiting IRS. See appendix II for more details  on service changes launched in fiscal year 2015.\nFigure 3 shows that a key indicator of taxpayer service, the level of  service (LOS)\u2014defined as the percentage of people who want to speak  with an IRS assistor who were able to reach one\u2014declined to about 38  percent in fiscal year 2015. While the IRS Commissioner characterized  this as \u201cabysmal\u201d service, it was in line with IRS\u2019s projected LOS for fiscal  year 2015 and a decrease from last year when LOS was about 64  percent. IRS also experienced declines in LOS on many telephone lines  used to answer questions on taxpayer accounts, including those for  responding to identity theft inquiries and calls from tax practitioners (see  appendix IV for more details). Additionally, average wait times have  almost tripled from about 11 minutes to more than 30 minutes since fiscal  year 2010.\nIn spite of these challenges, the quality of telephone service provided by  IRS has remained consistently high since fiscal year 2010 with assistors  providing an accuracy rate of higher than 90 percent in answering both  account and tax law questions.\nCorrespondence: Figure 4 shows that the amount of correspondence  Accounts Management received and closed (or completed) slightly  decreased between fiscal years 2010 and 2015. During the same period,  the average time needed to close cases once they were assigned to an  assistor increased from about 35 to 47 days. However, this time has  decreased from its peak of 67.4 days in fiscal year 2013. According to  IRS officials, IRS implemented a new approach to managing inventory in  2014. This approach reduced the overall time needed to close cases by  balancing work between new correspondence receipts that are quick to  complete and overaged cases.\nAs shown in figure 5, the percentage of correspondence cases in IRS\u2019s  inventory classified as \u201coverage\u201d\u2014cases generally not processed within  45 days of receipt by IRS\u2014has stayed close to 50 percent since fiscal  year 2013. However, this is more than double fiscal year 2010\u2019s  overage rate. IRS officials stated that ongoing efforts to consolidate  correspondence scanning from 10 to 5 sites contributed to higher overage  rates in fiscal year 2015 compared to prior years. An increasing overage  rate could lead to increased interest paid to taxpayers who are owed  refunds.\nThe composition of correspondence cases received by IRS since fiscal  year 2010 has been changing, with a higher number of cases involving  identity theft and fewer cases involving amended returns and duplicate  filings (see appendix V for additional details). Despite these changes, IRS  reported that it maintained a high degree of accuracy when closing them.  In fiscal year 2015, IRS found that assistors correctly answered and  provided appropriate resolutions to correspondence cases about 89  percent of the time, which is comparable to customer accuracy scores in  prior years. During the same period, IRS assistors also maintained scores  of well above 90 percent for adhering to statutory, regulatory, and other  process requirements when making determinations on taxpayer  accounts.\nOnline: IRS has taken steps in recent years to increase online services to  help reduce calls and written correspondence from taxpayers, but  encountered security issues in 2015. For example, IRS\u2019s Get Transcript  application allowed taxpayers to obtain a viewable and printable transcript  on IRS\u2019s website. Use of this application increased about 49 percent  (from about 19 million to 28 million) between fiscal years 2014 and 2015.  However, IRS took the Get Transcript self-service web application offline  on May 21, 2015, because of significant security problems. In June 2015,  the IRS Commissioner testified that unauthorized third parties had gained  access to taxpayer information from the application. According to officials,  criminals used taxpayer-specific data such as Social Security information,  dates of birth, and street addresses acquired from non-IRS sources to  gain unauthorized access to information on approximately 100,000 tax  accounts. In August 2015, IRS updated this number to about 114,000,  and reported that an additional 220,000 accounts had been  inappropriately accessed, bringing the total to about 330,000 accounts.  IRS sent letters to affected taxpayers and offered them free credit  protection and Identity Protection Personal Identification Numbers. As of  November 2015, IRS officials said they were working with subject matter  experts to identify and review various authentication options for the Get  Transcript application and may have a new authentication process in  place for relaunching the application in spring 2016. Taxpayers still have  several options to request a transcript.\nIn spite of these challenges, IRS officials said they are developing an  online account access feature so taxpayers can view balance due, make  a payment, view payment status and history, and view account  transcripts. In 2015, IRS began development of an online account  application that will enable taxpayers to view their balance due. IRS is  aiming to make the online account access feature available to the public  in 2016.\nIn January 2015, we reported that IRS created a group aimed at  centralizing several prior ad-hoc efforts to authenticate taxpayers across  its systems, but did not have a plan to assess costs, benefits, and risks to  inform decisions about whether and how much to invest in various options  to enhance authentication. We recommended that IRS estimate and  document such costs, benefits, and risks. IRS agreed with this  recommendation, but as of October 2015, had yet to implement it. We  also found that IRS\u2019s taxpayer authentication tools have limitations. For  example, identity thieves can easily find the information needed to falsely  obtain an e-file personal identification number, allowing them to bypass  some, if not all, of IRS\u2019s current automatic checks. Moreover, a small  number of taxpayers receive Identity Protection Personal Identification  Numbers or undergo knowledge-based authentication, which uses  questions about personal information that only the taxpayer should know  to confirm taxpayers\u2019 identities.\nAuthenticating a taxpayer online is one of several key steps needed for  IRS to enhance online services. In December 2011, we recommended  that IRS complete a strategy for providing online services, and further  expanded on that recommendation in April 2013. IRS agreed with those  recommendations and, in response, is developing a long-term strategy,  known as Service on Demand, in part to improve online services. In  September 2015, we reviewed IRS's Service on Demand strategy and  found that it implemented part of our April 2013 recommendation to link  investments in security to its long-term strategy for improving web  services. Specifically, we found that IRS incorporated investments in  security for enhanced web services, including for authentication  capabilities and taxpayer communication channels. This plan should help  to ensure that activities, core processes, and resources are aligned to  support the mission of providing better service to taxpayers and delivering  service more efficiently.\nWhile IRS experienced security problems with Get Transcript, it continued  to build on progress in directing more taxpayers to other online resources.  IRS\u2019s website received approximately 493 million visits in fiscal year  2015, which is about a 13 percent increase from the prior year. Use of  self-service tools, such as the Online Payment Agreement and Interactive  Tax Assistant applications, experienced substantial increases during the  same period. See appendix VI for additional information on uses of IRS\u2019s  website.\nWalk-in and volunteer sites: As a result of budget cuts, IRS officials  said IRS reduced staff devoted to face-to-face assistance at walk-in sites  and directed customers to self-service options. IRS reduced staff at walk- in sites by about 4 percent in fiscal year 2015 compared to the previous  year (from 1,938 to 1,867 FTEs). However, the percentage of customers  at walk-in sites waiting for longer than 30 minutes for service increased by  7 percentage points in fiscal year 2015 (from about 25 to 32 percent)  during the same period. IRS officials said that the FTE reductions were  the largest factor in the increase in wait time, but IRS staff must handle  tasks that require more time to complete as taxpayers move to self- service channels for simple tasks. IRS officials said they are taking steps  to better serve taxpayers with limited resources by testing appointment  scheduling at 44 walk-in sites. They determined that availability of  appointments significantly improved service availability, with fewer  customers at participating sites waiting more than 30 minutes for service.  Additionally, IRS made other service changes in fiscal year 2015 by  providing fewer forms, instructions, and publications at walk-in sites and  encouraging taxpayers to get them online instead. IRS also increased  promotion of electronic payment options, such as IRS\u2019s Direct Pay  application and Facilitated Self Assistance kiosks. To promote these  options, IRS updated forms, publications, and outreach materials on its  website; IRS officials also said they used automated messages on the  telephone, signs at walk-in sites, social media posts, and added  information in notices sent to taxpayers. Consequently, total contacts at  walk-in sites for forms and payments in fiscal year 2015 decreased by  32.3 and 10.3 percent, respectively, compared to the previous year. See  appendix II for a full list of fiscal year 2015 service initiatives.\nAt the 12,057 partner sites staffed by volunteers in fiscal year 2015,  taxpayers could receive return preparation assistance as well as financial  literacy information. These sites prepared about 3.8 million tax returns in  fiscal year 2015\u2014a 3 percent increase from the previous year. See  appendix VII for additional information on taxpayer use of walk-in and  volunteer site services.\n\n\t\tIRS Streamlined Its Processes for Handling Taxpayer Correspondence and Is Working to Implement a New Quality Review Process\n\nIRS routes each piece of correspondence through several steps before it  reaches an assistor. To make the process more efficient, IRS officials  said that teams within the Wage and Investment division\u2014which  oversees both Accounts Management and Submission Processing\u2014have  been working to identify opportunities to improve IRS\u2019s performance in  working and closing correspondence cases. According to IRS officials we  interviewed at Wage and Investment headquarters and Accounts  Management campuses, they formed individual teams to make  correspondence handling more accurate and timely, and have  coordinated reviews with IRS campuses to ensure that IRS staff  scanning correspondence into IRS\u2019s systems code them correctly so  they are routed to the appropriate assistor; reviewed IRS\u2019s efforts to consolidate scanning of correspondence  from 10 sites to 5, and identified opportunities to standardize work  processes and use resources more flexibly to address  correspondence backlogs;  identified significant differences in the procedures used at various  campuses when screening correspondence before scanning it into  IRS\u2019s systems and are working to standardize such processes; and helped IRS fully implement its new inventory process across all  Accounts Management campuses by June 2014 and measure results  of the transition. As a result, average times for closing  correspondence cases once they reached an assistor have declined  since fiscal year 2013. IRS believes the new process will help it  reduce unnecessary follow-up contacts with taxpayers and manage  correspondence inventory in a strategic and logical manner.\nIRS\u2019s launching of its Get Transcript tool\u2014one of the service initiatives  IRS implemented in fiscal year 2014\u2014helped to drive down  correspondence. Specifically, the number of transcripts sent to  taxpayers via postal mail decreased about 50 percent (from about 3.3  million to 1.7 million) between fiscal years 2013 and 2014.\nIn February 2015, Accounts Management began a pilot to improve the  consistency and quality of reviews of correspondence and telephone work  at selected campuses. Under the pilot, called the Centralized Evaluative  Review (CER), a centralized team of technical reviewers perform monthly  reviews of assistors\u2019 work, instead of the assistors\u2019 immediate  supervisors. IRS believes CER will standardize reviews for assistors,  improve the rebuttal process for both assistors and supervisors, and  provide more opportunities for staff to receive one-on-one mentoring from  their supervisors.\nWe conducted discussion groups with 17 Accounts Management  managers overseeing assistors at four sites, including two sites  participating in the CER pilot (see appendix I for a detailed methodology  of how we conducted discussion groups with assistors and managers).  Front-line managers at the pilot sites told us the CER pilot shows  promise. Most (seven of nine) of the managers we spoke with at the two  campuses piloting CER said it was beneficial for a centralized group to  perform reviews rather than frontline supervisors. IRS is taking steps  toward implementing CER across all Accounts Management sites, such  as drafting an implementation document for CER that IRS officials intend  to update and use for nationwide implementation of CER once IRS  reaches an agreement with the union representing assistors nationwide.  As of November 2015, IRS is negotiating with the union. However, even if  IRS and the union ratify an agreement before the end of this year, IRS  officials expect to wait until after the 2016 filing season to expand CER to  other Accounts Management sites because of the difficulties in  implementing new projects during the filing season.\n\n\t\tIRS Does Not Have Adequate Controls to Ensure Assistors Consistently Send Accurate Correspondence to Taxpayers\n\nSince fiscal year 2010, IRS assistors achieved customer accuracy scores  of 85 percent or higher when working correspondence cases. However,  they have made increasing numbers of errors in either not sending  required correspondence to taxpayers after closing a case, or sending  inaccurate information in that correspondence. The number of these  errors increased almost 200 percent from 1,165 to 3,377 errors found in  correspondence cases sampled by IRS between fiscal years 2010 and  2015. According to IRS officials, an analysis of these errors showed that  in fiscal year 2015, more than a third of these errors originated from  incorrect dates, amounts due, and other information, while another 20  percent originated from assistors failing to issue correspondence to  taxpayers.\nManagers in our discussion groups concurred that IRS faced problems in  sending out accurate correspondence to taxpayers. About half (eight of  17) of the managers in our discussion groups said that a common issue  was that assistors did not send required correspondence at all. In  addition, seven of the 17 managers said assistors incorporated incorrect  information into correspondence to taxpayers. Failure to send  correspondence, or providing inaccurate information to taxpayers, may  spur taxpayers to write again to IRS about the same problem or call or  visit IRS, requiring additional time and resources to resolve cases by both  taxpayers and IRS.\nIRS officials confirmed that assistors\u2019 failure to send required  correspondence to taxpayers was one of the most common errors made  by assistors in recent years, likely stemming from a lack of attention  because assistors work too quickly to get through cases and do not  remember to send correspondence. In response, Accounts Management  took steps to enhance training and remind assistors of requirements for  sending outgoing correspondence with accurate and complete  information. For instance, in May 2014, Accounts Management developed  and distributed a job aid for providing quality and timely responses to  taxpayers and provided refresher training on outgoing correspondence at  some sites during fiscal year 2014 training. In 2015, Accounts  Management launched a communication campaign with flyers and other  visual and verbal reminders for assistors to send required  correspondence. Officials said they experienced reductions in errors after  the campaign, though as time passed such errors gradually increased. In  addition, IRS provided recommendations to Accounts Management sites  for targeting defects in outgoing correspondence. IRS officials said they  provided biweekly workshops where subject matter experts answered  questions and assistors shared lessons learned. Officials also said they  required assistors to use a checklist to confirm completion of every step  of the correspondence adjustments process including sending out  required correspondence if necessary. They said that at least one IRS  automated tool prompts assistors to send correspondence based on  actions taken on a correspondence case. Additionally, managers have  discretion to conduct 100 percent reviews of correspondence cases after  they are completed to ensure that assistors send required  correspondence.\nIRS\u2018s Internal Revenue Manual (IRM) states that correspondence  soliciting additional information or responding to inquiries must be timely,  accurate, and professional, and address all issues based on information  provided by taxpayers. A quality response must also request additional  information as needed from the taxpayer and is written in language that  the taxpayer can understand. According to the IRM, responses to  taxpayers are \u201ctimely\u201d if initiated within 30 days of the date IRS received  the inquiry. Such responses may include interim letters explaining when a  taxpayer can expect a final resolution on a case or a final response  describing action taken by IRS to resolve the case. As previously noted,  IRS generally classifies correspondence cases not processed within 45  days as \u201coverage.\u201d In addition, internal control standards state that  agency management should design appropriate types of control  activities\u2014such as policies, procedures, techniques, and mechanisms\u2014 to achieve its stated objectives.\nAccounts Management officials acknowledged they do not have adequate  controls in IRS\u2019s systems to ensure assistors send out accurate and  complete correspondence to taxpayers when required before closing  cases. In fact, while IRS has implemented policies, procedures, and  mechanisms to help assistors send required correspondence with  accurate and complete information, such steps have not been sufficient in  helping IRS achieve its objective; between fiscal years 2014 and 2015,  the number of errors linked to outgoing correspondence rose about 29  percent (from 2,614 to 3,377), adding to the increasing number of errors  taking place since fiscal year 2010. IRS has not formally assessed the  feasibility of setting up such controls, but Accounts Management officials  noted it would be costly and difficult to build into IRS\u2019s systems and not all  correspondence inventories require letters sent to taxpayers. Without  reviewing the feasibility of setting up adequate controls for consistently  sending accurate correspondence to taxpayers, IRS is missing an  opportunity to reduce errors in providing accurate and timely responses to  taxpayers and sufficiently address their issues.\n\n\t\tTreasury and IRS Have Not Developed a Comprehensive Customer Service Strategy with Measurable Performance Targets\n\nBoth Congress and the executive branch have taken steps to improve  customer service. The GPRA Modernization Act of 2010 (GPRAMA)  requires agencies to, among other things, establish a balanced set of  performance indicators to measure progress toward each performance  goal, including, as appropriate, customer service. Similarly, several  executive orders, presidential memorandums, and OMB guidance require  agencies to take steps to strengthen customer service and describe a  number of actions agencies can take to improve their customer service. In  our previous reports on the IRS filing season, we have described these  requirements at length and emphasized how important it is for IRS to take  those actions to ensure taxpayers are receiving quality customer service.  Additional background on executive orders and other guidance is  provided in appendix VIII.\nIn response to GPRAMA, executive orders, and other policies, Treasury  and IRS have taken steps to define customer service targets and align  them to Treasury\u2019s and IRS\u2019s strategic and performance plans. For  example, Treasury   incorporated strategic goals and objectives into its fiscal year 2014- 2017 strategic plan for fairly and effectively reforming and  modernizing federal tax systems, and improving efficiency,  effectiveness, and customer interaction, and outlined strategies to  achieve them; established performance measures linked to the strategic goals  outlined above, such as telephone level of service, taxpayer self- assistance rate, and percentage of individual returns processed established an agency priority goal to increase self-service options for  taxpayers, which complements OMB\u2019s cross-agency priority goal to  improve customer service in part through utilizing technology.  incorporated a goal of delivering high-quality and timely service in its  fiscal year 2014-2017 strategic plan, along with strategic objectives,  such as tailoring service approaches to taxpayers to facilitate  voluntary compliance and providing timely service to taxpayers  through multiple channels, and strategies to achieve them; listed performance measures in its congressional justification that are  linked to Treasury\u2019s performance plan, including telephone level of  service, taxpayer self-assistance rate, accuracy rates for responses  provided to callers and percentage of individual returns processed  electronically; and used its strategic plan, Taxpayer Assistance Blueprint, and other key  documents to develop its joint Small Business\/Self-Employed Division  and Wage and Investment Concept of Operations (CONOPS) to  outline its vision for the future of taxpayer services. CONOPS also  includes high-level direction, specific initiatives, and work areas that  are intended to drive the achievement of its vision.\nHowever, Treasury and IRS\u2019s efforts fall short in several important areas:   Treasury does not list correspondence overage rates in its  performance plan. Handling correspondence is expensive; IRS  estimated that it cost about $818.7 million from October 1, 2014 through  June 30, 2015. In response to our December 2010 recommendation, IRS  started using a correspondence overage rate beginning in fiscal year  2011 to measure its timeliness in handling correspondence. However,  Treasury does not include correspondence overage rates as a  performance measure in its performance plan or annual financial report,  inhibiting its efforts to create a complete set of customer service  performance metrics for IRS. Further, Congress and other stakeholders\u2014 such as the Treasury Inspector General for Tax Administration (TIGTA)  and the National Taxpayer Advocate\u2014do not have information readily  available to monitor IRS's performance in handling correspondence from  taxpayers.\nIRS has not yet developed a comprehensive customer service  strategy incorporating appropriate levels of taxpayer services. In  December 2012, we recommended that IRS outline a strategy that lists  specific steps needed to attain appropriate levels of telephone and  correspondence service based on an assessment of time frames,  demand, capabilities, and resources. IRS intended the joint CONOPS,  which was released in July 2014, to illustrate how it wants to deliver  taxpayer services moving forward. The joint CONOPS articulates  compliance activities and services IRS believes are achievable within a 5- year period. It identifies 30 critical capabilities for IRS to strengthen or  develop, such as inventory planning, case management, and digital  account management. It also defined initiatives and work areas to help  IRS achieve its vision, such as using the Internet to submit documentation  to IRS and update and amend returns, improving correspondence case  management, and more accurately and quickly routing telephone calls to  resolve taxpayers\u2019 issues. While the joint CONOPS outlined a target of  achieving about 90 percent closure of compliance cases within a filing  year, it did not define what IRS believes are the appropriate service levels  of telephone and correspondence. As a result, IRS is not able to fully  articulate the levels of telephone and correspondence service which it  believes are appropriate as it seeks to transition demand to self-service  channels.\nIRS has not yet developed a telephone measure benchmarked to the  best in business or customer expectations. IRS requested about $186  million for fiscal year 2016 to help the agency reach its goal of increasing  telephone level of service to 80 percent in part by hiring more assistors  and investing in information technology (IT) improvements. IRS last  reached this level of service in fiscal year 2007. According to IRS officials,  they use a planning process and strategy designed to achieve the highest  level of service based on available resources and competing priorities,  including funding statutorily required responsibilities such as  implementing the Patient Protection and Affordable Care Act (PPACA)  and Foreign Account Tax Compliance Act (FATCA). This is in contrast to  our December 2014 recommendation, in which we recommended that  IRS set its level of service based on a comparison to private-sector  organizations providing a comparable or analogous service\u2014or the \u201cbest  in the business\u201d\u2014to identify gaps between actual and desired  performance. In addition, IRS has not implemented our December 2010  recommendation to determine a customer service telephone standard  based on the quality of service provided by comparable organizations or  on what matters most to the customer. Treasury and IRS officials noted  that IRS faces budgetary and legislative challenges not experienced by  private sector organizations. IRS officials also believe that establishing a  standard measure for telephone service would give the impression that  IRS would plan to fail to deliver service to the standard in years where  funding for taxpayer services is reduced. However, by not comparing  customer service performance against the best in business or customer  expectations, IRS is missing opportunities to illustrate gaps between  actual and desired service, and provide additional information to  Congress about resources IRS believes are needed for taxpayer service.\nIRS has not thoroughly examined all of the services provided via  telephone assistors to determine which services can be provided via  automated phone calls and online services. IRS has taken steps to  determine the service channels taxpayers prefer to use for tasks, such as  submitting documentation, obtaining updates on the status of a taxpayer  case, or setting up a payment plan. For example, in part due to our prior  work, IRS developed an automated telephone line and online tool that  enabled taxpayers to receive information on amended returns submitted  to IRS and locations of Volunteer Income Tax Assistance sites.  However, IRS has not fully assessed the services it provides on other  telephone lines to determine whether it can divert demand for services to  automated phone calls and online applications. For example, IRS has not  explored the costs and benefits of automating the process for ordering  IRS forms. IRS officials told us that these calls are answered by a  contractor who hires disabled individuals. Thus, they are reluctant to  change this option. However, automating such calls would free up  resources for services only IRS can provide, such as answering questions  about account information. Without a careful review of services provided  by telephone assistors and determining which services can be provided  through other channels, IRS is missing opportunities to reduce telephone  call volumes and effectively meet taxpayers\u2019 needs for services at a lower  cost.\nIn October 2015, Treasury officials said they are not inclined to develop a  comprehensive strategy since IRS already has a sufficient number of  customer service performance goals. Further, in September 2015,  officials from IRS\u2019s Planning, Programming and Audit Coordination office  said they were drafting an enterprise-wide CONOPS covering all IRS  operations with a goal of providing more efficient and effective taxpayer  services. They said they will define a more balanced view of customer  service that illustrates future use of telephone and correspondence  service as IRS expands its online services. They plan to release a draft of  the enterprise-wide CONOPS to Congress and other external  stakeholders in early 2016 and incorporate it into IRS\u2019s strategic plan  beginning in spring 2016. However, IRS\u2019s Planning, Programming and  Audit Coordination officials told us they did not envision the enterprise- wide CONOPS to incorporate specific goals for telephone and  correspondence performance in line with what customers would expect,  or resources needed to reach them. Without defining a comprehensive  strategy with specific goals for customer service tied to the best in  business and customer expectations, Treasury and IRS are not effectively  conveying to Congress the types and levels of customer service expected  by taxpayers and the capabilities and resources IRS requires to achieve  those levels.\n\n\tOpportunities Exist to Improve and Streamline Return Processing\n\n\t\tIRS Had Mixed Results Implementing New and Extended Tax Law Provisions\n\nIRS opened the 2015 filing season on the earliest starting date since  2012, despite having to implement challenging initiatives. IRS was able to  both ensure compliance with FATCA and implement multiple tax law  changes that passed late in 2014. In spite of these challenges, IRS  officials and tax preparation industry stakeholders reported relatively few  problems processing returns, which IRS attributed primarily to significant  advance planning. To its credit, IRS was able to implement these  changes while processing about the same number of returns and refunds  as last year. Table 1 shows that IRS continues to see a decrease in  processing paper returns and an increase in electronic processing, which  has many benefits for taxpayers such as improved convenience, higher  accuracy rates, and faster refunds.\nOne area, however, where IRS did experience some problems was  verifying taxpayers\u2019 Premium Tax Credit claims due to health insurance  marketplaces either not meeting the deadlines for providing IRS with  complete health care coverage information or submitting information that  was inaccurate. As we reported in July 2015, IRS had incomplete or  delayed marketplace data to verify claims at the time of return filing and  did not know whether these challenges were a single-year or an ongoing  problem. We concluded that, without complete and accurate information  from the marketplaces, IRS cannot effectively verify the amount of the  premium tax credit that taxpayers are eligible to receive, or the amount  that may have been paid on their behalf to an insurer in the form of an  advance premium tax credit. We found that IRS needed to strengthen  oversight of PPACA tax provisions for individuals and made several  recommendations designed to strengthen oversight of PTC provisions,  which IRS generally agreed to implement.\n\n\t\tIRS\u2019s Refund Timeliness Performance Measure Does Not Include All Returns with Errors\n\nIRS\u2019s Primary Processing Units for  Correcting Errors  Errors can occur on tax returns because of  mistakes made by both taxpayers and IRS.  When processing returns, one of IRS\u2019s  responsibilities is to correct these errors. IRS  generally does this in three processing units:  Error Resolution System\u2014Corrects a wide  range of simple errors, such as missing  schedules or forms using Math Error  Authority.  Rejects\u2014Corrects incomplete returns by  corresponding with taxpayers to request  information, such as missing forms.  Unpostables\u2014Corrects returns that failed to  pass validity checks and cannot be recorded  (or posted) to the taxpayer\u2019s account, such as  incidents associated with identity theft.\nIRS has three units that correct errors\u2014the Error Resolution System,  Rejects, and Unpostables (see sidebar). Errors can cause ripple effects  as returns move through processing and can significantly delay how long  it takes to process a return. For example, if a taxpayer did not include a  required tax form, examiners responsible for preparing the return for data  entry will send a letter to the taxpayer requesting the missing form. Once  the taxpayer submits the form, the return can be sent to the next unit for  data entry. For more details on how IRS processes returns and corrects  errors, see appendix IX.\nWhen IRS has to correct errors, it takes longer to process a return and  can result in paying interest to the taxpayer, which is required if IRS takes  longer than 45 days after the filing deadline to issue a refund.  Consequently, as the number of errors increase, it may result in IRS  paying more interest. IRS officials said they do not collect complete  information on the reasons why IRS pays refund interest; however, they  do conduct quality reviews of those cases where IRS paid the largest  amounts of interest. These reviews show that multiple types of processing  delays resulted in large interest payments. IRS officials attribute a rise in  interest paid since 2011 in part to its filters catching more identity theft- related fraudulent returns. This causes delays as IRS takes additional  steps to authenticate the legitimate return and can take longer than 45  days. Figure 6 shows that the amount of interest IRS paid has generally  trended in the same direction as the total number of errors IRS  identified.\nEven though millions of returns are corrected in the Error Resolution  System, Rejects, and Unpostables units, IRS excludes many of these  returns in its refund timeliness performance measure, which tracks the  percentage of refunds issued within 40 days or less. Instead, the  measure only includes paper-filed individual income tax returns and some  returns that contain errors. In 2011, we reported that this measure and  goal are outdated and have not significantly changed since 2003. We  recommended IRS develop a new refund timeliness measure and goal to  more appropriately reflect current capabilities. IRS officials said they  would reassess both. In July 2014, IRS reported that it had determined  not to develop a new refund timeliness measure, stating that  implementation of the Customer Account Data Engine 2 daily processing,  promotion of electronic filing, and newly implemented filters for identity  theft eliminated the need to change the measure. Since then, the  percent of returns processed electronically has increased from 78 percent  to 86 percent. Furthermore, in August 2015, IRS officials told us that  about 90 percent of refunds are issued within 21 days. These officials  expressed concern that focusing only on timeliness could jeopardize the  balance between quickly issuing refunds and ensuring that refunds are  accurate and issued to the correct individuals. It is important that IRS  issue refunds on time because when they are late, IRS is required to pay  interest and taxpayers\u2019 refunds are delayed. We continue to reiterate  our prior recommendation that IRS develop a new refund timeliness  measure and goal. Without including electronically filed returns in either  the current measure or a separate one, IRS is not fully or accurately  reporting on its performance in issuing timely refunds and omitting returns  with errors further compounds these issues. As a result, IRS is not fully  monitoring opportunities to potentially improve how efficiently IRS  processes returns and issues refunds.\n\n\t\tIRS Has Not Undertaken a Comprehensive Evaluation of Its Return Processing Operations, Resulting in Missed Opportunities to Identify Savings and Efficiencies\n\nWe have previously reported that GPRAMA requires agencies to  establish a balanced set of performance indicators to be used in  measuring progress toward performance goals, including customer  service. In its fiscal year 2014-2017 strategic plan, IRS acknowledges  the importance of measuring customer satisfaction related to processing  tax returns. An IRS unit reviewed submission processing operations and  found opportunities to improve service delivery and improve the way  returns are processed. In a narrowly focused review in 2011, a team from  IRS\u2019s Lean Six Sigma office identified 16 opportunities to improve  submission processing operations. In addition, IRS officials told us they  review processing operations and make incremental changes when  preparing for each filing season.\nHowever, these reviews do not include comprehensive assessments of  long-term or potentially systemic inefficiencies in IRS\u2019s return processing  operations. IRS officials said they do not have procedures to periodically  or regularly evaluate how they process returns. Such assessments are  important because the longer it takes IRS to process a return, the more  likely refunds could be delayed and increase interest paid by IRS.\nDuring our current review, we found multiple opportunities for IRS to  generate savings and efficiencies in its return processing operations.  From our discussion groups with Submission Processing frontline staff  and managers at the three sites that process individual tax returns,  observations at a processing center, and interviews with senior officials,  we identified opportunities that could potentially improve processing  returns and reduce errors. For example, we found that:  IRS\u2019s procedures result in premature correspondence with  taxpayers in certain instances. For returns filed on paper,  examiners who prepare returns for processing may prematurely  correspond with the taxpayer which contributes to delays in  processing. In our discussion groups, 8 of 16 tax examiners in the  error resolution and rejects units said there are restrictions on when  they can contact a taxpayer to correct an error. The IRM states that  tax examiners are generally allowed to correspond one time with  taxpayers when processing a return, though in certain limited  circumstances a second correspondence is permitted. These same  examiners said that for returns filed on paper, when examiners who  prepare returns for processing correspond with the taxpayer, others in  the error resolution system are prohibited from making additional  contact. For example, if a taxpayer did not include necessary  information for claiming a tax deduction or credit and an examiner  already corresponded with the taxpayer to request it, other examiners  would be unable to correspond with the taxpayer any further related to  that deduction or credit. In such a case, the return is suspended from  processing until the taxpayer responds. If the taxpayer does not reply  or provides incomplete information, then IRS processes the return  excluding the information in question and the taxpayer is notified of  the change. If the taxpayer disagreed with IRS\u2019s resolution, then the  taxpayer would have to file an amended return, which takes additional  time and resources for the taxpayer as well as IRS. Ensuring that all  errors are identified to the fullest extent possible before corresponding  with the taxpayer would help IRS streamline processes and reduce  burden on taxpayers when attempting to correct their returns for  processing.\nIRS is not collecting performance data about some of the errors  corrected during tax return processing. IRS does not estimate how  long it takes to process a return with or without an error and how long  it takes to resolve specific types of errors compared to others or how  many errors result from its employees incorrectly transcribing data. In  addition, IRS does not collect information on the percentage of  documents that will not post to a taxpayer\u2019s account by type, such as  tax returns or payments. As we have previously reported, key  practices for managing for results include the use of performance  information to make the decisions necessary to improve  performance. By not collecting such data, IRS is limited in its ability  to monitor and improve processing tax returns. According to IRS  officials, this could be difficult to accomplish because IRS\u2019s computing  systems are not set up to do so.\nIRS frontline managers and staff who correct errors on individual  taxpayer returns identified weaknesses in their training. In  discussion groups with us, 20 of 32 frontline managers and staff  raised concerns about the quality of training. Some of the weaknesses  they identified included that training did not coincide with the work  they received, the trainers were not adequately prepared to teach,  and that training designed to improve interpreting certain sections of  the IRM was inadequate. The IRS Oversight Board reported similar  training concerns last year. Although IRS has provided more training  to tax examiners who correct errors, since 2010, performance  problems have persisted. For example, for the units that process  errors on individual taxpayer returns, accuracy ratings were below the  baseline performance standard half the time between fiscal year 2013  to June 30, 2015. IRS officials acknowledged the challenges in  providing timely training particularly given uncertainties in the level  and timing of appropriations which affects IRS\u2019s ability to hire and  train before the filing season begins. In addition, officials explained  that individual business units assess their training needs every year  and conduct training accordingly. However, it is unclear the extent to  which the performance issues are the result of training gaps.\n\n\tIRS Redirected Resources to Core Services, but Could Improve Services and Compliance by Implementing Our Prior Recommendations\n\n\t\tIRS Redirected about $50 Million in Resources to Focus on Services Only IRS Can Provide\n\nIRS eliminated or reduced some services in fiscal year 2014 and  redirected taxpayers to lower-cost channels to focus on core taxpayer  services that only IRS can provide (see appendix II for a full list of the  fiscal year 2014 service initiatives). As a result, some taxpayers would  have lost access to services previously provided and had to seek  assistance from other sources such as paid tax preparers. We estimated  IRS realized about $50 million that it shifted to core services after it spent  about $356,000 on implementing these initiatives. Figure 7 shows the  estimated resources realized by each initiative.\nIRS said it redirected 515 assistor FTEs to answer telephone calls on  issues that only IRS could help resolve. It also redirected 160 walk-in site  FTEs to respond to questions about balances due to IRS, math errors,  refunds, identity theft, and other inquiries into taxpayers\u2019 accounts. In  turn, according to IRS, this enabled it to provide a higher level of service  and lower wait times than expected for callers seeking live assistance in  fiscal year 2014. These actions are examples of the difficult tradeoffs that  we recommended IRS take to provide more timely telephone and  correspondence services. IRS\u2019s actions also helped the agency move  toward its vision of transitioning taxpayer demand for assistance to lower  cost, self-service options.\n\n\t\tImplementing Our Prior Filing Season-Related Recommendations and Expanding Use of Math Error Authority Would Provide IRS with Multiple Benefits\n\nIRS has made mixed progress addressing our prior filing season-related  recommendations. For example, IRS implemented one recommendation  from our 2014 filing season report by establishing performance measures  and plans for assessing the effectiveness of service initiatives. IRS also  implemented recommendations to improve web services, such as  identifying potential risks for interactive products in development and  summarizing mitigation plans needed to address such risks.\nHowever, IRS has not fully implemented 21 other recommendations that  are intended to help increase transparency of its performance, reduce  taxpayer burden, and improve service and compliance. This includes a  recommendation on helping IRS have the information needed to weight  the potential risks, costs, and benefits of options for implementing a \u201cReal  Time Tax\u201d system to help improve verification of income tax returns by  matching third-party information to such returns before refunds are  issued. IRS can also take steps to implement our prior  recommendations on combating identity theft refund fraud to strengthen  present defenses against refund fraud while also developing new  strategies for both electronic and paper returns that stop such fraud at all  stages of return processing.\nOur prior work also identified actions Congress could take to enhance  IRS\u2019s Math Error Authority (MEA), which allows IRS in limited  circumstances to correct calculation errors and check for other obvious  noncompliance. Since 2008, we have raised five matters for Congress  to consider providing IRS with additional MEA. In November 2009, in  response to our suggestion, Congress acted to provide limited MEA for  correcting errors on First Time Homebuyer Tax Credit claims, but four  other matters on MEA remain open (see appendix X for details).\nIn fiscal years 2015 and 2016, the administration included legislative  proposals that would grant Treasury regulatory authority to expand the  IRS\u2019s use of MEA, which is consistent with what we suggested in  February 2010. These proposals would allow IRS to correct  computational-based errors and incorrect use of tables provided by IRS  and would add a new category of correctable error where the (1)  information provided by the taxpayer does not match the information  contained in government databases, (2) taxpayer has exceeded the  lifetime limit for claiming a deduction or credit, or (3) taxpayer has failed to  include documentation that is required by statute with his or her return.  This broader MEA, with appropriate safeguards, would give IRS the  flexibility to respond quickly as new uses for the authority emerge in the  future.\nExpanding opportunities to use MEA is also important because it could  help IRS correct additional errors during return processing, which would  save resources by reducing delays in processing and the need for  burdensome audits. For example, Congress could address two matters  we previously suggested if it granted Treasury regulatory authority to  expand IRS\u2019s use of MEA to correct errors in certain cases, such as  where the taxpayer has exceeded the lifetime limits for claiming a  deduction or credit. According to the Joint Committee on Taxation, by  doing so, the federal government could cumulatively save about $166  million between fiscal years 2015 and 2025.\nWe also identified actions Congress could take to reduce identity theft  refund fraud. In August 2014, we suggested that Congress consider  providing the Secretary of the Treasury with the regulatory authority to  lower the threshold for electronic filing of W-2s from 250 returns annually  to between 5 to 10 returns, as appropriate. By providing such authority,  Congress can help support IRS\u2019s efforts to conduct more pre-refund  matching of W-2 information.\n\n\tConclusions\n\nThe severe decline in IRS\u2019s customer service in fiscal year 2015  underscores how important it is for IRS to urgently make tough decisions  to improve services. In light of IRS\u2019s reduced budget and expanding  responsibilities, we have reported for several years that IRS needs to  dramatically revise its approach to customer service. While IRS\u2019s fiscal  year 2014 service initiatives resulted in efficiency gains, they do not go far  enough, as evidenced by the extremely low level of service the agency  delivered in 2015. IRS needs a longer-term strategy to manage its  budgetary and workload environment. To that end, we are concerned that  Treasury and IRS do not believe that they need to develop a  comprehensive customer service plan to set targets for appropriate levels  of telephone and correspondence service based on service provided by  the best in business and customer expectations. We continue to believe  that implementing our previous recommendation would enable IRS to  make more informed requests to Congress about the resource  requirements to deliver desired levels of service.\nIRS has taken noteworthy actions to improve customer service, such as  the Centralized Evaluative Review pilot, which shows promise to improve  correspondence and telephone work. There are also other opportunities  for Treasury and IRS to improve correspondence services and measure  performance, such as including performance targets for correspondence  in Treasury\u2019s performance plan. This would enhance Congress\u2019s  understanding of IRS\u2019s customer service performance and challenges.\nIRS continues to realize efficiencies in processing taxpayer returns  through e-file, however, without conducting performance evaluations of its  return processing, IRS is missing opportunities to reduce processing  delays that can contribute to refund interest paid to taxpayers. Identifying  efficiencies that both reduce common taxpayer errors and allow IRS to  more timely process new types of errors could save the government  money in interest paid. Examples of efficiencies we identified during our  observations at IRS sites include tracking information on errors it corrects  and identifying training needs that could improve performance for units  that process errors on individual taxpayer returns. Conducting  performance evaluations would likely enable IRS to find these and similar  opportunities to improve processes.\n\n\tMatter for Congressional Consideration\n\nTo improve taxpayer service amid declining budgets and increased  responsibilities, Congress should consider requiring the Secretary of the  Treasury to develop a comprehensive customer service strategy in  consultation with the Commissioner of Internal Revenue that (1)  determines appropriate telephone and correspondence levels of service,  based on service provided by the best in business and customer  expectations; and (2) thoroughly assesses which services IRS can shift to  self-service options.\n\n\tRecommendations for Executive Action\n\nTo improve performance management of taxpayer services, we  recommend that the Secretary of the Treasury update the Department\u2019s  performance plan to include overage rates for handling taxpayer  correspondence as a part of Treasury\u2019s performance goals.\nTo improve taxpayer service and gain efficiencies, we recommend that  the Commissioner of Internal Revenue take the following two actions:  1.  Assess the feasibility of setting up a control in IRS systems requiring  assistors to send out required correspondence to taxpayers prior to  closing a correspondence case.  2.  Periodically conduct performance evaluations of IRS return  processing operations to identify inefficiencies. The initial evaluation  could include, for example, assessing when to correspond with  taxpayers whose returns contain errors, collecting additional data on  errors that IRS corrects, and closing training gaps that are hindering  performance for units that process errors on individual taxpayer  returns.\n\n\tAgency Comments and Our Response\n\nWe provided a draft of this report to the Secretary of the Treasury and the  Commissioner of Internal Revenue. Treasury and IRS provided written  comments, which are reprinted in appendixes XI and XII, respectively.  IRS also provided technical comments which we incorporated where  appropriate.\nTreasury neither agreed nor disagreed with our recommendation to  update the Department\u2019s performance plan to include correspondence  overage rates as a part of Treasury\u2019s goals. Treasury stated that it meets  regularly with IRS leadership to review progress toward goals and  strategy decisions and that it will continue to work with IRS to improve  managing and reporting its performance.\nIRS agreed with both recommendations directed to it. Regarding our  recommendation to set up a control in IRS systems to require assistors to  send required correspondence before closing a case, IRS stated that it  would analyze its options for bolstering controls to address  correspondence concerns. For our recommendation to conduct periodic  performance evaluations of IRS return processing operations to identify  inefficiencies, IRS stated that it would consider opportunities for improving  existing processes that identify common errors requiring correction and\/or  correspondence with taxpayers. IRS noted that its long-term vision for tax  administration is to modernize taxpayer service focusing on options to  meet taxpayers\u2019 needs and preferences. This would include online tax  account access that would enable taxpayers to make adjustments such  as correcting errors. Finally, to further identify inefficiencies and improve  performance, IRS stated that it would review and improve employee  training where appropriate.\nAs agreed with your offices, unless you publically release its contents  earlier, we plan no further distribution of this report until 30 days from its  issuance date. At that time, we plan to send copies of this report to the  appropriate congressional committees. We will also send copies to the  Commissioner of Internal Revenue, the Secretary of the Treasury, and  other interested parties.\nIn addition, the report will be available at no charge on the GAO website  at http:\/\/www.gao.gov.\nIf you or your staff have any questions about this report, please contact  me at (202) 512-9110 or mctiguej@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 XIII.\n\nAppendix I: Objectives, Scope, and Methodology\n\nOur objectives in this report were to  1.  assess how well the Internal Revenue Service (IRS) provided  customer service compared to its performance in prior years and  identify opportunities for IRS to streamline services,  2.  assess how well IRS processed individual income tax returns  compared to its performance in prior years and identify opportunities  for IRS to streamline processing, and   3.  determine what resources IRS realized from implementing service  initiatives and describe IRS's progress toward implementing our prior  filing season-related recommendations.\nTo answer the first and second objectives, we obtained and analyzed IRS documents and data, including  performance, budget, and workload data for return processing and  taxpayer services, and used this information to compare IRS\u2019s  performance in 2015 to prior years (2010 through 2014) to identify  trends and anomalies; identified federal standards for evaluating customer service, such as  the Government Performance and Results Act Modernization Act and  executive orders, presidential memorandums and Office of  Management and Budget guidance to strengthen customer service,  and compared Department of the Treasury and IRS actions to those  standards;    visited IRS facilities in Austin to observe return processing and  assistors handling correspondence, and the Joint Operations Center  (which manages IRS\u2019s telephone operations) in Atlanta to observe  assistors answering taxpayer calls and correspondence;   interviewed officials from IRS\u2019s Wage and Investment division (which  is responsible for managing filing season operations) and external  stakeholders, including tax administration experts from major tax  preparation and software firms who interact with IRS on key aspects  of the filing season, to obtain contextual information about IRS\u2019s  performance;  interviewed officials from the Department of the Treasury and IRS to  discuss goals and strategies to improve taxpayer services and steps  they have taken to measure performance in delivering such services;  conducted 10 discussion groups with IRS frontline staff and managers  located at five IRS campuses. Four of the discussion groups were  with assistors who answer telephone calls or respond to  correspondence or frontline managers who oversee the assistors\u2019  work. The assistors and managers worked in Atlanta; Austin; Kansas  City, Missouri; and Philadelphia. Six of the groups were with tax  examiners in Austin; Fresno, California; and Kansas City, Missouri,  who are responsible for correcting errors and processing individual  taxpayer returns. To identify group participants, we asked IRS officials  for the contact information of staff located at each campus with the  responsibilities described above. We then contacted a select number  of assistors and tax examiners directly to schedule the meetings. We  conducted six discussion groups in person and four via conference  call. Each group contained four to seven participants. To encourage  participants to speak openly, we ensured that no senior IRS  management officials were present during the discussions, and we  separated staff and managers into different groups. At the beginning  of each group we explained that any comments and opinions provided  would be reported in summary form. We developed and administered  a standardized discussion guide to improve the quality of information  gathered. Our questions for assistors focused on their experiences  and suggestions, if any, for how IRS can more efficiently conduct its  correspondence and telephone processes. We discussed the benefits  and drawbacks of Centralized Evaluative Review at the campuses  that piloted it. We asked examiners about their experiences  processing returns with errors and what suggestions, if any, they had  for IRS to process such returns more efficiently.\nTo determine what resources IRS realized from implementing service  initiatives, we first calculated the total gross dollars IRS saved by  implementing each of the six service initiatives and redirected toward  other purposes. We determined this amount by multiplying full-time  equivalents (FTE) redirected by salaries and benefits per FTE using data  provided by IRS. Next, we calculated total costs of implementing each of  the service initiatives, then subtracted the amount from total gross dollars  saved to calculate IRS resources realized from implementing each of the  six initiatives in fiscal year 2014 dollars. IRS officials concurred with our  approach and calculations. To describe IRS\u2019s actions to implement our  prior recommendations, we reviewed relevant documentation, including  IRS Joint Audit Management Enterprise System reports tracking IRS\u2019s  actions to implement our recommendations, and obtained information  from IRS officials.\nTo identify data limitations and assess data reliability, we reviewed IRS  data and documentation, assessed documentation for data limitations,  and compared those results to our data reliability standards. We consider  the data presented in this report to be sufficiently reliable for our  purposes.\n\nAppendix II: The Internal Revenue Service Implemented Service Initiatives in Fiscal Years 2014 and 2015\n\nWe reported in our prior work that the Internal Revenue Service (IRS)  was struggling to provide taxpayers access to services despite regularly  realizing efficiency gains, and that IRS\u2019s performance would likely  continue to suffer unless it made tough choices about what services to  provide. Consistent with these findings, IRS implemented service  changes in fiscal years 2014 and 2015 by reducing or eliminating certain  telephone and walk-in services, and redirecting taxpayers toward other  service channels such as IRS\u2019s website.\nFiscal year 2014 service changes:  1.  Limited telephone assistance to only basic tax law questions during  the filing season and reassigned assistors to work account-related  inquiries.   2.  Eliminated free return preparation and reduced other services at IRS\u2019s  walk-in sites.  3.  Launched the \u201cGet Transcript\u201d tool, which allows taxpayers to obtain a  viewable and printable transcript on irs.gov, and redirected taxpayers  to automated tools for additional guidance.  4.  Redirected refund-related inquiries to automated services and did not  answer refund inquiries until 21 days after a tax return was filed  electronically or 6 weeks after a return was filed by paper (unless the  automated service directed the taxpayer to contact IRS).  5.  Limited access to the Practitioner Priority Service line to only those  practitioners working tax account issues.  6.  Limited live assistance and redirected requests for domestic employer  identification numbers to IRS\u2019s online tool.\nFiscal year 2015 service changes:  1.  Redesigned notices to clearly state why the notice was issued; if a  response is required; what action, if any, is required; and inform  taxpayers about online resources and self-service tools as an  alternative to calling or writing the IRS.  2.  Expanded use of the Oral Statement Authority tool to reduce the  amount of written correspondence to resolve penalty relief requests.   3.  Directed taxpayers who meet the Online Payment Agreement  qualifications to use a tool online (and at kiosks where available) to  apply for and set up installment payment agreements instead of  calling or visiting IRS.  4.  Reduced the volume of IRS products at walk-in sites and community  outlets, including forms, instructions, and publications that are  available online at IRS.gov, and encouraged taxpayers to use  available online sources.  5.  Reduced the number of walk-in sites accepting payments by cash and  more heavily promoted electronic payment options, such as IRS  Direct Pay, as an alternative to such payments made at a walk-in site  or by mail.\n\nAppendix III: Appropriated Resources, User Fees, and Other Resources for IRS Taxpayer Services, Fiscal Years (FY) 2010 through 2015\n\n\tResources Available for Obligation New Appropriated Resources Pre-Filing Taxpayer Assistance and Education\n\nAppendix IV: IRS Experienced Substantial Decreases in Levels of Service and Increased Average Wait Times among Many IRS Telephone Lines since Fiscal Year 2010\n\nIRS changed the name of the product line from \"Identity theft\" in May 2013.  IRS merged the previous International and International-Employer Identification Number lines to this  combined product line on October 1, 2012.\n\n\tAverage wait times (in minutes)\n\nIRS changed the name of the product line from \"Identity theft\" in May 2013.\n\nAppendix V: Receipts and Closures Changed for Selected Categories of Taxpayer Correspondence since Fiscal Year 2010, While Overage Rates for Most Categories Increased\n\nAppendix VI: Use of IRS Website and Online Services Generally Increased since Fiscal Year 2010\n\nAppendix VII: Services Offered at IRS Walk- in and Volunteer Sites, Fiscal Years (FY) 2010 through 2015\n\nAppendix VIII: Executive Orders, Presidential Memorandums, and Office of Management and Budget Guidance Outlining Required Agency Actions on Customer Service\n\nExecutive orders require agencies to take steps to strengthen customer  service and presidential memorandums. Office of Management and  Budget (OMB) guidance describe a number of actions agencies can take  to improve their customer service. In our previous reports on the IRS filing  season, we have described these requirements at length and emphasized  how important it is for IRS to take those actions to ensure it is providing  the best taxpayer service possible while informing Congress about  resources needed to improve the level of service provided to taxpayers.\nExecutive Order 12862, Setting Customer Service Standards, was  issued in September 1993 and requires that all executive departments  and agencies that \u201cprovide significant services directly to the public  shall provide those services in a manner that seeks to meet the  customer service standard established\u201d which is \u201cequal to the best in  business.\u201d A related presidential memorandum, issued in March  1995, also notes that customer service standards should reflect  customer views, and an OMB memorandum issued in March 2015  reemphasizes that agencies \u201cmust keep pace with the public's  expectations and transform its customer services by regularly  soliciting and acting on customer feedback, streamlining processes,  and delivering consistent quality across customer service channels.\u201d  In addition, we have reported that performance data should be used  to identify and analyze the gap between an organization\u2019s actual  performance and desired outcomes, including by setting performance  benchmarks to compare an organization with private organizations  that are thought to be the best in their field.\nExecutive Order 13571, Streamlining Service Delivery and Improving  Customer Service, was issued in April 2011 to strengthen customer  service and required agencies to develop and publish a customer  service plan, in consultation with OMB.\nWe identified other memorandums and guidance to agencies OMB  has issued since 1995 that describe a number of actions to improve  customer service, including setting, communicating, and using  customer service standards. For instance, in July 2014, to help  agency leadership focus on this issue, OMB issued guidance that  agencies include additional customer service information with their  fiscal year 2016 budget submissions.\n\nAppendix IX: Internal Revenue Service\u2019s Method for Processing Individual Tax Returns Is Complex\n\nThe Internal Revenue Service\u2019s (IRS) method for processing returns is a  complex operation because multiple units are involved. Figure 9  illustrates the numerous steps IRS goes through to process both returns  and correct errors. Electronic returns move quickly to processing once  IRS receives them while paper returns must first go through multiple  additional steps. When returns are processed, IRS checks for errors and  quickly corrects those that it can and notifies the taxpayer of missing  documents when it cannot, such as a missing form or information return.  In certain instances, after IRS has tried to post the return to the taxpayer\u2019s  account, it identifies that certain returns cannot post, such as identity theft  returns, and attempts to resolve these unpostable returns.\n\nAppendix X: Open Filing Season-Related Matters for Congress and Recommendations to the Internal Revenue Service\n\nThe following tables present our prior matters for Congress and  recommendations to the Internal Revenue Service (IRS) related to IRS\u2019s  filing season operations that had not been implemented as of October 20,  2015. The most recent information available on the status of matters and  recommendations for each GAO report listed in the tables below may be  found by clicking on the web link for each report.\n\nAppendix XI: Comments from the Department of the Treasury\n\nAppendix XII: Comments from the Internal Revenue Service\n\nAppendix XIII: GAO Contact and Staff Acknowledgments\n\n\tContact\n\n\tStaff Acknowledgments\n\nIn addition to the contact named above, Joanna Stamatiades, Assistant  Director, Erin Saunders Rath, Analyst-in-Charge, Lyle Brittain, Jehan  Chase, James Cook, Robert Gebhart, Shelby Kain, Kirsten B. Lauber,  Donna Miller, Mark Ryan, and Ardith Spence made key contributions to  this report.","output":"Why GAO Did This Study\n\nDuring tax filing season, IRS processes tax returns, issues refunds, and provides telephone, correspondence, online, and face-to-face services. GAO has reported that in recent years IRS has absorbed significant budget cuts and struggled to provide quality service. GAO was asked to report on the results of IRS's performance during the 2015 filing season. For this report, GAO assessed IRS's taxpayer service and individual income tax return processing. GAO also identified opportunities to streamline services and processes, among other issues.\nGAO analyzed IRS documents and data, and observed operations at IRS processing and telephone sites. GAO compared IRS performance to prior years and its actions to federal standards for evaluating performance. GAO also interviewed IRS officials and external stakeholders, and conducted discussion groups with IRS frontline staff and managers.\n\nWhat GAO Found\n\nThe Internal Revenue Service (IRS) provided the lowest level of telephone service during fiscal year 2015 compared to prior years, with only 38 percent of callers who wanted to speak with an IRS assistor able to reach one. This lower level of service occurred despite lower demand from callers seeking live assistance, which has fallen by 6 percent since 2010 to about 51 million callers in 2015. Over the same period, average wait times have almost tripled to over 30 minutes. IRS also struggled to answer correspondence in a timely manner and assistors increasingly either failed to send required correspondence to taxpayers or included inaccurate information in correspondence sent. IRS has taken steps to remind assistors to send correspondence, but does not have adequate controls to ensure that they send accurate correspondence before closing cases. GAO also found that the Department of the Treasury (Treasury) does not include correspondence performance goals in its performance plan, and therefore, does not have a complete set of measures to assess performance. The decline in service has coincided with a 10 percent reduction in IRS's annual appropriations, as well as resource allocation decisions by IRS to meet statutory responsibilities, such as implementing tax law changes and supporting information technology infrastructure.\nMore importantly, GAO found that Treasury and IRS have neither developed nor have any plans to develop a comprehensive customer service strategy to define appropriate service levels and benchmark to the best in business or customer expectations as GAO has previously recommended. Without such a strategy, Treasury and IRS can neither measure nor effectively communicate to Congress the types and levels of customer service taxpayers should expect, and the resources needed to reach those levels. Similarly, while IRS officials and stakeholders reported few problems with processing individual tax returns, GAO identified some inefficiencies related to tax processing, such as premature correspondence with taxpayers and inadequate training for frontline staff. These inefficiencies warrant further evaluation to determine if additional improvements are needed.\n\nWhat GAO Recommends\n\nCongress should consider requiring Treasury to develop a comprehensive customer service strategy in consultation with IRS. Treasury should update its performance plan to include goals for correspondence. IRS should assess the feasibility of a control to require assistors to send out required correspondence and evaluate return processing operations to identify inefficiencies.\nTreasury neither agreed nor disagreed with GAO's recommendation to update its performance plan but said it would coordinate with IRS. IRS agreed with GAO's two other recommendations."}
{"id":"crs_R44557","pid":"crs_R44557_0","input":"\tIntroduction\n\nThe Fair Housing Act was enacted as Title VIII of the Civil Rights Act of 1968 (P.L. 90-284). As initially enacted, the Fair Housing Act prohibited discrimination in the sale, rental, or financing of housing based on race, color, religion, and national origin. In 1974, Congress added sex as a protected category (the Housing and Community Development Act, P.L. 93-383 ), and in 1988 it added familial status and handicap (the Fair Housing Amendments Act, P.L. 100-430 ). The Fair Housing Act also prohibits retaliation when individuals attempt to exercise their rights (or assist others in exercising their rights) under the law.\nThis report discusses the Fair Housing Act from the perspective of the activities undertaken and programs administered by the Department of Housing and Urban Development (HUD) and its Office of Fair Housing and Equal Opportunity (FHEO). For information about legal aspects of the Fair Housing Act, such as types of discrimination, exceptions to the law, and discussion of court precedent, see CRS Report 95-710, The Fair Housing Act (FHA): A Legal Overview . \nHUD and FHEO play a role in enforcing the Fair Housing Act by receiving, investigating, and making determinations regarding complaints of Fair Housing Act violations. FHEO also oversees federal funding to state, local, and nonprofit organizations that investigate fair housing complaints based on federal, state, or local laws through the Fair Housing Assistance Program and Fair Housing Initiatives Program. \nThe Fair Housing Act also requires that HUD affirmatively further fair housing. While not defined in statute, affirmatively furthering fair housing has been found by courts to mean doing more than simply refraining from discrimination, and working to end discrimination and segregation. In July 2015, HUD released new regulations that govern how certain recipients of HUD funding (those receiving Community Planning and Development formula grants and Public Housing Authorities) must affirmatively further fair housing. However, as of the date of this report, HUD had delayed implementation of new regulations. \nAdditionally, HUD and FHEO have taken steps to protect against discrimination not explicitly directed against members of classes protected under the Fair Housing Act\u2014issuing regulations to prevent discrimination in HUD programs based on sexual orientation and gender identity, and providing guidance to prevent discrimination that may arise from criminal background checks, nuisance ordinances, and failure to provide housing to those who do not speak English. \nAfter a brief summary of the Fair Housing Act, this report discusses each of these Fair Housing activities, as well as two other initiatives administered by FHEO, Limited English Proficiency and Section 3, the latter of which provides economic opportunities for low- and very low-income persons.\n\n\tA Brief Overview of the Fair Housing Act\n\nThe Fair Housing Act protects specified groups from discrimination in obtaining and maintaining housing. The act applies to the rental or sale of dwelling units with exceptions for single-family homes (as long as the owner does not own more than three single-family homes) and dwellings with up to four units where one is owner-occupied. Discrimination based on the following characteristics is prohibited under the act:\nRace Color Religion\u2014The statute provides an exemption for religious organizations to rent or sell property they own or operate to members of the same religion (as long as membership is not restricted based on race, color, or national origin). National origin Sex\u2014Courts have found discrimination based on sex to include sexual harassment, and HUD regulations establish standards for quid pro quo and hostile environment sexual harassment that violates the Fair Housing Act. However, sex does not expressly include sexual orientation. Note, however, that discrimination based on nonconformity with gender stereotypes may be covered by the Fair Housing Act as discrimination based on sex. For more information, see CRS Report 95-710, The Fair Housing Act (FHA): A Legal Overview , by David H. Carpenter. Familial status\u2014The statute defines familial status to mean parents or others having custody of one or more children under age 18. Familial status discrimination does not apply to housing dedicated to older persons. Handicap \u2014The statute defines handicap as having a physical or mental impairment that substantially limits one or more major life activities, having a record of such impairment, or being regarded as having such an impairment. Regulations provide lists of conditions that may constitute physical or mental impairments. Major life activities means \"functions such as caring for one's self, performing manual tasks, walking, seeing, hearing, speaking, breathing, learning and working.\" \nNote that states and localities may have fair housing laws with broader protections than those encompassed in the federal Fair Housing Act, including such protected classes as age, sexual orientation, or source of income (prohibiting discrimination against those relying on government subsidies to pay for housing).\nThe Fair Housing Act protects individuals in the covered classes from discrimination in a range of activities involving housing. Some of the specific types of activities that are prohibited include the following: \nRefusing to rent or sell, refusing to negotiate for a rental or sale, or otherwise making a dwelling unavailable based on protected class. Discriminating in the terms, conditions, or privileges of sale or rental or in the services and facilities provided in connection with a sale or rental. Making, printing, or publishing notices, statements, or advertisements that indicate preference, limitation, or discrimination in connection with a sale or rental based on protected class. Representing that a dwelling is not available for inspection, sale, or rental based on protected class. Inducing, for profit, someone to sell or rent based on the representation that members of a protected class are moving to the neighborhood (sometimes referred to as blockbusting). Refusing to allow reasonable modifications or reasonable accommodations for persons with a disability. Reasonable modifications involve physical changes to the property while reasonable accommodations involve changes in rules, policies, practices, or services to accommodate disabilities. Discriminating in \"residential real estate related transactions,\" including the provision of loans and selling, brokering, or appraising property. Retaliating (i.e., coercing, intimidating, threatening, or interfering) against anyone attempting to exercise rights under the Fair Housing Act.\n\n\tHUD's Involvement in Enforcement of the Fair Housing Act\n\nHUD, together with state and local fair housing agencies and private fair housing organizations, investigates fair housing complaints. HUD receives complaints from individuals who believe they have been subject to discrimination or are about to experience discrimination. If the discrimination takes place in a state or locality with its own similar fair housing enforcement agency, sometimes referred to as a Fair Housing Assistance Program (FHAP) agency, HUD must refer the complaint to that agency. (See the \" Fair Housing Assistance Program (FHAP) \" section of this report for more information about state and local agencies.) In addition, if a complaint involves a challenge to zoning or land use laws, then HUD must refer the case to the Department of Justice (DOJ). HUD also refers complaints with possible criminal violations or patterns or practices of discrimination to DOJ.\nOnce an individual has filed a complaint with HUD, or HUD has filed a complaint on its own initiative, a notice is served on the party alleged to have discriminated. That party, in turn, has the opportunity to file a response to the complaint. HUD investigates complaints to determine if there is reasonable cause to believe a discriminatory practice has occurred or is about to occur. While an investigation is ongoing, HUD may also engage in conciliation to try to reach an agreement between the parties. Conciliation requires voluntary participation of both parties. Relief can be sought both for the aggrieved party and for the public interest. If parties do not reach an agreement, then HUD determines whether there is reasonable cause to believe discrimination occurred or was about to occur. \nNo Reasonable Cause: If HUD finds no reasonable cause to believe that discrimination occurred, then it dismisses the complaint. While not part of the statutory process, HUD may allow the person submitting the complaint to ask for reconsideration of the denial. Reasonable Cause: If HUD finds reasonable cause to believe that discrimination occurred, it issues a charge\u2014a written statement of facts on which the determination of reasonable cause is based. Either party may request that the case be heard in court, but if neither party makes this election, then the case is heard before an administrative law judge. If the case goes to federal court, then HUD transfers the case to DOJ.\nAggrieved parties may seek actual monetary damages. The law also allows an administrative law judge to impose a civil penalty \"to vindicate the public interest\" (amounts vary based on whether there have been previous infractions) and to order injunctive relief.\nIf an individual withdraws a complaint, no longer cooperates, or cannot be reached for follow-up, then HUD closes the complaint as an administrative closure. \nIn FY2016, there were 1,366 complaints filed with HUD. Of those, 2.5% led to HUD issuing a charge, 35.8% were settled through conciliation, and 37.7% resulted in a finding of no reasonable cause. The remainder of complaints either had an administrative closure (where complainants did not continue to pursue their complaints), were withdrawn with a resolution, or were referred to DOJ. For more information on complaints, see \" HUD and FHAP Agency Complaint and Enforcement Data .\"\n\n\tHUD Funding for State, Local, and Private Nonprofit Fair Housing Programs\n\nHUD oversees two programs that promote fair housing at the state and local level: the Fair Housing Assistance Program (FHAP) and the Fair Housing Initiatives Program (FHIP). FHAP funds state and local fair housing agencies, and FHIP funds eligible entities that largely include private nonprofit organizations. These recipients in turn supplement HUD's efforts to promote fair housing, detect discrimination, investigate complaints, and enforce the fair housing law. The following subsections describe FHAP and FHIP and provide funding levels for the programs.\n\n\t\tFair Housing Assistance Program (FHAP)\n\nFHAP funds state and local agencies that HUD certifies as having their own laws, procedures, and remedies that are substantially equivalent to the federal Fair Housing Act. The Fair Housing statute requires HUD to refer complaints that violate state and local fair housing laws to the certified agencies responsible for enforcing them (in jurisdictions that have such agencies). At the time of the enactment of the Fair Housing Act, multiple states and local jurisdictions had enacted their own laws and established agencies for their enforcement.\nFunding to assist state and local agencies in enforcing fair housing laws was first provided in the FY1980 Appropriations Act for HUD ( P.L. 96-103 ) after a budget request from the Carter Administration. The FY1980 budget justifications discussed limitations in the ability of states to handle fair housing complaints referred from HUD, and that in many cases complaints had to be sent back to HUD for processing. The President's budget proposed funding for financial and technical assistance to assist states in handling fair housing complaints, with first-year funding provided for capacity building, and subsequent years' funding based on the number of complaints processed by each agency. Funding continues to be based on the number of complaints handled by FHAP agencies. Congress followed the Administration's FY1980 request and appropriated $3.7 million for the program. The appropriation initially supported 31 state and local agencies. At the end of FY2016, there were 85 state and local agencies, which represents a gradual reduction over recent years as agencies withdrew from the program; in FY2009, 113 FHAP agencies were funded. \nActivities for which FHAP agencies receive funding include capacity building, processing complaints, administrative costs, training, and special enforcement efforts. When a FHAP agency receives a fair housing complaint, it goes through much the same process as HUD. The agency conducts an investigation, and, as the investigation is ongoing, works on conciliation with the parties. In FY2016, there were 7,019 complaints filed with FHAP agencies around the country. Of these, 5.3% led to FHAP agencies finding reasonable cause to believe that discrimination occurred, 28.9% were settled through conciliation, and 50.7% resulted in a finding of no reasonable cause. The remainder of complaints had an administrative closure or were withdrawn with a resolution. For more information on complaints, see \" HUD and FHAP Agency Complaint and Enforcement Data .\"\n\n\t\tFair Housing Initiatives Program (FHIP)\n\nThe Fair Housing Initiatives Program (FHIP) was created as part of the Housing and Community Development Act of 1987 ( P.L. 100-242 ) as a demonstration program and was made permanent in 1992 ( P.L. 102-550 ). Through FHIP, HUD enters into contracts or awards competitive grants to eligible entities\u2014including state and local governments, nonprofit organizations, or other public or private entities, including FHAP agencies\u2014to participate in activities resulting in enforcement of federal, state, or local fair housing laws, and for education and outreach. The majority of FHIP grantees are private nonprofit organizations.\nFHIP was added to the Fair Housing law in recognition of the fact that additional assistance was needed to detect fair housing violations and enforce the law. In particular, FHIP authorized funding for organizations to conduct testing whereby matched pairs of individuals, one with protected characteristics and the other without, both attempt to obtain housing from the same providers. \nHUD funds three activities that are provided for under the statute: \nPrivate Enforcement Initiative: Provides funds for fair housing enforcement organizations to investigate violations of the federal Fair Housing Act and similar state and local laws, and to obtain enforcement of the laws. Fair housing enforcement organizations are private nonprofit organizations that receive and investigate complaints about fair housing, test fair housing compliance, and bring enforcement actions for violations. Organizations may receive Private Enforcement Initiative funding if they have at least one year of experience participating in these activities. Education and Outreach Initiative: The statute provides for awards to fair housing enforcement organizations, private nonprofit organizations, public entities, and state or local FHAP agencies to be used for national, regional, local, and community-based education and outreach programs. Such activities include developing brochures, advertisements, videos, presentations, and training materials. Fair Housing Organization Initiative: Provides funding for existing fair housing enforcement organizations or new organizations to build their capacity to provide fair housing enforcement. \nOrganizations that receive FHIP funding investigate fair housing complaints brought to them by individuals and also initiate their own investigations. If there is evidence that discrimination occurred, then FHIP agencies can help individuals file complaints with HUD or a state or local FHAP agency, or bring a private action in court. \n\n\t\tFunding for FHAP and FHIP\n\nIn FY2018, appropriations were approximately $24 million for FHAP and almost $39 million for FHIP. These are reductions from peak funding, which occurred between FY2010 and FY2012. In FY2010, FHAP funding reached $29 million and in FY2012 FHIP funding was nearly $43 million. Prior to FY2010, funding for FHIP was significantly lower than what it has been since that time. In FY2010, funding for FHIP jumped from almost $28 million, at that point the most that had ever been appropriated for the program, to $42 million. The President's budget for FY2010 proposed increased funding for a mortgage fraud prevention initiative, through FHIP. And while Congress appropriated additional funds for FHIP, it was not done as a separate set-aside for mortgage fraud prevention. The same year, funding for FHAP increased by nearly $4 million. While funding for FHAP has fallen to its previous levels, funding for FHIP has remained well above the FY2009 level, ranging between $39 million and $42 million. Figure 1 , below, shows these funding trends. For exact amounts appropriated since FY1996, see the Appendix .\n\n\tHUD and FHAP Agency Complaint and Enforcement Data\n\nHUD reports the number of fair housing complaints it receives as well as those received by FHAP agencies. In recent years, the number of complaints filed with both HUD and FHAP agencies has declined, from a high of 10,552 in FY2008 to 8,385 in FY2016, the most recent year in which data are available. During this time period, the number of FHAP agencies decreased from 108 operating at the end of FY2008 to 85 at the end of FY2016. In addition, complaints received by private fair housing organizations (those not receiving FHAP funding), as reported by the National Fair Housing Alliance, decreased slightly between 2008 and 2015, with about 500 fewer requests in 2015 than the 20,173 reported in 2008. See Figure 2 for HUD and FHAP agency complaints between FY2005 and FY2016.\nComplaints filed with HUD and FHAP agencies rarely result in charges against housing providers. In fact, in many cases there is a finding of no reasonable cause to pursue the complaint\u201438% of complaints for HUD and 51% for FHAP agencies in FY2016. HUD conciliated and settled 36% of cases in FY2016, with FHAP agencies doing so for 29% of cases. Only 3% of complaints to HUD and 5% of those to FHAP agencies resulted in a charge being filed in FY2016. Approximately a quarter of complaints for HUD were either administrative closures, meaning generally that complainants did not continue to pursue their complaints, or were withdrawn after some kind of resolution. For FHAP agencies, 15% of cases were either administrative closures or withdrawn with resolution. See Figure 3 for HUD and FHAP agency complaint dispositions in FY2016.\nRecent years have brought a change in the types of complaints received by HUD and FHAP agencies. Approximately 10 years ago, in FY2005, the percentages of complaints based on race and disability were nearly equal: 38% and 41%, respectively. However, by FY2016 the percentage of complaints based on disability increased to 59%, and race declined to 26%. (Note that in calculating complaint percentages HUD takes into account the fact that one case may allege multiple bases for discrimination. As a result, the sum of percentages for all types of discrimination exceeds 100%.) Other protected categories\u2014familial status, national origin, sex, religion, and color\u2014have remained at about the same levels during the same time period. HUD also reports the number of complaints based on retaliation, which have increased from approximately 5% in FY2005 to 9% in FY2016. See Figure 4 for complaints filed by protected class in FY2016.\nThe high percentage of complaints based on disability may in part have to do with additional protections for people with disabilities. Unlike other protected statuses, the Fair Housing Act imposes affirmative duties on housing providers to make \"reasonable accommodations\" for individuals with disabilities. Under the law, it is discriminatory to refuse to allow residents with disabilities to make physical changes to the premises, at their own expense, in order to afford them full enjoyment of the premises. Examples of reasonable accommodations include changes to a unit such as widening doorways, installing a ramp or grab bars, or lowering cabinets. In addition, the law gives residents with disabilities the right to request \"reasonable accommodations\" in the rules, policies, practices, or services that may ordinarily apply to housing residents. It is considered discrimination under the Fair Housing Act to refuse to make a reasonable accommodation in order to give residents with disabilities an equal opportunity to use and enjoy their dwelling unit. Examples of reasonable accommodations include making parking spaces available to residents with disabilities or allowing assistance animals in a property that does not otherwise allow pets. An accommodation is not considered reasonable if it imposes an undue financial or administrative burden, or if it fundamentally alters the nature of the housing provider's operations. In FY2016, the failure to make a reasonable accommodation was the second-most frequently raised issue in complaints, representing 40% of HUD and FHAP complaints raised in cases filed (after discriminatory terms, conditions, privileges, services, and facilities in the rental or sale of property).\n\n\tOther HUD Efforts to Prevent Discrimination in Housing\n\nIn recent years, HUD has issued regulations and guidance to protect individuals from discrimination that may not be explicitly directed against protected classes under the Fair Housing Act. In one case, HUD used its authority to prevent discrimination in the programs it administers by issuing regulations prohibiting discrimination based on sexual orientation and gender identity. HUD has also released guidance to inform housing providers and localities about policies that may seem facially neutral but could have discriminatory effects in violation of the Fair Housing Act. These include policies regarding criminal background checks, local nuisance ordinances that prohibit certain behaviors, and treatment of people with limited English proficiency. \nThe following subsections describe HUD's regulations regarding equal access to housing as well as several guidance documents HUD released during 2016. \n\n\t\tHUD's Equal Access to Housing Regulations\n\nThe Fair Housing Act does not expressly protect individuals from discrimination based on sexual orientation or gender identity. (Note, however, that discrimination based on nonconformity with gender stereotypes may be covered by the Fair Housing Act as discrimination based on sex.) However, HUD, pursuant to its charge to ensure equal access to its programs, and to provide \"decent housing and a suitable living environment for every American family,\" published a final rule in 2012 providing for equal access to HUD housing programs regardless of sexual orientation or gender identity. The regulations promulgated by the rule apply to all HUD housing programs, including loan programs. Housing in these programs must be made available without regard to actual or perceived sexual orientation, gender identity, or marital status. In addition, the rule provided that property owners, program administrators, and lenders may not inquire about sexual orientation or gender identity of an applicant for or occupant of HUD-insured or HUD-assisted housing.\nThe 2012 regulations contained an exception to the prohibition on inquiries into sex when an individual is an applicant or occupant of temporary emergency shelter where there may be shared bedrooms or bathrooms or to determine the number of bedrooms to which a family is entitled. However, the exception resulted in a number of commenters to the proposed rule expressing concern about transgender individuals' ability to gain access to single-sex shelters in accordance with their gender identity. While HUD noted that it was not mandating a policy on placement of transgender persons, it said it would monitor how programs operate and issue additional guidance if necessary.\nIn February 2015, based on this monitoring, HUD followed up by issuing a notice governing Community Planning and Development (CPD) programs\u2014Community Development Block Grants, HOME Investment Partnerships (HOME), Housing Opportunities for Persons with AIDS (HOPWA), Emergency Solutions Grants (ESG), and the Continuum of Care program. In the notice, HUD clarified that it expected placement in single-sex shelters to occur in accordance with an individual's gender identity. HUD followed this notice, in November 2015, with a proposed rule that would apply to HUD CPD programs. A final rule was released on September 21, 2016, and was effective one month later. \nThe final rule requires that placement in facilities with shared sleeping and\/or bath accommodations occur in conformance with a person's gender identity. In addition, the final rule removed the general prohibition in the 2012 regulation on asking questions about sexual orientation and gender identity so that providers can ask questions to ensure they are complying with the rule. However, the rule provides that individuals shall not be asked \"intrusive\" questions or \"asked to provide anatomical information or documentary, physical, or medical evidence of the individual's gender identity.\" The final rule also updated the definition of gender identity as it applies to all HUD programs and defined \"perceived\" gender identity. \n\n\t\tHUD Guidance\n\nIn 2016, HUD released several guidance documents that inform housing providers and local communities about policies and practices that may violate the Fair Housing Act. The guidance addresses how use of criminal background checks, nuisance ordinances, and treatment of people with limited English proficiency can potentially result in discrimination against members of protected classes. The guidance discusses situations where discrimination could occur and the balancing test used to determine if policies or practices have a discriminatory effect.\n\n\t\t\tUse of Criminal Background Checks\n\nIn April 2016, HUD's Office of General Counsel released guidance applying the Fair Housing Act to use of criminal background checks in screening prospective tenants for housing. Unlike HUD's regulations regarding discrimination based on sexual orientation and gender identity, the guidance is directed at all housing providers subject to the Fair Housing Act, not just HUD programs. While individuals with a record of arrests or convictions are not protected under the Fair Housing Act, HUD's guidance noted that African American and Hispanic individuals are disproportionately represented in the criminal justice system, and that screening for criminal records could have discriminatory effect or disparate impact based on race or national origin, which may be prohibited under the act. For more information about discriminatory effects, also called disparate impact, see CRS Report R44203, Disparate Impact Claims Under the Fair Housing Act , by David H. Carpenter.\nHUD's guidance on this issue states that, in screening for criminal history (including arrest records), \"arbitrary and overbroad criminal history-related bans are likely to lack a legally sufficient justification.\" If a housing provider does take criminal history into account, HUD's guidance states that the policy should be tailored to serve a \"substantial, legitimate, nondiscriminatory interest\" and consider the particulars of an individual's circumstances such as type of crime and amount of time that has passed since a conviction occurred.\n\n\t\t\tNuisance Ordinances and Victims of Crime, Including Domestic Violence\n\nIn September 2016, HUD released guidance about application of the Fair Housing Act to nuisance ordinances that may result in victims of crime, particularly domestic violence, losing their housing. So-called nuisance ordinances, enacted at the local level, require property owners to abate\u2014to lessen or remove\u2014a nuisance associated with their property. The types of activities categorized as nuisances depend on jurisdiction, and may have to do with upkeep of the property itself, but they can also include disruptive behavior, criminal activity, or calls to law enforcement that exceed a certain minimum number. Similarly, lease provisions may consider calls to law enforcement a lease violation, potentially resulting in eviction. As described in the HUD guidance, calls from victims of domestic violence to law enforcement can result in evictions after landlords have been cited for violating nuisance ordinances for exceeding a minimum number of calls to law enforcement. \nThe HUD guidance points out that a nuisance ordinance could have a discriminatory effect, potentially violating the Fair Housing Act, if it is enforced disproportionately against victims of domestic violence resulting in discrimination based on sex. In such a case, the burden would shift to the government enforcing the nuisance ordinance to show that the nuisance ordinance is necessary to achieve a substantial, legitimate, and nondiscriminatory interest, and that there is no less-discriminatory alternative.\n\n\t\t\tPeople with Limited English Proficiency\n\nAnother area of potential discrimination where HUD released guidance in 2016 is limited English proficiency, with guidance released just days after that regarding nuisance ordinances. While the Fair Housing Act does not prohibit discrimination based on the language someone speaks, it is possible that this practice could have a discriminatory effect based on race or national origin. Language-related restrictions could include requiring that tenants speak English or turning away tenants who do not speak English, particularly if low-cost translation services are available.\nIf someone were to challenge language-related restrictions, the same balancing test described in the other HUD guidance would apply. If a policy or behavior is shown to have a discriminatory effect, then the burden shifts to the housing provider to show that the practice is necessary to serve a substantial, legitimate, nondiscriminatory interest, and that no less-discriminatory alternative is available.\n\n\tRequirement for HUD and Grant Recipients to Affirmatively Further Fair Housing (AFFH)\n\nIn addition to prohibiting discrimination, the Fair Housing Act, since its inception, has required HUD and other federal agencies that administer programs related to housing and urban development to administer their programs in a way that affirmatively furthers fair housing. \nWhat \"affirmatively further fair housing\" (AFFH) means is not defined in statute. Various courts, in decisions regarding HUD's obligations, have concluded that it means more than refraining from discrimination. For example, a federal court decision in 1973 interpreting the AFFH section of the Fair Housing Act regarding residents of public housing stated \nAction must be taken to fulfill, as much as possible, the goal of open, integrated residential housing patterns and to prevent the increase of segregation, in ghettos, of racial groups whose lack of opportunities the Act was designed to combat. \nA 1987 federal appellate court decision looked at the legislative history of the Fair Housing Act, saying that the \"law's supporters saw the ending of discrimination as a means toward truly opening the nation's housing stock to persons of every race and creed.\" And with that goal in mind, the court stated\nThis broader goal suggests an intent that HUD do more than simply not discriminate itself; it reflects the desire to have HUD use its grant programs to assist in ending discrimination and segregation, to the point where the supply of genuinely open housing increases.\nIn addition to HUD, the AFFH requirement has also been applied, via statute, regulation, and competitive grants, to recipients of HUD funding. The requirement applies to communities, states, and insular areas that receive formula funds through the Community Development Block Grant (CDBG), HOME Investment Partnerships, Housing Opportunities for Persons with AIDS (HOPWA), and Emergency Solutions Grants (ESG) programs, as well as to Public Housing Authorities (PHAs) that administer both Public Housing and Section 8 programs. Applicants for HUD's competitive grants are required to certify that they will affirmatively further fair housing as part of the grant application process.\n\n\t\tAFFH Process for Specific HUD Grantees\n\nFor a number of years, to fulfill the requirement of affirmatively furthering fair housing, HUD required that certain grantees go through a specific process called an Analysis of Impediments (AI). The grantees required to go through the process were communities that receive formula funding through the CDBG, HOME, HOPWA, and ESG programs, as well as PHAs. The jurisdictions receiving formula grants were to go through the AI process as part of the consolidated planning process that they participate in to receive the grants, and PHAs as part of their PHA plan.\nOn July 16, 2015, HUD issued a final rule changing the process through which these formula grantees and PHAs are to affirmatively further fair housing, a process called the Assessment of Fair Housing (AFH). The AFFH final rule was published two years after a proposed rule was released (on July 19, 2013) and received more than 1,000 comments. The rule has been controversial. While some commenters expressed support for the rule as a way to increase housing opportunity and attain the goals of the Fair Housing Act, others contended that it intrudes on the authority of local jurisdictions and constitutes social engineering. Other concerns about the rule included the potential cost of preparing AFHs, especially for small jurisdictions and PHAs; whether investment in racially and ethnically concentrated areas of poverty could still be prioritized; the fact that program participants may be unable to change the conditions affecting fair housing; and uncertainty about how HUD will enforce the rule. In Congress, there were amendments offered as part of both the FY2016 and FY2017 appropriations processes to prohibit funds appropriated by the HUD funding bill from being used to carry out the AFFH rule. (See \" Proposed Legislation to Prevent Implementation of the AFFH Rule .\") Finally, in May 2018, HUD indefinitely delayed implementation of the rule and directed communities to resume the AI process, the previous method of affirmatively furthering fair housing. (See \" HUD Decision to Delay Implementation of the AFFH Rule .\")\n\n\t\t\tThe Old Process: Analysis of Impediments\n\nPrior to release of the final AFFH rule, the regulations governing both CDBG recipients and the consolidated plan process, which applies to HOME, HOPWA, ESG, and CDBG recipients, provided that in order to satisfy the requirement to affirmatively further fair housing, recipient communities must conduct an analysis of impediments: \nthe certification that the grantee will affirmatively further fair housing shall specifically require the grantee to assume the responsibility of fair housing planning by conducting an analysis to identify impediments to fair housing choice within its jurisdiction, taking appropriate actions to overcome the effects of any impediments identified through that analysis, and maintaining records reflecting the analysis and actions in this regard. \nRegulations governing PHA annual plans had similar language regarding the identification of impediments to fair housing and addressing them. Through a report issued in 1996, the Fair Housing Planning Guide, HUD defined what it meant to affirmatively further fair housing and gave greater guidance surrounding the AI process for CDBG, HOME, HOPWA, and ESG recipients. Pursuant to the HUD guidance, program participants were to identify impediments to fair housing within their communities and suggest steps to address those impediments. \nThe guide defined impediments to fair housing choice as \"Any actions, omissions, or decisions taken because of race, color, religion, sex, disability, familial status, or national origin which restrict housing choices or the availability of housing choices,\" as well as those having the effect of restricting housing choice and availability. Communities were to identify impediments using local information and data. The guide also suggested steps a recipient community could take to address impediments. Recipients were to keep written records of their analysis and actions taken as a result of the analysis.\nHUD expected jurisdictions to use data in their analysis, but did not provide the data. HUD encouraged jurisdictions to communicate the findings to government officials, policymakers, community groups, and the general public, but there was no public process required for AIs, and results of an AI were not required to be made public. There was also no requirement that materials be submitted to HUD. Recipient communities were to submit a summary of the AI and any accomplishments with the consolidated plan performance report, and to complete or update an AI every three to five years (depending on when the consolidated plan was due).\nBoth HUD, in a report issued in 2009, and the Government Accountability Office, in a report issued in 2010, found weaknesses in the AI process. Both agencies requested AIs from a sample of jurisdictions. They found that AIs were outdated and that quality was uneven. GAO reported that among current AIs, many lacked timelines for accomplishing goals. A limitation identified by GAO as contributing to the problems was that regulations included very few requirements regarding AIs, with most procedures suggested in HUD guidance. GAO recommended that HUD issue a new regulation governing AFFH and include standards and a format for grantees to follow, require grantees to include time frames for implementing their recommended changes, and require grantees to submit their plans to HUD.\n\n\t\t\tThe New Rule: The Assessment of Fair Housing\n\nThe AFFH rule, for the first time, put in place detailed regulations that govern the process of affirmatively furthering fair housing. The rule applies to the same entities that had an obligation to affirmatively further fair housing previously: state and local governments and insular areas receiving CDBG, HOME, HOPWA, and ESG grants, and PHAs (collectively called \"program participants\"). However, the rule defines more specifically what affirmatively furthering fair housing means and provides for a new process called an Assessment of Fair Housing (AFH) instead of the AI. Further, HUD is to provide data for program participants to use in preparing their AFHs and is to publish tools that help program participants through the AFH process. In addition, because program participants must submit and have their AFHs approved by HUD, enforcement and results may be different.\nThis subsection describes how the AFFH rule is to operate.\n\n\t\t\t\tAssessment of Fair Housing Submission Deadlines\n\nThe requirements of the AFFH rule are to apply to program participants based on the three- or five-year cycle when their consolidated or PHA five-year plans are due. The year in which the first AFH is due pursuant to the rule varies, with local governments receiving CDBG grants greater than $500,000 required to submit an AFH as early as 2016, and other grantees and PHAs having later start dates. For example, small PHAs and local governments with CDBG grants at or less than $500,000 are to submit AFHs based on their submission cycles beginning after January 1, 2019. However, submissions may be further delayed based on the availability of assessment tools and data for communities to use in compiling their AFHs. According to the AFFH rule, the deadline for submitting an AFH is to be at least nine months after publication of a final assessment tool. As of the date of this report, HUD had only released final assessment tools for local governments and PHAs, but data were not yet available for PHAs. As a result, only local governments were required to submit AFHs.\n\n\t\t\t\tThe Assessment of Fair Housing (AFH)\n\nThe AFFH rule defines \"affirmatively furthering fair housing\" as \ntaking meaningful actions, in addition to combating discrimination, that overcome patterns of segregation and foster inclusive communities free from barriers that restrict access to opportunity based on protected characteristics. Specifically, affirmatively furthering fair housing means taking meaningful actions that, taken together, address significant disparities in housing needs and in access to opportunity, replacing segregated living patterns with truly integrated and balanced living patterns, transforming racially and ethnically concentrated areas of poverty into areas of opportunity, and fostering and maintaining compliance with civil rights and fair housing laws. The duty to affirmatively further fair housing extends to all of a program participant's activities and programs relating to housing and urban development.\nPrior to the AFFH rule, the term had not been defined in regulation. Program participants are to comply with the AFFH requirement by completing an AFH.\nThe AFH has several steps that program participants are to take:\nSummarizing the extent to which fair housing actions have taken place in the jurisdiction (e.g., lawsuits, enforcements actions, settlements, judgments), an assessment of compliance with laws and regulations, and the jurisdiction's fair housing outreach and enforcement capacity. Identifying fair housing issues. These may fall into four categories: Segregation or lack of integration for any protected class. Segregation is measured using a dissimilarity index showing the extent to which the distribution of groups differs across Census tracts. Racially or ethnically concentrated areas of poverty . These are areas with a nonwhite population of 50% or more and a poverty rate that exceeds 40% or is three or more times the average tract poverty rate for the metropolitan\/micropolitan area, whichever threshold is lower. Significant disparities in access to opportunity for any protected class. There are five areas of opportunity that program participants are to evaluate: education, employment, transportation, low-poverty exposure, and environmentally healthy neighborhood opportunities. Disproportionate housing needs for any protected class. This includes being housing cost burdened, experiencing overcrowding, or living in substandard housing. Identifying factors that contribute to the fair housing issues and prioritizing them based on the extent to which they affect fair housing choice. The proposed and final assessment tools issued by HUD in the months following publication of the final rule listed descriptions of possible contributing factors for each of the four categories of fair housing issues. The list is lengthy and includes many possible factors such as lack of access to financial services, community opposition to affordable housing, lack of accessibility features in a neighborhood for people with disabilities, etc. Setting goals for overcoming the effects of contributing factors. Program participants are to include strategies and actions they will take to achieve their goals in their Consolidated and PHA Plans.\nThe rule provides that program participants are to conduct the analysis for the programs they administer, the jurisdiction, and the region. They are to ensure that members of the community have the opportunity to participate in the AFH by communicating in a way that reaches the broadest possible audience.\nUnder the rule, HUD is to provide data to help program participants identify fair housing issues, and an assessment tool that prompts program participants to think about issues and contributing factors and how to use HUD data to inform the process. \nHUD encouraged program participants to collaborate on an AFH. For example, PHAs located within a CDBG entitlement area can work with each other or together with the city\/county receiving CDBG funds. Two or more program participants that complete an AFH together are called \"joint participants.\" In addition, under the rule two or more joint participants may collaborate and submit a single AFH as long as at least two joint participants are consolidated plan participants (i.e., not consisting only of PHAs).\nAccording to the rule, HUD will not approve an AFH if it does not comply with fair housing or civil rights requirements, or if it is substantially incomplete. If HUD does not approve an AFH, it is to notify the program participants involved, explain why the AFH was not accepted, and provide guidance on how to comply. Ultimately, the rule provides that if a program participant does not have an accepted AFH, then HUD will disapprove their consolidated or PHA plan. In addition, program participants are required to certify that they will affirmatively further fair housing as part of their consolidated and PHA plans. HUD may challenge the validity of the certification based on a program participant's failure to meet affirmatively furthering fair housing requirements.\nWhile HUD is to review each AFH to make sure it includes required components, the rule does not indicate how HUD will evaluate goals set by program participants and progress toward those goals. In the comments accompanying the final rule, HUD stated that \"it is not HUD's intention to dictate to program participants the decisions that they make based on local conditions. As stated in the proposed rule, through this new AFH process, HUD is not mandating specific outcomes for the planning process.\" The process encourages accountability at the local level by making the process and AFH available to the public. \n\n\t\t\t\tAssessment Tool\n\nIn the months following the publication of the final AFFH rule, HUD issued final assessment tools for entitlement communities and PHAs, while tools for states and insular areas were in the comment period. The assessment tools must be used by program participants in completing the AFH, and are meant to help them work through the process. While there are different tools for each category of program participant, the content is similar. \nThe assessment tools provide instructions to program participants as they complete each portion of the AFH. For example, the assessment tools direct program participants how to access and use HUD data for determining whether fair housing issues exist (such as segregation and racially or ethnically concentrated areas of poverty) and prompt program participants for information about these issues. The assessment tools also contain comprehensive lists of possible contributing factors to fair housing issues, such as community opposition, lack of investment, zoning laws, location of affordable housing, etc. \n\n\t\tProposed Legislation to Prevent Implementation of the AFFH Rule\n\nSince the proposed AFFH rule was published, legislation has been introduced in Congress that would keep HUD from implementing the rule. In addition, floor amendments also seeking to stop implementation of the rule have been offered to appropriations measures. The following are examples from the 114 th and 115 th Congresses. \nVersions of the Local Zoning Decisions Protection Act have been introduced in both the 114 th and 115 th Congresses. In the 114 th Congress, S. 1909 would have prohibited federal funds from being used to administer, implement, or enforce the AFFH rule, and from being used to maintain a federal database containing information on community racial disparities or disparities in access to housing. Versions of the bill introduced in the 115 th Congress ( H.R. 482 and S. 103 ) include similar prohibitions, and would also require HUD to consult with officials from states, localities, and PHAs about furthering the purposes and policies of the Fair Housing Act and issue a report on its findings. The House amended its version of the FY2016 Departments of Transportation and Housing and Urban Development appropriations act ( H.Amdt. 399 to H.R. 2577 ) to prohibit funds appropriated by the bill from being used to carry out the AFFH rule. The provision was not included in the final FY2016 HUD appropriations law. When the Senate considered the FY2017 HUD funding bill (also H.R. 2577 ), an amendment was proposed that would have prohibited funds appropriated in the bill from being used to carry out the AFFH rule ( S.Amdt. 3897 ). The amendment was tabled. Instead, an amendment was adopted that would prevent HUD from using funds to direct grantees to make specific changes to their zoning laws as part of enforcing the AFFH rule ( S.Amdt. 3970 ). The language was included in the FY2017 and FY2018 appropriations acts.\n\n\t\tHUD Decision to Delay Implementation of the AFFH Rule\n\nOn January 5, 2018, approximately two and a half years after releasing the final AFFH rule, HUD issued a notice stating that it would extend the deadline for local governments receiving more than $500,000 in CDBG funding to submit their AFHs until after October 31, 2020. Under the rule, these local governments had begun submitting AFHs starting in 2016. (At the time of HUD's notice, these jurisdictions were the only ones required to submit AFHs.) Prior to HUD issuing the notice, 49 local governments had submitted AFHs, 17 of which were not initially approved. HUD reasoned that \"[b]ased on the initial AFH reviews, HUD believes that program participants need additional time and technical assistance to adjust to the new AFFH process and complete AFH submissions that can be accepted by HUD.\" The delay in the submission deadline meant that many local governments would not be required to submit AFHs until 2024 based on their consolidated plan submission schedules. \nFive months after HUD released its notice extending the deadline for local governments, on May 8, 2018, a group of organizations\u2014the National Fair Housing Alliance, the Texas Low Income Housing Information Service, and Texas Appleseed\u2014filed a complaint in federal court alleging that by delaying implementation of the AFFH rule, HUD had violated the Administrative Procedures Act. As of the date of this report, the case is pending in United States District Court for the District of Columbia. \nA few weeks after the court case was filed, on May 23, 2018, HUD issued three more notices. The effect of the notices is to suspend indefinitely the implementation of the AFFH rule and return to the AI process. The three notices did the following: (1) withdrew the January 5, 2018, notice that delayed implementation of the AFFH rule for local governments until after October 31, 2020; (2) withdrew the final assessment tool for local governments, which had been released on January 13, 2017; and (3) directed program participants that have not already submitted an AFH under the new AFFH rule to comply with the previous requirements, the Analysis of Impediments (AI). \nIn withdrawing the local government assessment tool, HUD delayed the AFH submission dates for those entities. This is because, as required by the AFFH rule, AFH submission dates are to be delayed to allow at least nine months between publication of the final assessment tool and the AFH due date. HUD states that it withdrew the assessment tool because it had identified \"significant deficiencies\" that made it \"unduly burdensome\" for program participants to use. The notice also contended that HUD does not have the personnel to provide technical assistance to all of the jurisdictions that would need to use the tool and complete an AFH. As a result, the notice provides that HUD will produce a \"more effective and less burdensome\" tool and that it will accept information and recommendations from the public on improving the tool. \nCurrently, no program participants are required to submit AFHs because submission dates are delayed until after final assessment tools are published and data are made available. HUD has directed program participants to submit AIs instead. Plaintiffs in the court case amended their complaint to account for HUD's notices issued on May 23, 2018.\n\n\tOther Requirements Overseen by HUD's Office of Fair Housing and Equal Opportunity\n\nIn addition to administering fair housing programs and enforcing the law, HUD's Office of Fair Housing and Equal Opportunity (FHEO) oversees the Section 3 requirement and HUD's compliance with limited English proficiency requirements. Section 3 requires certain recipients of HUD funds to make attempts to hire and train low-income persons to work on projects for which the recipients receive federal funding. Limited English proficiency (LEP) requirements are federal government-wide and are meant to ensure that LEP individuals have access to federal programs.\n\n\t\tSection 3, Economic Opportunities for Low- and Very Low-Income Persons\n\nSection 3 of the Housing and Urban Development Act of 1968 (P.L. 90-448, as amended) is meant to provide employment and training opportunities for low- and very low-income persons, particularly those residing in assisted housing. The law applies to Public and Indian Housing Authorities in their use of operating and capital funds, and to grant recipients of HUD housing and community development construction or rehabilitation funds that exceed $200,000, or the recipients' contractors with contracts exceeding $100,000.\nPublic and Indian Housing Authorities: The law requires that Public and Indian Housing Authorities and those they contract with \"make their best efforts\" to provide employment opportunities for low- and very low-income individuals in the projects that they undertake with HUD funding. Housing authorities are to prioritize, in this order, individuals living in the housing for which funds are used, those living in other HUD-assisted housing, participants in the Department of Labor program YouthBuild, and those living in the metropolitan area where the funds are used. In addition, housing authorities and their contractors are to make their best efforts to contract with businesses that provide economic opportunities for low- and very-low income individuals, using the same priorities for individuals who are employed by the businesses.\nOther HUD Funding Recipients: For entities that receive other HUD funding for housing construction or rehabilitation and community development projects, the HUD Secretary is to ensure that \"to the greatest extent feasible\" the fund recipients provide opportunities for training and employment related to the project to low- and very low-income residents in the metropolitan area. Priority is to be given to those residing in the service area of the project or neighborhood where it is located and to YouthBuild participants. The law also directs the Secretary to ensure, to the greatest extent feasible, that recipients of funds for these projects contract with businesses that provide economic opportunities for low- and very low-income residents. \nSection 3 does not apply if housing authorities or other fund recipients do not need to employ additional people to undertake a project. Fund recipients can demonstrate compliance with the \"greatest extent feasible\" requirement by meeting numerical goals set out in the regulations, but meeting these numerical goals is not required. When interim program regulations were last published for Section 3, in 1994, the appendix to the regulations included examples of efforts Section 3-covered entities could undertake for training and employment opportunities. On March 27, 2015, HUD released proposed Section 3 regulations to replace the interim regulations published in 1994. Among the changes in the proposed rule would be clarification of what it means to provide employment and training opportunities \"to the greatest extent feasible.\" Under the proposed rule, covered entities would either meet numerical goals or provide written justifications explaining what actions were taken and impediments encountered in trying to meet the goal.\n\n\t\tLimited English Proficiency\n\nFHEO oversees HUD's efforts to ensure that persons with limited English proficiency have access to HUD programs. Title VI of the Civil Rights Act prohibits discrimination in federally assisted programs on the basis of race, color, or national origin. One aspect of this prohibition has been ensuring that LEP individuals have access to federal programs (lack of access may be considered discrimination based on national origin). In 2000, President Clinton signed an executive order to require federal agencies to publish guidance for recipients of federal funding about ensuring that LEP individuals have access to programs and services. In 2007, HUD issued final guidance to recipients of HUD funding about factors to consider in meeting the needs of LEP clients. \nHUD's guidance applies to all recipients of funding, including state and local governments, PHAs, and for-profit and nonprofit housing providers, and also includes recipients that receive funds indirectly, such as subgrantees of state CDBG or HOME grants. The guidance directs recipients \"to take reasonable steps to ensure meaningful access to their programs and activities by LEP persons.\" The guidance lays out four factors for recipients to consider in determining how to serve LEP clients: (1) the number or proportion of LEP clients likely to be served or encountered by the recipient, (2) how frequently eligible LEP persons are encountered by the recipient, (3) the nature and importance of the program or service in people's lives, and (4) the recipient's resources and the cost of LEP services.\nDepending on a recipient's analysis of these factors, it may opt to provide translation services on an as-needed basis by contracting with translation companies; or, if LEP clients are more frequent, it may decide to hire either a translator or bilingual staff. Recipients may also decide to have a wide number of documents translated or translate only the most critical documents. Enforcement of LEP requirements occurs through such avenues as compliance reviews or investigating complaints. \nCongress set aside $400,000 for HUD to translate materials as part of the FY2008 Consolidated Appropriations Act ( P.L. 110-161 ) and has continued to set aside funding since that time, ranging from $300,000 to $500,000. Funding has been used to translate HUD documents, provide translation services at HUD events, provide phone translations for callers to HUD, and acquire technology, among other services. Further, the campaign \"HUD Speaks,\" launched in 2015, is meant to communicate the availability of HUD services to LEP persons through posters, desk guides, and language cards where LEP clients can indicate their native language.\n\n\t\t\tAppendix. FHAP and FHIP Funding Table\n\nThe table below shows FHAP and FHIP funding from FY1996 to the present.","output":"The federal Fair Housing Act, enacted in 1968 as Title VIII of the Civil Rights Act (P.L. 90-284), prohibits discrimination in the sale, rental, or financing of housing based on race, color, religion, national origin, sex, familial status, and handicap. The Department of Housing and Urban Development (HUD), through its Office of Fair Housing and Equal Opportunity (FHEO), receives and investigates complaints under the Fair Housing Act and determines if there is reasonable cause to believe that discrimination has occurred or is about to occur.\nState and local fair housing agencies and private fair housing organizations also investigate complaints based on federal, state, and local fair housing laws. In fact, if alleged discrimination takes place in a state or locality with its own similar fair housing enforcement agency, HUD must refer the complaint to that agency. Two programs administered by FHEO provide federal funding to assist state, local, and private fair housing organizations:\nThe Fair Housing Assistance Program (FHAP) funds state and local agencies that HUD certifies as having their own laws, procedures, and remedies that are substantially equivalent to the federal Fair Housing Act. Funding is used for such activities as capacity building, processing complaints, administrative costs, and training. In FY2018, the appropriation for FHAP was $23.9 million. The Fair Housing Initiatives Program (FHIP) funds eligible entities, most of which are private nonprofit organizations. Funds are used for investigating complaints, including testing (comparing outcomes when members of a protected class attempt to obtain housing with outcomes for those not in a protected class), education, outreach, and capacity building. In FY2018, the appropriation for FHIP was $39.6 million.\nAnother provision of the Fair Housing Act requires that HUD affirmatively further fair housing (AFFH). As part of this requirement, recipients of certain HUD funding\u2014jurisdictions that receive Community Planning and Development grants and Public Housing Authorities\u2014go through a process to certify that they are affirmatively furthering fair housing. In July 2015, HUD issued a new rule governing the process, called the Assessment of Fair Housing (AFH). The rule provided that funding recipients are to assess their jurisdictions and regions for fair housing issues (including areas of segregation, racially and ethnically concentrated areas of poverty, disparities in access to opportunity, and disproportionate housing needs), identify factors that contribute to these fair housing issues, and set priorities and goals for overcoming them. HUD is to provide data for program participants to use in preparing their AFHs, as well as a tool that helps program participants through the AFH process. However, as of May 2018, HUD has indefinitely delayed implementation of the AFFH rule. In response, a group of advocacy organizations has filed a lawsuit challenging HUD's failure to implement and enforce the rule.\nAmong other activities undertaken by HUD's FHEO are efforts to prevent discrimination that may not be explicitly directed against protected classes under the Fair Housing Act. This includes issuing a regulation to prohibit discrimination in HUD programs based on sexual orientation and gender identity and releasing new guidance in 2016 addressing several issues: the use of criminal background checks in screening applicants for housing, local nuisance ordinances that may disproportionately affect victims of domestic violence, and failure to serve people who have limited English proficiency.\nFHEO also oversees efforts to ensure that clients with Limited English Proficiency (LEP) have access to HUD programs. Guidance from FHEO helps housing providers determine how best to provide translation services, and HUD also receives a small appropriation through the Fair Housing and Equal Opportunity account for the agency to translate documents and provide translation on the phone or at events. Another requirement overseen by FHEO is Section 3, which provides employment and training opportunities for low- and very low-income persons. Section 3 requirements apply to hiring associated with certain housing projects funded by HUD."}
{"id":"gao_GAO-16-545","pid":"gao_GAO-16-545_0","input":"\tBackground\n\nThe mission of IRS, a bureau within the Department of the Treasury, is to  provide America\u2019s taxpayers top quality service by helping them  understand and meet their tax responsibilities and by applying the federal  tax laws with integrity and fairness to all. In carrying out its mission, IRS  annually collects over $2 trillion in taxes from millions of individual  taxpayers and numerous other types of taxpayers and manages the  distribution of over $300 billion in refunds. To guide its future direction,  the agency has two strategic goals: (1) deliver high quality and timely  service to reduce taxpayer burden and encourage voluntary compliance;  and (2) effectively enforce the law to ensure compliance with tax  responsibilities and combat fraud.\nIRS has established seven overarching priorities to accomplish its  mission:  facilitate voluntary compliance by empowering taxpayers with secure  and innovative services, tools, and support; understand non-compliant taxpayer behavior, and develop  approaches to deter and change it;  leverage and collaborate with external stakeholders;  cultivate a well-equipped, diverse, skilled, and flexible workforce;  select highest value work using data analytics and a robust feedback  loop; drive more agility, efficiency, and effectiveness in IRS operations; and strengthen cyber defense and prevent identity theft.\nThe mission of IRS\u2019s Information Technology organization is to deliver IT  services and solutions that drive effective tax administration to ensure  public confidence. It is led by the Chief Technology Officer, who reports to  the Deputy Commissioner for Operations Support of the IRS. Several  subordinate offices report to the Chief Technology Officer. Figure 1 shows  the structure of IRS\u2019s Information Technology organization.\n\n\t\tIRS Relies on IT to Carry Out Its Mission\n\nIT plays a critical role in enabling IRS to carry out its mission and  responsibilities. For example, the agency relies on information systems to  process tax returns, account for tax revenues collected, send bills for  taxes owed, issue refunds, assist in the selection of tax returns for audit,  and provide telecommunications services for all business activities,  including the public\u2019s toll-free access to tax information.\nFor fiscal year 2016, IRS is pursuing 23 major and 114 non-major IT  investments to carry out its mission. These investments generally support  (1) day-to-day operations (which include operations and maintenance, as  well as development, modernization, and enhancements to existing  systems), and (2) modernization efforts in support of IRS\u2019s future goals.  The day-to-day operations are primarily funded via the operations support  appropriation account, user fees and other supplemental funding. The  modernization efforts are funded via the business systems modernization  appropriation account. IRS expects to spend about $2.7 billion for IT,  including $2.2 billion in appropriated funds, $391.9 million in user fees,  and $108.2 million in other supplemental funding.\nApproximately $1.4 billion of IRS\u2019s IT funding for fiscal year 2016  supports the two operational investments (TSS and MSSS), and four  development investments (FATCA, ACA, CADE 2, and RRP) that we  selected for review.\nTSS supports IRS\u2019s network infrastructure services such as network  equipment, video conference service, enterprise fax service, and  voice service for over 85,000 IRS employees at about 1,000 IRS  locations. According to IRS, the investment continues delivery of  services and products to employees which translates into service to  taxpayers. IRS allocated approximately $366.6 million to activities  supporting the TSS investment. Table 1 identifies the fiscal year 2016  funding allocation for the TSS investment, as well as the types of  activities being funded.\nMSSS provides for the design, development, and deployment of  server, middleware, and large systems as well as enterprise storage  infrastructures, including systems software products, databases, and  operating systems for these platforms. For fiscal year 2016, IRS  allocated approximately $454.2 million for activities supporting the  MSSS investment. Table 2 identifies the fiscal year 2016 funding  allocation for the MSSS investment, as well as the types of activities  being funded.\nFATCA is intended to improve tax compliance by identifying U.S.  taxpayers that attempt to shield or divert assets by depositing funds in  foreign accounts. A law enacted in 2010 requires foreign financial  institutions to report to the IRS information regarding financial  accounts held by U.S. taxpayers or foreign entities in which U.S.  taxpayers have a substantial ownership interest. IRS allocated $89.1  million to FATCA for fiscal year 2016.\nACA encompasses the planning, development, and implementation of  IT systems needed to support IRS\u2019s tax administration responsibilities  associated with parts of the Patient Protection and Affordable Care  Act. IRS allocated $311.2 million to ACA for fiscal year 2016.\nCADE 2 is intended to provide daily processing of taxpayer accounts.\nA major component of the program is a modernized database for all  individual taxpayers that is intended to provide the foundation for  more efficient and effective tax administration. In Transition State 2 of  the initiative, the modernized database will become IRS\u2019s authoritative  source for taxpayer account data, as it begins to address core  financial material weakness requirements for individual taxpayer  accounts. Existing financial reports will be modified to take into  account the increased level of detail and accuracy of data in the  database. CADE 2 data will also be made available for access by  downstream systems such as the Integrated Data Retrieval System  for online transaction processing by IRS customer service  representatives. IRS allocated $129.9 million to CADE 2 for fiscal year  2016.\nRRP is intended to deliver an integrated and unified system that  enhances IRS\u2019s capabilities to detect, resolve, and prevent criminal  and civil tax noncompliance. In addition, it is intended to allow  analysis and support of complex case processing requirements for  compliance and criminal investigation programs during prosecution,  revenue protection, accounts management, and taxpayer  communications processes. IRS allocated $91.7 million to RRP for  fiscal year 2016.\n\n\t\tGAO Has Reported on IRS\u2019s Major IT Investments and Identified Needed Improvements\n\nOver the past several years, we have issued a series of reports which  have identified opportunities for IRS to improve the management of its  major IT investments.\nWe reported in June 2012 that while IRS reported on the cost and  schedule of its major IT investments and provided chief information  officer ratings for them, the agency did not have a quantitative  measure of scope\u2013a measure that shows functionality delivered. We  noted that having such a measure is a good practice as it provides  information about whether an investment has delivered the  functionality that was paid for.\nWe recommended that IRS develop a quantitative measure of scope,  at a minimum for its major IT investments, to have more complete  information on the performance of these investments. In December  2015, IRS officials told us that they were exploring options to report  scope and proposed an option in a December 2015 quarterly report  on IT to Congress. We examined the suitability of proposed solutions  for a quantitative measure of scope as part of this review.\nFurther, in April 2013 we reported that the majority of IRS\u2019s major IT  investments were reportedly within 10 percent of cost and schedule  estimates and eight major IT investments reported significant cost  and\/or schedule variances. We also reported that weaknesses  existed, to varying degrees, in the reliability of reported cost and  schedule variances, and key risks and mitigation strategies were  identified. As a result, we made recommendations for IRS to improve  the reliability of reported cost and schedule information by addressing  the identified weaknesses in future updates of estimates. We also  recommended that IRS ensure projects consistently follow guidance  for updating performance information 60 days after completion of an  activity and develop and implement guidance that specifies best  practices to consider when determining projected amounts.\nIRS agreed with three of our four recommendations and partially  disagreed with the fourth recommendation. The agency specifically  disagreed with the use of earned value management data as a best  practice to determine projected cost and schedule amounts, stating  that the technique was not part of IRS\u2019s current program management  processes and the cost and burden to use it outweighed the value  added. While we disagreed with IRS\u2019s view of earned value  management because best practices have found that the value  generally outweighs the cost and burden of implementing it, we  provided it as one of several examples of practices that could be used  to determine projected amounts. We also noted that implementing our  recommendation would help improve the reliability of reported cost  and schedule variance information, and that IRS had flexibility in  determining which best practices to use to calculate projected  amounts.\nFinally, our February 2015 report found that most of IRS\u2019s major IT  investments reported meeting cost and schedule goals; however,  selected investments experienced variances from initial cost,  schedule, and scope plans that were not transparent in reports to  Congress because IRS had yet to address our prior  recommendations. Specifically, IRS had not addressed our  recommendation to report on how delivered scope compares to what  was planned, and also did not address guidance for determining  projected cost and schedule amounts, or the reporting of cumulative  cost and schedule performance information.\n\n\tIRS Has Identified IT Priorities for Fiscal Year 2016, but Does Not Have a Process for Prioritizing Modernization Efforts\n\nIRS has identified priorities for operations and modernization but does not  have a structured process for prioritizing among modernization efforts.  Specifically, IRS has developed eight priority groups for operations, such  as the delivering essential tax administration and taxpayer services  group, and identified eight priority projects for modernization, including  CADE 2 and RRP, to help reach IRS\u2019s future state vision. In addition, IRS  has developed a structured process for allocating funding to its operations  support activities which is consistent with best practices. However, IRS  has not fully documented this process. In addition, IRS does not have a  similar structured process for prioritizing funding among its modernization  activities, stating it does not have such a process because there are  fewer competing activities than for operations support. A documented  process for both operations support and modernization activities that is  consistent with best practices would provide transparency into the  process and provide greater assurance it is consistently applied.\n\n\t\tIRS Has Identified Priorities for Operations Support and Modernization\n\nIRS has identified eight priorities\u2014referred to as repeatable priority  groupings\u2014for its operations support activities. Officials told us that these  priorities evolved from lessons learned in using priorities established the  prior year and noted that they will continue to be refined over time. For  example, in fiscal year 2015, activities associated with the tax filing  season were identified as IRS\u2019s top priority; however, in fiscal year 2016,  IRS decided that infrastructure (i.e., telephones and computer servers)  was essential in supporting tax processing and should thus be classified  as IRS\u2019s top priority. Each of the priority groupings includes several  supporting business activities associated with major and non-major  investments that IRS allocates funding to. Examples of such business  activities include enterprise video conferencing service, and print support  for taxpayer notices. These priorities and information related to these  priorities are identified in order of importance, as determined by IRS, in  table 3.\nIRS has also identified eight priority projects for modernization. These  projects, as well as their descriptions and associated funding allocations  are identified in table 4.\n\n\t\tIRS Has a Structured Process for Prioritizing Funding for Its Operations Support Activities, but Lacks a Similar Process for Modernization Activities\n\nAccording to GAO\u2019s Information Technology Investment Management  Framework, an organization should document policies and procedures for  selecting new and reselecting ongoing IT investments. These policies  and procedures should include criteria for making selection and  prioritization decisions. A policy-driven, structured method for reselecting  ongoing projects provides the organization\u2019s investment board with a  common understanding of how ongoing projects will be reselected for  continued funding. In addition, executives funding decisions should be  aligned with the selection decision. Specifically, the organization\u2019s  executives have discretion in making the final funding decisions on IT  proposals. However, their decisions should be based upon the analysis  that has taken place in the previous activities.\nFurther, the Office of Management and Budget\u2019s (OMB) Capital  Programming Guide requires, among other things, that agencies have a  disciplined capital programming process that addresses project  prioritization and comparison of assets against one another to create a  prioritized portfolio.\nIn 2015, IRS developed and implemented a process known as the  Portfolio Investment Planning process to prioritize its operations support  activities. This process addresses (1) prioritization and comparison of IT  assets against each other and (2) criteria for making selection and  prioritization decisions. Further, senior IRS executives stated that the final  funding decisions on IT proposals are based on IRS\u2019s prioritization  process.\nIRS uses priority groupings it has defined as criteria for making  prioritized selections. Specifically, a consideration in determining if an  activity (i.e., request for funding) will be selected is to determine the  extent to which it supports any of eight priority groupings. If the activity  is found to support one of the eight priorities, it is further assigned one  of four priority levels: must do, high, medium, or low. IRS has defined  the criteria that must be met in order to classify a funding activity at a  particular priority level. Table 5 provides an example of the criteria  used to make these decisions for the legislative provisions for the  FATCA and ACA priority group.\nIRS prioritizes and compares IT assets against each other.  Specifically, IRS business units identify line item activities for which  they are requesting funding. For each activity, business units address,  among other things, placement within IRS\u2019s established priorities;  proposed high-level capabilities and a cost estimate; a 1-year usable  segment; and the date funding is needed and subsequent mitigation  strategy if funding is not received by the specified date. Further,  several meetings are held to review requested funding activities.  According to IRS, the purpose of these meetings is to provide a cross- organization review and evaluation of IT-related demands.  Stakeholders include Associate Chief Information Officers, business  unit representatives, and staff from IRS\u2019s IT Financial Management  Service.\nFinally, IRS senior executives stated that its final funding decisions on  IT proposals are based on IRS\u2019s prioritization process. According to  these officials, when the agency receives its appropriation, it  evaluates prioritized activities\u2014starting with the highest priority  demands\u2014until the total estimate of appropriated funding is allocated.  Officials have discussions relative to the items that will not be funded  and then engage the Office of the Chief Financial Officer to determine  the extent to which user fees and other sources of funding are  available to support priorities that exceed the appropriated amount.  Prioritized activities, which have been allocated funding for the  upcoming fiscal year, are presented to the Chief Technology Officer  for approval. IRS\u2019s Senior Executive Team approves the Chief  Technology Officer\u2019s funding recommendations and submits the  recommendations to the Commissioner and Deputy Commissioners  for final funding approval.\nDespite these strengths, IRS has not fully documented its process for  prioritizing operations support activities. Specifically, while several  documents describe aspects of the operations support prioritization  process, including the criteria used and the meetings to review and  evaluate IT related demands, none fully describe the procedures  associated with the process. IRS officials stated this is because it is  relatively new and not yet stabilized. IRS officials who are stakeholders in  this process stated that documentation would have reduced the  uncertainty they faced during implementation and would have helped  them to better prepare the required data for the process. IRS senior  executives stated they plan to fully document this process; however, they  did not identify a time frame for when this would be done. Fully  documenting IRS\u2019s portfolio investment process for operational activities  would help ensure consistent implementation of the process by all  stakeholders and provide transparency regarding how such prioritization  decisions are made.\nIn contrast with operations support, IRS does not have a structured  process for prioritizing funding among its modernization investments.  Specifically, IRS officials stated that discussions are held to determine the  modernization efforts that are the highest priority to meet IRS\u2019s future  state vision and technology roadmap. Officials reported that staffing  resources and lifecycle stage are considered but there are no formal  criteria for making final determinations.\nSenior IRS officials stated that they do not have a structured process for  selection and prioritization of business systems modernization activities  because the projects are set and there are fewer competing activities  than for operations support. While there may be fewer competing  activities, a structured, albeit simpler, process that is documented and  consistent with best practices would provide transparency into IRS\u2019s  needs and priorities for appropriated funds. Such a process would better  assist Congress and other decision makers in carrying out their oversight  responsibilities.\n\n\tPerformance Varied for Selected Investments\n\nOf the six selected investments in our review, two development  investments\u2014FATCA and RRP\u2014performed under cost, with varying  schedule performance, and delivered most of the scope that was  planned; however, performance information for these investments could  be improved by implementing best practices for determining actual work  performed. For portions of the two other development investments (CADE  2 and ACA) for which performance information was available, IRS  reported completing work under planned cost and on time. However,  neither investment reported information on planned versus actual delivery  of scope, in accordance with best practices. Further, ACA did not report  timely information on planned versus actual costs. Finally, one of the two  investments in operations and maintenance (MSSS) met all operational  performance goals, while the other investment in operations and  maintenance (TSS) met six out of eight goals.\n\n\t\tFour Investments in Development Experienced Variances and Performance Reporting for These Investments Could Be Improved\n\nBest practices highlight the importance of timely reporting on performance  relative to cost, schedule, and scope (both planned and actual).  According to these practices, one way to measure benefits of  development work is to approximate by measuring a project\u2019s actual cost  and schedule progression (i.e., evaluating earned value), which is a  measure of the amount of planned work that is actually performed in  relation to the funds expended. IRS reported metrics for FATCA and  RRP, which allowed us to determine these investments\u2019 performance.  The agency did not use such metrics or consistently develop planned and  actual cost, schedule, and scope information for all CADE 2 and ACA  projects and activities that were completed or ongoing during fiscal year  2015 and the first quarter of fiscal year 2016. As a result, we could only  determine the performance of portions of these investments.\nFATCA and RRP: During fiscal year 2015 and the first quarter of fiscal  year 2016, IRS reported quarterly cost, schedule, and scope performance  information for each of the FATCA and RRP projects it was working on.  Specifically, it reported metrics for these investments via its Investment  Performance Tool. Table 6 summarizes the performance of the FATCA  and RRP investments (see appendix II for detailed analyses).\nAs shown in table 6, FATCA and RRP performed under cost, with varying  schedule performance, and delivered most of the scope that was  planned. Specifically,  IRS was developing 10 projects to support the FATCA investment  during fiscal year 2015 and the first quarter of 2016. IRS reported  completing work at $12.4 million less than budgeted and delivering  91.7 percent of planned scope with an 8 percent schedule overrun for  these projects. IRS stated that the reasons for these variances  include, among other things, issues with the requirements  management process; an overestimation of costs; and a reduction in  the amount of work completed versus what was planned.\nIRS was developing three projects to support the RRP investment  during fiscal year 2015 and the first quarter of 2016. IRS reported  completing work at $24.5 million less than budgeted and delivering  99.9 percent of planned scope with a minor schedule overrun for  these projects. IRS stated that the reasons for these variances  include, among other things, overestimation of costs (including IRS  labor) and unplanned work that needed to be completed.\nWhile the scope metric used for FATCA and RRP provides an indication  of performance, this metric would be more reliable if it incorporated best  practices for determining the amount of work completed for all activities.  Specifically, IRS uses a level of effort method beyond the amount  generally accepted by best practices to determine the amount of work  completed by its own staff. Our Cost Estimating and Assessment  Guide states that the level of effort method should be used sparingly (15  percent of the budget or less); however, the work performed by IRS staff  ranged from 22 to 100 percent of the work completed for the FATCA and  RRP projects that were ongoing during the time frame of our review. IRS  officials stated that measuring value for government work is a vague  concept to pursue. Nevertheless, revising the method for determining the  amount of work completed by IRS staff for these investments would  improve the reliability of the performance information.\nCADE 2 and ACA: For the CADE 2 projects that were completed during  fiscal year 2015 and the first quarter of fiscal year 2016, IRS reported that  CADE 2 performed on time and $1.7 million under planned cost.  According to IRS, the positive cost variance for the CADE 2 investment is  the result of overestimation of costs and the ability to reuse existing code.  For the ACA activities that reported actual costs during fiscal year 2015  and the first quarter of 2016, IRS reported that ACA performed on time  and $10.3 million under planned costs. IRS stated that this variance was  primarily due to an overestimation of the labor needed to complete the  planned work. Table 7 shows the reported cost and schedule  performance for CADE 2 and ACA.\nWith respect to CADE 2, IRS does not report timely information on  planned versus actual delivery of scope. Specifically, a senior CADE 2  program official stated that, due to the nature of the methodology  being used to implement the projects, progress in delivering planned  scope cannot be determined until the end\u2014after the testing phase.  For CADE 2, projects can be 16 to 60 months long. We requested  information from IRS regarding delivery of planned scope for those  projects that completed during the time frame of our review; however,  IRS was unable to provide this information.\nRegarding ACA, IRS does not report timely cost or scope information.\nA senior IRS official stated that the investment is being developed  using an iterative approach, the goal of which is to deliver  functionality in short increments. However, the agency does not report  actual costs for the activities comprising the projects until the activities  are completed; this delay in reporting could be as long as 9 months.  Instead, ACA calculates a cost projection, which provides an estimate  of cost to complete rather than cost of work completed, with which we  have previously identified weaknesses. In addition, IRS only  provided information on delivery of planned scope for one of the ACA  projects it was developing during the timeframe of our review.\nReporting of performance for the CADE 2 and ACA investments could  be improved by incorporating best practices for timely reporting of  cost, schedule, and scope performance information. As a result of the  lack of timely and complete performance information, Congress and  other external parties do not have pertinent information about CADE 2  and ACA with which to make oversight decisions.\n\n\t\tOne Investment in Operations and Maintenance Met All Operational Performance Goals, the Other Met the Majority of Goals\n\nAccording to OMB\u2019s Fiscal Year 2016 Capital Planning Guidance,  ongoing performance of operational investments is monitored to ensure  the investments are meeting the needs of the agency, delivering expected  value, and\/or modernized and replaced consistent with the agency\u2019s  enterprise architecture. To this end, OMB requires agencies to report on  at least five operational metrics for major IT investments and agencies  are specifically required to report on planned and actual operational  performance.\nThe two operations and maintenance investments in our review reported  on operational performance metrics, as required. MSSS met its five  operational performance goals during fiscal year 2015; however, TSS  consistently underperformed on two of its eight metrics.\nTable 9 identifies the MSSS operational performance metrics, their  descriptions, and the performance against these metrics during fiscal year  2015.\nIRS reported planned and actual performance for eight operational  performance metrics for TSS during fiscal year 2015. However, as  previously mentioned, TSS consistently missed operational performance  goals for two of the eight metrics. The two TSS metrics that were not met  illustrate pervasive challenges meeting its goals in deploying new  telecommunications capabilities. Specifically, IRS missed every monthly  target in fiscal year 2015 for deploying voice, video, and data  technologies. As a result, TSS did not deploy such technologies to  approximately 4,300 users that were originally included in the planned  deployment.\nAccording to IRS officials, the operational performance goals for the two  metrics that were not met should have been updated to better reflect the  limited funding the agency intended to allocate to these activities.\nTable 10 identifies the TSS operational performance metrics, their  descriptions, and the performance against these metrics during fiscal year  2015.\n\n\tConclusions\n\nWhile IRS has developed a process for prioritizing funding for operations  support activities that adheres to best practices, it is not fully documented.  Further, IRS has not developed a priority setting process for  modernization activities for which the agency allocated nearly $300  million to for fiscal year 2016. Until IRS documents its process for  operations support activities and develops a process for modernization  activities, the agency will lack the transparency needed by Congress and  others to assist in carrying out their oversight responsibilities.\nIRS has developed performance metrics for two investments\u2014FATCA  and RRP\u2014which include a measure of progress in delivering scope, a  measure we have been reporting on and recommending IRS address  since 2012. While these metrics represent an important step, their  reliability could be improved by incorporating best practices for measuring  the work performed by IRS staff by using the level of effort measure  sparingly. In addition, only partial performance information was available  for CADE 2 and ACA because IRS did not use the metrics it is positioned  to develop for these investments or consistently have cost, schedule, and  scope information for these investments. Continued efforts in this area  would substantially improve the performance reporting for the CADE 2  and ACA investments, and potentially for all major development efforts.\n\n\tRecommendations for Executive Action\n\nTo help IRS improve its process for determining IT funding priorities and  to provide timely information on the progress of its investments, we  recommend that the Commissioner of IRS direct the Chief Technology  Officer to take the following four actions: document IRS\u2019s process for selecting and prioritizing operations establish, document, and implement policies and procedures for  selecting new and reselecting ongoing business systems  modernization activities, consistent with IRS\u2019s process for prioritizing  operations support priorities, which addresses (1) prioritization and  comparison of IT assets against each other, (2) criteria for making  selection and prioritization decisions, and (3) ensuring IRS executives\u2019  final funding decisions on IT proposals are based on IRS\u2019s  prioritization process; modify existing processes for FATCA and RRP for measuring work  performed by IRS staff to incorporate best practices, including  accounting for actual work performed and using the level of effort  measure sparingly; and  report on actual costs and scope delivery at least quarterly for CADE  2 and ACA. For these investments, IRS should develop metrics  similar to FATCA and RRP.\n\n\tAgency Comments and Our Evaluation\n\nWe provided a draft of this product to IRS for comment. In its written  comments, reproduced in appendix III, IRS agreed with two  recommendations, did not agree nor disagree with one, and disagreed  with one. Specifically,  IRS agreed with our recommendations to better document its  prioritization process for operations support activities and extend that  process to its business systems modernization activities.\nWith respect to our recommendation to report on actual costs and  scope delivery at least quarterly for CADE 2 and ACA, IRS did not  agree nor disagree, but noted that IRS is continuing to try to improve  its processes in reporting investment performance.\nRegarding our recommendation to modify existing processes for  FATCA and RRP for measuring work performed by IRS staff to  incorporate best practices, including accounting for actual work  performed and using the level of effort measure sparingly, IRS  disagreed and stated that modifying the use of the level of effort  measure would equate to a certified earned value management  system, which would add immense burden on IRS\u2019s programs on  various fronts and would outweigh the value it provides. However, we  did not specify the use of an earned value management system in our  report and believe other methods could be used to more reliably  measure work performed. As noted in our report, 22 to 100 percent of  the work for selected projects was performed by IRS staff. As a result,  we believe that it is a reasonable expectation for IRS to reliably  determine the actual work completed, as opposed to assuming that  work is always completed as planned. Accordingly, we maintain our  recommendation is still warranted.\nWe are sending copies of this report to interested congressional  committees, the Commissioner of IRS, and other interested parties. This  report will also be available at no charge on our website at  http:\/\/www.gao.gov.\nIf you or your staffs have any questions on matters discussed in this  report, please contact me at (202) 512-9286 or pownerd@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  major contributions to this report are listed in appendix IV.\n\nAppendix I: Objectives, Scope, and Methodology\n\nOur objectives were to (1) describe the Internal Revenue Service\u2019s (IRS)  current information technology (IT) investment priorities and assess IRS\u2019s  process for determining these priorities, and (2) determine IRS\u2019s progress  in implementing key IT investments.\nTo address our first objective, we reviewed documentation, such as IRS\u2019s  fiscal year 2016 Business Systems Modernization Operating Plan, as well  as financial reports to determine IRS\u2019s IT funding priorities and funding  allocations.\nIn addition, we reviewed artifacts from IRS\u2019s Portfolio Investment  Planning process, such as slide decks describing key stages of the  process, memorandums distributed to stakeholders, prioritized listings of  investment activities, and criteria for establishing priorities, to identify and  describe IRS\u2019s process for determining its IT investment priorities.  Further, we interviewed officials in IRS\u2019s Office of Strategy and Planning,  as well as stakeholders of the Portfolio Investment Planning process from  IRS business units. We then analyzed IRS\u2019s processes against best  practices in our IT Investment Management Framework and the Office of  Management and Budget\u2019s Capital Programming Guide to determine the  extent to which the processes met best practices and requirements.  Lastly, we met with officials at the Department of the Treasury who are  responsible for IT capital planning, including the Treasury Chief  Information Officer, to determine the department\u2019s role in IRS\u2019s process  for prioritizing IT funding.\nFor our second objective, we analyzed the performance of four key  development investments\u2014Customer Account Data Engine 2 (CADE 2),  Return Review Program (RRP), Foreign Account Tax Compliance Act  (FATCA), and the Affordable Care Act Administration (ACA). Further, we  analyzed two key operational investments \u2014Telecommunications  Systems and Support (TSS) and Mainframes and Servers Services and  Support (MSSS). We chose these investments because they represented  IRS\u2019s most significant expenditures on development and operations for  fiscal year 2015 ($496.5 million and $777.8 million, respectively).\nA tailored approach was necessary for analyzing the development  investments given the varying types and extent to which performance  information was available for these investments. To determine the  progress in implementing FATCA and RRP, we compiled and  analyzed quarterly output from IRS\u2019s Investment Performance Tool for  the period of fiscal year 2015 through the first quarter of 2016. IRS  does not consider this tool to be a formal Earned Value Management  System. As a result, we did not evaluate the extent to which the tool  was compliant with the American National Standards Institute\u2019s  guidelines for an Earned Value Management System. For CADE 2,  we analyzed IRS\u2019s quarterly reporting of planned and actual costs, as  well as requirements reports and schedule reporting. For ACA, we  analyzed IRS\u2019s financial reporting via the ACA business case  submissions, as well as performance reporting to management and  schedule reporting. In addition, we held multiple meetings with IRS  officials, including officials in the CADE 2, FATCA, ACA, and RRP  program offices.\nTo determine the progress in implementing TSS and MSSS, we  reviewed operational performance information reported for the  selected investments from October 2014 to September 2015; this  information included, where reported, the performance target and  actual results for each metric. In addition, we reviewed documentation  describing the performance metrics and interviewed IRS officials  regarding the process for reporting such metrics.\nTo determine the reliability of data used for our review, we obtained and  reviewed IRS\u2019s guidance for its Investment Performance Tool, which  identifies, among other things, how data are to be entered within this tool,  sources of such data, and explanations of the methods used to calculate  performance metrics generated from the tool. Further, we held meetings  with officials responsible for overseeing the use of IRS\u2019s Investment  Performance Tool. In addition, we relied on extensive work we previously  completed on IRS\u2019s financial management system for relevant data used  for this review. In determining the reliability of the data supporting this  review, we determined that data regarding the delivery of planned scope  for the FATCA and RRP investments could be more reliable by  incorporating best practices. While these data were sufficiently reliable for  our purposes, we made recommendations to improve their reliability.\nWe conducted this performance audit from September 2015 to June 2016  in accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.\n\nAppendix II: Performance Evaluation for Selected Investments in Development\n\nThis appendix illustrates the potential for reporting complete performance  information via IRS\u2019s Investment Performance Tool. Specifically, the  following tables provide a detailed evaluation of cost, schedule, and  scope performance for Return Review Program and Foreign Account Tax  Compliance Act projects that were being developed by IRS during fiscal  year 2015 and the first quarter of fiscal year 2016.\n\n\tReturn Review Program\n\nIRS reported working on three projects in support of Return Review  Program during fiscal year 2015 and the first quarter of fiscal year 2016.  The following tables identify the performance information reported via  IRS\u2019s Investment Performance Tool; positive cost variances indicate that  the project was performing under planned cost and positive schedule  variances indicate that the project was performing ahead of schedule.\n\n\tForeign Account Tax Compliance Act\n\nIRS reported working on 10 projects in support of Foreign Account Tax  Compliance Act during fiscal year 2015 and the first quarter of fiscal year  2016. The following tables identify the performance information reported  via IRS\u2019s Investment Performance Tool; positive cost variances indicate  that the project was performing under planned cost, and positive schedule  variances indicate that the project was performing ahead of schedule.\n\nAppendix III: Comments from the Internal Revenue Service\n\nAppendix IV: GAO Contact and Staff Acknowledgments\n\n\tGAO Contact\n\n\tStaff Acknowledgments\n\nIn addition to the individual named above, the following staff made key  contributions to this report: Sabine Paul (Assistant Director), Bradley  Roach (Analyst in Charge), Rebecca Eyler, Charles Hubbard III, Paul  Middleton, Karl Seifert, and Marshall Williams, Jr.","output":"Why GAO Did This Study\n\nIRS relies extensively on IT systems to annually collect more than $2 trillion in taxes, distribute more than $300 billion in refunds, and carry out its mission of providing service to America's taxpayers in meeting their tax obligations. For fiscal year 2016, IRS planned to spend approximately $2.7 billion for IT investments. Given the size and significance of these expenditures, it is important that Congress be provided information on agency funding priorities, the process for determining these priorities, and progress in completing key IT investments.\nAccordingly, GAO's objectives were to (1) describe IRS's current IT investment priorities and assess IRS's process for determining these priorities, and (2) determine IRS's progress in implementing key IT investments.\nTo do so, GAO analyzed IRS's process for determining its fiscal year 2016 funding priorities, interviewed program officials, and analyzed performance information for six selected investments for fiscal year 2015 and the first quarter of 2016.\n\nWhat GAO Found\n\nThe Internal Revenue Service (IRS) has developed information technology (IT) investment priorities for fiscal year 2016, which support two types of activities\u2014operations and modernization. For example, it has developed priority groups for operations such as: (1) critical business operations, infrastructure operations, and maintenance; and (2) delivery of essential tax administration\/taxpayer services. It has identified priorities for modernization, such as web applications, to help reach IRS's future state vision. However, while IRS has developed a structured process for allocating funding to its operations activities consistent with best practices, it has not fully documented this process. IRS officials stated this is because the process is relatively new and not yet stabilized. In addition, IRS does not have a structured process for its modernization activities, because, according to officials, there are fewer competing activities than for operations activities. Fully documenting a process for both operations support and modernization activities that is consistent with best practices would provide transparency and greater assurance it is consistently applied.\nOf the six investments GAO reviewed, two investments\u2014Foreign Account Tax Compliance Act and Return Review Program\u2014provided complete and timely performance information for GAO's analyses. These investments performed under cost, with varying schedule performance, and delivered most planned scope (see table). However, IRS did not always use best practices for determining scope delivered. Specifically, IRS used a method inconsistent with best practices for determining the amount of work completed by its own staff.\nTwo other investments reported completing portions of their work on time and $1.7 million under planned costs (for the Customer Account Data Engine 2), and on time and $10.3 million under planned costs (for Affordable Care Act Administration). However, neither investment reported information on planned versus actual delivery of scope in accordance with best practices. The remaining two investments\u2014Mainframes and Servers Services and Support and Telecommunications Systems and Support\u2014generally met performance goals.\n\nWhat GAO Recommends\n\nGAO is recommending that IRS develop and document its processes for prioritizing IT funding and improve the calculation and reporting of investment performance information. IRS agreed with two recommendations regarding its prioritization processes, disagreed with one related to the calculation of performance information, and did not comment on one recommendation. GAO maintains all of the recommendations are warranted."}
{"id":"gao_GAO-14-801","pid":"gao_GAO-14-801_0","input":"\tBackground\n\n\t\tFuture Operational Environment Includes Increasing A2\/AD Challenges\n\nFuture A2\/AD challenges are part of a security environment that will be  characterized by increasing complexity, uncertainty, and rapid change,  according to DOD. Further, national security challenges will continue to  arise from ongoing concerns such as violent extremism, the proliferation  of weapons of mass destruction, resource competition, and the rise of  modern competitor states, among others. These concerns, according to  DOD, combined with the proliferation of advanced technologies; the  increasing importance of space and cyberspace; and the ubiquity of  digital networks, including social media, will make the future security  environment less predictable, more complex, and potentially more  dangerous than it is today.\nThe JOAC notes that challenges to operational access are not new but  that three trends promise to significantly complicate DOD\u2019s ability to  establish operational access.are   According to the JOAC, the three trends\nTechnology Improvement and Proliferation: The first important trend is  the dramatic improvement and proliferation of weapons and other  technologies capable of denying access or freedom of action within an  operational area. Specifically, an increasing number of state and  nonstate actors are developing or obtaining weapons of increasing  range and accuracy.\nSpace and Cyberspace Emergence: The second and related trend is  the emergence of space and cyberspace as increasingly important  and contested domains. According to the JOAC, the U.S. military will  continue to derive great benefit from its space and cyberspace  capabilities, but potential adversaries understand that and are  increasingly targeting those capabilities. Operating in the space and  cyberspace domains is also attractive to potential adversaries  because actions in those domains are often difficult to attribute.\nPosture Changes: The third trend is that the change in U.S. overseas  defense posture complicates the U.S. ability to obtain operational  access. Specifically, DOD has reduced the number of overseas  facilities and number of deployed forces, meaning that future  operations will likely require it to deploy over longer distances.\nAccording to the JOAC, the effect of these three trends is that potential  adversaries who may have once perceived that they could not stop U.S.  forces from deploying into an operational area are now adopting A2\/AD  strategies. Figure 1 provides examples of anti-access and area denial  capabilities.\nThe JOAC describes A2\/AD challenges in the context of an adversary\u2019s  strategy rather than a list of technical capabilities that need to be  overcome. In general, the intent of an adversary that adopts an A2\/AD  strategy is to convince and, if necessary and possible, compel the United  States to keep out of its affairs. At the most sophisticated level, an A2\/AD  strategy is not a sequential series of actions using specific military  capabilities but rather an integrated and adaptive campaign using all  levers of national power and influence before, during, and after any actual  military conflict. Critical elements of an A2\/AD strategy include keeping  U.S. forces as far away as possible and imposing steeper costs on the  United States than it is willing to bear.\nMilitarily, an A2\/AD environment is characterized by sophisticated  adversaries using asymmetric capabilities, such as electronic and cyber  warfare, space capabilities, advanced air defenses, missiles, and mines,  according to DOD. The advanced weapons and technologies are  characterized by their increasing precision and range, and are often  affordable and increasingly proliferated. Adversaries could range from a  high-end peer state that has integrated a wide range of domestically  produced advanced capabilities to states, including failed or failing states,  adopting a hybrid strategy that includes regular and irregular forces and a  number of sophisticated weapons and technology developed at home or  acquired abroad. Even nonstate actors could obtain some A2\/AD  capabilities, such as guided anti-ship missiles and cyber attack tools,  according to DOD. Figure 2 depicts the range of A2\/AD challenges.\n\n\t\tDOD Strategic Guidance and Recent Joint Concepts Focus on Operational Access\n\nDOD has increasingly focused over the past few years on the operational  access challenges it may face in the future, although it has recognized  A2\/AD challenges for well over a decade. For example, projecting and  sustaining U.S. forces in distant A2\/AD environments and defeating  A2\/AD threats was one of six operational goals identified in the 2001  Quadrennial Defense Review (QDR). However, DOD\u2019s focus over the  subsequent decade was on operations in Afghanistan and Iraq. As those  operations began to wind down, DOD began to reemphasize the need to  be able to overcome challenges to operational access.\nThe 2012 Defense Strategic Guidance was intended to transition the  department from an emphasis on current operations to preparing for  future challenges, including helping guide decisions regarding the size  and shape of the future force in a more fiscally constrained environment.  In the guidance, the Secretary of Defense established projecting power  despite A2\/AD challenges as 1 of 10 primary DOD missions, noting that  countries such as Iran and China will continue to pursue capabilities such  as electronic and cyber warfare and ballistic and cruise missiles to  counter U.S. power projection capabilities and limit the operational access  of U.S. forces. Other primary missions, such as operating effectively in  cyberspace and space, deterring and defeating aggression, and providing  a stabilizing presence, are also relevant to overcoming A2\/AD challenges.\nThe 2014 QDR maintains the emphasis on overcoming A2\/AD  challenges. It builds on the 2012 Defense Strategic Guidance and  continues DOD\u2019s transition to focusing on future challenges during a time  of fiscal uncertainty. The QDR states that DOD must be prepared for a full  range of conflicts, including against state powers with advanced A2\/AD  capabilities. Further, two of the QDR\u2019s three strategic pillars\u2014build  security globally and project power and win decisively\u2014emphasize the  importance of being able to project power and overcome challenges to  access. The 2014 QDR also stresses that innovation will be paramount  across all of DOD\u2019s activities in order to best address the increasingly  complex operational environment.\nThe Chairman of the Joint Chiefs of Staff has also issued guidance in the  past 2 years that emphasizes the importance of overcoming access  challenges. The Capstone Concept for Joint Operations: Joint Force 2020  is the foundational concept document that describes the Chairman\u2019s  vision for how the joint force will defend the nation against a wide range of  security challenges and helps establish force development priorities.\nAmong these priorities is developing capabilities to defeat A2\/AD threats,  which as noted above is the specific focus of the JOAC.\nThe JOAC includes a list of 30 required capabilities that are essential to  the implementation of the concept (see app. I). It further states that this  list is neither complete nor prioritized but provides a baseline for further  analysis and concept development. DOD also has a number of supporting  concepts to the JOAC that provide further detail on specific aspects of  operations in A2\/AD environments. The first of these supporting concepts  is the Air-Sea Battle Concept, which is focused on overcoming the longer- range and advanced anti-access challenges. At the direction of the  Secretary of Defense, the Departments of the Navy and Air Force  developed this multiservice concept focused on gaining and maintaining  freedom of action in the global commons, that is, the areas of air, sea,   In April 2014, the  space, and cyberspace that belong to no one state.Chairman of the Joint Chiefs of Staff issued the Joint Concept for Entry  Operations, a supporting concept to JOAC focused on how forces will  enter onto foreign territory and immediately conduct operations in the face  of adversaries with increasingly effective area-denial strategies and  capabilities. There are a number of other existing concepts, as well as  concepts that are being developed, that support the JOAC (see fig. 3).\n\n\tArmy and Marine Corps Are Undertaking Efforts to Prepare for Operational Access Challenges\n\nThe Army and Marine Corps are undertaking multiple efforts to address  operational access challenges, which impact a broad range of their  existing missions. In light of the rapidly changing operational environment,  the Army and Marine Corps are reviewing how they will need to carry out  their roles and functions in part by revising their service concepts and by  conducting wargames that incorporate such challenges. Further, the  Army and Marine Corps have identified several areas where they have  important roles in overcoming access challenges, including engagement  activities and entry operations, as well as logistics and missile defense for  the Army. The services are beginning to take steps to change how they  carry out these roles.\n\n\t\tArmy and Marine Corps Are Incorporating Operational Access Challenges into Service Concepts and Wargames\n\nThe Army and the Marine Corps have begun examining the impact of  operational access challenges on existing missions by revising their  concepts and incorporating such challenges into their wargames. For  example, the Army is revising the Army Operating Concept, which  generally describes how an Army commander will operate in future  environments that include A2\/AD challenges, and identifies required  capabilities in land operations. Given future operational challenges, the  draft concept states that Army forces need to be agile, responsive,  adaptive, and regionally engaged across the globe, and be able to  conduct distributed operations. These distributed operations would  involve Army elements arriving from numerous directions and domains to  distributed locations in a joint operations area. According to the draft  concept, this operational approach, also discussed in the JOAC, could  help to overcome A2\/AD challenges because the Army forces would be  more spread out and thus more difficult to target and defend against.  Once completed, the Army Operating Concept is to provide guidance for  the Army\u2019s development of supporting functional concepts, which  eventually inform Army assessments of capability needs, gaps, and  solutions.\nThe Marine Corps has also incorporated consideration of A2\/AD  challenges into Expeditionary Force 21, its capstone concept, which  provides guidance for how the Marine Corps will be organized, trained,  and equipped to fulfill its assigned responsibilities over the next 10  years. Published in March 2014, the concept identifies the JOAC as an  input and is consistent with many of its themes, including the importance  of distributed operations. Expeditionary Force 21 identifies a number of  challenges to Marine Corps operations caused by A2\/AD threats and  proposes a number of potential solutions for how the service will  overcome them, including operating from amphibious ships farther from  shore and using dispersed formations. According to Marine Corps  officials, the service is also developing a number of supporting concepts,  including some with the Navy that will further explore proposed  approaches for overcoming A2\/AD challenges. These officials stated that  eventually this will inform Marine Corps assessments of capability needs,  gaps, and solutions. The officials added that while the capstone concept  has been issued and the associated analysis and innovation is under  way, developing the full range of capabilities envisioned will be a long- term endeavor.\nIn addition, the Army and Marine Corps are incorporating operational  access challenges into their wargames. Services conduct wargames for  multiple reasons, including mission rehearsal, concept analysis, and  doctrine validation. The Army\u2019s Unified Quest wargames explore a broad  range of future conflicts and have included A2\/AD scenarios. For  example, the scenario for Unified Quest 2013 was set in the 2030-2040  time frame with fictional adversaries adopting hybrid warfighting  approaches that used a mix of A2\/AD capabilities, including integrated air  defenses, cyber warfare, and anti-ship cruise missiles. The wargame  explored new operating concepts, including how to effectively fight with  dispersed forces. The Marine Corps\u2019 Expeditionary Warrior wargames  have also included A2\/AD challenges. For example, Expeditionary  Warrior 2012 was set in 2024 in a fictional country where state and  nonstate adversaries were armed with A2\/AD capabilities, including cyber  warfare, ballistic missiles, anti-ship cruise missiles, integrated air defense  systems, mines, and submarines. The Marine Corps used this wargame,  in part, to explore integration with special operations, cyber, and other  joint forces.\nAlthough they have functions important to overcoming the range of A2\/AD  challenges, the Army and Marine Corps have focused their wargames on  A2\/AD challenges from states and failed or failing states with less- advanced A2\/AD capabilities. A primary reason for this approach,  according to Army and Marine Corps officials, is that ground forces are  likely to have a larger role in failed and failing state scenarios as  compared with their roles in scenarios involving a peer or near-peer  competitor. Further, such conflicts are more likely than a conflict with a  peer competitor (see fig. 4). The officials added that the Army and Marine  Corps participate in Navy and Air Force wargames that examine the  A2\/AD challenges posed by peer competitors.\n\n\t\tArmy and Marine Corps Have Identified Important Roles in Overcoming Operational Access Challenges and Are Beginning to Take Steps to Change How They Carry Out These Roles\n\nThe Army and the Marine Corps have identified several areas where they  have important roles in overcoming operational access challenges.  According to Army and Marine Corps officials, A2\/AD challenges impact a   While  broad range of their existing missions but do not create new ones.A2\/AD challenges impact many missions, primary missions include the  engagement activities and entry operations of both services, as well as  logistics and missile defense for the Army. The services are beginning to  take steps to change how they carry out these missions. Some of these  efforts are expected to stretch well into the next decade and beyond.\n\n\t\t\tEngagement Activities\n\nThe Army and the Marine Corps play a primary role in establishing  access through their engagement activities and are using these  opportunities to help address A2\/AD challenges, according to DOD  officials. The JOAC emphasizes that success in overcoming A2\/AD  challenges in combat often depends on activities prior to conflict that help  gain and maintain access and identifies three required capabilities for  such activities. According to the JOAC, such activities include  multinational exercises, basing and support agreements, improving  overseas facilities, prepositioning supplies, and forward-deploying forces.  These types of activities help shape favorable access conditions. For  example, engagement activities such as combined training or exercises,  or improving a host-nation\u2019s infrastructure, help maintain and develop  good relationships with and improve the capabilities of allies and partners  that then may be called upon in the event of a crisis. Also, officials from  the U.S. Pacific Command (PACOM) and the U.S. Central Command  (CENTCOM) emphasized the importance of engagement activities in  gaining and maintaining access and stated that continued forward  presence of U.S. forces in their regions may help deter potential  adversaries and reassure allies and partners by signaling U.S.  commitment to that region. Moreover, DOD officials stated that having  Army and Marine Corps forces forward deployed conducting engagement  activities helps with access challenges because these forces are already  in theater and can respond more quickly if a crisis occurs than they could  if they had to deploy from the United States.\nBoth the Army and Marine Corps are developing new approaches to their  engagement activities to help shape favorable access conditions. For  example, the Army is testing a new operational approach in 2014, called  Pacific Pathways, that changes the way the Army supplies forces for  engagement activities. Rather than sending a number of small units that  each conduct a single activity for a short period of time, under Pacific  Pathways the Army will send a fully-equipped, combat-trained, 700- soldier battalion-sized force to participate in two or three regional  exercises over the course of 90 days. Soldiers and their equipment would  travel by air and sea between engagements. Similarly, the Marine Corps  is also taking steps to enhance engagement activities and provide  forward presence. The Marine Corps is planning on having one-third of its  forces forward deployed. As part of this effort, the Marine Corps is  returning to the practice of rotational deployments, where units based in  the United States deploy to Japan or Australia for 6 months to train,  engage allies and partners in the region, and provide forward presence.  According to DOD officials, these approaches allow the forces to better  fulfill their respective missions while providing the combatant  commanders with more options for their employment.\nIn addition, officials from CENTCOM, PACOM, and U.S. Special  Operations Command told us they are increasingly incorporating  engagement activities into their planning efforts. Moreover, the JOAC  states that combatant commanders will need to coordinate these efforts  with other U.S. agencies that are also conducting engagement activities.  In February 2013, we testified that as DOD continues to emphasize  engagement activities, to include building partner capacity, the need for  efficient and effective coordination with foreign partners and within the  U.S. government has become more important, in part because of fiscal  challenges, which can be exacerbated by overlapping or ineffective  efforts.\n\n\t\t\tEntry Operations\n\nThe Army and the Marine Corps both play a primary role in conducting  entry operations in an A2\/AD environment, according to DOD. Entry  operations are the projection and immediate employment of military  forces from the sea or through the air onto foreign territory to accomplish  assigned missions. The JOAC states that maintaining or expanding  operational access may require entry of Army or Marine Corps forces into  hostile territory to accomplish missions, such as eliminating land-based  threats or initiating sustained land operations, and identifies the ability to  conduct forcible entry operations as a required capability.\nThe Army has conducted several studies, exercises, and wargames that  examine entry operations in an A2\/AD environment and concluded,  among other things, that it must be able to deploy decisive force much  more rapidly. The Army identified a number of areas requiring  improvement, including enhancing engagement with friends and allies,  increasing the ability to deploy small units, reducing logistics demands,  and greatly advancing technologies such as vertical lift, lighter yet  survivable vehicles, missile defenses, and command and control.  Moreover, for Army airborne units, the Army has identified the need for  capabilities such as weapon systems and vehicles that can be air- dropped in a location and provide forces with long-range, precision  firepower; mobility across a range of terrain; and protection, among other  things.improvements by 2025 and to have significantly improved forces in the  2040 time frame.\nIt has further outlined an approach intended to achieve some  The Marine Corps is also examining how to conduct entry operations in  an A2\/AD environment. According to the Marine Corps, the joint force has  become brittle and risk averse because of its reliance on a small number  of very advanced and expensive weapons systems that are increasingly  vulnerable to A2\/AD capabilities. A key force priority for overcoming  A2\/AD challenges is resilience, according to PACOM officials. To  increase resilience, the Marine Corps is developing the idea of using a  greater number of highly mobile capabilities on expeditionary advanced  bases\u2014small, temporary, austere, and distributed bases that can be  established for a variety of purposes. For example, the Marine Corps  could use land-based anti-ship missiles on small mobile platforms to  control sea-lanes. However, according to the Marine Corps, pursuing this  idea would require it to obtain new missile capabilities as well as more  flexible supply and command and control systems than are currently in  place. Additionally, the Marine Corps is examining operating short- takeoff\/vertical-landing-capable joint strike fighters from small distributed  bases; however, according to the Marine Corps, it has not yet determined  the supportability requirements for this aircraft in austere environments.  The Marine Corps is aware of such challenges and is in the early stages  of addressing them. It has not yet completed the concepts and follow-on  analyses needed to support the implementation of these ideas, according  to Marine Corps officials.\n\n\t\t\tLogistics\n\nThe Army has a fundamental role in providing logistics support in an  A2\/AD environment, according to DOD, and the JOAC states that  increased threats and operational demands of future operations in such  environments may present challenges for logistics. Specifically, the  JOAC states that logistics hubs and networks may be increasingly  vulnerable to attack by adversaries with A2\/AD capabilities, such as  cyber, counterspace, and ballistic missiles. Further, one of DOD\u2019s and the  Army\u2019s approaches to conducting operations in an A2\/AD environment is  to use multiple smaller units operating independently, but supporting such  units is more logistically demanding. The JOAC identifies three required  capabilities for logistics, but also notes that new logistics concepts are  needed to explore the challenges to logistics in an A2\/AD environment  and to help define required capabilities. Also, a study examining the  impacts of the JOAC on joint logistics echoed this need.\nAccording to  officials from the Joint Staff and the Army, they have begun revising the  Joint Concept for Logistics, in part, to include A2\/AD challenges.\nIn addition, the Army is examining how it might address A2\/AD challenges  related to logistics. One way that the Army is proposing to mitigate the  problem of increased demands on logistics is to focus efforts on  decreasing the Army\u2019s and the joint force\u2019s demand for items such as  fuel, water, and ammunition. For example, the Army\u2019s Functional Concept  for Sustainment, issued in October 2010, states that during operations in  Iraq, 22 percent of all convoys into the theater per year were for fuel. The  concept states that technological advances are needed to reduce the fuel  demand for vehicles and energy production, among other things. In  addition, the Army is exploring unmanned distribution of supplies in  theater to help provide timely sustainment and reduce the exposure of  soldiers to potential threats. A 2013 Army Unified Quest wargame report  stated that while this technology could provide benefits, additional study is  needed to understand how and when automated systems should be  used, as well as the costs, such as those for maintenance, that would be  involved.\n\n\t\t\tMissile Defense\n\nAnother primary Army contribution to overcoming A2\/AD challenges is  providing active missile defenses, according to DOD. The JOAC notes  that the increasing accuracy, lethality, and proliferation of ballistic and  cruise missiles are a key A2\/AD challenge. Further, such capabilities are  attractive to potential adversaries because they are cost imposing: that is,  defenses against ballistic and cruise missiles tend to be more costly than  the missiles themselves. According to DOD, adversaries will use ballistic  and cruise missiles to counter U.S. power projection capabilities by  attacking forward bases, naval forces, and logistics support and  command and control capabilities. The JOAC therefore identifies  expeditionary missile defense as a required capability for overcoming  access challenges.\nLand-based missile defense is a core Army function and a main element  of DOD\u2019s force structure, according to DOD. Although the JOAC does not  provide a clear definition of what constitutes expeditionary missile  defense, several characteristics of the Army\u2019s missile defense force  structure indicate that they do not meet this required capability, including  the following:\nMobility\/supportability\u2014The JOAC emphasizes the need for smaller  and highly mobile systems requiring little support. Current Army  missile defenses are transportable but lack strategic and tactical  mobility, according to the Army. They also have large logistical  requirements.\nCapacity\u2014According to DOD, demand for missile defenses, including  those provided by the Army, exceeds capacity. Missiles are the core  of adversary A2\/AD capabilities, and growing adversary missile  inventories and improving capabilities will exacerbate capacity  issues.\nCost\u2014According to DOD, current missile defenses are very  expensive. By pursuing increasingly advanced missiles, adversaries  are able to impose costs on the United States.\nArmy and Army-sponsored reviews recognize some of these difficulties  and have recommended that more attention be paid to other, less costly  technologies that can protect against large numbers of missiles, such as  directed energy weapons and railguns.Office is working with the Navy and others to develop a railgun that can  provide cost-effective land-based ballistic and cruise missile defense   DOD\u2019s Strategic Capabilities  capability.projectiles with sensors and existing guns, including Army artillery, to  shoot down cruise missiles. These alternatives could provide high- capacity, cost-effective missile defense capabilities, but they have not yet  matured into programs, according to the Strategic Capabilities Office.  According to the Army, power generation, storage, and mobility issues  associated with directed energy weapons and railguns will be resolved in  the 2040 time frame.\n\n\tDOD Is in the Early Stages of Developing the JOAC Implementation Plan, but Has Not Fully Established Specific Measures and Milestones to Assess Progress\n\nDOD is developing an implementation plan for the JOAC in order to bring  coherence to the department\u2019s many simultaneous efforts to overcome  A2\/AD challenges but has not fully established measures and milestones  to gauge progress.effort to coordinate, oversee, and assess the department\u2019s  implementation of the JOAC. DOD is planning to issue the first iteration of  the plan in 2014 and intends to assess and update the plan annually.  However, the draft 2014 JOAC Implementation Plan is limited in scope  and does not fully establish the specific measures and milestones DOD  needs to allow decision makers to assess the progress the department is  making, including the contributions of the Army and the Marine Corps.\n\n\t\tDOD Is in the Early Stages of Developing the Joint Operational Access Concept Implementation Plan\n\nThe Joint Staff is leading a multiyear DOD-wide effort, initiated in June  2013, to coordinate, oversee, and assess the department\u2019s  implementation of the JOAC. In order for DOD to fulfill its mission to  project power despite A2\/AD challenges, the 2012 Defense Strategic  Guidance requires DOD to implement the JOAC. In addition, DOD  guidance on concept development requires DOD to develop and execute  implementation plans for joint concepts and to assess their  implementation.JOAC is the first joint concept to be implemented under the new  guidance, according to DOD officials. They further stated that the  emphasis on implementation is a significant and positive change to the  guidance but will be challenging to execute.\nThe guidance was issued in November 2013 and the  In accordance with this guidance, DOD is planning to issue the first  iteration of the JOAC Implementation Plan in August 2014 and intends to  assess and update the plan annually. single place where it was tracking and coordinating its efforts to address  A2\/AD challenges, including those of the Army and Marine Corps, even  though the JOAC notes that addressing A2\/AD challenges requires closer  integration between services than ever before. The draft 2014 JOAC  Implementation Plan states that it is intended to provide coherence by  integrating, overseeing, communicating, and assessing the various efforts  being taken across DOD to create the capabilities required to overcome  A2\/AD challenges.\nThe first iteration of the implementation plan\u2014the 2014 plan\u2014remains in draft as of July  2014. officials.force development processes to gather information about current and  planned activities that contributed to the implementation of the JOAC.  They further noted that the JOAC implementation process may eventually  address not only capability issues but also capacity issues, which officials  from the Army, Marine Corps, and the combatant commands we spoke  with noted were critical in terms of overcoming A2\/AD challenges.\nThese officials stated that the intent was to leverage existing  Because of the large scope of the JOAC and to help familiarize  stakeholders with a new process, Joint Staff officials stated that the  working group decided to focus the first iteration of the plan on 10  required capabilities that it determined to be the highest priority rather  than including all 30 JOAC-required capabilities.  Once those capabilities  were identified, officials said that working group members, including those  from the Army and Marine Corps, reviewed ongoing and planned  activities from their respective organizations that they believed would  align with the implementation of 1 or more of the 10 prioritized  capabilities.\nThe JOAC identifies 30 required capabilities as essential to the implementation of the  concept (see app. I). While the 30 capabilities are unclassified, when they are ordered in  terms of priority, they become classified. Thus, the 10 capabilities that were considered  the highest priority for the department are classified. The working group identified the 10  priorities by comparing DOD\u2019s current list of prioritized gaps in the Chairman\u2019s Capability  Gap Assessment with the list of JOAC capabilities. The working group also included a  special topic in the annual Chairman\u2019s Joint Assessment that asked the services,  combatant commanders, and other DOD organizations to identify the highest-priority  JOAC-required capabilities. for completion determined by the organization responsible for the action  that could span several years. Thus, for each capability, multiple  organizations are simultaneously undertaking implementation actions with  various timelines for completion. Joint Staff officials stated that the  execution matrix revealed that DOD was already taking many actions  addressing the 10 prioritized capabilities.\nOfficials noted that the 165 implementation actions do not constitute the  full effort required to complete implementation of these 10 required  capabilities, and future iterations of the execution matrix will be updated  as required based on analyses to identify additional discrete  implementation actions. In addition, future iterations of the JOAC  Implementation Plan will also include the other JOAC-required  capabilities as well as required capabilities from other joint concepts that  support the JOAC, according to Joint Staff officials.\n\n\t\tDraft Implementation Plan Does Not Have Fully Established Specific Measures and Milestones to Assess Progress\n\nThe draft 2014 JOAC Implementation Plan does not fully establish the  specific measures and milestones DOD needs to allow decision makers  to assess the progress the department is making, including the  contributions of the Army and the Marine Corps. DOD guidance requires  that all joint concepts have an implementation plan that includes  measures and milestones that allow decision makers to gauge  implementation progress. Further, a stated purpose of the plan is to  measure progress toward the development of a joint force able to project  power despite A2\/AD challenges. Internal control standards in the federal  government also call for agencies to provide reasonable assurance to  decision makers that their objectives are being achieved and that decision  makers have reliable data to determine whether they are meeting goals  and using resources effectively and efficiently.\nMoreover, GAO\u2019s  Schedule Assessment Guide states that milestones and measures are  essential for tracking an organization\u2019s progress toward achieving  intermediate and long-term goals, and helping to identify critical phases of  the project and the essential activities needed to be completed within  given time frames.\nThe draft JOAC Implementation Plan identifies four stages at which the  working group is to assess implementation.\nImplementation Actions. The working group is to assess the progress  made in implementing the discrete materiel and nonmateriel actions in  the execution matrix.\nRequired Capabilities. The working group is to assess progress in  implementing each JOAC-required capability based on the progress  made on completing the implementation actions relevant to that  capability.\nOperational Objectives. The Implementation Plan organizes the  required capabilities into four operational objectives\u2014the broad goals  a commander must achieve in order to project power despite A2\/AD  challenges. The working group is to assess progress in  implementing each operational objective based on the progress of the  required capabilities aligned under each objective.\nEnd State. The working group is to assess progress in reaching the  JOAC end state based on the implementation progress of the four  operational objectives.\nThe draft 2014 JOAC Implementation Plan includes measures and  milestones for the 165 identified implementation actions but not for the  other three implementation stages. Specifically, the 165 actions will be  assessed as being either complete or not yet complete, according to Joint  Staff officials. However, Joint Staff officials stated the working group has  not yet developed the necessary measures to gauge the extent to which  required capabilities, operational objectives, or the end state have been  implemented. For example, the working group has not yet developed  measures for how the completion of an implementation action affects the  completion of the required capability to which it is tied. In other words, the  aggregate of the implementation actions will show how much work has  been completed\u2014i.e., the number of actions\u2014but it will not show how  much work remains to be completed to fully implement the required  capability. Thus, even if DOD completed all 165 implementation actions  identified in the first plan, it currently would not be able to determine the  progress in implementing the 10 required capabilities. Figure 5 shows the  stages at which the draft 2014 JOAC Implementation Plan has measures  and milestones.\nSimilarly, the draft 2014 JOAC Implementation Plan does not fully identify  milestones for all four implementation stages. Specifically, the plan  identifies milestones for the 165 implementation actions, but not for  required capabilities, operational objectives, and the end state. Moreover,  the 2014 plan does not indicate if or when milestones will be established.  For example, the implementation plan does not identify when the required  capability for expeditionary missile defense should be completed, and  Army officials told us that plans for developing this high-priority capability  may take decades. Additionally, the plan does not identify milestones for  implementing the operational objective related to engagement activities,  which, as noted previously, is an area in which the Army and Marine  Corps play primary roles.\nJoint Staff officials emphasized that the 2014 JOAC Implementation Plan  is the first of many iterations and was intended only to provide visibility of  ongoing activities relevant to the top 10 JOAC-required capabilities. Joint  Staff officials stated that they intend to include ways to assess overall  implementation progress in future iterations of the plan. Specifically, the  draft 2014 Implementation Plan states that the working group will  establish a process to aggregate implementation actions in such a way as  to allow it to gauge progress at the required capability, operational  objective, and end state stages. However, the draft plan provides no  detail about how or when this will be accomplished.\nWhile DOD has stated its intent to assess progress in the future, its  current planning lacks specifics about the measures it will employ and  how it will set milestones to gauge that progress. Consequently, the draft  2014 plan is not fully consistent with DOD guidance, as well as federal  internal control standards and GAO\u2019s Schedule Assessment Guide, that  emphasize the importance of tracking an organization\u2019s progress toward  achieving its goals. Without establishing specific measures and  milestones in future iterations of the JOAC Implementation Plan, DOD will  not be able to gauge JOAC implementation progress and assess whether  efforts by the joint force, to include the Army and the Marine Corps, will  achieve DOD\u2019s goals in desired time frames in the near and long terms.  Specifically, if DOD does not have a means to assess implementation  progress, it may lack assurance that Army and Marine Corps efforts to  address areas such as engagement activities, entry operations, logistics  support, and expeditionary missile defense fully align with the JOAC.  Moreover, without an effective implementation plan that allows decision  makers to track progress over time, DOD will not have the assurance that  it will be able to provide commanders with the forces they need to  overcome A2\/AD challenges envisioned to be faced by the joint force of  2020.\n\n\tConclusions\n\nThe proliferation of relatively low-cost advanced technologies and the  emergence of space and cyberspace as contested domains, along with  the change in U.S. overseas defense posture, present DOD with a future  operational environment that no longer includes the unimpeded  operational access DOD has enjoyed for decades. As potential  adversaries develop strategies aimed at preventing the U.S. military from  arriving at the fight and complicating its freedom of action once there,  DOD\u2019s planning has shifted to focus on how to maintain its ability to  project power into operational areas. While DOD may have initially  emphasized the role of the Air Force and Navy in overcoming A2\/AD  challenges, the Army and the Marine Corps also have primary roles to  play and are beginning to address these challenges.\nDOD\u2019s effort to develop an implementation plan is a significant step and  provides the foundation for a roadmap to move the JOAC from concept to  implementation. However, since it does not yet include specific measures  and milestones that would allow DOD to gauge JOAC implementation  progress, it is not yet clear the extent to which efforts across the  department to address A2\/AD challenges, including those of the Army  and Marine Corps, support JOAC implementation, or whether current  efforts align with JOAC implementation time frames. Given that some of  the department\u2019s efforts to address JOAC-required capabilities, such as  the Army\u2019s work on missile defense, may take many years, a means to  assess progress is essential. Specifically, fully establishing measures and  milestones would clarify what additional steps the Army and Marine Corps  may need to take to align their current efforts to address A2\/AD  challenges\u2014including with respect to their key roles in engagement  activities, entry operations, logistics support, and missile defense\u2014with  the required capabilities in the JOAC. Until future iterations of the JOAC  Implementation Plan contain specific measures and milestones to gauge  progress, DOD may find it difficult to judge whether it is on target to meet  its overall goal of ensuring the joint force of 2020 can operate effectively  in an A2\/AD environment.\n\n\tRecommendation for Executive Action\n\nTo improve DOD\u2019s ability to assess Joint Operational Access Concept  implementation, including the contribution of the Army and the Marine  Corps, we recommend that the Secretary of Defense direct the Joint  Staff, in coordination with the Army, the Marine Corps, and other  members of the working group, to establish specific measures and  milestones in future iterations of the JOAC Implementation Plan to gauge  how individual implementation actions contribute in the near and long  terms to achieving the required capabilities, operational objectives, and  end state envisioned by the department.\n\n\tAgency Comments and Our Evaluation\n\nWe provided a draft of this report to DOD for review and comment. DOD  provided written comments, which are summarized below and reprinted in  appendix II. In its written comments, DOD partially concurred with the  report\u2019s recommendation to establish specific measures and milestones  in future iterations of the JOAC Implementation Plan to gauge how  individual implementation actions contribute in the near and long term to  achieving the required capabilities, operational objectives, and end state  envisioned by the department.\nIn its comments, the department stated that it had previously recognized  the need to assess JOAC implementation progress and that it had  already begun to develop specific measures and milestones and would  incorporate them into annual updates of the JOAC Implementation Plan.  We noted in the report that DOD intended to include ways to assess  overall implementation progress in future iterations of the implementation  plan but that the draft 2014 plan did not fully establish specific measures  and milestones to assess progress or provide detail for how progress  would be assessed or when this would be accomplished. As also noted in  the report, it is important that specific measures and milestones move  beyond being able to assess progress of individual implementation  actions and expand to allow the department to gauge JOAC  implementation progress and assess whether efforts by the joint force, to  include the Army and the Marine Corps, will achieve DOD\u2019s goals in  desired time frames in the near and long terms. In doing so, DOD will be  better positioned to judge whether it is on target to meet its overall goal of  ensuring the joint force of 2020 can operate effectively in an A2\/AD  environment.\nDOD also provided technical comments, which we have incorporated as  appropriate.\nWe are sending copies of this report to appropriate congressional  committees, the Secretary of Defense, the Chairman of the Joint Chiefs of  Staff, the Secretary of the Army, and the Commandant of the Marine  Corps. In addition, the report is available at no charge on the GAO  website at http:\/\/www.gao.gov.\nIf you or your staff have any questions about this report, please contact  me at (202) 512-3489 or pendletonj@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.\n\nAppendix I: Joint Operational Access Concept Required Capabilities\n\nThe Joint Operational Access Concept (JOAC) identifies 30 capabilities  considered essential to the implementation of the concept and what the  future joint force will need to gain operational access in an opposed  environment. According to the JOAC, the list of required capabilities is  neither complete nor prioritized but provides a baseline for further  analysis and concept development. The JOAC organizes the required  capabilities in eight categories as described below.\n\n\tCommand and Control\n\n1.  The ability to maintain reliable connectivity and interoperability among  major warfighting headquarters and supported\/supporting forces while  en route.  2.  The ability to perform effective command and control in a degraded  and\/or austere communications environment.  3.  The ability to create sharable, user-defined operating pictures from a  common database to provide situational awareness (including  friendly, enemy, and neutral situations) across the domains.  4.  The ability to integrate cross-domain operations, to include at lower  echelons, with the full integration of space and cyberspace  operations.  5.  The ability to employ mission command to enable subordinate  commanders to act independently in consonance with the higher  commander\u2019s intent and effect the necessary cross-domain  integration laterally at the required echelon.\n\n\tIntelligence\n\n6.  The ability of operational forces to detect and respond to hostile  computer network attack in an opposed access situation.  7.  The ability to conduct timely and accurate cross-domain all-source  intelligence fusion in an opposed access situation.  8.  The ability to develop all categories of intelligence in any necessary  domain in the context of opposed access.\n\n\tFires\n\n9.  The ability to locate, target, and suppress or neutralize hostile anti- access and area denial capabilities in complex terrain with the  necessary range, precision, responsiveness, and reversible and  permanent effects while limiting collateral damage.  10. The ability to leverage cross-domain cueing to detect and engage in- depth to delay, disrupt, or destroy enemy systems.  11. The ability to conduct electronic attack and computer network attack  against hostile anti-access\/area denial capabilities.  12. The ability to interdict enemy forces and materiel deploying to an  operational area.\n\n\tMovement and Maneuver\n\n13. The ability to conduct and support operational maneuver over  strategic distances along multiple axes of advance by air and sea.  14. The ability to \u201cmaneuver\u201d in cyberspace to gain entry into hostile  digital networks.  15. The ability to conduct en route command and control, mission  planning and rehearsal, and assembly of deploying forces, to include  linking up of personnel and prepositioned equipment.  16. The ability to conduct forcible entry operations, from raids and other  limited-objective operations to the initiation of sustained land  operations.  17. The ability to mask the approach of joint maneuver elements to  enable those forces to penetrate sophisticated anti-access systems  and close within striking range with acceptable risk.\n\n\tProtection\n\n18. The ability to defeat enemy targeting systems, including their  precision firing capabilities.  19. The ability to provide expeditionary missile defense to counter the  increased precision, lethality, and range of enemy anti-access\/area  denial systems.  20. The ability to protect and, if necessary, reconstitute bases and other  infrastructure required to project military force, to include points of  origin, ports of embarkation and debarkation, and intermediate staging  bases.  21. The ability to protect forces and supplies deploying by sea and air.  22. The ability to protect friendly space forces while disrupting enemy  space operations.  23. The ability to conduct cyber defense in the context of opposed  access.\n\n\tSustainment\n\n24. The ability to deploy, employ, and sustain forces via a global network  of fixed and mobile bases, to include seabasing.  25. The ability to quickly and flexibly establish nonstandard support  mechanisms, such as the use of commercial providers and facilities.  26. The ability to plan, manage, and integrate contractor support in the  context of operations to gain operational access in the face of armed  resistance.\n\n\tInformation\n\n27. The ability to inform and influence selected audiences to facilitate  operational access before, during, and after hostilities.\n\n\tEngagement\n\n28. The ability to develop relationships and partnership goals and to share  capabilities and capacities to ensure access and advance long-term  regional stability.  29. The ability to secure basing, navigation, and overflight rights and  support agreements from regional partners.  30. The ability to provide training, supplies, equipment, and other  assistance to regional partners to improve their access capabilities.\n\nAppendix II: Comments from the Department of Defense\n\nAppendix III: GAO Contact and Staff Acknowledgments\n\n\tGAO Contact\n\n\tStaff Acknowledgments\n\nIn addition to the contact named above, Patricia Lentini, Assistant  Director; Margaret Morgan, Assistant Director; Carolynn Cavanaugh;  Colin Chambers; Nicolaas Cornelisse; Amie Steele; and Erik Wilkins- McKee made key contributions to this report.","output":"Why GAO Did This Study\n\nAccording to DOD, its ability to deploy military forces from the United States to a conflict area is being increasingly challenged as potential adversaries pursue capabilities designed to deny access. Access can be denied by either preventing an opposing force from entering an operational area or limiting an opposing force's freedom of action within an operational area. DOD has a joint concept that broadly describes how DOD will operate effectively in such access-denied environments. DOD's initial efforts have emphasized the roles of the Air Force and Navy.\nGAO was mandated to review the role of the Army and Marine Corps in access-denied areas. This report (1) describes Army and Marine Corps efforts to address operational access challenges and (2) analyzes the extent to which DOD is able to gauge how its efforts support implementation of its concept for future operations in access-denied environments. GAO analyzed DOD, Army, and Marine Corps concepts; reports on service-level exercises; DOD policy and guidance on concept implementation; and documents specifically related to the joint concept. GAO also interviewed cognizant DOD officials.\n\nWhat GAO Found\n\nThe Army and Marine Corps are undertaking multiple efforts to address operational access challenges\u2014challenges that impede a military force's ability to enter and conduct operations in an area\u2014that impact a broad range of their existing missions. For example, they are incorporating operational access challenges into their wargames and revising their service concepts, which inform their assessments of capability needs, gaps, and solutions. In addition, the Army and the Marine Corps have identified important roles they play in overcoming operational access challenges and are examining ways to carry them out in access-denied environments, including\nengagement activities\u2014improving access conditions through such activities as multinational exercises, prepositioning supplies, and forward presence, and\nentry operations\u2014deploying forces onto foreign territory to conduct missions such as eliminating land-based threats to access.\nIn addition, the Army has identified areas specific to its role, including\nlogistics\u2014sustaining forces despite increased vulnerabilities from access threats and challenges associated with new operational approaches, and\nmissile defense\u2014providing defense against increasingly accurate, lethal, and available ballistic and cruise missiles.\nThe Department of Defense (DOD) is unable to gauge the extent to which its efforts to overcome operational access challenges support the implementation of the 2012 Joint Operational Access Concept (JOAC). The JOAC describes how the department will operate effectively in future operating environments with access challenges and is intended to guide the development of capabilities for the joint force of 2020. The Joint Staff is leading a multiyear DOD-wide effort, initiated in June 2013, to coordinate, oversee, and assess the department's implementation of the JOAC. DOD plans to issue the first iteration of the JOAC Implementation Plan in 2014 and to assess and update the plan annually. The draft plan focuses on the highest-priority JOAC-required capabilities and identifies related actions, but does not fully establish specific measures and milestones to gauge progress. While DOD has stated its intent to assess progress in the future, its current planning lacks specific details about the measures it will employ and the milestones it will use to gauge that progress. Until DOD establishes specific measures and milestones in future iterations of its implementation plan, the department will not be able to gauge implementation progress and assess whether efforts by the joint force, to include the Army and the Marine Corps, will achieve DOD's goals in desired time frames. As a result, DOD may lack assurance that efforts, including those currently being undertaken by the Army and the Marine Corps to address areas such as engagement activities, entry operations, logistics, and expeditionary missile defense, will fully align with the JOAC.\n\nWhat GAO Recommends\n\nGAO recommends that DOD establish specific measures and milestones in future iterations of the JOAC Implementation Plan to improve DOD's ability to gauge implementation progress. DOD agreed with the importance of assessing the plan and said it is developing measures and milestones and will continue to refine these tracking tools in the future."}
{"id":"gao_GAO-03-320","pid":"gao_GAO-03-320_0","input":"\tBackground\n\nOur work has repeatedly shown that mission fragmentation and program  overlap are widespread in the federal government. In 1998 and 1999, we  found that this situation existed in 12 federal mission areas, ranging from  agriculture to natural resources and environment. We also identified, in  1998 and 1999, 8 new areas of program overlap, including 50 programs for  the homeless that were administered by 8 federal agencies. These  programs provided services for the homeless that appeared to be similar.   For example, 23 programs operated by 4 agencies offered housing services,  and 26 programs administered by 6 agencies offered food and nutrition  services. Although our work indicates that the potential for inefficiency  and waste exists, it also shows areas where the intentional participation by  multiple agencies may be a reasonable response to a complex public  problem. In either situation, implementation of federal crosscutting  programs is often characterized by numerous individual agency efforts that  are implemented with little apparent regard for the presence of efforts of  related activities.\nIn our past work, we have offered several possible approaches for better  managing crosscutting programs\u2014such as improved coordination,  integration, and consolidation\u2014to ensure that crosscutting goals are  consistent; program efforts are mutually reinforcing; and, where  appropriate, common or complementary performance measures are used  as a basis for management. One of our oft-cited proposals is to consolidate  the fragmented federal system to ensure the safety and quality of food.\nPerhaps most important, however, we have stated that the Results Act  could provide the Office of Management and Budget (OMB), agencies, and  Congress with a structured framework for addressing crosscutting  program efforts.  OMB, for example, could use the governmentwide  performance plan, which is a key component of this framework, to  integrate expected agency-level performance. It could also be used to more  clearly relate and address the contributions of alternative federal  strategies. Agencies, in turn, could use the annual performance planning  cycle and subsequent annual performance reports to highlight crosscutting  program efforts and to provide evidence of the coordination of those  efforts.\nOMB guidance to agencies on the Results Act states that, at a minimum, an  agency\u2019s annual plan should identify those programs or activities that are  being undertaken with other agencies to achieve a common purpose or  objective, that is, interagency and cross-cutting programs. This  identification need cover only programs and activities that represent a  significant agency effort.  An agency should also review the fiscal year 2003  performance plans of other agencies participating with it in a crosscutting  program or activity to ensure that related performance goals and indicators  for a crosscutting program are consistent and harmonious. As appropriate,  agencies should modify performance goals to bring about greater synergy  and interagency support in achieving mutual goals.\nIn April 2002, as part of its spring budget planning guidance to agencies for  preparing the President\u2019s fiscal year 2004 budget request, OMB stated that  it is working to develop uniform evaluation metrics, or \u201ccommon  measures\u201d for programs with similar goals.  OMB asked agencies to work  with OMB staff to develop evaluation metrics for several major  crosscutting, governmentwide functions as part of their September budget  submissions.  According to OMB, such measures can help raise important  questions and help inform decisions about how to direct funding and how  to improve performance in specific programs.  OMB\u2019s common measures  initiative initially focused on the following crosscutting program areas:  job training and employment,  health.\nWe recently reported that one of the purposes of the Reports Consolidation  Act of 2000 is to improve the quality of agency financial and performance  data.  We found that only 5 of the 24 CFO Act agencies\u2019 fiscal year 2000  performance reports included assessments of the completeness and  reliability of their performance data in their transmittal letters.  The other  19 agencies discussed, at least to some degree, the quality of their  performance data elsewhere in their performance reports.\n\n\tScope and Methodology\n\nTo address these objectives, we first defined the scope of each crosscutting  program area as follows:  Drug control focuses on major federal efforts to control the supply of  illegal drugs through interdiction and seizure, eradication, and arrests.\nFamily poverty focuses on major federal efforts to address the needs of  families in poverty through programs aimed at enhancing family  independence and well-being.  We focused on agencies that provide key  support and transition tools associated with the income, health, and  food support and assistance to poor families.\nFinancial institution regulation focuses on major federal efforts to  supervise and regulate depository institutions.  Supervision involves  monitoring, inspecting, and examining depository institutions to assess  their condition and their compliance with relevant laws and regulations.   Regulation of depository institutions involves making and issuing  specific regulations and guidelines governing the structure and conduct  of banking.\nPublic health systems focuses on major federal efforts to prevent and  control infectious diseases within the United States.\nTo identify the agencies involved in each area we relied on our previous  work and confirmed the agencies involved by reviewing the fiscal year 2001  Results Act performance report and fiscal year 2003 Results Act  performance plans for each agency identified as contributing to the  crosscutting program area.  To address the remaining objectives, we  reviewed the fiscal year 2001 performance reports and fiscal year 2003  performance plans and used criteria contained in the Reports  Consolidation Act of 2000 and OMB guidance.  The act requires that an  agency\u2019s performance report include a transmittal letter from the agency  head containing, in addition to any other content, an assessment of the  completeness and reliability of the performance and financial data used in  the report. It also requires that the assessment describe any material  inadequacies in the completeness and reliability of the data and the actions  the agency can take and is taking to resolve such inadequacies.\nOMB guidance states that agency annual plans should include a description  of how the agency intends to verify and validate the measured values of  actual performance. The means used should be sufficiently credible and  specific to support the general accuracy and reliability of the performance  information that is recorded, collected, and reported.\nWe did not include any changes or modifications the agencies may have  made to the reports or plans after they were issued, except in cases in  which agency comments provided information from a published update to  a report or plan.  Furthermore, because of the scope and timing of this  review, information on the progress agencies may have made in addressing  their management challenges during fiscal year 2002 was not yet available.\nWe did not independently verify or assess the information we obtained  from agency performance reports and plans.  Also, that an agency chose  not to discuss its efforts to coordinate in these crosscutting areas in its  performance reports or plans does not necessarily mean that the agency is  not coordinating with the appropriate agencies.\nWe conducted our review from September through November 2002, in  accordance with generally accepted government auditing standards.\n\n\tAgencies Involved in Crosscutting Areas Show Opportunities for Coordination\n\nAs shown in table 1, multiple agencies are involved in each of the  crosscutting program areas we reviewed.\nThe discussion of the crosscutting areas below summarizes detailed  information contained in the tables that appear in appendixes I through IV.\n\n\tDrug Control\n\nFourteen million Americans use illegal drugs regularly, and drug-related  illness, death, and crime cost the nation approximately $110 billion  annually. From 1990 through 1997, there were more than 100,000 drug- induced deaths in the United States.  Despite U.S. and Colombian efforts,  the illegal narcotics threat from Colombia continues to grow and become  more complex. From 1995 through 1999, coca cultivation and cocaine  production in Colombia more than doubled and Colombia became a major  supplier of the heroin consumed in the United States. Moreover, over time,  the drug threat has become more difficult to address.  ONDCP was  established by the Anti-Drug Abuse Act of 1988 to set policies, priorities,  and objectives for the nation's drug control program.  The Director of  ONDCP is charged with producing the National Drug Control Strategy,  which directs the nation's antidrug efforts and establishes a budget and  guidelines for cooperation among federal, state, and local entities.   ONDCP\u2019s 2001 Annual Report discussed two strategic goals that pertain to  controlling the supply of drugs that enter the United States, including   (1) \u201cshielding U.S. borders from the drug threat\u201d and (2) \u201creducing the  supply of illegal drugs.\u201d  ONDCP reported two performance goals under the  strategic goals\u2014reduce the rate of illicit drug flow through transit zones  and reduce the shipment rate of illicit drugs from arrival zones and supply  zones.\nFor fiscal year 2001, all the agencies we reviewed\u2014Justice, State,  Transportation, and Treasury\u2014discussed coordination with other agencies  in the area of drug control, although the level of detail varied.  For example,  Transportation stated that the Coast Guard worked with ONDCP and  Customs to finalize an interagency study of the deterrent effect that  interdiction has on drug trafficking organizations.  Also, Justice reported  that it collaborated with Transportation to prosecute cases that relate to  maritime drug smuggling.  In contrast, State identified the lead and partner  agencies it coordinated with to accomplish its goals, but it did not discuss  specific coordination efforts.  None of the agencies distinguished between  coordination efforts that occurred in fiscal year 2001 and those that were  planned for fiscal year 2003.\nNone of the agencies reported having met all of their goals and measures  relating to drug control in fiscal year 2001.  Customs reported that it met  eight of its nine measures for seizures of cocaine, marijuana, and heroin.   Customs reported that it did not meet its target for number of marijuana  seizures.  State reported that it met the targets for its goal of increasing  foreign governments\u2019 effectiveness in dissolving major drug trafficking  organizations and prosecuting and convicting major traffickers.  For the  other goal\u2014increasing foreign governments\u2019 effectiveness in reducing the  cultivation of coca, opium poppy, and marijuana\u2014State did not meet two  of its four targets.  For its two measures, Transportation reported that it did  not establish a target for one, the amount of drugs that are seized or  destroyed at sea, and it did not meet its target for the other, the seizure rate  for cocaine that is shipped through the transit zone.  Justice reported that it  exceeded the target for one measure\u2014number of priority drug trafficking  organizations dismantled or disrupted by the Drug Enforcement  Administration (DEA)\u2014and did not meet one of two targets for the second  measure\u2014the number of drug trafficking organizations dismantled by the  Federal Bureau of Investigation (FBI).\nThe four agencies we reviewed\u2014Justice, State, Transportation, and  Treasury\u2014provided explanations for not meeting their fiscal year 2001  goals that appeared reasonable.  For example, Customs which is under  Treasury stated that although it did not meet its target for the number of  marijuana seizures, it seized more pounds of marijuana in fiscal year 2001  than in any other year.  Customs stated that it believes that the number of  seizures dropped because of an overall increase in sizes of marijuana loads.   Furthermore, it stated that the heightened state of alert on the border  following the events of September 11, 2001, might have deterred the  entrance into the country of hundreds of smaller, personal-sized loads.   However, none of the agencies discussed strategies for achieving the unmet  goals and measures in the future.\nAccording to their fiscal year 2003 performance plans, the agencies we  reviewed expected to make progress on goals similar to those established  for fiscal year 2001.  All of Treasury\u2019s performance targets were adjusted to  reflect higher anticipated levels of performance.  Justice and State  reflected a mixture of higher and lower anticipated levels of performance.   Although its goals remained the same, Transportation had measures that  differed from those reported in fiscal year 2001.  Justice and Transportation  provided strategies that appear reasonably linked to achieving their goals  for fiscal year 2003.  For the goal of reducing the supply and use of drugs in  the United States, Justice stated that the nine Organized Crime Drug  Enforcement Task Force (OCDETF) teams would coordinate to develop a  national priority target list of the most significant drug and money  laundering organizations.  As drug organizations are dismantled and more  organizations are identified, the OCDETF teams will monitor their progress  and modify the target list.  To achieve its target for the amount of drugs  seized or destroyed at sea\u2014Transportation stated that the Coast Guard will  (1) operate along maritime routes to deter attempts to smuggle drugs and  (2) finalize an interagency study that focuses on the deterrent impact that  interdiction has on drug trafficking organizations.  Customs did not discuss  any strategies for achieving its fiscal year 2003 goals.  State provided only  general statements about how it planned to achieve its fiscal year 2003  goals.\nJustice, Transportation, and Treasury each commented on the overall  quality and reliability of its data.  For example, in its combined report and  plan, Justice states that to ensure that data contained in this document are  reliable, each reporting component was surveyed to ensure that the data  reported met the OMB standard for data reliability.  Data that did not meet  this standard were not included in the report and plan.  These agencies also  discussed the quality of specific performance data in their fiscal year 2001  performance reports to various degrees.  In its fiscal year 2001  performance report, Justice provided a discussion of data verification and  validation for each performance measure.  For example, for the measure of  drug trafficking organizations dismantled by the FBI, an FBI field manager  reviewed and approved data that were entered into the system and the data  were verified through the FBI\u2019s inspection process.  Transportation  reported that it used data entry software to ensure data quality and  consistency by employing selection lists and logic checks.  Also,  Transportation stated that internal analysis and review of published data by  external parties helps identify errors.  Furthermore, Customs reported on  the completeness, reliability, and credibility of its performance data by  discussing how it verifies the data for each performance measure.  State  did not report on the completeness, reliability, and credibility of its  performance data.\nWhile Justice, Transportation, and Treasury acknowledged shortcomings in  their performance data, they did not report steps to resolve or minimize  these shortcomings.  Justice reported one shortcoming which was the need  to improve its reporting system for one measure\u2014number of priority drug  trafficking organizations dismantled or disrupted by DEA.  Transportation  stated that although data verification and validation occurs several times in  the data reporting process, a potential limitation to the accuracy of its data  could stem from data duplication and coding errors.  Customs reported  that while its data could be considered reliable, the data could be subject to  input errors or duplicative reporting not identified by reviewers.  State did  not report on shortcomings in its performance data.\n\n\tFamily Poverty\n\nFederal government agencies have major programs aimed at supporting  families classified as poor.  For example, HHS\u2019s Temporary Assistance for  Needy Families (TANF) program makes $16.8 billion in federal funds  available to states each year. While TANF delegates wide discretion to the  states to design and implement the program, it does specify four broad  program goals that focus on children and families:  providing assistance to needy families so that children may be cared for  in their own homes or in the homes of relatives;  ending the dependence of needy parents on government benefits by  promoting job preparation, work, and marriage;  preventing and reducing the incidence of out-of-wedlock pregnancies;   encouraging the formation and maintenance of two-parent families.\nIn addition, Agriculture\u2019s Food Stamp Program helps low-income  individuals and families obtain a more nutritious diet by supplementing  their incomes with food stamp benefits. Agriculture\u2019s Food and Nutrition  Service and the states jointly implement the Food Stamp Program, which  provided about $15 billion in benefits to over 17 million low-income  individuals in the United States during fiscal year 2000.  In 1998, Congress  passed the Workforce Investment Act (WIA) to consolidate services of  many employment and training programs, mandating that states and  localities use a centralized service delivery structure\u2014the one-stop center  system\u2014to provide most federally funded employment and training  assistance.  We previously reported that several challenges, including  program differences between TANF and WIA and different information  systems used by welfare and workforce agencies, inhibit state and local  coordination efforts.  For example, different program definitions, such as  what constitutes work, as well as complex reporting requirements under  TANF and WIA hamper state and local coordination efforts. Though some  states and localities have found creative ways to work around these issues,  the differences remain barriers to coordination for many others. For  example, antiquated welfare and workforce information systems are often  not equipped to share data with each other, and as a result, sometimes one- stop center staff members have to enter the same client data into two  separate systems. Although HHS and Labor have each provided some  assistance to the states on how to coordinate services, available guidance  has not specifically addressed the challenges that many continue to face.   Moreover, HHS and Labor have not addressed differences in program  definitions and reporting requirements under TANF and WIA.  To address  the obstacles to coordination, we recommended that HHS and Labor work  together to develop ways to jointly disseminate information on how some  states and localities have taken advantage of the flexibility afforded to  them under TANF and WIA to pursue coordination strategies to address  some of these obstacles to coordination. We also recommended that HHS  and Labor, either individually or jointly, promote research that would  examine the role of coordinated service delivery on outcomes of TANF  clients.\nThe agencies we reviewed generally discussed in their performance reports  and plans their efforts to coordinate with other federal agencies on  programs that address family poverty.  Three major interagency task forces  bring all of the agencies we reviewed, plus others, together to coordinate  on such programs: (1) the Interagency Council on the Homeless, which  includes such federal entities as HUD, HHS, Agriculture, Commerce,  Education, Energy, Justice, Labor, Defense, Transportation, Veterans  Affairs, the Social Security Administration, the Federal Emergency  Management Agency, the General Services Administration, and the U.S.  Postal Service, (2) OMB\u2019s Workforce Investment Act Committee, which  includes HUD, Labor, HHS, and Education, to address the nation\u2019s  employment issues, and (3) the Workforce Excellence Network, which  comprises Education, HHS, and Labor, conducts two major national  conferences each year, in which Labor is able to \u201cshowcase\u201d its best WIA  programs.  In addition, three of the five agencies we reviewed identified  individual coordination efforts outside these task forces and specified the  programs on which they coordinated.  For example, HHS\u2019s ACF reported  that it works with Labor in Welfare-to-Work (WtW) and WIA efforts,  Transportation in their Access to Jobs program, Education in providing  education and training services, and HUD in providing housing assistance.   Agriculture and HHS\u2019s CMS stated that they coordinated with other  agencies, but did not specify the agencies or the types of coordination  efforts.\nThe agencies we reviewed reported varied progress in achieving their fiscal  year 2001 goals and measures.  For example, CMS reported meeting two  goals, partially meeting one goal, and not meeting a fourth goal related to  family poverty.  For its goal of promoting self-sufficiency and asset  development, HUD reported meeting the targets for seven of its  performance indicators, missing or expecting to miss six targets, not  having enough data for one target, and establishing baselines for 4 of its 18  performance indicators.  Incomplete data prevented Agriculture, ACF, and  HUD from reporting on all of their measures.  For example, ACF was  unable to report on its progress for 18 of its 23 performance indicators  related to three of its goals linked to family poverty due to the time lag in  receiving and validating data from states, localities, and other program  partners.  However, ACF was able to report that it fell short in achieving its  targets for the 5 performance indicators related to two of its goals:  improving the quality of child care and the Head Start Health Status  program.\nAll of the agencies provided explanations that appeared reasonable for not  meeting their goals. For example, ACF reported that two factors  contributed to its failure to meet two of the three targets for its goal of  improving Head Start Health Status: (1) a high student turnover rate  hindered the students\u2019 receipt of health care despite Head Start\u2019s medical  referrals and (2) Medicaid\u2019s inability to cover dental and mental health  treatment for Head Start students prevented them from receiving proper  care.  In addition, these agencies generally provided strategies that  appeared reasonably linked to achieving the unmet goals in the future.  For  example, Labor outlined strategies to address its two unmet goals relating  to higher wages for and retention of WtW participants in the workforce and  increasing the number of child care apprenticeship programs and  apprentices.  Specifically, Labor proposed making retention of WtW  participants more attractive by increasing grantees\u2019 use of tax credits and  continuing the Pathways to Advancement pilot project, which subsidizes  employers, upgrades and advances current TANF \u201calumni,\u201d and validates  data at the program level, among other strategies.\nFor their fiscal year 2003 plan, the agencies we reviewed generally set goals  similar to those established for fiscal year 2001, but increased the targets to  reflect anticipated higher levels of performance.  The exception to this  consistency was HUD, which reported that the draft of its updated strategic  plan for fiscal years 2000 through 2006 affected the fiscal year 2003  performance plan framework.  The new framework introduced eight  strategic goals, two of which addressed family poverty.  Objectives  included helping families in public and assisted housing make progress  toward self-sufficiency and become homeowners, ending chronic  homelessness in 10 years, and helping homeless individuals and families  move to permanent housing.  Four of the five agencies we reviewed\u2014 Agriculture, ACF, HUD, and Labor\u2014provided reasonable strategies for  achieving at least one of their fiscal year 2003 goals related to family  poverty.  For example, Labor lists departmentwide means and strategies for  meeting all of its goals, most of which are to continue or improve  preexisting efforts.  Following the list, Labor describes eight significant  new or enhanced efforts in fiscal year 2003.  For its goal of having states  develop a baseline and methodology for measuring the immunization of 2- year-old children under Medicaid, CMS discusses time frames for the  development of each state\u2019s baseline measure and reporting methodology,  but it does not describe specific strategies for how it intends to achieve its  targets for this area.\nAll of the agencies we reviewed addressed data quality issues in some form,  although the degree to which such issues were addressed varied.  Three of  the five agencies\u2014Agriculture, HUD, and Labor\u2014included a broad  statement at the beginning or end of their reports or plans stating that the  reported data were generally reliable.  Because all of the agencies we  reviewed rely on data from the states and other grantees to report on  performance for at least one of their goals, they reported on the difficulty  of obtaining quality data in a timely manner.  However, all of the agencies  reported that they have methods for reviewing the performance data for  consistency and completeness.  For example, CMS stated that it had built- in quality assurance checks, technical consultants, and a review of data by  CMS personnel.   In addition, the agencies generally acknowledged  shortcomings in the data and discussed steps they were taking to resolve or  minimize the shortcomings.  For example, HUD reported that it is  discontinuing or updating the 18 performance indicators we reviewed in its  fiscal year 2001 report because of its inability to address data reliability  issues and because the connection between the indicators and the outcome  measure was unknown, among other reasons.  For the estimated data, HUD  stated that accurate numbers would be reported in its fiscal year 2002  performance report if adjustments were necessary.\n\n\tFinancial Institution Regulation\n\nFinancial regulation of depository institutions in the United States is a  highly complex system.  Federal responsibilities for regulation and  supervision are assigned to five federal regulators: FDIC, the Board of  Governors of the Federal Reserve System, NCUA, OCC, and OTS.  FDIC  is the primary federal regulator and supervisor for federally insured state- chartered banks that are not members of the Federal Reserve System and  for state savings banks whose deposits are federally insured.  The Board is  the federal regulator and supervisor for bank-holding companies and is the  primary federal regulator for state-chartered banks that are members of the  Federal Reserve System.  OCC is the primary regulator of federally  chartered banks or national banks.  OTS is the primary regulator of all  federal and state-chartered thrifts whose deposits are federally insured and  their holding companies.  NCUA is the primary federal regulator for credit  unions.\nA primary objective of federal depository institution regulators is to ensure  the safe and sound practices and operations of individual depository  institutions through regulation and supervision.  Regulation of depository  institutions involves making and issuing specific regulations and guidelines  governing the structure and conduct of banking.   Supervision involves the  monitoring, inspecting, and examining of depository institutions to assess  their condition and their compliance with relevant laws and regulations.   Each federal depository regulator is responsible for its respective  institutions; for example, the Board examines and regulates state member  banks and OCC examines and regulates national banks.\nAlthough the Board, FDIC, OCC, OTS, and NCUA are responsible for  specific depository institutions, all of the agencies have similar oversight  responsibilities for developing and implementing regulations, conducting  examinations and off-site monitoring, and taking enforcement actions for  those institutions that are under their respective purview.  To ensure that  depository institutions are receiving consistent treatment in examinations,  enforcement actions, and regulatory decisions, coordination among the  regulators is essential.  In 1979, Congress established the Federal Financial  Institutions Examination Council (FFIEC) to promote uniformity in the  supervision of depository institutions by the Board, FDIC, NCUA, OCC, and  OTS.  It is a formal interagency body empowered to prescribe uniform  principles, standards, and report forms for the federal examination of  financial institutions and to make recommendations to promote uniformity  in the supervision of financial institutions.\nGenerally, the performance reports and plans of the federal depository  institutions regulators discussed possible coordination on crosscutting  goals.  The performance reports and plans of FDIC, OCC, and OTS  described the types of coordination that they conduct with the other  regulators.  The Board\u2019s 2002-2003 plan includes a section on interagency  coordination of crosscutting issues.  For instance, the section of the plan  entitled, \u201cInteragency Coordination of Crosscutting Issues\u201d stated that the  Board formally coordinates with other federal depository institutions  regulators through the FFIEC and its participation with the Results Act  Financial Institutions Regulatory Working Group, a coordinating  committee of the depository institution regulators to address and report on  issues of mutual concern.  The performance report and plan of NCUA did  not include any discussion of coordination efforts with the other federal  depository institution regulators.\nIn 2001 and 2002, the federal depository institution regulators jointly issued  guidance or regulations on a number of occasions.  For example, the  regulators often jointly issue guidance in areas such as the risks of  brokered and other rate-sensitive deposits, temporary balance sheet  growth, clarification on the accounting and reporting for loans held for  sale, and consumer privacy.  In addition, earlier this year, the federal  depository institution regulators jointly issued proposed regulations to  implement section 326 of the USA Patriot Act on customer identification.   In 2001, they jointly issued guidelines on safeguarding confidential  customer information.\nOn the basis of their fiscal year 2001 performance reports, all the federal  depository institution regulators reported they made progress in achieving  their fiscal year 2001 goals for the supervision and regulation function.  The  Board, FDIC, and OCC each reported meeting all of their goals except for  one related to the examinations of depository institutions that were due for  a safety and soundness examination in 2001.  However, each of the three  agencies provided a reasonable explanation for not achieving the goal.    FDIC was unable to examine 11 banks that were scheduled for an  examination for the following reasons:  some institutions merged or  converted their charters, some institutions moved into or changed their  capital categories requiring a change in examination intervals, and one  institution converted its information system.  The Board did not meet its  goal because it failed to complete 17 bank examinations, as required by  statute and on the basis of their financial condition in 2001, but the Board  provided an appropriate reason for the delay\u2014scheduling problems with  state bank regulatory agencies.  The Board reported that it is implementing  a new scheduling system that will partially resolve these problems.  NCUA  reported it generally met its performance goals, although out of its four  strategic goals, it missed one out of five outcome goals for two and was  unable to report on most of the outcome goals for another. OTS reported  meeting all of its goals.\nOn the basis of their fiscal year 2003 performance plans, three of the five  federal depository institution regulators designed strategies to achieve  their performance goals that appear to be reasonable.  Similar to the fiscal  year 2001 performance reports, the performance goals focused on the  scheduling of examinations under specific time frames, enforcement  actions, and reviewing compliance with consumer protection statutes  relating to consumer financial transactions.  The Board\u2019s performance plan  outlined strategies that appeared reasonably linked to achieving its goals  and objectives for promoting a safe, sound, competitive, and accessible  banking system.  For example, the Board\u2019s plan proposed focusing on the  areas of highest risk, promoting sound risk management practices,  understanding and accommodating the effects of financial innovation and  technology, improving international banking and supervisory practices, and  refining and strengthening the foreign bank organizations program, among  other strategies.  The FDIC performance plan included a strategy for  achieving its planned performance goals that also appeared reasonable.   For example, FDIC plans to analyze examination-related data collected in  the System of Uniform Reporting of Compliance and Community  Reinvestment Act (CRA) Examination to determine whether it achieved  targeted performance levels during the reporting period.  In its  performance plan, OCC discussed strategies for each of its strategic goals.   OTS discussed general strategies, which were not clearly linked to  particular performance goals.\nOf the five regulators, only the performance reports of OCC and OTS  commented on the completeness, reliability, and credibility of the data for  the supervision and regulation function.  OCC\u2019s performance report for  fiscal year 2001 concluded the data were accurate for some of the  performance measurements used in the report.  In its fiscal year 2001  performance report, OTS concluded that the data for its performance  measures met standards for accuracy and auditability.  The performance  reports issued by the Board, FDIC, and NCUA did not discuss whether the  performance data for the supervision and regulation areas used in the  reports were complete, reliable, and credible.  None of their performance  reports commented on the potential shortcomings of these data.\n\n\tPublic Health Systems\n\nBroadly speaking, federal involvement in the area of public health systems  encompasses a mix of efforts to maintain the health of a diverse  population, such as directly providing health services, regulating  prescription drugs, or paying for medical services provided to the aged and  the needy.  In this report, we focused one aspect of the public health  system\u2014federal efforts to prevent and control infectious diseases within  the United States.  The spread of infectious diseases is a public health  problem once thought to be largely under control. However, outbreaks over  the last decade illustrate that infectious diseases remain a serious public  health threat.  For example, foodborne disease in the United States  annually causes an estimated 76 million illnesses, 325,000 hospitalizations,  and about 5,000 deaths, according to the Centers for Disease Control and  Prevention (CDC).  The resurgence of some infectious diseases is  particularly alarming because previously effective forms of control are  breaking down. For example, some pathogens (disease-causing organisms)  have become resistant to antibiotics used to bring them under control or  have developed strains that no longer respond to the antibiotics.  The need  for concerted efforts to prevent such diseases is critical to reducing this  threat to the public.  We have previously reported on various aspects of  protecting public health, such as ensuring the vaccination of children  through the Vaccines for Children program and limitations in several of  CDC\u2019s foodborne disease surveillance systems.\nAgriculture and each of the five components of HHS we reviewed\u2014CDC,  CMS, FDA, HRSA, and NIH\u2014discussed in their performance reports and  performance plans coordination efforts with other agencies related to  preventing infectious diseases.  For example, CDC reported that it  coordinated with (1) Agriculture and FDA on its food safety programs,  (2) HRSA, CMS, FDA, and NIH, among others, on its immunization  objectives, and (3) NIH and FDA on the development of new diagnostic and  treatment tools and better vaccines for tuberculosis.  Also, Agriculture  reported that it coordinated with HHS and the Environmental Protection  Agency regarding the goal to protect the public health by reducing the  incidence of foodborne illnesses.  However, none of the agencies discussed  specific details about the coordination.\nAccording to its combined fiscal year 2001 performance report and fiscal  year 2003 performance plan, NIH was the only agency that reported  achieving its public health systems goal\u2014to develop new or improved  approaches for preventing or delaying the onset or progression of disease  and disability.  Agriculture, FDA, and CDC each reported missing some of  its performance targets.  In addition, CDC, CMS, and HRSA lacked data to  report on some or all of their performance goals for fiscal year 2001.  For  example, HRSA indicated that the performance data for its goal\u2014increase  the proportion of the national AIDS education and training center (AETC)  interventions provided to minority health care providers\u2014will not be  collected until February 2003.   Three agencies\u2014CDC, FDA, and  Agriculture\u2014provided explanations for not meeting a measure or goal that  appeared reasonable.  For example, FDA reported that it missed its  target\u2014inspect 90 percent of high-risk domestic food establishments each  year\u2014because the agency purposefully diverted resources for these  inspections to focus on the even greater threat of bovine spongiform  encephalopathy that was breaking out in Europe at the time.  None of these  agencies discussed strategies to achieve the unmet goals in the future.\nFor fiscal year 2003, HHS\u2019s CDC, CMS, FDA, and HRSA, and Agriculture,  reported they expect to make progress on goals that were generally the  same as those they reported on in fiscal year 2001.  NIH developed two new  subgoals for its goal of developing new or improved approaches to  preventing or delaying the onset or progression of disease and disability,  but did not indicate targets for the new goals.  CDC developed a new goal  of conducting research to identify and assess community-based prevention  interventions.  HRSA plans to drop one of its goals\u2014\u201cincrease the number  of minority health care and social service providers who receive training in  AETCs\u201d\u2014because measuring the percentage of training interventions  provided to minority health providers was determined to be a more  accurate and appropriate method to measure the program\u2019s progress in  training health care providers.  CMS and HRSA reported that they expected  to achieve higher levels of performance for all of their targets.  CDC, FDA,  and Agriculture planned for a mixture of higher and lower levels of  performance in fiscal year 2003.\nAgriculture and three of the five HHS components we reviewed discussed  strategies that appeared reasonably linked to achieving their fiscal year  2003 goals.  For example, Agriculture reported that its performance goal\u2014 create a coordinated national and international food safety risk  management system to ensure safety of U.S. meat and poultry\u2014has a set of  specifically outlined strategies to follow in order to accomplish the goal,  including (1) develop national performance standards for ready-to-eat meat  and poultry items, (2) ensure food safety requirements are followed by  monitoring slaughter and process plants, and (3) increase reviews of  foreign inspection systems to ensure the safety of imported meat, poultry,  and egg products.  In contrast, NIH and HRSA did not discuss strategies for  achieving their fiscal year 2003 goals.\nAgriculture and NIH commented on the overall quality and reliability of the  performance data in their fiscal year 2001 performance reports.  For  example, NIH progress toward meetings its goals was assessed by its GPRA  Assessment Working Group, which reviewed the performance data.  In  addition, CDC, CMS, and Agriculture discussed aspects of data quality for  each of their performance measures.   For example, CDC\u2019s combined report  and plan addresses data verification and validation for each data source  corresponding to each goal.  FDA and HRSA discussed narrow aspects of  data quality for certain measures.\nFDA and HRSA acknowledged shortcomings in their performance data and  reported steps to resolve or minimize those shortcomings.  For example,  FDA stated that existing public health data systems are not adequate to  provide accurate and comprehensive baseline data needed to draw direct  relationships between FDA\u2019s regulatory activities and changes in the  number and types of foodborne illnesses that occur annually in the United  States.  Therefore, through coordination with CDC and Agriculture, FDA  reported developing an improved food safety surveillance program called  FoodNet.  HRSA reported limitations related to its HIV\/AIDS data  collection efforts.  For example, the reporting system that holds the data  contains duplicate data about individuals that prevents accurate  conclusions from being made.  To minimize the limitations, HRSA reported  it allows grantees the option of participating in a client-level reporting  system.  CDC and CMS acknowledged shortcomings in their data but did  not discuss steps to minimize the shortcomings.  NIH and Agriculture did  not discuss any limitations to their performance data in the area of public  health systems.\n\n\tConcluding Observations\n\nWe have previously stated that the Results Act could provide OMB,  agencies, and Congress with a structured framework for addressing  crosscutting program efforts.  In its guidance, OMB clearly encourages  agencies to use their performance plans as a tool to communicate and  coordinate with other agencies on programs being undertaken for common  purposes to ensure that related performance goals and indicators are  consistent and harmonious.  We have also stated that the Results Act could  also be used as a vehicle to more clearly relate and address the  contributions of alternative federal strategies.  The President\u2019s common  measures initiative, by developing metrics that can be used to compare the  performance of different agencies contributing to common objectives,  appears to be a step in this direction.\nSome of the agencies we reviewed appear to be using their performance  reports and plans as a vehicle to assist in collaborating and coordinating  program areas that are crosscutting in nature.  Those that provided more  detailed information on the nature of their coordination provided greater  confidence that they are working in concert with other agencies to achieve  common objectives.  Other agencies do not appear to be using their plans  and reports to the extent they could to describe their coordination efforts  to Congress, citizens, and other agencies.\nFurthermore the quality of the performance information reported\u2014how  agencies explain unmet goals and discuss strategies for achieving  performance goals in the future, and overall descriptions of the  completeness, reliability, and credibility of the performance information  reported\u2014varied considerably.  Although we found a number of agencies  that provided detailed information about how they verify and validate  individual measures, only 5 of the 10 agencies we reviewed for all the  crosscutting areas commented on the overall quality and reliability of the  data in their performance reports consistent with the requirements of the  Reports Consolidation Act.  Without such statements, performance  information lacks the credibility needed to provide transparency of  government operations so that Congress, program managers, and other  decision makers can use the information.\n\n\tAgency Comments and Our Evaluation\n\nWe sent drafts of this report to the respective agencies for comments. We  received comments from Agriculture, the Board, FDIC, HHS, HUD, Labor,  and Treasury, including OCC and OTS.  The agencies generally agreed with  our findings.  The comments we received were mostly technical and we  have incorporated them where appropriate.\nRegarding drug control, Justice, through its Office of Legal Policy,  commented that, as of November 2002, Justice had formalized increased  cooperation with ONDCP on drug policy and operations.\nRegarding public health systems, the NIH component of HHS commented  that the prevention goal GAO looked at is one of five goals that together  that give a comprehensive picture of the performance of NIH\u2019s research  program.  Furthermore, NIH commented that there are many formal and  informal ways in which it coordinates its work in the prevention arena that  are not reflected in its performance plan.  For example, NIH cites the Next- Generation Smallpox Vaccine Initiative, an intradepartmental task force  consisting of representatives from the Office of Public Health Policy, CDC,  FDA, and NIH.  We acknowledge this limitation in the scope and  methodology section of the report.\nRegarding family poverty, HUD commented that, although GAO\u2019s review  focused on two of HUD\u2019s eight goals, it believes all of its goals and many of  its indicators have an impact on family poverty.  We do not dispute HUD\u2019s  assertion that many of its goal address family poverty broadly.  However,  we focused on the goals that appeared to be most directly related to the  scope we defined in our scope and methodology section.\nRegarding financial institution regulation, FDIC commented that a lack of  specific reference in the performance report regarding the completeness,  reliability and credibility of the data should not lead to a negative inference.\nWe are sending copies of this report to the President, the Director of the  Office of Management and Budget, the congressional leadership, other  Members of Congress, and the heads of major departments and agencies.   In addition, the report will be available at no charge on the GAO Web site at  http:\/\/ www.gao.gov.\nIf you have any questions about this report, please contact me or Elizabeth  Curda on (202) 512-6806 or daltonp@gao.gov. Major contributors to this  report are listed in appendix V.\n\nGAO Contact and Staff Acknowledgments\n\n\tGAO Contact\n\n\tAcknowledgments\n\nIn addition to the individual named above, the following individuals made  significant contributions to this report:  Steven J. Berke, Lisa M. Brown,  Amy M. Choi, Peter J. Del Toro, Nancy M. Eibeck, and Debra L. Johnson.\n\n\tGAO\u2019s Mission\n\nThe General Accounting Office, the investigative arm of Congress, exists to  support Congress in meeting its constitutional responsibilities and to help improve  the performance and accountability of the federal government for the American  people. GAO examines the use of public funds; evaluates federal programs and  policies; and provides analyses, recommendations, and other assistance to help  Congress make informed oversight, policy, and funding decisions. GAO\u2019s  commitment to good government is reflected in its core values of accountability,  integrity, and reliability.\n\n\tObtaining Copies of GAO Reports and Testimony\n\nThe fastest and easiest way to obtain copies of GAO documents at no cost is  through the Internet. GAO\u2019s Web site (www.gao.gov) contains abstracts and full- text files of current reports and testimony and an expanding archive of older  products. The Web site features a search engine to help you locate documents  using key words and phrases. You can print these documents in their entirety,  including charts and other graphics.\nEach day, GAO issues a list of newly released reports, testimony, and  correspondence. GAO posts this list, known as \u201cToday\u2019s Reports,\u201d on its Web site  daily. The list contains links to the full-text document files. To have GAO e-mail this  list to you every afternoon, go to www.gao.gov and select \u201cSubscribe to GAO  Mailing Lists\u201d under \u201cOrder GAO Products\u201d heading.\n\n\t\tOrder by Mail or Phone\n\n\tTo Report Fraud, Waste, and Abuse in Federal Programs\n\n\tPublic Affairs","output":"Why GAO Did This Study\n\nGAO's work has repeatedly shown that mission fragmentation and program overlap are widespread in the federal government. Implementation of federal crosscutting programs is often characterized by numerous individual agency efforts that are implemented with little apparent regard for the presence and efforts of related activities. GAO has in the past offered possible approaches for managing crosscutting programs, and has stated that the Government Performance and Results Act could provide a framework for addressing crosscutting efforts. GAO was asked to examine the actions and plans agencies reported in addressing the crosscutting issues of drug control, family poverty, financial institution regulation, and public health systems. GAO reviewed the fiscal year 2003 performance plans for the major agencies involved in these issues.\n\nWhat GAO Found\n\nGAO did not independently verify or assess the information it obtained from agency performance reports and plans. On the basis of the reports and plans, GAO found the following: (1) Most agencies involved in the crosscutting issues discussed coordination with other agencies in their performance reports and plans, although the extent of coordination and level of detail provided varied considerably; (2) Most of the agencies we reviewed reported mixed progress in achieving their fiscal year 2001 goals--meeting some goals, missing others, or not reporting on progress. Some of the agencies that did not meet their goals provided reasonable explanations and\/or strategies that appeared reasonably linked to meeting the goals in the future; and (3) The agencies GAO reviewed generally planned to pursue goals in fiscal year 2003 similar to those in 2001, although some agencies added new goals, dropped existing goals, or dropped goals altogether. Many agencies discussed strategies that appeared to be reasonably linked to achieving their fiscal year 2003 goals."}
{"id":"crs_RS20672","pid":"crs_RS20672_0","input":"\tBackground\n\nSources of arsenic in water include natural sources, particularly rocks and soils, and also releases from its use as a wood preservative, in semi-conductors and paints, and from mining and agricultural operations. Elevated levels of arsenic are found more frequently in ground water than in surface water. Because small communities typically rely on wells for drinking water, while larger cities often use surface-water sources, arsenic tends to occur in higher concentrations more frequently in water used by small communities.\nIn the United States, the average arsenic level measured in ground-water samples is less than or equal to 1 part per billion (ppb, or micrograms per liter [\u03bcg\/L]); however, higher levels are not uncommon. Compared with the rest of the United States, Western states have more water systems with levels exceeding 10 ppb; levels in some locations in the West exceed 50 ppb. Parts of the Midwest and New England also have some water systems with arsenic levels exceeding 10 ppb, but most systems meet the new standard. When issuing the rule, EPA estimated that roughly 4,000 (5.5%) of regulated water systems, serving a total of 13 million people, were likely to exceed the 10 ppb standard.\nThe previous drinking water standard for arsenic, 50 ppb, was set by the U.S. Public Health Service in 1942. EPA adopted that level and issued an interim drinking water regulation for arsenic in 1975. This standard was based on estimated total dietary intake and non-cancer health effects. In 1986, Congress amended the Safe Drinking Water Act (SDWA), converted all interim standards to National Primary Drinking Water Regulations, and included arsenic on a list of 83 contaminants for which EPA was required to issue new standards by 1989. EPA's extensive review of arsenic risk assessment issues caused the agency to miss the 1989 deadline. As a result of a citizen suit, EPA entered into a consent decree with a new deadline for the rule of November 1995. EPA continued work on risk assessment, water treatment, analytical methods, implementation, and occurrence issues, but in 1995 decided to delay the rule in order to better characterize health effects and assess cost-effective removal technologies for small utilities.\n\n\tArsenic and the 1996 SDWA Amendments\n\nIn the 1996 SDWA Amendments ( P.L. 104-182 ), Congress directed EPA to propose a new drinking water standard for arsenic by January 1, 2000, and to promulgate a final standard by January 1, 2001. Congress also directed EPA to develop a research plan for arsenic to support the rulemaking effort and to reduce the uncertainty in assessing health risks associated with low-level exposures to arsenic. EPA was required to conduct the study in consultation with the National Academy of Sciences. In 1996, EPA requested the National Research Council (NRC) to review the available arsenic toxicity data base and to evaluate the scientific validity of EPA's risk assessments for arsenic.\nThe NRC issued its report in 1999 and recommended that the standard be reduced, but it did not recommend a particular level. The NRC affirmed that the available data provided ample evidence for EPA's classification of inorganic arsenic as a human carcinogen, but that EPA's dose-response assessment, which was based on a Taiwan study, deserved greater scrutiny. The NRC explained that the data in the study lacked the level of detail needed for use in dose-response assessment. The Council also reported that research suggested that arsenic intake in food is higher in Taiwan than in the United States, further complicating efforts to use the data for arsenic risk assessment. Based on findings from three countries where individuals were exposed to very high levels of arsenic (several hundreds of parts per billion or more), the NRC concluded that the data were sufficient to add lung and bladder cancers to the types of cancers caused by ingestion of inorganic arsenic; however, the NRC noted that few data addressed the risk of ingested arsenic at lower concentrations, which would be more representative of levels found in the United States. The NRC concluded that key studies for improving the scientific validity of risk assessment were needed, and recommended specific studies to EPA.\n\n\tEPA's Final Arsenic Rule\n\nIn June 2000, EPA published its proposal to revise the arsenic standard from 50 ppb to 5 ppb and requested comment on options of 3 ppb, 10 ppb, and 20 ppb. EPA stated that the proposal relied primarily on the NRC analysis and some recently published research, and that it would further assess arsenic's cancer risks before issuing the final rule. As proposed, the standard would have applied only to community water systems. Non-transient, non-community water systems (e.g., schools with their own wells) would have been required only to monitor and then report if arsenic levels exceeded the standard. In the final rule, published on January 22, 2001 (66 FR 6976), EPA set the standard at 10 ppb and applied it to non-transient, non-community water systems, as well as community water systems. The agency gave the water utilities five years to comply (the maximum amount of time allowed under SDWA). EPA estimated that 3,000 (5.5%) of the 54,000 community water systems, and 1,100 (5.5%) of the 20,000 non-transient, non-community water systems, would need to take measures to meet the standard.\n\n\t\tStandard-Setting Process\n\nIn developing standards under the Safe Drinking Water Act, EPA is required to set a maximum contaminant level goal (MCLG) at a level at which no known or anticipated adverse health effects occur and that allows an adequate margin of safety. (EPA sets the MCLG at zero for carcinogens [as it did for arsenic], unless a level exists below which no adverse health effects occur.) EPA must then set an enforceable standard, the MCL, as close to the MCLG as is \"feasible\" using the best technology, treatment, or other means available (taking costs into consideration). EPA's determination of whether a standard is feasible typically has been based on costs to large water systems (serving more than 50,000 people). Less than 2% of community water systems (roughly 750 of 54,000 systems) are this large, but they serve roughly 56% of all people served by community systems.\n\n\t\tVariances and Exemptions\n\nCongress has long recognized that the technical and cost considerations associated with technologies selected for large cities often are not applicable to small systems. In the 1996 amendments, Congress expanded SDWA variance and exemption provisions to address small system compliance concerns.\nThe small system variance provisions require that for each rule establishing an MCL, EPA must list technologies that comply with the MCL and are affordable for three size categories of small systems. If EPA does not list affordable compliance technologies for small systems, then it must list variance technologies. A variance technology need not meet the MCL, but must be protective of public health. If EPA lists a variance technology, a state then may grant a variance to a small system, allowing the system to use a variance technology to comply with a regulation. EPA has not identified variance technologies for arsenic or any other standards because, based on its current affordability criteria, EPA has determined that affordable compliance technologies are available for all standards. Thus, small system variances are not available.\nCongress took issue with EPA's assessment that small system variance technologies were not merited for the arsenic standard, and in 2002, directed EPA to review the criteria it uses to determine whether a compliance treatment technology is affordable for small systems. In March 2006, EPA proposed three options for revising its affordability criteria (71 FR 10671). Under the current affordability criteria, EPA considers a treatment technology affordable unless the average compliance cost exceeds 2.5% of the area's median household income. Based on this measure, EPA determined that affordable technologies are available for all SDWA standards. The proposed options under consideration are well below the current level: 0.25%, 0.50%, and 0.75% of an area's median household income. EPA also stated that it expects to address in the revised criteria the issue of how to ensure that a variance technology would be protective of public health. According to EPA, the final criteria would apply only to the new Stage 2 Disinfectants\/Disinfection Byproducts Rule and future rules, and not to the arsenic rule.\nExemptions potentially offer a source of compliance flexibility for small systems. States may grant temporary exemptions from a standard if, for certain reasons (including cost), a system cannot comply on time. The arsenic rule gives systems five years to comply with the new standard; an exemption allows another three years for qualified systems. Systems serving 3,300 or fewer persons may receive up to three additional two-year extensions, for a total exemption duration of nine years (a total of 14 years to achieve compliance). In the final rule, EPA noted that exemptions will be an important tool to help states address the number of systems needing financial assistance to comply with this rule and other SDWA rules (66 FR 6988). However, to grant an exemption, the law requires a state to hold a public hearing and make a finding that the extension will not result in an \"unreasonable risk to health.\" Because the exemption process is complex, states have seldom granted them. State officials have noted that \"unreasonable risk to health\" has never been defined, and that states must make a separate finding for each system. Many states have granted few or no exemptions for the arsenic rule.\n\n\t\tCosts and Benefits\n\nWhen proposing a rule under SDWA, EPA must publish a determination as to whether or not the benefits of the standard justify the costs. If EPA determines that costs are not justified, then it may set the standard at the level that maximizes health risk reduction benefits at a cost that is justified by the benefits. EPA determined that the \"feasible\" arsenic level (for large systems) was 3 ppb, but that the benefits of that level did not justify the costs. Thus, EPA proposed a standard of 5 ppb. Also, EPA proposed to require non-transient, non-community water systems (e.g., schools) only to monitor and report (as opposed to treating), largely because of cost-benefit considerations. In setting the standard at 10 ppb, EPA cited SDWA, stating that this level \"maximizes health risk reduction benefits at a cost that is justified by the benefits.\" The final rule applies to schools and similar non-community water systems.\nIn the final rule, EPA estimated that reducing the standard to 10 ppb could prevent roughly 19 to 31 bladder cancer cases and 5 to 8 bladder cancer deaths each year. The agency further estimated that the new standard could prevent 19 to 25 lung cancer cases and 16 to 22 lung cancer deaths each year, and provide other cancer and non-cancer health benefits that were not quantifiable.\nRegarding the cost of meeting the 10 ppb standard, EPA estimated that for systems that serve fewer than 10,000 people, the average cost per household could range from $38 to $327 per year. Roughly 97% of the systems that were expected to exceed the standard are in this category, and most of these systems serve fewer than 500 people. For larger systems, projected water cost increases range from $0.86 to $32 per household. The estimated national, annualized cost of the rule is approximately $181 million.\nEPA's Science Advisory Board (SAB) had raised concerns about the rule's economic and engineering assessment, and concluded that several cost assumptions were likely to be unrealistic and other costs seemed to be excluded. The SAB also suggested that EPA give further thought to the concept of affordability as applied to this standard. Many municipalities and water system representatives also disagreed with the agency's cost estimates. The American Water Works Association (AWWA), while supporting a stricter standard, estimated that the new rule would cost $600 million annually and require $5 billion in capital outlays. AWWA attributed differences in cost estimates partly to the costs of handling arsenic-contaminated treatment residuals and the estimated number of wells affected. AWWA projected that the rule could cost individual households in the Southwest, Midwest, and New England as much as $2,000 per year.\n\n\t\tArsenic Rule Review\n\nEPA issued the final rule on January 22, 2001. In March 2001, the Administrator delayed the rule for 60 days, citing concerns about the science supporting the rule and its estimated cost to communities. On May 22, 2001, EPA delayed the rule's effective date until February 22, 2002, but did not change the 2006 compliance date for water systems (66 FR 28342). At EPA's request, the NRC undertook an expedited review of EPA's arsenic risk analysis and the latest health effects research, the National Drinking Water Advisory Council (NDWAC) reassessed the rule's cost, and the SAB reviewed its benefits. EPA also requested public comment on whether the data and analyses for the rule support setting the standard at 3, 5, 10, or 20 ppb (66 FR 37617). The NRC determined that \"recent studies and analyses enhance the confidence in risk estimates that suggest chronic arsenic exposure is associated with an increased incidence of bladder and lung cancer at arsenic levels in drinking water below the current MCL of 50 \u03bcg\/L.\" The NDWAC concluded that EPA had produced a credible cost estimate, given constraints and uncertainties, and suggested ways to improve estimates. The SAB offered ways to improve the benefits analysis. In October 2001, EPA affirmed that 10 ppb was the appropriate standard and announced plans to provide $20 million for research on affordable treatment technologies to help small systems comply.\n\n\tLegislative Action\n\nSince the arsenic standard was revised, Congress repeatedly has expressed concern over the cost of this regulation, especially to small, rural communities. The 107 th Congress directed EPA to review its affordability criteria and how the small system variance and exemption programs should be implemented for arsenic ( P.L. 107-73 , H.Rept. 107-272 , p. 175). The conferees directed the agency to report on its affordability criteria, administrative actions, funding mechanisms for small system compliance, and possible legislative actions. In 2002, EPA submitted its report to Congress, Small Systems Arsenic Implementation Issues , on actions EPA was taking to address these directives. Major activities included developing and implementing a small community assistance plan to improve access to financial and technical assistance, improve compliance capacity, and simplify the use of exemptions. EPA also has sponsored research on low-cost arsenic treatment technologies and has issued guidance to help states grant exemptions.\nThe 108 th Congress again expressed concern over the economic impact that the revised standard could have in many communities. In the conference report for the omnibus appropriations act for FY2005 ( P.L. 108-447 ), Congress provided $8.2 million for arsenic removal research. The conferees expressed concern that the new requirements could pose a \"huge financial hardship\" for many rural communities. Congress directed EPA to report on the extent to which communities were being affected by the rule and to propose compliance alternatives and make recommendations to minimize costs. This report is pending.\nIn the 110 th Congress, as in the 109 th Congress, legislative efforts focused on helping economically struggling communities comply with the arsenic rule and other drinking water standards. Various bills were offered to promote small system compliance by providing technical assistance, financial assistance, and\/or compliance flexibility. The Senate Environment and Public Works Committee reported several bills that would have authorized new funding for drinking water infrastructure. The Water Infrastructure Financing Act ( S. 3617 , S.Rept. 110-509 ), which paralleled the committee bill from the 109 th Congress, proposed to increase funding authority for EPA's Drinking Water State Revolving Fund (DWSRF) program and Clean Water State Revolving Fund (CWSRF) program and to create a grant program at EPA for small or economically disadvantaged communities for critical drinking water and water quality projects. S. 1933 ( S.Rept. 110-475 ) would have authorized a new grant program for small water systems, and S. 1429 ( S.Rept. 110-242 ) and H.R. 6313 would have reauthorized funding authority for small system technical assistance under SDWA. Other bills included S. 2509 , which proposed to require EPA to promote the use of affordable technologies (e.g., point-of-use technologies and bottled water), revise its affordability criteria, and provide more compliance assistance for high-priority rules including the arsenic rule. S. 2509 also would have required EPA or a state to ensure that funds have been made available to small systems before taking enforcement actions. H.R. 2141 would have required states to grant exemptions to eligible small systems for rules covering naturally occurring contaminants (such as arsenic and radium). None of these bills was enacted.\nArsenic-specific legislation has again been offered in the 111 th Congress, although broader infrastructure bills have received wider attention. In July 2009, the Senate Committee on Environment and Public Works reported the Water Infrastructure Financing Act ( S. 1005 , S.Rept. 111-47 ), similar to the committee's bill from the 110 th Congress. This legislation would authorize appropriations for the DWSRF program in the amount of $14.7 billion over five years. It also would establish a drinking water infrastructure grant program with funding priority to be given to small and economically disadvantaged communities. In the House, the Water Protection and Reinvestment Act of 2009, H.R. 3202 , has been introduced to establish a water infrastructure trust fund and to provide a source of funding for drinking water and wastewater infrastructure projects based on the imposition of an excise tax on a wide range of beverages, pharmaceuticals, and other products. Additionally, H.R. 2206 would amend SDWA to reauthorize technical assistance to small public water systems to help them comply with federal drinking water standards generally. \nBills that specifically address arsenic in drinking water include H.R. 4798 and S. 3038 . The House bill would amend the exemption provisions to require states to grant exemptions to small, nonprofit public water systems from naturally occurring contaminants, including arsenic and other specified contaminants, provided that the water system finds that compliance is not economically feasible. S. 3038 , which is similar to S. 2509 from the 110 th Congress, addresses several small system issues. This bill would require EPA to convene a work group to study barriers to using point-of-entry and other specified treatment technologies, to develop guidance to assist states in regulating and promoting these treatment options, and to revise affordability criteria for variance technologies to give extra weight to poorer households and communities. The bill also would require EPA or a state to ensure that funds have been made available to smaller systems before taking enforcement actions, and would establish a research pilot program.\nSafe Drinking Water Act compliance and, more broadly, drinking water safety and infrastructure issues, have long held a place on the congressional agenda. However, severe competition for federal resources and uncertainty in the policy agenda make the prospects for new funding legislation unclear. (For more information on SDWA issues, see CRS Report RL34201, Safe Drinking Water Act (SDWA): Selected Regulatory and Legislative Issues , by [author name scrubbed].)","output":"The Safe Drinking Water Act Amendments of 1996 (P.L. 104-182) directed the Environmental Protection Agency (EPA) to update the standard for arsenic in drinking water. In 2001, EPA issued a new arsenic rule that set the legal limit for arsenic in tap water at 10 parts per billion (ppb), replacing a 50 ppb standard set in 1975, before arsenic was classified as a carcinogen. The arsenic rule was to enter into effect on March 23, 2001, and water systems were given until January 2006 to comply. EPA concluded that the rule would provide health benefits, but projected that compliance would be costly for some small systems. Many water utilities and communities expressed concern that EPA had underestimated the rule's costs significantly. Consequently, EPA postponed the rule's effective date to February 22, 2002, to review the science and cost and benefit analyses supporting the rule. After completing the review in October 2001, EPA affirmed the 10 ppb standard. The new standard became enforceable for water systems in January 2006.\nSince the rule was completed, Congress and EPA have focused on how to help communities comply with the new standard. In the past several Congresses, numerous bills have been offered to provide more financial and technical assistance and\/or compliance flexibility to small systems; however, none of the bills has been enacted. Similar legislation again has been offered in the 111th Congress, while broader infrastructure financing bills have received greater congressional attention."}
{"id":"gao_AIMD-96-4","pid":"gao_AIMD-96-4_0","input":"\tBackground\n\nPrior to CMIA, the timing of federal funds transfers to states was governed by the Intergovernmental Cooperation Act, Public Law 90-577. That law allowed a state to retain for its own purposes any interest earned on federal funds transferred to it \u201cpending its disbursement for program purposes.\u201d\nThe House Committee on Government Operations, when considering the CMIA legislation in 1990, noted that the Intergovernmental Cooperation Act had been \u201cthe source of continuing friction between the states and the Federal Government.\u201d The House Committee stated that under the Intergovernmental Cooperation Act, \u201cthe States need not account to the Federal Government for interest earned on Federal funds disbursed to the states prior to payment of program beneficiaries.\u201d Several years earlier, in 1988, when the Senate Committee on Governmental Affairs had looked into this matter, it found that as a result, \u201csome administering departments at the state level were drawing down Federal funds too far in advance of need, costing the Federal Government foregone interest.\u201d\nBoth committees pointed out, however, that whenever the federal government complained that states profited unduly from early drawdowns, states would recite \u201cnumerous instances where they lose interest opportunities because the Federal Government is slow to reimburse them for moneys the states advance to fund Federal programs.\u201d At the request of the Senate Committee, a Joint State\/Federal Cash Management Reform Task Force, comprised of financial management representatives from six states and six federal agencies, including OMB and Treasury, was formed in 1983 to seek fair and equitable solutions to the aforementioned problems relating to the transfer of funds between the federal government and the states. Its work contributed to passage of CMIA in October 1990.\nThe House Committee expected that CMIA would \u201cprovide a fair and equitable resolution to those differences.\u201d It would do so, according to the committee, by establishing \u201cequitable cash transfer procedures, procedures whereby neither the Federal nor state governments profit or suffer financially due to such transfers.\u201d\nCMIA, as enacted in 1990, requires the federal government to schedule transfers of funds to states \u201cso as to minimize the time elapsing between transfer of funds from the United States Treasury and the issuance or redemption of checks, warrants, or payments by other means by a state,\u201d and expects states to \u201cminimize the time elapsing between transfer of funds from the United States Treasury and the issuance or redemption of checks, warrants, or payments by other means for program purposes.\u201d To accomplish this goal, CMIA directed the Secretary of the Treasury to negotiate agreements with the individual states to specify procedures for carrying out transfers of funds with that state. It authorized the Secretary to issue regulations establishing such procedures for states with which the Secretary has been unable to reach agreement.\nThe Senate Governmental Affairs Committee explained when considering a 1992 amendment to CMIA that the act is \u201cmeant to provide a self-enforcing incentive for both state and Federal agencies to time the transfer of Federal funds as closely as possible to their actual disbursement for program purposes, so that neither... will lose the time value of their funds.\u201d The \u201cself-enforcing incentive\u201d that the Senate Committee refers to is the act\u2019s interest liability provision. States are required to pay interest to the United States on federal funds transferred to the state from the time those funds are deposited to the state\u2019s account until the time the state uses the funds to redeem checks or warrants or make payments by other means for program purposes. If a state advances its own funds for program purposes prior to a transfer of federal funds, the state is entitled to interest from the United States from the time the state\u2019s own funds are paid out to redeem checks or warrants, or make payments by other means, until the federal funds are deposited to the state\u2019s bank account.\nCMIA requires each state to calculate any interest liabilities of the state and federal government and calls for an annual exchange of the net interest owed by either party. Other key requirements of the act and\/or Treasuryrules and regulations are as follows:\nThe Department of the Treasury must establish rules and regulations for implementing CMIA.\nStates and FMS may enter into Treasury-State Agreements (TSAs) that outline, by program, the funding technique and the clearance patternstates will use to draw down funds from the federal government. If any state and FMS do not enter into such an agreement, FMS will designate the funding technique and the interest calculation method to be used by that state.\nStates may claim reimbursement from Treasury annually for allowable direct costs relating to development and maintenance of clearance patterns and the calculation of interest.\nStates must prepare and submit to FMS an annual report that summarizes by program the results of the interest calculation from drawdowns and may include any claims for reimbursement of allowable direct costs.\nThe federal program agencies are required to (1) schedule transfers of funds to the states so as to minimize the time elapsing between the disbursement of federal funds from the U.S. Treasury and the issuance and redemption of checks, warrants, or payments by other means by a state and (2) upon Treasury\u2019s request, review annual reports submitted by the states for reasonableness and accuracy.\nDuring fiscal year 1994 (which, for the majority of states, included 9 months of the states\u2019 first fiscal year under CMIA), the federal government obligated over a reported $150 billion in federal funds to the states for programs covered under the act. (See table 1.) These programs were funded by the Departments of Health and Human Services (HHS), Labor, Education, Agriculture, Transportation and the Social Security Administration. We did not independently verify the amounts in table 1.\n\n\tObjectives, Scope, and Methodology\n\nOur objective was to report, as required under the act, on CMIA\u2019s implementation. Specifically, we determined whether as required under the act, the Department of the Treasury developed rules and regulations for implementing the act; the Treasury-State Agreements (TSAs) were negotiated in accordance with CMIA provisions and Treasury rules and regulations; the states we visited followed the funding techniques and clearance patterns approved by FMS in requesting and transferring funds; for the states we visited, interest was assessed to the federal government and states, in accordance with CMIA and Treasury rules and regulations; claims submitted by the states we visited for reimbursement of allowable direct costs incurred in implementing CMIA were prepared in accordance with Treasury regulations; the states submitted all required annual reports to FMS; and the federal program agencies (1) scheduled transfers of funds to the states so as to minimize the time elapsing between the disbursement of federal funds from the U.S. Treasury and the issuance and redemption of checks, warrants, or payments by other means by a state and (2) upon Treasury\u2019s request, reviewed annual reports submitted by the states for reasonableness and accuracy.\nTo accomplish these objectives, we (1) performed walkthroughs of how funds flow from the federal government to the states and how the states distribute the funds for program purposes, (2) interviewed state officials, (3) tested transactions, (4) interviewed state auditors, and (5) reviewed Single Audit Act reports.\nThe Single Audit Act of 1984 requires each state or local government that receives $100,000 or more in federal financial assistance in any given year to have an annual comprehensive single audit of its financial operations, including tests to determine whether the entity complied with laws and regulations that may have a material effect on its financial statements or its major programs, as defined in the Single Audit Act. The Office of Management and Budget (OMB) publishes guidance to assist auditors in planning audits under the Single Audit Act of 1984.\nWe also reviewed Treasury\u2019s regulations, implementation plans, and procedures for reviewing TSAs and annual reports. In addition, we sent a questionnaire to all states to obtain their views on CMIA implementation and summarized the results of the 54 completed and returned questionnaires.\nTo determine if the federal program agencies and the states were properly implementing CMIA, we also documented systems used to process selected transactions of eight major programs (National School Lunch, Unemployment Insurance, Chapter 1-Local Education, Family Support Payments to States, Social Services Block Grant, Medical Assistance, Highway Planning and Construction, and Supplemental Security Income). These programs were selected on the basis of federal funding levels and the amount of interest liabilities incurred during the first year of CMIA implementation. It was not part of our scope to assess the adequacy of the accounting systems states and federal program agencies used to carry out their CMIA requirements.\nThe period covered by the audit was the states\u2019 1994 fiscal year, which, for almost all of the states, was the period from July 1, 1993 through June 30, 1994. The first required annual reports were due by December 31, 1994, and the first interest exchange between the states and the federal government occurred on or about March 1, 1995.\nThe 12 states selected for detailed audit work were chosen primarily because they received relatively large amounts of federal funds, incurred comparatively large federal or state interest liabilities, and, in some cases, were denied interest and direct costs reimbursement claims submitted to FMS. We included states that reported interest liabilities to or from the federal government (California, Colorado, Florida, Indiana, Maryland, New York, Ohio, Pennsylvania, Texas, and Tennessee) and states that reported no state or federal interest liabilities (District of Columbia and Georgia). We also visited the Departments of Health and Human Services, Labor, Education, Agriculture, Transportation and the Social Security Administration because they process requests for funds for the programs we selected for audit and review federal interest liabilities relating to these programs.\nWe conducted our audit between April and September 1995 at 12 states, 6 federal program agencies, and FMS. We performed our work in accordance with generally accepted government auditing standards. While we performed limited testing of the reasonableness of the calculated interest liability and reimbursement of the direct costs for the 12 states visited, our audit scope did not include an assessment of the accuracy and completeness of the $34 million net interest liability (comprised of $41.6 million of state interest liabilities offset by a $4.7 federal interest liability and $2.5 million in states\u2019 claims for direct costs reimbursement), nor did we test the accuracy of program disbursements made by the states.\nWe provided a draft of this report to Treasury\u2019s FMS for review and comment. FMS agreed with our findings and conclusions.\n\n\tThe Three Key Agents of CMIA Have Made Progress in Achieving the Act\u2019s Purpose\n\nOur review showed that the Department of the Treasury, federal program agencies, and the states have made substantial progress in achieving the act\u2019s purpose of timely transfers of funds. Most state officials acknowledged that CMIA has helped heighten their awareness of cash management, but several expressed concern over what they viewed as added administrative burden.\nWhile the three key agents have made progress in implementing CMIA, three of the states we visited consistently did not comply with certain Treasury rules and regulations. Some of the noncompliance situations resulted in an understatement in the states\u2019 reported state interest liability. However, because it was outside the scope of our audit, we did not attempt to project the total understatements resulting from these noncompliances. We communicated these noncompliances to FMS, and it informed us that it will take appropriate actions to address the noncompliances.\n\n\t\tFinancial Management Service and Federal Program Agencies\n\nAs amended, CMIA directed that by July 1, 1993, or the first day of a state\u2019s fiscal year beginning in 1993, whichever is later, the Secretary of the Treasury was to make all reasonable efforts to enter into a written agreement with each state that receives a transfer of federal funds. This agreement was to document the procedures and requirements for the transfer of funds between federal executive branch agencies and the states. In addition, the Secretary was to issue rules and regulations within 3 years relating to the implementation of CMIA.\nFMS officials have made substantial efforts to enable successful implementation. They published final rules and regulations for implementing CMIA; contracted for development of clearance patterns that could be used by states that did not develop their own; developed and issued an Implementation Guide, Federal and State Review Guides, and a Treasury-State Agreement Form Book; negotiated first year TSAs, within the time period specified in the act, with all but two states and second year agreements with all but one state; reviewed the documentation for reimbursement of allowable direct costs over $50,000 submitted by the states; received first-year annual reports from all the states and submitted them to program agencies for review of federal interest liabilities claimed; issued several policy statements intended to clarify regulations; submitted to OMB suggested language on CMIA-related audit objectives and procedures for inclusion in the planned revisions to the Compliance Supplement for Single Audit Act reviews; and developed plans to revise the CMIA regulations to streamline processes to make them more flexible.\nAs part of its revision of the CMIA regulations, FMS plans to allow for greater variation in funding techniques and to delete descriptions and examples of the four current funding techniques from the regulations. Thus, according to FMS, states will be able to choose a technique that meets their needs. FMS also plans to eliminate the prohibition on reimbursable funding to provide states with greater flexibility in funding techniques.\nIn the same regard, we found that the federal program agencies met their responsibilities under the act to transfer funds in a timely manner. This is evidenced by the relatively small (approximately $4.7 million) federal interest liability incurred in the first year of the act\u2019s implementation.\n\n\t\tStates\n\nState officials generally credit CMIA with heightening their awareness of cash management matters. Even though several of them said that they had been practicing cash management techniques prior to CMIA, they still believed that CMIA was instrumental in focusing attention on when federal funds should be requested. Of the 54 states responding to our questionnaire, 41 stated that CMIA raised their level of awareness regarding cash management. Thirty-two said that CMIA is needed to ensure financial equity in the transfer of funds. The 12 states we visited were generally making a good effort to comply with CMIA requirements.\nThe following sections describe actions states have taken and provide additional details on actions taken by the 12 states we visited and the noncompliance situations we found at 3 of the states.\nTreasury-State Agreement: All but 2 of the 56 states and all of the 12 states visited signed a first year TSA with FMS.\nClearance Pattern Methodology: Nine of the states we visited developed their own clearance patterns based on techniques described in the Treasury regulations. Three chose to accept a clearance pattern time provided by FMS based on a study done under contract for the federal government. In an effort to be efficient, a few states are testing clearance patterns on a quarterly basis, even though they are not required by Treasury regulations to recertify their clearance patterns more frequently than every 5 years.\nAdherence to Agreed to Drawdown Techniques: For all the programs included in our review, we tested to determine whether states we visited were drawing down federal funds in accordance with the terms contained in their agreements. Generally, we noted that drawdowns complied with agreement terms. However, in one state, the agreed upon drawdown techniques were consistently not followed for six of the seven programs tested. For example, two programs were consistently drawing funds several days prior to the TSA specified schedule. According to program officials, the agreed upon funding techniques negotiated by the state treasurer\u2019s office did not reflect the actual timing of when these funds were clearing accounts. Therefore, the program officials drew the funds in what they thought was a more accurate manner.\nIn addition, the state filed an amended annual report with FMS reducing its net state liability from about $500,000 to $60,000. The state informed FMS that it had followed its agreed upon funding techniques in all its programs and, therefore, was reducing its previously reported interest liability. However, as mentioned above, we found that the state was consistently not following its agreed upon funding techniques.\nIn another state, our work showed that no attempt was made to draw down in accordance with the funding technique for 5 of the programs tested. According to program officials, they were unaware of the techniques specified in the agreement because they were not consulted before the agreement was approved nor had they seen the agreement after it went into effect. In this case, no federal interest liability was created since funds were being transferred to the states in a timely manner whenever they were requested. However, in the transactions we looked at, this did result in the state consistently using its own money to fund programs until it received federal funds.\nInterest Calculation: Ten of the 12 states we visited computed interest liabilities. Both states that did not make such computations told us they had no interest liabilities to compute. However, our review showed that one of these states should have computed an interest liability on certain refunds it received.\nOur tests of interest calculations showed some problems. For example, one state claimed a federal interest liability because it did not receive federal funds by the time specified in the TSA. FMS denied a significant portion of this claim because it concluded that the state was not requesting funds in time for the federal government to provide them as called for in the agreement. We attempted to determine the reasonableness of the state\u2019s claim, but state officials told us that they no longer had sufficient documentation to support their claim.\nDirect Cost: The Treasury regulations authorize states to claim reimbursement for direct costs incurred for developing and maintaining clearance patterns and computing interest liabilities. Reimbursable direct costs were claimed by 11 of the 12 states we visited. FMS denied a significant portion of the direct cost claims for two of these states. FMS denied a portion of the claims because the documentation submitted did not support costs allowable under CMIA. One state has appealed the decision and the other is considering an appeal. In those cases where reimbursement was approved, our review of supporting documentation indicated that the states had reasonable support for their claims.\nAnnual Reports: All 56 states submitted an annual report to FMS for the first year\u2019s activities.\n\n\t\tSome States View Certain Procedures as Burdensome\n\nWhile overall states see benefits from CMIA, such as a heightened awareness of cash management, some expressed concern about what they perceived as an additional burden of the act. In 24 of the 54 responses to our questionnaire and 7 of the 12 states we visited, officials expressed their view that the additional administrative tasks associated with implementing the act are burdensome. In addition, officials at 2 of the states we visited stated that the CMIA regulations were inflexible.\nSome of the issues cited by the states included:\nAdministrative tasks needed to comply with CMIA, such as preparing TSAs and annual reports, developing clearance patterns, computing interest liabilities, tracking refunds, and compiling direct costs, are burdensome to their operations.\nThree states said that the Treasury was being inflexible by not allowing them to use the reimbursable funding technique, which is a method of transferring federal funds to a state after the state has paid out its own funds for program purposes. After June 30, 1994, Treasury regulations prohibited reimbursable funding, except where mandated by federal law. One state said that it believed that the act itself does not specifically prohibit reimbursable funding and that some federal assistance programs must use it as a necessity. It said that using another funding technique that requires estimating cash needs in advance and reconciling later to actual expenditures creates an unnecessary administrative burden. It also said that the cash needs for some programs cannot be estimated due to fluctuating activities. As we discussed earlier, FMS is planning to revise the CMIA regulations to allow for the use of reimbursable funding.\nA Treasury policy statement requires that average clearance patterns be calculated out until 99 percent of the funds have cleared through the bank account. Some of the states said that this degree of precision was unnecessary because it requires them to make excessive small dollar amount draws.\nTreasury regulations require states to compute interest on refunds for which the federal share is $10,000 or more. Several of the states said that monitoring all programs covered by CMIA for refunds was burdensome given that most of these refunds relate to one federal program. We determined that over 90 percent of all state interest liabilities from refunds reported by the states in the first year annual reports related to one federal program.\nSome states said that the Treasury regulatons should allow reimbursement for all direct costs related to implementing CMIA and not just those costs related to the three specific categories identified in the regulations.\nWe did not determine the extent of burden created by the added administrative tasks placed on the states as a result of implementing CMIA. However, it should be noted that the states can submit claims for reimbursement for some of the efforts required. Also, some of the tasks, such as preparing TSAs and annual reports, developing clearance patterns, and computing interest liabilities should be less onerous now that the initial processes for generating this information have been established.\n\n\tFirst-Year Exchange of Funds Indicates Act Is Working\n\nUnder CMIA, a state is authorized to draw down funds based on approved funding techniques. If the state requests funds early, interest is due the federal government. Conversely, if the federal government fails to transfer funds on time, the state is due interest. Ideally, under the act, the transfer of funds would be interest neutral, with neither the federal government nor the states incurring any interest liability. The first year of implementation of CMIA resulted in a cumulative net state interest liability due to the federal government of approximately $34 million. Taken in context, this liability is relatively small compared to the over $150 billion reported as obligated in fiscal year 1994 for the programs covered by the act. Table 2 summarizes the components of the $34 million net state interest liability.\nInterest claims are submitted by program. FMS denied 47 claims by 15 states for interest (approximately $6.4 million). Reasons cited included insufficient documentation and repeated failure to follow the funding technique specified in the TSA. As of October 1995, 8 of the 15 states had appealed those denials to FMS. Of the 8 states that filed claims to appeal these denials, all but 2 have been resolved. FMS denied a portion of direct cost reimbursement claims submitted by 10 states because the costs were not eligible for reimbursement under Treasury rules and regulations, or the supporting documentation contained both eligible and ineligible costs which could not be separately identified. Three states submitted claims to appeal the denials; two of these states\u2019 appeals were subsequently approved based on additional supporting documentation provided to FMS.\nAs indicated previously, most of the states visited computed interest liabilities in accordance with TSAs, and the majority of the programs reviewed had interest neutral funding techniques, whereby neither the federal government nor the states incur interest. Much of the state interest liability was beyond state agencies\u2019 immediate control and was instead attributed to certain states\u2019 laws which require that they have the federal funds in the bank before they make any associated disbursements, as opposed to when the check clears the bank. Four of the 12 states we visited had a state interest liability totaling $18.5 million which primarily resulted from the states\u2019 adherence to such laws.\n\n\tSingle Audit Coverage\n\nOMB publishes guidance to assist auditors in planning audits under the Single Audit Act of 1984. The guidance, entitled, Compliance Supplement for Single Audits of States and Local Governments, was last updated in September 1990 and does not address CMIA, which was enacted in October 1990. OMB plans to issue a revised Compliance Supplement during fiscal year 1996 which will address CMIA requirements. We reviewed and generally supported a draft of the proposed revisions to the Compliance Supplement relating to cash management. However, we suggested that the Compliance Supplement also include provisions to determine that clearance patterns were properly established and verified by the appropriate state official.\nThe fiscal year 1994 single audit reports for the states we visited lacked consistency and comprehensiveness in checking for compliance with CMIA requirements. Auditors in some of the states we visited said that they obtained knowledge about CMIA by obtaining FMS\u2019 guidelines to state governments and attended cash management and audit conferences where CMIA was discussed. The auditors also said that they intended to expand work in their next audits to cover other aspects of CMIA requirements such as clearance pattern establishment and compliance with drawdown techniques contained in the TSA.\nFMS officials informed us that they do not routinely receive a copy of single audit reports from each state. Under the single audit concept, audited entities are only required to submit single audit reports to federal agencies that directly provide them funds and the Single Audit Clearinghouse, Governments Division, of the Commerce Department. Since FMS is not a funding agency, entities would not be required to submit reports to FMS. However, FMS may obtain copies of single audit reports from the Federal Audit Clearinghouse. Since some states comply with Single Audit Act requirements by arranging for single audit reports for each state department and agency that receives federal assistance, rather than one single audit for the entire state, FMS would in those cases need to obtain multiple reports for a given state.\nFMS officials also informed us that they do not routinely review the reports they do receive for CMIA findings. In our June 1994 report on the single audit process, we pointed out that single audit reports are not user friendly. We recommended that the auditors include a summary of their determinations concerning the entity\u2019s financial statements, internal controls, and compliance with laws and regulations. The summary information would be useful because single audit reports generally contain seven or more reports from the auditor. We also recommended that the results of all single audits be made more accessible by having the Federal Audit Clearinghouse compile the results in an automated database. We believe that more useful information on compliance with cash management requirements, particularly when summarized in an accessible database, would provide FMS officials with a better basis for reviewing and acting on CMIA issues.\n\n\tConclusions\n\nThe Cash Management Improvement Act has heightened awareness of cash management at both the state and federal levels. Treasury, the federal agencies, and the states have made substantial progress in implementing the act. By implementing its plans to begin revising CMIA regulations to streamline the process and placing greater emphasis on using the results of single audits as a means of overseeing state activities and enforcing CMIA requirements, FMS should be able to further improve the act\u2019s effectiveness and help alleviate any concerns about administrative burden.\nWe are also sending this report to the Secretary of the Treasury; the Commissioner of the Financial Management Service, Department of the Treasury; the Director of the Office of Management and Budget; and the Chairmen and Ranking Minority Members of the House Committee on Government Reform and Oversight, Subcommittee on Government Management, Information and Technology and Senate Committee on Governmental Affairs. We will also send copies to others on request.\nThis report was prepared under the direction of Gregory M. Holloway, Director, Governmentwide Audits, who may be reached at (202) 512-9510 if you or your staffs have any questions. Other major contributors to this report were Gary T. Engel, Senior Assistant Director; J. Lawrence Malenich, Assistant Director; and Johnny R. Bowen, Senior Audit Manager.\nGene L. Dodaro Assistant Comptroller General The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent.\nU.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000  or by using fax number (301) 258-4066, or TDD (301) 413-0006.\nEach day, GAO issues a list of newly available reports and testimony.  To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone.  A recorded menu will provide information on how to obtain these lists.","output":"Why GAO Did This Study\n\nPursuant to a legislative requirement, GAO reviewed the Financial Management Service's (FMS), federal agencies', and states' implementation of the Cash Management Improvement Act (CMIA) during 1994.\n\nWhat GAO Found\n\nGAO found that: (1) FMS, federal agencies, and states have complied with CMIA requirements, established processes to implement CMIA, and made progress in achieving the act's goal of timely fund transfers; (2) total state interest liability during the first year of CMIA implementation was about $34 million; (3) states reported that while CMIA has improved their awareness of cash management, they are burdened by added administrative tasks; (4) states have not been able to effectively measure their compliance with CMIA, since the Office of Management and Budget has not published guidance for testing CMIA compliance; (5) FMS is taking action to address instances of state noncompliance in implementing CMIA which resulted in understatements of reported state interest liability; and (6) FMS is planning to revise CMIA regulations to allow states greater flexibility in funding techniques."}
{"id":"crs_R42645","pid":"crs_R42645_0","input":"\tBackground\n\nDespite the prominence of the U.S.-Japan alliance in America's overall strategic posture in the Asia-Pacific region, local concerns about the U.S. military presence on Okinawa have challenged the management of the alliance for decades. In recent years, Okinawan resistance has crystallized around the relocation of a U.S. Marine Corps Air Station. The Japanese islands serve as the most significant forward-operating platform for the U.S. military in the region. With the United States pledging to rebalance its defense posture towards Asia, the uncertainty surrounding the medium and long-term presence of American forces on Okinawa remains a critical concern for national security decision-makers. Many regional analysts have posed the question of whether this issue is at its core simply a dispute over real estate, or if the controversy threatens the fundamental sustainability of the alliance. Some Okinawans contend that the U.S. military presence on the island constitutes a form of discrimination by Washington and Tokyo and the suppression of local democratic expression.\nThe relocation of Marine Corps Air Station Futenma (MCAS Futenma) is the largest and most problematic part of a broad overhaul of the stationing of U.S. forces in Japan. A 2006 agreement between the U.S. and Japanese governments to relocate the Futenma base from its current location in the crowded city of Ginowan to Camp Schwab in Henoko, a less congested part of the island, was envisioned as the centerpiece of a planned realignment of U.S. forces. The anticipated air station is often referred to as the Futenma Replacement Facility (FRF). The arrangement was designed to reduce the local community's burden of hosting a loud air base that has generated safety concerns and, eventually, to return control of the Futenma land to local authorities as a way to boost economic development in the area. In addition, the relocation would have triggered the transfer of roughly 8,000 marines and their dependents from Japan to new facilities in Guam. Japan agreed to pay around 60% of the costs, then estimated at $10.3 billion.\nThe agreement was struck at a moment when the bilateral relationship was strong, but implementation has been a struggle, due largely to political turmoil in Tokyo and resistance in Okinawa. In the watershed 2009 elections, the Democratic Party of Japan (DPJ) defeated the Liberal Democratic Party (LDP), which had held power nearly continuously since the mid-1950s. Incoming DPJ Prime Minister Yukio Hatoyama had pledged in his campaign to close MCAS Futenma and remove its functions from Okinawa. During Hatoyama's term, he examined a number of possible options for resolving the Futenma conundrum but ultimately discarded them and came to support the Henoko FRF site. Since then, successive prime ministers have endorsed the 2006 plan, but many Okinawans now insist on closure of Futenma and relocation outside the prefecture. In addition, the U.S. Congress raised major concerns about the ballooning costs of moving the Marines to Guam and for several years blocked funds dedicated to the Marine Corps realignment. \nIn April 2012, the United States and Japan officially adjusted the policy by \"de-linking\" the transfer of marines to Guam with progress on the new base in the Henoko area of Camp Schwab. The announcement also stipulated that arrangements to return some land used by U.S. forces would not be contingent on the base relocation. As under the previous plan, about 9,000 U.S. marines are slated be transferred to locations outside of Japan: 5,000 marines to Guam, 1,500 to Hawaii, and 2,500 on a rotational basis to Australia. Alliance officials described the move as in line with their goal of making U.S. force posture in Asia \"more geographically distributed, operationally resilient, and politically sustainable.\" \nIn December 2013, then-Governor of Okinawa Prefecture, Hirokazu Nakaima, contradicted his campaign pledges and approved the central government's request to create a large landfill offshore of Camp Schwab at the Cape Henoko site, effectively approving construction of the FRF. Prime Minister Shinzo Abe promised to accommodate the governor's requests for a large financial support package, early closure of the MCAS Futenma and Makiminato Service Area (See Figure 1 ), and re-negotiation of certain privileges for U.S. military personnel. The apparent determination of Abe to follow through on the relocation of Futenma, coupled with Abe's strong political foundation for remaining in office, also may have been a major factor in Nakaima's decision. \n\n\tRenewed Political Contestation\n\nIn the November 2014 Okinawa gubernatorial election, the incumbent governor Hirokazu Nakaima lost to his former political ally, who ran on a platform opposing construction of the Futenma replacement facility (FRF). The new governor, Takeshi Onaga, a former member of the conservative LDP, built a broad political coalition of liberals and conservatives by emphasizing his opposition to the base relocation. Since taking office, Governor Onaga has pursued a multi-pronged approach to halt construction of the FRF and dissuade Tokyo and Washington from proceeding with their plan (see section \" Governor Onaga's Multi-Pronged Struggle against Futenma Relocation \"). His political stance has reenergized the anti-base movement on Okinawa and renewed the political contestation over the U.S. military presence on Okinawa and the fate of the Futenma base.\nOnaga has declared his intent to use all the legal and administrative authorities at his disposal to prevent the construction of the FRF. The Okinawa prefectural government and the central government have initiated legal proceedings against each other, and observers expect that the byzantine process of rulings, suspensions, lawsuits, and counter-suits could continue for a year or more. Observers believe that it is highly likely that the central government eventually will be able to override Governor Onaga's objections, but the administrative and legal processes could create significant delays for the project and dredge up doubts about the viability of the FRF plan.\n\n\t\tOutlook for Construction of Offshore Runways at the Henoko Site\n\nConstruction of the new facility will involve challenges for both law enforcement officials and engineers working on the project. Reportedly, the offshore runways will require 21 million cubic meters of soil to create 395 acres of reclaimed land. The bulk of this soil will be delivered by ship from other areas of Japan. (In an attempt to prevent or delay the construction of the FRF, the Okinawa prefectural legislature passed an ordinance that requires imported soil to undergo special screening and allows the governor to cancel the import of soil.) Japanese and U.S. officials have said that construction of the FRF would be finished in April 2022 at the earliest. A slightly larger offshore runway project at the Iwakuni Marine Corps base in mainland Japan took 13 years to complete, but the Henoko land reclamation project could proceed faster than the Iwakuni project if Tokyo commits more administrative attention and resources to it. Abe Administration officials have repeatedly declared their intent to return MCAS Futenma to local control as soon as possible, and the most plausible means of achieving that goal under the existing agreement would be to accelerate construction of the Henoko FRF.\nConstruction of the new base will also be a law enforcement challenge for Japan. The ability and will of the Okinawan Prefectural Police to thwart determined anti-base protesters and enable smooth construction could be severely tested. The Japanese Coast Guard has been called into service to prevent sea-going protestors in kayaks from interfering with the land reclamation operation. The mayor of the local municipality (Nago City) has declared that he will not cooperate whatsoever in construction of the Henoko FRF (see section \" Nago City Political Dynamics \"), which could bring additional inconveniences and logistical delays.\n\n\tOkinawa's Strategic Importance\n\nOkinawa's location has become more strategically important over the past few decades. (See Figure 2 .) In the post-World War II environment, Japan's northern islands were seen as a bulwark to contain the Soviet Union's Pacific fleet. Post-Cold War security threats include the potential flashpoints of the Korean Peninsula and the Taiwan Strait, but more recent assertiveness by the Chinese People's Liberation Army Navy (PLAN) in the South China Sea and East China Sea has drawn growing attention from Department of Defense (DOD) planners. The U.S. military presence in Japan, and particularly Okinawa, allows it to fulfill its obligations under the 1960 Treaty of Mutual Cooperation and Security to not only defend Japan but to maintain security in the Asia-Pacific region. The forward-deployed presence of the U.S. Air Force and Navy also allows for response to humanitarian disasters in the region, as demonstrated by the rapid U.S. assistance after the March 2011 earthquake and tsunami in northeastern Japan and after the November 2013 super-typhoon in the Philippines. The deployment of MV-22 \"Osprey\" tilt-rotor aircraft to Okinawa reportedly has enhanced the operational capability of the Marines based there, because MV-22s have a greater range and faster cruising speed than the helicopters they replaced.\nThe intensification of the territorial dispute between Japan and China over small islands in the East China Sea has provided another rationale for the approximately 19,000 marines stationed on Okinawa. The main island of Okinawa is only 270 nautical miles from the disputed islets, called Senkaku in Japan, Diaoyu in China, and Diaoyutai in Taiwan. The potential role of U.S. Marines in defending and\/or retaking uninhabited islands from a hypothetical invasion force is unclear, but the operational capabilities of the Okinawa-based Marines are aligned with the needs of such a mission.\nAlthough most strategists agree on the importance of Okinawa's location for U.S. security interests in East Asia, there is less consensus on the particular number of marines necessary to maintain stability. For example, two prominent analysts suggested a rethinking of U.S. military basing in light of cuts to the U.S. defense budget and Okinawan obstacles; they argue that leaving a force of 5,000-10,000 marines on Okinawa while also pre-positioning supply vessels in Japanese waters and bringing most of the marines home to California would amply serve U.S. rapid response and deterrence needs. Defense officials continue to assert the need for substantial numbers of U.S. marines to be positioned in Asia, but have offered a degree of flexibility in their exact location; current plans would deploy marines on a rotational basis through Guam and Australia. Congressional concerns, as discussed below, have focused on cost and implementation, but have not argued that the Marine presence itself is unnecessary.\nOne negative aspect of Okinawa's proximity to the Asian continent is its vulnerability to missile attack. Harvard University professor and former defense official Joseph Nye observed in an interview in December 2014, \"Fixed bases are still of value. But with the increase in Chinese ballistic missile capabilities, it means you have to be aware of their vulnerability, and if you put all your eggs in one basket, you are increasing your risks.\" Reducing the vulnerability of U.S. military facilities to air and missile attack, often referred to as \"hardening,\" has become a central theme for Congress when considering priorities for overseas military construction.\n\n\tOkinawan History and Grievances\n\nThe attitudes of native Okinawans toward U.S. military bases are generally characterized as negative, reflecting a tumultuous history and complex relationships with \"mainland\" Japan and with the United States. Okinawans are ethnically distinct from most Japanese, which may heighten a sense of discrimination. The Ryukyu island chain, once a semi-autonomous kingdom ruled from Okinawa, was first officially incorporated into the Japanese state around the time of the Meiji Restoration in the late 19 th Century. These southern islands were largely neglected by the Japanese central government until World War II, when they became bloody battlegrounds in the final stages of the \"island-hopping\" campaign waged by the U.S. military. The Battle of Okinawa from early April through mid-June 1945 resulted in the deaths of up to 100,000 Japanese soldiers and 40,000-100,000 civilians, many of whom were forced by the Imperial Japanese Army to commit mass suicide. A total of 12,281 Americans were killed, the highest total of any battle in the Pacific campaign. Many Okinawans remember these few months as a dark episode in a long history of the Japanese central government sacrificing Okinawa for the good of the mainland. \nThe United States maintained possession of the Ryukyu islands in the peace settlement ending World War II. The U.S. military appropriated existing Japanese military installations on Okinawa and built several more large bases on the strategically located island. The United States paid locals for the acquired land, but in some cases this purchase reportedly involved deception or outright coercion, using bulldozers and bayonets to evict unwilling residents. During the period of American administration, Okinawans had no political authority or legal redress for crimes committed by servicemembers\u2014though the worst crimes were prosecuted through court martial. The Korean War and Vietnam War eras brought an influx of thousands of additional U.S. soldiers and added grievances to local residents, along with a major increase in revenue for businesses catering to GIs.\nAfter the reversion of Okinawa to Japanese sovereignty in 1972, the pattern of crimes by American servicemembers abated, but was nevertheless a major concern for the local population. The Japanese central government took measures to placate Okinawans, for example by increasing the rent paid to owners of land on U.S. military bases and by prosecuting eligible crimes in Japanese courts. Despite these steps and increased funds for prefectural development, many Okinawans continue to perceive themselves as the victims of policies drafted in Tokyo and Washington with little regard for their communities.\n\n\t\tContemporary Okinawan Views\n\nThe views of Okinawans are far from monolithic. Many residents of base-hosting communities appreciate the economic benefits, whether as employees on the bases, as local business owners who serve American customers, or as landowners of base property. Some locals resent the actions of outsiders who focus on environmental issues at the expense of economic development. Pro-relocation authorities point to the village of Henoko (in Nago City municipality) as an example of local citizens who are more in favor of additional U.S. facilities than the broader population, though this may have to do with the monetary compensation that Tokyo provides to specific host communities. There is also a \"generation gap\" between older Okinawans with personal memories of past incidents and younger residents who may not be as involved in the anti-base activist movement. There appear to be no reliable opinion polls that might illuminate the extent of the opposition to U.S. presence across demographic categories.\nThe anti-base movement remains strong and vocal in Okinawa. Opposition to U.S. military bases derives from two main areas: (1) concerns that the American presence degrades the local quality-of-life with regard to personal safety, noise, crime, and the natural environment; and (2) pacifism and anti-militarism. These two strands are often interwoven in the rhetoric of the anti-base movement, but not all residents oppose the U.S. military presence on principle. There are those who support the U.S.-Japan security alliance while objecting to the significant and disproportionate \"burden\" imposed on Okinawa. \nThese long-held grievances burst into the forefront of Okinawan political life after a 12-year-old girl was raped by three U.S. servicemembers in 1995, inciting a massive anti-base protest. In response, the bilateral Security Consultative Committee (composed of the U.S. Secretaries of State and Defense and their Japanese counterparts, also known as the \"2+2\") established the Special Action Committee on Okinawa (SACO) to alleviate the burdens of the base-hosting communities. SACO led to concrete changes that improved conditions on Okinawa, but these propitiatory moves were offset by a number of distressing incidents; for example, a U.S. military helicopter crashed on the campus of Okinawa International University near MCAS Futenma in August 2004. Ultimately, the unwillingness of Tokyo and Washington to close Futenma without a replacement facility has fostered the perception that the two governments are discriminating against Okinawans.\nMedia outlets in Okinawa contribute to this narrative by viewing many developments in the base negotiations as further evidence of mainland discrimination. The two main daily newspapers, the Ryukyu Shim po and the Okinawa Times , are generally seen as left-leaning and deeply unsympathetic to Tokyo's security concerns. For example, the U.S. military's humanitarian response to the devastating March 11, 2011, tsunami and earthquake in northern Japan received scant coverage in local Okinawan newspapers compared to the mainland press. In its reporting on the 2014 summit between Prime Minister Abe and President Obama, rather than applaud their intention to reduce the \"burden\" of U.S. bases on Okinawans, the Ryukyu Shimpo drew attention to the phrase \"long-term sustainable presence for U.S. forces\" and criticized its implication of a permanent military presence on Okinawa.\nThe concerns of environmental groups stem mainly from the possible degradation of natural habitats caused by construction of the proposed FRF at Henoko. The offshore landfill design for the runways could involve the destruction of coral reefs and could have a negative impact on the health and biodiversity of Oura Bay ecosystems. Activists are particularly concerned with the plight of the dugong, a manatee-like endangered species. The environmental impact study conducted by the Japanese government concluded that the proposed base construction would not do significant damage to the dugong's natural environment, but academics at Okinawan universities and elsewhere have disputed the report's findings. In February 2015, a U.S. federal judge dismissed a lawsuit against the DOD that sought to prevent construction of the FRF on the grounds that it would harm the dugong. Another environmental concern is the impact of toxic substances stored on U.S. bases, largely a legacy of chemical storage during the Vietnam War era.\n\n\tPolicy Background to Base Realignment\n\nAttempts to make the U.S. presence in Okinawa more sustainable have been underway for years. As mentioned in the previous section, the 1996 SACO arrangement included measures \"to realign, consolidate and reduce U.S. facilities and areas, and adjust operational procedures of U.S. forces in Okinawa consistent with their respective obligations under the Treaty of Mutual Cooperation and Security and other related agreements.\" The 1996 SACO Final Report mandated the release to Okinawa of thousands of acres of land that had been used by the U.S. military since World War II, including MCAS Futenma. (See Figure 1 .) Although the work was slated to be completed within a year, political gridlock and local resistance prevented significant progress on the agreement, a pattern that would repeat itself on a range of Okinawa basing issues in subsequent years. \nEfforts to adjust the U.S. military presence in Japan were given new impetus in 2002 by the Defense Policy Review Initiative (DPRI), a bilateral initiative to enhance the U.S.-Japan security alliance. Through the DPRI talks, the United States and Japan reviewed U.S. force posture, examined opportunities for practical cooperation, and developed common strategic objectives. The 2005 Security Consultative Committee (SCC) joint statement listed 19 areas for alliance transformation, such as improving interoperability, shared use of military and civilian facilities in Japan, and cooperation on ballistic missile defense. The 2005 statement endorsed the realignment of U.S. marines from Okinawa to Guam and the relocation of Futenma Air Station operations to a new base on the shoreline of Cape Henoko.\nThe implementation plan for the DPRI is laid out in the May 2006 \"U.S.-Japan Roadmap for Realignment Implementation,\" a document that was endorsed in three subsequent SCC joint statements. The Roadmap established the \"linkages\" that had been a central point of debate until 2012: (1) that the Third Marine Expeditionary Force (III MEF) relocation from Okinawa to Guam was dependent on \"tangible progress toward completion\" of the Henoko base at Camp Schwab and Japanese financial contribution to the development of facilities on Guam; and (2) that land return for areas south of Kadena Air Base was dependent upon completion of the relocation of III MEF personnel and dependents from Futenma to the FRF and Guam. In April 2012, Washington and Tokyo signed an agreement that endorsed the Henoko FRF but removed the linkage between construction of a new facility and relocation of the Marines to Guam. \nSince the U.S. and Japanese governments first agreed to relocate MCAS Futenma in the 1990s, outside experts have proposed several alternative plans. Some proposals have called for a similar runway in another part of Okinawa Prefecture. Other concepts would entail building a large heliport, instead of the offshore runways, on an existing U.S. base. One option that periodically has received serious attention is to integrate the functions of MCAS Futenma into the large Kadena Air Base on Okinawa. There have also been proposals to construct a wholly offshore facility, either floating or supported by stilts. According to reports, the U.S. and Japanese governments considered many of these alternatives before settling on the current Henoko FRF plan as the best option.\n\n\t\tOverall Progress on Realignment Process\n\nThe controversy surrounding relocation of MCAS Futenma has overshadowed progress in implementing other elements of the DPRI. With the exception of the slow progress on the FRF and movement of Marines to Guam, the initiative has been largely successful. The U.S. Navy's Carrier Air Wing Five (CVW-5) is being relocated from Naval Air Facility Atsugi to Marine Corps Air Station Iwakuni to reduce safety risks and noise. The Japanese government built a new offshore runway at the Iwakuni base, which began handling civilian flights in December 2012. The squadron of KC-130 cargo aircraft relocated to MCAS Iwakuni from Futenma in 2014. \nIncreased joint training activities and shared use of facilities has improved the interoperability of the U.S.-Japan alliance. The Japanese military, known as the Self-Defense Forces (SDF), conducts joint exercises overseas with the U.S. military. Japan will have access to new training facilities on Guam and the Northern Marianas Islands as a result of a 2009 bilateral agreement. The two allies continue to discuss the potential costs and benefits of increasing the number of shared-use military facilities, which some observers believe would change the image of American troops as foreign occupiers.\n\n\t\t\tImpact Mitigation Measures on Okinawa\n\nThe U.S. and Japanese governments have implemented measures to mitigate some impacts of the U.S. military presence for Okinawan residents. The DPRI initiated several of these actions, whereas more recent steps were developed on an ad hoc basis. The Aviation Training Relocation program reduces noise pollution for local residents by having U.S. aircraft conduct training in Guam, away from crowded base areas. The United States has increased access for local fisherman to the ocean training area known as \"Hotel\/Hotel\" off the eastern coast of Okinawa.\nBased on the DPRI and SACO agreements, the U.S. military has turned several plots of land over to the Okinawan local authorities, including Yomitan Auxiliary Airfield, Sobe Communications Site, and Gimbaru Training Area. A 125-acre plot, formerly the West Futenma Housing area, reverted to local control in April 2015. Several more areas of present-day U.S. military facilities are approved for expedited return in the near future. A 2015 report by former U.S. military officers recommends accelerating the schedule of land returns, especially from Camp Kinser, in order to reduce resentment toward the U.S. military presence. In response to Governor Nakaima's request in late 2013 for advance environmental screening of land schedule for reversion, the United States and Japan reached an environmental stewardship agreement to allow Japanese inspectors early access to those facilities.\nA rash of off-base criminal incidents involving U.S. servicemembers in 2012 spurred U.S. military leaders in Japan to institute new conduct policies for all U.S. troops in Okinawa. These restrictive policies likely played a role in the significant drop since 2013 in reported crimes linked to U.S. military personnel (including dependents and DOD civilian employees) on Okinawa.\n\n\tThe Politics of U.S. Basing in Okinawa\n\nIn the postwar period, alliance security arrangements largely have been negotiated between political-military elites in Washington and Tokyo, often ignoring local concerns. Even as democratic practices deepened and the anti-base movement became more empowered, many leaders in Tokyo were unable or unwilling to invest enough political capital to reduce the strains of hosting foreign troops on Okinawans.\nContemporary politics surrounding basing issues in Japan are complex and ever-shifting and involve politicians from local village wards up to the Prime Minister's office. In 2009 and 2010, Prime Minister Hatoyama's involvement in the Futenma controversy elevated the issue to a major U.S.-Japan point of contention and, some assert, may have irrevocably shifted the political landscape in Okinawa by raising and then dashing the hopes of the anti-base movement. However, his Liberal Democratic Party (LDP) predecessors had made little progress in decades of trying to resolve the fundamental challenges of the U.S. military presence on Okinawa. The Abe government appeared to have broken this stalemate by wielding unprecedented pressure and inducements in late 2013 to win over key Okinawan politicians. However, Okinawan citizens in late 2014 voted out Nakaima, who had approved the landfill permit for the FRF, and turned out in large numbers to support the new governor, Takeshi Onaga, at an anti-base rally in early 2015.\n\n\t\tTokyo-Okinawa Relations\n\nAlthough Washington-Tokyo relations play a role, the controversy over bases is seen by many as largely a mainland Japan versus Okinawa issue. Due to the legacy of the U.S. occupation and the islands' key strategic location, Okinawa hosts a disproportionate share of the continuing U.S. military presence. According to the Okinawan government, about 25% of all facilities used by U.S. Forces Japan are located in the prefecture, which comprises less than 1% of Japan's total land area, and roughly half of all U.S. military personnel are stationed in Okinawa. Many observers assert that Tokyo has failed to communicate effectively to Okinawans the necessity and benefits of the alliance. Some Okinawans see the decision to host the bulk of U.S. forces on Okinawa as a form of discrimination by mainland Japanese, who also do not want U.S. bases in their backyards. The Abe Administration at times has not received envoys from Okinawa and at other times has engaged in talks about the U.S. military presence, although neither Tokyo nor Okinawa appeared to change its position on the issue. \nHowever, Okinawa has received millions of dollars in subsidies from the central government in exchange for the burden of hosting U.S. troops. In December 2013, immediately prior to Governor Nakaima's decision to approve the FRF landfill permit, Prime Minister Abe announced a 15% increase in the FY2014 budget for Okinawa economic development, to 346 billion yen ($3.0 billion USD). Although the money was not explicitly linked to the basing issues, analysts assert that the generous sum influenced the governor's decision on the permit. After Nakaima lost his reelection bid in November 2014, the central government indicated that it will follow through on its plans to provide at least 300 billion yen ($2.6 billion USD) annually through 2021.\n\n\t\tRole of the Prefectural Governor\n\nThe Okinawan governor's office wields significant influence over developments inside the prefecture. The governor has the authority to approve or reject off-shore landfill construction, which effectively gives him a veto over any base construction that relies on a landfill, such as the Henoko FRF plan. Toward the end of his second term, former governor Nakaima approved the landfill permit to build offshore runways at Camp Schwab, removing the most effective political leverage that the governor's office held. Takeshi Onaga, Nakaima's successor as governor and a former member of the conservative LDP, opposes the plan to relocate Futenma inside Okinawa. Since taking office at the end of 2014, Onaga has employed a variety of political and legal strategies to prevent or delay construction of the FRF at the Henoko site. \n\n\t\t\tGovernor Nakaima Agrees to Futenma Relocation with Conditions\n\nFirst elected in 2006 with the backing of the LDP and Okinawa's business community, Nakaima was seen as a pragmatist rather than an anti-base ideologue. In his first term, Nakaima agreed to the relocation of MCAS Futenma to Henoko with specific conditions. However, when Hatoyama revisited the FRF relocation plan in 2009, the political calculus changed. The Okinawan movement against the FRF proposal was rejuvenated and gained strong support on the island. Nakaima modified his position, calling for the base to be located out of the prefecture during the 2010 gubernatorial campaign against a resolutely anti-base opponent. \nIn late 2013, the top leadership of the ruling party, the LDP, placed heavy pressure on its Okinawa chapter to support relocation of MCAS Futenma. Governor Nakaima traveled to Tokyo to present a list of demands that appeared to be conditions for his approval of the landfill permit to construct the FRF. Nakaima requested that (1) the U.S. military terminate operations at MCAS Futenma within five years; (2) the U.S. military return Camp Kinser in full within seven years; (3) the U.S. military deploy at least half of its MV-22 Osprey aircraft outside of Okinawa immediately, then all Osprey after Futenma closes; and (4) the United States and Japan revise the SOFA to allow on-base investigations by prefectural officials for environmental and archaeological reasons. He also asked for supplemental funding for an Okinawan university, for a second runway at Naha airport, for a railway system, and to recover land returned by the United States. \nPrime Minister Abe agreed to provide the requested financial support and pledged his best efforts to fulfill the conditions regarding the U.S. military presence on Okinawa. However, it is not within the authority of the Japanese government to execute those base-related actions unilaterally, without assent from the U.S. government. Days later, Nakaima approved the landfill permit, putting pressure on the Abe government to deliver on its promises. The U.S. government, for its part, showed a willingness to negotiate in some areas but not all. However, U.S. officials have firmly rejected any plan that would close the Futenma base before a replacement facility on Okinawa is operational. \n\n\t\t\tGovernor Onaga's Multi-Pronged Struggle against Futenma Relocation\n\nGovernor Onaga has used a variety of tactics to prevent or delay the construction of the FRF at the Henoko site. After Onaga's initial attempt to negotiate a new base relocation plan with the central government met firm resistance in Tokyo, in March 2015 he demanded that the Ministry of Defense stop work on the offshore landfill. A member of the Abe Cabinet judged that the construction was in compliance with regulations, and the government proceeded with survey work for the landfill. Onaga then appointed an expert commission to study the prior governor's approval of the landfill permit. The commissioners determined that the approval had been illegal, and Onaga used the commission's findings as the basis to revoke the permit in October 2015. Again, a Cabinet Minister rejected Onaga's maneuver, leading him to apply for screening by a third-party council that manages disputes between the central governments and local governments.\nOn the political front, Onaga has sought to bring wider attention\u2014from mainland Japan and around the world\u2014to the issue of the U.S. military presence on Okinawa and to garner support for his positions. Onaga traveled to the United States in June 2015 to meet with U.S. officials and Members of Congress in an attempt to convince U.S. leaders that the current Futenma relocation plan is unwise. In August 2015, over 100 Japan scholars and peace activists from the United States and other countries signed a petition urging Onaga to revoke the landfill permit for the FRF. Although Onaga himself has remained at arm's length from anti-base civil society groups and has not engaged in protests outside U.S. bases, his political stance has energized the anti-base groups in Okinawa. Progressive political groups in mainland Japan have also held rallies to demonstrate opposition to the Abe Administration's plan to move forward with the Futenma relocation plan.\n\n\t\tNago City Political Dynamics\n\nCamp Schwab and the proposed new aviation facility are located in Henoko, a ward of the larger Nago City. The politics of Nago City mirror that of Okinawa in their complexity and tangle of interests. A 1997 city referendum revealed that a majority of voters opposed the new base construction, but despite this result successive mayors declared their conditional approval. In January 2014, the city reelected Mayor Susumu Inamine, who strongly opposes any increased military presence. Inamine has vowed that he will obstruct any cooperation with the central government on construction of the FRF. A slim majority of current city council members are also against the Henoko relocation plan.\nOn the other hand, the residents who would be most directly affected have mixed, and even positive, feelings about the proposed base, possibly due to the economic benefits for the hosting community. A small mountain range about seven miles wide separates the designated base site in Henoko village from the densely populated area of Nago City (see Figure 3 ). It is unlikely that most people living in Nago City would experience the noise of overflights near the base. In May 2010 the administrative council of Henoko village, where the base would be built, passed a resolution accepting the relocation of Futenma on the conditions that the runway site be moved further into the sea and that the government provide additional compensation. Henoko village residents are reportedly more focused on the economic benefits of the new base and irked by the intrusion of environmentalists.\n\n\tCongressional Involvement\n\nIn the past few years, Congress has exercised its oversight function on the military realignment initiatives in Japan and related movement to Guam. Members of the Senate Armed Services Committee in particular have voiced doubts about the viability of the Marine Corps realignment, questioned witnesses closely about the Defense Department's plans in the Asia-Pacific in a series of hearings, sent letters to the Secretary of Defense outlining their reservations, and inserted specific provisions into legislation to ensure that the executive branch heeds their concerns. In general, Members of the House Armed Services Committee have been more supportive of the Marine Corps realignment and more willing to fund initial components without a complete Master Plan.\n\n\t\tConcerns Raised in 2011\n\nIn May 2011, three Senators (Carl Levin, Chairman of the Armed Services Committee; John McCain, then-ranking minority Member of that committee; and James H. (Jim) Webb, Chairman of the Foreign Relations Subcommittee on East Asian and Pacific Affairs) released a joint statement that called the U.S. military realignment plans in East Asia, and particularly those on Okinawa, \"unworkable and unaffordable.\" They recommended alternatives, including transferring Marine Corps assets to the Kadena Air Base on Okinawa and moving some Air Force assets to Andersen Air Force Base on Guam. Senator Webb further proposed in subsequent letters to the Secretary of Defense that co-basing arrangements with the Japanese military be explored, as well as the use of aviation facilities on Okinawa during military contingencies. \nSoon afterward, in June 2011, the Government Accountability Office (GAO) released a report commissioned by the Subcommittee on Military Construction, Veterans Affairs, and Related Agencies, Senate Appropriations Committee. The report concluded that the Department of Defense had neither adequately estimated the costs involved in transforming its military posture in Japan and Guam nor analyzed the alternatives to existing initiatives. The initial estimate was for an expense of $10.3 billion to move 8,000 Marines and their dependents to Guam, but the GAO reported that the actual costs would be more than double the DODestimate at $23.9 billion. The cost to DOD for the latest plan, to move roughly 5,000 Marines and their dependents to Guam, has been estimated at $8.6 billion.\n\n\t\tFunding Cuts and New Requirements in FY2012 National Defense Authorization Act\n\nIncreasing alarm about the overall U.S. fiscal situation drove further scrutiny of existing plans. Concern about the ballooning costs of the Guam construction and the uncertainty surrounding the realignment led Congress to reject the Administration's request for related military construction funding in the FY2012 National Defense Authorization Act (NDAA), P.L. 112-81 . Section 2207 of the act prohibited funds authorized for appropriation, as well as amounts provided by the Japanese government, from being obligated to implement the planned realignment of Marine Corps forces from Okinawa to Guam until certain justifications and assessments were provided. These included an explanation of the Marine Corps' preferred force lay-down in the region; a Master Plan for the construction involved in the plan; a certification by the Secretary of Defense that \"tangible progress\" had been made on the Futenma base relocation; the submission of the independent assessment required by Section 346 (see the section of this report immediately following); and a series of plans involving infrastructure and construction costs on Guam. \nThe April 2012 \"de-linking\" agreement did not appear to assuage congressional concerns. After the announcement that the original policy would be adjusted and the base relocation and Marine redeployment de-linked, Senators Levin, McCain, and Webb wrote in a letter to Defense Secretary Panetta that\n... we have serious questions that have not been fully addressed regarding the emerging agreement between the administration and the Government of Japan. These questions pertain to the core details of this or any basing arrangement, including cost estimates, military sustainment and force management, and how it would support a broader strategic concept of operations in this increasingly vital region. Congress has important oversight and funding responsibilities beyond its traditional consultative role for this basing agreement, and any new proposal should not be considered final until it has the support of the Congress.\n\n\t\t\t2012 CSIS Assessment\n\nSection 346 of the FY2012 NDAA required an independent assessment of the U.S. strategic posture in the Asia-Pacific. The Center for Strategic and International Studies (CSIS) was commissioned by the Secretary of Defense to provide the report. CSIS delivered it in mid-July 2012 to the Secretary, who then forwarded the report with his comments to the Senate and House Armed Services Committees. In its unclassified version, the report broadly supports DOD's strategy to enhance U.S. defense posture in East Asia and recommends, with caveats, the implementation of the April 2012 agreement, including the construction of the FRF. While asserting that the Henoko plan is the best way forward geostrategically and operationally, it also acknowledges the budgeting and political obstacles that confront the FRF, concluding that other alternatives should still be explored. Among those other alternatives are Kadena Integration, the stationing of Marine air operations on an off-shore island, construction of a second runway at Naha Airport, and remaining at the current Futenma base. The report also recommends prioritizing infrastructure improvements on Guam that would facilitate the transfer of Marines. In a statement, Senators Webb, Levin, and McCain said that, \"We agree with CSIS's emphasis on the need for DOD to articulate the strategy behind its force-posture planning more clearly. Congress must also be confident that the DOD force planning and realignment proposals are realistic, workable, and affordable.\"\n\n\t\tIncremental Progress on Realignment since 2013\n\nThe realignment of the Marine Corps in the Asia-Pacific region has proceeded incrementally since 2013, even as Congress has restricted some spending for the realignment on Guam. The FY2013 NDAA ( P.L. 112-239 ) incorporated the Senate's language prohibiting DOD spending (including expenditure of funds provided by the Japanese government) to implement the realignment on Guam, with certain exceptions. The bill authorized DOD to do design work for future construction, conduct environmental assessments, and start construction of a project that would support the Marine Corps presence on Guam but has a justification independent from the realignment. The FY2013 NDAA also included requests for DOD to provide documents to help Congress understand the military's plans for the region and projected infrastructure needs on Guam. According to the conference report accompanying the NDAA, the conferees raised concerns that moving forward with the realignment prematurely could create operational risks for the military and the risk of wasteful spending.\nThe FY2014 NDAA ( P.L. 113-66 ) took the same approach to the Marine Corps realignment: an overall freeze on DOD spending on Guam, but with exceptions that allowed some related construction to go forward. The GAO released another report in June 2013 that criticized DOD for unreliable cost estimates and the lack of an integrated plan for the realignment. Visiting Japan in August 2013, Senator McCain repeated his concerns that DOD did not have adequate plans for the Marine Corps realignment. In August 2014, DOD submitted to Congress a Master Plan describing the future disposition of the Marine Corps on Guam and the cost and schedule of necessary construction. The Guam Master Plan does not include information about the anticipated Marine Corps relocation from Okinawa to Hawaii.\nThe beginning of construction on the Henoko FRF may provide some momentum to the supporters of the Marine Corps realignment. After then-Governor Nakaima approved the landfill permit in late December 2013, Senator McCain released a statement stating, \"After 17 years of hard work and setbacks, today's action paves the way for the construction of the [FRF], the redeployment of U.S. Marines from [MCAS] Futenma, and the broader realignment of U.S. forces on Okinawa and in the Asia-Pacific region.\" When Governor Onaga met with several U.S. Senators on a trip to the United States in June 2015, the Senators affirmed their support for the Henoko FRF plan. The FY2015 NDAA ( P.L. 113-291 ) allows DOD to proceed with its planned military construction for the realignment on Guam, including the expenditure of Japanese government funds allocated for that purpose. Although challenges remain, especially those related to civilian infrastructure on Guam, Congress' removal of previous restrictions on military construction should facilitate the Marine Corps realignment and the reduction of the U.S. military presence on Okinawa.\n\n\tOngoing Risks of Futenma Operations\n\nAs Tokyo and Washington have struggled to overcome paralysis on the agreement, the problematic base at the center of the controversy has remained operational but in need of repair and maintenance. In recognition of the pressing repair needs, U.S. and Japanese government officials committed to \"contribute mutually to necessary refurbishment projects\" at MCAS Futenma in the joint statement issued by the bilateral Security Consultative Committee in April 2012. Although these projects are vital to continued operations at Futenma, Okinawans may interpret the repairs as a sign that the United States and Japan do not intend to fulfill their goal of closing the base. The joint consolidation plan for Okinawa released by the U.S. and Japanese governments in April 2013 states that Futenma will be turned over to local authorities no earlier than 2022.\nThe base is located within a dense urban area, surrounded by schools and other facilities that are subjected to the high noise levels that accompany an active military training site. (See Figure 4 .) A new equipment accident or serious crime committed by a U.S. servicemember could galvanize further Okinawan opposition to the U.S. military presence on the island. \n\n\t\tDeployment of MV-22 \"Osprey\" Aircraft to Futenma\n\nThe U.S. Marine Corps replaced the 24 CH-46E \"Sea Knight\" helicopters stationed at the Futenma base with 24 MV-22 \"Osprey\" tilt-rotor aircraft in 2012 and 2013. The deployment of the first 12 Osprey aircraft to Japan in mid-2012 caused a public outcry in Okinawa and mainland base-hosting communities. Japanese politicians and civil society groups opposed introduction of the MV-22 to Japan due to the aircraft's safety record. However, the arrival of the second batch of 12 Ospreys in 2013 was greeted by substantially smaller protests in Okinawa. Observers warn that a crash involving an MV-22 Osprey on Okinawa could galvanize the anti-base movement and create serious problems for the alliance. The crash of another model of helicopter, an HH-60G Pave Hawk, on a U.S. training area in Okinawa in August 2013 renewed the sense of danger among Okinawans, but it did not spark widespread demonstrations.","output":"Although the U.S.-Japan alliance is often labeled as \"the cornerstone\" of security in the Asia Pacific region, local concerns about the U.S. military presence on the Japanese island of Okinawa have challenged the management of the alliance for decades. The Japanese archipelago serves as the most significant forward-operating platform for the U.S. military in the region; approximately 53,000 military personnel (39,000 onshore and 14,000 afloat in nearby waters), 43,000 dependents, and 5,000 Department of Defense civilian employees live in Japan. With the United States rebalancing its defense posture towards Asia, the uncertainty surrounding the medium and long-term presence of American forces on Okinawa remains a critical concern for national security decision-makers.\nDue to the legacy of the U.S. occupation and the island's key strategic location, Okinawa hosts a disproportionate share of the continuing U.S. military presence. About 25% of all facilities used by U.S. Forces Japan and about half of the U.S. military personnel are located in the prefecture, which comprises less than 1% of Japan's total land area. Many Okinawans oppose the U.S. military presence, although some observers assert that Tokyo has failed to communicate effectively to Okinawans the benefits of the alliance. However, Okinawa has received billions of dollars in subsidies from the central government to offset the \"burden\" of hosting U.S. troops.\nIn 2006, as part of a broad realignment of U.S. basing in Japan, the United States and Japan agreed to relocate Marine Corps Air Station (MCAS) Futenma to a less-congested area on Okinawa and then redeploy 8,000 marines to U.S. bases in Guam. The arrangement was designed to reduce the local community's burden of hosting a loud air base that has generated safety concerns and, eventually, to return control of the Futenma land to local authorities as a way to boost economic development in the area. The controversy surrounding relocation of MCAS Futenma has overshadowed progress in other elements of the realignment of U.S. Forces Japan.\nFacing delays in relocating the Futenma base, in 2012 the United States and Japan agreed to \"de-link\" the replacement facility with the transfer of marines to Guam. The current plan is to relocate 9,000 marines (and their dependents) from Okinawa, deploying 5,000 to Guam, 2,500 to Australia on a rotational basis, and 1,500 to Hawaii as soon as the receiving facilities are ready. From 2011 to 2014, Members of Congress continually raised concerns about the cost and feasibility of moving the Marines to Guam and other locations, and blocked some funds dedicated to the realignment. These concerns appear to have diminished since 2014.\nIn the last days of 2013, the United States and Japan cleared an important political hurdle in their long-delayed plan to relocate the Futenma base when Hirokazu Nakaima, then-Governor of Okinawa, approved construction of an offshore landfill necessary to build the replacement facility. Nakaima lost his reelection bid in late 2014, however, and his successor as Governor of Okinawa has used a variety of administrative, legal, and political tactics to prevent or delay construction of the Futenma replacement facility. A U.S.-Japan joint planning document in April 2013 indicated that the new base at Henoko would be completed no earlier than 2022.\nMany challenges remain to implementation of the Futenma relocation plan. Most Okinawans oppose the construction of a new U.S. base for a mix of political, environmental, and quality-of-life reasons. Okinawan anti-base civic groups may take extreme measures to prevent construction of the facility at Henoko. Any heavy-handed actions by Tokyo or Washington could lead to broader sympathy and support for the anti-base protesters from the public in Okinawa and mainland Japan. Meanwhile, the Futenma base remains in operation, raising fears that an accident might further inflame Okinawan opposition."}
{"id":"gao_GAO-10-25","pid":"gao_GAO-10-25_0","input":"\tBackground\n\nSecuritization is a process by which similar debt instruments\u2014such as  loans, leases, or receivables\u2014are aggregated into pools, and interest- bearing securities backed by such pools are then sold to investors. These  ABSs provide a source of liquidity for consumers and small businesses  because financial institutions can take assets that they would otherwise  hold on their balance sheets, sell them as securities, and use the proceeds  to originate new loans, among other purposes. During the recent financial  crisis, the value of many ABSs dropped precipitously, bringing the  securitization markets to a virtual halt. As a result, households and small  businesses found themselves unable to access the credit that they needed  to, among other things, buy homes and expand inventories.\nTALF was designed to reopen the securitization markets in an effort to  improve access to credit for consumers and businesses. The program  provides loans to certain institutions and business entities in return for  collateral in the form of securities that are forfeited if the loans are not  repaid. To assist in this effort, Treasury provides credit protection for the  program as part of TARP\u2019s Financial Stability Plan under the Consumer  and Business Lending Initiative (CBLI). Treasury has pledged $20 billion  for TALF LLC\u2014a special purpose vehicle created by FRBNY\u2014to purchase  the underlying collateral associated with TALF loans in the event the loans  are not repaid. Because of Treasury\u2019s role in protecting these taxpayer  funds committed through TARP, Treasury has consulted with the Federal  Reserve on TALF\u2019s design. Under TALF, FRBNY is currently authorized to  extend up to $200 billion in nonrecourse loans to eligible borrowers  pledging eligible collateral. TALF is authorized to extend new loans  against nonmortgage-backed ABSs and legacy CMBS collateral until March  31, 2010, and against newly issued CMBS collateral until June 30, 2010. As  of December 2009, FRBNY has made about $61.6 billion in loans under  TALF. Of that amount, $47.5 billion in TALF loans remained outstanding as  of the end of December 2009. The amount of loans outstanding may be less  than the amount of loans extended due to loan prepayments by the TALF  borrower or paydown of principal.\nTALF accounts for a small proportion of TARP funds (see fig. 1). As of  December 31, 2009\u2014of the $20 billion committed\u2014Treasury had loaned  TALF LLC $100 million: $16 million for administrative expenses and $84  million for potential asset purchases. This amount is less than 1 percent of  the $25.3 billion apportioned to the CBLI program, which itself represents  5 percent of apportioned TARP funds. TALF will receive TARP funds  beyond the $100 million already loaned if additional funding is required by  TALF LLC to purchase surrendered or seized collateral resulting from  unpaid TALF loans.\nFRBNY created TALF LLC, a special purpose vehicle, to purchase and  manage any assets that TALF borrowers surrender or the FRBNY seizes.   TALF LLC also holds any excess accumulated interest from TALF loans  and the $100 million funded portion of the Treasury loan for administrative  expenses and collateral purchases, plus interest earned from permitted  investments.\nA portion of the interest earned by FRBNY on all TALF loans\u2014called the  \u201cexcess interest\u201d\u2014is paid to TALF LLC as a fee for TALF LLC\u2019s  commitment to purchase the assets received by FRBNY in conjunction  with a TALF loan. As of December 31, 2009, TALF LLC had accumulated  approximately $198 million in excess interest, with roughly $30 million  added each month (according to FRBNY officials), based on the current  loan portfolio.\nIf accumulated fees and interest earned on TALF LLC\u2019s investments are  insufficient to cover any asset purchases, Treasury will provide additional  TARP funds to TALF LLC to finance up to $20 billion of asset purchases.  Subsequently, TALF LLC will finance any additional purchases by  borrowing funds from FRBNY. The TARP loan is subordinate to the  FRBNY loan, thus the TARP funds provide credit protection to FRBNY.\n\n\t\tAsset Classes Eligible for Use as TALF Collateral\n\nWhen TALF was first announced, the Federal Reserve made a number of  asset classes eligible for use as collateral in consultation with Treasury,  adding more as the program evolved (see table 1). Initially, securities  backed by automobile, credit card, and student loans, as well as loans  guaranteed by the Small Business Administration (SBA), were deemed  eligible because of the need to make credit in these sectors more widely  available. For most TALF-eligible collateral, FRBNY will stop providing  new TALF loans in March 31, 2010, while new-issue CMBSs will be  accepted as collateral on new TALF loans through June 30, 2010.\nAll TALF-eligible ABSs must be denominated in U.S. dollars, must be rated  AAA by at least two TALF-eligible nationally recognized statistical rating  organizations (NRSRO), must not have a credit rating below the highest  investment-grade rating category from a TALF-eligible NRSRO, and must  not be on review for a potential rating downgrade. In general, borrowers  must be U.S.-based businesses, investment funds, or U.S.-insured  depository institutions, although foreign banks with U.S. branches that  maintain reserves with a Federal Reserve bank are also eligible. However,  all or substantially all of the eligible collateral\u2019s underlying credit  exposures must be  for newly issued ABSs\u2014originated by U.S.-organized entities or  institutions, or U.S. branches or agencies of foreign banks\u2014and for all ABSs\u2014made to U.S.-domiciled obligors or located in the U.S. or one  of its territories, in the case of real property.\nInterest rates for TALF loans are either fixed or floating and vary  according to the collateral securing the loan, as has been determined by  FRBNY.\nIn order to constitute eligible collateral for a TALF loan, both the issuers  and sponsors of the proposed collateral must provide certification  documents stating that, among other things,  they have reviewed TALF\u2019s terms and conditions; the collateral is TALF-eligible;   an independent accounting firm was provided consent, in certain cases, to  contact the TALF compliance fraud hotline if it suspects fraud or illegal  acts; and   purchasers of the securities that are affiliated with the originators, issuers,  or sponsors cannot use these securities as TALF collateral.\nIn addition, external auditors review certain representations made by  issuers and sponsors about the TALF eligibility of the collateral. If any of  these representations change, the issuer and sponsor must provide public  notice. If any of the certifications are found to be incorrect, TALF LLC and  FRBNY can recover damages and the issuer and sponsor will be subject to  review by Treasury, the Special Inspector General for TARP (SIGTARP),  and GAO.\n\n\t\tHow TALF Works\n\nA number of entities help administer the TALF program.\nTALF agents, which are primary dealers or designated broker-dealers that  operate under FRBNY\u2019s Master Loan and Security Agreement. The agents\u2019  responsibilities include conducting due diligence on TALF borrowers and  making representations to FRBNY regarding eligibility of TALF borrowers  and their collateral, submitting TALF loan requests and supporting  documentation to FRBNY and the TALF custodian on behalf of borrowers,  delivering administrative fees and collateral from TALF borrowers to  FRBNY, and distributing the TALF borrower\u2019s share of principal and  interest payments paid on the collateral backing the TALF loan.\nThe Bank of New York Mellon, which serves as custodian of the program  and is responsible for administering TALF loans, holding and reviewing  collateral, collecting payments and administrative fees, disbursing cash  flows, maintaining the program\u2019s books and records, and assisting other  TALF entities with the pricing of collateral.\nCollateral monitors\u2014Trepp LLC and Pacific Investment Management  Company LLC (PIMCO)\u2014which check the pricing and ratings of  securities; provide valuation, modeling, reporting, and analytical support;  and advise on related matters.\nCW Capital, which provides underwriting advisory services related to  certain commercial mortgage loans backing newly issued CMBSs.\nFRBNY announces monthly subscription periods, during which potential  borrowers apply for loans and funds are disbursed. FRBNY has a  precertification process to streamline the process for certain eligible  borrowers. TALF precertification documents indicate that borrowers must  be deemed to be top-tier financial entities\u2014that is, they must be seen as  industry leaders and be ranked among the largest entities in the industry  or have some of the largest operations. During our audit, FRBNY officials  told us that they review loan requests from all borrowers that meet general  eligibility criteria, and that not all borrowers need to be precertified;  indeed, most are not precertified. Applicants must work through a TALF  agent throughout the application process. Because the agents must  demonstrate that they know a potential borrower and must vouch for its  reputation, they put applicants through a \u201cKnow Your Customer\u201d program  based on provisions in the Patriot Act. Once this process is completed,  TALF agents submit a loan request package to FRBNY that includes:    borrower identification information, such as name, address, and tax  loan information, such as the requested loan amount ($10 million  minimum), the term of the loan, the loan rate, and the type of interest rate  (fixed or floating) that corresponds to the type of collateral offered;   collateral information, such as the CUSIPs of the securities, asset class  and subclass, price and face value of the collateral, the weighted average  life of the collateral, and the haircut amount\u2014a percentage assigned to  the loan based on the asset class, or subsector where appropriate, of the  collateral and its weighted average life;   any appropriate filing documents, including a prospectus and offering  documents of the securities expected to be pledged; and   proof of purchase for the ABSs and CMBSs that are being offered as  collateral.\nNext, the Bank of New York Mellon and FRBNY verify the data that the  TALF agents provide and, among other things, ensure that the ratings  submitted for the securities are the most recent. For legacy CMBS  collateral, FRBNY evaluates whether the price the TALF borrower paid  was reasonable based on pricing information FRBNY receives from the  collateral monitors and Bank of New York Mellon. The collateral  monitors, Trepp LLC and PIMCO, also conduct stress tests on pledged  legacy CMBS collateral to help ensure that the loan amounts will not  exceed the stressed value of the pledged securities. Three weeks prior to  each ABS subscription, a newly issued ABS undergoes a risk assessment  by FRBNY (with PIMCO\u2019s support) to determine if it is likely to be  accepted as TALF collateral. The issuer must provide FRBNY any  information it provided the NRSROs so FRBNY can conduct its own credit  risk assessment. The issuer must also consent to permitting NRSROs to  discuss all aspects of the rating with FRBNY, including credit quality of the  ABS, modeling, and methodology, among other things.\nOn each TALF loan\u2019s settlement date, the borrower must deliver the loan  collateral and administrative fees to FRBNY\u2019s custodian, the Bank of New  York Mellon, which holds the collateral for the life of the loan. The  administrative fees vary by asset class and cover FRBNY\u2019s administrative  costs for the facility.\n\n\t\t\tDetermining the Loan Amount\n\nIf FRBNY deems the collateral eligible, it will lend an amount calculated  by subtracting a designated haircut percentage from the lesser of either  par or market value of the pledged collateral (or, in the case of legacy  CMBSs, a value based on an internal risk assessment). This percentage, or  \u201chaircut,\u201d in effect sets the amount of equity the TALF borrower holds in  the collateral. Haircuts vary by FRBNY\u2019s assessment of market risks for  each sector and subsector. The haircut represents the difference between  the value of the proposed collateral and the value of the loan (table 2).\nAs discussed earlier, the Bank of New York Mellon holds the collateral  throughout the life of the loan. As the collateral securities generate cash  flows, the Bank of New York Mellon makes all principal and interest  payments to FRBNY on behalf of the TALF borrower. The borrower may  earn returns from the collateral after all loan obligations have been  satisfied. As shown in figure 2, any returns that the collateral assets earn  beyond the required principal and interest payments is delivered to the  borrower via the TALF agent after all monthly loan payment obligations  are met. FRBNY retains a portion of the interest that is calculated using  Overnight Indexed Swap (OIS) rates plus 25 basis points (approximately  the FRBNY\u2019s cost of funds). The remaining part of the TALF loan interest  payment is transferred to TALF LLC, which would use the funds to  purchase surrendered collateral before accessing funds from Treasury.  This accumulated interest from TALF loans is held in an account called  the cash collateral account, and the Bank of New York Mellon is  authorized to invest these funds on behalf of TALF LLC to earn interest  income.\nTALF offers nonrecourse loans, which allow borrowers to walk away\u2014or  stop paying a loan\u2014with no personal exposure for the unpaid portion of  the debt. In this case, borrowers would surrender their collateral through  a TALF agent, which would submit a collateral surrender form to FRBNY.  Within 10 days of receiving the surrender notice, the Bank of New York  Mellon cancels the outstanding balance of the loan and transfers the  related collateral to FRBNY. FRBNY has the option to sell the collateral to  TALF LLC (see fig. 3) at a price equal to the then outstanding principal  amount of the TALF loan plus accrued but unpaid interest. This process  has several steps:    FRBNY sends a purchase notice to TALF LLC. To purchase surrendered  assets, TALF LLC first uses funds that have been accumulating in the cash  collateral account (as of December 31, 2009, the account contained  approximately $198 million).\nWhen these funds are exhausted, TALF LLC borrows money to purchase  any surrendered assets. Its first source of borrowed funds is Treasury,  which has committed up to $20 billion in TARP funds to the TALF program  for this purpose. To obtain these funds, TALF LLC must submit a request  to Treasury (as the subordinate lender) one business day prior to the  desired funding date. Treasury\u2019s loan rate is equal to the 1-month London  Interbank Offered Rate (LIBOR) rate plus 300 basis points.\nIf the $20 billion TARP loan commitment is fully exhausted, TALF LLC  must ask FRBNY for a loan to purchase any additional surrendered assets.  FRBNY has committed to provide up to $180 billion to TALF LLC for this  purpose. TALF LLC must submit a borrowing request to FRBNY (as senior  lender) one business day prior to the desired funding date. The FRBNY\u2019s   loan rate is equal to the 1-month LIBOR rate plus 100 basis points. The  principal on FRBNY\u2019s loan would be repaid before the principal of the $20  billion TARP loan.\nAlternatively, if a TALF borrower stops payment on a loan and does not  submit a collateral surrender form, under certain circumstances FRBNY  has rights to seize the collateral.\nManagement of TALF LLC  With the Federal Reserve\u2019s and Treasury\u2019s agreement, TALF LLC may  dispose of assets it has acquired. Agency officials told us that there were  no formal guidelines on when to sell any acquired assets and that the  decision to sell would be made on a case-by-case basis as is necessary  given the differences in types of assets that could be acquired by TALF  LLC. However, they added that factors such as market rates and the nature  of the underlying collateral would likely play a role in any decision to hold  or sell assets purchased by TALF LLC. According to Treasury officials,  because the Federal Reserve\u2019s monetary policy considerations may not  align with Treasury\u2019s investment interests in the TALF program, Treasury  plans to obtain independent advice on the disposition of investments.\nTALF LLC has certain sources of cash inflows, such as the excess interest  from TALF loans, interest paid from permitted investments, principal and  interest paid on ABS holdings, and proceeds from possible asset sales of  ABS holdings. These inflows are distributed according to the order defined  in an agreement among Treasury, FRBNY, the Bank of New York Mellon,  and TALF LLC. The payment order is as follows:    Pay TALF LLC expenses.\nFund expense reimbursement account up to $15 million.\nRepay outstanding principal on any FRBNY senior loans to TALF LLC.\nFund the cash collateral account up to the senior loan commitment  (currently $180 billion).\nRepay outstanding principal on any Treasury loans.\nRepay FRBNY loan interest.\nRepay Treasury loan interest.\nRepay any other secured obligations that may arise that have not been  specified yet by the agencies.\nPay Treasury and FRBNY (90 percent and 10 percent, respectively) any  residual amounts but only after the above requirements are satisfied.\nAs of December 2009, cash inflows have been used to pay TALF LLC  expenses and fund the expense reimbursement and cash collateral  accounts.\n\n\tTALF Includes Features That Mitigate Potential Losses, but CMBSs Could Pose Greater Risks Than Other Asset Classes\n\nUnder some scenarios, TALF borrowers may have economic incentives to  stop payment on their loans and surrender collateral. Treasury and FRBNY  assessments, along with our analyses, however, suggest that a number of  factors reduce the likelihood of this occurring. First, certain TALF features  are designed to protect TARP funds and also limit taxpayer exposure.  Specifically, FRBNY officials told us that risks in TALF are managed based  on four pillars: credit protection, credit ratings, FRBNY due diligence, and  market discipline. FRBNY also sought market perspectives on the level of  returns from TALF-eligible securities that would be required to encourage  market participation while also ensuring proper due diligence by TALF  participants, which in turn reduces the risks to taxpayers. Second, most  ABSs issued since the credit crisis began contain features such as  increased levels of subordination and overcollateralization that reduce the  likelihood that TALF borrowers will stop payment on their loans. Third,  Treasury and FRBNY analyses project minimal, if any, likelihood that  TARP funds will be used for TALF-related purchases, and Treasury  currently projects a profit from TALF. While TALF poses minimal risks to  TARP even in adverse market conditions, our analyses showed that  CMBSs held as collateral as of September 2009 potentially pose higher  risks than ABSs and under adverse conditions losses could exceed $500  million. TALF presents a range of other taxpayer risks beyond those  presented to TARP funds. Such risks include the risk that FRBNY might  not identify instances of material noncompliance with program  requirements by TALF participants. However, because of statutory audit  limitations on GAO, this review has been limited to presenting only  descriptive information about FRBNY\u2019s role in TALF and we cannot  evaluate FRBNY\u2019s TALF operations.\n\n\t\tSome Scenarios Could Provide TALF Borrowers with Economic Incentives to Stop Payment on Their Loans\n\nAs of January 8, 2010, there have been no collateral surrenders by any  TALF borrowers, but in some instances, a TALF borrower could have an  economic incentive to stop payment on a loan and surrender the  underlying collateral. A number of scenarios could result in a borrower  walking away from a loan. For example, the collateral could lose value so  that the loan amount exceeded the value of the collateral. Or, the expected  returns from the collateral could be less than the cost of financing the  loan. Also, interest rates could rise across the board, decreasing the  market value of the collateral or making refinancing more difficult.\nA borrower can lose equity in the collateral if the collateral\u2019s value falls  below the outstanding loan balance. As discussed earlier, TALF\u2019s  established haircuts determine the amount of equity borrowers have in  their collateral. This equity represents the amount of money that a TALF  borrower would lose by surrendering the collateral and not repaying the  loan. For example, if the ABSs a borrower seeks to use as collateral on a  TALF loan were initially valued at $100,000, a haircut of 10 percent would  provide the TALF borrower with a $90,000 loan and require $10,000 of its  own funds to acquire the securities. This $10,000 represents the borrower\u2019s  equity in the securities. If the value of the collateral were to decline\u2014such  that the borrower could sell the securities only for some amount less than  $90,000\u2014and especially if it declined dramatically, the borrower could  decide to cut further losses by stopping payments on the loan and  surrendering the collateral. The borrower is particularly likely to make this  choice if such a situation occurs at the point when the loan matures.\nAs TALF currently works, TALF borrowers earn the difference between  the ABS\u2019s return and the cost of borrowing from FRBNY on the TALF loan,  multiplied by the inverse of the borrower\u2019s percent equity stake. However,  if the returns on TALF collateral are less than initially anticipated, the  TALF loan costs could exceed them, providing another incentive to stop  making payments. This situation would be most likely to develop if the  underlying loans in the securities defaulted or otherwise failed to meet the  terms of the original loan agreement. In this situation, if the returns were  less than the total cost of the TALF loan\u2014the interest and principal due\u2014 a borrower might stop payment on the loan or surrender the collateral to  FRBNY.\nInvestors might also choose to surrender collateral at the maturity of their  TALF loan if overall interest rates on credit increased significantly above  levels available at the time the underlying securities were issued. A large  increase in interest rates would lower the market value of the securities,  especially for those with a fixed interest rate, because future cash flows  would be worth less. In this scenario, a borrower could wind up owing  more to FRBNY at maturity than the securities were worth. The borrower  would need to raise funds at higher interest rates to pay back the TALF  loan, but the collateral would be worth less than the new loan, potentially  making it difficult to find a lender. This situation would provide an  economic incentive for the borrower to surrender the collateral and walk  away from the loan. Nevertheless, many of the longer-term securities  pledged as collateral for TALF loans have floating interest rates. Generally,  floating rate securities do not decline in value when interest rates increase  because the interest rates on the securities also increase.\nTALF borrowers will not necessarily stop payment on a loan even with  one or more of these economic incentives. For example, a market  participant and a Treasury official told us that TALF borrowers wanted to  avoid \u201creputation risk\u201d by not walking away from their loans\u2014even if it  might be in their financial interest to do so. By continuing to pay on their  loans, even at some loss, borrowers could protect their reputations. Other  market participants we spoke with, however, did not mention concerns  about reputation, though they thought it was unlikely that TALF borrowers  would stop payment on their loans.\nMoreover, FRBNY and Treasury officials believe that the most important  disincentive for borrowers to stop payment on a TALF loan and surrender  collateral is maintaining a positive return based on the difference between  the cost of the TALF loan and the return of the underlying ABS collateral.  Even if the value of the collateral declines and removes the borrower\u2019s  equity, these officials stated that borrowers were not likely to walk away  from the loan if they were still receiving positive cash flow from the asset.  While this assumption may be reasonable, it is conceivable that investors  subject to mark-to-market accounting might choose to walk away from an  ABS that was still paying the required scheduled interest and principal  payments but had lost sufficient market value. Investors would be most  likely to walk away if they owed significantly more on the loan than the  current value of the asset so that walking away from the asset would have  positive implications for the borrower\u2019s reported profitability. As of  January 8, 2010, no TALF borrowers had surrendered collateral to FRBNY.  Nevertheless, because the behavior of individual borrowers is difficult to  predict, it remains unclear whether and why borrowers might stop  payment on TALF loans based on their own investment strategies and  other objectives.\n\n\t\tTALF Has Several Features That Likely Protect Taxpayers\n\nCertain TALF features help protect TALF funds and also taxpayer  exposures through TARP. We discussed these protections with FRBNY  officials but did not evaluate FRBNY compliance with them because of the  limitation of our statutory audit authority. FRBNY officials told us that  risks in TALF are managed based on four pillars: credit protection, credit  ratings, FRBNY due diligence, and market discipline.\nCredit protection is provided primarily by the borrower\u2019s equity in the  security (set by the haircuts) and a portion of the interest rate on TALF  loans that provides accumulated excess interest in TALF LLC. FRBNY  officials said that haircuts were designed to approximate multiples of  stressed historical impairment rates for ABSs. The size of the haircut is  important, because if it is set too low, the borrower will have less equity in  the collateral and, in the circumstances that we have discussed, could  have an incentive to walk away. The excess interest from TALF loans  accumulated in TALF LLC also protects taxpayers, because this money  would be used before TARP funds to purchase collateral surrendered from  unpaid loans. FRBNY officials said that such features were designed to  ensure that the haircuts and excess interest would result in no credit  losses for Treasury or the Federal Reserve.\nThe Federal Reserve requires that TALF collateral be rated AAA or its  equivalent by two of the nationally recognized statistical rating  organizations that it deems eligible to provide credit ratings for TALF,  among other requirements for credit ratings. Collateral that is offered  that has a lower rating is not eligible for TALF. The rating requirement  helps ensure that the securities TALF accepts as collateral present  minimal credit risks.\nFRBNY due diligence serves as another pillar of taxpayer protection. As  discussed earlier, FRBNY, with the support of its collateral monitors,  reviews the credit risks related to individual assets FRBNY might consider  accepting as TALF collateral. In addition, for legacy CMBSs, FRBNY  reserves the right to reject any collateral and has not disclosed its  selection criteria to reduce the likelihood that only the poorest-performing  collateral is put forward for TALF loans.\nThe final pillar, market discipline, includes the TALF borrowers\u2019 due  diligence conducted on the risks related to the underlying collateral, given  their equity in the collateral, as set by the haircut. Such discipline includes  reviewing the prospectuses and understanding how the structure of the  underlying securities impacts its overall risks. Investors purchasing ABSs  would generally review the terms of the security, the anticipated risks, and  the likely return. In addition, TALF borrowers help to facilitate price  discovery.\nThese design features are intended to help ensure that TALF borrowers  hold equity in the underlying TALF collateral, that such collateral is highly  rated, and that TALF borrowers carry out the same due diligence on TALF  collateral that they would conduct on any other security.\n\n\t\tRates of Return for TALF Borrowers on TALF Collateral Have Declined for Most TALF Collateral from Their Highs Earlier in 2009\n\nAs noted earlier, TALF borrowers earn the difference between the ABS\u2019s  coupon rate of return and the cost of borrowing from FRBNY on the TALF  loan. According to FRBNY officials, they, along with officials from the  Federal Reserve and Treasury, were aware of the importance of striking a  balance between achieving returns on equity that would encourage  program participation in the stressed market conditions when TALF was  announced, while also ensuring that investors had incentives for due  diligence and that the program would be less attractive during times of  less market stress. If borrowers saw an opportunity to earn excessive  returns due to a poorly designed program, borrowers might not conduct  appropriate due diligence on the underlying securities, which could put  taxpayers at risk. Moreover, because the loans are nonrecourse much of  the borrowers\u2019 risk is shifted to FRBNY and Treasury, while most of the  earnings potential remains with borrowers. FRBNY gathered information  on the rates of return that would entice potential TALF participants by  surveying market participants about expected returns for TALF-eligible  asset classes.\nTo understand the changes in returns on equity over time and the  reasonableness of those returns from the perspective of helping to ensure  that taxpayers were not subsidizing high returns, we analyzed fluctuations  in returns on TALF eligible collateral from March 2009 through September  2009. As seen in figure 4, returns generally decreased for select classes of  TALF-eligible collateral between the first TALF operation in March 2009  and September 2009, with limited exceptions.\nMost asset classes demonstrated a significant decline in returns, from a  peak of 43 percent among the first student loan ABS accepted under TALF  to lows of -5 percent for 1-year prime auto tranches and 2-year auto  leases, suggesting that if investors had used TALF to finance the purchase  of these auto-related TALF eligible securities they would have locked in  losses. However, in a sign that health may be returning to the ABS  markets, no TALF borrowings were needed to finance the purchase of  these negative return securities as the issuances were fully funded by non- TALF investors. The most dramatic decreases in returns have been in the  auto loan tranches with longer-term maturities and private student loan  ABSs. The average expected return for TALF borrowers that used prime  auto loan ABSs as TALF loan collateral declined by nearly a fifth after  March 2009. All of the TALF-eligible private student loan ABS transactions  that were completed between May 2009 and August 2009 had a unique  option feature that significantly lessened investor\u2019s expected returns on  equity. Additionally, the September 2009 increase in return for subprime  credit cards was primarily due to the unique structure of an issuance by a  large subprime issuer.\nThe trend of decreasing returns on equity in the overall market for most  asset classes indicates that the returns required to attract investors have  decreased since TALF\u2019s implementation, as ABS investors perceive the  assets to be less risky. In addition, the trend demonstrates that taxpayer  subsidies to TALF borrowers have not, over the course of the program,  provided what might be considered excessive returns. Although returns  were high in the beginning, they diminished once the ABS markets started  to revive and overall perceived risk began to decrease. Moreover, the trend  toward negative TALF returns on equity have coincided with a drop in  TALF participation by TALF borrowers in those asset classes as the rate  on the securities\u2019 bonds falls below the loan rate charged by the FRBNY.  This occurrence is consistent with FRBNY\u2019s intention for TALF financing  to become less attractive as the ABS market improves and can be viewed  as indicating normalization in the market, since investors can purchase  such ABSs without TALF funding.\n\n\t\tNew Securitizations Have Generally Been Structured with More Credit Protections since the Credit Crisis Began\n\nCertain elements of the securities themselves also reduce the risk of loss  to TALF and the taxpayer. Among these features are credit enhancements,  which have increased since the credit crisis began in the second half of  2008. Credit enhancements are features in the structure of a securitization  that protect investors from losses due to defaults on the underlying loans  in the securities. Two main forms of credit enhancement include  subordination, which helps ensure that more highly rated tranches in a  security receive priority of payment, and overcollateralization, which  ensures that funds are available if a borrower stops paying or other credit  problems develop with the underlying loans. For additional details on the  various types of credit enhancement, see appendix V.\nCredit enhancements offer several benefits. First, they provide a cushion  against losses, making it less likely that TALF borrowers will decide not to  repay their loans and surrender the collateral because of credit  performance problems in the ABS or CMBS markets. Second, credit  enhancements reduce the probability that TALF LLC will suffer principal  losses on surrendered ABSs and CMBSs from unpaid loans. For this  reason, credit enhancements also provide TALF LLC with an incentive to  decide to hold surrendered collateral to maturity. This reduces potential  losses to TARP funds, which would finance TALF LLC\u2019s purchase of such  ABS and CMBS.\nWe reviewed the credit enhancements on every TALF-eligible ABS issued  between the program\u2019s initiation in March 2009 and September 2009 and  compared them with credit enhancements on ABSs by the same issuer  between 2006 and 2008 to identify any changes. As shown in figure 5, the  level of enhancement for every TALF-eligible asset class increased.\nIn particular, credit enhancements on ABSs backed by private student  loans, nonauto floor plans, auto leases, and motorcycle loans at least  doubled after the credit crisis. In other words, from the perspective of  protecting TARP funds, taxpayers would receive more than double the  amount of credit protection for these particular asset classes compared  with these issuers\u2019 ABSs before the financial crisis. This increase was a  combination of market demands and credit rating agencies\u2019 more stringent  requirements for achieving AAA ratings on many ABSs. TALF agents and a  TALF issuer confirmed that credit enhancements had increased since the  onset of the financial crisis, even for non-TALF issuances, and noted that  requirements from the credit rating agencies had contributed to the  increases.\n\n\t\tTALF Poses Minimal Risks to TARP Even in Adverse Market Conditions; CMBS Risks are Potentially Higher\n\nWhile TARP funds designated for TALF are exposed to potential loss if  TALF LLC uses them to purchase ABSs or CMBSs used as collateral for  unpaid TALF loans, Treasury and FRBNY analyses suggest that the risks of  loss are minimal. According to the Federal Reserve\u2019s analysis, the  accumulated excess interest from TALF loans will likely cover any ABS or  CMBS purchases for TALF LLC, and Treasury will not need to provide any  TARP funds for such purchases. Accordingly, the total expenditures from  TARP funds would include only the $100 million placed in TALF LLC,  which is in the form of a loan that would be repaid. According to the terms  of the agreement between FRBNY and Treasury, Treasury will receive 90  percent of the monies accumulated in TALF LLC when the program  expires. In particular, if TALF LLC has not purchased any collateral, the  excess interest that has accumulated\u2014along with interest income from  investing such money\u2014will go mainly to Treasury; therefore, Treasury  could potentially gain from its commitment to TALF if losses were  minimal.\n\n\t\t\tTreasury Currently Expects to Earn a Profit on TALF\n\nTreasury hired a contractor to provide an estimate of potential losses to  TARP funds from TALF. According to one analysis conducted by the  contractor, any losses to TARP are likely to be far below the $20 billion  that has been set aside for TALF and in fact are unlikely to exceed about  $190 million. Any assets purchased by TALF LLC would first be paid for  with the excess interest and related interest income that had accumulated  in TALF LLC, which totaled almost $200 million at the end of December  2009. According to the contractor, the analysis of potential loss of TARP  funds did not include this excess interest, so the total estimated losses  could be largely offset by accumulated interest. In fact, the contractor and  Treasury officials said that a subsequent analysis that included projections  for the accumulation of excess interest\u2014and is updated on a quarterly  basis\u2014currently projects more than $1 billion in profit related to  Treasury\u2019s TALF exposure.\nTo assess the reasonableness of Treasury\u2019s position that TALF may  actually earn money rather than expose the taxpayer to any losses, we  reviewed the Treasury contractor\u2019s model\u2014which is central to estimating  losses for the various asset classes accepted in TALF. We found this model  appeared to incorporate generally reasonable loss assumptions for the  three asset classes that we reviewed and that comprise the largest portion  of the TALF portfolio: credit cards, auto loans, and student loans. That is,  many of the loss estimates were fairly conservative when compared to  recent historical results for these specific assets. For each asset class, the  contractor estimated expected loss percentages based on its own research  and analysis, which was used to generate total-loss estimates. The model  calculates total losses for each TALF borrower on each asset held in the  TALF portfolio. The portfolio includes current TALF collateral and  projections for future TALF collateral that borrowers will use for TALF  loans, based on information the contractor received from Treasury.  Potential Treasury losses from these various scenarios were calculated by  taking the total loss for the TALF borrower and subtracting the equity that  the TALF borrower holds in ABSs. Any difference is considered a loss,  first to TALF LLC and potentially to Treasury (through TARP funds) if  loans extended to TALF LLC for its purchase of TALF collateral are not  repaid. While some of the scenarios generated by the model estimated  losses from asset classes that did not have government guarantees, none  of the possible scenarios estimated losses to Treasury from CMBSs.\n\n\t\t\tUncertainty in the Commercial Real Estate Market Could Create the Potential for Losses if Conditions Deteriorate\n\nWhile Treasury has determined that CMBS-related losses are unlikely for a  number of reasons, our analysis shows that if the commercial real estate  markets were to be affected similarly to real estate markets in 2008, the  potential for loss exists under a worst-case scenario. Treasury and its  contractor said that CMBS losses were unlikely for a number of reasons  ranging from the relatively large haircuts (at least 15 percent) required on  CMBS loans to the level of credit enhancement associated with CMBSs  accepted for TALF. However, due in part to the recently weak economy,  commercial real estate continues to undergo price deterioration that  potentially poses risks to the TALF legacy CMBS portfolio and could lead  to increased delinquencies and defaults on commercial real estate  mortgages. For example, the potential risks that CMBSs pose to TALF, and  thus to TARP, are underscored by the fact that 63 percent of TALF\u2019s CMBS  portfolio was underwritten in 2006 and 2007, when underwriting standards  were at their worst. Moreover, as figure 6 shows, commercial real estate  prices have been falling since early 2008, following the deterioration in the  overall U.S. economy, and shortly thereafter CMBS delinquencies began to  rise sharply. The Federal Reserve and Treasury have continued to note  their ongoing concerns about this segment of the market.\nIn addition, prices on CMBSs experienced volatility between May 2008 and  November 2009. Even the highest credit quality AAA legacy CMBSs that  were used as collateral for TALF loans during the third quarter of 2009 had  dropped by one third, on average, between May and November 2008  during the most severe period of the credit crisis. While prices have  recovered since the expansion of TALF to include CMBSs in the second  quarter of 2009, market observers project that the sector will continue to  perform poorly into 2010.\nIn light of the ongoing distress in the commercial real estate market, we  analyzed the prices and values of 99 percent of the CMBS collateral  backing loans made by FRBNY during the third quarter of 2009. We  compared the prices at the time the loans were made with the lowest  prices in November 2008, a period of extreme stress for CMBSs. Our  analysis revealed that if legacy CMBSs accepted as TALF collateral as of  September 2009 reached market values equivalent to November 2008  levels, about 88 percent of such collateral would have fallen to levels at  which the TALF borrower\u2019s equity would be eliminated. Moreover, more  than $3.5 billion owed by TALF borrowers\u2014or about 85 percent of the  total value of TALF legacy CMBS loans\u2014would have negative equity in  this scenario. This extreme market stress scenario would result in a loss in  market value on the part of these TALF borrowers of nearly $1.2 billion.  The haircut investment for these borrowers totals $665 million, providing  significant economic incentive to walk away, which would result in a  worst-case loss of about $500 million for TALF.\nWhile this worst-case scenario provides useful information for Treasury to  consider as it monitors risk associated with TALF, we agree with the  Federal Reserve and Treasury that there are a number of factors that  affect whether such losses would be realized even in this adverse scenario.  First, as discussed in the ABS analysis, the accumulated excess interest in  TALF LLC would help offset potential losses. As of December 31, 2009, the  fund had almost $200 million in excess interest, which will continue to  increase every month in the absence of any asset purchases. Second, the  risk that all or a large portion of CMBS assets would be surrendered is  significantly mitigated by an FRBNY requirement that legacy CMBSs  prepay a portion of any returns in excess of certain limits. In short, the  requirement helps ensure that the TALF borrower will retain an equity  interest in the underlying CMBSs. The longer the term of the TALF loan  (assuming that the underlying collateral provides a return) the more equity  the borrower holds, and the less likely the borrower is to surrender the  CMBS collateral. Third, as with ABSs, and as indicated by Treasury  officials, TALF LLC could hold the securities acquired at a discount from  par\u2014instead of selling them\u2014and earn interest income and the equity  forfeited by the borrower as long as the underlying mortgages in the  security continue to perform well. Fourth, the estimated loss represents  less than 1 percent of total TALF loans as of December 2009, and total  TALF CMBS loans represent about 14 percent of all TALF loans. Because  CMBSs is a small portion of the portfolio, it would present a smaller  proportion of total losses. However, if recent TALF borrowing trends hold,  CMBS loans are likely to increase as the percentage of total TALF loans.  Finally, only senior credit-enhanced tranches within each CMBS can be  accepted as collateral. Thus, even if credit losses on the commercial  mortgages underlying the TALF CMBS securitizations are significantly  higher than currently expected in today\u2019s stressed commercial real estate  environment, these senior tranches are unlikely to experience principal or  interest payment interruptions. While losses associated with CMBSs  currently appear unlikely, these securities warrant ongoing scrutiny  because of continuing economic uncertainty and the distressed conditions  in the commercial real estate market.\n\n\tTreasury Worked with the Federal Reserve and FRBNY to Analyze Risks Related to TALF but Did Not Fully Document Analysis Supporting Final Decisions\n\nFRBNY, the Federal Reserve, and Treasury worked in a collaborative  manner to design certain elements of TALF, according to these agency  officials. The Federal Reserve led the initial efforts to determine collateral  eligibility and Treasury recommended one asset class and assessed the  risks of others. As part of this work, Treasury hired a contractor to  conduct independent analyses, and the contractor raised concerns about  accepting certain assets as TALF collateral, the size of the haircuts that  were required, and other program terms. While Treasury officials said that  the contractor\u2019s concerns were ultimately resolved, they could not provide  documentation showing how Treasury resolved the contractor\u2019s concerns,  or how the contractor\u2019s analysis informed Treasury\u2019s final decisions.  Treasury also did not document how they reached major decisions that  were made with FRBNY and the Federal Reserve. The lack of an effective  process to make and document decisions may inhibit transparency and  accountability of Treasury\u2019s monitoring of the $20 billion of taxpayer  funds at risk through TARP.\n\n\t\tThe Federal Reserve and Treasury Worked Together to Determine the Eligibility of Proposed TALF Collateral and Their Potential Risks\n\nTreasury, the Federal Reserve, and FRBNY officials with whom we spoke  said that the agencies have a positive working relationship when making  decisions on TALF. For example, Federal Reserve and FRBNY officials  said that they consulted with Treasury to select the types of ABSs to  include in TALF as eligible collateral. Under this process, the Federal  Reserve identified all eligible collateral except SBA loan guarantees.\nTreasury officials said that one asset class that FRBNY proposed\u2014 insurance premium finance loans\u2014required additional analysis to assess  the risks. These loans are not as widely traded or as well understood as  other asset classes. Treasury officials worked with Federal Reserve  officials to better understand the asset class, including its risks and factors  mitigating such risks, and its importance to small businesses. Treasury\u2019s  contractor also reviewed risk information on this class of ABSs. Treasury  and Federal Reserve officials determined that this asset class should be  eligible for TALF. According to Treasury officials, other asset classes were  also reviewed by both agencies and not included in the program because  of their risks.\nAccording to Treasury officials, the following criteria were used by  Treasury to evaluate the eligibility of asset classes for inclusion in TALF:  (1) whether including certain asset classes would have a significant or  beneficial effect on the broader economy, small businesses, or consumers;  and (2) whether assistance was needed because of a market failure in  what were otherwise safe asset classes. Based on these criteria, Treasury  recommended to the Federal Reserve and FRBNY that TALF accept as  collateral securities backed by SBA loan guarantees. SBA has two loan  guarantee programs\u2014section 7(a) and section 504\u2014that support financing  for small businesses. Treasury requested that these securities be included  because they would assist in carrying out TARP\u2019s goals of supporting small  businesses and the risks were deemed to be low because of their  government guarantees.\nAs part of the asset class selection process, the Federal Reserve and  Treasury each analyzed the potential for loss that the TALF assets  presented. Treasury hired a contractor to, among other things, conduct an  independent analysis of the credit and other risks of the TALF asset  classes and to determine appropriate haircuts for each of the asset classes.  In its initial reports to Treasury, the contractor raised some concern about  accepting certain asset classes for TALF, provided suggestions for  program changes, and, in a few instances, disagreed with haircuts that  FRBNY suggested. According to Treasury officials and the contractor, any  differences were ultimately reconciled.\nAs an example, the contractor\u2019s report noted that auto floor plan ABSs  faced risks because of the financial problems that the major domestic auto  manufacturers faced, and the nationally recognized statistical rating  organizations were in many cases unwilling to provide AAA ratings on  these securities. The contractor recommended a higher haircut to  encourage TALF borrowers to conduct thorough due diligence for this  asset class. Treasury questioned the contractor\u2019s methodology and asked  the contractor to redo its analysis of auto dealer floor plan ABSs. After  working with Treasury and FRBNY to understand the differences in  methodologies between its analysis and FRBNY\u2019s for this asset class, the  contractor agreed with FRBNY\u2019s estimates on haircuts and even suggested  a haircut lower than FRBNY\u2019s.\n\n\t\tTreasury Did Not Fully Document Its Analysis or Basis to Support All Major Agreements with the Federal Reserve and FRBNY\n\nAlthough Treasury told us what its reasons were for not accepting all of  the contractor\u2019s recommendations, Treasury officials were unable to  provide documentation showing when the contractor conducted the  analyses or when or how Treasury made decisions based on these  analyses. Further, no documentation was available showing how major  differences were resolved, including those involving program terms, the  eligibility of asset classes, and differences in haircut estimates among  Treasury, Treasury\u2019s contractor, the Federal Reserve, and FRBNY.\nAdditionally, Treasury officials could not provide documentation on the  rationale for major program decisions that Treasury, the Federal Reserve,  and FRBNY officials reached. Treasury officials told us that FRBNY, the  Federal Reserve, and Treasury had a positive working relationship when  making decisions on TALF and described the process as \u201cfluid;\u201d therefore,  there was not always documentation of discussions and final outcomes.  Moreover, Treasury officials said that they spoke almost daily to Federal  Reserve and FRBNY officials. In some cases, according to Treasury  officials, FRBNY and the Federal Reserve consulted Treasury, although  technically no consultation was required. Treasury and the Federal  Reserve did not formally document their conversations, but the end result  of those conversations was documented and reflected publicly on the  TALF Web site administered by FRBNY.\nFinally, some of the early decisions on TALF were made by Treasury  officials who are no longer at the agency. Without documentation, there  are no records to show, for instance, how certain suggestions made by  these officials about asset classes or program terms were incorporated  into policy choices for TALF.\nOur Standards for Internal Control in the Federal Government states that  internal control activities help ensure that government management  directives are carried out. Such activities are critical to helping ensure  accountability and stewardship for government resources, and include  proper documentation of major decisions. In the context of the Emergency  Economic Stabilization Act of 2008\u2014and the unprecedented size and  scope of government assistance to support the financial sector\u2014 transparency and accountability are of the utmost importance. As an  example, for the largest program in TARP\u2014the Capital Purchase  Program\u2014all major decisions are recorded in meeting minutes that report  who was present, what decisions were made, and when they were made.  In past TARP reports, we recommended that Treasury increase the  transparency and accountability of TARP, in part by documenting and  reporting certain processes and decisions.\nAs we noted in past TARP reports, given the economic environment  surrounding the creation of TARP, and subsequently TALF, during the fall  of 2008, the change in administrations and the lack of staff that Treasury\u2019s  administrative office for TARP\u2014the Office of Financial Stability\u2014faced,  Treasury may have initially had difficulty establishing its decision-making  processes for TALF and recording decisions and important meetings on  TALF program terms. At the time that TALF was created, the Office of  Financial Stability had been in existence for barely a month, and its  strategy and overall staffing needs were not yet in place. The broader  context at the onset of the program\u2014with unprecedented economic  challenges and low, impermanent staffing\u2014may help explain why such  processes were not established and documented when the program was  first established.\nHowever, for TALF decision-making processes and the activities of TALF  LLC to be viewed as credible, Treasury needs to ensure that it has  developed an effective process to document the basis for its decisions. A  year has passed since Treasury began rolling out TARP-related programs,  and other larger programs\u2014such as the Capital Purchase Program\u2014have  established systems for documenting decisions and the rationale for  decisions. But Treasury\u2019s decisions for TALF still lack a clear process for  tracking how important program decisions are made and why. Without  such documentation, ascertaining what information has been considered  to protect TARP funds committed to TALF is difficult. Further, the lack of  documentation inhibits transparency and accountability.\n\n\tTreasury\u2019s and FRBNY\u2019s Indicators Suggest That Credit Market Conditions Have Shown Some Improvement, but Treasury Lacks Performance Indicators in the Event that It Must Purchase TALF Assets\n\nFRBNY, in conjunction with Treasury, monitors TALF by tracking  indicators\u2014such as securitization volumes, changes in pricing, and TALF  loan volumes\u2014by amount and borrower type to identify any possible  impact from TALF. Our analysis of these and other indicators suggests that  market conditions have begun to improve for some TALF-eligible asset  classes, but that others, such as CMBSs, continue to show weakness.  However, any assessment of the effectiveness of an individual program  presents challenges. As we have reported, no indicator can provide a  definitive measure of TALF\u2019s impact because a myriad of programs have  been initiated to stabilize the markets, including actions taken under the  Capital Purchase Program and the Automotive Industry Financing  Program. Challenges remain for some of the TALF-eligible asset classes,  and FRBNY and Treasury monitor the performance of TALF loans and  collateral to be aware of all potential risks to TARP funds. However,  according to Treasury officials, Treasury has not yet developed a plan for  tracking assets that might be surrendered to TALF LLC or for publicly  disclosing how up to $20 billion in TARP funds would be monitored.\n\n\t\tTreasury, FRBNY, and the Federal Reserve Collaborate on Monitoring Market Indicators\n\nFederal Reserve and Treasury officials said that they collaborated on  monitoring indicators that could help measure TALF\u2019s effectiveness in  improving conditions in the securitization markets and, in turn, its impact  on the availability of credit to households and small businesses. Although  the officials have said they do not have specific benchmarks or targets  they hope to achieve for ABS issuance volumes or volumes of TALF loans,  they are monitoring those indicators. Officials also track interest spreads  for TALF-eligible asset classes, the number of borrowers accessing the  facility, and information about TALF borrowers, such as investor type.  FRBNY collects data on these indicators to monitor TALF\u2019s impact.  According to Treasury officials, they review FRBNY\u2019s metrics related to  TALF, including cash flows from TALF loans that it receives monthly from  FRBNY, and speak daily with FRBNY officials.\n\n\t\tNew Issuances in Various Asset Classes Increased after TALF\u2019s First Subscription in March 2009\n\nTo determine the condition of the securitization markets, we also have  been monitoring similar indicators, such as new ABS issuances and  changes in interest rates, types of investors, and spreads\u2014using data from  before and after TALF\u2019s implementation. In general, data from the  indicators that we have collected show increases in securitization  volumes, little change in the cost of credit, and declines in perceptions of  risk in certain asset classes since TALF began. ABS issuances in all of the  most liquid TALF-eligible sectors dropped sharply in 2008 from their peak  levels in 2006 and 2007. As figure 7 indicates, new issuance of ABSs had  come to a virtual halt in 2008, significantly reducing a major source of  credit for consumers and businesses. While securitization volumes  increased since the end of 2008, these increases have not been sustained  throughout 2009.\nAfter having shown little activity since the last quarter of 2008, issuance of  credit card, auto, and student loan ABSs increased after the initial TALF  subscription in March 2009 (shown as first quarter 2009 in figure 7). The  majority of ABS issuances in the credit card and auto sectors have been  supported by TALF loans. Specifically, of the $46 billion in ABSs issued on  credit card debt in 2009, $29.7 billion, or about 65 percent, have been  eligible for TALF financing. Similarly, about 88 percent\u2014or $44.9 billion\u2014 of the $51.2 billion in ABSs issued on auto loans in 2009 were TALF- eligible deals. For more detailed information on securitization volumes,  see appendix VII.\nBy the third quarter of 2009, credit card and student loan issuances had  declined again in dollar terms, while auto issuances continued to increase.  A number of factors\u2014such as the combined effects of the numerous  stimulus programs, changes in consumer demand for credit, and investor  willingness to invest\u2014also may have contributed to the trend in  securitization volumes in these sectors. Federal Reserve officials  suggested that some companies may have been hesitant to issue credit  card ABSs because of uncertainty regarding the continued availability of  the FDIC\u2019s \u201cSafe Harbor\u201d rule in light of new accounting rules effective for  annual financial periods beginning after November 15, 2009.\n\n\t\tInterest Rates in Most Asset Classes Have Generally Not Decreased Since TALF Was Announced\n\nOne of TALF\u2019s goals is to increase the availability of credit to consumers  and businesses. TALF assistance to the securitization markets is intended  to result in lower loan rates and increased credit availability to businesses  and individual consumers, including the auto loan, credit card, and student  loan sectors that account for the majority of securitizations.  Recent  increased activity in the securitization markets has been accompanied by a  substantial decrease in interest rates for loans originated by auto finance  companies. However, there have been few changes in credit card rates or  interest rates for consumers in auto loans originated by commercial banks.  Consumer interest rates remain flat.\nBecause auto finance companies rely more heavily on securitizations for  funding than commercial banks, the effects of positive changes in the  securitization markets are more likely to be reflected in their loan rates  than in those of commercial banks. As figure 8 shows, auto loan rates  offered by commercial banks remained fairly steady before and after the  implementation of TALF. The average finance company auto rate has been  consistently below commercial bank auto rates, with the exception of the  fourth quarter of 2008, perhaps reflecting the financial challenges facing  the auto industry at that time. Since then, rates at auto finance companies  have declined from an average of 7 percent to approximately 3 percent.  This reduction coincides with the launching of TALF but may also reflect  assistance from the numerous government stimulus programs, especially  those focused on the auto industry. While fixed credit card rates have  remained fairly flat in recent years, variable credit card rates have  increased by approximately one percent since TALF\u2019s inception. FRBNY  officials attributed the elevated credit card rates to increased charge-offs,  which have raised companies\u2019 costs of funds. These rate changes could  also be the result of credit card companies\u2019 efforts to anticipate the  implementation of the remaining part of the Credit Card Accountability  Responsibility and Disclosure Act of 2009, which will take effect in  February 2010.\nFRBNY officials said that it is possible that without TALF interest rates on  loans to consumers and small businesses would be much higher than they  are now. Issuers of TALF-eligible ABSs have told FRBNY that without  TALF they would have made fewer loans and those loans would have been  at higher rates. Data on private student loan rates are difficult to obtain,  but FRBNY officials said that Sallie Mae has reduced its rates on private  student loans over the past few months.\n\n\t\tTALF Loan Volumes and the Composition of TALF Participants Have Changed since the Program Began\n\nAs illustrated in table 3, the volume of TALF loans made since the  inception of the program has fluctuated by month, with loan volumes  peaking in May 2009 and June 2009. As of December 31, 2009, a total of  $61.6 billion in TALF loans had been granted; however, the balance of  loans outstanding at that date was $47.5 billion due to loan prepayments  and principal paydowns. As we reported previously, agency officials  indicated that improvements in securitization and loan markets had made  issuers less dependent on TALF support. However, according to FRBNY  officials, other issuers remain more heavily dependent on investor access  to TALF financing. FRBNY officials noted that there have been a number  of prepayments, and market participants also told us that financing under  TALF was now less favorable because better financing terms could be  found in the private sector for certain asset classes. Notably, the first and  only subscription for new-issue CMBSs occurred in November 2009.  FRBNY and Treasury officials stated that the slow new-issue CMBS  activity may be due to the length of time it takes to complete a deal.\nAs shown in figure 9, approximately 75 percent of TALF loans involved the  purchase of ABSs backed by auto loans and leases, credit card receivables,  and student loans. This activity reflects the historical trends in auto, credit  card, and student loan securitizations, which represent the majority of the  ABS markets.\nCMBS (legacy 14%; new issue 0%)\nAccording to Treasury and Federal Reserve officials, TALF was designed  to encourage broader investor participation in the securitization markets,  with the goal of reviving consumer lending. These officials noted that the  securitization markets stopped functioning in 2008 when many investors  stopped purchasing these securities. The lack of securitization market  activity disrupted a significant source of funding for businesses and  consumers. Gradually, some of these investors have returned to the  markets, but at a slower rate than during past market downturns.  Specifically, Treasury officials noted increasing participation in TALF  securitization by asset managers, hedge funds, and traditional institutional  investors such as pension funds and insurance companies. They consider  the return of investors to the securitization markets to be a measure of the  program\u2019s success. Hedge funds traditionally have not invested in ABSs  because of the low returns relative to other opportunities. However,  FRBNY officials believe the access to low-cost financing through TALF  made ABS returns attractive to hedge funds. FRBNY also noted  participation by private investors and banks.\n\n\t\tDifferences in Prices and Benchmarks Have Decreased for Most TALF- Eligible ABS Collateral\n\nAs we have discussed, one method of measuring market participants\u2019  perceived risk of a security is to compare the difference between the  security\u2019s yield and a benchmark yield. The difference is called a spread,  and wide spreads, or large differences, generally indicate that participants  perceive high risk in the market that requires a high rate of return. As  perceived risk declines, differences in such prices decrease, or narrow.  During the fourth quarter of 2008 and first quarter of 2009, spreads likely  reflected high expected costs of selling securities prior to their maturity,  which contributed to low desirability for those securities. Figure 10 shows  the change in spreads in the following TALF-eligible asset classes: auto  loan, credit card, student loan, and CMBS. A trend of widening spreads in  these asset classes began in mid-2007, indicating negative perceptions  about risk. Although there were fluctuations throughout 2008, spreads  began to narrow in early 2009, indicating a perceived decline in risk by  market participants and potentially improved credit market conditions.\n\n\t\tTreasury Reviews TALF- Related Data from FRBNY\u2019s Indicators but Has Not Developed Indicators to Collect and Disclose Data on Future TALF LLC Assets\n\nTreasury reviews the data that FRBNY collects on TALF loan volumes and  borrowers by type, securitization volumes, and changes in pricing.  Treasury officials noted that personnel at both agencies were responsible  for a variety of tasks in tracking TALF-related metrics. We found that  Federal Reserve officials, particularly at FRBNY, typically took the lead in  collecting data and calculating metrics. We also found that Treasury  officials did not have a plan to collect and analyze information related to  assets that might be placed in TALF LLC\u2014assets to which Treasury would  have an exposure. Such information might include the purchase and sale  price of the assets, their current market value, total outstanding loans by  Treasury to TALF LLC for the ABS purchases, and the rationale behind  TALF LLC\u2019s possible future sale of assets. Treasury has not yet developed  such a plan because no TALF collateral has been surrendered thus far, and  Treasury believes it is unlikely that it will have to use TARP funds to  finance TALF LLC\u2019s purchase of surrendered collateral. Moreover,  Treasury does not have a plan to publicly communicate such information  in the event that collateral is surrendered and placed there. In previous  TARP reports and in this report, we have discussed the importance of  improving the transparency and accountability of TARP programs. We  have also recommended that Treasury build on existing oversight  procedures to better monitor and report on the use of TARP funds and to  better quantify program results.\nAlthough Treasury is not responsible for implementing or administering  TALF, it has pledged support to TALF LLC with the first $20 billion of  potential loans to allow it to purchase surrendered TALF collateral. As  discussed earlier, commercial real estate continues to show weakness and  could potentially pose greater risks to TARP funds. Without a system for  tracking and reporting on any potential assets such as CMBSs that are  surrendered to TALF LLC, Treasury cannot assure transparent  management of these assets or determine if it is achieving its goals under  CBLI with respect to the use of TARP funds for TALF-related activities.  Further, without properly planning for its role in managing the collateral  should they have to be purchased by TALF LLC, Treasury may not be able  to effectively assess any risks associated with such assets or exercise  appropriately its decision-making responsibilities regarding the potential  sale of any assets.\n\n\tConclusions\n\nTALF is one of several programs created by the Federal Reserve to help  address the recent crisis in the financial sector. Specifically, this program  was designed to restart securitization markets, a critical part of financial  markets. Given the myriad of programs initiated to stabilize the financial  system and increase credit availability, it is difficult to attribute  improvement in markets to any one program. Nevertheless, according to a  variety of indicators, TALF appears to be contributing to measured  improvements in the securitization markets. As of December 31, 2009,  $61.6 billion in loans were made through TALF and TALF LLC had  received $100 million of the $20 billion in TARP funds committed to the  program. In addition to the $20 billion, funds provided by FRBNY to  operate TALF could expose additional risks. However, because we are  statutorily prohibited from auditing the Federal Reserve\u2019s monetary policy  activities, we believe our ability to completely assess and report on  taxpayers\u2019 exposure to the entire program or the Federal Reserve\u2019s  management of the program is limited.\nAlthough the government has taken a number of steps to mitigate the risk  of loss from TALF, in the long term risks remain. For example, while  analyses by the Federal Reserve and a Treasury contractor that were  based on predictions of market performance and other factors estimated  that a loss of a substantial portion of the $20 billion TARP commitment  would be unlikely based on current conditions in the securitization  markets, we found that until the TALF borrowers repay their loans, TALF  still presents risks. While we acknowledge that overall market conditions  have generally improved since 2008, some asset classes\u2014specifically  CMBS\u2014are still performing poorly and may continue to perform badly for  the foreseeable future. Moreover, markets remain fragile and predicting  how the overall ABS markets will perform in the future and how  borrowers might respond to new declines in the markets is difficult. A  return to 2008 conditions could have adverse impacts on the program,  such as significantly reducing the value of TALF collateral, providing an  economic incentive for borrowers to walk away from their loans, and  requiring TARP funds be used to buy TALF collateral. However, several  TALF program features make this less likely.\nTreasury, which worked with FRBNY and the Federal Reserve on certain  decisions related to TALF, was not able to provide documentation on how  these decisions were made. As we noted in past TARP reports, Treasury  has yet to develop systems to ensure the transparency and accountability  for TARP activities by implementing a strong, transparent strategic  framework with appropriate oversight mechanisms. Among other things,  these mechanisms would ensure accountability by tracking why decisions  are made, and whether goals are being achieved. Documenting the basis  for decisions is an important part of the decision-making process.  Moreover, documenting the rationale for major program decisions would  help ensure that the program objectives are being met and that it is  functioning as intended. Unless Treasury documents the rationale for  major program decisions that it made with the Federal Reserve, it cannot  demonstrate accountability for meeting the goals of TALF and could  unnecessarily place TARP funds at risk.\nBelieving it is highly unlikely that it will have to use TARP funds to finance  ABS purchases by TALF LLC, Treasury has not taken steps to develop a  set of metrics or a plan for tracking and reporting on the performance of  the collateral that could be placed in TALF LLC. While TARP funds may  never be used to finance purchases of ABS or CMBS used as TALF  collateral, Treasury should at least be prepared for the possibility. Without  a plan for collecting and analyzing such data, Treasury would have to  develop one as it is financing or after it has financed collateral purchases  by TALF LLC and risks being ill prepared to make informed decisions on  whether TALF LLC should keep collateral until the securities mature or  sell them. Unlike many other programs that were developed and  implemented in the midst of the crisis, Treasury has an opportunity to be  strategic by developing a plan in the event that its role in TALF is  triggered. In addition, without a plan Treasury cannot measure TALF\u2019s  success in meeting its goals under CBLI with respect to any assets that are  placed in TALF LLC. Finally, without a plan for communicating the  findings that result from tracking and analyzing such metrics, the public  will not be aware of how the assets are managed and financed,  undermining Treasury\u2019s efforts to be fully transparent about TARP  activities.\n\n\tMatter for Congressional Consideration\n\nTo enable GAO to audit TARP support for TALF most effectively, we  recommend that Congress provide GAO with audit authority over all  Federal Reserve operational and administrative actions taken with respect  to TALF, together with appropriate access authority.\n\n\tRecommendations for Executive Action\n\nTo improve transparency of decision making on the use of TARP funds for  TALF and to ensure adequate monitoring of risks related to TALF  collateral, we recommend that the Secretary of the Treasury direct the  Office of Financial Stability to take the following actions:  1.  Given the distressed conditions in the commercial real estate market,  as part of its ongoing monitoring of TALF collateral, continue to give  greater attention to reviewing risks posed by CMBSs. 2.  Strengthen the process for making major program decisions for TALF  and document how it arrives at final decisions with the Federal  Reserve and FRBNY. Such decisions should include how Treasury  considers expert and contractor recommendations and resolves those  recommendations that differ from those of the Federal Reserve and  FRBNY.  3.  Conduct a review of what data to track and metrics to disclose to the  public in the event that TALF LLC purchases surrendered assets from  FRBNY. Such data and metrics should relate to the purchase,  management, and sale of assets in TALF LLC that potentially impact  TARP funds. Metrics related to TALF LLC could include periodic  reports on the date and purchase price of assets; fluctuations in the  market value of assets held; the date, price, and rationale when assets  are sold; and the total amount of loans outstanding to Treasury.\n\n\tAgency Comments and Our Evaluation\n\nWe provided a draft of this report to Treasury for its review and comment.  We also provided the draft report to the Federal Reserve to verify the  factual information they provided to us about TALF. Treasury and the  Federal Reserve provided written comments that we have reprinted in  appendixes VIII and IX, respectively. Treasury and the Federal Reserve   also provided technical comments that we have incorporated as appropriate.\nIn their response Treasury welcomed our recognition that TALF  contributed to improvements in the securitization markets but believed  that the draft report understated the success of the program. In so doing  Treasury reiterated several points that were already underscored in the  draft report. For example, as discussed in the draft report and Treasury\u2019s  response, we acknowledged that securitization volumes in markets had  come to a complete halt in 2008, but increased after TALF\u2019s first  subscription in March 2009. Moreover, we also noted that recent TALF  subscription levels for the majority of eligible asset classes have tapered  off, which is an indication that investors\u2019 perception of risk has decreased.  As we have noted in our previous TARP reports, any assessment of the  effectiveness of TALF is complicated by the fact that a variety of programs  have been established by the Federal Reserve, Treasury, and others to  stabilize the markets\u2014making it virtually impossible to definitively single  out and measure TALF\u2019s impact.\nTreasury also stated that it disagreed with our methodology related to  potential losses for CMBSs.  As we discussed in the report, the adverse  scenario analysis of the TALF CMBS portfolio was not intended to project  an expected loss amount for this portfolio but to help assess the possible  range of losses in TALF.  We used a stress scenario and selected loss  assumptions that were similar to those the Federal Reserve imposed on  the 19 bank holding companies that participated in the 2009 stress test.  Treasury states that it would take a 65 percent loss on underlying  commercial real estate prices to experience losses. While we agree that  this is an unlikely event, commercial real estate prices have already fallen  by an average of 43 percent since prices peaked. Combined with the fact  that CMBSs have much longer time horizons than other TALF ABS asset  classes and hence greater uncertainty of outcomes, we continue to believe  that CMBS warrants ongoing attention.\nTreasury also noted that it appreciates the recommendations GAO makes  in the report to strengthen the documentation of decisions Treasury made  concerning changes to the program.  Treasury stated it is committed to  ensuring that not only TALF, but TARP as a whole, is administered in a  way that protects the taxpayer. We believe that development of a sound  decision-making process that includes steps for formal approval and  documentation of the basis of the final decisions at an appropriate  management level will improve transparency and accountability of the  TALF program. As we noted in past TARP reports and most recently in the  October 2009 report, Treasury has yet to develop systems to ensure the  transparency and accountability for TARP activities by implementing a  strong, transparent strategic framework with the appropriate oversight  mechanisms. Among other things, these mechanisms would ensure  accountability by tracking why decisions are made and whether goals are  being achieved.\nFinally, regarding our recommendation that Treasury review what data to  track and metrics to disclose to the public in the event that TALF LLC  purchases surrendered assets from FRBNY, Treasury noted that it will  continue to enhance its existing reporting on its investments in TALF that  strikes an appropriate balance between its goal of transparency and the  need to avoid compromising either the competitive positions of investors  or Treasury\u2019s ability to recover funds for taxpayers. We believe that having  a plan in place for tracking and reporting on the performance of any  collateral that could be placed in TALF LLC will help Treasury strike that  balance.\nIn its comments, the Federal Reserve did not agree with our  recommendation that Congress consider providing GAO with authority to  audit the Federal Reserve\u2019s TALF operational and administrative actions  because it disagreed that there are limitations on GAO\u2019s authority to audit  these Federal Reserve activities.  The Federal Reserve also noted that it  fully cooperated in GAO\u2019s conduct of this audit and provided us access to  records and personnel.\nThe Federal Reserve did cooperate and voluntarily provided all access we  requested in this audit of Treasury.  We appreciate this cooperation, which  enabled us to factually describe the TALF program and to evaluate  Treasury\u2019s involvement in it.  However, we believe the express statutory  prohibition in 31 U.S.C. \u00a7 714(b) on GAO auditing the Federal Reserve\u2019s  monetary policy and discount window activities, which the Federal  Reserve believes include TALF\u2019s operation and administration, prohibits  us from auditing the Federal Reserve\u2019s TALF activities, even from the  perspective of TARP. We limited the scope and conduct of this audit  accordingly, and thus did not request access to information to audit the  Federal Reserve\u2019s performance of these activities.  Further, the Federal  Reserve\u2019s decision to voluntarily provide requested access in this instance,  while helpful, does not create GAO authority for access to information the  agency may not volunteer, nor GAO authority to audit the Federal  Reserve\u2019s TALF operational activities or other performance.  In our view,  our lack of authority to audit the Federal Reserve\u2019s actions limited our  ability to fully assess the risk to taxpayer funds presented by TALF.   Accordingly, we continue to believe that Congress should provide GAO  with authority to audit the Federal Reserve\u2019s operation and administration  of the TALF program.  Our detailed response to the Federal Reserve\u2019s  comments on these issues is contained in appendix X.\nWe are sending copies of this report to the Congressional Oversight Panel,  Financial Stability Oversight Board, Special Inspector General for TARP,  interested congressional committees and members, Treasury, the federal  banking regulators, and others. The report also is available at no charge on  the GAO Web site at http:\/\/www.gao.gov.\nIf you or your staffs have any questions about this report, please contact  Orice Williams Brown at williamso@gao.gov or (202) 512-8678. Contact  points for our Offices of Congressional Relations and Public Affairs may  be found on the last page of this report. GAO staff who made major  contributions to this report are listed in appendix XI.\n\nAppendix I: Objectives, Scope, and Methodology\n\nThe objectives of this report are to (1) analyze the risks that the Term  Asset-Backed Securities Loan Facility (TALF) presents to Troubled Asset  Relief Program (TARP) funds and therefore to taxpayers, (2) evaluate how  the Department of the Treasury (Treasury) analyzed the risk of TALF  assets and used this information in making decisions on TALF with the  Board of Governors of the Federal Reserve System (Federal Reserve) and  the Federal Reserve Bank of New York (FRBNY), and (3) assess the  condition of securitization and credit markets before and after TALF\u2019s  implementation based on indicators tracked by Treasury and FRBNY.\nGAO has statutory limitations on auditing certain functions of the Federal  Reserve. Because of these limitations, the evaluative content of this report  is limited to Treasury\u2019s role of safeguarding TARP funds related to TALF  and we did not review or evaluate any monetary policy actions taken by  the Federal Reserve or FRBNY with respect to TALF. We collected  information on Federal Reserve practices related to TALF, but did not  audit those practices. Specifically, we did not evaluate the sufficiency of  how certain TALF program terms, such as haircuts and interest rates, were  arrived at. In addition, we did not assess FRBNY\u2019s system of internal  control or the role of TALF participants such as agents, borrowers, and  auditors in certifying and validating compliance with certain TALF terms.  Finally, we did not validate the comments or background information  provided to us by Federal Reserve and FRBNY officials about TALF.\nTo address the first objective, we first reviewed publicly available  documentation on the Web sites of the Federal Reserve and FRBNY. We  also interviewed Treasury, FRBNY, and Federal Reserve officials to  understand how TALF fits in to Treasury\u2019s Financial Stability Plan and  how risks to the taxpayer were reduced in TALF\u2019s design. Next, we  assessed how Treasury reviewed the risks of the various asset classes  considered for TALF eligibility by collecting and analyzing reports that  Treasury requested through a contractor, Bank of New York Mellon, which  in turn subcontracted the work to NSM Structured Credit Solutions, which  has since been acquired and is now known as RangeMark. We also  reviewed the subcontractor\u2019s methodology for assessing the likelihood of  loss to TARP funds and interviewed the subcontractor, contractor, and  Treasury officials about the assumptions in the loss model. We also  reviewed other factors that have an impact on the risk to TARP funds and  taxpayers, including the return on equity for TALF borrowers, credit  enhancement of TALF securities, and the risks of asset-backed securities  (ABS) and commercial mortgage-backed securities (CMBS).\nTo assess the changes in return on equity (ROE), we analyzed the returns  based on information collected from prospectuses for TALF-eligible ABSs  on credit cards, auto loans, auto leases, and private student loans issued  between March and September 2009. Some of these prospectuses were  provided by the Federal Reserve. We also used information collected from  reports from Moody\u2019s Investors Service and Standard & Poor\u2019s. We  calculated returns for fixed-rate bonds by using the tranche-level interest  rate paid to the FRBNY. For floating-rate bonds, we used a spread  between the interest rate paid to the FRBNY and an index, such as the  London Interbank Offered Rate. This is the \u201ccoupon\u201d variable in the  equation below:  ROE = Coupon \u2013 (1 \u2013 Haircut%)* Rate _ on _ loan _ paid _ to _ FRBNY    To assess the levels of credit enhancement for TALF securities, we  analyzed information collected from prospectuses related to public and  private offerings of TALF-eligible securities issued between March and  September 2009, along with related reports from Standard & Poor\u2019s and  Moody\u2019s Investors Service. For each security, we compared the level of  credit enhancement for the TALF issuance with that issuer\u2019s most recent  securitization prior to TALF, which ranged from 2004 through 2008.\nTo understand the recent activity in CMBS markets, we collected  information from Moody\u2019s Investors Service on commercial real estate  prices (Moody\u2019s\/REAL Commercial Property Price Index) and on CMBS  delinquency (Moody\u2019s CMBS Delinquency Tracker). We determined that  the data was reliable for our purposes of demonstrating recent trends in  the commercial mortgage sector. In addition, we collected CMBS price  performance data from Thomson Reuters DataScope and determined that  the information on the price, yield, and performance of securities was  reliable for our purposes of understanding trends in CMBS prices and  vintages for the TALF portfolio.\nWe interviewed a range of market participants and market observers about  the taxpayer protections and other features of TALF, to include three  dealers that also serve as TALF agents; three issuers (one for credit cards,  one for auto loans, and one for student loans) and an SBA securities  dealer; three industry associations representing the CMBS market, the  hedge fund industry, and small and regional banks; a buy-side investment  firm with interest in TALF; two large auditing firms that provide auditor  attestations for TALF; an attorney with securitization market expertise;  two TALF-qualified credit rating agencies, or nationally recognized  statistical rating organizations; an academic in banking and securitization  at the Massachusetts Institute of Technology; an analyst from Brookings  Institution; an analyst from a student loan firm; and a representative of a  consumer advocacy organization.\nFor details on our methodology for assessing adverse scenario losses from  TALF ABSs and CMBSs, see appendix II.\nTo address the second objective on Treasury\u2019s analysis of the risk  associated with TALF assets and how that analysis was used to make  decisions with the Federal Reserve and FRBNY related to TALF, we  analyzed reports from a subcontractor with Treasury\u2014NSM Structured  Credit Solutions\u2014that provided assessments of various risks of TALF to  TARP funds. In analyzing these reports, we reviewed the asset class risk  assessments, the recommendations made to change TALF program terms,  and the suggested haircuts for each asset class. We also interviewed  Treasury\u2019s contractor and the subcontractor for clarification on the  reports and to understand Treasury\u2019s interaction with both. In addition, we  interviewed Treasury officials about their role in reviewing and shaping  the terms of TALF, how they considered the analysis and  recommendations of the subcontractor, how they decided to include  certain asset classes, and how they came to agree on haircuts and other  program terms with the FRBNY and Federal Reserve. We also interviewed  officials from FRBNY and the Federal Reserve about the reasons for  differences in haircuts and other TALF program terms and how they were  resolved with Treasury and the subcontractor.\nTo address the third objective on changes in the securitization and credit  markets before and after TALF was created, and to understand how  Treasury tracks the impact of TALF and its potential risks to TARP funds,  we collected and analyzed information from a variety of data sources  relevant to the ABS, CMBS, and credit markets. Specifically:    To review changes in securitization markets for ABSs backed by auto  loans, credit cards, student loans, and commercial mortgages, we  collected data from Thomson Reuters IFR Markets, a database that  collects information on activity in the securitization markets. To analyze  changes in interest rates for auto loans and credit cards, we reviewed  quarterly data from the Federal Reserve\u2019s G.19 Consumer Credit Release, a  widely used data source, as well as weekly data provided by  BankRate.com. We selected the auto, credit card, student loan, and CMBS  asset classes because they were the most widely traded in securitization  markets and the latter had recently experienced significant trading and  price volatility. Because reliable interest rate data for private student loans  and commercial mortgages were more difficult to obtain, we collected and  analyzed data only on auto loans and credit cards. We validated the  securitization and interest rate information against reports and data  provided by credit rating agencies, issuers, and dealers. We determined  that the data sources were sufficient for our purposes of demonstrating  trends in the markets before and after TALF was created.\nTo report on the amount of TALF loans settled, we accessed data publicly  available on the FRBNY Web site and also information provided to us from  FRBNY for periods when FRBNY did not publicly report the settled loan  amounts, but only the requested amounts. Because of the limitations on  our audit authority, we did not review the internal systems that generated  this information.\nTo analyze spreads for ABSs backed by auto loans, credit cards, student  loans, and CMBSs, we analyzed dealer-provided data from three dealer  banks. Because this spread information is not available from one data  provider, we determined that collecting data from three dealers\u2014and   ensuring that the numbers were within an acceptable range of each  other\u2014would ensure the reliability of such data for our purposes.\nTo determine what information Treasury collects to assess TALF\u2019s impact  on securitization and credit markets and the risks TALF poses to TARP  funds, we interviewed officials from the Treasury about what data they  collect and received reports that Treasury\u2019s subcontractor provided on the  various risks of TALF activities. We also interviewed Federal Reserve and  FRBNY officials about what type of data they collect related to TALF\u2019s  impact on the securitization and credit markets.\n\nAppendix II: Methodology for Market Value Analysis of ABSs and CMBSs\n\nTo understand the possible range of losses to Troubled Asset Relief  Program (TARP) funds from the Term Asset-Backed Securities Loan  Facility (TALF), we conducted an analysis based on extreme market value  losses, similar to those experienced in the asset-backed securities (ABS)  and commercial mortgage-backed securities (CMBS) markets in  November 2008. This provides an alternative approach to the Department  of the Treasury (Treasury) subcontractor\u2019s analysis, and provides an  estimate of how large losses potentially could be in the event that the  markets returned to their November 2008 lows. Selecting November 2008  as the market low point is generally consistent with the approach used by  the Board of Governors of the Federal Reserve System (Federal Reserve)  in its \u201cstress tests\u201d for determining the capital that large bank holding  companies must maintain. Our scenario provides a more-adverse than  expected loss estimate for our sample of ABSs and all of the CMBS loans  remaining as of September 30, 2009.\nOur first analysis focused on ABSs. We conducted a market value analysis  on a sample of the three largest asset classes\u2014ABSs backed by credit  cards, auto loans, and student loans\u2014because they make up the majority  of TALF\u2019s portfolio. Of the $42.5 billion in TALF loans backed by credit  card, auto loan, and student loan ABSs that had been disbursed as of  September 30, 2009, we took a sample of $16.5 billion, or 39 percent. The  sample was selected to broadly match the makeup of these asset classes in  this subset of the TALF portfolio (see table 4).\nWithin each asset class the sample was selected to include ABSs that gave  the largest sample size on a TALF loan dollar basis; hence larger deals  predominate. In addition, TALF loans were spread across 6 of the 7 TALF  ABS subscription months between March and September. Nevertheless, it  is a nonprobability sample and is not necessarily generalizable to all TALF  deals.\nWe modeled TALF collateral cash flows using assumptions consistent with  the FRBNY\u2019s assumptions on the rate at which ABS principal is paid back  to investors. Then we calculated the discount rate that brought the price  back to par as of the issuance date. To this discount rate, we added the  incremental yield (or spreads) that would be required to deplete the  borrowers\u2019 entire equity investment and any excess interest that had built  up in TALF LLC as of September 30, 2009, for that specific tranche. These  incremental spreads were compared with the widest levels seen in  November 2008 for the appropriate asset class and expected average life.  November 2008 spreads were obtained from Wall Street ABS-dealer  weekly price data that are published for the more widely traded ABS  classes. If the spread seen in November 2008 was greater than that  required to deplete the borrower\u2019s equity and TALF\u2019s excess interest, a  stress loss was calculated. No loss was assumed if the required spread  widening was less than the extremes of November 2008.\nOur analysis makes the following assumptions: (1) excess interest has  accumulated as of September 30, 2009 at the tranche level of each TALF  security; (2) borrowers will surrender their TALF ABS collateral to the  FRBNY and stop paying the TALF loan when the ABS market value falls  below the TALF loan balance; (3) TALF will mark-to-market the  surrendered collateral, ignoring any recovery that Treasury might make if  the ABS collateral fully pays all cash flows over the life of the securities;  and (4) the change in market value is strictly based on mark-to-market,  with no assumption about the underlying credit performance of the ABS.\nFor the separate analysis on the risks that legacy CMBS collateral may  pose to TARP funds, we compared the prices on the 139 legacy CMBS  CUSIPs that were accepted by FRBNY as of September 30, 2009, with the  exception of 2 for which no price information was available. These prices  were then compared with the lowest prices that, on average, most CMBS  across the TALF portfolio reached in November 2008. This CMBS analysis  did not include consideration of the excess interest accumulated in TALF  LLC but otherwise made the same assumptions noted above for the ABS  analysis. As discussed earlier, the $198 million of excess interest that had  accumulated in the cash collateral account as of December 31, 2009,  would be available to absorb the first losses bourn on surrendered  collateral prior to any outlay by Treasury, and this amount is expected to  increase over time. In conducting this analysis we utilized certain data  from Thompson Reuters Datascope and the Federal Reserve.\n\nAppendix III: The Securitization Process Explained\n\nSecuritization is a process that packages relatively illiquid individual  financial assets\u2014such as loans, leases, or receivables\u2014and converts them  into interest-bearing, asset-backed securities (ABS) that are marketable to  capital market investors. As outlined below, the market participants in  securitization\u2014borrowers, consumer and small business lenders,  investment banks or pool assemblers, credit rating agencies, and  investors\u2014each derive specific benefits from the transaction. For  example, borrowers might gain access to loanable funds with more  favorable terms, such as longer repayment periods and lower interest  rates, than may otherwise be available. Similarly, securitization offers  consumer and small business lenders a funding source for making new  loans, improving balance sheet and capital management, and diversifying  fee or income streams. Securitization also allows the cash flows from asset  pools to be structured to satisfy the maturity, risk, and return preferences  of investors.\nThe degree to which participants receive these benefits depends, in large  part, on how efficiently the markets for securitized assets are functioning.  With accurate and more comprehensive performance data regarding  financial assets, capital markets can more easily profile the risk of a pool  of similar assets. This risk can be divided and sold to investors who are  willing to purchase it at an acceptable risk-adjusted return, sometimes  called the \u201cinvestor-required yield.\u201d As the markets for securitized asset  classes grow in volume and liquidity, and as the performance and risk  characteristics of those assets become better understood, investor- required yields on particular ABSs and transaction costs of securitizing  those assets may decline. Declining investor-required yields and  transaction costs can lower the cost of financing for consumer and small  business lenders and ultimately borrowers. Conversely, with inadequate  performance data, and low volumes of similar financial assets, these  benefits may not sufficiently materialize for securitization to be a viable  financing arrangement for consumer and small business lenders or  borrowers.\n\nAppendix IV: Descriptions of Asset-Backed Securities\n\n\tAuto Loan and Lease\n\nAsset-backed securities (ABS) for the auto market compose the largest  share of ABS issuances. Auto securitizations are collateralized with a fixed  pool of loans. In most cases, these transactions are divided into at least  four senior segments, or tranches, which have the same payment priority  in the event of default but different priorities for principal repayment (with  the exception of the shortest pay securities or A1 tranche designed to be  marketable to money market funds, which take priority). Tranches are  structured so that all scheduled principal amortization and prepayments of  principal are paid back first to the tranche with the lowest interest rate.  This tranche is generally designated the A1 tranche. Once the principal on  the first tranche is paid off, subsequent principal is paid to the A2, A3, and  A4 bondholders. The sizes of the tranches are designed so that the  expected average life on these securities is generally consistent within  each tranche\u2014for instance, the A1 average life is usually 3 months, the A2  average life 1 year, the A3 average life 2 years, and the A4 average life  approximately 3 years or more. In some deals, there are also \u201csubordinate  tranches,\u201d or tranches that receive ratings below AAA. In many cases, the  issuer retains subordinate tranches rather than selling them to the public.  Auto ABSs include the following subasset classes: prime auto loans,  subprime auto loans, auto leases, and motorcycle loans.\n\n\tCredit Card\n\nCredit card ABSs tend to use a master trust structure through which a  credit card issuer collateralizes a series of ABS issuances with receivables  from a large pool of credit card accounts. This pool is not a static set of  account balances but absorbs new receivables as they are created. New  issuance can be used to support an increase in the size of the receivables  collateralizing the securitizations. Investments in credit card ABSs are  usually divided into senior and subordinated, or junior, tranches where the  investors in the senior tranches are paid first.\n\n\tStudent Loan\n\nStudent loan ABSs can be collateralized with either federally guaranteed  Federal Family Education Loan Program (FFELP) loans or consumer  loans that are not part of a government guarantee program. Student loan  ABSs tend to have longer terms to maturity than other ABS classes due to  the longer repayment terms and the fact that students do not tend to pay  any principal or interest until at least 6 months after they graduate, thus  lenders might not receive cash flows on a student loan for years after the  initial cash disbursement.\n\n\tInsurance Premium Finance\n\nInsurance premium finance ABSs are collateralized with loans made to  businesses to finance their property and casualty insurance coverage. The  typical commercial insurance policy requires a down payment, with equal  monthly payments, typically over a time frame shorter than the term of the  insurance policy, which in effect creates overcollateralization. When a  policy is cancelled, refunds of unearned premiums will be used for making  payments to the securitization trust for the remaining term of the loan to  protect the ABS holders.\n\n\tCommercial Mortgage-Backed Securities\n\nCash flows on commercial mortgage-backed securities (CMBS) are  generally backed by principal and interest payments on a pool of  commercial mortgage loans. Most commercial mortgage loans are  structured with a 30-year amortization term, but CMBS terms are generally  shorter than the corresponding amortization terms. However, recent years  have seen an increase in the number of loans with interest-only periods  during which the mortgagee pays no principal on the mortgage.  Commercial mortgages are made on a wide variety of different property  types, including rental apartment buildings, industrial properties, office  buildings, hotels, healthcare related properties, and retail properties such  as shopping malls, strip malls, and freestanding outlets. CMBSs are highly  structured and frequently have more than 20 tranches in their capital  structure. The coupon payment generally is positively correlated with both  the expected average life of the tranche and the risk that the bondholder  will not receive the entire principal amount. Also differentiating CMBSs  from other asset classes is their sensitivity to the underlying commercial  real estate prices and the cash flow generated from the commercial  properties backing the mortgages.\n\n\tCommercial Fleet Leases\n\nUnlike other ABS classes for which investors own direct stakes in the trust  assets, commercial fleet lease ABSs are collateralized with special units of  beneficial interest (SUBI) in open-ended leases and fleet management  receivables on a pool of vehicle leases mainly for commercial trucks,  trailers, and equipment. The leases are made on a per-vehicle basis to large  corporate customers with fleets that may have more than 5,000 vehicle  leases with the issuer. Open-ended leases require the lessee to reimburse  any loss in a vehicle\u2019s residual value to the lessor. Commercial fleet ABSs  usually are structured out of a master trust with the ability to issue  numerous term securities. Collateral in the master trust can be replenished  with new or renewed leases as older contracts prepay and expire. The  lease SUBI entitles the ABS holders to receive the monthly lease  payments. This SUBI also includes beneficial interest in all the vehicles  that are being leased or are in the process of being leased but have not  completed the process. The fleet management receivables SUBI includes  beneficial interest in the receipt of management and other fees that the  lessees pay to the lessor.\n\n\tMortgage Servicing Advances\n\nMortgage servicing advance ABSs are collateralized with receivables owed  to the servicer for servicing advances made by the servicer to and on  behalf of the residential mortgage-backed securitization (RMBS) trusts.  There are three types of advances: principal and interest, which cover  these types of payments on delinquent loans; escrow advances, which  cover expenses related to maintaining ownership of a mortgaged property,  including property taxes and insurance premiums; and corporate  advances, which are costs for the process of foreclosure, including  attorney and other professional fees and expenses related to maintaining a  repossessed home. As there is no interest paid to the RMBS trusts when  advances are paid back out of either the proceeds of the liquidation of a  repossessed property (loan-level servicing advances) or broader pool level  cash flows (pool-level servicing advances), a discount factor is applied.  The discount factor reflects the estimated time frame for repaying the  loan. As a result of this discount factor, the issuer receives less than the  face value of the servicing advance at the time of securitization.\n\n\tDealer Floor Plans\n\nFloor plan ABSs are collateralized by loans made to finance either  automobiles or nonautomotive durable goods. Nonautomotive floor plan  inventory includes, among other things, recreational vehicles, boats,  motorcycles, industrial equipment and farm equipment, appliances, and  electronics. Automotive dealer floor plan arrangements tend to be  between a single financial entity and a dealer network. Nonauto dealers  can have multiple floor plan arrangements with several capital providers.  Financing could be in the form of revolving or nonrevolving lines of credit.  Once a floor plan agreement is in place, dealers place orders for inventory  from the manufacturer and specify that a lender will provide the financing.  The loan is repaid by proceeds from inventory sales, or the dealer can  arrange to repay the loan in monthly installments.\n\n\tEquipment\n\nEquipment ABSs are collateralized with retail installment sale contracts,  loans and leases secured by new and used agricultural equipment,  construction equipment, industrial equipment, office equipment, copiers,  computer equipment, telecommunications equipment, and medical  equipment, among other things.\n\n\tSBA-Loan Backed ABS\n\nThe Small Business Administration (SBA) provides guarantees on loans  made to small businesses. The most common SBA loan programs are 7(a)  and 504. In the 7(a) program, SBA guarantees up to 85 percent of the loan  amount made by participating lenders. 7(a) loans are usually made for  general business purposes, including working capital, equipment, furniture  and fixtures, and land and buildings. 504 program loans are typically long- term, fixed-rate loans for the purpose of expanding or modernizing a small  business. When pooled together for securitization purposes, underlying  loans must have similar terms and features\u2014for example, similar maturity  dates.\n\nAppendix V: Credit Enhancement\n\nCredit enhancements are features in the structuring of a securitization that  protect investors in the securitization from losses due to defaults on the  underlying loans. The following are some methods of credit enhancement  that have been used on asset-backed securities (ABS) eligible for the Term  Asset-Backed Securities Loan Facility (TALF).\nSubordination: This feature is a method of prioritizing cash flows from  the underlying loan collateral. The senior tranches within a securitization  get priority over subordinate, or junior, tranches in the event of a default  on the underlying collateral. All TALF-eligible securitizations must have a  AAA rating from at least two TALF-eligible nationally recognized statistical  rating organizations, and all of the AAA-rated ABSs have first priority for  cash flows. While most AAA tranches or bonds within an ABS have the  same priority in the event of a default, the sequential nature of the  principal paydown for certain classes of ABSs (for example, auto loans)  leads to higher risk of default for the tranches with weighted average lives  that extend further into the future. This higher risk requires the issuer to  pay a higher interest rate or coupon on longer tranches. Any losses are  applied to the most subordinate tranche first.\nOvercollateralization: When the total face value on the loan collateral  underlying an ABS is greater than the face value of the bonds, the  securitization is said to be overcollateralized. These assets are maintained  on the balance sheet of the issuer and are the first to absorb credit losses  on the collateral.\nReserve account: This is a cash account set up at the origination of an  ABS. This account is accessed when the cash flows from the collateralized  loan assets are insufficient to cover the contractual payments on the  bonds, including servicing and other fees.\nExcess spread: Excess spread refers to the funds leftover after payments  to bondholders and other contractual obligations have been met. This can  be used to make up for insufficient cash flows if the underlying borrowers  are delinquent or default on the loan.\nYield-supplement overcollateralization: This feature applies to  securitizations with assets in the underlying pool that are paying interest  that is below the coupon rate on the bonds. For example, borrowers  frequently pay very low interest rates on loans within certain auto loan  securitizations. These loans are often extended with advantageous  borrower terms as part of a sales promotion. Generally, the issuer will set  up a yield-spread overcollateralization account to make up the difference  over some portion of the life of the securitization. The initial balance in  this account is set as the present value of the shortfall on those loans for  the life of the loans.\nMortgage servicing advance discounts: A form of enhancement that is  implicit in the discounted price at which the securitization trust purchases  the servicing advance receivables from the mortgage servicing company  issuing the security. The servicing advances are segregated into several  classifications based on whether the servicing advances are treated at the  pool- or loan-level in order of repayment, whether the underlying mortgage  is located in a state that has a judicial or nonjudicial foreclosure regime,  and the type of cash flow for which the servicer is advancing payment. The  servicing advance is classified into one of three classes: principal and  interest advance, escrow advances, and corporate advances. Principal and  interest advances are made by mortgage servicers to holders of residential  mortgage-backed securities for mortgages whose underlying borrowers  are delinquent on their monthly payments. Escrow advances are used to  pay the property taxes, insurance premiums, or other property-related  expenses that the borrowers should have paid. Corporate advance costs,  usually in the form of attorneys\u2019 and other professional fees, are also  accounted for in the event that the servicer incurs them while foreclosing  on and liquidating repossessed real estate.\nThe advance discount percentage is calculated based on assumptions  about the length of time it will take to repay that particular type of  advance and the risk that it might not be paid back. Pool-level servicing  advances have the lowest discount percentage, because the advances can  be repaid to the servicer out of the entire pool\u2019s available funds, including  principal and interest payments received for nondelinquent mortgages.  Loan-level servicing advances are not repaid until the borrower repays all  the money advanced or from the proceeds of the sale of the repossessed  property (the likely scenario in a default). Servicing advances on  mortgages secured with properties in judicial foreclosure states have  higher discount rates than those in nonjudicial states, because judicial  foreclosures take longer. Principal and interest servicing advances are   viewed as the safest instruments and have lower discount rates than  escrow, which in turn has slightly lower discount factors than corporate  advances.\n\nAppendix VI: Additional Information on TALF Compliance\n\nAccording to Federal Reserve Bank of New York (FRBNY) officials,  FRBNY has in place a number of compliance measures to (1) ensure that  borrowers and collateral are eligible for the Term Asset-Backed Securities  Loan Facility (TALF); (2) protect FRBNY from fraudulent activity;   (3) reduce the risk of fraud and address conflicts of interest; (4) ensure  that agents have adequate compliance regimes; and (5) build multiple  layers of compliance where possible.\nTALF has a certification regime in place for a number of TALF  participants. TALF agents and sponsors must certify that they are  complying with certain TALF requirements, and TALF agents review the  eligibility of TALF borrowers. According to FRBNY officials, TALF agents  are the first line of defense against fraudulent participants in TALF, as they  conduct \u201cKnow Your Customer\u201d reviews of potential TALF borrowers.  FRBNY noted that it had antifraud measures in place and receives  referrals for those investors that TALF agents raised concerns about.  Moreover, FRBNY officials stated that they have developed an inspection  program to conduct on-site reviews of TALF Agent\u2019s \u201cKnow Your  Customer\u201d programs and files. The entire process is under the  management of FRBNY, without the Department of the Treasury\u2019s  (Treasury) participation.\nSponsors and issuers must include in any offering document a certification  required by FRBNY. Borrowers must also provide representations to the  TALF agent, who conducts the review of the borrower. According to  FRBNY officials, because the issuers and sponsors include certification to  TALF eligibility and acknowledge certain responsibilities related to the  TALF collateral in the offering documents, any material  misrepresentations would be covered under relevant securities laws. In  addition, the TALF agents and borrowers also make certain  representations on their eligibility and the eligibility of the collateral.  Though this is a certification and self-disclosure regime, FRBNY officials  told us they have established additional measures to detect and address  noncompliance. First, FRBNY has a 24-hour fraud hotline. Second, it has  hired a law firm to assist in assessing fraud risks associated with the  program. Third, it is cooperating with other government and law  enforcement agencies to gather additional information on potential TALF  participants.\nIn addition to certifications, FRBNY requires auditor attestations for non- CMBS collateral, which state that the Report on Management Compliance  fairly states compliance with certain TALF program criteria specified by  FRBNY. For CMBS collateral, agreed upon procedures (AUP) are required  to provide more detailed specifications on what to review. FRBNY has  published broad guidelines to the auditors for carrying out these  responsibilities, which are paid for by the issuers of TALF-eligible  securities. In addition, FRBNY requires that the attestation and AUP  processes follow standards issued by the Public Company Accounting  Oversight Board and the American Institute of Certified Public  Accountants. Most of the information that the auditors review is provided  by the issuers and is not verified independently, according to auditors we  spoke with. FRBNY officials added that loan-level testing is required and  this includes a review of original loan files or electronic versions thereof.\nAccording to Treasury officials, Treasury provided some input into the  design of the auditor attestations and AUPs but primarily leaves oversight  of this function to the Board of Governors of the Federal Reserve System  and FRBNY, which are responsible for designing and implementing TALF.  Treasury does not review these documents; however, should the assets be  placed to TALF LLC, Treasury may review them.\n\nAppendix VII: New Securitization Volumes Have Increased since the Inception of the TALF Program\n\nSince the Term Asset-Backed Securities Loan Facility\u2019s (TALF) March  2009 inception, securitization volumes have increased in some TALF- eligible sectors. For auto loan securitization, new issuance dropped off  significantly in the third quarter of 2008, bottoming in the fourth quarter  (see table 5). By 2009 issuance began to pick up, especially in the second  and third quarters, when most were TALF-eligible. There were 45  issuances through December 2, 2009, a marked contrast to the peak of 85  in 2005.\nCredit card securitization volumes show a similar pattern (see table 6).  The peak in credit card securitizations occurred in 2007, with 112  issuances, a sharp contrast to 2009 when only 35 securitizations were  issued through December 2, 2009. The majority of credit card ABSs  issuances in 2009\u2014about 65 percent\u2014have been TALF supported.\nStudent loan securitization volumes show similar patterns to the auto and  credit card asset classes, with a marked low of no new deals in the last  quarter of 2008 (see table 7). Lenders may be tightening their lending  standards, potentially resulting in fewer loans and reducing the need to  access the securitization markets as frequently as in the past. Although  both Federal Family Education Loan Program (FFELP) and private loan  securitizations are TALF eligible, to date no FFELP deals have been  underwritten to TALF eligibility standards. There have been five TALF  private student loan securitizations since the program\u2019s inception.\nThis report discussed the severe disruption in the commercial real estate  sector following the economic downturn. Table 8 shows that commercial  mortgage-backed securities (CMBS) volumes peaked in 2006 with 97  issuances before dropping dramatically to just 7 by 2008. These sharp  declines in part motivated the inclusion of CMBSs as a TALF-eligible asset  class. Three new-issue deals have been offered since TALF was expanded  to CMBSs, and only one used TALF for financing. Other CMBS deals in  2009 were repackaging of existing securitizations. Part of the sluggish  activity in the CMBS sector could be attributed to the length of time it  takes to put together a deal, which officials have noted is considerably  longer than for the other asset classes. There could be other reasons as  well. As we discussed in this report, the CMBS sector continues to show  signs of volatility resulting from sharp declines in commercial real estate  prices and increases in CMBS delinquency rates.\n\nAppendix VIII: Comments from the Department of the Treasury\n\nAppendix IX: Comments from the Board of Governors of the Federal Reserve System\n\nAppendix X: Analysis of Legal Comments Submitted by the Federal Reserve\n\nAs noted, in its comments, the Board of Governors of the Federal Reserve  System (Federal Reserve) did not agree with our recommendation that  Congress consider providing GAO with authority to audit the Federal  Reserve\u2019s operational and administrative actions because it disagreed that  there are limitations on GAO\u2019s authority to audit these Federal Reserve  activities.\nHowever, we believe the express statutory prohibition in 31 U.S.C. \u00a7  714(b) on GAO auditing the Federal Reserve\u2019s monetary policy and  discount window lending activities, which the Federal Reserve believes  includes the Term Asset-Backed Securities Loan Facility\u2019s (TALF)  operation and administration, prohibits us from auditing the Federal  Reserve\u2019s TALF activities, even from the perspective of the Troubled Asset  Relief Program (TARP). We limited the scope and conduct of this audit  accordingly, and thus did not request access to information to audit the  Federal Reserve\u2019s performance of these activities. Further, the Federal  Reserve\u2019s decision to voluntarily provide requested access in this instance,  while helpful, does not create GAO authority to audit the Federal  Reserve\u2019s TALF operational activities or other performance. In our view,  our lack of authority to audit the Federal Reserve\u2019s actions limited our  ability to fully assess the risk to taxpayer funds presented by TALF. information directly from banks and other firms receiving TARP funds, the  amendment provided GAO with such access to enable us to more  effectively review Treasury\u2019s actions under our existing TARP audit  authority. As the Federal Reserve correctly noted in its comments, section  601 included access to records of any entity \u201cthat is established by a  Federal reserve bank and receives funding from the TARP,\u201d thus covering  records of TALF LLC, the special purpose vehicle created by the Federal  Reserve Bank of New York to which Treasury has committed up to $20  billion of TARP funds. But GAO\u2019s authority to obtain access to records of  TALF LLC does not provide GAO access to other TALF program  information, nor GAO authority to audit the Federal Reserve\u2019s operation  or administration of TALF.\nAs support for its view that the May 2009 amendment in section 601  authorized GAO to audit the Federal Reserve\u2019s TALF performance, the  agency quoted a portion of remarks made by Senator Grassley, a lead  sponsor of the amendment. As Senator Grassley noted, however, he was  describing the Federal Reserve\u2019s position. The Senator provided material  for the record stating in part, \u201cAccording to Federal Reserve staff, . . .   amendment No. 1020  would expand GAO\u2019s authority  to oversee TARP, including the joint Federal Reserve-Treasury Term  Asset-Backed Securities Loan Facility (TALF) . . ..\u201d As noted, however, the  Federal Reserve was only partially correct: section 601 provided GAO  authority to access records of the Treasury-funded TALF LLC in order to  audit Treasury, but not authority to audit and evaluate the Federal  Reserve\u2019s TALF actions.\nCitigroup, Bank of America, and Bear Stearns. This language was enacted  as a new subsection (e) to 31 U.S.C. \u00a7 714.\nFinally, the Federal Reserve commented that because of TALF\u2019s unique  \u201chybrid\u201d nature\u2014it serves objectives of both monetary policy and TARP\u2014 GAO has \u201cample authority\u201d to audit TALF operations, Treasury\u2019s  participation in them, and the Federal Reserve\u2019s administration of TALF  \u201con behalf of\u201d Treasury, all from the perspective of TARP. In this regard,  the Federal Reserve noted that in practice, it obtains Treasury\u2019s input and  agreement on many aspects of TALF. However, the view that GAO can  separately audit the Federal Reserve\u2019s TALF performance as long as the  audit is limited to TARP objectives, without violating the statutory  prohibition against GAO auditing Federal Reserve monetary policy  actions, is not supported by either the language of 31 U.S.C. \u00a7 714, its  original legislative history, or the amendments Congress enacted to it in  May 2009. \u201cinextricably bound up in monetary policy\u201d and is intended to be covered  by the prohibition. Under this reading, GAO is prohibited from auditing  the Federal Reserve\u2019s TALF discount window lending activities even from  the perspective of TARP.\nThe Federal Reserve\u2019s position also conflicts with Congress\u2019 enactment of  \u00a7 714(e) in May 2009, noted above, authorizing GAO to audit Federal  Reserve section 13(3) actions with respect to a single and specific  partnership or corporation. If GAO already could audit TARP aspects of  \u201chybrid\u201d Treasury and Federal Reserve activity, such additional authority  would have been unnecessary regarding AIG, for example, because both  Treasury and the Federal Reserve already were providing assistance to  AIG. Yet GAO was required, as the Federal Reserve then agreed, to await  enactment of additional authority in order to audit this joint assistance.\nIn light of these statutory restrictions on GAO\u2019s authority to audit the  Federal Reserve\u2019s TALF activities, we continue to believe that Congress  should provide GAO with authority to audit the Federal Reserve\u2019s  operation and administration of the TALF program.\n\nAppendix XI: GAO Contact and Staff Acknowledgments\n\n\tStaff Acknowledgments\n\nIn addition to the contacts named above, Karen Tremba (Assistant  Director), Angela Burriesci, Emily Chalmers, Rudy Chatlos, Joe Cisewski,  Rachel DeMarcus, Mike Hoffman, Robert Lee, Sarah McGrath, Marc  Molino, Tim Mooney, Omyra Ramsingh, Susan Sawtelle, and Cynthia  Taylor made important contributions to this report.","output":"Why GAO Did This Study\n\nThe Term Asset-Backed Securities Loan Facility (TALF) was created by the Board of Governors of the Federal Reserve System (Federal Reserve) to help meet consumer and small business credit needs by supporting issuance of asset-backed securities (ABS) and commercial mortgage-backed securities (CMBS). This report assesses (1) the risks TALF-eligible assets pose to the Troubled Asset Relief Program (TARP), (2) Department of the Treasury's (Treasury) role in decision making for TALF, and (3) the condition of securitization markets before and after TALF. GAO reviewed program documents, analyzed data from prospectuses and other sources, and interviewed relevant agency officials and TALF participants.\n\nWhat GAO Found\n\nTALF contains a number of risk management features that in turn likely reduce the risk of loss to TARP funds, but risks remain. TALF was designed to reopen the securitization markets in an effort to improve access to credit for consumers and businesses. The Federal Reserve Bank of New York (FRBNY), which manages TALF, is authorized to lend up to $200 billion to certain eligible borrowers in return for collateral in the form of securities that are forfeited if the loans are not repaid. To assist in this effort, Treasury has pledged $20 billion of TARP funds in the form of credit protection to the program in the event the loans are not repaid. As of December 2009, FRBNY has made about $61.6 billion in TALF loans, of which $47.5 billion remained outstanding. For most TALF-eligible collateral, FRBNY will stop providing new TALF loans in March 2010, while new-issue CMBSs will be accepted as collateral on new TALF loans through June 2010. Treasury and FRBNY analyses project minimal, if any, use of TARP funds for TALF-related losses, and Treasury currently anticipates a profit. While GAO found that the overall risks TALF poses to TARP funds are likely minimal, GAO analyses showed that CMBSs potentially pose higher risk of loss than ABSs. As shown in figure 1, ongoing uncertainty in the commercial real estate market and TALF exposure to legacy CMBSs warrant ongoing monitoring. Finally, TALF may present risks beyond the potential risks to TARP, such as the risk that FRBNY might fail to identify material noncompliance with program requirements by TALF participants. Because the Federal Reserve views TALF as a monetary policy tool, however, statutory limitations on GAO's authority prohibited GAO from auditing FRBNY's role in administering TALF. Treasury has not fully documented its rationale, as part of its decision-making processes, for reaching final decisions related to the risks of TALF--including decisions involving other agencies. For example, the outcomes of Treasury's internal analysis of the amount of equity that TALF borrowers should hold in TALF ABS collateral, along with other TALF program terms, sometimes differed from FRBNY's. However, there was no clear documentation or explanation of how the discrepancies were resolved or how final decisions were made with FRBNY. Documenting the rationale and basis for these decisions would increase transparency and strengthen internal controls for TALF decision-making processes. Moreover, a sound decision-making process would help ensure that TALF objectives are being met and that it is functioning as intended. Unless Treasury documents the basis for major program decisions that it made with the Federal Reserve, it cannot demonstrate accountability for meeting the goals of TALF and could unnecessarily place TARP funds at risk."}
{"id":"crs_RS22949","pid":"crs_RS22949_0","input":"\tIntroduction1\n\nAs the role of lawyers in most countries has evolved from advocates regulated by local courts and their rules to legal advisors for transactions in economic activities, the increase in cross-border provision of legal services led to the inclusion of such services in the trade agreements and negotiations under the WTO, over the objections of some countries. The scope of agreements under the WTO has expanded over the years to cover issues and sectors not traditionally considered to fall within trade laws and regulations through periodic multilateral negotiations that are called \"rounds,\" the latest being the Doha Round. The commitments the United States has made and may make in current and future negotiations could affect domestic regulation of the legal profession, including ethical issues.\n\n\tLegal Services in the WTO\n\nLegal services are classified as part of professional services, which in turn are under the business services sector covered by the General Agreement on Trade in Services (GATS), concluded as part of the Uruguay Round of the General Agreement in Tariffs and Trade that created the WTO. Under the GATS, WTO countries undertake obligations with regard to all service sectors, including most-favored-nation treatment (MFN) under GATS Article II; transparency under GATS Article III; the notice and publication of relevant domestic laws and measures; judicial or administrative review of domestic regulation under GATS Article VI(2); and recognition agreements under GATS Article VII.\nIn addition to the general obligations under the GATS, the United States included legal services in its schedule of commitments under the GATS; not all WTO countries included legal services in their schedules. Such schedules set forth specific additional obligations made by a WTO country with respect to specific service sectors, including any limitations or qualifications to obligations undertaken. These obligations include market access under GATS Article XVI, national treatment under GATS Article XVII, and any other additional commitments under GATS Article XVIII, including those regarding qualifications, standards or licensing matters. A schedule also summarizes obligations as they apply via four modes of supply\u2014(1) cross-border supply, the ability of non-resident service suppliers to supply services cross-border into a WTO country; (2) consumption abroad, the ability of a WTO country's residents to buy services located in another WTO country; (3) commercial presence, the ability of foreign service suppliers to establish a branch or representative office in a WTO country, sometimes referred to as the right of establishment; and (4) movement of natural persons, the ability of foreign individuals to enter and stay in a WTO country's territory to supply a service. The U.S. schedule sets forth its obligations in terms of limitations and qualifications under the laws and\/or rules governing the practice of law by foreign lawyers and foreign law firms in each of the States, the District of Columbia, the U.S. territories, and before certain federal agencies, such as patent prosecution before the U.S. Patent and Trademark Office (USPTO).\nAs part of the sectors subject to WTO negotiations in the Doha Round, legal services are potentially subject to changes. Indeed, several members have sought concessions from the United States regarding legal services. Such changes could affect the laws and rules governing foreign lawyers and foreign law firms in each of the 50-plus jurisdictions in the United States and the federal agencies. Such laws and rules comprise the bar admission of lawyers who are admitted to practice in a foreign jurisdiction or who are foreign nationals and the eligibility of foreign legal consultants and foreign firms to provide legal services in the United States. Rules regarding foreign legal consultants may address the applicability to such consultants of ethics rules and disciplinary procedures for attorneys.\nThe European Union, which together with the United States has the most active trade in legal services among WTO members, is seeking several new legal services concessions from the United States. One significant change sought by the European Union is to eliminate the requirement in the U.S. states and territories that qualified U.S. lawyers providing legal services must be \"natural persons,\" not law firms or other organizational\/corporate persons. This apparently is not a requirement in some other WTO countries. The EU and the United States also propose eliminating the U.S. requirement that an attorney admitted to the patent bar for the purpose of prosecuting a patent before the USPTO must be a U.S. citizen.\nIn addition, there has been consideration of whether disciplines (WTO parlance for certain guidelines) on domestic regulation in the legal services sector should be adopted and applied. This may be accomplished by negotiation of a discipline specific to legal services or by application of the existing Disciplines on Domestic Regulation in the Accountancy Sector to legal services. Under GATS Article VI(4), disciplines on domestic regulation are developed \"[w]ith a view to ensuring that measures relating to qualification requirements and procedures, technical standards and licensing requirements do not constitute unnecessary barriers to trade in services.\" Disciplines aim to ensure that requirements are not more burdensome than necessary to ensure quality of service and that licensing procedures are not per se restrictions on the supply of the service. After the accountancy disciplines were developed and adopted, there was active consideration and debate about whether they should be extended to legal services, which the International Bar Association recommended against.\nAny substantive Doha Round concessions or any agreement to a legal services discipline by the United States would obligate it, under GATS Article I(3)(a), to take reasonable measures to ensure that each of its political subdivisions observes such agreements. This could pose federalism issues, since the rules governing practice in a state are a matter for the highest court of a state or for its legislature and not traditionally a matter for federal legislation or policy. The U.S. Trade Representative (USTR) does not make WTO commitments with which the United States is not in a position to comply. This is the reason the current schedule of commitments notes obligations in terms of which states have certain requirements, such as in-state residency for licensure. In accordance with \u00a7102 of the Uruguay Round Agreements Act (URAA), the USTR has consulted with several states concerning the negotiating position of the United States on legal services, apparently to consider what changes these states would be amenable to observing.\nIf the United States were to commit to liberalizing the rules for foreign lawyers or firms to provide legal services in the United States, any related complaint against the United States could be brought only by another WTO country and would be resolved through the WTO dispute settlement system. An individual foreign attorney or firm could not bring a complaint because disputes can only be brought by one WTO country against another WTO country. Nor could an individual attorney or firm bring a suit domestically for noncompliance with a WTO obligation. WTO agreements are not self-executing international agreements, so obligations under those agreements must be implemented through domestic legislation or other domestic measures. Section 102 of the Uruguay Round Agreements Act (URAA) provides that only the United States may bring an action to declare a state law invalid because it is inconsistent with an Uruguay Round agreement and that no private person may challenge a state or local law or other measure on the grounds that it is not consistent with an Uruguay Round agreement.\n\n\tCertain U.S. Rules Relating to Foreign Lawyers\n\nThe global nature of business, including legal services, and its continued growth has necessitated the consideration and adoption of rules concerning multijurisdictional practice of law. In 2007, 71 persons were licensed as foreign legal consultants in the United States across 16 jurisdictions. Twenty-nine jurisdictions have a rule permitting the licensing of foreign legal consultants. Some adopted a version of the ABA Model Rule on Foreign Legal Consultants (first approved in 1993, most recently revised in 2006), itself modeled on the New York rule first adopted in 1974. Others adopted their own rule differing significantly from the ABA Model Rule. The ABA Model Rule provides that foreign legal consultants may be licensed to provide certain legal services in a jurisdiction without an examination, if they are members in good standing in a recognized legal profession in a foreign country. They are not actually admitted as members of the bar in the host jurisdiction in the United States and are prohibited from providing certain services, such as appearing in court to represent a client or giving advice on U.S. law or a state law in the United States. Foreign legal consultants would be able to provide advice on the laws of their foreign home countries.\nAdditionally, five jurisdictions have rules that expressly refer to temporary practice by foreign lawyers, some similar to the ABA Model Rule for Temporary Practice by Foreign Lawyers (approved in 2002). This ABA Model Rule provides that foreign lawyers not admitted in a U.S. jurisdiction may provide legal services in that jurisdiction in certain circumstances, including, among others, where they are working with a lawyer admitted to practice in that jurisdiction or where they are advising clients with regard to legal proceedings in a foreign jurisdiction where they are admitted to practice.\n\n\tU.S. Ethical Implications\n\nThe WTO Secretariat has noted that WTO countries generally require foreign legal consultants to submit to the local code of ethics as a prerequisite to licensing in the host country. The WTO has observed that the legal profession does not consider this a major obstacle to trade in legal services. There are certain common principles shared by the national legal ethical codes, including rules on conflicts of interest, loyalty to the client, and confidentiality. The WTO has observed, for example, that the EU has developed a common legal ethics code applicable to some EU countries; the U.S., Japanese and European lawyers' professional associations have compared their ethical codes and found no serious differences; and a bilateral agreement exists between the ABA and its counterpart for England and Wales with regard to mutual recognition on matters such as ethical standards. However, the agreements of such associations are not binding on the U.S. jurisdictions whose courts or legislatures would implement such recognition in conjunction with the bar disciplinary authorities. Negotiations in the Doha Round of the WTO could help resolve ethical issues that have arisen in the cross-border provision of legal services.\nThe prohibition against the unauthorized practice of law is a basic tenet of U.S. legal ethics; therefore, any new agreement under WTO auspices that may affect the regulation of legal services providers admitted to the practice of law in a foreign jurisdiction could have implications for ethical compliance. However, U.S. legal ethics rules or codes have recognized that business demands and the mobility of society necessitate refraining from unreasonable territorial limitations. Any liberalizing of licensing requirements could facilitate the operations of law firms. ABA Opinion 01-423, dated September 21, 2001, found that U.S. law firms may include partners who are foreign lawyers, as long as the arrangement complies with U.S. and foreign law, and the foreigners are members of a recognized legal profession in the foreign jurisdiction. It cautioned that U.S. lawyers must avoid assisting in the unauthorized practice of law by foreign lawyers in the United States.\nABA Opinion 01-423 further noted that many countries recognize only a narrow attorney-client privilege. Some legal authorities cite the opinion in a European Union (EU) case, Australian Mining & Smelting Europe Ltd. v. Commission , as supporting the proposition that attorney-client privilege does not apply to attorneys not admitted to practice in the EU. In response, the ABA passed a resolution that attorney-client privilege should apply to non-European Union attorneys. In a more recent case, Akzo Nobel Chemicals Ltd and Akcros Chemicals Ltd v Commission , the EU Court of First Instance declined to consider whether the discriminatory non-recognition of privilege with respect to non-EU lawyers violated certain EU principles. A paper summarizing a discussion on Cross-Border Travel Traps: Protecting Client Confidences at the Frontier at the ABA Section of International Law 2007 Fall Meeting discusses the problems posed for U.S. attorneys by the narrower European view of profession privilege\/confidentiality with regard to attorney-client communications.\nWith regard to disciplinary measures and proceedings, U.S. legal professional groups have submitted letters to the USTR supporting local disciplinary jurisdiction over foreign attorneys and disciplinary reciprocity with foreign jurisdictions in Doha Round negotiations.","output":"This report provides a broad overview of the treatment of legal services under the World Trade Organization (WTO) agreements and its potential effect on laws and rules governing the provision of legal services by foreign lawyers in the United States and legal ethics rules."}
{"id":"gao_GAO-02-18","pid":"gao_GAO-02-18_0","input":"\tBackground\n\nAs of June 30, 2001, Amex was the third-largest U.S. market in terms of the number of companies whose common stock it listed. With the common stock of 704 companies listed, Amex trailed only Nasdaq, which had 4,378 listings, and NYSE, which had 2,814 listings. Overall, about 98 percent of the common stocks listed on U.S. markets were listed on Amex, Nasdaq, or NYSE. The remaining markets had significantly fewer listings. For example, the fourth-largest market in terms of the number of companies listed was the Boston Stock Exchange, with 84 listings, 46 of which were also listed on Nasdaq.\nIn 1998, the National Association of Securities Dealers (NASD), which also owns and operates Nasdaq, purchased Amex. Although Amex retained its independence as an exchange, in July 1999 its equity listing program was moved from New York City to Gaithersburg, Maryland, and integrated with the Nasdaq listing program. In June 2000, NASD completed the first phase of its plan to restructure Nasdaq as a stand-alone stock-based organization. According to Amex officials, as a result of this restructuring, the Amex equity listing department began moving back to New York in November 2000, and the move was completed about 6 months later.\nUnder federal law and consistent with its responsibilities as an SRO, each U.S. market establishes and implements the rules that govern equity listings in its market with the intent of maintaining the quality of the markets and public confidence in them. In general, a company applies to have its stock listed for trading in a specific market, subject to that market\u2019s rules. This process includes submitting an application for review, together with supporting information such as financial statements, a prospectus, a proxy statement, and relevant share distribution information. As part of making an initial listing decision, the market\u2019s equity listing department reviews these submissions for compliance with its listing requirements and conducts background checks of company officers and other insiders. The equity listing department will also monitor companies for compliance with the market\u2019s continued listing requirements and, in accordance with the market\u2019s rules, will take action when these requirements are not met.\nSEC\u2019s oversight of a market\u2019s equity listing requirements includes reviewing the SRO\u2019s proposed rules to ensure that they are consistent with the requirements of the Securities and Exchange Act of 1934. These rules, which make up the market\u2019s initial and continued equity listing guidelines or standards, must be approved by SEC and can be changed only with SEC\u2019s approval. SEC also reviews the SRO\u2019s listing decisions, either on appeal or by its own initiative, and SEC\u2019s OCIE periodically inspects the SRO\u2019s listing program to ensure compliance with the market\u2019s listing requirements.\n\n\tListing Requirements Have Generally Addressed the Same Factors, but Amex Has Not Required That All Quantitative Requirements Be Met\n\nIn all U.S. markets, quantitative and qualitative listing requirements for equities have generally addressed the same or similar factors. Two aspects of the quantitative listing requirements are noteworthy. First, the minimum thresholds for meeting them varied according to the characteristics of the companies the markets sought to attract. Second, initial listing requirements were generally higher than continued listing requirements. Qualitative listing requirements addressed corporate governance and other factors. The most significant difference between the equity listing requirements of Amex and those of other U.S. stock markets was that Amex was one of only two markets that retained the discretion to initially list companies that did not meet all of its quantitative requirements.\n\n\t\tQuantitative Listing Requirements Generally Addressed the Same Factors, Although Minimum Thresholds Varied\n\nAmex\u2019s quantitative initial listing guidelines for equities have generally addressed factors that are the same as or similar to those addressed by the initial listing standards of the other U.S. stock markets, including factors such as minimum share price, stockholders\u2019 equity, income, market value of publicly held shares, and number of shareholders. However, the minimum thresholds for meeting the requirements of each market have varied to reflect the differences in the characteristics\u2014such as size\u2014of the companies that each market targeted for listing. For example, Amex has marketed itself as a niche market designed to give growth companies access to capital and to the markets. A company could qualify for initial listing on Amex under one of two alternatives. Under both alternatives, a company was required to have a minimum share price of $3 and minimum stockholders\u2019 equity of $4 million (see table 1). In addition, under one alternative, a company could qualify for listing with no pretax income, a minimum market value of publicly held shares of $15 million, and a 2-year operating history. Under the other alternative, a company was required to have minimum pretax income of $750,000, either in the latest fiscal year or in 2 of the most recent 3 fiscal years, and a minimum market value of publicly held shares of $3 million.\nThe Nasdaq SmallCap Market focused on smaller companies that were generally similar in size to those listed on Amex, and its listing standards and minimum thresholds were similar to Amex\u2019s. To be eligible for listing on the Nasdaq SmallCap Market, a company was required to have, among other things, a minimum share price of $4, a minimum market value of publicly held shares of $5 million, a 1-year operating history, and either a minimum net income of $750,000 in the latest fiscal year or in 2 of the most recent 3 fiscal years, or $5 million of stockholders\u2019 equity. Alternatively, if the company did not meet the operating history, income, or equity requirements, the minimum market value of all shares was required to be $50 million.\nIn contrast to Amex and the Nasdaq SmallCap Market, the Nasdaq National Market and NYSE targeted larger companies, and their listing standards had higher minimum thresholds. For example, the Nasdaq National Market required in part that listing companies have a minimum of $1 million in pretax income in the latest fiscal year or in 2 of the 3 most recent fiscal years, along with a minimum market value of publicly held shares of $8 million, depending on the listing alternative. In comparison, NYSE required a company to have, among other things, a minimum total pretax income of $6.5 million for the most recent 3 years and a minimum market value of publicly held shares of $60 million or $100 million, depending on the listing alternative.\nThe quantitative continued listing requirements (the minimum thresholds that listed companies must maintain to continue to be listed) were generally lower than those for the initial listing requirements (see table 1). For example, although Amex\u2019s initial listing guidelines required, under one alternative, that a company have at least $4 million of stockholders\u2019 equity and $750,000 in pretax income, a company could remain in compliance with the continued listing guidelines even if it had losses in 3 of the last 4 years (beginning with its listing date), provided that it maintained $4 million in stockholders\u2019 equity. Such differences between initial and continued listing requirements were typical of all the U.S. markets.\n\n\t\tQualitative Listing Requirements Have Addressed Corporate Governance and Other Factors\n\nThe qualitative listing requirements for equities in all U.S. markets addressed corporate governance requirements as well as various other factors. Corporate governance requirements are generally concerned with the independence of corporate management and boards of directors, as well as with the involvement of shareholders in corporate affairs. These requirements address such factors as conflicts of interest by corporate insiders, the composition of the audit committee, shareholder approval of certain corporate actions, annual meetings of shareholders, the solicitation of proxies, and the distribution of annual reports.\nU.S. markets may also consider various other qualitative factors when considering a company for listing. These factors are inherently subjective and are not subject to comparison among markets. For example, Amex\u2019s guidelines stated that even though a company may meet all of the exchange\u2019s quantitative requirements, it may not be eligible for listing if it produces a single product or line of products, engages in a single service, or sells products or services to a limited number of companies. In addition, in making a listing decision, Amex would consider such qualitative factors as the nature of a company\u2019s business, the market for its products, the reputation of its management, and the history or recorded pattern of its growth, as well as the company\u2019s financial integrity, demonstrated earning power, and future outlook.\n\n\t\tAmex Retained the Discretion to List Companies That Did Not Meet Its Quantitative Guidelines\n\nAlthough all U.S. markets had rules giving them the discretion to apply additional or more stringent requirements in making an initial or continued listing decision, only Amex and Nasdaq retained the discretion to initially list companies that did not meet their quantitative requirements. The Amex listing guidelines stated that the exchange\u2019s quantitative guidelines are considered in evaluating listing eligibility but that other factors are also considered. As a result, Amex might approve a listing application even if the company did not meet all the exchange\u2019s quantitative guidelines. Amex believed that it was important for the exchange to retain discretion to approve securities for initial listing that did not fully satisfy each of its quantitative requirements because it would be impossible to include every relevant factor in the guidelines, especially in an evolving marketplace.\n\n\tAmex Did Not Agree to OCIE\u2019s Recommendations on Listing Requirements and Public Disclosures\n\nAs of September 7, 2001, Amex had not agreed to implement OCIE\u2019s recommendations related to the exchange\u2019s use of its discretion in making listing decisions. Amex was unwilling to relinquish its discretionary authority or to modify its stock symbols to address OCIE\u2019s concerns. OCIE officials told us that if these recommendations were not addressed, OCIE would include them among the open significant recommendations that are to be reported annually to the SEC Commissioners.\n\n\t\tOCIE Recommendations Addressing Amex\u2019s Use of Its Discretion Remained Open\n\nOCIE reported in April 2001 that the Amex listing department was generally thorough in its financial and regulatory reviews of companies seeking to be listed on the exchange. However, OCIE also reported that Amex was using its discretionary authority more often than was appropriate to approve initial listings that did not meet the exchange\u2019s quantitative guidelines, and that it did so without providing sufficient disclosure to the investing public. OCIE reported that the percentage of companies Amex listed that did not meet the exchange\u2019s initial quantitative guidelines increased from approximately 9 percent for the 20 months between January 1, 1998, and August 31, 1999, to approximately 22 percent for the subsequent 14.5 months ending on November 13, 2000. OCIE noted that although Amex\u2019s listing guidelines are discretionary, investors rightfully presume that the companies listed on Amex generally meet its quantitative and qualitative guidelines.\nIn response to concerns that the investing public was not receiving sufficient information about the eligibility of companies to trade on Amex, OCIE recommended that Amex amend its rules to provide mandatory initial quantitative listing requirements. Until the mandatory listing requirements are in place, OCIE recommended that Amex provide some form of public disclosure to identify companies that do not meet its initial listing guidelines. For example, Amex could attach a modifier to the trading symbols of these companies. The report indicated that another alternative would be to issue a press release each time Amex lists a company that does not meet its quantitative guidelines. However, OCIE officials said that a press release was not the preferred form of public disclosure because it was a one-time occurrence, while a symbol modifier would accompany a listing until the company complied with Amex listing requirements.\nOCIE also expressed concerns about Amex\u2019s use of its discretionary authority in making continued listing decisions. The concerns it raised in its April 2001 inspection report were similar to those raised in a 1997 report. In both reports, OCIE concluded that Amex did not identify noncompliant companies in a timely manner and that it deferred delisting actions for too long and without good cause. In addition to citing lapses in Amex\u2019s timely identification of companies that did not meet its continued listing guidelines, OCIE reported in 2001 that for 5 of 34 companies reviewed, or 15 percent, Amex either granted excessive delisting deferrals or did not begin delisting proceedings in a timely manner. Also, we learned from Amex that 71 companies\u2014about 10 percent of the exchange\u2019s 704 listings\u2014did not meet all aspects of its continued listing guidelines as of July 31, 2001. Of these, 12 companies had been out of compliance with its guidelines for more than 2 years, and 20 companies had been out of compliance for between 1 and 2 years (see table 2).\nIn addition, under a November 2000 Amex rule change, listed companies were required to issue a press release to inform current and potential investors when Amex notified the companies of a pending delisting decision. According to Amex, the exchange had sent notices to 18 companies of potential delisting between the time of the rule change and August 30, 2001. Amex informed us that these companies had not been in full compliance with the continued listing guidelines for an average of about 6.5 months before receiving the notice.\nIn response to the concerns OCIE expressed in 1997 about Amex deferring delisting action without good cause, the exchange agreed to review on a quarterly basis the status of companies that did not meet its continued listing standards and to document its rationale for allowing noncompliant companies to remain listed. OCIE believed that by more closely scrutinizing the actions that companies were taking to comply with the exchange\u2019s continued listing guidelines, Amex would be more likely to delist companies that were noncompliant for excessive periods. However, OCIE found in its most recent inspection that although Amex had performed the agreed-upon quarterly reviews, the exchange was still not taking timely action to delist noncompliant companies.\nOCIE recommended in its 2001 inspection report, as it had in its 1997 report, that Amex identify in a more timely manner the companies that did not comply with its continued listing guidelines, grant delisting deferrals to noncompliant companies only if the companies could show that a reasonable basis existed for assuming they would return to compliance with the listing guidelines, document reviews of each company\u2019s progress in coming into compliance with the listing guidelines, and place firm time limits on the length of delisting deferrals. The report also recommended that Amex append a modifier to the company\u2019s listing symbol or devise an alternative means of disclosure to denote that a company was not in compliance with Amex\u2019s continued listing guidelines.\n\n\t\tAmex Did Not Agree to Relinquish Its Discretionary Authority or to Modify Its Stock Symbols\n\nAs of September 7, 2001, OCIE and Amex were in ongoing discussions about the actions Amex would take to address OCIE\u2019s recommendations. However, in responding to OCIE\u2019s 2001 inspection report and in subsequent discussions with OCIE officials, Amex indicated that it did not want to relinquish its discretionary authority or to modify its stock symbols. Amex stressed the importance of being able to evaluate a company\u2019s suitability for listing on a case-by-case basis. The exchange further responded that its published listing policies put potential investors on notice that Amex would evaluate an applicant based on a myriad of factors and might approve companies for listing that did not meet all of its quantitative guidelines. In addition, Amex cited the November 2000 rule change under which companies are required to issue a press release to inform investors of a pending delisting decision. Amex officials also told us that investors could obtain sufficient information about a company\u2019s operating condition from other public sources, obviating the need for a stock symbol modifier or other public notice.\nOCIE officials said that they believed additional disclosure to the investing public would be necessary until Amex turned its equity guidelines into firm standards. The officials remained concerned that individual investors were unaware that Amex\u2019s listing guidelines provided broad discretion in making listing decisions. They emphasized that they were concerned about Amex\u2019s discretion to list companies that did not meet its quantitative guidelines, stressing that they did not want to remove Amex\u2019s discretion to apply additional or more stringent requirements in making listing decisions. Further, although the OCIE report acknowledged that alternative disclosure mechanisms existed, OCIE officials said that attaching a modifier to a stock\u2019s listing symbol to indicate that a stock did not meet either the initial or continued listing standards would provide the broadest and therefore most preferred type of disclosure. For example, a company\u2019s press release making public a delisting decision would not be a preferred form of disclosure because, depending on the circumstances, a company could remain out of compliance with Amex\u2019s continued listing requirements for months or years without being subject to a delisting decision. To address this concern, NYSE requires a company to issue a press release when the exchange notifies the company that it does not meet the continued listing requirements. Nonetheless, a press release is a one-time notice and, as such, may limit potential investors\u2019 awareness of a company\u2019s listing status.\nAmex also expressed concern that OCIE was imposing strict requirements on its market that would not be applicable to other markets. Amex specifically noted that neither the Nasdaq National Market nor NYSE appended a symbol to listed securities that did not meet their continued listing requirements. Amex officials told us that requiring Amex to do so could mislead investors into believing that other markets do not follow listing practices similar to those of Amex. Amex also said that a modifier would place an unwarranted negative label on the company and send an inappropriate message to the market. As noted above, companies listed on Amex have more closely resembled those listed on the Nasdaq SmallCap Market than those listed on the Nasdaq National Market. According to a Nasdaq official, the Nasdaq SmallCap Market has used a modified listing symbol for all companies that fall below its continued listing requirements since the market began operating in 1982, and 10 stocks had modified symbols as of August 15, 2001. Nonetheless, OCIE officials said that they are in the process of inspecting the listing programs at Nasdaq and NYSE and would, if they determined that companies were listed that did not meet the markets\u2019 equity listing standards, recommend that stock symbol modifiers be used to identify such companies.\nFinally, Amex said that a November 2000 rule change, as well as significant staffing changes that include a new department head, were having the effect of reducing the number of stocks approved for listing that did not meet the exchange\u2019s quantitative guidelines. According to Amex, from November 1, 2000, through August 27, 2001, 6 of the 39 new listings\u2014approximately 15 percent\u2014were granted exemptions to the exchange\u2019s quantitative listing guidelines. Five companies were approved for listing based on an appeal to the Committee on Securities, and one company was approved by the listing department staff because it had \u201csubstantially\u201d met all of the exchange\u2019s initial listing guidelines. According to Amex, the determination of substantial compliance was based on the fact that the applicant had met all the exchange\u2019s guidelines, except that the company\u2019s price at the time of approval was $2.9375, instead of the $3.00 minimum required by the guidelines. As discussed earlier, OCIE had found that 22 percent of new listings for a prior period had been granted exemptions. Amex officials said that they expected the downward trend to continue in the number of stocks approved for listing that did not meet the exchange\u2019s quantitative guidelines. OCIE officials told us that they had considered the changes to the Amex listing program in making their recommendations.\n\n\t\tOCIE Planned to Report to the SEC Commissioners on Significant Recommendations That Amex Did Not Agree to Implement\n\nIn a 1998 report, we recommended that the SEC Chairman require OCIE to report periodically on the status of all open, significant recommendations to the SEC Commissioners. Our rationale was that involving the Commissioners in following up on recommendations would provide them with information on the status of corrective actions that OCIE had deemed significant. Also, because the Commissioners have the authority to require the SROs to implement the staff\u2019s recommendations, reporting to them would provide the SROs with an additional incentive to implement these recommendations. After preparing its first annual report in August 1998, including both significant recommendations on which action had been agreed to but not completed and recommendations that had been rejected, OCIE determined that future reports would include only the status of significant recommendations that an SRO had expressly declined to adopt or had failed to adequately address. Reflecting the seriousness of their concerns about the open recommendations related to Amex\u2019s use of its discretionary authority in making initial and continued listing decisions, OCIE officials told us that in the absence of an Amex agreement to adequately address these recommendations, OCIE would include them among the open significant recommendations to be reported annually to the SEC Commissioners.\n\n\tAmex Did Not Prepare Management Reports That Demonstrated the Effectiveness of Its Listing Program\n\nAmex officials told us that the exchange was fulfilling its SRO responsibilities related to its equity listing operations in part by individually monitoring the status of companies that did not meet its continued listing guidelines and, beginning in January 2001, by summarizing related information in monthly reports to management. These monthly reports provided information on the output of the department\u2019s activities, including the names and total number of companies that did not meet the continued listing guidelines, the reasons that individual companies did not meet the guidelines, the date of the latest conference with each company to discuss its listing status, the total number of such conferences held, and the total number of decisions made on the basis of these conferences.\nThe Amex listing department did not, however, prepare management reports that aggregated and analyzed overall statistics to measure program results over time. As a result, Amex could not demonstrate the effectiveness of its exceptions-granting policies or its initial and continued listing guidelines. For example, Amex did not routinely aggregate or analyze statistics on the percentage of applicants listed that were granted exceptions to initial or continued listing guidelines, or on the length of time that companies were not in compliance with the continued listing guidelines and their progress in coming back into compliance with them. Collecting and analyzing such data over time, especially in conjunction with the outcomes for these companies\u2014whether they achieved compliance or were delisted\u2014could provide Amex and OCIE with an indicator of the effectiveness of Amex\u2019s process for granting exceptions. Analysis of this information could also help Amex and OCIE determine whether a significant difference exists between the outcomes for companies that meet the listing guidelines and those that do not. Also, although Amex told OCIE that it continually \u201cmonitors\u201d to determine whether its guidelines need to be revised, Amex did not develop and aggregate statistics on the number of companies delisted or on the reasons for delistings, such as noncompliance with listing requirements or a move to another market. As indicated above, Amex provided us with some of this information in response to a specific request but also told us that the listing department did not routinely aggregate such information for management purposes. Collected and analyzed over time, this information could provide Amex and OCIE with an indicator of the effectiveness of Amex\u2019s initial and continued listing guidelines and, therefore, could be useful in identifying appropriate revisions to them.\nOther markets have developed this kind of management report. In response to concerns about the effectiveness of Nasdaq\u2019s listing department, we recommended in 1998 that SEC require NASD to develop management reports based on overall program statistics. The resulting quarterly reports to senior Nasdaq management and OCIE include data on the number and disposition of listing applications, number and reasons for noncompliance with continued listing standards, disposition of companies that do not comply with the continued listing standards, requests for and results of hearings, status of companies granted temporary exceptions to the continued listing standards as a result of hearings, and number of and reasons for delistings. As a result of a 1998 OCIE recommendation, NYSE submits reports containing similar information to the NYSE Board of Directors and, upon request, to OCIE. According to an OCIE official, the resulting quarterly reports are useful for monitoring the listing activities of these markets.\n\n\tConclusions\n\nAmex\u2019s use of its discretion to initially list and continue to list companies that do not meet the exchange\u2019s quantitative guidelines for equities could mislead investors, who are likely to assume that the companies listed on Amex meet the exchange\u2019s listing guidelines. Because investors are entitled to clear information for use in making investment decisions, they should be informed when listed companies do not meet these guidelines. Amex has reiterated its concern about the potentially negative impact of being the only market to publicly identify listings that do not meet its guidelines. The Nasdaq SmallCap Market already uses stock symbol modifiers for companies that do not meet its continued listing standards. Also, OCIE officials told us they would recommend that other markets disclose noncompliance with their continued listing standards. (OCIE did not identify noncompliance with initial listing standards as an issue.) Ultimately, Amex could avoid concerns about the negative impact of public disclosure by adopting firm quantitative guidelines. In the meantime, including the recommendations that Amex rejected in the OCIE annual reports to the SEC Commissioners\u2014who have the authority to require their implementation\u2014would provide an additional incentive for Amex to act.\nNotwithstanding Amex\u2019s expectation that changes to its listing program would result in diminished use of its discretion, the ongoing concerns about weaknesses in program operations and the potentially negative impact of exchange practices on public confidence warrant continued monitoring of Amex\u2019s listing program. Both Amex and OCIE could use routine management reports that reflect the performance of the exchange listing program to improve oversight of the program. Amex officials did not use aggregated and analyzed information on the results of the listing process to help judge its overall effectiveness, including that of its exceptions-granting policies or its initial and continued listing guidelines. Such information would include, among other things, the number and percentages of companies listed that have exceptions to the initial and continued listing guidelines, the number and percentages of companies in each group that are delisted, the reasons for the delistings, and the turnover rate for listings. Aggregating and analyzing such information could help Amex and OCIE to identify and address weaknesses in Amex\u2019s listing program operations.\n\n\tRecommendations to the Chairman, SEC\n\nAs part of SEC\u2019s ongoing efforts to ensure that Amex addresses weaknesses in the management of its equity listing program, we recommend that the Chairman, SEC,   direct Amex to implement mandatory quantitative equity listing requirements or provide ongoing public disclosure of noncompliant companies, and require Amex to report quarterly to its Board of Governors on the operating results of its equity listing program and make these reports available to OCIE for review. Such reports should contain sufficient information to demonstrate the overall effectiveness of the Amex equity listing program, including, at a minimum, that of its exceptions-granting policies and its initial and continued listing guidelines.\n\n\tAgency Comments and Our Evaluation\n\nWe obtained written comments on a draft of this report from Amex and SEC officials. The written comments are presented in appendixes I and II, respectively. Amex committed to taking action to address our recommendation for improving public disclosure of its listing requirements by replacing its discretionary guidelines with mandatory initial and continued listing standards (see appendix I, exhibits A and B).\nAlso in response to our recommendation, Amex committed to enhancing its management reports as they relate to its initial listing program. SEC officials commented that they were pleased that Amex would be making changes to its listing program that would address the findings and recommendations outlined in our report, and they said they would continue working with Amex to ensure that the proposed changes are implemented effectively.\nAmex noted in its comment letter that its proposals are broad and that the various details would be finalized as part of the rule approval process, which involves SEC. In earlier discussions with Amex about its draft proposals, we expressed the view that Amex\u2019s rules would provide for greater investor protection if they included specific time frames for notifying the public about material events related to a company\u2019s listing status. For example, such time frames would provide for expeditiously notifying the public after Amex advises a company that delisting proceedings are to be initiated. We also observed that Amex had not established other critical time frames for procedures such as advising a company that it does not meet the exchange\u2019s continued listing requirements. Amex indicated in its comment letter that it intends to include applicable time frames as it works out the details of its proposals. SEC officials told us that they would work with Amex to ensure that appropriate time frames are established.\nIn agreeing to enhance its management reports to address our recommendation, Amex acknowledged the potential value of these reports in light of proposed changes to its initial listing requirements. Under these proposed changes, companies could qualify for initial listing under Amex\u2019s \u201cregular\u201d listing standards or, subject to mitigating circumstances, under its less stringent \u201calternative\u201d standards. Amex committed to enhancing its management reports with information on companies that have been approved under the proposed alternative standards to provide for executive management review of the continued status of such companies, as compared with those approved for listing pursuant to its regular listing standards. Amex believes that its enhanced management reports should be useful in providing feedback on the application of the alternative standards to the Amex Board of Governors, Amex Committee on Securities, and SEC. SEC officials told us that they would use the enhanced reports to monitor implementation of the alternative standards. Although we support the changes proposed by Amex, we believe that the management reports would be of even greater use to Amex and SEC in their oversight if they included data on the effectiveness of Amex\u2019s practices for continued listings in addition to data on the exchange\u2019s exceptions-granting practices for initial listings. Our report discussed the kinds of aggregated and analyzed data that would be important to include in Amex\u2019s management reports and that Nasdaq and NYSE include in their reports. Amex would benefit by working with SEC to ensure that the exchange\u2019s reports contain similar information.\n\n\tScope and Methodology\n\nTo describe the key differences between the Amex initial and continued equity listing guidelines and the equity listing standards of other U.S. stock markets, we compared the quantitative and qualitative guidelines and standards of the seven U.S. markets that are registered to trade stock and that have listing requirements. These markets include six national securities exchanges\u2014Amex, the Boston Stock Exchange, the Chicago Stock Exchange, NYSE, the Pacific Exchange, and the Philadelphia Stock Exchange\u2014and one national securities association, the Nasdaq Stock Market. The seventh national securities exchange, the Cincinnati Stock Exchange, trades only stocks that are listed on other exchanges and does not have listing standards. We also interviewed officials from SEC\u2019s OCIE and from Amex, Nasdaq, and NYSE to gain a further understanding of the initial and continued listing requirements of each market. This report places greater emphasis on the results of our comparison of Amex guidelines with the standards of Nasdaq and NYSE, because about 98 percent of U.S. common stocks were subject to the listing requirements of one of these three markets at the time of our review.\nIn reviewing OCIE recommendations to Amex for improving its equity listing program, we discussed the contents of the April 2001 inspection report and Amex\u2019s written response to it with officials of OCIE and Amex\u2019s Listings Qualifications Department and Office of General Counsel, focusing on the areas of disagreement between OCIE and Amex. Additionally, we examined OCIE\u2019s 1997 inspection report on Amex\u2019s listing activities, Amex\u2019s response, and associated correspondence to determine the nature of weaknesses identified in the OCIE inspection and how they were resolved. We also reviewed related GAO reports.\nTo examine how Amex monitors the effectiveness of its equity listing department operations, we interviewed Amex and OCIE officials. We also reviewed related GAO reports and examined the Nasdaq and NYSE quarterly management reports that are provided to OCIE.\nWe conducted our work in Chicago, IL; New York, NY; and Washington, D.C., from November 2000 through October 2001, in accordance with generally accepted government auditing standards.\nAs agreed with you, unless you publicly release its contents earlier, we plan no further distribution of this letter until 30 days from its issuance date. At that time, we will send copies to the Chairmen and Ranking Minority Members of the Senate Committee on Banking, Housing, and Urban Affairs and the House Committee on Financial Services; the Chairman of the House Energy and Commerce Committee; and other interested congressional committees and organizations. We will also send copies to the Chairman of SEC and to the Chairman and Chief Executive Officer of Amex. Copies will also be made available to others upon request.\nIf you or your staff have any questions regarding this report, please contact me at (202) 512-8678, hillmanr@gao.gov, or contact Cecile Trop, Assistant Director, at (312) 220-7705, tropc@gao.gov. Key contributors include Neal Gottlieb, Roger Kolar, Anita Zagraniczny, and Emily Chalmers.\n\nAppendix I: Comments From the American Stock Exchange\n\nAppendix II: Comments From the Securities and Exchange Commission","output":"What GAO Found\n\nThe Securities and Exchange Commission (SEC) has indicated that one-third of Amex's new listings did not meet the exchange's equity listing standards. Amex's listing guidelines address factors that are the same or similar to those addressed by other U.S. stock markets. Quantitative requirements addressed share price, stockholders' equity, income, and market value of publicly held shares. However, the minimum thresholds for meeting these requirements varied to reflect the differences in the companies that each market targeted for listing. The most significant difference between Amex's guidelines and the listing standards of other U.S. stock markets was that Amex was one of only two markets that retained discretion to initially list companies that did not meet all of its quantitative requirements. Amex had not implemented the Office of Compliance Inspections and Examinations' (OCIE) recommendations on the exchange's discretionary listing decisions. OCIE officials told GAO that in the absence of an Amex agreement to address the recommendations, they would include them among the open significant recommendations to be reported to the SEC Commissioners as a result of a 1998 GAO recommendation. The Commission can require Amex to implement OCIE's recommendations. Amex officials said that the exchange was fulfilling its self-regulatory organization responsibilities by individually monitoring the status of companies that did not meet its continued listing guidelines and by summarizing information in monthly reports to management."}
{"id":"gao_GAO-01-998T","pid":"gao_GAO-01-998T_0","input":"\tBackground\n\nIn fiscal year 2000, VA\u2019s pharmacy benefit provided approximately 86 million prescriptions at a cost of approximately $2 billion\u2014or about 12 percent of VA\u2019s total health care budget, compared to 6 percent of VA\u2019s total health care budget a decade ago. VA provides outpatient pharmacy services free to veterans receiving medications for treatment of service- connected conditions and to low-income veterans. Other veterans who have prescriptions filled by VA may be charged a copayment for each 30- day supply of medication.\nLike many health care organizations, VA uses several measures in an effort to improve quality of care and control pharmacy costs. These include (1) implementing a national formulary, which standardizes the list of drugs available; (2) developing clinical guidelines for prescribing drugs; and (3) using compliance programs, such as prior authorization, to encourage or require physicians to prescribe formulary drugs.\nVA medical centers individually began using formularies as early as 1955 to manage their pharmacy inventories. However, it was not until 40 years later in September 1995, that VA established a centralized group to manage its pharmacy benefit nationwide. In November 1995, when VISNs were established, VA\u2019s Under Secretary for Health directed each VISN to develop and implement a VISN-wide formulary. To develop their formularies, the VISNs generally combined existing medical center formularies and eliminated rarely prescribed drugs. In 1996, VA was required to improve veterans\u2019 access to care regardless of the region of the United States in which they live. As part of its response, VA implemented a national drug formulary on June 1, 1997, by combining the core set of drugs common to the newly developed VISN formularies. VA\u2019s formulary meets the Joint Commission for the Accreditation of Health Care Organizations\u2019 requirements for developing and maintaining an appropriate selection of medications for prescribers to use in treating their patient populations.\nVA\u2019s formulary lists more than 1,100 unique drugs in 254 drug classes\u2014 groups of drugs similar in chemistry, method of action, or purpose of use. After performing reviews of drug classes representing the highest costs and volume of prescriptions, VA decided that some drugs in 4 of its 254 drug classes were therapeutically interchangeable\u2014that is, essentially equivalent in terms of efficacy, safety, and outcomes. This determination allowed VA to select one or more of these drugs for its formulary so that it could seek better prices through competitively bid committed-use contracts. Other therapeutically equivalent drugs in these classes were then excluded from the formulary. These four classes are known as \u201cclosed\u201d classes. VA has not made clinical decisions regarding therapeutic interchange in the remaining 250 drug classes, and it does not limit the number of drugs that can be added to these classes. These are known as \u201copen\u201d classes.\nTo manage its pharmacy benefit nationwide, VA established the Pharmacy Benefits Management Strategic Healthcare Group (PBM). PBM is responsible for managing the national formulary list, maintaining databases that reflect drug use, and monitoring the use of certain drugs. PBM also facilitates the addition and deletion of drugs on the national formulary on the basis of safety and efficacy data, determines which drugs are therapeutically interchangeable in order to purchase drugs through competitive bidding, and develops safeguards to protect veterans from the inappropriate use of certain drugs. VISN directors are responsible for implementing and monitoring compliance with the national formulary and ensuring that a nonformulary drug approval process is functioning at each of their medical centers. Although VISN and medical center directors are held accountable in annual performance agreements for meeting certain national and local goals, attaining formulary goals has not been part of their performance standards.\n\n\tNational Formulary Standardization Not Yet Achieved\n\nWhile VA has made significant progress in establishing a national formulary, its oversight has not been sufficient to ensure that it is fully achieving its national formulary goal of standardizing its drug benefit nationwide. In our January 2001 report, we found three factors that have impeded formulary standardization: (1) medical centers we visited omitted some national formulary drugs from their local formularies, (2) VISNs varied in the number of drugs they added to local formularies to supplement the national formulary without appropriate oversight, and (3) medical centers inappropriately added or deleted drugs in closed classes. Nevertheless, most prescribed drugs were on the national formulary, and prescribers and patients were generally satisfied with the national formulary.\nThe first factor impeding standardization is that medical centers omitted some national formulary drugs from their local formularies. Almost 3 years after VA facilities were directed to make all national formulary drugs available locally, two of the three medical centers we visited in spring of 2000 omitted required drugs from the formularies used by their prescribers. At one medical center, about 25 percent (286 drugs) of the national formulary drugs were not available as formulary choices. These included drugs used to treat high blood pressure, mental disorders, and women\u2019s medical needs. At the second medical center, about 13 percent (147 drugs) of the national formulary drugs were omitted, including drugs used to treat certain types of cancer and others used to treat stomach conditions.\nFrom October 1999 through March 2000, health care providers at these two medical centers had to obtain nonformulary drug approvals for over 22,000 prescriptions for drugs that should have been available without question because they are on the national formulary. Our analysis showed that at the first center, over 14,000 prescriptions were filled as nonformulary drugs for 91 drugs that should have been on the formulary.At the other medical center, over 8,000 prescriptions for 23 national formulary drugs were filled as nonformulary drugs. If the national formulary had been properly implemented at these medical centers, prescribers would not have had to use extra time to request and obtain nonformulary drug approvals for these drugs, and patients could have started treatment earlier.\nThe second factor impeding standardization is the wide variation in the number of drugs added by VISNs to their local formularies. VA\u2019s policy allowing VISNs to supplement the national formulary locally has the potential for conflicting with VA\u2019s goal of achieving standardization if it is not closely managed. From June 1997 through March 2000, the 22 VISNs added a total of 244 unique drugs to supplement the list of drugs on the national formulary. As figure 1 shows, the number of drugs added by each VISN varies widely, ranging from as many as 63 to as few as 5. Adding drugs to supplement the national formulary is intended to allow VISNs to be responsive to the unique needs of their patients and to allow quicker formulary designation of new drugs approved by the Food and Drug Administration (FDA). VA officials have acknowledged that this variation affects standardization and told us they plan to address it. For example, PBM plans to more quickly review new drugs when approved by FDA to determine if they should be added to the national formulary.\nThe third factor is that medical centers we visited inappropriately modified the national formulary list of drugs in the closed classes. Contrary to VA formulary policy, two of three medical centers added two different drugs to two of the four closed classes, and one facility did not make a drug in a closed class available. Moreover, the Institute of Medicine (IOM) found broad nonconformity at the VISN level.Specifically, IOM reported that 16 of the 22 VISNs modified the list of national formulary drugs for the closed classes. This also undermines VA\u2019s ability to achieve cost savings through its committed-use contracts.\nWhile VA has not yet fully achieved national formulary standardization, most prescribed drugs were on the national formulary. From October 1999 through March 2000, 90 percent of VA outpatient prescriptions were written for national formulary drugs. The percentage of national formulary drug prescriptions filled by individual VISNs varied slightly, from 89 percent to 92 percent. We found wider variation among medical centers within VISNs\u201484 percent to 96 percent.\nOf the remaining 10 percent of prescriptions filled systemwide, VA\u2019s national database could not distinguish between nonformulary drugs and drugs added to local formularies by VISNs and medical centers to supplement the national formulary. VA\u2019s PBM and the IOM estimate that drugs added to supplement the national formulary probably account for about 7 percent of all prescriptions filled, and nonformulary drugs account for approximately 3 percent of all prescriptions filled. VA officials told us that they are modifying the database to enable them to identify which drugs are added to supplement the national formulary and which are nonformulary. This will allow them to better oversee the balance between local needs and national standardization.\nPrescribers we surveyed reported they were generally satisfied with the national formulary. Seventy percent of VA prescribers in our survey reported that the formulary includes the drugs their patients need either to a \u201cgreat extent\u201d or to a \u201cvery great extent.\u201d Approximately 27 percent reported that the formulary meets their patients\u2019 needs to a \u201cmoderate extent,\u201d with 4 percent reporting that it meets their patients\u2019 needs to a lesser extent. No VA prescribers reported that the formulary meets their patients\u2019 needs to \u201cvery little or no extent.\u201d This is consistent with IOM\u2019s conclusion that the VA formulary \u201cis not overly restrictive.\u201d\nVeterans also appear satisfied with their ability to obtain the drugs they believe they need. At the VA medical centers we visited, patient advocates told us that veterans made very few complaints concerning their prescriptions. In its analysis of patient complaints, IOM found that less than one-half of 1 percent of veterans\u2019 complaints were related to drug access. IOM further reported that complaints involving specific identifiable drugs often involved drugs that are marketed directly to consumers, such as Viagra. Our review also indicated that the few prescription complaints made were often related to veterans trying to obtain \u201clifestyle\u201d drugs or refusals by VA physicians and pharmacists to fill prescriptions written by non-VA health care providers. VA may fill prescriptions written by non-VA health care providers only under limited circumstances, for example, when the veteran is housebound and receives additional compensation because of a service-connected disability.\n\n\tApproval Processes for Nonformulary Drugs Have Weaknesses\n\nWhile the national formulary directive requires certain criteria for approval of nonformulary drugs, it does not prescribe a specific nonformulary approval process. As a result, the processes health care providers must follow to obtain nonformulary drugs differ among VA facilities regarding how requests are made, who receives them, who approves them, and how long it takes to obtain approval. In addition, some VISNs have not established processes to collect and analyze data on nonformulary requests. As a result, VA does not know if approved requests meet its established criteria or if denied requests are appropriate.\nBoth the people involved and the length of time to approve nonformulary drugs varied. The person who first receives a nonformulary drug approval request may not be the person who approves it. For example, 61 percent of prescribers reported that nonformulary drug requests must first be submitted to facility pharmacists, 14 percent said they must first be submitted to facility pharmacy and therapeutics (P&T) committees, and 8 percent said they must first be sent to service chiefs. In contrast, 31 percent of prescribers reported that facility pharmacists approve nonformulary drug requests, 26 percent said that facility P&T committees approve them, and 15 percent told us that facility chiefs of staff approve them. The remaining 28 percent reported that various other facility officials or members of the medical staff approve nonformulary drug requests. The time required to obtain approval for use of a nonformulary drug also varied depending on the local approval processes. The majority of prescribers we surveyed (60 percent) reported that it took an average of 9 days to obtain approval for use of nonformulary drugs. But many prescribers also reported that it took only a few hours (18 percent) or minutes (22 percent) to obtain such approvals.\nDuring our medical center visits, we observed that some medical center approval processes are less expeditious than others. For example, to obtain approval to use a nonformulary drug in one facility we visited, prescribers were required to submit a request in writing to the P&T committee for its review and approval. Because the P&T committee met only once a month, the final approval to use the requested drug was sometimes delayed as long as 30 days. The requesting prescriber, however, could write a prescription for an immediate 30-day supply if the medication need was urgent.\nIn contrast, another medical center we visited assigned a clinical pharmacist to work directly with health care providers to help with drug selection, establish dose levels, and facilitate the approval of nonformulary drugs. In that facility, clinical pharmacists were allowed to approve the use of nonformulary drugs. If a health care provider believed that a patient should be prescribed a nonformulary drug, the physician and pharmacist could consult at the point of care and make a final decision with virtually no delay.\nPrescribers we surveyed were almost equally divided on the ease or difficulty of getting nonformulary drug requests approved. (See table 1.)\nRegardless of whether the nonformulary drug approval process was perceived as easy or difficult, the majority of prescribers told us that their requests were generally approved. According to our survey results, 65 percent of prescribers sought approval for nonformulary drugs in 1999. These prescribers reported that they made, on average, 25 such requests (the median was 10 requests). We estimated that 84 percent of all prescribers\u2019 nonformulary requests were approved.\nWhen a nonformulary drug request was disapproved, 60 percent of prescribers reported that they switched to a formulary drug. However, more than one-quarter of the prescribers who had nonformulary drug requests disapproved resubmitted their requests with additional information.\nFor patients moving from one location to another, the majority of prescribers we surveyed told us that they were more likely to convert VA patients who were on a nonformulary drug obtained at another VA facility to a formulary drug than to request approval for the nonformulary drug. (See table 2.)\nContrary to the national formulary policy, not all VISNs have established a process for collecting and analyzing data on nonformulary requests at the VISN and local levels. Twelve of VA\u2019s 22 VISNs reported that they do not collect information on approved and denied nonformulary drug requests. Three VISNs reported that they collect information only on approved nonformulary drug requests, and seven reported that they collect information for both approved and denied requests. Such information could help VA officials to determine the extent to which nonformulary drugs are being requested and whether medical center processes for approving these requests meet established criteria. In its report, IOM noted that inadequate documentation on such matters could diminish confidence in the nonformulary process.\n\n\tPlans for Improving Oversight Are Progressing\n\nWe are encouraged by VA\u2019s actions, but it is too early to tell how successful it will be in addressing our recommendations for improving its management and oversight of the national formulary. To improve standardization of its formulary, we recommended that VA establish (1) a mechanism to ensure that VISN directors comply with VA\u2019s national formulary policy and (2) criteria that VISNs should use to determine the appropriateness of adding drugs to supplement the national formulary and monitor the VISNs\u2019 application of these criteria. VA\u2019s PBM has developed changes to its database that will provide comparative national data on VISN, nonformulary, and national formulary drug use. PBM also plans to share these data, including identification of outliers, with all 22 VISNs and coordinate with VISN formulary leaders to facilitate consistent compliance with national formulary policy. In addition, VA (1) drafted criteria for VISNs to use to determine the appropriateness of adding drugs to supplement the national formulary list, which it intends to include in a directive; (2) is developing a template for VISNs to document all VISN formulary additions; and (3) intends to review more quickly all new FDA- approved drugs for inclusion in the national formulary.\nTo improve its nonformulary drug approval process, we recommended that (1) VA establish a process to ensure timely and appropriate decisions by medical centers and (2) veterans be allowed continued access to previously approved nonformulary drugs, regardless of where they seek care in VA\u2019s health care system. In addressing these recommendations, VA plans to incorporate into its revised formulary directive the fundamental steps that all medical centers must take in establishing and reporting their nonformulary activities. VA also plans to include in its revised formulary directive a specific requirement that approved nonformulary medications will continue if a veteran changes his or her care to a different VA facility.","output":"Why GAO Did This Study\n\nAlthough the Department of Veterans Affairs (VA) has made significant progress establishing a national formulary that has generally met with acceptance by prescribers and patients, VA oversight has not fully ensured standardization of its drug benefit nationwide. The three medical centers GAO visited did not comply with the national formulary. Specifically, two of the three medical centers omitted more than 140 required national formulary drugs, and all three facilities inappropriately modified the national formulary list of required drugs for certain drug classes by adding or omitting some drugs. In addition, as VA policy allows, Veterans Integrated Service Networks (VISN) added drugs to supplement the national formulary ranging from five drugs at one VISN to 63 drugs at another. However, VA lacked criteria for determining the appropriateness of the actions networks took to add these drugs. In addition to problems standardizing the national formulary, GAO identified weaknesses in the nonformulary approval process. Although the national formulary directive requires certain criteria for approving nonformulary drugs, it does not prescribe a specific nonformulary approval process. As a result, the processes health care providers must follow to obtain nonformulary drugs differ among VA facilities on how requests are made, who receives them, who approves them, and how long it takes to obtain approval.\n\nWhat GAO Found\n\nGAO found that the length of time to approve nonformulary drugs averages nine days, but it can be as short as a few minutes in some medical centers. Some VISNs have not established processes to collect and analyze data on nonformulary requests. As a result, VA does not know if approved requests meet its established criteria or if denied requests are appropriate. This testimony summarizes the December 1999 report, HEHS-00-34 and the January 2001 report, GAO-01-183 ."}
{"id":"gao_GAO-06-813","pid":"gao_GAO-06-813_0","input":"\tBackground\n\nBefore 1996, Medicare program integrity activities were subsumed under  Medicare\u2019s general administrative budget and performed, along with  general claims processing functions, by insurance companies under  contract with CMS, which led to certain problems. The level of funding  available for program integrity activities was constrained, not only by the  need to fund ongoing Medicare program operations\u2014such as the costs for  processing medical claims, but also by budget procedures imposed under  the Budget Enforcement Act of 1990. In the early and mid-1990s, we  reported that such funding constraints had reduced Medicare contractors\u2019  ability to conduct audits and review medical claims. HHS advocated for a  dedicated and stable amount of program integrity funding outside of the  annual appropriations process, so that CMS and its contractors could plan  and manage the function on a multiyear basis. HHS also asserted that past  fluctuations in funding had made it difficult for contractors to retain  experienced staff who understood the complexities of, and could protect,  the financial integrity of Medicare program spending.\n\n\t\tHIPAA Established MIP and Provided Dedicated Funding\n\nBeginning in fiscal year 1997, HIPAA established MIP and provided CMS  with dedicated funding to conduct program integrity activities. HIPAA  stipulated a range of funds available for these activities from the Medicare  trust funds each year. For example, for fiscal year 1997, the law stipulated  that at least $430 million and not more than $440 million should be used.  The maximum amount of MIP funds rose from $440 million in fiscal year  1997 to $720 million in fiscal year 2003. For fiscal year 2003, and every year  thereafter, the maximum amount that HIPAA stipulated for MIP was   $720 million. (See app. II, table 2, for additional information on the MIP  funding ranges.) As a result of the increases stipulated in HIPAA, from  fiscal years 1997 through 2005, total MIP expenditures increased about   63 percent\u2014from about $438 million to $714 million, as figure 1 shows.  HIPAA authorized MIP funds to be used to enter into contracts to  \u201cpromote the integrity of the Medicare program.\u201d The statute also listed  the various program integrity activities to be conducted by contractors.\n\n\t\tMIP Funds Support Program Integrity Efforts\n\nCMS allocates MIP funds primarily to support its contractors\u2019 program  integrity efforts for the traditional Medicare program, known as fee-for- service Medicare. Among these contractors are fiscal intermediaries  (intermediaries), carriers, PSCs, and Medicare administrative contractors  (MAC). MACs are a new type of contractor that will replace all  intermediaries and carriers by October 2011, as required by the Medicare  Prescription Drug, Improvement, and Modernization Act of 2003 (MMA).  MMA required CMS to conduct full and open competition to select MACs.  CMS refers to this change as contracting reform.\nCMS has contracted with intermediaries, carriers, and MACs to perform  two types of activities\u2014claims processing and program integrity. Their  claims processing activities include receiving and paying claims. These  activities are classified as program management and are funded through a  program management budget. In addition, intermediaries and carriers  have been charged with conducting some program integrity activities  under MIP, including performing medical review of claims. The four MACs  selected in January 2006 will not conduct medical review activities. CMS  plans to assign responsibility for medical review of claims to the MAC  selected in July 2006 and to the other MAC contracts to be awarded in the  future. MIP provides funds to support these program safeguard efforts.\nIn addition, CMS uses MIP funds to support the activities of PSCs, which  perform medical review of claims and identify and investigate potential  fraud cases; a coordination of benefits (COB) contractor, which  determines whether Medicare or other insurance has primary  responsibility for paying a beneficiary\u2019s health care costs; the National  Supplier Clearinghouse (NSC), which screens and enrolls suppliers in the  Medicare program; and the data analysis and coding (DAC) contractor,  which maintains and analyzes Medicare claims data for durable medical  equipment (DME), prosthetics, orthotics, and supplies.\nContractors receive MIP funds to perform one or more of the following  five program integrity activities:    Audits involve the review of cost reports from institutions, such as  hospitals, nursing homes, and home health agencies. Cost reports play a  role in determining the amount of providers\u2019 Medicare reimbursement.\nMedical review includes both automated and manual prepayment and  postpayment reviews of Medicare claims and is intended to identify claims  for noncovered or medically unnecessary services.\nThe secondary payer activity seeks to identify primary sources of  payment--such as employer-sponsored health insurance, automobile  liability insurance, and workers\u2019 compensation insurance--that should be  paying claims mistakenly billed to Medicare. Secondary payer activities  also include recouping Medicare payments made for claims not first  identified as the responsibility of other insurers.\nBenefit integrity involves efforts to identify, investigate, and refer potential  cases of fraud or abuse to law enforcement agencies that prosecute fraud  cases.\nProvider education communicates information related to Medicare  coverage policies, billing practices, and issues related to fraud and abuse  both to providers identified as having submitted claims that were  improper, and to the general provider population.\nCMS also uses MIP to fund support for the five activities, such as certain  information technology systems, fees for consultants, storage of CMS  records, and postage and printing. The agency allocates the cost of this  support to the five activities, depending on which of the activities is  receiving support. Table 1 provides information on specific MIP activities  performed by the contractors. Appendix III provides examples of key  tasks performed by each of these contractors.\n\n\tMIP Funding for All Five Activities Has Generally Increased over Time\n\nFor fiscal years 1997 through 2005, CMS generally increased the amount of  funding for each of its five program integrity activities, but the amount of  the funding provided and the percentage increase have varied among the  activities. Provider education received the largest percentage increase in  funds, while audit and medical review received the largest amount of  funds overall. (See fig. 2.) CMS increased its allocation for provider  education by about 590 percent from fiscal year 1997 through fiscal year  2005. This increase was due, in part, to CMS\u2019s decision in fiscal year 2002  to use MIP funds for outreach activities to groups of like providers, which  had not previously been funded through MIP. CMS will be able to further  increase expenditures for program integrity in fiscal year 2006. In addition  to the maximum of $720 million originally appropriated under HIPAA for  fiscal year 2006, DRA increased the maximum by an additional   $112 million, for a total of $832 million. CMS plans to use some of the  $112 million to address potential fraud, waste, and abuse in the new  Medicare prescription drug benefit.\nIn each year from fiscal year 1997 through fiscal year 2005, CMS generally  increased the amount of MIP funds spent for each of its five program  integrity activities, as figure 2 shows. In addition to the increase in the  amount of funding for provider education, the expenditures for audit  increased 45 percent during the same period. As figure 3 shows,  expenditures for medical review increased from fiscal year 1997 to fiscal  year 2001 to almost $215 million\u2014about 81 percent\u2014and, since fiscal year  2001, decreased to about $166 million, or about 23 percent. Overall,  expenditures for medical review increased 40 percent from fiscal year  1997 to fiscal year 2005. During this period, expenditures for secondary  payer increased 49 percent, and for benefit integrity, expenditures  increased 89 percent. (See fig. 3 for the amount of expenditures by activity  in fiscal years 1997, 2001, and 2005 and app. II, table 3, for more detailed  information on the amount of expenditures for each activity in each year.)\nIncreased spending for provider education stemmed, in part, from  provider concerns about an increased burden on them in the medical  review process. In 2001, we reported that as CMS increasingly focused on  ensuring program integrity, providers were concerned about what they  considered to be inappropriate targeting of their claims for review.  Further, providers asserted that they may have billed incorrectly because  of their confusion about Medicare\u2019s program rules. To address these  concerns, CMS developed a more data-driven approach for conducting  medical review and also increased its emphasis on provider education.\nCMS officials explained that medical review would help identify providers  that were billing inappropriately, and provider education would focus on  individuals\u2019 specific billing errors to eliminate or prevent recurrence of the  problems. In addition, beginning in fiscal year 2002, spending for the  provider education activity increased significantly because CMS began to  use MIP funds for what the agency called provider outreach. Provider  outreach focuses on communicating with groups of providers about  Medicare policies, initiatives, and significant programmatic changes that  could affect their billing. This information is conveyed through seminars,  workshops, articles, and Web site publications. Previously, provider  outreach had been funded outside of MIP, as part of CMS\u2019s program  management budget. Provider education spending increased from   $17 million in fiscal year 2001\u2014before provider outreach was added to the  provider education activity\u2014to $53.5 million in fiscal year 2002. In fiscal  year 2005, funding for the provider education activity reached   $70 million.\nIn comparing the share of funds spent on each program integrity activity,  from fiscal year 1997 through fiscal year 2005, we found that CMS  generally spent the largest share on audit, averaging about 31 percent, and  on medical review, averaging about 27 percent. CMS spent less on  secondary payer, averaging 21 percent, and benefit integrity, averaging   15 percent. In contrast, during this period, CMS spent the smallest  percentage on provider education, which averaged about 6 percent of MIP  expenditures. See figure 4 for information on the percentage of funds  allocated to each activity. (For more detail, see table 4 in app. II.)\n\n\tCMS\u2019s Current MIP Funding Allocation Approach Has Weaknesses\n\nCMS officials told us that they generally had allocated MIP funds to the  five activities based predominantly on historical funding, but sometimes  considered high-level priorities. However, this approach does not take into  account data or information on the effectiveness of one activity over the  other in ensuring the integrity of Medicare or allow CMS to determine if  activities are yielding benefits that are commensurate with the amounts  spent. For example, while CMS has noted that benefit integrity and  provider education activities have intangible value, the agency has not  routinely collected information to evaluate their comparative  effectiveness. Furthermore, CMS has not fully assessed whether MIP funds  are appropriately allocated within the audit, medical review, benefit  integrity, and provider education activities. For example, audit\u2019s role has  changed as Medicare\u2019s payment methods have changed in the last decade,  but it continues to have the largest share of MIP funding.\n\n\t\tMIP Funds Allocated Primarily on a Historical Basis\n\nAccording to agency officials, CMS allocates funds for the five activities  based primarily on an analysis of previous years\u2019 spending and may also  consider other information when developing the MIP budget, such as  current expenditures by individual contractors. CMS officials told us that  they may also consider the agency\u2019s high-level priorities. For example, in  fiscal year 2004, CMS began to increase funds to expand the scope of its  annual study to estimate Medicare improper payment rates, and in fiscal  year 2002, it increased its MIP allocation for provider education.\nCMS does not have a means to compare quantitative data or qualitative  information on the relative effectiveness of MIP activities that it could use  in allocating funds. Instead, it calculates the quantitative benefits for two,  and assesses the qualitative benefits\u2014which are not objectively  measured\u2014for the other three. In fiscal year 2005, for its medical review  and secondary payer activities, CMS tracked dollars saved in relation to  dollars spent\u2014a quantitative measure that the agency calls a return on  investment (ROI).\nHaving an ROI figure is useful because it measures the effectiveness of an  individual activity so that its value can be compared with that of another  activity. As of fiscal year 2005, secondary payer had an ROI of $37 for  every dollar spent on the activity, and medical review had an ROI of $21  for every dollar spent. CMS tracked the ROI for audit, but by fiscal year  2002, audit\u2019s reported contribution to ROI fell to almost zero. (See fig. 5  and app. II, table 5, for additional ROI details.)\nCMS officials told us that the decrease in the ROI for audit was due to the  implementation of prospective payment systems (PPS), under which  Medicare pays institutional providers fixed, predetermined amounts that  vary according to patients\u2019 need for care. Until fiscal year 2001, audits  had achieved an ROI that was generally $9 or more for every dollar spent  conducting them, by disallowing payment for individual costs that should  not have been paid by Medicare under the previous payment method.  Under PPS, CMS\u2019s methods for paying providers changed. However, the  information system that had been used to track ROI began to incorrectly  calculate the savings from audit because it had not been adjusted for the  new payment method. According to agency officials, CMS is implementing  a different way to track audit savings, and an overall ROI. It will focus on  the savings from disallowing items that directly affect an individual  provider\u2019s payment under a PPS, such as bad debts and the number of low- income patients hospitals serve. It will track the amounts related to these  add-on payments actually paid by Medicare to, or recouped from, the  provider after an audit. The difference between the amount paid prior to  the audit and the amount paid after the audit (assuming there has been an  adjustment) would be the savings.\nHowever, all audit functions do not result in measurable savings. For  example, in its written comments on a draft of this report, CMS noted that  many audit functions funded by MIP do not have an ROI. CMS stated that  these include processing cost reports for data collection purposes,  correcting omissions on providers\u2019 cost reports, implementing court  decisions, and issuing notifications concerning Medicare payments. In  addition, CMS stated that some of these activities are mandated by law,  while others have significant value to the Medicare Payment Advisory  Commission (MedPAC), which is an independent federal commission;  providers; provider associations; and actuaries.\nFrom fiscal year 1997 through fiscal year 2005, CMS developed qualitative  assessments of the impact of benefit integrity and provider education.  According to CMS, the agency develops such assessments when the  savings generated by MIP activities are impossible or difficult to identify.  Nevertheless, CMS officials told us that these activities provide value to  the program in helping to ensure proper Medicare payments. For example,  CMS officials said that benefit integrity contributes to the work of federal  law enforcement agencies, which investigate and prosecute Medicare  fraud and abuse. CMS officials also noted that they consider benefit  integrity to have a sentinel effect in discouraging entities that may be  considering defrauding the Medicare program, but this effect is impossible  to measure.\nCMS indicated that trying to measure the results of the contractors\u2019 benefit  integrity activities could create incentives that undermine the value of  their work. For example, counting the number of cases referred to law  enforcement for further investigation could lead the contractors to refer  more cases that were less fully developed. However, other agencies that  investigate or prosecute fraud, such as HHS and the Department of  Justice, keep track of their successful cases, recoveries, and fines to  demonstrate their results. Similarly, CMS could assess the degree to which  each of its contractors had contributed to HHS and the Department of  Justice\u2019s successful investigations and prosecutions.\nIn regard to educating providers on appropriate billing practices, CMS may  be missing opportunities to evaluate its contractors\u2019 performance.  Provider education can help reduce billing errors, according to CMS.  However, according to an OIG report, CMS has not evaluated the  strategies used to modify the behavior of providers through education to  determine if these strategies are achieving desired results.\nCMS has noted the intangible value inherent in benefit integrity and  provider education activities, but the agency has not routinely collected  information to evaluate their comparative effectiveness in ensuring  program integrity. Further, as discussed earlier, correct information on  audit\u2019s effectiveness, based on an ROI, has not been available for the last  several years. Consequently, CMS is not able to determine if some of the  funds spent for benefit integrity, provider education, and audit\u2014about  $396 million, or 56 percent of MIP funds in fiscal year 2005\u2014could be  better directed to secondary payer or medical review. Nevertheless, CMS  officials told us that they plan to decrease the allocation to medical review  and increase the allocation to provider education.\nCMS officials stated that they are developing two initiatives that will give  the agency objective measures of the results of the audit and provider  education activities. As discussed earlier, CMS is implementing a revised  methodology for calculating the ROI for audit. In addition, it is trying to  develop information on the effectiveness of provider education. A CMS  official explained that the agency is adding a provider education  component to its program integrity management reporting system. This  component will potentially allow CMS to develop an ROI figure for  provider education by correlating educational efforts to a decrease in  claim denials and provide a measure of the quantitative benefits of this  activity. This component is scheduled to begin operating in the summer of  2006.\n\n\t\tCMS Does Not Ensure That Funds Are Allocated in an Optimal Way within Activities\n\nAfter CMS has allocated funds to each of the five MIP activities, it must  decide how to further distribute those funds to pay contractors that carry  out each one. For example, in fiscal year 2004, after CMS allocated about  $135 million for medical review to be conducted by intermediaries and  carriers, it then distributed those funds to pay 28 intermediaries and 24  carriers that were conducting medical review at that time. However, given  vulnerabilities for improper payment, contractor workload, and the  relative effectiveness of activities performed, CMS has not always taken  steps to ensure that it has allocated funds in an optimal way within its  activities. Nevertheless, CMS has used information on relative savings to  decide on funding allocations within the secondary payer activity.\n\n\t\t\tAllocations for Medical Review, Provider Education, and Benefit Integrity Are Not Based on Vulnerabilities\n\nMedical review, provider education, and benefit integrity are activities for  which allocation of MIP funds may not be optimal, because our analysis  suggests that CMS has not allocated funds within these activities based on  information concerning contractor vulnerabilities. Such vulnerabilities  include the potential for fraudulent billing in different locations and the  amount of potential benefit payments at risk in the contractor\u2019s  jurisdiction. For example, CMS estimated that the contractor that handled  claims for DME, orthotics, prosthetics, and supplies in a jurisdiction that  included Texas and Florida\u2014two states experiencing high levels of  fraudulent Medicare billing\u2014improperly paid 11.5 percent of its 2004  claims\u2014or $474.9 million\u2014which was a higher improper payment rate  than that of other contractors paying these types of claims. As we  previously reported, our analysis indicated this contractor received almost  a third less funds for medical review per $100 in submitted claims in fiscal  year 2003 than the amount given to contractors in other regions with less  risk of fraudulent billing. Our most recent analysis indicated that the  imbalance in fund allocation did not change in fiscal years 2004 and 2005.  We could not determine the rationale for this allocation beyond what was  historically budgeted for this contractor.\nThe amount of medical review funds allocated to individual contractors is  not directly tied to the amount of benefits that they pay, which is a key  measure of potential risk. For example, in fiscal year 2004, one contractor  paid out $66 million in benefits and received about 28 cents in medical  review funds for each $100 in benefits paid. In contrast, another contractor  paid out considerably more in benefits\u2014about $5 billion in fiscal year  2004\u2014and received about 7 cents in medical review funds for each $100 in  benefits paid.\nFurther, CMS has not adjusted the amount of funding for individual  contractors to educate providers based on their relative risks. A CMS  official told us that the amount of provider education funding is generally  aligned with the amount allocated for medical review, regardless of the  value of the benefits that the contractor pays.\nSimilarly, the amount of MIP funds provided to PSCs is not directly tied to  the amount of benefits paid in jurisdictions for which they have  responsibility for benefit integrity. For example, CMS spent about   $75 million for work performed by PSCs under 13 benefit integrity task  orders. The PSCs averaged about 3 cents for each $100 in paid claims in  the jurisdictions for which they conducted benefit integrity tasks.  However, the amount of MIP funding paid to the PSCs to conduct benefit  integrity activities varied from about 1 cent to about 7 cents for each $100  in claims paid. Further, our analysis showed no clear relationship between  funds provided to PSCs and their responsibilities for conducting benefit  integrity activities in jurisdictions with high incidences of fraudulent  Medicare billing. For example, one PSC received about 4 cents for  conducting benefit integrity work for each $100 in paid claims for benefit  integrity work in a jurisdiction that included Florida, which is at high risk  for fraudulent billing. In contrast, PSCs received the same level of funding  to conduct benefit integrity work in states at lower risk for fraudulent  billing, including Iowa, Montana, Pennsylvania, and Wyoming.\n\n\t\t\tAudit\u2019s Role Has Changed, but Funding Allocations May Not Be Optimal\n\nDuring the last decade, Medicare has significantly changed how it pays  institutional providers\u2014such as hospitals and nursing homes\u2014that it  audits. To align with the payment method changes, CMS has modified its  audit focus to items in the cost report that can affect payments under a  PPS. However, these audits can affect a much smaller proportion of  Medicare\u2019s payments under a PPS than audits of costs under the previous  payment method. Given the magnitude of the payment method change,  CMS has not evaluated whether funds within the audit activity should be  further reallocated to potentially generate greater savings to the Medicare  program by addressing the accuracy of reported costs that may be used to  determine payment increases.\nCMS distributes funds to its contractors to conduct certain tasks, such as  inputting data from; reviewing; and, if needed, auditing cost reports  submitted by its institutional providers in order to settle, or agree upon,  the reported costs. CMS\u2019s audit contractors are also required to conduct  wage index reviews and assist with intermediary hearings and appeals of  settled cost reports. For several years, CMS has had a backlog of cost  reports to settle, and the agency has made a priority of reducing the  backlog. Other priorities include more closely scrutinizing those providers  that are still paid based on their costs\u2014such as critical access hospitals\u2014 and conducting required audits.\nFor providers paid under a PPS, CMS has shifted its audit focus to the few  items that could affect a provider\u2019s payments if disallowed. These include  bad debt, payments for graduate medical training, and the number of low- income patients that hospitals serve. CMS has also shifted more audit  resources to hospitals because more items on their cost reports can affect  calculations of a provider\u2019s add-on payments.\nCMS does not know the amount of MIP funds that are associated with  audits of different types of providers or specific issues, such as bad debt.  However, in fiscal year 2004, CMS began to separately track some audit  costs, such as those for desk reviews, audits, and wage index reviews.  This provided some information on how audit funds were being spent.  According to CMS officials, tracking the costs of individual audits at a  provider or issue level would be difficult and costly because multiple  issues are audited at the same time and the complexity of individual audits  varies for the same provider type. Nevertheless, more detailed information  on audit costs\u2014such as at the provider level\u2014than CMS currently tracks  could provide it with a better understanding of the value of its current mix  of tasks, particularly if it could associate the costs with the savings from  the audits. This could provide CMS with information on whether it needs  to change the balance of funding for those tasks\u2014for example, whether it  should focus more attention on bad debt or other areas of the cost report  for specific types of providers.\nFurther, CMS\u2019s audit function continues to focus on verifying specific  aspects of the provider\u2019s cost report that affect its individual payment.  This type of audit generally addresses a small portion of providers\u2019  Medicare payments, while under a PPS, a much greater portion of the  payments are based on overall industry costs. Each year, MedPAC  advises the Congress on whether the Medicare PPS rates for institutional  providers should increase, decrease, or remain constant. However,  MedPAC generally does not have a set of audited cost reports that validate  the information it uses in its assessments of providers, such as hospitals\u2019  allocations of their costs. According to MedPAC, the current audit process  reveals little about the accuracy of the Medicare cost information. For  example, while CMS audits individual providers through full or partial  audits, it does not allocate funds to audit a panel of providers, such as  hospitals, which could provide a means to highlight areas where cost  reporting accuracy is problematic. Without accurate information, CMS  cannot ensure that payments to hospitals properly reflect their costs and  provide reliable information that can be a factor in determining whether  rates should change or remain constant.\nCMS might find it cost-effective to gather additional information because  audits have the potential to give the Congress better information on  hospitals\u2019 costs. For example, by law, CMS is required to periodically  conduct audits of end-stage renal disease (ESRD) facilities, which care for  patients who must rely on dialysis treatments to compensate for kidney  failure. CMS broadened its audit plan for these facilities to include a  review not only of bad debts, but also to validate the costs of a selected  number of items that are paid through PPS. CMS officials indicated that  their audits of these facilities generated only limited savings, usually  related to bad debts, so they did not consider these audits very valuable.  However, as a result of these audits, MedPAC officials stated in 2005 that  these facilities had a greater margin\u2014or ratio of Medicare payments to   costs\u2014than their cost reports suggested. This information was factored  into MedPAC\u2019s recommendation about the amount of payment increase  needed in calendar year 2007. Setting appropriate payment increases for  hospitals is potentially more important to Medicare than for ESRD  facilities because payments to participating inpatient hospitals  represented about $116 billion, or about 40 percent of Medicare\u2019s benefit  payments in fiscal year 2004. CMS officials agreed that gathering this  information might be valuable, but indicated that they did not currently  have sufficient funding to conduct this data validation in addition to their  current efforts funded as part of audit.\n\n\t\t\tCMS Used Savings Information to Optimize Allocation of Secondary Payer Funds\n\nIn contrast to provider education and audit, CMS collects information on  the relative savings from specific secondary payer functions and has used  this information to decide on funding allocations within the secondary  payer activity. CMS allocates funds to, and calculates savings for, about 16  secondary payer functions. Among these functions are (1) a data match  that helps identify instances when a Medicare beneficiary was covered by  other insurance and (2) the initial enrollment questionnaire, which gathers  insurance information on beneficiaries before they become eligible for  Medicare. Within secondary payer, for fiscal year 2005, savings for the 16  functions ranged from less than 1 percent to 49 percent of savings of over  $5 billion for all of the functions.\nCMS officials told us that they have used relative savings information for  secondary payer functions as one factor in determining whether to  increase, decrease, or terminate funding for the functions within this  activity. For example, according to CMS officials, in fiscal year 2005,  savings for one secondary payer function\u2014voluntary reporting of primary  payer information to CMS by health insurance companies\u2014increased by  about 65 percent over fiscal year 2004. Further, savings from this effort  continue to increase. CMS is planning to maintain or expand funding to it.  However, CMS officials said that after confirming their relatively low  savings, they had terminated certain other efforts to identify secondary  payer claims. The terminated efforts included (1) a second questionnaire  sent as follow-up to determine whether a beneficiary who is claiming  Medicare benefits for the first time has other health insurance that would  be responsible for paying the claim and (2) an effort to determine whether  certain trauma codes contained in a claim could indicate that another  insurer, such as worker\u2019s compensation, could be the primary payer.\n\n\tFuture Programmatic Changes Will Affect MIP Funding Allocations\n\nThe Medicare program is undergoing significant changes for which there is  little precedent. These include the addition of the new Part D prescription  drug benefit and the reform of Medicare contracting. Both will require  CMS to make new choices in how it should allocate its MIP funds to best  address its program integrity challenges. CMS\u2019s current allocation  approach\u2014which agency officials characterized as primarily relying on  previous fiscal year funding allocations for each activity, and to each  contractor, to determine current allocations\u2014will not be adequate to  address emerging program integrity risks and ongoing programmatic  changes. In addition, as contracting reform proceeds, CMS intends to  increase its use of MIP funds to reward contractors to encourage superior  performance. However, the usefulness of award payments as a tool to  encourage contractors to perform MIP tasks effectively depends on how  well CMS can develop, and consistently apply, performance measures to  gauge differences in the quality of performance.\n\n\t\tCMS\u2019s Current MIP Allocation Approach Is Not Adequate to Address Emerging Risks\n\nCMS\u2019s current allocation approach will not be adequate to address  Medicare\u2019s emerging program integrity risks related to the prescription  drug benefit. Over the next 10 years, total expenditures for the  prescription drug benefit, which was implemented in January 2006, are  projected to be about $978 billion, while total expenditures for the  Medicare program are projected to be about $6.1 trillion. CMS and others  have stated that the prescription drug benefit is at risk for significant fraud  and abuse. In December 2005, an assistant U.S. attorney noted that the  Medicare prescription drug benefit would be vulnerable to a host of fraud  and abuse schemes unless better detection systems are developed.  According to CMS, the prescription drug benefit may be vulnerable to  fraud and abuse in particular areas, including beneficiary eligibility, fraud  by pharmacies, and kickbacks designed to encourage certain drugs to be  included by the plans administering the benefit. To respond to these  challenges, CMS has selected eight private organizations, called Medicare  prescription drug integrity contractors (MEDIC), to support CMS\u2019s benefit  integrity and audit efforts.\nBecause the Medicare prescription drug benefit is in the early stages of  implementation, CMS does not yet have data to estimate the level of  improper payments or information to determine the level of program  integrity funds needed to address emerging vulnerabilities. As a result, it is  not clear whether, in the future, CMS will need to shift funds from  program integrity activities for Parts A and B to protect the Part D drug  benefit from potential fraud and abuse. For fiscal year 2006, $112 million  beyond the HIPAA limit of $720 million has been appropriated for CMS to  support program integrity activities. The President\u2019s Budget for fiscal year  2007 has also proposed additional funds for fiscal year 2007 and fiscal year  2008. CMS plans to use some of the additional funding provided under  DRA for fiscal year 2006 to support Part D program integrity efforts. For  example, CMS plans to spend $14 million over the next fiscal year to fund  efforts by MEDICs to protect the prescription drug benefit by performing  selected tasks, such as analyzing data to identify instances of potential  fraud and abuse. In addition, CMS plans to spend about $33 million on   Part D information technology systems to track data related to beneficiary  eligibility and to collect, maintain, and process information on Medicare  covered and noncovered drugs for Medicare beneficiaries participating in  Part D. See appendix IV for more information.\n\n\t\tMedicare Contracting Changes Will Affect MIP Allocations\n\nAnother significant programmatic change that will affect future MIP  funding allocations is Medicare contracting reform. MMA required CMS to  transfer all claims administration work, which includes selected program  integrity activities, to MACs by October 2011. CMS plans to transfer all  work to the MACs by July 2009\u2014about 2 years ahead of MMA\u2019s specified  time frame. Contracting reform will affect MIP funding allocations because  of (1) changes in contractors\u2019 responsibilities for program integrity  activities and their jurisdictions, (2) the potential for operational  efficiencies, and (3) increasing use of MIP funds for contractor award  payments.\nThe transition to MACs will change some contractors\u2019 program integrity  responsibilities and require reallocation of MIP funds among them. The  new MACs will be responsible for paying claims that were previously  processed by intermediaries and carriers, but CMS has decided that MACs  will not be performing all of the MIP activities that they previously  conducted. For example, PSCs performed medical reviews of claims in  some contractors\u2019 jurisdictions, but this activity will be performed by  almost all of the MACs in the future. Further, contractors\u2019 jurisdictions  will change as 23 MACs assume the work previously performed by a total  of 51 Medicare intermediaries and carriers, within the confines of 15 newly  designated geographic jurisdictions. The PSCs conducting benefit  integrity work will be aligned with the MACs in the 15 jurisdictions. In  some cases, one PSC may be aligned with more than one MAC jurisdiction.\nAccording to CMS officials, Medicare contracting reform will lead to  operational efficiencies and savings that would mostly be due to more  effective medical review. For example, CMS anticipates that greater  incentives for MACs to operate efficiently and adopt industry innovations  in the automated medical review of claims will result in total estimated  trust fund savings of $650 million for Medicare from fiscal year 2006 to  fiscal year 2011. Having program integrity activities operate more  effectively could give CMS additional flexibility to reallocate some funding  while achieving reductions in improperly paid claims. However, we have  not validated CMS\u2019s estimate, and in our August 2005 report on CMS\u2019s plan  for implementing Medicare contracting reform, we raised concerns about  the uncertainty of savings estimates, which were based on future  developments that are difficult to predict.\nAs part of contracting reform, CMS plans to increase its allocation of MIP  funds that are used as award payments to encourage superior performance  of program integrity activities by contractors. Award payments that are  tied to appropriate performance measures could encourage contractors to  conduct MIP activities effectively and introduce innovations, such as  developing new analytical approaches to enhance the medical review  process. Intermediaries and carriers, both of which conduct some program  integrity activities, are currently paid on the basis of their costs, generally  without financial incentives to encourage superior performance. In  contrast, CMS currently offers award payments to other types of  contractors that conduct program integrity activities, including four MACs  that were selected in January 2006, PSCs, the COB contractor, NSC, and  the DAC contractor. As early as 2009, or when all administrative work has  been transferred to MACs, CMS will be offering the opportunity to be  selected for award payments to all contractors that conduct program  integrity activities.\nThe usefulness of using MIP funding for award payments to encourage  contractors to conduct program integrity tasks effectively depends on how  well CMS can develop, and consistently apply, performance measures to  gauge differences in the quality of performance. In 2004, CMS conducted a  study to evaluate whether the agency could reduce improper payments by  using award payments for contractors to lower their paid claims error  rates, which represent the amount of claims contractors paid in error  compared with their total fee-for-service payments. According to CMS, the  outcome of that pilot was positive, and CMS plans to use award payments  in the future as part of its strategy for reducing improper payments.  However, as we reported in March 2006, CMS will need to refine its  measure of contractor-specific improper payments, which would enhance  its ability to evaluate their performance of medical review and provider  education activities. Further, even when CMS has developed measures to  assess the performance of contractors that conduct MIP activities, it has  not always effectively or consistently applied them. For example, the OIG  recently reviewed the extent and type of information provided in  evaluation reports on PSCs\u2019 performance in detecting and deterring fraud  and abuse. The OIG found that although the evaluation reports were used  as a basis to assess contractors\u2019 overall performance, they did not  consistently include quantitative information on the activities contractors  performed or their effectiveness.\n\n\tConclusions\n\nWe designated the Medicare program as high risk for fraud, waste, abuse,  and mismanagement in 1990, and the program remains so today. To  address this ongoing risk and reduce the program\u2019s billions of dollars in  improper payments, CMS must use Medicare\u2019s program integrity funding  as effectively as possible. Further, Medicare\u2019s susceptibility to fraud is  growing, as it addresses the challenges of adding a prescription drug  benefit to the program. Despite Medicare\u2019s increasing vulnerability, CMS  has generally not changed its allocation approach for MIP funding. In 2006,  a decade after MIP was established to support Medicare program integrity  activities, CMS officials state that the primary basis for their allocation of  funds is how they have been allocated in the past. However, programmatic  changes for Medicare\u2019s contractors and emerging risks for the Part D  prescription drug benefit suggest that CMS needs to modify its approach  for deciding on funding allocations for\u2014and within\u2014the five program  integrity activities. Also supporting the need for CMS to assess its current  allocation approach is that the agency\u2019s funding decisions do not routinely  take into account quantitative data or qualitative information on the  relative effectiveness of its five program integrity activities or contractors\u2019  vulnerabilities. Without considering information or data, CMS cannot  judge whether funds are being spent as effectively as possible or if they  should be reallocated. CMS is developing two new measures that may help  the agency evaluate the relative effectiveness of provider education and  the audit activity. Better information about MIP activities\u2019 effectiveness  should assist CMS in making more prudent management and funding  allocation decisions.\n\n\tRecommendation for Executive Action\n\nTo better ensure that MIP funds are appropriately allocated among and  within the five program integrity activities, we recommend that CMS  develop a method of allocating funds based on the effectiveness of its  program integrity activities, the contractors\u2019 workloads, and risk.\n\n\tAgency Comments and Our Evaluation\n\nIn its written comments on a draft of this report, CMS stated that it  generally agreed with our recommendation to develop a method of  allocating MIP funds based on the effectiveness of the agency\u2019s program  integrity activities, Medicare contractors\u2019 workloads, and risk. However,  the agency expressed concern that the report appeared to emphasize the  use of ROI, a quantitative measure that tracks dollars saved in relation to  dollars spent, as a way to allocate funds. CMS stated this quantitative  measure can be an indicator of effectiveness, but noted that such a  measure cannot serve as the sole basis for informing funding decisions.  The agency stated that some of its MIP activities had benefits that could  not be easily quantified. CMS agreed on the value of allocating funds based  on risk and provided information on programmatic changes that would  help it do so. The agency also noted the efforts it had recently made to  strengthen program integrity.\nCMS expressed concern about our discussion in the draft report  concerning the use of ROI as a way to quantitatively measure effectiveness  and to allocate MIP funds. CMS stated that the agency cannot provide  funding based exclusively on an ROI because some activities, including  benefit integrity, do not lend themselves to an ROI measurement and  others, such as audit, are governed by statutory requirements. CMS also  stated that in allocating MIP funds, it is critical that it consider factors  other than ROI, including historical funding, because MIP funding has not  increased since 2003.\nOur report indicates that an ROI is an important factor that should be  considered in allocating funds, but cannot be the sole consideration. Our  conclusions reflect our support of an approach that takes into account the  qualitative benefits of program integrity activities. Our report discusses  agency officials\u2019 views on the difficulty of developing quantitative  measures for the benefit integrity activity. We also provide information on  CMS officials\u2019 qualitative assessments of the positive impact of benefit  integrity and provider education. For example, our report notes that  according to CMS officials, these benefits include discouraging entities  that may be considering defrauding the Medicare program and helping to  ensure proper Medicare payments. Both quantitative and qualitative  assessments of effectiveness\u2014to the extent they can be developed\u2014could  help CMS determine whether MIP funds are being wisely invested or if  they should be reallocated.\nCMS also commented on the allocation of MIP funds to Medicare  contractors based on workload and risk. CMS noted that contracting  reform and the introduction of MACs will result in contractors\u2019 workloads  being more evenly distributed. In addition, CMS noted that it is developing  award fee measures for contractors\u2019 medical review activities, including  establishing performance goals for the Comprehensive Error Rate Testing  program contractor-specific error rate. CMS agreed with us that risk is a  factor that should be considered in allocating funds.\nCMS stated that it is committed to identifying and investigating better  approaches to allocate resources to support critical agency functions,  including using its new contracting authority to introduce incentives for  Medicare fee-for-service claims processing contracts and consolidating  Medicare secondary payer activities. CMS also noted that it is using state- of-the-art systems and expertise to aggressively fight waste and abuse in  the program, continues to work closely with its contractors to help ensure  that providers receive appropriate education and guidance in areas where  billing problems have been identified, and has expanded oversight of the  new Medicare Part D prescription drug benefit. In addition, CMS discussed  recent program integrity efforts and successes, including reducing the  number of improper fee-for-service Medicare payments and addressing  fraud across all provider types by coordinating the activities of CMS, law  enforcement, and Medicare contactors in Los Angeles, California, and  Miami, Florida.\nWe have reprinted CMS\u2019s letter in appendix V. CMS also provided us with  technical comments, which we incorporated in the report where  appropriate.\nAs agreed with your office, unless you publicly announce its contents  earlier, we plan no further distribution of this report until 30 days after its  date. At that time, we will send copies to the Secretary of HHS, the  Administrator of CMS, appropriate congressional committees, and other  interested parties. We will also make copies available to others upon  request. This report will also be available at no charge on GAO\u2019s Web site  at http:\/\/www.gao.gov.\nIf you or your staff have any questions about this report, please contact me  at (312) 220-7600 or aronovitzl@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 major contributions to this report are  Sheila K. Avruch, Assistant Director; Hazel Bailey; Krister Friday;   Sandra D. Gove; and Craig Winslow.\n\nAppendix I: Objectives, Scope, and Methodology\n\nTo provide information on the amount of funds allocated to the five  Medicare Integrity Program (MIP) activities over time, we interviewed  officials from the Centers for Medicare & Medicaid Services (CMS). We  obtained information concerning MIP funding allocations for audit,  medical review, secondary payer, benefit integrity, and provider education  for fiscal years 1997 through 2005. We also analyzed allocations within  these activities. Further, we obtained and analyzed related financial  information, including CMS\u2019s planned and actual expenditures, savings,  and return on investment (ROI) calculations for fiscal year 1997 through  fiscal year 2005; CMS financial reports; and presidential and Department of  Health and Human Service (HHS) budget proposals for fiscal years 2006  and 2007. Because most MIP expenditures are for activities related to the  Medicare fee-for-service plan, our analyses focused on those expenditures.  We reviewed relevant legislation, such as the Health Insurance Portability  and Accountability Act of 1996 (HIPAA); the Medicare Prescription Drug,  Improvement, and Modernization Act of 2003 (MMA); and the Deficit  Reduction Act of 2005 (DRA). We reviewed pertinent reports and  congressional testimony, including our own and those of CMS and the  HHS Office of Inspector General (OIG), related to program integrity  requirements.\nTo examine the approach that CMS uses to allocate MIP funds, we  interviewed CMS officials regarding factors they consider when allocating  MIP funds. We reviewed related documentation provided to us by CMS,  including budget development guidelines; manuals, such as the Financial  Management Manual; operating plans; and selected workload data. We  also reviewed information on individual projects, such as information  technology systems. We also reviewed pertinent GAO reports and  testimony and Medicare Payment Advisory Commission reports. We did  not independently examine the internal and automated data processing  controls for CMS systems from which we obtained data used in our  analyses. CMS subjects its data to limited reviews and periodic  examinations and relies on the data obtained from these systems as  evidence of Medicare expenditures and to support CMS\u2019s management and  budgetary decisions. Therefore, we considered these data to be reliable for  the purposes of our review.\nIn addition, we interviewed CMS officials regarding changes in the  Medicare program that may affect MIP funding allocations, including  CMS\u2019s plans to support activities to detect fraud and improper billing for  the new Part D prescription drug benefit and MIP activities to be  performed by contractors in the future. We also interviewed CMS officials  concerning performance measures and evaluations of contractors. We  reviewed related documentation, including the statement of work for the  Medicare prescription drug integrity contractors; plans for Medicare  contracting reform; policies and procedures associated with CMS\u2019s  measurement of contractor performance; standards and performance  measures, such as the Comprehensive Error Rate Testing program; various  manuals, including the Medicare Program Integrity Manual; and an OIG  report on performance evaluations of program safeguard contractors  (PSC). We also reviewed CMS\u2019s evaluations of contractor performance.  We performed our work from August 2005 through August 2006 in  accordance with generally accepted government auditing standards.\n\nAppendix II: Information on MIP Funding, Expenditures, and ROI\n\nThe following tables contain details on MIP funding, expenditures,  allocations, and ROI. Table 2 shows MIP funding ranges under HIPAA.  Table 3 shows the amounts of MIP expenditures allocated to each of the  program integrity activities. Table 4 shows the percentage of MIP funds  allocated to the program integrity activities. Table 5 shows the ROI for  three of the program integrity activities.\n\nAppendix III: Key Tasks Performed by Contractors That Conduct MIP Activities\n\n\tMedicare contractors conducting activity\n\nHospitals, nursing homes, home health agencies, and other institutional  providers that are\u2014or have been\u2014 paid on a cost reimbursement basis  submit cost reports to CMS. Cost reports provide a detailed accounting of  what costs have been incurred, what costs the provider is charging to the  Medicare program, and how such costs are accounted for by the  provider.\nContractors review all or part of the cost report to assess whether costs  have been properly allocated and charged to the Medicare program.\nContractors determine if the cost report is acceptable or if it needs further  review.\nIn some instances, contractors may conduct on-site cost report audits,  which include the review of financial records and related documentation  supporting costs and charges.\nContractors identify billing errors made by providers through analysis of  claims data; take action to prevent errors, address identified errors, or  both; and publish local coverage policies to provide guidance to the public  and medical community concerning items and services that are eligible  for Medicare payment.\nMost medical reviews do not require a manual review of medical records.\nOften contactors conduct medical reviews simply by examining the claim  itself, usually using automated methods.\nCoordination of benefits (COB)  contractor, intermediaries and  carriers, and Medicare  administrative contractors  (MAC)\nThe COB contractor collects, manages, and maintains information  regarding health insurance coverage for Medicare beneficiaries.\nTo gather information to properly adjudicate submitted claims, the COB  contractor sends questionnaires to newly enrolled Medicare beneficiaries  and employers to solicit information about beneficiaries\u2019 health insurance  coverage.\nThe COB contractor also collects secondary payer data from providers,  insurers, attorneys, and some state agencies.\nThe COB contractor uses data match programs to identify claims that  should have been paid by another insurer. When information indicates  that a beneficiary has other health insurance, the COB contractor initiates  a secondary payer claims investigation.\nIntermediaries and carriers also conduct secondary payer operations,  including prepayment activities in conjunction with the COB contractor,  and they recover erroneous secondary payer payments.\nContractors are tasked with preventing, detecting, and deterring Medicare  fraud.\nPSCs conduct medical reviews to support fraud investigations, analyze  data to support medical reviews, process fraud complaints, develop fraud  cases, conduct provider education related to fraud activities, and support  law enforcement entities.\nOnce a case is developed, PSCs refer it to the OIG or to law enforcement  for prosecution.\nNSC reviews and processes applications from organizations and  individuals seeking to become suppliers of medical equipment and  supplies in the Medicare program.\nNSC verifies suppliers\u2019 application information; conducts on-site visits to  the prospective suppliers; issues supplier authorization numbers, which  allow suppliers to bill Medicare; and maintains a central data repository of  information concerning suppliers.\nNSC also periodically reenrolls active suppliers and uses data to assist  with fraud and abuse research.\nThe DAC contractor conducts ongoing data analysis and reporting of  trends related to supplier billing for medical equipment and supplies and  provides ongoing feedback to the PSCs.\nWhen billing problems are identified through medical reviews, contractors  take a variety of steps to educate providers about Medicare coverage  policies, billing practices, and issues related to fraud and abuse.\nContractors may conduct group training sessions, including seminars and  workshops; send informational letters to providers; arrange for  teleconferences; conduct site visits; and provide information on their Web  sites.\n\nAppendix IV: CMS\u2019s Planned Spending of $100 Million Provided by DRA\n\nFor fiscal year 2006, DRA provided $112 million in MIP funds beyond the  annual HIPAA limit of $720 million. Of this amount, DRA specified that   $12 million was for the Medi-Medi program and $100 million was for MIP  in general. Table 6 provides information on CMS\u2019s planned spending of  $100 million in general MIP funds provided by DRA, including spending  related to the Part D prescription drug benefit.\n\nAppendix V: Comments from the Centers for Medicare & Medicaid Services","output":"Why GAO Did This Study\n\nSince 1990, GAO has considered Medicare at high risk for fraud, waste, abuse, and mismanagement. The Medicare Integrity Program (MIP) provides funds to the Centers for Medicare & Medicaid Services (CMS--the agency that administers Medicare--to safeguard over $300 billion in program payments made on behalf of its beneficiaries. CMS conducts five program integrity activities: audits; medical reviews of claims; determinations of whether Medicare or other insurance sources have primary responsibility for payment, called secondary payer; benefit integrity to address potential fraud cases; and provider education. In this report, GAO determined (1) the amount of MIP funds that CMS has allocated to the five program integrity activities over time, (2) the approach that CMS uses to allocate MIP funds, and (3) how major changes in the Medicare program may affect MIP funding allocations.\n\nWhat GAO Found\n\nFor fiscal years 1997 through 2005, CMS's MIP expenditures generally increased for each of the five program integrity activities, but the amount of the increase differed by activity. Since fiscal year 1997, provider education has had the largest percentage increase in funding--about 590 percent, while audit and medical review had the largest amounts of funding allocated. In fiscal year 2006, funding for MIP will increase further to $832 million, which includes $112 million in funds that CMS plans to use, in part, to address potential fraud and abuse in the new Medicare prescription drug benefit. CMS officials told us that they have allocated MIP funds to the five program integrity activities based primarily on past allocation levels. Although CMS has quantitative measures of effectiveness for two of its activities--the savings that medical review and secondary payer generate compared to their costs--it does not have a means to determine the effectiveness of each of the five activities relative to the others to aid it in allocating funds. Further, CMS has generally not assessed whether MIP funds are distributed to the contractors conducting each program integrity activity to provide the greatest benefit to Medicare. Because of significant programmatic changes, such as the implementation of the Medicare prescription drug benefit and competitive selection of contractors responsible for claims administration and program integrity activities, the agency's current approach will not be adequate for making future allocation decisions. For example, CMS will need to allocate funds for program integrity activities to address emerging vulnerabilities that could affect the Medicare prescription drug benefit. Further, through contracting reform, CMS will task new contractors with performing a different mix of program integrity activities. However, the agency's funding approach is not geared to target MIP resources to the activities with the greatest impact on the program and to ensure that the contractors have funding commensurate with their relative workloads and risk of making improper payments."}
{"id":"crs_RL31026","pid":"crs_RL31026_0","input":"\tIntroduction\n\nThere are two basic antitrust laws in the United States\u2014the Sherman Act and the Clayton Act ; both are enforceable either by the Antitrust Division of the Department of Justice, the Federal Trade Commission or private persons alleging economic injury caused by violation of either of them. In addition, the Federal Trade Commission (FTC) Act and the Robinson-Patman Act may also be utilized by the Commission and private persons (only the Commission, however\u2014i.e., neither the Antitrust Division nor private persons\u2014may enforce the FTC Act ). Together, they spell out the conduct and activities prohibited in economic, market transactions. There are also some statutes directed to specific industries or types of transactions which indicate the likely antitrust consequences for economic conduct in those areas.\nThis Report briefly summarizes (1) the primary United States antitrust statutes, and (2) some of the activities which are generally considered to be violations of those laws. There is also some reference to the prohibition against unfair competition and the \"unfairness\" jurisdiction of the Federal Trade Commission (FTC). There is not, however, any discussion of the extraterritorial reach of the United States antitrust laws (save the cursory material in footnote 4 ), a subject which is beyond the scope of this brief Report. Further, the laws whose descriptions follow do not constitute all of the statutes which may be applicable to, or implicated in antitrust issues, but rather, are those which are most often utilized. In reading the information presented, readers should bear in mind that the antitrust laws are concerned with the functioning of the marketplace\u2014i.e. competition and not the protection of any individual competitor .\n\n\tThe Primary Laws\n\n\t\tSherman Act (15 U.S.C. \u00a7\u00a7 1-7)\n\n\t\t\tSection 1 (15 U.S.C. \u00a7 1)\n\nProhibits contracts or conspiracies in restraint of trade, which phrase has been, since at least 1911, judicially interpreted as meaning unreasonable restraints of trade.\n\n\t\t\tSection 2 (15 U.S.C. \u00a7 2)\n\nProhibits monopolization or attempted monopolization; it is sometimes used in conjunction with section 7 of the Clayton Act\n(15 U.S.C. \u00a718), which prohibits mergers or acquisitions which may tend to lessen competition.\nViolation of either provision is a felony subject to fines of up to $1 million for individuals and $100 million for corporations; or imprisonment of up to 10 years; or both.\n\n\t\tClayton Act (15 U.S.C. \u00a7\u00a7 12-27)\n\n\t\t\tSection 4 (15 U.S.C. \u00a7 15)\n\nContains the damage provisions of the antitrust laws. 15 U.S.C. \u00a715(a) permits \"any person ... injured in his business or property by reason of anything forbidden in the antitrust laws [to] sue therefor [and to] recover threefold the damages by him sustained, and the cost of suit, including a reasonable attorney's fee.\" After the Supreme Court interpreted the words \"any person\" to include foreign governments, the provision was amended in 1982 to restrict foreign states' recovery of monetary antitrust damages to \"actual damages sustained\" plus costs and reasonable attorneys' fees (15 U.S.C. \u00a715(b)). The limitation to actual damages was also applicable, until late 1990, to monetary injuries sustained by the United States (15 U.S.C. \u00a715a)); that limitation was removed by the 101 st Congress in H.R. 29 ( P.L. 101-588 ), following much hearing testimony to the effect that the damage limitation made the federal government the \"antitrust victim of choice.\" Treble-damage recovery is now available to the United States, as it is to private antitrust plaintiffs pursuant to 15 U.S.C. \u00a715.\n\n\t\t\tSection 7 (15 U.S.C. \u00a7 18)\n\nIs probably the most prominent, substantive provision of the Clayton Act . Whereas the Sherman Act was enacted to prohibit concerted activity which actually restrains trade, this provision is directed at preventing activity in its incipiency which may tend to restrain trade. The Merger Guidelines issued by the Department of Justice offer an indication of the ways in which mergers and acquisitions will be analyzed by the Antitrust Division and the FTC; although they are not binding upon the courts, they are considered to be persuasive.\n\n\t\t\tSection 7A (15 U.S.C. \u00a7 18a)\n\nContains the \"premerger notification\" provisions, added to the Clayton Act in 1976 to allow the antitrust enforcement agencies the opportunity to examine potential mergers\/acquisitions prior to their consummation. It is enforced by both the Department of Justice and the FTC. As originally enacted, the provision required notification, with certain, enumerated exceptions, of all merger or acquisition transactions by persons in or affecting commerce in which either party had nets sales or assets of $10 million and the other party had net sales or assets of $100 million (15 U.S.C. \u00a718a(a)). The reviewing agency had 30 days from the time of notification (15 days in the case of tender offers) to review the proposed transaction, which could not be consummated during that time unless the reviewing agency granted an early termination of the waiting period (15 U.S.C.\u00a718a(b)). Prior to the conclusion of that time, the reviewing agency was authorized to seek a second round of information, which extended the original waiting period by 20 days (10 days in the case of a tender offer) (15 U.S.C. \u00a718a(e)). The focus of the current premerger notification provision is more clearly directed at the consequences of a merger\/acquisition transaction: notification must occur when the transaction will result in the acquiring party's holding assets or voting securities (1) in excess of $200 million, or (2) between $50 million and $200 million plus the assets or voting securities of the acquired party (either a $10 million or $100 million entity being acquired, respectively, by a $100 million or $10 million entity). The current provision also extends, for merger transactions, the period for review of material submitted in response to a second request for information\u2014from 20 to 30 days; and establishes, based on the size of the proposed transaction, a sliding scale of fees required in order for premerger review to begin (the fee previously was $45,000 irrespective of the size of the transaction; the new scale begins at $45,000). The penalty for failure to comply with the premerger notification statute remains at $10,000 \"for each day during which [a person required to report] is in violation of\" the provision.\n\n\t\tRobinson-Patman Act (15 U.S.C. \u00a7\u00a7 13, 21a, 13a, 13b)\n\nBroadly, the Robinson-Patman Act (which is not, \"technically,\" considered an antitrust statute, although its provisions amended the Clayton Act ) prohibits price discrimination: it mandates that two or more purchasers of a commodity from the same seller must be charged identical prices. There are exceptions to the mandate, however, such that the act may be seen to prohibit only unjustified price differentiation. There are also jurisdictional limits to the act, the courts having interpreted it so that all the sales in question must be in interstate commerce. Robinson-Patman applies only to sales of \"commodities of like grade and quality\" (15 U.S.C. \u00a713(a)) and not to services; and only to goods \"sold for use, consumption, or resale within the United States\" (15 U.S.C. \u00a713(a)), but not to goods destined for export.\nNonprofit institutions (e.g., schools, colleges, libraries, churches, hospitals) are not subject to the prohibitions of the Robinson-Patman Act to the extent that their purchases are made for \"their own use\" (15 U.S.C. \u00a713c).\n\n\t\tFederal Trade Commission Act (15 U.S.C. \u00a7\u00a7 41 et seq.)\n\nSection 5 (15 U.S.C. \u00a745) is the operative, substantive provision of the FTC Act . It prohibits \"unfair methods of competition\" and \"unfair or deceptive acts\" in commerce (15 U.S.C. \u00a745(a)(1)). The provision applies to \"unfair methods of competition involving commerce with foreign nations (other than import commerce),\" however, only to the extent that such \"unfair\" conduct has a \"direct, substantial, and reasonably foreseeable effect\" on the foreign commerce in question (15 U.S.C. \u00a745(a)(3)).\n\n\tOther Applicable Laws\n\n\t\tNational Cooperative Research Act of 1984 (15 U.S.C. \u00a7\u00a7 4301-05)\n\nThis legislation was enacted in 1984 to meet the perceived problem of a lack of joint research and development projects (believed to adversely impact the United States' international competitiveness) by business, which was said to fear (1) government prosecution of joint ventures which could be viewed as anticompetitive, and (2) private antitrust treble-damage actions. 15 U.S.C. \u00a74302 states clearly that research and development joint ventures will be examined individually and analyzed under a \"reasonableness\" standard; moreover, provided that a joint venture has notified the Department of Justice and the FTC as to its intended existence and activities, litigants claiming antitrust injury by reason of the venture's \"notified\" conduct may recover only actual damages (15 U.S.C. \u00a74303(a)), despite the general antitrust damage provisions (15 U.S.C. \u00a715, supra, pp. 2-3). The statute was amended in 1993 ( P.L. 103-42 ) to include production joint ventures.\n\n\t\tExport Trading Company Act (15 U.S.C. \u00a7\u00a7 4001-21)\n\nExport certificates of review are available to persons wishing to act collectively for the purpose of exporting goods or services from the United States. If the Secretary of Commerce, \"with the concurrence of the Attorney General,\" determines that the association will not likely result in a \"substantial lessening of competition or restraint of trade within the United States nor a substantial restraint of the export trade of any competitor of the applicant,\" and issues a certificate, the recipient of the certificate is immune to any civil or criminal antitrust action based on the conduct covered by the certificate (15 U.S.C. \u00a7\u00a74013, 4016).\n\n\t\tMcCarran-Ferguson Act (15 U.S.C. \u00a7\u00a71011-15)\n\nPursuant to the act, the \"business of insurance\" is exempt from the prohibitions of the antitrust laws to the extent such business is regulated by state laws. The Supreme Court has indicated on several occasions that \"the business of insurance \" is not synonymous with \"the business of insurers .\"\n\n\t\tSoft Drink Interbrand Competition Act (15 U.S.C. \u00a7\u00a73591-03)\n\nEnacted in 1980 to permit the owners of trademarked soft drinks to grant exclusive territorial franchises to, e.g., bottlers or distributors of those products, the act renders contracts or agreements containing the exclusive rights not subject to the antitrust laws provided that the \"product is in substantial and effective competition with other products of the same general class\" (15 U.S.C. \u00a73501). Outright price-fixing agreements or other horizontal restraints of trade and group boycotts remain subject to the antitrust laws (15 U.S.C. \u00a73502).\n\n\t\tLocal Government Antitrust Act of 1984 (15 U.S.C. \u00a7\u00a734, 35)\n\nThe statute prohibits the recovery of monetary damages (injunctive relief is permitted) from \"any local government, or official or employee thereof acting in an official capacity\" by anyone who challenges the antitrust legality of a local government's conduct.\n\n\tCharacterization of Antitrust Offenses\n\n\t\tPer Se\n\nPer se offenses are those for which there is no justification. As the Supreme Court has expressed it:\n... there are certain agreements or practices which because of their pernicious effect on competition and lack of any redeeming virtue are conclusively presumed to be unreasonable and therefore illegal without elaborate inquiry as to the precise harm they have caused or the business excuse for their use.\nThe kinds of activities which are most generally found to be per se antitrust offenses, and are most likely to be criminally prosecuted, include:\n1. Horizontal price fixing 2. Vertical price fixing (sometimes referred to as \"resale pricemaintenance\") 3. Bid rigging 4. Market division (customer or territorial allocation) 5. Boycotts (concerted refusals to deal) 6. Tying arrangements (\"If you want X, you must also take Y\")\nAll of the per se offenses, as concerted activity in restraint of trade, are violations of section 1 of the Sherman Act .\n\n\t\tRule of Reason\n\nAny antitrust-violative conduct which does not consist of a per se offense is judged by the reasonableness of the activity. Even when an otherwise unlawful action is found, if it is also determined that the action is ancillary to some lawful activity, and that its procompetitive consequences outweigh its anticompetitive effects, the action may well be found to be a not unreasonable violation of the antitrust laws. In other words, the rule of reason involves a balancing test.\nThere is not, for example, any per se rule against monopolization, or attempted monopolization. There is no \"no fault\" monopolization, i.e., no situation exists in which there is some \"magic\" number beyond which a firm may not increase its size or market share; the determining factors will include the means by which those numbers were reached\u2014in other words, the reasonableness of the actions which produced the final entity.\nMost rule of reason offenses involve a single entity, and do not usually violate section 1 of the Sherman Act .","output":"This Report briefly summarizes (1) the primary United States antitrust statutes, and (2) some of the activities which are generally considered to be violations of those laws. There is also some reference to the prohibition against unfair competition and the \"unfairness\" jurisdiction of the Federal Trade Commission (FTC). The laws discussed do not constitute all of the statutes which may be applicable to, or implicated in antitrust issues, but rather, are those which are most often utilized."}
{"id":"crs_RL34121","pid":"crs_RL34121_0","input":"Child welfare services are intended to prevent the abuse or neglect of children; to ensure that children have safe, permanent homes; and to promote the well-being of children and their families. Most federal child welfare programs are administered by the Children's Bureau, at the Administration on Children, Youth and Families (ACYF), Administration for Children and Families (ACF), within the U.S. Department of Health and Human Services (HHS). Funding for ACF programs is primarily provided in the annual appropriations bill for the Departments of Labor, HHS, and Education. Several child welfare programs authorized by the Victims of Child Abuse Act are administered by the Office of Justice Programs (OJP) within the Department of Justice (DOJ). Their funding is provided in the annual appropriations bill for the Departments of Commerce and Justice. \nThis report begins with an overview of the purposes for which federal child welfare funds are appropriated. It discusses FY2013 appropriations for those programs, including the effect of the automatic spending cuts, known as sequestration. Additionally, it reviews the President's FY2013 budget request for child welfare programs (first presented in February 2012). This report does not discuss the President's FY2014 budget request for child welfare.\n\n\tDedicated Child Welfare Funding by Purpose\n\nBy far, the largest share of dedicated federal child welfare funding (roughly 88% in recent years) is provided to states to assist them in supporting, or otherwise administering aid to, children who have been removed from their birth families primarily due to abuse or neglect. This includes funding to support children in foster care, to assist children who leave foster care permanently to live with adoptive families or with a legal guardian, and for services to youth who have aged out of foster care or are expected to age out of foster care. Remaining funds (roughly 12%) support child welfare-related services to children and their families, including children living in their own homes and those in foster care, or are provided to support child welfare-related research and demonstration projects. \n\n\t\tFoster Care, Adoption Assistance, and Kinship Guardianship Assistance\n\nUnder Title IV-E of the Social Security Act, funds are provided to support eligible children in foster care as well as those who leave foster care for permanent homes via adoption or guardianship. Funding under the Title IV-E program is provided to eligible states on a mandatory and open-ended basis, which means the federal government reimburses states for a part of the cost of providing this support (and related child placement, training, data collection, and other program administration costs) for every child meeting the federal Title IV-E eligibility criteria. As discussed below (see \" Foster Care \"), the overall number of children in foster care, as well as the number of those children who are eligible for Title IV-E support, has been in decline for more than a decade. By contrast, the number of Title IV-E-eligible children leaving foster care for permanent adoptive homes grew significantly during most of that same decade. Accordingly, the share of funding needed to reimburse states for support of children in foster care has been in decline\u2014although it still represents more than half of all federal dedicated child welfare funds\u2014while the share provided to support children in permanent adoptive or guardianship homes has increased to nearly one-third of the total dedicated child welfare funding. (See Figure 1 .)\n\n\t\tServices for Youth in, or Formerly in, Foster Care\n\nSeparately, all states receive formula grant funding under the Chafee Foster Care Independence Program (and related Education and Training Vouchers) to provide services and other support to youth who \"age out\" (or are expected to age out) of foster care without being placed in a permanent family. In contrast to the overall decline in the number of children who are in foster care, the number of children who age out of foster care without placement in a permanent home (sometimes called \"emancipating\" from care) grew from roughly 23,000 during FY2004 to more than 29,000 during FY2008 and FY2009 and remained above 26,000 for FY2011 (the most recent year for which national data are available). During that time, the annual funding amount dedicated to providing services to these youth has remained largely unchanged at roughly 2% of overall federal funding provided for child welfare purposes. (See Figure 1 .)\n\n\t\tServices for Children and Families\n\nThe share of dedicated federal child welfare funds provided, by formula, to all states for child welfare-related services to children and families has remained at around 9% to 10%. These include services or activities to strengthen families to prevent child abuse and neglect or to prevent placement of children in foster care; provide and improve screening, investigation, or other responses to child abuse and neglect allegations; enable children in foster care to be reunited with their families; promote adoption and provide adoption support services; improve monthly caseworker visits to children in foster care; and improve court handling of child welfare proceedings. Formula grant funds to states for these purposes are authorized under the Child Abuse Prevention and Treatment Act (CAPTA State Grants and Community-Based Grants), the Children's Justice Act, and Title IV-B of the Social Security Act (including all funding for the Stephanie Tubbs Jones Child Welfare Services program and most, but not all, funding under the Promoting Safe and Stable Families program). (See Figure 1 .)\n\n\t\tResearch, Other Grants, and Incentive Funds\n\nFinally, in recent years, federal child welfare incentive funding for states and competitive child welfare-related grants to eligible entities (including public child welfare agencies, national or community-based service agencies, and research organizations) have risen from roughly 2% of all federal child welfare funding to about 3%. Incentive funds are currently provided to encourage adoptions out of foster care. Competitive grant funds are used to provide project-based child and family services, conduct relevant research, or provide related technical assistance. Funds included in this category of child welfare spending are authorized under (1) Title IV-B of the Social Security Act (i.e., funding for Child Welfare, Research, Training and Demonstrations; Family Connection Grants; certain competitively awarded programs or grants included in the Promoting Safe and Stable Families Program ; and the National Survey of Child and Adolescent Well-Being (NSCAW)); (2) Title IV-E of the Social Security Act (i.e., Adoption Incentives and Tribal technical assistance and IV-E Implementation grants); (3) the Victims of Child Abuse Act (i.e., Court-Appointed Special Advocates, Children's Advocacy Centers, and Child Abuse Training for Judges and Judicial Practitioner), as well as (4) additional acts authorizing funds for Adoption Opportunities and Abandoned Infants Assistance. (See Figure 1 .)\n\n\t\tComposition of Funding by Purpose\n\n Figure 1 shows changes in the share of dedicated child welfare funding appropriated by general category across FY2004, FY2008, FY2012, and for FY2013 (after application of sequestration). Funding is shown in nominal dollars, which means it has not been adjusted to account for inflation. Funding amounts shown for the Title IV-E program include the definite budget authority provided, including any subsequently lapsed funding (i.e., funding authority that was not needed to pay the federal share of Title IV-E costs and thus was returned to the federal treasury). \nThe share of dedicated child welfare funding appropriated to support children once they have been removed from their birth families\u2014whether in foster care, in permanent adoptive or guardianship homes, or via services to youth in or formerly in foster care\u2014held steady at roughly 88% across all of those years. However, the overall share of federal child welfare funding provided for foster care declined across those years by 10 percentage points (64% to 54%), while the funding provided for children moving to permanent (primarily) adoptive homes increased by a corresponding amount (22% to 32%). The share of total dedicated child welfare funds available for all other purposes, including for services to prevent children's entry to foster care, remained relatively static, while the dollar amount made available for those purposes declined between FY2012 and FY2013. \n\n\t\tFY2013 Appropriations for Child Welfare Programs\n\nThe President signed the Consolidated and Further Continuing Appropriations Act, 2013 ( P.L. 113-6 ) on March 26, 2013. The law provides full-year funding for federal programs for FY2013. The House first passed the full-year funding legislation ( H.R. 933 ) on March 6, 2013. The first House version of the bill was amended and passed by the Senate on March 20, 2013, and one day later (March 21), the House agreed to the bill as amended by the Senate. \nP.L. 113-6 provided full-year FY2013 funding for federal programs at $7.925 billion. However, the final level of child welfare funding available for FY2013 is affected by both an across-the-board rescission (0.2%) determined necessary to meet the statutory cap on discretionary spending and by the March 1 sequestration order. The sequestration order required a 5.0% reduction in funding for all child welfare programs with discretionary funding and a 5.1% reduction in the limited number of child welfare programs that were subject to sequestration and receive mandatory funding. Those reductions lowered total FY2013 child welfare funding to $7.868\u00a0billion. \n\n\t\tChild Welfare Programs and Sequestration\n\nMost federal child welfare programs are subject to sequestration, which means they are non-exempt. This includes all but one of the programs included in the yellow and orange portions shown at the top of Figure 1 . These programs provide funding for formula grants for child and family services under Title IV-B of the Social Security Act (Stephanie Tubbs Jones Child Welfare Services Program and the Promoting Safe and Stable Families Program) and under CAPTA, as well as for competitive funding for research, evaluation, and incentives. Additionally, Education and Training Vouchers (ETVs) for youth aging out of foster care were subject to sequestration. ETV funding represents about one-fourth of the total shown in the turquoise portion of Figure 1 .\nHowever, most federal child welfare funding is provided under the Title IV-E Foster Care and Permanency account and is exempt from sequestration. This includes all of the funding shown in the dark and light blue portions of Figure 1 as provided for foster care, adoption, and guardianship ($6.863 billion in FY2012 funding versus $6.777 billion in FY2013 funding). It also includes the largest part (three-fourths) of the funding provided for services to youth aging out of foster care, which is shown in the turquoise portion of Figure 1 .\nFor a complete list of child welfare programs by kind of funding (discretionary or mandatory), and by whether or not they are subject to sequestration (exempt or non-exempt), see Table 2 .\n\n\t\tEarlier FY2013 Appropriations Laws or Bills\n\n\t\t\tTemporary FY2013 Funding Measure\n\nCongress did not act to provide final FY2013 appropriations levels before the start of the fiscal year on October 1, 2012. Initially, FY2013 federal funding was provided, on a temporary basis, under the terms of a continuing resolution ( P.L. 112-175 ). Under that measure, enacted on September 28, 2012, programs receiving discretionary funding were generally supported at the same level they received in FY2012, plus 0.612%, and programs with mandatory funding were maintained at the level of funding authorized under current law. This temporary funding measure expired on March 27, 2013, which is the date the final FY2013 funding measure was enacted ( P.L. 113-6 ). \n\n\t\t\tFull-Year Measures Considered During the 112th Congress\n\nAs noted above, nearly all the child welfare programs discussed in this report are administered within HHS and are funded via the appropriations made as part of the Labor-HHS-Education appropriations bill. However, neither the House nor the Senate completed action on full-year Labor-HHS-Education appropriations legislation for FY2013 before the close of the 112 th \u00a0Congress. In June 2012, the Senate Appropriations Committee approved a Labor-HHS-Education measure that would have provided for full-year funding for FY2013 ( S. 3295 , S.Rept. 112-176 ). Separately, the House Appropriations Subcommittee for Labor-HHS-Education approved a draft bill for FY2013 in July 2012, but no further action was taken on this measure by the full House Appropriations Committee. In the 113 th Congress, the Senate did consider an amendment ( S.Amdt. 53 ) that would have largely incorporated the Senate Appropriations Committee-approved measure into the final FY2013 funding bill. However, this amendment was not approved and thus did not become a part of the final FY2013 funding measure ( P.L. 113-6 ).\nThree relatively small child welfare programs are authorized by the Victims of Child Abuse Act and administered by the Department of Justice. The House passed legislation ( H.R. 5326 , H.Rept. 112-463 ) in May 2012 to provide full-year funding for Department of Justice-administered programs and the Senate Appropriations Committee approved a measure to do so ( S. 2323 , S.Rept. 112-158 ) in April 2012. Both of these measures included some funding for each of the programs authorized by the Victims of Child Abuse Act even though the President's FY2013 budget proposal sought elimination of funding for each of these three programs. \n\n\tThe President's FY2013 Budget Request for Child Welfare\n\nThe FY2013 budget request submitted by the Obama Administration on February 13, 2012, anticipated $8.175 billion in federal support for the child welfare programs and initiatives discussed in this report. This included about $7.571 billion in mandatory child welfare funding and $604 million in discretionary funding. Final FY2013 funding provided via P.L. 113-6 \u2014and after application of the March 1 sequestration order and the 0.2% reduction in non-security discretionary spending\u2014was $7.868 billion, including $7.282 billion in mandatory funding and $586 million in discretionary funds. By comparison, for FY2012 Congress provided $8.009 billion in funding for the child welfare programs discussed in this report, including $7.386 billion in mandatory funds and $623 million in discretionary program dollars. \nFor most programs, the President's FY2013 budget request closely tracked child welfare funding provided by Congress for FY2012 (as part of P.L. 112-55 and P.L. 112-74 ). The largest difference in funding authorized for FY2012 versus the funding requested in FY2013 reflected changes in the Administration's estimate of funds needed to reimburse eligible state claims (as authorized under current law) related to provision of foster care, adoption assistance, and guardianship assistance. Support for these purposes is authorized under Title IV-E of the Social Security Act on a mandatory and open-ended basis (meaning the federal government is committed to paying a part of the cost of providing this aid to every eligible child). As noted above, P.L. 113-6 provides whatever level of funding necessary to meet the federal share of costs under the Title IV-E program.\nThe President's FY2013 budget included $250 million to provide financial incentives to states to improve the child welfare system and $2 million as part of early implementation of a policy to ensure that child support payments collected on behalf of children in foster care are used in the child's best interest. As discussed below, implementation of these proposals would require legislative authorization (separate from appropriations), and specific legislation to authorize those proposals has not been introduced.\nThe FY2013 budget also proposed to reinstate funding ($6 million) to continue a nationally representative and longitudinal survey of children who come into contact with the child welfare system. The study, which was authorized under Section 429 of the Social Security Act and was last funded in FY2011, is known as the National Survey of Child and Adolescent Well-being (NSCAW). Additionally, the Administration proposed to fund competitive grants to reduce pregnancy among foster youth by \"repurposing\" mandatory funds previously appropriated for abstinence education (under Section 510 of the Social Security Act). HHS estimated funding of between $12 million and $15 million for the grants based on the amount of this pre-appropriated money that has not been claimed by states in past years. Neither of these proposals was included in the final FY2013 funding measure ( P.L. 113-6 ).\nOn the discretionary side of the budget, the Administration sought an increase of funds for research to support new competitive grants related to preventing and addressing commercial sexual exploitation of children ($5 million). This funding was not provided in the final FY2013 funding measure ( P.L. 113-6 ). Finally, the President's FY2013 budget sought to eliminate funding for three child welfare programs administered by the Department of Justice and included in the Victims of Child Abuse Act (Children's Advocacy Centers, Court Appointed Special Advocates, and Child Abuse Training for Judicial Personnel and Practitioners). These programs received combined funding of $24 million in FY2012 and the final FY2013 funding measure ( P.L. 113-6 ) includes support for them.\nThe following section discusses each of the child welfare legislative proposals included in the President's FY2013 budget as well as his proposals to increase, eliminate, or redirect funding for certain child welfare programs.\n\n\t\tLegislative Proposals\n\nLegislative proposals are included in the President's budget when, apart from appropriating the necessary funds, legislative authority does not exist for the Administration to carry out the proposal. Therefore, to allow a legislative proposal to go forward, Congress must both enact the authority for the Administration (in this case HHS) to administer the program as requested and it must appropriate funds for that purpose.\n\n\t\t\tImprove the Child Welfare System\n\nAs part of its FY2013 budget request, the Obama Administration sought additional annual mandatory funding authority of $2.5 billion across 10 years ($250 million in each of FY2013-FY2022) \"for incentive payments to States that demonstrate real, meaningful improvements\" on measures of child outcomes and service quality. \"These incentives would help States finance innovative services and encourage continuous improvement in the foster care system.\" (The Administration made a similar proposal in its FY2012 budget request but Congress did not act to provide any additional funds for the proposal at that time.)\nIn justifying this FY2013 request, the Obama Administration noted that the child welfare system serves \"vulnerable children\" whose experience of \"psychological trauma \u2026 presents a serious barrier to their safety, permanency, wellbeing, and for some, their chances for a successful adoption.\" It asserts that the federal government should be helping states to enable children who are served by the child welfare system \"to achieve safety, permanency and success in life\" but that current law \"can discourage investment and innovation.\" The Administration did not propose specific legislation to achieve this reform but noted that it \"looks forward to working with Congress to address these critical issues.\" The reform proposals would be based on the following principals:\nCreating financial incentives for states to improve key outcomes for children: reduce the length of time children stay in foster care; increase their exits from foster care to permanency through reunification, adoption, and guardianship; decrease the rate of child maltreatment recurrence and any maltreatment while in foster care; and reduce the rate at which children re-enter foster care. Improving the well-being of children and youth in the foster care system, transitioning to permanent homes, or transitioning to adulthood , including by ensuring proper oversight and monitoring of psychotropic medications; providing appropriate therapeutic services using the best research available on effective interventions; building capacity in child welfare and mental health systems to ensure effective interventions are available; and training child welfare staff and clinicians to provide effective, evidence-based interventions that address the trauma and mental health needs of children in foster care; and Reducing costly and unnecessary administrative requirements , while retaining the focus on children in need.\nNo legislation to implement this kind of proposal was approved by Congress during the 112 th Congress and no support for it is included in the final FY2013 funding measure ( P.L. 113-6 ). \n\n\t\t\tChild Support Enforcement Proposal Related to Foster Care\n\nUnder current law, states are required to return to the federal government a part of the child support collected on behalf of children who receive federal (Title IV-E) supported foster care maintenance payments, and states may use the remaining funds collected to reimburse their part of the cost of those payments. As part of its FY2013 budget, the Obama Administration sought legislation to require that states use those child support payments in the best interest of the children for whom they are made rather than as general revenue for the state or to reimburse the federal government for a part of its cost of providing this support. (This proposal was also included in the President's FY2012 budget.)\nBecause this legislative proposal would end federal \"cost recovery\" of Title IV-E foster care maintenance payments, it was estimated to increase the federal cost of foster care by $2 million in FY2013\u2014the first year proposed for implementation of this proposal\u2014rising to roughly $34 million annually when the proposal is fully launched (total estimated 10-year federal cost to the Title IV-E program: $303 million). The Administration proposed to make this legislative change effective in conjunction with several other proposed changes in the Child Support Enforcement program that are intended to ensure that a greater share of all child support payments made by noncustodial parents reach the children on whose behalf they are paid. \nLegislation to implement this specific proposal was not introduced in Congress during the 112 th Congress and no support for it is included in the final FY2013 funding measure ( P.L. 113-6 ).\n\n\t\t\tContinue Funding for Child Welfare Study on Permanent Basis\n\nThe President's FY2013 budget sought to permanently reinstate mandatory funding ($6 million) under Section 429 of the Social Security Act for research concerning children who are at risk of abuse or neglect or who have been abused or neglected. First authorized as part of the welfare reform legislation that created the Temporary Assistance for Needy Families (TANF) block grant ( P.L. 104-193 ), this survey, known as the National Survey of Child and Adolescent Well-being (NSCAW), provides nationally representative and longitudinal data on children and families that come into contact with child protective services via an investigation of alleged child abuse or neglect. NSCAW data permit insights into the health, education, and social well-being of all children coming into contact with the child welfare agency, including prevalence of certain risk factors among these children and their caregivers. \nFunding of $6 million was requested for FY2013 to reinstate support of a second phase of the NSCAW study, including collecting a full set of survey data for the third wave of this longitudinal study, providing reports on the survey findings, and archiving these data for researcher use, as well as providing reports on the survey findings. Baseline reports, as well as longitudinal findings, are available from the first NSCAW survey (conducted between 1999 and 2006). For the second NSCAW survey (begun in 2008), baseline data reports are currently available. However, according to HHS, longitudinal analysis (as conducted with the first NSCAW survey) will be contingent on the ability of the Administration to finish data collection and analysis. \nFunds were provided for NSCAW in each of FY1997-FY2011. Congress did not act on the Administration's request for this funding in FY2012. Neither does the final FY2013 funding measure ( P.L. 113-6 ) include funding for this survey.\n\n\t\tRequests to Increase, Eliminate, or Redirect Certain Funding\n\nThe President's FY2013 budget proposed to increase or eliminate funding for certain child welfare programs. In addition, it sought to redirect (for a specific child welfare purpose) funds previously provided for abstinence education. These proposals did not necessarily require congressional program authorization to be carried out. They are instead requests for Congress to appropriate different levels of funding for already authorized activities or to make other changes in appropriations language.\n\n\t\t\tIncrease Child Welfare Research Funds to Address Commercial Exploitation of Children\n\nThe President's FY2013 budget included $31 million for Child Welfare Research, Training, and Demonstration activities authorized under Section 426 of the Social Security Act. That amount is $5 million more than the $26 million provided under this funding authority in FY2012. The additional money was sought to permit HHS to make competitive grants to public child welfare agencies (state or local) or to public or private nonprofit institutions for improved coordination between entities that come into contact with young victims of domestic sex trafficking (e.g., child welfare agencies, foster care group homes, runaway and homeless youth shelters, law enforcement, and courts). In addition, the grants were sought to help train staff across these entities to better identify and serve children who are being sexually exploited for commercial purposes and for related training and outreach efforts. In making this funding request, the Administration notes: \nEach year, approximately 100,000 children in the U.S. are victims of domestic sex trafficking. Many of these youth reside in Federally-funded foster care group homes and runaway and homeless youth shelters. The purpose of this new grant program is to equip child welfare agencies and other community stakeholders who work with youth to prevent and address [commercial sexual exploitation of children].\nAccording to ACF, the proposed grants would be targeted to areas with \"elevated rates\" of commercial child sex exploitation. P.L. 113-6 does not include funding for this specific proposal. \n\n\t\t\tRedirect Funds to Provide Grants to Reduce Pregnancy Among Foster Youth\n\nThe Administration proposed to redirect (and \"re-purpose\") certain already appropriated funds for support of competitive grants to state and local child welfare agencies \"with the strongest and boldest plans to reduce pregnancy for youth in foster care.\" In justifying its focus on this issue, the Administration cited survey data (from several Midwest states) showing that as many as half of all female youth transitioning out of foster care became pregnant before age 19. It adds:\nThe circumstances that cause youth to be placed in foster care and the nature of the foster care system itself put them at higher risk for pregnancy. Relationships and connections that ameliorate the risks of an unplanned and early pregnancy\u2014close and trusting relationships with adults, connections to school and community, and access to contraception and information on sexual health\u2014are inconsistently available to youth in the foster care system.\nThe Administration noted that state or local child welfare agencies seeking a grant for this purpose would need to develop a \"comprehensive plan\" and that the program would \"be designed to expand the evidence base for preventing pregnancy among youth in foster care using both abstinence and comprehensive approaches.\" Strategies would include \"adapting proven programs for the foster care population and evaluating approaches that are unique to the foster care populations, such as working with the court system and training foster care parents.\"\nAs proposed by the Administration, funding for these grants would be derived from previously appropriated Title V Abstinence Education funding (provided under Section 510 of the Social Security Act). The Administration notes that each year some $12 million to $15 million of these appropriated funds are not used because some states do not draw down the money allocated to them under the Title V Abstinence Education program. The Administration proposed FY2013 appropriations language that would cancel any of the appropriated Title V Abstinence Education funding for any state that did not submit an application to receive the funding (as of September 20, 2013) and would simultaneously re-appropriate these funds to HHS for support of \"competitive contracts and grants to State and local governments to develop approaches to reduce pregnancy among youth in foster care and to fund age appropriate evidence-based programs that reduce pregnancy, behavioral risk factors underlying teen pregnancy, or other associated risk factors among youth in foster care and for the Federal costs associated with administering and evaluating such contracts and grants.\"\nThis language is not included in the FY2013 final funding measure ( P.L. 113-6 ).\n\n\t\t\tEliminate Funding for Programs Under the Victims of Child Abuse Act\n\nThe Obama Administration's FY2013 budget proposed to end funding for the Court Appointed Special Advocates (CASA) program, Children's Advocacy Centers, and Child Abuse Training for Judicial Personnel and Practitioners. All three of these programs have been authorized to receive funding under the Victims of Child Abuse Act (established by Title II of P.L. 101-647 , 1990) and are administered by the Office of Justice Programs within the U.S. Department of Justice. In FY2012, they received combined funding of $24 million. P.L. 113-6 provides combined funding for each of these programs of $25 million after application of the March 1 sequestration order.\nThe proposed elimination of funding for Victims of Child Abuse Act programs was described in the President's FY2013 budget (along with some other proposed program cuts) as part of a process of prioritizing funds in a tough fiscal climate so as to ensure that the DOJ's OJP will continue to have resources to support \"robust research and evaluation programs, encourage the continued development of evidence-based programs, and maintain funding for programs vital to our state, local, and tribal partners in the criminal justice system.\" Additionally, the Administration asserted that some of the activities that in past years have been supported by the Victims of Child Abuse Act programs could be supported by the Administration's proposed Children Exposed to Violence Initiative. \n\n\t\t\t\tCourt Appointed Special Advocates (CASA) Funding\n\nLocal CASA programs train volunteers, who are asked by the court to represent the best interests of children in certain child welfare-related cases. For roughly two decades, some federal funds have been provided to the National Court Appointed Special Advocates Association, which makes subgrants to help develop and sustain local CASA programs and provides training and technical assistance for a national network of some 1,000 local CASA program offices. \nThe Administration first proposed elimination of CASA funding in its FY2012 budget. While Congress has not eliminated funding for this program, it did reduce appropriations for CASA in FY2012 to $4.5 million (compared to $12.4 million in FY2011 and $15.0 million in FY2010). For FY2013 funding was increased to $5.6 million (after application of sequestration to the funding level specified in P.L. 113-6 ). \nFederal funding authority for the CASA program (Section 219 of the Victims of Child Abuse Act, or 42 U.S.C. \u00a713014) was recently extended as part the Violence Against Women Reauthorization Act of 2013 ( P.L. 113-4 ). That law extended this funding authority at $12 million annually for each of FY2014-FY2018. \n\n\t\t\t\tChild Abuse Training of Judicial Personnel and Practitioners\n\nSupport for the Child Abuse Training of Judicial Personnel and Practitioners (to improve the handling of child abuse and neglect proceedings) is authorized in Subtitle C of the Victims of Child Abuse Act (42 U.S.C. \u00a7\u00a713021-13024). Funding provided under this authority has been awarded annually to the National Council of Juvenile and Family Court Judges (NCJFCJ) for support of its Model [Dependency] Courts initiative. There are 36 \"model\" dependency courts spread across urban and rural locations in 27 states and the District of Columbia. \nThe Administration first proposed elimination of the child abuse training for judicial personnel and practitioners grant as part of its FY2012 budget. While Congress did not completely eliminate this program support in FY2012, it did reduce funding provided for this training program to $1.5 million in FY2012 (compared to $2.0 million in FY2011 and $2.5 million in FY2010). For FY2013, funding for this grant program was reduced to $1.4 million after application of sequestration to level of funding provided in P.L. 113-6 . \nSpecific funding authority for this training program ($2.3 million annually) had expired with FY2005, but Congress continued to provide funds for it in each fiscal year. In 2013, as part of the Violence Against Women Reauthorization Act ( P.L. 113-4 ), Congress extended annual funding authority for this grant program at $2.3 million for each of FY2014-FY2018.\n\n\t\t\t\tChildren's Advocacy Centers\n\nFederal CAC funding is authorized, generally, to support efforts to improve the investigation and prosecution of child abuse and neglect cases, especially to ensure that victims of child abuse or neglect are not re-traumatized by the handling of these cases. Specifically, the law provides that the funds are for the development and support of local CACs, establishment and operation of regional CACs, and related training and technical assistance. Federal funding for these activities is authorized in Subtitle A of the Victims of Child Abuse Act of 1990 (42 U.S.C. \u00a7\u00a713001-13004) and has been awarded annually to the National Children's Alliance (NCA). The NCA makes subgrants to help create or maintain local Children's Advocacy Centers. In addition, the NCA acts as an accrediting body for local CACs and, along with four federally authorized regional Child Advocacy Centers (located in Philadelphia, PA; St. Paul, MN; Huntsville, AL; and Colorado Springs, CO), provides training and technical assistance to local CACs. Funds from this account also are awarded to other organizations that provide training related to improving the investigation and prosecution of child abuse and neglect cases. Combined annual federal funding authority for these activities was set at $20 million for each of FY2004 and FY2005 by P.L. 108-21 (2003) and has not been extended. Despite expiration of the funding authority, however, Congress has continued to provide annual funding for CACs.\nFY2013 was the first budget in which the Obama Administration sought to eliminate funding for the Children's Advocacy Centers (CACs), including related training and technical assistance. For FY2012, the Administration requested $20.0 million for CACs but Congress provided just $18.0 million. Final FY2013 funding for Children's Advocacy Centers and related training and technical assistance is $17.7 million after application of sequestration to the funding level provided in P.L. 113-6 .\n\n\tTitle IV-E Program Funding\n\nAs noted at the beginning of this report, by far the largest share of federal support for child welfare programs is provided under the Title IV-E foster care, kinship guardianship, and adoption assistance program. The Title IV-E program is an annually appropriated entitlement and Congress typically provides the amount of funding that is estimated by the Administration as necessary under current law. This section of the report describes the meaning of an annually appropriated entitlement, before discussing some of the trends and assumptions behind the Title IV-E funding request.\n\n\t\tAn Appropriated Entitlement\n\nThe Title IV-E federal foster care, kinship guardianship, and adoption assistance program is authorized on an indefinite basis (its funding authorization never expires) and as an open-ended entitlement. The open-ended funding means that states with an approved Title IV-E plan (and, more recently, tribes with such a plan), are entitled to receive reimbursement for a certain percentage of all eligible program costs. In general, those eligible costs are tied to costs incurred in providing assistance and related program activities on behalf of children who meet federal Title IV-E eligibility criteria. \nTo ensure adequate funds are annually appropriated for the program, each year the Administration estimates how much money will be necessary to reimburse states (and any tribes) for the federal share of the eligible foster care, adoption assistance, and kinship guardianship costs they incur. Congress typically provides this definite level of budget authority as part of its annual appropriations process. In the event that the definite amount of funding Congress provides exceeds the amount needed to pay the eligible claims submitted by states (or tribes), these excess funds are eventually returned to the Treasury. For example, at the end of FY2012, $313 million in Title IV-E funding authority remained \"unobligated\" and was returned to the federal treasury. On the other hand, if the definite sum turns out to be less than the needed amount, HHS may access the additional funds necessary to meet the federal obligations under this program by using the \"indefinite\" budget authority included in annual appropriations bills. \n\n\t\tAssumptions Included in a Title IV-E Funding Request\n\nBecause nearly all Title IV-E funding is linked to assistance or other activities provided on behalf of children eligible to receive Title IV-E foster care maintenance payments, adoption assistance, or kinship guardianship assistance, the trend in the caseload is of great importance to the overall estimate of needed Title IV-E funds. Other factors including changes in the authorizing statute may also be significant. Finally, changes in spending amounts shown also reflect inflation.\n\n\t\t\tCaseload\n\nFigure 2 shows the growth in the overall Title IV-E caseload from FY1995-FY2012, and as projected by HHS for FY2013. The caseload grew from 367,000 children in FY1995 to nearly 608,000 in FY2010 and was at 598,000 for FY2011. Beginning with FY2011, these caseload data were being reported by states on revised forms. Therefore the FY2011 and subsequent data may not be entirely comparable to data for FY2010 and earlier years. \nThe general upward trend in the overall Title IV-E eligible caseload, however, masks significant changes in its composition. Specifically, since peaking at 305,000 in FY1998, the number of children receiving Title IV-E foster care assistance on a monthly basis has been in steady decline and was reported as 181,000 in FY2010 and 157,000 for FY2012. By contrast, the number of children receiving Title IV-E adoption assistance on a monthly basis showed steady increases from 106,000 in FY1995 to 423,000 in FY2010, and after a slight reported dip for FY2011 had increased again to 425,000 for FY2012. Congress first authorized Title IV-E support for kinship guardianship assistance in FY2009. Although the number of children currently receiving this assistance remains small, it has grown from about 100 in FY2009 to 16,000 in FY2012. \n\n\t\t\tAdoption Assistance\n\nFor FY2012 Congress provided definite budget authority of $2.495 billion for Title IV-E adoption assistance. However, just $2.363 billion was needed to pay Title IV-E adoption assistance claims for that year. As of early FY2013, HHS estimated it would need slightly more than this\u2014$2.369 billion\u2014to pay Title IV-E adoption assistance claims in FY2013. P.L. 113-6 provides whatever level of funding is necessary to meet federal costs for Title IV-E adoption assistance under current law. \nThe Administration's FY2013 budget request noted continued growth in the number of children who receive Title IV-E adoption assistance (see Figure 2 ). More than 423,000 children received Title IV-E adoption assistance on an average monthly basis during FY2010. This monthly assisted number showed its first reported dip in FY2011 but rose, again, to nearly 426,000 during FY2012. Further, HHS projects the average monthly number of children receiving Title IV-E adoption assistance will increase to 439,000 for FY2013. \nStates' continued success in finding permanent adoptive homes for children in foster care, combined with recent changes to federal law that expanded federal eligibility for Title IV-E adoption assistance, are factors contributing to the ongoing growth in the adoption assistance caseload. The number of children annually adopted with public child welfare agency involvement roughly doubled between FY1995 and FY2000, and since that latter year has been at or above 50,000 each year. During FY2009, the number of adoptions that involved public child welfare agencies reached an annual recorded high of 57,100, and for FY2011 that number remained relatively high at more than 51,500. \nAs noted above, some increase in the Title IV-E adoption assistance caseload is expected due to continued implementation of the Fostering Connections to Success and Increasing Adoptions Act of 2008 ( P.L. 110-351 ). That law broadened eligibility for federal adoption assistance; FY2013 will be the fourth year of a nine-year phase-in of the new eligibility criteria. Under the new criteria, any income and resource tests, or family structure requirements (linked to the child's birth parents\/family), no longer apply. Instead, any child who the state finds has \"special needs\" is eligible for Title IV-E adoption assistance. The broadened eligibility is being phased in (based on the age of the child) and will apply to any child adopted out of foster care as of FY2018. The new eligibility rules also apply to any child with special needs who has been in foster care for 60 continuous months, regardless of the child's age, and to any sibling of a child for whom the broadened eligibility rules apply (provided the sibling will be placed in the same adoptive family and is determined by the state to have special needs). For FY2013, the new federal adoption assistance eligibility criteria apply principally to children who are adopted at age 10 or older. \n\n\t\t\tFoster Care\n\nFor FY2012 Congress provided definite budget authority of $4.288 billion for Title IV-E foster care. However, just $4.180 billion was needed to pay Title IV-E foster care claims for that year. As of early FY2013, HHS estimated it would need $4.286 billion to pay Title IV-E foster care claims in FY2013. P.L. 113-6 provides whatever level of funding is necessary to meet federal costs for Title IV-E foster care under current law. \nIn explaining its request for Title IV-E funding, the Administration cited a continued decline in the overall (and Title IV-E eligible) foster care caseload. At the same time, HHS noted that decreasing costs associated with that decline are offset by costs associated with continued implementation of changes in the law made by the Fostering Connections to Success and Increasing Adoptions Act of 2008 ( P.L. 110-351 ). \nThe latter changes include further implementation of requirements made to safeguard children in care and ensure their well-being (e.g., diligent search and notice to all adult relatives of a child placed in foster care and planning related to educational stability of children in foster care). State expenditures to meet these and other Title IV-E child protection and related requirements\u2014including longer-standing rules that require a state to ensure that each child in foster care has a written case plan that is regularly reviewed and updated and includes an appropriate \"permanency\" goal (e.g., reuniting with family, adoption, or guardianship)\u2014are the primary reason that states continue to spend more on Title IV-E foster care (as opposed to Title IV-E adoption assistance) despite the smaller foster care caseload.\nIn addition, P.L. 110-351 gave states the option (as of FY2011) to amend their Title IV-E state plans so that otherwise eligible youth in foster care may receive Title IV-E foster care assistance beyond their 18 th birthday (and up to age 21). As of May 2013, 20 jurisdictions had submitted Title IV-E plan amendments to HHS\/ACF indicating that they intend to exercise the option to provide foster care to some, or all, of the older youth in foster care who meet federal eligibility requirements. Eighteen of those had their plan amendments approved, including the District of Columbia Title IV-E agency and 17 state Title IV-E agencies (Alabama, Arkansas, California, Illinois, Indiana Maine, Maryland, Michigan, Minnesota, Nebraska, New York, North Dakota, Oregon, Tennessee, Texas, Washington, and West Virginia). Two additional states had their extended care plan amendments under review or revision (Massachusetts and Pennsylvania). \n\n\t\t\t\tDecline in Overall Foster Care Caseload\n\nDespite this potential expansion of Title IV-E foster care recipients, HHS estimates that the average monthly number of children and youth receiving Title IV-E foster care assistance will decline to 150,000 in FY2013. By comparison, more than 168,000 children received Title IV-E foster care assistance on an average monthly basis in FY2011 and some 157,000 did so during FY2012. \nThe decline in the number of children receiving Title IV-E foster care assistance is driven in some part by a decrease in the total number of children who are in foster care (those who are eligible for Title IV-E and those who are not). On the last day of FY2000, there were an estimated 552,000 children in foster care, while on the last day of FY2011, the most recent year for which national data are available, some 401,000 children were in care. This represents a total foster care caseload decline of 29% from the last day of FY2000 to the last day of FY2011. For the first half of that decade, states achieved foster care caseload declines primarily by increasing exits from foster care to other permanent homes (e.g., adoption). States have continued to be successful at finding adoptive homes for many children leaving foster care. However, since roughly FY2005 many have also shown increased ability to reduce the number of children entering foster care. These changes in entries to and exits from foster care (combined with shortened lengths of time in care) have led to the decrease in total foster care caseload. \n\n\t\t\t\tErosion in Share of Foster Care Caseload Eligible for Federal Assistance\n\nNot all children in foster care meet the federal Title IV-E eligibility requirements, however, and current administrative data show that the share of all children in foster care who are Title IV-E eligible is declining. In FY2000, roughly 52% of children in foster care received Title IV-E foster care assistance compared to roughly 40% in FY2011. Although Title IV-E criteria are multifaceted, the program's static income test is sometimes blamed for this erosion in IV-E eligibility status. Specifically, to meet the federal foster care income test a child must have been removed (to foster care) from a home that met the income criteria for a \"needy\" family under his\/her state's prior law cash welfare program (as the program existed in July 1996 and without adjustment for inflation). States were able to establish their own need standards under that prior law program, and these income tests vary significantly. However, the median state need standard (annualized for a family of three) is $7,740, an amount that represents 41% of the federal poverty guideline for a family of that size in 2012. (In 1996 this same dollar amount represented roughly 60% of the federal poverty guideline for a family of three.) In a large majority of states (73%, or 37 states), eligibility for federal Title IV-E foster care assistance is limited to children removed from homes with countable income that is less than 50% of the 2012 federal poverty guideline (for a family of three). \n\n\t\t\tKinship Guardianship Assistance\n\nFor FY2012 Congress provided definite budget authority of $80 million for Title IV-E kinship guardianship assistance. However, just $74 million was needed to pay Title IV-E guardianship assistance claims for that year. As of early FY2013, HHS estimated it would need $123 million to pay Title IV-E guardianship claims in FY2013. P.L. 113-6 provides whatever level of funding is necessary to meet federal costs for Title IV-E kinship guardianship assistance under current law. \nThe request for increased funding for this Title IV-E component reflects expected growth in the number of children who will be eligible for guardianship assistance as more states (and some tribes) implement this relatively new Title IV-E program option. In an average month, close to 16,000 children received Title IV-E guardianship assistance during FY2012 (which is the third full year that states could claim this Title IV-E funding), and HHS expected this number to grow to 20,500 for FY2013. \nThe kinship guardianship assistance component of the Title IV-E program was authorized by the Fostering Connections to Success and Increasing Adoptions Act of 2008 ( P.L. 110-351 ). States are not required to provide this assistance but may choose to do so. As of May 2013, 33 Title IV-E agencies (30 states, the District of Columbia, and two tribes) had submitted Title IV-E plan amendments to enable them to make claims for federal support of guardianship assistance provided on behalf of eligible children and all but two of those agencies had received final approval of those plan amendments from HHS\/ACF. In addition to the District of Columbia Title IV-E agency, and the tribal Title IV-E agencies (Port Gamble S'Klallam and the Confederated Tribes of Salish and Koontenai), the 30 state Title IV-E agencies with approved kinship guardianship options are Alabama, Alaska, Arkansas, California, Colorado, Connecticut, Hawaii, Idaho, Illinois, Indiana, Louisiana, Maine, Maryland, Massachusetts, Michigan, Missouri, Montana, Nebraska, New Jersey, New York, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Dakota, Tennessee, Texas, Vermont, Washington, and Wisconsin. \n\n\t\t\tTribal Access to Title IV-E Funding\n\nThe Fostering Connections to Success and Increasing Adoptions Act of 2008 ( P.L. 110-351 ) provided new access to Title IV-E funds by permitting tribes (beginning with FY2010) to seek direct Title IV-E funding. With limited exceptions, tribes (or tribal organizations or consortia) must meet the same requirements to receive this funding as states. The Port Gamble S'Klallam tribe (in Washington) was the first tribe to win approval of its Title IV-E plan, and as of April 1, 2012, it is able to seek direct federal Title IV-E funding. In March 2013, the Confederated Tribes of Salish and Koonteni (in Montana) received approval of its Title IV-E plan. Other tribes are expected to follow the lead of these tribes.\nStates remain obligated to provide assistance to all eligible children who live in the state, including those living on tribal land, provided those eligible children do not otherwise have access to such assistance. Also, under current law, as was true previously, tribes and states may enter into a Title IV-E agreement, whereby the state agrees to pass through to the tribe certain Title IV-E dollars to support tribal children in foster care for whom the tribe is given responsibility. Given these facts, the change in authority is expected to enhance the ability of tribes to govern their own child welfare services while having a relatively limited federal fiscal impact.\n\n\tFunding for Child Welfare by Program\n\n Table 1 lists the federal funding streams dedicated to child welfare purposes that were included in this analysis. It also briefly describes those purposes and shows final funding levels for FY2010-FY2013. Title IV-E program funding shown for foster care, adoption assistance, and guardianship assistance reflects final definite budget authority provided for each of those components. Finally, while this was not true for the Title IV-E program, most federal child welfare programs were subject to sequestration. The final FY2013 funding levels shown here reflect the March 1 sequestration order as implemented in Administration operating plans for FY2013.","output":"Child welfare services are intended to prevent the abuse or neglect of children; ensure that children have safe, permanent homes; and promote the well-being of children and their families. The largest amount of federal child welfare funding is provided to states for assistance to children who have been removed from their homes (due primarily to abuse or neglect). In the past decade, the share of this support provided for children who remain in foster care has been on the decline, while the share provided for those who leave foster care for permanent homes (primarily via adoption) has increased. Congress first authorized Title IV-E support for kinship guardianship assistance in FY2009. Although the number of children receiving this assistance remains relatively small, it is growing.\nFinal FY2013 funding provided for child welfare programs was $7.868 billion (P.L. 113-6, and after application of the March 1 sequestration order). Final FY2012 funding provided for those same child welfare programs was $8.009 billion (P.L. 112-74).\nOf the $141 million in reduced child welfare funding (compared to FY2012), about $55 million resulted from the automatic spending cuts, known as sequestration. Those cuts largely affected funding to states for child welfare-related services to children and their families, including the Stephanie Tubbs Jones Child Welfare Services program, the Promoting Safe and Stable Families program, Education and Training Vouchers (for youth who age out of foster care), grants under the Child Abuse Prevention and Treatment Act (CAPTA), funding for Adoption Incentives, and several competitive grant programs supporting child welfare purposes. The remaining roughly $86 million difference in appropriated funding authority is tied to a change in the expected cost of the program that provides federal support for foster care, adoption assistance, and kinship guardianship (authorized under Title IV-E of the Social Security Act). That program is exempt from sequestration and receives mandatory funding to meet a part of all eligible foster care, adoption assistance, and kinship guardianship assistance costs incurred by states.\nThe President's FY2013 budget sought $8.175 billion for the child welfare programs and related initiatives described in this report, including $250 million annually (beginning with FY2013) to provide incentives to states that improve their performance with regard to child outcomes and service quality. The Administration also sought legislative authority to end federal and state \"cost recovery\" of child support payments made on behalf of children in foster care and to instead require that these funds be spent in the child's best interest. This change to the Child Support Enforcement program was estimated to cost the federal treasury $2 million in FY2013, and a total of $303 million across 10 years.\nAs part of its FY2013 budget, the Administration also proposed continued funding of a national survey of well-being for children in foster care, sought increased research funds ($5 million in FY2013) for competitive grants to improve coordination between entities serving young victims of domestic sex trafficking, and proposed re-purposing certain previously appropriated funding that was expected to go unused (an estimated $12 million to $15 million in FY2013) for competitive grants to fund and evaluate programs to reduce pregnancy among youth in foster care. Congress did not authorize, fund, or otherwise enable any of these FY2013 proposals. Finally, the Administration sought to eliminate funding for three programs, authorized under the Victims of Child Abuse Act (Children's Advocacy Centers, Court Appointed Special Advocates, and Child Abuse Training for Judges and Judicial Practitioners). Congress did not follow this proposal, choosing instead to provide a combined $25 million for the programs."}
{"id":"crs_RL34199","pid":"crs_RL34199_0","input":"\tIntroduction\n\nGerman Chancellor Angela Merkel took office in November 2005 and was elected to a second term in September 2009. Since reaching a low point in the lead-up to the Iraq war in 2003, diplomatic relations between the United States and Germany have improved substantially and the bilateral relationship remains strong. Merkel has distinguished herself as an advocate for strong U.S.-European relations and as a respected leader within Europe and internationally. Despite continuing areas of divergence, successive U.S. administrations and many Members of Congress have welcomed German leadership in Europe and have voiced expectations for increased German-U.S. cooperation on the international stage.\nMerkel is seeking to establish Germany as a U.S. partner on the forefront of multilateral efforts to address global security threats. She has made a concerted effort to improve the tone of U.S.-German diplomacy, emphasizing shared values and the need for broad U.S.-German and U.S-European cooperation in the face of common security challenges. Both of Merkel's governments have sought to increase transatlantic cooperation in areas ranging from economic and trade relations, climate change policy, counterterrorism, and non-proliferation policy, to peacekeeping, reconstruction and stabilization in Afghanistan, the Middle East, Africa, and the Balkans.\nAlthough U.S. and German officials agree that cooperation has increased, some fundamental differences remain. During the Administration of former President George W. Bush disagreement tended to stem from what many Germans perceived as a U.S. indifference to multilateral diplomacy and standards of international law and what some in the United States considered a German, and broader European, inability or unwillingness to take the necessary steps to counter emerging threats. Widespread belief that U.S. policy in Iraq has failed and even exacerbated global security threats appears to have fueled persistently negative German public opinion of U.S. foreign policy and corresponding skepticism of the exercise of military power. That said, strong popular support for President Obama in Germany suggests that many Germans expect the United States to distance itself from the policy agenda of Obama's unpopular predecessor. Observers caution, however, that policy differences will remain, and that Berlin could continue to react skeptically to U.S. foreign policy actions it perceives as unilateral and lacking international legitimacy.\n\n\t\tCurrent Domestic Context\n\nChancellor Merkel heads a center-right coalition government of her Christian Democratic\/Christian Social Union (CDU\/CSU) and the free-market oriented Free Democratic Party (FDP). The CDU\/CSU, which won 34% of the vote in September 2009 elections, holds 10 of 15 cabinet positions and as such, exerts the most influence in the current government. FDP leader Guido Westerwelle is vice chancellor and minister of foreign affairs. FDP members also oversee the economics, justice, and health ministries. Most observers expect Merkel to have more success advancing her policy priorities in coalition with the FDP than she had during her first term in office. From 2005 to 2009, Merkel led a so-called \"grand coalition\" government together with the CDU\/CSU's long-time rival, the center-left Social Democratic Party (SPD). This was only the second time in post-war history the traditionally opposing parties had ruled together, and they often struggled to reconcile their competing policy agendas. \nThe top priority of Merkel's CDU\/CSU-FDP government is to revitalize a German economy that in 2009 suffered its deepest recession in more than 50 years. Germany's export-driven economy is estimated to have contracted by 5% of GDP in 2009 and unemployment, at 8% in 2009, is expected to grow to over 9% in 2010. Observers believe the economy will grow at just above 1% of GDP in 2010 and 2011, but point to concerns about a budget deficit that is expected to rise from 3.2% of GDP in 2009 to 5.6% of GDP in 2010. Germany has adopted a legally binding deficit ceiling set to take effect in 2016. Under the law, the federal deficit will not be allowed to exceed 0.35% of GDP and individual states will be constitutionally barred from running deficits after 2020. \nFinance Minister Wolfgang Sch\u00e4uble has said that the government will begin implementing deficit reduction measures in 2011. However, analysts question whether the government will be able to successfully cut public spending and at the same time implement tax-cuts advocated by the FDP and promised in the CDU\/CSU-FDP's governing platform. The issue is considered likely to be a source of tension within the governing coalition in the coming years. Additional tensions between the governing parties could center on the FDP's calls for deeper structural reforms to the German economy, including cuts in spending on social welfare programs. Merkel and others in her party could prove reluctant to curb such programs at a time of low economic growth and high unemployment. \nOn foreign policy, Merkel and Westerwelle appear poised to pursue a unified platform consistent with that of the previous government. Both place a high value on maintaining strong U.S.-German relations and seem united on major foreign and security policies such as the Iranian nuclear program and relations with Russia. That said, Westerwelle was reportedly reluctant to support the government's January 2010 decision to deploy up to 850 additional soldiers to Afghanistan. He is said to favor devoting more resources to civilian reconstruction and development efforts in Afghanistan rather than to military efforts. Westerwelle has also attracted attention and some criticism in the United States by calling for the removal of U.S. nuclear weapons from German soil. Although many U.S. and German officials are thought to agree in principle with Westerwelle's proposal, some analysts have taken aim at Westerwelle's decision to draw public attention to a sensitive security matter that they believe could best be handled quietly.\n\n\tFoundations of German Foreign Policy\n\nMuch of the criticism in Germany of U.S. foreign policy during the George W. Bush Administration was grounded in perceived U.S. disregard for multilateral diplomacy and standards of international law\u2014both fundamental tenets of German foreign policy. Since the end of the Second World War, German foreign policy has been driven by a strong commitment to multilateral institutions and a deep-rooted skepticism of military power. In the war's aftermath, the leaders of the newly established Federal Republic of Germany (West Germany) embraced integration into multilateral structures as a crucial step toward fulfilling two of the country's primary interests: to reconcile with wartime enemies; and to gain acceptance as a legitimate actor on the international stage. To this end, foreign policy was identified almost exclusively with the Cold War aims of NATO and the European integration project, and a related quest for German unification.\nGerman unification in 1990 and the end of the Cold War represented monumental shifts in the geopolitical realities that had defined German foreign policy. Germany was once again Europe's largest country, and the Soviet threat, which had served to unite West Germany with its pro-western neighbors and the United States, was no longer. In the face of these radical changes, and conscious of Germany's newly found weight within Europe and lingering European and German anxiety toward a larger and potentially more powerful Germany, German leaders reaffirmed their commitment to the multilateral process and aversion to military force. The EU, NATO, and the U.N. remain the central forums for Berlin's foreign, security, and defense policy. Despite the deployment of approximately 7,000 German troops in internationally sanctioned peacekeeping, reconstruction, and stabilization missions worldwide, German armed forces operate under what many consider stringent constraints designed to avoid combat situations.\nSince the end of the Cold War, German leaders have been increasingly challenged to reconcile their commitment to continuity in foreign policy with a desire to pursue the more proactive global role many argue is necessary both to maintain Germany's credibility as an ally within a network of redefined multilateral institutions, and to address the foreign and security policy challenges of the post-Cold War, and post-September 11, 2001, era. As one scholar notes, \"the tensions, even contradictions, between [Germany's] traditional 'grand strategy'\u2014or foreign policy role concept as a 'civilian power'\u2014and a Germany, a Europe, a world of international relations so radically different from what they had been before 1990 have become increasingly apparent.\" These tensions are especially apparent in an evolving domestic debate over German national interests.\n\n\t\tMultilateralism as National Interest\n\nDuring the Cold War, West German leaders were reluctant to formulate or pursue national interests that could be perceived as undermining a fundamental commitment to the multilateral framework as embodied by the Atlantic Alliance, European Community, and United Nations. West Germany avoided assuming a leading role within these institutions, preferring a low international profile, and seeking to establish a reputation as an \"honest broker\" with limited interests beyond supporting the multilateral process itself. West German governments did pursue distinct foreign policy goals, chief among them a quest for German unification, but sought to frame these objectives as part of the broader East-West Cold War struggle, rather than as unilateral German interests.\nSince unification, German governments have continued to exercise a multilateralist foreign policy. To this end, they have sought to reform and strengthen the EU, NATO, and the United Nations in an effort to improve multilateral responses to emerging security challenges and threats. Through these institutions, Germany pursues a \"networked\" foreign and security policy focused on intra- and inter-state conflict prevention and settlement, crisis intervention and stabilization, the struggle against international terrorism, and mitigating the proliferation of weapons of mass destruction (WMD). These goals are to be pursued in strict accordance with international law, and with respect for human rights. German politicians and the German public generally express strong opposition to international action that is not sanctioned by a United Nations mandate, or that appears to violate human rights standards and\/or international law. German law forbids unilateral deployment of German troops, and requires parliamentary approval for all troop deployments. Although German leaders have traditionally treated energy considerations as distinct from foreign and security policy, energy security goals are playing an increasingly important role in German foreign policy, particularly toward Russia and within the European Union.\n\n\t\t\tGermany in the EU and NATO\u2014The \"Middle Path\"\n\nThe EU and NATO are the focal points of German foreign and security policy. Since unification, Germany has asserted itself as a driving force behind the EU's enlargement eastward, deeper European integration, increased European foreign policy coordination, and the development of a European Security and Defense Policy (ESDP). As Germany's role within the European Union evolves, its foreign policy is marked by a desire to balance its support for a stronger, more capable Europe, with a traditional allegiance to NATO as the foundation for European security. Chancellor Merkel argues that a more cohesive European foreign, security, and defense policy apparatus will in fact enable Germany and Europe to be more effective transatlantic partners to the United States. Germany consistently supports policies aimed at advancing EU-NATO cooperation. Berlin's dual commitment to the EU and NATO suggests that it is unlikely to advocate what might be perceived as too strong or independent a role for either organization in the foreseeable future, instead seeking what could be called a middle path of cooperation between the two institutions. \n\n\t\t\tGermany in the United Nations\n\nSince joining the United Nations as a full member in 1973, Germany has supported its development as a cornerstone of a German foreign policy grounded in a commitment to international legitimacy. Today, Germany contributes just under 9% of the regular U.N. budget, making it the third-largest financial contributor to the U.N. after the United States and Japan. For Germany, the U.N. offers a vital framework to determine and implement international law, and a necessary mechanism through which to sanction international peacekeeping and peacemaking efforts, and efforts to reduce world hunger and poverty, and increase sustainable development.\nGerman governments since the end of the Cold War have supported reform efforts aimed at improving the U.N.'s ability to provide timely and robust peacekeeping missions, avert humanitarian disasters, combat terrorist threats, and protect human rights. Many of these efforts have been resisted by some U.N. members, and the consequentially slow pace of U.N. reform has provoked much criticism, including from leaders in the United States. However, Germany continues to view the U.N. as the only organization capable of providing the international legitimacy it seeks in the conduct of its foreign policy.\nAn early indication of Germany's post-Cold War aspirations to assume greater global responsibilities has been its quest for permanent representation on the United Nations Security Council. Former Chancellor Helmut Kohl first articulated Germany's desire for a permanent U.N. Security Council seat in 1992, and received the backing of the Clinton Administration. Kohl's successor, Gerhard Schr\u00f6der, intensified calls for a permanent German seat, but failed to gain international support. In what some consider an indication of the Merkel government's decision to soften its tone on the international stage, German officials have ceased publicly calling for a permanent German seat. Nonetheless, German government documents state that \"Germany remains prepared to accept greater responsibility, also by assuming a permanent seat on the Security Council,\" and September 2007 press reports indicated that Merkel asked former President Bush to support a German bid for permanent Security Council representation.\n\n\t\t\tEvolving Domestic Debate\n\nAs global security threats have evolved, particularly since the terrorist attacks against the United States on September 11, 2001, German leaders have pursued a more proactive foreign policy. As recently as the early 1990s, German forces were understood to be constitutionally barred from operating outside of NATO territory, and the German foreign policy establishment was cautiously beginning to chart a post-Cold War course for the country. Today, approximately 7,000 German troops are deployed worldwide (largely in Afghanistan and the Balkans), and Germany plays a leading role in diplomatic initiatives from the Balkans to the Middle East. However, what some consider too rapid a shift in German security and defense policy has led to a growing debate over German national interests and the most appropriate means to realize them.\nGerman politicians have tended to justify increasing troop deployments and a more assertive foreign and security policy by appealing to a long-standing desire both to be considered a credible global partner, and maintain alliance solidarity. Some argue, however, that a foreign policy built largely on the need to assume a \"fair share\" of the multilateral burden, and on notions of international legitimacy and credibility, has obscured a lack of domestic consensus on more precisely defined national interests. This has become more apparent as German troops are deployed in riskier missions with less clear limits and mandates, such as in Afghanistan or Lebanon. Increasingly, Germans are questioning whether stated goals of alliance solidarity and credibility are worth the risks associated with military deployment; or, indeed, whether such deployments run counter to other German interests such as a commitment to pacifism. In response, calls for \"exit strategies\" and a more comprehensive accounting of the goals of German foreign policy have grown.\nSome analysts and politicians\u2014primarily in conservative political circles\u2014argue that German leaders should be more willing to justify diplomatic and military engagement as satisfying national interests beyond those defined in the multilateral sphere. Others are skeptical, emphasizing what they see as a continued post-World War II obligation to surrender a degree of German sovereignty to such multilateral institutions, and to avoid any action seen as satisfying unilaterally determined German interests. The evolving discussion is likely to increasingly influence German policy within the European Union, the Atlantic Alliance, and the United Nations.\n\n\tGermany in the EU\n\nGermany's post-World War II and Cold War commitment to the European integration project was grounded in a desire to reconcile with former enemies and spur economic and political development. Since the end of the Cold War, German leaders have used the EU as the primary forum through which to forge a more proactive role for Germany on the international stage. German foreign policy in the early- to mid-1990s was almost singly focused on fostering deeper European integration and EU enlargement to the east. This focus, strongly supported by former President George H.W. Bush, was widely understood as based in a desire to quell fear of a resurgent Germany, and to replicate the benefits of West Germany's post-World War II integration in central and eastern Europe. Europe's inability and\/or unwillingness to intervene to stem conflicts in the Balkans in the early- to mid-1990s fueled calls within Germany and other European countries for a collective European foreign, security, and defense policy.\nTo some analysts, Merkel's predecessor, Gerhard Schr\u00f6der, embodied a growing German desire to pursue German interests within the EU more assertively. Merkel has continued this trend, also demonstrating a willingness to forge a more proactive role for Germany within Europe. This growing assertiveness has at times put Germany at odds with other EU member states, causing some to question Germany's long-standing commitment to European unity.\nAs is the case in several other EU member states, German EU policy under Merkel reflects a much tempered enthusiasm for EU enlargement and skepticism of several aspects of European market integration. On the other hand, Germany advocates deeper European integration in areas ranging from climate change policy to police and judicial cooperation, and has assumed an increasingly significant role in Europe's Common Foreign and Security Policy (CFSP) and Common Security and Defense Policy (CSDP). Germany was a strong proponent of the EU's Lisbon Reform Treaty adopted in December 2009, and Merkel used Germany's EU presidency in the first half of 2007 to forge agreement on the outlines of a new reform treaty aimed at enabling a larger EU to operate more effectively. Finally, some analysts point to personal differences between Merkel and her French counterpart, Nicolas Sarkozy, and to what some perceive as their more pragmatic approaches to EU affairs as evidence of a weakening of the Franco-German partnership long considered the engine of European integration.\n\n\t\tEU Enlargement\n\nGermany was an early and strong supporter of the EU's eastern enlargement after the Cold War. This support was based largely on the belief that European integration offered an unparalleled mechanism to spread democratic governance and associated values to Germany's immediate neighbors. While analysts agree that the EU's eastward enlargement satisfied pressing German interests by bringing stability and democracy to its new eastern borders, the benefits of further enlargement are not so clear to many Germans. An ongoing debate on the EU's \"absorption capacity\" highlights possible German concern both about its potentially decreasing decision- and policy-making power within the Union, and growing public pressure to better define Europe's borders and to reform EU institutions. Calls for curbing further EU enlargement, particularly to Turkey, are especially strong within Merkel's CDU\/CSU political group.\nMerkel and others in her party have been careful not to explicitly rule out future EU expansion, particularly to the Western Balkans. However, Merkel has advocated more stringent requirements for new membership, and has advanced proposals for alternatives to full EU membership, especially for Turkey, which she argues could help bring some of the desired political and economic stability to non-EU member states within the European \"neighborhood.\"\nGermany's position on Turkey's EU accession process highlights the broader domestic debate on enlargement. According to a 2009 survey, 16% of Germans see Turkish accession to the Union as \"a good thing.\" Despite the Schr\u00f6der government's support of a 2005 EU decision to officially open accession negotiations with Turkey, and despite strong U.S. support for Turkish membership, Merkel and other CDU\/CSU members are said to oppose Turkey's entry to the EU. Merkel does not explicitly voice such opposition; but she is viewed as at best skeptical, and has advocated imposing relatively vigilant benchmarks and timetables for Turkey's accession process. Merkel and others in her party have also proposed offering Turkey a \"privileged partnership\" with the EU as an alternative to full membership. Despite a persistently skeptical public, the opposition SPD supports Turkey's efforts to accede to the EU, and continues to view further EU enlargement favorably.\n\n\t\tCommon Foreign and Security Policy (CFSP) and Relations with Russia\n\nGerman leaders have supported and increasingly sought to influence the development of the Union's evolving Common Foreign and Security Policy (CFSP). In some areas, for example Middle East policy, Germany's growing role has been welcomed both within Europe and by the United States. In others, such as relations with Russia, Germany's position has elucidated and even inflamed disagreements within the Union. Although it continues to emphasize the importance of EU-wide consensus on foreign policy issues, Berlin has exhibited what some consider a growing willingness to pursue independently defined foreign policy interests both within and outside the EU framework, even at the expense of European or transatlantic unity.\nGermany's pursuit of close bilateral relations with Russia has prompted some analysts to question Berlin's commitment to fostering European unity in foreign and security policy matters. Close German-Russian relations have their modern roots in the 1960s and 1970s when German leaders increased diplomatic and economic engagement with the Soviet Union and other Eastern Bloc countries in an effort to improve relations with and conditions in East Germany. Since the end of the Cold War, Germany has consistently sought to ensure that Russia not feel threatened by EU and NATO enlargement. Germany continues to prioritize relations with Russia. Today, Germany is Russia's largest trading partner, and relies on Russia for close to 40% of its natural gas and 30% of its crude oil needs.\nSome argue that Germany's dependence on Russian energy resources and its pursuit of bilateral agreements to secure future energy supplies has threatened broader European energy security and undermined the EU's ability to reach consensus on energy matters. The EU's newer member states in central and eastern Europe have been especially critical. Polish, Lithuanian, and other leaders take particular aim at a German-Russian gas pipeline agreement negotiated by former Chancellor Schr\u00f6der, and point to Russia's subsequent manipulation of gas and oil supplies flowing to Europe in early 2006, 2007, and 2009 as evidence of Russia's ability to use its energy wealth to divide Europe.\nMerkel and Foreign Minister Westerwelle have made a concerted effort to improve ties with Germany's eastern neighbors, seeking, among other things, to reassure them that Germany's close bilateral relations with Russia should not be viewed as a threat to European unity or security. While most have welcomed Merkel's efforts, German-Polish relations have been marked by disagreement on a variety of issues, including Germany's close ties to Russia. Merkel advocates a \"strategic partnership\" with Russia\u2014both for Germany and the EU\u2014based on mutual trust and cooperation. Negotiating a new EU-Russia Partnership and Cooperation Agreement was one of Germany's primary goals during its EU presidency in early 2007. However, Merkel allowed negotiations to collapse in May 2007 when faced with strong Polish opposition, and apparent Russian intransigence. Some observers and eastern European leaders took this as an important affirmation of Merkel's commitment to European unity in foreign policy.\nAs noted earlier, Merkel is seen by some as taking a harder line on Russia than her predecessor Schr\u00f6der, a position attributed at least in part to her East German background. Nonetheless, divisions within Germany's governing coalition over how to engage Russia, and the strong historical, economic, and energy ties between the two countries lead analysts to suggest that Germany is likely to continue to seek what could become an increasingly tenuous middle path between Russia and some of the EU's newer member states.\nGerman leaders on both sides of the governing coalition continue to affirm their commitment to a strong CFSP. Germany has played a leading role in forging a common EU approach to a range of international issues, including the question of Kosovo's future status, the Israeli-Palestinian conflict, the Iranian nuclear program, and policy in Africa and central Asia. In advocating common EU positions on these and other issues, Germany emphasizes the importance of EU-wide consensus, at times demonstrating a willingness to alter national goals for the sake of European unity. However, Germany's pursuit of bilateral energy agreements with Russia signals what could be considered both growing assertiveness within Europe in certain areas, and frustration with what many consider a cumbersome EU foreign policy-making apparatus.\n\n\t\tEuropean Security and Defense Policy (ESDP)\n\nGermany has become a strong supporter of a Common Security and Defense Policy (CSDP, formerly known as European Security and Defense Policy, or ESDP) for the European Union as a means for EU member states to pool defense resources and work collectively to counter emerging security threats. German and European backing for CSDP arose during the mid-1990s as Europeans proved unable and\/or unwilling to respond militarily to conflicts in the Balkans. German support has grown since the terrorist attacks of September 11, 2001, and is increasingly driven by an emphasis on boosting civilian crisis management and police training capacity. Germany contributes military and civilian personnel to CSDP missions in Bosnia, Kosovo, the coast of Somalia, and Afghanistan, four of 13 civilian crisis management, police, and military operations currently overseen by the EU. Germany has also committed troop support for four of the EU's rapid-response Battlegroups, each made up of roughly 1,500 soldiers ready for deployment within 10 days of an EU decision to launch operations.\nMerkel is particularly careful to cast CSDP as a complement to, not substitute for, NATO. To this end, Germany has advocated formal agreements between NATO and the EU aimed at preventing the duplication of NATO structures, such as the so-called \"Berlin Plus\" agreement, which allows the EU to use NATO assets and capabilities for EU-led operations in which, \"the alliance as a whole is not engaged.\"\n\n\t\tEuropean Leadership and Franco-German Relations\n\nA historically strong Franco-German partnership has widely been considered the driving force behind European integration. As two of the EU's largest and most prosperous member states, Germany and France continue to work closely to advance joint interests within the EU. However, the EU's eastward expansion over recent years has both diminished collective Franco-German decision-making power within the Union and compelled Merkel to shift diplomatic focus to managing relations with Germany's eastern neighbors. In directing German EU policy eastward, Merkel reportedly hopes to improve Germany's relations with newer member states. Many analysts believe that Schr\u00f6der's and former French President Jacques Chirac's pursuit of stronger relations with Russia, and their criticism of those EU member states that supported the 2003 U.S.-led invasion of Iraq, fueled harmful divisions between what former Secretary of Defense Donald Rumsfeld once famously dubbed \"old\" and \"new\" Europe.\nMerkel and French President Sarkozy espouse what many consider a highly pragmatic approach to EU policy. As German policy within the EU has become more focused on its eastern borders, France has sought to invigorate EU policy in the Mediterranean. While both appear eager to implement economic reforms aimed at increasing Europe's global competitiveness, each has also displayed a willingness to protect national interests and industries, especially in the energy sector. Merkel and others in her government have expressed particular concern about Sarkozy's reported desire to increase political governance of EU economic policy, and of his plans to introduce domestic tax cuts, which would likely prevent France from meeting EU-wide deficit-reduction targets. Merkel and Sarkozy's efforts to forge a common European response to the global financial crisis and the related economic downturn have had mixed results. While both continue to pursue tailored national responses to the crisis, they have united to advocate enhanced international regulation of global financial markets. \nAnalysts and European diplomats cite these policy differences as evidence of the decreasing influence a Franco-German partnership will have within an EU of 27 or more member states. Others note that Merkel and Sarkozy's more pragmatic approach to the Union and their emphasis on increasing the EU's economic competitiveness, and fostering a more outward-looking EU could present an opportunity for improved relations with the United Kingdom (U.K), and its leader [author name scrubbed]. Brown, Merkel, and Sarkozy are often touted as a new generation of European leaders with the potential to reinvigorate the EU politically and economically. However, while they appear to share an enthusiasm for a more dynamic Union, differences on specific policy issues, including enlargement, economic liberalization, and constitutional reform could ensure that long-standing divisions between Germany and France and the traditionally more Euroskeptic U.K. persist.\n\n\tEvolving Security and Defense Policy\n\nPerhaps the most profound change in German foreign and security policy since the end of the Cold War is Germany's deployment of troops outside NATO territory for the first time since World War II. \nSince a 1994 Constitutional Court ruling enabled German leaders to deploy troops abroad, Germany has participated in a number of U.N.- and NATO-sanctioned combat, peacekeeping, reconstruction and stabilization missions, and today, approximately 7,000 German soldiers are deployed in missions ranging from NATO's stabilization force in Afghanistan (ISAF) to the U.N. Mission in Lebanon (UNIFIL). However, Germans are increasingly questioning the grounds for what many believe has been too rapid a shift in German defense policy. One German security policy expert categorizes the evolving defense policy debate as evidence of \"a widening gap between Germany's institutional commitments and official defense posture, and the country's readiness to deal with the practical military consequences of these developments.\" Some observers point out that while German politicians have consistently voiced support for more robust collective European and NATO defense capabilities, budget allocations in the foreign and defense policy sectors have decreased by about 40% in real terms since their peak in the late 1980s.\nIn the early 1990s, public opposition and constitutional constraints prevented Germany from offering more than financial support to multilateral combat and peacekeeping efforts in the Persian Gulf and in the Balkans. Germany's inability to deploy troops to missions supported by many of its leaders led to the landmark 1994 Constitutional Court ruling, which determined that German troops could be deployed abroad, but only under a U.N. mandate and with the prior approval of the German parliament. This paved the way for Germany's participation in its first combat mission since the Second World War\u2014NATO's 1999 air campaign to prevent ethnic cleansing in Kosovo. Considerable domestic opposition to German participation in the Kosovo mission was based largely on the contention that Germany's history obligated it to refrain from all military intervention. In response, then German Foreign Minister Joschka Fischer, a member of the traditionally pacifist Green Party, successfully argued that German history, in fact, obligated Germany to intervene\u2014militarily, when necessary\u2014to stop atrocities similar to those perpetrated by Germany during the Second World War. Fischer's argument set the precedent for Germany's growing participation in so-called humanitarian interventions, mostly in the form of U.N. and NATO peacekeeping and reconstruction and stabilization missions, worldwide.\nToday, Germany's global threat assessments mirror those of many of its EU and NATO partners, including the United States. The government identifies terrorism, proliferation of weapons of mass destruction (WMD), regional conflicts and failed states, transnational crime, energy security, migration, and epidemics and pandemics as the primary security threats facing Germany and its EU and NATO allies. However, Germany's approach to countering these threats has at times been perceived to be at odds with U.S. policy. Germany highlights the importance of a multilateral approach within the confines of a strengthened system of international law. Germany's 2006 White Paper on security policy emphasizes the importance of non-military means to combat threats to security, arguing for a strong civilian role in all aspects of defense policy. While Germany views terrorism as a primary threat, it has never referred to a war on terrorism, and underscores the need to address root causes of terrorism through development and other policies. The government does not completely rule out military engagement to combat terrorism, but does downplay this option.\n\n\t\tGermany in NATO\n\nGermany's 2006 White Paper on security policy asserts that \"the transatlantic alliance remains the bedrock of common security for Germany and Europe. It is the backbone of the North Atlantic Alliance, which in turn is the cornerstone of German security and defense policy.\" Along with the United States, Germany was one of the first proponents of NATO expansion as an initial step in the Alliance's post-Cold War transformation. Since then, Germany has backed efforts to transform the Alliance to respond to post-Cold War and post-September 11, 2001, global security threats and engage in \"out-of-area\" missions. German policy within NATO and its relations with its NATO allies are influenced by several factors which have caused, and may continue to cause, tension within the Alliance. One factor concerns U.S. leadership within NATO, and the degree to which the United States, Germany, and other European allies continue to share a strategic and operational vision for the Alliance. A second factor concerns Germany's ability to undertake the security and defense policy reforms many, particularly in the United States, believe are necessary for Germany to meet its commitments to an evolving alliance that is expected to increasingly engage in \"out-of-area\" missions.\nApproximately 4,300 German troops are deployed to NATO's International Security Assistance Force (ISAF) in Afghanistan, and about 1,800 soldiers serve in NATO missions in Kosovo and the Mediterranean Sea. German participation in ISAF\u2014NATO's largest and most significant mission\u2014has sparked considerable domestic debate over national defense policy, and has fueled tension between Germany and some of its NATO allies. German forces in Afghanistan are engaged almost exclusively in stability operations in the northern part of the country. Germany is the lead nation for Regional Command North (RC-N), commands a forward support base in Mazar-E-Sharif, and leads two PRTs, one in Kunduz and one in Feyzabad. Since 2007, six German Tornado aircraft have been used for country-wide surveillance operations. In February 2010, the German parliament approved plans to send up to 850 additional troops to northern Afghanistan (the current parliamentary mandate governing Germany's engagement in Afghanistan authorizes a maximum troop deployment of 5,350).\nDespite having the third-largest troop contingent in Afghanistan, Germany has faced pointed criticism, particularly from the United States, for \"national caveats\" which prevent its soldiers from being deployed to Afghanistan's more dangerous southern region. German forces are authorized to engage in combat operations as part of their defense of the northern sector but they have reportedly been reluctant to conduct combined combat operations with their Afghan partners. The German response is generally twofold. First, German officials claim that strong public opposition to military engagement and to U.S. policies in Afghanistan leave legislators no other choice but to impose operational caveats on their forces. Second, German officials increasingly claim that NATO is overly focused on military action and must devote more resources to civilian reconstruction. \nTo this end, German officials have welcomed the Obama's Administration's renewed focus on Afghanistan and are particularly encouraged by the Administration's regional approach\u2014especially its emphasis on Pakistan and its apparent willingness to engage Iran in discussions of the mission\u2014and by its emphasis on improving civilian capacity- and institution-building efforts, and economic development in Afghanistan. On the other hand, there is some concern in Germany that significant U.S. troop increases and a continued reluctance in many allied countries to increase troop contributions to ISAF could lead to an \"Americanization\" of the mission that may limit allied influence in decision-making (for more information on German engagement in Afghanistan, see Appendix A ).\nSome in Germany argue that U.S. policy in Afghanistan indicates a broader U.S. reluctance to view NATO as a credible collective security mechanism. In particular, critics cite the U.S. decision to lead an initial \"coalition of the willing\" in Afghanistan in 2001\u2014despite the invocation of NATO's Article 5 collective defense clause\u2014as evidence that the United States prefers to use NATO as a tool box through which to realize independently defined U.S. interests, rather than as a legitimate multilateral forum to define interests collectively. Some analysts and U.S. officials counter that the United States has essentially been forced to rely on \"coalitions of the willing\" because many of its NATO allies, including Germany, lack the military capacity to justify NATO- rather than U.S.-led missions. \nGermany has backed NATO efforts to reassess the Alliance's collective defense strategy and to develop the capacity to more effectively respond to emerging threats. In signing on to the Alliance's 1999 Defense Capabilities Initiative (DCI) and 2002 Prague Capabilities Commitment (PCC), Germany committed to focus national defense procurement practices on specifically defined areas, including strategic air and sea lift. Most agree that meeting these commitments will require Germany and other allies to increase overall defense spending, modernize procurement priorities and procedures, and reduce personnel costs. However, German defense spending has declined steadily since 1991, and by most accounts, Germany has been slow to realign its spending priorities to reflect its NATO commitments. NATO's agreed-upon defense spending target for Alliance members is 2% of GDP. While the NATO average is about 2.6%, German defense spending in 2008 represented about 1.3% of GDP.\n\n\t\tForce Transformation and Bundeswehr Reform\n\nThe changing security environment of the post-Cold War and post-September 11, 2001, era has fueled calls for military modernization and structural defense reform. As a condition of the 1990 \"Two plus Four Treaty\" between the post-World War II occupying powers (France, Great Britain, the Soviet Union, and the United States) and West and East Germany, which restored Germany's full sovereignty over security matters, Germany agreed to reduce its total troop numbers from 500,000 to under 370,000. Since then, Germany has sought to transform its defense forces in order to meet NATO and ESDP targets\u2014specifically, to be able to contribute to the NATO Response Force (NRF) and EU Battlegroups. To meet these goals, Germany aims to reform its force structure to include 35,000 troops for high intensity, short duration crisis intervention operations; 70,000 for longer duration crisis stabilization operations; and support forces of 147,500. According to the 2006 White Paper on security policy, such a restructuring could enable Germany to expand its current deployment capabilities to simultaneously deploy 14,000 troops in two larger scale or five smaller scale operations. As mentioned above, about 7,400 troops are currently deployed worldwide.\nObservers generally commend Germany's stated intention to transform its military to meet EU, NATO and U.N. commitments, but point to substantial gaps between stated goals and actions taken. Other than to say \"there is no room for further reductions in spending,\" Germany's 2006 White Paper does not address funding mechanisms. German government officials have long appeared skeptical about the prospects for meaningful increases in defense spending. Some express confidence, however, that a realignment of spending priorities and increased EU-wide cooperation could bring the country closer to realizing its defense priorities.\nIn addition to stagnant defense spending, many security policy experts, including members of a 2000 high-level commission on Bundeswehr reform, argue that Germany's continued adherence to mandatory military service, or conscription, represents a significant impediment to meaningful reform. These critics call for a voluntary, fully professional force, arguing that the constraints placed on conscripts\u2014they can only be deployed abroad on a volunteer basis\u2014lead to significant operational deficiencies in the armed services. While conscription is suited for defense of national territory, they argue, it impedes Germany's ability to meet its peacekeeping and stabilization obligations abroad by wasting scarce financial resources to fulfill outdated security goals. In 2000, the government reduced the number of conscripts from 130,000 to about 70,000. However, support for conscription remains strong among members of the CDU. Strong CDU support, based largely in a historically rooted anxiety about the dangerous potential of a professional army like Hitler's Wehrmacht , indicates that reforms are unlikely during the remainder of Merkel's term. However, the FPD has joined some in Germany's opposition parties in calling for at least a partial end to conscription.\n\n\tTransatlantic Implications\n\nFor some, the end of the Cold War, Germany's growing assertiveness within the European Union and corresponding enthusiasm for European integration, and more recently, German opposition to the 2003 U.S.-led war with Iraq, all symbolize increasing divergence in U.S.-German relations. However, the countries continue to cooperate in pursuit of common foreign and security policy goals, and share robust bilateral investment and trade relations. Under Merkel's leadership, Germany seeks to bolster U.S.-German and U.S.-EU trade and investment ties, and works closely with the United States on counterterrorism policy, and on a range of foreign policy issues. U.S. Administration officials and many Members of Congress have welcomed the Merkel government's commitment to a foreign and security policy anchored in NATO and the transatlantic relationship, and have expressed confidence in Merkel's ability to improve U.S.-German and U.S.-European cooperation on the world stage. U.S.-German bilateral relations remain strong, anchored not only by deep economic ties, but by a shared commitment to democratic values. Germany, the European Union, and the United States share similar global security threat assessments, and cooperate closely to mitigate these threats, whether in the struggle against international terrorism, through NATO efforts to combat the Taliban and strengthen the Afghan government, or in pursuit of a two-state solution to the Israeli-Palestinian conflict.\nLooking forward, several overarching features of Germany's evolving foreign and security policy stand to shape U.S.-German relations. These include Germany's commitment to international institutions, international law, and the multilateral framework; its deep-rooted aversion to the exercise of military force; and a potentially widening gap between the foreign policy ambitions of some in Germany's political class and the German public. In addition, ongoing domestic debate over approaches to German national interests and what many consider too rapid a shift in defense policy could increasingly influence German foreign and security policy decisions.\nGerman politicians have questioned, and at times openly opposed, aspects of U.S. foreign and security policy they view as lacking multilateral legitimacy, and\/or as being overly dependent on the exercise of military force. On Middle East policy, for example, Merkel urged former President George W. Bush to diplomatically engage the leaders of Syria and Iran in order to initiate a region-wide effort to address the Israeli-Palestinian dispute and the future status of Iraq. Germany's strong commitment to a unified international front in dealing with Iran suggests it is more willing to accept compromises in exchange for Security Council unanimity than to support unilateral measures in the face of Chinese or Russian opposition. As U.S., German, and European leaders consider increased cooperation to stem global security threats and to promote stability, democracy, and human rights in regions from Africa to central Asia, Germany will likely continue to uphold its commitment to the multilateral process. Germany has called on U.S. leaders to enhance U.S. multilateral engagement and has consistently urged U.S. Administrations to join the International Criminal Court and U.N.-sanctioned climate change treaties such as the Kyoto Protocol. German officials appear encouraged by the Obama Administration's apparent willingness to boost U.S. multilateral engagement and to reconsider the U.S. position on some multilateral treaties and agreements.\nRecent developments suggest that German leaders will remain both reluctant and hard-pressed to justify increased German military engagement abroad to a persistently skeptical public, even within a NATO or EU framework. Germany's 2006 White Paper on national security indicates that Germany could increasingly emphasize the importance of civilian components to multilateral peacekeeping, stabilization and reconstruction missions, and that it will work within NATO and the EU to bolster such capacities. At the same time, trends in German defense spending, and the relatively slow pace of German defense reform highlight what many consider a notable discrepancy between articulated foreign policy goals and action taken to realize these goals.\nGermany's ongoing debate on military participation in Afghanistan has exposed a lack of domestic consensus on the goals and limits of German foreign and security policy. Specifically, Germans appear wary of linking reconstruction and development efforts with combat operations. Until now, Merkel and the Bundestag have argued that German participation in Afghanistan be focused on reconstruction and stabilization efforts. However, as the distinction between development work and combat operations becomes increasingly unclear, especially under unstable security conditions, Germans have begun to re-examine the nature and effect of German military engagement both in Afghanistan and elsewhere. Ensuing calls for a reassessment of the grounds for and rules of military engagement stand to further shape Germany's ability to partner with its allies in multilateral missions worldwide.\nGermany appears poised to continue to seek a \"middle path\" between NATO and the EU, promoting the development of an independent European foreign and defense policy as a complement, rather than counterweight to NATO. Successive U.S. Administrations have supported ESDP as a means to enhance European defense capability and interoperability, but Washington has also insisted that EU defense policy be tied to NATO. To this end, U.S. leaders have welcomed Merkel's renewed emphasis on NATO-EU links. While Germany remains committed to NATO as the pillar for European security, some Germans have questioned the U.S. commitment to NATO, and a perceived U.S. preference to pursue independently defined national interests within the Alliance rather than to define and pursue the collective interests of the Alliance.\nDomestic political considerations and German public opinion could continue to play a key role in shaping U.S.-German relations. President Obama's popularity in Germany suggests that many Germans view the new U.S. Administration's foreign policy as a welcome change from the perceived unilateralism of the unpopular George W. Bush Administration. However, some observers caution that public expectations of the new President have been unreasonably high and note that policy differences between the two countries remain, particularly in areas where public opposition is high. For example, in the face of the global economic slowdown, German leaders on both sides of the political spectrum resisted calls from the Obama Administration to stimulate economic growth through larger domestic spending measures. In the foreign policy domain, while German officials have welcomed the Obama Administration's strategic review of Afghanistan\/Pakistan policy, they have essentially ruled out sending more than 500 additional combat troops or relaxing constraints on those troops currently serving in Afghanistan.\nAppendix A. Selected Issues in U.S.-German Relations\u2014Current Status\nEconomic Ties\nGermany is the world's fifth-largest economy and the largest in Europe, accounting for about one-fifth of the European Union's (EU) GDP. Germany is also the largest European trade and investment partner and the second largest overall of the United States. Total two-way trade in goods between the countries totaled $152 billion in 2008. U.S. exports to Germany in 2008 were worth about $54.5 billion, consisting primarily of aircraft, and electrical and telecommunications equipment. German exports to the United States\u2014primarily motor vehicles, machinery, chemicals, and heavy electrical equipment\u2014totaled about $97.5 billion in 2008. The United States is the number-one destination for German foreign direct investment (FDI); 11.5% of all U.S. FDI is in Germany. U.S. firms operating in Germany employ approximately 800,000 Germans, and an estimated 670,000 Americans work for German firms in the United States.\nLike the United States, Germany is experiencing a relatively sharp decline in economic growth. Germany's export-based economy contracted 5% in 2009, and unemployment has been slowly but steadily rising since the end of 2008. However, although U.S.-German economic and trade ties remain strong, the global financial crisis and ensuing economic downturn have exposed U.S.-German differences on the cause of and the appropriate response to the crisis. U.S. officials and some observers have argued that Germany was late in recognizing the degree to which the German economy would be affected by the global financial crisis, and that it has not moved aggressively enough to spur domestic economic growth since acknowledging the domestic effects of the crisis. German officials counter that they have taken substantial action to stimulate their economy\u2014measures which they value at upwards of $100 billion for 2009 and 2010, including the effect of so-called \"automatic stabilizers\" guaranteed by Germany's social welfare programs. Moreover, they have argued that such domestic spending measures will do little to address the root of the problem, which they tend to view as inadequate regulation of global financial markets. \nCounterterrorism Cooperation\nMost observers consider U.S.-German cooperation in the fight against terrorism to be close and effective. Since discovering that three of the hijackers involved in the September 11, 2001, attacks on the United States lived and plotted in Germany, the German government has worked closely with U.S. and EU authorities to share intelligence. Germany has identified radical Islamic terrorism as a primary threat to its national security, and has passed a number of laws aimed at limiting the ability of terrorists to live and raise money in Germany. In June 2007, Germany's then-Interior Minister (and current Finance Minister) Wolfgang Sch\u00e4uble (CDU) proposed a series of domestic counterterrorism initiatives including for increased computer surveillance, and domestic military deployment in the event of a terrorist attack. Sch\u00e4uble's proposals were not adopted and sparked considerable debate in Germany, where personal privacy and individual civil liberties are strictly guarded, and where domestic military deployment is barred by the constitution. In a March 2010 victory for opponents of Sch\u00e4uble's and other subsequent proposals, Germany's highest court ruled that a 2008 data-retention law arising from an EU directive was unconstitutional. The law would have required telecommunications companies to retain all citizens' telephone and internet data for six months. The court ruled on personal privacy grounds that all such data be deleted. \nAlso in March 2010, three German citizens and a Turkish resident in Germany were convicted of plotting what German investigators say could have been one of the deadliest attacks in European postwar history. According to German and U.S. intelligence officials, the suspected terrorists planned to target Ramstein Airbase and other U.S. military and diplomatic locations. German authorities are reported to have collaborated closely with U.S. intelligence agencies in foiling the plot, with then-Homeland Security Secretary Michael Chertoff saying that intelligence cooperation between the two countries is \"the closest it's ever been.\" Discovery of the September 2007 terrorist plot elevated concern in Germany about the possibility of future attacks, with some predicting greater support for antiterrorism measures as proposed by Merkel and Sch\u00e4uble. At the same time, others saw the planned attack as designed to raise pressure for a pullout of German troops from Afghanistan, and expected calls for an end to German engagement in that country to increase.\nGerman officials are encouraged by the Obama Administration's reported shift away from the designation \"Global War on Terror.\" Germany has never considered its counterterrorism policies part of a war effort and refer rather to a \"struggle against international terrorism.\" German officials stress the importance of multilateral cooperation and adherence to international law in combating terrorism. Like the United States, Germany advocates a comprehensive U.N. anti-terrorism convention. Germany has welcomed President Obama's decision to close the U.S. prison for terrorist suspects at Guantanamo Bay, Cuba, which it views as violating rights guaranteed to \"prisoners of war\" under the Geneva Conventions. However, a reported May 2009 request from the Obama Administration asking Germany to house nine detainees\u2014reportedly all Uighurs originally from central and western China\u2014scheduled to be released from Guantanamo Bay caused concern within the German government. According to press reports, some German officials were reluctant to accept the detainees for fear of inciting a diplomatic dispute with the Chinese government, while others feared that the individuals could pose security risks. Some German officials have also suggested that while they support the Obama Administration's decision, continued U.S. reluctance to house detainees on U.S. soil could make it more difficult for the Merkel government to justify doing so to the German public.\nThe Middle East\nGermany, along with other European countries, believes the Israeli-Palestinian conflict lies at the root of many of the challenges in the Middle East. Merkel has promoted continuity in a German Middle East policy based on a commitment to protect Israel's right to exist; support for a two-state solution to the Israeli-Palestinian conflict; a commitment to a single EU-wide framework for peace; and a belief that U.S. engagement in the region is essential. Germany has been active in international negotiations aimed at curbing Iran's nuclear ambitions and, despite continuing to rule out a German troop deployment to Iraq, Berlin has provided funded some Iraqi reconstruction efforts and participated in efforts to train Iraqi security forces.\nRelations with Israel and the Israeli-Palestinian Conflict\nGermany, along with the United States is widely considered one of Israel's closest allies. Germany is Israel's second-largest trading partner, and long-standing defense and scientific cooperation, people-to-people exchanges and cultural ties between the countries continue to grow. While distinguishing itself as a strong supporter of Israel within the EU, Germany has also maintained the trust of Palestinians and other groups in the region traditionally opposed to Israeli objectives. Germany has been one of the largest country donors to the Palestinian Authority (PA), and in June 2008, hosted an international conference to raise funds to bolster PA President Mahmoud Abbas' emergency government in the West Bank. At the request of the Israeli government, German intelligence officers used their contacts with Lebanese-based militia Hezbollah to negotiate a prisoner exchange between Hezbollah and Israel in July 2008.\nLike other EU member states, Germany views a sustainable, two-state solution to the Israeli-Palestinian conflict as key to ensuring Israel's long-term security, and to fostering durable stability in the Middle East. German officials have urged the Obama Administration to play a leading role in negotiations for a peace agreement. Germany remains firm in its support for EU and U.S. efforts to isolate Hamas since its victory in 2006 parliamentary elections and subsequent 2007 takeover of the Gaza strip. However, some experts argue that U.S.-EU efforts to isolate Hamas have not worked, and some in Germany and Europe view engagement as a better way to try to moderate the group and generate progress in the peace process. \nIran\nAs a member of the so-called EU-3 (France, Germany and the United Kingdom), Germany has been at the forefront of EU and U.N. efforts to prevent Iran from developing nuclear weapons and continues to seek international consensus on more stringent economic sanctions against Iran. Of the EU-3, Germany has reportedly been the most reluctant to endorse autonomous EU sanctions against Iran without an accompanying U.N. Security Council resolution, and has consequently emphasized the importance of winning Chinese and Russian support for stricter sanctions. However, recent reports suggest that officials in Berlin could be warming to the idea of more stringent EU sanctions against Tehran, including a possible ban on gasoline exports to the country. Since her September reelection, Merkel and Foreign Minister Westerwelle have each made strong public statements criticizing the Iranian regime and advocating increased sanctions. The Merkel government remains opposed to a military response to the situation.\nGerman and European officials have welcomed the prospect of full U.S. participation in ongoing nuclear talks with Iran being led by the EU. European leaders also appear united in their support for bilateral talks between the United States and Tehran. At the same time, they emphasize that U.S. engagement with Iran should be closely coordinated within the existing multilateral framework consisting of the EU3, China, Russia, and the United States (the so-called P5+1).\nGermany has been a strong critic of the Ahmadinejad government and issued one of the earliest and most vocal condemnations of the Iranian government's actions following presidential elections in June. However, Berlin continues to face pressure from the United States and others to limit civilian commercial ties with Iran. Along with Italy and China, Germany remains one of Iran's most important trading partners. Two-way trade between Germany and Iran grew by 20% from 2007 to 2008. On the other hand, observers report that German exports to Iran were down 17% through July of this year. Germany's two largest banks, Deutsche Bank and Commerzbank AG, have withdrawn from the Iranian market, and officials in Berlin report that new export credit guarantees to companies doing business in Iran have dropped by more than half since 2005. \nIn what observers cite as additional evidence of increased pressure on the German business community, the Merkel government has reportedly launched an investigation into engineering giant Siemens for a possible violation of export control laws. In December 2009, authorities at the German port of Hamburg seized a shipment of turbo compressors that investigators believe could potentially aide Iran's nuclear program. The delivery was reportedly part of a larger shipment being sent from a Siemens branch in Sweden. While some interpret weakening German-Iranian economic ties as a sign that Berlin is intent on increasing economic pressure on Tehran, others argue that German-Iranian trade remains robust and that politicians in Berlin are unlikely to seek further cuts in commercial ties. They view German officials' emphasis on unanimity with, for example, Russia and China, as evidence that Berlin is unwilling to take bolder action against Iran.\nAfghanistan\nGermany is the third-largest troop contributor to ISAF and the third-largest donor of bilateral aid for reconstruction and development. However, perhaps more than any other ally, Germany has been criticized for a perceived reluctance to engage in combat and for limiting its military operations to northern Afghanistan. U.S. and NATO officials consistently praise Germany's contributions to the mission, but continue to call on its leaders to grant more flexibility to its deployed forces. Although Germany has resisted sending combat troops to Afghanistan's southern regions, it announced in January its intentions to significantly enhance its training of Afghan National Security Forces in northern Afghanistan and to double resources for civilian reconstruction efforts as part of a \"development offensive\" in the region.\nGerman Chancellor Angela Merkel faces persistently low public support for the Afghan mission. In what appears at least in part a reaction to public opposition, the German government says that its \"aim over the next four years is to create the conditions necessary to begin a phase-by-phase reduction in its military presence,\" in Afghanistan. To this end, Germany's strategy in Afghanistan will increasingly focus on training the ANSF and on supporting civilian reconstruction and development priorities identified by the Afghan government and. At a January 2010 international conference on Afghanistan in London, Germany announced the aforementioned \"development offensive\" and plans to send an additional 500 to 850 troops to Afghanistan in the coming year. It also committed \u20ac50 million (about $70 million) to the newly established Reintegration Fund to support Afghan government efforts to reintegrate insurgents into Afghan society. Like other allies, German officials have said they could begin to reduce Germany's troop presence by late 2011 and hope to see the Afghan government take full responsibility for security by 2014. \nGermany has about 4,300 troops deployed in ISAF engaged almost exclusively in stability operations in the northern part of the country. Germany is the lead nation for Regional Command North (RC-N), commands a forward support base in Mazar-E-Sharif, and leads two PRTs, one in Kunduz and one in Feyzabad. Since July 2008, Germany has also staffed RC-N's 200-man Quick Reaction Force, intended to provide reinforcement in emergency combat situations. German officials report that the country provides almost 50% of ISAF's fixed wing air transport as well as other country-wide air support. \nAs part of plans announced at the January 2010 London Conference, German officials say they will refocus Germany's military deployment to support the training of the Afghan National Army's 209 th corps, with a goal of establishing three ANA brigades. Germany's Quick Reaction Force will be disbanded and the 200 soldiers serving in it joined by an additional 500 military trainers to focus on the training mission. These forces will supplement eight German Operational Mentor and Liaison Teams (OMLTs) currently training ANA units. In 2009, Berlin contributed \u20ac50 million (about $70 million) to the Afghan National Army Trust Fund.\nGerman forces are authorized to engage in combat operations as part of their defense of the northern sector and German commanders have demonstrated an increasing willingness to engage in offensive operations. However, they continue to face criticism from some NATO and allied government officials who allege that German troops and civilians rarely venture beyond the perimeter of their PRTs and Forward Operating bases due to concern that they might arouse suspicion or come into contact with armed elements. A NATO airstrike ordered by a German officer in September 2009 that resulted in the death of 142 people, most civilians, caused controversy in Germany and has led to heightened public scrutiny of the role of the German military in Afghanistan. \nIn addition to enhancing training of the Afghan National Army, Germany is seeking to boost its police training efforts. About 120 German police advisors currently staff four German-financed police training centers, which can provide basic and some advanced training to about 5,000 Afghan police officers annually. Germany plans to increase the number of trainers in this bilateral program to 200 by mid-2010. In addition, German trainers participate in the Focused District Development Programme (FDD), through which Police Mentoring Teams of up to 10 civil and military police personnel train and accompany Afghan units in the field. \nAbout 60 German police officials\u2014mostly retirees\u2014also take part in the EU police-training mission (EUPOL) of 225 that is expected to eventually include up to 450 trainers. However, the EU mission, initially approved in May 2007, has reportedly suffered from personnel problems and a lack of EU-NATO coordination. Prior to the EU mission, Germany shared responsibility for police training with the United States. Some criticized German training efforts, carried out by about 50 police trainers in Kabul, for having too narrow an impact and for being overly bureaucratic. \nAs mentioned above, Germany emphasizes the need to enhance civilian reconstruction efforts in Afghanistan and has said it will double development resources as part of a \"development offensive\" in northern Afghanistan. Beginning in 2010, Germany plans to almost double annual resources for reconstruction from \u20ac220 (about $304 million) to \u20ac430 million (about $593 million) through 2013. Germany seeks to fund a mix of long-term development projects as well as short-term, \"quick-impact\" measures that can provide immediate and tangible benefits to the local population. Goals for the coming three years include: job creation and income enhancement through ongoing rural development programs; infrastructure improvements including construction of an additional 435 miles (700 km) of roads; improved access to energy and drinking water; and teacher training. These efforts will be focused in the northern provinces of Kunduz, Takhar, Badakhshan, Baghlan, and Balkh.\nAppendix B. Key Dates","output":"German Chancellor Angela Merkel began her first term in office in November 2005 and was elected to a second term in September 2009. Most observers agree that under her leadership, relations between the United States and Germany have improved markedly since reaching a low point in the lead-up to the Iraq war in 2003. U.S. officials and many Members of Congress view Germany as a key U.S. ally, have welcomed German leadership in Europe, and voiced expectations for increased U.S.-German cooperation on the international stage.\nGerman unification in 1990 and the end of the Cold War represented monumental shifts in the geopolitical realities that had defined German foreign policy. Germany was once again Europe's largest country, and the Soviet threat, which had served to unite West Germany with its pro-western neighbors and the United States, was no longer. Since the early 1990s, German leaders have been challenged to exercise a foreign policy grounded in a long-standing commitment to multilateralism and an aversion to military force while simultaneously seeking to assume the more proactive global role many argue is necessary to confront emerging security threats. Until 1994, Germany was constitutionally barred from deploying its armed forces abroad. Today, approximately 7,000 German troops are deployed in peacekeeping, stabilization, and reconstruction missions worldwide. However, as Germany's foreign and security policy continues to evolve, some experts perceive a widening gap between the global ambitions of Germany's political class, and a consistently skeptical German public.\nSince the end of the Cold War, Germany's relations with the United States have been shaped by several key factors. These include Germany's growing support for a stronger, more capable European Union, and its continued allegiance to NATO as the primary guarantor of European security; Germany's ability and willingness to undertake the defense reforms many argue are necessary for it to meet its commitments within NATO and a burgeoning European Security and Defense Policy; and German popular opinion, especially the influence on German leaders of strong public opposition to U.S. foreign policies during the George W. Bush Administration.\nPresident Obama's popularity in Germany suggests that many Germans expected the Obama Administration to distance itself from the perceived unilateralism of the Bush Administration. However, some observers caution that public expectations of President Obama may have been unreasonably high and note that policy differences between the two countries remain. For example, in the face of the global economic slowdown, German leaders on both sides of the political spectrum resisted calls from the Obama Administration to stimulate economic growth through larger domestic spending measures and have urged the Administration to pursue more stringent reforms of the U.S. and international financial sector. In the foreign policy domain, while German officials have welcomed the Obama Administration's strategic review of Afghanistan\/Pakistan policy, they have been reluctant to significantly increase the number of combat troops serving in Afghanistan."}
{"id":"crs_R41435","pid":"crs_R41435_0","input":"\tIntroduction\n\nThe Department of Veterans Affairs (VA) has administered and supervised several life insurance programs for servicemembers and veterans since 1919. Currently, three VA life insurance programs that provide benefits to the families of servicemembers and veterans are still enrolling new policyholders. These programs are Servicemembers' Group Life Insurance (SGLI), Veterans' Group Life Insurance (VGLI), and Service-Disabled Veterans' Insurance (S-DVI). The VA's Regional Office and Insurance Center (VAROIC) in Philadelphia, PA, supervises SGLI and VGLI, but the day-to-day administration of the programs is handled by the Office of Servicemembers' Group Life Insurance (OSGLI), a division of the Prudential Insurance Company of America. The Service-Disabled Veterans' Insurance (S-DVI) program, on the other hand, is administered entirely by the VA. Access to VA-administered life insurance programs gives servicemembers and veterans, who may not be eligible for private life insurance policies, the opportunity to carry group life insurance. This provides for their families in the event of the servicemember's or veteran's death.\nAcross all VA insurance programs, 7.1 million people have $1.3 trillion in face value of insurance coverage.\nThis report is structured into three major sections. The first section provides an overview of the VA's different life insurance programs, including eligibility requirements, premium rates, and benefits. The second section describes the VA's management and administrative structure, as well as how policy proceeds to beneficiaries are currently paid out for SGLI, VGLI, and S-DVI. The third section discusses major areas of congressional interest and policy issues as they pertain to SGLI, VGLI, and S-DVI.\n\n\tServicemembers' Group Life Insurance Program\n\nIn September 1965, Congress established the Servicemembers' Group Life Insurance program in P.L. 89-214 by mandating the VA to enter into an agreement with the private insurance industry to meet the insurance needs of Vietnam era servicemembers. Since 1965, Congress has amended SGLI to include all eligible servicemembers in the uniformed services.\nThe SGLI program, through a group policy issued by the Prudential Insurance Company of America, provides low-cost term insurance protection to servicemembers. It is administered by the Department of Veterans Affairs Regional Office and Insurance Center's Office of Servicemembers' Group Life Insurance, located in Philadelphia, PA. When first enacted, the SGLI program provided up to $10,000 in coverage for members. Today, all servicemembers can receive a maximum of $400,000 insurance coverage under the program. As of September 30, 2012, about 2.4 million members of the uniformed services were covered under the program.\nUnder the Veterans' Survivor Benefits Improvement Act of 2001 ( P.L. 107-14 ), Congress extended coverage to the spouses and children of servicemembers covered under the SGLI program. The FY2005 Emergency Supplemental Appropriations Act for Defense, the Global War on Terror, and Tsunami Relief ( P.L. 109-13 ) added Traumatic Injury Protection Insurance to SGLI, which extended the program to provide short-term financial assistance to servicemembers suffering from traumatic injuries.\n\n\t\tEligibility Requirements\n\nFull-time and part-time life insurance coverage are both provided through the SGLI program. According to the Servicemembers' and Veterans' Group Life Insurance Handbook , full-time coverage is provided to the following active duty servicemembers under calls or orders that exceed 30 days:\ncommissioned, warrant, and enlisted members of the Army, Navy, Air Force, Marine Corps, Coast Guard, the National Oceanic and Atmospheric Administration (NOAA) Commissioned Corps, and the Public Health Service (PHS) Commissioned Corps; members of a uniformed service's Ready Reserve\/National Guard that are assigned to a unit or position in which they may be required to perform active duty or active duty for training and are scheduled to perform at least 12 periods of inactive duty training annually that is creditable for retirement purpose under Title 10 of the U.S. Code ; members of the Individual Ready Reserve (IRR) who volunteer for assignment to a \"mobilization\" category under Section 12304 (i)(1) of Title 10 of the U.S. Code ; cadets or midshipmen of the U.S. Military Academy, the U.S. Naval Academy, the U.S. Air Force Academy, and the U.S. Coast Guard Academy; and Reserve Officers' Training Corps (ROTC) members, cadets, or midshipmen while attending field training or practice cruises.\nThe following members of the Reserves (who are ineligible for full-time coverage) are eligible for part-time coverage while on active duty under calls or orders that exceed 30 days:\ncommissioned, warrant, and enlisted members of the Army, Navy, Air Force, Marine Corps, and Coast Guard Reserves (except temporary members of the Coast Guard Reserve); members of the IRR during one-day call-ups; PHS Reserve Corps; Army National Guard and Air National Guard while performing duty under Sections 316, 502, 503, 504, or 505 of Title 32 of the U.S. Code ; and ROTC members, cadets, and midshipmen while attending field training or practice cruises.\n\n\t\tSGLI Coverage and Premium Rates\n\nCurrently, the maximum SGLI coverage is $400,000. This coverage amount ($400,000) is automatic when the servicemember enters into a period of active duty or reserve status. A servicemember can reduce coverage, from the maximum of $400,000, in decrements of $50,000. Members may elect to either decline coverage or reduce coverage by completing SGLI program Form SGLV-8286. However, proof of good health is required if the member decides to obtain or increase coverage after he or she had previously chosen to reduce or decline coverage.\nThis insurance is forfeited when an insured servicemember is found guilty of mutiny, treason, spying, or desertion, or, as a conscientious objector, refuses to perform service or refuses to wear his or her uniform.\n\n\t\t\tFull-Time Coverage\n\nServicemembers who are eligible for full-time SGLI coverage are covered through their period of active duty or qualifying reserve status. They are also covered for a period of 120 days (with no premium) after their separation or release from active duty or reserve status.\nThe Veterans' Housing Opportunity and Benefits Improvement Act of 2006 ( P.L. 109-233 ) extended the free 120-day coverage period to two years for certain disabled servicemembers and their dependents. This change allows SGLI policyholders that are totally disabled (unable to work) at the time of their separation or release from service to keep their SGLI coverage for up to two years. This coverage is classified as the SGLI Disability Extension, and the servicemember is obligated to apply for the coverage after he or she has separated from service.\nWhen a servicemember with full-time SGLI coverage is released from active duty or the Reserves, he or she may convert his or her coverage to VGLI or to a commercial life insurance policy with any of the participating commercial insurance companies.\n\n\t\t\tPart-Time Coverage\n\nServicemembers eligible for part-time SGLI coverage are only covered during the time in which they are on active duty or active duty for training, and the period in which they are traveling to and from such duty. Part-time coverage servicemembers are eligible for the free 120-day period of coverage only if they incur a disability or a preexisting disability is aggravated during a period of duty.\n\n\t\t\tBeneficiaries\n\nServicemembers can select anyone as the beneficiary of their insurance policies. If a servicemember fails to name someone, the insurance proceeds, by law, must be distributed in the following order:\n1. widow or widower, or, if none, 2. children ( not including stepchildren ), or, if none, 3. parents, or, if none, 4. executor of the estate, or, if none, 5. other next of kin.\nIf the servicemember chooses not to be insured under the SGLI program, chooses to be insured for less than the SGLI maximum amount, or names someone other than his or her spouse or child as the beneficiary, the law requires that the spouse of the servicemember must be notified by the uniformed service.\n\n\t\t\tPremium Rates\n\nThe cost of SGLI is generally shared by the servicemember and the government. Each servicemember is responsible for paying a monthly premium (unless in a combat zone, in which case the government pays the full premium), and the government and Prudential pay the cost of all death claims. The SGLI insurance premium is deducted from the servicemember's pay. The premium rates are mutually agreed upon by the VA and the contractor (Prudential Insurance Company of America).\nCurrently, the basic SGLI premium rate decreased from the 2007 rate of 7.0 cents per month per $1,000 of coverage, to 6.5 cents per month per $1,000 of coverage. Table 1 shows premium rates for both full-time and part-time active duty servicemembers and reservists:\n\n\t\tExtra Hazard of Duty Cost\n\nEach branch of service is liable, under law, to pay the additional cost of claims due to the extra hazards of serving in the military. The amount is determined by the VA and paid by the Department of Defense (DOD) on behalf of the uniformed service.\nEach year the VA actuaries study the mortality rate of the most recent three years of servicemembers' claim experience. This allows them to develop the average death rate by age. The rate is used to determine the expected number of death claims. At the end of each policy year, the expected death claims are compared with the actual number of incurred death claims. If the actual death claims exceed the estimated death claims, the excess claims are multiplied by the average amount of insurance per servicemember to determine the extra hazard cost for each uniformed service.\nIf the annual extra hazard cost paid is lower than the estimated amount, Prudential Insurance will refund the excess funds to the VA. Excess funds are deposited into the revolving fund. If the extra hazard cost paid exceeds the annual estimated amount, then the VA is responsible for reimbursing Prudential from the revolving fund.\n\n\t\tFamily Servicemembers' Group Life Insurance Coverage\n\nSGLI coverage was extended to the spouses and dependent children of insured servicemembers by the Veterans' Survivor Benefits Improvements Act of 2001 ( P.L. 107-14 ).\nFamily Servicemembers' Group Life Insurance (FSGLI) coverage is automatically issued to the servicemember's spouse and children, based on the information in the servicemember's personnel records. Servicemembers may decline family coverage or may elect reduced coverage by completing SGLI program Form SGLV-8286A, Family Coverage Election and Certificate. However, proof of good health of the spouse or child is required if the servicemember decides to obtain or increase coverage for his or her spouse or child after he or she has previously chosen to reduce or decline coverage.\n\n\t\t\tFSGLI Spousal Coverage\n\nSpouses of servicemembers on active duty or reservists, including National Guard members eligible for full-time SGLI coverage, can be insured up to the maximum amount of $100,000 in increments of $10,000. However, spousal coverage cannot exceed the servicemember's SGLI coverage. Premiums for spousal coverage are deducted from the servicemember's or reservist's pay. Table 2 shows the premium rates for spouses based on age and amount of coverage.\nA spouse of a servicemember or active duty reservist may convert his or her coverage to a commercial life insurance policy with any participating commercial insurance companies. Coverage for a spouse will end 120 days after any of the following events:\nThe date the servicemember elects (in writing) to terminate his or her spouse's coverage; The date the servicemember elects (in writing) to terminate his or her own SGLI coverage; The date of the servicemember's death; The date the servicemember separates from service; or The date of the servicemember's divorce from his or her spouse.\n\n\t\t\tFSGLI Child Coverage\n\nA child is considered to be a dependent of a servicemember if the child is unmarried and under the age of 18, or became permanently incapable of self-support before the age of 18. Dependent children include all natural born children, legally adopted children, and stepchildren who are under the care of the servicemember. A child is also considered to be a dependent if he or she is between the ages of 18 and 22 and is enrolled in an approved educational institution. Dependent children covered under an active duty servicemember's or reservist's SGLI policy are insured at the maximum amount of $10,000 each (at no cost to the servicemember). The child is covered up to 120 days after the servicemember has separated from service.\nThe Veterans' Benefits Improvement Act of 2008 ( P.L. 110-389 ) added benefits for families of stillborn children born on or after October 10, 2008, under the FSGLI program. Previously, stillborn children were excluded from coverage. Servicemembers who experience the death of such a dependent child are eligible to receive a $10,000 payment (the maximum amount under FSGLI child coverage).\nCoverage for a child will end 120 days after the servicemember's separation or release from service or assignment (in the case of Ready Reserve). There are currently no conversion options for children.\n\n\t\tSGLI Traumatic Injury Protection Program\n\nSince its inception in 2005, the Traumatic Servicemembers' Group Life Insurance (TSGLI) program has provided short-term financial assistance to servicemembers who suffer from traumatic injuries while on active duty. TSGLI is not an optional program, but an automatic coverage program under the SGLI program, and its purpose is to ease the burden for servicemembers and their families during times of extensive recovery and rehabilitation. TSGLI premiums are $1.00 per month and are deducted from the servicemember's pay.\n\n\t\t\tEligibility\n\nServicemembers who are covered under the SGLI program are automatically covered by the TSGLI program. However, TSGLI does not cover spouses and children who are covered under the SGLI program, nor does it cover those under the VGLI program. Eligibility and certification for payment are determined and provided by each servicemember's uniformed service.\nThe VA Secretary prescribes by regulation which conditions are eligible for, or excluded from, TSGLI coverage. The losses covered by TSGLI include the following conditions: \ntotal and permanent loss of sight, speech, or hearing; amputation of hand or the loss of four fingers on the same hand or the loss of a thumb; amputation of the foot or loss of all toes; loss of four toes on the same foot or the loss of the big toe; limb salvage; quadriplegia, paraplegia, hemiplegia, or uniplegia; burns (2 nd degree or more covering 20% or more of the body or 20% or more of the face); facial reconstruction; coma resulting from traumatic injury; inability to perform two activities of daily living due to traumatic brain injury; inability to perform two activities of daily living due to other traumatic injury; certain genitourinary conditions; and continuous 15-day inpatient hospital care due to traumatic injury.\nThe Veterans' Benefits Act of 2010 ( P.L. 111-275 ) provided that the VA Secretary may distinguish in payments for qualifying loss of a dominant hand and qualifying loss of a non-dominant hand.\n\n\t\t\tLosses Excluded From TSGLI Payment\n\nInjuries sustained while committing or attempting to commit a felony and losses caused by the following are excluded from TSGLI payment:\nmental disorder; mental or physical illness or disease, unless the illness or disease is caused by a pyogenic (pus forming, often from a wound) infection, biological, chemical, or radiological weapon, or accidental ingestion of a contaminated substance; attempted suicide; self-inflicted wounds; diagnostic procedures, preventive medical procedures (i.e., inoculations), medical or surgical treatment for an illness or disease, or any complications arising from such procedures or treatment; or the servicemember's willful use of illegal or controlled substances, unless they are administered or taken on the advice of medical professionals.\n\n\t\t\tBenefit Amount\n\nTSGLI benefit amounts depend on the type and severity of a servicemember's injury and range from $25,000 to a maximum of $100,000. Servicemembers who suffered injuries between October 7, 2001, and December 1, 2005, may receive retroactive TSGLI benefits regardless of SGLI coverage status.\n\n\tVeterans' Group Life Insurance Program\n\nOn August 1, 1974, Veterans' Group Life Insurance (VGLI) became available to former servicemembers ( P.L. 93-289 ). VGLI provides for the conversion of SGLI after separation from active duty. The administration of the VGLI program is handled by the OSGLI, a division of the Prudential Insurance Company of America. VGLI is a five-year renewable term policy which provides a maximum of $400,000 of coverage. VGLI policyholders have the right to renew their coverage at the end of each five-year term period. Policyholders may also convert VGLI to an individual commercial policy at any time with any of the participating private companies without proof of insurability. VGLI has no cash, loan, paid up, or extended values and does not pay dividends.\n\n\t\tEligibility Requirements\n\nVeterans eligible for the VGLI program are:\nReady Reserves\/National Guard SGLI policyholders who are separated, retired, or released from assignment; insured SGLI members who are being released from active duty or active duty for training under a call or order to duty that does not specify a period of less than 31 days; Ready Reservists who have part-time SGLI coverage and who, while performing duty (or traveling directly to or from duty), suffer an injury or disability that causes them to be uninsurable at standard premium rates; and people assigned to the IRR of a military service or to the Inactive National Guard (ING). This includes members of the Public Health Service Inactive Reserve Corps (IRC).\nAfter separation from service, servicemembers have 120 days to apply for VGLI without providing evidence of insurability (good health). Servicemembers who do not apply for VGLI within 120 days of separation from service have an additional year in which to apply for VGLI. During this additional year servicemembers are required to submit the initial premium and provide evidence of insurability (good health) in addition to the application for VGLI. If a servicemember does not apply for VGLI within the one year and 120 days allotted following separation from service, he or she becomes ineligible for coverage under VGLI.\nServicemembers who are totally disabled at the time of separation from active duty and are granted a free two-year extended SGLI coverage period are automatically enrolled in VGLI at the end of the two-year extension period.\n\n\t\tVGLI Coverage and Premium Rates\n\nThe maximum amount of coverage for VGLI is $400,000 if the veteran separated from service after September 1, 2005. If the veteran separated from service prior to September 1, 2005, his or her maximum coverage is $250,000, according to the Servicemembers' Group Life Insurance Enhancement Act of 2005 ( P.L. 109-80 ). VGLI coverage is issued in multiples of $10,000 up to the maximum amount of coverage. VGLI coverage, at the time of conversion from SGLI, may not exceed the amount of SGLI coverage that the veteran had at the time he or she was released from active duty or the reserves. However, a veteran may increase his or her coverage once in every five-year period by $25,000 if the veteran is under the age of 60, and still to the statutory maximum coverage amount. \nThe Veterans' Benefit Act of 2010 ( P.L. 111-275 ) permitted certain VGLI policyholders, at every fifth anniversary, to increase their VGLI coverage by up to $25,000, with total coverage limited to the maximum available at the time of renewal. If the current VGLI coverage is for less than $375,000, the policyholder may purchase an additional $25,000 of VGLI coverage (the amount for the increase in coverage cannot be less than $25,000 if the current coverage is less than $375,000). If the current VGLI coverage is more than $375,000, the policyholder can purchase the amount that increases the coverage to $400,000. \nBeginning on April 11, 2011, VGLI policyholders were allowed to increase their coverage under the following guidelines: \nThe additional coverage must be requested during the 120-day period prior to the 5-year VGLI anniversary of the policy; The insured does not have to answer any medical questions; The total amount of coverage cannot exceed $400,000 (the current maximum total coverage available); and The insured must be under the age of 60 on the coverage effective date of the 5-year VGLI anniversary of the policy. \nTo be covered under VGLI, veterans must pay premiums. VGLI premium rates are determined by age and amount of insurance. For example, a veteran who is aged 29 or younger would pay $32 per month for the maximum $400,000 coverage, while a veteran who is aged 75 or older would pay $1,800 per month for the same $400,000 coverage. Table 3 lists monthly premium rates per age group per coverage amount.\n\n\t\tVGLI Payment of Premiums\n\nThe VGLI program offers various options for paying premiums. Policyholders may choose to pay the premiums on a monthly, quarterly, semi-annual, or annual basis. Discounted premiums are available for some of these options. Table 4 shows the different payment options available under VGLI and their associated discounts.\n\n\t\tVGLI Coverage Reduction Schedule\n\nAs veterans age, they incur higher premium rates for insurance coverage, as shown in Table 5 . To lessen or maintain cost at older ages, veterans may gradually reduce the amount of their VGLI coverage. VA recommends the following schedule that will allow veterans to maintain level premiums ($225 per month) while reducing coverage at the ages of 65 and older:\n\n\t\tCommercial Conversion Criteria\n\nVGLI policyholders may convert to individual commercial policies at any time with a commercial company that participates in the program without proof of insurability so long as their VGLI premiums are paid up to the date of the conversion. However, once a veteran converts his or her coverage to a commercial policy, he or she may no longer renew his or her VGLI coverage. Veterans that convert to commercial policies are issued standard premium rates regardless of their health, but coverage may not exceed the amount of VGLI coverage that the members had at the time of conversion. In addition, the conversion policy must be a permanent policy, such as a whole life policy. Other types of policies, such as term, variable life, or universal life insurance, are not allowed as conversion policies. Spouses and children may not be covered under VGLI.\nTo convert a VGLI policy, the veteran must\nselect a company from the participating companies listing; submit an application to the local sales office of the company selected; obtain a letter from the OSGLI verifying coverage; and give a copy of that notice to the agent who takes the application.\n\n\tService-Disabled Veterans' Insurance Program\n\nDuring the Korean War, Congress passed the Insurance Act of 1951 (P.L. 82-23) and established the Service-Disabled Veterans' Insurance (S-DVI) program, which is administered entirely by the VA. S-DVI was created to meet the insurance needs of certain veterans with service-connected disabilities, many of whom would not be eligible for private life insurance due to their service-connected disabilities. S-DVI is available as a permanent plan or as a five-year term policy for disabled veterans, and policyholders can apply for up to $10,000 in coverage. Policies for this insurance are issued with the letters \"RH\" in front of the policy number. RH insurance is considered nonparticipating, which means that no dividends are paid to policyholders. S-DVI is still being issued to new policyholders, and it is currently the only issue of direct VA life insurance for veterans that is open to new policyholders. Table 6 shows basic statistics related to S-DVI, including the current number of veterans covered and the average age of covered veterans.\n\n\t\tEligibility Requirements\n\nTo be eligible for S-DVI, a veteran must have\nbeen released from military service for reasons other than dishonorable discharge or bad conduct discharge awarded at General Court-Martial; been released from active duty on or after April 25, 1951; been rated for a service-connected disability or disabilities (even if only 0%), but is otherwise in good health; and applied within two years of receiving a rating for a new service-connected disability.\nRatings for service-connected disabilities are determined by the severity of the veteran's disability on a scale from 0% to 100%. 0% is a valid rating and is different from no rating at all. A 0% rating means that a service-connected disability exists, but it is not so disabling that it entitles the veteran to compensation payments. Under S-DVI, all veterans with a service-connected disability are eligible for coverage, no matter the rating. However, the veteran must submit an insurance application within two years from the date that he or she is notified about the disability rating. If the veteran does not apply within that time but service connection is later established for some new condition, the veteran will then have two years from the date of notice of that new condition to apply.\n\n\t\tS-DVI Premiums and Disability Provisions\n\nPremiums charged for S-DVI coverage are\nbased on the rates that healthy people would have been charged when the program started in 1951, and based on 1941 mortality tables; and waived for veterans who are totally disabled.\nBecause the program insures many veterans who have severe disabilities, premium payments are insufficient to pay all claims and are supplemented yearly by congressional appropriations.\nPremiums paid for S-DVI coverage increase as policyholders get older. On November 1, 2000, to provide financial relief from high premium rates for veterans at advanced ages, \"RH\" term premiums were \"capped\" at the age 70 renewal rate. Therefore, annual premiums for policyholders were \"capped\" at $69.73 per $1,000 of coverage.\nA major issue for \"RH\" policyholders is that \"RH\" premiums are much higher than standard commercial rates because they are based on outdated mortality (1941) tables. The following statement was made at a hearing in the 111 th Congress, concerning the VA's current use of 1941 mortality tables to determine S-DVI premium rates:\nthe current mortality tables are almost 70 years old. Tables now are based on the assumption that disabled vets die at an average age of 58, which is no longer true given today's record. As life expectancy has significantly improved over the past 60 years, commercial insurance companies have used up-to-date mortality tables. The newest table in general used by the insurance industry has premium rates roughly 50 percent lower than S-DVI rates.\nBecause life expectancy has improved since the adoption of the S-DVI program, premiums based on the higher mortality rates of 1941 no longer fulfill congressional intent to provide life insurance to service-connected disabled veterans at standard rates. To address these concerns, it has been recommended that legislation be introduced to lower S-DVI premiums by basing them on the 2001 CSO Mortality Table, the table currently used by the National Association of Insurance Commissioners.\nSome S-DVI policyholders are eligible for premium waivers at no extra cost. To be eligible for a premium waiver, an insured person must have a total disability that lasts six months or longer and that starts before the age of 65. Even if the total disability started before the effective date of the policy, a waiver can still be obtained as long as the total disability is service-connected.\n\n\t\t\tEligibility Requirements\n\nThe Veterans' Benefits Act of 1992 ( P.L. 102-568 ) made supplemental coverage accessible to S-DVI policyholders. Veterans who are totally disabled may apply for a waiver of premiums and additional supplemental coverage of up to $20,000. The Veterans' Benefits Act of 2010 ( P.L. 111-275 ) increased the maximum coverage amount to $30,000 effective October 1, 2011. However, premiums cannot be waived on the additional supplemental coverage. To be eligible for Supplemental RH, policyholders must\nbe eligible for a waiver of premiums on their basic S-DVI policy due to total disability; apply for this coverage within one year from notice of the grant of the waiver; and be under the age of 65.\nIn the period from December 1992 to September 2010, VA approved 39,336 applications for Supplemental RH.\n\n\t\tGratuitous S-DVI (\"ARH\")\n\nIn 1959, Congress passed legislation to protect veterans who became incompetent due to a service-connected disability while eligible to apply for S-DVI, but who died before filing an application. This program is known as Gratuitous S-DVI (or ARH). Gratuitous S-DVI differs from S-DVI because it is \nissued posthumously, payable to a preferred class of a veteran's relatives, and payable solely in a lump sum.\n\n\t\t\tEligibility Requirements\n\nGratuitous S-DVI is granted posthumously to veterans who\nmet the basic eligibility requirements for S-DVI; did not apply for S-DVI because of continued mental incompetence due to a service-connected disability; and died before a guardian was appointed or within two years of such appointment.\nApplicants must submit their applications for Gratuitous S-DVI payment within two years from the date of the veteran's death. But if the person making the claim is mentally or legally incompetent when the right to apply for the benefit expires, he or she may apply within one year after his or her incompetency ends.\nGratuitous S-DVI lets veterans' families obtain lump-sum payments of $10,000 after the veterans' deaths as long as the previously mentioned eligibility requirements have been met. Gratuitous S-DVI is only payable as a lump sum and may not be paid as an annuity. \nPayment of Gratuitous S-DVI is made to the following family members in the order listed below:\n1. widow or widower of the insured, if living; if not, 2. insured's child or children, if living, in equal shares; if not, 3. insured's parents, if living, in equal shares.\n\n\tManagement and Administration\n\nIn 1919, the VA began oversight of all servicemember life insurance programs. The VA issued United States Government Life Insurance to World War I servicemembers (1919-1951), National Service Life Insurance for World War II servicemembers (1940-1951), Veterans' Special Life Insurance for Korean War servicemembers (1951-1956), and Veterans' Reopened Life Insurance for disabled World War II and Korean War servicemembers (1965-1966). All of these life insurance programs are currently closed to new issues. \nThe only three VA life insurance programs that provide benefits to the families of servicemembers and veterans, and that are still allowing new issues of life insurance, are S-DVI, SGLI, and VGLI. Congress passed the Insurance Act of 1951 (P.L. 82-23) and established the S-DVI program. S-DVI was created to meet the insurance needs of certain veterans with service-connected disabilities, many of whom would not be eligible for private life insurance due to their service-connected disabilities. Following S-DVI, in 1965, with the authorization of Congress (as part of establishing SGLI), the VA Administrator purchased group life insurance and selected the Prudential Insurance Company of America to cover its policies. In 1974, VGLI became available to former servicemembers under P.L. 93-289 . VGLI provides for the conversion of SGLI after separation from active duty.\nIn 1965, the Advisory Council on Servicemembers' Group Life Insurance was established. Initially, the Advisory Council is responsible for reviewing the SGLI programs and advising the VA Secretary on policy matters concerning SGLI. However, in 1974, the Advisory Council became responsible for reviewing the VGLI program as well. The Advisory Council consists of the following six members according to current law: \nSecretary of the Treasury as chairperson, Secretary of Defense, Secretary of Commerce, Secretary of Health and Human Services, Secretary of Homeland Security, and Director of the Office of Management and Budget.\nThe VA Regional Office and Insurance Center (VAROIC) in Philadelphia, PA, supervises the SGLI and VGLI programs. However, the OSGLI in Roseland, NJ, a division of Prudential, administers the day-to-day operations of SGLI and VGLI.\n\n\t\tHow Policy Proceeds are Paid Out\n\nSGLI and VGLI proceeds are paid either as a lump sum or with periodic payments over a period of 36 months. The lump sum payment may, at the beneficiary's election, be made as a single check (or electronic transfer) or via an Alliance Account. TSGLI proceeds may, at the beneficiary's election, be made as either a single check (or electronic transfer) or via an Alliance Account. An Alliance Account is an interest-bearing retained asset account administered through the Prudential Insurance Company of America that is similar to a checking account. Like a checking account, proceeds are deposited in the beneficiary's name and he or she is given a draft book, which the beneficiary may use to write drafts for any amount up to the full amount of the proceeds. However, unlike checks, drafts may not be used to make purchases at the point of sale. Instead, the beneficiary must write the draft and deposit it into his or her checking account, where the money will be transferred from the beneficiary's Alliance Account.\nAlliance Accounts are not offered under the S-DVI program, which is administered entirely by the VA. S-DVI beneficiaries may receive a lump-sum check or monthly payments, as predetermined by the veteran at the time that he or she fills out the application.\n\n\t\t\tAccelerated Benefit Option\n\nSGLI or VGLI policyholders may have access to the death benefits of their policies before they die if they exercise the Accelerated Benefit Option (ABO). This is a one-time benefit, available only if the policyholder is deemed terminally ill. If exercised, the ABO allows the policyholder to receive a lump-sum payment of the insurance subject to the following: \nTerminally ill policyholders will have access of up to 50% of the face amount of their coverage during their lifetimes. This money will be available in increments of $5,000. The insured must have a medical prognosis of life expectancy of nine months or less.\nThe S-DVI program does not have an ABO.\n\n\t\tFinancial Counseling\n\nSince October 1, 1999, the Beneficiary Financial Counseling Service (BFCS) has been available to VA insurance program beneficiaries. BFCS is a benefit that provides personalized objective financial counseling to SGLI, VGLI, and TSGLI beneficiaries at no additional charge.\nBFCS is provided by FinancialPoint. Beneficiaries may contact financial advisors to answer financial questions 24 hours a day, seven days a week, by calling FinancialPoint's toll free number. Beneficiaries may request targeted assistance; for instance, help with estate planning or saving for retirement. Beneficiaries may also request comprehensive personalized financial plans by submitting detailed financial questionnaires or having face-to-face meetings with advisors.\n\n\tPolicy Issues\n\n\t\tCoverage Limit for S-DVI\n\nCurrently, S-DVI policies are issued for a maximum face value of $10,000. This amount has not been increased in almost six decades. The $10,000 maximum coverage was part of the S-DVI program at its inception in 1951. By comparison, $10,000 in 1951 would be worth nearly $88,300 in 2012 after adjusting for inflation. Also, policyholders are denied the opportunity to buy additional coverage under the program.\nAs of June 24, 2009, less than 4% of veterans who were eligible to participate in the program were insured under S-DVI. According to a recent congressionally mandated study, the lowest area of veteran satisfaction was \"the maximum amount of S-DVI insurance coverage that veterans were authorized to purchase.\" Some critics say the program falls far short of delivering the protection it was originally designed to provide. For example, Brian E. Lawrence, assistant national legislative director of the Disabled American Veterans, said\nGovernment life insurance programs have limited basic coverage to $10,000 since their inception under the War Risk Insurance Act in 1917. Then, they were an excellent benefit. More than 93 percent of military members adopted the maximum coverage of $10,000 because they knew that in the event of their death, their family members would have the financial resources available to pay for the cost of a home and also to cover the cost of living for a considerable amount of time. For example, Sears, Roebuck and Co. sold prefabricated houses in the early 1900's. Its 1920 catalogue featured 80 models, ranging in price from $4,900 to $6,000. Obviously, $10,000 went much further in 1917 than it does in 2003.\nAccording to the VA, 49% of the veterans enrolled in the S-DVI program are considered totally disabled and are eligible for a premium waiver for their basic coverage. Of those who were eligible in 2009, only 27% had a Supplemental S-DVI policy. This means that a relatively small percentage of all S-DVI policyholders have $30,000 in total coverage, while a large majority of participants have $10,000 in total coverage. In comparison, the VGLI program offers maximum coverage of $400,000.\nIn addition, because coverage for S-DVI is not wholly funded by the premiums paid by policyholders, Congress appropriates funds to subsidize the program. These appropriations are necessary to support veterans who are waived from paying premiums because they are totally disabled from service-connected disabilities. Therefore, if the amount of coverage available to veterans were to increase, the appropriation allocated for the S-DVI program would also have to increase to avoid facing a shortfall.","output":"The Department of Veterans Affairs (VA) administers and supervises several life insurance programs for active servicemembers and veterans. The VA supervises the Servicemembers' Group Life Insurance (SGLI) and Veterans' Group Life Insurance (VGLI) programs, which are administered by the Office of Servicemembers' Group Life Insurance (OSGLI), a division of Prudential Insurance Company of America. The Service-Disabled Veterans' Insurance (S-DVI) program, on the other hand, is administered entirely by the VA. Access to VA-administered life insurance programs gives servicemembers and veterans, who may not be eligible for private life insurance policies, the opportunity to carry group life insurance. This provides for their families in the event of the servicemember's or veteran's death.\nIn September 1965, with the passage of P.L. 89-214, Congress established the SGLI program and mandated the VA to enter into an agreement with the private insurance industry to meet the insurance needs of Vietnam era servicemembers. As a result, VA established an agreement with Prudential Financial to administer its policies. When first enacted, the SGLI program provided up to $10,000 in coverage for policyholders. Today, servicemembers can receive a maximum of $400,000 insurance coverage under the program.\nOn August 1, 1974, with the enactment of P.L. 93-289, VGLI became available to servicemembers. VGLI provides for the conversion of SGLI after separation from active military duty. VGLI is a five-year renewable term policy that, like SGLI, provides a maximum of $400,000 of coverage.\nServicemembers may have their SGLI and VGLI proceeds paid either as a lump sum or over a period of 36 months. The lump sum payment may, at the beneficiary's election, be in the form of a single check via a retained asset account (called an Alliance Account). Free financial counseling is available to SGLI and VGLI beneficiaries.\nDuring the Korean War, before SGLI and VGLI were established, Congress passed the Insurance Act of 1951 (P.L. 82-23) and established the S-DVI program. S-DVI was created to meet the insurance needs of certain veterans with service-connected disabilities, many of whom would not be eligible for private life insurance due to their service-connected disabilities. Currently, policies are issued for a maximum face value of $10,000. Retained asset accounts are not offered under the S-DVI program.\nThis report provides information on the current VA life insurance programs available for servicemembers and veterans, management and administration issues, and associated policy issues."}
{"id":"crs_R41935","pid":"crs_R41935_0","input":"\tIntroduction\n\nThe Taxpayer Relief Act of 1997 ( P.L. 105-34 ) created a $500-per-child nonrefundable tax credit to help ease the financial burden that families incur when they have children. Since 2001, legislative changes, particularly those made by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA; P.L. 107-16 ) and the American Recovery and Reinvestment Act of 2009 (ARRA; P.L. 111-5 ), have altered the structure of this tax benefit. Specifically, the amount of the credit per child has increased and the credit has been made partially refundable, expanding the availability of the credit to some low-income families. The American Taxpayer Relief Act (ATRA; P.L. 112-240 ) made the EGTRRA changes to the child tax credit permanent. The Protecting Americans from Tax Hikes (PATH) Act (Division Q of P.L. 114-113 ) made the ARRA change to the child tax credit permanent.\nThe goal of this report is to analyze the economic impact of the child tax credit. This report first provides a brief overview of the current structure of the credit, followed by an economic and distributional analysis of the credit. The economic analysis focuses on the equity (i.e., \"fairness) of this tax provision, based on different definitions of equity, and examines the limited impact of the credit on taxpayer behavior. This report does not provide an in-depth examination of the history of the credit. \n\n\tCurrent Law\n\nFamilies with children may be eligible to claim a tax credit for each eligible child, subtracting the amount of the credit from their tax bill in order to reduce the taxes they owe. The child tax credit has three key features. \nAmount: The credit equals a maximum of $1,000 per child. Refundability: Families with little or no income tax liability may be able to claim the credit as a refund. The amount of the refund is equal to 15% of a taxpayer's earnings above $3,000, up to the maximum amount of credit for the family. This is referred to as the \"earned income\" refundability formula. Phase-out: The credit is phased out for higher-income taxpayers. Specifically, the credit is reduced by $50 for every $1,000 a family's modified adjusted gross income (AGI) exceeds specific income thresholds. \nThe monetary parameters of the credit (credit amount, refundability threshold, and phase-out threshold) are not indexed for inflation. The child tax credit can also offset a taxpayer's alternative minimum tax (AMT) liability. \n\n\tWho Claims the Child Tax Credit?\n\nThe current structure of the child tax credit benefits taxpayers over a wide range of income, as illustrated by Table 1 . Roughly half (52.4%) of the child tax credit benefits go to taxpayers with cash incomes under $40,000, whereas the other half go to those making more than $40,000. Roughly the same proportion of the child tax credit goes to taxpayers with AGI between $10,000 and $20,000 ($18.0%) as goes to those with AGI between $50,000 and $75,000 (16.9%), underscoring the fact that this tax credit provides significant benefits to both low-income and middle-income families. Most taxpayers with incomes above $200,000 will be ineligible for the credit due to the phase-out thresholds. \nEGTRRA and ARRA, which first made the credit partially refundable and then expanded refundability respectively, expanded the credit's availability to lower-income Americans, especially those with incomes between $10,000 and $20,000. Prior to this expansion, the credit was largely available only to middle- and upper-middle-income taxpayers. As previously noted, the EGTRRA provisions were made permanent by ATRA, while the ARRA changes were made permanent by the PATH Act.\nAlthough the current credit is generally available to low-income taxpayers, it provides little benefit to extremely poor taxpayers. Taxpayers with incomes under $10,000 receive 3.6% of the child tax credit, even though they make up 16.8% of tax units. This suggests that this provision may not benefit the very poor in proportion to their population. \nTaxpayers with very low income (i.e., less than $10,000) do not benefit from the child tax credit (or receive a very small credit, less than $1,000 per child) for two reasons. First, taxpayers with very low income do not have any income tax liability and so cannot claim the nonrefundable portion of the child tax credit. Even if the taxpayer had one qualifying child\u2014and so would be able to reduce their tax liability by $1,000\u2014if they do not owe any federal income taxes, they cannot reduce their taxes by the credit amount. This is one rationale for making tax credits refundable (i.e., available to taxpayers with little or no tax liability). The child tax credit is refundable. However, the child tax credit is only refundable if taxpayers have earnings above $3,000, and the refund is calculated as 15 cents for every dollar of earnings above this $3,000 threshold. Hence, the second reason the very poor do not claim the credit, or claim less than the full value of the credit, is that their low income prevents them from fully benefiting from the refundable portion of the credit. For example, a taxpayer with two children and earnings of $10,000 would, based on the refundability formula, be eligible for $1,050 in child tax credits, as opposed to the maximum amount of $2,000. A taxpayer with two children needs $16,333 in earnings to be able to claim the full $2,000 of child tax credit.\n\n\tEconomic Analysis\n\nGenerally, economists evaluate tax policy\u2014like the child tax credit\u2014through three different lenses: the equity (or fairness) of the provision (which necessitates defining fairness), how the tax provision affects taxpayers' behavior (again, the intended behavior must be specified), and the complexity of administering the tax provision. These three lenses are often referred to as equity, efficiency, and administration, respectively. A provision may be seen differently through these lenses. For example, a tax provision may simplify the tax code (improve administration), but result in an undesirable behavior (reduce efficiency). Hence economists tend to evaluate a tax provision using these three approaches to provide the most complete economic analysis of the provision. As with other tax provisions, this report will analyze the child tax credit through the lenses of equity, efficiency, and administration. Specifically: \nEquity: Economic theory suggests that there are two ways to analyze the fairness of a provision, vertical equity and horizontal equity. Vertical equity states that groups with more resources should pay more taxes, whereas horizontal equity states that families with the same circumstances should pay the same taxes. While the child tax credit is generally evaluated as vertically equitable, because it reinforces the progressivity of the current tax code, economists have differing views on whether it is horizontally equitable. \nEfficiency: When examining the efficiency of a tax provision, economists examine how a tax provision affects taxpayer behavior, in terms of encouraging a taxpayer to do more or less of a certain activity. Theoretically, the child tax credit may have effects on taxpayer behavior, in terms of encouraging taxpayers to work and to have children, but there is currently very little evidence to support or refute these theories. \nAdministration: Tax policies\u2014like the child tax credit\u2014can be analyzed with respect to their effect on the complexity of the tax code. The administration of a tax provision can affect whether it ultimately achieves its economic or policy goals. There are a variety of tax benefits available to families with children, and the addition of the child tax credit, while beneficial to many families, has made the tax code potentially more complicated especially for lower-income taxpayers. \nThe following section examines in detail the child tax credit in terms of its impact on equity, taxpayer behavior, and tax administration.\n\n\t\tEquity of the Child Tax Credit\n\nThere are several ways to assess the fairness or equity of a tax provision. Depending on the definition used, the child tax credit may or may not be equitable. \nThe current federal income tax is progressive, meaning higher-income taxpayers pay a greater share of their income in taxes (and thus have a higher average income tax rate) than lower-income taxpayers. A progressive tax system reflects a standard of fairness called vertical equity (whether taxes should be progressive and how progressive is subject to some debate). \nThe child tax credit is generally considered vertically equitable because it reinforces the progressivity of the current income tax structure. The credit is structured to lower the tax burden of families earning between $3,000 and the phase-out income level, generally $150,000 for a married couple with two children. As illustrated in Table 2 , the child tax credit reduces the average federal tax rate of taxpayers with cash income under $200,000, while having little impact on taxpayers with income greater than $200,000. In addition, the child tax credit tends to reduce lower-income taxpayers' average tax rates more than it reduces the average tax rate of higher-income taxpayers. The largest reduction occurs among those with income between $10,000 and $20,000.\nAnother standard of fairness used by economists\u2014referred to as horizontal equity\u2014suggests that families with equal circumstances should pay equal taxes. The child tax credit's effect on horizontal equity ultimately depends on what are considered \"equal circumstances.\" In other words, are taxpayers considered equal if they have the same income or are they considered equal if they have chosen to spend that income in the same way?\nSome economists interpret horizontal equity to mean that families with the same amount of financial resources (i.e., income) should pay the same amount in taxes (and thus have the same average tax rate), regardless of whether they use those resources to buy a house, go on a vacation, or have a child. If children are viewed as choices of how taxpayers use their resources, the credit would violate horizontal equity. Specifically, the child tax credit generally provides greater tax benefits to a family as the number of children increases, assuming their income remains unchanged. For example, in 2012 a married couple that has $50,000 in earnings and no children (and hence is ineligible for the child tax credit) would be expected to owe $3,634 (7.3% average tax rate) in taxes. If the same married couple had one child, they would be expected to owe $2,634 after applying the child tax credit (5.3% average tax rate). If they had an additional child, the credit would lower their tax liability to $1,634 (3.3% average tax rate).\nOther economists define horizontal equity to mean that families with the same \"ability to pay\" should pay the same in tax. Under this definition, families with more children should pay less in tax because additional children reduce their ability to pay. According to the \"ability to pay\" approach, the child tax credit does not generally violate horizontal equity. Congress used the \"ability to pay\" interpretation of horizontal equity to justify the structure of the child tax credit in 1997. According to the Joint Committee on Taxation, the main reason for the creation of a child tax credit was that \nCongress believed that [prior to the child tax credit] the individual income tax structure [did] not reduce tax liability by enough to reflect a family's reduced ability to pay taxes as family size increases.... The Congress believed that a tax credit for families with dependent children will reduce the individual income tax burden of those families, will better recognize the financial responsibilities of raising dependent children, and will promote family values. \nPolicymakers may also be interested in evaluating child tax benefits like the child tax credit simultaneously with the other available tax benefits to get a holistic picture of the tax code's impact on equity. For example, as previously mentioned, the child tax credit when evaluated individually may not be horizontally equitable at low incomes. Based on this analysis, increasing refundability of the credit could make the credit more horizontally equitable for some low-income families. However, prior CRS analysis suggests that after making adjustments for a family's ability to pay based on family size, the totality of child tax benefits results in a tax system that is disproportionally generous at lower income levels to larger as opposed to smaller families. In this broader context, expanding refundability of the child tax credit could exacerbate horizontal inequities. \n\n\t\tEfficiency (Behavioral Effects) of the Child Tax Credit\n\nEconomists may also analyze tax provisions in terms of whether a tax provision results in more or less of a good being produced or consumed. Subsidies, which lower the prices of goods, theoretically result in more of a good being consumed and produced. The current structure of the child tax credit subsidizes both low-wage work (by the earned income formula) and children (by the $1,000 per child aspect of the provision). However, there is currently very little substantive research evaluating the impact of the child tax credit on taxpayer behavior.\n\n\t\t\tImpact on Work Choices\n\nThe child tax credit's current refundability structure creates a wage subsidy for some low-income families, suggesting it may affect work decisions. For eligible families with sufficiently low income, the child tax credit gives families 15 cents for every dollar of earnings above $3,000. Economic theory suggests that increasing the price of labor (the wage) among low-income workers will have the overall effect of encouraging them to work more. In practice, however, it is very difficult to isolate the labor market effects of the child tax credit from the similarly structured but larger subsidy provided by the EITC, since both credits simultaneously subsidize earnings over the same income range. \n\n\t\t\tImpact on Having Children\n\nThe child tax credit is unlikely to have a significant impact on inducing families to have additional children. While the child tax credit reduces the cost of a child, the expenses incurred from having children greatly exceed the value of the credit for most taxpayers. A government report estimates that the annual cost of raising a child in a middle-income family ranged from $11,650 to $13,530. In addition, families choose to have children for a variety of factors that are not motivated by economics, including the happiness and fulfillment that children may bring them. \n\n\t\tComplexity of Administering Child-Related Tax Benefits\n\nIn a 2010 report to Congress, the IRS Taxpayer Advocate identified the complexity of the current tax code as the most serious problem facing taxpayers. Tax policies, including those targeted toward families with children, are currently structured very differently, adding to the complexity of the tax code. For example, a single parent with a 16-year-old child and income of $20,000 in 2010 will be eligible for a $1,000 child tax credit, a $3,650 dependent exemption for that child (which lowers their tax liability by $548), and $2,487 of EITC. In 2011, when the child is 17, the single parent will be ineligible for the child tax credit, but remain eligible for the dependent exemption (which equals $3,700 in 2011 and will lower their tax bill by $555) and approximately $2,598 of EITC. The amount of these tax benefits will also change if the parent marries (which can change their tax liability), has an additional child, or their income changes (which changes the value of the child tax credit and EITC). Tax complexity associated with child-related tax provisions is particularly burdensome for lower-income families. Complexity reduces utilization rates among eligible populations and reduces the value of the benefits among those who do claim them, because they often rely on a paid preparer for assistance. Complexity can thus undermine the ultimate goal of policymakers, whether it be behavioral changes or increased equity. \n\n\tPolicy Options: Changing Other Parameters of the Credit\n\nPolicymakers may consider modifying the current parameters of the child tax credit. The impact of modifications will depend on a taxpayer's income. Modifications that benefit middle- and upper-middle-income taxpayers include increasing the amount of the credit per child and increasing the phase-out thresholds. Modifications that benefit lower-income taxpayers include reducing the refundability threshold or increasing the current refundability rate. These changes will likely have significant budgetary cost that policymakers may consider alongside policy goals they may achieve by increasing this tax benefit. \n\n\t\tIncreasing the Maximum Amount of the Credit\n\nIncreasing the maximum amount of credit per child, either by a fixed amount or proportional to inflation, would be most valuable to families whose income does not exceed the phase-out limits. However, for lower-income families\u2014those with income tax liability less than the value of their credit\u2014increasing the maximum amount of the credit will be valuable insofar as they can claim it as a refund using the earned income formula. If their earnings are sufficiently low, they may not be able to benefit from increasing the maximum amount of the credit. For example, if the child tax credit was doubled to $2,000 per child, and all other aspects of the credit remained the same as current law, a family with two children would need earnings of at least $29,667 to claim the full credit if the maximum credit value doubled. Currently the minimum amount of earnings needed to claim the full credit for two children is $16,333. \nPolicymakers could also choose to increase the value of the credit by indexing it to inflation. If the $500 per child tax credit in 1998 had been indexed for inflation using the Consumer Price Index (CPI), it would be $693.14 in 2011 dollars. If the $1,000 child tax credit in effect in 2003 were indexed to the CPI it would be $1,228.07 in 2011 dollars. Increasing the amount of the credit based on inflation will not benefit certain lower-income taxpayers whose earnings tend to grow more slowly than inflation. \n\n\t\tReducing the Refundability Earnings Threshold and Increasing the Refundability Rate\n\nAmong lower-income taxpayers, whose tax liability is less than the value of their child tax credit, the most relevant parameters of the child tax credits are those that affect refundability. Lowering the refundability threshold (currently set at $3,000) and increasing the refundability rate (currently 15%) would result in more families with low earnings being eligible to receive the credit or a larger credit. Under current law, a family with two children must earn $16,333 to be eligible to receive $2,000 in child tax credits as a refund. If the refundability threshold was lowered to zero (and all other parameters remained the same), this same family would need earnings of $13,333 to receive the full $2,000 in child tax credits as a refund. Economic modeling of this scenario indicates that roughly 95% of the benefit resulting from reducing the child tax credit refundability threshold to zero would go to taxpayers with cash income levels below $30,000. Nearly half of the benefit, 46%, would go to taxpayers with cash income below $10,000.\nOn the other hand, if the refundability rate were increased to 100% (meaning for every dollar a family earned above the $3,000 threshold, they received $1 of refundable credit), this same family would need earnings of $5,000 to receive the full $2,000 in child tax credits. Alternatively, if the refundability rate were the same as the refundability rate of the EITC for a family with two children (40%), this family would need earnings of $8,000 to receive the full value of the child tax credit. Increasing the refundability rate and keeping the refundability threshold the same as current law would result in certain low-income households that already receive the child tax credit being eligible for a larger refundable credit. However, it would not provide any benefit to households with earnings below the refundability threshold. \nEconomic modeling of a 40% refundability rate suggests that approximately 94% of the tax benefits associated with increasing the refundability rate would benefit taxpayers with cash income levels under $30,000. The greatest share of the tax benefit would go to taxpayers with cash income between $10,000 and $20,000, because their income level is significantly above the $3,000 refundability threshold such that they can benefit from the increased refundability rate.\nChanging the refundable portion of the credit by changing the refundability threshold or refundability rate primarily affects lower-income families for whom the refundable portion is often the key component of the credit. Approximately 80% of the benefit that arises from reducing the refundability threshold to zero or raising the refundability rate to 40% would go to families making less than $20,000.\n\n\t\tIncreasing the Phase-out Limits of the Credit\n\nSince the child tax credit was created in 1997, the credit has phased out for married taxpayers filing joint returns whose income exceeds $110,000 ($55,000 for married couples filing separately) and for head of household filers with income above $75,000. These phase-out thresholds are not indexed for inflation. If they had been indexed for inflation, they would have been 41% higher in 2012 than they were in 1998. Over the years, the real value of these thresholds has decreased due to inflation, pushing more taxpayers into the phase-out range and reducing the amount of the child tax credit these taxpayers are eligible for. One policy option would be a one-time increase in the phase-out limits. Another policy option would be indexing the amounts in accordance with established procedures applied to other elements of the tax system, such as personal exemption and the standard deduction. Finally, some combination of the two approaches is also possible.\nIncreasing the AGI phase-out limits for the child tax credit would significantly expand the number of taxpayers who would be eligible to receive the child tax credit. Such a change may be particularly important for taxpayers who live in areas with a high cost of living, where both incomes and costs of rearing children may be correspondingly higher. It would also increase the budgetary cost of the program. Critics of this change may question the necessity of such relief. The empirical evidence suggests that the overall federal tax burden, as well as the federal individual income tax burden, fell for most households with children between 1979 and 2007. Legislation enacted since 2007 to address economic insecurity resulting from the recent recession, including ARRA and the 2010 Tax Act, has further reduced taxes for many Americans through the enactment of new provisions like the Making Work Pay tax credit (which expired at the end of 2010), payroll tax reduction, and the extension of EGTRRA's individual income tax provisions.\n\n\tPolicy Options: Reducing Complexity by Creating Uniform Child Benefits\n\nTax benefits compose a substantial proportion of the federal benefits that go to families with children. According to one study, of the five largest spending and tax programs on children, three are tax provisions\u2014the child tax credit (number two), the EITC (number three), and the exemption for dependents (number four). Only Medicaid spending on children is higher. The refundable portions of the EITC and child tax credit are structured to direct assistance to low-income families, and could reflect an increased interest by Congress in providing financial assistance to low-income workers through the tax code as opposed to transfer payments. In fact, the refundable portion of the EITC and child tax credit ranked fourth and sixth respectively in outlays among programs targeted toward low-income populations.\nSome experts believe that the different eligibility rules for different child-related tax benefits make it increasingly difficult for taxpayers to claim these benefits. This complexity results in direct financial costs for taxpayers, who may choose to use paid preparers instead of preparing their returns themselves. According to IRS data, more than half of taxpayers with income below $50,000 use paid tax preparers. President Bush's 2005 Presidential Panel on Federal Tax Reform summarized the complexity of claiming the child tax credit, \"Figuring out whether you can claim the child tax credit ... requires the skills of a professional sleuth: You need to complete eight lines on a tax form, perform up to five calculations, and fill out as many as three other forms or schedules.\"\nMuch of the complexity in child-related tax benefits is related to differing definitions of what constitutes an eligible child, specifically the different age limits of qualifying children among the different tax benefits. The child tax credit is limited to children under 17 years old, unlike other tax benefits, such as the dependent exemption, that can be claimed by taxpayers with children as old as 23. Increasing the age of eligible children would have significant budgetary costs. One study estimated that expanding the child tax credit to 17- and 18-year-olds would reduce revenues by $6.1 billion in 2011. Beyond the differing eligibility definitions used for different child tax benefits, the tax benefits themselves are structured differently. The interaction of these different structures has led to middle-income families receiving a smaller total benefit than some higher-income taxpayers, as illustrated in the Figure 1 . \nPresident Bush's 2005 Panel on Federal Tax Reform recommended simplifying the tax code, including child tax benefits, but to date these proposals have not been adopted. Specifically, the panel recommended consolidating the standard deduction, personal exemption, and child tax credit into one tax benefit, a family tax credit.\nMore than five years later, some experts have again proposed reducing the complexity of these provisions and making their benefits more transparent by combining child tax benefits into a uniform child credit. While such a proposal could significantly simplify eligibility rules as well as the calculation of the benefit, policymakers would need to consider the competing functions of current tax benefits as they create a uniform benefit. For example, some benefits like the EITC and refundable portion of the child tax credit subsidize earnings, whereas the nonrefundable portion of the child tax credit provides a uniform benefit per child for taxpayers with sufficient earnings that do not exceed the phase-out level. Because of this distinction, policymakers might consider creating different uniform credits based on the purpose of the credit, whether the purpose of the credit is to subsidize earnings of low-income taxpayers or provide a benefit for having children.\n\n\t\tAppendix. The Impact of the EGTRRA and ARRA Changes to the Child Tax Credit\n\nThe most recent changes to the child tax credit were made by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA; P.L. 107-16 ) and the American Recovery and Reinvestment Act of 2009 (ARRA; P.L. 111-5 ). These changes, while once temporary, are now permanent. Policymakers interested in potentially modifying the child tax credit in the future may be interested in understanding the economic impact of these past legislative changes.\nThe data indicate that while the ARRA modifications did provide relatively more benefit to lower-income taxpayers, the EGTRRA changes benefited more children. The analysis will then turn to the implications of extending the ARRA modifications, both on the number of children who will be affected as well as the budgetary cost, with similar data on the impact of the EGTRRA changes provided for comparison. \nImpact of EGTRRA Versus ARRA Modifications to the Credit\nEGTRRA and ARRA substantially changed the structure of the child tax credit. EGTRRA increased the value of the credit from $500 per child to $1,000 per child and made the credit partially refundable using the earned income formula. At the end of 2012, ATRA made these changes permanent. ARRA expanded upon EGTRRA's changes to refundability by lowering the earnings threshold of the earned income formula to $3,000. The Protecting Americans from Tax Hikes (PATH) Act (Division Q of P.L. 114-113 ) made the $3,000 threshold permanent.\nDistributional Impact\nA distributional impact of a tax benefit indicates the share of a tax benefit received by taxpayers at different income levels. Table A-1 illustrates the different impacts of the EGTRRA and ARRA provisions on taxpayers based on cash income. Overall, approximately 60% of the child tax benefits from EGTRRA went to taxpayers with cash income above $50,000. By contrast, 70.5% of child tax benefits under ARRA went to taxpayers with cash income of less than $20,000.\nIn addition, after the EGTRRA modification went into effect, research indicates that qualifying Hispanic and African American households were less likely to receive the full value of the child tax credit then qualifying white households. Specifically, in 2005, when all the child tax credit provisions of EGTRRA were effective, 49.5% of households with qualifying African American children and 46.0% of households with qualifying Hispanic children were ineligible to receive the full credit due to low incomes, in contrast to 18.1% of households with white children.\nEstimates of the distributional impact on tax filers of the EGTRRA and ARRA provisions are currently unavailable, but can reasonably be expected to approximate the distribution in Table A-1 . Recent data (provided in Figure A-1 ) do, however, provide information on the impact in 2013 of these modifications in terms of the number of children who benefit. (Although the data are presented in terms of the number of children who benefit, the tax credit is actually claimed by their parents, ostensibly for children's benefit.) These data provide another way to analyze the impact of the EGTRRA and ARRA changes to the credit.\nNumber of Children Affected by EGTRRA Versus ARRA Changes\nAccording to estimates provided by the Tax Policy Center, both the EGTRRA and ARRA changes to the child tax credit are estimated to have a significant impact on the benefits received by millions of children, as illustrated in Figure A-1 . In 2013, the EGTRRA provisions are estimated to result in 18.6 million children being eligible for the credit who otherwise would not receive this tax benefit if the EGTRRA changes had expired. In addition, 3.4 million children in 2013 are estimated receive a larger credit as a result of the EGTRRA provisions.\nThe extension of the ARRA modifications is estimated to have a lower overall benefit in terms of the impact on children. Approximately 17.1 million children in 2013 will benefit from the extension of ARRA child tax credit provisions as opposed to 22 million children that benefit from the EGTRRA provisions. The majority of children who will benefit from the ARRA modification would receive a larger credit (10.2 million children), while fewer will be newly eligible (6.9 million children). \nCost of Extending EGTRRA and ARRA Modifications to the Credit\nHistorical data provide estimates of the comparative costs associated with the EGTRRA and ARRA modifications, indicating that a majority of the cost is due to the EGTRRA provisions. The Joint Committee on Taxation's revenue estimates for the 2010 Tax Act isolated the costs of extending the EGTRRA and ARRA provisions for two years (2011 and 2012) and indicated that 78% of the cost of these policies was associated with the extension of the EGTRRA provisions. Specifically, the cost of the two-year extension of EGTRRA child tax credit provisions was $71.7 billion over 10 years (2011-2020), whereas the cost of extending the ARRA provisions was $19.7 billion over the same period. \nOf the total annual cost of the child tax credit in 2012, approximately 60% was a result of the EGTRRA changes, 16% was a result of ARRA modification, and 24% was a result of the underlying parameters of the pre-EGTRRA and ARRA credit.","output":"The child tax credit is currently structured as a $1,000-per-child credit that is partially refundable for lower-income families with more than $3,000 in earnings. Prior to 2001, the child tax credit was a $500-per-child nonrefundable tax credit which generally benefited middle- and upper-middle-income taxpayers.\nSince 2001, legislative changes, particularly those made by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA; P.L. 107-16) and the American Recovery and Reinvestment Act of 2009 (ARRA; P.L. 111-5), have altered the structure of this tax benefit. Specifically, the amount of the credit per child has increased and the credit has been made partially refundable, expanding the availability of the credit to some low-income families. The American Taxpayer Relief Act (ATRA; P.L. 112-240) made the EGTRRA changes to the child tax credit permanent. The Protecting Americans from Tax Hikes (PATH) Act (Division Q of P.L. 114-113) made the ARRA change to the child tax credit permanent.\nIn light of these recent changes to the structure of the child tax credit, this report provides an economic analysis of the current credit, focusing on the credit's impact on fairness (also referred to as \"equity\"). The report then explores how the credit has affected taxpayers' behavior about working and having children. Finally, this report examines the complexity of administering this tax provision in the context of other child-related tax benefits.\nThis report concludes with an overview of possible modifications to the child tax credit. The impact of these modifications will depend on a taxpayer's income. Modifications that benefit middle- and upper-middle-income taxpayers include increasing the amount of the credit per child and increasing the phase-out thresholds. Modifications that benefit lower-income taxpayers include reducing the refundability threshold or increasing the current refundability rate. These changes will likely have significant budgetary cost that policymakers may consider alongside their policy goals.\nThis report does not provide an in-depth examination of the history of the credit. For more information on the legislative history of the credit, see CRS Report R41873, The Child Tax Credit: Current Law and Legislative History, by [author name scrubbed]."}
{"id":"gao_GAO-03-1024T","pid":"gao_GAO-03-1024T_0","input":"\tGAO: A Unique Agency with a Hybrid System\n\nAs an arm of the legislative branch, GAO exists to support the Congress in  meeting its constitutional responsibilities and to help improve the  performance and ensure the accountability of the federal government for  the benefit of the American people.  Today, GAO is a multidisciplinary  professional services organization, comprised of about 3,250 employees,  that conducts a wide range of financial and performance audits, program  evaluations, management reviews, investigations, and legal services  spanning a broad range of government programs and functions.  GAO\u2019s  work covers everything from the challenges of securing our homeland, to  the demands of an information age, to emerging national security threats,  and the complexities of globalization.  We are committed to transforming  how the federal government does business and to helping government  agencies become organizations that are more results oriented and  accountable to the public.  We are also committed to leading by example in  all major management areas.\nGiven GAO\u2019s role as a key provider of information and analyses to the  Congress, maintaining the right mix of technical knowledge and subject  matter expertise as well as general analytical skills is vital to achieving the  agency\u2019s mission.  Carrying out GAO\u2019s mission today is a multidisciplinary  staff reflecting the diversity of knowledge and competencies needed to  deliver a wide array of products and services to support the Congress.  Our  mission staff\u2014at least 67 percent of whom have graduate degrees\u2014hold  degrees in a variety of academic disciplines, such as accounting, law,  engineering, public administration, economics, and social and physical  sciences.  I am extremely proud of our GAO employees and the difference  that they make for the Congress and the nation.  They make GAO the  world-class organization that it is, and I think it is fair to say that while they  account for about 80 percent of our costs, they constitute 100 percent of  our real assets.\nBecause of our unique role as an independent overseer of federal  expenditures, fact finder, and honest broker, GAO has evolved into an  agency with hybrid systems.  This is particularly evident in GAO\u2019s  personnel and performance management systems.  Unlike many executive  branch agencies, which have either recently received or are just requesting  new broad-based human capital tools and flexibilities, GAO has had certain  human capital tools and flexibilities for over two decades.  As a result, we  have been able to some extent to operate our personnel system with a  degree of independence that most agencies in the executive branch do not  have.  For example, we are excepted from certain provisions of Title 5,  which governs the competitive service, and we are not subject to Office of  Personnel Management (OPM) oversight.\nUntil 1980, our personnel system was indistinguishable from those of  executive branch agencies\u2014that is, GAO was subject to the same laws,  regulations, and policies as they were.  However, with the expansion of  GAO\u2019s role in congressional oversight of federal agencies and programs,  concerns grew about the potential for conflicts of interest.  Could GAO  conduct independent and objective reviews of executive branch agencies,  such as OPM, when these agencies had the authority to review GAO\u2019s  internal personnel activities?  As a result, GAO worked with the Congress  to pass the GAO Personnel Act of 1980, the principal goal of which was to  avoid potential conflicts by making GAO\u2019s personnel system more  independent of the executive branch.\nAlong with this independence, the act gave GAO greater flexibility in hiring  and managing its workforce.  Among other things, it granted the  Comptroller General authority to  appoint, promote, and assign employees without regard to Title 5  requirements in these areas;  set employees\u2019 pay without regard to the federal government\u2019s General  Schedule (GS) pay system\u2019s classification standards and requirements;  and   establish a merit pay system for appropriate officers and employees.\nBy excepting our agency from the above requirements, the GAO Personnel  Act of 1980 allowed us to pursue some significant innovations in managing  our people.  One key innovation was the establishment of a \u201cbroad  banding,\u201d or \u201cpay banding,\u201d approach for classifying and paying our Analyst  and Attorney workforce in 1989.  This was coupled with the adoption of a  pay for performance system for this portion of our workforce.  Therefore,  while other agencies are only now requesting the authority to establish  broad banding and pay for performance systems, GAO has had almost 15  years of experience with such systems.\nAlthough GAO\u2019s personnel and pay systems are not similar to those of  many executive branch agencies, I must emphasize that in important ways,  our human capital policies and programs are very much and will continue  to remain similar to those of the larger federal community.  GAO\u2019s current  human capital proposal will not change our continued support for certain  national goals (e.g., commitment to federal merit principles, protection  from prohibited personnel practices, employee due process through a  specially created entity\u2014the Personnel Appeals Board (PAB), and  application of veterans\u2019 preference consistent with its application in the  executive branch for appointments and all appropriate reductions-in- force).  Furthermore, our pay system is and will continue to be consistent  with the statutory principle of equal pay for equal work while making pay  distinctions on the basis of an individual\u2019s responsibilities and  performance.  In addition, we are covered and will remain covered by Title  VII of the Civil Rights Act, which forbids employment discrimination.  At  GAO, we also emphasize opportunity and inclusiveness for a diverse  workforce and have zero tolerance for discrimination of any kind.  We have  taken and will continue to take disciplinary action when it \u201cwill promote  the efficiency of the service\u201d\u2014which for us includes such things as GAO\u2019s  ability to do its work and accomplish its mission.\nAlthough we are not subject to OPM oversight, we are nevertheless subject  to the oversight of the Congress including our appropriations  committees\u2014the Senate Committee on Appropriations\u2019 Subcommittee on  the Legislative Branch and the House Committee on Appropriations\u2019  Subcommittee on Legislative\u2014and our oversight committees\u2014the Senate  Committee on Governmental Affairs and the House Committee on  Government Reform.  In addition, GAO\u2019s management actions are subject  to the review of an independent five member board, the Personnel Appeals  Board, which performs functions similar to those provided by the Merit  Systems Protection Board for federal executive branch employees\u2019  personnel grievances.  The Congress authorized the establishment of the  PAB specifically for GAO in order to protect GAO\u2019s independence as an  agency.  As with other federal executive branch employees, our employees  have the right to appeal certain kinds of management actions including  removal, suspension for more than 14 days, reductions in pay or grade,  furloughs of not more than 30 days, a prohibited personnel practice, an  action involving prohibited discrimination, a prohibited political activity, a  within-grade denial, unfair labor practices or other labor relations issue.   However, they do so to the PAB rather than the MSPB.\nWhile we currently do not have any bargaining units at GAO, our  employees are free to join employee organizations, including unions.  In  addition, we engage in a range of ongoing communication and coordination  efforts to empower our employees while tapping their ideas.  For example,  we regularly discuss a range of issues of mutual interest and concern with  our democratically elected Employee Advisory Council (EAC).  Chris  Keisling, who is a Band III field office representative of the EAC, is  testifying with me today.  In addition, I consult regularly with our managing  directors on issues of mutual interest and concern.  In that spirit, I will  consult with the managing directors and the EAC before implementing the  provisions related to our human capital proposal.  As we did with the  flexibilities granted it under Public Law 106-303, the GAO Personnel  Flexibilities Act, we will implement the authorities granted under this  provision of our proposal only after issuing draft regulations and providing  all employees notice and an opportunity for comment.  Specifically, for the  authorities granted to us under Public Law 106-303, we posted the draft  regulations on our internal Web site and sent a notice to all GAO staff  advising them of the draft regulations and seeking their comments.\n\n\tKey Elements of GAO\u2019s Proposal\n\nGAO\u2019s proposal combines diverse initiatives that, collectively, should  further GAO\u2019s ability to enhance our performance, assure our  accountability, and help ensure that we can attract, retain, motivate, and  reward a top quality and high-performing workforce currently and in future  years.  These initiatives should also have the benefit of helping guide other  agencies in their human capital transformation efforts.  Specifically, we are  requesting that the Congress provide us the following additional human  capital tools and flexibilities:   make permanent GAO\u2019s 3-year authority to offer voluntary early  retirement and voluntary separation payments;   allow the Comptroller General to adjust the rates of basic pay of GAO on  a separate basis than the annual adjustments authorized for employees  of the executive branch;   permit GAO to set the pay of an employee demoted as a result of  workforce restructuring or reclassification at his or her current rate  with no automatic annual increase to basic pay until his or her salary is  less than the maximum rate of  their new position;   provide authority in appropriate circumstances to reimburse employees  for some relocation expenses when that transfer does not meet current  legal requirements for entitlement to reimbursement but still benefits  GAO;   provide authority to put upper-level hires with less than 3 years of  federal experience in the 6-hour leave category;   authorize an executive exchange program with private sector  organizations working in areas of mutual concern and involving areas in  which GAO has a supply-demand imbalance; and  change GAO\u2019s legal name from the \u201cGeneral Accounting Office\u201d to the  \u201cGovernment Accountability Office.\u201d\nI will go into more detail later in my testimony on the details and rationale  for each of these proposals.\n\n\tProcess for Developing the Proposal\n\nIn developing our proposal, we used a phased approach that involved   (1) developing a straw proposal, (2) vetting the straw proposal broadly  both externally and internally, and (3) making appropriate adjustments  based on comments and concerns raised during the vetting process.   As we  have previously testified, many of the management tools and flexibilities  we needed to pursue modern human capital management approaches are  already available to us and we have used them.  We have chosen to come to  the Congress for legislation only where the tools and flexibilities we have  were inadequate for addressing the challenges we faced.  For example, the  Congress enacted Public Law 106-303 to provide us with certain narrowly  tailored flexibilities we needed to reshape our workforce and establish  senior-level technical positions in critical areas.  These flexibilities were  needed to help GAO address the past decade\u2019s dramatic downsizing  (approximately 40 percent from 1992 through 1997) combined with a  significant increase in the retirement-eligible workforce that jeopardized  our ability to perform our mission in the years ahead.\nIn developing our preliminary proposal, we gathered suggestions for  addressing GAO\u2019s human capital challenges as well as challenges faced by  the rest of the federal government, discussed and debated them internally,  and compiled a preliminary list of proposals.  We received a number of  viable proposals that we separated into two groups: (1) proposals that  would be more applicable government-wide and (2) proposals GAO should  undertake.  I had our Office of General Counsel review the proposals GAO  should undertake to determine whether we needed to seek legislative  authority to implement them or whether I could implement them under the  Comptroller General\u2019s existing authority.\nMindful of the need to keep the Congress appropriately informed, my staff  and I began our outreach to GAO\u2019s appropriations and oversight  committees on the need for additional human capital flexibilities beginning  late last year.   In early spring of this year, we shared with these committees  a confidential draft of a preliminary draft proposal.  We also advised them  that we planned to conduct a broad range of outreach and consultation on  the proposal with our employees and other interested parties and that we  would send them our revised legislative proposal at a later date.  We  conducted an extensive outreach and consultation effort with members of  the Congress, including chairmen and ranking minority members of our  appropriations and oversight committees and a number of local delegation  members; congressional staff; the Director of OPM; the Deputy Director for  Management of the Office of Management and Budget; public sector  employee associations and unions; and various \u201cgood government\u201d  organizations.\nWithin GAO, members of the Executive Committee (EC), which includes  our Chief Operating Officer, our General Counsel, our Chief Mission  Support Officer and me, engaged in an extensive and unprecedented range  of outreach and consultation with GAO employees.  This outreach included  numerous discussions with our managing directors, who manage most of  GAO\u2019s workforce, and members of the EAC.\nThe EAC is an important source of input and a key communications link  between executive management and the constituent groups its members  represent.  Comprising employees who represent a cross-section of the  agency, the EAC meets at least quarterly with me and members of our  senior executive team.  The EAC\u2019s participation is an important source of  front-end input and feedback on our human capital and other major  management initiatives.  Specifically, EAC members convey the views and  concerns of the groups they represent, while remaining sensitive to the  collective best interest of all GAO employees; propose solutions to  concerns raised by employees; provide input to and comment on GAO  policies, procedures, plans, and practices; and help to communicate  management\u2019s issues and concerns to employees.\nI have also used my periodic \u201cCG chats,\u201d closed circuit televised broadcasts  to all GAO employees, as a means of explaining our proposal and  responding to staff concerns and questions.  Specifically, I have held two  televised chats to inform GAO staff about the proposal.  One of these chats  was conducted in the form of a general listening session, open to all  headquarters and field office staff,  featuring questions from members of  the EAC and field office employees.  I have also discussed the proposal  with the Band IIs (GS-13-14 equivalents) in sessions held in April 2003, and  with our Senior Executive Service (SES) and Senior Level members at our  May off-site meeting. In addition to my CG chats, I have personally held a  number of listening sessions, including a session with members of our  Office of General Counsel, two sessions with our administrative support  staff, and sessions with staff in several field offices.  Furthermore, the Chief  Operating Officer represented me in a listening session with Band I field  office personnel.  Finally, I have also personally received and considered a  number of E-mails, notes, and verbal comments on the human capital  proposal.\nI would like to point out to others seeking human capital flexibilities that  the outreach process, while necessary, is indeed time-consuming and  requires real and persistent commitment on the part of an agency\u2019s top  management team.  In order for the process to work effectively, it also  requires an ongoing education and dialogue process that will, at times,  involve candid, yet constructive, discussion between management and  employees.   This is, however, both necessary and appropriate as part of the  overall change management process.  To facilitate the education process on  the proposal, we posted materials on GAO\u2019s internal website, including  Questions and Answers developed in response to employees\u2019 questions and  concerns, for all employees to review.  Unfortunately, others who have  sought and are seeking additional human capital flexibilities have not  employed such an extensive outreach process.\n\n\tNature of GAO Employee Concerns\n\nBased on feedback from GAO employees, there is little or no concern  relating to most of the provisions in our proposal.  There has been  significant concern expressed over GAO\u2019s proposal to decouple GAO\u2019s pay  system from that of the executive branch.  Some concerns have also been  expressed regarding the pay retention provision and the proposed name  change.  As addressed below, we do believe, however, that these employee  concerns, have been reduced considerably due to the clarifications,  changes, and commitments resulting from our extensive outreach and  consultation effort.\nOn the basis of various forms of GAO employee feedback, it is not  surprising, since pay is important to all employees, that the provision that  has caused the most stir within GAO has been the pay adjustment  provision.  Fundamentally, some of our employees would prefer to remain  with the executive branch\u2019s GS system for various types of pay increases.   There are others close to retirement who are concerned with their \u201chigh  three\u201d and how the modified pay system, when fully implemented, might  affect permanent base pay, which is the key component of their retirement  annuity computation.  Overall, there is a great desire on the part of GAO  employees to know specifically how this authority would be implemented.\nIt is important to note that, even in the best of circumstances, it is difficult  to garner a broad-based consensus of employee support for any major pay  system changes.  While it is my impression, based on employee feedback,  that we have made significant strides in allaying the significant initial  concerns expressed by employees regarding the pay adjustment provision,  I believe that some of these concerns will remain throughout  implementation.  In addition, some can never be resolved because they  involve philosophical differences or personal interest considerations on  behalf of individual GAO employees.\nGAO\u2019s history with pay banding certainly is illustrative of how difficult it is  for an organization to allay employee fears even in the face of obvious  benefits.  While history has proven that an overwhelming majority of GAO  employees have benefited from GAO\u2019s decision to migrate our Analysts and  Attorneys into pay banding and pay for performance systems, there was  significant opposition by GAO employees regarding the decision to move  into these systems.  The experience of the executive branch\u2019s pay  demonstration projects involving federal science and technology  laboratories shows that employee support at the beginning of the pay  demonstration projects ranged from 34 percent to 63 percent.  In fact, OPM  reports that it takes about 5 years to get support from two-thirds of  employees with managers generally supporting demonstrations at a higher  rate than employees.\nFollowing the pay adjustment provision but a distant second in terms of  employee concern, has been the pay reclassification provision, which  would allow GAO employees demoted as a result of workforce  restructuring or reclassification to keep their basic pay rates; however,  future pay increases would be set consistent with the new positions\u2019 pay  parameters.  Currently, employees subject to a reduction-in-force or  reclassification can be paid at a rate that exceeds the value of their duties  for an extended period.\nA distant third in terms of employee concern is the proposed name change  from the \u201cGeneral Accounting Office\u2019 to the \u201cGovernment Accountability  Office,\u201d which would allow the agency\u2019s title to more accurately reflect its  mission, core values, and work.  My sense is that some GAO employees  who have been with GAO for many years have grown comfortable with the  name and may prefer to keep it.   At the same time, I believe that a  significant majority of our employees support the proposed name change.   Importantly, all of our external advisory groups, including the Comptroller  General\u2019s Advisory Council, consisting of distinguished individuals from  the public and private sectors, and the Comptroller General\u2019s Educators  Advisory Council, consisting of distinguished individuals from the  academic community, and a variety of \u201cgood government\u201d groups strongly  support the proposed name change.\n\n\tChanges Made in Response to Employee Feedback\n\nThe members of the EC and I took our employees\u2019 feedback seriously and  have seriously considered their concerns.  Key considerations in our  decision making were our institutional responsibility as leaders and  stewards of GAO and the overwhelming support expressed through  anonymous balloting by our senior executives, who also serve as leaders  and stewards for GAO, for proceeding with all of the provisions of our  human capital proposal, including the pay adjustment provision.   Specifically, in a recent confidential electronic balloting of our senior  executives, support for each element of our proposal ranged from over 2 to  1 to unanimous, depending on the provision.  Support for the proposed pay  adjustment provision was over 3 to 1, and support for the proposed pay  protection provision was over 4 to 1.  Given this and other considerations,  ultimately, we decided to proceed with the proposal but adopted a number  of the suggestions made by employees in these sessions, including several  relating to the proposal to decouple GAO annual pay adjustments from  those applicable to many executive branch agencies.\nA key suggestion adopted include a minimum 2-year transition period for  ensuring the smooth implementation of the pay provisions which would  also allow time for  developing appropriate methodologies and issuing  regulations for notice and comment by all employees.  Another key  suggestion adopted was the commitment to guarantee annual across the  board purchase power protection and to address locality pay  considerations to all employees rated as performing at a satisfactory level  or above (i.e., meeting expectations or above) absent extraordinary  economic circumstances or severe budgetary constraints.  We have chosen  to implement this guarantee through a future GAO Order rather than  through legislative language because prior \u201cpay protection\u201d guarantees  relating to pay banding made by my predecessor, Comptroller General  Charles A. Bowsher, used this means effectively to document and  operationalize that guarantee.  I have committed to our employees that I  would include this guarantee in my statement here today so that it could be  included as part of the legislative record.  Additional safeguards relating to  our pay proposal are set forth below.\nThe following represents additional information regarding our specific  proposal.\n\n\tVoluntary Early Retirement and Separation Incentive Payment Authorities\n\nSection 2 of our proposal would make permanent the authority of GAO  under section 1 and 2 of Public Law 106-303, the GAO Personnel  Flexibilities Act of 2000, to offer voluntary early retirements (commonly  termed \u201cearly outs\u201d) and voluntary separation payments (commonly  termed \u201cbuyouts\u201d) to certain GAO employees when necessary to realign  GAO\u2019s workforce in order to meet budgetary or mission needs, correct skill  imbalances, or reduce high-grade positions.  We believe that we have  behaved responsibly in exercising the flexibilities that the Congress  granted us and deserve a permanent continuation of these authorities.  In  addition, the two flexibilities which we would like to be made permanent  are narrowly drawn and voluntary in nature, since the employees have the  right to decide if they are interested in being considered for the benefits.   Further, the provisions also have built in limits: no more than 10 percent of  the workforce in any one year can be given early outs and no more than 5  percent can be given buyouts.\nGAO\u2019s transformation effort is a work in progress, and for that reason, the  agency is seeking legislation to make the voluntary early retirement  provision in section 1 of the law permanent. While the overall number of  employees electing early retirement has been relatively small, GAO  believes that careful use of voluntary early retirement has been an  important tool in incrementally improving the agency\u2019s overall human  capital profile. Each separation has freed resources for other uses, enabling  GAO to fill an entry-level position or to fill a position that will reduce a skill  gap or address other succession concerns.   Similarly, we are seeking  legislation to make section 2\u2014authorizing the payment of voluntary  separation incentives\u2014permanent.    Although GAO has not yet used its  buyout authority and has no plans to do so in the foreseeable future, we are  seeking to retain this flexibility.  The continuation of this provision  maximizes the options available to the agency to deal with future  circumstances, which cannot be reasonably anticipated at this time.   Importantly, this provision seems fully appropriate since the Homeland  Security Act of 2002 provides most federal agencies with permanent early  out and buyout authority.\nPublic Law 106-303 required that GAO perform an assessment of the  exercise of the authorities provided under that law, which included the  authority for the Comptroller General to provide voluntary early retirement  and voluntary separation incentive payments.  With your permission, I  would like to submit the assessment entitled Assessment of Public Law  106-303: The Role of Personnel Flexibilities in Strengthening GAO\u2019s  Human Capital, issued on June 27, 2003, for the record.   I will now  highlight for you our observations from that assessment on voluntary early  retirement and buyouts.\nVoluntary Early Retirement   Public Law 106-303 also allows the Comptroller General to offer voluntary  early retirement to up to 10 percent of the workforce when necessary or  appropriate to realign the workforce to address budgetary or mission  constraints; correct skill imbalances; or reduce high-grade, supervisory, or  managerial positions.  This flexibility represents a proactive use of early  retirement to shape the workforce to prevent or ameliorate future  problems.  GAO Order 2931.1, Voluntary Early Retirement, containing the  agency\u2019s final regulations, was issued in April 2001.  Under the regulations,  each time the Comptroller General approves a voluntary early retirement  opportunity, he establishes the categories of employees who are eligible to  apply.  These categories are based on the need to ensure that those  employees who are eligible to request voluntary early retirement are those  whose separations are consistent with one or more of the three reasons for  which the Comptroller General may authorize early retirements.  Pursuant  to GAO\u2019s regulations, these categories are defined in terms of one or more  of the following criteria:  organizational unit or subunits,  grade or band level,   skill or knowledge requirements,  other similar factors that the Comptroller General deems necessary and  appropriate.\nSince it is essential that GAO retain employees with critical skills as well as  its highest performers, certain categories of employees have been ineligible  under the criteria.  Some examples of ineligible categories are employees  receiving retention allowances because of their unusually high or unique  qualifications; economists, because of the difficulty that the agency has  experienced in recruiting them; and staff in the information technology  area.  In addition, employees with performance appraisal averages above a  specified level have not been eligible under the criteria.\nTo give the fullest consideration to all interested employees, however, any  employee may apply for consideration when an early retirement  opportunity is announced, even if he or she does not meet the stated  criteria.  Furthermore, under our order, the Comptroller General may  authorize early retirements for these applicants on the basis of the facts  and circumstances of each case.  The Comptroller General or his EC  designee considers each applicant and makes final decisions based on  GAO\u2019s institutional needs.  Only employees whose release is consistent  with the law and GAO\u2019s objective in allowing early retirement are  authorized to retire early.  In some cases, this has meant that an employee\u2019s  request must be denied.\nGAO held its first voluntary early retirement opportunity in July 2001.   Employees who were approved for early retirement were required to  separate in the first quarter of fiscal 2002.  As required by the act,  information on the fiscal 2002 early retirements was reported in an  appendix to our 2002 Performance and Accountability Report.  Another  voluntary early retirement opportunity was authorized in fiscal 2003, and  employees were required to separate by March 14, 2003.  In anticipation of  the 3-year sunset on our authority to provide voluntary early retirements, I  have recently announced a final voluntary early retirement opportunity  under our current authority.  Table 1 provides the data on the number of  employees separated by voluntary early retirement as of May 30, 2003.\nAs you can see from the table, of the 79 employees who separated from  GAO through voluntary early retirement, 66, or 83.5 percent, were high- grade, supervisory, or managerial employees.  High-grade, supervisory, or  managerial employees are those who are GS-13s or above, if covered by  GAO\u2019s GS system; Band IIs or above, if covered by GAO\u2019s banded systems  for Analysts and Attorneys; or in any position in GAO\u2019s SES or Senior-Level  system.\nIn recommending that GAO\u2019s voluntary early out authority be made  permanent, I would like to point to our progress in changing the overall  shape of the organization. The 1990s were a difficult period for ensuring  that GAO\u2019s workforce would remain appropriately sized, shaped, and  skilled to meet client demands and agency needs.  Severe downsizing of the  workforce, including a suspension of most hiring from 1992 through 1997,  and constrained investments in such areas as training, performance  incentives, rewards, and enabling technology left GAO with a range of  human capital and operational challenges to address.  Over 3 years ago,  when GAO sought additional human capital flexibilities, our workforce was  sparse at the entry level and plentiful at the midlevel.  We were concerned  about our ability to support the Congress with experienced and  knowledgeable staff over time, given the significant percentage of the  agency\u2019s senior managers and analysts reaching retirement eligibility and  the small number of entry-level employees who were training to replace  more senior staff.\nAs illustrated in figure 1, by the end of fiscal year 2002, GAO had almost a  74 percent increase in the proportion of staff at the entry level (Band I)  compared with fiscal year 1998.  Also, the proportion of the agency\u2019s  workforce at the midlevel (Band II) decreased by 16 percent.\n\n\t\tVoluntary Separation Payments\n\nIn addition to authorizing voluntary early retirement for GAO employees,  Public Law 106-303 permits the Comptroller General to offer voluntary  separation incentive payments\u2014buyouts\u2014when necessary or appropriate  to realign the workforce to meet budgetary constraints or mission needs;  correct skill imbalances; or reduce high-grade, supervisory, or managerial  positions.  Under the act, up to 5 percent of employees could be offered  such an incentive, subject to criteria established by the Comptroller  General.\nThe act requires GAO to deposit into the U.S. Treasury an amount  equivalent to 45 percent of the final annual basic salary of each employee to  whom a buyout is paid.  The deposit is in addition to the actual buyout  amount, which can be up to $25,000 for an approved individual.  Given the  many demands on agency resources, these costs present a strong financial  disincentive to use the provision if at all.  GAO anticipates little, if any, use  of this authority because of the associated costs.  For this reason, as well as  to avoid creating unrealistic employee expectations, GAO has not  developed and issued agency regulations to implement this section of the  act.  Nevertheless, as stated earlier, it is prudent for us to seek the  continuation of this provision because it maximizes the options available to  the agency to deal with future circumstances.  Since GAO is also eligible to  request buyouts under the provisions of the Homeland Security Act, the  agency will consider its options under this provision as well.  However,  under the Homeland Security Act, GAO would have to seek OPM approval  of any buyouts, which raises serious independence concerns.\n\n\tAnnual Pay Setting Policy and Adjustments\n\nSection 3 and 4 of our proposal would provide GAO greater discretion in  determining the annual across the board and locality pay increases for our  employees.  Under our proposal, GAO would have the discretion to set  annual pay increases by taking into account alternative methodologies  from those used by the executive branch and various other factors, such as  extraordinary economic conditions or serious budgetary constraints.   While the authority requested may initially appear to be broad based, there  are compelling reasons why GAO ought to be given such authority.  First, as  I discussed at the beginning of my testimony, GAO is an agency within the  legislative branch and already has a hybrid pay system established under  the authority the Congress granted  over two decades ago.  Therefore, our  proposal represents a natural evolution in GAO\u2019s pay for performance  system.  Second, GAO\u2019s proposal is not radical if viewed from the vantage  point of the broad-based authority that has been granted the Department of  Homeland Security (DHS) under the Homeland Security Act of 2002;  agencies that the Congress has already granted the authority to develop  their own pay systems; the authorities granted to various demonstration  projects over the past two decades; and the authority Congress is currently  contemplating providing the Department of Defense (DOD).  Third, GAO  already has a number of key safeguards and has plans to build additional  safeguards into our modified pay system if granted this authority.\nOur proposal seeks to take a constructive step in addressing what has been  widely recognized as fundamental flaws in the federal government\u2019s  approach to white-collar pay.  These flaws and the need for reform have  been addressed in more detail in OPM\u2019s April 2002 White Paper, A Fresh  Start For Federal Pay: A Case for Modernization, and more recently the  National Commission on the Public Service\u2019s January 2003 report on  revitalizing the public service.  The current federal pay and classification  system was established over 60 years ago for a federal workforce that was  made up largely of clerks performing routine tasks which were relatively  simple to assess and measure.  Today\u2019s federal workforce is composed of  much higher graded and knowledge-based workers.\nAlthough there have been attempts over the years to refine the system by  enacting such legislation as the Federal Employees Pay Comparability Act  (FEPCA) which sought to address, among other things, the issue of pay  comparability with the nonfederal sector, the system still contains certain  fundamental flaws.  The current system emphasizes placing employees in a  relative hierarchy of positions based on grade; is a \u201cone size fits all  approach\u201d since it does not recognize changes in local market rates for  different occupations; and is performance insensitive in that all employees  are eligible for the automatic across the board pay increases regardless of  their performance.  Specifically, the annual across the board base pay  increase, also commonly referred to as the cost of living adjustment  (COLA) or the January Pay Increase which the President recommends and  the Congress approves, provides a time driven annual raise keyed to the  Employment Cost Index (ECI) to all employees regardless of performance.   In certain geographic areas, employees receive a locality adjustment tied to  the local labor markets.  However, in calculating the locality adjustment,  for example, it is my understanding that FEPCA requires the calculation of  a single average, based on the dominant federal employer in an area, which  does not sufficiently recognize the differences in pay rates for different  occupations and skills. In view of the fact that today we are in a knowledge- based economy competing for the best knowledge workers in the job  market, I believe that new approaches and methodologies are warranted.   This is especially appropriate for GAO\u2019s highly educated and skilled  workforce.\nOur proposed pay adjustment provision along with the other provisions of  GAO\u2019s human capital proposal are collectively designed to help GAO  maintain a competitive advantage in attracting, motivating, retaining, and  rewarding a high performing and top-quality workforce both currently and  in future years.  First, under our proposal, GAO would no longer be  required to provide automatic pay increases to employees who are rated as  performing at a below satisfactory level.  Second, when the proposal is fully  implemented, GAO would be able to allocate more of the funding\u2014 currently allocated for automatic across-the-board pay adjustments to all  employees\u2014to permanent base pay adjustments that would vary based on  performance.   In addition, our proposal would affect all GAO, non-wage  grade employees, including the SES and Senior Level staff.\nUltimately, if GAO is granted this authority, all GAO employees who  perform at a satisfactory level will receive an annual base pay adjustment  composed of purchase power protection and locality based pay increases  absent extraordinary economic circumstances or severe budgetary  constraints.  GAO will be able to develop and apply its own methodology  for annual cost-of-living and locality pay adjustments.  The locality pay  increase would be based on compensation surveys conducted by GAO and  which would be tailored to the nature, skills, and composition of GAO\u2019s  workforce.   The performance part of an employee\u2019s annual raise would  depend on the level of the employee\u2019s performance and that employee\u2019s pay  band.  We estimate that at least 95 percent of the workforce will qualify for  an additional performance-based increase.   However, under this provision,  employees who perform below a satisfactory level will not receive an  annual increase of either type.\n\n\t\tHow GAO Plans to Use This Authority\n\nGAO\u2019s major non-SES pay groups include (1) Analysts and Attorneys which  comprises the majority of our workforce and is our mission group, (2) the  Professional Development Program staff (PDP) which is our entry level  mission group, (3) the Administrative Professional Support Staff (APSS),  which is our mission support group for the most part, and (4) Wage Grade  employees who primarily operate our print plant.  Each of these groups  currently operate in a different pay system.  Generally, our mission staff are  all in pay bands whereby they currently receive the annual across-the- board base pay increase and locality pay increase similar to the GS pay  system, along with performance-based annual increases that are based on  merit.  Generally, our mission support staff, with some exceptions, remain  in a system similar to the GS pay system with its annual across- the-board  pay increases, locality pay, quality step increases, and within grade  increases.  We are currently in the process of migrating the mission support  staff into pay bands and a pay for performance system.  Our Wage Grade  staff will continue to be covered by the federal compensation system for  trade, craft, and laboring employees.  Because of the small number of  employees and the nature of their work, we have no plans to apply the pay  adjustment provision authority to this group.\nI would like to point out the tables in appendices I through IV, which  succinctly describe how GAO plans to operationalize our authority under  our proposed annual pay adjustment provision over time.\n\n\t\tGAO\u2019s Proposed Pay Authority Is Reasonable\n\nGAO\u2019s proposal for additional pay flexibility is reasonable in view of the  authority the Congress has already granted DHS through the Homeland  Security Act of 2002; the other agencies for whom the Congress has granted  the authority to develop their own pay systems; the demonstration projects  that OPM has authorized; and the authorities that other agencies in the  executive branch are currently seeking (e.g., DOD).\nWhile we are aware that the passage of the Homeland Security Act of 2002  was not without its difficult moments,  particularly with respect to the  broad-based authorities granted the department, we are also aware that the  process employed by DOD and certain of its human capital proposals are  highly controversial.  It is important to point out that GAO\u2019s proposal and  proposed pay flexibilities pale in respect to those granted to the DHS and to  those requested by the DOD in the Defense Transformation for the 21st  Century Act of 2003. Collectively, these two agencies represent almost 45  percent of the non-postal federal civilian workforce.  Specifically, in  November 2002, the Congress passed the Homeland Security Act of 2002,  which created DHS and provided the department with significant  flexibilities to design a modern human capital management system, which  could have the potential, if properly developed, for application  governmentwide.  DOD\u2019s proposed National Security Personnel System  (NSPS) would provide wide-ranging changes to its civilian personnel pay  and performance management systems, collective bargaining, rightsizing,  and a variety of other human capital areas.  NSPS would enable DOD to  develop and implement a consistent, DOD-wide civilian personnel system.\nIn addition to DHS, there are a number of federal agencies with authority  for their own pay systems.  Some of these agencies are, for example, the  Congressional Budget Office, which is one of our sister agencies in the  legislative branch; the Federal Aviation Administration (FAA); the  Securities and Exchange Commission (SEC) ; and the Office of the  Comptroller of the Currency (OCC) within the Department of the Treasury.   When the Congress created the CBO in 1974, it granted that legislative  branch agency significant flexibilities in the human capital area.  For  example, CBO has \u201cat will\u201d employment.  In addition, CBO is not subject to  the annual executive branch pay adjustments.  Further, CBO has extensive  flexibility regarding its pay system subject only to certain statutory annual  compensation limits.\nFurthermore, there are twelve executive branch demonstration projects  involving pay for performance.  These projects have taken different  approaches to the sources of funding for salary increases that are tied to  performance and not provided as entitlements.  Many of the demonstration  projects reduce or deny the annual across the board base pay increase for  employees with unacceptable ratings (e.g., the Department of Navy\u2019s China  Lake demonstration, DOD\u2019s Civil Acquisition Workforce demonstration, the  Department of Air Force\u2019s Research Laboratory demonstration, and the  Department of Navy\u2019s Research Laboratory demonstration, among others.)    Others, including the National Institute of Standards and Technology and  the Department of Commerce demonstration projects, deny both the  annual across the board base pay increase and the locality pay adjustment  for employees with unacceptable ratings.\nCurrently, this Congress is considering a NASA human capital proposal.   This proposal would provide NASA with further flexibilities and authorities  for attracting, retaining, developing, and reshaping a skilled workforce.  These include a scholarship-for-service program; a streamlined hiring  authority for certain scientific positions; larger and more flexible  recruitment, relocation, and retention bonuses; noncompetitive  conversions of term employees to permanent status; a more flexible critical  pay authority; a more flexible limited-term appointment authority for the  SES; and greater flexibility in determining annual leave accrual rate for  new hires.\n\n\t\tSafeguards Provided\n\nAs we have testified, agencies should have modern, effective, credible, and  as appropriate, validated performance management systems in place with  adequate safeguards, including reasonable transparency and appropriate  accountability mechanisms, to ensure fairness and prevent politicization  and abuse.  While GAO\u2019s transformation is a work in progress, we believe  that we are in the lead compared to executive branch agencies in having  the human capital infrastructure in place to provide such safeguards and  implement a modified pay system that is more performance oriented.   Specifically, for our Analyst pay group, we have gone through the first cycle  of a validated performance management system that has adequate  safeguards, including reasonable transparency and appropriate  accountability mechanisms.  We have learned from what has worked and  what improvements can and should be made with respect to the first cycle.   In fact, we have adopted many of the recommendations and suggestions of  our managing directors and EAC and are now in the process of  implementing these suggestions.\nThe following is an initial list of possible safeguards, developed at the  request of Congressman Danny Davis, for Congress to consider to help  ensure that any pay for performance systems in the government are fair,  effective, and credible.  GAO\u2019s current human capital infrastructure has  most of these safeguards built in, and the others are in the process of being  incorporated.\nAssure that the agency\u2019s performance management systems (1) link to  the agency\u2019s strategic plan, related goals, and desired outcomes and   (2) result in meaningful distinctions in individual employee  performance.  This should include consideration of critical  competencies and achievement of concrete results.\nInvolve employees, their representatives, and other stakeholders in the  design of the system, including having employees directly involved in  validating any related competencies, as appropriate.\nEnsure that certain predecisional internal safeguards exist to help  achieve the consistency, equity, nondiscrimination, and  nonpoliticization of the performance management process (e.g.,  independent reasonableness reviews by the human capital offices  and\/or the offices of opportunity and inclusiveness or its equivalent in  establishing and implementing a performance appraisal system, as well  as reviews of performance rating decisions, pay determinations, and  promotion actions before they are finalized to ensure that they are  merit-based; internal grievance processes to address employee  complaints; and pay panels predominately made up of career officials  who would consider the results of the performance appraisal process  and other information in making final pay decisions).\nAssure reasonable transparency and appropriate accountability  mechanisms in connection with the results of the performance  management process (e.g., publish overall results of performance  management and pay decisions while protecting individual  confidentiality, and report periodically on internal assessments and  employee survey results).\n\n\t\tTransition Period\n\nWe have provided a statutory period minimum to allow for a smooth  implementation of the law as it applies to both our mission and mission  support staff.  Specifically, for our Analyst and Attorney communities, we  plan to allow for at least a two-year period, during which they will continue  to receive their annual across the board pay raise and their locality pay, if  applicable, based on the amount set by the GS system.  Once the proposal  is fully implemented, the new across-the-board increase, which provides  for inflation protection and locality pay where applicable, would be  computed based on GAO compensation studies, and the performance- based merit pay would be provided based on an employee\u2019s performance.\nFor our APSS employees, the transition period of at least 2 years would  allow for a smooth migration to the pay bands and the implementation of at  least one performance cycle of a newly validated competency based  performance appraisal system for that component of GAO\u2019s workforce.   Our APSS employees are currently still in the GS system, but we are in the  process of moving them into pay bands.   We will allow time for the group  to migrate to broad bands and to have at least one performance cycle under  pay bands before moving it into the new pay system.  Therefore, as with the  analysts and attorneys, the administrative support staff will move into a  hybrid pay system once they migrate to pay bands. Also, as with the  analysts and attorneys, I have committed to providing them \u201cpay  protection.\u201d This guarantee would continue even after GAO\u2019s authority to  adjust pay is fully implemented.\nWe have a small Wage Grade community of under 20 employees.  As  mentioned earlier, we do not contemplate having the pay adjustment  provision apply to them.   \u201cPay Protection\u201d Guarantee  My predecessor, Comptroller General Charles A. Bowsher, provided the  analysts and attorneys a \u201cpay protection\u201d guarantee at the time of their  conversion to broad bands.  This guarantee, later spelled out in a GAO  order, provided that the analyst and attorneys rated as meeting  expectations in all categories would fare at least as well under pay bands as  under the GS system.  This guarantee would not apply to employees who  are promoted after conversion or demoted, and to new employees hired  after the conversion.  It is my understanding that this guarantee provided  by my predecessor is unique to GAO and has generally not been applied by  other agencies that have migrated their employees to pay bands.\nCurrently, 535 GAO employees are still covered by this \u201cpay protection\u201d  guarantee, while less than 10 employees annually have their pay readjusted  after the merit pay process.  I have committed to GAO employees that even  if we receive the new pay adjustment authority, I would still honor my  predecessor\u2019s pay protection guarantee.  In addition, our mission support  staff will also receive this guarantee upon conversion to pay bands.  This  guarantee will continue through the implementation period for our new  human capital authority.\n\n\tPay Retention\n\nSection 5 of our proposal would allow GAO not to provide any automatic  increase in basic pay to an employee demoted as a result of workforce  restructuring or reclassification at his or her current rate until his or her  salary is less than the maximum rate of the new position.  Under current  law, the grade and pay retention provisions allow employees to continue to  be paid at a rate that exceeds the value of the duties they are performing for  an extended period.  Specifically, employees who are demoted (e.g., incur a  loss of grade or band) due to, among other things, reduction-in-force  procedures or reclassification receive full statutory pay increases for 2  years and then receive 50 percent of the statutory pay increases until the  pay of their new positions falls within the range of pay for those positions.   We believe that this antiquated system is inconsistent with the merit  principle that there should be equal pay for work of equal value.\nIn granting GAO this authority, we would be able to immediately place  employees in the band or grade commensurate with their roles and  responsibilities.  It is important to note that we have a key safeguard\u2014 employees whose basic pay exceeds the maximum rate of the grade or  band in which the employee is placed will not have their basic pay reduced.   These employees, who would still be eligible to increase their overall pay  through certain types of performance-based awards (e.g., incentive  awards), would retain this rate until their basic pay is less than the  maximum for their grade or band.  As with all the provisions in our  proposal, we will not implement this pay retention provision until we have  consulted with the EAC and managing directors and have provided all GAO  employees an opportunity for notice and comment on any regulations.\n\n\tRelocation Expenses\n\nSection 6 would provide GAO the authority, in appropriate circumstances,  to reimburse employees for some relocation expenses when transfers do  not meet current legal requirements for entitlement to reimbursement but  still benefit GAO.  Under current law, employees who qualify for relocation  benefits are entitled to full benefits; however, employees whose transfer  may be of some benefit or value to the agency would not be eligible to  receive any reimbursement.  This provision would provide these employees  some relief from the high cost of relocating while at the same time allowing  GAO the flexibility to promulgate regulations in order to provide such  relief.  This authority has been previously granted to other agencies,  including the FAA.\n\n\tLeave for Upper Level Hires\n\nSection 7 of the proposal provides GAO the authority to provide 160 hours  (20 days) of annual leave to appropriate employees in high-grade,  managerial or supervisory positions who have less than 3 years of federal  service.  This is narrowly tailored authority that would apply only to GAO  and not to executive branch agencies.  While it is been a long-standing tenet  that all federal employees earn annual leave based on years of federal  service, we believe that there is substantial merit in revisiting this in view  of today\u2019s human capital environment and challenges.  We have found that,  in recruiting experienced mid- and upper-level hires, the loss of leave they  would incur upon moving from the private to the federal sector is a major  disincentive.  For example, an individual, regardless of the level at which  he enters first enters the federal workforce, is eligible to earn 4 hours of  annual leave for each pay period and, therefore, could accrue a total of 104  hours (13 days) annually so long as they do not use any of that leave during  the year.  This amount increases to 6 hours of annual leave after 3 years of  federal service.  By increasing the annual leave that certain newly hired  officers and employees may earn, this provision is designed to help attract  and retain highly skilled employees needed to best serve the Congress and  the country.\n\n\tExecutive Exchange Program\n\nSection 8 would authorize GAO to establish an executive exchange  program between GAO and private sector entities.  Currently, GAO has the  authority to conduct such an exchange with public entities and non profit  organizations under the Intergovernmental Personnel Act; there is no such  authority for private sector exchanges.   Under this program, high-grade,  managerial or supervisory employees from GAO may work in the private  sector, and private sector employees may work at GAO.  While GAO will  establish the details of this program in duly promulgated regulations, we  have generally fashioned, with exceptions where appropriate, the legal  framework for this program on the Information Technology Exchange  Program authorized by Public Law 107-347, the E-Government Act of 2002,  which the Congress enacted to address human capital challenges within  the executive branch in the information technology area.\nWhile the Information Technology Exchange Program only involves  technology exchanges, GAO\u2019s exchange program will cover not only those  who work in information technology fields, but also accountants,  economists, lawyers, actuaries, and other highly skilled professionals.  This  program will help us address certain skills imbalances in such areas as well  as a range of succession planning challenges.  Specifically, by fiscal year  2007, 52 percent of our senior executives, 37 percent of our management- level analysts, and 29 percent of our analysts and related staff will be  eligible for retirement.  Moreover, at a time when a significant percentage  of our workforce is nearing retirement age, marketplace, demographic,  economic, and technological changes indicate that competition for skilled  employees will be greater in the future, making the challenge of attracting  and retaining talent even more complex.\nOne of the key concerns raised in the past regarding private sector  exchange programs has been the issue of conflict of interest.  We believe  that in this regard GAO differs from executive branch agencies in that, as  reviewers, we are not as subject to potential conflicts of interest.   Nevertheless, it is important to note in requesting this authority that we  have made clear that the private sector participants would be subject to the  same laws and regulations regarding conflict of interest, financial  disclosure, and standards of conduct applicable to all employees of GAO.   Under the program, private sector participants would receive their salaries  and benefits from their employers and GAO need not contribute to these  costs.  We also believe that this will also encourage private sector  individuals to devote a portion of their careers to the public sector without  incurring substantial financial sacrifice.\n\n\tChanging GAO\u2019s Name to the \u201cGovernment Accountability Office\u201d\n\nSection 9 would change the name of our agency from the \u201cGeneral  Accounting Office\u201d to the \u201cGovernment Accountability Office.\u201d  At the  same time, the well-known acronym \u201cGAO,\u201d which has over 80 years of  history behind it, will be maintained.  We believe that the new name will  better reflect the current mission of GAO as incorporated into its strategic  plan, which was developed in consultation with the Congress.  As stated in  GAO\u2019s strategic plan, our activities are designed to ensure the executive  branch\u2019s accountability to the American people.  Indeed, the word  accountability is one of GAO\u2019s core values along with integrity and  reliability.  These core values are also incorporated in GAO\u2019s strategic plan  for serving the Congress.\nThe GAO of today is a far cry from the GAO of 1921, the year that the  Congress established it through the enactment of the Budget and  Accounting Act.  In 1921, GAO pre-audited agency vouchers for the legality,  propriety, and accuracy of expenditures.  In the 1950s, GAO\u2019s statutory  work shifted to the comprehensive auditing of government agencies.  Later,  beginning during the tenure of Comptroller General Elmer B. Staats, GAO\u2019s  work expanded to include program evaluation and policy analysis.   Whereas GAO\u2019s workforce consisted primarily of accounting clerks during  the first three decades of its existence, today it is a multidisciplinary  professional services organization with staff reflecting the diversity of  knowledge and skills needed to deliver a wide range of services to the  Congress.\nAlthough currently less than 15 percent of agency resources are devoted to  traditional auditing and accounting activities, members of the public, the  press, as well as the Congress often incorrectly assume that GAO is still  solely a financial auditing organization.  In addition, our name clearly  confuses many potential applicants, who assume that GAO is only  interested in hiring accountants.  We believe that the new name will help  attract applicants and address certain \u201cexpectation gaps\u201d that exist outside  of GAO.\n\n\tConcluding Observations\n\nIn conclusion, I believe that GAO\u2019s human capital proposal merits prompt  passage by this committee and, ultimately, the Congress.  We have used the  narrowly tailored flexibilities the Congress provided us previously in Public  Law 106-303 responsibly, prudently, and strategically to help posture GAO  to ensure the accountability of the federal government for the benefit of the  Congress and the American people.  Although some elements of our initial  straw proposal were controversial, we have made a number of changes,  clarifications, and commitments to address various comments and  concerns raised by GAO employees.  We recognize that the pay adjustment  provision of this proposal remains of concern to some of our staff.   However, we believe that it is vitally important to GAO\u2019s future that we  continue modernizing and updating our human capital policies and system  in light of the changing environment and anticipated challenges ahead.  We  believe that the proposal as presented and envisioned is well reasoned and  reasonable with adequate safeguards for GAO employees.  Given our  human capital infrastructure and our unique role in leading by example in  major management areas, including human capital management, the  federal government could benefit from GAO\u2019s experience with pay for  performance systems.  Overall, we believe that this proposal represents a  logical incremental advancement in modernizing GAO\u2019s human capital  policies, and with your support, we believe that it will make a big difference  for the GAO of the future.\nChairwoman Jo Ann Davis, Mr. Davis, and Members of the Committee, this  concludes my prepared statement.  I would be pleased to respond to any  questions you may have.\n\n\tContacts\n\nFor further information regarding this testimony, please contact Sallyanne  Harper, Chief Mission Support Officer, on (202) 512-5800 or at  harpers@gao.gov or Jesse Hoskins, Chief Human Capital Officer, on (202)  512-5553 or at hoskinsj@gao.gov.\n\nAnalysts and Attorneys: Pay Increases under GAO\u2019s Current System and Human Capital Proposal\n\n(Broad band)\nPay Protection from Band Conversion)\nConversion) (Same percentage as  executive branch GS;  performers) performers) (Same percentage as  executive branch GS;  performers) performers)\nEC annually) additional performance- based funds limited due  will vary over time) guarantee)\nN\/A  This element is not applicable circumstances or serious budgetary constraints, base pay and locality pay according to the same  adjustment provided to executive branch employees.   All such GAO staff will also be eligible for  additional performance-based merit pay increases, performance bonuses (if pay capped)\/dividends,  and incentive awards.  During the transition period, GAO will continue to raise the pay cap for its pay  bands commensurate with executive branch pay cap increases absent extraordinary economic  circumstances or serious budgetary constraints.  The Executive Committee will determine on an  annual basis which categories, if any, are eligible for bonuses and dividends.\n\nProfessional Development Program (PDP) Staff: Pay Increases under GAO\u2019s Current System and Human Capital Proposal\n\n(Broad band\/PDP) as executive  branch GS;  performers) performers) as executive  branch GS;  performers) performers)\nEC annually)\nEC annually)\nEC annually)\nN\/A  This element is not applicable The percentage allocated to each type of pay increase varies annually.\nExecutive Committee will determine on an annual basis which pay categories, if any, are eligible for  PDP bonuses.\n\nAdministrative Professional Support Staff (APSS): Pay Increases under GAO\u2019s Current System and Human Capital Proposal\n\n(Broad band)\nPay Protection from Band Conversion (GS) branch GS) for all satisfactory performers) branch GS) for all satisfactory performers)\nEC annually) amount will vary over time)\nN\/A  This element is not applicable The percentage allocated to each type of pay increase varies annually.   This chart applies only to  APSS employees who are under the General Schedule (GS) system.  APSS employees who are  already in broad bands should see the chart for Analysts and Attorneys.   guarantee will not apply to staff who are promoted after conversion or demoted and to new employees  hired after the conversion.  APSS staff will be eligible for performance-based merit increases,  performance bonuses (if pay capped) \/dividends, and incentive awards.  During the transition period,  GAO will continue to raise the pay cap for its pay bands commensurate with executive branch pay cap  increases.  The Executive Committee will determine on an annual basis which pay categories, if any,  are eligible for bonuses and dividends.\n\nWage Grade (WG) Staff: Pay Increases under GAO\u2019s Current System and Human Capital Proposal\n\n(Wage Grade)\nQuality step increase (QSI)\nWithin grade increase (WIG)\nThis is a work of the U.S. government and is not subject to copyright protection in the  United States. It may be reproduced and distributed in its entirety without further  permission from GAO. However, because this work may contain copyrighted images or  other material, permission from the copyright holder may be necessary if you wish to  reproduce this material separately.","output":"Why GAO Did This Study\n\nThe Subcommittee on Civil Service and Agency Organization, House Committee on Government Reform seeks GAO's views on its latest human capital proposal that is slated to be introduced as a bill entitled the GAO Human Capital Reform Act of 2003.\n\nWhat GAO Found\n\nAs an arm of the legislative branch, GAO exists to support the Congress in meeting its constitutional responsibilities and to help improve the performance and ensure the accountability of the federal government for the American people. Unlike many executive branch agencies, which have either recently received or are just requesting new broad-based human capital tools and flexibilities, GAO has had certain human capital tools and flexibilities for over two decades. GAO's latest proposal combines diverse initiatives that, collectively, should further GAO's ability to enhance its performance, assure its accountability, and help ensure that it can attract, retain, motivate, and reward a top-quality and high-performing workforce currently and in future years. Specifically, GAO is requesting that the Congress (1) make permanent GAO's 3-year authority to offer early outs and buyouts, (2) allow GAO to set its own annual pay adjustment system separate from the executive branch, (3) permit GAO to set the pay of an employee demoted as a result of workforce restructuring or reclassification to keep his\/her basic pay but to set future increases consistent with the new position's pay parameters, (4) provide authority to reimburse employees for some relocation expenses when that transfer has some benefit to GAO but does not meet the legal requirements for reimbursement, (5) provide authority to place upper-level hires with fewer than 3 years of federal experience in the 6-hour leave category, (6) authorize an executive exchange program with the private sector, and (7) change GAO's legal name from the \"General Accounting Office\" to the \"Government Accountability Office.\" GAO has used the narrowly tailored flexibilities granted by the Congress previously in Public Law 106-303, the GAO Personnel Flexibilities Act, responsibly, prudently, and strategically. GAO believes that it is vitally important to its future to continue modernizing and updating its human capital policies and system in light of the changing environment and anticipated challenges ahead. GAO's proposal represents a logical incremental advancement in modernizing GAO's human capital policies. Based on employee feedback, there is little or no concern relating to most of the proposal's provisions. Although some elements of GAO's initial straw proposal were controversial (e.g., GAO's pay adjustment provision), the Comptroller General has made a number of changes, clarifications, and commitments to address employee concerns. While GAO believes that some employees remain concerned about the pay adjustment provision, GAO also believes that employee concerns have been reduced considerably due to the clarifications, changes, and commitments the Comptroller General has made. Given GAO's human capital infrastructure and unique role in leading by example in major management areas, the rest of the federal government can benefit from GAO's pay system experience."}
{"id":"crs_R42854","pid":"crs_R42854_0","input":"\tOverview\n\nNatural disasters can have varying effects on the landscape. For agricultural producers, natural disasters are part of the inherent risk of doing business. The federal role for mitigating weather risk is primarily through federal crop insurance and a suite of agricultural disaster assistance programs to address a producer's crop or livestock production loss. \nOther, separate U.S. Department of Agriculture (USDA) programs are designed to repair agricultural and forest land following a natural disaster and potentially mitigate future risk. These programs offer financial and technical assistance to producers to repair, restore, and mitigate damage on private land. Agricultural land assistance programs include the Emergency Conservation Program (ECP), the Emergency Forest Restoration Program (EFRP), and the Emergency Watershed Protection (EWP) program. In addition to these programs, USDA also has flexibility in administering other programs that allow for support and repair of damaged cropland in the event of an emergency.\nThis report describes these emergency agricultural land assistance programs. It presents background on the programs\u2014purpose, activities, authority, eligibility requirements, and authorized program funding levels\u2014as well as current congressional issues.\n\n\tFederal Emergency Assistance for Agricultural and Rural Land\n\nAgricultural land assistance programs help producers rehabilitate crop and forest land following natural disasters. These programs are described below.\n\n\t\tEmergency Conservation Program\n\n\t\t\tPurpose, Activities, and Authority\n\nThe Emergency Conservation Program (ECP) assists landowners in restoring land used in agricultural production when damaged by a natural disaster. This can include removing debris, restoring fences and conservation structures, and providing water for livestock in drought situations. Restoration practices are authorized by the Farm Service Agency (FSA) county committee, with approval from state FSA committees, and the FSA national office.\nPayments are made to individual producers based on a share of the cost of completing the practice. This can be up to 75% of the cost, or up to 90% of the cost if the producer is considered to be a limited-resources producer. Payments are made following completion and inspection of the practice.\nThe ECP was created under Title IV of the Agricultural Credit Act of 1978 ( P.L. 95-334 ) and codified at 16 U.S.C. Sections 2201-2205. The program is permanently authorized, subject to appropriations. Authorized funding is for \"such funds as may be necessary,\" and once appropriated, funds are typically available until expended.\n\n\t\t\tEligible Land\n\nLand eligibility is determined by the FSA county committee except in the event of a drought, in which case the national FSA office authorizes the use of funds. Following an on-site inspection, the land may be considered eligible if it is determined that the lack of treatment would: \nimpair or endanger the land; materially affect the productive capacity of the land; lead to damage that is unusual in character and, except for wind erosion, is not the type that would recur frequently in the same area; and be so costly to rehabilitate that future federal assistance is or would be required to return the land to productive agricultural use.\nLand conservation issues that existed prior to the natural disaster are not eligible for assistance.\n\n\t\t\tEligible Participant\n\nAn eligible participant is defined as an agricultural producer with an interest in the land affected by the natural disaster. The applicant must be a landowner or user in the area where the disaster occurred and must be a party who will incur the expense that is the subject of the ECP cost-share application. Participants are limited to $200,000 per natural disaster.\nFederal agencies and states, including all agencies and political subdivisions of a state, are ineligible to participate in ECP.\n\n\t\t\tFunding and Allocation\n\nFunding for ECP varies widely from year to year. Most funding is authorized through supplemental appropriations acts rather than annual appropriations. Table 1 provides a funding history for ECP.\nFunding is generally appropriated to remain available until expended. In some instances, Congress has required that ECP funding be used for specific disasters, activities, or locations. For example, a portion of funding appropriated in FY2016 is to be used for major disasters declared pursuant to the Robert T. Stafford Disaster Relief and Emergency Assistance Act (Stafford Act). Since ECP does not typically require a Stafford Act declaration, this requirement limits the use of ECP funds to select locations as well as for future disasters. For further discussion, see the \" Issues for Congress \" section.\nOnce funding is appropriated, the FSA national office generally allocates ECP funds to the FSA state offices. The local FSA county committees will then obligate the funds on a first-come, first-served basis.\n\n\t\tEmergency Forest Restoration Program (EFRP)\n\n\t\t\tPurpose, Activities, and Authority\n\nThe Emergency Forest Restoration Program (EFRP) provides cost-share assistance to private forestland owners to repair and rehabilitate damage caused by natural disasters on nonindustrial private forest land. Natural disasters include wildfires, hurricanes or excessive winds, drought, ice storms or blizzards, floods, or other resource-impacting events, as determined by USDA. The program is administered by FSA. \nFSA may provide up to 75% of the cost of emergency measures that would restore forest health and forest-related resources following a disaster. Individual or cumulative requests for financial assistance of $50,000 or less per person (or legal entity) per disaster are approved by the FSA county committee. Financial assistance requests from $50,001 to $100,000 are approved by the FSA state committee. Financial assistance over $100,000 must be approved by the FSA national office. \nThe EFRP was created under Section 8203 of the Food, Conservation, and Energy Act of 2008 (2008 farm bill, P.L. 110-246 ), by adding a new Section 407 to Title IV of the Agricultural Credit Act of 1978. It is codified at 16 U.S.C. Section 2206 and is permanently authorized subject to appropriations. Authorized funding is for \"such funds as may be necessary,\" and once appropriated, funds are typically available until expended. \n\n\t\t\tEligible Land\n\nFor land to be eligible for EFRP, it must be nonindustrial private forest land and must: \nhave existing tree cover or have had tree cover immediately before the natural disaster and be suitable for growing trees; have damage to natural resources caused by a natural disaster, which occurred on or after January 1, 2010, that, if not treated, would impair or endanger the natural resources on the land and would materially affect future use of the land; and be physically located in a county in which EFRP has been implemented.\nLand is ineligible if it is owned or controlled by the federal government, a state, a state agency, or a political subdivision of a state.\n\n\t\t\tEligible Participant\n\nEligible recipients include owners of nonindustrial private forest land, defined as rural land that is owned by any nonindustrial private individual, group, association, corporation, or other private legal entity that has definitive decision making authority over the land. A payment limitation of $500,000 per person or legal entity applies per disaster.\n\n\t\t\tFunding and Allocation\n\nThe EFRP was created in the 2008 farm bill. Congress initially appropriated $18 million to the program in an FY2010 supplemental appropriations act. Funds were not obligated, however, until FY2011, when final regulations were published. Table 2 provides a funding history for EFRP.\n\n\t\tEmergency Watershed Protection (EWP) Program\n\n\t\t\tPurpose, Activities, and Authority\n\nThe Emergency Watershed Protection (EWP) program assists sponsors, landowners, and operators in implementing emergency recovery measures for runoff retardation and erosion prevention to relieve imminent hazards to life and property created by natural disasters. Eligible activities may include removing debris from stream channels, road culverts, and bridges; reshaping and protecting eroded banks; correcting damaged drainage facilities; establishing cover on critically eroding lands; removing carcasses; and repairing levees and structures.\nEWP funds cannot be used to perform operation or maintenance for existing structures or to repair, rebuild, or maintain private or public transportation facilities or public utilities. The EWP is administered by both USDA's Natural Resources Conservation Service (NRCS) and the U.S. Forest Service (USFS).\nThe federal contribution toward the implementation of emergency measures may not exceed 75% of the construction cost. This can be raised to 90% if the area is considered to be a limited-resource area. \nThe EWP was created under Title IV of the Agricultural Credit Act of 1978 ( P.L. 95-334 ) and codified at 16 U.S.C. Sections 2203-2205. The program is permanently authorized, subject to appropriations. Authorized funding is for \"such funds as may be necessary,\" and once appropriated, funds are typically available until expended.\n\n\t\t\tEligible Land\n\nPrivate, state, tribal, and federal lands are eligible for EWP. EWP is administered by NRCS on state, tribal, and private lands and by USFS on National Forest System lands. EWP assistance funded by NRCS may not be provided on any federal lands if the assistance would augment the appropriations of another federal agency.\n\n\t\t\tEligible Participant\n\nAll projects under EWP must have a sponsor. Sponsors must be a state or political subdivision, qualified Indian tribe or tribal organization, or unit of local government. Private entities or individuals may receive assistance only through the sponsorship of a governmental entity.\nSponsors are responsible for:\nobtaining necessary land rights and permits to do repair work; providing the nonfederal portion of cost-share assistance; completing the installation of all emergency measures; and carrying out any operation and maintenance responsibilities that may be required.\n\n\t\t\tFunding and Allocation\n\nFunding for EWP varies widely from year to year ( Table 3 ). Most funding is authorized through supplemental appropriations acts rather than annual appropriations.\nNRCS provides assistance based upon a determination by the NRCS state conservationist that the current condition of the land or watershed impairment poses a threat to health, life, or property. Sponsors must submit a formal request to the NRCS state conservationist within 60 days of the natural disaster or 60 days from the date when access to the site becomes available. No later than 60 days from receipt of the request, the state conservationist will investigate the situation and prepare an initial cost estimate to be forwarded to the NRCS national office. Before release of any funds, the project sponsor must sign a cooperative agreement with NRCS that details the responsibilities of the sponsor (e.g., funding, operation, and maintenance). No funding is provided for activities undertaken before the cooperative agreement is signed.\nApproval of funding is based on the following rank order:\nexigency situations; sites where there is a serious (but not immediate) threat to human life; and sites where buildings, utilities, or other important infrastructure components are threatened.\n\n\t\tEmergency Watershed Protection (EWP) Program\u2014Floodplain Easements\n\n\t\t\tPurpose, Activities, and Authority\n\nFloodplain easements under EWP are administered separately from the general EWP program. The easements are meant to safeguard lives and property from future floods, drought, and the consequences of erosion through the restoration and preservation of the land's natural values. USDA holds all EWP floodplain easements in perpetuity. Floodplain easements are purchased as an emergency measure and on a voluntary basis. If a landowner offers to sell a permanent conservation easement, then NRCS has the full authority to restore and enhance the floodplain's functions and values. This includes removing all structures, including buildings, within the easement boundaries and providing up to 100% of restoration costs. In exchange, the landowner receives the smallest of the three following values as an easement payment: \n1. a geographic area rate established by the NRCS state conservationist; 2. the fair-market value based on an area-wide market analysis or an appraisal completed according to the Uniform Standards of Professional Appraisal Practices (USPAP); or 3. the landowner's offer. \nSection 382 of the Federal Agricultural Improvement and Reform Act of 1996 (1996 farm bill, P.L. 104-127 ) amended the EWP authorization to include the purchase of floodplain easements. Prior to this amendment, NRCS had been directed in a 1993 emergency supplemental appropriations act ( P.L. 103-75 ) to use EWP funds for the purchase of floodplain easements under the Wetlands Reserve Program (WRP)\u2014a farm bill program for restoring wetlands through the voluntary purchase of long-term and permanent easements on agricultural land. This became known as the Emergency Wetlands Reserve Program, which purchased floodplain easements on cropland with a history of flooding in the 1993 and 1995 Midwest flooding events. Following the 1996 farm bill amendment, NRCS began an EWP floodplain easement pilot program in 17 states in FY1997. \nThe Agricultural Act of 2014 (2014 farm bill, P.L. 113-79 ) amended the floodplain easement section of the EWP program to allow USDA to modify or terminate floodplain easements when the landowner agrees and the change \"addresses a compelling public need for which there is no practical alternative, and is in the public interest.\" Modification or termination requires a compensatory arrangement determined by USDA.\nSimilar to the general EWP program, EWP floodplain easements are authorized under Title IV of the Agricultural Credit Act of 1978 ( P.L. 95-334 ) and codified at 16 U.S.C. Sections 2203-2205. The authorization of appropriations is for \"such funds as may be necessary\" and does not expire.\n\n\t\t\tEligible Land\n\nLands are considered eligible for an EWP floodplain easement if they are:\nfloodplain lands that were damaged by flooding at least once within the previous calendar year or have been subject to flood damage at least twice within the previous 10 years; other lands within the floodplain that would contribute to the restoration of the flood storage and flow, erosion control, or would improve the practical management of the easement; or lands that would be inundated or adversely impacted as a result of a dam breach.\nLand is considered ineligible if:\nrestoration practices would be futile due to \"on-site\" or \"off-site\" conditions; the land is subject to an existing easement or deed restriction that provides sufficient protection or restoration of the floodplain's functions and values; or the purchase of an easement would not meet the purposes of the program.\n\n\t\t\tEligible Participants\n\nEWP participants must have ownership of the land. Unlike the general EWP program, EWP floodplain easements do not require a project sponsor. \n\n\t\t\tFunding and Allocation\n\nThe American Recovery and Reinvestment Act of 2009 (ARRA, P.L. 111-5 ) provided $290 million to Watershed and Flood Prevention Operations, of which half ($145 million) was to be used for the purchase and restoration of EWP floodplain easements. Per requirements in ARRA, the funding was obligated by FY2011. Additional funding following Hurricane Sandy resulted in two EWP floodplain easement sign ups, which funded 246 applications on over 1,000 acres of eligible land. Through the end of 2016, NRCS reported enrolling a total of 1,586 easements on 184,911 acres, as well as 1,573 closed and restored easements on 184,423 acres.\n\n\t\tOther Programs\n\n\t\t\tEmergency Disaster Loans\n\nEmergency disaster (EM) loans are available through the FSA when a county has been declared a disaster area by either the President or the Secretary of Agriculture. Agricultural producers in the declared county and contiguous to the county may become eligible for low-interest EM loans. EM loan funds may be used to help eligible farmers, ranchers, and aquaculture producers recover from production losses (when the producer suffers a significant loss of an annual crop) or from physical losses (such as repairing or replacing damaged or destroyed structures or equipment or replanting permanent crops such as orchards). A qualified applicant can then borrow up to 100% of actual production or physical losses (not to exceed $500,000) at low interest rates.\n\n\t\t\tConservation Programs\n\nIn addition to the authorized land assistance programs, USDA uses a number of existing conservation programs to assist with rehabilitating land following natural disasters. In many cases this assistance comes through the use of waivers and flexibility provided to the Secretary of Agriculture. The following section discusses programs recently used by USDA to offer assistance.\n\n\t\t\t\tConservation Reserve Program (CRP)\n\nThe Conservation Reserve Program (CRP) provides annual payments to agricultural producers to take highly erodible and environmentally sensitive land out of production and install resource-conserving practices for 10 or more years. In limited situations, harvesting and grazing may be conducted on CRP land in response to drought or other emergencies (except during primary nesting season for birds). In many cases environmentally sensitive land is ineligible for harvesting and grazing. Emergency harvesting and grazing is authorized by the national FSA office at the request of a county FSA committee.\n\n\t\t\t\tEnvironmental Quality Incentives Program (EQIP)\n\nThe Environmental Quality Incentives Program (EQIP) is a voluntary program that provides financial and technical assistance to agricultural producers to address natural resource concerns on agricultural and forest land. USDA has recently announced a special EQIP signup for farmers and ranchers in hurricane-affected areas. EQIP may also be used to proactively mitigate potential damage from natural disasters through the use of conservation practices (e.g., residue management to improve the soil's capacity to be more drought-resilient, or vegetative buffer strips along waterways to reduce erosion and crop damage in the event of a flood).\n\n\tIssues for Congress\n\n\t\tFunding Mechanisms\n\nHistorically, the majority of emergency assistance for agriculture was funded through supplemental appropriations or as an add-on to regular annual appropriations. A supplemental appropriation provides additional budget authority during the current fiscal year either to finance activities not funded in the regular appropriation or to provide funds when the regular appropriation is deemed insufficient.\nSince most agricultural land assistance programs do not receive the level of attention that triggers a standalone supplemental appropriation bill, annual appropriation bills are increasingly seen as a vehicle for funding these programs. The change in funding mechanism from standalone supplemental appropriations to annual appropriations has presented a challenge for agricultural land assistance programs. The timing of annual appropriations bills may not coincide with natural disasters and the subsequent requests for assistance. This can increase the time between eligible disasters and funding availability. Disaster funds are typically provided to remain available until expended, which has allowed smaller, more localized disasters to be addressed in years without appropriations. However, despite this flexibility, the inconsistent funding has left some agricultural land assistance programs without funding during times of high request volume.\nBeginning in the 2008 farm bill, and continued in the 2014 farm bill, Congress authorized a series of permanent disaster assistance programs that receive mandatory funding, rather than relying on supplemental appropriations. These programs assist with crop and livestock production loss and are generally authorized at funding amounts that are \"such sums as necessary\" and by their mandatory nature are not subject to annual appropriations. For the three agricultural land rehabilitation programs discussed in this report, however, funding remains discretionary and is provided on an ad hoc basis. \nThe variability of funding for agricultural land rehabilitation has led some to suggest that these programs have been left behind in favor of providing assistance for crop and livestock production loss rather than for land rehabilitation and natural resources degradation. Some have suggested that the use of permanent mandatory funding could be expanded beyond production to include land rehabilitation assistance. Others point out that permanent mandatory funding would be difficult to achieve in the current fiscal climate. \n\n\t\tStafford Act Limitations\n\nThe Budget Control Act of 2011 (BCA, P.L. 112-25 ) limits emergency supplemental funding for disaster relief. Under Section 251(b)(2)(D) of the BCA, funding used for disaster relief must be used for activities carried out pursuant to the Robert T. Stafford Disaster Relief and Emergency Assistance Act (Stafford Act, P.L. 93-288 ) for FY2012 through FY2021. This means funds appropriated through emergency supplemental acts for disaster relief through FY2021 may apply only to activities with a Stafford Act declaration. \nIn recent years, agricultural land rehabilitation programs have received funding through annual appropriations. However, it is still considered supplemental in nature and, in some cases, classified as disaster relief. When classified as disaster relief, the funds must be used for a major disaster declared pursuant to the Stafford Act.\nSince emergency agricultural land assistance programs do not normally require a federal disaster declaration from either the President or a state official, the Stafford Act requirement has become a limiting factor in the way agricultural land assistance programs work, potentially assisting fewer natural disaster events. For example, droughts are traditionally not declared as major disaster events under the Stafford Act. However, droughts are one of the eligible natural disasters for land assistance programs\u2014primarily to assist livestock producers to provide water to animals. Since agricultural land assistance program funds are typically available until expended, the Stafford Act requirement also limits what areas may receive future assistance with any remaining funding.\nFor example, the FY2016 appropriated levels classify only a portion of the funding provided as disaster relief and therefore subject to the requirements of the BCA and the Stafford Act. The remaining funds are not considered disaster relief for budget scoring purposes and are therefore appropriated within the regular limitations of the current budget agreement. These funds are not subject to a Stafford Act declaration and may be used according to the authorities of the program.\n\n\t\tMitigation\n\nAnother contentious issue for federal land assistance programs is mitigation. Mitigation actions are steps taken to reduce risk before a natural disaster occurs. Currently only one mitigation program exists for emergency agricultural land assistance\u2014the EWP floodplain easement program (described above). This program purchases floodplain easements on agricultural land that has a history of flooding (two of the previous 10 years). Under the program, the land is permanently taken out of production and restored to a natural function. This program has been authorized since 1997. However, prohibitions in appropriations acts have limited available funding for the program.\nSome have questioned the use of federal restoration funds in areas with a high risk of damage by natural disasters, arguing that it encourages poor land use decisions. While the alternative of mitigation can potentially reduce the future cost of federal assistance, the initial cost of the permanent easement and restoration is sometimes viewed as too expensive a federal cost.","output":"The U.S. Department of Agriculture (USDA) administers several permanently authorized programs to help producers recover from natural disasters. Most of these programs offer financial assistance to producers for a loss in the production of crops or livestock. In addition to the production assistance programs, USDA also has several permanent disaster assistance programs that help producers repair damaged crop and forest land following natural disasters. These programs offer financial and technical assistance to producers to repair, restore, and mitigate damage on private land. These emergency agricultural land assistance programs include the Emergency Conservation Program (ECP), the Emergency Forest Restoration Program (EFRP), and the Emergency Watershed Protection (EWP) program. In addition to these programs, USDA also has flexibility in administering other programs that allow for support and repair of damaged cropland in the event of an emergency.\nBoth ECP and EFRP are administered by USDA's Farm Service Agency (FSA). ECP assists landowners in restoring agricultural production damaged by natural disasters. Participants are paid a percentage of the cost to restore the land to a productive state. ECP is available only on private land, and eligibility is determined locally. EFRP was created to assist private forestland owners to address damage caused by a natural disaster on nonindustrial private forest land.\nThe EWP program and the EWP floodplain easement program are administered by USDA's Natural Resources Conservation Service (NRCS) and the U.S. Forest Service (USFS). The EWP program assists sponsors, landowners, and operators in implementing emergency recovery measures for runoff retardation and erosion prevention to relieve imminent hazards to life and property created by a natural disaster. In some cases this can include state and federal land. The EWP floodplain easement program is a mitigation program that pays for permanent easements on private land meant to safeguard lives and property from future floods, drought, and the consequences of erosion.\nFunding for emergency agricultural land assistance varies greatly from year to year. Since most agricultural land assistance programs do not receive the level of attention that triggers a standalone supplemental bill, annual appropriation bills are increasingly seen as a vehicle for funding these programs. The timing of annual appropriation bills may not coincide with natural disasters, thus leaving some programs without funding during times of high request volume. This irregular funding method has led some to suggest the authorization of permanent mandatory funding similar to what was authorized in the Agricultural Act of 2014 (2014 farm bill, P.L. 113-79) for agricultural disaster assistance programs that support crop and livestock production loss.\nRestrictions placed on supplemental appropriations for disaster assistance have changed the way the agricultural land assistance programs allocate funding, potentially assisting fewer natural disasters. Language in the Budget Control Act of 2011 (P.L. 112-25) limits to the use of emergency supplemental funding for disaster relief. Specifically, funding used for disaster relief must be used for activities carried out pursuant to the Robert T. Stafford Disaster Relief and Emergency Assistance Act (Stafford Act, P.L. 93-288) for FY2012 through FY2021. This means funds appropriated through emergency supplemental acts for disaster relief for these 10 years may apply only to activities with a Stafford Act designation (generally requiring a federal disaster declaration from either the President or a state official). Since emergency agricultural land assistance programs do not normally require a federal disaster declaration, the Stafford Act requirement has become a limiting factor in the way agricultural land assistance programs work, potentially assisting fewer natural disaster events."}
{"id":"gao_GAO-04-241","pid":"gao_GAO-04-241_0","input":"\tBackground\n\nToday, 95 percent of American households purchase local telephone  service, 85 percent purchase subscription television service (usually from a  cable company or a satellite provider), and about 62 percent purchase  some form of access to the Internet.  Of those with access to the Internet,  about 39 percent have a high-speed\u2014or broadband\u2014connection usually  through either a cable modem or a digital subscriber line provided over a  telephone connection.\nLocal telephone service has been available since the late 1800s, and, by  1950, over 60 percent of households had telephone service.  Since the early  20th century, certain aspects of telephone service, such as its price, have  been regulated by state public utility commissions and by the FCC.  With  the Telecommunications Act of 1996, the Congress sought to increase  competition in the local telephone market.  Today, incumbent local  telephone companies face competition from a variety of types of  companies.  However, nearly 87 percent of residential local telephone  subscribers continue to receive service from an incumbent, or traditional,  local telephone company.\nSubscription television service has been available since the late 1940s when  cable television providers first emerged, and, by the late 1980s, cable  service was available to nearly 90 percent of households throughout the  United States.  Today, according to FCC, about 67 percent of American  households purchase cable service.  The 1992 Cable Television  Competition and Consumer Protection Act took steps to increase  competition to cable providers.  The act prohibited the awarding of  exclusive franchises by local franchising authorities.  Also, as required by  the act, FCC developed rules\u2014commonly referred to as program access  rules\u2014that require cable operators that have affiliated cable networks to  make those networks (if they are delivered to the cable operator via  satellite) available to competitors.  The Telecommunications Act of 1996  also took steps to allow telephone and electric companies to enter the  subscription television market.  In the 1990s, direct broadcast satellite  providers (such as DIRECTV and EchoStar) began offering subscription  television service through satellites.  According to FCC, over 17 percent of  American homes currently purchase satellite television service, and these  providers have become the primary competitors to the cable television  industry.  At this time, competition in the subscription video market from  wire-based providers exists in only about 2 percent of markets nationwide,  according to FCC information.\nHigh-speed Internet is a relatively new service that provides a continuous,  high-speed, high-capacity connection to the Internet.  High-speed  connections to the Internet became widely available in the late 1990s, and,  as of mid-2002, nearly 15 percent of American homes had a high-speed  connection to the Internet.  In recent years, local telephone companies  adapted their networks to provide new services, such as digital subscriber  line service, which is a form of high-speed Internet service.  Through their  digital subscriber line service, telephone companies serve approximately  33 percent of subscribers who purchase a broadband connection.   Similar  to local telephone companies, many cable television companies upgraded  their networks to provide high-speed Internet service through cable  modem service.  Cable modem service is the most widely subscribed to  high-speed service with approximately 57 percent of subscribers  purchasing this service.\nFigure 2 provides information on the extent of competition in the local  telephone, subscription television, and high-speed Internet markets.\n\n\tBSPs\u2019 Business Strategy Focuses on Providing Bundled Telecommunications Services\n\nBroadband service providers are a new type of telecommunications  provider.  Unlike local telephone and cable television companies, which are  adapting their existing networks to provide additional services, and other  entrants that focus on providing service in one communications market,  broadband service providers focus on a core business strategy of building a  new fiber-optic network over which they can provide local telephone,  subscription television, and high-speed Internet services.\nA fiber-optic network requires a long-term commitment to build.   According to the BSPA, companies must first obtain a local franchise that  authorizes them to begin construction.  They then must obtain the rights-of- ways to build the network and work with utility companies to make sure  that they do not disrupt other services.  Once the BSP begins building its  network, construction usually takes between 2.5 to 4 years if the company  (1) has steady access to capital and has no difficulties in obtaining the  necessary local government accommodations and (2) is able to receive  needed information from utility companies.  According to the BSPA, the  time it takes to build a network varies with the size of the market and  whether the BSP can string its cable on poles or if it must bury the cable in  the ground.  Because it takes 4 to 5 times longer for a BSP to build a  network if it must bury the cable, some BSPs target communities that allow  them to string their cable on poles according to the BSPA.  A BSPA  document indicates that BSPs have spent over $6 billion in capital  investments to build 32,000 miles of fiber network.  BSPs\u2019 networks  currently expand across areas that would enable them to service up to   4 million homes as of June 2003; of this possible subscriber base, these  companies have gained over 1 million subscribers.\nA representative of the BSPA said that most BSPs have specific targets  regarding the minimum threshold of the potential customers in an area they  need to attract in order to ensure that the large financial investment is  profitable.  Additionally, a common goal is to have most of their subscribers  purchase more than one of the three offered services.  Finally, we were told  that the target average revenue per subscriber each month is about $100.   In order to be able to achieve these goals, BSPs use several marketing  strategies.  First, part of the BSP business strategy is to enter markets that  do not have any wire-based providers other than the incumbent cable and  telephone providers.  That is, BSPs look to become the second major wire- based provider of subscription television and local telephone service in  each of the markets they enter.  Second, BSP officials told us that they  attempt to entice customers to stay with their company in the long term by  building the most modern network in the market, thus enabling the BSPs to  upgrade services as new technologies become marketable.  Third, and most  central to the BSP business strategy, the 6 BSPs we interviewed offer  pricing discounts to encourage the purchase of multiple services. This  business focus allows the BSPs to capitalize on network efficiencies by  generating more marginal revenue on the second or third service that the  subscriber purchases.\nIn order to illustrate the savings available to consumers from BSPs\u2019  bundled telecommunications offerings, we compared the packaged price of  a certain bundle of communications services offered by BSPs with the  prices that these companies would charge for the same set of services  individually.  While some of the BSPs offered packaged deals on a relatively  low end package of services, we found that to compare a similar package of  services across the 6 BSPs we interviewed, we needed to examine the price  for a higher end package of services that included such items as digital tiers  of video service, premium channels, and higher end speeds of Internet  access.  For the 6 markets with BSPs that we interviewed, figure 3 shows  the average savings a consumer can receive by purchasing this particular  set of telecommunications services in a bundle versus purchasing them  individually.  The average monthly BSP \u00e0 la carte prices for this bundle of  telecommunications services in the 6 markets is $136.63.  If purchased as a  bundle, the subscriber is able to receive a discount that would bring the  cost for this bundle of services down to $117.28.  That is, a BSP customer  will save, on average, about $20, or 14 percent, if they select three services  as a bundle package rather than buy them individually from the BSP.   Across the 6 markets with BSPs that we interviewed, the additional savings  a consumer could receive by purchasing this basket of services as a bundle  ranged from $11.66 to $28.74 per month.\n\n\tConsumers Enjoy Lower Rates in Markets with BSPs\n\nIn the 12 markets we reviewed, the entry of a BSP appears to induce  incumbent cable operators to respond by providing more and better  services and by reducing rates and offering special deals.  Incumbent  telephone providers have not shown as much of a competitive response to  BSP entry.  The ultimate result of the BSP operations, along with  incumbents\u2019 response, is substantially lower prices for consumers.\n\n\t\tIncumbent Cable Operators Responded to BSP Entry by Lowering Prices and Improving Services, but Incumbent Telephone Operators Show Less Response to BSP Entry\n\nIn the 6 markets we reviewed that had a BSP providing service, incumbent  cable operators appear to respond competitively to the presence of the  BSP.  Although cable operators told us they generally viewed satellite  providers as their primary competitors, they indicated that BSP  competition in individual markets can be a significant factor when they  develop their business strategies for that market.  In particular, incumbent  cable providers facing competition from a BSP told us that they responded  to the BSP activity by lowering rates or offering special deals or packages  and, in some cases by providing more local content and advanced services.   For example:    Almost all of the incumbent cable operators we contacted said they  lowered their cable and high-speed Internet prices in the markets where  a BSP was operating in order to be more competitive.  Moreover, we  found that one incumbent cable provider in a BSP market chose to offer  discounts to subscribers who purchased both cable and high-speed  Internet service, thus enabling it to compete directly with the BSP\u2019s  packaged offerings.  In this market, the incumbent cable operator priced  a package combining cable and high-speed Internet services at a 45  percent discount when compared with the same package that the cable  operator offered in the non-BSP matched market.\nTwo incumbent cable operators also said that exclusive programming  helps them to differentiate themselves from the BSP.  For example, one  incumbent cable operator said that they respond to BSP entry in a  number of ways, including  providing more local programming and  advanced services.  Another cable operator told us that its provision of  local high school sports games, a community-focused talk show, and  city council meetings provides an advantage over the BSP.  However, the  incumbent cable provider said that it provided this programming before  the BSP\u2019s entry into the market.\nSome incumbent cable providers also responded to BSP competition by  improving their customer service.  For example, one cable operator  noted that its company initiated door-to-door visits to customers to  ensure good picture reception and answer customer questions.   Similarly, on the basis of the information we gathered from local  franchising authorities, it appeared that in some cases customer  satisfaction with the incumbent cable providers improved after the BSP  entered the market.\nThe incumbent telephone companies that we interviewed had not generally  taken steps to respond to the BSP presence in their markets.  Incumbent  telephone providers told us that their primary competition comes from  providers other than BSPs.  The telephone companies varied in terms of  which other providers they viewed as providing the most competition to  their services, but this list of important competitors included a variety of  provider types, such as long-distance telephone providers, wireless  carriers, and Internet-based providers of telephony services.\nIncumbent local telephone providers we spoke with told us that they do not  perceive BSPs as a significant source of competition because the BSPs  have a very small presence focused only in scattered markets, and because  they face greater sources of competition, such as wireless and long  distance providers. For example, these providers generally did not lower  prices or enhance their services in markets where BSPs provided telephone  service.  However, the incumbent telephone providers told us that their  ability to respond to BSP competition was limited by federal and state laws  and regulations that they view as restrictive.  Regarding the high-speed  Internet market, incumbent telephone providers also noted that they did  not view BSPs as important competitors.  Instead, telephone companies  told us that their most important competitors in the high-speed Internet  market are incumbent cable television providers. Moreover, they noted  that, in their opinion, cable operators were likely to remain dominant in the  high-speed Internet market.  In fact, one incumbent local phone provider  said that it reduced prices for high-speed Internet service to compete with  cable operators\u2019 cable modem service\u2014not because of competition from  BSPs.\n\n\t\tConsumers Benefited from Lower Prices for Telecommunications Services in the 6 Markets With BSPs That We Reviewed\n\nRates were generally lower for the subscription television, high-speed  Internet, and local telephone services in the 6 markets we examined with a  BSP present than in the 6 markets that did not have BSP competition.   However, the extent to which prices were lower in a BSP markets  compared to its \u201cmatched market\u201d varied considerably across markets and  services.  For example, in 1 BSP market, the monthly rate for cable  television service was 41 percent lower compared with the matched  market, and in 2 other BSP locations, cable rates were more than 30  percent lower when compared with their matched markets.  On the other  hand, in 1 market, the price for cable television service was 3 percent  higher in the BSP market than it was in the matched market.  Also, we  found that rates for high-speed Internet service were at least 20 percent  lower in the 3 BSP markets compared each of their matched markets, but  for the other 3 market-pairs, high-speed Internet rates were roughly the  same across BSP markets and their matched markets.   The extent to which  rates were lower for one local phone line in BSP markets compared to their  matched market varied considerably:  rates were 4 to 33 percent lower in 5  of the 6 markets with a BSP we reviewed, and the rates for local telephone  service were the same in 1 of the matched-pair markets we reviewed.   See  figure 4 and appendix II for more information on pricing patterns between  market-pairs.\nIn some cases, the lowest price in the market with a BSP was the BSP price,  however, in other cases, the lowest price was the incumbent\u2019s price.   Specifically, in the 6 markets with a BSP, the BSP price was lowest for cable  television in 4 markets, the BSP price was lowest for high-speed Internet in  2 markets, and the BSP price was lowest for local telephone service in 5  markets.\nIt is possible that some of the differences in pricing we observed are caused  by factors other than the presence of a BSP in certain markets.  For  example, our earlier study on cable pricing included an econometric model  that showed that several factors, such as the number of cable channels,  direct broadcast satellite penetration, and population density, influence  cable prices.  We attempted to minimize the influence that other factors  would have on price differences across markets by choosing case-study  markets and matched-pair markets that had certain similarities. Because  the number of channels is known to be an influence on cable rates, we  examined channel line-ups of each of the 12 providers.  Our analysis  showed that the provider with the best price in the markets with a BSP also  offered more channels than the provider in their matched market in 4 of the  6 cases and offered the same number of channels in the other two matched- pair markets.  This indicates that the number of channels is not a cause of  lower prices in markets with BSPs.  See appendix I for a discussion of our  methods and appendix II for a more complete listing of the channel line-up  analysis.\n\n\tBSPs Consider Specific Demographic, Geographic, and Local Government Factors When Deciding Which Markets to Enter\n\nThe BSPs we analyzed considered a variety of factors when determining  which markets to enter.  These considerations were directly tied to the  ability to enter a market quickly and to further their business strategy of  selling multiple services to most of their subscribers.  The primary factors  considered regarding market selection fell into the following three  categories:  demographic factors, geographic factors, and factors related to  the local governments in the communities of interest.\n\n\t\tDemographic Factors Were Considered in Market Selection\n\nThree primary demographic factors were considered by the BSPs we  interviewed when deciding which markets to enter and provide service.  In  particular, the size of the city, the level of income of residents, and the level  of computer use among residents were primary determinants of market  selection.  Despite the commonality in the factors considered, there was  some variation in how BSPs considered each of these demographic factors.\nAll 6 of the BSPs we interviewed mentioned the size of the market as a key  factor that they considered in market selection.  Only 1 BSP focused its  business development toward larger cities.  This company was the first to  take the approach of competing with an incumbent by offering bundled  service packages; thus this BSP believed that in order to attract adequate  venture capital, it was important to focus its operations in major markets.   This BSP also told us that it believed a large-city focus would have the  benefit of enabling the company to rapidly gain subscribers in high-density  corridors where a greater number of customers could be served with a  given amount of infrastructure deployed.  This BSP further noted that a  downside of entering large markets was that construction in larger cities is  significantly harder and more costly than in smaller cities, which made it  difficult to meet an aggressive construction schedule.  In fact, this BSP was  unable to meet the 4-year construction deadline that was mandated by its  franchise agreement.\nFive BSPs built new infrastructure in medium and smaller cities.  They told  us that they took this approach, in part, because they recognized how  difficult it would be to meet construction requirements in a large city.   These BSPs also said that a benefit of entering a smaller city is that  incumbent cable operators are less likely to vigorously compete with them  as would likely, in their view, be the case if they entered a major city.   Representatives from 3 BSPs also told us that they enter smaller markets  because they may be able to leverage customers\u2019 dissatisfaction with the  incumbent\u2014which they believe tend to be more of an issue in smaller  markets.  Similarly, 3 of the BSPs told us that small and medium markets  tend to have old networks, and this provided an opportunity for the entrant  with an upgraded system to successfully compete for subscribers.   Representatives from the 5 BSPs also noted that entering smaller sized  cities allows them to better target markets with favorable demographics,  rather than have to serve the wide array of residents that would live in a  larger market.\nFour of the 6 BSPs we spoke with stated that the average household  income in a market was a key criterion in their decisions about what  markets to enter.  However, BSPs took various approaches regarding what  income levels they were targeting.  For example, 2 BSPs told us that they  choose to enter markets with high-income level populations because these  subscribers are more likely to take two or more telecommunications  services.  On the other hand, the other 2 BSPs look more for markets with a  balance of varied income levels.  Representatives of these companies told  us that a mix of income levels among subscribers helps to ensure that each  of the communications services offered by the company has a target  audience.  In fact, 1 BSP stated that higher level income subscribers may be  most likely to subscribe to broadband service, but middle income  subscribers may be most likely to subscribe to subscription television  service.\nTwo of the 6 BSPs noted that high levels of computer use and Internet  connections among residents of a community are factors they consider  when determining what markets to enter because high-speed Internet  service has a high profit margin.  In particular, these BSPs told us that they  selected markets with a high number of college students because the  academic environment has a large amount of computer ownership and  Internet use.\n\n\t\tGeographic Factors Were Considered in Market Selection\n\nWe found that BSPs consider certain geographic factors when deciding  which markets to enter and provide services.  In particular, BSPs looked for  markets that were in close proximity to other markets that were served by  a parent company or in proximity to other key facilities, such as the BSP  headquarters or network, or other needed infrastructure.\nOfficials of 2 BSPs that are subsidiaries of energy companies told us that a  key factor considered in market selection was proximity to the parent  company\u2019s service area, which they said helps to leverage the parent  company\u2019s name brand, infrastructure, and human capital.  For example, a  BSP representative told us that his BSP chose to enter one of the markets  we studied because it was close to its parent company, and the BSP was  thus able to benefit from the parent company\u2019s good reputation within the  community as a power provider.  The local franchising official in that  market agreed that the community\u2019s positive relationship with the parent  power company gave citizens confidence in the BSP\u2019s proposal and to trust  that it would fulfill its infrastructure construction requirements.  In  addition to name recognition, another BSP official said that entering cities  where the parent company has a presence allows the BSP to take  advantage of the parent company\u2019s workforce to assist with the  construction of the new infrastructure.\nTwo BSP representatives said that their BSP chose to enter markets on the  basis of close proximity to their BSPs\u2019 headquarters or physical network.\nFor example, 1 BSP that we interviewed chose markets that were close to  the BSP headquarters.  Another BSP told us that choosing cities in close  proximity to its existing physical network was important in order to  minimize the cost of fiber connecting any new market to the company\u2019s  network.  In fact, some markets that this BSP chose not to enter were too  far from existing infrastructure and would have been very costly to  connect.\n\n\t\tCharacteristics of Local Government Were Considered in Market Selection\n\nWe found that when deciding which markets to enter, BSPs considered the  receptivity of local government officials to new entrants.  Moreover, the  degree to which government officials took steps to reduce administrative  requirements\u2014which BSPs told us could be considerable\u2014was a key  factor for some BSPs when considering market entry.\nRepresentatives from 5 BSPs indicated that specific markets were selected  because the city government officials had a positive attitude toward  competition, were easy to work with, or invited the BSP to provide services  in their market.  Similarly, one BSP told us that they avoided entering  markets that had local franchising officials who showed limited interest in  their services.\nDuring our interviews, BSPs mentioned that they needed to overcome a  variety of administrative issues before market entry.  Gaining access to  rights-of-way, fulfilling costly franchise requirements, and obtaining  access to apartment buildings that have exclusive contracts with the  incumbent cable operators were a few of the varied administrative issues  that were mentioned by the BSPs.  Representatives from 2 BSPs told us  that when government officials are welcoming to the new entrants, the  officials often take steps to mitigate administrative costs and requirements.   For example, one local franchising authority, which was eager to have a  BSP offer services in its market, presented a franchise agreement with  reduced-fee payments for rights-of-way access and construction permits.   Also, 2 different BSPs told us that the timeliness for gaining approvals for  various required applications often were directly influenced by the  receptivity of the regulators.  We were told that two enthusiastic local  franchising authorities took only 120 days to approve a BSP\u2019s application  for a franchise.  In contrast, another BSP told us that it was unable to  obtain a franchise after 2 and 1\/2 years of working with a local franchising  authority that was not receptive to competition, and the BSP did not  succeed in entering that market.\nFive of the 6 case study markets that do not have a BSP competitor had  companies express interest in entering their cities, but, according to local  government officials, these companies decided not to enter for several  reasons.  For example, one local official told us that the level-playing-field  law in his state\u2014which are laws that require any new cable franchiser to  agree to the same terms and conditions that the incumbent cable provider  must meet\u2014was a factor in an interested competitive cable company\u2019s (not  1 of the 6 companies we studied) retracting a franchise application.   Another factor that may cause BSPs to choose not to enter a market is the  local government\u2019s lack of administrative resources.  Specifically, one local  official said that the lack of administrative resources to process  applications quickly caused some BSPs to withdraw their applications and  seek more receptive markets.\n\n\tBSPs Are Gaining Market Share, but a Variety of Factors May Hinder Their Success\n\nBSPs are gaining market share in the service markets they have entered,  with varying success.  BSPs we interviewed said that certain factors, such  as difficulty in gaining access to certain programming, can create obstacles  to their ability to compete effectively.  Moreover, BSPs may be finding that  these telecommunications markets are more competitive than they had  expected when they first developed their business strategy.  Currently, all  of the BSPs we interviewed are having problems with access to capital and,  thus are struggling to continue expanding their market presence.\n\n\t\tBSPs Are Having Varied Success in Gaining Subscribers\n\nOn the basis of statistics provided by the 6 BSPs we interviewed, these  companies appear to be having varied success in gaining subscribers for  their television, local telephone, and high-speed Internet services.  The 6  BSPs have made significant inroads in gaining market share in the three  service markets.  In particular, for the 6 cities with BSPs we interviewed,  the average BSP market penetration for subscription television service was  25 percent, the average penetration of subscribers for local telephone  service was 29 percent, and the average subscriber penetration for high- speed Internet service was 17 percent.  As figure 5 shows, there was  substantial variation across the companies in the penetration rates for each  service\u2014ranging from a low of 6 percent penetration for high-speed  Internet in 1 market to a high of 63 percent penetration in telephone service  in another market.  We found that entering smaller markets may be  associated with an ability to gain greater market penetration.  For example,  we found that in the 3 smaller markets we examined, the BSPs were able to  attract a larger share of the potential subscribers\u2014that is, to achieve a  higher level of penetration\u2014than was the case for BSPs that entered the  medium and the larger markets included in our case study.\n\n\t\tCertain Factors in Local Markets Can Hinder BSPs\u2019 Ability to Compete\n\nAll of the BSPs we interviewed noted that various barriers arise that can  hinder their ability to effectively compete in the markets that they have  entered.   Although a host of issues were mentioned during our interviews,  the greatest concern surrounded issues related to an inability to gain  access to certain cable networks, an inability to serve certain apartment  and condominium complexes, and restrictive local regulatory  requirements.\n\n\t\t\tProgram Access Concerns\n\nIn 4 markets, BSP officials said they have experienced problems obtaining  certain cable networks\u2014such as regional sports, weather, and local  informational channels\u2014that the incumbent cable provider of that market  owns or holds exclusive rights to within that market.  Of the 4 BSPs that  expressed concern with program access, 2 specifically told us that they  were unable to gain access to regional sports networks because the  incumbent cable provider, which owned that network, provided the  network to its own facilities terrestrially\u2014that is, not via a satellite.   Similarly, the third BSP stated that it could not obtain access to a popular  local news network because the incumbent cable provider partially owned  it.  The incumbent, however, explained that FCC ruled that program  exclusivity in this case was in the public interest and therefore FCC granted  it an exemption to the program access rules.  The last BSP stated that even  though the incumbent cable provider had not produced a local sports  network, it still could not obtain access because the incumbent had  secured an exclusive deal with the producers of that network.  The BSP  was able to gain access to that cable network only after the network was  sold from one owner to another.\nWhile 4 of the BSPs said they had a problem with program access, only two  cable operators we spoke with said that they were aware of program  access issues in the markets we reviewed.  Moreover, one incumbent cable  provider told us that producing or having access to exclusive content can  be a good marketing strategy for it and that without the ability to develop  exclusive content, the incentive to produce innovative programming is  minimized.  Regarding the market where an incumbent cable provider had  exclusive rights to certain programming, the incumbent\u2019s view was that it  created the concept for the programming package and the BSP was  unwilling to make such a commitment on an unproven product.\n\n\t\t\tMultiple Dwelling Units\n\nThree of the BSPs we interviewed expressed concern about being  prevented from providing service to large segments of the population that  live in apartments or condominiums, which are generally referred to as  \u201cmultiple dwelling units.\u201d  We were told that owners of multiple dwelling  units often enter into exclusive contracts with one cable provider, thereby  limiting a competitor\u2019s access to that building.  Also, even when BSPs have  gained access into a building, we were told that the building owners may  not allow them to lay additional wires because of the associated costs and  disruptions.  In fact, 1 BSP we spoke with estimated that it could not  provide service to 20 percent of subscribers in 1 of our case-study markets  because of problems gaining access to multiple dwelling units.  The  incumbent cable operators we interviewed said that in some cases they had  exclusive contracts to serve multiple dwelling units.  However, in 3 of the  markets, these providers noted that the BSPs also had exclusive contracts  with some multiple dwelling units.\nRecently, FCC reviewed issues related to access by telecommunications  companies to multiple dwelling units.  In a January 2003 order, FCC did not  establish federal access requirements or preempt state regulation of these  matters.  Likewise, FCC continued to permit exclusive or perpetual  contracts for subscription television service in multiple dwelling units  because, according to FCC, it found that it was not clear that there are  anticompetitive effects from exclusive and perpetual contracts, and, as  such, FCC could not support government intervention in privately  negotiated contracts.\n\n\t\t\tBurdensome Franchise Requirements\n\nSome of the BSPs also told us that certain franchise requirements can be  burdensome.  As we previously noted, BSPs told us that the administrative  requirements of local jurisdictions can influence the markets they enter,  but we were also told that these requirements could affect how quickly  they can begin providing service in markets they have chosen to enter.  For  example, we were told that required construction time frames often burden  new entrants, even though these rules are generally designed to create a  \u201clevel playing field\u201d by ensuring that new providers must meet all of the  same requirements that incumbent providers have had to meet.  These  construction rules can require extensive capital, reprioritization of the  business plan, or the provision of service in areas that are not economic to  serve.  In some cases, BSPs have changed their legal status in order to  avoid costly and labor-intensive construction requirements.  One BSP  noted that the incumbents effectively receive a longer build-out schedule  because they were able to grow with the communities they serve.\n\n\t\tBSPs May Have Underestimated the Level of Competition in Telecommunications Markets\n\nOne of the most significant factors that may hinder the BSP\u2019s marketing  success is that the communications markets BSPs seek to serve may be  more competitive today than these providers envisioned when they first  developed their plans.  We found that BSPs avoid markets where another  new wire-based operator had entered the market, but this avoidance does  not ensure that there are not other new competitors providing service in  the three service markets.  For example:      Regarding subscription television service, direct broadcast satellite  service (such as DIRECTV or EchoStar) service is available nationwide  and, thus, represents a second and third formidable competitor in every  market that a BSP may choose to enter.  As the number of direct  broadcast satellite subscribers continues to grow, it will be even harder  for the BSPs to achieve the penetration rates that are necessary for  profitability.\nCompetition in the market for local telephone service has been  emerging.  Incumbent local telephone companies noted that consumers  are increasingly turning to mobile telephones as their sole telephone  line in lieu of a wire line connection.  If more consumers replace their  wire line telephone service with wireless service (which is not  traditionally provided by BSPs), such action will also have the effect of  decreasing the number of potential subscribers to which BSPs can  market their services.  Also, incumbent local telephone providers view  the large established cable operators as their primary competitive threat  in the future.  In fact, some established cable operators are increasingly  providing telephone service in markets around the country.\nIn the high-speed Internet market, BSPs already compete against cable  and local telephone providers.  In addition, new platforms for the  provision of Internet service may erode the market for all wire-based  companies.  For example, one incumbent local telephone company  noted that the presence of a large university that provides free high- speed Internet service to its students and faculty reduces its potential  high-speed Internet market.  Other new means of Internet access, such  as through wireless modes, are also becoming more widely available.\n\n\t\tBSPs Serving the Markets We Reviewed Are Now Struggling to Obtain Adequate Access to Capital\n\nThe BSPs we spoke with gained financial capital to construct their  infrastructure and operate their business in a variety of ways.  Two BSPs  that are providing services in the markets we reviewed were wholly owned  subsidiaries of large power companies and were able to receive all of their  investment capital from their parent company.  Two other BSPs providing  service in the markets we reviewed are, or had been, part of larger  telecommunications companies and received their startup financing from  these parent companies.  The remaining BSPs serving markets we reviewed  were funded through venture capital or a mixture of venture capital and  money obtained through a partnership with an energy company.\nDespite these sources of capital in the early stages of their business, the 6  BSPs we interviewed are currently experiencing some level of financial  problems.  In particular, they told us that their difficulty in obtaining access  to necessary capital is threatening their ability to construct their networks  and market their services.  None of the 6 BSPs we studied are aggressively  expanding their operations.  Two of the BSPs are still completing  construction within their current markets in order to comply with their  agreed-upon schedule, but another BSP was currently unable to complete  construction.  Beyond their current markets, all of the BSPs we reviewed  have had to put expansion plans on hold until the market conditions  improve.  Additionally, 2 BSPs told us that they do not have enough capital  to advertise their service offerings to their current base of potential  subscribers, and 1 BSP reorganized through a Chapter 11 bankruptcy  proceeding.  BSPs told us that, to a large extent, these financial problems  are the result of the economic problems that have affected the entire  telecommunications sector.\n\n\tConclusions\n\nAlthough our study indicates that there are measurable consumer benefits  in markets with BSPs compared with markets without such competition,  the degree to which the BSP model is replicable throughout a broader set  of markets remains unclear.  For example, the majority of BSPs we spoke  with stated that they avoid entering large metropolitan cities because they  believe serving such markets might prove difficult.  Moreover, even in the  markets that they have successfully entered, the companies are struggling  to achieve their key business targets.  As a result, nationwide, BSPs serve  only about 1 percent of the subscription television market and even less of  the local telephone market, although BSPs do serve about 2 percent of all  high-speed Internet subscribers.  Nevertheless, at this time, with the  telecommunications sector struggling to recover from diminished capital  investments, it is difficult to determine the long-term prospects for success  of BSPs as new telecommunications providers.  The problems BSPs face  may be mitigated as the current economic downturn of the  telecommunications sector subsides, but the long-term viability of these  providers is not clear.\n\n\tAgency Comments\n\nWe provided a draft of this report to the Federal Communications  Commission and the Antitrust Division of the Department of Justice for  their review and comment.  The Department of Justice did not provide  comments on this report.  The FCC provided technical comments that we  incorporated.\n\n\tIndustry Association Comments and Our Evaluation\n\nWe also invited representatives from the Broadband Service Provider  Association (BSPA), the National Association of Telecommunications  Officers and Advisors (NATOA), the National Cable & Telecommunications  Association (NCTA), and the United States Telecom Association (USTA) to  review and comment on a draft of this report.  The USTA did not provide  any comments.  The BSPA and NATOA provided some comments that we  incorporated as appropriate.\nNCTA officials provided extensive comments on the draft.  These officials  expressed concern with certain summary statistics on price differences in  BSP markets compared with markets without BSPs that appeared in the  draft of this report that they reviewed.  We modified the presentation of the  data on these price differences. In particular, rather than providing  summary statistics on price differences across the markets with BSPs  compared to the markets without BSPs, we provide information on the  price difference between each BSP market and its match. Additionally,  NCTA made the following points:  NCTA officials note that a case study of 6 markets with and 6 markets  without a BSP competitor is a very small sample of the roughly 10,000  cable systems in operation in the United States.  They view the study as  thus having no statistical significance.  In particular, NCTA official  express concern that our draft \u201cimplies vastly broader conclusions  regarding the effect of BSPs on cable pricing than are warranted by the  limited case studies.\u201d  They also note that, as we reported, the larger  pricing differences were found for the 3 smaller city-pair case studies,  while smaller price differences were found in the medium and larger  city pairs.  The officials stated that, as such, for the larger percentage of  subscribers covered by the study, the differences were much smaller.\nGAO response:  We agree that our approach in this report\u2014a case study  analysis\u2014is not generalizable to the universe of cable systems.  We  have stated this several times in the report, and have added more  discussion of this in response to NCTA\u2019s comments.   However, as  stated in the report, our BSP sample represents more than 20 percent of  the households nationwide that are in areas where BSPs currently offer  the three-service package.  Given the caveats we place on our own  work, we do not believe that our conclusions imply a broader  interpretation than is warranted.\nNCTA officials note their concern that just 4 months after we released a  report on cable pricing that was based on an econometric analysis, we  would provide new information on cable pricing in competitive and  noncompetitive markets that are based on a different methodology.\nGAO response:  We do not believe there is a problem in conducting a  second study on cable rates and competition that analyzes the issue  using an alternative methodology.  The two studies used different data  and different methods to examine an overlapping issue.  The  fundamental findings of both studies were similar, but the specifics  were different\u2014as would be expected given the different methods  used.  While our October 2003 study examined the issue of cable rates  broadly, the current study focuses on 12 markets and compares rates in  the 6 with a BSP to the 6 without such a competitor.  The findings from  this study relate to those 12 markets.\nNCTA officials note that the reported pricing differences between  markets with BSPs and those without BSPs could be misinterpreted as  implying that BSP entry engenders a substantial price response by  incumbent providers, when in fact, for cable pricing, the BSP (not the  incumbent) offered the lower price in the BSP market in 4 out of the 6  case-study markets.  Moreover, NCTA officials note that to the extent  that incumbents are responding to competition, this response may be to  competition from DBS providers, rather than competition from BSPs.\nGAO response:  We agree with NCTA that price differences in cable  rates across the BSP markets compared to those without a BSP do not  necessarily mean that the incumbent providers lowered their prices  entirely in response to BSP entry.  We added some discussion in the  report to clarify this point.  Also, we note in the report that incumbent  cable providers told us that their most important competitors are the  two DBS providers.  However, almost all of the incumbent cable  providers also told us that when faced with wire-based competitors in  particular local markets, they tend to lower their prices.\nNCTA officials also note that any observed price difference between  markets with and without BSPs could be related to other factors not  controlled for by the case-study analysis.  For example, they noted that  the number of channels in a cable system\u2019s line up is a key factor that  may drive pricing differences across locations and providers.\nGAO response:  We agree with NCTA\u2019s point that some of the  differences in cable rates across our case study locations with a BSP as  compared to those without such a provider could be caused by factors  other than the presence of the BSP.  We have added language to that  effect in the report.  However, after receiving NCTA\u2019s comments, we  also examined the number of channels provided in the case study  markets\u2014which NCTA specifically cited as a possible cause of rate  differences\u2014and found a similar number of channels available in the  markets with a BSP when compared to its matched market.  Moreover,  when we asked incumbent cable operators why their prices differed  across the markets in our sample, they usually cited the presence of the  BSP as the primary cause.\nNCTA officials note that the draft report did not adequately address the  possibility that in markets with BSPs, prices are uneconomically low  and are unsustainable.  That is, they noted that the low prices available  in markets with BSPs may be of a transitory nature only.  The officials  noted that this seems particularly possible in light of the fact that we  found that all BSPs interviewed in the course of the study were facing  various degrees of financial difficulty.  NCTA officials also said that we  did not fully describe the extent of financial problems currently  experienced by the BSPs.\nGAO response:  We did not evaluate the long-term sustainability of the  BSPs in the markets we reviewed.  However, to address this to some  extent, we only selected markets where the BSP had been in operation  for at least a year.\nNCTA officials note that they believe that BSPs have overstated claims  that certain local conditions (e.g., related to program access concerns,  multiple dwelling unit access, and local franchising conditions) may  hinder BSPs\u2019 ability to compete.\nGAO response:  We did not evaluate BSPs\u2019 concerns about the effect of  local market conditions on their entry and success.  Similarly, we did  not evaluate the veracity of incumbent providers\u2019 statements on these  issues.  In this section of the report, we are simply reporting the views  of these providers.\nAs agreed with your offices, unless you publicly release its contents earlier,  we plan no further distribution of this report until 30 days after the date of  this letter.  At that time, we will provide copies to interested congressional  committees; the Chairman, FCC; and other interested parties.  We will also  make copies available to others upon request.  In addition, this report will  be available at no charge on the GAO Web site at http:\/\/www.gao.gov.  If  you have any questions about this report, please contact me at (202) 512- 2834 or goldsteinm@gao.gov.  Key contacts and major contributors to this  report are listed in appendix IV.\n\nScope and Methodology\n\nWe employed a case-study approach in gathering information in responding  to our four objectives.  In particular, this report provides information on (1)  BSPs\u2019 business strategy; (2) the impact of BSPs\u2019 market entry on incumbent  cable and telephone companies\u2019 market behavior and consumer prices of  subscription television, high-speed Internet, and local telephone services;  (3) the key factors BSPs consider when making decisions about which  local markets to enter; and (4) the success of BSPs in attaining  subscribership and any key factors that may limit their success. The case  study consisted of 6 matched pairs of cities (12 total) that shared certain  key traits except that 1 city in each pair has a BSP providing service and the  other does not.\nIn selecting the cities with BSPs, we considered several factors.  We  selected cities in various parts of the country with BSPs that met some  basic criteria.  To be considered for selection in our case study, a BSP had  to provide subscription television, local telephone, and high-speed Internet  services in the city for more than 1 year; had to have constructed its own  network (rather than having purchased an existing network); and had to  have a network that was nearly completed.  We also analyzed population  data to ensure that our case study included markets of varying sizes.  We  selected 3 small cities (with populations under 100,000), 2 medium-sized  cities (with populations of 100,000 to 200,000) and 1 large city (with a  population over 200,000).  The 6 cities chosen for the case studies  represented more than 20 percent of the households to which BSPs  currently offer the three-service package.  See appendix III for a detailed  listing of the BSPs and areas of service.\nTo choose cities without BSPs for our analysis, we matched the 6 BSP  cities with cities that were similar in terms of size and demographics.   Where possible, we matched each BSP city with a city that did not have a  BSP in the same state to avoid any possible differences caused by state  laws or regulations and to help ensure reasonably similar demographic  characteristics across the city-pairs.  However, in the case of the only large  city in our sample of BSP cities we selected a city in another state\u2014 Seattle\u2014to match with Boston because there was no city in Massachusetts  with similar size and demographics, and no other large cities had extensive  BSP presence. Each city-pair also has the same incumbent local telephone  and cable television providers, although in one case two incumbent  telephone companies served different parts of a city.\nWe conducted semistructured interviews with a variety of industry and  local government participants for each of the selected markets.  Our  interviews included questions about telecommunications competition in  each city, the price of telecommunications services, and the factors that  favor or discourage competition in each city.  We interviewed the BSPs (in  the 6 cities where they existed), the incumbent cable companies, the  incumbent telephone companies, the local franchising authorities, and the  public utility commissions.  Table 1 provides the details of the cities we  chose and the primary companies and local representatives we  interviewed.  In addition, we interviewed officials from the BSPA and the  Mid-American Regional Council (a support organization for local  governments).\nOur analysis provides details on the competitive status of markets with  BSPs.  However, because we used a case-study method, our results are not  generalizable to all markets with such providers.  We performed our work  between May 2003 and December 2003 in accordance with generally  accepted government auditing standards.\n\nPrice and Channel Information in Six Market Pairs\n\nThe following table provides additional data on the price patterns between  the matched pair markets.  The percentage price difference between each  matched market pair was calculated by subtracting the lowest price in the  BSP market from the incumbent\u2019s price in the non-BSP market, and then  dividing that difference by the incumbent\u2019s non-BSP market price.\n\nBroadband Service Provider Association Member Markets as of February 2003\n\nMinnesota: St. Cloud  California: Concord, Contra Costa County,  and Walnut Creek Kansas: Lenexa, Overland Park, Shawnee,  and Merriam Missouri: Kansas City and Kearney Texas: Austin, San Marcos, Corpus Christi,  Midland, Odessa, San Antonio, and Waco Alabama: Huntsville and Montgomery Florida: Panama City Georgia: Augusta and Columbus South Carolina: Charleston Tennessee: Knoxville Iowa: Lakeside and Storm Lake Minnesota: Luverne, Marshall, Pipestone,  Slayton, Tracy, and Worthington South Dakota: Canton, Coleman,  Flandreau, Madison, North Sioux City,  Watertown, and Yankton California: Gardena and San Francisco Illinois: Chicago New York: New York Massachusetts: Boston Pennsylvania: Philadelphia Washington, D.C.\nSeveral changes in the membership of BSPA have taken place since we selected our case-study  markets in early 2003.\n\nGAO Contacts and Staff Acknowledgments\n\n\tGAO Contacts\n\n\tStaff Acknowledgments\n\nIn addition to those named above, Julie Chao, Michael Clements, Andy  Clinton, David Dornisch, Etana Finkler, Bert Japikse, Sally Moino, and  Carrie Wilks made key contributions to this report.\n\n\tGAO\u2019s Mission\n\nThe General Accounting Office, the audit, evaluation and investigative arm of  Congress, exists to support Congress in meeting its constitutional  responsibilities and to help improve the performance and accountability of the  federal government for the American people. GAO examines the use of public  funds; evaluates federal programs and policies; and provides analyses,  recommendations, and other assistance to help Congress make informed  oversight, policy, and funding decisions. GAO\u2019s commitment to good  government is reflected in its core values of accountability, integrity, and  reliability.\n\n\tObtaining Copies of GAO Reports and Testimony\n\nThe fastest and easiest way to obtain copies of GAO documents at no cost is  through the Internet. GAO\u2019s Web site (www.gao.gov) contains abstracts and full- text files of current reports and testimony and an expanding archive of older  products. The Web site features a search engine to help you locate documents  using key words and phrases. You can print these documents in their entirety,  including charts and other graphics.\nEach day, GAO issues a list of newly released reports, testimony, and  correspondence. GAO posts this list, known as \u201cToday\u2019s Reports,\u201d on its Web  site daily. The list contains links to the full-text document files. To have GAO e- mail this list to you every afternoon, go to www.gao.gov and select \u201cSubscribe to  e-mail alerts\u201d under the \u201cOrder GAO Products\u201d heading.\n\n\t\tOrder by Mail or Phone\n\n\tTo Report Fraud, Waste, and Abuse in Federal Programs\n\n\tPublic Affairs","output":"Why GAO Did This Study\n\nOne of the primary purposes of the Telecommunications Act of 1996 was to promote competition in telecommunication markets, but wire-based competition has not developed as fully as expected. However, a new kind of entrant, called broadband service providers (BSP), offers an alternative wire- based option for local telephone, subscription television, and high- speed Internet services to consumers in the markets they have chosen to enter. This report provides information on (1) BSPs' business strategy, (2) the impact of BSPs' market entry on incumbent companies' behavior and consumer prices for telecommunications services, (3) the key factors that BSPs consider when making decisions about which local markets to enter, and (4) the success of BSPs in attaining subscribership and any key factors that may limit their success. We developed a case-study approach to compare 6 cities where a BSP has been operating for at least 1 year with 6 similar cities that do not have such a competitor. The 6 markets with a BSP presently account for more than 20 percent of the households nationwide that are in areas where BSPs currently offer the three-service package, but the results of these case studies are not generalizable to all markets.\n\nWhat GAO Found\n\nBSPs' primary business strategy is to build a fiber-optic network to provide consumers with a bundle of services, including subscription television, high-speed Internet access, and local telephone. To entice consumers to purchase more than one service of the three services they offer--a key marketing goal--all of the BSPs we reviewed offer substantial savings to consumers who buy more than one service. The rates for telecommunications services were generally lower in the 6 markets with BSPs than in the 6 markets without a BSP. For example, expanded basic cable television rates were 15 to 41 percent lower in 5 of the 6 markets with a BSP when compared with their matched market. The 6 BSPs we interviewed said that demographic factors, such as city size, income, and computer use were important factors in their decision to enter a market. For example, most of the BSPs avoided entering large cities. Location of the markets to key facilities and receptivity of local government officials were also considered when deciding which markets to enter. The 6 BSPs we interviewed have gained significant market shares for the services they provide, but they have also faced a number of obstacles that may be hindering their success. For example, the BSPs we spoke with are experiencing some financial difficulties and are putting off network expansion. Two of these companies also currently lack the resources necessary to adequately market their services within their existing markets. We provided a draft of this report to the FCC and DOJ. The DOJ did not provide any comments, and FCC provided technical comments that we incorporated. We invited the Broadband Service Provider Association, the National Association of Telecommunications Officers and Administrators, the National Cable & Telecommunications Association (NCTA), and the United States Telecom Association to comment on a draft of this report. We summarize and discuss NCTA's detailed comments in the report."}
{"id":"crs_R44603","pid":"crs_R44603_0","input":"\tOverview\n\nPrior to enactment of the Postal Reorganization Act of 1970 (PRA), mail delivery in the United States was the responsibility of the U.S. Post Office Department, a Cabinet-level department in the executive branch. PRA reform efforts were driven largely by the view that the Post Office Department was ill equipped to meet the demands of the growing U.S. population and the changing economy. Mail volume had risen sharply and the Post Office Department lacked the institutional flexibility to quickly respond to market changes. \nToday, the U.S. Postal Service (USPS or Postal Service) faces similar challenges but for different reasons. Between 2006 and 2015, total mail volume dropped sharply. Market changes and global economic conditions contributed to the Postal Service's financial challenges and affected its efforts to control expenses and expand revenue. Statutory mandates, such as the requirements to maintain six-day delivery and prefund health benefits for future retirees, may limit the actions USPS might take to mitigate these challenges. According to the Postal Service, \"many of the structural reforms needed to ensure long-term financial viability, such as the resolution of our unsupportable [retiree health benefit] liability, can only be achieved with comprehensive legislation.\" \n\n\tFinancial Challenges Facing the U.S. Postal Service8\n\nThis section of the report covers the current financial responsibilities, challenges, and limitations facing USPS. These issues are the result of a confluence of factors including (1) the USPS's statutorily designed organizational and financial structure, (2) U.S. and global economic conditions over the past decade, and (3) the impact that technological innovations have had on the demand for postal products and services. \nOn the one hand, the USPS must sell enough postal products to maintain self-sufficiency and meet other statutory requirements, such as the retiree health benefit prefunding obligation. On the other hand, the USPS generally cannot expand its operations beyond the scope of postal products and services and other limited nonpostal products authorized by statute. Statute also limits the USPS's ability to raise rates on certain postal products. These facts underlie many of the challenges facing the USPS and are also at the core of many of the reform efforts undertaken by the USPS and considered by Congress.\n\n\t\tFinancial Structure of the U.S. Postal Service\n\nThe current financial structure of the USPS was largely established by two statutes: the PRA and the Postal Accountability and Enhancement Act of 2006 (PAEA). The PRA created the USPS, which replaced the U.S. Post Office Department, as an independent agency of the executive branch, responsible for generating enough revenue to finance its own operations. Prior to the PRA, the U.S. Post Office Department was a Cabinet-level agency and was not financially self-sustaining. \nSince the passage of the PRA, the USPS has generated nearly all of its funding\u2014about $69 billion in FY2015 according to the USPS's most recent financial report\u2014by charging users of the mail for the costs of the services it provides. Congress, however, does provide an annual appropriation\u2014about $55 million in FY2016\u2014to compensate the USPS for revenue it forgoes in providing free mailing privileges to the blind and certain overseas voters. In addition, the annual appropriation compensates the USPS for debt it accumulated in the 1990s while providing postal services at below-cost rates to non-profit organizations. Funds appropriated to the USPS for the annual reimbursement and revenue forgone are deposited in the Postal Service Fund, a revolving fund in the Treasury that consists largely of revenues generated from the sale of postal products and services. The revenue in the Postal Service Fund is used to fund the operations of (1) the Postal Service, which includes the U.S. Postal Inspection Service (USPIS); (2) the U.S. Postal Service Office of Inspector General (USPSOIG); and (3) the Postal Regulatory Commission (PRC). \n\n\t\tFinancial Condition of the U.S. Postal Service\n\nThe USPS's end-of-year financial results for FY2015 marked the ninth consecutive year of losses for the agency. In the years immediately prior to FY2007, the USPS ran modest profits. Between FY2007 and FY2015, the USPS accumulated $56.8 billion in financial losses, including a net loss of $5.1 billion in FY2015. This trend was reversed in the first quarter of FY2016, which showed a net income of $300 million, compared to a net loss of $800 million at the same point in FY2015. The first quarter of FY2016 includes the holiday shipping season, which is one of the busiest times for USPS. The improvement in USPS's first quarter financial results is due in part to an increase in shipping and package volume and revenue as compared to the first quarter of FY2015. Additional factors, such as a temporary increase in select postal rates, known as a \"temporary exigent surcharge\" or \"exigent increase,\" will be discussed in greater detail later in this section.\n\n\t\tWhat Happens When USPS Ends the Year with a Net Loss?\n\nConstituents may ask if the USPS receives appropriations, subsidies, or a \"bailout\" when it ends the fiscal year with a net financial loss. The USPS does not receive additional appropriations when it ends a fiscal year with a financial loss. The USPS does, however, benefit from access to debt instruments from the U.S. Treasury.\nThe USPS has statutory authority to borrow a maximum of $3 billion per fiscal year and hold a maximum total debt of $15 billion. At the end of FY2012, the USPS reached its statutory debt limit. Further, USPS's total debt obligations have remained at $15 billion since FY2012. As the USPS pays down its existing debt, it accumulates new debt up to its statutory maximum. For example, on October 1, 2015, the USPS repaid $4 billion of its debt. It is expected, however, to borrow up to its statutory ceiling amount by the end of FY2016. \nUSPS's $15 billion in debt is issued through a variety of loan instruments, which includes fixed and floating rate loans, an overnight credit line of $600 million, and a short-term credit line that allows the USPS to borrow up to $3.4 billion with two days prior notice. The USPS's credit lines were fully drawn at the end of FY2015.\nAdditionally, financial losses have caused the USPS to default on certain statutorily required payments, such as the retiree health benefit prefunding obligations. Since FY2012, the USPS has defaulted on over $28 billion in statutorily required retiree health benefit prefunding obligations. Use of debt instruments and default on certain retiree health prefunding payments has likely allowed the USPS to maintain cash-on-hand sufficient to cover its operational expenses throughout each fiscal year. As Table 1 shows, the USPS has ended each fiscal year since FY2007 with at least $889 million cash-on-hand. \nAs shown in Table 1 and Figure 1 , in FY2015, the USPS had, on average, about 24 days of operating cash-on-hand, sufficient to pay its day-to-day operating expenses, despite ending the year with $15 billion total debt outstanding. As of the end of FY2015, when all assets and liabilities are considered (including retirement accounts, health fund balances, cash and other assets), the USPS's total liabilities exceeded its assets by about $101 billion. \n\n\t\tPostal Services, Revenue, and Expenses\n\nThe PAEA, for the first time, provided a definition of the term postal service . Under the PAEA, postal service is defined as \"the delivery of letters, printed matter, or mailable packages, including acceptance, collection, sorting, transportation, or other functions ancillary thereto.\" This definition is significant because it prevents the Postal Service from developing new nonpostal products (e.g., expanded banking and financial services) that could compete with private industry. \nThe PAEA also changed how postal rates are established and divided postal products into two distinct groups: market dominant products and competitive products. \nPrior to the passage of the PAEA, there was concern that the USPS was using its revenue from market dominant products to subsidize the costs of competitive products. Cross-subsidization could, potentially, provide an advantage for the USPS in the competitive market by creating artificially low prices that did not include all the costs attributable to those products. The PAEA addressed this issue by forbidding the subsidization of competitive products with market dominant revenue and establishing the Competitive Products Fund (CPF), which receives deposits from the Postal Service Fund for revenues derived from the sale of competitive products. \n\n\t\t\tPostal Revenue\n\nIn FY2015, overall revenue from postal products and services was $68.951 billion, which was an increase of $1.097 billion (or 1.6%) from FY2014. The increase was due in large part to revenue from competitive products, which offset decreased revenue from market dominant products. Nevertheless, revenue generated from the sale of market dominant products accounts for approximately 74% of USPS's annual operating revenue. \nAs shown in Figure 2 , total revenue from market dominant products was $52.426 billion in FY2015, a decrease of approximately $340 million (or 0.64%) from FY2014. Total revenue from competitive products, however, was approximately $16.52 billion in FY2015, an increase of $1.437 billion (or 9.52%) from FY2014. \nWithin the market dominant category, standard mail (i.e., advertising mail) remained one of the few profitable products. Revenue from standard mail increased approximately $217 million (or 1.24%) from FY2014 to FY2015.\nHistorically, competitive products have constituted a much smaller share of USPS revenue than market dominant products. Competitive products account for a larger proportion of USPS revenue than they do of USPS volume. For example, in FY2015, competitive products represented approximately 3% of mail volume, but they accounted for approximately 24% of USPS revenue. See Figure 3 below.\nWhile market dominant products made up 97% of USPS's FY2015 volume, they generated less revenue per piece ($0.35) than competitive products ($4.17).\nAs explained by the USPS, since competitive products are a relatively small percentage of total mail volume, future growth in shipping and packages might not offset future decline in market dominant products:\nBecause Shipping and Packages represents only 20.3% of our 2014 operating revenue, compared to First-Class and Standard Mail, which represents 67.5% of operating revenue, revenue growth in Shipping and Packages, by itself, cannot fully offset the declines in First-Class Mail. Furthermore, the profit margins on both First-Class Mail and Standard Mail are greater than that of Shipping and Packages. As a result, revenue from Shipping and Packages would have to grow at a substantially higher rate than the decline in First-Class Mail revenue in order to replace the lost profit contribution of First-Class Mail. \nFurthermore, the processing and delivery costs for competitive products, such as First-Class Package Service or Priority Mail, are greater than those of most market dominant products. For this reason, USPS's competitive products might be sold at a lower margin than their market dominant counterparts, meaning that a lower percentage of competitive product revenue is retained as profits for the USPS.\n\n\t\t\tMail Volume\n\nIn FY2015, mail volume for market dominant products dropped by 1.9 billion pieces, which is approximately 1.3% below FY2014. The decline for certain market dominant products was more pronounced than others. For example, in FY2015, first-class single-piece mail, a market dominant product that has historically been the largest source of revenue for the USPS, saw volume drop by nearly 1.4 billion pieces, or 2.1%. \nIn contrast, competitive mail volume, which is primarily shipping and package services, increased by more than 556 million pieces. This increase represents growth of 16.4% from FY2014. \n Figure 4 shows the mail volume for market dominant and competitive products for FY2014 and FY2015. Detailed information on USPS's revenue and volume for FY2014 and FY2015 is provided in Appendix A . \n\n\t\t\tLong-Term Trends\n\nTotal mail volume and revenue have been consistent or in decline for the past 10 years. Periods of decline have been driven largely by reductions in market dominant mail volume and revenue, which have dropped sharply since FY2009. The decline in market dominant volume has been driven by a variety of economic factors and long-term market trends, such as transition to electronic mail, that have altered the public's use of the postal service for more than a decade. \nAs shown in Figure 6 , growth in both competitive product volume and revenue has likely offset some of the revenue lost from the continued decline in market dominant products. Figure 7 below shows USPS's total annual mail volume and operating revenue for FY2005 through FY2015. \nFrom FY2005 to FY2015, total annual mail volume dropped 57.5 billion pieces. The drop was largely due to volume lost in market dominant products. Total annual operating revenue, however, has remained relatively flat over the past decade. The figure shows the sharp declines in revenue and volume, which were likely due to the economic recession. While total annual volume remained in decline after FY2012, total annual revenue began to recover. By FY2015, total annual revenue was $68.9 billion, or $1 billion below what it had been in FY2005. Additionally, in FY2014 and FY2015, total annual revenue included a temporary increase in market dominant prices. \n\n\t\t\tExigent Price Increase\n\nUnder the PAEA, price increases for market dominant products are limited to a formula based on annual, unadjusted changes in the Consumer Price Index for Urban Customers (CPI-U). During \"extraordinary or exceptional\" circumstances (a term not defined in statute or regulation), the PAEA allows the USPS to petition the PRC for an expedited postal rate adjustment. This exigent surcharge is a rate increase above what USPS would otherwise receive based on the CPI-U formula. \nIn July 2010, the USPS made its first request to the PRC for an exigent surcharge. In its 2010 exigent request, the USPS sought to increase rates on its market dominant products by approximately 5.6% due to poor economic conditions and decreased mail volume. The \"extraordinary or exceptional\" circumstance, according to USPS's request, was the \"unprecedented drop in mail volume,\" which they argue was caused by the recession. The PRC denied USPS's request, in part because PRC found that multiple factors contributed to reduced mail volume, not all of which were due to the recession.\nIn 2013, the USPS filed and the PRC approved a rate increase of 4.3% on market dominant products. Pursuant to the PRC's order, the increase went into effect on January 26, 2014. Originally, the increase was only to be in effect until the USPS recovered an additional $2.8 billion in lost revenue, which was the amount the PRC determined to be attributable to the recession. At the time, the temporary increase was expected to be in place for less than two years.\nThe exigent price increase has allowed the USPS to hold revenue for market dominant products steady, despite continued losses in volume. The USPS challenged the PRC methodology in court, arguing that the increase should be permitted to continue indefinitely. On June 5, 2015, the DC Circuit Court delivered an opinion upholding the temporary nature of the increase. This opinion, however, stated that the one aspect of the PRC methodology for calculating the cumulative losses attributable to the recession was \"arbitrary and capricious\" and must be revisited to resolve disagreement with the methodology proposed by the USPS. Following the ruling of the DC Circuit Court, the PRC increased the amount that the USPS could collect in exigent price revenue by an additional $1.4 billion. \nOn February 25, 2016, the PRC issued a \"Notice of the Removal of the Exigent Surcharge,\" which announced the Postal Service's plan to remove the surcharge on April 10, 2016. As of April 10, rates on many market dominant products and services have dropped to the price they were prior to the exigent surcharge. For example, the price of a First-Class Forever stamp dropped from $0.49 to $0.47, and the price of an International Forever stamp dropped from $1.20 to $1.15. Rates for select products and services used largely by bulk mailers (e.g., discounted rates for presorted mail) were adjusted using additional criteria. \nThe exigent surcharge had been in place since January 26, 2014. Table 2 shows the estimated revenue from the exigent surcharge for FY2014 and FY2015. \nIn FY2014 and FY2015, the estimated revenue from the temporary exigent surcharge was $1.4 billion and $2.1 billion, respectively. Total revenue (excluding the surcharge) was $66.4 billion in FY2014 and $66.8 billion in FY2015. In the two full years that the exigent surcharge has been in place, it has contributed an estimated 2.1% and 3.2% to the total revenue of the USPS (or an estimated 2.7% and 4.0% to the total market dominant revenue, respectively).\n\n\t\t\tExpenses from Operations\n\nTo address its financial challenges, the USPS has made several operational adjustments intended to align its revenue, mail volume, and operating expenses, including \nchanges to its workforce (e.g., increased use of non-career employees); consolidation of delivery routes and reductions in number of delivery facilities; reductions to retail office hours; and realignment of its mail processing and distribution network.\nFor FY2015, USPS's operating expenses were about $67.7 billion. Table 3 provides a further breakdown of expenses for FY2014 and FY2015. \nEach fiscal year, roughly two-thirds of the USPS's operating expenses are attributable to personnel costs, through salaries, compensation benefits, workers' compensation, and retiree benefits\u2014excluding the retiree health prefunding payments. For FY2015, personnel-related expenses were $51.8 billion, an increase of $1.5 billion (or 2.9%) from FY2014. The largest line-item for personnel costs is salaries. From FY2010 to FY2014 the costs for salaries and other compensation decreased steadily. USPS spent $35.1 billion on these costs in FY2014 and $37.5 billion in FY2010, with expenditures dropping an average of $600 million each year. These reductions have been driven by a number of USPS management decisions, including the use of voluntary separation incentives and the increased reliance on non-career employees. The current labor and employment challenges of the USPS are discussed in greater detail in the \" Current Issues Facing the USPS Workforce \" section of this report. \nThis trend, however, reversed in FY2015 when USPS's salaries and compensation costs increased by 2.3% to $35.9 billion. The USPS attributes the increased costs to \"contractually obligated salary escalations and additional work hours associated in part with the growth in the more labor-intensive Shipping and Packages business.\" \nThe USPS has not seen significant reductions in non-personnel costs in recent years. For the period from FY2010 to FY2015, total non-personnel related expenses have been about $15 billion to $16 billion annually. The largest non-personnel expenses are transportation costs. The USPS spent $6.6 billion for transportation in FY2015, largely on contracts for air, ground, and water transportation of the U.S. mail. Fuel expenses are also included under transportation, but they contribute a relatively small portion of costs. The other non-personnel expenses for FY2015 include supplies and services ($2.7 billion), rent and utilities ($4.8 billion), and depreciation of USPS assets ($1.8 billion). \nWhile the USPS has control over the majority of its expenses, there are expenses mandated by law, including the RHBF prefunding requirement. Additionally, the USPS reached its statutory debt limit of $15 billion in FY2012 and as a result the USPS has no remaining flexibility to finance operations or respond to market changes through borrowing without further action from Congress.\n\n\t\tPrefunding Requirement for Retiree Health Benefits64\n\nThe PAEA requires the USPS to prefund its retiree health benefits. To accomplish this task, the PAEA established a prefunding schedule beginning in FY2007. For the first 10 years (FY2007-FY2016), the USPS is to make statutorily prescribed prefunding payments into the Postal Service Retiree Health Benefits Fund (RHBF). The RHBF was created under the PAEA as an on-budget account in the U.S. Treasury. The statutorily prescribed prefunding payments range from $5.4 billion to $5.8 billion annually.\nThe statutorily prescribed payments conclude in FY2016. Beginning in FY2017, the USPS is to continue to make annual payments to the RHBF in amounts determined by OPM. Per the PAEA, OPM is to, on an annual basis, compute the difference between the size of current employees' future retiree healthcare benefit liability and the current RHBF balance, and then determine a schedule of annual payments to liquidate any outstanding liability by September 30, 2056.\nPursuant to the PAEA, the USPS payments to the RHBF are to be derived from operating revenue held in the Postal Service Fund. Beginning in FY2017, the USPS may begin accessing funds from the RHBF to pay for its current retirees' health benefits. \nSince the prefunding payment schedule began in FY2007, the USPS has made three of its annual payments in full\u2014FY2007, FY2008, and FY2010. Congress reduced the FY2009 payment owed from $5.4 billion to $1.4 billion, which the USPS paid. The USPS defaulted on each of its annual payments for FY2011 through FY2015. The FY2016 payment is due September 30, 2016. In total, through FY2015 the USPS has contributed $20.9 billion to the RHBF and has defaulted on payments totaling $28.1 billion. \nThe prefunding policy has been a contentious issue. Arguments advanced in favor of the policy center on the policy protecting future customers of the USPS and taxpayers by ensuring that they will not need to finance retirement benefits currently incurred by the USPS. However, according to the USPS, the prefunding requirement has contributed \"significantly\" to its financial losses. In its most recent financial statement, the USPS reiterated its pursuit of legislation that would allow the USPS to change how it offers health insurance to its employees and retirees. The USPS argues that such changes would \"eliminate any necessity for the [RHBF] prefunding requirement....\" The changes would require statutory authorization from Congress.\n\n\tCurrent Issues Facing the USPS Workforce71\n\nUSPS's challenging financial circumstances have prompted the agency to implement several cost-cutting strategies, one of which has been to reduce the size and cost of the USPS workforce. The sections below discuss three USPS initiatives to reduce its workforce size and cost: (1) attrition and separation incentives, (2) increased use of non-career employees, and (3) non-personnel initiatives that could impact workforce size and cost. The sections focus on implementation of these three initiatives since FY2007, at which time the USPS began to experience substantial revenue losses.\n\n\t\tSize and Cost of the USPS Workforce\n\nThe USPS has reduced its workforce size through voluntary attrition and separation incentives. The total number of USPS employees declined 21% (168,052 employees) between FY2007 and FY2014, from 785,929 to 617,877. To increase the voluntary attrition rate, the USPS has offered certain employees separation incentives to resign or retire early, which have ranged from $10,000 to $20,000 per person. Between FY2007 and FY2014, 55,473 employees accepted a separation incentive ( Table 4 ). Many of the separation incentives offered between FY2012 and FY2014 were associated with various postal facility closure initiatives, which are discussed later in this report. \nThe USPS has utilized separation incentives to avoid reductions in force (RIFs), which involve involuntary employee layoffs upon the abolishment of agency positions. On January 9, 2015, however, the USPS implemented a RIF for 249 postmasters who did not accept a separation incentive offered in FY2014. Of the 249 postmasters subject to the RIF, 169 opted for a Discontinued Service Retirement (DSR), and the remaining 80 who were not eligible for DSR received severance pay based on their age and years of service. According to the USPS, all postmasters affected by the RIF were offered part-time career positions at the USPS.\n\n\t\tIncreased Use of Non-Career Employees\n\nThe USPS categorizes its workforce into two employee types: career and non-career. Career employees serve in permanent positions and are typically provided full federal benefits. Non-career employees, in contrast, serve in time-limited or otherwise temporary positions. In many cases, non-career employees earn lower wages and are not provided benefits that are provided to career employees. For example, non-career employees are not eligible for federal life insurance and are not covered under the Federal Employees Retirement System (FERS). \nThe USPS has increased its use of non-career employees in an effort to contain costs. The number of non-career employees grew by 28% between FY2007 and FY2014, from 101,167 to 129,577. The number of career employees, in contrast, decreased by 28% over the same time period, from 684,762 to 488,300. The largest increase in the number of non-career employees occurred between FY2011 and FY2014, rising by 46.1% (40,878 employees). The influx of non-career employees during that period was primarily attributable to the establishment of three new non-career positions: Postal Support Employees (PSEs), City Carrier Assistants (CCAs), and Mail Handler Assistants (MHAs). Employees in these three positions constituted 51% of the USPS non-career workforce in FY2014.\nAccording to the USPS, non-career employees can reduce the overall costs of certain agency functions. Non-career employees can often perform the full range of duties undertaken by their career counterparts at lower wage rates. For instance, non-career CCAs can perform the duties of career city letter carriers at a starting rate of $15.00 per hour versus $16.71 per hour. The wage difference between CCAs and city letter carriers is greater after accounting for benefits and overtime ($19.35 per hour versus $46.11 per hour, respectively), according to a 2014 Government Accountability Office (GAO) report. In addition, the USPS OIG reported that non-career employees could be used in place of career employees earning overtime and thus could reduce compensation costs. \n\n\t\tImpact of USPS Workforce Initiatives on Costs\n\nThe USPS's initiatives to reduce the size and cost of its workforce have reportedly contributed to lowered compensation expenses in recent years. The USPS's total compensation costs decreased $526 million from FY2013 to FY2014, and the PRC found that 36.1% of the decreased amount ($190 million) resulted from increased use of non-career employees and a decrease in employee work hours. For instance, the PRC reported that increased use of CCAs and MHAs, combined with the reduction in their career counterparts, reduced the productive hourly wage rate for the mailhandling and city carrier functions by 3.5% and 5.4%, respectively, from FY2013 to FY2014. The remaining 63.9% of the reduced amount ($336 million) reflected a one-time cost of separation incentives that were paid in FY2013, according to a 2015 PRC report. Similarly, a 2016 USPS OIG report asserted that the decline in work hours over time\u2014a 2.8% average decline per year between 2006 and 2015\u2014has translated into cost savings.\nA 2014 GAO report on the USPS workforce, however, found that the USPS's overall expenses did not decrease amid the agency's efforts to reduce workforce size and work hours. According to the report, USPS's total expenses did not decline alongside reduced workforce size and work hours from FY2006 to FY2014 and instead fluctuated over the eight-year period. The report attributed the fluctuation to required annual RHBF payments, which varied by year. The USPS's overall expenses still declined at a slower rate compared to employee work hours (7.1% versus 24%, respectively) when excluding RHBF payments, according to the report. In response to the GAO report, the USPS attributed the slower rate of decline in overall expenses to increased hourly wage and benefit costs, increased non-personnel expenses, and other fixed costs that do not decline with decreases in mail volume.\n\n\tU.S. Postal Service's Current Strategies and Initiatives\n\nThis section provides information on the U.S. Postal Service's current five-year business plan and several ongoing USPS reform initiatives. The reform initiatives discussed in this section cover a wide range of issues and various aspects of postal operations. In many instances, these initiatives are underway, pursuant to the USPS's current legal authorities. Continuation of these initiatives does not require legislative action by Congress. In some cases, however, Congress has proposed legislation that would halt or amend actions that the USPS has already initiated. \n\n\t\tU.S. Postal Service's Five-Year Business Plan95\n\nThe USPS's Five-Year Business Plan (hereinafter, USPS Business Plan ) provides detailed analyses of the short- and long-term financial situation of the USPS and includes several reform proposals that the Postal Service argues would help it progress toward financial stability and long-term sustainability. Many of the proposed initiatives involve further adjustments to postal delivery networks. In its Business Plan , the USPS argues the adjustments\u2015which include the closure and consolidation of selected mail processing facilities\u2015are necessary to improve efficiency and address recent changes to mail volume (i.e., decreases in first-class mail volume and increases in package volume). Below is a selected list of the proposals contained in the USPS Business Plan : \ncontinued consolidation of mail processing facilities (known as the Network Rationalization Initiative); full implementation of revised postal service delivery standards; adjustments to staffing and the means of providing products and services at retail locations, including increases in \"self-service\" kiosks and reduced hours at selected retail locations; a shift to centralized and curbside mail delivery for both business and residential customers, where appropriate; an expanded scope of products and services offered at retail locations; and a move to five-day delivery of mail while maintaining six-day delivery of packages.\nOf the initiatives in the bulleted list above, the first two items are currently being implemented by the Postal Service. The third and fourth items have been implemented in part. The USPS arguably does not have authority to implement the final two items, and would likely require legislative action from Congress. Additional information on select initiatives developed and implemented (in full or in part) by the Postal Service is provided in the sections below. \n\n\t\tPostal Service Delivery Standards99\n\nThe USPS's delivery standards are performance goals that reflect \"the number of days after acceptance of a mail piece by which the sender and recipient can expect it to be delivered.\" Delivery standards differ for each mail class and product. Since 2012, the Postal Service has phased-in revisions to its delivery standards for market dominant products.\nFor example, as shown in Table 5 , the length of delivery time for First-Class mail ranges from one to three days, while periodicals take between three and nine days. Prior to the most recent revisions, the range for periodicals was from two to nine days and First-Class mail sent within a certain geographical boundary was generally guaranteed to be delivered overnight.\nThe delivery standards are not, however, a guarantee of specific delivery times. Based on the delivery standards, the Postal Service sets \"Service Performance Targets,\" which are the percentage of time it expects to meet its delivery standards. Table 6 shows FY2015 service performance targets and the USPS's actual percent on-time score for each category of market dominant mail. Actual percent on-time scores that fail to meet the percent on-time service performance targets are shown in italics. Those that are more than 10 percentage points below the percent on-time performance targets are in italics and bold. \nIn FY2015, USPS failed to meet its percent on-time performance targets for nearly all types of market dominant mail, including all categories of First-Class mail. Single-piece letters and flats that fell within the 3-day processing window met USPS's on-time performance standards about 77% and 65% of the time, respectively. In many other instances, on-time performance was more than 10% below the USPS's targets. According to the PRC's Annual Compliance Report , the USPS largely attributes these results to (1) winter weather storms, (2) insufficient air transportation capacity, and (3) staff realignments and other issues related to the network rationalization initiative, which is discussed below. \n\n\t\tRestructuring the Processing and Delivery Network105\n\nThe revised delivery standards discussed above are part of the USPS's broader Network Rationalization Initiative (NRI). The NRI involves the changes to delivery standards (discussed above) and the closure and consolidation of selected mail processing facilities. The USPS argues these changes are necessary to (1) address recent changes to mail volume (i.e., decreases in first-class mail volume and increases in package volume) and (2) improve the efficiency of the overall postal delivery network. \nThe NRI was implemented in two phases. Phase I is complete and Phase II has been partially implemented beginning in January 2015. In late 2015, the Postal Service decided to defer until 2016 most of the remaining mail processing plant consolidations that were scheduled as part of Phase II. Further, in February 2016, the Postal Service acknowledged that the Phase II closures failed to capture the savings originally projected. In its filing to the PRC, the USPS reported $64.3 million in savings and $130.2 million in costs attributable to Phase II of the NRI, which is a net loss of $65.9 million. The filing, however, did not state if the costs were a factor in USPS's decision to halt the closures. \nIn comparison, the USPS reported an annualized savings of $865 million from Phase I. The USPS states that the increased costs of Phase II are due to \"unplanned package growth and workload shift.\" The U.S. Postal Service OIG, however, argues that the consolidations have likely led to increased transportation costs and it encourages greater transparency regarding USPS transportation contracts. \n\n\t\t\tUnanticipated Effects of the NRI on the USPS Workforce\n\nA 2015 USPS OIG report found that the NRI had some unanticipated effects on USPS operations, including the USPS workforce. The report asserted that revised service standards under the NRI allowed the USPS to expedite mail processing timelines, which prompted the agency to transition 5,000 employees from night to day shifts. The shift changes have resulted in decreased differential pay and additional training for new jobs for some employees, according to the report. The report further asserted that shift changes required larger mail processing plants to re-bid hundreds of jobs to employees with the new shift times, noting that the job bidding process can take \"several months to complete.\"\n\n\t\tRestructuring the Retail Business\n\nTwo reforms the USPS included in its Five-Year Business Plan were (1) a proposal to move from six- to five-day delivery of all or most classes of mail, but maintain or expand package delivery, and (2) a proposal to further reduce retail post office hours to better align them with estimates of operational demand.\n\n\t\t\tSix- to Five-Day Delivery118\n\nOne reform that the USPS has repeatedly proposed in recent years is to move from six- to five-day delivery of all or most classes of mail\u2014typically, USPS's market dominant products, such as first-class mail, standard mail (i.e., advertising mail), and periodicals. To maximize revenue from the competitive portion of its product line, however, USPS proposes maintaining six-day delivery of packages, or further expanding its Sunday package delivery services. \nOpponents of reducing USPS's delivery days argue that it will have a negative effect on postal delivery standards, which\u2014according to the PRC's FY2015 Annual Compliance Report \u2014have already suffered following the closure and consolidation of postal processing facilities prior to the 2015 suspension of the process. \nAccording to economic estimates prepared for the PRC, shifting to five-day delivery of mail while maintaining Saturday delivery of packages would increase revenues by an estimated $912 million to $1.677 billion. The estimated net profit would be less, however, due to two factors. The Postal Service may incur additional labor costs due to increased mail volume on Mondays. \nAlso, proposals may differ regarding Saturday operating hours at local post offices. If local post offices are open, there would be additional operational costs. In contrast, some customers may mail fewer items or choose another service for shipping packages if their local post office is closed on Saturday, potentially leading to lost revenue in competitive products. The PRC report based its estimation on a model where post offices remained open but did not sort or dispatch letter mail. Under this scenario, the PRC report estimated that the annual net savings to the Postal Service would be between $625 million and $1.393 billion.\n\n\t\t\tRetail Post Office Closures126\n\nIn 2012, the USPS announced a plan to reduce hours at 13,000 \"low foot traffic\" U.S. Post Offices in rural communities. The Post Office Structure Plan, commonly referred to as the \"POStPlan,\" is, according to the USPS, an initiative intended to prevent closures of postal retail facilities by reducing operational hours at selected locations. According to communications from the PRC, most POStPlan facilities are small and often in rural areas, though neither term (i.e., \"small\" or \"rural\") has been defined by either the USPS or the PRC for the purpose of identifying specific retail postal facilities. \n Table 7 below provides data on the number of USPS retail facilities in existence at the end of each fiscal year from FY2010 through FY2015. \n\n\t\t\t\tImpact of Postal Facility Closures on Postal Workforce\n\nThe USPS has implemented several non-personnel initiatives that have reportedly affected the size and cost of its workforce. GAO and the PRC, for example, reported that streamlining and consolidating activities associated with the POStPlan and NRI have reduced the number of career employees and work hours for postmasters, clerks, mailhandlers, and equipment maintenance personnel. According to a 2014 GAO report, the USPS projects the POStPlan will generate $347.2 million in savings through FY2016. The GAO report also discusses other initiatives to streamline and consolidate operations that have affected workforce size and cost, such as changes to delivery schedules and modes. \n\n\tPossible Issues Facing the USPS Workforce132\n\n\t\tAchievement of Workforce Reduction Goals\n\nThe USPS anticipates its strategic initiatives, which appear to include the aforementioned workforce initiatives, would reduce its career workforce to around 404,000 employees by FY2017. The number of career employees, however, has not decreased at projected annual rates. While USPS anticipated the career workforce to decrease by about 84,000 employees from FY2012 to FY2014, it decreased by 40,158 employees over the two-year time period. Consequently, achievement of workforce reduction targets for FY2015-FY2017 might become more difficult. It is unclear if USPS still intends to reach its FY2017 workforce reduction goal, as the agency has not explicitly revised it since April 2013. Additional separation incentives, or other workforce reduction initiatives, might be needed, however, if the USPS intends to achieve the goal.\nThe USPS's ability to achieve its workforce reduction goal might be affected by unanticipated policy changes or actions of stakeholders. According to a 2014 GAO report, for example, the USPS's FY2017 workforce reduction goal assumed the adoption of actions that would impact workforce size that have not occurred, such as adoption of six-day package\/five-day mail delivery service. In addition, USPS postponed implementation of Phase II of the NRI, which was projected to affect around 15,000 employees. Finally, postal labor unions have made efforts to curtail reductions to the career workforce. For example, in September 2014, the American Postal Workers Union (APWU) won an arbitration award that was projected to create 9,000 positions within the clerk craft function, at least 3,000 of which must be career positions. \n\n\t\tLimitations on Use of Non-Career Employees\n\nThe USPS's use of certain non-career employees is governed by postal labor union contracts, which limit the total number of non-career employees that can comprise the USPS workforce. Union contracts current through 2015 and 2016 raised the number of non-career employees that can be used for certain functions. The 2006-2011 National Association of Letter Carriers (NALC) contract raised the limit on the total number of covered non-career employees to 15% of the total number of career carriers in a district, compared to 3.5% in the 2006-2011 contract. (See Table 8 .) \nThe USPS's ability to maintain or increase its use of certain non-career employees will depend on contract negotiations. Some labor unions seem to oppose increased use of non-career employees, which appear to have affected negotiations for certain unions. For example, negotiations between the USPS and the APWU ended without an agreement on May 28, 2015. The APWU subsequently issued a press release stating that \"proposed changes to the [USPS] workforce structure were completely unacceptable.\" The press release then cited USPS workforce proposals for the new contract, which included, among other things, an increase in the percentage of non-career employees. The APWU workforce proposals, in contrast, called for more career employees. On July 8, 2016, an arbitration panel issued a new APWU contract that maintained current levels of covered non-career employees.\nLower caps on the percentage of non-career employees might have implications for the size and cost of the USPS's workforce. According to a 2014 GAO report, the USPS asserted that it is close to reaching current caps on non-career employees. Lower caps, therefore, might require the USPS to reduce the number of non-career employees, which might prompt changes to the agency's workforce composition in ways that might increase personnel costs. For instance, compensation costs might increase if the USPS increases the number of career employees to comply with lower caps, either through additional hires or transitioning non-career employees to career positions. Alternatively, overtime pay cost might increase if the USPS reduces the number of non-career employees that were being used in place of career employees earning overtime. \n\n\t\tEmployee Morale\n\nSome postal labor unions and Members of Congress have expressed concern about employee morale at the USPS, particularly amid the agency's efforts to reduce the size and cost of its workforce. For example, the APWU asserted that post office closures and mail processing plant consolidations are lowering employee morale. On March 5, 2014, Senator Heidi Heitkamp sent a letter to the Postmaster General that highlighted challenges identified by USPS employees in North Dakota that might lead to low morale, including long hours, poor working conditions, a lack of training, and a lack of managerial focus on addressing such issues. \nOn July 9, 2015, Senator Heitkamp introduced the Rural Postal Act of 2015. The bill seeks to, among other things, improve employee morale at the USPS by establishing a Chief Morale Officer. The Officer would be responsible for developing national initiatives that address employee morale and factors that might influence morale, such as factors related to working conditions, communication, and training. For example, the bill would require national initiatives to address wages and the balance between temporary and career employees. The bill also proposes the establishment of Regional Morale Officers, who would be responsible for (1) implementing the national initiatives; (2) holding monthly roundtables with employees to discuss concerns related to working conditions, staffing, communication, and training; (3) submitting biennial feedback reports to the Chief Morale Officer; and (4) communicating regularly with other Regional Morale Officers and the Chief Morale Officer to provide progress updates on achieving the initiatives. As of August 10, 2016, there has been no committee or floor action on this bill. \n\n\tFurther Postal Reform Issues for Congress\n\n\t\tUpdating the Postal Fleet153\n\nTo fulfill its mission of providing \"prompt, reliable, and efficient\" postal services to its customers, the USPS has a fleet of approximately 190,000 delivery vehicles. These vehicles transport more than 153 billion pieces of mail each year to more than 150 million delivery points. Approximately 75% of the delivery fleet (142,000 vehicles) is comprised of long-life vehicles (LLVs), which have an expected useful life of 24 years. Many LLVs were purchased in the late 1980s and early 1990s, and have now met or exceeded their life expectancy. Indeed, the average age of an LLV reached 23 years in 2015. Moreover, the USPS OIG determined the current fleet can only meet delivery needs through FY2017. \nGiven the need to replace much of its aging delivery fleet, the USPS has proposed acquiring up to 180,000 new delivery vehicles through its Next Generation Delivery Vehicle (NGDV) acquisition program. The NGDVs would cost between $25,000 and $35,000 each, and have a life span of 20 years. The new fleet would differ from the current LLV fleet in several ways, notably that they would be configured to handle a larger number of packages \u2014which analysts believe will continue to grow in volume in coming years. The NGDVs would also use less fuel and more advanced safety features than the current LLV fleet.\nThe NGDV acquisition program will take an estimated five to seven years to complete. In January, 2015, the USPS issued a Request for Information (RFI), which provided prospective suppliers with the specifications of the NGDVs, and invited interested parties to submit information that demonstrated their ability to meet the manufacturing and production requirements of the program. Based on responses to the RFI, the USPS developed a list of \"prequalified\" suppliers who showed they could meet the program's requirements. Only the prequalified suppliers are eligible to participate in the next phase of the program.\nIn October, 2015, the USPS issued a Request for Proposal (RFP) seeking a qualified supplier to design and manufacture six \"fully functional\" prototypes of its NGDVs. The USPS anticipates that this phase of the program\u2014the design, build, and testing of the prototypes\u2014will take about two years to complete. \nThe final phase of the program, the production and delivery of the NGDV fleet, would begin in 2017. At that point, a second RFP would be released, which would establish the final NGDV production requirements, and indicate whether the USPS will purchase the vehicles, lease them, or both. The USPS has stated that while it is likely that just one supplier would be awarded the contract, it is possible that more than one supplier may be selected.\n\n\t\tNonpostal Products and Services175\n\nThe PAEA defines postal services as \"the delivery of letters, printed matter, or mailable packages, including acceptance, collection, sorting, transportation, or other functions ancillary thereto\" and prohibits the USPS from offering all but a limited number of excepted nonpostal products and services. This restriction prevents the Postal Service from offering or developing new nonpostal products (e.g., expanded banking and financial services) or expanding into new markets that might increase its market share and revenue.\nUnder the PAEA, the Postal Service is currently authorized to offer 11 nonpostal products and services, including two market dominant and nine competitive products. The two market dominant products are\nUSPS\/public sector alliances, e.g., MoverSource, which allows the USPS to provide free change-of-address services by including moving tips and related advertisements; and philatelic sales intended for stamp collectors, e.g., uncut press sheets, framed stamps, binders for storing stamps, and philatelic guides.\nThe nine competitive products are\nprivate sector advertising on USPS.com, within U.S. post offices, or in other postal venues; licensing of USPS's copyrights and trademarks; mail service promotions, which \"allow merchants who offer web-based customers the ability to create mail pieces through an online service.\" Prices for these products are negotiated between the merchant and the Postal Service; sale of officially licensed USPS retail products; U.S. Passport photo services; photocopying services; rental, leasing, and non-sale of USPS property; use of USPS training facility and courses; and the USPS Electronic Postmark (EPM) program, which \"authorizes vendors to provide their customers with Postal Service-authorized timestamps.\"\nIn FY2015, revenues from nonpostal market dominant products were $75 million and expenses were $13 million, for a net gain of $62 million. For nonpostal competitive products, revenues were $106 million and expenses were $17 million, for a net gain of $89 million. This was an increase of 13% and 4% from FY2014 nonpostal market dominant and competitive revenues, respectively. \nThe Postal Service is also authorized, with limitations, to conduct short-term market tests that may include nonpostal products. Market tests are generally limited to two years and have included the sale of gift cards, a same-day delivery service (Metro Post\u2122), and an international eCommerce shipping service (GeM Merchant). The USPS OIG suggested grocery delivery as another possible market test in its June 2016 OIG Blog post. \nSelect postal reform legislation introduced in the 113 th and 114 th Congresses would provide the USPS with authority to offer additional nonpostal products and services. The nonpostal products and services covered in recent bills include \npublic Internet access; drivers' license services; hunting and fishing license services; voter registration; and postal banking and financial services.\nFurther, legislation introduced in the 114 th Congress, such as S. 2051 , Improving Postal Operations, Service, and Transparency Act of 2015 (iPOST Act), and H.R. 5714 , Postal Service Reform Act of 2016 , includes provisions that would allow the USPS to offer a range of nonpostal products and services that are currently prohibited under the PAEA. \n\n\t\tPostal Banking202\n\nIn looking for ways to grow USPS's nonpostal products and services, one option is to expand the financial services it offers (e.g., international money orders, prepaid cards). The USPS offered select financial products in the 20 th century, but they have not been available since the termination of the Postal Savings System in 1967. \nOne reason that postal financial services are still raised as a potentially beneficial product line may be the example provided by other nations. Countries with some form of postal financial services include the United Kingdom, France, Japan, Germany, South Korea, and Brazil, in addition to many others. These examples also highlight the numerous different models that a postal system can utilize to provide financial services. In some cases, the postal service offers its own financial products through a separate entity established within the postal department. In other cases, the postal service facilitates the sale of financial services that are managed by a private financial institution. Some nations have implemented a hybrid of these two approaches. For example, South Korea uses a system wherein its postal service (Korea Post) offers its own financial services while also handling deposits made to private banks. \nTo further explore this idea, the USPS OIG issued a white paper in early 2014 to study whether the USPS is well positioned to offer financial services. In this report, the USPS OIG determined that financial services are the best opportunities for the USPS to generate new revenue. In addition, the report estimated there would be significant demand for these services from populations currently underserved by private banks. \nFollowing the publication of the initial white paper, the USPS OIG completed a second study in 2015 that examined the statutory authority required to offer financial services and offered possible models that could be used. First, the report stated that the USPS could simply expand its current offering of financial products, which includes paper money orders, gift cards, and check cashing. This approach would provide limited growth opportunities, but would also incur relatively low implementation costs and is permissible under current statutory authority. The USPS OIG estimates that after a five-year period of developing these services, the USPS could generate $1.1 billion in additional revenue annually. \nBeyond this approach, the white paper also identified four alternative models that draw heavily on the experience of other countries. For each of these approaches, the upfront costs would be higher and the USPS OIG states additional statutory authority would be needed. These four approaches are (1) a partnership with one outside firm to offer services through the USPS; (2) partnerships with multiple outside firms that are specialized for each individual product; (3) a marketplace model wherein the USPS facilitates many options for each financial service; and (4) a full-fledged postal bank, which would offer financial products wholly managed by the USPS or an entity within the agency. \n\n\t\t\tArguments For and Against Postal Banking\n\nThe work of the USPS OIG began a national conversation around the merits of developing postal financial services at the USPS, with many advocates for and against the concept. As mentioned above, proponents of postal financial services believe that such an expansion would offer financial services to underserved populations and provide needed revenue to the postal service at a time when demand for their traditional product line of first class mail delivery is declining. \nRecently, many journalists and organizations have recommended a postal savings system as a way to reach households and individuals that do not currently make use of an insured financial institution and instead rely on alternative financial services (AFS). According to a 2013 report from the Federal Deposit Insurance Corporation (FDIC), this population is relatively large. The report found that 7.7% of all U.S. households were unbanked, meaning they had no account at an insured financial institution, while 20% of households were considered underbanked, meaning they had used AFS in the previous 12 months. \nOn the other side of the debate over postal financial services are those who believe the expanded services would not generate revenue or would unfairly encroach on the private market for financial services. Specifically, some have critiqued the revenue forecasts developed by the USPS OIG and the assumption that the underserved populations trust the USPS more than other institutions. Some have questioned whether there is a conflict between the two primary benefits that are currently suggested by postal banking advocates. Writing in the Washington Post , Charles Lane stated,\nAt bottom, though, the problem with postal banking is a certain inherent tension between its policy objectives: is the primary purpose to help low-income people, or is it to help the postal service make more money to offset the irreversible decline of its bread-and-butter business, first-class mail?\nWithout a more detailed estimate of the costs at which the USPS could profitably provide these services, the validity of this particular critique cannot be determined. \n\n\t\t\tThe U.S. Postal Savings System: 1911-1967\n\nIn evaluating the merits of expanding USPS financial products and services, many have looked to the USPS's own experience with postal banking in the first half of the 20 th century. From 1911 until 1967, the USPS operated the U.S. Postal Savings System (PSS) throughout the United States. At its peak in the late 1940s, this system had more than 4 million depositors and $3.4 billion in accounts. The purpose of this system at the time of its creation was to \"get money out of hiding, to attract savings of a large number of immigrants who were accustomed to savings at post offices in their native countries, and to provide safe depositories for people who had lost confidence in private banks.\" This emphasis on reaching new underserved populations, providing an alternative beyond private institutions, and looking to international examples mirrors many of the arguments being made on behalf of postal financial services today. \n\n\t\t\tSelect Postal Banking Legislation\n\nIn the 113 th Congress, Representative Cummings introduced H.R. 2690 , Innovate to Deliver Act of 2013 , which if enacted, would have expanded USPS's authority to offer nonpostal products and services, including \"check-cashing services.\" \nAs discussed in the 2015 USPS OIG report, a more comprehensive approach is for the Postal Service to become a chartered and licensed bank. As a bank, the USPS would have authority to provide a range of financial services, such as savings accounts, personal loans, check cashing services, and insurance products. In the 114 th Congress, Representative Richmond introduced H.R. 4422 which, if enacted, would provide the Postal Service with authority to \"provide basic financial services\" including small-dollar loans, checking and savings accounts, and other services in the public interest. Under the bill, the USPS would have authority to provide some of these services \"alone, or in partnership with depository institutions.\" The bill, however, stopped short of establishing a new postal banking system with a chartered and licensed USPS bank. \nWhile the specific proposals in the USPS OIG white paper, in articles, and in legislation differ in the financial products they cover, each of the proposals appears to share certain characteristics and goals. Each leverages the nationwide service network and accessibility of the USPS. Further, each seeks to achieve one or both of two goals: reach populations that are underserved by current financial institutions or provide additional revenue opportunities to the USPS.\nAppendix A. USPS Revenue and Volume by Mail Category and Class\nAppendix B. Postal Reform Legislation Introduced in the 113 th and 114 th Congresses","output":"This report provides background information on the responsibilities, financial challenges, and workforce issues facing the U.S. Postal Service (USPS). Additionally, it covers the current strategies and initiatives under development by the USPS and discusses further options for postal reforms.\nIn FY2015, the USPS marked its ninth consecutive year of financial losses with a net loss of $5.1 billion. In addition, the USPS has reached its statutory debt limit of $15 billion. In recent years, the USPS has experienced growth in the package and shipping part of its business (known as Competitive Products). The USPS, however, has experienced sharp declines in both volume and revenue of its Market Dominant Products (e.g., First Class single-piece mail).\nThe USPS has struggled in recent years to fulfill its statutory obligation to prefund its health benefits liability for future postal retirees. Under a prefunding schedule established by the Postal Accountability and Enhancement Act, the USPS has made $20.9 billion in contributions since FY2007 but defaulted on its remaining $28.1 billion in payments. In its most recent financial statement, the USPS requested reforms that would integrate postal employee healthcare options with Medicare, thereby reducing costs and making the prefunding liability expense more manageable. Such reforms would require statutory authorization from Congress.\nThis report also covers several issues facing the USPS workforce. In recent years, initiatives designed to restructure the USPS retail and mail processing networks allowed the USPS to implement several workforce reduction strategies that helped cut costs. In FY2015, however, workforce costs increased. According to the USPS, this reversal was due to contract obligations and work hours associated with the growth in its labor-intensive package and shipping business.\nAdditional postal initiatives and reform options discussed in this report include (1) changes to postal delivery standards, (2) consolidation of mail processing facilities, (3) closure of retail post offices, (4) five-day delivery, (5) updates to the postal fleet, (6) nonpostal products and services; and (7) postal banking.\nAppendix B of this report includes a table of House and Senate postal reform legislation introduced in the 113th and 114th Congresses, such as S. 2051, Improving Postal Operations, Service, and Transparency Act of 2015 (iPOST Act), and H.R. 5714, Postal Service Reform Act of 2016.\nFor each bill, the table in Appendix B provides the bill number, title, sponsor, the committee(s) to which the bill was referred, a list of selected issues the bill covers, and the last major action (e.g., referral to committee, markup held)."}
{"id":"crs_RL33404","pid":"crs_RL33404_0","input":"T he development of offshore oil, gas, and other mineral resources in the United States is shaped by a number of interrelated legal regimes, including international, federal, and state laws. International law provides a framework for establishing national ownership or control of offshore areas, and U.S. domestic law has, in substance, adopted these internationally recognized principles. U.S. domestic law further defines U.S. ocean resource jurisdiction and ownership of offshore minerals, dividing regulatory authority and ownership between the states and the federal government based on the resource's proximity to the shore. This report explains the nature of U.S. authority over offshore areas pursuant to international and domestic law. It also describes state and federal laws governing development of offshore oil and gas and litigation under these legal regimes. The report also discusses recent executive action and legislative proposals concerning offshore oil and natural gas exploration and production.\n\n\tOcean Resource Jurisdiction\n\nUnder the United Nations Convention on the Law of the Sea, coastal nations are entitled to exercise varying levels of authority over a series of adjacent offshore zones. Nations may claim a 12-nautical-mile territorial sea, over which they may exercise rights comparable to, in most significant respects, sovereignty. Nations may also claim an area, termed the contiguous zone, which extends 24 nautical miles from the coast (or baseline). Coastal nations may regulate their contiguous zones, as necessary, to protect their territorial seas and to enforce their customs, fiscal, immigration, and sanitary laws. Further, in the contiguous zone and an additional area, the exclusive economic zone (EEZ), coastal nations have sovereign rights to explore, exploit, conserve, and manage marine resources and assert jurisdiction over\ni. the establishment and use of artificial islands, installations and structures;\nii. marine scientific research; and\niii. the protection and preservation of the marine environment.\nThe EEZ extends 200 nautical miles from the baseline from which a nation's territorial sea is measured (usually near the coastline). This area overlaps substantially with another offshore area designation, the continental shelf. International law defines a nation's continental shelf as the seabed and subsoil of the submarine areas that extend beyond either \"the natural prolongation of [a coastal nation's] land territory to the outer edge of the continental margin, or to a distance of 200 nautical miles from the baselines from which the breadth of the territorial sea is measured where the outer edge of the continental margin does not extend up to that distance.\" In general, however, under UNCLOS, a nation's continental shelf cannot extend beyond 350 nautical miles from its recognized coastline regardless of submarine geology. In this area, as in the EEZ, a coastal nation may claim \"sovereign rights\" for the purpose of exploring and exploiting the natural resources of its continental shelf.\n\n\t\tFederal Jurisdiction\n\nWhile a signatory to UNCLOS, the United States has not ratified the treaty. Regardless, many of its provisions are now generally accepted principles of customary international law and, through a series of executive orders, the United States has claimed offshore zones that are virtually identical to those described in the treaty. In a series of related cases long before UNCLOS, the U.S. Supreme Court confirmed federal control of these offshore areas. Federal statutes also refer to these areas and, in some instances, define them as well. Of particular relevance, the primary federal law governing offshore oil and gas development indicates that it applies to the \"outer Continental Shelf,\" which it defines as \"all submerged lands lying seaward and outside of the areas ... [under state control] and of which the subsoil and seabed appertain to the United States and are subject to its jurisdiction and control....\" Thus, the U.S. Outer Continental Shelf (OCS) would appear to comprise an area extending at least 200 nautical miles from the official U.S. coastline and possibly farther where the geological continental shelf extends beyond that point. The federal government's legal authority to provide for and to regulate offshore oil and gas development therefore applies to all areas under U.S. control except where U.S. waters have been placed under the primary jurisdiction of the states.\n\n\t\tState Jurisdiction\n\nIn accordance with the federal Submerged Lands Act of 1953 (SLA), coastal states are generally entitled to an area extending three geographical miles from their officially recognized coast (or baseline). In order to accommodate the claims of certain states, the SLA provides for an extended three-marine-league seaward boundary in the Gulf of Mexico if a state can show such a boundary was provided for by the state's \"constitution or laws prior to or at the time such State became a member of the Union, or if it has been heretofore approved by Congress.\" After enactment of the SLA, the Supreme Court of the United States held that the Gulf coast boundaries of Florida and Texas do extend to the three-marine-league limit; other Gulf coast states were unsuccessful in their challenges.\nWithin their offshore boundaries, coastal states have \"(1) title to and ownership of the lands beneath navigable waters within the boundaries of the respective states, and (2) the right and power to manage, administer, lease, develop and use the said lands and natural resources....\" Accordingly, coastal states have the option of developing offshore oil and gas within their waters; if they choose to develop, they may regulate that development.\n\n\t\tCoastal State Regulation\n\nState laws governing oil and gas development in state waters vary significantly from jurisdiction to jurisdiction. In addition to state statutes and regulations aimed specifically at oil and gas development, a variety of other laws could impact offshore development, such as environmental and wildlife protection laws and coastal zone management regulation. In states that authorize offshore oil and gas leasing, the states decide which offshore areas under their jurisdiction will be opened for development.\n\n\tFederal Resources\n\nThe primary federal law governing development of oil and gas in federal waters is the Outer Continental Shelf Lands Act (OCSLA). As stated above, the OCSLA codifies federal control of the OCS, declaring that the submerged lands seaward of the state's offshore boundaries appertain to the U.S. federal government. More than simply declaring federal control, the OCSLA has as its primary purpose \"expeditious and orderly development [of OCS resources], subject to environmental safeguards, in a manner which is consistent with the maintenance of competition and other national needs....\" To effectuate this purpose, the OCSLA extends application of federal laws to certain structures and devices located on the OCS; provides that the law of adjacent states will apply to the OCS when it does not conflict with federal law; and, significantly, provides a comprehensive leasing process for certain OCS mineral resources and a system for collecting and distributing royalties from the sale of these federal mineral resources. The OCSLA thus provides comprehensive regulation of the development of OCS oil and gas resources.\n\n\t\tFederal Offshore Energy Development Moratoria and Withdrawals\n\nIn general, the OCSLA requires the federal government to prepare, revise, and maintain an oil and gas leasing program. However, at various times some offshore areas have been withdrawn from disposition under the OCSLA. These withdrawals have usually fallen under three broad categories applicable to OCS oil and gas leasing: those imposed directly by Congress, those imposed by the President under authority granted by the OCSLA, and other statutory or administrative protections intended to protect marine or coastal resources.\n\n\t\t\tCongressional\/Legislative Moratoria\n\nAppropriations-based congressional moratoria first appeared in the appropriations legislation for FY1982. The language of the appropriations legislation barred the expenditure of funds by the Department of the Interior (DOI) for leasing and related activities in certain areas in the OCS. Similar language appeared in every DOI appropriations bill through FY2008. However, starting with FY2009, Congress has not included this language in appropriations legislation. As a result, the Bureau of Ocean Energy Management (BOEM), the agency within the Department of the Interior that administers and regulates the OCS oil and gas leasing program, is free to use appropriated funds to fund all leasing, preleasing, and related activities in any OCS areas not withdrawn by other legislation or by executive order. Language used in the legislation that funds DOI in the future will determine whether, and in what form, budget-based restrictions on OCS leasing might return.\nThe Gulf of Mexico Energy Security Act of 2006 (GOMESA), enacted as part of the Omnibus Tax Relief and Health Care Act of 2006, is another example of a legislative moratorium. The act created a new congressional moratorium over \"leasing, preleasing or any related activity\" in portions of the OCS. The 2006 legislation explicitly permits oil and gas leasing in areas of the Gulf of Mexico, but also established a new moratorium on preleasing, leasing, and related activity in the eastern Gulf of Mexico through June 30, 2022. This moratorium is independent of any appropriations-based congressional moratorium, and thus would continue even if Congress reinstated the annual appropriations-based moratorium.\n\n\t\t\tOCSLA Section 12(a)\n\nIn addition to the congressional moratoria, Section 12(a) of the OCSLA authorizes the President to issue moratoria on offshore drilling in many areas. The first withdrawal covering substantial offshore areas was issued by President George H. W. Bush on June 26, 1990. This memorandum, issued pursuant to the authority vested in the President under Section 12(a) of the OCSLA, placed under presidential moratoria those areas already under an appropriations-based moratorium pursuant to P.L. 105-83 , the Interior Appropriations legislation in place at that time. That appropriations-based moratorium prohibited \"leasing and related activities\" in the areas off the coast of California, Oregon, and Washington, and the North Atlantic and certain portions of the eastern Gulf of Mexico. The legislation further prohibited leasing, preleasing, and related activities in the North Aleutian basin, other areas of the eastern Gulf of Mexico, and the Mid- and South Atlantic. The presidential moratorium was extended by President Bill Clinton by a memorandum dated June 12, 1998.\nOn July 14, 2008, President George W. Bush issued an executive memorandum that rescinded the executive moratorium on offshore drilling created by President George H. W. Bush in 1990 and renewed by President Bill Clinton in 1998. President George W. Bush's memorandum revised the language of the previous memorandum to withdraw from disposition only areas designated as marine sanctuaries.\nPresident Barack Obama exercised the authority granted by Section 12(a) of the OCSLA to issue moratoria on exploration and production activities in certain areas off the coast of Alaska. On March 31, 2010, President Obama issued an executive memorandum pursuant to his Section 12(a) authority to \"withdraw from disposition by leasing through June 30, 2017, the Bristol Bay area of the North Aleutian Basin in Alaska.\" This withdrawal was superseded on December 16, 2014, with a broader withdrawal \"for a time period without specific expiration the area of the Outer Continental Shelf currently designated by the Bureau of Ocean Energy Management as the North Aleutian Basin Planning Area ... including Bristol Bay.\" A month later, President Obama once again exercised his authority under Section 12(a) of the OCSLA to withdraw certain areas in the Chukchi and Beaufort Seas off the coast of Alaska. Finally, on December 16, 2016, President Obama issued two more withdrawals under Section 12(a) of the OCSLA. One of these withdrew from disposition the entirety of the designated Chukchi Sea and Beaufort Sea Planning areas; the other withdrew from disposition areas \"associated with 26 major canyons and canyon complexes offshore the Atlantic Coast.\"\nIn 2017, President Trump issued Executive Order 13795, which modified the July 2008, January 2015, and December 2016 withdrawals to eliminate all of the areas withdrawn by those orders except \"those areas of the Outer Continental Shelf designated as of July 14, 2008 as Marine Sanctuaries under the Marine Protection, Research and Sanctuaries Act of 1972.\" As a result, only the North Aleutian Basin Planning Area and Bristol Bay, along with the aforementioned Marine Sanctuaries, are currently withdrawn from disposition pursuant to Section 12 of the OCSLA.\n\n\t\t\tOther Statutory or Administrative Protections\n\nWhile the OCSLA is the primary statute governing federal offshore energy exploration and production, other statutes play a role in determining what activities may take place in various offshore areas. All offshore activity must comply with generally applicable federal laws, those that protect the environment and public health. In addition, some statutes and administrative actions protect specific offshore regions from certain activities. For example, the National Marine Sanctuaries Act authorizes the Secretary of Commerce to \"designate any discrete area of the marine environment as a national marine sanctuary\" based on the criteria set forth in the act. It is unlawful to \"destroy, cause the loss of, or injure any sanctuary resource,\" a prohibition which effectively prohibits oil and natural gas exploration and production in the area, although as noted above these areas have also been withdrawn pursuant to Section 12 of the OCSLA. Similarly, Presidents have designated a handful of \"marine national monuments\" pursuant to their authority under the Antiquities Act. Such designations may explicitly or implicitly prohibit oil and natural gas exploration and production.\n\n\tLeasing and Development\n\nIn 1978, the OCSLA was significantly amended to increase the role of coastal states in the leasing process. The amendments also revised the bidding process and leasing procedures; set stricter criteria to guide the environmental review process; and established new safety and environmental standards to govern drilling operations. The OCS leasing process consists of four distinct stages: (1) the five-year planning program; (2)\u00a0preleasing activity and the lease sale; (3) exploration; and (4) development and production. \n\n\t\tThe Five-Year Program\n\nSection 18 of the OCSLA directs the Secretary of the Interior to prepare a five-year leasing program that governs any offshore leasing that takes place during the period of coverage. Each five-year program establishes a schedule of proposed lease sales, providing the timing, size, and general location of the leasing activities. This program is to be based on multiple considerations, including the Secretary's determination as to what will best meet national energy needs for the five-year period and the extent of potential economic, social, and environmental impacts associated with development.\nDuring the development of the program, the Secretary must solicit and consider comments from the governors of affected states, and at least 60 days prior to publication of the program in the Federal Register , the Secretary must submit the program to the governor of each affected state for further comments. After publication, the Attorney General is also authorized to submit comments regarding potential effects on competition. Subsequently, at least 60 days prior to its approval, the Secretary must submit the program to Congress and the President, along with any received comments and the reasons for rejecting any comment. Once the program is approved by the Secretary, areas covered by the program become available for leasing, consistent with the terms of the program. The OCSLA also requires the Secretary to \"review the leasing program approved under this section at least once each year\" and authorizes the Secretary to \"revise and re-approve such program, at any time.\" However, any \"significant\" revisions must comply with the requirements applicable to the original five-year program.\nThe development of the five-year program is considered a major federal action significantly affecting the quality of the human environment and as such requires preparation of an environmental impact statement (EIS) under the National Environmental Policy Act (NEPA). Thus, the NEPA review process complements and informs the preparation of a five-year program under the OCSLA.\nThe current Five-Year Program received final approval from the Secretary of the Interior on January 17, 2017. The Program schedules 11 potential lease sales, \"ten in portions of the three Planning Areas in the Gulf of Mexico not subject to moratorium and one in the Cook Inlet offshore Alaska.\" The Program notes that \"[t]hese areas have high resource potential, existing infrastructure and Federal or state leases, and more manageable potential environmental and coastal conflicts with development\" than other areas not included in the Program. The Trump Administration has proposed a superseding Five-Year Program, and published a Draft Proposed Program for 2019-2024 in January 2018. The planning areas and proposed dates of lease sales in each area are depicted in Figure 1 and Figure 2 below, while Figure 3 depicts the process for consideration and adoption of a Five-Year Program and the accompanying Programmatic Environmental Impact Statement.\n\n\t\tLease Sales\n\nThe lease sale process involves multiple steps as well. Leasing decisions are impacted by a variety of federal laws; however, Section 8 of the OCSLA and its implementing regulations establish the mechanics of the leasing process.\nThe process begins when the Director of BOEM publishes a call for information and nominations regarding potential lease areas. The Director is authorized to receive and consider these various expressions of interest in specific parcels and comments on which areas should receive special concern and analysis. The Director then considers all available information and performs environmental analysis under NEPA to craft a list of areas recommended for leasing and any proposed lease stipulations. BOEM submits the list to the Secretary of the Interior and, upon the Secretary's approval, publishes it in the Federal Register and submits it to the governors of potentially affected states.\nThe OCSLA and its regulations authorize the governor of an affected state and the executive of any local government within an affected state to submit to the Secretary any recommendations concerning the size, time, or location of a proposed lease sale within 60 days after notice of the lease sale. The Secretary must accept the governor's recommendations (and has discretion to accept a local government executive's recommendations), if the Secretary determines that the recommendations reasonably balance the national interest and the well-being of the citizens of an affected state.\nThe Director of BOEM publishes the approved list of lease sale offerings in the Federal Register (and other publications) at least 30 days prior to the date of the sale. This notice must describe the areas subject to the sale and any stipulations, terms, and conditions of the sale. The bidding is to occur under conditions described in the notice and must be consistent with certain baseline requirements established in the OCSLA.\nAlthough the statute establishes base requirements for the competitive bidding process and sets forth a variety of possible bid formats, some of these requirements are subject to modification at the discretion of the Secretary. Before the acceptance of bids, the Attorney General is also authorized to review proposed lease sales to analyze any potential effects on competition, and may subsequently recommend action to the Secretary of the Interior as may be necessary to prevent violation of antitrust laws. The Secretary is not bound by the Attorney General's recommendation, and likewise, the antitrust review process does not affect private rights of action under antitrust laws or otherwise restrict the powers of the Attorney General or any other federal agency under other law. Assuming compliance with these bidding requirements, the Secretary may grant a lease to the highest bidder, although deviation from this standard may occur under some circumstances.\nIn addition, the OCSLA prescribes many minimum conditions that all lease instruments must contain. The statute supplies generally applicable minimum royalty or net profit share rates, as necessitated by the bidding format adopted, subject, under certain conditions, to secretarial modification. Several provisions authorize royalty reductions or suspensions. Royalty rates or net profit shares may be reduced below the general minimums or eliminated to promote increased production. For leases located in \"the Western and Central Planning Areas of the Gulf of Mexico and the portion of the Eastern Planning Area of the Gulf of Mexico encompassing whole lease blocks lying west of 87 degrees, 30 minutes West longitude and in the Planning Areas offshore Alaska,\" a broader authority is also provided, allowing the Secretary, with the lessee's consent, to make \"other modifications\" to royalty or profit share requirements to encourage increased production. Royalties may also be suspended under certain conditions by BOEM pursuant to the Outer Continental Shelf Deep Water Royalty Relief Act, discussed infra .\nThe OCSLA generally requires successful bidders to furnish a variety of up-front payments and performance bonds upon being granted a lease. Additional provisions require that leases provide that certain amounts of production be sold to small or independent refiners. Further, leases must contain the conditions stated in the sale notice and provide for suspension or cancellation of the lease in certain circumstances. Finally, the law indicates that a lease entitles the lessee to explore for, develop, and produce oil and gas, conditioned on applicable due diligence requirements and the approval of a development and production plan, discussed below.\n\n\t\tExploration\n\nLessees planning exploration for oil and gas pursuant to an OCSLA lease must prepare and comply with an approved exploration plan. Detailed information and analysis must accompany the submission of an exploration plan, and, upon receipt of a complete proposed plan, the relevant BOEM regional supervisor is required to submit the plan to the governor of an affected state and the state's Coastal Zone Management agency.\nUnder the Coastal Zone Management Act, federal actions and federally permitted projects, including those in federal waters, must be submitted for state review. The purpose of this review is to ensure consistency with state coastal zone management programs as contemplated by the federal law. When a state determines that a lessee's plan is inconsistent with its coastal zone management program, the lessee must either reform its plan to accommodate those objections and resubmit it for BOEM and state approval or succeed in appealing the state's determination to the Secretary of Commerce. Simultaneously, the BOEM regional supervisor is to analyze the environmental impacts of the proposed exploration activities under NEPA; however, regulations prescribe that BOEM complete its action on the plan review within 30 days. Hence, extensive environmental review at this stage may be constrained or rely heavily upon previously prepared NEPA documents. If the regional supervisor disapproves the proposed exploration plan, the lessee is entitled to a list of necessary modifications and may resubmit the plan to address those issues. Even after an exploration plan has been approved, drilling associated with exploration remains subject to the relevant BOEM district supervisor's approval of an application for a permit to drill. This approval hinges on a more detailed review of the specific drilling plan filed by the lessee.\n\n\t\tDevelopment and Production\n\nWhile exploration often will involve drilling wells, the scale of such activities is likely to increase significantly during the development and production phase. Accordingly, additional regulatory review and environmental analysis are typically required before this stage begins. Operators are required to submit a Development and Production Plan for areas where significant development has not occurred before or a less extensive Development Operations Coordination Document for those areas, such as certain portions of the Western Gulf of Mexico, where significant activities have already taken place. The information required to accompany submission of these documents is similar to that required at the exploration phase, but must address the larger scale of operations. As with the processes outlined above, the submission of these documents complements any environmental analysis required under NEPA. It may not always be necessary to prepare a new EIS at this stage, and environmental analysis may be tied to previously prepared NEPA documents. In addition, affected states are allowed, under the OCSLA, to submit comments on proposed Development and Production Plans and to review these plans for consistency with state coastal zone management programs. Also, if the drilling project involves \"non-conventional production or completion technology, regardless of water depth,\" applicants might also submit a Deepwater Operations Plan (DWOP) and a Conceptual Plan. This allows BOEM to review the engineering, safety, and environmental impacts associated with these technologies.\nAs with the exploration stage, actual drilling requires approval of an Application for Permit to Drill (APD). An APD focuses on the specifics of particular wells and associated machinery. Thus, an application must include a plat indicating the well's proposed location, information regarding the various design elements of the proposed well, and a drilling prognosis, among other things.\n\n\t\tLease Suspension and Cancellation\n\nThe OCSLA authorizes the Secretary of the Interior to promulgate regulations on lease suspension and cancellation. The Secretary's discretion over the use of these authorities is specifically limited to a set number of circumstances established by the OCSLA. These circumstances are described below.\nSuspension of otherwise authorized OCS activities may generally occur at the request of a lessee or at the direction of the relevant BOEM Regional Supervisor, given appropriate justification. Under the statute, a lease may be suspended (1) when it is in the national interest; (2) to facilitate proper development of a lease; (3) to allow for the construction or negotiation for use of transportation facilities; or (4) when there is \"a threat of serious, irreparable, or immediate harm or damage to life (including fish and other aquatic life), to property, to any mineral deposits (in areas leased or not leased), or to the marine, coastal, or human environment....\" The regulations also indicate that leases may be suspended for other reasons, including (1) when necessary to comply with judicial decrees; (2) to allow for the installation of safety or environmental protection equipment; (3) to carry out NEPA or other environmental review requirements; or (4)\u00a0to allow for \"inordinate delays encountered in obtaining required permits or consents....\" Whenever suspension occurs, the OCSLA generally requires that the term of an affected lease or permit be extended by a length of time equal to the period of suspension. This extension requirement does not apply when the suspension results from a lessee's \"gross negligence or willful violation of such lease or permit, or of regulations issued with respect to such lease or permit....\"\nIf a suspension period reaches five years, the Secretary may cancel a lease upon holding a hearing and finding that (1) continued activity pursuant to a lease or permit would \"probably cause serious harm or damage to life (including fish and other aquatic life), to property, to any mineral (in areas leased or not leased), to the national security or defense, or to the marine, coastal, or human environment\"; (2) \"the threat of harm or damage will not disappear or decrease to an acceptable extent within a reasonable period of time\"; and (3) \"the advantages of cancellation outweigh the advantages of continuing such lease or permit in force....\"\nUpon cancellation, the OCSLA entitles lessees to certain damages. The statute calculates damages at the lesser of (1) the fair value of the canceled rights on the date of cancellation or (2) the excess of the consideration paid for the lease, plus all of the lessee's exploration- or development-related expenditures, plus interest, over the lessee's revenues from the lease.\nThe OCSLA also indicates that the \"continuance in effect\" of any lease is subject to a lessee's compliance with the regulations issued pursuant to the OCSLA, and failure to comply with the provisions of the OCSLA, an applicable lease, or the regulations may authorize the Secretary to cancel a lease as well. Under these circumstances, a nonproducing lease can be canceled if the Secretary sends notice by registered mail to the lease owner and the noncompliance with the lease or regulations continues for a period of 30 days after the mailing. Similar noncompliance by the owner of a producing lease can result in cancellation after an appropriate proceeding in any U.S. district court with jurisdiction as provided for under the OCSLA.\n\n\t\tLease Assignments and Transfers\n\nThe OCSLA also provides the framework for federal oversight of transfers of offshore oil and gas exploration and production leases. Section 5(b) of the OCSLA states that \"[t]he issuance and continuance in effect of any lease, or of any assignment or other transfer of any lease, under the provisions of this Act shall be conditioned upon compliance with regulations issued under this Act.\" The OCSLA further provides that \"[n]o lease issued under this Act may be sold, exchanged, assigned, or otherwise transferred except with the approval of the Secretary [of the Interior, whose authority is exercised by BOEM]. Prior to any such approval, the Secretary shall consult with and give due consideration to the views of the Attorney General.\" These two requirements\u2014of continued compliance with the OCSLA and the regulations issued pursuant to it, and of obtaining BOEM approval prior to transfer\u2014are the only restrictions placed upon transfers by the OCSLA.\nThe terms of the lease itself create obligations for offshore oil and natural gas exploration and production lessees. BOEM employs a form lease, so all lessees are bound by virtually identical lease terms and conditions. With respect to transfers, Section 20 of the form lease provides that \"[t]he lessee shall file for approval with the appropriate regional BOEM OCS office any instrument of assignment or other transfer of any rights or ownership interest in this lease in accordance with applicable regulations.\" This filing requirement is the only new restriction or condition placed on transfers by the terms of the lease. However, the regulations issued by the agency pursuant to its OCSLA authority set forth more detailed requirements applicable to transfers of all or part of the lease.\n\n\t\tRoyalty Collection and Revenue Distribution\n\nAs noted above, most leases obligate the lessee to pay royalties based on the \"amount or value of the production saved, removed or sold\" by the lessee. Most leases obligate the lessee to pay a royalty rate of at least 12.5%, although some leases are exempt from payment pursuant to a statutory or administratively determined exemption. The Office of Natural Resources Revenue (ONRR) is the agency tasked with collection and disbursement of royalties from both onshore and offshore oil and gas production on federal lands.\nMost of the revenue collected by the ONRR from royalty payments and any other payments associated with offshore oil and gas leases is \"deposited in the Treasury of the United States and credited to miscellaneous receipts.\" However, a few statutory provisions direct some revenue to state and local governments in an effort to offset the disparate impacts of some offshore oil and gas exploration and production activity borne by coastal states and localities. \nSection 8(g) of OCSLA addresses leasing details for \"lands containing tracts wholly or partially within three nautical miles of the seaward boundary of any coastal State,\" that is, the first three nautical miles of federal waters which border on state waters and, in most cases, are within several miles of the state's shoreline. Under the terms of Section 8(g), all revenue from leases wholly within that three-nautical-mile range must be deposited in a dedicated account in the Treasury. For leases partially within the three-nautical-mile range of state waters, a corresponding portion of the revenue from the lease must be deposited in the special account. The Secretary then must transfer to the coastal state 27% of the revenues collected from leases near their coastal waters. If the tract in question lies only partly within the first three nautical miles of federal waters, the disbursement to the coastal state is adjusted based on the percentage of the tract that lies within those three nautical miles. OCSLA also establishes a procedure for the resolution of boundary disputes.\nCertain revenue from certain leases in the Gulf of Mexico is also diverted from the general treasury by operation of law. Under GOMESA, 50% of \"qualified Outer Continental Shelf revenues\" are to be deposited into a special account. The Secretary then must disburse 75% of the revenue deposited in that special account (or 37.5% of the total revenue) to the \"Gulf Producing States\" in accordance with a formula based in part on each state's distance from the lease tract, including further allocation to political subdivisions within the states. The states and political subdivisions are free to spend that money for any of the \"authorized uses\" set forth in GOMESA, including mitigation of various types of environmental harms that may result from offshore oil and gas exploration and production. The remaining 25% of the revenue deposited in the special account (or 12.5% of the total revenue) is directed to the states for expenditure in accordance with Section 6 of the Land and Water Conservation Fund Act of 1965, which provides for apportionment of funds to the states for purposes of land acquisition, planning, and development for recreational purposes. \n\n\tLegal Challenges to Offshore Leasing\n\nMultiple statutes govern aspects of offshore oil and gas development, and therefore, may give rise to legal challenges. The Marine Mammal Protection Act, Endangered Species Act, and other environmental laws provide mechanisms for challenging actions associated with offshore oil and gas production in the past. Of primary interest here, however, are legal challenges to agency action with respect to the planning, leasing, exploration, and development phases under the procedures mandated by the OCSLA itself and the related environmental review required by the National Environmental Policy Act.\nThe following paragraphs provide an overview of the existing case law, including legal challenges to the five-year plan and other aspects of the leasing process as well as controversies over revenue collection and distribution.\n\n\t\tSuits Under the Outer Continental Shelf Lands Act\n\nJurisdiction to review agency actions taken in approving the five-year program is vested in the U.S. Court of Appeals for the D.C. Circuit pursuant to Section 23 of the OCSLA, subject to appellate review by writ of certiorari from the U.S. Supreme Court. A few challenges to five-year programs have been brought. The first, California ex. rel. Brown v. Watt , involved a variety of challenges to the 1980-1985 program and established the standard for review for legal challenges to Five-Year Programs. When reviewing \"findings of ascertainable fact made by the Secretary,\" the court required the Secretary's decisions to be supported by \"substantial evidence\" as per the language of Section 23(c)(6) of the OCSLA. However, the court noted that many of the decisions that inform the Five-Year Program involve policy determinations, and held that such determinations should be subject to a less searching standard. The court summarized this review standard for challenges to Five-Year Programs:\nWhen reviewing findings of ascertainable fact made by the Secretary, the substantial evidence test guides our inquiry. When reviewing the policy judgments made by the Secretary, including those predictive and difficult judgmental calls the Secretary is called upon to make, we will subject them to searching scrutiny to ensure that they are neither arbitrary nor irrational\u2014in other words, we must determine whether \"the decision is based on a consideration of the relevant factors and whether there has been a clear error of judgment.\"\nThe court also noted that statutory interpretation by the agency would be subject to stricter scrutiny than either fact or policy judgments because \"the interpretation of statutes is a matter which ultimately lies in the province of the judiciary.\" Based on these standards the court vacated a number of the Secretary's findings in the 1980-1985 Five-Year Program and remanded to the Secretary for revision of the Program.\nAlthough the reference to \"arbitrary\" administrative decisionmaking is reminiscent of the review standard for challenges to agency action under the Administrative Procedure Act (APA), the court explained in a footnote that the agency's decisions to reject certain state recommendations before promulgating the Five-Year Program were not subject to APA review. The court noted the following:\nFirst, the Outer Continental Shelf Lands Act itself contains provisions requiring the Secretary to respond to state comments and to explain and articulate his decision ... We see no reason to engraft other provisions onto those found in this comprehensive statute ... Second, the APA itself exempts from its reach \"matters relating to agency management or personnel or to public property, loans, grants, benefits, or contracts.\" ... Since the leasing program related to agency management of the OCS, which is undoubtedly public property ... the APA itself would appear to take the leasing program outside its scope.\nThe standards for review outlined in Watt have been upheld in subsequent litigation related to the five-year program.\nLitigation under the OCSLA has also challenged actions taken during the leasing phase. As described above, the OCSLA authorizes states to submit comments during the notice of lease sale stage and directs the Secretary to accept a state's recommendations if they \"provide for a reasonable balance between the national interest and the well-being of the citizens of the affected State.\" According to the cases from the Ninth Circuit Court of Appeals, because the OCSLA does not provide clear guidance on how to balance the national interest with state considerations, agency action will generally be upheld so long as \"some consideration of the relevant factors ...\" takes place. Cases from the federal courts in Massachusetts, including a decision affirmed by the First Circuit Court of Appeals, have, while embracing this deferential standard, found the Secretary's balancing of interests insufficient. However, it should be noted that the Massachusetts cases reviewed agency action that was not supported by explicit analysis of the sort challenged in the Ninth Circuit. Thus, it is possible that, given a more thorough record of the Secretary's decision, these courts may afford more significant deference to the Secretary's determination.\nOther litigation has focused on mandatory royalty relief provisions. In Kerr-McGee Oil & Gas Corp. v. Allred , the plaintiff, an oil and gas company operating offshore wells in the Gulf of Mexico pursuant to federal leases, challenged actions by the department to collect royalties on deepwater oil and gas production. The plaintiff alleged the department does not have authority to assess royalties based on an interpretation of amendments to the OCSLA found in the 1995 Outer Continental Shelf Deep Water Royalty Relief Act (DWRRA), that the act requires royalty-free production until a statutorily prescribed threshold volume of oil or gas production has been reached, and does not permit a price-based threshold for this royalty relief.\nThe DWRRA separates leases into three categories based on date of issuance. These categories are (1) leases in existence on November 28, 1995; (2) leases issued after November 28, 2000; and (3) leases issued in between those periods, that is, during the first five years after the act's enactment. The third category of leases is the source of current controversy. According to Kerr-McGee, its leases, which were issued during the initial five-year period after the DWRRA's enactment, are subject to different legal requirements from those applicable to the other two categories. Kerr-McGee argued that the department has a nondiscretionary duty under the DWRRA to provide royalty relief on its deepwater leases, and that the statute does not provide an exception to this obligation based on any preset price threshold. To the extent any price threshold has been included in these leases, Kerr-McGee argued that such provisions are contrary to DOI's statutory authority and unenforceable.\nSection 304 of the DWRRA, which addresses deepwater leases issued within five years after the DWRRA's enactment, directs that such leases use the bidding system authorized in Section 8(a)(1)(H) of the OCSLA, as amended by the DWRRA. Sec tion 304 of the DWRRA also stipulates that leases issued during the five-year post-enactment time frame must provide for royalty suspension on the basis of volume. Specifically, Section 304 states the following:\n[A]ny lease sale within five years of the date of enactment of this title, shall use the bidding system authorized in section 8(a)(1)(H) of the Outer Continental Shelf Lands Act, as amended by this title, except that the suspension of royalties shall be set at a volume of not less than the following:\n(1) 17.5 million barrels of oil equivalent for leases in water depths of 200 to 400 meters;\n(2) 52.5 million barrels of oil equivalent for leases in 400 to 800 meters of water; and\n(3) 87.5 million barrels of oil equivalent for leases in water depths greater than 800 meters.\nIt is possible to interpret this provision as authorizing leases issued during the five-year period to contain only royalty suspension provisions that are based on production volume with no allowance at all for a price-related threshold in addition. Such an intent might be gleaned from the language of the quoted section alone; in this provision, Congress provides for a specific royalty suspension method and does not clearly authorize the Secretary to alter or supplement it. Kerr-McGee's challenge to the Secretary's authority to impose price-based thresholds on royalty suspension was based on this interpretation of the statutory language above.\nThe U.S. District Court for the Western District of Louisiana agreed with Kerr-McGee's interpretation of the language discussed above. The court found that the DWRRA allowed only for volumetric thresholds on royalty suspension for leases issued between 1996 and 2000, and that the Secretary did not have authority under the DWRRA to attach price-based thresholds to royalty suspension for those leases. On January 12, 2009, the U.S. Court of Appeals for the Fifth Circuit issued a decision affirming the district court's ruling, and on October 5, 2009, the U.S. Supreme Court denied a petition for writ of certiorari. \nIn Center for Biological Diversity v. U.S. Department of the Interior , the plaintiff challenged the five-year program for 2007-2012 on several grounds, including that DOI had failed to satisfy Section 18(a)(2)(G) of the OCLSA, which requires DOI to consider \"the relative environmental sensitivity and marine productivity of different areas of the outer Continental Shelf.\" The court found that DOI's analysis, which relied solely on \"physical characteristics\" of different shoreline areas, did not satisfy the Section 18(a)(2)(G) requirements because it failed to consider non-shoreline areas of the OCS. The court therefore vacated the five-year program and remanded it to DOI for reconsideration. In a later order, the court clarified that this relief related only to those portions of the five-year program that addressed leasing in the Chukchi, Beaufort, and Bering Seas, as the environmental sensitivity analysis for these areas was the only analysis that was found to be deficient.\n\n\t\tSuits Under the National Environmental Policy Act\n\nIn the context of proposed OCS development, NEPA regulations generally require the agency to publish notice of an intent to prepare an EIS, to review comments on the scope of the EIS, to prepare a draft EIS, to hold a comment period on the draft EIS, and to publish a final EIS addressing all comments received at each stage of the leasing process where government action will significantly affect the environment. As described above, NEPA figures heavily in the OCS planning and leasing process and requires various levels of environmental analysis prior to agency decisions at each phase in the leasing and development process. Lawsuits brought under NEPA may indirectly challenge agency decisions by questioning the adequacy of the agency's environmental analysis.\nIn Natural Resources Defense Council v. Hodel , the plaintiff challenged the adequacy of the alternatives examined in the EIS and the level of consideration paid to cumulative effects of offshore drilling activities. The court held that the agency did not have to examine every possible alternative, and that the determination as to adequacy was subject to the \"rule of reason.\" This standard appears to afford some level of deference to the Secretary, and his choice of alternatives was found to be sufficient by the court in this instance. However, without significant explanation of the standard of review to be applied, the court found that the Secretary's failure to analyze certain cumulative impacts was a violation of NEPA. Thus, the Secretary was required to include this analysis, although final decisions based on that analysis remained subject to the Secretary's discretion, with review only under the arbitrary and capricious standard.\nAs mentioned above, NEPA plays a role in the leasing phase as well. The NEPA procedures and standard of review remain the same at this phase; however, due to the structure of the OCSLA process, more specific information is generally required. Still, courts are deferential at the lease sale phase. In challenges to the adequacy of environmental review, courts have stressed that inaccuracies and more stringent NEPA analysis will be available at later phases. Thus, because there will be an opportunity to cure any defects in the analysis as the OCSLA process continues, challenges under NEPA at this phase are often unsuccessful.\nIt is also possible to challenge exploration and development plans under NEPA. In Edwardsen v. U.S. Department of the Interior , the Ninth Circuit Court of Appeals applied the typical \"rule of reason\" to determine if the EIS adequately addressed the probable environmental consequences of the development and production plan, and held that, despite certain omissions in the analysis and despite an MMS decision to tier its NEPA analysis to an EIS prepared for a similar lease sale, the requirements of NEPA were satisfied. Thus, while additional analysis was required to account for the greater specificity of the plans and to accommodate the \"hard look\" at environmental impacts NEPA mandates, the reasonableness standard applied to what must be examined in an EIS did not allow for a successful challenge to agency action.","output":"The development of offshore oil, gas, and other mineral resources in the United States is impacted by a number of interrelated legal regimes, including international, federal, and state laws. International law provides a framework for establishing national ownership or control of offshore areas, and domestic federal law mirrors and supplements these standards.\nGovernance of offshore minerals and regulation of development activities are bifurcated between state and federal law. Generally, states have primary authority in the area extending three geographical miles from their coasts. The federal government and its comprehensive regulatory regime govern minerals located under federal waters, which extend from the states' offshore boundaries to at least 200 nautical miles from the shore. The basis for most federal regulation is the Outer Continental Shelf Lands Act (OCSLA), which provides a system for offshore oil and gas exploration, leasing, and ultimate development. Regulations run the gamut from health, safety, resource conservation, and environmental standards to requirements for production-based royalties and, in some cases, royalty relief and other development incentives.\nThe five-year program for offshore leasing for 2017-2022 adopted by the Bureau of Ocean Energy Management focuses only on new exploration and production in the Gulf of Mexico and the Cook Inlet off the coast of Alaska. However, the Trump Administration has published a 2019-2024 Draft Proposed Plan that would supersede the 2017-2022 Program. Congress is also free to alter the scope of offshore oil and gas exploration and production contemplated by the 2017-2022 Program via new legislation.\nIn addition to legislative and regulatory efforts, there has also been significant litigation related to offshore oil and gas development. Over a number of years, courts have clarified the extent of the Secretary of the Interior's discretion over how leasing and development are conducted."}
{"id":"gao_GAO-13-272","pid":"gao_GAO-13-272_0","input":"\tBackground\n\nIHS oversees the CHS program through 12 area offices. The federally  and tribally operated facilities in each of these areas use CHS program  funds to purchase health care services from external hospitals,  physicians, and other providers. Medicare-participating hospitals are  required to accept CHS program patients at rates no higher than the rates  paid by the Centers for Medicare & Medicaid Services\u2019 (CMS) Medicare  program, while federal and tribal CHS programs pay physicians and other  nonhospital providers at either their billed charges or at reduced rates an  IHS area office or tribal CHS program negotiates with them. Other federal  health care programs\u2014administered by the Department of Defense  (DOD) and the Department of Veterans Affairs (VA)\u2014have adopted  Medicare rates as the basis for their standard payment rate for both  hospital and nonhospital services.\n\n\t\tCHS Program Organization\n\nIHS manages the CHS program through a decentralized system of 12  area offices, which oversee individual CHS programs in 35 states where  many American Indian and Alaska Native communities are located. (See  fig. 1 for a map of the counties IHS designates as CHSDAs. Residence in  these counties is generally a requirement for obtaining contract health  services.) About 46 percent of CHS program funds are distributed by IHS  to federal CHS programs, and the other 54 percent to tribal CHS  programs. Tribal CHS programs must meet the same statutory and  regulatory requirements as federal CHS programs, but they are not  generally subject to the same policies, procedures, and reporting  requirements established for federal CHS programs.\nFunds permitting, federal and tribal facilities use CHS program funds to  pay for eligible patients to receive services from external providers if the  services are not available at IHS-funded facilities. The services  purchased include hospital, specialty physician, outpatient, laboratory,  dental, radiology, pharmacy, and transportation services. Patients must  meet certain requirements to have their services paid for by the CHS  program. For example, patients must be members of federally recognized  tribes and live in specific areas. If these requirements are met, CHS  program committees at each federal or tribal facility evaluate the medical  necessity of each patient case and assign it a priority level. Facilities  first pay for the highest priority services. If there are other health care  resources available to the patient, such as Medicare, Medicaid, or private  health insurance, these resources must first be used to pay for services  before the CHS program covers any remaining costs because the CHS  program is generally the payer of last resort.once the service has been approved and the care provided, providers  obtain payment for CHS program services by sending their claims to  IHS\u2019s fiscal intermediary, BlueCross BlueShield of New Mexico  (BCBSNM). BCBSNM processes claims for all of the federal CHS  programs. The tribal CHS programs process their own claims or contract  with a fiscal intermediary of their choosing; a small number of tribal  programs contract with BCBSNM.\n\n\t\tCHS Program Payment Rates\n\nThe rate that a CHS program pays a provider is determined by several  factors, including whether the provider is a hospital subject to MLR  reimbursement or the provider has negotiated reduced payment rates  with IHS or the tribe. (See fig. 2.) CHS program payments for hospital  services\u2014inpatient and outpatient services provided in Medicare- participating hospitals\u2014are subject to the MLR requirement. IHS  generally calculates the MLR using the same methodology that Medicare  uses to pay its claims, so the amount the CHS program pays for a service  generally equals the amount that Medicare would pay the hospital for that  same service. CHS program payments to providers for nonhospital  services\u2014including services provided by hospital- and office-based  physicians\u2014are not subject to the MLR requirement. Each CHS  program pays these providers at their billed charges unless the IHS area  office has negotiated with the provider for a reduced rate. Each IHS area  office can negotiate contracts with the providers that serve the CHS  programs in its geographic area. Tribally operated facilities are  independent and may negotiate their own contracts with providers.  However, IHS officials said that when they negotiate with providers, they  may ask those providers to honor the negotiated rates when they interact  with tribal CHS programs.\nIn 1986, IHS issued a policy advising area offices to negotiate rates no   In discussing the need for the policy, IHS  higher than Medicare rates.noted that paying providers for CHS program services at billed charges  resulted in a depletion of funding that often required the postponement of  needed care for American Indians and Alaska Natives. The agency also  noted that IHS should not pay more than other federal agencies for the  same services. The agency recommended that area offices identify and  prioritize high-volume providers with whom to negotiate lower rates. In  addition, the agency indicated that contracts negotiated with providers for  payments at rates higher than those paid by Medicare, such as a discount  off billed charges or a percentage above Medicare rates, would be  approved by IHS on a case-by-case basis. Further, the agency stated that  CHS programs should only use providers that do not have a contract with  the CHS program in two situations: if a patient needs emergency care  and if the patient\u2019s health requires that the services be rendered by a  noncontract provider. However, IHS has since stated it has not been  possible to negotiate contracts with each of the providers that the CHS  program uses because of limitations in area office contracting staff and  some providers not being willing to enter into a contract.\n\n\t\tFederal CHS Program Payments for Services Provided in 2010\n\nFor services provided in calendar year 2010, IHS\u2019s federal CHS programs  paid $262.8 million to 6,113 providers for services for 66,750 patients. Of  these payments, federal CHS programs paid $104.0 million (about   40 percent of total payments) for hospital services where the CHS  program was the primary payer and about $114.7 million (about   44 percent of total payments) for nonhospital services where the CHS  program was the primary payer. Of these payments for nonhospital  services, the federal CHS programs paid $62.5 million (about 55 percent)  for hospital- and office-based physician services. (See fig. 3.)\nCMS uses Medicare payment methodologies that take many factors, such  as the type and location of service delivery, into account when calculating  hospital and physician payments for a given service. CMS periodically  reassesses the specific Medicare payment rates to adjust for increases in  the cost of delivering care. The Medicare Payment Advisory Commission  (MedPAC) has stated that the goal of Medicare payment policy should be  to keep payment rates low enough to ensure efficient use of taxpayer  funds, but high enough to ensure that patient access to care is not  negatively affected by reduced provider participation.$549 billion in 2011 for care provided to Medicare\u2019s almost 49 million  beneficiaries.\nIn fiscal year 2010, DOD offered health care to over 9.5 million eligible beneficiaries  through TRICARE. Under TRICARE, eligible beneficiaries may obtain care either from  military hospitals and clinics, referred to as military treatment facilities, or from civilian  providers. with Medicare, which VA described as the federal government\u2019s standard  for purchasing care from private-sector providers.\nWe and MedPAC have reported that Medicare beneficiaries have  generally experienced few problems accessing physician services,  although access problems may exist in certain situations. For example,  in 2009, we reported that the percentage of Medicare beneficiaries who  reported major difficulties accessing specialty care was the same for  those living in urban areas and in rural areas in 2008\u20142.1 percent. We  also noted that the number of physicians billing Medicare for services had  increased between 2000 and 2007, suggesting that more physicians were  generally willing to accept Medicare patients. Some studies have found  that access-to-care problems may exist for certain types of Medicare  beneficiaries, such as those in fair or poor health, racial minorities, or  those living in the most remote areas. However, studies have also  suggested that factors other than payment rates, such as physician  capacity to accept patients and travel time, are important influences on  patient access to care. With respect to DOD\u2019s TRICARE program, we  have reported that reimbursement rates and provider shortages in some  locations have hindered access to care. Additional studies by DOD have  cited reimbursement rates as the primary reason civilian providers may  be unwilling to accept TRICARE beneficiaries as patients.\nDOD and VA have each made modifications to their payment  methodologies in an attempt to address concerns about access to care.  For example, both agencies pay higher rates in Alaska because of  concerns that providers would not accept their beneficiaries at Medicare  rates. In contrast to the Medicare rates it pays elsewhere, in Alaska, VA  and DOD pay providers using separate payment methodologies. In prior  reviews of DOD\u2019s program, we have noted that there is little evidence  these increased payments improved patient access to care. We noted  that increased payment rates do little to address more systemic causes of  limited access, such as scarcity of physicians and patient transportation  difficulties.\nWe have also noted that the potential for payment rate changes to affect  patient access to care points to the need to monitor beneficiary access.   This type of monitoring is conducted by some federal agencies paying  providers at Medicare rates. For example, as part of its monitoring, CMS  conducts annual surveys of Medicare beneficiaries to assess their  satisfaction with care and their ability to access health care. Additionally,  in fiscal year 2004, in response to concerns about certain TRICARE  beneficiaries\u2019 access to care from civilian providers, the Congress  directed DOD to monitor access through a survey of civilian providers.\nAs these concerns continued, DOD was further directed in fiscal year  2008 to conduct annual surveys of both beneficiaries and civilian  providers to determine the adequacy of access to health care and mental  health care providers for certain beneficiaries.\n\n\tIHS\u2019s Federal CHS Program Primarily Paid Physicians at Their Billed Charges, Which Were Significantly Higher than What Medicare and Private Insurers Would Have Paid\n\nMore than 80 percent of IHS\u2019s federal CHS program payments to  physicians for services provided in 2010 were paid to noncontracted  physicians at billed charges, rather than to contracted physicians at  negotiated, reduced rates. IHS\u2019s federal CHS program payments to these  physicians were significantly higher than what we estimate Medicare and  private insurers would have paid for these same services.\n\n\t\tIHS\u2019s Federal CHS Program Paid More than 80 Percent of Total Payments to Physicians at Billed Charges for Services Provided in 2010\n\nMore than 80 percent of IHS\u2019s federal CHS program payments to  physicians for services provided in 2010 were paid to noncontracted  physicians at billed charges, rather than to contracted physicians at  negotiated, reduced rates. With the exception of uninsured patients, who  are expected to pay providers at billed charges, other public and private  payers typically pay providers at lower rates.$62.5 million that federal CHS programs paid physicians, they paid about  $50.5 million (about 81 percent) to noncontracted physicians at billed  charges and about $12.1 million (19 percent) to contracted physicians at  negotiated, reduced rates. IHS\u2019s federal CHS program payments to other   However, of the   types of nonhospital providers for services provided in 2010 showed  similar trends. Specifically, the federal CHS programs paid $40.3 million  out of a total of $52.1 million (77 percent) to other noncontracted  nonhospital providers at billed charges and about $11.8 million (about   23 percent) to other contracted nonhospital providers at negotiated,  reduced rates. (See fig. 4.)\nWhile IHS\u2019s policy states that CHS programs should purchase services  from contracted providers in most situations, a significant majority of  physicians paid by federal CHS programs for services provided in 2010  did not have contracts. Specifically, of the 3,531 total physicians paid by  federal CHS programs for services provided in 2010, 3,085 were  noncontracted physicians paid at billed charges and 516 were contracted  physicians paid at negotiated, reduced rates for at least some of their  services. Although IHS\u2019s policy also states that contracting efforts  should be focused on high-volume providers, the majority of these high- volume providers did not have contracts. For example, on the basis of the  number of services provided, about 78 percent of the top 25 percent of  physicians did not have contracts, nor did about 74 percent of the top   5 percent of physicians. In addition, an examination of the data by area  office showed that noncontracted physicians constituted the majority of  paid physicians in all IHS areas. Specifically, for each of the 10 IHS areas  with federally operated CHS programs, noncontracted physicians  constituted more than two-thirds of all physicians paid for services  provided in 2010. (See fig. 5.) For all other nonhospital providers, the  numbers of contracted and noncontracted providers showed similar  trends. Specifically, of the 3,590 other nonhospital providers paid for  services provided in 2010, 3,145 other nonhospital providers did not have  contracts and were paid at billed charges and 507 other nonhospital  providers did have contracts and were paid at negotiated, reduced rates  for at least some of their services.\nFor those physicians whom IHS\u2019s federal CHS programs paid under  contracts for reduced rates, the programs achieved significant savings  relative to the physicians\u2019 billed charges. Specifically, the federal CHS  programs paid about $12.1 million for these services, which represented  an estimated $16.7 million (58 percent) in savings, relative to the  physicians\u2019 billed charges. The percentage of savings was fairly  consistent across the IHS area offices. The savings attributed to  physician contracts ranged from 50.4 percent in the Aberdeen and  Albuquerque Areas to 69.1 percent in the Phoenix Area. (See table 1.)  IHS\u2019s federal CHS programs\u2019 savings from contracts with other  nonhospital providers showed similar trends, achieving estimated savings  of 68 percent, or $25.3 million, relative to billed charges.\nIHS\u2019s federal CHS program payments to physicians for services provided  in 2010 were higher than what we estimate Medicare and private insurers  would have paid for these same services. These higher payments  resulted from payments federal CHS programs made to noncontracted  physicians at billed charges, as the CHS program generally paid  contracted physicians at rates similar to Medicare.\nIHS\u2019s federal CHS programs paid, in total, two times what we estimate  Medicare would have paid for the same physician services provided in  2010. Specifically, of the $62.5 million in total payments for services  provided in 2010, the federal CHS programs could have saved an  estimated $31.7 million if they paid physicians what Medicare would have  paid for the same services. The federal CHS programs could have used  these savings to pay for more than double the number of physician  services they provided in 2010\u2014approximately 253,000 additional  physician services (based on an average Medicare rate of $125 per IHS  physician service). Further, savings for the overall CHS program may be  even higher, as this analysis does not include payments for other types of  nonhospital services paid by the federal CHS programs, as well as  payments by tribally operated CHS programs, which receive over half of  annual CHS program funding and have also been found to pay for  nonhospital services above the Medicare rates. For example, a 2009  OIG report found that there was no difference between federally and  tribally operated CHS programs in terms of the percentages of  nonhospital claims paid above Medicare rates. It estimated that  federally and tribally operated CHS programs could have saved almost  half of total spending on nonhospital services if nonhospital payments  were capped at Medicare rates. This suggests that both federally and  tribally operated CHS programs are likely to achieve significant savings if  they paid physicians and other nonhospital providers according to what  Medicare would have paid for the same services. The potential for  savings is particularly significant in light of the CHS program\u2019s inability to  pay for all needed services.\nIHS\u2019s federal CHS programs paid physicians at rates that were higher  than Medicare rates because they primarily paid physicians at their billed  charges. Services provided by noncontracted physicians accounted for  approximately $30.5 million of the $31.7 million in estimated total savings  (96 percent) for the federal CHS programs. Specifically, the federal CHS  programs paid noncontracted physicians a total of about $50.5 million at  billed charges, which was two and a half times what we estimate  Medicare would have paid for the same services (about $20 million). (See  fig. 6.)\nMost, but not all, payments to contracted physicians were similar to what  Medicare would have paid. Federal CHS programs paid contracted  physicians about $12.1 million for services provided in 2010 and these  payments to contracted physicians accounted for approximately   $1.2 million of the $31.7 million in estimated total savings (about   4 percent). The federal CHS programs\u2019 contracts with physicians were  sometimes for negotiated rates that exceeded what Medicare would have  paid. Specifically, slightly over one-third of total payments to contracted  physicians were higher than what we estimate Medicare would have paid.  However, most payments to contracted physicians were equal to or lower  than what we estimate Medicare would have paid.\n\n\tMost Physicians We Interviewed Said CHS Program Payments Were a Small Part of Their Total Payments and Cited Both Advantages and Concerns about Capping Payments at Medicare Rates\n\nMost of the 10 physicians whom we interviewed indicated that the CHS  program represented a small portion of their practice and was not a  significant source of revenue. The physicians identified advantages of  capping CHS program payments for nonhospital services, including  physician services, at Medicare rates, but also expressed concerns about  the effect of such a cap on their finances.\n\n\t\tPhysicians We Interviewed Said CHS Program Payments Were Generally Less than 10 Percent of Their Total Practice Payments and Were Often at Medicare Rates\n\nAccording to most of the 10 physicians whom we interviewed, the CHS  program represented a small portion of their practice. All of the physicians  we interviewed were among federal CHS programs\u2019 top 25 percent of  physicians in terms of their volume of paid services in 2010. However,   8 of the 10 physicians said total CHS program payments constituted   10 percent or less of the total payments they received from all payers.  The remaining 2 physicians said the CHS program accounted for a larger  portion of their total payments. For example, payments from the CHS  program constituted 39 percent of total payments for 1 physician who was  located on a reservation. Payments from the CHS program to the other  physician, who was located near three reservations, constituted 15 to   20 percent of total payments.\nThe 10 physicians we interviewed were divided between those who were  paid above Medicare rates by the CHS program and those who were paid  at or below Medicare rates. According to IHS 2010 claims data, federal  CHS programs paid the 10 physicians we interviewed a total of about  $990,000. Four of the 10 physicians had a contract with the CHS program  and were paid at or below Medicare rates.with IHS saved the program about 60 percent relative to the physicians\u2019  billed charges, which is comparable to the federal CHS programs\u2019  percentage of estimated savings across all physician contracts in that  year. The other 6 physicians were paid by the CHS program at billed  charges that were higher than Medicare rates. For example, 1 physician  said he was paid at 133 percent of Medicare rates and another said he  was paid at 250 percent of Medicare rates.\nIn terms of other payers, most physicians we interviewed said they  received the majority of their payments from Medicare and Medicaid.  Eight of the 10 physicians said their payments from Medicare and  Medicaid were close to 50 percent or more of their total payments, private insurance and self-pay patients constituting most of their  remaining payments. Two of these 8 said that, respectively, they received  50 percent and 75 percent of their total payments from Medicare alone.  The remaining 2 of the 10 physicians said they received the majority of  their total payments from private insurance or self-pay patients. All   10 physicians reported that they are accepting new patients from all  payers, including Medicare and the CHS program.\nMedicaid physician fees vary by state, but are generally less than the fees paid by  Medicare in that state. See Stephen Zuckerman, Aimee Williams, and Karen Stockley,  \u201cTrends in Medicaid Physician Fees, 2003-2008,\u201d Health Affairs, vol. 28, no. 3 (2009).\n\n\t\tPhysicians We Interviewed Identified Both Advantages and Concerns with Capping CHS Program Payments at Medicare Rates\n\nThe 10 physicians we interviewed identified advantages of capping CHS  program payments for nonhospital services, including physician services,  at Medicare rates, but also expressed concerns about the effect of such a  cap on their finances. The 4 physicians who were already getting paid at  or below Medicare rates, as well as 4 of the other physicians who were  getting paid at higher billed charges, said such a cap would have little or  no effect on their practices. Two of these physicians noted that there  would be little effect because the CHS program is a small percentage of  their practice. The remaining 2 of these 10 physicians, who were paid at  higher billed charges, cited concerns that a cap could affect their finances  or patient access to care.\nSix of the physicians we interviewed, three of whom were paid at or below  Medicare rates, said they would support a cap on CHS program  payments for nonhospital services, including physician services, at  Medicare rates and provided various rationales for their support. For  example, one physician said that capping CHS program payments for  nonhospital services at the Medicare rates is a \u201cgood idea\u201d that would  save IHS money. This physician expected that capping the CHS program  payments would allow him to substantially decrease the time his practice  spends negotiating with different CHS programs, especially the numerous  tribal CHS programs in his area. Others noted that Medicare rates are  nearly universally accepted by physicians and, therefore, physicians are  familiar with the Medicare Physician Fee Schedule. One of these  physicians added that paying physicians according to Medicare rates  would allow all physicians to receive payment under a consistent  methodology. Another physician said he negotiated a contract with the  CHS program for lower, Medicare rates because, in his opinion, IHS  should not be paying physicians at billed charges that are higher than the  rates paid by Medicare. A physician paid by the CHS program at billed  charges higher than Medicare agreed that Medicare rates were  appropriate. He said that he is already receiving Medicare rates for many  patients because the majority of his work is done in a hospital and many  patients needing his services are older. Further, one physician noted that  such a cap could increase his practice\u2019s CHS program payment, as he  currently receives Medicare Physician Fee Schedule rates from the CHS  program, but a cap on payments for nonhospital services could allow him  to be paid at the higher cost-based reimbursement that he receives from  Medicare.\nFour of the physicians we interviewed, three of whom said they were paid  by the CHS program at billed charges higher than Medicare, did not  support such a cap and expressed varying concerns about its effect on  their finances and patient access to care. Specifically, two physicians  noted that if their CHS program payments were capped at Medicare rates  and Medicare rates were reduced in the future, this could have a  significant adverse financial effect on their practices.  One physician said  that reducing his rates to Medicare levels would not allow him to cover his  practice\u2019s costs, as his billed charges are 133 percent of Medicare rates  and CHS program payments represented 39 percent of his practice. Two  physicians also indicated that certain specialists might be particularly  affected by a cap at Medicare rates. For example, one physician noted  that there have been significant reductions in Medicare rates for certain  cardiology services in recent years. The other physician said that an  orthopedic practice in his area that had previously contracted with a CHS  program decided to stop accepting tribal patients at Medicare rates. Two  physicians also noted they use the higher payments from the CHS  program and private payers to compensate for their payments from  Medicare and Medicaid, which they indicated do not cover their costs for  providing care.\nThree physicians who did not support a cap on CHS program payments  for nonhospital services, including physician services, at Medicare rates  said they would support a rate cap set at a higher payment rate than  Medicare but lower than billed charges. Two of the physicians suggested  a cap set at a percent of their billed charges, while the third suggested a  cap set at 125 to 133 percent of the Medicare rates.\nThe Medicare Physician Fee Schedule is updated annually under the sustainable  growth rate system, with the intent of limiting the total growth in Medicare spending for  physician services over time. Because of rapid growth in Medicare spending for physician  services, the sustainable growth rate has called for fee reductions since 2002. However,  the Congress has averted such fee reductions for 2003 through 2013. Under current law,  Medicare\u2019s fees to physicians are scheduled to be reduced by about 27 percent in 2014.  See 42 U.S.C. \u00a7 1395w-4(d).\nWhen we asked physicians if they had any concerns unrelated to CHS  program payment rates but that have had a financial effect on their  practice, all 10 cited challenges processing their CHS program payment  requests or receiving timely claims payment. The physicians said, for  example, that to receive payment from the CHS program they spent a  disproportionate amount of time, relative to other payers, gathering  paperwork in support of payment requests or monitoring the progress of  those requests. Specifically, 1 physician indicated that she received the  same rates as Medicare for the CHS program, but her claims processing  costs for the CHS program were significantly higher than for Medicare.  Physicians\u2019 concerns about claims administration echoed those that we  heard from physicians as part of a 2011 report examining the CHS  program.\n\n\tMost Hospitals We Interviewed Indicated Little Negative Effect from the Current MLR Requirement, as They Already Had CHS Program Contracts to Be Paid at Medicare Rates\n\nOfficials from most of the nine hospitals that we interviewed indicated that  the MLR requirement has had little or no financial effect on their  hospital. They said the CHS program accounted for a small percentage  of their total payments. Officials from eight of the nine hospitals said the  program accounted for between 0.02 and 10 percent of their total  payments;accounted for about 14 percent of its total payments.   officials from the other hospital said the CHS program  Officials from seven of the nine hospitals noted that the CHS program  already paid them at Medicare rates prior to implementation of the MLR  requirement. Of these seven, officials from five hospitals said the  implementation of the MLR requirement has had little or no financial effect  on their hospital. Officials from the other two of the seven hospitals did  not experience a change in rates from the implementation of MLR, but  they had concerns with Medicare payment rates in general, saying they  do not cover their hospital\u2019s costs of providing patient services. For each  of the two hospitals, officials said that the Medicare program accounted  for a larger portion of their payments than the CHS program\u201429 percent  and 28 percent, while the CHS program accounted for 0.02 percent.\nOfficials from two hospitals indicated that the MLR requirement reduced  their payment rate. Officials from one of these hospitals said that, prior to  the implementation of the MLR requirement, the hospital had a contract to  be paid by the CHS program at 90 percent of its billed charges; an official  from the other hospital said the CHS program had paid it at 100 percent  of its billed charges. The official described these previous rates as  \u201cridiculous\u201d because no other payer they interacted with paid such high  rates. Officials from both hospitals indicated that they are now paid at  MLRs. Officials from both of these hospitals noted that they see most  CHS program patients through the emergency room and their hospital  has an obligation under the Emergency Medical Treatment and Active  Labor Act (EMTALA) to treat them regardless of their ability to pay.  Officials from one of the hospitals that did not experience a decrease in  rates also noted its EMTALA obligation in the context of access to care.\nMedicare designates some small, rural hospitals as CAHs, which allows them to be paid  at higher rates under a different payment methodology. not have the funding flexibility to settle with hospitals if the interim report  is later determined to need adjustment.\nWhile the implementation of the MLR requirement had little financial effect  on most of the hospitals that we interviewed, officials from all nine  hospitals cited other factors that affected the payments they received  from the CHS program. For example, officials from seven hospitals said  they experienced problems having claims paid in a timely way by the  CHS program or that they spent more staff time processing CHS program  claims than they did for other payers. hospitals added that they were negatively affected when IHS made the  decision to close the emergency room in local IHS facilities because this  resulted in an increased patient load that placed greater pressure on their  emergency rooms.\nWe previously reported that a selection of hospital and office-based providers described  similar burdens resulting from their interactions with the CHS program, including  challenges in determining patient eligibility for CHS payment of services, in obtaining CHS  payment, and in receiving communications on CHS policies and procedures from IHS  related to payment. See GAO-11-767.\n\n\tIHS and Tribal Officials Said the MLR Requirement Allowed Them to Expand Access and Said That a Similar Cap for Nonhospital Services Could Have Similar Benefits\n\nIHS and tribal officials we interviewed said that setting payments for  hospital services at MLRs (as required by statute) allowed the CHS  program to reduce payments and expand access to care. They also  agreed that a cap on payments to nonhospital providers, including  physicians, could have similar benefits, although some officials noted that  these benefits may not be achieved by all CHS programs.\n\n\t\tIHS and Tribal Officials We Interviewed Said the MLR Requirement Allowed Them to Reduce Payments to Hospitals and Expand Access to Care\n\nIHS and tribal officials we interviewed said that the implementation of the  MLR requirement in 2007 allowed the CHS program to reduce payments  for hospital services. Although IHS officials told us that prior to the  implementation of the MLR requirement, area offices had negotiated to  pay many hospitals at Medicare rates, officials we interviewed from four  of the six area offices noted that some hospitals were unwilling to  negotiate reduced rates and therefore were paid at billed charges. The  MLR requirement required these hospitals to accept Medicare rates. IHS  officials noted that tribally operated CHS programs likely experienced  more savings from the MLR requirement than federally operated CHS  programs because tribally operated CHS programs were generally less  successful at negotiating contracts with hospitals for reduced rates.  Officials from three tribes, for example, told us that they had difficulty  negotiating for reduced rates with hospitals and the MLR requirement  enabled them to pay lower rates than they had been able to negotiate.  Overall, the tribal officials we interviewed agreed that the MLR  requirement benefited tribal programs by allowing them to achieve  savings. IHS officials also indicated that the MLR requirement allowed  them to devote less staff time to negotiating contracts for hospital  services at lower rates. One tribal official also noted that her tribe had  already successfully contracted with hospitals for Medicare rates, but said  that the MLR requirement allowed the tribe to save the time and staff  resources it had spent negotiating contracts.\nIHS and tribal officials indicated that reduced payments from the MLR  requirement allowed the CHS program to expand access to care. For  example, officials from two area offices said that the lower rates from the  implementation of the MLR requirement have allowed some federal CHS  programs that could previously only fund high-priority (priority level I)  cases to now fund both priority level I and priority level II cases\u2014cases  that would have previously been deferred or denied. IHS officials  indicated that the lower payment rates paid to providers under the MLR  requirement have also allowed IHS to sustain the Catastrophic Health  Emergency Fund (CHEF) longer than it could prior to the implementation  of MLR because the higher payment rates would deplete the fund earlier  in the fiscal year. They said that IHS is now able to reimburse CHS  programs for more high-cost medical cases under CHEF than it could  prior to the implementation of the MLR requirement. In addition, IHS  officials said that, prior to the implementation of the MLR requirement,  hospitals were not required to accept IHS patients and would sometimes  turn them away in nonemergency situations. As part of the MLR  requirement, Medicare-participating hospitals are required to accept IHS  patients at the MLR rates, which IHS officials said has expanded access  to care for IHS patients.\nIHS and tribal officials we interviewed did not identify any ongoing  challenges with patient access to care related to implementation of the  MLR requirement. Officials from three area offices said that they were not  aware of any challenges resulting from the implementation of the MLR  requirement, although officials from the other three area offices and some  tribal officials said that there were some initial challenges. They said that  some hospitals initially refused to accept the new rates, so CHS program  staff may have had to spend time educating them about the new  requirement. They noted that the hospitals eventually accepted the  required rates and it did not negatively affect patient access to care.\n\n\t\tIHS and Tribal Officials Described Challenges Contracting with Nonhospital Providers for Reduced Rates and Said That a Cap at Medicare Rates Could Be Beneficial, despite Certain Concerns\n\nIHS and tribal officials said CHS programs experienced challenges  contracting for negotiated rates with nonhospital providers. Five of the six  IHS area offices that we interviewed acknowledged that they were  unlikely to be able to negotiate with many additional providers. Officials  from all six area offices described their efforts to contract with any known  nonhospital providers, which included sending contract documentation to  frequently used providers or new providers in their areas. However,  officials from three area offices noted that many providers do not respond.  Officials from two area offices said that there can be challenges  negotiating contracts in rural areas served by a single physician who may  have little incentive to negotiate a reduced rate. Area office officials also  noted that certain physician subspecialties, such as those providing  services for cancer or kidney disease, tend to be more resistant to  negotiating contracts. The officials said that this could be because these  physicians see fewer CHS program patients or because the physicians  believe that the lower rate would not cover their cost of doing business.  These challenges are not new for the CHS program. For example, in  1991, IHS stated that it had not been possible for the program to contract   The  with each of the 4,600 professionals that it used on a regular basis.agency noted that it had experienced difficulty negotiating contracts  because many providers were unwilling to contract and the area offices  lacked the resources necessary to negotiate contracts. Tribal officials  described similar challenges related to contracting. In addition, some  tribal officials noted that nonhospital providers are particularly hesitant to  negotiate contracts because of a history of problems getting paid in a  timely way by the CHS program.\nOfficials from all six of the area offices said that a cap on nonhospital  services, including physician services, at Medicare rates would reduce  payments to providers and they believed that the overall effect for the  CHS program would be positive. Officials from all six area offices  specifically cited the resulting financial savings from the cap and indicated  that this would allow the CHS programs to pay for more care. Officials  from four area offices noted that a cap would be particularly beneficial in  lowering the cost of certain high-cost nonhospital services, such as  cancer treatments, dialysis, and air ambulance services. Officials from  some of these areas said that providers of these services have been less  likely to negotiate contracts. IHS headquarters also identified these same  services as high-volume and high-cost services that could benefit from a  rate cap. Officials from two area offices added that a cap based on an  established fee schedule would help standardize the rates that CHS  programs pay physicians, which would make it easier for programs to  estimate their spending. Officials from one area office indicated that it  was time consuming to identify physicians and attempt to negotiate  contracts for lower rates, and a cap would eliminate the need for these  efforts. However, IHS headquarters officials told us that they would not  be able to implement a cap for nonhospital services, including physician  services, unless the agency received explicit statutory authority to do so,  because the current law requiring MLRs is limited to hospital services.\nThe other two area offices indicated that they did not expect a cap on nonhospital  services to create any problems with patient access to care.\nMedicare payment rates using the different payment methodologies used  by CMS. BCSBNM officials also noted that a cap on nonhospital  providers would require them to implement changes to their payment  system to track and collect additional claims data. Officials from one  area office noted that the added complexity could be especially  challenging for tribal CHS programs that do not contract with a fiscal  intermediary to process their claims. Similarly, officials from one tribal  area indicated that it was difficult for some tribes to learn how to calculate  hospital rates when the MLR requirement was implemented, and they  expected that calculating rates for nonhospital services would be more  challenging.\nThe tribal officials that we interviewed agreed that a cap on payments for  nonhospital services, including physician services, could reduce CHS  program payments to providers and achieve savings, although some  officials noted that these benefits may not be achieved by all CHS  programs. Some tribal officials indicated that a cap on nonhospital  services at Medicare rates could save them money. For example, officials  from one tribe said that, because individual providers had been unwilling  to contract with them, they contract with a private insurer to utilize the  rates that insurer has negotiated with providers. However, the tribal  officials noted that the insurer\u2019s negotiated rates are still higher than  Medicare rates, so capping CHS program payments for nonhospital  services at Medicare rates would allow the tribe to further lower its rates  without having to contract with the private insurer. They indicated that  these savings would allow them to expand patient access to care.  However, officials from some tribes worried that a cap could result in  access-to-care problems if physicians decided to stop seeing CHS  program patients because of the lower payment rates. For example, tribal  officials from one area noted that, while a cap could be beneficial for the  general CHS program, it could lead to problems for certain tribes. They  said that some physicians serving a large, rural tribe in their area had  already chosen not to participate in Medicare because of the low payment  rates. IHS headquarters officials noted that they had heard similar  concerns during their discussions with tribal officials, although the tribal  officials had generally been supportive of a cap to reduce CHS program  payments for nonhospital services, including physician services.\nIHS officials indicated that it would be important to monitor patient access  to care if CHS program payment rates for nonhospital services were  changed. The officials said that IHS currently tracks the number of  individuals who are unable to have care funded by the CHS program  because, for example, of a lack of funding. However, it does not have a  mechanism, such as a survey, to obtain information about patient access  to care and physicians\u2019 willingness to accept CHS program payments.  They said that IHS would likely be able to monitor these issues if  mechanisms were put in place prior to any changes in payment rates.\n\n\tConclusions\n\nIHS\u2019s CHS program serves as an important resource for American Indian  and Alaska Native patients who need health care services that are not  available in federal and tribal facilities. However, most federally and  tribally operated CHS programs are unable to pay for all needed services,  which underscores the need for them to maximize the care they can  purchase within available funding. The 2007 implementation of the MLR  requirement for hospitals allowed IHS and tribes to reduce the cost of  hospital services and use those savings to pay for more care. Nonhospital  services, including physician services, were not included in the scope of  the MLR requirement, and the CHS program continues to rely on the  ability of area offices to negotiate contracts with individual providers for  reduced rates that are lower than billed charges. Since 1986, IHS policy  has stated that area offices should attempt to negotiate with providers at  rates that are no higher than Medicare rates, and IHS officials we  interviewed described time-consuming efforts to establish such contracts.  However, in 2010, IHS still primarily paid nonhospital providers, including  physicians, at their billed charges. Our findings, which indicate that IHS  could have saved an estimated $32 million out of the $62.5 million that  federally operated CHS programs spent on physician services provided in  2010, are consistent with a 2009 OIG report and a 2009 internal IHS  study. If trends in payments for other types of nonhospital services and  the tribal CHS programs are similar to the payments for the federal CHS  program physician services that we examined, we estimate that savings  from capping all nonhospital services paid by federal and tribal CHS  programs at Medicare rates could be significantly higher. These savings  could be used to pay for some of the many services that the CHS  program is unable to fund each year.\nAs a steward of public resources, IHS is responsible and accountable for  using taxpayer funds efficiently and effectively. Despite the OIG\u2019s 2009  recommendation that IHS seek legislative authority to cap CHS program  payments for nonhospital providers, including physicians, the agency has  not pursued that authority. As a consequence, while other major federal  health care payers have based their payment methodologies on  Medicare, IHS still pays significantly higher billed charges for many  services. Setting CHS program physician and other nonhospital payments  at rates consistent with Medicare and the rates of these other federal  agencies would enable IHS to achieve needed savings that could be used  to expand patient access to health care. Moreover, given the possibility  that a change in payment rates could affect access to care in certain  areas, it is important that IHS put mechanisms in place to monitor patient  access to care to assess how new payment rates may benefit or impede  the availability of care.\n\n\tMatter for Congressional Consideration\n\nCongress should consider imposing a cap on payments for physician and  other nonhospital services made through IHS\u2019s CHS program that is  consistent with the rates paid by other federal agencies.\n\n\tRecommendation for Executive Action\n\nShould the Congress decide to cap payments for physician and other  nonhospital services made through IHS\u2019s CHS program, we recommend  that the Secretary of Health and Human Services direct the Director of  IHS to monitor CHS program patient access to physician and other  nonhospital care in order to assess how any new payment rates may  benefit or impede the availability of care.\n\n\tAgency Comments and Our Evaluation\n\nWe provided a draft of this report to HHS for review and received written  comments, which are reprinted in appendix I. HHS agreed with our  conclusions and our recommendation. Specifically, HHS indicated that  implementing a cap on CHS program payments to physicians and other  nonhospital services at Medicare rates would enable the CHS program to  fund additional services. HHS also indicated that monitoring patient  access to care in light of any payment changes is essential to providing  high-quality health care to American Indians and Alaska Natives.\nWe are sending copies of this report to the Secretary of Health and  Human Services and other interested parties. In addition, the report is  available at no charge on the GAO website at http:\/\/www.gao.gov.\nIf you or your staff have any questions about this report, please contact  me at (202) 512-7114 or kingk@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 major contributions to this report are  listed in appendix II.\n\nAppendix I: Comments from the Department of Health and Human Services\n\nAppendix II: GAO Contact and Staff Acknowledgments\n\n\tGAO Contact\n\n\tStaff Acknowledgments\n\nIn addition to the contact name above, Catina Bradley, Assistant Director;  Julianne Flowers; William Hadley; Sarah-Lynn McGrath; Lisa Motley;  Laurie Pachter; and Michael Rose made key contributions to this report.","output":"Why GAO Did This Study\n\nIndians and Alaska Natives. When care at an IHS-funded facility is unavailable, IHS's CHS program pays for care from external providers. Hospitals are required to accept Medicare rates from federal and tribal CHS programs, while physicians and other nonhospital providers are paid at either billed charges or negotiated, reduced rates. The Patient Protection and Affordable Care Act requires GAO to compare CHS program payment rates with those of other public and private payers. GAO examined (1) how payments to physicians by IHS's federal CHS programs compare with what Medicare and private health insurers would have paid for the same services, (2) physicians' perspectives about how a cap on payment rates could affect them, (3) hospitals' perspectives about how the MLR requirement affected them, and (4) IHS and tribal officials' perspectives about the MLR requirement and a potential cap on nonhospital services. GAO compared 2010 physician claims data for federal CHS programs with the Medicare Physician Fee Schedule and claims from private insurers. GAO also spoke to a nongeneralizable sample of 10 physicians and 9 hospitals that interacted frequently with IHS and spoke to IHS and tribal officials where these providers practiced.\n\nWhat GAO Found\n\nThe Indian Health Service's (IHS) federal contract health services (CHS) programs primarily paid physicians at their billed charges, which were significantly higher than what Medicare and private insurers would have paid for the same services. IHS's policy states that federal CHS programs should purchase services from contracted providers at negotiated, reduced rates. However, of the almost $63 million that the federal CHS programs paid for physician services provided in 2010, they paid about $51 million (81 percent) to physicians at billed charges and about $12 million (19 percent) to physicians at negotiated, reduced rates. Payments for other types of nonhospital services followed similar trends, with about $40 million out of $52 million (77 percent) paid at billed charges. GAO estimated that IHS's federal CHS programs paid two times as much as what Medicare would have paid and about one and a quarter times as much as what private insurers would have paid for the same physician services provided in 2010. If federal CHS programs had paid Medicare rates for these services, they could have used an estimated $32 million in savings to pay for many of the services that IHS is unable to fund each year. Savings for the overall CHS program may be even higher, as this analysis does not include other types of nonhospital services or the CHS program funding that goes to tribal CHS programs, which the Department of Health and Human Services' (HHS) Office of Inspector General found also paid for nonhospital care above Medicare rates.\nAlthough the 10 physicians GAO interviewed were among those most frequently paid by federal CHS programs, 8 said their CHS program payments constituted 10 percent or less of their total payments. Some physicians identified ways that capping CHS program payments for nonhospital services, including physician services, at Medicare rates could benefit the CHS program and physician practices. However, other physicians were concerned that reducing payment rates to Medicare levels could negatively affect their practices.\nSeven of nine hospitals GAO interviewed said the Medicare-like rates (MLR) required by statute had little negative effect, generally because they already had contracts with the CHS program to be paid Medicare rates. While two hospitals previously paid by the CHS program at or near billed charges said they were financially affected by the MLR requirement, both said it had not affected their delivery of care to CHS program patients.\nIHS and tribal officials GAO interviewed said the MLR requirement for hospital services generated savings that allowed CHS programs to expand access to health care. They said that a cap on nonhospital service payments, including physician services, could have benefits and challenges. Most IHS officials indicated that it was unlikely they could negotiate many more contracts. Some tribal officials said that some physicians might think Medicare rates were too low and decide to no longer accept tribal patients, although they agreed that a cap at these rates could save money. IHS officials noted, however, that they would not be able to implement a cap for nonhospital services, including physician services, unless the agency received explicit statutory authority to do so.\nHHS stated in its comments that it concurred with GAO's conclusions and recommendation and added that imposing a cap at Medicare rates would allow IHS to fund additional services.\n\nWhat GAO Recommends\n\nCongress should consider capping CHS program payments for nonhospital services, including physician services, at rates comparable to other federal programs. Should Congress cap payments, we recommend HHS direct IHS to monitor access to care."}
{"id":"gao_GAO-05-613","pid":"gao_GAO-05-613_0","input":"\tBackground\n\nThe Clean Air Act, a comprehensive federal law that regulates air pollution  from stationary and mobile sources, was passed in 1963 to improve and  protect the quality of the nation\u2019s air. The act was substantially overhauled  in 1970 when the Congress required EPA to establish national ambient air  quality standards for pollutants at levels that are necessary to protect  public health with an adequate margin of safety and to protect public  welfare from adverse effects. EPA has set such standards for ozone, carbon  monoxide, particulate matter, sulfur oxides, nitrogen dioxide, and lead. In  addition, the act directed the states to specify how they would achieve and  maintain compliance with the national standard for each pollutant. The  Congress amended the act again in 1977 and 1990. The 1977 amendments  were passed primarily to set new goals and dates for attaining the  standards because many areas of the country had failed to meet the  deadlines set previously. The act was amended again in 1990 when several  new themes were incorporated into it, including encouraging the use of  market-based approaches to reduce emissions, such as cap-and-trade  programs.\nThe major provisions of the 1990 amendments are contained in the first six  titles. As requested, this report addresses EPA\u2019s actions related to Titles I,  III, and IV: Title I establishes a detailed and graduated program for the attainment  and maintenance of the national ambient air quality standards;  Title III expands and modifies regulations of hazardous air pollutant  emissions and establishes a list of 189 hazardous air pollutants to be  regulated;  Title IV establishes the acid deposition control program to reduce the  adverse effects of acid rain by reducing the annual emissions of  pollutants that contribute to it.\nAlthough the Clean Air Act is a federal law, states and local governments  are responsible for carrying out certain portions of the statute. For  example, states are responsible for developing implementation plans that  describe how they will come into compliance with national standards set  by EPA. EPA must approve each state\u2019s plan, and if an implementation plan  is not acceptable, EPA may assume enforcement of the Clean Air Act in  that state. Once EPA sets a national standard, it is generally up to state and  local air pollution control agencies to enforce the standard, with oversight  from EPA. For example, state air pollution control agencies may hold  hearings on permit applications by power or chemical plants. States may  also fine companies for violating air pollution limits.\nAccording to EPA, by many measures, the quality of the nation\u2019s air has  improved in recent years. Each year EPA estimates emissions that impact  the ambient concentrations of the six major air pollutants for which EPA  sets national ambient air quality standards. EPA uses these annual  emissions estimates as one indicator of the effectiveness of its air  programs. As figure 1 shows, according to EPA, between 1970 and 2004,  gross domestic product, vehicle miles traveled, energy consumption, and  U.S. population all grew; during the same time period, however, total  emissions of the six principal air pollutants dropped by 54 percent.\nDespite this progress, large numbers of Americans continue to live in  communities where pollution sometimes exceeds federal air quality  standards for one or more of the six principal air pollutants. For example,  EPA reported in April 2004 that 159 million people lived in areas of the  United States where air pollution sometimes exceeds federal air quality  standards for ground-level ozone. According to EPA, exposure to ozone  has been linked to a number of adverse health effects, including significant  decreases in lung function; inflammation of the airways; and increased  respiratory symptoms, such as cough and pain when taking a deep breath.  Moreover, in 2003, 62 million people lived in counties where monitors  showed particle pollution levels higher than national particulate matter  standards, according to a December 2004 EPA report. Long-term exposure  to particle pollution is associated with problems such as decreased lung  function, chronic bronchitis, and premature death. Even short-term  exposure to particle pollution\u2014measured in hours or days\u2014is associated  with such effects as cardiac arrhythmias (heartbeat irregularities), heart  attacks, hospital admissions or emergency room visits for heart or lung  disease, and premature death.\n\n\tEPA Has Implemented Almost All Required Actions, but Many Were Implemented Late\n\nEPA identified 452 actions required to meet the objectives of Titles I, III,  and IV of the Clean Air Act Amendments of 1990. About half of these  required actions were included under Title III, which also included the  largest number of requirements with statutory deadlines. As shown in table  1, the 1990 amendments specified statutory deadlines for 338 of the Title I-,  III-, and IV-related requirements.\nThe numerous actions required to meet the objectives of Titles I, III, and IV  of the 1990 amendments vary in scope and complexity. For example, Title I  of the Clean Air Act requires EPA to periodically review and revise, as  appropriate, the national health- and welfare-based standards for air  quality. After EPA revises any one of these standards, states are responsible  for developing plans that detail how they will achieve the revised standard.  EPA then must review the individual state plans for each standard and  decide whether to approve them. While EPA must review and approve all  individual state plans submitted, each set of reviews is only counted as one  action. Other Title I requirements, on the other hand, only require EPA to  publish reports on air quality and emission trends. While the reports may  represent a significant amount of effort, the steps required to implement  national ambient air quality standards are inherently more difficult to  accomplish and often require parties independent of EPA, such as state and  local agencies, to pass legislation and issue, adopt, and implement rules.  Comparing the requirements among titles also shows how they vary in  complexity. For example, Title IV required EPA to develop a new  market-based cap and trade program to reduce emissions of sulfur dioxide  and a rate-based program to reduce emissions of nitrogen oxides from  power plants. While developing the cap and trade program was a large  undertaking on EPA\u2019s part, it involved regulating a specified number of  stationary sources in a single industry. In contrast, under Title III, EPA is  required to implement technology-based standards for 174 separate  categories of sources of hazardous air pollutants, involving many  industries.\nAs shown in table 2, a large portion of the requirements with statutory  deadlines related to Titles I, III, and IV were met late. That is, 256 of the 338  requirements with statutory deadlines have been completed but were late.\nOf the 114 requirements without statutory deadlines, all but 3 of the  requirements have been completed.\nOn average, EPA met the requirements related to Titles I, III, and IV about  24, 25, and 15 months after their statutory deadlines, respectively. Of the  256 requirements that EPA met late, 162 were met within 2 years of their  statutory deadline and 94 were completed more than 2 years after their  deadlines (see table 3). Consequently, improvements in air quality  associated with some of these requirements may have been delayed.\nEPA officials cited several factors to explain why the agency missed  deadlines for so many requirements. Among these factors was an emphasis  on stakeholders\u2019 review and involvement during regulatory development,  which added to the time needed to issue regulations. For example,  according to an EPA official, the process to develop an early technology  rule under Title III involved protracted negotiations among EPA, industry  groups, a labor union, and environmental groups. The rule was finalized in  October 1993, 10 months after its statutory deadline. In addition, EPA  officials mentioned the need to set priorities among the tremendous  number of new requirements for EPA resulting from the 1990 amendments,  which meant that some of these actions had to be delayed. Moreover,  competing demands caused by the workload associated with EPA\u2019s  responses to lawsuits challenging some of its rules caused additional  delays. For example, the time needed to respond to litigation of previous  rules impinged on EPA staff\u2019s ability to develop new rules, according to  agency officials. In addition, at the time of our 2000 report, EPA officials  also attributed delays to the emergence of new scientific information that  led to major Clean Air Act activities unforeseen by the 1990 amendments.  For example, the emergence of new scientific information regarding the  importance of regional ozone transport led to an extensive collaborative  process between states in the eastern half of the country to evaluate and  address the transport of ozone and its precursors.\nAs of April 2005, 45 of the requirements related to Titles I, III, and IV with  statutory deadlines that had passed have not been met. Thus, any  improvements in air quality that would result from EPA meeting these  requirements remain unrealized. The majority of the unmet requirements  related to Title I are activities involving promulgating regulations that limit  the emissions of volatile organic compounds from different groups of  consumer and commercial products. According to EPA officials, these  rules were never completed because EPA shifted its priorities toward  issuing the Title III technology-based standards. Additionally, EPA officials  noted that many states have implemented their own rules limiting  emissions of volatile organic compounds from these products, and these  state rules are achieving the level of emissions reductions that would be  achieved by a national rule passed by EPA. However, EPA is currently being  sued because it did not implement these rules by their statutory deadlines.  According to an EPA official, the agency and the litigant have agreed on the  actions to be taken to address the requirements, but they could not reach  agreement on completion dates. As a result, EPA is currently awaiting  court-issued compliance dates. In addition, 21 Title III requirements have yet to be met. Most of these are \u201cresidual risk\u201d reviews of  technology-based standards with deadlines prior to April 2005. That is,  within 8 years of setting each technology-based standard, EPA is required  to assess the remaining health risks (the residual risk) from each source  category to determine whether the standard appropriately protects public  health. Applying this \u201crisk-based\u201d approach, EPA must revise the standards  to make them more protective of health, if necessary. EPA completed its  first review and issued the first set of these risk-based amendments in  March 2005. Two actions required by Title IV have not been met, but,  according to EPA, the agency has decided not to pursue these actions  further. The requirements were to (1) promulgate an opt-in regulation for  process sources and (2) conduct a sulfur dioxide\/nitrogen oxides  inter-pollutant trading study. According to EPA officials, the agency  decided not to promulgate the opt-in regulation because it determined that  the federal resources needed to develop the rule would be well in excess of  those available and the implementation of this provision would not reduce  overall emissions. EPA officials also said that the rule would not be  cost-effective due to these factors and the limited number of sources  expected to use the opt-in option. EPA officials said that the agency  decided not to pursue the sulfur dioxide\/nitrogen oxides inter-pollutant  study because of the lack of a trading ratio that would capture the complex  environmental relationship between sulfur dioxide and nitrogen oxides and  because an inter-pollutant trading program would be complex and unlikely  to result in environmental benefits.\nThe list of specific actions EPA is required to take to meet the objectives of  Titles I and III of the Clean Air Act Amendments of 1990 includes  requirements for periodic assessments of some of the standards related to  these titles. Under the Clean Air Act, EPA is required every 5 years to  review the levels at which it has set national ambient air quality standards  to ensure that they are sufficiently protective of public health and welfare.  If EPA determines it is necessary to revise the standard, the agency  undertakes a rulemaking to do so. Each new national ambient air quality  standard, in turn, will trigger a number of subsequent EPA actions under  Title I, such as setting the boundaries of areas that do not attain the  standards and approving state plans to correct nonattainment. As a result,  the set of required actions related to Title I tends to repeat over time. Title  III also includes requirements for periodic assessments of its  technology-based standards. In addition to the residual risk assessments  discussed above, the Clean Air Act requires that EPA review the  technology-based standards every 8 years, and, if necessary, revise them to  account for improvements in air pollution controls and prevention. The  first round of these recurring reviews will occur concurrently with the first  round of residual risk assessments, according to an EPA official. Moreover,  EPA\u2019s workload related to its air programs may increase as a result of  recommendations for regulatory reform compiled by the Office of  Management and Budget. For example, in response to a recommendation  to permit the use of new technology to monitor leaks of volatile air  pollutants, EPA plans to propose a rule or guidance in March 2006.\n\n\tObservations\n\nThe Clean Air Act Amendments of 1990 constituted a significant overhaul  of the Clean Air Act, and notable reductions in emissions of air pollutants  have been attained as a result of the many actions these amendments  required of EPA, states, and other parties. Currently, EPA has completed  most of the 452 actions required by the 1990 amendments related to Titles I,  III, and IV. The number, scope, and complexity of the required actions  under each of these titles varied widely, and these differences, along with  other challenges EPA faced, led to varying timeliness in implementing  these requirements. Although EPA did not meet the statutory deadlines in  many cases, we believe that the deadlines played an important role in EPA\u2019s  implementation of the myriad and diverse actions mandated in the 1990  amendments by providing a structure to guide and support the agency\u2019s  efforts to complete them.\nAs EPA and the Congress now move on to addressing the remaining air  pollution problems that pose health threats to our citizens, some points  from our 2000 report on the implementation of the 1990 amendments bear  repeating. First, some of the stakeholders we interviewed representing  environmental groups and state and local government agencies expressed a  preference for legislation and regulations that describe specific amounts of  emissions to be reduced, provide specific deadlines to be met, and identify  the sources to be regulated. Second, we, along with many of these  stakeholders, concluded in that report that the acid rain program under  Title IV could offer a worthwhile model for some other air quality problems  because it set emission-reduction goals and encouraged market-based  approaches, such as cap-and-trade programs, to attain these goals. While  EPA officials noted that emissions-trading programs may not be suitable  for all air pollutants, the agency has applied this approach to several  pollutants since 2000. Specifically, EPA has issued final rules using  cap-and-trade programs to achieve further reductions in sulfur dioxide and  nitrogen oxides and to require reductions of mercury emissions for the first  time. However, whether EPA can apply the cap-and-trade model to  hazardous air pollutants such as mercury in the absence of express  statutory authority to do so is unclear, particularly in light of the lawsuit  that has been filed challenging EPA\u2019s March 2005 rule on mercury  emissions.\n\n\tAgency Comments and Our Evaluation\n\nWe provided EPA with a draft of this report for its review and comment.  EPA generally agreed with the findings presented in the report and  provided supplemental information about the air quality, public health, and  environmental benefits associated with implementation of the Clean Air  Act Amendments of 1990 and comments related to its future challenges.  The agency also provided technical comments, which we incorporated  where appropriate. Appendix V contains the full text of the agency\u2019s  comments and our responses.\nAs agreed with your office, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days from the  date of this letter. At that time, we will send copies of this report to the  appropriate congressional committees; the Administrator, EPA; and other  interested parties. We will also make copies available to others upon  request. In addition, the report will be available at no charge on the GAO  Web site at http:\/\/www.gao.gov.\nIf you or your staff have any questions, please call me at (202) 512-3841.  Key contributors to this report are listed in appendix VI.\n\nTitle I\n\nThe Clean Air Act requires that all areas of the country meet national  ambient air quality standards (NAAQS), which are set by EPA at levels that  are expected to be protective of human health and the environment.  NAAQS have been established for six \u201ccriteria\u201d pollutants: ozone, carbon  monoxide, nitrogen dioxide, sulfur oxides, particulate matter, and lead. The  act further specifies that EPA must assess the level at which the standards  are set every five years and revise them, if necessary.\nTo accomplish the objectives of Title I of the Clean Air Act Amendments of  1990, EPA identified 171 requirements. The specific requirements  contained in Title I direct EPA to perform a variety of activities, many of  which are related to implementing the NAAQS. Implementation of the  standards involves several stages, many requiring efforts by both EPA and  states. For example, once EPA has determined the appropriate air quality  level at which to set a standard, the agency then goes through a designation  process during which it identifies the areas of the country that fail to meet  the standard. After the nonattainment areas are identified, states have  primary responsibility for attaining and maintaining the NAAQS. To do this,  states develop state implementation plans (SIPs) that specify the programs  that states will develop to achieve and maintain compliance with the  standards. Once a state submits a SIP to EPA, EPA is responsible for  reviewing it and either approving or disapproving the plan. To assist states  in developing their plans, EPA develops guidance documents that help  states interpret the standards and provide information on how to comply.  For example, EPA established several alternative control techniques  documents for various sources that emit nitrogen oxides. These documents  provide suggestions for states and industry on different techniques that can  be used to reduce nitrogen oxides emissions. In some circumstances, EPA  may provide guidance to the state and local air pollution control agencies  through the issuance of EPA guidance and\/or policy memos. For example,  although designating areas as nonattainment or attainment is a complex  and time-consuming process, EPA issued guidance through policy memos  on the factors and criteria EPA used to make decisions for designating  areas of the country as nonattainment.\nAs of April 2005, EPA had completed 146 of the requirements that the  agency must implement to meet the objectives of Title I. Sixty-one  requirements that EPA had met by April 2005 had statutory deadlines. As  table 4 shows, EPA met 16 of these requirements on time and missed the  deadlines for 45 of them. EPA also completed 85 of the 88 requirements  that did not have statutory deadlines.\nOn average, Title I-related requirements that were met late were completed  24 months after their statutory deadline. As table 5 shows, the length of  time by which requirements were met late for Title I varied. For example,  24 of the late requirements were met within 1 year of their statutory  deadline while 8 requirements were completed more than 3 years late.\nAccording to EPA, the agency missed deadlines for Title I-related  requirements for a number of reasons, such as (1) having to review a larger  quantity of scientific information than was available in the past; (2)  competing demands placed on agency staff who had to work concurrently  on more than one major rulemaking; and (3) engaging in longer, more  involved interagency review processes. According to agency officials, many  of the requirements that EPA completed late arose due to issues beyond  EPA\u2019s control. For example, in implementing the ozone and particulate  matter NAAQS, the emergence of new scientific information regarding the  importance of regional ozone transport led to an extensive collaborative  process between states in the eastern half of the country to evaluate and  address the transport of ozone and its precursors. This information was  then taken into account in the review and subsequent revision of the ozone  NAAQS in 1997. In addition, EPA was sued on both the 1997 ozone and  particulate matter standards, which delayed EPA\u2019s action to designate areas  as nonattainment. Moreover, the ongoing review of the particulate matter  NAAQS has been significantly extended as a consequence of the  unprecedented amount of new scientific research that has become  available since the last review, according to EPA.\nCurrently, EPA has not completed 22 requirements related to Title I with  statutory deadlines (see table 6). Fifteen of these requirements call for  rules involving different groups of consumer and commercial products, six  involve reviewing the NAAQS for the criteria pollutants, and one requires  EPA to finalize approving the state implementation plans for ozone and  carbon monoxide. The outstanding rules involving the consumer and  commercial products are to limit volatile organic compound emissions  from various products, such as cleaning products, personal care products,  and a variety of insecticides. The 1990 amendments specified that the rules  be promulgated in four groups, based on a priority ranking established by  EPA that includes a number of factors, such as the quantity of emissions  from certain products. While EPA completed the first group of rules by  September 1998, the agency had not done anything further to implement  the remaining three groups of rules. According to EPA officials, no further  work had been done to implement the rules because EPA shifted its  priorities toward issuing the Title III technology-based standards.  Additionally, EPA officials noted that many states have implemented their  own rules limiting emissions of volatile organic compounds from these  products, and these state rules are achieving the level of emissions  reductions that would be achieved by a national rule passed by EPA. An  EPA official stated that a national rule would not provide much of an  additional benefit in the areas where emissions of volatile organic  compounds are a problem and that a national rule would be fought by  industry in states where emissions of volatile organic compounds are not a  problem. However, promulgating these rules is a requirement under the  1990 amendments, and according to EPA officials, the agency is currently  being sued by the Sierra Club, an environmental advocacy group, for not  promulgating them by their statutory deadline. EPA and the litigant have  agreed on the actions to be taken to address the requirements, however,  they could not reach agreement on the completion dates and are currently  awaiting court-issued compliance dates.\nIn addition, the other six unmet requirements related to Title I involve  potentially revising the NAAQS for the criteria pollutants. While EPA has  been involved in litigation regarding four of these standards, litigation is  still ongoing only regarding the lead NAAQS. EPA is being sued for not  reviewing since 1991 the lead NAAQS that was originally issued in October  1978. According to EPA officials, the agency did not undertake this review  because it shifted its focus to controlling other sources of lead, such as  drinking water and hazardous waste facilities. As shown in table 6, EPA  expects to complete the required reviews for four of the criteria pollutants  by 2009.\nIn addition to the unmet requirements discussed above, EPA has three  requirements related to Title I without statutory deadlines that have not yet  been completed. The first is to develop a proposed particulate matter  implementation rule, which EPA expects to complete in summer 2005. The  second is the promulgation of methods for measurement of visible  emissions; EPA has not yet set a completion date for this action. The third  is the promulgation of phase II of the 8-hour ozone implementation rule,  expected in summer 2005.\n\nTitle III\n\nTitle III of the Clean Air Act Amendments of 1990 established a new  regulatory program to reduce the emissions of hazardous air pollutants,  specifying 189 air toxics whose emissions would be controlled under its  provisions. The list includes organic and inorganic chemicals, compounds  of various elements, and numerous other toxic substances that are  frequently emitted into the air. Title III was intended to reduce the  population\u2019s exposures to these pollutants, which can cause serious  adverse health effects such as cancer and reproductive dysfunction. After  identifying the pollutants to be regulated, Title III directs EPA to impose  technology-based standards, or Maximum Achievable Control Technology  (MACT) standards, on industry to reduce emissions. These technology- based standards require the maximum degree of reduction in emissions  that EPA determines achievable for new and existing sources, taking into  consideration the cost of achieving such reduction, health and  environmental impacts, and energy requirements. The process for  developing each MACT standard may include surveying impacted  industries, visiting sites, testing emissions, and conducting public hearings.  As a second step, within 8 years after completing each technology-based  standard, EPA is to review the remaining risks to the public and, if  necessary, issue health-based amendments to each of the MACT rules to  address such risks. The first set of these \u201cresidual risk\u201d standards was  finalized in March 2005; residual risk standards for the remaining MACT  rules have not been completed. Finally, the Clean Air Act requires that EPA  review and, if necessary, revise the technology-based standards at least  every 8 years, to account for improvements in air pollution controls and  prevention. The first round of these recurring reviews will occur  concurrently with the first round of residual risk assessments, according to  an EPA official.\nEPA identified 237 requirements\u2014either with statutory deadlines prior to  April 2005 or without statutory deadlines\u2014that accomplish the objectives  of Title III of the Clean Air Act Amendments of 1990. Most of the specific  requirements under Title III direct EPA to promulgate MACT standards for  various sources of hazardous air pollutants, such as dry cleaning facilities,  petroleum refineries, and the printing and publishing industry. Title III also  requires EPA to issue a variety of studies and reports to the Congress. For  example, EPA has issued a series of studies on the deposition of air  pollutants to the Great Lakes and other bodies of water. In addition, Title III  also directs EPA to issue guidance on a number of subjects, including, for  example, guidance regarding state air toxics programs.\nAs of April 2005, EPA had met almost all of the requirements it identified to  fully implement the objectives of Title III of the Clean Air Act Amendments  of 1990, as shown in table 7. EPA\u2019s most recent data show that it has taken  the required action to meet 216 of the 237 Title III requirements, although  195 of these were met late, as shown in table 7.\nAs shown above, the vast majority of Title III requirements were met late.  On average, Title III requirements met late were completed 25 months after  their statutory deadline. However, the length of time by which  requirements were met late varied. As shown in table 8, 116 of the 195  requirements met late were completed within the first 2 years after the  statutory deadline, while 29 were not completed until more than 3 years  after the deadline.\nIn explaining why requirements under Title III were met late, an EPA  official discussed several factors. For example, the official said that the  vast majority of the requirements involved the development of the MACT  standards, which requires a significant amount of time and effort. The  official also confirmed the reasons that requirements were met late  provided by EPA officials at the time of our 2000 report, which included the  need to prioritize, given resource limitations, the time needed to develop  the policy framework and infrastructure of the MACT program, and the  need for stakeholder participation in the rulemaking processes for certain  MACT standards. In addition, the EPA official pointed out that in the past,  litigation on issued rules has imposed additional demands on EPA staff  working to meet outstanding requirements, leading to delays.\nThere are 21 requirements under Title III that EPA had not met as of April  2005, most of which involve the residual risk reviews required after EPA  has set technology-based standards (see table 9). Specifically, EPA has not  yet reviewed residual risk for 19 MACT standards with deadlines prior to  April 2005. EPA completed its first review and issued the first set of these  risk-based amendments, for the coke oven batteries MACT standard, on  March 31, 2005. In addition to the residual risk reviews, EPA has not yet  completed its urban area source standards. The other unmet requirement  under Title III calls for EPA to promulgate standards for solid waste  incinerators not previously regulated under the title. According to an EPA  official, the agency has focused its resources on regulating major solid  waste incinerators, while this requirement consists of a \u201ccatch-all\u201d to pick  up remaining sources. Part of the challenge to completing this action has  involved identifying what these other sources might be, according to the  official.\nIn addition to the unmet requirements above, EPA has not yet completed  residual risk reviews for 76 MACT standards whose deadlines fall later than  April 2005. Because these residual risk reviews are not due until 8 years  after the completion of each technology standard, some of these residual  risk reviews are not due until 2012.\n\nTitle IV\n\nTitle IV of the Clean Air Act Amendments of 1990 established the acid  deposition control program. This program was designed to provide  environmental and public health benefits through reductions in emissions  of sulfur dioxide and nitrogen oxides, the primary causes of acid rain. The  program provides an alternative to traditional \u201ccommand and control\u201d  regulatory approaches by using a market-based trading program that  allocates sulfur dioxide emission allowances to affected electric utilities.  The program creates a cost-effective way for utilities to achieve their  required sulfur dioxide emission reductions in the manner that is most  suitable to them. Utilities can choose to buy, sell, or bank their allowances,  as long as their annual emissions do not exceed the amount of allowances  (whether originally allocated to them or purchased) that they hold at the  end of the year. The nitrogen oxides program, on the other hand, does not  cap emissions of nitrogen oxides, nor does it utilize an allowance trading  system. Rather, this program, which focuses on emissions of nitrogen  oxides from coal-fired electric utility boilers, provides flexibility for  utilities in meeting emission limits by focusing on the emission rate to be  achieved and providing options for compliance.\nTo accomplish the objectives of Title IV of the Clean Air Act Amendments  of 1990, EPA identified 44 requirements. Many of the required activities had  to do with setting up the acid rain program\u2014for example, conducting  allowance auctions, issuing allowances to utilities, and establishing an  allowance trading system. Additionally, EPA developed requirements for  utilities to continuously monitor their emission levels to properly account  for allowances.\nAs of April 2005, EPA had completed 42 of the 44 requirements to meet the  objectives of Title IV. There were 26 requirements in Title IV with statutory  deadlines\u2014EPA met 8 of them on time and missed 16; 2 others were unmet.  There were 18 requirements that did not have statutory deadlines, and EPA  has completed all of them. (See table 10.)\nOn average, for the 16 requirements EPA met late, they were completed  within approximately 15 months of their deadlines. As shown in table 11, 10  were met within 1 year of their deadline and 1 was met more than 3 years  late.\nAccording to EPA officials, the agency was late with some of the  requirements because interagency review and consultation with the Acid  Rain Advisory Committee added time to the process. Officials consider this  time spent worthwhile because it allowed for more stakeholder input into  the rulemaking process, which may have made the rules less controversial.  In fact, EPA officials stated that Title IV has been subjected to less litigation  than other titles. According to the officials, litigation, however, did cause a  delay in the effective date of the first phase of the acid rain nitrogen oxides  reduction program by 1 year. EPA officials said the second phase of this  program affected approximately three times more units and was  implemented on schedule.\nEPA officials stated that since implementation of the acid rain program,  changes have been necessary to keep the program up to date and  successful. For example, EPA revised the continuous emission-monitoring  rule in 1999 and 2002. According to EPA, these updates were necessary  because of changes in the industry, such as technological advances and  growth in the number of sources.\nTwo Title IV requirements that EPA has not completed have statutory  deadlines that have passed. The two requirements are (1) promulgating the  opt-in regulation for process sources and (2) conducting a sulfur  dioxide\/nitrogen oxides inter-pollutant trading study. After conducting  preliminary work for the first action, which was to have been completed by  May 1992, EPA determined that the federal resources required to  accomplish it were well in excess of those available. Additionally,  according to an EPA official, there was evidence of very limited use of the  opt-in election for other sources. Given these two factors, and EPA\u2019s view  that implementation of this provision would not reduce overall emissions,  the agency determined that it would not be cost-effective to promulgate the  regulation. Finally, EPA officials said that the agency decided not to pursue  the second action, which was to have been completed by January 1994, for  three reasons. Specifically, according to EPA officials, (1) they lacked a  trading ratio that would capture the complex environmental relationship  between sulfur dioxide and nitrogen oxides; (2) if the ratio issue could be  resolved, an annual allowance system for nitrogen oxides would need to be  created with which to trade sulfur dioxide allowances; and (3) it was not  clear that implementing inter-pollutant trading would result in a net  environmental benefit as there are multiple and complex health and  environmental impacts of both sulfur dioxide and nitrogen oxides requiring  a comprehensive analysis of impacts and cost-effectiveness beyond  available resources.\n\nObjective, Scope, and Methodology\n\nThe objective of this review was to determine the extent to which the  Environmental Protection Agency (EPA) has completed the various actions  required to meet the objectives of Titles I, III, and IV of the Clean Air Act  Amendments of 1990. These titles, which respectively address national  ambient air quality standards, hazardous air pollutants, and acid deposition  control, are the most relevant to proposed legislation and recently finalized  regulations that address emissions of air pollutants by power plants.\nTo obtain information on the status of EPA\u2019s implementation of  requirements related to Titles I, III, and IV of the Clean Air Act  Amendments of 1990\u2014both those with and without statutory deadlines\u2014 we obtained lists of these requirements used for GAO\u2019s 2000 report, Air  Pollution: Status of Implementation and Issues of the Clean Air Act  Amendments of 1990 (GAO\/RCED-00-72) and held discussions with EPA  officials knowledgeable about EPA\u2019s workload required to meet the  objectives of these titles. EPA officials verified the list of requirements  related to each of the three titles for accuracy and completeness and  provided documentation for any changes and additions made to the list. To  determine how late the requirements were met, we compared the statutory  deadline for each requirement to the month in which the requirement was  met. For regulations that appeared in the Federal Register, for example, we  considered the date the Federal Register issue was published to be the date  the requirement was met, as agreed with EPA officials. In addition, we  obtained explanations for why a large number of requirements were met  after their statutory deadlines from two sources\u2014our 2000 report and  through discussions with EPA officials. For requirements that had not been  met as of April 2005, we obtained additional information from EPA  officials, including actions taken to date.\nTo ensure the reliability of the information provided by EPA, we requested  documentation for any changes EPA made to the list of requirements  developed for our previous report and checked the documentation to  ensure it matched the description of the requirement. In addition, we  reviewed the information EPA submitted to ensure there were no duplicate  entries or apparent inconsistencies; for any entries that appeared  questionable, we followed up with EPA officials and usually obtained  additional documentation. In certain cases, in particular with regard to  Title III requirements, we also independently verified the status of the  requirements. In all cases, EPA provided confirmation for the conclusions  we reached as well as, in some cases, additional documentation. We  determined that the data we obtained about the status of EPA\u2019s  implementation of required actions were sufficiently reliable for the  purposes of this report. We also reviewed the methodology of two EPA  studies that contained information about areas of the United States  impacted by ground-level ozone and particulate matter. We determined  that these studies were sufficiently methodologically sound to present their  results in this report as background information.\nWhile this report addresses the extent to which EPA has met its  requirements related to Titles I, III, and IV of the 1990 amendments, it does  not address the status of requirements under other titles of the  amendments or show the extent to which states have implemented  applicable requirements. We conducted our work from January 2005 to  May 2005 in accordance with generally accepted government auditing  standards.\n\nComments from the Environmental Protection Agency\n\nThe following are GAO\u2019s comments on EPA\u2019s letter dated May 18, 2005.\n\n\tGAO Comments\n\n1. As background, our report states that while air quality in the United  States has steadily improved over the last few decades, more than a  hundred million Americans continue to live in communities where  pollution causes the air to be unhealthy at times, according to EPA.  EPA has apparently interpreted this statement as implying that missed  deadlines described in the report are responsible for the scope of the  current particulate matter and ozone nonattainment problems.  However, our report does not make that link. 2. EPA provided us several examples of cases in which a delay in the  implementation of certain specific requirements did not lead to a delay  in improvements in air quality. While our draft report indicated that  requirements met late delayed improvements in air quality, we did not  mean to suggest that all late requirements delayed improvements in air  quality. Therefore, we revised the report to say that delays in  implementation of some of the requirements may have led to delays in  improvements in air quality. 3. During the course of our work, we discussed our proposed  methodology with EPA officials and they agreed with our plan to use  the Federal Register publication date as the completion date for  relevant requirements. In commenting on the draft report, however, the  agency stated that its Office of Air and Radiation generally considers  that it has met its statutory obligation to issue a rule on the date on  which a final rule is signed and disseminated to the public, which is  likely to be earlier than the publication of that rule in the Federal  Register. Although we agree with EPA\u2019s assessment that using the  signature date, rather than the Federal Register publication date, would  not change the report\u2019s conclusions, we revised the report to include  EPA\u2019s comment.  4. We revised report language throughout to reflect the fact that certain  actions originally included as requirements of Title I of the Clean Air  Act Amendments of 1990 were established earlier but are related to  these amendments.\n\nGAO Contacts and Staff Acknowledgments\n\n\tGAO Contacts\n\nJohn B. Stephenson, (202) 512-3841 (stephensonj@gao.gov) Christine Fishkin, (202) 512-6895 (fishkinc@gao.gov)\n\n\tStaff Acknowledgments\n\nIn addition to the individuals named above, Nancy Crothers, Christine  Houle, Karen Keegan, Judy Pagano, and Nico Sloss made key contributions  to this report.","output":"Why GAO Did This Study\n\nWhile air quality in the United States has steadily improved over the last few decades, more than a hundred million Americans continue to live in communities where pollution causes the air to be unhealthy at times, according to the Environmental Protection Agency (EPA). The Clean Air Act, first passed in 1963, was last reauthorized and amended in 1990, when new programs were created and changes were made to the ways in which air pollution is controlled. The 1990 amendments included hundreds of requirements for EPA, as well as other parties, to take steps that will ultimately reduce air pollution. The amendments also established deadlines for many of these requirements. Since the 1990 amendments, various actions have been proposed to either amend the Clean Air Act or implement its provisions in new ways. GAO was asked to report on the current status of EPA's implementation of requirements under Titles I, III, and IV of the 1990 amendments. These titles, which address national ambient air quality standards, hazardous air pollutants, and acid deposition control, respectively, are the most relevant to proposed legislation and recently finalized regulations addressing emissions of air pollutants by power plants.\n\nWhat GAO Found\n\nAs of April 2005, EPA had completed 404 of the 452 actions required to meet the objectives of Titles I, III, and IV of the Clean Air Act Amendments of 1990. Of the 338 requirements that had statutory deadlines prior to April 2005, EPA completed 256 late: many (162) 2 years or less after the required date, but others (94) more than 2 years after their deadlines. Consequently, improvements in air quality associated with some of these requirements may have been delayed. The numerous actions required to implement these titles varied in scope and complexity. For example, these actions included reviewing numerous state plans to comply with national health- and welfare-based air quality standards for six major pollutants, setting technology-based standards to reduce emissions from sources of hazardous air pollutants, and developing a new program to reduce acid rain. EPA officials cited several reasons for the missed deadlines, including the emphasis on stakeholders' involvement during regulatory development, which added to the time needed to issue regulations; the need to set priorities among the tremendous number of new responsibilities EPA assumed as a result of the 1990 amendments, which meant that some actions had to be delayed; and competing demands caused by the workload associated with EPA's response to lawsuits challenging some of its rules. Of the 48 requirements EPA had not met as of April 2005, 45 had associated deadlines, and 3 did not. The unmet requirements include 15 Title I requirements to promulgate regulations to limit the emissions of volatile organic compounds from a number of consumer and commercial products, such as household cleaners and pesticides. According to EPA officials, these rules were not completed because EPA shifted its priorities toward issuing standards related to the emissions of hazardous air pollutants regulated under Title III. However, the unmet requirements also include actions under Title III to periodically assess whether EPA's emissions standards for sources that emit significant amounts of hazardous air pollutants appropriately protect public health. These \"residual risk\" assessments are to be made within 8 years of the setting of each of the emissions standards, and 19 of these assessments are now past the 8-year mark. EPA completed the first of these residual risk assessments in March 2005. Any improvements in air quality that would result from EPA meeting these requirements remain unrealized. In commenting on a draft of this report, EPA generally agreed with our findings and provided supplemental information, primarily on the benefits of the Clean Air Act Amendments of 1990 and the reasons for implementation delays."}
{"id":"gao_T-RCED-96-137","pid":"gao_T-RCED-96-137_0","input":"\tBackground\n\nThe Congress passed the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) in 1980 to clean up hazardous waste sites. The act gives EPA the authority to compel the parties responsible for these sites to clean them up. The act also created a $1.6 billion trust fund, known as Superfund, for EPA to implement the program and pay for cleanups. The Superfund program has two basic types of cleanups: (1) remedial cleanups, which are long-term cleanup actions at sites on the National Priorities List (NPL), EPA\u2019s list of the nation\u2019s worst hazardous waste sites, and (2) removal cleanups, which mitigate more immediate threats at both NPL and non-NPL sites. EPA\u2019s removal cleanups include (1) emergency removals for threats requiring immediate action, (2) time-critical removals for threats requiring action within 6 months, and (3) NTC removals for threats where action can be delayed for at least 6 months in order to adequately plan for cleanups.\nIn March 1995, EPA surveyed site managers in the regions to obtain their estimates of the benefits and lessons learned from conducting NTC removals. EPA had initiated 81 such actions by then, and 40 were beyond the study phase. Our testimony today is based on the results of that survey and interviews of EPA headquarters and regional officials in charge of removals, state cleanup managers, private parties that used the NTC process, and representatives of environmental advocacy organizations. We did not independently validate EPA\u2019s survey results. We performed our work from September 1995 through March 1996 in accordance with generally accepted government auditing standards.\n\n\tNTC Removals Can Provide Valuable Benefits but May Have Some Disadvantages\n\nCompared to traditional remediation, NTC removals significantly accelerate the study and design steps of cleanups at portions of sites, thereby reducing overall cleanup costs and more quickly protecting human health and the environment. However, increasing the use of NTC removals may increase the amount of EPA staff time required to oversee contractors. Also, using these removals could shift a portion of the cleanup costs from the states to EPA.\n\n\t\tNTC Removals Save Time and Money and Improve Environmental Protection\n\nAccording to the site managers EPA surveyed, using the NTC program instead of the remedial program reduced the overall time spent on cleaning up portions of sites from about 4 years to 2 years, on average. In many cases, site managers reported time savings of more than 3 years. These savings occur primarily because NTC actions take much less time than remedial actions to study the contamination and design a cleanup method.\nAccording to EPA technical and regional staff who manage cleanups, they use NTC actions when they are relatively certain about the nature of the contamination that is present and the type of cleanup method they should use. For such cleanups, they do not need to use the extensive study and design steps that the remedial program calls for. Like remedial actions, NTC actions also include steps, although abbreviated, for the public and the state to participate in planning the cleanup. Also, because EPA\u2019s guidance requires that NTC removals generally meet states\u2019 cleanup standards, the level of cleanup achieved with these removals is not expected to be significantly different from the level achieved with remedial cleanups.\nThe streamlined NTC process also results in reduced cleanup costs. According to EPA\u2019s survey, conducting an NTC action costs, on average, about $3.6 million, or about $0.5 million less than a similar remedial action would have cost. In many cases, larger savings have been reported. For example, one private party estimated that conducting the cleanup as an NTC action instead of a remedial action reduced the cleanup costs by about $2 million\u2014at least half of the total cleanup costs. Savings of more than $1 million have also been reported for federally funded cleanups.\nFaster cleanups through the use of NTC removals also mean better protection of human health and the environment. According to EPA site managers, NTC removals can be used to clean up the portions of Superfund sites where contaminants pose a current risk to human health or could spread further in the environment. For example, EPA used the NTC process to accelerate a cleanup by more than 4 years at a chemical processing plant where contaminants in the soil were migrating toward a schoolyard. In another case, a private party used the NTC process to accelerate a cleanup by more than 4 years, removing contaminants from the soil and shallow groundwater before they could spread to deep groundwater, which is difficult and costly to clean up.\n\n\t\tNTC Removals Have Potential Disadvantages\n\nWhile NTC removals demonstrate valuable benefits, they may also present some disadvantages, including the need for more staff time to monitor NTC cleanups, less ability for EPA to enforce cleanup agreements with private parties, and a potential for states to decrease their funding of a portion of the cleanup costs. Opinions vary about the significance of these disadvantages.\nUnder a remedial cleanup contract, EPA pays a contractor to conduct a fixed set of actions that both parties have agreed to at the start of the cleanup. In contrast, under an NTC cleanup contract, EPA pays a contractor for the company\u2019s time and materials, but an EPA site manager directs the contractor\u2019s actions. EPA technical and regional staff involved in NTC removals agree that time and materials contracts require almost daily on-site supervision, whereas remedial cleanup contracts do not. However, EPA site managers argue that close supervision of the contractor offers EPA greater control over the work and more flexibility to make adjustments.\nUnder its NTC removal authority, EPA may have more difficulty enforcing private party cleanup agreements than it would under its remedial authority. For a remedial action, EPA uses a consent decree issued by a court, whereas, for an NTC removal, it uses an administrative order issued by its regional management. EPA headquarters and regional officials involved in both processes are concerned about the potential for a private party to default on an NTC removal because an administrative order does not provide EPA with immediate penalties for enforcing a cleanup agreement. If a party does default, EPA may then have to fund the rest of the cleanup while the matter is being resolved in the courts. Private parties have told us, however, that even with the consent decree for remedial agreements, a default will also likely have to be resolved in the courts.\nFinally, NTC cleanups may shift some portion of the cleanup costs from the states to the federal government. Under CERCLA and EPA\u2019s regulations, a federally funded remedial action cannot proceed until the state in which the site is located agrees to pay 10 percent of the cleanup costs and to handle most of the follow-on operations and maintenance activities. Because the law generally does not require such state participation in removals, including NTC removals, the federal government may have to bear the costs of NTC removals without state support. However, some states already have voluntarily shared the cost of NTC removals and assumed the responsibility for operations and maintenance in exchange for quicker and less costly cleanups. Also, EPA removal guidance advises regions to obtain such state participation.\n\n\tNTC Removals Can Be Used to Clean Up the High-Risk Portions of Most Superfund Sites\n\nThe variety of sites, media, and actions addressed under the NTC process to date indicate a strong potential for using NTC removals to clean up portions of most Superfund sites, especially the high-risk portions. However, the remaining portions of many of these sites may still require some long-term action, such as groundwater restoration, which is more appropriately conducted under the full remedial process.\nLike Superfund sites in general, NTC sites include manufacturing sites, landfills, mining sites, and chemical processing sites, among others. NTC removals have been used on relatively small and large areas, some exceeding 20 acres. While these actions have primarily addressed contaminated soil and shallow sources of groundwater, they have also been used to clean up sediment, surface water, and site debris. NTC removals have employed many of the same kinds of permanent cleanup actions as have the remedial program, including extracting contaminants from soil and shallow groundwater and treating contaminants. NTC removals have also relied on engineering controls to contain contamination.\nNTC removals have been performed at so many different kinds of sites that, according to several site managers, they could be used for portions of almost any Superfund site. Currently, about 1,000 NPL sites await cleanup and about another 1,400 to 2,300 sites are estimated to be contaminated enough to be listed in the future. If we assume that NTC removals could be performed at all of these sites and that cost savings could average $0.5 million per site, the federal government and private parties could save from $1.2 to $1.7 billion over the life of the Superfund program by using NTC removals instead of remedial actions.\nSite managers expected that for about one-third of the sites in the survey, no further action would be required beyond the NTC removal. The remaining sites most likely have portions that contain more complex contamination. Such sites would warrant a full remedial study and design, according to EPA cleanup managers. For example, contaminated groundwater may require decades of treatment and millions of dollars in cleanup costs. Such an investment would justify more extensive planning.\n\n\tSeveral Factors Constrain the Use of NTC Removals\n\nSeveral factors have constrained the use of NTC removals, including the difficulty regions encounter in funding these actions and the current statutory limits on the time and costs that can be spent on NTC removals.\n\n\t\tFunding for NTC Removals Is Limited\n\nAccording to regional cleanup managers, funding inflexibility limits the number of NTC removals they can conduct. Although spending for removals has increased gradually since 1992, it has represented only 9 to 17 percent of the total Superfund spending. Of this percentage, most must go to fund the hundreds of emergency and time-critical removals that regions conduct, leaving little for NTC removals. Although regions may have unobligated funds in their remedial budgets, EPA headquarters does not permit the regions to transfer these funds to their removal budgets. According to EPA budget officials in headquarters, the agency must allocate funds among many competing activities within the Superfund program and has an obligation to focus on the longer-term remedial program. Also, since the agency reports quarterly to the Congress on its Superfund expenditures, EPA has to account separately for its remedial and removal activities.\n\n\t\tTime and Cost Limits Set in Law Constrain the Use of NTC Removals\n\nCERCLA limits the cost of removal actions financed by the trust fund to $2 million. Furthermore, the law states that a removal action cannot take more than 12 months to complete. EPA can justify a waiver of these limits if it demonstrates either that the situation is an emergency\u2014unlikely for an NTC removal\u2014or that the action is \u201cconsistent with the remedial action to be taken.\u201d EPA\u2019s regions have interpreted this latter requirement inconsistently. For example, according to a site manager in San Francisco, the regional counsel advised that an NTC removal be used only if a remedial cleanup plan had been signed. This region had conducted only one of the NTC actions in EPA\u2019s survey. Also, according to the site manager in Boston, the regional counsel advised that an NTC removal be used only at an NPL site. That region had conducted five of the NTC removals.\nMore than half of the NTC removals in EPA\u2019s survey had exceeded either the time or the cost limits. Proposed legislation to reauthorize Superfund, H.R. 2500 and S. 1285, would raise the limits on removals and relax the consistency requirements.\nMr. Chairman, this completes our prepared statement. We would be pleased to respond to any questions you or other Members of the Subcommittee may have.\nThe first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent.\nU.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000  or by using fax number (301) 258-4066, or TDD (301) 413-0006.\nEach day, GAO issues a list of newly available reports and testimony.  To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone.  A recorded menu will provide information on how to obtain these lists.","output":"Why GAO Did This Study\n\nGAO discussed the Environmental Protection Agency's (EPA) use of non-time-critical removals for hazardous waste cleanups, focusing on: (1) the advantages and disadvantages of non-time-critical removals; (2) the potential use of non-time-critical removals in Superfund cleanups; and (3) factors that inhibit the use of non-time-critical removals.\n\nWhat GAO Found\n\nGAO noted that: (1) on average the use of non-time-critical removals could expedite environmental cleanups by 2 years and reduce costs by about $500,000 over similar cleanup actions using the remedial removal process; (2) non-time-critical removals are successful because they have a streamlined planning process; (3) non-time-critical removals would require EPA to spend more time overseeing cleanup contracts and shift costs from states to EPA; (4) non-time-critical removals are a potentially useful tool in cleaning up portions of most of the 3,000 sites in the EPA Superfund inventory; (5) non-time-critical removals have not been used for a wide variety of cleanups because most Superfund funding has been spent on emergency removals; (6) additional factors that have limited non-time-critical removal use include EPA inability to shift funds between accounts and regions, and statutory limits on the duration and cost of non-time-critical removals; and (7) the proposed Superfund reauthorization legislation would ease the statutory limitations on non-time-critical removals."}
{"id":"gao_GAO-11-238T","pid":"gao_GAO-11-238T_0","input":"\tDHS Has Made Progress in Harmonizing International Aviation Security and Facilitating Compliance through Foreign Airport Assessments, but Can Further Strengthen Assessment Efforts\n\n\t\tDHS Has Made Progress in Its Efforts to Harmonize International Aviation Security Standards and Practices\n\nDHS has increased its global outreach efforts. Historically, DHS and  its components, working with State, have coordinated with foreign  partners on an ongoing basis to promote aviation security enhancements  through ICAO and other multilateral and bilateral outreach efforts. For  example, DHS and TSA have coordinated through multilateral groups such  as the European Commission and the Quadrilateral Group\u2014comprising  the United States, the EU, Canada, and Australia\u2014to establish agreements  to develop commensurate air cargo security systems. On a bilateral basis,  the United States has participated in various working groups to facilitate  coordination on aviation security issues with several nations, such as  those that make up the EU, Canada, and Japan. The United States has also  established bilateral cooperative agreements to share information on  security technology with the United Kingdom, Germany, France, and  Israel, among others. In addition, TSA has finalized agreements with  ICAO to provide technical expertise and assistance to ICAO in the areas of  capacity building and security audits, and serves as the United States\u2019  technical representative on ICAO\u2019s Aviation Security Panel and the panel\u2019s  various Working Groups.\nIn the wake of the December 2009 incident, DHS increased its outreach  efforts. For example, to address security gaps highlighted by the  December incident, DHS has coordinated with Nigeria to deploy Federal  Air Marshals on flights operated by U.S. carriers bound for the United  States from Nigeria. Further, in early 2010, the Secretary of Homeland  Security participated in five regional summits\u2014Africa, the Asia\/Pacific  region, Europe, the Middle East, and the Western Hemisphere\u2014with the  Secretary General of ICAO, foreign ministers and aviation officials, and  international industry representatives to discuss current aviation security  threats and develop an international consensus on the steps needed to  address remaining gaps in the international aviation security system.  Each of these summits resulted in a Joint Declaration on Aviation Security  in which, generally, the parties committed to work through ICAO and on  an individual basis to enhance aviation security. Subsequently, during the  September 2010 ICAO Assembly, the 190 member states adopted a  Declaration on Aviation Security, which encompassed the principles of the  Joint Declarations produced by the five regional summits. Through the  declaration, member states recognized the need to strengthen aviation  security worldwide and agreed to take nine actions to enhance  international cooperation to counter threats to civil aviation, which  include, among other things    strengthening and promoting the effective application of ICAO Standards  and Recommended Practices, with particular focus on Annex 17, and  developing strategies to address current and emerging threats;    strengthening security screening procedures, enhancing human factors,  and utilizing modern technologies to detect prohibited articles and support  research and development of technology for the detection of explosives,  weapons, and prohibited articles in order to prevent acts of unlawful  interference;    developing and implementing strengthened and harmonized measures and  best practices for air cargo security, taking into account the need to  protect the entire air cargo supply chain; and    providing technical assistance to states in need, including funding,  capacity building, and technology transfer to effectively address security  threats to civil aviation, in cooperation with other states, international  organizations and industry partners.\nTSA has increased coordination with foreign partners to enhance  security standards and practices. In response to the August 2006 plot to  detonate liquid explosives on board commercial air carriers bound for the  United States, TSA initially banned all liquids, gels, and aerosols from  being carried through the checkpoint and, in September 2006, began  allowing passengers to carry on small, travel-size liquids and gels (3 fluid  ounces or less) using a single quart-size, clear plastic, zip-top bag. In  November 2006, in an effort to harmonize its liquid-screening standards  with those of other countries, TSA revised its procedures to match those  of other select nations. Specifically, TSA began allowing 3.4 fluid ounces  of liquids, gels, and aerosols onboard aircraft, which is equivalent to 100  milliliters\u2014the amount permitted by the EU and other countries such as  Canada and Australia. This harmonization effort was perceived to be a  success and ICAO later adopted the liquid, gels, and aerosol screening  standards and procedures implemented by TSA and other nations as a  recommended practice.\nTSA has also worked with foreign governments to draft international air  cargo security standards. According to TSA officials, the agency has  worked with foreign counterparts over the last 3 years to draft  Amendment 12 to ICAO\u2019s Annex 17, and to generate support for its  adoption by ICAO members. The amendment, which was adopted by the  ICAO Council in November 2010, will set forth new standards related to air  cargo such as requiring members to establish a system to secure the air  cargo supply chain (the flow of goods from manufacturers to retailers).  TSA has also supported the International Air Transport Association\u2019s  (IATA) efforts to establish a secure supply chain approach to screening  cargo for its member airlines and to have these standards recognized  internationally. Moreover, following the October 2010 bomb attempt in  cargo originating in Yemen, DHS and TSA, among other things, reached  out to international partners, IATA, and the international shipping industry  to emphasize the global nature of transportation security threats and the  need to strengthen air cargo security through enhanced screening and  preventative measures. TSA also deployed a team of security inspectors to  Yemen to provide that country\u2019s government with assistance and guidance  on their air cargo screening procedures.\nIn addition, TSA has focused on harmonizing air cargo security standards  and practices in support of its statutory mandate to establish a system to  physically screen 100 percent of cargo on passenger aircraft\u2014including  the domestic and inbound flights of United States and foreign passenger  operations\u2014by August 2010. In June 2010 we reported that TSA has  made progress in meeting this mandate as it applies to domestic cargo, but  faces several challenges in meeting the screening mandate as it applies to  inbound cargo, related, in part, to TSA\u2019s limited ability to regulate foreign  entities. As a result, TSA officials stated that the agency would not be  able to meet the mandate as it applies to inbound cargo by the August 2010  deadline. We recommended that TSA develop a plan, with milestones, for  how and when the agency intends to meet the mandate as it applies to  inbound cargo. TSA concurred with this recommendation and, in June  2010, stated that agency officials were drafting milestones as part of a plan  that would generally require air carriers to conduct 100 percent screening  by a specific date. At a November 2010 hearing before the Senate  Committee on Commerce, Science, and Transportation, the TSA  Administrator testified that TSA aims to meet the 100 percent screening  mandate as it applies to inbound air cargo by 2013.\nIn November 2010 TSA officials stated that the agency is coordinating with  foreign countries to evaluate the comparability of their air cargo security  requirements with those of the United States, including the mandated  screening requirements for inbound air cargo on passenger aircraft.  According to TSA officials, the agency has begun to develop a program  that would recognize the air cargo security programs of foreign countries  if TSA deems those programs provide a level of security commensurate  with TSA\u2019s programs. In total, TSA plans to coordinate with about 20  countries, which, according to TSA officials, were selected in part because  they export about 90 percent of the air cargo transported to the United  States on passenger aircraft. According to officials, TSA has completed a  6-month review of France\u2019s air cargo security program and is evaluating  the comparability of France\u2019s requirements with those of the United  States. TSA officials also said that, as of November 2010, the agency has  begun to evaluate the comparability of air cargo security programs for the  United Kingdom, Israel, Japan, Singapore, New Zealand, and Australia, and  plans to work with Canada and several EU countries in early 2011. TSA  expects to work with the remaining countries through 2013.\nTSA is working with foreign governments to encourage the  development and deployment of enhanced screening technologies.  TSA has also coordinated with foreign governments to develop enhanced  screening technologies that will detect explosive materials on passengers.  According to TSA officials, the agency frequently exchanges information  with its international partners on progress in testing and evaluating  various screening technologies, such as bottled-liquid scanner systems and  advanced imaging technology (AIT). In response to the December 2009  incident, the Secretary of Homeland Security has emphasized through  outreach efforts the need for nations to develop and deploy enhanced  security technologies.\nFollowing TSA\u2019s decision to accelerate the deployment of AIT in the  United States, the Secretary has encouraged other nations to consider  using AIT units to enhance the effectiveness of passenger screening  globally. As a result, several nations, including Australia, Canada, Finland,  France, the Netherlands, Nigeria, Germany, Poland, Japan, Ukraine,  Russia, Republic of Korea, and the UK, have begun to test or deploy AIT  units or have committed to deploying AITs at their airports. For example,  the Australian Government has committed to introducing AIT at  international terminals in 2011. Other nations, such as Argentina, Chile,  Fiji, Hong Kong, India, Israel, Kenya, New Zealand, Singapore, and Spain  are considering deploying AIT units at their airports. In addition, TSA  hosted an international summit in November 2010 that brought together  approximately 30 countries that are deploying or considering deploying  AITs at their airports to discuss AIT policy, protocols, best practices, as  well as safety and privacy concerns.\nHowever, as discussed in our March 2010 testimony, TSA\u2019s use of AIT has  highlighted several challenges relating to privacy, costs, and effectiveness  that remain to be addressed. For example, because the AIT presents a  full-body image of a person during the screening process, concerns have  been expressed that the image is an invasion of privacy. Furthermore, as  noted in our March 2010 testimony, it remains unclear whether the AIT  would have been able to detect the weapon used in the December 2009  incident based on the preliminary TSA information we have received. We  will continue to explore these issues as part of our ongoing review of  TSA\u2019s AIT deployment, and expect the final report to be issued in the  summer of 2011.\n\n\t\tDHS Has Made Progress in Its Efforts to Facilitate Compliance with ICAO Standards through Foreign Airport Assessments but Can Further Strengthen Its Efforts\n\nTSA conducts foreign airport assessments. TSA efforts to assess  security at foreign airports\u2014airports served by U.S. aircraft operators and  those from which foreign air carriers operate service to the United  States\u2014also serve to strengthen international aviation security. Through  TSA\u2019s foreign airport assessment program, TSA utilizes select ICAO  standards to assess the security measures used at foreign airports to  determine if they maintain and carry out effective security practices. TSA  also uses the foreign airport assessment program to help identify the need  for, and secure, aviation security training and technical assistance for  foreign countries. In addition, during assessments, TSA provides on-site  consultations and makes recommendations to airport officials or the host  government to immediately address identified deficiencies. In our 2007  review of TSA\u2019s foreign airport assessment program, we reported that of  the 128 foreign airports that TSA assessed during fiscal year 2005, TSA  found that 46 (about 36 percent) complied with all ICAO standards,  whereas 82 (about 64 percent) did not meet at least one ICAO standard.\nIn our 2007 review we also reported that TSA had not yet conducted its  own analysis of its foreign airport assessment results, and that additional  controls would help strengthen TSA\u2019s oversight of the program. Moreover,  we reported, among other things, that TSA did not have controls in place  to track the status of scheduled foreign airport assessments, which could  make it difficult for TSA to ensure that scheduled assessments are  completed. We also reported that TSA did not consistently track and  document host government progress in addressing security deficiencies  identified during TSA airport assessments. As such, we made several  recommendations to help TSA strengthen oversight of its foreign airport  assessment program, including, among other things, that TSA develop  controls to track the status of foreign airport assessments from initiation  through completion; and develop a standard process for tracking and  documenting host governments\u2019 progress in addressing security  deficiencies identified during TSA assessments. TSA agreed with our  recommendations and provided plans to address them. Near the end of  our 2007 review, TSA had begun work on developing an automated  database to track airport assessment results. In September 2010 TSA  officials told us that they are now exploring ways to streamline and  standardize that automated database, but will continue to use it until a  more effective tracking mechanism can be developed and deployed. We  plan to further evaluate TSA\u2019s implementation of our 2007  recommendations during our ongoing review of TSA\u2019s foreign airport  assessment program, which we plan to issue in the fall of 2011.\n\n\tChallenges Related to the Harmonization Process and TSA\u2019s Foreign Airport Assessment Program May Affect DHS\u2019s Progress\n\n\t\tChallenges Related to Harmonization\n\nA number of key challenges, many of which are outside of DHS\u2019s control,  could impede its ability to enhance international aviation security  standards and practices. Agency officials, foreign country representatives,  and international association stakeholders we interviewed said that these  challenges include, among other things, nations\u2019 voluntary participation in  harmonization efforts, differing views on aviation security threats, varying  global resources, and legal and cultural barriers. According to DHS and  TSA officials, these are long-standing global challenges that are inherent in  diplomatic processes such as harmonization, and will require substantial  and continuous dialogue with international partners. As a result, according  to these officials, the enhancements that are made will likely occur  incrementally, over time.\nHarmonization depends on voluntary participation. The framework  for developing and adhering to international aviation standards is based on  voluntary efforts from individual states. While TSA may require that  foreign air carriers with operations to, from, or within the United States  comply with any applicable U.S. emergency amendments to air carrier  security programs, foreign countries, as sovereign nations, generally  cannot be compelled to implement specific aviation security standards or  mutually accept other countries\u2019 security measures. International  representatives have noted that national sovereignty concerns limit the  influence the United States and its foreign partners can have in persuading  any country to participate in international harmonization efforts. As we  reported in 2007 and 2010, participation in ICAO is voluntary. Each  nation must initiate its own involvement in harmonization, and the United  States may have limited influence over its international partners.\nCountries view aviation security threats differently. As we reported  in 2007 and 2010, some foreign governments do not share the United  States government\u2019s position that terrorism is an immediate threat to the  security of their aviation systems, and therefore may not view  international aviation security as a priority. For example, TSA identified  the primary threats to inbound air cargo as the introduction of an  explosive device in cargo loaded on a passenger aircraft, and the hijacking  of an all-cargo aircraft for its use as a weapon to inflict mass destruction.  However, not all foreign governments agree that these are the primary  threats to air cargo or believe that there should be a distinction between  the threats to passenger air carriers and those to all-cargo carriers.  According to a prominent industry association as well as foreign  government representatives with whom we spoke, some countries view  aviation security enhancement efforts differently because they have not  been a target of previous aviation-based terrorist incidents, or for other  reasons, such as overseeing a different airport infrastructure with fewer  airports and less air traffic.\nResource availability affects security enhancement efforts. In  contrast to more developed countries, many less developed countries do  not have the infrastructure or financial or human resources necessary to  enhance their aviation security programs. For example, according to DHS  and TSA officials, such countries may find the cost of purchasing and  implementing new aviation security enhancements, such as technology, to  be prohibitive. Additionally, some countries implementing new policies,  practices, and technologies may lack the human resources\u2014for example,  trained staff\u2014to implement enhanced security measures and oversee new  aviation security practices. Some foreign airports may also lack the  infrastructure to support new screening technologies, which can take up a  large amount of space. These limitations are more common in less  developed countries, which may lack the fiscal and human resources  necessary to implement and sustain enhanced aviation security measures.  With regard to air cargo, TSA officials also cautioned that if TSA were to  impose strict cargo screening standards on all inbound cargo, it is likely  many nations would be unable to meet the standards in the near term.  Imposing such screening standards in the near future could result in  increased costs for international passenger travel and for imported goods,  and possible reductions in passenger traffic and foreign imports.  According to TSA officials, strict standards could also undermine TSA\u2019s  ongoing cooperative efforts to develop commensurate security systems  with international partners.\nTo help address the resource deficit and build management capacity in  other nations, the United States provides aviation security assistance\u2014 such as training and technical assistance\u2014to other countries. TSA, for  example, works in various ways with State and international organizations  to provide aviation security assistance to foreign partners. In one such  effort, TSA uses information from the agency\u2019s foreign airport assessments  to identify a nation\u2019s aviation security training needs and provide support.  In addition, TSA\u2019s Aviation Security Sustainable International Standards  Team (ASSIST), comprised of security experts, conducts an assessment of  a country\u2019s aviation security program at both the national and airport level  and, based on the results, suggests action items in collaboration with the  host nation. State also provides aviation security assistance to other  countries, in coordination with TSA and foreign partners through its Anti- Terrorism Assistance (ATA) program. Through this program, State uses a  needs assessment\u2014a snapshot of a country\u2019s antiterrorism capability\u2014to  evaluate prospective program participants and provide needed training,  equipment, and technology in support of aviation security, among other  areas. State and TSA officials have acknowledged the need to develop  joint coordination procedures and criteria to facilitate identification of  global priorities and program recipients. We will further explore TSA and  State efforts to develop mechanisms to facilitate interagency coordination  on capacity building through our ongoing work.\nLegal and cultural factors can also affect harmonization. Legal and  cultural differences among nations may hamper DHS\u2019s efforts to  harmonize aviation security standards. For example, some nations,  including the United States, limit, or even prohibit the sharing of sensitive  or classified information on aviation security procedures with other  countries. Canada\u2019s Charter of Rights and Freedoms, which limits the data  it can collect and share with other nations, demonstrates one such  impediment to harmonization. According to TSA officials, the United  States has established agreements to share sensitive and classified  information with some countries; however, without such agreements, TSA  is limited in its ability to share information with its foreign partners.  Additionally, the European Commission reports that several European  countries, by law, limit the exposure of persons to radiation other than for  medical purposes, a potential barrier to acquiring some passenger  screening technologies, such as AIT.\nCultural differences also serve as a challenge in achieving harmonization  because aviation security standards and practices that are acceptable in  one country may not be in another. For example, international aviation  officials explained that the nature of aviation security oversight varies by  country\u2014some countries rely more on trust and established working  relationships to facilitate security standard compliance than direct  government enforcement. Another example of a cultural difference is the  extent to which countries accept the images AIT units produce. AIT units  produce a full-body image of a person during the screening process; to  varying degrees, governments and citizens of some countries, including  the United States, have expressed concern that these images raise privacy  issues. TSA is working to address this issue by evaluating possible display  options that would include a \u201cstick figure\u201d or \u201ccartoon-like\u201d form to  provide enhanced privacy protection to the individual being screened  while still allowing the unit operator or automated detection algorithms to  detect possible threats. Other nations, such as the Netherlands, are also  testing the effectiveness of this technology.\nAlthough DHS has made progress in its efforts to harmonize international  aviation security standards and practices in key areas such as passenger  and air cargo screening, officials we interviewed said that there remain  areas in which security measures vary across nations and would benefit  from harmonization efforts. For example, as we reported in 2007, the  United States requires all passengers on international flights who transfer  to connecting flights at United States airports to be rescreened prior to  boarding their connecting flight. In comparison, according to EU and  ICAO officials, the EU has implemented \u201cone-stop security,\u201d allowing  passengers arriving from EU and select European airports to transfer to  connecting flights without being rescreened. Officials and representatives  told us that although there has been ongoing international discussion on  how to more closely align security measures in these and other areas,  additional dialogue is needed for countries to better understand each  others\u2019 perspectives. According to the DHS officials and foreign  representatives with whom we spoke, these and other issues that could  benefit from harmonization efforts will continue to be explored through  ongoing coordination with ICAO and through other multilateral and  bilateral outreach efforts.\n\n\t\tChallenges Related to TSA\u2019s Foreign Airport Assessment Program\n\nOur 2007 review of TSA\u2019s foreign airport assessment program identified  challenges TSA experienced in assessing security at foreign airports  against ICAO standards and recommended practices, including a lack of  available inspector resources and host government concerns, both of  which may affect the agency\u2019s ability to schedule and conduct assessments  for some foreign airports. We reported that TSA deferred 30 percent of  its scheduled foreign airport visits in 2005 due to the lack of available  inspectors, among other reasons. TSA officials said that in such  situations they sometimes used domestic inspectors to conduct scheduled  foreign airport visits, but also stated that the use of domestic inspectors  was undesirable because these inspectors lacked experience conducting  assessments in the international environment. In September 2010 TSA  officials told us that they continue to use domestic inspectors to assist in  conducting foreign airport assessments and air carrier inspections\u2014 approximately 50 domestic inspectors have been trained to augment the  efforts of international inspectors. We also previously reported that  representatives of some foreign governments consider TSA\u2019s foreign  airport assessment program an infringement of their authority to regulate  airports and air carriers within their borders. Consequently, foreign  countries have withheld access to certain types of information or denied  TSA access to areas within an airport, limiting the scope of TSA\u2019s  assessments. We plan to further assess this issue, as well as other potential  challenges, as part of our ongoing review of TSA\u2019s foreign airport  assessment program, which we plan to issue in the fall of 2011.\nMr. Chairman, this completes my prepared statement. I look forward to  responding to any questions you or other members of the committee may  have at this time.\n\n\tContacts and Acknowledgments\n\nFor additional information about this statement, please contact Stephen  M. Lord at (202) 512-4379 or lords@gao.gov. Contact points for our Offices  of Congressional Relations and Public Affairs may be found on the last  page of this statement.\nIn addition to the contact named above, staff who made key contributions  to this statement were Steve D. Morris, Assistant Director; Carissa D.\nBryant; Christopher E. Ferencik; Amy M. Frazier; Barbara A. Guffy; Wendy  C. Johnson; Stanley J. Kostyla; Thomas F. Lombardi; Linda S. Miller;  Matthew M. Pahl; Lisa A. Reijula; Rebecca Kuhlmann Taylor; and Margaret  A. Ullengren.\nThis 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.","output":"Why GAO Did This Study\n\nThe attempted December 25, 2009, terrorist attack and the October 2010 bomb attempt involving air cargo originating in Yemen highlight the ongoing threat to aviation and the need to coordinate security standards and practices to enhance security with foreign partners, a process known as harmonization. This testimony discusses the Department of Homeland Security's (DHS) progress and challenges in harmonizing international aviation security standards and practices and facilitating compliance with international standards. This testimony is based on reports GAO issued from April 2007 through June 2010, and ongoing work examining foreign airport assessments. For this work, GAO obtained information from DHS and the Transportation Security Administration (TSA) and interviewed TSA program officials, foreign aviation officials, representatives from international organizations such as the International Civil Aviation Organization (ICAO), and industry associations, about ongoing harmonization and TSA airport assessment efforts and challenges.\n\nWhat GAO Found\n\nIn the wake of the December 2009 terrorist incident, DHS and TSA have strived to enhance ongoing efforts to harmonize international security standards and practices through increased global outreach, coordination of standards and practices, use of enhanced technology, and assessments of foreign airports. For example, in 2010 the Secretary of Homeland Security participated in five regional summits aimed at developing an international consensus to enhance aviation security. In addition, DHS and TSA have coordinated with foreign governments to harmonize air cargo security practices to address the statutory mandate to screen 100 percent of air cargo transported on U.S.-bound passenger aircraft by August 2010, which TSA aims to meet by 2013. Further, in the wake of the December 2009 incident, the Secretary of Homeland Security has encouraged other nations to consider using advanced imaging technology (AIT), which produces an image of a passenger's body that screeners use to look for anomalies such as explosives. As a result, several nations have begun to test and deploy AIT or have committed to deploying AIT units at their airports. Moreover, following the October 2010 cargo bomb attempt, TSA also implemented additional security requirements to enhance air cargo security. To facilitate compliance with international security standards, TSA assesses the security efforts of foreign airports as defined by ICAO international aviation security standards. In 2007, GAO reported, among other things, that TSA did not always consistently track and document host government progress in addressing security deficiencies identified during foreign airport assessments and recommended that TSA track and document progress in this area. DHS and TSA have made progress in their efforts to enhance international aviation security through these harmonization efforts and related foreign airport assessments; however, a number of key challenges, many of which are beyond DHS's control, exist. For example, harmonization depends on the willingness of sovereign nations to voluntarily coordinate their aviation security standards and practices. In addition, foreign governments may view aviation security threats differently, and therefore may not consider international aviation security a high priority. Resource availability, which is a particular concern for developing countries, as well as legal and cultural factors may also affect nations' security enhancement and harmonization efforts. In addition to challenges facing DHS's harmonization efforts, in 2007 GAO reported that TSA experienced challenges in assessing foreign airport security against international standards and practices, such as a lack of available international inspectors and concerns host governments had about being assessed by TSA, both of which may affect the agency's ability to schedule and conduct assessments for some foreign airports. GAO is exploring these issues as part of an ongoing review of TSA's foreign airport assessment program, which GAO plans to issue in the fall of 2011. In response to prior GAO recommendations that TSA, among other things, track the status of foreign airport assessments, DHS concurred and is working to address the recommendations. TSA provided technical comments on a draft of the information contained in this statement, which GAO incorporated as appropriate."}
{"id":"crs_RS21988","pid":"crs_RS21988_0","input":"\tBackground\n\nDOE is responsible for managing defense nuclear waste and cleaning up contamination at sites involved in the past production of nuclear weapons. Among these challenges are the management and disposal of radioactive waste stored in underground tanks at sites in three states: Hanford in Washington, Savannah River in South Carolina, and the Idaho National Laboratory (INL). The production of radioactive materials for nuclear weapons generated 53 million gallons of radioactive waste stored in 177 tanks at Hanford, 37 million gallons in 49 tanks at Savannah River, and nearly 1 million gallons in 11 tanks at the INL. Some of these tanks are deteriorating and are known or suspected to have leaked, contaminating soil and groundwater. Of greatest concern are the tanks at Hanford, 67 of which are known or suspected to have leaked radioactive waste that has migrated through groundwater into the Columbia River. However, recent monitoring data indicate that the level of radionuclides in the Columbia River meets federal and state water quality standards. There are similar concerns about the possible contamination of the Snake River in Idaho and the Savannah River in South Carolina.\nHow to decommission (i.e., close) the tanks in a cost-effective and timely manner that mitigates environmental risk and potential exposure of workers has been the subject of controversy. DOE has argued that removing all of the waste in the tanks would take too long to respond to environmental risks from leaking tanks. DOE favors removal of the \"pumpable\" liquid waste and immobilizing (i.e., binding up) the sludge-like residual waste by filling the tanks with a cement grout to prevent leaks. The waste removed from the tanks classified as \"high-level\" would be stored for future disposal in a deep geologic repository (see below). Potentially affected states and environmental organizations raised questions regarding how much waste would be left in the tanks and whether the grout would thoroughly mix with the residual waste to solidify and contain it safely. Although the sludge-like consistency of the residual waste likely would not be as prone to leakage because of its semisolid form, whether pockets or layers of liquid waste may exist within the sludge-like residues and present greater risk of leakage is uncertain.\nAlthough removing all of the waste in the tanks would eliminate the risk of contamination, this alternative poses other risks and challenges. DOE has argued that methods to extract the residual waste after the pumpable liquid waste is removed would generate a new hazardous waste stream that would need to be managed and disposed of safely to protect the environment. DOE also asserts that there would be significant risks of exposure to workers who would remove the residues and manage and dispose of the resulting new waste stream. Once a tank is cleaned, there would be additional risks to workers who would extract the tank from the ground, and there would be environmental risks from the management and disposal of the contaminated tank metal.\n\n\tApplicability of the Nuclear Waste Policy Act\n\nHow to dispose of the tank waste is further complicated by the legal issue of how much of the waste is \"high-level.\" Under the Nuclear Waste Policy Act of 1982 (NWPA), high-level radioactive waste must be disposed of in a deep geologic repository. Consequently, the tank waste classified as high-level must be removed from the tanks, processed, and stored for disposal in such a repository. In July 1999, DOE issued internal agency Order 435.1 to classify residual tank waste as \"waste incidental to reprocessing,\" rather than as high-level. In effect, this order would exempt the residual tank waste from NWPA requirements for disposal in a geologic repository. DOE proposed to dispose of the residual tank waste at Hanford, Savannah River, and the INL by grouting it in place, as discussed above. Sealing a tank using this method would depend on state concurrence, as DOE must obtain approval from the state where the tank is located before it can be closed with no further action to be taken.\nDOE grouted residual waste in two tanks at the Savannah River site in 2000, with state concurrence. In 2002, DOE issued a Record of Decision to apply Order 435.1 to the closure of the remaining 49 tanks at the site, and to grout the residual waste it classified as incidental to reprocessing. The Natural Resources Defense Council (NRDC) legally challenged DOE's authority to dispose of the waste in this manner. The state of South Carolina and others filed as \"friends of the court,\" due to concern that states would not have a role under Order 435.1 in determining how much of the residual waste would be left in the tanks. In 2003, a federal district court determined that DOE does not have the authority to classify any of the waste in the tanks as other than high-level, nor to dispose of it permanently on site through grouting or other means.\nDOE appealed the 2003 ruling, and in 2004, the U.S. Court of Appeals for the Ninth Circuit reversed the above district court opinion, ruling that the challenge to Order 435.1 was not \"ripe\" for review. The court noted that DOE had planned to implement Order 435.1 to grout the 49 tanks, but had not yet done so. Thus, the court determined that DOE had not violated the NWPA because it had not yet taken such action. The circuit court opinion resulted in allowing DOE to pursue activities under Order 435.1, and NRDC or others then could bring suit if they believed actions taken by DOE violate the law.\n\n\tWaste Disposal Authority in P.L. 108-375\n\nPrior to the appeals court decision, DOE had asked Congress to enact legislation to clarify its authority for Order 435.1 and allow it to proceed with grouting the waste in tanks at Hanford, Savannah River, and the INL. After considerable debate, the 108 th Congress included provisions\u00a0in Section 3116 of the Ronald W. Reagan National Defense Authorization Act for FY2005 ( P.L. 108-375 ) authorizing DOE to classify some of the tank waste in South Carolina and\u00a0Idaho as incidental to reprocessing and to grout it in place. Congress did not provide this authority in Washington State, where most of the leaking tanks are located. Although this targeted\u00a0authority is permanent, unless repealed by Congress, funding to implement it is subject to annual\u00a0authorization and appropriation. An examination of provisions in Section 3116 of P.L. 108-375 follows.\nSection 3116(a) authorized the Secretary of Energy, in consultation with the Nuclear Regulatory Commission (NRC), to classify tank waste in South Carolina and Idaho as other than high-level, upon making certain determinations. These determinations are (1) that the waste \"does not require permanent isolation in a deep geological repository,\" as is required for high-level waste, and (2) that highly radioactive radionuclides have been removed from the waste to the \"maximum extent practical.\" Assuming these requirements are met, the Secretary must determine if the radioactivity of the waste will exceed concentration limits for Class C low-level waste. However, the waste could be disposed of according to Class C performance objectives for human exposure , regardless of whether the concentration exceeds allowable limits. If the concentration does exceed allowable limits, the Secretary must consult with the NRC to develop a plan for the disposal of such waste. In any case, disposal also would be subject to a state-approved closure plan and state permit authorized under other law.\nThe performance objectives for Class C waste require \"reasonable assurances\" that concentrations of radioactive materials that may be released into the environment do not result in human exposure to specific levels of radiation. The ability of the grout to accomplish this objective would depend primarily on the extent to which it mixes with the residual waste to prevent leaks from the tank. However, even if a tank leaks, the performance objectives could still be met if the radioactivity decays to allowable levels before contamination migrates and results in human exposure. The objectives also require that protection of individuals from inadvertent intrusion be ensured after institutional controls are removed. Sealing the tanks with a cement grout could provide a barrier to intrusion, and institutional control of the grouted tanks, presumably would continue as long as the Savannah River site and the INL remain federal facilities. Although grouting of the residual waste would be subject to state approval, the authority of states is limited to the hazardous component of the waste. Thus, South Carolina and Idaho presumably would not have the authority to prevent the grouting of a tank based solely on objections to the radioactivity left in the tank, as long as Class C performance objectives are met.\nIn effect, Section 3116(a) authorizes DOE to grout the residual waste in tanks in Idaho and South Carolina, if it consults with the NRC in making the determination that the waste is not high-level and if it meets the performance objectives for disposing of Class C waste. Section 3116(b) requires the NRC to monitor DOE's implementation of this authority, in coordination with Idaho and South Carolina. If the NRC determines that DOE is not in compliance, it is directed to inform DOE, the state, and the congressional committees with relevant jurisdiction. Section 3116(c) clarified that the waste classification authority in subsection (a) would not apply to any material transported outside of covered states, which are defined as Idaho and South Carolina in Section 3116(d). In effect, the law does not allow DOE to reclassify waste shipped out of South Carolina or Idaho as \"incidental to reprocessing\" and to dispose of it as low-level waste in other states.\nSection 3116(e) addressed the effect of the entire section on other laws and regulations and their application within Idaho and South Carolina. This provision stated that the authority in Section 3116(a) shall not \"impair, alter, or modify the full implementation of any Federal Facility Agreement and Consent Order or other applicable consent decree\" for a DOE site. These documents specify federal and state requirements applicable to waste disposal and cleanup, and establish legally binding time frames for disposal and cleanup actions. Thus, it appears that Section 3116 leaves the existing agreements for Savannah River and the INL intact, and would not permit DOE to leave more waste in the tanks than previously agreed to. Other provisions in Section 3116(e) clarified that the authority in subsection (a) is binding only in Idaho and South Carolina and that it does not override certain other statutes relevant to waste disposal.\nSection 3116(f) clarified the availability of judicial review under the Administrative Procedure Act (APA), for \"any determination made by the Secretary or any other agency action taken by the Secretary pursuant to this section,\" and for any failure of the NRC to carry out its monitoring and reporting responsibilities. Although Section 3116 does not require public notice of actions taken pursuant to it, DOE may be required to provide notice under other federal laws, such as the National Environmental Policy Act and the APA. The disposal of the tank waste is also subject to a state-approved closure plan, the preparation of which may provide opportunity for public notice under state law.\n\n\tWaste Determinations\n\nIn implementing the authority in Section 3116, DOE must first determine what portion of the tank waste is classified as other than high-level and is therefore not subject to disposal in a geologic repository. In November 2006, DOE determined in consultation with the NRC how much waste would be left in the tanks at the INL, but DOE has not made such a determination at Savannah River, where the removal of the tank waste is not as far along. However, in January 2006, DOE did determine the portion of the retrievable waste at Savannah River that would be classified as other than high-level. This waste would be solidified and disposed of in vaults on site rather than in a geologic repository. Although the NRC concurred with DOE in issuing these waste determinations, the two agencies have disagreed about their respective roles in making future determinations of the tank waste that has yet to be classified for disposal.\n\n\tNational Academy of Sciences Study\n\nTo inform decisions to dispose of the tank waste, Section 3146 of P.L. 108-375 authorized DOE to arrange for the National Academy of Sciences (NAS) to study disposal alternatives at Savannah River, the INL, and Hanford. The NAS released its final report in April 2006. The NAS concluded that DOE's \"overall approach\" to remove most of the waste from the tanks and to grout the residual waste in place is \"workable.\" However, the NAS noted that \"clear, definitive\" answers to certain questions were not possible because of insufficient information and technical, economic, and regulatory uncertainties, such as the lack of explicit authority for grouting tank waste in Washington State. The NAS acknowledged that using a cement grout is likely the most effective method currently available to immobilize the waste left in the tanks after all retrievable waste is removed, but noted that the long-term performance of the grout to safely contain the waste left in the tanks is uncertain and necessitates further research. However, the ability to reliably predict performance until all radioactivity decays to harmless levels appears doubtful, likely leaving some uncertainty for a substantial period of time, despite efforts to assess performance over the long-term.\nThe NAS also noted that many of the facilities to process the retrieved waste are not constructed or have ongoing problems, and that the regulatory deadlines for tank closure are years away, from 2016 to 2032. The NAS concluded that enough time likely remains to explore ways to remove more of the waste from the tanks before closing them. The NAS recommended that DOE delay the grouting of tanks with greater amounts of residual waste to allow for the development of technologies to retrieve a larger portion of the waste. Accordingly, the NAS recommended $50 million annually over 10 years for a research program to develop more effective methods to remove the waste from the tanks and to ensure the immobilization of residues left in them upon closure. The John Warner National Defense Authorization Act for FY2007 ( P.L. 109-364 , H.R. 5122 ) authorized $10 million for DOE to establish such a program, subject to appropriations.\n\n\tPotential Implications for Environmental Cleanup\n\nDOE estimates that the cleanup of the Savannah River site will be complete in 2025 at a cost of $32.1 billion, the INL in 2035 at a cost of $15.3 billion, and Hanford also in 2035 at a cost of $60.0 billion. The disposal of the tank waste at these sites is among the greater challenges to completing cleanup, along with remediation of existing soil and groundwater contamination. The authority in Section 3116 of P.L. 108-375 has implications in terms of cost and pace of cleanup at both Savannah River and the INL. Based on a 2002 assessment, DOE estimated that grouting residual tank waste at Savannah River would cost between $3.8 million and $4.6 million per tank, compared with a cost of greater than $100 million per tank to remove and dispose of all of the waste and to clean and remove the tank. The per tank closure costs at the INL likely would be lower because the tanks there contain less waste than those at Savannah River. DOE continues to assess alternatives and costs for the disposal of the tank waste at Hanford under other authorities, but a final decision has not been made.\nGrouting the tank waste also has implications in terms of environmental risk. If the grout is effective in solidifying the residual waste and containing it safely, this disposal method could provide a less costly and faster means of addressing risks. On the other hand, the possibility of future leaks and resulting environmental contamination remains if the grout does not mix thoroughly with the residual waste to solidify it completely, as potentially affected states and environmental organizations have noted. Whether contamination resulting from tank leaks could migrate and present a potential risk of human exposure would depend on many factors, including the hydrological conditions of the site and the effectiveness of any engineered or natural geologic barriers to migration. If a grouted tank leaked and contamination resulted, the federal government would remain liable for cleanup according to applicable federal and state requirements. Depending on the extent of contamination, potential risk of human exposure, and remedial actions selected to address such risk, the time and costs to clean up contamination from tank leaks could offset the initial savings from grouting the residual waste.","output":"How to safely dispose of wastes from producing nuclear weapons has been an ongoing issue. The most radioactive portion of these wastes is stored in underground tanks at Department of Energy (DOE) sites in Idaho, South Carolina, and Washington State. There have been concerns about soil and groundwater contamination from some of the tanks that have leaked. DOE proposed to remove the \"pumpable\" liquid waste, classify the sludge-like remainder as \"waste incidental to reprocessing,\" and seal it in the tanks with a cement grout. DOE has argued that closing the tanks in this manner would be a cost-effective and timely way to address environmental risks. Questions were raised as to how much waste would be left in the tanks and whether the grout would contain the waste and prevent leaks. After considerable debate, the 108th Congress included provisions in the Ronald W. Reagan National Defense Authorization Act for FY2005 (P.L. 108-375) authorizing DOE to grout some of the waste in the tanks in Idaho and South Carolina. Congress did not provide such authority in Washington State. This report provides background information on the disposal of radioactive tank waste, analyzes the waste disposal authority in P.L. 108-375, discusses the implementation of this authority, and examines relevant issues."}
{"id":"gao_RCED-99-135","pid":"gao_RCED-99-135_0","input":"\tBackground\n\nTo carry out its mission, DOE relies on contractors for the management, operation, maintenance, and support of its facilities. Since the end of the Cold War, DOE\u2019s employees\u2019 skill requirements have shifted because the mission at its defense nuclear facilities has expanded from focusing primarily on weapons production to also focusing on cleanup and environmental restoration. In addition, DOE facilities have had to reduce their workforce in response to overall cuts in the federal budget. At the end of fiscal year 1998, total employment by contractors at both DOE defense and nondefense facilities was estimated at about 103,000, down from a high of nearly 149,000 since the beginning of fiscal year 1993. DOE plans to reduce its contractor workforce by another 4,000 employees by the end of fiscal year 2000, leaving it with 99,000 contractor employees.\nSection 3161 of the National Defense Authorization Act for Fiscal Year 1993 requires DOE to develop a plan for restructuring the workforce for a defense nuclear facility when there is a determination that a change in the workforce is necessary. These plans are to be developed in consultation with the appropriate national and local stakeholders, including labor, government, education, and community groups. The act stipulates, among other things, that changes in the workforce should be accomplished to minimize social and economic impacts and, when possible, should be accomplished through the use of retraining, early retirement, attrition, and other options to minimize layoffs; employees should, to the extent practicable, be retrained for work in environmental restoration and waste management activities, and if they are terminated, should be given preference in rehiring; and\nDOE should provide relocation assistance to transferred employees and should assist terminated employees in obtaining appropriate retraining, education, and reemployment.\nWhile the act refers only to defense nuclear facilities, the Secretary of Energy determined that, in the interest of fairness, the workforce restructuring planning process would be applied at both defense nuclear facilities and nondefense facilities. DOE\u2019s Office of Worker and Community Transition is responsible for coordinating restructuring efforts, reviewing and approving workforce restructuring plans, and reporting on the status of the plans.\n\n\tDOE Has Spent Over $1 Billion on Its Downsizing Efforts\n\nFor fiscal years 1994 through 1998, DOE obligated and spent about $1.033 billion to provide benefits to contractor workers and communities affected by its downsizing efforts. At the end of fiscal year 1998, DOE had not used all workforce restructuring funds, resulting in a carryover balance of $72 million. These funds included $10 million that was unobligated and $62 million that was obligated but not yet spent (called uncosted balances). The Office of Worker and Community Transition and other DOE programs each provided about half the total funding. Combined, these programs spent about $853 million on worker assistance, and the remaining $179 million went to community assistance.\nOf the $1.033 billion spent on worker and community assistance, about $460 million was provided by the Office of Worker and Community Transition. Roughly two-thirds ($311 million) of the $460 million funded assistance to separated DOE contractor employees. More than $227 million, or 73 percent, of the $311 million was spent on one-time separation payments and early retirement incentives.\nThe remaining third ($148 million) assisted local community transition activities, such as new business development. Over the years, the amount of funds available for community assistance has grown. In fiscal year 1994, this assistance accounted for only 6 percent of the funds spent by the Office of Worker and Community Transition. However, by fiscal year 1998, this assistance had grown to 68 percent of funds the Office spent. Meanwhile, overall appropriations for this Office have been declining, from a high of $200 million in fiscal year 1994 to $61 million in fiscal year 1998.\nAt the same time, most of the uncosted balances are attributed to community assistance. Of the $62 million in uncosted balances at the end of fiscal year 1998, almost $51 million was for community assistance. Over half of these balances are for communities surrounding two facilities\u2014$14 million at Oak Ridge and $13 million at Savannah River.\nThe remaining $573 million came from other DOE programs, such as defense and environmental management. According to the Office of Worker and Community Transition, about $542 million of this amount was spent on worker benefits, and the remaining $31 million was spent on community assistance.\n\n\tBenefits Went to Most Separated Workers and Contained Similar Types of Benefits Provided in Public and Private Plans\n\nDOE provided separation benefits to about 88 percent of the 5,469 defense facility contractor employees separated during fiscal years 1997 and 1998. While DOE generally offered these employees a wide range of benefits, the value of the benefits varied because of differences in benefit packages among the sites and in the employees\u2019 length of service and base pay. DOE offered its separated contractor workers severance packages that were relatively consistent with the types of public and private sector benefits we analyzed. Although, we did not compare the value of the benefits offered to DOE contractor employees with all of the benefits offered by the other public and private employers we reviewed, the benefit forumulas in some DOE workforce restructuring plans potentially allow more generous benefits than those offered for federal civilian employees.\n\n\t\tBenefits Were Provided to Most Separated Employees\n\nWhile the 1993 act focused benefits on defense facilities, DOE provided separation benefits to most of its separated contractor employees. Of the 5,469 contractor workers separated during fiscal years 1997 and 1998, 4,788 received separation benefits. According to DOE, the remaining 681 workers had relatively low seniority and were not eligible for benefits. DOE decided that in the interest of fairness, similar benefits should also apply to contractor workers separated at nondefense facilities. According to our analysis of 10 defense facility workforce restructuring plans for fiscal years 1997 and 1998, almost all plans offered the same types of benefits. While DOE guidance has been updated periodically, the criteria for separation benefits were derived primarily from the fiscal year 1993 legislation.\nDOE\u2019s criteria require that workforce restructuring plans for each facility minimize impacts for all workers and recognize a \u201cspecial responsibility\u201d to Cold War workers. One of these criteria is to minimize layoffs through early retirement incentives, voluntary separations, and retraining. However, if layoffs are to occur, the restructuring plans are to provide for adequate notification and funding for education, relocation, and outplacement assistance. DOE criteria were not prescriptive and gave field offices substantial autonomy to determine benefit levels. These plans had to be approved by the Secretary of Energy.\nFor fiscal years 1997 and 1998, we found that the 10 plans we reviewed offered the same types of benefits. Separation benefits were provided under three types of programs: enhanced retirement, voluntary separation, and involuntary separation. Enhanced retirement provided for full retirement benefits with fewer years of eligibility or service. One plan had provisions that enhanced workers\u2019 eligibility by adding 3 years to both their age and years of service. Nine plans had some type of separation payment based on length of service and base pay for those employees voluntarily or involuntarily separated. All plans also included extended medical benefits, which require the contractor to pay its full share of a separated employee\u2019s medical insurance payments for the first year after separation and half the contribution during the second year. In all plans, educational assistance was available, usually for up to 4 years after separation. All of the plans included outplacement assistance, some of which consisted of resume-writing workshops, job bulletin boards, and employment search strategies\u2014many provided by an outside contractor. A hiring preference for involuntarily separated workers at other DOE contractors\u2019 work sites was provided for in 8 of the 10 restructuring plans. The other two plans did not offer rehiring preference because they did not call for involuntarily separating any contractor workers. Eight plans included relocation assistance.\n\n\t\tThe Value of Benefits Varied Widely\n\nWhile DOE generally offered its separated contractor employees the same types of benefits, the value of these benefits varied because of the differences in the packages among sites and employees\u2019 length of service and base pay (which reflects employee job and skill level). For example, in fiscal year 1997, the restructuring plan for the Portsmouth Gaseous Diffusion Plant in Ohio (which covered facilities in both Portsmouth and Paducah, Kentucky) based voluntary separation pay on years of service, with a limit of $25,000 per worker. Lawrence Livermore National Laboratory in California based its voluntary separation pay on years of service, with employees receiving 2 weeks\u2019 pay for each year of service, subject to a limit of 52 weeks. With the 52-week limit on separation payments, Lawrence Livermore\u2019s average voluntary separation payment of $43,939 exceeded Portsmouth\u2019s cap of $25,000.\nTable 1 identifies the lowest and highest average benefit amount offered separated contractor workers at defense nuclear sites for fiscal year 1998. For example, the lowest average voluntary separation benefit was $5,523 (at the Fernald facility in Ohio) and the highest was $64,907 (at Sandia National Laboratory in New Mexico). The table also identifies the number of separated workers receiving benefits among DOE\u2019s defense facilities and the average cost of these benefits. For example, 748 employees at eight sites received voluntary separation payments that averaged $23,659 per worker.\n\n\t\tDOE Generally Offered Types of Benefits That Were Similar to Those of Other Plans\n\nDOE generally offered its separated contractor workers benefits that were similar to those offered in public and private sector severance packages\u2014such as education assistance and preference in rehiring. However, some of DOE\u2019s voluntary separation benefits were greater than those offered federal employees. For example, the formula for extended medical coverage and the provisions for relocation assistance offered by DOE were more generous than the benefits offered to separated federal civilian employees.\nTable 2 shows the types of benefits generally offered and compares these generic benefits with the benefits offered in DOE\u2019s workforce restructuring plans, the plans offered by DOE contractors in the absence of DOE\u2019s plans, and the plans offered by the military, the federal government to its civilian employees, DOD contractors, and 25 other public and private sector organizations, including DOE-provided information on a survey of private company benefits.\nWe did not compare the value of the benefits offered to DOE contractor employees with all of the other benefit packages offered by the public and private employers we considered. However, table 2 shows that formulas in DOE\u2019s workforce restructuring plans allow for potentially more generous benefits than offered in some of the other benefit plans highlighted in the table. For example, we noted that some of DOE\u2019s workforce restructuring benefits had formulas that could provide more benefits than the amount separated federal civilian employees could expect to receive. Some of DOE\u2019s benefit formulas would allow for larger severance payments than do federal civilian packages. Voluntarily separated federal civilian employees received a one-time severance payment of 1 week of annual salary per year for up to 10 years\u2019 service and 2 weeks of salary per year for more than 10 years\u2019 service; with an adjustment for age. This benefit was paid out in a lump sum and was capped at $25,000. In contrast, while half of the DOE defense workforce restructuring plans we reviewed for fiscal years 1997 and 1998 had caps based on weeks of pay, these caps could exceed $25,000, depending on a contractor worker\u2019s base pay and years of service. As a result, seven workers who received voluntary separation payments at one DOE defense facility averaged $64,907 each in fiscal year 1998. Furthermore, 65 percent of the 748 employees voluntarily separated during fiscal year 1998 received an average separation payment of over $25,000.\nAmong the DOE plans we reviewed, one plan offered enhanced retirement benefits that added years to a contractor worker\u2019s age and eligibility to allow for early retirement without penalty and with a cash payment. While federal workers could retire early and receive a separation payment, they were not given added years of age or eligibility and their annuity amount was reduced.\nIn addition, the formula for extended medical coverage and the provisions for relocation assistance offered by DOE were more generous than the benefits offered to separated federal civilian employees. For extended medical coverage for eligible contractor workers, DOE pays the full employer cost for the first year of separation and about half of that cost in the second year. Separated federal workers who are eligible and wish to retain extended medical coverage must pay the full cost, plus an administrative fee, for the coverage upon separation.\n\n\tDOE\u2019s Criteria Do Not Ensure That Most Assistance Goes to the Communites Most Affected by Downsizing or Those With the Highest Unemployment\n\nThe use of DOE\u2019s criteria does not result in the most assistance going to the communities most affected by DOE\u2019s downsizing or those with the highest rate of unemployment. Several communities with low unemployment rates and comparatively fewer DOE job losses received more funds than did communities that had higher rates of unemployment and lost more DOE jobs. Unlike DOE\u2019s criteria, the criteria used by the Department of Commerce\u2019s Economic Development Administration (EDA) include specific provisions for determining the distribution of economic assistance on the basis of local unemployment and job loss. In applying EDA\u2019s criteria to the eight communities that received DOE assistance, we found that only four would have received funds at the time of the decision. Furthermore, because most DOE assistance went to communities with relatively strong economies, the extent to which DOE\u2019s assistance aided in the creation or retention of jobs is not clear.\n\n\t\tNeediest Communities Have Not Received the Most Benefits\n\nDOE\u2019s criteria does not result in the most assistance going to the communities most affected by the Department\u2019s downsizing. DOE\u2019s community assistance guidance has evolved since the program\u2019s inception in 1993. DOE\u2019s February 1997 Policy and Planning Guidance for Community Transition Activities refined the Department\u2019s criteria for evaluating all project and program funding requests in community transition plans. DOE requires communities requesting funds to submit plans describing the impact of the Department\u2019s downsizing. These plans \u201cmay be based upon community needs and may incorporate an analysis of the socio-economic strengths, weaknesses, opportunities, and threats.\u201d In developing their plans, communities are asked to identify the primary and secondary economic impacts likely to result from DOE\u2019s downsizing. Communities are instructed to use local information sources to establish a baseline of primary impacts and project factors, such as net job loss, changes in unemployment, loss of wages and disposable income, and business closings. In addition, communities should identify secondary impacts, such as decreases in tax revenues and property values.\nAlthough DOE requires communities to develop plans that include economic impact, DOE focuses its review on the merits of a plan\u2019s individual projects, not on a community\u2019s relative economic need. DOE uses a number of written criteria to evaluate individual projects. These include the project\u2019s ability to create at least one job for each $10,000 to $25,000 received and to provide jobs for separated DOE workers, induce investment or growth in the production of goods and services, and reduce the community\u2019s dependency on DOE. In addition to DOE\u2019s written guidance, the Director of the Office of Worker and Community Transition told us that DOE formally uses four criteria prior to submitting a recommendation to the Secretary: (1) economic distress measured by unemployment and the loss of income; (2) job loss relative to the size of the community affected as a measure of economic dependence on DOE; (3) the diversity of employment within a community and the impact of job loss on the economic base; and (4) the overall size of the workforce reduction. However, while the Director said that these are formal criteria, they are not published in the Department\u2019s guidance nor are the communities evaluated against these four criteria in the memorandums sent to the Secretary for funding approval.\nAfter completing its review, DOE submits a community\u2019s plan to EDA for its independent review. Under the National Defense Authorization Act of 1998, EDA is required to review and approve DOE\u2019s community plans. However, rather than using its own criteria, EDA evaluates the community plans using DOE\u2019s criteria, set out in DOE\u2019s February 1997 guidance.\nTable 3 shows the relative disparity between DOE\u2019s assistance to the affected communities and communities\u2019 unemployment rates or job losses. For example, the communities surrounding Rocky Flats had an average unemployment rate of 3.3 percent for fiscal years 1995 through 1998, lost 2,922 contractor jobs, and received about $25 million in DOE assistance. In contrast, the communities surrounding Richland had more than twice the unemployment rate and nearly twice the job loss of Rocky Flats during this same time but received only about $18.5 million in community assistance.\n\n\t\tSome Community Assistance Would Have Been Ineligible Under Other Criteria\n\nApplying EDA\u2019s job loss and unemployment criteria to DOE\u2019s community assistance funding decisions for fiscal years 1995 through 1998, we found that some communities that received assistance under DOE\u2019s criteria would not be eligible under EDA\u2019s criteria. EDA\u2014which helps communities recover from the effects of job losses\u2014has threshold criteria for its economic assistance that are based on job loss and unemployment. Under EDA\u2019s regulations in effect during this period, communities in a standard metropolitan statistical area suffering from sudden and severe economic distress were eligible for EDA\u2019s assistance if, among other things, they met one of the following tests: (1) the area\u2019s unemployment rate was equal to or less than the national average and 1 percent of the employed population, or 8,000 jobs, were lost or (2) the area\u2019s unemployment rate was greater than the national average and .5 percent of the employed population, or 4,000 jobs, were lost. While EDA\u2019s internal guidance further stated that employees subject to DOE downsizing were eligible for assistance, this provision was not a legal requirement until February 1999. Using EDA\u2019s criteria to assess DOE\u2019s funding decisions for the eight communities that received assistance for the fiscal year 1995 through 1998 period and where comparable data were available, we found that nine of the 21 decisions (some communities had more than one funding decision), representing four of the eight communities, did not meet these criteria. Appendix IV shows this analysis.\nThese nine decisions provided about $51 million to five communities surrounding the Mound, Pinellas, Nevada, Oak Ridge, and Rocky Flats facilities. The remaining 12 decisions provided about $57 million to the four other communities surrounding the Los Alamos, Nevada, Richland, and Savannah River facilities. In the Secretarial decision memorandums we reviewed, DOE justified awarding some of its funds on the basis of economic conditions at the county level and impacts on the economic diversity of the communities surrounding a facility, rather than on the standard metropolitan statistical areas. However, these criteria are not in DOE\u2019s written guidance.\n\n\t\tThe Effect of DOE\u2019s Assistance Is Uncertain Because of a Strong Economy\n\nSince 1993, jobs in the national economy have grown rapidly, bringing unemployment rates to their lowest levels in decades. Because of the strong national and local economies, DOE\u2019s contribution to job growth was uncertain in communities that received its assistance. For example, table 3 shows that six of the eight communities (excluding communities surrounding the Fernald and Idaho facilities) that received community assistance had a local unemployment rate lower than the national average of 5.19 percent for the 1995 through 1998 period. As discussed in appendix III, defining DOE\u2019s contribution to community job creation is difficult because job creation measurements have not differentiated between jobs that DOE created, those created by other assistance, or those created by the economy as a whole.\nWhile determining DOE\u2019s contribution to overall job growth is difficult, comparing the number of jobs created in the local communities with the ones DOE reports it has created or retained provides a rough measure of DOE\u2019s impact. In doing this comparison, we found that DOE\u2019s contribution had a relatively small impact on the growth of jobs in three of the six communities surrounding nuclear defense facilities for which we had comparable data. For the six sites for which comparable data on local job creation were available, DOE was responsible for about 1.8 percent of the total jobs created. For example, although the overall economy in the Denver area surrounding the Rocky Flats facility created 170,367 jobs, DOE\u2019s contribution to that growth was 1,191 jobs, or .7 percent. However, in Richland, DOE\u2019s contribution appears to be more significant. At this location, DOE contributed to about 36.1 percent of the job growth. Table 4 compares the increase in the number of jobs created in local economies with the number of jobs that were created or retained by DOE\u2019s community assistance program.\nWhile DOE estimated that it helped to create or retain 8,392 jobs in the communities surrounding the sites listed in table 4, it is difficult to directly link DOE\u2019s community assistance to job creation and retention. To illustrate this point, the Director of DOE\u2019s Office of Worker and Community Transition mentioned the difficulty in showing a direct relationship to job creation at the Bridgestone\/Firestone, Inc. plant near Savannah River. Bridgestone\/Firestone, Inc. is investing $435 million in a new tire facility that will eventually employ 800 workers. The company received assistance from DOE as well as from other government sources; however, without a strong national economy, it might not have expanded its tire production.\n\n\tConclusions\n\nDOE\u2019s criteria for assessing community assistance requests focus on the merits of individual projects and not on a community\u2019s relative economic need. This focus has resulted in some communities with relatively lower job losses or unemployment rates receiving more financial assistance than those with higher job losses or unemployment rates. The most effective and efficient use of federal resources would be to provide relatively more funding to those communities that have a greater need. Need-based criteria exist for DOE to use in developing an allocation formula that targets needs to these communities, such as that used by the Department of Commerce\u2019s Economic Development Administration. Furthermore, if DOE believes that other factors, such as diversity of employment within a community, more accurately reflect the economic impact of DOE restructuring, then it needs to identify these factors in its criteria. In addition, DOE should demonstrate that these other factors document the best allocation of community assistance resources to those with the greatest economic need.\n\n\tRecommendation\n\nIn order to target financial assistance to those communities that need it the most, we recommend that the Secretary of Energy revise the Department\u2019s criteria for administering community assistance so that aid is more focused on economic need. One way of doing this would be to develop community financial assistance criteria similar to those used by the Economic Development Administration in its existing guidance. These could include such factors as a community\u2019s unemployment rate and the impact of federal job loss on the local economy.\n\n\tAgency Comments\n\nWe sent a draft of this report to the Department of Energy for its review and comment. The Department stated that the draft report inaccurately portrayed its worker and community transition program because it contained numerous factual errors and inappropriate comparisons.\nFirst, the Department questioned our recommendation because it believes that the criteria it uses for providing community transition assistance are consistent with the statutory direction provided by the Congress and the regulations developed by the Department of Commerce. Furthermore, the Department said that it does consider economic need in awarding community assistance grants. We are not disputing the criteria\u2019s conformance with statute or regulation. However, we believe that these criteria could be improved. While approval memorandums for individual projects discuss some of the affected communities\u2019 economic conditions, DOE\u2019s written criteria do not. For example, DOE\u2019s March 18, 1998, memorandum allocating $4.5 million for fiscal year 1998 for assistance to communities surrounding the Department\u2019s Portsmouth facility, found that a four-county area surrounding the facility experienced unemployment rates double the state\u2019s average and that one in four people in this area lived in poverty. If DOE believes such county-level economic factors are important, then it needs to make these factors part of its written criteria for allocating community assistance. DOE should also demonstrate that these factors document the best allocation of community assistance resources to those with the greatest economic need. Therefore, we believe that DOE\u2019s criteria could be improved by explicitly describing the economic factors it will consider in determining relative need when allocating funds among affected communities.\nSecond, the Department said that the benefits it provides to separating contractor employees were consistent with the practices of other private and public organizations and are comparable in value. On the basis of additional information provided by DOE, we revised our report to show that the types of benefits offered were reasonably consistent with the practices of other private and public organizations. We did not compare the value of the benefits offered to DOE contractor employees with all the other benefit packages offered by the public and private employers we reviewed. However, some of the formulas in DOE\u2019s workforce restructuring plans, such as those determining voluntary separation benefits and extended medical coverage, potentially allow for more generous benefits than offered in some of the other benefit plans we describe in the table.\nDOE\u2019s comments and our evaluation of them are provided in appendix V.\n\n\tScope and Methodology\n\nTo determine the amount of funds DOE has obligated and expended in support of its worker and community assistance program for fiscal years 1994 through 1998, we reviewed budget records and talked to officials in DOE\u2019s Office of Worker and Community Transition and the Office of the Chief Financial Officer.\nTo determine who received benefits during fiscal year 1997 and 1998 and to compare the types of benefits with the benefit packages of other federal and private organizations, we reviewed program criteria and reports from the Office of Worker and Community Transition, federal laws, and Office of Personnel Management publications governing federal civilian and military benefits. In addition, we reviewed DOE\u2019s workforce restructuring plans for nuclear defense facilities for fiscal years 1997 and 1998, GAO and DOE Inspector General reports, the National Defense Authorization Act of 1993, and other relevant legislation. We also discussed with DOE officials the benefits provided under their restructuring efforts. However, we did not attempt to compare the value of DOE\u2019s benefits with the value of the benefits provided by other federal and private organizations.\nTo examine the results of DOE\u2019s criteria for determining which communities should receive assistance, we interviewed officials in DOE and the Department of Commerce\u2019s Economic Development Administration. We also reviewed DOE\u2019s policy, operating guidelines, and documentation of the approval process; the interagency agreement between DOE and Commerce; and individual communities\u2019 transition plans. We obtained economic information from an online database containing Department of Labor and Department of Commerce statistics. We used these statistics in conjunction with the statistics provided in DOE\u2019s Office of Worker and Community Transition annual reports for fiscal years 1993 through 1998.\nTo describe the contractor workforce in terms of length of service for Cold War workers and non-Cold War workers, we used data that the Office of Worker and Community Transition requested from its contractors\u2019 databases. This information identified those individuals who were separated during fiscal years 1997 and 1998 and those currently employed at defense facilities.\nTo analyze the extent to which the methodology used in a 1998 consultant study can be relied upon to evaluate the number of jobs DOE created or retained through its worker and community assistance program, we reviewed the study and the consultant\u2019s supporting workpapers. We also interviewed the consultant\u2019s investigators.\nWe did not independently verify the data provided by DOE, its contractors, or DOE\u2019s consultant. The consultant verified a sample of DOE\u2019s job creation data. Data on community assistance and job creation and retention are contained in DOE\u2019s annual reports to the Congress on its workforce restructuring activities. We used Department of Labor data, which is commonly used, to estimate job growth in surrounding communities. We conducted this work in accordance with generally accepted government accounting standards from January 1999 through April 1999.\nAs arranged with your offices, unless you publicly announce its contents earlier, we plan no further distribution of this report for 30 days after the date of this letter. At that time, we will send copies of this report to Senator Ted Stevens, Chairman, and Senator Daniel Inouye, Ranking Minority Member, Subcommittee on Defense, Senate Committee on Appropriations; and Representative Jerry Lewis, Chairman, and Representative John Murtha, Ranking Minority Member, Subcommittee on Defense, House Committee on Appropriations. We will also make copies available to others on request.\nIf you or your staff have any questions about this report, please call me at (202) 512-3841. Major contributors to this report were Jeffrey Heil, Tim Minelli, Robert Antonio, Greg Hanna, Kendall Pelling, and Sandy Joseph.\n\nLength of Service of Workers Separated at DOE Defense Facilities, Fiscal Years 1997 and 1998\n\nAs table I.1 shows, the Department of Energy (DOE) separated 5,469 defense nuclear workers during fiscal years 1997 and 1998, with Cold War workers\u2014those workers hired on or before September 27, 1991\u2014accounting for 4,094 of the separations and non-Cold War workers\u2014those hired after September 27, 1991\u2014accounting for 1,375 separations. For all separated workers, the overall average length of service was 8.6 years. Cold War workers averaged 14.6 years of service overall, ranging from an average of 8 to 26.5 years among the 13 sites. Non-Cold War workers averaged 2 years of service overall, ranging from an average of 1.1 to 4.9 years among the sites. The percentage of Cold War workers separated at individual sites ranged from 100 percent to 33 percent.\nDOE data show that contractor employees who were voluntarily separated had more years of service than those who were separated involuntarily in fiscal years 1997 and 1998. The Cold War workers who voluntarily separated had an average of 18 years of employment. The Cold War workers who were involuntarily separated had 10.5 years of employment.\nOverall, the non-Cold War workers separated averaged 2 years of employment. Non-Cold War workers who voluntarily separated averaged 3.4 years of employment, while those who were involuntarily separated averaged only 1.7 years of employment. Figure I.1 shows the lengths of service for these groups of workers.\nFigure I.2 shows that the number of involuntary separations has been increasing as a percentage of all separations. Between fiscal year 1995, when most of the restructuring actions took place, and fiscal year 1998, the percentage of involuntary separations increased from 27 percent to 56 percent. DOE reported that because the number of older, eligible individuals in the workforce has decreased, there is a trend toward a greater use of involuntary separations.\n\nLength of Service of Remaining Work Force at DOE Defense Facilities, Fiscal Year 1998\n\nIn table II.1, DOE data show that the remaining 76,010 defense nuclear workers reflect roughly the same percentage of Cold War and non-Cold War workers as the recently separated workforce. The overall average length of service is 14 years, 16.7 years for Cold War workers and 4.4 years for non-Cold War workers. Individual site averages ranged from 12.6 to 20.2 years for Cold War workers and from 2.1 to 5 years for non-Cold War workers. At individual sites, the percentage of Cold War workers ranged from 33 percent to 91.3 percent.\n\nConsultant\u2019s Study Estimated the Number of Jobs DOE Helped to Create and Retain\n\nUnder the National Defense Authorization Act for Fiscal Year 1998, the Secretary of Energy was required to have an independent auditing firm study the effects of DOE\u2019s workforce restructuring plans. Booz-Allen & Hamilton, Inc., which was awarded the contract, issued its report on September 30, 1998. While the study\u2019s methodology reasonably estimates the number of jobs that DOE \u201cwas helping\u201d to create or retain, it is difficult to know the extent to which DOE should receive full credit for these jobs because the consultant was not asked to (1) measure the impact of other assistance in creating or retaining jobs or (2) analyze the extent to which a strong economy helped to produce these jobs. The consultant\u2019s report, Study of the Effects of the Department of Energy\u2019s Work Force Restructuring and Community Transition Plans and Programs, was based upon the consultant\u2019s visits to affected DOE sites, related communities, and their new businesses. The consultant verified and\/or estimated that about 22,000 jobs were created or retained in those communities.\nThe act required that the study include an analysis of the number of jobs created by any employee retraining, education, and reemployment assistance and any community impact assistance provided in each workforce restructuring plan. However, the consultant used the category job retention because DOE collected information for jobs retained and one of the objectives of the act that originally authorized the worker transition program was, to the extent practicable, to retain workers in other jobs at the site to avoid layoffs. DOE defined created jobs as those that did not previously exist and retained jobs as those that held the existing work force in place and provided substitute employment for at-risk or displaced workers within a defined geographic area. The consultant\u2019s report concluded that DOE had a positive impact on mitigating the social and economic impacts of the DOE transition by helping to create or retain more than 22,000 jobs.\n\n\tConsultant\u2019s Methodology Reasonably Estimates the Number of Jobs Created or Retained\n\n\tScope of the Consultant\u2019s Job Creation and Retention Analysis Limited\n\nWhile this methodology provides reasonable results for the jobs created or retained, the consultant\u2019s scope of work did not include an analysis of (1) the impact of other assistance in creating or retaining jobs and (2) the extent to which the strong economy helped to produce these jobs.\nFirst, the methodology did not include the impact of other assistance. Both the consultant and DOE acknowledged the difficulty in estimating job creation and retention for specific programs. Therefore, the consultant and DOE both used the qualifier that the Department\u2019s program \u201cwas helping\u201d to create or retain these jobs. The Director of DOE\u2019s Office of Worker and Community Transition told us that it is difficult to directly link program stimulus to job creation and retention. To illustrate this point, Bridgestone\/Firestone, Inc. is investing $435 million in a new tire facility that will eventually employ 800 workers near Savannah River. South Carolina, Aiken County, the Department of Commerce, and DOE are also contributing funding for infrastructure development in support of this facility. In this case, DOE, along with three other government entities, each helped to create these jobs.\nSecond, another difficulty is separating DOE\u2019s contribution to job creation from the effects of a strong economy. Since 1993, jobs in the national economy grew rapidly, bringing unemployment rates to their lowest levels in decades. While Bridgestone\/Firestone, Inc. received government assistance, the company may not have been looking to expand its tire production capacity without a strong national economy in which to sell its tires. Furthermore, the local economy can be a significant factor in creating jobs. As discussed earlier in the report, table 4 shows the relatively small impact DOE had on job creation in some communities.\n\nApplication of Economic Development Adminstration Criteria to DOE Funding Decisions, Fiscal Years 1995 Through 1998\n\nMet overall EDA eligibility?\n\nComments From the Department of Energy\n\n\tGAO\u2019s Comments\n\nOur comments on DOE\u2019s two main assertions are summarized in the body of the report. In its comments, DOE asserted the following:\nThe report draft did not accurately portray the Department\u2019s Worker and Community Transition Program and contained numerous factual errors that, along with inappropriate comparisons, raises basic questions about the validity of the recommendation and major findings.\nThe Department\u2019s criteria are consistent with statutory direction and Department of Commerce regulations, and the benefits provided to separated employees were consistent with the practices of other private and public organizations.\nIn this appendix, we address each of the comments made in the attachment to DOE\u2019s letter. In addition, DOE provided us with additional detailed comments that elaborated on the points made in the attachment to its formal response. We used this supplemental material where appropriate to revise our report. 1. DOE challenges our recommendation for four reasons. First, the Department commented that its criteria for awarding community financial assistance are consistent with the congressionally mandated criteria of the Economic Development Administration Reform Act of 1998 and ensure that aid is focused on economic need. The act makes communities affected by DOE\u2019s defense-related reductions eligible for the Economic Development Administration\u2019s (EDA) assistance, regardless of the local unemployment rate, or the per capita income in the affected communities. The Department commented that its criteria are consistent with the act, but it appears that DOE\u2019s claim to consistency is based on a provision of the act that allows communities affected by DOE\u2019s defense-related funding reductions to qualify for assistance. However, the act was not effective until February 11, 1999. Furthermore, DOE\u2019s guidance does not have any economic threshold criteria for determining affected communities\u2019 need. Most other communities that suffer economic hardships not caused by defense-related funding reductions are required to meet economic threshold criteria, such as an unemployment rate above the national average.\nSecond, DOE commented that EDA must approve each community proposal before funding is provided and that economic need criteria are a key factor in its approval process. While EDA assesses the economic condition of the DOE community applying for assistance, the degree of, or relative, economic need is not a criteria in determining funding levels. We noted in our draft report that DOE submits the community plans to EDA for independent review and approval. However, EDA reviews the community plans using DOE\u2019s criteria for reviewing projects and programs, set out in DOE\u2019s Policy and Planning Guidance for Community Transition Activities. These criteria address projected job creation from the project, the amount of local participation in the project, and the ability of the project to become self-sufficient, not whether the communities requesting assistance meet threshold economic need.\nThird, DOE notes that its Policy and Planning Guidance for Community Transition Activities contains explicit criteria for ensuring that economic assistance is provided to communities suffering economic hardship. Furthermore, DOE added that each Secretarial decision memorandum approving community assistance formally addresses the economic need fulfilled by the funding to be provided. As we noted in our draft report, DOE\u2019s criteria focus on the merits of the community\u2019s individual projects, such as projected job creation, and not on the community\u2019s relative economic need. Our analysis shows that communities differ in their degree of economic strength, and DOE\u2019s criteria for determining community assistance funding do not result in the most assistance going to the communities most in need. We do note that several Secretarial decision memorandums included a general discussion of economic conditions, including job losses, and loss of economic diversity. For example, the June 1997 decision for Rocky Flats stated, \u201cAlthough unemployment in Colorado is comparatively low, new jobs are being created primarily in retail and service industries, not the high-wage manufacturing and engineering sectors. Wage growth is not keeping pace.\u201d However, none of the memorandums we reviewed considered threshold criteria or relative economic need.\nFourth, DOE notes that a 1998 independent audit found, \u201cThe principal criteria for providing assistance to DOE sites and adjacent communities was degree of need, driven by how many workers were impacted by the transition.\u201d On the basis of our review of Secretarial memorandums, we concur that the primary consideration for determining assistance was that workers were separated. However, our analysis shows that there was no correlation between the actual number of workers separated and the amount of assistance provided to communities. 2. DOE reports in its table 1 that each community it provided with community assistance met at least one economic threshold criterion established \u201cby the Congress for such assistance.\u201d We disagree with DOE\u2019s response on several points. First, DOE\u2019s table 1 uses criteria that did not exist at the time the Department made its funding decisions. These congressionally-mandated criteria, which included the DOE special need criterion, were not effective until February 11, 1999. However, our analysis applies economic threshold criteria, such as those used by EDA, to show funding decisions based on relative economic need. We used the administration\u2019s economic threshold criteria that were in existence during fiscal years 1995 through 1998, when the bulk of DOE\u2019s community assistance money was allocated. When we applied these criteria, the communities surrounding the Los Alamos, Richland, Savannah River, and Nevada facilities (one the three decisions for the Nevada facility) met EDA\u2019s criteria for economic need.\nSecond, DOE\u2019s analysis misapplies EDA\u2019s economic threshold criteria in two ways. DOE\u2019s comments applied EDA\u2019s 1999 criteria to individual counties around their Los Alamos and Oak Ridge facilities. If the facility is located within a standard metropolitan statistical area, then that area should be used to determine eligibility. As noted in the report, EDA uses standard metropolitan statistical area data when determining funding eligibility for communities located in these statistical areas. By using the larger standard metropolitan statistical areas as provided for in EDA\u2019s guidance, our analysis is more likely to reflect the total impact of separating workers in the communities surrounding those facilities. If DOE believes that the county-level analysis more accurately reflects the economic impact of its restructuring than does the use of metropolitan statistical areas, then it may want to consider using counties\u2019 economic strength in its community assistance allocation criteria.\nAdditionally, DOE\u2019s comments use the unemployment rate only for the year in which the majority of the workforce restructuring occurred at each DOE facility and compares it with the average national unemployment rate for that year. This provides a comparison for only one year out of the six that community assistance programs have been in existence. As shown in appendix IV, if economic and DOE restructuring information are compared against the appropriate administration criteria for each funding decision made since the beginning of fiscal year 1995 (soon after the Office of Worker and Community Transition was created), only four sites (Richland, Los Alamos and Savannah River, and one allocation decision for the Nevada facility) would have been eligible for funds. 3. According to DOE\u2019s comments, our table showing funding allocations to communities for the period 1995 through 1998 contained a basic factual error by including funds that were spent since the beginning of the program. The data contained in table 3 of our draft report were derived from community assistance allocation figures contained in the Office of Worker and Community Transition\u2019s annual reports. Since the receipt of DOE\u2019s comments, the Office provided us with figures for the 1995-98 period. Table 3 has been revised accordingly but still shows that communities with relatively low unemployment rates generally received more funds per worker than those with higher rates of unemployment.\nAccording to DOE, using data for comparable periods (1995 through 1998) yields starkly different results for total community assistance funding and funding per job lost. Even with the revised allocation figures, we disagree with DOE for two reasons. First, to support its assertion, DOE commented that its table shows that communities generally received between $5,000 and $10,000 per employee separated. However, DOE\u2019s table shows a wide disparity in the range of community assistance per job lost\u2014ranging from $949 to $14,601. Importantly, DOE\u2019s table does not show the allocation amounts with the communities\u2019 unemployment rates. For example, the communities surrounding the Mound facility had an overall unemployment rate of 4.13 percent for the 1995-98 period and received $10,302 in community assistance per separated worker. In contrast, while the communities surrounding the Richland facility, which had an unemployment rate of 7.92 percent, received only $3,098 per separated worker. Even among communities with comparatively low unemployment rates, our revised table 3 shows that there is a wide range of community assistance allocations. For example, the communities surrounding the Oak Ridge and Rocky Flats facilities had aggregate unemployment rates of 4.17 percent and 3.33 percent, respectively, and separated roughly the same number of workers\u20142,832 and 2,922\u2014respectively. However, the communities surrounding Oak Ridge received $5,932 per separated worker versus $8,500 per separated worker for communities around the Rocky Flats facility.\nFinally, DOE states that Richland received less funding because its downsizing started later than in other communities. The fact that some facilities started their restructuring earlier than others may help explain some of the disparity in the allocation of community assistance funds. Nevertheless, because of the criteria DOE uses in providing community assistance, the disparity in the allocation of funds is not likely to be made up over time. In addition, the Secretary\u2019s memorandums approving community assistance allocations generally do not describe the communities\u2019 economic conditions nor do they discuss threshold or relative economic need in the decisions to fund community development. 4. DOE asserted that our comparison of the assistance provided to Richland and Oak Ridge was inaccurate for two reasons\u2014incorrect allocation and unemployment data. First, as discussed under comment 3, we incorporated DOE\u2019s community assistance figures. Even though Richland received more community funding than Oak Ridge, it received less per worker separated\u2014Richland received $3,098 per job lost and Oak Ridge received $5,932 per job lost. Second, DOE challenged our analysis of these two facilities by using a single county\u2019s (Roane) unemployment data for its Oak Ridge facility. As discussed in our second comment, this is a misapplication of EDA\u2019s criteria. Following EDA\u2019s criteria, we used the standard metropolitan statistical area for our analysis. Using the unemployment rate for the standard metropolitan statistical area surrounding Oak Ridge, rather than the unemployment rate for Roane County, results in an unemployment rate for Oak Ridge of 4.2 percent instead of 7.3 percent. Furthermore, DOE\u2019s May 9,1997, Secretarial memorandum justifying $10 million in community assistance does not even discuss Roane County. However, as discussed in comment 2, if DOE believes that the county-level analysis more accurately reflects the economic impact of DOE\u2019s restructuring than does the use of the standard metropolitan statistical area, then it should include this factor in its community assistance criteria. 5. DOE states that we inaccurately reflect how it assists workers displaced by defense-related reductions. It cites the consultant\u2019s study that shows DOE\u2019s program helped create more than 22,000 jobs. Like the consultant\u2019s study, our draft report concurred that DOE helped to create and retain these jobs. However, the consultant\u2019s study did not provide information on the extent to which DOE should receive credit for the jobs created and retained. We noted in the draft report that the DOE data contain jobs created and retained, while the local employment data we used from the Bureau of Labor Statistics include only jobs created. Therefore, our analysis is likely to overstate the impact of DOE\u2019s job creation efforts in any given area. Furthermore, the consultant\u2019s study did not measure the impact of other assistance in creating or retaining jobs, or analyze the extent to which a strong economy helped to produce these jobs. We maintain that DOE\u2019s contribution had a relatively small impact on the overall growth of jobs in three of the six communities surrounding nuclear defense facilities for which we had comparable data. However, for three other communities, our draft shows that DOE contributed significantly to job growth. 6. DOE commented that our draft report incorrectly characterized enhanced retirement offerings. DOE provided us with additional information comparing its enhanced retirement offerings with those of other organizations, and we have revised the report accordingly. However, the formula for extended medical coverage and the provisions for relocation assistance offered by DOE were more generous than the benefits offered to separated federal civilian employees. For extended medical coverage for eligible contractor workers, DOE pays the full employer cost for the first year of separation and about half of that cost in the second year. Separated federal workers who are eligible and wish to retain extended medical coverage must pay the full cost, plus an administrative fee, for the coverage upon separation.\nDOE also commented that 17 of the 25 public and private sector employers identified in our 1995 report offered enhanced retirement. DOE\u2019s interpretation is not exact. The report states that 17 of the 25 organizations offered early retirement programs and at least 10 of these programs offered some incentive for early retirement. The incentives generally gave employees credit for a specified number of years of service and\/or a specified number of years added to their age; however, nine organizations also imposed penalties on the annuities of early retirees. 7. DOE said that the draft report is factually incorrect concerning involuntary separation benefits. DOE provided us with additional information on involuntary separation benefits offered at other organizations, and we revised our draft accordingly. 8. DOE contends that its management contractors offered extended medical benefits before the enactment of the worker and community transition program. The Office of Worker and Community Transition has since provided us with information supplementing its official comments indicating that a medical benefits program for displaced workers was approved by the Secretary of Energy on July 29, 1992. According to DOE\u2019s comments, these benefits are limited to contractor-separated employees who cannot obtain coverage through an employer or spouse. We have revised our report accordingly.\nDOE also commented that our draft report did not include the wide range of additional benefit categories offered by other organizations. Based on DOE\u2019s comments we revised table 2 that compared DOE benefits with other public and private sector severance packages offered from fiscal years 1993 through 1998. The revised table provides more detail of the benefits that were offered by the number of organizations that we identified. However, the benefit formulas in some of DOE\u2019s workforce restructuring plans, such as those determining voluntary separation benefits and extended medical coverage, potentially allow more generous benefits than those offered for federal civilian employees. 9. DOE\u2019s comment focuses on the overgeneralization of the data presented in table 2 of our draft report. This table compared DOE benefits with other public and private sector severance packages offered from fiscal years 1993 through 1998. DOE asserted that, overall, the frequency with which DOE contractors offered classes of benefits has not been substantially different than the frequency offered by other employers captured by private surveys. We agree and revised this table, as noted in comment 8.\nFinally, DOE commented that only a limited number of its sites offered some benefits. However, we note that DOE did not count benefits offered to its workforce when fewer than 10 individuals, or 1 percent of the separated workers, received benefits. Furthermore, DOE stated that because of qualification requirements, a large number of separated DOE workers were not provided with certain benefits, even when offered at a site. While these qualifications may preclude some separated workers from receiving a specific benefit, the benefit was still offered at a specific site.\nThe first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent.\nU.S. General Accounting Office P.O. Box 37050 Washington, DC  20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000  or by using fax number (202) 512-6061, or TDD (202) 512-2537.\nEach day, GAO issues a list of newly available reports and testimony.  To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone.  A recorded menu will provide information on how to obtain these lists.","output":"Why GAO Did This Study\n\nPursuant to a legislative requirement, GAO reviewed the Department of Energy's (DOE) community assistance program for minimizing the impact of downsizing its contractor workforce, focusing on: (1) how much funding DOE had committed to spend and spent in support of its worker and community assistance program for fiscal years (FY) 1994 through 1998; (2) who received benefits during FY 1997 and FY 1998; (3) comparing DOE's separation benefits with the benefit packages of other federal and nonfederal organizations; and (4) what effect DOE's criteria had on determining which communities received assistance.\n\nWhat GAO Found\n\nGAO noted that: (1) DOE's assistance to separated contractor workers is reasonably consistent with the types of benefits offered by other government and private sector employers; (2) however, its community development assistance funds did not necessarily go to those communities most affected by downsizing or with the highest unemployment; (3) for FY 1994 through FY 1998, DOE obligated and spent about $1.033 billion on benefits for the contractor workers and communities affected by its downsizing; (4) about $853 million was spent on worker assistance and the rest on community assistance; (5) about $460 million of the $1.033 billion was provided by DOE's Office of Worker and Community Transition and the remainder by other DOE programs; (6) at the end of FY 1998, DOE had a carryover balance of $72 million, including $10 million in unobligated funds and $62 million in funds that were obligated but not yet spent; (7) most of the contractor workers separated during FY 1997 and FY 1998 received benefits under DOE's workforce restructuring program; (8) while DOE generally offered its separated contractor employees a large range of benefits, the value of the benefits varied widely, primarily because of the differences in benefits packages among sites and in the employees' length of service and base pay; (9) these benefit packages are reasonably consistent with the types of benefits offered by public and private employers; (10) DOE's community assistance criteria, which focus on the merits of individual projects and not on relative economic need, do not necessarily result in the most assistance going to the communities most affected by its downsizing or with the highest unemployment; (11) for example, for FY 1995 through FY 1998, the communities surrounding DOE's Richland, Washington, facility had more than twice the unemployment rate and nearly twice the DOE job loss of those surrounding the Rocky Flats, Colorado, facility, but Richland received $18 million less than the $24 million that Rocky Flats received; (12) had the Department of Commerce's Economic Development Administration unemployment and jobs lost criteria been used to evaluate the request for community assistance, Rocky Flats would have been ineligible for funding, given the strength of its employment; (13) in addition, 5 of the 8 DOE sites that received community assistance would have been ineligible under these criteria; and (14) furthermore, because most DOE assistance went to communities with relatively strong economies, the extent to which DOE's assistance aided in creating or retaining jobs is not clear."}
{"id":"crs_RL33311","pid":"crs_RL33311_0","input":"Current federal tax law allows self-employed individuals to deduct the entire amount they spend on health insurance for themselves and their spouses and dependents. This treatment is similar to the tax exclusion for employer contributions to the health plans of wage earners, with one noteworthy exception: employer contributions are exempt from payroll taxes (e.g., Medicare and Social Security taxes), but health insurance expenditures by the self-employed are not deemed a deductible business expense and thus are subject to the self-employment payroll tax. Several bills in the 111 th Congress would enable self-employed taxpayers to exclude those expenditures from the income base for the tax.\nThis report examines the current tax treatment of these expenditures, the legislative history of the deduction, its effectiveness as a policy tool for improving access to health care for the self-employed, proposals in the 111 th Congress to alter the deduction, and the implications of the leading health care reform proposals in Congress for health insurance coverage among the self-employed.\n\n\tCurrent Law\n\nUnder Section 162(l) of the Internal Revenue Code (IRC), self-employed individuals are allowed to deduct the entire amount of their spending on health insurance for themselves and their immediate family members. In this case, a self-employed individual is defined as a sole proprietor, a working partner in a partnership, or an employee of a subchapter S corporation who owns over 2% of the firm's stock. The deduction is claimed above-the-line, which means it may be claimed even if a self-employed individual does not itemize deductions on his or her income tax return.\nSome self-employed individuals hire employees to assist with their trade or business. Any self-employed individual who offers health benefits to employees may deduct the cost of those benefits as an ordinary and necessary business expense. But he or she may not also include the cost of employee health benefits in any deduction claimed under IRC Section 162(l).\nUse of the deduction is subject to several limitations. First, the deduction may not exceed a self-employed taxpayer's net earned income from the trade or business in which the health plan was purchased, less the deductions for 50% of the self-employment tax and contributions to certain pension plans (e.g., Keogh plans or simplified employee pension plans for the self-employed). A self-employed taxpayer who earns income from more than one business or trade may not sum the profits and losses from those businesses to determine the net income ceiling for the deduction. Second, the deduction may not be claimed for any month when a self-employed individual is eligible to participate in a health plan offered by an employer or a spouse's employer. Third, the expenditures used to compute the deduction may not also be included in the medical expenses eligible for the itemized deduction under IRC Section 213\u2014though health insurance expenditures that cannot be deducted under IRC Section 162(l) may be included in these medical expenses. Finally, health insurance spending by self-employed individuals is not deemed an ordinary and necessary business expense, which means those expenditures must be added to the income base for the self-employment tax of 15.3%.\nIn addition, self-employed individuals may add any payments they make for long-term care insurance to the health insurance expenditures eligible for the deduction. But the amount of long-term care insurance premiums that may be deducted is limited, and the limits, which are indexed for inflation, vary with the age of a self-employed taxpayer at the close of a tax year. In 2009, the deductible amounts range from $320 for those age 40 and under to $3,980 for those over age 70.\nA self-employed individual has two other options for obtaining health insurance coverage that offer significant tax benefits.\nHe or she may open a health savings account (HSA), which serves as a tax-exempt vehicle for paying medical and dental expenses not covered by insurance or not otherwise reimbursable. An individual can open an HSA and make contributions to it only if he or she is covered by a qualified high-deductible health insurance plan and no other plan, including Medicare (with a few exceptions). In 2009, qualified plans must carry a deductible of at least $1,150 for individual coverage (with a cap of $5,800 on out-of-pocket expenses), and $2,300 for family coverage (with an out-of-pocket cap of $11,600). Total contributions to an HSA in 2009 are limited to the lesser of the deductible or $3,000 for individual plans, and the lesser of the deductible or $5,950 for family plans; the limits are $1,000 larger for individuals age 55 and older. Employer contributions are exempt from income and employment taxes, and account owners may claim a deduction for contributions they make. Self-employed individuals may not contribute to an HSA on a pre-tax basis (unlike employees who contribute to such an account through an employer's cafeteria plan), and they must include their contributions in the income base used to determine the self-employment tax. Withdrawals to pay for medical expenses are not subject to taxation. Unused balances may be carried over without limit to the following year with no tax penalty.\nSelf-employed individuals may also open Archer medical savings accounts (MSAs)\u2014though the total number of such accounts nationwide is currently capped at 750,000. They are similar in design to HSAs but more restrictive in the rules for contributions. For example, annual contributions for individual coverage cannot exceed 65% of the deductible (not less than $2,000 but not greater than $3,000) for such coverage, and for family coverage the limit is 75% of the deductible (at least $4,000 but not greater than $6,050). Holders of MSAs are allowed to own HSAs and transfer their MSA balances to the new accounts. It is not known how many self-employed individuals are covered by MSAs and HSAs.\n\n\tHealth Insurance Coverage for the Self-Employed\n\nAn estimated 14.0 million non-elderly individuals were self-employed in 2007, the most recent year for which reliable data on U.S. health insurance coverage by employment status are available. Of this total population, 9.7 million had private health insurance, 1.6 million received public health insurance (mainly Medicaid), and 3.7 million were uninsured. Over 71% of the self-employed with private health insurance (or 6.9 million) in 2007 were covered through plans offered by a current or former employer, or by a spouse's employer. The remaining 2.8 million (or 20% of the self-employed population) with private health insurance purchased it on their own.\nAccording to the Internal Revenue Service (IRS), individual taxpayers filed 3.8 million returns claiming the deduction in 2006; the amount claimed totaled $20.3 billion (see Table 1 ). Individuals with adjusted gross incomes between $30,000 to under $500,000 accounted for 70% of the value of those claims and 67% of the volume.\nThe revenue cost of the deduction could total $4.8 billion in FY2009. This cost represents the tax revenue that would be collected that year under two assumptions: (1) there were no deduction, and (2) self-employed taxpayers instead were to include their health insurance expenditures in the spending eligible for the itemized deduction for medical expenses.\n\n\tLegislative History of the Health Insurance Deduction for the Self-Employed\n\nThe tax deduction for health insurance purchased by self-employed individuals entered the federal tax code as a temporary provision of the Tax Reform Act of 1986 (TRA86, P.L. 99-514 ). Initially, it was limited to 25% of qualified expenditures and was scheduled to expire at the end of 1989. Although the act specified that Congress was to assess the deduction's effectiveness before it expired, no such study was completed.\nCongress made several significant changes in the rules governing the deduction's use before it considered legislation to extend the deduction beyond 1989. The Technical and Miscellaneous Revenue Act of 1988 (TAMRA, P.L. 100-647 ) added the limitation that the deduction cannot exceed a self-employed taxpayer's earned income from the trade or business in which the health insurance policy was established. TAMRA also added the requirement that the deduction be included in a self-employed taxpayer's income base for the computation of the self-employment tax.\nA string of laws enacted in the early 1990s extended the deduction for brief periods. The Omnibus Budget Reconciliation Act of 1989 ( P.L. 101-239 ) extended the deduction through September 30, 1990 and made it available to certain subchapter S corporation shareholders; the Omnibus Budget Reconciliation Act of 1990 ( P.L. 101-508 ) extended the deduction through December 31, 1991; the Tax Extension Act of 1991 ( P.L. 102-227 ) extended it through June 30, 1992; and the Omnibus Budget Reconciliation Act of 1993 ( P.L. 103-66 ) extended the deduction through December 31, 1993.\nFor reasons that evidently had nothing to do with the effects of the deduction, Congress allowed it to expire at the end of 1993 and did not extend it in 1994. But a bill adopted in April 1995 ( P.L. 104-7 ) permanently extended the deduction, retroactive to January 1, 1994. It also increased the deductible share of health insurance expenditures by the self-employed to 30%, starting in 1995 and continuing thereafter.\nThe 104 th Congress turned its attention to the deduction again in 1996, when it passed the Health Insurance Portability and Accountability Act of 1996 (HIPAA, P.L. 104-91 ). Among other things, the act established a timetable for raising the deductible share of health insurance expenditures from 30% in 1996 to 80% in 2006 and thereafter. HIPAA also permitted self-employed taxpayers to include in the spending eligible for the deduction any payments they make for qualified long-term care insurance as of January 1, 1997; imposed annual limits on the amount of long-term care insurance premiums that could be deducted; and indexed these limits for inflation.\nThe Omnibus Consolidated and Emergency Supplemental Appropriations Act, 1999 ( P.L. 105-277 ) accelerated the timetable for removing one of the main differences between the tax treatment of employer-provided health insurance and the taxation of health insurance purchased by the self-employed by raising the deductible share of health insurance spending by the latter to 100%, beginning in 2003 and thereafter.\n\n\tEffectiveness of the Deduction\n\nOne gauge of the effectiveness of the deduction is the extent to which it has accomplished its intended purpose. It can be argued that Congress added the deduction to TRA86 for two reasons. One was to provide the self-employed with a tax benefit for health insurance comparable to the tax exclusion for employee health benefits. The other reason was to foster a substantial expansion of health insurance coverage among self-employed individuals. To what extent have these objectives been achieved?\n\n\t\tCoverage Rate Among the Self-Employed\n\nThe deduction reduces the after-tax cost of health insurance for a self-employed individual by a factor equal to his or her marginal income tax rate. For example, a self-employed individual in the 35% tax bracket realizes a 35% reduction in that cost by claiming the deduction.\nAll other things being equal, a reduction in the after-tax cost of this insurance can be expected to lead to an increase in the coverage rate among the self-employed. The extent of the increase would hinge on how sensitive the demand for health insurance is to changes in its cost. There is some dated evidence that the demand for health insurance among single self-employed individuals is responsive to declines in this cost. \nYet unlike a tax credit for the purchase of health insurance, which would be of equal value to everyone who claims it, the deduction is of lesser value to those with lower incomes and of greater value to those with higher incomes, for the same health insurance plan. This is because the tax benefit from a deduction depends on a taxpayer's marginal tax rate: for someone in the 35% bracket, a $100 deduction reduces his or her tax liability by $35; but for a taxpayer in the 10% bracket, the same deduction yields a reduction in tax liability of $10. To the extent that health insurance coverage among the self-employed rises with household income, the deduction reinforces this linkage.\nIs there any evidence that the deduction has spurred an expansion in health insurance coverage among the self-employed? Such an effect seemed to materialize in the first few years after the deduction was enacted in 1986. In 1985, 69% of the self-employed were covered through private health plans (both plans they purchased on their own and plans offered by former employers); but in 1987, the first full year in which the deduction could be claimed, the share climbed to 76%. It seems likely that much of that rise was due to the advent of the deduction. Still, coverage has gradually fallen ever since: it was 69% in 2007, the most recent year for which data are available. In addition, the share of the self-employed population with individually purchased private health insurance was significantly lower in 2007 (20%) than in 1991 (29%). \nThese declines raise the possibility that whatever initial stimulus the deduction may have imparted to the demand for health insurance by the self-employed has been more than offset by certain other factors. A powerful countervailing force has been increases in the cost of health care, which is the main driver of trends in the cost of health insurance. In recent decades, the cost of health care has risen much faster than overall inflation. This is not to suggest that the deduction no longer influences a self-employed individual's decision to purchase or retain health insurance. In the absence of the deduction, the health insurance coverage rate among the self-employed arguably would be lower.\n\n\t\tTax Subsidies for Health Insurance for the Self-Employed and Wage Earners\n\nDoes the deduction create a level playing field between wage earners and the self-employed in the tax subsidies for the purchase of health insurance? Yes and no. On the one hand, the deduction has the same direct effect on the after-tax cost of health insurance as the exclusion for employer contributions to employee health plans: both lower that cost by a factor equal to an individual's marginal tax rate. On the other hand, the expenditures eligible for the deduction are subject to the self-employment tax, whereas employer contributions to employee health plans are exempt from payroll taxes. This difference means that the after-tax cost of a health plan is 15.3% higher for a self-employed individual than for a wage earner. A truly level playing field would permit self-employed individuals to exclude their payments for health insurance from the income base for the self-employment tax.\nThe self-employed are not the only taxpayers for whom the federal tax code denies equal treatment in access to health insurance with wage earners. There is no deduction or exclusion for health insurance bought by the unemployed or by individuals whose employers do not offer health benefits. As a result, their only option for lowering the after-tax cost of health insurance is to claim the itemized deduction for medical expenditures, provided they qualify.\nAt the same time, there is some evidence that the use of health care by the self-employed is not as tied to health insurance coverage as one might expect. A 2001 study by Craig Perry and Harvey Rosen, using data from the 1996 Medical Expenditures Panel Survey, found that the \"self-employed had the same utilization rates for medical services in 1996 as wage-earners, despite the fact that they (the self-employed) were substantially less likely to be insured.\" More specifically, their findings indicated that there were no statistically significant differences between employees and the self-employed in hospital admissions, hospital stays, dental checkups, and optometrist visits, while the self-employed had higher utilization rates for alternative care and chiropractor visits. Nor was there any evidence that the medical spending of the self-employed reduced their capacity to purchase other goods and services. Perry and Rosen concluded that the self-employed were able to \"finance access to health care from sources other than insurance,\" such as their own assets or loans. The study calls into question one of the main justifications for the deduction: that it is needed to increase the utilization of medical care among the self-employed. Rather, the findings suggest that access to medical care may have little to do with current tax subsidies for the purchase of health insurance.\n\n\tLegislation in the 111th Congress That Could Affect Health Insurance Coverage for the Self-Employed\n\nNumerous bills to create new tax subsidies for the purchase of health insurance have been introduced in the 111 th Congress. Some of the subsidies would be of greater benefit to the self-employed than the current deduction under IRC Section 162. \nA case in point is a proposal ( H.R. 879 ) to establish a refundable tax credit for individuals who purchase health insurance on their own in the non-group market. Depending on its design, such a credit could lead to more extensive health insurance coverage among self-employed individuals, as well as the population at large. A key consideration is the effective rate of the credit. If it is large enough to lower the after-tax cost of health insurance more than the deduction does, then a self-employed individual would be better off claiming the credit. A simple example illustrates this point. Suppose a self-employed individual in the 15% tax bracket buys a health insurance policy for $3,000. Would he or she be better off with a 50% refundable tax credit for that purchase or a deduction of $3,000? With the credit, the after-tax cost of the policy would be $1,500, but with the deduction, the after-tax cost of the policy would come to $2,550. Because the credit is refundable, the individual would receive the credit even if he or she has no federal income tax liability.\nAt least five bills in the current Congress would modify the deduction to equalize the tax treatment of health insurance purchased by the self-employed and the tax treatment of health benefits obtained by wage earners through their employers. Under current law, health insurance expenditures by the self-employed are subject to the self-employment tax, whereas employer contributions to employee health plans are not subject to payroll taxes. But the same provision in H.R. 533 , H.R. 1470 , H.R. 1763 , H.R. 3067 , and S. 725 would exempt these expenditures from the self-employment tax by allowing the self-employed to treat them as a deductible business expense. If enacted as proposed in these bills, the exemption would reduce the after-tax cost of health insurance to the self-employed by 15.3%, the self-employment tax rate. A decline of that size may be sufficient to spur an increase in the health insurance coverage rate for the self-employed. It is not clear what the revenue cost of the proposed exemption would be. Depending on the amount, the estimated cost could influence future congressional deliberations over whether to adopt such an exemption.\nHealth insurance coverage among the self-employed could also be affected by any major health care reform legislation Congress passes. The 111 th Congress is considering a variety of proposals to expand health insurance coverage and curb the rate of growth in health care spending. In essence, they incorporate one or more of the following approaches: (1) replacing the current system of private health insurance with some kind of national health insurance plan; (2) expanding coverage under current public health insurance programs (such as Medicaid) by including certain groups of uninsured individuals; (3) expanding coverage under private health insurance plans; (4) encouraging reforms in state health insurance regulations to compel private insurers to offer insurance to all applicants, regardless of any pre-existing health problems they may have; and (5) expanding current public and private options for health insurance coverage.\nA prominent example of the fifth approach is H.R. 3200 , which the three committees in the House with jurisdiction over health care have passed. As the bill now stands, H.R. 3200 would do more to expand coverage than to control future growth in per-capita health care spending. More specifically, it would make the following notable changes in the current health care system:\nrequire all individuals to have health insurance or pay a penalty, create a health insurance exchange where individuals and smaller companies can purchase health insurance, provide subsidies for the purchase of health insurance for individuals and families with incomes at or below 400% of the federal poverty level, require employers to provide health insurance to all employees or pay into a health insurance exchange trust fund, offer exceptions to the employer mandate to certain small firms and provide a tax credit to small employers that do provide coverage, impose new regulations on health plans participating in the health insurance exchange and in the small-group health insurance market aimed at improving access to affordable health insurance, and expand Medicaid coverage to eligible households with incomes up to 133% of the federal poverty level.\nSuch a measure could spark a significant rise in health insurance coverage among the self-employed. In 2007, the most recent year for which data are available, the self-employed accounted for 14% of the estimated U.S. non-elderly uninsured population, and 26% of all self-employed individuals under age 65 had no health insurance. The coverage rate that year for the self-employed was lower than that for non-elderly wage and salary workers: 74% compared to 83%. Though there are no publicly available data on the distribution of uninsured self-employed individuals by income class, a majority of the uninsured self-employed are likely to have relatively low incomes. This is because a major share of the uninsured have relatively low incomes. In 2007, for example, 63% of the uninsured population had family incomes of less than $40,000. So the enactment of a measure similar to H.R. 3200 \u2014with its individual mandate, income-based subsidies for the purchase of health insurance through exchanges, and health insurance market reforms\u2014would be likely to boost the coverage rate among the self-employed.\n\n\tPolicy Issues Related to the Deduction\n\nThe tax deduction for health insurance expenditures by the self-employed has several advantages. It is relatively simple for the IRS to administer and for self-employed individuals to claim. In addition, the deduction seems to contribute to an expansion in health insurance coverage among the self-employed and their immediate families by lowering the after-tax cost of health insurance. Many economists regard a lack of health insurance as a market failure because of the negative externalities associated with being uninsured: the uninsured are more likely than the insured to spread communicable diseases, and the cost of uncompensated care received by the uninsured is passed on to taxpayers through higher taxes and to insured patients through higher prices for medical care. The deduction also establishes a substantial degree of parity between the tax treatment of health insurance purchased by the self-employed and the taxation of health benefits employees receive from their employers.\nBut the deduction also has some disadvantages, some of which have implications for the debate in the current Congress over expanding access to health care through the use of tax subsidies for health insurance. \nFirst, the deduction fosters insurance outcomes that could be regarded as unfair or unjustified. This is because its value to self-employed individuals who take it depends critically on their marginal tax rates. Under the tax system's progressive rate structure, a deduction of $1 is of greater value to someone with a relatively high income (as much as $0.35) than to someone with a relatively low income (as little as nothing). Although disposable income plays a major role in decisions about whether to buy health insurance or how much coverage to buy, the deduction delivers the smallest marginal benefit to those who arguably are in greatest need of public assistance in order to be adequately insured. One policy option for avoiding such a result is to enact a refundable tax credit for the purchase of health insurance that phases out over some range of income above the federal poverty threshold. Such a credit would deliver the largest marginal benefit to those most in need of assistance, and the smallest (or no) marginal benefit to those least in need of assistance.\nSecond, the deduction cannot compensate for or replicate the significant advantages of receiving health insurance through an employer. Those advantages stem from certain critical differences between the group and non-group (or individual) health insurance markets. Generally, wage earners who receive health benefits from their employers participate in the group market, while self-employed individuals who purchase health insurance from private insurers participate in the non-group market. Group health plans typically cater to the health care needs of large groups of people who are drawn together for purposes other than obtaining insurance, such as employment. The plans are managed by sponsors (e.g., an employer) who negotiate the terms of coverage directly with insurers on behalf of the insured members. By contrast, individual health plans are tailored to the health care needs of the individuals seeking coverage on their own. Insurers set premiums and benefits in the group market mainly on the basis of key characteristics of the particular groups seeking coverage, especially their recent claims history, demographic composition, and geographic location; premiums tend to reflect an insurer's assessment of the expected cost of claims for medical services by the average member of a group (or risk pool). By contrast, insurers set premiums and benefits in the individual market mainly through a practice known as medical underwriting. Many applicants are required to have a thorough medical examination to assess their risk for developing a variety of costly health problems. Once the assessment is completed, an insurer then decides whether or not to offer a policy, what coverage to provide if it offers a policy, and the cost of that coverage, within the requirements imposed by state law.\nThe differences between the two markets result in more stable pricing, greater coverage, and lower premiums in the group market than in the non-group market. Premiums tend to be lower for comparable coverage in the group market for several reasons. Group insurance offers economies of scale in key administrative functions such as billing, marketing, and claims processing that cannot be duplicated in individual insurance. In addition, relatively large employers can use their employment size to negotiate deals with insurers that provide more generous benefits with lower cost-sharing requirements than individuals can obtain on their own.\nThere is no easy way to modify the deduction so that self-employed individuals could enjoy the advantages of employer-sponsored health plans. Such an outcome would require an overhaul of the U.S. health insurance market that would allow any adult not eligible for public health insurance (e.g., Medicare or Medicaid), regardless of his or her employment and health status, to join any group health plan organized through some kind of exchange.\nThird, like the exclusion for employer contributions to employee health plans, the deduction has the potential to foster inefficient uses of medical care. Such an outcome is tied to a market failure peculiar to insurance markets known as moral hazard. In the case of health insurance, moral hazard refers to the impact of insurance on the demand for medical services. Health insurance gives covered individuals a powerful incentive to consume more health care than is needed because the insurance allows them to pay only a fraction of its cost through deductibles or co-payments. As a result, they are likely to use medical services until the marginal benefit of the care equals their out-of-pocket cost; for someone with comprehensive first-dollar coverage, that cost can be nothing. Widespread use of health care whose marginal benefit is less than its true marginal cost is likely to give rise to a significant social welfare loss.\nNeither the exclusion nor the deduction are capped. As a result, wage earners and the self-employed are more likely to purchase generous health insurance coverage than they would if they were required to pay in after-tax dollars for coverage beyond the cost of a typical individual or family policy in the regions where they reside. Conventional economic theory predicts that offering substantial subsidies for health insurance coverage will result in the purchase of more insurance than individuals would choose without the subsidies. This extra coverage is more likely to summon the substantial costs of moral hazard than coverage that requires individuals to pay for most of the cost of routine medical procedures and fully insures only large medical expenses. Capping the deduction at an amount tied to average premiums in the non-group market for individual or family plans is sometimes proposed as a way to curtail any welfare loss arising from overly generous health insurance coverage for the self-employed. \nFinally, the current deduction points to a fundamental inequity in the tax treatment of health insurance expenditures. Under current law, only the self-employed and wage earners whose employers provide health benefits receive a tax subsidy for their purchase of health insurance. No comparable subsidy is available for the unemployed and those workers whose employers provide no health benefits. Their only option for lowering the after-tax cost of health insurance is to claim the itemized deduction for medical expenses, but it is doubtful that many of them could do so. Only about one-third of individual taxpayers itemize on their tax returns rather than take the standard deduction, and someone who itemizes may deduct only qualified medical expenses that exceed 7.5% of his or her adjusted gross income. Some of the health care reform proposals being considered in the 111 th Congress would address the lack of tax subsidies for the purchase of health insurance by those who are not self-employed and have no access to employer-provided health benefits.","output":"Federal tax law allows self-employed individuals to deduct from their gross income the entire amount they spend on health insurance for themselves and their spouses and dependents.\nThis report explains how these expenditures are treated under the federal tax code, reviews the legislative history of the deduction, assesses its effectiveness as a policy tool for expanding access to health care for the self-employed, describes proposals in the 111th Congress to modify the deduction, and discusses the implications of leading health care reform proposals in Congress for health insurance coverage among the self-employed.\nUnder Section 162(l) of the Internal Revenue Code (IRC), qualified self-employed individuals may deduct the entire amount of their payments for health insurance for themselves and immediate family members. Use of the deduction is governed by several rules. First, it may not exceed an eligible taxpayer's net earned income from the trade or business in which the health plan was established, less the deductions for 50% of the self-employment tax and contributions to certain pension plans. Second, the deduction may not be claimed for any period when a qualified individual is eligible to participate in a health plan offered by an employer or by a spouse's employer. Third, the expenditures used to claim the deduction cannot be included in the medical expenses eligible for the itemized deduction under IRC Section 213. Finally, health insurance expenditures by self-employed individuals are subject to the self-employment tax.\nThe tax deduction for health insurance expenditures by the self-employed has advantages and disadvantages. On the one hand, it is relatively easy for the IRS to administer and for self-employed taxpayers to claim, and the deduction comes close to establishing parity between the tax treatment of health insurance for the self-employed and the taxation of employer contributions to employee health plans. On the other hand, the deduction delivers the largest tax benefit for the same insurance policy to those who arguably need it the least: self-employed individuals in the highest tax bracket. It also is uncapped, thus encouraging the purchase of generous plans.\nSeveral bills in the 111th Congress (H.R. 533, H.R. 1470, H.R. 1763, H.R. 3067, and S. 275) would eliminate the final remaining obstacle to achieving equal tax treatment for the health insurance purchased by the self-employed and the health benefits employees receive through their employers. The obstacle lies in the difference between the income base for the payroll taxes paid by wage earners and the self-employment taxes paid by the self-employed: health insurance expenditures by the self-employed are subject to the self-employment tax, whereas employer contributions to employee health plans are not subject to the payroll tax. Each bill would allow the self-employed to deduct these expenditures as an ordinary and necessary business expense, thereby removing them from the income base for the self-employment tax.\nSome of the health care reform legislation being considered in the House and Senate could affect health insurance coverage for the self-employed. Though it remains unclear whether either chamber will pass such a bill in the current Congress\u2014and if so, what tax provisions it might contain\u2014enough is known about the key issues in the congressional debate to sketch their implications for the self-employed. Proposals that would expand private health insurance coverage or simultaneously expand public and private coverage options (e.g., H.R. 3200) could lead to greater coverage among the self-employed through income-based tax subsidies for the purchase of insurance and an individual mandate."}
{"id":"gao_GAO-09-903T","pid":"gao_GAO-09-903T_0","input":"\tBackground\n\nFAMS was originally established as the Sky Marshal program in the 1970s  to counter hijackers. In response to 9\/11, the Aviation and Transportation  Security Act expanded FAMS\u2019s mission and workforce and mandated the  deployment of federal air marshals on high-security risk flights. Within the  10-month period immediately following 9\/11, the number of air marshals  grew significantly. Also, during subsequent years, FAMS underwent  various organizational transfers. Initially, FAMS was transferred within the  Department of Transportation from the Federal Aviation Administration to  the newly created TSA. In March 2003, FAMS moved, along with TSA, to  the newly established DHS. In November 2003, FAMS was transferred to  U.S. Immigration and Customs Enforcement (ICE). Then, about 2 years  later, FAMS was transferred back to TSA in the fall of 2005.\nFAMS deploys thousands of federal air marshals to a significant number of  daily domestic and international flights. In carrying out this core mission  of FAMS, air marshals are deployed in teams to various passenger flights.  Such deployments are based on FAMS\u2019s concept of operations, which  guides the agency in its selection of flights to cover. Once flights are  selected for coverage, FAMS officials stated that they must schedule air  marshals based on their availability, the logistics of getting individual air  marshals in position to make a flight, and applicable workday rules.\nAt times, air marshals may have ground-based assignments. On a short- term basis, for example, air marshals participate in Visible Intermodal  Prevention and Response (VIPR) teams, which provide security  nationwide for all modes of transportation. After the March 2004 train  bombings in Madrid, TSA created and deployed VIPR teams to enhance  security on U.S. rail and mass transit systems nationwide. Comprised of  TSA personnel that include federal air marshals\u2014as well as transportation  security inspectors, transportation security officers, behavioral detection  officers, and explosives detection canines\u2014the VIPR teams are intended  to work with local security and law enforcement officials to supplement  existing security resources, provide a deterrent presence and detection  capabilities, and introduce an element of unpredictability to disrupt  potential terrorist activities.\nFAMS\u2019s budget request for fiscal year 2010 is $860.1 million, which is an  increase of $40.6 million (or about 5 percent) over the $819.5 million  appropriated in fiscal year 2009. The majority of the agency\u2019s budget  provides for the salaries of federal air marshals and supports maintenance  of infrastructure that includes 21 field offices.\n\n\tFAMS\u2019s Operational Approach to Achieving Its Core Mission Is Based on Risk-Related Factors\n\nFAMS\u2019s operational approach (concept of operations) for achieving its  core mission is based on assessments of risk-related factors, since it is not  feasible for federal air marshals to cover all of the approximately 29,000  domestic and international flights operated daily by U.S. commercial  passenger air carriers. Specifically, FAMS considers the following risk- related factors to help ensure that high-risk flights operated by U.S.  commercial carriers\u2014such as the nonstop, long-distance flights targeted  on 9\/11\u2014are given priority coverage by federal air marshals:    Threat (intelligence): Available strategic or tactical information  affecting aviation security is considered.\nVulnerabilities: Although FAMS\u2019s specific definition is designated  sensitive security information, DHS defines vulnerability as a physical  feature or operational attribute that renders an entity open to  exploitation or susceptible to a given hazard.\nConsequences: FAMS recognizes that flight routes over certain  geographic locations involve more potential consequences than other  routes.\nFAMS attempts to assign air marshals to provide an onboard security  presence on as many of the flights in the high-risk category as possible.  FAMS seeks to maximize coverage of high-risk flights by establishing  coverage goals for 10 targeted critical flight categories. In order to reach  these coverage goals, FAMS uses a scheduling process to determine the  most efficient flight combinations that will allow air marshals to cover the  desired flights. FAMS management officials stressed that the overall  coverage goals and the corresponding flight schedules of air marshals are  subject to modification at any time based on changing threat information  and intelligence. For example, in August 2006, FAMS increased its  coverage of international flights in response to the discovery, by  authorities in the United Kingdom, of specific terrorist threats directed at  flights from Europe to the United States. FAMS officials noted that a shift  in resources of this type can have consequences because of the limited  number of air marshals. The officials explained that international missions  require more resources than domestic missions partly because the trips  are of longer duration.\nIn addition to the core mission of providing an onboard security presence  on selected flights, FAMS also assigns air marshals to VIPR teams on an  as-needed basis to provide a ground-based security presence. For the first  quarter of fiscal year 2009, TSA reported conducting 483 VIPR operations,  with about 60 percent of these dedicated to ground-based facilities of the  aviation domain (including air cargo, commercial aviation, and general  aviation) and the remaining VIPR operations dedicated to the surface  domain (including highways, freight rail, pipelines, mass transit, and  maritime). TSA\u2019s budget for fiscal year 2009 reflects support for 225 VIPR  positions at a cost of $30 million. TSA plans to significantly expand the  VIPR program in fiscal year 2010 by adding 15 teams consisting of 338  positions at a cost of $50 million. However, questions have been raised  about the effectiveness of the VIPR program. In June 2008, for example,  the DHS Office of Inspector General reported that although TSA has made  progress in addressing problems with early VIPR deployments, it needs to  develop a more collaborative relationship with local transit officials if  VIPR exercises are to enhance mass transit security.\n\n\tAn Independent Assessment Concluded That FAMS\u2019s Approach for Achieving Its Core Mission Was Reasonable; Recommendations for Enhancing the Approach Are Being Implemented\n\nAfter evaluating FAMS\u2019s operational approach for providing an onboard  security presence on high-risk flights, the Homeland Security Institute, a  federally funded research and development center, reported in July 2006  that the approach was reasonable. In its report, the Homeland Security  Institute noted the following regarding FAMS\u2019s overall approach to flight  coverage:    FAMS applies a structured, rigorous approach to analyzing risk and  allocating resources.\nThe approach is reasonable and valid.\nNo other organizations facing comparable risk-management challenges  apply notably better methodologies or tools.\nAs part of its evaluation methodology, the Homeland Security Institute  examined the conceptual basis for FAMS\u2019s approach to risk analysis. Also,  the institute examined FAMS\u2019s scheduling processes and analyzed outputs  in the form of \u201ccoverage\u201d data reflecting when and where air marshals  were deployed on flights. Further, the Homeland Security Institute  developed and used a model to study the implications of alternative  strategies for assigning resources. We reviewed the institute\u2019s evaluation  methodology and generally found it to be reasonable.\nAlthough the institute\u2019s July 2006 report concluded that FAMS\u2019s  operational approach was reasonable and valid, the report also noted that  certain types of flights were covered less often than others. Accordingly,  the institute made recommendations for enhancing the operational  approach. For example, the institute recommended that FAMS increase  randomness or unpredictability in selecting flights and otherwise diversify  the coverage of flights.\nTo address the Homeland Security Institute\u2019s recommendations, FAMS  officials stated that a broader approach for determining which flights to  cover has been implemented\u2014an approach that opens up more flights for  potential coverage, provides more diversity and randomness in flight  coverage, and extends flight coverage to a variety of airports. Our January  2009 report noted that FAMS had implemented or had ongoing efforts to  implement the institute\u2019s recommendations. We reported, for example,  that FAMS is developing an automated decision-support tool for selecting  flights and that this effort is expected to be completed by December 2009.\n\n\tFAMS Has Taken Positive Actions to Address Issues Affecting Its Workforce and to Help Ensure Continued Progress\n\nTo better understand and address operational and quality-of-life issues  affecting the FAMS workforce, the agency\u2019s previous Director\u2014who  served in that capacity from March 2006 to June 2008\u2014established various  processes and initiatives. Chief among these were 36 issue-specific  working groups to address a variety of topics, such as tactical policies and  procedures, medical or health concerns, recruitment and retention  practices, and organizational culture. Each working group typically  included a special agent-in-charge, a subject matter expert, air marshals,  and mission support personnel from the field and headquarters. According  to FAMS management, the working groups typically disband after  submitting a final report, but applicable groups could be reconvened or  new groups established as needed to address relevant issues. The previous  Director also established listening sessions that provided a forum for  employees to communicate directly with senior management and an  internal Web site for agency personnel to provide anonymous feedback to  management. Another initiative implemented was assigning an air marshal  to the position of Ombudsman in October 2006 to provide confidential,  informal, and neutral assistance to employees to address workplace- related problems, issues, and concerns.\nThese efforts have produced some positive results. For example, as noted  in our January 2009 report, FAMS amended its policy for airport check-in  and flight boarding procedures (effective May 15, 2008) to better ensure  the anonymity of air marshals in mission status. In addition, FAMS  modified its mission scheduling processes and implemented a voluntary  lateral transfer program to address certain issues regarding air marshals\u2019  quality of life\u2014and has plans to further address health issues associated  with varying work schedules and frequent flying. Also, our January 2009  report noted that FAMS was taking steps to procure new personal digital  assistant communication devices\u2014to replace the current, unreliable  devices\u2014and distribute them to air marshals to improve their ability to  communicate effectively with management while in mission status.\nAll of the 67 air marshals we interviewed in 11 field offices commented  favorably about the various processes and initiatives for addressing  operational and quality-of-life issues, and the air marshals credited the  leadership of the previous FAMS Director. The current FAMS Director, as  noted in our January 2009 report, has expressed a commitment to sustain  progress and reinforce a shared vision for workforce improvements by  continuing applicable processes and initiatives.\nIn our January 2009 report, we also noted that FAMS plans to conduct a  workforce satisfaction survey of all employees every 2 years, building  upon an initial survey conducted in fiscal year 2007, to help identify issues  affecting the ability of its workforce to carry out its mission. We reported  that a majority (79 percent) of the respondents to the 2007 survey  indicated that there had been positive changes from the prior year,  although the overall response rate (46 percent) constituted less than half  of the workforce. The 46 percent response rate was substantially less than  the 80 percent rate encouraged by the Office of Management and Budget  (OMB) in its guidance for federal surveys that require its approval.  According to the OMB guidance, a high response rate increases the  likelihood that the views of the target population are reflected in the  survey results. We also reported that the 2007 survey\u2019s results may not  provide a complete assessment of employees\u2019 satisfaction because  7 of the 60 questions in the 2007 survey questionnaire combined two or  more issues, which could cause respondents to be unclear on what  issue to address and result in potentially misleading responses, and    none of the 60 questions in the 2007 survey questionnaire provided for  response options such as \u201cnot applicable\u201d or \u201cno basis to judge\u201d\u2014 responses that would be appropriate when respondents had little or no  familiarity with the topic in question.\nIn summary, our January 2009 report noted that obtaining a higher  response rate to FAMS\u2019s future surveys and modifying the structure of  some questions could enhance the surveys\u2019 potential usefulness by, for  instance, providing a more comprehensive basis for assessing employees\u2019  attitudes and perspectives. Thus, to increase the usefulness of the agency\u2019s  biennial workforce satisfaction surveys, we recommended that the FAMS  Director take steps to ensure that the surveys are well designed and that  additional efforts are considered for obtaining the highest possible  response rates. Our January 2009 report recognized that DHS and TSA  agreed with our recommendation and noted that FAMS was in the initial  stages of formulating the next workforce satisfaction survey. More  recently, by letter dated July 2, 2009, DHS informed applicable  congressional committees and OMB of actions taken in response to our  recommendation. The response letter noted that agency plans include (1)  ensuring that questions in the 2009 survey are clearly structured and  unambiguous, (2) conducting a pretest of the 2009 survey questions, and  (3) developing and executing a detailed communication plan.\n\n\tCongressional Oversight Issues\n\nFederal air marshals are an important layer of aviation security. FAMS, to  its credit, has established a number of processes and initiatives to address  various operational and quality-of-life issues that affect the ability of air  marshals and other FAMS personnel to perform their aviation security  mission. The current FAMS Director has expressed a commitment to  continue relevant processes and initiatives for identifying and addressing  workforce concerns, maintaining open lines of communications, and  sustaining progress.\nSimilarly, this hearing provides an opportunity for congressional  stakeholders to focus a dialogue on how to sustain progress at FAMS. For  example, relevant questions that could be raised include the following:  In implementing the agency\u2019s concept of operations, how effectively  does FAMS use new threat information and intelligence to modify  flight coverage goals and the corresponding flight schedules of air  marshals?\nIn managing limited resources to mitigate a potentially unlimited range  of security threats, how does FAMS ensure that federal air marshals  are allocated appropriately for meeting in-flight security  responsibilities as well as supporting new ground-based security  responsibilities, such as VIPR team assignments? What cost-benefit  analyses, if any, are being used to guide FAMS decision makers?\nTo what extent have appropriate performance measures been  developed for gauging the effectiveness and results of resource  allocations and utilization?\nHow does FAMS foster career sustainability for federal air marshals  given that maintaining an effective operational tempo is not  necessarily compatible with supporting a better work-life balance?\nThese types of questions warrant ongoing consideration by FAMS  management and continued oversight by congressional stakeholders.\nMr. Chairman, this completes my prepared statement. I look forward to  answering any questions that you or other members of the subcommittee  may have.\n\n\tContacts and Acknowledgments\n\nFor information about this statement, please contact Steve Lord, Director,  Homeland Security and Justice Issues, at (202) 512-4379, or lords@gao.gov.  Contact points for our Offices of Congressional Relations and Public  Affairs may be found on the last page of this statement. Other individuals  making key contributions to this testimony include David Alexander,  Danny Burton, Katherine Davis, Mike Harmond, and Tom Lombardi.\nThis 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.","output":"Why GAO Did This Study\n\nBy deploying armed air marshals onboard selected flights, the Federal Air Marshal Service (FAMS), a component of the Transportation Security Administration (TSA), plays a key role in helping to protect approximately 29,000 domestic and international flights operated daily by U.S. air carriers. This testimony discusses (1) FAMS's operational approach or \"concept of operations\" for covering flights, (2) an independent evaluation of the operational approach, and (3) FAMS's processes and initiatives for addressing workforce-related issues. Also, this testimony provides a list of possible oversight issues related to FAMS. This testimony is based on GAO's January 2009 report (GAO-09-273), with selected updates in July 2009. For its 2009 report, GAO analyzed policies and procedures regarding FAMS's operational approach and a July 2006 classified assessment of that approach. Also, GAO analyzed employee working group reports and related FAMS's initiatives for addressing workforce-related issues, and interviewed FAMS headquarters officials and 67 air marshals (selected to reflect a range in levels of experience).\n\nWhat GAO Found\n\nBecause the number of air marshals is less than the number of daily flights, FAMS's operational approach is to assign air marshals to selected flights it deems high risk--such as the nonstop, long-distance flights targeted on September 11, 2001. In assigning air marshals, FAMS seeks to maximize coverage of flights in 10 targeted high-risk categories, which are based on consideration of threats, vulnerabilities, and consequences. In July 2006, the Homeland Security Institute, a federally funded research and development center, independently assessed FAMS's operational approach and found it to be reasonable. However, the institute noted that certain types of flights were covered less often than others. The institute recommended that FAMS increase randomness or unpredictability in selecting flights and otherwise diversify the coverage of flights within the various risk categories. In its January 2009 report, GAO noted that the Homeland Security Institute's evaluation methodology was reasonable and that FAMS had taken actions (or had ongoing efforts) to implement the institute's recommendations. To address workforce-related issues, FAMS's previous Director, who served until June 2008, established a number of processes and initiatives, such as working groups, listening sessions, and an internal Web site for agency personnel to provide anonymous feedback to management. These efforts have produced some positive results. For example, FAMS revised its policy for airport check-in and aircraft boarding procedures to help protect the anonymity of air marshals in mission status, and FAMS modified its mission scheduling processes and implemented a voluntary lateral transfer program to address certain quality-of-life issues. The air marshals GAO interviewed expressed satisfaction with FAMS's efforts to address workforce-related issues. The current FAMS Director has expressed a commitment to continue applicable processes and initiatives. Also, FAMS has plans to conduct a workforce satisfaction survey of all employees every 2 years, building upon an initial survey conducted in fiscal year 2007. GAO's review found that the potential usefulness of future surveys could be enhanced by ensuring that the survey questions and the answer options are clearly structured and unambiguous and that additional efforts are considered for obtaining the highest possible response rates. To its credit, FAMS has made progress in addressing various operational and quality-of-life issues that affect the ability of air marshals to perform their aviation security mission. However, sustaining progress will require ongoing consideration by FAMS management--and continued oversight by congressional stakeholders--of key questions, such as how to foster career sustainability for air marshals given that maintaining an effective operational tempo can at times be incompatible with supporting a work-life balance."}
{"id":"gao_GAO-05-412","pid":"gao_GAO-05-412_0","input":"\tBackground\n\nMoney laundering is the process used to transform monetary proceeds  derived from criminal activities into funds and assets that appear to have  come from legitimate sources. Terrorist financing is generally  characterized by different motives than money laundering and the funds  involved often originate from legitimate sources. However, the techniques  for hiding the movement of funds intended to be used to finance terrorist  activity\u2014techniques to obscure the origin of funds and the ultimate  destination\u2014are often similar to those used to launder money. Therefore,  Treasury, federal law enforcement agencies, and the federal financial  regulators often employ similar approaches and techniques in trying to  detect and prevent both money laundering and terrorist financing.\nFollowing the September 11 terrorist attacks, Congress passed the USA  PATRIOT Act, which was enacted on October 26, 2001. Title III of the  PATRIOT Act amended the BSA. The BSA was enacted by Congress in 1970  and requires that financial institutions file reports and maintain records  with respect to certain transactions in currency and monetary instruments  that are determined to have a high degree of usefulness in criminal, tax, or  regulatory investigations and, as amended by the PATRIOT Act, these  records and reports also have a high degree of usefulness in the conduct of  intelligence or counterintelligence activities. As a result, the BSA helps to  provide a paper trail of the activities of money launderers for law  enforcement officials in pursuit of criminal activities. Congress has  amended the BSA several times to give the U.S. government a wider variety  of regulatory tools to combat money laundering. In addition to requiring  regulations for information sharing and customer identification programs,  Title III of the PATRIOT Act expands Treasury\u2019s authority to regulate the  activities of U.S. financial institutions and requires a wide variety of types  of financial institutions to maintain anti-money laundering programs.\nAgencies under the Departments of the Treasury, Justice, and Homeland  Security are to coordinate with each other and with federal financial  regulators in combating money laundering and terrorist financing. Within  Treasury, FinCEN, under delegated authority from the Secretary of the  Treasury, is the administrator for the BSA and supports law enforcement  agencies by collecting, analyzing, and coordinating financial intelligence  information to combat money laundering. As a bureau of Treasury, FinCEN  clears all BSA regulations through Treasury. In August 2004, FinCEN  created an Office of Compliance to oversee and work with the federal  financial regulators on BSA examination and compliance matters. FinCEN  signed a Memorandum of Understanding (MOU) with the banking  regulators in September 2004 that laid out procedures for the exchange of  certain BSA information. The MOU requires that the federal banking  regulators provide information on examination policies and procedures  and on significant BSA violations or deficiencies that have occurred at the  financial institutions they supervise, including relevant portions of  examination reports and information on follow-up and resolution. FinCEN  will also provide information to the banking regulators, including  information on FinCEN enforcement actions and analytical products that  will identify various patterns and trends in BSA compliance. FinCEN has  been working on similar MOUs with SEC and CFTC; however, as of March  25, 2005, no effective dates have been set for either of them.\nDepartment of Justice components involved in efforts to combat money  laundering and terrorist financing include the Criminal Division\u2019s Asset  Forfeiture and Money Laundering Section and Counterterrorism Section,  the FBI, the Bureau of Alcohol, Firearms, and Explosives, the Drug  Enforcement Administration, and the Executive Office for U.S. Attorneys  (EOUSA) and U.S. Attorneys Offices. The Department of Homeland  Security\u2019s Bureau of Immigration and Customs Enforcement (ICE) also  investigates cases involving money laundering and terrorist activities.\nThe federal financial regulators who oversee financial institutions and  examine them for compliance with anti-money laundering laws and  regulations include the federal banking regulators\u2014the Federal Reserve,  OCC, OTS, FDIC, and NCUA\u2014and SEC, which regulates the securities  markets, and the CFTC, which regulates commodity futures and options  markets. Because the U.S. securities and futures markets are regulated  through a combination of self-regulation (subject to federal oversight) and  direct federal regulation, the SROs also oversee compliance with anti- money laundering laws and regulations. Two of the SROs\u2014NASD and  NYSE\u2014oversee registered broker-dealers. NFA oversees futures  commission merchants and introducing brokers in commodities. In  addition to NFA, a number of the futures commission merchants are  overseen by futures exchanges, including the New York Mercantile  Exchange, CME, and CBOT.\n\n\tDeveloping Regulations for CIP and Section 314 That Applied to a Wide Range of Financial Institutions Was Difficult and Complex\n\nTreasury and the federal financial regulators encountered numerous  challenges as they developed regulations to implement sections 314 and  326. Key challenges related to implementing section 326 included  developing regulations that could be applied consistently across a financial  industry that has diverse business models, customer relationships, and  financial products. In addition, many financial institutions have  arrangements with other institutions to process customer transactions.  These arrangements and the need to build in a risk-based approach to  customer identification created concerns among the regulators and  industry about reasonable levels of accountability for verifying the identity  of customers. Developing regulations for section 314 presented practical  problems on how to develop a process for information sharing between law  enforcement and industry and a process that allows financial institutions to  share information with each other.\n\n\t\tDevelopment of the CIP Requirement Highlighted Difficulties in Applying Requirements Consistently to a Wide Range of Financial Products and Businesses\n\nTreasury and the federal financial regulators had to resolve several issues  through an interagency process when developing the regulations for CIP,  such as defining \u201ccustomer\u201d and \u201caccount\u201d for the purposes of the  regulations and determining how much flexibility to give firms in verifying  the identity of customers. Because the regulations for CIP would apply to a  diverse financial industry, FinCEN and the regulators formed a working  group and gathered information from industry officials about their different  business models and customer relationships. According to FinCEN  officials, the interagency process employed to issue joint regulations was  the first that included Treasury and the seven federal financial regulators.  Specifically, Treasury and the five banking regulators (FDIC, Federal  Reserve, NCUA, OCC, and OTS) jointly adopted a CIP rule covering banks,  thrifts, and credit unions. Treasury and SEC jointly adopted separate rules  for broker-dealers and mutual funds. Treasury and CFTC jointly adopted a  rule for futures commission merchants and introducing brokers. As  shown in figure 1, the rulemaking process took over a year and a half to  complete.\nFollowing the issuance of the joint notices of proposed rulemaking in July  2002, Treasury and the federal financial regulators collectively received  approximately 500 comments, many of which expressed concerns about  the types of accounts and customers that should be subject to CIP. For  instance, some comments questioned whether an account established as  part of an employee benefit plan should be subject to CIP regulations, the  extent to which the risk-based approach should be used, and the need for  Treasury and the federal financial regulators to be more specific about the  methods of verification. Other comments proposed that the entire process  be risk-based without any minimum requirements. Some comments also  addressed how financial institutions could rely on or share responsibility  with another institution for verifying the identity of a shared customer  account. This reliance aspect is important for some types of financial  institutions that have securities and futures products. For example, in the  securities industry, many brokers interact with customers (introducing  brokers) but rely on another broker for clearance, settlement, and custody  purposes (clearing firms). Typically under this arrangement the introducing  broker interacts with the customer by taking orders and making  recommendations and the clearing firm holds the customer assets.  Treasury and the regulators also considered how financial institutions  could verify customer identities for customers who open accounts by mail,  by phone, or over the Internet.\nTreasury and the federal financial regulators ultimately established  minimum identification requirements and mandated that financial  institutions develop risk-based procedures for verifying the identity of each  customer to the extent reasonable and practicable. The verification  procedures included documentary and nondocumentary methods to cover  the variety of approaches customers use to open accounts. The final rules  published on May 9, 2003, provide a framework with minimum standards  for identifying customers, while allowing financial institutions flexibility to  design and implement CIPs according to risk-based procedures for  verifying identity based on their business lines, types of customers, and  methods of opening accounts. Figure 2 illustrates requirements for  identification and verification procedures.\nIn addition to establishing minimum identification standards and a risk- based approach for verification procedures, the final rule requires that  financial institutions develop CIPs that include procedures for (1) making  and maintaining a record of information required to be obtained from the  customer at the time the account is opened and retaining the information  for five years after the date the account is closed, (2) providing notice to  the customer that their identity will be verified, and (3) determining  whether a person appears on any list designated by Treasury (in  consultation with the federal financial regulators) as a federal government  list of known or suspected terrorists or terrorist organizations that must be  checked by financial institutions as part of the CIP requirement. Treasury  has not designated a list for the CIP requirement at this time.\nThe final rule also allows financial institutions to rely on another financial  institution to perform any procedures of its own CIP for customers that the  two financial institutions share provided that, among other requirements,  the financial institution that is being relied on enter into a contract  certifying annually to the relying financial institution that it has  implemented its own anti-money laundering program and that it will  perform the specified requirements of the relying financial institution\u2019s CIP.  The rule also requires that the financial institution being relied on is  regulated by a federal functional regulator. The final rules stated that  financial institutions were expected to be in compliance with the final rules  no later than October 1, 2003.\nTreasury issued a Notice of Inquiry in July 2003 (see fig. 1) approximately 2  months after the final CIP rules had been adopted, soliciting additional  comments about two aspects of the final CIP rules that concerned some  interested parties, including members of Congress and law enforcement  officials. The Notice of Inquiry sought additional comments on (1) whether  and under what circumstances financial institutions should be required to  retain photocopies of identification documents relied on to verify customer  identity and (2) whether there are situations when the regulations should  preclude reliance on certain forms of foreign government-issued  identification to verify customer identity. Treasury received over 34,000  comments in response to the Notice of Inquiry from a wide variety of  individuals and entities, including members of Congress, the Department of  Justice, the financial services industry, advocacy groups, and interested  citizens.\nTreasury did not make any changes to the final CIP rules for two reasons.  First, it concluded that requiring photocopies in all cases is not consistent  with the risk-based approach for CIP. In its official disposition of comments  to the notice, Treasury said that the decision to make photocopies should  be at the discretion of the financial institution rather than an across-the- board requirement. Second, Treasury decided that specifying individual  types of documents that cannot be relied upon to verify customer identities  did not make sense from a regulatory perspective because the relative  security and reliability of various identification documents that are  available is constantly changing. The comments received in response to the  Notice of Inquiry primarily related to encouraging Treasury to take an  official position on whether the Mexican consular identification document,  the Matricula Consular is a reliable document for verifying identification.  Treasury concluded that because the relative security and reliability of  identification documents are constantly changing, any list of unacceptable  documents would quickly become outdated and may provide financial  institutions with an unwarranted sense of security concerning documents  that do not appear on such a list. Therefore, Treasury decided not to  prescribe a specific list of documents that are acceptable or not acceptable  in the regulation, but rather committed to providing financial institutions  with information relating to the security and reliability of identification  cards.\n\n\t\tDeveloping Section 314 Regulations Required Balancing the Needs of Law Enforcement and Industry\n\nWhen developing section 314 regulations, Treasury (through FinCEN) had  to determine the extent to which financial institutions should share  information about customers with law enforcement officials and with each  other. Treasury adopted final regulations in September 2002. Figure 3  shows the key dates in the rulemaking process for section 314.\nFor section 314(a), FinCEN implemented a process in which law  enforcement agencies provide information on potential suspects to  FinCEN. FinCEN distributes these 314(a) information requests across the  country to financial institutions that are required to search their accounts  and transactions to identify any matches.\nThe process was temporarily suspended in November 2002, based on  feedback from financial institutions that they were overwhelmed or  confused by the process. Some institutions did not know what to do with  the information requests, while others were not sure which accounts or  transactions to search. Following consultations with law enforcement and  the federal financial regulators to streamline the process, FinCEN resumed  314(a) information requests in February 2003. FinCEN and industry  officials agreed that, since the moratorium, FinCEN has implemented a  more streamlined process that has improved the clarity and efficiency of  314(a) information requests. Officials from FinCEN and law enforcement  agencies have also established procedures to vet requests sent by law  enforcement agencies to ensure that they are related to terrorist or  significant money laundering activities. (See fig. 4.) Before putting a name  on the information request list, FinCEN officials said that they follow up  with the requesting law enforcement agent to obtain more information to  determine whether the case merits the use of the 314(a) process and to  verify that the agent will be available to respond to any financial institution  that finds a match when the request goes out. FinCEN also sends each law  enforcement requester a feedback form on the usefulness of the  information obtained. For example, the feedback form asks if law  enforcement officials served grand jury subpoenas based on the  information obtained from the 314(a) process. In addition, law  enforcement officials said that they have taken steps to caution agents  against overusing the 314(a) process, and that the 314(a) process is not  meant to replace the need for a subpoena or more rigorous investigation  methods.\nFinCEN sends out the 314(a) information request list every 2 weeks. The  information requests include suspects related to terrorist cases and  significant money laundering investigations. FinCEN tries to limit the  number of subjects on the bi-weekly information request. The request  contains as much identifying information as possible, such as dates of  birth, social security numbers, and addresses as well as aliases so the  number of records that are to be searched for can be extensive. Financial  institutions have 2 weeks to respond. Urgent requests can also be  distributed with shorter turnaround time when deemed necessary.\nThe rulemaking process for section 314(b) addressed the need to  encourage information sharing among financial institutions while still  protecting customers\u2019 right to privacy and established a mechanism for  financial institutions to satisfy the statutory notice requirement. Section  314(b) of the PATRIOT Act allows financial institutions, upon providing  notice to Treasury, to share information regarding individuals, entities, and  countries suspected of possible terrorist or money laundering activities.  The final rule requires that to be protected by the safe harbor from liability  for sharing information pursuant to section 314(b), financial institutions  must comply with the procedures prescribed by the rule, including  providing notice annually to FinCEN of their intent to share information  with other institutions. The rule also requires that prior to sharing  information, a financial institution must verify that the financial institution  with which information will be shared has also filed a notice with FinCEN.  FinCEN determines that the notice requirement sufficiently reminds  financial institutions of their need to safeguard information that is obtained  using section 314(b).\n\n\tTreasury and the Federal Financial Regulators Have Reached Out to the Financial Industry to Assist It in Implementing CIP and Section 314 Rules, but Industry Concerns Remain\n\nTreasury and the federal financial regulators have taken several steps to  help the financial industry understand and comply with the CIP and 314  information sharing regulations; however, the need for agency coordination  has slowed the issuance of additional guidance. Industry officials said that  although the government\u2019s guidance has been helpful, it does not  completely address their questions and compliance concerns particularly  related to the CIP rule. The implementation of the 314(a) information  sharing process has highlighted the tension between law enforcement  officials\u2019 duty to protect sensitive information and the need for information  from law enforcement to help industry monitor, identify, and report  possible financial crimes, including terrorist financing and money  laundering. Finally, industry officials said that they appreciate the safe  harbor provided by 314(b), but some officials said distinguishing possible  money laundering and terrorist activities from other types of financial  crimes not covered by section 314(b), such as fraud, has been difficult.\n\n\t\tTreasury and the Regulators Have Assisted Industry in Implementing CIP and Section 314 Requirements, but Interagency Coordination Has Slowed Issuance of Additional Guidance\n\nTreasury and the federal financial regulators have sought to educate the  financial community to help it understand the new requirements, but the  need for interagency coordination has slowed regulators\u2019 issuance of  additional guidance. Regulators and SROs used established, formal  channels (such as Web site postings and existing regulatory memorandums  distribution channels) to distribute guidance to firms describing the  regulations, clarifying when the regulations would become effective, and  offering advice about implementation. Officials from the regulatory  agencies and SROs also informed firms of the regulations and addressed  practical issues during numerous industry-related conferences, conference  calls, and training sessions. Moreover, agency officials said that during  compliance exams conducted before and soon after the regulations  became effective, examiners clarified particular aspects and helped firms  establish compliant programs.\nTreasury and the federal financial regulators have provided specific  guidance related to the CIP rule and section 314 in the form of responses to  \u201cfrequently asked questions\u201d or \u201cFAQs.\u201d In August and October 2003,  Treasury and SEC issued limited FAQ guidance related to mutual funds and  broker-dealers, respectively. In January 2004, Treasury and the banking  regulators jointly issued FAQ guidance that addressed several issues  related to CIP. Among other topics, the answers clarified the definitions of  a customer and an account in different situations and discussed how firms  should apply the rules to existing customers. In July 2004, Treasury and  CFTC issued FAQ guidance concerning CIP that was similar to the banking  regulators\u2019 guidance.\nFinCEN issued FAQs for the 314 information sharing regulations in  February 2003. These FAQs were initially posted on FinCEN\u2019s public Web  site but, according to FinCEN officials, they were removed due to law  enforcement concerns that this guidance could give criminals an  advantage. FinCEN officials said they have now posted these FAQs to its  secure Web site that financial institutions access to obtain the 314(a)  information requests and will send the FAQs to a financial institution upon  request.\nAccording to FinCEN, because of the joint nature of the CIP rules, all of the  affected regulators and FinCEN must coordinate when issuing guidance to  assure consistency in the implementation of the regulations. Such  coordination has slowed the issuance of further guidance. Similar to the  challenges they encountered in the rulemaking process, the financial  regulators and FinCEN face continuing challenges in developing guidance  that applies to diverse types of financial products and businesses. FinCEN  and the federal financial regulators began developing a second series of  CIP FAQs pertaining primarily to banks in early 2004. Some officials told us  that this guidance has taken longer to finalize because of difficulties  reaching agreements on which questions to address and how to answer  them. FinCEN officials told us that although some of the officials had  signed off on the draft FAQs, agreement was not reached among two of the  regulators on one outstanding question until February 2005. FinCEN  officials told us that, although these are questions pertaining to CIPs, some  questions have broader policy implications for the affected agencies.  FinCEN released the draft for internal approval by the financial regulators  on March 25, 2005, and the final CIP FAQs were jointly issued by Treasury,  FinCEN, and the banking regulators on April 28, 2005. Officials from CFTC  and FinCEN told us that they hoped guidance in the form of an FAQ  addressing the CIP issue related to customers of executing and carrying  brokers would be released soon, but it has also taken some time to finalize  the guidance. SEC officials told us that they have been waiting for the  second set of banking FAQs and will then adapt the first and second set of  CIP FAQs for securities firms.\nThe industry officials we spoke with largely agreed that the regulators have  provided valuable information and services helping them to understand the  regulations. Some officials lauded the time and effort regulators have taken  to inform firms of the new regulations and answer difficult, practical  questions.\n\n\t\tIndustry Officials Believe That More Guidance from FinCEN and Financial Regulators Would Help Address Some CIP Implementation Challenges\n\nIndustry officials we met with said that while regulators\u2019 guidance has been  helpful, it does not address all of their questions and concerns, thus making  it difficult for them to know if they are in full compliance with the  requirements. Industry officials said that although their institutions had  customer identification procedures in place prior to the PATRIOT Act, they  revised their forms, processes, and systems to meet the minimum CIP  requirements. Many industry officials said that CIP regulations have  challenged them to organize and document their identification procedures,  create new forms and processes to notify customers of the new  procedures, and reconfigure systems in order to store information required  by the regulations for the specified period. Industry officials also said that  implementing CIP has improved the consistency of customer identification  procedures across different business lines in their own institutions and  should improve consistency across the various financial sectors.\nCIP FAQs that FinCEN and the federal financial regulators issued for bank,  securities, and futures firms in 2003 and 2004 responded to several of the  industry\u2019s implementation concerns. For example, the FAQs for banks  discussed two issues banks raised during the public comment period in the  rulemaking process\u2014(1) the extent to which banks should verify existing  customers and (2) how banks may identify customers using  nondocumentary sources of identification information. The one CIP FAQ  for securities firms clarified when an intermediary will be deemed the  customer for purposes of the CIP rule when opening a domestic omnibus  securities account to execute transactions for the intermediary customers.\nDespite the guidance, industry officials remain concerned about some  challenges they raised during the comment period and have additional  concerns. For example, industry officials said they are still uncertain how  examiners determine that firms have taken appropriate steps to verify the  identity of customers when the CIP regulations allow firms to take a risk- based approach and give them the flexibility to tailor their procedures for  verifying customers\u2019 identities according to their location, customers, and  products. Industry officials believe that they and their examiners may  reasonably disagree on the risks posed by certain customers and  subsequently disagree about when to take extra steps to verify the identity  of the customers. The officials expressed concern that examiners will  sanction firms who differed with them, despite the fact that the firms  followed what they believed were reasonable steps to determine the risk of  the customers and subsequently took reasonable steps to verify their  identity. For example, one industry representative told us that in a recent  exam an examiner questioned the firm\u2019s designation of high-risk countries-- the firm planned to take more stringent steps to verify the identity of  customers depending on the risk ranking of high-risk countries. According  to the industry official, the examiner thought that two of the countries on  the risk matrix should have been placed in a higher risk category but did  not provide a basis for believing that certain countries should be higher on  the firm\u2019s risk ranking.\nSome industry officials also said that they were unsure how examiners  expected them to verify the identity of institutions and people when  reliable identification information is unavailable, such as for people from  countries where sources of identification may not be reliable. CIP rules  require that financial institutions collect a government identification  number for corporations as well as individuals. Some industry officials said  that a foreign government identification number for institutions or  corporations can be very difficult to verify and therefore the collection of  the identification number is virtually worthless. Also, one of the  documentary methods for verifying the identity of a corporation is to  obtain the articles of incorporation, but these documents can also be  difficult to use to verify identities for foreign entities. Some securities  industry officials told us that foreign incorporation documents are difficult  to obtain and sometimes impossible because the country does not make  this information available to the public. Similarly, officials from mutual  fund firms expressed uncertainty concerning how examiners will assess  their practices for verifying the identity of some customers processed  online or over the telephone. The officials explained that they often use  credit reports and other nondocumentary sources to verify these types of  customers, and such sources are not always available for some customers,  such as young customers or some senior customers.\nAdditionally, some industry officials expressed uncertainty about the  reliance provision of the CIP rule. Specifically, industry officials said that  they did not know the scope of a reasonable reliance agreement and which  firm is liable for mistakes. Even after regulators issued guidance on the  reliance provision in the first series of CIP FAQs, some industry officials  said that they remain uncertain about the scope of reasonable reliance  agreements in some instances. Industry officials in the futures industry told  us that they hope that the federal government will provide guidance on how  the CIP requirement affects the relationship between executing brokers  and carrying brokers in \u201cgive up\u201d relationships. CFTC and NFA officials  said that the regulations suggest that for an executing broker to invoke the  reliance provision in give-up transactions, carrying brokers must certify  that they have verified the identity of each customer whose trades are given  up to the carrying broker, thus requiring numerous verifications, which  could overwhelm the daily operations of the firms with CIP requirements.  In February and March 2005, CFTC and FinCEN officials told us that they  were working to issue additional guidance concerning these give-up  relationships and they hoped it would be issued shortly. In addition, some  industry officials said that they avoid relying on other firms because they  did not know how examiners would determine which firm will be  responsible for mistakes. During the rulemaking process, officials from the  securities sector expressed this same concern. Some industry officials told  us that examiners did not fully understand the reliance provision. The  securities industry officials told us that the reliance provision was meant to  ensure that the CIP requirement did not result in duplicative efforts.  Because of these concerns, some firms may not take advantage of the  provision.\n\n\t\tIndustry Officials Faced Some Implementation Challenges and Question Whether the 314(a) Information Sharing Process Improves Communication with Law Enforcement\n\nThe implementation of the 314(a) information sharing process has created  some practical challenges and highlighted the tension between law  enforcement officials\u2019 duty to protect sensitive information and industry\u2019s  need for information useful in identifying and reporting financial crimes,  including terrorist financing and money laundering. One challenge industry  officials said they faced was their inability to simultaneously search the  multiple customer databases they are required to search, which forces  them to search numerous databases individually. Some industry officials  told us that they have dedicated significant staff hours to conduct the  searches, developed search programs specifically for 314(a) information  requests, and hired third-party vendors to conduct the searches.\nDespite the attempts to lessen the burden of the 314(a) process, some  industry officials said that they have been disappointed with how federal  law enforcement agencies appear to be using the process. Industry officials  said that they expected law enforcement officials to request information  only for select, serious threats and primarily terrorist-related activities;  however, they questioned the significance of some of the information  requests they have received because requesting law enforcement agents  have not followed up matches by sending subpoena requests or returning  telephone calls concerning the matches. FinCEN and law enforcement  agency officials responded that they continue to refine the process for  vetting requests and preventing agents from overburdening financial  institutions with unnecessary requests.\nAlso, some industry officials asked why law enforcement officials could  not provide more information about cases involving their institutions, how  to treat particular suspicious customers, and profiles of terrorists and other  criminals. The industry officials said that such information would help  them to recognize and report a potential criminal or terrorist and enable  them to update their criteria for assessing the risk of individual customers,  thus strengthening due diligence systems and improving their contributions  to law enforcement officials\u2019 anti-money laundering and anti-terrorism  efforts. Law enforcement and FinCEN officials said that although they  greatly appreciate the information provided by firms via the 314(a) process,  providing feedback to firms on particular cases can be a challenge,  particularly when cases involve sensitive information. In August 2004, the  FBI created a list of terrorist financing indicators to assist financial  institutions in identifying and reporting suspicious activity that may relate  to terrorism. FinCEN forwarded this information to financial institutions  through the 314(a) distribution channels. Consistent with the statements of  the law enforcement officials we spoke with, the 9-11 Commission praised  the benefits of the section 314(a) information sharing process, but also  expressed concerns about the extent to which law enforcement should  share sensitive law enforcement or intelligence information. The 9-11  Commission noted that providing financial institutions with information  concerning ongoing investigations opens up the possibility that the  institutions may leak sensitive information, compromise investigations, or  violate the privacy rights of suspects.\nIn response to the industry\u2019s request for more information concerning the  value of the 314(a) process, FinCEN periodically publishes 314(a) fact  sheets. These fact sheets provide industry with summary data on 314(a)  requests over a specific time period, including the law enforcement  agencies making requests and the number of search warrants, grand jury  subpoenas, and indictments attributable to information firms provide  through the 314(a) process. Regulators, industry officials, and law  enforcement officials also jointly publish semiannual Suspicious Activity  Report (SAR) Activity Reviews, which provide information on trends and  patterns in financial crimes and how industry\u2019s contributions through  reporting suspicious activity and responding to 314(a) requests have helped  investigations. Furthermore, as stated in its Fiscal Year 2006-2008 Strategic  Plan, released in February 2005, FinCEN plans to seek faster and more  efficient technical channels for dialog between government and the  financial industry. For example, FinCEN officials told us that they hope to  use FinCEN\u2019s new secure information sharing system to provide financial  institutions additional feedback information.\n\n\t\tIndustry Officials Expressed Some Confusion about Types of Suspicious Activity That Can Be Shared under Section 314(b)\n\nAlthough industry officials said section 314(b) is a helpful tool and has  enabled them to share information in a new way, some officials said it is  not always easy to determine if the suspicious activity is money laundering  or terrorist activity or other financial crimes. As noted earlier, section  314(b) of the PATRIOT Act provides a safe harbor for financial institutions  to protect them from liability for sharing information only if it relates to  individuals, entities, organizations, and countries suspected of possible  terrorist or money laundering activities. Some industry officials stated that  sometimes it is difficult to distinguish fraudulent activity from possible  money laundering, thus making it hard to determine if a firm can share  information about that activity with other firms participating in the 314(b)  network. As a consequence, some financial institutions may be reluctant to  use the 314(b) process.\nOn the positive side, industry officials who had used the process said that  the 314(b) provision has allowed firms to share useful information  regarding potential money laundering or terrorist activities with other  institutions that they previously had little or no interaction with. The  officials said that such sharing has helped them efficiently collect  otherwise unattainable information about customers, enabling their firms  to practice better due diligence. Furthermore, some officials from the  banking industry said the 314(b) safe harbor provision has encouraged  them to give and receive information that uncovers diverse criminal  activities because money laundering is a predicate to a wide variety of  crimes.\n\n\tFinancial Regulators and SROs Have Updated Examination Guidance and Trained Examiners to Evaluate Compliance with CIP and Section 314\n\nSince February 1 and October 1, 2003\u2014when financial institutions were to  be in compliance with regulations for sections 314 and CIP of the PATRIOT  Act, respectively\u2014banking, securities, and futures regulators and SROs  issued examination guidance and trained examiners to assess firms for  compliance with both provisions. The five banking regulators jointly issued  guidance for CIP and section 314. The SEC and the securities SROs we  reviewed issued final guidance for both provisions individually, and the  futures SROs we reviewed issued final guidance jointly in February 2004  through the Joint Audit Committee\u2014a consortium of futures exchanges.  NFA updated and issued its guidance by October 2003 for both provisions.  All federal financial regulators and SROs continue to update staff on  changes to examination procedures and have trained examiners to assess  firms for compliance with CIP and section 314.\n\n\t\tAll Financial Regulators and SROs Have Issued Final Guidance and Procedures for CIP and Section 314 and Used a Variety of Methods to Communicate Changes to Their Staff\n\nThe banking regulators jointly issued guidance and procedures for section  314 on October 20, 2003, and for CIP on July 28, 2004. Although banking  regulators did not issue final examination guidance for CIPs until several  months after the regulations took effect, examiners were assessing firms\u2019  CIPs using draft or interim guidance beginning in October 2003. SEC issued  final guidance and procedures for broker-dealers in September 2003 and  April 2002 for mutual funds. SEC\u2019s guidance for mutual fund examination  does not address examination for compliance with section 314(a) requests  to mutual funds. SEC officials told us that FinCEN is currently not  including mutual funds in the 314(a) process. Also, SEC officials said that  because mutual fund shares are typically purchased through a principal  underwriter, which is a registered broker-dealer, most mutual fund  accounts would likely be covered by broker-dealers who receive 314(a)  information requests.\nDevelopment of examination guidance for all of the federal financial  regulators and the SROs continues to evolve as events change the  requirements financial institutions must adhere to in order to maintain  sound anti-money laundering programs. FinCEN is working to provide  support to regulators that have been delegated compliance examination  responsibilities for financial institutions and has become more involved in  helping regulators develop examination guidance and best practices. For  example, federal banking regulators, working on an interagency basis  through the Federal Financial Institutions Examination Council (FFIEC)  and with FinCEN, have drafted joint examination guidance that was being  field tested as of March 2005. The targeted issue date for this guidance is  June 30, 2005. Banking agency officials told us that this is the first time  they have developed joint anti-money laundering guidance and procedures  and that they are more comprehensive than any they have issued in the  past. As part of this effort, the banking regulators plan to distribute the new  examination manual to examiners on a CD that will also include the most  current anti-money laundering examination guidance and procedures. SEC  officials told us that they also plan to revise the examination guidance and  procedures for broker-dealers and mutual funds based on lessons learned  from examinations conducted last year. FinCEN officials told us they  intend to also work jointly with SEC and CFTC to coordinate efforts among  securities and futures regulators and work together on new or revised  guidance and procedures. However, FinCEN officials told us that they have  not been involved with SEC and CFTC in developing examination guidance  to date and they are still in the process of establishing MOUs with the two  regulators.\nAll of the SROs in our review issued final examination guidance and  procedures for the CIP rule and section 314 of the PATRIOT Act. The  securities SROs issued final examination guidance for both provisions by  October 2003. However, NASD and NYSE began examining firms for  compliance with section 314 as early as October 2002 and January 2003,  respectively. The futures exchanges jointly issued final guidance for both  provisions in February 2004 through a consortium of futures exchanges  called the Joint Audit Committee. The CFTC, which performs regulatory  oversight of the Joint Audit Committee, conducts an annual review of all  Joint Audit Committee programs. The anti-money laundering program used  by the Joint Audit Committee is among the programs reviewed annually by  the CFTC. CME and CBOT had begun assessing firms for account  verification, which closely resembles the CIP requirement, by May 2002.  NFA updated its guidance to reflect the CIP requirement in October 2003  and April 2003 for section 314 and immediately began assessing firms for  compliance with both provisions. NFA officials said they expect to issue  revised examination guidance in 2005 for section 326 to address whether,  and under what circumstances, an executing broker in a give-up  transaction is required to apply its CIP to the give-up customer.\nThe federal financial regulators and the SROs included in our review told  us they have updated staff about changes to examination guidance and  procedures using a variety of techniques including teleconferences,  monthly or biannual staff meetings, interagency bulletins, email  notifications, and training sessions. For example, banking and securities  regulators including the Federal Reserve, OCC, FDIC, SEC, and NASD use  teleconferences that are broadcast to headquarters and district offices to  update staff on changes to examination guidance, post updates on the  organization\u2019s Intranet, or use biannual and monthly staff meetings. CFTC  and the futures SROs including, CBOT, CME, and NFA update staff through  monthly staff meetings and email. NCUA and NYSE send emails to staff  that outline or highlight major changes to examination guidance. The  banking regulators also issue agencywide regulatory bulletins and letters to  update examiners.\n\n\t\tFinancial Regulators and SROs Updated Their Training Program and Have Begun to Train Examiners to Evaluate Financial Institutions for Compliance with the CIP Requirement and Section 314\n\nAll federal financial regulators and SROs in our review updated their anti- money laundering training to include CIP and section 314. The federal  financial regulators and SROs began including CIP and section 314 in  training for anti-money laundering examination staff between January 2002  and June 2003. Banking and securities regulators use formal training  courses that are both instructor-led and computer-based and industry  experts to train staff administering anti-money laundering examinations.  Banking regulators also send examiners to training offered by FFIEC.  Training at most futures SROs we interviewed is more informal and occurs  mostly on the job due to the relatively small examination staffs at these  organizations. However, NFA and CFTC offer instructor-led training.\n\n\t\t\tBanking Regulators Use Formal Training Courses and FFIEC to Provide Staff Training\n\nAll of the federal banking regulators provide instructor-led courses in anti- money laundering and Web-based training. This training introduces BSA  and PATRIOT Act requirements and includes standard presentations and  theoretical as well as hands-on training. Their anti-money laundering  training curriculum includes instruction in various examination techniques  designed to help examiners recognize potential money laundering risks  confronting financial institutions and to learn procedures for assessing the  soundness of an institution\u2019s anti-money laundering program. The federal  banking regulators also send staff to conferences sponsored by trade  associations that offer multiday focused courses and provide informal  resources for self-training such as subscriptions to online newsletters.\nHowever, each banking regulator approaches training differently. For  example, OTS and NCUA require all new staff to attend a basic training  course in anti-money laundering. According to OTS officials, regional  conference training, which is attended primarily by examiners, is an  important part of bringing examiners up to speed on anti-money laundering  examination procedures. NCUA also uses regional conferences to train  large numbers of its examination staff. For example, in 2002, NCUA used  regional conferences to provide training on sections 314 and 326 of the  PATRIOT Act to all examination staff.\nFDIC and the Federal Reserve both have examiners that are anti-money  laundering specialists who serve as a training resource to other examiners.  Both agencies train examiners who are primarily responsible for  conducting anti-money laundering examinations. At the Federal Reserve,  anti-money laundering examination specialists interact on a daily basis  with examination staff engaged in anti-money laundering examinations to  offer case-specific guidance regarding the requirements. The Federal  Reserve also provides on-site examiner training at the individual Reserve  Banks, which emphasizes requirements under section 314 and 326 of the  PATRIOT Act as warranted. Similar to the Federal Reserve, FDIC uses staff  experienced in conducting anti-money laundering examinations as a  resource for examiners. Currently, FDIC has 321 anti-money laundering  specialists who serve as a resource and as trainers for other examiners.  However, FDIC recently trained every examiner on staff, approximately  1,721 as of 2004, in anti-money laundering requirements. In addition, many  of its supervisory and legal professionals are pursuing anti-money  laundering specialist certifications. OCC has four different training schools,  which all provide live, instructor-led training in anti-money laundering  requirements. Finally, in an effort to build up staff with anti-money  laundering expertise, OCC has a formal on-the-job training program for  anti-money laundering and finances certifications in anti-money laundering  examination for some of its examiners.\nBanking regulators also send examiners to FFIEC\u2019s interagency anti-money  laundering training workshops. We were able to attend one of these  workshops and observed that the course covered the CIP requirement and  section 314, in addition to other anti-money laundering requirements. The  course included lectures by experienced examiners, presentations by FBI  and Internal Revenue Service officials, reading materials, and case study  exercises. Many of the case study exercises demonstrated how to identify  suspicious transactions and how transaction testing could reveal  weaknesses in a financial institution\u2019s anti-money laundering program.  Table 1 provides additional information about training at each of the  banking regulators.\nSimilar to the banking regulators, the securities regulators and SROs also  provide formal classroom instruction in anti-money laundering review and  some Web-based training, but their approaches differ. SEC provides  training to more seasoned staff in anti-money laundering while anti-money  laundering training is available to all staff at the securities SROs. However,  SEC and NASD are beginning to tailor training in anti-money laundering  review for newer staff. For example, beginning in 2005, SEC\u2019s training for  new examiners will include an anti-money laundering workshop.  According to SEC, this effort responds to the increasing importance of anti- money laundering issues and serves to alert less experienced examiners to  SEC\u2019s new coordination efforts with FinCEN. Similarly, NASD has recently  enhanced its new examiner training program through the implementation  of a formal classroom training program. As part of this 6-week course,  participants will go through 2 full days of training devoted to anti-money  laundering requirements, including the CIP requirement and section 314 of  the PATRIOT Act. NYSE provides training using a combination of internal  and industry experts. Its training program includes several sessions on anti- money laundering and is administered by both internal employees who  have an extensive knowledge of the area and outside experts from law and  accounting firms.\nSecurities regulators also coordinate with each other to provide joint  training for their examiners. In February 2005, SEC, NASD, and NYSE  prepared a 2-day training session devoted to anti-money laundering  requirements. This training included presentations from FBI, FinCEN,  industry experts, and officials from each of the three securities regulators.  The SROs also work together to provide training about timely and relevant  examination and compliance topics. According to NASD and NYSE  officials we interviewed, the SROs periodically prepare joint training  sessions, which cover topics such as anti-money laundering requirements.  Table 2 provides additional information about training at SEC and the  securities SROs.\nFutures SRO officials at CBOT and CME told us that anti-money laundering  training was conducted primarily on the job because these organizations  have relatively small examination staffs. According to officials at these  organizations, more seasoned, senior staff is responsible for training new  staff on how to conduct anti-money laundering reviews. NFA also provides  on-the-job training; however, all examiners are required to attend formal  training in anti-money laundering such as instructor-led training sessions  and technical roundtables on various anti-money laundering issues. In June  and July 2004, the NFA\u2019s compliance department conducted two technical  roundtables, which focused primarily on CIP requirements. In addition to  in-house training, NFA also hosts outside agencies, such as FinCEN, to  make presentations on relevant and timely issued related to anti-money  laundering requirements. NFA invites other futures SROs including CME  and CBOT to most of their training sessions. According to officials at all of  the futures SROs, on-the-job and formal, classroom training for  examination staff on the CIP requirement and section 314 started as early  as May 2002. The CFTC also provides in-house training opportunities for its  entire staff, which includes examiners who conduct oversight  examinations of SROs. The training covers all aspects of the anti-money  laundering regulatory requirements applicable to futures firms.\n\n\tExaminations and Enforcement Actions Highlight Progress and Difficulties in Overseeing Compliance with the CIP Requirement and Section 314\n\nThe federal financial regulators and SROs responsible for examining  financial institutions\u2019 compliance with anti-money laundering laws and  regulations have conducted examinations that cover compliance with, and  have taken enforcement actions concerning, violations of both the CIP  requirement and section 314 and its corresponding regulations, but  coverage of these requirements varied in the examinations we reviewed.  Most of the examinations in our sample assessed whether financial  institutions had developed CIPs and procedures for complying with the  regulations implementing section 314(a), but specific aspects of the  procedures reviewed were not always documented. Some examinations  highlighted the difficulties examiners and financial institutions have  encountered in understanding CIP requirements. Compliance with section  314(b) and the implementing regulations was not routinely assessed in part  because information sharing under 314(b) is voluntary. The regulators and  SROs used informal actions to address the deficiencies or apparent  violations identified in the examinations in our sample. Since the  regulations became effective, some of the regulators have also taken  formal enforcement actions that include violations of the CIP requirement  and the regulations adopted under section 314(a). Finally, in conducting  our work for this objective, we encountered difficulties in obtaining the  information on examinations and violations from two of the regulators that  revealed weaknesses in their processes for tracking anti-money laundering  compliance.\n\n\t\tMost Examinations in Our Sample Reviewed CIP, but Coverage of Certain Aspects Varied\n\nAs shown in table 3, about 95 percent of the examinations in our sample  (168 of 176) documented some type of review of financial institutions\u2019 CIP  procedures. However, coverage varied when we looked for (1) evidence  that the examiner reviewed CIP and (2) documentation of specific aspects  of the examiners\u2019 reviews, such as reviewing the financial institution\u2019s  methods of verifying customers\u2019 identities or testing the CIP procedures.  When we reviewed the examinations for coverage of the CIP requirement,  we specifically looked for documentation that the examiner assessed  whether (1) the financial institution had developed a CIP and written  procedures for CIP; (2) the CIP procedures included collecting appropriate  customer information including the minimum requirements, such as date of  birth for individuals; (3) the CIP procedures included verifying customer  information using documentary or nondocumentary methods; (4) the  financial institution was using risk-based procedures for verification, such  as determining how much information to verify depending on its  assessment of the risk of the customer or type of account or collecting  additional information; and (5) the CIP had been adequately implemented  by testing a sample of accounts.\nGenerally, we saw documentation showing that examiners reviewed the  financial institution\u2019s written CIP procedures. Most examinations in our  sample had evidence that the review included assessing written procedures  for CIP (157 of 176 or 89 percent), and the procedures included appropriate  customer identification information (144 of 176 or 82 percent) and methods  of verification (143 of 176 or 81 percent). Fewer examinations\u2014 approximately 56 percent (99 of 176)\u2014assessed whether the financial  institution was using a risk-based approach. Our review leads us to believe  that the risk-based aspect of CIP is an area that could be difficult for both  financial institutions and examiners to interpret consistently, because  determining the level of risk of a customer or account can be difficult and  depends on several factors, such as the customer\u2019s line of business, the  process used to open the account, and whether the customer is in the  United States or overseas.\nBecause it can be difficult to determine the customer\u2019s risk level, it is not  surprising that some examiners would focus on reviewing the minimum  requirements, such as the requirements to collect minimum information on  customers. OCC officials told us that they developed some internal  guidance to assist OCC examiners in understanding the risk-based aspect  of CIP early in 2004 because some examiners were confused about it. This  guidance explained that limited identification and verification procedures  may be appropriate for local residents and businesses, but enhanced  procedures may be needed for nonlocal customers, non face-to-face  customers (such as customers who conduct transactions by mail,  telephone, and Internet), and high-risk accounts (such as private  investment corporations, offshore trusts, and foreign customers). The  guidance also provided examples of types of enhanced verification  procedures, such as customer callbacks, credit verification, and on-site  visits that could be used to verify the identity of higher-risk customers.  Finally, the guidance stated that for most banks a single set of procedures  for verifying the identity of customers would not be adequate. FDIC had  also incorporated some examples in examination guidance updated in  December 2004 that included examples of how CIP procedures may differ  depending on the risk of the customer or type of account. One example in  FDIC\u2019s guidance explained when a bank may want to obtain more  information on a business or company. The guidance said that although  obtaining information on signatories, beneficiaries, principals, and  guarantors is not a minimum requirement for CIPs, in the case of opening  an account for a relatively new or unknown firm, it would be in the bank\u2019s  interest to obtain and verify a greater volume of information on signatories  and other individuals with control or authority over the firm\u2019s account. It is  important that examiners determine whether financial institutions have  developed risk-based procedures in addition to developing procedures that  meet the minimum requirements, because (1) the regulations require that  financial institutions develop risk-based procedures and (2) the risk-based  procedures allow for more rigorous verification procedures on those types  of customers thought to be more at risk of engaging in money laundering or  terrorist activities.\nThe results of our review of examinations showed considerable variation  when we looked for documentation showing whether the examiner tested  CIP procedures. We found that only about 43 percent (75 out of 176)  examinations tested procedures, in part because our review looked at  examinations during the early implementation phase and the examination  guidance issued by some regulators does not require that they test  procedures. Federal Reserve and FDIC officials said that during the early  phase of implementation examiners may have focused on reviewing the  procedures with the intent of testing procedures in the next examination  cycle. SEC officials said that since many of their broker-dealer  examinations that we reviewed were oversight examinations of  examinations conducted by NASD or NYSE, SEC examiners would not  always conduct testing. Officials from NASD and NYSE told us that some of  the smaller broker-dealers may not have opened any new accounts  between October 1, 2003, and the time of the examination and, therefore,  the examiner would not have tested accounts. NYSE officials also said that  CIP was not reviewed in one examination in our sample because the  examiner determined that the firm did not have any customers and did not  interact with the public.\nThe regulators and SROs varied in their examiner guidance for testing  procedures. The banking regulators use a risk-based approach to their  examinations that determines what procedures are performed. Under this  risk-based approach to examinations, the examiners first determine  whether the financial institution has a strong compliance program and a  history of compliance and then tailors the examination procedures based  on this risk assessment and review of past examinations. For example,  Federal Reserve officials explained that an examiner\u2019s review of the  independent testing of an institution\u2019s anti-money laundering procedures  may reduce the need for the examiner to also test certain procedures.  When the banking regulators issued their joint examination guidance and  procedures for CIP in July 2004, the guidance directed examiners to  determine whether and to what extent to test CIP procedures based on a  risk assessment, prior examination reports, and a review of the bank\u2019s audit  findings. Although the SEC examination procedures for broker-dealers that  we reviewed did not include procedures for testing, an SEC official told us  that the initial request letters sent to institutions include a request for  customer account information so that examiners can test those accounts  for CIP compliance. SEC\u2019s procedures that we reviewed for mutual funds  included procedures for sampling accounts and testing CIP procedures for  examinations of funds\u2019 transfer agents that maintain customer account  information. NASD and NYSE have instructions that include sampling  accounts to determine whether the financial institution\u2019s CIP procedures  are being implemented properly. The examination procedures used by NFA  and the futures exchanges also include procedures to test the CIP  procedures against a sample of high-risk accounts.\nWe also looked to see if examiners conducted any testing of high-risk  accounts because the results of such testing would provide a clearer  indicator of whether the financial institution was exercising more due  diligence on riskier accounts. We saw evidence that examiners tested a  sample of high-risk accounts for CIP compliance in 8 of 176 of the  examinations. Several regulatory officials told us that the institutions in our  sample may not have had high-risk accounts. For example, many of the  NFA examinations included documentation saying that the institution did  not have any high-risk accounts and therefore a sample of such accounts  were not tested. Also, NCUA and OTS officials said that the probability that  the institutions they regulate would have high-risk accounts was small.\nAlthough most of the examinations had documentation that the examiner  had reviewed CIP, the documentation, such as the examination report or a  summary written by an examiner, did not always specify how the review  was conducted. Therefore, some of the variation in the results from our  examination review may also be due to differences in the way examiners  document their work. We observed a variety of methods for documenting  examination procedures that were conducted and examination results.  Some of the federal financial regulators and SROs used a system of  recording the completion of examination procedures, such as a  questionnaire or worksheet, which generally made it easy to follow what  the examiner had done but did not always include the same aspects that we  were reviewing. For example, NCUA examiners document their  examinations using a questionnaire. However, this questionnaire does not  ask the examiner to document whether he or she tested CIP procedures. In  the one instance in which we saw documentation of testing by NCUA, the  NCUA examiner had documented a deficiency in the credit union\u2019s CIP  procedures based on looking at a sample of accounts. An FDIC official told  us that examiners may not document that they tested procedures unless it  showed a deficiency. Some examiners documented their review by making  notes on copies of the financial institution\u2019s procedures. Finally, some  examinations, such as a few of the examinations conducted by the Federal  Reserve and OCC, used memorandums that discussed the findings of the  examination. However, the memorandums may not have specified all of the  aspects of CIP that were reviewed. In addition, OCC officials told us that  OCC does not require examiners to document every procedure that they  complete or what they do not do in an examination.\n\n\t\tThe Results of Our Examination Review Highlighted Some Difficulties in Understanding CIP Requirements\n\nOur review of some of the examinations in the sample revealed that  examiners and financial institutions may not always understand the  requirements for CIP or interpret them in the same way. The aspects of CIP  that raised questions about whether examiners or financial institutions  understand them are (1) the differences between CIP and know-your- customer procedures; (2) the differences between the requirements to  check government lists for CIP versus other government lists such as  OFAC; and (3) the extent to which a financial institution performs CIP  procedures for existing customers. Some confusion or lack of  understanding is to be expected during the early phases of implementing  new requirements. However, these differences in understanding have  resulted in inconsistencies in the examination process and may have  created further confusion and misunderstandings.\n\n\t\t\tCIP and Other Procedures That Require Customer Identification\n\nA potential challenge to assessing compliance with CIP are the similarities  among CIP requirements and other procedures that require customer  identification for anti-money laundering purposes, including what has been  called \u201cknow-your-customer\u201d or \u201ccustomer due diligence\u201d (CDD)  procedures. Also, although not an issue in the examinations we reviewed,  section 312 of the PATRIOT Act adds another customer due diligence  requirement and could lead to misunderstandings about appropriate due  diligence. Section 312 requires appropriate, specific and, where necessary,  enhanced, due diligence for correspondent accounts and private banking  accounts established in the United States for non-U.S. persons. FinCEN  adopted an interim final rule for section 312 on July 23, 2002. In the interim  rule, FinCEN noted that the requirements of this provision placed on  financial institutions are significant and therefore, additional time was  necessary to consider what is appropriate for the final rule.\nAs shown in table 4, CIP, know-your-customer procedures, and section 312  have some similarities. All three require some level of collecting customer  identification information and taking steps to verify that information and  the risk-based aspect of CIP could overlap or duplicate know-your- customer procedures and section 312 requirements. However, know-your- customer procedures typically require more information than CIP.  According to the 1997 BSA examination manual issued by the Federal  Reserve, a know-your-customer policy begins with obtaining identification  information and taking steps to verify information\u2014similar procedures to  CIP. However, know-your-customer procedures also include obtaining  information on the source of funds used to open an account and  determining whether to obtain information on beneficial owners of certain  types of accounts such as trusts. One goal of know-your-customer  procedures is to collect sufficient information so that the financial  institution knows what to expect in terms of customer account activity so  that it can adequately monitor for unusual or suspicious activities.\nIn 6 examinations in our sample of 176, we found evidence that examiners  were confusing know-your-customer procedures with CIP. For example, in  1 examination, the examiner documented a review of CIP but the  documentation included a copy of the financial institution\u2019s know-your- customer procedures that had been in place since 1997 and had not been  updated to include the minimum identification standards and other CIP  requirements, such as recordkeeping procedures. As a consequence, this  institution may be doing less than what CIP requires. In another  examination, the examiner reviewed the institution\u2019s know-your-customer  procedures, which included the minimum CIP requirements but also  directed employees to do more due diligence than CIP may require  depending on a risk assessment of the account and customer. As a  consequence the examiner and institution may believe that compliance  with CIP requires more procedures than necessary. Draft examination  guidance that the banking regulators intend to issue in June 2005 may  improve understanding of the difference. The draft guidance explains that  customer due diligence begins with customer identification and  verification but also involves collecting information in order to evaluate the  purpose of the account to be able to detect, monitor, and report suspicious  activity. One regulatory official told us that the banking regulators now  refer to know-your\u2013customer procedures as \u201ccustomer due diligence.\u201d\n\n\t\t\tCIP Requirements for Checking Government Lists\n\nIn 7 examinations, we found that the examiner confused the CIP  requirement to check government lists of suspected terrorists with another  government requirement to freeze assets and block transactions of  designated persons and entities. Treasury\u2019s Office of Foreign Assets  Control (OFAC) requires financial institutions to freeze assets or block  transactions of people and entities on the List of Specially Designated and  Blocked Persons. Therefore, financial institutions check customers  against this list to ensure that they are in compliance. In these 7  examinations, the examiners noted that the financial institution was not  compliant with the CIP requirement to check government lists because the  institution was not checking customers against the OFAC list. However, as  FinCEN and the banking regulators noted in the first set of CIP FAQs, lists  published by OFAC whose independent requirements stem from statutes  other than the PATRIOT Act and are not limited to terrorism, have not been  designated for purposes of the CIP rule.\n\n\t\t\tApplying CIP to Existing Customers\n\nTwo examinations documented disputes or confusion about the extent to  which financial institutions should apply the CIP requirement to existing  customers who open new accounts. In one examination, the examiner cited  a CIP deficiency because the institution had not updated the address  information for all of its existing customers. However, the CIP rule only  applies when an existing customer is opening a new account and the CIP  rule does not expect institutions to update records on existing customers if  it has a reasonable belief that it knows the true identity of its customers. As  stated in FAQs for the CIP rule issued by FinCEN and the banking  regulators, a bank can demonstrate it has a reasonable belief that it knows  its customers\u2019 true identities if it had comparable procedures in place prior  to October 1, 2003, or provide documentation showing that it has had a  long-standing relationship with a particular customer. In the other  examination, the institution and the examiners were familiar with the CIP  requirements but differed in interpreting the extent to which an institution  can develop a policy that exempts existing customers who open new  accounts. The institution disputed the examiners\u2019 finding that it was not in  compliance with CIP because it had assumed it knew the identity of all of  its customers who had opened accounts prior to January 2000. The  institution argued that it had procedures in place prior to 2000 that were  similar to CIP procedures and therefore did not have to apply the CIP  requirement to existing customers who open new accounts.\n\n\t\tMost Examinations in Our Sample Covered Section 314(a), While about Half Covered Section 314(b) in Part Because It Is Voluntary\n\nAs shown in table 5, most of the examinations in our sample\u2014about 76  percent\u2014included a review of compliance with section 314(a), but  documentation of specific aspects of section 314(a) were somewhat less.  We found documentation in 58 percent (91 of 157) of the examinations in  which the examiner determined that the financial institution was receiving  314(a) information requests from FinCEN. We also looked for evidence of  whether the examiner tested the 314(a) procedures and found  documentation of testing for about 16 percent (25 of 157) of the  examinations.\nAlthough many of the examinations had documentation that the examiner  had reviewed section 314(a), the documentation, such as the examination  report or a summary written by an examiner, did not always provide  enough specificity for us to determine if the examiner had verified that the  financial institution was receiving the requests or tested the procedures.  Also, in some cases, the examination procedures did not require that  examiners test 314(a) procedures. Neither NFA nor the exchanges require  in their examination guidance that examiners test the 314(a) procedures to  check if all of the required types of records are searched, but they do  require that the examiner determine if the financial institution responded  within 2 weeks if it had a customer account that matched a subject on the  314(a) request. An SEC official told us that it would be difficult to test the  314(a) procedures in many cases because many financial institutions  destroy the 314(a) information requests after they have searched their  accounts. The examination procedures for section 314(a) issued by the  banking regulators are also conducted under a risk-based approach. Under  the risk-based approach, examiners may determine the need to select a  sample of positive matches or recent 314(a) requests to test the  procedures.\nThe samples for SEC and NFA are smaller in our review of section 314(a)  because certain types of financial institutions do not typically receive the  314(a) information requests from FinCEN. According to SEC and FinCEN  officials, under the 314(a) process, information requests are generally sent  out to banks, credit unions, broker-dealers, and futures commission  merchants because these types of financial institutions have an established  infrastructure for capturing point of contact information. Also, SEC  officials told us that because mutual fund shares are typically purchased  through a principal underwriter, which is a registered broker-dealer, most  mutual fund accounts would likely be covered by broker-dealers who  receive 314(a) information requests. Therefore, SEC does not examine  mutual funds for compliance with section 314(a) at this time. SEC officials  said that because many of the examinations of broker-dealers in our sample  were oversight examinations of NASD and NYSE, some examinations  would not necessarily review all aspects of a financial institution\u2019s anti- money laundering program.\nThe number of examinations in our sample of NFA examinations that  covered section 314(a) is fewer than for CIP because most of the  examinations included in our NFA sample were examinations of  introducing brokers. NFA officials explained that introducing brokers do  not typically receive 314(a) requests because under industry regulation  every customer of an introducing broker must also be a customer of a  futures commission merchant. Therefore, if introducing brokers were  required to conduct 314(a) searches, they would be searching the same  universe of customers covered by the 314(a) requests sent to futures  commission merchants. Also, two of the NFA examinations of futures  commission merchants did not cover section 314(a) because (1) NYSE and  NASD had recently examined one of the firms and had covered it and (2)  NFA limited the scope of the examination of the other firm based on prior  NFA examinations that found the procedures were adequate. The two  CBOT examinations did not cover section 314(a) because the examinations  we reviewed were conducted prior to the issuance of the futures  exchanges\u2019 revised examination guidance and procedures in February 2004  that were updated to include section 314(a).\nSome of the OCC and NYSE examinations also did not cover a review of  section 314 procedures because our review occurred during the early  implementation phase and their examination approaches were still  evolving. According to OCC officials, OCC examinations in our sample did  not always cover section 314(a) procedures because during this time  period OCC was in the process of implementing its approach to reviewing  the PATRIOT Act provisions. In February 2004, OCC issued guidance to its  examiners to identify those banks with a high risk money laundering profile  with the intent of giving those institutions a higher priority in the  examination cycle for covering the PATRIOT Act provisions. Because OCC  examiners were just beginning to review the PATRIOT Act provisions  during the time of our review, some examinations may have not covered all  aspects of the PATRIOT Act. OCC officials also said that some examiners  may have focused on CIP because CIP procedures are more complex. OCC  officials said that compliance with section 314 and the CIP requirement  would be examined in all large banks by March 2005 and in all small and  mid-sized banks by end of 2006. NYSE examinations did not always cover  section 314(a) procedures, in part, because NYSE examination procedures  were not clear about how examiners should review section 314(a)  procedures. Initially, NYSE had included an examination procedure  covering section 314(a) within its examination objective covering the firm\u2019s  anti-money laundering program. NYSE officials created a separate  examination objective for section 314(a) while we were conducting our  review and told us that the revised questions and procedures were  incorporated into the anti-money laundering examination module in  December 2004.\nAs shown in table 6, about 55 percent of the examinations in our sample  covered section 314(b). The sharing of information with other financial  institutions pursuant to section 314(b) is voluntary. As a consequence,  some examiners may have chosen not to examine   for compliance with  section 314(b) regulations and some federal financial regulators and SROs  did not develop examination procedures for determining compliance with  section 314(b) regulations. SEC did not include section 314(b) in its  examination procedures for mutual funds because it is voluntary. The  futures SROs\u2014NFA, CME, and CBOT\u2014also did not include procedures for  examining compliance with section 314(b) regulations. An NFA official told  us that they did not review 314(b) because it is voluntary. Most of the  regulators and SROs that examined section 314(b) procedures emphasized  in their guidance that the provision is voluntary and financial institutions  can choose not to share customer information with other financial  institutions or share customer information without the benefit of the safe  harbor. However, financial institutions may choose to share information  without providing notice to FinCEN and be at risk of violating privacy laws.  An NYSE official told us that they assess compliance with section 314(b)  regulations to ensure that the financial institution will not violate privacy  laws. The procedures issued jointly by the federal banking regulators state  that the failure to follow the section 314(b) procedures is not a violation of  section 314(b) but could lead to a violation of privacy laws or other laws  and regulations.\n\n\t\tFederal Financial Regulators and SROs Generally Used Informal Actions to Address CIP and Section 314(a) Deficiencies and Violations\n\nBecause the regulations were new and many deficiencies and violations  were technical mistakes, the federal financial regulators and SROs mostly  took informal actions to address deficiencies and apparent violations  associated with section 314 and CIP. In our sample of 176 examinations, 32  examinations reported deficiencies or apparent violations related to  section 314(a) and 79 examinations reported deficiencies or apparent  violations relating to CIP requirements.\nThe federal financial regulators and SROs used different terms to classify  problems associated with section 314 and CIP and other elements of  institutions\u2019 anti-money laundering programs. For example, some  regulators would generally identify section 314 or CIP problems as  \u201cviolations\u201d or \u201capparent violations,\u201d while some of the banking regulators  would use the term \u201cdeficiency\u201d in some cases and \u201cviolation\u201d in other  cases. Officials from one of the banking regulators told us that they are in  the process of developing guidance on the matter. To allow for comparison  and aggregation across the different regulators and SROs, we examined  problems identified as both violations and deficiencies for our analysis.  The varying terminology has an impact on the banking regulators\u2019 reporting  systems, since some regulators track apparent violations but do not track  deficiencies. This issue will be examined in more depth in other work we  are conducting on the banking regulators and BSA examinations and  enforcement.\nThe types of section 314(a) deficiencies and violations in our sample  varied. Table 7 lists examples of the types of deficiencies and violations in  the examinations we identified as being minor or significant. We defined  those deficiencies and violations as minor when the financial institution  was generally receiving 314(a) requests and searching its accounts, but its  procedures needed enhancements. Those deficiencies and violations that  we defined as significant were situations in which the institution was not  receiving 314(a) requests or adequately searching accounts.\nThe severity of CIP deficiencies and violations also varied. We defined CIP  deficiencies and violations as being minor when the financial institution  generally had CIP procedures, but some aspects needed enhancements or  were incomplete according to the regulatory requirements. Situations in  which the institution did not have any CIP procedures or the examiner  found that the institution was generally not following its CIP procedures  we defined as significant. Table 8 lists some examples of minor and  significant CIP deficiencies and violations in our sample of examinations.\nIn many cases, the examinations included documentation showing that  institution management agreed to correct deficiencies or violations. In  several instances, the examination included documentation in which the  board of directors of the institution is directed to address the deficiencies.  For example, the Federal Reserve required a board of directors to address  a bank\u2019s failure to maintain documentation of its 314(a) searches and to  address the violation within 30 days of the examination. Similarly, NCUA  noted that a credit union lacked CIP policies and procedures and directed  its board of directors to address the apparent violation within a specific  timeframe. Additionally, in a few cases, examiners documented that  deficiencies or violations were corrected during the exam. For example, a  financial institution examined by NASD updated its procedures for  addressing FinCEN information requests while examiners were on-site.\n\n\t\tRecent Formal Enforcement Actions Have Cited Violations of CIP and Section 314(a)\n\nAlthough none of the examinations in our sample resulted in formal  enforcement actions, recent formal enforcement actions involved  violations of the CIP requirement and the regulations under section 314(a).  The federal financial regulators have independent statutory authority to  institute formal enforcement actions themselves, and they may also refer  BSA violations to FinCEN for formal enforcement action. Under  delegated authority, FinCEN is the administrator of the BSA and has the  authority to enforce BSA regulations. FinCEN\u2019s Office of Compliance and  Regulatory Enforcement evaluates enforcement matters that may result in  a variety of remedies, including the assessment of civil money penalties.\nThe federal banking regulators have the authority to take formal  enforcement action if they determine that a financial institution is engaging  in unsafe or unsound practices or has violated any applicable law or  regulation. According to officials from the federal banking regulators,  they would take formal action, such as issuing a cease and desist order, if  they detected systemic or willful violations of the BSA. Violations of  formal agreements or orders, such as a cease and desist order, may result in  the assessment of civil money penalties. According to a September 2004  MOU among the federal banking regulators and FinCEN, the federal  banking regulators have agreed to promptly notify FinCEN of significant  BSA violations or deficiencies by financial institutions under their  jurisdiction. SEC officials said that significant and willful BSA violations  would be referred to its enforcement division, as well as FinCEN.  Similarly, NASD and NYSE have their own rules to enforce anti-money  laundering regulations and officials from NASD and NYSE said that they  would take formal actions and may make a formal referral to FinCEN if  they encountered certain BSA violations. Officials from CFTC and the three  futures SROs in our review also said that they would take formal action for  significant BSA violations under their own rules to enforce anti-money  laundering regulations as well as refer the violations to FinCEN.\nWe identified several formal enforcement actions taken by the federal  banking regulators and FinCEN that included violations of CIP that  demonstrate how violations of CIP and section 314(a) are enforced (see  table 9). Only one enforcement action\u2014AmSouth\u2014included a violation of  section 314(a). These enforcement actions generally consisted of civil  money penalties, supervisory or written agreements, or cease and desist  orders. In each of these actions, the financial institution agreed to comply  with the enforcement action.\nTwo of these enforcement actions provide additional examples of how CIP  has been confused with know-your-customer policies. In two of the cases  above, Beach Bank and BAC Florida Bank, FDIC\u2019s cease and desist orders  cited institutions for violations of 31 C.F.R. \u00a7 103.121 by \u201cfailing to  implement an effective customer identification program and\/or effective  \u2018Know Your Customer\u2019 policies and procedures.\u201d While 31 C.F.R. \u00a7 103.121  requires banks to implement a CIP appropriate for their size and type of  business, it does not require banks to adopt know-your-customer policies  and procedures. Know-your-customer procedures generally require more  information than CIP.\nWe also identified five formal enforcement actions brought against broker- dealers for violations of CIP and section 314(a) requirements. According to  NASD, the firms that were the subject of the NASD enforcement actions in  table 10 were generally firms with limited risk profiles. Most of the firms  did not have extensive client bases, a large number of registered  representatives, and multiple branch offices. Therefore, the fine amounts  reflect both the smaller size and financial resources of the firms and the  lower risk of money laundering inherent in their business models.\n\n\t\tRegulators\u2019 Processes for Tracking Examination Information Varied with Some Having Weaknesses That Could Affect Their Ability to Monitor Anti- Money Laundering Compliance\n\nReviewing examination data and 176 examinations across six regulators  and five SROs provided us an opportunity to see a wide range of practices  for managing anti-money laundering oversight programs. One of the key  practices that varied across programs was the tracking system used to  track examination information. The information that was provided to us on  the examinations and apparent violations that covered section 314 and CIP  raised broader issues about how the regulators and SROs track anti-money  laundering compliance information. To select our sample of examinations,  we requested information on the examinations and apparent violations that  covered section 314 and CIP, but two of the regulators could not easily  obtain this information from their tracking systems. Although we assessed  the reliability of the data we received, we did not conduct broad  assessments of the information systems and processes regulators and  SROs use to track examinations in this report, in part, because we have  other work reviewing the banking regulators\u2019 anti-money laundering  examinations and enforcement programs and SEC\u2019s examination programs  that both include reviewing how they track examinations. However, we  highlight the problems we encountered in this review because the  problems could affect regulators\u2019 ability to monitor compliance with  sections 314 and CIP as well as other anti-money laundering requirements.\nGenerally, OCC, FDIC, OTS, and NCUA were able to respond to our data  request using their examination tracking systems and provide information  on examinations that would most likely cover section 314 and CIP by  identifying examinations that covered anti-money laundering compliance  and information on apparent violations. The information varied in  determining whether the examinations actually covered CIP and section  314 during the period of time between October 1, 2003, and May 31, 2004,  because the regulators began examining for these provisions at different  times. For example, OCC\u2019s system is designed to capture examination areas  but examiners were not provided guidance to begin reviewing PATRIOT  Act provisions until late February 2004, and therefore, the system was not  always recording that they had performed modules covering the PATRIOT  Act sections for the period of our review. Also, NCUA officials told us that  we were more likely to be able to review examinations that covered section  314 and CIP in examinations completed on or after February 2004, because  those examinations were more likely to have used the revised examination  questionnaire for anti-money laundering compliance that had been  installed on computers in December 2003.\nThe Federal Reserve had some difficulty responding to our request because  the Federal Reserve\u2019s existing automated tracking system for examinations  did not capture sufficient detail on whether its examinations cover a review  of anti-money laundering compliance. Although full-scope examinations  are all supposed to cover anti-money laundering compliance, many of the  Federal Reserve\u2019s target examinations may also cover anti-money  laundering compliance, but their tracking system does not capture this  level of detail. Therefore, the Federal Reserve could not readily identify the  population of examinations that would most likely cover CIP and section  314. Also, although the Federal Reserve tracks information on apparent  violations, its tracking system does not track deficiencies. This distinction  was important to our information request because the Federal Reserve had  not had any apparent violations related to section 314 or CIP, but its  Federal Reserve Banks had reported deficiencies in quarterly reports to the  Federal Reserve Board. However, the information in the quarterly reports  was not sufficiently detailed enough for identifying specific examinations  that had deficiencies related to CIP or section 314. Therefore, the Federal  Reserve Board had to request this information from the 12 Federal Reserve  Banks who had to manually go through examination files and compile the  information. Federal Reserve officials told us that they are making  significant enhancements to the tracking system to capture additional  information on Bank Secrecy Act and anti-money laundering compliance.\nSEC\u2019s examination tracking system is supposed to capture information on  whether the examination included certain focus areas, such as a review of  anti-money laundering compliance. However, when attempting to respond  to our information request on broker-dealer examinations, SEC discovered  that the information from its tracking system did not appear to be accurate.  According to an SEC official, SEC information on anti-money laundering  examinations for broker-dealers was not always accurate because  examiners were not always inputting all of the focus areas that they  covered, including anti-money laundering. Therefore, SEC conducted a  word search through its database of examination reports to identify  examinations that covered section 314 and CIP and identified about 26  examinations to respond to our information request. After our data request,  SEC officials emailed a reminder to examination staff of the importance of  accurately filling out all examination information in the tracking system,  including identifying when anti-money laundering is a focus area, and  asked that they review the accuracy of this information for completed  examinations and update it as necessary. For mutual fund examinations,  SEC used the same tracking system to identify all routine examinations of  mutual funds during our examination review period because anti-money  laundering was expected to be a focus area for all routine examinations  and did not encounter the same problem. NASD and NYSE were able to  identify examinations and apparent violations of section 314 and CIP using  their examination tracking systems.\nThe futures SROs provided us information without any difficulty.  According to an NFA official, once NFA had identified through its tracking  system the population of examinations that covered anti-money laundering  compliance and those examinations that included an apparent violation,  the examinations were reviewed to identify whether the apparent violation  was related to section 314 or CIP. CME and CBOT each only have  approximately 30 to 40 futures commission merchants at any point in time  that they track and had only completed a few examinations during the time  period for our examination review and therefore did not have difficulty  responding to our information request.\n\n\tLaw Enforcement Officials Believe That Section 314(a) and CIP Have Been Valuable Tools in Terrorist and Money Laundering Investigations\n\nLaw enforcement officials praised the 314(a) process, stating that it has  improved coordination between law enforcement agencies and financial  institutions and indicated that CIP has also assisted investigations. The  314(a) process has resulted in discovery of additional accounts held by  suspects and issuance of grand jury subpoenas, search warrants, arrests,  and indictments. Most law enforcement officials we interviewed also  believed that CIP requirements have helped investigators by ensuring that  better and more detailed information is collected and maintained at  financial institutions. Although CIP and 314(a) processes are useful tools  for investigating money laundering and terrorist financing cases, the  decision to bring charges in specific cases is always discretionary.\n\n\t\tLaw Enforcement Officials Believe That the Section 314(a) Process Has Improved Coordination with Financial Institutions and Has Led to More Efficient Investigations\n\nOfficials from the Department of Justice and other law enforcement  agencies told us that the 314(a) process has improved coordination  between law enforcement agencies and financial institutions and has  increased the speed and efficiency of investigations. Department of Justice  officials, including supervisory prosecutors in two U.S. Attorneys Offices,  with whom we spoke, said that the 314(a) process facilitated the flow of  information between financial institutions and law enforcement officials by  connecting FinCEN to approximately 20,000 financial institutions.\nInvestigators use the information FinCEN gathers from these financial  institutions as evidence in building cases against potential money  launderers and terrorist financers. FinCEN recently reported that the  314(a) system has processed 381 requests since it resumed operation in  February 2003. Of the total number of requests processed, 137 of them  were submitted by federal law enforcement agencies in the conduct of  terrorist financing investigations and 244 in the conduct of money  laundering investigations. FinCEN also reported that 314(a) feedback from  law enforcement requesters has been overwhelmingly positive. In  approximately 2 years, February 2003 through March 2005, 314(a) requests  submitted by law enforcement have resulted in the identification of  thousands of new accounts and transactions. According to information that  law enforcement provides to FinCEN, the 314(a) process has provided  information that helped support the issuance of more than 800 subpoenas,  11 search warrants, and 9 arrests. However, FinCEN officials cautioned  that this information represents feedback from only 10 percent of the cases  for which 314(a) information requests were made and that FinCEN does  not verify the accuracy of the data provided by law enforcement officials.\nAlmost all of the law enforcement officials we interviewed said that the  314(a) process improved the speed and efficiency of investigations by  allowing investigators to query a large number of financial institutions in a  short amount of time. One FBI official we interviewed showed us  information on how a 314(a) request led to identification of additional  suspect accounts across 23 states and 45 financial institutions. Prior to  submitting the request, the FBI was aware of only four accounts. One law  enforcement official told us that prior to section 314, law enforcement  officials often sent subpoenas to individual banks for information. They  could not, however, simultaneously request financial institutions across the  country to search accounts or transactions for groups of individuals or  even one person. According to FBI officials, the 314(a) process improves  the efficiency of investigations because agents spend less time finding the  suspect\u2019s specific financial transactions or accounts. The results from a  314(a) request may also help law enforcement to eliminate false leads. One  prosecutor told us that the 314(a) process had been used 3 or 4 times  during investigations of terrorist financing or money laundering cases.  However, all of the law enforcement officials we interviewed told us that  they are very judicious in their use of 314(a) requests, in part, because they  were aware of the costs to the financial services industry and also because  submitting the request can expose a covert operation. For instance, it is  possible that a financial institution will take some action, permissible  under the law, but which has the unintended effect of compromising the  investigation.\nAccording to some law enforcement officials, the 314(a) process also  allows investigators to track down sophisticated criminals who might  normally elude typical investigative approaches. For example, one  prosecutor told us that a potential money launderer or terrorist financer  with a lot of knowledge and sophistication about financial institutions  might have been able to circumvent traditional approaches used to collect  information, such as surveillance or tracing financial transactions to  individual financial institutions. However, in her view, the 314(a) process  has allowed investigators to cast a wider net thereby significantly  improving the investigative effort.\n\n\t\tInformation Collected through CIP Can Assist Money Laundering and Terrorist Financing Investigations\n\nMany of the law enforcement officials we interviewed said financial  institutions are collecting and maintaining better and more detailed  information as a result of CIP requirements. One prosecutor told us that as  a result of section 326 regulations, grand jury subpoenas can be used to  obtain more substantive and detailed information on accounts. This  improvement was due to the fact that the CIP rule requires financial  institutions to consistently gather more information from a customer when  an account is opened. For example, investigators and prosecutors are now  able to receive social security numbers, dates of birth, and complete  addresses when they issue subpoenas. The same prosecutor told us that in  the past, subpoenaed account information concerning criminal suspects  was often incomplete. For instance, instead of a physical address they  would receive only a P.O. Box or mailbox associated with the account.  Standardization of account opening procedures has also made it easier for  law enforcement to make positive matches with suspects on 314(a) lists.  Prior to the enactment of the PATRIOT Act, some financial institutions  already had established policies and procedures to verify customer  identities, but the financial services industry overall was not subject to  uniform minimum requirements for identifying and maintaining customer  information. As a result, law enforcement officials did not always know  what kind of information they would acquire from institutions pursuant to  a subpoena or warrant.\n\n\t\tSuccessful Prosecutions of Terrorist Financing and Money Laundering Cases Depend on Numerous Factors\n\nAlthough the CIP requirement and 314(a) requests have made useful  information available to federal prosecutors who are investigating and  prosecuting terrorist financing and money laundering cases, prosecution of  specific cases is always discretionary. Department of Justice officials,  including prosecutors in U.S. Attorneys Offices, said that case specific  factors continue to determine whether or not a prosecutor will bring  charges on a terrorist financing or money laundering case. There are no  specific monetary thresholds or criteria that determine when a prosecutor  will pursue a money laundering or terrorist financing case. One prosecutor  told us that these provisions helped prosecutors better understand the  financial lay of the land in anti-money laundering and terrorist financing  and that the use of the provisions by law enforcement leads to better  investigations. It is not feasible, however, to enumerate how many cases  were successfully prosecuted as a direct result of Suspicious Activity  Reports or 314(a) requests since each prosecution is unique and based on  many factors.\nProsecutors in two U.S. Attorney\u2019s Offices also told us that the provisions,  while helpful, could not alter the fact that anti-money laundering and  terrorist financing cases are resource intensive and complex. Prosecutors  told us that reviewing transactions for a typical money services business or  currency exchange was time consuming and may typically involve review  of voluminous daily transaction records. Once the transaction analysis is  performed, the information then must be reviewed in coordination with  other evidence to determine if it can support proof beyond a reasonable  doubt, and whether the evidence used to build the case is suitable for  presentation in court.\n\n\tConclusions\n\nSince the passage of the PATRIOT Act, the U.S. government and the  financial industry have worked together to develop and implement the  regulations required by the PATRIOT Act. It was challenging to develop  joint regulations that covered so many sectors of the financial industry. The  financial industry has implemented procedures to comply with the  PATRIOT Act\u2019s regulations, including the CIP requirement and the  information sharing provisions in section 314, but it has encountered  several challenges along the way and there are some concerns and issues  that remain outstanding. FinCEN, the federal financial regulators, and  SROs have made a concerted effort to reach out to and educate the  industry on its responsibilities for customer identification and sharing  information with law enforcement. However, the interagency process has  delayed the release of additional guidance for CIP. The implementation  challenges that industry officials shared with us demonstrate that the  government will need to continue its education efforts and work with  industry to resolve outstanding issues. Primarily, industry officials are  unclear about the regulators\u2019 views on what constitutes sufficient  verification procedures for certain high-risk customers, such as foreign  individuals and companies and whether they and their examiners would  view a customer and the appropriate level of verification in the same way.  Therefore, industry officials would like to receive more guidance from  FinCEN and the regulators on issues such as these.\nFinCEN, the federal financial regulators, and SROs have also taken steps to  implement section 314 and CIP and have begun examining financial  institutions and taking enforcement action for violations. However, our  review revealed examiner difficulties in assessing compliance with CIP that  could reduce its effectiveness at uncovering suspicious or questionable  customers or lead to inconsistencies in the way examiners conduct  examinations. Because our review found that not all examinations  documented a review of the risk-based aspect of CIP, we believe that some  examiners and financial institutions may not fully understand how the CIP  requirements should be applied to higher risk customers. The primary  reason that Treasury and the federal financial regulators adopted the risk- based approach to verifying customer identity was so that financial  institutions would be able to focus more effort on high-risk customers.  Also, some of the other difficulties we found in our review of examinations  highlight how inconsistent interpretations can occur during examinations.  For example, some examiners came to different conclusions about how the  CIP requirement is applied to existing customers that open new accounts.  Because examination findings can cause a financial institution to change its  practices, such inconsistencies could lead to significant variations in  policies and procedures among financial institutions based on differing  interpretations of the CIP requirements by examiners.\nAlthough our review focused on two specific anti-money laundering  regulations, the enforcement of these regulations occurs under the broader  BSA regulatory structure and, hence, the results of our review should be  understood in this broader context. Enforcing the BSA, as amended by the  PATRIOT Act, is a shared responsibility among FinCEN and the federal  financial regulators. As the administrator of BSA, FinCEN has  responsibility for enforcement of the provisions added by the PATRIOT  Act, but FinCEN relies on the federal financial regulators to conduct  examinations and alert it to violations that warrant an enforcement action.  This arrangement is even more complicated for securities and futures  financial institutions because SEC and CFTC largely rely on the SROs to  conduct examinations and enforce rules and regulations. Since the passage  of the PATRIOT Act, FinCEN and the financial regulators have been  working more closely together to better coordinate BSA examinations and  enforcement and to improve the consistency of the information they  provide to the financial industry. FinCEN\u2019s new Office of Compliance and  MOU with the federal banking regulators are good first steps in better BSA  oversight and enforcement. In addition, FinCEN and the federal banking  regulators have worked together to develop interagency anti-money  laundering examination procedures for the first time. FinCEN is in the  process of reaching similar MOU agreements with SEC and CFTC. Whether  in issuing guidance for industry or examiners, FinCEN will need the  continued cooperation of all seven financial regulators to effectively  address problems and inconsistencies in the U.S. anti-money laundering  regulatory system.\n\n\tRecommendations for Executive Action\n\nTo improve implementation of sections 326 and 314 of the PATRIOT Act,  we are making two recommendations:   To build on education and outreach efforts and help financial  institutions subject to the CIP requirement effectively implement their  programs, we recommend that the Secretary of the Treasury, through  FinCEN and in coordination with the federal financial regulators and  SROs, develop additional guidance covering ongoing implementation  issues related to the CIP requirement. Specifically, additional guidance  on the CIP requirement that provides examples or alternatives of how to  verify the identity of high-risk customers, such as foreign individuals  and companies, could help financial institutions develop better risk- based procedures.\nTo enhance examination guidance covering the CIP requirement and  ensure that examiners are well-informed about CIP requirements, we  recommend that the Director of FinCEN work with the federal financial  regulators to develop additional guidance for examiners to use in  conducting BSA examinations. Specifically, the guidance should clarify  that complying with the CIP requirement is more than determining  whether the minimum customer identification information has been  obtained\u2014the examiner should determine whether a financial  institution\u2019s CIP contains effective risk-based procedures for verifying  the identity of customers. Secondly, the guidance should clarify how CIP  fits into other customer due diligence practices, such as know-your- customer procedures. Finally, the guidance should reflect the FAQs on  CIP issued for industry, which addressed the difficulties in  interpretation we observed for checking government lists and applying  the CIP requirement to existing customers.\n\n\tAgency Comments and Our Evaluation\n\nWe provided a draft of this report for review and comment to the  Departments of the Treasury, Justice, and Homeland Security; seven  federal financial regulators (Federal Reserve, FDIC, OCC, OTS, NCUA,  SEC, and CFTC) and five SROs (CBOT, CME, NFA, NASD, and NYSE). We  received written comments from the Department of the Treasury, NCUA,  and SEC. These comments are reprinted in appendixes II, III, and IV. The  Departments of the Treasury and Justice, the Federal Reserve, FDIC, OCC,  SEC, CFTC, NASD, NYSE and NFA also provided technical comments and  clarifications, which we incorporated in this report where appropriate. The  Department of Homeland Security, OTS, CME, and CBOT had no  comments.\nIn its written comments, Treasury said that despite the considerable  educational and outreach efforts already undertaken by FinCEN, there was  still some confusion and lack of clarity on the part of both the federal  financial regulators and SROs, and the regulated industries and examiners  who conduct compliance inspections of these industries. Treasury  concurred with our recommendations that additional guidance would  improve implementation of these regulations. Treasury also commented  that, with the diversity of financial institutions that must comply with CIP  regulations, firms need the flexibility to implement programs tailored to  their own size, location, and type of business and to allow them to use a  risk-based approach to verify the identity of their respective customer  bases. In its written comments, NCUA also supported our  recommendations. Both agencies commented that Treasury and the federal  banking regulators plan to issue new BSA examination procedures in June  2005. In its written response, SEC commented that consistent with our  recommendation, the federal financial regulators are continuing to work  cooperatively to ensure that they provide consistent guidance on  interpretive and compliance issues. Concerning difficulties SEC had with  its examination tracking system when responding to our information  request, SEC also said that its staff is formulating improvements to the  existing automated tracking system.\nUnless you publicly announce its contents earlier, we plan no further  distribution of this report until 30 days after the date of this report. At that  time, we will send copies of this report to the Departments of the Treasury,  Homeland Security, and Justice; the Federal Reserve Board, FDIC, OCC,  OTS, NCUA, CFTC, SEC, NASD, NYSE, NFA, CBOT, CME, and interested  congressional committees. We will also make copies available to others on  request. In addition, this report will be available at no cost on our Web site  at http:\/\/www.gao.gov.\nIf you or your staff have any questions about this report please contact me  at (202) 512-2717 or Barbara Keller, Assistant Director, at (202) 512-9624.  GAO contacts and key contributors to this report are listed in appendix V.\n\nScope and Methodology\n\nTo determine how Treasury and the federal financial regulators developed  the regulations for CIP and section 314 and identify challenges, we  reviewed documents related to the rulemaking process including comment  letters and the Federal Register notices of the final rules and interviewed  officials from Treasury (FinCEN), Justice, the federal financial regulators,  and SROs.\nTo identify the government\u2019s education and outreach efforts, we  interviewed officials from Treasury (FinCEN), the federal financial  regulators, and SROs about how they have informed and educated the  industry and reviewed education and outreach materials provided to us. To  identify implementation challenges encountered by financial institutions,  we interviewed company officials and industry trade associations  representing banks, credit unions, securities broker-dealers, mutual funds,  futures commission merchants, and futures introducing brokers. We also  reviewed letters that company officials and industry representatives sent to  Treasury and the federal financial regulators during the rulemaking process  as well as after the final rules were issued that expressed concerns and  challenges they had about implementing procedures to comply with CIP  and section 314 regulations.\nTo determine the extent to which the federal financial regulators and SROs  have updated examination guidance and trained examiners on CIP and  section 314, we reviewed copies of draft and final versions of guidance;  collected information on examiner training courses related to anti-money  laundering and the number of examiners trained in 2002, 2003, and 2004;  and interviewed officials on their examination guidance and training  programs. We also observed one anti-money laundering training course  taught by the Federal Financial Institutions Examination Council (FFIEC)  that provides training to bank examiners.\nTo determine the extent to which the federal financial regulators have  examined for compliance and taken enforcement actions on CIP and  section 314 regulations, we collected data on the number of exams  completed from October 1, 2003, through May 31, 2004, and the number of  violations for CIP and section 314 regulations for the same time period  from six federal financial regulators and five SROs. The data from the  regulators and SROs generally came from information systems and  reporting processes used to collect and track information on examinations  and violations. There was some variability in how the regulators and SROs  defined examinations, violations, and the start and end dates for  examinations and therefore the data are not comparable. However, we  determined that the data provided to us were generally reliable for our  purposes. Our data reliability assessments generally involved interviewing  officials about the management of the data and basic tests of the data to  determine if it appeared accurate. We attempted to select approximately 20  examinations from each regulator and SRO. To ensure that we would be  able to review a sufficient number of examinations with the types of  violations related to CIP and section 314 requirements and how the  regulators and SROs addressed violations, we sampled proportionally more  examinations that included violations of CIP and section 314 than  examinations without violations, though in some cases the number of  examinations that had such violations were less than 10 and, therefore, the  sample would not include proportionally more examinations with  violations. We reviewed a total of 176 examinations. However, the number  of examinations varied widely between organizations, and in the cases of  CBOT and CME, all available examinations were selected because the  number of examinations was small.   While the selections of individual  examinations were made randomly within the subsets of violation and  nonviolation examinations to minimize the possibility of bias in our  sample, the arbitrary totals selected were small in number and not  representative of the true ratio of violation to nonviolation examinations  within the organization nor the volume of examination activity across the  organizations. Therefore, these samples are not statistically representative.  However, our review of the examinations enabled us to describe the  approaches used by the regulators to examine for compliance and highlight  issues that may present challenges for examiners in interpreting the new  regulations and appropriately assessing financial institutions for  compliance. Table 11 displays the final sample size for each of the  regulators and SROs and also explains why some examinations initially  selected were not part of our final sample.\nAfter selecting our sample of examinations, we requested the examination  reports and related workpapers associated with each examination from  each of the regulators and SROs. We developed a data collection  instrument to review the examination documentation. The data collection  instrument was developed by reviewing the regulation requirements for  CIP and section 314 and the examination procedures developed by the  regulators and SROs. After each examination was reviewed once using the  data collection instrument, a second person reviewed the examination  using the data collection instrument a second time to ensure the reliability  of our coding of the review questions and accuracy of data entry. We used  the results from the data collection instrument to determine how the  regulators and SROs reviewed compliance and how regulators and SROs  dealt with deficiencies and violations related to CIP and section 314. We  also identified formal enforcement actions that were completed during the  time of our review and included violations of CIP or section 314  regulations. Finally, we interviewed officials from FinCEN, the federal  financial regulators, and SROs about their examination and enforcement  policies.\nTo determine how these new regulations have and could improve law  enforcement investigations and prosecutions of money laundering and  terrorist activities, we interviewed officials representing several law  enforcement agencies, including the FBI and ICE, and Department of  Justice officials. We interviewed supervisory prosecutors from two U.S.  Attorneys offices as well as supervisory officials at the Asset Forfeiture and  Money Laundering Section and the Counter-Terrorism Section at the  Department of Justice who have been involved with money laundering and  terrorist cases and had experience with section 314 and CIP to better  understand the factors that are considered when deciding whether to  prosecute a money laundering or terrorist financing case. We also reviewed  information that FinCEN collects from law enforcement agencies on the  results of the 314(a) process.\nWe conducted our work in New York City, NY; Chicago, IL; and Washington,  D.C., between February 2004 and March 2005 in accordance with generally  accepted government auditing standards.\n\nComments from the Department of the Treasury\n\nComments from the National Credit Union Administration\n\nComments from the Securities and Exchange Commission\n\nGAO Contacts and Staff Acknowledgments\n\n\tGAO Contacts\n\n\tStaff Acknowledgments\n\nWilliam Bates, Davi M. D\u2019Agostino, David Nicholson, Carl Ramirez, Omyra  Ramsingh, Adam Shapiro, and Kaya Leigh Taylor made key contributions to  this report.\n\nRelated Products\n\nAnti-Money Laundering: Issues Concerning Depository Institution  Regulatory Oversight. GAO-04-833T. Washington, D.C.: June 3, 2004.\nCombating Money Laundering: Opportunities Exist to Improve the  National Strategy. GAO-03-813. Washington, D.C.: September 26, 2003.\nInternet Gambling: An Overview of the Issues. GAO-03-89. Washington,  D.C.: December 2, 2002.\nInterim Report on Internet Gambling. GAO-02-1101R. Washington, D.C.:  September 23, 2002.\nMoney Laundering: Extent of Money Laundering through Credit Cards is  Unknown. GAO-02-670. Washington, D.C.: July 22, 2002.\nAnti-Money Laundering: Efforts in the Securities Industry. GAO-02-111.  Washington, D.C.: October 10, 2001.\nMoney Laundering: Oversight of Suspicious Activity Reporting at Bank- Affiliated Broker-Dealers Ceased. GAO-01-474. Washington, D.C.: March  22, 2001.\nSuspicious Banking Activities: Possible Money Laundering by U.S.  Corporations Formed for Russian Entities. GAO-01-120. Washington,  D.C.: October 31, 2000.\nMoney Laundering: Observations on Private Banking and Related  Oversight of Selected Offshore Jurisdictions. GAO\/T-GGD-00-32.  Washington, D.C.: November 9, 1999.\nPrivate Banking: Raul Salinas, Citibank, and Alleged Money  Laundering. GAO\/T-OSI-00-3. Washington, D.C.: November 9, 1999.\nPrivate Banking: Raul Salinas, Citibank, and Alleged Money  Laundering.  GAO\/OSI-99-1. Washington, D.C.: October 30, 1998.\nMoney Laundering: Regulatory Oversight of Offshore Private Banking  Activities. GAO\/GGD-98-154. Washington, D.C.: June 29, 1998.\nMoney Laundering: FinCEN\u2019s Law Enforcement Support Role Is  Evolving. GAO\/GGD-98-117. Washington, D.C.: June 19, 1998.\nMoney Laundering: FinCEN Needs to Better Manage Bank Secrecy Act  Civil Penalties. GAO\/GGD-98-108. Washington, D.C.: June 15, 1998.\nMoney Laundering: FinCEN\u2019s Law Enforcement Support, Regulatory,  and International Roles. GAO\/GGD-98-83. Washington, D.C.: April 1, 1998.\nMoney Laundering: FinCEN Needs to Better Communicate Regulatory  Priorities and Timelines. GAO\/GGD-98-18. Washington, D.C.: February 6,  1998.\nPrivate Banking: Information on Private Banking and Its Vulnerability  to Money Laundering. GAO\/GGD-98-19R. Washington, D.C.: October 30,  1997.\nMoney Laundering: A Framework for Understanding U.S. Efforts  Overseas. GAO\/GGD-96-105. Washington, D.C.: May 24, 1996.","output":"Why GAO Did This Study\n\nTitle III of the USA PATRIOT Act of 2001, passed after the September 11 terrorist attacks, amended U.S. anti-money laundering laws and imposed new requirements on financial institutions. Section 326 of the act required the development of minimum standards for verifying the identity of financial institution customers. Section 314 required the development of regulations encouraging the further sharing of information between law enforcement agencies and the financial industry and between the institutions themselves. Because of concerns about the implementation of these new provisions, GAO determined how (1) the government developed the regulations, educated the financial industry on them, and challenges it encountered; (2) regulators have updated guidance, trained examiners, and examined firms for compliance; and (3) the new regulations have affected law enforcement investigations.\n\nWhat GAO Found\n\nTreasury (including its Financial Crimes Enforcement Network (FinCEN)), the federal financial regulators, and self-regulatory organizations (SRO) overcame challenges to create regulations that apply consistently to a diverse financial sector and have used several outreach mechanisms to help the financial industry understand and comply with Customer Identification Program (CIP) requirements under section 326 and information sharing requirements under section 314. However, several implementation challenges remain. Industry officials told us some of their concerns have been addressed but they are still concerned about (1) how some CIP requirements will be interpreted during compliance examinations, (2) the lack of feedback from law enforcement on information provided by financial institutions through section 314(a), and (3) the extent to which they can share information with each other under section 314(b). The six federal financial regulators and five SROs in our review have issued examination guidance covering sections 326 and 314, subsequently trained examiners, and begun examining financial institutions for compliance with CIP and section 314. GAO's review of examinations showed progress, but coverage varied in part because the examinations were conducted during early implementation. One aspect of CIP that was not always covered in examinations was whether financial institutions had adequately developed a CIP appropriate for their business lines and types of customers. However, this aspect of CIP is critical for ensuring that the identification and verification procedures are appropriate for types of customers and accounts that are at higher risk of being linked to money laundering or terrorist activities. Some examinations also revealed implementation difficulties related to CIP that could lead to inconsistencies in the way examiners conduct examinations. For example, some examiners did not differentiate between the CIP requirement and other procedures that require customer identification information. Coverage in the examinations GAO reviewed of how institutions had implemented section 314 requirements was somewhat lower than for CIP, in part, because CIP received more attention from examiners and information sharing between financial institutions is voluntary. In the examinations GAO reviewed, apparent violations of the CIP requirement and section 314(a) regulations were mostly addressed through informal actions between the institution and the regulator. Officials from the Department of Justice and other law enforcement agencies told us that CIP and section 314 have assisted them in the investigation of money laundering and terrorist financing cases. Some officials said that CIP has been useful because financial institutions have more information on their customers so they obtain more useful information when issuing grand jury subpoenas and other requests for information. Many officials said the 314(a) process had improved coordination between the law enforcement community and the financial industry and increased the speed and efficiency of investigations."}
{"id":"gao_GAO-06-747T","pid":"gao_GAO-06-747T_0","input":"\tBackground\n\nAs you know, Mr. Chairman, for over two decades, we have reported on  problems with DOD\u2019s personnel security clearance program as well as the  financial costs and risks to national security resulting from these problems  (see Related GAO Reports at the end of this statement). For example, at  the turn of the century, we documented problems such as incomplete  investigations, inconsistency in determining eligibility for clearances, and  a backlog of overdue clearance reinvestigations that exceeded 500,000  cases. More recently in 2004, we identified continuing and new  impediments hampering DOD\u2019s clearance program and made  recommendations for increasing the effectiveness and efficiency of the  program. Also in 2004, we testified before this committee on clearance- related problems faced by industry personnel.\nA critical step in the federal government\u2019s efforts to protect national  security is to determine whether an individual is eligible for a personnel  security clearance. Specifically, an individual whose job requires access to  classified information must undergo a background investigation and  adjudication (determination of eligibility) in order to obtain a clearance.  As with federal government workers, the demand for personnel security  clearances for industry personnel has increased during recent years.  Additional awareness of threats to our national security since September  11, 2001, and efforts to privatize federal jobs during the last decade are but  two of the reasons for the greater number of industry personnel needing  clearances today. As of September 30, 2003, industry personnel held about  one-third of the approximately 2 million DOD-issued clearances. DOD\u2019s  Office of the Under Secretary of Defense for Intelligence has overall  responsibility for DOD clearances, and its responsibilities also extend  beyond DOD. Specifically, that office\u2019s responsibilities include obtaining  background investigations and adjudicating clearance eligibility for  industry personnel in more than 20 other federal agencies, as well as the  clearances of staff in the federal government\u2019s legislative branch.\nProblems in the clearance program can negatively affect national security.  For example, delays reviewing security clearances for personnel who are  already doing classified work can lead to a heightened risk of disclosure of  classified information. In contrast, delays in providing initial security  clearances for previously noncleared personnel can result in other  negative consequences, such as additional costs and delays in completing  national security-related contracts, lost-opportunity costs, and problems  retaining the best qualified personnel.\nLongstanding delays in completing hundreds of thousands of clearance  requests for servicemembers, federal employees, and industry personnel  as well as numerous impediments that hinder DOD\u2019s ability to accurately  estimate and eliminate its clearance backlog led us to declare the program  a high-risk area in January 2005. The 25 areas on our high-risk list at that  time received their designation because they are major programs and  operations that need urgent attention and transformation in order to  ensure that our national government functions in the most economical,  efficient, and effective manner possible.\nShortly after we placed DOD\u2019s clearance program on our high-risk list, a  major change in DOD\u2019s program occurred. In February 2005, DOD  transferred its personnel security investigations functions and about 1,800  investigative positions to OPM. Now DOD obtains nearly all of its  clearance investigations from OPM, which is currently responsible for 90  percent of the personnel security clearance investigations in the federal  government. DOD retained responsibility for adjudication of military  personnel, DOD civilians, and industry personnel.\nOther recent significant events affecting DOD\u2019s clearance program have  been the passage of the Intelligence Reform and Terrorism Prevention Act  of 2004 and the issuance of the June 2005 Executive Order No. 13381,  Strengthening Processes Relating to Determining Eligibility for Access to  Classified National Security Information. The act included milestones for  reducing the time to complete clearances, general specifications for a  database on security clearances, and requirements for greater reciprocity  of clearances (the acceptance of a clearance and access granted by  another department, agency, or military service). Among other things, the  executive order resulted in the Office of Management and Budget (OMB)  taking a lead role in preparing a strategic plan to improve personnel  security clearance processes governmentwide.\nUsing this context for understanding the interplay between DOD and OPM  in DOD\u2019s personnel security clearance processes, my statement addresses  two objectives in this statement: (1) key points of a billing dispute  between DOD and OPM and (2) some of the major impediments affecting  clearances for industry personnel.\nAs requested by this committee, we have an ongoing examination of the  timeliness and completeness of the processes used to determine the  eligibility of industry personnel to receive top secret clearances. We  expect to present the results of this work in the fall. My statement today,  however, is based primarily on our completed work and our institutional  knowledge from our prior reviews of the steps in the clearance processes  used by DOD and, to a lesser extent, other agencies. In addition, we used  information from the Intelligence Reform and Terrorism Prevention Act of  2004; executive orders; and other documents, such as a memorandum of  agreement between DOD and OPM. We conducted our work in accordance  with generally accepted government auditing standards in May 2006.\n\n\tUnexpected Volume of Clearance Requests and Funding Constraints Delay Security Clearances for Industry Personnel Further\n\nDOD stopped processing applications for clearance investigations for  industry personnel on April 28, 2006, despite an already sizeable backlog.  DOD attributed its actions to an overwhelming volume of requests for  industry personnel security investigations and funding constraints. We will  address the issue of workload projections later when we discuss  impediments that affect industry personnel as well as servicemembers and  federal employees, but first we would like to talk about the issue of  funding.\nAn important consideration in understanding the funding constraints that  contributed to the stoppage is a DOD-OPM billing dispute, which has  resulted in the Under Secretary of Defense for Intelligence requesting  OMB mediation. The dispute stems from the February 2005 transfer of  DOD\u2019s personnel security investigations function to OPM.\nThe memorandum of agreement signed by the OPM Director and the DOD  Deputy Secretary prior to the transfer lists many types of costs that DOD  may incur for up to 3 years after the transfer of the investigations function  to OPM. One cost, an adjustment to the rates charged to agencies for  clearance investigations, provides that \u201cOPM may charge DOD for  investigations at DOD\u2019s current rates plus annual price adjustments plus a  25 percent premium to offset potential operating losses. OPM will be able  to adjust, at any point of time during the first three year period after the  start of transfer, the premium as necessary to cover estimated future costs  or operating losses, if any, or offset gains, if any.\u201d\nThe Under Secretary\u2019s memorandum says that OPM has collected  approximately $50 million in premiums in addition to approximately $144  million for other costs associated with the transfer. The OPM Associate  Director subsequently listed costs that OPM has incurred. To help resolve  this billing matter, DOD requested mediation from OMB, in accordance  with the memorandum of agreement between DOD and OPM. Information  from the two agencies indicates that in response to DOD\u2019s request, OMB  has directed them to continue to work together to resolve the matter. The  DOD and OPM offices of inspector general are currently investigating all  of the issues raised in the Under Secretary\u2019s and Associate Director\u2019s  correspondences and have indicated that they intend to issue reports on  their reviews this summer.\n\n\tIf Not Effectively Addressed, Impediments Could Continue to Hinder Efforts to Provide Timely Clearances\n\nSome impediments, if not effectively addressed, could hinder the timely  determination of clearance eligibility for servicemembers, civilian  government employees, and industry personnel; whereas other  impediments would mainly affect industry personnel. The inability to  accurately estimate the number of future clearance requests and the  expiration of the previously mentioned executive order that resulted in  high-level involvement by OMB could adversely affect the timeliness of  eligibility determinations for all types of employee groups. In contrast, an  increased demand for top secret clearances for industry personnel and the  lack of reciprocity would primarily affect industry personnel.\n\n\t\tAn Existing and a Potential New Impediment Could Lead to Continuing Problems for All Types of Employees Seeking Clearances\n\nA major impediment to providing timely clearances is the inaccurate  projections of the number of requests for security clearances DOD-wide  and for industry personnel specifically. As we noted in our May 2004  testimony before this committee, DOD\u2019s longstanding inability to  accurately project its security clearance workload makes it difficult to  determine clearance-related budgets and staffing requirements. In fiscal  year 2001, DOD received 18 percent (about 150,000) fewer requests than it  expected, and in fiscal years 2002 and 2003, it received 19 and 13 percent  (about 135,000 and 90,000) more requests than projected, respectively. In  2005, DOD was again uncertain about the number and level of clearances  that it required, but the department reported plans and efforts to identify  clearance requirements for servicemembers, civilian employees, and  contractors. For example, in response to our May 2004 recommendation to  improve the projection of clearance requests for industry personnel, DOD  indicated that it was developing a plan and computer software that would  enable the government\u2019s contracting officers to (1) authorize a certain  number of industry personnel clearance investigations for any given  contract, depending on the number of clearances required to perform the  classified work on that contract, and (2) link the clearance investigations  to the contract number.\nAnother potential impediment that could slow improvements in personnel  security clearance processes in DOD\u2014as well as governmentwide\u2014is the  July 1, 2006, expiration of Executive Order No. 13381. Among other things,  this executive order delegated responsibility for improving the clearance  process to the Director of OMB for about 1 year. We have been  encouraged by the high level of commitment that OMB has demonstrated  in the development of a governmentwide plan to address clearance-related  problems. Also, the OMB Deputy Director met with GAO officials to  discuss OMB\u2019s general strategy for addressing the problems that led to our  high-risk designation for DOD\u2019s clearance program. Demonstrating strong  management commitment and top leadership support to address a known  risk is one of the requirements for removing DOD\u2019s clearance program  from GAO\u2019s high-risk list. Because there has been no indication that the  executive order will be extended, we are concerned about whether such  progress will continue without OMB\u2019s high-level management  involvement. While OPM has provided some leadership in assisting OMB  with the development of the governmentwide plan, OPM may not be in a  position to assume additional high-level commitment for a variety of  reasons. These reasons include (1) the governmentwide plan lists many  management challenges facing OPM and the Associate Director of its  investigations unit, such as establishing a presence to conduct overseas  investigations and adjusting its investigative workforce to the increasing  demand for clearances; (2) adjudication of personnel security clearances  and determination of which organizational positions require such  clearances are outside the current emphases for OPM; and (3) agencies\u2019  disputes with OPM\u2014such as the current one regarding billing\u2014may  require a high-level third party to mediate a resolution that is perceived to  be impartial.\n\n\t\tIncreased Demand for High-level Clearances and the Lack of Reciprocity Are Previously Identified Problems for Industry Personnel\n\nAs we have previously identified, an increase in the demand for top secret  clearances could have workload and budgetary implications for DOD and  OPM if such requests continue to occur. In our 2004 report, we noted that  the proportion of requests for top secret clearances for industry personnel  increased from 17 to 27 percent from fiscal years 1995 through 2003. This  increase has workload implications because top secret clearances (1)  must be renewed every 5 years, compared to every 10 years for secret  clearances, and (2) require more information about the applicant than  secret clearances do. Our 2004 analyses further showed that the 10-year  cost to the government was 13 times higher for a person with a top secret  clearance ($4,231) relative to a person with a secret clearance ($328).  Thus, if clearance requirements for organizational positions are set higher  than needed, the government\u2019s capacity to decrease the clearance backlog  is reduced while the cost of the clearance program is increased.\nWhen the reciprocity of clearances or access is not fully utilized, industry  personnel are prevented from working. In addition to having a negative  effect on the employee and the employer, the lack of reciprocity has  adverse effects for the government, including an increased workload for  the already overburdened staff who investigate and adjudicate security  clearances. Problems with reciprocity of clearances or access, particularly  for industry personnel, have continued to occur despite the establishment  in 1997 of governmentwide investigative standards and adjudicative  guidelines. The Reciprocity Working Group, which helped to prepare  information for the governmentwide plan to improve the security  clearance process, noted that \u201ca lack of reciprocity often arises due to  reluctance of the gaining activity to inherit accountability for what may be  an unacceptable risk due to poor quality investigations and\/or  adjudications.\u201d Congress enacted reciprocity requirements in the  Intelligence Reform and Terrorism Prevention Act of December 2004, and  OMB promulgated criteria in December 2005 for federal agencies to follow  in determining whether to accept security clearances from other  government agencies. Because of how recently these changes were made,  their impact is unknown.\n\n\tConcluding Observations\n\nWe will continue to assess and monitor DOD\u2019s personnel security  clearance program at your request. We are conducting work on the  timeliness and completeness of investigations and adjudications for top  secret clearances for industry personnel and we will report that  information to this committee this fall. Also, our standard steps of  monitoring programs on our high-risk list require that we evaluate the  progress that agencies make toward being removed from the list. Lastly,  we monitor our recommendations to agencies to determine whether steps  are being taken to overcome program deficiencies.\n\n\tStaff Contact and Acknowledgments\n\nFor further information regarding this testimony, please contact me at  (202)512-5559 or stewartd@gao.gov. Individuals making key contributions  to this testimony include Jack E. Edwards, Assistant Director; Jerome  Brown; Kurt A. Burgeson; Susan C. Ditto; David Epstein; Sara Hackley;  James Klein; and Kenneth E. Patton.\n\nRelated GAO Products\n\nManaging Sensitive Information: Departments of Energy and Defense  Policies and Oversight Could Be Improved. GAO-06-369. Washington,  D.C.: March 7, 2006.\nManaging Sensitive Information: DOE and DOD Could Improve Their  Policies and Oversight. GAO-06-531T. Washington, D.C.: March 14, 2006.\nGAO\u2019s High-Risk Program. GAO-06-497T. Washington, D.C.: March 15,  2006.\nQuestions for the Record Related to DOD\u2019s Personnel Security Clearance  Program and the Government Plan for Improving the Clearance Process.  GAO-06-323R. Washington, D.C.: January 17, 2006.\nDOD Personnel Clearances: Government Plan Addresses Some Long- standing Problems with DOD\u2019s Program, But Concerns Remain. GAO-06- 233T. Washington, D.C.: November 9, 2005.\nDefense Management: Better Review Needed of Program Protection  Issues Associated with Manufacturing Presidential Helicopters. GAO-06- 71SU. Washington, D.C.: November 4, 2005.\nDOD\u2019s High-Risk Areas: High-Level Commitment and Oversight Needed  for DOD Supply Chain Plan to Succeed. GAO-06-113T. Washington, D.C.:  October 6, 2005.\nQuestions for the Record Related to DOD\u2019s Personnel Security Clearance  Program. GAO-05-988R. Washington, D.C.: August 19, 2005.\nIndustrial Security: DOD Cannot Ensure Its Oversight of Contractors  under Foreign Influence Is Sufficient. GAO-05-681. Washington, D.C.: July  15, 2005.\nDOD Personnel Clearances: Some Progress Has Been Made but Hurdles  Remain to Overcome the Challenges That Led to GAO\u2019s High-Risk  Designation. GAO-05-842T. Washington, D.C.: June 28, 2005.\nDefense Management: Key Elements Needed to Successfully Transform  DOD Business Operations. GAO-05-629T. Washington, D.C.: April 28,  2005.\nMaritime Security: New Structures Have Improved Information  Sharing, but Security Clearance Processing Requires Further Attention.  GAO-05-394. Washington, D.C.: April 15, 2005.\nDOD\u2019s High-Risk Areas: Successful Business Transformation Requires  Sound Strategic Planning and Sustained Leadership. GAO-05-520T.  Washington, D.C.: April 13, 2005.\nGAO\u2019s 2005 High-Risk Update. GAO-05-350T. Washington, D.C.: February  17, 2005.\nHigh-Risk Series: An Update. GAO-05-207. Washington, D.C.: January  2005.\nIntelligence Reform: Human Capital Considerations Critical to 9\/11  Commission\u2019s Proposed Reforms. GAO-04-1084T. Washington, D.C.:  September 14, 2004.\nDOD Personnel Clearances: Additional Steps Can Be Taken to Reduce  Backlogs and Delays in Determining Security Clearance Eligibility for  Industry Personnel. GAO-04-632. Washington, D.C.: May 26, 2004.\nDOD Personnel Clearances: Preliminary Observations Related to  Backlogs and Delays in Determining Security Clearance Eligibility for  Industry Personnel. GAO-04-202T. Washington, D.C.: May 6, 2004.\nSecurity Clearances: FBI Has Enhanced Its Process for State and Local  Law Enforcement Officials. GAO-04-596. Washington, D.C.: April 30, 2004.\nIndustrial Security: DOD Cannot Provide Adequate Assurances That Its  Oversight Ensures the Protection of Classified Information. GAO-04-332.  Washington, D.C.: March 3, 2004.\nDOD Personnel Clearances: DOD Needs to Overcome Impediments to  Eliminating Backlog and Determining Its Size. GAO-04-344. Washington,  D.C.: February 9, 2004.\nAviation Security: Federal Air Marshal Service Is Addressing Challenges  of Its Expanded Mission and Workforce, but Additional Actions Needed.  GAO-04-242. Washington, D.C.: November 19, 2003.\nResults-Oriented Cultures: Creating a Clear Linkage between Individual  Performance and Organizational Success. GAO-03-488. Washington, D.C.:  March 14, 2003.\nDefense Acquisitions: Steps Needed to Ensure Interoperability of  Systems That Process Intelligence Data. GAO-03-329. Washington D.C.:  March 31, 2003.\nManaging for Results: Agency Progress in Linking Performance Plans  With Budgets and Financial Statements. GAO-02-236. Washington D.C.:  January 4, 2002.\nCentral Intelligence Agency: Observations on GAO Access to Information  on CIA Programs and Activities. GAO-01-975T. Washington, D.C.: July 18,  2001.\nDetermining Performance and Accountability Challenges and High  Risks. GAO-01-159SP. Washington, D.C.: November 2000.\nDOD Personnel: More Consistency Needed in Determining Eligibility for  Top Secret Clearances. GAO-01-465. Washington, D.C.: April 18, 2001.\nDOD Personnel: More Accurate Estimate of Overdue Security Clearance  Reinvestigations Is Needed. GAO\/T-NSIAD-00-246. Washington, D.C.:  September 20, 2000.\nDOD Personnel: More Actions Needed to Address Backlog of Security  Clearance Reinvestigations. GAO\/NSIAD-00-215. Washington, D.C.:  August 24, 2000.\nSecurity Protection: Standardization Issues Regarding Protection of  Executive Branch Officials. GAO\/T-GGD\/OSI-00-177. Washington, D.C.:  July 27, 2000.\nSecurity Protection: Standardization Issues Regarding Protection of  Executive Branch Officials. GAO\/GGD\/OSI-00-139. Washington, D.C.: July  11, 2000.\nComputer Security: FAA Is Addressing Personnel Weaknesses, But  Further Action Is Required. GAO\/AIMD-00-169. Washington, D.C.: May 31,  2000.\nDOD Personnel: Weaknesses in Security Investigation Program Are  Being Addressed. GAO\/T-NSIAD-00-148. Washington, D.C.: April 6, 2000.\nDOD Personnel: Inadequate Personnel Security Investigations Pose  National Security Risks. GAO\/T-NSIAD-00-65. Washington, D.C.: February  16, 2000.\nDOD Personnel: Inadequate Personnel Security Investigations Pose  National Security Risks. GAO\/NSIAD-00-12. Washington, D.C.: October  27, 1999.\nBackground Investigations: Program Deficiencies May Lead DEA to  Relinquish Its Authority to OPM. GAO\/GGD-99-173. Washington, D.C.:  September 7, 1999.\nDepartment of Energy: Key Factors Underlying Security Problems at  DOE Facilities. GAO\/T-RCED-99-159. Washington, D.C.: April 20, 1999.\nPerformance Budgeting: Initial Experiences Under the Results Act in  Linking Plans With Budgets. GAO\/AIMD\/GGD-99-67. Washington, D.C.:  April 12, 1999.\nMilitary Recruiting: New Initiatives Could Improve Criminal History  Screening. GAO\/NSIAD-99-53. Washington, D.C.: February 23, 1999.\nExecutive Office of the President: Procedures for Acquiring Access to  and Safeguarding Intelligence Information. GAO\/NSIAD-98-245.  Washington, D.C.: September 30, 1998.\nInspectors General: Joint Investigation of Personnel Actions Regarding  a Former Defense Employee. GAO\/AIMD\/OSI-97-81R. Washington, D.C.:  July 10, 1997.\nPrivatization of OPM\u2019s Investigations Service. GAO\/GGD-96-97R.  Washington, D.C.: August 22, 1996.\nCost Analysis: Privatizing OPM Investigations. GAO\/GGD-96-121R.  Washington, D.C.: July 5, 1996.\nPersonnel Security: Pass and Security Clearance Data for the Executive  Office of the President. GAO\/NSIAD-96-20. Washington, D.C.: October 19,  1995.\nPrivatizing OPM Investigations: Implementation Issues. GAO\/T-GGD-95- 186. Washington, D.C.: June 15, 1995.\nPrivatizing OPM Investigations: Perspectives on OPM\u2019s Role in  Background Investigations. GAO\/T-GGD-95-185. Washington, D.C.: June  14, 1995.\nSecurity Clearances: Consideration of Sexual Orientation in the  Clearance Process. GAO\/NSIAD-95-21. Washington, D.C.: March 24, 1995.\nBackground Investigations: Impediments to Consolidating  Investigations and Adjudicative Functions. GAO\/NSIAD-95-101.  Washington, D.C.: March 24, 1995.\nManaging DOE: Further Review Needed of Suspensions of Security  Clearances for Minority Employees. GAO\/RCED-95-15. Washington, D.C.:  December 8, 1994.\nPersonnel Security Investigations. GAO\/NSIAD-94-135R. Washington,  D.C.: March 4, 1994.\nClassified Information: Costs of Protection Are Integrated With Other  Security Costs. GAO\/NSIAD-94-55. Washington, D.C.: October 20, 1993.\nNuclear Security: DOE\u2019s Progress on Reducing Its Security Clearance  Work Load. GAO\/RCED-93-183. Washington, D.C.: August 12, 1993.\nPersonnel Security: Efforts by DOD and DOE to Eliminate Duplicative  Background Investigations. GAO\/RCED-93-23. Washington, D.C.: May 10,  1993.\nAdministrative Due Process: Denials and Revocations of Security  Clearances and Access to Special Programs. GAO\/T-NSIAD-93-14.  Washington, D.C.: May 5, 1993.\nDOD Special Access Programs: Administrative Due Process Not  Provided When Access Is Denied or Revoked. GAO\/NSIAD-93-162.  Washington, D.C.: May 5, 1993.\nSecurity Clearances: Due Process for Denials and Revocations by  Defense, Energy, and State. GAO\/NSIAD-92-99. Washington, D.C.: May 6,  1992.\nDue Process: Procedures for Unfavorable Suitability and Security  Clearance Actions. GAO\/NSIAD-90-97FS. Washington, D.C.: April 23, 1990.\nWeaknesses in NRC\u2019s Security Clearance Program. GAO\/T-RCED-89-14.  Washington, D.C.: March 15, 1989.\nNuclear Regulation: NRC\u2019s Security Clearance Program Can Be  Strengthened. GAO\/RCED-89-41. Washington, D.C.: December 20, 1988.\nNuclear Security: DOE Actions to Improve the Personnel Clearance  Program. GAO\/RCED-89-34. Washington, D.C.: November 9, 1988.\nNuclear Security: DOE Needs a More Accurate and Efficient Security  Clearance Program. GAO\/RCED-88-28. Washington, D.C.: December 29,  1987.\nNational Security: DOD Clearance Reduction and Related Issues.  GAO\/NSIAD-87-170BR. Washington, D.C.: September 18, 1987.\nOil Reserves: Proposed DOE Legislation for Firearm and Arrest  Authority Has Merit. GAO\/RCED-87-178. Washington, D.C.: August 11,  1987.\nEmbassy Blueprints: Controlling Blueprints and Selecting Contractors  for Construction Abroad. GAO\/NSIAD-87-83. Washington, D.C.: April 14,  1987.\nSecurity Clearance Reinvestigations of Employees Has Not Been Timely  at the Department of Energy. GAO\/T-RCED-87-14. Washington, D.C.: April  9, 1987.\nImprovements Needed in the Government\u2019s Personnel Security Clearance  Program. Washington, D.C.: April 16, 1985.\nNeed for Central Adjudication Facility for Security Clearances for Navy  Personnel. GAO\/GGD-83-66. Washington, D.C.: May 18, 1983.\nEffect of National Security Decision Directive 84, Safeguarding  National Security Information. GAO\/NSIAD-84-26. Washington, D.C.:  October 18, 1983.\nFaster Processing of DOD Personnel Security Clearances Could Avoid  Millions in Losses. GAO\/GGD-81-105. Washington, D.C.: September 15,  1981.\nThis is a work of the U.S. government and is not subject to copyright protection in the  United States. It may be reproduced and distributed in its entirety without further  permission from GAO. However, because this work may contain copyrighted images or  other material, permission from the copyright holder may be necessary if you wish to  reproduce this material separately.","output":"Why GAO Did This Study\n\nThe Department of Defense (DOD) is responsible for about 2 million active personnel security clearances. About one-third of the clearances are for industry personnel working on contracts for DOD and more than 20 other executive agencies. Delays in determining eligibility for a clearance can heighten the risk that classified information will be disclosed to unauthorized sources and increase contract costs and problems attracting and retaining qualified personnel. On April 28, 2006, DOD announced it had stopped processing security clearance applications for industry personnel because of an overwhelming volume of requests and funding constraints. GAO has reported problems with DOD's security clearance processes since 1981. In January 2005, GAO designated DOD's program a high-risk area because of longstanding delays in completing clearance requests and an inability to accurately estimate and eliminate its clearance backlog. For this statement GAO addresses: (1) key points in the billing dispute between DOD and OPM and (2) some of the major impediments affecting clearances for industry personnel.\n\nWhat GAO Found\n\nThe costs underlying a billing dispute between DOD and OPM are contributing to further delays in the processing of new security clearance requests for industry personnel. The dispute stems from the February 2005 transfer of DOD's personnel security investigations function to OPM and associated costs for which DOD agreed to reimburse OPM. Among other things, the two agencies' memorandum of agreement for the transfer allows OPM to charge DOD annual price adjustments plus a 25 percent premium, in addition to the rates OPM charges to other federal government agencies. A January 20, 2006, memorandum from the Under Secretary of Defense for Intelligence to the Office of Management and Budget (OMB) questioned the continued need for the premiums and requested mediation from OMB. According to DOD and OPM, OMB has directed the two agencies to continue to work together to resolve the matter. The inspectors general for both DOD and OPM are expected to report on the results of their investigations into the dispute this summer. Other impediments, if not effectively addressed, could negatively affect the timeliness of clearance-eligibility determinations for one or more of the following employee groups: industry personnel, servicemembers, and civilian government employees. All three groups are affected by DOD's longstanding inability to accurately estimate the size of its security clearance workload. Inaccurate estimates of the volume of clearances needed make it difficult to determine clearance-related budgets and staffing requirements. Similarly, the July 1, 2006, expiration of Executive Order 13381, which delegated responsibility for improving the clearance process to OMB, could potentially slow improvements in personnel security clearance processes DOD-wide as well as governmentwide. GAO has been encouraged by OMB's high level of commitment to activities such as the development of a government plan to improve personnel security clearance processes governmentwide but is concerned about whether such progress will continue after the executive order expires. In contrast, demand for top secret clearances for industry personnel and the lack of reciprocity (the acceptance of a clearance and access granted by another department, agency, or military service) are impediments that mainly affect industry personnel. A previously identified increase in the demand for top secret clearances for industry personnel has workload and budgetary implications for DOD and OPM if such requests continue to occur. Finally, the lack of reciprocity has a negative effect on employees and employers, and increases the workload for already overburdened investigative and adjudicative staff. Reciprocity problems have occurred despite the issuance of governmentwide investigative standards and adjudicative guidelines in 1997."}
{"id":"crs_R44303","pid":"crs_R44303_0","input":"\tRecent Developments\n\n\t\tEarthquake\n\nA 7.8 magnitude earthquake struck the Central and Western Regions of Nepal on April 25, 2015. More than 8,000 people were killed and an estimated 3 million people were displaced by the earthquake. An estimated half a million homes were destroyed. The cost of the disaster has been estimated at approximately $7 billion. The Nepali people face the immense challenge of trying to rebuild what was lost. A Nepal National Reconstruction Authority was established by ordinance, but reportedly has been slow to distribute the approximately $4 billion pledged for reconstruction at an international donors conference held in June 2015. While Nepal appears to have largely been spared a cholera outbreak in the aftermath of the earthquake, aid workers are concerned that little has been done to rebuild with winter approaching. \n\n\t\tNew Constitution\n\nMany observers believe the devastation wrought by the April 2015 earthquake acted as an impetus for the second Constituent Assembly, elected in 2013, to reach agreement on a new constitution. The long-awaited document was voted into effect in September, with 507 of 601 CA members voting in favor. Members of Madhese political parties, representing constituencies in the southern Terai plains, boycotted the vote. The Madhesi Jan Adhikar Forum won 10 seats in the 2013 CA election while the Terai Madhes Loktantrik Party won 11 seats. The new constitution does not delineate provinces along ethnic lines as is desired by some groups in Nepal (see \" Political Developments \" section below). It also reportedly has stirred agitation by including a provision that full Nepali citizenship only be granted to those individuals with two Nepali parents. Many of the Terai have a parent from India. While many analysts had hoped that the new constitution would provide unity and help to consolidate Nepal's fledgling democracy, upon its release it triggered violent protests from among disaffected groups in Nepal's south, who contend that it continues discrimination against them. According to a leader of the Unified Madhesi Democratic Front, an umbrella group of Madhesi political parties, \"we are burning the document as it curtailed our rights.\"\n\n\tUnited States-Nepal Relations\n\nThe United States recognized an independent Nepal in 1947 and established diplomatic ties in 1948. Relations between the two nations are described by the State Department as friendly. \nU.S. policy objectives toward Nepal center on helping it build a peaceful, prosperous and democratic society. The United States works with Nepal to promote political and economic development, decrease the country's dependence on humanitarian assistance, and increase its ability to make positive contributions to regional security and the broader global community.\n\n\t\tU.S. Assistance\n\nNepal is the 17 th -poorest country in the world, with approximately one in four citizens living in poverty. As such, it has a great need for economic development and foreign assistance. United States assistance seeks to \"cement gains in peace and security, further the democratic transition, support the continued delivery of essential social services, scale up proven effective health interventions and address the challenges of food insecurity and climate change.\"\nThe United States has provided $1.6 billion in assistance to Nepal since 1951. The U.S Agency for International Development (USAID) Country Development Cooperation Strategy (CDCS) for the period 2014-2018 is focused on fostering \"a more democratic, prosperous and resilient country.\" The CDCS features three key development objectives: more inclusive and effective governance, inclusive and sustainable economic growth to reduce extreme poverty, and increased human capital. These development objectives are designed to be mutually reinforcing. Assisting Nepal's efforts to respond to disasters and to stabilization operations and security sector reform are other key areas of United States assistance to Nepal. The FY2016 foreign assistance request for Nepal totals $82.4 million.\n\n\t\tCongressional Engagement\n\nA bipartisan Congressional Nepal Caucus is chaired by Representatives Anders Crenshaw and Jared Polis. The caucus serves as \"an informal group of Members dedicated to educating the American public and policymakers on U.S. policy objectives toward Nepal including supporting democratic institutions and economic liberalization, promoting peace and stability in South Asia, supporting Nepalese territorial integrity, and alleviating poverty and promoting development.\" The House Democracy Partnership has also engaged with Nepal. \n\n\t\tPeace Corps\n\nMore than 4,200 Peace Corps volunteers served in Nepal between 1962 and 2004, when the program was suspended due to civil war. The program was restarted in 2012 and there currently are about 70 volunteers working on food security projects in Nepal.\n\n\tPolitical Developments\n\n\t\tGovernment\n\nNepal is a parliamentary democracy led by the Prime Minister and cabinet with a largely ceremonial presidency. The Constituent Assembly (CA) has 601 seats, with 575 elected and 26 appointed by the cabinet. The Nepali Congress Party (NC), with 196 of 575 elected seats, and the Communist Party of Nepal Unified Marxist-Leninist (CPN-UML), with 175 seats, led the government in coalition under the leadership of the NC until recently. Khadga Prasad Sharma Oli of the CPN-UML was elected prime minister by the CA in October 2015. He replaces Sushil Koirala of the NC. Oli has \"articulated a tougher line towards India\" and is seen as less sympathetic towards the Madhese of the Terai than his predecessor. Many observers see Oli's inclusion of the NC in his coalition as boding well for political stability within parliament. Parliament elected Bidhya Devi Bhandari as the country's first female President on October 28, 2015. The Communist Party of Nepal-Maoist, which was the largest party after the 2008 election, is now the third-largest party in the CA. With 371 of 575 elected seats, the NC and the CPN-UML together enjoy a strong majority. Ethnic, communal, ideological, and regional cleavages continue to be sources of conflict. \n\n\t\tUnrest in the Terai\n\nAn estimated 45 people were killed in violent protests over the Nepali constitution in August and September 2015. Most of those killed were in the Terai. This recent violence stems from a regionally-based, socio-political cleavage in Nepali society between the Madhese and Tharu people of the Terai and \"hill\" or Pahadi people who have traditionally held power in Nepal. The Madhese of the lowland Terai region that spans the southern border with India have expressed discontent with the political status quo for some time. Political agitation and violence in the Terai in 2007-2008 led to negotiations with the government to address discrimination against people from the Terai. \nAccording to some reports, strikes by Madhese and police curfews in the Terai have significantly restricted trade across the border with India. The state-owned Indian Oil Corporation also reportedly was instructed not to refuel Nepalese tankers. This has led to severe fuel shortages in Nepal, which Kathmandu has blamed on India. New Delhi denies imposing an unofficial blockade to force changes in Nepal's constitution that would be more favorable for the Madhese, who traditionally have closer ties to India than the rest of Nepal. India did seal the border for 13 months in 1988-1989. The Government of Nepal has responded to the fuel shortage by seeking to reduce its dependence on India and gain greater access to fuel from China. On October 28, 2015, Nepal signed a Memorandum of Understanding with China to import petroleum products from China, which has the potential to end India's monopoly and thereby reduce somewhat India's leverage over Nepal. Transport linkages between Nepal and China are limited at present. \nThe Maoists previously supported opposition parties who have favored redrawing the country's district map based on ethnic identity in order to address grievances of ethnic groups that feel they have been underrepresented in the key institutions of the state. One concern with this approach is that it could exacerbate divisions within Nepali society by accentuating subnational ethnic, regional, and linguistic identities over identification with the overall state of Nepal. One lesson that disaffected groups may have learned from the Maoist experience is that armed insurrection can be translated into political leverage. The view reportedly held by many in Nepal\u2014that the agitation in the Terai is in some way backed by India\u2014may well have the effect of delegitimizing Madhese or Tharu demands in the eyes of much of the rest of the country.\n\n\tHistorical Context\n\nReligion has long been an important factor for Nepal's inhabitants, where 81% of the population is Hindu and 9% is Buddhist. Nepali is the official language, though there are over 100 regional and indigenous languages spoken in Nepal. The main geographic division in the country is between the low-lying and agriculturally productive Terai region and the more mountainous parts of the country. \nNever colonized, Nepal was almost totally isolated until the early 1950s. A transition from strict rule by the king to constitutional monarchy began in 1959, when then-King Mahendra issued a new constitution and held the country's first democratic elections. In 1960, however, the king declared the parliamentary system a failure, dismissed the fledgling government, suspended the constitution, and established a party-less system of rule under the monarchy. Although officially banned, political parties continued to operate and to agitate for a return to constitutional democracy.\nIn February 1990, student groups and the major political parties launched the Movement for the Restoration of Democracy. The centrist Nepali Congress (NC) party joined with the leftist parties to hold peaceful demonstrations in Nepal's urban centers. Two months later, after more than 50 people were killed when police fired on a crowd of demonstrators, then-King Birendra turned power over to an interim government. This government drafted a constitution in November 1990, establishing Nepal as a parliamentary democracy with a constitutional monarch as head of state. The king at that time retained limited powers, including the right to declare a state of emergency with the approval of a two-thirds majority of parliament.\nIn 1996, the leaders of the underground Communist Party of Nepal Maoist (CPN-M) launched a \"People's War\" in the mid-western region of Nepal, with the aim of replacing the constitutional monarchy with a one-party communist regime. The uprising appears to have been fueled by widespread perceptions of government corruption and failure to improve the quality of life of citizens, including providing access to cultivable land. The Maoists ran a parallel government, established their own tax system, burned land records, and redistributed seized property and food to the poor in 45 districts. The insurgency was waged in part through torture, killings, and bombings targeting police, the military, and public officials. A number of bank robberies, combined with \"revolutionary tax\" revenue, made the Nepali Maoists one of the wealthiest rebel groups in Asia.\nThe Kathmandu government faced additional turmoil in June 2001, when Crown Prince Dipendra shot and killed his parents, King Birendra and Queen Aishwarya; seven other members of the royal family; and himself, reportedly after a disagreement over whom he should marry. This incident did much to undermine the legitimacy of the monarchy. King Gyanendra, the former king's brother, was crowned on June 4, 2001, and he appointed a commission to investigate the assassinations. By mid-June, the country began returning to normal following rioting and widespread refusal to believe official accounts of the massacre. In July 2001, then-Prime Minister Girija Prasad Koirala stepped down amid fears of continuing instability and his government's failure to deal with the growing Maoist insurgency. He was replaced by NC leader Sher Bahadur Deuba, who then became the head of Nepal's 11 th government in as many years.\n\n\t\tConstitutional Crisis\n\nDuring the summer of 2002, the government of Nepal was thrown into a constitutional crisis that interfered with its ability to effectively combat the Maoist insurgency. The crisis began in late May, when King Gyanendra dissolved parliament and unilaterally declared a three-month extension of emergency rule, which had expired. The Prime Minister, who also scheduled early elections for November 2002, reportedly took such action after his centrist Nepali Congress party refused to support his plan to extend emergency rule. Following his actions, 56 former members of Parliament filed a lawsuit against him, claiming there was no constitutional precedent for the dissolution of parliament during emergency rule. In August 2002, the Supreme Court rejected this lawsuit. Although opponents of the Prime Minister agreed to accept the verdict, they emphasized the difficulty of holding free and fair elections two years ahead of schedule when much of the country was then under either rebel or army control.\nAlthough the prime minister pledged that there would be no emergency rule during the scheduled November 2002 elections, Maoist attacks and threatened strikes prompted the government to consider various measures to prevent a Maoist disruption of the polls. The government discussed imposing a partial state of emergency in areas most affected by the insurgency. However, opposition parties, which urged the government to open a dialogue with the Maoists, argued that by curbing civil liberties, emergency rule would inhibit free and fair elections. As an alternative, the government announced in September 2002 that it would hold the elections in six stages over two months, starting in mid-November, so that government troops could be transferred around the country to protect voters and candidates. After further deliberation, however, Nepal's cabinet concluded that the security situation was too risky to hold elections. On October 3, 2002, the cabinet asked King Gyanendra to postpone the national elections for one year. The next day, the king dismissed the prime minister, disbanded his cabinet, and assumed executive powers.\n\n\t\tThe King's Takeover\n\nThe security situation in Nepal deteriorated after the collapse of the cease-fire between the Maoists and the government in August 2003. The Maoists favored drafting a new constitution that would abolish the monarchy. The king opposed such a move and wanted the Maoists to relinquish their weapons. Accommodation between the monarchy and opposition democratic elements was widely seen as a key to creating the unified front necessary to defeat the Maoists. With his direct assumption of powers, and arrest of opposition democratic elements, the king decided to try defeating the Maoists without political support. This move proved to be the beginning of the end of the power of the monarchy in Nepal.\nAfter seizing direct power in early 2005, King Gyanendra exerted control over democratic elements, but made little progress in the struggle against the Maoists. The king reportedly thought he could take advantage of a split in the Maoist leadership and disarray amongst democrats to seize control and use the Royal Nepal Army (RNA) to defeat the Maoists. The seizure of power by the king appears to have been aimed as much, if not more so, at asserting the king's control over democratic forces. Many observers felt that a military solution to the conflict with the Maoists was not achievable and that a concerted effort by the king and the democrats was needed to establish a unified front to defeat the Maoists.\nWhen the king assumed power, he stated that he would take steps to reinstate a constitutional democracy within 100 days, which he then failed to do. Although some political prisoners were released by the king, hundreds of others remained under arrest and restrictions on civil liberties, such as public assembly and freedom of the press, remained in place. A U.N. Office of the High Commissioner of Human Rights team was established in Nepal in April 2005 to monitor the observance of human rights and international humanitarian law.\nBy moving against the democrats, who under different circumstances could have worked with the monarchy against the Maoists, the king strengthened the position of the Maoists at that time. By some estimates, almost half of the RNA was occupied with palace security, civil administration, and efforts to restrict communications and civil rights. The king's legitimacy with the people was weakened due to the circumstances under which he assumed the throne, the way he seized direct rule, and poor popular perceptions of his son, Prince Paras Shah. The former crown prince was unpopular with Nepalis \"for his drunken antics and playboy lifestyle.\"\n\n\t\tMaoist Reaction\n\nFrom February 13 to 27, 2005, the Maoists reacted to the king's actions by blockading major highways linking the country's 75 districts, as well as international road links to India and China. This led to clashes between Maoists and the RNA and brought trade by road to a standstill. The army organized armed convoys, which allowed limited trade to continue. The Maoists had earlier cut off land routes to Kathmandu in August 2004. During the week-long blockade in 2004, prices of some basic foods more than doubled and fuel was rationed. This increase in food prices reportedly recurred in the 2005 blockade. By blockading Kathmandu, the Maoists successfully increased pressure on the king's government and demonstrated their power. This action demonstrated the political leverage that could be gained by blockading the capitol.\n\n\t\tDemocratic Uprising\n\nIn April 2006, mounting popular resistance in support of the political parties led King Gyanendra to hand over power to a Seven Party Alliance. This followed weeks of violent protests and demonstrations against direct royal rule in Nepal. The Seven Party Alliance that opposed the king in April included the following parties:\nThe Nepali Congress (NC); Communist Party of Nepal Unified Marxist-Leninist (CPN-UML); Nepali Congress (Democratic) or NC (D); Nepal Sadbhavana Party (Anandi Devi) or NSP (A); Jana Morcha Nepal; Samyukta Baam Morcha (United Left Front) or ULF; and Nepal Workers and Peasants Party (NWPP).\nThe Maoists were not part of the Seven Party Alliance, though they worked with the alliance to oppose the monarchy. This was made possible by the king's political crackdown on the democrats. The seven parties worked together through their alliance to promote a more democratic Nepal in the face of direct rule by the king. In May 2006, six of the seven political parties formed a coalition government. In November 2006, the Seven Party Alliance and the Maoists reached a peace agreement, ending a decade-old insurgency that claimed over 13,000 lives. In it, the Maoists agreed to put down their arms and postpone a decision on the future disposition of the monarchy until after the election of a Constituent Assembly. Under the peace agreement, Constituent Assembly elections were to be held by the end of June 2007. This election date slipped, but Constituent Assembly elections were eventually held in April 2008. This CA was disbanded after failing to reach agreement on a new national constitution.\nA second CA was elected in 2013 to draft a new constitution. Voter turnout for this election increased from 56.5% of registered voters in 2008 to 77.6% in 2013. These elections marked a largely peaceful shift to the center-right of Nepali politics with the Nepali Congress (NC) Party and the Communist Party of Nepal Unified Marxist-Leninist (CPN-UML) gaining relative to the Communist Party of Nepal\u2013Maoist (CPN-M), which had previously led the bloody armed struggle against the state. The second CA reached agreement on a new constitution in September 2015 (see \" New Constitution \" section above).\n\n\tThe Economy\n\nNepal's economy faces the twin challenge of rebuilding after the April 2015 earthquake while also dealing with the economic impact of the political unrest in the Terai that is limiting cross-border trade with India. The situation in the Terai could further undermine economic growth in 2015. Real GDP growth is expected to slow from 5.4% in 2014 to 3.4% in 2015. Many have attributed this to the earthquake of April 2015. \nThe fuel shortage brought on by strife in the Terai is the most pressing aspect of the breakdown in cross-border trade with India. New arrangements with China appear set to alleviate some of Nepal's dependence on India as a source of fuel imports. Some observers have speculated that the trade blockade could lead to a negative economic growth rate for Nepal. Nepal has not had a negative economic growth rate since 1982. \nRebuilding damaged and destroyed housing and infrastructure caused by the earthquake will likely take years. Observers believe that future economic growth will be modestly stimulated by government spending on reconstruction. According to the Asian Development Bank, the total cost of recovery from the earthquake is estimated at $7.1 billion, equal to approximately one-third of Nepal's GDP. Development partners have pledged $4 billion in grants and loans over five years. \nNepal's economy is heavily dependent on agriculture. Agriculture employs 75% of the country's work force. Agriculture, forestry, and fisheries account for 31.7% of GDP by sector of origin while services account for 53.2% and industry 15.1%. \nThe United States is one of Nepal's key trade partners. India (59.7%), the United States (8.6%), China (4.6%), and Germany (3.5%) are the key destinations for Nepal's exports while India (57%) and China (29.5%) are the main sources of Nepal's imports. The United States and Nepal have signed a Trade and Investment Framework Agreement to enhance bilateral trade and investment. \"U.S. exports to Nepal include agricultural products, aircraft parts, optic and medical instruments and machinery.\" \n\n\t\tHydropower\n\nNepal's substantial hydropower potential is viewed by many analysts as an important means of stimulating economic growth and development. With 6,000 rivers of various sizes, many with steep gradient, Nepal is estimated by some to have 40,000 MW of hydropower potential. It has thus far developed 680 MW of hydropower capacity. With only an estimated 40% of the population with access to electricity, future demand is projected to grow by 7%-9% annually. The United States is supporting the expansion of economic growth, employment and energy exports through its Nepal Hydropower Development Project, which is a five-year, $9.8 million project being implemented by Deloitte Consulting. China and India have also sought to support Nepal's hydropower development. The China International Water and Electric Corporation has an 80% share of the 25 MW Madi Hydro project in Kaski District. This project has been delayed by the blockade in the Terai. China is also reported to be investing $1.6 billion toward the construction of a 750 MW hydropower project in West Seti. \n\n\t\tRemittances\n\nRemittances from Nepalis working abroad are vital to the Nepalese economy. Estimates of their value vary from 20% to 30% of GDP. They further are predicted to rise from $7.1 billion in 2014 to $8.8 billion in 2016 as Nepalis abroad send larger sums home to help rebuild after the earthquake. An estimated 3.5 million Nepalese work abroad, most of them in unskilled or semi-skilled work in construction, manufacturing, or domestic work. Major destinations for Nepalese working abroad include Saudi Arabia, South Korea, the United Arab Emirates, Qatar, Kuwait, Malaysia, Oman, and Japan. The number of Nepalese going to India for work is not known, but is believed to be sizeable.\n\n\tHuman Rights\n\nThere are a number of human rights concerns about Nepal. Ongoing political turmoil has delayed the establishment of the National Human Rights Commission and the Truth and Reconciliation and Disappearance commissions. Discrimination based on caste and ethnicity remains, as do problems with poor prisons, and the courts reportedly remained vulnerable to political pressure, bribery, and intimidation. There were also restrictions on the freedom of assembly and harassment of the media. Corruption reportedly remains widespread, and the freedoms of refugees are limited. It is also reported that \"the government made little progress in combating forced and bonded labor, which persisted despite laws banning the practice.\"\n\n\t\tTrafficking\n\nTrafficking in persons remains a serious problem in Nepal. According to USAID, while trafficking of women and children, particularly to India, for sexual exploitation continues, \"various emerging trends of human trafficking are a growing concern in Nepal. These include cases of organ trafficking, internal trafficking, fake foreign marriages, and international labor trafficking.\" Each year as many as 20,000 women and young girls reportedly are trafficked from Nepal to India every year. \nThe April 2015 earthquake may have increased the vulnerability of women and marginalized groups to traffickers. In June, USAID's Office of Foreign Disaster Assistance provided additional funding to expand ongoing projects to combat trafficking in Nepal. The State Department's 2015 Trafficking in Persons report assigned Nepal a \"Tier 2\" ranking, and recognized that the \"Government of Nepal has made progress through increased efforts to prevent human trafficking.\" The report also noted that the increased effort reportedly led to only 203 convictions in 2014. \n\n\t\tReligious Freedom\n\nNepal is an overwhelmingly Hindu (81.3%) nation with significant Buddhist (9%) and Muslim (4.4%) minorities. \"Discrimination against members of lower castes, particularly Dalits, remained widespread and inhibited their access to Hindu temples and ability to participation in religious events.\" Most Nepali Muslims are Sunnis.\n\n\tRefugees\n\n\t\tLhotshampa\n\nTens of thousands of Lhotshampa, or ethnic Nepalese living in Bhutan, were expelled from Bhutan in the late 1980s and 1990s. This led to over 100,000 Lhotshampa refugees in Nepal by 2006. The United States, Australia, Canada, Denmark, Netherlands, New Zealand, Norway, and the United Kingdom have resettled most of these refugees. The United States has taken in 84,500 Lhotshampa out of a total of 100,000 that have been resettled (as of November 2015). An estimated 10,000-12,000 Lhotshampa are believed to desire to remain in Nepal.\n\n\t\tTibetans\n\nTibetan refugees total approximately 15,000-20,000 people out of Nepal's total population of 31 million. The Tibetan population in Nepal stems from those who fled from Tibet to Nepal following the Dalai Lama's escape to India in 1959. Between 1959 and 1989 the government of Nepal recognized and registered Tibetans crossing the border into Nepal as refugees. After 1989 Tibetans were not allowed to settle permanently in Nepal but were allowed to transit on their way to India. Diplomatic pressure from China following a wave of protests across the Tibetan plateau in 2008 led the government of Nepal to suppress Tibetan political activism in Nepal and, according to HRW, \"Restrictions on Tibetans' rights in Nepal and on the Nepal-China border have grown much more stringent since 2008.\" The number of Tibetans crossing from China into Nepal has diminished from an estimated 2,200 per year before the 2008 protests in Tibet to 171 in 2013.\nIn 2015 Congress earmarked assistance for the Tibetan community in Nepal and India through Section 7043(a)(6)(b) of the Consolidated and Further Continuing Appropriations Act, 2015 ( P.L. 113-235 ), which states that \"Funds appropriated by this Act under the heading 'Global Health Programs,' 'Development Assistance,' 'Economic Support Fund,' and 'Migration and Refugee Assistance' shall be made available for programs to promote and preserve Tibetan culture and the resilience of Tibetan communities in India and Nepal.\" \n\n\tThe Environment\n\nNepal can be divided ecologically into the lowland Terai, the intermediate hill, and mountainous Himalaya regions. Nepal's \"diversity of eco-climatalogical conditions ... is mainly due to its enormous altitudinal gradient, its location at the interface of the Tibetan plateau and the plains of northern India, and its highly dissected mountain terrain.\" Nepal is heavily reliant on its natural resources.\n\n\t\tClimate Change\n\nStudies have found that Nepal is \"experiencing gradual changes in climate.\" Nepal is ranked as the 13 th most vulnerable country to the effects of climate change and is a focus country for the U.S. Global Climate Change Initiative. Widespread poverty and dependence on agriculture, which employs most people, makes Nepal vulnerable to climate change. With little irrigated land, agriculture in Nepal is dependent on rain from the Asian monsoon despite 6,000 rivers, both great and small, in the country. Deglaciation caused by rising temperatures due to climate change is predicted by some experts to cause growth of glacial lakes and increase the risk of subsequent flooding. \nSoil loss from erosion, landslides, and floods is a major cause of decline in agricultural production in Nepal. A history of deforestation has contributed to landslides and also exacerbates flooding and erosion. Between 1990 and 2005 Nepal is thought by some to have lost 24.5% of its forest cover. Others, while acknowledging high rates of deforestation, point to a lack of robust or comprehensive data. Rising temperatures may also increase the prevalence of diseases such as malaria, kalaazar, and Japanese encephalitis. Because of its dependence on rain-fed agriculture any potential change to the monsoon rains could have a significant impact on the livelihoods of a majority of Nepalese. Its poverty also makes Nepal poorly placed to mitigate negative impacts of climate change.\n\n\t\tWildlife Preservation\n\nWhile huge numbers of elephants, rhinos, and other endangered animals continue to be poached worldwide, Nepal has made significant progress in protecting its endangered species. Not a single rhino is known to have been poached in Nepal in 2013. This contrasts starkly with South Africa, where rhino poaching increased 5,000% between 2007 and 2012. The key to this success appears to be patrolling by the army and a community-based approach to wildlife protection. Some 30%-50% of park entry fees reportedly goes to communities near wildlife preserves. Nepal's integrated approach, which is based on collaboration between park agencies, national law enforcement, Interpol's Wildlife Crime Working Group, and local communities, appears to be the basis of the country's success in preserving its wildlife.\n\n\tExternal Affairs\n\nNepal is a landlocked geopolitical buffer state, like nearby Bhutan, that is situated between two Asian giants. India and China fought a border war in 1962 in the Himalayan mountains near Nepal, which led to ongoing territorial disputes between those two nations. Tensions along the India-China border have mounted from time to time with concomitant troop buildups. Nepal's reliance on these two huge neighbors leads it to seek amicable relations with both, though trade, religious, and cultural ties with India have historically been closer. \n\n\t\tNepal-India Relations\n\nIndia and Nepal have a tradition of close cooperation in the area of defense and foreign affairs. Nepal also is heavily dependent on India as the primary source of imports, its main market for exports, and for access to the sea through the port of Kolkata. A significant percentage of all foreign investment in Nepal also comes from India. Moreover, the Himalayan mountain range along Nepal's northern border limits access to China, whereas the 500-mile southern plains border with India is relatively open. Some sectors of the Nepali leadership have reportedly long resented Indian economic influence and have sought to establish a more independent foreign policy, which could draw Nepal closer to China. Kathmandu has at times sought to counterbalance what it considers undue pressure from India. Prime Minister Narendra Modi's state visit to Kathmandu in August 2014 was the first by an Indian prime minister in 17 years. The two countries agreed to refresh their bilateral Treaty of Peace and Friendship and India plans to extend $1 billion in concessionary loans to Nepal to develop hydropower and infrastructure. India pledged $1 billion in additional assistance for reconstruction in Nepal following the 2015 earthquake. \nIt is not entirely clear to what extent if at all India orchestrated a blockade of energy supplies to Nepal. India reportedly sought to influence Nepal to alter its new constitution to take into account the interests of the Tharu and Madhese of the Terai. To some observers it appears that India will have to change its policy if it wishes to remove incentives for Nepal to seek to further develop its energy, trade, and other linkages with China. According to the Economist Intelligence Unit, the fuel agreement between Nepal and China could \"end India's position as holding a monopoly on fuel supplies and enhance China's influence in Nepal, altering the regional balance of power.\"\n\n\t\tNepal-China Relations\n\nChina has in recent years made significant inroads in developing ties with South Asian and Indian Ocean littoral states. Some view this engagement as predominantly being economically driven, while others, particularly analysts in New Delhi who follow strategic issues, increasingly view Chinese activity with geopolitical alarm. China promised $483 million in post-earthquake assistance to Nepal at the donors conference in June 2015. China reportedly has plans to extend the Qinghai-Llasa railway line to Kathmandu, though some have challenged the technical feasibility of the plans. As discussed above, Nepal has been a transit country for Tibetans seeking to flee Chinese repression in Tibet. Most of those entering Nepal from Tibet move on to settle in India. The Government of Nepal closely monitors Tibetan refugees, restricts their freedom of assembly and expression, and enforces restrictions that make it difficult for Tibetans to obtain documents necessary for access to public services. \n\n\t\tPeacekeeping\n\nNepal is the sixth-largest contributor to United Nations-sponsored peacekeeping operations. In 2015, Nepal had approximately 4,000 troops and 1,000 police deployed to 14 U.N. missions. Between 1955 and 2014 Nepal deployed a total of 110,000 troops to 41 different U.N. peacekeeping missions. The United States provided $1.8 million in peacekeeping equipment to Nepal under the Global Peacekeeping Operations Initiative in 2015. \n\n\tChronology76","output":"Nepal is a poor country of an estimated 31 million people that has undergone a radical political transformation since 2006, when a 10-year armed struggle by Maoist insurgents, which claimed at least 13,000 lives, officially came to an end. The country's king stepped down in 2006, and two years later Nepal declared itself a republic, electing a Constituent Assembly (CA) in 2008 to write a new constitution. A second CA elected in 2013 reached agreement on a new constitution in September 2015. Though the process of democratization begun in 2006 has had setbacks and has been marked by violence, Nepal has conducted reasonably peaceful elections, brought former insurgents into the political system, and, in a broad sense, taken several large steps toward establishing a functioning democracy.\nNew provincial demarcations contained in the new constitution, along with other provisions, have met with opposition by the minority Madhese people of the lowland Terai border region with India. This has led to violent protests and disruptions to cross-border trade that have led to economic hardship and fuel shortages in Nepal. Kathmandu has asserted that the Indian government is playing a role in this unrest. Some media coverage described this as an unofficial blockade of Nepal. In part as a result of these developments, Nepal is seeking closer energy and trade linkages with China.\nAmong the drivers of congressional interest in Nepal are the country's still-unfolding democratization process, geopolitical and humanitarian concerns, and its location as a landlocked state situated between India and China. The United States and Nepal established diplomatic ties in 1948 and relations between the two countries are friendly. U.S. policy objectives toward Nepal include supporting democratic institutions and economic liberalization, promoting peace and stability in South Asia, supporting Nepalese territorial integrity, alleviating poverty, and promoting development.\nNepal's status as a relatively small, landlocked buffer state situated between India and China largely defines the context of its foreign policy. This geopolitical dynamic is changing somewhat as Nepal appears to be the site of more intense diplomatic and economic activity by both India and China. Historically, Nepal's ties with India have been closer than its ties with China. Recent developments in the Terai, however, have encouraged Nepal to seek closer relations with China. China is developing trade, transport and development linkages with Nepal and has reportedly pressured Nepal to constrain the activities of Tibetan refugees in Nepal.\nNepal was devastated by a massive 7.8 magnitude earthquake on April 25, 2015. The disaster killed over 8,000 and destroyed much of Nepal's housing and infrastructure. By one estimate, over half a million homes were destroyed. Reconstruction costs are estimated by some at $7 billion. The devastation wrought by the earthquake is compounded by economic hardship stemming from the ongoing discontent in the Terai. An international donors conference held in June 2015 led to significant pledges of assistance to help Nepal rebuild.\nNepal faces other challenges, as well as potential opportunities. Trafficking remains a key human rights concern. Nepal also faces challenges related to demographic and climate change driven pressures on the environment. Nepal has extensive and underutilized hydropower potential that, if developed, could hold the promise of improved economic development for the nation."}
{"id":"crs_RL33907","pid":"crs_RL33907_0","input":"Following the terrorist attacks of 2001, the federal government determined that it would need additional medical countermeasures (e.g., diagnostic tests, drugs, vaccines, and other treatments) to respond to an attack using chemical, biological, radiological, or nuclear (CBRN) agents. The enactment of the Project BioShield Act of 2004 ( P.L. 108-276 ) was designed to be an important part of federal efforts to obtain new civilian medical countermeasures. It provides countermeasure developers with a guaranteed government market for their products. As Congress continues oversight of federal efforts to protect the United States, the effectiveness and efficiency of the Project BioShield implementation may draw legislative attention.\nThis report discusses actions taken by Congress and the Administration that have affected this program, describes the decision-making process for choosing countermeasures, describes the countermeasures for which the Department of Health and Human Services (HHS) has contracted, and discusses accounting discrepancies between the President's Budget and HHS reporting of Project BioShield awards.\n\n\tOverview of Project BioShield\n\nThe Project BioShield Act of 2004 ( P.L. 108-276 ) contains three major provisions. One relaxes some procedures for bioterrorism-related procurement, hiring, and research grant awarding. Another permits the emergency use of countermeasures not approved by the Food and Drug Administration (FDA). The third authorizes a 10-year program to encourage the development and production of new countermeasures for chemical, biological, radiological, and nuclear (CBRN) agents. This last provision is usually referred to as Project BioShield and is the focus of this report.\nIn contrast to federal programs that directly fund research and development of biomedical countermeasures, Project BioShield is a procurement program. It acts as a guarantee that the federal government will buy successfully developed countermeasures for the Strategic National Stockpile (SNS). It allows the government to enter into contracts to procure countermeasures while they still are in development, up to eight years before product delivery is expected. The government guarantees that it will buy a certain quantity at a specified price, once the countermeasure meets specific requirements. The government pays the agreed-upon amount only after these requirements are met and the product is delivered to the Strategic National Stockpile. If the product does not meet the requirements within the specified time frame, the contract can be cancelled without any payment to the contractor. Thus, Project BioShield is intended to reduce the developer's market risk; that is, the possibility that no customer will buy the successfully developed product. However, it does not reduce the development risk; that is, the possibility that the countermeasure will fail during development. The Pandemic and All-Hazards Preparedness Act ( P.L. 109-417 ) modified the Project BioShield Act to allow for milestone-based payments for up to half of the total award before countermeasure delivery.\n\n\t\tProject BioShield Procurement Process\n\nThe Project BioShield procurement process requires actions by the Department of Homeland Security (DHS), HHS, and the President, and relies on interagency working groups. Figure 1 illustrates the Project BioShield decision-making and acquisition process.\n\n\t\t\tDHS Roles\n\nThe first step in the BioShield acquisition process is to determine whether a particular CBRN agent poses a material threat to national security. This analysis, generally referred to as a Material Threat Assessment (MTA), is performed by DHS. Between 30 and 40 subject matter experts are consulted during an MTA. On the basis of this assessment, the DHS Secretary determines whether that agent poses a material threat to national security. The Project BioShield Act of 2004 requires such a written Material Threat Determination (MTD) for procurement using BioShield funds and authorities. This declaration neither addresses the relative risk posed by an agent nor determines the priority of its acquisition. Furthermore, the issuance of an MTD does not guarantee that the government will pursue countermeasures against that agent.\nDHS has issued MTDs for 13 agents. These included the biological agents that cause anthrax, multi-drug resistant anthrax, botulism, glanders, meliodosis, tularemia, typhus, smallpox, plague, and the hemorrhagic fevers Ebola, Marburg, and Junin. Additionally, DHS issued a single MTD covering radiological and nuclear agents. According to HHS, the first four MTDs (anthrax, radiological\/ nuclear agents, botulinum toxin, and smallpox) were completed before or shortly after the enactment of the Project BioShield Act. No other MTDs were issued until September 2006, when nine were issued. HHS predicted no additional MTDs would be issued unless \"technology advances or if our understanding of the potential threats changes.\"\nHomeland Security Presidential Directive (HSPD)-10 and HSPD-18 direct DHS to perform additional risk assessments. HSPD-10 directs DHS to develop, and periodically update, risk assessments that include a ranking of relative risks for biological agents. HSPD-10 states that this overall biological agent risk assessment is to be used to prioritize federal government-wide planning and response to the threat of biological agent attacks. The first iteration of this assessment was delivered in 2006. Following its completion, this overall biological agent risk ranking helped determine which agents should have MTAs and MTDs. HSPD-18 requires DHS to develop a comprehensive risk assessment that integrates all CBRN agents into a single ranking of relative risk. This risk assessment is required to be completed by June 1, 2008. HSPD-18 directs that this assessment be used to prioritize CBRN countermeasure research, development, and acquisition.\nIn addition to making MTDs and performing risk assessments, DHS contributes to the interagency process by developing credible attack scenarios to help establish countermeasure requirements and response planning.\n\n\t\t\tHHS Roles\n\nFor agents that have received an MTD, HHS assesses the public health consequences of an attack using that agent. This analysis relies on interagency working groups (see below) and is now coordinated by the HHS Office of Public Health Emergency Medical Countermeasures (OPHEMC). OPHEMC is within the Office of the Assistant Secretary for Preparedness and Response (ASPR). Following this assessment, HHS determines whether this material threat lacks an existing, effective countermeasure and whether a countermeasure should be procured using Project BioShield authorities and funds. If so, the HHS and DHS Secretaries may jointly\u00a0submit a recommendation for presidential approval to use BioShield funds to acquire such\u00a0a countermeasure.\nThe HHS Secretary is also responsible for establishing countermeasure requirements, such as dosage, patient administration method (e.g., injection or pill), minimum effectiveness, and quantity. This process is coordinated by OPHEMC and relies on input from interagency working groups. HHS is responsible for the entire Project BioShield contracting process, including issuing Requests for Information, Requests for Proposals, awarding contracts, managing awarded contracts, and determining whether contractors have met the minimum requirements for payment. OPHEMC maintains a website detailing all Project BioShield solicitations and awards.\nHHS implementation of Project BioShield and its management of the procurement process have been widely criticized. These issues provided some of the impetus for creating the Biodefense Advanced Research and Development Authority (BARDA) through the Pandemic and All-Hazards Preparedness Act ( P.L. 109-417 ). Despite concerns that OPHEMC was not optimally executing its BioShield responsibilities, HHS has chosen to implement P.L. 109-417 by adding the new BARDA responsibilities and authorities to this office. To reflect this increase in responsibilities, HHS also plans to rename OPHEMC as the Biodefense Advanced Research and Development Authority. These new duties include directly funding the advanced development of countermeasures which are not yet deemed eligible for Project BioShield contract awards.\n\n\t\t\tPresidential Roles\n\nPresidential approval is required before HHS enters into any Project BioShield countermeasure procurement contract or issues a call for countermeasure development. The President may only make such approval subsequent to a joint recommendation from the Secretaries of HHS and DHS. The President delegated this approval responsibility to the Director of the Office of Management and Budget.\nThe Executive Office of the President also had coordinated the interagency process, largely through the Homeland Security Council (HSC), the National Security Council (NSC), and the National Science and Technology Council (NSTC). This was changed by HSPD-18, which directed the HHS Secretary to lead the interagency process (see below).\n\n\t\t\tInteragency Roles\n\nMuch of the priority-setting and requirement-determining activities have input from multiple agencies, such as HHS, DHS, Department of Defense, and some of the intelligence agencies. The interagency process has been changed multiple times in the past, most recently by the issuance of HSPD-18 and the enactment of the Pandemic and All-Hazards Preparedness Act ( P.L. 109-417 ).\n\n\t\t\t\tWeapons of Mass Destruction Medical Countermeasures Subcommittee\n\nIn the past, the interagency process relied on expertise resident in the Weapons of Mass Destruction Medical Countermeasures (WMD MCM) Subcommittee. As part of the National Science and Technology Council (NSTC), this interagency group predated Project BioShield. The NSTC, a cabinet-level council, acts to coordinate science and technology policy across the federal research and development enterprise. The WMD MCM Subcommittee is a part of the NSTC Committee on Homeland and National Security. According to HHS, the charter of the WMD MCM Subcommittee was changed in 2005, and it began reporting to the joint HSC\/NSC Biodefense Policy Coordinating Committee. According to NSTC, the Subcommittee also continues to remain within NSTC. The WMD MCM Subcommittee contains representatives from Centers for Disease Control and Prevention, Food and Drug Administration, National Institutes of Health, DHS, Department of Defense, Department of Agriculture, Nuclear Regulatory Commission, Department of Energy, Department of Veterans Affairs, Environmental Protection Agency, Homeland Security Council, National Security Council, Office of the Vice President, Office of Science and Technology Policy, Office of Management and Budget, and various intelligence agencies.\nThe WMD MCM Subcommittee's role in the Project BioShield process appears to have been assumed by the Public Health and Emergency Countermeasure Enterprise Governance Board (see\u00a0below).\n\n\t\t\t\tPublic Health and Emergency Medical Countermeasures Enterprise\n\nThe Public Health and Emergency Medical Countermeasures Enterprise (PHEMCE) is an interagency working group that was established in July 2006 during a HHS Office of Public Health Emergency Preparedness reorganization. It is to:\n(1) define and prioritize requirements for public health medical emergency countermeasures, (2) coordinate research, early and late stage product development and procurement activities addressing the requirements [including BioShield procurement], and (3) set deployment and use strategies for medical countermeasures held in the Strategic National Stockpile.\nPHEMCE is distinct from the HHS Office of Public Health Emergency Medical Countermeasures (OPHEMC). PHEMCE is an interagency working group while OPHEMC resides solely within HHS. However, the Director of OPHEMC is also responsible for coordinating PHEMCE. Neither its establishing regulation nor the PHEMCE strategy states to whom this interagency group reports nor details its membership.\nAccording to HHS, the WMD MCM Subcommittee's duties were transferred to the PHEMCE Governance Board. However, the apparent continuance of the WMD MCM Subcommittee in the NSTC suggests that not all of its duties have transferred to PHEMCE. It is unclear what effect this transfer of duties from a subcommittee of a Cabinet-level Council to an interagency working group associated with an office under the Assistant Secretary for Preparedness and Response will have on the interagency process and the efficiency of the Project BioShield acquisition process.\n\n\t\t\t\tHSPD-18\n\nHomeland Security Presidential Directive 18 (HSPD-18) was issued on January 31, 2007. When fully implemented, HSPD-18 may change the interagency process described above. HSPD-18 establishes a government-wide strategy for developing and acquiring civilian WMD countermeasures. One of its provisions requires the HHS Secretary to\nestablish an interagency committee to provide advice in setting medical countermeasure requirements and coordinate HHS research, development, and procurement activities.\nHSPD-18 also requires the HHS Secretary to establish a\ndedicated strategic planning activity to integrate risk-based requirements across the threat spectrum and of the full range of research, early-, mid- and late-stage development acquisition and life-cycle management of medical countermeasures.\nThe Secretary is to align all relevant HHS programs to support this plan.\nThese roles are similar to those of PHEMCE whose draft strategy was published prior to the issuance of HSPD-18. The final PHEMCE strategy appears to support the interpretation that HHS intends PHEMCE to fulfill the interagency committee and dedicated strategic planning activity requirements of HSPD-18. HSPD-18 requires the interagency committee to \"apprise\" the joint HSC\/NSC Biodefense Policy Coordination Committee of countermeasure development and acquisition progress.\n\n\t\t\t\tThe Pandemic and All-Hazards Preparedness Act\n\nThe Pandemic and All-Hazards Preparedness Act ( P.L. 109-417 ), enacted December 19, 2006, may also affect the Project BioShield interagency decision-making process. It gives the HHS Secretary until June 19, 2007 to\ndevelop and make public a strategic plan to integrate biodefense and emerging infectious disease requirements with the advanced research and development, strategic initiatives for innovation, and the procurement of... countermeasures\nThis role is similar to that directed by HSPD-18. The finalized PHEMCE Strategy and PHEMCE Implementation Plan appear to only partially fulfill this requirement in that they address the biodefense plan but do not address emerging infectious diseases. HHS is preparing a separate strategic plan to fulfill the requirements of P.L. 109-417 .\n\n\tAppropriations, Rescissions, and Future Funding Options\n\n\t\tAppropriations\n\nThe Department of Homeland Security Appropriations Act, 2004 ( P.L. 108-90 ) provided an advance appropriation of $5.593 billion to procure civilian medical countermeasures for a 10-year period (FY2004-FY2013). This appropriation was enacted October 1, 2003, almost a year before the July 21, 2004 enactment of the Project BioShield Act of 2004 ( P.L. 108-276 ). The appropriations act established the \"Biodefense Countermeasures\" account for \"necessary expenses for securing medical countermeasures against biological terror attacks.\"\nAlthough all the funds for this account were provided in the 2004 appropriations act, only a portion became available for obligation upon enactment. The Department of Homeland Security Appropriations Act, 2004 specified that no more than $890 million could be obligated in FY2004, and no more than $3.418 billion could be obligated from FY2004 through FY2008 ( Table 1 ). Any money not obligated within these defined periods would remain available through FY2013. Thus, before rescissions were enacted, DHS had $890 million available as budget authority for this account in FY2004. In FY2005, an additional $2.528 billion would have become available. The remaining $2.175 billion would become available in FY2009 ( Table 2 ).\nThe Project BioShield Act of 2004 ( P.L. 108-276 ) designated the \"Biodefense Countermeasures\" account established by the Department of Homeland Security Appropriations Act, 2004 ( P.L. 108-90 ) as the special reserve fund for Project BioShield acquisitions. P.L. 108-276 placed additional restrictions on the use of these funds, including requiring a determination that an agent constitutes a material threat to national security, requiring Presidential approval before a countermeasure can be purchased, and restricting these funds to procurements only (i.e., not for administrative costs). It also broadened the types of countermeasures that may be acquired from this account to include those against biological, chemical, radiological, and nuclear agents.\n\n\t\tRescissions\n\nAlthough Congress provided the entire appropriation for the 10-year program, Congress retains the power to increase or decrease the amount available for Project BioShield. Two separate rescissions have removed a total of $25 million from the Project BioShield special reserve fund.\nThe Consolidated Appropriations Act, 2004 ( P.L. 108-199 ) contained an across-the-board rescission of 0.59%. This rescission applied to the amount of the Project BioShield advance appropriation that became available for obligation in FY2004 ( Table 2 ). This rescission removed $5 million from the amounts available for obligation in FY2004, as well as reducing the total special reserve fund by an equal amount. Thus, the amount available for obligation in FY2004 was reduced from $890 million to $885 million, and the total amount available for FY2004-FY2013 was reduced from $5.593 billion to $5.588 billion ( Table 1 and Table 2 ).\nThe Consolidated Appropriations Act, 2005 ( P.L. 108-447 ) contained an across-the-board rescission of 0.8%. This rescission applied to the $2.528 billion that became available for obligation in FY2005 ( Table 2 ). This removed $20 million from the amount available for obligation for FY2005-FY2008 as well as reducing the total special reserve fund by an equal amount. Thus, the amount that became available for obligation in FY2005 was reduced from $2.528 billion to $2.508 billion, and the total amount available until FY2013 was reduced from $5.588 billion to $5.568 billion ( Table 1 and Table 2 ).\n\n\t\tFuture Funding Options\n\nAcross-the-board rescissions generally only affect those amounts that become available in that fiscal year. Therefore, the special reserve fund is unlikely to be affected by future across-the-board rescissions, except in FY2009, when the remaining $2.175 billion becomes available ( Table 2 ). However, Congress retains the power to make both specific appropriations and rescissions to this account and could thus directly increase or decrease the amount available for Project BioShield obligations.\n\n\tAcquisitions\n\nThe HHS has reported awarding $2.331 billion worth of Project BioShield contracts ( Table 3 ). These contracts address four material threats: Bacillus anthracis (the bacteria which cause anthrax), smallpox, botulinum toxin, and radiological and nuclear agents. The distribution of contract awards has been uneven between these threats, with $1,429 million against Bacillus anthracis (61%), $500 million against smallpox (21%), $364 million against botulinum toxin (16%) and $38 million against radiological and nuclear weapons (2%). While HHS has made additional requests for information from companies developing CBRN countermeasures, none have resulted in contract offers.\nOn December 17, 2006, HHS terminated an anthrax countermeasure contract for failure to meet a contract milestone. This contract was the first, and largest to date, awarded using Project BioShield funds. This cancellation took place after the preparation of both the HHS' Project BioShield Annual Report to Congress and the President's FY2008 Budget. Thus, neither of these documents reflect the recovery of these funds. Taking this cancellation into account, the HHS has obligated $1.454 billion to date ( Table 3 ).\nGovernment acquisitions often follow a pattern of gathering information about available products, contract solicitation, award of the contract, and finally product delivery. Figure 2 displays a time line of Project BioShield acquisition activity.\nA Request for Information (RFI) is a mechanism for the government to determine what products are available or that are under development that might fulfill a specified government need. It can cover a broad area or be narrowly focused. For example, in September 2006, HHS issued an relatively broad RFI to help in \"identifying and characterizing the current and projected status of the research and development programs related to CBRN medical countermeasures\" (CBRN General in Figure 2 ). In contrast, an RFI issued in December 2003 focused on a specific type of treatment for a specific disease, anthrax therapeutics, based on antibodies ( Figure 2 ).\nAgencies can use the information in RFI responses to help shape policy and to help develop requirements for a contract solicitation. However, RFIs do not necessarily lead to contract solicitations. Four of the eight Project BioShield RFIs have not lead to contract solicitations. These RFIs were seeking countermeasures against CBRN in general, nerve agents, one of the two\u00a0anthrax therapeutic RFIs, and one of the two acute radiation syndrome RFIs ( Figure 2 ). RFIs\u00a0are also not required before issuing a contract solicitation. Four of the eight contract solicitations did not have an RFI. These contracts were for AVA based anthrax vaccine, botulinum antitoxin, and the radiation treatments Zn- and Ca-DTPA and potassium iodide (KI) ( Figure 2 ). These contract solicitations were for specific products from specific companies and not subject to open competition.\nContract solicitations are invitations for companies to submit proposals to provide goods or services to fulfill government needs. Project BioShield solicitations fall into two basic categories, sole source and Requests for Proposals (RFP). The sole source solicitations were for specific products from specific companies and not subject to open competition. Four of the eight contract solicitations were sole source. These are the same four contracts which did not go through the RFI process discussed above, AVA-based anthrax vaccine, botulinum antitoxin, and the radiation treatments Zn- and Ca-DTPA, and KI ( Figure 2 ). Four of the eight contract solicitations were RFPs. Each RFP specified certain characteristics required by the government and multiple companies could submit proposals. The government could then choose the proposal or proposals that best fit its requirements needs or decide that none of the proposals met the minimum requirements. The contract solicitations which went through the RFP process were those seeking an rPA-based anthrax vaccine, an MVA-based smallpox vaccine, and treatments for acute radiation syndrome ( Figure 2 ). Three of the four RFPs have resulted in contract awards to date, rPA-based anthrax vaccine, anthrax therapeutics, and MVA-based smallpox vaccine. The anthrax therapeutics RFP resulted in contracts with two companies for two different products. The government may decide that none of the companies responding to an RFP have products that meet the government's minimum requirements. This appears to be the case with the acute radiation syndrome RFP, which was terminated without an award on March 7, 2007.\nHHS has awarded ten Project BioShield contracts to six different companies. Of these contracts, four have been completed (two for AVA-based anthrax vaccine, one for the radiation treatments Zn-DTPA and Ca-DTPA, and one of the two for the radiation treatment KI), four remain open (one of the two for the radiation treatment KI, two for anthrax therapeutics, and one for smallpox vaccine), and one was terminated (rPA-based anthrax vaccine). All of the completed contracts resulted from sole source contracting rather than an open bidding RFP process. These completed contracts were for products which required no further development time. It is not clear why HHS chose to acquire these products through the Project BioShield process rather than using the standard process for acquiring similar off-the-shelf products for the Strategic National Stockpile.\nOf the ten contracts awarded by HHS, five were for products that required further development: rPA-based anthrax vaccine, smallpox vaccine, botulinum antitoxin, and the two anthrax therapeutics. None of these contracts have yet resulted in deliveries to the Strategic National Stockpile. The rPA anthrax vaccine contract was cancelled and development continues on the remaining four products with open contracts.\n\n\t\tAnthrax\n\nThe Project BioShield countermeasures against anthrax fall into two categories, vaccines and treatments. The vaccines would likely be used after an attack to prevent those people who were exposed to Bacillus anthracis from developing the disease anthrax, a procedure called postexposure prophylaxis. This contrasts with the manner in which most vaccines (e.g., childhood vaccines) are administered before exposure.\n\n\t\t\trPA Vaccine\n\nThe vaccine based on recombinant Protective Antigen (rPA) is often referred to as the \"second generation anthrax vaccine,\" to differentiate it from the anthrax vaccine adsorbed (AVA) vaccine, which is currently used by the Department of Defense (DOD). In 2002, the Institute of Medicine (IOM) stated, \"Although AVA appears to be sufficiently safe and effective for use, it is far from optimal.\" The IOM supported the development of a new anthrax vaccine. Officials at HHS believe that, when fully developed, the rPA vaccine will address many of the shortcomings of the AVA vaccine as identified in the IOM report.\nIn November 2004, HHS awarded VaxGen, Inc. an $877.5 million contract for the delivery\u00a0of\u00a075\u00a0million doses of rPA vaccine to the Strategic National Stockpile ($11.70 per dose).\u00a0On December 17, 2006, HHS terminated this contract for VaxGen's failure to meet a\u00a0contract milestone.\nHHS had planned that each person would require a three dose regimen of this vaccine for protection. Thus, 75 million doses would be sufficient for 25 million people. The Food and Drug Administration (FDA) has not licensed this vaccine. Although FDA licensing is not required for delivery to the stockpile, this vaccine required additional clinical testing before it could be accepted by the government. Under the contract with VaxGen, delivery was to begin by the end of 2006 and be completed by the end of 2007. Technical difficulties repeatedly delayed delivery.\nThis first, largest Project BioShield contract has drawn intense scrutiny. Critics of this contract award point to VaxGen's previous unsuccessful attempts to develop products, financial difficulties, and problems meeting the contract deadlines as indicative of problems in HHS' implementation of Project BioShield authorities. HHS responded to such criticisms by stating VaxGen won the contract through open competition after all the proposals were subjected to \"a robust technical and business evaluation process.\" HHS portrayed the delays as part of the normal drug development process. VaxGen reportedly denied responsibility for the delays, stating that they arose from the government changing its requirements.\nFollowing the cancellation of the contract, HHS restated its commitment to obtain an rPA-based anthrax vaccine for the Strategic National Stockpile.\n\n\t\t\tAVA Vaccine\n\nThe AVA anthrax vaccine was originally licensed in 1970. It is currently approved by the FDA for use in 18- to 65-year olds prior to exposure to Bacillus anthracis (pre-exposure prophylaxis). Neither this vaccine nor the rPA vaccine is approved by the FDA for post-exposure prophylaxis. The FDA-approved regimen for pre-exposure prophylaxis requires a series of six doses administered over the course of 18 months.\nThe DOD currently uses this vaccine for troops and other personnel deployed in certain areas, including South Korea, Afghanistan, and Iraq. Complaints of adverse reactions and questions about the vaccine's efficacy prompted judicial review of its use. In October 2004, a federal judge ordered the DOD to stop mandatory vaccinations pending FDA review. After this order, DOD continued to use this vaccine on a voluntary, rather than mandatory, basis. The FDA completed its review in December 2005. In October 2006, DOD announced plans to resume mandatory vaccinations. Reportedly, several DOD employees plan to sue to block implementation of mandatory vaccinations.\nIn May 2005 and May 2006, HHS awarded contracts to Emergent BioSolutions (formerly BioPort Corp.) for the delivery of AVA vaccine to the Strategic National Stockpile. Combined, the contracts are for 10 million doses of AVA vaccine for $242.7 million ($24.27 per dose). According to the company, 9 million doses have been delivered to the government, and the remainder is to be delivered in 2007.\nThis contract award has also drawn criticism on the basis of cost and questions of policy. Despite the manufacturer carrying no developmental risk, the AVA vaccine cost per dose is twice the cost per dose of rPA. Additionally, critics observe that DOD studies indicate that up to 35% of people have adverse reactions to this vaccine and that 6% of vaccine recipients have reported serious complications to the FDA's Vaccine Adverse Event Reporting System. Critics point to this and observations in the IOM report to support their conclusion that AVA is an inferior product. Lastly, since AVA is the only currently licensed vaccine, critics question whether its acquisition has resulted from its unique status rather than filling a Project BioShield need. Emergent BioSolutions defended its product stating that both the IOM report and the FDA found its product safe and that, as the only FDA-approved anthrax vaccine available, it is filling an urgent need.\n\n\t\t\tABthrax\n\nABthrax is an antibody-based treatment that works in a manner similar to anti-venom treatments\u00a0for snake bites. It is currently under development and it is not yet licensed by the FDA.\u00a0In June 2006, HHS awarded a $165.2 million contract to Human Genome Sciences for the delivery of 20\u00a0thousand doses of ABthrax ($8,260 per dose). Human Genome Sciences expects to complete the delivery of ABthrax to the government in 2008. This high cost per dose, the mechanisms of\u00a0action, and method of patient administration suggest that ABthrax would be used as a treatment for people who have already developed the symptoms of anthrax, rather than as a post-exposure prophylactic.\n\n\t\t\tAnthrax Immune Globulin\n\nAnthrax Immune Globulin is also an antibody-based therapeutic. It is derived from the blood of people who have received the anthrax vaccine. It is currently under development and is not yet licensed by the FDA. In July 2006, HHS awarded a $143.8 million contract to Cangene Corp. for the delivery of 10 thousand doses of Anthrax Immune Globulin ($14,380 per dose). This high cost per dose, the mechanism of action, and likely method of patient administration suggest that Anthrax Immune Globulin would be used as a treatment for people who have already developed the symptoms of anthrax, rather than as a post-exposure prophylactic.\n\n\t\tSmallpox\n\nAlthough the World Health Organization eradicated naturally occurring smallpox, it remains a terrorist threat. Following the terrorist attacks of 2001, the Untied States acquired for the Strategic National Stockpile enough of the currently FDA-licensed vaccine (Dryvax \u00ae made by Wyeth Laboratories) to vaccinate 300 million people. However, this vaccine has a high rate of complications, which could be especially serious in people with certain conditions including pregnancy, compromised immune systems, and eczema. The HHS determined that a different smallpox vaccine is required to protect such vulnerable populations.\nIn June 2007, HHS awarded a $500 million contract to Bavarian Nordic A\/S for 20 million doses of smallpox vaccine ($25 per dose), enough for 10 million people. This vaccine is based on the Modified Vaccinia Ankara (MVA) viral strain, which is a different viral strain than the currently licensed vaccine. Experts at HHS believe that this will make it safer for use in vulnerable populations. HHS plans to use this vaccine as a pre-exposure prophylactic in those populations following a known or suspected smallpox release. Additional research is required before this vaccine can be accepted into the stockpile and licensed by the FDA. According to the company, this contract contains options worth up to $1.1 billion for 60 million additional doses and clinical research to extend the license to include children, the elderly, and people infected with HIV.\n\n\t\tBotulinum Toxin\n\nBotulinum antitoxin is an antibody-based treatment for botulism, a life threatening illness caused by a toxin produced by Clostridium botulinum bacteria. In June 2006, HHS awarded a $362.6 million contract to Cangene Corp. for 200 thousand doses of a botulinum antitoxin ($1,813 per dose). The company expects to begin delivery by the end of 2007. Botulinum toxin has several different types; an antitoxin against one type will not be effective against other types. This contract calls for a combination of antitoxins that will work against seven types of botulinum toxins. This combination is known as heptavalent antitoxin. Following an intentional release of botulinum toxin, this antitoxin would probably be administered to people who have developed symptoms of toxin exposure, consistent with the way that similar trivalent products are currently used to treat naturally occurring exposures.\nBotulinum antitoxin is produced in a manner similar to anthrax immune globulin, except in this case, it is extracted from horse blood instead of human blood. In 2004, after the Department of Homeland Security Appropriations Act, 2004 provided the advance appropriation, but before the Project BioShield Act was enacted, HHS obligated $50 million from this account to support the botulinum antitoxin program. These funds were used to process existing horse blood that had been collected by the DOD and to establish horse farms needed to provide new horse blood. This expenditure would probably not have been eligible for funding from this account after enactment of the Project BioShield Act, as it limited the use of these funds to procuring products. Because these funds were not obligated as part of Project BioShield, they are not included in Table 3 , but they are included in Table 4 (see below).\n\n\t\tRadiological and Nuclear Agents\n\nIn addition to direct blast effects, attacks using radiological or nuclear agents can produce injuries resulting from ionizing radiation, which can damage or kill living cells. HHS determined that the threat posed by both acute radiation sickness and internal contamination with radioactive particles require countermeasures. HHS has contracted for two types of countermeasures designed to reduce internal contamination. An RFP for countermeasures to address acute radiation sickness did not lead to a contract award. The RFP was cancelled, apparently because none of the proposals met the minimum requirements determined by HHS.\n\n\t\t\tPotassium Iodide\n\nThe HHS awarded contracts in March 2005 and February 2006 to Fleming & Company Pharmaceuticals for the delivery of a total of 4.8 million doses of liquid potassium iodide (KI) for a total cost of $15.9 million ($3.31 per dose). This product is FDA-approved and available without a prescription to treat people exposed to radioactive iodine.\nPotassium iodide might be distributed following a release of radioactive iodine into the air, possibly following an attack on a nuclear power plant. Because the thyroid gland extracts and stores iodine present in the blood, it is vulnerable to injury from radioactive iodine. If administered in time, potassium iodide would block extraction and storage of radioactive iodine by the thyroid. Potassium iodide does not protect against the effects of any other type of radioactive material. Even before these acquisitions, potassium iodide tablets were included in the Strategic National Stockpile, but the tablet formulation was considered poorly suited for children. This liquid preparation, in contrast, is designed for pediatric use.\n\n\t\t\tChelators\n\nIn February and April 2006, HHS awarded a $21.9 million contract to Akorn, Inc. for 395 thousand doses of calcium diethylenetriaminepentaacetate (Ca-DTPA) and 80 thousand doses of\u00a0zinc diethylenetriaminepentaacetate (Zn-DTPA). (a nominal average of $46 per dose). These\u00a0chelators might be used to treat those exposed to radioactive material through the detonation of a radiological dispersal device (\"dirty bomb\"), improvised nuclear device, or terrorist attack against stored radioactive material. These products are FDA-approved for this type of internal decontamination.\nRadioactive materials that may be inhaled or ingested following a dirty bomb or nuclear attack are treated as minerals in the body. Thus, they enter into biological processes like other minerals and become incorporated into internal organs. Once incorporated, they are very difficult to remove and continue to emit radiation, potentially sickening those exposed. Chelators help remove these radioactive particles from the body by binding to them and facilitating their excretion through normal physiological processes.\n\n\tDifferences in HHS Contract Awards and Annual Budget Document Accounting\n\nThe Project BioShield special reserve fund, established by the Department of Homeland Security Appropriations Act, 2004, is managed by DHS. In FY2006, the DHS management of this appropriations account passed internally from the Federal Emergency Management Agency to the Preparedness Directorate. However, the contracts obligating the appropriated funds are executed through the HHS OPHEMC.\n Table 4 shows the accounting from the President's annual budget documents. In FY2004, $885 million from the advance appropriation became available for obligation. According to the DHS section of the budget, all available budget authority was obligated in FY2004; no budget authority was carried into the following fiscal year. In FY2005, another $2.508 billion became available for obligation. The budget documents state that $189 million of this was obligated in FY2005, leaving $2.324 billion to be carried over into FY2006. For FY2006, the budget states that $856 million was obligated, leaving $1.468 billion to be carried over into FY2007. DHS anticipates obligations of $1.045 billion in FY2007, leaving only $423 million available for obligation in FY2008. The next part of the advance appropriation does not become available for obligation until FY2009 (see Table 2 ).\nThese figures conflict with totals calculated from the countermeasure awards reported by HHS ( Table 3 ). Table 5 lists all of the contracts that HHS has announced for this account along with their dates of award and fiscal year subtotals.\nAccording to HHS, the only obligation from this account in FY2004 was $50 million to support the botulinum antitoxin program. In contrast, the President's FY2006 Budget documents state that $885 million was obligated in FY2004. Additionally, it describes this obligation as falling under two object classifications; with $190 million for \"other services\" (object classification 25.2) and $695 million for \"other purchases of goods and services from Government accounts\" (object classification 25.3). It is not clear what these amounts represent. The $50 million HHS obligated for the botulinum antitoxin program support could fall under the \"other services\" category, since it was not an acquisition per se , but the amount of this contract does not correlate to the amount categorized as \"other services.\"\nAnother possibility is that President's Budget accounted for the rPA vaccine contract (awarded in November 2004) in FY2004 rather than FY2005. This interpretation is supported by the FY2007 Budget reporting that only $189 million was obligated in FY2005. However, the total of the $878 million rPA obligation and the $50 million botulinum antitoxin program obligation is greater than the budget authority made available in FY2004 ($885 million). This interpretation also would not account for the division of the funds into the two object classifications. Furthermore, the FY2007 DHS Preparedness Directorate BioDefense Countermeasures Congressional Justification materials list acquiring the rPA vaccine as one of its FY2005 accomplishments. The source of the FY2004 account discrepancy of $835 million is not apparent.\nIn FY2005, HHS reported awarding three contracts for a total of $1.008 billion. The FY2007 Budget states that the actual amount obligated in FY2005 was $189 million. The DHS FY2007 Congressional Justification documents state that its FY2005 accomplishments include the rPA, KI, and AVA contracts. These would equal the $1.008 billion calculated from the HHS figures. It is not apparent to what the $189 million stated in the Budget correlates.\nLike the preceding two years, the stated obligations for FY2006 are different according to HHS and the President's Budget. For FY2006, HHS reported awarding six contracts, with obligations totaling $824 million. This is $32 million less than the $856 million stated as \"actual obligations\" in FY2006 in the President's FY2008 Budget.\nCombining all of the differences in reporting through FY2006, the President's Budgets state that $48 million more have been obligated than the HHS documents report.\n\n\tRemaining Available Funds\n\nEffective management and Congressional oversight of Project BioShield require specific and clear knowledge of the funds remaining available. For the Administration to most effectively plan and prioritize future acquisitions, it must know the amount of funds remaining available. For Congress, knowing the amount of funds remaining can be important in assessing program management, the implementation pace, and general program effectiveness. Due to conflicting statements from executive branch agencies, the amount of funds remaining available for obligation for this program is not clear.\nAccording to HHS, as of June 2007, it has obligated $2.331 billion from this account. This figure does not include the $878 million that should be recovered in FY2007 from the cancellation of the rPA anthrax vaccine contract. Taking this recovery into account, $1.889 billion would be available for obligation in FY2007-FY2008 and $4.064 billion would be available until the end of the program in FY2013. As stated above, using the President's Budget figures to calculate obligations would reduce these numbers by $48 million.\n\n\tConcluding Observations\n\nProject BioShield plays a key role in the federal government's response to the threat of chemical, biological, radiological, and nuclear terrorism. It created a process for the government to agree to purchase countermeasures while they still are in development. In addition to increasing the holdings of the Strategic National Stockpile, it was hoped that this government market guarantee would encourage companies to continue to develop promising countermeasures that they might have otherwise abandoned, and induce other companies to begin countermeasure development. It remains unclear how well Project BioShield is meeting these goals.\nMany stakeholders, industry leaders, and policymakers have criticized the rate at which DHS completes Material Threat Determinations. To address these concerns, legislation has been introduced in the previous and current Congresses. In the 110 th Congress, the Project BioShield Material Threats Act of 2007 ( H.R. 1089 , Langevin) and the Department of Homeland Security Authorization Act for Fiscal Year 2008 ( H.R. 1684 , Thompson) would require an assessment, and an MTD if appropriate, for all currently known CBRN agents likely to pose a significant national security threat. These assessments would be required to be completed by December 31, 2007. By assessing all known threats and issuing those MTDs necessary, the full spectrum of material threats may be considered when developing a countermeasure acquisition strategy. Such a comprehensive acquisition strategy may allow for more efficient prioritization and balance of countermeasures, providing optimized protection from CBRN attacks using finite funds in the shortest time. Since HHS has not issued contracts for the all of the agents that already have MTDs, an increase in this number may not increase the rate of countermeasure awards. However, HHS has predicted that no additional MTDs would be issued unless \"technology advances or if our understanding of the potential threats changes.\"\nAppropriators set limits on how much could be obligated during specified periods of time. The pace by which HHS awards countermeasure contracts roughly corresponds to these limits. By this criterion, this program is on track to fulfill its goals; HHS cannot obligate the money faster than it becomes available.\nStakeholders, industry leaders and policymakers have criticized HHS for some of the countermeasures it has chosen. In decisions as complicated and weighty as these, any choice is likely to be criticized. Given the failure of the largest contract to date, some critics may conclude that Project BioShield has fallen short of its goals, since the majority of the money that has been obligated, though not the majority of contracts, has not yet resulted in products in the stockpile. However, one of the unique features of Project BioShield contracts is that the government may contract for products that require up to eight years more of development. It was designed to allow the government to promise to buy something, but only pay for it on delivery. Thus the company, rather than the government, bears the majority of the development risk, i.e. that the product will never be deliverable. One industry group estimates that more than half of all pharmaceuticals will fail during the last eight years of development. Thus, it may be expected that at least some Project BioShield contracts will be cancelled. The government bears some development risk in the form of opportunity costs since the money available for obligation is finite, i.e., money obligated to a countermeasure that will ultimately fail in development cannot be simultaneously obligated to another needed countermeasure.\nIt is possible that the establishment of the Biodefense Advance Research and Development Authority (BARDA) in HHS will reduce the likelihood that future Project BioShield contracts will fail during the advanced development phase. Established by the Pandemic and All-Hazards Preparedness Act ( P.L. 109-417 ), one of BARDA's roles is to support the advanced research and development of promising countermeasures. In theory, funding this part of the development process through such a dedicated mechanism could allow countermeasures to further mature through the development process longer before competing for a Project BioShield contract. This could reduce the risk that a countermeasure will fail while under a Project BioShield contract. P.L. 109-417 included authorization for approximately $1 billion to support this type of activity for FY2007 through FY2008. Although, Congress did not appropriate money for BARDA in FY2007, the U.S. Troop Readiness, Veterans' Care, Katrina Recovery, and Iraq Accountability Appropriations Act, 2007 ( P.L. 110-28 ) transferred $99 million from National Institutes of Health accounts to fund BARDA. Even if BARDA becomes operational in FY2007, it will take some time to determine what projects to fund, provide funding, and receive returns on this investment. It remains to be seen how HHS' decision to combine BARDA with the HHS office responsible for executing Project BioShield (Office of Public Health Emergency Medical Countermeasures) will affect the execution of both programs.\nAdditional criticism of the Project BioShield procurement process may stem from the perceived opacity of its decision-making process. HHS is moving to address some of these issues by publishing its PHEMCE Strategy for Chemical, Biological, Radiological and Nuclear Threats , inviting public comment, and reaching out to the public and companies that might develop needed countermeasures through stakeholder meetings.\nSome critics also suggest that the Project BioShield process has been poorly managed overall. Such suggestions are reinforced by the annual accounting discrepancies between HHS and DHS. It remains to be seen whether these concerns will be allayed through the management changes being implemented subsequent to: the establishment of the Public Health and Emergency Medical Countermeasures Enterprise (PHEMCE) and publication of its strategy; the enactment of the Pandemic and All-Hazards Preparedness Act ( P.L. 109-417 ); and the issuance of HSPD-18.","output":"The Project BioShield Act of 2004 (P.L. 108-276) established a 10-year program to acquire civilian medical countermeasures to chemical, biological, radiological, and nuclear (CBRN) agents for the Strategic National Stockpile. Provisions of this act were designed to encourage private companies to develop these countermeasures by guaranteeing a government market for successfully developed countermeasures.\nCongress has expressed concern about the implementation of Project BioShield. It has held multiple oversight hearings and considered several pieces of legislation to improve the execution of this program, including the Pandemic and All-Hazards Preparedness Act (P.L. 109-417), H.R. 1089, and H.R. 1684. Stakeholders and policymakers have criticized specific contract award decisions and the rate at which they are made. Additionally, contract awards reported by the Department of Health and Human Services (HHS) do not directly correspond with figures provided in the President's annual budget documents, which may suggest problems with interagency coordination and communication.\nBoth the Department of Homeland Security (DHS) and HHS have responsibilities in this program. Funds for this program are appropriated to DHS, while contracts are executed through HHS. The interagency process responsible for deciding which countermeasures to procure has changed multiple times since this program's inception.\nThe Homeland Security Appropriations Act, 2004 (P.L. 108-90) provided an advance appropriation of $5.6 billion to acquire CBRN countermeasures over a 10-year period (FY2004-FY2013). This act also limited the amount that could be obligated during specified time periods. The Project BioShield Act of 2004 (P.L. 108-276) assigned the $5.6 billion advance appropriation to Project BioShield countermeasure acquisitions. Two separate rescissions reduced the total amount available for Project BioShield by a total of $25 million. Congress retains the power to make additional appropriations and rescissions to this account.\nHHS has awarded Project BioShield contracts for a countermeasures against anthrax, smallpox, botulinum toxin, and radiological or nuclear agents. These awards total approximately $2.331 billion. However, the largest contract, $878 million for an anthrax vaccine, was cancelled in December 2006 for failure to meet a contract milestone. Taking this into account, approximately $1.889 billion remains available for obligation through FY2008 and $4.064 billion available for obligation through the end of the program in FY2013.\nThis report discusses actions taken by Congress and the Administration that have affected this program, describes the decision-making process for choosing countermeasures, describes the countermeasures for which the Department of Health and Human Services (HHS) has contracted, and discusses accounting discrepancies in Project BioShield budget documents. This report will be updated periodically."}
{"id":"gao_GAO-08-3","pid":"gao_GAO-08-3_0","input":"\tBackground\n\nThe Randolph-Sheppard Act created a vending facility program in 1936 to  provide blind individuals with more job opportunities and to encourage  their self-support. The program trains and employs blind individuals to  operate vending facilities on federal property. While Randolph-Sheppard is  under the authority of the Department of Education, the states  participating in this program are primarily responsible for program  operations. State licensing agencies, under the auspices of the state  vocational rehabilitation programs, operate the programs in each state.  Federal law gives blind vendors under the program a priority to operate  cafeterias on federal property. Current DOD guidance implementing this  priority directs that a state licensing agency be awarded a contract if its  contract proposal is in the competitive range. In fiscal year 2006, all of the  activities of the Randolph-Sheppard program generated $692.2 million in  total gross income and had a total of 2,575 vendors operating in every state  except for Wyoming.\nIn 1938 the Wagner-O\u2019Day Act established a program designed to increase  employment opportunities for persons who are blind so they could  manufacture and sell certain goods to the federal government. In 1971, the  Javits-Wagner-O\u2019Day Act amended the program to include people with  other severe disabilities and allowed the program to provide services as  well as goods. The JWOD Act established the Committee for Purchase,  which administers the program. The Committee for Purchase is required  by law to designate one or more national nonprofit agencies to facilitate  the distribution of federal contracts among qualified local nonprofit  agencies. The designated national agencies are the National Industries for  the Blind and NISH, which represent local nonprofit agencies employing  individuals who are blind or have severe disabilities. These designated  national agencies charge fees for the services provided to local nonprofit  agencies. Effective on October 1, 2006, the maximum fee is 3.83 percent of  the revenue of the contract for the National Industries for the Blind, and  3.75 percent for NISH. The purpose of these fees is to provide operating  funds for these two agencies. In fiscal year 2006, more than 600 JWOD  nonprofit agencies provided the federal government with goods and  services worth about $2.3 billion. The JWOD program provided  employment for about 48,000 people who are blind or have severe  disabilities.\nMilitary dining contracts under the Randolph-Sheppard and JWOD  programs provide varying levels of service, ranging from support services  to full-food services. Support services include activities such as food  preparation and food serving. Full-food service contracts provide for the  complete operation of facilities, including day-to-day decision making for  the operation of the facility. As of October 17, 2006, DOD had 39  Randolph-Sheppard contracts in 24 different states. These contracts had  an annual value of approximately $253 million and were all for full-food  services. At the same time, DOD had 53 JWOD contracts valued at $212  million annually. Of these, 39 contracts were for support services and 15  were for full-food service. Figure 1 shows the distribution of Randolph- Sheppard and JWOD contracts with DOD dining facilities across the  country.\nIn 1974, amendments to the Randolph-Sheppard Act expanded the scope  of the program to include cafeterias on federal property. According to a  DOD official, when DOD began turning increasingly to private contractors  rather than using its own military staff to fulfill food service functions in  the 1990s, state licensing agencies under the Randolph-Sheppard program  began to compete for the same full-food services contracts for which  JWOD traditionally qualified. This development led to litigation, brought  by NISH, over whether the Randolph-Sheppard Act applied to DOD dining  facilities. Two decisions by federal appeals courts held that the Randolph- Sheppard Act applied because the term \u201ccafeteria\u201d included DOD dining  facilities. The courts also decided that if both programs pursued the full- food service contracts for DOD dining facilities, Randolph-Sheppard had  priority.\nCongress enacted section 848 of the National Defense Authorization Act  for Fiscal Year 2006 requiring the key players involved in each program to  issue a joint policy statement about how DOD food services contracts  were to be allocated between the two programs.  In August 2006, DOD,  Education, and the Committee for Purchase issued a policy statement that  established certain guidelines, including the following:    The Randolph-Sheppard program will not seek contracts for dining  support services that are on the JWOD procurement list, and Randolph- Sheppard will not seek contracts for operation of a dining facility if the  work is currently being performed under the JWOD program; JWOD  will not pursue prime contracts for operation of dining facilities at  locations where an existing contract was awarded under the Randolph- Sheppard program (commonly known as the \u201cno-poaching\u201d provision).\nFor contracts not covered under the no-poaching provision, the  Randolph-Sheppard program may compete for contracts from DOD for  full-food services; and the JWOD program will receive contracts for  support services.  If the needed support services are on the JWOD procurement list, the  Randolph-Sheppard contractor is obligated to subcontract for those  services from JWOD.  In affording a priority to a state licensing agency when contracts are  competed and the Randolph-Sheppard Act applies, the price of the  state licensing agency\u2019s offer will be considered to be fair and  reasonable if it does not exceed the best value offer from other  competitors by more than 5 percent or $1 million, whichever is less.\nCongress enacted the no-poaching provision in section 856 of the National  Defense Authorization Act for Fiscal Year 2007. A recent GAO bid protest  decision determined that adherence to the other provisions of the policy  statement was not mandatory until DOD and the Department of Education  change their existing regulations. As of July 2007, neither agency had  completed updating its regulations.\n\n\tRandolph-Sheppard Places Blind Individuals in Managerial Roles, while JWOD Employs Persons with Disabilities in Less Skilled Jobs\n\nThe Randolph Sheppard and JWOD programs utilize different operating  procedures to provide dining services to DOD. For the Randolph-Sheppard  program, state licensing agencies act as prime contractors, and train and  license blind vendors to operate dining facilities. For the JWOD program,  the Committee for Purchase utilizes NISH to act as a central nonprofit  agency and match DOD needs for dining services with local nonprofit  agencies able to provide the service. JWOD employees generally fill less  skilled jobs such as cleaning dining facilities or serving food.\n\n\t\tRandolph-Sheppard Relies on State Licensing Agencies to Place Blind Vendors as Managers of Dining Facilities\n\nEducation is responsible for overseeing the Randolph-Sheppard program,  but relies on state licensing agencies to place blind vendors as dining  facility managers. The Department of Education certifies state licensing  agencies and is responsible for ensuring that their procedures are  consistent with Randolph-Sheppard regulations. According to our survey,  state licensing agencies act as prime contractors on Randolph-Sheppard  contracts, meaning that they hold the actual contract with DOD. The state  licensing agencies are responsible for training blind vendors to serve as  dining facility managers and placing them in facilities as new contracting  opportunities become available. According to our survey, the state issues  the vendor a license to operate the facility upon the successful completion  of the training program. Furthermore, many states said this process often  includes both classroom training and on-the-job training at a facility.  Figure 2 depicts how the Randolph-Sheppard program is generally  structured.\nResponding to our survey, state licensing agencies reported that all blind  vendors have some level of managerial responsibility for each of the 39  Randolph-Sheppard contracts. Specific responsibilities may include  managing personnel, coordinating with military officials, budgeting and  accounting, and managing inventory. An official representing state  licensing agencies likened the vendor\u2019s role to that of an executive and  said the vendor is responsible for meeting the needs of his or her military  customer. At one facility we visited, the vendor was responsible for  general operations, ensuring the quality of food, and helped develop new  menu selections. Of the 37 contracts where the state licensing agencies  provided information regarding whether the blind vendor visits his or her  facility, all stated that their blind vendors visit their facilities, and in most  cases are on site every day. Additionally, most state licensing agencies told  us that they have an agreement with the blind vendor that lays out the  state licensing agency\u2019s expectations of the blind vendor and defines the  vendor\u2019s job responsibilities.\nMost state licensing agencies rely on private food service companies to  provide the expertise to help operate dining facilities. According to our  survey, 33 of the 39 Randolph-Sheppard contracts relied on a food service  company\u2014known as a teaming partner\u2014to provide assistance in  operating dining facilities. The survey showed that in many cases, the  blind vendor and teaming partner form a joint venture company to operate  the facility with the vendor as the head of the company. The teaming  partner can provide technical expertise, ongoing training, and often  extends the vendor a line of credit and insurance for the operation of the  facility. Officials representing state licensing agencies told us that states  are often unable to provide these resources, and for large contracts these  start-up costs may be beyond the means of the blind vendor and the state  licensing agency. According to our survey, the teaming partner may assist  the state in negotiating and administering the contract with DOD.  Additionally, state licensing agencies told us that they often enter into a  teaming agreement that defines the responsibilities of the teaming partner.\nFor 6 of the 39 contracts, the state licensing agencies reported that the  blind vendor operates the dining facility without a teaming partner. We  visited one of these locations and learned that the vendor has his own  business that he uses to operate the facility. This particular vendor had  participated in the Randolph-Sheppard program for almost 20 years and  operated various other dining facilities.\nIn our survey, state licensing agencies reported that vendors in about half  (20 of 39) of the contracts are required to employ individuals who are  blind or have other disabilities, while others have self-imposed goals. In  other cases there may be no formal hiring requirements, but the state  licensing agency encourages the blind vendor to hire individuals with  disabilities. Based on survey responses we received for 30 contracts, we  calculated that the percentage of persons with disabilities working at  Randolph-Sheppard dining facilities ranged from 3 percent to 72 percent,  with an average of 18 percent.\n\n\t\tThe Committee for Purchase Works with NISH and Local Nonprofit Agencies to Employ Individuals with Disabilities in DOD Dining Facilities\n\nThe Committee for Purchase works with NISH to match DOD\u2019s need for  services with nonprofit agencies able to provide food services. For military  food service contracts, NISH acts as a central nonprofit agency and  administers the program on behalf of the Committee for Purchase. In this  role, NISH works with DOD to determine if it has any new requirements  for dining services. When it identifies a need, NISH will search for a  nonprofit agency that is able to perform the required service. NISH then  facilitates negotiations between DOD and the nonprofit agency, and  submits a proposal to the Committee for Purchase requesting that the  specific service be added to the JWOD procurement list. If the Committee  for Purchase approves the addition, DOD is required by the Federal  Acquisition Regulation (FAR) to obtain the food service from the entity on  the procurement list.  In some instances, a private food service company  is awarded a military dining facility contract and then subcontracts with a  JWOD nonprofit agency to provide either full or support food services. For  example, the Marine Corps awarded two regional contracts to Sodexho\u2014a  large food service company\u2014to operate its dining facilities on the East  and West Coasts. Sodexho is required by its contracts to utilize JWOD  nonprofit agencies and uses these nonprofit agencies to provide food  services and\/or support services at selected Marine Corps bases. Figure 3  depicts the JWOD program structure.\nMost JWOD employees at military dining facilities perform less skilled jobs  as opposed to having managerial roles. At the facilities we visited, we  observed that employees with disabilities (both mental and physical)  performed tasks such as mopping floors, serving food, and cleaning pots  and pans after meals. Officials from NISH said this is generally true at  JWOD dining facilities, including facilities where the nonprofit agency  provides full-food service. Additionally, we observed\u2014and NISH  confirmed\u2014that most supervisors are persons without disabilities. At one  facility we visited, for example, the nonprofit supervisor oversees  employees with disabilities who are responsible for keeping the facility  clean and serving food. The Committee for Purchase requires that  agencies associated with NISH perform at least 75 percent of their direct  labor hours with people who have severe disabilities. For nonprofit  agencies with multiple JWOD contracts, the 75 percent direct labor  requirement is based on the total for all of these contracts.  Therefore one  contract may be less than 75 percent but another contract must be greater  than 75 percent in order for the total of these contracts to meet the 75  percent requirement. NISH is responsible for ensuring that nonprofit  agencies comply with this requirement, and we previously reported that it  performs site visits to all local nonprofit agencies every three years, in  order to ensure compliance with relevant JWOD regulations. At the three  JWOD facilities we visited, officials reported that the actual percentage of  disabled individuals employed was 80 percent or higher. Table 1 provides  a comparison of the Randolph-Sheppard and JWOD programs\u2019 operating  procedures.\n\n\tPrograms Differ Regarding How Contracts Are Awarded and Priced, and How Program Beneficiaries Are Compensated\n\nThe Randolph-Sheppard and JWOD programs have significant differences  in terms of how contracts are awarded and priced, and in the  compensation provided to beneficiaries who are blind or have other  disabilities. Under the Randolph-Sheppard program, federal law provides  for priority for blind vendors and state licensing agencies in the operation  of a cafeteria. This priority may come into play when contracts are  awarded either by direct noncompetitive negotiations or through  competition with other food service companies. Regardless of how the  contract is awarded, the prices are negotiated between the state licensing  agency and DOD. Under the JWOD program, competition is not a factor  because DOD is required to purchase food services from a list maintained  by the Committee for Purchase. Contracts are awarded at fair market  prices established by the Committee for Purchase. The two programs also  differ in terms of how program beneficiaries are compensated. Under the  Randolph-Sheppard program, blind vendors generally receive a share of  the profits, while JWOD beneficiaries receive hourly wages and fringe  benefits under federal law or any applicable collective bargaining  agreement. Randolph-Sheppard blind vendors received, on the average,  pretax compensation of about $276,500 annually, while JWOD workers at  the three sites visited earned on average $13.15 per hour, including fringe  benefits.\n\n\t\tSignificant Differences Exist in How Randolph- Sheppard and JWOD Contracts Are Awarded and Priced\n\nAlthough contracts for food services awarded under the Randolph- Sheppard and JWOD programs use the terms and conditions generally  required for contracts by the FAR, the procedures for awarding and  pricing contracts under the two programs differ considerably. Under the  Randolph-Sheppard program, Education\u2019s regulations provide for giving  priority to blind vendors in the operation of cafeterias on federal property,  provided that the costs are reasonable and the quality of the food is  comparable to that currently provided. The regulations provide for two  procedures to implement this priority. First, federal agencies, such as the  military departments, may engage in direct, noncompetitive negotiations  with a state licensing agency. Of the eight Randolph-Sheppard contracts  we reviewed in detail, six had been awarded through direct negotiations  with the state licensing agency. In most of the eight cases, the contract  was a follow-on to an expiring food service contract. The second award  procedure involves the issuance of a competitive solicitation inviting  proposals from all potential food service providers, including the relevant  state licensing agency. The solicitation will specify the criteria for  evaluating proposals, such as management capability, past performance,  and price, and DOD will use these criteria to evaluate the proposals  received. When the competitive process is used, DOD policy provides for  selecting the state licensing agency for award if its proposal is in the  \u201ccompetitive range.\u201d  Of the eight Randolph-Sheppard contracts we  reviewed, only two involved a solicitation open to other food service  providers, and there was no case in which more than one acceptable  proposal was received such that DOD was required to determine a  competitive range.\nThe prices of contracts under the Randolph-Sheppard program are  negotiated between DOD and the state licensing agency, regardless of  whether DOD uses direct negotiations or seeks competitive proposals.  Negotiations in either case typically begin with a pricing proposal  submitted by the state licensing agency, and will then involve a  comparison of the proposed price with the prices in previous contracts, an  independent government estimate, or the prices offered by other  competitors, if any. In some cases, DOD will seek the assistance of the  Defense Contract Audit Agency (DCAA) in assessing various cost aspects  of a proposal. All of the Randolph-Sheppard contracts we reviewed were  generally firm, fixed price. Some had individual line items that provided  for reimbursing the food service provider for certain costs incurred, such  as equipment maintenance or replacing items. In most cases, the contract  was for a base year, and provided for annual options (usually four) that  may be exercised at the discretion of DOD. Of the 39 Randolph-Sheppard  contracts within the scope of our review, the average price for the current  year of the contract was about $6.5 million. Table 2 shows the 8 Randolph- Sheppard contracts in our sample with selected contract information.\nUnder Part 8 of the FAR, the JWOD program is a mandatory source of  supply, requiring DOD to award contracts to the listed nonprofit entity at  fair market prices established by the Committee for Purchase. There is no  further competition. Table 3 shows the 6 JWOD contracts in our sample  with selected contract information.\n\n\t\tRandolph-Sheppard Vendors Generally Receive a Percentage of Profits, and JWOD Beneficiaries Are Paid Hourly Wages According to Federal Law\n\nCompensation for Randolph-Sheppard blind vendors is computed  differently from compensation paid to JWOD disabled workers. For the  Randolph-Sheppard program, blind vendors\u2019 compensation is generally  based on a percentage of the profits generated by the dining facilities\u2019  operations. Based on the 37 survey responses where we could determine  the basis of how blind vendors\u2019 compensation was computed, 34 reported  that that the vendor\u2019s compensation was computed either entirely, or in  part, based on the profits generated by the dining facility contract. For  compensation based entirely on the facilities\u2019 profits, the blind vendor  received from 51 to 65 percent of the profits. For those blind vendors that  were compensated partially based on profits, their compensation was  based on fixed fees, administrative fees or salaries, and a percentage of the  profits. Where compensation was not based on profits, these three blind  vendors received either a percentage of the contract value or a fixed base  fee. Figure 4 shows the annual compensation received by blind vendors  for military food services contracts, within specified ranges, and the  average compensation for each range.\nAs shown in figure 4, 15 of 38 Randolph-Sheppard blind vendors\u2019 annual  compensation was between $100,000 and $200,000. Overall, blind  vendors working at DOD dining facilities received average annual  compensation of about $276,500 per vendor. These figures are based on  pretax earnings.  We did not collect compensation information for  employees of the blind vendors or employees of the teaming partners.\nFor the JWOD program, for most workers\u2014including those with and  without a disability\u2014the compensation is determined by either federal law  or collective bargaining agreements. The Service Contract Act (SCA) was  enacted to give employees of contractors and subcontractors labor  standards protection when providing services to federal agencies. The  SCA requires that, for contracts exceeding $2,500, contactors pay their  employees, at a minimum, the wage rates and fringe benefits that have  been determined by the Department of Labor to be prevailing in the  locality where the contracted work is performed. However, the SCA  hourly rate would not be used if there is a collective bargaining agreement  that sets a higher hourly wage for selected workers. According to NISH,  the collective bargaining hourly rates are, in general, 5 to 10 percent higher  than the SCA\u2019s wage rates. Of the six JWOD contracts in our sample,  Holloman Air Force Base and the Marine Corps\u2019 eastern and western  regional contracts had collective bargaining agreements. For the three  JWOD sites visited, we obtained an estimate of the average hourly wages,  average hourly fringe benefits rates, and average number of hours worked  and computed their annual wages. The average hourly wage for the three  JWOD sites was $13.15 including fringe benefits. Table 4 shows the  average annual wages that an employee earned.\nAnother law that can affect the disabled worker\u2019s wages is section 14(c) of  the Fair Labor Standards Act, which allows employers to pay individuals  less than the minimum wage (called special minimum wage rates) if they  have a physical or mental disability that impairs their earning or  productive capacity. For example, if a 14(c) worker\u2019s productivity for a  specific job is 50 percent of that of experienced workers who do not have  disabilities that affect their work, and the prevailing wage paid for that job  is $10 dollars per hour, the special minimum wage rate for the 14(c)  worker would be $5 dollars per hour.  None of the three JWOD sites we  visited applied the special minimum wage for any of their disabled  workers.\n\n\tConcluding Observations\n\nThe Randolph-Sheppard and JWOD programs have a common goal of  serving individuals who are blind or have severe disabilities, and who are  generally underrepresented in the workforce. However, these programs  operate differently regarding how contracts are awarded and priced, and  are designed to serve distinct populations through different means\u2014 particularly with respect to compensation for program participants. This is  true for contracts with military dining facilities. The blind vendors who  participate in the Randolph-Sheppard program seek to become  entrepreneurs by gaining experience managing DOD dining facilities. In  this respect, although most of these vendors require the assistance of a  private food service teaming partner, they are compensated for managing  what can be large, complicated food service operations. By contrast,  because the participants of the JWOD program perform work activities  that require less skill and experience, and who might otherwise not be able  to secure competitive employment, they are compensated at a much lower  rate than the Randolph-Sheppard vendors. In this regard, it is apparent  that the two programs are designed to provide very different populations  with different types of assistance, and thus, it is difficult to directly  compare them, particularly with respect to compensation.\n\n\tAgency Comments and Our Evaluation\n\nWe provided a draft of this report to the Committee for Purchase, the  Department of Defense, and the Department of Education for review and  comment.  The Committee for Purchase had no comments.  DOD  concurred with the draft and also provided technical comments for our  consideration.  We considered all of DOD\u2019s technical comments and  revised the draft as appropriate.  The DOD comment letter is attached as  appendix II.\nThe Department of Education provided clarifications and suggestions in a  number of areas.  First, Education was concerned about comparing the  earnings of the blind vendors under the Randolph-Sheppard program and  the compensation provided to the food service workers under the JWOD  program.  The agency suggested we compare the earnings of the blind  vendors with the earnings of employees of the JWOD nonprofit agencies  who perform similar management functions. We agree that there are  significant differences in their responsibilities, but we were required to  report on the compensation of the \u201cbeneficiaries\u201d of the two programs,  which are blind managers for the Randolph-Sheppard program and hourly  workers for the JWOD program.  Our report highlights these differences.    Our report also highlights in a number of places the difficulty in comparing  the compensation of the two groups of beneficiaries.  We were not  required to report on the earnings of the management personnel of the  nonprofit agencies, and we did not collect this information.\nSecond, Education urged that we fully describe the permitted uses of the  set-aside fees charged by the state licensing agencies, and that we  recognize that there is a similar assessment under the JWOD program.  We  have revised the report to point out that the Randolph-Sheppard set-aside  may be used to fund the operation of the state licensing agencies.  We also  added language to a footnote to table 3 to recognize that the JWOD  contract amounts include a fee that is used to fund the operations of the  central nonprofit agency.  Third, Education questions our description of  the price negotiations that occur between DOD and the state licensing  agencies.  We believe our report is both clear and accurate on this point as  written.  In addition, DOD did not have any comments or questions about  how we described price negotiations for the Randolph-Sheppard program.\nFourth, Education questioned our discussion of the numbers of persons  with disabilities employed under the two programs.  Specifically,  Education  pointed out that the requirement under the JWOD program that  at least 75 percent of the direct labor hours be performed by persons with  disabilities applies in the aggregate to all work performed by a nonprofit  entity, not at the contract level.  We have revised the report to reflect this.   And finally, Education sought clarification concerning the extent  commercial food service companies are used as teaming partners under  the Randolph-Sheppard program or as subcontractors under the JWOD  program.  We have revised figures 2 and 3 of the report to more accurately  reflect the use of these companies.  The comment letter from Education is  attached as Appendix III.\nWe will send copies of this report to interested congressional committees,  the Secretary of Defense, the Secretary of Education, and the Chairperson  of the Committee for Purchase, as well as other interested parties. We will  also make copies available to others upon request. In addition, the report  will be available at no charge on GAO\u2019s Web site at http:\/\/www.gao.gov.\nIf you or your staffs have any questions about this report, please contact  George Scott at (202) 512-7215 or scottg@gao.gov or William Woods at  (202) 512-8214 or woodsw@gao.gov. Contact points for our Offices of  Congressional Relations and Public Affairs may be found on the last page  of this report. Key contributors to this report are listed in appendix IV.\n\nAppendix I: Scope and Methodology\n\nTo accomplish our research objectives, we interviewed officials from the  Department of Defense (DOD), the Department of Education, the  Committee for Purchase, and organizations representing both the  Randolph-Sheppard and Javits-Wagner-O\u2019Day (JWOD) programs. We also  reviewed pertinent documents and regulations governing both programs.  We reviewed a sample of 14 contracts\u20148 Randolph-Sheppard contracts  and 6 JWOD contracts. For these contracts, we requested the source  selection memorandum, the acquisition plan, the basic contract, and the  statement of work. For two of these contracts, the Randolph-Sheppard  prime contractor for full-food services subcontracted with a JWOD  nonprofit agency for support services. We determined that it was not  feasible to review a representative sample of contracts based on our  preliminary work, which indicated wide variations in how the two  programs are structured and how the Randolph-Sheppard program is  administered from state to state. For these reasons, we selected a number  of contracts to review in order to ensure representation of both programs,  as well as ensure a balance of contracts based on dollar value, size of  military facility, branch of the military, and geographic location. As the  sample was not representative, results of our review cannot be projected  to the entire universe of contracts. In addition, we visited the military  installation for 5 of the 14 contracts in our sample in order to observe  dining facilities and their operations, as well as interview pertinent  officials and staff, including the blind vendor or JWOD agency  management whenever possible. Again, these five locations were selected  to ensure representation of both programs, as well as variation in  geographic location, contract size, and military branch. In terms of  beneficiary compensation, we limited our review to Randolph-Sheppard  blind vendors and JWOD workers. For the JWOD program, we obtained  average hourly wages, average hourly fringe benefits, and average total  hours worked during the year for JWOD employees at selected sites.  We  did not obtain compensation amounts for the managerial employees for  any JWOD nonprofit agencies.\nTo obtain information on the relationships between state licensing  agencies and blind vendors, we conducted a survey of the 24 state  licensing agencies we determined to have Randolph-Sheppard military  dining contracts. We asked questions regarding the roles and  responsibilities of blind vendors, the vendor\u2019s relationship with the state  licensing agencies, and the role played by teaming partners. We  administered this survey between April and July 2007. We pretested this  survey with program directors and modified the survey to take their  comments into account. All 24 state licensing agencies responded to our  survey for a response rate of 100 percent and provided information for 39  military dining facilities contracts. Additionally, we requested information  for the 40 blind vendors with military dining contracts to determine their  annual compensation. For the 39 contracts, there were 40 blind vendors as  one contract utilized two vendors. We received compensation information  for 38 of the 40 blind vendors.\n\nAppendix II: Comments from the Department of Defense\n\nAppendix III: Comments from the Department of Education\n\nAppendix IV: GAO Contacts and Staff Acknowledgments\n\n\tStaff Acknowledgments\n\nJeremy D. Cox (Assistant Director), Richard Harada (Analyst-in-Charge),  Daniel Concepcion, Rosa Johnson, and Sigurd Nilsen made significant  contributions to all aspects of this report. In addition, Susannah Compton  and Lily Chin assisted in writing the report and developing graphics. John  Mingus provided additional assistance with graphics. Walter Vance  assisted in all aspects of our survey of state licensing agencies as well as  providing methodological support. Doreen Feldman, Daniel Schwimer,  and Alyssa Weir provided legal support.\n\nRelated GAO Products\n\nFederal Disability Assistance: Stronger Federal Oversight Could Help  Assure Multiple Programs\u2019 Accountability. GAO-07-236. Washington,  D.C.: January 26, 2007.","output":"Why GAO Did This Study\n\nRandolph-Sheppard and Javits-Wagner-O'Day (JWOD) are two federal programs that provide employment for persons with disabilities through federal contracts. In 2006, participants in the two programs had contracts with the Department of Defense (DOD) worth $465 million annually to provide dining services at military dining facilities. The 2007 National Defense Authorization Act directed GAO to study the two programs. This report examines (1) differences in how the Randolph-Sheppard and JWOD programs provide food services for DOD and (2) differences in how contracts are awarded, prices are set, and program beneficiaries (i.e. persons with disabilities) are compensated. GAO interviewed program officials, conducted a survey of states with Randolph-Sheppard programs, and reviewed eight Randolph-Sheppard and six JWOD contracts.\n\nWhat GAO Found\n\nThe Randolph-Sheppard and JWOD programs use different procedures to provide food services to DOD. In Randolph-Sheppard, states act as prime contractors, and train and license blind individuals to act as managers of dining facilities. In most cases, the blind vendor relies on a food service company--known as a teaming partner--to assist in operations, provide expertise, and help with start-up costs. About half of the blind vendors are required to employ other persons with disabilities. JWOD is administered by an independent federal agency called the Committee for Purchase from People Who are Blind or Severely Disabled (Committee for Purchase). The Committee for Purchase engages a central nonprofit agency to match DOD's needs with services provided by local nonprofit agencies. Most of the individuals working for these local nonprofit agencies are employed in less skilled jobs such as serving food or washing dishes. The Randolph-Sheppard and JWOD programs differ significantly in the way DOD dining contracts are awarded, how prices are set, and how participants are compensated. For Randolph-Sheppard, DOD awards contracts to the states either through direct negotiations or competition with other food service companies. In either case, DOD and the states negotiate the prices based on factors such as historical prices and independent government estimates. Under JWOD, competition is not a factor because DOD is required to purchase services it needs from a list maintained by the Committee for Purchase, which establishes fair market prices for these contracts. In terms of compensation, Randolph-Sheppard blind vendors generally received a percentage of contract profits, averaging about $276,500 per vendor annually. JWOD beneficiaries are generally paid hourly wages according to rules set by the federal government. For the three sites we visited, we estimate that beneficiaries received an average wage of $13.15 per hour, including fringe benefits. Given the differences in the roles of the beneficiaries of these two programs, comparisons of their compensation have limited value."}
{"id":"crs_RL33135","pid":"crs_RL33135_0","input":"\tBackground\n\nIn May 2001, President Bush made the founding pledge of $200 million to a new,yet-to-be-named global fund to fight AIDS at a White House Rose Garden ceremony attended byU.N. Secretary General Kofi Annan and Nigeria's President Olusegun Obasanjo. (7) U.S. officials played aprominent role in the subsequent negotiations on creating the Global Fund, and the new organizationbegan operations in January 2002, with its mission expanded to include tuberculosis and malaria. The Global Fund is an innovative organization in many ways. The Fund's board includesrepresentatives of both donor and recipient governments, NGOs, the private sector, and communitiesaffected by the three diseases. UNAIDS, the World Health Organization (WHO), and the WorldBank also participate. The Fund's Secretariat in Geneva is relatively small, with about 135employees. This is possible because the Global Fund is not an implementing agency, but rather a\"financial instrument\" designed to mobilize new resources for fighting disease and to manage anddisburse those resources. (8) The CCMs in the recipient countries bring together the interested parties or \"stakeholders\" to agreeon national priorities and to develop and submit coordinated applications to the Fund. CCMsinclude representatives of government, NGOs, the private sector, multilateral and bilateral aidagencies operating in the country, academic institutions, and people living with the diseases. Theapplications identify one or more Principal Recipients, such as the national health ministry or oneor more NGOs, which are legally responsible for grant implementation. Applications are reviewedby a Technical Review Panel of independent experts, and if a grant is made, the Fund contracts aLocal Fund Agent, typically a large accounting firm, to oversee its implementation. The GlobalFund's grant-making takes place in \"Rounds,\" which are announced when the Fund estimates thatit has funds available to cover the first two years of a large number of new grants. The two-yearrequirement, known as the Comprehensive Funding Policy, is intended to assure that the projectsbeing funded, including treatment projects, are not interrupted for lack of money.\nPresident George W. Bush announced the launching of PEPFAR in his January 2003 Stateof the Union Address. The United States had been implementing bilateral international AIDSprojects through the U.S. Agency for International Development (USAID) since the mid-1980s. TheClinton Administration's 1999 LIFE (Leadership and Investment in Fighting an Epidemic) initiativebrought other agencies, particularly the Centers for Disease Control and Prevention of theDepartment of Health and Human Services, into the effort as well. PEPFAR, which was authorizedin May 2003 by P.L. 108-25 (see above), brought these efforts into a single program headed by aGlobal AIDS Coordinator carrying the rank of Ambassador and based at the Department of State. Randall Tobias, former Chairman, President, and CEO of Eli Lilly, the pharmaceutical corporation,was named to the post by President Bush in July 2003 and confirmed in October. \nThe PEPFAR initiative promised substantial new resources for fighting AIDS, including $9billion over five years to be committed in 14 (later expanded to 15) of the most afflicted countriesof the world. (9) This newfunding is being channeled through the Global HIV\/AIDS Initiative (GHAI) directed by the Officeof the Global AIDS Coordinator (OGAC). PEPFAR also promised $5 billion over five years forongoing bilateral AIDS programs in 105 other countries, (10) as well as $1 billion in contributions to the Global Fund. Officials said that overall, PEPFAR represented $10 billion in \"new money,\" -- that is, $10 billionin additional funds beyond spending that would have occurred if existing programs had simply beencontinued at then-current spending levels. \nAIDS activists and others have been impatient with the pace at which PEPFAR and theGlobal Fund have been meeting the difficult challenge of scaling up their efforts to combat the globalAIDS pandemic. (11) However, both are already claiming considerable success. PEPFAR aims at supporting treatmentfor 2 million HIV-infected people by 2008, preventing 7 million new HIV infections, and\"supporting care for 10 million people infected and affected by HIV\/AIDS, including orphans andvulnerable children.\" (12) The Office of the Global AIDS Coordinator reports that at the end of March 2005, the PEPFARGlobal HIV\/AIDS Initiative was supporting antiretroviral therapy for more than 235,000 AIDSpatients in the focus countries. (13) Through September 2004, 1.7 million were receiving care,including 630,000 Orphans and Vulnerable Children. (14) \nOGAC estimates that in FY2004 it reached 120 million people in the focus countries withprevention messages focusing on abstinence and being faithful. In addition, 96 million condomswere purchased and shipped to focus countries for programs directed toward people who engage inhigh risk behavior. (15) The Global Fund reports that the 316 grants it had approved in 127 countries through July 2005 hadput 220,000 patients on HIV therapy, provided HIV testing and counseling for 2.5 million people,and provided 397,000 orphans with social, medical, and educational support. (16) Some patients receivingtreatment for AIDS are participating in programs supported by both PEPFAR and the Global Fund. This overlap was estimated at 63,000 in 2004. (17) \n\n\tGlobal Fund Resource Gap\n\nThe Global Fund estimates that it needs $3.3 billion in 2006 and 2007 to cover all existinggrants through the end of 2007. In addition, it is seeking $3.7 billion, for a total of $7 billion, inorder to respond to anticipated applications in Rounds 6 through 8 during the two-year period. (18) At a pledging conferenceheld in London in September 2005, donors pledged a total of $3.7 billion. Unless additional pledgesare made, the Global Fund will have the resources to do little more than fund its existing grants. Itwill not be able to bring new resources to bear in fighting the AIDS pandemic. Resource constraintswere evident when the Global Fund's board met in Geneva at the end of September 2005 to discussRound 5 grants. The Board decided to approve 26 grants costing $382 million over the first twoyears. Another 37 grants costing $344 million were provisionally accepted pending additionalpledges in the first half of 2006. If sufficient pledges are not received by the end of June 2006, the37 grants will be denied final approval. (19) The Board did not schedule a sixth Round.\n\n\t\tU.S. Contributions\n\nThe United States made initial contributions to the Global Fund totaling $275 million fromappropriations for FY2001 and FY2002 ( Table 1 ). For FY2003 through FY2005, theAdministration requested $200 million annually, but Congress provided more than requested in eachyear. A $200 million request is in keeping with the PEPFAR promise of $1 billion over five years,but for FY2006, the Administration raised its request to $300 billion. Some speculated that thisreflected recognition on the Administration's part that Congress favored larger contributions. Houseand Senate versions of FY2006 appropriations would again provide more for the Global Fund thanrequested. \n Table 1. Funding for U.S. Contributions to the GlobalFund\n($ millions)\nGlobal Fund contributions have been funded principally through the Foreign Operations Appropriations legislation and the appropriations for the Departments of Labor, Health and HumanServices, and Education (Labor\/HHS). The amounts reported in Table 1 for appropriations inFY2003 through FY2005 reflect rescissions included in these appropriations bills. In FY2004, asshown in line 3, $87.8 million of the amount appropriated for the Global Fund was not provided dueto legislative provisions limiting the U.S. contribution for FY2004 through FY2008 to 33% of theamount contributed by all donors. (20) The FY2005 Consolidated Appropriations legislation directedthat these withheld funds be provided to the Global Fund in FY2005, subject, like the remainder ofthe U.S. contribution, to the 33% proviso. The amount reported in the Senate-passed ForeignOperations bill for FY2006 ( H.R. 3057 ) includes $100 million transferred from theEconomic Support Fund under Sec. 6118, added as a floor amendment during debate.\nThe one-third rule governing contributions is not an issue in 2005, when the U.S.contribution is estimated at about 29% of total contributions for the calendar year (see below, Table2) . At the September 2005 pledging conference in London, U.S. Global AIDS Coordinator RandallTobias said that the United States would pledge a total of \"at least\" $600 million ($300 million ineach year) in 2006 and 2007. (21) Tobias noted, however, that the final amount would bedetermined by Congress -- a remark that was interpreted as suggesting that he expected theultimate U.S. contribution to be larger. The $600 million offered by Tobias represents 16% ofamounts pledged for the two years, and was second to the French pledge of $631 million. America'sEuropean partners together pledged $1.6 billion, including the French pledge. (22) The $600 million for theGlobal Fund in FY2006 in the Senate-passed version of the Foreign Operations Appropriation --without considering any additional amount for FY2007 -- would double the Administration requestfor the year and put the U.S. contribution at approximately 28% of the total. \n\n\tGlobal Fund and PEPFAR in U.S. Policy\n\nRepresentatives of the Global Fund and PEPFAR consistently maintain that the two arepartners rather than competitors in the struggle against AIDS. Ambassador Tobias told the Londonpledging conference that the U.S. contribution to the Global Fund is a \"strategic priority\" of PEPFAR. The operational plan of the Office of the Global AIDS Coordinator for FY2005 states thatthe Global Fund \"was conceived to be an integral part of the Administration's global strategy againstthe epidemic.\" (23) AnAugust 2005 Global Fund press release affirmed that the two programs are partners, noting that\"Together, the Global Fund and PEPFAR are the major financial engines to achieve greatly increasedtreatment numbers over the coming years.\" (24) Jack Valenti, President of Friends of the Global Fight AgainstAIDS, Tuberculosis, and Malaria, which advocates for the Global Fund in the United States,describes the Fund as the \"multi-lateral arm of PEPFAR, complementing the work of U.S. bilateralprograms around the world.\" (25) U.S.-Global Fund cooperation was underscored in January 2003,when then U.S. Secretary of Health and Human Services Tommy Thompson was elected Chairmanof the Fund's Board. Thompson served until April 2005. Ambassador Tobias currently serves ashead of the Global Fund's Policy and Strategy Committee. Many argue that this history ofcooperation represents a significant U.S. policy investment in the Global Fund, and consideredtogether with U.S. financial contributions, gives the United States a significant stake in the Fund'ssuccess.\nThose who insist that the Global Fund and PEPFAR are partners also assert that the work ofthe two organizations is complementary. They point out that the Global Fund is the principal vehiclefor mobilizing new resources to fight AIDS outside the 15 Global HIV\/AIDS Initiative focuscountries, thus furthering PEPFAR's worldwide objectives. At the same time, the Global Fund isadding resources for treatment and other AIDS relief measures within the GHAI countries. Bycontributing to the Global Fund, the United States is able to \"leverage\" its investment for fightingthe pandemic because the Fund provides a means for other donors, most of which lack the capacityfor carrying out large bilateral AIDS program, to participate in fighting the pandemic. Many feel thatby working through CCMs, local government ministries, and local NGOs, the Global Fund iscomplementing PEPFAR objectives by helping to build indigenous institutional capacities that willboost the abilities of host countries to deal with health challenges over the long term. PEPFARbilateral programs, meanwhile, complement the work of the Global Fund by bringing the capacitiesof USAID, CDC, and other U.S. agencies to bear on an emergency basis in 15 of the most heavilyaffected countries, where indigenous institutions are not able to cope with the pandemic in the shortterm. \nU.S. and Global Fund officials make a point of noting that the two organizations worktogether closely, underscoring their partnership and complementarity. Global Fund staff participatedin the May 2005 annual meeting of PEPFAR field staff, held in Addis Ababa, Ethiopia; and a keyemphasis of the meeting was the importance of cooperation between the two organizations at thelocal level. U.S. embassies in the focus countries report back to Washington on this cooperation. Consultations also take place between the two organizations at the headquarters level. In the field,USAID provides technical assistance to CCMs in setting priorities and formulating proposals to theGlobal Fund. As noted above, there has also been cooperation in providing antiretroviral treatmentto AIDS patients. Officials foresee closer cooperation in the future. For example, W. Brad Herbert,Chief of Operations at the Global Fund, expects U.S. AIDS experts in the field to become moreengaged in helping to monitor the performance of Global Fund-supported projects. (26) \nDespite the emphasis on partnership, complementarity, and cooperation in public statements,some suspect that U.S. officials are not entirely happy with the Global Fund, and may see it as a rivalthat is drawing attention away from the accomplishments of U.S. bilateral programs. Some tracethe suspected estrangement to April 2002, when the Global Fund board chose Dr. Richard Feachem,a Briton, as Executive Director, rather than an American candidate proposed by the UnitedStates. (27) Others arguethat the lead-up to the 2003 war in Iraq brought out sentiments in the Administration that wereunfriendly toward the United Nations and multilateral organizations generally, and that this affectedattitudes toward the Global Fund. (28) The tendency of the Administration to request less for the GlobalFund than Congress was willing to provide may be traced to these anti-multilateral points of view,some believe. At a September 2004 congressional staff briefing on the Global Fund, officials werereportedly highly critical of Fund operations, causing observers to doubt Administration statementsof support. (29) However,even many of those who have been skeptical of the degree of partnership between the Global Fundand PEPFAR now acknowledge that there seems to be a new spirit of cooperation, as symbolizedin the Administration's $300 million request for the Fund in FY2006. This new spirit has come latein the day, some argue, but is welcome nonetheless. \n\n\tDebate Over U.S. Funding for the Global Fund\n\nDespite increasing cooperation between PEPFAR and the Global Fund, the level of U.S.contributions remains a point of contention. Fund supporters believe that other donors are unlikelyto increase their contributions unless the United States boosts its own level of support. Theymaintain that the one-third rule governing U.S. contributions serves as a benchmark for the otherdonors, who see it as their responsibility to provide two-thirds of the funding while the United Statesprovides the rest. Thus, the United States would have to contribute $2.3 billion in FY2006 andFY2007 combined, rather than the $600 million pledged by Ambassador Tobias, if it is to persuadeother donors to make contributions sufficient to meet the Global Fund's stated need of $7 billion. \nMany see an increase for the Global Fund on this scale as unlikely, since there are manycompeting budget priorities and no guarantee that other donors would follow the U.S. lead. Administration officials and others argue that the United States has already been generous towardthe Global Fund, and should not be expected to do more. In July 2004, Ambassador Tobias pointedout to an interviewer in Bangkok, during the biennial International AIDS Conference, that\nThe United States made the first contribution to theGlobal Fund, and we remain the biggest contributor.... We're contributing nearly twice as much asall other donors combined. (30) \nMoreover, the United States is on target to contribute considerably more than the $1 billion over fiveyears initially promised when PEPFAR was announced. There was much criticism of the level ofU.S. funding for the Global Fund at the Bankok meeting, where Tobias said that the United Stateswould not fulfill a request from United Nations Secretary General Kofi Annan for a $1 billion annualcontribution. (31) \n Table 2. Contributions to the Global Fund by the G7 andEuropean Commission (%)\nSources: Tables on pledges and contributions at the Global Fund to Fight AIDS, Tuberculosis, andMalaria website; Global Fund Observer , September 7, 2007; press reports. Canada's 2006-2007pledge was made after the London pledging conference. \nU.S. officials also note that the United States is contributing by far the largest share of fundsgoing toward fighting the global pandemic, including both its Global Fund contribution and itsbilateral PEPFAR program. A report issued by the Henry J. Kaiser Family Foundation in July 2005found that the United States was contributing 45.4% of the funds committed by the G7 nations andthe European Communities for international AIDS programs. (32) This is more than a fairshare, some believe, and if more funding is needed at the Global Fund it should come from othersources. However, the Kaiser study also pointed out that when bilateral commitments andcommitments to the Global Fund were adjusted for Gross National Income, the United States rankedthird in funding international AIDS programs, behind Britain and Canada, but well ahead of France,Germany, and Japan. UNAIDS estimates the total need for resources to fight AIDS in 2006 at $14.9billion, whereas $8.9 billion is likely to be provided (33) -- suggesting to some that donors generally are falling short oftheir \"fair share\" contribution to the AIDS struggle.\nFor those who argue that other donors, rather than the United States, should be doing moreto help the Global Fund, the one-third rule governing U.S. contributions should be seen as asafeguard put in place by Congress, rather than as a benchmark determining what others shouldcontribute. Table 2 suggests that the one-third rule may not be governing pledges by other donorsfor 2006 and 2007, although it is also possible that their pledges reflect an expectation that Congresswill add to the U.S. contribution. \nNonetheless, there is significant support, often stated in heated terms, for a larger U.S.contribution to the Global Fund. A number of editorials and opinion pieces have strongly urged anincrease for the Fund, (34) and advocacy organizations, such as the, Global AIDS Alliance, have accused the Administrationof a \"deliberate, concerted action\" to undermine the Fund. (35) Some argue that anincrease is merited precisely because the United States has assumed world leadership in the struggleagainst AIDS. A larger Global Fund contribution would affirm this leadership, and have diplomaticand public relations benefits as well, since it would underscore the U.S. commitment to an importanthumanitarian cause. Supporters of a boost in funding typically praise the Global Fund for itsinnovative features and its multilateral character. They depict PEPFAR's bilateral effort in thefocus countries as a \"top down\" program run from Washington, and contrast this with the GlobalFund's direct support for programs developed in the field by stakeholders participating in the CCMs. In this way, they argue, the Global Fund is making a major contribution to institution-building indeveloping countries, with potential wider benefits for governance and growth. Many feel that theGlobal Fund should be the primary component of the U.S. response to the pandemic. They agreewith Stephen Lewis, U.N. Special Envoy for HIV\/AIDS in Africa, in seeing the Fund, \"whatever itsteething problems\" as \"the most formidable new international financial mechanism in the battleagainst communicable disease.\" According to Lewis, the Fund \"deserves every ounce of support itcan muster.\" (36) \nMany also favor the Global Fund over PEPFAR's bilateral programs because they believe thatPEPFAR has been fettered by various requirements and restrictions which, in their view,inappropriately restrict the program. PEPFAR, for example, is required by law to spend one-thirdof funds allocated for HIV\/AIDS prevention in FY2006 through FY2008 onabstinence-until-marriage programs, (37) and PEPFAR contractors must sign a pledge stating that theyoppose commercial sex work and sex trafficking. (38) Some question the effectiveness of abstinence-until-marriageprograms and worry that the prostitution pledge could inhibit the ability of NGOs to work with agroup that is a key vector for HIV. Such requirements do not affect the Global Fund. In May 2005,Ambassador Tobias rescinded an effort to require NGOs receiving U.S. funds indirectly through theGlobal Fund to sign the prostitution pledge, saying that the policy had not been fully cleared. \nThose who oppose an increase in the U.S. contribution to the Global Fund tend to describethe PEPFAR's bilateral effort as superior to the Global Fund program. They emphasize thatPEPFAR is funding expanded involvement in the struggle against AIDS by U.S. agencies, primarilyUSAID and CDC, which have years of experience in fighting disease. Spending in the field is underthe direction of personnel based at U.S. embassies, and this results in better coordination, they argue. It is a mistake to see PEPFAR as a \"top down\" program, because embassy involvement means thatlocal considerations are constantly being taken into account. (39) Moreover, PEPFAR isitself making a major contribution to building local capacity through its training and infrastructureprograms, and by channeling much of its spending through local organizations as contractors orsubcontractors. With PEPFAR oversight and assistance, supporters maintain, local institutions arebecoming more transparent, potentially strengthening the overall quality of governance in the focuscountries. Some also argue that only a large bilateral program under U.S. control could have gainedthe domestic American political support needed for a commitment of $10 billion in additionalresources to fighting AIDS. They believe that the restrictions on the use of PEPFAR funds reflectwidely-held U.S. values, and further that the program might have failed to win majority support inCongress if the restrictions were not in place. \nSome PEPFAR advocates maintain that several Global Fund programs have run intodifficulties, and see this as an argument for refraining from larger contributions. In January 2004,for example, the Global Fund suspended grants in Ukraine that were found to be poorly managedand behind schedule, while in August 2005, grants to Uganda were suspended when the Local FundAgent reported mismanagement of one grant by the Ministry of Health. Global Fund supporters,however, argue that such suspensions are a sign that the Global Fund's oversight mechanisms areeffective and transparent, and that they can be an incentive to recipient countries to strengthen their capabilities for grant management. Grants to Ukraine have been resumed conditional onimprovements in governance and adherence to sound business practices on the part of the CCM. Uganda is implementing changes to improve grant management and restore its own eligibility forGlobal Fund grants. Problems in Global Fund grants are most likely to be encountered in the earlystages of grant implementation, some argue, but tend to ease as a country's capacity for grantadministration begins to grow. \nThe ongoing debate between advocates for the Global Fund and for PEPFAR bilateralprograms is unfortunate, some observers maintain, because both programs are making importantcontributions in the struggle against AIDS. In their view, a way should be found to provide theGlobal Fund with the resources it needs from the United States and other donors, without takingresources away from bilateral efforts. The United States has already contributed substantial amountsto the Global Fund, and some believe that a failure by the Fund to mobilize the resources it needsto fight the AIDS pandemic will to some degree be a failure of U.S. policy. Some also doubt thatPEPFAR will be able to meet its own objectives for treatment, prevention, and care unless it bolstersthe Global Fund.\n\n\tPolicy Options\n\nThe difficulty in attempting to leverage larger contributions from other donors to the GlobalFund by increasing the U.S. contribution is that the resources available under the two appropriationsbills used to support the fund -- Foreign Operations and Labor\/HHS -- are finite. Once an annualbudget resolution is passed and funds are allocated to the Appropriations Committees and then tosubcommittees, increases for one program can only be achieved through decreases for others. (40) In hearings and meetings,according to observers, representatives of executive branch agencies tend to argue most stronglyin support of bilateral programs under their control, even though they may also be supportive ofmultilateral programs. Some also suggest that a similar process occurs in the executive branchbefore the annual budget is submitted to Congress, and that this has tended to limit the request forthe Global Fund. The Global Fund has strong supporters in Congress, and this has led toappropriations above the Administration's request, but these have not been on the scale that GlobalFund advocates believe is needed. \nThe solution for many Global Fund advocates is a \"larger pie\" for Foreign Operations and\/orLabor\/HHS, backed up by a larger budget request from the Administration, leaving room for asubstantially larger contribution to the Global Fund. However, expanding funding for theseappropriations bills to benefit the Global Fund would likely prove problematic in a period ofconcern over the federal deficit as well as high levels of spending for the war in Iraq and hurricanerelief. Some advocates of a larger U.S. contribution to the Global fund believe that legislativeprovisions limiting the U.S. contribution to 33% of all contributions should be repealed, since itcould lead to the withholding of U.S. funds in the future. Others argue that the provision should beretained as an incentive to other donors.\nAnother option would be a concerted U.S. effort to persuade other donor countries to increasetheir contributions to the Global Fund even in the absence of a large U.S. increase. U.S. officialsmight argue that the United States is using its substantial bilateral capabilities to carry out a largescale effort against AIDS under PEPFAR, and that those lacking these capabilities should participatein the struggle through larger contributions to Global Fund. Some suggest that making this caseshould not be left to Ambassador Tobias and his assistants, but that Secretary of State Rice andPresident Bush should also strongly advocate for the Global Fund in public forums and in theirmeetings with foreign leaders. Skeptics question, however, whether foreign leaders would be willingto make substantially larger contributions unless the United States does so as well.\nA third option would be an effort to persuade private sector donors, foundations, and thegeneral public to contribute to the Global Fund. At the September 2005 Global Fund pledgingconference, Ambassador Tobias urged non-government sources, including the private sector, to givegenerously to the Global Fund. Some suggest that popular music events along the lines of the 1985Live Aid concert, which raised funds to fight famine in Ethiopia, could generate new revenues forthe Global Fund. Prior to the July 2005 G8 summit in Scotland, ten \"Live 8\" concerts in supportof ending world poverty reportedly drew more than a million people around the world, (41) although the concerts didnot specifically raise funds for AIDS. To date, however, non-government sources -- apart from theBill and Melinda Gates Foundation -- have contributed only modest amounts to the Global Fund. The Gates Foundation has given $150 million, but corporations have given just $1.9 million, while individuals, groups, and events have accounted for $3.3 million. These relatively low numberssuggest to some that there is great untapped potential for larger contributions from alternativesources; others see them as evidence that the potential is limited. (42) In any event, manycontinue to believe a way must be found to boost Global Fund resources if U.S. objectives incombating the Global AIDS pandemic are to be fulfilled.","output":"The United States is responding to the international AIDS pandemic through the President'sEmergency Plan for AIDS Relief (PEPFAR), which includes bilateral programs and contributionsto the multilateral Global Fund for AIDS, Tuberculosis, and Malaria. PEPFAR overall appears ontarget to meet the Administration's five-year, $15 billion spending plan, although competing budgetpriorities could affect its prospects. By contrast, the Global Fund, which relies on multiple donors, is reporting a funding gap that may prevent it from awarding new grants to fight the pandemic. The Fund estimates that it needs $3.3 billion in 2006 and 2007 to cover the renewal of its existing grants,in addition to $3.7 billion in order to fund two new Rounds of grant-making. At a September 2005Global Fund pledging conference in London, donors offered a total of $3.7 billion for the two years,and unless additional pledges are made, the Fund will be able to do little more than fund existinggrants.\nThe United States, at the London meeting, pledged a total $600 million for 2006 and 2007,although Andrew Tobias, the U.S. Global AIDS Coordinator, suggested that Congress might providea larger amount. Congress has consistently appropriated more than requested for the Fund. Somebelieve that the Administration increased its FY2006 request for the Fund to $300 million, from$200 million sought in FY2003-FY2005, in recognition of the support the Fund enjoys in Congress.\nRepresentatives of the Global Fund and PEPFAR maintain that their programs arecomplementary, and that they are partners rather than competitors. The United States is the largestcontributor to the Global Fund through PEPFAR. Some worry, however, that there are strainsbetween U.S. officials and the Global Fund, pointing to the tendency of the Administration torequest less for the Fund than Congress has been willing to provide. Global Fund representativesattended a major PEPFAR planning session in May 2005, and this is seen by many as one indicatoramong others that any past strains between the two programs are easing.\nAdvocates for the Global Fund seek a major increase in the U.S. contribution, arguing thatit would affirm U.S. leadership in the struggle against AIDS and persuade other donors to increasetheir support. They believe that the Global Fund has several unique advantages, including itsmultilateral character, its contribution to capacity building, and its operations in countries other thanthe 15 PEPFAR focus countries. Supporters of U.S. bilateral programs note that they too buildcapacity and operate beyond the focus countries, while bringing the capacities of highly experiencedU.S. agencies to bear in fighting the pandemic. Through PEPFAR, some argue, the United Statesis already doing more than its fair share in fighting AIDS, and any large increase for the Global Fundshould come from other donor countries. U.S. officials and others are also encouragingcontributions from private sector sources. Such contributions have been limited to date, apart from$150 million contributed by the Bill and Melinda Gates Foundation. This report will not be updated. For further information, see CRS Report RS21181, HIV\/AIDS International Programs:Appropriations FY2003-FY2006 and CRS Report RL31712 , The Global Fund to Fight AIDS,Tuberculosis, and Malaria: Background and Current Issues ."}
{"id":"crs_R41750","pid":"crs_R41750_0","input":"\tIntroduction\n\nIn June 2008, the Supreme Court issued its decision in District of Columbia v. Heller , holding by a 5-4 vote that the Second Amendment to the Constitution of the United States protects an individual right to possess a firearm, unconnected with service in a militia, and to use that firearm for traditionally lawful purposes such as self-defense within the home. In Heller , the Court affirmed the lower court's holding that declared three provisions of the District of Columbia's Firearms Control Regulation Act to be unconstitutional. The decision in Heller marked the first time in almost 70 years that the Supreme Court addressed the nature of the right conferred by the Second Amendment. Although the Court conducted an extensive analysis of the Second Amendment to interpret its meaning, the decision left unanswered other significant constitutional questions, including the standard of scrutiny that should be applied to laws regulating the possession and use of firearms, and whether the Second Amendment applies to the states. This latter issue was subsequently addressed by the Supreme Court in McDonald v. City of Chicago .\nAccordingly, this report first provides a historical overview of judicial treatment of the Second Amendment and a discussion of the Court's decision in Heller . It then examines the issue of incorporation, which was the focus of the McDonald decision. Lastly, this report concludes with an analysis that focuses on the potential impact of the Court's decisions in Heller and McDonald on such legislation pertaining to the use and possession of firearms at the federal, state, and local levels.\n\n\tThe Second Amendment\u2014An Individual or Collective Right?\n\nThe Second Amendment to the Constitution states that \"A well regulated Militia, being necessary to the security of a free State, the right of the people to keep and bear Arms, shall not be infringed.\" Despite its brevity, the nature of the right conferred by the language of the Second Amendment has been the subject of great debate in the political, academic, and legal spheres for decades. Generally, it can be said that there are two opposing models that govern Second Amendment interpretation. On one side of the debate, there is the \"individual right model,\" which maintains that the text and underlying history of the Second Amendment clearly establishes that the right to keep and bear arms is committed to the people, that is, an individual, as opposed to the states or the federal government. On the other end of the spectrum is the \"collective right model,\" which interprets the Second Amendment as protecting the authority of the states to maintain a formal organized militia. A related interpretation, commonly called the \"sophisticated collective right model,\" posits that individuals have a right under the Second Amendment to own and possess firearms, but only to the extent that such ownership and possession is connected to service in a state militia.\nThe text of the amendment is often raised to both support and contravene the argument that there is an individual right to keep and bear arms. The individual right model places great weight on the operative clause of the amendment that states \"the right of the people to keep and bear arms shall not be infringed.\" Accordingly, it is argued that this command language clearly affords a right to the people, and not simply to states. To support this notion, it is argued that the text of the Tenth Amendment, which clearly distinguishes between \"the states\" and \"the people,\" makes it evident that the two terms are, in fact, different, and that the Founders knew to say \"state\" when they meant it. Under this reading, it may be argued that if the Second Amendment did not confer an individual right, it simply would have read that the right of the states to organize the militia shall not be infringed. Supporters of the collective right model, by contrast, often counter with the argument that the dependent clause, which refers to \"a well regulated militia,\" qualifies the rest of the amendment, thereby limiting the right of the people to keep and bear arms and investing the states with the authority to control the manner in which weapons are kept, and to require that any person who possesses a weapon be a member of the militia.\nAn outgrowth of the rationale used by the collective right proponents has been the argument that the militia, in modern times, is embodied by the National Guard, and that the realities of modern warfare have negated the need for the citizenry to be armed. Individual right theorists have countered these arguments by noting that the militia of the Founders' era consisted of every able-bodied male, who was required to supply his own weapon. These theorists also point to 10 U.S.C. \u00a7 311, which as part of its express definition of the different classes of militia states that in addition to the National Guard, there is an \"unorganized militia\" that is composed of all able-bodied males between the ages of 17 and 45 who are not members of the National Guard or naval militia. Moreover, proponents of the individual right model deride the notion that an individual right to keep and bear arms can be read out of the Constitution as a result of technological advancements or shifting societal mores. As illustrated below, various federal appellate courts gave effect to each of these interpretive models, contributing to the uncertainty that characterized the debate over the meaning of the Second Amendment prior to the Court's decision in Heller .\n\n\t\tThe Second Amendment in the Supreme Court: United States v. Miller\n\nDespite the heated debate regarding the meaning of the Second Amendment, the Supreme Court had decided only one case touching upon its scope prior to the decision in Heller . That case, United States v. Miller , considered the validity of a provision of the National Firearms Act in relation to the Second Amendment. An interesting aspect of the decision in Miller , as illustrated below, is that it was commonly cited in subsequent lower court decisions as supportive of the proposition that the Second Amendment confers a collective right to keep and bear arms. However, the Court's discussion and actual holding, while giving effect to the dependent clause, could nonetheless be taken to indicate that the Second Amendment confers an individual right limited to the context of the maintenance of the militia.\nIn Miller , the Court upheld a provision of the National Firearms Act that required the registration of sawed-off shotguns. In discussing the Second Amendment, the Court noted that the term \"militia\" was traditionally understood to refer to \"all males physically capable of acting in concert for the common defense,\" and that members of the militia were primarily civilians and, on occasion, soldiers too, who when called upon \"were expected to appear bearing arms supplied by themselves and of the kind in common use at the time.\" This kind of language throughout the Miller Court's brief discussion of the meaning and expectations of those in a militia during the Founding-era, though subsequently cited as supporting a collective right interpretation, also lent itself to the possible interpretation that the Second Amendment confers an individual right to keep and bear arms limited to the context of the maintenance of a militia. Despite this language, the Court in Miller held:\nIn absence of any evidence tending to show that possession or use of a \"shotgun having a barrel of less than 18 inches in length\" at this time has some reasonable relationship to the preservation or efficiency of a well regulated militia, we cannot say that the Second Amendment guarantees the right to keep and bear such an instrument. Certainly it is not within judicial notice that this weapon is any part of the ordinary military equipment or that its use could contribute to the common defense.\nThe Miller holding focuses on and appears to suggest that the applicability of the Second Amendment depends upon the type of weapon possessed by an individual and that the weapon, in order to be protected under the amendment, must have some reasonable relationship to the preservation or efficiency of a well-regulated militia. Yet, the decision in Miller is perplexing because while it indicated a connection between the right to keep and bear arms and the militia, the Court did not explore the logical conclusions of its holding; thus the question remained as to what point the regulation or prohibition of firearms would violate the strictures of the amendment. After Miller , the cases decided in the following decades departed from this rather undefined test, with each succeeding decision arguably becoming more attenuated such that judicial treatment of the Second Amendment for the remainder of the 20 th century almost summarily concluded that the amendment conferred only a collective right to keep and bear arms.\n\n\t\tThe Second Amendment in Federal Court: Appellate Decisions Since Miller\n\nThe process of departure from, and the attenuation of, Miller began with the 1942 decision in Cases v. United States . The U.S. Court of Appeals for the First Circuit (First Circuit) stated its view on the holding in Miller and found it to suggest that \"the federal government can limit the keeping and bearing of arms by a single individual as well as by a group of individuals but it cannot prohibit the possession or use of any weapon which has any reasonable relationship to the preservation or efficiency of a well regulated militia.\" The First Circuit pointed out that a general application of the test in Miller could, as a consequence, prevent the government from regulating the possession or use by private persons, not connected with a militia, of machine guns and similar weapons, which clearly serve military purposes. Beginning its departure from Miller , the court in Cases simply stated that it doubted the Founders intended for citizens to be able to possess weapons like machine guns, and further declared that Miller did not formulate any sort of general test to determine the limits of the Second Amendment. The court then applied a new test of its own formulation, focusing on whether the individual in question could be said to have possessed the prohibited weapon in his capacity as a militiaman. Applying that rationale to the case at hand, the First Circuit declared that the defendant possessed the firearm \"purely and simply on a frolic of his own and without any thought or intention of contributing to the efficiency of [a] well regulated militia.\" While Cases acknowledged that the Federal Firearms Act \"undoubtedly curtails to some extent the right of individuals to keep and bear arms,\" the court upheld its constitutionality, stating that the act \"does not conflict with the Second Amendment\" because as suggested by the court's new test, the government can regulate individuals from possessing a weapon (that could be viewed as a weapon of common militia use) if such an individual is not in fact using that weapon in his capacity as a militiaman or for the purpose of common militia use.\nThe court in Cases further cited the Supreme Court's decision in United States v. Cruikshank and Presser v. Illinois , (both of which were decided prior to the advent of modern incorporation doctrine principles) as support for the proposition that the Second Amendment does not confer an individual right: \"The right of the people to keep and bear arms is not a right conferred upon the people by the federal constitution. Whatever rights the people may have depend upon local legislation; the only function of the Second Amendment being to prevent the federal government and the federal government only from infringing that right.\"\nThe concept of the Second Amendment as a collective protective mechanism rather than a conferral of an individual right was reinforced by the U.S. Court of Appeals for the Third Circuit's (Third Circuit) decision that same year in United States v. Tot . In that case, the Third Circuit declared that it was \"abundantly clear\" that the right to keep and bear arms was not adopted with individual rights in mind. The court's support for this statement was brief and conclusory, and did not address any of the relevant, competing arguments. It was this type of holding that became the norm for the remainder of the century in cases addressing the Second Amendment, with courts increasingly referring to others' holdings to support the determination that there is no individual right conferred under the Second Amendment, without engaging in any appreciable substantive legal analysis of the issue.\n\n\t\t\tUnited States v. Emerson\n\nThe traditional, albeit highly undefined, balance among the federal appellate courts with regard to judicial treatment of the Second Amendment changed with the 2001 decision in United States v. Emerson . In Emerson , the U.S. Court of Appeals for the Fifth Circuit (Fifth Circuit) became the first federal appellate court to hold that the Second Amendment confers an individual right to keep and bear arms. The court in Emerson specifically addressed the constitutionality of 18 U.S.C. \u00a7 922(g)(8), which prevents those under a domestic violence restraining order from possessing a firearm. The district court had ruled this provision to be unconstitutional on grounds that it allows the existence of a restraining order, even if issued \"without particularized findings of the threat of future violence, to automatically deprive a citizen of his Second Amendment rights.\" The Fifth Circuit agreed with the district court's conclusion that the Second Amendment confers an individual right after it engaged in an extensive analysis of the text and history of the amendment. It further stated that \"the history of the Amendment reinforces its plain text, namely that it protects individual Americans in their right to keep and bear arms whether or not they are a member of a select militia or performing active military service or training.\" In making this determination, the Fifth Circuit explicitly acknowledged that it was repudiating the position of every other circuit court that had previously addressed the meaning of the Second Amendment, stating: \"[W]e are mindful that almost all of our sister circuits have rejected any individual rights view of the Second Amendment. However, it respectfully appears to us that all or almost all of these opinions seem to have done so either on the erroneous assumption that Miller resolved that issue or without sufficient articulated examination of the history and text of the Second Amendment.\"\nThe court in Emerson stated: \"We reject the collective rights and sophisticated collective rights models for interpreting the Second Amendment. We hold, consistent with Miller , that it protects the rights of individuals, including those not then actually a member of any militia or engaged in active military service or training, to privately possess and bear their own firearm ... that are suitable as personal, individual weapons and are not of the general kind or type excluded by Miller .\" Although the Emerson court adopted the individual right model, it nonetheless reversed the district court decision, determining that rights protected by the Second Amendment are subject to reasonable restrictions:\nAlthough, as we have held, the Second Amendment does protect individual rights, that does not mean that those rights may never be made subject to any limited, narrowly tailored specific exceptions or restrictions for particular cases that are reasonable and not inconsistent with the right of Americans generally to individually keep and bear their private arms as historically understood in this country. Indeed, Emerson does not contend, and the district court did not hold, otherwise. As we have previously noted, it is clear that felons, infants and those of unsound mind may be prohibited from possessing firearms.\nApplying this standard to the challenged provision, the Emerson court noted that while the evidence before it did not establish that an express finding of a credible threat had been made by the local state court, the nexus between firearm possession by an enjoined party and the threat of violence was sufficient to establish the constitutionality of 18 U.S.C. \u00a7 922(g)(8). The decision in Emerson was accompanied by a special concurrence arguing that \"[t]he determination whether the rights bestowed by the Second Amendment are collective or individual [was] entirely unnecessary to resolve this case and has no bearing on the judgment we dictate by this opinion.\"\nAlthough the decision in Emerson did not result in the invalidation of any laws, the decision was quite significant as it marked the first time a circuit court adopted an individual rights interpretation of the Second Amendment, which in turn led to the most substantive exposition of the collective rights model by a sister circuit.\n\n\t\t\tSilveira v. Lockyer\n\nIn Silveira v. Lockyer , the U.S. Court of Appeals for the Ninth Circuit (Ninth Circuit) rejected a Second Amendment challenge to California's Assault Weapons Ban, specifically repudiating the analysis in Emerson and adopting the collective right model interpretation of the Second Amendment. It stated, \"Our court, like every other federal court of appeals to reach the issue except for the Fifth Circuit, has interpreted Miller as rejecting the traditional individual rights view.\" The Silveira decision was particularly significant because the Ninth Circuit essentially picked up the gauntlet thrown down in Emerson . The court engaged in its own substantive analysis of the text of the amendment, but reached the opposite conclusion than that of the Fifth Circuit, which is important because the opinion in Silveira acknowledged and purported to rectify the deficiencies in prior cases that have summarily interpreted Miller as precluding an individual rights interpretation.\nIn particular, the Ninth Circuit began its analysis by expressly acknowledging that \"the entire subject of the meaning of the Second Amendment deserves more consideration than we, or the Supreme Court, have thus far been able (or willing) to give it.\" After engaging in an extensive consideration of the same historical and textual arguments that were addressed in Emerson , the court in Silveira stated, \"The amendment protects the people's right to maintain an effective state militia, and does not establish an individual right to own or possess firearms for personal or other use. This conclusion is reinforced in part by Miller 's implicit rejection of the traditional individual rights position.\" The court later reemphasized this position, declaring: \nIn sum, our review of the historical record regarding the enactment of the Second Amendment reveals that the amendment was adopted to ensure that effective state militias would be maintained, thus preserving the people's right to bear arms. The militias, in turn, were viewed as critical to preserving the integrity of the states within the newly structured national government as well as to ensuring the freedom of the people from federal tyranny. Properly read, the historical record relating to the Second Amendment leaves little doubt as to its intended scope and effect.\nUpon determining that the collective right model controls Second Amendment analysis, the Ninth Circuit held that the amendment \"poses no limitation on California's ability to enact legislation regulating or prohibiting the possession or use of firearms, including dangerous weapons such as assault weapons.\" Like the Emerson decision, the opinion in Silveira was accompanied by a special concurrence that argued that the court's \"long analysis involving the merits of the Second Amendment claims,\" and its adoption of the \"collective rights theory\" was \"unnecessary and improper\" in light of existing precedent mandating the dismissal of such claims for a lack of standing. A request for rehearing en banc was denied by the full court, resulting in the dissent of six judges.\nThe holdings in Emerson and Silveira , for the first time, presented the Supreme Court with two contemporaneous circuit court decisions that reached fundamentally different conclusions with regard to the protections afforded by the Second Amendment. While this dynamic led to a great deal of speculation as to whether the Court would grant a petition for certiorari in Silveira to resolve this split, the Court ultimately denied the application. This was presumably due to the fact that even though the decisions constituted a concrete split between the two circuit courts on this issue for the first time, no firearms laws were actually invalidated. \n\n\tThe District of Columbia v. Heller Decision\n\nIn light of the split interpretations of the meaning of the Second Amendment in the circuit court decisions Emerson and Silveira , both of which were denied certiorari by the Supreme Court, the stage for just such a conflict was set in 2007 in Parker v. District of Columbia . The decision in Parker , which eventually made its way to the Supreme Court, marked the first time that a federal appellate court struck down a law regulating firearms on the basis of the Second Amendment.\n\n\t\tParker v. District of Columbia\n\nIn Parker , six residents of the District of Columbia challenged three provisions of the District's 1975 Firearms Control Regulation Act: DC Code \u00a7 [phone number scrubbed].02(a)(4), which generally barred the registration of handguns, thus effectively prohibiting of possession of handguns in the District; \u00a7\u00a022-4504(a), which prohibited carrying a pistol without a license (to the extent the provision would prevent a registrant from moving a gun from one room to another within his or her home); and \u00a7 [phone number scrubbed].02, which required all lawfully owned firearms be kept unloaded and disassembled or bound by a trigger lock or similar device.\nThe Parker court first dismissed the claims of five of the six plaintiffs upon determining that the District's general threat to prosecute violations of its gun control laws did not constitute an injury sufficient to confer standing on citizens who had only expressed an intention to violate the District's gun control laws but had not suffered any injury in fact. The remaining plaintiff, Dick Heller, was found to have standing due to the fact that he had applied for, and had been denied, a license to possess a handgun. Based on this, the court determined that the denial of a license \"constitutes an injury independent of the District's prospective enforcement of its gun laws.\" The court also allowed Heller's claims challenging \u00a7 22-4504(a) (prohibiting the carriage of a pistol without a license) and \u00a7 [phone number scrubbed].02 (requiring firearms be kept unloaded and disassembled or bound by a trigger lock) to stand, as they \"would amount to further conditions on the [right] Heller desires.\"\nThe court then turned to its substantive consideration of the Second Amendment, engaging in a textual and historical analysis that largely mirrored the approach of the Fifth Circuit in Emerson . The court placed particular importance on the \"word[s] ... the drafters chose to describe the holders of the right\u2014'the people.'\" Stating that the phrase \"the people\" is \"found in the First, Fourth, Ninth, and Tenth Amendments,\" and that \"[i]t has never been doubted that these provisions were designed to protect the rights of individuals ,\" the court stated that it necessarily follows that the Second Amendment likewise confers an individual right. The court also rejected the contention that the prefatory clause of the amendment (\"A well regulated Militia, being necessary to the security of a free State\") qualified the effect of its operative clause (\"the right of the people to keep and bear Arms, shall not be infringed\"), based on its characterization of the historical factors at play. According to the court, early Congresses recognized that the militia existed as all \"able-bodied men of a certain age,\" independent of any governmental creation, but also that a militia nevertheless required governmental organization to be effective. This interpretation enabled the court to dispose of the District's argument that \"a militia did not exist unless it was subject to state discipline and leadership.\" By specifically rejecting the notion that there is a state organization requirement for the creation of a militia, the court was able to interpret the prefatory clause as encompassing a broad swath of the populace, irrespective of a state's right to raise a collective protective force. The court concluded its analysis by stating: \"The important point, of course, is that the popular nature of the militia is consistent with an individual right to keep and bear arms: Preserving an individual right was the best way to ensure that the militia could serve when called.\"\nThe Parker court also addressed the District's argument that it was not subject to the restraints of the Second Amendment because it is a purely federal entity. This argument was predicated on the supposition that since the District is not a state, no federalism concerns are posed within the context of the Second Amendment as there is no possibility that the exercise of legislative power would unconstitutionally encumber the organization of a state militia, that is, \"interfere with the 'security of a free State.'\" The court, in rejecting the District's argument, referred to it as an \"appendage of the collective right position\" and made note that \"the Supreme Court has unambiguously held that the Constitution and Bill of Rights are in effect in the District.\"\nThe final argument addressed by the court in Parker was the District's contention that \"even if the Second Amendment protects an individual right and applies to the District, it does not bar the District's regulation, indeed, its virtual prohibition, of handgun ownership.\" Engaging in a historical analysis, the court determined that long guns (such as muskets and rifles) and pistols were in \"common use\" during the era when the Second Amendment was adopted. While noting that modern handguns, rifles, and shotguns are \"undoubtedly quite improved over [their] colonial-era predecessors,\" the court held that the \"modern handgun ... is, after all, a lineal descendant\" of the pistols used in the Founding-era and that they \"certainly bear 'some reasonable relationship to the preservation or efficiency of a well regulated militia,'\" thereby meeting the standard delineated in Miller . The court further rejected the argument that the Second Amendment applies only to colonial era weapons, stating that \"just as the First Amendment free speech clause covers modern communication devices unknown to the Founding generation, e.g., radio and television, and the Fourth Amendment protects telephonic conversation from a 'search,' the Second Amendment protects the possession of the modern-day equivalents of the colonial pistol.\"\nThe court stressed that its conclusion should not be taken to suggest that \"the government is absolutely barred from regulating the use and ownership of pistols,\" stating that \"the protections of the Second Amendment are subject to the same sort of reasonable restrictions that have been recognized as limiting, for instance, the First Amendment.\" The court stated that its holding did not conflict with earlier Supreme Court determinations that existing laws prohibiting the concealed carriage of weapons or depriving convicted felons of the right to keep and bear arms \"[do] not offend the Second Amendment.\" According to the court, regulations of this type \"promote the government's interest in public safety consistent with our common law tradition. Just as importantly, however, they do not impair the core conduct upon which the right was premised.\" It went on to state other \"[r]easonable regulations also might be thought consistent with a 'well regulated Militia,'\" including but not necessarily limited to, the registration of firearms (on the basis that it would give the government an idea of how many would be armed for militia service if called upon), or reasonable firearm proficiency testing (as this would promote public safety and produce better candidates for service).\nApplying these standards to the provisions of the DC Code at issue, the court ruled that each challenged restriction violated the protections afforded by the Second Amendment. With regard to \u00a7 [phone number scrubbed].02(a)(4) (prohibiting the registration of a pistol), the court stated: \"Once it is determined\u2014as we have done\u2014that handguns are 'Arms' referred to in the Second Amendment, it is not open to the District to ban them.\" Turning to \u00a7 22-4504(a) (prohibiting the carriage of a pistol without a license, inside or outside the home), the court stated: \"[J]ust as the District may not flatly ban the keeping of a handgun in the home, obviously it may not prevent it from being moved throughout one's house. Such a restriction would negate the lawful use upon which the right was premised\u2014i.e., self defense.\" Finally, with respect to \u00a7 [phone number scrubbed].02 (requiring that all lawfully owned firearms be kept unloaded and disassembled or bound by a trigger lock or similar device), the court stated: \"[L]ike the bar on carrying a pistol within the home, [this provision] amounts to a complete prohibition on the lawful use of handguns for self-defense. As such, we hold it unconstitutional.\"\n\n\t\tDistrict of Columbia v. Heller\n\nOn November 20, 2007, the Supreme Court granted the District of Columbia's petition for certiorari , though limiting it to the question of \"[w]hether the following provisions, DC Code \u00a7\u00a7\u00a0[phone number scrubbed].02(a)(4), 22-4504(a), and [phone number scrubbed].02, violated the Second Amendment rights of individuals who are not affiliated with any state-regulated militia, but who wish to keep handguns and other firearms for private use in their homes?\" \n\n\t\t\tOral Argument\n\nOn March 18, 2008, the Supreme Court heard oral argument for Heller , considering in detail many of the issues raised by the decision in Parker . Based on the questions and comments of the Justices, it was widely assumed that the Court would hold that the Second Amendment does in fact confer an individual right to keep and bear arms. In particular, Chief Justice Roberts and Justices Alito and Scalia all made statements indicating that they support an individual right interpretation. For instance, responding to the Petitioner's assertion that the prefatory clause of the amendment confirms that the right is militia related, Chief Justice Roberts stated: \"[I]t's certainly an odd way in the Second Amendment to phrase the operative provision. If it is limited to State militias, why would they say 'the right of the people'? In other words, why wouldn't they say 'State militias have the right to keep arms'?\" Likewise, Justice Scalia declared:\nI don't see how there's any, any, any contradiction between reading the second clause as a\u2014as a personal guarantee and reading the first one as assuring the existence of a militia, not necessarily a State-managed militia because the militia that resisted the British was not State-managed. But why isn't it perfectly plausible, indeed reasonable, to assume that since the framers knew that the way militias were destroyed by tyrants in the past was not by passing a law against militias, but by taking away the people's weapons\u2014that was the way militias were destroyed. The two clauses go together beautifully: Since we need a militia, the right of the people to keep and bear arms shall not be infringed.\nAdditionally, Justice Kennedy indicated that he would support an individual right interpretation, suggesting that the purpose of the prefatory clause was to \"reaffirm the right to have a militia,\" with the operative clause establishing that \"there is a right to bear arms.\" Justice Kennedy's questioning further indicated that he might view a right to self-defense as being of a constitutional magnitude, suggesting that the Framers may have also been attempting to ensure the ability of \"the remote settler to defend himself and his family against hostile Indian tribes and outlaws, wolves and bears and grizzlies.\" While Justice Thomas remained silent during the oral argument, he had made statements in the past indicating support for an individual right interpretation of the Second Amendment.\n\n\t\tThe Decision in Heller\n\nOn June 26, 2008, the Supreme Court issued its decision, holding by a vote of 5-4 that the Second Amendment protects an individual right to possess a firearm, unconnected to service in a militia, and protects the right to use that arm for traditionally lawful purposes such as self-defense within the home. The opinion engaged in an extensive analysis of the text of the amendment. It first focused on the operative clause of the amendment (\"the right of the people to keep and bear Arms, shall not be infringed\"), finding that the textual elements of this clause and the historical background of the amendment \"guarantee the individual right to possess and carry weapons in case of confrontation.\" With regard to the prefatory clause (\"A well regulated Militia, being necessary to the security of a free State,\") the Court held that the term \"militia\" refers to all able-bodied men, as opposed to state and congressionally regulated military forces described in the Militia Clauses of the Constitution. The Court further held that \"the adjective 'well-regulated' implied nothing more than imposition of proper discipline and training,\" and that the phrase \"security of a free State\" refers to the security of a free polity as opposed to the security of each of the several states. \nAfter analyzing the operative and prefatory clause, the Court then addressed the issue of whether the prefatory clause \"fits\" with the operative clause that \"creates an individual right to keep and bear arms.\" The Court declared that the two clauses \"fit[] perfectly\" when viewed in light of the historical backdrop that motivated adoption of the Second Amendment. In particular, the Court pointed to the concern, raised by Justice Scalia in oral argument, of the Founding generation's knowledge that the federal government would disarm the people in order to disable the citizens' militia rather than banning the militia itself, which would then enable a politicized standing army or a select militia to rule. According to the Court, the amendment was thus designed to prevent Congress from abridging the \"ancient right of individuals to keep and bear arms, so that the ideal of a citizens' militia would be preserved.\"\nAfter reaching this conclusion, the Court examined its prior decisions relating to the Second Amendment in order to ascertain \"whether any of [its] prior precedents foreclose[] the conclusions [it] reached about the meaning of the Second Amendment.\" The Court first considered its ruling in United States v. Cruikshank , which held that the Second Amendment does not by its own force apply to anyone other than the federal government. There, the Cruikshank Court vacated the convictions of a white mob for depriving blacks of their right to keep and bear arms. Whereas past lower courts interpreted Cruikshank to support the proposition that the Second Amendment does not confer an individual right, the Heller Court stated that the decision in Cruikshank \"supports, if anything, the individual-rights interpretation.\" The Court stressed that their decision in Cruikshank described the right protected by the Second Amendment as the \"bearing [of] arms for a lawful purpose,\" and that \"the people must look for their protection against any violation by their fellow-citizens of the rights it recognizes to the States' police power.\" This discussion in Cruikshank , according to the Court in Heller , \"makes little sense if it is only a right to bear arms in a state militia.\"\nThe Court then turned to its prior ruling in Presser v. Illinois , which held that the right to keep and bear arms was not violated by a law that prohibited groups of men \"to associate together as military organizations, or to drill or parade with arms in cities and towns unless authorized by law.\" The Heller Court stated that this holding in Presser \"[did] not refute the individual-rights interpretation of the Amendment,\" and has no bearing on the Second Amendment's \"meaning or scope, beyond the fact that it does not prevent the prohibition of private paramilitary organizations.\"\nRegarding the holding in United States v. Miller , the Heller Court rejected the assertion that the decision in Miller established that the \"Second Amendment 'protects the right to keep and bear arms for certain military purposes, but ... does not curtail the legislature's power to regulate the nonmilitary use and ownership of weapons.'\" The Court declared that \" Miller did not hold that and cannot be possibly read to have held that,\" given that the decision in Miller was predicated on the determination that the \" type of weapon was not eligible for Second Amendment Protection.\" According to the Heller Court, the holding in Miller \"is not only consistent with, but positively suggests, that the Second Amendment confers an individual right to keep and bear arms (though only arms that 'have some reasonable relationship to the preservation or efficiency of a well regulated militia').\" The Court went on to note, \"[h]ad the [ Miller ] Court believed that the Second Amendment protects only those serving in the militia, it would have been odd to examine the character of the weapon rather than simply note that the two crooks were not militiamen.\" The Court concluded its consideration of this issue by stating, \" Miller stands only for the proposition that the Second Amendment right, whatever its nature, extends only to certain types of weapons.\"\nHaving determined that the Second Amendment confers an individual right and that precedent supports such an interpretation, the Court stressed, \"like most rights, the right secured by the Second Amendment is not unlimited.\" The Court noted that the right at issue had never been construed as allowing individuals \"to keep and carry any weapons whatsoever in any manner whatsoever and for whatever purpose,\" and that \"the majority of the 19 th century courts to consider the question held that prohibitions on carrying concealed weapons were lawful under the Second Amendment or state analogues.\" Moreover, the Court's opinion appears to indicate that current federal firearm laws are constitutionally tenable: \n[N]othing in our opinion should be taken to cast doubt on longstanding prohibitions on the possession of firearms by felons and the mentally ill, or laws forbidding the carrying of firearms in sensitive places such as schools and government buildings, or laws imposing conditions and qualifications on the commercial sale of arms. [fn 26: We identify these presumptively lawful regulatory measures only as examples; our list does not purport to be exhaustive.]\nThe Court further stressed: \nWe also recognize another important limitation on the right to keep and carry arms. Miller said, as we have explained, that the sorts of weapons protected were those \"in common use at the time.\" [citation omitted] We think that limitation is fairly supported by the historical tradition of prohibiting the carrying \"dangerous and unusual weapons.\" [citations omitted]\nThe Court in Heller ultimately affirmed the holding in Parker v. District of Columbia , ruling unconstitutional the three relevant provisions of the DC Code. The Court then declared that the inherent right of self-defense is central to the Second Amendment right, and that the District's handgun ban amounted to a prohibition of an entire class of arms that has been overwhelmingly utilized by American society for that purpose. It did not specify a governing standard of review for Second Amendment issues, but stated that the District's handgun ban violates \"any of the standards of scrutiny that we have applied to enumerated constitutional rights.\" The Court also struck down as unconstitutional the District's requirement that any lawful firearm in the home be disassembled or bound by a trigger lock, as such requirement \"makes it impossible for citizens to use arms for the core lawful purpose of self-defense.\" However, the Court's opinion did not address the District's licensing requirement (\u00a7 22-4504), making note of Heller's concession that such a requirement would be permissible if enforced in a manner that is not arbitrary and capricious.\nSubsequent to the Supreme Court decision, the District of Columbia amended its firearms laws to be in compliance with the ruling. However, there has been much legislative movement with respect to the District's firearms laws. For more information on DC gun laws, see CRS Report R40474, DC Gun Laws and Proposed Amendments , by [author name scrubbed].\n\n\t\tThe Second Amendment Post-Heller\n\nAlthough the decision in Heller marked the first time in almost 70 years that the Supreme Court addressed the nature of the right conferred by the Second Amendment, the Court itself noted that its decision did not constitute \"an exhaustive historical analysis ... of the full scope of the Second Amendment.\" Consequently, while the Court's opinion is extremely important simply by virtue of its determination that the Second Amendment protects an individual right to possess a firearm, it left unanswered many questions of significant constitutional magnitude. \nThe Court acknowledged the criticism that its ruling leaves \"so many applications of the right in doubt,\" and that \"it does not provid[e] extensive historical justification for those regulations of the right,\" which the Court described as constitutionally permissible. In response to such criticism, the Court explained:\n[S]ince this case represents this Court's first in-depth examination of the Second Amendment, one should not expect it to clarify the entire field.... And there will be time enough to expound upon the historical justifications for the exceptions we have mentioned if and when those exceptions come before us.\nA significant question left open by the Court centers on the standard of scrutiny that should be applied to laws regulating the possession and use of firearms. In Heller , the Court refused to establish or identify any such standard, declaring instead that the challenged provisions were unconstitutional \"[u]nder any of the standards of scrutiny that we have applied to enumerated constitutional rights.\" Yet, the Court did reject a test grounded in rational basis scrutiny, stating that \"if all that was required to overcome the right to keep and bear arms was a rational basis, the Second Amendment would be redundant with the separate constitutional prohibitions on irrational laws, and would have no effect.\" And, the Court explicitly rejected Justice Breyer's argument, raised in his dissent, that an \"interest-balancing inquiry\" that \"asks whether the statute burdens a protected interest in a way or to an extent that is out of proportion to the statute's salutary effects upon other important governmental interests\" should be applied. Responding to Justice Breyer's suggesting, the Court stated: \nWe know of no other enumerated constitutional right whose core protection has been subjected to a freestanding \"interest-balancing\" approach. The very enumeration of the right takes out of the hands of government\u2014even the Third Branch of Government\u2014the power to decide on a case-by-case basis whether the right is really worth insisting upon. A constitutional guarantee subject to future judges' assessments of its usefulness is no constitutional guarantee at all.\nAnother issue that was unresolved by the Court is whether the Second Amendment applies to the states. However, this issue was soon settled in the 2009 term of the Supreme Court when it decided McDonald v. City of Chicago , subsequently discussed. \n\n\tThe Second Amendment\u2014Does It Apply to the States?\n\nOn June 28, 2010, the Supreme Court issued its decision in McDonald v. City of Chicago . The issue before the Court in McDonald was whether the Second Amendment applies to, or is incorporated against, the states. An incorporation analysis generally asks whether the protections provided for in the first eight amendments of the Bill of Rights apply to state governments in the same manner that they directly apply to the federal government. Judicial treatment of incorporation has evolved over time, with the Court inquiring: (1) if the first eight amendments apply directly to the states; (2) if the Privileges or Immunities Clause of the Fourteenth Amendment guarantees these rights; and (3) if the Due Process Clause of the Fourteenth Amendment incorporates the protections provided for in the first eight amendments. These three inquiries are explained below. \n\n\t\tDirect Application\n\nInitially, in the early 19 th century, the Supreme Court had ruled in Barron v. Mayor & City Council of Baltimore that the protection of individual liberties in the Bill of Rights applied only to the federal government, not to state or local governments. Chief Justice John Marshall, writing for the Court, stated: \"The constitution was ordained and established by the people of the United States for themselves, for their own government, and not for the government of the individual states.\" He further stated that had the framers intended the Bill of Rights to apply to the states, \"they would have declared this purpose in plain and intelligible language.\" Although application of the Bill of Rights solely to the federal government would mean that state and local governments could then be free to infringe upon these individual protections, Chief Justice Marshall observed that \"[e]ach state established a constitution for itself, and in that constitution, provided such limitations and restrictions on the power of its particular government, as its judgment dictated.\" Although the argument continued to be made that the Bill of Rights applied directly to the states, the Court rejected this contention time and time again.\n\n\t\tPrivileges or Immunities Clause of the Fourteenth Amendment\n\nIt was not until after the Civil War when the Fourteenth Amendment was ratified that claimants resorted to the Privileges or Immunities Clause of Section 1 of the amendment for judicial protection. The Privileges or Immunities Clause provides: \"No State shall make or enforce any law which shall abridge the privileges or immunities of citizens of the United States.\"\nFive years after the Fourteenth Amendment was ratified, the Supreme Court, in Slaughter-House Cases , rejected the plaintiffs' assertions that a state law, which granted a monopoly to the City of New Orleans, was in violation of the U.S. Constitution because it created involuntary servitude, denied them equal protection of the laws, and abridged their privileges or immunities as citizens under the Thirteenth and Fourteenth Amendments. In rejecting the plaintiffs' challenge, the Court narrowly construed all of these provisions. With respect to the Privileges or Immunities Clause, the Court held that this Clause was not meant to protect individuals from state government actions and was not meant to be a basis for federal courts to invalidate state laws. In doing so, the Court first acknowledged: \"It is quite clear, then, that there is a citizenship of the United States, and a citizenship of a state, which are distinct from each other, and which depend upon different characteristics or circumstances in the individual.\" After making this distinction, the Court specifically stated that \"it is only the [privileges and immunities of the citizens of the United States] which are placed by this clause under the protection of the Federal Constitution, and that the [privileges and immunities of the citizen of the State] whatever they may be, are not intended to have any additional protection by the paragraph of this amendment.\" Furthermore, the Court stated that \"privileges and immunities relied on in the argument are those which belong to the citizens of the States as such, and that they are left to State governments for security and protection, and not by this article [the Fourteenth Amendment] placed under the special care of the Federal government.\" While this ruling has never been expressly overturned, and therefore generally continues to preclude use of the Privileges or Immunities Clause to apply the Bill of Rights, Justice Thomas addressed the Clause as it applies to the Second Amendment at length in his concurring opinion in McDonald (see infra ). \n\n\t\tDue Process Clause of the Fourteenth Amendment\n\nIn the early 20 th century, the Supreme Court in Twining v. New Jersey recognized the possibility that the Due Process Clause of the Fourteenth Amendment incorporates provisions of the Bill of Rights, thereby making them applicable to state and local governments. The Due Process Clause of the Fourteenth Amendment provides: \"[N]or shall any State deprive any person of life, liberty, or property, without due process of law.\" In Twining , the Court observed that\n[I]t is possible that some of the personal rights safeguarded by the first eight Amendments against National action may also be safeguarded against state action, because a denial of them would be a denial of due process of law ... not because those rights are enumerated in the first eight Amendments, but because they are of such nature that they are included in the conception of due process of law. \nAlthough the Court acknowledged that the Due Process Clause included \"principles of justice so rooted in the tradition and conscience of our people as to be ranked fundamental,\" and therefore \"implicit in the concept of ordered liberty,\" the Court, despite debate, has never endorsed total incorporation of all of the Bill of Rights. Rather, the Court embraced what has become known as the doctrine of \"selective incorporation,\" which holds that the Due Process Clause incorporates the text of certain provisions of the Bill of Rights. It was in Gitlow v. New York that the Supreme Court for the first time said that the First Amendment's protection of freedom of speech applies to the states through its incorporation into the Due Process Clause of the Fourteenth Amendment. Although the Court held that New York's criminal anarchy statute did not violate the Fourteenth Amendment because the state was properly exercising its police power, the Court, in finding incorporation, stated, \"[F]reedom of speech and of the press ... are among the fundamental personal rights and 'liberties' protected by the due process clause of the Fourteenth Amendment from impairment by the States.\"\nPrior to McDonald , the Supreme Court had found the following provisions of the Bill of Rights to be incorporated: \nThe First Amendment's establishment clause, free exercise clause, and protection of speech, press, assembly, and petition. The Fourth Amendment's protection against unreasonable searches and seizures and the requirement for a warrant based on probable cause; also the exclusionary rule, which prevents the government from using evidence obtained in violation of the Fourth Amendment. The Fifth Amendment's prohibition of double jeopardy, protection against self-incrimination, and requirement that the government pay just compensation when it takes private property for public use. The Sixth Amendment's requirements for speedy and public trial, by an impartial jury, with notice of the charges, and for the chance to confront adverse witnesses, to have compulsory process to obtain favorable witnesses, and to have assistance of counsel if the sentence involves possible imprisonment. The Eight Amendment's prohibition against excessive bail and cruel and unusual punishment. \nOver time, the Court has articulated various tests for deciding whether a provision of the Bill of Rights is incorporated through the Due Process Clause of the Fourteenth Amendment. The Supreme Court in Duncan v. Louisiana summarized these formulations, stating, \"the question has been asked whether a right is among those 'fundamental principles of liberty and justice which lie at the base of all our civil and political institutions ...' whether it is 'basic in our system of jurisprudence ...' and whether it 'is a fundamental right, essential to a fair trial.' \" The Court also noted, in discussing state criminal processes, that \"the question ... is ... whether given this kind of [common-law] system a particular procedure is fundamental\u2014whether, that is, a procedure is necessary to an Anglo-American regime of ordered liberty.\"\n\n\t\tHas the Supreme Court Addressed Incorporation of the Second Amendment via the Due Process Clause?\n\nOver 100 years ago, the Supreme Court held in United States v. Cruikshank that the Second Amendment does not act as a constraint upon state law. In its brief treatment of the Second Amendment, the Court in Cruikshank stated that \"this is one of the amendments that has no other effect than to restrict the powers of the national government.\" This holding was reaffirmed in Presser v. Illinois , where the Court further commented that because \"all citizens capable of bearing arms constitute the reserved military force or reserve militia of the United States as well as of the States,\" the \"States cannot, even laying the constitutional provision [aside], prohibit the people from keeping and bearing arms, so as to deprive the United States of their rightful resource for maintaining the public security, and disable the people from performing their duty to the general government.\" In other words, the Court seemed to be of the opinion that there was no need to rely upon the Second Amendment to act as a constraint upon state law, because states could not go so far as to prohibit the people from owning firearms as doing so would interfere with the United States' ability to rely on its reserved military force\u2014defined as \"citizens capable of bearing arms\"\u2014to maintain the public security. Both of these decisions were decided shortly after the Slaughter-House Cases decision, and prior to the advent of modern incorporation principles (discussed above).\nIn Heller , the Court commented upon the issue of incorporation, stating: \nWith respect to Cruikshank 's continuing validity on incorporation, a question not presented by this case, we note that Cruikshank also said that the First Amendment did not apply against the States and did not engage in the sort of Fourteenth Amendment inquiry required by our later cases. Our decisions in Presser v. Illinois (citation omitted) and Miller v. Texas , 153 U.S. 535, 538, 14 S.Ct. 874, 38 L.Ed. 812 (1894), reaffirmed that the Second Amendment applies only to the Federal Government. \nAt the time, this statement seemed to leave open the possibility that were the issue of incorporation to come before the Supreme Court, the Court would either support the application of modern incorporation doctrine principles to the Second Amendment or continue with the precedents found in Cruikshank and Presser that the Second Amendment does not apply to the states.\n\n\t\tPost-Heller Appellate Decisions and Incorporation of the Second Amendment\n\nAfter the Heller decision, three courts of appeals addressed whether the Second Amendment applies to the states, that is, via direct application or via incorporation through the Due Process Clause of the Fourteenth Amendment. The U.S. Courts of Appeals for the Second Circuit and Seventh Circuit both held that the Second Amendment does not apply to the states, whereas the Court of Appeals for the Ninth Circuit in Nordyke v. King held that the Second Amendment is applicable to the states, though it later vacated its decision in light of McDonald .\n\n\t\t\tThe Second and Seventh Circuit Decisions\n\nThe U.S. Court of Appeals for the Second Circuit (Second Circuit) was the first to address this issue in Maloney v. Rice. In Maloney , the plaintiff sought a declaration that a New York penal law that punishes the possession of nunchukas was unconstitutional. On appeal, the plaintiff argued that the state statutory ban violates the Second Amendment because it infringes on his right to keep and bear arms. The court, citing Presser , held that the state law did not violate the Second Amendment because \"it is settled law ... that the Second Amendment applies only to limitations the federal government seeks to impose on this right.\" The court noted that, although Heller might have questioned the continuing validity of this principle, Supreme Court precedent directed them to follow Presser because \"[w]here, as here, a Supreme Court precedent 'has direct application in a case, yet appears to rest on reasons rejected in some other line of decisions, the Court of Appeals should follow the case which directly controls, leaving to the Supreme Court the prerogative of overruling its own decisions.'\"\nSimilarly, in National Rifle Association v. City of Chicago , the U.S. Court of Appeals for the Seventh Circuit (Seventh Circuit) held that the Second Amendment does not apply to the states. Here, the National Rifle Association (NRA) appealed the decision of the lower court to dismiss its suits against two municipalities on the ground that Heller dealt with law enacted under the authority of the national government, while the City of Chicago and Village of Oak Park are subordinate bodies of a state. Although the NRA case was decided after the Ninth Circuit's decision in Nordyke v. King , which held the opposite, the Seventh Circuit stated that the Supreme Court's decisions in Cruikshank , Presser , and Miller still control, as they have direct application in the case. The court noted that, although Heller questioned Cruikshank , this \"[did] not license inferior courts to go their own ways.... If a court of appeals may strike off on its own, this not only undermines the uniformity of national law but also may compel the Justices to grant certiorari before they think the question ripe for decision.\" \n\n\t\t\tThe Ninth Circuit Decision\n\nOn April 20, 2009, the U.S. Court of Appeals for the Ninth Circuit in Nordyke v. King held that the Due Process Clause of the Fourteenth Amendment incorporated the Second Amendment and applied it against the states and local governments. However, the Chief Judge issued an order on July 29, 2009, stating that the Ninth Circuit would rehear the case en banc and that the three-judge panel decision issued in April 2009 was not to be cited as precedent by or to any court of the Ninth Circuit. Following the McDonald decision, the Ninth Circuit vacated the panel decision and remanded the case for further consideration. Despite these developments, this report examines the April 2009 opinion, as the Court in McDonald followed a similar analysis when it examined the Second Amendment through the Due Process Clause of the Fourteenth Amendment.\nNordyke stated that there are three doctrinal ways the Second Amendment could apply to the states: (1) direct application, (2) guaranteed as a right by the Privileges or Immunities Clause of the Fourteenth Amendment, or (3) incorporation by the Due Process Clause of the Fourteenth Amendment. Citing precedent, the court held that it was precluded from finding incorporation through the first two options. The court then embarked on an analysis under the Due Process Clause of the Fourteenth Amendment. It began by noting that \"[s]elective incorporation is a species of substantive due process, in which the rights the Due Process Clause protects include some of the substantive rights enumerated in the first eight amendments of the Constitution.\" The court stated that addressing either selective incorporation, which addresses enumerated rights, or substantive due process, which addresses unenumerated rights, requires the court to answer if \"a right is so fundamental that the Due Process Clause guarantees it.\"\nTo answer this, the Ninth Circuit, although acknowledging other standards used in selective incorporation analyses, applied another standard the Supreme Court used \"outside the context of incorporation\" to determine whether an individual right unconnected to criminal or trial procedures is a fundamental right protected by substantive due process. Specifically, the Ninth Circuit inquired \"whether the right to keep and bear arms ranks as fundamental, meaning 'necessary to an Anglo-American regime of ordered liberty' ... [which compelled them] to determine whether the right is 'deeply rooted in this Nation's history and tradition' (emphasis added).\" The inquiry \"deeply rooted in this Nation's history and tradition\" stems from Moore v. City of East Cleveland , where the Supreme Court recognized a fundamental right to keep family together that includes an extended family. Noting that \"incorporation is logically a part of substantive due process,\" the court in Nordyke applied the standard from Moore because that case noted \"the similarity between ... general substantive due process and the incorporation inquiry stated in Duncan [ v. Louisiana ].\" As will be seen infra , the Supreme Court in McDonald generally abstained from addressing that its past decisions had linked the Due Process Clause with a substantive due process analysis even though it also utilized the \"deeply rooted in our Nation's history\" standard. However, Justice Stevens, dissenting, conducted his own substantive due process analysis and concluded that the right is not incorporated.\nAfter engaging in a historical analysis of the right during the Founding era, the post-Revolutionary years, and the post-Civil War era, and drawing from some of the Supreme Court's findings in Heller , the Ninth Circuit concluded that the Second Amendment is incorporated and applies against state and local governments because \"the crucial role [of this] deeply rooted right ... compels us to recognize that it is indeed fundamental [and] necessary to the Anglo-American conception of the ordered liberty that we have inherited.\" \nTypically, when a right is deemed fundamental, the court must use the strict scrutiny test as the standard of review, meaning that \"a law will be upheld if it is necessary to achieve a compelling government purpose.\" Although the Ninth Circuit concluded that the Second Amendment was a fundamental right, it did not apply the strict scrutiny test to the challenged county ordinance. Rather, it noted that the Supreme Court in Heller did not announce a standard of review and held that the challenged ordinance, which prohibited the possession of firearms or ammunition on county property, \"fits within the exception from the Second Amendment for 'sensitive places' that Heller recognized.\" \n\n\tThe McDonald v. City of Chicago Decision\n\nOn June 28, 2010, the Supreme Court issued its decision in McDonald v. City of Chicago . The petitioners, Otis McDonald and other residents of Chicago and the Village of Oak Park, Illinois, asserted that certain municipal ordinances prevented them from keeping handguns in their homes for self-defense. The Chicago ordinance provided: \"No person ... shall ... possess ... any firearm unless such person is the holder of a valid registration certificate of such firearm.\" The Chicago Code, however, prohibited the registration of most handguns, which \"effectively ban[s] handgun possession by almost all private citizens who reside in the City.\" Similarly, Oak Park made it \"unlawful for any person to possess ... any firearm,\" a term that included \"pistols, revolvers, guns and small arms ... commonly known as handguns.\"\nPetitioners advocated for incorporation of the Second Amendment against the states either under the Fourteenth Amendment's Privileges or Immunities Clause or under the Fourteenth Amendment's Due Process Clause. It is worth noting that the petitioners devoted much of their brief and oral argument for application of the Second Amendment via the Privileges or Immunities Clause of the Fourteenth Amendment. On the other hand, the NRA, who was recognized by the Court as a \"respondent\" in support of the petitioners' (McDonald) group, primarily argued for incorporation of the Second Amendment via the Due Process Clause of the Fourteenth Amendment.\nAlthough five Justices agreed that the Second Amendment applies to the states, these Justices came to different conclusions as to how the amendment is incorporated, resulting in a fractured opinion. Justice Alito delivered the opinion of the Court and concluded that the Due Process Clause of the Fourteenth Amendment incorporates the Second Amendment. This opinion was joined by Chief Justice Roberts, and Justices Scalia and Kennedy. Justice Thomas, however, filed a concurring opinion in which he concluded that the Privileges or Immunities Clause of the Fourteenth Amendment guarantees the right to keep and bear arms. Two dissenting opinions were filed. Justice Stevens opined that whether the Second Amendment applies should be analyzed under a substantive due process analysis, and that \"the analysis should depend on whether there is a constitutionally protected liberty to keep handguns in the home ... which he [consequently] did not believe existed due to the 'fundamentally ambivalent relationship' of firearms to liberty.\" The second dissenting opinion was authored by Justice Breyer, joined by Justices Ginsburg and Sotomayor, who opined that the history of the right is so uncertain that it does not support incorporation; that determining the constitutionality of a particular state gun law is outside the Court's scope and expertise; and that incorporation would intrude significantly upon state police power. \n\n\t\tJustice Alito's Majority and Plurality Opinion: Incorporation of the Second Amendment via the Due Process Clause of the Fourteenth Amendment\n\nJustice Alito, writing for the Court, revisited the precedents in Barron and Slaughter-House Cases , which precluded application of the Bill of Rights either by direct application or the Privileges or Immunities Clause of the Fourteenth Amendment, respectively. Although Justice Alito, writing for the plurality, declined to disturb these holdings, and further acknowledged that the Court's decisions in Cruikshank , Presser , and Miller held that the Second Amendment applies only to the federal government, he stated that those decisions \"do not preclude us from considering whether the Due Process Clause of the Fourteenth Amendment makes the Second Amendment right binding on the States.\"\nBefore analyzing how the Fourteenth Amendment incorporates the Second Amendment, the Court first examined the evolution of its Due Process Clause analysis. It noted five features of its earlier approach to a Due Process Clause analysis, which included \nviewing \"the due process question as entirely separate from the question whether a right was a privilege or immunity of national citizenship\"; the use of \"different formulations in describing the boundaries of due process,\" which included looking to \"immutable principles of justice which no member of the Union may disregard,\" or protecting rights that are \"so rooted in the traditions and conscience of our people as to be ranked fundamental,\" and that are \"the very essence of a scheme of ordered liberty ... and essential to 'a fair and enlightened system of justice'\"; asking whether any other \"civilized system could be imagined\" as not affording a particular procedural safeguard before compelling a state to recognize a particular right; recognizing that some rights set out in the Bill of Rights failed to meet the test for inclusion within the protection of the Due Process Clause; and holding that even if a right was protected against state infringement that \"the protection or remedies afforded against [the state] sometimes differed from the protection or remedies provided against abridgment by the Federal Government.\"\nOut of these five features, the Court pointed out that later cases, which selectively incorporated certain rights, abandoned three of the previously noted characteristics. The Court, instead of examining \" any civilized system,\" now asks \"whether a particular guarantee is fundamental to our scheme of ordered liberty and system of justice.\" The second feature the Court has shed was any prior \"reluctance to hold that rights guaranteed by the Bill of Rights met the requirements for protection under the Due Process Clause,\" stating that the Court has incorporated almost all of its provisions, as discussed above. Lastly, the Court has \"abandoned 'the notion that the Fourteenth Amendment applies to the States only a watered-down, subjective version of the individual guarantees of the Bill of Rights,' stating that it would be 'incongruous' to apply different standards 'depending on whether the claim was asserted in a state or federal court.'\" With some exceptions, the Court has held that incorporated Bill of Rights protections \"'are all to be enforced against the States under the Fourteenth Amendment according to the same standards that protect those personal rights against federal encroachment.'\"\nWith this modern framework for analyzing if a right comes under the protection of the Due Process Clause, the Court turned to the issue of whether the Second Amendment was just such a right that was incorporated in the concept of due process. The Court, similar to the Ninth Circuit, analyzed whether \"the right to keep and bear arms is fundamental to our scheme of ordered liberty, (citation omitted) or as [it has] said in a related context, whether this right is 'deeply rooted in this Nation's history and tradition' Washington v. Glucksberg , 521 U.S. 702, 721 (1997) (internal quotation marks omitted).\" \nTurning back to its decision in Heller , the Court emphasized self-defense as a basic right that is the \"central component\" of the Second Amendment right. It reiterated that it had found \"the need for defense of self, family, and property [as] most acute\" in the home and that the right applies to handguns because they are \"the most preferred firearm in the nation to 'keep' and use for protection of one's home and family.\" Thus, the Court's decision appeared to concentrate on whether the Fourteenth Amendment's Due Process Clause incorporated the Second Amendment as it was defined in Heller , that is, the right to keep and bear arms for a lawful purpose such as self-defense and that it protects those weapons typically possessed by law-abiding citizens for lawful purposes. In the Court's review of historical evidence from both the Framing-era of the Bill of Rights and the ratifying era of the Fourteenth Amendment, it believed it to be \"clear that the Framers and ratifiers ... counted the right to keep and bear arms among those fundamental rights necessary to our system of ordered liberty.\"\nAccording to the Court, both Federalists and Antifederalists of the Framing-era considered the right to keep and bear arms as fundamental to the newly formed system of government, but differed as to whether the right was sufficiently protected. Federalists believed that the right was adequately protected due to the limited powers assigned to the federal government, while Antifederalists, who feared that the new federal government would infringe on traditional rights, insisted on the adoption of the Bill of Rights as a condition of ratification. By the mid-19 th century, the Court found that the Second Amendment \"was still highly valued for the purposes of self-defense\" even though the perceived threat of the federal government's intrusion had faded. \nAccording to the Court, in the aftermath of the Civil War, southern states and militia members made \"systematic efforts\" to disarm African Americans, to which the 39 th Congress decided that legislative action was necessary. The legislative actions included the Freedmen's Bureau Act and the Civil Rights Act of 1866, both of which the Court found demonstrated that the right to keep and bear arms was still recognized as fundamental. Specifically, Section 14 of the Freedmen's Bureau Act provided that \"the right ... to have full and equal benefit of all laws and proceedings concerning personal liberty, personal security, and the acquisition, enjoyment, and disposition of estate, real and personal, including the constitutional right to bear arms , shall be secured to and enjoyed by all citizens ... without respect to race or color, or previous condition of slavery (emphasis added).\" Section 1 of the Civil Rights Act, similarly, guaranteed the \"full and equal benefit of all laws and proceedings for the security of person and property, as is enjoyed by white citizens.\" Although the Civil Rights Act does not explicitly define the meaning of \"all laws and proceedings,\" the Court stated that Representative Bingham, one of the drafters of the Fourteenth Amendment, believed the act \"protected the same rights as enumerated in the Freedmen's Bureau bill.\" Based on this evidence, the Court concluded that \"the Civil Rights Act, like the Freedmen's Bureau Act, aimed to protect 'the constitutional right to bear arms' and not simply to prohibit discrimination\" and that \"[t]oday, it is generally accepted that the Fourteenth Amendment was understood to provide a constitutional basis for protecting the rights set out in the Civil Rights Act.\" In addition, the Court presented excerpts of the congressional debates on the Fourteenth Amendment, and from the period immediately following ratification of the amendment, as well as emphasized the number of state constitutions that recognized the right, as evidence that the right to keep and bear arms was considered fundamental.\nAlthough the Court found incorporation under the Due Process Clause, the plurality chose to address an argument made by respondents concerning the Privileges or Immunities Clause, specifically that the historical record provides no basis for imposing the Second Amendment on the states, and that Section 1, presumably in its entirety, was \"overwhelmingly\" viewed by Members of the U.S. House of Representatives as an antidiscrimination rule. The respondents' end point seemed to be that mixed understanding and divided views among 19 th century legislators and legal scholars alike demonstrate that the public could not have understood the reach of the Privileges or Immunities Clause or understood that the Clause incorporated the Bill of Rights. The Court, however, focused on the assertion that Section 1 would only outlaw discriminatory measures and stated five reasons as to why such a construction would be \"implausible.\" These reasons included (1) that if Section 1 did no more than prohibit discrimination, it would be plausible that \"the Fourth Amendment, as applied to the states, would not prohibit all unreasonable searches and seizures, but only discriminatory searches and seizure\"; (2) that the Freedmen's Bureau Act must be read as more than a simple prohibition of racial discrimination because it would have been nonsensical for Congress to guarantee \"the full and equal benefit\" of \"the constitutional right to bear arms,\" if it did not exist; and (3) that if the 39 th Congress and the ratifying public had simply prohibited racial discrimination with respect to the bearing of arms, opponents of the Black Codes, laws that deprived blacks of their rights, would have been left without the means of self-defense.\n\n\t\tJustice Thomas's Concurring Opinion: Application of the Second Amendment via the Privileges or Immunities Clause\n\nAlthough the plurality declined to find incorporation under the Privileges or Immunities Clause, Justice Thomas in his concurring opinion proceeded with his own analysis of the Second Amendment's application through the Clause, because he could \"not agree that it is enforceable against the States through a clause that speaks only to 'process.'\" Justice Thomas took to task the Court's precedent where it has determined that the Due Process Clause applies to unenumerated rights against the states, believing that \"neither its text nor its history suggests that it protects the many substantive rights this Court's cases now claim it does.\" In acknowledging the numerous cases founded upon the substantive due process framework and the importance of stare decisis , Justice Thomas stated that his only task at hand is to decide \"to what extent, [a] particular clause in the Constitution protects the particular right at issue\" and that the objective of his inquiry is to \"discern what 'ordinary citizens' at the time of ratification would have understood the Privileges or Immunities Clause to mean.\" \nFirst, Justice Thomas found that \"the terms 'privileges' and 'immunities' had an established meaning as synonyms for 'rights.'\" Second, in tracing the English roots, he concluded that the \"[F]ounding generation generally did not consider many of the rights identified in [the] amendments as new entitlements, but as inalienable rights of all men,\" and that \"both the States and Federal Government had long recognized the inalienable rights of state citizenship.\" Third, he concluded that Article IV, \u00a7 2, which provides that \"[t]he Citizens of each State shall be entitled to all Privileges and Immunities of Citizens in the several States,\" protected traveling citizens against state discrimination with respect to the fundamental rights of state citizenship. Noting textual similarity between Article IV, \u00a7 2 and that of the Privileges or Immunities Clause (\u00a7 1) of the Fourteenth Amendment, Justice Thomas stated that \"it can be assumed that the public's understanding of the latter was informed by its understanding of the former.\" Therefore, to determine whether the Second Amendment was one of the rights guaranteed in the Fourteenth Amendment's Privileges or Immunities Clause, he explored two remaining questions. \nFirst, he asked if \"the privileges or immunities of 'citizens of the United States' recognized by \u00a7 1 [are] the same as the privileges and immunities of 'citizens in the several States' to which Article IV, \u00a7 2 refers?\" To a certain extent, Justice Thomas implicitly answered this question by referring to some instances where politicians debating the Fourteenth Amendment and legal commentators equated the privileges and immunities of \u00a7 1 to those referred to in Article IV, \u00a7\u00a02. However, much of Justice Thomas's analysis focused on presenting evidence, such as treaties, congressional speeches, and legislation of the era. From these various sources, Justice Thomas concluded that the \"evidence overwhelmingly demonstrates\" that \"the ratifying public understood the Privileges or Immunities Clause to protect constitutionally enumerated rights, including the right to keep and bear arms.\"\nThe second question asked is if \"\u00a7 1 [of the Fourteenth Amendment], like Article IV, \u00a7 2 prohibits only discrimination with respect to certain rights if the State chooses to recognize them, or does it require States to recognize those rights?\" Or, more specifically applied to the right at issue, \"whether the Privileges or Immunities Clause merely prohibits States from discriminating among citizens if they recognize the Second Amendment's right to keep and bear arms, or whether the Clause requires States to recognize the right.\" In his analysis, Justice Thomas seemed to answer this question by stating \"it was understood that liberty would be assured little protection if \u00a71 left each State to decide which privileges or immunities of United States citizenship it would protect.\" However, a greater part of his discussion to this second question was devoted to why the Privileges or Immunities Clause protects against more than just state discrimination and establishes a \"minimum baseline of rights for all American citizens.\"\nFirst, Justice Thomas pointed out that the Privileges or Immunities Clause uses the verb \"abridge\" rather than \"discriminate,\" to describe the limit it imposes on state authority (\"[n]o State shall\"). He referred to the dictionary which defines the word \"abridge\" to mean \"[t]o deprive; to cut off ... as, to abridge one of his rights.\" Thus, a plain reading of the Clause indicates that it is meant to impose a limitation on state power to infringe upon pre-existing substantive rights and does not indicate that the Framers of the Clause used \"abridge\" to prohibit only discrimination. Second, Justice Thomas presented several reasons as to the lack of discussion on this Clause and Section 1 to rebut the \"typical\" argument that because there was no extensive public discussion on the Clause, that it must \"not have been understood to accomplish such a significant task of subjecting States to federal enforcement of minimum baseline of rights.\" He, instead, looked to historical events that \"underscored the need for, and wide agreement upon, federal enforcement of constitutionally enumerated rights against the States, including the right to keep and bear arms.\" Chronicling the many instances prior to, and after, the Civil War where pro-slavery forces and southern legislatures enacted laws that \"repressed virtually every right recognized in the Constitution\" including prohibiting blacks from carrying or possessing firearms, Justice Thomas, reiterating the Court, stated that \"if the Fourteenth Amendment 'had outlawed only those laws that discriminate on the basis of race or previous condition of servitude, African-Americans in the South would likely have remained vulnerable to attack by many of their worst abusers: the state militia and state peace officers.'\" In other words, because evidence demonstrates that the intent was to protect blacks from such abuses, the Clause, contrary to respondents' claim, cannot simply be about protection from discriminatory state laws, as a nondiscriminatory law banning firearm possession outright would have still \"left firearms in the hands of militia and local peace officers.\" Building upon his Privileges or Immunities Clause analysis, Justice Thomas concluded that \"history confirms what the text of the ... Clause most naturally suggests: ... that '[n]o State shall ... abridge' the rights of United States citizens, the Clause establishes a minimum baseline of federal rights, and the constitutional right to keep and bear arms plainly was among them.\"\n\n\t\tJustice Stevens's Dissenting Opinion: No Incorporation Under a Substantive Due Process Analysis\n\nJustice Stevens began his dissent by rephrasing the question presented. Rather than asking if the Fourteenth Amendment incorporates the Second Amendment, a question he believed to be settled by the Cruickshank , Presser , and Miller decisions, the question he posed was \"whether the Constitution 'guarantees individuals to a fundamental right,' enforceable against the States, 'to possess a functional, personal firearm, including a handgun, within the home.'\" \nHe stated that the Court's decisions that render procedural guarantees in the Bill of Rights enforceable against the states have little impact on the meaning of the word \"liberty\" in the Clause or about the scope of its protection of nonprocedural rights, such as the Second Amendment. Asserting that a substantive due process analysis must be used to determine if the Second Amendment should be applied to the states, his dissent provided a \"fresh survey of this old terrain.\" Justice Stevens presented three general principles elicited from the Court's substantive due process case law. First, he stated \"that the rights protected by the Due Process Clause are not merely procedural in nature.\" A second principle made clear by case law is that substantive due process is fundamentally a matter of personal liberty, in which it must be asked if the interest asserted is \"compromised within the term liberty.\" The third principle derived from case law is that \"the rights protected against state infringement by the Fourteenth Amendment's Due Process Clause need not be identical in shape or scope to the rights protected against Federal Government infringement by the various provisions of the Bill of Rights.\" He also forewarned that \"the costs of federal courts' imposing a uniform national standard may be especially high when the relevant regulatory interests vary significantly across localities, and when the ruling implicates the States' core police powers.\"\nJustice Stevens disagreed with the plurality that the historical pedigree of a right is dispositive of its status under the Due Process Clause, and its suggestion \"that only interests that have proved 'fundamental from an American perspective,' ... or 'deeply rooted in this Nation's history and tradition,' to the Court's satisfaction, may qualify for incorporation into the Fourteenth Amendment.\" He stated that although the tests have varied, the Court \"has been largely consistent in its liberty-based approach to substantive interests outside of the adjudicatory system,\" and that the focus has been \"not so much on the historical conceptions of the guarantee as on its functional significance within the States' regimes.\" \nWith this framework, Justice Stevens believed it necessary to examine the \"nature of the right that petitioners have asserted,\" and \"whether [the right asserted] is an aspect of Fourteenth Amendment 'liberty.'\" Finding the gravamen behind petitioners' complaint plainly to be \"an appeal to keep a handgun or other firearm of one's choosing in the home,\" Justice Stevens stated that the petitioners' argument \"has real force\" but felt that a number of factors supported the respondents. \nFirst, Justice Stevens stated that \"firearms have a fundamentally ambivalent relationship to liberty.\" On the one hand, \"[g]uns may be useful for self-defense, as well as hunting and sport, but they also have a unique potential to facilitate death and destruction and thereby to destabilize ordered liberty.\" Second, \"the right to possess a firearm of one's choosing is different in kind from the liberty interests [the Court] has recognized under the Due Process Clause\" and that is \"not the kind of substantive interest ... on which a uniform, judicially enforced national standard is presumptively appropriate.\" Third, the experience of other advanced democracies undermines \"the notion that an expansive right to keep and bear arms is intrinsic to ordered liberty.\" Fourth, Justice Stevens reasoned that the Second Amendment differs from the other Amendments in that it is a federalism provision and that \"it is directed at preserving the autonomy of the sovereign States, and its logic therefore 'resists' incorporation by a federal court against the States.\" In other words, because the Second Amendment, like the Tenth Amendment, exists for the vitality of the states, one cannot argue that it applies to the states. Furthermore, Justice Stevens stated the reasons that motivated the Framers or Reconstruction Congress to act \"have only a limited bearing on the question that confronts the homeowner in a crime-infested metropolis today.\" Fifth, he emphasized that the \"idea that States may place substantial restrictions on the right to keep and bear arms short of complete disarmament, is in fact, far more entrenched than the notion that the Federal Constitution protects any such right.\" Agreeing with the Seventh Circuit that \"[f]ederalism is a far 'older and more deeply rooted tradition than is a right to carry,' or to own, 'any particular kind of weapon,'\" Justice Stevens noted that the Court's ruling in particular will take a \"heavy toll in terms of state sovereignty.\" Lastly, due to the varying patterns of gun violence and traditions and cultures of lawful gun use across the states and localities, among other things, Justice Stevens asserted that even if the Court could assert a plausible constitutional basis for intervening, that it should not necessarily do so. \nJustice Scalia also wrote a concurring opinion, which takes issue with the substantive due process, or \"liberty clause\" analysis espoused by Justice Stevens. Justice Scalia primarily critiqued the subjective nature of the standard proposed by the dissent, stating that any of the guideposts or constraints listed by Justice Stevens still leaves too much power in the hands of judges, ultimately depriving people of power.\n\n\t\tJustice Breyer's Dissenting Opinion: No Incorporation Under Due Process Clause\n\nJustice Breyer issued a separate dissenting opinion, in which Justices Ginsburg and Sotomayor joined. Noting Justice Stevens's conclusion that the Fourteenth Amendment's guarantee of substantive due process does not include a general right to keep and bear firearms for purposes of self-defense, Justice Breyer chose to consider separately the question of \"incorporation\" as the Court had done so when it asked \"if the Second Amendment right to private self-defense is 'fundamental' so that it applies to the States through the Fourteenth Amendment.\" In short, Justice Breyer concluded that he could \"find nothing in the Second Amendment's text, history, or underlying rationale that could warrant characterizing it as 'fundamental' insofar as it seeks to protect the keeping and bearing of arms for private-self-defense purposes.\"\nFirst, Justice Breyer revisited the Heller decision by stating that the Court had based its conclusion \"almost exclusively upon its reading of history.\" Yet, he cited numerous articles by historians, scholars, and judges that the history underlying the Heller decision is far from clear. Given the Court's emphasis on the historical pedigree of the right, he thus posited \"where Heller 's historical foundations are so uncertain, why extend its applicability?\" However, Justice Breyer expressed that the Court \"has never stated that the historical status of a right is the only relevant consideration,\" but rather it has asked if the \"right in question has remained fundamental over time.\" Furthermore, he opined that the Court should look to other factors where history does not provide a clear answer. These factors include \"the nature of the right; any contemporary disagreement about whether the right is fundamental; the extent to which incorporation will further other ... constitutional aims; and the extent to which incorporation will advance or hinder the Constitution's structural aims, including its division of powers among different governmental institutions.\" \nJustice Breyer applied these factors to the \"private right of self-defense\" as it is considered \"the central component\" of the Second Amendment by the Court in Heller . With respect to these factors, he found (1) that there is disagreement, or no consensus, that the private right of self-defense is fundamental; (2) that there is no reason to believe that incorporation will further any broader constitutional objectives; and (3) that incorporation of the right will disrupt the constitutional allocation of decision-making authority. Justice Breyer gave several reasons in support of this last factor, including that incorporation of the right recognized in Heller \"would amount to an incursion on a traditional and important area of state concern, altering the constitutional relationship between the States and the Federal Government.\" Additionally, because \"determining the constitutionality of a particular state gun law requires finding answers to complex empirically based questions,\" he made the case that the courts are not suited with either the expertise or the tools to weigh the constitutional right to bear arms \"against the 'primary concern of every government\u2014a concern for the safety and indeed the lives of its citizens'\" (citation omitted). In light of these factors, he suggested that the Court could proceed in examining state gun regulation by \"adopting a jurisprudential approach similar to the many state courts that administer a state constitutional right to bear arms.\" However, he noted that the Court has not only not done so, but also rejected an \"interest-balancing approach\" similar to that utilized by the states.\nSecond, Justice Breyer returned to examine history after determining that none of the factors supported incorporation. Because the Court examined whether the interests the Second Amendment protects are \"deeply rooted in this Nation's history and tradition,\" Justice Breyer declared that the question, thus, is not whether there are references to the right to bear arms for self-defense throughout the Nation's history as there naturally would be, but rather \"whether there is a consensus that so substantial a private self-defense right as the one described in Heller applies to the States.\" Although the Court in Heller collected much evidence, Justice Breyer stated that he found \"no more than ambiguity and uncertainty\" when he supplemented the findings in Heller with additional historical facts from the 18 th , 19 th , 20 th , and 21 st centuries. He declared that \"a historical record that is so ambiguous cannot itself provide an adequate basis for incorporating a private right of self-defense and applying it against the States.\"\nThe plurality opinion criticized Justice Breyer's dissent on four grounds. First, it did not approve of his assertion that \"there is no popular consensus\" that the right is fundamental, stating that the Court has never used \"popular consensus\" as a rule for finding incorporation. Second, the plurality did not agree with his argument that \"the right does not protect minorities or persons holding political power\" when he argued that incorporation should not be found because the right at issue does not further any broader constitutional objective. The plurality countered by citing petitioners' and other supporting briefs' claims that the right is especially important for women and members of groups vulnerable to crime as evidence that the Second Amendment right protects \"the rights of minorities and other residents of high-crime areas whose needs are not being met by elected public officials.\" Third, the plurality agreed with Justice Breyer that incorporation will limit the legislative freedom of the states, but it was not convinced that this argument was persuasive in finding a lack of incorporation, given that a limitation on the states always exists when a provision is incorporated. Last, the plurality disagreed with Justice Breyer's argument that \"incorporation will require judges to assess the costs and benefits of firearms restrictions,\" because \"[t]he very enumeration of the right takes out of the hands of government ... the power to decide on a case-by-case basis whether the right is really worth insisting upon\"(emphasis in the original).\n\n\t\tThe Second Amendment Post-McDonald\n\nAlthough holding that the Second Amendment as recognized in Heller applies to the states, the Court did not decide whether the challenged municipal ordinances were in violation of the amendment, leaving the question for the lower court to examine. Because the McDonald decision was thus limited, a number of questions unanswered by the Court in Heller still remain, most of which are concerned with the scope of the Second Amendment. \nFirst, what standard of judicial scrutiny will be used to decide if a firearms law is in violation of the Second Amendment? As discussed above, the Court in Heller did not specify a particular level of scrutiny, instead stating that the three challenged District of Columbia firearms provisions were unconstitutional \"[u]nder any of the standards of scrutiny that we have applied to enumerated constitutional rights.\" The Court in Heller rejected a rational basis standard as well as Justice Breyer's proposed \"interest-balancing\" inquiry, which would have examined \"whether the statute burdens a protected interest in a way that is out of proportion to the statute's salutary effects upon other important governmental interests.\" (For more of the Court's discussion of the standard of scrutiny in Heller , see \" The Second Amendment Post- Heller \"). \nSince McDonald , the U.S. Court of Appeals for the Third Circuit (Third Circuit), in United States v. Marzzarella , attempted to draw a framework for how to approach such cases when it held that a federal ban on possession of unmarked firearms was constitutional. The Third Circuit noted that Heller suggested a two-pronged approach: \nFirst, we ask whether the challenged law imposes a burden on conduct falling within the scope of the Second Amendment's guarantee (citations omitted). If it does not, our inquiry is complete. If it does, we evaluate the law under some form of means-end scrutiny. If the law passes muster under the standard, it is constitutional. If it fails, it is invalid.\nWith respect to the challenged federal statute, the defendant argued that because firearms in common use in 1791 did not have serial numbers, the Second Amendment must protect firearms without serial numbers. The court was not convinced by this argument because it found that \"it would make little sense to categorically protect a class of weapons bearing a certain characteristic wholly unrelated to their utility. ... The mere fact that some firearms possess a nonfunctional characteristic should not create a categorically protected class of firearms on the basis of that characteristic.\" The court was further skeptical of the defendant's argument that \"possession in the home is conclusive proof that \u00a7 922(k) regulates protected conduct.\" Nonetheless, the court assumed that 18 U.S.C. \u00a7 922(k) burdened the defendant's Second Amendment right. Looking to First Amendment jurisprudence for guidance, the court noted that even an enumerated, fundamental right may be subjected to varying levels of scrutiny depending on the circumstances. The court noted that \u00a7 922(k) \"does not severely limit the possession of firearms,\" and still pass muster because the statute is narrowly tailored to achieve the government's compelling interest in preserving serial numbers for tracing purposes.\nSecond, does the Second Amendment right for purposes of lawful self-defense extend only to the home? In both Heller and McDonald , the provisions challenged were those that prevented handgun possession in the home, and in each case the Supreme Court stressed the right of self-defense within the home as being central component of the right to keep and bear arms. However, the Court did not make clear if this similar protective right extend to a vehicle, a temporary living space, a place of business, or in public places? Heller mentioned the possibility that the self-defense right has the potential to extend further upon \"future evaluation.\" \nThird, what types of regulations would be burdensome enough to infringe on the Second Amendment right? Both Heller and McDonald emphasized that the right to keep and bear arms is not \"a right to keep and carry any weapon whatsoever in any manner whatsoever and for whatever purpose.\" The Court further repeated assurances that its holding \"does not imperil every law regulating firearms,\" and \"[does] not cast doubt on [] longstanding regulatory measures [such] as 'prohibitions on the possession of firearms by felons and the mentally ill,' 'laws forbidding the carrying of firearms in sensitive places such as schools and government buildings, or laws imposing conditions and qualifications on the commercial sale of arm.'\" Heller indicated that mere regulation of a right would not sufficiently infringe upon, or burden, the Second Amendment right, when it pointed out that certain colonial-era ordinances did not \"remotely burden the right of self-defense as much as an absolute ban on handguns.\" In other words, it appears that to be burdensome, a regulation must also substantially burden the self-defensive right.\nFourth, what types of weapons will fall within the protection of the Second Amendment? Heller determined that the Second Amendment protection extends to weapons that are \"in common use at the time,\" and not those that are \"dangerous and unusual.\" The Court in Heller made clear that the Second Amendment protects handguns, as it found them to be a common weapon \"overwhelmingly chosen by American society\" for purposes of self-defense, but not other weapons such as machine guns, short-barreled rifles and shotguns, or grenade launchers. However, it is unclear if other types of so-called \"assault\" weapons, martial arts weapons, and clubs will be protected under the Second Amendment. There have been recent challenges to state and local \"assault weapons\" bans, which have been upheld. In 2009, the California Court of Appeals in People v. James considered Heller 's impact on California's Roberti-Roos Assault Weapons Control Act of 1989, which several localities like the District of Columbia and Cook County, Illinois have mirrored. In James , the court declared that the prohibited weapons on the state's list \"are not the types of weapons that are typically possessed by law-abiding citizens for lawful purposes such as sport hunting or self-defense; rather these are weapons of war.\" It concluded that the relevant portion of the act did not prohibit conduct protected by the Second Amendment as defined in Heller and therefore the state was within its ability to prohibit the types of dangerous and unusual weapons an individual can use.\nIt is highly likely that these last three questions, which center on the scope of the Second Amendment, will result in future litigation. As courts begin to tackle these questions, they may draw from the Third Circuit's framework or develop their own standards. For example, since the Marzzarella decision, the U.S. Court of Appeals for the Seventh Circuit in United States v. Skoien rejected a Second Amendment challenge to 18 U.S.C. \u00a7 922(g)(9)\u2014prohibiting persons convicted of misdemeanor crimes of domestic violence from possessing firearms\u2014on the basis that \"logic and data\" demonstrate \"a substantial relation between \u00a7 922(g)(9) and [an important governmental] objective.\"\nFaced with evaluating the same federal provision as in Skoien , the U.S. Court of Appeals for the Fourth Circuit (Fourth Circuit) in United States v. Chester issued a decision to provide district courts in its circuit guidance on the framework for deciding Second Amendment challenges. The Fourth Circuit followed the two-pronged approach delineated in Marzzarella , that is, the first, a historical inquiry \"seeks to determine whether the conduct at issue was understood to be within the scope of the right at the time of ratification,\" and second, if the regulation burdens the conduct that was within the scope of the Second Amendment as historically understood, \"then we move up to the second step of applying the appropriate form of means-end scrutiny.\"\nAlthough the Fourth Circuit remanded the case to the district court, it noted that \u00a7 922(g)(9), like \u00a7 922(g)(1)\u2014prohibiting convicted felons from possession\u2014requires the court to evaluate whether a person, rather than a person's conduct, is unprotected by the Second Amendment, and that \"the historical data is not conclusive on the question of whether the Founding era understanding was that the Second Amendment did not apply to felons.\" Thus, as in Mar zza rella , the Fourth Circuit assumed, due to lack of historical evidence, that the defendant was entitled to some Second Amendment protection to keep and possess firearms in his home for self-defense. For this defendant and other similarly situated persons, the court declared that the government, upon remand, must meet the intermediate scrutiny standard and not strict scrutiny, because the defendant's claim \"was not within the 'core right' identified in Heller \u2014the right of a law-abiding , responsible citizen to possess and carry a weapon for self-defense\u2014by virtue of [the defendant's] criminal history as a domestic violence misdemeanant.\" (emphasis in the original).","output":"In District of Columbia v. Heller, the Supreme Court of the United States ruled in a 5-4 decision that the Second Amendment to the Constitution of the United States protects an individual right to possess a firearm, unconnected with service in a militia, and the use of that firearm for traditionally lawful purposes, such as self-defense within the home. The decision in Heller affirmed the decision of the Court of Appeals for the District of Columbia, which declared three provisions of the District of Columbia's Firearms Control Regulation Act unconstitutional. The provisions specifically ruled on were: DC Code \u00a7 [phone number scrubbed].02, which generally barred the registration of handguns; DC Code \u00a7 22-4504, which prohibited carrying a pistol without a license, insofar as the provision would prevent a registrant from moving a gun from one room to another within his or her home; and DC Code \u00a7 [phone number scrubbed].02, which required that all lawfully owned firearms be kept unloaded and disassembled or bound by a trigger lock or similar device. In noting that the District's approach \"totally bans handgun possession in the home,\" the Supreme Court declared that the inherent right of self-defense is central to the Second Amendment right, and that the District's handgun ban amounted to a prohibition of an entire class of arms that has been overwhelmingly utilized by American society for that purpose.\nThe Court in Heller conducted an extensive analysis of the Second Amendment to interpret its meaning, but the decision left unanswered other significant constitutional questions, including the standard of scrutiny that should be applied to laws regulating the possession and use of firearms, and whether the Second Amendment is incorporated, or applies to, the states.\nAfter Heller, three federal Courts of Appeals addressed the question of incorporation. Two of these decisions, from the U.S. Courts of Appeals for the Second Circuit and the Seventh Circuit, held that the Second Amendment did not apply to the states, whereas the Court of Appeals for the Ninth Circuit held that the Second Amendment is incorporated under the Due Process Clause of the Fourteenth Amendment, although this decision has since been vacated. In McDonald v. City of Chicago, the Court reversed the decision of the Court of Appeals for the Seventh Circuit, and held that the Second Amendment applies to the states.\nWith respect to the Heller decision, this report provides an overview of judicial treatment of the Second Amendment over the past 70 years in both the Supreme Court and federal appellate courts. With respect to the McDonald decision, this report presents an overview of the principles of incorporation, early cases that addressed the application of the Second Amendment to state governments, and the federal appellate cases that addressed incorporation of the Second Amendment since the Heller decision. Lastly, this report provides an analysis of the Court's opinions in Heller and McDonald and the potential implications of these decisions for firearms legislation at the federal, state, and local levels."}
{"id":"gao_GAO-07-400T","pid":"gao_GAO-07-400T_0","input":"\tBackground\n\nAccording to the Institute of Medicine, the federal government has a  central role in shaping nearly all aspects of the health care industry  as a regulator, purchaser, health care provider, and sponsor of  research, education, and training. According to HHS, federal  agencies fund more than a third of the nation\u2019s total health care  costs. Given the level of the federal government\u2019s participation in  providing health care, it has been urged to take a leadership role in  driving change to improve the quality and effectiveness of medical  care in the United States, including expanded adoption of IT.\nIn April 2004, President Bush called for the widespread adoption of  interoperable electronic health records within 10 years and issued  an executive order that established the position of the National  Coordinator for Health Information Technology within HHS as the  government official responsible for the development and execution  of a strategic plan to guide the nationwide implementation of  interoperable health IT in both the public and private sectors. In  July 2004, HHS released The Decade of Health Information  Technology: Delivering Consumer-centric and Information-rich  Health Care\u2014Framework for Strategic Action. This framework  described goals for achieving nationwide interoperability of health  IT and actions to be taken by both the public and private sectors in  implementing a strategy. HHS\u2019s Office of the National Coordinator  for Health IT updated the framework\u2019s goals in June 2006 and  included an objective for protecting consumer privacy. It identified  two specific strategies for meeting this objective\u2014(1) support the  development and implementation of appropriate privacy and  security policies, practices, and standards for electronic health  information exchange and (2) develop and support policies to  protect against discrimination based on personal health information  such as denial of medical insurance or employment.\nIn July 2004, we testified on the benefits that effective  implementation of IT can bring to the health care industry and the  need for HHS to provide continued leadership, clear direction, and  mechanisms to monitor progress in order to bring about measurable  improvements. Since then, we have reported or testified on several  occasions on HHS\u2019s efforts to define its national strategy for health  IT. We have recommended that HHS develop the detailed plans and  milestones needed to ensure that its goals are met and HHS agreed  with our recommendation and has taken some steps to define more  detailed plans. In our report and testimonies, we have described a  number of actions that HHS, through the Office of the National  Coordinator for Health IT, has taken toward accelerating the use of  IT to transform the health care industry, including the development  of its framework for strategic action. We have also described the  Office of the National Coordinator\u2019s continuing efforts to work with  other federal agencies to revise and refine the goals and strategies  identified in its initial framework. The current draft framework\u2014 The Office of the National Coordinator: Goals, Objectives, and  Strategies\u2014identifies objectives for accomplishing each of four  goals, along with 32 high-level strategies for meeting the objectives,  including the two strategies for protecting consumer privacy.\n\n\t\tHealth Insurance Portability and Accountability Act of 1996\n\nFederal health care reform initiatives of the early- to mid-1990s were  inspired in part by public concern about the privacy of personal  medical information as the use of health IT increased. Congress,  recognizing that benefits and efficiencies could be gained by the use  of information technology in health care, also recognized the need  for comprehensive federal medical privacy protections and  consequently passed the Health Insurance Portability and  Accountability Act of 1996 (HIPAA). This law provided for the  Secretary of HHS to establish the first broadly applicable federal  privacy and security protections designed to protect individual  health care information.\nHIPAA required the Secretary of HHS to promulgate regulatory  standards to protect certain personal health information held by  covered entities, which are certain health plans, health care  providers, and health care clearinghouses. It also required the  Secretary of HHS to adopt security standards for covered entities  that maintain or transmit health information to maintain reasonable  and appropriate safeguards. The law requires that covered entities  take certain measures to ensure the confidentiality and integrity of  the information and to protect it against reasonably anticipated  unauthorized use or disclosure and threats or hazards to its security.\nHIPAA provides authority to the Secretary to enforce these  standards. The Secretary has delegated administration and  enforcement of privacy standards to the department\u2019s Office for  Civil Rights and enforcement of the security standards to the  department\u2019s Centers for Medicare and Medicaid Services.\nMost states have statutes that in varying degrees protect the privacy  of personal health information. HIPAA recognizes this and  specifically provides that its implementing regulations do not  preempt contrary provisions of state law if the state laws impose  more stringent requirements, standards, or specifications than the  federal privacy rule. In this way, the law and its implementing rules  establish a baseline of mandatory minimum privacy protections and  define basic principles for protecting personal health information.\nThe Secretary of HHS first issued HIPAA\u2019s Privacy Rule in  December 2000, following public notice and comment, but later  modified the rule in August 2002. Subsequent to the issuance of the  Privacy Rule, the Secretary issued the Security Rule in February  2003 to safeguard electronic protected health information and help  ensure that covered entities have proper security controls in place  to provide assurance that the information is protected from  unwarranted or unintentional disclosure.\nThe Privacy Rule reflects basic privacy principles for ensuring the  protection of personal health information. Table 1 summarizes these  principles.\n\n\tHHS Has Initiated Actions to Identify Solutions for Protecting Personal Health Information but Has Not Defined an Overall Approach for Addressing Privacy\n\nHHS and its Office of the National Coordinator for Health IT have  initiated actions to identify solutions for protecting health  information. Specifically, HHS awarded several health IT contracts  that include requirements for developing solutions that comply with  federal privacy and security requirements, consulted with the  National Committee on Vital and Health Statistics (NCVHS) to  develop recommendations regarding privacy and confidentiality in  the Nationwide Health Information Network, and formed the  American Health Information Community (AHIC) Confidentiality,  Privacy, and Security Workgroup to frame privacy and security  policy issues and identify viable options or processes to address  these issues. The Office of the National Coordinator for Health IT  intends to use the results of these activities to identify technology  and policy solutions for protecting personal health information as  part of its continuing efforts to complete a national strategy to guide  the nationwide implementation of health IT. However, HHS is in the  early stages of identifying solutions for protecting personal health  information and has not yet defined an overall approach for  integrating its various privacy-related initiatives and for addressing  key privacy principles.\n\n\t\tHHS\u2019s Contracts Are to Address Privacy and Security Policy and Standards for Nationwide Health Information Exchange\n\nHHS awarded four major health IT contracts in 2005 intended to  advance the nationwide exchange of health information\u2014Privacy  and Security Solutions for Interoperable Health Information  Exchange, Standards Harmonization Process for Health IT,  Nationwide Health Information Network Prototypes, and  Compliance Certification Process for Health IT. These contracts  include requirements for developing solutions that comply with  federal privacy requirements. The contract for privacy and security  solutions is intended to specifically address privacy and security  policies and practices that affect nationwide health information  exchange.\nHHS\u2019s contract for privacy and security solutions is intended to  provide a nationwide synthesis of information to inform privacy and  security policymaking at federal, state, and local levels and the  Nationwide Health Information Network prototype solutions for  supporting health information exchange across the nation. In  summer 2006, the privacy and security solutions contractor selected  34 states and territories as locations in which to perform  assessments of organization-level privacy- and security-related  policies and practices that affect interoperable electronic health  information exchange and their bases, including laws and  regulations. The contractor is supporting the states and territories  as they (1) assess variations in organization-level business policies  and state laws that affect health information exchange, (2) identify  and propose solutions while preserving the privacy and security  requirements of applicable federal and state laws, and (3) develop  detailed plans to implement solutions.\nThe privacy and security solutions contractor is to develop a  nationwide report that synthesizes and summarizes the variations  identified, the proposed solutions, and the steps that states and  territories are taking to implement their solutions. It is also to  deliver an interim report to address policies and practices followed  in nine domains of interest: (1) user and entity authentication, (2)  authorization and access controls, (3) patient and provider  identification to match identities, (4) information transmission  security or exchange protocols (encryption, etc.), (5) information  protections to prevent improper modification of records, (6)  information audits that record and monitor the activity of health  information systems, (7) administrative or physical security  safeguards required to implement a comprehensive security  platform for health IT, (8) state law restrictions about information  types and classes and the solutions by which electronic personal  health information can be viewed and exchanged, and (9)  information use and disclosure policies that arise as health care  entities share clinical health information electronically. These  domains of interest address the use and disclosure and security  privacy principles.\n\n\t\tThe National Committee on Vital and Health Statistics Made Recommendations for Addressing Privacy and Security within a Nationwide Health Information Network\n\nIn June 2006, NCVHS, a key national health information advisory  committee, presented to the Secretary of HHS a report  recommending actions regarding privacy and confidentiality in the  Nationwide Health Information Network. The recommendations  cover topics that are, according to the committee, central to  challenges for protecting health information privacy in a national  health information exchange environment. The recommendations  address aspects of key privacy principles including (1) the role of  individuals in making decisions about the use of their personal  health information, (2) policies for controlling disclosures across a  nationwide health information network, (3) regulatory issues such  as jurisdiction and enforcement, (4) use of information by non- health care entities, and (5) establishing and maintaining the public  trust that is needed to ensure the success of a nationwide health  information network. The recommendations are being evaluated by  the AHIC work groups, the Certification Commission for Health IT,  the Health Information Technology Standards Panel, and other HHS  partners.\nIn October 2006, the committee recommended that HIPAA privacy  protections be extended beyond the current definition of covered  entities to include other entities that handle personal health  information. It also called on HHS to create policies and procedures  to accurately match patients with their health records and to require  functionality that allows patient or physician privacy preferences to  follow records regardless of location. The committee intends to  continue to update and refine its recommendations as the  architecture and requirements of the network advance.\n\n\t\tThe American Health Information Community\u2019s Confidentiality, Privacy, and Security Workgroup Is to Develop Recommendations to Establish a Privacy Policy Framework\n\nAHIC, a commission that provides input and recommendations to  HHS on nationwide health IT, formed the Confidentiality, Privacy,  and Security Workgroup in July 2006 to frame privacy and security  policy issues and to solicit broad public input to identify viable  options or processes to address these issues. The  recommendations to be developed by this work group are intended  to establish an initial policy framework and address issues including  methods of patient identification, methods of authentication,  mechanisms to ensure data integrity, methods for controlling access  to personal health information, policies for breaches of personal  health information confidentiality, guidelines and processes to  determine appropriate secondary uses of data, and a scope of work  for a long-term independent advisory body on privacy and security  policies.\nThe work group has defined two initial work areas\u2014identity  proofing and user authentication\u2014as initial steps necessary to  protect confidentiality and security. These two work areas address  the security principle. Last month, the work group presented  recommendations on performing patient identity proofing to AHIC.  The work group intends to address other key privacy principles,  including, but not limited to maintaining data integrity and control  of access. It plans to address policies for breaches of confidentiality  and guidelines and processes for determining appropriate secondary  uses of health information, an aspect of the use and disclosure  privacy principle.\n\n\t\tHHS\u2019s Collective Initiatives Are Intended to Address Aspects of Key Privacy Principles, but an Overall Approach for Addressing Privacy Has Not Been Defined\n\nHHS has taken steps intended to address aspects of key privacy  principles through its contracts and with advice and  recommendations from its two key health IT advisory committees.  For example, the privacy and security solutions contract is intended  to address all the key privacy principles in HIPAA. Additionally, the  uses and disclosures principle is to be further addressed through the  advisory committees\u2019 recommendations and guidance. The security  principle is to be addressed through the definition of functional  requirements for a nationwide health information network, the  definition of security criteria for certifying electronic health record  products, the identification of information exchange standards, and  recommendations from the advisory committees regarding, among  other things, methods to establish and confirm a person\u2019s identity.  The committees have also made recommendations for addressing  authorization for uses and disclosure of health information and  intend to develop guidelines for determining appropriate secondary  uses of data.\nHHS has made some progress toward protecting personal health  information through its various privacy-related initiatives. For  example, during the past 2 years, HHS has defined initial criteria and  procedures for certifying electronic health records, resulting in the  certification of 35 IT vendor products. In January 2007, HHS  contractors presented 4 initial prototypes of a Nationwide Health  Information Network (NHIN). However, the other contracts have  not yet produced final results. For example, the privacy and security  solutions contractor has not yet reported its assessment of state and  organizational policy variations. This report is due on March 31,  2007. Additionally, HHS has not accepted or agreed to implement  the recommendations made in June 2006 by the NCVHS, and the  AHIC Privacy, Security, and Confidentiality Workgroup is in the very  early stages of efforts that are intended to result in privacy policies  for nationwide health information exchange.\nHHS is in the early phases of identifying solutions for safeguarding  personal health information exchanged through a nationwide health  information network and has not yet defined an approach for  integrating its various efforts or for fully addressing key privacy  principles. For example, milestones for integrating the results of its  various privacy-related initiatives and resolving differences and  inconsistencies have not been defined, and it has not been  determined which entity participating in HHS\u2019s privacy-related  activities is responsible for integrating these various initiatives and  the extent to which their results will address key privacy principles.  Until HHS defines an integration approach and milestones for  completing these steps, its overall approach for ensuring the privacy  and protection of personal health information exchanged  throughout a nationwide network will remain unclear.\n\n\tThe Health Care Industry Faces Challenges in Protecting Electronic Health Information\n\nThe increased use of information technology to exchange electronic  health information introduces challenges to protecting individuals\u2019  personal health information. In our report, we identify and  summarize key challenges described by health information  exchange organizations: understanding and resolving legal and  policy issues, particularly those resulting from varying state laws  and policies; ensuring appropriate disclosures of the minimum  amount of health information needed; ensuring individuals\u2019 rights to  request access to and amendments of health information to ensure it  is correct; and implementing adequate security measures for  protecting health information. Table 2 summarizes these challenges.\nUnderstanding and Resolving Legal and Policy Issues  Health information exchange organizations bring together multiple  and diverse health care providers, including physicians, pharmacies,  hospitals, and clinics that may be subject to varying legal and policy  requirements for protecting health information. As health  information exchange expands across state lines, organizations are  challenged with understanding and resolving data-sharing issues  introduced by varying state privacy laws. HHS recognized that  sharing health information among entities in states with varying  laws introduces challenges and intends to identify variations in state  laws that affect privacy and security practices through the privacy  and security solutions contract that it awarded in 2005.\nSeveral organizations described issues associated with ensuring  appropriate disclosure, such as determining the minimum data  necessary that can be disclosed in order for requesters to  accomplish the intended purposes for the use of the health  information. For example, dieticians and health claims processors  do not need access to complete health records, whereas treating  physicians generally do. Organizations also described issues with  obtaining individuals\u2019 authorization and consent for uses and  disclosures of personal health information and difficulties with  determining the best way to allow individuals to participate in and  consent to electronic health information exchange. In June 2006,  NCVHS recommended to the Secretary of HHS that the department  monitor the development of different approaches and continue an  open, transparent, and public process to evaluate whether a national  policy on this issue would be appropriate.\nEnsuring Individuals\u2019 Rights to Request Access and  Amendments to Health Information to Ensure It Is Correct  As the exchange of personal health information expands to include  multiple providers and as individuals\u2019 health records include  increasing amounts of information from many sources, keeping  track of the origin of specific data and ensuring that incorrect  information is corrected and removed from future health  information exchange could become increasingly difficult.  Additionally, as health information is amended, HIPAA rules require  that covered entities make reasonable efforts to notify certain  providers and other persons that previously received the individuals\u2019  information. The challenges associated with meeting this  requirement are expected to become more prevalent as the numbers  of organizations exchanging health information increases.\nImplementing Adequate Security Measures for Protecting  Health Information  Adequate implementation of security measures is another challenge  that health information exchange providers must overcome to  ensure that health information is adequately protected as health  information exchange expands. For example, user authentication  will become more difficult when multiple organizations that employ  different techniques exchange information. The AHIC  Confidentiality, Privacy, and Security Workgroup recognized this  difficulty and identified user authentication as one of its initial work  areas for protecting confidentiality and security.\n\n\tImplementation of GAO Recommendations Should Help Ensure that HHS\u2019S Goal to Protect Personal Health Information is Met\n\nTo increase the likelihood that HHS will meet its strategic goal to  protect personal health information, we recommend in our report  that the Secretary of Health and Human Services define and  implement an overall approach for protecting health information as  part of the strategic plan called for by the President. This approach  should:   1.  Identify milestones and the entity responsible for integrating the  outcomes of its privacy-related initiatives, including the results  of its four health IT contracts and recommendations from the  NCVHS and AHIC advisory committees.  2.  Ensure that key privacy principles in HIPAA are fully addressed.   3.  Address key challenges associated with legal and policy issues,  disclosure of personal health information, individuals\u2019 rights to  request access and amendments to health information, and  security measures for protecting health information within a  nationwide exchange of health information.\nIn commenting on a draft of our report, HHS disagreed with our  recommendation and referred to \u201cthe department\u2019s comprehensive  and integrated approach for ensuring the privacy and security of  health information within nationwide health information exchange.\u201d  However, an overall approach for integrating the department\u2019s  various privacy-related initiatives has not been fully defined and  implemented. While progress has been made initiating these efforts,  much work remains before they are completed and the outcomes of  the various efforts are integrated. HHS specifically disagreed with  the need to identify milestones and stated that tightly scripted  milestones would impede HHS\u2019s processes and preclude  stakeholder dialogue on the direction of important policy matters.  We disagree and believe that milestones are important for setting  targets for implementation and for informing stakeholders of HHS\u2019s  plans and goals for protecting personal health information as part of  its efforts to achieve nationwide implementation of health IT.\nHHS did not comment on the need to identify an entity responsible  for the integration of the department\u2019s privacy-related initiatives,  nor did it provide information regarding an effort to assign  responsibility for this important activity. HHS neither agreed nor  disagreed that its approach should address privacy principles and  challenges, but stated that the department plans to continue to work  toward addressing privacy principles in HIPAA and that our report  appropriately highlights efforts to address challenges encountered  during electronic health information exchange. HHS stated that the  department is committed to ensuring that health information is  protected as part of its efforts to achieve nationwide health  information exchange.\nIn written comments, the Secretary of Veterans Affairs concurred  with our findings, conclusions, and recommendation to the  Secretary of HHS and commended our efforts to highlight methods  for ensuring the privacy of electronic health information. The  Department of Defense chose not to comment on a draft of the  report.\nIn summary, concerns about the protection of personal health  information exchanged electronically within a nationwide health  information network have increased as the use of health IT and the  exchange of electronic health information have also increased. HHS  and its Office of the National Coordinator for Health IT have  initiated activities that, collectively, are intended to protect health  information and address aspects of key privacy principles. While  progress continues to be made through the various initiatives, it  becomes increasingly important that HHS define a comprehensive  approach and milestones for integrating its efforts, resolve  differences and inconsistencies among them, fully address key  privacy principles, ensure that recommendations from its advisory  committees are effectively implemented, and sequence the  implementation of key activities appropriately.\nHHS\u2019s current initiatives are intended to address many of the  challenges that organizations face as the exchange of electronic  health information expands. However, without a clearly defined  approach that establishes milestones for integrating efforts and fully  addresses key privacy principles and the related challenges, it is  likely that HHS\u2019s goal to safeguard personal health information as  part of its national strategy for health IT will not be met.\nMr. Chairman, Senator Voinovich, and members of the  subcommittee, this concludes our statement. We will be happy to  answer any questions that you or members of the subcommittee  may have at this time.\n\n\tContacts and Acknowledgments\n\nIf you have any questions on matters discussed in this testimony,  please contact Linda Koontz at (202) 512-6240 or David Powner at  (202) 512-9286, or by e-mail at koontzl@gao.gov or  pownerd@gao.gov. Other key contributors to this testimony include  Mirko J. Dolak, Amanda C. Gill, Nancy E. Glover, M. Saad Khan,  David F. Plocher, Charles F. Roney, Sylvia L. Shanks, Sushmita L.  Srikanth, Teresa F. Tucker, and Morgan F. Walts.","output":"Why GAO Did This Study\n\nIn April 2004, President Bush called for the Department of Health and Human Services (HHS) to develop and implement a strategic plan to guide the nationwide implementation of health IT. The plan is to recommend methods to ensure the privacy of electronic health information. GAO was asked to summarize its report that is being released today. The report describes the steps HHS is taking to ensure privacy protection as part of its national health IT strategy and identifies challenges associated with protecting electronic health information exchanged within a nationwide health information network.\n\nWhat GAO Found\n\nHHS and its Office of the National Coordinator for Health IT have initiated actions to identify solutions for protecting personal health information through several contracts and with two health information advisory committees. For example, in late 2005, HHS awarded several health IT contracts that include requirements for addressing the privacy of personal health information exchanged within a nationwide health information exchange network. Its privacy and security solutions contractor is to assess the organization-level privacy- and security-related policies, practices, laws, and regulations that affect interoperable health information exchange. Additionally, in June 2006, the National Committee on Vital and Health Statistics made recommendations to the Secretary of HHS on protecting the privacy of personal health information within a nationwide health information network and in August 2006, the American Health Information Community convened a work group to address privacy and security policy issues for nationwide health information exchange. While these activities are intended to address aspects of key principles for protecting the privacy of health information, HHS is in the early stages of its efforts and has therefore not yet defined an overall approach for integrating its various privacy-related initiatives and addressing key privacy principles, nor has it defined milestones for integrating the results of these activities. GAO identified key challenges associated with protecting electronic personal health information in four areas."}
{"id":"gao_GGD-96-166","pid":"gao_GGD-96-166_0","input":"\tIntroduction\n\nChanges in prices as measured by the Consumer Price Index (CPI) were automatically linked to $441 billion in federal spending and $595 billion of federal tax receipts and affected the lives of millions of individuals who received federal benefit payments and paid federal taxes in fiscal year 1995. For example, when Congress legislated the use of the CPI to automatically increase Social Security payments, it indicated that this indexation was to offset increases in the cost of living.\nAccording to BLS, the CPI is not a cost-of-living index but measures the change in prices of a fixed market basket of goods and services. However, the CPI has been used in various ways that are related to the cost of living. For example, the CPI is used as an escalator to adjust income payments, tax brackets, and deductions for personal exemptions. Although some elements of the CPI reflect cost-of-living concepts, the CPI was not designed as a cost-of-living index. To date, the federal government has not developed a comprehensive cost-of-living index.\nThe CPI tracks the change in prices of a fixed market basket of goods and services purchased directly by urban consumers. These purchases are for food, clothing, shelter, fuels, transportation, entertainment, medical services, and other goods and services that people buy for day-to-day living. Only expenditures made by consumers are captured in the CPI.\nThe CPI does not attempt to measure all changes in the cost of consumption needed for an individual to maintain a constant level of utility, that is, consumer satisfaction. When consumers face rising prices, and especially when some prices rise faster than others, consumers tend to alter their purchasing patterns to maintain as high a living standard as possible. Because the CPI holds the \u201cmarket basket\u201d constant and does not account for what consumers would pay when they change the amounts they buy, or substitute one product for another, it does not measure consumers\u2019 cost of living. The CPI, therefore, is not a cost-of-living index.\nA comprehensive cost-of-living index would be broader in coverage than an index based on consumer expenditures or consumer budgets. In theory, a cost-of-living index would include purchased goods and services; the use of semidurable and durable goods, such as houses and automobiles, owned or rented; free goods of nature; and government-provided goods and services. However, the components of an actual cost-of-living index may vary and there is no single, comprehensive measure of the cost of living.\nSome government-provided goods and services, such as public mass transit, that charge for the service are included in the CPI. However, other items that would be in a comprehensive cost-of-living index, particularly public and free goods of nature, are excluded from the CPI because they cannot be readily measured and consumers do not directly pay for their use.\n\n\t\tBackground\n\nThe Bureau of Labor Statistics (BLS), within the Department of Labor, produces the CPI by measuring the average change over time in the prices paid by urban consumers for a fixed market basket of consumer goods and services. The market basket is determined from detailed records of purchases made by thousands of individuals and families. The items selected for the market basket, such as potatoes, are to be priced each month at retail outlets, such as grocery stores, in urban areas throughout the country. According to BLS, in 1995, approximately 30,000 outlets were visited each month, with prices collected for 94,000 items.\nThe CPI is used as a measure of price changes to make economic decisions in the private and public sectors. For example, landlords use the CPI to adjust rental payments for the effects of inflation. According to BLS, the CPI has three major uses: (1) indicator of inflation for policymaking and economic decisionmaking; (2) escalator for wages, income payments, and tax brackets to preserve the purchasing power of people receiving government transfer payments and to adjust the tax burden so that people pay in inflation-adjusted dollars; and (3) deflator of selected economic statistical data series to make adjustments to show real changes in the data over time. For additional information about the uses and construction of the CPI, see appendix II.\nThe CPI was initiated during World War I, when rapid increases in the prices of goods and services, particularly in shipbuilding centers, made such an index essential for calculating cost-of-living adjustments in wages.\nIn 1921, BLS began regular publication of an index representing the expenditures of urban wage and clerical workers, which was then called the Cost-of-Living Index. The name of the index was changed to the CPI following controversy during World War II over the index\u2019s validity as a measure of the cost of living. According to BLS, it has always been a measure of the changes in prices for goods and services purchased for family living.\nMajor revisions were made to the CPI about every 10 years to update the fixed market basket; the next major revision is scheduled to be released in January 1998. Because people\u2019s buying habits changed, new studies were made of what goods and services people were purchasing and major revisions of the CPI were made in 1940, 1953, 1964, 1978, and 1987. In the 1978 major revision, several changes were made, including the publication of a new index for all urban consumers\u2014CPI-U. According to BLS, the CPI-U, which represents the expenditures of about 80 percent of the population, takes into account the buying patterns of professional employees, part-time workers, the self-employed, the unemployed, and retired people, as well as those previously covered in the CPI. BLS continued publication of the original index, the CPI-W, which represents the expenditures of urban wage and clerical workers, about 32 percent of the population.\n\n\t\tConceptual Change to the CPI Recommended in 1961\n\nIn 1961, the Price Statistics Review Committee of the National Bureau of Economic Research, chaired by George Stigler, identified conceptual problems with the CPI and addressed issues concerning the measurement over time of durable goods, such as housing. The Stigler committee acknowledged that the CPI\u2019s original purpose was to measure average price changes of a fixed market basket of goods and services over time, which could measure the change in consumers\u2019 standard of living if the marketplace did not change. However, given that consumers\u2019 tastes change over time, or that higher quality goods at lower prices may become available, the committee determined that a fixed market basket of goods and services did not realistically represent a consumer\u2019s standard of living. The Stigler committee recommended that the conceptual framework of the CPI be modified to represent a cost-of-living index because the CPI was being used in the private sector as a cost-of-living measure. Specifically, the committee recommended that the asset-price approach for measuring homeownership costs be replaced with an approach that determined the cost of consuming a flow of services generated by durable goods like houses. A flow-of-services approach would measure the cost of consuming housing rather than the change in the investment value of a house that the asset-price approach measured.\nAccording to BLS, the Stigler committee\u2019s effort was the last comprehensive review of price indexes. At the time we were doing our work, a CPI commission appointed by the Senate Finance Committee was conducting a study on the CPI\u2019s accuracy as a measure of the cost of living. The commission issued an interim report in September 1995. According to the interim report, the commission\u2019s formation and charter were motivated by concern that the CPI misstates inflation and leads to inappropriate changes in federal individual income tax brackets and federal benefits. The interim report discusses categories of potential bias in the CPI, such as substitution and quality change.\nThe commission\u2019s interim estimate was that the CPI overstates inflation by 1.0 percent per year, which fell within a range of 0.7 to 2.0 percent. The commission expects its final report to include recommendations for procedures to improve and\/or complement the CPI. The commission\u2019s final report is scheduled to be issued by December 1996.\n\n\t\tObjectives, Scope, and Methodology\n\nThe Ranking Minority Member of the House Committee on Banking and Financial Services asked us to (1) determine if a change made to the housing component in the early 1980s made the CPI either more or less suitable for use as a cost-of-living measure and (2) identify the advantages and disadvantages of changing the current measurement of medical care costs to an approach that more closely matches a cost-of-living measure. We surveyed recognized experts to obtain their views on how the change affected the housing component and on the advantages and disadvantages of changing the medical care component. As agreed with the requester, we did not try to identify and address all of the policy issues that might arise in moving the CPI toward a cost-of-living index.\nWe reviewed relevant literature and held discussions with experts in the field to gain an understanding of the methodologies used in computing the CPI. These experts included individuals associated with the CPI at BLS, as well as private organizations and academic institutions. We also obtained information from BLS officials on their plans to revise and improve the CPI. On the basis of these reviews and discussions, we identified the major concerns that were associated with the asset-price approach, which was used to measure homeowners\u2019 costs before 1983, and the measurement of medical care. We recognize that these concerns and issues we identified are not exhaustive.\nTo obtain the views of experts, we selected two panels of experts and surveyed them. We chose 10 housing measurement experts from a candidate list of more than 50 names; we also chose 10 individuals to serve as medical care measurement experts from a candidate list of more than 50 names. To obtain diverse candidate lists, we conducted a literature review and asked for nominations of potential experts from those experts in the field and representatives of BLS that we met with during our initial discussions. We then contacted the nominated individuals and asked for their nominations of experts. To avoid potential conflicts of interest, we excluded individuals from the lists who were current political appointees, current BLS employees, and previous BLS administrators responsible for making CPI methodological changes. In selecting the experts, we first selected those who were nominated more frequently than the others and then randomly chose thereafter. We verified that these selections included experts from academic and user communities, such as the American Medical Association, and that the selections contained at least one expert suggested by BLS. The responses we received reflect only the views of the experts included. (See app. IV for a list of the selected experts.)\nWe surveyed 10 housing measurement experts. The questionnaire we sent to these experts contained a historical synopsis of housing cost measurement in the CPI, including brief descriptions of the concerns that stimulated BLS\u2019 adoption of the rental equivalence method in the 1980s and an overview discussion of the rental equivalence method in terms of measuring the cost of living. We asked the selected housing experts if the rental equivalence method adequately addressed the concerns expressed by critics about the use of the asset-price approach and if any concerns emerged as a result of using the rental equivalence method. In addition, we asked them if the adoption of the rental equivalence method made the CPI either more or less suitable for use as a measure of cost of living. (See app. V for a copy of the information and questionnaire sent to each expert.)\nWe interviewed 10 medical measurement experts. Before holding the interviews, we sent a letter to these experts in which we provided a background paper that identified and briefly described measurement issues that may result from cost shifting among medical care payers. This material was provided to the experts prior to our interviews as a reference point from which to begin our in-person interviews. At the interviews, we asked the experts about the influence of cost shifting on the medical care component. We also asked the experts to provide advantages and disadvantages of changing the current measurement of medical care costs to an approach that more closely approximates a cost-of-living measure. (See app. V for a copy of the information sent to and the questions asked of each expert.)\nWe did our work in Baltimore, MD; Boston, MA; Chicago, IL; Philadelphia, PA; Richmond, VA; and Washington, D.C., between July 1995 and January 1996 in accordance with generally accepted government auditing standards.\nWe requested comments on a draft of this report from the Acting Director of OMB and the Secretary of Labor, or their designees. The comments are summarized and addressed in chapter 4. A more detailed account of our scope and methodology is contained in appendix I.\n\n\tMethodological Changes to Homeownership Measure Made the CPI More Suitable as a Cost-of-Living Measure\n\nIn the 1980s, BLS began using the rental equivalence method of measuring homeowners\u2019 costs. Recognized experts that we surveyed viewed the change that BLS made as making the CPI more suitable as a measure of the cost of living. They noted, however, that some new issues have emerged as a result of using the rental equivalence method. Although the new method may have made the CPI more suitable as a cost-of-living measure, BLS officials said this was not their objective. Rather, they made the change to better measure housing costs within the CPI\u2019s structure of measuring price changes of a fixed market basket of goods and services.\n\n\t\tHistorical Development of Housing Measures in the CPI\n\nHomeownership was not included in the original CPI that was designed to represent 1917 through 1919 expenditures of wage earner and clerical worker families in large shipbuilding and industrial centers, for the main reason that these families typically did not own homes. Costs associated with homeownership were first included in 1953 because homeownership among the urban wage earner and clerical worker population increased following World War II. The homeownership measure in the CPI\u2014the asset-price approach\u2014was designed to measure changes in the cost of acquiring, financing, and maintaining houses. This concept was used from 1953 to 1983. For more information on the historical development of the measurement of housing, see appendix III.\n\n\t\t\tBLS Adopted the Rental Equivalence Method\n\nFollowing publication of the Stigler committee report, BLS started in the 1960s to explore measures of the flow of services received from owner-occupied homes. However, because methodologies had not yet been developed on how to measure these services, BLS had to develop new methodologies.\nBLS decided to explore two flow-of-services methods: user cost and rental equivalence. BLS staff considered the two methods to be equally powerful in concept; however, problems raised over implementation of the user cost method outweighed its attractiveness. A user cost index measures total cost to owners living in their homes by adding the various explicit costs, such as payments for mortgage interest and property taxes, and implicit costs, such as depreciation, which homeowners incur in providing shelter for themselves. The user cost approach was abandoned after much review because it involved estimating the appreciation or depreciation value of a house over time and the cost of not having access to equity in the house. BLS noted that calculating such estimates was difficult because of substantial variations in housing data. BLS also found that the method sometimes provided some peculiar results.\nRental equivalence, on the other hand, was easier to explain to the public and the users. The rental equivalence method attempts to infer the income that homeowners forgo when they reside in their own homes rather than rent them to others.\nIn 1977, when it was time to implement methodological changes for the 1978 major revision to the CPI, BLS\u2019 advisory groups had not reached a consensus on an appropriate flow-of-services approach, so the asset-price approach was continued. In addition, some users of the CPI thought it should reflect the cost of purchasing a home because most families lived in their own homes and did not rent. Therefore, it was not changed.\nBLS, however, decided to continue research and consultation and, in 1980, began publication of experimental indexes that represented alternative homeownership concepts. These indexes were variations of the user cost method and the asset-price approach, as well as the rental equivalence method. By the early 1980s, however, changes in real estate and mortgage markets\u2014high prices of housing and high interest rates\u2014drew attention to the limitations of the approach used to measure homeowners\u2019 costs. For a detailed description of issues associated with the asset-price approach, see appendix III. In 1981, the Commissioner of Labor Statistics announced that beginning in 1983, BLS would use the rental equivalence method to measure homeownership costs.\nIn January 1983, BLS changed the measurement of homeowners\u2019 costs in the CPI-U from an asset-price approach to a flow-of-services approach. The CPI-W was not changed until January 1985 because BLS wanted to provide adequate notice of the conceptual change, since the CPI-W was used to escalate long-term labor contracts and federal programs.\n\n\t\tExperts Said That the Rental Equivalence Method Makes CPI More Suitable as a Cost-of-Living Measure\n\nWe asked 10 experts their views on whether the rental equivalence method made the CPI more or less suitable as a cost-of-living index. All 10 were expert in measuring housing costs and were very familiar with the CPI housing component.\nAll of the housing measurement experts agreed that the adoption of the rental equivalence method made the CPI more suitable for use as a measure of the cost of living. Our analysis of the experts\u2019 comments showed that most of the experts responded that the CPI is now more suitable because it measures the cost of housing services that are used, rather than the cost of buying the house or its value as an asset. One of the experts said that the cost-of-living index \u201cconcept is based on consumer utility theory which suggests that utility comes from consumption, or use. Since rent is the \u2018price of using,\u2019 rental equivalence enhances the use of the CPI as a proxy for the cost of living.\u201d A few of the experts also noted that additional improvements, such as including environmental costs and taxes in the CPI, would make it more like a cost-of-living index. A few of the experts noted that the rental equivalence method was not perfect for measuring the cost of living because renting is not the same as owning a home.\n\n\t\t\tExperts Agreed That Concerns About the Asset-Price Approach Were Adequately Addressed With the Rental Equivalence Method\n\nAll of the housing measurement experts reported that in general, the rental equivalence method adequately addressed the concerns that had been expressed about the use of the asset-price approach, which had been used prior to the early 1980s. A few of these experts commented that in comparison with the asset-price approach, the rental equivalence method was better in the representation of inflation and tracking the changes in the cost of occupying a home. The rental equivalence method was viewed by a few experts to be more appropriate than the asset-price approach, especially if the CPI is to approximate the cost of living. A few of the experts also noted that rental equivalence addressed long-standing concerns with the mortgage and housing price data that were associated with the asset-price approach (e.g., mortgage interest rates overstating actual interest expenses). According to a few of the experts, rental equivalence could represent all sections of the housing market, as long as rental housing of similar quality is available. A few of the experts also commented that the rental equivalence method in comparison to the user cost index method, which was also proposed in the 1970s as an alternative methodology, was easier to understand, more stable, and was not subject to arguable assumptions.\nA few experts mentioned alternative methods to the rental equivalence method. These experts\u2019 general comments indicated some interest in using variations of current mortgage payments, down payments, or mortgage interest to measure homeowners\u2019 costs. However, there was no consensus on any one variation. As one of these experts noted, the \u201csuggestion is not in any way intended to invite a return to the asset-price approach used until 1982.\u201d\n\n\t\t\tMixture of Issues With the Rental Equivalence Method\n\nOverall, the experts\u2019 responses to whether issues have emerged as a result of using the rental equivalence method were mixed. The majority of experts said there were issues with the method, but none of the specific issues was identified by more than two experts. Although the experts found the rental equivalence method to be a good replacement for the asset-price approach, a few of the experts expressed concern that the rental units used in the methodology may not be similar to the owner-occupied housing units they are to represent. One expert said that this \u201ccould lead to errors, but in both directions.\u201d\nA few of the experts noted another concern that the CPI overstates inflation because of the time at which the rental equivalence method was implemented. The change to rental equivalence occurred at a historical peak in mortgage interest rates. As a result of the timing of the switch in methodology, the subsequent decline in mortgage interest rates was not captured in the CPI. One of the experts noted that \u201cgovernment transfer payments would be . . . lower today if the switch had not been made at the interest rate peak. Moving to a better index, but at the wrong time, has been extremely costly.\u201d\n\n\t\tBLS Views Rental Equivalence as Consistent With Fixed Market Basket Definition\n\nBLS officials told us that the adoption of the change to the rental equivalence method was simply a change in the measurement of the costs of homeownership rather than one intended to move the index toward a cost-of-living index. In making changes to the CPI, BLS said it seeks to improve the presentation of out-of-pocket expenditures, not to move the CPI conceptually toward a cost-of-living index.\n\n\tAdvantages and Disadvantages Cited for Changing Measurement of Medical Care\n\nMedical care expenses, including health insurance premiums, directly paid by consumers have historically been included in the CPI. Medical care expenses paid by third parties, such as employers, which make up about two-thirds of all medical care expenses, are excluded from the CPI. A CPI based on comprehensive cost-of-living concepts would include expenses paid by third parties.\nThe 10 medical care measurement experts responding to our structured interview survey offered various advantages and disadvantages to changing the medical care component to an approach that more closely matches a cost-of-living measure. A majority of the experts said that some types of third-party expenses should be included in determining the level of importance BLS would assign to medical care price changes. Medical care expenses paid by third parties are excluded because, according to BLS, the CPI is designed to measure only out-of-pocket expenses and given that the most important purposes are probably Social Security and tax bracket indexation, it is not clear that health insurance fringe benefits should be included.\nAll of the experts we interviewed said that prices that are actually paid by consumers and third-parties should be used in the CPI. Since 1987, BLS has been moving toward collecting more transaction prices for medical care items.\n\n\t\tDetermining Medical Care Costs in the CPI\n\nThe CPI is constructed from two kinds of data. One kind is used to determine what items are to be included in the CPI components and the relative importance of the components. The second kind of data reflects the prices paid for items in the CPI. (See app. II for more information on the construction of the CPI.) These two kinds of data are used to construct the medical care component; and over the years, BLS has tried different methods of incorporating these data.\n\n\t\t\tDifference Between Weighting and Pricing\n\nThe goods and services that consumers purchase are collectively referred to as items in the market basket. These items are grouped together into components. For example, hearing aids and dental services are items in the medical care component. BLS assigns weights to items within a component and to the components. Weighting is the proportionate emphasis given to price changes of one item or component in relation to other items and components. In the medical care component, weighting is affected by the presence or absence of third-party payers. In addition, prices paid by consumers are collected for the items in the market basket. For the medical care component, BLS may collect several different prices for the same item from medical care providers. For example, one hospital may have a list price that is charged a patient who pays the fees directly, while another hospital reports a discounted transaction price for the same procedure that has been negotiated with third-party payers.\nTo further illustrate how weighting and pricing differ, consider a hypothetical example of a consumer who receives medical care at a physician\u2019s office. The consumer pays a $5 insurance co-payment and the insurance provider pays the physician an additional $12 under a negotiated fee arrangement. The combined payment to the physician of $17 is less than the price that the physician \u201clists\u201d for the service provided, $20. In computing the CPI, such a transaction may have the following effects:\nThe $5 co-payment is the \u201cout-of-pocket\u201d expenditure, which is used to set the amount of the weight. To determine the share of consumer expenditures spent on medical care or other components, BLS added that $5 together with all other consumption expenditures in the Consumer Expenditure Survey (CEX), which includes the consumer\u2019s cost of premiums paid for health insurance. This aggregate of medical expenses is compared with the aggregate of expenditures on all goods and services in the market basket. The percentage of medical care expenses in relation to all expenditures becomes the expenditure weight assigned to the medical care component. In its pricing surveys, BLS would price the medical service at $20, the list price. The transaction price would be $17 in this hypothetical situation, assuming that this payment method were selected for pricing.\n\n\t\t\tBLS Tried Different Methods to Price Medical Care Costs\n\nMedical care has always been in the CPI, and consumer-purchased health insurance has always been included as a medical expense. Over the years, BLS tried different methods of pricing medical care, including health insurance directly paid by consumers, but has not altered the method used to determine the weight of the medical care component.\nOriginally, the price change rate for health insurance was assumed to be equal to the average of other medical items. In the 1950 revision, BLS deviated from this approach and began to directly price health insurance policies. In 1964, the approach was changed to an approach that again based health insurance price changes on prices observed for other medical goods and services, as well as the insurance carriers\u2019 operating costs and profits. In 1978 and 1987, BLS made minor adjustments in measuring health insurance with most of the changes occurring in publication of health insurance price changes.\nIn 1987, BLS began to collect medical care transaction prices, actual prices paid, which include fees that have been negotiated between medical care providers and third-party payers. BLS plans to collect transaction prices for all medical care items by January 1997. (See app. III for a detailed historical description of the measurement of medical care items.)\n\n\t\tTrends in Medical Care Expenditures\n\nIn 1965, households directly paid for about two-thirds of all medical care expenses. About 30 years later, these medical care expenses, upon which the CPI is based, represented less than one-third of all medical care expenses. As shown in figure 3.1, the proportion of total medical care represented in the CPI steadily declined since 1965.\nThe most recent data available, for 1991, indicate that about 28 percent of total consumption of medical care is represented in the CPI. Because the medical care component is based only on out-of-pocket medical expenses and health insurance premiums reported in the CEX, not all medical care expenditures are included in the CPI (see fig. 3.2). The CPI does not include medical care that consumers receive through employer-provided benefits and government-provided health care programs, such as Medicaid and part A of Medicare. Although employees and the self-employed make contributions to the Medicare hospital insurance trust fund, BLS considers these contributions as employment taxes and thereby excludes expenses paid under these programs.\n\n\t\tResearchers\u2019 View of the CPI\u2019s Measurement of Medical Care\n\nLike other aspects of research on the CPI and cost-of-living indexes, research on the medical care component has sought to determine the appropriate weights and prices for medical care. Research into the issue of cost shifting between third parties and consumers has drawn attention to the impact that the inclusion of third-party payments may have on the weight given to the medical care component of the CPI. Similarly, research findings on medical care providers using multiple prices for the same medical care service have led to an examination of the CPI\u2019s use of list prices rather than transaction prices.\n\n\t\t\tConcerns About Medical Care Weight\n\nThe appropriateness of the weight assigned for medical care in the CPI has been questioned by some researchers who contend that the current weight distorts price changes that result from cost shifting among health care payers. They contend that the current weight based on expenditures directly paid by households can result in an inaccurate level of importance being assigned to this component of the CPI, as compared with a weight based on all medical expenditures. The inaccuracy can occur when costs shift between payers who are included in the CPI and those who are excluded. For example, if employers decrease the amount that they pay of their employees\u2019 medical care expenses, then the employees\u2019 direct expenses, which are used to set the CPI medical care component weight, increase thereby increasing the weight assigned to medical care. An inappropriate weight of a component in the CPI can lead to over- or understatement of the rate of inflation, if the rate of price change for that component differs from other components in the CPI. A weight based on all medical care expenses, however, would not be affected by cost shifting over time between payers because all costs, regardless of who paid for the care, would be represented in the CPI.\nCost shifting over time can be illustrated by employers\u2019 efforts to constrain increases in annual health insurance premiums by raising deductibles and shifting more of the premium costs to employees. BLS reported that the proportion of families paying all or part of their health insurance premiums has increased from 60 percent in 1984 to 67 percent in 1992. BLS reported that between 1984 and 1992 average household out-of-pocket medical care expenditures rose from $1,049 to $1,634, a rise of about 7 percent per year. These data suggest that the weight for medical care, which is based on 1982 through 1984 CEX data, is lower than one that would be derived from more recent out-of-pocket medical expenses.\nA comprehensive cost-of-living index would include out-of-pocket, government-provided, and employer-provided medical care costs to incorporate all medical care expenses. In a 1994 study, the Congressional Budget Office (CBO) noted that, if the measurement of all medical care expenses were more appropriate for measuring the cost of living, the current CPI would have a downward bias relative to the cost of living.Using data from the National Income and Product Accounts, CBO estimated in 1994 that the influence of medical care price changes on the CPI would more than double if all medical care expenses were incorporated.\n\n\t\t\tConcerns About How Medical Care Expenses Are Priced\n\nIn addition, researchers have noted the divergence in medical care price indexes when one group of payers subsidizes another. Cost shifting within the marketplace also occurs when third-party payers are charged prices that differ from prices paid by consumers. BLS does not use transaction prices for all medical care goods and services included in the CPI; it has announced plans to do so. Any collection and use of inappropriate medical care prices could lead to over- or understatement of the rate of inflation, if the rate of change for transaction prices differs from the prices used in the CPI. (See app. II for a description of the collection of medical care prices for the CPI.)\nIn its 1994 study, CBO noted that a CPI based on out-of-pocket medical costs fails to capture price distortions caused by cost shifting. In this case, cost shifting may occur when the government does not reimburse health care providers for full cost of services to Medicare patients, and providers try to recoup the difference by increasing the costs to their private-pay patients (e.g., those paying for services themselves). CBO found that Medicare reimbursement in the early 1990s paid for 88 percent of the costs of covered services, compared with full reimbursement during the mid-1980s. CBO observed that the CPI for out-of-pocket medical care costs increased faster than the price index for Medicare during the mid-1980s to early 1990s because of cost shifting. The study suggests that the CPI overstates the rate of inflation because it fails to capture the price paid by the federal government.\nHowever, HCFA disputes CBO\u2019s findings on cost shifting. According to an HCFA official, any findings that Medicare or Medicaid pays less per day of hospital care than others is not evidence that these programs are shifting their costs elsewhere.\nThe medical care measurement experts we surveyed indicated in their general comments that this issue is not resolved. A few of the experts said that cost shifting does not occur between government-provided programs and other payers and cited research on cost shifting in Illinois and California hospitals. The study of Illinois hospitals supported CBO\u2019s findings that hospitals offset most of the rise in unreimbursed Medicare costs during the 1980s by generating higher revenues from private payers, which were cited in the background paper sent to the medical care experts. The author, however, suggests that as private sector pricing becomes more competitive, the ability and willingness of hospitals to cost shift will decline. The study of California hospitals found no cost shifting from publicly funded patients to privately insured patients.\n\n\t\tExperts\u2019 Views on Changing Medical Care Measurement Were Mixed\n\nWe asked 10 experts for their views on the advantages and disadvantages of changing the current measurement of medical care costs to more closely match a cost-of-living measure. We also asked about the types of medical care expenses that should be included in the weighting of the medical care component, as well as the types of prices that should be incorporated in calculating the changes in medical care costs.\n\n\t\t\tAdvantages and Disadvantages Cited by Experts of Moving to a Cost-of-Living Concept\n\nAll but one of the experts cited advantages to changing the current measurement of medical care to an approach that more closely approximates a cost-of-living measure. Our analysis of the experts\u2019 responses showed that a few of the experts said that policymaking would be improved with such a change. These experts said that a change to a cost-of-living concept could support the implementation of appropriate health care policies. For example, one expert cited a need for accurate information during a debate on pharmaceutical drugs. A few experts also cited each of the following advantages:\nA change would improve macroeconomic policymaking; one expert noted that the Federal Reserve was currently guessing at the amount of overstatement of inflation in the CPI.\nA change to cost-of-living concepts for the medical care component would allow private and public policymakers and researchers to have a better understanding of what is happening in medical care costs.\nThe change would improve the Gross Domestic Product\u2019s (GDP) implicit price deflator thereby improving research that used the implicit price deflator.\nAll of the experts cited at least one disadvantage to changing the medical care component to more closely approximate a cost-of-living measure. A few of the experts were concerned about the measurement of utility (as previously defined in footnote 3, p. 10) in the medical area. For example, one expert questioned how one would measure a patient\u2019s satisfaction from a procedure that had a very high mortality rate but also offered, when successful, a long-term survival rate. In addition, a few experts noted the following disadvantages:\nA change would mean a break in the continuity of the price data, which would affect long-term trend analyses.\nMeasures based on cost-of-living concepts were susceptible to manipulation because of the subjectivity of measuring satisfaction.\nIt would be expensive to switch to the new methodology, and it would also be more expensive than the current methodology to maintain. For example, one expert noted that transaction price data would be regarded by health care providers as sensitive information and burdensome to provide to BLS. More specifically, this expert said that physicians would have to go through each of their third-party contracts to obtain this information. In general, the political environment is not conducive to making a change in medical care indexes. For example, one expert noted that recognition of a previous overstatement in the CPI would anger those whose benefits are indexed with the CPI.\nIn addition, a few of the experts were concerned about changing the medical care component without changing other components at the same time to more closely approximate a cost-of-living measure.\n\n\t\t\tMost Experts Said Additional Expenses Should Be Included in the Weighting of Medical Care\n\nIn addition to obtaining the experts\u2019 opinions on the advantages and disadvantages of changing the current measurement of medical care costs, we took the opportunity to ask the experts how cost-of-living concepts would be implemented. All but one of the experts said that some types of medical expenses other than those already captured in the CPI should be included in weighting the medical care component. The majority of the experts said that employer-provided and union-provided medical care should be included in the weighting of the medical care component. One-half of the experts supported the inclusion of government-provided care. Fewer experts supported the inclusion of medical expenses provided by charitable organizations and expenses absorbed by health care providers. One expert said that no additional expenses should be included in the weighting of the medical care component. This expert said that if the CPI is used to adjust wages or payments, then only out-of-pocket expenses paid by consumers should be included in the CPI.\nOur analysis of the experts\u2019 responses showed that a few of the medical care measurement experts who supported the inclusion of all medical care expenses commented that it was logical to include all expenses if the burden of payment fell upon the general population. Of the experts who supported the inclusion of additional expenses other than those provided by charities or the government, a few said that expenses that affect the buying power of consumers should be included in the medical care component.\nThere was no consensus on how to implement weighting that is based on cost-of-living concepts. The experts\u2019 observations on whether public-provided health care should be included illustrate both the diverse and occasionally contradictory comments of the experts. A few of the experts did not want such care included because other government-provided services (e.g., national defense) were not in the CPI. Other experts expressly told us that government-provided care should be included because consumers pay for this care through taxes and lower wages. These experts also supported the inclusion of taxes in the CPI. And still other experts were silent on this issue. A few of the experts expressed the opinion that the medical care component should not be changed to measure cost-of-living concepts unless all components were changed at the same time.\n\n\t\t\tExperts Agree That Transaction Prices Should Be Used\n\nAll of the medical care measurement experts said that transaction prices should be used in gathering price data for medical goods and services. A few of the experts observed that consumers are paying transaction prices and that list prices should only be used in instances when nothing else is available, or if list prices are cheaper to collect. A similar number advocated the pricing of comprehensive health care packages, such as basic health maintenance organizations\u2019 (HMO) plans. However, one expert advocated using list prices in geographic areas where HMOs had not penetrated the market. A few of the experts made the following additional comments:\nList prices could be transaction prices in some instances.\nTransaction prices are available for data collection.\nBLS was not recording the appropriate transaction prices.\nList prices usage in the CPI has led to the overstatement of inflation, especially in pharmaceutical drugs.\nBLS\u2019 pricing of medical care items was inappropriate. These experts told us that BLS should be pricing the cost of a treatment or cure of an illness. They said that the current approach of pricing the cost of medical care items, such as x-rays, doctor visits, diagnostic tests, and hospital stays, is inappropriate for today\u2019s CPI.\nBLS\u2019 methodologies are not capturing the substitution of new treatments for items in the CPI\u2019s medical care market basket. For example, one expert said BLS should be pricing the cost of treating medical conditions, such as heart attacks, rather than hospital stays. This expert stated that BLS\u2019 methodology used for the CPI indicates that the per day charges for hospital stays are going up for heart attack patients, when in reality new treatments allow patients to go home earlier. According to this expert, by incorrectly pricing hospital stays, the current BLS methodology results in overstatement of inflation.\nIn addition, a few of the experts also provided an example of the difference in rate of price change between transaction and list prices. They noted the lower rate of increase for hospital rooms in the Producer Price Index (PPI), which uses transaction prices. The difference between the CPI and the PPI for physicians fees that both use transaction prices, however, is not as large as that for hospital rooms.\nBLS began collecting and using medical care transaction prices in 1987. Since then, it has expanded the collection of transaction prices for additional medical care items. It plans to collect transaction prices for all medical items by January 1997. (See app. III for further details.)\nAccording to BLS, the incorporation of discounted transaction prices was accomplished through a series of improvements in detailed data collection procedures; therefore, the experts were unlikely to know that BLS had already begun to incorporate hospital transaction prices in the CPI. According to a BLS official, about 15 percent of hospital prices in the CPI are transaction prices.\nWhile BLS officials considered the capturing of medical transaction prices to be an improvement, they said many problems remain in measuring price change in medical care. They agreed with our experts who noted that measuring specific commodities and services used in medical treatments does not capture changes in the approaches for treating specific medical problems. However, according to the officials, every treatment is administered, not just to a medical condition but to an individual with that condition. Therefore, according to these officials, the treatment administered in different cases with a given condition, such as a heart attack, need not be the same. Using the same example of hospital stays cited by one of the experts, BLS said that some patients will require shorter or longer hospital stays, or different combinations of drugs or surgical procedures, which further complicates defining what is to be priced and calculation of expenditure weights. According to BLS, in some cases a shorter hospital stay might not be better (if, for example, the patient were weaker and at greater risk for complications when he or she left the hospital), while in other cases it might be better.\n\n\t\t\tOther Comments\n\nWhen asked if they would like to make additional comments, the medical care measurement experts identified several issues related to changing the approach used to measure medical care. In their general comments, a few of the experts said that the United States measures medical care better than other developed countries. One expert said that if the United States changes its approach to measuring medical care, the other countries are likely to change their methodologies to whatever the United States does. Other comments stated by a few of the experts included\nThe CPI cannot be used for their work because the CPI uses list prices.\nThey were concerned about how a change to cost-of-living concepts would measure quality changes and noted that the implementation of these concepts would involve value judgments.\nThe distinction between prices and quantities had to be clear, implying that an increase in total expenditures cannot be easily translated into increases in prices or increases in quantities without the collection of additional data.\nAlso, a few experts questioned whether the CPI should be used as a measure by which to make cost-of-living adjustments. These experts suggested that BLS develop CPIs for specific demographic groups.\n\n\t\tBLS Does Not Plan to Include Third-Party Payments\n\nBLS does not plan to include third-party payments in the medical care component. BLS officials hold this position for several reasons.\nBLS views the CPI as an index that measures the changes in prices of goods and services that consumers purchase directly\u2014the fixed market basket. Therefore, the CPI excludes payments made by private third parties. The changes to the CPI that BLS seeks to make are to improve the representation of out-of-pocket expenditures, not to move the CPI conceptually toward a cost-of-living index.\nBLS considers medical care provided through employment as a cost of doing business rather than a consumer expenditure.\nBLS excludes income taxes, which pay for government-provided health care, because they are indirect payment for medical care. The CPI only includes taxes that are paid as a result of consumption, such as sales taxes.\nAccording to the Commissioner of Labor Statistics, methodologies have \u201cnot advanced to the point where anyone knows how to construct true cost-of-living measures\u201d for medical care and other CPI components.\nAccording to BLS, the most important purposes for use of the CPI are probably the indexation of Social Security payments and federal income tax brackets. BLS says it is not clear that health insurance fringe benefits should be included in the CPI because these benefits are not taxed.\n\n\tObservations\n\nAccording to BLS, the CPI is not a cost-of-living index but a measure of the change in prices of a fixed market basket of goods and services. But questions have surfaced from time to time as to whether the CPI could and should be made into a cost-of-living index. The Stigler committee\u2019s landmark study in 1961 said the CPI should be changed to better reflect the cost of living because of the uses that were being made of it at that time. However, additional uses have been made of the CPI since 1961, most notably indexing Social Security benefits and individual income tax brackets and deductions for personal exemptions.\nSince the Stigler committee\u2019s report, BLS changed the way in which the CPI measures homeownership. It went from an asset approach to a rental equivalency method. For our review, we asked 10 housing measurement experts whether the change made the CPI more or less suitable for use as a cost-of-living measure. They all said it made the CPI more suitable as a cost-of-living index.\nBLS has said that it did not make the change to move the CPI closer to a cost-of-living index, whether or not it had that effect. According to BLS, it made the change to improve the presentation of consumers\u2019 out-of-pocket expenditures, which was in keeping with the concept it follows to construct the CPI.\nBLS likely would be unable to remain faithful to that concept if it were to make the medical care component truly reflective of the cost of living. The medical care component is not reflective in large measure because it excludes payments made by third parties for medical care that consumers receive. BLS is opposed to adding third-party payments to the CPI because the payments do not reflect what consumers spend directly and because BLS officials do not believe that adding such payments would make the CPI a clearly better index for its most important uses.\nWe discussed with 10 medical care measurement experts the advantages and disadvantages to changing the medical care component to more closely match a cost-of-living measure. A majority of the experts offered advantages and all identified disadvantages to making such a change. Also, we discussed with the experts the question of what types of medical care expenses the CPI should include in determining the weight of the medical care component. Their answers were not unanimous, and cautionary statements were made. Most experts would include some type of third-party payment, but there was no consensus on how to implement weighting that is based upon cost-of-living concepts. A few questioned whether a single CPI should be used as a measure by which to make cost-of-living adjustments.\nThe overall impact of changing the medical care component of the CPI is unknown. In terms of the weighting of the component, a 1994 CBO study suggests that the present system leads to an understatement of the rate of inflation. Regarding the pricing, a few of the medical care measurement experts we interviewed stated that the use of list prices leads to an overstatement of the rate of inflation. Taken together, the overall magnitude or direction of a possible misstatement from the current weighting and pricing of medical care items is unknown.\nTaking into account the views of our experts and the scope of our work, we do not have a view as to whether the medical care component should be changed to reflect the cost of living. The Stigler committee held that the CPI and the uses made of it should match. Although BLS cannot control the uses made of the CPI, we believe there is a fundamental soundness to the principle of the index matching its uses. However, the federal government uses the CPI in a variety of ways today, some of which did not exist when the Stigler committee did its work. Because the relationship between the current CPI and these uses has not been assessed, it is not clear whether the current CPI, a CPI based on cost-of-living concepts, or even multiple new indexes would best meet all of the purposes for which the CPI is now used. Further, there would be inevitable technical and policy choices to be made in any effort to change the CPI. These choices would reflect on the cost, scope, and quality of such an altered index. Because these issues were outside the scope of our review, we are not making recommendations on whether BLS should work toward making the CPI a comprehensive cost-of-living index.\n\n\t\tAgency Comments and Our Evaluation\n\nOMB and BLS commented on a draft of this report. At a July 15, 1996, meeting, OMB\u2019s Chief Statistician characterized the draft as a fine report and said it had an educational quality that would make it useful for laymen and policymakers. She and her staff identified several places where a technical change could be appropriate or the wording of the report could be improved, and we made these alterations where appropriate.\nThe BLS Commissioner focused her comments on the medical care component. Appendix VI contains a copy of the Commissioner\u2019s July 11, 1996, letter and our additional comments. The Commissioner said the draft report asserted that incorporating expenditures on medical care goods and services by third-party payers would move the CPI toward \u201cthe cost-of-living concept.\u201d According to the Commissioner, this argument implies that there exists one theoretically correct, comprehensive measure of the cost of living and that the CPI deviates from this measure because it lacks a cost-of-living concept as a measurement objective. Neither assumption is strictly correct, the Commissioner said.\nElaborating on this statement, the Commissioner presented information to indicate that different index concepts are required to address different policy concerns and uses, implying that it is infeasible to change the CPI to conform with every possible use. She said developing a separate index measure might be a better way to address the concerns with tracking medical care costs than changing the CPI. The Commissioner also identified conceptual and operational difficulties, some of which she termed formidable or impossible to overcome, that she associated with developing a comprehensive cost-of-living measure. Finally, concerning the exclusion of employer-provided benefits from the medical care component, the Commissioner said BLS\u2019 decision to exclude those benefits reflected a variety of considerations about the scope and use of the CPI but not a rejection of the cost-of-living concept.\nWe did not intend to suggest that there was a single, correct, and comprehensive measure of the cost of living or that there could only be one measure. Accordingly, we made this position clearer in the executive summary and in chapter 1.\nAs we said earlier in this chapter, because of the limitations of our scope, we have not taken a view as to whether the medical care component should be changed to reflect the cost of living or whether multiple indexes should be developed. We agree with BLS\u2019 contention that designing a cost-of-living index is not an easy task. However, to the extent the government uses the CPI for significant purposes as if it were a cost-of-living index, we believe there is fundamental soundness to the principle of an index matching its purposes.","output":"Why GAO Did This Study\n\nPursuant to a congressional request, GAO determined: (1) whether changes made to the housing component of the consumer price index (CPI) made it more or less suitable as a cost-of-living measure; and (2) the advantages and disadvantages of changing the current measurement of medical care costs to a cost of living measurement.\n\nWhat GAO Found\n\nGAO found that: (1) the CPI is not a cost-of-living index, but a measure of the change in prices paid for a fixed market of goods and services; (2) a comprehensive cost-of-living index is broader in coverage than an index based on consumer expenditures and budgets; (3) the Bureau of Labor Statistics (BLS) uses the rental equivalence method to better measure housing costs within the CPI structure; (4) this method has made the CPI more suitable for measuring cost of living; (5) two-thirds of medical care expenses are excluded from the CPI, since they are paid by third parties payers; (6) including third-party payments in the CPI would move the CPI towards a cost-of-living index; (7) BLS excludes third-party payments from the CPI to better represent direct expenditures by consumers; (8) changing the medical care component of CPI would improve the formulation of health-care-specific policies and macroeconomic policies, but there is little technical feasibility in making such changes; (9) the Stigler committee believes that CPI should better reflect the cost-of-living index; (10) it is difficult to design a cost-of-living index for the federal government because of the additional uses of CPI; and (11) policymakers need to consider how the CPI will be affected by changing the medical care component and whether any single price index can account for such cost-of-living measurements."}
{"id":"gao_GAO-08-84","pid":"gao_GAO-08-84_0","input":"\tBackground\n\nCalls to reform the UN began soon after its creation in 1945. Despite  cycles of reform, UN member states continue to have concerns about  inefficient management operations. As the largest contributor of 192  member states, the United States has played a significant role in promoting  UN management reform, including calling for various financial and  administrative changes. The United States, through the Department of  State in Washington, D.C., and the U.S. Mission to the United Nations in  New York, continues to advocate reform of UN management processes.\nIn July 1997, the Secretary-General proposed a broad reform agenda to  transform the UN into an efficient organization focused on achieving  results as it carried out its mandates. In May 2000, we reported that while  the Secretary-General had substantially reorganized the Secretariat\u2019s  leadership and structure, he had not yet completed reforms in human  resource management and planning and budgeting. In September 2002, to  encourage the full implementation of the 1997 reforms, the Secretary- General released a second set of reform initiatives, some expanding on  those introduced in 1997 and others reflecting new priorities. In February  2004, we reported that 60 percent of the 88 reform initiatives in the 1997  agenda and 38 percent of the 66 initiatives in the 2002 agenda were in  place.\nIn 2004 and 2005, a series of UN and expert task force reports  recommended a comprehensive reform of UN management and the UN  human rights apparatus. In September 2005, world leaders gathered at the  UN World Summit in New York to discuss global issues such as UN  reform, development, and human rights, as well as actions needed in each  of these areas. The outcome document from the World Summit, endorsed  by all members of the UN, outlines broad UN reform efforts in areas such  as oversight and accountability and human rights. The document also  called for the Secretary-General to submit proposals for implementing  reforms to improve management functions of the Secretariat.\nIn April 2006, we reported on weaknesses in the UN\u2019s oversight and  procurement systems, both of which have been identified as important  areas for reform. We found that UN funding arrangements constrained  the ability of the UN Secretariat\u2019s Office of Internal Oversight Services  (OIOS) to operate independently and direct resources toward high-risk  areas as needed. In addition, we found serious weaknesses in procurement  internal controls. Specifically, the UN lacked an effective organizational  structure for managing procurement, had not demonstrated a commitment  to improving its procurement workforce, and had not adopted specific  ethics guidance.\nIn October 2006, we reported slow progress in five key UN management  reform areas\u2014management operations of the Secretariat, oversight,  ethics, review of programs and activities (known as mandates), and human  rights. Numerous reform proposals were either awaiting General Assembly  review or had been recently approved, and many of the proposed or  approved reforms lacked an implementation plan with time frames and  cost estimates for the goals stated in the 2005 outcome document. We  also identified several factors that could affect the UN\u2019s ability to fully  implement management reforms, including (1) disagreements among  member states about the implications of the reforms, (2) the difficulty of  holding managers accountable for completing reform efforts due to the  absence of time frames and cost estimates, and (3) administrative policies  and procedures that could complicate the implementation process.\n\n\tProgress on UN Management Reform Efforts Has Varied\n\nSince October 2006, the progress of UN management reform efforts has  varied from little or no progress to substantial progress in the five areas  we reviewed\u2014ethics, oversight, procurement, management operations of  the Secretariat, and review of programs and activities (known as  mandates).\n\n\t\tSteps to Improve Ethics Have Been Taken\n\nThe UN has taken steps to improve organizational ethics since the fall of  2006. In the past year, the ethics office has hired a permanent director and  additional staff and has developed and provided ethics standards, training,  and guidance. The office has begun to enforce a whistleblower protection  policy, but concerns have been raised about the policy\u2019s lack of  jurisdiction over UN funds and programs and weaknesses in the UN\u2019s  internal justice system. Finally, the ethics office has collected financial  disclosure forms for 2005 and 2006 and a private consultant has begun to  review them, but the review has been delayed by the development of an e- filing system for the forms. Progress on UN ethics reform is shown in  figure 1.\nIn the past year, the UN has made substantial progress in staffing its ethics  office by hiring a permanent director and additional permanent staff. In  the fall of 2006, we reported concerns of UN experts that the newly  created UN ethics office was insufficiently staffed with a temporary  director and four professional and two administrative staff members. In  May 2007, a new director of the ethics office was appointed to a 3-year  term. As of October 2007, the ethics office had six professional and three  administrative staff. At that time, the director of the office told us the  office had sufficient staff to carry out its responsibilities.\n\n\t\t\tSome Progress Has Been Made in Developing and Sharing Ethics Guidance\n\nAs of October 2007, the UN ethics office had made some progress in  developing and circulating ethics standards and guidance and had begun  to develop a systemwide code of ethics. The office reported that it had  received 287 requests for services from staff at different levels of the  Secretariat between August 2006 and July 2007, including ethics advice on  issues such as potential and actual conflicts of interest, protection against  retaliation for reporting misconduct, and training.\nThe ethics office has increased ethics training within the organization,  including half-day ethics training workshops for over 3,000 staff members  at all levels of the Secretariat and consultations on the acceptance and  disposal of gifts received by staff in their official capacity. The office has  also developed new ethics standards, such as postemployment restrictions  standards. In May 2007, the ethics office published, and disseminated  throughout the Secretariat, the booklet Working Together: Putting Ethics  to Work. This guide highlights the main challenges to professional and  ethical conduct, clarifies the reasons behind ethical standards in the  context of the UN\u2019s mission and values, and provides staff with resources  to put ethical principles to use, such as contact information for reporting  abuse. In addition, in August 2007, the office published four brochures that  have been used in outreach, training, and communication activities.\nThe ethics office has begun to develop a systemwide code of ethics for all  UN personnel, including those of UN bodies and agencies other than the  Secretariat as requested by the General Assembly in the 2005 World  Summit outcome document. The director of the ethics office told us the  development of a systemwide code of ethics was one of his top priorities  and would be undertaken in the near future, in consultation with staff and  management from multiple UN entities.\n\n\t\t\tSubstantial Progress Has Been Made in Enforcing a Whistleblower Protection Policy\n\nThe UN has made substantial progress in enforcing a whistleblower  protection policy. The ethics office has begun receiving complaints of  retaliation, and several concerns have arisen during the handling of cases.  Between August 1, 2006, and July 31, 2007, the ethics office received 52  complaints of whistleblower retaliation. After its initial assessment, the  ethics office determined that 16 complaints warranted a preliminary  review. Of these 16, the ethics office referred two cases to OIOS for  further investigation following a determination that a prima facie case of  retaliation had been established. Of the remaining 36 complaints, the  ethics office determined that 19 fell outside the scope of its  responsibilities and\/or referred them to other offices, and provided  advice and guidance on more appropriate actions to address 11  complaints. In addition, the office was copied on six complaints that were  primarily addressed to other offices or departments in the UN; in these  instances, the ethics office keeps track of and follows up on any pending  action by other offices.\n\n\t\t\tSeveral Concerns Have Been Identified with the UN\u2019s Whistleblower Protection Policy\n\nUN and State officials have raised concerns regarding the UN\u2019s  whistleblower protection policy. Officials from the ethics office and a  nonprofit public interest group, the Government Accountability Project,  informed us that the success of the UN\u2019s whistleblower protection policy  could be, in part, dependent on successful reform of the UN\u2019s internal  justice system. UN and Government Accountability Project staff told us  that some UN staff members might not trust the current system to be fair  or impartial and, consequently, might not come forward with claims of  retaliation. In its August 2007 annual activities report, the ethics office  expressed a concern that it had not had an opportunity to provide input  into its role in the proposed new internal justice system in relation to other  offices, such as OIOS and the Office of the Ombudsman, and the office  expressed the importance of its inclusion in the justice reform process.\nUN and State officials told us another concern about the whistleblower  protection policy is its lack of jurisdiction over UN funds and programs.  In August 2007, after initially reviewing a whistleblower retaliation case of  an employee at the UN Development Program, the ethics office and the  Office of Legal and Procurement Services concluded that the UN\u2019s  whistleblower protection policy applies only to employees directly under  the Secretary-General. They also concluded that the office has no formal  jurisdiction over various UN funds and programs, including the UN  Development Program. UN and State officials told us that the  whistleblower protection policy is limited in its effectiveness if it is not  applied to the entire UN system. Similarly, the Government Accountability  Project has criticized the effectiveness of the current UN whistleblower  protection policy and recommended that the jurisdiction of the ethics  office be extended to UN funds and programs and possibly to specialized  agencies. In his August 2007 report on the activities of the ethics office,  the Secretary-General recommended that the General Assembly consider  broadening the jurisdiction of the ethics office to cover all UN entities and  to provide further guidance on this issue.\n\n\t\t\tSome Progress Has Been Made in Collecting and Analyzing Financial Disclosures\n\nThe UN has made some progress in collecting and analyzing financial  disclosure forms for 2005 and 2006. Financial disclosure forms have been  collected from UN staff members, and a private contractor has begun to  review them. The primary purpose of the financial disclosure program is  to identify potential conflicts of interest arising from staff members\u2019  financial holdings, private affiliations, or outside activities and to provide  advice when conflicts are found. About 1,700 staff members were required  to file financial disclosure or declaration of interest statements for 2005.  About 98 percent of staff complied, and the remaining 2 percent were  referred to the Office of Human Resources Management for disciplinary  action. A total of 2,548 staff members were required to file forms for 2006.  The office reported that the increase in staff required to file likely reflects  an increased awareness of the program by the heads of departments and  their staff members. In addition, as a confidence-building measure, the  current UN Secretary-General and Deputy Secretary-General voluntarily  made their recent financial disclosure forms public.\nThe financial disclosure statements for 2005 were reviewed by a private  contractor and analyzed to determine any potential conflicts of interest  between the staff members\u2019 confidentially disclosed private interests and  their official duties and responsibilities. In May 2007, the contractor  identified potential conflicts of interest in 17 of the cases reviewed, or  about 1 percent. Of these cases, 14 staff members accepted the advice of  the private contractor to address the potential conflict and 3 cases were  referred to the ethics office for final resolution due to disagreements with  the contractor.\nThe 2006 review is not yet complete. The deadline for submitting forms for  2006 was delayed until May 31, 2007, as a consequence of the development  of an online e-filing system. In order to enhance efficiencies and  standardize procedures, the private contractor developed an online e-filing  system in liaison with the ethics office to simplify and expedite filing  requirements. The director of the ethics office told us that the process for  the 2006 review was ongoing, and, as a result, the compliance rate was not  finalized as of September 2007.\nThe ethics office plans to review the online financial disclosure form and  accompanying guidelines in consultation with other UN offices to decide  whether modifications need to be made. In addition, the office reported  that it is conducting a review to determine whether financial disclosures  should be required of officials other than those of the Secretariat.\n\n\t\tSteps to Improve Oversight Have Been Taken\n\nSteps have been taken to improve UN oversight capabilities. After almost 2  years of discussions that included negotiating its composition and  responsibilities, member states established an Independent Audit Advisory  Committee (IAAC) in June 2007. Since our October 2006 report, OIOS has  worked to improve the capacity of individual divisions, including internal  audit and investigations. However, UN funding arrangements continue to  constrain OIOS\u2019s ability to audit high-risk areas, and the General Assembly  has not authorized OIOS\u2019s financial and operational independence.  Progress on UN oversight reform is shown in figure 2.\nThe UN has made some progress in creating IAAC, but the committee is  not expected to be operational until January 2008. In June 2007, member  states established IAAC to provide an external, independent assessment of  UN oversight capabilities based on best practices in the private sector as  well as the experiences of other international institutions.\nIn approving the creation of IAAC in June 2007, the General Assembly also  established the committee\u2019s terms of reference. These terms include the  following guidelines and requirements:    membership of 5 individuals, preferably from a pool of at least 10  candidates proposed by member states, based on regional and  geographical representation and selected by the General Assembly;   an evaluation process for candidates through consultations with an  external relevant institution, such as the International Organization of  Supreme Audit Institutions; and   membership appointment for a term of 3 years, with the possibility of one- time re-election.\nThe IAAC\u2019s responsibilities include, but are not limited to    examining OIOS\u2019s work plan, taking into account the work plans of the  other UN oversight bodies; reviewing the adequacy of OIOS\u2019s budget, taking into account OIOS\u2019s work  plan;   advising on the effectiveness, efficiency, and impact of OIOS\u2019s audit and    advising the General Assembly on potential oversight issues based on  review of UN financial statements and Board of Auditors reports.\nThe guidelines and requirements represent a compromise among the  member states, according to member state representatives and State  Department officials. Member states disagreed on some of the initially  proposed responsibilities of IAAC. For example, the United States and  several other countries had originally favored that candidates for  membership be referred by the International Organization of Supreme  Audit Institutions and that members not be eligible for re-election. Other  member states disagreed. In addition, State wanted IAAC to be responsible  for assessing the work of all UN oversight bodies, including the UN Board  of Auditors and the UN Joint Inspection Unit. However, both of these  bodies strongly resisted having IAAC oversee their respective functions,  and it was ultimately decided that IAAC would focus primarily on the  work of OIOS while taking into account the work plans of the other UN  oversight bodies. State Department officials told us they were satisfied  overall with the creation of IAAC despite the various compromises. The  five members of the newly created IAAC were elected in November 2007,  and the committee is expected to be operational in January 2008.\n\n\t\t\tSome Progress Has Been Made in Strengthening OIOS\n\nThe UN has made some progress in strengthening the Office of Internal  Oversight Services. The office has strengthened the capacity of its internal  audit, investigation, and evaluations and inspections sections. However,  OIOS funding arrangements continue to hinder its operational  independence.\nSince our last report, OIOS has strengthened the capacity of its internal  audit, investigation, and evaluations and inspections sections. For  example, OIOS created nine new audit posts for its internal audit division  and combined two previously separated internal audit divisions in New  York and Geneva within a single division. OIOS established a professional  practices section\u2014fully staffed with six regular staff and three general  services staff\u2014that is responsible for (1) implementing OIOS\u2019s risk  assessment framework, (2) implementing a quality assurance program,   (3) devising productivity tools, and (4) improving performance reporting  to management. OIOS also established an information and communication  technology section, which has developed an audit strategy and conducted  risk assessments for the information and communication technology  functions of various departments at headquarters.\nSeveral steps have also been taken to improve OIOS\u2019s investigations  division. Member states decided to keep investigations in OIOS rather than  move it to the Secretariat\u2019s Office of Legal Affairs, despite a July 2006  external evaluation\u2019s recommendation to shift the investigations function  to a department in the Secretariat. OIOS argued that such a shift would  significantly diminish the UN\u2019s oversight functions by potentially  compromising the independence of investigations and creating a potential  conflict of interest. Since 2006, about 16 new posts have been created for  the investigations division. OIOS has established a separate special  investigations task force for sexual exploitation and abuse, as well as a  procurement investigations task force.\nFinally, OIOS has made progress in reducing its range of functions and  improving the capacity of its evaluations and inspections sections. For  example, in order to reduce some of its multiple responsibilities and focus  more directly on its oversight responsibilities, the office has shifted  several nonoversight related functions to the UN Department of  Management, including its consulting function. In addition, in 2006, the  evaluation section was strengthened by the addition of two posts to  increase the number of evaluations that can be undertaken.\nFunding arrangements at OIOS continue to impede the independence of  internal auditors. OIOS is designed to be an operationally independent  entity responsible for assisting the Secretary-General in fulfilling his  internal oversight responsibilities of the resources and staff of the UN  through internal audit, monitoring, inspection, evaluation, and  investigations. However, OIOS faces two conflicts that have been  impeding its independence: (1) OIOS\u2019s budget is subject to the review of  the Department of Management, for which OIOS has oversight  responsibility, and (2) OIOS must negotiate funding for nearly two-thirds  of its budget with the entities it is chartered to audit. Without operational  independence, OIOS is constrained in its ability to prevent or mitigate  risks to the UN\u2019s resources and personnel. These risks include fraud,  waste, abuse, inefficiencies, and mismanagement. In April 2006, we  reported that UN funding arrangements adversely affect OIOS\u2019s budgetary  independence and constrain its ability to audit high-risk areas. For  example, OIOS depends on the resources of the funds, programs, and  other entities it audits, and the managers of these programs can deny OIOS  permission to perform work or not pay OIOS for services. State and OIOS  generally agreed with our overall findings and recommendations.\nDiscussion of the revision of OIOS\u2019s funding arrangements was deferred  from the 61st to the 62nd session of the General Assembly due to a lack of  consensus on funding issues. In its report to the 62nd session on its  activities between July 1, 2006, and June 30, 2007, OIOS reiterated that the  UN does not yet have a formal and structural internal control framework  that would provide reasonable assurance to management that its financial  resources are being handled effectively and that its objectives are being  achieved. OIOS pointed out that serious deficiencies in internal controls  have left the UN susceptible to mismanagement and fraud, particularly  regarding procurement activities in Sudan and Congo. OIOS reported that  its internal audit division continues to rely directly on organizations  funded from extra-budgetary resources to provide the resources necessary  to finance a portion of its functions. This reliance does not allow the  division to focus its attention on the areas of highest risk and constrains  the implementation of its audit work plan. For example, it reported that  OIOS is unable to provide reasonable assurance that all high-risk areas  have been identified and are being addressed in the United Nations  Environment Programs. OIOS concluded that its dependence on extra- budgetary funding significantly affects its independence.\n\n\t\tSteps to Improve Procurement Have Been Taken\n\nThe UN Secretariat has improved the UN procurement process, but a  number of reform issues have not moved forward since our October 2006  report. Some progress has been made in strengthening the procedures for  its procurement staff and suppliers, developing a comprehensive training  program for procurement staff, and developing a risk management  framework. However, the UN has made little or no progress in establishing  an independent bid protest system and creating a lead agency concept for  procurements, whereby specific UN organizations would procure certain  goods and services in order to enhance division of labor, reduce  duplication, and reduce costs. In addition, since our October 2006 report,  other organizational issues have arisen that may affect the UN\u2019s  procurement reform efforts. Progress on UN procurement reform is shown  in figure 3.\nThe UN Secretariat has made some progress in strengthening the  operating procedures for its procurement staff and suppliers. In December  2006, the Secretariat issued a bulletin on postemployment restrictions for  former UN staff involved in procurement. The bulletin was issued  following several incidents in recent years in which UN officials and  former officials were involved in unethical and improper procurement  activities. The December 2006 bulletin requires that former UN staff  members, for 1 year following UN employment, are prohibited from  accepting employment or compensation from any UN contractor and, for 2  years, are prohibited from acting on behalf of others in procurement- related matters. In an additional measure to strengthen its procedures, the  UN also issued, in May 2007, a revised supplier code of conduct. The code  requires that suppliers are responsible for adhering to the postemployment  restrictions by not employing former UN staff members for at least 1 year  following a staff member\u2019s separation from the UN. However, a proposal  to increase the minimum threshold for contracts required to be reviewed  by the Headquarters Committee on Contracts from $200,000 to $500,000  has not been approved. OIOS previously recommended that the threshold  be increased, and, according to Procurement Division officials, increasing  the threshold would assist in expediting procurements and better utilizing  their time.\n\n\t\t\tSome Progress Has Been Made in Developing a Training Program for UN Procurement Staff\n\nThe UN Procurement Division has made some progress in developing a  comprehensive training program for procurement staff. Although the  program is not expected to be formally in place until early 2008,  procurement staff are currently being trained in contracting, acquisition,  and other specialized subjects. The training is part of a development plan  to provide a career path for procurement staff\u2014those who complete the  training will be eligible to be certified by internationally recognized  procurement institutions. In addition, according to UN Procurement  Division officials, all procurement staff in headquarters received ethics  training in 2007. As of October 2007, some field staff had received the  ethics training and, according to UN officials, the UN expects to have  provided the training to all field staff by the end of March 2008.\n\n\t\t\tSome Progress Has Been Made in Developing a Risk Management Framework\n\nThe UN Procurement Division has made some progress in its efforts to  develop a risk management framework. In July 2007, a Planning,  Compliance, and Monitoring Section was established and a chief was  appointed to establish tools to detect potential transaction problems and  minimize risks. Also, a proposal for implementing the concept of best- value-for-money is under development and expected to be put into  practice by the Procurement Division in March 2008. In addition, the UN  Department of Management is in the initial planning stages of establishing  a UN-wide risk management framework, known as the Enterprise Risk  Management concept. However, as of September 2007, the concept is still  in the planning stages, time frames and costs for its implementation have  not been established, and risks associated with procurement activities  remain. For example, the OIOS Procurement Task Force reported in  October 2007 that it had found multiple instances of fraud, waste, and  mismanagement\u2014including 10 instances of fraud and corruption in cases  with an aggregate value of over $610 million\u2014resulting in  misappropriation of resources or the unjust enrichment of vendors and  their agents in excess of $25 million. The task force reported that a  number of cases have been referred to national authorities for criminal  prosecution or to the UN for consideration of subsequent legal action. It  has also recommended civil recovery of monetary damages.\n\n\t\t\tLittle or No Progress Has Been Made in Establishing an Independent Bid Protest System\n\nAs of October 2007, an independent bid protest system had not been  established. The lack of an independent bid protest system limits the  transparency of the procurement process by not providing a means for a  vendor to protest the outcome of a contract decision to an independent  official or office. Such a system would provide reasonable assurance that  vendors are treated fairly when bidding and would also help alert senior  UN management to situations involving questions about UN compliance.  According to the UN Procurement Division, a draft process, which  includes an emphasis on best practices from public- and private-sector  procurements, is expected to be finalized by the first quarter of 2008.  Procurement Division officials told us that, in the meantime, they have  enhanced communications with vendors, including developing a more  systematic debriefing procedure for vendors whose bids were  unsuccessful.\n\n\t\t\tLittle or No Progress Has Been Made in Establishing a Lead Agency Concept for Procurement\n\nThe UN has made little or no progress in establishing a lead agency  concept, whereby specific UN organizations would procure certain goods  and services in order to enhance division of labor, reduce duplication, and  reduce costs. For example, the World Food Program might be best suited  to procure items for air transport needs, while the UN Inter-Agency  Procurement Services Office might be best at procuring certain vehicles.  In a report on procurement reform submitted to the General Assembly in  June 2006, the UN projected that implementation of the lead agency  concept would take 6 to 12 months. However, in December 2006, the  General Assembly did not approve a proposal to adopt the concept. In the  absence of the General Assembly\u2019s approval, Procurement Division  officials told us they have established informal relationships with several  UN organizations that, under current rules and regulations, facilitate the  procurement of certain specialized goods and services, as needed.\n\n\t\t\tSeveral Procurement-Related Issues Have Not Moved Forward Due to DPKO Reorganization\n\nThe General Assembly did not consider several procurement reform issues  during the recently completed 61st session because of the UN\u2019s June 2007  reorganization of the UN Department of Peacekeeping Operations  (DPKO). Issues that are currently unclear include operational  procedures, such as establishing lines of accountability, delegation of  authority, and the responsibilities of the Departments of Management and  Peacekeeping Operations. Because of the reorganization, announced by  the Secretary-General in February 2007, the Secretariat did not submit  several reports on procurement during the 61st session, as requested by  the General Assembly. According to Secretariat officials, they did not  submit the reports mainly because the reorganization of the DPKO created  several procurement-related concerns that have not yet been addressed.\n\n\t\tSteps to Improve the Management Operations of the Secretariat Have Been Taken\n\nThe UN has taken actions to improve some of the management operations  of the Secretariat, but many reform proposals still have not moved  forward. Some progress has been made on issues involving human  resources and information technology, while little or no progress has been  made in reforming the UN\u2019s internal justice system, reforming certain  budgetary and financial management functions, and improving the delivery  of certain services. Since our October 2006 report, the Secretariat has  issued several reports on management operations that the General  Assembly is expected to consider during the current (62nd) session.  Progress on reforming management operations of the UN Secretariat is  shown in figure 4.\nThe UN has made some progress in improving human resource functions.  Since we issued our October 2006 report, the UN Secretariat has issued  several reports with proposals that, if implemented, could improve some  human resource functions. However, the proposals are, in large part, still  awaiting General Assembly review. In addition, the Secretariat has not  completed reviews and analyses of other human resource reform  proposals.\nIn late September 2006\u2014too late for inclusion in our October 6, 2006  report\u2014the Secretary-General released a report entitled Investing in  People that included a human resources management framework aimed at  strengthening the UN\u2019s human resources goals. The report included  discussions of several human resources issues and specifically stated that    staff mobility is essential to creating a more-versatile, multiskilled,  experienced staff capable of handling the UN\u2019s operations, which have  changed dramatically in the last 20 years;   an effective career development policy serves both the UN and its staff  members by building and maintaining an international civil service capable  of meeting the UN\u2019s present and future needs, as well as meeting the  development needs and aspirations of the staff; and   a one-time staff buyout could enable the Secretary-General to realign staff  to meet the UN\u2019s changing priorities, while facilitating retirement or  separation of staff who can no longer meet their career aspirations.\nThe General Assembly considered the report during the 61st session and,  in large part, postponed making decisions on key issues. For example, in  a January 2007 resolution, the General Assembly postponed decisions  regarding streamlining contractual arrangements and harmonizing  conditions of service and rejected the proposed one-time staff buyout.  Also, since its May 2006 rejection of the concept, the General Assembly  has not taken steps to redefine the role of the Deputy Secretary-General to  assume formal authority and accountability for the management and  overall direction of the operational functions of the Secretariat.\nFrom March to May 2007, the Secretariat submitted reports to the General  Assembly, as requested, on human resource issues such as recruiting and  staffing, conditions of service, and contractual arrangements. However,  because of the General Assembly\u2019s focus on the reorganization of the  DPKO and other issues during that time frame, the General Assembly did  not consider these issues, which are currently rescheduled for  consideration during the 62nd session. According to U.S. and UN officials  and most of the 17 member state delegates we spoke with, reforming these  and other human resource functions is likely to continue to be difficult  because of long-standing disagreements among member states.\n\n\t\t\tSome Progress Has Been Made in Improving Information Technology\n\nThe UN has made some progress in improving information technology.  The position of chief information technology officer (CITO), created by  the General Assembly in August 2006, was filled in July 2007, and the  official took office in September 2007. The leadership of a CITO is  necessary to help ensure greater integration of the Secretariat\u2019s workflow  and knowledge management by allowing program objectives to be  integrated with budgetary and financial data into one process, with the  goal of enabling the Secretariat to act more transparently and efficiently in  managing staff and procuring goods and services of greater quality and  quantity, at lower levels of risk. The CITO is especially important at the  present time because the UN is in the process of developing a new  organizationwide information system\u2014known as the Enterprise Resource  Planning (ERP) system\u2014to replace its antiquated integrated management  information system. Creation of the ERP has been in the planning process  for several years, and, according to Secretariat officials, implementation of  the system is expected to start in 2008. During the planning process, the  UN has worked with potential vendors to help ensure that the new system,  when implemented, will adequately support the global functions of the  UN, including an ever-growing number of peacekeeping missions. As of  October 2007, the Secretariat had not selected the firm that will implement  the new system. According to UN officials, the Secretariat is expected to  announce a decision in 2008.\nThe Secretary-General did not submit a comprehensive report on  information management, including cost estimates, in March 2007, as  requested by the General Assembly. According to UN officials, the report  was not submitted because the ERP planning process was ongoing, a CITO  had not yet been named, and the Secretariat was still collecting data on  information technology and other issues. The Secretariat plans to present  reports on information technology to the General Assembly during the  62nd session, on topics such as the implementation of the ERP and  governance of information and communications technology.\n\n\t\t\tLittle or No Progress Has Been Made in Reforming the UN\u2019s Internal Justice System\n\nThe UN has made little or no progress in reforming its internal justice  system. According to a July 2006 report by an independent external panel  of experts, the UN\u2019s internal justice system was outdated, ineffective, and  compromised. The panel\u2019s report concluded that effective reform of the  UN is not possible without an efficient, independent, and well-resourced  internal justice system that safeguards the rights of staff members and  effectively helps ensure the accountability of managers and staff members.  Although the General Assembly agreed in April 2007 to establish a new  internal justice system, many issues involving organizational relationships,  personnel, and funding of the new system are still unclear. As of October  2007, the General Assembly had yet to decide who would be covered by  the new system, how judges within the Office of the Ombudsman would be  nominated and selected, and what resources would be needed. According  to the Secretariat, member states aim to implement the new system by  January 2009.\n\n\t\t\tLittle or No Progress Has Been Made in Reforming Certain Budgetary and Financial Management Functions\n\nSince our October 2006 report, the UN has made little or no progress in  improving certain budgetary and financial management functions. The  General Assembly has rejected some proposed reforms and taken no  action on others. For example, to improve cash management and  operational flexibility, the Secretary-General proposed that peacekeeping  accounts be consolidated. In July 2007, the General Assembly rejected this  proposal. The Secretary-General also proposed to improve strategic  budgetary planning and implementation by reducing the number of  sections in the budget from 35 sections to 13, and provided detailed  information on this proposal in May 2006. However, as of October 2007,  the General Assembly had not taken action on the proposal. Other  financial management reform proposals that have not been adopted  include retaining budget surpluses for use in subsequent periods, charging  interest on arrears of member states\u2019 assessed contributions, and creating  a separate account to cover certain unanticipated expenditures arising  from exchange rate fluctuations and inflation. The Secretariat has  prepared a number of reports that the General Assembly is scheduled to  review during the current (62nd) session and is reviewing other proposed  reform actions, such as the management of trust funds.\n\n\t\t\tLittle or No Progress Has Been Made in Improving the Delivery of Certain Services\n\nThe UN has made little or no progress in improving the delivery of certain  services. In May 2006, the General Assembly asked the Secretary-General  to conduct several cost-benefit analyses to determine whether certain UN  services could be improved. Among the services are internal printing and  publishing processes; medical insurance plan administration; information  technology support; payables, receivables, and payroll processes; and staff  benefits administration. Subsequently, the Secretariat initiated several  projects to address these reform proposals but has not completed its  analyses. For example, the Secretariat is currently collecting data from  staff participants in the UN medical plan and reviewing alternative delivery  methods for payroll and other functions.\nThe Secretariat has not issued a comprehensive report on public access to  UN documentation, which the General Assembly requested be submitted  during the 61st session. The Secretariat developed a detailed policy  proposal that includes resource requirements, financing mechanisms, and  proposal of a fee structure. However, according to Secretariat officials, the  Secretary-General intends to discuss the proposal with member states  before formally submitting it.\n\n\t\tLimited Steps Have Been Taken on the Review of UN Programs and Activities\n\nAlthough UN member states agreed to continue a review of UN programs  and activities (known as mandates) in 2007, no actions have been taken to  eliminate or consolidate mandates. Member states continue to disagree on  the scope and process of the review and lack the capacity to carry out the  review, according to State. Consultations among member states on how to  move forward on the issue will continue into the 62nd session. Progress in  reviewing UN programs and activities is shown in figure 5.\nIn 2005, UN member states agreed to complete a review of all UN  mandates with the goal of strengthening and updating them to more  accurately reflect the needs of the organization. After some initial minor  progress, this effort has diminished substantially due to member states\u2019  ongoing disagreements on the scope and process of the review. In  addition, the review has not advanced due to the lack of capacity among  member states to evaluate the mandates in a substantive matter, according  to State.\nPhase I of mandate review, which covered all mandates 5 years old or  older and not renewed that originated from the General Assembly, was  completed in November 2006. We reported in 2006 that throughout the  Phase I review, member states disagreed on which mandates to include in  the review and what to do with any savings generated by the potential  elimination or consolidation of mandates, which led to limited or slow  progress. Members of the G-77 contended that the scope of the review  should include only those mandates 5 years old or older that have not been  reviewed since they were adopted. Phase I thus consisted of a review of  626 mandates originating from the General Assembly. As a result of Phase  I, member states agreed to set aside 74 completed mandates and requested  more information from the Secretariat on 15 mandates. No agreement  was reached on the remaining mandates, and no mandates were  consolidated or eliminated as a result of the review.\nMember states agreed to carry out a Phase II review of mandates to  include mandates both renewed and not renewed. The planned approach  was to review mandates by thematic cluster. The initial goal for beginning  Phase II was January 2007. Phase II was delayed by the lack of a co-chair  on the Informal Working Group on Mandate Review from January 2007 to  April 2007 and again from July to October 2007. In October 2007, the  process was far from complete, with only one of the nine clusters  addressed.\nOn September 17, 2007, the General Assembly, per the request of the  outgoing President of the General Assembly, adopted an oral decision to  continue consultations among member states on how to proceed with  mandate review in the 62nd session. State officials told us that a new  approach is necessary for the review and that it would be meaningless to  proceed unless member states identify a process that can achieve  meaningful results. State also informed us that there was no  implementation plan for mandate review. New parameters for the  continuation of the mandate review process have been proposed, but  progress remains to be seen.\n\n\tVarious Factors Have Slowed the UN\u2019s Management Reform Efforts\n\nVarious factors have slowed the UN\u2019s efforts to improve the management  of the Secretariat, and many remaining UN management reforms cannot  move forward until these factors are addressed. During our review, we  identified four key factors that hinder progress on UN management  reforms: (1) disagreements among member states on UN management  reform efforts, (2) lack of comprehensive implementation plans for some  management reform proposals, (3) administrative policies and procedures  that continue to complicate the process of implementing certain complex  human resource initiatives, and (4) competing UN priorities, such as the  proposal to reorganize the Department of Peacekeeping Operations, that  limit the capacity of General Assembly members to address management  reform issues.\n\n\t\tDisagreements among Member States Continue to Impede Efforts\n\nDisagreements within the General Assembly continue to limit the  implementation of management reforms. Progress on UN management  reform efforts is dependent in large part on member states reaching  consensus, which can be a time-consuming process as the UN is composed  of 192 diverse member states that have differing views on a wide array of  issues. (App. III shows the typical management reform decision-making  process at the UN for issues requiring General Assembly approval.) In  October 2006, we reported that disagreements between G-77 and  developed countries over the broader implications of management  reforms may affect the UN\u2019s ability to fully implement them.\nFrom April through September 2007, we discussed management reform  efforts with delegates from 17 member states representing Africa, Asia,  Europe, Latin America, the Middle East, and North America. In these  discussions, 15 of the 17 delegations told us that the number one challenge  to continued progress on management reform efforts is member state  disagreements on the priorities and importance of the remaining reform  efforts. For example, member states continue to disagree on the scope  and process of the review of UN mandates, and some member states are  concerned that mandates important to them will be eliminated. For that  reason, no mandates have been eliminated or consolidated as a result of  the reviews\u2014two of the goals of the process, according to State.\nRepresentatives of member states we spoke with repeatedly stated a clear  need for more constructive engagement on reform efforts, particularly  between the United States and G-77 countries. For example, four member  states\u2014Chile, South Africa, Sweden, and Thailand\u2014have launched the  Four Nations Initiative in an effort to provide new ideas and perspectives  on governance and management of the UN Secretariat. A State official told  us the process appears to be a \u201ccredible effort\u201d by member states that  complements the UN management reform process. However, he added  that other member states\u2019 views on this initiative and the potential of the  initiative to overcome disagreements among member states are unclear.\n\n\t\tLack of Comprehensive Implementation Plans Continues to Impede Management Reform Efforts\n\nThe UN has not developed comprehensive long-term implementation plans  for some management reform proposals. Establishing implementation  plans is a practice that increases the transparency and accountability of  the reform process. We previously recommended that State work with  other member states to encourage the General Assembly and the  Secretary-General to include cost estimates and expected time frames for  implementation and completion of each reform effort as it is approved.  During our current review, we found little evidence that time frames,  completion dates, and cost and savings estimates for completing the long- term implementation of specific management reforms had been  established. In addition, most of the approximately 20 cost-benefit  analyses and other assessments of management reform issues that the  Secretariat had planned to complete by March 2007 have not yet been  submitted to the General Assembly. As a result, the total long-term costs of  the reform efforts, including the U.S. government\u2019s share, remain unclear.  Moreover, the UN currently has no formal plan to evaluate the  effectiveness of its management reform efforts to determine whether they  have achieved the goals set out in the 2005 World Summit outcome  document.\n\n\t\tAdministrative Policies and Procedures Continue to Complicate Human Resource Reform Efforts\n\nAdministrative policies and procedures, such as staff regulations and rules  that are directed by the General Assembly, continue to complicate and  sometimes restrict the process of implementing certain human resources  initiatives. Such guidance, some of which has been in existence for  decades, is part of the UN\u2019s existing resource management framework  that, according to the Secretary-General, still lacks flexibility and is largely  headquarters-based, though more than half of the UN\u2019s staff are currently  serving in the field. Although the Secretariat has made progress on some  administrative reform initiatives relating to human resources and  information technology, it has not addressed several other administrative  policies and procedures issues, including conducting a one-time staff  buyout and outsourcing and telecommuting for certain administrative  services, such as payroll processes, staff benefit administration, and  information technology support. As we discussed in our October 2006  report, the overall restrictiveness of these policies and procedures  continues to complicate the management reform process.\n\n\t\tCompeting Priorities Slow UN Management Reform Efforts\n\nSince our October 2006 report, competing priorities within the Secretariat  and General Assembly have limited the capacity of General Assembly  members to address the remaining management reform issues. In  February 2007, for example, several procurement-related reform issues,  such as clear lines of responsibility and accountability, delegation of  authority, and internal controls, were not taken into consideration by the  General Assembly during the spring 2007 session, as planned. The General  Assembly did not address these issues because the new Secretary-General  concurrently proposed a reorganization of the DPKO, which absorbed  much of the General Assembly\u2019s attention throughout the session. As a  result, the Secretariat decided not to issue several procurement reports  during the spring 2007 session, without which member states told us they  were unable to formally consider certain procurement-related reform  issues.\n\n\tConclusions\n\nReforming the management of the United Nations has been a priority of  the U.S. government for many years, as long-standing weaknesses and  inefficiencies in UN management functions have persisted. Although there  has been progress in implementing several components of the 2005 reform  agenda, some key components remain to be implemented. Completion of  the reform agenda will require overcoming several factors, particularly  disagreements among member states regarding how to achieve the goals  they agreed to at the 2005 World Summit. Some past reform efforts remain  incomplete because they did not get sustained and broad support of  member states. The current effort faces this same risk. Moreover, while  implementation of the reform agenda is a necessary element in meeting  the goals of the 2005 World Summit outcome document, it is not in itself  sufficient. Successful management reform requires that its components  are ultimately effective in modernizing the management functions of the  United Nations.\n\n\tRecommendation for Executive Action\n\nTo encourage UN member states to continue to pursue the reform agenda  of the 2005 World Summit, we recommend that, as management reforms  are implemented over time, the Secretary of State and the U.S. Permanent  Representative to the UN include in State\u2019s annual U.S. Participation in  the United Nations report an assessment of the effectiveness of the  reforms.\n\n\tAgency Comments and Our Evaluation\n\nWe requested comments on a draft of this report from the Department of  State and the UN Secretariat. State\u2019s comments are reprinted in appendix  II, along with our responses to specific points. The UN Secretariat did not  provide written comments.\nState endorsed the main findings and conclusions of our report and noted  that our assessment of UN progress on management reform efforts was  accurate and balanced. State also agreed fully with the need to keep  Congress informed of the effectiveness of management reforms, adding  that the department will continue to monitor and inform Congress, as we  recommended. In addition, State agreed with us that more could be done  to ensure credible oversight at the UN. Furthermore, State noted that we  correctly recognize the need for the UN to establish a formal internal  control framework.\nState did not agree with our statement that successful whistleblower  protections cannot be established without substantial reform of the UN\u2019s  internal justice program. During our review, we found that UN and  nongovernmental organization staff had concerns about weaknesses in the  UN internal justice system and the potential impact of these weaknesses  on the implementation of a successful whistleblower protection policy. We  agree with these concerns. State also notes that the General Assembly\u2019s  approval of the creation of an independent bid protest system was a  critical first step toward enhancing transparency in the UN\u2019s procurement  award process. However, per our methodology, we categorize this reform  effort under \u201clittle or no progress\u201d because there was evidence that few or  no steps had been taken towards actual implementation of the system.   State said it understood that this assessment was consistent with our  evaluation methodology.\nState and the UN Secretariat provided technical comments that we have  incorporated into the report, as appropriate.\nWe are sending copies of this report to interested congressional  committees, the Secretary of State, and the U.S. Permanent Representative  to the United Nations. We will also make copies available to others upon  request. In addition, the report will be available at no charge on the GAO  Web site at http:\/\/www.gao.gov.\nIf you or your staffs have any questions about this report, please contact  me at (202) 512-9601 or melitot@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 contributions to this report are listed  in appendix V.\n\nAppendix I: Scope and Methodology\n\nTo identify and examine the progress of UN management reforms, we  reviewed key documents proposing United Nations (UN) management  reforms and interviewed officials from several UN departments in New  York. We obtained and reviewed official reports of the Secretariat and the  Office of Internal Oversight Services (OIOS), Advisory Committee on  Administrative and Budgetary Questions (ACABQ) documents, General  Assembly resolutions, Secretary-General bulletins, Web sites, related  budget documents, and statements from UN officials. We also interviewed  senior officials from UN departments in New York City. Specifically, we  met with officials from the General Assembly Office of the President, the  Office of the Deputy Secretary-General, the Department of Management,  and OIOS. During the course of our review, we discussed the status of UN  management reforms with officials from the Department of State in  Washington, D.C., and the UN in New York. We also met with  representatives from 17 of 192 member states representing various  geographic regions, including Africa, Asia, Europe, the Middle East, North  America, and South America, to obtain a balance of views on the most  critical challenges to reforming UN management.\nWe selected management reform issues in the key areas of ethics,  oversight, management operations of the Secretariat, and review of  programs and activities (known as mandates) to examine in more detail.  We determined that these were the key areas of management reform  through our review of UN documents and our discussions with UN and  U.S. officials. We focused our work on management reforms that began in  2005 and did not specifically address the 1997 and 2002 reform agendas.  The 2005 reforms applied to the Secretariat and the UN\u2019s governing bodies,  including the General Assembly, the Economic and Social Council, and the  Security Council. We did not include in our review reforms targeted at UN  specialized agencies or UN funds and programs; we also excluded efforts  such as the UN Peace Building Commission and Security Council and  governance reforms. We did not evaluate the effectiveness of the reform  efforts because of the recentness of their implementation.\nTo assess the progress of the UN reform efforts we reviewed, we  developed the following three categories:    Little or no progress: There is evidence that few or no steps have been  taken on the reform effort.\nSome progress: There is evidence that some steps have been taken on the  reform effort, while others remain.\nSubstantial progress: There is evidence that the reform effort has been  mostly or fully implemented.\nDuring our review, we determined which category of progress to assign to  each reform effort based on documents we collected and discussions we  had with State, UN, and other officials. After we made our initial  assessments of progress, three other GAO staff members not involved in  this review used the evidence and the categories to make their own  assessments independently of each other. These staff members then met  with each other to reconcile any differences in their initial assessments.  Finally, they met with us and confirmed that we were all in agreement on  our assessments.\nTo identify factors slowing the progress of the UN reforms we examined,  we reviewed reports and documentation of the Secretariat, General  Assembly, OIOS, and the ethics office. In addition, we spoke with UN  officials in New York. These included officials from the Office of the  Deputy Secretary-General, the Department of Management, ACABQ, and  OIOS. We also met with representatives from several member states and  spoke with U.S. officials in Washington, D.C., and New York. We also  interviewed outside observers of the UN system, including  nongovernmental organizations and members of academia.\nMany cost estimates for the proposed reform initiatives are preliminary,  and detailed longer-term cost estimates are being developed; therefore, we  did not analyze the assumptions underlying these estimates to determine  whether they are reasonable and reliable. However, we believe that the  cost estimates and the associated funds that the General Assembly has  appropriated to date for reform efforts are sufficiently reliable for the  purposes of this report.\nWe conducted our work from March to November 2007 in accordance with  generally accepted government auditing standards.\n\nAppendix II: Comments from the Department of State\n\n\tGAO Comments\n\n1.  During our review, we found that UN and nongovernmental  organization staff had concerns about weaknesses in the UN internal  justice system and the potential impact of these weaknesses on the  implementation of a successful whistleblower protection policy. We  agree with these concerns.  As we state in our report, without a fair  and impartial justice system that effectively executes corrective action  in cases of retaliation or threatened retaliation, staff may not submit  cases to the ethics office.  Also, the annual activities report of the  ethics office states that protection against retaliation is linked to the  internal justice system.    2.  State notes that the General Assembly\u2019s approval of the creation of an  independent bid protest system was a critical first step toward  enhancing transparency in the UN\u2019s procurement award process. Per  our methodology, approving the creation of a protest system, while  demonstrating intent, is not equivalent to actual implementation of the  system, which has yet to begin. We categorize this reform effort under  \u201clittle or no progress\u201d because there was evidence that few or no  implementation steps had been taken.  As State notes in its comments,  our assessment that the UN has made little or no progress in  establishing an independent bid protest system for UN procurements is  consistent with our evaluation methodology.\n\nAppendix III: Typical Management Reform Decision-Making Process for Issues Requiring General Assembly Approval\n\nThe management reform decision-making process at the UN involves  multiple entities. For example, when a management reform has budgetary  implications, the Advisory Committee on Administrative and Budgetary  Questions and the Administrative and Budgetary Committee (the Fifth  Committee) are involved in the process. The Advisory Committee on  Administrative and Budgetary Questions, a subsidiary organ of the General  Assembly, consists of 16 members appointed by the assembly in their  individual capacity. The functions and responsibilities of the advisory  committee include advising the General Assembly concerning any  administrative and budgetary matters referred to it. The Fifth Committee  is the General Assembly\u2019s committee for administrative and budgetary  matters and is composed of all 192 member states. Figure 6 depicts the  typical management reform decision-making process at the UN for issues  requiring General Assembly approval.\n\nAppendix IV: Funds Approved to Implement Certain Management Reform Initiatives, as of October 2007\n\nWe reported in October 2006 that the Secretariat\u2019s estimated costs for  implementing certain management reform initiatives were approximately  $40 million. Since then, due to additional actions taken during the 61st  session, the Secretariat\u2019s revised cost estimate, as of October 2007, had  risen by about $13 million to approximately $53 million, as shown in table  1 below.\n\nAppendix V: GAO Contact and Staff Acknowledgments\n\n\tStaff Acknowledgments\n\nIn addition to the contact named above, Phillip Thomas, Assistant  Director; Sarah Chankin-Gould; Debbie J. Chung; Lyric Winona Clark; and  George Taylor made key contributions to this report. Michael Derr,   Etana Finkler, Grace Lui, Amanda Miller, and Jena Sinkfield provided  technical assistance.\n\nRelated GAO Products\n\nUnited Nations Organizations: Oversight and Accountability Could Be  Strengthened by Further Instituting International Best Practices.  GAO-07-597. Washington, D.C.: June 18, 2007.\nUnited Nations: Management Reforms Progressing Slowly with Many  Awaiting General Assembly Review. GAO-07-14. Washington, D.C.:  October 5, 2006.\nUnited Nations: Weaknesses in Internal Oversight and Procurement  Could Affect the Effective Implementation of the Planned Renovation.  GAO-06-877T. Washington, D.C.: June 20, 2006.\nUnited Nations: Oil for Food Program Provides Lessons for Future  Sanctions and Ongoing Reform. GAO-06-711T. Washington, D.C.: May 2,  2006.\nUnited Nations: Internal Oversight and Procurement Controls and  Processes Need Strengthening. GAO-06-710T. Washington, D.C.: April 27,  2006.\nUnited Nations: Funding Arrangements Impede Independence of  Internal Auditors. GAO-06-575. Washington, D.C.: April 25, 2006.\nUnited Nations: Lessons Learned from Oil for Food Program Indicate  the Need to Strengthen UN Internal Controls and Oversight. GAO-06-330.  Washington, D.C.: Apr. 25, 2006.\nUnited Nations: Procurement Internal Controls Are Weak. GAO-06-577.  Washington, D.C., April 25, 2006.\nUnited Nations: Preliminary Observations on Internal Oversight and  Procurement Practices. GAO-06-226T. Washington, D.C.: October 31, 2005.\nUnited Nations: Sustained Oversight Is Needed for Reforms to Achieve  Lasting Results. GAO-05-392T. Washington, D.C.: March 2, 2005.\nUnited Nations: Oil for Food Program Audits. GAO-05-346T. Washington,  D.C.: February 15, 2005.","output":"Why GAO Did This Study\n\nThe United States has advocated reforms of United Nations (UN) management for many years. In October 2006, GAO reported that UN management reforms were progressing slowly and that many were still awaiting review by the General Assembly. For this review, GAO was asked to (1) determine the progress of UN management reform initiatives in five key areas--ethics, oversight, procurement, management operations of the Secretariat, and review of programs and activities (known as mandates)--and (2) identify factors that have slowed the pace of reform efforts. To address these objectives, GAO reviewed documents relating to UN management reform and interviewed U.S. and UN officials.\n\nWhat GAO Found\n\nThe progress of UN management reform efforts has varied in the five areas that GAO reviewed--ethics, oversight, procurement, management operations of the Secretariat, and review of programs and activities (known as mandates). To determine the status of these reform efforts, GAO developed three categories of progress, defined as follows: (1) Little or no progress = Few or no steps have been taken; (2) Some progress = Some steps have been taken, while others remain; and (3) Substantial progress = The reform effort has been mostly or fully implemented. The ethics office has made substantial progress in staffing its office and implementing a whistleblower protection policy, as well as some progress in developing ethics standards and collecting and analyzing financial disclosure forms. Member states made some progress in improving oversight at the UN when they created an Independent Audit Advisory Committee, which is expected to be operational by January 2008. Additionally, the Office of Internal Oversight Services (OIOS) improved the capacity of individual divisions, including internal audit and investigations. However, UN funding arrangements continue to constrain the independence of OIOS and its ability to audit high-risk areas. Some progress has been made in the area of procurement, such as developing a comprehensive training program for procurement staff. However, the UN has made little or no progress in establishing an independent bid protest system. Some progress has been made in reforming management operations of the UN Secretariat, such as improving human resource functions and information technology. In contrast, little or no progress has been made in reforming the UN's internal justice system for resolving and adjudicating staff grievances and safeguarding the rights of staff members, certain budgetary and financial management functions, and the delivery of certain services. Finally, despite some limited initial actions, the UN's review of programs and activities (known as mandates) has not advanced due in part to a lack of support by many member states. Various factors have slowed the pace of UN management reforms, and a number of reforms cannot move forward until these factors are addressed. Four key factors that have slowed the pace include (1) disagreements among member states on the priorities and importance of UN management reform efforts, (2) the lack of comprehensive implementation plans for some management reform proposals, (3) administrative policies and procedures that continue to complicate the process of implementing certain complex human resource initiatives, and (4) competing UN priorities, such as the proposal to reorganize the Department of Peacekeeping Operations, that limit the capacity of General Assembly members to address management reform issues."}
{"id":"gao_GAO-08-967","pid":"gao_GAO-08-967_0","input":"\tBackground\n\nIn 2007, almost 13 million citizens from 27 countries entered the United  States under the Visa Waiver Program. The program was created to  promote the effective use of government resources and facilitate  international travel without jeopardizing U.S. national security. The United  States last expanded the Visa Waiver Program\u2019s membership in 1999; since  then, other countries have expressed a desire to become members. In  February 2005, President Bush announced that DHS and State would  develop a strategy, or \u201cRoad Map Initiative,\u201d to clarify the statutory  requirements for designation as a participating country. According to DHS,  some of the countries seeking admission to the program are U.S. partners  in the war in Iraq and have high expectations that they will join the  program due to their close economic, political, and military ties to the  United States. As we reported in July 2006, DHS and State are consulting  with 13 \u201cRoad Map\u201d countries seeking admission into the Visa Waiver  Program\u2014Bulgaria, Cyprus, Czech Republic, Estonia, Greece, Hungary,  Latvia, Lithuania, Malta, Poland, Romania, Slovakia, and South Korea.\nFollowing the terrorist attacks of September 11, 2001, Congress passed  additional laws to strengthen border security policies and procedures, and  DHS and State instituted other policy changes that have affected a  country\u2019s qualifications for participating in the Visa Waiver Program. In  August 2007, Congress enacted the 9\/11 Act, which provides DHS with the  authority to consider admitting into the Visa Waiver Program countries  that otherwise meet the program requirements, but have refusal rates  between 3 percent and 10 percent, provided the countries meet certain  conditions (see app. II for worldwide refusal rates for fiscal year 2007).  Before being admitted to the program, for example, the countries must  demonstrate a sustained reduction in refusal rates, and must be  cooperating with the United States on counterterrorism initiatives,  information sharing, and the prevention of terrorist travel, among other  things. In addition, DHS must complete two actions aimed at enhancing  the security of the program (see app. III for the key legislative  requirements for inclusion in the Visa Waiver Program). In particular, to  consider admitting countries into the Visa Waiver Program with refusal  rates between 3 percent and 10 percent, DHS must certify the following to  Congress:    A system is in place that can verify the departure of not less than 97  percent of foreign nationals who depart through U.S. airports. Initially,  this system will be biographic only. Congress required the eventual  implementation of a biometric exit system at U.S. airports. If the biometric  air exit system is not in place by July 1, 2009, the flexibility that DHS may  obtain to consider admitting countries with refusal rates between 3  percent and 10 percent will be suspended until the system is in place.\nAn electronic travel authorization system is \u201cfully operational.\u201d This  system will require nationals from Visa Waiver Program countries to  provide the United States with biographical information before boarding a  U.S.-bound flight to determine the eligibility of, and whether there exists a  law enforcement or security risk in permitting, the foreign national to  travel to the United States under the program. DHS recommends that  applicants obtain ESTA authorizations at the time of reservation or ticket  purchase, or at least 72 hours before their planned date of departure for  the United States. The ESTA application will electronically collect  information similar to the information collected in paper form by CBP.To the extent possible, according to DHS, applicants will find out almost  immediately whether their travel has been authorized, in which case they  are free to travel to the United States, or if their application has been  rejected, in which case they are ineligible to travel to the United States  under the Visa Waiver Program. Those found ineligible to travel under the  Visa Waiver Program must apply for a visa at a U.S. embassy to travel to  the United States.\nIn addition, the 9\/11 Act requires that visa waiver countries    enter into an agreement with the United States to report, or make available  through Interpol or other means as designated by the Secretary of  Homeland Security, to the U.S. government information about the theft or  loss of passports within a strict time frame;    enter into an agreement with the United States to share information  regarding whether citizens and nationals of that country traveling to the  United States represent a threat to U.S. security; and    accept for repatriation any citizen, former citizen, or national of the  country against whom the United States has issued a final order of  removal.\nWhen DHS exercises its authority to waive the 3 percent refusal rate  requirement, it shall, in consultation with State, take into account other  discretionary factors, pursuant to the 9\/11 Act, including a country\u2019s  airport security standards; whether the country assists in the operation of  an effective air marshal program; the standards of passports and travel  documents issued by the country; and other security-related factors,  including the country\u2019s cooperation with (1) the United States\u2019 initiatives  toward combating terrorism and (2) the U.S. intelligence community in  sharing information regarding terrorist threats. DHS works in consultation  with State and Justice, as well as the intelligence community, as part of  DHS\u2019s assessment of countries seeking to join the Visa Waiver Program.\n\n\tExecutive Branch Is Moving Quickly to Expand the Visa Waiver Program without a Transparent Process\n\nThe executive branch is moving aggressively to expand the Visa Waiver  Program by the end of 2008, but, in doing so, DHS has not followed a  transparent process for admitting new countries to the program\u2014an  approach that has created confusion among other U.S. agencies in  Washington, D.C.; U.S. embassy officials overseas; and those countries  that are seeking to join the Visa Waiver Program. During the expansion  negotiations, DHS has achieved some security enhancements, such as new  agreements that, among other things, require the reporting of lost and  stolen blank and issued passports.\n\n\t\tDHS Has Not Followed a Transparent Process for Visa Waiver Program Expansion\n\nWe found that the Visa Waiver Program Office has not followed its own  standard operating procedures, completed in November 2007, which set  forth the key milestones that DHS and aspiring countries must meet before  additional countries are admitted into the program. According to the  standard procedures, State should submit to DHS a formal, written  nomination for a particular country, after which DHS is to lead an  interagency team to conduct an in-country, comprehensive review of the  impact of the country\u2019s admission into the Visa Waiver Program on U.S.  security, law enforcement, and immigration interests. Figure 1 depicts the  standard procedures that the program office established to guide  expansion of the Visa Waiver Program compared with DHS\u2019s actions since  August 2007. Although State has only nominated one country\u2014Greece\u2014 DHS has nonetheless conducted security reviews for countries that State  has not yet nominated\u2014Czech Republic, Estonia, Hungary, Latvia,  Lithuania, Slovakia, and South Korea. According to State officials, until  DHS has implemented the required provisions of the 9\/11 Act, and aspiring  countries have met all of the Visa Waiver Program\u2019s statutory  requirements, State does not plan to nominate any other countries. DHS\u2019s  Assistant Secretary for Policy Development told us that the department  had determined that it would not follow the standard operating  procedures during these expansion negotiations and, thus, had to \u201cmake  up the process as it went along,\u201d in part because DHS had never expanded  the program before and because Congress significantly changed the  program\u2019s legislative requirements in August 2007.\nNov.\nDec.\nJn.\nFe.\nMr.\nApr.\nAg.\nSept.\nOct.\nNov.\nDec.\nState and Justice officials told us that the lack of a transparent timeline  and requirements for Visa Waiver Program expansion has led to confusion  among U.S. agencies in headquarters\u2019 offices and at U.S. embassies  overseas, as well as foreign governments seeking to join the program. For  example, DHS\u2019s standard procedures were not updated to account for the  department\u2019s plans to sign with each of the aspiring Visa Waiver Program  countries separate memorandums of understanding (MOU) that lay out the  new legislative requirements from the 9\/11 Act. According to DHS, while  not required by the act, the U.S. government is seeking to negotiate MOUs  with current and aspiring Visa Waiver Program countries to help put the  legislative provisions in place. Although DHS has not yet signed MOUs  with any current program countries, the department intends to complete  negotiations with existing program countries by October 2009. As  indicated in figure 1, DHS signed MOUs with aspiring countries before  conducting in-country security reviews. The MOUs are to be accompanied  by more specific \u201cimplementing arrangements\u201d for sharing biographic,  biometric, and other data, as required by the 9\/11 Act, within general  parameters of what the United States is willing and able to reciprocate\u2014 this includes sharing information on known or suspected terrorists.  According to DHS, the type and scope of these arrangements will vary by  country and will take into account existing bilateral information-sharing  arrangements. As of June 2008, DHS had signed MOUs with eight Road  Map countries and had begun negotiations on the implementing  arrangements. However, State and Justice officials told us that DHS had  not been clear in communicating these steps to aspiring and current  program countries. DHS officials acknowledged that the department was  still exploring how to best complete the implementing arrangements. U.S.  embassy officials in several Road Map countries told us that it had been  difficult to explain the expansion process to their foreign counterparts and  manage their expectations about when those countries might be admitted  into the Visa Waiver Program. Justice officials and U.S. officials in several  embassies told us that the implementing arrangements may be more  difficult to negotiate than the nonbinding MOUs because some countries  have expressed concerns about sharing private information on their  citizens due to strict national privacy laws\u2014concerns that the United  States also has about its citizens\u2019 information. In response to our request,  in late April 2008, DHS provided us with an outline of the department\u2019s  completed and remaining actions for expanding the Visa Waiver Program  by the end of this year. DHS officials stated that this outline could be a  first step in providing guidance for all stakeholders, should the program be  expanded again in the future. However, the outline does not include  criteria for selecting countries under consideration for admission into the  program, other than the 13 Road Map countries.\nThe U.S. government is only considering the Road Map countries for  potential admission into the program in 2008 because the United States  began formal discussions with these 13 countries several years ago, not  due to the application of clearly defined requirements. DHS is negotiating  with 4 Road Map countries with fiscal year 2007 refusal rates over 10  percent (Hungary, Latvia, Lithuania, and Slovakia), with the expectation  that fiscal year 2008 refusal rates for these countries will fall below 10  percent. State officials told us that they lacked a clear rationale to explain  to other aspiring, non-Road Map countries with refusal rates under 10  percent (Croatia, Israel, and Taiwan) that they will not be considered in  2008 due to the executive branch\u2019s plans to expand the program first to  South Korea and countries in Central and Eastern Europe. In addition, on  May 1 of each year, State must report to Congress those countries that are  under consideration for inclusion in the Visa Waiver Program; the  department has never submitted this report because, according to  consular officials, no country has been under consideration for admission  into the program since the reporting requirement was established in 2000.  As of late June 2008, State had not yet submitted its report for 2008. A  State official told us that, despite the actions that DHS, State, and other  U.S. agencies have taken to expand the Visa Waiver Program to as many as  9 countries in 2008, State was initially unclear about which countries it  should include in this report. While only Greece has been nominated, DHS  has made clear its goal to admit many of the Road Map countries in 2008.  (Fig. 2 shows the fiscal year 2007 refusal rates for the 13 Road Map  countries.)\nAccording to DHS, it could not wait until all statutory requirements were  officially met before beginning bilateral negotiations with Road Map  countries, because doing so would not allow sufficient time to add the  countries by the end of 2008. DHS plans to complete the security reviews  and sign MOUs and implementing arrangements with Road Map countries  by the fall of 2008. If these and all other statutory provisions are  completed\u2014including countries\u2019 achievement of refusal rates below 10  percent\u2014State indicated that it will then formally nominate the countries.  However, DHS has acknowledged that if it and the aspiring countries  cannot meet all of the program\u2019s statutory requirements, the United States  will not admit additional countries into the program. In such an event, the  U.S. government could face political and diplomatic repercussions, given  the expectations raised that many of the Road Map countries will be  admitted in 2008. DHS, State, and Justice officials acknowledged that  following a more transparent process would be useful in the future as  additional countries seek to join the program.\n\n\t\tDHS Has Achieved Some Results in Visa Waiver Program Expansion Negotiations\n\nDHS\u2019s expansion negotiations with current and aspiring Visa Waiver  Program countries have led to commitments from countries to improve  information sharing processes with the United States. For example, by  signing MOUs, eight aspiring countries have signaled their intent to  comply with the program\u2019s statutory provision to report to the United  States or Interpol in a timely manner the loss or theft of passports\u2014a key  vulnerability in the Visa Waiver Program, as we have previously reported.  In addition, as a result of ongoing visa waiver negotiations with the South  Korean government, in January 2008, DHS initiated the Immigration  Advisory Program at Incheon International Airport in South Korea to help  prevent terrorists and other high-risk travelers from boarding commercial  aircraft bound for the United States.Furthermore, a senior consular  official testified that the executive branch\u2019s dialogue on Visa Waiver  Program expansion is helping to stimulate U.S. negotiations on other  terrorist watch-list- sharing arrangements with Road Map countries.\n\n\tDHS Has Not Fully Developed Tools Aimed at Assessing and Mitigating Risks in the Visa Waiver Program\n\nAs of early September 2008, DHS had not yet met two key certification  requirements in the 9\/11 Act that are necessary to allow the department to  consider expanding the Visa Waiver Program to countries with refusal  rates between 3 percent and 10 percent. In addition, the Visa Waiver  Program Office does not fully consider data on overstay rates for current  and aspiring Visa Waiver Program countries, even though doing so is  integral to meeting a statutory requirement for continued eligibility in the  Visa Waiver Program. Finally, in reviewing recommendations from our  2006 report aimed at improving efforts to assess and mitigate program  risks, we found that DHS has implemented many of our prior  recommendations, but some are only partially implemented.\n\n\t\tDHS Has Not yet Implemented Key Security Provisions of 9\/11 Act That Are Necessary to Admit Certain Countries into the Visa Waiver Program\n\nOn February 28, 2008, we testified that DHS\u2019s plan for certifying that it can  verify the departure of 97 percent of foreign nationals from U.S. airports  will not help the department mitigate risks of the Visa Waiver Program.  Furthermore, DHS will face a number of challenges in implementing ESTA  by January 2009. Finally, it is unlikely that DHS will implement a biometric  air exit system before July 2009, due to opposition from the airline  industry.\n\n\t\t\tPlan to Verify the Air Departure of Foreign Nationals Will Not Help DHS Mitigate Program Risks\n\nAs we have previously mentioned, the 9\/11 Act requires that DHS certify  that a system is in place that can verify the departure of not less than 97  percent of foreign nationals who depart through U.S. airports. In  December 2007, DHS reported to us that it will match records, reported by  airlines, of visitors departing the country to the department\u2019s existing  records of any prior arrivals, immigration status changes,or prior  departures from the United States. At the time of our February 2008  testimony, DHS had confirmed that it planned to employ a methodology  that begins with departure records. During the hearing, we also testified  that this methodology will not demonstrate improvements in the air exit  system and will not help the department mitigate risks of the Visa Waiver  Program. We identified a number of weaknesses with this approach, as  follows:    First, DHS\u2019s methodology will not inform overall or country-specific  overstay rates, which are key factors in determining illegal immigration  risks in the Visa Waiver Program. In particular, DHS\u2019s methodology does  not begin with arrival records to determine if those foreign nationals  departed or remained in the United States beyond their authorized periods  of admission\u2014useful data for oversight of the Visa Waiver Program and its  expansion. As we previously testified, an alternate approach would be to  track air arrivals from a given point in time and determine whether those  foreign nationals have potentially overstayed. Figure 3 compares DHS\u2019s  plan to match visitor records using departure data as a starting point with  a methodology that would use arrival data as a starting point.\nSecond, for purposes of this provision and Visa Waiver Program  expansion, we do not see the value in verifying that a foreign national  leaving the United States had also departed at a prior point in time\u2014in  other words, matching a new departure record back to a previous  departure record from the country. DHS\u2019s Assistant Secretary for Policy  Development told us in January 2008 that the department chose to include  previous departures and changes of immigration status records because  this method allowed the department to achieve a match rate of 97 percent  or greater.\nThird, DHS\u2019s methodology does not address the accuracy of airlines\u2019  transmissions of departure records, and DHS acknowledges that there are  weaknesses in the departure data. Foreign nationals who enter the United  States by air are inspected by DHS officers\u2014a process that provides  information that can be used to verify arrival manifest data\u2014and, since  2004, DHS has implemented the US-VISIT program to collect biometric  information on foreign nationals arriving in the United States.However,  the department has not completed the exit portion of this tracking system;  thus, there is no corresponding check on the accuracy and completeness  of the departure manifest information supplied by the airlines.According  to DHS, it works with air carriers to try to improve both the timeliness and  comprehensiveness of manifest records, and fines carriers that provide  incomplete or inaccurate information. If DHS could evaluate these data,  and validate the extent to which they are accurate and complete, the  department would be able to identify problems and work with the airlines  to further improve the data.\nAn air exit system that facilitates the development of overstay rate data is  important to managing potential risks in expanding the Visa Waiver  Program. We found that DHS\u2019s planned methodology for meeting the \u201c97  percent provision\u201d so it can move forward with program expansion will  not demonstrate improvements in the air exit system or help the  department identify overstays or develop overstay rates. As of early  September 2008, DHS had not yet certified this provision, nor had it  finalized a methodology to meet the provision.\n\n\t\t\tDHS\u2019s Planned Implementation of ESTA by January 2009 Will Face Challenges\n\nIn June 2008, DHS announced in the Federal Register that it anticipates  that all visa waiver travelers will be required to obtain ESTA authorization  for visa waiver travel to the United States after January 12, 2009. However,  we identified four potential challenges that DHS may face in implementing  ESTA, including a limited time frame to adequately inform U.S. embassies  and the public and the significant impact that ESTA will have on the airline  and travel industry.\nWe have previously reported that visa waiver travelers pose inherent  security and illegal immigration risks to the United States, since they   (1) are not subject to the same degree of screening as travelers with visas  and (2) are not interviewed by a consular officer before arriving at a U.S.  port of entry. In the 9\/11 Act conference report,Congress agreed on the  need for significant security enhancements to the Visa Waiver Program  and to the implementation of ESTA prior to permitting DHS to admit new  countries into the program with refusal rates between 3 percent and 10  percent. According to DHS, ESTA will allow DHS to identify potential  ineligible visa waiver travelers before they embark on a U.S.-bound carrier.  DHS also stated that by recommending that travelers submit ESTA  applications 72 hours in advance of their departure, CBP will have  additional time to screen visa waiver travelers destined for the United  States.\nDHS must follow several steps in implementing ESTA (see fig. 4). First, the  9\/11 Act requires that DHS must certify both the 97 percent air exit system  and ESTA as fully operational before the department can consider  expanding the Visa Waiver Program to countries with refusal rates  between 3 percent and 10 percent. DHS has not announced when it plans  to make this certification. DHS attorneys told us that the department could  admit additional countries to the program once it provides this  certification. In addition, according to DHS, the act provides that 60 days  after the Secretary of Homeland Security publishes a final notice in the  Federal Register of the ESTA requirement, each alien traveling under the  Visa Waiver Program must use ESTA to electronically provide DHS with  biographic and other such information as DHS deems necessary to  determine, in advance of travel, the eligibility of, and whether there exists  a law enforcement or security risk in permitting, the alien to travel to the  United States. DHS stated that it expects to issue this final notice in early  November 2008, and, as of January 12, 2009, all visa waiver travelers would  be required to obtain authorization through ESTA prior to boarding a U.S.- bound flight or cruise vessel. DHS stated that if, after certifying ESTA as  fully operational, it admits an additional country prior to January 12, 2009,  it will require that visa waiver travelers from that country obtain ESTA  authorizations immediately. For example, if Estonia were admitted into  the Visa Waiver Program on October 10, 2008, citizens of that country  traveling to the United States under the program would be required to  begin using ESTA on that date; however, visa waiver travelers from  existing program countries would not be required to obtain approval  through ESTA until January 12, 2009, more than 3 months later.\nAug.\nSept.\nOct.\nNov.\nDec.\nJan.\nWe identified four potential challenges to DHS\u2019s planned implementation  of ESTA by January 12, 2009. It is difficult to predict the extent to which  DHS will address these challenges due to the short time frame in which  the department is implementing the system. These challenges include the  following:    DHS has a limited time frame to adequately inform U.S. embassies in  Visa Waiver Program countries and the public about ESTA. U.S. embassy  officials in current and aspiring Visa Waiver Program countries told us that  the United States will need to ensure that there is sufficient time to inform  travelers, airlines, and the travel industry of ESTA requirements and  implementation timelines. U.S. commercial and consular officials at a U.S.  embassy in a current Visa Waiver Program country told us that they would  ideally like 1 year\u2019s advance notice before ESTA is implemented to allow  sufficient time to inform and train the public and the travel industry of the  new requirement. However, DHS\u2019s announcement in June 2008 accelerated  the timeline for ESTA implementation in current visa waiver countries.  During our site visits in March 2008, U.S. embassy officials in a visa waiver  country told us that they had been informed by DHS officials that the  department did not plan to require ESTA authorization for travelers from  that country until the summer of 2009 or later. According to a senior U.S.  official at one embassy, DHS had confirmed this plan with host country  government officials in early May 2008. Following the June 2008  announcement, a senior U.S. embassy official in another country told us  that DHS did not give the embassy adequate advance notice\u2014to prepare  translated materials, brief journalists from the major media, prepare the  embassy Web site, or set up a meeting with travel and tourism  professionals to discuss the implications of ESTA requirements\u2014before  publishing the interim final rule. DHS officials told us that the department  is currently working on an outreach strategy to ensure that travelers are  aware of the ESTA requirement.\nImpact on air and sea carriers could be significant. DHS estimates that 8  U.S.-based air carriers and 11 sea carriers, as well as 35 foreign-based air  carriers and 5 sea carriers, will be affected by ESTA requirements for visa  waiver travelers. In addition, DHS stated that it did not know how many  passengers annually would request that their carrier apply for ESTA  authorization on their behalf to travel under the Visa Waiver Program or  how much it will cost carriers to modify their existing systems to  accommodate such requests. Thus, in the short term, DHS expects that the  carriers could face a notable burden if most of their non-U.S. passengers  request that their carriers submit ESTA applications. On the basis of DHS\u2019s  analysis, ESTA could cost the carriers about $137 million to $1.1 billion  over the next 10 years, depending on how the carriers decide to assist the  passengers. DHS has noted that these costs to carriers are not compulsory  because the carriers are not required to apply for an ESTA authorization  on behalf of their visa waiver travelers. DHS is developing a separate  system, independent from ESTA, which will enable the travel industry to  voluntarily submit an ESTA application on behalf of a potential Visa  Waiver Program traveler. As of early August 2008, DHS had analyzed the  role that transportation carriers could play in applying for and submitting  ESTA applications on behalf of their customers when they arrive at an air  or sea port. However, CBP stated that there had been no further  development on this issue.\nESTA could increase consular workload. In May 2008, we reported that  State officials and officials at U.S. embassies in current Visa Waiver  Program countries are concerned with how ESTA implementation will  affect consular workload.Consular officers are concerned that more  travelers will apply for visas at consular posts if their ESTA applications  are rejected or because they may choose to apply for a visa that has a  longer validity period (10 years) than an ESTA authorization. We reported  that if 1 percent to 3 percent of current Visa Waiver Program travelers  came to U.S. embassies for visas, it could greatly increase visa demand at  some locations, which could significantly disrupt visa operations and  possibly overwhelm current staffing and facilities.DHS officials told us  that the department is aware of concerns regarding rejection rates and has  been working with State to create a system that mitigates these concerns.\nDeveloping a user-friendly ESTA could be difficult. According to DHS,  the ESTA Web site will initially be operational in English; additional  languages will be available by October 15, 2008. Even when the Web site is  operational in additional languages, ESTA will only allow travelers to fill  out the application in English, as with CBP\u2019s paper-based form. In  addition, during our site visits, embassy officials expressed concerns that  some Visa Waiver Program travelers do not have Internet access and, thus,  will face difficulties in submitting their information to ESTA.Implementing a user-friendly ESTA is essential, especially for those  travelers who do not have Internet access or are not familiar with  submitting forms online.\n\n\t\t\tImplementation of Biometric Air Exit System before July 2009 Will Be Difficult\n\nA third provision of the 9\/11 Act requires that DHS implement a biometric  air exit system before July 1, 2009, or else the department\u2019s authority to  waive the 3 percent refusal rate requirement\u2014and thereby consider  admitting countries with refusal rates between 3 percent and 10 percent\u2014 will be suspended until this system is in place. In March 2008, DHS  testified that US-VISIT will begin deploying biometric exit procedures in  fiscal year 2009. DHS released a proposed rule for the biometric exit  system in April 2008, and the department plans to issue a final rule before  the end of 2008. According to the proposed rule, air and sea carriers are to  collect, store, and transmit to DHS travelers\u2019 biometrics. During the public  comment period on the proposed rule, airlines, Members of Congress, and  other stakeholders have raised concerns about DHS\u2019s proposal, and  resolving these concerns could take considerable time. For example, the  airline industry strongly opposes DHS\u2019s plans to require airline personnel  to collect digital fingerprints of travelers departing the United States  because it believes it is a public sector function. We have issued a series of  reports on the US-VISIT program indicating that there is no clear schedule  for implementation of the exit portion of the system, and that DHS will  encounter difficulties in implementing the system by July 2009. Although  DHS program officials stated that DHS is on track to implement the  biometric exit system by July 2009, it is unlikely that DHS will meet this  timeline. We are currently reviewing DHS\u2019s proposed rule and plan to  report later this year on our findings.\n\n\t\tDHS Does Not Fully Consider Overstay Rates to Assess the Illegal Immigration Risks of the Visa Waiver Program\n\nSome DHS components have expanded efforts to identify citizens who  enter the United States under the Visa Waiver Program and then overstay  their authorized period of admission. In 2004, US-VISIT established the  Data Integrity Group, which develops data on potential overstays by  comparing foreign nationals\u2019 arrival records with departure records from  U.S. airports and sea ports. US-VISIT provides data on potential overstays  to ICE, CBP, and U.S. Citizenship and Immigration Services, as well as to  State\u2019s consular officers to aid in visa adjudication. For example, US-VISIT  sends regular reports to ICE\u2019s Compliance Enforcement Unit on potential  overstays, and ICE officials told us they use these data regularly during  investigations. In fiscal year 2007, ICE\u2019s Compliance Enforcement Unit  received more than 12,300 overstay leads from the Data Integrity Group.As an example of one of these leads, on November 27, 2007, ICE agents in  Ventura, California, arrested and processed for removal from the United  States an Irish citizen whose term of admission expired in September 2006.  On the basis of concerns that Visa Waiver Program travelers could be  overstaying, ICE has requested that US-VISIT place additional emphasis on  identifying potential overstays from program countries. In turn, ICE has  received funding to establish a Visa Waiver Enforcement Program within  the Compliance Enforcement Unit to investigate the additional leads from  US-VISIT. As part of this funding, ICE plans to hire 46 additional  employees to help the unit increase its focus on identifying individuals  who traveled to the United States under the Visa Waiver Program and  potentially overstayed.\nHowever, DHS is not fully monitoring compliance with a legislative  provision that requires a disqualification rate (this calculation includes  overstays) of less than 3.5 percent for a country to participate in the Visa  Waiver Program.Monitoring these data is a long-standing statutory  requirement for the program. We have testified that the inability of the U.S.  government to track the status of visitors in the country, identify those  who overstay their authorized period of visit, and use these data to  compute overstay rates has been a long-standing weakness in the  oversight of the Visa Waiver Program.DHS\u2019s Visa Waiver Program Office  reported that it does not monitor country overstay rates as part of its  mandated, biennial assessment process for current visa waiver countries  because of weaknesses in US-VISIT\u2019s data.\nSince 2004, however, the Data Integrity Group has worked to improve the  accuracy of US-VISIT\u2019s overstay data and can undertake additional  analyses to further validate these data. For example, using available  resources, the group conducts analyses, by hand, of computer-generated  overstay records to determine whether individuals identified as overstays  by the computer matches are indeed overstays. In addition, US-VISIT  analysts can search up to 12 additional law enforcement and immigration  databases to verify whether a potential overstay may, in fact, be in the  country illegally. While it receives periodic reporting on potential  overstays from US-VISIT, the Visa Waiver Program Office has not  requested that the Data Integrity Group provide validated overstay rate  estimates from visa waiver or Road Map countries since 2005. Although  DHS has not designated an office with the responsibility of developing  such data for the purposes of the Visa Waiver Program, US-VISIT officials  told us that, with the appropriate resources, they could provide more  reliable overstay data and estimated rates, by country, to the Visa Waiver  Program Office, with support from other DHS components, such as the  Office of Immigration Statistics. For example, the Visa Waiver Program  Office could request additional analysis for countries where the  preliminary, computer-generated overstay rates raised concerns about  illegal immigration risks in the program. These resulting estimates would  be substantially more accurate than the computer-generated overstay  rates. However, the resulting estimates would not include data on  departures at land ports of entry. In addition, as we have previously  mentioned, airline departure data have weaknesses.DHS has asserted  that overstay data will continue to improve with the implementation of the  biometric US-VISIT exit program.\nIn addition to US-VISIT, State\u2019s overseas consular sections develop data on  overstay rates that might be useful for assessing potential illegal  immigration risks of the Visa Waiver Program. Specifically, some consular  sections have conducted validation studies to determine what percentage  of visa holders travel to the United States and potentially overstay. For  example, at the U.S. embassy in Estonia, consular officials conducted a  validation study in the summer of 2006 that concluded that 2.0 percent to  2.7 percent of Estonian visa holders traveling to the United States in 2005  had potentially overstayed. US-VISIT overstay data, after appropriate  analysis and in conjunction with other available data, such as validation  studies, would provide DHS with key information to help evaluate the  illegal immigration risks of maintaining a country\u2019s membership or  admitting additional countries into the Visa Waiver Program.\n\n\t\tDHS Has Implemented Many of GAO\u2019s Prior Recommendations Aimed at Improving Efforts to Assess and Mitigate Risks in the Visa Waiver Program\n\nIn July 2006, we reported that the process for assessing and mitigating  risks in the Visa Waiver Program had weaknesses, and that DHS was not  equipped with sufficient resources to effectively monitor the program\u2019s  risks.For example, at the time of our report, DHS had only two full-time  staff charged with monitoring countries\u2019 compliance with the program\u2019s  requirements and working with countries seeking to join the program. We  identified several problems with the process by which DHS was  monitoring countries\u2019 adherence to the program requirements, including a  lack of consultation with key interagency stakeholders. In addition, we  reported that DHS needed to improve its communication with officials at  U.S. embassies so it could communicate directly with officials best  positioned to monitor compliance with the program\u2019s requirements, and  report on current events and issues of potential concern in each of the  participating countries. Also, at the time of our 2006 report, the law  required the timely reporting of passport thefts for continued participation  in the Visa Waiver Program, but DHS had not established or  communicated these time frames and operating procedures to  participating countries. In addition, DHS had not yet issued guidance on  what information must be shared, with whom, and within what time frame.\nTo address these weaknesses, we recommended that DHS take a number  of actions to better assess and mitigate risks in the Visa Waiver Program.  As we note in table 1, DHS has taken actions to implement some of our  recommendations, but still needs to fully implement others. In particular,  DHS has provided the Visa Waiver Program Office with additional  resources since our 2006 report. As of April 2008, the office had five  additional full-time employees, and two other staff from the Office of  Policy that devote at least 50 percent of their time to Visa Waiver Program  tasks. In addition, staff from several other DHS components assists the  office on a regular basis, as well as during the in-country security  assessments for Road Map and current program countries. In response to  our recommendation to finalize clear, consistent, and transparent  protocols for the biennial country assessment, the Visa Waiver Program  Office drafted standard operating procedures in November 2007 for  conducting reviews of nominated and participating visa waiver countries.\nIn addition, DHS now provides relevant stakeholders with copies of the  most current mandated, biennial country assessments; during our visits in  early 2008, U.S. embassy officials confirmed that the assessments are now  accessible. Furthermore, regarding our recommendation to develop and  communicate clear, standard operating procedures for the reporting of  lost and stolen blank and issued passports, DHS established criteria for the  reporting of lost and stolen passport data\u2014including a definition of  \u201ctimely reporting\u201d and an explanation of to whom in the U.S. government  countries should report\u2014as part of the MOUs it is negotiating with  participating and Road Map countries.\nFurthermore, DHS, in coordination with the U.S. National Central Bureau,  has initiated a system that allows DHS to screen foreign nationals arriving  at all U.S. international airports against Interpol\u2019s database of lost and  stolen travel documents before the foreign nationals arrive in the country.  Results to date indicate that the system identifies two to three instances of  fraudulent passports per month. According to the National Central Bureau,  Interpol\u2019s database has intercepted passports that were not identified by  DHS\u2019s other screening systems. For example, on February 18, 2008, the  Interpol database identified a Nigerian national traveling on a  counterfeited British passport who attempted to enter the United States at  Newark International Airport. Upon arrival, the individual was referred to  secondary inspection and determined to be inadmissible to the United  States.\nWhile DHS has taken action on many of our recommendations, it has not  fully implemented others. We recommended that DHS require that all Visa  Waiver Program countries provide the United States and Interpol with  nonbiographical data from lost or stolen blank and issued passports.  According to DHS, all current and aspiring visa waiver countries report  lost and stolen passport information to Interpol, and many report such  information to the United States. The 9\/11 Act requires agreements  between the United States and Visa Waiver Program countries on the  reporting of lost and stolen passports within strict time limits; however,  none of the current visa waiver countries have yet to formally establish  lost and stolen passport reporting agreements by signing MOUs with DHS.  DHS also still needs to fully implement our recommendations to create  real-time monitoring arrangements, establish protocols for direct  communication with contacts at overseas posts, and require periodic  updates from these contacts. For example, while the Visa Waiver Program  Office has recently begun communicating and disseminating relevant  program information regularly with U.S. embassy points of contact at Visa  Waiver Program posts, officials at some of the posts we visited in early  2008 reported that they had little contact with the office and were not  regularly informed of security concerns or developments surrounding the  program.\n\n\tConclusions\n\nThe executive branch is moving aggressively to expand the Visa Waiver  Program in 2008 to allies in Central and Eastern Europe and South Korea,  after the countries have met certain requirements and DHS has completed  and certified key security requirements in the 9\/11 Act. However, DHS has  not followed a transparent process for expanding the program, thereby  causing confusion among other U.S. agencies and embassies overseas. The  lack of a clear process could bring about political repercussions if  countries are not admitted to the program in 2008, as expected. In  addition, DHS is not fully assessing a critical illegal immigration risk of the  Visa Waiver Program and its expansion since it does not consider overstay  data in its security assessments of current and aspiring countries. DHS  should determine what additional data and refinements of that data are  necessary to ensure that it can assess and mitigate this potential risk to the  United States. Finally, DHS still needs to take actions to fully implement  our prior recommendations in light of plans to expand the program.\n\n\tRecommendations for Executive Action\n\nTo improve management of the Visa Waiver Program and better assess and  mitigate risks associated with it, we are recommending that the Secretary  of Homeland Security take the following four actions:    establish a clear process, in coordination with the Departments of State  and Justice, for program expansion that would include the criteria used to  determine which countries will be considered for expansion and timelines  for nominating countries, security assessments of aspiring countries, and  negotiation of any bilateral agreements to implement the program\u2019s  legislative requirements;    designate an office with responsibility for developing overstay rate  information for the purposes of monitoring countries\u2019 compliance with the  statutory requirements of the Visa Waiver Program;    direct that established office and other appropriate DHS components to  explore cost-effective actions necessary to further improve, validate, and  test the reliability of overstay data; and    direct the Visa Waiver Program Office to request an updated, validated  study of estimated overstay rates for current and aspiring Visa Waiver  Program countries, and determine the extent to which additional research  and validation of these data are required to help evaluate whether  particular countries pose a potential illegal immigration risk to the United  States.\n\n\tAgency Comments and Our Evaluation\n\nWe provided a draft of this report to DHS, State, and Justice for review and  comment. DHS provided written comments, which are reproduced in  appendix IV, and technical comments, which we incorporated into the  report, as appropriate. Justice also provided written comments, which are  reprinted in appendix V. State did not provide comments on the draft  report.\nDHS either agreed with, or stated that it was taking steps to implement, all  of our recommendations. For example, DHS indicated that it is working  with State to create procedures so that future Visa Waiver Program  candidate countries are selected and designated in as transparent and  uniform a manner as possible. In addition, DHS noted that it is taking steps  to improve the accuracy and reliability of the department\u2019s overstay data.  DHS also provided additional details about its continued outreach efforts  to the department\u2019s interagency partners and foreign counterparts on the  expansion process for the Visa Waiver Program. Justice did not comment  on our recommendations, but provided additional information about the  importance of monitoring countries\u2019 reporting of lost and stolen passport  data to Interpol. In addition, Justice discussed its efforts, in collaboration  with DHS, to include screening against Interpol\u2019s lost and stolen passport  database as part of ESTA. Justice noted that use of Interpol\u2019s database  continues to demonstrate significant results in preventing the misuse of  passports to fraudulently enter the United States.\nWe are sending copies of this report to interested congressional  committees, the Secretaries of Homeland Security and State, and the U.S.  Attorney General. Copies of this report will be made available to others  upon request. In addition, this report is available at no charge on the GAO  Web site at http:\/\/www.gao.gov.\nIf you or your staffs have any questions about this report, please contact  Jess T. Ford, Director, International Affairs and Trade, at (202) 512-4128 or  fordj@gao.gov. Contact points for our Offices of Congressional Relations  and Public Affairs may be found on the last page of this report. Key  contributors to this report are listed in appendix VI.\n\nAppendix I: Objectives, Scope, and Methodology\n\nTo describe the process that the Department of Homeland Security (DHS)  is following to admit countries into the Visa Waiver Program, we reviewed  laws governing the program and its expansion, and relevant regulations  and agency operating procedures, as well as our prior reports and  testimonies. In particular, we reviewed DHS\u2019s standard operating  procedures for oversight and expansion of the Visa Waiver Program. We  spoke with officials from the Visa Waiver Program Office, which is  responsible for oversight of Visa Waiver Program requirements, as well as  representatives from the Department of State\u2019s (State) Consular Affairs,  Europe and Eurasia, and East Asia and Pacific Bureaus. In addition, we  visited U.S. embassies in three current visa waiver countries\u2014France,  Japan, and the United Kingdom\u2014whose nationals comprise a large  percentage annually of visa waiver travelers to the United States. We also  visited U.S. embassies in four countries\u2014Czech Republic, Estonia, Greece,  and South Korea\u2014with which DHS is negotiating visa waiver status.  During these visits, we interviewed political, economic, consular,  commercial, and law enforcement officials regarding oversight of the Visa  Waiver Program and its expansion. We also conducted telephone  interviews with consular officials in four additional countries\u2014Hungary,  Latvia, Lithuania, and Slovakia\u2014that DHS also aims to admit into the Visa  Waiver Program in 2008. We did not interview officials in Bulgaria, Poland,  or Romania because DHS told us that it does not anticipate that these  countries will be admitted into the program in 2008. We did not interview  officials in Malta because of the country\u2019s relatively small number of  annual Visa Waiver Program travelers to the United States.\nTo assess actions taken to mitigate potential risks in the Visa Waiver  Program, we focused on DHS\u2019s efforts to implement the new security  enhancements required by the 9\/11 Act, as well as the recommendations  from our July 2006 report. First, to review the department\u2019s plans for air  exit system implementation, we collected and analyzed documentation  and interviewed officials from DHS\u2019s Office of Policy, Customs and Border  Protection (CBP), and the U.S. Visitor and Immigrant Status and Indicator  Technology (US-VISIT) Program Office. We also reviewed prior GAO  reports on immigrant and visitor entry and exit tracking systems.\nSecond, to analyze plans for the implementation of the Electronic System  for Travel Authorization (ESTA), we collected and analyzed  documentation and interviewed officials from DHS\u2019s Offices of Policy,  Screening Coordination, and General Counsel, as well as CBP officials  who are implementing the Web-based program. In addition, to understand  DHS\u2019s legal position regarding the statutory requirements for ESTA  implementation, on May 5, 2008, we requested, in writing, DHS\u2019s legal  position on certain ESTA statutory requirements, which the department  provided to us on June 6, 2008.\nThird, regarding DHS\u2019s efforts to monitor citizens who enter the United  States under the Visa Waiver Program and then overstay their authorized  period of admission (referred to as \u201coverstays\u201d), we assessed the reliability  of the US-VISIT data on potential overstays, which are based on air and  sea carriers\u2019 arrival and departure data. We reviewed documentation and  interviewed cognizant U.S. VISIT officials about how data on potential  overstays are generated and validated. As we have previously mentioned,  we determined that data on potential overstays that are generated  automatically by US-VISIT\u2019s systems have major limitations; however,  many of these limitations could be overcome by a series of manual checks  and validations that US-VISIT can perform, upon request.\nFourth, to determine the status of our prior recommendations to DHS on  oversight of the Visa Waiver Program, we developed a scale to classify  them as (1) implemented, (2) partially implemented, or (3) not  implemented. We collected and analyzed documentation and interviewed  officials from DHS\u2019s Visa Waiver Program Office on the actions that office  has taken since July 2006 to respond to our recommendations. In addition,  we met with International Criminal Police Organization (Interpol) officials  in Lyon, France, as well as officials from the Department of Justice\u2019s  Interpol-U.S. National Central Bureau to discuss the status of DHS\u2019s access  to Interpol\u2019s database of lost and stolen travel documents. We concluded  that a recommendation was (1) \u201cimplemented,\u201d if the evidence indicated  that DHS had taken a series of actions addressing the recommendation;   (2) \u201cpartially implemented,\u201d if the evidence indicated that DHS had taken  some action toward implementation; and (3) \u201cnot implemented,\u201d if the  evidence indicated that DHS had not taken any action.\nWe conducted this performance audit from September 2007 to September  2008 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.\n\nAppendix II: Worldwide Refusal Rates for Short-term Business and Tourism Visas, Fiscal Year 2007\n\nThe Visa Waiver Program nonimmigrant visa refusal rate is based on the  number of visitor visa applications submitted, worldwide, by nationals of  that country. Visitor visas are issued for short-term business or pleasure  travel to the United States. The adjusted refusal rate is calculated by first  subtracting from the number of visas that were initially refused (referred  to as \u201crefusals\u201d), the number of visas that were subsequently issued after  further administrative consideration (referred to as \u201covercomes\u201d)\u2014or, in  short, refusals minus overcomes (see table 2). This resulting number is  then divided by the number of visa issuances plus refusals minus  overcomes\u2014that is, refusals minus overcomes divided by issuances plus  refusals minus overcomes. Adjusted visa refusal rates for nationals of Visa  Waiver Program countries reflect only visa applications submitted at U.S.  embassies and consulates abroad. These rates do not take into account  persons who, under the Visa Waiver Program, travel to the United States  without visas. Visa Waiver Program country refusal rates, therefore, tend  to be higher than they would be if the Visa Waiver Program travelers were  included in the calculation, since such travelers in all likelihood would  have been issued visas had they applied, according to State. We are  presenting these data to show that the countries under consideration for  Visa Waiver Program admission do not all have refusal rates of less than 10  percent; we did not assess the reliability of these data.\n\nAppendix III: Key Legislative Requirements for Inclusion in the Visa Waiver Program\n\nThe Immigration Reform and Control Act of 1986 created the Visa Waiver  Program as a pilot program.In 2000, the program became permanent  under the Visa Waiver Permanent Program Act.In 2002, we reported on  the legislative requirements to which countries must adhere before they  are eligible for inclusion in the Visa Waiver Program. In general, the  requirements are as follows:    A low nonimmigrant visa refusal rate. To qualify for visa waiver status, a  country must maintain a refusal rate of less than 3 percent for its citizens  who apply for business and tourism visas. If DHS certifies that it has met  certain requirements under the 9\/11 Act, it will have the authority to waive  the 3 percent refusal rate requirement\u2014currently up to a maximum of 10  percent\u2014provided that the country meets other security requirements.\nA machine-readable passport program. The country must certify that it  issues machine-readable passports to its citizens. As of June 26, 2005, all  travelers are required to have a machine-readable passport to enter the  United States under this program.\nReciprocity. The country must offer visa-free travel for U.S. citizens.\nPersons entering the United States under the Visa Waiver Program must    have a valid passport issued by the participating country and be a national    be seeking entry for 90 days or less as a temporary visitor for business or    have been determined by CBP at the U.S. port of entry to represent no  threat to the welfare, health, safety, or security of the United States;    have complied with conditions of any previous admission under the  program (e.g., individuals must have stayed in the United States for 90  days or less during prior visa waiver visits);  if entering by air or sea, possess a round-trip transportation ticket issued  by a carrier that has signed an agreement with the U.S. government to  participate in the program, and must have arrived in the United States  aboard such a carrier; and  if entering by land, have proof of financial solvency and a domicile abroad  to which they intend to return.\n\nAppendix IV: Comments from the Department of Homeland Security\n\nFollowing are GAO\u2019s comments on the Department of Homeland  Security\u2019s letter dated August 27, 2008.\n\n\tGAO Comments\n\n1.  We disagree that the department followed a transparent process for  expansion of the program. As we state in our report, State and Justice  officials told us that the lack of a transparent timeline and  requirements for Visa Waiver Program expansion has led to confusion  among U.S. agencies in headquarters\u2019 offices and at U.S. embassies  overseas, as well as foreign governments seeking to join the program.  Moreover, absent clear direction from DHS, U.S. embassy officials in  several aspiring countries told us that it had been difficult to explain  the expansion process to their foreign counterparts and manage their  expectations about when those countries might be admitted into the  Visa Waiver Program. Therefore, we recommend in this report that  DHS establish a clear process, in coordination with State and Justice,  for program expansion. DHS noted that it is currently working to  create procedures so that future candidate countries are selected and  designated in as transparent and uniform a manner as possible and  expectations are appropriately managed during the process.  2.  Aside from the 13 Road Map countries identified in 2005, State officials  told us that they lacked a clear rationale to explain to other aspiring,  non-Road Map countries with refusal rates under 10 percent (Croatia,  Israel, and Taiwan) that they will not be considered in 2008 due to the  executive branch\u2019s plans to expand the program first to South Korea  and countries in Central and Eastern Europe. DHS noted that it is  currently working to create procedures so that future candidate  countries are selected and designated in as transparent and uniform a  manner as possible and expectations are appropriately managed  during the process.  3.  We have updated the report to indicate that ESTA began accepting  voluntary applications from visa waiver travelers on August 1, 2008.  However, DHS does not anticipate that ESTA authorizations will be  mandatory for visa waiver travelers until after January 12, 2009. As we  state in our report, and as DHS noted, the department has not yet  certified that it can verify the departure of not less than 97 percent of  foreign nationals exiting U.S. airports, or that an Electronic System for  Travel Authorization (ESTA) for screening visa waiver travelers in  advance of their travel is \u201cfully operational.\u201d Moreover, DHS has not  yet implemented a biometric air exit system at U.S. airports. Thus,  DHS has not yet fully developed the tools to assess and mitigate risks  in the Visa Waiver Program.  4.  In July 2006, we reported that DHS needed to improve its  communication with officials at U.S. embassies so it could  communicate directly with officials best positioned to monitor  compliance with the program\u2019s requirements, and report on current  events and issues of potential concern in each of the participating  countries. Therefore, we recommended that DHS establish points of  contact at U.S. embassies and develop protocols to ensure that the  Visa Waiver Program Office receives periodic updates in countries  where there are security concerns. As we note in this report, the Visa  Waiver Program Office has recently begun communicating and  disseminating relevant program information regularly with U.S.  embassy officials at Visa Waiver Program posts. However, despite our  requests during the course of this review\u2014and again following our  receipt of DHS\u2019s formal comments on the draft of this report\u2014the  department has not provided us with sufficient documentation to  demonstrate that it has established points of contact at U.S. embassies  for all 27 participating countries or established protocols for  communications between these contacts and the Visa Waiver Program  Office. Furthermore, the department has not provided us with  documentation to demonstrate that established points of contact are  reporting periodically to the Visa Waiver Program Office. Therefore,  we cannot conclude that these 2006 recommendations are fully  implemented.  5.  DHS noted that it has not yet signed memorandums of understanding  (MOU) with any of the 27 current Visa Waiver Program countries.  Because the MOUs will commit all signatories to report to Interpol or  otherwise make available to the United States information about lost  and stolen blank and issued passports, this recommendation will  remain open until all MOUs are finalized.  6.  To verify the departure of not less than 97 percent of foreign nationals  exiting U.S. airports, DHS reported to us in December 2007 that it will  match records, reported by airlines, of visitors departing the country  with the department\u2019s existing records of any prior arrivals,  immigration status changes, or prior departures from the United  States. In January 2008, the Assistant Secretary for Policy  Development made this statement, which corroborated data that we  received from US-VISIT in late October 2007. At the time of our  February 2008 testimony,DHS confirmed to us that it planned to  employ a methodology that begins with departure records; however, as  DHS indicated in its written comments on a draft of this report, it has  still not decided on a final methodology. DHS has not provided us with  information on any other options that it might be considering to meet  this provision. Furthermore, the department has not explained how  and when it intends to validate these data.\n\nAppendix V: Comments from the Department of Justice\n\nAppendix VI: GAO Contact and Staff Acknowledgments\n\n\tStaff Acknowledgments\n\nIn addition to the individual named above, John Brummet, Assistant  Director; Teresa Abruzzo; Kathryn Bernet; Joseph Carney; Martin de  Alteriis; Etana Finkler; Eric Larson; and Mary Moutsos made key  contributions to this report.","output":"Why GAO Did This Study\n\nThe Visa Waiver Program, which enables citizens of participating countries to travel to the United States without first obtaining a visa, has many benefits, but it also has risks. In 2006, GAO found that the Department of Homeland Security (DHS) needed to improve efforts to assess and mitigate these risks. In August 2007, Congress passed the 9\/11 Act, which provides DHS with the authority to consider expanding the program to countries whose short-term business and tourism visa refusal rates were between 3 and 10 percent in the prior fiscal year. Countries must also meet certain conditions, and DHS must complete actions to enhance the program's security. GAO has examined DHS's process for expanding the Visa Waiver Program and evaluated the extent to which DHS is assessing and mitigating program risks. GAO reviewed relevant laws and procedures and interviewed agency officials in Washington, D.C., and in U.S. embassies in eight aspiring and three Visa Waiver Program countries.\n\nWhat GAO Found\n\nThe executive branch is moving aggressively to expand the Visa Waiver Program by the end of 2008, but, in doing so, DHS has not followed a transparent process. DHS did not follow its own November 2007 standard operating procedures, which set forth key milestones to be met before countries are admitted into the program. As a result, Departments of State (State) and Justice and U.S. embassy officials stated that DHS created confusion among interagency partners and aspiring program countries. U.S. embassy officials in several aspiring countries told us it had been difficult to explain the expansion process to foreign counterparts and manage their expectations. State officials said it was also difficult to explain to countries with fiscal year 2007 refusal rates below 10 percent that have signaled interest in joining the program (Croatia, Israel, and Taiwan) why DHS is not negotiating with them, given that DHS is negotiating with several countries that had refusal rates above 10 percent (Hungary, Latvia, Lithuania, and Slovakia). Despite this confusion, DHS achieved some security enhancements during the expansion negotiations, including agreements with several aspiring countries on lost and stolen passport reporting. DHS, State, and Justice agreed that a more transparent process is needed to guide future program expansion. DHS has not fully developed tools to assess and mitigate risks in the Visa Waiver Program. To designate new program countries with refusal rates between 3 and 10 percent, DHS must first make two certifications. First, DHS must certify that it can verify the departure of not less than 97 percent of foreign nationals who exit from U.S. airports. In February 2008, we testified that DHS's plan to meet this provision will not help mitigate program risks because it does not account for data on those who remain in the country beyond their authorized period of stay (overstays). DHS has not yet finalized its methodology for meeting this provision. Second, DHS must certify that the Electronic System for Travel Authorization (ESTA) for screening visa waiver travelers in advance of their travel is \"fully operational.\" While DHS has not announced when it plans to make this certification, it anticipates ESTA authorizations will be required for all visa waiver travelers after January 12, 2009. DHS determined that the law permits it to expand the program to countries with refusal rates between 3 and 10 percent after it makes these two certifications, and after the countries have met the required conditions, but before ESTA is mandatory for all Visa Waiver Program travelers. For DHS to maintain its authority to admit certain countries into the program, it must incorporate biometric indicators (such as fingerprints) into the air exit system by July 1, 2009. However, DHS is unlikely to meet this timeline due to several unresolved issues.In addition, DHS does not fully consider countries' overstay rates when assessing illegal immigration risks in the Visa Waiver Program. Finally, DHS has implemented many recommendations from GAO's 2006 report, including screening U.S.-bound travelers against Interpol's lost and stolen passport database, but has not fully implemented others. Implementing the remaining recommendations is important as DHS moves to expand both the program and the department's oversight responsibilities."}
{"id":"crs_RL34517","pid":"crs_RL34517_0","input":"Wildfires have been getting more severe in recent fire seasons; the 2004, 2005, 2006, 2007, 2011, and 2012 seasons were the most severe since 1960. An escaped prescribed fire that burned 239 houses in Los Alamos, NM, in May 2000 focused national attention on the growing wildfire problem. The fire in Los Alamos highlighted the wildland-urban interface problem. At that time, 2000 was the second most severe fire season since 1960, eclipsed only by the 1988 Yellowstone fires. President Clinton responded with a new National Fire Plan to increase funding for wildfire protection.\nIt has been widely proclaimed that the increasing severity of wildfires is a result of excessive biomass accumulations. In at least some ecosystems, logging, livestock grazing, and a century of fire suppression efforts have allowed biomass fuels to accumulate to unnatural levels. Climate change, and its impacts on drought, fire, and insects and diseases, could exacerbate these problems. Many interests have proposed fuel reduction treatments as a means to lower the fuel levels and thus reduce the wildfire threat to homes and to wildlands. The severe 2002 fire season led President Bush to propose a Healthy Forests Initiative to expedite efforts to reduce biomass fuels on federal lands, and in 2003, Congress enacted the Healthy Forests Restoration Act to expedite federal fuel reduction and other forest protection programs.\nSome interests are concerned that current efforts to reduce fuel levels on federal lands are inadequate, and that \"environmentalist objections\" to some of those efforts are unnecessarily raising costs and delaying action. Others counter that some efforts are so broad that they permit substantial timber sales without significantly reducing wildfire risks for communities. Congress continues to address these issues as it considers funding and legislative proposals.\nThis report focuses on options for protecting structures and for protecting wildlands and natural resources from wildfires. It begins with a brief overview of the nature of wildfires, followed by a discussion of protecting structures. Then, it discusses wildfire damages to wildlands and natural resources, fuel treatment options and their benefits and limitations, and public involvement in federal decisions.\n\n\tBackground: Fires Happen\n\nIn temperate ecosystems, wildfires are inevitable. The combination of biomass plus dry conditions\u2014in the short term (e.g., the annual dry season) or in the long term (e.g., drought or climate change)\u2014equals fuel to burn. Add an ignition source, such as lightning, and wildfire happens. Fire is a self-sustaining chemical reaction that perpetuates itself as long as all three elements of the fire triangle\u2014fuel, heat, and oxygen\u2014remain available. Fire control focuses on removing one of those elements.\nThere are two principal kinds of wildfire, although an individual wildfire may contain areas of both kinds. One is a surface fire , which burns the needles or leaves, grass, and other small biomass within a foot or so of the ground and quickly moves on. Such fires are relatively easy to control by removing fuel with a fireline, essentially a dirt path wide enough to eliminate the continuous fuels needed to sustain the fire, or by cooling or smothering the flames with water or dirt.\nThe other principal kind of wildfire is a crown fire , also called a conflagration. Crown fires burn biomass at all levels\u2014from the surface through the tops of the crowns of the trees\u2014although they do not consume all the biomass; logs and large limbs may need to burn for hours before being completely reduced to ashes. Rather, a crown fire quickly burns the needles or leaves and small twigs and limbs on the surface and throughout the crown of the trees. Because the needles and leaves in the crown are green, they require more energy to burn than dry fuels on the surface. Furthermore, because of the green fuels and the often discontinuous biomass of the canopy, wind is usually needed to sustain a crown fire. Once burning vigorously, a crown fire can create its own wind (the strong upward convection of the heated air can draw in cooler air from surrounding areas, thus creating a wind that feeds the fire). The strong upward convection can also lift burning biomass ( firebrands ) and send it soaring ahead of the fire, creating spot fires and accelerating the spread of the wildfire. Crown fires typically include areas of surface fire and unburned areas within their perimeters.\nNot surprisingly, crown fires are difficult, if not impossible, to control. Unless quite wide, firelines may be ineffective to control crown fires, especially if winds are causing spot fires. Water or fire retardant ( slurry ) dropped from helicopters or airplanes can sometimes knock a crown fire down (back to a surface fire) if the area burning and the winds are not too great. Often, however, crown fires burn until they run out of fuel or the weather changes (the wind dies or it rains or snows).\nNearly all fires are \"patchy,\" with a mix of areas of varying fire severities, depending on site-specific fuel, moisture, and wind conditions. This patchiness makes understanding and controlling wildfires difficult at best.\n\n\tProtecting Structures from Wildfires\n\nWildfires occasionally burn houses, in a zone commonly called the wildland-urban interface . In recent years, it seems one or more fires annually have burned down several to a few hundred homes and outbuildings (sheds, garages, etc.). These structures generally have ignited in one of three ways: through direct contact with fire, through radiation (heating from exposure to flames), and through firebrands. The likelihood of a structure burning from one of these ignition methods is called home ignitability .\n\n\t\tHome Ignitability\n\nResearch has identified three essential elements to protecting structures: the roof; adjacent burnable materials; and the landscaping. Treating these three elements addresses all three ways by which structures are ignited\u2014direct contact, radiation, and firebrands.\nThe roof is critical to protecting structures from wildfires. Firebrands that land on a flammable roof can ignite the roof. Untreated red cedar shakes and shingles are particularly problematic: \"A major cause of home loss in wildland areas is flammable woodshake roofs.\" Fire retardant treatments are sufficient for wood shakes, but the effectiveness of such treatments degrades over time. Alternatives include tile, slate, metals (e.g., copper or aluminum), and other non-flammable materials. Walls, doors and windows, and vents can also contribute to the protection, or destruction, of a structure, depending on materials, location, and other variables.\nAdjacent burnable materials are items that can burn that abut the house. This can include plants (live or dead) and flammable mulch (e.g., wood chips or bark) under an overhang or eave or next to the structure, gutters clogged with leaves or needles, decks and porches, sheds and garages, and especially woodpiles. These factors were particularly important for the 239 homes burned by the Cerro Grande fire in Los Alamos, NM, in May 2000: \"The high ignitability of Los Alamos was principally due to the abundance and ubiquity of pine needles, dead leaves, cured vegetation, flammable shrubs, and wood piles that were adjacent to, touching, or covering parts of homes.\" One source recommended that \"when assessing the ignition potential of a structure, attachments [such as decks, porches, and fences] are considered part of the structure.\"\nFinally, landscaping\u2014the character of the vegetation surrounding the house\u2014is critical to preventing both direct burning and ignition by radiation. Recommended defensible space around structures is at least 30 feet or 10 meters, with greater distances for steeper slopes (because of up-slope convection heating) and for larger vegetation (least for grass, more for shrubs, most for mature forest). Others recommend greater distances, such as 100 feet. One researcher calculated that the ignition time for an untreated wood wall was more than 10 minutes at a distance of 40 meters (about 130 feet). With burning durations for crown fires \"on the order of 1 minute at a specific location,\" the \"safe distance\" for an untreated wood wall was calculated to be 27 meters (less than 90 feet), which is consistent with field tests documenting wall ignition times for experimental crown fires in Canada. The same source notes older fire case studies documenting structure survival\u201495% survival for 10-18 meter (about 32-60 feet) clearance in the 1961 Belair-Brentwood (CA) fire and 86% survival for 10+ meter clearance in the 1990 Painted Cave (CA) fire. Thus, clearing to 40 meters would likely be considered ideal, to 30 meters desirable, and to at least 10 meters essential to achieving about 90% probability of survival. Note also that \"clearing a defensible space\" does not require an expanse of concrete or gravel; relatively non-flammable vegetation, such as a lawn or succulent, herbaceous plants and flowers, can provide comparable protection.\nThe importance of landscapes in protecting structures can also be deduced from evidence from the 2002 Hayman fire, the largest wildfire in Colorado history. A total of 132 homes were burned in the Hayman fire. Of these, 70 (53%) \"were destroyed in association with the occurrence of torching or crown fire in the home ignition zone. Sixty-two [47%] were destroyed by surface fire or firebrands.\" Conversely, 662 homes\u201483% of the homes within the fire perimeter\u2014survived the Hayman fire relatively unscathed. Since 35% of the Hayman fire was a high-severity burn, and another 16% was a moderate-severity burn, it seems likely that at least some of these homes (the number and portion are not documented) survived despite crown fire around them. Thus, it seems reasonable to conclude that the nature of the structure\u2014rather the nature of the fire\u2014primarily determines whether a structure survives a wildfire.\n\n\t\tResponsibility for Protecting Structures\n\nOwners are responsible for their structures. Insurance companies and the relevant state agencies that regulate insurance can contribute to structural protection by requiring certain materials and actions to obtain a policy for compensation following wildfire losses or by adjusting premiums based on homeowner actions. Local governmental agencies also play a role, since the building and zoning codes that could implement some of the safe-structure requirements are generally developed and enforced locally. Alternatively, states can play a role; as of January 1, 2008, the California Building Standards Commission is enforcing wildland-urban interface building standards in very high hazard zones.\nThe structure owners are also primarily responsible for the defensible space surrounding their structures. A 10-meter-wide clearing around a 3,000-square-foot structure encompasses less than a third of an acre\u2014almost certainly private land owned in conjunction with the structure. Even a 40-meter clearing encompasses less than 2 acres, and thus is commonly part of the structure owner's property in the wildland-urban interface.\nWhen a structural fire starts, the local fire department is responsible for controlling the blaze. State agencies may provide support for local fire departments, especially in the wildland-urban interface where a structural fire could cause a wildland fire. Occasionally, because of the location of firefighting resources, the federal agencies may be the first responders on a structural fire in the interface, but federal firefighters are generally not trained for safety in structural firefighting. The federal government has no responsibility for structural fire control in the wildland-urban interface. However, the Forest Service (FS) does have programs to provide technical and financial assistance to states and to volunteer fire departments.\nGiven the nature of efforts needed to protect structures and the fact that developing, adopting, and enforcing building codes are local and state responsibilities, there is no clear federal responsibility in protecting structures from wildfires. However, the federal government often provides disaster assistance in the wake of a catastrophic wildfire, generally at the request of a governor. Federal disaster assistance is expensive and could be avoided if action to protect homes were taken in advance. Several federal agencies currently support FIREWISE, a program aimed at educating homeowners about how to make their structures safe from wildfire. Assistance to homeowners\u2014such as technical assistance, low-cost loans, and cost-sharing on projects\u2014might be a cost-saving federal investment. Federal assistance to prepare local firefighters is another means for addressing home protection from wildfires. Research on wildland-urban interface fire protection can also reduce losses. Another possibility might be federal wildfire insurance, comparable to the National Flood Insurance Program. Those living in an identified wildfire-prone zone would be required to purchase federal wildfire insurance (probably with an annual premium) to receive compensation for wildfire damages. The premiums could vary by eco-region, depending on the likelihood and risk of wildfires, and by aspects of the structure and landscaping (which might require periodic inspections).\n\n\tProtecting Wildlands and Natural Resources\n\nWildlands and natural resources can also be damaged by wildfires. Wildfire damages vary widely, depending on the nature of the ecosystems burned as well as site-specific conditions. Activities to modify wildland biomass fuels can reduce damages, although the cost and effectiveness also vary. Finally, for fuel reduction activities on federal lands, delays and modifications\u2014related to endangered species concerns and public involvement in decision-making\u2014can affect the cost of fuel treatments.\n\n\t\tWildland Ecosystems and Wildfire\n\nEcosystem fire regimes can be classified in several ways; one common approach is to distinguish among surface fire ecosystems, stand-replacement fire ecosystems, and mixed fire ecosystems. Damages to lands and resources depend on the nature of those ecosystems.\n\n\t\t\tSurface Fire Ecosystems\n\nSurface fire ecosystems are ecosystems where fires burn relatively frequently (typically 5- to 35-year intervals), with the fires consuming leaves or needles, grasses, twigs and small branches, and sometimes small trees, but generally leaving moderate and large trees unharmed by the fire. The classic surface fire ecosystem is the western Ponderosa pine, where seedlings occasionally survive the surface fire to become the scattered, stately pines in fields of grass or low brush. The other archetypical surface fire ecosystem is that of the southern yellow pines\u2014shortleaf, slash, loblolly, and especially longleaf pine. Surface fire ecosystems account for about 34% of all U.S. wildlands.\nOver the past century, surface fire ecosystems in the West have been affected by grazing, logging, and fire protection. Heavy grazing reduced grass cover, which commonly carried the surface fires. Logging in many areas emphasized large pines, often leaving true firs and Douglas firs (which are more susceptible to drought, insect damage, and crown fires) to replace the pines, at least in the northern Rockies and Pacific Northwest. Fire protection has similarly led to more firs and Douglas firs, and small Ponderosa pines, than would typically have survived. With fire return intervals of 5-35 years (i.e., fires typically burning once in that period), many surface fire ecosystems have missed two or more burning cycles. Thus, many forests now have an unnaturally large accumulation of small burnable materials and of trees susceptible to crown fires.\nMany are concerned that the unnatural fuel accumulations and fuel ladders (continuous fuels from the ground to the tree crowns) from many small and medium-sized pines, firs, and Douglas firs are causing crown fires in ecosystems where such fires were rare. This could result in significant ecological damage to plants and animals ill-adapted to crown fires. It is unclear whether a new surface fire ecosystem will develop in the wake of an intense crown fire.\nResearch on fuel reduction treatments (discussed below) has documented the effectiveness of such treatments on Ponderosa pine (a surface fire ecosystem), and activities that reduce fuel accumulations have been shown to reduce wildfire severity in surface fire ecosystems. Presumably, less severe wildfires cause less damage to timber, to watersheds, and to wildlife and wildlife habitats.\n\n\t\t\tStand-Replacement Fire\/Crown Fire Ecosystems\n\nStand-replacement fire ecosystems are those where crown fires are normal, natural, periodic events to which the ecosystem has adapted. The interval for the stand-replacement fires varies widely\u2014from a few years (prairie grasses) to more than 1,000 years (coastal Douglas fir)\u2014depending on the ecosystem. Some ecosystems require periodic crown fires to regenerate the ecosystem. For example, lodgepole pine in much of the West and jack pine in the Lake States have serotinous cones, which only open and release their seeds after exposure to temperatures exceeding 250\u00b0 Fahrenheit. Similarly, chaparral in southern California and the desert Southwest, most perennial grasses, and aspen everywhere regenerate from rootstocks; burning the surface vegetation allows new plants to sprout from the underground stems, rhizomes, and root crowns. Stand-replacement fire ecosystems account for about 42% of all U.S. wildlands.\nIt seems unlikely that stand-replacement fire ecosystems could suffer significant ecological damage from severe wildfires. In contrast to surface fire ecosystems, where crown fires could alter the ecosystem, in stand-replacement fire ecosystems, the exclusion of crown fires (if it were possible) would likely alter the ecosystems. This ecological change is implied by evidence from grass ecosystems (prairies and meadows), where fire suppression is feasible and which are being encroached upon by trees that would normally have been eliminated by the frequent fires.\nActivities that reduce fuel levels in stand-replacement fire ecosystems have no documented effect on wildfire severity. Anecdotal reports have asserted that crown fires were halted (became surface fires) when they arrived at treated areas, but research has not documented where and when such occurrences have happened. To date, no research has shown that fuel treatments consistently reduce the extent or severity of wildfires in stand-replacement fire ecosystems. The ineffectiveness of fuel reduction was particularly noted for southern California chaparral: \"large fires were not dependent on old age classes of fuels, and it is thus unlikely that age class manipulation of fuels can prevent large fires.\"\n\n\t\t\tMixed-Fire-Intensity Ecosystems\n\nMany wildlands have ecosystems that burn in crown fires of relatively limited scale, substantially mixed with surface fires. These ecosystems are called mixed-fire-intensity ecosystems. A classic example is whitebark pine, a species generally limited to high elevation sites, near timberline (a demarcation where trees no longer grow). Whitebark pine is a slow-growing species that invades harsh sites and moderates the micro-climatic conditions to allow true firs and spruces to germinate and grow. The sporadic mixed-intensity fires kill most of the competing trees and some of the whitebark pines, but some pines survive. Also, burned sites are preferred \"cache\" sites for Clark's nutcrackers, which is the primary means of whitebark pine tree regeneration. Other species that are commonly surface fire or stand-replacement fire species, such as Ponderosa pine and lodgepole pine, can be mixed-fire-intensity types under certain conditions, typically near the transition to another area with a different dominant tree species. Ponderosa pine, for example, may be a mixed-fire-intensity type on relatively moist sites, especially where it mixes naturally with Douglas fir, such as on north-facing slopes in the northern Rockies. Lodgepole pine may be a mixed-fire-intensity type on relatively dry sites, where the trees naturally grow farther apart, such as on the eastern slopes of the Sierra Nevada Mountains.\nLess is known about wildfire in mixed-fire-intensity ecosystems, even though they occupy about 24% of U.S. wildlands. It is unclear whether fuel loads have accumulated to unnatural levels, whether crown fires could cause significant ecological damage, or whether fuel reduction activities would alter wildfire extent or severity in these ecosystems.\n\n\t\t\tWildfire Effects\n\nThe effects of wildfires on natural resources are difficult to assess and are commonly overstated for two reasons. First, burned areas look bad\u2014blackened trees and ground cover\u2014even following surface fires. However, many plants recover from being burned. Conifers generally survive even with as much as 60% of their crowns scorched. Other plants, especially grasses, aspen, and some brush species, resprout vigorously after being burned. Furthermore, animals (regardless of their size and mobility) are rarely killed by wildfire.\nThe other reason that wildfire effects are commonly overstated is that the reported burned area includes all the acres within the fire perimeter. However, even severe crown fires are patchy, leaving some areas lightly burned or unburned. For example, in the Yellowstone fires that were on the nightly news for weeks in the summer of 1988, 30% of the reported burned area was actually unburned and another 15%-20% had only surface fire. In the 2002 Hayman fire, the worst wildfire in Colorado history, 35% of the area had a high-severity burn and 16% had a moderate-severity burn; 34% had a low-severity burn and 15% was unburned. Thus, severely burned acreage is substantially less than the burned area that is reported.\nSevere wildfires can cause long-lasting resource damages. Crown fires kill many plants within the burned area, increasing the potential for erosion until the vegetation recovers. Some observers have reported \"soil glassification,\" where the silica in the soils has been melted and fused, forming an impermeable layer in the soil, although research has yet to document the extent, frequency, and duration of the condition and the soils and conditions in which it occurs. Landslides can also occur in areas with unstable soils where the vegetation has burned, such as in coastal southern California. Timber can also be damaged, although burned trees can often be salvaged for lumber and other wood products. However, harvesting and processing costs are typically higher in burned areas, and many object to post-fire salvage harvesting because of its possible additional impacts on soils and other resource values. Wildfires, especially crown fires, can also have significant local economic effects\u2014directly on tourism, and indirectly through effects on timber supply, water quality, and aesthetics. On the other hand, federal wildfire suppression efforts include substantial expenditures, many of which are made locally, and fire-fighting jobs are considered financially desirable in many areas.\n\n\t\tProtecting Wildlands and Resources\n\nThe federal government is generally responsible for protecting federal lands and their natural resources from wildfire. Wildfire protection of other wildlands and natural resources\u2014state, local government, and private lands\u2014is the responsibility of the states, although the individual landowners are responsible for excessive fuel accumulations and other hazardous conditions on their own lands. As noted above, the FS has a technical and financial assistance program for state fire agencies.\nThe principal goal for land and resource protection is to reduce the damages caused by wildfires. This can best be achieved by reducing burnable biomass (live and dead) to reduce wildfire intensity and duration, and especially by eliminating the fuel ladders (relatively continuous biomass from the surface to tree crowns) that facilitate wildfire transition from a surface fire to a crown fire. Fuel treatments can also reduce the crown bulk density (the biomass, especially fine fuels, in the tree crowns), making it more difficult for a crown fire to sustain itself, thus making a wildfire more controllable. Reducing burnable biomass, however, does not eliminate wildfires, because fuel reduction does not directly alter the dryness of the biomass or the probability of an ignition.\nThe two principal mechanisms for reducing fuels are prescribed burning and mechanical treatments, although the two tools can also be combined. Each tool has benefits, costs, and risks or limitations to its use.\n\n\t\t\tPrescribed Burning\n\nPrescribed burning is intentionally setting fires in specified areas when fuel and weather conditions are within prescribed limits (e.g., fuel moisture content, relative humidity, wind speed). Some observers include, in their definition of prescribed burning, naturally occurring fires that are allowed to burn because they are within acceptable areas and conditions, as identified in fire management plans. The agencies term such fires wildland fire use , and do not identify them as prescribed fires, but do include the acres burned in wildland-fire-use fires as acres treated for fuel reduction.\nPrescribed burning is used for reducing biomass fuels because it is the only means available for eliminating fine fuels (grasses, needles, leaves, forbs, and twigs and shrubs less than a quarter-inch in diameter [pencil-sized]). Burning converts the vegetation to smoke (carbon dioxide, water vapor, fine particulates, and other pollutants) and ashes (mineralized forms of the organic matter, readily available for absorption by new plant growth). Reducing fine fuels is critical in wildfire protection and control, because fine fuels are necessary to carry wildfires; without fine fuels, wildfires cannot spread.\nPrescribed burning has various limitations. Smoke can be a problem, contributing to human health problems, especially in areas where inversions are common or with relatively stagnant airsheds. Also, prescribed burning is risky. It is not controlled burning; there is no such thing as controlled burning, because there is no switch to turn the fire off. Prescribed fire is also an indiscriminate tool for reducing tree density, crown density, and fuel ladders, burning what is available, depending on a host of site-specific and micro-climatic conditions.\nFinally, prescribed burning is expensive. Actually starting the prescribed fire is cheap\u2014matches don't cost a lot. However, minimizing the risk to surrounding areas (especially private lands and housing developments) requires planning and preparation as well as sufficient trained personnel and supervisors to react when unexpected fire behavior occurs or weather conditions change. Prescribed burning costs are estimated to range from $12 to $174 per acre, depending on the fuel type, treatment method, size of area to be treated, steepness of slopes, site elevation, and other factors. A prescribed fire that becomes a wildfire, such as the Cerro Grande fire in Los Alamos, NM (which burned 239 houses in town), raises questions about the practice and about the fire managers who use it. Thus, fire managers tend to err on the side of excessive personnel (and cost) for a prescribed fire, rather than risk a costly, damaging wildfire with far higher costs.\n\n\t\t\tMechanical Treatment\n\nMechanical fuel treatment includes a wide array of activities designed to reduce biomass on a site. Foresters have a variety of terms for the various activities, including:\npruning\u2014removing lower tree branches, which eliminates fuel ladders and can reduce crown density. release\u2014removing several to many trees from a young stand (saplings or smaller) to concentrate wood growth on desirable trees, which reduces crown density. thinning\u2014removing a portion of the standing trees; the portion can vary widely from very light (relatively few trees) to very heavy (more than half the trees in the stand). Thinning can be commercial (if the trees are large enough for products) or precommercial. It can be used to eliminate fuel ladders and reduce crown density, depending on the approach and portion of trees removed. Thinning approaches include:\n\u2014low thinning, or thinning from below, to remove the smallest and poorest specimens, which eliminates fuel ladders and can reduce crown density;\n\u2014crown thinning, or thinning from above, to open the canopy to stimulate growth on the remaining trees, which substantially reduces crown density;\n\u2014selection thinning, to remove the least desirable trees for the future stand, which reduces crown density and can eliminate fuel ladders; and\n\u2014mechanical thinning, to provide appropriate spacing for the remaining trees, which reduces crown density and can eliminate fuel ladders.\nsalvage harvesting\u2014removing a portion to all of the standing trees, many of which have been killed or are in imminent danger. This includes presalvage harvesting (removing highly vulnerable trees before they are killed) and sanitation harvesting (removing trees to control the spread of insects or diseases). It reduces (or eliminates) crown bulk density, and might reduce fuel ladders.\n\n\t\t\t\tTreatment Choices\n\nMechanical fuel treatment clearly involves choices\u2014about the amount of biomass to be removed, and about the nature of the biomass to be removed (small and weak trees, lower limbs, vulnerable trees or species, etc.). The choice can also be over the method used for the treatment: a commercial sale, if the treatment yields commercially usable wood; a stewardship contract, if commercially usable wood can be exchanged for other activities; a service contract, for specified actions; an end-results contract, to specify what is left after treatment; or even treatment by agency personnel. All of these choices affect public acceptance of the proposed treatment.\n\n\t\t\t\tBenefits and Limitations\n\nThe primary benefit of mechanical fuel treatment is the high degree of control over the results. One report stated:\nMechanical thinning has the ability to more precisely create targeted stand structure than does prescribed fire.... Used alone, mechanical thinning, especially emphasizing the smaller trees and shrubs, can be effective in reducing the vertical fuel continuity that fosters initiation of crown fires. In addition, thinning of small material and pruning branches are more precise methods than prescribed fire for targeting ladder fuels and specific fuel components.\nThe authors also observed some of the limitations of mechanical fuel treatment:\nHowever, by itself mechanical thinning does little to beneficially affect surface fuels with the exception of possibly compacting, crushing, or masticating it during the thinning process. Depending on how it is accomplished, mechanical thinning may add to surface fuels (and increase surface fire intensity) unless the fine fuels that result from the thinning are removed from the stand or otherwise treated....\nThinning and prescribed fires can modify understory microclimate that was previously buffered by overstory vegetation.... Thinned stands (open tree canopies) allow solar radiation to penetrate to the forest floor, which then increases surface temperatures, decreases fire fuel moisture, and decreases relative humidity compared to unthinned stands\u2014conditions that can increase surface fire intensity.... An increase in surface fire intensity may increase the likelihood that overstory tree crowns ignite.\nOther sources have similarly reported the limitations of thinning:\nDepending on the forest type and its structure, thinning has both positive and negative impacts on crown fire potential. Crown bulk density, surface fuel , and crown base height [fuel ladders] are primary stand characteristics that determine crown fire potential. Thinning from below, free thinning, and reserve tree shelterwoods have the greatest opportunity for reducing the risk of crown fire behavior. Selection thinning and crown thinning that maintain multiple crown layers ... will not reduce the risk of crown fires except in the driest ponderosa pine ... forests. Moreover, unless the surface fuels created by using these treatments are themselves treated, intense surface wildfire may result, likely negating positive effects of reducing crown fire potential. No single thinning approach can be applied to reduce the risk of wildfires in the multiple forest types of the West.\nThus, thinning and pruning have the potential to reduce the risk of crown fire, but may increase wildfire risk until the slash (non-commercial biomass) degrades (rots or burns, typically in a few years to decades, depending on the ecosystem), or is removed. In addition, thinning is an expensive proposition, with treatment costs ranging \"from $35 to over $1000 per acre depending on the type of operation, terrain, and number of trees to be treated.\"\nCommercial operations\u2014commercial thinning, stewardship contracting, and salvage logging\u2014have been suggested as a means to moderate the high cost of mechanical fuel treatment. However, commercial timber sales on federal lands commonly cost more to prepare and administer than they return to the Treasury. The results of commercial operations for fuel reduction are also questionable:\nThe proposal that commercial logging can reduce the incidence of canopy fires was untested in the scientific literature. Commercial logging focuses on large diameter trees and does not address crown base height\u2014the branches, seedlings and saplings which contribute so significantly to the \"ladder effect\" in wildfire behavior. \nOthers have also noted the likely net cost of thinning to reduce the risk of crown fires:\nAlthough large trees can be removed for valuable products, the market value for the smaller logs may be less than the harvest and hauling charges, resulting in a net cost for thinning operations. However, the failure to remove these small logs results in the retention of ladder fuels that support crown fires with destructive impacts to the forest landscape. A cost\/benefit analysis broadened to include market and nonmarket considerations indicates that the negative impacts of crown fires are underestimated and that the benefits of government investments in fuel reductions are substantial.\n\n\t\t\tCombined Operations\n\nThe ability to control the resulting stand structure with mechanical treatments and the ability to remove fine fuels with prescribed burning make combining the two treatments seem a logical choice. However, empirical evidence to document the effectiveness of such combined operations is limited:\nA more limited number of studies addressed the effectiveness of a combination of thinning and burning in moderating wildfire behavior. The impacts varied, depending on the treatment of the thinning slash prior to burning. \nIn addition, the cost of combined operations is substantially greater than the cost of either alone.\n\n\t\t\tArea Needing Treatment\n\nThe areas that might benefit from prescribed burning and\/or mechanical treatment are not entirely clear. Table 1 , below, shows the acreage of national forest land, Department of the Interior land, and all other land by (a) historical fire regime (comparable to the ecosystem types described above); and (b) condition class\u2014low risk (Class 1), moderate risk (Class 2), and high risk (Class 3) of losing key ecosystem components in a wildfire.\nBased on the discussion above of the effectiveness of various treatments, it seems reasonable to conclude that treating lands in the Class 3 (high risk), low severity (surface fire) regime could reduce the likelihood of crown fires in these ecosystems, where such fires are unnatural (or at least very rare). Table 1 shows this to include 28.8 million acres of national forest land, 6.5 million acres of Interior land, and 42.2 million acres of other federal, state, and private land.\nThe cost to treat these lands varies widely. One study, cited above, reported mechanical treatment costs of $35 to $1,000 per acre, depending on terrain, type of operation, and number of trees to be cut. Others have similarly reported highly variable costs for commercial mechanical treatment above and below the \"base case\" cost of $150 per acre, depending on tree size, stand density, terrain, and whether the treatment was conducted in the wildland-urban interface. The same source reported similar variability in costs for prescribed burning, above and below the \"base case\" cost of $105 per acre. Federal appropriations for fuel treatment averaged about $170 per acre for FY2001-FY2006\u2014$165 per acre for the Forest Service and $174 per acre for the BLM. The General Accounting Office (GAO, now the Government Accountability Office) used a Forest Service estimate of $300 per acre in its 1999 estimate of needed funding for fuel treatment, because of the higher cost per acre to treat additional western lands. At $300 per acre, Forest Service costs to treat the Class 3 surface fire regime lands would be $8.6 billion, and Department of the Interior costs would be $1.9 billion. Other surface (low severity) fire regime lands might also warrant treatment, although the lower risk of ecological damage suggests a lower priority for treatment.\nIt is unclear whether any lands other than the surface fire regime lands warrant fuel treatment. The existing research evidence on fuel treatment for stand-replacement fire regimes raises questions about the effectiveness of both mechanical treatment and prescribed fire for reducing the likelihood of damages from a crown fire. One might even question whether ecological damage can be ascribed to a crown fire in a stand-replacement fire ecosystem, since these ecosystems have evolved adaptations to reestablish themselves following crown fires. Evidence is also lacking about the effectiveness of mechanical treatments and prescribed burning on mixed-intensity fire ecosystems. Thus, it is not certain whether fuel treatment on these mixed-intensity fire regime lands and stand-replacement fire regime lands would provide any significant wildfire protection.\n\n\t\tDelays and Changes in Federal Decision-Making\n\nSome advocates of fuel treatment are concerned that delays and changes to the implementation of fuel treatments might lead to catastrophic crown fires that could have been prevented by more expeditious fuel treatment. Concerns are generally linked to consultations under the Endangered Species Act (ESA, P.L. 93-205 ; 16 U.S.C. \u00a7\u00a71531-1544), and to public involvement under the National Environmental Policy Act of 1969 (NEPA; P.L. 91-190, 42 U.S.C. \u00a7\u00a74321-4347) and the Forest Service Appeals Reform Act (ARA; \u00a7322 of P.L. 102-381 , the FY1993 Interior Appropriations Act, 16 U.S.C. \u00a71612 note).\nInvolving the public and consulting over possible impacts on endangered or threatened species take time, and concerns and objections can delay, modify, or even prevent some proposed actions. However, others caution that expedited review or limits on ESA consultation and on public oversight of proposed fuel treatments may allow treatments to include commercial timber harvests or other actions that provide little wildfire protection and exacerbate fuel accumulations in the short run, while causing other environmental damages.\nThis raises the question of the effect of delays on wildfire threats. Clearly, structures in the wildland-urban interface are threatened by wildfire, but as shown above, fuel treatment provides little, if any, fire protection for structures, and thus delaying fuel treatments has little consequence for structure protection. Resources in surface fire ecosystems with unnatural fuel accumulations are at risk from severe wildfires. The odds of having treated the \"right\" acres to prevent a crown fire with significant resource damages are, however, quite low. For the past decade, during which more area burned than in any other decade since 1960, wildfires have burned an average of 7.3 million acres annually. Total wildlands in the United States are 1.45 billion acres\u2014roughly 640 million acres of federal land, and roughly 815 million acres of private forest and rangeland. Thus, the likelihood of any particular acre burning in any given year, on average, is less than 0.66% (i.e., burning once every 150 years). Obviously, the risk for certain areas in particular years can be much higher\u20145.4% of Idaho's wildlands burned in 2007, for example\u2014but this is offset by much lower risks for those areas in other years and for other areas in the same year\u20140.2% of Idaho's wildlands burned in 2002, while 0.04% of Colorado wildlands burned in 2007, in contrast to 1.8% in 2002, when the Hayman fire burned. Wildfire risk is probably somewhat higher in western states than the national average, because the ecosystems in the Lake States, mid-Atlantic region, and New England experience less fire; however, even if the risk were 50% greater than the national average (which seems unlikely because the larger area in the West already contributes to a higher national average), the risk would still be less than 1% per year.\nIn addition to the low probability of a particular acre burning is the modest likelihood of an area being treated. The Forest Service and BLM treated 2.7 million acres of their lands annually from FY2003 through FY2007. This is less than 8% of their Class 3 surface fire ecosystem lands, and less than 3% of Class 3 plus Class 2 surface fire ecosystem lands. If the same acreage of treatments are spread more broadly\u2014to Class 1 surface fire ecosystem lands or to lands in other fire regimes\u2014the probability of treating a particular acre to prevent a crown fire diminishes further.\nNonetheless, lengthy delays can exacerbate the risks. Annual probabilities of a wildfire burning an area and of an area being treated are both cumulative. Over a 10-year period, the likelihood of an area burning is more than 6%, while the likelihood of a moderate- or high-risk surface fire ecosystem being treated rises to 15% (if half of all treatments are concentrated on these lands). Thus, relatively brief delays may have relatively little impact of the likelihood of an area being burned in an unnatural crown fire, but longer delays (a decade or more) could have a significant impact.\n\n\t\t\tESA Consultations65\n\nThe ESA established a process for federal agencies to consult with the Fish and Wildlife Service (FWS), or with the National Marine Fisheries Service (NMFS) for some species, on any actions that might jeopardize a listed endangered or threatened species or adversely modify its critical habitat. This is not a problem for firefighting, as immediate, informal consultations can occur during an emergency, with formal consultation to follow after the emergency has passed. However, some fuel treatments might jeopardize a species or adversely modify its habitat, which would require ESA consultation. Consultation means the FWS (or NMFS) would review the proposed action and, if jeopardy or adverse habitat impacts are likely, propose a \"reasonable and prudent alternative\" to achieve the same purpose without jeopardy or adverse habitat modification. The vast majority of agency activities have a finding of no jeopardy, and most with jeopardy have a reasonable and prudent alternative; actions with jeopardy and no alternative findings are exceedingly rare.\nFuel treatments that reduce the likelihood of crown fires in ecosystems where such fires were historically rare are generally unlikely to jeopardize or adversely modify the critical habitat of endangered species. Many species in North America are adapted to survive and even thrive with natural wildfires. One study reported that more than 90% of rare, threatened, and endangered plants in the 48 coterminous states either benefit from fire or are found in fire-adapted ecosystems. Also, as noted above, animal mortality in wildfires is rare. Thus, treatments that only restore forests to conditions that allow a historically natural ecological role for wildfire are more likely to benefit endangered and threatened species than to harm them.\nNonetheless, ESA consultations take time, and can delay fuel treatments. This is more likely to be the case when restoration treatments (e.g., prescribed burning or thinning from below) are combined with other activities (e.g., commercial timber harvesting), such as in a stewardship contract. Thus, the method used to undertake the treatment, as well as the nature of the treatment itself, determines the length of delays and possible project modifications from ESA consultations.\n\n\t\t\tNEPA Environmental Analysis and Public Involvement67\n\nNEPA requires federal agencies to review the environmental effects of \"major Federal actions significantly affecting the quality of the human environment.\" Agencies must consider every significant aspect of the environmental impacts of a proposed action before making an irreversible commitment of resources to the project. NEPA also requires that agencies inform the public that they have considered those impacts in their decision-making process. In his executive order on NEPA implementation, President Richard Nixon directed the agencies to go beyond just informing the public, to actively involve the public early in the decision-making process. Fuel reduction treatments to protect resources from wildfires are generally considered to be major federal actions subject to NEPA.\n\n\t\t\t\tEnvironmental Analysis\n\nThe action agency must analyze the possible environmental consequences of its actions. The first step is to determine if the action will have significant environmental impacts. There are three possible outcomes. If significant impacts are likely, then the agency prepares an environmental impact statement (EIS). If the impacts are normally insignificant\u2014individually and cumulatively\u2014the activity can be categorically excluded from further NEPA environmental analysis and public involvement. (See below.) If the significance of the impacts is uncertain, the agency prepares an environmental assessment (EA) to determine the significance of the impacts. The EA leads either to a finding of no significant impact (FONSI) or to an EIS.\nAdvocates of expedited fuel treatment are concerned about the time needed to prepare an EIS or even an EA. Information collection and analysis may take from several days to a few months, depending on the magnitude and complexity of the proposed action. An EIS involves additional steps to assess the likely and the possible environmental impacts and to inform and involve the public. These steps include scoping (public discussions about the nature, location, and possible consequences of the proposal); a draft EIS, examining a range of alternatives and generally identifying a preferred alternative; public comments on the draft and the preferred alternative; and then a final EIS and record of decision (ROD). Only after completing this process\u2014which can take a year or more for large, complex projects\u2014can the agency undertake the action. Thus, proponents of expeditious fuel reduction projects often advocate various approaches to accelerate the process, discussed below.\n\n\t\t\t\tCategorical Exclusions (CEs)\n\nAs noted above, certain projects can be categorically excluded from the requirement to prepare an EA or an EIS. Such a CE action is defined as:\na category of actions which do not individually or cumulatively have a significant effect on the human environment ... and for which, therefore, neither an environmental assessment nor an environmental impact statement is required.... Any procedures under this section shall provide for extraordinary circumstances in which a normally excluded action may have a significant environmental effect.\nCEs are typically used for relatively minor, routine actions (e.g., thinning, debris removal) that the agency does frequently and has found to have at most insignificant environmental impacts. For projects approved under CEs, the Forest Service is not required to provide notice and opportunity for public comment as otherwise required for agency activities under the ARA. (See below.)\nIn certain situations\u2014such as those involving controversial issues (e.g., wetlands and roadless areas) or specifically protected resources (e.g., endangered species and archaeological sites)\u2014known as extraordinary circumstances , CEs cannot be used. In 2002, the Forest Service modified its application of extraordinary circumstances, allowing the responsible official to determine whether the extraordinary circumstances warranted an EA or an EIS, rather than automatically precluding use of a CE in the presence of extraordinary circumstances.\nThe Forest Service has identified numerous categories of actions for which a CE may be used; two relate directly to wildfire protection (for details on Forest Service CEs and extraordinary circumstances, see the Appendix ):\n6. Timber stand and\/or wildlife habitat improvement activities ..., [including] thinning or brush control to improve growth or reduce fire hazard ..., prescribed burning to control understory hardwoods in stands of southern pine, [and] prescribed burning to reduce natural fuel build-up....\n10. Hazardous fuel reduction activities using prescribed fire, not to exceed 4,500 acres, and mechanical methods for crushing, piling, thinning, pruning, cutting, chipping, mulching, and mowing, not to exceed 1,000 acres ... limited to ... the wildland-urban interface; or Condition Classes 2 or 3 [moderate or high risk of ecological damage] in Fire Regimes I, II, or III [surface fire, stand-replacement fire with a return interval of 35 years or less, and mixed-intensity fire]. (emphasis in original)\nForest Service use of the latter CE was halted after a court found it was arbitrary and capricious. Other CEs have also been challenged, raising questions about the availability of CEs for fuel reduction projects.\n\n\t\t\tForest Service Appeals Reform Act\n\nIn addition to public involvement under NEPA, the Forest Service must also inform the public of its decisions and provide an opportunity for the public to request an administrative review of its decisions under the Forest Service Decisionmaking and Appeals Reform Act (ARA). Subsections (a) and (b) require the Forest Service to provide notice and an opportunity for public comment on proposed actions; this is the only provision requiring notice and comment on Forest Service proposals other than under NEPA. Subsections (c) and (d) specify an administrative appeals process\u2014review by a higher-ranking official\u2014for those who had commented on the proposal and object to the decision.\nGAO was asked to examine administrative appeals of fuel reduction projects. For FY2001 and FY2002, prior to promulgation of the hazardous fuel reduction CE, 59% of fuel reduction projects used CEs and could not be appealed. Of those that could be appealed, 58% were appealed (i.e., 24% of all fuel reduction projects during that period). Of those, 73% were implemented without change, 8% were modified, and 19% (less than 5% of all projects) were withdrawn or reversed. Furthermore, 79% of the appeals were resolved within the prescribed 90 days. These data are supported by a study of all Forest Service administrative appeals. This study found that 8% of appeals were granted (i.e., decision reversed) and that 9% of appealed decisions were withdrawn.\nA different study examined factors that increased the likelihood of a fuel reduction project being appealed. It reported that appeals were more likely for fuel reduction projects that (1) affected more area; (2) included more activities for the site; (3) included commercial timber harvest; (4) included as a purpose reducing fuels generated by the project; and (5) had at least one threatened or endangered mammal near the site. These factors are indirectly confirmed in the GAO study, since 92% of projects with EISs (larger projects with likely environmental impacts) were appealed, compared to 52% of projects with EAs (projects with uncertain environmental impacts). Conversely, projects were significantly less likely to be appealed if the project was (1) implemented by Forest Service personnel or a service contract; and (2) in the wildland-urban interface.\nThese data suggest that administrative appeals are less of a problem than the advocates of fuel treatment suggest. Only about a quarter of proposed projects are appealed, with less than 5% prevented from being implemented, and delays of less than 90 days for most projects. However, for prescribed burning, a 90-day delay can be significant, since the period within the prescribed conditions can be brief.\n\n\t\t\tExpedited Procedures\n\nProponents of aggressive fuel treatment continue to be concerned about delays from the ESA, NEPA, and ARA review processes, and have pressed for various means for accelerating the reviews. Some procedures are currently feasible under existing regulations, others have been enacted by Congress in various contexts, and more have been proposed.\n\n\t\t\t\tExpedited ESA Consultations\n\nAs noted above, during emergencies, the agencies can consult informally for rapid action, with formal consultations to follow when the situation has stabilized. This clearly applied during wildfire suppression activities, but fuel reduction treatments are not emergency actions that require an immediate response to prevent damages. As discussed above, lengthy (multi-year) delays in fuel reduction activities can increase the likelihood of resource damages from wildfires, but brief delays have minor impacts.\nThe agencies have developed an alternative approach to ESA consultations that is intended to accelerate the ESA review process: counterpart regulations. These regulations allow the Forest Service, BLM, and others to assess whether the proposed fuel reduction action is likely to jeopardize a listed threatened or endangered species or to adversely modify critical habitat, rather than to consult with the Fish and Wildfire Service on the likelihood of jeopardy or adverse habitat modification. While some ESA counterpart regulations have been challenged successfully, the counterpart regulations related to wildfire management remain in place.\n\n\t\t\t\tExpedited NEPA Reviews (Other than Through CEs)\n\nIn addition to the option of CEs, the NEPA regulations of the Council on Environmental Quality (CEQ) allow for alternative arrangements in the event of an emergency. These alternative arrangements do not waive NEPA requirements, but establish an alternative means of fulfilling those requirements for actions necessary to control the immediate impacts of an emergency, typically with conditions on short-term and long-term actions. For example, in 1998, the Forest Service requested alternative arrangements for rapid restoration actions following a windstorm that damaged 103,000 acres of national forest land in Texas that contained critical habitat for the endangered red-cockaded woodpecker; CEQ concurred that the situation was an emergency and agreed to alternative arrangements that included subsequent preparation of an EA, limits on tree removal, long-term public involvement, emergency consultation under ESA, and more.\nFor fuel treatment, NEPA alternative arrangements will rarely provide a means of accelerated action. First, alternative arrangements are not used very often\u201442 requests were made from 1980 through 2010. Second, alternative arrangements are to be used for emergencies. Fuel conditions in a delineated area might occasionally be an emergency, such as in the wake of a ice storm or a tornado, but fuel levels generally do not constitute an emergency requiring immediate action.\n\n\t\t\t\tHealthy Forests Restoration Act\n\nThe Healthy Forests Restoration Act of 2003 (HFRA; P.L. 108-148 , 16 U.S.C. \u00a7\u00a76501-6591) expedited review processes in several ways. In Title I, it modifies the NEPA environmental analysis and public involvement processes for authorized Forest Service and BLM fuel reduction projects (based on priorities, exclusions, and other standards in the act). The EA or EIS for each project may be limited to the proposed action, the no-action alternative, and possibly an additional alternative (in contrast to the range of alternatives normally required). The agencies \"shall facilitate collaboration\" with tribes and state and local governments and \"participation\" of interested persons; however, the law does not explain the distinction between collaboration with certain interests and participation by other interests.\nTitle I includes two other changes to accelerate fuel reduction projects. First, for the Forest Service, it replaces ARA administrative appeals with a \"predecisional administrative review process.\" This process is only available to persons who submitted \"specific written comments that relate to the proposed action\" during scoping or the public comment period on the draft NEPA document. The process is also limited to the period between completing the EA or EIS and issuing the record of decision, with no requirements for how long that period must be. Then, the act restricts judicial review, generally limiting plaintiffs to those who have exhausted administrative review processes and specifying the venue for review, while encouraging expeditious judicial review and requiring the courts to balance the short- and long-term effects of action and inaction in deciding on injunctions.\nIn Title IV, HFRA allows the use of CEs for \"applied silvicultural assessments\"\u2014timber harvesting and other vegetative treatments \"for information gathering and research purposes.\" Each treatment is limited to 1,000 acres, with exclusions for certain areas and limitations on the adjacency of treatments, and with public notice and comment and \"peer reviewed by scientific experts selected by the Secretary [of Agriculture or of the Interior], which shall include non-Federal experts.\" Total acreage of all applied silvicultural assessments using this CE is limited to 250,000 acres.\n\n\t\t\t\tOther Possibilities\n\nCongress can create other means of accelerating the decision-making process for fuel reduction treatments. Congress has exempted certain federal activities (such as construction of the Trans-Alaska Pipeline to deliver oil from the North Slope) from NEPA compliance. Congress has also directed in law that no EIS or EA be prepared in certain instances, through direct statutory language or by deeming that the authorized activities are not major federal actions that significantly affect the human environment. Congress has also pronounced certain analyses or substitute processes to be sufficient or adequate under NEPA.\nCongress has also established alternative review processes. Typically this is in addition to NEPA public involvement, to accelerate the review by obtaining broader, organized review early in the decision-making process, vetting the decision before public review. Examples include resource advisory committees (RACs) under Section 403 of the Federal Land Policy and Management Act of 1976 (FLPMA; P.L. 94-579 , 43 U.S.C. \u00a71753) and under Title II of the Secure Rural Schools and Community Self-Determination Act of 2000 ( P.L. 106-393 ; 16 U.S.C. \u00a7500 note). Other advisory or collaborative groups have been established or acknowledged statutorily, commonly to provide supplemental public involvement.\n\n\t\t\t\tConsiderations in Expediting Decisions\n\nPublic acceptance of options to accelerate fuel treatments depends on a variety of factors. In general, earlier discourse among interests about the risks and needed treatments lead to greater comfort with the resulting decisions. One study found that survey respondents were willing to accept limitations on the rights to appeal and litigate agency decisions, but wanted to be more informed and involved in those decisions. Greater specificity in approved treatments also is likely to result in greater acceptance. For example, a treatment prescription that specifies \"thinning from below to approximately 20-foot spacing of remaining trees and emphasizing retention of Ponderosa pine\" is likely to be more acceptable than \"mechanical treatment to reduce stand density.\" Finally, authors have identified the need for collective action to minimize conflict over decisions, and three broad social factors to achieve collective action: developing collaborative capacity, framing problems in mutually understood terms, and creating mutual trust among groups. These are factors that take time, and cannot be legislated directly, although Congress can foster (or negate) their development by the ways in which it authorizes agency action to promote wildfire protection.\n\n\tConclusions\n\nAs more acres and more homes have burned in the past few years, and more people are at risk from wildfires, Congress has faced increasing pressures to protect structures and resources. Congress decides what programs to authorize and fund, and many options exist.\nTo protect homes, Congress could create new programs and expand existing ones for installing non-flammable roofing, removing burnable materials adjacent to structures, and creating a defensible space of at least 30 feet around the building. Programs could inform homeowners, or assist or require landowner action; the programs could be federal or implemented through state or local governments.\nProtecting resources poses different challenges for Congress, because ecological damages vary widely, depending on the ecosystem and on site-specific conditions. Fuel reduction can probably moderate crown fire damages in surface fire ecosystems, and possibly in mixed-intensity fire ecosystems. Existing programs for federal lands authorize prescribed burning (intentional fires under prescribed conditions) and mechanical treatments (cutting and removing some trees), the principal means of reducing fuel levels. However, prescribed fires are risky and mechanical treatments can cause other ecological damages, and both are expensive. Proponents of more fuel treatment advocate accelerated processes for environmental analysis and public review to reduce costs and expedite action. Others caution that inadequate analysis and review can allow projects with unintended damages and few fire protection benefits. Congress can alter the existing environmental and public review processes, recognizing the trade-offs between expeditious action and insufficient review. However, the fact is that crown fires occur; they cannot be halted and the damages they cause cannot be totally prevented.\n\n\t\tAppendix. Excerpts from Forest Service Handbook on NEPA Categorical Exclusions Related to Structural or Resource Protection From Wildfires\n\nThe following materials are excerpts from the Forest Service handbook on NEPA categorical exclusions\u2014 FSH 1909.15 \u2014 Environmental Policy and Procedures Handbook. Chapter 30 \u2014 Categorical Exclusion from Documentation , Amendment No. 1909.15-2007-1 (February 15, 2007). Emphases (underscoring and boldface font) are in the original.\n30.3 - Policy\n...\n2. Resource conditions that should be considered in determining whether extraordinary circumstances related to the proposed action warrant further analysis and documentation in an EA or EIS are:\na. Federally listed threatened or endangered species or designated critical habitat, species proposed for Federal listing or proposed critical habitat, or Forest Service sensitive species.\nb. Flood plains, wetlands, or municipal watersheds.\nc. Congressionally designated areas, such as wilderness, wilderness study areas, or national recreation areas.\nd. Inventoried roadless areas.\ne. Research natural areas.\nf. American Indians or Alaska Native religious or cultural sites.\ng. Archaeological sites, or historic properties or areas.\n...\n31.2 - Categories of Actions for Which a Project or Case File and Decision Memo Are Required\n...\n6. Timber stand and\/or wildlife habitat improvement activities which do not include the use of herbicides or do not require more than one mile o f low standard road construction.... Examples include but are not limited to: ...\nb. Thinning or brush control to improve growth or to reduce fire hazard including the opening of an existing road to a dense timber stand.\nc. Prescribed burning to control understory hardwoods in stands of southern pine.\nd. Prescribed burning to reduce natural fuel build-up and improve plant vigor.\n...\n10. Hazardous fuels reduction activities using prescribed fire, not to exceed 4,500 acres, and mechanical methods for crushing, piling, thinning, pruning, cutting, chipping, mulching, and mowing, not to exceed 1,000 acres. Such activities:\na. Shall be limited to areas:\n(1) In the wildland-urban interface; or\n(2) Condition Classes 2 or 3 [moderate or high risk of ecological damage] in Fire Regimes I, II, or III [surface fire, stand-replacement fire at 35 years or less, and mixed-intensity fire], outside the wildland-urban interface;\nb. Shall be identified through a collaborative framework as described in \"A Collaborative Approach for Reducing Wildland Fire Risks to Communities and Environment 10-Year Comprehensive Strategy Implementation Plan\";\nc. Shall be conducted consistent with agency and Departmental procedures and applicable land and resource management plans;\nd. Shall not be conducted in wilderness areas or impair the suitability of wilderness study areas for preservation as wilderness; and\ne. Shall not include the use of herbicides or pesticides or the construction of new permanent roads or other new permanent infrastructure; and may include the sale of vegetative material if the primary purpose of the activity is hazardous fuel reduction.\n...\n12. Harvest of live trees not to exceed 70 acres, requiring no more than \u00bd mile of temporary road construction. Do not use this category for even-aged regeneration harvest or vegetation type conversion. The proposed action may include incidental removal of trees for landings, skid trails, and road clearing. Examples include but are not limited to:\na. Removal of individual trees for sawlogs, specialty products, or fuelwood.\nb. Commercial thinning of overstocked stands to achieve the desired stocking level to increase health and vigor.\n13. Salvage of dead and\/or dying trees not to exceed 250 acres, requiring no more than \u00bd mile of temporary road construction. The proposed action may include incidental removal of live or dead trees for landings, skid trails, and road clearing. Examples include but are not limited to:\na. Harvest of a portion of a stand damaged by a wind or ice event and construction of a short temporary road to access the damaged trees.\nb. Harvest of fire-damaged trees.\n14. Commercial and non-commercial sanitation harvest of trees to control insects or disease not to exceed 250 acres, requiring no more than \u00bd mile of temporary road construction, including removal of infested\/infected trees and adjacent live uninfested\/uninfected trees as determined necessary to control the spread of insects or disease. The proposed action may include incidental removal of live or dead trees for landings, skid trails, and road clearing. Examples include but are not limited to:\na. Felling and harvest of trees infested with southern pine beetles and immediately adjacent uninfested trees to control expanding spot infestations.\nb. Removal and\/or destruction of infested trees affected by a new exotic insect or disease, such as emerald ash borer, Asian long horned beetle, and sudden oak death pathogen.","output":"Wildfires are getting more severe, with more acres and houses burned and more people at risk. This results from excess biomass in the forests, due to past logging and grazing and a century of fire suppression, combined with an expanding wildland-urban interface\u2014more people and houses in and near the forests\u2014and climate change, exacerbating drought and insect and disease problems. Some assert that current efforts to protect houses and to reduce biomass (through fuel treatments, such as thinning) are inadequate, and that public objections to some of these activities on federal lands raise costs and delay action. Others counter that proposals for federal lands allow timber harvesting with substantial environmental damage and little fire protection. Congress is addressing these issues through various legislative proposals and through funding for protection programs.\nWildfires are inevitable\u2014biomass, dry conditions, and lightning create fires. Some are surface fires, which burn needles, grasses, and other fine fuels and leave most trees alive. Others are crown fires, which are typically driven by high winds and burn biomass at all levels from the ground through the tree tops. Many wildfires contain areas of both surface and crown fires. Surface fires are relatively easy to control, but crown fires are difficult, if not impossible, to stop; often, crown fires burn until they run out of fuel or the weather changes.\nHomes can be ignited by direct contact with fire, by radiative heating, and by firebrands (burning materials lifted by the wind or the fire's own convection column). Protection of homes must address all three. Research has identified the keys to protecting structures: having a non-flammable roof; clearing burnable materials that abut the house (e.g., plants, flammable mulch, woodpiles, wooden decks); and landscaping to create a defensible space around the structure.\nWildland and resource damages from fire vary widely, depending on the nature of the ecosystem as well as on site-specific conditions. Surface fire ecosystems, which burn on 5- to 35-year cycles, can be damaged by crown fires due to unnatural fuel accumulations and fuel ladders (small trees and dense undergrowth); fuel treatments probably prevent some crown fires in such ecosystems. Stand-replacement fire ecosystems are those where crown fires are natural and the species are adapted to periodic crown fires; fuel treatments are unlikely to alter the historic fire regime of such ecosystems. In mixed-intensity fire ecosystems, where a mix of surface and crown fires is historically normal, it is unclear whether fuel treatments would alter wildfire patterns.\nPrescribed burning (intentional fires) and mechanical treatments (cutting and removing some trees) can reduce resource damages caused by wildfires in some ecosystems. However, prescribed fires are risky, mechanical treatments can cause other ecological damages, and both are expensive. Proponents of more treatment advocate expedited processes for environmental and public review of projects to hasten action and cut costs, but others caution that inadequate review can allow unintended damages with few fire protection benefits."}
{"id":"gao_GAO-05-169","pid":"gao_GAO-05-169_0","input":"\tBackground\n\nThe AWACS aircraft first became operational in March 1977, and as of  November 2004, the U.S. AWACS fleet was comprised of 33 aircraft. The  aircraft provides surveillance, command, control, and communications of  airborne aircraft to commanders of air defense forces. The onboard radar,  combined with a friend-or-foe identification subsystem, can detect,  identify, and track in all weather conditions enemy and friendly aircraft at  lower altitudes and present broad and detailed battlefield information.\nThe AWACS airplane is a modified Boeing 707 commercial airframe with a  rotating radar dome (see fig. 1). The ailerons and cowlings are similar to  commercial 707 parts but were modified for special requirements. The  AWACS radome is the covering that provides housing for the airplane\u2019s  radar and friend-or-foe (IFF) identification system. Half of the radome  covers the radar and half covers the IFF system and each has a different  make-up in its composition. The Air Force purchased only the IFF section  of the radome in the two separate purchases.\nIn the past, the Air Force has generally repaired, rather than purchased,  the ailerons, cowlings, and radomes but recently had to purchase new  parts to meet operational requirements. Prior to the recent spare parts  purchases, the ailerons and cowlings had not been purchased since the  mid-1980s, and the last radome unit had not been purchased since 1998.\nAll of the spare parts were purchased as noncompetitive negotiated  procurements. The Federal Acquisition Regulation (FAR) provides  guidance for the analysis of negotiated procurements with the ultimate  goal of establishing fair and reasonable prices for both the government  and contractor. For a noncompetitive purchase, the contract price  is negotiated between the contractor and government and price  reasonableness is established based primarily on cost data submitted by  the contractor. The ailerons were also purchased as a commercial item.  For a commercial item, price reasonableness is established based on an  analysis of prices and sales data for the same or similar commercial items.\nFor the AWACS spare parts purchases we reviewed, DCMA provided  technical assistance to the Air Force by analyzing labor hours, material  and overhead costs, and contract prices. DCAA provided auditing and  cost accounting services. DCMA and DCAA analyses were submitted to  the Air Force prior to contract negotiations for the respective purchases.\n\n\tRecent AWACS Parts Prices Are Significantly Higher Than Prior Purchase Prices\n\nSince late 2001, the Air Force has negotiated and awarded contracts to  Boeing for the purchase of outboard ailerons, cowlings, and radomes  totaling over $23 million. Specifically, the Air Force purchased three  ailerons for about $1.4 million, 12 right-hand cowlings and 12 left-hand  cowlings for about $7.9 million, and three radomes for about $5.9 million.  The Air Force paid an additional $8.1 million in costs as part of the initial  radome contract to move equipment and establish manufacturing  capabilities in a new location (see table 1).\nThe most recent per unit cost of each part represents a substantial  increase from prior purchases. The overall unit cost of the ailerons  and cowlings increased by 442 percent and 354 percent, respectively,  since they were last purchased in 1986. The unit price for the one radome  purchased under the September 2001 contract increased by 38 percent  since it was last purchased in 1998, and the unit price nearly doubled  two years later under the September 2003 contract. Overall, only a small  portion of the price increases could be attributed to inflation. Figure 2  shows the unit price increases, including adjustments for inflation, for  ailerons, cowlings, and radomes.\nThe Air Force and Boeing cited a number of additional factors that may  have contributed to higher prices. For all the parts, the Air Force  purchased limited quantities, which generally results in higher unit prices.  For the ailerons, which had not been purchased since 1986, Boeing  officials told us that some of the price increase was attributable to  production inefficiencies that would result from working with older  technical drawings, developing prototype manufacturing methods, and  using different materials in the manufacturing process. The unit price of  the cowlings included costs for the purchase of new tools required to  manufacture the cowlings in-house\u2014which Boeing decided to do rather  than have vendors manufacture the cowlings, as had been done in the  past. The new tools included items such as large production jigs, used to  shape and fabricate sheet metal. Regarding radomes, the Air Force paid  Boeing to relocate tooling and equipment from Seattle, Washington, to  Tulsa, Oklahoma, and develop manufacturing capabilities at the Tulsa  facility to produce and repair radomes. Boeing had initially decided to  discontinue radome production and repair at its Seattle location due to  low demand for these parts but, after further consideration of the Air  Force\u2019s requirements, decided to relocate the capability in Tulsa. The first  radome contract the Air Force awarded Boeing included over $8.1 million  to relocate the tooling and equipment and set up the manufacturing  process. The remaining $1.2 million was the estimated production cost of  the one radome.\n\n\tAir Force Did Not Obtain and Evaluate Information Needed to Negotiate Fair and Reasonable Prices\n\nIn negotiating contracts for the outboard ailerons, cowlings, and radomes,  the Air Force did not obtain and evaluate information needed to  knowledgeably assess Boeing\u2019s proposals and ensure that the spare parts  prices were fair and reasonable. In general, the Air Force did not obtain  sufficient pricing information for a part designated a commercial item,  adequately consider DCAA and DCMA analyses of aspects of contractor  proposals, or seek other pricing information that would allow it to not only  determine the fairness and reasonableness of the prices but improve its  position for negotiating the price.\n\n\t\tPricing Information Not Sought for Commercial Item to Ailerons\n\nBoeing asserted that the aileron assembly was a commercial item. Under  such circumstances, fair and reasonable prices should be established  through a price analysis, which compares the contractor\u2019s proposed price  with commercial sales prices for the same or similar items. However,  when purchasing the ailerons, the Air Force did not seek commercial sales  information to justify the proposed price. Instead, the Air Force relied on a  judgmental analysis prepared by Boeing, which was not based on the  commercial sales of the same or similar aileron.\nIn reviewing the contractor\u2019s submissions of data to the government,  both DCMA and DCAA found Boeing\u2019s proposal inadequate for the Air  Force to negotiate a fair and reasonable price. DCMA performed a series  of analyses on the purchase of the aileron assembly, each of which  indicated that Boeing\u2019s proposed unit price was too high. Boeing proposed  in November 2002 to sell three aileron assemblies for $514,472 each.  Subsequently, DCMA performed three separate price analyses, which  indicated that Boeing\u2019s price should be in the $200,000 to $233,000 range.  However, the Air Force negotiation team did not discuss these analyses  with Boeing during negotiations or include them as part of the Air Force\u2019s  price negotiation documentation. In January 2003, DCAA reported that  the proposed price was \u201cunsupported\u201d and that Boeing did not comply  with the Boeing Estimating System Manual, which requires support for  commercial item prices. Further, the report said that Boeing must submit  cost information and supporting documentation. The Air Force never  addressed DCAA\u2019s concerns. Instead, the Air Force relied on the analysis  prepared by Boeing and paid $464,133 per unit.\nThe price analyst involved with the negotiation said that, in retrospect, the  Air Force should have sought commercial sales information from Boeing,  citing this purchase as his first experience with a commercial item. We  asked Boeing to provide historical sales information of the same or  commercial equivalent item to use as a general benchmark on price  reasonableness of the ailerons purchased by the Air Force. According to  Boeing representatives, the requested data were not available because the  military version of the ailerons had not been produced for over 20 years.\nBoeing representatives agreed that the Boeing analysis was subjective, but  they said the analysis represented the best estimate based on their  assumptions and limitations.\n\n\t\tAir Force Did Not Act on DCMA\u2019s Recommendation to Investigate the Use of Existing Tools for Cowlings\n\nWhen negotiating the purchase price for the cowlings, the Air Force  again did not use information provided by DCMA or address DCMA\u2019s  recommendation that it determine the availability and potential use of  existing tools to manufacture the cowlings. Included in the $7.9 million  contract for cowlings, Boeing proposed and the Air Force awarded about  $1.1 million for the purchase of new tools, such as large production jigs,  associated with the manufacture of the cowlings. However, DCMA had  recommended in its initial evaluation of Boeing\u2019s proposal that the Air  Force give qualified offerors an opportunity to inspect the condition of  cowling tools used in prior manufacturing for their applicability and use in  fabricating the cowlings. DCMA pointed out that the tools were located at  Davis\u2013Monthan Air Force Base in Arizona, where government-owned  tooling is often stored when no longer needed for production. However,  the Air Force did not accurately determine the existence and condition of  the tools.\nSubsequent to the contract award, Boeing\u2014not the Air Force\u2014 determined that extensive government-owned tooling was available at  Davis-Monthan and got approval, in May 2004, to use the tools in  manufacturing the cowlings. As a result, the cowlings contract included  unnecessary tool purchase costs when it was awarded. Air Force and  Boeing officials anticipated a contract modification would be submitted to  reduce the price as a result of using the existing tools.\n\n\t\tCost Information from Recent Radome Purchase Not Considered\n\nA significant portion of the September 2001 cost-plus-fixed fee contract  that the Air Force awarded to Boeing to purchase one radome unit  involved relocating tools and equipment and establishing a manufacturing  process at Tulsa. Specifically, over $8.1 million of the contract, which was  valued at about $9.3 million, was spent to move equipment and establish a  manufacturing process at the Tulsa facility; the price of producing the  one radome unit was about $1.2 million. About 19 months later, in  April 2003, at the Air Force\u2019s request, Boeing provided a proposal to  produce two additional radomes at the Tulsa facility, and in  September 2003, the Air Force awarded a contract to Boeing to produce  the two radomes at over $2.3 million per unit\u2014almost twice the 2001  unit price.\nBased on our analysis, the Air Force did not obtain adequate data to  negotiate a fair and reasonable price for the second radome contract.  First, the Air Force requested a DCMA analysis of Boeing\u2019s proposal, but,  in late June 2003, DCMA told the Air Force price analyst that, for an  unexplained reason, DCMA did not receive the request for assistance; the  price analyst then determined that he would waive the technical  evaluation, which would forego the benefit of DCMA\u2019s technical expertise.  Second, and most importantly, the Air Force did not consider Boeing\u2019s  costs under the September 2001 contract, which would have provided  important information to help the Air Force determine if it was obtaining a  fair and reasonable price for the radomes.\n\n\tNo Competition Used for AWACS Spare Parts Purchases\n\nIn addition to encouraging innovation, competition among contractors  can enable agencies to compare offers and thereby establish fair and  reasonable prices and maximize the use of available funds. The Air Force  determined that Boeing was the sole source for the parts and did not seek  competition. However, a DCMA analysis had determined that Boeing\u2019s  proposed price for the engine cowlings was not fair and reasonable and,  because a subcontractor provided the part in support of the original  production contracts, recommended that the cowlings be competed  among contractors.\nFrom the outset of the cowlings purchase, Air Force documents said that  the Air Force did not have access to information needed to compete the  part. However, the Air Force has a contract with Boeing that could allow  the Air Force to order drawings and technical data for the AWACS and  other programs for the purpose of competitively purchasing replenishment  spare parts. Nevertheless, Boeing has not always delivered AWACS data  based on uncertainties over the Air Force\u2019s rights to the data. Based on  discussions with Air Force representatives, Boeing has been reluctant to  provide data and drawings in the past, making it difficult for the Air Force  to obtain them. Moreover, Boeing maintains that it owns the rights to the  technical data and drawings and the Air Force could not use the drawings  to compete the buy without Boeing\u2019s approval.\nIt is unclear if the AWACS program office had placed a priority on  fostering competition for the cowlings and other spare parts.  Representatives of the AWACS spare parts program office at Tinker Air  Force Base cited a number of concerns in purchasing the spare parts from  vendors other than Boeing. First, they said that the need for these spare  parts had become urgent and noted that other vendors would have to pass  certain testing requirements, which could be a lengthy process, and that,  even with this testing, performance risks and delivery delays were more  likely to occur. An overriding concern was that the Air Force establish a  good relationship with reliable parts providers, such as Boeing. Program  office officials told us that the Air Force would likely be better served in  the long run by staying with a reliable supplier rather than competing  the parts.\nIn contrast, senior contracting officials at Tinker\u2014who have oversight  responsibilities for the contracting activities that support the AWACS  program\u2014have a different point of view. These officials were concerned  about the large price increases on AWACS spare parts and the lack of  competition. They stated that the Air Force is a \u201ccaptured customer\u201d of  Boeing because the company is the only source for many of the parts  needed to support aircraft manufactured by Boeing, such as the AWACS.  According to these senior contracting officials, during the last  several years Boeing has become more aggressive in seeking higher profits  regardless of the risk involved with the purchase. For example, they told  us that, even when the risk to the company is very low, the company is  seeking at least a 3- to 5-percent higher fee than in the past. As a result,  contracting officers have had to elevate some negotiations to higher  management levels within the Air Force. They also said that, without the  ability to compete spare parts purchases, the Air Force is in a vulnerable  position in pricing such contracts. Earlier in 2004, Boeing and the senior  Air Force contracting officials involved with the aircraft programs  managed at Tinker began a joint initiative to work on various contracting  issues. Concerning data rights, these contracting officials told us that in  future weapon systems buys, the Air Force must ensure that it obtains  data rights so that it can protect the capability to later compete  procurements of spare parts.\n\n\tConclusions\n\nThe Air Force needs to be more vigilant in its purchases of spare parts.  The AWACS parts purchases we reviewed illustrate the difficulty of buying  parts for aircraft that are no longer being produced as well as buying them  under non-competitive conditions. A key problem was that the Air Force  did not take appropriate steps to ensure that the prices paid were fair and  reasonable. It did not obtain and evaluate information that either should  have been available or was available to improve its negotiating position. It  did not attempt to develop other sources to purchase the spare parts and  promote competition. And, it did not have a clear understanding of its  rights to technical data and drawings, which are necessary to carry out  competitive procurements. As the AWACS aircraft\u2014like other Air Force  weapon systems\u2014continue to age, additional spare parts will likely be  needed to keep them operational. Given the significant price increases for  the ailerons, cowlings, and radomes, the Air Force needs to look for  opportunities to strengthen its negotiating position and minimize price  increases. Clearly, competition is one way to do this. Unless the Air Force  obtains and evaluates pricing or cost information and\/or maximizes the  use of competition, it will be at risk of paying more than fair and  reasonable prices for future purchases of spare parts.\n\n\tRecommendations for Executive Action\n\nTo improve purchasing of AWACS spare parts, we recommend that the  Secretary of Defense direct the Secretary of the Air Force to    ensure that contracting officers obtain and evaluate available  information, including analyses provided by DCAA and DCMA, and  other data needed to negotiate fair and reasonable prices;    develop a strategy that promotes competition, where practicable, in the  purchase of AWACS spare parts; and    clarify the Air Force\u2019s access to AWACS drawings and technical data  including the Air Force\u2019s and Boeing\u2019s rights to the data.\n\n\tAgency and Company Comments and Our Evaluation\n\nWe received written comments on a draft of this report from DOD and  The Boeing Company.\nIn its comments, DOD concurred with GAO\u2019s recommendations and  identified actions it plans to take to implement the recommendations.  DOD\u2019s comments are included in appendix II. DOD also provided technical  comments, which we incorporated into the report as appropriate.\nIn its comments The Boeing Company provided information that augments  the information in the report and provides the company\u2019s perspective on  the AWACS purchases. With respect to the prices the Air Force paid for  the spare parts, Boeing provided more detailed information to explain the  costs associated with each part. However, the information Boeing  provided did not change our conclusion that the Air Force did not obtain  and evaluate sufficient information to establish fair and reasonable prices.  The company also noted that it has worked with Air Force representatives  to address issues associated with higher profits and, as of January 2005,  was working with the Air Force to address issues associated with access  to AWACS technical drawings and data. The Boeing Company\u2019s comments  are included in appendix III.\nWe are sending copies of this report to the Secretaries of the Air Force, the  Army, and the Navy; appropriate congressional committees; and other  interested parties. We will also provide copies to others on request. In  addition, the report will be available at no charge on the GAO Web site at  http:\/\/www.gao.gov.\nIf you or your staff has questions concerning this report, please contact me  at (202) 512-4841 or by e-mail at cooperd@gao.gov, or James Fuquay at  (937) 258-7963. Key contributors to this report were Ken Graffam, Karen  Sloan, Paul Williams, and Marie Ahearn.\n\nAppendix I: Scope and Methodology\n\nTo identify price increases associated with the ailerons, cowlings, and  radomes, we reviewed Air Force contracting files and we held discussions  with members of the Air Force involved in each purchase, which included  contracting officers, negotiators, and price analysts. These officials were  located at Tinker Air Force Base, Oklahoma, the location of the Airborne  Warning and Control System (AWACS) spare parts program office\u2014the E3  Systems Support Management Office. To account for the impact of  inflation, we used published escalation factors for aircraft parts and  auxiliary equipment to escalate prices previously paid for the parts to a  price that would have been expected to be paid if the prices considered  the effects of inflation.\nTo determine whether the Air Force contracting officers obtained and  evaluated sufficient information to ensure that Boeing\u2019s prices were fair  and reasonable, we held discussions with the Defense Contract  Management Agency (DCMA) representatives and obtained copies of  reports and analyses prepared by DCMA and Defense Contract Audit  Agency (DCAA). We reviewed Air Force contracting files and held  discussions with Air Force officials that negotiated the respective  purchases, which included contracting officers, negotiators, and price  analysts. We also held discussions with representatives of Boeing and  visited Boeing production facilities in Tulsa, Oklahoma. The Boeing  officials represented several Boeing divisions involved in the purchases  including Boeing\u2019s military division (Boeing Aircraft and Missiles, Large  Aircraft Spares and Repairs), which had responsibility for negotiating all  of the spare parts purchases. Boeing Aerospace Operations, Midwest City,  Oklahoma, had contract management responsibility for the purchases.\nTo determine the extent that competition was used to purchase the parts,  we reviewed Air Force contracting files and held discussions with  members of the Air Force involved in each purchase, which included  contracting officers, negotiators, and price analysts. We also held  discussions with representatives of the AWACS spare parts program office  and senior contracting officials responsible for overseeing contracting  activities at Tinker Air Force Base, Oklahoma.\nWe conducted our review from August 2003 to November 2004 in  accordance with generally accepted government auditing standards.\n\nAppendix II: Comments from the Department of Defense\n\nAppendix III: Comments from The Boeing Company\n\n\tGAO\u2019s Mission\n\nThe Government Accountability Office, the audit, evaluation and  investigative arm of Congress, exists to support Congress in meeting its  constitutional responsibilities and to help improve the performance and  accountability of the federal government for the American people. GAO  examines the use of public funds; evaluates federal programs and policies;  and provides analyses, recommendations, and other assistance to help  Congress make informed oversight, policy, and funding decisions. GAO\u2019s  commitment to good government is reflected in its core values of  accountability, integrity, and reliability.\n\n\tObtaining Copies of GAO Reports and Testimony\n\nThe fastest and easiest way to obtain copies of GAO documents at no cost  is through GAO\u2019s Web site (www.gao.gov). Each weekday, GAO posts  newly released reports, testimony, and correspondence on its Web site. To  have GAO e-mail you a list of newly posted products every afternoon, go to  www.gao.gov and select \u201cSubscribe to Updates.\u201d\n\n\t\tOrder by Mail or Phone\n\n\tTo Report Fraud, Waste, and Abuse in Federal Programs\n\n\tCongressional Relations\n\n\tPublic Affairs","output":"Why GAO Did This Study\n\nOver the past several years, the Air Force has negotiated and awarded more than $23 million in contracts to the Boeing Corporation for the purchase of certain spare parts for its Airborne Warning and Control System (AWACS) aircraft. Since they first became operational in March 1977, AWACS aircraft have provided U.S. and allied defense forces with the ability to detect, identify, and track airborne threats. In March 2003, GAO received allegations that the Air Force was overpaying Boeing for AWACS spare parts. This report provides the findings of GAO's review into these allegations. Specifically, GAO identified spare parts price increases and determined whether the Air Force obtained and evaluated sufficient information to ensure the prices were fair and reasonable. GAO also determined the extent to which competition was used to purchase the spare parts.\n\nWhat GAO Found\n\nSince late 2001, the Air Force has spent about $1.4 million to purchase three ailerons (wing components that stabilize the aircraft during flight), $7.9 million for 24 cowlings (metal engine coverings), and about $5.9 million for 3 radomes (protective coverings for the radar antennae). The unit prices for the ailerons and cowlings increased by 442 percent and 354 percent, respectively, since they were last purchased in 1986. The unit price of the radomes, purchased under two contracts, nearly doubled from September 2001 to September 2003. Although some of the price increases can be attributed to inflation, other factors, such as re-establishing production processes and procuring limited quantities of the parts, contributed more significantly to the increases. In addition, the 2001 radome contract included about $8.1 million for Boeing to relocate equipment and establish a manufacturing capability at a new location. The Federal Acquisition Regulation (FAR) requires contracting officers to evaluate certain information when purchasing supplies and services to ensure fair and reasonable prices. However, Air Force contracting officers did not evaluate pricing information that would have provided a sound basis for negotiating fair and reasonable prices for the spare parts. Moreover, the Air Force did not adequately consider Defense Contract Audit Agency (DCAA) and DCMA analyses of these purchases, which would have allowed the Air Force to better assess the contractor's proposals. For example, when purchasing ailerons, the Air Force did not obtain sales information for the aileron or similar items to justify Boeing's proposed price and did not consider DCMA analyses that showed a much lower price was warranted. Instead, the contracting officer relied on a Boeing analysis. None of the spare parts contracts cited in the allegations were competitively awarded--despite a DCMA recommendation that the cowlings be competed to help establish fair and reasonable prices. The Air Force did not develop alternate sources for competing the purchase of the cowlings because it believed it lacked access to technical drawings and data that would allow it to compete the purchase. Yet the Air Force has a contract with Boeing that could allow the Air Force to order technical drawings and data specifically for the purpose of purchasing replenishment spare parts."}
{"id":"crs_RS22491","pid":"crs_RS22491_0","input":"\tIntroduction\n\nProblems for patients associated with dramatic increases in the cost of prescription medications have generated a great deal of interest among the media, interest groups, and legislators alike. Although no broad consensus exists regarding the causes of\u2014and thus solutions to\u2014the rapid increase in many pharmaceutical prices, policymakers have explored a number of options, including the recycling of unadulterated surplus drugs.\nCurrently, many health care institutions, especially long-term care facilities (LTCFs), routinely dispose of medications that otherwise have a useful life. This practice typically occurs when drugs are dispensed to patients but remain unused because the patient switches medication, is discharged, or dies. Studies have estimated that more than one billion dollars worth of drugs are discarded each year in the United States. One way to counter this costly practice is to recycle the unused medications. However, the ability to implement recycling programs may be constrained by federal and\/or state law.\nCurrent regulation of pharmaceuticals and those who dispense them consists of a complex system of federal and state laws. There are three federal laws discussed below that may impede the practice of recycling medications. At the state level, state controlled substances laws, pharmacy laws, and other rules promulgated by state boards of pharmacy govern practices relating to the manufacture, distribution, and possession of medicines. Nevertheless, state legislatures that have implemented drug recycling programs appear to tailor them to conform to existing regulations. State laws vary greatly regarding who may return and accept the medications, which medications may be recycled, and the procedures in place to safeguard against adulteration or unlawful possession of the medications.\n\n\tFederal Laws Affecting Reuse of Drugs\n\nFederal laws regulating pharmaceuticals pose potential obstacles to the implementation of drug recycling programs. Specifically, many of the medications covered by recycling programs are considered controlled substances and thus are subject to the requirements of the Controlled Substances Act (CSA). Furthermore, most, if not all, of the drugs in question also require a prescription in order to be dispensed, and therefore are regulated by the Federal Food, Drug, and Cosmetics Act (FFDCA) \u2014thus adding another layer of federal statutory regulations. Additionally, programs to recycle medications may also encounter logistical problems relating to billing under the Health Insurance Accountability and Portability Act (HIPAA).\n\n\t\tControlled Substances Act\n\nOne potential impediment to drug recycling programs is the CSA. Enacted in 1970 with the main objectives of combating drug abuse and controlling traffic in controlled substances, the CSA created a regulatory regime criminalizing the unauthorized manufacture, distribution, dispensation, and possession of the substances covered by the act. Enforced by the federal Drug Enforcement Agency (DEA), the CSA establishes civil as well as criminal sanctions for its violation.\nThe CSA is relevant to drug recycling programs because most, if not all, of the costly medications the programs seek to recycle are considered controlled substances under the CSA. Practitioners who dispense or administer controlled substances listed on Schedules II through V, including substances that may not require a prescription, must register with the DEA. Entities that apply for federal registration to handle controlled substances and those so registered must provide effective controls and procedures to guard against theft and diversion of controlled substances in accordance with security requirements. These requirements vary depending on the type of activity and the substances.\nHowever, unlike hospitals and pharmacies, most long-term care facilities (LTCFs) are not registrants. Due to the stringent safety standards imposed on registrants, registration may not be feasible or cost-effective for many facilities to implement. Because of the prohibition against handling or possessing controlled substances without DEA registration, the CSA seems to preclude LTCFs\u2014or any entity not registered with the DEA\u2014from effectively participating in a drug recycling program. As a result, the DEA distribution system, which is designed to prevent diversion by establishing a closed distribution loop among registrants for purposes of tracking all entities that handle controlled substances prior to dispensing, often prevents LTCFs from returning such drugs to pharmacy stock and forces them to destroy any unused controlled substances.\nAn alternative to recycling programs that LTCFs may wish to pursue is the installation of automated dispensing systems (ADS). Similar to a vending machine, an ADS is stocked with drugs by a pharmacy, which controls the device remotely and programs it to dispense drugs on a single-dose basis. The DEA recently promulgated a rule to allow this practice as a way to \"mitigate the problem of excess stocks and disposal.\" Using this system, the drugs are not deemed to be dispensed until provided by the ADS, so any unused drugs remain in pharmacy stock.\n\n\t\tFederal Food, Drug, and Cosmetics Act\n\nRecycling programs must also comply with statutes that regulate the safety and efficacy of prescription drugs. Federally, this regulation occurs under the FFDCA. One of the purposes of the FFDCA is to ensure drug safety by prohibiting the introduction of adulterated or misbranded foods, drugs, or cosmetics into interstate commerce. Therefore, programs to recycle unused prescription drugs may encounter barriers if such recycling could lead to drug adulteration or misbranding.\nThe federal Food and Drug Administration's (FDA) policy guidance reflects these concerns. In guidance that dates back to 1980, the agency states, \"[a] pharmacist should not return drug products to his stock once they have been out of his possession. It could be a dangerous practice for pharmacists to accept and return to stock the unused portions of prescriptions that are returned by patrons, because he would no longer have any assurance of the strength, quality, purity, or identity of the articles.\" However, the FDA has no specific regulations regarding drug recycling programs and leaves these programs to the discretion of the state so long as state legislation does not offend applicable regulations relating to the safety and efficacy of prescription medications.\n\n\t\tHealth Insurance Portability and Accountability Act\n\nA smaller administrative obstacle to the effective implementation of drug recycling programs is the billing requirements under HIPAA. This law requires electronic transactions for operations conducted by pharmacies\u2014the entities that are responsible for accepting unused medications in many recycling programs. Every transaction that occurs within a pharmacy must be part of the HIPAA Transactions Code Set. However, there is currently no code for returning an unused drug to stock for credit. Without this code, such transactions cannot be properly documented and accounted for, posing an obstacle for pharmacists and doctors who would participate in drug recycling programs.\n\n\tCurrent State Practice\n\nIn recent years, several states have attempted to combat waste associated with discarding unused medications by creating drug recycling programs. These programs aren't \"as simple as returning 'leftovers.'\" Rather, most state legislation typically specifies who may return the unused medication, who may accept the medication, what types of medications may be returned, and to whom the medications may be redistributed. This section provides examples of current practices regarding such recycling programs.\n\n\t\tAuthorized Participants\n\nMost laws specify who may return, who may accept, and\/or who may receive unused medications. Some states allow patients to donate, while others restrict the practice to pharmacies, doctors and wholesale distribution centers. Iowa, which falls in the former category, allows any person to donate unused medications. In contrast, California law allows donations only from drug manufacturers, licensed health care facilities, and pharmacies.\n\n\t\tAuthorized Medications\n\nSome states do not place restrictions on the drugs included in their recycling program, while others specify the types they will accept. For example, Nebraska restricts its drug repository program to cancer drugs. Wisconsin began its recycling program as a cancer drug repository, but later expanded it to include prescription drugs and supplies for all other chronic diseases such as diabetes.\n\n\t\tAdditional Precautions\n\nStates also impose restrictions to ensure that the medications are safe. Safety requirements are fairly uniform across most states. They typically require that medications be in their original, unopened sealed packaging or in single unit doses that are individually contained in unopened, tamper-evident packaging. Most states also prohibit the return of medications that will expire within six months or appear to be adulterated or misbranded in any way.\nDespite the precautions states have attempted to build into their recycling programs, some people remain unconvinced that these programs are completely safe. Critics argue that insufficient safety controls may lead to adulterated, dangerous medicines, and drugs that land in the wrong hands. They also argue that the actual process of repackaging medications can pose safety hazards. Nevertheless, states seem intent on continuing to tailor their legislation in order to conform to existing law, while simultaneously acting as laboratories to test new cost-effective measures.","output":"In recent years, the rising costs of prescription drugs have motivated various policymakers to implement cost-saving measures. In some cases, states have pursued programs to collect and redistribute unused medications that would otherwise be discarded. However, the ability to implement these so-called drug recycling programs may be constrained by federal or state law or both. For example, medications classified as controlled substances are regulated by the Controlled Substances Act (CSA). Furthermore, drugs that require prescriptions, as many controlled substances do, are regulated by the Federal Food, Drug, and Cosmetics Act (FFDCA). Additionally, programs may encounter logistical problems related to billing under the Health Insurance Portability and Accountability Act (HIPAA), which is not designed to accommodate drug recycling. Despite these hurdles, states have begun to implement drug recycling programs. Although the details of the laws vary among states, most contain strict rules to ensure the safety of the medications. This report provides an overview of the federal laws that may affect state drug recycling programs, as well as examples of these state programs."}
{"id":"gao_GAO-12-343","pid":"gao_GAO-12-343_0","input":"\tBackground\n\nCurrently, public safety officials primarily communicate with one another  using LMR systems that support voice communication and usually consist  of handheld portable radios, mobile radios, base stations, and repeaters,  as described:\nHandheld portable radios are typically carried by emergency  responders and tend to have a limited transmission range.\nMobile radios are often located in vehicles and use the vehicle\u2019s  power supply and a larger antenna, providing a greater transmission  range than handheld portable radios.\nBase station radios are located in fixed positions, such as dispatch  centers, and tend to have the most powerful transmitters. A network is  required to connect base stations to the same communication system.\nRepeaters increase the effective communication range of handheld  portable radios, mobile radios, and base station radios by  retransmitting received radio signals.\nFigure 1 illustrates the basic components of an LMR system.\nLMR systems are generally able to meet the unique requirements of  public safety agencies. For example, unlike commercial cellular networks,  which can allow seconds to go by before a call is set up and answered,  LMR systems are developed to provide rapid voice call-setup and group- calling capabilities. When time is of the essence, as is often the case  when public safety agencies need to communicate, it is important to have  access to systems that achieve fast call-set up times. Furthermore, LMR  systems provide public safety agencies \u201cmission critical\u201d voice  capabilities\u2014that is, voice capabilities that meet a high standard for  reliability, redundancy, capacity, and flexibility. Table 1 describes the key  elements for mission critical voice capabilities, as determined by the  National Public Safety Telecommunications Council (NPSTC).\nAccording to NPSTC, for a network to fully support public safety mission  critical voice communications, each of the elements in table 1 must  address part of the overall voice communications services supported by  the network. In other words, NPSTC believes a network cannot be a  mission critical network without all of these elements. Furthermore, unlike  commercial networks, mission critical communication systems rely on  \u201chardened\u201d infrastructure, meaning that tower sites and equipment have  been designed to provide reliable communications even in the midst of  natural or man-made disasters. To remain operable during disasters,  mission critical communications infrastructure requires redundancy, back- up power, and fortification against environmental stressors such as  extremes of temperature and wind.\nNationwide, there are approximately 55,000 public safety agencies.  These state and local agencies typically receive a license from FCC to  operate and maintain their LMR voice systems. Since these systems are  supported by state and local revenues, the agencies generally purchase  equipment and devices using their own local budgets without always  coordinating their actions with nearby agencies, which can hinder  interoperability. Since 1989, public safety associations have collaborated  with federal agencies to establish common technical standards for LMR  systems and devices called Project 25 (P25). The purpose of these  technical standards is to support interoperability between different LMR  systems, that is, to enable seamless communication across public safety  agencies and jurisdictions. While the P25 suite of standards is intended to  promote interoperability by making public safety systems and devices  compatible regardless of the manufacturer, it is a voluntary standard and  currently incomplete. As a result, many LMR devices manufactured for  public safety are not compatible with devices made by rival  manufacturers, which can undermine interoperability.\nThe federal government plays an important role in public safety  communications by providing funding for emergency communication  systems and working to increase interoperable communication systems.  Congress, in particular, has played a critical role by designating radio  frequency spectrum for public safety use. Furthermore, Congress can  direct action by federal agencies and others in support of public safety.  For example, through the Homeland Security Act of 2002, Congress  established DHS and required the department, among other things, to  develop a comprehensive national incident management system  comprising all levels of government and to consolidate existing federal  government emergency response plans into a single, coordinated  national response plan.\nThe number of licenses excludes the 700 MHz public safety broadband license, the 4.9  GHz band, and public safety point-to-point microwave licenses. for public safety broadband use.its Public Safety and Homeland Security Bureau (PSHSB), which is  responsible for developing, recommending, and administering FCC\u2019s  policies pertaining to public safety communications issues. FCC has  issued a series of orders and proposed rulemakings and adopted rules  addressing how to develop a public safety broadband network, some of  which are highlighted:   In September 2006, FCC established  In 2007, FCC adopted an order to create a nationwide broadband  network with the 10 MHz of spectrum designated for a public safety  broadband network and the adjacent 10 MHz of spectrum\u2013\u2013the Upper  700 MHz D Block, or \u201cD Block.\u201d As envisioned by FCC, this  nationwide network would be shared by public safety and a  commercial provider and operated by a public\/private partnership.  However, when FCC presented the D Block for auction in 2008 under  these conditions, it received no qualifying bids and thus was not  licensed. Subsequently it was found that the lack of commercial  interest in the D Block was due in part to uncertainty about how the  public\/private partnership would work. Although many stakeholders  and industry participants called for the D Block to be reallocated to  public safety, an alternate view is that auctioning the D Block for  commercial use would have generated revenues for the U.S.  Treasury. As noted previously, a provision in pending legislation, the  Middle Class Tax Relief and Job Creation Act of 2012, reallocates the  D Block to public safety.\nIn 2007, FCC licensed the 10 MHz of spectrum that FCC assigned for  public safety broadband use to the Public Safety Spectrum Trust  (PSST), a nonprofit organization representing major national public  safety associations. This 10 MHz of spectrum, located in the upper  700 MHz band is adjacent to the spectrum allocated to public safety  for LMR communications. As the licensee, the PSST\u2019s original  responsibilities included representing emergency responders\u2019 needs  for a broadband network and negotiating a network sharing  agreement with the winner of the D Block auction. However, since the  D Block was not successfully auctioned, FCC stayed the majority of  the rules guiding the PSST.\nIn 2009, public safety entities began requesting waivers from FCC\u2019s  rules to allow early deployment of broadband networks in the 10 MHz  of spectrum licensed to the PSST, and since 2010, FCC granted  waivers to 22 jurisdictions for early deployment.  These jurisdictions  had to request waivers because the rules directing the deployment of  a broadband network were not complete. In this report, we refer to the  22 entities receiving waivers as \u201cwaiver jurisdictions.\u201d As a condition  of these waivers, FCC required that local or regional networks would  interoperate with each other and that all public safety entities in the  geographic area would be invited to use the new networks. In  addition, FCC required that all equipment operating on the 700 MHz  public safety broadband spectrum comply with Long Term Evolution  (LTE), a commercial data standard for wireless technologies.shown in table 2, of the 22 jurisdictions that successfully petitioned for  waivers, only 8 received federal funding. Seven waiver jurisdictions  received funding from NTIA\u2019s Broadband Technology Opportunities  Program (BTOP), a federal grant program authorized through the  American Recovery and Reinvestment Act of 2009 that had several   As  purposes, including promoting the expansion of broadband  infrastructure.\nIn January 2011, FCC adopted rules and proposed further rules to  create an effective technical framework for ensuring the deployment  and operation of a nationwide, interoperable public safety broadband  network. As part of this proceeding, FCC sought comment on  technical rules and security for the network as well as testing of  equipment to ensure interoperability. The comment period for the  proceeding closed on April 11, 2011, and FCC received comments  from waiver jurisdictions, consultants, and manufacturers, among  others. As of February 7, 2012, FCC did not have an expected  issuance date for its final rules.\nIn addition to FCC, DHS has been heavily involved since its inception in  supporting public safety by assisting federal, state, local, and regional  emergency response agencies and policy makers with planning and  implementing interoperable communication networks. Within DHS,  several divisions have focused on improving public safety  communications. DHS also has administered groups that bring together  stakeholders from all levels of government to discuss interoperability  issues:\nThe Emergency Communications Preparedness Center (ECPC) was  created in response to Hurricane Katrina by the 21st Century  Emergency Communications Act of 2006 to help improve  intergovernmental emergency communications information sharing.\nThe ECPC has 14 member agencies with a goal, in part, to support  and promote interoperable public safety communications through  serving as a focal point and clearing house for information. It has  served to facilitate collaboration across federal entities involved with  public safety communications.\nSAFECOM is a communications program that provides support,  including research and development, to address interoperable  communications issues. Led by an executive committee, SAFECOM  has members from state and local emergency responders as well as  intergovernmental and national public safety communications  associations. DHS draws on this expertise to help develop guidance  and policy. Among other activities, SAFECOM publishes annual grant  guidance that outlines recommended eligible activities and application  requirements for federal grant programs providing funding for  interoperable public safety communications.\nWithin Commerce, NTIA and NIST are also involved in public safety  communications by providing research support to the PSCR program.  The PSCR serves as a laboratory and advisor on public safety standards  and technology. It provides research and development to help improve  public safety interoperability. For example, the PSCR has ongoing  research in many areas related to communications, including the  voluntary P25 standard for LMR communication systems, improving  public safety interoperability, and the standards and technologies related  to a broadband network. PSCR also conducts laboratory research to  improve the audio and video quality for public safety radios and devices.\n\n\tEven With Investment of Significant Resources, Current Public Safety Communication Systems Provide Mission Critical Voice Capabilities but Are Not Fully Interoperable\n\n\t\tPublic Investment\n\nCongress has appropriated billions in federal funding over the last decade  to public safety in grants and other assistance for the construction and  maintenance of LMR voice communication systems and the purchase of  communication devices. Approximately 40 grant programs administered  by nine federal agencies have provided this assistance for public safety.  Some of the grants provided a one-time infusion of funds, while other  grants have provided a more consistent source of funding. For example,  in 2007, the one-time Public Safety Interoperable Communications Grant  Program awarded more than $960 million to assist state and local public  safety agencies in the acquisition, planning, deployment, or training on  interoperable communication systems.Grant Program has provided $6.5 billion since 2008, targeting a broad  scope of programs that enhance interoperability for states\u2019 emergency  medical response systems and regional communication systems, as well  as planning at the community level to improve emergency preparedness.  See appendix II for more information about the grant programs.\nHowever, the Homeland Security  State and local governments have also invested millions of dollars of their  own funds to support public safety voice communications, and continue to  do so. Jurisdictions we visited that received federal grants to support the  construction of a broadband network have continued to invest in the  upgrade and maintenance of their current LMR voice systems. For  example, Adams County, Colorado, has spent about $19.7 million since  2004 on its LMR system, including $6.9 million in local funds,  supplemented with $12.8 million in federal grants. Mississippi, another  jurisdiction we visited that is constructing a statewide broadband network,  has spent about $214 million on its LMR network, including $57 million in  general revenue bonds and $157 million in federal grants. Officials in  the jurisdictions we contacted stressed the importance of investing in the  infrastructure of their LMR networks to maintain the reliability and  operability of their voice systems, since it was unclear at what point the  broadband networks would support mission critical voice  communications. In addition to upgrading and maintaining their LMR  networks, many jurisdictions are investing millions of dollars to meet  FCC\u2019s requirement that communities use their spectrum more efficiently  by reducing the bandwidth on which they operate.\nIn addition to direct federal funding, the federal government has allocated  more than 100 MHz of spectrum to public safety over the last 60 years.   The spectrum is located in various frequency bands since FCC assigned  frequencies to public safety in new bands over time as available  frequencies became congested and public safety\u2019s need for spectrum   Figure 2 displays the spectrum allocated to public safety,  increased.which is located between 25 MHz and 4.9 GHz. As noted previously, the  Middle Class Tax Relief and Job Creation Act of 2012 requires FCC to  reallocate the D Block from commercial use to public safety use.\nPublic safety agencies purchase radios and communication devices that  are designed to operate on their assigned frequency. Since different  frequencies of radio waves have different propagation characteristics,  jurisdictions typically use the spectrum that is best suited to their  particular location. For example, very high frequency (VHF) channels\u2014 those located between 30 and 300 MHz\u2014are more useful for  communications that must occur over long distances without obstruction  from buildings, since the signals cannot penetrate building walls very well.  As such, VHF signals are well suited to rural areas. On the other hand,  ultra high frequency (UHF) channels\u2014those located between 300 MHz  and 3 GHz\u2014are more appropriate for denser urban areas as they have  more capacity and can penetrate buildings more easily. When we visited  Adams County, Colorado, we learned that public safety officials in the  mountainous areas of Colorado use the 150 MHz and 450 MHz bands  because of the range of the signals and their ability to navigate around  the natural geography. However, public safety officials in the Denver,  Colorado, metropolitan area operate on the 700 and 800 MHz frequency  bands which can support more simultaneous voice transmissions, such  as communications between fire, police, public utility, and transportation  officials.\n\n\t\tCurrent Public Safety Communications Capabilities\n\nThe current public safety LMR systems use their allocated spectrum to  facilitate reliable mission critical voice communications. Such  communications need to be conveyed in an immediate and clear manner  regardless of environmental and other operating conditions. For example,  while responding to a building fire, firefighters deep within the building  need the ability to communicate with each other even if they are out of  range of a wireless network. The firefighters are able to communicate on  an LMR system because their handheld devices operate on as well as off  network. Currently, emergency response personnel rely exclusively on  their LMR systems to provide mission critical voice capabilities. One  waiver jurisdiction we visited, Mississippi, is constructing a new statewide  LMR system and officials there noted a high degree of satisfaction with  the planned LMR system. They said the new system is designed to  withstand most disasters and when complete, will provide interoperability  across 97 percent of the state. Public safety officials in the coastal region  of the state have already used the system to successfully respond to  problems caused by the Mississippi River flooding in the spring of 2011.\nLMR public safety communication systems also are able to provide some  data services but the systems are constrained by the narrowband  channels on which they operate. These channels allow only restricted  data transfer speeds, thus limiting capacity to send and receive data such  as text and images, or to access existing databases. Some jurisdictions  supplement their LMR systems with commercial data services that give  them better access to applications that require higher data transfer rates  to work effectively. However, commercial service also has limitations,  such as the lack of priority access to the network in an emergency  situation.\n\n\t\tInteroperability of Current Communication Systems Remains a Limitation\n\nAccording to DHS, interoperability of current public safety  communications has improved as a result of its efforts. In particular, the  DHS National Emergency Communications Plan established a strategy  for improving emergency communications across all levels of  government, and as a result, all states have a statewide interoperability  coordinator and governing body to make strategic decisions within the  state and guide current and future communications interoperability.  According to DHS, it has worked with states to help them evaluate and  improve their emergency communications abilities. DHS also helped to  develop the Interoperability Continuum, which identifies five critical  success elements to assist emergency response agencies and policy  makers to plan and implement interoperability solutions for data and voice  communications. Furthermore, DHS created guidance to ensure a  consistent funding strategy for federal grant programs that allow  recipients to purchase communications equipment and enhance their  emergency response capabilities. As we have reported in the past,  interoperability has also improved due to a variety of local technical  solutions. For example, FCC established mutual aid channels, whereby  specific channels are set aside for the sole purpose of connecting  incompatible systems. Another local solution is when agencies maintain a  cache of extra radios that they can distribute during an emergency to  other first responders whose radios are not interoperable with their own.\nHowever, despite decades of effort, a significant limitation of current LMR  systems is that they are not fully interoperable. One reason for the lack of  interoperability is the fragmentation of spectrum assignments for public  safety, since existing radios are typically unable to transmit and receive in  all these frequencies. Therefore, a rural area using public safety radios  operating on VHF spectrum will not be interoperable with radios used in  an urban area that operate on UHF spectrum. While radios can be built to  operate on multiple frequencies, which could support greater  interoperability, this capability can add significant cost to the radios and  thus jurisdictions may be reluctant to make such investments. In addition,  public safety agencies historically have acquired communication systems  without concern for interoperability, often resulting in multiple, technically  incompatible radio systems. This is compounded by the lack of  mandatory standards for the current LMR systems or devices. Rather, the  P25 technical standards remain incomplete and voluntary, creating  incompatibility among vendors\u2019 products. Furthermore, local jurisdictions  are often unable to coordinate to find solutions. Public safety  communication systems are tailored to meet the unique needs of  individual jurisdictions or public safety entities within a given region. As  such, the groups are reluctant to give up management and control of their  systems.\n\n\tPlanning for a Nationwide Public Safety Broadband Network Progresses, but Such a Network Will Not Support Mission Critical Voice for the Foreseeable Future\n\n\t\tFederal Role\n\nNumerous federal entities have helped to plan and begin to define a  technical framework for a nationwide public safety broadband network. In  particular, FCC, DHS, and Commerce\u2019s PSCR program, have  coordinated their planning and made significant contributions by  developing technical rules, educating emergency responders, and  creating a demonstration network, respectively.\nSince 2008, FCC has:\nCreated a new division within its PSHSB, called the Emergency  Response Interoperability Center (ERIC), to develop technical  requirements and procedures to help ensure an operable and  interoperable nationwide network.\nConvened two advisory committees, the ERIC Technical Advisory  Committee and the Public Safety Advisory Committee, that provide  advice to FCC. The Technical Advisory Committee\u2019s appointees must be federal officials, elected officers of state and local  government, or a designee of an elected official. It makes  recommendations to FCC and ERIC regarding policies and rules for  the technical aspects of interoperability, governance, authentication,  and national standards for public safety. ERIC\u2019s Public Safety  Advisory Committee\u2019s members can include representatives of state  and local public safety agencies, federal users, and other segments of  the public safety community, as well as service providers, equipment  vendors, and other industry participants. Its purpose is to make  recommendations for a technical framework that will ensure  interoperability on a nationwide public safety broadband network.\nDefined technical rules for the broadband network, including  identifying LTE as the technical standard for the network, which FCC  and public safety agencies believe is imperative to the goal of  achieving an interoperable nationwide broadband network. In addition,  FCC sought comments on other technical aspects and challenges to  building the network in its most recent proceeding, which FCC hopes  will further promote and enable nationwide interoperability. FCC  officials said they continue to monitor the waiver jurisdictions that are  developing broadband networks to ensure they are meeting the  network requirements by reviewing required reports and quarterly  filings.\nSince 2010, DHS has:\nPartnered with FCC, Commerce, and the Department of Justice to  conduct three forums for public safety agencies and others. These  forums provided insight about the needs surrounding the  establishment of a public safety broadband network as they relate to  funding, governance, and the broadband market.\nCoordinated federal efforts on broadband implementation by bringing  together the member agencies of ECPC. Also, ECPC updated its  grant guidance for federal grant programs to clarify that broadband  deployment is an allowable expense for emergency communications  grant programs. These updates could result in more federal grant  funding going to support the development of a broadband network.\nUpdated its SAFECOM program\u2019s grant guidance targeting grant   applicants to include information pertaining to broadband deployment,  based on input from state and local emergency responders.\nWorked with public safety entities to define the LTE standard and  write educational materials about the broadband network.\nPartnered with state and regional groups and interoperability  coordinators in preparing broadband guidance documentation.\nRepresented federal emergency responders and advocated for  sharing agreements between the federal government and the PSST  that will enable federal users, such as responders from the Federal  Emergency Management Agency, to access the broadband  network.\nSince 2009, PSCR has:\nWorked with public safety agencies to develop requirements for the  network and represents their interests before standards-setting  organizations to help ensure public safety needs are met.\nDeveloped a demonstration broadband network that provides a  realistic environment for public safety and industry to test and observe  public safety LTE requirements on equipment designed for a  broadband network. According to PSCR representatives, the  demonstration network has successfully brought together more than  40 vendors, including manufacturers and wireless carriers. Among  many goals, PSCR aims to demonstrate to public safety how the new  technology can meet their needs and encourage vendors to share  information and results. FCC requires the 22 waiver jurisdictions and  their vendors to participate in PSCR\u2019s demonstration network and  provide feedback on the challenges they have faced while building the  network. PSCR representatives told us that the lessons learned from  the waiver jurisdictions would be applied to future deployments.\nTested interoperable systems and devices and provided feedback to  manufacturers. Currently, there are five manufacturers working with  PSCR to develop and test systems and devices.\n\n\t\tBroadband Network Could Improve Incident Response\n\nWith higher data speeds than the current LMR systems, a public safety  broadband network could provide emergency responders with new video  and data applications that are not currently available. Stakeholders we  contacted, including waiver jurisdictions, emergency responders, and  federal agencies, identified transmission of video as a key potential  capability. For example, existing video from traffic cameras and police car  mounted cameras could provide live video feeds for dispatchers.  Dispatchers could use the video to help ensure that the proper personnel  and necessary equipment are being deployed immediately to the scene of  an emergency. Stakeholders we contacted predict that numerous data  applications will be developed once a broadband network is complete,  and that these applications will have the potential to further enhance  incident response. These could range from a global positioning system  application that provides directions based on traffic patterns to a 3D  graphical floor plan display that supports firefighters\u2019 efforts to battle  building fires. In addition, unlike the current system, a public safety  broadband network could provide access to existing databases of  information, such as fire response plans and mug shots of wanted  criminals, which could help to keep emergency responders and the public  safe. As shown in figure 3, moving from lower bandwidth voice  communications to a higher bandwidth broadband network unleashes the  potential for the development of a range of public safety data applications.\nBesides new applications, a public safety broadband network has the  potential to provide nationwide access and interoperability. Nationwide  access means emergency responders and other public safety officials  could access their home networks from anywhere in the country, which  could facilitate a better coordinated emergency response. Interoperability  on a broadband network could allow emergency responders to share  information irrespective of jurisdiction or type of public safety agency. For  example, officials from two waiver jurisdictions indicated that forest fires  are a type of emergency that brings together multiple jurisdictions, and in  these situations a broadband network could facilitate sharing of response  plans. However, an expert we contacted stressed that broadband  applications should be tailored to the bandwidth needs of the response  task. For example, responders should not use high-definition video when  grainy footage would suffice to enable them to pursue a criminal suspect.\n\n\t\tLimitations of Broadband Results in Continued Reliance on LMR Voice Systems\n\nA major limitation of a public safety broadband network is that it would not  provide mission critical voice communications for many years. LTE, the  standard FCC identified for the public safety broadband network, is a  wireless broadband standard that is not currently designed to support  mission critical voice communications. Commercial wireless providers are  currently developing voice over LTE capabilities, but this will not meet  public safety\u2019s mission critical voice requirements because key elements  needed for mission critical voice, such as push-to-talk, are not part of the  LTE standard. While one manufacturer believes mission critical voice  over LTE will be available as soon as 5 years, some waiver jurisdictions,  experts, government officials, and others told us it will likely be 10 years  or more due to the challenges described in table 3.\nAbsent mission critical voice capabilities on a broadband network,  emergency responders will continue to rely on their current LMR voice  systems, meaning a broadband network would supplement, rather than  replace, LMR systems for the foreseeable future. Furthermore, until  mission critical voice communications exist, issues that exacerbated  emergency response efforts to the terrorist attacks on September 11,  2001\u2014in particular, that emergency responders were not able to  communicate between agencies\u2014will not be resolved by a public safety  broadband network. As a result, public safety agencies will continue to  use devices operating on the current LMR systems for mission critical  voice communications, and require spectrum to be allocated for that  purpose. Additionally, public safety agencies may be reluctant to give up  their LMR devices, especially if they were costly and are still functional.  As jurisdictions continue to spend millions of dollars on their LMR  networks and devices, they will likely continue to rely on such  communication systems until they are no longer functional.\nIn addition to not having mission critical communications, emergency  responders may only have limited access to the public safety broadband  network from the interior of large buildings. While the 700 MHz spectrum  provides better penetration of buildings than other bands of the spectrum,  if emergency responders expect to have access to the network from  inside large buildings and underground, additional infrastructure will need  to be constructed. For example, antennas or small indoor cellular stations  could be installed inside buildings and in underground structures to  support access to the network. FCC is seeking comment on this issue as  part of its most recent proceeding. Without this added infrastructure,  emergency responders using the broadband network may not have  access to building blue prints or fire response plans during building  emergencies, such as a fire. In fact, one jurisdiction constructing a  broadband network that we visited told us their network would not support  in-building access in one city of the jurisdiction because the plan did not  include antennas for inside the buildings.\nA final limitation to a public safety broadband network could be its  capacity during emergencies. Emergencies tend to happen in localized  areas that may be served by a single cell tower or even a single cellular  antenna on a tower. With emergency responders gathering to fight a fire  or other emergency, the number of responders and the types of  applications in use may exceed the capacity of the network. If the network  reaches capacity it could overload and might not send life saving  information. Therefore, the network would have to be managed during  emergencies to ensure that the most important data are being sent, which  could be accomplished by prioritizing data. Furthermore, capacity could  be supplemented through deployable cell sites to emergency locations.\n\n\tVarious Challenges Could Jeopardize the Implementation and Functionality of a Public Safety Broadband Network\n\nAlthough the federal agencies have taken important steps to advance the  broadband network, challenges exist that may slow its implementation.  Specifically, stakeholders we spoke with prioritized five challenges to  successfully building, operating, and maintaining a public safety  broadband network. These challenges include (1) ensuring  interoperability, (2) creating a governance structure, (3) building a reliable  network, (4) designing a secure network, and (5) determining funding  sources. FCC, in its Fourth Further Notice of Proposed Rulemaking,  sought comment on some of these challenges, and as explained further,  the challenge of creating a governance structure has been addressed by  recent law. However, the other challenges currently remain unresolved  and, if left unaddressed, could undermine the development of a public  safety broadband network.\nEnsuring interoperability. To avoid a major shortcoming of the LMR  communication systems, it is essential that a public safety broadband  network be interoperable across jurisdictions and devices. DHS, in  conjunction with its SAFECOM program, developed the Interoperability  Continuum which identifies five key elements to interoperable networks\u2014 governance, standard operating procedures, technology, training, and  usage\u2014that waiver jurisdictions and other stakeholders discussed as  important to building an interoperable public safety broadband network,  as shown in figure 4. For example, technology is critical to interoperability  of the broadband network and most stakeholders, including public safety  associations, experts, and manufacturers believe that identifying LTE as  the technical standard was a good step towards interoperability. To  further promote interoperability, stakeholders indicated that additional  technical functionality, such as data sharing and roaming capabilities,  should be part of the technical design. If properly designed to the  technical standard, broadband devices will support interoperability  regardless of the manufacturer. Testing devices to ensure they meet the  identified standard could help eliminate devices with proprietary  applications that might otherwise limit interoperability. In its Fourth Further  Notice, FCC solicited input on the technical design of the network and  testing of devices to ensure interoperability.\nCreating a governance structure. As stated previously, governance is a  key element for interoperable networks. A governance authority can  promote interoperability by bringing together federal, state, local, and  emergency response representatives. Each of the waiver jurisdictions we  contacted had identified a governance authority to oversee its broadband  network. Jurisdictions we visited, as well as federal agencies, told us that  any nationwide network should also have a nationwide governance entity  to oversee it. Although several federal entities are involved with the  planning of a public safety broadband network, at the time we conducted  our work no entity had overall authority to make critical decisions for its  development, construction, and operation. According to stakeholders,  decisions on developing a common language for the network,  establishing user rights for federal agencies, and determining network  upgrades, could be managed by such an entity. Pending legislation, the  Middle Class Tax Relief and Job Creation Act of 2012, establishes a First  Responder Network Authority as an independent authority within NTIA  and gave it responsibility for ensuring the establishment of a nationwide,  interoperable public safety broadband network. Among other things, the  First Responder Network Authority is required to (1) ensure nationwide  standards for use and access of the network; (2) issue open, transparent,  and competitive requests for proposals to private sector entities to build,  operate, and maintain the network; (3) encourage that such requests  leverage existing commercial wireless infrastructure to speed deployment  of the network; and (4) manage and oversee the implementation and  execution of contracts and agreements with nonfederal entities to build,  operate, and maintain the network.\nBuilding a reliable network. A public safety broadband network must be  as reliable as the current LMR systems but it will require additional  infrastructure to do so. As mentioned previously, emergency responders  consider the current LMR systems very reliable, in part because they can  continue to work in emergency situations. Any new broadband network  would need to meet similar standards but, as shown in figure 5, such a  network might require up to 10 times the number of towers as the current  system. This is because a public safety broadband network is being  designed as a cellular network, which would use a series of low powered  towers to transmit signals and reduce interference. Also, to meet robust  public safety standards, each tower must be \u201chardened\u201d to ensure that it  can withstand disasters, such as hurricanes and earthquakes. According  to waiver jurisdictions and other stakeholders, this additional  infrastructure and hardening of facilities may be financially prohibitive for  many jurisdictions, especially those in rural areas that currently use  devices operating on VHF spectrum\u2014spectrum that is especially well  suited to rural areas because the signals can travel long distances.\nDesigning a secure network. Secure communications are important.  Designing a protected and trusted broadband network will encourage  increased usage and reliance on it. Security for a public safety network  will require authentication and access control. By defining LTE as the  technical standard for the broadband network, a significant portion of the  security architecture is predetermined because the standard governs a  certain level of security. Given the importance of this issue, FCC required  waiver jurisdictions to include some security features in their networks  and FCC\u2019s most recent proceeding seeks input on security issues.  Furthermore, FCC\u2019s Public Safety Advisory Committee has issued a  report making several security-related recommendations. For example, it  recommended that standardized security features be in place to support  roaming to commercial technologies. However, one expert we contacted  expressed concern that the waiver jurisdictions were not establishing  sufficient network security because they had not received guidance. He  believes this would result in waiver jurisdictions using security standards  applied to previous networks.\nDetermining funding sources. It is estimated that a nationwide public  safety broadband network could cost up to $15 billion or more to  construct, which does not take into account recurring operation and  maintenance costs. As noted previously, of the 22 waiver jurisdictions, 8  have received federal grants to support deployment of a broadband  network. Some of the other waiver jurisdictions have obtained limited  funding from nonfederal sources, such as through issuing bonds. Several  of the jurisdictions we spoke with stressed that in addition to the upfront  construction costs, the ongoing costs associated with operating,  maintaining, and upgrading a public safety broadband network would  need to be properly funded. As previously indicated, the ECPC and  SAFECOM have updated grant guidance to reflect changing technologies  but this does not add additional funding for emergency communications.  Rather, it defines broadband as an allowable purpose for emergency  communications funding grants that may currently support the existing  LMR systems. Since the LMR systems will not be replaced by a public  safety broadband network, funding will be necessary to operate, maintain,  and upgrade two separate communication systems.\n\n\tLimited Competition and High Manufacturing Costs Increase the Price of Handheld LMR Devices, but Options Exist to Reduce Prices\n\n\t\tCompetition for Handheld LMR Devices is Limited\n\nHandheld LMR devices often cost thousands of dollars, and many  stakeholders, including national public safety associations, state and local  public safety officials, and representatives from the telecommunications  industry, attribute these high prices to limited competition. Industry  analysts and stakeholders estimate that the approximately $4 billion U.S.  market for handheld LMR devices consists of one manufacturer with  about 75 to 80 percent market share, one or two strong competitors, and  several device manufacturers with smaller shares of the market.  According to industry stakeholders, competition is weak because of  limited entry by device manufacturers; this may be due to (1) the market\u2019s  relatively small size and (2) barriers to entry that confront nonincumbent  device manufacturers.\nSmall size of the public safety market. The market for handheld LMR  devices in the United States includes only about 2 to 3 million customers,  or roughly 1 percent of the approximately 300 million customers of  commercial telecommunication devices. According to an industry  estimate in 2009, approximately 300,000 handheld LMR devices that are  P25 compliant are sold each year. Annual sales of handheld LMR devices  are small in part because of low turnover. For example, device  manufacturers told us that public safety devices are typically replaced  every 10 to 15 years, suggesting that less than 10 percent of handheld  LMR devices are replaced annually. In contrast, industry and public safety  sources indicate that commercial customers replace devices roughly  every 2 to 3 years, suggesting that about 33 to 50 percent are replaced  annually. Together, low device turnover and a small customer base  reduce the potential volume of sales by device manufacturers, which may  make the market unattractive to potential entrants.\nThe size of the market is reduced further by the need for manufacturers to  customize handheld LMR devices for individual public safety agencies.  Differences in spectrum allocations across jurisdictions have the effect of  decreasing the customer base for any single device. As previously  discussed, public safety agencies operate on different frequencies  scattered across the radio spectrum. For example, one jurisdiction may  need devices that operate on 700 MHz frequencies, whereas another  jurisdiction may need devices that operate on both 800 MHz and 450  MHz frequencies. Existing handheld LMR devices typically do not  transmit and receive signals in all public safety frequencies. As a result,  device manufacturers cannot sell a single product to customers  nationwide, and must tailor devices to the combinations of frequencies in  use by the purchasing agency.\nBarriers to entry by nonincumbent manufacturers. Device  manufacturers wishing to enter the handheld LMR device market face  barriers in doing so, which further limits competition. The use of  proprietary technologies represents one barrier to entry. The inclusion of  proprietary technologies often makes LMR devices noninteroperable with  one another. This lack of interoperability makes it costly for customers to  switch the brand of their devices, since doing so requires them to replace  or modify older devices. These switching costs may continually compel  customers to buy devices from the incumbent device manufacturer,  preventing less established manufacturers from making inroads into the  market. For example, in a comment filed with FCC, one of the  jurisdictions we visited said that device manufacturers offer a proprietary  encryption feature for free or at only a nominal cost. When a public  safety agency buys devices that incorporate this proprietary encryption  feature, the agency cannot switch its procurement to a different  manufacturer without undertaking costly modifications to its existing fleet  of devices. Switching costs are particularly high when a device  manufacturer has installed a communication system that is incompatible  with competitors\u2019 devices. In this scenario, a public safety agency cannot  switch to a competitor\u2019s handheld device without incurring the cost of new  equipment or a patching mechanism to resolve the incompatibility. Even  where devices from different manufacturers are compatible, a fear of  incompatibility may deter agencies from switching to a nonincumbent  brand. According to industry stakeholders\u2014and as we have confirmed in  the past\u2014devices marketed as P25 compliant often are not interoperable   This lack of confidence in the P25 standard may encourage  in practice.agencies to continue buying handheld LMR devices from their current  brand, placing less established device manufacturers at a disadvantage  and thus discouraging competition.\nAt the same time that less established manufacturers are at a  disadvantage, the market leader enjoys distinct \u201cincumbency  advantages.\u201d These advantages refer to the edge that a manufacturer  derives from its position as incumbent, over and above whatever edge it  derives from the strength of its product:\nAccording to an industry analyst, some public safety agencies are  reluctant to switch brands of handheld LMR devices because their  emergency responders are accustomed to the placement of the  buttons on their existing devices.\nAccording to another industry analyst, the extensive network of  customer representatives that the market leader has established over  time presents an advantage. According to this analyst, less  established device manufacturers face difficulty winning contracts  because their networks of representatives are comparatively thin.\nThe well-recognized brand of the market leader also represents an  advantage. According to one stakeholder, some agencies mistakenly  believe that only the market leader is able to manufacturer devices  compliant with P25, and thus conduct sole-source procurements with  this manufacturer. Even where procurements are competitive, the  market leader is likely to enjoy an upper hand over its competitors;  according to an industry analyst, local procurement officers prefer to  buy handheld LMR devices from the dominant device manufacturer  because doing so is an uncontroversial choice in the eyes of their  management.\n\n\t\tHigh Manufacturing Costs and Lack of Buying Power Increase Device Prices\n\nCompetition aside, handheld LMR devices are costly to manufacture, so  their prices will likely exceed prices for commercial devices regardless of  how much competition exists in the market. First, this is in large part  because these devices need to be reinforced for high-pressure  environments. Handheld LMR devices must be able to withstand  extremes of temperature as well physical stressors such as dust, smoke,  impact, and immersion in water. Second, they also have much more  robust performance requirements than commercial devices\u2013\u2013including  greater transmitter and battery power\u2013\u2013to enable communication at  greater ranges and during extended periods of operation. Third, the  devices are produced in quantities too small to realize the cost savings of  mass production. Manufacturers of commercial telecommunication  devices can keep prices lower simply because of the large quantities they  produce. For example, one industry stakeholder told us that economies of  scale begin for commercial devices when a million or more devices are  produced per manufacturing run. In contrast, LMR devices are commonly  produced in manufacturing runs of 25,000 units. Fourth, the exterior of  handheld LMR devices must be customized to the needs of emergency  responders. For example, the buttons on these devices must be large  enough to press while wearing bulky gloves.\nIn addition, given that the P25 standard remains incomplete and  voluntary, device manufacturers develop products based on conflicting  interpretations of the standard, resulting in incompatibilities between their  products. Stakeholders from one jurisdiction we visited said that agencies  can request add-on features\u2013\u2013such as the ability to arrange channels  according to user preference or to scan for radio channels assigned for  particular purposes\u2014which fall outside the P25 standard. These features  increase the degree of customization required to produce handheld LMR  devices, pushing costs upward.\nFurthermore, public safety agencies may be unable to negotiate lower  prices for handheld LMR devices because they cannot exert buying  power in relationship with device manufacturers. We found that public  safety agencies are not in an advantageous position to negotiate lower  prices because they often request customized features and negotiate with  device manufacturers in isolation from one another. According to a public  safety official in one jurisdiction we contacted, each agency has unique  ordinances, purchasing mechanisms, and bidding processes for devices.  Because public safety agencies contract for handheld LMR devices in this  independent manner, they sacrifice the quantity discounts that come from  placing larger orders. Moreover, they are unlikely to know what other  agencies pay for similar devices, enabling device manufacturers to offer  different prices to different jurisdictions rather than set a single price for  the entire market. One public safety official told us that small jurisdictions  therefore pay more than larger jurisdictions for similar devices. As we  have reported in the past, agencies that require similar products can  combine their market power\u2014and therefore obtain lower prices\u2014by  engaging in joint procurement.procurement at the state, regional, or national level are likely to increase  the buying power of public safety agencies and help bring down prices.\nTherefore, wider efforts to coordinate  Although these factors drive up prices in the current market for handheld  LMR devices, industry observers said that many of these factors diminish  in the future market for handheld broadband devices. As described  earlier, FCC has mandated a commercial standard, LTE, for devices  operating on the new broadband networks. The use of this standard may  reduce the prevalence of proprietary features that inhibit interoperability.  In addition, the new broadband networks will operate on common 700  MHz spectrum across the nation, eliminating the need to customize  devices to the frequencies in use by individual jurisdictions. Together, the  adoption of a commercial standard and the use of common spectrum are  likely to increase the uniformity of handheld public safety devices, which  in turn is likely to strengthen competition and enable the cost savings that  come from bulk production. In addition, industry analysts and federal  officials told us that they expect a heightened level of competition in the  market for LTE devices because multiple device manufacturers are  expected to develop them.\n\n\t\tOptions Exist to Reduce the Prices of Handheld LMR Devices\n\nOptions exist to reduce prices in the market for handheld LMR devices by  increasing competition and the bargaining power of public safety  agencies. One option is to reduce barriers to entry into the market. As  described above, less established manufacturers may be discouraged  from entering the market for handheld LMR devices because of the lack  of interoperability between devices produced by different manufacturers.  Consistent implementation of the P25 standard would increase  interoperability between devices, enabling public safety agencies to mix  and match handheld LMR devices from different brands. As we have  reported in the past, independent testing is necessary to ensure  compliance with standards and interoperability among products.past several years, NIST and DHS have established a Compliance   In the  Assessment Program (CAP) for the P25 standard. CAP provides a  government-led forum in which to test devices for conformance with P25  specifications. If the CAP program succeeds in increasing  interoperability, it may reduce switching costs\u2014that is, the expense of  changing manufacturers\u2014and thus may open the door to greater  competition. Although CAP is a promising means to lower costs in this  way, it is too soon to assess its effectiveness.\nA second option is for public safety agencies to engage in joint  procurement to lower costs. Joint procurement of handheld LMR devices  could increase the bargaining power of agencies as well as facilitate cost  savings through quantity discounts. One public safety official we  interviewed said that while local agencies seek to maintain control over  operational matters\u2014such as which emergency responders operate on  which channels\u2014they are likely to cede control in procurement matters if   As described earlier in this report, DHS provides  doing so lowers costs. significant grant funding, technical assistance, and guidance to enhance  the interoperability of LMR systems. For example, as described in its  January 2012 Technical Assistance Catalog, DHS\u2019s Office of Emergency  Communications supports local public safety entities to ensure that LMR  design documents meet P25 specifications and are written in a vendor- neutral manner. Based on its experience in emergency communications  and its outreach to local public safety representatives, DHS is positioned  to facilitate and incentivize opportunities for joint procurement of handheld  LMR devices.\n\n\tConclusions\n\nAn alternative approach to fostering joint procurement is through a federal supply  schedule. In 2008, the Local Preparedness Acquisition Act, Pub. L. No. 110-248, 122 Stat.  2316 (2008), gave state and local governments the opportunity to buy emergency  response equipment through GSA\u2019s Cooperative Purchasing Program. The Cooperative  Purchasing Program may provide a model for extending joint procurement to state and  local public safety agencies. mission critical voice. As a result, a public safety broadband network  would likely supplement, rather than replace, current LMR systems for the  foreseeable future. Although a public safety broadband network could  enhance incident response, it would have limitations and be costly to  construct. Furthermore, since the LMR systems will still be operational for  many years, funding will be necessary to operate, maintain, and upgrade  two separate public safety communication systems.\nAt the time of our work, there was not an administrative entity that had the  authority to plan, oversee, or direct the public safety broadband spectrum.  As a result, overarching management decisions had not been made to  guide the development or deployment of a public safety broadband  network. According to SAFECOM\u2019s interoperability continuum,  governance structures provide a framework for collaboration and decision  making with the goal of achieving a common objective and therefore  foster greater interoperability. In addition to ensuring interoperability, a  governance entity with proper authority could help to address the  challenges identified in this report, such as ensuring the network is secure  and reliable. Pending legislation, the Middle Class Tax Relief and Job  Creation Act of 2012, establishes an independent authority within NTIA to  manage and oversee the implementation of a nationwide, interoperable  public safety broadband network.\nHandheld communication devices used by public safety officials can cost  thousands of dollars, mostly due to limited competition and high  manufacturing costs. However, public safety agencies also lack buying  power vis-\u00e0-vis the device manufacturers, which may result in the  agencies overpaying for the devices. In particular, since public safety  agencies negotiate individually with device manufacturers, they are  unlikely to know what other agencies pay for comparable devices and  they sacrifice the increased bargaining power and economies of scale  that accompany joint purchasing. Especially in rural areas, public safety  agencies may be overpaying for handheld devices. We have repeatedly  recommended joint procurement as a cost saving measure for situations  where agencies require similar products because it allows them to  combine their market power and lower their procurement costs. Given  that DHS has expertise in emergency communications and relationships  with local public safety representatives, we believe it is well-suited to  facilitate opportunities for joint procurement of handheld communication  devices.\n\n\tRecommendation for Executive Action\n\nTo help ensure that public safety agencies are not overpaying for  handheld communication devices, the Secretary of Homeland Security  should work with federal and state partners to identify and communicate  opportunities for joint procurement of public safety LMR devices.\n\n\tAgency Comments and Our Evaluation\n\nWe provided a draft of this report to Commerce, DHS, the Department of  Justice, and FCC for their review and comment. In the draft report we  sent to the agencies, we included a matter for congressional  consideration for ensuring that a public safety broadband network has  adequate direction and oversight, such as by creating a governance  structure that gives authority to an entity to define rules and develop a  plan for the overarching management of the network. As a result of  pending legislation that addresses this issue, we removed the matter for  congressional consideration from the final report.\nCommerce provided written comments, reprinted in appendix III, in which  it noted that NIST and NTIA will continue to collaborate with and support  state, local, and tribal public safety agencies and other federal agencies  to help achieve effective and efficient public safety communications.\nIn commenting on the draft report, DHS concurred with our  recommendation that it should work with federal and state partners to  identify and communicate opportunities for joint procurement of public  safety LMR devices. While DHS noted that this recommendation will not  likely assist near-term efforts to implement a public safety broadband  network, assisting efforts for the broadband network was not the intention  of the recommendation. Rather, we intended this recommendation to help  ensure that public safety agencies do not overpay for handheld LMR  devices by encouraging joint procurement. DHS suggested in response to  our recommendation that a GSA solution may be more appropriate than  DHS contracting activity. Although we recognize that a GSA solution is  one possibility for joint procurement of handheld LMR devices, other  opportunities and solutions might exist. We believe DHS, based on its  experience in emergency communications and its outreach to state and  local public safety representatives, is best suited to identify such  opportunities and solutions for joint procurement and communicate those  to the public safety agencies. In its letter, DHS also noted that it continues  to work with federal, state, local, and private-sector partners to facilitate  the deployment of a nationwide public safety broadband network, and  stressed that establishing an effective governance structure is crucial to  ensuring interoperability and effective use of the network. DHS\u2019s written  comments are reprinted in appendix IV.\nCommerce, DHS, the Department of Justice, and FCC provided technical  comments on the draft report, which we incorporated as appropriate.\nWe are sending copies of this report to the Secretary of Homeland  Security, the Attorney General, the Secretary of Commerce, the  Chairman of FCC, and appropriate congressional committees. In addition,  the report will be available at no charge on the GAO website at  http:\/\/www.gao.gov.\nIf you or your staff have any questions about this report, please contact  me at (202) 512-2834 or goldsteinm@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on  the last page of this report. Contact information and major contributors to  this report are listed on appendix V.\n\nAppendix I: Objectives, Scope, and Methodology\n\nThis report examines current communication systems used by public  safety and issues surrounding the development of a nationwide public  safety broadband network. Specifically, we reviewed (1) the resources  that have been provided for current public safety communication systems  and their capabilities and limitations, (2) how a nationwide public safety  broadband network is being planned and its anticipated capabilities and  limitations, (3) the challenges to building a nationwide public safety  broadband network, and (4) the factors that influence competition and  cost in the development of public safety communication devices and the  options that exist to reduce prices.\nTo address all objectives, we conducted a literature review of 43 articles  from governmental and academic sources on public safety  communications. We reviewed these articles and recorded relevant  evidence in workpapers, which informed our report findings. To identify  existing studies, we conducted searches of various databases, such as  EconLit, ProQuest, Academic OneFile, and Social SciSearch. We also  pursued a snowball technique\u2014following citations from relevant articles\u2014 to find other relevant articles and asked external researchers that we  interviewed to recommend additional studies. These research methods  produced 106 articles for initial review. We vetted this initial list by  examining summary level information about each piece of literature,  giving preference to articles that appeared in peer-reviewed journals and  were germane to our research objectives. As a result, the 43 studies that  we selected for our review met our criteria for relevance and quality. For  the 13 articles related to our fourth objective\u2014factors that affect  competition and cost in the market for public safety communication  devices\u2014a GAO economist performed a secondary review and confirmed  the relevance to our objective. Articles were then reviewed and evidence  captured in workpapers. The workpapers were then reviewed for  accuracy of the evidence gathered. We performed these searches and  identified articles from June 2011 to September 2011.\nWe also interviewed government officials or stakeholders in 6 of the 22  jurisdictions that are authorized to build early public safety broadband  networks and obtained information concerning each objective. In  particular, we obtained information concerning their current  communication systems and its capabilities, including any funding  received to support the current network. We discussed their plan for  building a public safety broadband network and the challenge they had  faced thus far, including the role each thought the federal government  should play in developing a network. We also discussed their views on  the communication device market and the factors shaping the market. We  selected jurisdictions to contact based on three criteria: (1) whether the  jurisdiction received grant funds from the National Telecommunications  and Information Administration (NTIA) to help build the network, (2)  whether the planned network would be a statewide or regional network,  and (3) geographic distribution across the nation. Table 4 lists the  jurisdictions we selected based on these criteria. We selected  jurisdictions based on NTIA grant funding because these jurisdictions had  received the most significant federal funds dedicated towards developing  a broadband network. Other jurisdictions either had not identified any  funding or applied smaller grant funding that was not primarily targeted at  emergency communications. We selected the size of the network,  statewide or regional, to determine if challenges differed based on the  size of the network and the number of entities involved. Finally, we  selected sites based on the geographic region to get a geographic mix of  jurisdictions from around the country. In jurisdictions that received NTIA  funding, we met with government officials and emergency responders. In  jurisdictions that did not receive NTIA funding we met with the  government officials since the network had not progressed as much.\nTo determine the resources that have been provided for current public  safety communication systems, we reviewed Federal Communications  Commission (FCC) data on spectrum allocations for land mobile radio  (LMR) systems. In addition, we reviewed relevant documentation and  interviewed officials from offices within the Departments of Commerce  (Commerce), Homeland Security (DHS), and Justice that administer grant  programs or provide grants that identify public safety communications as  an allowable expense. We selected these agencies to speak with  because they had more grant programs providing funds or were regularly  mentioned in interviews as providing funds for public safety  communications. We also reviewed documents from agencies, such as  the Departments of Agriculture and Transportation, which similarly  operate grant programs that identify public safety communications as an  allowable expense. The grants were identified by DHS\u2019s SAFECOM  program as grants that can support public safety communications.\nTo identify the capabilities and limitations of current public safety  communication systems, we reviewed relevant congressional testimonies,  academic articles on the capabilities and limitations of LMR networks, and  relevant federal agency documents, including DHS\u2019s National Emergency  Communications Plan. We interviewed officials from three national public  safety associations\u2014the Association of Public-Safety Communications  Officials (APCO), National Public Safety Telecommunications Council  (NPSTC), and the Public Safety Spectrum Trust (PSST)\u2014as well as  researchers and consultants referred to us for their knowledge of public  safety communications and identified during the literature review process.\nTo determine the plans for a nationwide public safety broadband network  and its expected capabilities and limitations, we reviewed relevant  congressional testimonies and academic articles on services and  applications likely to operate on a public safety broadband network, the  challenges to building, operating, and maintaining a network. We  interviewed officials from APCO, NPSTC, and PSST, as well as  researchers and consultants who specialize in public safety  communications to understand the potential capabilities of the network. In  addition, we reviewed FCC orders and notices of proposed rulemaking  relating to broadband for public safety, as well as comments on this topic  submitted to FCC.\nTo determine the federal role in the public safety broadband network, we  interviewed multiple agencies involved in planning this network. Within  FCC, we interviewed officials from the Public Safety and Homeland  Security Bureau (PSHSB), the mission of which is to ensure public safety  and homeland security by advancing state-of-the-art communications that  are accessible, reliable, resilient, and secure, in coordination with public  and private partners. Within Commerce, we interviewed officials from  NTIA and the National Institute of Standards and Technology (NIST), two  agencies that develop, test, and advise on broadband standards for  public safety. We also interviewed officials from the Public Safety  Communications Research (PSCR) program, a joint effort between NIST  and NTIA that works to research, develop, and test public safety  communication technologies. Within DHS, we interviewed officials from  the Office of Emergency Communications (OEC) and the Office of  Interoperability and Compatibility (OIC), two agencies that provide input  on the public safety broadband network through their participation on  interagency coordinating bodies.\nTo determine the technological, historical, and other factors that affect  competition in the market for public safety devices, as well as what  options exist to reduce the cost of these devices, we reviewed the  responses to FCC\u2019s notice seeking comment on competition in public  safety communications technologies. In addition, we reviewed our prior  reports and correspondence on this topic between FCC and the House of  Representatives Committee on Energy and Commerce that occurred in  June and July of 2010 and April and May of 2011. We also conducted an  economic literature review that included 13 academic articles examining  markets for communications technology and, in particular, how issues of  standards, compatibility, bundling, and price discrimination affect entry  and competition in these markets. These articles provided a historical and  theoretical context for communication technology markets, which helped  shape our findings. We asked about factors affecting the price of public  safety devices, as well as how to reduce these prices, during our  interviews with national public safety organizations, local and regional  public safety jurisdictions, and the federal agencies we contacted during  our audit work. We also interviewed two researchers specifically identified  for their knowledge of communication equipment markets based on their  congressional testimony or publication history. In addition, we interviewed  representatives from four companies that produce public safety devices  or network components, as well as two financial analysts who track the  industry.\nWe conducted this performance audit from March 2011 to February 2012  in accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.\n\nAppendix II: Federal Grant Programs for Emergency Communications\n\nSAFECOM, a program administered by DHS, has identified federal grant  programs across nine agencies, including the Departments of Agriculture,  Commerce, Education, Health and Human Services, Homeland Security,  Interior, Justice, Transportation, and the U.S. Navy that allow grant funds  to fund public safety emergency communications efforts. These grants  include recurring grants that support emergency communications,  research grants that fund innovative and pilot projects, and past grants  that may be funding ongoing projects. While the funding from these  grants can support emergency communications, the total funding reported  does not mean it was all spent on emergency communications. We  provided the amounts of the grants and the years funded when this  information was available.\n\n\tDepartment of Commerce\n\nTwo agencies within Commerce\u2014NTIA and NIST\u2014administer grants that  allow funds to be directed towards public safety emergency  communications (see table 5).\n\n\tDepartment of Homeland Security\n\nTwo agencies within DHS administer grants that allow funds to be  directed towards public safety emergency communications\u2014the Federal  Emergency Management Agency (FEMA) and the Science and  Technology Directorate. Another agency, OEC, has administered one  such grant program. Furthermore, DHS maintains an authorized  equipment list to document equipment eligible for purchase under its  grant programs, including interoperable communications equipment.(See table 6.)\n\n\tDepartment of Justice\n\nTwo offices within Department of Justice, the Community Oriented  Policing Services (COPS) and the Office of Justice Programs (OJP),  administer grants that allow funds to be directed towards public safety  emergency communications (see table 7).\nSix additional federal agencies administer grants that can fund public  safety emergency communications, including the Departments of  Agriculture (USDA), Transportation (DOT), Health and Human Services  (HHS), Education, Interior, and the U.S. Navy (see table 8).\n\nAppendix III: Comments from the Department of Commerce\n\nAppendix IV: Comments from the Department of Homeland Security\n\nAppendix V: GAO Contact and Staff Acknowledgments\n\n\tGAO Contact\n\n\tStaff Acknowledgments\n\nIn addition to the contact named above, Sally Moino, Assistant Director;  Namita Bhatia-Sabharwal; Dave Hooper; Eric Hudson; Josh Ormond;  Bonnie Pignatiello Leer; Ellen Ramachandran; Andrew Stavisky; Hai  Tran; and Mindi Weisenbloom made significant contributions to this  report.\n\nRelated GAO Products\n\nEmergency Communications: National Communications System Provides  Programs for Priority Calling, but Planning for New Initiatives and  Performance Measurement Could Be Strengthened. GAO-09-822.  Washington, D.C.: August 28, 2009.\nEmergency Communications: Vulnerabilities Remain and Limited  Collaboration and Monitoring Hamper Federal Efforts. GAO-09-604.  Washington, D.C.: June 26, 2009.\nFirst Responders: Much Work Remains to Improve Communications  Interoperability. GAO-07-301. Washington, D.C.: April 2, 2007.\nHomeland Security: Federal Leadership and Intergovernmental  Cooperation Required to Achieve First Responder Interoperable  Communications. GAO-04-740. Washington, D.C.: July 20, 2004.\nProject SAFECOM: Key Cross-Agency Emergency Communications  Effort Requires Stronger Collaboration. GAO-04-494. Washington, D.C.:  April 16, 2004.\nHomeland Security: Challenges in Achieving Interoperable  Communications for First Responders. GAO-04-231T. Washington, D.C.:  November 6, 2003.","output":"Why GAO Did This Study\n\nEmergency responders across the nation rely on land mobile radio (LMR) systems to gather and share information and coordinate their response efforts during emergencies. These public safety communication systems are fragmented across thousands of federal, state, and local jurisdictions and often lack \u0093interoperability,\u0094 or the ability to communicate across agencies and jurisdictions. To supplement the LMR systems, in 2007, radio frequency spectrum was dedicated for a nationwide public safety broadband network. Presently, 22 jurisdictions around the nation have obtained permission to build public safety broadband networks on the original spectrum assigned for broadband use. This requested report examines (1) the investments in and capabilities of LMR systems; (2) plans for a public safety broadband network and its expected capabilities and limitations; (3) challenges to building this network; and (4) factors that affect the prices of handheld LMR devices. GAO conducted a literature review, visited jurisdictions building broadband networks, and interviewed federal, industry, and public safety stakeholders, as well as academics and experts.\n\nWhat GAO Found\n\nAfter the investment of significant resources\u0097including billions of dollars in federal grants and approximately 100 megahertz of radio frequency spectrum\u0097the current land mobile radio (LMR) systems in use by public safety provide reliable \u0093mission critical\u0094 voice capabilities. For public safety, mission critical voice communications must meet a high standard for reliability, redundancy, capacity, and flexibility. Although these LMR systems provide some data services, such as text and images, their ability to transmit data is limited by the channels on which they operate. According to the Department of Homeland Security (DHS), interoperability among LMR systems has improved due to its efforts, but full interoperability of LMR systems remains a distant goal.\nMultiple federal entities are involved with planning a public safety broadband network and while such a network would likely enhance interoperability and increase data transfer rates, it would not support mission critical voice capabilities for years to come, perhaps even 10 years or more. A broadband network could enable emergency responders to access video and data applications that improve incident response. Yet because the technology standard for the proposed broadband network does not support mission critical voice capabilities, first responders will continue to rely on their current LMR systems for the foreseeable future. Thus, a broadband network would supplement, rather than replace, current public safety communication systems.\nThere are several challenges to implementing a public safety broadband network, including ensuring the network\u0092s interoperability, reliability, and security; obtaining adequate funds to build and maintain it; and creating a governance structure. For example, to avoid a major shortcoming of the LMR systems, it is essential that a public safety broadband network be interoperable across jurisdictions and devices by following five key elements to interoperable networks: governance, standard operating procedures, technology, training, and usage. With respect to creating a governance structure, pending legislation\u0097the Middle Class Tax Relief and Job Creation Act of 2012, among other things\u0097establishes a new entity, the First Responder Network Authority, with responsibility for ensuring the establishment of a nationwide, interoperable public safety broadband network.\nThe price of handheld LMR devices is high\u0097often thousands of dollars\u0097in part because market competition is limited and manufacturing costs are high. Further, GAO found that public safety agencies cannot exert buying power in relationship to device manufacturers, which may result in the agencies overpaying for LMR devices. In particular, because public safety agencies contract for LMR devices independently from one another, they are not in a strong position to negotiate lower prices and forego the quantity discounts that accompany larger orders. For similar situations, GAO has recommended joint procurement as a cost saving measure because it allows agencies requiring similar products to combine their purchase power and lower their procurement costs. Given that DHS has experience in emergency communications and relationships with public safety agencies, it is well-suited to facilitate joint procurement of handheld LMR devices.\n\nWhat GAO Recommends\n\nThe Department of Homeland Security (DHS) should work with partners to identify and communicate opportunities for joint procurement of public safety LMR devices. In commenting on a draft of this report, DHS agreed with the recommendation. GAO also received technical comments, which have been incorporated, as appropriate, in the report."}
{"id":"gao_RCED-98-8","pid":"gao_RCED-98-8_0","input":"\tBackground\n\nEstablished in 1983, the Motor Carrier Safety Assistance Program (MCSAP) provides grants to states to support commercial motor vehicle safety programs aimed at (1) large trucks that have a gross vehicle weight rating of at least 10,000 pounds, (2) vehicles used to transport more than 10 passengers, and (3) vehicles used to transport hazardous materials. Under MCSAP, the federal government funds up to 80 percent of the costs of each state\u2019s motor carrier safety program. Federal funding for MCSAP has increased from $8 million in fiscal year 1984 to $78.2 million in fiscal 1997. The Intermodal Surface Transportation Efficiency Act of 1991 required that by January 1994, each of the 48 contiguous states participate in Safetynet, the Office of Motor Carrier\u2019s (OMC) automated database system used to monitor the safety performance of commercial motor carriers. The act also directed OMC to provide grants for states to develop a Commercial Vehicle Information System that would link OMC\u2019s motor carrier safety information with states\u2019 motor vehicle registration systems. The Commercial Vehicle Information System project led to the development of OMC\u2019s Safety Status Measurement System (SafeStat) program.\nThe Motor Carrier Safety Act of 1984 directed the Secretary of Transportation to establish a procedure to determine the safety fitness of owners and operators of commercial vehicles. In response, OMC modified its existing safety management audit program to institute safety reviewswith follow-up compliance reviews. During a compliance review, OMC and\/or state investigators perform an on-site review of a motor carrier\u2019s compliance with federal safety regulations by assessing its policies, management controls, and operations. Typically, investigators examine a sample of the carrier\u2019s records, including drivers\u2019 hours-of-service logs, commercial drivers\u2019 license requirements, alcohol- and drug-testing records, vehicle maintenance and inspection records, and accident records. Investigators also may perform full vehicle inspections of several of the carrier\u2019s vehicles. The investigators give the carrier a satisfactory, conditional, or unsatisfactory rating on the basis of this review.\nFrom 1983 through 1995, the rate of fatal accidents involving large trucks dropped by 42 percent\u2014from 4.3 to 2.5 fatal accidents per 100 million vehicle miles traveled. (See fig. 1.) The lower fatal accident rate reflects a (1) 57-percent growth in total vehicle miles driven by large trucks and (2) 9-percent drop in the number of large trucks involved in fatal accidents. However, almost all of this decline occurred during MCSAP\u2019s first 10 years; since 1992, the fatal accident rate has been relatively stable. In contrast, the total number of large trucks involved in fatal accidents increased from 4,035 in 1992 to 4,740 in 1996; 4,035 and 5,126 people died from these accidents, respectively. (See table I.1 in app. I.)\nThe interstate trucking industry has grown rapidly in recent years from about 213,000 firms in 1990 to about 379,000 in 1996.\n\n\tMCSAP and Other Initiatives Have Contributed to Improved Commercial Motor Vehicle Safety\n\nOMC and state officials and industry representatives told us that the most important factors in reducing the rate of fatal accidents involving commercial vehicles were federal and state initiatives to improve safety for commercial vehicles and actions that trucking firms have taken to improve the safety of their trucks and drivers. In particular, the states assumed the responsibility for conducting roadside inspections of commercial vehicles under MCSAP, and OMC expanded its compliance review program under the 1984 safety fitness requirement. OMC and the states also established drug- and alcohol-testing requirements and a commercial driver\u2019s license program designed to eliminate the opportunity for drivers to evade law enforcement penalties by using commercial licenses from more than one state. As OMC and the states expanded their safety programs, many trucking firms implemented safety programs and improved their vehicles\u2019 maintenance. OMC recently announced that it will work with the states to develop performance-based Commercial Vehicle Safety Plans that give each state more flexibility to decide the best combination of programs for reducing truck accidents while maintaining the current levels of roadside inspections.\n\n\t\tStates Conduct Almost All Roadside Inspections\n\nWith the establishment of MCSAP, the responsibility for conducting roadside inspections of commercial vehicles shifted from OMC to the states. As a result, total inspections increased from 25,000 performed by OMC inspectors in 1983 to 2.1 million performed predominantly by state inspectors in 1996. (See table I.2 in app. I.) The use of state inspectors also expanded the program\u2019s coverage because federal personnel are authorized to inspect only commercial vehicles engaged in interstate and foreign commerce, while state personnel can inspect vehicles operating in both intrastate and interstate commerce. In fiscal year 1996, 16 percent of the vehicles inspected were engaged in intrastate commerce.\nState inspectors and enforcement officers can conduct any of five levels of inspection that focus on the vehicle and\/or the driver. Level 1 inspections, the most rigorous, accounted for 46 percent of the fiscal year 1996 inspections, ranging from 91 percent of the inspections in California to 4 percent of the inspections in South Dakota. (See table I.3 in app. I.) In comparison, level 2 inspections, which check the driver and readily observable vehicle items\u2014such as tires and lights but not the brakes\u2014accounted for 30 percent of the inspections; level 3 inspections, which focus on such driver-related items as hours of service and the commercial driver\u2019s license, accounted for 22 percent of the inspections; and level 4 and level 5 inspections (special purpose inspections) accounted for the remaining 2 percent of the inspections in fiscal year 1996.\nAn important measure of safety is the percentage of vehicles and drivers that inspectors put out of service until violations are corrected. Out-of-service rates for vehicles have dropped from a high of 39 percent, on average, in fiscal year 1986 to 21 percent, on average, in fiscal 1996.The out-of-service rate for drivers generally has remained steady, ranging from 6 to 8 percent during this period. State police officials responsible for roadside inspection programs in several states told us that the condition of trucks on the road today is substantially better than that of trucks at the beginning of MCSAP.\n\n\t\tStates Are Performing More Compliance Reviews\n\nWhile OMC has had the primary responsibility for conducting compliance reviews since the inception of the safety fitness program, many states have substantially increased their involvement in an effort to develop comprehensive commercial vehicle safety programs. OMC performed 6,211 compliance reviews and the states performed 5 in fiscal year 1989, the first year for which data are available. In fiscal year 1996, OMC performed 5,241 compliance reviews, and states performed 3,711. (See table I.4 in app. I.) Figure 2 shows that 26 states performed at least 25 compliance reviews in fiscal year 1996; 11 states performed fewer than 25 compliance reviews; and 13 states, the District of Columbia, and Puerto Rico did not perform any compliance reviews.\nThe 16 MCSAP state coordinators we contacted generally believe that compliance reviews are an essential element of a comprehensive commercial vehicle safety program. Greater state involvement in conducting compliance reviews would extend the program\u2019s coverage to include intrastate motor carriers, which OMC has no authority to audit. During the past 3 years, about 26 percent of the commercial vehicle accidents reported to Safetynet involved vehicles operated by intrastate carriers, including dump trucks and garbage trucks. Maryland State Police officials noted that these trucks may rarely be inspected because they operate within a metropolitan area and can more readily bypass state weigh stations by using other routes. In fiscal year 1996, 24 states conducted compliance reviews of one or more intrastate commercial motor carriers.\nOMC officials told us that their policy is to encourage, but not require, states to develop compliance review programs. While the OMC officials support a greater state role in conducting compliance reviews, they noted that OMC wants to give each state more flexibility to decide the combination of programs that would best reduce commercial vehicle accidents. OMC also has offered states the option to issue \u201cU.S. DOT numbers\u201d to intrastate carriers and enter them into OMC\u2019s motor carrier management information system to provide a single set of identification numbers for tracking accidents and the results of roadside inspections and compliance reviews. OMC requires, however, that states conduct a census of their intrastate carriers to provide a complete and accurate list of carriers. Connecticut, Kentucky, Indiana, Utah, and Wyoming have completed their census, and other states have expressed an interest in using U.S. DOT numbers.\nMCSAP coordinators for several states we contacted believe that their state could assume lead responsibility for conducting compliance reviews. However, MCSAP coordinators in several other states expressed concern about further expanding their state\u2019s role in the compliance review program because of funding and personnel constraints. For example, one coordinator stated that, without additional MCSAP funding, his state may have to reduce the number of roadside inspections to conduct more compliance reviews. Some MCSAP coordinators also told us that their state laws do not provide them with adequate legal authority to conduct compliance reviews of intrastate carriers or to impose civil fines for the violations found during a review.\n\n\t\tOMC Requires Performance-Based State Safety Plans\n\nEffective in fiscal year 1998, OMC initiated performance-based Commercial Vehicle Safety Plans to replace the State Enforcement Plan that each state submits annually as a basis for receiving MCSAP funds. The new plan is intended to give each state more flexibility in choosing the combination of programs that would best achieve the goal of reducing motor carrier accidents in the state while retaining minimum levels of effort for roadside inspections. In contrast, the State Enforcement Plan had established safety activity goals for the forthcoming year, including the number of roadside inspections and law enforcement activities.\nIn fiscal year 1996, OMC provided the states with $54 million for MCSAP\u2019s basic grant program and $22.6 million for designated program activities, such as hazardous materials training and covert operations. (See table I.5 in app. I.) Several MCSAP coordinators suggested moving some of MCSAP\u2019s designated program funding to MCSAP\u2019s basic grant funding because, in accordance with the new Commercial Vehicle Safety Plans, the states should be given more flexibility to determine the best use of funds for reducing motor carrier accidents. Some MCSAP coordinators said that using funds for designated activities sometimes is not an efficient use of their state\u2019s limited resources, adding that their state could use these funds more productively in other motor carrier safety programs.\n\n\tSafeStat Is Designed to Better Target Compliance Reviews\n\nOMC and the states have rated the safety fitness of about 34 percent of the 379,000 commercial motor carriers currently engaged in interstate and foreign commerce. In 1989, OMC had announced its intention to assess the safety fitness of each commercial motor carrier. However, because the number of interstate carriers has grown rapidly in recent years and resources for conducting compliance reviews are limited, OMC subsequently targeted compliance reviews on carriers that pose the greatest potential risk to highway safety. In fiscal year 1996, OMC and the states conducted 8,952 compliance reviews of commercial motor carriers, including about 4,324 first-time reviews and 4,628 follow-up reviews.\nIn fiscal year 1996, OMC identified motor carriers for compliance reviews primarily through its Selective Compliance and Enforcement (SCE) list, which prioritized motor carriers on such factors as the commodity being transported and the carrier\u2019s out-of-service rate for vehicles, prior compliance reviews, and the written complaints that it had received. In April 1997, consistent with the Government Performance and Results Act of 1993, OMC began using SafeStat, a computer program that uses performance-based data on accidents, roadside inspections, and compliance reviews to identify problem carriers. OMC also is working with the states to improve the completeness and timeliness of their safety data reporting to the Safetynet database.\n\n\t\tOMC\u2019s SCE List Used Descriptive and Performance Data\n\nAs shown in table 1, OMC used the SCE list to select 46 percent of the motor carriers for a compliance review in fiscal year 1996. The SCE list prioritized motor carriers on the basis of (1) the commodity transported; (2) their annual mileage; (3) the months since the last safety fitness rating; (4) their vehicles\u2019 out-of-service rate; (5) their drivers\u2019 out-of-service rate; (6) their preventable, recordable accident rate; and (7) their overall safety fitness rating. (See app. II for a more detailed description of each factor.) Of the remaining compliance reviews conducted, 14 percent were to follow up prior enforcement cases, 14 percent were in response to complaints,9 percent were initial reviews of carriers\u2019 operations; 4 percent were in response to carriers\u2019 requests for a compliance review; and 12 percent were for other reasons. Among the other reasons for a compliance review is if a motor carrier\u2019s vehicle was involved in a major accident that resulted in multiple fatalities or closed down an interstate highway for several hours.\nCompliance review investigators found that 63 percent of the carriers examined in fiscal year 1996 did not have a recordable accident during the previous 12 months. OMC also calculated that the national average accident rate for all carriers that had a compliance review in fiscal year 1996 was 0.5 recordable, preventable accidents per million miles driven. About 77 percent of these carriers had an accident rate below the average rate.\nIn a March 1997 report, the DOT Office of Inspector General found that OMC\u2019s SCE list did not ensure that carriers with the worst safety records were targeted for compliance reviews. In particular, the report stated that the SCE list did not define problem carriers and used factors that did not sufficiently emphasize on-the-road performance to prioritize carriers. For example, a carrier that transported passengers or hazardous materials was given more points and, therefore, was more likely to be reviewed than one that transported general freight, regardless of each carrier\u2019s actual accident record. The report also stated that a carrier\u2019s annual mileage, the number of months since its last safety fitness rating, and its overall safety fitness rating were descriptive factors not directly related to the carrier\u2019s on-the-road performance. The Inspector General recommended that OMC replace its existing system for prioritizing carriers for compliance reviews with one that uses on-the-road performance and stated that the implementation of SafeStat satisfied the recommendation\u2019s intent.\n\n\t\tSafeStat Uses Safety Data to Improve Targeting\n\nTo address the limitations associated with the SCE list in identifying commercial motor carriers with poor on-the-road performance, OMC has worked with the Volpe National Transportation Systems Center, a DOT research laboratory, to develop the SafeStat computer program. SafeStat ranks motor carriers on the basis of performance-based data in four safety evaluation areas (SEA): (1) accident rates; (2) driver factors, including out-of-service violations from roadside inspections; (3) vehicle factors, including out-of-service violations from roadside inspections; and (4) safety management practices and policy, including the results of prior compliance reviews and enforcement actions. SafeStat also weights these data on the basis of the severity and age of an event. For example, SafeStat gives more weight to a fatal or serious injury accident than to a tow-away accident and to an accident that occurred within 6 months than one that occurred more than 6 months previously. (See app. III for a more detailed description of SafeStat.)\nTable 2 shows the SafeStat categories for carriers ranked among the worst 25 percent of all carriers in at least one SEA. OMC will conduct a compliance review of each carrier included in category A or category B. OMC also considers those carriers in category C to be poor performers. Each category A, B, and C motor carrier remains in OMC\u2019s Motor Carrier Safety Improvement Process until its on-the-road performance improves sufficiently for SafeStat not to subsequently identify them.\nThe Volpe National Transportation Systems Center tested SafeStat\u2019s effectiveness in identifying problem carriers by using prior year information and then comparing the subsequent accident rates of carriers that SafeStat identified as being poor performers with those for all other carriers. The Volpe Center found, in particular, that the subsequent accident rate for poor performers in the (1) accident SEA was 259 percent higher than that for motor carriers not identified and (2) driver SEA was 81 percent higher than that for motor carriers not identified. Many of the MCSAP coordinators we interviewed believe that SafeStat will considerably improve the targeting of problem carriers for compliance reviews as compared with the SCE list\u2019s criteria. OMC officials noted that if SafeStat targets problem carriers better than the SCE list does, OMC and state investigators could improve the program\u2019s effectiveness while performing about the same number of compliance reviews. However, OMC officials noted that better targeting could reduce the total number of compliance reviews performed because investigators may become involved with more complex enforcement cases, increasing the staff days spent per case.\nIn April 1997, OMC used SafeStat to generate its first nationwide list of problem carriers, which included 1,700 category A and B carriers and 3,300 category C carriers. OMC will generate a new list of problem carriers every 6 months. Beginning in October 1997, OMC is sending letters to category C motor carriers notifying them of their poor safety performance. Each letter will identify the carrier\u2019s accidents, out-of-service orders from roadside inspections, and violations and enforcement actions from compliance reviews that provide the basis for the SafeStat score. The letters will give a carrier the opportunity to correct any database mistakes, especially if an accident or inspection was wrongly assigned to the carrier. The letters will advise category C carriers that they will be subject to a compliance review unless their SafeStat score subsequently improves.\nOMC\u2019s policy that a compliance review be performed of each category A and B carrier includes a revisit to any carrier that remains in either category A or B when a new SafeStat list is generated. OMC also plans to conduct a compliance review of any carrier listed in category C after the carrier has been listed in category C for a third time. In addition to these motor carriers, OMC\u2019s regional offices can target other motor carriers from (1) category D carriers that were among the worst 25 percent of the carriers in the accident category only and\/or (2) hazardous materials carriers and bus companies that the SCE list prioritized because of the potential severity of an accident involving these carriers. Roadside inspection data may not be sufficient for a SafeStat ranking for bus companies because buses often are allowed to bypass weigh stations so that passengers are not inconvenienced.\nSafeStat is part of the larger Commercial Vehicle Information System demonstration program. The program links OMC\u2019s databases with states\u2019 motor vehicle registration systems, which provide current information on each vehicle that a carrier operates. An OMC official told us that the extension of the Commercial Vehicle Information System demonstration program to all 50 states is essential to enable SafeStat to effectively compare accident rates among carriers.\n\n\t\tMany States Have Improved the Completeness and Timeliness of Their Safetynet Data\n\nA key element in implementing performance-based criteria for selecting motor carriers is ensuring that the Safetynet database contains complete, accurate, and timely data about each motor carrier\u2019s safety performance. The Intermodal Surface Transportation Efficiency Act of 1991 took a first step toward developing a comprehensive database by requiring that the 48 contiguous states submit data to Safetynet on commercial vehicles\u2019 recordable accidents and the results of roadside inspections and compliance reviews. The states have substantially improved the quantity and quality of the safety data on commercial vehicles reported to Safetynet since 1991. (See app. IV for three examples of innovative ways that the states are collecting, analyzing, and using these data to improve traffic enforcement.) OMC and the states increased the percentage of reported accidents from about 14 percent in fiscal year 1992 to an estimated 74 percent in fiscal 1995.\nTo improve the completeness, accuracy, and timeliness of roadside inspection data, OMC has provided funding through MCSAP grants for states to purchase laptop computers and special software, known as ASPEN, that enable inspectors to upload inspection results directly into Safetynet\u2019s electronic database. Using ASPEN, instead of paper forms, improves accuracy because the software alerts inspectors to inconsistent information, particularly if the carrier\u2019s name and the entered U.S. DOT number do not match. (Without the correct U.S. DOT number, SafeStat cannot attribute the inspection results to the motor carrier.) The electronic entry of the inspection results also substantially reduces the time needed to transmit data to Safetynet because it eliminates the step of mailing paper forms to a central office for entry into the computer\u2019s database.\nIn addition, to better ensure that adequate inspection data are collected on the drivers and vehicles of individual motor carriers, OMC introduced the Inspection Selection System (ISS) software in 1995. As of March 1997, 36 states were using ISS to help inspectors select vehicles for inspection and focus the inspection on problems identified in a carrier\u2019s previous inspections. As a vehicle pulls into an inspection station, its U.S. DOT number is entered into ISS. The program assigns the vehicle a score on the basis of the number and the results of the motor carrier\u2019s previous inspections and compliance reviews. Specifically, ISS recommends an inspection for a motor carrier that has a poor safety record or has had very few roadside inspections relative to its size in the prior 2 years. Alternatively, state inspectors may select vehicles for inspections on the basis of either random sampling or judgmental factors, including the type of commodity transported or observed safety violations.\nImproving the completeness, accuracy, and timeliness of accident data is more difficult than improving roadside inspection data primarily because (1) accident reporting is decentralized, involving many more state and local law enforcement officers, and (2) the officer at an accident scene often has other more urgent concerns and gives low priority to obtaining all of the necessary information and filing the accident report with the state. Several states told us that they are taking actions to encourage their law enforcement officers to improve the reporting of accidents involving commercial vehicles. For example, some states we contacted are providing officers with more training in completing the 22-item supplemental form developed by the National Governors\u2019 Association for reporting commercial vehicle accidents. Similarly, some states are incorporating the supplemental form\u2019s items into their basic accident-reporting form to further streamline the needed information. An OMC official noted that accident reporting is likely to improve as law enforcement officers become aware that SafeStat is using their reports to identify poor performers in their states.\nIn December 1996, OMC provided the states with guidance that tightened the time frames for uploading (1) roadside inspection and compliance review data to within 7 days if the data are collected electronically or within 21 days if paper forms are used and (2) accident data to within 90 days from the date of the accident. Previously, the standards for uploading the information were 90 days for inspections, 30 days for compliance reviews, and 180 days for accidents. OMC\u2019s data showed that the states, on average, had reduced the time for uploading roadside inspection data to Safetynet from 49 days in fiscal year 1996 to 42 days in fiscal 1997. However, 42 states did not meet OMC\u2019s 21-day standard for paper forms, and only Connecticut met OMC\u2019s 7-day standard for electronically uploading inspection data. OMC\u2019s data show that the states, on average, reduced the time for uploading accident data to Safetynet from 159 days in fiscal year 1996 to 98 days in fiscal 1997. (This improvement is somewhat overstated because no accident data for Maryland were uploaded during fiscal year 1997.) Five states did not meet OMC\u2019s former 180-day standard for uploading accident data during fiscal year 1997.\nEight of the 16 MCSAP coordinators we contacted do not believe that their state will meet the tighter time frames for uploading inspection and compliance review data. Eight MCSAP coordinators also do not believe that their state will meet the new accident-reporting time frames. For example, Ohio\u2019s MCSAP coordinator told us that Ohio relies on the voluntary cooperation of local police departments to report commercial vehicle accidents, unlike many states that require state and local police to file traffic accident reports with a state highway agency. Ohio\u2019s MCSAP coordinator also noted that uploading accident data into Safetynet has been delayed by a backlog in electronically entering the data from paper forms in the state\u2019s central office. OMC officials acknowledged that if commercial motor carriers\u2019 accidents were unreported, their SafeStat rankings would be reduced for the accident SEA, possibly allowing some carriers to avoid being listed among the worst 25 percent of the performers and subsequently not receive a compliance review.\n\n\tOMC Has Used Compliance Reviews to Rate a Carrier\u2019s Safety Fitness\n\nOMC uses a compliance review to assess a commercial motor carrier\u2019s management controls that results in a safety fitness rating. Trucking industry representatives have opposed using compliance reviews to rate a carrier\u2019s safety fitness, stating that too much weight is given to record-keeping requirements that may not correlate with a firm\u2019s on-the-road safety performance. While OMC will continue to perform compliance reviews, especially to upgrade the safety management of problem carriers, OMC plans to publish an advance notice of proposed rule making later this year to solicit public comments on alternatives for rating a carrier\u2019s safety fitness, including the possible use of performance-based criteria.\n\n\t\tDrivers\u2019 Hours-Of-Service Regulations Result in the Most Safety Violations\n\nIn a compliance review, trained investigators assess a motor carrier\u2019s compliance with federal motor carrier safety regulations that are divided into general, driver-related, operations-related, vehicle-related, and hazardous materials-related rating factors. The investigators also examine the carrier\u2019s recordable accidents. OMC distinguishes among its motor carrier safety regulations by designating certain regulations as (1) acute, because violating one of these regulations would create an immediate risk to persons or property, or (2) critical, because violations, if occurring in patterns, would indicate a breakdown in the effective control over essential safety functions. Examples of acute regulations are several related to controlled substances and alcohol use and testing. Examples of critical regulations are several driver\u2019s hours-of-service regulations that specify the maximum working hours and minimum hours off duty for drivers at selected times during an 8-day period.\nEach compliance rating factor is evaluated to determine whether the carrier violated any of the acute and critical regulations. A carrier\u2019s rating factor is (1) satisfactory if no violations of acute or critical regulations exist, (2) conditional if one violation of an acute or critical regulation exists, and (3) unsatisfactory if two or more violations of acute or critical regulations exist. In addition, each carrier is rated on the number of recordable, preventable accidents per million miles that its vehicles traveled during the past year. (See table V.1 in app. V.)\nOf the motor carriers that received a compliance review in fiscal year 1996, 35 percent were rated unsatisfactory for the operational rating factor, which includes hours-of-service regulations, while 13 percent were rated unsatisfactory for the driver rating factor\u2014the second highest unsatisfactory category. (See table V.2 in app. V.) A substantial number of carriers violated at least one critical driver\u2019s hours-of-service regulation. (See table V.3 in app.V.) OMC gives double weight to the violation of these regulations because of the link between hours-of-service violations and driver fatigue.\nOMC does not track the time that investigators spend evaluating each rating factor. Compliance review investigators told us that they spend between 30 and 40 percent of their time examining the driver\u2019s hours-of-service records during a typical compliance review, but they added that this percentage could vary, depending on known problems, available records, and whether it was a first visit or a follow-up. We did not identify any studies that specifically analyzed the relationship between the accuracy of the driver\u2019s hours-of-service logs and accidents; however, we found two studies that generally examined these issues. A 1995 study by the National Transportation Safety Board on single-vehicle heavy truck crashes found that drivers were more likely to have exceeded OMC\u2019s maximum allowable hours of service in fatigue-related accidents. A 1996 study by the Northwestern University Traffic Institute examined the relationship between a carrier\u2019s hours-of-service logs and accident rates, but the study primarily relied on interviews with representatives of 26 motor carriers that had received a compliance review. The study stated that the most frequent suggestion for modifying OMC\u2019s safety fitness rating system was to give more weight to performance-based measures, including accidents and roadside inspection results, and eliminate the stringent emphasis on record keeping. In November 1996, OMC published an advance notice of proposed rule making in the Federal Register to request comments on its hours-of-service regulation (49 C.F.R. part 395), as required by the Interstate Commerce Commission Termination Act of 1995 (P.L. 104-88).\n\n\t\tFew Motor Carriers Appealed Their Safety Fitness Ratings in Fiscal Year 1996\n\nOf the 8,952 carriers that received a compliance review in fiscal year 1996, 54 percent were rated satisfactory, 32 percent were rated conditional, and 12 percent were rated unsatisfactory. (See table V.4 in app. V.) A carrier\u2019s overall safety fitness rating is satisfactory if none of the six rating factors are unsatisfactory and at most two rating factors are conditional. A carrier\u2019s rating is conditional if either no rating factor is unsatisfactory and more than two rating factors are conditional or one rating factor is unsatisfactory and at most two rating factors are conditional. A carrier\u2019s rating is unsatisfactory if one rating factor is unsatisfactory and more than two rating factors are conditional or if at least two rating factors are unsatisfactory.\nA motor carrier that receives an unsatisfactory or conditional rating may appeal its rating on either factual or procedural grounds within 90 days after the rating is received. Of about 3,940 motor carriers that received either a conditional or unsatisfactory rating in fiscal year 1996, only 17 appealed their rating within 90 days. After reviewing each case, OMC (1) upgraded the ratings of eight carriers, primarily on the basis of actions taken by the carrier; (2) denied the appeal of eight carriers; and (3) did not act on one appeal because a state had conducted the compliance review and had not entered the results into OMC\u2019s Safetynet database.\nAlternatively, a carrier may request a new safety fitness rating on the basis of operational improvements made. This request usually results in a new compliance review. Officials in two OMC regional offices told us that a request for a change of a carrier\u2019s rating is relatively rare and that their regional offices typically try to schedule a follow-up visit within 3 months. Another OMC official added that a follow-up compliance review usually results in an upgraded rating because a carrier would not request one unless previously cited violations had been addressed.\n\n\t\tOMC Plans to Reexamine Its Criteria for Rating Safety Fitness\n\nIn March 1997, the U.S. Court of Appeals for the District of Columbia ruled that OMC had failed to carry out its statutory obligation to promulgate a regulation that establishes criteria for determining whether a carrier has complied with the safety fitness requirements of the Motor Carrier Safety Act of 1984. While this decision applied only to the safety fitness rating of a single carrier, OMC has temporarily stopped issuing ratings. To address the court\u2019s concerns, OMC published a notice of proposed rule making in the May 1997 Federal Register that would establish a safety fitness rating methodology, including six rating factors, substantially similar to the methodology that OMC had used to rate motor carriers. (OMC also published an interim final rule that applies only to hazardous materials and passenger carriers.) The notice of proposed rule making would revise the accident rating factor by (1) eliminating the determination of whether each recordable accident was preventable by the motor carrier or the driver, (2) increasing the threshold for an unsatisfactory rating from 1 accident to 1.6 accidents per million miles driven, and (3) eliminating the satisfactory and conditional ratings.\nThe notice of proposed rule making states that the safety fitness rating methodology is a short-term approach needed to address the court of appeals\u2019 decision. The notice further states that, in the longer term, OMC plans to shift from using compliance reviews to performance-based criteria for determining whether motor carriers are fit to conduct commercial vehicle operations safely in interstate commerce. OMC believes that SafeStat can be successfully employed to identify the worst performing carriers within the next 2 years. As a first step in this transition, OMC plans to publish an advance notice of proposed rule making later this year to solicit public comments on alternative approaches for rating the safety fitness of commercial motor carriers.\n\n\tConclusions\n\nOMC\u2019s SCE list and other criteria for selecting motor carriers for compliance reviews did not effectively target commercial motor carriers with poor safety performance. While OMC\u2019s new SafeStat system is designed to better identify problem carriers by using on-the-road performance data, it depends upon the states to submit complete, accurate, and timely data on recordable accidents and the results of roadside inspections and compliance reviews. However, some states currently lack adequate data, particularly for accidents. Substantial gaps in the reported data can change a carrier\u2019s score, thus affecting SafeStat\u2019s reliability. In addition, 14 states do not use the Inspection Selection System for selecting vehicles for roadside inspections, and small motor carriers may get no ranking or a biased ranking by SafeStat if few roadside inspections are performed on their vehicles and drivers.\nWe agree in concept with OMC\u2019s announced plan to use performance-based data for rating the safety fitness of commercial motor carriers. However, for this approach to succeed, the states must provide substantially complete, accurate, and timely data to Safetynet. While OMC has taken steps to improve states\u2019 data reporting by, for example, introducing the Inspection Selection System and providing funding for the states to purchase laptop computers to directly upload roadside inspection results, many states have not provided complete and timely data that meet OMC\u2019s reporting requirements.\n\n\tRecommendations\n\nTo better ensure that the safety fitness ratings of commercial motor carriers accurately reflect their on-the-road performance, we recommend that the Secretary of Transportation (1) identify the barriers that prevent the states from providing complete and timely data and work with the states to develop a strategy for addressing each barrier and (2) develop alternative approaches to SafeStat, such as consulting with state and local law enforcement officials to identify problem motor carriers, in the states that have inadequate data.\n\n\tAgency Comments and Our Evaluation\n\nWe provided the Department of Transportation with a draft of this report for review and comment. We met with officials in the Office of Motor Carriers, including the Chief, Safety and Hazardous Materials Division; the Chief, Information Division; and OMC\u2019s National Field Coordinator, as well as with a senior analyst in the Office of the Secretary. DOT agreed with the overall message of the report, stating that it was fair and accurate, and agreed with our recommendation that it work with the states to develop a strategy for addressing barriers that prevent the states from providing complete and timely data. However, DOT disagreed with our recommendation that it develop alternative approaches to SafeStat in the states that have inadequate data, stating that (1) its resources would be better spent by working with the states to improve their data and (2) developing separate processes for different states or individual populations of carriers would not be practical or an effective use of resources because an interstate carrier\u2019s performance is influenced by multiple states.\nWe continue to believe that DOT needs to develop alternative approaches for the states that have inadequate data, especially on recordable accidents, because of the importance of improving the safety fitness of motor carriers with poor safety records. An alternative approach need not be labor intensive; for example, it could involve asking a state to identify for compliance reviews any motor carrier whose drivers or vehicles have multiple out-of-service violations. Alternatively, OMC could modify SafeStat for the states that have inadequate accident data to rank carriers only on the basis of the other three SEAs that use roadside inspection, compliance review, and enforcement case results. DOT also provided clarifying information to improve the report\u2019s technical accuracy, which we incorporated as appropriate.\n\n\tScope and Methodology\n\nTo obtain the information in this report, we interviewed officials from OMC, the Volpe National Transportation Systems Center, the Commercial Vehicle Safety Alliance, and the American Trucking Associations and the MCSAP coordinators for Arizona, California, Connecticut, Georgia, Illinois, Iowa, Maryland, Massachusetts, Mississippi, Missouri, Ohio, Oregon, Pennsylvania, Texas, Utah, and Wisconsin. We selected these 16 states to provide geographical diversity, a mix of large and small states, and a mix in the number of compliance reviews that each state performed in fiscal year 1996. We also (1) made site visits to three of these states that have strong programs for collecting and using commercial vehicle accident, inspection, and enforcement data; (2) interviewed officials in each of the five states that participated in the SafeStat pilot program; and (3) accompanied OMC investigators as they performed a compliance review.\nWhile we did not verify the accuracy of the data that the states submitted to OMC\u2019s Safetynet database, OMC reviews these data for accuracy and completeness before they are entered into its motor carrier management information system, which OMC has used to generate its SCE and SafeStat rankings. We also did not examine the safety performance of longer-combination vehicles, which are limited by federal law to designated highways in 20 states. DOT does not plan to propose any revisions to the current federal restrictions until it completes an ongoing major study on these trucks. We conducted our review from April through September 1997 in accordance with generally accepted government auditing standards.\nAs arranged with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days after the date of this letter. At that time, we will send copies of the report to congressional committees and subcommittees responsible for commercial motor vehicle safety issues; the Secretary of Transportation; the Director, Office of Management and Budget; and other interested parties. We will make copies available to others upon request.\nIf you or your staff have any questions about this report, please contact me at (202) 512-3650. Major contributors to this report are Jason Bromberg, Richard Cheston, and James Ratzenberger.\n\nCommercial Vehicle Safety Data\n\nData are not available.\nTable I.5: Federal MCSAP Grants to the States by Category, Fiscal Year 1996 (1,499)\n\nSelective Compliance and Enforcement Criteria for Selecting Motor Carriers for a Compliance Review\n\nCommodity transported (1 to 8 points):\n8 points for a passenger carrier\n5 points for hazardous materials in a tank\n2 points for hazardous materials in a package\n1 point for everything else Annual carrier mileage (1 to 4 points):\n4 points for at least 5 million miles\n3 points for from 1 million to 4,999,999 miles\n2 points for from 150,000 to 999,999 miles\n1 point for less than 150,000 miles If mileage is unavailable, then a driver census would be used\n4 points for at least 72 drivers\n3 points for from 16 to 71 drivers\n2 points for from 6 to 15 drivers\n1 point for from 1 to 5 drivers If mileage and a driver census are unavailable, then the number of power units (for semi-trailer trucks, the tractor unit that includes the engine) would be used\n4 points for at least 72 power units\n3 points for from 16 to 71 power units\n2 points for from 6 to 15 power units\n1 point for from 1 to 5 power units\nNeutral value if 0, blank, or unknown Months since last safety fitness rating (0 to 4 points):\n4 points for more than 36 months\n3 points for from 25 to 36 months\n2 points for from 13 to 24 months\n1 point for from 7 to 12 months\n0 points for from 0 to 6 months\n2 points for an unrated carrier Vehicle out-of-service rate (1 to 5 points):\n5 points for an out-of-service rate of at least 40 percent\n4 points for an out-of-service rate from 33.34 to 39.99 percent\n3 points for an out-of-service rate from 25 to 33.33 percent\n2 points for an out-of-service rate from 16.67 to 24.99 percent\n1 point for an out-of-service rate of from 0 to 16.66 percent Driver out-of-service rate (2 to 10 points):\n10 points for an out-of-service rate of at least 15 percent\n8 points for an out-of-service rate from 10 to 14.99 percent\n6 points for an out-of-service rate from 7 to 9.99 percent\n4 points for an out-of-service rate from 3.25 to 6.99 percent\n2 points for an out-of-service rate of from 0 to 3.24 percent Preventable, recordable accident rate (1 to 5 points):\n5 points for an accident rate of at least 1.0\n4 points for an accident rate from 0.67 to 0.99\n3 points for an accident rate from 0.34 to 0.66\n2 points for an accident rate from 0.01 to 0.33\n1 point for an accident rate of 0\nNeutral value for a blank or missing accident rate Overall safety fitness rating (1 to 5 points):\n5 points for an unsatisfactory rating\n3 points for a conditional rating\n1 point for a satisfactory rating\nNeutral value for an unrated carrier The Selective Compliance and Enforcement (SCE) selection formula removes a neutral value for a factor from consideration because of a lack of data. To adjust for neutral values, the selection formula multiplies the carrier\u2019s SCE score by seven (the total number of factors) and divides by the number of factors for which data are available. A carrier\u2019s final SCE score is the total of its scores for the seven factors.\nThe SCE list used (1) inspections conducted within the previous 18 months and (2) accident rates calculated during a compliance review within the previous 2 years. OMC required that the out-of-service rates for the vehicle and driver be calculated on the basis of at least 10 valid inspections for trucks and 5 valid inspections for passenger vehicles.\n\nSafeStat Criteria for Selecting Motor Carriers for a Compliance Review\n\nAccident Safety Evaluation Area (SEA) 1. Motor carriers\u2019 accidents that states report to OMC\u2019s Safetynet database. (The accident must involve a fatality, an injury, or a vehicle that was towed away from the scene.) 2. Recordable, preventable accident rate from compliance reviews. 1. Out-of-service violations for drivers from roadside inspections. 2. Violations of driver-related critical and acute regulations from compliance reviews. 1. Out-of-service violations for vehicles from roadside inspections. 2. Violations of vehicle-related critical and acute regulations from compliance reviews. 1. Closed enforcement cases. (An enforcement case is the result of one or more major violations discovered by a safety investigator during a compliance review.) 2. Out-of-service violations for hazardous materials from roadside inspections. 3. Violations of safety management-related critical and acute regulations from compliance reviews.\nSafeStat time weights data by (1) giving more weight to events that occurred during the past year than to events that are older and (2) using only data that are less than 30 months old. SafeStat also weights accident data and compliance review violations by the severity of the event. For example, a fatal accident is given more weight than an accident involving a vehicle that was towed from the scene.\n\nSelected State Initiatives to Improve the Collection and Use of Safety Data\n\nStates vary widely in the quality and completeness of their commercial vehicle safety data and in the ways they make use of these data in their commercial vehicle safety programs. Several states have initiated programs to improve their collection and use of safety data for commercial vehicles. Below are three state initiatives to develop comprehensive data on accidents involving commercial motor vehicles, targeting high-accident corridors for increased enforcement, and using real-time wireless communications to provide state police with electronic access to Safetynet data.\n\n\tOregon: Accident Reporting\n\nThe Motor Carrier Transportation Branch, within Oregon\u2019s Department of Transportation (DOT) has a system for gathering data on commercial vehicle accidents that differs from that of many other states. In particular, the branch employs an experienced accident analyst whose sole job is to collect and check accident information, look for inconsistencies in the data, and follow up with the police or the carrier to make the accident report as accurate and complete as possible. The accident analyst also provides information that helps decide whether the branch should get involved in the investigation of a particular accident.\nOregon uses several sources to acquire information on accidents involving commercial vehicles, the most important of which is the police accident report. But unlike many states, Oregon also requires motor carriers to file a report within 30 days if one of their vehicles is involved in a serious accident. The carrier\u2019s report provides more information than the police report about the driver and such things as the configuration of the vehicle and its load. In about one in six cases, the carrier\u2019s report is the only source of information about an accident because local police departments do not always file an accident report.\nUnlike many states, Oregon makes an effort to determine the cause of a commercial vehicle accident and who was at fault. Oregon\u2019s DOT uses a list of about 50 different reasons (lane change, brake failure, etc.) that can be identified as the primary or secondary cause of an accident. While Safetynet does not include data on cause and fault, Oregon uses this information to develop its performance-based standards and strategies. For example, the information allows Oregon\u2019s DOT to map out the location of accidents, on the basis of their cause, showing problem spots for accidents believed to be caused by such things as excessive speed or fatigue. Oregon\u2019s DOT can then respond to patterns by, for example, focusing its resources on traffic enforcement efforts on speed-problem corridors or targeting hours-of-service violations where fatigue is a problem.\n\n\tUtah: Reducing Fatigue-Related Accidents\n\nUtah, like other states, is adopting performance-based standards to implement its truck safety programs. In 1996, Utah\u2019s DOT used its basic MCSAP grant to participate in a pilot project to address a 78-percent increase in truck accidents on a stretch of Interstate Route 80 west of Salt Lake City that is very straight, flat, and monotonous. Utah\u2019s DOT conducted an analysis of these accidents in relation to the time of day, location, number of vehicles involved, and other elements that found that a disproportionate number of the accidents were single-vehicle events, such as a truck\u2019s running off the road, suggesting that the accidents were related to driver fatigue.\nThrough the pilot, Utah has targeted resources on the driver-fatigue problem on this corridor. The truck unit of the state police has increased level 3 (driver) inspections at targeted locations, focusing on hours-of-service violations. Where problems were found, Utah\u2019s DOT focused on the carrier\u2019s operations by looking at the carrier\u2019s collective driver records and conducting a full compliance review, if warranted. In addition, Utah\u2019s DOT initiated educational activities to reduce the number of sleep-related crashes, such as disseminating brochures outlining the warning signs of fatigue and informational packets for drivers and carriers at ports of entry, during compliance reviews, and at various driver-related events.\n\n\tConnecticut: Real-Time Wireless Communication\n\nThe Commercial Vehicle Safety Division, within the Connecticut Department of Motor Vehicles, has begun to implement a real-time wireless communication system that links an inspector performing a truck inspection at a roadside stop with state and national motor carrier information systems. The system, known as the cellular digital package data system, provides inspectors with the ability to send and receive real-time data from the ASPEN vehicle inspection system, OMC\u2019s commercial driver license information system, and other related commercial vehicle and enforcement databases. The system substantially increases both the quantity and currency of the data available to an inspector at a roadside stop about a vehicle, its driver, and the motor carrier.\nSeveral police departments in Connecticut and nationwide already use this basic technology, but Connecticut is using a special MCSAP research and development grant to piggyback onto this existing technology to incorporate ASPEN. The communications are double-encrypted before going over the airwaves, since they contain sensitive information. The operating costs are much less than those for a cellular telephone, since the system sends out its data in short bursts, rather than through a continuously open telephone line.\nBy entering a truck\u2019s U.S. DOT number at a roadside stop, an inspector will be able to obtain a motor carrier\u2019s complete inspection history and the results of compliance reviews. Having more up-to-date information will allow the inspector to make a better determination about whether to inspect the truck. In addition, having more complete information allows the inspector to focus the inspection more effectively; if the database shows a history of brake violations, for example, the inspection may focus more on the vehicle\u2019s brakes. The inspector also can use the cellular system to input the data collected during an inspection into the system immediately, rather than have it entered at some future date, which facilitates data processing and makes the databases more current.\n\nCompliance Review Rating Factors\n\nRequiring or permitting driver to drive more than 10 hours.\nRequiring or permitting driver to drive after having been on duty 15 hours.\nRequiring or permitting driver to drive after having been on duty more than (1) 60 hours in 7 consecutive days or (2) 70 hours in 8 consecutive days.\nFailing to require driver to make a record of duty status.\nFalse reports of records of duty status.\nFailing to require driver to forward, within 13 days of completion, the original of the record of duty status.\nFailing to preserve driver\u2019s records of duty status and supporting documents for 6 months.\nThe first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent.\nU.S. General Accounting Office P.O. Box 37050 Washington, DC  20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000  or by using fax number (202) 512-6061, or TDD (202) 512-2537.\nEach day, GAO issues a list of newly available reports and testimony.  To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone.  A recorded menu will provide information on how to obtain these lists.","output":"Why GAO Did This Study\n\nPursuant to a congressional request, GAO examined the efficiency and effectiveness of the Federal Highway Administration's Office of Motor Carriers' commercial motor vehicle safety programs, focusing on the efforts by the Office and the states to: (1) reduce serious accidents by conducting roadside inspections and compliance reviews; (2) better target motor carriers for compliance reviews; and (3) improve the compliance review criteria for assessing and rating a carrier's safety fitness.\n\nWhat GAO Found\n\nGAO noted that: (1) federal, state, and industry officials told GAO that federal and state initiatives to improve the safety of commercial vehicles and actions taken by trucking firms to improve the safety of their trucks and drivers were the most important factors behind the 42-percent reduction in the fatal accident rate for large trucks from 1983 to 1995; (2) effective in fiscal year (FY) 1998, the Office revised the criteria for awarding funding from the Motor Carrier Safety Assistance Program to provide each state with more flexibility in choosing the combination of programs--including roadside inspections and compliance reviews--that would best reduce accidents involving commercial vehicles; (3) in April 1997, consistent with the Government Performance and Results Act of 1993, the Office began using performance-based data through its Safety Status Measurement System to identify carriers with the worst highway safety records; (4) while many states have improved the completeness and timeliness of their data submissions in recent years, the Office found that: (a) the states, overall, reported only about 74 percent of the recordable accidents in 1995; and (b) during FY 1997, five states submitted accident data more than 6 months, on average, after the accidents occurred; (5) without these data, the Office and the states cannot effectively target their limited compliance review resources on the motor carriers with safety problems; (6) the Office is in the early stages of revising its criteria for assessing and rating a commercial motor carrier's safety fitness; (7) the Office rates carriers on the basis of compliance reviews that examine a carrier's: (a) compliance with federal motor carrier safety regulations (primarily those related to financial responsibility, drivers' qualifications and operations, including hours-of-service, vehicle inspection and maintenance, and any hazardous materials handling); and (b) recordable, preventable accident rate; (8) while compliance reviews will continue to be an important element of the federal motor carrier safety program, the Office plans to publish an advance notice of proposed rulemaking to solicit public comments on alternatives for rating motor carriers' safety fitness; and (9) one option under consideration is to rely on accident date, roadside inspections, and other performance-based data for safety fitness ratings."}
{"id":"gao_GAO-02-160T","pid":"gao_GAO-02-160T_0","input":"\tThe Nature of the Threat Facing the United States\n\nThe United States and other nations face increasingly diffuse threats in the post-Cold War era. In the future, potential adversaries are more likely to strike vulnerable civilian or military targets in nontraditional ways to avoid direct confrontation with our military forces on the battlefield. The December 2000 national security strategy states that porous borders, rapid technological change, greater information flow, and the destructive power of weapons now within the reach of small states, groups, and individuals make such threats more viable and endanger our values, way of life, and the personal security of our citizens.\nHostile nations, terrorist groups, transnational criminals, and individuals may target American people, institutions, and infrastructure with cyber attacks, weapons of mass destruction, or bioterrorism.  International criminal activities such as money laundering, arms smuggling, and drug trafficking can undermine the stability of social and financial institutions and the health of our citizens. Other national emergencies may arise from naturally occurring or unintentional sources such as outbreaks of infectious disease. As we witnessed in the tragic events of September 11, 2001, some of the emerging threats can produce mass casualties. They can lead to mass disruption of critical infrastructure, involve the use of biological or chemical weapons, and can have serious implications for both our domestic and the global economy.  The integrity of our mail has already been compromised. Terrorists could also attempt to compromise the integrity or delivery of water or electricity to our citizens, compromise the safety of the traveling public, and undermine the soundness of government and commercial data systems supporting many activities.\n\n\tKey Elements to Improve Homeland Security\n\nA fundamental role of the federal government under our Constitution is to protect America and its citizens from both foreign and domestic threats. The government must be able to prevent and deter threats to our homeland as well as detect impending danger before attacks or incidents occur. We also must be ready to manage the crises and consequences of an event, to treat casualties, reconstitute damaged infrastructure, and move the nation forward. Finally, the government must be prepared to retaliate against the responsible parties in the event of an attack.  To accomplish this role and address our new priority on homeland security, several critical elements must be put in place.  First, effective leadership is needed to guide our efforts as well as secure and direct related resources across the many boundaries within and outside of the federal government. Second, a comprehensive homeland security strategy is needed to prevent, deter, and mitigate terrorism and terrorist acts, including the means to measure effectiveness. Third, managing the risks of terrorism and prioritizing the application of resources will require a careful assessment of the threats we face, our vulnerabilities, and the most critical infrastructure within our borders.\n\n\t\tLeadership Provided by the Office of Homeland Security\n\nOn September 20, 2001, we issued a report that discussed a range of challenges confronting policymakers in the war on terrorism and offered a series of recommendations. We recommended that the government needs clearly defined and effective leadership to develop a comprehensive strategy for combating terrorism, to oversee development of a new national-threat and risk assessment, and to coordinate implementation among federal agencies.  In addition, we recommended that the government address the broader issue of homeland security.  We also noted that overall leadership and management efforts to combat terrorism are fragmented because no single focal point manages and oversees the many functions conducted by more than 40 different federal departments and agencies.\nFor example, we have reported that many leadership and coordination functions for combating terrorism were not given to the National Coordinator for Security, Infrastructure Protection and Counterterrorism within the Executive Office of the President.  Rather, these leadership and coordination functions are spread among several agencies, including the Department of Justice, the Federal Bureau of Investigation (FBI), the Federal Emergency Management Agency, and the Office of Management and Budget.  In addition, we reported that federal training programs on preparedness against weapons of mass destruction were not well coordinated among agencies resulting in inefficiencies and concerns among rescue crews in the first responder community. The Department of Defense, Department of Justice, and the Federal Emergency Management Agency have taken steps to reduce duplication and improve coordination. Despite these efforts, state and local officials and organizations representing first responders indicate that there is still confusion about these programs.  We made recommendations to consolidate certain activities, but have not received full agreement from the respective agencies on these matters.\nIn his September 20, 2001, address to the Congress, President Bush announced that he was appointing Pennsylvania Governor Thomas Ridge to provide a focus to homeland security.  As outlined in the President\u2019s speech and confirmed in a recent executive order, the new Homeland Security Adviser will be responsible for coordinating federal, state, and local efforts and for leading, overseeing, and coordinating a comprehensive national strategy to safeguard the nation against terrorism and respond to any attacks that may occur.\nBoth the focus of the executive order and the appointment of a coordinator within the Executive Office of the President fit the need to act rapidly in response to the threats that surfaced in the events of September 11 and the anthrax issues we continue to face.  Although this was a good first step, a number of important questions related to institutionalizing and sustaining the effort over the long term remain, including:   What will be included in the definition of homeland security?  What are the specific homeland security goals and objectives?\nHow can the coordinator identify and prioritize programs that are spread across numerous agencies at all levels of government?  What criteria will be established to determine whether an activity does or does not qualify as related to homeland security?\nHow can the coordinator have a real impact in the budget and resource allocation process?\nShould the coordinator\u2019s roles and responsibilities be based on specific statutory authority? And if so, what functions should be under the coordinator\u2019s control?\nDepending on the basis, scope, structure, and organizational location of this new position and entity, what are the implications for the Congress and its ability to conduct effective oversight?\nA similar approach was pursued to address the potential for computer failures at the start of the new millennium, an issue that came to be known as Y2K.  A massive mobilization, led by an assistant to the President, was undertaken.  This effort coordinated all federal, state, and local activities, and established public-private partnerships.  In addition, the Congress provided emergency funding to be allocated by the Office of Management and Budget after congressional consideration of the proposed allocations. Many of the lessons learned and practices used in this effort can be applied to the new homeland security effort.  At the same time, the Y2K effort was finite in nature and not nearly as extensive in scope or as important and visible to the general public as homeland security.   The long-term, expansive nature of the homeland security issue suggests the need for a more sustained and institutionalized approach.\n\n\t\tDeveloping a Comprehensive Homeland Security Strategy\n\nI would like to discuss some elements that need to be included in the development of the national strategy for homeland security and a means to assign roles to federal, state, and local governments and the private sector. Our national preparedness related to homeland security starts with defense of our homeland but does not stop there.  Besides involving military, law enforcement, and intelligence agencies, it also entails all levels of government \u2013 federal, state, and local \u2013 and private individuals and businesses to coordinate efforts to protect the personal safety and financial interests of United States citizens, businesses, and allies, both at home and throughout the world.  To be comprehensive in nature, our strategy should include steps designed to reduce our vulnerability to threats;   use intelligence assets and other broad-based information sources to identify threats and share such information as appropriate;   stop incidents before they occur;   manage the consequences of an incident; and in the case of terrorist attacks, respond by all means available, including economic, diplomatic, and military actions that, when appropriate, are coordinated with other nations.\nAn effective homeland security strategy must involve all levels of government and the private sector. While the federal government can assign roles to federal agencies under the strategy, it will need to reach consensus with the other levels of government and with the private sector on their respective roles.  In pursuing all elements of the strategy, the federal government will also need to closely coordinate with the governments and financial institutions of other nations.  As the President has said, we will need their help.  This need is especially true with regard to the multi-dimensional approach to preventing, deterring, and responding to incidents, which crosses economic, diplomatic, and military lines and is global in nature.\n\n\t\tManaging Risks to Homeland Security\n\nThe United States does not currently have a comprehensive risk management approach to help guide federal programs for homeland security and apply our resources efficiently and to best effect.  \u201cRisk management\u201d is a systematic, analytical process to determine the likelihood that a threat will harm physical assets or individuals and then to identify actions to reduce risk and mitigate the consequences of an attack. The principles of risk management acknowledge that while risk generally cannot be eliminated, enhancing protection from known or potential threats can serve to significantly reduce risk.\nWe have identified a risk management approach used by the Department of Defense to defend against terrorism that might have relevance for the entire federal government to enhance levels of preparedness to respond to national emergencies whether man-made or unintentional in nature.  The approach is based on assessing threats, vulnerabilities, and the importance of assets (criticality).  The results of the assessments are used to balance threats and vulnerabilities and to define and prioritize related resource and operational requirements.\nThreat assessments identify and evaluate potential threats on the basis of such factors as capabilities, intentions, and past activities. These assessments represent a systematic approach to identifying potential threats before they materialize. However, even if updated often, threat assessments might not adequately capture some emerging threats.  The risk management approach therefore uses the vulnerability and criticality assessments discussed below as additional input to the decision-making process.\nVulnerability assessments identify weaknesses that may be exploited by identified threats and suggest options that address those weaknesses.  For example, a vulnerability assessment might reveal weaknesses in an organization\u2019s security systems, financial management processes, computer networks, or unprotected key infrastructure such as water supplies, bridges, and tunnels.  In general, teams of experts skilled in such areas as structural engineering, physical security, and other disciplines conduct these assessments.\nCriticality assessments evaluate and prioritize important assets and functions in terms of such factors as mission and significance as a target. For example, certain power plants, bridges, computer networks, or population centers might be identified as important to national security, economic security, or public health and safety.  Criticality assessments provide a basis for identifying which assets and structures are relatively more important to protect from attack. In so doing, the assessments help determine operational requirements and provide information on where to prioritize and target resources while reducing the potential to target resources on lower priority assets.\nWe recognize that a national-level risk management approach that includes balanced assessments of threats, vulnerabilities, and criticality will not be a panacea for all the problems in providing homeland security. However, if applied conscientiously and consistently, a balanced approach\u2014 consistent with the elements I have described\u2014could provide a framework for action.  It would also facilitate multidisciplinary and multi-organizational participation in planning, developing, and implementing programs and strategies to enhance the security of our homeland while applying the resources of the federal government in the most efficient and effective manner possible. Given the tragic events of Tuesday, September 11, 2001, a comprehensive risk management approach that addresses all threats has become an imperative.\nAs this nation implements a strategy for homeland security, we will encounter many of the long-standing performance and accountability challenges being faced throughout the federal government.  For example, we will be challenged to look across the federal government itself to bring more coherence to the operations of many agencies and programs.  We must also address human capital issues to determine if we have the right people with the right skills and knowledge in the right places. Coordination across all levels of government will be required as will adequately defining performance goals and measuring success.  In addressing these issues, we will also need to keep in mind that our homeland security priorities will have to be accomplished against the backdrop of the long-term fiscal challenges that loom just over the 10-year budget window.\n\n\tShort- and Long-Term Fiscal Implications\n\nThe challenges of combating terrorism and otherwise addressing homeland security have come to the fore as urgent claims on the federal budget. As figure 2 shows, our past history suggests that when our national security or the state of the nation\u2019s economy was at issue, we have incurred sizable deficits.  Many would argue that today we are facing both these challenges.  We are fortunate to be facing them at a time when we have some near-term budgetary flexibility. The budgetary surpluses of recent years that were achieved by fiscal discipline and strong economic growth put us in a stronger position to respond both to the events of September 11 and to the economic slowdown than would otherwise have been the case. I ask you to recall the last recession in the early 1990s where our triple-digit deficits  limited us from considering a major fiscal stimulus to jump start the economy due to well- founded fears about the impact of such measures on interest rates that were already quite high.  In contrast, the fiscal restraint of recent years has given us the flexibility we need to both respond to the security crisis and consider short-term stimulus efforts.\nAs we respond to the urgent priorities of today, we need to do so with an eye to the significant long-term fiscal challenges we face just over the 10- year budget horizon.  I know that you and your counterparts in the Senate have given a great deal of thought to how the Congress and the President might balance today\u2019s immediate needs against our long-term fiscal challenges.  This is an important note to sound\u2014while some short-term actions are understandable and necessary, long-term fiscal discipline is still an essential need.\nAs we seek to meet today\u2019s urgent needs, it is important to be mindful of the collective impact of our decisions on the overall short- and long-term fiscal position of the government. For the short term, we should be wary of building in large permanent structural deficits that may drive up interest rates, thereby offsetting the potential economic stimulus Congress provides. For the longer term, known demographic trends (e.g., the aging of our population) and rising health care costs will place increasing claims on future federal budgets\u2013reclaiming the fiscal flexibility necessary to address these and other emerging challenges is a major task facing this generation.\nNone of the changes since September 11 have lessened these long-term pressures on the budget. In fact, the events of September 11 have served to increase our long-range challenges.  The baby boom generation is aging and is projected to enjoy greater life expectancy. As the share of the population over 65 climbs, federal spending on the elderly will absorb larger and ultimately unsustainable shares of the federal budget. Federal health and retirement spending are expected to surge as people live longer and spend more time in retirement.  In addition, advances in medical technology are likely to keep pushing up the cost of providing health care. Absent substantive change in related entitlement programs, we face the potential return of large deficits requiring unprecedented spending cuts in other areas or unprecedented tax increases.\nAs you know, the Director of the Congressional Budget Office (CBO) has recently suggested the possibility of a federal budget deficit in fiscal year 2002, and other budget analysts appear to be in agreement.  While we do not know today what the 10-year budget projections will be in the next updates by CBO and the Office of Management and Budget (OMB), we do know the direction: they will be considerably less optimistic than before September 11, and the long-term outlook will look correspondingly worse. For example, if we assume that the 10-year surpluses CBO projected in August are eliminated, by 2030 absent changes in the structure of Social Security and Medicare, there would be virtually no room for any other federal spending priorities, including national defense, education, and law enforcement.  (See fig. 3.)  The resource demands that come from the events of September 11\u2014and the need to address the gaps these events surfaced\u2014will demand tough choices.  Part of that response must be to deal with the threats to our long-term fiscal health.  Ultimately, restoring our long-term fiscal flexibility will involve both promoting higher long- term economic growth and reforming the federal entitlement programs. When Congress returns for its next session, these issues should be placed back on the national agenda.\nWith this long-term outlook as backdrop, an ideal fiscal response to a short-term economic downturn would be temporary and targeted, and avoid worsening the longer-term structural pressures on the budget. However, you have been called upon not merely to respond to a short-term economic downturn but also to the homeland security needs so tragically highlighted on September 11.  This response will appropriately consist of both temporary and longer-term commitments.  While we might all hope that the struggle against terrorism might be brought to a swift conclusion, prudence dictates that we plan for a longer-term horizon in this complex conflict.\nGiven the long-term fiscal challenge driven by the coming change in our demographics, you might think about the options you face in responding to short-term economic weakness in terms of a range or portfolio of fiscal actions balancing today\u2019s urgent needs with tomorrow\u2019s fiscal challenges. In my testimony last February before the Senate Budget Committee, I suggested that fiscal actions could be described as a continuum by the degree of long-term fiscal risk they present. At one end, debt reduction and entitlement reform actually increase future fiscal flexibility by freeing up resources.  One-time actions\u2014either on the tax or spending side of the budget\u2014may have limited impact on future flexibility.  At the other end of the fiscal risk spectrum, permanent or open-ended fiscal actions on the spending side  or tax side of the budget can reduce future fiscal flexibility\u2014although they may have salutary effects on longer-term economic growth depending on their design and implementation.  I have suggested before that increasing entitlement spending arguably presents the highest risk to our long-range fiscal outlook. Whatever choices the Congress decides to make, approaches should be explored to mitigate risk to the long term.  For example, provisions with plausible expiration dates\u2014on the spending and\/or the tax side\u2014may prompt re-examination taking into account any changes in fiscal circumstances.  In addition, a mix of temporary and permanent actions can also serve to reduce risk.\nAs we move beyond the immediate threats, it will be important for the Congress and the President to take a hard look at competing claims on the federal fisc.  I don\u2019t need to remind this Committee that a big contributor to deficit reduction in the 1990s was the decline in defense spending. Given recent events, it is pretty clear that the defense budget is not a likely source for future budget reductions. (See fig. 4.)\nOnce the economy rebounds, returning to surpluses will take place against the backdrop of greater competition of claims within the budget. The new commitments that we need to undertake to protect this nation against the threats stemming from terrorism will compete with other priorities. Subjecting both new proposals and existing programs to scrutiny would increase the ability to accommodate any new needs.\nA fundamental review of existing programs and operations can create much needed fiscal flexibility to address emerging needs by weeding out programs that have proven to be outdated, poorly targeted or inefficient in their design and management. Many programs were designed years ago to respond to earlier challenges.  Obviously many things have changed.  It should be the norm to reconsider the relevance or \u201cfit\u201d of any federal program or activity in today\u2019s world and for the future.  In fact, we have a stewardship responsibility to both today\u2019s taxpayers and tomorrow\u2019s to reexamine and update our priorities, programs, and agency operations. Given the significant events since the last CBO 10-year budget projections, it is clear that the time has come to conduct a comprehensive review of existing agencies and programs\u2014which are often considered to be \u201cin the base\u201d\u2014while exercising continued prudence and fiscal discipline in connection with new initiatives.\nIn particular, agencies will need to reassess their strategic goals and priorities to enable them to better target available resources to address urgent national preparedness needs.  The terrorist attacks, in fact, may provide a window of opportunity for certain agencies to rethink approaches to longstanding problems and concerns.  For instance, the threat to air travel has already prompted attention to chronic problems with airport security that we and others have been pointing to for years. Moreover, the crisis might prompt a healthy reassessment of our broader transportation policy framework with an eye to improving the integration of air, rail, and highway systems to better move people and goods. Other longstanding problems also take on increased relevance in today\u2019s world. Take, for example, food safety.   Problems such as overlapping and duplicative inspections, poor coordination and the inefficient allocation of resources are not new.  However, they take on a new meaning\u2014and could receive increased attention\u2014given increased awareness of bioterrorism issues.\nGAO has identified a number of areas warranting reconsideration based on program performance, targeting, and costs. Every year, we issue a report identifying specific options, many scored by CBO, for congressional consideration stemming from our audit and evaluation work. This report provides opportunities for (1) reassessing objectives of specific federal programs, (2) improved targeting of benefits and (3) improving the efficiency and management of federal initiatives.\nThis same stewardship responsibility applies to our oversight of the funds recently provided to respond to the events of September 11.  Rapid action in response to an emergency does not eliminate the need for review of how the funds are used.  As you move ahead in the coming years, there will be proposals for new or expanded federal activities, but we must seek to distinguish the infinite variety of \u201cwants\u201d from those investments that have greater promise to effectively address more critical \u201cneeds.\u201d\nIn sorting through these proposals, we might apply certain investment criteria in making our choices. Well-chosen enhancements to the nation\u2019s infrastructure are an important part of our national preparedness strategy. Investments in human capital for certain areas such as intelligence, public health and airport security will also be necessary as well to foster and maintain the skill sets needed to respond to the threats facing us. As we have seen with the airline industry, we may even be called upon to provide targeted and temporary assistance to certain vital sectors of our economy affected by this crisis.  A variety of governmental tools will be proposed to address these challenges\u2014grants, loans, tax expenditures, direct federal administration.  The involvement of a wide range of third parties\u2014state and local governments, nonprofits, private corporations, and even other nations\u2014will be a vital part of the national response as well.\nIn the short term, we have to do what is necessary to get this nation back on its feet and compassionately deal with the human tragedies left in its wake.  However, as we think about our longer-term preparedness and develop a comprehensive homeland security strategy, we can and should select those programs and tools that promise to provide the most cost- effective approaches to achieve our goals. Some of the key questions that should be asked include the following:   Does the proposed activity address a vital national preparedness mission and do the benefits of the proposal exceed its costs?\nTo what extent can the participation of other sectors of the economy, including state and local governments, be considered; and how can we select and design tools to best leverage and coordinate the efforts of numerous governmental and private entities? Is the proposal designed to prevent other sectors or governments from reducing their investments as a result of federal involvement?\nHow can we ensure that the various federal tools and programs addressing the objective are coherently designed and integrated so that they work in a synergistic rather than a fragmented fashion?\nDo proposals to assist critical sectors in the recovery from terrorist attacks appropriately distinguish between temporary losses directly attributable to the crisis and longer-term costs stemming from broader and more enduring shifts in markets and other forces?\nAre the proposal\u2019s time frames, cost projections, and promises realistic in light of past experience and the capacity of administrators at all levels to implement?\nWe will face the challenge of sorting out these many claims on the federal budget without the fiscal benchmarks and rules that have guided us through the years of deficit reduction into surplus. Your job therefore has become much more difficult.\nUltimately, as this Committee recommended on October 4, we should attempt to return to a position of surplus as the economy returns to a higher growth path.  Although budget balance may have been the desired fiscal position in past decades, nothing short of surpluses are needed to promote the level of savings and investment necessary to help future generations better afford the commitments of an aging society.  As you seek to develop new fiscal benchmarks to guide policy, you may want to look at approaches taken by other countries.  Certain nations in the Organization for Economic Cooperation and Development, such as Sweden and Norway, have gone beyond a fiscal policy of balance to one of surplus over the business cycle.  Norway has adopted a policy of aiming for budget surpluses to help better prepare for the fiscal challenges stemming from an aging society.  Others have established a specific ratio of debt to gross domestic product as a fiscal target.\n\n\tConclusion\n\nThe terrorist attack on September 11, 2001, was a defining moment for our nation, our government, and, in some respects, the world.  The initial response by the President and the Congress has shown the capacity of our government to act quickly.  However, it will be important to follow up on these initial steps to institutionalize and sustain our ability to deal with a threat that is widely recognized as a complex and longer-term challenge. As the President and the Congress\u2014and the American people\u2014recognize, the need to improve homeland security is not a short-term emergency. It will continue even if we are fortunate enough to have the threats moved off the front page of our daily papers.\nAs I noted earlier, implementing a successful homeland security strategy will encounter many of the same performance and accountability challenges that we have identified throughout the federal government. These include bringing more coherence to the operations of many agencies and programs, dealing with human capital issues, and adequately defining performance goals and measuring success.\nThe appointment of former Governor Ridge to head an Office of Homeland Security within the Executive Office of the President is a promising first step in marshalling the resources necessary to address our homeland security requirements.  It can be argued, however, that statutory underpinnings and effective congressional oversight are critical to sustaining broad scale initiatives over the long term.  Therefore, as we move beyond the immediate response to the design of a longer-lasting approach to homeland security, I urge you to consider the implications of different structures and statutory frameworks for accountability and your ability to conduct effective oversight.  Needless to say, I am also interested in the impact of various approaches on GAO\u2019s ability to assist you in this task.\nYou are faced with a difficult challenge: to respond to legitimate short- term needs while remaining mindful of our significant and continuing long- term fiscal challenges.  While the Congress understandably needs to focus on the current urgent priorities of combating international terrorism, securing our homeland, and stimulating our economy, it ultimately needs to return to a variety of other challenges, including our long-range fiscal challenge.  Unfortunately, our long-range challenge has become more difficult, and our window of opportunity to address our entitlement challenges is narrowing.  As a result it will be important to return to these issues when the Congress reconvenes next year.  We in GAO stand ready to help you address these important issues both now and in the future.\nI would be happy to answer any questions that you may have.\n\nAppendix I: Prior GAO Work Related to Homeland Security\n\nGAO has completed several congressionally requested efforts on numerous topics related to homeland security. Some of the work that we have done relates to the areas of combating terrorism, aviation security, transnational crime, protection of critical infrastructure, and public health. The summaries describe recommendations made before the President established the Office of Homeland Security.\n\n\tCombating Terrorism\n\nGiven concerns about the preparedness of the federal government and state and local emergency responders to cope with a large-scale terrorist attack involving the use of weapons of mass destruction, we reviewed the plans, policies, and programs for combating domestic terrorism involving weapons of mass destruction that were in place prior to the tragic events of September 11. Our report, Combating Terrorism: Selected Challenges and Related Recommendations, which was issued September 20, 2001, updates our extensive evaluations in recent years of federal programs to combat domestic terrorism and protect critical infrastructure.\nProgress has been made since we first began looking at these issues in 1995. Interagency coordination has improved, and interagency and intergovernmental command and control now is regularly included in exercises. Agencies also have completed operational guidance and related plans. Federal assistance to state and local governments to prepare for terrorist incidents has resulted in training for thousands of first responders, many of whom went into action at the World Trade Center and at the Pentagon on September 11, 2001.\nWe also recommended that the President designate a single focal point with responsibility and authority for all critical functions necessary to provide overall leadership and coordination of federal programs to combat terrorism. The focal point should oversee a comprehensive national-level threat assessment on likely weapons, including weapons of mass destruction, that might be used by terrorists and should lead the development of a national strategy to combat terrorism and oversee its implementation. With the President\u2019s appointment of the Homeland Security Adviser, that step has been taken.  Furthermore, we recommended that the Assistant to the President for Science and Technology complete a strategy to coordinate research and development to improve federal capabilities and avoid duplication.\n\n\tAviation Security\n\nSince 1996, we have presented numerous reports and testimonies and identified numerous weaknesses that we found in the commercial aviation security system. For example, we reported that airport passenger screeners do not perform well in detecting dangerous objects, and Federal Aviation Administration tests showed that as testing gets more realistic\u2014 that is, as tests more closely approximate how a terrorist might attempt to penetrate a checkpoint\u2014screener performance declines significantly. In addition, we were able to penetrate airport security ourselves by having our investigators create fake credentials from the Internet and declare themselves law enforcement officers. They were then permitted to bypass security screening and go directly to waiting passenger aircraft. In 1996, we outlined a number of steps that required immediate action, including identifying vulnerabilities in the system; developing a short-term approach to correct significant security weaknesses; and developing a long-term, comprehensive national strategy that combines new technology, procedures, and better training for security personnel.\n\n\tCyber Attacks on Critical Infrastructure\n\nFederal critical infrastructure-protection initiatives have focused on preventing mass disruption that can occur when information systems are compromised because of computer-based attacks. Such attacks are of growing concern due to the nation\u2019s increasing reliance on interconnected computer systems that can be accessed remotely and anonymously from virtually anywhere in the world. In accordance with Presidential Decision Directive 63, issued in 1998, and other information-security requirements outlined in laws and federal guidance, an array of efforts has been undertaken to address these risks. However, progress has been slow. For example, federal agencies have taken initial steps to develop critical infrastructure plans, but independent audits continue to identify persistent, significant information security weaknesses that place many major federal agencies\u2019 operations at high risk of tampering and disruption. In addition, while federal outreach efforts have raised awareness and prompted information sharing among government and private sector entities, substantive analysis of infrastructure components to identify interdependencies and related vulnerabilities has been limited. An underlying deficiency impeding progress is the lack of a national plan that fully defines the roles and responsibilities of key participants and establishes interim objectives. Accordingly, we have recommended that the Assistant to the President for National Security Affairs ensure that the government\u2019s critical infrastructure strategy clearly define specific roles and responsibilities, develop interim objectives and milestones for achieving adequate protection, and define performance measures for accountability. The administration has been reviewing and considering adjustments to the government\u2019s critical infrastructure-protection strategy and last week, announced appointment of a Special Advisor to the President for Cyberspace Security.\n\n\tInternational Crime Control\n\nOn September 20, 2001, we publicly released a report on international crime control and reported that individual federal entities have developed strategies to address a variety of international crime issues, and for some crimes, integrated mechanisms exist to coordinate efforts across agencies. However, we found that without an up-to-date and integrated strategy and sustained top-level leadership to implement and monitor the strategy, the risk is high that scarce resources will be wasted, overall effectiveness will be limited or not known, and accountability will not be ensured. We recommended that the Assistant to the President for National Security Affairs take appropriate action to ensure sustained executive-level coordination and assessment of multi-agency federal efforts in connection with international crime, including efforts to combat money laundering. Some of the individual actions we recommended were to update the existing governmentwide international crime threat assessment, to update or develop a new International Crime Control Strategy to include prioritized goals as well as implementing objectives, and to designate responsibility for executing the strategy and resolving any jurisdictional issues.\n\n\tPublic Health\n\nThe spread of infectious diseases is a growing concern. Whether a disease outbreak is intentional or naturally occurring, the public health response to determine its causes and contain its spread is largely the same. Because a bioterrorist event could look like a natural outbreak, bioterrorism preparedness rests in large part on public health preparedness.  We reported in September 2001 that concerns remain regarding preparedness at state and local levels and that coordination of federal terrorism research, preparedness, and response programs is fragmented.\nIn our review last year of the West Nile virus outbreak in New York, we also found problems related to communication and coordination among and between federal, state, and local authorities. Although this outbreak was relatively small in terms of the number of human cases, it taxed the resources of one of the nation\u2019s largest local health departments. In 1999, we reported that surveillance for important emerging infectious diseases is not comprehensive in all states, leaving gaps in the nation\u2019s surveillance network. Laboratory capacity could be inadequate in any large outbreak, with insufficient trained personnel to perform laboratory tests and insufficient computer systems to rapidly share information. Earlier this year, we reported that federal agencies have made progress in improving their management of the stockpiles of pharmaceutical and medical supplies that would be needed in a bioterrorist event, but that some problems still remained. There are also widespread concerns that hospital emergency departments generally are not prepared in an organized fashion to treat victims of biological terrorism and that hospital emergency capacity is already strained, with emergency rooms in major metropolitan areas routinely filled and unable to accept patients in need of urgent care. To improve the nation\u2019s public health surveillance of infectious diseases and help ensure adequate public protection, we recommended that the Director of the Centers for Disease Control and Prevention lead an effort to help federal, state, and local public health officials achieve consensus on the core capacities needed at each level of government. We advised that consensus be reached on such matters as the number and qualifications of laboratory and epidemiological staff as well as laboratory and information technology resources.\n\nRelated GAO Products\n\nHomeland Security: A Risk Management Approach Can Guide Preparedness Efforts (GAO-02-208T, Oct. 31, 2001).\nHomeland Security: Need to Consider VA\u2019s Role in Strengthening Federal Preparedness (GAO-02-145T, Oct. 15, 2001).\nHomeland Security: Key Elements of a Risk Management Approach (GAO-02-150T, Oct. 12, 2001).\nHomeland Security: A Framework for Addressing the Nation\u2019s Efforts, (GAO-01-1158T, Sept. 21, 2001).\n\n\tCombating Terrorism\n\nCombating Terrorism: Considerations for Investing Resources in Chemical and Biological Preparedness (GAO-02-162T, Oct. 17, 2001).\nCombating Terrorism:  Selected Challenges and Related Recommendations  (GAO-01-822, Sept. 20, 2001).\nCombating Terrorism:  Actions Needed to Improve DOD\u2019s Antiterrorism Program Implementation and Management (GAO-01-909, Sept. 19, 2001).\nCombating Terrorism:  Comments on H.R. 525 to Create a President\u2019s Council on Domestic Preparedness (GAO-01-555T, May 9, 2001).\nCombating Terrorism:  Observations on Options to Improve the Federal Response (GAO-01-660T, Apr. 24, 2001).\nCombating Terrorism:  Accountability Over Medical Supplies Needs Further Improvement (GAO-01-463, Mar. 30, 2001).\nCombating Terrorism:  Comments on Counterterrorism Leadership and National Strategy (GAO-01-556T, Mar. 27, 2001).\nCombating Terrorism:  FEMA Continues to Make Progress in Coordinating Preparedness and Response (GAO-01-15, Mar. 20, 2001).\nCombating Terrorism:  Federal Response Teams Provide Varied Capabilities; Opportunities Remain to Improve Coordination (GAO-01- 14, Nov. 30, 2000).\nCombating Terrorism:  Linking Threats to Strategies and Resources (GAO\/T-NSIAD-00-218, July 26, 2000).\nCombating Terrorism:  Action Taken but Considerable Risks Remain for Forces Overseas (GAO\/NSIAD-00-181, July 19, 2000).\nWeapons of Mass Destruction:  DOD\u2019s Actions to Combat Weapons Use Should Be More Integrated and Focused (GAO\/NSIAD-00-97, May 26, 2000).\nCombating Terrorism:  Comments on Bill H.R. 4210 to Manage Selected Counterterrorist Programs (GAO\/T-NSIAD-00-172, May 4, 2000).\nCombating Terrorism:  How Five Foreign Countries Are Organized to Combat Terrorism (GAO\/NSIAD-00-85, Apr. 7, 2000).\nCombating Terrorism:  Issues in Managing Counterterrorist Programs (GAO\/T-NSIAD-00-145, Apr. 6, 2000).\nCombating Terrorism:  Need to Eliminate Duplicate Federal Weapons of Mass Destruction Training (GAO\/NSIAD-00-64, Mar. 21, 2000).\nCombating Terrorism:  Chemical and Biological Medical Supplies are Poorly Managed (GAO\/HEHS\/AIMD-00-36, Oct. 29, 1999).\nCombating Terrorism:  Observations on the Threat of Chemical and Biological Terrorism (GAO\/T-NSIAD-00-50, Oct. 20, 1999).\nCombating Terrorism:  Need for Comprehensive Threat and Risk Assessments of Chemical and Biological Attack (GAO\/NSIAD-99-163, Sept. 7, 1999).\nCombating Terrorism:  Analysis of Federal Counterterrorist Exercises (GAO\/NSIAD-99-157BR, June 25, 1999).\nCombating Terrorism: Observations on Growth in Federal Programs (GAO\/T-NSIAD-99-181, June 9, 1999).\nCombating Terrorism: Analysis of Potential Emergency Response Equipment and Sustainment Costs (GAO\/NSIAD-99-151, June 9, 1999).\nCombating Terrorism:  Use of National Guard Response Teams Is Unclear (GAO\/NSIAD-99-110, May 21, 1999).\nCombating Terrorism:  Issues to Be Resolved to Improve Counterterrorist Operations (GAO\/NSIAD-99-135, May 13, 1999).\nCombating Terrorism:  Observations on Biological Terrorism and Public Health Initiatives (GAO\/T-NSIAD-99-112, Mar. 16, 1999).\nCombating Terrorism:  Observations on Federal Spending to Combat Terrorism (GAO\/T-NSIAD\/GGD-99-107, Mar. 11, 1999).\nCombating Terrorism:  FBI's Use of Federal Funds for Counterterrorism-Related Activities (FYs 1995-98) (GAO\/GGD-99-7, Nov. 20, 1998).\nCombating Terrorism:  Opportunities to Improve Domestic Preparedness Program Focus and Efficiency (GAO\/NSIAD-99-3, Nov. 12, 1998).\nCombating Terrorism:  Observations on the Nunn-Lugar-Domenici Domestic Preparedness Program (GAO\/T-NSIAD-99-16, Oct. 2, 1998).\nCombating Terrorism:  Observations on Crosscutting Issues (GAO\/T- NSIAD-98-164, Apr. 23, 1998).\nCombating Terrorism:  Threat and Risk Assessments Can Help Prioritize and Target Program Investments (GAO\/NSIAD-98-74, Apr. 9, 1998).\nCombating Terrorism:  Spending on Governmentwide Programs Requires Better Management and Coordination (GAO\/NSIAD-98-39, Dec. 1, 1997).\nCombating Terrorism:  Federal Agencies' Efforts to Implement National Policy and Strategy (GAO\/NSIAD-97-254, Sept. 26, 1997).\nCombating Terrorism:  Status of DOD Efforts to Protect Its Forces Overseas (GAO\/NSIAD-97-207, July 21, 1997).\nTerrorism and Drug Trafficking:  Responsibilities for Developing Explosives and Narcotics Detection Technologies (GAO\/NSIAD-97-95, Apr. 15, 1997). Federal Law Enforcement:  Investigative Authority and Personnel at 13 Agencies (GAO\/GGD-96-154, Sept. 30, 1996).\nTerrorism and Drug Trafficking:  Technologies for Detecting Explosives and Narcotics (GAO\/NSIAD\/RCED-96-252, Sept. 4, 1996).\nTerrorism and Drug Trafficking: Threats and Roles of Explosives and Narcotics Detection Technology (GAO\/NSIAD\/RCED-96-76BR, Mar. 27, 1996).\n\n\tAviation Security\n\nAviation Security: Vulnerabilities in, and Alternatives for, Preboard Screening Security Operations, (GAO-01-1171T, Sept. 25, 2001).\nAviation Security: Weaknesses in Airport Security and Options for Assigning Screening Responsibilities, (GAO-01-1165T, Sept. 21, 2001).\nAviation Security: Terrorist Acts Demonstrate Urgent Need to Improve Security at the Nation\u2019s Airports (GAO-01-1162T, Sept. 20, 2001).\nResponses of Federal Agencies and Airports We Surveyed About Access Security Improvements (GAO-01-1069R, Aug. 31, 2001).\nAviation Security: Additional Controls Needed to Address Weaknesses in Carriage of Weapons Regulations (GAO\/RCED-00-181, Sept. 29, 2000).\nAviation Security:  Long-Standing Problems Impair Airport Screeners\u2019 Performance (GAO\/RCED-00-75, June 28, 2000).\nAviation Security: Breaches at Federal Agencies and Airports (GAO\/T- OSI-00-10, May 25, 2000).\nAviation Security: Vulnerabilities Still Exist in the Aviation Security System (GAO\/T-RCED\/AIMD-00-142, Apr. 6, 2000).\nAviation Security: Slow Progress in Addressing Long-Standing Screener Performance Problems (GAO\/T-RCED-00-125, Mar. 16, 2000).\nAviation Security: FAA\u2019s Actions to Study Responsibilities and Funding for Airport Security and to Certify Screening Companies (GAO\/RCED- 99-53, Feb. 25, 1999).\nAviation Security: Progress Being Made, but Long-term Attention Is Needed (GAO\/T-RCED-98-190, May 14, 1998).\nAviation Security:  FAA's Procurement of Explosives Detection Devices (GAO\/RCED-97-111R, May 1, 1997).\nAviation Safety and Security: Challenges to Implementing the Recommendations of the White House Commission on Aviation Safety and Security (GAO\/T-RCED-97-90, Mar. 5, 1997).\nAviation Security: Technology\u2019s Role in Addressing Vulnerabilities (GAO\/T-RCED\/NSIAD-96-262, Sept. 19, 1996).\nAviation Security:  Urgent Issues Need to Be Addressed (GAO\/T- RCED\/NSIAD-96-151, Sept. 11, 1996).\nAviation Security:  Immediate Action Needed to Improve Security (GAO\/T-RCED\/NSIAD-96-237, Aug. 1, 1996).\nAviation Security: Development of New Security Technology Has Not Met Expectations (GAO\/RCED-94-142, May 19, 1994).\nAviation Security:  Additional Actions Needed to Meet Domestic and International Challenges (GAO\/RCED-94-38, Jan. 27, 1994).\n\n\tCyber Attacks on Critical Infrastructure\n\nInformation Sharing: Practices That Can Benefit Critical Infrastructure Protection (GAO-02-24, Oct. 15, 2001).\nCritical Infrastructure Protection: Significant Challenges in Safeguarding Government and Privately-Controlled Systems from Computer-Based Attacks, (GAO-01-1168T, Sept. 26, 2001).\nCritical Infrastructure Protection:  Significant Challenges in Protecting Federal Systems and Developing Analysis and Warning Capabilities (GAO-01-1132T, Sept. 12, 2001).\nInformation Security: Serious and Widespread Weaknesses Persist at Federal Agencies (GAO\/AIMD-00-295, Sept. 6, 2000).\nCritical Infrastructure Protection:  Significant Challenges in Developing Analysis, Warning, and Response Capabilities (GAO-01-769T, May 22, 2001).\nCritical Infrastructure Protection:  Significant Challenges in Developing National Capabilities (GAO-01-232, Apr. 25, 2001).\nCritical Infrastructure Protection:  Challenges to Building a Comprehensive Strategy for Information Sharing and Coordination (GAO\/T-AIMD-00-268, July 26, 2000).\nSecurity Protection:  Standardization Issues Regarding Protection of Executive Branch Officials (GAO\/GGD\/OSI-00-139, July 11, 2000 and GAO\/T-GGD\/OSI-00-177, July 27, 2000).\nCritical Infrastructure Protection:  Comments on the Proposed Cyber Security Information Act of 2000 (GAO\/T-AIMD-00-229, June 22, 2000).\nCritical Infrastructure Protection:  \u201cI LOVE YOU\u201d Computer Virus Highlights Need for Improved Alert and Coordination Capabilities (GAO\/T-AIMD-00-181, May 18, 2000).\nCritical Infrastructure Protection:  National Plan for Information Systems Protection (GAO\/AIMD-00-90R, Feb. 11, 2000).\nCritical Infrastructure Protection:  Comments on the National Plan for Information Systems Protection (GAO\/T-AIMD-00-72, Feb. 1, 2000).\nCritical Infrastructure Protection:  Fundamental Improvements Needed to Assure Security of Federal Operations (GAO\/T-AIMD-00-7, Oct. 6, 1999).\nCritical Infrastructure Protection:  The Status of Computer Security at the Department of Veterans Affairs (GAO\/AIMD-00-5, Oct. 4, 1999).\nCritical Infrastructure Protection:  Comprehensive Strategy Can Draw on Year 2000 Experiences (GAO\/AIMD-00-1, Oct. 1, 1999).\nInformation Security:  The Proposed Computer Security Enhancement Act of 1999 (GAO\/T-AIMD-99-302, Sept. 30, 1999).\nInformation Security:  NRC\u2019s Computer Intrusion Detection Capabilities (GAO\/AIMD-99-273R, Aug. 27, 1999).\nElectricity Supply: Efforts Underway to Improve Federal Electrical Disruption Preparedness (GAO\/RCED-92-125, Apr. 20, 1992)\n\n\tPublic Health\n\nAnthrax Vaccine: Changes to the Manufacturing Process (GAO-02-181T, Oct. 23, 2001).\nBioterrorism: Public Health and Medical Preparedness, (GAO-02-141T, Oct. 9, 2001).\nBioterrorism: Coordination and Preparedness, (GAO-02-129T, Oct. 5, 2001).\nBioterrorism: Federal Research and Preparedness Activities (GAO-01- 915, Sept. 28, 2001).\nWest Nile Virus Outbreak:  Lessons for Public Health Preparedness (GAO\/HEHS-00-180, Sept. 11, 2000).\nFood Safety:  Agencies Should Further Test Plans for Responding to Deliberate Contamination (GAO\/RCED-00-3, Oct. 27, 1999).\nEmerging Infectious Diseases: Consensus on Needed Laboratory Capacity Could Strengthen Surveillance (GAO\/HEHS-99-26, Feb. 5, 1999).\n\n\tInternational Crime Control\n\nInternational Crime Controls: Sustained Executive Level Coordination of Federal Response Needed (GAO-01-629, Sept. 20, 2001).\nAlien Smuggling: Management and Operational Improvements Needed to Address Growing Problem (GAO\/GGD-00-103, May 1, 2000).\nCriminal Aliens: INS Efforts to Identify and Remove Imprisoned Aliens Continue to Need Improvement (GAO\/T-GGD-99-47, Feb. 25, 1999).\nCriminal Aliens: INS Efforts to Remove Imprisoned Aliens Continue to Need Improvement (GAO\/GGD-99-3, Oct. 16, 1998).\n\n\tImmigration and Naturalization\n\nImmigration and Naturalization Service: Overview of Management and Program Challenges (GAO\/T-GGD-99-148, July 29, 1999).\nIllegal Immigration: Status of Southwest Border Strategy Implementation (GAO\/GGD-99-44, May 19, 1999).\nIllegal Immigration: Southwest Border Strategy Results Inconclusive; More Evaluation Needed (GAO\/GGD-98-21, Dec. 11, 1997).","output":"What GAO Found\n\nThe United States now confronts a range of diffuse threats that put increased destructive power into the hands of small states, groups, and individuals. These threats include terrorist attacks on critical infrastructure and computer systems, the potential use of weapons of mass destruction, and the spread of infectious diseases. Addressing these challenges will require leadership to develop and implement a homeland security strategy in coordination with all relevant partners, and to marshal and direct the necessary resources. The recent establishment of the Office of Homeland Security is a good first step, but questions remain about how this office will be structured, what authority its Director will have, and how this effort can be institutionalized and sustained over time. Although homeland security is an urgent and vital national priority, the United States still must address short-term and long-term fiscal challenges that were present before September 11."}
{"id":"crs_R44227","pid":"crs_R44227_0","input":"T he Internet of Things (IoT) is a complex, often poorly understood phenomenon. The term is more than a decade old, but interest has grown considerably over the last few years as applications have increased. The impacts of the IoT on the economy and society more generally are expected by many to grow substantially. This report was developed to assist Congress in responding to some commonly asked questions about it:\n\" What Is the Internet of Things (IoT)? \" \" How Does the IoT Work? \" \" What Impacts Will the IoT Have? \" \" What Is the Current Federal Role? \" \" What Issues Might Affect the Development and Implementation of the IoT? \" \" What Actions Has Congress Taken? \" \" Where Can I Find Additional Resources on This Topic? \"\n\n\tWhat Is the Internet of Things (IoT)?\n\nWhen people talk about the Internet, they are usually referring to the electronic network that permits computers around the world to communicate with each other. What, then, is the IoT? There is no universally agreed-upon definition, but generally, the term is used to describe networks of objects that are not themselves computers but that have embedded components that connect to the Internet. \"Things\" may include, for example, smart meters, fitness trackers, personal vehicles, home appliances, medical devices, and even clothing used by individual consumers. They may also include embedded devices in roadways and in other components of infrastructure such as electric grids, manufacturing plants and other buildings, farms, and virtually any other object, element, or system for which remote communications, control, or data collection and processing might be useful. \nWhile fixed and mobile computing devices such as desktop computers, smartphones, and tablets are generally not considered to be IoT objects, smartphones in particular have features such as motion and position sensors that blur the distinctions. Some smartphone applications, for example, enable them to be used in fitness tracking and other health monitoring.\nIn other words, the IoT potentially includes huge numbers and kinds of interconnected objects. In practice, IoT refers not to a simple or uniform network of objects but rather to a complex collection of objects and networks. Specific dimensions of the IoT may be referred to by terms such as smart grid, connected cities, and Industrial Internet. Other terms may also be used in the context of IoT to denote related concepts such as cyber-physical systems and the Internet of Everything.\nThe IoT is often considered the next major stage in the evolution of cyberspace. The first electronic computers were developed in the 1940s, but 40 years passed before connecting computers through wired devices began to spread in the 1980s. The first decade of the 21 st century saw the next stage, marked by the rapid spread of smartphones and other mobile devices that use wireless communications, as well as social media, big-data analytics, and cloud computing. Building on those advances, connections between two or more machines (M2M) and between machines and people are expected by many observers to lead to huge growth in the IoT by 2020.\n\n\tHow Does the IoT Work?\n\nThe IoT is not separate from the Internet, but rather, a potentially huge extension and expansion of it. The \"things\" that form the basis of the IoT are objects. They could be virtually anything\u2014streetlights, thermostats, electric meters, fitness trackers, factory equipment, automobiles, unmanned aircraft systems (UASs or drones), or even cows or sheep in a field. What makes an object part of the IoT is embedded or attached computer chips or similar components that give the object both a unique identifier and Internet connectivity. Objects with such components are often called \"smart\"\u2014such as smart meters and smart cars.\nInternet connectivity allows a smart object to communicate with computers and with other smart objects. Connections of smart objects to the Internet can be wired, such as through Ethernet cables, or wireless, such as via a Wi-Fi or cellular network.\nTo enable precise communications, each IoT object must be uniquely identifiable. That is accomplished through an Internet Protocol (IP) address, a number assigned to each Internet-connected device, whether a desktop computer, a mobile phone, a printer, or an IoT object. Those IP addresses ensure that the device or object sending or receiving information is correctly identified.\nWhat kinds of information do IoT objects communicate? The answer depends on the nature of the object, and it can be simple or complex. For example, a smart thermometer might have only one sensor, used to communicate ambient temperature to a remote weather-monitoring center. A wireless medical device might, in contrast, use various sensors to communicate a person's body temperature, pulse, blood pressure, and other variables to a medical service provider via a computer or mobile phone. \nSmart objects can also be involved in command networks. For example, industrial control systems can adjust manufacturing processes based on input from both other IoT objects and human operators. Network connectivity can permit such operations to be performed in \"real time\"\u2014that is, almost instantaneously.\nSmart objects can form systems that communicate information and commands among themselves, usually in concert with computers they connect to. This kind of communication enables the use of smart systems in homes, vehicles, factories, and even entire cities. \nSmart systems allow for automated and remote control of many processes. A smart home can permit remote control of lighting, security, HVAC (heating, ventilating, and air conditioning), and appliances. In a smart city, an intelligent transportation system (ITS) may permit vehicles to communicate with other vehicles and roadways to determine the fastest route to a destination, avoiding traffic jams, and traffic signals can be adjusted based on congestion information received from cameras and other sensors. Buildings might automatically adjust electric usage, based on information sent from remote thermometers and other sensors. An Industrial Internet application can permit companies to monitor production systems and adjust processes, remotely control and synchronize machinery operations, track inventory and supply chains, and perform other tasks.\nIoT connections and communications can be created across a broad range of objects and networks and can transform previously independent processes into integrated systems. These integrated systems can potentially have substantial effects on homes and communities, factories and cities, and every sector of the economy, both domestically and globally.\n\n\tWhat Impacts Will the IoT Have?\n\nThe IoT may significantly affect many aspects of the economy and society, although the full extent and nature of its eventual impacts remains uncertain. Many observers predict that the growth of the IoT will bring positive benefits through enhanced integration, efficiency, and productivity across many sectors of the U.S. and global economies. Among those commonly mentioned are agriculture, energy, health care, manufacturing, and transportation. Significant impacts may also be felt more broadly on economic growth, infrastructure and cities, and individual consumers. However, both policy and technical challenges, including security and privacy issues, might inhibit the growth and impact of IoT innovations.\n\n\t\tEconomic Growth\n\nSeveral economic analyses have predicted that the IoT will contribute significantly to economic growth over the next decade, but the predictions vary substantially in magnitude. The current global IoT market has been valued at about $2 trillion, with estimates of its predicted value over the next 5 to 10 years varying from $4 trillion to $11 trillion. Such variability demonstrates the difficulty of making economic forecasts in the face of various uncertainties, including a lack of consensus among researchers about exactly what the IoT is and how it will develop.\n\n\t\tEconomic Sectors\n\n\t\t\tAgriculture\n\nThe IoT can be leveraged by the agriculture industry through precision agriculture, with the goal of optimizing production and efficiency while reducing costs and environmental impacts. For farming operations, it involves analysis of detailed, often real-time data on weather, soil and air quality, water supply, pest populations, crop maturity, and other factors such as the cost and availability of equipment and labor. Field sensors test soil moisture and chemical balance, which can be coupled with location technologies to enable precise irrigation and fertilization. Drones and satellites can be used to take detailed images of fields, giving farmers information about crop yield, nutrient deficiencies, and weed locations. For ranching and animal operations, radio frequency identification (RFID) chips and electronic identification readers (EID) help monitor animal movements, feeding patterns, and breeding capabilities, while maintaining detailed records on individual animals.\n\n\t\t\tEnergy\n\nWithin the energy sector, the IoT may impact both production and delivery, for example through facilitating monitoring of oil wellheads and pipelines. When IoT components are embedded into parts of the electrical grid, the resulting infrastructure is commonly referred to as the \"smart grid.\" This use of IoT enables greater control by utilities over the flow of electricity and can enhance the efficiency of grid operations. It can also expedite the integration of microgenerators into the grid.\nSmart-grid technology can also provide consumers with greater knowledge and control of their energy usage through the use of smart meters in the home or office. Connection of smart meters to a building's HVAC, lighting, and other systems can result in \"smart buildings\" that integrate the operation of those systems. Smart buildings use sensors and other data to automatically adjust room temperatures, lighting, and overall energy usage, resulting in greater efficiency and lower energy cost. Information from adjacent buildings may be further integrated to provide additional efficiencies in a neighborhood or larger division in a city.\n\n\t\t\tHealth Care\n\nThe IoT has many applications in the health care field, in both health monitoring and treatment, including telemedicine and telehealth. Applications may involve the use of medical technology and the Internet to provide long-distance health care and education. Medical devices\u2014which can be wearable or nonwearable, or even implantable, injectable, or ingestible \u2014can permit remote tracking of a patient's vital signs, chronic conditions, or other indicators of health and wellness. Wireless medical devices may be used not only in hospital settings but also in remote monitoring and care, freeing patients from sustained or recurring hospital visits. Some experts have stated that advances in healthcare IoT applications will be important for providing affordable, quality care to the aging U.S. population.\n\n\t\t\tManufacturing\n\nIntegration of IoT technologies into manufacturing and supply chain logistics is predicted to have a transformative effect on the sector. The biggest impact may be realized in optimization of operations, making manufacturing processes more efficient. Efficiencies can be achieved by connecting components of factories to optimize production, but also by connecting components of inventory and shipping for supply chain optimization. Another application is predictive maintenance, which uses sensors to monitor machinery and factory infrastructure for damage. Resulting data can enable maintenance crews to replace parts before potentially dangerous and\/or costly malfunctions occur.\n\n\t\t\tTransportation\n\nTransportation systems are becoming increasingly connected. New motor vehicles are equipped with features such as global positioning systems (GPS) and in-vehicle entertainment, as well as advanced driver assistance systems (ADAS), which utilize sensors in the vehicle to assist the driver, for example with parking and emergency braking. Further connection of vehicle systems enables fully autonomous or self-driving automobiles, which are predicted to be commercialized in the next 5-20 years. \nAdditionally, IoT technologies can allow vehicles within and across modes\u2014including cars, buses, trains, airplanes, and unmanned aerial vehicles (drones)\u2014to \"talk\" to one another and to components of the IoT infrastructure, creating intelligent transportation systems (ITS). Potential benefits of ITS may include increased safety and collision avoidance, optimized traffic flows, and energy savings, among others.\n\n\t\t\tInfrastructure and Smart Cities\n\nThe capabilities of the smart grid, smart buildings, and ITS combined with IoT components in other public utilities\u2014such as roadways, sewage and water transport and treatment, public transportation, and waste removal\u2014can contribute to more integrated and functional infrastructure, especially in cities. For example, traffic authorities can use cameras and embedded sensors to manage traffic flow and help reduce congestion. IoT components embedded in street lights or other infrastructure elements can provide functions such as advanced lighting control, environmental monitoring, and even assistance for drivers in finding parking spaces. Smart garbage cans can signal waste removal teams when they are full, streamlining the routes that garbage trucks take.\nThis integration of infrastructure and service components is increasingly referred to as smart cities, or other terms such as connected, digital, or intelligent cities or communities. A number of cities in the United States and elsewhere have developed smart-city initiatives. \nAs with IoT and other popular technology terms, there is no established consensus definition or set of criteria for characterizing what a smart city is. Specific characterizations vary widely, but in general they involve the use of IoT and related technologies to improve energy, transportation, governance, and other municipal services for specified goals such as sustainability or improved quality of life. The related technologies include \nsocial media (such as Facebook and Twitter), mobile computing (such as smartphones and wearable devices), data analytics (big data\u2014the processing and use of very large data sets; and open data\u2014databases that are publicly accessible), and cloud computing (the delivery of computing services from a remote location, analogous to the way utilities such as electricity are provided). \nTogether, these are sometimes called SMAC.\n\n\t\tSocial and Cultural Impacts\n\nThe IoT may create webs of connections that will fundamentally transform the way people and things interact with each other. The emerging cyberspace platform created by the IoT and SMAC has been described as potentially making cities \"like 'computers' in open air,\" where citizens engage with the city \"in a real-time and ongoing loop of information.\"\nSome observers have proposed that the growth of IoT will result in a hyperconnected world in which the seamless integration of objects and people will cause the Internet to disappear as a separate phenomenon. In such a world, cyberspace and human space would seem to effectively merge into a single environment, with unpredictable but potentially substantial societal and cultural impacts.\n\n\tWhat Is the Current Federal Role?\n\nThere is no single federal agency that has overall responsibility for the IoT, just as there is no one agency with overall responsibility for cyberspace. Federal agencies may find the IoT useful in helping them fulfill their missions through a variety of applications such as those discussed in this report and elsewhere. Each agency is responsible under various laws and regulations for the functioning and security of its own IoT, although some technologies, such as drones, may also fall under some aspects of the jurisdiction of other agencies.\nVarious agencies have regulatory, sector-specific, and other mission-related responsibilities that involve aspects of IoT. For example, entities that use wireless communications for their IoT devices will be subject to allocation rules for the portions of the electromagnetic spectrum that they use. \nThe Federal Communications Commission (FCC) allocates and assigns spectrum for nonfederal entities. In the Department of Commerce , the National Telecommunications and Information Administration (NTIA) fulfills that function for federal entities, and the National Institute of Standards and Technology (NIST) creates standards, develops new technologies, and provides best practices for the Internet and Internet-enabled devices. The Federal Trade Commission (FTC) regulates and enforces consumer protection policies, including for privacy and security of consumer IoT devices. The Department of Homeland Security (DHS) is responsible for coordinating security for the 16 critical infrastructure sectors. Many of those sectors use industrial control systems (ICS), which are often connected to the Internet, and the DHS National Cybersecurity and Communications Integration Center (NCCIC) has an ICS Cyber Emergency Response Team (ICS-CERT) to help critical-infrastructure entities address ICS cybersecurity issues. The Food and Drug Administration (FDA) also has responsibilities with respect to the cybersecurity of Internet-connected medical devices. The Department of Justice (DOJ) addresses law-enforcement aspects of IoT, including cyberattacks, unlawful exfiltration of data from devices and\/or networks, and investigation and prosecution of other computer and intellectual property crimes. Relevant activities at the Department of Energy (DOE) include those associated with developing high-performance and green buildings, and other energy-related programs, including those related to smart electrical grids. The Department of Transportation (DOT) has established an Intelligent Transportation Systems Joint Program Office (ITS JPO) to coordinate various programs and activities throughout DOT relating to the development and deployment of connected vehicles and systems, involving all modes of surface transportation. DOT mode-specific agencies also engage in ITS activities. The Federal Aviation Administration (FAA) is involved in regulation and other activities relating to unmanned aerial vehicles (UAVs) and commercial systems (UAS). The Department of Defense was a pioneer in the development of much of the foundational technology for the IoT. Most of its IoT deployment has related to its combat mission, both directly and for logistical and other support.\nIn addition to the activities described above, several agencies are engaged in research and development (R&D) related to the IoT. \nLike NIST, the National Science Foundation (NSF) engages in cyber-physical systems research and other activities that cut across various IoT applications. The Networking and Information Technology Research and Development Program (NITRD), under the Office of Science and Technology Policy (OSTP) coordinates federal agency R&D in networking and information technology. The NITRD Cyber Physical Systems Senior Steering Group \"coordinates programs, budgets and policy recommendations\" for IoT R&D. Other agencies involved in such R&D include the Food and Drug Administration (FDA), the National Aeronautics and Space Administration (NASA), the National Institutes of Health (NIH), the Department of Veterans Affairs (VA), and several DOD agencies. The White House has also announced a smart-cities initiative focusing on the development of a research infrastructure, demonstration projects, and other R&D activities.\n\n\tWhat Issues Might Affect the Development and Implementation of the IoT?\n\nThe Internet of Things is often lauded for its potentially revolutionary applications. Indeed, IoT devices are today being implemented in many different sectors for a vast array of purposes. However, it is still unclear how IoT will progress due to challenges associated with both technical and policy issues .\n\n\t\tTechnical Issues\n\nProminent technical limitations that may affect the growth and use of the IoT include a lack of new Internet addresses under the most widely used protocol, the availability of high-speed and wireless communications, and lack of consensus on technical standards.\n\n\t\t\tInternet Addresses\n\nA potential barrier to the development of IoT is the technical limitations of the version of the Internet Protocol (IP) that is used most widely. IP is the set of rules that computers use to send and receive information via the Internet, including the unique address that each connected device or object must have to communicate . Version 4 (IPv4) is current ly in widest use. It can accommodate about 4 billion addresses, and it is close to saturation, with few new addresses available in many parts of the world.\nSome observers predict that Internet traffic will grow faster for IoT objects than any other kind of device over the next five years, with more than 25 billion IoT objects in use by 2020 , and perhaps 50 billion devices altogether. I Pv4 appears unlikely to meet that growing demand, even with the use of workarounds such as methods for sharing IP addresses.\nVersion 6 (IPv6) allows for a huge increase in the number IP addresses . With IPv4 , the maximum number of unique addresses , 4.2 billion, is not enough to provide even one address for each of the 7.3 billion people on Earth. IPv6 , in contrast, will accommodate over 10 38 addresses\u2014more than a trillion trillion per person . \nIt is highly likely that to accommodate the anticipated growth in the numbers of Internet-connected objects, IPv6 will have to be implemented broadly. It has been available since 1999 but was not formal ly launched until 2012. In most countries, fewer than 10% of IP addresses were in IPv6 as of September 2015 . Adoption is highest in some European countries and in the United States , where adoption has doubled in the past year to about 20% . Globally, adoption has doubled annually since 2011, to about 7% of addresses in mid-201 5 . While growth in adoption is expected to continue, it is not yet clear whether the rate of growth will be sufficient to accommodate the expected growth in the IoT. That will depend on a number of factors, including replacement of some older systems and applications that cannot handle IPv6 addresses , resolution of security issues associated with the transition, and availability of sufficient resources for deployment .\nEfforts to transition federal systems to IPv6 began more than a decade ago. According to estimates by NIST, adoption for public-facing services has been much greater within the federal government th an within industry or academia. However, adoption varies substantially among agencies, and some data suggest that federal adoption plateaued in 2012. Data were not available for this report on domains that are not public-facing, and it is not clear whether adoption of IPv6 by federal agencies will affect their deployment of IoT applications.\n\n\t\t\tHigh-Speed Internet\n\nUse and growth of the IoT can also be limited by the availability of access to high-speed Internet and advanced telecommunications services, commonly known as broadband, on which it depends. While many urban and suburban areas have access, that is not the case for many rural areas, for which private-sector providers may not find establishment of the required infrastructure profitable, and government programs may be limited.\n\n\t\t\tWireless Communications\n\nMany observers believe that issues relating to access to the electromagnetic spectrum will need to be resolved to ensure the functionality and interoperability of IoT devices. Access to spectrum, both licensed and unlicensed, is essential for devices and objects to communicate wirelessly. IoT devices are being developed and deployed for new purposes and industries, and some argue that the current framework for spectrum allocation may not serve these new industries well .\n\n\t\t\tStandards\n\nCurrent ly, there is no single universal ly recognized set of technical standard s for the IoT, especially with respect to communication s , or even a commonly accepted definition among the various organizations that have produced IoT standards or related documents . Many observers agree that a common set of standard s will be essential for interoperability and scalability of devices and systems. However, other s have expressed pessimism that a universal standard is feasible or even desirable , given the diversity of objects that the IoT potentially encompasses. Several different sets of de facto standard s have been in development, and some observers do not expect formal standards to appear before 2017. Whether conflicts between standards will affect growth of the sector as they did for some other technologies i s not clear.\n\n\t\t\tOther Technical Issues\n\nSeveral other technical issues might impact the development and adoption of IoT. For example, if an object's software cannot be readily updated in a secure manner, that could affect both function and security. Some observers have therefore recommended that smart objects have remote updating capabilities. However, such capabilities could have undesirable effects such as increasing power requirements of IoT objects or requiring additional security features to counter the risk of exploitation by hackers of the update features.\nEnergy consumption can also be an issue. IoT objects need energy for sensing, processing, and communicating information. If objects isolated from the electric grid must rely on batteries, replacement can be a problem, even if energy consumption is highly efficient. That is especially the case for applications using large numbers of objects or placements that are difficult to access. Therefore, alternative approaches such as energy harvesting, whether from solar or other sources, are being developed.\n\n\t\tCybersecurity\n\nThe security of devices and the data they acquire, process, and transmit is often cited as a top concern in cyberspace. Cyberattacks can result in theft of data and sometimes even physical destruction. Some sources estimate losses from cyberattacks in general to be very large\u2014in the hundreds of billions or even trillions of dollars. As the number of connected objects in the IoT grows, so will the potential risk of successful intrusions and increases in costs from those incidents.\nCybersecurity involves protecting information systems, their components and contents, and the networks that connect them from intrusions or attacks involving theft, disruption, damage, or other unauthorized or wrongful actions. IoT objects are potentially vulnerable targets for hackers. Economic and other factors may reduce the degree to which such objects are designed with adequate cybersecurity capabilities built in. IoT devices are small, are often built to be disposable, and may have limited capacity for software updates to address vulnerabilities that come to light after deployment. \nThe interconnectivity of IoT devices may also provide entry points through which hackers can access other parts of a network. For example, a hacker might gain access first to a building thermostat, and subsequently to security cameras or computers connected to the same network, permitting access to and exfiltration or modification of surveillance footage or other information. Control of a set of smart objects could permit hackers to use their computing power in malicious networks called botnets to perform various kinds of cyberattacks. \nAccess could also be used for destruction, such as by modifying the operation of industrial control systems, as with the Stuxnet malware that caused centrifuges to self-destruct at Iranian nuclear plants. Among other things, Stuxnet showed that smart objects can be hacked even if they are not connected to the Internet. The growth of smart weapons and other connected objects within DOD has led to growing concerns about their vulnerabilities to cyberattack and increasing attempts to prevent and mitigate such attacks, including improved design of IoT objects. Cybersecurity for the IoT may be complicated by factors such as the complexity of networks and the need to automate many functions that can affect security, such as authentication. Consequently, new approaches to security may be needed for the IoT.\nIoT cybersecurity will also likely vary among economic sectors and subsectors, given their different characteristics and requirements. Each sector will have a role in developing cybersecurity best practices, unique to its needs. The federal government has a role in securing federal information systems, as well as assisting with security of nonfederal systems, especially critical infrastructure. Cybersecurity legislation considered in the 114 th Congress, while not focusing specifically on the IoT, would address several issues that are potentially relevant to IoT applications, such as information sharing and notification of data breaches.\n\n\t\tSafety\n\nGiven that smart objects can be used both to monitor conditions and to control machinery, the IoT has broad implications for safety, with respect to both improvements and risks. For example, objects embedded in pipelines can monitor both the condition of the equipment and the flow of contents. Among other benefits, that can help both to expedite shutoffs in the event of leaks and to prevent them through predictive maintenance. Connected vehicles can help reduce vehicle collisions through crash avoidance technologies and other applications. Wireless medical devices can improve patient safety by permitting remote monitoring and facilitating adjustments in care. \nHowever, given the complexities involved in some applications of IoT, malfunctions might in some instances result in catastrophic system failures, creating significant safety risks, such as flooding from dams or levees. In addition, hackers could potentially cause malfunctions of devices such as insulin pumps or automobiles, potentially creating significant safety risks.\n\n\t\tPrivacy\n\nCyberattacks may also compromise privacy, resulting in access to and exfiltration of identifying or other sensitive information about an individual. For example, an intrusion into a wearable device might permit exfiltration of information about the location, activities, or even the health of the wearer. \nIn addition to the question of whether security measures are adequate to prevent such intrusions, privacy concerns also include questions about the ownership, processing, and use of such data. With an increasing number of IoT objects being deployed, large amounts of information about individuals and organizations may be created and stored by both private entities and governments. \nWith respect to government data collection, the U.S. Supreme Court has been reticent about making broad pronouncements concerning society's expectations of privacy under the Fourth Amendment of the Constitution while new technologies are in flux, as reflected in opinions over the last five years. Congress may also update certain laws, such as the Electronic Communications Privacy Act of 1986, given the ways that privacy expectations of the public are evolving in response to IoT and other new technologies. IoT applications may also create challenges for interpretation of other laws relating to privacy, such as the Health Insurance Portability and Accountability Act and various state laws, as well as established practices such as those arising from norms such as the Fair Information Practice Principles. \n\n\t\tOther Policy Issues\n\n\t\t\tFederal Role\n\nAs described in the section, \" What Is the Current Federal Role? \" many federal agencies are involved in different aspects of the IoT. Some business representatives and others have stressed the role of effective public\/private partnerships in the development of this technology space. However, observers have also expressed concerns about the role of government regulations and policy, as discussed further in sections below, and about the degree and effectiveness of coordination among the involved federal agencies. Concerns of some extend beyond the federal role to that of state, local, and foreign governments. \nGiven the eclectic nature of the IoT, overall coordination of federal efforts may be challenging with respect to identification of both the goals of coordination and the methods for achieving them. Nevertheless, several observers have argued in favor of a national strategy for the IoT, including in resolutions considered in the 114 th Congress (see \" What Actions Has Congress Taken? \"). \nSome interagency initiatives have been established with respect to specific aspects of the IoT. For example, in addition to the R&D coordination activities for cyber-physical systems under the NITRD program, a specific framework has been developed for smart cities as part of the overall White House initiative involving several federal agencies, local governments, and the private sector.\n\n\t\t\tSpectrum Access\n\nRadio frequency (electromagnetic) spectrum is widely regarded as a critical link in IoT communications, with reliable and affordable access to it required to accommodate the billions of new IoT devices projected to go online over the next decade. New technology for mobile communications is predicted to allow devices to operate on any available radio frequency and potentially permit communications technologies and cyber-physical systems to converge further. Concerns have been raised that current spectrum policy may favor consumer-oriented mobile services and the wireless industry, rather than emerging markets for IoT devices, such as transportation and manufacturing. Congress may therefore be faced with decisions about whether the current policy needs to be revised.\n\n\t\t\tNet Neutrality\n\nThe concept of \"net neutrality\" includes the two general principles that owners of the networks that comprise and provide access to the Internet should not control how end users lawfully use that network, and that they should not be able to discriminate against content provider access to that network. The FCC adopted an order in February 2015 that established regulatory guidelines to protect the marketplace from potential abuses that could threaten the net neutrality concept. The order bans broadband Internet access providers (both fixed and wireless) from blocking and throttling lawful content, and it prohibits paid prioritization of affiliated or proprietary content. The order also creates a general conduct standard that Internet service providers cannot harm consumers or providers of applications, content, and services. These rules went into effect, with limited exceptions, on June 12, 2015, but have been challenged in the U.S. Court of Appeals for the D.C. Circuit.\nIt remains unclear how the FCC order will affect IoT devices and services. Some observers view the implementation of FCC regulations as a positive development. They believe that it will ensure openness and nondiscrimination for service providers, leading to the growth of new services and consumer demand. Others have expressed concerns that the regulations will stifle investment and innovation to the detriment of the expansion and growth of Internet deployment and services. Furthermore, the rules are subject to \"reasonable network management,\" as defined by the FCC, and a category of \"specialized services\" defined as those that \"do not provide access to the Internet generally\" are exempt from the rules established by the order. Depending on how individual IoT services and devices are categorized and the degree of network management such specialized services may need, the order could also affect IoT applications on a case-by-case basis.\n\n\tWhat Actions Has Congress Taken?\n\n\t\tLegislation\n\n\t\t\tBills\n\nNo bills have been introduced in the last two Congresses relating specifically to the IoT. However, many bills have been introduced with provisions related to aspects of the IoT such as connected vehicles, cyber-physical systems, smart cities, and the smart grid. None of those bills were enacted as of September 2015, although some bills with provisions on applications and appropriations relating to telehealth and telemedicine were enacted in both the 113 th and 114 th Congresses. Several bills in the 114 th Congress would address issues that are potentially relevant to IoT applications, such as information sharing in cybersecurity, privacy, and notification of data breaches.\n\n\t\t\tResolutions\n\nTwo similar resolutions on the IoT have been submitted in the 114 th Congress, one in the House ( H.Res. 195 \/Lance, introduced April 13, 2015) and one in the Senate ( S.Res. 110 \/Fischer, introduced and passed March 24). Both call for\na U.S. strategy for development of the IoT to improve social well-being while allowing for innovation and protecting against misuse, recognition of the importance of a consensus-based approach and the role of businesses in that development, federal government commitment to use the IoT, and a U.S. commitment to use the IoT for developing new technologies to address challenging societal issues.\nThe House version also calls for the use of cost-benefit analysis to determine when federal action is needed to address \"discrete harms\" in the marketplace. It also refers explicitly to energy optimization and the need for cybersecurity.\n\n\t\tHearings\n\nBoth the House and the Senate have held hearings on the IoT in 2015. In the Senate, the Committee on Commerce, Science, and Transportation held a hearing on February 11. In the House, one was held by the Energy and Commerce Committee on March 24, and another by the Subcommittee on Courts, Intellectual Property, and the Internet of the Committee on the Judiciary on July 29. The hearings featured witnesses from businesses and associations who discussed the growth, uses, and economic potential of the IoT, as well as some of the issues described in this report, such as privacy, regulation, security, spectrum management, and standards. \n\n\t\tCaucuses\n\nThere are several congressional caucuses that may consider issues associated with the IoT. Among them are caucuses on cloud computing, cybersecurity, the Internet, and high-performance buildings. In addition, new caucuses announced in this session included one expressly on the Internet of Things, and one on smart transportation.\n\n\tWhere Can I Find Additional Resources on This Topic?\n\nFor additional assistance on the IoT and related topics, see CRS Report R44225, The Internet of Things: CRS Experts , by [author name scrubbed] and [author name scrubbed]. Congressional offices may also contact CRS by placing a request via telephone or online through the CRS website (see http:\/\/www.crs.gov\/AboutCRS\/Contact-Us ).","output":"\"Internet of Things\" (IoT) refers to networks of objects that communicate with other objects and with computers through the Internet. \"Things\" may include virtually any object for which remote communication, data collection, or control might be useful, such as vehicles, appliances, medical devices, electric grids, transportation infrastructure, manufacturing equipment, or building systems.\nIn other words, the IoT potentially includes huge numbers and kinds of interconnected objects. It is often considered the next major stage in the evolution of cyberspace. Some observers believe it might even lead to a world where cyberspace and human space would seem to effectively merge, with unpredictable but potentially momentous societal and cultural impacts.\nTwo features make objects part of the IoT\u2014a unique identifier and Internet connectivity. Such \"smart\" objects each have a unique Internet Protocol (IP) address to identify the object sending and receiving information. Smart objects can form systems that communicate among themselves, usually in concert with computers, allowing automated and remote control of many independent processes and potentially transforming them into integrated systems.\nThose systems can potentially impact homes and communities, factories and cities, and every sector of the economy, both domestically and globally. Although the full extent and nature of the IoT's impacts remain uncertain, economic analyses predict that it will contribute trillions of dollars to economic growth over the next decade. Sectors that may be particularly affected include agriculture, energy, government, health care, manufacturing, and transportation.\nThe IoT can contribute to more integrated and functional infrastructure, especially in \"smart cities,\" with projected improvements in transportation, utilities, and other municipal services. The Obama Administration announced a smart-cities initiative in September 2015.\nThere is no single federal agency that has overall responsibility for the IoT. Agencies may find IoT applications useful in helping them fulfill their missions. Each is responsible for the functioning and security of its own IoT, although some technologies, such as drones, may fall under the jurisdiction of other agencies as well. Various agencies also have relevant regulatory, sector-specific, and other mission-related responsibilities, such as the Departments of Commerce, Energy, and Transportation, the Federal Communications Commission, and the Federal Trade Commission.\nSecurity and privacy are often cited as major issues for the IoT, given the perceived difficulties of providing adequate cybersecurity for it, the increasing role of smart objects in controlling components of infrastructure, and the enormous increase in potential points of attack posed by the proliferation of such objects. The IoT may also pose increased risks to privacy, with cyberattacks potentially resulting in exfiltration of identifying or other sensitive information about an individual. With an increasing number of IoT objects in use, privacy concerns also include questions about the ownership, processing, and use of the data they generate.\nSeveral other issues might affect the continued development and implementation of the IoT. Among them are\nthe lack of consensus standards for the IoT, especially with respect to connectivity; the transition to a new Internet Protocol (IPv6) that can handle the exponential increase in the number of IP addresses that the IoT will require; methods for updating the software used by IoT objects in response to security and other needs; energy management for IoT objects, especially those not connected to the electric grid; and the role of the federal government, including investment, regulation of applications, access to wireless communications, and the impact of federal rules regarding \"net neutrality.\"\nNo bills specifically on the IoT have been introduced in the 114th Congress, although S.Res. 110 was agreed to in March 2015, and H.Res. 195 was introduced in April. Both call for a U.S. IoT strategy, a focus on a consensus-based approach to IoT development, commitment to federal use of the IoT, and its application in addressing challenging societal issues. House and Senate hearings have been held on the IoT, and several congressional caucuses may consider associated issues. Moreover, bills affecting privacy, cybersecurity, and other aspects of communication could affect IoT applications."}
{"id":"gao_GAO-08-560T","pid":"gao_GAO-08-560T_0","input":"\tInterior\u2019s Oversight Does Not Provide Adequate Assurance That the Government Is Being Fully Compensated for Oil and Gas Production on Federal Lands and Waters\n\nInterior lacks adequate assurance that it is receiving the full royalties it is  owed because (1) neither BLM nor OMM is fully inspecting leases and  meters as required by law and agency policies, and (2) MMS lacks  adequate management systems and sufficient internal controls for  verifying that royalty payment data are accurate and complete. With  regard to inspecting oil and gas production, BLM is charged with  inspecting approximately 20,000 producing onshore leases annually to  ensure that oil and gas volumes are accurately measured. However, BLM\u2019s  state Inspection and Enforcement Coordinators from Colorado, Montana,  New Mexico, Utah, and Wyoming told us that only 8 of the 23 field offices  in the 5 states completed both their (1) required annual inspections of  wells and leases that are high-producing and those that have a history of  violations and (2) inspections every third year on all remaining leases.  According to the BLM state Inspection and Enforcement Coordinators, the  number of completed production inspections varied greatly by field office.  For example, while BLM inspectors were able to complete all of the  production inspections in the Kemmerer, Wyoming, field office, inspectors  in the Glenwood Springs, Colorado, field office were able to complete only  about one-quarter of the required inspections. Officials in 3 of the 5 field  offices in which we held detailed discussions with inspection staff told us  that they had not been able to complete the production inspections  because of competing priorities, including their focus on completing a  growing number of drilling inspections for new oil and gas wells, and high  inspection staff turnover. However, BLM officials from all 5 field offices  told us that when they have conducted production inspections they have  identified a number of violations. For example, BLM staff in 4 of the 5 field  offices identified errors in the amounts of oil and gas production volumes  reported by operators to MMS by comparing production reports with  third-party source documents. Additionally, BLM staff from 1 field office  we visited showed us a bypass built around a gas meter, allowing gas to  flow around the meter without being measured. BLM staff ordered the  company to remove the bypass. Staff from another field office told us of a  case in which individuals illegally tapped into a gas line and routed gas to  private residences. Finally, in one of the field offices we visited, BLM  officials told us of an instance in which a company maintained two sets of  conflicting production data\u2014one used by the company and another  reported to MMS.\nMoreover, OMM, which is responsible for inspecting offshore production  facilities that include oil and gas meters, did not inspect all oil and gas  royalty meters, as required by its policy, in 2007. For example, OMM  officials responsible for meter inspections in the Gulf of Mexico told us  that they completed about half of the required 2,700 inspections, but that  they met OMM\u2019s goal for witnessing oil and gas meter calibrations. OMM  officials told us that one reason they were unable to complete all the meter  inspections was their focus on the remaining cleanup work from  hurricanes Katrina and Rita. Meter inspections are an important aspect of  the offshore production verification process because, according to  officials, one of the most common violations identified during inspections  is missing or broken meter seals. Meter seals are meant to prevent  tampering with measurement equipment. When seals are missing or  broken, it is not possible without closer inspection to determine whether  the meter is correctly measuring oil or gas production.\nWith regard to MMS\u2019s assurance that royalty data are being accurately  reported by companies, MMS\u2019s systems and processes for collecting and  verifying these data lack both capabilities and key internal controls,  including those focused on data accuracy, integrity, and completeness. For  example, MMS lacks an automated process to routinely and systematically  reconcile all production data filed by payors (those responsible for paying  the royalties) with production data filed by operators (those responsible  for reporting production volumes). MMS officials told us that before they  transitioned to the current financial management system in 2001, their  system included an automated process that reconciled the production and  royalty data on all transactions within approximately 6 months of the  initial entry date. However, MMS\u2019s new system does not have that  capability. As a result, such comparisons are not performed on all  properties. Comparisons are made, if at all, 3 years or more after the initial  entry date by the MMS compliance group for those properties selected for  a compliance review or audit.\nIn addition, MMS lacks a process to routinely and systematically reconcile  all production data included by payors on their royalty reports or by  operators on their production reports with production data available from  third-party sources. OMM does compare a large part of the offshore  operator-reported production data with third-party data from pipeline  operators through both its oil and gas verification programs, but BLM  compares only a relatively small percentage of reported onshore oil and  gas production data with third-party pipeline data. When BLM and OMM  do make comparisons and find discrepancies, they forward the  information to MMS, which then takes steps to reconcile and correct these  discrepancies by talking to operators. However, even when discrepancies  are corrected and the operator-reported data and pipeline data have been  reconciled, these newly reconciled data are not automatically and  systematically compared with the reported sales volume in the royalty  report, previously entered into the financial management database, to  ensure the accuracy of the royalty payment. Such comparisons occur only  if a royalty payor\u2019s property has been selected for an audit or compliance  review.\nFurthermore, MMS\u2019s financial management system lacks internal controls  over the integrity and accuracy of production and royalty-in-value data  entered by companies. Companies may legally make changes to both  royalty and production data in MMS\u2019s financial management system for up  to 6 years after the reporting month, and these changes may necessitate  changes in the royalty payment. However, when companies retroactively  change the data they previously entered, these changes do not require  prior approval by, or notification of, MMS. As a result of the companies\u2019  ability to unilaterally make these retroactive changes, the production data  and required royalty payments can change over time, further complicating  efforts by agency officials to reconcile production data and ensure that the  proper amount of royalties was paid. Compounding this data reliability  concern, changes made to the data do not necessarily trigger a review to  determine their reasonableness or whether additional royalties are due.  According to agency officials, these changes are not subject to review at  the time a change is made and would be evaluated only if selected for an  audit or compliance review. This is also problematic because companies  may change production and royalty data after an audit or compliance  review has been done, making it unclear whether these audited royalty  payments remain accurate after they have been reviewed. Further, MMS  officials recently examined data from September 2002 through July 2007  and identified over 81,000 adjustments made to data outside the allowable  6-year time frame. MMS is working to modify the system to automatically  identify adjustments that have been made to data outside of the allowable  6-year time frame, but this effort does not address the need to identify  adjustments made within the allowable time that might necessitate further  adjustments to production data and royalty payments due.\nFinally, MMS\u2019s financial management system could not reliably detect  when production data reports were missing until late 2004, and the system  continues to lack the ability to automatically detect missing royalty  reports. In 2004, MMS modified its financial management system to  automatically detect missing production reports. As a result, MMS has  identified a backlog of approximately 300,000 missing production reports  that must be investigated and resolved. It is important that MMS have a  complete set of accurate production reports so that BLM can prioritize  production inspections, and its compliance group can easily reconcile  royalty payments with production information. Importantly, MMS\u2019s  financial management system continues to lack the ability to automatically  detect cases in which an expected royalty report has not been filed. While  not filing a royalty report may be justifiable under certain circumstances,  such as when a company sells its lease, MMS\u2019s inability to detect missing  royalty reports presents the risk that MMS will not identify instances in  which it is owed royalties that are simply not being paid. Officials told us  they are currently able to identify missing royalty reports in instances  when they have no royalty report to match with funds deposited to  Treasury. However, cases in which a company stops filing royalty reports  and stops paying royalties would not be detected unless the payor or lease  was selected for an audit or compliance review.\n\n\tMMS\u2019s Compliance Efforts Do Not Consistently Use Third-Party Data to Check Self-Reported Royalty-in-Value Payment Data\n\nMMS\u2019s increasing use of compliance reviews, which are more limited in  scope than audits, has led to an inconsistent use of third-party data to  verify that self-reported royalty data are correct, thereby placing accurate  royalty collections at risk. Since 2001, MMS has increasingly used  compliance reviews to achieve its performance goals of completing  compliance activities\u2014either full audits or compliance reviews\u2014on a  predetermined percentage of royalty payments. According to MMS,  compliance reviews can be conducted much more quickly and require  fewer resources than audits, largely because they represent a quicker,  more limited reasonableness check of the accuracy and completeness of a  company\u2019s self-reported data, and do not include a systematic examination  of underlying source documentation. Audits, on the other hand, are more  time- and resource-intensive, and they include the review of original  source documents, such as sales revenue data, transportation and gas  processing costs, and production volumes, to verify whether company- reported data are accurate and complete. When third-party data are readily  available from OMM, MMS may use them when conducting a compliance  review. For example, MMS may use available third-party data on oil and  gas production volumes collected by OMM in its compliance reviews for  offshore properties. In contrast, because BLM collects only a limited  amount of third-party data for onshore production, and MMS does not  request these data from the companies, MMS does not systematically use  third-party data when conducting onshore compliance reviews. Despite  conducting thousands of compliance reviews since 2001, MMS has only  recently evaluated their effectiveness. For calendar year 2002, MMS  compared the results of 100 of about 700 compliance reviews of offshore  leases and companies with the results of audits conducted on those same  leases or companies. However, while the compliance reviews covered,  among other things, 12 months of production volumes on all products\u2014 oil, gas, and retrograde, a liquid product that condenses out of gas under  certain conditions\u2014the audits covered only 1 month and one product. As  a result of this evaluation comparing the results of compliance reviews  with those of audits, MMS now plans to improve its compliance review  process by, for example, ensuring that it includes a step to check that  royalties are paid on all royalty-bearing products, including retrograde.\nTo achieve its annual performance goals, MMS began using the  compliance reviews along with audits. One of MMS\u2019s performance goals is  to complete compliance activities\u2014either audits or compliance reviews\u2014 on a specified percentage of royalty payments within 3 years of the initial  royalty payment. For example, in 2006 MMS reported that it had achieved  this goal by confirming reasonable compliance on 72.5 percent of all  calendar year 2003 royalties. To help meet this goal, MMS continues to rely  heavily on compliance reviews, yet it is unable to state the extent to which  this performance goal is accomplished through audits as opposed to  compliance reviews. As a result, MMS does not have information available  to determine the percentage of the goal that was achieved using third- party data and the percentage that did not systematically rely on third- party data. Moreover, to help meet its performance goal, MMS has  historically conducted compliance reviews or audits on leases and  companies that have generated the most royalties, with the result that the  same leases and companies are reviewed year after year. Accordingly,  many leases and companies have gone for years without ever having been  reviewed or audited.\nIn 2006, Interior\u2019s Inspector General (IG) reviewed MMS\u2019s compliance  process and made a number of recommendations aimed at strengthening  it. The IG recommended, among other things, that MMS examine 1 month  of third-party source documentation as part of each compliance review to  provide greater assurance that both the production and allowance data are  accurate. The IG also recommended that MMS track the percentage of the  annual performance goal that was accomplished through audits versus  through compliance reviews, and that MMS move toward a risk-based  compliance program and away from reviewing or auditing the same leases  and companies each year. To address the IG\u2019s recommendations, MMS has  recently revised its compliance review guidance to include suggested steps  for reviewing third-party source production data when available for both  offshore and onshore oil and gas, though the guidance falls short of  making these steps a requirement. MMS has also agreed to start tracking  compliance activity data in 2007 that will allow it to report the percentage  of the performance goal that was achieved through audits versus through  compliance reviews. Finally, MMS has initiated a risk-based compliance  pilot project, whereby leases and companies are selected for compliance  work according to MMS-defined risk criteria that include factors other  than whether the leases or companies generate high royalty payments.  According to MMS, during fiscal year 2008 it will further evaluate and  refine the pilot as it moves toward fuller implementation.\nFinally, representatives from the states and tribes who are responsible for  conducting compliance work under agreements with MMS have expressed  concerns about the quality of self-reported production and royalty data  they use in their reviews. As part our work, we sent questionnaires to all  11 states and seven tribes that conducted compliance work for MMS in  fiscal year 2007. Of the nine state and five tribal representatives who  responded, seven reported that they lack confidence in the accuracy of the  royalty data. For example, several representatives reported that because  of concerns with MMS\u2019s production and royalty data, they routinely look  to other sources of corroborating data, such as production data from state  oil and gas agencies and tax agencies. Finally, several respondents noted  that companies frequently report production volumes to the wrong leases  and that they must then devote their limited resources to correcting these  reporting problems before beginning their compliance reviews and audits.\n\n\tThe MMS Royalty-in- Kind Program Is at Risk of Inaccurate Collection of Natural Gas Royalties because of Inconsistent Oversight\n\nBecause MMS\u2019s royalty-in-kind program does not extend the same  production verification processes used by its oil program to its gas  program, it does not have adequate assurance that it is collecting the gas  royalties it is owed. As noted, under the royalty-in-kind program, MMS  collects royalties in the form of oil and gas and then sells these  commodities in competitive sales. To ensure that the government obtains  the fair value of these sales, MMS must make sure that it receives the  volumes to which it is entitled. Because prices of these commodities  fluctuate over time, it is also important that MMS receive the oil and gas at  the time it is entitled to them. As part of its royalty-in-kind oversight effort,  MMS identifies imbalances between the volume operators owe the federal  government in royalties and the volume delivered and resolves these  imbalances by adjusting future delivery requirements or cash payments.  The methods that MMS uses to identify these imbalances differ for oil and  gas.\nFor oil, MMS obtains pipeline meter data from OMM\u2019s liquid verification  system, which records oil volumes flowing through numerous metering  points in the Gulf of Mexico region. MMS calculates its royalty share of oil  by multiplying the total production volumes provided in these pipeline  statements by the royalty rates for a given lease. MMS compares this  calculation with the volume of royalty oil that the operators delivered as  reported by pipeline operators. When the value of an imbalance  cumulatively reaches $100,000, MMS conducts further research to resolve  the discrepancy. Using pipeline statements to verify production volumes is  a good check against companies\u2019 self-reporting of royalties due the federal  government because companies have an incentive to not underreport their  share of oil going into the pipeline because that is the amount they will  have to sell at the other end of the pipeline.\nFor gas, MMS relies on information contained in two operator-provided  documents\u2014monthly imbalance statements and production reports.  Imbalance statements include the operator\u2019s total gas production for the  month, the share of that production that the government is entitled to, and  any differences between what the operator delivered and the government\u2019s  royalty share. Production reports contain a large number of data elements,  including production volumes for each gas well. MMS compares the  production volumes contained in the imbalance statements with those in  the production reports to verify production levels. MMS then calculates its  royalty share based on these production figures and compares its royalty  share with gas volumes the operators delivered as reported by pipeline  operators. When the value of an imbalance cumulatively reaches $100,000,  MMS conducts further research to resolve the discrepancy.\nMMS\u2019s ability to detect gas imbalances is weaker than for oil because it  does not use third-party metering data to verify the operator-reported  production numbers. Since 2004, OMM has collected data from gas  pipeline companies through its gas verification system, which is similar to  its liquid verification system in that the system records information from  pipeline company-provided source documents. Our review of data from  this program shows that these data could be a useful tool in verifying  offshore gas production volumes. Specifically, our analysis of these  pipeline data showed that for the months of January 2004, May 2005, July  2005, and June 2006, 25 percent of the pipeline metering points had an  outstanding discrepancy between self-reported and pipeline data. These  discrepancies are both positive and negative\u2014that is, production volumes  submitted to MMS by operators are at times either under- or overreported.\nData from the gas verification system could be useful in validating  production volumes and reducing discrepancies. However, to fully benefit  from this opportunity, MMS needs to improve the timeliness and reliability  of these data. After examining this issue, in December 2007, the  Subcommittee on Royalty Management, a panel appointed by the  Secretary of the Interior to examine MMS\u2019s royalty program, reported that  OMM is not adequately staffed to conduct sufficient review of data from  the gas verification system. We have not yet, nor has MMS, determined  the net impact of these discrepancies on royalties owed the federal  government.\n\n\tSignificant Questions and Uncertainties Exist Regarding the Reported Financial Benefits of the Royalty-in-Kind Program\n\nThe methods and underlying assumptions MMS uses to compare the  revenues it collects in kind with what it would have collected in cash do  not account for all costs and do not sufficiently deal with uncertainties,  raising doubts about the claimed financial benefits of the royalty-in-kind  program. Specifically, MMS\u2019s calculation showing that MMS sold the  royalty oil and gas for $74 million more than MMS would have received in  cash payments did not appropriately account for uncertainty in estimates  of cash payments. In addition, MMS\u2019s calculation that early royalty-in-kind  payments yielded $5 million in interest was based on assumptions about  payment dates and interest rates that could misstate the estimated interest  benefit. Finally, MMS\u2019s calculation that the royalty-in-kind program cost  about $8 million less to administer than an in-value program did not  include significant costs that, if included, could change MMS\u2019s  conclusions.\n\n\t\tSales Revenue\n\nMMS sold the oil and gas it collected during the 3 fiscal years 2004 through  2006 for $8.15 billion and calculated that this amount exceeded what MMS  would have received in cash royalties by about $74 million\u2014a net benefit  of approximately 0.9 percent. MMS has recognized that its estimates of  what it would have received in cash payments are subject to some degree  of error but has not appropriately evaluated or reported how sensitive the  net benefit calculations are to this error. This is important because even a  1 percent error in the estimates of cash payments would change the  estimated benefit of the royalty-in-kind program from $74 million to  anywhere from a loss of $6 million to a benefit of $155 million.\nMoreover, MMS\u2019s annual reports to the Congress present oil sales data in  aggregate and therefore do not reflect the fact that, in many individual  sales, MMS sold the oil it collected in kind for less than it estimates it  would have collected in cash. Specifically, MMS estimates that, in fiscal  year 2006, it sold 28 million barrels of oil, or 64 percent of all the oil it  collected in kind, for less than it would have collected in cash. The  government would have received an additional $6 million in revenue if it  had taken these royalties in cash instead. These sales indicate that MMS  has not always been able to achieve one of its central goals: to select,  based on systematic economic analysis, which royalties to take in cash  and which to take in kind in a way that maximizes revenues to the  government.\nAccording to a senior MMS official, the federal government has several  advantages when selling gas that it does not have when selling oil, a fact  that helps to explain why MMS\u2019s gas sales have performed better than its  oil sales. For example, MMS can bundle the natural gas production in the  Gulf of Mexico from many different leases into large volumes that MMS  can use to negotiate discounts for transporting gas from production sites  to market centers. Because purchasers receive these discounts when they  buy gas from MMS, they may be willing to pay more for gas from MMS  than from the original owners. Opportunities for bundling are less  prevalent in the oil market. Because MMS generally does not have this, or  other, advantages when selling oil, purchasers often pay MMS about what  they would pay other producers for oil, and sometimes less. Indeed, MMS\u2019s  policies allow it to sell oil for up to 7.7 cents less per barrel than MMS  estimates it would collect if it took the royalties in cash. MMS told us that  the other financial benefits of the royalty-in-kind program, including  interest payments and reduced administrative costs, justify selling oil for  less than the estimated cash payments because once these additional  revenues are factored in, the net benefit to the government is still positive.  However, as discussed below, we have found that there are significant  questions and uncertainties about the other financial benefits as well.\n\n\t\tInterest\n\nRevenues from the sale of royalty-in-kind oil are due 10 days earlier than  cash payments, and revenues from the sale of in-kind gas are due 5 days  earlier. MMS calculates that the government earned about $5 million in  interest from fiscal years 2004 through 2006 from these early payments  that it would not have received had it taken royalties in cash. We found  two weaknesses in the way MMS calculates this interest. First, the  payment dates used to calculate the interest revenue have the potential to  over- or underestimate its value. MMS calculates the interest on the basis  of the time between the actual date that Treasury received a royalty-in- kind payment and the theoretical latest date that Treasury would have  received a cash payment under the royalty-in-value program. However,  MMS officials told us that cash payments can, and sometimes do, arrive  before their due date. As a result, MMS might be overstating the value of  the early royalty-in-kind payments. Second, the interest rate used to  calculate the interest revenue may either over- or understate its value  because the rate is not linked to any market rate. From fiscal year 2004  through 2007, MMS used a 3 percent interest rate to calculate the time  value of these early payments. However, during this time, actual market  interest rates at which the federal government borrowed fluctuated. For  example, 4-week Treasury bill rates ranged from a low of 0.72 percent to a  high of 5.18 percent during this same period. Therefore, during some fiscal  years, MMS likely overstated or understated the value of these early  payments.\n\n\t\tAdministrative Cost Savings\n\nMMS has developed procedures to capture the administrative costs of the  royalty-in-kind and cash royalty programs and includes in its  administrative cost comparison primarily the variable costs for the federal  offshore oil and gas activities\u2014that is, costs that fluctuate based on the  volume of oil or gas received by MMS, such as labor costs. Although MMS  also includes some department-level fixed costs, it excludes some fixed  costs that it does not incur on a predictable basis (largely information  technology  costs). According to MMS, if it included these IT and other  such costs, there would be a high potential of skewing the unit price used  to determine the administrative cost savings. However, by excluding such  fixed costs from the administrative cost comparison, MMS is not including  all the necessary cost information to evaluate the efficacy of the royalty-in- kind program.\nMMS\u2019s administrative cost analysis compares a bundle of royalty-in-kind  program administrative costs divided by the number of barrels of oil  equivalent realized by the royalty-in-kind program during a year, with a  bundle of cash royalty program administrative costs divided by the  number of barrels of oil equivalent realized by that program. The  difference between these amounts represents the difference in cost to  administer a barrel of oil equivalent under each program.\nMMS then multiplies the difference in cost to administer a barrel of oil  equivalent under the two programs by the number of barrels of oil  equivalent realized by the royalty-in-kind program to determine the  administrative cost savings. However, MMS\u2019s calculations excluded some  fixed costs that are not incurred on a regular or predictable basis from the  analysis. For example, in fiscal year 2006, royalty-in-kind IT costs of $3.4  million were excluded from the comparison. Moreover, additional IT costs  of approximately $29.4 million\u2014some of which may have been incurred  for either the royalty-in-kind or the cash royalty program\u2014were also  excluded. Including and assigning these IT costs to the programs  supported by those costs would provide a more complete accounting of  the respective costs of the royalty-in-kind and royalty-in-value programs,  and would likely impact the results of MMS\u2019s administrative cost analysis.\n\n\tConclusions\n\nUltimately the system used by Interior to ensure taxpayers receive  appropriate value for oil and gas produced from federal lands and waters  is more of an honor system than we are comfortable with. Despite the  heavy scrutiny that Interior has faced in its oversight of royalty  management, we and others continue to identify persistent weaknesses in  royalty collections. Given both the long-term fiscal challenges the  government faces and the increased demand for the nation\u2019s oil and gas  resources, it is imperative that we have a royalty collection system going  forward that can assure the American public that the government is  receiving proper royalty payments. Our work on this issue is continuing  along several avenues, including comparing the royalties taken in kind  with the value of royalties taken in cash, assessing the rate of oil and gas  development on federal lands, comparing the amount of money the U.S.  government receives with what foreign countries receive for allowing  companies to develop and produce oil and gas, and examining further the  accuracy of MMS\u2019s production and royalty data. We plan to make  recommendations to address the weaknesses we identified in our final  reports on these issues.\nWe look forward to further work and to helping this subcommittee and the  Congress as a whole to exercise oversight on this important issue. Mr.  Chairman, this concludes our prepared statement. We would be pleased to  respond to any questions that you or other members of the subcommittee  may have at this time.\n\n\tGAO Contact and Staff Acknowledgments\n\nFor further information about this testimony, please contact either Frank  Rusco, at 202-512-3841, or ruscof@gao.gov, or Jeanette Franzel, at 202-512- 9406, or franzelj@gao.gov. Contact points for our Congressional Relations  and Public Affairs may be found on the last page of this statement.  Contributors to this testimony include Ron Belak, Ben Bolitzer, Lisa  Brownson, Melinda Cordero, Nancy Crothers, Glenn C. Fischer, Cindy  Gilbert, Tom Hackney, Chase Huntley, Heather Hill, Barbara Kelly, Sandra  Kerr, Paul Kinney, Jennifer Leone, Jon Ludwigson, Tim Minelli, Michelle  Munn, G. Greg Peterson, Barbara Timmerman, and Mary Welch.\nThis  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.","output":"Why GAO Did This Study\n\nCompanies that develop and produce federal oil and gas resources do so under leases administered by the Department of the Interior (Interior). Interior's Bureau of Land Management (BLM) and Offshore Minerals Management (OMM) are responsible for overseeing oil and gas operations on federal leases. Companies are required to self- report their production volumes and other data to Interior's Minerals Management Service (MMS) and to pay royalties either \"in value\" (payments made in cash), or \"in kind\" (payments made in oil or gas). GAO's testimony will focus on whether (1) Interior has adequate assurance that it is receiving full compensation for oil and gas produced from federal lands and waters, (2) MMS's compliance efforts provide a check on industry's self-reported data, (3) MMS has reasonable assurance that it is collecting the right amounts of royalty-in-kind oil and gas, and (4) the benefits of the royalty-in-kind program that MMS has reported are reliable. This testimony is based on ongoing work. When this work is complete, we expect to make recommendations to address these and other findings. To address these issues GAO analyzed MMS data, reviewed MMS, and other agency policies and procedures, and interviewed officials at Interior. In commenting on a draft of this testimony, Interior provided GAO technical comments which were incorporated where appropriate.\n\nWhat GAO Found\n\nInterior lacks adequate assurance that it is receiving full compensation for oil and gas produced from federal lands and waters because Interior's Bureau of Land Management (BLM) and Offshore Minerals Management (OMM) are not fully conducting production inspections as required by law and agency policies and because MMS's financial management systems are inadequate and lack key internal controls. Officials at BLM told us that only 8 of the 23 field offices in five key states we sampled completed their required production inspections in fiscal year 2007. Similarly, officials at OMM told us that they completed about half of the required production inspections in calendar year 2007 in the Gulf of Mexico. In addition, MMS's financial management system lacks an automated process for routinely and systematically reconciling production data with royalty payments. MMS's compliance efforts do not consistently examine third-party source documents to verify whether self-reported industry royalty-in-value payment data are complete and accurate, putting full collection of royalties at risk. In 2001, to help meet its annual performance goals, MMS moved from conducting audits, which compare self-reported data against source documents, toward compliance reviews, which provide a more limited check of a company's self-reported data and do not include systematic comparison to source documentation. MMS could not tell us what percentage of its annual performance goal was achieved through audits as opposed to compliance reviews. Because the production verification processes MMS uses for royalty-in-kind gas are not as rigorous as those applied to royalty-in-kind oil, MMS cannot be certain it is collecting the gas royalties it is due. MMS compares companies' self-reported oil production data with pipeline meter data from OMM's oil verification system, which records oil volumes flowing through metering points. While analogous data are available from OMM's gas verification system, MMS has not chosen to use these third-party data to verify the company-reported production numbers. The financial benefits of the royalty-in-kind program are uncertain due to questions and uncertainties surrounding the underlying assumptions and methods MMS used to compare the revenues it collected in kind with what it would have collected in cash. Specifically, questions and uncertainties exist regarding MMS's methods to calculate the net revenues from in-kind oil and gas sales, interest payments, and administrative cost savings."}
{"id":"gao_GAO-07-781","pid":"gao_GAO-07-781_0","input":"\tBackground\n\nThe Strategy lays out three high-level goals to prepare for and respond to  an influenza pandemic: (1) stop, slow, or otherwise limit the spread of a  pandemic to the United States; (2) limit the domestic spread of a pandemic  and mitigate disease, suffering, and death; and (3) sustain infrastructure  and mitigate impact on the economy and the functioning of society. These  goals are underpinned by three pillars that are intended to guide the  federal government\u2019s approach to a pandemic threat: (1) preparedness and  communication, (2) surveillance and detection, and (3) response and  containment. Each pillar describes domestic and international efforts,  animal and human health efforts, and efforts that would need to be  undertaken at all levels of government and in communities to prepare for  and respond to a pandemic.\nThe Plan is intended to support the broad framework and goals articulated  in the Strategy by outlining specific steps that federal departments and  agencies should take to achieve these goals. It also describes expectations  regarding preparedness and response efforts of state and local  governments and tribal entities and the private sector. The Plan\u2019s chapters  cover categories of actions that are intended to address major  considerations raised by a pandemic, including protecting human and  animal health; transportation and borders; and international, security, and  institutional considerations. The Plan is not intended to describe the  operational details of how federal departments and agencies would  accomplish their objectives to support the Strategy. Rather, these  operational details are supposed to be included in the departments\u2019 and  agencies\u2019 pandemic implementation plans along with additional  considerations raised during a pandemic involving (1) protection of  employees, (2) maintenance of essential functions and services, and         (3) the manner in which departments and agencies would communicate  messages about pandemic planning and respond to their stakeholders.\n\n\t\tAll-Hazards Emergency Management Policies Provide the Overarching Context for the Strategy and Plan\n\nThe Homeland Security Act of 2002 required the newly established DHS to  develop a comprehensive National Incident Management System (NIMS)  and a comprehensive NRP. NIMS and the NRP are intended to provide an  integrated all-hazards approach to emergency incident management. As  such, they are expected to form the basis of the federal response to a  pandemic. NIMS defines \u201chow\u201d to manage an emergency incident. It  defines roles and responsibilities of federal, state, and local responders for  emergency incidents regardless of the cause, size, or complexity of the  situation. Its intent is to establish a core set of concepts, principles,  terminology, and organizational processes to enable effective, efficient,  and collaborative emergency incident management at all levels. The NRP,  on the other hand, defines \u201cwhat\u201d needs to be done to manage an  emergency incident. It is designed to integrate federal government  domestic prevention, protection, response, and recovery plans into a  single operational plan for all hazards and all emergency response  disciplines. Using the framework provided by NIMS, the NRP is intended  to provide the structure and mechanisms for national-level policy and  operational direction for domestic incident management where federal  support is necessary.\nStates may need federal assistance in the event of a pandemic to maintain  essential services. Upon receiving such requests, the President may issue  emergency or major disaster declarations pursuant to the Robert T.  Stafford Disaster Relief and Emergency Assistance Act of 1974 (the  Stafford Act). The Stafford Act primarily establishes the programs and  processes for the federal government to provide major disaster and  emergency assistance to state and local governments and tribal nations,  individuals, and qualified private nonprofit organizations. Federal  assistance may include technical assistance, the provision of goods and  services, and financial assistance, including direct payments, grants, and  loans. FEMA is responsible for carrying out the functions and authorities  of the Stafford Act.\nThe Secretary of Health and Human Services also has authority, under the  Public Health Service Act, to declare a public health emergency and to  take actions necessary to respond to that emergency consistent with  his\/her authorities. These actions may include making grants, entering  into contracts, and conducting and supporting investigations into the  cause, treatment, or prevention of the disease or disorder that caused the  emergency. The Secretary\u2019s declaration may also initiate the authorization  of emergency use of unapproved products or approved products for  unapproved uses as well as waiving of certain HHS regulatory  requirements.\nThe NRP, as revised in May 2006, applies to all incidents requiring a  coordinated federal response. The most severe of these incidents, termed  Incidents of National Significance, must be personally declared and  managed by the Secretary of Homeland Security. According to the Plan,  the Secretary of Homeland Security may declare a pandemic an Incident of  National Significance, perhaps as early as when an outbreak occurs in  foreign countries but before the disease reaches the United States. In  addition to the base response plan, the NRP has 31 annexes consisting of  15 Emergency Support Function (ESF) annexes, 9 support annexes, and 7  incident annexes. The ESFs are the primary means through which the  federal government provides support to state, local, and tribal  governments, and the ESF structure provides a mechanism for interagency  coordination during all phases of an incident\u2014some departments and  agencies may provide resources during the early stages, while others  would be more prominent in supporting recovery efforts. The ESFs group  capabilities and resources into the functions that are most likely needed  during actual or potential incidents where coordinated federal response is  required.\nOf the 15 ESF annexes, ESF-8, the public health and medical services ESF,  would be the primary ESF used for the public health and medical care  aspects of a pandemic involving humans. Although HHS is the lead agency  for ESF-8, the ESFs are carried out through a \u201cunified command\u201d  approach and several other federal agencies, including the Departments of  Agriculture, Defense, Energy, Homeland Security (and the U.S. Coast  Guard), Justice, and Labor, are specifically supporting agencies.\nESF-11 pertains to agriculture and natural resources, and its purpose  includes control and eradication of an outbreak of a highly contagious or  economically devastating animal\/zoonotic disease including avian  influenza. The purpose of ESF-11 is to ensure, in coordination with ESF-8,  that animal\/veterinary\/wildlife issues in natural disasters are supported.  The Departments of Agriculture and the Interior share responsibilities as  primary agencies for this ESF.\nFEMA has or shares lead responsibility for several of the ESFs, including  those that would be applicable during a pandemic. For example, FEMA is  the lead agency for ESF-5 (emergency management), ESF-6 (mass care,  housing, and human services), and ESF-14 (long-term community recovery  and mitigation) and is the primary agency for ESF-15 (external affairs).  Additionally, FEMA is responsible for carrying out the functions and  authorities of the Stafford Act.\nThe incident annexes describe the policies, situations, concept of  operations, and responsibilities pertinent to the type of incident in  question. Included among the seven incident annexes within the NRP is  the Catastrophic Incident Annex. The Catastrophic Incident Annex could  be applicable to a pandemic influenza as it applies to any incident that  results in extraordinary levels of mass casualties, damage, or disruption  severely affecting the population, infrastructure, environment, economy,  national morale, and\/or government functions.\nThe NRP also addresses two key leadership positions in the event of a  Stafford Act emergency or major disaster. One official, the FCO, who can  be appointed by the Secretary of Homeland Security on behalf of the  President, manages and coordinates federal resource support activities  related to Stafford Act disasters and emergencies. The other official, the  PFO, is designated by the Secretary of Homeland Security to facilitate  federal support to established incident command structures and to  coordinate overall federal incident management and assistance activities  across the spectrum of prevention, preparedness, response, and recovery.  The PFO is to provide a primary point of contact and situational  awareness for the Secretary of Homeland Security. While the PFO is  supposed to work closely with the FCO during an incident, the PFO has no  operational authority over the FCO.\n\n\t\tThe Executive Branch Has Taken Other Steps to Prepare for a Pandemic\n\nThe executive branch has also developed tools and guidance to aid in  preparing for and responding to a pandemic influenza. Among these are  the following:    A Web site, www.pandemicflu.gov, to provide one-stop access to U.S.  government avian and pandemic influenza information. This site is  managed by HHS.\nPlanning checklists for state and local governments, businesses, schools,  community organizations, health care providers, and individuals and  families. As of July 2007, there were 16 checklists included on the Web  site.  Interim planning guidance for state, local, tribal, and territorial  communities on nonpharmaceutical interventions (i.e., other than  vaccines and drug treatment) to mitigate an influenza pandemic. This  guidance, called the Interim Pre-pandemic Planning Guidance:  Community Strategy for Pandemic Influenza Mitigation in the United  States, includes a Pandemic Severity Index to characterize the severity of a  pandemic, provides planning recommendations for specific interventions  for a given level of pandemic severity, and suggests when those  interventions should be started and how long they should be used.  In March 2006, FEMA issued guidance for federal agencies to revise their  Continuity of Operations (COOP) Plans to address pandemic threats.  COOP plans are intended to ensure that essential government services are  available in emergencies. We testified in May 2006, on the need for  agencies to adequately prepare their telework capabilities for use during a  COOP event.  In September 2006, DHS issued guidance to assist owners and operators of   critical infrastructure and key resources to prepare for a localized  outbreak, as well as a broader influenza pandemic.\nIn addition to these tools and guidance, other actions included HHS grant  awards totaling $350 million to state and local governments for pandemic  planning and more than $1 billion to accelerate development and  production of new technologies for influenza vaccines within the United  States.\n\n\tFederal Government Leadership Roles and Responsibilities Need Clarification and Testing\n\nWhile the Strategy and Plan describe the broad roles and responsibilities  for preparing for and responding to a pandemic influenza, they do little to  clarify existing emergency response roles and responsibilities. Instead, the  documents restate the shared roles and responsibilities of the Secretaries  of Health and Human Services and Homeland Security already prescribed  by the NRP and related annexes and plans. These and other leadership  roles and responsibilities continue to evolve, such as with the  establishment of a national PFO and regional PFOs and FCOs and  potential changes from ongoing efforts to revise the NRP. Congress has  also passed legislation to address prior problems that emerged regarding  federal leadership roles and responsibilities for emergency management  that have ramifications for pandemic influenza. Although pandemic  influenza scenarios have been used to exercise specific response elements,  such as the distribution of stockpiled medications at specific locations or  jurisdictions, no national exercises have tested the new federal leadership  structure for pandemic influenza. The only national multisector pandemic  exercise to date was a tabletop simulation conducted by members of the  cabinet in December 2005, which was prior to the release of the Plan and  the establishment of the PFO and FCO positions for a pandemic.\n\n\t\tThe Strategy and Plan Do Not Clarify Leadership Roles and Responsibilities\n\nThe Strategy and Plan do not clarify the specific leadership roles and  responsibilities for a pandemic. Instead, they restate the existing  leadership roles and responsibilities, particularly for the Secretaries of  Homeland Security and Health and Human Services, prescribed in the  NRP\u2014an all-hazards plan for emergencies ranging from hurricanes to  wildfires to terrorist attacks. However, the leadership roles and  responsibilities prescribed under the NRP may need to operate somewhat  differently because of the characteristics of a pandemic that distinguish it  from other emergency incidents. For example, because a pandemic  influenza is likely to occur in successive waves, planning has to consider  how to sustain response mechanisms for several months to over a year\u2014 issues that are not clearly addressed in the Plan. In addition, the  distributed nature of a pandemic, as well as the sheer burden of disease  across the nation, means that the support states, localities, and tribal  entities can expect from the federal government would be limited in  comparison to the aid it mobilizes for geographically and temporarily  bounded disasters like earthquakes and hurricanes. Consequently, legal  authorities, roles and responsibilities, and lines of authority at all levels of  government must be clearly defined, effectively communicated, and well- understood to facilitate rapid and effective decision making. This is also  important for public and private sector organizations and international  partners so everyone can better understand what is expected of them  before and during a pandemic.\nThe Strategy and Plan describe the Secretary of Health and Human  Services as being responsible for leading the medical response in a  pandemic, while the Secretary of Homeland Security is responsible for  overall domestic incident management and federal coordination. However,  since a pandemic extends well beyond health and medical boundaries, to  include sustaining critical infrastructure, private sector activities, the  movement of goods and services across the nation and the globe, and  economic and security considerations, it is not clear when, in a pandemic,  the Secretary of Health and Human Services would be in the lead and  when the Secretary of Homeland Security would lead.\nSpecifically, the Plan states that the Secretary of Health and Human  Services, consistent with his\/her role under the NRP as the coordinator for  ESF-8, would be responsible for the overall coordination of the public  health and medical emergency response during a pandemic, including  coordinating all federal medical support to communities; providing  guidance on infection control and treatment strategies to state, local, and  tribal entities and the public; maintaining, prioritizing, and distributing  countermeasures in the Strategic National Stockpile; conducting ongoing  epidemiologic assessment and modeling of the outbreak; and researching  the influenza virus, novel countermeasures, and rapid diagnostics. The  Plan calls for the Secretary to be the principal federal spokesperson for  public health issues, coordinating closely with DHS on public messaging  pertaining to the pandemic.\nAlso similar to the NRP, the Plan states that the Secretary of Homeland  Security, as the principal federal official for domestic incident  management, would be responsible for coordinating federal operations  and resources; establishing reporting requirements; and conducting  ongoing communications with federal, state, local, and tribal governments,  the private sector, and nongovernmental organizations. It also states that  in the context of response to a pandemic, the Secretary of Homeland  Security would coordinate overall nonmedical support and response  actions, sustain critical infrastructure, and ensure necessary support to the  Secretary of Health and Human Services\u2019 coordination of public health and  medical emergency response efforts. Additionally, the Plan states that the  Secretary of Homeland Security would be responsible for coordinating the  overall response to the pandemic; implementing policies that facilitate  compliance with recommended social distancing measures; providing for a  common operating picture for all departments and agencies of the federal  government; and ensuring the integrity of the nation\u2019s infrastructure,  domestic security, and entry and exit screening for influenza at the  borders.\nOther DHS responsibilities include operating and maintaining the National  Biosurveillance Integration System, which is intended to provide an all- source biosurveillance common operating picture to improve early  warning capabilities and facilitate national response activities through  better situational awareness. This responsibility, however, appears to be  both a public health issue and an overall incident management issue,  raising similar issues about the interrelationship of DHS and HHS roles  and responsibilities. In addition, a pandemic could threaten our critical  infrastructure, such as the capability to deliver electricity or food, by  removing essential personnel from the workplace for weeks or months.  The extent to which this would be considered a medical response with the  Secretary of Health and Human Services in the lead, or when it would be  under the Secretary of Homeland Security\u2019s leadership as part of his\/her  responsibility for ensuring that critical infrastructure is protected, is  unclear. According to HHS officials we interviewed, resolving this  ambiguity will depend on several factors, including how the outbreak  occurs and the severity of the pandemic.\nOfficials from other agencies also need greater clarity about these roles  and responsibilities. For example, USDA is not planning for DHS to  assume the lead coordinating role if an outbreak of avian flu among  poultry occurs sufficient in scope to warrant a presidential declaration of  an emergency or major disaster. The federal response may be slowed as  agencies resolve their roles and responsibilities following the onset of a  significant outbreak. In addition, although DHS and HHS officials  emphasize that they are working together on a frequent basis, these roles  and responsibilities have not been thoroughly tested and exercised.\n\n\t\tAdditional Key Leadership Roles and Responsibilities Are Evolving and Untested\n\nThe executive branch has several efforts, some completed and others  under way, to strengthen and clarify leadership roles and responsibilities  for preparing for and responding to a pandemic influenza. However, many  of these efforts are new, untested through exercises, or both. For example,  on December 11, 2006, the Secretary of Homeland Security predesignated  the Vice Commandant of the U.S. Coast Guard as the national PFO for  pandemic influenza, and also established five pandemic regions, each with  a regional PFO. Also, FCOs were predesignated for each of the regions. In  addition to the five regional FCOs, a FEMA official with significant FCO  experience has been selected to serve as the senior advisor to the national  PFO. DOD has selected Defense Coordination Officers and HHS has  selected senior health officials to work together within this national  pandemic influenza preparedness and response structure.\nDHS is taking steps to further clarify federal leadership roles and  responsibilities. Specifically, it is developing a Federal Concept Plan for  Pandemic Influenza, which is intended to identify specific federal  response roles and responsibilities for each stage of an outbreak.  According to DHS, the Concept Plan, which is based on the  Implementation Plan and other related documents, would also identify  \u201cseams and gaps that must be addressed to ensure integration of all federal  departments and agencies prior to, during, and after a pandemic outbreak  in the U.S.\u201d According to DHS officials, they sent a draft to federal  agencies in May for comment and have not yet determined when the  Concept Plan will be issued.\nU.S. Coast Guard and FEMA officials we met with recognized that  planning for and responding to a pandemic would require different  operational leadership roles and responsibilities than for most other  emergencies. For example, a FEMA official said that given the number of  people who would be involved in responding to a pandemic, collaboration  between HHS, DHS, and FEMA would need to be greater than for any  other past emergencies. Officials are starting to build relationships among  the federal actors for a pandemic. For example, some of the federal  officials with leadership roles for an influenza pandemic met during the  week of March 19, 2007, to continue to identify issues and begin  developing solutions. One of the participants, however, told us that  although additional coordination meetings are needed, it may be  challenging since there is no dedicated funding for the staff working on  pandemic issues to participate in these and other related meetings.\nThe national PFO for pandemic influenza said that a draft charter has also  been developed to establish a Pandemic Influenza PFO Working Group to  help identify and address many policy and operational issues before a  pandemic. According to a FEMA official, some of these issues include staff  availability, protective measures for staff, and how to ensure that the  assistance to be provided under the Stafford Act is implemented and  coordinated in a unified and consistent manner across the country during  a pandemic. As of June 7, 2007, the draft charter was undergoing some  revisions and was expected to be sent to the Secretary of Homeland  Security for review and approval around the end of June. Additionally,  there are plans to identify related exercises, within and outside of the  federal government, to create a consolidated schedule of exercises for the  national PFO for pandemic influenza and regional PFOs and FCOs to  participate in by leveraging existing exercise plans. DHS officials said that  they expect FEMA would retain responsibility for maintaining this  consolidated schedule.\nIt is unclear whether the newly established national and regional positions  for a pandemic will further clarify leadership roles. For example, in 2006,  DHS made revisions to the NRP and released a Supplement to the  Catastrophic Incident Annex\u2014both designed to further clarify federal  roles and responsibilities and relationships among federal, state, and local  governments and responders. However, we reported in February 2007 that  these revisions had not been tested and there was little information  available on the extent to which these and other actions DHS was taking  to improve readiness were operational. Additionally, DHS is currently  coordinating a comprehensive review of the NRP and NIMS to assess their  effectiveness, identify improvements, and recommend modifications. One  of the issues expected to be addressed during this review is clarifying of  roles and responsibilities of key structures, positions, and levels of  government, including the role of the PFO and that position\u2019s current lack  of operational authority during an emergency. The review is expected to  be done, and a revised NRP and NIMS issued, by the summer of 2007.\n\n\t\tRecent Congressional Actions Addressed Leadership Roles and Responsibilities\n\nIn 2006, Congress passed two acts addressing leadership roles and  responsibilities for emergency management\u2014the Pandemic and All- Hazards Preparedness Act and the Post-Katrina Emergency Management  Reform Act of 2006\u2014which were enacted into law on December 19, 2006  and October 4, 2006, respectively.\n\n\t\t\tPandemic and All-Hazards Preparedness Act and Its Implementation\n\nThe Pandemic and All-Hazards Preparedness Act codifies preparedness  and response federal leadership roles and responsibilities for public health  and medical emergencies that are now in the NRP by designating the  Secretary of Health and Human Services as the lead federal official for  public health and medical preparedness and response, consistent with the  NRP. The act also requires the Secretary to establish an interagency  agreement, in collaboration with DOD, DHS, DOT, the Department of  Veterans Affairs, and other relevant federal agencies, prescribing that  consistent with the NRP, HHS would assume operational control of  emergency public health and medical response assets in the event of a  public health emergency. Further, the act requires that the Secretary  develop a coordinated National Health Security Strategy and  accompanying implementation plan for public health emergency  preparedness and response. This health security strategy and  accompanying implementation plan are to be completed by 2009 and  updated every 4 years.\nThe act also prescribes several new preparedness responsibilities for HHS.  For example, the Secretary must develop and disseminate criteria for an  effective state plan for responding to a pandemic influenza. Additionally,  the Secretary is required to develop and require the application of  measurable evidence-based benchmarks and objective standards that  measure the levels of preparedness in such areas as hospitals and state  and local public health security.\nThe act seeks to further strengthen HHS\u2019s public health leadership role by  transferring the National Disaster Medical System from DHS back to HHS,  thus placing these public health resources within HHS. It also creates the  Office of the Assistant Secretary for Preparedness and Response  (replacing the Office of the Assistant Secretary for Public Health  Emergency Preparedness) and consolidates other preparedness and  response functions within HHS in the new Assistant Secretary\u2019s office.\nHHS has set up an implementation team involving over 200 HHS staff to  implement the provisions of this act. According to a HHS official, an  interim implementation plan is expected to be made available for public  comment sometime during the summer of 2007.\n\n\t\t\tPost-Katrina Reform Act and Its Implementation\n\nIn response to the findings and recommendations from several reports, the  Post-Katrina Emergency Management Reform Act (referred to as the Post- Katrina Reform Act in this report) designated the FEMA Administrator as  the principal domestic emergency management advisor to the President,  the HSC, and the Secretary of Homeland Security. Therefore, the FEMA  Administrator also has a leadership role in preparing for and responding to  an influenza pandemic, including key areas such as planning and  exercising. For example, under the Post-Katrina Reform Act, the FEMA  Administrator is responsible for carrying out a national exercise program  to test and evaluate preparedness for a national response to natural and  man-made disasters.\nThe act made FEMA a distinct entity within DHS for leading and  supporting the nation in a risk-based, comprehensive emergency  management system of preparedness, protection, response, recovery, and  mitigation. As part of the reorganization, DHS transferred several offices  and divisions of its National Preparedness Directorate to FEMA, including  the Offices of Grants and Training and National Capital Region  Coordination. FEMA\u2019s National Preparedness Directorate contains  functions related to preparedness doctrine, policy, and contingency  planning and includes DHS\u2019s exercise coordination and evaluation  program and emergency management training. Other transfers included  the Chemical Stockpile Emergency Preparedness Division, Radiological  Emergency Preparedness Program, and the United States Fire  Administration. The reorganization took effect on March 31, 2007, and it  will likely take some time before it is fully implemented and key  leadership positions within FEMA are filled.\n\n\t\tRigorous and Robust Exercises Are Important for Testing Federal Leadership for a Pandemic\n\nDisaster planning, including for a pandemic influenza, needs to be tested  and refined with a rigorous and robust exercise program to expose  weaknesses in plans and allow planners to refine them. Exercises\u2014 particularly for the type and magnitude of emergency incidents such as a  severe influenza pandemic for which there is little actual experience\u2014are  essential for developing skills and identifying what works well and what  needs further improvement. Our prior work examining the preparation for  and response to Hurricane Katrina highlighted the importance of realistic  exercises to test and refine assumptions, capabilities, and operational  procedures; and build upon strengths. In response to the experiences  during Hurricane Katrina, the Post-Katrina Reform Act called for a  national exercise program to evaluate preparedness of a national response  to natural and man-made disasters.\nWhile pandemic influenza scenarios have been used to exercise specific  response elements and locations, such as for distributing stockpiled  medications, there has been no national exercise to test a multisector,  multijurisdictional response or any exercises to test the working and  operational relationships of the national PFO and the five regional PFOs  and FCOs for pandemic influenza. According to a CRS report, the only  national multisector pandemic exercise to date was a tabletop simulation  involving members of the federal cabinet in December 2005. This tabletop  exercise was prior to the release of the Plan in May 2006, the  establishment of a national PFO and regional PFO and FCO positions for a  pandemic, and enactment of the Pandemic and All-Hazards Preparedness  Act in December 2006 and the Post-Katrina Reform Act in October 2006.\n\n\tThe National Strategy and Its Implementation Plan Do Not Address All the Characteristics of an Effective Strategy, Thus Limiting Their Usefulness as Planning Tools\n\nThe Strategy and Plan represent important efforts to guide the nation\u2019s  preparedness and response activities, setting forth actions to be taken by  federal agencies and expectations for a wide range of actors, including  states and communities, the private sector, global partners, and  individuals. However, the Strategy and Plan do not address all of the  characteristics of an effective national strategy as we identified in our  prior work. While national strategies necessarily vary in content, the six  characteristics we identified apply to all such planning documents and can  help ensure that they are effective management tools. Gaps and  deficiencies in these documents are particularly troubling in that a  pandemic represents a complex challenge that will require the full  understanding and collaboration of a multitude of entities and individuals.  The extent to which these documents, that are to provide an overall  framework to ensure preparedness and response to a pandemic influenza,  fail to adequately address key areas, could have critical impact on whether  the public and key stakeholders have a clear understanding and can  effectively execute their roles and responsibilities.\nAs shown in table 3, the Strategy and its Plan address one of the six  characteristics of an effective national strategy. However, they only  partially address four and do not address one of the characteristics at all.  As a result, the Strategy and Plan fall short as an effective national strategy  in important areas.\n\n\t\tThe Strategy and Plan Partially Address Purpose, Scope, and Methodology\n\nA national strategy should address its purpose, scope, and methodology,  including the process by which it was developed, stakeholder involvement,  and how it compares and contrasts with other national strategies.  Addressing this characteristic helps make a strategy more useful to  organizations responsible for implementing the strategy, as well as those  responsible for oversight. We found that the Strategy and Plan partially  address this characteristic by describing their purpose and scope.  However, neither document described in adequate detail their  methodology for involving key stakeholders, how they relate to other  national strategies, or a process for updating the Plan.\nIn describing its purpose, the Strategy states that it was developed to  provide strategic direction for the departments and agencies of the U.S.  government and guide the U.S. preparedness and response activities to  mitigate the impact of a pandemic. In support of the Strategy, the Plan  states that its purpose is to translate the Strategy into tangible action and  direct federal departments and agencies to take specific, coordinated steps  to achieve the goals of the Strategy and outline expectations for state,  local, and tribal entities; businesses; schools and universities;  communities; nongovernmental organizations; and international partners.\nAs a part of its scope, the Plan identifies six major functions:                     (1) protecting human health, (2) protecting animal health, (3) international  considerations, (4) transportation and borders, (5) security  considerations, and (6) institutional considerations. The Plan proposes  that departments and agencies undertake a series of actions in support of  these functional areas with operational details on how departments would  accomplish these objectives to be provided by separate departmental  plans. Additionally, the Strategy and Plan describe the principles and  planning assumptions that guided their development. The Strategy\u2019s  guiding principles include recognition of the private sector\u2019s integral role  and leveraging global partnerships. The Plan\u2019s principles are more  expansive, listing 12 planning assumptions that it identifies as facilitating  its planning efforts. For example, 1 of the assumptions is that illness rates  would be highest among school-aged children (about 40 percent).\nAnother element under this characteristic is the involvement of key  stakeholders in the development of the strategy. Neither the Strategy nor  Plan described the involvement of key stakeholders, such as state, local,  and tribal entities, in the development of the Strategy or Plan, even though  they would be on the front lines in a pandemic and the Plan identifies  actions they should complete. The Plan contains 17 actions calling for  state, local, and tribal governments to lead national and subnational  efforts, and identifies another 64 actions where their involvement is  needed. Officials told us that federal stakeholders had opportunities to  review and comment on the Plan but that state, local, and tribal entities  were not directly involved, although the drafters of the Plan were  generally aware of their concerns. Stakeholder involvement during the  planning process is important to ensure that the federal government\u2019s and  nonfederal entities\u2019 responsibilities and resource requirements are clearly  understood and agreed upon. Therefore, the Strategy and Plan may not  fully reflect a national perspective on this critical national issue since  nonfederal stakeholders were not involved in the process to develop the  actions where their leadership, support, or both would be needed. Further,  these nonfederal stakeholders need to understand their critical roles in  order to be prepared to work effectively under difficult and challenging  circumstances.\nBoth documents address the scope of their coverage and include several  important elements in their discussions, but do not address how they  compare and contrast to other national strategies. The Strategy recognizes  that preparing for a pandemic is more than a purely federal responsibility,  and that the nation must have a system of plans at all levels of government  and in all sectors outside of government that can be integrated to address  the pandemic threat. It also extends its scope to include the development  of an international effort as a central component of overall capacity. The  Strategy lays out the major functions, mission areas, and activities  considered under the extent of its coverage. For example, the Strategy\u2019s  scope is defined as extending well beyond health and medical boundaries,  to include sustaining critical infrastructure, private sector activities, the  movement of goods and services across the nation and the globe, and  economic and security considerations. Although the Strategy states that it  will be consistent with the National Security Strategy and the Strategy for  Homeland Security, it does not specify how they are related. The Plan  mentions the NRP and states that it will guide the federal pandemic  response. Because a pandemic would affect all facets of our society,  including the nation\u2019s security, it is important to recognize and reflect an  understanding of how these national strategies relate to one another.\nThe Plan does not describe a mechanism for updating it to reflect policy  decisions, such as clarifications in leadership roles and responsibilities  and other lessons learned from exercising and testing or other changes.  Although the Plan was developed with the intent of being initial guidance  and being updated and expanded over time, officials in several agencies  told us that specific processes or time frames for updating and revising it  have not been established. In addition to incorporating lessons learned,  such updates are important in ensuring that the Plan accurately reflects  entities\u2019 capabilities and a clear understanding of roles and  responsibilities. Additionally, an update would also provide the  opportunity for input from nonfederal entities that have not had an  opportunity to directly provide input to the Strategy and Plan.\n\n\t\tStrategy and Plan Address Problem Definition and Risk Assessment\n\nNational strategies need to reflect a clear description and understanding of  the problems to be addressed, their causes, and operating environment. In  addition, the strategy should include a risk assessment, including an  analysis of the threats to and vulnerabilities of critical assets and  operations. We found that the Strategy and Plan address this characteristic  by describing the potential problems associated with a pandemic as well  as potential threats and vulnerabilities.\nIn defining the problem, both documents provide information on what a  pandemic is and how influenza viruses are transmitted, and explain that a  threat stems from an unprecedented outbreak of avian influenza in Asia  and Europe, caused by the H5N1 strain of the influenza A virus. The  President, in releasing the Strategy, stated that it presented an approach to  address the threat of pandemic influenza, whether it results from the strain  currently in birds in Asia or another influenza virus. Additionally, the  problem definition includes a historical perspective of other pandemics in  the United States.\nThe Plan used the severity of the 1918 influenza pandemic as the basis for  its risk assessment. A CBO study was used to describe the possible  economic consequences of such a severe pandemic on the U.S. economy  today. While the Plan did not discuss the likelihood of a severe pandemic  or analyze the possibility of whether the H5N1 strain would be the specific  virus strain to cause a pandemic, it stated that history suggests that a  pandemic would occur some time in the future. As a result, it recognizes  the importance of preparing for an outbreak.\nThe Strategy and Plan included discussions of the constraints and  challenges involved in a pandemic. For example, the Plan included  challenges such as severe shortfalls in surge capacity in the nation\u2019s health  care facilities, limited vaccine production capabilities, the lack of real-time  surveillance among most of the systems, and the inability to quantify the  value of many infection control strategies.\nIn acknowledging the challenges involved in pandemic preparedness, the  Plan also describes a series of circumstances to enable preparedness, such  as viewing pandemic preparedness as a national security issue,  connectivity between communities, and communicating risk and  responsibility. In this regard, the Plan recognizes that one of the nation\u2019s  greatest vulnerabilities is the lack of connectivity between communities  responsible for pandemic preparedness. The Plan specifically cites  vulnerabilities in coordination of efforts between the animal and human  health communities, as well as between the public health and medical  communities. In the case of public health and medical communities, the  public health community has responsibility for communitywide health  promotion and disease prevention and mitigation efforts, and the medical  community is largely focused on actions at the individual level.\n\n\t\tThe Strategy and Plan Partially Address Goals, Objectives, Activities, and Performance Measures\n\nA national strategy should describe its goals and the steps needed to  achieve those results, as well as the priorities, milestones, and outcome- related performance measures to gauge results. Identifying goals,  objectives, and outcome-related performance measures aids implementing  parties in achieving results and enables more effective oversight and  accountability. We found that the Strategy and Plan partially address this  characteristic by identifying the overarching goals and objectives for  pandemic planning. However, the documents did not describe  relationships or priorities among the action items, and some of the action  items lacked a responsible entity for ensuring their completion. The Plan  also did not describe a process for monitoring and reporting on the action  items. Further, many of the performance measures associated with action  items were not clearly linked with results nor assigned clear priorities.\nThe Strategy and Plan identify a hierarchy of major goals, pillars,  functional areas, and specific activities (i.e., action items), as shown in  figure 1. The Plan includes and expands upon the Strategy\u2019s framework by  including 324 action items.\nThe Plan uses the Strategy\u2019s three major goals that are underpinned by  three pillars as its framework and expands on this organizing structure by  presenting chapters on six functional areas with various objectives, action  items, and performance measures. For example, pillar 2, surveillance and  detection, under the transportation and borders functional area, includes  an objective to develop and exercise mechanisms to provide active and  passive surveillance during an outbreak, both within and outside our  borders. Under this objective is an action item for HHS, in coordination  with other specific federal agencies, to develop policy recommendations  for transportation and borders entry and exit protocols, screening, or both  and to review the need to develop domestic response protocols and  screening within 6 months. The item\u2019s performance measure is policy  recommendations for response protocols, screening, or both.\nWhile some action items depend on other action items, these linkages are  not always apparent in the Plan. For example, one action item, concerning  the development of a joint strategy for deploying federal health care and  public health assets and personnel, is under the preparedness and  communication pillar. However, another action item concerning the  development of strategic principles for deployment of federal medical  assets is under the response and containment pillar within the same  chapter. While these two action items are clearly related, the plan does not  make a connection between the two or discuss their relationship. An HHS  official who helped draft the Plan acknowledged that while an effort was  made to ensure linkages among action items, there may be gaps in the  linkages among interdependent action items within and across the Plan\u2019s  chapters on the six functional areas (i.e., the chapters that contain action  items).\nSome action items, particularly those that are to be completed by state,  local, and tribal governments or the private sector, do not identify an  entity responsible for carrying out the action. Although the plan specifies  actions to be carried out by states, local jurisdictions, and other entities,  including the private sector, it gives no indication of how these actions will  be monitored and how their completion will be ensured. For example, one  such action item states that \u201call health care facilities should develop and  test infectious disease surge capacity plans that address challenges  including: increased demand for services, staff shortages, infectious  disease isolation protocols, supply shortages, and security.\u201d Similarly,  another action item states that \u201call Federal, State, local, tribal, and private  sector medical facilities should ensure that protocols for transporting  influenza specimens to appropriate reference laboratories are in place  within 3 months.\u201d Yet the plan does not make clear who will be  responsible for making sure that these actions are completed.\nWhile most of the action items have deadlines for completion, ranging  from 3 months to 3 years, the Plan does not identify a process to monitor  and report on the progress of the action items nor does it include a  schedule for reporting progress. Agency officials told us that they had  identified individuals to act as overall coordinators to monitor the action  items for which their agencies have lead responsibility and provide  periodic progress reports to the HSC. However, we could not identify a  similar mechanism to monitor the progress of the action items that fall to  state and local governments or the private sector. The first public  reporting on the status of the action items occurred in December 2006  when the HSC reported on the status of the action items that were to have  been completed by November 3, 2006\u20146 months after the release of the  Plan. Of the 119 action items that were to be completed by that time, we  found that the HSC omitted the status of 16 action items. Two of the action  items that were omitted from the report were to (1) establish an  interagency transportation and border preparedness working group and  (2) engage in contingency planning and related exercises to ensure  preparedness to maintain essential operations and conduct missions.\nAdditionally, we found that several of the action items that were reported  by the HSC as being completed were still in progress. For example, DHS,  in coordination with the Department of State (State), HHS, the Department  of the Treasury (Treasury), and the travel and trade industry, was to tailor  existing automated screening programs and extended border programs to  increase scrutiny of travelers and cargo based on potential risk factors  within 6 months. The measure of performance was to implement enhanced  risk-based screening protocols. Although this action item was reported as  complete, the HSC reported that DHS was still developing risk-based  screening protocols, a major component of this action. A DHS official,  responsible for coordinating the completion of DHS-led action items,  acknowledged that all action items are a work in progress and that they  would continue to be improved, including those items that were listed as  completed in the report. The HSC\u2019s report included a statement that a  determination of \u201ccomplete\u201d does not necessarily mean that work has  ended; in many cases work is ongoing. Instead, the complete  determination means that the measure of performance associated with an  action item was met. It appears that this determination has not been  consistently or accurately applied for all items. Our recent report on U.S.  agencies\u2019 international efforts to forestall a pandemic influenza also  reported that eight of the Plan\u2019s international-related action items included  in the HSC\u2019s report either did not directly address the associated  performance measure or did not indicate that the completion deadline had  been met.\nMost of the Plan\u2019s performance measures are focused on activities such as  disseminating guidance, but the measures are not always clearly linked  with intended results. This lack of clear linkages makes it difficult to  ascertain whether progress has in fact been made toward achieving the  national goals and objectives described in the Strategy and Plan. Most of  the Plan\u2019s performance measures consist of actions to be completed, such  as guidance developed and disseminated. Without a clear linkage to  anticipated results, these measures of activities do not give an indication  of whether the purpose of the activity is achieved. Further, 18 of the action  items have no measure of performance associated with them. In addition,  the plan does not establish priorities among its 324 action items, which  becomes especially important as agencies and other parties strive to  effectively manage scarce resources and ensure that the most important  steps are accomplished.\n\n\t\tThe Strategy and Plan Do Not Address Resources, Investments, and Risk Management\n\nA national strategy needs to describe what the strategy will cost; identify  where resources will be targeted to achieve the maximum results; and  describe how the strategy balances benefits, risks, and costs. Guidance on  costs and resources needed using a risk management approach helps  implementing parties allocate resources according to priorities, track  costs and performance, and shift resources, as appropriate. We found that  neither the Strategy nor Plan contain these elements.\nWhile neither document addresses the overall cost to implement the Plan,  the Plan refers to the administration\u2019s budget request of $7.1 billion and a  congressional appropriation of $3.8 billion to support the objectives of the  Strategy. In November 2005, the administration requested $7.1 billion in  emergency supplemental funding over 3 years to support the  implementation of the Strategy. In December 2005, Congress appropriated  $3.8 billion to support budget requirements to help address pandemic  influenza issues. The Plan states that much of this funding would be  directed toward domestic preparedness and the establishment of  countermeasure stockpile and production capacity, with $400 million  directed to bilateral and multilateral international efforts. However, the 3- year $7.1 billion budget proposal does not coincide with the period of the  Plan. Additionally, whereas the Plan does not allocate funds to specific  action items, our analysis of budget documents indicates that the funds  were allocated primarily toward those action items related to vaccines and  antivirals.\nDeveloping and sustaining the capabilities stipulated in the Plan would  require the effective use of federal, state, and local funds. Given that  funding needs may not be readily addressed through existing mechanisms  and could stress existing government and private resources, it is critical  for the Plan to lay out funding requirements. For example, the Plan states  that one of the primary objectives of domestic vaccine production  capacity would be for domestic manufacturers to produce enough vaccine  for the entire U.S. population within 6 months. However, it states that  production capacity would depend on the availability of future  appropriations. Despite the fact that the production of enough vaccine for  the population would be critical if a pandemic were to occur, the Plan  does not provide even a rough estimate of how much the vaccine could  cost for consideration in future appropriations.\nDespite the numerous action items and specific implementing directives  and guidance directed toward federal agencies, states, organizations, and  businesses, neither document addresses what it would cost to complete  the actions that are stipulated. Rather, the Plan states that the local  communities would have to address the medical and nonmedical effects of  the pandemic with available resources, and also that pandemic influenza  response activities may exceed the budgetary resources of responding  federal and state government agencies.\nThe overall uncertainty of funding to complete action items stipulated in  the Plan has been problematic. For example, there were more than 50  actions in the Plan that were to be completed before the end of 2006 for  which DOD was either a lead or support agency. We reported that because  DOD had not yet requested funding, it was unclear whether DOD could  address the tasks assigned to it in the Plan and pursue its own  preparedness efforts for its workforce departmentwide within current  resources.\n\n\t\tThe Strategy and Plan Partially Address Organizational Roles, Responsibilities, and Coordination\n\nA national strategy should address which organizations would implement  the strategy, their roles and responsibilities, and mechanisms for  coordinating their efforts. It helps to answer the fundamental question  about who is in charge, not only during times of crisis, but also during all  phases of emergency management, as well as the organizations that will  provide the overall framework for accountability and oversight. This  characteristic entails identifying the specific federal departments,  agencies, and offices involved and, where appropriate, the different  sectors, such as state, local, private, and international sectors. We found  that the Strategy and Plan partially address this characteristic by  containing broad information on roles and responsibilities. But, as we  noted earlier, while the Plan describes coordination mechanisms for  responding to a pandemic, it does not clarify how responsible officials  would share leadership responsibilities. In addition, it does not describe  mechanisms for coordinating preparations and completing the action  items, nor does it describe an overall accountability and oversight  framework.\nThe Strategy identifies lead agencies for preparedness and response.  Specifically, HHS is the lead agency for medical response; USDA for  veterinary response; State for international activities; and DHS for overall  domestic incident management, sustainment of critical infrastructure and  key resources, and federal coordination. The Plan also briefly describes  the preparedness and response roles and responsibilities of DOD, the  Department of Labor, DOT, and Treasury. The Plan states that these and  all federal cabinet agencies are responsible for their respective sectors and  developing pandemic response plans. In addition, the Strategy and Plan  broadly describe the expected roles and responsibilities of state, local, and  tribal governments; international partners; the private and nonprofit  sectors; and individuals and families. For example, in the functional area  of transportation and borders, the Plan states that it expects state and  local communities to involve transportation and health professionals to  identify transportation options, consequences, and implications in the  event of a pandemic.\nThe Plan states that the primary mechanism for coordinating the federal  government\u2019s response to a pandemic is the NRP. In this regard, the Plan  acknowledges that sustaining mechanisms for several months to over a  year will present unique challenges, and thus day-to-day monitoring of the  response to a pandemic influenza would occur through the national  operations center with an interagency body composed of senior decision  makers from across the government and chaired by the White House.  Additionally, the Plan states that policy issues that cannot be resolved at  the department level would be addressed through the HSC-National  Security Council policy coordination process. As stipulated in the Plan, the  specifics of this policy coordination mechanism were included in the May  2006 revisions to the NRP.\nThe Plan also generally identifies lead and support roles for the action  items federal agencies are responsible for completing, but it is not explicit  in defining these roles or processes for coordination and collaboration.  While it identifies which federal agencies have lead and support roles for  completing 305 action items, the Plan does not define the roles of the lead  and support agencies. Rather, it leaves it to the agencies to interpret and  negotiate their roles. According to DOT officials we met with, this lack of  clarity, coupled with staff turnover, left them unclear about their roles and  responsibilities in completing action items. Thus, they had to seek  clarification from DHS and HHS officials to assist them in defining what it  meant to be the lead agency for an action item. Additionally, the Plan does  not describe specific processes for coordination and collaboration  between federal and nonfederal organizations and sectors for completing  the action items.\nRelated to this issue, we recently reported that some of DOD\u2019s combatant  commands, tasked with providing support in the event of a pandemic, had  received limited detailed guidance from the lead agencies about what  support they may be asked to provide during a pandemic. This has  hindered these commands\u2019 ability to plan to provide support to lead  federal agencies domestically and abroad during a pandemic.\nThe Plan also does not describe the role played by organizations that are  to provide the overall framework for accountability and oversight, such as  the HSC. According to agency officials, the HSC is monitoring executive  branch agencies\u2019 efforts to complete the action items. However, there is no  specific documentation describing this process or institutionalizing it. This  is important since some of the action items are not expected to be  completed during this administration. Also, a similar oversight process for  those actions items for which nonfederal entities have the lead  responsibility does not appear to exist.\n\n\t\tThe Strategy and Plan Partially Address Integration and Implementation\n\nA national strategy should make clear how it relates to the goals,  objectives, and activities of other strategies and to subordinate levels of  government and their plans to implement the strategy. A strategy might  also discuss, as appropriate, various strategies and plans produced by  state, local, private, and international sectors. A clear relationship between  the strategy and other critical implementing documents helps agencies and  other entities understand their roles and responsibilities, foster effective  implementation, and promote accountability. We found that the Strategy  and Plan partially address this characteristic. Although the documents  mention other related national strategies and plans, they do not provide  sufficient detail describing the relationships among these strategies and  plans nor do they describe how subordinate levels of government and  independent plans proposed by the Plan would be integrated to implement  the Strategy.\nSince September 11, 2001, various national strategies, presidential  directives, and national initiatives have been developed to better prepare  the nation to respond to incidents of national significance, such as a  pandemic influenza. As noted in figure 2, these include the National  Security Strategy and the NRP. However, although the Strategy states that  it is consistent with the National Security Strategy and the National  Strategy for Homeland Security, it does not state how it is consistent or  describe its relationship with these two strategies. In addition, the Plan  does not specifically address how the Strategy or other related pandemic  plans should be integrated with the goals, objectives, and activities of the  national initiatives already in place.\nWhereas the Plan states that it supports Homeland Security Presidential  Directive 8, which required the development of a domestic all-hazards  preparedness goal\u2014the National Preparedness Goal (Goal)\u2014it does not  describe how it supports the directive or its relationship to the Goal. The  current interim Goal is particularly important for determining what  capabilities are needed for a catastrophic disaster. It defines 36 major  capabilities that first responders should possess to prevent, protect from,  respond to, and recover from a wide range of incidents and the most  critical tasks associated with these capabilities. An inability to effectively  perform these critical tasks would, by definition, have a detrimental effect  on protection, prevention, response, and recovery capabilities. The interim  Goal also includes 15 planning scenarios, including one for pandemic  influenza that outlines universal and critical tasks to be undertaken for  planning for an influenza pandemic and target capabilities, such as search  and rescue and economic and community recovery. Yet, the Strategy and  Plan do not integrate this already-developed planning scenario and related  tasks and capabilities. One federal agency official who assisted in drafting  the Plan told us that the Goal and its pandemic influenza scenario had  been considered but omitted because the Goal\u2019s pandemic influenza  scenario is geared to a less severe pandemic\u2014such as those that occurred  in 1957 and 1968\u2014while the Plan is based on the more severe 1918-level  mortality and morbidity rates.\nFurther, the Strategy and Plan do not provide sufficient detail about how  the Strategy, action items, and proposed set of independent plans are to be  integrated with other national strategies and framework. Without clearly  providing this linkage, the Plan may limit a common understanding of the  overarching framework, thereby hindering the nation\u2019s ability to  effectively prepare for, respond to, and recover from a pandemic. For  example, the Plan contains 39 action items that are response related (i.e.,  specific actions are to be taken within a prescribed number of hours or  days after an outbreak). However, these action items are interspersed  among the 324 action items, and the Plan does not describe the linkages of  these response-related action items with the NRP or other response  related plans. Further, DHS officials have recognized the need for a  common understanding across federal agencies and better integration of  agencies plans to prepare for and respond to a pandemic. DHS officials are  developing a Federal Concept Plan for Pandemic Influenza to enhance  interagency preparedness, response, and recovery efforts.\nThe Plan also requires the federal departments and agencies to develop  their own pandemic plans that describe the operational details related to  the respective action items and cover the following areas: (1) protection of  their employees; (2) maintenance of their essential functions and services;  (3) how they would support both the federal response to a pandemic and  those of states, localities, and tribal entities; and (4) the manner in which  they would communicate messages about pandemic planning and  response to their stakeholders. Further, it is unclear whether all the  departments will share some or all of the information in their plans with  nonfederal entities. While some agencies-such as HHS, DOD, and the  Department of Veterans Affairs-have publicly released their pandemic  plans, at least one agency, DHS, has indicated that it does not intend to  publicly release its plan. Since DHS is a lead agency for planning for and  responding to a pandemic, this gap may make it more challenging to fully  advance joint and integrated planning across all levels of government and  the private sector.\nThe Plan recognizes and discusses the need for integrating planning across  all levels of government and the private sector to ensure that the plans and  response actions are complementary, compatible, and coordinated. In this  regard, the Plan provides initial planning guidance for state, local, and  tribal entities; businesses; schools and universities; and nongovernmental  organizations for a pandemic. It also includes various action items that  when completed, would produce additional planning guidance and  materials for these entities. However, the Plan is unclear as to how the  existing guidance relates to broad federal and specific departmental and  agency plans as well as how the additional guidance would be integrated  and how any gaps or conflicts that exist would be identified and  addressed.\n\n\tConclusions\n\nAlthough it is likely that an influenza pandemic will occur in the future,  there is a high level of uncertainty about when a pandemic might occur  and its level of severity. The administration has taken an active approach  to this potential disaster by establishing an information clearinghouse for  pandemic information; developing numerous planning guidelines for  governments, businesses, nongovernmental organizations, and individuals;  issuing the Strategy and Plan; completing many action items contained in  the Plan; and continuing efforts to complete the remaining action items.\nA pandemic poses some unique challenges. Other disasters, such as  hurricanes, earthquakes, or terrorist attacks, generally occur within a  short period and the immediate effects are experienced in specific  locations. By contrast, a pandemic would likely occur in multiple waves,  each lasting weeks or months and affecting communities across the  nation. Initial actions may help limit the spread of an influenza virus,  reflecting the importance of a swift and effective response. Therefore, the  effective exercise of shared leadership roles and responsibilities could  have substantial consequences, both in the short and long term. However,  these roles and responsibilities continue to evolve, leaving uncertainty  about how the federal government would lead preparations for and  response to a pandemic. Since the release of the Plan in May 2006, no  national pandemic exercises of federal leadership roles and  responsibilities have been conducted. Without rigorous testing, training,  and exercising, the administration lacks information to determine whether  current and evolving leadership roles and responsibilities are clear and  clearly understood or if more changes are needed to ensure clarity.\nThe Strategy and Plan are important because they broadly describe the  federal government\u2019s approach and planned actions to prepare for and  respond to a pandemic, as well as expectations for states and  communities, the private sector, and global partners. Although they  contain a number of important characteristics, the documents lack several  key elements. As a result, their usefulness as a management tool for  ensuring accountability and achieving results is limited. For example,  because the Strategy and Plan do not address the resources and  investments needed to implement the actions called for, it is unclear what  resources are needed to build capacity and whether they would be  available. Further, because they did not include stakeholders that are  expected to be the primary responders to a pandemic in the development  of the Strategy and Plan, these documents may not fully reflect a national  perspective on this critical national issue, and stakeholders and the public  may not have a full understanding of their critical roles. In addition, the  linkages among pandemic planning efforts and with all-hazards plans and  initiatives need to be clear so that the numerous parties involved can  operate in an integrated manner. Finally, because many of the  performance measures do not provide information about the impacts of  proposed actions, it will be difficult to assess the extent to which we are  better prepared or to identify areas needing additional attention.  Opportunities exist to improve the usefulness of the Plan because it is  viewed as an evolving document and is intended to be updated on a  regular basis to reflect ongoing policy decisions, as well as improvements  in domestic preparedness. Currently, however, time frames or  mechanisms for updating the Plan are undefined.\nWhile the HSC publicly reported on the status of approximately 100 action  items that were to have been completed by November 2006, the Plan lacks  a prescribed process for monitoring and reporting on the progress of the  action items or what has been accomplished as a result. Therefore, it is  unclear when the next report will be issued or how much information will  be released. In addition, some of the information reported was incorrect.  This lack of transparency makes it difficult to inform a national dialogue  on the progress made to date or what further steps are needed. It also  inhibits congressional oversight of strategies, funding priorities, and  critical efforts to enhance the nation\u2019s level of preparedness.\nDHS officials believe that their efforts to develop a Federal Concept Plan  for Pandemic Influenza may help to more fully address some of the  characteristics that we found the Strategy and Plan lack. According to  those officials, the proposed Concept Plan may help, for example, better  integrate the organizational roles, responsibilities, and coordination of  interagency partners. They recognized, however, that the Concept Plan  would not fully address all of the gaps we have identified. For example,  they told us that the Concept Plan may not address actual or estimated  costs or investments of the resources that will be required. Overall, they  agreed that more needs to be done, especially in view of the long time  requirements and challenging issues presented by a potential pandemic  influenza.\n\n\tRecommendations for Executive Action\n\nTo enhance preparedness efforts for a possible pandemic, we are making  the following two recommendations:  We recommend that the Secretaries of Homeland Security and Health and  Human Services work together to develop and conduct rigorous testing,  training, and exercises for pandemic influenza to ensure that federal  leadership roles are clearly defined and understood and that leaders are  able to effectively execute shared responsibilities to address emerging  challenges. Once the leadership roles have been clarified through testing,  training, and exercising, the Secretaries of Homeland Security and Health  and Human Services should ensure that these roles are clearly understood  by state, local, and tribal governments; the private and nonprofit sectors;  and the international community.\nWe also recommend that the Homeland Security Council establish a  specific process and time frame for updating the Implementation Plan for  the National Strategy for Pandemic Influenza. The process for updating  the Plan should involve key nonfederal stakeholders and incorporate  lessons learned from exercises and other sources. The Plan should also be  improved by including the following information in the next update:  the cost, sources, and types of resources and investments needed to  complete the action items and where they should be targeted;    a process and schedule for monitoring and publicly reporting on progress  made on completing the actions;    clearer linkages with other strategies and plans; and    clearer descriptions of relationships or priorities among action items and  greater use of outcome-focused performance measures.\n\n\tAgency Comments and Our Evaluation\n\nWe provided a draft of this report to DHS, HHS, and the HSC for review  and comment. DHS provided written comments, which are reprinted in  appendix II. In commenting on the draft report, DHS concurred with the  first recommendation and stated that DHS is taking action on many of the  shortfalls identified in the report. For example, DHS stated that it is  working closely with HHS and other interagency partners to develop and  implement a series of coordinated interagency pandemic exercises and  will include all levels of government as well as the international  community and the private and nonprofit sectors. Additionally, DHS stated  that its Incident Management Planning Team intends to use our list of  desirable characteristics of an effective national strategy as one of the  review metrics for all future plans. DHS also provided us with technical  comments, which we incorporated in the report as appropriate.\nHHS informed us that it had no comments and concurred with the draft  report. The HSC did not comment on the draft report.\nAs agreed with your offices, unless you publicly announce the contents of  this report earlier, we plan no further distribution of it until 30 days from  its date. We will then send copies of this report to the appropriate  congressional committees and to the Assistant to the President for  Homeland Security; the Secretaries of HHS, DHS, USDA, DOD, State, and  DOT; and other interested parties. We will also make copies available to  others upon request. In addition, this report will be available at no charge  on the GAO Web site at http:\/www.gao.gov.\nIf you or your staff have any questions regarding this report, please  contact me at (202) 512-6543 or steinhardtb@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 major contributions to  this report are listed in appendix III.\n\nAppendix I: Scope and Methodology\n\nOur reporting objectives were to review the extent to which (1) federal  leadership roles and responsibilities for preparing for and responding to a  pandemic are clearly defined and (2) the National Strategy for Pandemic  Influenza (Strategy) and the Implementation Plan for the National  Strategy for Pandemic Influenza (Plan) address the characteristics of an  effective national strategy.\nTo determine to what extent federal leadership roles and responsibilities  for preparing for and responding to a pandemic are clearly defined, we  drew upon our extensive body of work on the federal government\u2019s  response to hurricanes Katrina and Rita as well as our prior work on  pandemic influenza. We also studied the findings in reports issued by  Congress, the Department of Homeland Security\u2019s Office of the Inspector  General, the Homeland Security Council (HSC), and the Congressional  Research Service. Additionally, we reviewed the Strategy and Plan and a  variety of federal emergency documents, including the National Response  Plan\u2019s base plan and supporting annexes and the implementation plans  developed by the Departments of Homeland Security and Health and  Human Services. HSC officials declined to meet with us, stating that we  should rely upon information provided by agency officials. We interviewed  officials in the departments of Agriculture, Defense, Health and Human  Services, Homeland Security, Transportation, and State and the Federal  Emergency Management Agency and the U.S. Coast Guard. Some of these  officials were involved in the development of the Plan.\nTo review the extent to which the Strategy and Plan address the  characteristics of an effective national strategy, we analyzed the Strategy  and Plan; reviewed key relevant sections of major statutes, regulations,  directives, national strategies, and plans discussed in the Plan; and  interviewed officials in agencies that the Strategy and Plan identified as  lead agencies in preparing for and responding to a pandemic.\nWe assessed the extent to which the Strategy and Plan jointly addressed  the six desirable characteristics, and the related elements under each  characteristic, of an effective national strategy by using the six  characteristics developed in previous GAO work. Table 4 provides the  desirable characteristics and examples of their elements.\nNational strategies with these characteristics offer policymakers and  implementing agencies a management tool that can help ensure  accountability and more effective results. We have used this methodology  to assess and report on the administration\u2019s strategies relating to  terrorism, rebuilding of Iraq, and financial literacy.\nTo assess whether the documents addressed these desirable  characteristics, two analysts independently assessed both documents  against each of the elements of a characteristic. If the analysts did not  agree, a third party reviewed, discussed, and made the final determination  to rate that element. Each characteristic was given a rating of either  \u201caddresses,\u201d \u201cpartially addresses,\u201d or \u201cdoes not address.\u201d According to our  methodology, a strategy \u201caddresses\u201d a characteristic when it explicitly  cites all, or nearly all, elements of the characteristic and has sufficient  specificity and detail. A strategy \u201cpartially addresses\u201d a characteristic  when it explicitly cites one or a few of the elements of a characteristic and  has sufficient specificity and detail. It should be noted that the \u201cpartially  addresses\u201d category includes a range that varies from explicitly citing most  of the elements to citing as few as one of the elements of a characteristic.\nA strategy \u201cdoes not address\u201d a characteristic when it does not explicitly  cite or discuss any elements of a characteristic, any references are either  too vague or general to be useful, or both.\nWe reviewed relevant sections of major statutes, regulations, directives,  and plans discussed in the Plan to better understand if and how they were  related. Specifically, our review included Homeland Security Presidential  Directive 5 on the Management of Domestic Incidents; the National  Response Plan; and the Robert T. Stafford Disaster Relief and Emergency  Assistance Act of 1974 (as amended) as well as other national strategies.\nWe conducted our review from May 2006 through June 2007 in accordance  with generally accepted government auditing standards.\n\nAppendix II: Comments from the Department of Homeland Security\n\nAppendix III: GAO Contact and Staff Acknowledgments\n\n\tGAO Contact\n\n\tAcknowledgments\n\nIn addition to the contact named above, Susan Ragland, Assistant Director;  Allen Lomax; David Dornisch; Donna Miller; Catherine Myrick; and  members of GAO\u2019s Pandemic Working Group made key contributions to  this report.\n\nRelated GAO Products\n\nHomeland Security: Observations on DHS and FEMA Efforts to Prepare  for and Respond to Major and Catastrophic Disasters and Address  Related Recommendations and Legislation. GAO-07-1142T. Washington,  D.C.: July 31, 2007.\nEmergency Management Assistance Compact: Enhancing EMAC\u2019s  Collaborative and Administrative Capacity Should Improve National  Disaster Response. GAO-07-854. Washington, D.C.: June 29, 2007.\nInfluenza Pandemic: DOD Combatant Commands\u2019 Preparedness Efforts  Could Benefit from More Clearly Defined Roles, Resources, and Risk  Mitigation. GAO-07-696. Washington, D.C.: June 20, 2007.\nInfluenza Pandemic: Efforts to Forestall Onset Are Under Way;  Identifying Countries at Greatest Risk Entails Challenges. GAO-07-604.  Washington, D.C.: June 20, 2007.\nAvian Influenza: USDA Has Taken Important Steps to Prepare for  Outbreaks, but Better Planning Could Improve Response. GAO-07-652.  Washington, D.C.: June 11, 2007.\nThe Federal Workforce: Additional Steps Needed to Take Advantage of  Federal Executive Boards\u2019 Ability to Contribute to Emergency  Operations.  GAO-07-515. Washington, D.C.: May 4, 2007.\nFinancial Market Preparedness: Significant Progress Has Been Made,  but Pandemic Planning and Other Challenges Remain. GAO-07-399.  Washington, D.C.: March 29, 2007.\nPublic Health and Hospital Emergency Preparedness Programs:  Evolution of Performance Measurement Systems to Measure Progress.  GAO-07-485R. Washington, D.C.: March 23, 2007.\nHomeland Security: Preparing for and Responding to Disasters. GAO-07- 395T. Washington, D.C.: March 9, 2007.\nInfluenza Pandemic: DOD Has Taken Important Actions to Prepare, but  Accountability, Funding, and Communications Need to be Clearer and  Focused Departmentwide. GAO-06-1042. Washington, D.C.: September 21,  2006.\nHurricane Katrina: Better Plans and Exercises Needed to Guide the  Military\u2019s Response to Catastrophic Natural Disasters. GAO-06-643.  Washington, D.C.: May 15, 2006.\nContinuity of Operations: Agencies Could Improve Planning for  Telework during Disruptions. GAO-06-740T. Washington, D.C.: May 11,  2006.\nHurricane Katrina: GAO\u2019s Preliminary Observations Regarding  Preparedness, Response, and Recovery. GAO-06-442T. Washington, D.C.:  March 8, 2006.\nEmergency Preparedness and Response: Some Issues and Challenges  Associated with Major Emergency Incidents. GAO-06-467T. Washington,  D.C.: February 23, 2006.\nStatement by Comptroller General David M. Walker on GAO\u2019s  Preliminary Observations Regarding Preparedness and Response to  Hurricanes Katrina and Rita. GAO-06-365R. Washington, D.C.: February  1, 2006.\nInfluenza Pandemic: Applying Lessons Learned from the 2004-05  Influenza Vaccine Shortage. GAO-06-221T. Washington, D.C.: November 4,  2005.\nInfluenza Vaccine: Shortages in 2004-05 Season Underscore Need for  Better Preparation. GAO-05-984. Washington, D.C.: September 30, 2005.\nInfluenza Pandemic: Challenges in Preparedness and Response. GAO-05- 863T. Washington, D.C.: June 30, 2005.\nInfluenza Pandemic: Challenges Remain in Preparedness. GAO-05-760T.  Washington, D.C.: May 26, 2005.\nFlu Vaccine: Recent Supply Shortages Underscore Ongoing Challenges.  GAO-05-177T. Washington, D.C.: November 18, 2004.\nEmerging Infectious Diseases: Review of State and Federal Disease  Surveillance Efforts. GAO-04-877. Washington, D.C.: September 30, 2004.\nInfectious Disease Preparedness: Federal Challenges in Responding to  Influenza Outbreaks. GAO-04-1100T. Washington, D.C.: September 28,  2004.\nEmerging Infectious Diseases: Asian SARS Outbreak Challenged  International and National Responses. GAO-04-564. Washington, D.C.:  April 28, 2004.\nPublic Health Preparedness: Response Capacity Improving but Much  Remains to Be Accomplished. GAO-04-458T. Washington, D.C.:       February 12, 2004.\nHHS Bioterrorism Preparedness Programs: States Reported Progress but  Fell Short of Program Goals for 2002. GAO-04-360R. Washington, D.C.:  February 10, 2004.\nHospital Preparedness: Most Urban Hospitals Have Emergency Plans  but Lack Certain Capacities for Bioterrorism Response. GAO-03-924.  Washington, D.C.: August 6, 2003.\nSevere Acute Respiratory Syndrome: Established Infectious Disease  Control Measures Helped Contain Spread, But a Large-Scale Resurgence  May Pose Challenges. GAO-03-1058T. Washington, D.C.: July 30, 2003.\nSARS Outbreak: Improvements to Public Health Capacity Are Needed for  Responding to Bioterrorism and Emerging Infectious Diseases. GAO-03- 769T. Washington, D.C.: May 7, 2003.\nInfectious Disease Outbreaks: Bioterrorism Preparedness Efforts Have  Improved Public Health Response Capacity, but Gaps Remain. GAO-03- 654T. Washington, D.C.: April 9, 2003.\nFlu Vaccine: Steps Are Needed to Better Prepare for Possible Future  Shortages. GAO-01-786T. Washington, D.C.: May 30, 2001.\nFlu Vaccine: Supply Problems Heighten Need to Ensure Access for High- Risk People. GAO-01-624. Washington, D.C.: May 15, 2001.\nInfluenza Pandemic: Plan Needed for Federal and State Response.   GAO-01-4. Washington, D.C.: October 27, 2000.\nGlobal Health: Framework for Infectious Disease Surveillance.  GAO\/NSIAD-00-205R. Washington, D.C.: July 20, 2000.","output":"Why GAO Did This Study\n\nAn influenza pandemic is a real and significant potential threat facing the United States and the world. Pandemics occur when a novel virus emerges that can easily be transmitted among humans who have little immunity. In 2005, the Homeland Security Council (HSC) issued a National Strategy for Pandemic Influenza and, in 2006, an Implementation Plan. Congress and others are concerned about the federal government's preparedness to lead a response to an influenza pandemic. This report assesses how clearly federal leadership roles and responsibilities are defined and the extent to which the Strategy and Plan address six characteristics of an effective national strategy. To do this, GAO analyzed key emergency and pandemic-specific plans, interviewed agency officials, and compared the Strategy and Plan with the six characteristics GAO identified.\n\nWhat GAO Found\n\nThe executive branch has taken an active approach to help address this potential threat, including establishing an online information clearinghouse, developing planning guidance and checklists, awarding grants to accelerate development and production of new technologies for influenza vaccines within the United States, and assisting state and local government pandemic planning efforts. However, federal government leadership roles and responsibilities for preparing for and responding to a pandemic continue to evolve, and will require further clarification and testing before the relationships of the many leadership positions are well understood. The Strategy and Plan do not specify how the leadership roles and responsibilities will work in addressing the unique characteristics of an influenza pandemic, which could occur simultaneously in multiple locations and over a long period. A pandemic could extend well beyond health and medical boundaries, affecting critical infrastructure, the movement of goods and services across the nation and the globe, and economic and security considerations. Although the Department of Health and Human Services' (HHS) Secretary is to lead the public health and medical response and the Department of Homeland Security's (DHS) Secretary is to lead overall nonmedical support and response actions, the Plan does not clearly address these simultaneous responsibilities or how these roles are to work together, particularly over an extended period and at multiple locations across the country. In addition, the Secretary of DHS has designated a national Principal Federal Official (PFO) to facilitate pandemic coordination as well as five regional PFOs and five regional Federal Coordinating Officers. Most of these leadership roles and responsibilities have not been tested under pandemic scenarios, leaving it unclear how they will work. Because initial actions may help limit the spread of an influenza virus, the effective exercise of shared leadership roles and responsibilities could have substantial consequences. However, only one national multisector pandemic-related exercise has been held and that was prior to the issuance of the Plan. While the Strategy and Plan are an important first step in guiding national preparedness, they do not fully address all six characteristics of an effective national strategy. Specifically, they fully address only one of the six characteristics, by reflecting a clear description and understanding of problems to be addressed, and do not address one characteristic because the documents do not describe the financial resources needed to implement actions. Although the other characteristics are partially addressed, important gaps exist that could hinder the ability of key stakeholders to effectively execute their responsibilities, including state and local jurisdictions that will play crucial roles in preparing for and responding to a pandemic were not directly involved in developing the Plan, relationships and priorities among actions were not clearly described, performance measures focused on activities that are not always linked to results; insufficient information is provided about how the documents are integrated with other key related plans, and no process is provided for monitoring and reporting on progress."}
{"id":"gao_GAO-16-310","pid":"gao_GAO-16-310_0","input":"\tBackground\n\nThe CSA places various plants, drugs, and chemicals such as narcotics,  stimulants, depressants, hallucinogens, and anabolic steroids into one of  five schedules based on the substance\u2019s medical use or lack thereof,  potential for abuse, and safety or potential for dependence. The act  requires persons and entities who manufacture, distribute, or dispense  controlled substances or listed chemicals to register with DEA, which by  delegation from the U.S. Attorney General is responsible for administering  and enforcing the CSA and its implementing regulations.\nWithin DEA, the Office of Diversion Control (OD) is directly responsible  for enforcing the provisions of the CSA as they pertain to ensuring the  availability of substances\u2014such as prescription drugs and listed  chemicals\u2014for legitimate uses while preventing their diversion. Given this  overall mission, OD is responsible for preventing, detecting, and  investigating the diversion of controlled substances.\nThe CSA requires DEA to maintain a closed system of distribution of  controlled substances in the United States from the point of import or  manufacture through dispensing to patients or disposal. Under this  system, most legitimate handlers of controlled substances\u2014 manufacturers, distributors, physicians, pharmacies, researchers, and  others\u2014must be registered with DEA and account for all controlled  substances distributions. DEA registrants must renew their registration  every year or every 3 years, depending on the type of registration. Table  1 presents the number and type of individuals and entities that are  registered with DEA to manufacture, distribute, or dispense controlled  substances.\nDEA maintains the list of registrants in the controlled substances  database (i.e., CSA2), which includes registrants\u2019 identifying information,  such as first and last name, date of birth, and Social Security number  (SSN) for individuals; and name and employer identification number (EIN)  for businesses. As of March 2014, and as highlighted in table 1, the CSA2  consisted of records of more than 1.5 million registrations under the act,  of which 93 percent were practitioners. The database is used to register  practitioners as well as to certify a practitioner\u2019s CSA status and is useful  to health-maintenance organizations, clinics, health-insurance  companies, pharmaceutical and medical-services firms, and others who  must verify that a practitioner is registered to handle controlled  substances. Registrants may only engage in those activities that are  authorized under state law for the jurisdiction in which the practice is  located. The CSA requires a separate DEA registration for each principal  place of business or professional practice where controlled substances  are manufactured, distributed, or dispensed. However, a practitioner who  is registered at one location, but also practices at other locations, is not  required to register separately for any other location within the same state  at which controlled substances are only prescribed.\nStates also play a role in overseeing the entities that handle controlled  substances. All practitioner applicants to DEA must first demonstrate that  they have received applicable licenses from their state. Further, according  to DEA, 26 states and U.S. territories register practitioners wanting to  handle controlled substances at the state level. Forty-nine states also  have developed Prescription Drug Monitoring Programs (PDMP).  PDMPs are statewide programs that collect data on prescriptions for  controlled substances and enable prescribers, pharmacists, regulatory  boards, and law-enforcement agencies (under certain restrictions) to  access this information pursuant to applicable state laws and guidelines.  PDMPs may aid the care of those patients with chronic, untreated pain or  chemical dependency by providing patient prescription-history reports or  electronic alerts to prescribers and dispensers to bring patients of  concern to their attention. PDMP data can be also used to help identify  patients and practitioners engaged in prescription drug abuse and  diversion. For example, PDMP data can be used to identify individuals  who have obtained controlled substances from multiple physicians  without the prescribers\u2019 knowledge of the other prescriptions (i.e., \u201cdoctor  shopping\u201d) and can be used to identify practitioners with patterns of  inappropriate high levels of prescribing and dispensing. The manner and  conditions of access to PDMP data vary from state to state depending on  the laws that implement PDMP programs. Laws in each state determine  which users are authorized to access PDMP data and provide the specific  purposes that are allowed for this access.\nEach state determines which health-care occupations may prescribe or  dispense controlled substances, as well as an occupation\u2019s licensure  requirements. To administer state licensure laws, depending on the state  and occupation, legislatures create agencies, boards, or other entities to  carry out licensing processes. See table 2 for an example of the variety  of professions eligible to prescribe controlled substances in two different  states and the relationship between the professions and licensing  authorities.\nThe CSA requires DEA to register a practitioner if the applicant is  authorized to dispense controlled substances in the state in which he or  she practices. DEA may deny an application if it determines that issuance  of the registration would be \u201cinconsistent with the public interest.\u201d  According to the CSA, DEA must consider several factors in determining  whether such a registration would be inconsistent with the public interest,  such as the recommendation of the appropriate state licensing board or  disciplinary authority, the applicant\u2019s compliance with applicable state,  federal, or local laws relating to controlled substances, and such other  conduct by the applicant that may threaten the public health and safety.\nFigure 1 below provides an overview of how state and DEA processes  interconnect for controlled substance registration.\nFurther, under the CSA, DEA has the authority to deny, suspend, or  revoke an existing controlled substance registration for several reasons,  including if a registrant has had a state license revoked, been convicted  of a felony related to controlled substances, or been excluded or directed  to be excluded from participating in federal health-care programs, such as  Medicaid or Medicare, due to certain types of criminal convictions. If DEA  decides to revoke, suspend, or deny a registration, it must serve upon the  applicant or registrant an order to show cause why the action should not  be taken. If continued registration poses an imminent danger to public  health or safety, DEA can issue an immediate suspension order, which  immediately deprives the registrant of the authority to handle controlled  substances. Orders to show cause and immediate suspension orders,  along with other adverse actions, are collectively known as registrant  actions. DEA also has the authority to take a number of administrative  actions against practitioners, including placing restrictions on the type of  scheduled drugs practitioners can handle. Other administrative actions  include issuing a letter of admonition to advise the registrant of any  violations and necessary corrective actions, and developing a  memorandum of agreement that outlines specific actions to be taken by  the registrant and subsequent DEA actions if not corrected. Although  DEA can issue these registrant actions and impose sanctions, a denial or  revocation of a practitioner\u2019s registration cannot be finalized until the  practitioner has been given the opportunity to have an administrative  hearing. Table 3 below provides the number and type of actions taken  against controlled substances practitioner applicants and registrants from  fiscal years 2011 to 2015.\nThe Department of Justice (DOJ) Office of the Inspector General (OIG)  reviewed the timeliness of DEA\u2019s process for issuing final decisions on  registrant adverse actions and, in May 2014, reported that the overall time  it takes DEA to adjudicate all registrant adverse actions continues to be  very lengthy. The OIG reviewed overall registrant adverse action  processing for the period 2008 through 2012 and found that the average  time for DEA to adjudicate registrant adverse actions, from initiation to  final decision, was almost 2 years in 2009. By 2012, the time frame to  complete adjudication of adverse actions had declined, but it still took 1  year, on average, for DEA to issue a final decision on any given registrant  adverse action. According to the OIG, delays in adjudicating registrant  adverse actions can have harmful effects on the general public,  registrants, and DEA. The OIG reported that delays can create risks to  public health and safety by allowing noncompliant registrants to operate  their business or practice while the registrant adverse action is being  adjudicated. For example, if a doctor is issued an order to show cause,  that doctor can keep writing prescriptions until DEA makes a final  decision.\n\n\tSelected States and DEA Have Established Controls to Ensure the Eligibility of Individuals to Handle Controlled Substances, Including Checks on Licenses and Legal Violations\n\n\t\tState Controls Include Verifying Identity and Licensure Information, and Some States Conduct Criminal-Background Checks\n\nEach of the five states we examined has established several controls,  with some common features for physician licensing and monitoring, as  illustrated in figure 2 below.\nAs reflected in the figure above, all five states we examined utilize a  number of the same controls for issuing and renewing medical licenses,  and for monitoring licensees. For example, according to our interviews  with state officials and, where available, documentation on state  processes, all five states had processes to confirm the identifying  information for an applicant and for verifying the professional credentials  of applicants. Also, all five states review disciplinary actions taken by  other state medical licensing authorities by requiring applicants to arrange  for one of three national clearinghouses to send this information to the  state licensing authority for review.\nOfficials in the five states we examined had established controls to renew  and monitor physicians\u2019 licenses. For example, officials from the five  state medical boards said that they track disciplinary actions imposed on  their licensees by receiving reports from the FSMB. This includes  disciplinary actions that may have been implemented by a medical board  in another state.\nAlthough all five states use some common controls, we found differences  in how each state employs other key checks in the initial licensing  process. For example, variations exist among the five states in how they  conduct state and federal criminal-background checks for applicants.  While all five states require applicants to answer one or more questions  about a criminal record to which they must self-attest,  two state authorities\u2014in Connecticut and Vermont\u2014accept the self- attestations and investigate only affirmative responses by applicants;  in contrast, three state authorities\u2014in Arizona, New Mexico, and  Texas\u2014conduct both state and federal criminal-background checks,  regardless of the applicant\u2019s attestation; and additionally, four of the five states\u2014Arizona, Connecticut, Texas, and  Vermont\u2014review medical malpractice judgements for all medical  license applicants, while one state\u2014New Mexico\u2014reviews medical  malpractice judgements only for medical license applicants that have  self-reported on their application.\nAdditionally, the extent of reviewing the criminal backgrounds of licensees  after initial licensure differs by state. Upon license renewal, licensees are  again asked similar questions about their criminal record. Two states  (Connecticut and Vermont) accept the renewing licensee\u2019s self-attestation  and investigate only affirmative responses. One state (Arizona) does not  conduct any subsequent checks against state or federal criminal  databases after initial licensure, while two states (Texas and New Mexico)  regularly monitor state or federal criminal databases. For example, New  Mexico contracts with a vendor that continuously monitors the state\u2019s  licensed physicians\u2019 interactions with law-enforcement agencies  nationwide using the FBI\u2019s national database and other law-enforcement  databases. In addition, at the time of our review, Texas was in the  process of working on an agreement with the FBI to allow the board to  monitor federal criminal backgrounds of licensees, in addition to the  already-implemented quarterly state criminal-background checks.\nThere are also differences among the five states in how prescription data  are used to monitor top prescribers of controlled substances. Of the five  states we examined, three states (Connecticut, New Mexico, and Texas)  use data from the state\u2019s PDMP to identify physicians with high  incidences of prescribing controlled substances in order to initiate a  follow-up with the physicians. The follow-ups are meant to determine the  reasons for the high rate of prescriptions. For example, New Mexico  Medical Board officials told us they monitor prescriber patterns by  reviewing quarterly PDMP report cards. The board will send out letters to  physicians who appear to have high-risk prescribing practices, and may  issue formal complaints if the patterns continue. However, the extent to  which the states have implemented their PDMP can vary. For example,  Texas officials estimated that about 25 percent of the state\u2019s controlled  substance prescribers are registered in the program, while New Mexico  requires every physician to register with the PDMP as a prerequisite to  obtaining their state-level controlled substance license and mandates that  physicians regularly use the state\u2019s PDMP.\n\n\t\tDEA Controls Include Verifying Current Licensures for Initial Practitioner Applications and Renewals, and Monitoring the Public Death Master File\n\nThrough its practitioner application and renewal processes, DEA employs  several controls to assess whether an individual applicant is eligible for a  controlled substance registration. These controls include comparing  applicant identifying information for consistency with state licensure  information and confirming that applicant medical licenses are current;  confirming status of state controlled substance registration, if applicable;  and determining whether an applicant has any drug-related offenses. In  addition, DEA OD officials said they compare registrants to SSA\u2019s public  Death Master File (DMF) on a weekly basis to identify registrants who  have died. DEA also receives information from state entities, other law- enforcement agencies, private citizens, former patients, and health  practitioners on adverse actions related to professional health-care  licenses or other issues that could call into question a registrant\u2019s  continued suitability to prescribe or handle controlled substances.  However, according to DEA OD officials, the amount of communication  with state entities varies significantly from state to state. See figure 3 for  an overview of the process and controls DEA uses to register, renew, and  monitor practitioners of controlled substances.\nDEA officials known as Registration Program Specialists hold primary  responsibility for reviewing and processing applications of practitioners  seeking to handle controlled substances. Registration specialists use  several controls to verify information provided on a new application to  determine applicant eligibility. These controls include the following:\nComparing DEA applicant information to state licensing board  information for inconsistencies. According to DEA OD officials,  registration specialists are to compare identifying information on  applications to identifying information maintained by the appropriate  state licensing board. They perform this comparison by accessing  public websites maintained by the state licensing boards that can be  searched, for instance using the applicant\u2019s license number or other  identifying information. Registration specialists are to verify the name  of licensee, type of license, license number, and expiration date and  are to look for differences between the information associated with the  state license and what the applicant put on the DEA registration  application. Any differences could indicate potential fraud or other  risks.\nConfirming that an applicant\u2019s professional health-care license is  current. Registration specialists are to use the state licensing board  websites to verify licensure status with the respective state boards  (medical, pharmacy, nursing, etc.). According to DEA OD officials, the  registration specialists are not required to review administrative  complaints or disciplinary actions taken by state licensing boards. If  there are any conflicting data, the application is to be referred to a  Diversion Investigator (DI) for further review.\nFor states with a controlled substance registration, confirming  applicant\u2019s status. DEA\u2019s CSA2 will notify the registration specialist if  a separate state controlled substance registration is required.  According to DEA OD officials, when applicants are from states that  have their own CS registration requirement, the registration specialist  is to review the state controlled substance authority\u2019s website to  determine whether the applicant\u2019s name and state registration number  match the information on the DEA application. The specialist is to also  check to be sure that the state registration has not expired and that  the registration is not restricted in any way. If there are any conflicting  data, the application is to be referred to a DI for further review.\nChecking for any drug-related offenses or suspect associations.\nRegistration specialists are to check the names of anyone listed on  each initial application against DEA\u2019s Narcotics and Dangerous Drugs  Information System (NADDIS). This system contains information  about drug offenders, alleged drug offenders, persons suspected of  conspiring to commit, aid, or abet the commission of a drug offense,  and other individuals related to, or associated with, DEA\u2019s law- enforcement investigations and intelligence operation, among other  things. If the registration specialists identify any inconsistency  between the information in the application and any of the sources  used for validation, the registration specialists will refer the application  to a DI for further investigation.\nReviewing applicant responses to liability questions. Applicants  are also asked to answer four liability questions and to explain any  affirmative responses. Questions include whether the applicant has  ever been convicted of a crime in connection with controlled  substances under state or federal law, or ever had a state  professional license revoked, suspended, restricted, denied, or placed  on probation. For any affirmative responses, the application will be  forwarded to a DI for further investigation.\nPractitioners who have received authorization to handle controlled  substances must renew their registrations every 3 years, and DEA uses  some of the controls for the renewal process that are used for an initial  registration. For example, registrants must again respond to the same  liability questions that appear on the initial application concerning criminal  activity and changes to their professional or legal status and are to report  any criminal convictions related to controlled substances, or whether their  state license or controlled substance registration has been revoked,  suspended, or otherwise restricted. If the registrant does not self-report  any liabilities and there are no changes to the information contained in the  registrant\u2019s record (such as changes to the registrant\u2019s name, address, or  state license number), then the renewal is automatically approved without  further checks against state licensure websites. In addition, at renewal,  the registration specialist is to review the historical records from the  registrant\u2019s initial application. DEA OD officials told us that the registration  specialists do not conduct subsequent checks against NADDIS for  renewals unless the applicant self-reports a criminal conviction related to  controlled substances.\nDEA OD officials told us that they perform one systematic form of  monitoring of registrants\u2019 eligibility between renewal periods by  conducting weekly checks of the public DMF. Specifically, DEA OD staff  have established an automated process to compare the DEA registrants\u2019  database against SSA\u2019s public DMF every week to find possible matches,  which can indicate that an individual registrant has died. Names and  SSNs from the registrants\u2019 database are compared to names and SSNs  contained in the DMF. Registrations that match to DMF names and SSN  are automatically retired in the system. A report of partial matches is  generated by the system, and any partial matches will be researched  further. On the basis of this research, registrations will be manually  retired, if appropriate.\nDEA OD officials indicated that other monitoring activities may include  states communicating directly with DEA to provide information and  allegations of wrongdoing by registrants. For example, state medical  licensing boards and state controlled substance authorities may provide  practitioner complaint and disciplinary action or sanction information to  DEA. Also, many of the investigations that DEA initiates are conducted  pursuant to tips and complaints received from other law-enforcement  agencies, private citizens, former patients, and health practitioners.\n\n\tLimitations Exist in DEA\u2019s Controls to Collect and Validate Identifying Information and Verify Continued Eligibility of Its Controlled Substance Registrants\n\nDEA has established controls to aid in determining registrant eligibility.  However, we found limitations in DEA\u2019s processes to collect and validate  registrants\u2019 identifying information and verify continued registrants\u2019  eligibility. These limitations include issues related to identifying registrants  who were deceased, did not possess state-level controlled substance  authority, or had criminal backgrounds that may have provided a sufficient  basis to deny or revoke a registration.\n\n\t\tMissing, Potentially Invalid, and Duplicative SSNs in DEA\u2019s Registrants Data Reduce the Effectiveness of Key Controls\n\nDEA\u2019s controlled substance registration process involves applicants  submitting key identifying information, some of which DEA staff are to  verify. Specifically, individual applicants are required to provide DEA with  key identifying information, such as first and last name and date of birth.  Additionally, applicants must provide a taxpayer identification number,  such as an SSN for individuals or an EIN for businesses, unless the  applicant is fee-exempt. DEA\u2019s system for processing applications has  edit checks in place to ensure that SSNs entered are in the appropriate  format (9-digit, numeric) and do not contain all repeating numbers (e.g.,  999-99-9999). DEA\u2019s CSA2 system recognizes and flags SSNs that are  already in its system. This system control was designed to alert the  registration specialist that an applicant has (or had) another DEA  registration and to prevent reregistering individuals who may not be  eligible based on actions taken against their previous or current  registrations. According to DEA OD officials, this system control was  established after a registrant who had been prosecuted by DEA reapplied  and was approved for a new registration under a different address. Once  the application information is submitted, DEA\u2019s registration specialists are  to compare the applicant\u2019s name and state licensure information to the  information maintained by the appropriate state licensing board.\nOur examination of DEA\u2019s CSA2 data revealed gaps and other issues  pertaining to registrants\u2019 SSNs, as described below.\nIndividuals registered using EINs instead of SSNs. As described  above, DEA must collect taxpayer identification numbers for all non- fee-exempt individuals for the purpose of collecting and reporting on  any delinquent amounts arising out of the individual\u2019s relationship with  DEA, pursuant to the Debt Collection Improvement Act of 1996.  Instructions on DEA\u2019s application form state that SSNs are required  for individual registrations, and tax identification numbers (such as an  EIN) are required for business registrations.\nOur analysis of DEA\u2019s CSA2 data identified 41,909 of about 1.4  million individual registrations (about 3 percent) who were registered  using an EIN instead of an SSN. We reviewed these results and  identified 1,124 of the 41,909 records that contained text suggesting  they were registered under official government capacity (e.g., \u201cLimited  to Official Federal Duties Only\u201d), and therefore, not required to provide  either an EIN or SSN. The remaining 40,785 records did not contain  such text. However, depending on how an individual has structured  his or her professional business activities, it may be appropriate for  the individual to apply to DEA as a business instead of as an  individual. Because DEA is required to collect taxpayer identification  numbers for debt collection purposes, according to officials in DEA\u2019s  Office of Chief Counsel, DEA only has the legal authority to collect  EINs, and not SSNs, from those individuals who apply as a business.  As a result, DEA would have to obtain additional legal authority in  order to require SSNs for all individuals. As discussed later,  registering individuals with an SSN is essential to DEA\u2019s use of the  public Death Master File (DMF) as a control, in that SSNs (and not  EINs) are needed to identify and retire deceased registrants. EINs do  not allow DEA to use the DMF as a control mechanism. In addition,  allowing EINs in place of SSNs limits DEA\u2019s ability to identify other  registrations for the same individual, particularly those with past  adverse history.\nPotentially invalid SSNs. We identified 11,740 out of about 1.3  million SSNs associated with individual registrations whose SSN or  date of birth (or both) could not be validated by SSA\u2019s EVS.  Specifically, we compared DEA registrants\u2019 names, dates of birth, and  SSNs to SSA\u2019s records using EVS. EVS flags SSNs in which the  name or date of birth (or both) do not match its records for the SSN,  as well as SSNs that have never been issued. Specifically, of the  11,740 SSNs, we found 8,235 SSNs that did not match the name  identified, 3,441 SSNs that did not match the date of birth, and 64  SSNs that had never been issued by SSA. Mismatches in names,  SSNs, or dates of birth could be a potential identity fraud indicator but  could also be due to data-entry errors or unreported name changes.  As previously mentioned, DEA has procedures in place to compare  identifying information, such as first and last names, from registrant  applications to license information maintained by state professional  licensing boards. In contrast, however, DEA does not have  procedures to verify other identifying information, such as SSNs or  dates of birth. For example, DEA does not have an agreement with  SSA to access EVS as one possible option to verify the SSNs  provided by DEA registrants. DEA officials said that while they had not  previously considered strategies to validate SSNs and dates of birth,  they were open to exploring options to do so. In our discussions, SSA  officials said they would be open to the option of providing DEA with  access to EVS, although it would require a legal review based on  DEA\u2019s intended use.\nMultiple individuals registered using same SSN. We identified 688  SSNs associated with multiple individuals, which is a risk indicator for  potential fraud. Of the 688 SSNs, we identified 268 SSNs  associated with names that reasonably appeared to be the same  person, but whose names did not match due to possible typos (e.g.,  \u201cSally Simpson\u201d and \u201cSally Simpsen\u201d), name cognates (e.g.,  \u201cJonathan Smith\u201d and \u201cJon Smith\u201d), name inversions (e.g., \u201cJon Smith\u201d  and \u201cSmith Jon\u201d), or additional first or last names (e.g., \u201cMary Lynn  Smith\u201d and \u201cMary Smith,\u201d or \u201cJane Smith Johnson\u201d and \u201cJane  Johnson\u201d). However, the remaining 420 SSNs were associated with  first or last names (or both) that reasonably appeared to be distinctly  different. Different names registered with the same SSN could be a  potential identity fraud indicator but could also be due to data-entry  errors or individual name changes.\nWe provided a list of these individuals to DEA for further investigation.  DEA OD officials reviewed 449 of the 688 SSNs and provided several  reasons why there were multiple names registered using the same  SSN. DEA OD officials indicated that one reason this occurred was  because some SSNs associated with these registrations were entered  into the system prior to the implementation of the multiple SSN  system flag. The system flags are generated when a new  application is entered into the system. Therefore, according to DEA  OD officials, the system would not have recognized duplicate SSNs  among the existing registrations. Additionally, DEA OD officials told us  that some of the names did not match due to individual name  changes, data-entry errors, and other reasons that would require  further DEA review. Because DEA did not review every SSN, it is  unclear whether there are any other reasons this may have occurred.\nAccording to the Standards for Internal Control in the Federal  Government, agencies should design processes that use the agency\u2019s  objectives and related risks to identify the information requirements  needed to achieve the objectives and address the risks. In addition,  agencies are to design controls to help ensure the completeness,  accuracy, and validity of their data in order to help the agency achieve its  objectives and respond to risk. These standards also require agencies to  have appropriate control activities in place to ensure that the data used by  the agency are accurate.\nAs demonstrated by our analyses, DEA has an opportunity to enhance  the integrity of its database by developing policies and procedures to  collect and validate registrants\u2019 SSNs. By not collecting and validating  SSNs for all of its individual registrants, DEA is missing key information  required to establish registrant identity and monitor eligibility. In particular,  missing, invalid, or incorrect SSNs will reduce the effectiveness of DEA\u2019s  use of the public DMF to identify decedents because SSNs are needed  for the matching process. Further, not having complete and accurate  SSNs would limit DEA\u2019s ability to identify other registrations held by the  same individual and any past adverse history that may affect the eligibility  of the registrant. By not requiring SSNs for all individual registrants,  regardless of whether they apply as a business, and not taking steps to  verify the SSNs, DEA is not well positioned to ensure the identities of its  registrants. Additionally, not requiring SSNs for all individual registrants  limits DEA\u2019s ability to conduct any other potential data matching, which  could improve the integrity of its registrants\u2019 data and reduce the risk of  potential misrepresentation or fraud.\n\n\t\tSome Registrants Were Potentially Ineligible Because They Were Reported as Deceased, Did Not Have a Current State License, or Had Criminal Violations Related to Controlled Substances\n\nOf the approximately 1.4 million individual registrations in DEA\u2019s CSA2,  we found 764 registrants that may have been ineligible to have controlled  substance registrations because the registrants were reported deceased  by SSA, did not possess state-level controlled substance authority, or  were incarcerated for felony offenses related to controlled substances.  Each of these issues may adversely affect an individual\u2019s registration. In  addition, we also found 100 registrants who presented issues that may  increase the risk of illicit diversion of controlled substances, such as  registrants with active or recent warrants for offenses related to controlled  substances, registrants incarcerated or with active or recent warrants for  offenses unrelated to controlled substances, and registrants listed in the  NSOR. We note that the numbers of potentially ineligible registrants, as  well as registrants who may pose an increased risk of illicit diversion, may  be more than the total number of registrants we identified because  missing or incorrect SSNs reduced our ability to identify matches between  the registrants\u2019 data and other data we used. Table 4 shows a summary  of DEA registrants we identified that may be ineligible or may pose an  increased risk of controlled substance diversion.\nAccording to federal regulations, a DEA registration legally terminates  immediately upon death of a registrant. To identify such individuals,  DEA matches its database weekly against SSA\u2019s public DMF, which is a  publicly available subset of the death records that SSA maintains on  deceased SSN-holders. According to DEA officials, registrants matching  on SSN and name are automatically retired in CSA2. DEA officials also  told us that the DEA OD Registration and Program Support Section Chief  is to manually review any partial matches (e.g., instances in which the  SSN matches, but name does not match) to determine whether additional  actions are necessary.\nRemoving deceased registrants from its database and retiring their  registration can reduce the risk of someone obtaining and misusing the  deceased registrant\u2019s authority to handle, dispense, or prescribe  controlled substances, thus limiting opportunities for the diversion of  these substances. While DEA\u2019s control is designed to identify and remove  deceased registrants, our analysis identified 705 registrants that were  reported deceased by SSA as of March 2014 (the most-current DEA data  available at the time of our review). We identified these deceased  registrants by comparing DEA\u2019s CSA2 data of about 1.4 million individual  registrations with SSA\u2019s full death file, which lists all SSNs of people for  whom SSA has received a record of death. Specifically, of the 705  reportedly deceased registrants, 420 had been deceased for 6 months or  longer, including 236 who had been deceased over a year.\nUnder current law, DEA is not eligible to access SSA\u2019s full death file, the  database we used to conduct our analysis. According to SSA officials, the  public DMF contained about 16 million fewer records than the full death  file as of March 2016. We previously reported that SSA officials expect  that the proportion of state-reported death records that must be excluded  from the public version will continue to increase over time. For example,  for deaths reported in 2012 alone, the public DMF included about 40  percent fewer death records than the full death file. According to the  Standards for Internal Control in the Federal Government, agencies  should design procedures using information necessary to achieve their  objectives and respond to risks. Because of the differences in the death  databases, DEA may not have been alerted to the reportedly deceased  individuals that we identified. In our discussions, DEA officials were open  to the idea of exploring legislative options to obtain the full death file.\nBy not identifying deceased registrants and not subsequently deactivating  their registrations, DEA\u2019s registry may be vulnerable to potential fraud  leading to diversion of controlled substances. To better ensure that DEA\u2019s  registry maintains current registration information and to prevent others  from potentially utilizing the registration information of deceased  registrants, DEA could take additional steps by developing a legislative  proposal to gain access to the more comprehensive full death file.\n\n\t\t\tLimitations Exist in Monitoring State Licensure Information\n\nAs described previously, the CSA requires DEA to register a practitioner if  the applicant is authorized to dispense controlled substances in the state  in which he or she practices. DEA may deny an application if it  determines that the registration would be inconsistent with the public  interest. Two of the factors DEA must consider in this determination are  the recommendation of the appropriate state licensing board or  disciplinary authority and the applicant\u2019s compliance with applicable state,  federal, and local laws relating to controlled substances. Additionally,  DEA also has the authority to suspend or revoke an existing controlled  substance registration if a registrant has had a state license suspended or  revoked, among other reasons.\nWe found at least 57 individuals associated with 58 registrations who may  have been ineligible for a controlled substance registration based on our  analysis of actions taken against their respective state licenses, such as  revocations of medical license or controlled substance privileges. We  compared data from the FSMB on physician license information and  disciplinary actions to data from CSA2. The FSMB maintains a central  repository database for licensure information and disciplinary sanctions  provided by all medical boards within the 50 states, Puerto Rico, and the  District of Columbia, among other sources. By matching registrants\u2019  information to information contained in the FSMB data, we were able to  review an individual\u2019s entire licensure history, including revocations and  suspensions, for all medical licenses, across all U.S. states, Puerto Rico,  and the District of Columbia, among others. We then reviewed supporting  documentation for each of the actions identified in FSMB data using state  medical board websites. To help identify revocations, surrenders, or  suspensions occurring without reinstatement prior to March 6, 2014 (the  most-current DEA data available at the time of our review), we limited our  review of FSMB data to the most-recent action taken against the  registrant prior to March 6, 2014. Therefore, the number of individuals  with disciplinary actions we identified represents a minimum number.\nOur analysis of FSMB data identified 57 individuals who did not appear to  possess active state-level controlled substance authority in the states  where they held active DEA registrations, as of March 6, 2014.  Specifically, of the 57 individuals, we identified 41 who had disciplinary  actions that resulted in the revocation or surrender of their medical  licenses, and 16 whose medical licenses were not revoked, but the state  licensing board restricted the individuals\u2019 controlled substance authority.  These actions occurred between June 2011 and February 2014. For  example:\nWe identified a physician whose Ohio medical license was revoked in  October 2011 for prescription drug\u2013related crimes. In January 2012,  the physician pled guilty in an Ohio county court to one count of  engaging in a pattern of corrupt activity, six counts of trafficking in  drugs, and one count of theft. The physician was sentenced to 3 years  of imprisonment in February 2012 and was still actively registered with  DEA as of March 2014. According to DEA OD officials, DEA was  unaware that the registrant no longer possessed state-level controlled  substance authority and therefore it did not initiate any action against  the registration. The DEA registration subsequently expired in May  2014, approximately 2-\u00bd years after the state authority was revoked.\nWe identified a physician whose controlled substance registration  from the District of Columbia was placed on immediate suspension for  risk to public health and safety in April 2012 and later revoked in June  2013 after a patient died due to excessive and inappropriate  controlled substances prescribing, according to a District of Columbia  board action report. The physician was still actively registered with  DEA as of March 2014. According to DEA OD officials, DEA was  unaware that the registrant no longer possessed state-level controlled  substance authority and therefore it did not initiate any action against  the registration. The DEA registration subsequently expired in  February 2015, almost 3 years after authority in the District of  Columbia was inactivated.\nWe provided information on these 57 individuals to DEA for further  investigation. DEA OD officials provided information indicating the status  of each registration, whether any action was taken against the  registration, and whether there was knowledge of the state disciplinary  action. In 36 of the 57 cases, CSA2 did not contain information on these  individuals\u2019 state licensure status or disciplinary actions, which meant that  DEA OD staff could not make an informed decision on the eligibility of  these registrants to continue to handle or prescribe controlled  substances. According to DEA OD officials, DEA took action against 3  of the 36 registrations. However, the bases for these actions were  unclear, and there was no indication that they were based on the loss of  state-level controlled substance authority.\nAs described earlier, DEA verifies an applicant\u2019s state licensure  information upon initial application by checking the relevant state board  websites to ensure the applicant is appropriately licensed. However, DEA  does not verify practitioners\u2019 state licenses after initial registration to  ensure they are still actively licensed by the state. Instead, it relies on the  practitioner to self-report any disciplinary actions related to controlled  substances at renewal every 3 years, or the individual state licensing  boards to notify DEA of any actions taken against its registrants that may  affect their controlled substance eligibility. According to DEA OD officials,  the amount of communication between DEA and the state licensing  boards varies significantly, so not all state licensing boards may notify  DEA that the state has taken action against a DEA registrant.  Furthermore, DEA is not required to and has not chosen to make use of  perpetual vetting techniques; that is, regularly matching its database of  registrants against databases containing medical sanctions, such as the  database we used in this analysis. Therefore, DEA may not have been  alerted to the information on the disciplinary actions that we identified.  When asked why DEA does not monitor state licensure information after  initial registration, agency officials said that they had not considered  monitoring state licensure information, but would be open to exploring  options to do so.\nAs previously noted, the Standards for Internal Control in the Federal  Government state that agencies should design procedures using  information necessary to achieve their objectives and respond to risks.  DEA\u2019s reliance on state boards to alert them of any actions, complaints,  or criminal offenses against one of its registrants could result in delays in  receiving pertinent information about the eligibility of its registrants. In  addition, if a state fails to notify DEA of an action against one of its  registrants or the applicant does not self-report a disciplinary action, then  DEA may not discover that the registrant is no longer eligible.\nBy not making use of available resources to monitor the state licensure  and disciplinary actions taken against its registrants, such as databases  containing information on medical sanctions, DEA is not well-positioned to  ensure the continued eligibility of its registrants. For example, databases  containing information on medical sanctions, such as those maintained by  the FSMB or the National Practitioner Data Bank (NPDB), capture  information on multiple types of practitioners from many different sources,  such as adverse actions taken by state boards, federal agencies, and  professional societies. In addition, these data also include information on  actions taken due to controlled substance violations, criminal offenses,  and exclusions from federal health-care programs reported by the  Department of Health and Human Services (HHS). One database, NPDB,  also captures information from state law-enforcement and Medicaid fraud- control agencies. Utilizing these types of databases would allow DEA to  regularly monitor adverse actions taken against its registrants across a  broad spectrum of sources. Furthermore, utilizing these types of  databases would allow DEA to monitor its registrants\u2019 licenses and  disciplinary actions across all states, not just the state in which they hold  a DEA registration. Disciplinary actions occurring in other states could be  relevant to DEA\u2019s assessment of whether registering an individual would  be inconsistent with the public interest. However, using these databases  may have costs. Therefore, it would be important for DEA to balance the  cost and benefit to using such databases with developing other  approaches for monitoring its registrants\u2019 state authority. Regardless of  the approach used, without taking steps to verify registrants\u2019 continued  eligibility, DEA may not have complete or timely information about the  continued eligibility of its registrants, thereby weakening the integrity of its  registry.\n\n\t\t\tLimitations Exist in Monitoring Criminal Backgrounds\n\nIn furtherance of its mission to enforce the closed system of controlled  substance distribution, DEA has promulgated regulations that require all  applicants and registrants to provide effective controls and procedures to  guard against theft and diversion of controlled substances. DEA has also  published the Controlled Substances Security Manual (Manual), which  clarifies the regulations and provides additional guidance to assist  handlers of controlled substances in safeguarding them. For example, the  Manual instructs practitioners to keep blank prescription forms and  unused DEA Order Forms in a secure location to prevent against theft.  The Manual also emphasizes that applicants and registrants who hire  employees to work in or around areas where controlled substances are  handled must carefully screen these employees, identifying this process  as \u201ca critical first step in diversion prevention,\u201d \u201cvital to fairly assess  the likelihood of an employee committing a drug security breach,\u201d and  \u201cessential to overall controlled substances security.\u201d According to DEA, as  part of the screening process, criminal-background checks with local law- enforcement authorities should be performed by the employer, and each  potential employee should be required to answer the question, \u201cWithin the  past five years, have you been convicted of a felony, or within the past  two years, of any misdemeanor, or are you presently charged (formally)  with committing a criminal offence?\u201d Given DEA\u2019s guidance to registrants  that their employees with criminal convictions, or pending charges, may  pose an increased risk of illicit diversion of controlled substances, we  assessed the extent to which DEA\u2019s internal controls help ensure  individual registrants do not present similar issues that may increase the  risk of illicit diversion of controlled substances.\nOur analysis of DOJ\u2019s BOP SENTRY data, USMS\u2019s warrant data, and the  FBI\u2019s NSOR data identified one individual who may have been ineligible  to have controlled substance registrations because of crimes related to  controlled substances. In addition, we found 94 individuals associated  with 100 DEA registrations that presented issues that may increase the  risk of illicit diversion of controlled substances, such as registrants with  active or recent warrants for offenses related to controlled substances,  registrants incarcerated or with active or recent warrants for offenses  unrelated to controlled substances, and registrants listed in the NSOR for  crimes such as sexual assault and exploitation of minors.\nIncarcerated registrants. We found 28 individuals associated with 32  DEA registrations who may have been either ineligible for a controlled  substance registration or presented issues that may increase the risk  of illicit diversion of controlled substances because they were  incarcerated in federal prisons for crimes related to controlled  substances, health-care fraud, or other crimes. Of the 28  incarcerated individuals, 1 was incarcerated for crimes related to  controlled substances. In this case, the individual was convicted of  possession of approximately 535 pounds of marijuana with the intent  to distribute in September 2013, required to undergo treatment for  substance abuse, and subsequently imprisoned in December 2013.  The registrant surrendered her state-level authority in February 2014.  According to DEA OD officials, the registrant\u2019s CSA2 record did not  contain any notes indicating awareness of the crime and DEA did not  initiate any action against the registrant. The registration subsequently  expired in May 2015.\nIn addition, 18 of the 28 individuals were incarcerated for crimes  related to health-care fraud, of which 10 had been excluded from  participating in federal health-care programs due to criminal  convictions that may have provided a sufficient basis to deny or  revoke a registration, while maintaining DEA registrations. One such  registrant was convicted of defrauding Medicare in June 2013  following an investigation by the FBI and HHS OIG. The registrant  was subsequently excluded from participating in federal health-care  programs in April 2014. According to DEA OD officials, the registrant\u2019s  CSA2 record did not contain any notes indicating awareness of the  crime, nor did DEA initiate any action against the registrant. The  individual was still actively registered with DEA as of January 2016.\nFurthermore, we identified an additional 9 individuals who were  incarcerated for other crimes, such as sexual abuse and illicit acts as  well as fraud, including bank, wire, and tax fraud. One such individual,  a former doctor for DOJ\u2019s BOP, was convicted in November 2012 and  sentenced to federal prison in February 2013 for sexually abusing  three inmates in the course of his employment with DOJ. Another  individual was serving 8 years in federal prison after being convicted  of attempting to travel to Canada to engage in illicit sexual conduct  with a minor. According to DEA OD officials, the registrants\u2019 CSA2  records did not contain any notes indicating awareness of the crime.  The registrations subsequently expired in December 2014 and June  2014, respectively.\nRegistrants with active or recent warrants. We identified five  individuals associated with six DEA registrations who were listed in  USMS warrant data, of which three possessed outstanding  warrants. Of the five individuals with active or recent warrants, three  individuals had warrants for offenses related to controlled  substances. For example, we identified a physician with an active  warrant who was indicted in October 2013 on multiple felony counts  for knowingly and intentionally distributing controlled substances  outside the scope of professional practice, health-care fraud, and  making false statements in health-care matters, among others. The  indictment alleged that the physician convinced patients to undergo  medically unnecessary spinal surgeries, and then billed private and  public health-care benefit programs, deriving significant profits for the  fraudulent services. Additionally, according to Kentucky and Ohio  medical board orders, the physician was presigning blank  prescriptions so his employees (who lacked lawful authority) could  issue prescriptions for controlled substances in his absence. In  October 2013, the Kentucky medical board issued an emergency  suspension due to immediate danger to public health and safety,  followed by an Ohio medical board suspension in November 2013.  Both medical boards later revoked the physician\u2019s license in 2014.  According to DEA OD officials, the registrant\u2019s CSA2 record did not  contain any notes indicating awareness of the criminal allegations.  The physician was still actively registered with DEA as of January  2016.\nRegistered Sex Offenders. We identified 62 individuals associated  with 63 DEA registrations who were also registered with the FBI\u2019s  NSOR for convictions involving sexual offenses. Types of offenses  included actions such as sexual assault against patients and  exploitation of a minor, among others. For example, we identified a  physician who was convicted of four felony counts of gross sexual  imposition and two misdemeanor counts of sexual imposition involving  patients. The conviction led to an automatic suspension of the  physician\u2019s medical license in November 2012, and the license was  subsequently revoked in January 2014. According to DEA OD  officials, the registrant\u2019s CSA2 record did not contain any notes  indicating awareness of the crime. The physician\u2019s registration expired  in April 2014. We identified another physician who pled guilty to two  felony counts of sexual exploitation of a minor in October 2012 and  subsequently surrendered his medical license and state-level  controlled substance registration in February 2013. According to DEA  OD officials, the registrant\u2019s CSA2 record did not contain any notes  indicating awareness of the crime. The DEA registration expired in  May 2015.\nDEA is not required to and has not chosen to regularly match its database  of registrants against databases containing criminal background, such as  the databases we used in this analysis. Further, according to DEA OD  officials, DEA only considers crimes related to controlled substances  when evaluating whether to take action against an individual\u2019s registration  based on criminal activity. Therefore, DEA may not have been alerted to  the criminal offenses, such as health-care fraud and sexual assault, we  identified.\nWe provided DEA with a list of the 95 individuals that matched these  databases to determine whether it was aware of the criminal background,  and what, if any, action it took against these individuals\u2019 registrations. In  response, DEA OD officials compiled a list indicating the status of each  registration, whether any action was taken against the registration, and  whether the registrant\u2019s CSA2 record contained any notes indicating  knowledge of the crime. In 43 of the 95 cases, CSA2 did not contain  information on these individuals\u2019 criminal history, which meant that DEA  was not aware of the presence of issues that may have increased the risk  of illicit diversion of controlled substances.\nDEA has controls in place to check for drug-related offenses, such as  checking initial applicants against NADDIS; however, DEA does not  conduct ongoing or subsequent checks against NADDIS for renewals  unless the applicant self-reports a criminal conviction related to controlled  substances. Additionally, while DEA receives information from state  licensing boards about the criminal activity of its registrants, the extent  and frequency to which the states monitor varies by state as do the  sources that the states use for such monitoring. For example, as  described earlier, two of the five states we visited only conduct criminal- background investigations if the state applicant self-reports a criminal  offense. In addition, some states only monitor criminal activity occurring  within the state, while others monitor criminal reports from states across  the nation. Therefore, states without strong criminal-background controls  may not have known to take action against the individual and, therefore,  could not have notified DEA. In our discussions, DEA OD officials said  they had not considered monitoring criminal backgrounds but were open  to doing so.\nBy relying on the applicant to self-report a criminal conviction or the states  to notify DEA of actions taken against its registrants, DEA may be missing  opportunities to develop a more-complete assessment of the continued  eligibility of its registrants and risks to the closed system of controlled  substance distribution. Additional criminal background controls and  regular monitoring would allow DEA to promptly identify registrants with  criminal backgrounds. By promptly identifying such registrants, DEA  would obtain better assurance of the integrity of its registry and better  identification of potential risks of illicit diversion.\nAlthough such monitoring could improve the integrity of the registry, such  actions may have costs, and, given the relatively low number of  individuals with unidentified criminal backgrounds, weighing those costs  with the risks would be important. The Standards for Internal Control in  the Federal Government state that agencies should identify and analyze  relevant risks to achieve their objectives and form a basis for determining  how risks should be managed. Additionally, GAO\u2019s Fraud Risk  Management Framework identified as a leading practice considering the  benefits and costs to address identified risks when designing and  implementing specific controls to prevent and detect fraud. Until DEA  explores options that would balance the risk posed by individuals having  criminal backgrounds with the cost of identifying those individuals and  documenting associated decisions, DEA is not well-positioned to make an  informed decision on how best to use its resources.\n\n\tConclusions\n\nAs part of an overall effort to prevent the diversion of controlled  substances for nonmedical use, having effective controls to ensure that  only those who are authorized and eligible handle and prescribe  controlled substances is essential. While many stakeholders are involved  in making this determination, DEA plays a key role because it administers  and enforces the Controlled Substances Act (CSA) and, in doing so, is  responsible for ensuring that registering an individual to handle or  prescribe controlled substances is not inconsistent with the public  interest.\nDEA has implemented controls to register individuals to handle or  prescribe controlled substances. However, as demonstrated by our  analyses, DEA has the opportunity to enhance the integrity of its  controlled substances registry by taking additional steps to collect and  validate registrants\u2019 identifying information and verify the continued  eligibility of its registrants. Given that unique identifying information, such  as SSNs, is critical to validating the identities and implementing controls  to identify deceased registrants, obtaining legal authority to require such  information and developing policies and procedures to validate this  information would help ensure that DEA\u2019s registrants are and remain  eligible to prescribe and handle controlled substances. In addition, having  complete and valid SSNs for all individual registrants would enhance  DEA\u2019s ability to identify other registrations held by each individual,  including any past adverse actions taken against previous registrations,  as it evaluates whether registering the individual would be inconsistent  with the public interest.\nFurthermore, while DEA has taken steps to identify and retire deceased  registrants in its database by using SSA\u2019s public Death Master File  (DMF), obtaining legal authority to access that agency\u2019s more  comprehensive full death file would help ensure that DEA is using the  most-complete information available. This would better ensure that DEA  maintains current information on the eligibility of its registrants and  prevents others from potentially using the registration information of  deceased registrants.\nSimilarly, developing procedures to verify the continued eligibility of its  registrants in other areas, such as verifying that registrants maintain  appropriate state authority and have not been subject to disciplinary  actions that may affect their eligibility, would help ensure that its  registrants maintain eligibility to handle and prescribe controlled  substances. Additionally, exploring options that weigh the risks posed by  registrants with criminal backgrounds with the costs of identifying these  individuals could better inform DEA about the potential for illicit diversion  of controlled substances. Given DEA\u2019s guidance to registrants that their  employees with criminal convictions or pending charges may pose an  increased risk of illicit diversion, taking steps to monitor its own  registrants\u2019 criminal backgrounds would help ensure that these registrants  do not present similar issues that may increase the risk of illicit diversion  of controlled substances.\n\n\tRecommendations for Executive Action\n\nTo help ensure that practitioners who may be ineligible do not possess a  controlled substance registration and that practitioners who pose an  increased risk of illicit diversion are identified, we recommend the Acting  Administrator of DEA take additional actions to strengthen verification  controls. Specifically, we recommend that the Acting Administrator of  DEA take the following five actions: develop a legislative proposal requesting authority to require SSNs for  all individuals, regardless of whether they hold an individual or  business registration; develop policies and procedures to validate SSNs and apply the  policies and procedures to all new and existing SSNs in the CSA2;  such an approach could involve collaborating with SSA to assess the  feasibility of checking registrants\u2019 SSNs against EVS; develop a legislative proposal to request access to SSA\u2019s full death  identify and implement a cost-effective approach to monitor state  licensure and disciplinary actions taken against its registrants; such  an approach could include using data sources that contain this  information, such as NPDB or FSMB; and assess the cost and feasibility of developing procedures for  monitoring registrants\u2019 criminal backgrounds, such as conducting  matches against federal law-enforcement databases, and document  decisions about the approach chosen.\n\n\tAgency Comments, Third-Party Views, and Our Evaluation\n\nWe provided a draft of this report to DOJ for its review, and DEA\u2019s Office  of Inspections provided written comments, which are reproduced in full in  appendix II. We also provided relevant sections of a draft of this report to  SSA and the appropriate licensing boards in the five states we visited\u2014 Arizona, Connecticut, New Mexico, Texas, and Vermont\u2014to obtain their  views and verify the accuracy of the information provided.\nIn its written comments, DEA stated that it appreciates the intent of our  recommendations, but raised concerns about its legal authority to take  some of the actions we recommended. It also raised concerns about  technical and fiscal challenges that it stated would make compliance with  the recommendations burdensome. Despite these limitations, DEA stated  that it is in the process of determining the feasibility of implementing  actions that would permit it to comply with the recommendations utilizing  the current legal framework and within reasonable cost parameters. DEA  specifically agreed with our recommendation to identify and implement a  cost-effective approach to monitor state licensure and disciplinary actions  taken against its registrants, dependent on its determination that these  actions are allowable under the authority of the CSA. DEA neither agreed  nor disagreed with the remaining four recommendations. Instead, DEA  described actions it has taken or plans to take in response to each  recommendation.\nRegarding our first recommendation that DEA develop a legislative  proposal requesting authority to require SSNs for all individuals  regardless of whether they hold an individual or business registration,  DEA stated that it is exploring the possibility and practicality of  implementing changes to require SSNs for practitioners and mid-level  practitioners and will pursue the actions necessary to legally authorize  DEA to require such information. DEA further stated that, if new  legislative authority is required, it defers to GAO to recommend legislative  action to Congress. As we noted in the report, officials in DEA\u2019s Office of  Chief Counsel told us that they do not have legal authority to collect SSNs  for individuals who apply as a business. We also noted that collecting  SSNs is critical to validating identities and carrying out DEA\u2019s existing  controls to identify and remove deceased registrants and to identify other  registrations held by each individual, including past adverse actions taken  against previous registrations. We agree that DEA\u2019s plans to pursue  actions necessary to legally authorize DEA to require SSNs is a good first  step and we continue to believe that DEA should develop a legislative  proposal to request authority to require SSNs for all individuals. DEA  developing its own legislative proposal would ensure the proposal is  drafted in a way that addresses the actions necessary to legally authorize  DEA to require SSNs for all individuals.\nRegarding our second recommendation to develop policies and  procedures to validate SSNs and apply these to all new and existing  SSNs in the CSA2, DEA said that it has initiated discussions with SSA to  determine the legality and feasibility of using EVS to verify SSNs and  outlined the issues that its review will focus on. We agree that these  actions are good first steps in developing an approach to validate SSNs in  the CSA2 and further agree that use of EVS is one possible approach to  validate SSNs. As we noted in the report, validating SSNs will help  establish registrants\u2019 identities and help ensure that DEA has the  information necessary to implement its existing controls and to identify  other registrations held by each individual, including past adverse actions  taken against previous registrations.\nRegarding our third recommendation to develop a legislative proposal to  request access to SSA\u2019s full death file, DEA stated that it is preparing a  proposal to SSA to request access to the full death file. If SSA determines  it cannot provide access to this data to DEA under existing law, DEA  stated that it defers to GAO to advise the appropriate congressional  representatives to seek legislative changes for DEA. As we noted in the  report, DEA is not eligible under current law to access SSA\u2019s full death  file. We also noted that having access to the more comprehensive full  death file would ensure that DEA is using the most-complete information  available. As a result, this would better ensure it maintains current  information on the eligibility of its registrants and prevent others from  potentially using the registration information of deceased registrants. We  continue to believe that DEA should develop a legislative proposal to  request access to SSA\u2019s full death file. DEA developing its own legislative  proposal would ensure the proposal is drafted in a way that addresses the  requirements necessary to grant DEA access to this information.\nWith regard to our fourth recommendation to identify and implement a  cost-effective approach to monitor state licensure and disciplinary actions  taken against its registrants, DEA stated that it does not specifically have  authority to access state medical licensing boards\u2019 databases. However,  our recommendation does not specifically require the use of state medical  licensing boards\u2019 databases and allows DEA flexibility in an approach for  monitoring the information that it needs to help ensure the continued  eligibility of its registrants. DEA concurred with our recommendation,  dependent upon a determination that these actions are allowable under  the authority of the CSA. DEA stated that it has met with FSMB  representatives and is currently exploring the use of FSMB\u2019s services to  verify the existence and status of state licenses and to identify disciplinary  information from the medical boards. We agree that use of FSMB\u2019s  services can be beneficial for validating the types of practitioners included  in FSMB\u2019s services, such as medical doctors, osteopathic doctors, and  some physician assistants. However, these actions do not include other  types of individual practitioners for which DEA should also develop  processes to monitor state licensure and disciplinary actions, such as  dentists, veterinarians, and pharmacists, among others. While these  individuals represent a smaller percentage of DEA\u2019s registrants, we  believe it is important for DEA to monitor state licensure and disciplinary  actions for these individuals as well to better ensure that its registrants  are and remain eligible.\nLastly, in response to our fifth recommendation that DEA assess the cost  and feasibility of developing procedures for monitoring registrants\u2019  criminal backgrounds, DEA stated that it has started discussions with  BOP about effective ways of comparing DEA\u2019s registrant data to BOP\u2019s  inmate data. DEA also stated that it is exploring the technical and  financial feasibility of adding an additional query of NADDIS for renewal  applications since this query is currently done only for new applications.  We believe that developing procedures to monitor registrants\u2019 criminal  backgrounds using these databases would be beneficial for DEA to help  ensure that its registrants are and remain eligible and do not possess an  increased risk of illicit diversion.\nDOJ, SSA, and the New Mexico Medical Board also provided technical  comments that were incorporated into the report, as appropriate. The  Connecticut Departments of Public Health and Consumer Protection and  the Texas Medical Board reported that they had no comments. The  Arizona Medical Board, New Mexico Board of Pharmacy, Texas  Department of Public Safety, and the Vermont Board of Medical Practice  did not respond to our request for comments.\nAs agreed with your offices, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days from the  report date. At that time, we will send copies of this report to the Attorney  General, the Acting Commissioner of SSA, and other interested parties.  In addition, the report will be available at no charge on the GAO website  at http:\/\/www.gao.gov.\nIf 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 III.\n\nAppendix I: Objectives, Scope, and Methodology\n\nThis report (1) identifies and describes the internal controls that selected  states and the Drug Enforcement Administration (DEA) use to help  ensure the eligibility of individuals to handle controlled substances, and  (2) assesses the extent to which DEA\u2019s internal controls help ensure that  individuals listed in the controlled substances database are and remain  eligible and do not present issues that may increase the risk of illicit  diversion of controlled substances.\nTo identify and describe the internal controls that selected states use to  help ensure the eligibility of individuals to handle controlled substances,  we conducted site visits to five states\u2014Arizona, Connecticut, New  Mexico, Texas, and Vermont. We developed site visit selection criteria  and selected states to ensure a mix of states with state-level controlled  substance registrations and those without; states with a high number of  DEA adverse actions per 1,000 registrants; states with a low and high  incidence rate of accidental deaths from prescription opioid and  benzodiazepine drugs in 2012 (the most recently available data at the  time of our review), per 100,000 people; and states with large increases  and large decreases in the rate of change in accidental opioid and  benzodiazepine drug overdose per 100,000 people. We also prioritized  states that were located near a DEA field division office. Because each  state determines the internal controls used to ensure the eligibility of  individuals to handle controlled substances, the internal controls may vary  by state. Our selection of states is not a generalizable sample. Therefore,  our findings are only applicable to these five states and cannot be used to  make inferences about other states.\nPrior to making our state selections, we convened several discussion  groups at the National Association of State Controlled Substances  Authorities Conference held in October 2014 in order to gain an overall  understanding of how state agencies and health-care industry companies  interact with DEA to prevent controlled substance diversion and abuse,  and communicate and share information with DEA regarding registrants.  We also obtained the state agency and industry representatives\u2019 views  about DEA\u2019s controlled substances screening, registration, and  enforcement processes for individuals and entities.\nBecause each state determines which health-care occupations may  prescribe or dispense controlled substances, as well as an occupation\u2019s  licensure requirements, the number of state licensing boards and the  individuals they license varies by state. For consistency in the types of  state licensing boards we met with and as a means for comparison, we  visited medical and pharmacy boards, or their equivalents, in the five  states because physicians are the largest category of individual  practitioners that DEA registers and pharmacies are the largest category  of registered entities. We also reviewed applicable state statutes and  administrative rules, agency and board websites, as well as forms and  application instructions for new and renewing licensees for each of the  five states. For each of the selected states, we interviewed state officials  about validating information submitted on physician licensure applications  initially and at renewal, information sharing with other state or federal  agencies, and procedures for handling complaints and for matching  licensure data with other state or federal databases. We also met with  officials in three of our five states (Connecticut, New Mexico, and Texas)  who were responsible for administering their respective programs for  state-level controlled substance registration.\nTo identify and describe the internal controls that DEA uses to help  ensure the eligibility of individuals to handle controlled substances, we  reviewed federal statutes and DEA regulations and interviewed DEA  officials from headquarters and four field division offices about their  interactions with other federal, state, and local agencies, as well as their  interactions with registrants. We focused on how DEA officials carry out  registration activities, validate information submitted on the registration  applications, share information with state agencies, and follow their  processes for receiving and investigating complaints. Additionally, our  review focuses on individuals who were practitioners, such as physicians,  dentists, and veterinarians, and mid-level practitioners, such as nurse  practitioners, physician assistants, and pharmacists. These groups  represent about 1.4 million (93 percent) of the 1.5 million DEA  registrations. To identify and describe DEA\u2019s requirements and processes  for registration, renewal, and monitoring of individual handlers of  controlled substances, we reviewed applicable statutes, regulations and  federal guidance, DEA\u2019s annual budget submissions, DEA\u2019s website, the  controlled substances registrant database user manual, and forms and  instructions for new and renewing applicants. We also interviewed  relevant DEA officials to identify DEA\u2019s processes for registrants\u2019 initial  registration, renewal, and monitoring.\nTo assess the extent to which DEA\u2019s internal controls help ensure that  individuals listed in the controlled substances database (CSA2) are and  remain eligible and do not present issues that may increase the risk of  illicit diversion of controlled substances, we identified vulnerabilities for  potential fraud and then identified the associated internal control  weaknesses that led to the vulnerability. To accomplish this, we reviewed  federal statutes and regulations, decisions from DEA administrative  hearings and federal courts, and DEA policies and guidance, and  interviewed DEA officials responsible for controlled substance registration  functions. We used federal standards for internal control, GAO\u2019s Fraud  Risk Management Framework, federal statutes, and DEA policies to  evaluate these functions. To identify vulnerabilities for potential fraud in  DEA\u2019s internal controls, we analyzed registrants\u2019 identifying information  contained in CSA2 as of March 6, 2014 (the most-current CSA2 data  available at the time of our review) and matched CSA2 data to the  following five databases (1) the Social Security Administration\u2019s (SSA) full  death file, as of February 2014; (2) Federation of State Medical Boards  (FSMB) physician-licensure data, as of the 2014 census, and disciplinary- action data, as of April 2015; (3) Federal Bureau of Prisons\u2019 (BOP)\nSENTRY data, as of March 2014; (4) U.S. Marshals Service (USMS)  warrant data, as of February 2014; and (5) the Federal Bureau of  Investigation\u2019s (FBI) National Sex Offender Registry (NSOR), as of  February 2014. We also compared DEA registrants\u2019 identity information  to the identity information from SSA\u2019s official records using the  Enumeration Verification System (EVS). We then identified the related  internal control weaknesses that led to these vulnerabilities to help us  assess the extent to which DEA\u2019s internal controls help ensure that  individuals are and remain eligible and do not present issues that may  increase the risk of illicit diversion of controlled substances. For the  purposes of our review, we selected only individuals who were  practitioners, such as physicians, dentists, and veterinarians, and mid- level practitioners, such as nurse practitioners, physician assistants, and  pharmacists. These groups represent about 1.4 million (93 percent) of  the 1.5 million DEA registrations. We excluded businesses, such as  pharmacies, hospitals, and manufacturers, from our analysis.\nTo identify individuals with missing, duplicative, or potentially inaccurate  or invalid Social Security numbers (SSN), we analyzed registrants\u2019  identifying information contained in CSA2 and compared this information  to SSA\u2019s records. Specifically, we identified instances where individuals  were registered using employer identification numbers (EIN) instead of  SSNs. We reviewed these results and identified instances where  records contained text suggesting they were registered under official  government capacity (e.g., \u201cLimited to Official Federal Duties Only\u201d) and,  therefore, not required to provide either an EIN or SSN. We then  reviewed a nongeneralizable sample of 20 records, matching the  registrant\u2019s name and address to the registrant\u2019s website to confirm that  the individual\u2019s registration appeared to be associated with a private  employer and not a government entity.\nWe also identified instances where the SSN matched multiple  registrations, but the names associated with those registrations did not  match each other. We reviewed the results to determine the extent to  which the names did not match. For example, we identified instances  where the names reasonably appeared to be the same person, but whose  names did not match due to possible typos (e.g., \u201cSally Simpson\u201d and  \u201cSally Simpsen\u201d), name cognates (e.g., \u201cJonathan Smith\u201d and \u201cJon  Smith\u201d), name inversions (e.g., \u201cJon Smith\u201d and \u201cSmith Jon\u201d), or additional  first or last names (e.g., \u201cMary Lynn Smith\u201d and \u201cMary Smith,\u201d or \u201cJane  Smith Johnson\u201d and \u201cJane Johnson\u201d). We also identified instances  where the SSNs were associated with first or last names (or both) that  reasonably appeared to be distinctly different. We provided a list of all of  these individuals to DEA to determine the reason this occurred.\nTo identify whether any registrants had potentially inaccurate or invalid  SSNs or dates of birth, we submitted this information for individuals for  verification to SSA\u2019s EVS. EVS provides information on invalid (never  issued) SSNs and instances where there are mismatches between SSN,  name, and date of birth. EVS flags SSNs in which the name or date of  birth (or both) do not match its records for the SSN, as well as SSNs that  have never been issued by SSA.\nTo identify whether any registrants were potentially ineligible or presented  issues that may increase the risk of illicit diversion of controlled  substances, we matched DEA\u2019s CSA2 data of approximately 1.5 million  registrants, as of March 6, 2014 (the most-current CSA2 data available at  the time of our review), to the five databases listed below.  1.  SSA\u2019s full death file. To identify registrants who were reported  deceased by SSA, we matched the CSA2 data to SSA\u2019s full death file  by SSN, name, and date of birth, as of February 28, 2014. The full  death file contains all of SSA\u2019s death records, including state-reported  death information. We included only those individuals who had dates  of death prior to March 1, 2014.  2.  FSMB licensure and disciplinary action data. To identify registrants  who did not possess active state-level controlled substance authority,  we matched CSA2 to FSMB licensure and disciplinary action data  based on the FSMB\u2019s 2014 physician census and disciplinary action  data dated through April 20, 2015. We matched the CSA2 data to  FSMB data by SSN and name to identify physicians with disciplinary  actions related to the suspension, revocation, or surrender of their  medical license or controlled substance privileges. To better identify  suspensions, revocations, or surrenders occurring without  reinstatement prior to March 6, 2014, we limited our review of FSMB  data to the most-recent disciplinary action taken against the registrant  prior to March 6, 2014. Therefore, the number we identified may not  include all suspended, revoked, or surrendered licenses and  represents a minimum number. For each of the disciplinary actions  identified in the FSMB data, we reviewed supporting documentation,  such as medical board actions, using the applicable state medical  board website. We provided a list of potentially ineligible registrants  based on our review of state disciplinary actions to DEA to determine  whether DEA was aware of these disciplinary actions and what action,  if any, DEA took against their respective registrations.  3.  BOP SENTRY data. To identify registrants incarcerated while actively  registered with DEA, we matched CSA2 data to federal prisoner data  provided by BOP as of March 2014 by SSN, name, and date of birth.  We conducted a second match using name and date of birth to  identify any additional matches where the SSN field may have been  missing or inaccurate. We identified two individuals who matched by  name and date of birth, but whose SSNs were missing in at least one  of the data files. For these two individuals, we reviewed state licensing  board action documentation to determine whether the offenses in the  board actions matched the offenses identified in the BOP data and to  confirm that they were likely matches.\nWe provided a list of the DEA registrants that matched by SSN or  name and date of birth to BOP to obtain the incarceration dates for  these registrants to determine whether they were incarcerated as of  March 6, 2014. We then categorized offenses that were related to  controlled substances, health-care fraud, or contained other attributes,  such as bank fraud or sexual abuse. We provided a list of registrants  who matched this database to DEA to determine whether DEA was  aware of the criminal offenses and what action, if any, DEA took  against their respective registrations.  4.  USMS warrant data. To identify registrants with active or recent  warrants, we matched the CSA2 data to warrant data provided by  USMS as of February 2014. We identified records for which the  registrant\u2019s SSN and name matched that of an individual (or an  individual\u2019s alias) who was listed in the warrant data. We provided a  list of DEA registrants who matched USMS warrant data to USMS to  obtain the warrant issued and warrant closed dates, among other  information, to determine whether these registrants had active or  recent warrants as of March 6, 2014. We then determined which  matches had open or recently closed warrants. We then categorized  offenses that were related to controlled substances, health-care fraud,  or contained certain other attributes. We provided a list of registrants  who matched this database to DEA to determine whether DEA was  aware of the criminal offenses and what action, if any, DEA took  against their respective registrations.  5.  FBI NSOR data. To identify registrants who were listed as registered  sex offenders, we matched the CSA2 data to the FBI\u2019s NSOR data, as  of February 2014. We identified records for which the registrant\u2019s  SSN, name, and date of birth matched that of an actively registered  sex offender (or an associated alias). We provided a list of DEA  registrants who matched NSOR to the FBI to obtain the NSOR  registration start and end dates, among other information, to  determine whether these individuals were registered in the NSOR as  of March 6, 2014. We then provided a list of registrants who matched  this database to DEA to determine whether DEA was aware of the  criminal offenses and what action, if any, DEA took against their  respective registrations.\nBecause we matched CSA2 data to these datasets using two or more  identifiers\u2014SSN, name, date of birth\u2014we are generally confident in the  accuracy of our results. However, in some cases, our matches may  include registrants who were not deceased, sanctioned by their  respective states, incarcerated, the subject of an active or recent warrant,  or registered sex offenders. This can occur when a DEA registrant has an  SSN, name, and date of birth that are identical to an individual listed in  one of the other databases or when the registrant is listed in the other  database erroneously. In addition, our matches may be understated  because we may not have detected registrants whose identifying  information in the CSA2 data differed from the identifying information in  other databases, or was missing.\nWe assessed the reliability of DEA\u2019s CSA2 data, SSA\u2019s full death file,  FSMB physician licensure and disciplinary action data, BOP SENTRY  data, USMS warrant data, and the FBI NSOR data by reviewing relevant  documentation, interviewing knowledgeable agency officials, and  performing electronic testing for duplicate records and valid or missing  values to determine the completeness and accuracy of specific data  elements in the databases. We assessed the reliability of SSA\u2019s EVS by  reviewing relevant documentation. We determined that the data elements  we used from these databases were sufficiently reliable for the purposes  of matching DEA registrants to these datasets to identify potentially  ineligible registrants.\nWe conducted this performance audit from November 2014 through May  2016 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.\n\nAppendix II: Comments from the Department of Justice\n\nAppendix III: GAO Contact and Staff Acknowledgments\n\n\tGAO Contact\n\n\tStaff Acknowledgments\n\nIn addition to the contact named above, the following staff members  made significant contributions to this report: Gabrielle M. Fagan and Joah  G. Iannotta, Assistant Directors; Tracy Abdo; Melinda Cordero; Carrie J.  Davidson; Colin J. Fallon; Dennis Fauber; Maria McMullen; James  Murphy; Joy Myers; and Shana Wallace.","output":"Why GAO Did This Study\n\nDEA registers individuals and entities authorized to manufacture, distribute, or dispense controlled substances in accordance with the Controlled Substances Act, which seeks to ensure that only authorized individuals handle controlled substances. States also have a role in the registration process as they determine general licensing requirements for health-care professionals who are permitted to handle or prescribe controlled substances. Controlled substances include prescription pain relievers, such as OxyContin, stimulants, and sedatives.\nGAO was asked to review DEA's processes for registering applicants, monitoring the eligibility of registrants, and managing CSA2 data. This report assesses the extent to which DEA's internal controls help ensure that individual registrants are and remain eligible and do not present issues that may increase the risk of illicit diversion, among other objectives. GAO reviewed relevant documents and interviewed DEA and state officials. GAO matched CSA2 data to several databases to identify potentially ineligible registrants.\n\nWhat GAO Found\n\nThe Drug Enforcement Administration (DEA) has established controls for determining registrant eligibility to handle and prescribe controlled substances. However, GAO found limitations in DEA's controls to help ensure that individual registrants are and remain eligible and do not present issues that may increase the risk of illicit diversion. GAO's examination of DEA's controlled substances database (CSA2) as of March 2014 (the most-current data available) revealed gaps and other issues pertaining to registrants' identifying information. For example, GAO's analysis identified 40,785 of about 1.4 million individual registrations that were registered using a business tax identification number instead of a Social Security number (SSN). According to DEA officials, DEA does not have legal authority to require SSNs for individuals applying as a business. For individuals registered with an SSN, GAO found 11,740 SSNs that could not be validated by the Social Security Administration (SSA) and 688 SSNs that were registered to multiple names or variations of names, which can be a risk indicator of potential fraud. SSNs are needed to identify and remove deceased registrants as well as identify any past adverse history that may affect registrant eligibility. Given that SSNs are critical to validating identities, implementing DEA's controls, and identifying registrants' past adverse history, obtaining legal authority to require SSNs for all individuals and developing policies and procedures to validate them would help ensure that registrants are and remain eligible.\nGAO also found limitations in DEA's processes for verifying continued eligibility of its registrants. Of the approximately 1.4 million individual registrations in CSA2 as of March 2014, GAO found 764 registrants who were potentially ineligible because they were reported deceased by SSA, did not possess state-level controlled substance authority, or were incarcerated for felony offenses related to controlled substances. GAO also found 100 registrants who presented issues that may increase the risk of illicit diversion, such as registrants incarcerated for offenses unrelated to controlled substances, registrants with active or recent warrants, and registrants listed as sex offenders. DEA does not have processes in place to verify its registrants' state licenses or criminal background after initial registration, unless the registrant self-reports or the state notifies DEA of actions taken against its registrants. Developing processes to monitor registrant state licensure and disciplinary actions, such as verifying that registrants maintain appropriate state authority and assessing the cost and feasibility of monitoring registrants' criminal backgrounds, would help ensure that registrants maintain eligibility to handle and prescribe controlled substances and do not present issues that may increase the risk of illicit diversion.\n\nWhat GAO Recommends\n\nGAO is making five recommendations to DEA to help ensure practitioners are and remain eligible and that those who pose an increased risk of illicit diversion are identified. DEA stated it appreciated the intent of GAO's recommendations, but raised concerns about its legal authority to take some of the actions. GAO's recommendations include having DEA seek legal authority as needed, and remain valid."}
{"id":"gao_T-RCED-98-131","pid":"gao_T-RCED-98-131_0","input":"\tBackground\n\nIn the international sector, the routes that airlines can fly, the frequency of their flights, and the fares they can charge are governed by 72 bilateral agreements between the United States and other countries. Many of these agreements, including the accord with the United Kingdom, are very restrictive. Since the late 1970s, U.S. policy has been to negotiate agreements that substantially reduce or eliminate bilateral restrictions. DOT\u2019s Office of the Assistant Secretary for Aviation and International Affairs, with assistance from the State Department, is responsible for negotiating these agreements and awarding U.S. airlines the right to offer the services provided for in those agreements.\nIn January 1993, DOT granted antitrust immunity to the Northwest\/KLM alliance in conjunction with the U.S.-Netherlands open skies accord. In April 1995, DOT issued the U.S. International Aviation Policy Statement in which it reiterated its desire for open skies agreements and endorsed the growing trend toward alliances between U.S. and foreign airlines. Since issuing that statement, DOT has negotiated a number of more liberal agreements, including open skies accords with Germany and numerous smaller European countries. In 1996, the agency granted antitrust immunity to the alliances between United and Lufthansa, which is Germany\u2019s largest airline, and between Delta and several smaller European carriers. In announcing their proposed alliance, American Airlines and British Airways emphasized that they are at a competitive disadvantage with these alliances because the airlines in those alliances can, among other things, better coordinate service and jointly set fares.\nDespite success in negotiating open skies agreements throughout much of Europe, DOT has had very little success with the United Kingdom, our largest aviation trading partner overseas. The current U.S.-U.K. accord, commonly known as \u201cBermuda II,\u201d was signed in 1977 after the British renounced the prior agreement. Bermuda II restricts the number of U.S. airlines that can serve Heathrow to two carriers\u2014currently American Airlines and United Airlines. DOT has expressed increasing dissatisfaction with Bermuda II and attempted to negotiate increased access for U.S. airlines to Heathrow. Negotiations with the British take on particular importance because of the size of the U.S.-U.K. markets. In 1996, 12 million passengers traveled on scheduled service between the United States and the United Kingdom, which is more than twice that for the U.S.-Germany markets and three times that for the U.S.-France markets.\nCompetition is restricted in the U.S.-U.K. markets because Bermuda II, among other things, sets limits on the amount of service airlines can provide and prevents all U.S. airlines, except American and United, from flying to and from Heathrow. These restrictions on competition result in fewer service options for U.S. and British consumers. In addition, they also likely result in higher airfares. However, the extent to which airfares are higher is uncertain. DOT does not have data on the fares paid by passengers flown by BA or Virgin Atlantic if those passengers\u2019 itineraries did not involve a connection with a U.S. carrier, because it has generally not required foreign airlines to report data from a sample of their tickets, as it requires U.S. airlines to do.\nBermuda II\u2019s limits on competition also disproportionately affect U.S. airlines. In contrast to the continuing restrictions placed on U.S. airlines, the United Kingdom was successful in negotiating increased access for British carriers to the U.S. markets in the early 1990s. Partly as a result, between 1992 and 1996, the British carriers\u2019 share of the U.S.-U.K. markets rose from 49 percent to 59 percent. As figure 1 shows, this gain by British Airways and Virgin Atlantic has come primarily at the expense of the U.S. airlines that are not allowed to serve Heathrow.\n\n\tEuropean Reviews Considering a Range of Competitive Issues; U.S. Reviews Pending\n\nThe proposed AA\/BA alliance is subject to review by the European Commission, several agencies within the U.K. government, and DOT. The European Commission, the U.K. Department of Trade and Industry, and DOT have decision-making authority over the proposed alliance. The U.K. Office of Fair Trading and the U.S. Department of Justice\u2019s Antitrust Division (Justice) have advisory roles and provide analysis and comments to their respective decisionmakers. According to officials, the process for reviewing the AA\/BA alliance is complicated by the fact that it is new and untested and some European laws have not previously been applied to airline alliances. The European regulatory agencies have nearly completed their reviews, and the formal U.S. review has yet to get under way.\nBoth the European and the U.S. reviewers have access to extensive information\u2014including confidential proprietary data\u2014to evaluate the competition issues arising from the AA\/BA and other alliances. This information includes data on airline capacity, market shares on specific routes, and passenger travel statistics.\n\n\t\tEuropean Commission\u2019s Review Forthcoming\n\nIn July 1996, because of concerns about the anticompetitive effects of the alliances, the European Commission\u2019s Directorate General for Competition initiated a review of the proposed AA\/BA alliance and three other ongoing alliances: United\/Lufthansa\/SAS; Delta\/Swissair\/Sabena\/Austrian Airlines; and Northwest\/KLM. This review is examining a broad range of competition issues on AA\/BA, including access to slots and facilities at Heathrow Airport; the frequency of service offered by AA and BA, which would dominate the market at Heathrow; and AA\/BA\u2019s sales and marketing practices, such as frequent flier programs, travel agent commission overrides, corporate incentive agreements, and computer reservation system practices.\nThe European Commission\u2019s Directorate General for Competition expects to issue its draft remedies for addressing the anticompetitive effects of AA\/BA within the coming weeks. Officials added that their reports on other alliances should be done soon afterwards. Various parties then have the opportunity to provide comments and possibly participate in oral hearings on the draft remedies. After it obtains comments from the interested parties, the Directorate General for Competition prepares a document outlining its recommendations on whether to approve the alliance with conditions or to withhold approval, and submits the document to the European Commission\u2019s Member States Advisory Committee for review. After the Advisory Committee\u2019s review, the Directorate General for Competition incorporates appropriate comments and prepares its draft final ruling, which either lays out the conditions that must be met in order for the alliance to be approved or disapproves the alliance. It becomes the ruling of the Commission when it is adopted by the European Commission\u2019s College of Commissioners. Thus, the European Commission\u2019s final decisions are not expected for several more months.\n\n\t\tUnited Kingdom Awaiting European Commission\u2019s Draft Remedies\n\nThe U.K. Department of Trade and Industry is conducting its own review of the proposed AA\/BA alliance. It has asked the U.K. Office of Fair Trading to investigate and provide advice on the proposed alliance. The Office of Fair Trading investigation, which began in June 1996, examined a broad range of issues raised by the proposed alliance, including competitive impacts of the alliance on routes, hubs, and networks within the U.S.-European markets; the frequency of service in the U.S.-U.K. markets; the pooling of frequent flier programs; and access to slots at Heathrow. The Office of Fair Trading issued a draft report in December 1996 that called for AA\/BA to, among other things, make available to other airlines up to 168 slots per week at Heathrow for use only on U.S.-U.K. transatlantic services and allow third-party access to their joint frequent flier program in those cases in which that party does not have access to an equivalent program. The report took into account the views of third parties on conditions that should be placed on the alliance to remedy competition concerns. Before they provide their final advice on the proposed AA\/BA alliance, the U.K. Office of Fair Trading is awaiting the European Commission\u2019s publication of its draft remedies. The Secretary of State for Trade and Industry will decide on the case after receiving final advice from the Office of Fair Trading.\nThe U.K. agencies reviewing the proposed AA\/BA alliance are in contact with the European Commission and have a duty to cooperate with it. If the United Kingdom\u2019s decision on the proposed AA\/BA alliance differs from the European Commission\u2019s, the differences will have to be reconciled. According to European Commission officials, this could require a judgement by the European Court of Justice in Luxembourg, which ultimately judges the sound application of the European Union\u2019s treaties by the institutions of the Union or the member states.\n\n\t\tU.S. Reviews Not Proceeding Until AA and BA Complete the Application Process\n\nIn the United States, DOT has the authority not only for approving airline alliances, but also for granting those alliances immunity from the antitrust laws. In determining whether to grant approval and antitrust immunity for an airline alliance, DOT must find that the alliance is not adverse to the public interest. DOT cannot approve an agreement that substantially reduces or eliminates competition unless the agreement is necessary to meet a serious transportation need or to achieve important public benefits that cannot be met or that cannot be achieved by reasonably available alternatives that are materially less anticompetitive. Public benefits include considerations of foreign policy concerns. In general, DOT has found code-sharing arrangements to be procompetitive and therefore consistent with the public interest because they create new services, improve existing services, lower costs, and increase efficiency for the benefit of the traveling and shipping public. As with the other international code-sharing alliances that the United States has approved, DOT officials explained that they will not approve AA\u2019s and BA\u2019s proposed code-sharing alliance with antitrust immunity unless the United States has reached an open skies agreement with the United Kingdom.\nAccording to U.S. law, DOT is to give the Attorney General and Secretary of State \u201can opportunity to submit written comments about\u201d the application. In practice, DOT and Justice officials told us that they stay in contact throughout the application process regarding their respective analyses of airline alliances.\nJustice\u2019s role is advisory and is performed pursuant to the Sherman Antitrust Act and the Clayton Act, which set forth antitrust prohibitions against restraints of trade. To determine if a proposed alliance is likely to create or enhance market power and allow firms to maintain prices above competitive levels for a significant period of time, Justice applies its Horizontal Merger Guidelines, which describe the analytic framework and the specific standards to be used in analyzing mergers and alliances. A key concern is whether entry into the market would deter or counteract a proposed merger\u2019s potential for harm.\nDOT officials told us that in reviewing other code-sharing alliances, the Department did not apply any written set of guidelines in its analysis. Rather, DOT has discretion in deciding the factors it will analyze and in past applications for international code-sharing alliances has considered issues raised in petitions by interested parties. Those issues generally involved market power between particular hub airports, except in one instance. In response to United\u2019s application for antitrust immunity in its code sharing with Lufthansa, TWA contended that Lufthansa\u2019s control over travel agents, both through dominance of the computer reservation system and through commissions and override payments, was a serious impediment to new airlines\u2019 entry into the U.S.-Germany marketplace. In making its final decision, DOT addressed the concern about the computer reservation system, but wrote that other forums were more appropriate for addressing the other concerns.\nDOT has considered, but not always completely agreed with, Justice\u2019s comments on the extent to which particular code-sharing alliances pose threats to competition in individual markets. In the case of United\/Lufthansa, for example, Justice was concerned that competition could be reduced in two nonstop markets\u2014Chicago-Frankfurt and Washington D.C. (Dulles)-Frankfurt. DOT agreed, and \u201ccarved out\u201d (i.e., withheld antitrust immunity from) specific airline operations in those two markets. In considering Delta\u2019s proposed alliance, Justice identified seven nonstop markets that raised concerns of reduced competition. DOT agreed with Justice on three markets (Atlanta-Brussels, Atlanta-Zurich, and Cincinnati-Zurich) and withheld antitrust immunity for specific operations there; DOT generally disagreed with Justice and imposed different conditions on the other four city-pairs, each of which involved travel from New York.\nIn the case of the proposed AA\/BA alliance, U.S. reviews are essentially on hold. DOT cannot move forward with its review of the alliance until AA and BA file the necessary documents to make their application complete. DOT officials do not believe that AA and BA will complete their application until after the European Commission issues its draft remedies on the alliance, and BA officials confirmed that to us. Once DOT determines that the application is complete, interested parties\u2014including Justice\u2014will have 30 business days to comment on the alliance. Interested parties and AA\/BA will then have another opportunity for rebuttal comments.\nAccording to its regulations, DOT may order a full evidentiary hearing at the end of the comment period. Requests for DOT to hold an oral evidentiary hearing must specify the material issues of fact that cannot be resolved without such a hearing. However, DOT has the discretion by statute whether to hold a hearing, even if requested to do so by the Attorney General or Secretary of State.\nAlthough the AA\/BA application is not complete, DOT has already proposed holding an oral hearing before a departmental \u201cdecisionmaker\u201d so that interested parties can express in person their particular opinions and views on the issues concerning the AA\/BA alliance. AA and BA have characterized any type of hearing as merely a delaying tactic. Six airlines opposing the proposed AA\/BA alliance, on the other hand, have argued that the kind of hearing DOT has proposed is not sufficient; they contend that questions of fact could only be adequately explored and resolved with an oral evidentiary hearing before an administrative law judge. For example, AA and BA have contended that slots are easily obtainable at Heathrow and that Gatwick is an available and competitive alternative. Other airlines have testified that it is impossible to obtain slots at Heathrow that are timely and competitive, that Gatwick is full, and, in any event, that Gatwick is not a reasonable alternative to Heathrow, especially for business travelers. DOT has told us that it may reconsider its proposed schedule for reviewing the AA\/BA alliance, along with the type of hearing it would hold.\nWe are not in a position to assess whether material issues of fact remain to be resolved in the proposed AA\/BA alliance, but we believe it is critical that DOT avail itself of all empirical data in making its determination. Although DOT considers code-sharing agreements to be procompetitive, it has not collected sufficient data to fully analyze the long-term effects of such alliances. In our 1995 report on alliances, we found that DOT\u2019s ability to monitor the impact of alliances was limited because foreign airlines are not required to report data from a sample of their tickets involving travel to or from the United States. In addition, U.S. carriers were not required to report traffic flying on a code-share flight. Since that report, DOT has required foreign airlines in alliances that have been granted antitrust immunity to report data on traffic to and from the United States. Even so, alliances have not been sufficiently studied to determine their long-term consequences or to allay fears that such alliances may hinder competition in the long term.\n\n\tAA\/BA Alliance Would Dominate, and Competition Would Decline Unless Substantial New Entry Occurred\n\nThe proposed AA\/BA alliance has network benefits and could increase competition in markets between the United States and the European continent, the Middle East, and Africa because the number of alliances competing in these markets would increase from three to four. However, it raises serious competition issues in U.S.-U.K. markets. Competition issues arise because, under the alliance, rather than competing with each other, the two largest airlines in U.S.-U.K. markets would in essence be operating as if they were one airline. For the month of March 1998, an analysis of Official Airline Guide data indicates that AA and BA account for nearly 58 percent of the seats available on scheduled passenger flights between the United States and London. Moreover, as of March 1998, the two airlines account for 37 of the 55 total daily roundtrips (67 percent) between the United States and Heathrow offered by scheduled U.S. and British airlines.\nAA and BA currently compete with one another from six U.S. airports to Heathrow and from Dallas to London\u2019s Gatwick airport. New York\u2019s importance\u2014Kennedy and Newark\u2014is underscored by the fact that the market between these airports and Heathrow accounts for nearly one-fifth of all U.S.-London service and is more than three times the size of the Los Angeles-Heathrow market. At five of the seven airports where AA and BA compete\u2014Kennedy, Chicago, Boston, Miami, and Dallas\u2014these two airlines account for over 70 percent of the service, and at Los Angeles, they account for almost 50 percent. In addition, in Boston, AA and BA currently are the only carriers that serve Heathrow, and in the Dallas market, they are the only nonstop competitors. Figure 2 shows the location of seven cities where AA and BA currently compete with each other.\nOur review of current competitive conditions in the New York-Heathrow (Kennedy and Newark) market indicates that substantial new entry would need to occur to provide competition because of the (1) size of the market, (2) large share of that market currently held by AA and BA, (3) frequency of service in that market\u201415 flights a day\u2014provided by the two airlines (compared with 3 daily flights by United and 3 daily flights by Virgin Atlantic), and (4) substantial portion of the market accounted for by time-sensitive business travelers. New entry could come from Delta and TWA, which have hubs at Kennedy, and from Continental from its hub at nearby Newark. In the Boston and Chicago markets, new nonstop service may offset the effect on competition caused by joining the two largest competitors in those markets.\nIn the event of the alliance, time-sensitive business travelers in the Dallas-London and Miami-London markets will have fewer nonstop options and thus will likely pay higher fares for nonstop service. In the Dallas-London market, AA and BA are currently the only competitors providing nonstop service. In the Miami-London market, the number of nonstop competitors would fall from three to two. Several carriers told us that it is unlikely that a new U.S. competitor would attempt nonstop London service from either Miami or Dallas, since no carrier besides American maintains a large enough network from either of those airports to provide critical \u201cfeed\u201d traffic. As a result, DOT will need to carefully examine the unique circumstances associated with these markets.\nAt another eight U.S. cities, either BA or AA has a monopoly on nonstop service to either Heathrow (two cities) or Gatwick (six cities). In our October 1996 report on domestic competition, we found that competition was most limited and airfares highest in markets dominated by one airline. Figure 3 shows the location of eight cities where either AA or BA has a monopoly.\nIf slots at Heathrow were made available, several U.S. carriers might serve London from their primary or secondary hubs. These slots would provide new competition to AA and BA on several routes that they currently monopolize. In particular, U.S. carriers could provide new nonstop service in the Philadelphia, Charlotte, and Pittsburgh markets. They could also provide new nonstop service from cities that are currently unserved with nonstop flights, such as Cleveland.\nIn addition to increased nonstop competition, carriers could provide consumers with new one-stop options to compete with the alliance\u2019s nonstop services in markets that include their primary or secondary hubs. For example, if Northwest Airlines, which is one of the largest carriers in Seattle, could serve Heathrow from its hub in Minneapolis, consumers in Seattle would have more and better connecting opportunities to Heathrow, and hence competition would be greater than it is today with BA\u2019s being the only nonstop carrier. However, for time-sensitive travelers, these one-stop options may not be very competitive. Consumers in cities such as Des Moines or Fargo with no nonstop service to London, would experience an increase in the number of one-stop options offered by competing airlines to Heathrow.\n\n\t\tAir Carriers Vary on the Effort Needed to Overcome Combined AA\/BA Strength\n\nWhen we testified last June on the proposed alliance, representatives from six major U.S. airlines told us that they would need a total of 38 daily roundtrip slots (or 532 weekly slots) at Heathrow, along with gates and facilities, to compete with the AA\/BA alliance. For this testimony, we discussed the issue of access to Heathrow with officials from each major U.S. carrier, as well as with Virgin Atlantic. This time, some were not as clear on the number of slots they would need to be competitive. The officials emphasized that gaining a sufficient number of commercially viable slots, gates, and facilities at Heathrow was critically important for them to be able to compete effectively against the alliance, and several expressed doubt that the proposed alliance could be sufficiently restructured to prevent it from being inherently anticompetitive.\nThe carriers\u2019 representatives expressed a range of views on the actions needed to compete effectively against the proposed alliance. For example, officials from Continental discussed the importance of flight frequency, which they argued is vital for business travelers, who represent the most valued passenger because of the revenue generated by business travel. For Continental to be able to compete in the New York-London market, where, they said, AA\/BA would operate what amounts to a virtual shuttle, they argued that an additional three flights between Newark and London on top of their current schedule would not be sufficient. They believed they would need an additional six flights per day.\nOfficials from United Airlines, which already participates in a global alliance, suggested that their alliance would compete effectively with AA\/BA for many points beyond Heathrow. However, because of the importance of Heathrow, they would like to create a greater presence for their entire alliance. Thus, United officials did not indicate a desired number of slots and gates needed at Heathrow but spoke about the importance of having its STAR alliance partners (Air Canada, Thai, Varig, SAS, and Lufthansa) operate out of a single terminal at Heathrow.\nOn the other hand, officials from Delta, which also participates in a global alliance, found the proposed AA\/BA alliance to be highly anticompetitive and argued that the best way to protect the traveling and shipping public would be to disapprove the proposed alliance. Failing that, Delta officials have testified that the respective governments should guarantee that competing carriers will have unrestrained opportunities to provide service between the United States and London and receive a significant number of commercially viable slots and airport infrastructure to support those services. They suggested a minimum of 800 weekly peak-period slots would be required to provide sufficient competition at Heathrow.\nVirgin Atlantic officials concluded that determining the number of slots needed for a carrier to compete successfully in the U.S.-U.K. markets is difficult, but that BA would need to divest itself of a \u201cvery large\u201d number of slots to make successful competition by another airline (besides American) a realistic possibility.\nAs we testified last year, as a practical matter, because of a limited number of slots available at Heathrow, AA and BA would likely need to have slots transferred from them and made available to competing airlines. If the proposed alliance is approved and the regulatory agencies decide how many slots and gates should be made available, it is uncertain how long it would take the British Airports Authority, which owns and operates seven U.K. airports, including London\u2019s Heathrow and Gatwick airports, to actually make them available to new airlines. For example, according to the British Airports Authority, it probably will not have the facilities to allow the STAR alliance to locate all of its members within the same terminal until Heathrow opens the new Terminal 5, which is not scheduled to open before the fall of 2004.\nIf approved, the AA\/BA alliance would bring a history of competitive service to London. Many other airlines that do not have a history of service to London, on the other hand, would have no such advantage. DOT will have to address this issue because it will be critical for new carriers to obtain access to commercially viable slots, as well as needed gates and facilities, at the same time as the proposed alliance begins joint operations. Some have suggested that AA and BA \u201cphase in\u201d their alliance over time, in part to give other carriers the time needed to establish themselves. If this happened, new airlines\u2019 operations should be phased in to coincide with the alliance.\n\n\tAirline Sales and Marketing Practices May Further Enhance Market Dominance Over Smaller, Nonaligned, and New Entrant Carriers\n\nAccording to airline officials, aviation experts, and consumer groups we interviewed, restrictions on access to slots and gates at Heathrow Airport are the most significant barriers to competition in U.S.-U.K. markets, but sales and marketing practices\u2014which include frequent flier programs, travel agent commission overrides, multiple listings on computer reservation systems, and corporate incentive programs\u2014may also reduce competition. They do so by reinforcing market dominance at hubs and impeding successful entry by new carriers and existing carriers into new markets, which can lead to higher fares. However, measuring the impact of these practices on fares is difficult, and limiting them would involve a trade-off between their anticompetitive effect and the consumer benefits that some of them bring.\nIn October 1996, we reported that sales and marketing strategies, when used by incumbent airlines in U.S. domestic markets, make it difficult for nonincumbents to enter markets dominated by an established airline. The strength of these programs depends largely on an airline\u2019s route networks, alliance memberships, and hubs. If an airline is already dominant in a given airport, these programs will serve to reinforce this dominance. In particular:\nTravel agent commission overrides encourage travel agencies to book travelers on one airline over another on the basis of factors other than price.\nFrequent flier programs encourage travelers to chose one airline over another on the basis of factors other than price.\nCorporate fare agreements make it more difficult for point-to-point carriers to compete for corporate business.\nBias in the computer reservation systems, in which multiple listings of a single flight offered by an alliance partner crowd the first few screens in U.S. systems, makes the booking of an alliance flight more likely.\nIn our October report, we noted that travel agent commission overrides and frequent flier programs are targeted at business fliers and encourage them to use the dominant carrier in each market. Because business travelers represent the most profitable segment of the industry, airlines in many cases have chosen not to enter, or quickly exit, domestic markets where they did not believe they could overcome the combined effect of these strategies and attract a sufficient amount of business traffic.\nAA, which is credited with having first created frequent flier programs in 1981, is reputed to have the largest frequent flier program in the world, with more than 30 million members. Continental has more than 15 million members. European airlines, on the other hand, tend to have much smaller frequent flier memberships. BA\u2019s program, for example, has approximately 1 million members. The difference in memberships compared with U.S. carriers is due to their relative newness among European carriers and U.S. programs\u2019 tending to allow members to accumulate miles for activities other than flying (e.g., through car rentals or stays at hotels), while European carriers\u2019 programs are more restrictive in scope.\nSome airline officials we interviewed expressed concern that the scope of AA\u2019s and BA\u2019s combined route network and flight frequency, in combination with sales and marketing practices, would effectively preclude competition by other carriers in the U.S.-U.K. markets, especially at BA-dominated Heathrow. These carriers argued that the alliance would be able to exercise such market power, especially in relation to travel agents and corporate fare products, that other carriers would not be able to attract key business traffic. Officials from Continental Airlines told us that the problem with the sales and marketing practices of the combined AA\/BA alliance would be their effect on enhancing AA\/BA\u2019s dominance of market share. They said that rather than restrict AA\/BA in combining their frequent flier programs, travel agent commission overrides, corporate incentive agreements, and computer reservation system practices, DOT should not grant antitrust immunity to AA\/BA. TWA officials also said that these sales and marketing practices are anticompetitive and their use by the proposed alliance should be restricted. Officials from Virgin Atlantic, noting the strength and market dominance of AA and BA, questioned whether any mitigating conditions would be sufficient to limit the competitive advantage the two airlines would have if joined in a code-sharing partnership.\nHowever, United, Delta, and Northwest\u2014each of which participates in its own global code-sharing alliance\u2014generally disagreed that any of these sales and marketing practices represented significant barriers to their ability to compete. United told us that its alliance would compete with any other both in terms of their networks and their various sales and marketing practices. US Airways also indicated that it was not concerned with sales and marketing practices, as long as it had access to sufficient Heathrow slots and gates.\nOutside experts on airline competition had varying opinions on the degree to which sales and marketing practices stifle competition. While none had done research specifically on how these practices affect international air transport markets, some said frequent flier programs do not raise entry barriers for large worldwide carriers because they all have relatively strong frequent flier programs and extensive route networks. However, point-to-point carriers may be at an additional disadvantage when competing against carriers with both large route networks and strong frequent flier programs. For example, while AA and BA are perceived to have considerable advantages in their frequent flier programs compared with other nonallied or point-to-point airlines, the differences are relatively minor when compared with other U.S.-European alliances. Even so, these experts said it is almost impossible to measure the degree to which sales and marketing practices impede competition.\nWe were unable to obtain any data on these sales and marketing practices. The airlines are not required by law to report this information to DOT, and GAO has no right of access to commercially owned data. However, we know of at least two lawsuits alleging that BA has engaged in certain sales and marketing practices that are anticompetitive in nature. However, because these actions have not yet entered the trial phase, we have been unable to obtain detailed information on the alleged economic damage stemming from BA\u2019s practices, or BA\u2019s evidence to the contrary.\nIn past alliances, DOT has not restricted partner airlines in their use of frequent flier programs, travel agent commission overrides, or corporate fare packages. It has, in some of the alliances, withheld antitrust immunity from the airlines\u2019 coordination of the management of their financial interests in computer reservation system companies. While restrictions on other sales and marketing practices would be unprecedented, the European Commission, as noted earlier, is considering whether to address sales and marketing practices with all alliances. DOT and some U.S. carriers are concerned that the European Commission would so broadly regulate the industry\u2019s practices.\nThe outside experts we interviewed concurred that restrictions on sales and marketing practices in alliances should not be imposed. They believed that any restrictions on the pooling of frequent flier programs, for example, would reduce the benefits that accrue to travelers while doing nothing to address the underlying issue of market dominance. Moreover, they said it would be difficult to limit alliance members\u2019 use of these marketing practices without eliminating them altogether; banning them involves a trade-off between their anticompetitive effect and the consumer benefits that some of them bring.\nIn summary, Mr. Chairman, as a result of the challenges in addressing the barriers to entry at Heathrow, significant intergovernmental agreement will be needed well beyond the scope of prior open skies agreements. If the U.S. government is successful in obtaining an open skies agreement with the United Kingdom, and that agreement provides for sufficient access to Heathrow, significant new entry in the U.S.-U.K. markets would likely provide substantial benefits for consumers in both countries in terms of lower fares and better service. However, because these markets have been heavily regulated for 2 decades, the incumbent airlines enjoy a competitive advantage over new carriers in the U.S.-London markets. Because of AA\u2019s and BA\u2019s dominance at certain airports and extensive networks, that advantage may be further strengthened by sales and marketing practices. Thus, it will be important that new competitors are able to initiate their service no later than the time at which the AA\/BA alliance becomes operational.\nHow much access would be needed for other airlines to effectively compete, and what other conditions should be imposed on the alliance can only be determined after careful analysis of the facts to ensure that over the long run, consumers benefit. While we recognize that ultimately, decisions on all conditions must inevitably reflect numerous policy judgments, public policy should be based on significant quantitative analysis of the factors at issue, rather than anecdotal evidence. At least four governmental bodies\u2014DOT, Justice, the European Commission, and the U.K. Department of Trade and Industry\u2014have the ability to get the data needed for such analyses. Only then can the public be assured that such important international policy is grounded on a sound basis and that consumers benefit, both in the short and long term.\nMr. Chairman, this concludes my prepared statement. Our work was conducted in accordance with generally accepted government auditing standards. We would be pleased to respond to any questions that you or any Member of the Subcommittee may have.\n\nRelated GAO Products\n\nInternational Aviation: Competition Issues in the U.S.-U.K. Market (GAO\/T-RCED-97-103, June 4, 1997).\nInternational Aviation: DOT\u2019s Efforts to Promote U.S. Air Cargo Interests (GAO\/RCED-97-13, Oct. 18, 1996).\nAirline Deregulation: Barriers to Entry Continue to Limit Competition in Several Key Domestic Markets (GAO\/RCED-97-4, Oct. 18, 1996).\nInternational Aviation: DOT\u2019s Efforts to Increase U.S. Airlines\u2019 Access to International Markets (GAO\/T-RCED-96-32, Mar. 14, 1996).\nInternational Aviation: Better Data on Code-Sharing Needed by DOT for Monitoring and Decisionmaking (GAO\/T-RCED-95-170, May 24, 1995).\nInternational Aviation: Airline Alliances Produce Benefits, but Effect on Competition Is Uncertain (GAO\/RCED-95-99, Apr. 6, 1995).\nInternational Aviation: DOT Needs More Information to Address U.S. Airlines\u2019 Problems in Doing Business Abroad (GAO\/RCED-95-24, Nov. 29, 1994).\nInternational Aviation: New Competitive Conditions Require Changes in DOT Strategy (GAO\/T-RCED-94-194, May 5, 1994).\nInternational Aviation: Measures by European Community Could Limit U.S. Airlines\u2019 Ability to Compete Abroad (GAO\/RCED-93-64, Apr. 26, 1993).\nAirline Competition: Impact of Changing Foreign Investment and Control Limits on U.S. Airlines (GAO\/RCED-93-7, Dec. 9, 1992).\nAirline Competition: Effects of Airline Market Concentration and Barriers to Entry on Airfares (GAO\/RCED-91-101, Apr. 26, 1991).\nThe first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent.\nU.S. General Accounting Office P.O. Box 37050 Washington, DC  20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000  or by using fax number (202) 512-6061, or TDD (202) 512-2537.\nEach day, GAO issues a list of newly available reports and testimony.  To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone.  A recorded menu will provide information on how to obtain these lists.","output":"Why GAO Did This Study\n\nPursuant to a congressional request, GAO discussed the United States' aviation relations with the United Kingdom, focusing on the: (1) status of the various reviews of the proposed American Airlines\/British Airways (AA\/BA) alliance being undertaken by the European regulatory agencies and the Departments of Transportation and Justice; (2) competitive impact of the proposed alliance; and (3) extent to which sales and marketing practices of American Airlines and British Airways should be considered in reviewing the alliance.\n\nWhat GAO Found\n\nGAO noted that: (1) European regulatory agencies have nearly completed their reviews of the proposed AA\/BA alliance; (2) they are considering a range of issues that would have to be addressed as a condition of approving the alliance, including the number of slots and gates that other airlines would need at London's Heathrow Airport to compete, as well as American Airlines' and British Airways' marketing practices; (3) the United Kingdom, which is also reviewing the proposed alliance, is waiting for the European Commission to announce its draft remedies; (4) in contrast, the Department of Transportation (DOT) has not yet begun its formal review of the proposed alliance because neither airline has filed all the documentation requested; (5) DOT has reiterated that it will not approve the alliance until the United States successfully negotiates an open skies agreement with the United Kingdom; (6) the proposed AA\/BA alliance raises significant competition issues; (7) currently, the two airlines account for nearly 58 percent of the available seats on scheduled U.S. and British airlines between the U.S. and London; (8) in addition, they provide over 70 percent--and in some cases all-of the available seats on scheduled U.S. and British airlines between Heathrow Airport and several key U.S. airports, including Chicago, Boston, and Miami; (9) as a result of this level of market concentration, DOT's approval of the alliance would further reduce competition unless, as a condition of approval, other U.S. airlines were able to obtain adequate access to Heathrow; (10) although slots, gates, and facilities are most important, most experts and some airline officials with whom GAO spoke also recognize that American Airlines' and British Airways' sales and marketing practices may make competitive entry more difficult for other airlines; (11) practices such as frequent flier programs and travel agent commission overrides encourage travelers to choose one airline over another on the basis of factors other than obtaining the best fare; (12) such practices may be most important if an airline is already dominant in a given market or markets; (13) ultimately, this may lead to higher fares than would exist in the absence of these marketing practices; (14) even so, the experts agreed that measuring the effect of these practices is nearly impossible; and (15) mitigating their effect without banning them is difficult, and banning them involves a trade-off between their anticompetitive effect and the consumer benefits that some of them bring."}
{"id":"gao_GAO-01-600T","pid":"gao_GAO-01-600T_0","input":"\tBackground\n\nDramatic increases in computer interconnectivity, especially in the use of the Internet, are revolutionizing the way our government, our nation, and much of the world communicate and conduct business. The benefits have been enormous. Vast amounts of information are now literally at our fingertips, facilitating research on virtually every topic imaginable; financial and other business transactions can be executed almost instantaneously, often on a 24-hour-a-day basis; and electronic mail, Internet web sites, and computer bulletin boards allow us to communicate quickly and easily with a virtually unlimited number of individuals and groups.\nIn addition to such benefits, however, this widespread interconnectivity poses significant risks to our computer systems and, more important, to the critical operations and infrastructures they support.  For example, telecommunications, power distribution, water supply, public health services, and national defense\u2014including the military\u2019s warfighting capability---law enforcement, government services, and emergency services all depend on the security of their computer operations. The speed and accessibility that create the enormous benefits of the computer age likewise, if not properly controlled, allow individuals and organizations to inexpensively eavesdrop on or interfere with these operations from remote locations for mischievous or malicious purposes, including fraud or sabotage.\nReports of attacks and disruptions abound.  The March 2001 report of the \u201cComputer Crime and Security Survey,\u201d conducted by the Computer Security Institute and the Federal Bureau of Investigation\u2019s San Francisco Computer Intrusion Squad, showed that 85 percent of respondents (primarily large corporations and government agencies) had detected computer security breaches within the last 12 months.  Disruptions caused by virus attacks, such as the ILOVEYOU virus in May 2000 and 1999\u2019s Melissa virus, have illustrated the potential for damage that such attacks hold. A sampling of reports summarized in Daily Reports by the FBI\u2019s National Infrastructure Protection Center during two recent weeks in March illustrates the problem further:   A hacker group by the name of  \u201cPoizonB0x\u201d defaced numerous Government officials are increasingly concerned about attacks from individuals and groups with malicious intent, such as crime, terrorism, foreign intelligence gathering, and acts of war. According to the FBI, terrorists, transnational criminals, and intelligence services are quickly becoming aware of and using information exploitation tools such as computer viruses, Trojan horses, worms, logic bombs, and eavesdropping sniffers that can destroy, intercept, or degrade the integrity of and deny access to data. As greater amounts of money are transferred through computer systems, as more sensitive economic and commercial information is exchanged electronically, and as the nation\u2019s defense and intelligence communities increasingly rely on commercially available information technology, the likelihood that information attacks will threaten vital national interests increases.  In addition, the disgruntled organization insider is a significant threat, since such individuals often have knowledge that allows them to gain unrestricted access and inflict damage or steal assets without a great deal of knowledge about computer intrusions.\nSince 1996, our analyses of information security at major federal agencies have shown that federal systems were not being adequately protected from these threats, even though these systems process, store, and transmit enormous amounts of sensitive data and are indispensable to many federal agency operations. In September 1996, we reported that serious weaknesses had been found at 10 of the 15 largest federal agencies, and we concluded that poor information security was a widespread federal problem with potentially devastating consequences.  In 1998 and in 2000, we analyzed audit results for 24 of the largest federal agencies: both analyses found that all 24 agencies had significant information security weaknesses.   As a result of these analyses, we have identified information security as a high-risk issue in reports to the Congress since 1997\u2014most recently in January 2001.\n\n\tWeaknesses Remain Pervasive\n\nEvaluations published since July 1999 show that federal computer systems are riddled with weaknesses that continue to put critical operations and assets at risk.  Significant weaknesses have been identified in each of the 24 agencies covered by our review.  These weaknesses covered all six major areas of general controls\u2014the policies, procedures, and technical controls that apply to all or a large segment of an entity\u2019s information systems and help ensure their proper operation.  These six areas are (1) security program management, which provides the framework for ensuring that risks are understood and that effective controls are selected and implemented, (2) access controls, which ensure that only authorized individuals can read, alter, or delete data, (3) software development and change controls, which ensure that only authorized software programs are implemented, (4) segregation of duties, which reduces the risk that one individual can independently perform inappropriate actions without detection, (5) operating systems controls, which protect sensitive programs that support multiple applications from tampering and misuse, and (6) service continuity, which ensures that computer-dependent operations experience no significant disruptions.\nWeaknesses in these areas placed a broad range of critical operations and assets at risk for fraud, misuse, and disruption. In addition, they placed an enormous amount of highly sensitive data\u2014much of it pertaining to individual taxpayers and beneficiaries\u2014at risk of inappropriate disclosure.\nThe scope of audit work performed has continued to expand to more fully cover all six major areas of general controls at each agency. Not surprisingly, this has led to the identification of additional areas of weakness at some agencies. While these increases in reported weaknesses are disturbing, they do not necessarily mean that information security at federal agencies is getting worse. They more likely indicate that information security weaknesses are becoming more fully understood\u2014an important step toward addressing the overall problem. Nevertheless, our analysis leaves no doubt that serious, pervasive weaknesses persist. As auditors increase their proficiency and the body of audit evidence expands, it is probable that additional significant deficiencies will be identified.\nMost of the audits covered in our analysis were performed as part of financial statement audits. At some agencies with primarily financial missions, such as the Department of the Treasury and the Social Security Administration, these audits covered the bulk of mission-related operations. However, at agencies whose missions are primarily nonfinancial, such as the Departments of Defense and Justice, the audits may provide a less complete picture of the agency\u2019s overall security posture because the audit objectives focused on the financial statements and did not include evaluations of systems supporting nonfinancial operations.\nIn response to congressional interest, during fiscal years 1999 and 2000, we expanded our audit focus to cover a wider range of nonfinancial operations.  We expect this trend to continue.\n\n\tRisks to Federal Operations, Assets, and Confidentiality Are Substantial\n\nTo fully understand the significance of the weaknesses we identified, it is necessary to link them to the risks they present to federal operations and assets. Virtually all federal operations are supported by automated systems and electronic data, and agencies would find it difficult, if not impossible, to carry out their missions and account for their resources without these information assets. Hence, the degree of risk caused by security weaknesses is extremely high.\nThe weaknesses identified place a broad array of federal operations and assets at risk of fraud, misuse, and disruption.  For example, weaknesses at the Department of the Treasury increase the risk of fraud associated with billions of dollars of federal payments and collections, and weaknesses at the Department of Defense increase the vulnerability of various military operations.  Further, information security weaknesses place enormous amounts of confidential data, ranging from personal and tax data to proprietary business information, at risk of inappropriate disclosure.  For example, in 1999, a Social Security Administration employee pled guilty to unauthorized access to the administration\u2019s systems.  The related investigation determined that the employee had made many unauthorized queries, including obtaining earnings information for members of the local business community.\nSuch risks, if inadequately addressed, may limit government\u2019s ability to take advantage of new technology and improve federal services through electronic means.  For example, this past February, we reported on serious control weaknesses in the Internal Revenue Service\u2019s (IRS) electronic filing system, noting that failure to maintain adequate security could erode public confidence in electronic filing, jeopardize the Service\u2019s ability to meet its goal of 80 percent of returns being filed electronically by 2007, and deprive it of financial and other anticipated benefits. Specifically, we found that, during the 2000 tax filing season, IRS did not adequately secure access to its electronic filing systems or to the electronically transmitted tax return data those systems contained.  We demonstrated that unauthorized individuals, both internal and external to IRS, could have gained access to these systems and viewed, copied, modified, or deleted taxpayer data.  In addition, the weaknesses we identified jeopardized the security of the sensitive business, financial, and taxpayer data on other critical IRS systems that were connected to the electonic filing systems.  The IRS Commissioner has stated that, in response to recommendations we made, IRS has completed corrective action for all of the critical access control vulnerabilities we identified and that, as a result, the electronic filing systems now satisfactorily meet critical federal security requirements to protect the taxpayer.  As part of our audit follow up activities, we plan to evaluate the effectiveness of IRS\u2019s corrective actions.\nI would now like to describe the risks associated with specific recent audit findings at agencies of particular interest to this subcommittee.\nInformation technology is essential to the Department of Energy\u2019s (DOE) scientific research mission, which is supported by a large and diverse set of computing systems, including very powerful supercomputers located at DOE laboratories across the nation. In June 2000, we reported that computer systems at DOE laboratories supporting civilian research had become a popular target of the hacker community, with the result that the threat of attacks had grown dramatically in recent years. Further, because of security breaches, several laboratories had been forced to temporarily disconnect their networks from the Internet, disrupting the laboratories\u2019 ability to do scientific research for up to a full week on at least two occasions.  In February 2001, the DOE\u2019s Inspector General reported network vulnerabilities and access control weaknesses in unclassified systems that increased the risk that malicious destruction or alteration of data or the processing of unauthorized operations could occur.\nIn February, the Department of Health and Human Services\u2019 Inspector General again reported serious control weaknesses affecting the integrity, confidentiality, and availability of data maintained by the department.Most significant were weaknesses associated with the department\u2019s Health Care Financing Administration, which was responsible, during fiscal year 2000, for processing more than $200 billion in medicare expenditures. HCFA relies on extensive data processing operations at its central office to maintain administrative data, such as Medicare enrollment, eligibility, and paid claims data, and to process all payments for managed care.  HCFA also relies on Medicare contractors, who use multiple shared systems to collect and process personal health, financial, and medical data associated with Medicare claims.  Significant weaknesses were also reported for the Food and Drug Administration and the department\u2019s Division of Financial Operations.\nThe Environmental Protection Agency (EPA) relies on its computer systems to collect and maintain a wealth of environmental data under various statutory and regulatory requirements. EPA makes much of its information available to the public through Internet access in order to encourage public awareness of and participation in managing human health and environmental risks and to meet statutory requirements. EPA also maintains confidential data from private businesses, data of varying sensitivity on human health and environmental risks, financial and contract data, and personal information on its employees. Consequently, EPA\u2019s information security program must accommodate the often competing goals of making much of its environmental information widely accessible while maintaining data integrity, availability, and appropriate confidentiality. In July 2000, we reported serious and pervasive problems that essentially rendered EPA\u2019s agencywide information security program ineffective. Our tests of computer-based controls concluded that the computer operating systems and agencywide computer network that support most of EPA\u2019s mission-related and financial operations were riddled with security weaknesses.\nIn addition, EPA\u2019s records showed that its vulnerabilities had been exploited by both external and internal sources, as illustrated by the following examples.\nIn June 1998, EPA was notified that one of its computers was used by a remote intruder as a means of gaining unauthorized access to a state university\u2019s computers. The problem report stated that vendor- supplied software updates were available to correct the vulnerability, but EPA had not installed them.\nIn July 1999, a chat room was set up on a network server at one of EPA\u2019s regional financial management centers for hackers to post notes and, in effect, conduct on-line electronic conversations.\nIn February 1999, a sophisticated penetration affected three of EPA\u2019s computers. EPA was unaware of this penetration until notified by the FBI.\nIn June 1999, an intruder penetrated an Internet web server at EPA\u2019s National Computer Center by exploiting a control weakness specifically identified by EPA about 3 years earlier during a previous penetration of a different system. The vulnerability continued to exist because EPA had not implemented vendor software updates (patches), some of which had been available since 1996. -  On two occasions during 1998, extraordinarily large volumes of network traffic\u2014synonymous with a commonly used denial-of-service hacker technique\u2014affected computers at one of EPA\u2019s field offices.  In one case, an Internet user significantly slowed EPA\u2019s network activity and interrupted network service for over 450 EPA computer users. In a second case, an intruder used EPA computers to successfully launch a denial-of-service attack against an Internet service provider.\nIn September 1999, an individual gained access to an EPA computer and altered the computer\u2019s access controls, thereby blocking authorized EPA employees from accessing files.   This individual was no longer officially affiliated with EPA at the time of the intrusion, indicating a serious weakness in EPA\u2019s process for applying changes in personnel status to computer accounts.\nOf particular concern was that many of the most serious weaknesses we identified\u2014those related to inadequate protection from intrusions through the Internet and poor security planning\u2014had been previously reported to EPA management in 1997 by EPA\u2019s inspector general.  The negative effects of such weaknesses are illustrated by EPA\u2019s own records, which show several serious computer security incidents since early 1998 that have resulted in damage and disruption to agency operations. As a result of these weaknesses, EPA\u2019s computer systems and the operations that rely on them were highly vulnerable to tampering, disruption, and misuse from both internal and external sources.\nEPA management has developed and begun to implement a detailed action plan to address reported weaknesses.  However, the agency does not expect to complete these corrective actions until 2002 and continued to report a material weakness in this area in its fiscal year 2000 report on internal controls under the Federal Managers\u2019 Financial Integrity Act of 1982.\nThe Department of Commerce is responsible for systems that the department has designated as critical for national security, national economic security, and public health and safety. Its member bureaus include the National Oceanic and Atmospheric Administration, the Patent and Trademark Office, the Bureau of the Census, and the International Trade Administration.  During December 2000 and January 2001, Commerce \u2018s inspector general reported significant computer security weaknesses in several of the department\u2019s bureaus and, last month, reported multiple material information security weaknesses affecting the department\u2019s ability to produce accurate data for financial statements. These included a lack of formal, current security plans and weaknesses in controls over access to systems and over software development and changes.  At the request of the full committee, we are currently evaluating information security controls at selected other Commerce bureaus.\n\n\tWhile Nature of Risk Varies, Control Weaknesses Across Agencies Are Strikingly Similar\n\nThe nature of agency operations and their related risks vary. However, striking similarities remain in the specific types of general control weaknesses reported and in their serious negative impact on an agency\u2019s ability to ensure the integrity, availability, and appropriate confidentiality of its computerized operations\u2014and therefore on what corrective actions they must take. The sections that follow describe the six areas of general controls and the specific weaknesses that were most widespread at the agencies covered by our analysis.\n\n\t\tSecurity Program Management\n\nEach organization needs a set of management procedures and an organizational framework for identifying and assessing risks, deciding what policies and controls are needed, periodically evaluating the effectiveness of these policies and controls, and acting to address any identified weaknesses. These are the fundamental activities that allow an organization to manage its information security risks cost effectively, rather than react to individual problems in an ad-hoc manner only after a violation has been detected or an audit finding reported.\nDespite the importance of this aspect of an information security program, poor security program management continues to be a widespread problem. Virtually all of the agencies for which this aspect of security was reviewed had deficiencies. Specifically, many had not developed security plans for major systems based on risk, had not documented security policies, and had not implemented a program for testing and evaluating the effectiveness of the controls they relied on. As a result, agencies   were not fully aware of the information security risks to their operations, had accepted an unknown level of risk by default rather than consciously deciding what level of risk was tolerable, had a false sense of security because they were relying on controls that were not effective, and could not make informed judgments as to whether they were spending too little or too much of their resources on security.\nWith the October 2000 enactment of the government information security reform provisions of the fiscal year 2001 National Defense Authorization Act, agencies are now required by law to adopt the practices described above, including annual management evaluations of agency security.\n\n\t\tAccess Controls\n\nAccess controls limit or detect inappropriate access to computer resources (data, equipment, and facilities), thereby protecting these resources against unauthorized modification, loss, and disclosure. Access controls include physical protections\u2014such as gates and guards\u2014as well as logical controls, which are controls built into software that require users to authenticate themselves through the use of secret passwords or other identifiers and limit the files and other resources that an authenticated user can access and the actions that he or she can execute. Without adequate access controls, unauthorized individuals, including outside intruders and terminated employees, can surreptitiously read and copy sensitive data and make undetected changes or deletions for malicious purposes or personal gain. Even authorized users can unintentionally modify or delete data or execute changes that are outside their span of authority.\nFor access controls to be effective, they must be properly implemented and maintained. First, an organization must analyze the responsibilities of individual computer users to determine what type of access (e.g., read, modify, delete) they need to fulfill their responsibilities. Then, specific control techniques, such as specialized access control software, must be implemented to restrict access to these authorized functions. Such software can be used to limit a user\u2019s activities associated with specific systems or files and to keep records of individual users\u2019 actions on the computer. Finally, access authorizations and related controls must be maintained and adjusted on an ongoing basis to accommodate new and terminated employees, and changes in users\u2019 responsibilities and related access needs.\nSignificant access control weaknesses were reported for all of the agencies covered by our analysis, as evidenced by the following examples:   Accounts and passwords for individuals no longer associated with the agency were not deleted or disabled; neither were they adjusted for those whose responsibilities, and thus need to access certain files, changed. At one agency, as a result, former employees and contractors could and in many cases did still read, modify, copy, or delete data. At this same agency, even after 160 days of inactivity, 7,500 out of 30,000 users\u2019 accounts had not been deactivated.\nUsers were not required to periodically change their passwords.\nManagers did not precisely identify and document access needs for individual users or groups of users. Instead, they provided overly broad access privileges to very large groups of users. As a result, far more individuals than necessary had the ability to browse and, sometimes, modify or delete sensitive or critical information. At one agency, all 1,100 users were granted access to sensitive system directories and settings. At another agency, 20,000 users had been provided access to one system without written authorization.\nUse of default, easily guessed, and unencrypted passwords significantly increased the risk of unauthorized access. During testing at one agency, we were able to guess many passwords based on our knowledge of commonly used passwords and were able to observe computer users\u2019 keying in passwords and then use those passwords to obtain \u201chigh level\u201d system administration privileges.\nSoftware access controls were improperly implemented, resulting in unintended access or gaps in access-control coverage. At one agency data center, all users, including programmers and computer operators, had the capability to read sensitive production data, increasing the risk that such sensitive information could be disclosed to unauthorized individuals. Also at this agency, certain users had the unrestricted ability to transfer system files across the network, increasing the risk that unauthorized individuals could gain access to the sensitive data or programs.\nTo illustrate the risks associated with poor authentication and access controls, in recent years we have begun to incorporate network vulnerability testing into our audits of information security. Such tests involve attempting\u2014with agency cooperation\u2014to gain unauthorized access to sensitive files and data by searching for ways to circumvent existing controls, often from remote locations. Our auditors have been successful, in almost every test, in readily gaining unauthorized access that would allow intruders to read, modify, or delete data for whatever purpose they had in mind. Further, user activity was inadequately monitored. At one agency, much of the activity associated with our intrusion testing was not recognized and recorded, and the problem reports that were recorded did not recognize the magnitude of our activity or the severity of the security breaches we initiated.\n\n\t\tApplication Software Development and Change Controls\n\nApplication software development and change controls prevent unauthorized software programs or modifications to programs from being implemented. Key aspects of such controls are ensuring that (1) software changes are properly authorized by the managers responsible for the agency program or operations that the application supports, (2) new and modified software programs are tested and approved prior to their implementation, and (3) approved software programs are maintained in carefully controlled libraries to protect them from unauthorized changes and to ensure that different versions are not misidentified.\nSuch controls can prevent both errors in software programming as well as malicious efforts to insert unauthorized computer program code. Without adequate controls, incompletely tested or unapproved software can result in erroneous data processing that, depending on the application, could lead to losses or faulty outcomes. In addition, individuals could surreptitiously modify software programs to include processing steps or features that could later be exploited for personal gain or sabotage.\nWeaknesses in software program change controls were identified for almost all of the agencies where such controls were evaluated. Examples of weaknesses in this area included the following: Testing procedures were undisciplined and did not ensure that implemented software operated as intended. For example, at one agency, senior officials authorized some systems for processing without testing access controls to ensure that they had been implemented and were operating effectively. At another, documentation was not retained to demonstrate user testing and acceptance.\nImplementation procedures did not ensure that only authorized software was used. In particular, procedures did not ensure that emergency changes were subsequently tested and formally approved for continued use and that implementation of \u201clocally developed\u201d (unauthorized) software programs was prevented or detected.\nAgencies\u2019 policies and procedures frequently did not address the maintenance and protection of program libraries.\n\n\t\tSegregation of Duties\n\nSegregation of duties refers to the policies, procedures, and organizational structure that help ensure that one individual cannot independently control all key aspects of a process or computer-related operation and thereby conduct unauthorized actions or gain unauthorized access to assets or records without detection. For example, one computer programmer should not be allowed to independently write, test, and approve program changes.\nAlthough segregation of duties alone will not ensure that only authorized activities occur, inadequate segregation of duties increases the risk that erroneous or fraudulent transactions could be processed, improper program changes implemented, and computer resources damaged or destroyed. For example, an individual who was independently responsible for authorizing, processing, and reviewing payroll transactions could inappropriately increase payments to selected individuals without detection; or a computer programmer responsible for authorizing, writing, testing, and distributing program modifications could either inadvertently or deliberately implement computer programs that did not process transactions in accordance with management\u2019s policies or that included malicious code.\nControls to ensure appropriate segregation of duties consist mainly of documenting, communicating, and enforcing policies on group and individual responsibilities. Enforcement can be accomplished by a combination of physical and logical access controls and by effective supervisory review.\nSegregation of duties weaknesses were identified at most of the agencies covered by our analysis. Common problems involved computer programmers and operators who were authorized to perform a variety of duties, thus providing them the ability to independently modify, circumvent, and disable system security features. For example, at one data center, a single individual could independently develop, test, review, and approve software changes for implementation.\nSegregation of duties problems were also identified related to transaction processing. For example, at one agency, 11 staff members involved with procurement had system access privileges that allowed them to individually request, approve, and record the receipt of purchased items. In addition, 9 of the 11 had system access privileges that allowed them to edit the vendor file, which could result in fictitious vendors being added to the file for fraudulent purposes. For fiscal year 1999, we identified 60 purchases, totaling about $300,000, that were requested, approved, and receipt-recorded by the same individual.\n\n\t\tOperating System Controls\n\nOperating system software controls limit and monitor access to the powerful programs and sensitive files associated with the computer systems operation. Generally, one set of system software is used to support and control a variety of applications that may run on the same computer hardware. System software helps control and coordinate the input, processing, output, and data storage associated with all of the applications that run on the system. Some system software can change data and program code on files without leaving an audit trail or can be used to modify or delete audit trails. Examples of system software include the operating system, system utilities, program library systems, file maintenance software, security software, data communications systems, and database management systems.\nControls over access to and modification of system software are essential in providing reasonable assurance that operating system-based security controls are not compromised and that the system will not be impaired. If controls in this area are inadequate, unauthorized individuals might use system software to circumvent security controls to read, modify, or delete critical or sensitive information and programs. Also, authorized users of the system may gain unauthorized privileges to conduct unauthorized actions or to circumvent edits and other controls built into application programs. Such weaknesses seriously diminish the reliability of information produced by all of the applications supported by the computer system and increase the risk of fraud, sabotage, and inappropriate disclosure. Further, system software programmers are often more technically proficient than other data processing personnel and, thus, have a greater ability to perform unauthorized actions if controls in this area are weak.\nThe control concerns for system software are similar to the access control issues and software program change control issues discussed earlier. However, because of the high level of risk associated with system software activities, most entities have a separate set of control procedures that apply to them.\nWeaknesses were identified at each of the agencies for which operating system controls were reviewed. A common type of problem reported was insufficiently restricted access that made it possible for knowledgeable individuals to disable or circumvent controls in a variety of ways. For example, at one agency, system support personnel had the ability to change data in the system audit log. As a result, they could have engaged in a wide array of inappropriate and unauthorized activity and could have subsequently deleted related segments of the audit log, thus diminishing the likelihood that their actions would be detected.\nFurther, pervasive vulnerabilities in network configuration exposed agency systems to attack.  These vulnerabilities stemmed from agencies\u2019 failure to (1) install and maintain effective perimeter security, such as firewalls and screening routers, (2) implement current software patches, and (3) protect against commonly known methods of attack.\n\n\t\tService Continuity\n\nFinally, service continuity controls ensure that when unexpected events occur, critical operations will continue without undue interruption and that crucial, sensitive data are protected. For this reason, an agency should have (1) procedures in place to protect information resources and minimize the risk of unplanned interruptions and (2) a plan to recover critical operations, should interruptions occur. These plans should consider the activities performed at general support facilities, such as data processing centers, as well as the activities performed by users of specific applications. To determine whether recovery plans will work as intended, they should be tested periodically in disaster simulation exercises.\nLosing the capability to process, retrieve, and protect information maintained electronically can significantly affect an agency\u2019s ability to accomplish its mission. If controls are inadequate, even relatively minor interruptions can result in lost or incorrectly processed data, which can cause financial losses, expensive recovery efforts, and inaccurate or incomplete financial or management information. Controls to ensure service continuity should address the entire range of potential disruptions. These may include relatively minor interruptions, such as temporary power failures or accidental loss or erasure of files, as well as major disasters, such as fires or natural disasters that would require reestablishing operations at a remote location.\nService continuity controls include (1) taking steps, such as routinely making backup copies of files, to prevent and minimize potential damage and interruption, (2) developing and documenting a comprehensive contingency plan, and (3) periodically testing the contingency plan and adjusting it as appropriate.\nService continuity control weaknesses were reported for most of the agencies covered by our analysis. Examples of weaknesses included the following: Plans were incomplete because operations and supporting resources had not been fully analyzed to determine which were the most critical and would need to be resumed as soon as possible should a disruption occur.\nDisaster recovery plans were not fully tested to identify their weaknesses.\nAt one agency, periodic walkthroughs or unannounced tests of the disaster recovery plan had not been performed. Conducting these types of tests provides a scenario more likely to be encountered in the event of an actual disaster.\n\n\tImproved Security Program Management Is Essential\n\nThe audit reports cited in this statement and in our prior information security reports include many recommendations to individual agencies that address specific weaknesses in the areas I have just described.  It is each individual agency\u2019s responsibility to ensure that these recommendations are implemented.   Agencies have taken steps to address problems and many have good remedial efforts underway. However, these efforts will not be fully effective and lasting unless they are supported by a strong agencywide security management framework.\nEstablishing such a management framework requires that agencies take a comprehensive approach that involves both (1) senior agency program managers who understand which aspects of their missions are the most critical and sensitive and (2) technical experts who know the agencies\u2019 systems and can suggest appropriate technical security control techniques. We studied the practices of organizations with superior security programs and summarized our findings in a May 1998 executive guide entitled Information Security Management: Learning From Leading Organizations (GAO\/AIMD-98-68). Our study found that these organizations managed their information security risks through a cycle of risk management activities that included assessing risks and determining protection needs, selecting and implementing cost-effective policies and controls to meet these needs, promoting awareness of policies and controls and of the risks that prompted their adoption among those responsible for complying with them, and implementing a program of routine tests and examinations for evaluating the effectiveness of policies and related controls and reporting the resulting conclusions to those who can take appropriate corrective action.\nIn addition, a strong, centralized focal point can help ensure that the major elements of the risk management cycle are carried out and serve as a communications link among organizational units. Such coordination is especially important in today\u2019s highly networked computing environments. This cycle of risk management activities is depicted below.\nThis cycle of activity, as described in our May 1998 executive guide, is consistent with guidance on information security program management provided to agencies by the Office of Management and Budget (OMB) and by NIST. In addition, the guide has been endorsed by the federal Chief Information Officers (CIO) Council as a useful resource for agency managers. We believe that implementing such a cycle of activity is the key to ensuring that information security risks are adequately considered and addressed on an ongoing basis.\nWhile instituting this framework is essential, there are several steps that agencies can take immediately.   Specifically, they can (1) increase awareness, (2) ensure that existing controls are operating effectively, (3) ensure that software patches are up-to-date, (4) use automated scanning and testing tools to quickly identify problems, (5) propagate their best practices, and (6) ensure that their most common vulnerabilities are addressed. None of these actions alone will ensure good security. However, they take advantage of readily available information and tools and, thus, do not involve significant new resources. As a result, they are steps that can be made without delay.\n\n\tNew Legal Requirements Provide Basis for Improved Management and Oversight\n\nDue to concerns about the repeated reports of computer security weaknesses at federal agencies, in 2000, the Congress passed government information security reform provisions require agencies to implement the activities I have just described.  These provisions were enacted in late 2000 as part of the fiscal year 2001 NationalDefense Authorization Act.  In addition to requiring these management improvements, the new provisions require annual evaluations of agency information security programs by both management and agency inspectors general.  The results of these reviews, which are initially scheduled to become available in late 2001, will provide a more complete picture of the status of federal information security than currently exists, thereby providing the Congress and OMB an improved means of overseeing agency progress and identifying areas needing improvement.\n\n\tImprovement Efforts Are Underway, but Many Challenges Remain\n\nDuring the last two years, a number of improvement efforts have been initiated.  Several agencies have taken significant steps to redesign and strengthen their information security programs; the Federal Chief Information Officers Council has issued a guide for measuring agency progress, which we assisted in developing; and the President issued a National Plan for Information Systems Protection and designated the related goals of computer security and critical infrastructure protection as a priority management objective in his fiscal year 2001 budget.  These actions are laudable. However, recent reports and events indicate that they are not keeping pace with the growing threats and that critical operations and assets continue to be highly vulnerable to computer-based attacks.\nWhile OMB, the Chief Information Officers Council, and the various federal entities involved in critical infrastructure protection have expanded their efforts, it will be important to maintain the momentum. As we have noted in previous reports and testimonies, there are actions that can be taken on a governmentwide basis to enhance agencies\u2019 abilities to implement effective information security.\nFirst, it is important that the federal strategy delineate the roles and responsibilities of the numerous entities involved in federal information security and related aspects of critical infrastructure protection. Under current law, OMB is responsible for overseeing and coordinating federal agency security; and NIST, with assistance from the National Security Agency (NSA), is responsible for establishing related standards.  In addition, interagency bodies, such as the CIO Council and the entities created under Presidential Decision Directive 63 on critical infrastructure protection are attempting to coordinate agency initiatives.  While these organizations have developed fundamentally sound policies and guidance and have undertaken potentially useful initiatives, effective improvements are not taking place, and it is unclear how the activities of these many organizations interrelate, who should be held accountable for their success or failure, and whether they will effectively and efficiently support national goals.\nSecond, more specific guidance to agencies on the controls that they need to implement could help ensure adequate protection.  Currently agencies have wide discretion in deciding what computer security controls to implement and the level of rigor with which they enforce these controls. In theory, this is appropriate since, as OMB and NIST guidance states, the level of protection that agencies provide should be commensurate with the risk to agency operations and assets. In essence, one set of specific controls will not be appropriate for all types of systems and data.\nHowever, our studies of best practices at leading organizations have shown that more specific guidance is important. In particular, specific mandatory standards for varying risk levels can clarify expectations for information protection, including audit criteria; provide a standard framework for assessing information security risk; and help ensure that shared data are appropriately protected. Implementing such standards for federal agencies would require developing a single set of information classification categories for use by all agencies to define the criticality and sensitivity of the various types of information they maintain.  It would also necessitate establishing minimum mandatory requirements for protecting information in each classification category.\nThird, routine periodic audits, such as those required in the government information security reforms recently enacted, would allow for more meaningful performance measurement.   Ensuring effective implementation of agency information security and critical infrastructure protection plans will require monitoring to determine if milestones are being met and testing to determine if policies and controls are operating as intended.","output":"Why GAO Did This Study\n\nThis testimony discusses GAO's analysis of security audits at federal agencies.\n\nWhat GAO Found\n\nThe widespread interconnectivity of computers poses significant risks to federal computer systems and the operations and the infrastructures they support. GAO's evaluations show that federal computer systems are riddled with weaknesses that continue to put critical operations and assets at risk. GAO found weaknesses in following six areas: (1) security program management, (2) access controls, (3) software development and change controls, (4) segregation of duties, (5) operating systems controls, and (6) service continuity. Weaknesses in these areas place a broad range of critical operations and assets at risk for fraud, misuse, and disruption. Federal agencies have tried to address these problems, and many have good remedial efforts underway. However, these efforts will not be fully effective and lasting unless they are supported by a strong agencywide security management framework. Establishing such a management framework requires that agencies take a comprehensive approach that involves both (1) senior agency program managers who understand which aspects of their missions are the most critical and sensitive and (2) technical experts who know the agencies' systems and can suggest appropriate technical security control techniques."}
{"id":"gao_GAO-16-793","pid":"gao_GAO-16-793_0","input":"\tBackground\n\n\t\tFederal Employees\u2019 Compensation Act Program\n\nThe Federal Employees\u2019 Compensation Act (FECA) and its implementing  regulations provide compensation for federal civilian employees who  suffer disabilities resulting from work-related injuries or diseases. DOL\u2019s  Office of Workers\u2019 Compensation Programs administers the FECA  program through its 12 district offices located throughout the United  States, and DOL claims examiners are responsible for directly managing  cases. While DOL has sole authority to adjudicate all claims for  compensation and make other determinations, the employing agency of  the beneficiary has a role in the process. In particular, DOL provides  FECA compensation\u2014including cash and medical benefits\u2014up front and  then charges agencies a \u201cchargeback\u201d for the compensation provided to  their employees. Employing agencies subsequently reimburse DOL each  \u201cchargeback year\u201d from their next annual appropriation. Table 1  provides an overview of the types of FECA benefits.\nDOL determines the level and type of FECA benefits based on various  factors. For instance, disability benefits are paid to compensate for lost  wages if DOL finds that an employment-related injury, disease, or illness  impedes an employee\u2019s ability to work. If an employee is unable to  perform any gainful employment, then he or she is considered totally  disabled, and DOL calculates compensation as a proportion of the  beneficiary\u2019s entire income at the time of injury. If an employee is unable  to return to his or her previous job but is determined by DOL to be able to  work in some capacity, then he or she is considered to be partially  disabled, and compensation is based on any loss of wage-earning  capacity as compared to the preinjury wages.\nTotal-disability FECA beneficiaries with eligible dependents receive 75  percent of their preinjury wages, and those without dependents receive  66-2\/3 percent. Partial-disability FECA beneficiaries with eligible  dependents receive a FECA benefit that is 75 percent of the difference  between their preinjury and postinjury wage-earning capacity, and those  without dependents receive 66-2\/3 percent of the difference.  Additionally, benefits are adjusted annually for cost-of-living increases  and are neither subject to age restriction nor taxed. See figure 1 for an  example of how disability benefit payments are calculated.\nThere are certain restrictions or offsets for FECA beneficiaries if they are  eligible for or receive other federal benefits, such as from federal  retirement plans or other disability benefits. For instance, while  beneficiaries who receive medical benefits or schedule awards can  receive federal retirement benefits concurrently, such as benefits under  the Federal Employees Retirement System (FERS), beneficiaries  receiving wage-loss compensation (i.e., disability benefits) must elect to  receive one or the other. However, FECA does not require beneficiaries  to retire at a certain age and transition to their designated federal  retirement program. FECA beneficiaries can continue receiving FECA  compensation payments for as long as they remain unable to work due to  a workplace injury. Beneficiaries who are eligible for both FECA and  disability benefits from the Department of Veterans Affairs or the Social  Security Administration face restrictions on concurrent benefits for the  same injury. For instance, FECA beneficiaries receiving FECA and  Social Security disability payments for the same injury will have their  Social Security disability payments reduced by the amount of the FECA  compensation.\n\n\t\tDOD and the Military Department Roles in the FECA Program\n\nAlthough DOL administers the FECA program, directly manages claims,  and has sole approving authority, each military department and defense  agency within DOD has a role in processing its respective FECA claims.  Employing agencies like DOD and the military departments have a  financial responsibility and other roles in managing claims and the  employees\u2019 cases, such as in submitting new injury claims and  subsequent wage-loss claims, providing continuation of pay, and  identifying job opportunities for employees to return to work where  possible.\nAt DOD, the Defense Civilian Personnel Advisory Service is the central  DOD entity responsible for civilian human resource management,  including workers\u2019 compensation through the Injury and Unemployment  Compensation Branch. It provides policies, guidelines, and assistance to  each military department and the other DOD agencies, which directly  process employee FECA claims in coordination with DOL. The Defense  Civilian Personnel Advisory Service also employs DOD injury  compensation liaisons across the United States that directly support the  military departments and other DOD component agencies when  processing claims and coordinating with DOL.\nThe military departments each oversee their FECA claimants. The  Department of the Air Force, for example, has a workers\u2019 compensation  and claims-management program located at the Air Force Personnel  Center that manages all FECA claims across the department. The  Department of the Navy\u2014which includes the Marine Corps\u2014oversees its  FECA claims with compensation specialists spread across the Navy  major commands and with major command program managers reporting  to the Navy FECA program manager. Within the Department of the Army,  each installation\u2019s Civilian Personnel Advisory Center has an injury  compensation specialist who reports to the Civilian Human Resources  Agency.\nIn addition to the FECA statute, as well as DOL regulations and  procedures, DOD and the military departments follow Department of  Defense Instruction 1400.25, volume 810, which establishes policies and  procedures, provides guidance, delegates authority, and assigns  responsibilities regarding civilian personnel management of injury  compensation in DOD. The military departments and other DOD FECA  programs may use these documents to guide their FECA programs and,  like the Air Force, not publish additional formal policy documents, or they  may issue their own instructions or policies to further inform their FECA  programs. For example, the Army has documented implementing  guidance for its FECA program, and the Navy has a Secretary of the  Navy Instruction specific to the FECA program.\n\n\t\tInformation Systems to Process Claims\n\nFECA claims are processed by DOL and employing agencies like DOD  using automated systems, including the Employees\u2019 Compensation  Operations and Management Portal (ECOMP), as well as some agency-  and billing-specific systems. To provide information to DOL, such as  medical files or other supporting documentation, claimants and employing  agencies like DOD use ECOMP to conduct a variety of tasks related to  claims management and to electronically upload documents, which DOL  then reviews to make claims determinations and other decisions.\nThe Defense Civilian Personnel Advisory Service and military  departments also use the Defense Injury and Unemployment  Compensation System\u2014a DOD-wide data application used as the  internal source for department-related FECA information. This system  gives DOD injury compensation specialists\u2014the DOD counterparts that  coordinate with DOL claims examiners\u2014the ability to perform case  management and data analysis functions by pulling a variety of DOL and  DOD data. The system includes key personnel information and claims  data for employees, including DOD payroll data and compensation costs,  and regularly updated DOL data.\n\n\t\tReturning Employees to Work under FECA\n\nFECA, as with workers\u2019 compensation programs in general, attempts to  balance the goals of providing adequate wage-loss benefits for  employees injured on the job and also promoting return to work to  minimize the need for continued benefits. DOL testified before the House  Subcommittee on Workforce Protections in 2015 that over the past 5  years fewer than 2 percent of new injury cases\u2014not all of which involved  a significant period of disability\u2014remained on the compensation rolls 2  years after the date of injury. Additionally, to further improve  government-wide return-to-work rates, in July 2010 the President  introduced the Protecting Our Workers and Ensuring Reemployment  (POWER) Initiative, which created a new set of performance metrics  toward the achievement of government-wide goals, including targets for  returning injured employees to work. In the 2015 testimony, DOL also  noted that, as of fiscal year 2014, 88 percent of FECA claimants that  suffered a significant period of disability had returned to work within the  first year of injury and 91 percent returned to work by the end of the  second year. To support this end, DOL provides vocational rehabilitation  and other employment assistance. For example, DOL may offer  vocational assessments and transferable skills analysis and training for  injured employees.\nWhile there is no universal agreement on the optimal level of workers\u2019  compensation benefits or incentives for injured workers to return to work,  one can consider benefits in relation to take-home pay or retirement  benefits for older beneficiaries since overly generous benefits could  provide a disincentive to return to work. One possible disincentive is the  greater rate of compensation for beneficiaries with at least one  dependent. DOL has reported that most FECA beneficiaries fall into this  category and receive 75 percent of their preinjury wages tax-free, which  can in certain instances result in compensation greater than the injured  worker\u2019s usual take-home pay. As FECA benefits do not have an age  limit, a second potential disincentive to return to work may exist if FECA  benefits are more generous than the retirement benefits that an individual  would receive as a federal annuitant.\nAn incentive to return to work within the FECA program is the reduction of  benefits for partial-disability beneficiaries, as noted in our prior work.  Specifically, benefits for partial disability are reduced based on wage- earning capacity by taking into account the income a beneficiary could  earn\u2014whether a beneficiary finds a job or not. As such, in order for an  injured worker to maximize total income, he or she has an incentive to  find work that meets his or her work capabilities.\nIn our 2012 work, we examined FECA benefit levels in relation to take- home pay and retirement benefits, as some policymakers raised  questions about the level of FECA benefits, especially compared to  retirement benefits. Using simulated scenarios based on 2010 FECA  benefit data, we compared FECA benefits to wages and retirement  benefits that would have been earned absent the injury. Our simulations  showed that for 2010 total-disability beneficiaries, a median of 80 percent  of take-home pay was replaced by FECA for non-U.S. Postal Service  employees and a median of 88 percent for Postal employees.  Additionally, the median percentage of take-home pay replaced by FECA  was 3 percentage points greater for beneficiaries with an eligible  dependent than for those without eligible dependents.\nOur comparison between simulated FECA benefits and retirement  focused on the retirement benefits package under the current Federal  Employees Retirement System (FERS), which consists of a pension  based on years of service and salary, the 401(k)-like Thrift Savings Plan,  and Social Security benefits. We conducted two separate analyses: The  first represented retirement benefits in 2010 and the second represented  retirement benefits in the future, based on employees\u2019 ability to contribute  to the Thrift Savings Plan over the course of a more typical federal career  of 30 years. According to our simulations focused on 2010, the median  FECA benefit package for total-disability retirement-age non-Postal  beneficiaries was 32 percent greater than the comparable median  retirement benefit package they would have received absent an injury.\nFor Postal employees, the median FECA benefit was 37 percent greater  than the retirement package. However, our future-looking simulation  found smaller differences. Specifically, in the 30-year-career scenario, we  found that the median FECA benefit for total-disability non-Postal  employees was on par or slightly below the simulated median FERS  retirement package, and for Postal employees ranged from about 13  percent greater than the median retirement benefit to about 4 percent  less, depending on how much the employee contributed to the retirement  program.\n\n\tDOD Represented 17 Percent of All Claimants Government-Wide in 2015, and Total- Disability DOD Beneficiaries Were Older Than Non-DOD Beneficiaries\n\n\t\tDOD Accounted for about 17 Percent of All FECA Claimants, and DOD Beneficiaries Received Various Types and Levels of Benefits\n\nIn 2015, DOD\u2019s FECA claimants represented 17 percent of all FECA  claimants government-wide, and DOD beneficiaries received  approximately $553.7 million worth of benefits (see fig. 2). In  comparison, DOD\u2019s more than 720,000 employees represented about 35  percent of the federal civilian workforce. Overall in 2015, the FECA  program paid more than $3.1 billion in benefits and managed 277,775  claims, including 47,340 from DOD. The U.S. Postal Service had the  largest number of claimants\u2014approximately 132,000.\nFECA claimants were spread across DOD, and the military  departments\u2014which represent nearly 80 percent of DOD\u2019s civilian  workforce\u2014had the vast majority of claimants. Specifically, the Navy  and the Army each had about one-third of all of DOD\u2019s FECA claimants in  2015 (see fig. 3), while the other, nonmilitary DOD entities\u2014which include  the Office of the Secretary of Defense and other DOD organizations\u2014had  the smallest total percentage of FECA claimants (11 percent).\nDOD\u2019s beneficiaries receive various types of benefits\u2014such as disability  benefits for wage-loss compensation on the daily and periodic roll, direct  schedule award payments, or paid medical care, as shown in table 2. For  example, in 2015 approximately 35 percent of DOD beneficiaries received  medical benefits only, and about 20 percent received partial- or total- disability benefits.\nAbout 31 percent of DOD claimants received cash benefits in 2015,  compared to 26 percent of non-DOD claimants (see fig. 4). Across both  groups, partial- and total-disability beneficiaries on the periodic roll made  up the largest proportion of those receiving cash benefits.\nIn 2015, cash benefits totaled about $400 million for DOD beneficiaries  and $1.6 billion for non-DOD beneficiaries. The majority of cash benefits  were paid to total- and partial-disability beneficiaries on the periodic roll,  as illustrated by figure 5. The total percentage of cash payments to these  beneficiaries was slightly higher for DOD (75 percent) than for non-DOD  agencies (69 percent).\nTotal-disability beneficiaries constitute about 14 percent of all DOD FECA  claimants in 2015, as represented in the DOL data (as illustrated earlier in  fig. 4). Of these beneficiaries, the Navy and the Army had the highest  percentages in DOD (see fig. 6); though, taken together these two military  departments also constituted about 60 percent of the total DOD civilian  workforce. The Navy had the highest percentage of beneficiaries on the  periodic roll, with 36 percent of DOD\u2019s total-disability population and 48  percent of DOD\u2019s partial-disability population.\nOf DOD\u2019s total-disability beneficiaries, the vast majority\u2014approximately  85 percent\u2014received less than $50,000 in cash benefits in 2015 (see fig.  7). In contrast, about 4 percent received a benefit of $70,000 or more.  The median cash benefit in 2015 for total-disability beneficiaries across  DOD was just under $36,000.\nThe distribution of cash benefits for DOD\u2019s military departments generally  mirrored the benefits for DOD overall, with the majority of all beneficiaries  receiving less than $50,000 per year (see fig. 8). The median cash benefit  for total-disability beneficiaries in the military departments was  approximately $36,000, while the median cash benefit paid to  beneficiaries from the other DOD agencies was just under $30,000.\n\n\t\tDOD Total-Disability Beneficiaries Were Generally Injured Longer Ago and Constituted an Older Population Than Non-DOD Beneficiaries\n\nA higher proportion of DOD total-disability beneficiaries sustained injuries  longer ago than similar non-DOD beneficiaries in 2015. Specifically, as  indicated in figure 9, about 60 percent of DOD total-disability beneficiaries  sustained their injuries 21 or more years ago, as compared to about 30  percent of non-DOD beneficiaries.\nWhile DOD total-disability beneficiaries, as of 2015 data, were injured  longer ago than non-DOD beneficiaries, the two populations had similar  distributions with respect to age at the time of injury, as shown in figure  10. The median age at time of injury for these populations was 44 for  DOD and 45 for non-DOD. As a result of being similar ages as non- DOD beneficiaries at the time of injury but injured longer ago, DOD total- disability beneficiaries in 2015 were substantially older than those from  the rest of government (see fig. 11). Specifically, about 60 percent of  DOD total-disability beneficiaries were over the age of 65 as compared to  about 35 percent of non-DOD beneficiaries. This difference may be  attributable to the combination of DOD beneficiaries being injured longer  ago but at similar ages to their non-DOD counterparts.\nIn addition, about 56 percent of DOD beneficiaries were at or above their  full Social Security retirement age, compared to 32 percent of non-DOD  beneficiaries. For more information on the age of DOD and non-DOD  beneficiaries, as well as a discussion of total-disability beneficiaries at full  Social Security retirement age, see appendix I.\n\n\tDOD Officials We Interviewed Reported Claims Data Are Generally Available to Process FECA Claims, but Said They Experience Challenges Regarding Process Timelines\n\n\t\tDOD Officials Report Generally Sufficient Access to FECA Claims Data and Information Necessary to Carry Out Responsibilities\n\nMost of the DOD injury compensation specialists, liaisons, and program  offices we interviewed reported they had the necessary FECA-related  information to effectively conduct their work. Specifically, 10 of the 12  injury compensation specialists and liaisons we spoke with, as well as  three of the four program offices, reported that they generally have  sufficient access to FECA claims data and information necessary for  managing their respective FECA program, including facilitating return-to- work outcomes.\nECOMP is DOL\u2019s web-based system for various claim-management tasks  and is the source for filing and transmitting FECA claim information and  documents. DOD began migrating to ECOMP from past systems in fiscal  year 2015 and continues to adjust and increase access across the  department, according to Defense Civilian Personnel Advisory Service  officials. At the time we interviewed officials, the Defense Civilian  Personnel Advisory Service and the military departments had general  access to DOL\u2019s ECOMP system, and five injury compensation  specialists and liaisons we interviewed specifically highlighted that  ECOMP improves the ability to access relevant information and data. For  instance, ECOMP allows DOD personnel faster access to claims  information, the ability to track the completion of certain documents, to  electronically file more types of claims forms, and real-time access to  claims documents. DOD has access to other DOL data and information  through other systems, including DOD\u2019s internal Defense Injury and  Unemployment Compensation System that also provides access to DOL  claims information. In addition to case-specific data and information,  through the POWER Initiative DOL began providing agency-level FECA  program performance metrics, which it continues to make available on its  website. Although the POWER Initiative officially ended in fiscal year  2014, as of June 2016 DOL continued to use these metrics to report  agencies\u2019 performance. All of the military department FECA program  managers we interviewed noted that they continue to monitor their  POWER goals and use them as a performance metric.\nDefense Civilian Personnel Advisory Service officials stated that the data  they receive from DOL and other sources is extensive, though they added  that there may be additional resources that could be useful for their work.  For example, one liaison stated that additional access to certain  information, such as data on non-FECA disability benefits managed by  the Social Security Administration and the Department of Veterans  Affairs, could allow them to more easily identify individuals potentially  receiving other disability benefits. Additionally, although the majority of  DOD officials we spoke with reported having generally sufficient access to  conduct their case-management responsibilities, DOL and DOD officials  stated that DOD is still in the process of rolling out ECOMP throughout  DOD. For instance, according to Defense Civilian Personnel Advisory  Service officials, not all components have had full access to a component  of ECOMP that gives increased visibility over claimant documentation  such as medical information. For instance, at the time we interviewed  officials, Army and Navy injury compensation specialists noted instances  when medical documentation provided directly to DOL was not yet  accessible to them. In these instances, injury compensation specialists  must request hard-copy information directly from DOL claims examiners,  such as having the DOD liaison physically retrieve hard-copy information.  According to Defense Civilian Personnel Advisory Service officials, as of  July 2016 the Army has full access to ECOMP so can determine whether  or not updated information has been submitted. Officials expect the Navy  to have full access to ECOMP by the end of fiscal year 2016.\n\n\t\tDOD Does Not Internally Monitor Processing Timelines\n\nThe Defense Civilian Personnel Advisory Service and all three military  department FECA program offices we spoke with reported experiencing  challenges when requesting information, decisions, or other actions, such  as suitability determinations and second-opinion requests, from DOL  during the return-to-work process. However, because DOD does not  monitor process timelines associated with such difficulties, the  department cannot fully identify the nature, magnitude, or effects of  problems it may be experiencing, or whether these issues, if any, are  widespread. Moreover, without a full understanding of any issues that  may exist, DOD is unable to communicate the scope of any such  problems to DOL.\nEmploying agencies are responsible for returning employees to work, but  DOL is responsible for determining whether a job offer is suitable to return  an employee to work and to obtain a second opinion on an employee\u2019s  medical condition or work capacity. Suitability determinations of job offers  are needed when a claimant does not accept a job offer or accepts a job  offer but does not return to work. According to the DOL FECA Procedure  Manual, this process can involve a variety of considerations and  information that is submitted by multiple parties including the employing  agency, the claimant, often the claimant\u2019s physician, and other medical  referrals as necessary. Second opinions may be requested by DOL to  obtain an additional medical evaluation to clarify the claimant\u2019s condition,  the extent of a disability, work capacity, or other issues. During our  review, 9 of the 12 injury compensation specialists and liaisons we spoke  with, as well as all four of the program offices, reported experiencing  some challenges pertaining to lengthy response times from DOL\u2019s claims  examiners, such as when submitting requests to DOL for suitability  determinations and second opinions. For instance, according to Defense  Civilian Personnel Advisory Service officials, DOD has experienced what  they perceive as lengthy periods waiting for suitability determinations from  DOL, in some instances over a year. DOL officials told us that the  process can take several months due to the exchange of information  among each of the parties involved, including DOL, the employing agency  (such as DOD), and the claimant. Additionally, the claimant is entitled to  due process of between 20 and 45 days depending on the circumstances  of the claim, according to DOL officials.\nDefense Civilian Personnel Advisory Service officials stated that they  understand it takes time to make decisions about claims, especially given  the claims examiners\u2019 caseloads, and the amount of documentation they  must review, including the required information they must collect from  doctors and the claimant. However, waiting for such long periods,  according to DOD officials, creates a hardship on the employing agency,  as it must both keep the position open for the injured employee, as well  as continue to pay the claimant until a decision is made. Although officials  from the Defense Civilian Personnel Advisory Service and all three  military department FECA program offices we spoke to cited the lengthy  response times for suitability determinations as a difficulty they  experience, officials did not provide further data or information on these  instances, and Defense Civilian Personnel Advisory Service officials said  such cases are not monitored across the department. Additionally,  according to DOL officials, even after DOL has reached a decision there  is often continued back and forth between DOL and the claimant to  provide additional documentation, or between DOL and the employing  agency in order to provide additional or revised documentation. According  to DOD and DOL officials, they seek to resolve such delays or other  issues at the case-management level\u2014between the DOD injury  compensation specialist and the DOL claims examiner\u2014so the reasons  for the delay may not be elevated to higher levels, or monitored across  the department, if they are ultimately resolved.\nIn addition to concerns with response times for suitability determinations,  three of the four FECA program managers we spoke with, as well as five  injury compensation specialists, specifically cited the length of time it  takes DOL to approve or process second opinions as a key challenge  they perceive during the return-to-work process. For example, one  program manager stated that when a second opinion medical evaluation  is conducted, that evaluation is valid for 1 year, so if DOL does not review  and act on the information in a timely manner it may result in the need for  an additional medical evaluation. Further, according to that program  manager, second-opinion evaluations can cost between $2,000 and  $7,000, and this cost is borne by the employing agency, as well as the  cost of a subsequent second opinion if the first one expires. However, this  official did not provide specific examples or the frequency with which this  issue occurred, and Defense Civilian Personnel and Advisory Service  officials do not know the extent to which this may be a problem across the  department. All three DOD liaisons we spoke with, as well as DOL, said  that it is difficult to provide expectations for the amount of time it may take  DOL to take action, in part because of elements outside of DOL\u2019s control,  such as the scheduling of appointments and submission of medical  documentation, and because every claim has its own set of facts and  circumstances.\nDOL procedures require claims examiners to respond to employing  agencies within some established time frames, according to DOL officials,  but there is no established time frame within which they are required to  make suitability determinations, approve a second-opinion request, or  complete the review of related medical documentation. There are also  instances, according to DOL officials, when a DOL claims examiner may  not agree that a second opinion is appropriate. According to the DOL  FECA Procedure Manual, however, employing agencies should expect to  receive information from DOL relevant to the claim-management process,  including prompt determinations on medical issues and the suitability of  job offers when needed. DOL officials stated that they generally expect  to respond to agency requests from employing agencies within 30 days,  and if they are aware of any overdue requests or issues with claims  examiner performance they try to resolve them between the claims  examiner and the employing agency at the lowest possible level, and the  issue is only raised to the district office or higher if it is not resolved.  Officials added that it is challenging to establish expected standard time  frames for certain requests, such as suitability determinations, given the  variability of requests and the specific circumstances and details of each  case.\nOne of the ways DOD injury claims specialists seek information on  suitability determinations and second-opinion requests, among other  claims-related information, is through DOL\u2019s central phone system. Many  of the DOD officials we spoke with cited the reliance on this phone  system for direct communication as a complicating factor in attempting to  discuss these and other information requests with DOL claims examiners.  Specifically, 7 of the 12 injury compensation specialists and liaisons  identified issues related to DOL\u2019s consistency and timeliness in  responding to agency requests using DOL\u2019s centralized phone system.  For example, FECA program managers from all three military  departments, as well as two injury compensation specialists, noted  instances in which DOL either did not respond in a timely manner or  never returned the phone call. The DOL FECA Procedure Manual  requires that DOL claims examiners respond to phone calls within 2 work  days, and DOL officials stated that leaving a voice-mail message is  sufficient to meet this deadline. According to DOL officials, agency  requests can be submitted to DOL claims examiners through ECOMP or  via postal mail, in addition to DOL\u2019s central phone system. One DOD  injury compensation specialist stated that, due to the challenges  experienced in reaching a claims examiner by phone, it is more efficient  to use ECOMP\u2014which allows adding additional notes to previous entries  into the system\u2014to ensure the DOL claims examiner receives the  updates. However, this specialist added that ECOMP does not convey  whether or not the claims examiner has taken action on these follow-up  requests.\nAll of the DOD officials we spoke with\u201412 injury compensation  specialists and liaisons, as well as each of the military departments\u2019  FECA program offices, and FECA management at the Defense Civilian  Personnel Advisory Service\u2014highlighted difficulties with the  communication timelines between DOD and DOL. However, while the  military departments\u2019 program offices cover the majority of the FECA  beneficiaries, we did not speak to a generalizable sample of the FECA  program staff at DOD, and the officials we spoke with could only present  their individual experiences. Further according to officials from the  Defense Civilian Personnel Advisory Service, DOD has not monitored  FECA program processes such as communication timelines and  response times between DOD and DOL, nor has it tracked any known  reasons or solutions to any related issues, on a department-wide basis  across its approximately 800 FECA injury compensation specialist staff.\nDOL officials stated that if DOD is experiencing ongoing challenges, more  information about these challenges would be helpful to find a solution.  They added that DOL has an open-door policy, and a number of existing  mechanisms are intended to facilitate general communication between  the employing agencies and DOL. For example, DOL officials stated that  many issues are resolved at the claims examiner level, or after being  elevated to the district-office level, and while district offices can track  responsiveness and other issues in their district to identify any issues, this  is not done across agencies. However, DOL and Defense Civilian  Personnel Advisory Service officials noted that there is ongoing staff  turnover among the DOD injury compensation specialists and DOL claims  examiners. According to Defense Civilian Personnel Advisory Service  officials, such turnover can make monitoring the claims process more  difficult at the injury compensation specialist level, though they noted that  the role of the DOD liaisons can mitigate this by providing continuity  across the FECA program. According to DOD officials, the DOD liaisons  serve a key function in providing information to DOD injury claims  specialists as well as facilitating communication at the DOL district-office  level since they are colocated with DOL claims examiners at these offices  and are able to be in more immediate contact.\nStandards for Internal Control in the Federal Government state that  ongoing monitoring should occur in the course of normal operations.  Monitoring should assess the quality of performance over time and  ensure that the findings are promptly resolved. DOD has monitored  high-level program metrics such as return-to-work rates and overall  timelines, but Defense Civilian Personnel Advisory Service officials stated  that particular claims-processing timelines\u2014such as response times  between DOD and DOL\u2014are not specifically collected or monitored.  According to Defense Civilian Personnel Advisory Service officials, DOD  has internal mechanisms through which such monitoring or information  gathering of the FECA process could occur, such as the function of  liaisons in DOL district offices and installation-level working groups, as  well as periodic program office\u2013level meetings. Additionally, Defense  Civilian Personnel Advisory Service officials stated that the increased  access to ECOMP will provide further visibility of FECA claims and the  decisions and actions that DOD is waiting for from DOL.\nBased on our interviews with FECA program officials at DOD, issues such  as difficulties contacting DOL claims examiners and lengthy response  times occur between DOD and DOL. However, the extent to which this is  a problem across the department is unknown. In our past work we have  found that leading practices for results-oriented organizations state that it  is important for organizations to have complete, accurate, and consistent  information to support decision-making. Further, leading practices for  effective interagency collaboration state that frequent communication is a  means to work across agency boundaries and prevent  misunderstanding. Defense Civilian Personnel Advisory Service officials  stated that monitoring information like response times could help them  further understand any issues or problems they may experience and help  inform future communication with DOL. DOL officials added that if there is  an issue within DOD that is not being elevated or reported up their own  chain of command, then DOL is likely unaware of the issue as well.  Without monitoring or collecting information on issues DOD may  experience, including any known reasons for or resolutions to delays,  department leadership will not be positioned to identify and assess the  nature of any problems, and make any appropriate internal improvements  or external improvements in collaboration with DOL.\n\n\tConclusions\n\nIn 2015, DOD employees constituted nearly one-fifth of all FECA  beneficiaries across the federal government\u2014the highest number outside  the U.S. Postal Service. DOD paid $554 million in FECA medical and  compensation benefits in 2015. Given the substantial monetary outlay this  represents, DOD needs accurate information on the operation of the  FECA program, including the timeliness of its various processes.  Facilitating return-to-work outcomes can depend on timely job-suitability  determinations. While not generalizable, our discussions with the military  departments\u2019 injury compensation specialists, DOD liaisons, and FECA  program managers indicate that the department may face challenges in  its efforts to work with DOL to effectively manage DOD\u2019s FECA process.  However, without monitoring the timelines associated with injury  compensation specialists\u2019 processing of FECA claims\u2014particularly the  significant claims-management actions over which DOL has approving  authority\u2014the department is not positioned to identify the extent to which  delays or inefficiencies are present, at what points in the process they  occur, or any reasons or resolutions for such issues. Such information  would help DOD in managing its FECA responsibilities, and allow the  department to communicate any appropriate concerns to DOL.\n\n\tRecommendation for Executive Action\n\nTo help support DOD management of its FECA responsibilities, we  recommend that the Secretary of Defense direct the Office of the Under  Secretary of Defense for Personnel and Readiness, in collaboration with  the Secretaries of the military departments and other defense agency  leaders, to monitor timelines associated with significant FECA claims- management actions in order to identify the extent to which delays or  inefficiencies may be occurring and at what points in the process; to  identify any known reasons for the delays; and to communicate this  information to DOL as appropriate for consideration and action.\n\n\tAgency Comments\n\nWe provided a draft of this product to DOD and DOL for comment. In its  written comments, reproduced in appendix II, DOD agreed with our  recommendation. DOL provided technical comments that were  incorporated, as appropriate.\nWe are sending copies of this report to the appropriate congressional  committees, the Secretary of Defense, the Secretary of Labor, and other  interested parties including the military departments and other defense  agencies. In addition, this report is available at no charge on the GAO  website at http:\/\/www.gao.gov.\nIf you or your staff has any questions regarding this report, please contact  Brenda Farrell at (202) 512-3604 or farrellb@gao.gov, or Andrew Sherrill  at (202) 512-7215 or sherrilla@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 major contributions to this report are  listed in appendix III.\n\nAppendix I: Age of Total-Disability Beneficiaries and Full Social Security Retirement Age\n\nIn 2015, the Department of Defense (DOD) had a higher percentage of  beneficiaries over the age of 65 than the rest of the beneficiary  population, as illustrated in figure 11. DOD also had a higher proportion of  total-disability beneficiaries at or above full Social Security retirement age  (see fig.12). About 56 percent of DOD beneficiaries were at or above their  full Social Security retirement age, compared to 32 percent of non-DOD  beneficiaries.\nFurther, while DOD and non-DOD total-disability beneficiaries had similar  median ages at time of injury, a greater percentage of DOD total-disability  beneficiaries at or above their full Social Security retirement age were  injured at age 50 or younger. As illustrated in figure 13, 65 percent of  DOD beneficiaries at or above their full retirement age, and 56 percent of  non-DOD beneficiaries, were age 50 or younger when injured.\nAccording to the data for 2015, DOD had a higher percentage of  retirement age beneficiaries who were injured longer ago compared to  beneficiaries in non-DOD agencies. However, these data are only  reflective of FECA beneficiaries in chargeback year 2015\u2014the period  from July 1, 2014, through June 30, 2015\u2014so no longer-term trends or  conclusions may be drawn from these data. Further, DOL\u2019s data system  is not designed in a way that allows us to determine the cumulative  amount of time a person has received FECA benefits, so we are unable  to determine whether these beneficiaries have been on disability  continuously since the time of injury. Hence, these data do not account  for any possible breaks in benefits, such as if an employee returned to  work during this time.\n\nAppendix II: Comments from the Department of Defense\n\nAppendix III: GAO Contacts and Staff Acknowledgments\n\n\tGAO Contacts\n\n\tStaff Acknowledgments\n\nIn addition to the above contacts, Vincent Balloon, Assistant Director;  Nagla\u2019a El-Hodiri, Assistant Director; David Ballard; James Bennett;  Melinda Cordero; Michael Kniss; Kirsten Lauber; Tamiya Lunsford;  Jonathon Oldmixon; James Rebbe; Sabrina Streagle; Anjali Tekchandani;  Patrick Tierney; Jennifer Weber; Erik Wilkins-McKee; and Sally  Williamson made key contributions to this report.\n\nRelated GAO Products\n\nDisability Insurance: Actions Needed to Help Prevent Potential  Overpayments to Individuals Receiving Concurrent Federal Workers\u2019  Compensation. GAO-15-531. Washington, D.C.: July 8, 2015.\nFederal Employees\u2019 Compensation Act: Analysis of Benefits Associated  with Proposed Program Changes. GAO-15-604T. Washington, D.C.: May  20, 2015.\nFederal Employees\u2019 Compensation Act: Effects of Proposed Changes on  Partial Disability Beneficiaries Depend on Employment After Injury.  GAO-13-143R. Washington, D.C.: December 7, 2012.\nFederal Employees\u2019 Compensation Act: Analysis of Proposed Changes  on USPS Beneficiaries. GAO-13-142R. Washington, D.C.: November 26,  2012.\nFederal Employees\u2019 Compensation Act: Analysis of Proposed Program  Changes. GAO-13-108. Washington, D.C.: November 26, 2012.\nFederal Employees\u2019 Compensation Act: Status of Previously Identified  Management Challenges.GAO-12-508R. Washington, D.C.: April 27,  2012.\nFederal Employees\u2019 Compensation Act: Benefits for Retirement-Age  Beneficiaries. GAO-12-309R. Washington, D.C.: February 6, 2012.\nFederal Workers\u2019 Compensation: Questions to Consider in Changing  Benefits for Older Beneficiaries. GAO-11-854T. Washington, D.C.: July  26, 2011.","output":"Why GAO Did This Study\n\nDOD employs more than 720,000 civilians\u2014approximately 35 percent of the federal civilian workforce\u2014in an array of critical positions worldwide. DOD civilians who are injured or ill as a result of a work-related incident are covered under the DOL-administered FECA program. DOL, along with employing agencies like DOD, works to return injured employees to work and provides compensation for work-related disabilities. In 2015, about 90 percent of DOD's injured workers returned to work within 2 years of injury.\nSenate Report 114-49 included a provision that GAO review DOD's use of the FECA program. This report analyzes (1) characteristics of DOD's 2015 FECA claimants and how they compared to non-DOD claimants and (2) the extent to which DOD experiences any challenges managing its FECA responsibilities and facilitating return-to-work outcomes.\nGAO analyzed 2015 DOL data to identify characteristics, such as the age and benefit type, of FECA claimants, including those who received benefits that year (beneficiaries). GAO also analyzed relevant law, policies, and guidance on DOL and DOD's management of FECA, and interviewed DOL and DOD officials\u2014including a nongeneralizable sample of DOD program officials.\n\nWhat GAO Found\n\nThe Department of Defense's (DOD) 47,340 civilian employees who filed claims under the Federal Employees' Compensation Act (FECA) made up 17 percent of FECA claimants in 2015, and DOD total-disability beneficiaries (i.e., with no capacity to work) were generally older than those from the rest of government. About 35 percent of DOD beneficiaries received medical benefits only, and 31 percent received cash payments for injury or death\u2014including the nearly 20 percent receiving partial- or total-disability benefits. About 56 percent of DOD total-disability beneficiaries were at or above their full Social Security Retirement age, compared to 32 percent of non-DOD beneficiaries (see figure).\nDOD FECA officials that GAO interviewed generally had sufficient access to Department of Labor (DOL) data to manage their FECA responsibilities; however, they reported perceived delays with receiving certain decisions from DOL. As the administrator of FECA, DOL has responsibility and authority for managing all claims, but employing agencies have roles in returning employees to work. DOD FECA program managers, injury compensation specialists, and liaisons GAO interviewed reported experiencing some challenges in instances requiring DOL action or approval, such as determining whether a potential job is suitable in order to return an injured employee to work. According to DOD officials, in some instances such determinations have taken over a year, which could affect DOD as it must both hold the job unfilled and continue to pay compensation until a decision is made. According to DOL, this process can take several months due to the amount of information and communication required among the employing agency, the injured employee, DOL, and other parties, such as an employee's physician. Additionally, DOD has not monitored the timelines associated with requesting DOL action to determine the extent to which delays or related issues may exist across DOD, any known reasons for these issues, and any effect possible delays may have on DOD's return-to-work efforts. DOD officials said that such monitoring could help them understand any issues. DOL officials stated that if DOD experiences challenges, more information could help DOL find a solution. Without monitoring timelines, DOD is not positioned to identify the nature and extent of any problems, make any improvements, or communicate such issues to DOL.\n\nWhat GAO Recommends\n\nGAO recommends that DOD monitor timelines associated with significant FECA claims-management actions to identify the extent to which delays may occur and any known reasons, and communicate with DOL as appropriate. DOD agreed with the recommendation."}
{"id":"gao_GAO-10-80","pid":"gao_GAO-10-80_0","input":"\tBackground\n\nBoth NTIA\u2019s BTOP and RUS\u2019s BIP programs focus primarily on broadband  infrastructure deployment, but the programs have some differences based  on provisions in the Recovery Act (see table 1). BTOP funds are intended  to expand broadband access to unserved and underserved areas. BTOP  funds can also be awarded to projects that promote broadband demand  and adoption and provide equipment, training, and access for higher  education, job creation, public safety and health, and other facilities that  serve vulnerable populations. BIP focuses on rural areas and its funds can  be used solely for broadband infrastructure deployment. The agencies also  have different project eligibility requirements. For example, the Recovery  Act requires that BTOP applicants demonstrate that a project would not  have been implemented during the grant period without federal grant  assistance; the Recovery Act does not include a similar requirement for  RUS broadband applicants.\nTo implement the Recovery Act, NTIA and RUS will fund several types of  projects. The agencies will fund last-mile and middle-mile network  infrastructure projects to extend broadband service in unserved or  underserved areas. According to NTIA and RUS, last-mile projects are  those infrastructure projects whose predominant purpose is to provide  broadband service to end users or end-user devices. Middle-mile projects  mostly do not provide broadband service to end users or end-user devices,  but instead provide relatively fast, large-capacity connections between  backbone facilities\u2014long-distance, high-speed transmission paths for  transporting massive quantities of data\u2014and last-mile projects. NTIA is  also funding public computer centers and sustainable adoption projects.\nBoth NTIA and RUS have experience with similar broadband grant or loan  programs. Before receiving Recovery Act funding, NTIA implemented the  Technology Opportunities Program; this program promoted the innovative  use of information and communication technologies, primarily in  underserved population segments, to promote public benefits.  Additionally, NTIA implemented other, nonbroadband programs, such as  the Public Safety Interoperability Communications (PSIC) program, which  provides funding to public safety organizations; the digital television  transition coupon program; and the Public Telecommunications Facilities  Program, which provides funding to public broadcasters. RUS has prior  and ongoing experience with several broadband-specific programs\u2014 including the Rural Broadband Access Loan and Loan Guarantee  (Broadband Access Loan) Program which funds the construction,  improvement, and acquisition of facilities and equipment for broadband  service in eligible rural communities, and the Community Connect  broadband grant program, which funds broadband on a \u201ccommunity- oriented connectivity\u201d basis to currently unserved rural areas for the  purpose of fostering economic growth and delivering enhanced health  care, education, and public safety services.\nTo implement the broadband provisions in the Recovery Act, NTIA and  RUS coordinated their efforts and developed program milestones (see   fig. 1). OMB tasked agencies implementing Recovery Act programs to  engage in aggressive outreach with potential applicants. NTIA and RUS,  with FCC coordination, held a series of public meetings in March 2009,  explaining the overall goals of the new broadband programs. NTIA and  RUS also sought public comments from interested stakeholders on various  challenges that the agencies would face in implementing the broadband  programs through these meetings and by issuing a Request for  Information. NTIA and RUS received over 1,500 comments. FCC, in a  consultative role, provided support in developing technical definitions and  participated in the first kick-off meeting. On July 1, 2009, Vice President  Joe Biden, Secretary of Commerce Gary Locke, and Secretary of  Agriculture Tom Vilsack announced the release of the first joint Notice of  Funds Availability (NOFA) detailing the requirements, rules, and  procedures for applying for BTOP grants and BIP grants, loans, and loan- grant combinations. Subsequently, the agencies held 10 joint  informational workshops throughout the country for potential applicants  to explain the programs, the application process, and the evaluation and  compliance procedures, and to answer stakeholder questions. NTIA and  RUS coordinated and developed a single online intake system whereby  applicants could apply for either BTOP or BIP funding. NTIA and RUS  initially indicated that they would award Recovery Act broadband program  funds in three jointly-conducted rounds and initially expected to issue the  NOFA for a second funding round before the end of calendar year 2009  and for a third round in 2010. In a draft version of this report, we  recommended that the agencies combine the second and third funding  rounds. Subsequently, on November 10, 2009, the agencies announced that  they would award the remaining program funds in one round, instead of  two. Both BTOP and BIP projects must be substantially complete within  2 years and fully complete no later than 3 years following the date of  date of  issuance of their award.  issuance of their award.\n\n\tNTIA and RUS Have Taken Steps to Address Challenges, Including Scheduling and Staffing, Associated With Evaluating Applications and Awarding Funds; However, Some Risks Remain\n\nNTIA and RUS face scheduling, staffing, and data challenges in evaluating  applications and awarding funds. The agencies have taken steps to meet  these challenges, including the adoption of a two-step evaluation process,  utilization of nongovernmental personnel, and publication of information  on the applicant\u2019s proposed service area. While these steps address some  challenges, the agencies\u2019 remaining schedule may pose risks to the review  of applications. In particular, the agencies may lack the needed time to  apply lessons learned from the first funding round and may face a  compressed schedule to review new applications, thereby increasing the  risk of awarding funds to projects that may not be sustainable or do not  meet the priorities of the Recovery Act.\n\n\t\tNTIA and RUS Face Scheduling, Staffing, and Data Challenges in the Evaluation of Applications and Awarding of Funds\n\nScheduling challenges. Under the provisions of the Recovery Act, NTIA  and RUS must award all funds by September 30, 2010. Thus, the agencies  have 18 months to establish their respective programs, solicit and evaluate  applications, and award funds. While in some instances a compressed  schedule does not pose a challenge, two factors increase the challenges  associated with the 18-month schedule. First, while RUS has existing  broadband programs, albeit on a much smaller scale than BIP, NTIA must  establish the BTOP program from scratch. Second, the agencies face an  unprecedented volume of funds and anticipated number of applications  compared to their previous experiences.\nThe volume of funds to be awarded exceeds previous broadband-related  programs implemented by NTIA and RUS. While NTIA and RUS have prior  experience in administering grant or loan programs, these programs had  less budgetary authority than the programs in the Recovery Act (see fig. 2).  Of the $7.2 billion appropriated in the Recovery Act, NTIA received $4.7  billion for BTOP. In comparison, NTIA administered the PSIC program, a  one-time grant program with an appropriation of about $1 billion for a  single year, in close coordination with the Department of Homeland  Security (DHS). Additionally, NTIA\u2019s Public Telecommunications Facilities  Program received an average of $23 million annually and its  Telecommunications Opportunities Program received $24 million  annually. RUS received $2.5 billion from the Recovery Act for BIP. In  comparison, RUS\u2019s Community Connect program\u2019s average annual  appropriation was $12 million and its Broadband Access Loan Program\u2019s  average annual appropriation was $15 million. According to preliminary  information from the agencies, they received approximately 2,200  applications requesting $28 billion in grants and loans in the first funding  round. Based on the number of applications received and the funds  requested, the average amount an applicant sought was $12.7 million, or  almost half the size of the total average appropriation for NTIA\u2019s  l average appropriation for NTIA\u2019s  Technology Opportunities Program.  Technology Opportunities Program.\nNTIA and RUS also face an increase in the number of applications that  they must review and evaluate in comparison to similar programs (see fig.  3). As mentioned previously, the agencies indicated that for the first round  of funding alone, they received 2,200 applications. Of these 2,200  applications, NTIA received 940 applications exclusively for BTOP and  RUS received 400 applications exclusively for BIP and 830 dual  applications for both programs. Both NTIA and RUS will review the dual  applications; if RUS does not fund the project through the BIP program,  NTIA can consider funding the project through the BTOP program. By  comparison, NTIA received an average of 838 applications annually for the  Telecommunications Opportunities Program; for PSIC, NTIA and DHS  received 56 applications from state and territorial governments containing  a total of 301 proposed projects. RUS received an average of 35  applications annually for the Broadband Access Loan Program and an  average of 105 applications annually for the Community Connect program.  In addition, since BTOP and BIP will not carry over applications between  rounds, applicants who do not receive funding in the first round must  reapply to be eligible for consideration for funding in the second round.  Therefore, a single proposed project may be evaluated multiple times by  BTOP and BIP reviewers. Fourteen of 15 stakeholders with whom we  spoke expressed concern that the agencies will face challenges in  adequately reviewing the large number of expected applications in the  time frame allotted.\nStaffing challenges. NTIA and RUS will need additional personnel to  administer BTOP and BIP. NTIA is establishing a new program with BTOP  and will for the first time award grants to commercial entities. NTIA\u2019s  initial risk assessment indicated that a lack of experienced and  knowledgeable staff was a key risk to properly implementing the program  in accordance with the priorities of the Recovery Act. In its fiscal year  2010 budget request to Congress, NTIA estimated that it will need 30 full- time-equivalent staff in fiscal year 2009 and 40 more full-time-equivalent  staff for fiscal year 2010. While RUS already has some broadband loan and  grant programs in place and staff to administer them, it also faces a  shortage of personnel. RUS\u2019s staffing assessments indicated that the  agency will need 47 additional full-time-equivalents to administer BIP.  Prior to the Recovery Act, RUS had 23 full-time-equivalent staff in fiscal  year 2008 for its Broadband Access Loan Program and no full-time- equivalent staff dedicated to the Community Connect program; RUS  utilized personnel from the Broadband Access Loan Program for the  Community Connect program. RUS indicated that it would have  Broadband Access Loan Program staff also assist with BIP.\nData challenges. NTIA and RUS lack detailed data on the availability of  broadband service throughout the country that may limit their ability to  target funds to priority areas. According to NTIA and RUS, priority areas  include unserved and underserved areas. NTIA and RUS require applicants  to assemble their proposed service areas from contiguous census blocks  and to identify the proposed service area as unserved or underserved.  However, RUS and NTIA will be awarding loans and grants before the  national broadband plan or broadband mapping is complete. NTIA does  not expect to have complete, national data on broadband service levels at  the census block level until at least March 2010. Eight of 15 stakeholders  with whom we spoke said that the agencies face challenges determining  whether proposed service areas meet the requirements for underserved  and unserved in order to effectively award funds. To work around this  problem, the agencies plan to use existing FCC data on broadband  service levels (Form 477 data) and state broadband service maps where  available. However, the data collected by FCC are at the census tract level,  not the census block level. In addition, although FCC and NTIA have  discussed NTIA\u2019s access to and use of the Form 477 data, the agencies  have not developed formal procedures; RUS has not discussed use of the  Form 477 data with FCC. Finally, not all states have broadband maps.\n\n\t\tNTIA and RUS Have Taken Steps to Address Challenges in Evaluating Applications and Awarding Funds\n\nTwo-step evaluation process. To address the scheduling and staffing  challenges, NTIA and RUS are conserving scarce staff resources by  screening applications and therefore reducing the number of applications  subject to a comprehensive review by using a two-step process. In the first  step, the agencies will evaluate and score applications based on the  criteria delineated in the NOFA, such as project purpose and project  viability. During this step, the agencies will select which applications  proceed to the second step. After the first step is complete and the pool of  potential projects is reduced, the agencies intend to conduct the second  step\u2014due diligence, which involves requesting extra documentation to  confirm and verify information contained in an application. Since not all  applications will proceed to the second step, not all applicants will be  required to submit extra documentation. This will reduce the amount of  information the agencies must review. In the NOFA, the agencies indicated  that using this two-step process balances the burdens on applicants with  the needs of the agencies to efficiently evaluate applications.\nUse of nongovernmental personnel. Both NTIA and RUS are using  nongovernmental personnel to address anticipated staffing needs  associated with evaluating applications and awarding funds. To evaluate  applications, NTIA is using a review system, in which three unpaid,  independent expert reviewers examine and score applications. To be  considered an expert reviewer, the individual must have significant  expertise and experience in at least one of the following areas: (1) the  design, funding, construction, and operation of broadband networks or  public computer centers; (2) broadband-related outreach, training, or  education; or (3) innovative programs to increase the demand for  broadband services. In addition, NTIA will use contractors in an  administrative role to assist the expert reviewers. NTIA officials said that  the agency issued three guides to be used by the reviewers for each of the  three project categories\u2014broadband infrastructure, public computer  centers, and sustainable adoption\u2014and conducted more than 15 Web- based training seminars. RUS will use contractors to evaluate and score  applications. Both NTIA and RUS said that they are confident that an  expert would be able to draw conclusions on the technical feasibility or  the financial sustainability of a project based on information provided in  the application. Regardless of who reviews the application, the final  selection and funding decisions are to be formally made by a selecting  official in each agency.\nPublish applicant information. To address the challenge of incomplete  data on broadband service, NTIA and RUS require applicants to identify  and attest to the service availability\u2014either unserved or underserved\u2014in  their proposed service area. In order to verify these self-attestations, NTIA  and RUS will post a public notice identifying the proposed funded service  area of each broadband infrastructure applicant. The agencies intend to  allow existing service providers in the proposed service area to question  an applicant\u2019s characterization of broadband service in that area.  According to the NOFA, existing service providers will have 30 days to  submit information regarding their service offerings. If this information  raises eligibility issues, RUS may send field staff to the proposed service  area to conduct a market survey. RUS will resolve eligibility issues by  determining the actual availability of broadband service in the proposed  service area. Currently, NTIA has no procedures in place for resolving  these types of issues, but said that it is developing these procedures using  its contractors and other means.\n\n\t\tThe Agencies\u2019 Remaining Schedule May Pose Risks to the Review of Applications\n\nDuring the first funding round, the compressed schedule posed a challenge  for both applicants and the agencies. As mentioned previously, NTIA and  RUS initially proposed to utilize three separate funding rounds during the  18-month window to award the entire $7.2 billion. As such, each funding  round would operate under a compressed schedule. Eight of the 15  industry stakeholders with whom we spoke expressed concern that a  small entity would have difficulties completing an application in a timely  manner. Specifically, some stakeholders said that small entities were  having trouble locating the professional staff needed to assemble an  application. The compressed schedule also posed challenges for the  agencies. During the first funding round, the agencies missed several  milestones. For example, RUS originally intended to select a contractor on  June 12, 2009, and NTIA intended to select a contractor on June 30, 2009;  however, both agencies missed their target dates, with RUS selecting its  contractor on July 31, 2009, and NTIA selecting its contractor on August 3,  2009. Also, the agencies intended to begin awarding the first-round grants  and loans on November 7, 2009, but the agencies now expect to begin  awarding funds in December 2009.\nBecause of the compressed schedule within the individual funding rounds,  NTIA and RUS have less time to review applications than similar grant and  loan programs. In the first funding round, the agencies have approximately  2 months to review 2,200 applications. With other telecommunications  grant and loan programs, agencies have taken longer to evaluate  applications and award funds. For example, from fiscal year 2005 through  2008, RUS took from 4 to 7 months to receive and review an average of 26  applications per year for its Broadband Access Loan Program. NTIA  officials acknowledged that the BTOP timeline is compressed compared  with the timeline for the Public Telecommunications Facilities Program,  which operated on a year-long grant award cycle. For the PSIC program,  NTIA and DHS closed the application period in August 2007 and  completed application reviews in February 2008, a period of roughly 6  months. In California, the Public Utilities Commission took 4 to 6 months  to review 54 applications and award funds for 25 projects in the first year  of the California Advanced Services Fund, a $100 million broadband  program.\nBased on their experience with the first funding round, on November 10,  2009, NTIA and RUS reported that they will reduce the number of funding  rounds from three to two. In the second and final funding round, the  agencies anticipate extending the window for entities to submit  applications. This change will help mitigate the challenges the compressed  schedule posed for applicants in the first funding round. However, it is  unclear whether the agencies will similarly extend the amount of time to  review the applications and thereby bring the review time more in line  with the experiences of other broadband grant and loan programs. NTIA  officials indicated that the agency would like to award all $4.7 billion by  summer 2010, to promote the stimulative effect of the BTOP program. RUS  officials indicated that the agency will award all $2.5 billion by September  30, 2010, as required by the Recovery Act, indicating a potentially longer  review process.\nDepending on the time frames NTIA and RUS select, the risks for both  applicants and the agencies may persist with two funding rounds. In  particular, these risks include:    Limited opportunity for \u201clessons learned.\u201d Based on the current  schedule, NTIA and RUS will have limited time between the completion of  the first funding round and the beginning of the second funding round.  NTIA and RUS recently announced that the agencies will begin awarding  funds for the first funding round in December 2009. On November 10,  2009, the agencies sought public comment on approaches to improve the  application experience and strengthen BTOP and BIP; the public has 14  days to respond with comments following publication of the notice in the  Federal Register. Because of this compressed time frame, applicants might  not have sufficient time to analyze their experiences with the first funding  round to provide constructive comments to the agencies. Further, the  agencies might not have sufficient time to analyze the outcomes of the first  round and the comments from potential applicants. As such, a compressed  schedule limits the opportunity to apply lessons learned from the first  funding round to improve the second round.\nCompressed schedule to review applications. Due to the complex  nature of many projects, NTIA and RUS need adequate time to evaluate  the wide range of applications and verify the information contained in the  applications. NTIA is soliciting applications for infrastructure, public  computer center, and sustainable adoption projects. Therefore, NTIA will  receive applications containing information responding to different  criteria and it will evaluate the applications with different standards. Even  among infrastructure applications, a wide variability exists in the  estimates, projections, and performance measures considered reasonable  for a project. For example, in RUS\u2019s Broadband Access Loan Program,  approved broadband loans for the highest-cost projects, on a cost-per- subscriber basis, ranged as much as 15, 18, and 70 times as high as the  lowest-cost project, even among projects using the same technology to  deploy broadband. Previous experience with broadband loan programs  also reveals the challenges inherent in evaluating an application based on  estimates provided by the applicant. For example, as of fiscal year 2008, 55  percent of RUS broadband loan borrowers were meeting their forecasted  number of subscribers. Nine of the 15 stakeholders that we interviewed  expressed concerns that NTIA and RUS lack staffing expertise to  determine whether project proposals will generate sufficient numbers of  subscribers and revenues to cover operating costs and be sustainable on a  long-term basis.\nContinued lack of broadband data and plan. According to NTIA,  national broadband data provide critical information for grant making.  Additionally, some stakeholders, including members of Congress, have  expressed concern about awarding broadband grants and loans without a  national broadband plan. Under the Recovery Act, up to $350 million was  available pursuant to the Broadband Data Improvement Act to fund the  development and maintenance of a nationwide broadband map for use by  policymakers and consumers. NTIA solicited grant applications to help  develop the national broadband map, and grant applicants must complete  their data collection by March 1, 2010. Additionally, based on provisions in  the Recovery Act, FCC must deliver to Congress a national broadband  plan by February 17, 2010. To prepare the plan, FCC sought comment on  a variety of topics, including the most effective and efficient ways to  ensure broadband service for all Americans. By operating on a  compressed schedule, NTIA and RUS will complete the first funding round  before the agencies have the data needed to target funds to unserved and  underserved areas and before FCC completes the national broadband  plan. Depending on the time frames the agencies select for the second  funding round, they may again review applications without the benefit of  national broadband data and a national broadband plan.\n\n\tNTIA and RUS Face Staffing Challenges in Overseeing Funded Projects, and Despite Steps Taken, Several Risks to Project Oversight Remain\n\nNTIA and RUS will need to oversee a far greater number of projects than  in the past, including projects with large budgets and diverse purposes and  locations. In doing so, the agencies face the challenge of monitoring these  projects with far fewer staff per project than were available in similar  grant and loan programs they have managed. To address this challenge,  NTIA and RUS procured contractors to assist with oversight activities and  will require funding recipients to complete quarterly reports and, in some  cases, obtain annual audits. Despite the steps taken, several risks to  adequate oversight remain. These risks include insufficient resources to  actively monitor funded projects beyond fiscal year 2010 and a lack of  updated performance goals for NTIA and RUS. In addition, NTIA has yet to  define annual audit requirements for commercial entities funded under  BTOP.\n\n\t\tA Large Number of Projects to Oversee Creates Staffing Challenges\n\nNTIA and RUS will need to oversee a far greater number of projects than  in the past. Although the exact number of funded projects is unknown,  both agencies have estimated for planning purposes that they could fund  as many as 1,000 projects each\u2014or 2,000 projects in total\u2014before  September 30, 2010. In comparison, from fiscal year 1994 through fiscal  year 2004, NTIA awarded a total of 610 grants through its Technology  Opportunities Program\u2014or an average of 55 grants per year. From fiscal  year 2005 through fiscal year 2008, RUS awarded a total of 84 Community  Connect grants, averaging 21 grants per year; and through its Broadband  Access Loan Program, RUS approved 92 loans from fiscal year 2003  through fiscal year 2008, or about 15 loans per year.\nIn addition to overseeing a large number of projects, the scale and  diversity of BTOP- and BIP-funded projects are likely to be much greater  than projects funded under the agencies\u2019 prior grant programs. Based on  NTIA\u2019s estimated funding authority of $4.35 billion for BTOP grants and  RUS\u2019s estimated potential total funding of approximately $9 billion for BIP  grants, loans, and loan-grant combinations, if the agencies fund 1,000  projects each, as they have estimated, the average funded amount for  BTOP and BIP projects would be about $4.35 million and $9 million,  respectively. In comparison, from fiscal year 1994 to fiscal year 2004,  NTIA\u2019s average grant award for its Technology Opportunities Program was  about $382,000, and from fiscal year 2005 to fiscal year 2008, RUS  awarded, on average, about $521,000 per Community Connect grant  award. Further, NTIA and RUS expect to fund several different types of  projects that will be dispersed nationwide, with at least one project in  every state. NTIA is funding several different types of broadband  projects, including last- and middle-mile broadband infrastructure projects  for unserved and underserved areas, and public computer center and  sustainable broadband adoption projects. BIP can fund last- and middle- mile infrastructure projects in rural areas across the country.\nBecause of the volume of expected projects, NTIA and RUS plan to  oversee and monitor BTOP- and BIP-funded projects with fewer staff  resources per project than the agencies used in similar grant and loan  programs (see table 2). In its fiscal year 2010 budget request to Congress,  NTIA estimated that it would need a total of 70 full-time-equivalent staff  for fiscal year 2010 to manage BTOP, which includes overseeing funded  projects. After refining its spending and budget plans, NTIA said that it will  need 41 full-time-equivalent staff for BTOP; at the time of our review, it  had filled 33 of these positions. Based on NTIA\u2019s estimate of funding 1,000  projects and its estimated 41 full-time-equivalent staff needed, NTIA will  have about 1 full-time-equivalent staff available for every 24 projects.  Under the Technology Opportunities Program, NTIA had an average of 1  full-time-equivalent staff in any capacity for every three projects funded  annually from fiscal year 1994 through fiscal year 2004. NTIA reported  that it is continually assessing its resources and is considering additional  staff hires. Similarly, RUS reported that it will need 47 full-time-equivalent  staff to administer all aspects of BIP, and the majority of these positions  were to be filled by the end of September 2009. These 47 staff members  are in addition to the 114 full-time-equivalent staff in the Rural  Development Telecommunications program which support four existing  loan or grant programs, including the Telecommunications Infrastructure  loan program, the Distance Learning and Telemedicine loan and grant  program, the Broadband Access Loan Program, and Community Connect  grant program. If RUS funds a total of 1,000 projects, as estimated, based  on the 47 staff assigned to BIP, it would have 1 staff of any capacity  available for every 21 funded projects. Under its Broadband Access Loan  Program, RUS had more than 1 full-time-equivalent staff for every loan  made annually from fiscal year 2003 through fiscal year 2008. RUS  reported that it could use other staff in the Rural Development  Telecommunications program to address BIP staffing needs, if necessary.\n\n\t\tNTIA and RUS Are Addressing Project Oversight Challenges by Procuring Contractor Services and Requiring Funding Recipient Reports and Audits\n\nContractor services. NTIA and RUS will use contractors to help monitor  and provide technical assistance for BTOP and BIP projects, in addition to  evaluating applications as discussed earlier. On August 3, 2009, NTIA  procured contractor services to assist in a range of tasks, including  tracking and summarizing grantees\u2019 performance, developing grant- monitoring guidance, and assisting with site visits and responses to audits  of BTOP-funded projects. Through its statement of work for contracted  services, NTIA estimated that its contractor will provide about 35,000  hours of support for grants administration and postaward support in 2010  and about 55,000 hours of support for additional optional years. On July  31, 2009, RUS awarded a contract to a separate contractor for a wide range  of program management activities for BIP. RUS\u2019s contractor will be  responsible for a number of grant-monitoring activities, including  developing a workflow system to track grants and loans; assisting RUS in  developing project monitoring guidance and policies; and assisting in site  visits to monitor projects and guard against waste, fraud, and abuse.\nIn addition to its contractor, RUS intends to use existing field staff for  program oversight. RUS reported that it currently has 30 general field  representatives in the telecommunications program and 31 field  accountants in USDA\u2019s Rural Development mission area that may be  available to monitor broadband programs. RUS field accountants conduct  financial audits primarily within its telecommunications and electric utility  loan programs. Two of the 30 general field representatives are dedicated to  RUS\u2019s broadband grant and loan programs, and RUS reported that the  other general field representatives would be available to assist with BIP  oversight if needed. Of the 47 full-time-equivalent staff that RUS has  estimated needing to implement BIP, it plans to hire a total of 10 general  field representatives and 10 field accountants on a temporary basis. In  addition, RUS officials told us that Rural Development has an estimated  5,000 field staff available across the country that support a variety of Rural  Development loan and grant programs. Although these individuals do not  have specific experience with telecommunications or broadband projects,  according to RUS, this staff has experience supporting RUS\u2019s business and  community development loan programs, and this workforce could be used  for project monitoring activities if there was an acute need.\nRecipient reports and audits. To help address the challenge of  monitoring a large number of diverse projects, NTIA and RUS have  developed program-specific reporting requirements that are intended to  provide transparency on the progress of funded projects. Based on our  review of the requirements, if NTIA and RUS have sufficient capacity to  review and verify that information provided by funding recipients is  accurate and reliable, these requirements could provide the agencies with  useful information to help them monitor projects. The following reporting  requirements apply to BTOP and BIP funding recipients:    General Recovery Act reports. Section 1512 of the Recovery Act and  related OMB guidance requires all funding recipients to report quarterly to  a centralized reporting system on, among other things, the amount of  funding received or obligated, the project completion status, and an  estimate of the number of jobs created or retained through the funded  project.  Under OMB guidance, awarding agencies are responsible for  ensuring that funding recipients submit reports to a central, online portal  no later than 10 calendar days after each calendar quarter in which the  recipient receives assistance. Awarding agencies must also perform their  own data quality review and request further information or corrections by  funding recipients, if necessary. No later than 30 days following the end of  the quarter, OMB requires that detailed recipient reports are made  available to the public on the Recovery.gov Web site.\nBTOP-specific reports. The Recovery Act requires BTOP funding  recipients to report quarterly on their use of funds and NTIA to make these  reports available to the public. NTIA also requires that funding recipients  report quarterly on their broadband equipment purchases and progress  made in achieving goals, objectives, and milestones identified in the  recipient\u2019s application, including whether the recipient is on schedule to  substantially complete its project no later than two years after the award  and complete its project no later than 3 years after the award. Recipients  of funding for last- and middle-mile infrastructure projects must report on  a number of metrics, including the number of households and businesses  receiving new or improved access to broadband as a result of the project,  the advertised and averaged broadband speeds and the price of the  broadband services provided, and the total and peak utilization of network  access links.\nBIP-specific reports. RUS requires BIP funding recipients to submit  quarterly balance sheets, income and cash-flow statements, and the  number of customers taking broadband service on a per community basis,  among other information. In addition, RUS requires funding recipients to  specifically state in the applicable quarter when they have received 67  percent of the award funds, which is RUS\u2019s measure for \u201csubstantially  complete.\u201d BIP funding recipients must also report annually on the  number of households; businesses; and educational, library, health care,  and public safety providers subscribing to new or improved access to  broadband. RUS officials reported that it plans to use quarterly reports to  identify specific projects for on-site monitoring and to determine when  that monitoring should take place.\nNTIA and RUS also require some funding recipients to obtain annual,  independent audits of their projects. The primary tool for monitoring  federal awards through annual audits is the Single Audit report required  under the Single Audit Act, as amended. We recently reported that the  Single Audit is a valuable source of information on internal control and  compliance for use in a management\u2019s risk assessment and monitoring  processes\u2014and with some adjustments, we said, the Single Audit process  could be improved for Recovery Act oversight. The Single Audit report is  prepared in accordance with OMB\u2019s implementing guidance in OMB  Circular No. A-133. OMB\u2019s Recovery Act guidance directed federal  agencies to review Single Audit reports and provide a synopsis of audit  findings to OMB relating to obligations and expenditures of Recovery Act  funding. All states, local governments, and nonprofit organizations that  expend over $500,000 in federal awards per year must obtain an annual  Single Audit or, in some cases, a program-specific audit (referred to  collectively in this report as a Single Audit). Commercial (for profit)  entities awarded federal funding of any amount are not covered by the  Single Audit Act, and states, local governments, and nonprofit  organizations expending less than $500,000 in federal awards per year are  also not required to obtain an annual Single Audit under the Single Audit  Act. RUS, however, requires all commercial recipients of BIP funds to  obtain an annual, independent audit of their financial statements under  requirements that also apply to RUS\u2019s existing broadband grant and loan  programs. However, RUS\u2019s existing audit requirements are different from  the Single Audit requirements. NTIA has yet to determine what annual  audit requirements will apply to commercial grantees; NTIA reported that  it intends to develop program-specific audit requirements and guidelines  that will apply to commercial recipients that receive broadband grants and  plans to have those guidelines in place by December 2009. See table 3 for a  description of BTOP and BIP audit requirements.\n\n\t\tSeveral Risks to Project Oversight Remain\n\nLack of sufficient resources beyond fiscal year 2010. Both NTIA and  RUS face the risk of having insufficient resources to actively monitor  BTOP- and BIP-funded projects after September 30, 2010, which could  result in insufficient oversight of projects not yet completed by that date.\nAs required by the Recovery Act, NTIA and RUS must ensure that all  awards are made before the end of fiscal year 2010. Under the current  timeline, the agencies do not anticipate completing the award of funds  until that date. Funded projects must be substantially complete no later  than 2 years, and complete no later than 3 years following the date of  issuance of the award. Yet, the Recovery Act provides funding through  September 30, 2010. The DOC Inspector General has expressed concerns  that \u201cwithout sufficient funding for a BTOP program office, funded  projects that are still underway at September 30, 2010, will no longer be  actively managed, monitored, and closed.\u201d NTIA officials told us that  NTIA has consulted with OMB about seeking BTOP funding after  September 30, 2010, to allow it to close grants. RUS officials reported that  given the large increase in its project portfolio from BIP, RUS\u2019s capacity to  actively monitor these projects after its BIP funding expires may be  stressed. Without sufficient resources to actively monitor and close BTOP  grants and BIP grants and loans by the required completion dates, NTIA  and RUS may be unable to ensure that all recipients have expended their  funding and completed projects as required.\nLack of updated performance goals. The Government Performance and  Results Act of 1993 (GPRA) directs federal agencies to establish objective,  quantifiable, and measurable goals within annual performance plans.  GPRA stresses the importance of having clearly stated objectives, strategic  and performance plans, goals, performance targets, and measures in order  to improve a program\u2019s effectiveness, accountability, and service delivery.  Specifically, performance measures allow an agency to track its progress  in achieving intended results. Performance measures also can help inform  management decisions about such issues as the need to redirect resources  or shift priorities.\nNTIA has established preliminary program performance measures for  BTOP, including job creation, increasing broadband access, stimulation of  private sector investment, and spurring broadband demand. However,  NTIA has not established quantitative, outcome-based goals for those  measures. NTIA officials reported that the agency lacks sufficient data to  develop such goals and is using applications for the first round of funding  to gather data, such as the expected number of households that will  receive new or improved broadband service. According to NTIA officials,  data collected from applications for the first funding round could be used  to develop program goals for future funding rounds.\nRUS has established quantifiable program goals for its existing broadband  grant and loan programs, including a measure for the number of  subscribers receiving new or improved broadband service as a result of  the programs. However, according to USDA\u2019s fiscal year 2010 annual  performance plan, RUS has not updated its goals to reflect the large  increase in funding it received for broadband programs under the  Recovery Act. In addition, RUS officials told us that the agency\u2019s existing  measure for the number of subscribers receiving new or improved  broadband access as a result of its programs is based on the estimates  provided by RUS borrowers in their applications. Consequently, these  program goals do not reflect actual program outcomes, but rather the  estimates of applicants prior to the execution of their funded projects.\nUndefined audit requirements for commercial recipients. At the time  of our review, NTIA did not have audit requirements or guidelines in place  for annual audits of commercial entities receiving BTOP grants. NTIA  officials reported that because BTOP is the first program managed by  NTIA to make grants to commercial entities, the agency does not have  existing audit guidelines for commercial entities. However, NTIA reported  that it intends to develop program-specific audit requirements and  guidelines that will apply to commercial recipients that receive broadband  grants, and it plans to have those guidelines in place by December 2009.  Although award recipients that do not expend more than $500,000 per year  in federal awards may not be subject to an annual audit requirement, NTIA  officials reported that they do not yet know the extent to which they will  make awards in this range. In the absence of clear audit requirements and  guidelines for commercial recipients of BTOP funding, NTIA will lack an  important oversight tool to identify risks and monitor BTOP grant  expenditures.\n\n\tConclusions\n\nThe Recovery Act established an ambitious schedule for NTIA and RUS to  implement the broadband provisions. In particular, the agencies have 18  months to establish their respective programs, solicit and evaluate  applications, and award funds. Compounding the challenge, NTIA must  establish the BTOP program from scratch, and the agencies face an  unprecedented volume of funds and anticipated number of applications.\nThe agencies initially indicated that they would award Recovery Act funds  in three rounds; but, on November 10, 2009, the agencies announced that  they would consolidate the second and third funding rounds and award  the remaining funds in a single, second funding round. However, the  schedule of the new, second funding round is unclear.  Based on the  experience in the first funding round and their legacy grant and loan  programs, the agencies might have little time to thoroughly review  applications to ensure that funded projects meet the objectives of the  Recovery Act. Without adequate time to gather lessons learned from the  first funding round and to thoroughly review applications, the agencies  risk funding projects that might not meet the objectives of the Recovery  Act.\nIn addition to reviewing an unprecedented number of applications, NTIA  and RUS must oversee funded projects to ensure the projects meet the  objectives of the Recovery Act and to guard against waste, fraud, and  abuse. All funded projects must be complete no later than 3 years  following the award of funds; therefore, some funded projects might not  be complete until September 30, 2013. However, the Recovery Act only  provided funding through September 30, 2010. Without adequate resources  beyond fiscal year 2010, the agencies may not be able to ensure that all  projects are completed as intended and to guard against waste, fraud, and  abuse.\nDue to the compressed schedule and limited staff resources, NTIA and  RUS have had limited time to develop outcome-based performance goals  for their programs. However, the agencies use of sequential funding  rounds provides them with an opportunity to collect important data from  funding applicants early in the program that could be used to develop  meaningful performance goals. For example, because applicants must  provide estimates for and reports on the number of households and other  entities that will receive new or improved broadband service as a result of  the projects, NTIA and RUS should have a good basis to establish program  goals for BTOP and BIP for the second funding round and to evaluate the  effectiveness of federal spending for broadband deployment. Without such  goals, future efforts to expand broadband deployment and adoption may  lack important information on the types of projects that were most  effective at meeting subscriber goals and other targets, thereby limiting  the ability to apply federal resources to programs with the best likelihood  of success.\nFinally, although NTIA and RUS have established a range of reporting  requirements for funding recipients, NTIA has yet to define what annual  auditing requirements, if any, will apply to commercial funding recipients  under BTOP. Although we have previously reported that the Single Audit  Act\u2019s annual audit requirement is not a perfect tool to oversee Recovery  Act funding, the absence of an annual audit requirement for commercial  entities would hamper NTIA\u2019s oversight of its Recovery Act funding. For  example, NTIA would lack independent auditors\u2019 assurances that its  funding recipients have important internal controls in place to fully track  expenditures and guard against fraud, waste, and abuse.\n\n\tRecommendations for Executive Action\n\nWe recommend that the Secretaries of Commerce and Agriculture take the  following three actions:  1.  To reduce the risk of awarding funds to projects that may not be  sustainable or do not meet the priorities of the Recovery Act    delay the issuance of the second NOFA in order to provide time to  analyze application and evaluation processes and apply lessons  learned from the first funding round, and     provide review time in the second funding round comparable with  other broadband grant and loan programs. 2.  To ensure that all funded projects receive sufficient oversight and  technical support beyond September 30, 2010, and through their  required completion dates, develop contingency plans to ensure  sufficient resources for oversight of funded projects beyond fiscal year  2010. 3.  To ensure that management has appropriate tools in place to evaluate  the effectiveness of BTOP and BIP and to apply limited resources to  achieve desired program outcomes, use information provided by  program applicants in the first funding round to establish quantifiable,  outcome-based performance goals by which to measure program  effectiveness.\nWe also recommend that the Secretary of Commerce take the following  step:  To ensure that NTIA has sufficient insight into the expenditure of federal  funding by commercial entities that may receive BTOP grants, determine  whether commercial entities should be subject to an annual audit  requirement.\n\n\tAgency Comments and Our Evaluation\n\nWe provided a draft of this report to the departments of Commerce and  Agriculture, to OMB, and to FCC for review and comment. In the draft  report, we recommended that NTIA and RUS combine the second and  third planned funding rounds into one extended funding round. The  departments of Commerce and Agriculture agreed with our  recommendations; FCC and OMB did not comment on our  recommendations. Subsequently, on November 10, 2009, NTIA and RUS  announced that they would award the remaining program funds in one  round, instead of two. Therefore, we removed this recommendation from  the final report. In its comments, NTIA noted that the agency will take all  appropriate additional steps to apply the lessons learned and address  GAO\u2019s concerns, including utilizing experiences from the first round of  funding to improve the program, establishing outcome-based performance  measures, and implementing reasonable audit requirements for  commercial grantees. NTIA\u2019s full comments appear in appendix III. For the  recommendations directed to RUS, RUS described steps it is exploring  that are consistent with our first recommendation. RUS agreed with the  second and third recommendations. FCC, NTIA, OMB, and RUS provided  technical comments that we incorporated, as appropriate.\nIn its comments, RUS noted that it has extensive experience awarding and  managing grants and loans for rural America, including grants and loans  for electric and telecommunications projects. RUS noted that by focusing  on budget authority, our report does not reflect the true scope of its  telecommunications programs. In particular, RUS noted that the  Broadband Access Loan Program operated with a program level of $300 to  $400 million. We chose to report the budget authority for the various  programs to provide comparability between the grant and loan programs  operated by NTIA and RUS. We acknowledge that RUS\u2019s legacy programs  operate at the program level exceeding the budget authority; however, the  BIP program will also operate at a program level exceeding the $2.5 billion  budget authority. RUS also noted that our report does not reflect the full  scale of its existing staffing levels. In particular, RUS noted that it has 114  full-time staff dedicated solely to telecommunications programs and 30  General Field Representatives who can assist with oversight of the BIP  program. In our report, we note the number of staff dedicated to RUS\u2019s  broadband programs, and we also note that RUS has additional staff,  including 30 General Field Representatives, that the agency can draw upon  for the BIP program. RUS\u2019s full comments appear in appendix II.\nWe are sending copies of this report to the Secretary of Agriculture, the  Secretary of Commerce, the Director of the Office of Management and  Budget, the Chairman of the Federal Communications Commission, and  interested congressional committees. The report also is available at no  charge on the GAO Web site at http:\/\/www.gao.gov.\nIf you have any questions about this report, please contact me at (202) 512- 2834 or goldsteinm@gao.gov. Contact points for our Offices of  Congressional Relations and Public Affairs may be found on the last page  of this report. Major contributors to this report are listed in appendix IV.\n\nAppendix I: Stakeholder Organizations or Individuals Interviewed\n\nAppendix II: Comments from the Department of Agriculture\n\nAppendix III: Comments from the Department of Commerce\n\nAppendix IV: GAO Contact and Staff Acknowledgments\n\n\tGAO Contact\n\n\tStaff Acknowledgments\n\nIn addition to the contact named above, Michael Clements, Assistant  Director; Eli Albagli; Matt Barranca; Elizabeth Eisenstadt; Dean Gudicello;  Tom James; Kim McGatlin; Sara Ann Moessbauer; Josh Ormond; and Mindi  Weisenbloom made key contributions to this report.","output":"Why GAO Did This Study\n\nAccess to broadband service is seen as vital to economic, social, and educational development, yet many areas of the country lack access to, or their residents do not use, broadband. To expand broadband deployment and adoption, the American Recovery and Reinvestment Act (Recovery Act) provided $7.2 billion to the Department of Commerce's National Telecommunications and Information Administration (NTIA) and the Department of Agriculture's Rural Utilities Service (RUS) for grants or loans to a variety of program applicants. The agencies must award all funds by September 30, 2010. This report addresses the challenges NTIA and RUS face; steps taken to address challenges; and remaining risks in (1) evaluating applications and awarding funds and (2) overseeing funded projects. The Government Accountability Office (GAO) reviewed relevant laws and program documents and interviewed agency officials and industry stakeholders.\n\nWhat GAO Found\n\nNTIA and RUS face scheduling, staffing, and data challenges in evaluating applications and awarding funds. NTIA, through its new Broadband Technology Opportunities Program, and RUS, through its new Broadband Initiatives Program, must review more applications and award far more funds than the agencies formerly handled through their legacy telecommunications grant or loan programs, including NTIA's largest legacy grant program, Public Safety Interoperable Communications. NTIA and RUS initially proposed distributing these funds in three rounds, but recently adopted two rounds. To meet these challenges, the agencies have established a two-step application evaluation process that uses contractors or unpaid, independent experts for application reviews and plan to publish information on applicants' proposed service areas to help ensure the eligibility of proposed projects. While these steps address some challenges, the upcoming deadline for awarding funds may pose risks to the thoroughness of the application evaluation process. In particular, the agencies may lack time to apply lessons learned from the first funding round and to thoroughly evaluate applications for the remaining rounds. NTIA and RUS will oversee a significant number of projects, including projects with large budgets and diverse purposes and locations. In doing so, the agencies face the challenge of monitoring these projects with far fewer staff per project than were available for their legacy grant and loan programs. To address this challenge, NTIA and RUS have hired contractors to assist with oversight activities and plan to require funding recipients to complete quarterly reports and, in some cases, obtain annual audits. Despite these steps, several risks remain, including a lack of funding for oversight beyond fiscal year 2010 and a lack of updated performance goals to ensure accountability for NTIA and RUS. In addition, NTIA has yet to define annual audit requirements for commercial entities funded under the Broadband Technology Opportunities Program."}
{"id":"crs_R40577","pid":"crs_R40577_0","input":"Food safety in the United States is regulated mainly by the U.S. Department of Agriculture (USDA) and the Food and Drug Administration (FDA) within the U.S. Department of Health and Human Services (HHS). Although the FDA is the federal agency primarily responsible for ensuring the safety of a vast majority of foods under the current system, the USDA is responsible for regulating meat, poultry, and some egg products, as well as being responsible for animal and plant health.\nUSDA's role in the food safety system is founded on its authority to regulate meat and poultry inspection and importation. The Food Safety and Inspection Service (FSIS) within USDA is responsible for inspecting domestic and imported meat and poultry products under the Federal Meat Inspection Act and the Poultry Products Inspection Act. This role in inspection of meat and poultry generally begins beyond the farm at slaughter and processing facilities. This authority does not include direct regulation of on-farm practices related to animal health. However, as the next step in the food chain after the farm, the standards set for inspection may be seen to indirectly regulate the health of animals on the farm. The Egg Products Inspection Act may be interpreted similarly. In other words, these acts restrict acceptance of animals that do not meet health standards at slaughtering and processing facilities, which effectively require farms to maintain healthy livestock in order to sell their livestock for food processing.\nFood safety regulation is not limited to processing plants. USDA has authority to exercise food safety oversight and enforcement on farms as well. Four statutes that provide the most significant authority related to on-farm activity and food safety are the Animal Health Protection Act, the Plant Protection Act, the Agricultural Marketing Agreement Act of 1937, and the Agricultural Marketing Act of 1946.\n\n\tUSDA Statutory Authorities Related to Farms and Farm Activities\n\n\t\tAuthority to Protect Animal and Plant Health\n\nThe Animal and Plant Health Inspection Service (APHIS) within the USDA is responsible for the protection of health of animals and plants from agricultural pests and diseases. Issues of animal and plant health are of interest not only in the food safety context, but also in trade matters and the agricultural industry generally. Outbreaks of disease among animals may lead to negative consequences for the U.S. agricultural system and also may have negative effects on international trade if U.S. agricultural resources are deemed unsafe for import and consumption in other countries.\nThe USDA's on-farm authority includes authority to monitor animal health, which would assist in government efforts to prevent the spread of some diseases from animals to human populations ( e.g. , bovine spongiform encephalopathy, or \"mad cow disease\"). Although there has been some concern about an April 2009 outbreak of influenza A(H1N1), initially dubbed \"swine flu\" because it contained genetic material from flu strains that normally circulate in swine, USDA has confirmed that \"there is no evidence of the 2009-H1N1 virus in U.S. swine.\" The virus, however, is not a foodborne illness, meaning that it is not transmitted by consumption of certain foods like pork and pork products. Under authority currently in place, USDA may monitor or take other protective actions to prevent outbreaks of such diseases, whether they pose a foodborne or airborne risk to the health of other animals or humans.\n\n\t\t\tAnimal Health Protection Act\n\nCongress enacted the Animal Health Protection Act (AHPA) as part of the 2002 farm bill in order to protect animal health through the prevention and control of animal diseases and pests. AHPA generally authorizes USDA to prohibit or restrict the importation, exportation, or entry of animals into interstate commerce if it determines such action is necessary to prevent the introduction or dissemination of any pest or disease of livestock. The AHPA also generally authorizes USDA to hold, seize, quarantine, or destroy any animal that is in interstate commerce and is believed to be carrying or have been exposed to any pest or disease of livestock.\nMost of USDA's authority under AHPA relates to animals moving in interstate commerce, but the AHPA specifically permits USDA to take some actions without explicitly requiring that the animal be in interstate commerce at the time. USDA is authorized to take protective actions such as seizing, treating, or destroying animals if the USDA determines that \"an extraordinary emergency exists because of the presence in the United States of a pest or disease of livestock.\" For such emergencies, the presence of the pest or disease must threaten U.S. livestock and the protective action must be necessary to prevent the spread of the threat. USDA is also authorized to make inspections and seizures under the AHPA at any premises, including farms, if it obtains a warrant showing probable cause to believe there is an \"animal, article, facility, or means of conveyance regulated under [the AHPA].\" This inspection authority supplements USDA's authority to make warrantless inspections of any person or means of conveyance moving in interstate commerce that is believed to be carrying an animal regulated by AHPA.\nThe AHPA also provides broad authority to USDA for detection, control, and prevention of the introduction and spread of outbreaks of animal diseases and pests. AHPA authorizes USDA to \"carry out operations and measures to detect, control, or eradicate any pest or disease of livestock (including ... diagnostic testing of animals), including animals at a slaughterhouse, a stockyard, or other point of concentration.\" AHPA also expanded APHIS's authority to protect against the introduction of plant and animal disease and \"otherwise improve the capacity of the [APHIS] to protect against the threat of bioterrorism.\" APHIS used this authority to implement a voluntary system of animal tracking known as the National Animal Identification System, which allows for registration of premises where livestock and poultry are raised or housed, identification of animals with unique identifier information, and tracking of identified animals.\n\n\t\t\tPlant Protection Act\n\nThe Plant Protection Act (PPA), enacted in 2000, provides protections similar to the AHPA but specifically applies to plants, rather than animals. The PPA was enacted to control and prevent the spread of plant pests for the protection of the agriculture, environment, and economy of the United States by regulating plant pests and noxious weeds that are in or affect interstate commerce. The PPA defines plant pests as certain organisms \"that can directly or indirectly injure, cause damage to, or cause disease in any plant or plant product.\" It defines noxious weeds as \"any plant or plant product that can directly or indirectly injure or cause damage to crops ... , livestock, poultry, or other interests of agriculture, irrigation, navigation, the natural resources of the United States, the public health, or the environment.\" Under the PPA, the USDA has authority to prohibit or restrict the movement of plants and plant products in interstate commerce if it determines such action would be necessary to prevent the introduction or spread of plant pests or noxious weeds. APHIS has used the PPA to monitor genetically engineered crops that may cause negative effects on other agricultural products.\nThe PPA authorizes USDA generally to hold, quarantine, treat, or destroy any plant, plant pest, or noxious weed that is moving or has moved in interstate commerce if it deems such action necessary \"to prevent the dissemination of a plant pest or noxious weed that is new to or not known to be widely prevalent or distributed\" in the United States. USDA may also order owners of plants, plant products, plant pests, or noxious weeds that are determined to threaten plant health to treat or destroy them. USDA's ability to impose remedial measures under this authority is limited, though. That is, USDA may not require that a plant, plant product, plant pest, or noxious weed be destroyed or exported if the Secretary believes there is a less drastic, feasible and adequate alternative available to prevent dissemination of the threat.\nIn addition to the general authority to prevent the spread of plant pests and noxious weeds, USDA also has emergency authority under PPA. For USDA to act under its emergency authority, it must find \"that the measures being taken by the State are inadequate to eradicate the plant pest or noxious weed\" after consulting with the governor of the affected state. Under the PPA, if USDA determines that \"an extraordinary emergency\" exists, it may hold, seize, quarantine, treat, or destroy any plant, plant product, or premises that it \"has reason to believe is infested with the plant pest or noxious weed.\" Like the limitation under its general authority to impose remedial measures, the USDA is prohibited from destroying or exporting anything under its emergency authority if there is a less drastic, feasible action \"that would be adequate to prevent the dissemination of any plant pest or noxious weed new to or not known to be widely prevalent or distributed [in] the United States.\"\n\n\t\tAuthority to Enforce Marketing Orders and Implement Marketing Programs\n\nAlthough the AHPA and PPA may provide more significant sources of authority for USDA to take regulatory actions on farms, other statutes provide USDA with oversight authority related to farm activities and food safety. The Agricultural Marketing Service (AMS) within the USDA oversees programs related to the standardization and marketing of agricultural products. The Agricultural Marketing Agreement Act of 1937 and the Agricultural Marketing Act of 1946 authorize programs that may involve oversight of producers regarding food quality and safety.\n\n\t\t\tAgricultural Marketing Agreement Act of 1937\n\nThe Agricultural Marketing Agreement Act of 1937 (AMAA) authorizes USDA to issue marketing orders that legally bind processors, associations of producers, and others engaged in the handling of certain agricultural commodities or products thereof. The AMAA provides a list of terms and conditions that may be included in marketing orders. Orders must include at least one of the possible terms and conditions provided by statute, and may not include other terms and conditions not provided by statute. The possible terms and conditions include regulating the amount, grade, size, or quality of the marketed commodity; regulating the containers used for packaging, transportation, sale, and handling of the marketed commodity; and requiring inspection of any commodity or product. Thus, depending on what terms and conditions are included in a marketing order, the order may create legally binding requirements relating to food quality and safety.\nCommodities eligible to be regulated by marketing orders include milk, fruits, vegetables, and nuts. The orders are limited to the regulation of any commodity or product \"in the current of interstate or foreign commerce, or which directly burdens, obstructs, or affects, interstate or foreign commerce in such commodity or product thereof.\"\nUSDA also has enforcement powers under the AMAA to ensure that entities covered by the marketing orders comply with the terms and conditions set forth. USDA may investigate individuals or entities that it believes may be in violation of provisions of orders created under the AMAA. USDA may also conduct hearings on the matter in order to determine whether to refer the matter to the Department of Justice (DOJ) for enforcement.\n\n\t\t\tAgricultural Marketing Act of 1946\n\nThe Agricultural Marketing Act of 1946 (AMA) authorizes the USDA to promulgate regulations related to agricultural markets and standards. The AMA does not provide specific regulatory authority to USDA, but it does authorize USDA \"to inspect, certify, and identify the class, quality, quantity, and condition of agricultural products when shipped or received in interstate commerce\" under regulations to be prescribed by the Secretary of Agriculture.\nUSDA has used its authority to develop voluntary programs to allow agricultural producers \"to help promote and communicate quality and wholesomeness to consumers.\" These programs allow interested producers to use third-party audits to certify that their products meet buyer specifications. An example of such a program includes AMS's Good Agricultural Practices and Good Handling Practices Audit Verification Program, which allows the food industry to use third-party audits to verify the conformance of producers to best practices on the farm. Although the USDA does not have a direct role in the testing and verification programs, the agency facilitates a process that provides heightened protections for consumers.\n\n\tUSDA Regulation of On-Farm Activity\n\nUSDA's role in the current food safety system appears to focus on inspections during production, but USDA appears to have authority under numerous statutes to regulate at least some on-farm activities. Although this authority does not explicitly provide for oversight of farm operations, the statutory language does not explicitly prohibit USDA from carrying out its authority on farms. Thus, it appears that USDA may apply its statutory authority to on-farm activities, if the on-farm activity is one that is generally covered by the relevant statute. The statutory authorities discussed in this report generally require that exercise of the authority provided be linked to products in interstate commerce. In the debate over food safety regulation on the farm, some have raised arguments that on-farm activities may not be sufficiently linked to commerce to justify congressional regulation. As a result, USDA's authority to implement programs related to food safety on farms before the agricultural products in question actually enter commerce has become an issue.\nAlthough it might seem obvious that agricultural products sold in stores are a part of commerce, one may question whether USDA would be authorized to take actions under these statutes on farms that do not sell their products, but rather are self-sufficient. It is likely that any farm would be subject to USDA's regulatory authority in the context of these statutes because of Congress's broad authority to act under the Commerce Clause of the U.S. Constitution.\nThe Constitution empowers Congress \"to regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes,\" and \"to make all Laws which shall be necessary and proper for carrying into Execution the foregoing Powers.\" The U.S. Supreme Court has found that the Commerce Clause allows for three categories of congressional regulation: the channels of interstate commerce; the instrumentalities of interstate commerce; and \"those activities having a substantial relation to interstate commerce ... i.e., those activities that substantially affect interstate commerce.\"\nOne of the Court's most expansive Commerce Clause rulings, Wickard v. Filburn , concerned Congress's ability to regulate the production and consumption of homegrown wheat. The Court held that economic activities, regardless of their nature, could be regulated by Congress if the activity \"asserts a substantial impact on interstate commerce.\" In Wickard , a farmer challenged a monetary penalty he received for growing wheat in excess of a quota established by the USDA to regulate wheat prices, arguing that the wheat never went to market but was grown and consumed on his own farm and thus outside the scope of interstate commerce. Although the Court recognized that one family's production alone would likely have a negligible impact on the overall price of wheat, if combined with other personal producers, the effect would be substantial enough to make the activity subject to congressional regulation. Although the Court has arguably narrowed its interpretation of Congress's authority under the Commerce Clause in recent decades, the Court has indicated as recently as 2005 that Wickard v. Filburn is still good law, holding that Congress can regulate purely intrastate activity that is not \"commercial\" if it concludes that failure to regulate the activity would undercut the interstate market.\nThe relevant on-farm statutes, particularly the AHPA and the PPA, include provisions that generally apply to agricultural products in interstate commerce, which Wickard indicates would include items still on the farm. They also include some provisions that authorize USDA to inspect agricultural products at any time, including when on a farm, to control pests and diseases that might affect agricultural commerce generally. Thus, it seems that USDA's authority to regulate animals, plants, and other agricultural products on the farm itself is a proper exercise of authority and a valid interpretation of the authority delegated by Congress.","output":"In recent years, outbreaks of foodborne illnesses and subsequent product recalls have highlighted concerns about the current food safety system. Some have argued for a more comprehensive approach to the regulation of food products. Among the questions raised in the debate on the adequacy and potential improvements for the U.S. food safety system is the appropriate starting point of federal regulation. The current system provides regulation of various food products under differing systems of inspection and oversight. Advocates of a more comprehensive approach to food safety regulation say it could be achieved by a thorough system of oversight beginning at the point of production\u2014on farms and ranches. Opponents of this approach argue that some proposals for on-farm oversight would impose too great a burden on small farms, would be too costly to implement, and in some cases may not be sufficiently linked to commerce to constitutionally justify congressional regulation.\nThe U.S. Department of Agriculture (USDA) has a major role in the U.S. food safety system through its inspection authority for meat and poultry products, but it also has authority to regulate the agricultural industry in other ways. This report will analyze the authority of USDA to regulate on-farm activities in the context of food safety. Specifically, the report will provide an overview of USDA statutory authorities related to on-farm activities, including the Animal Health Protection Act, the Plant Protection Act, the Agricultural Marketing Agreement Act of 1937, and the Agricultural Marketing Act of 1946. Although these statutes do not provide explicitly for USDA actions taken on farms, they do provide USDA broad general authority to protect animal and plant health and to enforce and implement marketing programs related to the quality and safety of agricultural food products. The report will also analyze the scope of USDA's authority to act on farms under these statutes. Because Congress's authority to enact these statutes falls under the Commerce Clause, the report will also analyze the question of whether USDA's authority applies to farms that do not directly participate in interstate commerce."}
{"id":"gao_GAO-04-795","pid":"gao_GAO-04-795_0","input":"\tBackground\n\nOur nation\u2019s border security process includes multiple mechanisms for  addressing potential terrorist threats to the United States. One of these  mechanisms is the visa revocation process. The visa revocation process is  a homeland security tool that can prevent potential terrorists from  entering the United States and can help immigration and law enforcement  officials identify and investigate potential terrorists already in the country.  The visa revocation process begins after consular officers at the  Department of State\u2019s overseas consular posts adjudicate visa applications  for foreign nationals who wish to temporarily enter the United States for  business, tourism, or other reasons. After receiving a visa, foreign  nationals travel to ports of entry within the United States. At ports of  entry, inspectors from DHS\u2019s Customs and Border Protection determine  whether the visa holder is admitted to the United States and, if so, how  long he or she may remain in the country. Once foreign nationals have  entered the United States, DHS\u2019s Immigration and Customs Enforcement  assumes responsibility for enforcing our immigration laws, including  ensuring that foreign nationals are eligible to remain in the United States.\nAccording to State officials, most visa revocations on terrorism grounds  begin with information from the TIPOFF database, the U.S. government\u2019s  primary terrorist watch list. The TIPOFF database includes individuals the  U.S. government suspects may have ties to terrorism. Information in the  TIPOFF database is provided by various federal agencies including the  FBI, State, and others. At the time of our previous report, this information  was managed by State\u2019s Bureau of Intelligence and Research. In December  2003, TSC assumed responsibility for this function. TSC was officially  formed in December 2003 as a result of a presidential directive designed to  increase information sharing across agencies and to facilitate better  understanding between the intelligence and investigation communities. As  an interagency organization under the administration of the FBI with  representatives from State, DHS, and other federal agencies, part of its  role is to work with federal agencies to provide access to the TIPOFF  database. Figure 1 depicts the visa revocation process in effect during the  October to December 2003 time period we analyzed for this report as  described in agency procedures and as explained to us by agency officials.\nState uses information in TIPOFF to determine if visa holders may be  suspected or actual terrorists. When TSC adds individuals in TIPOFF to  the Department of State\u2019s Consular Lookout and Support System (CLASS),  it provides a list of these names to Consular Affairs. State officials told us  that the entry of these names into CLASS and the Interagency Border  Inspection System (IBIS) should help prevent any of those individuals  from entering the United States because border inspectors will be alerted  to deny them entry. This lookout process does not completely address the  potential vulnerability posed by individuals already in the country.  Therefore, the visa revocation process is an important tool to help identify  individuals whom immigration and law enforcement officials should locate  and investigate. After TSC adds names to CLASS and IBIS, Consular  Affairs compares these names with its database of all visa holders and  sends an electronic spreadsheet back to TSC containing probable or  possible matches. TSC refines this list by identifying direct matches and  recommends that Consular Affairs revoke these individuals\u2019 visas. It also  sends Consular Affairs an information package containing a summary of  the derogatory information that led TSC to the recommendation to revoke.\nAfter determining that the revocation is appropriate, the Consular Affairs  officer posts a lookout in CLASS for the individual. According to State and  DHS officials, this lookout is then accessible in near real time to DHS  inspectors at border ports of entry through the IBIS database. CBP  inspectors at ports of entry use IBIS to check whether foreign nationals  are inadmissible and should be denied entry into the United States. When a  person comes to the United States by air or by sea, CBP inspectors are  required to check that person\u2019s name in IBIS before he or she is allowed to  enter the country. After posting the lookout, the Consular Affairs officer  writes an internal case file memo summarizing the derogatory information,  creates a draft revocation certificate and cable for management review,  and forwards these materials to the appropriate officials within State.  Once these officials clear and sign the revocation certificate, Consular  Affairs sends a cable instructing the overseas post that issued the visa to  contact the visa holder, physically cancel the visa, and report all actions  taken to State. State also notifies other federal agencies of visa  revocations. Specifically, Consular Affairs\u2019 Visa Office faxes a copy of the  revocation certificate to CBP. In addition, the Visa Office sends a copy of  the cable by email that includes the wording of the revocation certificate  to various other agencies, including CBP and ICE.\nUpon receiving the notification from State, CBP determines whether the  individual may have already legally entered the United States by  electronically searching immigration records. If CBP determines that the  individual may be in the country, it notifies ICE. ICE officials also attempt  to determine whether the individual may be in the country. Once ICE  determines that an individual with a visa revoked on national security  grounds may be in the United States, ICE employees query law  enforcement and open source information to attempt to locate the  individual. If they determine that the individual is in the country, they  conduct an additional investigation in law enforcement and intelligence  databases and forward the results of this preliminary research to the  appropriate Special Agent in Charge (field) office or offices. The ICE  Special Agent in Charge office then coordinates with the FBI and conducts  an investigation to locate the individual and determine if the alien is in  compliance with all terms of his or her admission.\n\n\t\tFBI\u2019s Role in Border Security\n\nWhile FBI investigators do not play a formal role in the visa revocation  process, they play a key role in the U.S. government\u2019s overall border  security efforts, including investigating suspected terrorists in the United  States. The FBI supports border security by (1) working to deny entry into  the United States of aliens associated with, suspected of being engaged in,  or supporting terrorist activity and (2) aiding in supplying information to  locate, detain, prosecute, or deport any such aliens already present in the  United States. According to FBI officials, the TIPOFF database is central  to the FBI\u2019s efforts to track suspected terrorists in the United States. When  names of suspected terrorists are added to TIPOFF, this information may  originate from the FBI. When names are added to TIPOFF, the FBI may  forward investigative leads to the Foreign Terrorist Tracking Task Force,  which in turn may relay information to one or more of the 84 Joint  Terrorist Tracking Task Forces throughout the country for investigation.\n\n\tInitial Actions Taken to Address Weaknesses Were Inadequate\n\nFollowing our June 2003 report, State and DHS took some actions to  address weaknesses we identified in the visa revocation process, but these  actions did not adequately address all of the weaknesses we found. State  developed written procedures providing detailed instructions for  personnel to follow when revoking visas. DHS did not develop an  agencywide policy for visa revocations, but DHS\u2019s Customs and Border  Protection developed a workflow outline related to its role in the visa  revocation process. Our review of visas revoked from October through  December 2003 showed that despite State\u2019s and CBP\u2019s initial actions,  weaknesses persisted in the visa revocation process.\n\n\t\tState Developed Initial Procedures in 2003, but DHS Did Not\n\nAfter our June 2003 report, State developed written standard operating  procedures for processing visa revocations. These procedures were issued  on July 7, 2003, and included written instructions for consular officers to  follow once they decide to revoke an individual\u2019s visa. Specifically, they  included directions for posting lookouts, preparing and finalizing  revocation certificates, and notifying appropriate State personnel of the  action taken. Additionally, these procedures provided instructions for  notifying both the overseas post that issued the visa and Homeland  Security officials. State published a less detailed version of these  procedures in its Foreign Affairs Manual on July 17, 2003, for use by  consular officers.\nDHS did not develop an intra-agency policy regarding responsibilities for  handling visa revocation cases. However, following our June 2003 report,  DHS\u2019s Customs and Border Protection developed a workflow outline  showing the steps for determining whether individuals with revoked visas  may be in the United States and, if so, notifying ICE immigration officials  to take specific actions. These procedures were designed to ensure that  appropriate lookouts were recorded and that, in cases in which the visa  holder had entered the United States prior to the visa revocation, all  research information from CBP was immediately relayed to DHS\u2019s  Immigration and Customs Enforcement for investigation.\n\n\t\tReview of Revocation Process Identified Several Weaknesses\n\nOur review of visas revoked based on terrorism concerns from October  through December 2003 indicated that, despite State\u2019s and CBP\u2019s initial  efforts, weaknesses remained in the visa revocation process. We found  that backlogs in cases to be screened, delays in forwarding the appropriate  intelligence to State, and delays in taking action to revoke visas all created  weaknesses in the visa revocation process. (See fig. 2 for the points of  delay we observed in our review of visas revoked over a 3-month period.)\nWe also found instances of delays in State\u2019s notification to DHS. In  addition, conflicting records of how many individuals\u2019 visas were revoked  for terrorism concerns during our reporting period and which of these  people may be in the United States suggest a risk that agencies may have  been prevented from taking appropriate action in some cases. Further, we  found that ICE was not consistently or promptly notified after CBP  determined that aliens with revoked visas might be in the United States.  We also found that ICE officials were generally unaware of the basis for  individual revocations. Additionally, we found that ICE waited more than 2  months to request that field offices investigate individuals with visas  revoked on terrorism grounds who may be in the country. Finally,  outstanding legal and policy issues continue to exist regarding the removal  of individuals based solely on their visa revocation.\nOur review of all visas revoked on terrorism grounds from October  through December 2003 showed that delays occurred in identifying  individuals whose visas should be revoked. According to a State official, in  August and September 2003, there was a backlog of approximately 5,000  names of suspected terrorists in TIPOFF that had not been screened to  identify any visa holders. Therefore, there was a delay between identifying  individuals who may be suspected terrorists and determining whether they  had a visa. This official explained that the backlog developed in part  because of a quadrupling in the amount of counterterrorism intelligence  gathered after September 11 without a commensurate increase in staff  allocated to screen this intelligence information. She added that the  backlog was cleared in December 2003 following the temporary  assignment of additional staff from Consular Affairs.\nOur review of a sample of 35 visas revoked based on terrorism concerns  showed that delays occurred in transmitting recommendations to  Consular Affairs to revoke visas. To eliminate the backlog of names to be  checked, Consular Affairs temporarily assigned two full-time employees to  screen these intelligence data from TIPOFF. TSC officials told us that  terrorism intelligence should be screened to identify visa holders as  quickly as possible. A TSC contractor who typically performs this duty  said that TSC normally sends an average of no more than six  recommendations for visa revocation per day. However, according to a  TSC official, during the time that the Consular Affairs staff were  temporarily assigned to screen intelligence, these staff waited until they  had collected large quantities of recommendations and sent them to  Consular Affairs in large batches. As a result, about 260 visa revocations  on terrorism grounds during the 3-month period we examined were  processed on 2 days, November 25 and December 1. This delay increased  the risk that some of these individuals could have entered the United  States before State was able to post the appropriate lookouts or revoke  their visas.\n\n\t\t\tState\u2019s Lookouts Were Not Always Timely\n\nBased on our review of a sample of visa revocations, the Department of  State did not always post lookouts in a timely manner. According to State  and DHS officials, posting this lookout is a key step in the border security  process because it is the primary mechanism for notifying border  inspectors that individuals\u2019 visas have been revoked and should not be  admitted to the United States. State\u2019s standard operating procedures  issued in July 2003 directed Consular Affairs officials to post a lookout for  an individual before the revocation is finalized. Although State posted  lookouts in all 35 visa revocations we examined in detail, we found that in  six instances, Consular Affairs did not do so until after the revocation was  finalized. In one case it took 8 days after the revocation certificate was  signed for Consular Affairs to post the lookout.\n\n\t\t\tDelays Occurred in Revoking Visas\n\nOur review of 35 visas revoked based on terrorism concerns also showed  that delays occurred in Consular Affairs\u2019 decisions to revoke visas after  receiving a recommendation to do so. State officials told us that it should  not take more than a week for them to complete the visa revocation  process after receiving a recommendation to revoke. We attempted to  determine how long it took Consular Affairs to revoke visas after receiving  a recommendation to do so for our sample of 35. However, this  information only existed for 6 of the 35 cases. In 3 of these cases, Consular  Affairs revoked the individuals\u2019 visas within 10 days of receiving the  recommendation. However, in the other 3 cases, Consular Affairs took  much longer to act on the recommendation. For example, in one instance,  a Consular Affairs official told us that State officials deliberated for more  than 6 months before deciding to revoke the individual\u2019s visa. According to  this official, Consular Affairs was deliberating whether the individual\u2019s  connection to terrorism was strong enough to warrant revoking his or her  visa. In another instance, more than 17 months elapsed between the  recommendation to revoke and the actual revocation.\n\n\t\t\tState\u2019s Notifications to DHS Were Not Always Timely\n\nWe also observed delays in the Department of State notification to DHS of  visa revocations. It is particularly important that these notifications are  timely when the alien whose visa is revoked may already be in the United  States so that DHS can locate and investigate him or her. Of the 35 cases  we reviewed in detail, CBP told us it received notification from State the  same day a revocation was finalized in 9 cases; within 1 to 6 days in 23  cases; and in 7 days or more in three cases.\n\n\t\t\tAgencies Reported Conflicting Information on Visa Revocations\n\nState, CBP, and ICE each maintain separate records on visa revocations.  We found that for the October through December 2003 time period, each  agency reported different numbers of revocations based on terrorism  concerns. As shown in figure 3, State listed 338; ICE, 347; and CBP, 336.  We found that only 320 names were on all three lists and that some lists  contained names that were not on either of the other lists.\nInstances where a name did not appear on all three lists show a potential  breakdown in the visa revocation process. We could not determine why all  of the names were not on all lists. However, we determined that some of  the names were not included because the agencies disagreed over whether  some of these individuals\u2019 visas were revoked on terrorism grounds or  when their visas were revoked, and others were not included because we  were provided incomplete information. Regardless of the reason, this  discrepancy is a cause for concern because CBP and ICE may not have  taken timely action to determine if these individuals were in the country  and, if so, to locate and investigate them.\nIn our June 2003 report, we noted that State\u2019s Visa Office neither kept a  central log of visas it revoked on the basis of terrorism concerns, nor did it  monitor whether notifications were sent to other agencies. In commenting  on that report, State said the Visa Office had changed its practices to keep  a log of revocation cases and maintain all signed certificates in a central  file. However, in conducting this review, Visa Office officials told us that  State did not maintain a formal list of all visas revoked. We also learned  that State, CBP, and ICE did not have a system in place to regularly  reconcile their separate records of visa revocations to ensure that each  agency has consistent information.\n\n\t\t\tCBP and ICE Disagreed on Which Individuals May Have Been in the Country\n\nOur review of a sample of 35 visa revocations on terrorism grounds shows  that CBP and ICE records also conflicted regarding whether certain  individuals may have been in the country. In 3 of the 35 cases, CBP and  ICE disagreed about whether an individual may have been in the country  at the time of visa revocation and whether they might still be in the  country. In two of the instances, CBP did not believe the individual was in  the country and, therefore, did not refer the cases to ICE for investigation.  However, ICE special agents determined that both of these individuals  were and still are in the country\u2014one is awaiting adjudication of a  political asylum claim, and the other has a pending application to become  a lawful permanent resident of the United States.\nIn another instance, CBP believed an individual was in the country when  his visa was revoked and subsequently notified ICE of the need to locate  and investigate him. However, because ICE did not use CBP\u2019s notification,  it performed its own search of immigration records based on State\u2019s  notification and concluded that the individual was not in the country.  Therefore, it did not investigate him. According to CBP data, this  individual has been in the country for more than a year.\nThese disagreements are due in part to the lack of clearly defined  responsibilities for each of the DHS components. Because of DHS\u2019s lack of  an agencywide written policy regarding visa revocations, its component  units\u2019 procedures are sometimes duplicative. For example, CBP\u2019s written  procedures require its personnel to determine if individuals with revoked  visas may be in the United States and notify ICE of any such individuals.  According to ICE officials, they conduct their own record checks to  determine if individuals with revoked visas are in the country and rely  primarily on notifications from State to identify individuals on whom they  need to conduct records checks.\nAn ICE official told us that CBP and ICE have different responsibilities  regarding visa revocations and, as a result, may have different levels of  sensitivity to information regarding whether individuals with revoked  visas may be in the country. CBP\u2019s primary responsibility is to post  lookouts to prevent individuals from entering the country. ICE\u2019s primary  responsibility is to prevent any national security threats by enforcing  immigration laws once individuals have already entered the country.  Therefore, ICE officials told us that they initiate investigations of  individuals out of an abundance of caution, even if CBP may not believe  the individual may be in the country. They added that notifications from  CBP merely supplement ICE\u2019s efforts to determine if individuals may be in  the country.\n\n\t\t\tICE May Not Have Been Informed of Aliens with Revoked Visas Who May Be in the Country\n\nOnce they receive notification of a visa revocation from State, DHS  personnel at CBP should notify ICE if they determine that the individual  whose visa was revoked may be in the country. CBP\u2019s workflow outline  states that CBP verifies that any lead information on individuals whose  visas are revoked and may be in the United States is immediately provided  to ICE for investigation. A CBP official confirmed that, because these  cases are highly urgent, they should be handled immediately. However,  CBP could not document that it had notified ICE promptly, or in several  cases, that it notified ICE at all. According to CBP data on the 35 cases in  our sample, 10 aliens may have been in the United States at the time of  their revocation. In 3 of these cases, CBP records indicate that ICE was  never notified that the alien might be in the country. In the other 7 cases,  CBP notified ICE but could not document that the notification occurred  until at least 3 months after the revocation.\n\n\t\t\tICE Officials Are Generally Unaware of Basis for Individual Revocations\n\nWhile ICE could readily identify which visa revocation cases were based  on terrorism concerns, agency officials stated that they often received no  derogatory information showing that individuals whose visas State had  revoked on terrorism concerns might pose a national security threat.  Because ICE personnel are responsible for fully investigating every case in  which the individual may be in the country, they expend resources  conducting investigations on individuals who they believe may pose little  or no threat to national security. According to ICE officials, the growing  number of visa revocation cases based on terrorism concerns places a  significant strain on their investigative resources, and ICE was forced to  pull agents off active investigations of known national security threats to  investigate visa revocation cases.\nAs discussed earlier, State officials told us that the vast majority of visas  revoked for terrorism concerns are based on derogatory information  contained in TIPOFF. According to TSC, of the 35 cases we examined in  detail, 32 of the individuals whose visas were revoked appeared in  TIPOFF. However, in May 2004, ICE officials told us that they were not  aware that most of State\u2019s visa revocations on terrorism grounds are based  on information in TIPOFF. In June 2004, they informed us that their  records check located only 6 of the 35 individuals from our sample in  TIPOFF. Also in June, State officials told us they recently began providing  DHS with the TIPOFF record number for each individual whose  revocation was based on derogatory information in TIPOFF.\n\n\t\t\tICE Initiated Field Investigations More Than 2 Months after Receiving Notification of Visa Revocation\n\nOur review of 35 visa revocations on terrorism grounds from October  through December 2003 shows that ICE forwarded requests for field  offices to initiate investigations of individuals who may be in the United  States more than 2 months after receiving notification of the visa  revocation. ICE officials explained that requests sent to field offices  specify a date by which the field offices should complete their  investigations. These officials added that, in instances when the individual  is in TIPOFF and in the country, they take immediate action to locate and  investigate him or her. After receiving notification from State, ICE  determined that field offices should investigate 8 of the 35 cases we  examined in detail. In all 8 of these cases, ICE waited more than 2 months  to initiate field investigations. In 2 cases, ICE received notification from  the Department of State of the visa revocation in mid-October 2003 but did  not send a request to field offices to investigate these individuals until the  end of February 2004. In the other 6 cases, ICE received notification from  the Department of State of the visa revocation in early December but again  did not send a request to field offices to investigate these individuals until  the end of February.\nICE officials told us that it might have taken longer than it usually takes to  initiate these investigations because of an increase in their workload  resulting from the raising of the nationwide terror threat level to \u201ccode  orange\u201d (high) during the period of our review. On December 21, 2003,  DHS raised the terror threat level from \u201ccode yellow\u201d (elevated) to \u201ccode  orange\u201d for 19 days. In June, ICE officials told us they were considering  revising their policies to ensure that all future investigations are initiated  promptly.\n\n\t\t\tDHS Investigated Individuals with Visas Revoked on Terrorism Grounds\n\nSeparate from our sample of 35 visa revocations, we reviewed the more  than 300 visa revocations based on terrorism concerns from October  through December 2003. According to ICE records, ICE determined that  64 of these individuals needed to be investigated because they might have  been in the United States at the time of revocation. ICE indicated it had  initiated investigations on all 64 of these individuals and has concluded a  majority of these investigations. Data provided by ICE show that these  investigations resulted in confirming departure of some aliens, clearing  others, and arresting 3 on administrative immigration charges. On June 8,  2004, ICE officials told us that they have no specific derogatory  information that would indicate that any of the individuals remaining in  the United States represent a threat to national security. We also noted  several cases where the visa revocation process prevented individuals  with visas revoked based on terrorism concerns from entering the United  States or helped remove them from the United States.\n\n\t\t\tExisting Law Does Not Expressly Provide for the Removal of Aliens Based Solely on Visa Revocations\n\nRevocation of a visa is not explicitly a stated grounds for removal under  the Immigration and Nationality Act. State\u2019s visa revocation certificate  states that the revocation shall become effective immediately on the date  the certificate is signed unless the alien is already in the United States, in  which case the revocation will become effective immediately upon the  alien\u2019s departure from the United States. Therefore, if ICE special agents  locate an alien in the United States for whom the Department of State has  issued a revocation certificate that states that the alien\u2019s visa is revoked  effective upon his or her departure, ICE would be unable to place the alien  in removal proceedings based solely on a visa revocation that had not yet  taken place. In light of the Department of State\u2019s current revocation  certificate, the issue whether, under the current statute and regulations,  DHS would have the authority to initiate removal proceedings on the basis  solely of a visa revocation has not been litigated and remains unresolved  legally. According to DHS officials, if State changed the wording of the  certificate to make the revocation effective retroactively to the date of  issuance of the visa, the government would no longer be effectively barred  from litigating the issue. However, in June 2004 State and DHS officials  told us that they had reached an informal understanding that should the  wording of the revocation certificate be changed, it would not be changed  in all instances, but only on a case by case basis. In commenting on a draft  of this report, DHS stated that on a case by case basis DHS may ask that  State change its revocation certificate related to an admitted alien to make  the revocation effective retroactively to the date of issuance of the visa,  and State will consider such a request in consultation with DHS and the  Department of Justice.\n\n\tRecent Actions Taken to Address Identified Weaknesses in the Visa Revocation Process\n\nSince we initiated our inquiry in January 2004, State and DHS have taken  additional actions to address identified weaknesses in the process. These  included revisions to visa revocation procedures, reviewing past  revocations, and taking steps to address legal and policy issues. In  addition, in mid-April, TSC identified visa revocations as a potential  vulnerability that could compromise homeland security and developed an  informal process for coordinating actions and sharing information relating  to visa revocations. However, we identified some weaknesses that still  need to be addressed.\n\n\t\tState Revised Its Procedures and Formalized Its System for Tracking Cases\n\nIn April and May 2004, State took several actions to improve its  performance in the visa revocation process, including revising its  procedures and formalizing its tracking of visa revocations. In the course  of responding to our inquiries, State\u2019s Visa Office discovered that its  standard operating procedures had not always been followed correctly. In  response, the Assistant Secretary of State for Consular Affairs informed us  on April 27, 2004, that in light of the importance of visa revocation cases,  the procedures were revised to provide more explicit details for each step  in the process. For example, the procedures were revised to highlight the  importance of posting a lookout code into CLASS before the revocation  certificate is signed. Additionally, the Visa Office now requires its  personnel performing visa revocations to certify that they have completed  all steps in the process and to provide the date on which each step was  completed. At the end of the process, a designated supervisor must now  review the revocation file and certify that the standard operating  procedures were completed correctly. State revised these procedures  again in late May 2004 to further clarify which federal agencies should  receive notification of the revocation. Finally, the Assistant Secretary for  Consular Affairs told us that the Visa Office planned to formalize its  previously informal system for tracking visa revocations to make it a  definitive reference point for information about all visa revocations.\n\n\t\tCBP Reviewed Past Revocations to Provide Additional Information to ICE\n\nOfficials from CBP took two steps following the initiation of our review to  ensure that appropriate action was taken on prior visa revocations. On  March 25, 2004, CBP officials sent notifications to ICE regarding  individuals with visas revoked from October through December 2003 who  may be in the country. CBP officials told us that they sent these  notifications to ICE because, in responding to our inquiry, they determined  that they could not document previous notifications to ICE of these  individuals.\nIn May 2004, a CBP official informed us that CBP was performing a review  of all visa revocations in its lookout database to ensure that all appropriate  notifications had been sent to ICE. This review identified 656 individuals  with revoked visas who may be in the country. CBP provided this  information to ICE. We reviewed these data and determined that 34 of  these individuals\u2019 visas were revoked based on terrorism concerns from  October through December 2003.\n\n\t\tICE Assigned Staff to CBP and Developed Written Standard Operating Procedures\n\nIn January 2004, ICE assigned a special agent to CBP in order to assist  with information exchange and coordination of visa revocation issues.  According to DHS, if CBP determines that an individual whose visa was  revoked is in the country, ICE is notified immediately. Also, on March 1,  2004, ICE issued written standard operating procedures for all visa  revocation investigations. ICE officials acknowledged that prior to March  2004, ICE did not have a policy that specifically addressed visa  revocations. However, ICE explained that it had procedures for handling  all investigative leads received, including visa revocations. ICE\u2019s March  2004 procedures outline the steps that ICE officials should take for cases  where an individual has entered the United States and subsequently has a  visa revoked. These procedures begin with the receipt of a visa revocation  cable from State and include steps for determining if individuals are in the  country, conducting records searches to determine where the individual  may be, and forwarding necessary information to field offices for further  investigation.\n\n\t\tState and DHS Took Steps to Address Legal and Policy Issues\n\nIn February 2004, officials from DHS, which has overall responsibility for  visa policy, told us they were considering a regulation relating to visa  revocations that could allow the removal of individuals from the United  States because their visas have been revoked by State. In June 2004, DHS  officials told us that they were still considering this regulation and were  coordinating with State and the Department of Justice. Additionally, DHS  was working with Justice to address questions regarding DHS\u2019s authority  to issue such a regulation. State officials told us that making changes  regarding removal of persons with revoked visas would require both State  and DHS to make legal and policy decisions and establish a formal written  agreement regarding procedures.\n\n\t\tTSC\u2019s Efforts to Improve the Visa Revocation Process\n\nSince its formation in December 2003, TSC has taken actions to clarify its  role, increase its capacity to handle visa revocation cases, and analyze the  visa revocation process as an antiterrorism tool. Specifically, in March  2004, TSC developed written standard operating procedures outlining the  process for screening intelligence information to identify visa holders who  may be terrorists and for recommending that Consular Affairs revoke  these individuals\u2019 visas. TSC also recently began training additional staff to  screen terrorism intelligence for matches with visa holders. Previously, the  center had one full-time staff member dedicated to performing this  function.\nTSC officials told us that, in mid-April 2004, TSC identified the visa  revocation process as a potential vulnerability to homeland security. As a  result, it developed a process for TSC to coordinate the sharing of  information on visa revocation cases. This process outlines  responsibilities for representatives from State, CBP, ICE, and the FBI who  are assigned to TSC. According to a TSC official, this process is designed  to coordinate the efforts of these representatives, without relying on  formal notifications transmitted among the agencies. When new names are  added to the TIPOFF database, all the agency representatives receive this  information at the same time. According to TSC\u2019s new process, State  personnel assigned to TSC determine if the person has a valid visa; CBP  personnel determine if the individual may be in the country; and, if the  individual is in the country, ICE and FBI personnel determine if they have  open investigations of the individual. Because this process was developed  after the October to December 2003 time period, we did not assess its  effectiveness.\nIn April 2004, TSC also initiated a review of pending visa revocation cases  based on terrorism concerns to determine whether any of the individuals  in question were in the United States and whether DHS and FBI were  aware of their presence and had open investigations on them. A senior FBI  official assigned to TSC told us that as of May 27, 2004, this review was not  complete, but that, in some instances, law enforcement or immigration  officials needed to open investigations on some of these individuals.\n\n\t\tAdditional Actions Are Needed to Improve the Visa Revocation Process\n\nDespite the steps taken by State and DHS, additional actions are needed to  improve the visa revocation process. There is no governmentwide policy  outlining roles and responsibilities for the visa revocation process, and  State and DHS have not completed their discussions on legal and policy  issues related to removing individuals with revoked visas from the United  States. Although CBP and ICE have written internal procedures related to  their respective roles and responsibilities in the visa revocation process,  DHS has still not developed an agencywide policy governing the process.  As a result, CBP and ICE take responsibility for performing some of the  same tasks. While CBP\u2019s workflow outline states that CBP is responsible  for determining if individuals with revoked visas are in the United States  and referring cases to ICE, ICE\u2019s standard operating procedures indicate  that ICE staff are also responsible for performing this function. In some  cases, State, CBP, and ICE are not familiar with what the different  agencies\u2019 policies and procedures expect of them. Because agency officials  do not always recognize what other agencies\u2019 written policies expect of  them, important information may not be passed from one agency to the  next, and efforts may be duplicated. Further, since the agencies do not  have a system in place for routinely reconciling their visa revocation  records, there is a heightened chance that individuals with visas revoked  for terrorism concerns and who are in the country will not be investigated.\nState\u2019s and DHS\u2019s written procedures also lack specific time frames for  completing individual steps in the process. For instance, State\u2019s  procedures dated May 20, 2004 lack guidance on how quickly Consular  Affairs officials should act on recommendations from TSC to revoke  individuals\u2019 visas. Further, they lack guidance on how quickly Consular  Affairs officials should notify the overseas post and other federal agencies  once the revocation certificate is signed. In addition, ICE\u2019s written  procedures do not specify a time frame for referring cases to Special Agent  in Charge offices. This general lack of time frames is significant, given the  extent of delays we observed in the visa revocation process and the  potential threat posed by the individuals whose visas have been revoked.\nState\u2019s and DHS\u2019s discussions of legal and policy issues regarding the visa  revocation process have not been completed. DHS officials told us that the  agencies continue to discuss possible mechanisms for addressing these  issues, including possibly changing the wording of State\u2019s revocation  certificate or studying the feasibility of drafting a regulation to address  these issues. According to State and DHS, the complexity of these issues  have required an extraordinary amount of review and coordination with  various interested government agencies. As of June 2004, neither State nor  DHS could provide a time line for addressing these legal and policy issues.\n\n\tConclusions\n\nOur testing of the visa revocation process from October through  December 2003 identified several gaps in the process.  Since then, DHS  and State have taken several actions to improve the process.  DHS and  State believe that these actions will avoid the delays that were  experienced in the past. TSC\u2019s recent initiative to coordinate the sharing of  information on potential terrorists should also improve the process.   Nevertheless, some additional actions are needed to further improve the  process. A governmentwide commitment is necessary to address the  weaknesses in the implementation of the visa revocation process so that it  can be a more effective antiterrorism tool.\n\n\tRecommendations for Executive Action\n\nTo strengthen and improve the visa revocation process as an antiterrorism  tool, we recommend that the Secretary of Homeland Security work jointly  with the Secretary of State and other appropriate agencies to take the  following two actions:    Develop a written governmentwide policy that clearly defines the roles  and responsibilities of the agencies involved in the visa revocation  process, including TSC. This policy should include directions for sharing  information and tracking visa revocation cases throughout the interagency  visa revocation process. It should incorporate performance standards  (e.g., time frames for completing each step in the process) and periodic  interagency assessments to determine whether information is being shared  among the agencies involved and appropriate follow-up action is being  taken and to reconcile data differences if they occur; and   Address outstanding legal and policy issues regarding the status of aliens  with visas revoked on national security grounds who are in the United  States at the time of the revocation. If these issues cannot be addressed,  the Executive Branch should, by October 1, 2004, provide Congress with a  list of specific actions (including any potential legislative changes) that  could help resolve them.\n\n\tAgency Comments and Our Evaluation\n\nWe provided a draft of this report to the Departments of Homeland  Security, State, and Justice for their comments.\nThe Department of Homeland Security said it generally concurred with the  report and its recommendations. DHS believes that our identification of  areas where improvements are needed will contribute to ongoing efforts  to strengthen the visa revocation process. DHS emphasized that persons  whose visas have been revoked for terrorism concerns may not be  terrorists and that revoking a visa is a precautionary measure to preclude  an alien from gaining admission to the United States until more  information is obtained to decide if the person should be admitted to the  United States.\nThe Department of State indicated that it believes that its handling of the  revocation process overall has been excellent and has improved over time.  State indicated it would consult with DHS regarding implementation of  our recommendations. State also provided additional information on the  visa revocation process and the procedures currently in effect.\nDHS and State also provided technical comments, which we have  incorporated where appropriate.\nWe are sending copies of this report to other interested Members of  Congress. We are also sending copies to the Secretary of State, Secretary  of Homeland Security, and the Attorney General. We also will make copies  available to others upon request. In addition, the report will be available at  no charge on the GAO Web site at http:\/\/www.gao.gov. If you or your staff  have any questions about this report, please contact me at (202) 512-4128.  Key contributors to this report were John Brummet, Jason Bair,   Elizabeth Singer, Mary Moutsos, Janey Cohen, and Etana Finkler.\n\nAppendix I: Scope and Methodology\n\nThe scope of our work covered the interagency process for visas revoked  by the Department of State (State) headquarters on the basis of terrorism  concerns between October 1 and December 31, 2003. To assess the  policies and procedures governing the visa revocation process, we  obtained copies of written procedures from the Department of State and  the Department of Homeland Security\u2019s (DHS) U.S. Customs and Border  Protection (CBP) and U.S. Immigration and Customs Enforcement (ICE).  In addition, we interviewed officials from State, DHS, the Terrorist  Screening Center (TSC), and the Federal Bureau of Investigation (FBI).\nTo assess the process for revoking visas on terrorism grounds, we  examined data and records provided by State\u2019s Visa Office on visa  revocations from October through December 2003. The Visa Office  provided us an initial list of such revocations in February 2004 and an  amended list in April 2004. We also obtained information from CBP and  ICE on the number of visas revoked on terrorism grounds during this time  period and compared these data with that provided by State\u2019s Visa Office.  We found that the total number of visa revocations differed among these  three data sources. We identified discrepancies and discussed these with  agency officials. In addition, we obtained copies of the official revocation  certificates for individuals whose visas State revoked during that time. We  determined that State made at least 338 visa revocations during this time  period, but we also determined that the data on visa revocations were not  sufficiently reliable to provide an exact count of the number of  revocations. However, the data were sufficiently reliable for purposes of  this report.\nWe used the Visa Office\u2019s February 2004 list of 318 cases to draw a random  sample of 35 to review in detail. We cannot generalize from this sample to  the full universe of all cases because, after we had drawn our sample, the  Visa Office subsequently supplied us with an amended list of 338 cases.  For the individuals in our sample of 35, we obtained printouts from State\u2019s  Consular Consolidated Database, which provided us with the individuals\u2019  names, biographic data such as dates and places of birth, passport  numbers, and visa information such as issuing posts and types of visa. We  also obtained a copy of the cable sent by State headquarters to the post  that issued the visa that was revoked. This cable included a reference to  the specific section of the Immigration and Nationality Act that was used  as the basis for the revocation as well as a list of other agencies the cable  was sent to. The Visa Office also provided documentation of the lookouts  it posted in the Consular Lookout and Support System (CLASS).\nWe met with officials from TSC and State\u2019s Visa Office to determine the  steps taken prior to finalizing visa revocations. TSC officials provided  copies of their written policies and procedures for dealing with visa  revocations and described the process it follows in such cases. TSC  officials also informed us whether individuals in our sample of 35 visa  revocations are in the TIPOFF database and, if so, when a  recommendation to revoke these visas was sent to State. To calculate the  length of time between the recommendation to revoke and the actual  revocation, we compared the information provided by TSC with the dates  on the revocation certificates provided by State.\nTo determine when State posted lookouts and notified other agencies of  visa revocations, we obtained information from the Visa Office. This  included printouts from the CLASS system showing when a lookout was  posted, who posted the lookout, and what lookout code was used. In  addition, we examined the revocation cables sent to other agencies. We  also obtained information from CBP and ICE regarding when they  received notification from State. We determined that the CLASS system  was sufficiently reliable for the purposes of showing when lookouts were  posted.\nTo determine if and when ICE officials were informed by CBP of  individuals with revoked visas who might be in the country, we obtained  documents from and spoke with officials from CBP. These officials  provided an electronic version of CBP\u2019s Visa Revocation Case Tracking  Spreadsheet for the period we examined. This spreadsheet contained  information on all visa revocations during the period, not just those based  on terrorism concerns. The spreadsheet included the names, dates the  notifications of the revocations were received, dates of the most recent  entry and exit from the United States, and the date on which CBP  informed ICE that the individual might be in the country.\nWe also compared State, CBP, and ICE records regarding the number and  names of individuals with visas revoked based on terrorism concerns from  October through December 2003. We obtained lists of all such cases during  the period from State and ICE. We then compared these lists to one  another and to CBP\u2019s Visa Revocation Case Tracking Spreadsheet.\nTo determine which individuals with revoked visas might be in the  country, we examined CBP\u2019s entry and exit data in its Visa Revocation  Case Tracking Spreadsheet. These data are based on information from the  Nonimmigrant Information System, which does not have complete entry  and exit data (e.g., it does not include departure information if aliens fail  to turn in the bottom portion of their I-94 form when they leave the  country). As such, we determined that these data are not sufficiently  reliable for the purpose of determining which individuals with visas  revoked on terrorism grounds are in the country. In addition, because ICE  officials told us they do not rely on CBP to determine which individuals  might be in the country, we obtained additional entry and exit data from  ICE for our sample of 35 cases. To assess the reliability of the ICE data, we  interviewed officials who were knowledgeable about the data and  compared it with CBP\u2019s data. Where we found discrepancies, we discussed  these cases with officials from both CBP and ICE. We determined that the  ICE data were sufficiently reliable for the purposes of providing the  ongoing results of investigations of individuals that had been in the United  States with revoked visas; however, some investigations were still  outstanding and, in some cases, ICE officials were not completely certain  whether the individuals had actually departed the United States.\nWe obtained information on actions taken to locate and investigate  individuals in the United States with visas revoked based on terrorism  concerns. ICE officials provided us with summary data on all visa  revocations based on terrorism concerns during the period. In addition,  they provided detailed information on their efforts to locate and  investigate each of the 35 individuals in our sample. We also met with  officials from the FBI and the Foreign Terrorist Tracking Task Force to  determine their activities regarding investigating individuals with visas  revoked based on terrorism concerns.\nTo determine the steps taken to improve the visa revocation process since  our June 2003 report, we met with State, DHS, FBI, and TSC officials.  From these officials we obtained copies of policies and procedures  developed since our previous report. We also obtained information on  changes in the visa revocation process since our prior report. In addition,  we met with State and DHS officials regarding the steps taken to resolve  outstanding legal issues regarding visa revocations. These officials  described the discussions they have had regarding changing the wording  of State\u2019s certificate of revocation and DHS\u2019s regulations. DHS declined to  provide us with a copy of a draft regulation they had prepared, noting that  it was the subject of ongoing intra- and interagency discussions.\nWe were briefed by FBI officials regarding their efforts to investigate  suspected terrorists in the TIPOFF database. However, we did not review  these efforts.\nWe conducted our work from January through June 2004 in accordance  with generally accepted government auditing standards.\n\nAppendix II: Comments from the Department of Homeland Security\n\nThe following are GAO\u2019s comments on the Department of Homeland  Security\u2019s letter dated June 17, 2004.\n\n\tGAO Comments\n\n1.  We have revised the report to reflect the fact that, while ICE did not  have procedures specific to visa revocations prior to March 2004, it  had procedures that applied more generally to all investigative leads.  2.  Our report did not indicate that any of the individuals included in our  review were necessarily suspected or actual terrorists. The  Department of State revokes a person\u2019s visa as a precautionary  measure after it learns that person might be a suspected terrorist. The  purpose of this revocation is to obtain additional information from the  person to determine if they are the same person that is suspected to be  a terrorist by requiring them to return to the consulate that issued their  visa. In commenting on our draft report, State explained that all of  these revocations were based on information suggesting possible  terrorist activities or links.  3.  Based on our analysis, we reported that ICE and CBP records  conflicted regarding whether specific individuals whose visas were  revoked on terrorism grounds were or may still be in the country. With  regard to one of these individuals, ICE concluded that the individual  was not in the country and therefore, it did not investigate him.  According to CBP data, this individual has been in the country for  more than a year. As a result of such discrepancies between agency  records, we are recommending that State and DHS conduct periodic  interagency assessments to determine whether information is being  shared among the agencies involved in the visa revocation process and  appropriate follow-up action is being taken and to reconcile data  differences if they occur.  4.  We acknowledge that ICE requests sent to field offices specify a date  by which they should complete their investigations. However, our  statement refers to a lack of time frames for sending requests to field  offices, not to a lack of time frames for those field offices to complete  their investigations.\n\nAppendix III: Comments from the Department of State\n\nThe following are GAO\u2019s comments on the Department of State\u2019s letter  dated June 23, 2004.\n\n\tGAO Comments\n\n1.  The posting of lookouts in CLASS and IBIS is an important tool for  preventing potential terrorists from entering the country. However,  posting these lookouts is not designed to track individuals who  entered the United States before the Department of State revokes their  visas. As such, the visa revocation process remains a useful tool for  promptly identifying, locating, and investigating individuals who may  be in the United States and may pose a threat to homeland security.  2.  We acknowledge that the Department of State should appropriately  deliberate over visa revocation cases. However, State officials told us  that their involvement in the entire visa revocation process should take  no longer than one week. Given this standard, State\u2019s delay in three  cases of more than 6 months appears excessive.  3.  This report includes a review of all 330+ visas revoked on terrorism  grounds from October through December 2003, including a detailed  review of a random sample of 35 cases. We chose to review this 3- month period to allow some time for the agencies involved to  implement our recommendations for improving the visa revocation  process contained in our June 2003 report. In addition to this report,  we previously reviewed all 240 visas revoked on terrorism grounds  from September 11, 2001 through December 31, 2002, and found  similar weaknesses. As noted earlier, posting CLASS and IBIS lookouts  is not intended to track individuals who entered the United States  before the Department of State revoked their visas. As such, the visa  revocation process remains a useful tool for promptly identifying,  locating, and investigating individuals who may be in the United States  and may pose a threat.  4.  In February 2004, we requested detailed information from State on 35  individuals whose visas State had revoked on terrorism grounds from  October through December 2003. In April, we received this  information. After reviewing the data, we discussed our preliminary  findings with the Managing Director of State\u2019s Office of Visa Services,  including delays in State\u2019s decisions to revoke three individuals\u2019 visas.   The same day, we provided State the names of these three individuals  and requested information on why these delays occurred. In May, a  State official provided an explanation of State\u2019s actions regarding these  individuals. However, we chose to exclude this information from our  report due to the sensitivity of the type of information involved.  5.  In February 2004, we requested detailed information (including when  lookout codes were entered) for a random sample of 35 visa  revocation cases. In April 2004, the Assistant Secretary of State for  Consular Affairs informed us that in researching and gathering this  information, State discovered that, in some cases, the officer  responsible for handling revocations did not enter the revocation  lookout code immediately into CLASS before the revocation certificate  was signed.  6.  Based on information State provided during the course of our review,  we note that State revises its standard operating procedures for visa  revocations as necessary. After reviewing our draft report, State  provided us with a revised copy of its standard operating procedures  dated June 17, 2004, which included more explicit time frames. We  believe this is a good step toward implementing our recommendation.  7.  In conducting this review, we requested a list of individuals whose  visas were revoked based on terrorism concerns from October through  December 2003 from State, CBP, and ICE. State asserts that the  conflicting records were probably due to different methodologies for  compiling various agencies\u2019 lists. We note that we observed multiple  instances where conflicting records could not be explained by  differing methodologies. For example, in some cases the agencies  disagreed over whether the individuals\u2019 visas were revoked based on  terrorism grounds and, in other cases, agencies did not initially provide  names that they later acknowledged should have been included in their  lists.\nGiven these conflicting records and the possible threat to homeland  security, we are recommending that State and DHS conduct periodic  interagency assessments to determine whether information is being  shared among the agencies involved in the visa revocation process and  appropriate follow-up action is being taken and to reconcile data  differences if they occur.  8.  We have updated our report to reflect the current status of State\u2019s and  DHS\u2019s discussions of legal and policy issues and have removed all  references to unresolved legal disagreements.  We have added  information reflecting a recent informal understanding reached by  State and DHS that, on a case by case basis, DHS may ask that State  revoke a visa retroactively.  However, we note that legal and policy  issues regarding the removal of individuals based solely on their visa  revocations continue to exist, and agency discussions on how to  address these issues have not been completed.    9.  During the course of our review, State\u2019s and DHS\u2019s discussions evolved  regarding legal and policy issues relating to removing individuals from  the United States based on visa revocations. Based on discussions with  State and DHS officials, we have removed any implied linkage between  revising the visa revocation certificate and a regulatory or statutory  amendment.","output":"Why GAO Did This Study\n\nThe National Strategy for Homeland Security calls for preventing foreign terrorists from entering our country and using all legal means to identify; halt; and where appropriate, prosecute or bring immigration or other civil charges against terrorists in the United States. GAO reported in June 2003 that the visa revocation process needed to be strengthened as an antiterrorism tool and recommended that the Department of Homeland Security (DHS), in conjunction with the Departments of State (State) and Justice, develop specific policies and procedures to ensure that appropriate agencies are notified of revocations based on terrorism grounds and take proper actions. GAO examined whether weaknesses in the visa revocation process identified in its June 2003 report were addressed.\n\nWhat GAO Found\n\nGAO's analysis shows that the Departments of State and Homeland Security took some actions in the summer of 2003 to address weaknesses in the visa revocation process identified in its June 2003 report. However, GAO's review of visas revoked from October to December 2003, including a detailed review of a random sample of 35 cases, showed that weaknesses remained in the implementation of the revocation process, especially in the timely transmission of information among federal agencies. For example, delays existed in matching names of suspected terrorists with names of visa holders and in forwarding necessary information to State. In at least 3 of the 35 cases, it took State 6 months or more to revoke visas after receiving a recommendation to do so. In 3 cases, State took a week or longer after deciding to revoke visas to post a lookout or notify DHS. Without these notifications, DHS may not know to investigate those individuals who may be in the country. In 10 cases, DHS either failed to notify or took several months to notify immigration investigators that individuals with revoked visas may be in the country. It then took over 2 months for immigration investigators to request field investigations of these individuals. After GAO initiated its inquiry for this report in January 2004, additional actions were taken to improve the process, including revising procedures and reassessing the process. DHS and State believe these actions will help avoid the delays experienced in the past. In April and May, State revised its procedures and formalized its tracking system for visa revocation cases. In March, DHS developed new written procedures and acted to ensure that immigration investigators are aware of all individuals with revoked visas who may be in the country. State and DHS also took some steps to address legal and policy issues related to visa revocations. In April, the Terrorist Screening Center (TSC), an interagency group organized under the FBI, identified the visa revocation process as a potential homeland security vulnerability and developed an informal process for TSC to handle visa revocation cases. However, weaknesses remain. For example, State's and DHS's procedures are not fully coordinated and lack performance standards, such as specific time frames, for completing each step of the process. Outstanding legal and policy issues continue to exist regarding the removal of individuals based solely on their visa revocation."}
{"id":"gao_GAO-12-473T","pid":"gao_GAO-12-473T_0","input":"\tBackground\n\nDOE is responsible for a diverse set of missions, including nuclear  security, energy research, and environmental cleanup. These missions  are managed by various organizations within DOE and largely carried out  by management and operating (M&O) contractors at DOE sites.  According to federal budget data, NNSA is one of the largest  organizations in DOE, overseeing nuclear weapons and nonproliferation- related missions at its sites. With a $10.5 billion budget in fiscal year  2011\u2014nearly 40 percent of DOE\u2019s total budget\u2014NNSA is responsible for  providing the United States with safe, secure, and reliable nuclear  weapons in the absence of underground nuclear testing and maintaining  core competencies in nuclear weapons science, technology, and  engineering.\nUnder DOE\u2019s long-standing model of having unique M&O contractors at  each site, management of its sites has historically been decentralized  and, thus, fragmented. Since the Manhattan Project produced the first  atomic bomb during World War II, NNSA, DOE, and predecessor  agencies have depended on the expertise of private firms, universities,  and others to carry out research and development work and efficiently  operate the facilities necessary for the nation\u2019s nuclear defense. DOE\u2019s  relationship with these entities has been formalized over the years  through its M&O contracts\u2014agreements that give DOE\u2019s contractors  unique responsibility to carry out major portions of DOE\u2019s missions and  apply their scientific, technical, and management expertise.\nCurrently, DOE spends 90 percent of its annual budget on M&O  contracts, making it the largest non-Department of Defense contracting  agency in the government. The contractors at DOE\u2019s NNSA sites have  operated under DOE\u2019s direction and oversight but largely independently  of one another. Various headquarters and field-based organizations  within DOE and NNSA develop policies and NNSA site offices, collocated  with NNSA\u2019s sites, conduct day-to-day oversight of the M&O contractors,  and evaluate the contractors\u2019 performance in carrying out the sites\u2019  missions.\n\n\tNNSA Does Not Have Reliable Enterprise- Wide Management Information on Program Budgets and Costs\n\nAs we have reported since 1999, NNSA has not had reliable enterprise- wide budget and cost data, which potentially increases risk to NNSA\u2019s  programs. Specifically:  In July 2003 and January 2007, we reported that NNSA lacked a  planning and budgeting process that adequately validated contractor- prepared cost estimates used in developing annual budget requests.  Establishing this process was required by the statute that created  NNSA\u2014Title 32 of the National Defense Authorization Act for Fiscal  Year 2000. In particular, NNSA had not established an independent  analysis unit to review program budget proposals, confirm cost  estimates, and analyze budget alternatives. At the request of the  Subcommittee on Energy and Water Development, Senate  Committee on Appropriations, we are currently reviewing NNSA\u2019s  planning and budgeting process, the extent to which NNSA has  established criteria for evaluating resource trade-offs, and challenges  NNSA has faced in validating its budget submissions. We expect to  issue a report on this work later this year.\nIn June 2010, we reported that NNSA could not identify the total costs  to operate and maintain essential weapons activities\u2019 facilities and  infrastructure. Furthermore, we found that contractor-reported costs  to execute the scope of work associated with operating and  maintaining these facilities and infrastructure likely significantly  exceeded the budget for this program that NNSA justified to  Congress.\nWe reported in February 2011 that NNSA lacked complete data on (1)  the condition and value of its existing infrastructure, (2) cost estimates  and completion dates for planned capital improvement projects, (3)  shared-use facilities within the nuclear security enterprise, and (4)  critical human capital skills in its M&O contractor workforce that are  needed to maintain the Stockpile Stewardship Program. As a result,  NNSA does not have a sound basis for making decisions on how to  most effectively manage its portfolio of projects and other programs  and will lack information that could help justify future budget requests  or target cost savings opportunities. uncertainty over future federal budgets.to compare or quantify total savings across sites because guidance  for estimating savings is unclear and the methods used to estimate  savings vary between sites.\nWe found that it was difficult  The administration plans to request $88 billion from Congress over the  next decade to modernize the nuclear security enterprise and ensure that  base scientific, technical, and engineering capabilities are sufficiently  supported and the nuclear deterrent can continue to be safe, secure, and  reliable. To adequately justify future presidential budget requests, NNSA  must accurately identify these base capabilities and determine their costs.  Without this information, NNSA risks being unable to identify return on its  investment or opportunities for cost savings or to make fully informed  decisions on trade-offs in a resource-constrained environment.\nNNSA, recognizing that its ability to make informed enterprise-wide  decisions is hampered by the lack of comprehensive data and analytical  tools, is considering the use of computer models\u2014quantitative tools that  couple data from each site with the functions of the enterprise\u2014to  integrate and analyze data to create an interconnected view of the  enterprise, which may help to address some of the critical shortcomings  we identified. In July 2009, NNSA tasked its M&O contractors to form an  enterprise modeling consortium. NNSA stated that the consortium is  responsible for leading efforts to acquire and maintain enterprise data,  enhance stakeholder confidence, integrate modeling capabilities, and fill  in any gaps that are identified. The consortium has identified areas in  which enterprise modeling projects could provide NNSA with reliable data  and modeling capabilities, including capabilities on infrastructure and  critical skills needs. In addition, we recently observed progress on  NNSA\u2019s development of an Enterprise Program Analysis Tool that should  give NNSA greater insight into its sites\u2019 cost reporting. The Tool also  includes a mechanism to identify when resource trade-off decisions must  be made, for example, when contractor-developed estimates for program  requirements exceed the budget targets provided by NNSA for those  programs. A tool such as this one could help NNSA obtain the basic data  it needs to make informed management decisions, determine return on  investment, and identify opportunities for cost saving.\n\n\tNNSA Needs to Make Further Improvements to Its Management of Major Projects and Contracts\n\nA basic tenet of effective management is the ability to complete projects  on time and within budget. However, for more than a decade and in  numerous reports, we have found that NNSA has continued to experience  significant cost and schedule overruns on its major projects, principally  because of ineffective oversight and poor contractor management.  Specifically:  In August 2000, we found that poor management and oversight of the  National Ignition Facility construction project at Lawrence Livermore  National Laboratory had increased the facility\u2019s cost by $1 billion and  delayed its scheduled completion date by 6 years. Among the many  causes for the cost overruns or schedule delays, DOE and Livermore  officials responsible for managing or overseeing the facility\u2019s  construction did not plan for the technically complex assembly and  installation of the facility\u2019s 192 laser beams. They also did not use  independent review committees effectively to help identify and correct  issues before they turned into costly problems. Similarly, in April 2010,  we reported that weak management by DOE and NNSA had allowed  the cost, schedule, and scope of ignition-related activities at the  National Ignition Facility to increase substantially., Since 2005,  ignition-related costs have increased by around 25 percent\u2014from  $1.6 billion to over $2 billion\u2014and the planned completion date for  these activities has slipped from the end of fiscal year 2011 to the end  of fiscal year 2012 or beyond.\nWe have issued several reports on the technical issues, cost  increases, and schedule delays associated with NNSA\u2019s efforts to  extend, through refurbishment, the operational lives of nuclear  weapons in the stockpile. For example, in December 2000, we  reported that refurbishment of the W87 strategic warhead had  experienced significant design and production problems that  increased its refurbishment costs by over $300 million and caused  schedule delays of about 2 years. Similarly, in March 2009 we  reported that NNSA and the Department of Defense had not  effectively managed cost, schedule, and technical risks for the B61  nuclear bomb and the W76 nuclear warhead refurbishments. For the  B61 life extension program, NNSA was only able to stay on schedule  by significantly reducing the number of weapons undergoing  refurbishment and abandoning some refurbishment objectives. In the  case of the W76 nuclear warhead, NNSA experienced a 1-year delay  and an unexpected cost increase of nearly $70 million as a result of  its ineffective management of one the highest risks of the program\u2014 the manufacture of a key material known as Fogbank, which NNSA  did not have the knowledge, expertise, or facilities to manufacture.\nIn October 2009, we reported on shortcomings in NNSA\u2019s oversight of  the planned relocation of its Kansas City Plant to a new, more modern  facility. Rather than construct a new facility itself, NNSA chose to  have a private developer build it. NNSA would then lease the building  through the General Services Administration for a period of 20 years.  However, when choosing to lease rather than construct a new facility  itself, NNSA allowed the Kansas City Plant to limit its cost analysis to  a 20-year life cycle that has no relationship with known requirements  of the nuclear weapons stockpile or the useful life of a production  facility that is properly maintained. As a result, NNSA\u2019s financing  decisions were not as fully informed and transparent as they could  have been. If the Kansas City Plant had quantified potential cost  savings to be realized over the longer useful life of the facility, NNSA  may have made a different decision as to whether to lease or  construct a new facility itself.\nWe reported in March 2010 that NNSA\u2019s plutonium disposition  program was behind schedule in establishing a capability to produce  the plutonium feedstock necessary to operate its Mixed-oxide Fuel  Fabrication facility currently being constructed at DOE\u2019s Savannah  River Site in South Carolina. In addition, NNSA had not sufficiently  assessed alternatives to producing plutonium feedstock and had only  identified one potential customer for the mixed-oxide fuel the facility  would produce. In its fiscal year 2012 budget justification to Congress,  NNSA reported that it did not have a construction cost baseline for the  facility needed to produce the plutonium feedstock for the mixed-oxide  fuel, although Congress had already appropriated over $270 million  through fiscal year 2009 and additional appropriation requests totaling  almost $2 billion were planned through fiscal year 2016. NNSA stated  in its budget justification that it is currently considering options for  producing necessary plutonium feedstock without constructing a new  facility.\nGAO, Nuclear Weapons: National Nuclear Security Administration\u2019s Plans for Its  Uranium Processing Facility Should Better Reflect Funding Estimates and Technology  Readiness, GAO-11-103 (Washington, D.C.: Nov. 19, 2010).\nSenate Committee on Appropriations. We plan to issue our report  next month.\nAs discussed above, NNSA remains on our high-risk list and remains  vulnerable to fraud, waste, abuse, and mismanagement. DOE has  recently taken a number of actions to improve management of major  projects, including those overseen by NNSA. For example, DOE has  updated program and project management policies and guidance in an  effort to improve the reliability of project cost estimates, better assess  project risks, and better ensure project reviews that are timely, useful and  identify problems early. However, DOE needs to ensure that NNSA has  the capacity\u2014that is, the people and other resources\u2014to resolve its  project management difficulties and that it has a program to monitor and  independently validate the effectiveness and sustainability of its corrective  measures. This is particularly important as NNSA embarks on its long- term, multibillion dollar effort to modernize the nuclear security enterprise.\n\n\tNNSA\u2019s Oversight of Safety and Security in the Nuclear Security Enterprise Has Been Questioned\n\nAnother underlying reason for the creation of NNSA was a series of  security issues at the national laboratories. Work carried out at NNSA\u2019s  sites may involve plutonium and highly enriched uranium, which are  extremely hazardous. For example, exposure to small quantities of  plutonium is dangerous to human health, so that even inhaling a few  micrograms creates a long-term risk of lung, liver, and bone cancer and  inhaling larger doses can cause immediate lung injuries and death. Also,  if not safely contained and managed, plutonium can be unstable and  spontaneously ignite under certain conditions. NNSA\u2019s sites also conduct  a wide range of other activities, including construction and routine  maintenance and operation of equipment and facilities that also run the  risk of accidents, such as those involving heavy machinery or electrical  mishaps. The consequences of such accidents could be less severe than  those involving nuclear materials, but they could also lead to long-term  illnesses, injuries, or even deaths among workers or the public. Plutonium  and highly enriched uranium must also be stored under extremely high  security to protect it from theft or terrorist attack.\nIn numerous reports, we have expressed concerns about NNSA\u2019s  oversight of safety and security across the nuclear security enterprise.  With regard to nuclear and worker safety:  In October 2007, we reported that there had been nearly 60 serious  accidents or near misses at NNSA\u2019s national laboratories since  2000. These incidents included worker exposure to radiation,  inhalation of toxic vapors, and electrical shocks. Although no one was  killed, many of the accidents caused serious harm to workers or  damage to facilities. For example, at Los Alamos in July 2004, an  undergraduate student who was not wearing required eye protection  was partially blinded in a laser accident. Accidents and nuclear safety  violations also contributed to the temporary shutdown of facilities at  both Los Alamos and Livermore in 2004 and 2005. In the case of Los  Alamos, laboratory employees disregarded established procedures  and then attempted to cover up the incident, according to Los Alamos  officials. Our review of nearly 100 reports issued since 2000 found  that the contributing factors to these safety problems generally fell into  three key categories: (1) relatively lax laboratory attitudes toward  safety procedures; (2) laboratory inadequacies in identifying and  addressing safety problems with appropriate corrective actions; and  (3) inadequate oversight by NNSA.\nWe reported in January 2008 on a number of long-standing nuclear  and worker safety concerns at Los Alamos.included, among other things, the laboratory\u2019s lack of compliance with  safety documentation requirements, inadequate safety systems,  radiological exposures, and enforcement actions for significant  violations of nuclear safety requirements that resulted in civil penalties  totaling nearly $2.5 million.\nIn October 2008, we reported that DOE\u2019s Office of Health, Safety, and  Security\u2014which, among other things, develops, oversees, and helps  enforce nuclear safety policies at DOE and NNSA sites\u2014fell short of  fully meeting our elements of effective independent oversight of  nuclear safety.independently was limited because it had no role in reviewing  technical analyses that help ensure safe design and operation of  nuclear facilities, and the office had no personnel at DOE sites to  provide independent safety observations.\nWith regard to security:  In June 2008, we reported that significant security problems at Los  Alamos had received insufficient attention. The laboratory had over  two dozen initiatives under way that were principally aimed at  reducing, consolidating, and better protecting classified resources but  had not implemented complete security solutions to address either  classified parts storage in unapproved storage containers or  weaknesses in its process for ensuring that actions taken to correct  security deficiencies were completed. Furthermore, Los Alamos had  implemented initiatives that addressed a number of previously  identified security concerns but had not developed the long-term  strategic framework necessary to ensure that its fixes would be  sustained over time. Similarly, in October 2009, we reported that Los  Alamos had implemented measures to enhance its information  security controls, but significant weaknesses remained in protecting  the information stored on and transmitted over its classified computer  network. A key reason for this was that the laboratory had not fully  implemented an information security program to ensure that controls  were effectively established and maintained.\nIn March 2009, we reported about numerous and wide-ranging  security deficiencies at Livermore, particularly in the ability of  Livermore\u2019s protective force to assure the protection of special nuclear  material and the laboratory\u2019s protection and control of classified  matter. Livermore\u2019s physical security systems, such as alarms and  sensors, and its security program planning and assurance activities  were also identified as areas needing improvement. Weaknesses in  Livermore\u2019s contractor self-assessment program and the NNSA  Livermore Site Office\u2019s oversight of the contractor contributed to these  security deficiencies at the laboratory. According to one DOE official,  both programs were \u201cbroken\u201d and missed even the \u201clow-hanging fruit.\u201d  The laboratory took corrective action to address these deficiencies,  but we noted that better oversight was needed to ensure that security  improvements were fully implemented and sustained.\nWe reported in December 2010 that NNSA needed to improve its  contingency planning for its classified supercomputing operations. All three NNSA laboratories had implemented some components of a  contingency planning and disaster recovery program, but NNSA had  not provided effective oversight to ensure that the laboratories\u2019  contingency and disaster recovery planning and testing were  comprehensive and effective. In particular, NNSA\u2019s component  organizations, including the Office of the Chief Information Officer,  were unclear about their roles and responsibilities for providing  oversight in the laboratories\u2019 implementation of contingency and  disaster recovery planning.\nIn March 2010, the Deputy Secretary of Energy announced a new effort\u2014 the 2010 Safety and Security Reform effort\u2014to revise DOE\u2019s safety and  security directives and reform its oversight approach to \u201cprovide  contractors with the flexibility to tailor and implement safety and security  programs without excessive federal oversight or overly prescriptive  departmental requirements.\u201d We are currently reviewing the reform of  DOE\u2019s safety directives and the benefits DOE hopes to achieve from this  effort for, among others, the House Committee on Energy and  Commerce. We expect to issue our report next month. Nevertheless, our  prior work has shown that ineffective NNSA oversight of its contractors  has contributed to many of the safety and security problems across the  nuclear security enterprise and that NNSA faces challenges in sustaining  improvements to safety and security performance.\n\n\tConcluding Observations\n\nNNSA faces a complex task in planning, budgeting, and ensuring the  execution of interconnected activities across the nuclear security  enterprise. Among other things, maintaining government-owned facilities  that were constructed more than 50 years ago and ensuring M&O  contractors are sustaining critical human capital skills that are highly  technical in nature and limited in supply are difficult undertakings. Over  the past decade, we have made numerous recommendations to DOE and  NNSA to improve their management and oversight practices. DOE and  NNSA have acted on many of these recommendations, and we will  continue to monitor progress being made in these areas. In the current  era of tight budgets, Congress and the American taxpayer have the right  to know whether investments made in the nuclear security enterprise are  worth the cost. However, NNSA currently lacks the basic financial  information on the total costs to operate and maintain its essential  facilities and infrastructure, leaving it unable to identify return on  investment or opportunities for cost savings. NNSA is now proposing to  spend decades and tens of billions of dollars to modernize the nuclear  security enterprise, largely by replacing or refurbishing aging and  decaying facilities at its sites across the United States. Given NNSA\u2019s  record of weak management of its major projects, we believe that careful  federal oversight will be critical to ensure this time and money are spent  in as an effective and efficient manner as possible.\nWith regard to the concerns that DOE\u2019s and NNSA\u2019s oversight of the  laboratories\u2019 activities have been excessive and that safety and security  requirements are overly prescriptive and burdensome, we agree that  excessive oversight and micromanagement of contractors\u2019 activities is not  an efficient use of scarce federal resources. Nevertheless, in our view,  the problems we continue to identify in the nuclear security enterprise are  not caused by excessive oversight, but instead result from ineffective  oversight. Given the critical nature of the work the nuclear security  enterprise performs and the high-hazard operations it conducts\u2014often  involving extremely hazardous materials, such as plutonium and highly  enriched uranium, that must be stored under high security to protect them  from theft\u2014careful oversight and stringent safety and security  requirements will always be required at these sites  It is also important in an era of scarce resources that DOE and NNSA  ensure that the work conducted by the nuclear security enterprise is  primarily focused on its principal mission\u2014ensuring the safety and  reliability of the nuclear weapons stockpile. DOE has other national  laboratories capable of conducting valuable scientific research on issues  as wide-ranging as climate change or high-energy physics, but there is no  substitute for the sophisticated capabilities and highly-skilled human  capital present in the nuclear security enterprise for ensuring the  credibility of the U.S. nuclear deterrent.\nChairman Turner, Ranking Member Sanchez, and Members of the  Subcommittee, this completes my prepared statement. I would be  pleased to respond to any questions you may have at this time.\n\n\tGAO Contact and Staff Acknowledgments\n\nIf you or your staff have any questions about this testimony, please  contact me at (202) 512-3841 or aloisee@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 Allison Bawden, Ryan T. Coles, and Jonathan Gill,  Assistant Directors, and Patrick Bernard, Senior Analyst.\nThis 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.","output":"Why GAO Did This Study\n\nThe National Nuclear Security Administration (NNSA), a separately organized agency within the Department of Energy (DOE), is responsible for managing its contractors\u0092 nuclear weapon- and nonproliferation-related national security activities in laboratories and other facilities, collectively known as the nuclear security enterprise. GAO designated DOE\u0092s management of its contracts as an area at high risk of fraud, waste, and abuse. Progress has been made, but GAO continues to identify problems across the nuclear security enterprise, from projects\u0092 cost and schedule overruns to inadequate oversight of safety and security at NNSA\u0092s sites. Laboratory and other officials have raised concerns that federal oversight of the laboratories\u0092 activities has been excessive. With NNSA proposing to spend tens of billions of dollars to modernize the nuclear security enterprise, it is important to ensure scarce resources are spent in an effective and efficient manner.\nThis testimony addresses (1) NNSA\u0092s ability to produce budget and cost data necessary to make informed management decisions, (2) improving NNSA\u0092s project and contract management, and (3) DOE\u0092s and NNSA\u0092s safety and security oversight. It is based on prior GAO reports issued from August 2000 to January 2012.\nDOE and NNSA continue to act on the numerous recommendations GAO has made in improving budget and cost data, project and contract management, and safety and security oversight. GAO will continue to monitor DOE\u0092s and NNSA\u0092s implementation of these recommendations.\n\nWhat GAO Found\n\nNNSA has successfully ensured that the nuclear weapons stockpile remains safe and reliable in the absence of underground nuclear testing, accomplishing this complicated task by using state-of-the-art facilities as well as the skills of top scientists. Nevertheless, NNSA does not have reliable enterprise-wide management information on program budgets and costs, which potentially increases risk to NNSA\u0092s programs. For example, in June 2010, GAO reported that NNSA could not identify the total costs to operate and maintain essential weapons activities facilities and infrastructure. In addition, in February 2011, GAO reported that NNSA lacks complete data on, among other things, the condition and value of its existing infrastructure, cost estimates and completion dates for planned capital improvement projects, and critical human capital skills in its contractor workforce that are needed for its programs. As a result, NNSA does not have a sound basis for making decisions on how to most effectively manage its portfolio of projects and other programs and lacks information that could help justify future budget requests or target cost savings opportunities. NNSA recognizes that its ability to make informed decisions is hampered and is taking steps to improve its budget and cost data.\nFor more than a decade and in numerous reports, GAO found that NNSA has continued to experience significant cost and schedule overruns on its major projects. For example, in 2000 and 2009, respectively, GAO reported that NNSA\u0092s efforts to extend the operational lives of nuclear weapons in the stockpile have experienced cost increases and schedule delays, such as a $300 million cost increase and 2-year delay in the refurbishment of one warhead and a nearly $70 million increase and 1-year delay in the refurbishment of another warhead. NNSA\u0092s construction projects have also experienced cost overruns. For example, GAO reported that the cost to construct a modern Uranium Processing Facility at NNSA\u0092s Y-12 National Security Complex experienced a nearly seven-fold cost increase from between $600 million and $1.1 billion in 2004 to between $4.2 billion and $6.5 billion in 2011. Given NNSA\u0092s record of weak management of major projects, GAO believes careful federal oversight of NNSA\u0092s modernization of the nuclear security enterprise will be critical to ensure that resources are spent in as an effective and efficient manner as possible.\nNNSA\u0092s oversight of safety and security in the nuclear security enterprise has also been questioned. As work carried out at NNSA\u0092s sites involves dangerous nuclear materials such as plutonium and highly enriched uranium, stringent safety procedures and security requirements must be observed. GAO reported in 2008 on numerous safety and security problems across NNSA\u0092s sites, contributing, among other things, to the temporary shutdown of facilities at both Los Alamos and Lawrence Livermore National Laboratories in 2004 and 2005, respectively. Ineffective NNSA oversight of its contractors\u0092 activities contributed to many of these incidents as well as relatively lax laboratory attitudes toward safety procedures. In many cases, NNSA has made improvements to resolve these safety and security concerns, but better oversight is needed to ensure that improvements are fully implemented and sustained. GAO agrees that excessive oversight and micromanagement of contractors\u0092 activities are not an efficient use of scarce federal resources, but that NNSA\u0092s problems are not caused by excessive oversight but instead result from ineffective departmental oversight."}
{"id":"crs_RL34031","pid":"crs_RL34031_0","input":"\tMost Recent Developments\n\nThe FY2008 Consolidated Appropriations Act, which was enacted on December 26, 2007, provides $3.97 billion in new budget authority for the legislative branch. This total includes an across-the-board rescission of 0.25% which was applied to accounts within the legislative branch division of the act.\nFrom the beginning of the fiscal year on October 1, until the enactment of the consolidated bill ( H.R. 2764 ), the legislative branch was funded by a series of continuing appropriations resolutions. On September 29, 2007, the President signed into law P.L. 110-92 . The law provided for continued funding for most federal activities, including the legislative branch, at FY2007 levels through November 16, 2007. P.L. 110-116 , which was enacted on November 13, continued this funding through December 14, 2007. P.L. 110-137 , enacted on December 14, 2007, and P.L. 110-149 , enacted on December 21, 2007, also provided continuing funding for the legislative branch prior to the enactment of the Consolidated Appropriations Act. These laws also provided gratuity payments to the survivors of a total of four deceased Members.\nPrior to the consideration of the consolidated appropriations measure, both the Senate and House of Representatives considered separate legislation funding the legislative branch for FY2008. S. 1686 , the Senate version of the FY2008 Legislative Branch Appropriations Bill, was reported to the Senate on June 25, 2007. The bill, which proposed nearly $2.78 billion in new budget authority (not including House items), had been marked up by the Senate Committee on Appropriations on June 21. At the markup, the committee voted unanimously to report the bill without amendment.\nH.R. 2771 , the House version of the FY2008 Legislative Branch Appropriations Bill, was introduced on June 19, 2007, following the House Committee on Appropriations markup on June 12 and the subcommittee markup on June 6. The House bill would have provided $3.1 billion in new budget authority (not including Senate items). The bill, with two amendments, passed the House on June 22 with a roll call vote of 216-176.\n\n\tIntroduction to the Legislative Branch Appropriations Bill\n\nSince FY2003, the annual legislative branch appropriations bill has usually contained two titles. Appropriations for legislative branch agencies are contained in Title I. These entities, as they have appeared in the annual appropriations bill, are the Senate; House of Representatives; Joint Items; Capitol Police; Office of Compliance; Congressional Budget Office; Architect of the Capitol, including the Capitol Visitor Center; Library of Congress, including the Congressional Research Service; Government Printing Office; Government Accountability Office; and Open World Leadership Program.\nTitle II contains general administrative provisions and, from time to time, appropriations for legislative branch entities. For example, Title II of the FY2003 Act, P.L. 108-7 , contained funds for the John C. Stennis Center for Public Service Training and Development and for the Congressional Award Act.\nOn occasion the bill may contain a third title for other provisions. For example, Title III of the FY2006 legislative branch appropriations act, P.L. 109-55 , contained language providing for the continuity of representation in the House of Representatives in \"extraordinary circumstances.\"\n\n\t\tChanges in Structure of Legislative Branch Appropriations Effective in FY2003\n\nPrior to enactment of the FY2003 bill, and effective in FY1978, the legislative branch appropriations bill was structured differently. Title I, Congressional Operations, contained budget authority for activities directly serving Congress. Included in this title were the budgets of the Senate; House of Representatives; Joint Items; Office of Compliance; Congressional Budget Office; Architect of the Capitol, except funds for Library of Congress buildings and grounds; Congressional Research Service, within the Library of Congress; and congressional printing and binding activities of the Government Printing Office.\nTitle II, Related Agencies, contained budget authority for activities considered by the Committee on Appropriations not directly supporting Congress, including those for the Botanic Garden; Library of Congress (except the Congressional Research Service, which was funded in Title I); Library of Congress buildings and grounds maintained by the Architect of the Capitol; Government Printing Office (except congressional printing and binding costs, which were funded in Title I); and Government Accountability Office, formerly named the General Accounting Office. Occasionally, from FY1978 through FY2002, the annual legislative appropriations bill contained additional titles for such purposes as capital improvements and special one-time functions.\n\n\t\tActivities and Programs Related to the Legislative Branch but Not Funded in the Legislative Branch Appropriations Bill\n\nIn addition to activities funded in the annual legislative branch appropriations bill, funds are contained in the legislative branch section of the U.S. Budget for other programs and entities. These include permanent budget authority for both federal funds and trust funds and for non-legislative entities.\nPermanent federal funds and permanent trust funds are available as the result of previously enacted legislation and do not require annual action. Permanent federal funds and trust funds are included in the U.S. Budget, prepared by the Office of Management and Budget. The U.S. Budget also contains non-legislative entities within the legislative branch budget. They are funded in other appropriation bills, but are counted as legislative branch funds by the Office of Management and Budget for bookkeeping purposes.\nFor another picture of the legislative branch budget, the total legislative branch request of $4.8 billion in the FY2008 U.S. Budget must be adjusted. When reflecting only items contained in the annual legislative branch appropriation bill, the funding request for the legislative branch is $4.3 billion.\n\n\t\tReestablishment of House Subcommittee on Legislative Branch for the 110th Congress\n\nPrior to the 109 th Congress, the legislative branch appropriations bill was handled by the House Subcommittee on Legislative Branch, Committee on Appropriations. Under a House Appropriations Committee reorganization plan released on February 9, 2005, the subcommittee was abolished and its jurisdiction assumed by the full Appropriations Committee. Although changes were made in the structure of the Senate Committee on Appropriations, announced in March 2005, the Subcommittee on Legislative Branch was retained. Under a reorganization plan announced by the House Appropriations Committee on January 4, 2007, the House Subcommittee on Legislative Branch was reestablished for the 110 th Congress.\n\n\tStatus of FY2008 Appropriations\n\n\t\tAction on the FY2008 Legislative Branch Appropriations Bill\n\n\t\t\tSubmission of FY2008 Budget Request on February 5, 2007\n\nThe FY2008 U.S. Budget contained a request for $4.3 billion in new budget authority for legislative branch activities, an increase of 14% from FY2007 levels. A substantial portion of the increase requested by legislative branch entities is to meet (1) mandatory expenses, which include funding for annual salary adjustments required by law and related personnel expenses, such as increased government contributions to retirement based on increased pay, and (2) expenses related to increases in the costs of goods and services due to inflation. Amendments to the request were transmitted to Congress by the President on June 8, 2007.\n\n\t\t\tCongressional Caps on FY2008 Legislative Branch Discretionary Funds\n\nAs required by law, both houses are considering separate 302(b) budget allocations for legislative branch discretionary and mandatory funds in FY2008. The House has allocated $4.150 billion in total budget authority for the legislative branch, and the Senate allocation is $4.177 billion.\n\n\t\t\tSenate and House Hearings on FY2008 Budget\n\nThe House Subcommittee on Legislative Branch held budget hearings on March 1 for the Architect of the Capitol, on March 8 for the U.S. Capitol Police, on March 22 for the Library of Congress and the Open World Leadership Program, on March 27 for the Government Printing Office, on March 29 for the House of Representatives, on April 19 for the Government Accountability Office, and on April 26 for the Office of Compliance and Congressional Budget Office. Public witnesses were heard from on May 1. The subcommittee also held additional hearings during these months to conduct oversight and discuss long-range planning requirements and challenges.\nThe Senate Subcommittee on Legislative Branch held hearings on the FY2008 budget requests on March 2 for the Architect of the Capitol; on March 16 for the Government Accountability Office, the Government Printing Office, the Congressional Budget Office, and the Office of Compliance; on March 30 for the Office of the Senate Sergeant at Arms and Doorkeeper and the U.S. Capitol Police; and on May 3 for the Secretary of the Senate and the Library of Congress.\n\n\t\t\tHouse Appropriations Committee Markup and Report (FY2008)\n\nThe House Subcommittee on Legislative Branch held a markup on the FY2008 bill on June 6, and the full committee marked up and reported the FY2008 bill on June 12. Major issues considered at both markups included efforts to rename the Great Hall of the Capitol Visitor Center \"Emancipation Hall,\" the future of the Open World Leadership Program, and the use of funds to renovate an FDA building proposed for use as swing space for House offices. The House Committee on Appropriations issued its report ( H.Rept. 110-198 ) on June 19, 2007.\n\n\t\t\tHouse Passage of the FY2008 Bill (H.R. 2771)\n\nOn June 22, the House passed H.R. 2771 by a vote of 216-176 (Roll call #548). Floor consideration followed adoption of the rule on the bill, H.Res. 502 ( H.Rept. 110-201 ), earlier that day by a vote of 222-179 (Roll call #544). The rule waived all points of order against the bill and made in order only those amendments specified in the committee report, which included\nan amendment to be offered by Representative Jane Harman of California preventing the funds made available in the act from being used to purchase light bulbs unless the light bulbs have an \"energy star\" or \"Federal Energy Management Program\" designation, an amendment to be offered by Representative Jeff Flake of Arizona reducing the amount available for the Government Printing Office (GPO) Congressional Printing and Binding account by $3.2 million, and an amendment to be offered by Representative Jim Jordan of Ohio requiring an across-the-board reduction of 4% for funds appropriated in this act.\nDuring floor consideration of the bill on June 22, the first amendment was agreed to, although some Members expressed concerns about adapting this provision to account for the historical lighting in the Capitol Complex.\nThe second amendment, which reduced the House committee's recommended appropriation for the Government Printing Office by $3.2 million, was agreed to with a roll call vote of 218-191. Supporters argued that this amendment would reduce the number of copies of the Congressional Record printed for Congress each day, while opponents argued this would add to the GPO budgetary shortfall and that any reduction in copies should be achieved through the authorizing committee.\nThe House voted against the third amendment in a roll call vote of 177-231.\n\n\t\t\tSenate Markup and Report of FY2008 Bill (S. 1686)\n\nThe Senate Appropriations Committee marked up and reported its version of the legislative branch appropriations bill on June 21. Senator Mary Landrieu of Louisiana, chairman of the Subcommittee on the Legislative Branch during the 110 th Congress, noted that the committee's bill would provide nearly $2.8 billion in new budget authority (not including House items), a 5% increase ($138.65 million) over the FY2007 budget and $289 million below agency requests.\nBoth Senator Landrieu and Senator Wayne Allard of Colorado, the ranking minority member of the Subcommittee on the Legislative Branch, voiced their concern over using this bill to change the name of the main hall of the Capitol Visitor Center, as proposed by the House, and noted that the Senate version of the bill contains language to effectuate the merger between the U.S. Capitol Police and the Library of Congress Police.\nNo amendments were considered, and the committee voted 29-0 to report the bill. Senator Landrieu reported an original measure ( S. 1686 ) to the Senate on June 25, with a report ( S.Rept. 110-89 ).\n\n\t\tAction on FY2007 Supplemental Appropriations\n\nWhile the House and Senate Appropriations Committees were considering requests for FY2008, Congress also considered bills providing supplemental appropriations for FY2007. H.R. 1591 was reported as an original measure by the House Appropriations Committee on March 20, 2007. S. 965 was introduced as an original measure by the Senate Appropriations Committee on March 22, 2007.\nThe House passed its bill on March 23 by a vote of 218-212. The Senate then called up the House-passed bill, inserted the text of the Senate Appropriations Committee version of the bill, amended it, and passed it March 29 by a vote of 51-47. As agreed to by the House and Senate, the legislative branch chapters of the bill included $6.4 million in new budget authority for the House of Representatives for business continuity and disaster recovery, an additional $374,000 for the Government Accountability Office, a gratuity payment to the widow of a deceased Member, and $50 million for Capitol Power Plant repairs. The President vetoed H.R. 1591 on May 1, 2007. A veto override attempt in the House failed on a 222-203 vote.\nA new supplemental appropriations measure, H.R. 2206 , was introduced in the House on May 8. The House passed the bill two days later by a roll-call vote of 221\u2014205. The Senate amended and passed the measure with an amendment by voice vote on May 17, 2007. After the House and Senate resolved their differences through amendments between the houses, the bill was signed into law by the President on May 25, 2007. In addition to the appropriations proposed in H.R. 1591 , as passed by both chambers, P.L. 110-28 contained $10 million for a radio modernization program for the U.S. Capitol Police. The measure provided two gratuity payments for the surviving spouses of two Representatives. The measure also established within the Office of the Architect of the Capitol the position of Chief Executive Officer for Visitor Services. The official, who will be appointed by the Architect and compensated at the rate of the Chief Operating Officer of the Office of the Architect, will be responsible for the operation and management of the Capitol Visitor Center.\n\n\tFY2008 Legislative Branch Funding Issues\n\n\t\tCapitol Complex Security\u2014U.S. Capitol Police\n\n\t\t\tFunding Issues\n\nThe Consolidated Appropriations Act, 2008 provides $281 million for the Capitol Police, an increase of 5.8% over the $265.6 million (including supplemental appropriations) provided in FY2007. It is 6.4% less than the $299.07 million requested for FY2008. The House bill, as passed on June 22, would have provided $286 million for the U.S. Capitol Police (USCP). The House proposal was $20.4 million (7.7%) more than the FY2007 level. The Senate bill, as reported by the Committee on Appropriations, would have provided $284 million in new budget authority, an increase of nearly 7% over FY2007 funds.\nAppropriations for the police are contained in two accounts\u2014a salaries account and a general expenses account. The salaries account contains funds for the salaries of employees, including overtime; hazardous duty pay differential; and government contributions for employee health, retirement, Social Security, professional liability insurance, and other benefit programs. The general expenses account contains funds for expenses of vehicles; communications equipment; security equipment and its installation; dignitary protection; intelligence analysis; hazardous material response; uniforms; weapons; training programs; medical, forensic, and communications services; travel; relocation of instructors for the Federal Law Enforcement Training Center; and other administrative and technical support, among other expenses. A second appropriation relating to the Capitol Police appears within the Architect of the Capitol account for Capitol Police buildings and grounds.\nThe Consolidated Appropriations Act provides $232.2 million for salaries and $48.8 million for general expenses. The total for salaries is $7.7 million more than the $224.5 million provided in the House-passed bill ( H.R. 2771 ) and $6.3 million more than the $225.9 million recommended by the Senate Committee on Appropriations ( S. 1686 ). The new budget authority for general expenses is $12.7 million less than the figure from the House bill and $9.3 million less than the Senate committee recommendation.\nThe Capitol Police request would have allowed for an additional 30 civilian FTEs (full-time equivalent employees), increasing the civilian level to 444 FTEs and the total department FTE level to 2,125. The House Appropriations Committee, in its report, stated that its recommendation supports a total of 1,681 sworn and 439 civilian FTEs. The Senate report stated that the level recommended by the Senate Appropriations Committee would support the \"current sworn staffing of 1,681 officers, and 10 new officers associated with Library of Congress police attrition\" and \"new positions in financial management, security service, information system and facilities management.\" The statement issued by Chairman Obey and inserted into the Congressional Record states that the funding provided in the Consolidated Appropriations Act supports 1,702 sworn personnel and 391 civilian personnel.\n\n\t\t\tAdministrative Issues\n\nBoth the House and Senate reports reference the merger of the U.S. Capitol Police and Library of Congress Police, an issue which was addressed in hearings in both chambers during consideration of the FY2008 bill. Language requiring the merger was contained in the FY2003 Consolidated Appropriations Resolution. A separate bill implementing the merger, H.R. 3690 , was introduced in the House on September 27, 2007. The House Administration Committee held a markup and ordered the bill reported on November 7, 2007. The House passed the bill on December 5, 2007, and the Senate passed the bill with an amendment on December 17, 2007. The House agreed to the Senate amendment the following day with a vote of 413-0. The legislation became P.L. 110-178 on January 7, 2008. The FY2008 Consolidated Appropriations Act also contained language requiring the merger.\n\n\t\tArchitect of the Capitol\n\nThe AOC is responsible for the maintenance, operation, development, and preservation of the United States Capitol Complex, which includes the Capitol and its grounds, House and Senate office buildings, Library of Congress buildings and grounds, Capitol Power Plant, Botanic Garden, Capitol Visitors Center, and Capitol Police buildings and grounds. The Architect is responsible for the Supreme Court buildings and grounds, but appropriations for their expenses are not contained in the legislative branch appropriations bill.\n\n\t\t\tOverall Funding Levels\n\nOperations of the Architect are funded in the following ten accounts: general administration, Capitol building, Capitol grounds, Senate office buildings, House office buildings, Capitol power plant, Library buildings and grounds, Capitol Police buildings and grounds, Capitol Visitor Center, and Botanic Garden.\nThe FY2008 Consolidated Appropriations Act provides $414.3 million in new budget authority for the Architect of the Capitol. The House-passed bill ( H.R. 2771 ) would have provided $348.38 million (not including Senate items), and the Senate bill ( S. 1686 ), as reported from the Committee on Appropriations, would have provided $352.5 million (not including House items). The Architect had requested $481.7 million.\n\n\t\t\tCapitol Visitor Center (CVC)24\n\nThe Architect's FY2008 budget request included $20.0 million for the CVC project. An additional $13.9 million was requested for Capitol Visitor Center operational costs. The requested funding was addressed in both House and Senate hearings this year. Some of the questions posed by Members of the legislative branch subcommittees have related to the final cost of the project, its estimated completion and occupancy date, and the center's daily administration after it is opened to the public. The FY2008 Consolidated Appropriations Act provides $20.2 million for the CVC project and $8.5 million for operational costs.\n\n\t\t\tCapitol Power Plant Utility Tunnels\n\nThe condition of the Capitol Power Plant utility tunnels, and the funds necessary to repair them, have been of interest to appropriators during the FY2006, FY2007, and FY2008 appropriations cycles. The funding for repairs follows a complaint issued February 28, 2006, by the Office of Compliance regarding health and safety violations in the tunnels. The Office of Compliance had previously issued a citation due to the condition of the tunnels on December 7, 2000. On November 16, 2006, the Government Accountability Office (GAO) wrote a letter to the Chair and Ranking Minority Members of the Senate Committee on Appropriations, Subcommittee on the Legislative Branch, and the House Committee on Appropriations, examining the conditions of the tunnels, plans for improving conditions, and efforts to address workers' concerns. Potential hazards identified by the Office of Compliance and GAO include excessive heat, asbestos, falling concrete, lack of adequate egress, and insufficient communication systems. In May 2007, the Architect of the Capitol and the Office of Compliance announced a settlement agreement for the complaint and citations.\nSteps necessary to remedy the situation, as well as the actions and roles of the Architect of the Capitol and the Office of Compliance, have been discussed at multiple hearings of the House and Senate Appropriations Committees in 2006 and 2007. Other committees have also expressed concern about the utility tunnels and allegations of unsafe working conditions. For example, the Senate Committee on Health, Education, Labor and Pensions, Subcommittee on Employment and Workplace Safety, heard testimony on tunnel safety during a March 1, 2007, hearing on the effects of asbestos.\nFollowing the complaint by the Office of Compliance, Congress provided $27.6 million in FY2006 emergency supplemental appropriations to the Architect of the Capitol for Capitol Power Plant repairs, and an additional $50 million was provided in emergency supplemental appropriations for FY2007. The Architect of the Capitol had requested $24.77 million for FY2008. This request, which was submitted prior to the provision of funds in the May 2007 emergency supplemental appropriations act, was not supported by either the House or Senate Appropriations Committee.\n\n\t\t\tAdministrative Provisions\n\nThe FY2008 Consolidated Appropriations Act contains language establishing a statutory Office of the Inspector General for the Architect of the Capitol. Both the House-passed and the Senate-reported bills had included provisions establishing this position.\nThe House-passed bill also included language designating the main hall of the CVC \"Emancipation Hall.\" Separate legislation changing the name was introduced in the Senate (S.\u00a01679) on June 21, 2007, and in the House ( H.R. 3315 ) on August 2, 2007. The Subcommittee on Economic Development, Public Buildings and Emergency Management of the House Committee on Transportation and Infrastructure held a hearing on the House bill on September 25, 2007. The bill was reported by the committee, before being considered in the House under suspension of the rules, where it was agreed to by a vote of 398-6 on November 13, 2007. The Senate passed its bill renaming the space by unanimous consent on November 15, 2007. H.R. 3315 passed the Senate on December 6 and became P.L. 110-139 on December 18, 2007.\n\n\t\tHouse of Representatives\n\n\t\t\tOverall Funding\n\nThe FY2008 Consolidated Appropriations Act provides $1.183 billion for the internal operations of the House. The House requested $1.24 billion, an increase of 8.5% from the FY2007 level, and the House-passed bill would have provided $1.199 billion in new budget authority.\n\n\t\t\tHouse Committee Funding\n\nFunding for House committees\u2014for which $162.4 million was provided in the Consolidated Appropriations Act\u2014is contained in the appropriation heading \"committee employees,\" which comprises two subheadings. This level is $5.6 million more than the $156.8 million requested, and $0.4 million less than $162.8 million agreed to by the House in H.R.\u00a02771.\nThe first subheading contains funds for personnel and nonpersonnel expenses of House committees, except the Appropriations Committee, as authorized by the House in a committee expense resolution. The FY2008 request of $129.7 million, an increase of 4.2%, included funds for investigations. The House-passed bill would have provided $133 million in new budget authority for this subheading. The Consolidated Appropriations Act provides $132.7 million.\nThe second subheading contains funds for the personnel and nonpersonnel expenses of the Committee on Appropriations, for which $27.1 million was requested, a 4.8% increase. The House-passed bill would have provided $29.8 million in new budget authority. The Consolidated Appropriations Act provides $29.7 million in new budget authority.\n\n\t\t\tMembers' Representational Allowance\n\nThe Members' Representational Allowance (MRA) is available to support Members in their official and representational duties. It provides for personnel, official office expenses, and official (franked) mail. A total of $610.6 million, an increase of 10% over the $554.7 million provided in FY2007, was requested for the overall MRA heading. The House-passed bill would have provided $581 million (an increase of 4.7%). The Consolidated Appropriations Act provides $579.5 million (an increase of nearly 4.5%) for the MRA.\n\n\t\tSenate\n\n\t\t\tOverall Funding\n\nThe Consolidated Appropriations Act provides $831.8 million for the Senate's internal operations, an increase of 3.5% over the prior year funding level. The Senate had requested $893.3 million, an increase of 11%.\n\n\t\t\tSenate Committee Funding\n\nAppropriations for Senate committees are contained in two accounts:\nthe inquiries and investigations account , contains funds for all Senate committees except Appropriations. $138.6 million was requested (a 14.9% increase). The Senate Appropriations Committee recommended $129 million, which was subsequently included in the Consolidated Appropriations Act (a 6.9% increase); and the Committee on Appropriations account, for which $14.9 million was requested (an increase of 7.5%) and $14.6 million was recommended by the Senate Appropriations Committee (an increase of 5.2%). The Consolidated Appropriations Act provides $14.2 million (an increase of 2%).\n\n\t\t\tSenators' Official Personnel and Office Expense Account\n\nThe Senators' Official Personnel and Office Expense Account provides each Senator with funds to administer an office. It is comprised of an administrative and clerical assistance allowance, a legislative assistance allowance, and an official office expense allowance. The funds may be interchanged by the Senator, subject to limitations on official mail. A total of $396.1 million was requested for this account (an increase of 8.4% over FY2007 funds), with $379.1 million recommended by the Senate Appropriations Committee (an increase of 3.7%). The Consolidated Appropriations Act provides $373.6 million (an increase of 2.2%).\n\n\t\tSupport Agency Funding\n\n\t\t\tCongressional Budget Office (CBO)\n\nCBO is a nonpartisan congressional agency created to provide objective economic and budgetary analyses required by law and by members of the House and Senate Committees on Budget and Committees on Appropriations, House Committee on Ways and Means, and other committees, and by Members of Congress.\nThe Consolidated Appropriations Act provides $37.3 million for the Congressional Budget Office, an increase of $2.1 million (nearly 6%) over its FY2007 funding. CBO requested $37.97 million, an increase of $2.8 million (7.9%) over its FY2007 funding, most of which would meet mandatory pay and related costs. The House-passed bill contained $37.8 million, and the Senate Appropriations Committee recommended $38.5 million.\n\n\t\t\tHighlights of House and Senate Hearings on FY2008 Budget of the CBO\n\nCBO Director Peter R. Orszag testified before the House legislative branch subcommittee that personnel expenses account for approximately 91% of CBO's budget. He indicated his desire to expand CBO's capacity in the area of health economics. Subsequently, the House Appropriations Committee, in its report, stated that its recommended funding would provide for one additional full-time equivalent employee (FTE) in this area; and the Senate report stated that the committee had \"included $538,000 for CBO to expand its ability to assist the Congress in identifying and analyzing potential ways to address projected growth in health care spending.\"\n\n\t\t\tLibrary of Congress (LOC)\n\nThe Library of Congress provides research support for Congress through a wide range of services, from research on public policy issues to general information. Among its major programs are acquisitions, preservation, legal research for Congress and other federal entities, administration of U.S. copyright laws by the Copyright Office, research and analyses of policy issues by the Congressional Research Service, and administration of a national program to provide reading material to the blind and physically handicapped. The Library also maintains a number of collections and provides a range of services to libraries in the United States and abroad.\nThe FY2008 Consolidated Appropriations Act provides $562.5 million for the Library of Congress. The House-passed bill contained $572.5 million in new budget authority, and the Senate-reported bill proposed $576.9 million. These figures do not include additional authority to spend receipts.\nThe Library had requested (1) a net appropriation of $661.6 million, and (2) authority to use $41.7 million in funds generated from Library receipts. Most of the increase, $45.9 million, was requested to meet mandatory pay and price level increases to maintain current services. Also included in the request was $28.1 million in program increases. The requested funding would support a staff level of 4,244 FTEs, a net decrease of 58 FTEs from the FY2007 level of 4,302.\nFY2008 new budget authorities for the Library's accounts are\nsalaries and expenses\u2014The Consolidated Appropriations Act provides $388.5 million. The House-passed bill would have provided $394.65 million, while $401.5 million was contained in the Senate-reported bill. $461.1 million was requested. These totals do not include authority to spend $6.35 million in receipts; Copyright Office\u2014The Consolidated Appropriations Act provides $5.3 million (not including authority to spend $44.2 million in receipts). The House-passed bill would have provided $5.6 million (not including authority to spend $44.2 million in receipts), while $4.9 million was contained in the Senate-reported bill (not including authority to spend $45.2 million in receipts). $16.2 million was requested (not including authority to spend $35.4 million in receipts); Congressional Research Service\u2014The Consolidated Appropriations Act provides $102.3 million. The House-passed bill would have provided $104.5 million, while $102.9 million was contained in the Senate-reported bill. $108.7 million was requested; and Books for the Blind and Physically Handicapped\u2014The Consolidated Appropriations Act provides $66.9 million. The House-passed and Senate reported bills that would have provided approximately $67.7 million. $75.6 million was requested.\nThe total request included $43.9 million, to be transferred to the Architect of the Capitol, for the construction of the Library of Congress Fort Meade Logistics Center. In FY2007, $54.2 million was requested, but not provided, for this project in the Architect's Library Buildings and Grounds account.\nAn additional $42.8 million was contained in the Architect's FY2008 request for Library Buildings and Grounds. The Consolidated Appropriations Act provides $27.5 million in new budget authority for Library Buildings and Grounds. The House-passed bill contained $31.6 million, and the Senate-reported bill recommended $28.06 million.\n\n\t\t\tHighlights of the House and Senate Hearings on FY2008 Budget of the LOC\n\nThe Library's concern over the rescission of nearly $50 million in funding in the FY2007 appropriations act was discussed at both the House and Senate hearings. Both hearings also discussed funding for the Books for the Blind program and efforts to update the technology that the \"talking book\" program currently uses. The House subcommittee also discussed reasons for the inclusion of the funds for the Fort Meade Logistics Center in the Library request and not that of the Architect of the Capitol. Librarian of Congress James H. Billington expressed his desire to prioritize this project.\n\n\t\t\tCongressional Research Service (CRS)\n\nCRS works exclusively for Members and committees of Congress to support their legislative and oversight functions by providing nonpartisan and confidential research and policy analysis.\nThe FY2008 Consolidated Appropriations Act provides $102.3 million for CRS. The agency's request of $108.7 million represented a 7.85%, or $7.9 million, increase over FY2007 funds, which covers only mandatory pay and related costs and price level changes. The request did not contain funds to support program growth. The House-passed bill contained $104.5 million in new budget authority and the Senate-reported bill recommended $102.89 million.\n\n\t\t\tGovernment Accountability Office (GAO)\n\nGAO works for Congress by responding to requests for studies of federal government programs and expenditures. GAO may also initiate its own work. Formerly the General Accounting Office, the agency was renamed the Government Accountability Office effective July 7, 2004.\nThe FY2008 Consolidated Appropriations Act provides $499.7 million in new budget authority for the GAO, which had requested $522.8 million (figures do not include an additional $7.5 million from offsetting collections). The House-passed bill would have provided $503.3 million in new budget authority for GAO, an increase of 4.6% over FY2007 funding. The House Appropriations Committee, in its report, states that this amount would provide for 3,217 FTEs, an increase of 57 FTEs above the FY2007 levels. The Senate-reported bill recommended $510.3 million in new budget authority. The Senate Appropriations Committee, in its report, stated that this amount would allow for 3,221 FTEs and recommended \"$750,000 and four full-time equivalent employees to establish a permanent technology assessment function in the Government Accountability Office.\"\n\n\t\t\tHighlights of House and Senate Hearings on FY2008 Budget of the GAO\n\nThe issue of GAO's possible role in providing technology assessments was addressed during Senate hearings this year. In response to a question, Comptroller General David M. Walker testified before the Senate that GAO could assume this role, formerly handled by the Office of Technology Assessment, and indicated that, in his opinion, such action would be more cost-effective than establishing a new agency. Chairman Obey's statement indicated that the Consolidated Appropriations Act includes up to $2.5 million for technology assessment studies.\n\n\t\t\tGovernment Printing Office (GPO)\n\nThe FY2008 Consolidated Appropriations Act provides $124.7 million in new budget authority for the Government Printing Office. GPO had requested $181.98 million, or an increase of 49% over the $122.1 million made available for FY2007.\nGPO's budget authority is contained in three accounts: (1) congressional printing and binding, (2) Office of Superintendent of Documents (salaries and expenses), and (3) the revolving fund. FY2008 requests for these accounts are\ncongressional printing and binding\u2014The Consolidated Appropriations Act provides $89.8 million. Previously, the House Appropriations Committee had recommended $87.89 million, which was reduced by $3.2 million through an amendment adopted on the Houses floor. The Senate Appropriations Committee recommended $95.37. $109.5 million was requested; Office of Superintendent of Documents (salaries and expenses)\u2014The Consolidated Appropriations Act provides $34.9 million. The House-passed bill would have provided $35.4 million, while $38.2 million was included in the Senate-reported bill. $45.6 million was requested; and revolving fund\u2014The Consolidated Appropriations Act provides no additional funding for the revolving fund. The House-passed bill would have provided $2.45 million, while $5 million was recommended by the Senate Appropriations Committee. $26.8 million was requested.\nThe congressional printing and binding account pays for expenses of printing and binding required for congressional use, and for statutorily authorized printing, binding, and distribution of government publications for specified recipients at no charge. Included within these publications are the Congressional Record ; Congressional Directory ; Senate and House Journals; memorial addresses of Members; nominations; U.S. Code and supplements; serial sets; publications printed without a document or report number, for example, laws and treaties; envelopes provided to Members of Congress for the mailing of documents; House and Senate business and committee calendars; bills, resolutions, and amendments; committee reports and prints; committee hearings; and other documents.\nThe Office of Superintendent of Documents account funds the mailing of government documents for Members of Congress and federal agencies, as statutorily authorized; the compilation of catalogs and indexes of government publications; and the cataloging, indexing, and distribution of government publications to the Federal Depository and International Exchange libraries, and to other individuals and entities, as authorized by law.\nGPO requested $26.8 million for its revolving fund to support the agency's acquisition of information technology infrastructure and security enhancements, workforce retraining and restructuring efforts, and facilities maintenance and repairs. This is an increase of $25.8 million over the $1 million provided in FY2007. Of the requested amount, $10.5 million was proposed for the completion of the development of GPO's Future Digital System, while $9.4 million would cover the replacement of a 30-year-old automated composition system. The House committee report stated that the recommended level of $2.45 million would provide funds for elevator repairs, the GPO fire alarm systems, and workforce retraining. The Senate committee report stated that the recommended level of $5 million would support \"Release 2 of the 'Future Digital System' [FDSys].\" The Consolidated Appropriations Act did not provide funding for the revolving fund.\n\n\t\t\tAdditional Provisions\n\nThe House Committee on Appropriations, in its report, expressed its concern about possible security lapses at the GPO facilities and required a report on security staffing plans. Language in the Consolidated Appropriations Act requires GPO police officers, and not contracted security services, to be responsible for security at the D.C. passport facility.\n\n\t\t\tHighlights of House and Senate Hearings on FY2008 Budget of the GPO\n\nActing Public Printer William H. Turri, in his written testimony, discussed recent efforts to transform GPO's operations for the digital age.\n\n\t\tOther Funding\n\n\t\t\tOffice of Compliance\n\nThe Office of Compliance is an independent and nonpartisan agency within the legislative branch. It was established to administer and enforce the Congressional Accountability Act, which was enacted in 1995. The act applies business and federal government employment and workplace safety laws to Congress and certain legislative branch entities.\nThe FY2008 Consolidated Appropriations Act provides $3.3 million for the Office of Compliance, an increase of 6.5% over the $3.1 million made available in FY2007. The act also contained language authorizing an increase in the compensation for members of the board of directors and officers of the Office of Compliance. The House-passed bill ( H.R. 2771 ) would have provided $3.8 million, an increase of nearly 23%. The Senate-reported bill ( S. 1686 ) also recommended $3.8 million in new budget authority.\nThe Office of Compliance had requested $4.1 million. In her prepared testimony, Tamara E. Chrisler, the acting executive director, stated that $280,000 of the requested increase was related to the office's required monitoring of asbestos abatement in the Capitol Power Plant utility tunnels.\nThe House bill contained a provision requiring legislative agencies to reimburse the Treasury, from existing funds, for the payment of an award or settlement under the Congressional Accountability Act. Since the passage of the act in 1995, \"only funds which are appropriated to an account of the Office in the Treasury of the United States for the payment of awards and settlements may be used for the payment of awards and settlements.\" In response to a question for the record posed during the House Appropriations Committee hearing on the budget request of the Office of Compliance, the Office provided a list of amounts paid on behalf of each legislative branch agency from this account since FY1997, and indicated that the total equals slightly less than $7.5 million. In its report, the House Appropriations Committee stated its belief that the administrative provision would \"enhance accountability, encourage issues to be solved at a lower level, encourage work place fairness, and require periodic training of managers regarding their responsibility under the Congressional Accountability Act.\" The Senate-reported bill did not contain this provision.\nThe Senate-reported bill included language that would have permitted an employee of the Office of Compliance to be appointed to the positions of Executive Director or General Counsel and would have authorized an increase in the statutory pay cap for these positions. Under the law creating the office, these positions can not be held by most individuals who have held positions within the legislative branch during the previous four years. The original language would have precluded certain promotions from within the office, for example, from deputy executive director to executive director. In a statement, the office's Board of Directors indicated that \"since the Board could be actively contemplating such a promotion, we have an immediate interest in changing the prohibitive section of the CAA.\" Support of the Board for language permitting internal promotions was voiced at the Senate budget request hearing on March 16, 2007, by Barbara Camens, who represented the Board. Separate legislation permitting individuals who have served as employees of the Office of Compliance to serve in appointed positions in the office was introduced in the House on September 18, 2007. The House agreed to that bill, H.R. 3571 , by voice vote on October 2, 2007. It passed the Senate without amendment on December 19 and became P.L. 110-164 on December 26, 2007.\n\n\t\t\tOpen World Leadership Center\n\nThe center administers a program that supports democratic changes in other countries by giving their leaders opportunity to observe democracy and free enterprise in the United States. The first program was authorized by Congress in 1999 to support the relationship between Russia and the United States. The program encouraged young federal and local Russian leaders to visit the United States and observe its government and society.\nEstablished at the Library of Congress as the Center for Russian Leadership Development in 2000, the center was renamed the Open World Leadership Center in 2003, when the program was expanded to include specified additional countries. In 2004, Congress further extended the program's eligibility to other countries designated by the center's board of trustees, subject to congressional consideration. The center is housed in the Library and receives services from the Library through an inter-agency agreement.\nFollowing discussion at both the subcommittee and full committee levels regarding the funding and location of this program, the House Appropriations Committee recommended $6 million for Open World. The committee report stated that an additional $6 million would be provided for transfer to the program in the FY2008 State, Foreign Operations, and Related Programs appropriation. The House-passed bill, which retained the committee-recommended funding level, also contained an administrative provision transferring the Open World Leadership Center to the Department of State effective October 1, 2008.\nThe Senate-reported bill had provided $13.5 million in new budget authority for Open World.\nThe FY2008 Consolidated Appropriations Act provides $8.98 million for Open World. The act also requires the center to examine options for transfer to the executive branch and report its findings to the House and Senate Committees on Appropriations not later than March 31, 2008.\nOpen World had requested $14.4 million for FY2008. The request was equal to the amount requested in FY2007 and would have represented an increase of 3.9% from the $13.86 million provided in FY2007 and FY2006.\n\n\t\t\tJohn B. Stennis Center for Public Service Training and Development\n\nThe center was created by Congress in 1988 to encourage public service by congressional staff through training and development programs. The FY2008 Consolidated Appropriations Act provides $429,000 for the center. The House-passed bill and the Senate-reported bill both had provided $430,000 for the center, which is equal to the FY2008 request and the same as provided in FY2007.\n\n\tFor Additional Reading\n\n\t\tCRS Report\n\nCRS Report RL33379, Legislative Branch: FY2007 Appropriations , by [author name scrubbed] and [author name scrubbed].\nCRS Report RL32819, Legislative Branch: FY2006 Appropriations , by [author name scrubbed].\n\n\t\tSelected Websites\n\nThese sites contain information on the FY2007 and FY2008 legislative branch appropriations requests and legislation, and the appropriations process.\nHouse Committee on Appropriations http:\/\/appropriations.house.gov\/\nSenate Committee on Appropriations http:\/\/appropriations.senate.gov\/\nCRS Appropriations Products Guide http:\/\/www.crs.gov\/products\/appropriations\/apppage.shtml\nCongressional Budget Office http:\/\/www.cbo.gov\nGovernment Accountability Office http:\/\/www.gao.gov\nOffice of Management & Budget http:\/\/www.whitehouse.gov\/omb\/","output":"From beginning of the fiscal year on October 1, 2007, until the enactment of the Consolidated Appropriations Act on December 26, 2007, funding for the legislative branch was provided through a series of interim continuing appropriations measures. The first, which was signed by President Bush on September 29, 2007, provided funding at FY2007 levels through November 16, 2007. Three additional continuing appropriations measures were enacted on November 13, December 14, and December 21, 2007.\nLegislative branch entities requested $4.3 billion in new budget authority for FY2008. The House version of the FY2008 Legislative Branch Appropriations Bill, H.R. 2771, was introduced on June 19, 2007. The bill proposed $3.1 billion in new budget authority for the legislative branch for FY2008, not including Senate items. This amount reflects a 4.1% increase over the $2.98 billion (including the FY2007 supplemental but not including Senate items) approved by Congress for FY2007 and less than the 13% increase requested.\nThe Senate version of the FY2008 Legislative Branch Appropriations Bill, S. 1686, was reported to the Senate on June 25, 2007. The bill would have provided approximately $2.78 billion in new budget authority, not including House items. This amount reflects an increase of 5.2% over the nearly $2.65 billion (including the FY2007 supplemental but not including House items) approved by Congress for FY2007 and less than the 16% increase requested.\nBy comparison, in FY2007, overall legislative branch budget authority was increased by approximately 1.5% (including supplemental appropriations), which had followed a 4.2% increase in new budget authority for FY2006 and a 3.1% increase approved for FY2005.\nAmong issues that were considered during discussions on the FY2008 budget are the following:\ncompletion of the Capitol Visitor Center and consideration of the Architect of the Capitol's request for an additional $20 million for this project; the renaming of the \"Great Hall\" of the Capitol Visitor Center; repair of the Capitol Power Plant tunnels and the role of the Office of Compliance in monitoring progress on this effort; funds requested to support the \"Greening of the Capitol\" initiative and the use of alternative fuels; the merger of the U.S. Capitol Police and the Library of Congress Police; funding for the acquisition of new technology for the \"Books for the Blind\" program; and the future of the Open World Leadership Program.\nThis report will be updated to reflect major congressional action."}
{"id":"crs_RS21473","pid":"crs_RS21473_0","input":"\tThe Taepo Dong Program\n\nThe North Korean Taepo Dong program traces its origins to the No Dong medium-range ballistic missile program of the late 1980s. In the early 1990s, North Korea initiated the development of two ballistic missile programs known to the West as Taepo Dong 1 and Taepo Dong 2. The reported design objectives for the Taepo Dong 1 system were to deliver a 1,000 to 1,500 kg warhead to a range of 1,500 to 2,500 km and for the Taepo Dong 2 to deliver the same warhead to a 4,000 to 8,000 km range. Initial prototypes for both systems were probably manufactured in 1995 or 1996 with a possible initial production run for the Taepo Dong 1 initiated in early 1997 or 1998. Some analysts estimated that North Korea may have produced from one to ten Taepo Dong 1 and one or two Taepo Dong 2 prototypes by the end of 1999. These missiles are not believed to be deployed. North Korea is believed to have had extensive foreign assistance from China, Russia, Pakistan, and Iran throughout the program. Very little was known about the actual program until the August 31, 1998 launch of a Taepo Dong 1 (or Paektusan-1) from the Musudan-ri Launch Facility in North Hamgyong Province, northeast coast of North Korea.\nThe stated objective of this launch was to place North Korea's first satellite into orbit. Initial U.S. intelligence reports postulated that the Taepo Dong 1 SLV was only a two-stage rocket. The first stage fell into international waters 300 km east of Musudan-ri and the second stage flew over the Japanese island of Honshu and fell into the water 330 km away from the Japanese port of Hachinohe for a total distance of approximately 1,646 km. Further analysis of radar tapes reportedly revealed that the Taepo Dong 1 had a small third solid propellant stage (presumably designed to place the satellite into orbit). Some debris from this third stage was believed to have impacted as far as 4,000 km from the launch point. Some analysts believe that if the missile had functioned properly, the Taepo Dong 1 space launch vehicle (SLV) could have achieved a 3,800 to 5,900 km range. North Korean media claimed the satellite entered earth orbit.\n\n\tPotential Configurations and Ranges\n\nIn order to strike targets from North Korea, a North Korean missile would need to achieve the following ranges:\nWithin possible range of the Taepo Dongs are U.S. military facilities in Guam (3,500 km), Okinawa, and Japan. The Taepo Dong 1 missile (as opposed to the SLV) is believed to be a two-stage missile that uses a No Dong missile derivative as its first stage and SCUD C derivative (called the Hwasong 6) as its second stage. In this configuration, it is estimated that it could deliver a 700 - 1,000 kg warhead to a range of 2,500 km, which could put Japan and Okinawa within range. For the Taepo Dong 1 to achieve greater range its payload would have to be decreased. Some analysts speculated that a reduced-payload configuration could deliver a 200 kg warhead into the U.S. center and a 100 kg warhead to Washington D.C., albeit with poor accuracy.\nUntil a few years ago, the Taepo Dong 2 had not yet been flight tested. (It has also been called the Moksong 2 and the Pekdosan 2.) The Taepo Dong 2 is believed to be a two-stage missile about 35 meters long. The first stage has been said to bear close resemblance to the Chinese CSS-2 and CSS-3 first stage. The second stage is believed to be based on the No Dong missile. The two-stage variant is assessed by some to have a range potential of as much as 3,750 km with a 700 to 1,000 kg payload and, if a third stage were added, some believe that range could be extended to 4,000 to 4,300 km with a full payload. Some analysts further believe that the Taepo Dong 2 could deliver a 700 to 1,000 kg payload as far as 6,700 km. Pyongyang has yet to test the guidance system, and so the missile is believed to be inaccurate. How it might be deployed (i.e., silo or transportable) also remains undetermined, although some have suggested it is a road mobile system. In order to achieve ranges capable of striking Hawaii and targets on the U.S. mainland, some analysts believe that the Taepo Dong 2's payload would need to be reduced to 200 - 300 kg. Some believe the Taepo Dong 2 may be exported to other countries in the future.\nIn June 2006 the Taepo Dong 2 (or Paektusan-2) was observed being assembled and fueled at the Musudan-ri test site along the northeast coast of North Korea. At that time, some observers believed a test was imminent while others expressed caution because considerable technical uncertainty remained. On July 4, 2006, North Korea launched the Taepo Dong 2. The launch was preceded by three shorter-range ballistic missile launches, and then followed by three more. About 40 seconds into the flight, the Taepo Dong 2 failed on its own during the first stage and fell into the Sea of Japan, according to USNORTHCOM (U.S. Northern Command). Causes for the failure were studied, but details were not made public. Japanese sources reported some details of the missile launches, suggesting greater accuracy in their impact areas than other analyses. Others have suggested structural failure of the airframe, or failure of the propulsion or guidance system as the causes. The report also suggested greater Russian engineering support than indicated elsewhere. Some believe initial production of the Taepo Dong 2 may have started in 2005, and that perhaps 20 missiles were built in 2006.\nIn early February 2009, various reports indicated that North Korea was making test preparations for a Taepodong-2 launch by setting up radar and other monitoring equipment around a missile test site along its northeast coast. Secretary of State Clinton said any such test would \"be very unhelpful in moving our relationship forward\" and that it would violate a 2006 UN Security Council Resolution (Resolution 1718) demanding that North Korea \"not conduct any further nuclear test or launch of a ballistic missile.\" Similarly, the South Korean government warned any missile test would \"be a serious threat.\" In late February 2009, North Korea announced that it was preparing to launch a communications satellite, similarly to what it said about the 1998 test.\n\n\tNorth Korea's Military Spending25\n\nSome experts continue to register some concern over North Korea's level of military spending in relation to its missile program. North Korea may spend as much as 40 percent of its gross domestic product (GDP) on the military. In 2004, U.S. Forces Korea commander, General Leon J. LaPorte, reportedly stated that North Korea's military investments are primarily in their nuclear, biological, chemical and missile programs in order to gain an \"asymmetrical\" advantage over U.S and South Korean forces. General LaPorte reportedly emphasized his concern over missile development and North Korea's continued development of its nuclear weapons program that could eventually lead to \"weaponizing their weapons-grade materials on missiles.\"\nNorth Korea's apparent willingness to devote such a large portion of its GDP to missiles and weapons of mass destruction could be cause for additional concern when viewed in the light of their alleged cooperation with other countries. Evidence suggests that North Korea has had extensive dealings with Iran, Pakistan, Russia, Syria, Yemen, and Libya on ballistic missiles and possibly even nuclear warheads. One particular concern is that Chinese warhead designs, sold to Libya by Pakistani nuclear scientist Dr. A.Q. Khan, might also be in the hands of North Korea, which could help accelerate its efforts to develop long-ranged nuclear ballistic missiles. Some suggest that North Korea's access to these countries' missile and WMD technologies might enable North Korea to advance its long-range nuclear ballistic missile program at a more accelerated rate without having to conduct extensive testing, particularly if they use proven missile designs from other countries.\n\n\tMedium or Intermediate Range Missiles\n\nVarious reports indicate that North Korea may be developing and deploying at least two new medium to intermediate-range ballistic missile systems. The Japanese Defense Ministry reportedly believes North Korea has about 200 Nodong medium-range missiles. It is not publicly known if North Korea is continuing development of a reported new version of its Taepo Dong ballistic missile, the so-called Taepo Dong X, which might achieve intercontinental ranges. The two new medium to intermediate-range missiles are believed to be based on the decommissioned Soviet R-27 submarine launched ballistic missile.\nThe R-27, which was allegedly acquired from Russia in the 1990s and possibly enhanced with the help of Russian missile specialists, has been called an \"excellent choice\" on which to base a new missile system. Its 40 year-old, liquid-fueled technology is considered within the technological and industrial capabilities of North Korea and versions of its engines are already used in North Korean SCUDs and No Dongs. Perhaps the greatest advantage of this system, according to some observers, is that the R-27 is a proven design meaning that North Korea may be able to develop and deploy these missiles without having to conduct extensive ground and flight tests.\nIn February 2009, South Korea's Defense Ministry reported that North Korea had deployed a new type of medium-range ballistic with a range estimated at 1,800 miles. This missile is believed to be the same type seen at a military parade in North Korea in 2007. Additional details, such as the name of this missile and how many are deployed have not yet been made public.\n\n\t\tLand-Based Version 36\n\nThe land-based version called Musadan or No Dong B is a medium to intermediate-range ballistic missile with an estimated range of 2,500-3,200 km. The North Korean version of this missile is 12 m long\u20142.4m longer than the R-27\u2014and, although smaller than the No Dong and Taepo Dong 1, it has a greater range than these two missiles. This could put most of East Asia within its range, including U.S. military bases at Guam and Okinawa, although experts point out that the North Korean No Dong 2 missile could also reach Japan and Okinawa. Initial prototypes of the land-based version were reportedly first identified in 2000, and pre-production models and a new transporter-erector-launcher (TEL) were believed to have been completed by mid-2003. The Musadan has not been flight-tested. Although some remain uncertain whether it is deployed, others report that perhaps 15-20 Musadan have been deployed without apparent testing.\nThe North Koreans reportedly began constructing two new missile bases to accommodate the Musadan\/No Dong B. One base is near Yangdok-gun and the other is at Sangnam-ni, previously reported as a No Dong and Taepo Dong base. North Korea reportedly constructed administrative and maintenance facilities at these two sites as well as fortified underground tunnels for storing the missiles and TELs. \n\n\t\tSea-Based Version\n\nThe sea-based version of the R-27 is reportedly either a submarine or ship-mounted system with an estimated range of at least 2,500 km. Russian versions of the R-27 reportedly had both a single nuclear reentry vehicle as well as a version with three reentry vehicles, each with a 200 kiloton (KT) nuclear weapon. It is not known if North Korea possesses reentry vehicles for their versions of the R-27. In any such case, they have not been tested by North Korea There are indications that North Korea may be actively pursuing a sea-based ballistic missile capability, which also could have potential security implications for the United States.\nIn September 1993, the Korean People's Navy (KPN) reportedly purchased 12 decommissioned Russian Foxtrot class and Golf-II class submarines for scrap metal from a Japanese company. The Golf-IIs, which are capable of carrying three SS-N-5 SLBMs, did not have their missiles or electronic firing systems when they were sold to the North Koreans, but they did allegedly retain significant missile launch sub-systems including launch tubes and stabilization systems. Some analysts believe that this technology, in conjunction with the R-27's well-understood design, gives North Korea the capability to develop either a submarine or ship-mounted ballistic missile. Many experts postulate that North Korea does not have the capability to develop a new SLBM on its own and that none of North Korea's other ballistic missiles are easily convertible to SLBMs.\nNorth Korea apparently integrated the Golf-IIs missile stabilization and launch technology into a new class of conventionally powered ballistic missile submarines, possibly modified versions of Golf-IIs or Romeo class Russian submarines. It is also possible, according to some observers, that North Korea might attempt to incorporate this launch technology into a merchant ship. It is not known if North Korea has sold or will sell this new system to other countries. Some analysts suggest that Iran might be an ideal candidate for such a system, as it has allegedly researched a sea-based ballistic missile capability in the past.\n\n\tSecurity Implications\n\nDPRK systems potentially increase the missile threat to the United States. If the new missiles are indeed closely modified versions of the R-27, they are likely more accurate in relative terms and have greater range than other DPRK missiles. Some analysts believe that the sea-launched version could pose the greatest threat by threatening the continental United States. These experts suggest that a North Korean sea-launched missile capability could complicate intelligence collection efforts as well as present challenges for South Korean, Japanese, and U.S. ballistic missile defense systems. Others, however, are skeptical that North Korea can reach the continental United States with the new sea-based version. Anonymous U.S. government officials reportedly stated that North Korea does not presently have a submarine that is capable of transporting a missile within striking distance of the continental United States. These officials also expressed doubt that North Korea had intentions of developing a missile to hide inside a freighter to be used against targets in the United States.","output":"This report briefly reviews North Korea's ballistic missile program. In summer 2007, North Korea tested modern, short-range missiles. In February 2009, South Korea reported the DPRK had deployed a new intermediate-range missile. This report may be updated periodically. Additional information is provided by CRS Report RL33590, North Korea's Nuclear Weapons Development and Diplomacy, by [author name scrubbed]."}
{"id":"crs_RS21127","pid":"crs_RS21127_0","input":"\tIntroduction\n\nInsider trading in securities may occur when a person in possession of material nonpublic information about a company trades in the company's securities and makes a profit or avoids a loss. Federal statutes have provisions that either specifically forbid insider trading or have been interpreted by courts to prohibit insider trading. This report discusses some of the key statutes as well as regulations issued by the Securities and Exchange Commission (SEC or Commission) to implement the statutes. The report also discusses some of the most pertinent court decisions on insider trading.\n\n\tOverview of Federal Statutes Related to Insider Trading\n\n\t\tSecurities Act of 1933\n\nThe Securities Act of 1933 (1933 Act) makes it illegal to offer or sell securities to the public unless the securities have been registered with the SEC. A registration statement becomes effective 20 days after it is filed with the Commission, unless it is delayed or suspended. Registration under the 1933 Act covers only the securities actually being offered and only for the purposes of the offering in the registration statement. The registration statement consists of two parts: the prospectus, provided to every purchaser of the securities, and Part II, containing information and exhibits that do not have to be provided to purchasers but are available for inspection. Section 7 of the 1933 Act, referring to Schedule A, sets forth the information that must be contained in the registration statement. This schedule requires a great deal of information, such as the underwriters, the specific type of business, significant shareholders, debt and assets of the company, and opinions as to the legality of the stock issue. Section 10(a) of the 1933 Act specifies the information which the prospectus must contain. There are also numerous regulations issued by the Commission which provide additional details about the registration process under the 1933 Act.\nCertain transactions and securities are exempted from the registration process. The exempted transactions include private placements, intrastate offerings, and small offerings. Among the exempted securities are government securities, bank securities, and short-term commercial paper; all securities for which it is believed that other, adequate means of government regulation exist.\n\n\t\tSecurities Exchange Act of 1934\n\nThe Securities Exchange Act of 1934 (1934 Act) is concerned with several different topics, one of which is the ongoing process of required disclosure by covered publicly traded companies to the investing public through the filing of periodic and updated reports with the Commission. Any issuer that has a class of securities traded on a national securities exchange or, in certain circumstances, has total assets exceeding $10 million and a class of equity securities held of record by 2,000 shareholders or 500 shareholders who are not accredited investors must register with the SEC under the 1934 Act. Every issuer required to register under the 1934 Act must also file periodic and other reports with the SEC. Section 12 of the 1934 Act requires the filing of a detailed statement about the company when the company first registers. Section 13, in turn, requires a registered company to file annual and quarterly reports with the SEC. These reports must contain essentially all material information, financial and otherwise, about the company\u2014information that the investing public would need in making an informed decision about whether to invest in the company. Section 14 contains requirements about proxy solicitation. Some exemptions from these reporting requirements are provided. The Commission has issued extensive regulations to specify information that these reports must provide.\nFailure to disclose material information is actionable. For example, Section 18(a) of the Securities Exchange Act grants an express private right of action to investors who have been injured by reliance upon material misstatements or omissions of facts in reports that have been filed with the SEC. Section 10(b) of the 1934 Act, the general antifraud provision, and Rule 10b-5, issued by the SEC to carry out the statutory fraud prohibition, provide for a cause of action for injuries caused by omissions, misrepresentations, or manipulations of material facts in statements filed with the SEC, as well as in statements other than those filed with the SEC.\nOne provision in the 1934 Act is specifically designed to discourage insiders in the corporation from taking advantage of their inside information in the trading of the corporation's securities. Section 16 of the 1934 Act places sanctions on insiders who use inside information in making short-swing profits. For purposes of this provision, an insider is defined as any \"person who is directly or indirectly the beneficial owner of more than 10 percent of any class of any equity security . . . which is registered . . . or who is a director or an officer of the issuer . . . .\" Every person who qualifies as an insider under this definition must file a report with the SEC at the time of the security's registration on a national securities exchange or by the effective date of a filed registration statement or within 10 days after he becomes a beneficial owner, director, or officer. If there has been a change in the ownership of the security or if there has been a purchase or sale of a security-based swap agreement involving the equity security, the insider must file the report before the end of the second business day following the day on which the transaction has been executed.\nTo prevent the unfair use of inside information, Section 16(b) permits the company or any security holder to sue on behalf of the company to recover any profit that the person realizes from any purchase and sale or sale and purchase of any equity security of the company within a period of less than six months.\nSection 10(b) and Rule 10b-5 are used in most cases of insider trading violations, as well as in other kinds of alleged securities fraud. (Some of the major cases are discussed below.) Although Section 10(b) does not refer to specific types of fraud or specific types of insiders, one of its most frequent applications over the years has been to insider trading. The statute states, in relevant part:\nIt shall be unlawful for any person, directly or indirectly by the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange . . . \n(b) To use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, or any securities-based swap agreement any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors. . . .\nRule 10b-5, mentioned later along with other SEC regulations that focus more specifically on insider trading, is the general SEC rule used in many securities fraud cases. The rule states:\nIt shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,\n(a) To employ any device, scheme, or artifice to defraud,\n(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or\n(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person,\nin connection with the purchase or sale of any security.\n\n\t\tInsider Trading Sanctions Act of 1984\n\nAccording to the House report on the bill, the Insider Trading Sanctions Act of 1984 was enacted because:\nInsider trading threatens . . . markets by undermining the public's expectations of honest and fair securities markets where all participants play by the same rules. This legislation provides increased sanctions against insider trading in order to increase deterrence of violations.\n\"Insider trading\" is the term used to refer to trading in the securities markets while in possession of \"material\" information (generally, information that would be important to an investor in making a decision to buy or sell a security) that is not available to the general public.\nThe 1984 Act provides that, if the Commission believes that any person has bought or sold a security while in possession of material, nonpublic information, the Commission may bring an action in federal district court seeking a civil penalty. The penalty may be up to three times the profit gained or loss avoided.\n\n\t\tInsider Trading and Securities Fraud Enforcement Act of 1988\n\nAfter a number of hearings and considerable debate in the 100 th Congress, President Reagan signed the Insider Trading and Securities Fraud Enforcement Act of 1988. This act expanded the scope of civil penalties that may be imposed against officers and directors who fail to take adequate steps to prevent insider trading. Among other things, the 1988 Act also established a private right of action against the inside trader for buyers or sellers of securities who traded contemporaneously with the insider.\n\n\t\tStop Trading on Congressional Knowledge (STOCK) Act of 2012\n\nThe STOCK Act, signed into law on April 4, 2012, affirms that insider trading prohibitions apply to Members of Congress, congressional staff, and other federal officials.\nThe STOCK Act also has provisions concerning financial disclosure reporting requirements for legislative and executive branch officials.\n\n\t\tExamples of Penalties for Insider Trading\n\nThere are both civil and criminal penalties for insider trading, and the penalties can vary depending on what statutes a trader is found guilty of violating. The 1934 Act sets out the civil penalties for engaging in securities transactions while in possession of material nonpublic information. As mentioned above, the penalty can be up to three times the profit gained or loss avoided. However, willful violations of other provisions, such as Section 10(b), the general antifraud securities provision, may result in other significant penalties, including fines up to $5 million and\/or imprisonment for up to 20 years for individuals and fines up to $25 million for businesses.\n\n\tSelected Regulations\n\nAs stated above, SEC Rule 10b-5, which implements Section 10(b) of the Securities Exchange Act, is apparently the most frequently used SEC rule in lawsuits that charge violations of insider trading prohibitions. However, other SEC rules, some of which specifically target insider trading, are also important.\nRule 10b5-1 prohibits trading \"on the basis of\" material nonpublic information. This rule states that one of the proscribed activities under Section 10(b) and Rule 10b-5 is securities trading \"on the basis of material nonpublic information about that security or issuer, in breach of a duty of trust or confidence that is owed\" to the issuer of the security, shareholders of the issuer, or another who is the source of the inside information. The regulation defines \"on the basis of\" to have a kind of knowledge requirement:\n[A] purchase or sale of a security of an issuer is \"on the basis of\" material nonpublic information about that security or issuer if the person making the purchase or sale was aware of the material nonpublic information when the person made the purchase or sale.\nVarious affirmative defenses are allowed under the rule, such as the alleged violator's demonstrating that he had entered into a binding contract to buy or sell the security, had instructed another person to buy or sell the security for his account, or had adopted a written plan for trading securities before becoming aware of the material nonpublic information.\nRule 10b5-2 sets out duties of trust or confidence in insider trading cases based on the misappropriation of inside information. The misappropriation theory of insider trading is a fairly recent development in securities law. Under the classical theory of insider trading, a corporate insider is prohibited from trading that corporation's securities if the trade is based on inside information and the trader has a fiduciary duty to the corporation's shareholders. In contrast to classical insider trading, the misappropriation theory may hold liable a person who is not actually a corporate insider but has instead been provided inside information in confidence and who breaches a fiduciary duty to the source of the information in order to gain profit or avoid loss in the securities market. Rule 10b5-2 sets out examples of what is meant by \"duties of trust or confidence.\" Such duties include a person's agreement to maintain the disclosed information in confidence; a person's history with the discloser of the inside information indicating an expectation that the recipient of the information will keep the information in confidence; and a person's receiving information from a spouse or close relative, unless the recipient can show that he neither knew nor should have reasonably known or agreed that he would keep the information confidential.\nRegulation FD is another SEC rule that could prohibit insider trading. Regulation FD addresses selective disclosure. It provides that, when an issuer or any person acting on behalf of an issuer discloses material nonpublic information to certain enumerated persons (typically, securities market professionals and holders of the securities), that issuer or person acting on behalf of the issuer must disclose the information to the public. This disclosure must be made simultaneously with the intentional disclosure to the enumerated persons or as promptly as possible after the disclosure, in the case of a non-intentional disclosure to the enumerated persons.\n\n\tSelected Decisions Illustrating the Use of Section 10(b) and Rule 10b-5 to Prosecute Insider Trading Violations\n\nThere are numerous cases and administrative proceedings in which Section 10(b) and Rule 10b-5 have been used to prosecute insider trading violations. The following is a brief discussion of some of the most notable of these cases and proceedings.\n\n\t\tStrong v. Repide\n\nAlthough it was decided 25 years before the enactment of the Securities Exchange Act, Strong v. Repide illustrates that the common law rule of fiduciary duty, which is arguably the idea driving the case law imposing penalties for insider trading, prohibits a company insider from profiting from knowledge that he alone has about the company. According to the Court, a corporate director may not generally have an obligation of a fiduciary nature to disclose to a shareholder the director's knowledge affecting the value of the shares. However, the Court believed that such a duty can exist in special cases and did, in fact, exist in this case because the fraudulent concealment of the identity of a stock purchaser would have affected the value of the stock in question. To wit, the Court stated: \"Concealing his identity when procuring the purchase of the stock, by his agent, was in itself strong evidence of fraud on the part of the defendant.\" The Court went on to state: \"The case before us seems a plain one for holding that, under the circumstances detailed, there was a legal obligation on the part of the defendant to make these disclosures.\"\n\n\t\tIn the Matter of Cady Roberts & Co.\n\nIn an administrative disciplinary proceeding, In the Matter of Cady Roberts & Co. , the SEC held that Section 10(b) and Rule 10b-5 prohibited insider trading by a person, in this case a broker-dealer, who may not be within the corporation whose stock has been traded, but who has received privileged information about the corporation from someone within the corporation.\nThe case concerned a partner in a brokerage firm who, after receiving a message from a director of the Curtiss-Wright corporation stating that the board of directors had voted to cut the dividend, placed orders to sell some Curtiss-Wright stock before news of the dividend cut was disseminated to the public. The broker was not a corporate insider (i.e., he was not an officer, director, or significant shareholder). However, the SEC held that the broker's conduct violated at least clause (3) of the above-quoted SEC Rule 10b-5 in that the conduct operated as a fraud or deceit on the purchasers and, thus, there was no need to decide the scope of clauses (1) and (2). In determining that there was a violation of clause (3), the SEC appears to have found fraud committed on both the company and on persons on the other side of the market, noting:\nAnalytically, the obligation [not to trade on inside information] rests on two principal elements: first, the existence of a relationship giving access, directly or indirectly, to information intended to be available only for a corporate purpose and not for the personal benefit of anyone, and second, the inherent unfairness involved where a party takes advantage of such information knowing it is unavailable to those with whom he is dealing. In considering these elements under the broad language of the anti-fraud provisions we are not to be circumscribed by fine distinctions and rigid classifications. Thus, it is our task here to identify those persons who are in a special relationship with a company and privy to its internal affairs, and thereby suffer correlative duties in trading in its securities. Intimacy demands restraint lest the uninformed be exploited.\nThe SEC rejected the broker's argument that the obligation to disclose material information exists only in situations involving face-to-face dealings on the grounds that:\n[i]t would be anomalous indeed if the protection afforded by the anti-fraud provisions were withdrawn from transactions effected on exchanges, primary markets for securities transactions. If purchasers on an exchange had available material information known by a selling insider, we may assume that their investment judgment would be affected and their decision whether to buy might accordingly be modified. Consequently, any sales by the insider must await disclosure of the information.\nThus, it appears that this case established that Section 10(b) and Rule 10b-5 extend beyond officers, directors, and major stockholders to others (in this case, a broker-dealer) who receive information from a corporate source. Later cases, discussed below, appear to support this view.\n\n\t\tSecurities and Exchange Commission v. Texas Gulf Sulphur\n\nSecurities and Exchange Commission v. Texas Gulf Sulphur , a 1968 decision by the U.S. Court of Appeals for the Second Circuit (Second Circuit), effectively supported the SEC's ruling in Cady Roberts by suggesting that anyone in possession of inside information must either publicly disclose the information or not trade the particular stock until the information becomes public. According to the Second Circuit:\n[A]nyone in possession of material inside information must either disclose it to the investing public, or, if he is disabled from disclosing it in order to protect a corporate confidence, or if he chooses not to do so, must abstain from trading in or recommending the securities concerned while such inside information remains undisclosed.\n\n\t\tChiarella v. United States\n\nThe U.S. Supreme Court appears, however, in 1980 to have somewhat modified the rule of Texas Gulf Sulphur by indicating that, for a fraud to be actionable under Rule 10b-5, there must be a duty to disclose arising from a relationship of trust and confidence between parties to the transaction. Chiarella v. United States involved an alleged violation of Rule 10b-5 by an employee of a financial printer. The employee, who was involved in printing materials related to corporate takeover bids, deduced the names of the target companies from information contained in documents delivered to the printer by the acquiring companies. Without disclosing his knowledge, the employee purchased stock in the target companies and sold the shares immediately after the information was made public, realizing a profit of $30,000. The Second Circuit held that a violation of Rule 10b-5 had occurred and convicted the employee for willfully failing to inform the sellers of the target company securities that he knew of an imminent takeover bid that would increase the value of their stock.\nThe Supreme Court reversed. According to the Court, an employee in this situation did not have a duty to disclose the information. He was not a corporate insider, and he received no confidential information. In addition, no duty arose from the relationship between the printing company employee and the sellers of the target companies' securities. The Court held that a duty to disclose under Section 10(b) and Rule 10b-5 does not arise from the mere possession of nonpublic market information.\n\n\t\tDirks v. Securities and Exchange Commission\n\nDirks v. Securities and Exchange Commission could be seen to have gone a little further than Chiarella by indicating that persons not within a corporation who possess inside information are not always liable when trading on this information. The case involved an officer of a broker-dealer who specialized in providing investment analysis of insurance company securities to institutional investors. He received information that the assets of an insurance company were greatly overstated because of fraudulent corporate practices and that regulatory agencies had not acted on charges made by company employees. Although the officer of the broker-dealer did not himself trade the stock, some of his customers did, based on information they received from him. The price of the stock fell, and the SEC began investigations, eventually finding that the officer had violated Rule 10b-5 by repeating the allegations of fraud to investors who later sold their stock in the insurance company. However, because of his role in uncovering the fraud, he received only a censure from the SEC.\nOn appeal, the Supreme Court held that no violation of Section 10(b) had occurred in this case. In order to find a violation of Section 10(b) by a corporate insider, two elements are necessary, according to the Court: (1) the existence of a relationship affording access to inside information intended to be available only for a corporate purpose, and (2) the unfairness of allowing a corporate insider to take advantage of that information by trading without disclosure. However, the duty arises from a fiduciary relationship, in the Court's view. In addition, there must be manipulation or deception to bring about a breach of the fiduciary duty. Here, according to the Court, the insider did not trade on the inside information, nor did he make secret profits. For the officer of the broker-dealer to have a duty to disclose inside information or abstain from trading, the officer must have a fiduciary duty and must have breached that fiduciary duty. The officer in this case had no duty to abstain from using inside information because he had no pre-existing fiduciary duty to the insurance company's shareholders. Therefore, he did not violate Section 10(b) or Rule 10b-5.\n\n\t\tCarpenter v. United States\n\nSeven years after Dirks , the Supreme Court decided another landmark securities case, Carpenter v. United States . In this case, although the Court did not find the defendants guilty under the misappropriation theory of securities fraud, it did discuss the issue. The case arose when R. Foster Winans, a former writer for the Wall Street Journal's \"Heard on the Street\" column, and others were charged with violations of Section 10(b) and Rule 10b-5. They were also charged with violating the federal mail and wire fraud statutes and conspiracy. In researching information to be used in his column, Winans interviewed corporate executives, but none of the information he obtained was said to have involved corporate inside information. Because of its perceived quality and integrity, the column had the potential for affecting the prices of the stocks that it discussed.\nThe Wall Street Journal's official policy was that, before publication, the contents of the column were its confidential information. However, despite being familiar with this rule, Winans agreed to give Peter Brant and Kenneth Felis, both employees of Kidder Peabody, advance information about the columns. Brant, Felis, and another person, David Clark, bought and sold stocks based on the probable effects of the information that would later appear in Winans's columns. The profits from these trades over a four-month period amounted to $690,000. Kidder Peabody's compliance department eventually noticed correlations between the Winans columns and the Clark and Felis accounts. The SEC began an investigation; Winans and his roommate, David Carpenter, revealed the scheme, and indictments followed.\nThe Second Circuit held that Winans had knowingly breached a duty of confidentiality by misappropriating prepublication information. It found that this misappropriation had violated Section 10(b) and Rule 10b-5 because Winans's deliberate breach of his duty of confidentiality was a fraud and deceit on the newspaper. The Second Circuit also held that Winans had fraudulently misappropriated property within the meaning of the mail and wire fraud statutes.\nIn reviewing the Second Circuit's decision, the Supreme Court was evenly divided concerning these convictions under the securities laws and therefore affirmed, by a vote of four to four, the Second Circuit's opinion. The Court did not elaborate on whether Winans's activities violated the securities laws. It also affirmed the Second Circuit's judgment with respect to the mail and wire fraud convictions without elaboration.\n\n\t\tUnited States v. O'Hagan\n\nTen years later, in United States v. O'Hagan , the Supreme Court legitimated the misappropriation theory of securities fraud by finding James O'Hagan guilty of violating Section 10(b) and Rule 10b-5. O'Hagan was a partner in a Minneapolis law firm that represented Grand Metropolitan PLC (Grand Met), a company based in London. Grand Met was interested in acquiring Pillsbury Company (Pillsbury). O'Hagan purchased call options for and stock in Pillsbury after he learned of Grand Met's interest. After the tender offer was publicly announced, Pillsbury stock immediately rose. O'Hagan exercised his options and liquidated his stock, realizing a profit of over $4 million.\nThe SEC indicted O'Hagan on 57 counts, including securities fraud under Section 10(b) and Rule 10b-5. A jury convicted him on all of the counts, but the U.S. Court of Appeals for the Eighth Circuit (Eighth Circuit) reversed, holding, among other things, that the misappropriation theory is inconsistent with Section 10(b). The Supreme Court subsequently reversed the Eighth Circuit.\nIn its decision with respect to the misappropriation theory, the Court found that O'Hagan's fiduciary status and his willful intent to violate that status were sufficient to find him guilty of misappropriating confidential information:\n[T]he fiduciary's fraud is consummated, not when the fiduciary gains the confidential information, but when, without disclosure to his principal, he uses the information to purchase or sell securities. The securities transaction and the breach of duty thus coincide. This is so even though the person or entity defrauded is not the other party to the trade, but is, instead, the source of the nonpublic information . . . . A misappropriator who trades on the basis of material, nonpublic information, in short, gains his advantageous market position through deception; he deceives the source of the information and simultaneously harms members of the investing public.\n\n\t\tUnited States v. Newman\n\nA decision late in 2014 by the Second Circuit recently brought increased attention to the issue of insider trading. In this decision, United States v. Newman , the Second Circuit overturned two high-profile convictions for insider trading. The Second Circuit held that the evidence against Todd Newman and Anthony Chiasson, who were analysts for hedge funds and investment funds, could not sustain a guilty verdict. According to the Second Circuit, the government had not adequately shown that the alleged insiders, who were employees of publicly traded technology companies, received personal benefits for providing information to Newman and Chiasson. In addition, according to the court, the government had not presented evidence that the defendants knew that they were trading on inside information obtained from insiders who were violating their fiduciary duties. According to some commenters, this decision \"upended the government's campaign\" against insider trading because it held that the government must show that the insiders, who in this case allegedly passed on inside information, received personal benefits, presumably of a tangible nature, in order to obtain conviction. Although the federal government sought review of the Second Circuit's decision in Newman from the Supreme Court, the High Court declined to hear the case.\n\n\t\tSalman v. United States\n\nAs mentioned above, the Second Circuit's Newman decision required proof of a tangible benefit. However, in its 2015 decision in United States v. Salman , the Ninth Circuit found that it is enough to show that the insider and the tippee (the one who receives inside information) share a close family relationship. The Ninth Circuit took specific note of the Supreme Court's statement in Dirks v. Securities and Exchange Commission , discussed above, that \"[t]he elements of fiduciary duty and exploitation of nonpublic information also exist when an insider makes a gift of confidential information to a trading relative or friend .\" Salman appealed the Ninth Circuit's decision to the Supreme Court, which granted review.\nOn December 6, 2016, the U.S. Supreme Court in Salman v. United States sided with the Ninth Circuit, unanimously upholding the conviction of Bassam Yacoub Salman for insider trading on tips that he had received from his brother-in-law. The Court agreed with federal prosecutors that a trader can be guilty of violating insider trading prohibitions even if the insider did not receive a tangible benefit, such as money or property, for passing the tip so long as the trader and insider are friends or relatives. In so doing, the Court resolved a difference of opinion between the U.S. Courts of Appeals for the Second and Ninth Circuits concerning what the government must prove in prosecuting insider trading cases.\nIn its Salman decision, the Supreme Court held that the Ninth Circuit had properly applied Dirks in affirming Salman's conviction. The Court first looked to the trial court evidence that had established there were close family and friendship relationships among Salman and others involved in the case. With these close relationships in mind, the Court found that Dirks easily resolved the issue at hand, reiterating the Dirks Court's statement that \"a jury can infer a personal benefit\u2014and thus a breach of the tipper's duty\u2014where the tipper receives something of value in exchange for the tip or 'makes a gift of confidential information to a trading relative or friend.'\"\nAccording to the Court in Salman , when an individual disclosed confidential information to his brother with the expectation that his brother would trade on it, that individual breached his fiduciary duty to his employer, Citigroup, and its clients. Then, when Salman, as a tippee, traded on this information, knowing that it had been improperly disclosed, he too breached a duty of trust and confidence to Citigroup and its clients. According to the Court, it is not necessary that the tipper receive something of a tangible nature; rather, the breach of the fiduciary duty to a trading relative or friend suffices to meet the standard laid out in Dirks.\n\n\tCongressional Interest in Insider Trading\n\nNo bills concerning insider trading appear to have been introduced, to date, in the 115 th Congress. However, before the Supreme Court's Salman decision, at least three bills were introduced in the 114 th Congress in an attempt to prevent the type of securities trading that would appear to have been allowed under the Newman decision.\nTwo of the bills would have amended Section 10, the general antifraud provision of the Securities Exchange Act, and one of the bills would have added a new provision, Section 16A, to the Securities Exchange Act.\nH.R. 1173 , 114 th Congress, referred to the House Committee on Financial Services, would have added a new subsection (d) to Section 10. This new subsection would have held a person liable for violating the insider trading prohibition laid out in Section 2(a) of the bill if the person intentionally disclosed \"without a legitimate business purpose\" information he knew or should have known is material information and inside information. The bill would have defined \"should know\" to include various factors, such as the person's financial sophistication, knowledge of and experience in financial matters, position in the company, and assets under management.\nH.R. 1625 , 114 th Congress, also referred to the House Committee on Financial Services, would have added a new Section 16A to the Securities Exchange Act. This section would have prohibited the trading of securities if a person had material nonpublic information about the securities or knew or recklessly disregarded that the information was wrongfully obtained or that the securities transaction would involve a wrongful use of the information. The section would also have prohibited a person from communicating material nonpublic information about securities to others if: (1) others engaged in securities transactions based on the communication and (2) the securities transactions were reasonably foreseeable. The standard for the wrongfulness of a communication is based on information that has been obtained by activities such as theft, breach of a fiduciary duty, or violation of a federal law protecting computer data. Specific knowledge of how the information was obtained is not necessary for a violation so long as the person trading was aware or recklessly disregarded that the information was wrongfully obtained or communicated. The bill would also have authorized the SEC to provide exemptions from these prohibitions by rule if the exemptions were not inconsistent with the purposes of the section.\nS. 702 , 114 th Congress, referred to the Senate Committee on Banking, Housing, and Urban Affairs, would have added a new subsection (d) to Section 10 of the Securities Exchange Act. This new subsection would have prohibited securities transactions on the basis of material information that a person knew or had reason to know was not publicly available. It also would have prohibited knowingly or recklessly communicating information that was not publicly available if it was reasonably foreseeable that the communication was likely to result in a securities transaction. \"Not publicly available\" would have been defined in such a way that it would not have included information that a person had independently developed from publicly available sources. The SEC would also have been authorized to provide for exemptions by regulations if it determined that such regulations were necessary or appropriate in the public interest and consistent with the protection of investors.\nThe Supreme Court's decision in Salman may accomplish at least part of the goals of the legislation proposed in the 114 th Congress. However, the Salman decision does not appear to go as far as the bills in prohibiting the act of trading in securities with inside information and disclosing inside information. Salman addressed the issue of whether it is necessary for a tipper to receive something of a tangible nature when providing inside information to a trading relative or friend. However, the bills are not limited to relatives and friends; instead, they appear to prohibit in a broad way the trading of securities by any person who knows or should know that he possesses inside information.","output":"Insider trading in securities may occur when a person in possession of material nonpublic information about a company trades in the company's securities and makes a profit or avoids a loss. Certain federal statutes have provisions that have been used to prosecute insider trading violations. For example, Section 16 of the Securities Exchange Act of 1934 requires the disgorgement of short-swing profits by named insiders\u2014directors, officers, and 10% shareholders. The 1934 Act's general antifraud provision, Section 10(b), is frequently used in the prosecution of insider traders. Although the statute does not specifically mention insider trading but, instead, forbids the use of \"manipulative or deceptive\" means in buying or selling securities, case law has clarified that insider trading is the type of fraud that is prohibited by Section 10(b). Securities and Exchange Commission (SEC) rules issued to implement Section 10(b), particularly Rule 10b-5, have also been frequently invoked in insider trading prosecutions. With the Insider Trading Sanctions Act of 1984 and the Insider Trading and Securities Fraud Enforcement Act of 1988, Congress enacted legislation that imposed up to treble damages (and in some cases the greater of $1 million or up to treble damages) on persons found guilty of insider trading. More recently, the Stop Trading on Congressional Knowledge (STOCK) Act of 2012 (P.L. 112-105) explicitly stated that there is no exemption from the insider trading prohibitions for Members of Congress, congressional employees, or any federal officials. As noted above, SEC Rule 10b-5 is the most frequently used SEC rule in lawsuits that charge violations of insider trading prohibitions. However, other SEC rules, some of which specifically target insider trading, are also important.\nThere are numerous cases in which Section 10(b) and Rule 10b-5 have been used to prosecute insider trading violations. The most recent case of note is the Supreme Court's decision in Salman v. United States. On December 6, 2016, the Court unanimously upheld the conviction of Bassam Yacoub Salman for insider trading on tips that he had received from his brother-in-law. The Court agreed with federal prosecutors that a trader can be guilty of violating insider trading prohibitions even if the insider did not receive a tangible benefit, such as money or property, for passing the tip so long as the trader and insider are friends or relatives.\nNo bill concerning insider trading appears to have been introduced in the 115th Congress to date. However, several bills, including H.R. 1173, H.R. 1625, and S. 702, were introduced in the 114th Congress before the Supreme Court's Salman decision. The Salman decision appears not to go as far as these bills would have in prohibiting the acts of trading in securities with inside information and disclosing inside information."}
{"id":"gao_GAO-04-363","pid":"gao_GAO-04-363_0","input":"\tBackground\n\nMedicare covers about 40 million elderly (over 65 years old) and disabled  beneficiaries. Individuals who are eligible for Medicare automatically  receive Hospital Insurance, known as part A, which helps pay for inpatient  hospital, skilled nursing facility, hospice, and certain home health services.  A beneficiary generally pays no premium for this coverage unless the  beneficiary or spouse has worked fewer than 40 quarters in his or her  lifetime, but the beneficiary is liable for required deductibles, coinsurance,  and copayment amounts. Medicare-eligible beneficiaries may elect to  purchase Supplementary Medical Insurance, known as part B, which helps  pay for certain physician, outpatient hospital, laboratory, and other  services. Beneficiaries must pay a premium for part B coverage, which  was $58.70 per month in 2003. Beneficiaries are also responsible for part  B deductibles, coinsurance, and copayments. Table 1 summarizes the  benefits covered and cost-sharing requirements for Medicare part A and  part B.\nMany low-income Medicare beneficiaries who cannot afford to pay  Medicare\u2019s cost-sharing requirements receive assistance from Medicaid.  For Medicare beneficiaries qualifying for full Medicaid benefits, state  Medicaid programs pay for Medicare\u2019s part A (if applicable) and part B  cost-sharing requirements up to the Medicaid payment rate as well as for  services that are not generally covered by Medicare, such as prescription  drugs. To qualify for full Medicaid benefits, beneficiaries must meet their  state\u2019s eligibility criteria, which include income and asset requirements  that vary by state. In most states, beneficiaries that qualify for  Supplemental Security Income (SSI) automatically qualify for full  Medicaid benefits. Other beneficiaries may qualify through one of several  optional eligibility categories targeted to low-income beneficiaries,  individuals with high medical costs, or those receiving care at home or in  the community who otherwise would have been institutionalized.\nTo assist low-income Medicare beneficiaries with their premium and cost- sharing obligations, Congress established several Medicare savings  programs\u2014the QMB, SLMB, QI, and QDWI programs. Under these  programs, state Medicaid programs pay enrolled beneficiaries\u2019 Medicare  premiums. As a result, for QMB, SLMB and QI beneficiaries, Medicare part  B premiums would not be deducted from their monthly SSA checks. The  QMB program also pays Medicare deductibles and other cost-sharing  requirements, thereby saving beneficiaries from having to make such  payments. Beneficiaries eligible for Medicare savings programs can apply  for and be determined to be eligible through their state Medicaid  programs. Thirty-three states have agreements with SSA whereby SSA  makes eligibility determinations for a state if beneficiaries are deemed  eligible by SSA to receive SSI benefits. In the other 18 states, even if an  individual is eligible to receive SSI benefits, an individual must file an  application with the state or local Medicaid agency to be eligible.  Beneficiaries qualifying for Medicare savings programs receive different  levels of assistance depending on their income. See table 2 for eligibility  criteria and benefits for each program.\nIn 1998, Congress passed legislation specifically providing funding for SSA  to evaluate ways to promote Medicare savings programs. In response,  SSA conducted demonstration projects to explore the effects of using  various approaches to increase participation in Medicare savings  programs. In one of these demonstrations conducted in 1999 and 2000,  SSA tested six models designed to increase awareness and reduce barriers  to enrollment. The models were implemented at 20 sites in 10 states, as  well as the entire state of Massachusetts. The models differed in the extent  to which SSA was involved in outreach efforts beyond mailing the letters.  For example, in the \u201capplication model,\u201d SSA staff screened beneficiaries  if they appeared to be eligible, completed applications, collected  supporting documents, and forwarded the completed application form and  supporting evidence to the state Medicaid agency for an eligibility  determination. In the \u201cpeer assistance model,\u201d Medicare beneficiaries  contacted an AARP toll-free number and were screened for program  eligibility by an AARP volunteer. Across all six models, SSA sent more  than 700,000 letters informing low-income Medicare beneficiaries that they  may be eligible for benefits under the Medicare savings programs. The  enrollment rate for each model varied\u2014ranging from an additional 7  enrollees per 1,000 letters to 26 enrollees per 1,000 letters\u2014with the  application model recording the highest enrollment rate and peer  assistance recording the lowest.\nIn 2000, Congress amended the Social Security Act, through BIPA,  requiring the Commissioner of Social Security to notify eligible Medicare  beneficiaries about assistance available from state Medicaid programs to  help pay Medicare premiums and cost sharing. BIPA also required SSA to  furnish each state Medicaid program with the names and addresses of  individuals residing in the state that SSA determines may be eligible for  the Medicare savings programs. SSA is required to update such  information at least annually.\nIn addition to SSA\u2019s outreach efforts, CMS and individual states have  engaged in efforts to increase enrollment in Medicare savings programs.  Since fiscal year 2002, CMS has included increasing awareness of the  Medicare savings programs as one of its Government Performance and  Results Act (GPRA) goals. Specifically, CMS\u2019s goal in fiscal year 2002 was  to develop a baseline to measure awareness of Medicare savings programs  and to set future targets for increasing awareness. CMS estimated that 11  percent of beneficiaries were aware of Medicare savings programs in 2002  and the goal was to increase this to 13 percent for fiscal year 2003. As part  of its efforts to increase awareness, CMS has coordinated with states, SSA,  and other organizations regarding various outreach efforts; provided  information about Medicare savings programs in various CMS  publications; and developed a variety of educational materials for targeted  populations, including minorities. CMS efforts in increasing enrollment in  earlier years included setting state-specific enrollment targets and  measuring progress toward these enrollment targets; developing and  disseminating training and outreach materials to the states, and  sponsoring national and regional training workshops for a variety of  stakeholders, including other federal and state agencies, health care  providers, and community organizations; designing a model application for  Medicare savings programs that states can consider adopting; and  providing grant funding to state Medicaid agencies, state health insurance  assistance programs, and national advocacy groups to test and promote  innovative approaches to outreach.\nIn 2001, CMS also contracted for a survey of states to identify activities  undertaken to increase program enrollment and streamline administration  of these programs. Some of the most common state efforts included  allowing application by mail (49 states), eliminating in-person interviews  (46 states), developing a shorter application form (43 states), and  conducting outreach presentations at health fairs (34 states). Other state  efforts identified by the survey included  increasing awareness of the programs through outreach efforts such as  direct mailings and other printed material, and public service  announcements on radio, television, and in newspapers;    providing training for employees and education for beneficiaries;    developing partnerships with other entities, such as State Health Insurance  Assistance programs and local agencies on aging, to enhance outreach  efforts and promote issues and solutions involving the Medicare savings  programs;    eliminating potential barriers to enrollment such as streamlining the  enrollment and renewal process and easing financial eligibility rules;    supplementing program benefits with other benefits, such as prescription  drug discount programs; and    providing information targeting underserved populations, including  minorities.\n\n\tSSA Is Conducting an Annual Outreach Effort Targeted to Low-Income Medicare Beneficiaries\n\nIn response to BIPA, SSA is conducting an annual outreach effort to help  increase enrollment in Medicare savings programs. This outreach consists  of a nationwide mailing campaign and data sharing with the states. SSA  selected low-income Medicare beneficiaries to be sent an outreach letter if  their incomes were below the income eligibility ceilings for the Medicare  savings programs. From May through November 2002, SSA sent a total of  16.4 million outreach letters to persons potentially eligible for QMB,  SLMB, and QI. Additionally, in late 2002, SSA sent about 53,000 letters to  those potentially eligible for benefits under the QDWI program. Starting in  2003, SSA has targeted annual outreach letters to individuals newly eligible  for Medicare as well as a subset of those who were sent outreach letters in  2002 but are still not enrolled. From June through October 2003, SSA sent  outreach letters to 4.3 million of these beneficiaries. SSA intends to  continue its outreach mailing annually to potentially eligible beneficiaries,  including recipients who did not enroll after receiving earlier letters, as  well as those whose income has declined, making them eligible for the  program. In addition to sending outreach letters, in 2002 and 2003 SSA  provided states with a data file that listed residents who were potentially  eligible for benefits under the Medicare savings programs. SSA plans to  continue sharing these data once a year with states. The data provided by  SSA could be used by the states to coordinate their outreach with SSA\u2019s or  supplement SSA\u2019s outreach efforts.\nFor the 2002 mailing, SSA sent letters three times each week from May  through November. Each time letters were mailed, SSA sent them to  approximately 207,000 Medicare beneficiaries randomly selected from the  16.4 million beneficiaries who were identified as potentially eligible for  QMB, SLMB, and QI. Letters were targeted to beneficiaries whose  incomes from Social Security and certain other federal sources were less  than 135 percent of the federal poverty level (FPL). Specifically, those  selected to be sent the outreach letters were intended to meet the  following three criteria:  individuals and couples entitled to Medicare, or within 2 months of  Medicare entitlement eligibility;  individuals who were not currently receiving Medicare savings program  benefits under a state Medicaid program or not already entitled to full  Medicaid based on SSI participation; and  individuals and couples whose combined Social Security income and  Department of Veterans Affairs and federal civil service pensions fell  below the program\u2019s income eligibility ceiling.\nThe letters provided information in English or Spanish about the Medicare  savings programs, including state-specific asset guidelines and a state  contact number. (See app. II for a sample 2002 outreach letter.) At the  end of November 2002, SSA sent a separate mailing to about 53,000  disabled working adults who were potentially eligible for benefits under  the QDWI program.\nMedicare beneficiaries who had sources of income other than Social  Security\u2014such as income from employment and public and private  pensions\u2014and whose incomes were above the programs\u2019 eligibility  thresholds were selected nonetheless to be sent the SSA outreach letter  because SSA\u2019s data systems do not collect information on these income  sources. In addition, SSA\u2019s records do not contain information about  beneficiaries\u2019 private assets, making it impossible for SSA to identify  whether letter recipients had assets within their states\u2019 Medicare savings  programs\u2019 eligibility limits\u2014typically $4,000 for an individual and $6,000  for couples.\nIn 2002, the Medicare Rights Center, a national health advocacy group for  older adults and people with disabilities, sought a federal court order  requiring SSA to resend 1.4 million letters to potentially eligible  beneficiaries in Connecticut and New York to correct erroneous  information on the asset limit for the QI program. The New York and  Connecticut letters had incorrectly informed potential beneficiaries that  only individuals with assets of less than $4,000 were eligible for the QI  program, even though Connecticut and New York abolished the asset  requirement for QI eligibility in 2001 and 2002, respectively. SSA agreed to  resend the letters and the parties settled the case before trial.\nIn addition to sending letters to potentially eligible low-income Medicare  beneficiaries, in 2002 SSA provided all but six states with an electronic  data file containing the names of all beneficiaries to whom it had sent  letters in that state. The data file contained information that could assist  states with outreach efforts, such as the name, address, Social Security  number, date of birth, spouse\u2019s name, and the basis for Medicare  entitlement of each letter recipient. SSA is required to provide updated  data to the states each year.\nFor the June through October 2003 mailing, SSA sent a second round of  letters to about 4.3 million potentially eligible low-income Medicare  beneficiaries nationwide whom its records indicated might have met the  QMB, SLMB, and QI income eligibility criteria and were not currently  enrolled in Medicare savings programs. This mailing included beneficiaries  who were newly eligible since the 2002 mailing, current Medicare  beneficiaries who newly met the income criteria, and about one-fifth of  the beneficiaries notified in 2002 who still met the mailing criteria but  were not enrolled in a Medicare savings program. At the time we  conducted our work, enrollment data for beneficiaries who were sent the  letter in 2003 were not available.\nIn contrast to the 2002 letter that provided state-specific eligibility criteria  and a state-specific telephone number, the 2003 letter did not contain  customized state information, but provided more general national  information. The letter suggested that beneficiaries who may be eligible  check the government list in their local telephone books for their local  Medicaid contact or call the general 1-800-Medicare number that refers  callers to state help lines, such as state or local medical assistance offices,  social services, or welfare offices. SSA gave several reasons for not  including state-specific information in the 2003 letter. One official  indicated that there was additional cost to SSA to develop state-specific  letters and therefore the agency did not tailor the letters for each state.  CMS officials reported that a few states did not want to provide state-level  contact numbers because eligibility and other Medicare savings program  administrative matters were actually conducted at the county levels.  Furthermore, in some cases, the telephone numbers states initially  provided were changed shortly before the 2002 mailings were begun,  creating additional need for SSA to coordinate with states in finalizing the  letters. However, some state officials we interviewed expressed concern  about the lack of state-specific information for the 2003 mailing. Their  concern was that, given that most states had established mechanisms for  responding to these inquiries for the larger 2002 mailing, not including  state-specific criteria or contact information on the letter could make the  letter less effective since it could be more difficult for beneficiaries to  obtain direct assistance or applications for eligibility determinations.\n\n\tMedicare Savings Program Enrollment Increased by More than 74,000 Beneficiaries Following the 2002 SSA Mailing\n\nWe estimate that SSA\u2019s mailing from May through November 2002 to 16.4  million potentially eligible beneficiaries contributed to more than 74,000  additional beneficiaries enrolling in Medicare savings programs. Further,  in the year following SSA\u2019s mailing, nationwide enrollment in Medicare  savings programs increased 2.4 to 2.9 percentage points over that in the 3  previous years. Certain demographic groups also had larger additional  increases in enrollment following the 2002 SSA mailing. For example,  beneficiaries less than 65 years old, persons with disabilities, racial and  ethnic minorities, and residents in southern states experienced larger  additional increases in enrollment.\n\n\t\tMore than 74,000 Additional Beneficiaries Enrolled in Medicare Savings Programs Following SSA\u2019s 2002 Mailing\n\nOn the basis of our analysis of SSA\u2019s Master Beneficiary Record (MBR),  we estimate that, of the 16.4 million SSA letter recipients in 2002, an  additional 74,000 beneficiaries (0.5 percent of letter recipients) enrolled in  Medicare savings programs than would have likely enrolled without the  mailing. To estimate this increased enrollment, we examined two cohorts  of letter recipients\u2014a cohort of 1.3 million beneficiaries who were sent  the letters during the first six mailings in May 2002 and a baseline cohort  of 1.3 million beneficiaries who were sent the letters during the last six  mailings through November 2002. Because SSA sent the mailing to  beneficiaries in a random order nationwide from May through November  2002, the only difference between the cohorts is the time at which the  letters were sent to them. As a result, other factors that could influence  enrollment patterns, such as demographic differences or other outreach  efforts by CMS and the states, should affect the May and November  cohorts similarly. We used the November 2002 cohort as a baseline to  examine how the May 2002 cohort\u2019s enrollment in Medicare savings  programs was affected following SSA\u2019s mailing.\nAs shown in figure 1, by August 2002\u20143 months after the initial letters  were sent in May 2002\u2014the Medicare savings program enrollment for the  May cohort began to increase faster than that of the November cohort,  which was yet to have the SSA letter sent to them. While the cohorts were  sent the SSA letters in May or November 2002, SSA officials reported that  it typically takes about 3 months before enrollment is reported in the MBR.\nAs of December 2002, more than 5,800 additional beneficiaries in the  cohort of 1.3 million beneficiaries who were sent the letter in May had  enrolled in Medicare savings programs compared with the November  cohort, whose enrollment was not yet affected by the mailing. (See table  3.) This additional enrollment in the May cohort represents 0.5 percent of  the letter recipients. Projecting the experience of the May cohort to the  universe of the 16.4 million letter recipients results in an estimate of over  74,000 additional beneficiaries enrolling in Medicare savings programs as a  result of the 2002 SSA mailing.\nNationwide, CMS data showed that Medicare savings programs  experienced an overall net increase in enrollment of 5.9 percent (341,069  individuals) from May 2002\u2014the start of SSA\u2019s mailing\u2014to May 2003.  This 5.9 percent increase was nearly double the 3.0 to 3.5 percent  increases in the 3 previous years before SSA\u2019s nationwide mailings. (See  table 4.) These data suggest that SSA\u2019s mailing helped to increase  enrollment at a greater annual rate than in earlier years.\n\n\t\tCertain States and Demographic Groups Had Higher Enrollment Rates Following SSA\u2019s Outreach\n\nAcross the United States, letter recipients residing in the southern states  had a 0.6 percent additional increase in enrollment following SSA\u2019s  mailing. This was more than residents in the Northeast, Midwest, and  West, where the additional increase in enrollment was 0.4 percent. Thirty- five states had an additional increase in enrollment following the SSA  mailing compared to the increase that would likely have occurred without  the letter. Of the thirty-five states, the largest additional increase in  enrollment following the SSA mailing occurred in Alabama, (2.9 percent),  followed by Delaware (2.0 percent), and Mississippi (1.3 percent). While  data from 13 other states showed an increase in enrollment following the  SSA mailing, these increases were not statistically significant. Another  three states showed a decrease in enrollment following the SSA mailing,  but these changes also were not statistically significant. Appendix III  provides the additional percentage change in enrollment following the  2002 SSA mailing for each state.\nCertain demographic groups also had higher additional increases in  enrollment rates than the additional increase among all letter recipients. In  comparison to the 0.5 percent additional increase in enrollment among all  letter recipients, beneficiaries less than 65 years old and beneficiaries of  any age who qualified for Medicare as a result of a disability each had a 0.8  percent additional increase in enrollment following SSA\u2019s outreach. Also,  minority beneficiaries, which based on SSA\u2019s data categories include  blacks or individuals of African origin, Asians and Pacific Islanders, and  North American Indians or Eskimos, had a 0.7 percent additional increase  in enrollment. Appendix IV provides data for all demographic groups that  we examined.\n\n\tEnrollment Increases Varied among Selected States We Reviewed, with Several Reporting Increased Calls and Applications Concurrent with SSA Mailing\n\nThe percentage of additional letter recipients newly enrolling in Medicare  savings programs following SSA\u2019s mailings varied significantly among the  six states we reviewed. Among these six states, enrollment increases  ranged from 0.3 to 2.9 percent. Further, several states we reviewed  reported that calls to their telephone hot lines and applications mailed or  received increased sharply during the period of the SSA outreach. In  addition, some states supplemented SSA efforts with outreach efforts of  their own, while other states were aware of or assisted outreach efforts by  private or community groups.\n\n\t\tSSA Outreach Efforts Had Varying Effects on Enrollment in Selected States\n\nAmong the states we reviewed, SSA\u2019s outreach had varying effects on the  percentage of letter recipients enrolling. Alabama, with 2.9 percent  additional letter recipients enrolled compared to the percentage that likely  would have enrolled without the SSA letter, had the largest additional  increase in enrollment following the SSA mailing. This contrasts with the  national average of 0.5 percent. For the states we reviewed, SSA\u2019s  outreach had the least impact on Medicare savings program enrollment in  California, Washington, and New York with a 0.3 percent increase in  additional enrollment. (See table 5.)\nThe varying effects on enrollment by state can be attributed to several  factors, including, the share of eligible beneficiaries already enrolled in  Medicare savings programs prior to the outreach, a state\u2019s ability to handle  increased phone calls and applications, and a state\u2019s income and asset  limits. For example, a smaller share of low-income elderly beneficiaries in  Alabama was enrolled in QMB as of the year prior to the SSA mailing than  the national average. Specifically, the number of QMB enrollees in  Alabama in 2001 was about half the number of Alabama seniors reported  by the Census Bureau to have incomes below the limit for the QMB  program. In contrast, about three-quarters of the seniors nationwide who  reported income below the QMB limit were enrolled. As a result, a larger  number of letter recipients in Alabama may have been able to meet the  QMB and other Medicare savings program eligibility criteria whereas other  states may have already enrolled a larger share of these beneficiaries.  Further, each of the states we reviewed established or used an existing  state-specific telephone number that was listed in the SSA letter to receive  calls. After the SSA mailing started, however, California\u2019s phone number  was discontinued and calls were redirected to CMS\u2019s nationwide 1-800- Medicare number. California\u2019s lower enrollment could also result from its  eligibility requirements for SSI. For example, in a prior demonstration,  SSA\u2019s mailing in 1999 and 2000 resulted in lower enrollment in California  than in other demonstration sites, in part because the state offered a  generous state supplement to SSI. Therefore, there were potentially not as  many people eligible for the Medicare savings programs. In addition,  other state differences, such as different state asset eligibility  requirements and application requirements as well as state efforts to  support the SSA outreach, may have contributed to different effects  among states.\n\n\t\tStates Reported Increased Interest in Medicare Savings Programs Concurrent with SSA and States\u2019 Outreach Efforts\n\nStates we reviewed often reported that calls to their hot lines and  applications for Medicare savings programs increased significantly during  the period of the 2002 SSA mailing. Four states provided data on the  monthly trends in the number of calls either related to Medicare and  Medicaid in general or the Medicare savings program specifically that  showed increases concurrent with the 2002 SSA mailing. Three states were  also able to provide data on changes in the number of applications sent to  interested beneficiaries or received from beneficiaries. (See table 6.) While  officials in several states indicated that not all of the increases noted could  be attributed directly to the SSA mailing, the data provided by the states  suggest that beneficiaries\u2019 interest in Medicare savings programs increased  during the mailing period. For example, Alabama experienced a 19 percent  increase in monthly calls to its state hot line related to any Medicare and  Medicaid issue after the SSA mailings began; this was followed by a 25  percent decrease after the mailings ended. Alabama also experienced a  158 percent surge in applications received per month during the SSA  mailing and then a decrease of 57 percent afterwards. State officials  reported that Washington tracked calls and applications specific to the  SSA mailing, and these data showed 85 percent decreases in both monthly  call volume and applications mailed out to beneficiaries after the mailings  ended; Washington also reported a 72 percent monthly decrease in  applications received after the 2002 mailings ended.\nConcurrent with SSA\u2019s mailing, each of the states we reviewed reported  that the state or other stakeholders conducted additional outreach. For  example, the Louisiana Department of Health and Hospitals and the  Pennsylvania Health Law Project, a coalition advocating for low-income  individuals and the disabled, each received 3-year grants from the Robert  Wood Johnson Foundation in 2002 to conduct outreach to low-income  Medicare beneficiaries in these states. A state official also reported that in  2002 the New York Department of Health developed and distributed  100,000 copies of a brochure called \u201cHow To Protect Your Health and  Money,\u201d which included information about the Medicare savings  programs, and conducted a \u201cSenior Day\u201d at 16 sites in New York City and  several other districts as well as presentations at local fairs. Other states  reported coordinating with community or state organizations as well as  private health plans participating in Medicare, such as health maintenance  organizations participating in the Medicare + Choice program. Some  private health plans conducted outreach to increase Medicare savings  program enrollment since CMS pays these plans a higher rate for these  enrollees. Several state officials also said that their states work with other  groups, such as the local departments of aging or senior services and local  businesses and community organizations, to assist with outreach efforts to  potentially eligible beneficiaries. None of the states we reviewed reported  having assessed the effectiveness of their outreach efforts.\nOf the six states we reviewed, only Louisiana and Pennsylvania officials  reported that they used the data file listing names and addresses of  potentially eligible beneficiaries provided by SSA in 2002 to assist with  state outreach or enrollment efforts. For example, after receiving the SSA  data file, seven parishes in Louisiana used it to obtain a list of potentially  eligible beneficiaries and sent an application with a letter and return  envelope to these beneficiaries. In 2003, about 20,450 applications were  mailed to potential beneficiaries. Pennsylvania officials used the file to  cross-check against the state\u2019s own data system to assess the number of  applications authorized, rejected, or denied as a result of the SSA mailing.\n\n\tAgency and State Comments\n\nWe provided a draft of this report to SSA, CMS, and state Medicaid  agencies in Alabama, California, Louisiana, New York, Pennsylvania, and  Washington. In written comments, SSA generally concurred with our  findings and provided technical comments that we incorporated as  appropriate. SSA also noted that improvements in state enrollment  processes could further increase enrollment. SSA\u2019s comments are  reprinted in appendix V. In a written response, CMS stated it did not have  any specific comments on the report. However, CMS provided technical  comments that we incorporated as appropriate.\nWhile we did not examine the effects of SSA\u2019s 2003 mailing, Louisiana  Medicaid officials indicated that, in comparison to the 2002 SSA mailing,  there was little increase in call volume following SSA\u2019s 2003 mailing, and  that they believe that this was because a state-specific telephone number  was not included in the 2003 outreach letter. New York Medicaid officials  stated that they found an increase in Medicare savings program enrollment  of over 6 percent from December 2002 to December 2003. However, in  addition to being a different timeframe from what we examined, we do not  believe that all of this increase can be attributed to the SSA mailing. Based  on our analysis of SSA\u2019s MBR data, we report a 0.3 percent increase in  enrollment in New York specifically attributable to the 2002 SSA outreach  mailing. We found the net increase in enrollment from May 2002 to May  2003 (following SSA\u2019s 2002 mailing) to be 5.9 percent nationwide, similar  to the net increase in enrollment that New York reported from December  2002 to December 2003. Louisiana and Pennsylvania Medicaid officials  also provided technical comments that we incorporated as appropriate.  Alabama, California, and Washington Medicaid officials reviewed the draft  and stated that the report accurately reflected information relevant to their  respective states.\nWe are sending copies of this report to the Commissioner of SSA, the  Administrator of CMS, and other interested parties. We will also provide  copies to others on request. In addition, this report will be available at no  charge on GAO\u2019s Web site at http:\/\/www.gao.gov.\nPlease call me at (202) 512-7118 or John Dicken at (202) 512-7043 if you  have any additional questions. N. Rotimi Adebonojo and Rashmi Agarwal  were major contributors to this report.\n\nAppendix I: Methodology\n\nTo determine what outreach the Social Security Administration (SSA)  conducted in response to the statutory requirement, we obtained and  reviewed copies of SSA documents, including sample 2002 and 2003  outreach letters and data on the number of letters sent to eligible Medicare  beneficiaries in each state, as well as reports prepared by the Centers for  Medicare & Medicaid Services (CMS) related to the Medicare savings  program. In addition, we interviewed officials from the SSA and CMS.\nTo determine how enrollment changed following SSA\u2019s outreach, we  analyzed records from SSA\u2019s Master Beneficiary Record (MBR)\u2014a  database that contains the administrative records of Social Security  beneficiaries, including payments for Medicare premiums\u2014and CMS\u2019s  national enrollment data for the Medicare savings programs. The MBR  data contain demographic information as well as information on the  monthly deductions made from beneficiaries\u2019 Social Security checks to  cover Medicare part B premiums. We obtained MBR data on beneficiaries  who were sent the outreach letters in the first six mailings in May and the  last six mailings through November 2002, representing 2.6 million of the  16.4 million Social Security beneficiaries who were sent letters from SSA.  To determine which letter recipients enrolled in the Medicare savings  programs following SSA\u2019s 2002 mailing, we identified letter recipients who  met the following criteria:  those whose date of eligibility for Medicare savings programs began  January 2002 or afterwards;  those for whom a third-party payer, specifically a state, made payments on  their behalf to cover Medicare part B premiums;  and  those who no longer had the premium deduction made from their Social  Security checks to cover Medicare part B premiums at any point from June  2002 through December 2002.\nIn order to estimate the impact of the SSA outreach mailing on additional  enrollment in Medicare savings programs, we analyzed monthly  enrollment from June 2002 to December 2002 for two cohorts of letter  recipients to identify letter recipients who enrolled in Medicare savings  programs following the initiation of the SSA mailing in May 2002. Because  the mailings were sent to beneficiaries in a random order, the only notable  difference between the recipients in the two cohorts would be the timing  of when the SSA letters were sent to them. SSA officials noted that it  typically takes about 3 months until enrollment is reported on the MBR.  Therefore, since the mailings began in May 2002, the first effects of the  mailing would not have been apparent until after June 2002. We analyzed  the MBR data provided by SSA to determine specifically what month and  year a letter recipient enrolled in Medicare savings programs. Using the  enrollment by the November cohort as a baseline because these  individuals met the same selection criteria as those in the May cohort, we  estimated the net effect of the SSA mailing by comparing the difference in  cumulative monthly enrollment between the May and November cohorts  in December 2002\u2014this difference represented the additional enrollment  we attributed to the SSA mailing. We made the comparison in December  2002 because after this date the enrollment of the baseline group began  increasing at a rate faster than the May cohort, indicating that this was the  point when the largest cumulative difference in enrollment between the  two cohorts occurred before the effects of the mailing started becoming  evident for the November cohort. Using the same methodology, we  calculated the effect of the SSA outreach letter for certain demographic  groups and for beneficiaries in each state. We also obtained and analyzed  data contained in CMS\u2019s third party master file for the period May 1999 to  May 2003 that tracks national Medicare savings programs enrollment.  Using these data, we examined how national Medicare savings enrollment  trends compared before and after the 2002 SSA mailing.\nTo determine how additional enrollment in the programs changed in  selected states following SSA\u2019s outreach and what outreach efforts these  states undertook, we interviewed Medicaid officials in six states\u2014 Alabama, California, Louisiana, New York, Pennsylvania, and Washington.  We selected these states based on several factors, including states with  different levels of change in overall Medicare savings programs enrollment  from 2002 to 2003, geographic diversity, relatively large populations of  Medicare savings programs enrollees, and availability of data on program  enrollment. We also reviewed CMS\u2019s third party master file to identify how  many beneficiaries in each state were enrolled in Medicare savings  programs, and analyzed records from SSA\u2019s MBR to estimate the  additional enrollment in each state following the SSA mailing. In addition,  we obtained information from each state to the extent available on its  involvement with the SSA mailing, the state\u2019s specific eligibility criteria for  its Medicare savings program, outreach efforts conducted by the state to  low-income Medicare beneficiaries, and state data on call and application  volume before, during, and after the SSA outreach.\nWe obtained information from SSA and CMS on their data reliability  checks and any known limitations on the data they provided us. SSA and  CMS perform quality controls, such as data system edits, on the MBR and  the third party beneficiary master file, respectively. We concluded that  their data were sufficiently reliable for our analysis. A few MBR variables  have certain limitations. For example, some Medicare beneficiaries receive  their Social Security payments electronically, and therefore may not keep  the record of their mailing address current. For our analysis we only used  the beneficiary\u2019s state of residence, which is less likely to change as SSA  reported that, even if a beneficiary\u2019s address changes, the beneficiary often   stays within the same state of residence. Finally, since it is optional for  beneficiaries to identify their race, a number of Social Security recipients  do not. However, sufficient numbers of individuals reported their race to  to allow us to analyze these data and also report missing or unknown  values.\n\nAppendix II: SSA 2002 Outreach Letter\n\nSSA mailed 16.4 million letters in 2002 to potentially eligible Medicare  beneficiaries notifying them about state Medicare savings programs. These  letters were customized to include state-specific information, including a  state contact number. These letters were sent in English or Spanish,  depending on the beneficiary\u2019s preference. Figure 2 provides a sample of  the outreach letter sent to a beneficiary in Texas between May and  November 2002.\n\nAppendix III: Medicare Savings Program Enrollment following 2002 SSA Mailing by State\n\nFigure 3 shows enrollment by state of the estimated 74,000 additional  beneficiaries who enrolled in Medicare savings programs following the  2002 SSA mailing. Because these estimates are based on two cohorts of  about 1.3 million beneficiaries each that represent a sample of the entire  population of 16.4 million beneficiaries, we calculated 95 percent  confidence intervals to reflect the potential for statistical error in  projecting these estimates from the sample cohorts to the entire  population. The small sample size in states with smaller populations  results in larger confidence intervals for the estimates for these states. The  highest additional increase in enrollment was in Alabama, in which an  estimated 2.9 percent (with a 95 percent confidence interval of 2.6 percent  to 3.3 percent) of beneficiaries who were sent the SSA letter enrolled than  if the mailing had not occurred. In three states (Montana, Utah, and  Vermont) our analysis showed no additional or slightly negative  enrollment following the SSA mailing, and because the confidence  intervals for these and 13 other states overlap the numeric value zero, the  data do not show a statistically significant change in additional enrollment  in the Medicare savings programs following the 2002 SSA mailing for these  states. The other 35 states showed a statistically significant increase in  additional enrollment in the Medicare savings programs following the 2002  SSA mailing.\n\nAppendix IV: Medicare Savings Program Enrollment following 2002 SSA Mailing by Demographic Group\n\nOn the basis of our analysis of SSA\u2019s MBR, we estimate that enrollment in  Medicare savings programs was about 74,000 higher for Medicare  beneficiaries following the 2002 SSA mailing than it would have been  without the mailing. This represents about 0.5 percent of the 16.4 million  letters sent nationwide. However, this additional enrollment following the  SSA mailing varied among demographic groups.\nFigure 4 shows the additional enrollment in Medicare savings programs  following the 2002 SSA mailing by geographic region and demographic  groups, including racial categories, sex, disability status, and age  categories. Because these estimates are based on two cohorts of about 1.3  million beneficiaries each that represent a sample of the entire population  of 16.4 million beneficiaries, we calculated 95 percent confidence intervals  to reflect the potential for statistical error in projecting these estimates  from the sample cohorts to the entire population. Additional enrollment  following the 2002 SSA mailing was statistically significantly higher among  beneficiaries in southern states compared to other geographic regions,  minorities compared to white beneficiaries, beneficiaries with disabilities  compared to beneficiaries without disabilities, and beneficiaries who were  younger than 65 years compared to those who were 65 years or older.\n\nAppendix V: Comments from the Social Security Administration\n\nRelated GAO Products\n\nMedicare and Medicaid: Implementing State Demonstrations for Dual  Eligibles Has Proven Challenging. GAO\/HEHS-00-94. Washington, D.C.:  August 18, 2000.\nLow-Income Medicare Beneficiaries: Further Outreach and  Administrative Simplification Could Increase Enrollment. GAO\/HEHS- 99-61. Washington, D.C.: April 9, 1999.\nMedicare and Medicaid: Meeting Needs of Dual Eligibles Raises Difficult  Cost and Care Issues. GAO\/T-HEHS-97-119. Washington, D.C.: April 29,  1997.\nMedicare and Medicaid: Many Eligible People Not Enrolled in Qualified  Medicare Beneficiary Program. GAO\/HEHS-94-52. Washington, D.C.:  January 20, 1994.","output":"Why GAO Did This Study\n\nTo assist low-income beneficiaries with their share of premiums and other out-of-pocket costs associated with Medicare, Congress has created four Medicare savings programs. Historic low enrollment in these programs has been attributed to several factors, including lack of awareness about the programs, and cumbersome eligibility determination and enrollment processes through state Medicaid programs. Concerned about this low enrollment, Congress passed legislation as part of the Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000 (BIPA) requiring the Social Security Administration (SSA) to notify low-income Medicare beneficiaries of their potential eligibility for Medicare savings programs. The statute also required GAO to study the impact of SSA's outreach effort. GAO examined what outreach SSA undertook to increase enrollment, how enrollment changed following SSA's 2002 outreach, and how enrollment changed in selected states following SSA's outreach and what additional outreach efforts these states undertook. GAO reviewed information obtained from SSA and the Centers for Medicare & Medicaid Services (CMS), analyzed enrollment data provided by SSA and CMS, and interviewed officials in and obtained data from six selected states (Alabama, California, Louisiana, New York, Pennsylvania, and Washington).\n\nWhat GAO Found\n\nIn response to a statutory requirement, SSA is carrying out an annual outreach effort to help increase enrollment in Medicare savings programs. This outreach effort consists of mailing letters to potentially eligible lowincome beneficiaries nationwide as well as sharing data with states to assist with their supplemental outreach efforts. In 2002, SSA sent 16.4 million letters to low-income Medicare beneficiaries whose incomes from Social Security and certain other federal sources met the income eligibility criteria for Medicare savings programs. The 2002 letters provided eligibility criteria for programs in the beneficiary's home state and urged beneficiaries interested in enrolling to call a state telephone number provided. In addition to sending these letters, SSA provided states with a data file containing information on the beneficiaries to whom it sent letters. In 2003, SSA sent another 4.3 million letters to potentially eligible beneficiaries, and indicated that it intends to repeat the outreach mailing annually to newly eligible beneficiaries and a portion of prior letter recipients. Following SSA's outreach efforts in 2002, GAO estimated that more than 74,000 additional eligible beneficiaries enrolled in Medicare savings programs, 0.5 percent of all 2002 letter recipients, than would have likely enrolled without the letter. CMS enrollment data also showed that growth in Medicare savings programs enrollment for the year following SSA's mailing was nearly double that for each of the 3 prior years. Of the 74,000 additional enrollees, certain states and demographic groups had somewhat larger increases in enrollment than other groups. The highest additional enrollment increase was in Alabama, where 2.9 percent of letter recipients enrolled, followed by Delaware at 2.0 percent. Beneficiaries less than 65 years old, persons with disabilities, racial and ethnic minorities, and residents in southern states also had higher enrollment rates than other groups. The percentage of letter recipients newly enrolling in Medicare savings programs following SSA's 2002 mailing ranged from 0.3 to 2.9 percent among the six states GAO reviewed. The varying effects on enrollment by state could be attributable to several factors, including the share of eligible beneficiaries enrolled in Medicare savings programs prior to the outreach, each state's ability to handle increased call and application volume, and a state's income and asset limits. Four states GAO reviewed reported increases in the numbers of calls received or applications mailed or received following the SSA mailing and then decreases after the mailing period ended. Each of the states GAO reviewed reported that the state or other stakeholders conducted additional outreach during SSA's 2002 outreach. SSA generally agreed with GAO's findings. CMS stated that it did not have specific comments on the report."}
{"id":"crs_RL32420","pid":"crs_RL32420_0","input":"\tIntroduction\n\nCongressional concern about mercury in the environment has greatly increased in recent years due to emerging scientific evidence that exposure to low levels of mercury may harm the developing nervous systems of young children. At higher levels of exposure, mercury is known to be a potent neurotoxin. People in the United States are exposed to mercury primarily by eating large, predatory fish. Risks of health problems for people who consume mercury in fish have caused wide public concern and prompted the U.S. Environmental Protection Agency (EPA) and the Food and Drug Administration (FDA) to issue consumer alerts, warning women of child-bearing age and young children to avoid certain fish altogether and to limit the number of meals for other fish.\nNumerous legislative proposals in the 109 th Congress aim to reduce levels of mercury in the environment\u00e2\u0080\u0094in consumer products, in solid waste, in utility and other emission sources, and in surface water. Most of these proposals focus on sources of mercury emissions to air, because atmospheric mercury deposition accounts for most of the mercury in U.S. freshwater lakes and streams. At least five proposals target emissions from coal-fired electric utilities, because they are thought to be the last remaining major uncontrolled source of mercury emissions. These various proposals and a final regulation promulgated by the U.S. Environmental Protection Agency (EPA) on March 15, 2005, differ in how much and how soon emission reduction would be required, as well as in the extent to which reductions would be distributed geographically across the United States.\nAnalysis of the competing policy proposals for reducing mercury emissions raises questions about the urgency of a need for emission controls, the likelihood that they will reduce mercury contamination of fish, and the possibility that overall reductions might be achieved at the expense of local \"hot spots\" of mercury contamination. To answer such questions requires an understanding of the sources, fate, and toxicity of mercury in the environment\u00e2\u0080\u0094an understanding that is growing quickly as the results of numerous scientific studies are being reported. This CRS report provides background information about mercury, and summarizes recent scientific findings. It discusses the sources (i.e., natural versus industrial, historic versus modern) and chemical forms of mercury in the environment; how mercury moves through the environment and concentrates in fish (i.e., the fate of mercury); and the risks to human health and wildlife of mercury exposure through fish consumption. Each of these major sections of the report aims to summarize scientific evidence relevant to specific arguments and questions that have emerged in the policy context. For example, the section on mercury in the environment addresses the question \"Are utility emissions deposited locally or regionally, or do they rise to merge with the global atmospheric mercury pool?\" For information about specific regulatory proposals to reduce environmental mercury, see CRS Report RL32868, Mercury Emissions from Electric Power Plants: An Analysis of EPA ' s Cap-and-Trade Regulations ; CRS Issue Brief IB10137, Clean Air Act Issues in the 109 th Congress , both by [author name scrubbed]; or CRS Report RL31908, Mercury in Products and Waste: Legislative and Regulatory Activities to Control Mercury , by [author name scrubbed] (pdf).\n\n\tSources of Mercury in the Environment\n\nMercury is a natural element, a silver-colored, shiny, liquid metal that is found in a variety of chemical forms in rocks, soil, water, air, plants, and animals. Sometimes mercury occurs in its elemental, relatively pure form, as a liquid or vapor, but more commonly mercury is found combined with other elements in various compounds, which may be inorganic (e.g., the mineral cinnabar, a combination of mercury and sulfur) or organic (e.g., methylmercury).\nNatural forces move mercury through the environment, from air to soil to water, and back again. Volcanoes and deep sea vents release tons of mercury to the atmosphere and oceans. Mercury in the air falls to earth with dust, rain, and snow. Mercury evaporates from the oceans, leaves of plants, and other surfaces back into the air. Depending on geologic and meteorologic conditions, the relative amounts of mercury in the atmosphere, surface water, or soil may vary from one year, decade, century, or millennium to another.\nDuring the past 500 years or so, human activities have released mercury from its relatively stable and water-insoluble form (cinnabar) in rocks and soil through mining, fossil fuel combustion, and other activities, and so have increased the portion of mercury that is actively cycling through the atmosphere, surface waters, plants, and animals as it changes chemical and physical form. Released mercury may enter the air, persist in the atmosphere and travel great distances or be deposited locally, dissolve in water droplets, settle back onto the land or water, re-enter the air (i.e., be re-emitted), be buried in lake or ocean sediments, or be taken into plants and animals. The generally accepted estimate is that roughly three to five times as much mercury is mobilized today as was mobile before industrialization. However, the author of one recent study argues that the mercury deposited from the atmosphere today is at least 10 times the amount of mercury that was being deposited 500 years ago.\nIn 1995, about 1,913 metric tons (roughly 2,104 U.S. tons) of mercury were newly emitted globally as a result of stationary combustion, metal production, cement production, and waste disposal. Roughly another 514 metric tons (565 U.S. tons) were emitted from other human sources, including chlor-alkali plants, gold production, and mercury uses. Thus, 2,427 metric tons (2,670 U.S. tons) of mercury were released due to human activities in 1995, according to recent estimates. These and other mercury emissions from human activities (past and present) account for at least 50% and perhaps as much as 75% of current, annual, global mercury emissions from all sources (including natural sources), but a large, unknown portion of those mercury emissions is due to past rather than current human activities, according to EPA estimates. The most recent estimates of global, natural mercury emissions range between roughly 1,600 and 3,200 metric tons (1,960 and 3,520 U.S. tons) per year.\nPeople have released mercury to the environment primarily through mining and smelting of minerals, burning of fossil fuels (e.g., coal, oil, and diesel fuel), use and disposal of mercury, certain industrial processes (e.g., chlorine production and cement production), and burning of municipal and medical wastes. In some parts of the world such activities are increasing, but in the United States, annual mercury emissions are decreasing. Most of the largest and most direct sources of U.S. mercury releases to water and air have been eliminated. Among the remaining U.S. industrial sources, coal-fired electric utilities are the most important, accounting for about 40% of current U.S. mercury releases.\nThree estimates of U.S. national emissions are presented in Table 1 . The first two estimates were made by EPA for the National Emissions Inventory. CRS added 12 tons of emissions from gold mines to the EPA emission inventory that was conducted for 1995, at the suggestion of EPA. EPA was unaware of the emissions from that source at the time the inventory was conducted. The \"other\" category encompasses emissions from various unidentified industries, including most iron and steel mills. EPA advised CRS to note that there are some sources not accounted for in the 1999 EPA inventory, such as iron and steel production using mercury-contaminated scrap, which probably accounts for 7-10 tons of emissions per year. These emissions are not included in the \"other\" category. EPA also does not include mobile source emissions in its inventory, although these might be significant, because the agency is still developing an estimate.\nSince the time that EPA completed its 1999 inventory, the medical waste incinerator rules promulgated under the Clean Air Act have been fully implemented, which may have further reduced emissions from that source, and gold mining emissions have decreased due to a voluntary project. Chlorine production emissions also may have declined since the 1999 inventory, because some facilities closed, but one additional facility was identified and included in emission estimates by Seigneur et al., which appear in the third column. These latter estimates were calculated by researchers with Atmospheric & Environmental Research, Inc., and published in 2004, but represent emissions in the year 1998. It is not clear why the Seigneur estimates for 1998 emissions from waste incineration are so much larger than EPA estimates for emissions from that category in 1999. Seigneur included emissions from landfills and electric arc furnaces in the \"other\" category. The Electric Power Research Institute (EPRI) provided the estimates used in that article for utility emissions. Both the EPRI calculations and the EPA estimate for 1999 utility emissions were based on measurements of mercury content in coal and stack emissions that were collected for the year 1999, in response to an information collection request issued by EPA.\n\n\tFate of Mercury Released to the Environment\n\n\t\tTransport, Deposition, Re-emission, and Transformation\n\nChemical form generally determines the ease with which mercury moves through the air, water, and soil and over distances. For example, elemental mercury emissions may remain airborne for more than a year, traveling around the world as part of the so-called \"global pool\" of atmospheric mercury. About 95% of atmospheric mercury is elemental. Particulate and reactive gaseous mercury (both organic and inorganic) are found in the atmosphere in smaller amounts, because they travel shorter distances from the point of emission and are more quickly deposited. Reactive gaseous mercury typically is deposited within about 100 kilometers of the point of emission. Coal-fired electric utility emissions vary depending on the technology and coal used at each plant, but are roughly 50% elemental mercury, according to EPA.\nHowever, the chemical form of mercury emissions can and does change in the atmosphere, making it difficult to predict the fate of particular emissions, including utility emissions. Elemental mercury emitted to the atmosphere can attach to particles or change to a water-soluble form (i.e., a reactive gas) that more easily combines with other chemicals and deposits relatively quickly. Reactive, gaseous mercury is more likely to form (and to be deposited) in the presence of sunlight. This explains why measured concentrations of atmospheric mercury generally are lower during the day than they are at night.\nMercury deposition in North America increases in spring and peaks in summer, according to data from the mercury deposition network. Higher summer deposition probably results, at least in part, from the increase in solar energy that is available to spark key chemical reactions (i.e., oxidation). For example, scientists have shown that in the lower layers of the atmosphere (i.e., roughly 400 meters of land or 1,000 meters of the ocean surface), elemental mercury gas may be quickly oxidized by bromine, chlorine, ozone, or hydroxide in the presence of sunlight, leading to local \"mercury depletion events.\" In such cases, concentrations of elemental gaseous mercury in the atmosphere decrease rapidly as the oxidized forms of mercury are deposited to the surface in dry deposits (i.e., without the help of rain or snow). This has been observed during the summer in the Arctic and Antarctic regions, and over the oceans.\nSummer mercury deposition also might be a result of increased oxidation by ozone. Higher ozone concentrations occur in summer, also due to the action of sunlight.\nMercury that is deposited onto plants or soil can be re-emitted to air, attached to soil, dissolved, washed away, buried, or ingested. It may again change chemical form. Mercury often attaches to soil particles, especially humus. Recent research indicates that soil may be a repository for the largest portion of mercury emitted in the past.\nMercury may be delivered to surface water bodies by air, in soil, or in streams and rivers. For many isolated lakes, very large lakes, and the oceans, atmospheric deposition (wet and dry) accounts for the largest portion of mercury contamination.\nMercury deposited or delivered to surface water may be re-emitted to air, remain suspended or dissolved in the water column, be deposited in sediments, or absorbed or ingested by living things. Re-emission rates from the ocean surface to air may be very large. For example, some experts believe that as much as 90% of the mercury deposited to the ocean surface might be re-emitted. Nevertheless, the concentration of mercury in the mixing layer of the deep oceans probably is increasing by a few percent per year.\nMercury in the air eventually will fall back to land or surface water. A recent analysis of deposition data collected for both hemispheres indicates that total gaseous mercury increased in the late 1970s, peaked in the late 1980s, decreased somewhat until the mid-1990s, and has remained constant since then. At present, approximately 5,000 metric tons (5,500 U.S. tons) of mercury are deposited globally each year.\nLayered samples (known as cores) of glaciers and peat provide historical records of mercury deposits that clearly show the contemporary impact on land of major trends in mercury emissions. That is, cores record the historical rise in mercury emissions and deposition due to mining and industrialization. However, while such records inform us about relative changes in global, regional, and local emissions over a scale of years, even centuries, they provide little information about the precise relationship between particular emissions and particular deposits. This is because the path and time taken by emitted mercury to cycle through environmental media depends on its chemical form, as well as on physical conditions like height of emission, temperature, sunlight, wind speed and direction, humidity, and the presence of certain other substances, such as ozone.\nAtmospheric deposition tends to be greater in areas closer to emission sources and in locations with more rainfall. Thus, EPA has estimated that about 60% of mercury deposited in the United States is from local or regional U.S. sources, and deposition increases from west to east. Local or even regional deposition can result in areas of relatively high deposition, or \"hot spots.\" Deposition of mercury in particular cases varies, however, depending on many factors, including regional and local climate and weather patterns, soil types, topography, vegetation, and local or regional sources of mercury emissions. Thus, mercury may be deposited near to or far from an emission source.\nThe relative contribution of various sources to mercury deposition also can change over time. For example, the record of mercury deposition in ice cores from Fremont Glacier, Wyoming, shows peaks of high mercury deposition following volcanic eruptions in the northern and southern hemispheres, as well as during the California Gold Rush. Such cores are difficult to interpret, however, because they reflect local as well as global influences.\nOnly a few ecosystems have been studied in sufficient detail to determine the sources of mercury contamination. However, additional information about emission sources and deposition is being gathered through monitoring and modeling across the continental United States, particularly as states undertake detailed analyses of steps needed to restore the quality of waters that are impaired by mercury. According to EPA, more than 700 bodies of water throughout the United States are listed as impaired by mercury; in most cases, the source of the mercury contamination is air deposition. To address these impairments, states are developing Total Maximum Daily Loads (TMDLs), which are plans to bring those waters into attainment with water quality standards. The Florida Everglades and Devil's Lake in Wisconsin were selected as pilot TMDL projects for mercury.\nScientists studying the Florida Everglades have estimated that at least half of the mercury deposited in the Everglades is emitted locally, while between 5% and 29% is emitted regionally (from within the southeastern United States). The remainder derives from sources outside the United States. EPA has estimated that 80% of deposition to Pines Lakes, New Jersey, comes from U.S. sources. In contrast, almost all of the mercury found in remote regions of the Arctic is believed to have traveled from distant sources.\n\n\t\tMethylmercury Formation and Accumulation\n\nThe most biologically significant transformation of mercury occurs in soil or sediments of lakes or streams, where bacteria (primarily sulfate-reducing bacteria) are capable of converting inorganic mercury to methylmercury. The significance of methylation is that relative to inorganic mercury, methylmercury is more easily absorbed by living tissues, more likely to be ingested in food, and much more toxic to animals. Methylmercury is easily absorbed by the digestive tract and accumulates in the bodies of fish and other animals, when it is ingested faster than it can be excreted. Because methylmercury tends to be stored in muscle tissue (i.e., the edible meat of fish and other animals), animals higher on the food chain tend to have higher levels of exposure. Predatory fish (e.g., walleye, large-mouthed bass, or tuna), fish-eating birds (e.g., loons, ospreys, or eagles), and fish-eating mammals (e.g., raccoons, otters, or mink) which top the longest food chains accumulate the greatest concentrations of methylmercury. In the Florida Everglades, methylmercury concentrations in fish are up to ten million times greater than concentrations of mercury in water. Inorganic mercury is not easily transferred through the food chain and does not concentrate to higher levels with each nutritional link.\nGenerally, the more mercury that is added to an ecosystem, through direct discharge to water, runoff from the surrounding watershed, or deposition from air, the more mercury that will be found in fish. However, the rate of methylmercury formation and accumulation is highly variable, even within relatively small geographic areas, because it depends on many factors, in addition to the abundance of inorganic mercury. Recent research indicates that some ecosystems are particularly sensitive to relatively small mercury inputs, and are more likely to experience high rates of methylmercury production and accumulation. Sensitive ecosystems include low-alkalinity (i.e., low capacity for neutralizing acid) and humic lakes and streams (which are characterized by an abundance of dissolved, decomposed, plant or bacterial matter), wetlands, surface waters connected to wetlands, and waters linked to areas subjected to flooding. Methylmercury formation by sulfate-reducing bacteria and bioaccumulation is favored in ecosystems:\nthat are oxygen-poor and acidic; that contain sulfate (the most common form of sulfur in surface waters), but not too much sulfide (the form of sulfur rendered by sulfate-reducing bacteria; and in which mercury is recently deposited, rather than older mercury.\nIn a Wisconsin lake, researchers found that levels of both sulfate and mercury determined levels of production and bioaccumulation of methylmercury, and that \"modest changes in acid rain or mercury deposition can significantly affect mercury bioaccumulation over short-time scales.\" In response to a significant decrease in mercury deposition between 1994 and 2000, methylmercury in yellow perch decreased by roughly 30% (5% per year).\nThe link between industrial emissions and mercury levels in the oceans is less clear, because the role of the oceans in mercury cycling is poorly understood. On the one hand, significant quantities of reactive inorganic mercury are deposited in the oceans, and methylmercury is found in marine fish and their predators, sometimes at very high concentrations. And, although methylmercury levels are very low in the surface layer of the open oceans, concentrations are greater, perhaps as much as three-fold higher than they were prior to industrialization (assuming that insignificant amounts descended to the ocean depths). So we know that organic (methyl) mercury is formed in the oceans. What we do not know is where the mercury in ocean fish originated\u00e2\u0080\u0094in industrial emissions deposited to the oceans or in the natural reservoir of the ocean depths\u00e2\u0080\u0094nor where it was transformed into methylmercury.\nSome scientists believe that methylmercury probably is formed in the deep sediments of oceans or in the areas surrounding deep thermal vents in the ocean floor. In that case, they argue, deposition of atmospheric mercury cannot account for current methylmercury levels in ocean fish, given the relatively large size of the deep sea reservoir of mercury and the time it takes for the ocean depths to mix with the surface layers where fish feed, an estimated 400 years. If all the mercury deposited into the oceans due to human activities over the past hundred years were mixed into the ocean even to its greatest depths, the mercury concentration of ocean water would have increased only an estimated 1% to 10% over pre-industrial concentrations.\nOther scientists believe that sulfate-reducing bacteria form methylmercury in coastal sediments where it is taken up by tiny plants and animals at the bottom of aquatic food webs. Small fish and other animals feeding in near-shore waters concentrate the mercury, then venture far enough from shore to be prey for larger fish, seabirds, and mammals.\nAt this time, not enough information is available to determine whether mercury levels in ocean fish and fish-eating marine mammals have increased or decreased over the past hundred years or so, much less whether levels rose and declined as a result of changes in atmospheric emissions. Although most scientists who study mercury agree that deposition of atmospheric mercury has increased, and therefore the total amount of mercury in the oceans probably has increased, particularly in the surface layer, and one study (described below) has found increased mercury levels in feathers of fish-eating seabirds, measurements of mercury in ocean water and fish are lacking or inconclusive. In part, this lack of data is due to the difficulty of measuring mercury: measurement of methylmercury has only been possible since about 1985, and past measurements of total mercury often were inaccurate because samples were so easily contaminated.\nA recent study that compared total mercury concentrations in yellowfin tuna captured in 1971 with methylmercury in yellowfin tuna caught in 1998, both in the vicinity of Hawaii, found no significant differences in mercury concentrations. However, the significance of these measurements is unclear, given the historical trend in atmospheric deposition, which peaked in the mid 1980s.\nAnother study compared feathers over time from two kinds of fish-eating birds that live in the northern Atlantic Ocean. Feathers were obtained from museum specimens taken as long ago as 1885. The study found a significant increase in concentrations of methylmercury over time. Among birds that eat fish living near the ocean surface, concentrations of methylmercury in feathers increased at an estimated rate of 1.1% annually between 1885 and 1994. According to study authors, this increase is consistent with the estimated three-fold increases in concentrations of mercury in the atmosphere and surface oceans due to human industry over the same period of time. Among birds that eat fish living in a deeper, darker ocean layer, methylmercury concentrations increased at an estimated rate of 3.5 to 4.8% per year.\n\n\tRisks of Methylmercury Poisoning\n\n\t\tToxicity of Methylmercury\n\nMethylmercury is highly toxic to the central nervous system of humans and many animals. The observed effects of toxic levels of exposure generally have been similar in laboratory animals, domestic pets, wildlife, and people. Typically, there is a lag time of weeks or even months between exposure to mercury and the onset of health effects.\nIn human adults, absorbed methylmercury is dispersed throughout the body in blood and enters the brain, where it may cause structural damage. The physical lesions may lead to tingling and numbness in fingers and toes, loss of coordination, difficulty in walking, generalized weakness, impairment of hearing and vision, tremor, and finally loss of consciousness and death. At high levels of exposure, effects on the brain are easily observed and irreversible. Damage to the brain may exist, however, in the absence of these observable symptoms of toxicity. Nervous system damage (indicated by tingling and\/or numbness in the fingers and toes) has been estimated to occur in about 5 % of adults whose hair is found to contain 50 parts of methylmercury per million parts of hair (ppm). This condition is predictive of more severe toxicity. Lower levels of exposure may have more subtle adverse impacts on coordination, ability to concentrate, and thought processes.\nMethylmercury readily crosses the placenta of pregnant women. Levels of methylmercury in the fetal brain are roughly five to seven times the levels in maternal blood. Compared to the adult brain, the fetal brain is more sensitive to methylmercury. In the fetus, methylmercury exposure can affect brain development, as evidenced during childhood by a child's ability to learn and function normally after birth. Human poisoning incidents in Iraq and Japan caused severely exposed children to be born with cerebral palsy and mental retardation, and in a few cases infants died. In Japan, poisoning occurred because local fish were poisoned by industrial mercury releases to Minamata Bay. The average mercury content of fish samples there ranged from 9 to 24 ppm. Recent research indicates that exposure to much lower levels of methylmercury also leads to developmental effects on cognitive development.\nThere is general agreement that as little as 10 ppm methylmercury in maternal hair indicates a level of exposure that may produce prenatal effects. Some believe effects occur at even lower exposure levels. For example, a study of women and their infants in eastern Massachusetts indicated that there might be adverse effects when mothers have less than 3 ppm methylmercury in hair. At very low levels of exposure, effects may be very subtle, and detectable only on a population basis\u00e2\u0080\u0094for example, by an increase in the proportion of an exposed population that falls below a level of function defined as impaired.\nIn response to a mandate from the U.S. Congress, EPA contracted with the National Research Council (NRC) to review available research on methylmercury toxicity. The NRC Committee issued a report in 2000. It concluded that scientific studies have demonstrated the sensitivity of the human fetus to pre-natal methylmercury exposure, and that the risk to women who eat large amounts of fish and seafood during pregnancy is \"likely to be sufficient to result in an increase in the number of children who have to struggle to keep up in school.\"\nA study published in 2003 strengthened and extended the findings of the single major study of children which failed to find any adverse effects in children exposed to mercury before they were born. However, one NRC Committee member testified before a House subcommittee in November 2003 that although those findings had not been published at the time, they only confirmed results already considered and would not have led to a different Committee conclusion. This conclusion has since been confirmed in a peer-reviewed publication by four members of the original NRC committee.\nHuman sensitivity to cardiovascular toxicity might be even greater than to developmental neurotoxicity, given recent research results. For example, a study of 1,833 Finnish men found that those who had at least 2 ppm of mercury in hair had twice the risk of acute myocardial infarction compared to men with less mercury in hair. ( Two ppm of methylmercury roughly corresponds to the upper 10 th percentile of current methylmercury exposure among adult men in the United States.)\nA follow-up study of the Finnish men also looked at levels of fish-derived fatty acids. Results suggested that the adverse effect of mercury exposure resulted from its interference with the protective effect of fatty acids in the fish. Men who ate fish appeared to benefit from a protective effect of the acids against heart disease, but among those with more than 2 ppm mercury in their hair the protective effect was reduced by half. Other studies generally are consistent with these results, but one major study failed to find an association between total mercury exposure (measured in toenail clippings) and cardiovascular disease. More research is needed to explore interactions among the various risk factors, fish-derived fatty acids, and mercury exposure with respect to heart disease.\n\n\t\tEnvironmental Methylmercury Exposure\n\nPeople may be exposed to mercury by eating or drinking, inhaling, or simply absorbing it through their skin. The level of recent (within a month or two) individual exposure to mercury may be determined based on measured concentrations of mercury in blood. For a slightly longer exposure history (e.g., over several months), mercury concentrations in human hair several inches from the scalp may be useful. However, there is no way to measure exposure that occurred more than a few years ago, because methylmercury breaks down in the bodies of animals, and both organic and inorganic mercury are excreted over time.\nAlthough rates of physiological processes vary widely among individuals, in general, people eliminate about half the mercury taken in within a period of roughly 44-80 days. In this way, mercury differs from many other pollutants such as lead, which may be measured in the bone or teeth years after exposure has ceased. If mercury exposure ends (because mercury is excreted) before a toxic amount of mercury has accumulated in the body, adverse health effects would not be expected to occur. However, effects would not necessarily subside after excretion, if a toxic level of exposure had occurred.\nThe 1999-2002 National Health and Nutrition Examination Survey (NHANES) collected data on blood mercury levels for a representative sample of U.S. women of child-bearing age. The results for the first two years (1999-2000) are summarized in Table 2 . Because mercury is present in much lower levels in blood than in tissues such as hair, concentrations are expressed as parts of mercury per billion parts blood (ppb), by weight. Based on these data, the Centers for Disease Control and Prevention (CDC) concluded that mercury concentrations generally were low among women of child-bearing age and children in the U.S. population. These results were confirmed by data collected in 2001-2002. However, study authors noted that the survey was designed to gather baseline data, and that there were too few people interviewed to provide reliable estimates of blood mercury levels for individuals at the highest levels of exposure.\nIn the United States, most people are exposed to mercury primarily through eating the flesh (muscle) of fish. People who eat a lot of predatory fish, such as bass, pike, tuna, or swordfish, which may be highly contaminated, may increase the risk of adverse health effects for themselves or, in the case of women who become pregnant, for any unborn children. Thus, NHANES 1999-2000 found that women who ate three or more servings of fish within a month had almost four times the level of mercury in their blood as women who ate no fish that month. Nevertheless, 95% of the 448 women who ate fish relatively frequently (at least three times during the previous 30 days) had blood mercury levels less than about 11 ppb. About 25% of the study population ate no fish or shellfish at all. Generally, their blood contained levels of mercury that were below 2 ppb.\nThe amount of mercury in fish varies with the species, age, and size of the fish. Uncontaminated fish contain less than 0.01 ppm methylmercury in muscle, while very contaminated swordfish in U.S. waters have more than 3 ppm mercury. (Grossly contaminated fish in Minamata Bay, Japan, contained between 9 and 24 ppm mercury.) Even higher levels have been found where there is a local source of water pollution. Diverse species of fish differ in sensitivity to mercury. Significant toxic effects and death are associated in adult fish of various species with between 6 ppm (e.g., for walleyes) and 20 ppm (e.g., for salmon) in muscle tissue. However, individual fish within species also differ in sensitivity, and fish seem able to tolerate higher concentrations of mercury if it is accumulated slowly. In general, older, larger fish of the same species will have more mercury. Table 3 provides the average concentration found in recent years in selected species popular with American consumers. Concentrations are given in parts of mercury per million parts of fish (ppm). Freshwater fish are in italic type. Methylmercury levels in particular species of fish are highly variable, however, reflecting the chemistry and methylation potential of the bodies of water in which they live.\n\n\t\tRecommended Exposure Limits\n\nA key question for Congress is whether there is currently a potential for adverse health effects among individuals who regularly consume fish. Federal agencies have estimated the risk associated with methylmercury exposure at current levels of environmental (i.e., fish) contamination. Of particular relevance is the reference dose (RfD) set by EPA, which is discussed in some detail below. Because there has been some controversy surrounding the EPA RfD, it is compared to two other maximum allowable concentration levels established by federal agencies, the minimum risk level (MRL) set by the Agency for Toxic Substances and Disease Registry, and the Acceptable Daily Intake (ADI) level established by the Food and Drug Administration. As explained below, the apparent inconsistency among the FDA, ATSDR, and EPA estimates of a \"safe\" exposure level for methylmercury is primarily due to the agencies' diverse responsibilities and actions that are triggered when contamination is found to occur.\n\n\t\t\tEPA Reference Dose for Methylmercury\n\nThe EPA Reference Dose (RfD) is a risk assessment tool, used to estimate daily intake levels of chemicals that are expected to be \"without an appreciable risk of deleterious health effects,\" even if exposure persists over a lifetime. The risk associated with exposure to methylmercury above the RfD is uncertain, but likely to increase with increasing exposure levels. The RfD is intended to account for sensitive members of the human population, such as pregnant women and infants, but not individuals with unusual sensitivity due to conditions such as genetic disorders or severe illness. To calculate the RfD, EPA generally uses a \"no observed adverse effect level\" (NOAEL), which may be observed or estimated using a model. A NOAEL estimates the threshold level of exposure below which adverse effects do not occur. Then the RfD is established by dividing the NOAEL by uncertainty factors which account for the need to extrapolate from limited data sets to the general U.S. population.\nIn 1985, EPA established its first RfD for people who eat methylmercury-contaminated fish at 0.3 micrograms of methylmercury (\u00ce\u00bcg) per kilogram of body weight (kg bw ) per day. This is equivalent to about 126 \u00ce\u00bcg of methylmercury per week (roughly the amount in two 7-ounce servings of fish containing 0.3 ppm mercury) for a person weighing 132 pounds. This dose is based on the lowest level of exposure that produced adverse effects on the nervous systems (i.e., numbness and tingling in the extremities) of adult Iraqis after they were poisoned by eating contaminated grain during 1971-1972 and adult Japanese who ate contaminated fish from Minamata Bay during the mid-1950s.\nTwo years after EPA set its RfD, data were published showing adverse effects of maternal mercury exposure on the development of Iraqi children who were exposed in the womb. In 1995, EPA revised its RfD, basing it on these developmental effects. This second RfD of 0.1 \u00ce\u00bcg\/kg bw \/day (42 \u00ce\u00bcg per week for a person weighing 132 pounds) remains in effect. This level would be exceeded if a 132-pound person ate more than one fish meal per week, and the fish contained more than 0.21 ppm of mercury.\nTo calculate the current RfD, EPA used a benchmark dose approach. The benchmark dose for methylmercury estimates the level of exposure that has a 5% chance of doubling the number of children (from 5% to 10% of the exposed population) who function at an abnormally low level on a standardized measure. In 1997, the benchmark dose calculated was 11 parts methylmercury per million parts maternal hair (ppm), by weight, based on all the adverse health effects observed in Iraqi children who were exposed to methylmercury before birth. The findings of other human studies as well as toxicity data collected from animals in scientific laboratories, supported the validity of the EPA calculated benchmark dose. Benchmark doses calculated based on data from studies of island populations with heavy seafood consumption produced similar values (11 to 17 ppm).\nEPA used the benchmark dose to conclude that consumption of 1.1 \u00ce\u00bcg\/kg bw \/day of methylmercury probably was safe for the unborn children of women who ate contaminated grain in Iraq. At this level of mercury intake, Iraqi women who weighed an average of 60 kg (about 132 pounds) had about 11 ppm mercury in maternal hair and 44 \u00ce\u00bcg methylmercury per liter of blood. (However, individual ratios of hair to blood concentrations varied widely.) EPA divided that daily dose (1.1 \u00ce\u00bcg\/kg bw \/day) by an uncertainty factor of 10, accounting for the lack of data on reproductive effects and differences among individuals, to establish the RfD at 0.1 \u00ce\u00bcg\/kg bw \/day. At this level of exposure, a mercury concentration of approximately 4 to 5 parts mercury per billion parts blood (ppb), by weight, and 1 part mercury per million parts of hair (ppm), by weight, would be expected to accumulate in an adult.\nAccording to EPA's independent advisory group, the Science Advisory Board (SAB), the1997 EPA RfD was strongly supported by multiple studies based on different ethnic populations and species, exposures, and developmental endpoints, all suggesting similar RfDs. However, the SAB advised EPA to consider an additional uncertainty factor to account for the need to extrapolate from the observed effects of an acute, short-term exposure to effects that might result from low-level, life-long exposure; the difficulty of detecting subtle population effects; and evidence from animal and human studies suggesting possible neurological degeneration in the elderly and high mercury exposure of the fetus compared to the mother's exposure.\nSoon after the results of long-term studies were published, the NRC recommended that EPA base its RfD on a evidence of chronic toxicity among island dwellers who were exposed to methylmercury through fish and other seafood. The NRC panel concluded in its 2000 report that there is a 5% chance that maternal exposure to1.0 \u00ce\u00bcg\/kg bw \/day of methylmercury would double the proportion of children functioning at an abnormally low level. Mothers eating that amount of mercury (in contaminated fish), on average, would have about 12 ppm methylmercury in their hair (and 58 ppb in their blood); fetuses would be exposed to about 58 ppb in cord blood. Recent analyses indicate that these numbers may need to be revised to incorporate research results indicating that the relationship between cord blood and maternal mercury intake is highly variable.\nBased on the NRC report, EPA revised the RfD for methylmercury. The value of the RfD did not change from 0.1 \u00ce\u00bcg\/kg bw \/day, but the basis for the RfD was updated using the most current data and analyses. This RfD is considered to be protective of all populations in the United States, including sensitive subpopulations. Based on that RfD, pursuant to section 304(a)(1) of the Clean Water Act, EPA established in 2001 a water quality criterion for methylmercury of 0.3 parts of methylmercury per one million parts of fish tissue (ppm). (This is the first time that EPA based a water quality criterion on a concentration of a pollutant in fish rather than in the water column.) EPA indicated that to protect consumers of fish and shellfish among the general population, this concentration of methylmercury in fish and shellfish tissue should not be exceeded.\n\n\t\t\tAgency for Toxic Substances and Disease Registry Minimum Risk Level\n\nThe Agency for Toxic Substances and Disease Registry (ATSDR), a branch of the Public Health Service, has health-related authority under the Comprehensive Emergency Response, Compensation, and Liability Act (CERCLA, better known as Superfund). One of the agency's responsibilities is to study hazardous substances found at sites on the national priority list (NPL) and to publish and periodically update toxicological profiles of those most frequently found. In revising the toxicological profile for mercury, ATSDR evaluated available data and concluded in 1999 that they supported a Minimum Risk Level (MRL) for chronic exposure to methylmercury of 0.3 \u00ce\u00bcg\/kg bw \/day. (This is the same as EPA's 1985 RfD.) ATSDR uses the MRL as a screening tool to determine when the risks posed by a hazardous waste site require additional study.\n\n\t\t\tFood and Drug Administration Action Level\n\nThe Food and Drug Administration (FDA) established an action level in 1984 at a concentration of 1 ppm methylmercury in fish or seafood products sold through interstate commerce. At this level, the Acceptable Daily Intake for an adult in the general population is 0.42 \u00ce\u00bcg\/kg bw \/day, slightly higher than 0.3 \u00ce\u00bcg\/kg bw \/day, the RfD established by EPA in 1985. The FDA action level is based on the mid-point of the estimated range of the \"lowest observed adverse effects level\" (LOAEL), or 300 \u00ce\u00bcg of methylmercury\/day, at which level of exposure Japanese adults who ate contaminated fish experienced paresthesia (numbness and tingling in extremities). FDA divided this value by 10 to account for scientific uncertainties and to provide a margin of safety. FDA chose not to use the Iraqi data on the effects of fetal exposure as a basis for revising its action level, due to concerns about uncertainties (in contrast to the relative certainty of the health benefits of consuming fish.) The FDA action level is enforceable; the Administration may seize interstate shipments of fish and shellfish containing more than 1 ppm of methylmercury, and may seize treated seed grain containing more than 1 ppm of mercury. For the purpose of advising the general public about fish consumption, FDA has used EPA's RfD, recommending that women of child-bearing age avoid certain fish and limit consumption of other fish.\nThe inconsistency among the FDA, ATSDR, and EPA estimates of a \"safe\" exposure level for methylmercury is more apparent than real: the differences are less than the uncertainty factor, and the reference levels serve different purposes. In addition, the EPA number assumes a lifetime of exposure, while the ATSDR level is for chronic exposure of 365 days or longer, and the FDA level is for consumption of particular fish.\n Table 4 consolidates the quantitative information provided above to facilitate comparisons among agencies.\n\n\t\tU.S. Fish Consumption, Methylmercury Exposure, and Health Risk\n\nBy comparing methylmercury concentrations for popular fish ( Table 3 ) with federal guidelines ( Table 4 ), it is possible to assess the relative safety of eating different fish and shellfish. Table 5 provides estimates of the numbers of meals of fish with different average levels of contamination that one could eat without increasing methylmercury exposure beyond the EPA RfD. It is important to note, however, that these recommendations assume that the size of meals, the age and size of particular fish, and the age and size of the consumer are \"average.\" Generally, if other factors are held constant, risks of poisoning increase to the extent that consumers are younger or smaller than average, eat larger amounts, or eat older and larger fish (and risks decrease if the reverse is true). For example, a fish lover who consumed one 7-ounce meal of freshwater fish (roughly 200 grams) containing 0.3 ppm of methylmercury (the level permitted by the EPA water quality criterion) seven days in a row could be exposed to ten times the level of EPA's RfD, a level equal to the benchmark dose level. But, because different fish contain different levels of methylmercury, daily consumption of 7 ounces of fish could result in much lower or much higher levels of methylmercury exposure, depending on the types of fish consumed.\nAverage U.S. fish consumption is 7-14 ounces (200-400 grams) per month , according to EPA, when those who do not eat fish are included. On average, that level of fish consumption would expose fish eaters to 4 \u00ce\u00bcg of mercury per day, a level below the RfD for anyone weighing more than 88 pounds (40 kilograms). Fish consumption rates in the United States are estimated annually by the National Marine Fisheries Service (NMFS). Rates are estimated based on total fish and shellfish in commerce (edible weight) divided by the total population in the middle of the census period. No adjustments are made for waste or spoilage of the fish or for people who do not eat fish. Sport-caught fish are not included. For 2002, NMFS estimated per person consumption at 15.6 pounds of fish. Of this quantity, 11 pounds were fresh or frozen, including 6 pounds of finfish and 5 of shellfish. Cured fish accounted for 0.3 pounds and canned fish for 4.3 pounds per capita. Seventy-seven percent of the fish consumed was imported.\nConsumption rate estimates are higher when only those who eat fish are considered. Unfortunately, data are limited. In the Mercury Study Report to Congress , EPA estimated that:\n85% of adults in the United States consume fish and shellfish at least once a month with about 40% of adults selecting fish and shellfish as part of their diets at least once a week (based on food frequency data collected among more than 19,000 adult respondents in the NHANES III conducted between 1988 and 1994). This same survey identified 1-2% of adults who indicated they consume fish and shellfish almost daily.\nData from NHANES 1999-2002 indicates that exposure to methylmercury is greater than the RfD for approximately 6% of women of child-bearing age. This percentage is based on four years of data; it is lower than was found by NHANES in the first two-year reporting period,1999-2000. However, a declining trend should not be inferred, because the difference is not statistically significant. At least two more years of data are needed to determine whether the apparent decline in blood mercury levels is a real trend. For study subjects who identified themselves as Asian, Pacific Islander, Native American, or multiracial, approximately 16% had levels greater than the reference level.\nData for certain areas of the California coast indicate that although half of all consumers surveyed ate 21 grams per day or less, 5% of consumers ate more than 161 grams per day (more than 10 pounds per month) of fish that consumers caught themselves. At 0.3 ppm methylmercury, such consumers would be taking in about 48 \u00ce\u00bcg per day of methylmercury, an amount close to the benchmark dose. Similarly, a 1988 study of Michigan anglers who eat the fish they catch found that they ate on average 45 grams of freshwater fish per day, but 5% of those surveyed ate 98 grams per day. That amounts to 1.5 pounds of fish per week per person, much more than is recommended for contaminated species of fish, but not an implausibly large amount. Table 6 illustrates the general relationship between plausible levels of fish consumption and methylmercury exposure for various segments of the U.S. population, assuming that fish contain methylmercury at the level of the water quality criterion established by EPA.\nIn making choices about fish consumption, factors other than, or in addition to, methylmercury concentration should be considered. In particular, the health benefits of eating fish high in omega fatty acids are important, especially for cardiovascular health and fetal development. The benefits of fish consumption for the development of intellectual abilities in infants was supported recently by a study of 130 mother-child pairs. The study measured maternal fish consumption, hair mercury levels, and infant scores on tests of visual recognition memory (VRM) and found that VRM scores rose significantly with fish consumption, falling only when mercury levels in maternal hair rose above 1.2 ppm. The study authors concluded that pregnant women should eat at least two fish meals each week, but that they should choose fish species that tend to be high in fatty acids but low in mercury content. As shown below, lake trout and salmon would fit those requirements. Table 7 provides average mercury levels and relative fatty acid content for some popular fish.\n\n\tWildlife Exposure and Health Effects\n\nFish consumption also is the dominant pathway for wildlife exposure to methylmercury. Fish-eating predators in North America generally have relatively high concentrations of mercury. Toxic mercury levels have been found in individual mink, otters, loons, the Florida panther, and other U.S. birds and wildlife. However, it is not clear whether typical levels of environmental contamination are stressful for wildlife.\nFish-eating birds annually eliminate much of their accumulated methylmercury when they form new feathers. Moreover, seabirds seem to be able to demethylate methylmercury, rendering it less toxic. Nevertheless, methylmercury exposure may harm sensitive species at levels found in certain local environments. Many scientists suspect that the immune system is weakened as a result of methylmercury exposure. The most likely adverse impact on birds of methylmercury exposure is impaired ability to reproduce.\nIn common loons, which have been studied extensively, concentrations of mercury in blood correlate with mercury levels in the fish they eat. Mercury levels in loon blood increase from west to east in Canada, with the highest levels being found in southeast Canada. A recent study of mercury in 577 loon eggs collected across eight U.S. states from Alaska to Maine found a similar trend of increasing mercury concentrations from west to east. These blood and egg concentrations are consistent with the pattern of mercury deposition for North America (i.e., increasing from west to east). A study reported in 2003 declining egg volume, but no effect on fertility, with increasing mercury concentrations in New England. However, eggs were collected only if abandoned, which might have biased the results. Reduced egg laying has been associated with concentrations greater than 0.4 ppm methylmercury in prey fish.\nMink and otter exposed over a long period of time to more than 1 ppm methylmercury in their diets exhibit classic signs of poisoning and may die. Higher concentrations cause earlier but similar health effects. Less than half that concentration is not lethal; data are lacking for more subtle effects on mink of mercury exposure. There are no field data indicating that the wildlife species most at risk (because they eat fish) currently are experiencing adverse health effects from mercury exposure.\n\n\tConclusion\n\nCurrent scientific knowledge can inform the debate about competing legislative and administrative proposals to reduce mercury emissions from utilities, but it cannot provide firm answers to all of the specific questions that have been raised. Neither can science resolve policy controversies that revolve around value judgments, for example, questions about how urgent the need is for utility emission controls. However, recent scientific studies have provided potentially useful information for policy makers, about chemical changes to mercury emissions that may take place in the atmosphere; rates of mercury deposition to, and re-emission from, the earth's surface; the relationship between mercury emissions and mercury levels in freshwater fish in various specific ecosystems; and the potential effects of low level, chronic exposure to methyl mercury through fish consumption.\nScientific studies have clearly demonstrated that levels of mercury in the atmosphere and in deposits to earth have at least doubled and probably tripled due to human activities, even in places that are remote from human influence. Although most of the largest and most direct U.S. sources of mercury releases to water and air have been controlled, and levels of U.S. mercury deposition are declining, levels of mercury in fish continue to be a concern. Electric utilities are the only uncontrolled major stationary source of U.S. mercury emissions. As a result, control of utility emissions might be the most direct step that could be taken to reduce mercury deposition in the United States. However, there are uncertainties in chemistry and transport, leading to current debates among policy makers.\nLocal and regional emissions from various sources have caused mercury deposition to increase as much as tenfold in some locations, indicating that there is a possibility that local \"hot spots\" of mercury contamination might persist, despite overall reductions in mercury emissions. In sensitive experimental lakes and wetlands, when local and regional mercury emissions decreased, deposition decreased proportionately, and levels of methylmercury in freshwater fish dropped quickly. This indicates that controls on mercury emissions from electric power plants (particularly those plants with emissions that tend to be deposited locally) could lead to substantial reductions in deposition at some nearby hot spots. It remains to be determined whether there is a link between mercury emissions and mercury in ocean fish. However, scientists have shown that significant quantities of emitted mercury are deposited in the oceans; methylmercury is found in marine fish and predatory seabirds, sometimes at very high concentrations; and sulfate-reducing bacteria are active in coastal sediments.\nAs yet unquantifiable but potentially significant risks from emissions exist, to people and wildlife locally, but also in areas distant from emission sources. Research continues to find evidence of subtle impacts on human health of low levels of methylmercury exposure, levels close to current levels of exposure for people who eat large amounts of certain large, predatory fish. In considering the potential adverse effects of mercury, however, the potential nutritional benefits of eating fish that are not heavily contaminated by mercury should not be overlooked.","output":"Concern about mercury in the environment has increased in recent years due to emerging evidencehat exposure to low levels of mercury may harm the developing rvous systems of unborn children. At least five bills in the 109 th Congress aim to reduce mercury emissions from coal-fired electric utilities. The various proposals and a final regulation promulgated by the U.S. Environmental Protection Agency (EPA) on March 15, 2005, differ in how much and how soon emission reduction would be required, and in whether reductions would be achieved through controls at each plant or through a nationwide cap and trade system. The latter approach could allow individual plants to continue emitting current levels of mercury, potentially worsening conditions at nearby \"hot spots.\" Analysis of competing proposals raises questions about the sources, fate, and toxicity of mercury in the environment. This CRS report provides background information about mercury and summarizes recent scientific findings. For information about regulatory proposals to reduce environmental emissions of mercury, see CRS Report RL32868, Mercury Emissions from Electric Power Plants: An Analysis of EPA ' s Cap-and-Trade Regulations , by [author name scrubbed].\nMercury is a natural element found in rocks, soil, water, air, plants, and animals, in a variety of chemical forms. Natural forces move mercury through the environment, from air to soil to water, and back again. Industrial activities have increased the portion of mercury in the atmosphere and oceans, and have contaminated some local environments. Coal-fired electric utilities are the largest single source of U.S. mercury emissions, according to EPA, but mobile sources also are important. The chemical form of mercury generally determines how it moves through the environment, but mercury can and does change form relatively rapidly where bromine and other oxidizing substances (e.g., ozone) are abundant. In soil or sediments of lakes, streams, and probably oceans (especially where water is oxygen-poor and acidic, and sulfate is present), bacteria convert inorganic mercury to more toxic methylmercury, which can accumulate in fish. Newly deposited mercury seems to be more readily converted than older deposits.\nPeople and wildlife who eat contaminated fish can be exposed to toxic levels of methylmercury. In people, methylmercury enters the brain, where it may cause structural damage. Methylmercury also crosses the placenta. The National Research Council has reported that the human fetus is sensitive to methylmercury exposure, and the current risk to U.S. women who eat large amounts of fish and seafood during pregnancy is \"likely to be sufficient to result in an increase in the number of children who have to struggle to keep up in school.\" Some studies indicate that the cardiovascular system may be even more sensitive. Mercury concentrations generally are low, but the estimated safe blood-mercury level is exceeded in about 6% of U.S. women between the ages of 16 and 49 years. EPA and the Food and Drug Administration advise women of child-bearing age to avoid certain large fish, and to limit the amount eaten of other fish. In making choices about fish consumption, the health benefits of eating fish also should be considered. Fish-eating wildlife also are exposed to methylmercury, but it is not clear whether typical current levels of environmental contamination are harmful. This report will be updated as warranted by significant scientific discoveries."}
{"id":"crs_RL31495","pid":"crs_RL31495_0","input":"\tIntroduction1\n\nJuly 1, 2002, marked the birth of the International Criminal Court (ICC), meaning that crimes of the appropriate caliber committed after that date could fall under the jurisdiction of the ICC. The ICC is the first global permanent international court with jurisdiction to prosecute individuals for \"the most serious crimes of concern to the international community.\" Since its creation, the ICC has received three referrals by States Parties, which involved allegations of war crimes in the Republic of Uganda, the Democratic Republic of Congo, and the Central African Republic. The United Nations Security Council has also referred a situation to the Prosecutor\u2014allegations of atrocities occurring in Darfur, Sudan. The Chief Prosecutor subsequently decided to open investigations into three of the referred cases: Democratic Republic of the Congo, Republic of Uganda, and Darfur, Sudan. Currently, five arrest warrants have been issued by the Court, all in connection to the situation in Northern Uganda.\nThe United Nations, many human rights organizations, and most democratic nations have expressed support for the ICC. The Bush Administration, however, opposes it and in May, 2002, formally renounced any U.S. obligations under the treaty, to the dismay of the European Union. On August 2, 2002, President Bush signed into law the American Servicemembers' Protection Act (ASPA) to restrict government cooperation with the ICC. The Administration had earlier stressed that the United States shares the goal of the ICC's supporters\u2014promotion of the rule of law\u2014and does not intend to take any action to undermine the ICC.\nWhile the United States initially supported the idea of creating an international criminal court and was a major participant at the Rome Conference, in the end, the United States voted against the Statute. Nevertheless, President Clinton signed the treaty December 31, 2000, at the same time declaring that the treaty contained \"significant flaws\" and that he would not submit it to the Senate for its advice and consent \"until our fundamental concerns are satisfied.\" The Bush Administration has likewise declined to submit the Rome Statute to the Senate for ratification, and has notified the U.N. Secretary General, as depositary, of the U.S. intent not to ratify the treaty. The primary objection given by the United States in opposition to the treaty is the ICC's possible assertion of jurisdiction over U.S. soldiers charged with \"war crimes\" resulting from legitimate uses of force, and perhaps over civilian policymakers, even if the United States does not ratify the Rome Statute. The United States sought to exempt U.S. soldiers and employees from the jurisdiction of the ICC based on the unique position the United States occupies with regard to international peacekeeping.\nOn June 30, 2002, the United States threatened to veto a draft U.N. resolution to extend the peacekeeping mission in Bosnia because the members of the Security Council refused to add a guarantee of full immunity for U.S. personnel from the jurisdiction of the ICC, a move that provoked strong opposition from ICC supporters concerned with the viability of that institution, and that also raised some concerns about the future of United Nations peacekeeping. Ultimately, however, the Security Council and the U.S. delegation were able to reach a compromise and adopted unanimously a resolution requesting the ICC defer, for an initial period of one year, any prosecution of persons participating in U.N. peacekeeping efforts who are nationals of states not parties to the ICC. The compromise reached by the Security Council did not provide permanent immunity for U.S. soldiers and officials from prosecution by the ICC; rather, it invoked article 16 of the Rome Statute to defer potential prosecutions for one year. Some States Parties to the Rome Statute and other supporters have argued that article 16 was meant only to apply to specific cases and was not intended to permit a blanket waiver for citizens of a specific country. The U.N. Security Council adopted another resolution extending the deferral to July 1, 2004. However, during the summer of 2004, opposition to extending the deferral through 2005 eventually led the Administration to drop its pursuit. The United States continues to pursue bilateral agreements to preclude extradition by other countries of U.S. citizens to the ICC.\nThis report outlines the main objections the United States has raised with respect to the ICC and analyzes the American Servicemembers' Protection Act (ASPA) enacted to regulate U.S. cooperation with the ICC. The report discusses the implications for the United States, as a non-ratifying country, as the ICC begins to take shape, as well as the Administration's efforts to win immunity from ICC jurisdiction for Americans. A description of the ICC's background and a more detailed analysis of the ICC's organization, jurisdiction, and procedural rules may be found in CRS Report RL31437, International Criminal Court: Overview and Selected Legal Issues (pdf).\n\n\tU.S. Objections to the Rome Statute\n\nThe primary objection given by the United States in opposition to the treaty is the ICC's possible assertion of jurisdiction over U.S. soldiers charged with \"war crimes\" resulting from legitimate uses of force, or its assertion of jurisdiction over other American officials charged for conduct related to foreign policy initiatives. The threat of prosecution by the ICC, it is argued, could impede the United States in carrying out military operations and foreign policy programs, impinging on the sovereignty of the United States. Detractors of the U.S. position depict the objection as a reluctance on the part of the United States to be held accountable for gross human rights violations or to the standard established for the rest of the world.\nBelow, in bold type, are summarized some of the main objections voiced by U.S. officials and other critics of the Rome Statute. Each objection is followed by the counterpositions likely to be voiced by representatives of U.S. foreign allies that support the ICC, as well as a very brief discussion of the issue. This section is intended to familiarize the reader with the basic issues that comprise the current debate, and not to provide an exhaustive analysis of the issues. None of the statements in the section below should be interpreted to represent the view of CRS, since CRS does not take positions on policy issues.\n\n\t\tIssue #1: Jurisdiction over Nationals of Non-Parties\n\nOnly nations that ratify treaties are bound to observe them. The ICC purports to subject to its jurisdiction citizens of non-party nations, thus binding non-party nations. ICC supporters may argue that the ICC has jurisdiction over persons, not nations. Non-party states are not obligated to do anything under the treaty. Therefore, the Rome Statute does not purport to bind non-parties, although non-party states may cooperate or defend their own interests that may be affected by a pending case. ICC opponents, however, may point out that if individuals are charged for conduct related to carrying out official policy, the difference between asserting jurisdiction over individuals and over the nation itself becomes less clear. After all, it is arguably the policy decision and not the individual conduct that is actually at issue. The threat of prosecution, however, could inhibit the conduct of U.S. officials in implementing U.S. foreign policy. In this way, it is argued, the ICC may be seen to infringe U.S. sovereignty.\nSome ICC supporters have asserted that the crimes covered by the Rome Statute are already prohibited under international law either by treaty or under the concept of \"universal jurisdiction\" or both; therefore, all nations may assert jurisdiction to try persons for these crimes. The ICC, they argue, would merely be exercising the collective jurisdiction of its members, any of which could independently assert jurisdiction over the accused persons under a theory of \"universal jurisdiction\"; the Nuremberg trials serve as an example of such collective jurisdiction. ICC opponents may note that the existence of \"universal jurisdiction\" has been disputed by some academics, who argue that actual state practice does not provide as much support for the concept as many ICC supporters may claim. However, ICC supporters note, the Rome Statute does not rely entirely on universal jurisdiction; certain pre-conditions to jurisdiction must be met, including the consent of either the State on whose territory the crime occurred or the State of nationality of the accused. The United States is already party to most of the treaties that form the basis for the definitions of crimes in the Rome Statute, meaning U.S. citizens are already subject to the prohibitions for which the ICC will have jurisdiction.\nICC supporters may further argue that if the ICC could not assert jurisdiction over non-party States, so-called \"rogue regimes\" could insulate themselves from the reach of the ICC simply by not ratifying the Rome Statute. The purpose for creating the ICC would be subverted. The United States had proposed to resolve this problem by creating a mandatory role for the U.N. Security Council in deciding when the ICC should assert jurisdiction, but the majority of other countries refused to adopt such a rule on the stated grounds that it would mirror the uneven prosecution of war crimes and crimes against humanity under the present system of ad hoc tribunals.\n\n\t\tIssue #2: Politicized Prosecution\n\nThe ICC ' s flaws may allow it to be used by some countries to bring trumped-up charges against American citizens, who, due to the prominent role played by the United States in world affairs, may have greater exposure to such charges than citizens of other nations. ICC supporters argue that the principle of \"complementarity\" will ensure that the ICC does not take jurisdiction over a case involving an American citizen, unless the United States is unwilling or unable genuinely to investigate the allegations itself, a scenario some argue is virtually unthinkable. Some also take exception to the notion that Americans are more likely to be targeted for prosecution although many other countries that participate in peacekeeping operations, for example, are willing to subject their soldiers and officials to the jurisdiction of the ICC. Many\u00a0U.S. opponents of the ICC express concern that the ICC will be able to second-guess a valid determination by U.S. prosecutors to terminate an investigation or decline to prosecute a person. It is not uncommon for unfriendly countries to characterize U.S. foreign policy decisions\u00a0as \"criminal.\" The ICC could provide a forum for such charges. Some ICC supporters dispute the likelihood of such an occurrence, and express confidence that unfounded charges would be dismissed.\nA recent determination by the ICC's Chief Prosecutor seems to demonstrate a reluctance to launch an investigation against the United States based on allegations regarding its conduct in Iraq. On February 9, 2006, the Chief Prosecutor issued a letter explaining his reasons for declining to launch an investigation despite multiple submissions by private groups urging action against the United States. In addition to acknowledging the limits of the Court's jurisdiction, which he noted precluded pursuing charges based on the legality of the decision to invade, the\u00a0Prosecutor noted that the allegations about U.S. nationals' behavior during the Iraq occupation\u00a0were \"of a different order than the number of victims found in other situations under\u00a0investigation,\" and concluded that the allegations were of insufficient gravity to warrant an\u00a0investigation.\n\n\t\tIssue #3: The Unaccountable Prosecutor\n\nThe Office of the Prosecutor, an organ of the ICC that is not controlled by any separate political authority, has unchecked discretion to initiate cases, which could lead to \" politicized prosecutions. \" ICC supporters may counter that the ICC statute does contain some restraints on the Prosecutor, including a provision that the Prosecutor must seek permission from a pre-trial chamber to carry out a self-initiated prosecution, and a provision for removal of the Prosecutor by vote of the Assembly of States Parties. The independence of the prosecutor, it is argued, is vital in order to ensure just results, free from political control. U.S. negotiators at the Rome Conference had pressed for a role for the U.N. Security Council to check possible \"overzealous\" prosecutors and prevent politicized prosecutions. The majority of nations represented at the Rome Conference took the view that the U.N. Security Council, with its structure and permanent members, would pose an even greater danger of \"politicizing\" ICC prosecutions, thereby guaranteeing impunity for some crimes while prosecuting others based on the national interests of powerful nations.\n\n\t\tIssue #4: Usurpation of the Role of the U.N. Security Council\n\nThe ICC Statute gives the ICC the authority to define and punish the crime of \" aggression, \" which is solely the prerogative of the Security Council of the United Nations under the U.N. Charter. ICC supporters may argue that all States Parties will have the opportunity to vote on a definition of aggression after the treaty has been in effect for seven years, which definition must comport with the U.N. Charter, thereby preserving the role of the U.N. Security Council. The ICC, under this view, is merely providing a forum for trying persons accused of committing \"aggression\" under international law. Opponents of the ICC, however, may argue that the lack of agreement among nations as to the definition of aggression suggests that any definition adopted only by a majority of member states of the ICC may not be sufficiently grounded in international law to be binding as jus cogens . The U.N. General Assembly adopted a resolution in 1974 addressing the definition of aggression, but it has only been invoked once by the Security Council. The definition contains an enumeration of offenses included as possible aggression, but leaves the determination to the Security Council.\n\n\t\tIssue #5: Lack of Due Process Guarantees\n\nThe ICC will not offer accused Americans the due process rights guaranteed them under the U.S. Constitution, such as the right to a jury trial. Supporters of the Rome Statute contend it contains a comprehensive set of procedural safeguards that offers substantially similar protections to the U.S. constitution. Some also note that the U.S. Constitution does not always afford American citizens the same procedural rights. For example, Americans may be tried overseas, where foreign governments are not bound to observe the Constitution. Moreover, cases arising in the armed services are tried by court-martial, which is exempt from the requirement for a jury trial. The current U.S. policy about the use of military tribunals in the war against terrorism could lead to suggestions of a double standard on the part of the United States with respect to procedural safeguards in war crimes trials.\n\n\tCongressional Action\n\nCongress has passed several riders effectively precluding the use of funds to support the ICC. The 107 th Congress passed the American Servicemembers' Protection Act of 2002 (ASPA) as title II of the supplemental appropriations bill for 2002, which was signed by the President on August 2, 2002. The 108 th Congress included a provision in the Consolidated Appropriations Act, P.L. 108-447 , to prohibit the use of funds made available under the Economic Support Fund heading to provide assistance to countries who are members of the ICC and who have not entered into a so-called \"Article 98\" agreement with the United States. This provision, known as the Nethercutt Amendment, was reauthorized by the 109 th Congress as part of the FY2006 Consolidated Appropriations Act ( H.R. 3057 \/ P.L. 109-102 ). A substantially identical provision is included in H.R. 5522 , The Foreign Operations, Export Financing, and Related Programs Appropriations Act, 2007, as passed by the House of Representatives (\u00a7 572).\n\n\t\tAmerican Servicemembers' Protection Act of 2002\n\nBoth the House of Representatives and the Senate added the American Servicemembers' Protection Act (ASPA) to the supplemental appropriations bill for the fiscal year ending September 30, 2002, H.R. 4775 , 107 th Congress. The conferees adopted the Senate version of the bill, which included a new provision that the ASPA will not prevent the United States from cooperating with the ICC if it prosecutes persons such as Saddam Hussein or Osama bin Laden.\n\n\t\t\tLegislative History\n\nOriginally introduced in the 106 th Congress as S. 2726 , the ASPA is intended to shield members of the United States Armed Forces and other covered persons from the jurisdiction of the ICC. The Senate Committee on Foreign Relations held hearings the same day the bill was introduced but did not report it.\n\n\t\t\tProhibitions and Requirements\n\nThe ASPA prohibits cooperation with the ICC by any agency or entity of the federal government, or any state or local government. (Section 2004) Covered entities are prohibited from responding to a request for cooperation by the ICC or providing specific assistance, including arrest, extradition, seizure of property, asset forfeiture, service of warrants, searches, taking of evidence, and similar matters. It prohibits agents of the ICC from conducting any investigative activity on U.S. soil related to matters of the ICC. Section 2004(d) states that the United States \"shall exercise its rights to limit the use of assistance provided under all treaties and executive agreements for mutual legal assistance in criminal matters ... to prevent ... use by the [ICC of such assistance].\" It does not ban the communication to the ICC of U.S. policy, or U.S. government assistance to defendants. It does not prevent private citizens from providing testimony or evidence to the ICC. Section 2006 requires the President to put \"appropriate procedures\" in place\u00a0to prevent the direct or indirect transfer of certain classified national security information to the ICC.\n\n\t\t\t\tRestrictions on Participation in Peacekeeping Missions\n\nUnless subject to a blanket waiver under section 2003, section 2005 of the ASPA restricts U.S. participation in U.N. peacekeeping operations to missions where the President certifies U.S. troops may participate without risk of prosecution by the ICC because the Security Council has permanently exempted U.S. personnel from prosecution for activity conducted as participants, or because each other country in which U.S. personnel will participate in the mission is either not a party to the ICC and does not consent to its jurisdiction, or has entered into an agreement \"in accordance with Article 98\" of the Rome Statute. The latter option may not provide as much assurance as the first; an Article 98 agreement would prevent the surrender of certain persons to the ICC by parties to the Article 98 agreement, but would not bind the ICC if it were to obtain custody of the accused through other means. If the alleged crime is committed on the territory of a state party to the Rome Statute, the consent requirement for the jurisdiction of the ICC would be met, despite the existence of the Article 98 agreement. That country could, however, carry out its own investigation and invoke complementarity to preclude the ICC's jurisdiction. Additionally, the country that is the object of the peacekeeping mission may consent to the ICC's jurisdiction over U.S. participants for alleged crimes committed on its territory, whether or not it is a member of the ICC.\nThe restriction may also be waived for peacekeeping missions where the President certifies that U.S. participation is in the national interest of the United States. The national interest qualification would appear to be the most easily met of the three waiver options; whenever the United States uses its vote in the Security Council to approve a peacekeeping operation, the mission presumably is deemed to serve the national interest. This section could conceivably be interpreted to suggest the President has the authority to commit U.S. troops to participate in U.N. peacekeeping missions without the prior approval of Congress. The restriction does not apply to peacekeeping missions established prior to July 1, 2003.\n\n\t\t\t\tRestriction on Provision of Military Assistance\n\nEffective 1 July 2003, the ASPA also prohibits military assistance to any country that is a member of the ICC, except for NATO countries and major non-NATO allies, unless the President waives the restriction (section 2007) or a blanket waiver is in effect under section 2003. Military assistance, as defined in the ASPA, includes foreign assistance under chapters 2 and 5 of Part II of the Foreign Assistance Act of 1961, as amended, and defense articles and services financed by the government, including loans and guarantees, under section 23 of the Arms Export Control Act. The President may waive the prohibition without prior notice to Congress if he determines and reports to the appropriate committees that such assistance is important to the national interest or the recipient country has entered into a formal Article 98 agreement to prevent the ICC's proceeding against U.S. personnel present in such country.\nThe restriction does not appear to apply to any regional organizations that may receive military assistance. The restrictions on military assistance will no longer apply to these countries if they\u00a0agree to sign Article 98 agreements with the United States, or if the President waives the restrictions as he deems justified with respect to a particular country in accordance with national\u00a0interests.\nOne hundred countries are reported to have signed Article 98 agreements with the United States as of May 3, 2005. It is not clear whether all of the agreements have been ratified by their respective governments so as to be effective at present.\n\n\t\t\t\tAuthority to Free Persons from ICC\n\nSection 2008 authorizes the President to use \"all means necessary and appropriate\" to bring about the release of covered United States and allied persons, upon the request of the detainee's government, who are being detained or imprisoned by or on behalf of the ICC. The Act does not provide a definition of \"necessary and appropriate means\" to bring about the release of covered persons, other than to exclude bribes and the provision of other such incentives. Section 2008 also authorizes the President to direct any federal agency to provide legal representation and other legal assistance, as well as any exculpatory evidence on behalf of covered U.S. or allied persons who are arrested, detained, investigated, prosecuted or imprisoned by, or on the behalf of the ICC. Section 2008 further permits the government to appear before the ICC in defense of the interests of the United States.\n\n\t\t\t\tWaivers and Exceptions\n\nThe ASPA contains multiple waiver provisions and exceptions. Section 2003(a)-(b) provides for presidential waivers of sections 2005 and 2007 (restriction on U.S. participation in U.N. peacekeeping missions and prohibition on military assistance) if the President certifies to Congress that the ICC has agreed not to seek to assert jurisdiction over any covered U.S. or allied person with respect to actions undertaken by such person in an official capacity. This blanket waiver may be extended for successive periods of one year if the ICC abides by the agreement. As described above, section 2005 may be waived under its own terms with respect to specific peacekeeping missions if satisfactory protection can be achieved through U.N. Security Council measures or by agreement with other participants, or if the national interests of the United States justify participation in the mission. Section 2007 also contains its own waiver provision, allowing the President to provide military assistance to a particular country if he determines and reports to Congress that it is in the national interest or that the country in question has entered into an agreement with the United States \"pursuant to Article 98 of the Rome Statute preventing the International Criminal Court from proceeding against United States personnel present in such country.\" NATO and major non-NATO allies are excepted from the prohibition in section 2007.\nIf the ICC enters into and abides by an agreement under sections 2003(a) or (b), section 2003(c) permits the President to waive sections 2004 and 2006 (prohibiting cooperation with the ICC and directing the President to implement measures to prohibit the transfer of classified information) with respect to specific cases before the ICC. To waive the prohibitions and allow cooperation with the ICC, the President must first certify to Congress that there is reason to believe the accused is guilty as charged, it is in the national interest to waive the prohibitions, and that the investigation and prosecution by the ICC will not result in the investigation or arrest of any covered U.S. or allied persons with respect to any actions undertaken by them in an official capacity. It is somewhat unclear what a waiver of section 2006 would entail, in that the section does not directly prohibit any action. Instead, it directs the President to implement rules to prevent transfer of classified national security information and law enforcement information to the ICC, and to prevent indirect transfer of material related to matters under investigation or prosecution by the ICC to the United Nations and ICC member countries unless assurances are received from the recipient that such information will not be made available to the ICC. A waiver of section 2006 could be interpreted to mean that the President's requirement to implement the rules is waived, or that the requirement to obtain assurances from recipients other than the ICC is waived, or that the rules themselves may be waived with respect to a particular case.\nSection 2011 provides an exception for certain presidential authorities, stating that the restrictions on cooperation with the ICC (section 2004) and the requirement for procedures to protect certain sensitive information (section 2006) do not apply to \"any action or actions with respect to a specific matter taken or directed by the President on a case-by-case basis in the exercise of the President's authority as Commander in Chief of the Armed Forces of the United States under article II, section 2 of the United States Constitution or in the exercise of the executive power under article II, section 1 of the United States Constitution.\" The section would require the President to notify Congress within 15 days of the action, unless such notification would jeopardize national security. It further clarifies that \"nothing in [the] section shall be construed as a grant of statutory authority to the President to take any action.\" Section 2012 prohibits delegation of the authorities vested in the President by sections 2003 (waiver provision) and 2011(a) (constitutional exception).\nInasmuch as sections 2004 and 2006 are already subject to presidential waiver under section 2003(c) in the case of the investigation or prosecution of a \"named individual,\" it appears that this section is drafted to avoid possible conflicts of the separation of powers between the President and Congress. In the event that the President takes the position that the prohibitions of sections\u00a02004 and 2006 infringe upon his constitutional authority in certain cases, he might assert\u00a0that Congress has no power even to require a waiver under section 2003. Section 2011 appears to ensure notification of Congress, at least at some point after the action has been taken,\u00a0regardless of whether the President believes that sections 2004 and 2006 impinge his constitutional authority.\nThe effect of section 2011 is not entirely clear, depending as it does on the interpretation of the President's executive powers under article II, section 1 of the Constitution and his authority as Commander in Chief of the Armed Forces. Interpreted broadly, the constitutional executive power includes the power to execute the law, meaning the execution of any law, whether statutory or constitutional, or even international law. Such an interpretation would seem to render sections 2004 and 2006, as well as the waiver provision of section 2003(c), largely superfluous. Interpreted narrowly, the executive authorities cited above could refer to those powers which the President does not share with Congress. Under a narrow interpretation, Congress would be deemed to be without authority to regulate such actions in any event, in which case it would appear to make little sense to restrict its application to sections 2004 and 2006. The language could be construed by a court to imply a waiver authority apart from the restrictions outlined in section 2003.\nSection 2015 provides clarification with respect to assistance to international efforts. It states:\nNothing in this title shall prohibit the United States from rendering assistance to international efforts to bring to justice Saddam Hussein, Slobodan Milosovic, Osama bin Laden, other members of Al Qaeda, leaders of Islamic Jihad, and other foreign nationals accused of genocide, war crimes or crimes against humanity.\nThis language would appear to have the effect of limiting the prohibitions in section 2004 to cases in which the ICC prosecutes non-U.S. citizens for the crimes currently under the jurisdiction of the ICC, although the United States may be obligated to deny such assistance in the case of an accused foreign national who is a national of a country with which the United States has entered into a reciprocal Article 98 agreement. The provision could also eliminate the restrictions on participation in peacekeeping missions or provision of military assistance where such participation or aid could be interpreted to further an international effort to prosecute the named crimes. There is no definition of \"foreign national\" in the ASPA; its use in section 2015 could lead to a conflict with sub-sections (d) and (f) of section 2004 (22 U.S.C. \u00a7 7423) as they apply to permanent resident aliens.\n\n\t\t\t\tReporting Requirements\n\nIn addition to the congressional notifications required by some of the waiver authorities described above, the ASPA encourages the President to submit, by February 2, 2003, a report for each military alliance to which the United States is a party assessing the command arrangements they entail and the degree to which such arrangements may place U.S. servicemembers under the command or control of foreign officers subject to the jurisdiction of the ICC. No later than August 2, 2003, the President was encouraged to submit a report describing possible modifications to such alliance command arrangements that would reduce the risks to U.S. servicemembers identified in the first report.\n\n\t\tThe Nethercutt Amendment\n\nSection 574 of the FY2005 Consolidated Appropriations Act ( H.R. 4818 \/ P.L. 108-447 ) prohibited Economic Support Funds (ESF) assistance to the government of any country that is a party to the ICC that has not entered into an Article 98 agreement with the United States, except for countries eligible for assistance under the Millennium Challenge Act of 2003. It authorized the President to waive the prohibition with respect to NATO members and major non-NATO allies without prior notice to Congress, if he determined and reported to the appropriate committees that a waiver was in the U.S. national security interest. The President could also waive the prohibition on economic assistance for countries that entered into Article 98 agreements with the United States. (Presumably, this provision would have applied to countries that later agreed to enter into such an Article 98 agreement, to ensure congressional notification).\nThe Nethercutt Amendment was re-enacted by the 109 th Congress as part of the FY2006 Consolidated Appropriations Act ( H.R. 3057 \/ P.L. 109-102 ). The FY2006 measure, however, requires that the President give Congress notice before he invokes a waiver, but he may grant a waiver not only with respect to any NATO or major non-NATO ally, but also to \"such other country as he may determine if he determines and reports to the appropriate congressional committees that it is important to the national interests of the United States to waive such prohibition.\" The Foreign Operations Appropriations bill for FY2007 ( H.R. 5522 ), recently passed by the House of Representatives, would continue these prohibitions (\u00a7 572). As with prior years' legislation, the bill would not affect the funding for the Millennium Challenge Corporation. The Senate Appropriations Committee reported its version of the bill without any similar prohibition.\n\n\t\tNational Defense Authorization Act for FY2007\n\nThe Senate passed a measure as part of the 2007 National Defense Authorization Act, S. 2766 , that would modify ASPA to end the ban on International Military Education and Training (IMET) assistance to countries that are members of the ICC and that have not implemented Article 98 agreements (\u00a7 1210). The House version of the FY2007 Defense Authorization bill, H.R. 5122 , does not contain such a provision; however, after hearing testimony from several combatant commands regarding the perceived negative consequences flowing from the cut-off of IMET assistance to affected allies, the House Armed Services Committee reported its view that the President's authority to waive ASPA funding restrictions can and should be invoked where necessary to \"impede undue influence on U.S. partner nations\" by third-party governments that might occur in the absence of U.S. engagement efforts made possible through IMET.\n\n\t\tProspective Legislation\n\nSome observers have suggested that Congress should pass legislation to close jurisdictional gaps in U.S. criminal law in order to ensure U.S. territory does not become a safe haven for those accused of genocide, war crimes, and crimes against humanity. The War Crimes Act of 1996, for example, establishes U.S. federal jurisdiction to punish war crimes, as defined in international treaties to which the United States is a party, but only when perpetrated by or against U.S. nationals. Likewise, the Genocide Convention Implementation Act of 1987 prohibits acts that would constitute genocide under the Rome Statute, except that the U.S. Code covers only conduct committed by a U.S. national or conduct committed within the United States. Some observers have expressed concern that war criminals or perpetrators of genocide from other countries could seek refuge in the United States from extradition to and prosecution by the ICC. However, the exception in section 2013 of the ASPA, which allows U.S. entities to cooperate with the ICC in the case of foreign nationals accused of war crimes, may obviate the need for such legislation.\nSome have suggested that changes in U.S. statutes to broaden the jurisdiction of federal courts to cover all crimes over which the ICC might assert jurisdiction could enhance the implementation of complementarity by precluding a finding by the ICC that the United States is \"unable\" to prosecute one of its citizens. For the most part, war crimes committed by U.S. persons are covered by the War Crimes Act, although there may be some acts covered by the Rome Treaty that are not explicitly prohibited by U.S. law. Also, there is no U.S. statute codifying crimes against humanity as such. U.S. criminal law prohibits most of the crimes enumerated under the Rome Statute as possible crimes against humanity, as long as they are committed within the United States or by military personnel. Under current law, acts that could constitute crimes against humanity committed by U.S. civilians overseas generally are not triable in U.S. civil or military courts unless they involve torture or certain acts of international terrorism. In the event a U.S. citizen is alleged to have committed such an act, the United States may not be deemed able to investigate and prosecute the alleged crime, a prerequisite for asserting complementarity.\n\n\tImplications of the ICC for the United States as a Non-member\n\nAs a member of the Preparatory Commission established by the Rome Statute, the United States played a significant role during the drafting of rules of procedure, elements of crimes, and other documents detailing how the ICC will operate. Now that the Rome Statute has entered into force, the Preparatory Commission has been replaced by the Assembly of States Parties (\"Assembly\") as the governing body to oversee the implementation of the Rome Statute. The Assembly held its first conference September 3\u201310, 2002, during which it adopted rules of evidence and procedure and a host of other regulations, including the methods for nominating and electing its officials. During its subsequent session in February, the Assembly elected 18 judges, who later elected Canadian jurist Philippe Kirsch to be their president. In April of 2003, the Assembly elected Argentinian lawyer Luis Moreno Ocampo to be the ICC's first prosecutor.\nThe first Review Conference, an alternative forum for considering amendments to the Statute, is to be convened in July of 2009, seven years after the Statute has entered into effect. Thereafter, Review Conferences may be convened from time to time by the U.N. Secretary-General upon request by a majority of the States Parties. As a non-party, the United States has no vote in either body. However, it will remain eligible to participate in both the Assembly and in Review Conferences as an observer.\n\n\t\tObserver Role\n\nThe Assembly of States Parties adopted procedural rules for its activities at its first conference, including rules setting forth the role of observers and other participants. Observers are entitled to participate in the deliberations of the Assembly and any subsidiary bodies that might be established. Observer States will receive notifications of all meetings and records of Assembly proceedings on the same basis as States Parties. They will not, however, be permitted to suggest items for the agenda or to make motions during debate, such as points of order or motions for adjournment. Thus, the United States may be able to participate substantially in Assembly debates as well as proffer and respond to proposals, even if it never becomes a party to the Statute. The United States may also use its position at the United Nations to communicate to the Assembly of States Parties.\nAs noted, the United States is not able to vote in these bodies so long as it does not ratify the Rome Statute. It may not nominate U.S. nationals to serve as judges or cast a vote in elections for judges or the Prosecutor (or for their removal), or vote on the ICC's budget. It will not be able to vote on the definition of the crime of aggression or its inclusion within the jurisdiction of the ICC, when the matter is considered at first Review Conference, or on any other amendment to the Rome Statute, unless it ratifies the Rome Statute.\nThe United States, as a non-party, will have no right itself to refer situations to the Prosecutor for investigation; as a Permanent Member of the Security Council, however, it could seek to influence referrals by the Security Council. Similarly, it may participate in Security Council requests to the Prosecutor to defer an investigation or prosecution and to the Pre-Trial Chamber to review a decision of the Prosecutor not to investigate or prosecute. As a non-party to the treaty, the United States is eligible, but not obligated, to cooperate with any ICC investigation and prosecution; and under the Statute, the United States could, but would not be obligated to, arrest a person named in a request for provisional arrest or for arrest and surrender from the ICC. The United States also retains the right not to provide information or documents the disclosure of which would prejudice its national security interests and to refuse to consent to the disclosure by a state party of information or documents provided to that state in confidence. Finally, as a non-party, the United States is not under any obligation to contribute to the budget for the ICC, except, perhaps indirectly, to the extent that the U.N. General Assembly regular budget might include ICC support.\n\n\t\tForeign Policy Implications\n\nPerspectives differ on the impact of the ICC on U.S. interests, as it begins to operate. Some see the ICC as a fundamental threat to the U.S. armed forces, civilian policy makers, and U.S. defense and foreign policy. Others see it as a valuable foreign policy tool for defining and deterring crimes against humanity, a step forward in the decades-long U.S. effort to end impunity for egregious mass crimes. Debate over the ICC has created a tension between enhancing the international legal justice system and encroaching on what some countries perceive as their legitimate use of force. The review by the International Criminal Tribunal for the Former Yugoslavia (ICTY) of allegations that NATO bombing in Kosovo might be deemed a war crime is illustrative of this tension. Many opponents of the ICC were outraged that the issue was even considered. They questioned the legitimacy of the tribunal's actions, and their anger was not assuaged by the Tribunal's ultimate decision that there was \"no basis for opening an investigation into any of those allegations or into other incidents relating to NATO bombing.\" While opponents of the ICC interpret this event as an indication that the ICC is likely to pursue spurious and politically motivated cases against U.S. citizens, proponents of the ICC see it as illustrating that similar allegations would be dismissed by the ICC Prosecutor.\nAnother consideration is the practical effect that the U.S. position will have on the ICC itself. Because the ICC relies largely on States Parties to provide mechanisms and manpower for arresting suspects and enforcing verdicts of the ICC, it has been argued that the lack of U.S. participation in the ICC may seriously impair the ICC's ability to function. Those who believe the ICC is a fundamental threat to U.S. foreign and defense policy may welcome this outcome; while ICC supporters may argue that an ineffective court could serve the interests of human rights abusers, ensuring impunity and decreasing the likelihood of future ad hoc tribunals.\nThe United States has enjoyed a long reputation for leadership in the struggle against impunity and the quest for universal human rights and the rule of law. Human rights organizations have expressed concern that U.S. refusal to ratify the Rome Statute, coupled with any actions that might undermine the ICC, could cause the United States to lose the moral high ground and damage its influence world-wide, including its ability to influence the development of the law of war. The perceived U.S. willingness to hold U.N. peacekeeping missions hostage to U.S. demands for immunity from the ICC may deepen the rift between the United States and allies that support the ICC. The withholding of military assistance and other economic aid to members of the ICC may also be seen as an effort to coerce countries to refuse to ratify the Rome Statute or to sign an Article 98 agreement, which could appear to some as undermining the ICC and negating the Administration's stated intent to respect the decisions of other countries to join the ICC. By seemingly demanding special treatment in the form of immunity from the ICC, the United States may bolster the perception of its unilateral approach to world affairs and its unwillingness to abide by the same laws that apply to other nations. This perception could undermine U.S. efforts at coalition-building to gain international support for the present war against terrorism and operations in Iraq, as well as future international endeavors.\nOthers argue that the perception of U.S. commitment to the rule of law has little effect on countries where human rights abuses are most rampant. Despots like Cambodia's Pol Pot or Iraq's Saddam Hussein have not weighed possible future legal ramifications before committing massive crimes. Under this view, the establishment of the ICC might have the unintended effect of hardening the resolve of ruthless tyrants who may feel they have nothing to gain by giving up their power to more democratic regimes if they fear prosecution for the crimes they committed while in power. From this perspective, in terms of curbing human rights abuses, it does not matter whether the U.S. ratifies the Rome Statute, other than perhaps to provide support to an accused dictator's argument challenging the legitimacy of the ICC. According to this viewpoint, the costs to the United States appear to outweigh the benefits.\n\n\t\tStrategy for Precluding ICC Prosecution of U.S. Troops and Officials\n\nASPA \u00a7 2005 prohibits U.S. participation in peacekeeping and peace-enforcing missions established by the Security Council unless the President certifies and reports to the appropriate committees of Congress that U.S. personnel are not placed at risk of prosecution by the ICC because they are guaranteed immunity by the U.N. Resolution or because of arrangements with the host government. The Bush Administration has pursued efforts in the U.N. Security Council and with individual States to prevent the possibility that American citizens could be prosecuted before the ICC. This effort has met with some success but also some resistance.\n\n\t\t\tAgreement with the U.N. Security Council\n\nOn July 12, 2002, in response to the U.S. veto of the extension of peacekeeping operations in Bosnia, the U.N. Security Council adopted a resolution requesting a blanket deferral of prosecutions by the ICC of peacekeepers from states not parties to the Rome Statute for a period of one year. Resolution 1422 provides, in pertinent part:\nActing under Chapter VII of the Charter of the United Nations,\n1. Requests , consistent with the provisions of Article 16 of the Rome Statute, that the ICC, if a case arises involving current or former officials or personnel from a contributing State not a Party to the Rome Statute over acts or omissions relating to a United Nations established or authorized operation, shall for a twelve-month period starting 1 July 2002 not commence or proceed with investigation or prosecution of any such case, unless the Security Council decides otherwise;\n2. Expresses the intention to renew the request in paragraph 1 under the same conditions each 1 July for further 12-month periods for as long as may be necessary;\n3. Decides that Member States shall take no action inconsistent with paragraph 1 and with their international obligations;\n4. Decides to remain seized of the matter.\nThe resolution, which was renewed for another year under Security Council Resolution 1487, appeared to fall short of the President's original proposal, which would have provided permanent immunity for U.S. troops and officials from the jurisdiction of the ICC. Opponents of the original proposal objected that the U.N. Security Council does not have the authority to \"rewrite\" international treaties. The compromise invoked article 16 of the Rome Statute, which provides:\nNo investigation or prosecution may be commenced or proceeded with under this Statute for a period of 12 months after the Security Council, in a resolution adopted under Chapter VII of the Charter of the United Nations, has requested the Court to that effect; that request may be renewed by the Council under the same conditions.\nAlthough some opponents of the U.S. position had argued that article 16 was intended to be invoked only on a case-by-case basis, the language of the article does not expressly state such a requirement. Therefore, Resolutions 1422 and 1487 appear to be consistent with the Rome Statute. The language deferred ICC action for one year; it does not provide absolute immunity for actions occurring during the deferral period. Because the Security Council did not extend the deferral past July 2004, it appears that the ICC may investigate and prosecute any purported crimes under its subject matter jurisdiction that occurred at any time after the Rome Statute's entry into force, subject to other provisions of the Rome Statute.\n\n\t\t\tOther U.N. Missions\n\nU.S. military personnel were able to participate in the United Nations Mission in Liberia (UNMIL) because, in authorizing the multinational force to enforce the cease-fire, the Security Council decided that\ncurrent or former officials or personnel from a contributing State, which is not a party to the Rome Statute of the International Criminal Court, shall be subject to the exclusive jurisdiction of that contributing State for all alleged acts or omissions arising out of or related to the Multinational Force or United Nations stabilization force in Liberia, unless such exclusive jurisdiction has been expressly waived by that contributing State.\nUnlike the previous arrangement with respect to the U.N. mission in Bosnia, the authorization for operations in Liberia appears to provide permanent immunity to U.S. participants from the jurisdiction of the ICC with respect to conduct linked to the U.N. mission. Accordingly, President Bush made the appropriate certification to Congress under ASPA \u00a7 2005 (22 U.S.C. \u00a7 7424). Liberia had signed the Rome Statute in 1998 but did not ratify it until September of 2004.\nThe United States also sent troops to participate in the U.N. mission to establish peace in Haiti in 2004. In April of 2004, the U.N. Security Council established the United Nations Stabilization Mission in Haiti (MINUSTAH). In June of that year, President Bush certified that U.S. servicemembers could safely participate because Haiti had signed an Article 98 agreement.\n\n\t\t\tU.N. Action Regarding the Situation in Darfur\n\nOn March 31, 2005, the U.N. Security Council, acting under Chapter VII of the U.N. Charter, adopted Resolution 1593 (2005) which refers reports about the situation in Darfur, Sudan (dating back to July 1, 2002), to the ICC Prosecutor, Luis Moreno-Ocampo. This is the first time such a referral from the U.N. Security Council has been made. As Sudan is not a party to the ICC, and has not consented to its jurisdiction, the ICC jurisdiction over the case could only be established by means of a U.N.S.C. referral. Under the ICC Statute, the ICC is authorized, but not required, to take such a case. The Resolution, which is binding on all U.N. member states, was adopted by a vote of 11 in favor, none against and with 4 abstentions\u2014the United States, China, Algeria, and Brazil.\nU.S. foreign policy respecting action to address the situation in Darfur was complicated by its position regarding the ICC and its jurisdiction over non-member states. In September 2004, the United States concluded that genocide had taken place in Darfur. According to the State Department, it supported the formation of the International Commission of Inquiry but preferred a tribunal in Africa to be the mechanism of accountability for those who committed crimes in Darfur. After these proposals failed to garner sufficient support, the United States agreed to abstain from voting on the Resolution (which is not equivalent to a veto in the U.N. Security Council) once language was introduced into the Resolution that dealt with the sovereignty questions of concern and essentially protected U.S. nationals and other persons of non-party States outside Sudan from prosecution.\nThe abstention did not change the fundamental objections of the United States to the ICC. Although some view the decision as a sign that the Administration is softening its stance with respect to the ICC, it may also be seen as consistent with the U.S. support of a version of the Rome Statute that would have allowed the U.N. Security Council to refer cases involving non-States Parties to the ICC, but would not have allowed other states to refer cases. At the same time, the compromise allowed the United States to show support for the need for the international community to come together and take action on the atrocities occurring in Darfur.\n\n\t\t\tArticle 98 Agreements\n\nThe United States is also pursuing bilateral options for achieving protection for U.S. troops, within or outside U.N. peacekeeping arrangements, by concluding agreements similar to the status-of-forces agreements (SOFA) routinely negotiated where U.S. troops are stationed abroad. The United States has so far concluded 100 bilateral agreements whereby each signatory promises that it will not surrender citizens of the other signatory to the ICC, unless both parties consent in advance to the surrender. The Department of State is seeking to conclude these agreements with as many states as possible, even those who are not parties to the ICC and others who would not be subject to the sanctions under ASPA.\nThe agreements are intended to make use of Article 98 of the Rome Statute, which states:\nCooperation with respect to waiver of immunity and consent to surrender\n1. The Court may not proceed with a request for surrender or assistance which would require the requested State to act inconsistently with its obligations under international law with respect to the State or diplomatic immunity of a person or property of a third State, unless the Court can first obtain the cooperation of that third State for the waiver of the immunity.\n2. The Court may not proceed with a request for surrender which would require the requested State to act inconsistently with its obligations under international agreements pursuant to which the consent of a sending State is required to surrender a person of that State to the Court, unless the Court can first obtain the cooperation of the sending State for the giving of consent for the surrender.\nParagraph 1 of Article 98 appears intended to retain diplomatic immunity and immunity for heads of state, while paragraph 2 seems to contemplate typical SOFA arrangements, in which countries hosting members or units of the armed forces of allies agree to forego certain types of jurisdiction over the soldiers and other government officers stationed there. The use of the term \"sending state\" in the second paragraph appears to indicate that it is meant to cover only persons who are sent to accomplish government business, and not citizens present in the country for personal or business reasons. The State Department reportedly sought broader application for the bilateral agreements. In 2002, the European Council argued that parties to the ICC who signed such agreements with the United States would be acting inconsistently with their obligations under the Rome Statute. The European Union (EU), all of whose members are parties to the Rome Statute, initially opposed the agreements altogether, but its members reached a compromise to allow member countries to sign. The EU issued guidelines for member countries for the acceptable terms of Article 98 agreements, specifying that coverage would be limited to government representatives on official business, the United States would expressly pledge to prosecute any war crimes committed by Americans, and the agreements would not contain a reciprocal promise to prevent the surrender of European citizens to the ICC. In response to the Nethercutt Amendment, the European Council released a statement calling on President Bush to make \"full use of his waiver authority\" and reiterated the EU stand with respect to Article 98 agreements, referring to the 2002 guidelines.\nDespite the EU compromise, the U.S. pursuit of \"immunity\" has been criticized by some as unnecessary or as an outright effort to undermine the ICC. Supporters of the policy note that agreements, such as SOFAs, that provide immunity for soldiers from prosecution in foreign courts are not unusual. For example, the 19-member International Security Assistance Force (ISAF), a joint force authorized by the U.N. Security Council to provide assistance to the interim government in Afghanistan, included a clause providing immunity for participants in its Military Technical Agreement with the interim government. Furthermore, supporters point out, the agreements are based on and consistent with Article 98 of the Rome Statute, and therefore cannot be said to undermine the ICC.\nThe practical effect of the Article 98 agreements is as of yet uncertain. The use of such agreements with host countries does not provide absolute immunity from the ICC. They would bind only countries that choose to sign, and would have the effect only of preventing the host nation from surrendering an accused to the ICC for prosecution. While the Rome Statute gives some discretion to States Parties to honor their international obligations applicable to extradition of persons who are identified in an ICC request for surrender, there does not appear to be a provision for accused persons or their states of nationality to challenge the jurisdiction of the ICC based on the violation of a bilateral agreement. Therefore, States Parties to the Rome Statute are not precluded from entering into Article 98 agreements that provide for immunity of foreign troops from surrender, but if the ICC were nevertheless to gain custody over the accused through other means, its jurisdiction may not be affected by the agreement.\n\n\t\t\tOptions\n\nThough the Administration continues to seek to conclude Article 98 agreements with relevant countries, it is not clear how many more such agreements are likely to be forthcoming. To strengthen the Administration's pursuit of these agreements, Congress could make more forms of aid contingent on the recipient country's agreement to protect U.S. troops from surrender to the ICC, or it could enact legislation to restrict the President's discretion to grant waivers. If further negotiations fail to garner necessary support, or in case the agreements should turn out to less effective than desired or counterproductive for other reasons, policymakers may seek alternative avenues. One option might be to implement a policy of investigating, and if warranted, prosecuting, all crimes under the ICC jurisdiction alleged to be committed by a U.S. person, thus preempting the ICC through application of the complementarity principle. Such a policy, coupled with changes in U.S. statutes to broaden the jurisdiction of federal courts to cover all relevant crimes, could further insulate U.S. citizens from the reach of the ICC. The United States could seek to further enhance its reputation for conducting fair and credible investigations and trials of suspected war criminals, as well as perpetrators of crimes against humanity or genocide, through the use of consistent procedures that are as open as security considerations permit. Such a practice may help to overcome any charges that a U.S. investigation or prosecution of an accused is not \"genuine\" for the purposes of complementarity.\nFinally, some have argued that a policy of cooperation with the ICC in the prosecution of persons accused of crimes that the United States agrees amount to \"the most serious crimes of concern to the international community\" would enhance the reputation of the United States as a promoter of human rights and the rule of law. Such a policy could take the form of passive non-interference with the ICC to active assistance, including working from within the U.N. Security Council to refer cases to the ICC. By actively keeping the Security Council involved in the referral of cases, some of the predicted problems with referrals by States Parties or by the prosecutor could be minimized. On the other hand, some argue a cooperative posture with respect to the ICC in the case of foreigners while pursuing immunity for U.S. citizens would be perceived as a double standard.","output":"One month after the International Criminal Court (ICC) officially came into existence on July 1, 2002, the President signed the American Servicemembers' Protection Act (ASPA), which limits U.S. government support and assistance to the ICC; curtails certain military assistance to many countries that have ratified the Rome Statute establishing the ICC; regulates U.S. participation in United Nations (U.N.) peacekeeping missions commenced after July 1, 2003; and, most controversially among European allies, authorizes the President to use \"all means necessary and appropriate to bring about the release\" of certain U.S. and allied persons who may be detained or tried by the ICC. The provision withholding military assistance under the programs for Foreign Military Financing (FMF) and International Military Education and Training (IMET) from certain States Parties to the Rome Statute came into effect on July 1, 2003. The 109th Congress reauthorized the Nethercutt Amendment as part of the FY2006 Consolidated Appropriations Act (H.R. 3057\/P.L. 109-102). Unless waived by the President, it bars Economic Support Funds (ESF) assistance to countries that have not agreed to protect U.S. citizens from being turned over to the ICC for prosecution. H.R. 5522, as passed by the House of Representatives, would continue the ESF restriction for FY2007. The Senate passed a measure as part of the 2007 National Defense Authorization Act (H.R. 5122, S. 2766) that would modify ASPA to end the ban on IMET assistance.\nThe ICC is the first permanent world court with nearly universal jurisdiction to try individuals accused of war crimes, crimes against humanity, genocide, and possibly aggression. While most U.S. allies support the ICC, the Bush Administration firmly opposes it and has renounced any U.S. obligations under the treaty. After the Bush Administration threatened to veto a United Nations Security Council resolution to extend the peacekeeping mission in Bosnia on the ground that it did not contain sufficient guarantees that U.S. participants would be immune to prosecution by the ICC, the Security Council adopted a resolution that would defer for one year any prosecution of participants in missions established or authorized by the U.N. whose home countries have not ratified the Rome Statute. That resolution was renewed through July 1, 2004, but was not subsequently renewed. In addition, the United States is pursuing bilateral \"Article 98\"agreements to preclude extradition by other countries of U.S. citizens to the ICC. However, in what some view as a sign that the Administration is softening its stance with respect to the ICC, the United States did not exercise its veto power at the Security Council to prevent the referral of a case against Sudan's leaders for the alleged genocide in Darfur.\nThis report outlines the main objections the United States has raised with respect to the ICC and analyzes ASPA and other relevant legislation enacted or proposed to regulate U.S. cooperation with the ICC. The report concludes with a discussion of the implications for the United States, as a non-ratifying country, as the ICC begins to take shape, as well as the Administration's efforts to win immunity from the ICC's jurisdiction for Americans. A description of the ICC's background and a more detailed analysis of the ICC organization, jurisdiction, and procedural rules may be found in CRS Report RL31437, International Criminal Court: Overview and Selected Legal Issues, by [author name scrubbed] (pdf)."}
{"id":"crs_R42033","pid":"crs_R42033_0","input":"\tIntroduction\n\nIn response to continuing high rates of unemployment and a weak economy, President Obama announced his American Jobs Act on September 8, 2011, before a joint session of Congress, and submitted formal legislation the following week. The President stated the purpose of the legislation was to \"put more people back to work and more money in the pockets of those who are working.\" \nThe American Jobs Act was introduced, by request, in the Senate on September 13, 2011 ( S. 1549 ), and in the House on September 21, 2011 ( H.R. 12 ). The Administration estimated the act would result in spending of $447 billion, to be offset by revenue provisions included in the bill or savings achieved by the Joint Select Committee on Deficit Reduction. Senate Majority Leader Harry Reid subsequently re-introduced the proposal as S. 1660 , using a different offset to pay for its spending provisions. Specifically, S. 1660 would impose a 5.6% surtax on income above $1 million. The Congressional Budget Office (CBO) estimated this version would increase revenues by $453 billion over FY2012-FY2021, compared to $450 billion in the original version of the American Jobs Act ( S. 1549 ). In the months since its introduction, individual provisions of the American Jobs Act have been considered\u2014and some enacted\u2014as freestanding bills or parts of other legislation.\nThis report describes provisions in the American Jobs Act that fall into three major categories: \nprovisions intended to promote hiring and prevent layoffs among selected categories of workers, specifically teachers, law enforcement officers, firefighters, veterans, and the long-term unemployed; provisions to assist unemployed workers through unemployment compensation and reemployment services; and provisions to expand workforce development opportunities for low-income adults and youth. \nThe report does not discuss tax provisions (except for specialized tax credits intended as hiring incentives) or proposals related primarily to infrastructure (except for School Modernization grants).\n\n\tOverview of the American Jobs Act\n\nThe American Jobs Act has four titles, as shown below. (Note that the body of this CRS report is not organized in the sequence of the act, but rather by the three major topic areas identified above.) \nTitle I\u2014 Relief for Workers and Businesses \u2014would extend and expand through 2012 the temporary payroll tax reduction in effect during 2011, and would also establish a tax credit for employers for increased payroll attributed to certain workers. The title includes other tax relief for businesses, including provisions related to bonus depreciation and tax withholding requirements for government contractors. (Title I provisions are not discussed in this report.)\nTitle II\u2014 Putting Workers Back on the Job While Building and Modernizing America \u2014includes subtitles that would create hiring incentives for veterans (through the Work Opportunity Tax Credit); authorize grants to prevent layoffs and create jobs for teachers, law enforcement officers, and firefighters; and provide funding for the modernization, repair, and renovation of schools and colleges. (These provisions are all discussed in the body of this report.)\nTitle II also includes subtitles related to infrastructure development, including transportation infrastructure grants; establishment of an American Infrastructure Financing Authority; Project Rebuild to be administered by the Department of Housing and Urban Development for the purpose of rehabilitating and refurbishing foreclosed and vacant properties; and a National Wireless Initiative to expand access to high-speed wireless. (These provisions are not discussed in this report.)\nTitle III\u2014 Assistance for the Unemployed and Pathways Back to Work \u2014includes an extension of certain temporary Unemployment Compensation (UC) provisions. The title also would create a Reemployment NOW program for beneficiaries of Emergency Unemployment Compensation (EUC08); and would clarify existing law and make grants for short-time compensation programs. The title would create incentives for employers to hire veterans and long-term unemployed workers through the Work Opportunity Tax Credit; and would create a Pathways Back to Work program to assist unemployed, low-income adults and youth. Finally, the title includes a provision intended to prohibit employment discrimination on the basis of an individual's unemployed status. (All Title III provisions are discussed in this report.)\nTitle IV\u2014 Offsets \u2014includes tax provisions intended to offset costs of the American Jobs Act. These provisions are different in the Administration's version (introduced as S. 1549 and H.R. 12 ) and the subsequent version introduced as S. 1660 . As proposed by the Administration, this title also would increase the deficit reduction goal and automatic spending reduction trigger established in the Budget Control Act of 2011 ( P.L. 111-125 ). (These provisions are not discussed in this report.) \n\n\tPromoting Hiring and Preventing Layoffs\n\nThe American Jobs Act contains several provisions to promote hiring and prevent layoffs of selected categories of workers, specifically teachers, law enforcement officers, and firefighters, through formula or competitive grant programs to government entities. The act also would promote hiring of veterans and long-term unemployed individuals through tax credits to employers. Finally, the act would prohibit employment discrimination on the basis of an individual's unemployed status. These components of the act are discussed in the following sections.\n\n\t\tTeacher Stabilization (Title II, Subtitle B)20\n\nThe act would provide $30 billion for a Teacher Stabilization program, which would provide formula grants to states to \"prevent teacher layoffs and support the creation of additional jobs in public early childhood, elementary, and secondary education\" for the current school year (2011-2012 school year) and the following school year (2012-2013 school year). The Teacher Stabilization program bears similarities to the Education Jobs Fund, which was authorized by P.L. 111-226 and received $10 billion for similar purposes. Those funds remain available through September 30, 2012. The current status of the Education Jobs Fund is discussed at the end of this section, and various provisions of the program are discussed where they are relevant to the discussion of the Teacher Stabilization program.\n\n\t\t\tDistribution of Funds to States\n\nOf funds appropriated for the proposed Teacher Stabilization program, 0.5% would first be reserved for the outlying areas, 0.5% would be reserved for the Secretary of Interior to carry out activities in schools operated or funded by the Bureau of Indian Education (BIE), and up to $2 million would be reserved for administration and oversight of the program by the U.S. Department of Education (ED). The Secretary of ED would then be required to provide the remaining funds to state governors using a population-based formula. In determining these grants, 60% of a state's grant would be based on its population of children ages 5 through 17 relative to the overall U.S. population for this age group, and 40% would be based on the state's overall population relative to the overall U.S. population. Funds appropriated for the Teacher Stabilization program would remain available to the Secretary until September 30, 2012. Table A-1 shows estimated state grants under the Teacher Stabilization program as calculated by the White House.\n\n\t\t\tApplication Process\n\nFunds would be awarded to state governors who had submitted an approvable application to the Secretary within 30 days of the law's enactment, in such a manner and containing such information as the Secretary may reasonably require. If a state governor failed to meet this requirement, the Secretary would be required to provide the state's share of funds to another entity or entities in the state under terms and conditions established by the Secretary. The specific entity or entities to whom these funds could be awarded is not defined in the legislation. The same terms and conditions that would apply to other grant recipients under the Teacher Stabilization program would also apply to any entity or entities that received funding in the aforementioned situation. The Secretary would be prohibited from allocating funds to another entity unless the governor provided an assurance that the state would meet the maintenance of effort (MOE) requirements for FY2012 and FY2013 (see discussion below). However, the Secretary would be permitted to allocate up to 50% of the funds available to a state to another entity in the state if the state educational agency (SEA) demonstrated that the state would meet the MOE requirements for FY2012, or if the Secretary determined the state would meet those requirements or comparable requirements established by the Secretary. If a state does not receive funds under the Teacher Stabilization program or only receives partial funding, the Secretary would be required to reallocate the remaining funds to the remaining states based on the aforementioned population-based formula.\n\n\t\t\tDistribution of Funds to the Local Level and Uses of Funds\n\nOf the funds received by a state, not more than 10% could be reserved to make grants to state-funded early learning programs and not more than 2% could be reserved for administrative costs associated with the Teacher Stabilization program. The American Jobs Act defines a state-funded early learning program as one that \"provides educational services to children from birth to kindergarten entry\" and that receives funding from the state. It is unclear whether a state-funded program that fails to serve the entire age range specified in the definition could use funds under the American Jobs Act. If states use funds to support state-funded early learning programs, the funds could only be used for \"compensation, benefits, and other expenses, such as support services, necessary to retain early childhood educators, recall or rehire former early childhood educators, or hire new early childhood educators to provide early learning services.\" States would be required to obligate all funds used for these purposes by September 30, 2013. \nWithin 100 days of the receipt of funds, states would be required to provide the remaining funds to local educational agencies (LEAs) to support early childhood, elementary, and secondary education. Funds would be awarded to LEAs based on two measures: (1) 60% of the funds would be awarded on the basis of LEAs' relative shares of enrollment; and (2) 40% of the funds would be awarded based on an LEA's relative share of funds received by LEAs in the state under Title I-A of the Elementary and Secondary Education Act.\nLEAs receiving funds under the Teacher Stabilization program would only be permitted to use the funds for \"compensation and benefits and other expenses, such as support services, necessary to retain existing employees, recall or rehire former employees, or hire new employees to provide early childhood, elementary, or secondary educational and related services.\" LEAs would be prohibited from using funds for \"general administrative expenses\" or for \"other support services or expenditures\" as these terms are defined by the National Center for Education Statistics (NCES) for the Common Core of Data (CCD).\n\n\t\t\t\tEducation Jobs Fund and Use of Funds\n\nNo additional information is provided in the American Jobs Act regarding exactly what constitutes compensation and benefits and other expenses, such as support services. However, the Education Jobs Fund had similar use of funds requirements, and ED issued guidance that addressed this issue. While ED may or may not issue similar guidance for the Teacher Stabilization program, given the similarities between the uses of funds between the two programs, it may be informative to examine the guidance issued by ED regarding the use of funds for the Education Jobs Fund. \nAccording to guidance provided by ED, \"compensation and benefits and other expenses, such as support services\" includes, among other items, \"salaries, performance bonuses, health insurance, retirement benefits, incentives for early retirement, pension fund contributions, tuition reimbursement, student loan repayment assistance, transportation subsidies, and reimbursement for childcare expenses.\" Funds could be used to restore reductions in salaries and to provide salary increases, as well as to cover salary and benefits costs associated with eliminating furlough days. \nWith respect to which staff members may be supported with the funds, the guidance notes that the funds could be used for \"teachers and other employees who provide school-level educational and related services.\" The guidance goes on to include the following staff members as employees who may be supported with program funds: \"principals, assistant principals, academic coaches, in-service teacher trainers, classroom aides, counselors, librarians, secretaries, social workers, psychologists, interpreters, physical therapists, speech therapists, occupational therapists, information technology personnel, nurses, athletic coaches, security officers, custodians, maintenance workers, bus drivers, and cafeteria workers.\" The Education Jobs Fund money could not be used to pay for contractual school-level services (e.g., maintenance workers employed by an outside firm). For individuals that have both LEA-level and school-level responsibilities, only the portion of their salary and benefits that is attributable to their work on allowable school-level activities could be paid with funds from the Education Jobs Fund.\nStatutory language specifically prohibits LEAs from using the Education Jobs Fund grants for \"general administrative expenses\" or \"other support service expenditures\" as these terms are defined for the CCD. In its guidance, ED indicated that prohibited administrative expenditures include those related to the operation of the superintendant's office or the LEA's board of education, including the salaries and benefits of administrative employees at the LEA level. ED has also interpreted the prohibition on the use of funds for other support service expenditures to prohibit the use of funds for \"fiscal services, LEA program planners and researchers, and human resource services.\"\n\n\t\t\tRainy-Day Funds and Debt Reduction30\n\nSimilar to the Education Jobs Fund, the Teacher Stabilization program would include various prohibitions related to state rainy-day funds and debt reduction. Under the Teacher Stabilization program, states would be prohibited from using their funds to directly or indirectly establish, restore, or supplement a rainy-day fund. Further, states would be prohibited from using funds to reduce or retire state debt obligations. They would also be prohibited from supplanting state funds in a manner that would effectively establish, restore, or supplement a rainy-day fund or reduce or retire state debt obligations incurred by the state. The term \"rainy-day fund\" is not defined in the American Jobs Act. While there may be a general understanding of what this term means, the bill's lack of a definition makes it difficult to predict how the prohibition would be applied across states. \n\n\t\t\tFiscal Accountability Requirements\n\nA long-standing principle of federal aid to elementary and secondary education is that federal funding adds to, and does not substitute for, state and local education funding. That is, federal funds are awarded to provide a net increase in financial resources for specific types of educational services (such as the education of disadvantaged students or students with disabilities), rather than effectively providing general subsidies to state and local governments. All of the fiscal accountability requirements included in federal elementary and secondary education programs are intended to ensure that all federal funds represent a net increase in the level of financial resources available to serve eligible students, and that they do not ultimately replace funds that states or LEAs would provide in the absence of federal aid.\nTwo fiscal accountability requirements that apply to major federal K-12 education aid programs would also be relevant to the Teacher Stabilization program. The first requirement\u2014maintenance of effort\u2014requires, for example, that recipient LEAs must have provided, from state and local sources, a level of funding (either aggregate or per student) in the preceding year that is at least a specified percentage of the amount in the second preceding year. A second fiscal accountability requirement provides that federal funds must be used to supplement, not supplant (SNS), state and local funds that would otherwise be available for the education of students eligible to be served under the federal program in question. SNS provisions prohibit states and\/or LEAs from using federal funds (1) to provide services that state and\/or local funds have provided or purchased in the past; (2) to provide services that are required to be provided under federal, state, or local law; or (3) to provide services for some students (e.g., those eligible under specific federal programs) that are provided to other students with non-federal funds. Similar to the Education Jobs Fund, funds provided under the Teacher Stabilization program would not be subject to supplement, not supplant requirements (except as noted above). Thus, for example, an LEA could use funds provided through the Teacher Stabilization program to pay the salary of a teacher currently being paid with state and local funds and shift the state and local funds to another purpose.\nThe Teacher Stabilization program includes MOE requirements for FY2012 and FY2013. In order to receive Teacher Stabilization funds for state FY2012, a state would be required to provide an assurance to the Secretary that either \n1. the state will maintain state support for early childhood, elementary, and secondary education, in the aggregate, or based on per pupil expenditures, and for public institutions of higher education (IHEs) at not less than the level of support provided to each of these two levels of education, respectively, for state FY2011; or 2. the state will maintain state support for early childhood, elementary, and secondary education and for public IHEs at a percentage of the total revenues available to the state that is equal to or greater than the percentage provided for state FY2011.\nFor state FY2013, the state would have to provide an assurance that similar MOEs would be met with respect to funding provided or revenues available for FY2012. It should be noted that the second MOE option available for both state FY2012 and state FY2013 does not require the state to meet the requirement separately for each level of education.\nThe Secretary would be permitted to waive the MOE requirements if the Secretary determined that a waiver would be equitable due to exceptional or uncontrollable circumstances (e.g., natural disaster) or a \"precipitous decline\" in the state's financial resources.\n\n\t\t\tReporting Requirements\n\nEach state receiving funds under the Teacher Stabilization program would be required to submit an annual report to the Secretary that includes a description of how the funds were expended or obligated and how many jobs were supported by the state using funds provided under the program. It should be noted that these requirements may not provide the type of detailed information that Congress may want as it considers a subsequent program or possible extension of the Teacher Stabilization program. For example, the reporting requirements may not result in information being reported on the specific type of staff supported with the funds; the extent to which funds were used for early childhood education, elementary education, and secondary education; the extent to which funds were used to provide compensation or benefits to existing employees versus rehiring employees or hiring new employees; or how funds were used in individual LEAs. Without more detailed information, it may be difficult to make an accurate determination about how many jobs were created versus supported, if this is information of interest to Congress. Table A-1 includes estimates calculated by the White House of the number of jobs (for both teachers and first responders) that would be supported by the Teacher Stabilization state grants and First Responder Stabilization grants (described below).\n\n\t\t\tCurrent Status of the Education Jobs Fund\n\nAs previously mentioned, P.L. 111-226 provided $10 billion for an Education Jobs Fund. Based on data maintained by ED, of the $9.9 billion awarded to states, the District of Columbia, and Puerto Rico (hereafter collectively referred to as states), as of October 7, 2011 (most recent data available), the cumulative outlays for states totaled $6.264 billion, meaning that about $3.635 billion remained available to states for outlays. The percent of awarded funds drawn down by states varied from about 7.8% in New Jersey to nearly 100% in several states. The differences in the draw down rates may be attributed to several factors, including the timing of the grant awards (funds were awarded after the start of the 2010-2011 school year), no requirement for states to provide funds to LEAs within a certain time frame, and the ability to obligate funds through September 30, 2012, which would permit their use during the 2011-2012 school year.\n\n\t\tFirst Responder Stabilization (Title II, Subtitle C)39\n\nThe American Jobs Act would provide $5 billion for a proposed Community Oriented Policing Stabilization Fund (the fund), which would be used to \"prevent layoffs of, and support additional jobs for, law enforcement officers and other first responders.\" Of the proposed appropriation for the fund, $4 billion would be for the Community Oriented Policing Services (COPS) Office for a competitive grant program for hiring, rehiring, or retaining law enforcement officers. In addition, $1 billion of the $5 billion appropriation for the fund would be transferred to the Department of Homeland Security for the Staffing for Adequate Fire and Emergency Response (SAFER) grant program (discussed below).\n\n\t\t\tLaw Enforcement Officers\n\nThe Community Oriented Policing Services (COPS) program was created by Title I of the Violent Crime Control and Law Enforcement Act of 1994. The mission of the COPS program is to advance community policing in all jurisdictions across the United States. The COPS program awards grants to state, local, and tribal law enforcement agencies throughout the United States so they can hire and train law enforcement officers to participate in community policing, purchase and deploy new crime-fighting technologies, and develop and test new and innovative policing strategies. COPS grants are managed by the COPS Office, which was created in 1994 by the Department of Justice (DOJ) to oversee the COPS program. \nThe American Jobs Act would require that grants be awarded in accordance with the conditions set forth in the authorizing legislation for the COPS program. However, the matching requirement and maximum grant award amount would be waived under the proposed program. These waivers would allow the COPS Office to award grants to law enforcement agencies that cover the entire cost of hiring, rehiring, or retaining a law enforcement officer, but it also likely means that the COPS Office would award fewer grants than it would if both the matching and maximum grant amount conditions were left in place. While the matching and maximum grant amount requirements would be waived under this program, the COPS Office would still be required to ensure that, unless all eligible applicants receive awards, every state receives no less than 0.5% of the total appropriation and that half of the total appropriation goes to law enforcement agencies serving jurisdictions of 150,000 or fewer.\nIn evaluating the current proposal, it might be useful to examine how the COPS Office awarded the funding it received under the American Recovery and Reinvestment Act of 2009 (ARRA, P.L. 111-5 ). The COPS Office established the COPS Hiring Recover Program (CHRP) to award the funds it received under ARRA. The COPS Office acknowledged that it had a statutory requirement to promote community policing, but that the intent of the ARRA was to preserve and create jobs and promote economic recovery; to assist those most impacted by the recession; and to stabilize state and local government budgets. As such, applicants for funding under the CHRP were required to submit data on their community's fiscal health, crime rate, and planned community policing activities. The COPS Office used the data to develop a score for each application whereby 50% of the final score was based on fiscal health factors and the other 50% was based on the applicant's crime rate and planned community policing activities. Given that the purpose of the proposed American Jobs Act program is to prevent layoffs and support additional jobs for law enforcement officers, which would imply that funding should be targeted to areas where there is some level of fiscal distress, it is possible that the COPS Office could use the CHRP methodology as a blueprint for awarding grants under the proposed program. However, nothing in the current bill would require the COPS Office to use the CHRP methodology when selecting applications for funding.\n\n\t\t\tFirefighters\n\nAs mentioned above, $1 billion of the proposed Community Oriented Policing Stabilization Fund would be transferred to a First Responder Stabilization Fund, from which the Secretary of Homeland Security would be directed to make competitive grants for the hiring, rehiring, or retention of firefighters. These grants would be competitively awarded through the existing SAFER grant program, currently housed at the Department of Homeland Security (DHS). SAFER grants are awarded directly to applying fire departments through a peer-review process that makes award decisions based on the merits of the applications received. \nThere are two categories of SAFER grants. Hiring grants (constituting about 90% of SAFER funding each year) helps career and combination fire departments meet the costs of employing firefighters. Recruitment and retention grants help volunteer and combination fire departments finance activities related to the recruitment and retention of volunteer firefighters. The SAFER program was established by the 108 th Congress in Section 1057 of the FY2004 National Defense Authorization Act ( P.L. 108-136 ), and is codified as Section 34 of the Federal Fire Prevention and Control Act of 1974 (15 U.S.C. 2229a). From FY2005 (the SAFER program's initial year) through FY2011, Congress has appropriated a total of $1.5 billion to SAFER. \nThe SAFER statute, as it currently stands, does not allow fire departments to use SAFER grants to supplant local budget shortfalls. However, since FY2009, Congress has added provisions in appropriations legislation giving DHS the authority to waive these and other SAFER statutory requirements and restrictions that may impede the ability of some local fire departments to participate in the program. The American Jobs Act would include this waiver authority for the additional $1 billion in grant money to be made available for FY2012. Specifically, this waiver authority would allow SAFER grants to be used to retain and rehire firefighters, and to fill positions eliminated through attrition. Additionally, the waivers would give DHS authority to eliminate cost-share requirements, remove the five-year requirement for the duration of the grant, and permit the amount of funding per position at levels exceeding the current limit of $100,000.\n\n\t\tWork Opportunity Tax Credits52\n\nThe Work Opportunity Tax Credit (WOTC) is a non-refundable tax credit for employers who hire individuals of certain targeted groups. The credit is calculated as 40% of the first-year wages paid to the qualifying individual, up to a maximum amount of wages. For most qualified individuals, the maximum amount of first-year wages for calculating the WOTC is $6,000. \nThe American Jobs Act would expand the WOTC for certain veterans and long-term unemployed persons. Under current law an employer may claim the WOTC on up to $12,000 of first-year wages paid to certain qualified veterans. A qualified veteran is: \n3. a member of a family receiving Supplemental Nutrition Assistance Program (SNAP) benefits for at least 3 months in the year prior to the date the veteran is hired; and 4. eligible for disability compensation from the Department of Veterans Affairs (VA), and : (a) was hired within one year of discharge or release from active military duty, or (b) had aggregate periods of unemployment in the one-year period prior to being hired of six months or more.\nUnder current law there is no targeted group for long-term unemployed for the WOTC.\n\n\t\t\tVeterans Targeted Group (Title II, Subtitle A)\n\nThe following provisions, related specifically to the veterans targeted group, were separately introduced and have been enacted as part of P.L. 112-56 . As proposed in the American Jobs Act, and as now enacted in P.L. 112-56 , these provisions will expand the targeted group for qualified veterans and change the amount of first-year wages that can be claimed for the WOTC, such that\nfor veterans who are members of a family receiving SNAP benefits for at least three months in the year prior to being hired, the maximum wages for the credit would be $6,000; for veterans who have been unemployed for an aggregate of at least four weeks, but less than six months, in the year prior to being hired, the maximum wages for the credit would be $6,000; for veterans eligible for disability compensation from the VA and within one year of discharge or release from active military duty when hired, the maximum wages for the credit would be $12,000; for veterans who have been unemployed for an aggregate of at six months or more in the year prior to being hired, the maximum wages for the credit would be $14,000; and for veterans who are eligible for disability compensation from the VA and have been unemployed for an aggregate of six months or more in the year prior to being hired, the maximum wages for the credit would be $24,000.\nThe provisions also will make the WOTC refundable for certain non-profit employers. For these non-profit employers, the refundable credit will be the lesser of the calculated WOTC for hiring veterans who qualify for the WOTC based on unemployment, or the payroll taxes paid by the non-profit. For this comparison, the credit rate for the calculated WOTC is 26% rather than 40%. Non-profit employers eligible for the refundable credit are 501(c) tax-exempt organizations and public higher education institutions.\nThe provisions also extend the WOTC for qualified veterans to U. S. possessions with a tax system that mirrors the U.S. tax system, with the Secretary of the Treasury paying to the possession the amount lost to the possession in taxes because of the expansion of the WOTC for qualified veterans.\n\n\t\t\tLong-Term Unemployed Targeted Group (Title III, Subtitle B)\n\nThe American Jobs Act would also expand the WOTC by adding a new targeted group for individuals who are not students and have aggregate periods of unemployment of 6 months or more in the year prior to being hired. The maximum wages for calculating the WOTC for qualified long-term unemployed persons would be $10,000.\nAs stated above with regard to veterans, the act would make the WOTC refundable for certain non-profit employers who hire from the long-term unemployed targeted group. For these non-profit employers, the refundable credit would be the lesser of the WOTC for hiring qualified long-term unemployed or the payroll taxes paid by the non-profit. For this comparison, the credit rate for the calculated WOTC would be 26% rather than 40%. As noted above, non-profit employers eligible for the refundable credit would be 501(c) tax-exempt organizations and public higher education institutions.\nThe act also would extend the WOTC for long-term unemployed to U. S. possessions with a tax system that mirrors the U.S. tax system, with the Secretary of the Treasury paying to the possession the amount lost to the possession in taxes because of the expansion of the WOTC for long-term unemployed.\n\n\t\tProhibition of Discrimination on the Basis of Unemployed Status (Title III, Subtitle D)\n\nThe American Jobs Act would establish the Fair Employment Opportunity Act of 2011, which would prohibit employment discrimination against the unemployed. Designed to eliminate the economic burdens imposed by discrimination against the unemployed, the act would prohibit such discrimination in job advertising and hiring practices. The act appears to be modeled on Title VII of the Civil Rights Act of 1964, which prohibits discrimination in employment on the basis of race, color, national origin, sex, or religion. Specifically, much of the enforcement authority appears to be borrowed from Title VII and related statutes, as do the definitions for several of the terms in the act.\n\n\t\t\tCoverage\n\nLike Title VII, the Fair Employment Opportunity Act would prohibit employers and employment agencies from discriminating on the basis of unemployment status. Most public and private employers would be covered, although private employers who have fewer than 15 employees would be exempt. Like Title VII, the act would define \"employer\" to exclude \"bona fide private membership\" clubs that qualify for federal tax exemptions. \nThe act would also adopt Title VII's definition of \"employment agency\" with some modifications. Like Title VII, an employment agency would include any person (and his or her agents) who regularly seeks to procure employees for an employer or to procure opportunities for individuals to work as employees for an employer. The act, however, would significantly broaden the definition to also include any person who maintains a website or print medium that publishes advertisements or announcements regarding job openings for covered employees. \nLikewise, most public and private employees would be protected, including employees covered by the Government Employee Rights Act of 1991 and the Congressional Accountability Act of 1995. Because the act is intended to prohibit discrimination against the unemployed, it would cover not only employees but also other affected individuals, defined to include any persons who were subject to an unlawful employment practice solely because of their status as unemployed. Under the act, the term \"status as unemployed\" would be defined to include individuals who, at the time of application for employment or at the time of the alleged violation, do not have a job, are available for work, and are searching for employment.\n\n\t\t\tProhibited Acts\n\nUnder the act, it would be unlawful for employers to: (1) publish an advertisement or announcement stating that individuals who are unemployed are not qualified for the employment opportunity or indicating that the employer will not consider or hire an unemployed individual for the employment opportunity; (2) fail or refuse to consider, or fail or refuse to hire, an individual because of that individual's status as unemployed; and (3) direct or request that an employment agency disqualify unemployed individuals from consideration, screening, or referral to the employer. \nLikewise, the act would prohibit employment agencies from: (1) publishing an advertisement or announcement stating that individuals who are unemployed are not qualified for the employment opportunity or indicating that the employment agency or employer will not consider or hire an unemployed individual for the employment opportunity; (2) screening, failing or refusing to consider, or failing or refusing to refer for employment an individual because of that individual's status as unemployed; and (3) limiting, segregating, or classifying an unemployed individual in any manner that would limit or tend to limit the individual's access to information about jobs. In addition, the act would bar both employers and employment agencies from interfering with or retaliating against individuals who exercise their rights under the act.\nThe act clarifies that it is not intended to preclude an employer or employment agency from considering an individual's employment history or examining the reasons behind an individual's unemployed status when making employment decisions about an individual. Such consideration or examination may include an assessment of whether the individual's previous employment in a similar position is job-related or consistent with business necessity.\n\n\t\t\tEnforcement and Remedies\n\nEnforcement procedures under the act would parallel the enforcement provisions of Title VII. Thus, the Department of Justice (DOJ) would enforce the act against state and local governments, and administrative enforcement with respect to private employment would be delegated to the Equal Employment Opportunity Commission (EEOC), which would have the same authority to receive and investigate complaints, to negotiate voluntary settlements, and to seek judicial remedies as it currently exercises under Title VII. Similarly, in devising remedies for unemployment discrimination under the act, a federal court would have the same jurisdiction and powers as the court has to enforce Title VII. In general, federal courts possess broad remedial discretion under Title VII, including the ability to enjoin the unlawful employment practice and to \"order such affirmative action as may be appropriate, which may include, but is not limited to, reinstatement or hiring of employees, with or without back pay ... or any other relief as the court deems appropriate.\"\nIndividuals who sue for violations of the advertising provisions of the act could be awarded the following remedies: an injunction prohibiting the unlawful employment practice; reimbursement of costs; liquidated damages not to exceed $1,000 for each day of the violation; and reasonable attorney's fees. Remedies for other violations of the act would be patterned on Title VII's remedial provisions. Under Title VII, victims of discrimination may seek equitable relief, including limited back pay awards for wage, salary, and fringe benefits lost as the result of discrimination. Private employers who intentionally discriminate in violation of the statute may be liable for capped compensatory and punitive damages, while plaintiffs may seek awards of compensatory, but not punitive, damages against federal, state, and local governmental agencies. Unlike Title VII, the act would limit damages to $5,000 for cases in which wages, salary, employment benefits, or other compensation has not been lost.\nFinally, the act would waive the states' Eleventh Amendment immunity from suit for unemployment discrimination against employees or applicants within any state program or activity that receives federal financial assistance.\n\n\tCompensation and Services for Unemployed Workers\n\nThe American Jobs Act focuses on the income and reemployment needs of unemployed workers, particularly the long-term unemployed who might qualify for benefits under the temporary Emergency Unemployment Compensation (EUC08) program, or the Extended Benefits (EB) program that provides benefits beyond the usual Unemployment Compensation (UC) maximum of 26 weeks. In addition to provisions that would extend certain temporary programs and expand services for certain EUC08 claimants, the act also would authorize a new Reemployment NOW program, that would provide formula grants to states to address the reemployment needs of eligible individuals, and would expand federal funding for state-administered short-time compensation (or \"work sharing\") programs. These provisions are discussed in the following sections.\n\n\t\tUnemployment Compensation (Title III, Subtitle A, Part I)\n\n\t\t\tExtension of Temporary Provisions: EUC08, 100% EB Federal Financing, EB Three-Year Lookback Trigger Option, and Increased Railroad Unemployment Benefits\n\nThe American Jobs Act proposed to extend several temporary federal provisions related to unemployment benefits and programs that were otherwise scheduled to expire. On December 23, 2011, these provisions were extended for two additional months by P.L. 112-78 ; a further extension of some of the provisions is included in H.R. 3630 , which has passed the House and Senate and awaits conference. The following describes provisions included in the American Jobs Act; for a complete discussion of legislation to extend or expand unemployment benefits, see CRS Report R41662, Unemployment Insurance: Legislative Issues in the 112 th Congress , by [author name scrubbed] and [author name scrubbed] and CRS Report R41508, Expiring Unemployment Insurance Provisions , by [author name scrubbed].\nIn general, basic income support for unemployed workers is provided through the joint federal-state UC program, which generally pays up to 26 weeks of unemployment benefits. Unemployment benefits may be extended at the state level by the permanent EB program if high unemployment exists within the state. Once regular unemployment benefits are exhausted, the EB program may provide up to an additional 13 or 20 weeks of benefits, depending on worker eligibility, state law, and state economic conditions. Under permanent law (P.L. 91-373), the EB program is funded 50% by the federal government and 50% by the states. The 2009 stimulus package ( P.L. 111-5 , as amended, including by P.L. 111-312 ) temporarily provided for 100% federal funding of the EB program until January 4, 2012. Most recently, P.L. 112-78 extended 100% federal financing of EB through March 7, 2012.\nIn addition to extending the temporary 100% federal financing of EB, P.L. 111-312 also allowed states to temporarily use lookback calculations based on three years of unemployment rate data (rather than the current lookback of two years of data) as part of their EB triggers if states would otherwise trigger off or not be on a period of EB benefits. Using a two-year versus a three-year EB trigger lookback is an important adjustment because some states are likely to trigger off their EB periods in the near future despite high, sustained\u2014but not increasing\u2014unemployment rates. This temporary option to use three-year EB trigger lookbacks was scheduled to expire the week ending on or before December 31, 2011; under P.L. 112-78 , the option now expires the week ending on or before February 29, 2012. \nThe American Jobs Act would provide a year-long extension of the 100% federal financing of the EB program through calendar year 2012. In addition, it would extend authorization for states to use three-year lookbacks for state EB triggers during this period. It would not create additional weeks of EB benefits.\nIt is projected that the impact of maintaining the three-year lookback for state EB triggers would be that the effective maximum availability of unemployment benefits from all programs would likely decrease from 99 weeks to 79 by mid-year for almost all states. This projection reflects current economic models that have most states continuing to experience high unemployment rates that are not increasing\u2014and, thus, failing to be 10% higher than in any of the previous three years.\nTo supplement UC and EB benefits and respond to the most recent recession, Congress created a temporary unemployment insurance program, the EUC08 program. The EUC08 program began in July 2008. EUC08 has been amended by Congress numerous times (including by P.L. 111-312 ), and was scheduled to expire the week ending on or before January 3, 2012. Under P.L. 112-78 , the program is now scheduled to expire the week ending on or before March 6, 2012. Currently, the EUC08 program provides up to four tiers of additional weeks of unemployment benefits to certain workers who have exhausted their rights to regular UC benefits. Tiers I (up to an additional 20 weeks) and II (up to an additional 14 weeks) are available in all states. Tier III (up to an additional 13 weeks) is available in states with a total unemployment rate of at least 6%. Tier IV (up to additional six weeks) is available in states with a total unemployment rate of at least 8.5%.\nThe American Jobs Act would provide a year-long extension of the EUC08 authorization through calendar year 2012. However, the act would not expand the number of weeks of unemployment benefits available to the unemployed beyond what is currently available. (For example, it would not authorize a \"tier V\" of EUC08 benefits.)\nThe proposed American Jobs Act would also extend the temporary increased railroad unemployment benefits\u2014authorized under the American Recovery and Reinvestment Act (ARRA; P.L. 111-5 , as amended)\u2014for an additional year through June 30, 2012. The funds would continue to be financed with funds still available under the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 ( P.L. 111-312 ).\n\n\t\t\tReemployment Services\n\nThe proposal would impose new federal requirements and appropriate new federal funds for states to provide reemployment and eligibility assessments to certain EUC08 claimants. The proposal would require states to enter into agreements with the Department of Labor (DOL) and require new EUC08 claimants to report to or check in with their local One-Stop Career Centers. The American Jobs Act would provide $200 per unemployed worker in federal funding for states to conduct Reemployment and Eligibility Assessments in order to review new EUC08 claimants' eligibility for benefits and provide an assessment of their work search efforts.\n\n\t\t\tSelf-Employment Assistance\n\nThe Jobs Act also would authorize states to enter into new agreements with DOL to pay Self-Employment Assistance (SEA) benefits for up to 26 weeks to individuals receiving EUC08 benefits who (1) have at least 26 weeks of EUC08 remaining benefits and (2) are participating in entrepreneurial training activities. The new SEA proposal is distinct from the existing authorization for states to set up SEA programs under state laws that are available to individuals receiving regular, state Unemployment Compensation (UC) benefits.\nUnder this proposal, SEA benefits would be identical in amount to EUC08 benefits and be paid in lieu of EUC08 benefits, for up to 26 weeks to individuals who choose to participate and are currently eligible for EUC08 benefits in states that enter into DOL agreements. SEA participants would be exempt from the work availability and work search requirements under EUC08. Instead, individuals receiving SEA benefits would be required to engage in activities related to starting their own businesses. SEA benefits would be available to up to 1% of all EUC08 recipients in each participating state. An individual receiving SEA benefits would be able to stop participation and receive any remaining EUC08 benefits at any time (since an individual's total EUC08 entitlement\u2014from all tiers of EUC08 available in his or her state\u2014may not exceed 26 weeks). States with agreements to pay SEA benefits would be able to use Reemployment NOW funds (see description below) to finance SEA administrative, start-up costs, if specified in an approved state Reemployment NOW plan.\n\n\t\tReemployment NOW Program (Title III, Subtitle A, Part II)\n\nThe act would establish a \"Reemployment NOW\" program with $4 billion in direct appropriations. These federal funds would be allotted to states based on a two-part formula: (1) two-thirds would be distributed to states based upon each state's share of the U.S. total number of unemployed persons and (2) one-third would be distributed to the states based on each state's share of the long-term unemployed (measured as unemployment spells of at least 27 weeks). Up to 1% of the funds would be available for program administration and evaluation.\nTo receive a Reemployment NOW allotment, a state would have to submit a plan describing (1) activities to assist the reemployment of eligible individuals; (2) performance measures; (3) coordination of efforts with Title I of the Workforce Investment Act of 1998, the Wagner-Peyser Act, and other appropriate federal programs; (4) timelines for implementation; (5) estimates of quarterly enrollments; (6) assurances that the state will provide appropriate reemployment services to any participating EUC08 claimants; and (7) assurances that the state will provide information to DOL relating to the fiscal, performance, and other matters, including employment outcomes and program impacts that DOL determines is necessary to effectively monitor the activities. DOL would be required to provide Congress and the public with both guidance as well as program evaluation for activities conducted with Reemployment NOW funds.\nAllowable program uses of Reemployment NOW funds would include the following:\nThe \"Bridge to Work\" program would allow individuals to continue to receive EUC08 benefits as wages for work performed in a short-term work experience placement. The Bridge to Work placement would last up to eight weeks and would be required to compensate claimants at a rate equivalent to the minimum wage. The state would be permitted to augment the EUC08 benefit with Reemployment NOW funds to meet this criteria. For individuals participating at least 25 hours per week in a Bridge to Work program, work search requirements would be suspended during the participation and wages paid would not offset EUC08 benefit amounts. Any earnings acquired during program participation would not be considered earnings for the purposes of employment taxes, but would be treated as unemployment benefits for tax purposes. Wage insurance would authorize states to provide an income supplement to EUC08 claimants who secure reemployment at a lower wage than their separated employment. The benefit level would be determined by the states, although it could not be more than 50% of the difference between the worker's wage at the time of separation and the worker's reemployment wage. States would also establish a maximum benefit amount that an individual could collect. The duration of wage insurance payments would be limited to two years. Wage insurance under this proposal would also be limited to individuals who (1) are at least 50 years of age; (2) earn not more than $50,000 per year from reemployment; (3) are employed on a full-time basis as defined by the state; and (4) are not employed by the employer from which the individual was separated. Enhanced reemployment services would allow states to use funds to provide EUC08 claimants and individuals who have exhausted all entitlements to EUC08 benefits with reemployment services that are more intensive than any reemployment services provided by the states previously (for instance, one-on-one assessments, counseling, or case management). Start-up of SEA state programs would authorize states to use funds for any administrative costs associated with the start-up of SEA agreements (as described above). Additional innovative programs would allow states to use funds for programs other than the programs described above. These programs would be required to facilitate the reemployment of EUC08 claimants, among other requirements.\n\n\t\tShort-Time Compensation Program (Title III, Subtitle A, Part III)\n\nThe American Jobs Act would clarify requirements related to short-time compensation (STC or \"work sharing\") programs and provide temporary federal financing to support state work sharing programs. This proposal would temporarily federally finance 100% of STC benefits for up to three years in states that meet the new definition of an STC program, with a transition period for states with existing STC programs that do not meet the new definition (currently 22 states have STC programs). States without existing STC programs would be allowed to enter into an agreement with DOL for up to two years in order to receive federal reimbursement for administrative expenses, as well as temporary federal financing of 50% of STC payments to individuals, with employers paying the other 50% of STC costs. Under this proposal, if a state that enters into an agreement with the Secretary of Labor subsequently enacts a law providing for STC, that state would be eligible to receive 100% of federal financing. The proposal would award DOL grants to eligible states, with one-third of each state's grant available for implementation and improved administration purposes and two-thirds of each state's grant available for program promotion and enrollment of employers. The maximum amount of all grants to states would be $700 million. Finally, the proposal would provide $1.5 million for DOL to submit a report to Congress and the President, within four years of enactment, on the implementation of this provision, including a description of states' best practices, analysis of significant challenges, and a survey of employers in states without STC programs.\n\n\tWorkforce Development for Low-Income Adults and Youth\n\nTitle III, Subtitle C of the American Jobs Act would authorize the Pathways Back to Work Act of 2011 (Pathways Act), which would provide funds for three grant programs to promote the employment of unemployed low-income adults and youth. Overall, the Pathways Act would provide $5 billion for these initiatives through a combination of formula and competitive grants. Funds provided under the Pathways Act would remain available for obligation by the Department of Labor (DOL) until December 31, 2012, and would remain available for expenditure by grantees until September 30, 2013. For all three Pathways Act initiatives, the Secretary of Labor would be allowed to reserve up to 1% of the allocated funding for each initiative to provide technical assistance, evaluations, and administration. The three grant programs are described in the following sections.\n\n\t\tSubsidized Employment for Unemployed, Low-Income Adults (Title III, Subtitle C, Section 364)\n\nThe first of the three Pathways Act programs would provide $2 billion for the purpose of subsidizing employment of unemployed, low-income adults.\n\n\t\t\tPurpose\n\nFunds provided under the subsidized employment initiative of the Pathways Act would be used by state and local entities for two main purposes.\nFirst, administering entities would be authorized to use a range of strategies to recruit employers and identify employment opportunities. Priority would be for opportunities likely to develop into unsubsidized employment within in-demand or emerging occupations in the relevant local area. State and local entities would have the authority to determine the level (i.e., the percentage of wages and costs that the employer would receive for providing employment) and duration of the subsidy.\nSecond, funds provided under this initiative would be available for support services, such as transportation and child care, that would assist individuals in obtaining and keeping subsidized employment.\n\n\t\t\tEligibility and Administration\n\nTo be eligible to participate in activities supported by this initiative, individuals would have to be\nat least 18 years of age; without employment and seeking assistance under the American Jobs Act; and low-income, generally defined as an individual with an income or a member of a family with an income below the poverty level.\nWith regard to the low-income requirement, the proposal would provide an exception to this general definition of a low-income individual. Specifically, Section 368(6)(C) of the American Jobs Act would allow state and local entities administering the grant funds to increase the threshold for eligibility to 200% of the poverty line.\nStates would have the option of administering funds for subsidized employment activities through state and local Workforce Investment Boards (WIBs), entities responsible for administering the Temporary Assistance for Needy Families (TANF) program, or a combination of these entities.\nTo receive formula allotments (described below) under the subsidized employment initiative, a state would be required to submit a plan to the Secretary of Labor that includes, at a minimum, strategies to provide subsidized employment opportunities; requirements the state will apply for participant eligibility; administration plans; performance outcomes expected to be achieved; coordination strategies with WIA Title I (state formula grant programs), TANF, and other relevant state and local programs; implementation timelines and estimates of placement in subsidized employment by quarter; and assurances of effective program monitoring and compliance. Similarly, local entities must submit plans to the Governor of the state, containing the same elements in the state plan, in order to receive allotments from the state.\n\n\t\t\tFunding\n\nEach state with a plan approved by the Secretary of Labor would receive an allotment from the $2 billion provided for subsidized employment activities. For purposes of this section, the term \"State\" refers to the 50 states, the District of Columbia, and Puerto Rico. Of the total appropriated amount of $2 billion, the Secretary of Labor would make two reservations before allotting to states. One, up to 0.25% of the total appropriated would be reserved for outlying areas to provide subsidized employment opportunities. Two, 1.5% of the total appropriated would be reserved for Native American programs to provide subsidized employment opportunities.\nFollowing these reservations, the remainder of funds would be allocated to states on the basis of the following factors:\none-third of the funds would be allocated on the basis of each state's relative share of total unemployment in areas of substantial unemployment (ASU); one-third of the funds would be allocated on the basis of each state's relative share of excess unemployment; and one-third of the funds would be allocated on the basis of each state's relative share of economically disadvantaged adults and youth.\nFor any state that did not submit a state plan or receive approval of a state plan by the Secretary of Labor, the amount of funding that the ineligible state would have received would go to the competitive grant program authorized under Section 366 of the proposed Jobs Act. Likewise, for any locality that did not submit a local plan or receive approval of a local plan by the governor, the amount of funding that the ineligible locality would have received would be reallocated to eligible local entities under the same grant formula.\nAfter funds are allotted to states, the governor of each state would be allowed to reserve up to 5% of the state's allotment for administration and technical assistance. The remaining funds would then be allocated to the entities chosen to administer the subsidized employment programs. If the state chose to administer Pathways Act programs through WIBs, funds would be allocated by the same formula used to allot funds to states (with \"local workforce investment areas\" in place of \"states\" in the formula factors). Each local area would be allowed to reserve up to 10% of the allocated funds for administration. If the state chose to administer the Pathways Act programs through the TANF program, funds would be allocated to local entities in a way the state determines appropriate.\n\n\t\t\tPerformance Accountability\n\nAs with programs authorized under WIA, the proposed Pathways Act programs would require grantees to collect and report performance measures. All three proposed Pathways Act initiatives\u2014subsidized employment, youth employment, and work-based strategies\u2014would require grantees to provide the following information:\nnumber of individuals participating in and completing participation in grant-funded activities; expenditures of grant funds; number of jobs created through grant-funded activities; and demographic characteristics of participants in grant-funded activities.\nIn addition to the common reporting requirements listed above, grantees under Section 364 would be required to report the following performance outcomes for participants:\nentry into unsubsidized employment; retention in unsubsidized employment; and earnings in unsubsidized employment.\n\n\t\tSummer Employment and Year-Round Employment Opportunities for Low-Income Youth (Title III, Subtitle C, Section 365)\n\nThe second of the three Pathways Act programs would provide $1.5 billion for the purpose of providing employment opportunities for low-income youth.\n\n\t\t\tPurpose\n\nFunds provided under the youth employment initiative of the Pathways Act would be used by state and local WIBs for two main purposes.\nFirst, WIBs would be authorized to provide summer employment opportunities to low-income youth (ages 16 to 24). These employment opportunities would be required to have direct linkages to academic and occupational learning. Funds provided under this initiative would be available for support services, such as transportation and child care, that would assist eligible youth in obtaining and keeping employment.\nSecond, WIBs would be authorized to provide year-round employment opportunities to low-income youth (ages 16 to 24). These opportunities could be combined with youth activities authorized under Section 129 of WIA. For year-round employment opportunities, priority would be given to out-of-school youth who are high school dropouts or who have a high school degree or equivalent but are basic skills deficient.\nPriority in both summer and year-round programs would be for opportunities within in-demand or emerging occupations in the relevant local area or in the public or non-profit sectors that meet community needs and for opportunities that link year-round participants to activities that would provide youth with industry-recognized certificates or credentials.\n\n\t\t\tEligibility and Administration\n\nTo be eligible to participate in activities supported by this initiative, individuals would have to\nbe between the ages of 16 and 24; be low-income, generally defined as an individual with an income or a member of a family with an income below the poverty level; and meet one of more of these characteristics: deficient in basic literacy skills; a school dropout; a homeless, runaway or foster child; pregnant or a parent; an offender; an individual requiring additional assistance to complete an educational program or secure and hold employment.\nWith regard to the low-income requirement, the act would provide an exception to the general definition of a low-income youth. Specifically, Section 368(4)(B) would allow local WIBs administering the grant funds to increase the threshold for eligibility to 200% of the poverty line.\nFunds provided under the youth employment section of the Pathways Act would be administered through state and local Workforce Investment Boards (WIBs).\nTo receive formula allotments (described below) under the youth employment initiative, a state would be required to submit a modification of the state plan required under Section 112 of WIA to the Secretary of Labor that includes, at a minimum, strategies to provide summer and year-round employment opportunities; requirements the state will apply for participant eligibility, including targeting assistance to certain low-income youth; performance outcomes expected to be achieved; implementation timelines and estimates of placement in summer and year-round employment by quarter; and assurances of effective program monitoring and compliance. Similarly, local WIBs would be required to submit modifications to local plans required under Section 118 of WIA to the governor of the state, describing the strategies and activities to implement summer and year-round employment opportunities for low-income youth, in order to receive allotments from the state.\n\n\t\t\tFunding\n\nEach state with a plan approved by the Secretary of Labor would receive an allotment from the $1.5 billion provided for youth employment activities. For purposes of this section, the term \"State\" refers to the 50 states, the District of Columbia, and Puerto Rico. Of the total appropriated amount of $1.5 billion, the Secretary of Labor would make two reservations before allotting to states. One, up to 0.25% of the total appropriated would be reserved for outlying areas to provide summer and year-round employment opportunities to low-income youth. Two, 1.5% of the total appropriated would be reserved for Native American programs to provide summer and year-round employment opportunities to low-income youth.\nFollowing these reservations, the remainder of funds would be allocated to states on the basis of the same three equally weighted factors used for the subsidized employment for low-income adults initiative, described above.\nFor any state that did not submit a state plan or receive approval of a state plan by the Secretary of Labor, the amount of funding that the ineligible state would have received would go to the competitive grant program authorized under Section 366 of the proposed Act. Likewise, for any local WIB that did not submit a local plan or receive approval of a local plan by the governor, the amount of funding that the ineligible local WIB would have received would be reallocated to eligible local workforce investment areas under the same grant formula.\nAfter funds are allotted to states, the governor of each state would be allowed to reserve up to 5% of the state's allotment for administration and technical assistance. The remaining funds would then be allocated to local WIBs by the same formula used to allot funds to states (with \"local workforce investment areas\" in place of \"states\" in the formula factors). Each local area would be allowed to reserve up to 10% of the allocated funds for administration.\n\n\t\t\tPerformance Accountability\n\nAs with programs authorized under WIA, the proposed Pathways Act programs would require grantees to collect and report performance measures. As noted above, the three proposed Pathways Act initiatives\u2014subsidized employment, youth employment, and work-based strategies\u2014would require grantees to provide the following information:\nnumber of individuals participating in and completing participation in grant-funded activities; expenditures of grant funds; number of jobs created through grant-funded activities; and demographic characteristics of participants in grant-funded activities.\nIn addition to the common reporting requirements listed above, grantees under both the youth employment (\u00a7365) and work-based strategies initiatives (\u00a7366, described below) would be required to report the following performance outcomes for low-income youth participating in summer employment:\nwork readiness skill attainment; and placement in or return to secondary or postsecondary education or training, or entry into unsubsidized employment.\nFor youth participating in year-round employment, under activities authorized by Section 365 or Section 366, grantees would be required to report\nplacement in or return to post-secondary education; attainment of a high school diploma or equivalent; attainment of an industry-recognized credential; and entry into unsubsidized employment, retention in unsubsidized employment, and earnings in unsubsidized employment.\n\n\t\tWork-Based Employment Strategies of Demonstrated Effectiveness (Title III, Subtitle C, Section 366)\n\nThe third of the three Pathways Act programs would provide $1.5 billion in funding for competitive grants to eligible entities to provide a range of activities and strategies for the purpose of providing employment opportunities for unemployed, low-income adults and youth.\n\n\t\t\tPurpose\n\nFunds provided under the work-based strategies initiative of the Pathways Act would be used by eligible entities to carry out strategies and activities of \"demonstrated effectiveness\" to provide unemployed, low-income youth or adults with skills that would lead to employment. These activities and strategies could include\non-the-job training; sector-based training; employer- or labor-management based partnership involving a work-experience component; attainment of industry-recognized credentials in fields with demand or growth potential; connections to immediate work opportunities, including subsidized employment; career academies; and adult basic education.\n\n\t\t\tEligibility and Administration\n\nEntities eligible to apply for and receive funding under this section of the Pathways Act would include local elected officials (e.g., mayors) in collaboration with a local WIB or an entity eligible to receive funding under Section 166 of WIA (Native American programs). These eligible entities would be allowed to include partners, including employers, adult or postsecondary educational providers (including community colleges), community-based organizations, joint labor-management committees, work-related intermediaries, or other appropriate organizations.\n\n\t\t\tFunding\n\nThe $1.5 billion in funding appropriated for work-based strategies would be distributed on a competitive grant basis following the submission of applications from eligible entities to the Secretary of Labor. The Secretary of Labor would develop the application but elements would include a description of work-based strategies to be carried out, strategies for targeting assistance to meet the needs of the local population and local employers, a description of the expected outcomes, evidence that grant funds would be spent expeditiously and efficiently, strategies for coordination with other government programs, evidence of employer commitment to participate, and assurances of effective program monitoring and compliance.\nPriority in awarding grants would be given to eligible entities applying from areas of high poverty and high unemployment.\n\n\t\t\tPerformance Accountability\n\nAs with programs authorized under WIA, the proposed Pathways Act programs would require grantees to collect and report performance measures. As stated earlier, the three proposed Pathways Act initiatives\u2014subsidized employment, youth employment, and work-based strategies\u2014would require grantees to provide the following information:\nnumber of individuals participating in and completing participation in grant-funded activities; expenditures of grant funds; number of jobs created through grant-funded activities; and demographic characteristics of participants in grant-funded activities.\nIn addition to the common reporting requirements listed above, grantees under Section 366 would be required to report the same information for youth participants as required of grantees under Section 365 (described above), and the following performance outcomes for low-income adults participating in grant-funded activities:\nattainment of an industry-recognized credential; and entry into unsubsidized employment, retention in unsubsidized employment, and earnings in unsubsidized employment.\n\n\tSchool Modernization\n\nThe American Jobs Act would authorize two new grant programs for the modernization, renovation, and repair of education facilities. Part I of Title II, Subtitle D would authorize a new elementary and secondary education school facilities grant program. Part II of Title II, Subtitle D would authorize a new grant program of federal assistance for eligible postsecondary education facilities. Currently, the majority of federal support for education facilities is attributable to interest exemptions and tax credits on bonds. The federal government also provides grant and loan support for facilities serving certain populations, facilities with specific needs, and facilities serving particular purposes.\nUnder the proposed two programs, funds could be used for the modernization, renovation, and repair of eligible facilities. Funds could not be used for routine maintenance costs or for stadiums or other facilities primarily used for athletic contests or exhibitions or other events for which admission is charged to the general public. Elementary and secondary education facilities funds could not be used for new construction. Postsecondary education facilities funds could not be used on facilities used for sectarian instruction, religious worship, or a school or department of divinity; or in which a substantial portion of the functions of the facilities are subsumed in a religious mission. Modernization, renovation, and repair would include activities such as facilities assessments, roofing, installation of heating systems, code compliance, and reducing or eliminating hazards. \nThe use of funds under both programs would also be required to adhere to the wage rates in the Davis-Bacon Act, as amended. In addition, funds used on elementary, secondary, or postsecondary facilities would have to use American iron, steel, and manufactured goods, unless waived. Funds for each program would be used to supplement, not supplant (SNS), other federal, state, and local funds that would otherwise be used for the modernization, renovation, and repair of eligible facilities.\n\n\t\tA Note About the Fix America's Schools Today (FAST) Act of 2011\n\nProvisions that are substantially similar to Title II-D of the American Jobs Act have been included in the FAST Act of 2011 ( S. 1597 and H.R. 2948 , introduced September 21 and November 18, respectively). The major differences between the FAST Act and the school modernization provisions included in the American Jobs Act are:\nThe FAST Act would allow states to reserve up to 1% of their allocation for administrative costs associated with the Elementary and Secondary Schools Modernization program and reserve up to 1% of their allocation for administrative costs associated with the Community College Modernization program. The American Jobs Act would restrict the administrative reservations to the lesser of 1% or $750,000 each. The FAST Act does not include the American Jobs Act provisions that would require the equitable participation requirements for private school students, as authorized under Section 9501 of the Elementary and Secondary Education Act (ESEA), to\u00a0apply to the funding provided for the Elementary and Secondary Schools Modernization program. The FAST Act would require additional reporting.\u00a0Each local educational agency (LEA) and state that receives either a Elementary and Secondary Schools Modernization program grant or a Community College Modernization program grant would be required to report annually on the projects and jobs created. The Secretary would be required to report on the programs to the appropriating and authorizing committees. Finally, the Government Accountability Office (GAO) would be required to evaluate the impact and benefits\u00a0of the programs. The American Jobs Act would only require reports on the\u00a0Community College Modernization program from the states and\u00a0the Secretary. \nThe House version of the FAST Act ( H.R. 2948 ) includes two additional differences:\nH.R. 2948 does not include the American Jobs Act provision that would prohibit Elementary and Secondary Schools Modernization funds\u00a0from being used for stadiums or other facilities primarily used for athletic contests or exhibitions or other events for which admission is charged to the general public. For the Community College Modernization program, H.R. 2948 would define the eligible institutions of higher education (IHEs) as two-year public IHEs, two-year private not-for-profit IHEs, four-year public IHEs that award a significant number of degrees and certificates below the baccalaureate level, and four-year private not-for-profit IHEs that award a significant number of degrees and certificates below the baccalaureate level.\u00a0Under the American Jobs Act, the eligible IHEs would not include four-year private not-for-profit IHEs\u00a0that award a significant number of degrees and certificates below the baccalaureate level. \nThe sections below describe the School Modernization provisions, as included in the American Jobs Act.\n\n\t\tElementary and Secondary Schools Modernization (Title II, Subtitle D, Part I)\n\nThe act would appropriate a one-time amount of $25 billion for obligation by the Secretary of Education (Secretary) through FY2012 for early learning, elementary, or secondary education facilities. The program would provide a 0.5% set-aside for Bureau of Indian Education (BIE)-funded schools, a 0.5% set-aside for the outlying areas, and a set-aside of an amount deemed necessary for the Department of Education's National Center for Education Statistics (NCES) to conduct a survey of public school construction, modernization, renovation, and repair needs. The Administration has estimated that the survey may require $5 million (see Table A-2 ). The act does not suggest a methodology for distributing the funds among the BIE-funded schools or outlying areas.\n\n\t\t\tDistribution of Funds to States and 100 Largest LEAs\n\nThe remainder of funds after the set-asides would be allocated by formula to states and 100 local educational agencies (LEAs) in the same manner that funds were allocated for qualified school construction bonds (QSCBs) in CY2009 and CY2010. The 100 LEAs are those with the largest numbers of children aged 5-17 living in poverty (hereafter referred to as the 100 largest LEAs). The states, which include the District of Columbia and Puerto Rico, would each receive an allocation of 100% of the remaining funds in proportion to their FY2011 allocations under Title I-A of the ESEA, reduced by the amount received by the largest LEAs in the state (see Table A-2 ). The 100 largest LEAs would receive 40% of the remaining funds in proportion to their FY2011 allocations under Title I-A of the Elementary and Secondary Education Act (ESEA) (see Table A-3 ). The states and 100 largest LEAs would have to obligate their funds within 24 months of enactment of the AJA. \n\n\t\t\tDistribution of Funds to the Local Level and Uses of Funds\n\nOf the funds received by the state and the largest LEAs in the state, the lesser of 1% or $750,000 could be reserved by the state for administrative costs associated with the Elementary and Secondary Schools Modernization program. After the administrative reservation, states, in turn, would award both competitive and formula subgrants to LEAs, including charter schools that are their own LEAs but excluding the 100 largest LEAs. Formula subgrants would be awarded from 50% of the state's remaining allocation in proportion to the FY2011 ESEA Title I-A allocation of each LEA that was not one of the 100 largest LEAs. The minimum LEA formula subgrant would be $10,000. LEAs would have to obligate their formula funds within 24 months of enactment. \nStates would award competitive grants to LEAs, which are not one the 100 largest LEAs, from the other 50% of the state's remaining allocation based on \"objective criteria\" with priority for project need and rural LEAs. States would be required to give priority to the use of green building\/energy rating standards. LEAs would have to obligate their competitive funds within 36 months of enactment.\nAll LEAs, including the 100 largest LEAs, could use the funds to support direct costs, interest on newly issued bonds, or payments for other newly issued financing instruments for modernization, renovation, and repair or a combination of these uses. \n\n\t\t\tPrivate School Participation89\n\nThe proposal would require that the equitable participation requirements for private school students authorized under Section 9501 of the ESEA apply to the funding provided for the Elementary and Secondary Schools Modernization program. Section 9501 requires that LEAs (or other grantees under relevant programs) shall \"after timely and meaningful consultation with appropriate private school officials provide to those children and their teachers or other educational personnel, on an equitable basis, special educational services or other benefits that address their needs under the program.\" Under the American Jobs Act, equitable participation requirements for private school students would only apply to students enrolled in private nonprofit elementary and secondary schools with child poverty rates of at least 40%. In addition, all services, benefits, material, and equipment provided would be required to be secular, neutral, and nonideological. The services provided would be equitable in comparison to services provided to public school students and staff, and would be required to be provided in a timely manner. The expenditures for private school students would be required to be equal to those for public school students, taking into account the number and educational needs of the children to be served. Under the proposal, expenditures for services would be considered equal if the per-pupil expenditures under the Elementary and Secondary Schools Modernization program for students enrolled in eligible private schools were consistent with the per-pupil expenditures for children enrolled in the public schools of the LEA receiving funds under the program, unless there is insufficient need in the eligible private schools.\nEligible private schools would be able to use funds for \nmodifications of school facilities necessary to meet the standards applicable to public schools under the Americans with Disabilities Act of 1990 (42 U.S.C. 12101 et seq.); modifications of school facilities necessary to meet the standards applicable to public schools under Section 504 of the Rehabilitation Act of 1973 (29 U.S.C. 794); and asbestos or polychlorinated biphenyls abatement or removal from school facilities. \nWhen implementing the provisions of Section 9501 for ESEA programs, the control of funds used to provide services and the title to materials, equipment, and property purchased with those funds remains with a public agency. For the purposes of the Elementary and Secondary Schools Modernization program, however, these requirements would not apply, and private schools receiving funds under the program would retain the title to their property.\n\n\t\t\tPotential Issue of Grant Size\n\nThe minimum LEA formula subgrant of $10,000 may not be of sufficient size to support substantial modernization, renovation, or repair. Table A-4 provides examples of construction, modernization, renovation, and repair project estimates from the Alabama Department of Education, the Wyoming School Facilities Department, and Illinois State Board of Education.\n\n\t\tCommunity College Modernization (Title II, Subtitle D, Part II)\n\nThe American Jobs Act would appropriate $5 billion for obligation by the Secretary in FY2012 to modernize, renovate, or repair existing facilities used by postsecondary students pursuing two-year and less-than-two-year degrees\/certificates. The program would provide a 0.25% set-aside for tribally controlled colleges and universities and a 0.25% set-aside for the outlying areas. The act does not suggest a methodology for distributing the funds among the tribally controlled colleges and universities and outlying areas. \n\n\t\t\tDistribution of Funds to States\n\nThe remainder of funds after the set-asides would be allocated by formula to the states, including Puerto Rico and the District of Columbia, that have approved applications using a formula based on a combination of postsecondary enrollment and degree\/certificate awards (see Table A-2 ). In determining these grants, each grant would be based on the sum of \nthe numbers of students enrolled in two-year public and two-year private not-for-profit institutions of higher education (IHEs) in the state; and the estimated number of students who are pursuing two-year and less-than-two-year degrees\/certificates and who are enrolled in four-year public IHEs that award a \"significant number\" of two-year and less-than-two-year degrees\/certificates in the state (see formula below). \nThe estimated number of students at four-year IHEs would be calculated as the total enrollment at four-year public IHEs that award a significant number of two-year and less-than-two-year degrees\/certificates multiplied by the ratio of two-year and less-than-two-year degrees\/certificates awarded at such IHEs to all degrees\/certificates awarded at such IHEs. The proposal would require the Secretary to use data from the Department of Education's Integrated Postsecondary Education Data System (IPEDS) to determine grant amounts. The minimum state grant amount is $2.5 million.\nWhere:\nNP2E = Two-year public and two-year private not-for-profit IHE enrollment\nPub4E = Four-year public IHE enrollment\n2YrDeg = Total of two-year and less-than-two-year degrees\/certificates awarded at public four-year IHEs\nAllDeg = Total of all degrees\/certificates awarded at public four-year IHEs\nAPP = Program allocation after set-asides\n\u2211 = Sum (for all approved states)\nThe proposal would require each state application to include estimated start dates for each project. Although many states have capital plans and capital project priority lists for public IHEs, states may need to solicit similar information from the private IHEs, develop a process for verifying cost estimates, and establish standards for estimating costs. \nStates receiving a grant would be required to report annually on the use of funds to the Secretary starting on September 30, 2012. The report would include a description of projects funded and planned for funding, subgrant amounts, and the number of jobs created. The Secretary would in turn consolidate the state reports annually for the Senate Committee on Health, Education, Labor, and Pensions and the House Committee on Education and the Workforce.\n\n\t\t\tDistribution of Funds to the Local Level and Uses of Funds\n\nOf the funds received by the state, the lesser of 1% or $750,000 could be reserved for administrative costs associated with the Community College Modernization program. The proposal does not establish a methodology or process for further distributing funds to eligible IHEs, except that states would be required to consider the extent to which IHEs plan to use green building\/energy rating standards. Grants could only be made to eligible IHEs\u2014two-year public IHEs, two-year private not-for-profit IHEs, and four-year public IHEs.\nIHEs could use the funds to modernize, renovate, or repair existing facilities used by postsecondary students pursuing two-year and less-than-two-year degrees\/certificates. Four-year IHEs could not use the funds for facilities that are not available to students pursuing two-year and less-than-two-year degrees\/certificates. IHEs would have to obligate their funds within 36 months of enactment.\n\n\t\t\t\tAppendix. Related Tables","output":"In response to continuing high rates of unemployment and a weak economy, President Obama announced his American Jobs Act on September 8, 2011. As stated by the President, the proposal aims to \"put more people back to work and more money in the pockets of those who are working.\" The proposal was introduced, by request, as S. 1549 and H.R. 12. Senate Majority Leader Harry Reid subsequently introduced the proposal with a different spending offset, as S. 1660 on October 6. Since then, individual pieces of the American Jobs Act have been considered\u2014and some provisions enacted\u2014as freestanding bills or parts of other legislation.\nThis report describes provisions in the American Jobs Act that fall into three major categories:\nprovisions to promote hiring and prevent layoffs among teachers, law enforcement officers, firefighters, veterans, and the long-term unemployed; provisions to assist unemployed workers through unemployment compensation and reemployment services; and provisions to expand workforce opportunities for low-income adults and youth.\nThe report does not discuss tax provisions (except for specialized tax credits intended as hiring incentives) or proposals related to infrastructure. (However, the report does discuss proposed School Modernization grants, including related provisions in the Fix America's Schools Today Act, S. 1597 and H.R. 2948.)\nThe American Jobs Act (and similar provisions in S. 1723) would aim to promote hiring and prevent layoffs of teachers, law enforcement officers, and firefighters, through grants to government entities totaling $35 billion. The act would also promote hiring of veterans and long-term unemployed individuals through tax credits to employers, costing an estimated $8 billion. (The veterans tax credit was enacted separately, on November 21, as part of P.L. 112-56.) The Administration's proposal also would prohibit employment discrimination on the basis of an individual's unemployed status.\nThe act focuses on the income and reemployment needs of unemployed workers, particularly the long-term unemployed. In addition to provisions that would extend certain temporary compensation programs, the act would authorize a new Reemployment NOW program, to help states address the reemployment needs of eligible individuals, and would expand federal funding for state-administered short-time compensation (or \"work sharing\") programs. In total, these provisions would cost an estimated $49 billion.\nThe workforce development needs of low-income adults and youth also are a focus of the act, which would provide a total of $5 billion for three grant programs collectively called the Pathways Back to Work Act.\nAlthough not discussed in this report, tax reductions for employers ($70 billion) and employees ($175 billion)\u2014largely through payroll tax cuts\u2014would form the largest single category of spending under the American Jobs Act. Another $75 billion would go to infrastructure projects, including transportation ($50 billion), an infrastructure bank ($10 billion), and grants to rehabilitate foreclosed or vacant properties ($15 billion), in addition to $30 billion for School Modernization grants."}
{"id":"crs_R44651","pid":"crs_R44651_0","input":"\tIntroduction\n\nThere are 14 U.S. territories, or possessions, five of which are inhabited: Puerto Rico (PR), Guam, U.S. Virgin Islands (USVI), American Samoa (AS), and the Commonwealth of the Northern Mariana Islands (CNMI). Each inhabited territory's local tax system has features that help determine the structure of its public finances. \nAdditionally, U.S. law, including the Internal Revenue Code (IRC), provides the territories with certain authorities relating to each territory's tax system, while also placing limits on the taxing authority of local lawmakers. The IRC also establishes interdependencies between federal and territorial tax systems, such that changes to the IRC can have economic and revenue effects in the territories and vice versa.\nThese dynamics between federal and territorial tax policy could interest Congress for a number of reasons. First, the inhabited territories elect representatives to Congress. The U.S. insular areas of Guam, AS, CNMI, and USVI are each represented in Congress by a Delegate to the House of Representatives. PR is represented by a Resident Commissioner, whose position is treated the same as a Delegate. Although these representatives have limited voting powers relative to other Members of the House, Delegates and the Resident Commissioner can speak and introduce bills and resolutions on the floor of the House, offer amendments and most motions on the House floor, and speak and vote in House committees.\nSecond, Congress could be interested in using tax policies intended to improve the economic conditions of the territories. The expansion of several individual federal tax benefits that are currently used to assist lower-income households and increase participation in the labor market, or the introduction of new ones, could potentially improve the quality of living among the territories. Additionally, Congress could use business-related tax incentives to encourage capital investment and employment in the territories. \nThird, U.S. tax policies could have revenue implications for the territories, and vice versa. For the United States, territorial policies meant to encourage the relocation of certain industries, high-income, or high-net-worth residents to the territories could compound concerns about the erosion of the U.S. tax base and profit shifting. For the territories, their fiscal balances could be positively or negatively affected by the mix of federal and local tax policies. Territorial fiscal imbalances could raise concerns in Congress, such as recent legislation to create a fiscal control board for the purposes of restructuring public finances in PR.\nThese policies could be considered by the bipartisan Congressional Task Force on Economic Growth in PR, created by the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA; P.L. 114-187 ). The Task Force has been directed to issue a report, by the end of 2016, providing recommended changes to federal law that would serve to \"spur sustainable long-term economic growth, job creation, reduce child poverty, and attract investment\" in PR. Although many of these issues are currently being considered within the context of PR, some of these issues have also been part of longer policy debates over U.S. tax policy toward the territories.\nThis report summarizes U.S. tax policy related to the territories, including what federal tax policies apply to residents in each of the territories and how federal law affects the different territorial tax systems. Multiple current tax policy issues related to the territories are then analyzed. This report is intended to provide Congress with an overview of tax issues related to the territories. It is not intended to be a comprehensive guide to territorial or federal tax policy or tax law. For more tax policy and tax law background on the U.S. territories, please see the list of related readings listed in the Appendix . \n\n\tTerritorial Tax Authority: Mirror vs. Non-Mirror Code Jurisdictions\n\nU.S. law restricts the territories' authority to impose territorial (local) taxes. Most importantly is the distinction between the mirror code and non-mirror code tax systems. Three territories\u2014Guam, CNMI, and the USVI\u2014are currently required by U.S. law to have a mirror code (see Figure 1 ). This means these territories must use the IRC as their territorial income tax law, substituting terms where appropriate (e.g., the territory's name for \"United States\"). The mirror code requirements relate only to the IRC's income tax provisions (individual, corporate, and noncorporate business income), and not the IRC's other provisions such as excise taxes. Also, while these territories use the IRC as their income tax system, the tax imposed is a local tax (see Table A-1 for a discussion of how this could also affect tax filing requirements). \nIn contrast, territories that are not bound by the mirror code (PR and AS) may establish their own local forms of income taxation and promulgate their own income tax regulations.\nRegardless of whether territories use the mirror code, they are still allowed to enact additional forms of taxation within certain boundaries enacted by U.S. Constitution and applicable federal statutes. A number of territories have used this authority to enact additional types of revenue-raising measures, or provide rebates on territorial-source income taxes.\n\n\t\tGuam and the Commonwealth of Northern Mariana Islands\n\nAlthough Guam and CNMI are mirror-code jurisdictions, they are authorized under Section 1271 of the Tax Reform Act of 1986 (TRA86) to delink from the IRC if certain conditions are met. In order to delink, Guam or CNMI would need to (1) enact a new, non-discriminatory local income tax system to replace the IRC that raised revenue during each of its first five years that is at least equal to the revenue raised during the final year under the old system; and (2) enter into an implementing agreement with the United States to address issues relating to tax administration. While Guam signed an implementing agreement with the United States in 1989, it has never gone into effect. CNMI, meanwhile, has not entered into an implementing agreement with the United States. \n\n\t\tU.S. Virgin Islands\n\nUSVI is required to mirror the IRC for its local tax code but has additional authority to levy taxes compared to Guam and CNMI. Unlike Guam or CNMI, TRA86 did not provide USVI with the authority to delink from the mirror code, reportedly by mutual agreement with the United States. TRA86 did grant USVI, though, with the authority to enact nondiscriminatory local income taxes in addition to those taxes mirrored in the IRC. However, USVI has not enacted any additional forms of income taxes to date. Under IRC Section 934, USVI is also allowed to provide tax benefits to its residents on their USVI-source income only.\n\n\t\tPuerto Rico and American Samoa\n\nThere is no requirement in U.S. law that PR and AS use a mirror code. Thus, these two territories may enact their own income tax laws, subject to any requirements in U.S. law (e.g., any such tax laws must comply with the U.S. Constitution). Congress recognized PR's authority over matters of internal governance, including territorial tax law and policy, in the 1950 Federal Relations Act (P.L. 81-600) and its approval of the territory's constitution in 1952. Since then, PR has enacted its own income tax laws. AS, meanwhile, has chosen to adopt a modified version of the IRC as its territorial income tax laws. The current version of AS's local tax code is the version of the IRC that was in effect on December 31, 2000, with some modifications. In other words, provisions in the IRC that were enacted after December 31, 2000 are not automatically incorporated into AS' mirror-code system, unless the AS' government passed legislation amending their local tax code.\n\n\tApplicability of Federal Taxes in the Territories\n\nIn addition to the imposition of local taxes in each territory, there are instances when federal taxes may apply as well. Two general principles are helpful in understanding when federal taxes apply in the territories. First, while the United States taxes its citizens, residents, and corporations based on their worldwide income regardless of whether the income is earned within the United States or abroad, for federal tax purposes the residents of the U.S. territories are generally treated more similar to foreign citizens (even though they are U.S. citizens or nationals) and corporations organized or created in the territories are treated like foreign companies. This means that federal taxes will generally only be levied when a territory resident or corporation has income that can be sourced (or connected) to the United States. Second, the territories are generally considered to be beyond the physical borders of the United States for federal tax purposes. Thus, any IRC provision whose applicability is limited to the geographic United States does not apply in the territories unless the provision specifically provides otherwise (such as the provisions listed in the \" U.S. Tax Incentives Targeted to the Territories \" section of this report). \n\n\t\tU.S. Individual Income Taxation\n\nAs a general rule, individuals who are bona fide residents of a territory are eligible for a possession-source income exclusion, and therefore not subject to U.S. income tax on work or business income sourced from within the territories (except for compensation of federal government employees). Bona fide residents of a territory with income only from that territory need to only file one tax return with their local tax authorities. Table A-1 summarizes the general tax filing and income reporting procedures for individuals with territorial-source income.\nThe possession-source income exclusion currently applies to each of the territories through several sections of the IRC:\nAmerican Samoa (IRC Section 931) U.S. Virgin Islands (IRC Section 932) Puerto Rico (IRC Section 933) Guam and CNMI (former IRC Section 935)\nThe possession-source income exclusion and IRC tax coordination requirements between each territory and the United States will determine the filing situation of bona fide residents with income earned outside of their jurisdiction, and individuals who are not bona fide residents and earned territorial-source income. Bona fide residents with income from another jurisdiction (such as the United States) might have to file returns with the IRS or their local tax authorities (or both). For individuals who are not bona fide residents, tax filing requirements will depend on such things as the territory involved, the tax filer's citizenship and residency, and the source of the tax filer's income. U.S. tax-filing procedures also vary for excluding certain territorial-source income or allocating income earned in the territories versus the United States.\nBona fide residency in a territory is determined by the three-part test in IRC Section 937. To claim residency in a particular territory, the tax filer generally must \n1. meet a physical presence test (e.g., present in the relevant possession for at least 183 days during the tax year); 2. not have a tax home outside the relevant possession; and 3. not have a closer connection to the United States or to a foreign country than to the relevant possession. \nFor both territorial and mainland residents, situations might arise as to whether or not U.S. or territorial income tax is due on certain sources of income. For example, residents of the territories might work part of the year on the U.S. mainland, earn rental property income, or collect income from U.S.-based investments or businesses. Similarly, U.S. citizens residing in the mainland might earn income attributable to the territories. Table 1 outlines the general rules as articulated by the IRS for determining U.S. source of income in certain situations. \nAdditionally, IRC Section 911 permits U.S. citizens and residents who live and work abroad a capped exclusion of their foreign wage and salary income. However, U.S. citizens and residents who reside in the territories cannot qualify for income or housing exclusions specified in IRC Section 911 because they are not classified as living abroad for the purposes of the foreign earned income tax exclusion. \n\n\t\tCorporate Income Taxation\n\nU.S. corporations are subject to U.S. income tax on their worldwide earnings. U.S. tax on the earnings of foreign subsidiaries of U.S. corporations is deferred until these earnings are repatriated back to the United States in the form of dividend distributions to the U.S. parent corporation. Generally, income earned by the active business operations of U.S. corporations in the territories is considered foreign-source income, because the IRC does not define them as being within the \"United States.\" As a result, active corporate income earned in the territories can be deferred. The income earned by foreign branches of U.S. corporations, however, is not deferrable.\nThere are two exceptions from the general deferral rule that result in taxation of certain forms of highly mobile income earned by a foreign subsidiary on a current year basis: (1) subpart F income of controlled foreign corporations (CFCs), and (2) passive foreign investment company (PFIC) rules. These forms of highly mobile income are not eligible for deferral because they can be transferred relatively easily to low-tax jurisdictions to lower U.S. income taxes. One exception to the current year taxation of subpart F income is for active financing income, which is income earned by U.S. corporations from the active conduct of a banking, financing, or insurance business abroad. This income can be deferred. \nU.S. corporations can claim a foreign tax credit, for any qualifying taxes paid to foreign jurisdictions, including the territories, up to the amount of U.S. income tax due. For example, a U.S. corporation earns $30 million in worldwide income, of which $10 million is foreign source income attributed to a wholly-owned subsidiary in PR. Assume that the tax rate on PR-source income is 10% and the U.S. tax rate is 35%. In this example, the pre-credit U.S. tax liability faced by the corporation is $10.5 million ($30 million times 35%). The corporation pays $1 million in income tax to PR ($10 million times 10%), which can be credited against U.S. income tax. Thus, the corporation would owe $9.5 million in income tax to the United States after applying foreign tax credits. \nU.S. subsidiaries of foreign-owned corporations (including corporations organized in the territories) are generally subject to U.S. corporate income tax on any income effectively connected to a U.S. trade or business. \nDividends paid by U.S. corporations to foreign companies (such as a foreign parent company) are generally subject to a withholding tax of 30% (unless reduced by bilateral tax treaty). Foreign corporations created or organized in AS, Guam, CNMI, or USVI are not subject to this 30% withholding tax so long as the foreign company receiving the dividends meets certain territorial ownership and activity requirements. Each of these territories has adopted local tax laws to waive withholding taxes on payments made by local corporations to corporations organized in the United States. For PR corporations meeting these territorial ownership and activity requirements, the U.S. withholding tax rate on dividends is reduced from 30% to 10% so long as PR imposes a withholding tax on dividends paid to U.S. corporations not engaged in a PR trade or business at a rate not greater than 10%.\n\n\t\tPayroll Taxes\n\nFor the purposes of Federal Insurance Contributions Act (FICA) taxes, wages paid to U.S. citizens, resident aliens, and nonresident aliens employed in the territories are generally subject to Social Security and Medicare taxes under the same conditions that would apply to U.S. citizens and residents employed in the United States. The FICA payroll taxes are comprised of two taxes: (1) a 1.45% tax paid by both the employee and employer for Medicare Hospital Insurance (plus an additional tax of 0.9% on any earned income in excess of $200,000, $250,000 if married filing jointly); and (2) a 6.2% tax on wages, up to a cap, paid by both the employee and employer for the Old Age, Survivors, and Disability Insurance (Social Security). \nPR and USVI are eligible under federal law for the Unemployment Compensation program, and thus only employers in those territories that pay wages to U.S. citizens, resident aliens, and nonresident aliens employed in the territories are subject to the Federal Unemployment Tax Act (FUTA) tax at a rate equal to 6.0% of wages. Employers that make contributions to PR or USVI's unemployment insurance programs can be eligible for a credit against up to 90% of gross federal FUTA tax owed (i.e., 5.4% out of the 6% tax rate).\nAs with FICA taxes on employee wages, bona fide residents of a U.S. territory who have self\u00ademployment income must generally pay self\u00ademployment tax to the United States. Bona fide residents may be subject to U.S. self\u00ademployment tax even if they have no income tax filing obligation with the United States.\nEmployers and employees in the territories are generally not subject to withholding for U.S. income tax, since most wages paid by an employer residing in the territory are subject to withholding by the territory and are generally subject to local income taxes.\n\n\t\tExcise Taxes\n\nU.S. excise taxes generally do not apply within the territories, with a few exceptions. One exception includes environmental excise taxes, such as the ozone-depleting chemicals tax or the Oil Spill Liability Trust Fund tax on petroleum refiners, which are in effect in the territories. Another exception is a special excise tax imposed on products manufactured in PR and USVI that are shipped to the U.S. mainland for consumption or sale. The tax is equal to any U.S. excise tax (e.g., alcohol, tobacco) that would apply to the identical item produced on the mainland and was intended to prevent products that are manufactured in PR or USVI from having a tax advantage over similar products manufactured on the mainland. These \"equalization taxes\" are generally \"covered over\" to the respective treasuries, meaning that the U.S. Treasury transfers any taxes collected under this provision to the territories in the form of direct payments. \nIn addition to the equalization tax, a specific cover-over for federal tax is collected on rum imported to the United States. A portion of the $13.50 per proof gallon federal excise tax on rum imported into the United States from other sources\u2014not including PR or USVI\u2014is transferred to the treasuries of PR and USVI based on the estimated U.S. market share of rum produced in those territories. Under current law, the cover-over rate transferred to PR and USVI is $13.25 per proof gallon of rum taxed by the United States. The covered-over revenue has never been designated for particular purposes by Congress, but the territories have tended to dedicate some portion to fund marketing campaigns for the rum industry and general economic development.\n\n\t\tEstate and Gift Taxation\n\nA U.S. citizen or resident is subject to tax on the value of bequests at death (regardless of where the property is located) as well as inter-vivos (i.e., during life) gifts. A tax rate of 40% is levied on the value of any estate exceeding the unified credit ($5.45 million in 2016, adjusted for inflation). \nThere is an exemption for U.S. citizens residing in the territories who acquired U.S. citizenship solely by reason of birth or residence within the possession. However, the estates of territorial residents could still be subject to U.S. estate and gift tax if the estate contains any tangible property (such as real estate) located in the United States.\n\n\t\tU.S. Tax Incentives Targeted to the Territories\n\nFederal tax incentives are made available for certain activities in the territories. Some of these provisions include the deduction for state and local income or sales taxes, the exclusion of interest on state and local bonds, the credit for research and experimentation, the low-income housing credit, and the renewable energy production tax credit, among others. \nThere are also a few provisions in the federal tax code that effectively support specific industries in specific territories. As discussed in the \" Excise Taxes \" section of this report, rum cover-over payments are often used by the government of PR and USVI to support economic development projects for the rum industries in their respective territories. Additionally, the Section 199 deduction for certain manufacturing and production activities has been temporarily extended to include eligible activities in PR. Congress has also temporarily extended a corporate tax credit for business operations and investment activities in AS. \n\n\tPolicy Issues for Congress\n\nThis section of the report summarizes three tax policy issues relevant to the territories that could be of current interest to Congress: (1) tax-based assistance to households in the territories, (2) tax policy and economic development of the territories, and (3) tax arbitrage and U.S. tax avoidance activities related to the territories. \n\n\t\tTax-Based Assistance to Households in the Territories\n\nAs an alternative or complement to enhancing social welfare programs, Congress could consider using U.S. tax policy to provide economic assistance to households in some or all of the territories. While there are many ways to potentially structure this assistance, common proposals include (1) expanding the availability of the federal earned income tax credit (EITC) to households in the territories, (2) expanding the availability of the federal additional child tax credit (ACTC) to households in the territories, and (3) creating a payroll tax cut for territorial tax filers. \n\n\t\t\tEarned Income Tax Credit (EITC) and Additional Child Tax Credit (ACTC)\n\nThe EITC is a refundable tax credit available to eligible workers earning relatively low wages. The lump sum credit is issued to eligible households at one time during the year (after they file their annual federal tax returns), and the size of the credit depends on a variety of factors\u2014namely the recipient's earnings and amount of dependent children. The EITC is a refundable tax credit, which means that it can benefit a taxfiler (in the form of a tax refund) even if they have no federal tax liability. The EITC is intended to encourage the nonworking poor to enter the workforce and reduce the overall tax burdens of working poor families.\nThe child tax credit (CTC) is a dollar-for-dollar reduction in tax liability and is partially refundable for low-income tax filers. The size of the credit depends on the tax filer's earnings and the number of qualifying children. The refundable portion of the CTC is known as the ACTC. The CTC is intended to reduce the financial burden that families incur when they have children.\nGenerally, bona fide residents of the territories do not meet the criteria to claim the federal EITC. Mirror code residents (Guam, CNMI, and USVI) and certain PR residents can claim the ACTC. Congress could expand eligibility of the EITC and ACTC to more residents of non-mirror code territories, as President Obama and others have called for in PR. \nThe research surrounding the economic impact of these refundable credits in the United States may prove insightful to policymakers interested in expanding eligibility of these credits to the territories. In theory, the CTC and ACTC could provide subsidies for low-income families to work and have children. However, researchers have found it difficult to isolate the labor market effects of CTC and ACTC, particularly with the presence of the similarly-targeted, but larger, subsidy provided by the EITC. Additionally, the CTC and ACTC are unlikely to have a significant impact on inducing families to have additional children, as the expenses associated with raising a child typically exceed the benefits associated the tax provisions. \nIn comparison, studies have found that the EITC is effective in encouraging single mothers to enter the labor force, as was the original intention of the provision, but the credit is less effective in increasing the labor supply of secondary earners. There is no significant evidence that the EITC increases the labor supply of individuals without children, likely because so few childless taxpayers receive the childless EITC. The EITC also generally reduces poverty but only for recipients who have children. \nGiven these findings, expanding access for territorial residents to claim the EITC and ACTC could increase labor supply and reduce poverty in these areas to the extent that these issues are concentrated in populations where the proposals have shown to be effective. For example, a single man without children or an unemployed spouse might not benefit much from these policies compared to a single mother with children. \nThere are several barriers that could prevent expanded EITC or ACTC from having the type of economic benefits claimed by the policies' proponents. Most notably, many territorial residents currently do not file a U.S. tax return, particularly if their income comes only from territorial sources (see Table A-1 ). Requiring these households to file a U.S. tax return to claim a federal tax provision could dissuade low-income territorial households from claiming the credit or raise tax compliance costs (especially if it requires accounting for income earned in the informal economy). Alternatively, the U.S. Treasury could offset the cost of such policies enacted via the local tax code. While this option could reduce the household tax compliance costs of filing a U.S. tax return, it could add responsibilities to territorial tax officials with little or no history of administering these provisions. Even in the United States, roughly one-quarter of EITC payments are issued improperly, with the most common errors being the claiming of ineligible children who are not qualified for the purposes of the EITC, income reporting errors, and filing status errors. \nAdditionally, other policies (such as the application of the U.S. minimum wage and local labor regulations) could constrain employer demand for new workers and potentially offset any labor supply effects of expanding the EITC to the territories. These constraints could be lessened by reducing the applicability of the minimum wage to the territories or by introducing a tax-based labor subsidy (explained in \" Economic Development of the Territories \" section of this report). \nExpanding eligibility for these refundable tax credits could have significant budgetary costs. In 2006, the JCT noted that many people could be eligible for the EITC and ACTC in PR. On the one hand, a redesign of the benefit structure could lessen the revenue loss of expanding access to the EITC and ACTC for territorial residents. This could be achieved, for example, by reducing the income level at which the credits begin to phase out. Adjusting the phaseouts or reducing the benefit rates that apply to households on the U.S. mainland might also better target \"low-income\" households in the territories after adjusting for costs of living between territories and states on the mainland. If the thresholds are not adjusted, then higher-income households, by territorial standards, could receive \"windfall\" tax benefits that might not contribute much to improving the local economy or achieving the desired tax relief. On the other hand, the IRC typically does not adjust benefit or threshold amounts for differences in economic conditions between the states. Additionally, the cost of living varies across the territories, thus making it difficult to develop a single, alternative benefit formula just for the territories. One study found that some areas in the territories, such as San Juan (PR), have higher costs of living than average metropolitan areas in the United States.\n\n\t\t\tPayroll Tax Cut\n\nCongress could increase the after-tax income of territorial households by reducing payroll taxes for territorial residents. A payroll tax cut would reduce the amount withheld from workers' paychecks, thereby increasing their take-home pay. Since all employees must pay payroll taxes on the first $118,500 of income (in 2016), a payroll tax cut would target lower-income households as well as upper-middle income households. Higher after-tax incomes could allow residents to more easily pay for basic needs. As previously mentioned, employers and workers in all five of the inhabited territories pay FICA taxes on their wages, and employers pay FUTA taxes on wages in PR and AS. \nThe most straightforward way to reduce payroll taxes would be to lower the payroll tax rates. For example, a temporary two-percentage-point reduction, or \"holiday,\" in wages subject to OASDI payroll taxes was enacted in the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 ( P.L. 111-312 ). The reductions in payroll taxes to the Social Security trust funds were offset by transfers from the general fund. \nAlternatively, a payroll tax cut could be modeled after the temporary Making Work Pay (MWP) tax credit that was enacted as part of the American Recovery and Reinvestment Act of 2009 (ARRA; P.L. 111-5 ). The MWP credit provided a refundable tax credit of 6.2% of wages (up to a certain dollar amount, based on filing status) through lower income tax withholdings in workers' paychecks. The credit phased in and phased out based on a worker's earnings, with the maximum credit amount being $400 for individuals ($800 for joint filers). \nStill, both of these payroll tax options have an administrative advantage compared to the EITC and ACTC options in providing tax-based assistance to households in the territories. All territorial residents are subject to some form of federal payroll tax, while not all territorial residents file U.S. income tax returns. As a result, the territories would also not have to implement a new program for the U.S. Treasury to reimburse. The benefits of a payroll tax cut can also be delivered to households more quickly through workers' paychecks rather than through the EITC and ACTC, which are issued once per year during tax season. \n\n\t\tEconomic Development of the Territories\n\nCongress could consider the role tax policies play in promoting economic development in the territories. For example, the Congressional Task Force on Economic Growth in Puerto Rico could consider options for the use of U.S. tax policies to encourage or discourage certain industries or types of jobs, or affect the structure of territorial public finances. Historically, Congress has deliberately structured provisions of the IRC to promote particular goals of economic development in the territories. Although a comprehensive historical analysis of U.S. tax policy toward the territory is beyond the scope of this report, notable examples include the now-repealed IRC Section 936 possessions tax credit (first enacted in 1976, but fully phased-out in 2005); deferral of tax on the earnings of territorial subsidiaries of U.S. corporations; and the federal, state, and local exclusion of interest on qualified public bonds issued by the territories.\nOptions available include tax policies that reduce the cost of capital investment. For example, one such option could provide a credit against U.S. income tax liability for new physical investment in the territories. Credits against U.S. income tax based on wages paid to new workers hired in the territories could reduce the cost of hiring workers. Both forms of tax incentives could be made available to encourage economic activity in any industry, or they could be structured to provide a relative boost to particular industries. However, these types of tax policies could redirect investment away from locations, industries, or modes of production that produce the greatest economic rate of return. Moreover, these policies might have unintended economic side effects. For example, tax incentives for capital investment in the territories could lead firms to engage in more capital-intensive modes of production, and reduce firms' reliance on labor. Even tax incentives for broader economic activity in the territories, including benefits for both capital- and labor-intensive producers, could leave the relative cost of both inputs unchanged, thereby generating little to no employments effects. \nMost evaluations of U.S. tax policies encouraging development in the territories have focused on the effects that the Section 936 possessions tax credit has had on PR. Section 936 enabled certain U.S. corporations to pay little to no U.S. tax on income generated by PR affiliates. This, in turn, provided a substantial incentive for U.S. investment in PR. It also, provided an incentive to use tax planning techniques to book profits in PR with little change in real economic activity (i.e., engage in profit shifting). While the Section 936 credit was not exclusively tied to PR operations, a U.S. Department of the Treasury data analysis published in 1991, found that U.S. corporations with affiliate activity in PR accounted for 96.8% of all corporate filings claiming the Section 936 credit and 99.2% of Section 936 credit amounts in 1987. \nOfficials from PR claimed that Section 936 encouraged the development of a high-skilled labor force on the island, particularly in jobs within the pharmaceutical and electronics industries. The 1991 Treasury study confirmed these general arguments, as it found that Section 936 corporations employed 82.3% of manufacturing workers in PR and that the average annual wage for employees of Section 936 corporations was 59.5% higher than the average wage across all production workers in PR. With this said, though, the Treasury study also indicated that the Section 936 incentives effectively amounted to a subsidy almost equal to the average worker's salary in their respective industries. For corporations claiming the credit in 1987, the average tax benefit per employee was 94.5% of the average wage. Specifically in the drug, chemicals, and electronics manufacturing industries, the average tax benefit per employee were: 267.4%, 251.7%, and 116.3% (respectively). Other studies, such as those by the Government Accountability Office (GAO) in 1993, provided additional evidence that the average tax benefit for 936 corporations often equaled if not surpassed average compensation per employee. In 1996, Congress approved the ten-year phaseout of Section 936, in part, because the costs to taxpayers outweighed the benefits accumulating to the \"relatively small number of U.S. corporations that operate in the possessions.\"\nSubsequent economic analyses support the notion that Section 936 activity provided significant benefits to U.S. parent corporations. For example, Grubert and Slemrod (2008) indicated that the U.S. firms that benefited the most from Section 936 were those that were able to shift income earned from intangible property, such as patents, developed from research and development conducted elsewhere (such as the United States) to their PR affiliates. The authors concluded that income shifting opportunities represented the predominant reason for U.S. investment in PR, even overcoming higher labor and electricity costs for production in the territory. This income shifting activity provided abnormally large returns to investors in Section 936 companies. Bosworth and Collins (2006) found that the net return on stockholders' equity in 1997 was 112% for pharmaceutical firms in PR (compared to 25% for pharmaceutical firms in the United States) and 48% for chemicals firms in PR (compared to 16% for chemicals firms in the United States).\n\n\t\tTax Arbitrage and U.S. Tax Avoidance\n\nTax arbitrage activity in the territories is symptomatic of the broader erosion of the U.S. tax base due to international income and profit shifting. Opportunities for U.S. corporate and individual taxpayers to avoid or reduce U.S. tax liability are created, in part, because the territories are generally treated like foreign countries for U.S. income tax purposes, and some of the territories provide tax incentives to attract overseas investment.\nAs mentioned in the \" Economic Development of the Territories ,\" above, economic studies indicate that some U.S. corporations were able to pay low or zero income tax to the United States or local territories on income shifted to the territories during the era of the Section 936 tax credit. While the phaseout of Section 936 in 2005 ended this tax planning strategy, U.S. corporations can still take advantage of deferral, transfer pricing, low tax rates in third-party countries, and special tax incentives offered by the territories to lower their U.S. tax liability. \nFor example, media reports indicate that U.S. multinational corporations in the past have established holding companies in a low- or zero-income tax jurisdiction (such as the Cayman Islands) and transferred the ownership of intangible assets (such as patents) to that holding company. A PR subsidiary of the U.S. multinational corporation can manufacture a product with the support of special tax incentives offered by the PR government. The U.S. multinational corporation can shift any earnings from U.S. sales of this product to their PR subsidiary, who can then shift these earnings to their holding company in the zero-tax jurisdiction in the form of royalty payments for the use of the intellectual property in manufacturing products in PR. Corporations can use transfer pricing strategies to further reduce taxable income.\nAdditionally, U.S. individuals can use U.S. or territorial tax incentives to reduce or avoid tax that would otherwise be subject to U.S. tax. For example, a common strategy marketed by tax planning professionals is for U.S. individuals to first establish residency in PR (e.g., by residing on the island for at least half of the year) as a means to avoid U.S. worldwide tax from PR sources (because of the IRC Section 933 exclusion). These individuals would then qualify under PR's Individual Investors Act, which exempts most investment income of new residents from PR tax. Overall, U.S. taxpayers can accumulate capital gains on certain investments made in the United States but avoid both U.S. and PR tax when realizing those gains after establishing residency in PR (although their estate could still be subject to U.S. estate and gift taxes). \nThese tax avoidance strategies, both at the corporate and individual levels, could raise a number of concerns about the policy implications of these practices. First, tax arbitrage and avoidance strategies result in foregone revenue to the United States. In the territories, these policies could reduce or increase revenue, depending on whether the tax incentives redirected new investment to the territories or simply rewarded behavior that might have occurred even without the incentives. In any case, though, these tax strategies might be compared to alternative policy means to attract foreign capital or support economic growth. For example, the revenue raised by shutting off these tax strategies could be used for paying down government debt or on spending programs (such as infrastructure, workforce education, or general social services) that could potentially have a larger effect on growth or income security in the territories. Non-mirror-code territories could also use this revenue to lower statutory income tax rates for all territorial taxpayers (and not just those who are granted special exemptions).\nSecond, tax avoidance opportunities reduce economic efficiency by distorting relative rates of return to capital across locations. Additionally, capital allocation is distorted across industries, as incentives are offered in targeted industries and as more resources are devoted to international tax planning professional services than would otherwise occur under certain simpler international tax systems. A more efficient tax system would facilitate the flow of capital to locations and industries based on their economic returns, instead of gains from sophisticated tax planning. \nThird, tax avoidance opportunities raise issues of economic equity, or fairness, as multinational corporations with the financial means and access to an in-house accounting department or outside consultants with tax planning expertise could pay a lower effective U.S. tax rate on their profits than similar-sized firms that only have U.S. operations. Similarly, individuals with the means to structure their finances offshore, travel and establish bona fide residency in the territories, and subsist on earnings from passive investments could end up paying a lower effective U.S. income tax rate (if any at all) than those who derive most of their earnings from wage income and do not have the means to establish residency in the territories.\n\n\t\t\tAppendix. Summary of Internal Revenue Code Tax Filing Requirements for U.S. Territories\n\n Table A-1 provides a summary of the general U.S. income tax filing requirements, as imposed by the Internal Revenue Code (IRC), for two groups of tax filers: (1) U.S. citizens or residents who are not bona fide residents of the territories (e.g., residents of the 50 states or the District of Columbia); and (2) bona fide residents of the territories. Table A-1 also indicates whether a territory is a \"single tax return filing jurisdiction\"\u2014meaning a territory in which a bona fide territorial resident generally has to file only one annual income tax return, either with the IRS or the local territory's tax department. General filing procedures and income reporting measures are discussed for residents of the mainland United States and the territories under the three scenarios: (1) tax filers with only territorial-source income, (2) tax filers with income only from non-territorial sources, and (3) tax filers with a both territorial and non-territorial source income.\n Table A-1 relates only to IRC's income tax filing requirements and does not apply, for example, to other types of taxes, including self-employment or payroll taxes (FICA) that are due to the United States. This table also does not discuss special tax filing procedures for certain groups, such as U.S. military servicemembers stationed in the territories. This table also does not provide details on income tax filing requirements imposed by the territories.\n Table A-1 is intended to inform the legislative debate by providing an overview of current administrative tax filing procedures for territorial residents and U.S. citizens who are nonresidents of the territories but have territorial income. It is also intended to supplement the discussion of potential administrative challenges and costs related to extending provisions in the IRC to certain territorial residents. It is not intended to be a comprehensive source of tax advice or a substitute for professional accounting advice. For more guidance on tax compliance, see the IRS's Tax Guide for Individuals with Income from U.S. Possessions (Publication 570).\nFor more background on tax law regarding the territories, the status of federal legislation to encourage development in the territories, see\nCRS Report R43541, Recently Expired Community Assistance-Related Tax Provisions (\"Tax Extenders\"): In Brief , by Sean Lowry (discussing the American Samoa Economic Development Credit); Internal Revenue Service (IRS), Tax Guide for Individuals with Income from U.S. Possessions (Publication 570), at https:\/\/www.irs.gov\/pub\/irs-pdf\/p570.pdf ; IRS, \"Individuals Living or Working in U.S. Territories\/Possessions,\" at https:\/\/www.irs.gov\/Individuals\/International-Taxpayers\/Individuals-Living-or-Working-in-US-Possessions; Joint Committee on Taxation (JCT), Federal Tax Law and Issues Related to the Commonwealth of Puerto Rico , JCX-132-15, September 28, 2015, at https:\/\/www.jct.gov\/publications.html?func=startdown&id=4840 ; and JCT, Federal Tax Law and Issues Related to the United States Territories , JCX-41-12, May 14, 2012, at https:\/\/www.jct.gov\/publications.html?func=fileinfo&id=4427.","output":"There are 14 U.S. territories, or possessions, five of which are inhabited: Puerto Rico (PR), Guam, U.S. Virgin Islands (USVI), American Samoa (AS), and the Commonwealth of the Northern Mariana Islands (CNMI). Each of these inhabited territories has a local tax system with features that help determine each territory's local public finances.\nThe U.S. Internal Revenue Code (IRC) has two important roles in establishing the tax policy relationship between the United States and the territories. First, native residents of U.S. territories are U.S. citizens or nationals but are taxed more similar to foreign citizens because income earned from territorial sources is treated like foreign-source income. The IRC also treats U.S. subsidiaries formed in the territories as foreign corporations, which can generally defer U.S. tax on income earned from business or trade in the territories.\nSecond, the IRC serves as the local tax laws in the territories that are required to use a mirror-code system (USVI, Guam, and the CNMI), in which the territory substitutes its name for the \"United States\" to give the IRC the proper effect as the territory's local income tax system. AS is not bound by the mirror system but has chosen to adopt much of the IRC for its income tax. PR has its own income tax system, which is not based on the IRC.\nThese dynamics between federal and territorial tax policy raise several potential issues for Congress. First, economic development of the territories has been of perennial congressional interest. Tax incentives enacted by the territories and the United States have been shown to direct offshore investment to the territories. With this said, though, economic studies of one broader U.S. tax incentive, the now-repealed Section 936 credit, indicate that any employment effects are usually secondary to the magnitude of effects on shareholder earnings, and average tax benefit for corporations often equaled if not surpassed average compensation per employee. Tax policies that effectively subsidize a more narrow set of industries in certain territories, such as rum production in PR and the USVI and manufacturing in AS, still exist today.\nSecond, federal tax benefits could be used to assist low-income households living in the territories. For example, the Earned Income Tax Credit (EITC) and the additional child tax credit (ACTC) could be expanded to low-income territorial households. The EITC is typically not available to territorial residents and the ACTC is limited to residents of the mirror code territories and certain residents of PR. Although these options could target lower-income households, they could also impose administrative costs for territorial households that are not required to file U.S. tax returns (e.g., because they only have territorial-source income). A payroll tax cut could be administratively simpler (since all territorial residents withhold taxes for some federal payroll taxes), but it would also be less narrowly targeted to lower-income households.\nThird, interactions and differences in tax rates between the U.S. and territorial tax policies also create opportunities for tax arbitrage and avoidance by corporations and certain individuals. For the United States, this tax revenue loss is part of a broader issue with international income and profit shifting. For the territories, the revenue lost from special tax incentives could be used to reform the local tax system, increase spending on social programs, or pay down their debt. Such tax avoidance opportunities can distort the allocation of capital away from locations and industries where investment earns the highest economic rate of return. Additionally, the ability for certain taxpayers to utilize sophisticated tax avoidance strategies could raise issues of fairness.\nThis report summarizes U.S. tax policy related to the territories, including a general discussion of how federal taxes apply to territorial residents and how federal law affects the different territorial tax systems in similar or different ways. This report is not intended to be a comprehensive guide to federal or territorial tax policy or tax law."}
{"id":"gao_GAO-02-831","pid":"gao_GAO-02-831_0","input":"\tBackground\n\nDI and SSI are the two largest federal programs providing cash assistance to people with disabilities. Established in 1956, DI provides monthly payments to workers with disabilities (and their dependents or survivors) under the age of 65 who have enough work experience to be qualified for disability benefits. Created in 1972, SSI is a means-tested income assistance program that provides monthly payments to adults or children who are blind or who have other disabilities and whose income and assets fall bellow a certain level. To be considered eligible for either program as an adult, a person must be unable to perform any substantial gainful activity by reason of a medically determinable physical or mental impairment that is expected to result in death or that has lasted or can be expected to last for a continuous period of at least 12 months. Work activity is generally considered substantial and gainful if the person\u2019s earnings exceed a particular level established by statute and regulations.In calendar year 2001, about 6.1 million working age individuals (age 18- 64) received about $59.6 billion in DI benefits, and about 3.8 million working-age individuals received about $19 billion in SSI federal benefits.\nTo obtain disability benefits, a claimant must file an application at any of SSA\u2019s offices or other designated places. If the claimant meets the nonmedical eligibility criteria, the field office staff forwards the claim to the appropriate state DDS office. DDS staff\u2014generally a team comprised of disability examiners and medical consultants\u2014review medical and other evidence provided by the claimant, obtaining additional evidence as needed to assess whether the claimant satisfies the program requirements, and make the initial disability determination. If the claimant is not satisfied with the DDS determination, the claimant may request a reconsideration within the same DDS. Another DDS team will review the documentation in the case file, as well as any new evidence the claimant may submit, and determine whether the claimant meets SSA\u2019s definition of disability. In 2001, the DDSs made 2.1 million initial disability determinations and over 514,000 reconsiderations.\nIf the claimant is not satisfied with the reconsideration, the claimant may request a hearing by an ALJ. Within SSA\u2019s OHA, there are approximately 1,100 ALJs who are located in 140 hearing offices across the country. The ALJ conducts a new review of the claimant\u2019s file, including any additional evidence the claimant submitted since the DDS decision. The ALJ may also hear testimony from medical or vocational experts and the claimant regarding the claimant\u2019s medical condition and ability to work. The hearings are recorded, and claimants are usually represented at these hearings. In fiscal year 2001, ALJs made over 347,000 disability decisions.\nSSA is required to administer its disability programs in a fair and unbiased manner. However, in our 1992 report, we found that, among ALJ decisions at the hearings level, the racial difference in allowance rates was larger than at the DDS level and did not appear to be related to severity or type of impairment, age or other demographic characteristics, appeal rate, or attorney representation. We recommended, and SSA agreed, to further investigate the reasons for the racial differences at the hearings level and act to correct or prevent any unwarranted disparities.\n\n\tSSA\u2019s Study of Racial Disparities Was Extensive, but Methodological Weaknesses in Available Documentation Preclude Conclusions\n\nFollowing our report, SSA undertook an extensive effort to study racial disparities in ALJ decisions at the hearings level, but weaknesses in available documentation preclude conclusions from being drawn. The study involved 4 years of data collection, outside consultants, and many staff who collected and analyzed data from over 15,000 case files. Although the results were not published, SSA officials told us that their statistical analyses of these data revealed no evidence of racial disparities. On the basis of our review of SSA\u2019s internal working papers and other available information, we identified several weaknesses in sampling and statistical methods. Presently, SSA has no further plans to study racial disparities but, if it did, its ability to do so would likely be hampered by data limitations.\n\n\t\tSSA\u2019s Effort to Study Racial Disparities Was Extensive, but Results Were Not Published\n\nIn response to our 1992 report, SSA initiated a study of racial disparities at the ALJ level that involved several components of the agency. SSA obtained help in designing and conducting the study from staff in its Office of Quality Assurance and Performance Assessment; the Office of Research, Evaluation and Statistics; and the Office of Hearings and Appeals. SSA also created a new division within the Office of Quality Assurance\u2014the Division of Disability Hearings Quality\u2014to spearhead the collection of data needed to study racial disparities and to oversee ongoing quality assurance reviews of ALJ decisions.\nData collection for this study was a large and lengthy effort. In order to construct a representative sample of cases to determine whether race significantly influenced disability decisions, SSA selected a random sample each month from the universe of ALJ decisions, stratifying by race, region, and decisional outcome (allowance or denial). This sample of over 65,000 cases was drawn over a 4-year period\u2014from 1992 to 1996. Then, for each ALJ decision that was selected to be in the sample, SSA requested the case file and a recording of the hearing proceedings from hearing offices and storage facilities across the country. Obtaining this documentation was complicated by the fact that files were stored in different locations, depending on whether the case involved an SSI or DI claim, and whether the ALJ decision was an allowance or denial.\nIn addition to obtaining files and tapes, the data collection effort included a systematic review of each case\u2014the results of which SSA used, in part, for its analysis of racial disparities. Specifically, each case used in the analysis received three reviews: a peer review by an ALJ, a medical evaluation performed by one or more medical consultants (depending on the number and type of impairments alleged by the claimant), and a general review of the documentation and decisions by a disability examiner. In total, a panel of 10 to 12 ALJs, whose composition changed every 4 months, worked full-time to review cases. In addition, over a 4-year period, 37 to 55 staff, including disability examiners, worked full- time reviewing case files that were used for this study. Ultimately, about 15,000 cases received all three reviews necessary for inclusion in this study.\nDuring and after the 4-year data collection effort, SSA worked with consultants to analyze the data in order to determine the effect of race on ALJ decisions. SSA used descriptive statistics to show that overall application and allowance rates of African Americans differed from whites. In addition, SSA used multivariate analyses to examine the effect of race on ALJ decisions while controlling for other factors that influence decisions. One of SSA\u2019s consultants\u2014a law professor and recognized expert in disability issues\u2014reviewed SSA\u2019s analytical approach and evaluated initial results. In his report to SSA, this consultant expressed overall approval of SSA\u2019s data collection methods, but made several recommendations on how the analysis could be improved\u2014some of which SSA incorporated into later versions of its analysis. SSA subsequently hired two consulting statisticians to review later versions of the analysis. These statisticians expressed concerns about SSA\u2019s methods and offered several suggestions. According to SSA officials, these suggestions were not incorporated into the analysis because they were perceived to be labor intensive and SSA was not sure the effort would result in more definitive conclusions.\nAccording to SSA officials, the agency\u2019s final analysis of the data revealed no evidence of racial disparities, but the results were considered to be not definitive enough to warrant publication. Specifically, SSA officials told us that, by 1998, they found no evidence that race significantly affected ALJ decisions for any of the regions. However, these officials also told us that, due to general limitations of statistical analysis, especially as applied to such complex processes as ALJ decision making, they believed that they could not definitively conclude that no racial bias existed. Given the complexity of the results and the topic\u2019s sensitive nature, SSA officials told us the agency decided not to publish the conclusions of this study.\n\n\t\tAvailable Documentation of Racial Disparities Study Indicated Some Methodological Weaknesses\n\nFrom our review of SSA\u2019s internal working papers pertaining to the study, and information provided verbally by SSA officials, we identified several weaknesses in SSA\u2019s study of racial disparities. These weaknesses include: using a potentially nonrepresentative final sample of cases in their multivariate analyses, performing only limited analyses to test the representativeness of the final sample, and using certain statistical techniques that could lead to inaccurate or misleading results.\nAlthough SSA started with an appropriate sampling design, its final sample included only a small percentage of the case files in its initial sample in part because staff were unable to obtain many of the associated case files or hearing tapes. SSA was not able to obtain many files and tapes because they were missing (i.e., lost or misplaced) or they were in use and were not made available for the study. For example, according to SSA officials, files for cases involving appeals of ALJ decisions to SSA\u2019s Appeals Council\u2014about half of ALJ denials\u2014were in use and, therefore, excluded from the study. In addition, SSA officials told us that, due to resource constraints, not all of the obtained files underwent all three reviews, which were necessary for inclusion in SSA\u2019s analysis of racial disparities. In the end, less than one-fourth of the cases that were selected to be in the initial sample were actually included in SSA\u2019s final sample.\nWith less than one-fourth of the sampled cases included in the final sample, SSA took steps to determine whether the final sample of cases was still representative of all ALJ decisions. While the investigation SSA undertook revealed no clear differences between cases that were and were not included in the final sample, we found no evidence that SSA performed certain analyses that could have provided more assurance of the sample\u2019s representativeness. For example, SSA made some basic comparisons between claimants who were included in the final sample and those that were in the initial sample but not the final sample. SSA\u2019s results indicate that these two groups were fairly similar in key characteristics such as racial composition, years of education, and years of work experience. However, we found no indication in the documentation provided to us that SSA tested whether slight differences between the two groups were or were not statistically significant. Further, we found no indication that SSA compared the allowance rates of these two groups. This is an important test because, in order to be statistically representative, claimants in the final sample should not have had significantly different allowance rates from claimants who were not included in the final sample. In addition, although children were not included in SSA\u2019s analysis of racial disparities, SSA\u2019s tests to determine the representativeness of the final sample included children in one group and excluded children from the other. By including children in one of the comparison groups, SSA could not assess whether characteristics of the adults in the two groups were similar.\nAnother weakness, as documented in internal working papers available for our review, was the inclusion of certain variables in the multivariate analyses of ALJ decisions, which could lead to biased results. SSA guidelines clearly define the information that should be considered in the ALJ decision, and SSA appropriately included many variables that capture this information in its multivariate analysis. However, SSA also included several variables developed during the review process that reflected the reviewer\u2019s evaluation of the hearing proceedings. For example, SSA included a variable that assessed whether the ALJ, in the hearing decision, appropriately documented the basis for his or her decision in the case file. This variable did not influence the ALJ\u2019s decision, but evaluated the ALJ\u2019s compliance with SSA procedures and should not have been included in the multivariate analysis. This and other variables that reflected a posthearing evaluation of ALJ decisions were included in SSA\u2019s multivariate analysis. If these variables are associated with race or somehow reflect racial bias in ALJ decision making, including such variables in multivariate analysis will reduce the explanatory power of race as a variable in that analysis. For example, if a model includes a variable that may reflect racial bias\u2014such as one that indicates the reviewer believed that the original ALJ decision was unfair or not supported\u2014then that variable, rather than the race of the claimant, could show up as a significant factor in the model. The statisticians hired by SSA as outside consultants also expressed concern about the inclusion of these variables in SSA\u2019s analyses.\nFinally, in its internal working papers, SSA used a statistical technique\u2014 stepwise regression\u2014that was not appropriate given the characteristics of its analysis. Specifically, SSA researchers first identified a set of variables for potential use in their multivariate analysis\u2014variables drawn mostly from data developed during the case file review process. Then, to select the final set of variables, SSA used stepwise regression. Stepwise regression is an iterative computational technique that determines which variables should be included in an analysis by systematically eliminating variables from the starting variable set that are not statistically significant. Using the results from this analysis, SSA constructed a different model for each of SSA\u2019s 10 regions, which were used in SSA\u2019s multivariate analysis to test whether African Americans were treated differently than whites in each region. Stepwise regression may be appropriate to use when there is no existing theory on which to build a model. However, social science standards hold that when there is existing theory, stepwise regression is not an appropriate way to choose variables. In the case of SSA\u2019s study, statutes, regulations, rulings and SSA guidance establish the factors that ALJs should consider in determining eligibility, and thus indicate which variables should be included in a model. By using the results of stepwise regression, SSA\u2019s regional models included variables that were statistically significant but reflected the reviewer\u2019s evaluation of the hearing proceedings\u2014which an ALJ would not consider in a hearing\u2014and therefore were not appropriate. As mentioned earlier, including these variables may have reduced the explanatory power of other variables\u2014 such as race; this, in conjunction with the use of stepwise regression, may explain why race did not show up as statistically significant in the regional models. Had SSA chosen the variables for its model on the basis of theory and its own guidelines, race may have been statistically significant. The statisticians hired by SSA as consultants also noted this as a concern.\nAccording to an SSA official, the analysts directly responsible for or involved in the study conducted other analyses that were not reflected in the documentation currently available and provided to us. For example, this SSA official told us that the analysts involved in the study would have tested the statistical significance of slight differences between the cases included and not included in the final sample. This official also said that the analysts used multiple techniques in addition to stepwise regression\u2014 and ran the models with and without variables that reflected posthearing evaluations\u2014and still found no evidence of racial bias. However, due to the lack of available documentation, we were unable to review these analyses or corroborate that they were performed.\n\n\t\tFuture Studies of Racial Disparities Would Be Hampered by Data Limitations\n\nSince the conclusion of its study of racial disparities, SSA no longer analyzes race as part of its ongoing quality review of ALJ decisions, and SSA officials told us they have no plans to do so in the future. SSA still samples and reviews ALJ decisions for quality assurance purposes. However, since 1997, SSA no longer stratifies ALJ decisions by race before identifying a random sample of cases\u2014a practice that had helped to ensure that SSA had a sufficient number of cases in each region to analyze decisions by race. Although the dataset used for SSA\u2019s ongoing quality assurance review of ALJ decisions still includes information on race, SSA no longer analyzes these data to identify patterns of racial disparities.\nEven if SSA decided to resume its analysis of racial disparities in ALJ decisions, it would encounter two difficulties. First, SSA collects files for only about 50 percent of sampled cases in its ongoing review of ALJ decisions for quality assurance purposes, such that its final samples may be nonrepresentative of the universe of ALJ decisions. SSA uses this review data to produce annual and biennial reports on ALJ decision making. Data in these reports are also used to calculate the accuracy of ALJ decisions\u2014a key performance indicator used in SSA\u2019s 2000\u201303 performance plans pursuant to the Government Performance and Results Act. The reasons for obtaining only half of the files are the same, potentially biasing reasons as for the racial disparities study\u2014files are either missing or not made available if the cases are in use for appeals or pending decisions. However, SSA\u2019s annual and biennial reports do not cite the number or percentage of case files not obtained for specific reasons. In addition, SSA officials told us that they do not conduct ongoing analyses to test the representativeness of samples used for quality assurance purposes, and SSA\u2019s annual and biennial reports do not address whether the final sample used for quality assurance purposes and for calculating the performance indicator for ALJ accuracy is representative of the universe of ALJ decisions. In addition to not obtaining about 50 percent of the case files, SSA officials told us that medical consultants and disability examiners only review a portion of cases for which a file was obtained due to limited resources.\nSecond, future analyses of racial disparities at either the DDS or hearings level is becoming increasingly problematic because, since 1990, SSA no longer systematically collects race data as part of its process in assigning Social Security Numbers (SSN). For many years, SSA has requested information on race and ethnicity from individuals who complete a form to request a Social Security card. Although this process is still in place, since 1990 SSA has been assigning SSNs to newborns through its Enumeration at Birth (EAB) program, and SSA does not collect race data through the EAB program. Under current procedures, SSA is unlikely to subsequently obtain information on race or ethnicity for individuals assigned SSNs at birth unless those individuals apply for a new or replacement SSN (due to change in name or lost card). As of 1998, SSA did not have data on race or ethnicity for 42 percent of SSI beneficiaries under the age of 9. As future generations obtain their SSNs through the EAB program, this number is likely to increase.\n\n\tSSA Has Taken Limited Steps to Address Possible Racial Bias in Its Hearings Level Decision-Making Process\n\nConcurrent with SSA\u2019s study of racial disparities, SSA\u2019s Office of Hearings and Appeals took several steps to address possible racial bias in disability decision making at the hearings level. These steps included providing diversity training, increasing recruitment efforts for minority ALJs, and administering a new complaint process for the hearings level to help ensure fair and impartial hearings. The complaint process was intended, in part, to help identify patterns of possible racial and ethnic bias and other misconduct; however, this process lacks mechanisms to help OHA easily identify patterns of possible racial or ethnic bias for further investigation or corrective action.\n\n\t\tOHA Has Taken Some Steps to Address Possible Racial Bias\n\nSSA\u2019s OHA adopted a mandatory diversity sensitivity program in 1992. All of SSA\u2019s incumbent ALJs were required to attend a 2- or 1-1\/2-day course immediately after its development. In addition, the course (now 1 day in length) is included in a 3-week orientation for newly hired ALJs. The course was designed and is conducted by an outside contractor. The course addresses topics such as cultural diversity, geographic diversity, unconscious bias, and gender dynamics through a series of exercises designed to help the ALJs understand how their thought processes, beliefs, and past experiences with people influence their decision-making process.\nOHA also increased its efforts to recruit minorities for ALJ and other legal positions, although the impact of these efforts on the racial\/ethnic mix of SSA\u2019s ALJ workforce has been limited. According to OHA officials, OHA has attended conferences held by several minority bar organizations, to raise awareness about the opportunities available at SSA to become an ALJ. In addition to having information booths and distributing information on legal careers at OHA, OHA presented a workshop called \u201cHow to Become an Administrative Law Judge at OHA,\u201d at each conference. Despite these efforts, there have not been significant changes in the racial\/ethnic profile of SSA ALJs.\nIn addition to these efforts, in 1993 SSA instituted a complaint process under the direction of OHA that provides claimants and their representatives with a new mechanism for voicing complaints specifically about bias or misconduct by ALJs. The ALJ complaint process supplements and is coordinated with the normal appeals process. All SSA claimants have the right to appeal the ALJ decision to the Appeals Council and, in doing so, may allege unfair treatment or misconduct. According to OHA officials, the vast majority of allegations of unfair hearings are submitted by claimants or their representatives in connection with a request for Appeals Council review. Under the 1993 process, claimants or their representatives may also file a complaint at any SSA office, send it by mail, or call it into SSA\u2019s 800 number service. Any complaints where there is a request for Appeals Council review are referred to the Appeals Council for its consideration as part of its normal review. For complaints where the complainant did not request an Appeals Council review, the complaint is reviewed by the appropriate Regional Chief ALJ, and the findings are reported to the Chief ALJ. Regardless of how the complaint was filed or which office reviewed the complaint, OHA\u2019s Special Counsel Staff is notified of all claims and any findings from either the Appeals Council or the Regional Chief ALJ. On the basis of these findings, OHA may decide to take remedial actions against the ALJ, such as a counseling letter, additional training, mentoring or monitoring, an official reprimand, or some other adverse action. OHA\u2019s Special Counsel Staff may also decide to conduct a further investigation. Regardless of which office handles the complaint, OHA acknowledges the receipt of each complaint in writing, notifies the complainant that there will be a review or investigation (unless to do so would disrupt a pending hearing or decision), and notifies the complainant concerning the results of the investigation.\nOfficials from the Special Counsel Staff told us OHA receives about 700 to 1,000 complaints (out of 400,000 to 500,000 hearings) per year. About 90 percent of these are notifications from the Appeals Council that involve an allegation of bias or misconduct. Officials from the Special Counsel Staff also said that few complaints are related to race. For example, officials noted that, in response to a special request, Special Counsel Staff reviewed all 372 complaints filed during the first 6 months of 2001, and found that only 19 (5.1 percent) were in some way related to race.\n\n\t\tALJ Complaint Process Lacks Mechanisms to Identify Patterns of Racial Bias\n\nWhile the ALJ complaint process provides a mechanism for claimants to allege discrimination, it lacks useful mechanisms for detecting patterns of possible racial discrimination. In SSA\u2019s public notice on the creation of this process, it was stated that SSA\u2019s Special Counsel would \u201ccollect and analyze data concerning the complaints, which will assist in the detection of recurring incidences of bias or misconduct and patterns of improper behavior which may require further review and action.\u201d However, OHA\u2019s methods of collecting, documenting, and filing complaints make this difficult to do. For example, in its instructions to the public, SSA directs complainants to describe, in their own words, how they believe they were treated unfairly. This flexible format for filing complaints may make it difficult for OHA to readily identify a claim alleging racial bias. In contrast, SSA\u2019s Office of General Counsel\u2019s complaint form specifically asks complainants to categorize their claim as being related to such factors as race or sex.\nSimilarly, OHA does not use a standardized internal cover-sheet to summarize key aspects of the review, such as whether the complaint involved racial or some other type of bias or misconduct, and whether the complaint had merit and what action, if any, was taken. The lack of a cover-sheet makes it difficult to quickly identify patterns of allegations involving race that have merit. In order to determine whether patterns exist, OHA staff would have to reread each complaint.\nAdditionally, OHA staff do not record key information about complaints\u2014 such as the nature of the complaint\u2014in an electronic database so that patterns of bias can be easily identified. OHA\u2019s Special Counsel Staff files complaints and related documents manually, and in chronological order by hearing office. According to OHA officials, this filing system was developed in 1993 when the process was created and complaint workloads were much lower. Today, SSA receives and reviews 700 to 1,000 complaints a year. In order to identify patterns of bias, Special Counsel Staff must not only reread each file, it must tabulate patterns by hand\u2014a time-consuming process that it does not perform on a routine basis.\nFinally, OHA does not currently obtain demographic information (such as race, ethnicity, and sex) on complainants, which are important in identifying patterns of bias. These data are important for identifying patterns of possible racial bias because complainants\u2014aware only of their own circumstances and lacking a basis for comparison\u2014may not specifically allege racial bias when they file a complaint about unfair treatment. Without demographic data, it is impossible to discern whether certain types of allegations are disproportionately reported by one race (or sex) and whether further investigative or corrective action is warranted. Although SSA is currently obtaining less race data in its process of assigning SSNs, OHA staff could still obtain data on race and sex for most complainants from the agency\u2019s administrative data.\n\n\tConclusions\n\nThe steps SSA has taken over the last decade have not appreciably improved the agency\u2019s understanding of whether or not, or to what extent, racial bias exists in its disability decision-making process. SSA\u2019s attempt to study racial disparities was a step in the right direction, but methodological weaknesses evident in SSA\u2019s remaining working papers prevent our concluding, as SSA did, that there is no evidence of racial bias in ALJ decision making. SSA does not have an ongoing effort to demonstrate the race neutrality of its disability programs. Moreover, the continuing methodological weaknesses in SSA\u2019s ongoing quality assurance reviews of ALJ decisions hamper not only its ability to ensure the accuracy of those reviews but also its ability to conduct future studies to help ensure the race neutrality of its programs. Furthermore, in the longer term, SSA\u2019s ability to analyze racial differences in its decision making will diminish due to a lack of data on race and ethnicity. Finally, SSA\u2019s complaint process for ALJs lacks mechanisms\u2014such as summaries of key information on each complaint, an electronic filing system, and information on the race and ethnicity of complainants\u2014that could help identify patterns of possible bias. SSA is not legally required to collect and monitor data to identify patterns of racial disparities, although doing so would help SSA to demonstrate the race neutrality of its programs and, if a pattern of racial bias is detected, develop a plan of action.\n\n\tRecommendations\n\nTo address shortcomings in SSA\u2019s ongoing quality assurance process for ALJs\u2014which would improve SSA\u2019s assessment of ALJ decision-making accuracy\u2014we recommend the agency take the following steps:   conduct ongoing analyses to assess the representativeness of the sample used in its quality assurance review of ALJ decisions, including testing the statistical significance of differences in key characteristics of the cases included in the final sample with those that were not obtained; include the results of this analysis in SSA\u2019s annual and biennial reports on ALJ decision making; and   use the results to make appropriate changes, if needed, to its data collection or sampling design to ensure a representative sample.\nTo more readily identify patterns of misconduct, including racial bias, in complaints against ALJs, we also recommend that SSA\u2019s Office of Hearing and Appeals:   adopt a form or some other method for summarizing key information on each ALJ complaint, including type of allegation;   use internal, administrative data, where available, to identify and document the race and\/or ethnicity of complainants; and   place the complaint information in an electronic format, periodically analyze this information and report the results to the Commissioner, and develop action plans, if needed.\n\n\t\tAgency Comments and Our Response\n\nWe provided a draft of this report to SSA for comment. SSA concurred fully with our recommendations and agreed to take steps to implement them. In its general comments, SSA expressed concern that the title of the report might foster the perception that its disability decision making, particularly at the OHA level, is suspect. Although we believe the draft report\u2019s title accurately reflected the report\u2019s content and recommendations, we have modified the title to ensure clarity. SSA also cited a number of reasons for the low percentage of cases included in its final sample, as well as steps it took to ensure the representativeness of its final sample. Nevertheless, we continue to believe that SSA could have performed additional analyses to provide more assurance of the sample\u2019s representativeness.\nSSA also provided technical comments and clarifications, which we incorporated in the report, as appropriate. SSA\u2019s general comments and our response are printed in appendix I.\nWe are sending copies of this report to the Social Security Administration, appropriate congressional committees, and other interested parties. We will also make copies available to others on request. In addition, the report will be available at no charge on the GAO Web site at http:\/\/www.gao.gov.\nIf you or your staff have any questions concerning this report, please call me or Carol Dawn Petersen, Assistant Director, at (202) 512-7215. Staff acknowledgments are listed in appendix II.\n\nAppendix I: Comments from the Social Security Administration\n\n\tGAO Comments\n\n1.  Although we believe the draft report\u2019s title accurately reflected the content of our report and recommendations, we have modified the title to ensure clarity. This report and its recommendations are not restricted to a discussion of only two races. Although we referred to race and ethnicity in the second objective and the conclusion section of the draft reviewed by Social Security Administration (SSA), we added the word \u201cethnicity\u201d to the recommendations and the body of the report to further clarify this issue. 2.  We added language to a note in the report regarding the litigation SSA mentions and that SSA has increased the number of Regional Chief Administrative Law Judges (ALJs) who are members of a racial minority group from 1 to 3 since 1992. 3.  We agree with SSA that the low proportion of cases included in the final sample is due to several factors. In our report, we cited several reasons for cases not being included in the final sample that are significant in terms of the number of affected cases and that we believe have the potential for being nonrandom in nature. On the basis of a subsequent discussion with SSA officials, we added a note in our report that a small proportion of cases were excluded because they were later identified as being cases that were not intended to be included in the sample. 4.  Although SSA noted that it used \u201choldout samples and cross modeling\u201d to ensure that the group of cases sampled for this study was essentially free of sampling bias, SSA officials explained to us that these techniques were not used to test for the representativeness of the final sample. 5.  We agree with SSA that, with large sample sizes, even small differences generally are statistically significant, and that such statistically significant differences are not always substantively significant. We do not believe, however, that a large sample is sufficient reason to forego significance tests. Moreover, our report cited additional analyses that SSA could have performed to provide more assurance of the sample\u2019s representativeness. Another approach that we do not cite in the report\u2014but which SSA may wish to consider\u2014is multivariate analysis of nonresponse. SSA performed bivariate comparisons of samples to determine whether they contained different proportions of cases with various characteristics. However, two samples can have very similar percentages of, for example, women and African Americans, but be very different with respect to the percentage of African American women. In contrast, multivariate analysis would allow SSA to look systematically and rigorously at different characteristics simultaneously.\n\nAppendix II: GAO Contacts and Staff Acknowledgments\n\n\tGAO Contacts\n\n\tStaff Acknowledgments\n\nIn addition to those named above, the following individuals made significant contributions to this report: Erin Godtland, Michele Grgich, Stephen Langley, and Ann T. Walker, Education, Workforce and Income Security Issues; Doug Sloane and Shana Wallace, Applied Research and Methods; and Jessica Botsford and Richard Burkard, General Counsel.","output":"What GAO Found\n\nThe Social Security Administration (SSA) is responsible for administering the Social Security Disability Insurance and the Supplemental Security Insurance programs--the nation's two largest disability programs. SSA is required to administer its disability programs in a fair and unbiased manner. Nevertheless, the proportion of African American applicants allowed benefits has been historically lower than the proportion of white applicants. These allowances rate differences have occurred with respect to disability determinations made by state Disability Determination Service offices and in decisions made at the hearings level by Administrative Law Judges (ALJ). In response to GAO's 1992 report, SSA initiated an extensive study of racial disparities in ALJ decisions, but methodological weaknesses preclude conclusions being drawn from it. The study--the results of which were not published--set out to analyze a representative sample of cases to determine whether race significantly influenced disability decisions, while simultaneously controlling for other factors. SSA officials told GAO that, by 1998, they found no evidence that race significantly influenced ALJ decisions. However, GAO was unable to draw these same conclusions due to weaknesses in sampling and statistical methods evident in the limited documentation still available for GAO's review. Concurrent with SSA's study of racial disparities, SSA's Office of Hearings and Appeals (OHA) took some limited steps at the hearings level to address possible racial bias in ALJ decision-making. OHA instituted a mandatory diversity sensitivity training course for ALJs. Additionally, OHA increased its efforts to recruit minorities for ALJ and other legal positions by attending conferences for minority bar associations, where SSA distributed information and gave seminars on how to become an ALJ. Finally, in keeping with its commitment to provide fair and impartial hearings, SSA established a new process under the direction of OHA for the review, investigation, and resolution of claimant complaints about alleged bias or misconduct by ALJs."}
{"id":"gao_GAO-15-292","pid":"gao_GAO-15-292_0","input":"\tBackground\n\nDHS invests in major acquisition programs to develop capabilities  intended to improve its ability to execute its mission. DHS policy defines  acquisition programs as follows:\nLevel 1 major acquisition programs are expected to cost $1 billion or  more over their life cycles.\nLevel 2 major acquisition programs are expected to cost at least $300  million over their life cycles.\nSpecial interest programs, without regard to the established dollar  thresholds, are designated as Level 1 or Level 2 programs. For  example, a program may be raised to a higher acquisition level if  its importance to DHS\u2019s strategic and performance plans is  disproportionate to its size or it has high executive visibility.\nLevel 3 programs are those with a life-cycle cost estimate less than  $300 million and are considered non-major.\nDHS\u2019s Acquisition Management Directive 102-01 (MD 102) and DHS  Instruction Manual 102-01-001 (Guidebook), which includes 12  appendices, establish the framework for the department\u2019s policies and  processes for managing these acquisition programs. MD 102 establishes  that DHS\u2019s Chief Acquisition Officer\u2014the Under Secretary for  Management (USM)\u2014is responsible for the management and oversight  of the department\u2019s acquisition policies and procedures. The Deputy  Secretary, USM, and CAE are the acquisition decision authorities for  DHS\u2019s acquisition programs, depending on the level.\nThe acquisition decision authority is responsible for reviewing and  approving the movement of DHS\u2019s major acquisition programs through  four phases of the acquisition life cycle at a series of five acquisition  decision events. These acquisition decision events, which can be more  than one year apart, provide the acquisition decision authority an  opportunity to assess whether a major program is ready to proceed  through the life-cycle phases. Following are the four phases of the  acquisition life cycle, as established in DHS acquisition policy:  1.  Need: Department officials identify that there is a need, consistent  with DHS\u2019s strategic plan, justifying an investment in a new capability  and the establishment of an acquisition program to produce that  capability;  2.  Analyze\/Select: A designated program manager reviews alternative  approaches to meeting the need and recommends a best option to  the acquisition decision authority;  3.  Obtain: The program manager develops, tests, and evaluates the  selected option. During this phase, programs may proceed through  acquisition decision event 2B, which focuses on the cost, schedule,  and performance parameters; and acquisition decision event 2C,  which focuses on low rate initial production; and  4.  Produce\/Deploy\/Support: DHS delivers the new capability to its  operators, and maintains the capability until it is retired. This phase  includes sustainment, which begins when a capability has been  fielded for operational use; sustainment involves the supportability of  fielded systems through disposal, including maintenance.\nFigure 1 depicts the four phases of the acquisition life cycle and the  associated acquisition decision events.\nAn important aspect of these acquisition decision events is the review and  approval of key acquisition documents critical to establishing the need for  a major program, its operational requirements, an acquisition baseline,  and testing and support plans. Examples of key DHS acquisition  documents include: a life-cycle cost estimate, which provides an exhaustive and  structured accounting of all resources and associated cost  elements required to develop, produce, deploy, and sustain a  program; and an acquisition program baseline, which establishes a program\u2019s  critical baseline cost, schedule, and performance parameters.\nWe are also conducting a separate review that assesses the extent to  which select DHS major acquisition programs are on track to meet their  cost estimates, schedules, and capability requirements.\nPARM is designated by MD 102 as the lead body responsible for  overseeing the acquisition process of major acquisition programs. PARM  was established in October 2011 to develop and update program  management policies and practices, oversee the acquisition workforce,  and collect program performance data. PARM is led by an executive  director who reports directly to the USM. In addition to its role of  overseeing major acquisitions, PARM provides support and assistance to  CAEs and program managers at each of DHS\u2019s 13 components during  the acquisition process. Within these components, CAEs are responsible  for establishing acquisition processes and overseeing the execution of  their respective portfolios. Also within the components, program  management offices are responsible for planning and executing DHS\u2019s  individual programs within cost, schedule, and performance goals and  preparing required acquisition documents for acquisition decision events,  which help facilitate the governance process. Table 1 lists elements at  the headquarters, component, and program level that contribute to  oversight of DHS major acquisition programs.\nThe Fiscal Year 2012 DHS Appropriations Act required the USM to  submit a Comprehensive Acquisition Status Report (CASR) with the  President\u2019s budget proposal for fiscal year 2013, and an associated  conference report contained the specific information to be included in the  CASR. The requirement for the CASR has been continued in  subsequent appropriations acts, and DHS is currently working on the next  iteration of the CASR, assuming DHS will again be required to produce  this report. The legislation required DHS to provide to Congressional  appropriations committees programmatic data and evaluative information,  such as a program\u2019s current acquisition phase, life-cycle cost, and a  rating of cost, schedule, and technical risks. DHS is to include this  information for each major acquisition on the Master Acquisition Oversight  List (MAOL)\u2014a list of DHS acquisitions that is broken down into  categories defining the differing oversight requirements across programs.  The legislation established the following CASR requirements for major  acquisition programs:  1.  A narrative description including current gaps and shortfalls, the  capabilities to be fielded, and the number of planned increments  and\/or units;  2.  Acquisition Review Board status of each acquisition, including the  current acquisition phase, the date of the last review, and a listing of  the required documents that have been reviewed and\/or approved;  3.  The most current approved acquisition program baseline, including  project schedules and events;  4.  A comparison of the original and current acquisition program baseline,  and the current estimate;  5.  Whether or not an independent verification and validation has been  implemented, with an explanation for the decision and a summary of  any findings;  6.  A rating of cost risk, schedule risk, and technical risk associated with  the program, including narrative descriptions and mitigation actions;  7.  Contract status, including earned value management data, as  8.  A life-cycle cost of the acquisition, and time basis for the estimate;  9.  A planned procurement schedule, including the best estimate of the  annual cost and increments\/units to be procured annually;  10. A table delineated by appropriation that provides the actual or  estimated appropriations, obligations, unobligated authority, and  planned expenditures;  11. The reason for any significant changes from the previous CASR in  acquisition quantity, cost, or schedule;  12. Key events or milestones from the prior fiscal year; and  13. Key events or milestones for the current fiscal year.\n\n\tDHS Has Taken Steps to Improve Oversight of Major Acquisition Programs, but Lacks Written Guidance and Cost Oversight Mechanism for Some Programs\n\nAlthough DHS has taken steps to improve oversight of major acquisition  programs, such as clarifying the role of the CAEs, it lacks written  guidance for a consistent approach to oversight. Specifically, there is no  guidance to define the roles and responsibilities of PARM and other DHS  headquarters organizations in providing day-to-day support and oversight  to programs during the acquisition process. PARM started conducting  monthly high visibility meetings to discuss programs that require  immediate or additional management attention. PARM also maintains a  list of programs subject to oversight, the MAOL. The process for creating  this list has fluctuated over time; PARM recently made revisions to the  MAOL and plans to make further changes to it in the future. Finally, DHS  has not established a structure for overseeing the costs of 42 programs in  sustainment whose acquisition documentation requirements were waived  by the USM in 2013. Sustainment costs can account for more than 80  percent of total costs, and all but one of these programs lack an approved  cost estimate.\n\n\t\tDHS Lacks Written Guidance for a Consistent Approach to Ongoing Oversight\n\nWhile DHS has made progress in defining and documenting roles and  responsibilities in the oversight of major acquisitions, such as issuing  guidance describing the roles of CAEs, the roles and responsibilities of  PARM and other DHS headquarters organizations are not clear. Without  defined roles and responsibilities, DHS cannot ensure it is providing the  appropriate level of oversight or receiving the right information to conduct  oversight. PARM has made efforts to expand its oversight and support  roles through its component leads, PARM\u2019s liaisons to the components;  however, roles and responsibilities for these positions are not defined. In  addition, there was no guidance to define the differences in the role of  PARM and OCIO-Enterprise Business Management Office (EBMO) in the  oversight of major IT acquisitions, and we found potential overlap in the  roles of these entities.\nFigure 2 illustrates PARM\u2019s interactions with DHS headquarters,  component, and program-level offices and officials with acquisition  oversight responsibility. Some of these interactions are set forth in policy  while others are not.\nPARM provides ongoing oversight and support to programs in a number  of ways, such as consulting with program officials to prepare required  documents prior to an Acquisition Review Board and providing training to  components on various aspects of program management. One of  PARM\u2019s key mechanisms for providing day-to-day oversight and support  to programs between acquisition decision events is through its staff of 10  component leads, but their roles and responsibilities are not defined in  DHS acquisition policy. According to PARM officials, the component leads  provide day-to-day oversight and support to acquisition programs for a  specific component and are intended to be a key source of  communication and coordination between PARM and the programs. In  turn, component leads provide program information to PARM\u2019s executive  director, which may be used in high visibility meetings with the USM.\nPARM component leads told us they interact directly with the CAEs and  program offices to ensure that programs are adhering to the acquisition  process, along with meeting acquisition milestones and reporting  requirements. While PARM\u2019s component leads play an important role in  the coordination with components, their roles and responsibilities are not  defined in DHS acquisition policy. We found that their involvement and  relationships with components varies significantly. For example, PARM\u2019s  component lead for U.S. Citizenship and Immigration Services is involved  in the day-to-day management of programs. This component lead  regularly attends component and program-level meetings and organizes  training workshops to educate component and program-level staff. In  another example, the PARM component lead for the National Protection  and Programs Directorate provided additional guidance and attention to  the directorate\u2019s programs while the acting CAE was learning his role. In  contrast, a U.S. Coast Guard official told us that while there is informal,  almost daily communication, their component lead does not have direct  access to program level data and relies on the input of the CAE to  schedule and prioritize department-level acquisition milestone meetings.  Such differences in the PARM component leads\u2019 involvement with  programs may be appropriate depending on the type of program or  experience of component and program office staff; however, without  defined roles and responsibilities, PARM cannot ensure it is providing the  appropriate level of oversight or receiving the right information to conduct  oversight.\nGAO, Auditing and Financial Management: Standards for Internal Control in the Federal  Government, GAO\/AIMD-00-21.3.1 (Washington, D.C.: Nov. 1, 1999). leads are not defined in DHS acquisition policy and it is a challenge that  they are trying to determine how to address.\nFurther, while PARM is the lead office responsible for overseeing all  major acquisition programs, we found confusion among component  officials related to PARM\u2019s role in IT acquisitions, where OCIO-EBMO  also has oversight responsibility. Of the 72 Level 1 and Level 2  acquisition or service programs listed on the 2014 MAOL, 57 are  designated as IT programs. Per the DHS acquisition policy, the OCIO is  responsible for establishing IT policies and procedures and ensuring that  approved IT acquisitions comply with technical requirements and  departmental management processes, such as Agile development, which  calls for producing software in small, short increments. Within OCIO,  EBMO has been given primary responsibility for ensuring that the  department\u2019s IT investments align with its missions and objectives.  However, while DHS acquisition policy outlines responsibilities for PARM  and OCIO, there is no guidance that defines how the role of PARM differs  from the role of EBMO in the oversight of IT acquisition programs.\nGAO, Auditing and Financial Management: Framework for Assessing the Acquisition  Function At Federal Agencies, GAO-05-218G (Washington, D.C.: Sept.1, 2005). the oversight of major acquisitions could improve coordination, limit  overlap of responsibilities, and reduce duplicative efforts at the  component level.\n\n\t\t\tDHS Issued Guidance to Clarify the Role of the CAE\n\nIn September 2014, the USM issued a policy memorandum clarifying the  responsibilities of the CAEs, who have an important role in acquisition  oversight. To strengthen acquisition oversight within the department, the  USM intends to standardize these officials\u2019 acquisition authorities and  experience levels. The memo also sets forth oversight responsibilities of  the CAEs, particularly for the Level 3 programs for which they are the  acquisition decision authority. The memorandum additionally clarifies that  for the purposes of acquisition oversight, program managers report to  their CAE and the CAEs report to the USM. This clarification is useful, as  CAEs we spoke with prior to the issuance of the memorandum noted  differences in the roles and responsibilities of the CAEs across  components. For example, at U.S. Immigration and Customs  Enforcement, it was the component OCIO, rather than the CAE, who was  responsible for the execution of acquisitions, and program managers  reported directly to the component OCIO. At the U.S. Coast Guard, the  CAE is currently the Vice Commandant, who oversees all of the  component\u2019s operations and mission support functions, including human  resources, budget, and acquisitions. Within mission support is the  Assistant Commandant for Acquisitions, who has more direct oversight of  the U.S. Coast Guard\u2019s acquisition programs. Given the new  requirements for CAE experience levels, PARM\u2019s executive director  anticipates that there may be changes in CAE assignments for at least  one component.\nThe memo directs PARM to create and provide executive-level  acquisition training to the CAEs. The memorandum further outlines the  CAEs\u2019 responsibilities for complementing PARM\u2019s oversight activities,  such as responding in a timely manner to requests for information. As of  March 2014, PARM began working with CAEs to hold monthly forums to  discuss topics such as the MAOL, staffing plans, and the CASR.\n\n\t\tPARM Highlights Some Programs for Oversight through High Visibility Meetings, but DHS Lacks a Cost Oversight Mechanism for Programs In Sustainment\n\nPARM established monthly high visibility meetings to discuss programs  that require immediate or additional management attention. In addition, to  identify programs for which PARM has oversight responsibility, PARM  maintains a list of DHS\u2019s acquisition programs on the MAOL, which is  broken down into categories that describe each program\u2019s reporting  characteristics. However, DHS has not established a structure for  overseeing the costs of 42 programs in sustainment whose acquisition  documentation requirements were waived by the USM in 2013.  Sustainment costs can account for more than 80 percent of total costs,  and all but one of these programs lack an approved cost estimate.\n\n\t\t\tPARM High Visibility Meetings Highlight Programs for Management Attention\n\nPARM\u2019s executive director established high visibility meetings in  December 2013 to discuss any acquisition programs that require more  immediate attention from DHS management. PARM\u2019s executive director  uses these meetings as a management tool. He identifies the programs to  be discussed in consultation with component leads. PARM\u2019s executive  director told us that the purpose of these meetings is to make sure that  senior leadership\u2014including the USM, Chief Financial Officer, Chief  Information Officer, Chief Readiness Support Officer, Chief Procurement  Officer, and General Counsel\u2014have a common understanding of the  acquisition programs\u2019 status and key issues. According to PARM officials,  the high visibility meetings have provided better focus through greater  senior level involvement and led to a reinvigoration of preparation for  Acquisition Review Boards. As of November 2014, 33 programs have  been discussed in the high visibility meetings.\nPARM officials put programs on the meeting agenda based on a variety  of considerations: programs with an upcoming Acquisition Review Board  meeting, programs with concerns or issues, and programs that PARM is  monitoring closely. Officials told us that the last two categories may  include programs under GAO or Inspector General review, programs  involved in a bid protest, and programs that have experienced schedule  slips or a cost increase. For example, PARM officials told us about a  program that changed its acquisition strategy to incorporate information  technology, but did not involve the Chief Information Officer. PARM  included this program in a high visibility meeting to ensure that officials  were informed of the change in strategy and were involved as  appropriate. In another case, PARM officials told us that they used high  visibility meetings to raise early awareness about concerns with a  program, which resulted in multiple follow-on meetings among high level  headquarters and component officials. The USM directed the component  to pause the program and issued an acquisition decision memorandum  that described the path forward.\n\n\t\t\tPARM is Taking Steps to Improve the MAOL\n\nDHS acquisition policy provides the overall structure for acquisition  management that programs are required to follow. The policy requires  PARM to create a list of major acquisition programs, the MAOL, a  document approved by the USM. PARM uses the MAOL to identify  programs for which it has oversight responsibility and to determine which  programs they include in the CASR, an annual report to Congress. In  2014, PARM updated and expanded the MAOL by listing programs in six  categories that detail the characteristics of programs. Five categories  specifically address acquisition programs (see table 2). In addition, there  is one category for a non-acquisition activity that is required to submit an  Office of Management and Budget business case.\nPARM officials stated that they updated the list to more clearly  incorporate input of all headquarters organizations, thereby making it a  more useful oversight tool. The list has evolved over time as more  headquarters organizations have added programs to the MAOL. PARM  officials have drafted updates to DHS acquisition policy that include a  section on requirements for the MAOL. Specifically, the planned updates  will include which headquarters organizations will be involved in the  development of the list, and establish a process for removing programs.  PARM officials also told us they recently began a process for updating the  list more regularly. The updates also provide additional information about  the development and use of the MAOL. The draft updates describe the  process for determining whether or not a program belongs on the MAOL,  which follows a decision tree. PARM officials said that the new process  for developing the MAOL more effectively coordinates and tracks the  input from other DHS headquarters organizations, like EBMO and the  Office of the Chief Financial Officer, as well as CAEs. The draft updates  also describe justifications for removal from the MAOL. For example, a  program might be removed if it is merged with another program, or if it is  no longer considered special interest\u2014meaning that a program was  elevated to a higher acquisition level without regard to dollar threshold.  Officials were unsure when the draft updates would be approved by DHS  management. In addition to the draft policy updates, PARM officials told  us that they recently instituted a governing board of officials who will  determine changes to the MAOL on a quarterly basis, given its potential  to provide important information to department decision makers. PARM  officials told us that the next MAOL, expected in February 2015, will use  the new process described in draft guidance.\n\n\t\t\tDHS Lacks Cost Oversight Mechanism for Programs in Sustainment\n\nDHS does not have a structure in place for overseeing the costs of 42  programs whose acquisition documentation requirements were waived   This waiver  through a memorandum issued by the USM in May 2013.covered certain programs in sustainment, meaning that these acquisition  programs have been developed and delivered and they are being  operated and maintained through the disposal phase. Because these  programs were in sustainment when MD 102 was instituted in 2008, the  USM determined that it would be cost prohibitive and inefficient to  recreate documentation for previous phases. However, we found that only  one of the 42 waived programs has an approved life-cycle cost estimate,  which would include acquisition costs as well as the costs to operate and  maintain the system once it is in sustainment. PARM officials could not  provide us estimates of the value of the sustainment programs. PARM\u2019s  executive director stated that these programs should produce operations  and maintenance cost estimates. These estimates would account for the  remainder of their life cycles through disposal, but the programs are not  currently required to do so, given the 2013 waiver.\nFurther, in the 2014 MAOL, PARM included seven additional programs in  sustainment and also noted that documentation was waived for these  programs. The 42 programs in sustainment from the USM\u2019s  memorandum and the seven programs listed on the MAOL are listed in  appendix II. The Office of Management and Budget stated in 2014 that  the sustainment phase can account for more than 80 percent of program  life-cycle costs, which demonstrates the need for oversight of these  programs\u2019 costs. We have previously reported that cost estimates are  necessary to support decisions about program funding, develop annual  budget requests, and evaluate resource requirements. Furthermore, the  management of a cost estimate involves continually updating the estimate  with actual data as they become available, revising the estimate to reflect  changes, and analyzing differences between the estimated and actual  costs. Without knowing the operations and maintenance cost estimates  for these programs, DHS will not be able to fully plan for and manage  funding requirements across its major acquisition programs.\nThe 2013 waiver did not define which DHS office is responsible for  oversight of the sustainment programs. CAEs are responsible for Level 3  programs and PARM officials stated that this also applies to programs in  sustainment. A PARM official further told us it is difficult to know who is  responsible for oversight of Level 1 and Level 2 programs in sustainment.  PARM officials expressed concerns about the lack of oversight of these  programs. Specifically, officials noted DHS may decide, on a case-by- case basis, which organization should most appropriately provide  oversight to programs in sustainment, which may include more than one  office.\n\n\tProgram Data PARM Provided to DHS and Congressional Decision Makers Were Not Consistently Accurate and Up-to-Date\n\nPARM\u2019s fiscal year 2014 CASR, a report mandated by Congress,  provided the status of 82 DHS major acquisition programs but contained  data that were inaccurate and out-of-date. PARM primarily drew  information for the CASR from nPRS, DHS\u2019s official system of record for  acquisition program reporting. However, data issues\u2014including  inconsistent participation among the programs responsible for entering  data\u2014have led to inaccurate information in nPRS. For example, our  analysis found discrepancies between the CASR and nPRS for life-cycle  cost estimate data even after efforts to update or fix the data inaccuracies  through an extensive adjudication process. Therefore, it was unclear  whether congressional CASR recipients received accurate program  information. PARM officials have acknowledged ongoing issues with the  data reported in both nPRS and the CASR, and noted that they are  working to improve the data quality. Officials stated that information in the  CASR did not provide a complete picture of program life-cycle costs,  which was the result of both incorrect data that programs had reported  and limitations in using the nPRS system. Further, component and  program officials have also stated that the CASR did not accurately reflect  program risks. Finally, DHS provided insufficient information to address  certain CASR reporting requirements. For example, the CASR did not  include annual planned procurement schedules containing estimates of  the units and\/or increments for each program, although it was required to  do so.\n\n\t\tData in DHS\u2019s Acquisition Program Reporting System Were Not Consistently Accurate\n\nFor the nine programs in our review, we found that program offices did  not consistently enter and verify their data in nPRS. DHS established  nPRS as the system of record for acquisition program reporting in 2008,  and in 2012 the USM issued a memorandum to CAEs stating that  programs should make every effort to ensure that their data in nPRS is  complete, accurate, and valid on a monthly basis. According to the  memorandum, nPRS was intended to be a key tool for acquisition  program management, and help provide the capability to efficiently  assess the department\u2019s acquisition portfolio. DHS components have the  responsibility to ensure that their respective programs enter the data in  nPRS as required, and CAEs are required to ensure that the data is  validated and submitted in timely manner. However, we found that this  was not done consistently for the nine major acquisition programs in our  review, which are overseen by nine different DHS components.\nWe examined nPRS data for the nine programs at two key points:  September 2013, the closing date for data for fiscal year 2013, and March  2014, the date when PARM issued its fiscal year 2014 CASR, which was  based on fiscal year 2013 program data. We found a number of problems  with the data. For example, as of September 2013, three programs we  reviewed did not enter expenditure data, the amount the programs  actually spent, in nPRS for fiscal year 2013 as required, and two of these  programs did not enter historical expenditure data at all.\nWhen we compared programs\u2019 entries of expenditure data over time, we  found additional discrepancies. As an example, the U.S. Coast Guard\u2019s  Fast Response Cutter program\u2019s expenditure entries in nPRS increased  by more than $340 million from September 2013 to March 2014, even  though both of these entries were supposed to reflect fiscal year 2013  expenditures. A U.S. Coast Guard official stated that this increase was  due to a correction in the program\u2019s reported expenditures, to account for  all funds spent in fiscal year 2013 regardless of when those funds were  received. The official noted that the program\u2019s entry from September  2013 reflected only funds received in fiscal year 2013. However, the  reason for this change was not documented in nPRS. In another  example, the U.S. Citizenship and Immigration Service\u2019s Verification  Modernization program\u2019s entries for total historical expenditures through  fiscal year 2012 decreased by almost $240 million when comparing these  data from September 2013 and March 2014. Figure 3 shows the  differences in reported expenditure data in nPRS for the Fast Response  Cutter and Verification Modernization programs.\nLarge nPRS discrepancies such as these call into question the reliability  of the underlying data and whether DHS management has the information  it needs to provide oversight of major acquisition programs. PARM  officials have acknowledged ongoing issues with the data reported in  nPRS and noted that they are working to improve its quality. For example,  PARM provides a working group to the components to express their  views on the nPRS system and its processes. However, PARM officials  stated they do not have a mechanism to hold the programs accountable  for updating their data. Component and program officials told us that they  do not use nPRS for program management\u2014even though that was one  intended purpose of the system\u2014because the system is difficult to use  and does not meet their needs. For example, the OCIO National Capital  Region Infrastructure Operations program manager stated that his  program does not work with nPRS. For both September 2013 and March  2014, nPRS data fields for this program that were to be used to populate  the fiscal year 2014 CASR, such as the program description and last  acquisition review board date, were blank. Component and program  officials also stated that they use other internal tools, such as  spreadsheets, presentations, or project software for program  management purposes and to maintain current information. PARM has  not undertaken an effort to ascertain the root causes of why program  managers are not populating nPRS as required. As we have previously  reported, to be useful, performance information must meet users\u2019 needs  for completeness, accuracy, consistency, timeliness, validity, and ease of  use. Unless DHS program managers consider nPRS to be a useful tool  for their own program management purposes, as intended, the problems  we found with inaccurate data are likely to persist.\n\n\t\tExtensive Adjudication Process Did Not Correct Inaccuracies for Reported Life-Cycle Cost Estimates\n\nTo further understand the reasons for program data inaccuracies in the  fiscal year 2014 CASR, we analyzed the steps that PARM undertakes as  part of an extensive adjudication process with the components regarding  the underlying nPRS data. We found that PARM\u2019s adjudication process  did not rectify key inaccuracies in the fiscal year 2014 CASR, specifically  regarding programs\u2019 life-cycle cost estimates. As a result, Congress may  not have received accurate program information. Prior to its release,  PARM conducts an extenstive adjudication process for the CASR  information, including reviews with program and various DHS  headquarters offices, in order to identify and address potential data  inconsistencies between the sources and draft report. This process began  in October after the close of the fiscal year and ended when the report  was published in March. We reviewed nPRS data from March 2014, the  date when PARM issued its fiscal year 2014 CASR (which is comprised  of fiscal year 2013 program data) to compare these data to what was  presented to Congress in the CASR. Figure 4 shows select elements of  the CASR development and adjudication process, along with our  assessment of those elements.\nThe fiscal year 2014 CASR reported on a total of 82 major acquisition  programs. For four of the nine major acquisition programs in our review,  we found discrepancies between the CASR and nPRS for life-cycle cost  estimate data after the adjudication process, which should have  reconciled such inconsistencies. As an example of these discrepancies,  both across nPRS and between nPRS and the CASR, life-cycle cost  estimates for two programs differed even though the estimates were  associated with the same source and date. Another program, the  Electronic Health Record System, had three different life-cycle values  ranging from approximately $60 million to $80 million, a difference of over  35 percent, with two of those values presented in the CASR. Our analysis  of the data inconsistencies indicated that it was unclear whether  congressional CASR recipients received accurate program cost  information because there was no way to confirm which estimate was  correct or what the different estimates represented. PARM officials stated  that they are changing their process for the development of the next  CASR, which they expect to issue with the President\u2019s fiscal year 2016  budget submission, in an effort to more effectively match their reported  data to nPRS. Table 3 highlights discrepancies between the CASR and  nPRS for life-cycle cost estimate data for the four programs that we  reviewed.\nFurther, PARM may have incorrectly included or excluded certain  programs in the CASR based on DHS\u2019s incomplete information on  program life-cycle costs. As we reported in 2014, unreliable cost  estimates have been an enduring challenge for DHS. PARM included  Level 1 and 2 programs from the MAOL in the CASR, as required, using  program life-cycle costs to determine program status. However, PARM  officials acknowledged that some programs\u2019 acquisition category levels  were incorrect in the CASR, and due to the lack of DHS approved life- cycle cost estimates, they would not know the scope of this issue. For  example, the CASR included program life-cycle cost estimate figures, but  did not indicate who approved these estimates (i.e., if they were approved  at the component or department level), or if anyone approved the  estimates at all. Because these cost figures may not accurately reflect the  actual life-cycle costs, programs may have been inappropriately included  or excluded from the CASR and ultimately not receive the appropriate  level of congressional oversight.\nWe also found areas where additional explanation in the CASR would  have been helpful. For example, PARM listed the Electronic Health  Record System program in the CASR as a Level 2 program, while its  reported life-cycle cost estimate of approximately $70 million would  designate it a Level 3 program. PARM is not required to include Level 3  programs in the CASR. Electronic Health Record System officials  explained that the program was listed as Level 2 because DHS  management designated it as a \u201cspecial interest\u201d program in the MAOL,  which did make it eligible for inclusion in the CASR, but PARM did not  include this rationale in the CASR.\nIn addition, program officials stated that the inflexibility of nPRS may  prevent the department from providing accurate program information in  the CASR. For example, officials from the National Protection and  Programs Directorate\u2019s Next Generation Network-Priority Service noted  difficulties in accurately reporting data on their program\u2019s increments in  nPRS. The officials stated that the program has multiple increments, each  with its own set of acquisition decision events. However, the program  reported one overall life-cycle cost estimate in nPRS, even though it has  estimates for each increment, because the system does not allow for the  inclusion of multiple estimates. Officials ultimately provided explanatory  comments in nPRS that noted the increment 1 estimate included only  acquisition costs while not specifying who approved the estimate, and  that PARM approved the increment 2 estimate in July 2013. Because  these incremental estimates were at different stages in their development,  combining them into a single estimate in nPRS, which PARM ultimately  reported in the CASR, did not provide Congress with an accurate picture  of the program\u2019s costs.\n\n\t\tDHS Did Not Provide Most Useful Information on Program Risks and Other Requirements for the CASR\n\nOf the 13 CASR reporting requirements, DHS provided insufficient  information for in-depth oversight for four of them, and in one case, DHS  did not comply with a reporting requirement. The first reporting  requirement was a rating of cost risk, schedule risk, and technical risk  associated with the program. PARM fulfilled this requirement by reporting  programs\u2019 top-five cost, schedule, and technical risks, instead of separate  ratings for each. However, this reporting was inconsistent. Programs  submitted these risks through DHS\u2019s Investment Management System,  but this system can contain more than five risks. As a result, program  officials stated that they did not know how PARM selected their top-five  risks for inclusion in the CASR. For example, the Strategic Air and Marine  Program listed nine risks in the system, but PARM only reported two risks  in the CASR. Further, the risk reporting in this section varied across the  programs in our review. For example:\nThe Verification Modernization program had five risks, all of which  were technical.\nThe Technology Infrastructure Modernization program used four  of its own risk categories, which do not track to the required cost,  schedule, and technical risks: reliability of systems; dependencies  and interoperability between this investment and others; security;  and business.\nThe inconsistent risk reporting in this section prevents Congress from  making cost, schedule, and performance comparisons across DHS  programs.\nIn addition, as part of a separate requirement for independent verification  and validation, PARM evaluated the overall risk of each program,  assigned each a numerical risk score, and published these scores in the  CASR. PARM officials computed these risk scores using a set of  weighted criteria. However, component and program officials told us that  they did not know how PARM evaluated the risk scores for their  respective programs. PARM, component, and program officials have  acknowledged that the CASR did not accurately reflect the cost,  schedule, and performance risks associated with the programs. PARM  officials were unable to provide us with the supporting data used to  generate the scores because they did not store this information in nPRS.  As a result, we were unable assess how PARM computed these scores  or determine the extent to which PARM\u2019s evaluation accurately reflected  program risks.\nDue to PARM\u2019s inability to provide us with supporting data, we reviewed  the Science and Technology Directorate\u2019s National Bio and Agro-Defense  Facility program\u2019s risk assessment in the CASR and found it lacked  details that could be useful to Congress and DHS management. PARM  gave the program a high risk score, in part, due to the lack of DHS  approval for the program\u2019s acquisition documents. A program official  stated, however, that the documents could not go forward for DHS  approval due to the program\u2019s lack of funding. The CASR did not contain  any clarifying explanation for the documents not being approved. Further  complicating the issue, the program\u2019s nPRS data in September 2013  conflicts with its CASR entry, and showed program documents approved  by DHS as early as 2009. Discrepancies such as this call into question  the value of the information DHS is providing to Congress in the CASR.  To gain more visibility into the reasons for these inconsistencies, we  reviewed the source documents for the National Bio and Agro-Defense  Facility program, provided to us by PARM, and found that the approval  dates for five out of six documents do not match what was listed in either  nPRS or the CASR. Table 4 compares the National Bio and Agro- Defense Facility program\u2019s reported document status according to nPRS  as of September 2013 and the CASR issued in March 2014, and the  source documents provided by PARM.\nIn another example, in PARM\u2019s risk assessment of the Federal  Emergency Management Agency\u2019s Risk Mapping, Assessment and  Planning program, the CASR stated that the program was covered by the  USM\u2019s waiver of acquisition documents requirements and thus did not  include certain program data. However, an examination of nPRS showed  that, according to the system, the program had key documents, including  a mission needs statement and an acquisition program baseline approved  by DHS, which PARM did not list in the CASR and which could have  provided further information to decision makers.\nA second CASR reporting requirement was a program\u2019s planned  procurement schedule, including an estimate of the quantity to be  procured annually until completion. PARM did not comply with this  requirement. Instead, PARM provided the top-five contracts by dollar  value for each program, but these entries did not include procurement  quantity information for the programs. Some programs did report total  procurement quantities, but did not link these units to a schedule. PARM  officials noted that certain programs are not well-suited for reporting  procurement quantities, such as IT programs. However, in such cases,  the CASR should explain why no procurement quantities were listed.\nA third requirement was the reason for any significant changes in a  program\u2019s acquisition cost, quantity, or schedule from the prior annual  CASR. PARM officials interpreted these changes to only be those that  resulted in the submission of a new acquisition program baseline.  According to DHS acquisition policy, programs need to submit new  baselines when they breach defined cost, schedule, and performance  parameters defined in their original baseline. However, programs can  experience cost, quantity, or schedule changes that do not require a new  baseline. For example, the National Bio and Agro-Defense Facility  program experienced a delay in its construction schedule. While this  program\u2019s baseline remains in place, the construction delay could impact  on-time delivery of the facility and is an example of a significant change  that could be reported in this section. In addition, the CASR included 38  programs without an approved acquisition program baseline; according to  PARM\u2019s guidance, the CASR would not include any cost, schedule, or  performance changes for these programs. By defining programs\u2019  significant changes as those that resulted in new baselines, PARM  eliminated the need to report on any cost, schedule, or performance  changes for almost half of the programs in the CASR, thereby limiting the  information available to Congress.\nFinally, we found that PARM did not include certain key program events  in the CASR, such as acquisition decision events or full operating  capability schedules. Such data, in addition to the acquisition program  baseline approval dates that PARM currently reports, would have  provided Congress with more robust information about the program  status. Table 5 lists these four CASR requirements and our assessment  of the information reported.\n\n\tConclusions\n\nEffective, on-going oversight of DHS\u2019s broad portfolio of programs is  essential to ensure that programs are accountable for their performance  and that Congress and DHS decision makers receive useful, accurate,  and up-to-date information. DHS has improved aspects of its acquisition  management in recent years, including dedicating additional resources to  acquisition oversight and clarifying the roles of CAEs.\nDHS could further enhance its oversight efforts by providing written roles  and responsibilities to oversight officials within PARM and among  headquarters organizations. Furthermore, a consistent, defined approach  to oversight could limit overlap of responsibilities and give DHS more  insight into whether its acquisition programs are executing according to  cost, schedule, and performance goals.\nLikewise, as DHS acquisition programs move into the sustainment phase,  their costs continue to require monitoring. The USM\u2019s waiving of  documentation requirements for the 42 programs in sustainment in 2013  resulted in a lack of oversight of costs for these programs. As of yet, no  DHS office has been designated to take over monitoring those programs\u2019  operations and maintenance costs. Without an identified oversight body,  DHS lacks insight into those programs\u2019 performance and the execution of  their funding, which could potentially be billions of dollars. This is  particularly of concern given that only one program had an approved cost  estimate at the time of the waiver.\nFinally, DHS has not effectively communicated program status to  Congress through the CASR because it has provided out-of-date and  inaccurate information. Programs do not consistently report their own  data in nPRS, and components are not validating the information.  Although PARM\u2019s adjudication process may address some data issues,  data are not corrected in the source systems before being published in  the CASR. Further, while PARM has some flexibility in the implementation  of the CASR reporting requirements, in one case the requirement was not  met. In other cases, such as PARM\u2019s assessment of program risks, there  are opportunities for more transparency and clarity in the information  being transmitted to Congress. Holding programs accountable for  maintaining their cost, schedule, and performance data, and presenting  contextual information would help make the CASR a more effective  instrument for DHS and congressional oversight.\n\n\tRecommendations for Executive Action\n\nIn order to help ensure consistent, effective oversight of DHS\u2019s acquisition  programs, we recommend the Secretary of DHS take the following five  actions:\nDirect PARM to develop written guidance that defines roles and  responsibilities of its component leads.\nDirect the USM to:\nDevelop written guidance to clarify roles and responsibilities of  PARM and OCIO-EBMO for conducting oversight of major  acquisition programs.\nProduce operations and maintenance cost estimates for programs  in sustainment and establish responsibility for tracking  sustainment programs\u2019 adherence to those estimates.\nDetermine mechanisms to hold programs accountable for entering  data in nPRS consistently and accurately and to hold CAEs  accountable for validating the information. Also, evaluate the root  causes of why programs are not using nPRS as intended.\nTo make the CASR more useful, starting with the report reflecting  fiscal year 2015 program data, adjust the CASR to do the  following:\nReport an individual rating for each program\u2019s cost, schedule,\nReport a best estimate of procurement quantities or indicate  why this is not applicable, as appropriate;\nReport all programs\u2019 significant changes in acquisition cost,  quantity, or schedule from the previous CASR report by  determining a means to account for programs that lack  acquisition program baselines;\nReport major program events that are included in acquisition  program baselines, such as scheduled acquisition decision  events; and\nReport the level at which the program\u2019s life-cycle cost  estimate was approved.\n\n\tAgency Comments and Our Evaluation\n\nWe provided a draft of this product to DHS for comment. In its written  comments, reproduced in appendix III, DHS concurred with all five of our  recommendations and provided plans of action and estimated completion  dates for four of them. Regarding the remaining recommendation, that the  Secretary of DHS direct PARM to develop written guidance that defines  roles and responsibilities for component leads, DHS provided evidence  that is has complied with the recommendation, and we agree.  Specifically, DHS provided a Component Lead Handbook, signed on  February 13, 2015, while our report was out for comment, that provides  oversight roles and responsibilities and other guidance to PARM  component leads in their job to oversee component programs.\nDHS also provided technical comments that we incorporated into the  report as appropriate.\nAs agreed with your offices, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days from the  report date. At that time, we will send copies to the Secretary of DHS. In  addition, the report will be available at no charge on GAO\u2019s website at  http:\/\/www.gao.gov.\nIf you or your staff have questions about this report, please contact me at  (202) 512-4841 or mackinm@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 major contributions to this report are  listed in appendix IV.\n\nAppendix I: Objectives, Scope, and Methodology\n\nThe objective of this review was to assess the Department of Homeland  Security\u2019s (DHS) oversight of its major acquisition programs. Specifically,  this review focused on DHS\u2019s Office of Program Accountability and Risk  Management (PARM) and its day-to-day program oversight, rather than  the oversight it conducts at key points in the acquisition life cycle as  defined in policy. We assessed (1) steps DHS has taken to improve  oversight and what gaps, if any, exist and (2) whether the data PARM  provides to DHS and congressional decision makers to carry out their  oversight responsibilities on program cost, schedule, and performance  are accurate and up-to-date.\nTo answer these questions, we identified organizations within DHS, in  addition to PARM, that are responsible for oversight of major acquisitions  and determined their roles and responsibilities by analyzing DHS policies  and procedures, reviewing organizational charts, and interviewing policy,  budget, and acquisition oversight officials at the headquarters level.  Specifically, we reviewed DHS Acquisition Management Directive 102-01  (MD 102) and its associated guidebook\u2014DHS Instruction Manual 102-01- 001\u2014and the guidebook\u2019s 12 appendices. We reviewed draft updates to  DHS acquisition policy, as well as draft updates to departmental  instructions, such as Agile Development and Delivery for Information  Technology and the Systems Engineering Life Cycle Guidebook. We also  reviewed DHS acquisition memorandums, including the Secretary\u2019s April  2014 Unity of Effort memorandum; the Office of the Chief Procurement  Officer\u2019s Strategic Plan; information technology (IT) policies and  guidance, such as DHS Directive 102-04 on IT portfolio management and  the Office of the Chief Information Officer (OCIO) Portfolio Governance  Concept of Operations. At the department level, we interviewed officials  from PARM, OCIO\u2013Enterprise Business Management Office (EBMO),  Office of the Chief Procurement Officer, Office of Policy, and Office of the  Chief Financial Officer\u2013Office of Program Analysis and Evaluation and  Cost Analysis Division. In addition, we reviewed relevant GAO and DHS  Inspector General reports to provide context for all of our objectives.\nTo address our first objective, we selected nine DHS components with  responsibility for at least one Level 1 acquisition\u2014a program with a  reported life-cycle cost estimate exceeding $1 billion\u2014and interviewed  their Component Acquisition Executives (CAE) or designees. We  reviewed component-specific policies and procedures and charters for  program governance groups, as well as other relevant documentation.  The 2014 Master Acquisition Oversight List (MAOL) identifies Level 1  acquisition programs for the following nine components:\nFederal Emergency Management Agency\nNational Protection and Programs Directorate\nOCIO\nScience and Technology Directorate\nTransportation Security Administration\nU.S. Citizenship and Immigration Services\nU.S. Coast Guard\nU. S. Customs and Border Protection\nU.S. Immigration and Customs Enforcement  To collect examples of PARM\u2019s oversight and coordination activities at  the program level, we selected a non-generalizable sample of major  acquisition programs from each of the nine components. Table 6 lists the  nine programs we selected as case studies.\nWe selected programs that were included in the fiscal year 2014  Comprehensive Acquisition Status Report (CASR), which PARM  submitted to the House and Senate Appropriations Committees to provide  information on DHS major acquisition programs. To the extent possible,  we chose programs that have been identified as having \u201cconcerns\/issues\u201d  or as being \u201cmonitored closely\u201d in PARM\u2019s high visibility meetings, which  include DHS senior leadership. In order to assess acquisition oversight  across the spectrum of DHS programs, we selected case study programs  with a variety of characteristics. We chose a mix of Level 1 and Level 2  programs, as defined in the fiscal year 2014 CASR, and included both IT  and non-IT programs. One of our nine case study programs, the  Electronic Health Record System, was classified as a Level 2 program in  the fiscal year 2014 CASR, but listed as a Level 3 program on the 2014  MAOL. We chose this program in order to examine the reasons for the  change and to determine the extent to which oversight varies for major  and non-major acquisition programs. Another factor used to select the  case studies was program risk, as measured by CASR risk scores. Risk  scores are included in the CASR\u2019s independent verification and validation  section and are derived from PARM\u2019s rating of program risk using a  standard set of criteria. We chose programs to include a mix of both high  and low CASR risk scores. For these case studies, we reviewed relevant  program documentation, such as acquisition decision memorandums, and  interviewed program officials.\nFor the second objective, we collected and reviewed data from DHS\u2019s  official system of record for its acquisition programs, the Next Generation  Periodic Reporting System (nPRS), and compared that data to the fiscal  year 2014 CASR. All major programs on DHS\u2019s MAOL are required to  report in nPRS. PARM then uses the program data in nPRS to help  generate its CASR.\nIn order to assess the data reliability of nPRS, we reviewed select  acquisition program data from nPRS and compared this data to the  information contained in the CASR. Specifically, we used nPRS reports  for each of the nine case study programs from the end of fiscal year 2013,  when PARM pulled the program data from the system to begin generating  the fiscal year 2014 CASR. We then compared the data from those  reports to the issued CASR, as well as to the nPRS program reports from  March 2014\u2014the date that PARM released the CASR. The comparison of  those three sets of information allowed us to note discrepancies, including  missing data or outliers, between the system data and the issued data, as  well as if corrections were made to the system data following the release  of the report.\nWe assessed various data elements from the nPRS program reports that  are used to generate the information contained in the CASR. We  reviewed data across a range of tabs contained in the nPRS program  reports such as general information, Acquisition Review Board history,  program status, budget and funding, acquisition program baseline  milestones, risk, and key documents. For each of the nine case study  programs, we assessed reports from the end of fiscal year 2013, as well  as March 2014, for a total of eighteen program reports. In addition, we  reviewed documents, such as the nPRS user manual and policies related  to data entry, and interviewed agency officials responsible for inputting  and reviewing the nPRS data.\nWe determined that the nPRS data were not sufficiently reliable for our  purposes; however, we present the data for illustrative purposes only. For  example, for certain programs in our review, current and historical  expenditure data was missing. Another example from our analysis  showed differences in the life-cycle cost estimates for certain programs in  nPRS compared to those reported in the CASR. While the Under  Secretary for Management (USM) issued a memorandum that programs  are to update their nPRS data monthly, PARM officials recognized that  this does not happen consistently, and they acknowledged that there are  data accuracy issues with nPRS. In addition, when officials made updates  or changes to program-reported information due to the pending release of  the CASR, the programs were responsible for entering these updates or  changes into nPRS. Our analysis confirmed that certain programs in our  review did not update nPRS after going through the CASR reporting  process.\nIn order to evaluate the effectiveness of nPRS and the CASR as tools for  DHS management and congressional oversight, we first reviewed the  Department of Homeland Security Appropriations Act, 2014, which  established the provision for the USM to submit the CASR with the  President\u2019s budget proposal for fiscal year 2015. In addition, we reviewed  Conference Report 112-331 for the Consolidated Appropriations Act,  2012, which contained the information requirements for inclusion in the  CASR. We then compared the data from nPRS for the nine case study  programs to that presented in the fiscal year 2014 CASR to determine  discrepancies between the two for certain data elements. We further  compared the CASR information to PARM policies and procedures, such  as the MAOL and MD 102. In order to review the CASR\u2019s independent  verification and validation requirement, we asked PARM officials for  supporting documentation for how they generated their independent  verification and validation evaluations, but they were unable to provide  the documentation because they did not store it in nPRS. Finally, we  assessed the information the CASR either did or did not provide  compared to its congressional reporting requirements. We conducted this  assessment based on the CASR\u2019s congressional reporting requirements,  DHS policies, and acquisition practices.\nWe conducted this performance audit from March 2014 to March 2015 in  accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.\n\nAppendix II: Department of Homeland Security Acquisition Programs in Sustainment Exempt From Documentation Requirements\n\nTable 7 below identifies 42 acquisition programs for which the  Department of Homeland Security\u2019s (DHS) Under Secretary for  Management waived documentation requirements in a May 2013  memorandum. These programs were already in sustainment prior to  2008, meaning that they were in the last phase of their acquisition life  cycle, when DHS issued MD 102. Programs in sustainment have been  developed and delivered to their respective components for operation and  maintenance through disposal. The memorandum stated that it would be  cost prohibitive and inefficient for these programs to recreate the  documentation called for under the directive for their previous acquisition  life-cycle phases.\nTable 8 below identifies seven additional major acquisition programs in  sustainment for which DHS waived documentation requirements on the  2014 Master Acquisition Oversight List. The Master Acquisition Oversight  List stated that having programs provide documents for their previous  acquisition life-cycle phases would be costly and provide no positive  performance impact for systems already delivered.\n\nAppendix III: Comments from the Department of Homeland Security\n\nAppendix IV: GAO Contact and Staff Acknowledgments\n\n\tGAO Contact\n\n\tStaff Acknowledgments\n\nIn addition to the contact named above, Katherine Trimble, Assistant  Director; Leigh Ann Haydon, Analyst-in-Charge; Stephen V. Marchesani;  Alexis Olson; Sarah Marie Martin; and Daniel Hilger made key  contributions to this report. Peter W. Anderson, Jean L. McSween, Ozzy  Trevino, and Alyssa Weir also provided assistance.","output":"Why GAO Did This Study\n\nIn fiscal year 2014, DHS reported it planned to spend approximately $10.7 billion on its major acquisition programs. DHS acquires systems to reduce the probability of a terrorist attack, protect against disease, mitigate natural hazards, and secure borders. Partially in response to GAO recommendations, the department has taken steps to improve acquisition management in recent years, but has not yet implemented many of these recommendations.\nGAO was asked to review DHS's oversight of its major acquisition programs. This report addresses (1) steps DHS has taken to improve oversight and gaps that exist, if any, and (2) whether the data PARM provides to DHS and congressional decision makers are accurate and up-to-date.\nGAO reviewed DHS policies and procedures and interviewed oversight and acquisition officials from all nine DHS components with at least one major acquisition program with a life-cycle cost estimate exceeding $1 billion. From these components, GAO selected a non-generalizable sample of nine major acquisition programs with a variety of characteristics to compare PARM oversight activities and review program data.\n\nWhat GAO Found\n\nThe Department of Homeland Security (DHS) has taken steps to improve oversight of major acquisition programs, but it lacks written guidance for a consistent approach to day-to-day oversight. Federal Standards for Internal Control call for organizations to define and document key areas of responsibility in order to effectively plan, direct, and control operations to achieve agency objectives. DHS has defined the role of the Component Acquisition Executive, the senior acquisition official within each component, and established monthly meetings to discuss programs that require management attention. However, DHS has not defined all of the roles and responsibilities of the Office of Program Accountability and Risk Management (PARM)\u2014the lead body responsible for overseeing the acquisition process and assessing the status of acquisition programs\u2014and other headquarters organizations. GAO also found that officials' involvement and relationships with components varied significantly. DHS does not have a structure in place for overseeing the costs of 42 programs in sustainment (that is, programs that have been fielded and are operational) for which acquisition documentation requirements were waived in 2013. Sustainment costs can account for more than 80 percent of total costs, and all but one of these programs lack an approved cost estimate. GAO also previously reported that cost estimates are necessary to support decisions about program funding and resources.\nThe most recent data that PARM provided to DHS and congressional decision makers for oversight were not consistently accurate and up-to-date. Specifically, PARM's fiscal year 2014 Comprehensive Acquisition Status Report (CASR), which was based on fiscal year 2013 data, contained inaccurate information on DHS acquisition programs. To develop the CASR, PARM drew from DHS's official system for acquisition program reporting, the Next Generation Periodic Reporting System (nPRS); however, the system is hampered by data issues, including inconsistent participation by program officials responsible for entering the data. Further, DHS has not provided useful information for certain CASR reporting requirements. DHS interpreted one requirement in a way that eliminated the need to report cost, schedule, or performance changes for almost half of the programs in the CASR. Holding programs accountable for maintaining their data in nPRS and providing decision makers with more in-depth information would enhance future acquisition reports and render the CASR a more effective instrument for DHS and congressional oversight.\nGAO Assessment of the DHS Comprehensive Acquisition Status Report Development Process\n\nWhat GAO Recommends\n\nGAO recommends that DHS take a number of actions including developing written guidance for a consistent approach to oversight, addressing programs in sustainment, and enhancing data quality and reports to Congress. DHS concurred with GAO's recommendations."}
{"id":"gao_GAO-17-259","pid":"gao_GAO-17-259_0","input":"\tBackground\n\nCredit unions can be federally or state-chartered, which determines their  primary regulator for safety and soundness and also their options for  deposit insurance. Federally chartered credit unions are regulated by  NCUA and must be federally insured by the National Credit Union Share  Insurance Fund, which is administered by NCUA and provides up to  $250,000 of insurance per depositor for each account ownership type.  State-chartered credit unions are usually regulated by credit union  supervisors in their respective state. These credit unions can be federally  insured (and thus also supervised) by NCUA or, in some states, can  choose to be privately insured. As of February 2017, ASI was the only  company providing private primary deposit insurance. ASI provides up  to $250,000 of insurance per account (rather than per depositor for each  ownership type, as with NCUA). Deposit insurance covers deposit  products such as checking and savings accounts, money market deposit  accounts, and certificates of deposit. It does not cover other financial  products, such as investments in stocks, bonds, or mutual funds.\n\n\t\tOverview of Credit Union and Deposit Insurance Markets\n\nThe vast majority of credit unions are federally insured. As seen in figure  1, in 2015, there were more than 6,000 federally insured credit unions  with more than $1 trillion in insured deposits, and 125 privately insured  credit unions with $13 billion in insured deposits.\nThe mix of asset sizes is largely similar for federally and privately insured  credit unions, and the majority of both have assets of less than $100  million. Between 2011 and 2015, the number of federally and privately  insured credit unions declined by about 15 percent, due largely to  mergers and liquidations. Some credit unions chose to convert between  private and federal deposit insurance and appendix II contains  information about the reasons that some credit unions switch insurers.\n\n\t\tAmerican Share Insurance\n\nASI is a private, not-for-profit company, headquartered in Ohio. The  company is governed by Ohio law and licensed by the Ohio Department  of Insurance, and its primary regulators are the Ohio Departments of  Insurance and Commerce, although regulators in the other eight states in  which ASI operates also have an oversight role. ASI has provided  deposit insurance since 1974 and the company is owned by the credit  unions for which it provides deposit insurance. The company does not  normally charge premiums, which are common in the insurance industry,  but instead requires its credit unions to maintain a capital contribution with  the company, adjusted annually, equal to a rate of 1.3 percent of the  credit union\u2019s total insured deposits. In addition, ASI has the authority to  charge special premium assessments under certain conditions with  regulator approval, as it did in 2009\u20132013.\nASI is overseen by a board of directors that is made up of six chief  executives from the credit unions it insures, as well as one ASI  management representative. Quarterly, according to ASI management,  ASI\u2019s board of directors meets to review and monitor the company\u2019s  financial statements, investment activities, risk management practices,  information technology issues, and sales and marketing activities. An  independent auditor annually audits and renders an opinion on ASI\u2019s  consolidated financial statements prepared in accordance with generally  accepted accounting principles. Additionally, ASI retains an independent  actuarial firm to conduct a capital adequacy study (at least every 3 years),  annually review and help estimate loss reserves, and render an annual  actuarial opinion on the adequacy of its loss reserves.\n\n\t\tFederal Law and Regulation I\n\nFederal law requires that any depository institution that does not have  federal deposit insurance clearly and conspicuously disclose that the  institution is not federally insured. CFPB and the Federal Trade  Commission (FTC) are the federal entities responsible for enforcing these  requirements. In December 2011, CFPB issued an interim final rule  restating the implementing regulation, which had been promulgated by  FTC. This regulation, known as Regulation I, contains the disclosure  requirements for credit unions that do not have federal deposit insurance.  CFPB published a final rule in April 2016, which adopted its 2011 interim  final rule without changes.\nRegulation I requires disclosure that an institution does not have federal  deposit insurance (1) at locations where deposits are normally received  (stations or windows) except enumerated exceptions, (2) on the  institution\u2019s main Internet page (website), (3) in all advertising except  enumerated exceptions, and (4) in periodic statements and account  records. Regulation I generally requires depository institutions to obtain  a written acknowledgment from depositors that the institution does not  have federal deposit insurance.\n\n\t\tFAST Act and Federal Home Loan Bank System\n\nThe FAST Act amended the Federal Home Loan Bank Act to permit  privately insured credit unions to apply for membership in a Federal  Home Loan Bank (FHLBank) and, if approved, obtain the benefits of  membership, including access to loans (known as advances). The  FHLBank System is a government-sponsored enterprise, composed of 11  regional banks. Federally insured credit unions have been allowed to  apply for membership since 1989; other members of the FHLBank  System include commercial banks, thrifts, and insurance companies.  The FHLBank of Cincinnati approved ASI as a member in June 2011.\nThe Federal Housing Finance Agency (FHFA) regulates the FHLBanks  and issued a proposed rule in September 2016 to implement provisions of  the FAST Act. By law, certain types of prospective FHLBank members  must have at least 10 percent of their assets in residential mortgage loans  to be eligible. As of December 31, 2015, FHFA estimated that 78 of the  125 privately insured credit unions met this eligibility criterion. As of  December 31, 2016, the FHLBanks had approved 16 privately insured  credit unions for membership.\n\n\tRegulatory and Other Assessments Indicate ASI Has Had Adequate Reserves and Strong Claims- Paying Ability\n\n\t\tRegulators Have Not Cited Concerns about ASI\n\nThe Ohio Department of Insurance\u2019s most recent examination of ASI,  which covered 2008\u20132012, did not identify any deficiencies in ASI\u2019s  financial condition and determined that ASI\u2019s reserves for losses were  consistent with Ohio\u2019s legal requirements and were adequate and  appropriate. According to Ohio Department of Insurance staff, the  department has not identified any issues and was not aware of any  problems with ASI\u2019s loss reserves in at least the past 10 years. They  noted that ASI is classified as a nonpriority insurer by the department,  which means that the company is considered low-risk and does not  require enhanced oversight. This determination was based on factors  such as ASI\u2019s Insurance Regulatory Information System (IRIS) ratios and  management competency. As a result of this classification, the  department conducts full-scope examinations of ASI every 5 years, rather  than annually or every 3 years as conducted for insurers deemed riskier.\nOhio Department of Insurance staff told us that as part of their full-scope  examinations every 5 years, the examination team reviews ASI\u2019s audited  financial statements, analyzes estimates for loss reserves, and evaluates  any risks to the company by reviewing legal issues, corporate  governance, and management. In particular, the department\u2019s actuary  performs an analysis of ASI\u2019s information to derive the department\u2019s own  estimate for ASI\u2019s loss reserves. The department compares its derived  estimate to ASI\u2019s held reserves, as well as to the range of estimates  reported by ASI\u2019s third-party actuarial firm. Staff said that if the  department were to identify significant differences in the estimates, it  would request additional information from ASI to understand the reasons  for the differences. Additionally, the department uses the IRIS ratios to aid  in evaluation of the adequacy of ASI\u2019s loss reserves. According to  representatives from the National Association of Insurance  Commissioners (NAIC), the procedures the department uses for  assessing ASI\u2019s capital, including its loss reserves estimates, are  consistent with NAIC\u2019s guidelines for conducting such assessments.\nOhio Department of Insurance staff also told us that on an annual basis  they review the statement of actuarial opinion of ASI\u2019s loss reserve  estimates (as rendered by the third-party actuarial firm and discussed  later in this report) and ASI\u2019s audited financial statements, and also  compute financial ratios. According to the staff, as part of this review,  analysts review ASI\u2019s capital position and monitor ASI\u2019s asset quality to  ensure they did not deteriorate significantly in a given period. Under Ohio  law, ASI is required to maintain at least $5 million in capital, and as of  December 31, 2015, ASI\u2019s capital was roughly $219 million. In addition,  Ohio Department of Insurance staff said they consider any risks that  could affect ASI\u2019s financial condition. For example, they said they  evaluate risk in terms of growth, underwriting, how the company invested  its assets, and any legal concerns. In addition, the department analyzes  the risk-based capital ratio. They also said that a company\u2019s risk-based  capital ratio must be at least 200 percent of its calculated authorized  control level risk-based capital. From 2009 through 2015, according to  examination records from the Ohio Department of Insurance, ASI\u2019s risk- based capital ratio was well above this standard. Ohio Department of  Insurance staff told us that ASI management is very transparent about  disclosing risk that new credit unions may pose to the company. The staff  said that they engage in quarterly discussions with ASI management  about the company\u2019s quarterly financial statements and the credit unions  for which ASI is considering providing deposit insurance coverage.\nOhio Department of Insurance staff said that their concern with ASI, as  with any insurer, generally has been the risk posed by macroeconomic  issues. For example, they stated fluctuations in the economy could pose  significant concerns for insurers such as ASI. Therefore, a decline in the  economy could have a significant (negative) impact on a company like  ASI. The staff further noted that while the frequency of claims for losses  for ASI would be low, the severity of such losses could potentially be high,  which could pose a risk to the company. According to ASI management,  roughly 2 percent of its privately insured credit unions failed during or  since the 2007\u20132009 financial crisis (as compared to roughly 2 percent of  federally insured credit unions, according to NCUA). In 2009, ASI  reported that almost all of its loss expense was related to just two of its  insured credit unions, both in Nevada. One of these credit unions merged  with another. The second troubled credit union had approximately $1  billion in total assets when it received assistance from ASI. Department  staff told us that during and just after the financial crisis, they monitored  ASI more frequently and met monthly with ASI management to discuss  the company\u2019s exposures and potential losses, but the department never  determined there was a need to conduct an additional full-scope  examination.\nIn addition to the Ohio Department of Insurance\u2019s oversight, the Ohio  Department of Commerce annually performs a risk-based safety and  soundness examination of ASI in collaboration with the eight other state  credit union supervisors that regulate privately insured credit unions.  However, the Ohio Department of Commerce could not share with us the  results of these examinations because, as interpreted by the department,  it is prohibited by law from providing details about its examination findings  to third parties other than those specified in the regulations. According  to Ohio Department of Commerce staff, their annual safety and  soundness examination of ASI focuses on risk areas similar to those  reviewed during the examination of a credit union. As a part of this  process, the Ohio Department of Commerce reviews ASI\u2019s audited  financial statements, statement of actuarial opinion, and reports from  ASI\u2019s internal system used to monitor insured credit unions. Ohio  Department of Commerce staff told us that on a quarterly basis,  examiners review quarterly financial statements and monitor any troubled  credit unions that ASI insures.\nAs well as participating in the Ohio Department of Commerce\u2019s annual  examination of ASI, the eight other state credit union supervisors told us  that they monitor ASI\u2019s financial condition on an annual or quarterly  basis. This process generally involves a review of ASI\u2019s annual audited  or quarterly unaudited financial statements and its actuarial reports. None  of the eight state supervisors with whom we spoke raised concerns about  ASI\u2019s financial condition at the time of our review. But one state credit  union supervisor expressed concern that during volatile economic times,  ASI might not be able to cover losses once it had exhausted its capital  because ASI is not backed by the full faith and credit of the U.S.  government and has no access to state guaranty funds. According to the  National Conference of Insurance Guaranty Funds\u2014whose funds provide  protection for various property and casualty lines of insurance written by  its member insurers\u2013\u2013private deposit insurers are not covered.  Additionally, representatives from the state credit union supervisors also  told us that none of the states in which ASI operates, including Ohio, had  a state guaranty fund to assist in covering losses or credit union member  deposits if ASI ran into financial difficulties. However, in the event of  potential impairment of ASI\u2019s funding, Ohio law allows ASI to charge a  special assessment, with regulator approval, against the credit unions it  insures.\nMoreover, FHFA reviews information about ASI as part of its oversight of  the FHLBanks. As noted earlier, ASI is a member of the FHLBank of  Cincinnati and bank representatives told us that they monitor ASI\u2019s  financial condition by reviewing ASI\u2019s annual audited financial statements,  statutory quarterly financial filings, and reports on ASI\u2019s loss reserves.  FHLBanks protect against credit risk on advances by requiring members  to pledge collateral. Representatives from the FHLBank of Cincinnati told  us ASI, like all FHLBank members (including privately insured credit  unions), must pledge collateral to receive advances. According to FHFA  staff, while FHFA may review ASI information as part of its supervision of  FHLBanks, FHFA has no supervisory authority over ASI and no plans to  independently assess the company\u2019s financial condition. The FAST Act  does require ASI to provide FHFA a copy of its annual audit. The audit  must be conducted by an independent auditor and must include an  assessment by the auditor that ASI follows generally accepted accounting  principles and has set aside sufficient reserves for losses. This FAST Act  requirement allows FHFA to review the independent auditor\u2019s opinion to  confirm that ASI has met these requirements. FHFA staff told us FHFA  planned to use the ASI audited financial statements to prepare for its next  annual examination of the FHLBank of Cincinnati.\nASI has several processes in place to mitigate risk and help prevent and  control losses to the company. ASI management told us that applicant  credit unions undergo an insurability assessment that includes a review of  the credit union\u2019s financial data, corporate governance, and CAMEL  rating, and an evaluation of its operating policies and procedures.  Additionally, the company continuously monitors the financial condition of  the credit unions the company insures. ASI management said that  quarterly they compare their credit unions against federally insured credit  unions in terms of capital adequacy, earnings, and liquidity. The company  conducts an examination of about 70 percent of its credit unions annually,  and the rest on a 2\u20133 year cycle. ASI management noted that they  conduct most of their examinations jointly with state credit union  supervisors. For credit unions with at least $100 million in assets, ASI has  a process of enhanced monitoring, which includes quarterly reviews, as  well as on-site reviews annually or semiannually. As needed, ASI can  issue a corrective action, such as advancing funds to an insured credit  union on a short-term basis to aid in the credit union\u2019s liquidity needs.\n\n\t\tIndependent Actuarial Reviews Found That ASI Had a Strong Financial Ability to Pay Claims under Different Scenarios\n\nASI retains an independent actuarial firm to conduct analyses for the  company. The actuarial firm conducts a study of the adequacy of ASI\u2019s capital every 3 years, which looks at  the company as a whole and its ability to pay present and future  claims for losses experienced by the credit unions it insures, under  different economic scenarios; and an annual study of ASI\u2019s loss experience to help estimate loss  reserves and render an annual statement of actuarial opinion on the  adequacy of its loss reserves.\n\n\t\t\tCapital Adequacy\n\nThe four most recent capital adequacy studies, which covered calendar  years 2009\u20132015, indicated that ASI\u2019s ability to pay claims was strong.  The 2010 capital adequacy study\u2014conducted near the end of the  financial crisis\u2014indicated ASI\u2019s ability to pay claims was strong, but it  also reported that ASI\u2019s ability to pay claims had decreased. For the  most recent capital adequacy study, the actuarial firm\u2019s analysis found  that ASI\u2019s ability to pay claims was strong under each of three economic  scenarios (expansion, recession, and depression). For example, the  actuarial firm estimated the probability that ASI could withstand a 1-year  and 5-year recession as 99.7 percent and 97.3 percent, respectively.  According to staff from the actuarial firm, the capital adequacy study  serves as a financial model to assist ASI management in its decision  making. They noted ASI\u2019s management is as important as the study\u2019s  findings because even with adequate capital, a company could fail based  on mismanagement or fraud, which cannot be modeled.\nAccording to staff from the actuarial firm, ASI could face difficulty paying  claims for losses if one or more of its largest credit unions were to suffer  severe losses. The firm reported that as of December 31, 2015, ASI had  $218 million in assets (cash and investments) readily available to pay  claims, but as of year-end 2015, 14 of its credit unions each had more  than that amount in total insured deposits. However, the actuarial staff  told us they factored this risk into their analysis and that the larger the  credit union (by asset size), the smaller the probability of a severe loss  (expressed as a percentage of the credit union\u2019s total assets).\nAdditionally, the actuarial firm analyzed the capital adequacy of ASI\u2019s  wholly owned subsidiary, Excess Share Insurance Corporation, which can  affect ASI\u2019s financial condition because ASI offers it various funding  sources and a guarantee. The actuarial firm\u2019s 2016 study showed the  subsidiary\u2019s ability to pay claims under the three economic scenarios was  strong. ASI management told us they believe the risk posed by its  subsidiary to be small, and that multiple adverse events would have to  occur simultaneously for it to impair ASI\u2019s financial condition. To transfer  some of this risk, the subsidiary carries a reinsurance policy for its excess  insurance line of business.\nThe actuarial studies also noted that ASI has other sources of funding to  help pay claims, including special assessments, lines of credit, and  increases to the capital contribution rate it charges. For example, during  and after the 2007\u20132009 financial crisis, ASI (1) charged its insured credit  unions a special premium assessment each year in 2009\u20132013; (2)  borrowed $22 million from its line of credit to pay initial claims in 2009  (which according to ASI management was repaid in full within 6 months);  and (3) increased the credit unions\u2019 capital contributions rate in 2010,  from a rate ranging between 1 percent and 1.3 percent to a rate of 1.3  percent of total insured deposits, which ASI management told us  enhanced the company\u2019s capital adequacy.\n\n\t\tLoss Reserves\n\nEach of the actuarial firm\u2019s annual loss reserve studies conducted during  2011\u20132015 found that ASI\u2019s reserves for losses were reasonable and  consistent with amounts computed based on actuarial standards of  practice, and met the requirements of Ohio insurance laws. ASI  maintains a reserve for losses to cover its estimated unpaid liability for  reported and unreported loss claims. To assist management with its  determination of loss reserves, the actuarial firm annually analyzes ASI\u2019s  loss reserve experience and reviews the assumptions ASI uses to  determine its reserves for losses. The reserve studies identified some  potential risks\u2014for example, the possibility that some of ASI\u2019s credit  unions could cancel their deposit insurance coverage and withdraw their  capital contributions, which would reduce ASI\u2019s capital (but also reduce its  exposure to potential losses).\nIn its 2016 loss reserve study, the actuarial firm stated that it did not  believe that significant risks and uncertainties were present that could  result in material adverse deviation of ASI\u2019s loss reserves. The firm  based its conclusion on the presence of certain favorable factors that  offset the risks and uncertainties identified in previous years. These  factors included the low ratio of the company\u2019s held reserves to its capital,  and that ASI\u2019s held reserves were at the high end of the actuarially- determined range of reserves estimated to be reasonable. However, the  actuarial firm staff stated that the absence of such risks and uncertainties  did not imply that factors could not be identified in the future that could  have a significant influence on ASI\u2019s reserves.\n\n\t\tPrivately and Federally Insured Credit Unions Had Similar Regulatory Ratings, but Differed in Geographic and Deposit Concentration\n\nASI\u2019s risk profile depends in large part on the financial condition of the  privately insured credit unions that it insures. We reviewed the CAMEL  ratings (which regulators use to rate a credit union\u2019s performance and risk  profile) of privately insured credit unions, and compared them to those of  federally insured credit unions. We found that, in the aggregate,  privately and federally insured credit unions had similar CAMEL ratings  during 2006\u20132015. For example, as seen in figure 2, roughly the same  percentages of privately and federally insured credit unions were rated  satisfactory (CAMEL ratings of 1 or 2). For both groups, the percentage of  troubled credit unions (CAMEL ratings of 4 or 5) peaked in 2011 and then  declined. These similarities remained roughly the same (for both  satisfactory and troubled credit unions) when we reviewed the percentage  of assets in credit unions by CAMEL rating rather than percentage of  individual credit unions.\nFor further review, we also selected one indicator in each of five  categories\u2013\u2013capital adequacy, asset quality, loss coverage, profitability,  and liquidity\u2013\u2013regulators commonly use to assess the financial health of  credit unions. The median values for all of these indicators were similar  for privately and federally insured credit unions from 2011\u20132015.\nThe sizes of privately and federally insured credit unions also were  roughly similar. In 2015, the majority of insured credit unions had less  than $100 million in total assets (see table 1). For privately and federally  insured credit unions, respectively, the median total assets were roughly  $34 million and $27 million, and the median numbers of members were  roughly 4,300 and 3,200.\nHowever, our analysis shows that privately insured credit unions have  higher geographic and deposit concentration than federally insured credit  unions, which can present risks. Specifically,\nPrivately insured credit unions are much less geographically diverse  than federally insured credit unions because they operate solely in  nine states. Forty-two percent of ASI-insured credit unions are in Ohio  and an additional 30 percent are in Illinois (18 percent) and Indiana  (12 percent). This geographic concentration may create risks for ASI  because economic downturns are sometimes concentrated in  particular regions of the country. NCUA staff noted that previous  private deposit insurers have failed mostly as a result of severe  regional economic shocks (or in some cases a single major fraud).\nThe total insured deposits of privately insured credit unions are  concentrated in a much smaller number of credit unions than for  federally insured credit unions. In 2015, ASI\u2019s 2 largest credit unions  (by total assets) represented 15 percent of its total insured deposits,  and its 10 largest represented 54 percent of its insured deposits. In  comparison, NCUA\u2019s 10 largest insured credit unions (by total assets)  made up 15 percent of total insured deposits in 2015. This  concentration of insured deposits may be viewed as a risk to ASI  because, as discussed previously, ASI could face difficulty paying  claims for losses if one or more of its largest credit unions were to  suffer severe losses.\n\n\tCredit Unions We Reviewed Largely Complied with Disclosure Requirements, but Some Disclosure Provisions Lack Specificity\n\nPrivately insured credit unions we reviewed largely complied with  requirements to disclose that they are not federally insured. But a lack of  specificity in Regulation I provisions that relate to disclosure location  (drive-through windows), format (signage dimensions and font size), and  advertising (printed materials) may have contributed to some variations  we saw in compliance with disclosure rules.\nDisclosure signage at teller and drive-through windows. The 47  privately insured credit unions we visited were largely in compliance with  CFPB\u2019s requirement for disclosures at each station or window where  deposits are normally received. For example, 45 of the 47 credit unions  displayed a disclosure at teller windows. Of the two that did not display  signs at teller windows (both of which were small employer-based credit  unions), one had a disclosure on the front door and the other had a  disclosure on a bulletin board outside the credit union, but still within the  employer\u2019s building. However, 7 of the 17 credit unions we visited that  had drive-through windows did not have disclosures at the window (see  fig. 3). While Regulation I states disclosures are needed at each station or  window where deposits are normally received, it does not specifically cite  drive-through windows. In contrast, the regulation specifically excludes  certain other places of deposit from requiring the disclosure. For example,  it states that disclosure is not needed at automated teller machines or  point-of-sale terminals. CFPB staff told us that, in their view, a plain  reading of Regulation I would include a drive-through window as a  \u201cstation or window where deposits are normally received,\u201d and thus  require disclosure.\nWe also observed that the dimensions and font sizes of the disclosure  signage varied among credit unions, with some having signage too small  to be easily read, or not placed conspicuously. At 28 of 47 credit unions  we visited the signs measured smaller than 3 by 7 inches. The sign we  commonly observed measured 2-\u00bc inches by 4 inches, which is larger  than a business card, but smaller than an index card (see fig. 4).  Additionally, in more than half the credit unions we visited, we found the  font size of the disclosures was too small to be easily read when standing  at the teller window. Further, at 7 of 47 credit unions, disclosures were  placed where they were not easily noticed. For example, one was placed  on a windowsill across the room, another at a teller station covered with  other materials, and another at the bottom of an 8 by 10 inch sign  containing a lot of other information about the credit union\u2019s policies.\nCFPB does not provide official signage to privately insured credit unions  and Regulation I does not specify signage dimensions or font size  requirements. Instead, Regulation I states the disclosures must be \u201cclear  and conspicuous and presented in a simple and easy-to-understand  format, type size, and manner\u201d but does not provide definitions,  parameters, or illustrative examples of what would constitute simple and  easy to understand. By comparison, NCUA provides official signs to  federally insured credit unions to display at each station or window where  insured account funds or deposits are normally received. NCUA\u2019s  regulation notes credit unions should not alter the font size of the official  sign when used for this purpose. The sign itself, which measures 3 by 7  inches. can be ordered and downloaded from NCUA\u2019s website.\nDisclosures on websites. We also reviewed 102 privately insured credit  union websites and found that almost all of these websites complied with  CFPB\u2019s requirement to disclose on their main Internet page that the  institution is not federally insured. Three credit unions did not have the  disclosure on their main Internet page (each of the three had the  disclosure on a different page of its website). However, on many websites  (28 of 99) the disclosures were not easily seen or readable. For example,  the overall space the disclosure occupied or its placement next to or  between colorful or larger graphics made it difficult to notice the  disclosures in these cases. Additionally, we observed that more than half  the websites (60 of 99) used a font size that was smaller than that used  for the other text on the same webpage (see fig. 5).\nCFPB\u2019s Regulation I states that the website disclosures, like all other  required advertising and premises disclosures, should be \u201cclear and  conspicuous and presented in a simple and easy to understand format,  type size, and manner,\u201d but CFPB does not define these terms or specify  font size requirements for websites. In comparison, NCUA\u2019s regulation  for federally insured credit unions specifies that the disclosure must be in  a size and print that is clearly legible and no smaller than the smallest font  size used elsewhere.\nDisclosures in advertising (printed materials). On our visits to privately  insured credit unions we obtained printed materials (such as brochures,  promotional flyers, and newsletters which could be considered  advertisements), and 8 of the 36 credit unions from which we obtained  samples of printed materials had at least one item that did not contain a  disclosure. Regulation I states \u201call advertisements\u201d except those  specifically enumerated must disclose a lack of federal deposit insurance,  but the regulation does not define what constitutes an advertisement.  CFPB staff told us the agency does not have any guidance or  commentary on what constitutes \u201call advertisements.\u201d In comparison,  NCUA\u2019s regulation for federally insured credit unions defines advertising,  and also provides examples. In NCUA\u2019s regulation, an advertisement is \u201ca  commercial message, in any medium, that is designed to attract public  attention or patronage to a product or business.\u201d Furthermore, NCUA\u2019s  regulation specifies that advertising includes print, electronic, or  broadcast media, displays and signs, stationery, and other promotional  material.\nDisclosures in periodic statements, account records, and signature  cards. Representatives of all nine state credit union supervisors with  whom we spoke told us that privately insured credit unions were generally  compliant with the requirements to (1) disclose on periodic statements  and certain other account records a lack of federal deposit insurance, and  (2) obtain written acknowledgment from depositors on this lack of federal  insurance, as is generally required. The state credit union supervisors  said they checked a sample of periodic statements, account records, and  signature cards for new accounts as part of their routine examinations of  privately insured credit unions.\nReviews of compliance. Overall, compliance levels with disclosure  requirements have improved since our 2003 review of privately insured  credit unions, which included an assessment of their compliance with  federal disclosure rules. In 2003, we found that 36 of 57 credit unions  had the required disclosures on premises. Similarly, in 2003, 39 of 78  websites and 93 of 227 printed materials we reviewed had the required  disclosures.\nCFPB has not had any findings, observations, or evaluations regarding  privately insured credit unions\u2019 disclosures. CFPB staff told us the  agency has not received any complaints related to private deposit  insurance. CFPB staff said they have reviewed privately insured credit  unions\u2019 websites at a very informal level and the websites seemed to be  complying with Regulation I. As previously noted, CFPB shares  enforcement authority for Regulation I with FTC. CFPB staff told us that state credit union supervisors and attorneys general also have the  authority to enforce Regulation I, as necessary.\nThe state credit union supervisors in the nine states with privately insured  credit unions similarly told us that compliance with disclosure  requirements has not been a problem in recent years. They said that their  routine examinations of state-chartered credit unions check for  disclosures on premises, on websites, in advertising materials, and, as  noted earlier, by reviewing selected periodic statements, account records,  and signature cards. They said that if examiners observe  noncompliance with disclosure requirements, they cite it as an  examination finding and expect the credit union to promptly correct the  issue and display the proper signage or disclosure.\nWhile we generally found that compliance levels were high, Regulation I  may be interpreted and enforced differently by different credit unions and  state regulators. Without clarity on whether or not drive-through windows  are required to have disclosures, some credit unions may continue to not  display them at these windows. Additionally, without more clarity or  guidance around dimensions and font sizes for disclosures, the  disclosures may be too small to be easily read or noticed. Further, there  may continue to be confusion about what constitutes \u201cadvertising\u201d and  whether certain printed materials are required to include disclosures. As a  result, the state credit union supervisors and the credit unions themselves  may face challenges consistently monitoring and complying with  Regulation I. In turn, credit union members may not always be  consistently and adequately informed that deposits are not federally  insured.\n\n\tConclusions\n\nDeposit insurance helps protect depositors from losing their money in the  event a financial institution fails. By law, any institution that does not have  federal deposit insurance must clearly and conspicuously inform  consumers that the institution is not federally insured and privately  insured credit unions we reviewed largely complied with disclosure  requirements. However, the instances we observed of missing  disclosures or disclosures that were too small to be easily read or  inconspicuous suggest that the lack of specificity in some provisions of  Regulation I has led to inconsistencies in interpretation. By clarifying  Regulation I, CFPB would facilitate state credit union supervisor  monitoring and credit union compliance and would better ensure that  consumers were informed that their deposits are not federally insured.\n\n\tRecommendations for Executive Action\n\nWe are making three recommendations to help state credit union  supervisors and privately insured credit unions better interpret Regulation  I and inform consumers when an institution is not federally insured. CFPB  should issue guidance to (1) clarify whether drive-through windows  require disclosures; (2) describe what constitutes clear and conspicuous  disclosure, including minimum signage dimensions and font size for  disclosures; and (3) explain and provide examples of which  communications are advertising.\n\n\tAgency Comments\n\nWe provided CFPB, FHFA, and NCUA with a draft of this report for review  and comment. In its written comments, reproduced in appendix III, CFPB  agreed with our recommendations. CFPB noted that the agency  recognizes that providing guidance clarifying Regulation I may improve  privately insured credit unions\u2019 understanding of and compliance with the  federal disclosure requirements. Additionally, CFPB stated that the  agency intends to explore options that will most effectively provide  guidance regarding Regulation I, such as issuing a bulletin that could be  published in the Federal Register or posted on the agency\u2019s website.  CFPB, FHFA, and NCUA also provided technical comments, which we  incorporated as appropriate. We also provided selected relevant portions  of the draft to ASI, its third-party actuarial firm, the Ohio Departments of  Insurance and Commerce, and the other eight state credit union  supervisory authorities for their technical review, and we incorporated  their comments as appropriate.\nWe are sending copies of this report to the appropriate congressional  committees, agencies, and other interested parties. In addition, this report  will be available at no charge on the GAO website at http:\/\/www.gao.gov.\nIf you or your staff have any questions about this report, please contact  me at (202) 512-8678 or cackleya@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 IV.\n\nAppendix I: Objectives, Scope, and Methodology\n\nThis report (1) discusses regulatory and other assessments of American  Share Insurance (ASI), the sole private deposit insurer, and (2) examines  the level of compliance with disclosure requirements by credit unions that  do not have federal deposit insurance. The Fixing America\u2019s Surface  Transportation Act (FAST Act) includes a provision for us to review  private deposit insurers and privately insured credit unions\u2019 disclosure  compliance in the United States. Our scope includes the nine states that  permit credit unions to use private deposit insurance and have credit  unions that have chosen to do so: Alabama, California, Idaho, Illinois,  Indiana, Maryland, Nevada, Ohio, and Texas. Some credit unions in  Puerto Rico are insured by a quasi-governmental entity\u2013\u2013the Public  Corporation for the Supervision and Insurance of Cooperatives\u2013\u2013and  these credit unions are not included in the scope of this report. In  addition, this report does not compare ASI\u2019s reserves and capital  adequacy to those of the National Credit Union Administration\u2019s (NCUA)  National Credit Union Share Insurance Fund because the two entities  have different legal requirements and risk profiles, use different models to  help estimate reserves, and use different assumptions and methods to  help determine capital adequacy. Based on this, we limited the scope of  the report to solely cover regulatory and other assessments of ASI,  instead of an analysis or comparison of the two entities.\nTo gather information about ASI, we identified the company\u2019s regulators  and legal requirements and reviewed laws and regulations pertaining to  the company. We reviewed Ohio law and implementing regulations, which  establish the powers and authorities governing credit union guaranty  corporations, such as ASI. We interviewed the company\u2019s primary  regulators (Ohio Departments of Insurance and Commerce), as well as  representatives from the state credit union supervisors in the other eight  states in which ASI operates. To determine how the Ohio Department of  Insurance assessed ASI\u2019s financial condition, we reviewed documentation  such as the most recent examination report covering calendar years  2008\u20132012 and financial analyses of ASI covering calendar years 2013\u2013 2015. We also compared the department\u2019s process with the guidelines  recommended by the National Association of Insurance Commissioners  (NAIC) and confirmed with NAIC staff that the department\u2019s procedures  were consistent with NAIC guidelines. Finally, we interviewed staff at the  Federal Housing Finance Agency (FHFA), which oversees the Federal  Home Loan Bank (FHLBank) System, and the FHLBank of Cincinnati (of  which ASI is a member) to determine their oversight role with regard to  ASI and to obtain information about the number and status of privately  insured credit unions applying for membership to the FHLBanks.\nWe reviewed ASI\u2019s annual reports and audited financial statements for  2008\u20132015 and other documentation, such as the company\u2019s investment  policy, its examination and insurance policy, and its application form and  process for credit unions seeking private deposit insurance. We  interviewed ASI management about the company\u2019s history, governance  structure, regulatory and financial reporting requirements, underwriting  policies, and capital and reserves requirements. We also reviewed  reports from the third-party actuarial firm that ASI retains, including the  firm\u2019s analyses of ASI\u2019s capital adequacy for 2009\u20132015 (conducted  every 3 years), annual analyses of ASI\u2019s unpaid loss and loss adjustment  expense for 2011\u20132015, and annual statements of actuarial opinion for  2011\u20132015, as well as the firm\u2019s analysis of capital adequacy for ASI\u2019s  wholly-owned subsidiary for 2015. We interviewed the actuarial firm\u2019s  staff about their analyses related to these studies and obtained  information about the assumptions and methods used. For the most  recent capital adequacy study, our internal actuarial staff reviewed the  actuarial firm\u2019s modeling approach and certain key methods and  assumptions, including those related to the three economic scenarios  used in the study. Additionally, we inquired about the firm\u2019s internal peer  review process and steps taken to ensure the completeness and  accuracy of the models used to assess ASI\u2019s capital adequacy and  reserves for losses. We did not conduct our own independent  assessment of ASI\u2019s capital adequacy and reserves for losses and  therefore cannot make our own actuarial determination or opinion.\nTo review information about the credit unions that ASI insures, we  reviewed CAMEL ratings for privately and federally insured credit unions  for 2006\u20132015. We also used financial data from SNL Financial (2011\u20132015) to analyze selected financial indicators for privately and federally  insured credit unions. We selected these financial indicators for further  review because they had been previously identified by regulators as  metrics to assess a credit union\u2019s financial health and used in prior  reports looking at credit unions. For our previous work, we had obtained  information from NCUA on the indicators it typically uses to assess credit  unions\u2019 financial health and we selected one indicator in each of the  following five categories: capital adequacy, asset quality, loss coverage,  profitability, and liquidity. We analyzed data from SNL Financial in  September 2016 for year-end 2011\u20132015. We presented median rather  than the mean because means can be skewed by extremely high or low  values. We assessed the reliability of the CAMEL ratings for privately and  federally insured credit unions, as well as the SNL Financial data for the  five financial indicators, by requesting information about the underlying  data, how they are collected, and data reliability testing. We found the  data to be sufficiently reliable for the purposes of our review.\nTo determine compliance with disclosure requirements, we identified  disclosure requirements for credit unions that do not have federal deposit  insurance by reviewing the Federal Deposit Insurance Act disclosure  provisions and the Bureau of Consumer Financial Protection\u2019s (CFPB)  corresponding Regulation I. To review on-site disclosure requirements  (at stations or windows), we selected a nonprobability sample of 53  privately insured credit unions and conducted in-person, unannounced  site visits at 47 of these 53 (41 site visits to unique credit unions and 6  site visits to multiple locations of the 41 credit unions). We were unable to  enter the other six credit unions, usually because they were closed when  we attempted our visit. The sample was selected to ensure diversity  across a number of criteria related to possible differences in compliance.  We selected credit unions for their geographic diversity (credit unions in  different regions of the country and different states), and to achieve a mix  of credit unions of different asset sizes, main retail and branch locations,  and urban and nonurban areas. We also took proximity to GAO offices  into account as a secondary criterion. Because there may be variation in  how state regulators and examiners check for compliance with disclosure  requirements, we conducted site visits in four different states. We  selected these states to obtain a mix of states in terms of numbers of  privately insured credit unions\u2013\u2013two with many (Ohio and Illinois), one  with a moderate number (California), and one with few (Maryland)\u2013\u2013and  for geographic diversity. For the geographic distribution (by number and  percentage) of all the privately insured credit unions across the nine  states that have them, see table 2.\nWe selected privately insured credit unions of varying sizes, as defined by  total assets, and selected credit unions for site visits that were roughly  representative of the overall population of credit unions. For instance,  almost 75 percent of privately insured credit unions had total assets of  less than $100 million and therefore the majority of credit unions we  selected for our site visits did as well.\nWe conducted site visits at both main retail and branch locations. We  selected locations to include both urban and nonurban areas. We roughly  defined \u201curban\u201d as a downtown area where consumers are more likely to  walk to the credit union and \u201cnonurban\u201d as an area where they are more  likely to drive. Credit unions in nonurban areas were more likely to have  drive-through teller windows. Staff conducted site visits between June  and August 2016. On each visit, staff followed a protocol to help ensure  consistency and completed a data collection instrument to record their  observations. The protocol included checking for signs at teller and drive- through windows and observing sizes and clarity of signs, among other  items. When possible, we obtained photographic evidence to document  examples of disclosure signage. Two GAO analysts recorded their  observations at each site, and any discrepancies were reconciled by  discussions and photographic evidence where available. We aggregated  the site visit data and present summary-level information in this report.\nTo determine compliance with disclosure requirements for the credit  unions\u2019 main Internet page, we reviewed the websites of all 102 privately  insured credit unions that had a website during the time of our review.  Analysts followed a protocol to help ensure consistency of observations  about the clarity, placement, and font size of disclosures observed and  completed a data collection instrument for each credit union. A second  analyst independently reviewed each credit union\u2019s website to verify the  accuracy of information collected by the first analyst. Any discrepancies  between the two analysts were identified, discussed, and resolved by  referring to the source websites.\nTo determine compliance with disclosure requirements for advertising  (printed materials), we obtained samples of printed materials (such as  brochures, promotional flyers, and newsletters) from 36 of the 41 unique  credit unions we visited where such printed materials were readily  available. We assessed whether these printed materials had proper  disclosures, taking into account the specified exclusions regarding  advertising noted in Regulation I. To determine compliance with the  requirement to (1) provide disclosures in periodic (monthly) statements  and account records, and (2) get written acknowledgment from depositors  that the institution does not have federal deposit insurance, we relied on  testimonial evidence from the nine state credit union supervisors we  interviewed because we determined that their compliance review in this  area was adequate for our purposes\u2014for example, each state reviews a  sample of new accounts as part of the routine examination each credit  union receives.\nBecause CFPB is the federal entity responsible for issuing disclosure  regulations, we interviewed CFPB staff about the agency\u2019s oversight and  findings related to compliance with these disclosure requirements. We  compared CFPB\u2019s disclosure requirements for credit unions that do not  have federal insurance with those of NCUA for federally insured credit  unions. Because privately insured credit unions are state-chartered, we  interviewed the respective state credit union supervisors in each of the  nine states about their annual examinations of privately insured credit  unions, including their review of compliance with requirements to disclose  a lack of federal insurance. We also interviewed representatives from the  Credit Union National Association, National Association of State Credit  Union Supervisors, and the Ohio Credit Union League to ask whether  they were aware of any issues or concerns related to compliance with  disclosure requirements for privately insured credit unions.\nTo determine reasons why credit unions chose private or federal deposit  insurance and to obtain views on the benefits and risks of each, we  interviewed representatives from 10 credit unions that had switched to or  from private insurance in recent years. We identified these credit unions  by reviewing NCUA\u2019s Insurance Activity Reports (from January 2008 to  July 2016), which identify deposit insurance conversions, and then  confirmed these conversions with NCUA and ASI. We interviewed  representatives from five of the eight credit unions that converted from  federal insurance provided by NCUA to private deposit insurance  provided by ASI within the past 5 years. Additionally, we interviewed  representatives from five credit unions that most recently converted from  private (ASI) to federal (NCUA) deposit insurance. The conversions took  place in 2008\u20132009. These selection criteria were chosen because  representatives from credit unions that recently converted should be able  to provide reasons why their credit union made the choice to switch from  federal to private deposit insurance, or vice versa, and have the most up- to-date information. We also interviewed representatives from credit union  trade associations, NCUA, and ASI about the reasons credit unions  choose private versus federal deposit insurance.\nWe conducted this performance audit from February 2016 to March 2017  in accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.\n\nAppendix II: Reasons Credit Unions Chose Private or Federal Deposit Insurance\n\nCredit unions in the United States can be federally or state-chartered,  which determines their primary regulator for safety and soundness and  also their options for deposit insurance. Federally chartered credit unions  are regulated by the National Credit Union Administration (NCUA) and  must be federally insured by NCUA\u2019s National Credit Union Share  Insurance Fund, which provides up to $250,000 of insurance per  depositor for each account ownership type. State-chartered credit unions  are regulated by credit union supervisors in their respective state and also  can be federally insured by NCUA or, in some states, choose a private  insurer. American Share Insurance (ASI) is the sole insurer for private  deposit insurance to credit unions and provides coverage up to $250,000  per account. Credit unions sometimes change deposit insurers\u2014for  example, converting between federal and private deposit insurance.  According to information provided by NCUA, eight credit unions converted  from federal to private deposit insurance in 2012\u20132016, and five  converted from private to federal deposit insurance in 2008\u20132009 (the  most recent such conversions).\nRepresentatives of some credit unions that converted from federal to  private deposit insurance cited the following reasons:\nGreater coverage for members. ASI insures $250,000 per account,  whereas NCUA insures $250,000 per depositer for each account  ownership type. Thus, ASI provides more coverage for members with  more than $250,000 in a particular deposit type because they can  structure their deposits into multiple accounts of $250,000 or less.\nReduced federal oversight. Representatives of some state- chartered credit unions described state regulation and oversight,  including the examination process, as less burdensome than federal  regulation and oversight.\nCost savings. Credit union representatives said that private deposit  insurance was less expensive than federal deposit insurance following  the 2007-2009 financial crisis because ASI\u2019s special premium  assessments were lower than the premiums of the National Credit  Union Share Insurance Fund, and state regulatory fees are less than  those of NCUA.\nComparable business models. A credit union representative noted  that the credit union business model aligns well with ASI\u2014both are  not-for-profit organizations that exist to serve their members, and  member credit unions sit on ASI\u2019s board of directors.\nRepresentatives of some credit unions that converted from private to  federal deposit insurance cited the following reasons:\nFull faith and credit of U.S. government. Deposits are backed by  the full faith and credit of the U.S. government, which provides  depositors with greater confidence and security.\nConcern about private insurer during financial crisis. A  representative of one credit union told us the main reason it switched  to NCUA insurance was because it was concerned that ASI might not  survive the 2007\u20132009 financial crisis.\nAccess to additional funding source. One credit union  representative told us the credit union switched to federal deposit  insurance in 2008 to allow it to join a Federal Home Loan Bank, which  provided it with access to an additional funding source.\n\nAppendix IV: GAO Contact and Staff Acknowledgments\n\n\tGAO Contact\n\n\tStaff Acknowledgments\n\nIn addition to the contact name above, Jason Bromberg (Assistant  Director), Beth Faraguna (Analyst in Charge), Caitlin Cusati, Paul  Foderaro, Alice Hur, Risto Laboski, Yola Lewis, Ned Malone, Scott  McNulty, Marc Molino, Barbara Roesmann, Jessica Sandler, Frank  Todisco, and Shana Wallace made key contributions to the report.","output":"Why GAO Did This Study\n\nThe Federal Deposit Insurance Act requires privately insured credit unions to disclose to consumers that they do not have federal deposit insurance and CFPB has implemented regulations on these requirements. The Fixing America's Surface Transportation Act includes a provision for GAO to review private deposit insurers and privately insured credit unions' compliance with disclosures. This report (1) discusses regulatory and other assessments of ASI, the sole private insurer, and (2) examines the level of compliance with disclosure requirements for privately insured credit unions. GAO reviewed documentation from and interviewed federal and state regulators, ASI management, and ASI's third-party actuarial firm. GAO reviewed certain key methods and assumptions used by the actuarial firm. GAO also analyzed regulatory ratings (2006\u20132015) and selected financial data (2011\u20132015) on privately and federally insured credit unions. In addition, GAO reviewed 102 websites for all privately insured credit unions that had websites, conducted unannounced site visits at 47 credit unions (selected based largely on asset size and geography), and reviewed printed materials from 36 of the credit unions it visited that had materials readily available.\n\nWhat GAO Found\n\nAbout 2 percent of credit unions (125) have private deposit insurance, which is provided by one company\u2014American Share Insurance (ASI). Regulatory and other assessments have suggested that ASI's reserves have been adequate and that the company has had a strong ability to cover present and future losses for the credit unions it insures. The most recent examination of ASI by its primary regulator (Ohio Department of Insurance) determined that ASI's reserves for losses were adequate and appropriate and consistent with legal requirements. An independent actuarial firm hired by ASI reported that it had a strong ability to cover losses under different economic scenarios. The Ohio regulator and the actuarial firm both noted risk factors that could affect ASI's financial condition, including changes in macroeconomic conditions or major losses by the largest credit unions it insures. In the event of financial difficulties, Ohio law allows ASI to tap into additional sources of funding, including lines of credit and special assessments from its insured credit unions.\nPrivately insured credit unions largely complied with the Bureau of Consumer Financial Protection (CFPB) requirements to disclose that they do not have federal deposit insurance. For instance, 45 of 47 credit unions GAO visited displayed required disclosures at teller windows (see fig.), and 99 of 102 websites GAO reviewed included the disclosure on their main Internet page, as required. However, 7 of 17 credit unions with drive-through windows that GAO visited did not have disclosure signs at these windows. Additionally, printed materials (such as brochures and flyers) GAO reviewed from 8 of 36 credit unions did not include disclosures. The regulations require all advertising to include a disclosure, but do not define what constitutes advertising. In some cases, disclosure signs or text size were too small to be easily read, or were not placed conspicuously. CFPB's regulations on disclosures for privately insured credit unions do not specify signage dimensions or font size. Without clear disclosure requirements, state credit union supervisors and credit unions may not be consistent in how they interpret disclosure requirements and some consumers may not be informed that their deposits are not federally insured.\n\nWhat GAO Recommends\n\nGAO recommends that CFPB issue guidance for privately insured credit unions to clarify whether drive-through windows require disclosure, describe what constitutes clear and conspicuous disclosure, including minimum signage dimensions and font size, and explain and provide examples of which communications are advertising. CFPB agreed with these recommendations."}
{"id":"gao_GAO-08-481T","pid":"gao_GAO-08-481T_0","input":"\tNumber and Rate of Incursions Show Upward Trend\n\nRunway safety is a longstanding major aviation safety concern; prevention  of runway incursions, which are precursors to aviation accidents, has been  on NTSB\u2019s list of most wanted transportation improvements since 1990  because runway collisions can be catastrophic. Recent data indicate that  runway incursions are growing and may become even more numerous as  the volume of air traffic increases. The number and rate of incursions  declined from a peak in fiscal year 2001 and remained relatively constant  for the next 5 years. However, from fiscal years 2006 through 2007, the  number and rate of incursions increased by 12 percent and nearly regained  the 2001 peak (see fig. 1).\nAdditionally, data for the first quarter of fiscal year 2008 show that the  number of incursions increased substantially after FAA began using a  definition of incursions developed by the International Civil Aviation  Organization (ICAO), a United Nations specialized agency.  Using the  ICAO definition, FAA is now counting some incidents as incursions that  had been formerly classified as surface incidents. During the first quarter  of fiscal year 2008, using the ICAO definition, FAA counted 230 incursions.  If FAA had continued to use its previous definition, it would have counted  94 incursions. According to an FAA official, by adopting the ICAO  definition, FAA expects to report about 900 to 1,000 incursions this year.  Fig. 2 shows the number and rate of incursions, by quarter, during fiscal  year 2007 and during the first quarter of fiscal year 2008.\nMoreover, the number and rate of serious incursions\u2014where collisions  were narrowly or barely avoided\u2014increased substantially during the first  quarter of fiscal year 2008, compared to the same quarter in fiscal year  2007. During the first quarter of fiscal year 2008, 10 serious incursions  occurred, compared to 2 serious incursions during the first quarter of  fiscal year 2007.  (See fig. 3.)\nMost runway incursions involve general aviation aircraft. According to  FAA, 72 percent of incursions from fiscal years 2003 through 2006 involved  at least one general aviation aircraft. However, about one-third of the most  serious incursions from fiscal years 2002 through 2007\u2014about 9 per  year\u2014involved at least one commercial aircraft that can carry many  passengers.  That number includes two serious incursions that occurred  just two months ago, in December 2007.  (See table 3 in the appendix for  additional information on recent serious incursions.)  Figure 4 shows the  number of serious incursions involving commercial aircraft from fiscal  years 2001 through 2007.\nIn the United States, most incursions have occurred at major commercial  airports, where the volume of traffic is greater. Los Angeles International  Airport and Chicago O\u2019Hare International Airport had the greatest number  of runway incursions from fiscal years 2001 through 2007, as shown in fig.  5.\nThe primary causes of incursions, as cited by experts we surveyed and  some airport officials, include human factors issues, such as  miscommunication between air traffic controllers and pilots, a lack of  situational awareness on the airfield by pilots, and performance and  judgment errors by air traffic controllers and pilots. According to FAA, 57  percent of incursions during fiscal year 2007 were caused by pilot errors,  28 percent were caused by air traffic controller errors, and 15 percent  were caused by vehicle operator or pedestrian errors (see fig. 6).\n\n\tChallenges Remain Despite Numerous Efforts to Address Runway Safety\n\nFAA, airports, and airlines have taken steps to address runway safety, but  the lack of leadership and coordination, technology challenges, lack of  data, and human factors-related issues impede further progress. To  improve runway safety, FAA has deployed and tested technology designed  to prevent runway collisions; promoted changes in airport layout,  markings, signage, and lighting; and provided training for pilots and air  traffic controllers. In addition, in August 2007, following several serious  incursions, FAA met with aviation community stakeholders and agreed on  a short-term plan to improve runway safety. In January 2008, FAA reported  on the status of those actions, which included    accelerating the upgrading of airport markings, which were originally  required to be completed by June 30, 2008, at medium and large  airports,    upgrading markings at smaller commercial airports, which had not    completing a runway safety review of 20 airports that were selected on  the basis of runway incident data, and  requiring that nonairport employees, such as airline mechanics, receive  recurrent driver training at 385 airports.\nAccording to FAA, since the August 2007 meeting, all 112 active air  carriers have reported that they are (1) providing pilots with similar or  other training that incorporates scenarios from aircraft pushback through  taxi, and (2) reviewing procedures to identify and develop a plan to  address elements that contribute to pilot distraction while taxiing. FAA  also indicated that it had completed an analysis of air traffic control  procedures pertaining to taxi clearances and found that more explicit taxi  instructions are needed, and that it had signed a partnership agreement  with the National Air Traffic Controllers Association to create a voluntary  safety reporting system for air traffic controllers.\nIn our November 2007 report, we found that FAA\u2019s Office of Runway  Safety had not carried out its leadership role to coordinate and monitor  the agency\u2019s runway safety efforts.  Until recently, the office did not have a  permanent director for the previous 2 years and staffing levels declined.   FAA took a positive step by hiring a permanent director at the Senior  Executive Service level for the office in August 2007.  The new director  has indicated he is considering several initiatives, including establishing a  joint FAA-industry working group to analyze the causes of incursions and  track runway safety improvements.  In our November 2007 report, we also  found that FAA had not updated its national runway safety plan since  2002, despite agency policy that such a plan be prepared every 2 to 3 years.  The lack of an updated plan resulted in uncoordinated runway safety  efforts by individual FAA offices. For example, in the absence of an  updated national runway plan, each FAA office is expected to separately  include its runway safety initiatives in its own business plan.  However,  this practice does not provide the same national focus and emphasis on  runway safety that a national plan provides.  Furthermore, not all offices  with runway safety responsibilities included efforts to reduce incursions in  their business plans. Until the national runway safety plan is updated, the  agency lacks a comprehensive, coordinated strategy to provide a sustained  level of attention to improving runway safety.\nThe deployment of surface surveillance technology to airports is a major  part of FAA\u2019s strategy to improve runway safety, but it has presented  challenges. To provide ground surveillance, FAA has deployed the Airport  Movement Area Safety System (AMASS), which uses the Airport Surface  Detection Equipment-3 (ASDE-3) radar, at 34 of the nation\u2019s busiest  airports and is deploying an updated system, ASDE-X, at 35 major airports.   The current deployment schedule will result in a total of 44 airports having  AMASS and\/or ASDE-X (see table 5 in the appendix). Both systems are  designed to provide controllers with alerts when they detect a possible  collision on the ground. As of January 2008, ASDE-X was commissioned  at 11 of the 35 airports scheduled to receive it. FAA is also testing runway  status lights, which are a series of lights embedded in the runways that  give pilots a visible warning when runways are not clear to enter, cross, or  depart on, at the Dallas-Ft. Worth International Airport and the San Diego  International Airport. The agency made an initial investment decision last  year to deploy the system at 19 airports, starting in November 2009, and is  planning to make a final investment decision in June 2008. In addition,  FAA is testing the Final Approach Runway Occupancy Signal at the Long  Beach-Daugherty Field airport in California, which activates a flashing  light visible to aircraft on approach as a warning to pilots when a runway  is occupied and hazardous for landing.\nHowever, FAA risks not meeting its current ASDE-X cost and schedule  plans, which have been revised twice since 2001, and the system is  experiencing operational difficulties with its alerting function. Although it  took about 4 years for ASDE-X to be commissioned at 11 airports, FAA  plans to deploy the system at the remaining 24 additional airports by 2010.  In addition, not all 11 ASDE-X airports have key safety features of the  system. For example, as of January 2008, two ASDE-X airports did not  have safety logic, which generates a visible and audible alert to an air  traffic controller regarding a potential runway collision. Furthermore, the  ASDE-X airports are experiencing problems with false alerts, which occur  when the system incorrectly predicts an impending collision, and false  targets, which occur when the system incorrectly identifies something on  the airfield as an aircraft or vehicle and could generate a false alert.  Moreover, most airports in the United States have no runway safety  technology to supplement a controller\u2019s vision of the airfield and will not  have such technology even after FAA completes its plan to deploy ASDE-X  at 35 major airports. While FAA is testing additional technology to prevent  runway collisions, such as the Final Approach Runway Occupancy Signal,  the systems are years away from deployment.  Another technology,  runway status lights, have had positive preliminary test evaluations, but  need a surface surveillance system such as ASDE-3\/AMASS or ASDE-X to  operate. In addition, FAA is still testing a low cost surface surveillance  system that already is being used at 44 airports outside of the United  States. Furthermore, systems that provide direct collision warnings to  flight crews, which NTSB and experts have recommended, are still being  developed.\nFAA lacks reliable runway safety data and the mechanisms to ensure that  the data are complete. Although FAA collects information about runway  incursions and classifies their severity, its tabulation of the number of  incursions does not reflect the actual number of incidents that occur. FAA  only counts incursions that occur at airports with air traffic control  towers, so the actual number of incursions, which includes those that  occurred at airports without air traffic control towers, is higher than FAA  reports.  While the change in definition of incursions that FAA adopted at  the beginning of fiscal year 2008 will increase the number of incursions  counted, it will not address this problem.  In addition, an internal agency  audit of 2006 incursion data questioned the accuracy of some of the  incursion severity classifications. FAA plans to start a nonpunitive,  confidential, voluntary program for air traffic controllers similar to a  program that FAA has already established for pilots and others in the  aviation community.  The new program will enable air traffic controllers to  report anything that they perceive could contribute to safety risks in the  national airspace system. The benefit of such program is that the  information obtained might not be reported otherwise, and could increase  the amount of data collected on the causes and circumstances of runway  incursions. However, FAA has not indicated when such a program would  be implemented.\nFAA has also taken some steps to address human factors issues through  educational initiatives, such as developing simulated recreations of actual  incursions to enhance air traffic controller training. However, air traffic  controller fatigue, which may result from regularly working overtime,  continues to be a human factors issue affecting runway safety. NTSB,  which investigates transportation accidents, has identified four instances  from 2001 through 2006 when tired controllers made errors that resulted in  serious incursions. We found that, as of May 2007, at least 20 percent of  the controllers at 25 air traffic control facilities, including towers at several  of the country\u2019s busiest airports, were regularly working 6-day weeks. (See  table 7 in the appendix for additional information.)\nExperts we surveyed indicated that the actions that FAA could take with  the greatest potential to prevent runway incursions, considering costs,  technological feasibility, and operational changes, were measures to  provide information or alerts directly to pilots. Experts believed that  lighting systems that guide pilots as they taxi at the airport, and  technology that provides enhanced situational awareness on the airfield  and alerts of potential incursions, would be of particular importance.\n\n\tRecommendations\n\nIn our November 2007 report, we recommended that FAA (1) prepare a  new national runway safety plan, (2) develop an implementation schedule  for establishing a nonpunitive voluntary safety reporting program for air  traffic controllers, and (3) develop a mitigation plan for addressing  controller overtime.  The agency agreed to consider our recommendations.\nIn closing, although FAA has taken many actions to improve runway  safety, the number of serious incursions that are continuing to occur\u2014 many of which involved aircraft carrying hundreds of passengers\u2014 suggests that this country continues to face a high risk of a catastrophic  runway collision. FAA must provide sustained attention to improving  runway safety through leadership, technology, and other means. As the  volume of air traffic continues to increase, providing sustained attention to  runway safety will become even more critical.\nMr. Chairman, this concludes my prepared statement. I would be pleased  to respond to any questions from you or other members of the  Subcommittee.\n\n\tGAO Contact and Staff Acknowledgments\n\nFor further information on this testimony, please contact Dr. Gerald L.  Dillingham at (202) 512-2834 or dillinghamg@gao.gov.  Individuals making  key contributions to this testimony include Teresa Spisak, Bob Homan,  and David Goldstein.","output":"Why GAO Did This Study\n\nWhile aviation accidents in the United States are relatively infrequent, recent incidents have heightened concerns about safety on airport runways. As the nation's aviation system becomes more crowded every day, increased congestion at airports may exacerbate ground safety concerns. This statement discusses (1) the trends in runway incursions, (2) what FAA has done to improve runway safety, and (3) what more could be done. This statement is based on GAO's November 2007 report issued to this committee on runway safety. GAO's work on that report included surveying experts on the causes of runway incidents and accidents and the effectiveness of measures to address them, reviewing safety data, and interviewing agency and industry officials. This statement also contains information from FAA on recent incursions and actions taken since November 2007.\n\nWhat GAO Found\n\nRecent data indicate that runway incursions, which are precursors to aviation accidents, are growing. Although the number and rate of incursions declined after reaching a peak in fiscal year 2001 and remained relatively constant for the next 5 years, they show a recent upward trend. From fiscal year 2006 through fiscal year 2007, the number and rate of incursions increased by 12 percent and both were nearly as high as their 2001 peak. Furthermore, the number of serious incursions--where collisions are narrowly or barely avoided--increased from 2 during the first quarter of fiscal year 2007 to 10 during the same quarter in fiscal year 2008. FAA has taken steps to address runway safety, but further progress has been impeded by the lack of leadership and coordination, technology challenges, lack of data, and human factors-related issues. FAA's actions have included deploying and testing technology designed to prevent runway collisions and promoting changes in airport layout, markings, signage, and lighting. However, until recently, FAA's Office of Runway Safety did not have a permanent director. Also, FAA has not updated its national runway safety plan since 2002, despite agency policy that such a plan be prepared every 2 to 3 years, resulting in uncoordinated efforts within the agency. Moreover, runway safety technology currently being installed, which is designed to provide air traffic controllers with the position and identification of aircraft on the ground and alerts of potential collisions, is behind schedule and experiencing cost increases and operational difficulties with its alerting function. FAA also lacks reliable runway safety data and the mechanisms to ensure that the data are complete. Furthermore, air traffic controller fatigue, which may result from regularly working overtime, continues to be a matter of concern for the National Transportation Safety Board (NTSB) and others. FAA could take additional measures to improve runway safety. These measures include implementing GAO's recommendations to prepare a new national runway safety plan, address controller overtime and fatigue, and start a nonpunitive, confidential, voluntary program for air traffic controllers to report safety risks in the national airspace system, which would be similar to a program that FAA has already established for pilots and others in the aviation community. Such a program could help the agency to understand the causes and circumstances regarding runway safety incidents. Additional improvements, suggested by experts and NTSB, include developing and deploying technology to provide alerts directly to pilots."}
{"id":"gao_NSIAD-98-57","pid":"gao_NSIAD-98-57_0","input":"\tBackground\n\nIn 1996, the federal government spent $1.4 trillion in U.S. states and territories to procure products and services, to fund grants and other assistance, to pay salaries and wages to federal employees, to provide public assistance, and to fund federal retirement programs and Social Security, among other things. Some states rank relatively high on the per capita distribution of different types of federal dollars. Government reports indicate that in 1996, Maryland, Virginia, and Alaska were the only three states to rank among the top five in each of the following categories: (1) total federal expenditures, (2) total federal procurement expenditures, and (3) total salary and wage expenditures for federal workers. The only other state that ranked among the top 10 states in all these categories was New Mexico.\nInterest in the economic magnitude of defense and other federal expenditures in states has been amplified by concerns over anticipated outcomes of the post-Cold War drawdown. In hearings before the Joint Economic Committee of the 101st Congress, 12 state governors submitted to the leadership of the Senate and House a plan for responding to expected adverse economic impacts in states that were believed to be particularly vulnerable to reductions in defense spending. In 1992, President Bush issued Executive Order 12788, requiring the Secretary of Defense to identify the problems of states, regions, and other areas that result from base closures and Department of Defense (DOD) contract-related adjustments. The Office of Economic Adjustment is DOD\u2019s primary office responsible for providing assistance to communities, regions, and states \u201cadversely impacted by significant Defense program changes.\u201d\nThe federal government tracks defense-related and other federal spending and associated employment through various sources. Centralized reporting of this information is done by the Census Bureau in its Consolidated Federal Funds Report (CFFR) series. The CFFR includes the Federal Expenditures by State (FES) report and a separate two-report volume that presents information at the county and subcounty level. The FES report presents the most comprehensive information on federal expenditures at the state level that can actually be attributed to specific federal agencies or programs. Agencies involved in collecting and reporting various types of employment information include the Office of Personnel Management (OPM) and the Bureau of Labor Statistics.\nExpenditure information reported in the CFFR also appears in agency-specific publications or data sources. DOD reports information on its total procurement expenditures and the salaries and wages paid to DOD personnel, by state, in the Atlas\/Data Abstract for the United States and Selected Areas. In compiling information for the CFFR, DOD\u2019s procurement data are first sent to the Federal Procurement Data System (FPDS) and then sent to Census. Therefore, Census, DOD, and the FPDS can and do report DOD procurement expenditures.\nFederal expenditure and employment data are available to users in and outside the government and are regularly used in policy formulation and evaluation. DOD contractors, including the Logistics Management Institute, have used federal government data in support of their work for DOD on the economic impacts of base realignment and closure actions. The Office of Economic Conversion Information, a collaborative effort between the Economic Development Administration of the Department of Commerce and DOD, uses existing federal data to provide information to communities, businesses, and individuals adjusting to the effects of defense downsizing and other changing economic conditions. The Congressional Budget Office and the Congressional Research Service have also used DOD procurement expenditure data in examining the expected effects of planned reductions in the national defense budget. DOD uses its prime contract award expenditure data to track the status and progress of goals associated with contracts made to small businesses. Researchers at think tanks, universities, and state government offices also use government data in a wide array of research projects and publications.\n\n\tFederal Dollars Contribute to New Mexico Economy, but Economy Is Diversifying\n\nDOE and DOD military activities have contributed substantially to the economy of New Mexico for about 50 years. Government data show that between 1988 and 1996, New Mexico was ranked second, third, or fourth, among U.S. states in per capita distribution of federal dollars. In terms of per capita federal procurement expenditures only, New Mexico was ranked first among U.S. states during 1988-94 and second in 1995-96. In 1996, New Mexico was ranked first among states in return on federal tax dollars, receiving $1.93 in federal outlays for every $1.00 in federal taxes paid. The state was also ranked first in return on federal tax dollars in 1995. In 1996, 5 of the 6 major federal facilities were among the top  10 employers in the state.\nThis federal revenue comes largely from the six major federal facilities in New Mexico, including two DOE national laboratories, Los Alamos National Laboratory and Sandia National Laboratory; Cannon, Holloman, and Kirtland Air Force Bases; and White Sands Missile Range, a test range that supports missile development and test programs for all the services, the National Aeronautics and Space Administration (NASA); and other government agencies and private industry. New Mexico\u2019s geography and climate, including relative isolation from major population centers, year-round good weather, and open airspace, have made the state attractive for some military activities. In May 1996, the Secretary of Defense and the German Defense Minister activated the German Air Force Tactical Training Center at Holloman Air Force Base in Alamogordo. The training opportunities provided by the vast airspace in and around Holloman and its proximity to Fort Bliss, Texas\u2014the headquarters location for German air force operations in North America\u2014were factors in Germany\u2019s decision to invest in a tactical training center at the base. State officials estimate that the training center will result in a population increase to the Alamogordo area of about 7 percent and investment by Germany of $155 million by 1999.\nServices and trade are distinct components of New Mexico\u2019s economy. In 1993, the largest employment sectors in New Mexico were services, government, and trade: these were reported as accounting for approximately 76 percent of the total average annual state employment.Businesses involved in trade and\/or services accounted for 67 percent of all businesses in New Mexico in 1993. Revenue from the gross receipts tax is the highest source of tax revenue in New Mexico, and in 1996, gross receipt taxes from services and trade accounted for more than half of all gross receipts tax revenue. DOE reports show that between 1990 and 1995, it made more expenditures in the services and trade sectors of the New Mexico economy. New Mexico Department of Labor projections indicate that by 2005, the services sector will alone account for about 41 percent of total employment while employment in the trade sector is projected to remain stable and government employment is expected to decline. The projections indicate that jobs in services and trade will account for 70 percent of the new jobs between 1993 and 2005.\nNew Mexico state officials have been focusing on \u201cachieving economic diversification to protect against dramatic negative changes in the state\u2019s economy,\u201d believed to be linked to changes in federal spending in the state. Efforts in 1996 to recruit select industries to the state have initially resulted in at least 7 businesses locating to New Mexico, creating 230 new jobs. In terms of other efforts, New Mexico was 8th among U.S. states in high-technology employment growth between 1990 and 1995. The single leading high-technology industry in the state is semiconductor manufacturing, which accounts for 34 percent of total high-technology jobs. Intel Corporation has three advanced computer chip manufacturing sites that employ at least 6,500 people making it the state\u2019s second-largest private sector employer and contributing to the growth in New Mexico\u2019s high-technology employment. In 1995, Intel was also the leading manufacturing employer in the state. High-technology exports account for the largest percentage of New Mexico exports to other countries, with exports to Korea leading other nations. Currently, about 10 percent of all New Mexico manufacturers are exporting. The leading exporters in New Mexico are Intel, Motorola, and Honeywell Defense Avionics.\nA comparison of the percent change in New Mexico\u2019s per capita income and total defense-related spending (DOE and DOD) in the state during 1990-94 shows that real growth occurred in per capita income, while total defense expenditures declined (see fig.1). A comparison between percent real growth in New Mexico\u2019s gross state product and total defense-related federal expenditures reveals the same pattern, suggesting that efforts to diversify the state\u2019s economy may be having a positive effect (see fig. 2). Based on the average rate of growth in the gross state product during 1987-94, the Bureau of Economic Analysis identified New Mexico as the third-fastest-growing state.\n\n\tDOE Spends More on Procurement; DOD Spends More on Workforce and Retirement\n\nAvailable federal data provides a segmented and rough snapshot of federal money spent in states and the employment linked to those expenditures that is relevant to gauging some trends and patterns. For example, government data indicates that in 1996, the federal government spent about $12 billion in New Mexico. Direct expenditures for procurement, salaries and wages for federal workers, and grants accounted for  60 percent, or about $7.3 billion, of the total. Direct payments to individuals, the single largest category of federal expenditures, accounted for approximately 37 percent, or about $4.4 billion, of total 1996 federal expenditures (see fig. 3).\nAppendix II includes additional descriptions of federal spending and employment in New Mexico.\n\n\t\tDefense-Related Expenditures\n\nThe top five agencies making procurement expenditures in New Mexico during 1993-96, were DOE, DOD, the Department of Interior, NASA, and the Postal Service. The defense-related agencies (DOE and DOD), compared to the nondefense-related ones, accounted for 90 percent, or $14.1 billion, of the $15.5 billion total spent during 1993-96. Specifically, DOE accounted for 80 percent of the total federal defense-related procurement expenditures, or about $11.2 billion of the 1993-96 total of $14.1 billion.\nBetween 1993 and 1996, the top five federal agencies that accounted for the largest dollar amount of expenditures to pay salaries and wages of federal workers in New Mexico were DOD; the Postal Service; and the Departments of Interior, Health and Human Services, and Veterans Affairs. Salaries and wages paid to federal employees of the defense-related agencies account for about $7 billion, or 54 percent, of the total $13 billion spent in New Mexico. Specifically, between 1988 and 1996 DOD accounted for about $6.5 billion, or 93 percent, of the $7 billion total defense-related federal salaries and wages. Payments to workers retired from defense-related agencies also accounted for more of the total annuities to retired federal workers living in New Mexico during 1990-96. Payments to retired defense-related federal workers accounted for $3.2 billion, or  68 percent, of the total $4.7 billion in annuitant expenditures. Payments to former DOD workers accounted for 98 percent of the total payments to retired defense-related workers. Figure 4 shows the percent of defense-related expenditures for procurement, federal workers\u2019 salary and wages, and retirement payments accounted for by DOE and DOD, respectively.\n\n\t\tDefense-Related Employment\n\nBetween 1988 and 1996, the Departments of Defense, the Interior, Health and Human Services, Veterans Affairs, and Agriculture were the top five agencies in terms of total federal employees in New Mexico. Between 1988-1996, defense-related jobs were about 72 percent, or 300,000 jobs, of the total 420,000 federal jobs in New Mexico. Specifically, DOD accounted for 97 percent, or about 292,000 of these jobs, over the period 1988-96. Thus, DOD federal jobs were more of the total federal jobs and more of the defense-related federal jobs in New Mexico. Federal retirees of defense-related agencies also comprised more of the retired federal workers living in New Mexico: 68 percent of the total between 1990 and 1996. Specifically, DOD accounted for 99 percent of all retirees from the defense-related agencies. Figure 5 shows the percent of defense-related jobs and retirees in New Mexico accounted for by DOE and DOD.\nThe existing data provides information on federal employees only. This is an important point because although the overall ratio of DOD federal workers to DOE federal workers was 44:1 between 1988 and 1996, our research also shows that more of the DOE employment is linked to private contractors that manage and operate the laboratories and other DOE facilities than to the number of DOE federal employees. Private contractors working on government contracts are not considered or counted as federal employees. However, even when we compared the total DOE employment, which included direct DOE prime contractor, subcontractor, and federal employees, to the total DOD federal employment DOD\u2019s direct federal employment was higher than DOE\u2019s in each year between 1990 and 1996.\nOf the DOD employment, more of the federal jobs were DOD military than DOD civilians. Between 1988-96 about 42 percent of the total DOD federal jobs in New Mexico were held by active duty military members, 33 percent were held by inactive duty military (national guard and reserves), and 25 percent were held by DOD civilians. Similarly, more of the federal wages were associated with active duty military. Active duty military members accounted for 55 percent, inactive members accounted for 5 percent, and DOD civilians accounted for 40 percent of the total salaries and wages between 1988-96.\nA comparison of the occupations represented by the defense-related federal jobs in New Mexico indicates that during 1988-96 the largest number of jobs were blue-collar and technical. This finding, however, largely represents the patterns for the DOD active duty employment in New Mexico, for which technical and blue-collar jobs comprise about 70 percent of the total jobs. Among DOD civilian employees, the two categories that accounted for the largest number of jobs over the period 1988-96 were professional (23 percent of the total jobs) and blue-collar (20 percent of the total jobs). The two occupational categories that account for more of the DOE direct federal employment in New Mexico are administrative (30 percent of total jobs) and professional (37 percent of total jobs).\n\n\tFederal Expenditure and Employment Data Are Incomplete\n\nOfficial federal data sources are useful for gaining a preliminary understanding of the composition of federal expenditures in states. However, fundamental characteristics of the federal data make it difficult to determine the direct economic impact of federal activities on states. For example, our analysis of defense-related expenditures and employment did not include information on DOD contractor employment because there is no official DOD or other federal source of such information. Federal government data sources provide insufficient evidence for determining where federal dollars are actually spent, how much is actually spent, and the number or type of jobs that the federal dollars directly generate because of numerous limitations in scope and coverage and in reporting requirements or procedures. Our related findings that pertain to the data sources used and reviewed in our work are summarized in tables 1 and 2.\nTo gain further insights into the reliability of the federal government\u2019s data we focused on characteristics of existing DOD data. Although DOD\u2019s procurement expenditure data (DD350) is used in broad policy contexts and used to evaluate the status of programs that are believed to be important to economic security, the form is not designed to provide information on all DOD expenditures in a single state or at the national level. Procurement contracts under $25,000 are not included, no information on DOD subcontracts of any value are included, and financial data related to classified programs may or may not be reported or be accurate.\nDOD acknowledges that the DD350 does not completely account for all procurement expenditures, and although this limitation is generally understood and acknowledged by informed users, the possible implications are not. We surveyed the top five DOD contractors in New Mexico to determine how much money they received in DOD prime contracts and subcontracts and compared their responses to DOD\u2019s records (the DD350 data) of their total contracts. The comparisons revealed that in no case were the DOD records of the dollar value of contracts awarded to these companies the same as the contractors\u2019 records. Differences between DOD and contractors\u2019 records ranged from $20 million for prime contracts to $80 million for total contracts. In some cases, the DOD records appeared to overstate the amount the contractors received, while in other cases the DOD records appeared to understate the amount.\nOur research suggests several possible reasons for the inconsistencies between contractor records and DOD records. For example, expenditures associated with procurement contracts can leak from a state\u2019s economy if a company subcontracts part of the work elsewhere. One study reported that of $5.2 billion in DOD prime contracts received by McDonnell Douglas in St. Louis, Missouri, less than 3 percent, or $156 million, stayed in Missouri due to out-of-state subcontracting. However, from our survey of contractors in New Mexico we determined that leakages were more prevalent for certain types of procurement contracts. While our survey showed overall that more than 80 percent of the total DOD prime contract dollars remained in the state, for every year between 1988 and 1996, it also showed that the businesses that predominantly received service contracts, rather than supply and equipment contracts (i.e., major hard goods\/weapons), kept nearly all of the DOD contract money they received in the state. This is particularly relevant because other DOD data indicate that in every year between 1988 and 1996, DOD procurement contracts for services account for the largest dollar volume of contracts to New Mexico.\nAlso, service contracts may more likely be under DOD\u2019s $25,000 reporting threshold and therefore excluded from total expenditures as officially reported by DOD. Furthermore, injections of dollars from subcontracts with out-of-state firms or with other in-state firms are not tracked by DOD, yet would have been included in the contractors\u2019 records.\nFinally, the DOD Inspector General reported in 1989 that the DD350 data had reliability problems due to instances of unreported contract obligations and other errors in reported data. The Inspector General made no recommendations and has not assessed the reliability and validity of the DD350 contract tracking system since then.\nThe existing data that track defense-related employment are limited in their scope, coverage, and reliability. Among the most notable limitation in the data is the lack of a central or official source of data on private-sector employment associated with DOD contracts. Information on the number of jobs associated with particular defense contracts or weapon programs are repeatedly discussed in the media and in Congress. Further, DOD has stated that defense procurement dollars promote the creation of jobs. However, DOD officials have also indicated that they do not collect information on the job impacts of particular DOD budget decisions.\nTo obtain information on the employment associated with defense contracts or the employment linked to particular defense programs, it is necessary to contact individual defense contractors and\/or DOD system program offices directly. The contractor employment data we obtained from our survey of defense contractors in New Mexico is summarized in appendix III, along with other survey findings. The responses from the top four contractors who provided us data indicated that the total number of direct jobs associated with DOD contracts was approximately 19,200 during 1988-96. The total DOD federal employment (active duty, inactive, and civilians) in the state for the same period (1989 data included) was approximately 328,000. A comparison of employment data from three top DOE prime contractors to the data from the top four DOD prime contractors indicates that, over the period 1994-96, DOE had about eight prime contractor employees to every one DOD prime contractor employee in New Mexico. We also obtained employment and expenditure data for a sample of specific defense programs that were known to have some involvement with New Mexico contractors (see table 3).\n\n\tConclusions\n\nThe available data indicate that the state of New Mexico receives relatively large amounts of federal dollars. Defense-related federal activities in the state have contributed to the development of the economy, and recent efforts to diversify the economic base appear linked to continued growth. The best available data indicate that in New Mexico DOE and DOD account for about 90 percent of all federal procurement spending (1993-96), 54 percent of expenditures for federal worker salary and wages (1988-96), 72 percent of all federal jobs in the state (1988-96), and 68 percent of all retired federal workers living in the state (1990-96). Specifically, DOE accounts for 80 percent of the defense-related procurement expenditures, and DOD accounts for 93 percent of the defense-related salary and wage expenditures, 97 percent of the defense-related federal jobs, and 99 percent of the federal workers retired from defense-related agencies and living in New Mexico. The largest component of DOE employment is private contractor employment, while the largest component of DOD employment is federal employment, namely active duty military members.\nOn one hand, determining the full and complete economic magnitude of federal expenditures in states, whether defense or nondefense, and the related employment is not possible with existing data. Trying to reconcile differences among data sources and account for gaps or questionable data is very resource-intensive and does not necessarily yield benefits in precision or accuracy. On the other hand, the existing data are not without value, nor should the government necessarily strive for increased data collection that could actually entail more costs than benefits. The limitations in federal data may, in part, reflect the fact that data collection trails behind changes in federal policy or shifts in policy relevance. Those who rely on federal data need to be alert to their drawbacks and exercise discretion when using them.\n\n\tAgency Comments\n\nIn oral comments on a draft of this report, DOD concurred with our findings and conclusions. It also provided several technical comments, which we incorporated in the text where appropriate.\n\n\tScope and Methodology\n\nIn conducting our work, we contacted and interviewed officials and experts from federal and state government offices and the private sector. Because the scope of the work covered all federal expenditures and related employment in New Mexico over an 8-year period, there was a large range and number of contacts and outreach efforts we made in completing our work. We made over 50 contacts throughout federal and state governments and the private sector. Our final results were produced from databases from four separate federal agencies; our survey of New Mexico defense contractors encompassing 8 years of financial and business information; information obtained from a review of more than  30 publications; and information we obtained from numerous documented interviews with key officials. A list of the offices we contacted is in appendix I.\nTo determine the characteristics of the New Mexico economy and recent changes in the economy, we reviewed and analyzed economic data and information we obtained from interviews with New Mexico state officials, federal government officials, and available federal and state data sources, including the Bureau of Economic Analysis and the Bureau of Business and Economic Research at the University of New Mexico.\nTo determine the direct defense-related and nondefense-related federal expenditures and employment in New Mexico over the period 1988-1996we contacted multiple federal offices and obtained official data from DOD and DOE. We obtained data on all other nondefense-related federal expenditures from the Census Bureau. All available data on DOD and DOE expenditures were categorized as defense-related. We obtained total nondefense-related employment data from OPM\u2019s Central Personnel Data File. All expenditure figures were adjusted for inflation and are presented in constant 1996 dollars. Appendix II contains the complete overview and figures depicting our findings related to direct federal expenditures and employment in New Mexico.\nTo determine the extent to which available government data provides reliable information on defense spending and employment, we evaluated the qualities of the existing federal data. We reviewed technical documentation for the sources used, interviewed agency officials about the data sources, conducted crosschecks of data that appeared in multiple sources but had been derived from the same source, and in the case of DOD procurement expenditures, compared the results of DOD data to our survey results. Survey results are discussed in appendix III. Given the outcome of our review, federal data limitations and data reliability concerns are discussed in our findings and reflected in the report\u2019s conclusions.\nOur work was conducted between November 1996 and October 1997 in accordance with generally accepted government standards.\nAs agreed with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 14 days from its issue date. At that time, we will send copies of this report to other interested congressional committees and members. Copies will also be made available to others upon request.\nPlease contact me at (202) 512-3092 if you or your staff have any questions concerning this report. Major contributors to this report were Carolyn Copper, John Oppenheim, and David Bernet.\n\nOffices We Contacted\n\n\tDepartment of Defense, Washington, D.C.\n\n\tDepartment of Energy, Washington, D.C.\n\n\tDepartment of Commerce, Washington, D.C.\n\n\tCongressional Agencies, Washington, D.C.\n\n\tFederal Facilities, New Mexico\n\n\tState Government Offices\n\n\tUniversities\n\n\tDefense Contractors\n\n\tOthers\n\nProfessional Aerospace Contractors Association of New Mexico,     Albuquerque, New Mexico Intel Corporation, Albuquerque, New Mexico American Electronics Association, Santa Clara, California Logistics Management Institute, McClean, Virginia Academy for State and Local Governments, Washington, D.C. National Council of State Governments, Washington, D.C. National Legislative Council, Washington, D.C. National Governors Association,Washington, D.C. RAND, Washington, D.C.\n\nDirect Federal Expenditures and Employment in New Mexico\n\nThis appendix presents 1988-96 (1) trends in total direct federal expenditures and employment in New Mexico and within specific spending categories, (2) defense-related and nondefense-related expenditures and employment, and (3) the Department of Energy\u2019s (DOE) and the Department of Defense\u2019s (DOD) share of the defense-related expenditures and employment.\nWe used existing databases and a survey on how much money is directly spent and how many people are directly employed to determine expenditures and employment. We did not assess the indirect or induced effects of federal expenditures and employment. All expenditure data were adjusted for inflation and are presented in constant 1996 dollars. Data for all years were not always available.\n\n\tFederal Expenditures in New Mexico\n\nFederal expenditures in New Mexico fluctuated between about $10 billion and $12 billion, 1988 through 1996. The highest level of spending occurred in 1996 (see fig. II.1).\nFigure II.1: Federal Expenditures in New Mexico (1988-96)\nThis increase in federal expenditures for New Mexico is consistent with nationwide trends.\nTotal federal employment in New Mexico generally increased between 1988 and 1994, then declined to 1996. Total employment in 1996 is the lowest level of any year in the period (see fig. II.2). The decline in federal employment in New Mexico in the last several years is consistent with trends in declining nationwide federal employment.\nFigure II.2: New Mexico Federal Employment (1988-96)\nFigure II.3 shows the specific expenditure trends in procurement, grants, salaries and wages for federal workers, and direct payments to individuals.\nFigure II.3: Total Federal Spending on Procurement, Grants, Federal Employee Salaries and Wages, and Direct Payments in New Mexico (1988-96)\nProcurement expenditures in New Mexico have generally declined over time but did increase between 1989 and 1992. In the 1988-96 time frame, procurement expenditures were at their lowest in 1996. Expenditures on grants and direct payments have increased over time and have not shown periods of decline. This is consistent with national trends. Federal salary and wage trends are marked by small increases over time with periods of stability following an increase.\n\n\tDefense-Related and Nondefense-Related Federal Expenditures in New Mexico\n\nDefense-related procurement expenditures far exceeded nondefense-related procurement expenditures during 1993-96. But both types of expenditures have been declining (see fig. II.4). The decline in defense-related expenditures is consistent with overall trends in declining DOD and DOE budgets.\nFigure II.4: Defense-Related and Nondefense-Related Federal Procurement Expenditures in New Mexico (1993-96)\nNondefense-related agencies accounted for more of the expenditures for federal grants to New Mexico (see fig. II.5). The top five agencies in terms of expenditures on federal grants to New Mexico were the Departments of Health and Human Services (HHS), Transportation, Interior, Agriculture, and Education. Expenditures on nondefense-related grants were 99 percent of the total grant expenditures in each year between 1988 and 1996.\nFigure II.5: Defense-Related and Nondefense-Related Federal Grant Expenditures in New Mexico (1988-96)\nDefense-related agencies accounted for more of the total salaries and wages for federal workers than nondefense-related agencies between 1988 and 1996 (see fig. II.6).\nFigure II.6: Salaries and Wages to Defense-Related and Nondefense-Related Federal Workers in New Mexico (1988-96)\nBetween 1988 and 1993 total expenditures on salaries and wages for nondefense-related workers increased steadily, slowly declining in the last 4 years. On the other hand, salary and wage expenditures for defense-related workers generally declined between 1988 and 1993 but increased slightly between 1995 and 1996. Salaries and wages were at their highest in 1996 for defense-related workers were and at their highest in 1993 for nondefense-related federal workers.\nIt is not possible to make clear federal agency distinctions in direct payment expenditures. These expenditures are commonly reported by federal program, not by federal agency. Given the reporting criterion used, we determined which federal program accounted for most of the direct payments in New Mexico. In some but not all cases, this information is sufficient to determine which federal agency accounted for most of the expenditures.\nPrograms administered by HHS accounted for over 50 percent of the total direct payment expenditures in New Mexico in each year between 1988 and 1996: the average was 63 percent (see fig. II.7). The programs included in the HHS roll-up include Social Security, Medicare, and Supplemental Security Income.\nFigure II.7: Distribution of Federal Direct Payments in New Mexico, by Federal Program (1988-96)\nPayments for federal retirement and disability made up the second largest category of direct payments in New Mexico in each year between 1988 and 1996. On average, these payments accounted for 18 percent of all direct payments made in New Mexico during 1988-96. The Food Stamp Program, administered by the Department of Agriculture, on average, accounted for 5 percent, and direct payments to individuals associated with all other programs, on average, accounted for 14 percent of the total direct payments over the same time period.\nWe could not determine the breakdown between the defense-related and nondefense-related distribution of federal retirement payments directly from the Census data. Therefore, we obtained additional data from DOD and the Office of Personnel Management (OPM). Figure II.8 shows that payments to workers retired from the defense-related agencies account for the majority\u2014on average 68 percent\u2014of the total annuities for retired federal workers in New Mexico, between 1988 and 1996. Total annuities for defense and nondefense-related retired federal workers have increased over time.\nFigure II.8: Total Annuities for Federal Workers Living in New Mexico and Retired From Defense-Related and Nondefense-Related Agencies (1988-96)\n\n\tDefense-Related and Nondefense-Related Federal Employment in New Mexico\n\nFederal workers from the defense-related agencies accounted for the majority of the total federal employment in New Mexico during 1988-96 (see fig. II.9). Federal jobs in the defense-related agencies, on average, accounted for 72 percent of the total federal jobs in New Mexico. Total federal employment declined by approximately 4,000 jobs between 1992 and 1996; about 84 percent of these jobs were in defense-related agencies.\nFigure II.9: Defense-Related and Nondefense-Related Federal Employment in New Mexico (1988-96)\nDefense-related agencies in New Mexico account for about 68 percent of the federal retirees, on average, between 1990 and 1996. The number of federal workers retired from defense and nondefense-related agencies and living in New Mexico has increased over time.\nFigure II.10: Federal Retired Workers From Defense and Nondefense-Related Agencies Living in New Mexico (1988-96)\nThe defense-related agencies in New Mexico accounted for the majority of procurement expenditures, total annuities for retired federal workers, and salaries and wages for federal employees. In figures II.11, II.12, and II.14, we show the trends in the DOD and DOE share of the expenditures in each of these categories. We also show the number of DOD and DOE federal retirees in New Mexico (see fig. II.13).\nBetween 1993 and 1996, DOE accounted for more of the defense procurement dollars that went to New Mexico than DOD (see fig. II.11). Consistent with overall declining DOE and DOD budgets, DOE and DOD procurement expenditures in New Mexico have declined in the last several years.\nFigure II.11: DOD and DOE Procurement Expenditures in New Mexico (1993-96)\nFigure II.12 shows that payments to DOD retired federal workers living in New Mexico account for most of the total annuities to federal workers retired from defense-related agencies between 1990 and 1996. On average, annuities to retired DOD workers accounted for 98 percent of total annuities between 1990 and 1996.\nFigure II.12: Annuities to Workers Retired From DOD and DOE and Living in New Mexico (1990-96)\nAlso, more former DOD than DOE federal employees were living in New Mexico between 1990 and 1996 (see fig. II.13).\nFigure II.13: DOD and DOE Retired Federal Workers in New Mexico (1990-96)\nThe increase in retired DOD workers in New Mexico is consistent with an overall increase in the number of retired active duty military members and DOD civilians.\nFigure II.14 shows that DOD also accounts for nearly all of the salary and wage expenditures for federal employees of defense-related agencies.\nFigure II.14: DOD and DOE Federal Employee Salary and Wage Expenditures in New Mexico (1988-96)\nOn average, DOD accounted for 93 percent of the defense-related salaries and wages for federal employees. The total amount of DOD and DOE salary and wage expenditures has fluctuated some over the years, but no sharp increases or decreases have occurred.\nDOE mostly employs prime contractor employees, who are not counted as federal employees, thus, their numbers are not included in federal data. DOE data we obtained indicates that the salaries and wages for DOE prime contractor employees in New Mexico are greater than those of DOD federal employees in the state. For example, between 1990 and 1994 the total salaries and wages for DOD federal employees were about $4 billion and, for DOE prime contractors were about $6 billion. Comparable figures on the total compensation to DOD prime contractor employees in New Mexico were not available. However, the data we obtained from our survey of the top New Mexico contractors shows that the total compensation to their employees was $332 million between 1990 and 1994, or about $6.6 million per year.\n\n\tDOD and DOE Share of Defense-Related Employment in New Mexico\n\nDefense-related federal employment in New Mexico is higher than nondefense-related employment. In this section, we show the DOD and DOE portions of defense-related employment over time, including DOD\u2019s and DOE\u2019s numbers and types of occupations.\nOn average, DOD accounted for 97 percent of the total defense-related federal employment in New Mexico between 1988 and 1996 (see fig. II.15).\nFigure II.15: DOE and DOD Employment in New Mexico (1988-96)\nDOE In each year between 1988 and 1996, active duty military members were the single largest group of DOD federal employees in New Mexico. Inactive duty military and DOD civilian employees, respectively, accounted for the second and third largest component of DOD federal employment (see  fig. II.16).\nFigure II.16: DOD Active, Inactive, and Civilian Employment in New Mexico (1988-96)\nActive duty and inactive duty military members, and DOD civilians ranked first, third, and second, respectively, in accounting for the largest share of salary and wages for DOD federal employees in New Mexico from 1988 to 1996 (see fig. II.17).\nFigure II.17: Salary and Wages for DOD Active and Inactive Duty Members and DOD Civilians in New Mexico (1988-96)\nBetween 1988 and 1996 more of the DOD active duty military jobs in New Mexico were blue collar and technical compared to administrative, clerical, white collar, or professional job occupations (see fig. II.18).\nFigure II.18: Job Occupations of DOD Active Duty Military in New Mexico (1988-96)\nThe job occupations of DOD civilians were more evenly dispersed across categories than DOD military jobs. Professional job occupations accounted for the most DOD civilian jobs in New Mexico between 1988 and 1996 (see fig. II.19).\nFigure II.19: Job Occupations of DOD Civilians in New Mexico (1988-96)\nThe majority of DOE federal jobs in New Mexico between 1988 and 1996 were professional and administrative (see fig. II.20).\nFigure II.20: Job Occupations of DOE Federal Employees in New Mexico (1988-96)\n\nSurvey of Top Defense Contractors in New Mexico\n\nThe principal purpose of our survey was to determine and characterize the flow of defense dollars to contractors and to illuminate and quantify the limitations of existing data sources that document defense spending in states.\n\n\tSurvey Methods\n\nFor our survey sample, we selected contractors who were among the top five in terms of the total dollar amount of DOD prime contracts awarded in fiscal year 1996. Time and resource constraints prevented us from surveying every business that was awarded a defense contract and performed work in New Mexico. For example, in 1996 alone, 471 businesses were awarded DOD contracts exceeding $25,000 for work principally done in New Mexico.\nWe obtained DOD\u2019s DD350 data to determine the total value of DOD prime contracts awarded to all businesses in 1996 with the principal place of work in New Mexico. From this population we selected five contractors: Honeywell, DynCorp, EG&G, Kit Pack Company, and Lockheed Martin. In 1996, prime contracts to these businesses accounted for 26 percent of the total value of all DOD prime contracts awarded to businesses in New Mexico. In the period covered by our survey, that is, 1988-96, the percentage of total DOD prime contract awards accounted for by the top five New Mexico contractors ranged from 26 to 46 percent. Different companies have been in the list of the top five over the years. However, over the survey period, Honeywell and DynCorp were consistently among the top five.\nContractors were asked to complete several questions about DOD contracts they were awarded as a prime and subcontractor between 1988-96. We asked them to indicate the total value of all DOD contracts received, the dollar amount of contract work that was subcontracted or was interdivisional work, the amounts subcontracted in-state and out-of-state, the amount of salary and wages for all contracts completed by the contractor and by subcontractors, and the number of full-time equivalent (FTE) positions for work completed by the contractor and for subcontractors.\n\n\tContractor Background\n\nAs a group Honeywell, Lockheed Martin, DynCorp, and EG&G are large, diversified corporations with business establishments physically located in New Mexico but actual corporate headquarters located elsewhere in the country. Kit Pack is a relatively smaller company, with its business headquarters and all operations located in New Mexico.\nDuring the period of time covered by our survey, Honeywell\u2019s principal DOD work in New Mexico was research, development, and testing and evaluation services for military aircraft and the manufacturing of aircraft avionics components. In 1996, DOD awarded prime contracts to Honeywell to provide automatic pilot mechanisms; flight instruments; and research, development, and testing and evaluation services related to aircraft engine manufacturing, among other things. Its survey data was completed by staff at Honeywell\u2019s business establishment in Albuquerque.\nDynCorp is a large professional and technical services firm. DynCorp\u2019s principal work in New Mexico is providing business services, which include aircraft maintenance and repair at military bases, and operations services provided at government-owned facilities. In 1996, DOD awarded prime contracts to DynCorp to provide maintenance and repair services to equipment and laboratory instruments, telecommunications services, and other services associated with operating a government-owned facility at White Sands Missile Range, among other things. DynCorp\u2019s survey data was completed by staff at the corporate headquarters in Reston, Virginia. DynCorp\u2019s responses were based on financial data for DynCorp and its subsidiaries that also operate in New Mexico (e.g., Aerotherm).\nEG&G\u2019s principal DOD work in New Mexico is providing communications equipment; operating radar and navigation facilities at Holloman Air Force Base; and doing advanced research, development, testing and evaluation work. In 1996, DOD awarded prime contracts to EG&G to provide advanced development and exploratory research and development (including medical) services at Kirtland Air Force Base and to operate radar and navigation facilities at Holloman Air Force Base, among other things. EG&G\u2019s survey data was completed by staff at the Albuquerque office and includes data only for EG&G Management Systems.\nKit Pack Company is located in Las Cruces, south of Holloman Air Force Base near White Sands Missile Range. Kit Pack\u2019s principal DOD work in New Mexico is providing aircraft spare parts and modification kits. In 1996, DOD awarded prime contracts to Kit Pack to provide aircraft hydraulics, vacuum and deicing system components, airframe structural components, and torque converters and speed changers, among other things. After it completed and returned the survey to us, Kit Pack officials informed us that it was currently operating under Chapter 11 bankruptcy due to the termination for default of an Army contract. Kit Pack had filed an appeal of the termination, which was pending when we completed our work. The company indicated that it has seen a severe reduction in the number of DOD contracts awarded since it filed for bankruptcy. Kit Pack staff in Las Cruces completed our survey.\nWe were unable to obtain survey information from Lockheed Martin. Company officials indicated that they did not have the type of information we requested broken out by states or geographical locations. In a follow-up meeting, company officials provided us with information on their total expenditures to New Mexico suppliers, annual payroll for their employees in New Mexico and the number of employees in the state between 1992 and 1996. The information was developed by staff in Lockheed Martin\u2019s Washington operations office.\nWe could not use Lockheed Martin\u2019s information because it was not broken out by specific federal agencies, nor could we determine whether the total expenditures, payroll, or employment were associated with government-funded work or whether they were part of the company\u2019s commercial business. Over the course of several meetings and conversations with Lockheed Martin officials, we obtained detailed supplier expenditure information from the Lockheed Martin Consolidated Procurement Program which was broken out by specific Lockheed Martin business units. Company officials said that this would provide an indication of the type of business activity (e.g., DOD, DOE, NASA, and commercial) that the expenditures were made for. In addition, we were given information on corporate sales and payroll by staff in Lockheed Martin\u2019s tax department.\nWe discovered several discrepancies in the company\u2019s financial information. When we discussed these with company officials, they indicated that the data provided by the Washington operations office were \u201cless reliable\u201d than other data. Company officials also indicated that their record-keeping had been challenged by the recent merger\/acquisition activities (i.e., Lockheed and Martin Marietta in 1995 and the Loral acquisition in 1997). Lockheed Martin officials said that different companies had different information systems and that some information may have been lost during the recent merger.\n\n\tKey Limitations\n\nOur survey was not designed to specify or measure the exact amount of all DOD contract dollars that flow into New Mexico. Rather, its purpose was to reflect the nature of the flow of DOD prime and subcontract dollars to a sample of top New Mexico contractors and to compare these results to existing DOD data.\nAmong the four contractors that completed the survey, none indicated that they could not provide reliable responses to the survey items. The most common limitation was the lack of information on FTEs and wages for subcontracted work. Specifically, contractors indicated the following limitations in their responses to us.\nHoneywell provided information on the dollar amount of the orders it received during the calendar year and estimates of subcontracted work and employees and wages associated with subcontracted work.\nKit Pack did not have FTE or wage information on its subcontractors and indicated that it no longer had payroll records for its own staff for 1988, 1989, or 1991.\nEG&G did not have records for FTEs and wages associated with subcontracted work.\nDynCorp did not have information on its subcontractors prior to 1993. To report fiscal year information, DynCorp had to convert some company financial data that was not identified by fiscal years.\n\n\tSurvey Findings\n\nWe treated all survey data received from contractors as proprietary. Therefore, in discussing survey findings, contractor names are not used and data is aggregated to protect business-sensitive information. All dollars were adjusted for inflation and are constant 1996 dollars. All of the contractors surveyed were DOD prime contractors. Two of the four contractors we surveyed indicated that they were also DOD subcontractors.\nThe total amount of DOD prime and contract subcontract awards has declined over the 9-year period. The totals reported for 1996 were the lowest of all the years. For the 9-year period of our survey, expenditures for DOD prime contracts ($1.5 billion) were roughly the same as for subcontracts ($1.4 billion). However, in 5 of the 9 years, the contractors received more subcontract than prime contract dollars (see fig. III.1).\nFigure III.1: DOD Contracts Awarded to the Top Four New Mexico Defense Contractors (1988-96)\nBetween 1988 and 1996, the percent of prime contract dollars that remained in-state was consistently greater than 80 percent (see fig. III.2). The 9-year average was 83 percent.\nFigure III.2: Contract Dollars Received by the Top Four New Mexico Defense Contractors That Stayed In-State (1988-96)\nAlthough the average percent of prime contract dollars that remained in New Mexico was high, examination of specific contractor data indicates important exceptions. For two of the contractors, the survey results indicated that nearly 100 percent of the prime contract dollars they received remained in-state between 1988 and 1996. However, one contractor\u2019s data shows that less than 50 percent of prime contract dollars received remained in-state each year between 1988 and 1996. Approximately 70 percent of the total prime contract awards received by another contractor remained in-state for all years (see fig. III.3).\nFigure III.3: Differences in Percent of Prime Contract Dollars That Remained In-State (1988-96)\nFor the two contractors that were also DOD subcontractors, a slightly smaller percentage of their subcontract dollars remained in-state compared to the percentage of their prime contract dollars (see fig. III.4). On average, 75 percent of subcontract dollars remained in-state between 1988 and 1996.\nFigure III.4: Subcontract Dollars That Stayed In-State (1988-96)\nThe contractors indicated that the majority of jobs supported by their DOD prime contracts remained in-state. On average, 73 percent of the jobs remained in-state during 1988-96. The lowest yearly percentage was 66 percent in 1989 and 1990, and the highest was 83 percent in 1996 (see fig. III.5).\nFigure III.5: DOD Prime Contract and Subcontract Jobs That Stayed In-State (1988-96)\nOn average, 73 percent of the total wages for employees working on DOD prime contracts and subcontracts remained in-state between 1988 and 1996 (see fig. III.6). From 1988 to 1996 the percent of wages that remained in-state generally increased.\nFigure III.6: Wages for DOD Prime Contract and Subcontract Work That Stayed In-State (1988-96)\nWe compared our survey results to DOD\u2019s records of the total amount of contract awards received by the contractors between 1994 and 1996. DOD sources collect and report information only on prime contracts while our survey collected information on DOD prime contracts and subcontracts. Thus, we expected that DOD\u2019s records and the contractors\u2019 would be different as was revealed in the survey. Therefore, we compare DOD\u2019s records of total prime contracts to our survey results on the amount of prime contracts received by the contractors in New Mexico and that remained in the state. However, to shed further light on and quantify, where possible, the limitations in existing DOD data, we also compared the amount of total contracts, defined as in-state prime contracts and subcontracts, to the DOD totals, defined as prime contracts (see fig. III.7).\nThe overall comparison between the contractors\u2019 records and DOD\u2019s records of total prime contract amounts shows that DOD records can both overstate and understate the total amount of prime contracts that actually end up in a state\u2019s economy. In 1994, the contractors\u2019 records show that $93.6 million in DOD prime contract work was done in New Mexico. On the other hand, DOD\u2019s records indicate that the contractors received $144.9 million in prime contracts, representing a possible $51 million, or about a 54-percent overstatement. However, in 1995, the contractors\u2019 records showed that $143.3 million in DOD prime contract work was done in the state, whereas DOD\u2019s records show that the businesses received $117.2 million, representing a possible $26-million, or about an 18 percent understatement.\nAs expected, a comparison of the contractors\u2019 records of the total contracts (in-state prime contracts and in-state subcontracts) to the existing DOD records of total prime contracts shows that the totals reported by the contractors were consistently greater than the totals reported in DOD\u2019s records.","output":"Why GAO Did This Study\n\nPursuant to a congressional request, GAO examined defense and other federal spending in the state of New Mexico, focusing on: (1) characteristics of New Mexico's economy and changes in it; (2) the amount of direct defense-related and nondefense-related federal spending in the state and the direct federal employment associated with both, over time; and (3) the extent to which available government data can provide reliable information on defense spending and employment.\n\nWhat GAO Found\n\nGAO noted that: (1) New Mexico is home to two Department of Energy (DOE) national laboratories and four Department of Defense (DOD) military installations, among other federal activities; (2) state officials indicate that New Mexico's economy is \"heavily dependent\" upon federal expenditures; (3) in 1996, New Mexico was fourth among states in the per capita distribution of federal dollars and first in return on federal tax dollars; (4) while parts of the state have relatively strong economies, in 1994 New Mexico's poverty rate was the second highest in the country and its per capita income was 48th in the country; (5) although defense-related spending has been declining, New Mexico's gross state product and total per capita income have been increasing, indicating that the economy is growing and that efforts to diversify the economy may be having a positive effect; (6) one can learn several things from the available federal government expenditure and employment data for New Mexico; (7) DOD and DOE expenditures have consistently represented the largest share of all federal expenditures for procurement and salaries and wages in New Mexico; (8) defense-related employment has also consistently represented the largest share of total federal employment in New Mexico, including retired federal workers; (9) DOD and DOE do not contribute equally on types of defense-related spending or defense-related employment, revealing relevant distinctions between the types of direct economic contributions made by these agencies; (10) DOE contributes most in federal procurement expenditures and private contractor employment; (11) DOD contributes most in federal salaries and wages and federal employment, namely active duty military and retired employees; (12) existing government data, however, contributes to only a partial understanding of the type of federal dollars that enter a state's economy and the employment supported by the expenditures; (13) GAO's research based on New Mexico shows that the data have limitations that severely restrict the ability to determine the total amount and distribution of federal funding and jobs in the state; (14) key limitations include: (a) reporting thresholds that exclude millions in procurement expenditures; (b) the reporting of the value of an obligation, rather than the money actually spent; (c) the absence of any comprehensive source of primary data that systematically identifies private sector employment associated with federal contracts; and (d) DOD's lack of data on subcontracts; and (15) since these data sources are not unique to New Mexico, these limitations would also apply to assessments of other states."}
{"id":"crs_RL33341","pid":"crs_RL33341_0","input":"\tHistory of the SPR\n\n\t\tEstablishment of the SPR\n\nFrom the mid-1970s until 2007, world markets have had to absorb roughly five significant spikes in the price of crude oil and petroleum products. Whether driven by disruptions in the physical supply of crude or refined fuels, or by uncertainties owing to international conflicts and instabilities, these price increases have consequences for the United States. Elevated petroleum prices affect the balance of trade and, owing to the relative inelasticity of demand for gasoline at prices less than $4.00 per gallon, siphon away disposable income that might be spent to support spending, investment, or savings.\nThe origin of the U.S. Strategic Petroleum Reserve (SPR) stems from the 1973 Arab-Israeli War. In response to the United States' support for Israel, the Organization of Arab Exporting Countries (OAPEC) imposed an oil embargo on the United States, the Netherlands, and Canada, and reduced production. While some Arab crude did reach the United States, the price of imported crude oil rose from roughly $4\/barrel (bbl) during the last quarter of 1973 to an average price of $12.50\/bbl in 1974. While no amount of strategic stocks can insulate any oil-consuming nation from paying the market price for oil in a supply emergency, the availability of strategic stocks can help blunt the magnitude of the market's reaction to a crisis. One of the original perceptions of the value of a strategic stockpile was also that its very existence would discourage the use of oil as a political weapon. The embargo imposed by the Arab producers was intended to create a very discernible physical disruption. This explains, in part, why the genesis of the SPR was focused especially on deliberate and dramatic physical disruptions of oil flow, and on blunting the significant economic impacts of a shortage stemming from international events.\nIn response to the experience of the embargo, Congress authorized the Strategic Petroleum Reserve in the Energy Policy and Conservation Act (EPCA, P.L. 94-163 ) to help prevent a repetition of the economic dislocation caused by the Arab oil embargo. In the event of an interruption, introduction into the market of oil from the Reserve was expected to help calm markets, mitigate sharp price spikes, and reduce the economic dislocation that had accompanied the 1973 disruption. In so doing, the Reserve would also buy time for the crisis to sort itself out or for diplomacy to seek some resolution before a potentially severe oil shortage escalated the crisis beyond diplomacy. The SPR was to contain enough crude oil to replace imports for 90 days, with a goal initially of 500 million barrels in storage. In May 1978, plans for a 750-million-barrel Reserve were implemented. The SPR is currently authorized for expansion to 1 billion barrels. The George W. Bush Administration was unsuccessful in persuading Congress to raise the authorized size further to 1.5 billion barrels.\nThe program is managed by the Department of Energy (DOE). Physically, the SPR comprises five underground storage facilities, hollowed out from naturally occurring salt domes, located in Texas and Louisiana. The caverns were finished by injecting water and removing the brine. Similarly, oil is removed by displacing it with water injection. For this reason, crude stored in the SPR remains undisturbed, except in the event of a sale or exchange. Multiple injections of water, over time, will compromise the structural integrity of the caverns. By 2005, the capacity of the SPR reached 727 million barrels. Its inventory reached nearly 700 million barrels before Hurricanes Katrina and Rita in 2005. Following the storms, some crude was loaned to refiners and some was sold. Loans of SPR oil are \"paid\" by the return of larger amounts of oil than were borrowed. By the end of 2009, was virtually filled to its capacity at 726 million barrels of crude oil.\nSPR oil is sold competitively. A Notice of Sale is issued, including the volume, characteristics, and location of the petroleum for sale; delivery dates and procedures for submitting offers; as well as measures for assuring performance and financial responsibility. Bids are reviewed by DOE and awards offered. The Department of Energy estimates that oil could enter the market roughly two weeks after the appearance of a notice of sale.\nThe SPR could be drawn down initially at a rate of roughly 4.4 mbd for up to 90 days; thereafter, the rate would begin to decline. Although fears were expressed periodically during the 1980s about whether the facilities for withdrawing oil from the Reserve were in proper readiness, the absence of problems during the first real drawdown in early 1991 (the Persian Gulf War) appeared to allay much of that concern. However, some SPR facilities and infrastructure were beginning to reach the end of their operational life. A Life Extension Program, initiated in 1993, upgraded or replaced all major systems to ensure the SPR's readiness to 2025.\nThe Arab oil embargo also fostered the establishment of the International Energy Agency (IEA) to develop plans and measures for emergency responses to energy crises. Strategic stocks are one of the policies included in the agency's International Energy Program (IEP). Signatories to the IEA are committed to maintaining emergency reserves representing 90 days of net imports, developing programs for demand restraint in the event of emergencies, and agreeing to participate in allocation of oil deliveries among the signatory nations to balance a shortage among IEA members. The calculation of net imports for measuring compliance with the IEA requirement includes private stocks. By that measure, the United States has more than 100 days' cushion. However, it is likely that less than 20% of the privately held stocks would technically be available in an emergency, because most of that inventory supports movement of product through the delivery infrastructure. At full capacity, the SPR might afford the United States roughly 70 days or more of net import protection, depending upon the pace of recovery of the domestic economy. These measures of days' protection assume a total cessation of oil supply to importing nations, a scenario that is highly unlikely. This would be especially true for the United States, given that Canada is currently the nation's principal source for crude oil. \nSome IEA member nations require a level of stocks to be held by the private sector or by both the public and private sectors. Including the U.S. SPR, roughly two-thirds of IEA stocks are held by the oil industry, whereas one-third is held by governments and supervisory agencies.\nThe Energy Policy Act of 2005 (EPACT) requires, \"as expeditiously as practicable,\" expansion of the SPR to its authorized maximum of 1 billion barrels. Advocates for expansion argue that the SPR will need to be larger if the United States is to be able to maintain stocks equivalent to 90 days of net imports. Congress approved $25 million in the FY2008 budget for expansion activities. A site in Richton, MS, has been evaluated for the addition of 160 million barrels of capacity. The FY2010 budget, at $229 million, includes $43.5 million for purchase of a cavern at Bayou Choctaw to replace a cavern posing environmental risks, as well as $25 million for expansion activities. However, it is not apparent that expansion remains a high priority.\nThe conferees accepted language in the Senate version of the bill that prohibits SPR appropriations expended to anyone engaged in providing refined products to Iran or contributing in any way to expansion of refining capacity in Iran. Firms providing, or insuring tankers carrying, refined product to Iran would also be included in the prohibition.\n\n\tThe Drawdown Authorities\n\nThe Energy Policy and Conservation Act (EPCA, P.L. 94-163 ) authorized drawdown of the Reserve upon a finding by the President that there is a \"severe energy supply interruption.\" This was deemed by the statute to exist if three conditions were joined: If \"(a) an emergency situation exists and there is a significant reduction in supply which is of significant scope and duration; (b) a severe increase in the price of petroleum products has resulted from such emergency situation; and (c) such price increase is likely to cause a major adverse impact on the national economy.\"\nCongress enacted additional drawdown authority in 1990 (Energy Policy and Conservation Act Amendments of 1990, P.L. 101-383 ) after the Exxon Valdez oil spill, which interrupted the shipment of Alaskan oil, triggering spot shortages and price increases. The intention was to provide for an SPR drawdown under a less rigorous finding than that mandated by EPCA. This section, 42 U.S.C. \u00a7 6241(h), has allowed the President to use the SPR for a short period without having to declare the existence of a \"severe energy supply interruption\" or the need to meet obligations of the United States under the international energy program. As noted previously, the Energy Policy Act of 2005 made the SPR authorities permanent. These authorities also provided for U.S. participation in emergency-sharing activities of the International Energy Agency without risking violation of antitrust law and regulation. \nUnder the additional authorities authorized in P.L. 101-383 , a drawdown may be initiated in the event of a circumstance that \"constitutes, or is likely to become, a domestic or international energy supply shortage of significant scope or duration\" and where \"action taken ... would assist directly and significantly in preventing or reducing the adverse impact of such shortage.\" This authority allows for a limited use of the SPR. No more than 30 million barrels may be sold over a maximum period of 60 days, and this limited authority may not be exercised at all if the level of the SPR is below 500 million barrels. This was the authority behind the Bush Administration's offer of 30 million barrels of SPR oil on September 2, 2005, which was part of the coordinated drawdown called for by the International Energy Agency. The same authority may have been the model for a swap ordered by President Clinton on September 22, 2000.\n\n\t\tProposals in the 111th Congress to Amend the Authorities\n\nLegislation has been reported in the Senate that would alter significantly the authorities governing drawdown and sale from the SPR. The American Clean Energy Leadership Act of 2009 ( S. 1462 ) would require that the SPR include 30 million barrels of refined product (distinct from the 2 million barrels of home heating oil held in the Northeast Heating Oil Reserve); would transfer authority for a drawdown from the President to the Secretary of Energy; and would amend the drawdown authority to permit drawdown and sale in the event of a \"severe energy market supply interruption\" that has caused, or is expected to cause \"a severe increase\" in prices. This language is a significant departure from existing authorities which predicate drawdown disruptions in supply, and discourages use of the SPR to address high prices, per se. \nThe refined product reserves that would be established by S. 1462 could be drawn down if the Secretary of Energy determines that \"a sale of refined products will mitigate the impacts of weather-related events or other acts of nature that have resulted in a severe energy market supply disruption.\" However, the proposed language would amend the broader authorities to allow drawdown in the event of a \"severe energy market disruption,\" deemed to exist if \"a severe increase in the price of petroleum products has resulted or is likely to result from the emergency situation\" and that the increase in price \"is likely to cause a major adverse impact\" on the economy. \nHistorically, use of the SPR is premised on a physical shortage of supply\u2014which normally will manifest itself, in part, in an increase in price. However, price was deliberately kept out of the authorities as grounds for a drawdown because it invited the question: at what price? A concern was that, if there were any hint of a price threshold that would trigger a drawdown, it could influence private sector and industry inventory practices. \nBehind this also lies the assumption and expectation that refined product prices are driven, in large measure, by crude supply and price. However this dynamic was severed in recent years. During 2008, for example, with the exception of supply uncertainties caused by Hurricanes Gustav and Ike, high prices were not associated with shortages, but with significantly higher prices for crude that reflected international anxiety about the sufficiency of supply in the future. Though some policymakers urged the Bush Administration to release crude from the SPR, a drawdown would have been unlikely to significantly affect price. High prices were softened when slumping demand in the face of those prices, and pessimistic economic forecasts, triggered a plummeting in the price of crude oil that was eventually reflected in product prices.\nIf enacted, the legislation would require a report to Congress within 180 days describing what refined products would be acquired for the Reserve and how they would be acquired at minimal cost or disruption of markets. The report would be required to assess storage options (which would need to be above-ground) and \"the anticipated location of existing or new facilities.\" Presumably, some analysis would need to be undertaken to identify regions that might be likeliest affected by incapacitation of normal product distribution, as well as seasonal differences in the refined product itself. The report would be directed to assess the option of exchanging crude oil in the SPR for refined products. \nArguments in favor of establishing a refined product reserve are that U.S. oil imports include refined products and that it could be more efficient and calming to markets if it were not necessary to first draw down SPR crude and then refine it into needed products. The effect that SPR crude might have on moderating price increases could also be offset if refineries themselves or oil pipelines carrying crude to refineries were compromised. The availability of refined product reserves would address that scenario. Having a regional product reserve would also lessen the likelihood that delivery of crude or product from the stocks of IEA signatories might overwhelm U.S. port facilities; this happened in the wake of the European response that followed Hurricanes Rita and Katrina.\nArguments against a product reserve include the prospect that the availability of supplemental supplies of gasoline from abroad may increase as European demand for diesel vehicles displaces gasoline consumption there. Additionally, storage of refined product is more expensive than for crude. Storage of crude in salt caverns is estimated to cost roughly $3.50\/barrel while above-ground storage of product in tanks might cost $15-$18\/barrel. Refined product will also deteriorate and would need to be periodically sold and replaced to assure the quality of the product held in the product reserve. Many states also use different gasoline blends, adding to the complexity of identifying which blends should be stored where, and in what volume. It would be simpler to hold conventional gasoline in a product reserve with the expectation that the Environmental Protection Agency (EPA) would waive Clean Air Act (CAA) requirements during an emergency.\n\n\tAcquisition of Crude Oil for the SPR\n\n\t\tResumption of Fill (2009)\n\nAs already noted, legislation ( P.L. 110-232 ) enacted in May 2008 forbade DOE from initiating any new activities to acquire royalty-in-kind (RIK) oil for the SPR during the balance of 2008. The sharp decline in crude oil prices since spiking to $147\/barrel in the summer of 2008 has spurred interest in resuming fill of the SPR. On January 2, 2009, the Bush Administration announced plans to purchase oil for the SPR, and to reschedule deferred deliveries. There are four components in the resumption of fill: (1) a purchase announced on January 16, 2009, of nearly 10.7 million barrels to replace oil that was sold after Hurricanes Katrina and Rita in 2005; (2) the return of roughly 5.4 million barrels of oil borrowed by refiners after Hurricane Gustav in 2008; (3) delivery of roughly 2.2 million barrels of RIK oil that had been deferred; and (4) resumption of RIK fill in May 2009 at a volume of 26,000 barrels per day, totaling over 6.1 million barrels to be delivered over a period from May 2009 to January 2010. These activities are intended to fill the SPR to its current capacity of 727 million barrels by early 2010. The government has not acquired oil for the SPR by outright purchase since 1994, when oil purchases ended. The SPR held 592 million barrels.\n\n\t\tRoyalty-in-Kind Acquisition\n\nFrom 1995 until the latter part of 1998, sales of SPR oil, not acquisition, were at the center of debate. However, the subsequent reduction and brief elimination of the annual federal budget deficit\u2014as well as a precipitous drop in crude oil prices into early 1999\u2014generated new interest in replenishing the SPR, either to further energy security objectives or as a means of providing price support to domestic producers who were struggling to keep higher-cost, marginal production in service. As an initiative to help domestic producers, Secretary of Energy Bill Richardson requested that the Office of Management and Budget (OMB) include $100 million in the FY2000 budget request for oil purchases. The proposal was rejected. \nAs an alternative to appropriations for the purchase of SPR oil, DOE proposed that a portion of the royalties paid to the government from oil leases in the Gulf of Mexico be accepted \"in kind\" (in the form of oil) rather than as revenues. The Department of the Interior (DOI) was reported to be unfavorably disposed to the royalty-in-kind (RIK) proposal, but a plan to proceed with such an arrangement was announced on February 11, 1999. (Legislation had also been introduced [H.R. 498] in the 106 th Congress to direct the Minerals Management Service to accept royalty-in-kind oil.) Producers were supportive, maintaining that the system for valuation of oil at the wellhead is complex and flawed. While acquiring oil for the SPR by RIK avoids the necessity for Congress to make outlays to finance direct purchase of oil, it also means a loss of revenues in so far as the royalties are settled in wet barrels rather than paid to the U.S. Treasury in cash. Final details were worked out during the late winter of 1999. \nIn mid-November of 2001, President Bush ordered fill of the SPR to 700 million barrels, principally through oil acquired as royalty-in-kind (RIK). At its inception, the RIK plan was generally greeted as a well-intended first step toward filling the SPR to its capacity of 727 million barrels. However, it became controversial when crude prices began to rise sharply in 2002. Some policymakers and studies asserted that diverting RIK oil to the SPR instead of selling it in the open market was putting additional pressure on crude prices. A number of industry analysts argued that the quantity of SPR fill was not enough to have driven the market. The Administration strongly disagreed with claims that RIK fill bore responsibility for the continuing spike in prices.\nLegislative attempts to suspend RIK fill began in 2004, during the 108 th Congress. The Energy Policy Act of 2005 ( P.L. 109-58 ), enacted in the summer of 2005, required the Secretary of Energy to develop and publish for comment procedures for filling the SPR that take into consideration a number of factors. Among these are the loss of revenue to the Treasury from accepting royalties in the form of crude oil, how the resumed fill might affect prices of both crude and products, and whether additional fill would be justified by national security. On November 8, 2006, DOE issued its final rule, \"Procedures for the Acquisition of Petroleum for the Strategic Petroleum Reserve.\" The rule essentially indicated that DOE would take into account all the parameters required by P.L. 109-58 to be taken into consideration before moving ahead with any acquisition strategy. DOE rejected tying decisions to acquire oil to any specific, measurable differentials in current and historic oil prices.\nIn the summer of 2007, DOE resumed RIK fill of the SPR. On May 19, 2008, with gasoline prices exceeding, on average, $3.60 gallon, and approaching $4.00\/gallon in some regions, Congress passed P.L. 110-232 . However, a few days earlier, on May 16, DOE announced it would not accept bids for an additional 13 million barrels of RIK oil that had been intended for delivery during the second half of 2008. \nThrough FY2007, royalty-in-kind deliveries to the SPR totaled roughly 140 million barrels and forgone receipts to the Department of Interior an estimated $4.6 billion. DOE had estimated deliveries of 19.1 million barrels of RIK oil during FY2008 and $1.170 billion in forgone revenues. \nOpponents of RIK fill in the 110 th Congress were not necessarily opposed to the concept of an SPR. When the price of crude was much less of an issue, objections to RIK fill were also ideological. Opponents of RIK fill in principle contended that a government-owned strategic stock of petroleum is inappropriate under any circumstance\u2014that it essentially saddled the public sector with the expense of acquiring and holding stocks, the cost for which might have otherwise been borne by the private sector. The existence of the SPR, this argument goes, has blunted the level of stocks held in the private sector. As already noted, RIK fill resumed in 2009 and will end in early 2010, pending establishment of additional storage. As has been noted, a site in Richton, MS, has been evaluated as a possible site for expansion of the SPR. However, while $25 million for expansion activities was included in the FY2010 budget, it is not apparent that expansion is a high priority.\n\n\tWhen Should the SPR Be Used?: The Debate Over the Years\n\nThe history of the SPR traces differences of opinion over what could be deemed a \"severe energy supply interruption.\" As has been noted, the original intention of the SPR was to create a reserve of crude oil stocks that could be tapped in the event of an interruption in crude supply. However, in the last few years, there have been increases in the price of products independent of crude prices, as well as increases in crude prices that correlate to \"tight\" markets, but not to measurable shortages in crude supply. Legislation introduced in the 111 th Congress to amend the authorities for drawdown of both the SPR and the Northeast Heating Oil Reserve ( S. 967 , S. 283 ) would allow a drawdown under such a set of circumstances, which would have been seen as anomalous in the past.\nAuthorizing a drawdown of the SPR and the NHOR in the event of a \"severe energy supply disruption,\" both bills have language that includes a price component in the definition of what constitutes such a \"disruption\"\u2014either an observed price increase, or the likelihood of one.\nA debate during the 1980s over when, and for what purpose, to initiate a drawdown of SPR oil reflected the significant shifts that were taking place in the operation of oil markets after the experiences of the 1970s, and deregulation of oil price and supply. Sales of SPR oil authorized by the 104 th Congress\u2014and in committee in the 105 th \u2014renewed the debate for a time. The rise in oil prices from 2005-2008 renewed interest in the debate over the appropriate time to call upon the SPR. \nThe SPR Drawdown Plan, submitted by the Reagan Administration in late 1982, provided for price-competitive sale of SPR oil. The plan rejected the idea of conditioning a decision to distribute SPR oil on any \"trigger\" or formula. To do so, the Administration argued, would discourage private sector initiatives for preparedness or investment in contingency inventories. Many analysts, in and out of Congress, agreed with the Administration that reliance upon the marketplace during the shortages of 1973 and 1979 would probably have been less disruptive than the price and allocation regulations that were imposed. But many argued that the SPR should be used to moderate the price effects that can be triggered by shortages like those of the 1970s or the tight inventories experienced during the spring of 1996, and lack of confidence in supply availability. Early drawdown of the SPR, some argued, was essential to achieve these objectives.\nThe Reagan Administration revised its position in January 1984, announcing that the SPR would be drawn upon early in a disruption. This new policy was hailed as a significant departure, considerably easing congressional discontent over the Administration's preparedness policy, but it also had international implications. Some analysts began to stress the importance of coordinating stock drawdowns worldwide during an emergency lest stocks drawn down by one nation merely transfer into the stocks of another and defeat the price-stabilizing objectives of a stock drawdown. In July 1984, responding to pressure from the United States, the International Energy Agency agreed \"in principle\" to an early drawdown, reserving decisions on \"timing, magnitude, rate and duration of an appropriate stockdraw\" until a specific situation needed to be addressed.\n\n\t\tUse of the SPR in the Persian Gulf War (1990)\n\nThis debate was revisited in the aftermath of the Iraqi invasion of Kuwait on August 2, 1990. The escalation of gasoline prices and the prospect that there might be a worldwide crude shortfall approaching 4.5-5.0 million barrels daily prompted some to call for drawdown of the SPR. The debate focused on whether SPR oil should be used to moderate anticipated price increases, before oil supply problems had become physically evident.\nIn the days immediately following the Iraqi invasion of Kuwait, the George H. W. Bush Administration indicated that it would not draw down the SPR in the absence of a physical shortage simply to lower prices. On the other hand, some argued that a perceived shortage does as much and more immediate damage than a real one, and that flooding the market with stockpiled oil to calm markets is a desirable end in itself. From this perspective, the best opportunity to use the SPR during the first months of the crisis was squandered. It became clear during the fall of 1990 that in a decontrolled market, physical shortages are less likely to occur. Instead, shortages are likely to be expressed in the form of higher prices, as purchasers are free to bid as high as they wish to secure scarce supply.\nWithin hours of the first air strike against Iraq in January 1991, the White House announced that President Bush was authorizing a drawdown of the SPR, and the IEA activated the plan on January 17. Crude prices plummeted by nearly $10\/barrel in the next day's trading, falling below $20\/bbl for the first time since the original invasion. The price drop was attributed to optimistic reports about the allied forces' crippling of Iraqi air power and the diminished likelihood, despite the outbreak of war, of further jeopardy to world oil supply. The IEA plan and the SPR drawdown did not appear to be needed to help settle markets, and there was some criticism of it. Nonetheless, more than 30 million barrels of SPR oil was put out to bid, but DOE accepted bids deemed reasonable for 17.3 million barrels. The oil was sold and delivered in early 1991.\nThe Persian Gulf War was an important learning experience about ways in which the SPR might be deployed to maximize its usefulness in decontrolled markets. As previously noted, legislation enacted by the 101 st Congress, P.L. 101-383 , liberalized drawdown authority for the SPR to allow for its use to prevent minor or regional shortages from escalating into larger ones; an example was the shortages on the West Coast and price jump that followed the Alaskan oil spill of March 1989. In the 102 nd Congress, omnibus energy legislation ( H.R. 776 , P.L. 102-486 ) broadened the drawdown authority further to include instances where a reduction in supply appeared sufficiently severe to bring about an increase in the price of petroleum likely to \"cause a major adverse impact on the national economy.\" The original EPCA authorities permit \"exchanges\" of oil for the purpose of acquiring additional oil for the SPR. Under an exchange, a company borrows SPR crude and later replaces it, including an additional quantity of oil as a premium for the loan. There were seven exchanges between 1996 and 2005. The most recent one (with the exception of a test exchange in the spring of 2008) was in June 2006. ConocoPhillips and Citgo borrowed 750 thousand barrels of sour crude for two refineries affected by temporary closure of a ship channel. \nA new dimension of SPR drawdown and sale was introduced by the Clinton Administration's proposal in its FY1996 budget to sell 7 million barrels to help finance the SPR program. While agreeing that a sale of slightly more than 1% of SPR oil was not about to cripple U.S. emergency preparedness, some in the Congress vigorously opposed the idea, in part because it might establish a precedent that would bring about additional sales of SPR oil for purely budgetary reasons, as did indeed occur. There were three sales of SPR oil during FY1996. The first was to pay for the decommissioning of the Weeks Island site. The second was for the purpose of reducing the federal budget deficit, and the third was to offset FY1997 appropriations. The total quantity of SPR sold was 28.1 million barrels, and the revenues raised were $544.7 million. Fill of the SPR with RIK oil was initiated in some measure to replace the volume of oil that had been sold during this period.\n\n\t\tHurricanes and Changes in the Market Dynamics (2005-2008)\n\nPrior to Hurricanes Ivan, Katrina, and Rita in 2005, growth in oil demand had begun to strap U.S. refinery capacity. A result has been an altering in a once-observed historic correlation between crude oil and refined oil product prices. In the past, changes in the price of crude had driven changes in the cost of refined products. The assumption that product prices are driven by, and follow the path of, crude prices, was at the center of debates from the 1980s until early in the decade of 2000 whether an SPR drawdown was warranted when prices spiked. \nHowever, beginning in the middle of the first decade of the new century, pressure on product supplies and the accompanying anxiety stoked by international tensions caused a divorce in that traditional correlation between crude and product prices. The increases in prices of gasoline and other petroleum products following Hurricanes Katrina and Rita, for example, were not a response to any shortage of crude, but to shortages of products owing to the shutdown of major refining capacity in the United States, and to an interruption of product transportation systems. \nThe rise in crude prices to over $140\/barrel by the summer of 2008 was attributable to many contributing factors, including increasing international demand, and concern that demand for crude might outstrip world production. Markets were described as \"tight,\" meaning that there might be little cushion in terms of spare production capacity to replace any crude lost to the market, or to provide adequate supply of petroleum products. In such a market, where demand seems to be brushing against the limits to meet that demand, refinery outages, whether routine or unexpected, can spur a spike in crude and product prices, as can weekly reports of U.S. crude and petroleum stocks, if the numbers reported are not consistent with expectations. As prices continued to increase during 2007-2008, some argued that market conditions did not support the high prices. One market analyst remarked at the end of October 2007, \"The market at this stage totally ignores any bearish news [that would soften the price of oil], but it tends to exaggerate bullish news.\" Significant and sustained increases in oil prices were observed in the absence of the sort of \"severe energy supply interruption\" that remains the basis for use of the SPR. As has been noted, legislation in the Senate ( S. 1462 ) would introduce a price basis for authorizing a drawdown of the SPR. A release from the SPR might not lower prices under every scenario.\n\n\t\tThe Call for an SPR Drawdown: Summer 2008\n\nSome policymakers were urging the Administration to release oil from the SPR during the spring and summer of 2008. A review of the dynamics in the oil market during this period provides a demonstration of why an SPR release in the face of high prices will not necessarily foster a decline in petroleum prices.\nBy mid-July 2008, U.S. gasoline prices were exceeding $4.00\/gallon and diesel fuel was averaging $4.75\/gallon. Crude oil prices had briefly exceeded more than $145\/barrel, but declined late in the month to less than $128\/barrel. Oil prices had risen in recent years in the absence of the normal association with the concept of \"disruption\" or \"shortage.\" The escalation in prices to their observed peak in July 2008 was driven by several factors that are difficult to weigh. Chief among them was the existence of little or no spare oil production capacity worldwide, and a general inelasticity in demand for oil products despite high prices. Prices also generally prove sensitive to the ebb and flow of international tensions, the value of the U.S. dollar, and even the appearance of storms that could develop into hurricanes that might make landfall in the Gulf of Mexico.\nIn the months prior to Hurricanes Gustav and Ike, there were some calls for an SPR drawdown despite the absence of any discernible shortage. On July 24, 2008, legislation ( H.R. 6578 ) to require a 10% drawdown of SPR oil failed to achieve a two-thirds majority in the House under suspension of the rules (226-190). The language was included in H.R. 6899 , the Comprehensive American Energy Security and Consumer Protection Act, which passed the House on September 16 th (236-189).\nThe bill would have required a sale of 70 million barrels of light grade petroleum from the SPR within six months following enactment. The bill stipulated that 20 million barrels must be offered for sale during the first 60 days. All oil from the sale would be replaced with \"sour\" crude to be acquired after the six-month sale period, with the replacement acquisition completed not later than five years after enactment. \nThe genesis of the proposal lay partly in an analysis by the Government Accountability Office, which observed that the proportion of grades of oil in the SPR was not as compatible as it could be with the trend of refineries toward being able to handle heavier grades of crudes. Refiners reported to GAO that running lighter crude in units designed to handle heavy crudes could impose as much as an 11% penalty in gasoline production and 35% in diesel production. The agency reported that other refiners indicated that they might have to shut down some of their units.\nIt was unclear what sort of effect a roughly 70 million barrel draw on the SPR would have on prices. In a market where there is no physical shortage, oil companies may have limited interest in SPR oil unless they have spare refining capacity to turn the crude into useful products, or want to build crude oil stocks. SPR oil is not sold at below-market prices. Bids on SPR oil are accepted only if the bids are deemed fair to the U.S. government. If the announcement itself that the SPR is going to be tapped does not prompt or contribute to a softening of prices, there may be limited interest on the part of the oil industry in bidding on SPR supply. Although the possibility exists that prices might decline if additional refined product is released into the market, it was impossible to predict what effect an SPR drawdown would have had on oil prices at any time in 2008, given the many other factors that bear on daily oil prices. \nThere are additional considerations. A unilateral draw on U.S. stocks will probably have less impact on the world oil market than a coordinated international drawdown of the sort that occurred after Hurricanes Katrina and Rita in 2005. Some might argue that it would be unwise under any scenario for the U.S. to draw down its strategic stocks while other nations continue to hold theirs at current levels. Additionally, it is always possible that producing nations might reduce production to offset any SPR oil delivered into the market. In the setting of 2008, producing, exporting nations could have argued that the market was already well-supplied and that short-term supply concerns were not what was supporting elevated prices. \nThe SPR has been perceived as a defensive policy tool against high oil prices, but if it is used without a discernible impact on oil prices, it is possible that the SPR will lose some of whatever psychological leverage it exercises on prices when left as an untapped option. \n\n\tEstablishment of a Regional Home Heating Oil Reserve\n\nAlthough a number of factors contributed to the virtual doubling in some Northeastern locales of home heating oil prices during the winter of 1999-2000, one that drew the particular attention of lawmakers was the sharply lower level of middle distillate stocks\u2014from which both home heating oil and diesel fuels are produced\u2014immediately beforehand. It renewed interest in establishment of a regional reserve of home heating oil. EPCA includes authority for the Secretary of Energy to establish regional reserves as part of the broader Strategic Petroleum Reserve. With support from the Clinton Administration, Congress moved to specifically authorize and fund a regional heating oil reserve in the Northeast. The FY2001 Interior Appropriations Act ( P.L. 106-291 ) provided $8 million for the Northeast Heating Oil Reserve (NHOR). The regional reserve was filled by the middle of October 2000 at two sites in New Haven, CT, and terminals in Woodbridge, NJ, and Providence, RI. The NHOR is intended to provide roughly 10 days of Northeast home heating oil demand.\nThere was controversy over the language that would govern its use. Opponents of establishing a regional reserve suspected that it might be tapped at times that some consider inappropriate, and that the potential availability of the reserve could be a disincentive for the private sector to maintain inventories as aggressively as it would if there were no reserve. The approach enacted predicated drawdown on a regional supply shortage of \"significant scope and duration,\" or if\u2014for seven consecutive days\u2014the price differential between crude oil and home heating oil increased by more than 60% over its five-year rolling average. The intention was to make the threshold for use of the regional reserve high enough so that it would not discourage oil marketers and distributors from stockbuilding. The President could also authorize a release of the NHOR in the event that a \"circumstance exists (other than the defined dislocation) that is a regional supply shortage of significant scope and duration,\" the adverse impacts of which would be \"significantly\" reduced by use of the NHOR.\nDuring mid- and late December 2000, the 60% differential was breached. However, this was due to a sharp decline in crude prices rather than to a rise in home heating oil prices. In fact, home heating oil prices were drifting slightly lower during the same reporting period. As a consequence, while the 60% differential was satisfied, other conditions prerequisite to authorizing a drawdown of the NHOR were not. \nA general strike in Venezuela that began in late 2002 resulted, for a time, in a loss of as much as 1.5 million barrels of daily crude supply to the United States. With refinery utilization lower than usual owing to less crude reaching the United States, domestic markets for home heating oil had to rely on refined product inventories to meet demand during a particularly cold winter. Prices rose, and there were calls for use of the NHOR; still, the price of heating oil fell significantly short of meeting the guidelines for a drawdown. In connection with the FY2004 Interior appropriations, both the House and Senate Appropriations Committees included language in their committee reports directing that DOE advise Congress as to the \"circumstances\" under which the NHOR might be used. The provision implied that some in Congress were not satisfied with the formula currently in place that would permit drawdown of the NHOR. The language was not included in the final FY2004 Interior appropriations bill. As the sharp increases in home heating oil prices during 2005 are averaged into the five-year rolling average, the price differential needed to trigger use of the NHOR will increase further. However, the President can invoke the authorities for an NHOR drawdown even if the price threshold is not met.\nS. 283 , introduced on January 21, 2009, would permit drawdown on the basis of price as well as supply. The bill would mandate a release of 20% of the heating oil held in the Reserve if the average retail price for home heating oil in the Northeast exceeds $4.00 per gallon on November 1 of the fiscal year. An additional 20% would be released in four additional installments if the average retail price exceeded $4.00\/gallon on the first of each month, December through March.","output":"Congress authorized the Strategic Petroleum Reserve (SPR) in the Energy Policy and Conservation Act (EPCA, P.L. 94-163) to help prevent a repetition of the economic dislocation caused by the 1973-1974 Arab oil embargo. The program is managed by the Department of Energy (DOE). The capacity of the SPR is 727 million barrels, and by the end of 2009, was virtually filled to its capacity at 726 million barrels of crude oil. In addition, a Northeast Heating Oil Reserve (NHOR) holds 2 million barrels of heating oil in above-ground storage.\nThe SPR comprises five underground storage facilities, hollowed out from naturally occurring salt domes in Texas and Louisiana. EPCA authorized drawdown of the Reserve upon a finding by the President that there is a \"severe energy supply interruption.\" Congress enacted additional authority in 1990 (Energy Policy and Conservation Act Amendments of 1990, P.L. 101-383), to permit use of the SPR for short periods to resolve supply interruptions stemming from situations internal to the United States. The meaning of a \"severe energy supply interruption\" has been controversial. EPCA intended use of the SPR only to ameliorate discernible physical shortages of crude oil. However, the American Clean Energy Leadership Act of 2009 (S. 1462), reported in the Senate, would require that the SPR include 30 million barrels of refined product; would transfer authority for a drawdown from the President to the Secretary of Energy; and would amend the drawdown authority to permit drawdown and sale in the event of a \"severe energy market supply interruption\" that has caused, or is expected to cause, \"a severe increase\" in prices. This language is a significant departure from existing authorities which predicate drawdown disruptions in supply, and discourages use of the SPR to address high prices, per se.\nBeginning in 2000, additions to the SPR were made with royalty-in-kind (RIK) oil acquired by the Department of Energy in lieu of cash royalties paid on production from federal offshore leases. In May 2008, Congress passed legislation (P.L. 110-232) ordering DOE to suspend RIK fill for the balance of the calendar year unless the price of crude oil dropped below $75\/barrel. However, the sharp decline in crude oil prices since spiking to $147\/barrel in the summer of 2008 brought about a resumption of fill of the SPR. On January 2, 2009, the Bush Administration announced plans that included the purchase of nearly 10.7 million barrels for the SPR to replace oil that was sold after Hurricanes Katrina and Rita in 2005. In May 2009, RIK fill was resumed at an average volume of 26,000 barrels per day, totaling over 6.1 million barrels to be delivered by January 2010. These activities have brought the SPR essentially to capacity. The government has not purchased oil for the SPR since 1994.\nThe Energy Policy Act of 2005 (EPACT) required expansion of the SPR to its authorized maximum of 1 billion barrels. Congress approved $205 million for FY2009, including $31.5 million to continue expansion activities. A site in Richton, MS, has been evaluated as a possible location for an additional 160 million barrels of capacity. Although expansion activity appears to have been set aside, the FY2010 budget enacted in the FY2010 Energy and Water Appropriations Act (P.L. 111-85), which provides $243.8 million for the entire SPR program, includes $25 million for expansion activities and $43.5 million for purchase of a cavern at Bayou Choctaw to replace a cavern posing environmental risks. An amendment agreed to in the Senate, and included in the final bill, prohibits SPR appropriations expended to anyone engaged in providing refined product to Iran, or assisting Iran in developing additional internal capacity to refine oil."}
{"id":"crs_R43361","pid":"crs_R43361_0","input":"\tIntroduction\n\nThe increasing Department of Defense (DOD) emphasis on expanding U.S. partnerships and building partnership capacity with foreign military and other security forces has refocused congressional attention on two long-standing human rights provisions affecting U.S. security assistance policy. Sponsored in the late 1990s by Senator Patrick Leahy (D-VT), and often referred to as the \"Leahy amendments\" or the \"Leahy laws,\" one is Section 620M of the Foreign Assistance Act of 1961, as amended (FAA, P.L. 87-195, made permanent law by its codification at 22 U.S.C. 2378d) and the other is a recurring provision in annual defense appropriations. FAA Section 620M prohibits the furnishing of assistance authorized by the FAA and the Arms Export Control Act, as amended (AECA, P.L. 90-629), to any foreign security force unit that is credibly believed to have committed a gross violation of human rights. The other provision, inserted annually in DOD appropriations legislation, for years prohibited the use of DOD funds to support any training program (as defined by DOD) involving members of a unit of foreign security or police force if the unit had committed a gross violation of human rights. For FY2014, the prohibition has been expanded to also include \"equipment, or other assistance.\" \nAs two of the many laws that Congress has enacted in recent decades to promote respect for human rights, which has become widely recognized as a core U.S. national interest, the Leahy laws have been the subject of long-standing debate. Policy makers, practitioners, and advocacy groups continue to deliberate overarching questions regarding their utility and desirability, as well as specific questions regarding their appropriate scope and problems in implementation. For many, the Leahy laws are important U.S. foreign policy tools not only because of their potential to promote human rights but because they may help safeguard the U.S. image abroad by distancing the United States from corrupt or brutal security forces. Some, however, raise concerns that these laws limit the Administration's flexibility to balance competing national interests and may constrain the United States' ability to respond to national security needs. Central to this debate are overarching questions that are difficult to answer given the lack of systematic study of Leahy law results. Have these laws indeed been effective in promoting human rights? To what extent have these laws impeded or advanced other key U.S. objectives, such as countering terrorism, preventing violence, or stabilizing territory? Do the laws lead other nations to choose competitors for foreign influence as the source of military materiel and training? Will the United States be able to control down-range effects as it outsources military training through third-party nations? Competing perceptions of these overarching issues underlie perspectives on specific proposals for congressional action. \nIn the 113 th Congress, an illustration of the enduring debate surrounding the Leahy laws is deliberation on a provision in the Senate Appropriations Committee (SAC) version of the FY2014 DOD Appropriations bill (Section 8057 of S. 1429 ), a modified version of which is now contained in the Consolidated Appropriations Act, 2014 (Division C, Section 8057, P.L. 113-76 , signed into law January 17). This provision expanded the scope of the DOD Leahy law by extending the FY2013 (and prior fiscal year) prohibition on training to all DOD assistance. Further action in the 113 th Congress may occur during consideration of FY2015 foreign aid appropriations, which may include proposals to fund implementation of the laws.\nThis report provides background on the Leahy laws, including a brief history of their legislative development; an overview guide to the standards and processes used to \"vet\"\u2014that is, review and clear\u2014foreign military and other security forces for gross violations of human rights; and a brief review of salient issues regarding the provisions of the laws and their implementation. Two of these issues concern debate over the consistency of the language of the two laws: whether the scope of the DOD provision should be expanded or altered to bring it closer to the FAA version, and whether the FAA and DOD \"remediation standards\" (the conditions for clearing units found guilty of a gross violations of human rights in order to provide aid) should be made consistent. Two others concern debate over implementation: whether the resources to conduct vetting are adequate, and whether implementation practices and procedures should be standardized. Several text boxes provide information on security assistance subject to the Leahy laws, the types of acts defined as gross violations of human rights, the language of the FAA and DOD Leahy laws and key differences between them, a discussion of the \"credible information\" standard for denying assistance, and a case study on Colombia. A concluding section offers further observations for Congress.\n\n\tLegislative Background\n\nSince Congress first enacted the two \"Leahy laws\" in the late 1990s, these laws have been regarded as a key element of U.S. human rights policy. Beginning in the 1970s, Congress passed many conditions on U.S. assistance to foreign governments seeking to promote respect for human rights. Most were\u2014and continue to be\u2014attached to legislation for an individual country or region. \nA major precursor to the Leahy laws was the broad legislative provision passed in 1974, known as \"Section 502B,\" which prohibits security assistance to any country found to engage in a \"consistent pattern of gross violations of internationally recognized human rights.\" This legislation provides the basis for the standard definition of human rights used for U.S. government purposes, including for Leahy law vetting, but has been rarely if ever invoked. In 1997, Congress enacted a condition on counternarcotics (CN) assistance similar to the current Leahy laws, prohibiting the use of FY1998 State Department CN appropriations for foreign security forces where there was credible evidence that a unit had committed gross violations of human rights.\nIn 1998, Congress passed the first of what are now known as the Leahy laws, extending the scope of the CN condition to all assistance provided by foreign operations appropriations. The expanded provision was thereafter included in annual foreign operations appropriations acts until 2008, when that condition was codified in permanent law first as FAA Section 620J, now FAA Section 620M (22 U.S.C. 2378d), applying to all assistance authorized by the FAA and AECA, unless exempted by a notwithstanding provision. \nIn 1998, for FY1999, Congress placed a similar condition in the DOD appropriations bill. This condition prohibited the use of DOD funds to train units of foreign military and other security forces if there was credible information that a member of a unit had committed a gross violation of human rights. (Unlike the FAA version, the DOD Leahy law, as contained in DOD FY2013 and prior DOD appropriations, pertained only to training, but not to any other form of assistance and activities\u2014such as equipment, support services, grants, loans and cash transfers, and exercises\u2014that might be provided under a variety of DOD authorities.) DOD defines military training of foreign personnel as the \"instruction of foreign security force personnel that may result in the improvement of their capabilities.\" This condition has been retained in all subsequent DOD appropriations legislation, with two changes. In 2000, the reference to a \"member\" of a unit was deleted, and in 2013 the words \"or police\" were added. \nIn 2011, Congress amended the FAA provision (and renumbered it as Section 620M of the FAA) with three word changes to align it more closely with the DOD language. First, the requirement invoking \"gross violations\" of human rights was changed from the plural to the singular \"a gross violation\" of human rights. Second, Congress modified the standard to resume aid to require that the government take \"effective steps\" (rather than \"effective measures\") to bring responsible members of the foreign security unit to justice. Finally, the standard of proof was changed from \"credible evidence\" to \"credible information,\" a term that expresses Congress's intent that the standard not require a level of substantiation that would be admissible in a U.S. court. Congress also added seven procedural requirements to the provision. \nIn January 2014, Congress expanded the scope of the DOD provision, making it equivalent in scope to the FAA provision. The Consolidated Appropriations Act, 2014 (P.L. 113-76), contains a provision extending the FY2013 (and earlier) prohibition on any support for training where a gross violation of human rights occurred to \"any training, equipment, or other assistance for the members of a unit of a foreign security force if the Secretary of Defense has credible information that the unit has committed a gross violation of human rights.\" An exception is made for disaster and humanitarian assistance. \nDepending on the legal interpretation, this provision applies to many of the DOD programs and activities conducted with foreign military and other security forces under a wide variety of DOD authorities. These may include counternarcotics, coalition, and logistics support and assistance, including equipment; services such as transportation and logistics, maintenance and operation of equipment; and grants and loans to procure goods and services in support of security forces, as well as cash transfers of funds. They may also include some types of military-to-military contacts, including advising and mentoring. Not all military activities with foreign forces would necessarily constitute assistance, however. \nAs contained in P.L. 113-76 , the expanded provision would not apply to DOD-funded foreign disaster assistance and other humanitarian assistance, where the ultimate beneficiaries are foreign populations but where U.S. military personnel often work with or support foreign military or other security forces in delivering assistance.\n\n\t\tComparison of Current Laws\n\nThe FAA and DOD appropriations Leahy laws both prohibit assistance to foreign military and other security units credibly believed to be involved in a gross violation of human rights. After the FY2014 change, three differences remain. First, in the FAA language, the prohibition does not apply if the Secretary of State \"determines and reports\" to specified congressional committees \"that the government of such country is taking effective steps to bring the responsible members of the security forces unit to justice.\" The DOD appropriations language states that the prohibition applies \"unless all necessary corrective steps have been taken.\" These provisions establish the basis for \"remediating\" units, making them eligible for assistance, but neither remediation standard is defined. Second, the DOD version provides for a waiver by the Secretary of Defense in consultation with the Secretary of State in extraordinary circumstances; the FAA contains no corresponding provision. Third, the FAA legislation includes a \"duty to inform\" provision requiring the Secretary of State to promptly inform a foreign government of the basis for withholding assistance and to help that government, to the extent practicable, take effective measures to bring the responsible members of the security forces to justice. \n(See Table 1 , below, which summarizes these key differences.)\n\n\tLeahy Vetting in Practice22\n\nThe State Department and U.S. embassies worldwide have developed a system that seeks to ensure that no applicable State Department assistance or DOD-funded training is provided to units or individuals in foreign security forces who have committed any gross violations of human rights. This procedure, designed to comply with the Leahy laws, is known as \"vetting\" or \"Leahy vetting.\" Primarily a State Department responsibility with input from other agencies, Leahy vetting is a multi-step process that involves staff at U.S. embassies abroad; the State Department Bureau for Democracy, Human Rights, and Labor (DRL) in Washington, DC, which is the lead State Department bureau for vetting; State Department regional bureaus; and other government agencies as required. The State Department policy provides for two separate processes, one for training and one for equipment and other non-training assistance.\nFor DOD and State Department-funded training (and in some cases the provision of equipment related to training), the process has evolved from a \"cable-based\" system when the State Department began to vet foreign security forces in 1997 to a computerized process through the International Vetting and Security Tracking (INVEST) system. Gradually put in place between April 2010 and February 2011, INVEST is the current official system for Leahy vetting for training. At some posts INVEST is also used for equipment provided in conjunction with training, but this is not mandatory. \nFor State Department-funded equipment and other non-training assistance, the State Department generally approves potential recipients through a memorandum and clearance process generated by the Bureau of Political-Military Affairs at the time funding is allocated to beneficiary countries. (The GAO recommended in November 2011 that the State Department vet individuals and units receiving equipment through the INVEST system, but the State Department has not developed such a policy. In some cases, however, equipment and non-training assistance is vetted through INVEST even though this is not mandatory.) \nUnder the INVEST system, the State Department to date has vetted approximately 400,000 \"candidates\" for training, a figure that includes both individuals and units. Since its adoption, INVEST has averaged about 130,000 discrete new vettings a year, and the pace seems to be increasing. In FY2012, the State Department reported vetting nearly 165,000 individuals and units. According to some vetters, the 2011 amendments to the FAA Leahy law requiring that, in the case of individual training candidates, the candidate's unit as well as the individual candidate be vetted each time the candidate is named as a potential recipient of assistance have increased their work load. In some embassies, however, vetters had already interpreted the vetting requirements to cover both individuals and their units.\n\n\t\tThe Vetting Process\n\nLeahy vetting is a multi-stage process that begins in U.S. embassies abroad and concludes with action at State Department headquarters in Washington, D.C. Vetting procedures generally utilize a dedicated online tracking system for vetting candidates\u2014both units and individuals\u2014for training and the exchange of memoranda for other forms of assistance. \n\n\t\t\tU.S. Embassy Procedures\n\nU.S. embassy staff initiates each vetting request. (For a diagram of the process see Figure 1 , below.) The State Department recommends that each embassy have its own Standard Operating Procedures (SOPs) that define country-specific requirements for initiating and completing vetting requests such as the lead time needed for turning around a request. Representatives of relevant U.S. departments and agencies at U.S. embassies submit vetting requests to staff conducting the vetting. The subjects of these vetting requests typically are members of the country's military or civilian police, but they may also include prison guards, armed game wardens, and coast guards, as well as customs, border, and tax enforcement personnel. Civilian government officials, including those representing foreign defense ministries, are typically not required to be vetted. Exceptions to this general rule do exist. For example, the DOD Regional Counterterrorism Fellowship Program (CTFP) vets all participants as a matter of policy. \nAs part of the vetting process under INVEST, individuals proposed for receiving U.S. assistance as part of a single event, equipment issuance, or training are grouped together in a \"batch.\" Input of the initial data is just one of the functions that are completed at the embassy. Once a batch of candidates has been identified, embassy personnel check their names as well their units against a variety of sources for derogatory information. (See the textbox below regarding the standard for judging derogatory information to be credible enough to disqualify candidates for U.S. assistance.) Sources include local and U.S. government databases and reports, as well as a range of civil society and non-governmental organizations (NGOs). \nThe vetting at the embassy stage is completed with one of four determinations: to approve, reject, or suspend candidates, or to request further guidance from State Department headquarters. Once the suspended or rejected cases are removed from an INVEST batch, the remaining candidates are sent on to State Department headquarters for further vetting.\n\n\t\t\tHeadquarters Level\n\nIn Washington, DRL and the State Department regional bureaus further vet approved individuals in the batch. DRL and the relevant regional bureau work independently, although the two offices stay in communication as the vetting process proceeds. If the regional bureau and the DRL vetters agree that no derogatory information was found, then the individual is deemed approved and the embassy vetting staff is notified of the positive determination. One exception to this process involves vetting candidates from \"Fast Track\" countries, determined by the State Department to be functional democracies without a record of human rights abuse. Candidates from Fast Track countries are vetted only at the embassy and not in Washington. \n\n\t\t\tAdditional Review and Conclusion\n\nIf further review is deemed required, DRL convenes a \"broader team of State Department representatives\" who may request further information from the relevant embassy to evaluate the credibility of derogatory information. Until the team reaches consensus, the assistance or training is kept on hold. Except for Fast Track countries, Leahy vetting is complete when the final determination is recorded in INVEST.\n\n\t\tVetting Results and Their Use\n\nBy and large, most vettings filed through the INVEST system conclude with an approval. Vettings recently have ended in denial around 1% or less of the time, and a suspension about 9% of the time, according to figures provided in news reports. CQ Weekly reports that training was withheld \"for a variety of reasons, including the possibility that there was credible information that the person or unit involved had committed a gross violation of human rights,\" and for administrative difficulties. In some cases, training was suspended if derogatory information other than a human rights violation was found, as candidates may be excluded for other undesirable behavior. In the many cases where training was suspended for administrative reasons, it was subsequently rescheduled once the problem was resolved, according to that source. \nIn general, vetting results are used to determine who will receive U.S. assistance or training. They also form the basis for reporting to foreign governments under the FAA \"duty-to-inform\" provision when members and units of their security forces fail vetting and assistance is denied. According to some U.S. policy makers, even though only the FAA contains the \"duty-to-inform\" requirement, in practice the provision should extend also to DOD-funded cases. The logic of this requirement is to garner cooperation with the law, encourage improved compliance by host governments with human rights standards, and make clear that U.S. assistance will not be provided to human rights violators. In addition, the FAA provides that the State Department should offer assistance to a foreign \"host\" government to investigate and prosecute suspected human rights violators who have been identified through the vetting process.\n\n\t\tVetting Personnel\n\nThe number of embassy staff involved in Leahy vetting may differ based on work flows, request volumes, funding levels, and other conditions that vary across U.S. embassies. Some embassy operations are quite limited, according to embassy inspection reports by the State Department's Office of the Inspector General (OIG). Some advocates for strengthening implementation of the Leahy law conditions maintain that some vetting operations are underfunded and this has resulted in \"thin\" to nonexistent efforts at some embassies. \n\n\t\tVetting Funding\n\nIn recent years, Congress has supported Leahy vetting operations through a directed allocation of funds to DRL in the Diplomacy and Consular Programs (D&CP) account. In FY2008, for example, DRL received $2.65 million in appropriations for Leahy vetting. Much of this funding was used to develop and establish the INVEST system, an online tool to track and process vetting requests. Subsequently, Congress directed DRL to allocate approximately $2 million for Leahy vetting, which the State Department has made a regular practice. (The joint explanatory statement to the Consolidated Appropriations bill for FY2014 [ H.R. 3547 , Division K] states that State Department Diplomatic and Consular Affairs funding in the bill contains $2.75 million to implement the FAA Leahy law.) According to State Department officials, the $2 million in recent years has supported several regional bureau vetting positions, and a few contract positions to carry out vetting and support running the INVEST system. The number of completed vettings has become a performance indicator for the DRL bureau. In its annual congressional budget justification, the DRL bureau reports completed vettings and sets targets for the future.\nIn the field, vetting-related activities, including personnel costs, are typically funded out of embassy administrative budgets. The State Department generally gives the embassies wide latitude in staffing and financing their operations. There does not appear to be formal guidance on how U.S. embassies should allocate resources and funds for Leahy vetting. As a result, each embassy plans and budgets for Leahy vetting operations differently. Some embassies, for example, receive assistance from the State Department's International Narcotics and Law Enforcement (INL) bureau, through its International Narcotics Control and Law Enforcement (INCLE) account. U.S. Embassy Mexico City, which conducts the second-largest number of vettings worldwide, reportedly draws funds from the M\u00e9rida Initiative, a multi-year counternarcotics and anticrime assistance program that is funded largely through the State Department's Foreign Military Financing (FMF) and INCLE accounts. \nSome embassies with large volumes of vetting requests have one or more full-time positions dedicated to the vetting process. Many embassies, however, are very lightly staffed and the data entry into the INVEST system is frequently a part-time duty. Increased workloads resulting from the 2011 amendments to the Leahy law in the FAA have raised concerns at some embassies, among them those that are small and understaffed or those with the heaviest Leahy vetting demands. In the absence of dedicated Leahy vetting funding, such embassies maintain they have inadequate staff to handle the increased demand on their operations.\n\n\t\tVetting System Improvement Initiatives\n\nThe State Department and DOD are discussing ways to improve the vetting process by increasing DOD participation. (After DOD personnel in each embassy's security assistance organization forward nominees for security assistance to embassy Leahy vetters, DOD generally has no further role in the Leahy vetting process.) One step would be to improve the lines of communication between the State Department and DOD, and creating greater communication within DOD, when the INVEST system identifies potential human rights violations or other obstacles to approving assistance. A related step would be to lengthen the timeline between the embassy's submission of a vetting request to State Department headquarters and the conclusion of the vetting process. This change would allow time for DOD headquarters officials to coordinate a response with the geographic Combatant Commands that might avert the suspension of activities for non-substantive reasons. A third step would be to improve training on how to conduct vetting. DOD is also looking into updating its own guidance on Leahy vetting as last articulated in the DOD 2004 Joint Staff policy message.\nDRL recently broadened its outreach to human rights organizations, increasing dialogue through meetings and developing an Internet-based \"portal.\" DRL has received Leahy-relevant information from NGOs through face-to-face meetings and email, and encouraged U.S.-based NGOs to communicate with the relevant country desk officers in DRL and NGOs outside the United States to communicate with the designated human rights officer in each U.S. embassy. The portal is an online website designed to facilitate the anonymous and confidential reporting of accusations and evidence of human rights abuses. The State Department hopes the portal, scheduled to go online in early 2014, will encourage human rights and other NGOs to post credible information about violations of human rights without fear they are further endangering victims. The portal will augment the current processes by which NGOs can report information through written correspondence, meetings, or briefings with State Department personnel. (Additionally, all written communication to the State Department and embassies is reviewed by desk officers.) Some practitioners and analysts warn that an anonymous reporting system has to be carefully designed or it has the potential to be manipulated or \"gamed\" by those who might seek to discredit units and block their receipt of U.S. assistance by submitting false reports.\n\n\tIssues for Congress\n\nThe Leahy laws raise many potential policy questions. At the broadest level, questions remain about the extent to which the promotion of human rights abroad and the pursuit of other U.S. national security objectives are mutually reinforcing and the circumstances in which they might diverge. More narrowly, some in Congress question whether the Leahy laws should be further modified and how implementation of those laws might be improved. The following discussion first addresses questions of law: specifically, should the FAA and DOD remediation standards and other remaining differences be made consistent, and should implementation practices be standardized? It then discusses questions of implementation, specifically resource availability and standardization. It concludes with a discussion of the possible challenges presented by Congress's recent expansion of the scope of the DOD law.\n\n\t\tShould the FAA and DOD Leahy Laws Be Made Consistent?\n\nOver time, Congress has aligned the State Department and DOD Leahy language for greater consistency, most recently by extending the scope of the DOD law in the Consolidated Appropriations Act, 2014. Three differences remain \u2014the difference in remediation standards between the laws, DOD the waiver provision, and the FAA requirement to report the reasons for the denial of assistance to the foreign government. Policymakers and those in the human rights and international security communities debate whether U.S. interests are best served by maintaining, modifying, or eliminating these differences. Some view these differences as inconsistencies that undermine U.S. policy goals related to the promotion of human rights; others view them as providing the United States with flexibility to balance potentially competing interests, or to respond to an emerging threat or disaster in a timely manner. The following explores these perspectives. \n\n\t\t\tShould the FAA and DOD Remediation Standards Be the Same?\n\nThe differing FAA and DOD language on remediation standards\u2014the criteria that a foreign government must meet before aid can be provided or resumed to units that have been denied funding due to human rights abuses\u2014leaves much open to interpretation. Questions have been raised as to whether these remediation standards are appropriate, given that few if any units appear to have been cleared for aid after they have been denied assistance. The \"taint\" remains even years later after membership in a unit may have substantially or even entirely changed. Questions are also raised about the degree to which these standards actually differ in practice, given that the State Department makes the decision to deny assistance, and whether they should be aligned. \nIf FAA or AECA assistance is withheld, a foreign government must \"take effective steps to bring responsible members of the security forces unit to justice\" before assistance can be provided to that unit. Congressional intent regarding the FAA language was expressed in the conference report on the original (1998) legislation, where the conferees stated that \"effective steps\" required the government to \"carry out a credible investigation and that the individuals involved face appropriate disciplinary action or impartial prosecution in accordance with local law.\" This was echoed in the conference report for subsequent legislation. It is similar to State Department guidance which, according to GAO, states that effective steps \"means that the foreign government must carry out a credible investigation and take steps so that individuals who are credibly alleged to have committed gross violations of human rights face impartial prosecution or appropriate disciplinary action.\" The DOD remediation provision requires that \"all necessary corrective steps\" be taken before aid can be resumed. There has been no statement of intent in documents accompanying annual DOD appropriations measures. In 1999, Senator Leahy wrote to then Secretary of Defense William Cohen that the FAA and DOD standards were intended to be the same. Secretary Cohen differed, and since then DOD has held that, in the words of the 2013 GAO report, necessary corrective steps \"could include removing the identified violator or violators from the unit to be trained, providing human rights training and law-of-war training, or some other combination of steps.\" Despite this position, according to DOD officials, DOD has never proceeded with DOD-funded training to an otherwise ineligible unit on the basis that \"all necessary corrective steps\" have been taken by a foreign government.\nIn practice, according to State and DOD officials, the same remediation standards have been applied to potential recipients of DOD and State Department assistance. Some Members would favor incorporating that practice into law as a means of increasing the consistency of U.S. human rights policy and the message sent to foreign governments. Standardization of remediation steps is necessary, they affirm, because the purpose of DOD and FAA Leahy provisions is the same\u2014to promote human rights and protect the U.S. government against the stigma of supporting human rights violators. In addition to expanding the scope of the DOD Leahy law, the SAC version of the FY2014 DOD appropriations bill, S. 1429 , would have made the DOD language on remediation the same as that of the FAA. This provision was not retained in action on the final DOD appropriations measure included in the Consolidated Appropriations Act, 2014 ( P.L. 113-76 ).\nOn the other hand, given that few, if any, units have been cleared once aid has been denied, some practitioners argue that the State Department standard may set too high a bar and may be perceived as unattainable by a host government. In addition, some analysts argue that the FAA's standard for remediation\u2014punishing all members of a unit for the transgressions of some members of a unit\u2014is inequitable. Some critics view the remediation measures set forth by DOD\u2014removing individuals who have committed abuses from units rather than making all in the unit guilty of their transgressions\u2014as a more realistic standard. In addition, some perceive as an internal contradiction of the Leahy laws that they block even human rights training to \"tainted\" units whose members, they argue, would potentially most benefit from such training. Some point to the Senate floor colloquy between Senators Graham and Leahy in 1997, regarding the Leahy human rights provision affecting counternarcotics assistance, as evidence that the legislative intent was not meant to permanently bar assistance to \"tainted\" units after offending individuals were removed, although others caveat that the meaning of the colloquy would depend on the circumstances of the removal. \nIn contrast, those who believe that holding a unit responsible is an appropriate standard point out that it often is difficult to ascertain actions of individuals, and that sanctioning the entire unit may be the only way of ascertaining that U.S. assistance is not provided to human rights violators. In addition, holding units responsible for the actions of their members may serve as a means to promote a \"self-cleansing\" mechanism, where individuals who feel they are being unfairly denied training will cooperate with or put pressure on authorities to cleanse the unit, promoting an ethos among members of a unit that does not tolerate human rights abuse. \n\n\t\t\tShould Other Differences Be Aligned?\n\nIn addition to the differences in remediation standards, discussed above, two other differences between the FAA and the DOD Leahy provisions remain: the DOD waiver and the FAA \"duty to inform. Neither has a corresponding provision in the other legislation. To some analysts, the DOD waiver seems dispensable, given its historic lack of use. According to DOD officials, the waiver has never been exercised. Others would argue the waiver provides DOD with needed flexibility to act in urgent circumstances where important U.S. security interests are at stake; alternatively, notwithstanding language might be added to authorities that are used in such circumstances. The FAA \"duty to inform\" requirement for the Secretary of State to \"promptly inform the foreign government of the basis\" for withholding aid is a precursor to assisting the government in bringing responsible members of the security forces to justice. Some who view this provision as central to promoting reform among foreign security forces would include it in the DOD law. \n\n\t\tWhat Level of Resources Are Adequate to Conduct Vetting?\n\nThe level of funding available to implement Leahy vetting is determined by Congress (through appropriations measures) and by the State Department (through its internal allocation of resources and personnel positions at embassies). Financial and personnel resources can directly affect the Leahy vetting process. Resource-related questions concerning Leahy implementation include the following and are discussed below. Are Leahy vetting operations adequately funded? Do vetting activities at State Department headquarters and U.S. embassies worldwide receive enough technological support to be successful, and if not, where are the biggest resource deficits? Are those who conduct the vetting adequately trained, and is there sufficient oversight by State Department headquarters of vetting operations at the embassies? \nThe recent expansion of the scope of the DOD Leahy law to cover all DOD assistance, not just training, may present extensive challenges for the current vetting system. Some practitioners have voiced concern that the number of additional vettings required each year could overload the State Department's arguably already overstretched vetting system. \n\n\t\t\tFunding\n\nSome advocates for strengthening implementation of the Leahy conditions maintain that some vetting operations are underfunded. Indeed, some practitioners consider the vetting requirements an \"unfunded mandate\" placed on the State Department and its embassies by Congress. Several advocates who promote more vigorous enforcement of the Leahy conditions suggest that leadership from State Department's DRL bureau has improved headquarters vetting operations and they commend DRL for strengthening its outreach to in-country and international human rights organizations. Nevertheless, the quality and capacity of U.S. embassies abroad to carry out Leahy vetting requirements remain mixed; some advocates suggest that this is in part due to the lack of consistent and dedicated funding for vetting operations at post.\nSome have proposed that vetting be paid for with a dedicated funding source that is proportional to the size of U.S. security assistance expenditures on a global basis. In the 113 th Congress, a variation of this idea was put forth by the Senate Appropriations Committee in its version of the FY2014 Department of State and Foreign Operations appropriations measure ( S. 1372 , S.Rept. 113-81 ) to fund DRL to carry out the amended FAA prohibition, Section 620M. Acknowledging \"the technological challenges and staff time involved in the vetting process\" in its report, the Committee would provide not less than 0.1% of funds appropriated in the FMF account \"for assistance for the security forces of foreign countries\" to fund DRL to carry out Section 620M. This would amount to over $5 million in FY2014, depending on the final level of appropriation for FMF, which would be a significant increase over the roughly $2 million that DRL has received for Leahy vetting in recent appropriations. Neither the House version of the FY2014 Department of State and Foreign Operations appropriations bill ( H.R. 2855 , H.Rept. 113-185 ), nor the Consolidated Appropriations Act, FY2014 ( P.L. 113-76 ) makes reference to funding for Leahy vetting. \n\n\t\t\tTechnology\n\nAnother resource challenge for carrying out the Leahy conditions concerns developing adequate databases and applying technology to better implement vetting. Some observers maintain that information about the Leahy vetting requirements provided on embassy websites remains limited. One potential consequence of this limitation is that local NGOs that might report alleged human rights abuse are unaware of U.S. requirements and their opportunities to assist the vetting process. Some advocates maintain that many embassy databases are inadequate, and that many do not take advantage of technological tools to gather data and documentation about human rights abuses. Such tools could include those that compile and analyze video images and aerial photography, and that have audio capabilities to facilitate voice and facial recognition of alleged abusers. \n\n\t\t\tTraining and Oversight\n\nConcern about the adequacy of resources extends to whether personnel and time are made available to train and oversee those at U.S. embassies who conduct the vetting. The State Department provides training at its Foreign Service Institute and DOD provides training through the Defense Institute for Security Assistance Management (DISAM). \nIn its September 2013 report, GAO found that the State Department offers training to human rights vetting personnel by various means. These include two web-based training courses; modules in Foreign Service Institute (FSI) courses; a specially developed briefing that provides an overview of State and DOD Leahy laws and explains State's policies and processes (now available online through http:\/\/www.humanrights.gov ); and other outreach efforts. Vetting personnel also receive on-the-job training. At the time, GAO found that the web-based courses were out-of-date, lacking changes mandated in the 2011 law, but DRL officials report that the courses were subsequently updated and are now available to everyone in the State Department through the FSI online learning website. DOD personnel assigned to work on security assistance at U.S. embassies and at the geographic combatant commands receive an instructional module on human rights training at DISAM that includes instruction on Leahy vetting. DISAM statistics indicate, however, that while most military personnel destined for security assistance organization posts at U.S. embassies take the three-week training course, some 15% do not. \n\n\t\tShould Implementation Practices and Procedures Be Standardized?\n\nAlthough there are not many studies of how the Leahy laws are implemented worldwide, a few reports point to an inconsistent application of the laws. For example, a September 2013 non-government publication on trends in security assistance in Latin America and the Caribbean found that the Leahy provisions have been \"applied with varying degrees of rigor by U.S. embassies around the world.\" This report noted, for example, that \"while the U.S. Embassy in Colombia had [in 2012] a substantial system in place, the U.S. Embassy in Honduras's system was far less developed.\" Recently, GAO has identified other implementation inconsistencies across countries. \nIn its September 2013 report, GAO found after examining implementation practices in eight countries that the Standard Operating Procedure (SOP) guides of those embassies \"contained inconsistent information on how to address\" the part of the duty-to-inform requirement that directs State to inform foreign governments when funds are withheld because of human rights violations. GAO's three recommendations were for the State Department to (1) \"provide clarifying guidance for implementing the duty-to-inform requirement of the State Leahy law\" added in December 2011; (2) ensure that all U.S. embassies have human rights vetting standard operating procedures that address the requirements in the Leahy law;\" and (3) update the web-based training for personnel who conduct human rights vetting to reflect December 2011 changes. According to GAO, State agreed with all three of its recommendations, but said that the steps State planned regarding the need for standard operating procedures \"do not directly address our recommendation.\" The GAO recommended that the State Department take further steps to implement its recommendations on SOP guides.\nTo many analysts, standardizing practices and procedures seems a self-evident means to ensure a more rigorous compliance with the Leahy laws. However, others might argue that given the divergent circumstances under which the laws are applied from country to country\u2014including levels and types of training and equipment provided, whether a country's human rights practices are a matter of concern, and whether the United States regards other matters as more pressing than human rights practices in a given country\u2014a certain degree of flexibility in the application of the laws may be desirable. \n\n\t\tWhat Challenges May the Expanded DOD Scope Present?\n\nThe recent expansion of the scope of the DOD Leahy law in the Consolidated Appropriations Act, 2014 ( P.L. 113-76 ), to include not only training but also DOD \"equipment and other assistance\" is a step toward institutionalizing human rights promotion in U.S. law, according to some analysts. From this perspective, the lack of consistency in scope between the DOD and FAA Leahy laws muddled the intended message regarding the importance of U.S. human rights policy, a problem intensified by the perception that DOD is increasingly providing security assistance and directing security assistance programs under an expanding array of DOD authorities. \nNevertheless, the expansion of scope of the DOD prohibition presents the State Department and DOD with a number of challenges. These challenges include the following: \nDefining what constitutes DOD \"assistance\" as intended by the law may be one challenge. DOD conducts a wide range of activities that it categorizes as \"security cooperation\" with no agreement which among them constitute \"assistance.\" The FY2014 expansion in scope seems to require a specific definition of assistance for the purposes of the DOD Leahy law. Determining whether additional resources are needed to implement Leahy vetting may be another challenge. A lack of resources may hinder the United States' ability to thoroughly vet prospective participants in a timely manner and may result in a failure to disqualify ineligible participants or lead to withholding aid from eligible participants. Determining whether DOD vetting will be conducted through a system compatible with the State Department's current two-track system using the INVEST database and memos, or a new, unique DOD-specific system. Whatever the choice, DOD and the State Department may find it necessary to proactively collect information on foreign military units and individuals who may be potential recipients of DOD assistance to expedite the vetting process. Implementing the broadened scope of DOD Leahy vetting may present possible diplomatic challenges. Some practitioners already note that explaining to foreign military and political leaders why U.S. assistance is being withheld can be difficult and disrupt other aspects of a bilateral relationship. Some express concern that the new scope of the DOD Leahy law, even without the express \"duty to inform\" found in the FAA law, may further complicate diplomatic and military-to-military relations. In some cases, some analysts suggest that the new DOD provision may put at risk U.S. efforts to advance bilateral relations or to achieve other national security priorities. \n\n\tConclusion\n\nMore than a decade after the passage of the Leahy laws, their implementation remains a work in progress, and overarching questions on their utility and desirability persist. Congress continues to deliberate whether and how to strengthen their application, as represented by recent debate over expanding the scope of the DOD law through the omnibus FY2014 appropriations bill ( P.L. 113-76 ), and by proposals to increase available resources, such as the one contained in the Senate Appropriations Committee version of State Department and foreign operations appropriations bill ( S. 1372 ) but not in P.L. 113-76 . Many may judge that an expansion of the scope of the DOD law, which may require extensive additional vetting, could also require substantial new resources. \nGiven that foreign aid appropriations have declined in recent years, an important issue for consideration of FY2015 foreign operations appropriations may be whether existing Leahy vetting requirements receive sufficient funds to be carried out effectively. In hearings and other consideration of the FY2015 budget, Congress may wish to question the quality and effectiveness of Leahy law vetting, and request information about current State Department and DOD efforts to improve procedures, practices, and standards. Congress may wish to be informed of new technologies and methodologies that may require additional resources but could improve data collection as well as the monitoring and assessment of the activities of foreign units. A related question is whether and how to establish metrics or compile standardized narratives; although such measures could involve extra costs, they might provide greater insight to the Leahy laws' utility in advancing foreign policy goals and national security interests. \nEvolving global conditions and circumstances may warrant ongoing consideration of when and how the Leahy law provisions should be applied. One national security trend raising questions about the utility of the Leahy provisions is the \"outsourcing\" of U.S. military training\u2014with the United States funding other military forces to train third parties. And, as the United States faces competition in the international security arena in developing relationships with foreign militaries, Congress may wish to stay apprised of whether the Leahy laws are a significant factor leading some foreign militaries to choose other countries as providers of military training and equipment. In addressing the overarching issues of utility and desirability, Congress may wish to question the Obama Administration about the laws' effectiveness. \nSome questions may target potential indicators of success. For example: Where has the application of the Leahy laws resulted in the United States withholding assistance from units and individuals credibly believed to have committed gross violations of human rights? How have the human rights practices of partner nation security forces improved as a result of the application of the Leahy laws? Do foreign governments and populations view the United States more favorably as a result of the Leahy laws? Other questions may target possible instances of negative effects: Where has application of the Leahy vetting process precluded or significantly delayed a U.S. engagement that in retrospect would have been important for U.S. national security? To what extent might such engagement have been possible if different standards or procedures were in place? \nCongress may wish to address such questions to the State Department and DOD in hearings, or request that they be examined in the context of the Obama Administration's ongoing review mandated by its April 5, 2013, Presidential Policy Decision (PPD) 23, U.S. Security Assistance Policy , which identifies promoting universal values, including respect for human rights, as a goal.","output":"Congressional interest in the laws and processes involved in conditioning U.S. assistance to foreign security forces on human rights grounds has grown in recent years, especially as U.S. Administrations have increased emphasis on expanding U.S. partnerships and building partnership capacity with foreign military and other security forces. Congress has played an especially prominent role in initiating, amending, supporting with resources, and overseeing implementation of long-standing laws on human rights provisions affecting U.S. security assistance.\nFirst sponsored in the late 1990s by Senator Patrick Leahy (D-VT), the \"Leahy laws\" (sometimes referred to as the \"Leahy amendments\") are currently manifest in two places. One is Section 620M of the Foreign Assistance Act of 1961 (FAA), as amended, which prohibits the furnishing of assistance authorized by the FAA and the Arms Export Control Act to any foreign security force unit where there is credible information that the unit has committed a gross violation of human rights. The second is a recurring provision in annual defense appropriations, newly expanded by the FY2014 Department of Defense (DOD) appropriations bill as contained in the Consolidated Appropriations Act, 2014 (P.L. 113-76), to align its scope with that of the FAA provision. (Prior DOD appropriations measures had applied the prohibition to support for any training program, as defined by DOD, but not to other forms of DOD assistance.) As they currently stand, the FAA and DOD provisions are similar but not identical. Over the years, they have been subject to changes to more closely align their language, most recently with the expansion of scope enacted in the FY2014 DOD appropriations law. Nevertheless, some differences remain.\nImplementation of Leahy vetting involves a complex process in the State Department and U.S. embassies overseas that determines which foreign security individuals and units are eligible to receive U.S. assistance or training. Beginning in 2010, the State Department has utilized a computerized system called the International Vetting and Security Tracking (INVEST) system, which has facilitated a major increase in the number of individuals and units vetted (some 160,000 in FY2012). Congress supports Leahy vetting operations through a directed allocation of funds in State Department appropriations.\nThe Leahy laws touch upon many issues of interest to Congress. These range from current vetting practices and implementation (involving human rights standards, relations and policy objectives with specific countries, remediation mechanisms, and inter-office and inter-agency coordination, among other issues), to legislative efforts to increase alignment between the Foreign Assistance Act and DOD restrictions, to levels and forms of resources dedicated to conduct vetting. More broadly, overarching policy questions persist about the utility and desirability of applying the Leahy laws, and whether there is sometimes a conflict between promoting respect for human rights and furthering other national interests."}
{"id":"crs_RS20717","pid":"crs_RS20717_0","input":"RS20717 -- Vietnam Trade Agreement: Approval and Implementing Procedure\nUpdated December 17, 2001\n\n\tBackground (1)\n\nAfter protracted negotiations and a one-year delay after its adoption in principle, the United States and Vietnam signed, on July 13, 2000, a comprehensivebilateral trade agreement. The key statutory purpose of the agreement is the restoration of nondiscriminatory tarifftreatment (2) (\"normal-trade-relations\" (NTR),formerly \"most-favored-nation\" treatment) to U.S. imports from Vietnam, suspended since 1951. Hence, theagreement contains a provision reciprocallyextending the NTR treatment and certain other provisions required by law for trade agreements with nonmarketeconomy (NME) countries. In addition, it containscomprehensive specific commitments by Vietnam in matters of market access (e.g., reduced tariff rates on importsfrom the United States), intellectual propertyrights, trade in services, and investment, such as the United States already has in force as a matter of general tradepolicy. To enter into force, the agreement mustbe approved by the enactment of a joint resolution of Congress. \nRestoration of NTR treatment to Vietnam as an NME country is also contingent on Vietnam's compliance with the freedom-of-emigration requirement of theJackson-Vanik amendment (Section 402) of the Trade Act of 1974. (3) In the case of Vietnam, such compliance is achieved by an annual Presidential waiver of fullcompliance under specified statutory conditions; such waiver may be disapproved by the enactment of a jointresolution of Congress. The President has issuedsuch waivers for Vietnam since mid-1998, but in no instance has a disapproval resolution, if introduced, been passedby Congress, allowing the waiver to continuein force.\n\n\tImplementing Procedure\n\nThe statutory requirements and legislative procedure leading to the enactment and entry into force of a trade agreement with a nonmarket economy (NME)country, including Vietnam, are set out in detail in Sections 151, 404, 405, and 407 of the Trade Act of 1974 ( P.L.93-618 ), as amended. Section 151 has beenenacted as an exercise of the rulemaking power of either house and supersedes its other rules to the extent that theyare inconsistent with it. Its provisions can bechanged by either house with respect to its own procedure at any time, in the same manner and to the same extentas any other rule of that house (Section 151(a);19 U.S.C. 2191(a)).\nAll alphanumerical statutory references cited in this report are to sections of the Trade Act of 1974. While care has been taken to reflect accurately the meaning ofthe statutes, consulting the actual language of any statute is recommended in case of any ambiguity.\nFunctionally, the consideration and enactment of the approval resolution and the implementation of the agreement follow a specific expedited (\"fast-track\")procedure explained below. Additional information, based on past practice of implementing trade agreements withNME countries in general, but applicable alsoto Vietnam, is provided in footnotes\n(1) Enactment necessary. \nThe agreement can take effect only if approved by enactment of a joint resolution (Section 405(c)); 19U.S.C.2435(c)).\n(2) Transmittal of the agreement by the President to Congress. \nThe text of the bilateral trade agreement with Vietnam must be transmitted by the President to both houses ofCongress, together with a proclamation (4) extendingnondiscriminatory treatment to Vietnam and stating his reasons for it (Section 407(a); 19 U.S.C. 2437). While thereis no statutory deadline for the transmittal ofthe proclamation and the agreement to Congress after its signing, the law requires that the transmittal take place\"promptly\" after the proclamation is issued. (5)\n(3) Mandatory introduction of approval resolution. \nOn the day the trade agreement is transmitted to the Congress (or, if the respective house is not in session onthat day, the first subsequent day on which it is insession), a joint resolution of approval (Sec. 151(b)(3); 19 U.S.C. 2191(b)(3)) must be introduced (by request) ineach house by its majority leader for himself andthe minority leader, or by their designees (Sec. 151(c)(2); 19 U.S.C. 2191(c)(2)). (6)\n(4) Language of approval resolution . \nThe language of the resolution is prescribed by law (Sec. 151(b)(3); 19 U.S.C. 2191(b)(3)) to read, in thisparticular instance, after the resolving clause: \n\"That the Congress approves the extension of nondiscriminatory treatment with respect to the products ofVietnam transmitted by the President to the Congress onJune 8, 2001\". (7)\n(5) Committee referral . \nThe resolution is referred in the House to the Committee on Ways and Means and in the Senate to theCommittee on Finance (Sec. 151(c)(2); 19 U.S.C.2191(c)(2)).\n(6) Amendments prohibited . \nNo amendment to the resolution, and no motion, or unanimous-consent request, to suspend the no-amendmentrule, is in order in either house (Sec. 151(d); 19U.S.C. 2191(d)). \n(7) Committee consideration in the House . (8)\nIf the Ways and Means Committee has not reported the resolution within 45 days (9) after its introduction, the Committee is automatically discharged from furtherconsideration of the resolution, and the resolution is placed on the appropriate calendar (Sec. 151(e)(1); 19 U.S.C.2191(e)(1)).\n(8) Floor consideration in the House. \n(a) A motion to proceed to the consideration of the approval resolution is highly privileged and nondebatable;an amendment to the motion, or a motion toreconsider the vote whereby the motion is agreed or disagreed to, is not in order (Sec. 151(f)(1); 19 U.S.C.2191(f)(1)).\n(b) Debate on the resolution is limited to 20 hours (10) , divided equally between the supporters and opponents of the resolution; a motion further to limitdebate isnot debatable; a motion to recommit the resolution, or to reconsider the vote whereby the resolution is agreed ordisagreed to, is not in order (Sec. 151(f)(2); 19U.S.C. 2191(f)(2)). \n(c) Motions to postpone the consideration of the resolution and motions to proceed to the consideration of otherbusiness are decided without debate (Sec.151(f)(3); 19 U.S.C. 2191(f)(3)).\n(d) All appeals from the decisions of the Chair relating to the application of the rules of the House ofRepresentatives to the approval resolution are decidedwithout debate (Sec. 151(f)(4); 19 U.S.C. 2191(f)(4)).\n(e) In all other respects, consideration of the approval resolution is governed by the rules of the House ofRepresentatives applicable to other measures in similarcircumstances (Sec. 151(f)(5); 19 U.S.C. 2191(f)(5)).\n(f) The vote (by simple majority) on the final passage of the approval resolution must be taken on or before the15th day (11) after the Ways and MeansCommitteehas reported the resolution, or has been discharged from its further consideration (Sec. 151(e)(1); 19 U.S.C.2191(e)(1)). \n(9) Committee consideration in the Senate (12)\nAn approval resolution adopted by the House of Representatives and received in the Senate is referred to theFinance Committee (Sec. 151(c)(2) and (e)(2); 19U.S.C. 2191(c)(2) and (e)(2)). (13) If the FinanceCommittee has not reported the resolution within 15 days after its receipt from the House or 45 days (14) after theintroduction of its own corresponding resolution (whichever is later), the Committee is automatically dischargedfrom further consideration of the resolution, andthe resolution is placed on the appropriate calendar (Sec. 151(e)(1); 19 U.S.C. 2191(e)(1)).\n(10) Floor consideration in the Senate. \n(a) A motion to proceed to the consideration of the approval resolution is privileged and nondebatable; anamendment to the motion, or a motion to reconsider thevote whereby the motion is agreed or disagreed to, is not in order (Sec. 151(g)(1); 19 U.S.C. 2191(g)(1)).\n(b) Debate on the approval resolution and on all debatable motions and appeals connected with it is limited to20 hours, equally divided between, and controlledby, the majority leader and the minority leader, or their designees (Sec. 151(g)(2); 19 U.S.C. 2191(g)(2)). \n(c) Debate on any debatable motion or appeal is limited to one hour, equally divided between, and controlledby, the mover and the manager of the resolution,except that if the manager of the resolution is in favor of any such motion or appeal, the time in opposition iscontrolled by the minority leader or his designee;such leaders may, from time under their control on the passage of the resolution, allot additional time to any Senatorduring the consideration of any debatablemotion or appeal (Sec. 151(g)(3); 19 U.S.C. 2191(g)(3)).\n(d) A motion further to limit debate on the approval resolution is not debatable; a motion to recommit it is notin order (Sec. 151(g)(4); 19 U.S.C. 2191(g)(4)).\n(e) The vote (by simple majority) on the final passage of the approval resolution must be taken on or before the15th day (15) after the FinanceCommittee hasreported the resolution, or has been discharged from its further consideration (Sec. 151(e)(2); 19 U.S.C. 2191(e)(2)).\n(f) Although, unlike in the case of the House procedure (16) , this is not specifically mentioned in Section 151, the Rules of the Senate govern the considerationofthe approval resolution in the Senate in all aspects not specifically addressed in Section 151. \n(g) If prior to the passage of its own approval resolution, the Senate receives the approval resolution alreadypassed by the House, it continues the legislativeprocedure on its own resolution, but the vote on the final passage is on the House resolution.\n(11) President's implementing authority. \n(a) After the joint resolution approving the trade agreement with Vietnam is passed \nby both houses and signed by the President, it becomes public law, in effect, authorizing the President to putinto effect the already issued proclamation (17) implementing the agreement extending nondiscriminatory treatment to Vietnam (Secs. 404(a) and 405(c); 19 U.S.C.2434(a) and 2435(c)).\n(b) Application of nondiscriminatory treatment is limited to the term during which the agreement remainsin force (Sec. 404(b); 19 U.S.C. 2434(b)) (see alsofootnote 19 and text which it accompanies).\n(c) The President may at any time suspend or withdraw nondiscriminatory treatment of Vietnam (Sec. 404(c);19 U.S.C. 2434(c)) and thereby subject all importsfrom that country to column 2 tariff rates (i.e., full rather than NTR rates).\n(12) Approval by Vietnam. \nThe agreement also must be approved by Vietnam. (18)\n(13) Entry into force. \nAfter the joint resolution of approval is enacted and the agreement is approved by Vietnam, the proclamation(see item (2) becomes effective, the agreemententers into force, and nondiscriminatory treatment is extended to Vietnam on the date of exchange of written noticesof acceptance of the agreement by the UnitedStates and Vietnam. A notice of the effective date of the agreement is published by the U.S. Trade Representativein the Federal Register . (19)\n(14) Maintenance in force . \nAccording to its own terms (Article 8 of Chapter VII - General Articles), the agreement with Vietnam remainsin force for a period of three years and isautomatically renewable for successive three-year terms unless either party to it, at least 30 days before theexpiration of the then current term, gives notice of itsintent to terminate the agreement. If either party ceases to have domestic legal authority to carry out its obligationsunder the agreement, it may suspend theapplication of the agreement, or, with the agreement of the other party, any part of the agreement. (20)\nIn addition, Section 405(b)(1) (19 U.S.C. 2435(b)(1)) limits the life of trade agreements restoring nondiscriminatory treatment to NME countries to an initial termof three years. Agreements may be renewable for additional three-year terms if a satisfactory balance of tradeconcessions has been maintained during the life ofthe agreement and the President determines that actual or foreseeable U.S. reductions of trade barriers resulting frommultilateral negotiations are satisfactorilyreciprocated by the other country. (21)","output":"The procedure leading to the entry into force of the U.S. trade agreement with Vietnam, including a reciprocalextension of nondiscriminatory treatment. calls for its approval by the enactment of a joint resolution of Congress,considered under a specific fast-track procedurewith deadlines for its various stages, with mandatory language and no amendments. After favorable reports on thelegislation in both houses, H.J.Res. 51,approving the nondiscriminatory treatment, was enacted on October 16, 2001; the agreement also was ratified byVietnam on December 4, 2001, and entered intoforce by exchange of notices of acceptance between the two parties on December 10, 2001. The functional sequenceof the legislative and executive steps involvedin the implementation of the agreement is described in this report."}
{"id":"crs_RS20458","pid":"crs_RS20458_0","input":"RS20458 -- Vieques, Puerto Rico Naval Training Range: Background and Issues for Congress\nUpdated August 20, 2004\n\n\tBackground information\n\nThe Vieques Training Range. The Commonwealth of Puerto Rico is a U.S. territory in the Caribbean whose people are U.S. citizens. Vieques (pronounced vee-EH-kez) is a small Puerto Rican islandafew miles east of mainland Puerto Rico. The Department of the Navy (DON), which includes the Navy and Marine Corps,purchased the western and eastern ends of the island between 1941 and 1950; the two DON-owned parcels totaled about22,000 acres, or about two-thirds of the island. Almost all of the 8,000-acre western parcel, which was used primarilyas anaval ammunition depot, was returned by DON to the Municipality of Vieques on May 1, 2001. The remainingDON-owned14,000-acre eastern parcel was used by U.S. naval and other military forces since the early 1940s for training exercisesinvolving ship-to-shore gunfire, air-to-ground bombing by naval aircraft, Marine amphibious landings, or some combination. The parcel included a roughly 11,000-acre Eastern Maneuver Area for Marine Corps ground exercises and a roughly900-acre Live Impact Area (LIA) designed for targeting by live ordnance. The LIA was at the eastern tip of the island,several miles from the civilian-populated center section of the island, which has about 9,300 residents.\nUntil April 1999, the Navy used the Vieques training range about 180 days per year. Of these, about 120 days were forintegrated (i.e., combined land-sea-air) live-fire exercises (i.e., exercises with explosive ammunition) by U.S. Atlantic Fleetaircraft carrier battle groups and amphibious ready groups preparing to deploy overseas on regular six-month-longdeployments to the Mediterranean Sea or Persian Gulf. Until 2001, DON officials argued adamantly that there was no siteother than Vieques where Atlantic Fleet naval forces could conduct integrated live-fire training operations, and that suchtraining operations are critical to fully preparing U.S. naval forces for deployment.\nPuerto Rican Discontent and Opposition. U.S. military activities in Puerto Rico had been a source of discontent among Puerto Ricans for several decades. Puerto Rican opposition to DON activitieson Vieques increased after 1975, when DON withdrew from Culebra, another small Puerto Rican island near ViequeswhereDON had conducted some of its live-fire training operations. After withdrawing from Culebra as a consequence of strongPuerto Rican opposition to DON's use of that island, DON consolidated its live-fire training operations at Vieques. PuertoRican dissatisfaction regarding military training activities on Vieques was driven by several issues: (1) lost potential foreconomic development due to lack of access to most of the island's land, interruptions to local fishing operations, and theeffect of DON's activities on reducing the potential for developing the island as a tourist destination; (2) the inadequacy ofDON economic development efforts intended to compensate the Vieques community for this economic loss; (3) damagetothe island's environment, ecology, natural resources, historic resources, and archaeological sites caused by DON trainingactivities; (4) concern that the incidence of cancer or other diseases might be increased by pollutants released into the localenvironment by DON training operations; (5) noise, especially from nearby ship-to-shore gunfire; (6) safety (the risk of anoff-range accident), and (7) perceived DON insensitivity in conducting its relations with the Vieques community.\nApril 19, 1999 Bombing Accident and Subsequent Impasse. On April 19, 1999, the pilot of a Marine Corps F-18 on a training mission mistakenly identified an observation post located just to thewestof the LIA (but still well within the overall range perimeter) as its intended target. The two 500-pound bombs dropped bytheplane struck the post, killing David Sanes Rodriguez, a Puerto Rican civilian employed as a security guard, and injuring fourothers. Following the accident, DON temporarily suspended its use of the range. The accident galvanized Puerto Ricanopposition to DON's activities on the island. Puerto Rican political leaders and overwhelming segments of Puerto Ricanpublic opinion soon declared their firm opposition to any further military training operations on the island and called forDONto withdraw from the island immediately and return the land to Puerto Rico. At the same time, dozens of demonstratorsentered the range (most of which was off-limits to the civilian population) and established several protest camps, preventingDON from easily resuming training activities there.\nRush Panel. On June 9, 1999, President Clinton asked Secretary of Defense William Cohen to establish a special panel to study the situation. The 4-member panel was chaired by Frank Rush,who was the acting Assistant Secretary of Defense for force management policy. The Rush panel, as it was called, releasedits report on October 19, 1999. The report recommended, among other things, that DON\nshould immediately conduct a priority assessment of the training requirements at Vieques with the objective of ceasing all training activities at Vieques within five years. The Navy should take necessaryprogramming actions to ensure that adequate resources are available to facilitate the identification and preparation ofalternative locations, to institute necessary changes in training methods, and to provide for restoration and transfer to PuertoRico of the Eastern Maneuver Area.\nClinton-Rossello Plan. On January 31, 2000, President Clinton announced an agreement with then-Governor of Puerto Rico Pedro Rossello on a plan for resolving the dispute over Vieques. Theplancalled for holding a referendum of the registered voters of Vieques to determine the future of DON activities on the island. The referendum, which was later scheduled for November 6, 2001, and subsequently rescheduled for January 2002, wouldpresent two choices. One would be for DON to cease training activities no later than May 1, 2003; the other would beforDON to continue training, including live-fire training, beyond that date. If voters choose the second option, OMB wouldsubmit a $50-million funding request to Congress to finance further infrastructure-improvement and housing projects on thewestern end of Vieques. Under the plan, DON would be permitted prior to the referendum to conduct exercises on therangefor no more than 90 days a year using only non-explosive ordnance, and the Office of Management and Budget (OMB)would submit a $40-million funding request to Congress to finance a series of community assistance projects on Vieques. Theplan also called for transferring DON lands back to civilian use.\nRemoval of Protestors and Resumption of Training. On May 4, 2000, more than 300 federal agents moved onto the training range and peacefully removed 216 demonstrators. On May 8, 2000,DON resumed training operations on the range using non-explosive ordnance. Hundreds demonstrators attempting toreenterthe range on various dates after May 4, 2000 were detained and removed by U.S. forces.\nCongressional Activity and Legislation in 1999 and 2000. Hearings devoted to the situation on Vieques were held by the House and Senate Armed Services Committees on September 22,1999, and by the Senate Armed Services Committee on October 19, 1999 (at which the Rush panel report was released). Several bills were introduced in September and October 1999 that proposed various measures for addressing the situation. Following the announcement of the Clinton-Rossello plan, Congress in 2000 debated the merits of the plan and acted ontheadministration's request for $40 million in community assistance funding and its proposed land-transfer legislation.\nCongress appropriated the $40 million in community assistance funding as part of P.L. 106-246 ( H.R. 4425 ) ofJuly 13, 2000, the combined FY2001 military construction appropriation and FY2000 supplemental appropriations bill. TheFY2000 supplemental appropriations portion of the bill (Division B) contains a provision under the Operation andMaintenance, Defense-Wide section that provides $40 million to Vieques for conducting a referendum and for variouscommunity and economic assistance projects.\nCongress authorized the $40 million, provided land-transfer legislation (with terms modified from those proposed under theClinton-Rossello plan), and approved other implementing legislation, as Title XV (Sections 1501-1508) of P.L. 106-398 ( H.R. 4205 ) of October 30, 2000, the FY2001 defense authorization bill. (See pages 365-373 and 879-881 of H.Rept. 106-945 of October 6, 2000, the conference report on H.R. 4205 .) Section 1502 provided for theMay 1, 2001 transfer of the ammunition depot on the western end of the island.\nPosition of Governor Calderon. On November 7, 2000, Puerto Rico elected a new Governor, Sila Maria Calderon, who took office on January 2, 2001. Calderon did not support theClinton-Rossello plan and pledged to take steps that would appear to break the accord.\nFinal Clinton Administration Actions. The Clinton Administration warned Governor Calderon that if Puerto Rico did not fulfill its obligations under the plan, DON would no longer be obliged toabideby the results of the November 6, 2001 referendum. On January 15 and 19, 2001, President Clinton issued two directivesconcerning Vieques. The first directed the Department of Health and Human Services to examine a new study showingthatresidents of Vieques suffer from a high incidence of vibroacoustic disease, an ailment affecting the heart and other internalorgans. The second directed DoD to find a long-term alternative to live-fire training on Vieques, on the grounds that voterswere likely to vote in the November 2001 referendum to permanently end training operations.\nInitial Bush Administration Actions and Puerto Rican Response. The Bush Administration initially supported the Clinton-Rossello plan and held private discussions with Governor Calderon's office.OnMarch 1, 2000, the Bush Administration canceled training operations for an aircraft carrier battle group that were scheduledto take place at Vieques later that month. On April 11, 2001, the Navy notified the Puerto Rican government of its intentionto resume training operations at Vieques using inert ordnance (as required by the Clinton-Rossello agreement) starting April27, 2001.\nIn response, Governor Calderon promised to introduce legislation to tighten noise restrictions in a way that would effectivelyprohibit the Navy from engaging in ship-to-shore gunfire. She also accused the Defense Department of violating anunderstanding to suspend training operations on Vieques pending the outcome of independent reviews of studies on thehealth-effects of the training. Calderon introduced the bill and the Puerto Rican Legislature passed it on April 23. GovernorCalderon signed the bill into law, and on April 24, Puerto Rico filed a federal lawsuit to halt the Navy's exercise, arguingthatthe Navy's training activities would threaten public health and violate both the new noise-restriction law and the 1972 federalNoise Control Act. On January 2, 2002, the court dismissed the lawsuit on jurisdictional grounds, stating that Congressneverintended \"to create a private action for violations by a federal entity of the state and local environmental noise requirements.\"\nNew Bush Administration Plan and Reaction. On June 14, 2001, the Bush Administration announced that it had decided to end military training operations at Vieques by May 1, 2003. Under theAdministration's plan, DON began planning for withdrawal from the island by that date, Secretary of Defense DonaldRumsfeld was to appoint a panel of retired military officers and other experts to seek effective training alternatives toVieques,and the Defense Department was to seek relief from the requirement to hold the November 2001 referendum (which wasrescheduled for January 2002) by asking Congress to pass legislation cancelling sections 1503, 1504 and 1505(b) of P.L.106-398 . After May 1, 2003, the DON-owned land on the eastern end of the island would be turned over to the InteriorDepartment.\nSupporters of the military immediately criticized the Bush Administration's new plan on the grounds that it could lead toreduced readiness of U.S. naval forces and complicate the U.S. ability to maintain access to overseas training ranges inplacessuch as Okinawa and South Korea. Some opponents of continued military training operations on the island welcomed theplan because it established with finality that training operations would end by May 1, 2003, but other opponents of thetrainingoperations criticized the plan on the grounds that it didn't go far enough -- that training operations should end immediatelyrather than on May 1, 2003.\nGovernor Calderon welcomed the plan as far as it went but stated that she still wanted training operations to end immediately. She proceeded with her plan to hold a Puerto Rico-sponsored non-binding referendum on July 29, 2001 that gave votersonthe island an opportunity to vote in favor of an immediate cessation of training operations -- an option that would not beavailable at the separate January 2002 referendum to be held under the Clinton-Rossello plan. In the July 29 referendum,which drew 80.6 percent of the island's 5,893 registered voters, about 68 percent voted in favor of immediate cessationoftraining operations, about 30 percent voted to permit operations to continue indefinitely, and about 2 percent voted foroperations to cease by May 1, 2003.\nOn January 7, 2002, the Secretary of the Navy denied a November 2001 request from the Chief of Naval Operations (CNO) and Commandant of the Marine Corps for a Navy battle group led by the carrier John F. Kennedy to train atVieques. Subsequent Navy battle groups, however, were permitted to train at Vieques.\nLegislation in 2001 and 2002. The FY2002 defense authorization act ( P.L. 107-107 ; S. 1438 ) contains a provision (Section 1049) that (1) canceled the requirement for holding the January2002 referendum; (2) authorized the Secretary of the Navy to close the Vieques range, and terminate all Navy and MarineCorps operations at the Roosevelt Roads naval station that are related exclusively to use of the range, if the Secretarycertifiesthat \"one or more alternative training facilities exist that, individually or collectively, provide an equivalent or superior leveloftraining\" and are immediately available upon cessation of training on Vieques; (3) required the Secretary, in making thisdetermination, to take into account the written views and recommendations of the Chief of Naval Operations and theCommandant of the Marine Corps; and (4) transferred the range lands to the Department of the Interior if the range isclosed. In its report ( S.Rept. 107-151 of May 15, 2002) on the FY2003 defense authorization bill ( S. 2514 ), the SenateArmed Services Committee\ndirects the Secretary of the Navy to provide a report to the congressional defense committees on the plans for joint task force, combined-arms training of carrier battle groups and amphibious ready groupsduring fiscal year 2003. This report should include a description of the locations where that training will be conducted, theuseof live munitions during that training, and a description of the naval and military capabilities to be exercised during training. Thereport should also describe the Secretary's progress regarding the identification of an alternate location or locations for thetraining range at Vieques. The committee directs the Secretary to provide this report no later than March 1, 2003. Thecommittee understands that, until such time as a decision is made by the Secretary of the Navy in accordance with Section1049 of [ P.L. 107-107 ], Navy and Marine Corps training will continue at Vieques as it is currently. (page311)\nClosures of Vieques Range and Roosevelt Roads. DON conducted its final training operations at Vieques in February 2003. On April 30, 2003, DON closed the range and transferred the land totheDepartment of the Interior, which will use the land as a wildlife refuge, except the Live Impact Area, which will bedesignatedas a wilderness area. The Secretary of the Navy certified to Congress on January 10, 2003, that DON would ceasetrainingoperations on the island by that date, in accordance with Section 1049 of P.L. 107-107 . In making the certification, DoDstated that the Navy had identified alternative training sites that collectively will provide equivalent or superior training tothetraining options provided at Vieques. On March 31, 2004, as directed by Section 8132 of the FY2004 defenseappropriations act ( P.L. 108-87 \/ H.R. 2658 ), the Navy closed the supporting Roosevelt Roads naval station onmainland Puerto Rico.\n\n\tPotential Issues for Congress\n\nPotential issues for Congress include the following: Are the Navy's alternative training sites and methods collectively providingan equivalent or superior level of training to that provided at Vieques prior to April 1999? How might the decision to closeVieques affect the U.S. ability to maintain access to overseas training ranges where there is local opposition to U.S.operations, such as Okinawa or South Korea? Does the decision to close Vieques set a precedent for managing disputesover ranges? Will it encourage other local populations to step up their opposition to U.S. training activities? Whateconomicimpact will the closure of the Roosevelt Roads naval station have on the surrounding community?\n\n\tLegislative Activity\n\nFY2004 Defense Authorization Bill. In its report ( S.Rept. 108-46 of May 13, 2003) on the FY2004 defense authorization bill ( S. 1050 ), the Senate Armed Services Committee said itstrongly supported the Navy's plan to reduce its presence at Roosevelt Roads (page 300) and directed the Navy to reporttoCongress on the status of cleanup-related actions for Vieques (page 307). The report stated that\nthis committee intends to remain focused on the progress of cleanup and future use of the former Navy lands on Vieques.... The committee further expects the Secretary of the Navy to expeditiouslycomplete all environmental cleanup actions on Vieques Island, based on available funds, overall priorities, and applicablelaws. (Page 307)\nFY2004 Defense Appropriations Bill. Section 8132 of the FY2004 defense appropriations act ( H.R. 2658 \/ P.L. 108-87 of September 30, 2003; H.Rept. 108-283 of September24, 2003, pages 50 and 344-345) directed the Navy to close Roosevelt Roads naval station no later than six months afterenactment of the bill, and to dispose of the property in accordance with the procedures and authorities of the BaseRealignment and Closure (BRAC) Act of 1990 (10 USC 2687). The House-passed version of the bill contained asomewhatdifferent provision (Section 8125) added by floor amendment.","output":"This report discusses the controversy leading up to the closure of the U.S. navaltraining range on the Puerto Rican island of Vieques, Congress' legislation directing the closure, and the potential impactof theclosure on military training and readiness. For a discussion of post-closure environmental cleanup issues atVieques,see CRS Report RL32533(pdf). (1) On April 30, 2003,the Department of the Navy (DON) closed its training range on Vieques. On March 31, 2004, as directed by Section 8132 of the FY2004 defense appropriations act (P.L. 108-87\/H.R. 2658), the Navy closed the supporting Roosevelt Roads naval station on mainland Puerto Rico. This CRS report will beupdated as events warrant."}
{"id":"crs_RL32623","pid":"crs_RL32623_0","input":"The prospect and potential for severe weather or other natural disasters on or immediately before election day, in addition to lingering hypotheticals about terrorist attacks in the United States, have brought attention to the possibility of postponing as well as the authority to postpone, cancel, or reschedule an election for federal office.\nThere is no provision in the United States Constitution which currently authorizes in express language any federal official or institution to \"postpone\" an election for federal office. The Constitution expressly delegates to the states the primary authority to administer within their respective jurisdictions elections for federal office, with a residual and superseding authority within the United States Congress over most aspects of congressional elections (other than the place of choosing Senators). Additionally, the Constitution provides an express authority in Congress over at least the timing of the selections of presidential electors in the states. As to the time established for holding federal elections under these express constitutional authorities, Congress has legislated, originally in 1845, a uniform date for presidential electors to be chosen in the states, and in 1872, a uniform date for congressional elections across the country.\nIn addition to the absence of specific constitutional direction, there is also no federal law which currently provides express authority to \"postpone\" an election, although the potential operation of federal statutes regarding vacancies and the consequences of a state's failure to select on the prescribed election day may allow the states to hold subsequent elections in \"exigent\" circumstances. A handful of states have provided in s tate law express authority to postpone or reschedule elections within their jurisdictions based on certain emergency contingencies, and others have provided general emergency provisions which might be applicable to election situations.\nAs to potential disruptions on or immediately before election day, particularly in regard to the presidential election, some of the confused scenarios and proposed solutions appear to stem from a misconception of the presidential election as being in the nature of a national referendum. The presidential election is, however, in essence a series of state (and District of Columbia) elections for presidential electors from that state (or jurisdiction) that the Congress has mandated, since 1845, to be held on the same day throughout the country. An event which may disrupt an election for presidential electors in one state, or in a part of one state, may not affect or impact at all the election for presidential electors in other states, or in other portions of the affected state. \nConsistent with the states' authority over the administration and procedural aspects of elections to federal office within their jurisdictions is their initial responsibility for resolving issues of challenges and recounts in those elections. This authority and these procedures may be relevant in the case of disruptions, disasters, or violence at the polling places on election day which could conceivably cast into question the efficacy and legitimacy of a particular election result in that jurisdiction. The relevant state procedures could be applied after the fact of an election to resolve initial questions concerning the results of such elections.\nIt should be emphasized that while the states have the initial authority, or the \"first cut\" at resolving disputes and recounts in their respective jurisdictions regarding elections to federal office, the Constitution expressly provides that the final authority over the elections and returns of its own Members lies exclusively in each house of Congress. As to the elections for presidential electors, the Constitution expressly gives to the Congress the task of counting the electoral votes for President. Implicit within this explicit authority to count the electoral votes has been the practical necessity to determine which electoral votes to count. While Congress has established procedures and rules for counting the electoral votes and resolving disputed lists of electors, Congress has, by statute, specifically given the states a \"safe harbor\" time within which to formally resolve presidential electoral disputes, prior to the meeting of the Electoral College in December, which then would be considered \"conclusive\" upon the Congress in counting those electoral votes for President.\n\n\tTiming of Federal Elections\n\nThe United States Constitution does not require a uniform election date in the states for elections to the House or Senate, or for the selection of presidential electors. Rather, this has been done by Congress by the enactment of federal law. \nThe Constitution, while declaring in the \"Times, Places and Manner\" clause (art. I, \u00a74, cl. 1) that the states have the general authority over the administration of even federal elections within their respective jurisdictions, expressly provides that the Congress may supersede a state provision regarding, among other things, the timing of congressional elections, and further provides that Congress may establish the time for the election of presidential electors in the states (art. II, \u00a71, cl. 4). Under these express constitutional authorities, Congress has established uniform dates for the general elections to federal office within the states, which now are mandated to be held on the first Tuesday next following the first Monday in November in the appropriate even-numbered years.\nIt was not until 1845 that a uniform date for electing presidential electors in the states was mandated by Congress. Previous to that congressional enactment, the timing for selecting presidential electors could, and did, vary from state to state. Congress in 1844 and 1845 was, however, concerned about the allegations of fraud and corruption in the previous election (1840) for electors for President and Vice President in several states. It was asserted that some of the particular misconduct in that election appeared to have been encouraged, in part, because the states had differing dates for the presidential election, which allowed the alleged movement of populations and voters to key states having later elections (described as \"pipelaying\"). Congress sought to eliminate such opportunities for fraud and corruption by establishing a uniform day throughout the country for selecting the electors for President and Vice President, while assuring that those states that required an absolute majority to elect could continue to hold a run-off for presidential electors if needed in an election on a subsequent date.\nThe uniform date for congressional elections in the states was not established by the Congress until 1872. In first enacting this legislation, the Congress appeared to be concerned primarily with two factors, that is, the potential undue and unfair influence on elections in some states that earlier results and elections in other states may routinely have; and the burden on voters who in some states would have to go to the polls twice for two different general elections to choose federal officers in presidential election years.\n\n\tFederal Authority to Postpone\n\nAs noted, the United States Constitution does not provide express authority for any federal official or institution to postpone an election for federal office in a particular state, in any part of one state, or in all of the states. Specifically, there is no current constitutional authority residing in the President of the United States, nor the executive branch of government, to postpone, cancel, or reschedule elections for federal office in the various states. There might certainly be some potential emergency powers inherent in the President of the United States, as well as those delegated by statute, but there is no precedent for such powers being applied with respect to elections held in the various states for presidential electors, authority over which, as to the procedures and methods, has been expressly delegated in the Constitution to the states. It is possible that some scenarios could be imagined, however, where attacks, disruptions, and destruction are so severe and so dangerous in certain localities, particularly in crowded urban areas, that the President under a rule of necessity may look to protect the public safety by federalizing the state national guard and restricting movement and activities in such areas which would obviously affect the ability to conduct an election at those sites.\nUnlike the President, Congress does have explicit constitutional authority over elections to federal office which is of an express, residual nature concerning congressional elections, and a broad implicit authority recognized by the Supreme Court to legislate to protect the integrity and proceedings of presidential elections (as well as express authority over the date of the selection of presidential electors). Congress could, therefore, pass legislation regarding dates, and emergency postponements and\/or rescheduling times for elections to federal offices. The courts have recognized an expansive authority in the Congress to \"provide a complete code\" for federal elections within the states, including presidential elections and, within the parameters of the specific dates for the length and terms of federal offices established within the Constitution, Congress would appear to have the authority to exercise its legislative discretion with regard to emergency scheduling and rescheduling. As noted by the Supreme Court in the 19 th century with regard to Congress's authority over the conduct of elections for federal office in the states:\nThat a government whose essential character is republican, whose executive head and legislative body are both elective ... , has no power by appropriate laws to secure this election from the influence of violence ... is a proposition so startling as to arrest attention and demand the gravest consideration.\nIf this government is anything more than a mere aggregation of delegated agents of other States and governments, each of which is superior to the general government, it must have the power to protect the elections on which its existence depends from violence and corruption .\nFurthermore, in theory, Congress could also enact a law delegating to the executive certain authority in this area regarding emergency rescheduling. However, as a policy matter, and under the constitutional authority delegated to it, Congress has traditionally allowed the states, within the framework of the federal constitutional and statutory mandates, to exercise the substantive control over the procedures and administrative details of elections within their own respective jurisdictions. \nIt should be noted, and as discussed in more detail in the following sections, that there are existing provisions under current federal law regarding a failure of a state to make a selection on the prescribed election day with respect to both congressional elections (2 U.S.C. \u00a78) and presidential elections (3 U.S.C. \u00a72), which have traditionally left the details of such decisions up to the states.\n\n\tState Authority Over Election Procedures and Administration of Federal Elections\n\n\t\tState Authority Under United States Constitution\n\nThere is under our federal system of shared sovereignty a division of jurisdiction and authority which occurs in the case of elections to federal office under the provisions of the United States Constitution. In the first instance, the terms of federal offices and the qualifications of candidates eligible for federal offices are established and fixed by the agreement of the states within the instrument which created those offices, that is, the U.S. Constitution. The length of the terms of federal offices, as well as the qualifications for such offices, are thus unalterable by the Congress alone, or by any state unilaterally.\nThe Constitution expressly provides, however, that the individual states have the authority to administer elections for federal congressional office, while providing that Congress may generally supersede any such regulations. The Supreme Court has described this \"Times, Places and Manner\" clause of Article I, Section 4, as a \"default provision; it invests the States with responsibility for the mechanics of congressional elections ... but only so far as Congress declines to pre-empt state legislative choices.\" The state legislatures also have express authority over the \"manner\" in which presidential electors in their state are to be chosen. Within certain constitutionally prescribed parameters, the states are also responsible to establish the qualifications for voting in their states in federal elections. \nFinally, as to its own Members, the Constitution provides that each house of Congress expressly retains the authority to be the final judge of the results of their elections, and to judge those qualifications of their Members expressly prescribed the Constitution. Congress, in joint session, is also assigned in the Constitution the duty to count the electoral votes for President and to declare the winner.\nAlthough Congress has a \"residual and superseding\" authority over congressional elections (and could, in theory, pass a detailed code for administering federal elections), Congress has generally allowed the states the primary responsibility to administer elections to federal office (and the states, in turn, have further devolved immediate administrative and supervisory control over many election procedures to local and county authorities within their jurisdictions). This policy of deferring to the states in the administration of all elections within their respective borders, including federal elections, has generally recognized the principle that because of the varying political cultures, practices, and traditions across the nation, and from state-to-state, that operational authority over most of the election mechanics is more efficiently left to the states and localities.\nUnder the states' \"Times, Places and Manner\" authority in the Constitution, the states may promulgate a broad range of regulatory and administrative provisions over the mechanics and procedures even for federal elections within their states regarding such things as forms of the ballots, \"ballot access\" by candidates (including new party or independent candidates), voting procedures, voting places, and the nominating and electoral process generally, to facilitate proper election administration generally, and to prevent election fraud, voter confusion, ballot overcrowding, and the proliferation of frivolous candidates, specifically.\nThe states' procedural and administrative authority over elections within their jurisdictions, including elections to federal office, includes the initial authority over election contests, protests, and recounts. As noted by the Supreme Court in Roudebush v. Hartke , even though the Constitution expressly gives each house of Congress the final authority over the elections and returns of its own members (Article I, Section 5), a state may adopt contest and recount provisions as one of the \"safeguards which experience shows are necessary in order to enforce the fundamental right involved.\" The Court noted there:\nIndiana has found, along with many other States, that one procedure necessary to guard against irregularity and error in the tabulation of votes is the availability of a recount. ... A recount is an integral part of the Indiana electoral process and is in the ambit of the broad powers delegated to the States by Art. I, \u00a7 4.\nIt is true that a State's verification of the accuracy of election results pursuant to its Art. I, \u00a7 4, powers is not totally separable from the Senate's power to judge elections and returns. But a recount can be said to \"usurp\" the Senate's function only if it frustrates the Senate's ability to make an independent final judgment. A recount does not prevent the Senate from independently evaluating the election any more than the initial count does. The Senate is free to accept or reject the apparent winner in either count, and, if it chooses, to conduct its own recount.\nAs to the presidential election, as noted, the state legislatures are granted express authority in the Constitution over the \"manner\" in which presidential electors are to be chosen. Although there remains some controversy over the Supreme Court's ruling in Bush v. Gore , where a federal court intervened to stop a state-ordered recount of the vote for presidential electors in Florida in 2000, the Court's per curium opinion left intact and affirmed, at least in theory, a state legislature's authority under the United States Constitution to enact protest or contest statutes and provisions regarding elections for presidential electors (although the implementation of that procedure as directed by the Florida courts was found by a majority of the Supreme Court to violate the equal protection and due process requirements of the United States Constitution). The primacy under the United States Constitution of the state legislatures in establishing the mechanisms for appointment of presidential electors and in fashioning recount and protest statutes was also emphasized by the Supreme Court in the decision preceding Bush v. Gore , that is, Bush v. Palm Beach County Canvassing Board, which had remanded to the Florida state courts the issue of the recount proceedings in the Florida presidential election of 2000. Under such authority, the state may be in the position to initially hear challenges to and to rectify voting problems or issues that arose in a presidential election because of disruptions in voting caused by natural or man-made disasters. \n\n\t\tAuthority Under State Law to Postpone or Reschedule an Election to Federal Office\n\nThere are several state provisions which currently purport to give to certain specified state officials the authority to \"postpone\" or to reschedule an election within the state, prior to the holding of an election, for a number of emergency and exigent circumstances. Furthermore, other states may have general emergency powers which might be used, and might be broad enough, to allow the Governor or other state executive official to take action which may involve a postponement of an election. Because of the increased awareness of the threat from severe weather events, or from concern over hypothetical terrorist threats, state legislatures may in the future consider the adoption of additional provisions which set out the considerations and circumstances for the declaration of a postponement and\/or rescheduling of an election within their jurisdiction, including elections to federal offices.\n\n\t\t\tConformance With Federal Law\n\nDoes a state law or order instituting a rescheduling of an election to federal office within that state, or a portion of the state, impermissibly affect the date of such election in contravention of the federal laws that have established election day for federal offices to be the first Tuesday after the first Monday in November?\n\n\t\t\t\tCongressional Elections\n\nThe statutorily established date for elections for federal office\u2014while it is clearly mandatory and not merely advisory\u2014may not necessarily be an \"absolute\" such that no election subsequent to that date could be or should be recognized. In fact, as noted, the federal statutory scheme for congressional elections specifically provides for the contingency of a \"vacancy\" in the state delegation, whether that vacancy is caused by death, resignation, or incapacity, or by a \"failure to elect at the time prescribed by law,\" by authorizing another time for the election to be prescribed by state law:\n2 U.S.C. \u00a7 8 . Vacancies \nThe time for holding elections in any State, District, or Territory for a Representative or Delegate to fill a vacancy, whether such vacancy is caused by a failure to elect at the time prescribed by law, or by the death, resignation, or incapacity of a person elected, may be prescribed by the laws of the several States and Territories respectively.\nThe Supreme Court of the United States has found that the day established in 2 U.S.C. Section 7 for electing Senators and Representatives in the states is a mandatory date, and that a state's statutory scheme may not regularly permit or allow the \"election\" of such a federal official at an election held prior to the first Tuesday after the first Monday in November date. The Louisiana election provisions which designated as \"elected\" to Congress an open primary winner who received at least a majority of the votes cast in that primary election held prior to the general election, were therefore found to be a violation of the federal law setting the general election date. States that allow \"early voting\" in federal elections, however, have not been found by federal courts to be holding a prior election in violation of the federal statute, since it was found that the election would not be \"consummated\" before election day, or that such ballots would not be officially counted or tallied before federally prescribed election day.\nFederal courts interpreting the federal statutes regarding the timing of elections to Congress have noted that a state's scheme for elections must be in general conformance with the date prescribed by federal law, at 2 U.S.C. Section 7, and may not routinely allow the election on an earlier date, but that certain \"exigent\" circumstances may permit the holding of an election for federal office at a subsequent time under 2 U.S.C. Section 8. The federal District Court in the District of Columbia in Busbee v. Smith , in a case affirmed by the United States Supreme Court, found that an exigent circumstance, such as the State of Georgia's reapportionment plan being refused preclearance by the Justice Department under the Voting Rights Act of 1965 because of \"discriminatory effects,\" allowed for an election to federal office in two congressional districts to be held on a subsequent date:\n...[W]here exigent circumstances arising prior to or on the date established by [2 U.S.C.] section 7 preclude holding an election on that date, a state may postpone the election until the earliest practicable date. In this case, for example, Georgia will \"fail[ ] to elect at the time prescribed by law\" because its purposefully discriminatory conduct prevented it from securing Section 5 approval for constitutionally required changes in its voting procedures. As a result, we believe, that [2 U.S.C.] section 8 permits a reasonable postponement of the elections in the Fourth and Fifth Congressional Districts.\nThis reasoning, as noted later by another federal court, would allow for the postponement of an election, and the holding of the election for federal office in the state at a later date, for a number of possible \"exigent\" circumstances, including \"natural disasters\" such as hurricanes, tied votes, or fraud. This federal court in Georgia found that the state's statutory requirement that a candidate\u2014to be elected\u2014receive a majority and not merely a plurality of votes in the general election, was such an exigent circumstance that could require the holding of a subsequent run-off election for Senator to be held on November 24, after the earlier November general election mandated by 2 U.S.C. Section 7 resulted in no candidate receiving a majority of the votes:\nThe court in Busbee acknowledged that 2 U.S.C. \u00a7 8 allows states, under certain circumstances, to hold elections at times other than those prescribed by 2 U.S.C. section 7. Id. at 524-25. In addition to the circumstances it specifically enumerates\u2014death, resignation, personal incapacity\u20142 U.S.C. section 8 allows states to reschedule elections \"where exigent circumstances arising prior to or on the date established by section 7 preclude holding an election on that date.\" Id. at 525. The court offered natural disasters, and the parties to the instant suit offer fraud and a tie vote as examples of 'exigent' circumstances warranting state rescheduling.\n\n\t\t\t\tElections for Presidential Electors\n\nThe election for presidential electors presents somewhat different issues from those elections for congressional office because the language of the federal statutes for presidential electors varies from the language governing congressional elections. The statute concerning the timing and scheduling for congressional elections provides expressly that when there is a vacancy caused by death, resignation or incapacity, or when \"such vacancy is caused by a failure to elect at the time prescribed by law,\" then a subsequent election may be scheduled. This language appears to be broad enough and, as noted above, has been interpreted by federal courts to actually permit a temporary postponement and rescheduling of a congressional election. The federal statute for presidential elections, however, expressly states that \"[w]henever any State has held an election for the purpose of choosing electors,\" but fails to \"make a choice on the day prescribed by law,\" then the electors may be selected on a subsequent day in the manner established by the legislature of the state:\n3 U.S.C. \u00a7 2 . Failure to make choice on prescribed day\nWhenever any State has held an election for the purpose of choosing electors, and has failed to make a choice on the day prescribed by law, the electors may be appointed on a subsequent day in such a manner as the legislature of such State may direct.\nDoes the wording of 3 U.S.C. Section 2 mean that the authority of the states to reschedule an election for presidential electors is contingent upon the state actually having \"held an election for the purpose of choosing electors\"? If so, then under this theory no prior postponement and rescheduling would be permitted state-wide, even a postponement for natural disasters such as an impending hurricane, or the destruction shortly prior to the elections of a number of polling places, since it would conflict with the federally scheduled time in 3 U.S.C. Section 2.\nCertainly, the states could respond after-the-fact to disruptions on election day. If a regularly scheduled election is disrupted by natural or man-made disasters in a state, then the state could, under its general election contest and challenge procedures, find that the results of the election were not viable or valid. Pursuant to such finding, the state might order a new election or a continuation of the election in the affected areas (whereby those people who were not certified by election officials as having already voted could come to vote at a subsequent time), which would appear to be in conformance with federal law, both at 2 U.S.C. Section 8 (for congressional elections), as well as 3 U.S.C. Section 2, in the case of the election of presidential electors. In such cases, the state had clearly \"held an election,\" but a choice was not necessarily made because the state has determined that the results could not fairly be ascertained on the prescribed election day.\nHowever, if there is a disruption prior to an election, or anticipated at the time of election\u2014such as in the case of a hurricane, for example\u2014could an election for presidential electors not be held on the proscribed date, that is, be postponed and rescheduled in a particular state and still be in conformance with 3 U.S.C. Section 2? There is no clear and definitive authority on this question, nor do there appear to be specific legal precedents bearing upon this issue. Even though the purpose in 1845 of this particular provision at 3 U.S.C. Section 2, regarding the subsequent choosing of electors, was clearly to allow those states that required an absolute \"majority\" in a general election to be \"elected\" to hold a subsequent run-off election if no candidate's electors received such a majority, the language itself may be open to broader interpretation.\nIt may be contended in the first place that the express constitutional authority of the state legislatures over the selection of presidential electors at Article II, Section 1, clause 2, which language allows the state legislatures to enact statutory schemes to protect the validity of their elections for presidential electors in the state, including fashioning protest or contest procedures, may be consonant with such an authority in the legislature itself to temporarily postpone or to authorize by state law the postponement and rescheduling of state-wide elections by the state executive in certain emergency circumstances. One of the major points made by the Supreme Court in both the earlier Palm Beach County case, and the latter Bush v. Gore decision, was the primacy of the state legislatures' role in the manner of the selection of presidential electors. Although clearly the concepts of \"time\" and \"manner\" of election are not necessarily synonymous, this constitutional provision and the Supreme Court's deference to the state legislatures may arguably give credibility to states' attempts to statutorily prescribe a system whereby emergency procedures may be implemented with respect to all state-wide elections, including the general election for presidential electors, which provide that such elections, while certainly scheduled for the federally prescribed date, because of such emergency and exigent circumstances need to be rescheduled, postponed, or continued at a subsequent time.\nFurthermore, it may be noted that in addition to Article II, Section 1, clause 2 of the Constitution, the federal law at 3 U.S.C. Section 5 (which was part of the original Electoral Vote Count Act of 1887), provides the state legislatures with further statutory authority to finally and conclusively resolve within the state protests, challenges, and contests of the election of presidential electors. One of the purposes of the original 1887 statute regarding counting of the electoral votes was to substantially devolve upon the states the burden for resolving conflicts over the election, selection, and appointment of those states' own electors for President and Vice President. As noted by the Supreme Court, this statute at 3 U.S.C. Section 5:\ncreates a \"safe harbor\" for a State insofar as congressional consideration of its electoral votes are concerned. If the state legislature has provided for final determination of contests or controversies by a law made prior to election day, that determination shall be conclusive if made at least six days prior to said time of meeting of the electors.\nClearly, there is an understanding that the states were intended to have the principal and initial responsibility for resolving the conflicts, arguments, controversies and difficulties involved in the processes of selecting presidential electors in their respective states. If a challenge were raised to a state's selection of presidential electors because of a partial or complete postponement and rescheduling of the popular vote for presidential electors due to \"exigent\" circumstances, and such challenge was resolved in the state within the \"safe harbor\" timeframe, then the presumption would appear to exist that such determination would be \"conclusive\" on the Congress in accepting those electoral votes.\nIt is possible to argue, therefore, that to harmonize the provisions for elections to federal office, that is specifically the provisions for subsequent congressional elections at 2 U.S.C. Section 8 and the presidential provisions at 3 U.S.C. Section 2, and the authority devolved upon the states in 3 U.S.C. Section 5, that it would be logical to read the federal statutes as permitting a postponement and an election on a subsequent date for both Congress and presidential electors under the state's current laws when necessitated by emergency and exigent circumstances in the particular state. As long as the election and any subsequent challenges are resolved in time, such resolution would be \"conclusive\" on Congress in counting the presidential electoral votes. Such a supposition might be bolstered somewhat by the alternative, that is, that the federal law could work to disenfranchise the voters of a particular state when that state believes it is necessary to temporarily postpone entirely or partially the regularly scheduled state-wide elections because of some extraordinary and disastrous event in the state.\nFinally, although both the authority and practical arguments would appear to provide support for placing the power for postponement of elections for federal offices within the particular states, there has been some concerns expressed, as a matter of policy as well as statutory interpretation, over allowing any state to postpone or otherwise reschedule an election for federal office within the entire state\u2014particularly an election for presidential electors\u2014based merely on the anticipation of events that may or may not happen, or on an event taking place in another state or in only one part of the same state. The grounds for any such postponement or rescheduling, as well as any express, implied, or inherent authority, would have to be examined initially under the applicable state law and procedure, and no blanket statement could be made with respect to the interpretation in all of the states.\nThere appears to be little legal or factual precedent to apply to such circumstances regarding an election in a state, particularly for presidential electors. Remembering that the presidential election is not necessarily in the nature of a national referendum, but is rather 51 simultaneous state\/district elections for presidential electors, however, it may be asked as a matter of policy whether or not an event that occurred earlier in the state, or an event that occurs in a different state or in a different voting locality within the same state, would or should be enough to trigger a postponement of an election in the entirety of any particular state as a matter of good public policy. It has been argued that a violent disruption of an election in Manhattan, New York City, should not necessarily affect, or at least could not predictably affect, an election in Manhattan, Kansas. It may be noted that on the fateful day of September 11, 2001, despite the events unfolding in Manhattan in New York City, in Pennsylvania, and at the Pentagon in the Washington, DC, area, a primary election for federal congressional office\u2014a contested congressional primary\u2014on the South Shore of Massachusetts reportedly drew a larger than normal number of the voting age population. Similarly, a violent tropical storm hit Hawaii a day before a contested Senate primary election in the summer of 2014, and the executive authority of the state decided to proceed with the primary election in all of the state other than two precincts which were particularly devastated by Tropical Storm Iselle on August 8, 2014. The Chief Election Officer in the state of Hawaii decided to allow the election to continue and be held in those two precincts the next week, on August 15, 2014.\nProblems and disruptions in one state clearly may not predictably (or necessarily) affect the turnout or the viability of the results of an election in another state. Similarly, natural or man-made disasters occurring, or anticipated to occur, in one part or region of a state may not predictably affect the turnout in another part of the state. To avoid the appearance of political maneuvering or gamesmanship, and to adhere more closely to the federal statutory scheme for the timing of elections for presidential electors, it has been argued that the more reasoned policy would be\u2014absent the most extreme disruption and immediate \"exigent\" circumstance\u2014to have the state conduct such an election as scheduled in as many localities and local jurisdictions as feasible, and then to deal with any implications of the disruptions subsequently, after having held the election, including re-votes or rescheduled votes in affected areas, under the state's contest and challenge procedures.\n\n\tAppendix: Constitutional and Federal Statutory Provisions\n\nConstitutional Provisions: Congressional Elections\nA rticle I, Section 2 , clause 1 . The House of Representatives shall be composed of Members chosen every second year by the people of the several States ....\nArticle I, Section 2 , clause 4 . When vacancies happen in the Representation from any State, the Executive Authority thereof shall issue Writs of Election to fill such Vacancies.\nAmendment Seventeen . The Senate of the United States shall be composed of two Senators from each State, elected by the people thereof, for six years ....\nWhen vacancies happen in the representation of any State in the Senate, the executive authority of such State shall issue writs of election to fill such vacancies: Provided , That the legislature of any State may empower the executive thereof to make temporary appointments until the people fill the vacancies by election as the legislature may direct.\nArticle I, Section 4, clause 1 . The times, Places and Manner of holding Elections for Senators and Representatives, shall be prescribed in each State by the Legislature thereof; but the Congress may at any time by Law make or alter such Regulations, except as to the Places of chusing Senators.\nArticle I, Section 5, clause 1 . Each house shall be the Judge of the Elections, Returns and Qualifications of its own Members ....\nPresidential Elections.\nArticle II, Section 1 , cl. 1. The executive Power shall be vested in a President of the United States of America. He shall hold his Office during the Term of four Years, and, together with the Vice President, chosen for the same Term, be elected, as follows:\nArticle II, Section 1, cl. 2. Each State shall appoint, in such Manner as the Legislature thereof may direct, a Number of Electors, equal to the whole number of Senators and Representatives to which the State may be entitled in the Congress.... \nArticle II, Section 1, clause 4 . The Congress may determine the Time of chusing the Electors, and the Day on which they shall give their votes; which Day shall be the same throughout the United States.\nAmendment XII . The Electors shall meet in their respective states, and vote by ballot for President and Vice-President, ... and they shall make distinct lists of all persons voted for as President, and of all persons voted for as Vice-President, and of the number of votes for each, which lists they shall sign and certify, and transmit sealed to the seat of the government of the United States, directed to the President of the Senate; \u2013 The President of the Senate shall, in the presence of the Senate and House of Representatives, open all the certificates and the votes shall then be counted ....\nDates of Federal Office Terms.\nAmendment XX, Section 1 . The terms of the President and Vice President shall end at noon on the 20 th day of January, and the terms of Senators and Representatives at noon on the 3 rd day of January, of the years in which such terms would have ended if this article had not been ratified; and the terms of their successors shall then begin.\nCurrent Federal Statutory Provisions.\n2 U.S.C. Section 1 . Time for election of Senators . At the regular election held in any State next preceding the expiration of the term for which any Senator was elected to represent such State in Congress, at which election a Representative to Congress is regularly by law to be chosen, a United States Senator from said State shall be elected by the people thereof for the term commencing on the 3d day of January next thereafter.\n2 U.S.C. Section 7 . Time of election . The Tuesday next after the 1 st Monday in November, in every even numbered year, is established as the day for the election, in each of the States and Territories of the United States, of Representatives and Delegates to the Congress commencing on the 3d day of January next thereafter. \n2 U.S.C. Section 8 . Vacancies . The time for holding elections in any State, District, or Territory for a Representative or Delegate to fill a vacancy, whether such vacancy is caused by a failure to elect at the time prescribed by law, or by the death, resignation, or incapacity of a person elected, may be prescribed by the laws of the several States and Territories respectively.\n3 U.S.C. Section 1 . Time of appointing electors . The electors of President and Vice President shall be appointed, in each State, on the Tuesday next after the first Monday in November, in every fourth year succeeding every election of a President and Vice President.\n3 U.S.C. Section 2 . Failure to make choice on prescribed day . Whenever any State has held an election for the purpose of choosing electors, and has failed to make a choice on the day prescribed by law, the electors may be appointed on a subsequent day in such a manner as the legislature of such State may direct.\n3 U.S.C. Section 5 . Determination of controversy as to appointment of electors . If any State shall have provided, by laws enacted prior to the day fixed for the appointment of the electors, for its final determination of any controversy or contest concerning the appointment of all or any of the electors of such State, by judicial or other methods or procedures, and such determination shall have been made at least six days before the time fixed for the meeting of the electors, such determination made pursuant to such law so existing on said day, and made at least six days prior to said time of meeting of the electors, shall be conclusive, and shall govern in the counting of the electoral votes as provided in the Constitution, and as hereinafter regulated, so far as the ascertainment of the electors appointed by such State is concerned.","output":"The prospect and potential for severe weather or other natural disasters, in addition to lingering hypotheticals about terrorist attacks directed at certain metropolitan areas, have brought attention to the possibility of postponing and\/or the authority to postpone, cancel, or reschedule an election for federal office.\nThe United States Constitution does not provide in express language current authority for any federal official or institution to \"postpone\" an election for federal office. Although the Constitution does expressly delegate to the states the primary authority to administer within their respective jurisdictions elections for federal office, there remains within the Constitution a residual and superseding authority in the U.S. Congress over most aspects of congressional elections (art. I, \u00a75, cl. 1), and an express authority in Congress over at least the timing of the selections of presidential electors in the states (article II, \u00a71, cl. 4). Under this authority Congress has legislated a uniform date for presidential electors to be chosen in the states, and a uniform date for congressional elections across the country, to be on the Tuesday immediately following the first Monday in November in the particular, applicable even-numbered election years.\nIn addition to the absence of an express constitutional direction, there is also no federal law which currently provides express authority to \"postpone\" an election, although the potential operation of federal statutes regarding vacancies and the consequences of a state's \"failure to select\" on the prescribed election day (see 2 U.S.C. \u00a78, and 3 U.S.C. \u00a72) might allow a state to hold subsequent elections in \"exigent\" circumstances. It would appear that under Congress's express constitutional authority over the timing of federal elections that Congress could, at some time, enact a federal law setting conditions, times, and dates for rescheduling of elections to federal offices in the states in emergency or other exigent circumstances, and with the proper standards and guidelines could delegate the execution and application of those provisions to executive branch or state officials.\nWith regard to state laws and federal elections, in addition to the general protest, contest, and challenge statutes whereby the results of elections to federal office are initially adjudicated in the states, a handful of states have provided in state law express authority to postpone or reschedule elections within their jurisdictions based on certain emergency contingencies. The states' authority within the United States Constitution appears to be sufficient to enact legislation to deal with emergency and exigent circumstances concerning federal elections, as long as such laws do not conflict with federal law enacted under Congress's superseding constitutional authority. Federal courts have thus generally interpreted federal law to permit the states to reschedule elections to congressional office when \"exigent\" circumstances have necessitated a postponement. There may be different issues raised in the case of the election of presidential electors if the state attempted to hold the entire election within the state on a different date, because the federal statute regarding the \"failure to make a choice\" on the prescribed election day for presidential electors is different than that regarding congressional elections.\nThis report has been revised from an earlier version and will be updated as case law or events warrant."}
{"id":"gao_GAO-07-794T","pid":"gao_GAO-07-794T_0","input":"\tBackground\n\nTitles XVIII and XIX of the Social Security Act establish minimum  requirements that all nursing homes must meet to participate in the  Medicare and Medicaid programs, respectively. With the passage of OBRA  \u201887, Congress responded to growing concerns about the quality of care that  nursing home residents received by requiring major reforms in the federal  regulation of nursing homes. Among other things, these reforms revised  care requirements that facilities must meet to participate in the Medicare  or Medicaid programs, modified the survey process for certifying a home\u2019s  compliance with federal standards, and introduced additional sanctions  and decertification procedures for homes that fail to meet federal  standards. Following OBRA \u201887, CMS published a series of regulations and  transmittals to implement the changes. Key implementation actions have  included the following: In October 1990, CMS implemented new survey  standards; in July 1995, it established enforcement actions for nursing  homes found to be out of compliance; and it enhanced oversight through  more rigorous federal monitoring surveys beginning in October 1998 and  annual state performance reviews in fiscal year 2001. CMS has continued  to revise and refine many of these actions since their initial  implementation.\n\n\t\tSurvey Process\n\nEvery nursing home receiving Medicare or Medicaid payment must  undergo a standard survey not less than once every 15 months, and the  statewide average interval for these surveys must not exceed 12 months.  During a standard survey, separate teams of surveyors conduct a  comprehensive assessment of federal quality-of-care and life safety  requirements. In contrast, complaint investigations, also conducted by  surveyors, generally focus on a specific allegation regarding resident care  or safety.\nThe quality-of-care component of a survey focuses on determining  whether (1) the care and services provided meet the assessed needs of the  residents and (2) the home is providing adequate quality care, including  preventing avoidable pressure sores, weight loss, and accidents. Nursing  homes that participate in Medicare and Medicaid are required to  periodically assess residents\u2019 care needs in 17 areas, such as mood and  behavior, physical functioning, and skin conditions, in order to develop an  appropriate plan of care. Such resident assessment data are known as the  minimum data set (MDS). To assess the care provided by a nursing home,  surveyors select a sample of residents and (1) review data derived from  the residents\u2019 MDS assessments and medical records; (2) interview nursing  home staff, residents, and family members; and (3) observe care provided  to residents during the course of the survey. CMS establishes specific  investigative protocols for state survey teams\u2014generally consisting of  registered nurses, social workers, dieticians, and other specialists\u2014to use  in conducting surveys. These procedural instructions are intended to make  the on-site surveys thorough and consistent across states.\nThe life safety component of a survey focuses on a home\u2019s compliance  with federal fire safety requirements for health care facilities. The fire  safety requirements cover 18 categories, ranging from building  construction to furnishings. Most states use fire safety specialists within  the same department as the state survey agency to conduct fire safety  inspections, but some states contract with their state fire marshal\u2019s office.\nComplaint investigations provide an opportunity for state surveyors to  intervene promptly if problems arise between standard surveys.  Complaints may be filed against a home by a resident, the resident\u2019s  family, or a nursing home employee either verbally, via a complaint  hotline, or in writing. Surveyors generally follow state procedures when  investigating complaints but must comply with certain federal guidelines  and time frames. In cases involving resident abuse, such as pushing,  slapping, beating, or otherwise assaulting a resident by individuals to  whom their care has been entrusted, state survey agencies may notify state  or local law enforcement agencies that can initiate criminal investigations.  States must maintain a registry of qualified nurse aides, the primary  caregivers in nursing homes, that includes any findings that an aide has  been responsible for abuse, neglect, or theft of a resident\u2019s property. The  inclusion of such a finding constitutes a ban on nursing home  employment.\nEffective July 1995, CMS established a classification system for  deficiencies identified during either standard surveys or complaint  investigations. Deficiencies are classified in 1 of 12 categories according to  their scope (i.e., the number of residents potentially or actually affected)  and their severity. An A-level deficiency is the least serious and is isolated  in scope, while an L-level deficiency is the most serious and is considered  to be widespread in the nursing home (see table 1). States are required to  enter information about surveys and complaint investigations, including  the scope and severity of deficiencies identified, in CMS\u2019s OSCAR  database.\n\n\t\tEnforcement\n\nIn an effort to better ensure that nursing homes achieve and maintain  compliance with the new survey standards, OBRA \u201887 expanded the range  of enforcement sanctions. Prior to OBRA \u201887, the only sanctions available  were terminations from Medicare or Medicaid or, under certain  circumstances, DPNAs. OBRA \u201887 added several new alternative sanctions,  such as civil money penalties (CMP) and requiring training for staff  providing care to residents, and expanded the types of deficiencies that  could result in DPNAs. To implement OBRA \u201887, CMS published  enforcement regulations, effective July 1995. According to these  regulations, the scope and severity of a deficiency determine the  applicable sanctions. CMS imposes sanctions on homes with Medicare or  dual Medicare and Medicaid certification on the basis of state referrals.  CMS normally accepts a state\u2019s recommendation for sanctions but can  modify it.\nEffective January 2000, CMS required states to refer for immediate  sanction homes found to have harmed one or a small number of residents  or to have a pattern of harming or exposing residents to actual harm or  potential death or serious injury (G-level or higher deficiencies on the  agency\u2019s scope and severity grid) on successive surveys. This is known as  the double G immediate sanctions policy. Additionally, in January 1999,  CMS launched the Special Focus Facility program. This initiative was  intended to increase the oversight of homes with a history of providing  poor care. When CMS established this program, it instructed each state to  select two homes for enhanced monitoring. For these homes, states are to  conduct surveys at 6-month intervals rather than annually. In December  2004, CMS expanded this program to require immediate sanctions for  those homes that fail to significantly improve their performance from one  survey to the next and termination for homes with no significant  improvement after three surveys over an 18-month period.\nUnlike other sanctions, CMPs do not require a notification period before  they go into effect. However, if a nursing home appeals the deficiency, by  statute, payment of the CMP\u2014whether received directly from the home or  withheld from the home\u2019s Medicare and Medicaid payments\u2014is deferred  until the appeal is resolved. In contrast to CMPs, other sanctions,  including DPNAs, cannot go into effect until homes have been provided a  notice period of at least 15 days, according to CMS regulations; the notice  period is shortened to 2 days in the case of immediate jeopardy. Although  nursing homes can be terminated involuntarily from participation in  Medicare and Medicaid, which can result in a home\u2019s closure, termination  is used infrequently.\n\n\t\tOversight\n\nCMS is responsible for overseeing each state survey agency\u2019s performance  in ensuring quality of care in nursing homes participating in Medicare or  Medicaid. Its primary oversight tools are (1) statutorily required federal  monitoring surveys and (2) annual state performance reviews. Pursuant to  OBRA \u201887, CMS is required to conduct annual monitoring surveys in at  least 5 percent of the state-surveyed Medicare and Medicaid nursing  homes in each state, with a minimum of five facilities in each state. These  federal monitoring surveys can be either comparative or observational. A  comparative survey involves a federal survey team conducting a complete,  independent survey of a home within 2 months of the completion of a  state\u2019s survey in order to compare and contrast the findings. In an  observational survey, one or more federal surveyors accompany a state  survey team to a nursing home to observe the team\u2019s performance. State  performance reviews measure state survey agency compliance with seven  standards: timeliness of the survey, documentation of survey results,  quality of state agency investigations and decision making, timeliness of  enforcement actions, budget analysis, timeliness and quality of complaint  investigations, and timeliness and accuracy of data entry. These reviews  replaced state self-reporting of their compliance with federal  requirements.\n\n\tQuality of Care Remains a Problem for a Small but Significant Proportion of Nursing Homes Nationwide\n\nA small but significant proportion of nursing homes nationwide continue  to experience quality-of-care problems\u2014as evidenced by the almost 1 in 5  nursing homes nationwide that were cited for serious deficiencies in  2006\u2014despite the reforms of OBRA \u201887 and subsequent efforts by CMS  and the nursing home industry to improve the quality of nursing home  care. Although there has been an overall decline in the numbers of nursing  homes found to have serious deficiencies since fiscal year 2000, variation  among states in the proportion of homes with serious deficiencies  indicates state survey agencies are not consistently conducting surveys.  Challenges associated with the recruitment and retention of state  surveyors, combined with increased surveyor workloads, can affect survey  consistency. In addition, federal comparative surveys conducted after  state surveys found more serious quality-of-care problems than were cited  by state surveyors. Although understatement of serious deficiencies  identified by federal surveyors in five states has declined since 2004,  understatement continues at varying levels across these states.\nCMS data indicate an overall decline in reported serious deficiencies from  fiscal year 2000 through 2006. The proportion of nursing homes  nationwide cited with serious deficiencies declined from 28 percent in  fiscal year 2000 to a low of 16 percent in 2004, and then increased to   19 percent in fiscal year 2006 (see fig. 1).\nDespite this national trend, significant interstate variation in the  proportion of homes with serious deficiencies indicates that states  conduct surveys inconsistently. (App. II shows the percentage of homes,  by state, cited for serious deficiencies in standard surveys across a 7-year  period.). In fiscal year 2006, 6 states identified serious deficiencies in   30 percent or more of homes surveyed, 16 states found such deficiencies  in 20 to 30 percent of homes, 22 found these deficiencies in 10 to   19 percent of homes, and 7 found these deficiencies in less than 10 percent  of homes. For example, in fiscal year 2006, the percentage of nursing  homes cited for serious deficiencies ranged from a low of approximately   2 percent in one state to a high of almost 51 percent in another state.\nThe inconsistency of state survey findings may reflect challenges in  recruiting and retaining state surveyors and increasing state surveyor  workloads. We reported in 2005 that, according to state survey agency  officials, it is difficult to retain surveyors and fill vacancies because state  survey agency salaries are rarely competitive with the private sector.  Moreover, the first year for a new surveyor is essentially a training period  with low productivity. It can take as long as 3 years for a surveyor to gain  sufficient knowledge, experience, and confidence to perform the job well.  We also reported that limited experience levels of state surveyors resulting  from high turnover rates was a contributing factor to (1) variability in  citing actual harm or higher-level deficiencies and (2) understatement of  such deficiencies. In addition, the implementation of CMS\u2019s nursing home  initiatives has increased state survey agencies\u2019 workload. States are now  required to conduct on-site revisits to ensure serious deficiencies have  been corrected, promptly investigate complaints alleging actual harm on- site, and initiate off-hour standard surveys in addition to quality-of-care  surveys. As a result, surveyor presence in nursing homes has increased  and surveyor work hours have effectively been expanded to weekends,  evenings, and early mornings.\nIn addition, data from federal comparative surveys indicate that quality-of- care problems remain for a significant proportion of nursing homes. In  fiscal year 2006, 28 percent of federal comparative surveys found more  serious deficiencies than did state quality-of-care surveys. Since 2002,  federal surveyors have found serious deficiencies in 21 percent or more of  comparative surveys that were not cited in corresponding state quality-of- care surveys (see fig. 2). However, some serious deficiencies found by  federal, but not state surveyors, may not have existed at the time the state  survey occurred.\nIn December 2005, we reported on understatement of serious deficiencies  in five states\u2014California, Florida, New York, Ohio, and Texas\u2014from  March 2002 through December 2004. We selected these states for our  analysis because the percentage of their state surveys that cited serious  deficiencies decreased significantly from January 1999 through January  2005. Our analysis of more recent data from these states showed that  understatement of serious deficiencies continues at varying levels.  Altogether, we examined 139 federal comparative surveys conducted from  March 2002 through March 2007 in the five states. Understatement of  serious deficiencies decreased from 18 percent for federal comparative  surveys during the original time period to 11 percent for federal  comparative surveys during the period January 2005 through March 2007.\nFederal comparative surveys for Florida and Ohio for this most recent  time period found that state surveys had not missed any serious  deficiencies; however, since 2004 all five states experienced increases in  the percentage of homes cited with serious deficiencies on state surveys  (see app. II). Understatement of serious deficiencies varied across these  five states, as the percentage of serious missed deficiencies ranged from a  low of 4 percent in Ohio to a high of 26 percent in New York during the 5- year period March 2002 to March 2007. Figure 3 summarizes our analysis  by state, from March 2002 through March 2007.\n\n\tCMS Has Strengthened Its Enforcement Capabilities, although Key Initiatives Still Need Refinement\n\nCMS has strengthened its enforcement capabilities since OBRA \u201887 by, for  example, implementing additional sanctions and an immediate sanctions  policy for nursing homes found to repeatedly harm residents and  developing a new enforcement management data system; however, several  key initiatives require refinement. The immediate sanctions policy is  complex and appears to have induced only temporary compliance in  certain nursing homes with histories of repeated noncompliance. The term  \u201cimmediate sanctions\u201d is misleading because the policy requires only that  homes be notified immediately of CMS\u2019s intent to implement sanctions,  not that sanctions must be implemented immediately. Furthermore, when  a sanction is implemented, there is a lag time between when the deficiency  citation occurs and the sanction\u2019s effective date. In addition to the  immediate sanctions policy, CMS has taken other steps that are intended  to address enforcement weaknesses, but their effectiveness remains  unclear. Finally, although CMS has developed a new data system, the  system\u2019s components are not integrated and the national reporting  capabilities are incomplete, hampering the agency\u2019s ability to track and  monitor enforcement.\n\n\t\tDespite Changes in Federal Enforcement Policy, Immediate Sanctions Do Not Always Deter Noncompliance and Often Are Not Immediate\n\nDespite CMS\u2019s efforts to strengthen federal enforcement policy, it has not  deterred some homes from repeatedly harming residents. Effective  January 2000, CMS implemented its double G immediate sanctions policy.  The policy is complex and does not always appear to deter  noncompliance, nor are the sanctions always implemented immediately.  We recently reported that the immediate sanctions policy\u2019s complex rules,  and the exceptions they include, allowed homes to escape immediate  sanctions even if they repeatedly harmed residents. CMS acknowledged  that the complexity of the policy may be an inherent limitation and  indicated that it intends to either strengthen the policy or replace it with a  policy that achieves similar goals through alternative methods.\nIn addition to the complexity of the policy, it does not appear to always  deter noncompliance. We recently reported that our review of 63 homes  with prior serious quality problems in four states indicated that sanctions  may have induced only temporary compliance in these homes because  surveyors found that many of the homes with implemented sanctions were  again out of compliance on subsequent surveys. From fiscal year 2000  through 2005, 31 of these 63 homes cycled in and out of compliance more  than once, harming residents, even after sanctions had been implemented,  including 8 homes that did so seven times or more. During this same time  period, 27 of the 63 homes were cited 69 times for deficiencies that  warranted immediate sanctions, but 15 of these cases did not result in  immediate sanctions.\nWe also recently reported that the term \u201cimmediate sanctions\u201d is  misleading because the policy is silent on how quickly sanctions should be  implemented and there is a lag time between the state\u2019s identification of  deficiencies during the survey and when the sanction (i.e., a CMP or  DPNA) is implemented (i.e., when it goes into effect). The immediate  sanctions policy requires that sanctions be imposed immediately. A  sanction is considered imposed when a home is notified of CMS\u2019s intent to  implement a sanction\u201415 days from the date of the notice. If during the  15-day notice period the nursing home corrects the deficiencies, no  sanction is implemented. Thus, nursing homes have a de facto grace  period. In addition, there is a lag time between the state\u2019s identification of  deficiencies and the implementation of a sanction. CMS implemented  about 68 percent of the DPNAs for double Gs among the homes we  reviewed during fiscal year 2000 through 2005 more than 30 days after the  survey. In contrast, CMPs can go into effect as early as the first day the  home was out of compliance, even if that date is prior to the survey date  because, unlike DPNAs, CMPs do not require a notice period. About   98 percent of CMPs imposed for double Gs took effect on or before the  survey date. However, the deterrent effect of CMPs was diluted because  CMS imposed CMPs at the lower end of the allowable range for the homes  we reviewed. For example, the median per day CMP amount imposed for  deficiencies that do not cause immediate jeopardy to residents was $500 in  fiscal year 2000 through 2002 and $350 in fiscal year 2003 through 2005; the  allowable range is $50 to $3,000 per day.\nAlthough CMPs can be implemented closer to the date of survey than  DPNAs, the immediacy and the effect of CMPs may be diminished by   (1) the significant time that can pass between the citation of deficiencies  on a survey and the home\u2019s payment of the CMP and (2) the low amounts  imposed, as described earlier. By statute, payment of CMPs is delayed  until appeals are exhausted. For example, one home we reviewed did not  pay its CMP of $21,600 until more than 2 years after a February 2003  survey had cited a G-level deficiency. This citation was a repeat deficiency:  less than a month earlier, the home had received another G-level  deficiency in the same quality-of-care area. This finding is consistent with  a 2005 report from the Department of Health and Human Services\u2019 (HHS)  Office of Inspector General that found that the collection of CMPs in  appealed cases takes an average of 420 days\u2014a 110 percent increase in  time over nonappealed cases\u2014and \u201cconsequently, nursing homes are  insulated from the repercussions of enforcement by well over a year.\u201d\nCMS has taken additional steps intended to improve enforcement of  nursing home quality requirements; however, the extent to which\u2014or  when\u2014these initiatives will address enforcement weaknesses remains  unclear. First, to ensure greater consistency in CMP amounts proposed by  states and imposed by regions, CMS, in conjunction with state survey  agencies, developed a grid that provides guidance for states and regions.  The CMP grid lists ranges for minimum CMP amounts while allowing for  flexibility to adjust the penalties for factors such as the deficiency\u2019s scope  and severity, the care areas where the deficiency was cited, and a home\u2019s  past history of noncompliance. In August 2006, CMS completed the  regional office pilot of its CMP grid but had not completed its analysis of  the pilot as of April 2007. CMS plans to disseminate the final grid to states  soon. Second, in December 2004, CMS expanded the Special Focus  Facility program from about 100 homes to include about 135 homes. CMS  also modified the program by requiring immediate sanctions for those  homes that failed to significantly improve their performance from one  survey to the next and by requiring termination for homes with no  significant improvement after three surveys over an 18-month period.  According to CMS, 11 Special Focus Facilities were terminated in fiscal  year 2005 and 7 were terminated in fiscal year 2006. Despite the expansion  of the program, many homes that could benefit from enhanced oversight  and enforcement are still excluded from the program. For example, of the  63 homes with prior serious quality problems that we recently reviewed,  only 2 were designated Special Focus Facilities in 2005, and the number  increased to 4 in 2006.\n\n\t\tWhile CMS Collects Valuable Enforcement Data, Its Enforcement Monitoring Data Systems Need Improvement\n\nIn March 1999, we reported that CMS lacked a system for effectively  integrating enforcement data nationwide and that the lack of such a  system weakened oversight. Since 1999, CMS has made progress  developing such a system\u2014ASPEN Enforcement Manager (AEM)\u2014and,  since October 1, 2004, CMS has used AEM to collect state and regional  data on sanctions and improve communications between state survey  agencies and CMS regional offices. CMS expects that the data collected in  AEM will enable states, CMS regional offices, and the CMS central office  to more easily track and evaluate sanctions against nursing homes as well  as respond to emerging issues. Developed by CMS\u2019s central office  primarily for use by states and regions, AEM is one of many modules of a  broader data collection system called ASPEN. However, the ASPEN  modules\u2014and other data systems related to enforcement such as the  financial management system for tracking CMP collections\u2014are  fragmented and lack automated interfaces with each other. As a result,  enforcement officials must pull discrete bits of data from the various  systems and manually combine the data to develop a full enforcement  picture.\nFurthermore, CMS has not defined a plan for using the AEM data to inform  the tracking and monitoring of enforcement through national enforcement  reports. While CMS is developing a few such reports, it has not developed  a concrete plan and timeline for producing a full set of reports that use the  AEM data to help assess the effectiveness of sanctions and its  enforcement policies. In addition, while the full complement of  enforcement data being recorded by the states and regional offices in AEM  is now being uploaded to CMS\u2019s national system, CMS does not intend to  upload any historical data, which could greatly enhance enforcement  monitoring efforts. Finally, AEM has quality control weaknesses, such as  the lack of systematic quality control mechanisms to ensure accuracy of  data entry.\nCMS officials told us they will continue to develop and implement  enhancements to AEM to expand its capabilities over the next several  years. However, until CMS develops a plan for integrating the fragmented  systems and for using AEM data\u2014along with other data the agency  collects\u2014efficient and effective tracking and monitoring of enforcement  will continue to be hampered. As a result, CMS will have difficulty  assessing the effectiveness of sanctions and its enforcement policies.\n\n\tCMS Has Strengthened Oversight, although Competing Priorities Impede Certain Key Initiatives\n\nCMS oversight of nursing home quality and state surveys has increased  significantly through several efforts, but CMS initiatives for nursing home  quality oversight continue to compete with each other, as well as with  other CMS programs, for staff and financial resources. Since OBRA \u201887  required CMS to annually conduct federal monitoring surveys for a sample  of nursing homes to test the adequacy of state surveys, CMS has developed  a number of initiatives to strengthen its oversight. These initiatives have  increased federal surveyors\u2019 workload and the demand for resources.  Greater demand on limited resources has led to queues and delays in  certain key initiatives. In particular, the implementation of three key  initiatives\u2014the new Quality Indicator Survey (QIS), investigative protocols  for quality-of-care problems, and an increase in the number of federal  quality-of-care comparative surveys\u2014was delayed because they compete  for priority with other CMS projects.\n\n\t\tIntensity of Federal Efforts Has Increased Significantly\n\nCMS has used both federal monitoring surveys and annual state  performance reviews to increase its oversight of quality of care in nursing  homes. Through these two mechanisms it has focused its resources and  attention on (1) prompt investigation of complaints and allegations of  abuse, (2) more frequent and timely federal comparative surveys,   (3) stronger fire safety standards, and (4) upgrades to data systems.\n\n\t\t\tComplaint Investigations\n\nTo ensure that complaints and allegations of abuse are investigated and  addressed in accordance with OBRA \u201887, CMS has issued guidance and  taken other steps. CMS guidance issued since 1999 has helped strengthen  state procedures for investigating complaints. For example, CMS  instructed states to investigate complaints alleging harm to a resident  within 10 workdays; previously states could establish their own time  frames for complaints at this level of severity. In addition, CMS guidance  to states in 2002 and 2004 clarified policies on reporting abuse, including  requiring notification of local law enforcement and Medicaid Fraud  Control Units, establishing time frames, and citing abuse on surveys.\nCMS has taken three additional steps to improve its oversight of state  complaint investigations, including allegations of abuse. First, in its annual  state performance reviews implemented in 2002, it required that federal  surveyors review a sample of complaints in each state. These reviews  were done to determine whether states (1) properly categorized  complaints in terms of how quickly they should be investigated,   (2) investigated complaints within the time specified, and (3) properly  included the results of the investigations in CMS\u2019s database. Second, in  January 2004, CMS implemented a new national automated complaint  tracking system, the ASPEN Complaints and Incidents Tracking System.  The lack of a national complaint reporting system had hindered CMS\u2019s and  states\u2019 ability to adequately track the status of complaint investigations  and CMS\u2019s ability to maintain a full compliance history on each nursing  home. Third, in November 2004, CMS requested state survey agency  directors to self-assess their states\u2019 compliance with federal requirements  for maintaining and operating nurse aide registries. CMS has not issued a  formal report of findings from these assessments, but in 2005 we reported  that CMS officials noted that resource constraints have impeded states\u2019  compliance with certain federal requirements. As a part of this effort,  CMS is also conducting a Background Check Pilot Program. The pilot  program will test the effectiveness of state and national fingerprint-based  background checks on employees of long-term care facilities, including  nursing homes.\n\n\t\t\tFederal Comparative Surveys\n\nCMS has increased the number of federal comparative surveys for both  quality of care and fire safety and decreased the time between the end of  the state survey and the start of the federal comparative surveys. These  improvements allow CMS to better distinguish between serious problems  missed by state surveyors and changes in the home that occurred after the  state survey. The number of comparative quality-of-care surveys  nationwide per year increased from about 10 surveys a year during the   24-month period prior to October 1998 to about 160 per year for fiscal  years 2005 and 2006. The number of fire safety comparative surveys  increased as well from 40 in fiscal year 2003 to 536 in fiscal year 2006. In  addition, the average elapsed time between state and comparative quality- of-care surveys has decreased from 33 calendar days for the 64  comparative surveys we reviewed in 1999 to 26 days for all federal  comparative surveys completed through fiscal year 2006.\n\n\t\t\tFire Safety Standards\n\nIn addition to conducting more frequent federal comparative surveys for  fire safety, CMS has strengthened fire safety standards. In response to a  recommendation in our July 2004 report to strengthen fire safety  standards, CMS issued a final rule in September 2006 requiring  nonsprinklered nursing homes to install battery-powered smoke detectors  in resident rooms and common areas. In addition, CMS has issued a  proposed rule that would require all nursing homes to be equipped with  sprinkler systems and, after reviewing public comment, intends to publish  a final version of the rule and stipulate an effective date for all homes to  comply.\n\n\t\t\tUpgrades to Data Systems\n\nCMS has pursued important upgrades to data systems, expanded  dissemination of data and information, and addressed accuracy issues in  the MDS in addition to implementing complaint and enforcement systems.  One such upgrade increased state and federal surveyors\u2019 access to OSCAR  data. CMS now uses OSCAR data to produce periodic reports to monitor  both state and federal survey performance. Some reports, such as survey  timeliness, are used during state performance reviews, while others are  intended to help identify problems or inconsistencies in state survey  activities and the need for intervention. In addition, CMS created a Web- accessible software program called Providing Data Quickly (PDQ) that  allows regional offices and state survey agencies easier access to standard  OSCAR reports, including one that identifies the homes that have  repeatedly harmed residents and meet the criteria for imposition of  immediate sanctions.\nSince launching its Nursing Home Compare Web site in 1998, CMS has  expanded its dissemination of information to the public on individual  nursing homes participating in Medicare or Medicaid. In addition to data  on any deficiencies identified during standard surveys, the Web site now  includes data on the results of complaint investigations, information on  nursing home staffing levels, and quality measures, such as the percentage  of residents with pressure sores. On the basis of our recommendations,  CMS is now reporting fire safety deficiencies on the Web site, including  information on whether a home has automatic sprinklers to suppress a  fire, and may include information on impending sanctions in the future.  However, CMS continues to address ongoing problems with the accuracy  and reliability of some of the underlying data. For example, CMS has  evaluated the validity of quality measures and staffing information it  makes available on the Web, and it has removed or excluded questionable  data.\nIn addition to building the quality measures reported on Nursing Home  Compare, the MDS data are the basis for patient care plans, adjusting  Medicare nursing home payments as well as Medicaid payments in some  states, and assisting with quality oversight. Thus the accuracy of the MDS  has implications for the identification of quality problems and the level of  nursing home payments. OBRA \u201887 required nursing homes that participate  in the Medicare and Medicaid programs to perform periodic resident  assessments; these resident assessments are known as the MDS. In  February 2002, we assessed federal government efforts to ensure the  accuracy of the MDS data. We reported that on-site reviews of MDS data  that compared the MDS to supporting documentation were a very effective  method of assessing the accuracy of the data. However, CMS\u2019s efforts to  ensure the accuracy of the underlying MDS data were too reliant on off- site reviews, which were limited to documentation reviews or data  analysis. To ensure the accuracy of the MDS, CMS signed a new contract  for on-site reviews in September 2005; these reviews are ongoing.\n\n\t\tCompeting Priorities Impede Certain Key CMS Initiatives\n\nCMS initiatives for nursing home quality oversight continue to compete  with each other, as well as with other CMS programs, for staff and  financial resources. Greater nursing home oversight and growth in the  number of Medicare and Medicaid providers has created increased  demand for staff and financial resources. Greater demand on limited  resources has led to queues and delays in key initiatives. Three key  initiatives\u2014the new Quality Indicator Survey (QIS), investigative protocols  for quality-of-care problems, and an increase in the number of federal  quality-of-care comparative surveys\u2014were delayed because they compete  for priority with other CMS projects.\nThe implementation of the QIS, in process for over 8 years, continues to  encounter delays because of a lack of resources. The QIS is a two-stage,  data-driven, structured survey process intended to systematically target  potential problems at nursing homes by using an expanded sample and  structured interviews to help surveyors better assess the scope of any  identified deficiencies. CMS is currently concluding a five-state  demonstration of the QIS system. A preliminary evaluation by CMS  indicates that surveyors have spent less time in homes that are performing  well, deficiency citations were linked to more defensible documentation,  and serious deficiencies were more frequently cited in some  demonstration states. However, CMS officials recently reported that  resource constraints in fiscal year 2007 threaten the planned expansion of  this process beyond the five demonstration states. Although 13 states  applied to transition to QIS, resource limitations may prevent this  expansion. In addition, at least $2 million is needed over 2 years to develop  a production quality software package for the QIS.\nSince hiring a contractor in 2001 to facilitate convening expert panels for  the development and review of new investigative protocols, CMS has  implemented eight sets of investigative protocols. In December 2005, we  reported that these investigative protocols provided surveyors with  detailed interpretive guidance and ensured greater rigor in on-site  investigations of specific quality-of-care areas, such as pressure sores,  incontinence, and medical director qualifications. However, the issuance  of additional protocols was slowed because of lengthy consultation with  experts and prolonged delays related to internal disagreement over the  structure of the process. Instead, it has returned to the traditional revision  process even though agency staff believes that the expert panel process  produced a high-quality product. Since issuing several protocols in 2006,  CMS has plans to issue two additional protocols.\nAlthough CMS hired a contractor in 2003 to further increase the number of  federal quality-of-care comparative surveys, it stopped funding this  initiative in fiscal year 2006. The agency reallocated the funds to help state  survey agencies meet the increased workload resulting from growth in the  number of other Medicare providers.\n\n\tConcluding Observations\n\nAbout 20 years ago, significant attention from the Special Committee on  Aging, the Institute of Medicine, and others served as a catalyst to focus  national attention on nursing home quality issues, culminating in the  nursing home reform provisions of OBRA \u201887. Beginning in 1998, the  Committee again served as a catalyst to focus national attention on the  fact that the task was not complete; through a series of hearings, it held  the various stakeholders publicly accountable for the substandard care  reported in a small but significant share of nursing homes nationwide.  Since then, in response to many GAO recommendations and on its own  initiative, CMS has taken many important steps and invested resources to  respond in a timelier, more rigorous, and more consistent manner to  identified problems and improve its oversight process for the care of  vulnerable nursing home residents. This is admittedly no small  undertaking, given the large number and diversity of stakeholders and  caregivers involved at the federal, state, and provider levels. Nevertheless,  despite the passage of time and the level of investment and effort, the  work begun after OBRA \u201887 is still not complete. It is important to continue  to focus national attention on and ensure public accountability for homes  that harm residents. With these ongoing efforts, the momentum of earlier  initiatives can be sustained and perhaps even enhanced and the quality of  care for nursing home residents can be secured, as intended by Congress  when it passed this legislation.\nMr. Chairman, this concludes my prepared remarks. I would be pleased to  respond to any questions that you or other Members of the Committee  may have.\n\n\tGAO Contact and Acknowledgments\n\nFor future contacts regarding this testimony, please contact Kathryn G.  Allen at (202) 512-7118 or at allenk@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on the  last page of this testimony. Walter Ochinko, Assistant Director; Kaycee M.  Glavich; Leslie V. Gordon; K. Nicole Haeberle; Daniel Lee; and Elizabeth T.  Morrison made key contributions to this statement.\n\nAppendix I: Prior GAO Recommendations, Related CMS Initiatives, and Implementation Status\n\nTable 2 summarizes our recommendations from 11 reports on nursing  home quality and safety, issued from July 1998 through March 2007; CMS\u2019s  actions to address weaknesses we identified; and the implementation  status of CMS\u2019s initiatives as of April 2007. The recommendations are  grouped into four categories\u2014surveys, complaints, enforcement, and  oversight. If a report contained recommendations related to more than one  category, the report appears more than once in the table. For each report,  the first two numbers identify the fiscal year in which the report was  issued. For example, HEHS-98-202 was released in 1998. The Related GAO  Products section at the end of this statement contains the full citation for  each report. Of our 42 recommendations, CMS has fully implemented 18,  implemented only parts of 7, is taking steps to implement 10, and declined  to implement 7.\n\nAppendix II: Percentage of Nursing Homes Cited for Actual Harm or Immediate Jeopardy during Standard Surveys\n\nIn order to identify trends in the percentage of nursing homes cited with  actual harm or immediate jeopardy deficiencies, we analyzed data from  CMS\u2019s OSCAR database for fiscal years 2000 through 2006 (see table 3).  Because surveys are conducted at least every 15 months (with a required  12-month statewide average), it is possible that a home was surveyed  twice in any time period. To avoid double counting of homes, we included  only homes\u2019 most recent survey from each period.\n\nRelated GAO Products\n\nNursing Homes: Efforts to Strengthen Federal Enforcement Have Not  Deterred Some Homes from Repeatedly Harming Residents. GAO-07-241.  Washington, D.C.: March 26, 2007.\nNursing Homes: Despite Increased Oversight, Challenges Remain in  Ensuring High-Quality Care and Resident Safety. GAO-06-117.  Washington, D.C.: December 28, 2005.\nNursing Home Deaths: Arkansas Coroner Referrals Confirm Weaknesses  in State and Federal Oversight of Quality of Care. GAO-05-78.  Washington, D.C.: November 12, 2004.\nNursing Home Fire Safety: Recent Fires Highlight Weaknesses in  Federal Standards and Oversight. GAO-04-660. Washington D.C.:   July 16, 2004.\nNursing Home Quality: Prevalence of Serious Problems, While  Declining, Reinforces Importance of Enhanced Oversight. GAO-03-561.  Washington, D.C.: July 15, 2003.\nNursing Homes: Public Reporting of Quality Indicators Has Merit, but  National Implementation Is Premature. GAO-03-187. Washington, D.C.:  October 31, 2002.\nNursing Homes: Quality of Care More Related to Staffing than Spending.  GAO-02-431R. Washington, D.C.: June 13, 2002.\nNursing Homes: More Can Be Done to Protect Residents from Abuse.  GAO-02-312. Washington, D.C.: March 1, 2002.\nNursing Homes: Federal Efforts to Monitor Resident Assessment Data  Should Complement State Activities. GAO-02-279. Washington, D.C.:  February 15, 2002.\nNursing Homes: Sustained Efforts Are Essential to Realize Potential of  the Quality Initiatives. GAO\/HEHS-00-197. Washington, D.C.:   September 28, 2000.\nNursing Home Care: Enhanced HCFA Oversight of State Programs  Would Better Ensure Quality. GAO\/HEHS-00-6. Washington, D.C.:  November 4, 1999.\nNursing Home Oversight: Industry Examples Do Not Demonstrate That  Regulatory Actions Were Unreasonable. GAO\/HEHS-99-154R. Washington,  D.C.: August 13, 1999.\nNursing Homes: Proposal to Enhance Oversight of Poorly Performing  Homes Has Merit. GAO\/HEHS-99-157. Washington, D.C.: June 30, 1999.\nNursing Homes: Complaint Investigation Processes Often Inadequate to  Protect Residents. GAO\/HEHS-99-80. Washington, D.C.: March 22, 1999.\nNursing Homes: Additional Steps Needed to Strengthen Enforcement of  Federal Quality Standards. GAO\/HEHS-99-46. Washington, D.C.:   March 18, 1999.\nCalifornia Nursing Homes: Care Problems Persist Despite Federal and  State Oversight. GAO\/HEHS-98-202. Washington, D.C.: July 27, 1998.\nThis is a work of the U.S. government and is not subject to copyright protection in the  United States. It may be reproduced and distributed in its entirety without further  permission from GAO. However, because this work may contain copyrighted images or  other material, permission from the copyright holder may be necessary if you wish to  reproduce this material separately.","output":"Why GAO Did This Study\n\nWith the Omnibus Budget Reconciliation Act of 1987 (OBRA '87), Congress responded to growing concerns about the quality of care that nursing home residents received by requiring reforms in the federal certification and oversight of nursing homes. These reforms included revising care requirements that homes must meet to participate in the Medicare or Medicaid programs, modifying the survey process for certifying a home's compliance with federal standards, and introducing additional sanctions and decertification procedures for noncompliant homes. GAO's testimony addresses its work in evaluating the quality of nursing home care and the enforcement and oversight functions intended to ensure high-quality care, the progress made in each of these areas since the passage of OBRA '87, and the challenges that remain. GAO's testimony is based on its prior work; analysis of data from the Centers for Medicare & Medicaid Services' (CMS) On-Line Survey, Certification, and Reporting system (OSCAR), which compiles the results of state nursing home surveys; and evaluation of federal comparative surveys for selected states (2005-2007). Federal comparative surveys are conducted at nursing homes recently surveyed by each state to assess the adequacy of the state's surveys.\n\nWhat GAO Found\n\nThe reforms of OBRA '87 and subsequent efforts by CMS and the nursing home industry to improve the quality of nursing home care have focused on resident outcomes, yet a small but significant share of nursing homes nationwide continue to experience quality-of-care problems. In fiscal year 2006, almost one in five nursing homes was cited for serious deficiencies, those that caused actual harm or placed residents in immediate jeopardy. While this rate has fluctuated over the last 7 years, GAO has found persistent variation in the proportion of homes with serious deficiencies across states. In addition, although the understatement of serious deficiencies--that is, when federal surveyors identified deficiencies that were missed by state surveyors--has declined since 2004 in states GAO reviewed, it has continued at varying levels. CMS has strengthened its enforcement capabilities since OBRA '87 in order to better ensure that nursing homes achieve and maintain high-quality care, but several key initiatives require refinement. CMS has implemented additional sanctions authorized in the legislation, established an immediate sanctions policy for homes found to repeatedly harm residents, and developed a new enforcement management data system. However, the immediate sanctions policy is complex and appears to have induced only temporary compliance in some homes with a history of repeated noncompliance. Furthermore, CMS's new data system's components are not integrated and national reporting capabilities are incomplete, which hamper CMS's ability to track and monitor enforcement. CMS oversight of nursing home quality has increased significantly, but CMS initiatives continue to compete for staff and financial resources. Attention to oversight has led to greater demand on limited resources, and to queues and delays in certain key initiatives. For example, a new survey methodology has been in development for over 8 years and resource constraints threaten the planned expansion of this methodology beyond the initial demonstration states. Significant attention from the Special Committee on Aging, the Institute of Medicine, and others served as a catalyst to focus national attention on nursing home quality issues, culminating in the nursing home reform provisions of OBRA '87. In response to many GAO recommendations and at its own initiative, CMS has taken many important steps; however, the task of ensuring high-quality nursing home care for all residents is not complete. In order to guarantee that all nursing home residents receive high-quality care, it is important to maintain the momentum begun by the reforms of OBRA '87 and continue to focus national attention on those homes that cause actual harm to vulnerable residents."}
{"id":"crs_RL32922","pid":"crs_RL32922_0","input":"\tBackground on the Programs\n\nThe U.S. Department of Agriculture's (USDA's) Food Safety and Inspection Service (FSIS) is responsible for inspecting most meat, poultry, and processed egg products for safety, wholesomeness, and proper labeling. Federal inspectors or their state counterparts are present at all times in virtually all slaughter plants and for at least part of each day in establishments that further process meat and poultry products. The Food and Drug Administration (FDA), within the U.S. Department of Health and Human Services (HHS), is responsible for ensuring the safety of virtually all other human foods, including seafood, and for animal drugs and feed ingredients.\nSeveral significant changes in meat and poultry inspection programs were included in the 2008 farm bill ( P.L. 110-246 ), signed into law in June 2008. These include permitting certain state-inspected meat and poultry products to enter interstate commerce, just like USDA-inspected products; bringing catfish under mandatory USDA inspection; requiring an inspected establishment to notify USDA if it believes that an adulterated or misbranded product has entered commerce; and requiring establishments to prepare and maintain written recall plans.\nRecently, the effectiveness of the FSIS inspection system has been compared favorably (by some) to FDA's, particularly with regard to its import safety program. At the same time, recalls of fresh and processed meat and poultry products, often due to microbiological contamination, and illness outbreaks caused by such products, continue to challenge the industry and government regulators. \nThese incidents have fueled interest in a number of bills in the 110 th and 111 th Congresses to change other elements of USDA's authorizing statutes. What, if any, additional changes should lawmakers consider to improve safety oversight of meat and poultry production?\n\n\t\tStatutory Authorities\n\n\t\t\tFederal Meat Inspection Act of 1906\n\nThis law as amended (21 U.S.C. 601 et seq .) has long required USDA to inspect all cattle, sheep, swine, goats, horses, mules, and other equines brought into any plant to be slaughtered and processed into products for human consumption. Since passage of the FY2006 USDA appropriation ( P.L. 109-97 , Section 798), these types of animals are now called \"amenable species.\" P.L. 109-97 also gave the Secretary of Agriculture the discretion to add additional species to the list. As noted, the 2008 farm bill makes catfish an amenable species.\n\n\t\t\tPoultry Products Inspection Act of 1957\n\nThis law as amended (21 U.S.C. 451 et seq .) makes poultry inspection mandatory for any domesticated birds intended for use as human food. The current list of included species is chickens, turkeys, ducks, geese, guineas, ratites (ostrich, emu, and rhea), and squabs (pigeons up to one month old).\n\n\t\t\tAgricultural Marketing Act of 1946\n\nUnder this law as amended (7 U.S.C. 1621), FSIS also provides voluntary inspection for buffalo, antelope, reindeer, elk, migratory waterfowl, game birds, and rabbits, which the industry can request on a fee-for-service basis. These meat and poultry species (which are not specifically covered by the mandatory inspection statutes) are still within the purview of FDA under the Federal Food, Drug, and Cosmetic Act (FFDCA, 21 U.S.C. 301 et seq.), whether or not inspected under the voluntary FSIS program. FDA has jurisdiction over meat products from such species in interstate commerce, even if they bear the USDA inspection mark.\n\n\t\t\tEgg Products Inspection Act\n\nThis law as amended (21 U.S.C. 1031 et seq .) is the authority under which FSIS assures the safety of liquid, frozen, and dried egg products, domestic and imported, and the safe disposition of damaged and dirty eggs. FDA holds regulatory authority over shell eggs in restaurants and stores.\n\n\t\tSystem Basics\n\n\t\t\tCoverage\n\nFSIS's legal inspection responsibilities begin when animals arrive at slaughterhouses, and they generally end once products leave processing plants. Certain custom slaughter and most retail store and restaurant activities are exempt from federal inspection; however, they may be under state inspection.\n\n\t\t\tPlant Sanitation\n\nNo meat or poultry establishment can slaughter or process products for human consumption until FSIS approves in advance its plans and specifications for the premises, equipment, and operating procedures. Once this approval is granted and operations begin, the plant must continue to follow a detailed set of rules that cover such things as proper lighting, ventilation, and water supply; cleanliness of equipment and structural features; and employee sanitation procedures.\n\n\t\t\tHACCP\n\nPlants are required to have a Hazard Analysis and Critical Control Point (HACCP) plan for their slaughter and\/or processing operations. Essentially, a plant must identify each point in the process where contamination could occur, called a \"critical control point,\" have a plan to control it, and document and maintain records. Under HACCP regulations, all operations must have site-specific standard operating procedures (SOPs) for sanitation. USDA inspectors check records to verify a plant's compliance.\n\n\t\t\tSlaughter Inspection\n\nFSIS inspects all meat and poultry animals to look for signs of disease, contamination, and other abnormal conditions, both before and after slaughter (\"antemortem\" and \"postmortem,\" respectively), on a continuous basis\u2014meaning that no animal may be slaughtered and dressed unless an inspector has examined it. One or more federal inspectors are on the line during all hours the plant is operating.\n\n\t\t\tProcessing Inspection\n\nThe inspection statutes appear to be silent on how frequently USDA inspector must visit facilities that produce processed products like hot dogs, lunch meat, prepared dinners, and soups. Under current policies, processing plants visited once every day by an FSIS inspector are considered to be under continuous inspection in keeping with the laws. Inspectors monitor operations, check sanitary conditions, examine ingredient levels and packaging, review records, verify HACCP processes, and conduct statistical sampling and testing of products during their on-site visits.\n\n\t\t\tPathogen Testing\n\nThe HACCP rule also mandates two types of microbial testing: for generic E. coli and for Salmonella . Levels of these two organisms are indicators of conditions that either suppress or encourage the spread of such potentially dangerous bacteria as Campylobacter and E. coli O157:H7, as well as Salmonella itself. Test results (plants test for E. coli and FSIS for Salmonella ) help FSIS inspectors verify that plant sanitation procedures are working, and to identify and assist plants whose process controls may be underperforming.\n\n\t\t\tEnforcement\n\nFSIS has a range of enforcement tools to prevent adulterated or mislabeled meat and poultry from reaching consumers. On a day-to-day basis, if plant conditions or procedures are found to be unsanitary, an FSIS inspector can, by refusing to perform inspection, temporarily halt the plant's operation until the problem is corrected. FSIS can condemn contaminated, adulterated, and misbranded products, or parts of them, and detain them so they cannot progress down the marketing chain. FSIS does not have mandatory recall authority; if potentially dangerous or mislabeled products do enter commerce, the agency relies on establishments to voluntarily recall them.\nOther tools include warning letters for minor violations; requests that companies voluntarily recall a potentially unsafe product; a court-ordered product seizure if such a request is denied; and referral to federal attorneys for criminal prosecution. Prosecutions under certain conditions may lead to the withdrawal of federal inspection from offending firms or individuals, which results in plant closure.\n\n\t\t\tFunding\n\nFederal appropriations pay for most, but not all, mandatory inspection. For FY2010, FSIS received an annual appropriation of approximately $1 billion. In addition, FSIS uses revenue from fees paid by the meat and poultry industries for FSIS inspection that occurs beyond regularly scheduled shifts and on holidays, and by private laboratories that apply for FSIS certification to perform official meat testing and sampling. In FY2010, revenue from the fees is expected to add approximately $150 million in additional program support. \n\n\t\t\tStaffing\n\nFSIS carries out its duties with about 9,400 total staff (full-time equivalent). Approximately 7,800 of FSIS's employees, roughly 1,000 of them veterinarians, are in approximately 6,200 establishments and import inspection facilities nationwide.\n\n\t\t\tState Inspection\n\nTwenty-seven states have their own meat and\/or poultry inspection programs covering nearly 1,900 small or very small establishments. The states run the programs cooperatively with FSIS, which provides up to 50% of the funds for operating them, comprising about $65 million of the total FSIS budget annually. A state program operating under a cooperative agreement with FSIS must demonstrate that its system is equivalent to federal inspection. However, state-inspected meat and poultry products are limited to intrastate commerce only. In states that have discontinued their inspection systems for meat or poultry (or both), FSIS has assumed responsibility for inspection at the formerly state-inspected plants. However, actual inspection is performed by state personnel.\nApproximately 360 meat and poultry establishments in nine states are covered by a separate federal-state program, the so-called Talmadge-Aiken plants. Under this program, USDA has signed cooperative agreements with states whereby state employees are used to conduct federal inspections, and passed products carry the federal mark of inspection. Established by the Talmadge-Aiken Act of 1962 (7 U.S.C. 450), the arrangement was intended to achieve federal coverage in remote locations to offset the higher cost of assigning federal inspectors there.\n\n\t\t\tImport Inspection\n\nFSIS conducts evaluations of foreign meat safety programs and visits establishments to determine that they are providing a level of safety equivalent to that of U.S. safeguards. No foreign plant can ship meat or poultry to the United States unless its country has received such an FSIS determination. Once they reach U.S. ports of entry, meat and poultry import shipments must first clear Department of Homeland Security (DHS) inspection to assure that only shipments from countries free of certain animal and human disease hazards are allowed entry. This function was transferred to DHS from USDA's Animal and Plant Health Inspection Service (APHIS) when DHS was established by the Homeland Security Act of 2002 ( P.L. 107-296 ). After DHS inspection, imported meat and poultry shipments go to one of approximately 150 nearby FSIS inspection facilities for final clearance into interstate commerce.\n\n\tMicrobiological Contamination and HACCP\n\nThe U.S. Centers for Disease Control and Prevention (CDC) observed in April 2009:\nDespite numerous activities aimed at preventing foodborne human infections, including the initiation of new control measures after the identification of new vehicles of transmission (e.g., peanut butter-containing products), progress toward the national health objectives has plateaued, suggesting that fundamental problems with bacterial and parasitic contamination are not being resolved. Although significant declines in the incidence of certain pathogens have occurred since establishment of FoodNet, these all occurred before 2004. Of the four pathogens with current Healthy People 2010 targets, Salmonella , with an incidence rate of 16.2 cases per 100,000 in 2008, is farthest from its target for 2010 (6.8). The lack of recent progress toward the national health objective targets and the occurrence of large multistate outbreaks point to gaps in the current food safety system and the need to continue to develop and evaluate food safety practices as food moves from the farm to the table.\nNot all of these infections are from consumption of meat and poultry products. A more recent CDC article reported that, among 243 foodborne disease outbreaks attributed to a single commodity in 2006, the most outbreaks were attributed to fish (47), poultry (35), and beef (25). However, the most cases were attributed to poultry (1,355), leafy vegetables (1,081) and fruits\/nuts (1,021). Pairing pathogens with commodities, the CDC found that the most outbreak-related cases were Clostridium perfringens in poultry (902 cases), Salmonella in fruits nuts (776), norovirus in leafy vegetables (657), shiga-toxin E. coli in leafy vegetables (398), Salmonella in vine-stalk vegetables (331), and V. parahaemolyticus in mollusks (223).\nNonetheless, large recent recalls of meat and poultry products, often due to microbiological contamination, have brought closer attention to USDA's and industry's record in detecting harmful pathogens and preventing them from reaching consumers and making them sick. Although government officials had asserted that the number of both recalls and illnesses had declined over the long term, illness data from the past several years appear to indicate that this overall decline has not continued.\n\n\t\tDevelopment of HACCP\n\nIn the early 1990s, following years of debate over how to respond to mounting evidence that invisible, microbiological contamination on meat and poultry posed greater public health risks than visible defects (the focus of traditional inspection methods), FSIS began to add testing for pathogenic bacteria on various species and products to its inspection system.\nIn 1995, under existing statutes, FSIS published a proposed rule to systematize these changes in a mandatory program called the Hazard Analysis and Critical Control Point (HACCP) system. In this system, firms must analyze risks in each phase of production, identifying and then monitoring \"critical control points\" for preventing such hazards, and taking corrective actions when necessary. Record-keeping and verification ensure that the system is working. FSIS published the final rule on July 25, 1996, and since January 2000 all slaughter and processing operations are required to have HACCP plans in place. HACCP is intended to operate as an adjunct to the traditional methods of inspection, which still are mandatory under the original statutes.\n\n\t\tPathogen Performance Standards and Salmonella\n\nThe CDC has noted that poultry is an important source of human Salmonella infections. The pathogen also periodically has been found in beef, as well as non-animal foods such as fresh produce. According to CDC reports, the overall incidence of Salmonella infections through all types of food has not decreased significantly. CDC also has reported that Salmonella has been the most common foodborne pathogen, although exposure to live animals also has been an important nonfood source.\nIn the initial years of HACCP implementation, plants that failed three consecutive Salmonella tests could have their USDA inspectors withdrawn. This would effectively shut down the plant until the problem could be remedied. However, a federal court ruled in 2000 that the meat and poultry inspection statutes do not give USDA the authority to use failure to meet Salmonella standards as the basis for withdrawing inspection. An appeals court upheld this decision in 2001. Subsequently, USDA has adopted the position that the court decision did not affect the agency's ability to use the standards as part of the verification of plants' sanitation and HACCP plans.\nNonetheless, the appeals court ruling supports arguments of those who say that pathogen testing results should not be a basis for enforcement actions until scientists can determine what constitutes an unsafe level of Salmonella in ground meat and a number of other meat and poultry products. Consumer groups and other supporters of mandatory testing and microbiological standards, as well as of increased enforcement powers, have used the case to bolster their argument for amending the meat and poultry inspection statutes to expressly require microbiological standards.\nFSIS had reported its concern about increases in Salmonella rates observed over a three-year period (2003-2005) among the three poultry product categories, broiler carcasses, ground chicken, and ground turkey. To address the problem, in early 2006 the agency launched an initiative to reduce the pathogen in raw meat and poultry products, including the concentration of more inspection resources at establishments with higher levels, and quarterly rather than annual reporting of Salmonella test results. Sampling frequency was to be based on a combination of factors such as a plant's regulatory history and its incidence of the pathogen.\nFSIS on January 28, 2008 issued a notice on new policies and procedures for Salmonella sampling and testing. One change was to begin posting on its website sampling test results from establishments, with their names and locations\u2014beginning with young chicken slaughter establishments\u2014that have substandard or variable records in meeting Salmonella performance standards. The agency stated that it was taking this unprecedented action in part because at least 90% of such establishments were not testing consistently for low Salmonella rates.\nThe FSIS performance standard for Salmonella in young chickens is 20% (i.e., 12 positive samples out of 51 taken). Tested plants are placed in one of three categories, as follows:\nCategory 1 establishments have results from their two most recent completed sample sets that are at or below half of the standard (i.e., at or below 10%);\nCategory 2 establishments have results from their most recent completed sample set that are higher than half of the standard but do not exceed the standard (i.e., above 10% but below 20%);\nCategory 3 establishments have results from their most recent completed sample set that exceed the standard (i.e., above 20%).\nTwenty-one category 2 or category 3 plants, out of 195 tested, were named in the first report, accessed in April 2008. The December (fourth quarter) 2009 report showed 12 establishments in category 2 and four in category 3.\nThe CDC in 2009 credited the industry's response to the FSIS Salmonella initiative with a decrease in the percent-positive rate for Salmonella in raw broiler chicken, from 11.4% in 2006 to 7.3% in 2008. The rate was 8.6% in the fourth quarter of 2009.\nAnother Salmonella initiative developed by FSIS is on a list of Obama Administration food safety actions announced by the President's Food Safety Working Group (FSWG) on July 7, 2009. The group said that FSIS would, by the end of 2009, \"develop new standards to reduce the prevalence of Salmonella in turkeys and poultry\" (more specifically, young chickens, or broilers) and \"establish a Salmonella verification program with the goal of having 90 percent of poultry establishments meeting the new standards by the end of 2010.\" On December 31, 2009, the agency announced that it would \"issue a Federal Register notice in the very near future that will provide specific details\" on the new standards, and invite public comments on them, with implementation by July 2010. FSIS also for the first time is developing new standards for the pathogen Campylobacte r in young chickens (broilers) and turkeys, the announcement stated. \nConcerns regarding Salmonella contamination are not limited to poultry, as illustrated by recalls of 825,769 pounds of ground beef products in August 2009 and another 22,723 pounds of ground beef products in December 2009, both by a California establishment, Beef Packers Inc. The recalls were associated with investigations of Salmonella illness outbreaks, according to FSIS. Media reports in late 2009 on these recalls by the company, a supplier of beef to the federal school lunch program, and on pathogens found in ground beef produced by another school lunch supplier, Beef Products Inc., raised questions about the safety of these USDA-purchased commodities (see discussion later in this report).\n(FSIS's quarterly Salmonella reports also list performance standards and testing results for, in addition to broilers and turkeys, market hogs, steers and heifers, cows and bulls, and ground products\u2014chicken, turkey and beef.)\nIn another recent incident, Danielle International of Rhode Island had, through February 2010, recalled approximately 30 Italian-style meat products totaling nearly 1.4 million pounds after reports of a multistate outbreak of Salmonella Montevideo infections in 252 persons in 44 states and the District of Columbia. Samples of black pepper used on the products tested positive for Salmonell a , indicating that outside ingredients can be a source of concern. FDA, which oversees pepper and other spices, has been coordinating with FSIS regarding the recall.\n\n\t\tE. coli O157:H7\n\nIllness outbreaks continue to be linked to the pathogen E. coli O157:H7 in beef products. This has led to calls from critics for improvements in testing for E. coli and for minimizing its presence. Some consumer groups have argued that more tests should be mandated; meat industry representatives counter that while an effective sampling and testing program is important to help determine whether a plant's pathogen control measures are working, testing itself cannot assure safety.\nCDC noted that \" E. coli O157:H7 is one of hundreds of strains of the bacterium Escherichia coli. Although most strains are considered harmless and live in the intestines of healthy humans and animals, this strain produces a powerful toxin and can cause severe illness. E. coli O157:H7 was first recognized as a cause of illness in 1982 during an outbreak of severe bloody diarrhea; the outbreak was traced to contaminated hamburgers. Since then, most infections have come from eating undercooked ground beef.\" CDC also noted that \"people have also become ill from eating contaminated bean sprouts or fresh leafy vegetables such as lettuce and spinach. Person-to-person contact in families and child care centers is also a known mode of transmission. In addition, infection can occur after drinking raw milk and after swimming in or drinking sewage-contaminated water.\"\nThe CDC foodborne illness reports for 2006 and 2007 indicated that the incidence of all foodborne infections caused by E. coli O157:H7 had declined significantly from the 1996-1998 baseline through 2004, but not since then. The CDC reported that it did not know why reductions had not been maintained, but it did point out that the 2006 outbreaks caused by contaminated spinach and lettuce highlighted the need for more effective prevention. The earlier CDC report (on 2006) stated that the frequency of E. coli O157:H7 in ground beef samples taken in 2005 and 2006 had remained about the same as in 2004.\nThe CDC report on 2007 concluded that \"additional efforts are needed\" to control the pathogen in cattle \"and to prevent its spread to other food animals and food products, such as produce.\" The CDC reported an increase in the percentage of ground beef samples yielding O157:H7\u2014from 0.24% in 2007 to 0.47% in 2008\u2014but said it was unknown whether this was related to focused sampling of higher-risk facilities, improved laboratory detection, or an actually higher microbial load.\nDuring calendar 2006, FSIS announced eight recalls due to E. coli O157:H7 contamination, mostly of ground beef products, and none were related to human illness. In 2005, the agency announced five recalls. In 2007 FSIS announced 20 recalls, totaling more than 33 million pounds, mostly ground beef products, due to E. coli concerns. At least nine of the 2007 recalls were related to human illnesses (the rest came about after routine testing). Although many of the recalls were relatively small, a June recall involved nearly 6 million pounds of beef, and the Topps recall 21.7 million pounds (see box, \" Topps Recall \").\nIn 2008, 17 E. coli -related recalls were listed on the FSIS website. The largest was by Nebraska Beef, of Omaha, of approximately 5.3 million pounds of beef manufacturing trimmings and other products intended for use in raw ground beef produced between May 16 and June 26. Nebraska Beef was involved in another large recall, of 1.36 million pounds of primal cuts, subprimal cuts, and boxed beef, produced on June 24 and on July 8, 2008. Dozens of illnesses were linked to products in the two Nebraska Beef recalls. Nebraska-processed products sold under the Coleman Natural Beef brand were also recalled by the Whole Foods Market chain.\nFor 2009, a total of 15 E. coli -related recalls were announced by FSIS, four of which were linked to an illness outbreak investigation. The others generally were the result of routine testing. Two large recalls late in the year included 545,699 pounds of fresh ground beef products from a New York State establishment in October, following an investigation of 26 E. coli-related illnesses among 26 persons from eight states; and 248,000 pounds of primarily whole beef cuts from an Oklahoma establishment in December, linked to 21 illnesses in 16 states.\nFSIS had begun testing samples of raw ground beef for E. coli O157:H7 in October 1994, declaring that any such product found with this pathogen would be considered adulterated\u2014the first time a foodborne pathogen on raw product was declared an adulterant under the meat inspection law. Industry groups immediately asked a Texas federal court for a preliminary injunction to halt this effort, on the grounds that it was not promulgated through appropriate rulemaking procedures, was arbitrary and capricious, and exceeded USDA's regulatory authority under law. In December 1994, the court denied the groups' request, and no appeal was filed, leaving the program in place. FSIS has taken tens of thousands of samples since the program began; to date, hundreds of samples have tested positive.\nIn September 2002, FSIS issued a press release stating that \"[t]he scientific data show that E. coli O157:H7 is more prevalent than previously estimated,\" and in October 2002 the agency published a notice requiring manufacturers of all raw beef products (not just ground beef) to reassess their HACCP plans and add control points for E. coli O157:H7 if the reassessment showed that the pathogen was a likely hazard in the facility's operations. FSIS inspectors are to verify that corrective steps have been taken and conduct random testing of all beef processing plants, including all grinders (some previously had been exempted). In addition, the agency announced guidelines for grinding plants advising them to increase the level of pathogen testing by plant employees, and to avoid mixing products from different suppliers.\nBy June 2007, after FSIS had identified an increased number of positive E. coli O157:H7 beef samples, along with a larger number of recalls and illnesses linked to the pathogen than in recent years, it increased the number of tests on ground beef by more than 75%, the agency stated. It also began or accelerated implementation of several other E. coli prevention initiatives that had been under development. Among the actions it cited in October 2007 were the testing (starting in March 2007) of beef trim, which is used in ground beef; requiring beef plants to verify that they are effectively controlling E. coli O157:H7 during slaughter and processing; directing its inspectors to use a new checklist to review establishment control procedures; beginning testing other types of materials used in ground beef in addition to beef trim and requiring importing countries to conduct equivalent sampling; better targeting its routine E. coli testing; and working to speed up recalls.\nAdditional FSIS E. coli initiatives were announced as one of the items on the FSWG list of actions on July 7, 2009. The working group stated that FSIS is increasing its sampling, focusing on the components that go into ground beef, and also improving its instructions to field staff on how to verify beef establishment controls over the pathogen. These beef components are typically are referred to as \"bench trim\" and are the trimmings from larger cuts of primal and sub-primal cuts of beef. A notice on sampling bench trim and a directive on E. coli verification activities were issued on July 31, 2009. Meanwhile, FSIS reportedly was considering whether to define all cuts of beef as adulterated if they test positive for E. coli O157:H7, something a number of groups requested after a recent recall of 421,000 pounds of such \"muscle cuts.\"\nThe agency also is planning or contemplating a number of other efforts aimed at addressing E. coli O157:H7, including directing its enforcement investigators to gather more information within 48 hours of a presumed positive test for the pathogen (to improve ability to trace contaminated products back to their source); proposing rules requiring products to be held until testing results are completed; requiring labels on whole meat cuts that have been mechanically tenderized; and possibly instituting new record-keeping requirements aimed at enhancing traceback capabilities.\nFSIS reported that, of an average of nearly 10,000 ground beef samples tested annually in 2004, 2005, and 2006, a total of 43 (less than 0.2%) tested positive for E. coli O157:H7, part of a significant decline in the percentage of positive samples since 2000, when it was 0.86%. FSIS asserted that the reduction reflected the success of its HACCP-based and related regulatory policies. However, increases were recorded in 2007, when 29 or 0.24% of 12,200 ground beef samples tested positive, and in 2008, when 54 or 0.47% of 11,535 were positive. FSIS and other food safety experts were speculating as to whether the increase was due to a higher prevalence of the bacteria, or simply to the fact that the agency had changed its testing method in 2008. It is possible, for example, that the newer method is more sensitive to the presence of E. coli. In 2009, through December 27, a total of 41 or 0.32% out of 12,685 ground beef samples tested positive. In 2009 testing of ground beef components, FSIS reported that 30 or 0.86% out of 3,496 samples tested positive.\n\n\t\tListeria monocytogenes\n\nIn February 2001, FSIS published a proposed rule to set performance standards that meat and poultry processing firms would have to meet to reduce the presence of Listeria monocytogenes ( Lm ), a pathogen in ready-to-eat foods (e.g., cold cuts and hot dogs). The proposal covered over 100 different types of dried, salt-cured, fermented, and cooked or processed meat and poultry products. Lm causes an estimated 2,500 illnesses and 499 deaths each year (from listeriosis), and has been a major reason for meat and poultry product recalls.\nThe proposed rule raised controversy among affected constituencies. The meat industry argued that the benefits to consumers would not outweigh the cost to packers of additional testing. Representatives of food manufacturers criticized the proposed regulations for covering some categories of foods too broadly and heavily, while not covering some other high-risk foods at all (such as milk, which is under FDA jurisdiction). Consumer groups said the proposed rule would not require enough testing in small processing plants and that products not tested for Lm should not be labeled \"ready-to-eat\" because they would still require cooking to be 100% safe.\nInterest in the Listeria issue had grown in 1998 and 1999, following reports of foodborne illnesses and deaths linked to ready-to-eat meats produced by a Sara Lee subsidiary. Interest increased significantly after October 2002, when Pilgrim's Pride Corporation recalled a record-breaking 27.5 million pounds of poultry lunch meats for possible Lm contamination after a July 2002 outbreak of listeriosis in New England. CDC confirmed 46 cases of the disease, with seven deaths and three stillbirths or miscarriages. The recall covered products made as early as May 2002, and officials stated that very little of the meat was still available to be recovered.\nIn December 2002, FSIS issued a directive to inspection program personnel giving new and specific instructions for monitoring processing plants that produce hot dogs and deli meats. In June 2003, FSIS announced the publication of an interim final rule to reduce Listeria in ready-to-eat meats. Rather than set performance standards, as the February 2001 proposed rule would have, the new regulation requires plants that process RTE foods to add control measures specific to Listeria to their HACCP and sanitation plans, and to verify their effectiveness by testing and disclosing the results to FSIS. The rule directs FSIS inspectors to conduct random tests to verify establishments' programs. Plants are subject to different degrees of FSIS verification testing depending upon what type of control steps they adopt in their HACCP and sanitation plans.\nOn January 4, 2005, the Consumer Federation of America (CFA) issued a report sharply criticizing USDA's Listeria rulemaking. CFA asserted that the Department essentially adopted meat industry positions in weakening the final rule, such as by deleting proposed plant testing requirements and by not explicitly requiring that HACCP plans include Listeria controls. In 2003, Listeria illnesses increased by 22%, CFA contended, citing CDC data.\nUSDA and meat industry officials countered that the number of product recalls related to Listeria had declined from 40 in 2002 to 14 in 2003, that the rise in Listeriosis cases was quite small in 2003 after four years of declines, and that the interim rule provides more incentives for plants to improve safety. The CDC's 2006 and 2007 FoodNet reports indicated that the incidence of foodborne illness caused by Listeria, which had reached its lowest level in 2002 compared with a 1996-1998 baseline, has not continued to decline significantly in more recent years.\nRecalls of FSIS-regulated products continue. In 2005, the largest was a December 2005 recall of 2.8 million pounds of various bologna, ham, and turkey lunchmeat products by ConAgra. Another 28 Listeria -related recalls were announced during 2005, involving approximately 649,000 pounds of processed meat and poultry products, according to the agency's website. The website had posted six Listeria recalls in 2006 and another 11 in 2007, including, in January and February 2007, 2.8 million pounds of Oscar Mayer\/Louis Rich chicken breast cuts and strips. Fifteen Listeria -related recalls were posted in 2008, and eight in 2009.\n\n\t\tRisk-Based Inspection System\n\nCongress in 2007 ordered a halt to FSIS's work on what the agency was calling a more robust \"risk-based inspection system\" (RBIS), aimed at enabling the agency to rebalance existing inspection resources. The objective of this initiative was \"to improve public health by placing greater inspection and verification emphasis on federally inspected meat and poultry establishments that pose greater risks. In a more robust RBIS, each establishment's risk could be categorized, and the type and intensity of inspection could be based primarily on that risk.\"\nMore specifically, the initiative was to enable FSIS to shift some processing inspection resources from lower-risk products and plants to relatively higher-risk products (for example, ground poultry), and to plants with relatively poor safety records. USDA in February 2007 had announced a timetable for introducing RBIS, beginning in April 2007 at 30 locations representing about 254 processing (but not yet slaughter) establishments. About a fourth of these plants would come under closer scrutiny, about a fourth less scrutiny, and about half would receive approximately the same level of attention as currently, a USDA official said. He added that all plants will still be under \"daily inspection,\" and full-time employees would not be reduced under RBIS.\nPublic comments to FSIS on RBIS, and hearings by a House appropriations subcommittee, indicated that many agreed in concept with risk-based inspection but were concerned that the agency had provided too few specifics on how it would be implemented, lacked the data it needed to implement it, and should consider doing it through formal rulemaking. A few warned that it could undermine rather than strengthen safety oversight, and wondered whether the agency has the statutory authority to change inspection frequency.\nSeveral interest groups reiterated their concerns following the earlier, February 22, 2007, USDA announcement. The American Meat Institute, representing major meat packers, said in a statement that it was concerned that the \"hasty launch\" of the initiative could jeopardize consumer confidence in meat and poultry, and that details of exactly how the program would work still were unclear. Several consumer groups questioned the validity of the data that USDA was using to rank product risk and plant performance FY2009.\nThe Department's Office of Inspector General (OIG) conducted an audit of FSIS's work on RBIS, issuing its report in December 2007. Among other findings, the OIG questioned whether the agency had the systems in place \"to provide reasonable assurance that risk can be timely or fully assessed, especially since FSIS lacks current, comprehensive assessments of establishments' food safety systems.\" OIG reported that FSIS lacks adequate management control processes or an integrated IT (computer) system to support a program, and the agency had not resolved all of the prior recommendations that OIG said were most critical to successful development of risk-based inspection. The OIG report offered 35 new recommendations around such matters as improving the use of food safety assessment-related data; determining how assessment results will be used to estimate risk; and providing clearer documentation and written procedures and guidance for all stakeholders.\nThe OIG report was the major item discussed at the February 5-6, 2008, meeting of the National Advisory Committee on Meat and Poultry Inspection. FSIS said it has been retooling RBIS\u2014which it now calls a \"Public Health Risk-Based Inspection System\" (PHRBIS)\u2014to address the OIG recommendations and those of public commenters. FSIS issued a report outlining the elements of and scientific basis for the evolving PHRBIS on April 2008. The agency has been implementing the OIG recommendations, and has predicted that implementation will begin in late FY2010.\nThe agency also asked the National Academy of Sciences (NAS) to evaluate the data and methodology underlying its PHRBIS initiative. On March 23, 2009, a committee of the NAS Institute of Medicine issued its report, commending FSIS for its commitment to develop a risk-based system and agreeing with the \"general concept of using process control indicators as part of an algorithm to rank establishments in different levels of inspection.\" However, the committee also \"found it a challenge to evaluate the adequacy of indicators of process control to rank establishments and allocate agency inspection resources without a clear understanding of the rationale for the general approach,\" which the FSIS technical report did not articulate. For example, the agency did not clearly define the meaning of \"process control indicators,\" or provide in-depth consideration of the underlying statistics for specific microbiological testing protocols, among other uncertainties or limitations found by the committee. \n\n\t\t\tIn Congress\n\nProvisions in several successive appropriations measures (including P.L. 110-28 and P.L. 110-161 , Division A, in the 110 th Congress, and P.L. 111-8 , Division A, in the 111 th Congress) have directed USDA not to implement its risk-based inspection system anywhere until the OIG evaluated the data supporting the system, and the FSIS resolved any issues raised in the evaluation. This prohibition is continued under the FY2010 appropriations measure ( P.L. 111-80 ).\nSeveral freestanding bills were introduced late in the first session of the 111 th Congress that aimed to address microbiological contamination. They include S. 2792 , which would direct USDA to require beef slaughterhouses, processing establishments, and grinding facilities to meet minimum testing requirements for E. coli O157:H7. The new provisions would be applied to imported as well as domestic beef, require positive E. coli O157:H7 test results to be reported to USDA within 24 hours, and exempt facilities that process or grind 25,000 pounds or less per day. Also, S. 2819 would prohibit the marketing of any processed food regulated under the meat and poultry inspection laws (as well as any processed food regulated by FDA under the Federal Food, Drug, and Cosmetic Act) that either has not undergone a pathogen reduction treatment or is certified not to contain verifiable traces of pathogens.\nIn the second session, H.R. 4750 , introduced March 3, 2010, would subject firms and other entities to up to three years in prison, a $10,000 fine, or both, if they prohibit\u2014whether by contract or other means\u2014another firm or entity from further examining carcasses, carcass parts, or the meat or poultry products from them to ensure that they are not adulterated. The measure follows reports that some firms were prohibiting those who bought their products from testing them to ensure they were free of pathogens; at issue, among other things, is who might be liable for such products if they are found to be contaminated.\n\n\tOther Selected Issues\n\n\t\tSafety of Meats in School Meals Programs\n\nAs noted earlier, media reports appeared in late 2009 that raised questions about the safety of the meat being supplied to school meals programs. Meanwhile, several lawmakers also have called for a review of how USDA screens meat and poultry destined for school meals and\/or for consideration of legislation in the second session of the 111 th Congress that would require the Department to enforce more rigorous testing, recall, and other procedures for products to be used in the programs.\nAlthough schools use cash to purchase directly most of the foods used in these programs, a significant amount\u2014by law, at least 12% of the combined value of cash and commodity assistance\u2014is provided through commodities purchased by USDA and transferred to schools through the states. This 12% now amounts to about $1 billion annually for all types of commodities. USDA's Agricultural Marketing Service (AMS) handles purchases for most commodities, including meat and poultry, and has purchased approximately 133 million pounds of beef alone in each of the past three years.\nUSA Today reported that, during the dates covered by the Beef Packers Inc. recall, USDA purchased four orders totaling nearly 450,000 pounds of ground beef for the school lunch program. One order reportedly tested positive for the Salmonell a strain that triggered the retail recall\u2014and was rejected by USDA. However, it would have been prudent for the Department to reject the other three orders even though they did not produce positive test results, one food safety expert told the newspaper. Such pathogen tests do not guarantee that the pathogen is absent. \"Because Salmonella is seldom distributed evenly in any lot of beef, '94% of the time, I won't find it even though it's there,'\" the article quoted the expert as saying. On the other hand, the three lots that were not rejected were produced during production runs on days following those that the recalled beef was produced; the assembly lines are cleaned each night, making it very unlikely that the pathogen would have survived, he added.\nA subsequent USA Today article observed that on the one hand, AMS's safety rules for school-bound meat and poultry are more stringent than the Department's (presumably meaning FSIS's) rules are for commercially marketed products. On the other hand, the article asserted, many of the larger fast food and supermarket chains set testing and safety standards that are far higher than those required by AMS. For example, McDonald's, Burger King, and Costco test the ground beef they buy five to 10 times more frequently than the Department's tests for a typical production day.\nThe New York Times reported on a separate case where E. coli and Salmonella have been found \"dozens of times\" in meat produced for the school lunch program by Beef Products Inc. The Times stated that the meat was diverted before it went into the program. Although one of the company's facilities reportedly has been suspended from the school lunch buying program three times in three years, USDA (again, presumably FSIS) has allowed the facility to remain in production for other customers.\nThe Times article outlines the company's use of \"a product made from beef that included fatty trimmings the industry once relegated to pet food and cooking oil.\" Because the \"trimmings were particularly susceptible to contamination,\" the company began treating the product with ammonia gas, which, it said, proved highly effective in killing pathogens. The challenge, according to the Time s , has been how to keep the ammonia levels high enough to kill the pathogens but not negatively affect the taste of the product. Furthermore, the government reportedly did not require that the ammonia-treated meat be so labeled, because the government agreed with Beef Products' assertion that it was a processing agent and not an additive.\nThe food safety expert quoted by USA Today , James Marsden, generally defended the AMS purchasing program in a recent Internet posting. He observed that ground beef destined for schools must be tested for both Salmonella and E. coli O157:H7, both of for which AMS has a \"zero-tolerance\" policy and thus will not accept any products where it is found. Furthermore, suppliers must hold the product until tests confirm that samples are negative for the pathogens. Marsden added that other provisions in the AMS purchasing program require that slaughter plants include at least two pathogen intervention steps and that carcasses themselves be tested regularly for E. coli O157:H7. However, he also reiterated the \"potential weakness\" in the program that he described in the USA Today article, namely what he called \"an overreliance on microbiological test results.\"\n\n\t\tRecall and Enforcement Proposals\n\nCurrently, the Agriculture Secretary must go to the courts to obtain an order to seize and detain suspected contaminated products if a firm refuses to issue a recall voluntarily. The GAO has criticized agencies' efforts to ensure that companies carry out recalls quickly and efficiently, particularly of products that may carry severe risk of illness. A 2004 GAO report concluded that the agencies do not know how well companies are carrying out recalls and are ineffectively tracking them. As a result, most recalled items are not recovered and thus may be consumed, GAO reported.\nAt past hearings, consumer and food safety advocacy groups have testified in favor of obtaining these new enforcement tools to improve food safety in general, and to strengthen USDA's enforcement of the new HACCP system in particular. These groups have asserted that civil fines would serve as an effective deterrent and could be imposed more quickly than criminal penalties or the withdrawal of inspection. They also have argued that the authority to assess civil penalties would permit USDA to take stronger\u2014and more rapid\u2014action against \"bad actors,\" or those processors who persistently violate food safety standards. Food safety advocates argue that FSIS should have the authority to mandate product recalls as a backup guarantee in case voluntary recalls moved too slowly or were not comprehensive enough.\nMeat and poultry industry trade associations have testified in opposition to granting USDA new enforcement powers. Both producers and processors argue that current authorities are sufficient and that only once has a plant refused to comply with USDA's recommendation to recall a suspected contaminated product. Industry representatives have testified that USDA's current authority to withdraw inspection, thereby shutting down a plant, is a strong enough economic penalty to deter potential violators and punish so-called bad actors. Furthermore, they say, new enforcement powers would increase the potential for plants to suffer drastic financial losses from suspected contamination incidents that could ultimately be proven false. It is also argued that voluntary procedures encourage cooperation between industry and its regulators, whereas mandatory recall authority might discourage it. Mandatory authority would foster a more adversarial system of mistrust and possible litigation, making recalls less rather than more effective, industry representatives argue.\nIn August 2004, the consumer group Center for Science in the Public Interest (CSPI) began a national campaign to urge USDA to publicize the names of retail outlets where recalled meat has been distributed, so that consumers can learn more quickly whether they have purchased potentially contaminated products. USDA and industry leaders have contended that distribution records are proprietary, and exempt from provisions of the Federal Freedom of Information Act; such information, they argue, should be limited mainly to public officials so that they can monitor recalls. However, in the March 7, 2006, Federal Register , FSIS proposed posting on its website the names of retailers who have products subject to a voluntary recall. FSIS announced on July 11, 2008, that it would begin to post such names in August 2008. The lists cover retailers involved in the potentially most serious (Class I) recalls only.\nReviewing FSIS protocols for handling recalls following the Topps case (see box, \" Topps Recall \"), USDA's OIG concluded that while the agency has improved its investigative and recall procedures, it still needed \"a science-based sampling protocol to collect and analyze a representative sample of product at an establishment to conclude whether contamination occurred there.\"\n\n\t\t\tIn Congress\n\nProvisions of the Food and Drug Administration Amendments Act of 2007 ( H.R. 3580 ; P.L. 110-85 ) require the Secretary of HHS both to establish a food registry for the reporting of food adulteration, and to encourage more coordination and communication when recalls occur, but it applies to FDA-regulated foods. In the Senate but not the House version of the omnibus farm bill ( H.R. 2419 ) was a requirement that USDA establish similar \"reportable food registries\" for meat and poultry and their products. The final conference substitute, enacted as P.L. 110-246 , amends the meat and poultry laws to require an establishment to notify USDA if it has reason to believe that an adulterated or misbranded product has entered commerce. Another conference provision requires meat and poultry establishments to prepare and maintain written recall plans. The proposed implementing rules for these two requirements were still in review at USDA in mid-September 2009.\nSeveral other bills to authorize mandatory recalls for meat and poultry products were introduced but not enacted in the 110 th Congress. In the 111 th Congress, bills by Representative DeGette ( H.R. 815 ) and by Senator Brown ( S. 425 ) would amend both the FMIA and the PPIA to require \"[a] person (other than a household consumer) that has reason to believe\" that any carcass, poultry, meat product, or poultry product \"transported, stored, distributed, or otherwise handled by the person is adulterated or misbranded shall, as soon as practicable, notify the Secretary of the identity and location of the article.\" The bills set forth a series of steps for voluntary recall and consumer notification and, if they are not taken, require the Secretary to order them. The bills (which also would mandate similar requirements for FDA-regulated products) provide for hearing opportunities, among other related language. A bill with similar objectives also was introduced by Senator Udall ( S. 1527 ).\nMandatory recall provisions have been incorporated into food safety legislation ( H.R. 2749 ) that cleared the House on July 30, 2009, as well as into a comprehensive bill ( S. 510 ) approved in November 2009 by a Senate committee, but these bills' provisions apply to FDA-regulated foods and not to FSIS-regulated meat and poultry products.\n\n\t\tMeat Traceability and Animal Identification\n\nRecalls imply the ability to quickly trace the movement of products. Some argue, for example, that improved traceability capabilities would have enabled USDA to determine the whereabouts of all related cattle of potential interest in the three U.S. case of BSE (bovine spongiform encephalopathy, or \"mad cow disease\"). The traceability issue has also been debated in connection with protecting against agroterrorism; verifying the U.S. origin of live cattle and meat products for export; and facilitating recalls to prevent or contain foodborne illness outbreaks, among other things.\nSupporters of animal ID and meat traceability point out that most major meat-exporting countries already have domestic animal ID systems. The U.S. meat industry had argued in the past that such a system would not be based on sound science, and would be technically unworkable. However, following the domestic BSE case, the industry, USDA, and other professionals attempted to implement a universal, although not mandatory, national animal ID (but not meat traceability) system. However, this system was focused on animal disease control rather than on food safety objectives.\nRegardless, progress has been slow on this so-called National Animal Identification System (NAIS). Some Members of Congress are among those who believed the programs should be mandatory in order to achieve universal participation. Although many producers themselves appear to be supportive, many also have expressed adamant opposition to the plan. Among other issues are cost, need for a mandatory rather than voluntary system, potential producer liability, and privacy of records.\nOn February 5, 2010, Secretary of Agriculture Vilsack announced that USDA was revising its approach to achieving a national capability for animal disease traceability. The NAIS is to be abandoned. In its place USDA proposes a new approach that will allow individual states (and tribal nations) to chose their own degree of within-state animal identification (ID) and traceability for livestock populations. Under this revised focus, states may chose to have no mandatory animal ID and traceability capability, or to rely on existing ID systems already in place to fight brucellosis, tuberculosis, and other contagious animal diseases, or to develop their own version of a more detailed birth-to-market ID system as originally proposed under NAIS. The flexibility is intended to allow each state to respond to its own producer needs and interests. However, under the proposed revision USDA will require that all animals moving in interstate commerce have a form of ID that allows traceability back to their originating states.\n\n\t\t\tIn Congress\n\nAnimal ID proposals were offered but not enacted in the 110 th Congress. For example, H.R. 1018 would have prohibited the establishment of a mandatory ID system. H.R. 2301 would have created a livestock identification board with members from industry to oversee a national program. Several other bills establishing broader traceability programs would have applied to animal ID as well. Also in the 110 th Congress, both the House and Senate committee reports to accompany USDA's FY2008 appropriation ( H.Rept. 110-258 ; S.Rept. 110-134 ) had questioned USDA's progress and direction in implementing NAIS. Over several years through FY2008, about $128 million had gone into the development of such a program.\nThe FY2009 USDA appropriation ( P.L. 111-8 , Division A), passed near the start of the 111 th Congress, provided another $14.5 million for program, of which $3.5 million was for information technology, $9.4 million was for field implementation, and $1.6 million was for program administration. Explanatory language to accompany the appropriation further directed APHIS \"to make demonstrable progress\" to implement the program, and to meet a number of specific objectives (regarding 48-hour traceback ability) that were in the agency's 2008 traceability business plan.\nThe FY2010 appropriation ( P.L. 111-80 ) provided $5.3 million for NAIS, $9.1 million less than FY2009. This was in contrast to no funding under the House bill and was $2 million less than the Senate bill. The conference report expressed concern that the lack of progress by APHIS in registering animal premises in the United States would prohibit APHIS from implementing an effective national animal ID system, and that such a system was needed for animal health and would benefit livestock markets. As of mid-2009, about 37% of premises were registered under NAIS, out of an estimated 1.4 million U.S. animal and poultry operations. USDA had stated that much higher levels of participation were needed to successfully implement NAIS. The conference report stated further that, \"[i]f significant progress is not made, the conferees will consider eliminating funding for the program.\" Since FY2004, approximately $142 million has been appropriated for NAIS.\nWith regard to proposed authorizing legislation in the 111 th Congress, the broader food traceability provisions of H.R. 814 (DeGette) and S. 425 (Brown) both include the requirement that FSIS establish, within one year, a system that can trace each animal to any premises it was held at any time prior to slaughter, and each carcass, carcass part, or meat\/poultry product from slaughter through processing and distribution to the ultimate consumer. The bills also would authorize the Secretary to require records to be maintained and to provide access to them for purposes of traceability.\nTraceability provisions have been incorporated into food safety legislation ( H.R. 2749 ) approved by the House and into a Senate bill ( S. 510 ), but these provisions would apply to FDA-regulated foods and not to FSIS-regulated meat and poultry products.\n\n\t\tFunding and User Fees\n\nFrom time to time in the past, FSIS has had difficulty in sufficiently staffing its service obligations to the meat and poultry industries. Usually a combination of factors causes these shortages, including new technologies that increase plant production speeds and volume, insufficient appropriated funds to hire additional inspectors at times of unexpected increases in demand for inspections, and problems in finding qualified people to work in dangerous or unpleasant environments or at remote locations. These staffing problems were complicated somewhat by the addition of HACCP requirements on top of the traditional inspection duties.\nTo ease funding pressures, most administrations over the past 20 years have proposed to charge the meat-packing industry new user fees sufficient to cover the entire cost, or at least a portion, of federal inspection services. (FSIS has been authorized since 1919 to charge user fees for holiday and overtime inspections, and does so). The primary rationale for more extensive user fees has been that resources would then be adequate to hire new inspectors as necessary. USDA economists estimate that the cost passed on to consumers from such a fee would be no more than one cent per pound. Meat industry and consumer groups have consistently opposed increased fees, arguing that food safety is a public health concern that merits taxpayer support.\nFor example, as part of its FY2009 budget submitted to Congress in February 2008, the Bush Administration again had asked for new user fees, beginning after FY2009, of $92 million by collecting licensing fees from meat and poultry establishments, and of another $4 million by charging plants that require additional inspections due to performance failures. These fees were not adopted by Congress, which also had opposed them when they were in the Administration's FY2008 budget. The $4 million user fee was again requested by the Obama Administration in its FY2010 proposal, but neither the House nor Senate Appropriations Committee recommended its adoption (which would require a change in authorizing legislation).\n\n\t\t\tIn Congress\n\nAs noted, the enacted omnibus ( P.L. 111-8 , Division A) provides $971.6 million for FSIS, approximately $41 million above the FY2008 level and approximately $20 million above the Administration request. This congressional appropriation is being augmented in FY2009 by existing (currently authorized) user fees, which FSIS had earlier estimated would total $140 million for the fiscal year. For FY2010, the enacted appropriation ( P.L. 111-80 ) provides $1.019 billion, which is the Administration-requested level and an increase over the enacted FY2009 level. Congressional consideration of the FY2011 budget request was getting underway in March 2010.\n\n\t\tChinese Poultry Rule\n\nThe FY2009 omnibus appropriation continued language, which was also in the FY2007 and FY2008 USDA appropriations measures, prohibiting FSIS from implementing rules to allow the importation of poultry products from China into the United States. The explanatory statement accompanying the FY2009 measure expressed \"very serious concerns about contaminated foods from China,\" and called on USDA to submit a report to Congress on the safety implications of such changes and a plan of action to guarantee the safety of Chinese poultry product imports. A final rule to allow certain processed poultry products to enter from China had been published by FSIS rule on April 24, 2006.\nThe Chinese government in March 2009 strongly criticized the ban as a violation of trade rules and stated that it would challenge it in the World Trade Organization (WTO). It also pointed out that China had \"imported 580,000 tons of chicken products from the United States last year, accounting for 73.4% of total chicken imports.\" On April 17, 2009, China formally requested formal WTO consultations on the issue, the first step toward referral to a dispute settlement panel (which subsequently was established in July 2009 and composed in September 2009).\nThe House-passed FY2010 appropriation for USDA would have continued the Chinese chicken prohibition; the Senate would have permitted such imports but only under specified conditions. House-Senate conferees on the final measure (enacted as P.L. 111-80 ) adopted language that appears to be closer (but not identical) to the Senate approach. More specifically, Section 743 of the final measure states that funds cannot be used to implement the rule unless the Secretary of Agriculture formally notifies Congress that China will not receive any preferential consideration of any application to export poultry or poultry products to the United States; the Secretary will conduct audits of inspection systems and on-site reviews of slaughter and processing facilities, laboratories, and other control operations before any Chinese facilities are certified to ship products to the United States, and subsequently such audits and reviews will be conducted at least annually (or more frequently if the Secretary determines it necessary); there will be a \"significantly increased level\" of reinspections at U.S. ports of entry; and a \"formal and expeditious\" information sharing program will be established with other countries importing Chinese processed poultry products that have conducted audits and plant inspections.\nFurthermore, USDA must provide a report to the House and Senate Appropriations Committees within 120 days and every 180 days thereafter, indefinitely, that includes both initial and new actions taken to audit and review the Chinese system to ensure it meets sanitary standards equivalent to those of the United States, the level of port of entry reinspections being conducted on Chinese poultry imports, and a work plan incorporating any agreements between FSIS and the Chinese government regarding a U.S. equivalency assessment. USDA also is to meet specified requirements (spelled out in Section 743) for notifying the public about audits and site reviews in China and lists of certified Chinese facilities.\nMany food safety advocates were supportive of the House appropriations language banning the poultry rule, arguing that China\u2014the third leading foreign supplier of food and agricultural imports into the United States\u2014lacks effective food safety protections, and that the 2006 rule was rushed into approval without an adequate safety evaluation. Opponents of a ban, particularly those in the U.S. animal industries, argue that it would undermine U.S. trade commitments, and believe it already has led to trade retaliation by the Chinese.\n\n\t\tState-Inspected Products\n\nAs noted, federal law long prohibited state-inspected meat and poultry plants from shipping their products across state lines, a ban that many states and small plants have wanted to overturn. Limiting state-inspected products to intrastate commerce is unfair, these states and plants argued, because their programs must be, and are, \"at least equal\" to the federal system. While state-inspected plants could not ship interstate, foreign plants operating under USDA-approved foreign programs, which must be \"equivalent\" to the U.S. program, have been permitted to export meat and poultry products into and sell them anywhere in the United States.\nThose opposing state-inspected products in interstate commerce argued that state programs have not been required to have the same level of safety oversight as the federal, or even the foreign, plants. For example, foreign-processed products are subject to U.S. import reinspection at ports of entry. The opponents of interstate shipment note that a recent FSIS review, which had found all 28 state programs to be at least equal to the U.S. program, was based largely on self-assessments.\n\n\t\t\tIn Congress\n\nIn the 110 th Congress, Section 11015 of the enacted farm bill ( P.L. 110-246 ) amends the FMIA and the PPIA to authorize a new opt-in program for state-inspected plants. This program is to supplement rather than replace the existing federal-state cooperative inspection program. In states that choose to participate, a federally employed coordinator would supervise state inspectors in plants that want to ship across state lines. Eligible plants are limited to those with 25 or fewer employees\u2014except that plants with between 25 and 35 employees can apply for coverage within the first three years of enactment. The law sets federal reimbursement for state costs under the new program at 60%; the current federal-state cooperative inspection program provides reimbursement at 50% of costs. Products inspected under the new program are to carry the federal mark of inspection, and meet all FMIA and PPIA requirements. Other provisions prohibit federally inspected establishments from participation, establish a new technical assistance division to assist the states, and require periodic audits by USDA, among other things.\nThe new program, which reflects language in the Senate version of the farm bill, reportedly was developed as a compromise by those on both sides of the issue. It appears to be based in concept on the Talmadge-Aiken program (see page 4 ). Some proponents of ending the interstate ban on state-inspected meat contended that the new language is overly restrictive, while those who supported the change countered that it provides appropriate safeguards.\nThe farm bill required final rules to implement the new state program by December 2009. FSIS published, on September 16, 2009, the proposed rules, with an initial 60-day comment period. The proposal spells out standards for determining the average number employees in a plant; clarifies that eligibility is limited to those states that already have a cooperative agreement to operate a meat or poultry inspection program; describes the process for a state to apply for the interstate version; and specifies that an eligible establishment is to apply for participation through the state-approved program, not FSIS. Among other provisions, the proposed rule would prohibit a participating establishment from reverting to intrastate inspection if it fails to correct any violations of federal standards that are found. A final rule had not yet appeared as of mid-March 2010.\n\n\t\tBSE\n\n\t\t\tNorth American Cases\n\nTwenty-one cases of BSE have been reported in North America. Eighteen of them were cattle born in Canada, which reported its first native case in May 2003 and its latest case in March 2010 (one earlier case was imported into Canada from Great Britain). The United States reported its first case in December 2003 (one of the Canadian-born animals, imported into the United States). The United States also found two additional cases, in U.S.-born cattle. The most recent U.S. case was in late February 2006. The most recent Canadian case was announced by Canadian officials on March 10, 2010, in a six-year-old beef cow in Alberta. \nIn epidemiological investigations of the three U.S. cases, USDA was unable to track down all related animals of interest, but those that were located tested negative for the disease. Despite a beef recall, some meat from the first U.S. BSE cow may have been consumed, USDA said, adding, however, that the highest-risk tissues never entered the food supply. No materials from the other two U.S. cows entered the food supply, USDA also said. \nAnimal health officials initially indicated that all of the North American cases were caused by the consumption of BSE-contaminated feed. However, USDA reportedly now believes that the two native-born U.S. cattle had \"atypical\" BSE, which differs from other cases. If these cases are determined to be \"spontaneous,\" that may affect future control strategies.\n\n\t\t\tBSE Safeguards\n\nFSIS is one of the three federal agencies primarily responsible for keeping BSE out of the food supply. The other two agencies involved in BSE are USDA's Animal and Plant Health Inspection Service (APHIS), which handles primarily the animal disease aspects, and FDA, which regulates feed ingredients. After the first U.S. BSE case, FSIS published, as interim final rules in the January 12, 2004, Federal Register , several actions to bolster U.S. BSE protection systems, effective immediately:\nDowner (nonambulatory) cattle are no longer allowed into inspected slaughter and processing facilities. (This interim final rule was published in the July 13, 2007 Federal Register .) Cattle selected for testing cannot be marked as \"inspected and passed\" until confirmation is received that they have tested negative for BSE. Specified risk materials (SRM), which include the skull, brain, trigeminal ganglia, eyes, vertebral column, spinal column, and dorsal root ganglia of cattle over 30 months of age, and the small intestine of cattle of all ages, are now prohibited from the human food supply. Slaughter facilities are required to develop and implement procedures to remove, segregate, and dispose of SRM and make information readily available for review by FSIS inspection personnel. SRM from cattle 30 months or older cannot be in a product labeled as \"meat\" if derived from advanced meat recovery (AMR) technology, which USDA said would help ensure it does not contain spinal tissue. Mechanically separated meat may not be used for human food. Air injection stunning is banned, to ensure that portions of the animal brain are not dislocated into the carcass.\nThe FSIS actions, which remain in effect, were in addition to other BSE regulatory safeguards that have been in place for several years. These include import controls and ongoing BSE surveillance through carcass testing by APHIS, and restrictions on the feeding of certain mammalian proteins to cattle by FDA (see box, \" The FDA \"Feed Ban\" \").\nAdditional USDA actions in the wake of the December 2003 BSE discovery have included more attention to implementing a nationwide animal identification program that would enable all cattle and other animal movements to be traced within 48 hours in cases of animal disease (see prior section on \" Meat Traceability and Animal Identification \"); and an intensive, one-time BSE testing program for higher-risk cattle (since completed).\n\n\t\t\t\tIn Congress\n\nFor many Members of Congress, much of the recent interest in BSE has focused on trade rather than food safety concerns. Japan and Korea, once among the four leading export markets for U.S. beef, took years to begin accepting U.S. beef products. Exports to Japan, which restarted in 2005, are still limited to products from younger cattle. Korean inspection procedures kept that market largely closed to the United States through much of 2007 and again during early 2008.\nOn April 18, 2008, a new U.S.-Korea agreement was announced that was to lead to that country's opening to most U.S. beef in accordance with accepted international veterinary guidelines. However, Korea first delayed implementation and then scaled back the types of products it would accept, following vigorous anti-government protests that grew from this agreement's announcement. By July, and through the end of 2008, U.S. beef again was moving into Korea. U.S. authorities have been hopeful that such positive developments could help to defuse the frustration of many Members of Congress, some of whom had been expected to reintroduce legislation calling for sanctions against trading partners that failed to accept assurances of U.S. beef safety. U.S. access to Korea's beef market has been an issue in the debate over implementation of the U.S.-Korea free trade agreement (FTA). A number of Members had signaled that their support for legislation to implement the FTA was contingent on Korea fully opening its market for U.S. beef. (See CRS Report RL34528, U.S.-South Korea Beef Dispute: Agreement and Status , by [author name scrubbed] and [author name scrubbed].)\nA recent incident inciting U.S. lawmakers and trade officials was a vote in early January 2010 by Taiwan's parliament to effectively reverse provisions in a U.S.-Taiwan agreement that was to permit U.S. ground beef and offal to enter that country. The agreement, reached in October 2009 after lengthy negotiations, also is to permit U.S. bone-in beef, but the parliament reportedly did not change that provision. Taiwan's actions, which U.S. trade officials declared \"do not have a basis in science and constitute a unilateral violation of a bilateral agreement,\" could again lead to congressional proposals for some type of sanctions or retaliation. \n\n\t\tHumane Slaughter and the Hallmark\/Westland Recall\n\nOn February 17, 2008, USDA announced that Hallmark\/Westland Meat Packing Co. of California was voluntarily recalling 143 million pounds of fresh and frozen beef products dating to February 1, 2006. About 50 million pounds were distributed to the school lunch and several other federal nutrition programs in at least 45 states. This largest U.S. meat recall ever came after FSIS found that for at least two years the facility had not always notified inspectors about cattle that had become nonambulatory after they had been inspected and approved\u2014but before they were actually slaughtered\u2014for food. FSIS regulations explicitly prohibit most nonambulatory cattle which are presented for ante-mortem inspection, because of their higher risk of BSE.\nFSIS also cited evidence that the plant had violated the Humane Methods of Slaughter Act (HMSA), which first came to light after animal welfare advocates secretly videotaped what they described as employees inhumanely handling downer cattle before slaughter. The HMSA stipulates, among other things, that \"[n]o method of slaughtering or handling in connection with slaughtering shall be deemed to comply with the public policy of the United States unless it is humane.\"\nFSIS published a final rule in the March 18, 2009, Federal Register that now specifically requires cattle slaughter establishments to notify government inspectors when cattle become nonambulatory even if they have already passed ante-mortem inspection. All such cattle must be condemned\u2014that is, diverted from the human food supply\u2014and properly disposed of.\n\n\t\t\tIn Congress\n\nThe 110 th Congress had held several hearings in which the effectiveness and USDA implementation of the HMSA, and its BSE rules, were challenged. Bills to legislatively prohibit the slaughter of nonambulatory livestock for food included H.R. 661 , S. 394 , and S. 2770 . They were not enacted.\nIn the 111 th Congress, the Senate-passed version of the American Recovery and Investment Act of 2009 ( H.R. 1 ) included a provision to prohibit permanently the use of federal funds for inspecting any nonambulatory disabled cattle for use as human food, regardless of the reason for becoming nonambulatory. However, the provision was removed by House-Senate conferees prior to final enactment as P.L. 111-5 . A freestanding bill ( H.R. 4356 ) to ban such cattle from the food supply and to ensure that they are humanely euthanized was introduced in December 2009; the measure was pending at the start of 2010. A subcommittee of the House Oversight and Government Reform Committee held a hearing on the issue on March 4, 2010, where, among other witnesses, the Government Accountability Office testified on a new GAO report concluding that FSIS inspectors may not be taking consistent actions to enforce the HMSA. For background, see CRS Report RS22819, Nonambulatory Livestock and the Humane Methods of Slaughter Act , by [author name scrubbed].","output":"The U.S. Department of Agriculture's (USDA's) Food Safety and Inspection Service (FSIS) must inspect most meat, poultry, and processed egg products for safety, wholesomeness, and labeling. Federal inspectors or their state counterparts are present at all times in virtually all slaughter plants and for at least part of each day in establishments that further process meat and poultry products. Debate has ensued for decades over whether this system, first designed in the early 1900s, has kept pace with changes in the food production and marketing industries.\nSeveral significant changes in meat and poultry inspection programs were included in the 2008 farm bill (P.L. 110-246), signed into law in June 2008. These include permitting certain state-inspected meat and poultry products to enter interstate commerce, just like USDA-inspected products; bringing catfish under mandatory USDA inspection; requiring an inspected establishment to notify USDA if it believes that an adulterated or misbranded product has entered commerce; and requiring establishments to prepare and maintain written recall plans. USDA's implementation of these provisions is an oversight item for the 111th Congress. Other recent inspection issues could receive continued attention in the 111th Congress, which currently appears to be focused on broader legislation to reform food safety programs\u2014notably those of the U.S. Food and Drug Administration (FDA), which oversees all foods other than meat and poultry. Issues relevant to FSIS programs include the following.\nIs enough being done to address longstanding concerns about naturally occurring microbiological contamination? In 1996, FSIS added a sweeping new system known as Hazard Analysis and Critical Control Point (HACCP)\u2014essentially plant-specific contamination prevention plans\u2014on top of the traditional \"sight-, smell-, and touch-based\" inspection system. However, recalls due to pathogen problems continue to occur, and the significant rates of decline in the incidence of some major foodborne pathogens have not been sustained in recent years, according to government data. Past proposals to delineate pathogen performance standards and\/or safe tolerance levels could again be offered.\nShould USDA have authority to mandate recalls of meat and poultry products, as advocates have requested? FSIS now relies on the establishments to recall adulterated products but asserts that this approach, along with other enforcement tools, is sufficient to protect consumers. Those wanting mandatory recall authority also contend that an improved ability to trace animals, meat, and poultry products should be built into the system to make recalls more effective.\nDoes FSIS have adequate funding and resources, and\/or should industry pay more for inspection? FSIS inspection is mainly funded through USDA's annual appropriation, with some user fees authorized to cover plant overtime and holiday inspection costs. Congress has denied successive Administrations' proposals for additional user fees. Congress also has used annual appropriations measures to direct FSIS's administration of its programs. Examples include prohibiting implementation of a rule that would allow imports of some Chinese poultry products; prohibiting the use of funds to inspect horses to be used for food for humans; and slowing the agency's implementation of a controversial \"risk based inspection system\" (RBIS, now being retooled as the \"Public Health Based Inspection System\") aimed at shifting some existing FSIS resources from processing plants and products that pose relatively lower safety risks to others posing relatively higher risks."}
{"id":"gao_GAO-03-685","pid":"gao_GAO-03-685_0","input":"\tBackground\n\nIn 1978, Congress passed the Inspector General Act, creating Inspector  General offices in 12 federal agencies. This followed growing reports of  serious and widespread breakdowns in agencies\u2019 internal controls. These  new OIGs were established as independent and objective offices within  their respective agencies to promote economy, efficiency, and  effectiveness in government programs and operations and to prevent and  detect fraud and abuse. In addition, they were created to keep agency  heads and Congress fully informed about problems and deficiencies in  program operations, as well as needed corrective action. Over the years,  the act has been amended to increase the number of inspectors general.  The President, with the advice and consent of the Senate, appoints  inspectors general at cabinet-level departments and other large agencies,  including HHS. The inspectors general at smaller, independent agencies  and other federal entities are appointed by the heads of their organizations  and have essentially the same authorities and duties as those appointed by  the President. Presently, there are 28 inspectors general appointed by the  President and 29 appointed by their agency heads.\nInspectors general hold a unique place in the executive branch of  government. They report to and are subject to the general supervision of  their agency heads, but carry out their duties independently. In addition,  they have reporting obligations to both the heads of their agencies and  Congress. Those that are presidentially appointed are among the few such  appointees that are to be selected \u201cwithout regard to political affiliation  and solely on the basis of integrity and demonstrated ability.\u201d To help  maintain their independence and fulfill their mission\u2014which often  involves being publicly critical of their own departments\u2014inspectors  general must familiarize their departmental colleagues with their special  role.\nBecause they are charged with independently protecting the integrity of  federal programs, inspectors general must be impartial in fact and  appearance. Government Auditing Standards, effective in January 2003,  call for auditors to \u201cbe free, both in fact and appearance from personal,  external, and organizational impairments to independence.\u201d These  standards also require that auditors \u201cavoid situations that could lead  reasonable third parties with knowledge of the relevant facts and  circumstances to conclude that the auditor is not capable of exercising  objective and impartial judgment . . ..\u201d Given that their independence and  impartiality is so critical, inspectors general need to be sensitive to how  their actions might be perceived and interpreted by their staffs, the  administration, Congress, and the public.\nAbout 300 of the approximately 1,600 HHS OIG employees are employed in  its Washington D.C. headquarters. The remainder work in its 8 regional  offices and 85 field offices in all 50 states. The OIG consists of five  components, or major units, each headed by a deputy inspector general.  The office is led by 13 Senior Executive Service level employees, who all  work in headquarters, and about 60 GS-15 level employees. About two- thirds of the GS-15 employees are spread across the various components  in headquarters with the remaining third located in the OIG\u2019s regional  offices.\nConsistent with the act, the OIG maintains the Office of Audit Services  (OAS) and the Office of Investigations (OI). They each represent about 40  percent of the OIG\u2019s budget. OAS is responsible for auditing a variety of  HHS health care programs and generally spends about 80 percent of its  resources on projects related to the Medicare and Medicaid programs. Its  findings can result in program improvements and the return of  overpayments to the federal government. In addition, OAS provides audit  support to OI. OI investigators typically pursue allegations of criminal  conduct that they receive from contractors that process Medicare claims,  state Medicaid Fraud Control Units, officials involved in administering  HHS\u2019s many grant programs, and others. When investigators find evidence  of potential wrongdoing, they refer the matter to DOJ for possible  prosecution or the OIG may opt to impose other sanctions.\nThe OIG has established three additional components to enable it to fulfill  its mission. The Office of Evaluation and Inspections (OEI) conducts  short-term management evaluations of HHS programs that generally  involve significant expenditures and services to beneficiaries or in which  important management issues have surfaced. Its reports are expected to  identify opportunities for improvement in departmental programs. While  OAS may audit the same federal programs examined by OEI, the scope of  OEI studies is typically broader and would more likely involve the use of  surveys, interviews, and other qualitative research methods. A relatively  small component, OEI represents about 10 percent of the office\u2019s  resources. The Office of Counsel to the Inspector General (OCIG) provides  legal services to the OIG. Among other things, it renders advisory opinions  to health care providers and develops model industry guidance for  compliance with relevant laws and regulations. It also has several  sanctions at its disposal to penalize those who abuse HHS programs.  Finally, the Office of Management and Policy (OMP) is responsible for the  administration of the office, which includes overseeing the budget,  supporting the office\u2019s information technology needs, and working with  the media. It is also responsible for the OIG\u2019s human resource  management activities, but obtains significant personnel support from the  department\u2019s centralized Program Support Center. OCIG and OMP each  represent about 5 percent of the OIG\u2019s budget.\nThe OIG plays an instrumental role in identifying and investigating  individuals and entities that may have abused HHS programs. It may make  referrals to DOJ for possible prosecution under applicable criminal  statutes. In addition, health care providers who violate federal laws and  regulations may face a variety of civil sanctions. The OIG may make use of  the False Claims Act\u2014the federal government\u2019s primary civil remedy for  false or fraudulent claims\u2014and refer such matters to DOJ. The act  imposes substantial penalties on those who knowingly submit false claims  to Medicare and other federal programs.\nIf a provider has filed a false claim that DOJ opts not to pursue through the  use of the False Claims Act, the OIG may impose other sanctions, such as  civil monetary penalties (CMP), against that health care provider. CMPs  are also imposed for other types of improper conduct, such as violations  of statutory prohibitions on \u201ckickbacks\u201d in connection with patient  referrals. The OIG also can assess CMPs against hospitals for \u201cpatient  dumping,\u201d that is, failing to provide appropriate treatment to patients  presenting a medical emergency. The amount of the CMP imposed is  related to each provider\u2019s specific violation. The OIG may also exclude  health care providers from participating in Medicare, Medicaid, and other  federal health programs if they have, for example, been convicted of a  criminal offense related to Medicare\u2014including health care fraud or  patient abuse and neglect\u2014or had their license suspended or revoked.  OCIG may also opt to negotiate corporate integrity agreements with health  care providers.\nAlthough the OIG focuses the majority of its attention on health care  programs, its activities extend to other areas as well. For example, the OIG  has made the detection, investigation, and prosecution of absent parents  who fail to pay court-ordered child support a priority. The OIG works with  other federal, state, and local agencies to expedite the collection of these  payments. Parents who repeatedly fail to honor such obligations are  subject to criminal prosecution. The OIG\u2019s recent activities with respect to  parents who have defaulted on their child support payments resulted in  152 convictions and more than $7 million in court-ordered criminal  restitution in fiscal year 2002.\n\n\tExamination of the Inspector General\u2019s Actions Regarding Independence and Judgment\n\nWe examined the independence that was reflected in the Inspector  General\u2019s decision-making during her tenure. In addition, we reviewed  personnel changes that she initiated and evaluated her judgment in several  instances. We interviewed appropriate staff, including the Inspector  General herself, and examined relevant documentation.\n\n\t\tThe Inspector General\u2019s Independence\n\nCurrent and former OIG headquarters employees frequently expressed  concerns about the Inspector General\u2019s independence. These concerns  centered on several incidents\u2014some of which were widely reported by  the media. Employees also identified other audits and investigations that  they felt may have suffered from inappropriate management intervention.  We concluded that the following four incidents involved actions on the  part of the Inspector General that at least contributed to the perception of  a lack of independence.\n\n\t\t\tFlorida Pension Audit\n\nIn the spring of 2002, the OIG was scheduled to begin an audit of the  Florida Retirement System. The objective was to evaluate whether the  state appropriately charged the federal government for the pension  expenses of state agency employees who help administer federal  programs. The auditors specifically wanted to determine whether funds  designated as federal contributions to the retirement system were used to  provide for pension expenses, and whether the federal contribution rates  were reasonable.\nThe OIG\u2019s first meeting to discuss this audit with Florida pension officials  was scheduled for April 16, 2002. The day before, the Chief of Staff to the  Florida governor placed an urgent call to the Office of the HHS Secretary,  requesting that the audit be delayed to accommodate the new pension  department director who was going to assume his position in a few weeks.  This call was ultimately referred to the Inspector General, who instructed  her Deputy for Audit Services to delay the audit for a few days. The  Inspector General subsequently ordered a second delay until July. Due to  subsequent scheduling problems affecting both OIG and Florida pension  staff, the audit team did not begin its work until September 2002.  Allegations made by OIG employees and the media suggested that the  federal government\u2019s contributions to the Florida retirement system could  be excessive and that a report on these contributions might affect the  outcome of the Florida governor\u2019s race that November.\nWhen asked about the incident, the Inspector General stated that she  agreed to temporarily postpone the audit until she could determine the  appropriate response to the request and did not have any involvement in  subsequent delays. She also insisted that audits are frequently delayed,  that her decision to delay the audit was not politically motivated, and that,  even if the audit had begun in April, it would not have been completed  before the election. She told us that, in hindsight, she could have handled  the situation differently by referring the request to the Deputy for Audit  Services, but she did not believe she acted inappropriately in these  circumstances.\nWe believe that the Inspector General did not appropriately investigate the  implications of her decision before agreeing to delay what ultimately  resulted in a report containing significant monetary findings. First, Florida  pension department officials could have known that a substantial  overpayment existed, and that a delay in the OIG\u2019s audit could have  benefited the state by changing the time frames used to calculate the  amount it owed. In fact, the draft report on the Florida pension audit  contains a finding that there were excessive federal contributions totaling  about $517 million, which the state will be required to return or offset  against the amount of future federal contributions to the retirement fund.  Second, given that the team was scheduled to begin its work in April 2002  and had estimated that the audit report would be drafted in 6 months, it is  conceivable that the report could have been available by election day, if  the audit had begun when originally planned. Finally, contrary to the  Inspector General\u2019s recollection, we found that she sent an e-mail message  to her Deputy for Audit Services in April 2002 instructing him to postpone  the audit until July 2002. The Inspector General acknowledged that,  although short delays in commencing audits are common, it was  admittedly unusual for a request for a delay to be directed to, and resolved  at, her level.\n\n\t\t\tYork Hospital\n\nIn February 2000, the OIG alleged that York Hospital\u2014located in York,  Pennsylvania\u2014had submitted improper claims for services provided to  Medicare beneficiaries. The OIG had notified the hospital that it planned  to impose a CMP and was engaged in negotiations with the hospital when  the Inspector General assumed office. The OIG attorneys had estimated  that York Hospital\u2019s potential liability was $726,000.\nSoon after taking office, the Inspector General received a letter from three  members of Congress encouraging her to settle the case quickly.  According to the former Chief Counsel, the Inspector General told him, \u201cI  hate this case; get rid of it.\u201d Feeling as though they had to move fast, OIG  attorneys lost the benefit of time\u2014which they explained is a key factor in  resolving a case in the government\u2019s favor\u2014and quickly settled the matter.  The former Chief Counsel also noted that the settlement amount of  $270,000 was far less than the attorneys believed the government could  have received had negotiations proceeded as they had planned.\nThe Inspector General indicated that she in no way directed a settlement  or personally involved herself in the York Hospital negotiations. She also  stated that if her OCIG staff perceived that they were under pressure to  settle the case quickly, they misinterpreted her instructions. She told us  that she simply wanted to settle this case in a timely manner.\nAlthough the Inspector General said she did not intend to pressure her  staff, the former Chief Counsel told us that he and those responsible for  negotiating with hospital officials clearly perceived a sense of urgency. He  also told us that her staff perceived that timing, rather than maximizing the  settlement amount, was her main concern. We believe that her staff acted  accordingly, possibly against the government\u2019s financial interest.\n\n\t\t\tLithotripsy Claims\n\nTwo medical societies representing providers of lithotripsy services  threatened to sue the Centers for Medicare & Medicaid Services (CMS)  over a regulation resulting in the denial of claims submitted for payment to  the Medicare program. The CMS regulation implemented statutory  restrictions on physician referrals to providers in which the physicians  have an ownership interest and included lithotripsy services within the  scope of these restrictions. The medical societies maintained that  Congress did not intend to include lithotripsy services within the scope of  the statute and intended to litigate this matter, if a settlement could not be  reached quickly.\nA partner in the law firm representing the two medical societies, who was  also a friend of the Inspector General, contacted her for assistance in  expediting this case. The Inspector General directed her former Chief  Counsel to contact the law firm and begin negotiating the matter, which  was under the jurisdiction of CMS and not the OIG. The former OIG Chief  Counsel was hesitant to intervene until the appropriate attorney  representing CMS in this matter could be consulted. Because CMS\u2019s  attorney was unavailable for about a week, the former Chief Counsel took  no action during this time. According to the former Chief Counsel, the  Inspector General admonished him severely when she discovered that he  had not followed her instructions to immediately contact the law firm.\nThe Inspector General asserted that her office had a legitimate role in this  matter. Although the issue was being disputed between the medical  societies representing the lithotripsy providers and CMS, the Inspector  General believed that her OCIG staff, which advised Congress on  physician referral matters, was in a unique position to resolve the issue.  She pointed out that she did not personally involve herself in the matter,  nor instruct her staff about how to resolve the issue. Instead, she stated  that her goal was to help resolve a matter in which her attorneys had vast  expertise.\nDespite the OIG\u2019s expertise in this matter, we agree with the former Chief  Counsel that it would have been inappropriate for the OIG to intervene by  contacting the law firm to initiate discussions, particularly in the absence  of CMS\u2019s attorney. If the Inspector General wanted OCIG\u2019s expertise to be  offered to CMS, it would have made sense for OCIG to contact CMS\u2019s  attorney before proceeding. CMS\u2019s attorney responsible for handling this  matter told us that she would have been troubled if the OIG had  commenced discussions without her agency\u2019s participation. Given the  Inspector General\u2019s personal relationship with the medical societies\u2019  attorney and the OIG\u2019s lack of jurisdiction in the matter, her actions  created the impression that she was more interested in helping a friend  than offering advice to CMS, which called her independence into question.\n\n\t\t\tAdjusted Community Rating Audit\n\nOn February 20, 2001, the OIG sent its draft report on adjusted community  rate proposals for Medicare+Choice organizations to CMS for comment.  This report was of potentially significant interest to congressional  committees, which were then considering the adequacy of payments in the  Medicare+Choice program. While OIG guidelines generally provide up to  45 days for audited entities to comment on its draft reports, the  publication of this report was delayed for 14 months while the OIG waited  for comments from CMS. Ultimately CMS agreed with the OIG\u2019s findings in  written comments on April 16, 2002.\nSome employees alleged that the delay in issuing this report reflected a  lack of independence on the Inspector General\u2019s part. They suggested that  the Inspector General should have taken a more active role in expediting  the report\u2019s issuance. They pointed out that the CMS Administrator  initially disagreed with the draft report\u2019s findings and hired a consultant to  validate the OIG\u2019s results. According to these employees, it took CMS  more than a year to replicate the OIG\u2019s work and determine that it agreed  with the report\u2019s findings. OIG employees told us that the Inspector  General tolerated this situation because she was unwilling to issue a  relatively controversial report without the benefit of CMS\u2019s agreement.  The delay in issuing this report diminished its usefulness because  congressional committees were focused on other concerns by the time the  report was finalized.\nThe Inspector General stated that she was only vaguely familiar with this  project but was certain that she did not direct her audit team to delay the  report\u2019s issuance. Although she recalled that the CMS Administrator  initially disagreed with the report\u2019s conclusions, she told us that she did  not remember the specific time frames associated with it.\nOur evidence shows that the Inspector General\u2019s staff tried to enlist her  assistance in expediting CMS\u2019s comments to no avail. By permitting CMS  to delay the report\u2019s publication, the Inspector General created the  appearance among her staff of being unduly influenced by CMS. In our  view, a time sensitive report of congressional interest should have, at the  very least, garnered more of the Inspector General\u2019s attention.\n\n\t\tThe Inspector General\u2019s Personnel Changes\n\nDuring the Inspector General\u2019s tenure, staff turnover among the OIG  senior headquarters staff has been considerable. Between September 2001  and November 2002, at least 20 OIG senior managers retired, resigned, or  were reassigned. Ten of these were Senior Executive Service employees,  most of whom had over 25 years of government service and had played an  important leadership role at the OIG for many years. The others were   GS-15 employees who were instrumental in carrying out specific office  functions. The Inspector General\u2019s representative characterized these  changes as voluntary and beneficial to the overall mission of the office.\nThe Inspector General told us that these changes were made to provide  senior managers with new insights into agency operations and to  capitalize on the fresh perspectives they could bring to their new jobs.  However, we found that the sudden and unexplained nature of many of the  Inspector General\u2019s actions resulted in a widespread perception of  unfairness among her staff. In addition, the promotion of a close advisor to  the Inspector General, to the position of Director of Public and  Congressional Affairs, raises a legal concern.\nWe found the circumstances surrounding the departures of eight senior  OIG managers to be particularly troubling. Four of these eight managers  who left the OIG or were detailed elsewhere were members of the Senior  Executive Service. One of the four took an early retirement after the  Inspector General proposed that the department assign him to a position  outside of his local commuting area with the assumption that he would  retire instead. Another retired after most of his responsibilities were  reassigned to another official or eliminated. A third resigned about 6  weeks after the Inspector General reassigned his job responsibilities and  directed that he not report to his office and instead spend his time seeking  new employment. Finally, one manager was detailed to a temporary  position within HHS and was also instructed not to return to his OIG  office. He is currently seeking new employment.\nThese four individuals told us that the Inspector General had not informed  them of specific deficiencies in their performance, given them any  opportunity to improve their performance, worked with them to find a  mutually satisfactory resolution to her concerns, or provided an adequate  rationale for her decisions to remove them from their positions. Moreover,  three of these managers told us that they were shocked with the urgency  she displayed when asking them to leave the OIG, and two perceived that a  single event ultimately led to the Inspector General\u2019s decision to remove  them. For example, in one instance, a senior manager linked his removal  to an incident in which a problem had to be resolved in the Inspector  General\u2019s absence. Although he successfully contacted her and proposed a  solution, she did not wish to address the matter until her return to the  office. He delayed taking action, as she directed. However, according to  this official, when the Inspector General returned, she was angry and  suggested that he had tried to pressure her into accepting his proposed  solution, essentially excluding her from the decision-making process.  Describing their departures from the OIG, these four individuals told us  that they felt they had no alternative but to leave their positions. Other  OIG staff also told us that these four changes\u2014all of which were initiated  by the Inspector General\u2014were involuntary.\nThe other four individuals whose departures were particularly troubling  were GS-15 level managers from OMP, OCIG, OI, and the Inspector  General\u2019s Immediate Office. One manager resigned after being reassigned  twice within 9 months. According to several OIG employees, the purpose  of this manager\u2019s second reassignment was to accommodate the Inspector  General\u2019s preference that this manager no longer work in the OIG  headquarters building. The Inspector General gave no explanation why she  wanted this individual to work in a remote location. A second was  reassigned to an interagency task force for an indefinite period after his  position was abolished. The Inspector General reportedly no longer  wanted him in the OIG headquarters building. The third individual was  temporarily reassigned to a position at another HHS agency and  subsequently resigned. He told us that his duties were curtailed following  a briefing of congressional staff in which he voiced an official OIG opinion  that conflicted with that of CMS. The fourth individual retired after being  reassigned from the Inspector General\u2019s Immediate Office to another  component. Some staff members perceived that the reassignment of this  individual resulted, in part, from her requesting\u2014without the Inspector  General\u2019s knowledge\u2014a gun safe to properly store a firearm that the  Inspector General had recently acquired. Like the reassignments at the  senior executive level, the Inspector General initiated these changes.\nSome of the employees we interviewed were skeptical that these changes  were necessary and asserted that they actually damaged the organization\u2019s  effectiveness. Specifically, they were concerned with the sheer number of  personnel moves made in a relatively brief period of time and that their  new component heads lacked experience in the areas that they were going  to lead. They also expressed concerns about the Inspector General\u2019s  motivations because they felt that the changes generally had not been  adequately explained to the employees involved. The abruptness of these  changes and the lack of any overall explanation for them heightened  employees\u2019 mistrust. Although some employees were supportive of the  Inspector General\u2019s organizational changes or felt unaffected by her  actions, comments made during our interviews and in our employee  survey highlighted the frustration many employees\u2014especially at  headquarters\u2014felt due to the perception of unfairness associated with  these personnel changes. We found that the magnitude and abruptness of  the Inspector General\u2019s actions raised fear and anxiety among her staff.\nWe asked the Inspector General about each of the individuals to obtain her  rationale in making these personnel decisions. The Inspector General told  us that she was concerned about the individuals\u2019 privacy and that she was  uncomfortable discussing the circumstances involving these managers  with us.\nFinally, we identified one matter giving rise to a legal concern. We  obtained information suggesting that a member of the OIG\u2019s staff may  have been preselected for a GS-15 position as the Director of Public and  Congressional Affairs. Specifically, as explained below, e-mail  communication by one of the Inspector General\u2019s closest advisors implies  that a decision had been made to promote this employee to the GS-15 level  prior to the initiation of a competitive selection process. Citing the  individual\u2019s outstanding performance as a GS-14 in the same office, the  Inspector General had directed the employee\u2019s supervisor to promote her  to a GS-15 at the earliest opportunity. Shortly thereafter, an advisor to the  Inspector General contacted the individual\u2019s supervisor and emphasized  that the Inspector General believed that it was important for the individual  to have a GS-15 in her current position. The advisor urged him to initiate  the promotion process so that the GS-15 would be effective on the date of  her eligibility for promotion, or soon thereafter. The advisor further  explained that the Inspector General had made a commitment when the  individual agreed to take the GS-14 position that she would be promoted  to a GS-15 one year later. In addition, the OIG included a \u201cselective  placement factor\u201d in the GS-15 position description, reportedly to favor the  employee. OIG staff told us that, although the GS-15 position was  advertised both inside and outside of the agency, there was a widespread  perception that the selection had already been made. This perception may  account for the fact that there was only one applicant for the position.  While the information we obtained raises concern about a possible  preselection, we have not conducted the type of formal, factual inquiry  that would ultimately be necessary to determine whether the Inspector  General\u2019s actions were unlawful.\n\n\t\tThe Inspector General\u2019s Judgment\n\nWe identified several matters that raised concerns about the adequacy of  the Inspector General\u2019s leadership. Some employees questioned the  Inspector General\u2019s judgment in regard to her possession of a firearm in  the office, as well as law enforcement credentials. Others raised concerns  about the manner in which she conducted her business travel. In addition,  several employees interpreted some of the Inspector General\u2019s actions as  demonstrating a lack of interest in key office operations.\n\n\t\t\tReport by the President\u2019s Council on Integrity and Efficiency\n\nIn the fall of 2002, the Integrity Committee of the President\u2019s Council on  Integrity and Efficiency (PCIE) received an allegation that the Inspector  General had improperly requested and obtained a firearm from her Deputy  Inspector General for Investigations. Subsequently, the Integrity  Committee received a second allegation that the Inspector General had  improperly obtained supervisory special agent law enforcement  credentials. After consulting with DOJ officials, who declined to pursue  these allegations, the Integrity Committee proceeded with its investigation.  The PCIE forwarded its report to the Deputy Secretary of HHS on April 4,  2003.\nThe PCIE found that the Inspector General had obtained a firearm from an  OIG special agent and maintained it in her Washington, D.C. office for a  short period of time. An OIG Memorandum of Understanding (MOU) with  DOJ and the Federal Bureau of Investigation set forth a process for  deputizing OIG special agents to allow them to carry firearms, make  arrests, and execute warrants when carrying out their law enforcement  functions. However, the PCIE found that the Inspector General had not  met the job classification and training requirements outlined in the MOU  and had not been deputized. In an interview with PCIE investigators, the  Inspector General stated that she believed that inspectors general were  statutorily authorized to possess firearms and that she had not reviewed  the MOU for deputation of OIG special agents.\nIn regard to the second allegation, the PCIE found that the Deputy  Inspector General for Investigations obtained supervisory special agent  credentials for the Inspector General because she did not want the  Inspector General to have any difficulty gaining access to secured areas in  the event of a terrorist incident. The Inspector General told PCIE  investigators that other inspectors general did not seem to know how to  handle the issue of access to secured areas in the event of a terrorist  attack, but she had never asked them if they had law enforcement  credentials. She also told investigators that she had the credentials in her  possession for a short time, and returned them to her Deputy for  Investigations to store in a safe. (Before the PCIE investigated this issue,  concerns about the ease with which OIG credentials could be obtained  came to our attention. We examined the internal controls for the  credentialing system and identified several weaknesses, which are  described in appendix II. OIG officials have since told us that they have  taken steps to correct these weaknesses.)\nThe PCIE report identified several criminal statutes as relevant to the  allegations, including provisions of federal and District of Columbia law  concerning the possession of firearms, which are applicable to those  working in federal buildings. At the conclusion of the investigation, DOJ  officials advised the PCIE that it declined to prosecute the Inspector  General for any possible violations of criminal statutes regarding the  possession of a firearm or law enforcement credentials. In addition, in the  letter to the Deputy Secretary of HHS accompanying its report, the PCIE  advised that the Inspector General\u2019s resignation mooted the need to take  any administrative actions against her. It also expressed deep concern  about the actions of some OIG employees who facilitated the Inspector  General\u2019s acquisition of these items.\n\n\t\t\tThe Inspector General\u2019s Travel\n\nAnother issue that persistently surfaced during our review was  perceptions of the propriety of the Inspector General\u2019s business travel. As  the head of a large organization with offices nationwide, the Inspector  General is entitled\u2014and expected\u2014to periodically visit these offices to  provide oversight, guidance, and support to her staff. In addition, the  Inspector General may engage in other business-related travel, such as  attending conferences and meeting with provider organizations and other  external groups. Inspectors general\u2014like other government employees\u2014 are not prohibited from planning personal travel in conjunction with their  business trips. However, we spoke with current and former inspectors  general from other federal agencies, and they told us that they generally  refrain from including personal travel with their business trips for fear of  raising suspicion about their motivation or integrity. While no one alleged  that the Inspector General violated travel regulations, some current and  former officials questioned her motivation for planning certain trips that  included a personal element, such as sightseeing activities\u2014sometimes  with two senior OIG managers.\nTo better understand the purpose of the Inspector General\u2019s travel, we  examined all of the documentation related to her trips, including travel  orders, vouchers, and detailed itineraries prepared by her office. We found  that during the first 4 months of the Inspector General\u2019s tenure she took  four trips outside of the Washington D.C. area. None of these trips  included a personal element or any companions. However, over the next  12 months, the Inspector General traveled eight more times and included  personal activities on half of these trips. In addition, she invited one or two  senior managers to accompany her on six of these eight trips.\nThree of the Inspector General\u2019s trips in particular raised concerns, arising  from a perception that this travel was motivated by other than official  duties. In some of these cases, large blocks of time could not always be  accounted for. For example, the Inspector General took one trip to San  Francisco and Phoenix that spanned 8 days and included 2 days of  personal time on a weekend. In examining the business portion of this trip,  we were only able to determine that the Inspector General made two half- hour speeches and traveled between these cities and Washington, D.C.  Further, in some cases, personal activities\u2014sometimes involving the  participation of the two senior managers\u2014were included. While we did  not validate the managers\u2019 activities on these trips beyond their own  assertions, we believe that it is appropriate for the Inspector General to  ask managers to accompany her as needed on business-related travel.  However, including her colleagues in her personal activities during travel  contributed to a perception that the business reasons for these trips were  pretexts and that the trips were planned solely for nonbusiness purposes.\nIn responding to our inquiries regarding the Inspector General\u2019s travel, she  indicated that all of her trips were made for legitimate business purposes.  She also told us that she was not concerned with any perceptions OIG  employees may have had about her travel. Finally, in a written response to  our inquiry regarding approximately 3 days of unaccounted time during  her San Francisco and Phoenix trip, she indicated that she spent her time  performing office work and preparing for one of her two speeches. She  offered no other elaboration on her business activity.\n\n\t\t\tThe Inspector General\u2019s Leadership in Resolving Budgetary Problems\n\nDuring our study, the Deputy Inspectors General were grappling with a  major budgetary shortfall due to aggressive hiring in fiscal year 2002,  lower than expected attrition throughout the OIG, and uncertain funding  levels for fiscal year 2003 that had yet to be resolved. Senior OIG officials  told us that they were concerned that, without a quick solution, they might  ultimately violate the Antideficiency Act. In February 2003, the Deputy  Inspectors General were developing various proposals to react to their  forecasted budget shortfall. The deputies had severely limited travel,  training, and other human resource activities in their components. In  addition, they were reallocating staff positions to accommodate the  budget\u2014regardless of where the positions were actually needed. Positions  that became vacant through attrition were transferred to the overstaffed  components. By gaining the vacant positions, the overstaffed components  were able to reduce the number of staff considered to be in excess in their  units.\nSome of the deputies expressed strong resentment about the chaos this  situation caused within their components. For example, a relatively small  component that lost a key member of one of its functional teams could not  replace that individual, and instead had to continue to meet mission goals  with one fewer supervisor. Other component heads explained that the lack  of funds to perform routine duties in the field affected morale and could  impact long-term productivity.\nThis situation could have been avoided if OIG leadership had developed a  human resource hiring and development plan that contained realistic  budget projections and hiring goals that all deputies would have to follow.  Historically, the Inspector General\u2019s Principal Deputy was responsible for  ensuring that component heads worked together to carry out such a plan,  but the Principal Deputy position had been vacant for months. As a result,  component heads we spoke with felt that they did not have the authority  to fill the leadership void that developed in this instance, and relied on the  Inspector General to impose whatever fiscal constraints were necessary to  establish an equitable budget allocation among the components. While the  Inspector General expressed concern about funding issues, she did not  take aggressive steps to remedy the situation. Although the deputies  ultimately resolved their financial situation, at the time of her resignation,  the component heads were still struggling among themselves with these  budgetary challenges.\n\n\tEvaluation of OIG Productivity\n\nThe OIG conducts a variety of activities that aim to improve program  operations, identify and recover overpayments, and investigate and  sanction those who violate statutes and regulations governing HHS  programs. Evaluating the effect of the Inspector General\u2019s recent actions  on productivity is difficult to assess in the short term. For example, in  addition to the decisions she made and the personnel moves she initiated,  a variety of other factors contribute to productivity. Two factors make it  impossible to reach an overall conclusion about OIG productivity for any  limited period of time. First, fluctuations in performance are to be  expected in any given year, given the multitude of the OIG\u2019s activities.  Second, it is difficult to compare performance from one year to the next  because the results in one period are heavily dependent on work in the  pipeline that was initiated in prior years. For example, it could take 2 or 3  years from the time a project is initiated until a recommendation is made  and subsequently implemented; investigating potential criminal activity  and prosecuting the individuals involved could take even longer. Many of  the OIG\u2019s productivity measures remain comparable to prior years or  showed increases, but we found that several other key indicators of  performance have declined since the Inspector General took office.\n\n\t\tSavings, OAS Reports, and Convictions\n\nWe analyzed a wide variety of performance measures to evaluate the OIG\u2019s  effectiveness and found that many of these measures indicated that the  OIG may be performing well, as table 1 shows. For example, in its  semiannual reports covering fiscal year 2002, the OIG identified almost $22  billion in savings attributable to its work. The OIG consistently reported  increases in these savings since fiscal year 1997. In addition, the number of  OAS reports published has increased each year since fiscal year 2000.  Also, the number of convictions resulting from the OIG\u2019s investigative  referrals has steadily increased over the last 6 years.\nOI officials, who told us that the number of convictions is an important  measure of their success, also said that they appear to be on target in  achieving even more convictions in fiscal year 2003. At the midpoint of the  current fiscal year\u2014March 31, 2003\u2014the OIG reported 320 convictions.\nAlthough it is difficult to measure the \u201csentinel\u201d effect of some of the OIG\u2019s  activities, it has taken steps to encourage lawful and ethical conduct by  the health care industry, which we believe should be acknowledged. For  example, in recent years the OIG has actively worked with the private  sector to develop compliance guidance to prevent the submission of  improper claims and to discourage inappropriate conduct by providers. In  March 2003, the OIG issued compliance guidance for ambulance suppliers.  This was followed by the publication of compliance guidance for  pharmaceutical manufacturers in April 2003.\n\n\t\tExclusions from Medicare\n\nLike convictions, the number of providers excluded from the Medicare  program is a strong indicator of OI effectiveness. Although the number of  exclusions imposed declined in fiscal year 2002, reversing a trend of  increases since fiscal year 1999, we were unable to determine whether this  decline reflects diminishing productivity. The OIG Chief Counsel  explained that, in 2002, the Department of Education became responsible  for processing most of the exclusions of health care providers who had  defaulted on the repayment of their federally funded student loans. The  Chief Counsel told us that in 2001, when the OIG still had this  responsibility, it excluded 518 providers who had defaulted on these loans.  In 2002\u2014the transition year\u2014the number of such providers excluded by  the OIG dropped to 166. Table 2 shows the OIG\u2019s exclusions imposed since  fiscal year 1997.\n\n\t\tSettlements, Recoveries, CMPs, and CIAs\n\nWe found declines in the use of sanctions available to the OIG. For  example, we noted reductions in the number of settlements and recovery  amounts that result from the OIG\u2019s False Claims Act referrals to DOJ.  Similarly, there were declines in the number of CMPs and CIAs recently  imposed. Table 3 shows that both the number of settlements and amount  of recoveries declined significantly in fiscal year 2002, compared to fiscal  years 2000 and 2001.\nOIG officials told us that its False Claims Act cases are strongly tied to  DOJ\u2019s efforts to combat health care fraud, which have had to compete  with investigative resources dedicated to the September 11, 2001, terrorist  attacks. In addition, DOJ has reduced the number of its national health  care antifraud initiatives in recent years as well as the number of  individual cases that it pursues under the auspices of each initiative. OIG  officials also attribute this decline to its increasing emphasis on program  compliance, which the OIG believes has had a sentinel effect on providers.  Although the number of False Claims Act settlements and recoveries have  declined, DOJ officials and the Medicaid Fraud Control Unit  representatives we spoke to told us that they were pleased with the quality  of the support they received from the OIG in pursuing abusive or  fraudulent providers. However, several of these officials were concerned  that the OIG could not devote more resources to assist them in their  investigations.\nAnother important indicator of OIG productivity is the imposition of  CMPs. As shown in table 4, the number of these cases had a marked  decline since fiscal year 2000.\nIn explaining the declining number of CMPs imposed, OIG officials offered  two explanations. First, they told us that the increase in convictions may  account for the decline in CMPs, which are typically imposed when more  stringent penalties cannot be used. Because convictions have recently  increased, there would be fewer opportunities to impose CMPs. Second,  officials suggested that the office\u2019s previous aggressiveness in pursuing  patient dumping cases\u2014which generally made up between 65 and 90  percent of all CMPs imposed each year\u2014has been a strong deterrent. The  officials also emphasized that patient dumping cases have proven to be  resource intensive. As a result, the OIG can only afford to pursue the most  egregious cases.\nCIAs, typically negotiated in conjunction with False Claims Act  settlements, are also an indicator of the OIG\u2019s productivity. CIAs consist of  \u201cintegrity provisions\u201d that are intended to ensure that a provider\u2019s future  transactions with Medicare and other federal health care programs are  proper and valid. Such provisions include implementing an OIG-approved  compliance program, use of an independent review organization to  annually review provider billings, and other periodic monitoring and  reporting requirements. Providers accept the imposition of the CIAs and,  in turn, OCIG agrees not to seek additional administrative sanctions. As  table 5 shows, the number of active CIAs, as well as the number of newly  negotiated CIAs, has declined since 2001.\nOCIG officials attributed the most recent decline to several factors. First,  the number of civil False Claims Act settlements declined between 2001  and 2002, resulting in fewer providers with whom to negotiate CIAs.  Second, in fiscal year 2002, OCIG began implementing the Inspector  General\u2019s November 20, 2001, \u201cOpen Letter to Health Care Providers\u201d  regarding CIAs. CIAs had long been a concern of providers because of the  costs associated with implementing the specified integrity provisions\u2014 such as retaining an independent review organization each year to review  a statistically valid sample of billings. The November open letter  announced that the OIG\u2019s policies and practices regarding CIAs were  being modified in response to those concerns.\nThe letter noted, in part, that the OIG would no longer seek to negotiate  CIAs with every provider settling a False Claims Act case with the  government. In some situations, corporate compliance matters would be  negotiated separately, after settlement of the False Claims Act case. The  letter also indicated that the OIG would consider increasing its reliance on  providers\u2019 internal audit capabilities. For example, some providers may  not be required to retain an independent review organization. Similarly,  not all billing reviews would be subject to statistically valid random  sampling. Instead, these providers would be able to self-certify compliance  based on the error rate indicated by reviewing an initial sample of their  billings. Further, the new approach to CIAs could also be applied to  previously negotiated CIAs. As a result, in fiscal year 2002, OCIG  renegotiated 94 existing CIAs associated with False Claims Act  settlements. The revised CIAs contained \u201ccertification agreements,\u201d  permitting providers to self-certify their compliance with the specific  provisions contained in their agreements, instead of retaining an external  review organization for this verification.\n\n\t\tOutreach and Education Activities\n\nWe also found that there has been a considerable drop in the testimonies  and outreach and education activities performed by OIG employees. Prior  to the current Inspector General\u2019s tenure, the OIG frequently provided  assistance to congressional staff developing legislative proposals related  to HHS programs, offered informal advice about program oversight, and  testified at congressional hearings. In addition, OIG employees routinely  presented the results of their work at conferences, meetings, and in other  educational forums. However, as shown in table 6, the number of  testimonies and speeches and other presentations by OIG employees  revealed a significant decline in the assistance provided during the last  fiscal year\u2014especially among OCIG employees.\nWe spoke with several congressional staff working for committees with  jurisdiction over HHS programs who told us that they were not satisfied  with the level of support they were currently receiving from the OIG.  While formal requests for assistance were fulfilled, congressional staff  indicated that OIG employees no longer discussed issues with them  informally, as they had in the past. In our interviews, primarily at  headquarters, several OIG employees recognized that they were no longer  providing what congressional staff members considered to be a valuable  service and what they considered to be a meaningful part of their work.\nOIG officials emphasized that their responsiveness to Congress is still an  extremely high priority. They explained that the Inspector General  instituted a more centralized approach to providing assistance to  congressional staff and other external groups than had her predecessors in  an attempt to ensure the quality and appropriateness of the assistance  provided. In response to the declining number of testimonies, OIG senior  officials told us that they are very willing to appear at congressional  hearings when they have relevant material to present. However, they  explained that the Inspector General does not consider the number of  testimonies to be a relevant performance measure.\nIn regard to speeches and other presentations, the decline was partly due  to a policy change in the spring of 2002 that moved approval authority for  these activities from the individual component heads to the Director of  Public and Congressional Affairs. A lack of travel funds for collateral  activities in the first half of the fiscal year also limited OIG\u2019s staff  participation in discretionary events. According to this Director, because  she could not approve all of the requests, she considered the nature and  size of the audience, in addition to the cost of the trip, in deciding whether  approval would be granted.\n\n\t\tOEI Reports\n\nA number of employees of OEI told us that they have been frustrated with  the cancelation of projects since the Inspector General took office.  According to these individuals, many projects were well under way at the  time of their termination. Although OEI managers could not tell us how  many projects have been canceled under the current Inspector General\u2019s  tenure, they could tell us how many of the OEI projects begun in fiscal  years 2000, 2001, and 2002 were subsequently canceled. As table 7 shows,  27 reports, or about 26 percent of reports started in 2002, were canceled  by the end of February 2003. According to OEI management, although  some projects have been canceled, the work performed on these projects  has been used by OEI teams involved in related OEI projects.\nWe followed up on several projects that recently had been canceled to  better understand management\u2019s rationale for doing so. Staff members  brought these projects to our attention during the course of our work. In  one instance, a project was canceled 7 months after the team had  conducted the exit conference with the agency. More than 4,000 staff  hours had been expended on this project, which included three full-time  and one part-time staff and a paid intern. The Deputy Inspector General  ultimately told the team that the report lacked sufficient evidence and  would not be presented to the Inspector General for signature. Although  the team subsequently prepared two memoranda as substitutes for the  report, no product was ever issued\u2014despite interest from the provider  community and relevant agency.\nWe have learned that OEI projects continue to be canceled. For example,  in March 2003 the Inspector General took the unusual step of recalling a  draft report, which had been sent to the relevant agency for comment in  February 2003. Both the Deputy Inspector General for OEI and the  Inspector General approved this draft. Also in March 2003, a related  project, which had begun in fiscal year 2002, was canceled as the OEI team  prepared for an exit conference with the agency it had evaluated. OEI  management decided to combine the results of both projects into a single  report. Although the OEI staff involved with these projects contend that  they briefed management several times over the course of these  assignments, the Deputy Inspector General for OEI explained that he  made this decision once he realized there were inconsistencies between  the two projects that needed to be reconciled. As of late April 2003, no  report had been published.\nIn conversations with the Inspector General and the Deputy for OEI, we  learned that they had been particularly concerned with the  appropriateness of criteria used by OEI staff in evaluations. They told us  that they were uncomfortable with the policy-oriented work that OEI had  done and were taking actions in the pipeline of OEI reports to address  what they viewed as shortcomings in the accuracy and sufficiency of  evidence in OEI products. The Deputy for OEI also explained that they  were providing training to all OEI staff on evidence standards with the  hope of improving the quality of future projects. OEI managers and staff  that we spoke to expressed surprise and frustration at these concerns and  pointed out that in the past, OEI had been recognized and praised by  Congress, the public, and the press for its high-quality evaluation work.\n\n\tMeasure of Employee Morale\n\nBased on our survey and extensive interviews, we found in the aggregate  that employee views about the organization, management, and their  personal job satisfaction remained positive and relatively unchanged  between 2002 and 2003. However, we identified several groups of  employees whose morale was of concern, namely, employees working at  headquarters, those at the highest levels of management, and staff working  in two OIG components. Our analysis of open-ended survey comments  also revealed areas of dissatisfaction that were not fully captured by other  items on our survey.\nOur survey and interviews found, in the aggregate, a high level of  satisfaction among OIG employees. Overall, positive responses to survey  items in both 2002 and 2003 averaged over 80 percent and no item  responses changed more than 5 percentage points between the 2 years.  Positive responses were especially prevalent both years for statements  such as \u201cAll things considered, my component is a good place to work\u201d (89  percent and 87 percent, respectively) and \u201cI believe that my work is  important to the success of the component\u201d (94 percent and 93 percent,  respectively). Similarly, our interviews revealed an overall high level of job  satisfaction, typified by comments such as \u201cI believe my work makes a  difference.\u201d Staff repeatedly cited their close relationships with their  immediate work groups and their involvement on important issues as  reasons for their job satisfaction. We also identified some examples of  improvement. For instance, in both the survey and interviews, OI  employees indicated there had been an increase in communication with  upper management in their component over the last year.\nWe found that positive responses to most survey items were lower for  headquarters employees than for field staff. For example, we found that  there was a marked difference in positive responses\u201410 percentage  points\u2014to the statement that \u201cEveryone is treated with respect.\u201d We also  found a 14 percentage point difference in positive responses to the  statement, \u201cI have confidence and trust in my organization.\u201d This pattern  of more positive responses from the field was consistent with statements  made during our interviews. Whereas many headquarters staff expressed  concern about the Inspector General\u2019s actions, most field employees told  us that they felt insulated from, and largely unaffected by, the personnel  and other changes that occurred in headquarters.\nIn addition, our survey indicated that senior management staff\u2014 specifically members of the Senior Executive Service and GS-15  employees\u2014were considerably more concerned than all other employees  about OIG leadership. While 88 percent of employees at the GS-14 and  lower levels agreed with the statement, \u201cAs an organization, the OIG has  clear goals,\u201d only 67 percent of the senior management staff\u2014those at the  GS-15 level and members of the Senior Executive Service\u2014responded  positively to that statement. Further, about 70 percent of the employees at  the GS-14 level and lower levels indicated that they had confidence and  trust in the organization. On the other hand, only 56 percent of senior  managers agreed with that statement. In our interviews, some senior  management staff were extremely clear about, and supportive of, the  Inspector General\u2019s goals, but others expressed confusion about the  Inspector General\u2019s priorities for their components. Many in senior  management were disquieted by the decisions that resulted in some of  their colleagues retiring, resigning, or being reassigned during 2002. These  managers explained that they were uncomfortable because they did not  fully understand the motivations behind the Inspector General\u2019s actions.\nOur survey revealed a substantial deterioration in OEI employees\u2019 views of  the organization, management, and their personal job satisfaction. For  example, a statement focusing on whether \u201cupper management clearly  communicates the goals of my component,\u201d elicited an almost 50  percentage point drop in positive responses between January 2002 and  February 2003 (compared to a 1 percentage point decrease in the  aggregate). Similarly, there was a 34 percentage point drop in positive  responses to the statement about being \u201cfully informed about major issues  affecting my job\u201d (compared to a 5 percentage point drop overall). Finally,  about 62 percent of OEI employees indicated a lack of trust and  confidence in their organization (compared to 30 percent overall).\nThe decline in the overall climate in OEI can be linked to a number of  changes that profoundly affected the staff in that component. OEI staff  told us that they were negatively affected by the abrupt departure of the  Deputy Inspector General, decreased communications from headquarters  management, changes and delays in the report review process, canceled  projects, and a narrowing of the scope of their work. In addition, OEI staff  explained that they have been disappointed by a decrease in the number of  their assignments that has resulted in what are considered to be \u201chigh- profile\u201d products\u2014those signed by the Inspector General, those issued as  standard blue-cover reports, and those placed on the OIG\u2019s Web site.\nOur employee survey also identified a distinct decline in positive  responses to survey items among OCIG employees\u2014almost all of whom  work in headquarters. Of particular concern were answers to survey  statements addressing the adequacy of communication and job  satisfaction. For example, compared with 2002 survey results, there was a  22 percentage point drop in positive responses to the statement about  being kept fully informed about major job issues. OCIG employees also  reported a 16 percentage point drop in positive responses to the item \u201cI am  satisfied with my job\u201d and a 12 percentage point drop in their opinion that  \u201ceveryone is treated with respect,\u201d compared with last year\u2019s survey. Our  results also showed that 54 percent of OCIG employees lack trust and  confidence in their organization. The decline in the views of OCIG staff  can, in part, be attributed to changes implemented by the Inspector  General, and the atmosphere of anxiety and distrust that her actions  created. OCIG employees expressed concern about the circumstances  under which the former Chief Counsel and other senior managers left the  OIG. In addition, we were told that the curtailment of education and  outreach activities and contact with congressional committee staff had an  adverse effect on OCIG employee morale.\nFinally, we analyzed the written comments that some employees opted to  write in the comment box provided on our survey. In total, 578 of the 1,451  survey respondents (40 percent) elected to write comments, which  allowed them to express opinions about issues that were not covered in  detail in our other survey items. Our analysis of these comments showed  that the majority were negative in tone (75 percent). Overall, the most  frequently mentioned categories were: morale (82 percent negative),  recent changes in headquarters management (61 percent negative),  sufficiency of training or equipment (85 percent negative), and quality of  headquarters management (80 percent negative). The demographic  characteristics of those who wrote comments were generally similar to the  overall sample of respondents, although those planning to leave the OIG in  the next 5 years and OEI staff were more likely to provide comments than  other survey respondents.\n\n\tAgency Comments and Our Evaluation\n\nWe met with officials from the OIG and the Office of the HHS Secretary  and briefed them on our findings. We also provided them with a copy of  our draft report. In written comments on a draft of this report, the  Inspector General disagreed with some of our findings and  characterizations of certain events. The Office of the Secretary did not  provide comments.\nIn reference to our discussion about the OIG\u2019s productivity, the Inspector  General stated that the OIG had achieved substantial accomplishments  under her leadership and direction and cited the savings attributable to its  work in fiscal year 2002. In addition, she highlighted some of the OIG\u2019s  nonmonetary achievements during her tenure. As we noted in our draft  report, many of the OIG\u2019s productivity measures have remained steady or  improved, including those cited in the Inspector General\u2019s letter. However,  we also pointed out that making a conclusive determination regarding  productivity in the short term is extremely difficult because current  savings are often the result of efforts started in prior years. Our draft also  identified declines in other important areas, such as settlements and  recoveries.\nIn addressing our findings related to employee morale, the Inspector  General pointed out that our survey of OIG employees showed that  employee morale remained positive and relatively unchanged during her  tenure. However, our survey also identified several groups of employees  whose morale was of concern. For example, senior managers were  considerably more disturbed than all other employees about OIG  leadership. Further, headquarters employees expressed less satisfaction  with the organization and leadership than their counterparts in the field.  While the majority of OIG staff are located in field offices and generally  were more satisfied with their work environment than headquarters  employees, they also felt less affected by the changes instituted by the  Inspector General than their colleagues in headquarters. A striking  exception to field office employee satisfaction, as discussed in our draft,  was staff in OEI, whose dissatisfaction increased substantially compared  to last year.\nThe Inspector General also took issue with our discussion of the  circumstances surrounding the delay in beginning the Florida pension  audit. We included this example of her decision-making in our draft  because we believe that it demonstrated a lack of awareness and  appreciation of the need for the Inspector General to closely safeguard her  independence. We believe it is imperative that an inspector general  perform due diligence when responding to external requests\u2014particularly  where independence could be questioned. We continue to believe that the  Inspector General\u2019s decision to intervene at the request of senior officials  in the Florida governor\u2019s office and her subsequent instructions to her  staff to delay the audit created a perception that her independence was  compromised. The Inspector General did not address the issue of her  independence in her comments. Instead, she disagreed with our  suggestion that the OIG\u2019s report could have been available prior to the  November 2002 election, if the audit had begun 7 months earlier, in April  2002, as initially planned. While we cannot be certain that the final report  would have been issued by the election, we believe that it is likely that the  findings would have been made public\u2014particularly since the actual  findings of the audit were reported by the media in March 2003, 6 months  after the work commenced.\nRegarding the York Hospital matter, the Inspector General stated that she  discussed her concerns about the proposed settlement with her staff and  that she believed that seeking a larger settlement was not fair or  justifiable. However, during the course of our work, the Inspector General  told us that she did not direct a settlement or involve herself in  negotiations with the hospital. In any case, we believe that the Inspector  General\u2019s actions in response to a letter from several members of  Congress contributed to the perception that she was not independent. The  Inspector General stated in her comments that she discussed this matter  with her attorneys and determined the OIG\u2019s case was weak. However, the  former Chief Counsel and other OCIG attorneys told us that when she  instructed them to \u201cget rid of\u201d the case, she did not address the specific  facts or sufficiency of the evidence collected in this matter. Further, the  former OIG Chief Counsel did not share the Inspector General\u2019s belief that  this was a weak case, and told us that he believed the government could  have obtained a higher settlement, absent any pressure to close the case  quickly.\nConcerning the OIG\u2019s delayed report on the adjusted community rate  proposals, the Inspector General pointed out that the report was already  delayed 7 months by the time she took office. While we acknowledge this  fact, in our view, the already lengthy delay should have prompted her to  take more aggressive action to either obtain CMS\u2019s comments or publish  the OIG\u2019s report without them. Although the Inspector General stated that  she relied on the advice of her senior staff in delaying the issuance of this  report, our evidence indicates that some of her senior managers were very  concerned that she took little action to expedite CMS\u2019s comments. The  Inspector General indicated that she spoke to the CMS administrator  regarding this matter, but she did not indicate when this discussion  occurred or how CMS responded. However, the Inspector General did not  indicate\u2014nor did we find any evidence to suggest\u2014that she took more  rigorous steps to obtain CMS\u2019s comments, such as imposing a deadline for  the publication of the report, regardless of the status of the comments. The  Inspector General also stressed that the delay in publishing the OIG\u2019s  report had nothing to do with her independence. However, the fact that  CMS strenuously objected to the OIG\u2019s findings, and that CMS was allowed  to delay its comments for over a year, in our view, at least contributed to  the perception that the Inspector General was not independent. In  addition, the Inspector General disputed our statement that this report  was a time sensitive one of congressional interest. We disagree. During the  summer and fall of 2001, Medicare+Choice legislative proposals were  developed in both the House and Senate. Also congressional hearings were  held on the status of the Medicare+Choice progam, which included the  issue of adjusted community ratings.\nRegarding our assessment of personnel changes in the OIG, the Inspector  General stated that her actions were appropriate and that the nature of the  Senior Executive Service encourages rotations among staff. While we do  not dispute the Inspector General\u2019s authority to reassign staff to meet  office needs, the manner in which she made these changes clearly created  an atmosphere of anxiety in the OIG. The Inspector General stated that  she explained the rationale for her decisions \u201cover and over again.\u201d  However, our discussions with staff members revealed that they did not  understand why many of the changes had been made. Moreover, most of  the eight senior managers whose departures we found particularly  troubling told us that the Inspector General never explained to them why  she wanted them to leave their positions. The Inspector General also  commented that our employee survey suggested that there were no  widespread negative perceptions among staff concerning her personnel  decisions. We disagree with this observation because our survey did not  contain a question related to her personnel changes. Instead, our survey  focused on employee satisfaction within their immediate work groups\u2014 most of which are in the field where the consequences of the Inspector  General\u2019s changes were least felt. The Inspector General noted that most  of the individuals who left the OIG following her changes were in new  positions that were \u201cat least equal to or better than\u201d the ones they  occupied at the OIG and that she always promoted from within the  organization. We do not think that the current employment situations of  these former staff members are relevant to the Inspector General\u2019s  personnel decisions, nor is her practice of promoting other employees  from within the organization.\nIn our draft report, we also discussed the OIG\u2019s budgetary difficulties. In  her comments, the Inspector General described her efforts to respond to  this situation, which primarily consisted of directing one of her senior  managers\u2014who was in an acting deputy position\u2014to develop strategies  for resolving the OIG\u2019s financial problems and to work with other senior  OIG managers to develop a spending plan. While we would fully expect  that the Inspector General would want to call on her management team to  confront the agency\u2019s budgetary problems, our concern was that she  personally played only a minor role in resolving this matter, particularly in  the absence of a Principal Deputy. Given the Inspector General\u2019s limited  personal involvement, the OIG\u2019s senior management team lacked a leader  with sufficient authority to mediate any disagreements between them and  to take aggressive steps to identify appropriate solutions to the  organization\u2019s fiscal challenges.\nFinally, the Inspector General\u2019s comments pointed out that OI had taken  steps to correct the deficiencies we noted in its credentialing system. We  acknowledged that corrective action has been initiated and this was  reflected in our draft report.\nWe have reprinted the Inspector General\u2019s letter in appendix III.\nWe are sending copies of this report to the Secretary of HHS, the HHS  Acting Principal Deputy Inspector General, the former Inspector General,  and other interested parties. We will also make copies available to others  upon request. In addition, this report will be available at no charge on  GAO\u2019s Web site at http:\/\/www.gao.gov. We will also make copies available  to others upon request.\nIf you or your staffs have any questions about this report, please call me at  (202) 512-7114. Additional GAO contacts and other staff members who  made key contributions to this report are listed in appendix IV.\n\nAppendix I: Scope and Methodology\n\nTo conduct our review, we focused on three key areas\u2014the leadership  exhibited by the current Inspector General, Janet Rehnquist, the  productivity of the Office of Inspector General (OIG) in recent years, and  employee morale. To do our work, we became familiar with the  organization and structure of the OIG and many of its policies and  procedures related to its budgeting, work planning, and report processing  activities. We also examined its personnel practices and controls over  certain OIG operations. As part of our efforts, we interviewed over 200  current and former OIG employees\u2014including the Inspector General\u2014and  conducted a Web-based survey of all employees to obtain their views  about their work environment. We also interviewed two current and one  former inspectors general from other federal agencies to better  understand their unique role and the principles they embraced to manage  their offices.\nOur review included the examination of more than 8,000 pages of  documents, including material related to the OIG\u2019s general policies and  procedures, human resource management, productivity measures, and  reporting standards. Many of these documents were given to us by OIG  managers and other employees. In addition, we requested\u2014and were  given access to\u2014the e-mail accounts of eight senior OIG managers. This  enabled us to retrieve selected messages that these individuals sent or  received for approximately a 6-month period on a wide variety of topics  affecting the management of the office. We also obtained documentation  from other organizations, including the President\u2019s Council on Integrity  and Efficiency (PCIE), which recently issued a report on some of the  Inspector General\u2019s actions.\n\n\tInterviews with Current and Former Employees\n\nTo obtain the views of OIG employees, we conducted a series of  semistructured interviews. These interviews relied on open-ended  questions regarding the Inspector General\u2019s leadership, productivity,  morale, and other OIG operations. We interviewed three categories of  employees\u2014those who were selected randomly, those who volunteered  for interviews, and those we selected because of their knowledge or  position within the OIG.\nThe randomly selected staff were chosen for interviews from five of the  OIG\u2019s eight regional offices as well as employees in OIG headquarters. This  provided us with a broad geographic representation of OIG employees.  Our regional interviews were conducted in Atlanta, Boston, Chicago,  Dallas, and San Francisco. In order to afford confidentiality to  interviewees, we conducted our regional interviews in GAO offices in  those cities or in other non-OIG space. Some regional interviews were also  conducted by telephone. Headquarters staff were given the option of being  interviewed in either the OIG headquarters or GAO headquarters building.\nAt each of the five regional offices we visited, we interviewed  approximately 20 randomly selected employees who ranged from the GS-7  through the GS-15 levels. One hundred and six randomly selected regional  staff members were interviewed in total. Interviewees were selected using  a stratified, random sampling technique. Employees from the Office of  Audit Services (OAS), the Office of Investigations (OI), and the Office of  Evaluation and Inspections (OEI) were included in our random interviews  at each regional location. We also interviewed 32 randomly selected staff  from the OIG\u2019s headquarters in Washington, D.C. and in nearby field  offices, including those in Baltimore, Columbia, and Rockville, Maryland.\nTo supplement our random interviews and to enhance identification of  issues of concern to all OIG employees, regardless of their location, we  invited all employees, through an OIG officewide e-mail, to contact us if  they wished to participate in an interview. We received 28 requests for  interviews and conducted many of these by telephone. We generally used  the same set of questions that were posed during the random interviews.\nIn both the random interviews and in discussions with those employees  who requested to be interviewed, we asked individuals to bring to our  attention any topic that they felt was noteworthy but which our questions  did not address. Some interviewees provided us with supporting  documentation that they felt was relevant. In some instances, interviewees  were reluctant to provide us with documentary evidence and were also  concerned about confidentiality. In these situations, we attempted to  corroborate the information they shared with us through other means,  without jeopardizing their confidentiality.\nAs our work progressed, we identified a number of individuals whom we  believed would be able to supply us with important information in areas  we had identified as potential areas of concern, including the  independence of the Inspector General, turnover among senior OIG  personnel, and changes in productivity and morale. In total, we  interviewed 44 such individuals, many of whom were current or former  OIG employees with first-hand knowledge about issues central to our  review.\n\n\tEvaluation of the Inspector General\u2019s Independence\n\nTo determine the extent to which policies and procedures were in place to  ensure that all OIG employees maintained a high degree of independence,  we reviewed existing OIG policies, procedures, and protocols. We also  reviewed guidance issued to the Inspector General community by the  PCIE and the Government Auditing Standards pertaining to independence.  We also discussed the OIG\u2019s protocols for responding to requests for  information or assistance from external entities with selected current and  former senior-level OIG officials. In addition, we obtained information  regarding specific instances concerning the Inspector General\u2019s  independence from interviews with current and former OIG officials as  well as the Inspector General.\n\n\tReview of Personnel Information\n\nTo evaluate recent personnel changes among OIG officials, we examined  detailed personnel information for 24 current or former OIG employees  who had resigned, retired, been reassigned, or promoted during the  Inspector General\u2019s tenure. We reviewed the official personnel files for  these individuals and collected relevant information including their history  of government service; time employed by the OIG; and any awards,  bonuses, and letters of commendation that they had received. We also  reviewed the performance appraisals these individuals had received for  the prior 3 years.\nFinally, we reviewed documentation specifically concerning the  promotion of an OIG staff member to the position of Director of Public  and Congressional Affairs. Among other things, we examined relevant  position descriptions, job announcements, and e-mail communications.\nWe also interviewed OIG officials regarding this and other personnel  decisions made during the Inspector General\u2019s tenure.\n\n\tExamination of the Inspector General\u2019s Travel\n\nTo understand the purpose, frequency, and duration of the Inspector  General\u2019s travel, we examined the itineraries, travel orders, and travel  vouchers for all of the trips she had taken from August 2001 through  November 2002. For trips for which the itineraries lacked sufficient  information about the Inspector General\u2019s business activities, we  requested additional information and discussed these trips with the  Inspector General. We also identified all OIG employees that accompanied  her when she traveled. We obtained similar travel records for two senior  staff members who accompanied the Inspector General on several  occasions and discussed their roles during these trips with them.\n\n\tAnalysis of OIG Performance Measures\n\nTo determine whether the OIG has experienced any changes in  productivity since the current Inspector General took office in August  2001, we reviewed OIG publications, such as its semi-annual reports, to  determine how savings, recommendations, and other performance  indicators changed since fiscal year 2000. From OAS and OEI, we  collected data about the number of projects initiated, reports published,  and reports canceled in fiscal year 2002. We compared these data to the  number of reports that were initiated, published, and canceled from fiscal  years 2000 and 2001\u2014before the current Inspector General\u2019s tenure.\nTo measure productivity in OI and OCIG, we reviewed data on  investigations, prosecutions, and convictions, and exclusions from fiscal  year 1997 through fiscal year 2002. We also examined relevant monetary  accomplishments including the number and amounts of fines and penalties  assessed, civil settlements and judgments, cost savings claimed, and  recoveries and court-ordered restitutions. Our review included an  examination of OCIG files pertaining to eight civil monetary penalty cases.  We also judgmentally selected 18 corporate integrity agreements instituted  since fiscal year 2000, to determine the extent to which new policies  outlined in the Inspector General\u2019s November 20, 2001, open letter to  providers had been implemented.\nIn addition, we discussed the OIG\u2019s productivity with some of its partners  in the law enforcement community to determine whether there have been  recent changes in the level of OI\u2019s or OCIG\u2019s support. Specifically, we  spoke to officials from the Department of Justice and seven of its U.S.  Attorneys\u2019 Offices. We also discussed this matter with officials from  Medicaid Fraud Control Units in California, Florida, Illinois, and New York  and a representative from the National Association of Medicaid Fraud  Control Units.\nFinally, we assessed the OIG\u2019s productivity in terms of its outreach and  education activities. To do this, we collected information regarding the  number of speeches, presentations, and testimonies given by various OIG  employees. We also discussed this matter with OIG employees and  professional staff members at several congressional committees with  jurisdiction over Medicare and other federal health programs.\n\n\tAnalysis of Web-Based Survey Results\n\nTo elicit broad-based views of OIG employees on morale and other issues,  we conducted a Web-based survey. We solicited OIG employee  participation by e-mail, using an e-mail list provided by the OIG. We first  sent a notification e-mail alerting the employees to the upcoming survey  and to check for inaccurate e-mail addresses. We verified with the OIG  that the individuals whose e-mails were returned as \u201cnot deliverable\u201d were  no longer active OIG employees. We then sent an activation e-mail to each  employee, containing a unique user name, password, and instructions for  accessing the survey on the GAO Web site. We sent three follow-up  reminder e-mails to nonrespondents. Employees were given 1 month to  complete the survey. Of the 1,621 employees on our list, 1,451 completed  the survey for a response rate of 90 percent.\nThe survey contained 29 items asking employees for their views on the  organization, management, and their personal job satisfaction. The four  possible responses were: strongly agree, somewhat agree, somewhat  disagree, and strongly disagree. The first 26 items on the survey were  identical to those from an employee survey conducted by the OIG in  January 2002, which we used as a basis for comparing our survey results.  We included three additional items: \u201cOverall, the OIG is improving as a  place to work and make a difference,\u201d \u201cI have confidence and trust in my  organization,\u201d and \u201cIn the last 15 months, morale in my work group has  improved.\u201d We also included seven demographic items and provided an  open-ended comment box. We included a final item for the respondent to  mark the survey as \u201cCompleted,\u201d which, if checked, indicated that the  respondent gave us permission to include his or her responses in our  analyses.\nIn total, 578 of the 1,451 survey respondents (40 percent) elected to write  open-ended comments. We coded 573 of the comments for tone (positive,  negative, neutral) and content. To code content, we used 36 categories  related to morale, productivity, management, personnel issues,  independence, propriety, and other topics. The comments of three  respondents were not coded because they did not fit into any of our  coding categories. The comments of two additional respondents were not  coded because they did not mark their surveys as \u201cCompleted.\u201d The unit of  analysis was the comment\u2014not the respondent. For example, if one  respondent made several comments that fell into different categories, each  comment was coded separately.\n\nAppendix II: Insufficient Internal Controls Over the OIG\u2019s Credentialing System\n\nIn response to allegations that certain employees, including the Inspector  General, possessed improper credentials, we evaluated the security of the  OIG\u2019s credentialing system. OIG employees are issued credentials that  display their photographs, signatures, job titles, and, in the case of OI  investigators, their status as law enforcement officers. Because adequate  internal controls are key to preventing mismanagement and operational  problems, our evaluation centered on the controls governing this  computer-based system, physically located in the OIG headquarters  building. In addition, recent advances in information technology have  heightened the importance of ensuring that controls over electronically  stored information are frequently reviewed and updated to minimize the  threat of improper use. Changes in information technology led to revisions  in Standards for Internal Controls in the Federal Government, which  became effective at the beginning of fiscal year 2000, to reflect new  guidance for modern computer systems. Our work revealed serious  weaknesses in the internal controls governing the OIG\u2019s credentialing  system.\nThe physical security of the computer system used to produce credentials  was inadequate. The system was housed in a public file room with  unrestricted access. Because the room also contained a copier machine,  many individuals routinely entered the area. The system\u2019s backup tapes  were located in an unlocked drawer in the credentialing system desk. In  addition, we also found the stock paper containing the agency\u2019s insignia,  used in the production of all credentials, stored unlocked in a cabinet in  the same room.\nIn addition, we found deficiencies in the system itself, making it even more  vulnerable to misuse. For example, we found that neither the computer\u2019s  screen saver nor the credentialing software programs on the computer  were password protected, and the employee photo and signature files  were not adequately protected. The system also did not have the capability  to create a history log or audit trail to identify past users. Given the  system\u2019s unsecured location, we determined that the system itself was  easily susceptible to unauthorized access through the use of several  techniques, such as a device that could identify recent keystrokes to  capture the names of recent users and their passwords.\nWhen we visited the credentialing room we found it empty, the computer  on, and the screensaver active. By touching the computer\u2019s mouse we  were able to cancel the screensaver and observed an open record on  display. We found that we could access, copy, modify, and delete sensitive  files including employee photos, digital signatures, and personnel  information with little likelihood of detection or system recovery. It would  also have been possible to create a false, unauthorized set of credentials.  OIG officials have since told us that they have taken steps to correct these  weaknesses.\n\nAppendix III: Comments from the Inspector General\n\nAppendix IV: GAO Contacts and Staff Acknowledgments\n\n\tGAO Contacts\n\n\tAcknowledgments\n\nMajor contributors to this report were Enchelle D. Bolden, Helen  Desaulniers, Curtis Groves, Shirin Hormozi, Behn Kelly, Terry Richardson,  Christi Turner, and Anne Welch.","output":"Why GAO Did This Study\n\nJanet Rehnquist became the Inspector General of the Department of Health and Human Services (HHS) in August 2001. GAO was asked to conduct a review of the Inspector General's organization and assess her leadership, independence, and judgment in carrying out the mission of the Office of Inspector General (OIG). GAO examined indicators of the OIG's productivity and compared them to the organization's past performance. GAO also determined whether employee morale has been sustained by surveying all OIG employees and comparing the results to those obtained through an identical survey administered in 2002. On March 4, 2003, the Inspector General resigned her office effective June 1, 2003. However, in this report we refer to Ms. Rehnquist as the Inspector General.\n\nWhat GAO Found\n\nThe credibility of inspectors general is largely premised on their ability to act objectively and impartially--both in substance and in perception. Some of the HHS Inspector General's actions--including her decision to delay a politically sensitive audit--created the perception that she lacked appropriate independence in certain situations. The Inspector General exhibited serious lapses in judgment that further troubled many OIG staff. For example, she inappropriately obtained a firearm that she briefly possessed at her workplace and OIG credentials that identified her as a law enforcement officer. The Inspector General also initiated a variety of personnel changes in a manner that resulted in the resignation or retirement of a significant portion of senior management, disillusioned a number of higher level OIG officials and other employees, and fostered an atmosphere of anxiety and distrust. Ultimately, the collective effect of these actions compromised her ability to serve as an effective leader of HHS's Office of Inspector General. Examining productivity trends is difficult because the work of the OIG often involves multiyear efforts and the results recorded for a single year are heavily dependent on work initiated in prior years. Similarly, savings achieved in any one year can be attributable to the culmination of efforts made over several years. Given these constraints, GAO noted that productivity at the OIG over the last 3 years increased in some areas and declined in others. Overall savings attributable to the OIG's efforts--as reported in its semiannual reports to the Congress--increased from $15.6 billion in fiscal year 2000 to $21.8 billion in fiscal year 2002. The number of individuals convicted for violating HHS program statutes and regulations--another key indicator of the OIG's performance--also increased. On the other hand, declines were noted in the number of settlements with providers who submitted false claims to the government and the OIG's education and outreach activities. GAO's survey results showed that employees' overall views of the organization, management, and their personal job satisfaction generally remained positive and relatively unchanged between 2002 and 2003. However, field office staff and those in lower level positions were considerably more positive in their views of the organization than their counterparts in headquarters and at the highest levels of management. Two units in particular--the OIG's Office of Counsel and the Office of Evaluation and Inspections--also had marked declines in morale. Both reported significantly lower levels of trust and confidence in the organization and less job satisfaction, compared to 1 year earlier. The Inspector General generally disagreed with some of our findings. In our response, we address why these findings raise concerns about the management of the OIG. We also provided our draft report to the Office of the HHS Secretary, but did not receive comments."}
{"id":"gao_AIMD-95-177","pid":"gao_AIMD-95-177_0","input":"\tBackground\n\nIn 1980, Congress enacted the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA). This act, which created the Superfund program, was intended primarily to clean up those sites considered to be the most serious of the hazardous waste sites identified in the United States. As of March 7, 1995, EPA reported 15,723 sites in its inventory, of which 1,363 are considered the most hazardous.\nEPA is authorized to compel parties responsible for causing the hazardous waste pollution, such as waste generators or haulers and site owners or operators, to clean up the sites. If these parties, known as potentially responsible parties (PRPs), cannot be found, or if a settlement cannot be reached, EPA can conduct the cleanup.\nEPA uses funds from a trust fund established by CERCLA when it performs such cleanups. This trust fund, currently authorized at $15.2 billion, is financed primarily by a tax on crude oil and certain chemicals and by an environmental tax on corporations.\nAfter completing a cleanup, EPA can take action against the responsible parties to recover costs and replenish the fund. These costs can cover such items as EPA cleanup studies, removal actions, and program administration, as well as costs incurred by other agencies, such as the Department of Justice, in helping to administer the Superfund program.\nThe process of recovering costs includes (1) conducting searches to identify the PRP(s) and assessing their liability and financial viability, (2) issuing both notice and demand letters to the PRP(s) for the recovery of costs, and (3) if warranted, initiating judicial action with the assistance of the Department of Justice, if the PRP(s) decide not to participate in negotiations to settle the case or if negotiations are unsuccessful. These steps must be completed within specified time periods that are cited in CERCLA.\n\n\t\tSite Cleanup Costs and Workload Are Substantial\n\nEPA has reported expenditures of over $10.1 billion for cleaning up nonfederal Superfund sites through fiscal year 1994. Barring major changes to the program, we estimate that such sites may cost the federal government about $37 billion more between 1995 and 2019 (in 1993 discounted present-value dollars).\nEPA\u2019s cost recovery workload has grown substantially over the years as cleanups have been completed and recoveries of costs have been sought from responsible parties. As of January 1995, EPA reported it had pursued actions to recover costs for 1,625 sites. Through the end of fiscal year 1994, EPA reported that the Superfund program had about $1.4 billion in binding agreements from responsible parties to reimburse the federal government. About $934 million of this amount had actually been collected, including about $9 million in fines and penalties. The remaining $8.7 billion of Superfund past costs include costs such as those not pursued, unrecoverable costs, and costs currently being sought through litigation.\nAlthough Superfund was enacted 15 years ago, the bulk of EPA\u2019s cost recovery settlements has occurred in the last 7 years. For example, during the first 8 years of the program, cost recovery activities resulted in binding cost recovery agreements totaling about $104 million. In contrast, such binding agreements in fiscal year 1994 alone totaled about $207 million.\nEPA\u2019s cost recovery workload to recover cleanup costs is likely to increase because the number of Superfund sites is expected to grow. In November 1994, we reported that between 2,500 and 2,800 nonfederal sites could be added to the then inventory of about 1,200 sites that were considered to be the most serious.\n\n\t\tEPA\u2019s Automated Information Systems Are Vital to Effective Cost Recovery\n\nAfter EPA has identified PRPs that are liable and able to pay, the success of EPA\u2019s cost recovery efforts depends in large part on the ability of staff to access accurate and complete cost data and related supporting documentation. For a typical cost recovery case, EPA may amass thousands of pages of (1) documents identifying work that was authorized and performed, referred to as work-performed documents and (2) financial documents, including travel vouchers and contract-related documents, showing site costs that were invoiced, approved, and paid.\nEPA has a number of financial and records management information systems to help support its cost recovery efforts. For instance, EPA operates two financial information systems to maintain Superfund cost data and two more to generate reports: the Integrated Financial Management System (IFMS), the agency\u2019s official financial information system, which contains all of the agency\u2019s core financial data since March 1989; the Financial Management System (FMS), the predecessor system to IFMS, which contains financial data both before and after the implementation of IFMS in March 1989. the Management and Accounting Reporting System, which is used to produce reports from IFMS data; and the Software Program for Unique Reports, the reporting system for FMS, which generates reports containing both IFMS and FMS data.\nAccording to EPA officials, the functionality of the Financial Management System and the Software Program for Unique Reports will be completely replaced by IFMS and the Management and Accounting Reporting System as of October 1, 1995.\nEPA also has two information management systems developed specifically to support Superfund cost recovery: the Superfund Cost Recovery Image Processing System (SCRIPS), which allows cost recovery staff to electronically capture, store, display, and print images of original Superfund financial documents, such as contract invoices, travel vouchers, and payroll records; and the Superfund Cost Organization and Recovery Enhancement System, which is designed to organize and edit financial information into easy-to-read cost summaries.\n\n\t\tPast Concerns With Management of Superfund Cost Recovery\n\nEPA\u2019s Office of Solid Waste and Emergency Response has overall responsibility for the Superfund program. Other key EPA organizations with Superfund responsibilities include (1) the Office of Enforcement and Compliance Assurance, which is responsible for enforcement actions, and (2) the Office of Administration and Resources Management, which is responsible for financial management activities and the development of supporting information systems.\nEPA also has ten regional offices that have lead responsibility for carrying out the program within their geographical jurisdiction. These responsibilities include conducting or overseeing cleanup activities and pursuing cost recovery, including assembly of supporting documentation; negotiating settlements with PRPs; and collecting amounts owed the government.\nIn December 1992, and again in February 1995, we reported that EPA\u2019s management of the Superfund program was a high-risk area and noted that EPA had recovered only a fraction of the cleanup costs from responsible parties. We have also previously reported that the low priority EPA has given to the cost recovery program had resulted in a backlog of cost recovery cases. EPA also recognizes its problems with Superfund cost recovery, having reported it as a material weakness in its fiscal year 1994 Federal Managers\u2019 Financial Integrity Act Report to the President and Congress. Concerning IFMS, EPA\u2019s Office of Inspector General (OIG) reported in 1991 and 1994 deficiencies with the agency\u2019s development and implementation of the system, such as problems with the integrity of payroll data and inadequate system development and user documentation. Also, IFMS has been on the Office of Management and Budget\u2019s (OMB) high-risk list since 1990.\n\n\tScope and Methodology\n\nOur work was performed at several offices at EPA headquarters including the Office of Solid Waste and Emergency Response; Office of Enforcement and Compliance Assurance; Office of Inspector General; and the Financial Management Division in the Office of Administration and Resources Management. These offices are located in Washington, D.C., and Arlington, Virginia. We also performed work at (1) EPA regional offices in New York, New York; Philadelphia, Pennsylvania; Chicago, Illinois; and San Francisco, California; (2) the Department of Justice in Washington, D.C.; and (3) the office of Leonard G. Birnbaum and Company in Springfield, Virginia.\nWe conducted our review from January 1994 to July 1995, in accordance with generally accepted government auditing standards. We requested comments on a draft of this report from the Administrator, Environmental Protection Agency. In August 1995, we received the agency\u2019s response from the Comptroller, the Director of the Financial Management Division, and the Director of the Policy and Program Evaluation Division. We have incorporated their comments where appropriate. Additional details on our scope and methodology are provided in appendix I.\n\n\tInformation System Limitations Make Cost Recovery Time-Consuming and Labor-Intensive\n\nThe automated information systems that EPA has in place fall short of providing the information and support that staff need to efficiently perform Superfund cost recovery work. Data in the central financial systems are insufficiently detailed, and are sometimes inaccurate or incomplete. Further, the records management systems do not provide for the efficient retrieval of supporting cost and work-performed documentation, which, if not located, can result in unrecovered costs. In addition, efforts to collect costs from responsible parties is more difficult, in part because the agency\u2019s financial system, IFMS, is not sufficiently sophisticated to address the complexity of the repayment agreements. As a result of these limitations, the cost recovery process is often longer and more tedious than necessary and must be supported by manual searches and ad hoc information systems.\n\n\t\tData in Financial Systems Must Be Augmented by Manual Efforts\n\nHaving sufficiently detailed financial information is essential for preparing and supporting cost recovery actions. The Chief Financial Officers Act of 1990 requires that an agency\u2019s Chief Financial Officer develop and maintain an integrated agency accounting and financial management system that provides for (1) complete, reliable, consistent, and timely information that is responsive to the financial information needs of agency management and (2) the development and reporting of cost information. Further, the Joint Financial Management Improvement Program states that financial data reporting should be of proper scope, level of detail, timing, content, and presentation format to provide information of real value to users.\nEPA currently operates two financial management systems for maintaining Superfund cost data, IFMS and FMS. However, neither system currently records cost information at a level of detail that is often needed by EPA staff to prepare cost recovery packages. Specifically, EPA regions divide large or complex cleanup sites into smaller components called operable units. Cost recovery staff said that in order to properly assign the correct amount of costs to the appropriate PRP they need to be able to tracedetailed costs to these operable units.\nBecause EPA systems do not currently record costs at the operable unit level, identifying which costs were incurred at different operable units becomes a time-consuming and tedious task. During the course of a cleanup, which often lasts for years, thousands of individual transactions are processed and stored, including payroll and travel costs for EPA employees, as well as contractor cleanup costs and costs incurred by other agencies, such as the Department of Justice and the U.S. Army Corps of Engineers. To trace these costs to individual operable units, EPA staff must identify all costs that have been recorded and accumulated by site, and then manually segregate the costs by operable unit.\nStaff in EPA\u2019s regions told us that this data limitation has resulted in wasted staff resources. For example, one region we contacted was managing a site with 18 operable units, involving $2.8 million in cost recovery. In order to identify costs at the operable unit level, three staff had to work full time for over 4 months to manually allocate the costs. This required them to go through numerous records, including individual time sheets and travel records. Similarly, a staff person in another region estimated that about 10 percent of his time was spent manually allocating costs, which he believed could be avoided if costs were recorded in greater detail. The independent public accounting firm\u2019s report on EPA\u2019s fiscal year 1993 financial statements for the Superfund Trust Fund stated that the system limitation may adversely impact EPA\u2019s ability to account for costs at Superfund sites and projects. The report noted that this could result in the failure to identify and recover these costs in cost recovery actions.\n\n\t\tData Problems Impede the Efficiency of Cost Recovery\n\nEPA staff need accurate and complete financial data to efficiently and effectively pursue cost recovery actions. OMB Circular A-127 specifies that federal agencies should have financial management systems in place to process and record financial events effectively and efficiently and to provide complete, timely, and consistent information. It also states that these systems should have consistent internal controls over data entry, transaction processing, and reporting to ensure the validity of information and protection of federal government resources.\nConcerns exist about the integrity of data in IFMS. For example, in its 1994 report on IFMS, the OIG raised concerns about data integrity, including inaccuracies and omissions in the data. In our discussions with cost recovery staff, they too stated that they had encountered instances of inaccurate and incomplete data, including critical cost and site identification information, in the agency\u2019s financial information systems. Several of the examples cited by these staff are described below.\nStaff in three regions stated that they had identified instances of duplicative data. For example, during initial negotiations, one region initially overstated costs for a PRP by about $822,000. While staff identified and corrected this overstatement prior to final negotiations, they determined that the error was largely due to a cost figure that had been duplicated in the financial system. EPA staff were unsure whether this was a random problem or a systemic one.\nOne region discovered, while attempting to support a cost summary it had provided to a PRP, that approximately $23,000 had been erroneously charged to a site. The overcharge occurred because contract lab costs that should have been charged to a site in another EPA region had instead been charged to this site, possibly due to a data entry error.\nFive regions expressed concerns that certain costs associated with work performed at individual sites, under national contracts, were not being recorded by site in the agency\u2019s financial management systems. For example, one EPA region reported in 1994 that about $90 million in technical assistance team contract charges associated with one of two national contracts could not be traced to specific sites through the agency\u2019s financial systems. According to EPA, most of these costs were incurred for non site-specific activities and are recovered from responsible parties as indirect costs through the annual allocation process. However, the regional analysis concluded that some of the costs that were site-specific in nature were not reflected in individual site accounts in IFMS.\nTwo regions provided examples of missing or invalid data in the site\/project identification field. This was corroborated by a report generated by EPA\u2019s Financial Management Division showing about 10,500 transactions, totaling about $129 million in expenditures, for which, according to EPA officials, the site\/project identification field was missing.\nThese examples are not intended to be representative of the overall integrity of data in the financial systems. However, EPA staff told us that as a result of these types of problems, they have to spend excessive time and effort in researching, reconciling, and correcting financial data needed to support cost recovery actions.\nEPA has no assurance that its application controls are sufficient to prevent these data quality problems. Such controls are critical for ensuring accurate data input, processing, and output. The independent public accounting firm that reviewed EPA\u2019s financial statements for the Superfund Trust Fund for fiscal year 1993 noted that weaknesses with the internal controls governing data entry made it possible for inaccurate or incomplete account numbers to be entered into IFMS. For example, they found there was no error check control of the site\/project code portion of IFMS\u2019 account code.\nEPA officials believe IFMS contains adequate application controls. However, because these controls are not documented in accordance with federal policies, such as OMB Circular No. A-127 and the Joint Financial Management Improvement Program, we could not assess these controls to determine if they are sufficient to prevent data integrity problems. The lack of documentation for application controls was identified in the OIG\u2019s February 1995 report, in which the OIG stated that it could not assess application processing controls due to a lack of technical system documentation. The OIG reported that such an internal control weakness could adversely affect EPA\u2019s ability to ensure that (1) obligations and costs were in compliance with applicable laws, (2) funds, property, and other assets were safeguarded against unauthorized use or disposition, and (3) transactions were properly recorded to permit the preparation of reliable financial statements.\nThe previously mentioned example of missing site identification data for technical assistance team costs could have been prevented had additional controls been in place. Such controls would have alerted senior financial managers that these costs had been approved and paid, but were at risk of being excluded from cost recovery actions because they had not been allocated, where possible, to a specific Superfund site.\nUntil EPA addresses the need for documented controls, data integrity problems could continue to adversely affect the efficiency of performing cost recovery. In addition, when site\/project codes are missing, EPA may lose the opportunity to recover related costs in specific cost recovery actions.\n\n\t\tCost Recovery Documentation Not Readily Accessible\n\nTo successfully defend its claims for cost recovery, EPA must be able to substantiate each cost item. To do this, the agency locates and provides a wide-range of supporting financial documents, such as invoices and travel vouchers, and supporting work-performed documents, such as contracts, contractor work assignments, and progress reports pertaining to a site. Such documents are needed to provide proof to PRPs and the courts that Superfund-led work to clean up hazardous waste sites was authorized, performed, invoiced, and paid.\nDespite the importance of these documents, EPA staff in regional offices believe that the difficulty in locating and retrieving supporting documents was a major contributor to the amount of time and effort required to assemble the packages detailing costs to be recovered. According to these staff, almost all financial documents generated since 1991 are available through the SCRIPS imaging system. However, most of the contract-related financial documents created prior to this time are not available from SCRIPS because the system was not operational until 1991. Pre-1991 contract-related financial documents are stored in EPA\u2019s financial management center in Research Triangle Park, North Carolina, and must be manually retrieved for inclusion in the cost recovery packages. Cost recovery staff said that it usually takes about 20 working days to retrieve these documents once identified, and that the time required to assemble the requisite financial documents could be substantially decreased if these documents could also be retrieved using SCRIPS.\nStaff also noted that the situation is worse for work-performed documents. There are estimated to be over 11 million pages of work-performed documents occupying about 6,000 linear feet of shelf space in EPA\u2019s ten regional offices. The regional offices maintain these work-performed documents as hard copy in various locations\u2014some in off-site storage, some in records management centers, and some in working files maintained by EPA staff responsible for managing or overseeing the cleanup process. In many cases, cost recovery staff have to rely on their memories to identify which contractors were used at a site and where relevant documents might be located. Cost recovery staff also noted that if the documents cannot be found in EPA\u2019s offices, they must then try to obtain replacements from the contractors\u2019 files. Staff in several regions said that assembling work-performed documents from various locations inside and outside of the agency is a time-consuming or labor-intensive process. For example, in one region it typically takes 2 months to assemble such documents. Another region said it takes about 4 months to identify, retrieve, and review work-performed documents.\nAlthough locating supporting documentation can be labor-intensive, the effect of not locating needed documentation can be worse. According to cost recovery staff, if supporting documents cannot be located or otherwise supported, the corresponding cost items are removed from the cost recovery summary, even though these costs may be recoverable. We could not determine the amount that EPA has lost because of such missing documentation because EPA does not track this information. While EPA maintains a record showing the reasons why costs are excluded from final settlements with PRPs, costs excluded from initial negotiations due to missing documentation are not a part of this record.\n\n\t\tFinancial System Does Not Efficiently Support Management of Superfund Cost Recovery Receivables\n\nEPA regional offices are primarily responsible for managing accounts receivable after the government reaches cost recovery settlements with responsible parties. This requires EPA to establish accounts receivable in a timely manner, collect interest, accurately record collections, and identify and take action on delinquencies.\nOMB Circular A-127 requires that an agency\u2019s financial management systems provide reliable and timely information on amounts owed the government. It also requires that agency financial systems satisfy the core financial system requirements developed by the Joint Financial Management Improvement Program, including a variety of functions to support the establishment, management, and collection of accounts receivable. These functions include calculating and generating customer bills, tracking receivables to be paid for under an installment plan, and accurately identifying receivables that are past due.\nIFMS does not meet these requirements. Although IFMS includes an accounts receivable module, which EPA began using in 1989, the module does not meet the special requirements needed to manage the settlement agreements reached with PRPs. It lacks the capabilities to compute compound interest and manage installment payments. This module also lacks the ability to produce accurate aging reports for Treasury and EPA management.\nEPA has recognized that it has a receivables problem. It has reported this problem as a material weakness in its fiscal year 1994 Federal Managers\u2019 Financial Integrity Act Report. This weakness is very significant, especially given that EPA data show that uncollected Superfund cost recovery receivables totalled about $498 million at the end of fiscal year 1994.\nBecause EPA has not yet resolved its problem with receivables, some regional offices have developed their own automated systems or manual procedures to overcome these limitations. For example, four regional offices have developed local PC-based systems to provide some of these accounts receivable capabilities, while another region uses a combination of manual procedures and IFMS capabilities. Staff in these regions pointed out that the locally developed systems or procedures give them the capability to perform basic debt-servicing functions that IFMS does not support.\n\n\tPlanned Changes to Information Systems Could Be Enhanced\n\nEPA has initiated efforts to address its information system limitations. These efforts include (1) reporting cost data in greater detail, (2) using a statistical tool to test the integrity of financial data, and developing a capability to require that the site\/project field is complete and valid, (3) implementing and testing an imaging system to improve the agency\u2019s identification and retrieval of Superfund work-performed documentation, and (4) developing a PC-based information system to better manage accounts receivable. However, additional actions are needed to fully address the limitations and ensure that the agency obtains the best possible systems support for its cost recovery efforts.\n\n\t\tExpansion of Account Code Structure Should Result in More Detailed Cost Data\n\nTo address the need for more detailed cost data, in October 1995, EPA plans to begin using an expanded 41-digit account code structure in IFMS. This expanded structure should provide the capability to record costs in greater detail, such as by site operable unit, and thus better support EPA\u2019s cost recovery efforts.\n\n\t\tStatistical Testing and Improved Documentation of Application Controls Should Help to Improve Data Integrity\n\nTo assess financial data reliability, EPA\u2019s Financial Management Division has recently developed an automated statistical sampling tool. The Division instructed the regions and finance centers in March 1995 to begin using this statistical tool as part of the agency\u2019s internal control evaluations. In August 1995, EPA officials stated that the results of the initial testing are currently being reviewed. In response to our concerns, EPA officials told us they intend to issue guidance for automated statistical testing of the integrity of financial data needed for cost recovery.\nRegarding application controls, EPA officials acknowledged that the capability to require that the site\/project field be completed when financial transactions are entered into IFMS would be beneficial. They said that a new project cost accounting subsystem of IFMS, scheduled for implementation by October 1995, should provide this capability. With respect to the requirement that financial systems be documented in accordance with federal policies, EPA officials also reported that they intend to work with the OIG in improving the documentation of application controls in IFMS.\n\n\t\tAdditional Use of Technology Could Enhance Records Management Systems Used for Cost Recovery\n\nAs noted earlier, difficulties in locating and retrieving financial and work-performed documentation has been a major contributor to the amount of time and effort required to assemble cost recovery packages. Although EPA has two efforts underway that may improve certain aspects of its records management capabilities, neither project, as currently planned, will address the agency\u2019s difficulties in locating pre-1991 financial documents, or millions of work-performed documents that occupy growing amounts of space in EPA locations nationwide.\nOne project involves the development of an imaging system, called the Superfund Document Management System (SDMS). SDMS is intended to provide a number of advanced capabilities, such as full-text indexing, electronic redaction, and security controls. The system is being tested in EPA\u2019s regional office in San Francisco, California, using documents related to its largest Superfund site. This site accounts for about 25 percent of the region\u2019s Superfund documents. Although SDMS may provide an effective means for locating Superfund-related program documentation, EPA has not assessed the use of SDMS for cost recovery in other regions.\nA second project, initiated in 1993, involves microfilming over a million pages of documentation pertaining to 60 expired nationally-managed contracts and creating an automated index of these documents. The project, which is being funded by EPA and implemented by the Department of Justice, is intended to overcome difficulties that EPA regions and Justice have experienced in obtaining copies of this documentation. This effort may substantially improve the accessibility and retrievability of work-performed documents related to the expired national contracts. However, EPA has no plans to assess whether this effort should be expanded to include other region-specific work-performed documents that are used extensively in cost recovery, such as documents pertaining to contracts managed by EPA regions.\nAlthough SCRIPS provides electronic access to financial documents generated since 1991, an EPA official in the Financial Management Division told us that the agency had not evaluated the costs or benefits of expanding this system to include pre-1991 financial documents, or included such a project in the agency\u2019s Five-Year Plan. Agency officials explained that this has not been a high priority.\n\n\t\tEvidence Lacking to Support EPA Assessment of Risks and Controls for Accounts Receivable System\n\nRecognizing that IFMS\u2019 accounts receivable management capabilities needed improvement, EPA has initiated plans to strengthen these capabilities beginning in early fiscal year 1996. The agency plans to implement a Cost Recovery Collection Tracking System (CTS), which is being developed in EPA\u2019s Chicago, Illinois, regional office. CTS will run on personal computers that are connected to a local area network in the region. The system is intended to provide (1) a demand letter billing capability for actions initiated subsequent to an administrative or judicial order, (2) timely collection information to EPA managers, (3) tracking reports concerning cost recovery collections, and (4) direct uploading of collections data to IFMS. EPA\u2019s Financial Management Division plans to have CTS designed, developed, and tested in the Chicago regional office by September 30, 1995, and plans to distribute CTS to all of its regional offices by December 31, 1995.\nGiven that the development of receivables management capabilities could affect the collection of and accounting for billions of dollars, it is critical that EPA implement a system that effectively safeguards these public assets. As outlined in OMB Circulars A-123, A-127, and A-130, agencies are required to (1) perform an assessment of the potential risks associated with the operation of a system and (2) provide some assurance that appropriate controls are in place to reduce risks such as data entry errors and fraudulent manipulation of accounts receivable data. Although EPA officials told us that risk assessment was an inherent part of the development of CTS, they could not provide us with documentation demonstrating that the agency had performed a risk assessment or ensured that necessary controls will be in place.\n\n\tConclusions\n\nEPA\u2019s financial and records management systems do not efficiently support cost recovery, a critical business process that is vital to the continued existence of the Superfund program. Because of limitations in these systems, cost recovery staff cannot fully rely on them to provide the information needed for cost recovery. Instead, they laboriously search and reconcile paper records to ensure that the information supporting cost recovery cases is accurate, reliable, and complete.\nAware of these limitations, EPA is taking steps to improve support for cost recovery. However, the agency could further ensure that it is obtaining the best possible support for cost recovery by (1) implementing its planned automated statistical testing of the integrity of financial data needed for cost recovery and developing a baseline on the extent of any integrity problems; (2) improving the documentation of its financial systems\u2019 application controls; (3) assessing how best to use records management systems to meet cost recovery users\u2019 needs; and (4) ensuring that all risks associated with the collection and management of receivables have been addressed. These additional actions could further improve EPA\u2019s efforts to recover billions of Superfund dollars through cost recovery actions, make cost recovery more efficient, and lower the risks of losing recoverable dollars.\n\n\tRecommendations\n\nTo improve EPA\u2019s ability to recover costs associated with cleaning up hazardous waste sites, we recommend that the Administrator of the Environmental Protection Agency take steps to ensure that cost recovery data and supporting documentation are complete and accurate by implementing planned automated statistical testing of the integrity of financial data needed for cost recovery and developing a baseline on the extent of any integrity problems identified, improving the documentation of financial systems\u2019 application controls to help ensure accurate data input, processing, and output, assessing whether efforts to improve records management systems for cost recovery should be expanded, including evaluating how best to improve the retrieval of pre-1991 financial documents, and performing a risk assessment and determining if additional controls are needed for accounts receivable.\n\n\tAgency Comments and Our Evaluation\n\nEPA officials, including the Comptroller, the Director of the Financial Management Division, and the Director of the Policy and Program Evaluation Division, provided comments on a draft of this report. Overall, the officials agreed with our recommendations and with our conclusions that the agency\u2019s systems supporting cost recovery needed improvement. The agency provided additional information on the status of its improvement activities, which we have incorporated where appropriate.\nAs arranged with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the date of this letter. At that time, we will send copies to the Administrator of the Environmental Protection Agency, Director, Office of Management and Budget, and interested congressional committees. Copies will also be made available to others upon request.\nPlease call me at (202) 512-6253 if you or your staff have any questions concerning this report. Other major contributors are listed in appendix II.\n\nScope and Methodology\n\nTo evaluate how well EPA\u2019s information systems support the Superfund cost recovery process, we used a structured interview document to discuss cost recovery efforts with staff from five of EPA\u2019s ten regional offices: Region 2 (New York), Region 3 (Philadelphia), Region 5 (Chicago), Region 7 (Kansas City); and Region 10 (Seattle). We chose regions 2, 3, and 5 because they had the highest levels of direct expenditures on cleanups. We chose regions 7 and 10 because they provided geographical diversity. We analyzed numerous documents related to cost recovery from each of these regions. Because integrity of data in EPA\u2019s financial systems has a direct impact on how well these systems support cost recovery, we sought information from cost recovery staff on the extent of problems with the financial data. However, because these staff were unable to provide quantified information on the extent of such problems, we relied on their oral responses and some documented instances in reaching our conclusions. We also contacted by phone records management officials in all ten EPA regions concerning the volume of documentation maintained and researched for supporting cost recovery.\nWe met with representatives and analyzed workpapers and documents from the three firms involved in the audit of EPA\u2019s fiscal year 1993 financial statements for the Superfund Trust Fund. These firms were Leonard G. Birnbaum and Company; KPMG Peat Marwick; and American Power Jet Company. We met with officials from EPA\u2019s OIG and reviewed its past and current reports related to Superfund and cost recovery. We also met with officials in the Department of Justice\u2019s Environment and Natural Resources Division concerning the quality of the cost recovery documentation that it receives from EPA and uses to pursue cost recovery actions.\nTo evaluate the extent to which EPA\u2019s planned information systems modifications could improve the efficiency of cost recovery efforts, we (1) applied relevant segments of the information systems audit methodology published by the EDP Auditors Foundation, (2) interviewed officials from several EPA headquarters offices in Washington, D.C., and from EPA regional offices involved in developing new information systems or modifications to existing systems, and (3) reviewed and analyzed documents on EPA\u2019s actions, including documentation on users\u2019 requirements, feasibility, costs, benefits, and detailed specifications pertaining to the agency\u2019s efforts to enhance and develop system capabilities to support cost recovery. We also reviewed EPA planning documents, including the agency\u2019s Five-Year Plan, and Strategy and Master Work Plan for IFMS.\nOur work was performed at several offices at EPA headquarters including the Office of Solid Waste and Emergency Response, Office of Enforcement and Compliance Assurance, Office of Inspector General, and the Financial Management Division in the Office of Administration and Resources Management. These offices were located in Washington, D.C., and Arlington, Virginia. We also worked at (1) EPA regional offices in New York, New York; Philadelphia, Pennsylvania; Chicago, Illinois; and San Francisco, California; (2) the Department of Justice in Washington, D.C.; and (3) the office of Leonard G. Birnbaum and Company in Springfield, Virginia.\nWe conducted our review from January 1994 to July 1995, in accordance with generally accepted government auditing standards. We requested comments on a draft of this report from the Administrator, Environmental Protection Agency. In August 1995, we received the agency\u2019s response from the Comptroller, the Director for the Financial Management Division, and the Director for the Policy and Program Evaluation Division. We have incorporated these comments where appropriate.\n\nMajor Contributors to This Report\n\n\tAccounting and Information Management Division, Washington, D.C.\n\nRonald W. Beers, Assistant Director William G. Barrick, Project Manager Robert C. Reining, Deputy Project Manager James V. Rinaldi, Senior Evaluator The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent.\nU.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000  or by using fax number (301) 258-4066, or TDD (301) 413-0006.\nEach day, GAO issues a list of newly available reports and testimony.  To receive facsimile copies of the daily list or any list from the past 30 days, please call (301) 258-4097 using a touchtone phone.  A recorded menu will provide information on how to obtain these lists.\n\n\t\tAddress Correction Requested","output":"Why GAO Did This Study\n\nPursuant to a congressional request, GAO reviewed the adequacy of the Environmental Protection Agency's (EPA) information systems that support the Superfund cost recovery process, focusing on whether planned modifications to the information systems will improve the efficiency of EPA cost recovery efforts.\n\nWhat GAO Found\n\nGAO found that: (1) EPA financial and records management systems do not provide all the detailed cost information EPA staff need for the Superfund cost recovery process; (2) EPA staff have to conduct excessive manual searches and reconciliations to gather the needed data, which prolongs the cost recovery process; (3) EPA financial management systems are not sophisticated enough to cope with the complexity of certain transactions and the data contained in the systems are not always accurate; (4) EPA internal controls to prevent inaccurate data entry are inadequate and undocumented; and (5) although planned information systems modifications will improve cost information collection and retrieval, EPA needs to do more to enhance its records management capabilities."}
{"id":"gao_T-RCED-98-122","pid":"gao_T-RCED-98-122_0","input":"\tConcessions Operations in the Federal Government\n\nOur work has shown that concession activities on federal lands are a large industry that generates billions of dollars. In April 1996, we issued a report on governmentwide concessions activities. Unlike our past work, which examined concession activities within the six land management agencies, this report reviewed concession operations throughout the civilian agencies of the federal government and included concession activities at agencies such as NASA, the U.S. Postal Service, the Department of Justice, and the Department of Veterans Affairs\u2014just to name a few. In the report, we found that in fiscal year 1994, there were 11,263 concession agreements managed by 42 different federal agencies. Concessioners operating under these agreements generated about $2.2 billion in revenues, and paid the government about $65 million in fees and about $23 million in other forms of compensation. The average total rate of return to the government from concessioners that had their concession agreement initiated or extended in fiscal year 1994 was about 3.6 percent of concession revenues.\nWhile 42 different federal agencies have concession agreements, 93 percent of these agreements and revenues are managed by the six land management agencies. However, in spite of having the largest programs, the rate of return from concessioners operating in the land management agencies is significantly less than the return generated from concessioners in other federal agencies. We found that for concession agreements that were either initiated or extended during fiscal year 1994, the average return to the government from concessions in the land management agencies was about 3 percent\u2014in the case of the Park Service it was about 3.5 percent. In contrast, the return from concessions in the other nonland management agencies averaged about 9 percent. (See app. I for a list of rates of return from concessioners for agreements initiated or extended during fiscal year 1994 for each federal agency in our review.)\n\n\tFactors Affecting the Rate of Return\n\nOur analysis of rates of return throughout the federal government indicated that there are three key factors that affect the rate of return to the government. These are (1) whether the return from a concession agreement was established through a competitive bidding process, (2) whether the incumbent concessioner had a preferential right of renewal in the award of a follow-on concession agreement, and (3) whether the agency had the authority to retain a majority of the fees generated from the concession agreement.\nOur work indicated that when concession agreements are awarded through a competitive process, the rate of return to the federal government was higher. Specifically, for concession agreements initiated during fiscal year 1994, the return to the government from concession agreements that were competed averaged 5.1 percent of the concessioners\u2019 gross revenues. When competition was not used in establishing concession agreements, the return to the government averaged about 2.0 percent. While the return to the government is higher for concessions that are competitively selected, very few concessions agreements have fees established through competition\u2014especially among concessions in the land management agencies. For concession agreements that were entered into during fiscal year 1994, only 8.6 percent of over 2,100 agreements in the land management agencies were established through competition. In contrast, for concession agreements in the nonland management agencies, about 96 percent of 101 concession agreements were established through competition during this time period.\nAnother factor affecting the return to the government from concessioners is the existence of preferential rights of renewal. These rights primarily affect concessioners in the Park Service. Under the Concessions Policy Act of 1965, Park Service concessioners that have performed satisfactorily have a preferential right of renewal when their concession agreements expire. This preference has generally meant that when a concession agreement expires, an incumbent concessioner has the right to match or better the best competing offer to win the award of the next concession agreement. This preference tends to put a chilling effect on competition because qualified businesses are reluctant to expend time and money preparing bids in a process where the award is most likely to go to the incumbent concessioners. With fewer bidders, there is less competitive pressure to increase the return to the government. Our analysis of Park Service concession agreements showed that in fiscal year 1994, new concession agreements that were awarded with a preferential right of renewal resulted in a return to the government of about 3.8 percent. In contrast, Park Service concession agreements that were competed in the same year without any preference resulted in an average return to the government of 6.4 percent.\nA third factor that affects the rate of return to the government from concessioners is the agencies\u2019 authority to retain fees. Our analysis of federal concessions showed that when agencies are permitted to retain over 50 percent of the fees from concessions, the return to the government is over 3 times higher than agencies that are not authorized to retain this level of fees. In addition, five nonland management agencies that had authority to retain most of their fees managed 5 percent of the concession agreements throughout the government. These agreements generated about 3 percent of the total revenues from concessioners, but generated 18 percent of the total concession fees. In contrast, the six land management agencies, which have not had authority to retain concession fees, have over 90 percent of the total concession agreements and concession revenues, but generate only 73 percent of the total concession fees. Thus, our work showed that agencies authorized to retain fees obtained more fees in proportion to their concessioners\u2019 revenue than agencies that were not authorized to retain fees.\n\n\tNeed for Concession Reform\n\nFor over 20 years, we have issued reports and testimonies that highlighted the need for reform of federal concession laws and policies. Our most recent work, which I have just summarized, is further evidence of the need for reform. Based on this body of work, it is our view that any efforts at reforming concessions should consider (1) encouraging greater competition in the awarding of concession agreements, including eliminating preferential rights of renewal, and (2) under what circumstances it would be appropriate to provide opportunities for the land management agencies to retain at least a portion of their concession fees. In addition, some concession reform proposals have suggested removing possessory interest\u2014the right of concessioners in the Park Service to be compensated for facilities constructed or acquired on federal lands. At issue are the costs of acquiring concessioner-owned facilities relative to the benefits realized by having greater control through government ownership of facilities.\nEncouraging greater competition in awarding concession agreements, and eliminating preferential rights of renewal, should be a primary goal of reforming concessions. Using a competitive bid process to award concession agreements has several benefits. Our April 1996 report presents evidence that where there is competition in awarding concession agreements the rate of return to the government is significantly higher. Competition among qualified bidders would also likely result in improving the level or quality of services provided to the public. Finally, using competition to establish fees would eliminate much of the need for elaborate and at times cumbersome fee systems used by the land management agencies. A significant impediment to competition is preferential rights of renewal granted to Park Service concessioners by the Concessions Policy Act of 1965. Thus, in our view, any legislative effort to reform existing concessions law should consider including the elimination of preferential rights of renewal.\nOur April 1996 report on concessions indicated that when agencies are authorized to retain most of their concession fees, the return to the government from its concessioners is significantly higher. However, permitting agencies to retain a portion of the fees from concessioners has both costs and benefits. Our work has shown that retaining fees for use in agencies\u2019 operations serves as a powerful incentive in managing concessioners. However, if the Congress decides to use increased fees to supplant rather than supplement existing appropriations, this incentive would be diminished. In addition, our past work in the Park Service indicated that the agency has a multibillion dollar backlog of unmet maintenance and infrastructure needs. Furthermore, in recent years, the agency has had to cutback on the level of visitor services provided to the public. One option to help address these issues, which we have raised in the past, might be to provide additional financial resources through fees\u2014including entrance fees, user fees, and concession fees. While retaining fees will not resolve such problems as multibillion dollar backlogs, it will nonetheless provide some assistance to parks units across the nation.\nIt is important to note that permitting the land management agencies to retain concession fees is a form of \u201cbackdoor\u201d spending authority, and as such raises questions of oversight and accountability. In addition, earmarking revenues reduces congressional flexibility to shift budget priorities. Furthermore, permitting the land management agencies to retain fees could also raise scoring and compliance issues under the Budget Enforcement Act. These issues need to be weighed in considering whether to permit the land management agencies to retain fees.\n\n\t\tCosts and Benefits of Removing Possessory Interest\n\nOne issue that is frequently discussed as part of Park Service concession reform is possessory interest\u2014the concessioners right to be compensated for improvements constructed or acquired on federal lands. Possessory interest was established by the Concessions Policy Act of 1965 and is unique to the Park Service. Bills to reform concessions law have often differed in their treatment of possessory interest. Some proposals have sought to get rid of possessory interests while others would allow it to remain. There are some costs and benefits of removing possessory interest which I would like to discuss.\nBills which have proposed to remove possessory interest have suggested it be done over time. As existing concession contracts expired, the new contracts would contain language directing the concessioner to depreciate the value of its possessory interest over an extended period of time. Once the possessory interest was fully depreciated, the structure would be owned by the government.\nRemoving possessory interest in concession facilities would provide the Park Service with greater control over these facilities and would allow greater flexibility in managing concessioners. For example, when possessory interest is provided for, the Park Service would have to use appropriations to buy out the possessory interest of a nonperforming concessioner. If possessory interest were eliminated, the Park Service could terminate the contract of a nonperforming concessioner without having to use appropriations to acquire concession facilities. In addition, government ownership of concessions facilities has the potential of expanding competition for concession contracts. If the concession facilities are government owned, prospective bidders for concession contracts would not be required to expend capital to acquire facilities. As such, the Park Service may receive more bids for the award of concession contracts which has the potential of increasing the return to the government.\nHowever, in the near-term, acquiring these facilities could be costly. If the Park Service acquired a concession facility during the term of the contract, the fees it received would likely be lower because the concession would probably not give up its ownership interest in a park facility without some form of compensation in return. This result becomes more significant if, as the administration proposes, concession fees are returned to the parks. While the Park Service would gain ownership of the facilities, it would be getting less, and possibly substantially less, in fees during the acquisition period.\nIn addition, once the Park Service owns these facilities, it is responsible for maintaining them. The Park Service currently has a multibillion dollar backlog of deferred maintenance. If the concessions\u2019 possessory interest is eliminated and the Park Service acquires additional facilities that need to be maintained, its workload will increase. While the Park Service could require the facilities to be maintained as part of a concession contract, such a requirement may lead to some reduction in the fees it receives.\nMr. Chairman, in recent years, an understanding has emerged that the federal government needs to be run in a more businesslike manner than in the past. It is clear that agencies such as the Park Service can learn some lessons about competition and incentives from nonland management agencies. However, if the Congress proceeds with reforming concessions, it should consider (1) changing existing concessions law to encourage greater competition and eliminating preferential rights of renewal, and (2) providing opportunities for the Park Service to retain at least a portion of its concession fees.\nThis concludes my statement. I would be happy to answer any questions that you or other members of the Subcommittee may have.\n\nRate of Return on Concessions Agreements Either Initiated or Extended During FY 1994\n\nTotal (fees +  special accounts)\nThe first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent.\nU.S. General Accounting Office P.O. Box 37050 Washington, DC  20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000  or by using fax number (202) 512-6061, or TDD (202) 512-2537.\nEach day, GAO issues a list of newly available reports and testimony.  To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone.  A recorded menu will provide information on how to obtain these lists.","output":"Why GAO Did This Study\n\nGAO discussed the need for concessions reform in the National Park Service as well as in other land management agencies, focusing on a comparison of the Park Service's concessions programs with those of other federal agencies.\n\nWhat GAO Found\n\nGAO noted that: (1) concession activities on federal lands is a large industry that generates billions of dollars; (2) GAO's most recent work showed that over 11,000 concession agreements were managed by civilian agencies throughout the federal government; (3) concessioners operating under these agreements generated about $2.2 billion in gross revenues; (4) over 90 percent of concession agreements and the concession gross revenues were from concessioners in the six land management agencies--with many of the largest concessioners operating in the Park Service; (5) for agreements that were either initiated or extended during fiscal year 1994, concessioners in all of the land management agencies paid the government an average of about 3 percent of their gross revenues; (6) in the case of the Park Service, the average return was about 3.5 percent; (7) in contrast, concessioners in nonland management agencies paid fees of about 9 percent of their gross revenues; (8) the key factors affecting rate of return to the government were: (a) whether the fee was established through competition; (b) whether the agency was permitted to retain most of the concessions fees it generated; and (c) whether an incumbent concessioner had a preferential right in renewing its concession agreement with the government; (9) throughout the federal government, rates of return from concessioners were higher when established through competition; (10) in addition, agencies which had authority to retain fees and which did not grant preferential rights of renewal generally obtained higher rates of return to the government from concessioners; (11) in previous reports, GAO noted that as Congress considers reforming concessions in the Park Service, it may want to consider: (a) encouraging greater competition by eliminating preferential rights of renewal; and (b) providing opportunities for the Park Service to retain at least a portion of concession fees; (12) in addition, some concession reform proposals have suggested removing possessory interest--the concessioners right to be compensated for facilities constructed or acquired on federal lands; and (13) at issue are the long-term costs of acquiring concessioner-owned facilities relative to the benefits realized by having greater control through government ownership of facilities."}
{"id":"gao_GAO-01-780","pid":"gao_GAO-01-780_0","input":"\tBackground\n\nThe main purpose of a foreign counterintelligence investigation is to protect the U.S. government from the clandestine efforts of foreign powers and their agents to compromise or to adversely affect U.S. military and diplomatic secrets or the integrity of U.S. government processes. At the same time, however, many of the foreign powers\u2019 clandestine efforts may involve a violation of U.S. criminal law, usually espionage or international terrorism, which falls within the federal law enforcement community\u2019s mandate to investigate and prosecute. As a result, foreign counterintelligence investigations often overlap with law enforcement interests.\nTo provide a statutory framework for electronic surveillance conducted within the United States for foreign intelligence purposes, the Congress, in 1978, enacted the Foreign Intelligence Surveillance Act (FISA). The legislative effort emerged, in part, from the turmoil that surrounded government intelligence agencies\u2019 efforts to apply national security tools to domestic organizations during the 1970s. For example, congressional hearings identified surveillance abuses within the United States by intelligence agencies that were carried out in the name of national security. FISA was designed to strike a balance between the government\u2019s need for intelligence information to protect the national security and the protection of individual privacy rights. In 1994, the Congress amended the 1978 act to include physical searches for foreign intelligence purposes under the FISA warrant procedures.\nWithin DOJ, various components have responsibilities related to the investigation and prosecution of foreign intelligence, espionage, and terrorism crimes. The Criminal Division has responsibility for developing, enforcing, and supervising the application of all federal criminal laws, except those specifically assigned to other divisions. Within the Criminal Division, the Internal Security Section and the Terrorism and Violent Crime Section have responsibility for supervising the investigation and prosecution of crimes involving national security. Among such crimes are espionage, sabotage, and terrorism.\nThe Office of Intelligence Policy and Review (OIPR) is, among other things, to assist the Attorney General by providing legal advice and recommendations regarding national security matters and is to approve the seeking of certain intelligence-gathering activities. OIPR represents the United States before the Foreign Intelligence Surveillance Court (hereinafter, the FISA Court). OIPR prepares applications to the FISA Court for orders authorizing surveillance and physical searches by U.S. intelligence agencies, including the FBI, for foreign intelligence purposes in investigations involving espionage and international terrorism and presents them for FISA Court review. When evidence obtained under FISA is proposed for use in criminal proceedings, OIPR is to obtain the FISA- required advance authorization from the Attorney General. In addition, in coordination with the Criminal Division and U.S. Attorneys, OIPR has the responsibility of preparing motions and briefs required in U.S. district courts when surveillance authorized under FISA is challenged.\nThe FBI is DOJ\u2019s principal investigative arm with jurisdiction over violations of more than 200 categories of federal crimes, including espionage, sabotage, assassination, and terrorism. To carry out its mission, the FBI has over 11,000 agents located primarily in 56 field offices and its headquarters in Washington, D.C. Among its many responsibilities, within the United States, the FBI is the lead federal agency for protecting the United States from foreign intelligence, espionage, and terrorist threats. The FBI\u2019s National Security and Counterterrorism Divisions are the units responsible for countering these threats. To accomplish their task, the National Security and Counterterrorism Divisions engage in foreign intelligence and foreign counterintelligence investigations.\nWithin the Judicial Branch, FISA established a special court (the FISA Court). The FISA Court, as noted previously, has jurisdiction to hear applications for and grant orders approving FISA surveillance and searches. The FISA Court is comprised of seven district court judges from seven different districts who are appointed by the Chief Justice of the U.S.\nSupreme Court to serve rotating terms of no longer than 7 years. The Chief Justice also designates three federal judges from the district or appeals courts to serve on a Foreign Intelligence Surveillance Review Court. The Foreign Intelligence Review Court was established to rule on the government\u2019s appeals of Foreign Intelligence Surveillance Court denials of government-requested surveillance and search orders.\nAs noted previously, foreign counterintelligence and law enforcement investigations often overlap, but at the same time different legal requirements apply to each type of investigation. For intelligence and counterintelligence purposes, electronic surveillance and physical searches against foreign powers and agents of foreign powers in the United States are governed by FISA, as amended. FISA, among other things, contains requirements and a process for seeking electronic surveillance and physical search authority in investigations seeking to obtain foreign intelligence and counterintelligence information within the United States. For example, FISA permits surveillance only when the purpose of the surveillance is to obtain foreign intelligence information. FISA also requires prior judicial approval by the FISA Court for surveillance and searches. With respect to FBI foreign counterintelligence investigations, the FBI Director must certify, among other things, to the FISA Court that the purpose of the surveillance is to obtain foreign intelligence information and that such information cannot reasonably be obtained by normal investigative techniques. However, FISA also contains provisions permitting intelligence agencies to share with law enforcement intelligence information that they have gathered that implicates federal criminal violations. For federal criminal investigations, the issuance and execution of search warrants, for example, is generally governed by the Federal Rules of Criminal Procedure. In addition, electronic surveillance or wiretapping in criminal investigations is, in general, governed by title III of the Omnibus Crime Control and Safe Streets Act of 1968, as amended.\nThe differing standards and requirements applicable to criminal investigations and intelligence investigations are evident with respect to electronic surveillance of non-U.S. persons where the requisite probable cause standard under FISA differs from that required in a criminal investigation. In criminal investigations, the issuance of court orders authorizing electronic surveillance must, in general, be supported by a judicial finding of probable cause to believe that an individual has committed, is committing, or is about to commit a particular predicate offense. In contrast, FISA, in general, requires that a FISA Court judge find probable cause to believe that the suspect target is a foreign power or an agent of a foreign power, and that the places at which the surveillance is directed is being used, or is about to be used, by a foreign power or an agent of a foreign power.\n\n\tScope and Methodology\n\nTo determine what key factors affected coordination between the FBI and the Criminal Division, we interviewed DOJ officials, including officials from the Office of the Deputy Attorney General, OIPR, the Criminal Division, the Division\u2019s Internal Security and Terrorism and Violent Crime Sections, the Office of Inspector General, and the FBI\u2019s National Security and Counterterrorism Divisions and Office of General Counsel. We also reviewed congressional committee reports and hearing transcripts regarding intelligence coordination issues and the DOJ Inspector General\u2019s July 1999 unclassified report on intelligence coordination problems related to DOJ\u2019s campaign finance investigation. In addition, we reviewed the classified report of the Attorney General\u2019s Review Team on the FBI\u2019s handling of its investigation at the Los Alamos National Laboratory.\nTo determine what policies, procedures, and processes are in place for coordinating foreign counterintelligence investigations that indicate possible criminal violations within appropriate DOJ units, we reviewed applicable laws, Executive Orders 12139 on Foreign Intelligence Electronic Surveillance and 12949 on Foreign Intelligence Physical Searches, and copies of existing guidance provided by DOJ and the FBI. We interviewed Criminal Division, OIPR, and FBI officials to determine the pertinent coordination policies, procedures, and processes in effect and their views on their effectiveness. In order to provide you with an unclassified report, we agreed with the Committee not to review specific cases to try to identify instances of compliance or noncompliance with the 1995 coordination procedures.\nTo determine what actions DOJ has taken to address identified coordination problems and what concerns and impediments, if any, remain, we reviewed certain legal requirements pertaining to disseminating and safeguarding information from foreign counterintelligence investigations and criminal investigations. For foreign counterintelligence investigations, we reviewed FISA, as amended; relevant federal court cases; Executive Order 12333 on United States Intelligence Activities; and Congressional Research Service reports. For criminal investigations, we reviewed sections of the United States Code and Federal Rules of Criminal Procedure; federal court cases; and news articles related to espionage prosecutions. In addition, we obtained and reviewed congressional committee reports and hearing transcripts regarding intelligence coordination issues. We also reviewed internal DOJ reports, as mentioned earlier, the DOJ Inspector General\u2019s unclassified report on DOJ\u2019s campaign finance investigation and the Attorney General\u2019s Review Team\u2019s classified report concerning the FBI\u2019s Los Alamos National Laboratory investigation. Furthermore, we met with Criminal Division, OIPR, coordination working group, and FBI officials to discuss the proposed revisions to the July 1995 guidelines and any issues the working group was unable to resolve. During our review, decision memorandums containing recommendations concerning the coordination of FBI intelligence investigations with the Criminal Division, prepared by the coordination working group, remained draft internal documents. We were not provided and did not have the opportunity to review the working group\u2019s documents. As such, our findings and conclusions relating to DOJ\u2019s proposed actions and remaining impediments are based on testimonial evidence.\nTo determine what mechanisms have been put into place to ensure compliance with intelligence coordination policies and procedures, we reviewed applicable OIPR and FBI internal policies and procedures. We also interviewed officials from the Office of Deputy Attorney General, including the then Principal Associate Deputy Attorney General in charge of the intelligence coordination working group, OIPR, and the Office of the Inspector General and FBI officials, including the the General Counsel and representatives of the FBI\u2019s Inspection Division.\nWe performed our work from May 2000 to May 2001 in accordance with generally accepted government auditing standards. In June 2001, we requested comments on a draft of this report from the Attorney General. On June 21, 2001, we received written comments from the Acting Assistant Attorney General for Administration. The comments are discussed on pages 32 and 33 and reprinted in appendix II. DOJ also provided technical comments, which we have incorporated where appropriate.\n\n\tConcern Over Possible Adverse Consequences of Judicial Rulings Has Been a Key Factor Impeding Coordination\n\nA key factor impeding coordination of foreign counterintelligence investigations involving the use or anticipated use of the FISA surveillance and search tools has been the FBI\u2019s and OIPR\u2019s concern about the possible consequences that could result should a federal court rule that the line between an intelligence and a criminal investigation had been crossed due to contacts and\/or information shared between the FBI and the Criminal Division. Specifically, FBI and OIPR were concerned over the consequences should a court find that the primary purpose of the surveillance or search had shifted from intelligence gathering to collecting evidence for criminal prosecution. While these concerns inhibited coordination, Criminal Division officials questioned their reasonableness and believe that they had an adverse effect on the strength of subsequent prosecutions. A further concern of FBI intelligence investigators, not necessarily related to the question of the primary purpose of the surveillance or search, has been the potential revelation of its sources and methods during criminal proceedings.\n\n\t\tConcerns Inhibited FBI and OIPR Coordination\n\nThe consequences about which the FBI and OIPR were concerned included the potential (1) rejection of the FISA application or the loss of a FISA renewal and\/or (2) suppression of evidence gathered using FISA tools, which, in turn, might lead to loss of the criminal prosecution. According to OIPR officials, differences of opinion existed among OIPR, the Criminal Division, FBI, and other DOJ officials, regarding their perceptions of the likelihood that the FISA Court or another federal court might, upon review, find that the line between an intelligence and criminal surveillance or search had been crossed and, therefore, the primary purpose had shifted from intelligence gathering to a criminal investigation. Complicating the resolution of these differences has been DOJ\u2019s disinclination to risk rejection of a FISA application or loss of a prosecution, for example, by requiring the FBI to more closely coordinate with the Criminal Division.\n\n\t\t\tConcerns Regarding Loss of FISA Investigative Tools\n\nThe FBI has long recognized that the investigative tools FISA authorized were often the FBI\u2019s most effective means to secure intelligence information. However, since the mid-1990s, FBI investigators, cautioned by OIPR, became concerned that their interaction with the Criminal Division regarding an investigation might result in the FISA Court denying a FISA application, the renewal of an existing FISA, or limit the FBI\u2019s options to seek the use of the FISA tools at a later date should the FISA Court interpret these interactions as an indication that intelligence gathering was not, or no longer was, the primary purpose of the investigation. As a result, according to the Attorney General\u2019s Review Team\u2014the team established to review the FBI\u2019s handling of the Los Alamos National Laboratory investigation\u2014even in foreign counterintelligence investigations not involving FISA tools, the FBI and OIPR were reluctant to notify the Criminal Division of possible federal crimes as they feared such contacts could be detrimental should they decide to subsequently seek the use of FISA tools.\nAccording to an Associate Deputy Attorney General, resolving these concerns is complicated because DOJ\u2019s interactions with the FISA Court take place during FISA proceedings before the court. Introducing new policies or procedures during an investigation for which the court was considering a FISA application or renewal (e.g., requiring greater coordination), might result in the FISA Court rejecting that FISA. The official also said that DOJ officials did not want to take such a risk.\n\n\t\t\tConcerns Regarding Loss of Evidence in a Criminal Prosecution\n\nContacts between FBI intelligence investigators and the Criminal Division may also raise concerns with respect to the preservation of certain evidence in criminal prosecutions. As noted earlier, FISA provides that evidence of criminal violations gathered during an intelligence investigation may be shared with law enforcement and, for example, used in a criminal prosecution. Under the primary purpose test, most courts have held that information gathered using the FISA tools may be used in subsequent criminal prosecutions only so long as the primary purpose of the FISA surveillance or search was to obtain foreign intelligence information. According to Criminal Division officials, since FISA\u2019s enactment, no court using the primary purpose test has upheld a challenge to the government\u2019s use of FISA-obtained intelligence information for criminal prosecution purposes.  However, OIPR and FBI officials expressed concern that a federal court could determine that the primary purpose of the surveillance or search was for a criminal investigation, and, could potentially suppress any FISA evidence gathered subsequent to that time.\nAccording to Criminal Division officials, the FBI\u2019s and OIPR\u2019s more restrictive interpretation of what could be shared with the Criminal Division stemmed from the application of the judicially created primary purpose test, articulated prior to the enactment of FISA. Most federal courts have adopted the primary purpose test in post-FISA cases. Under this test, most federal courts have held that foreign intelligence information gathered using FISA tools may be used in subsequent criminal proceedings so long as the primary purpose of the FISA surveillance or search was to obtain foreign intelligence information.\nThese officials suggested that the application of the primary purpose test had not raised potential coordination problems between the FBI and the Criminal Division until the Aldrich Ames case. In 1994, Aldrich H. Ames, a Central Intelligence Agency official, was arrested on espionage charges of spying for the former Soviet Union and subsequently Russian intelligence. The FISA Court authorized an electronic surveillance of the computer and software within the Ames\u2019 residence. In addition, the Attorney General had authorized a warrantless physical search of the residence. At that time, FISA did not apply to physical searches. DOJ obtained a guilty plea from Ames who was sentenced to life in prison without parole.\nCriminal Division and FBI officials said that some in DOJ were concerned that, had the Ames case proceeded to trial, early and close coordination between the FBI and the Criminal Division might have raised a question as to whether the primary purpose of the surveillance and searches of Ames\u2019 residence had been a criminal investigation and not intelligence gathering. According to these officials, had this question been raised, a court might have ruled that information gathered using the FISA surveillance and\/or the warrantless search be suppressed, thereby possibly jeopardizing Ames\u2019 prosecution. To date, this issue remains a matter of concern to the FBI and OIPR. OIPR officials indicated that while such a loss had not occurred because Ames had pleaded guilty, the fear of such a loss, nonetheless, was real.\n\n\t\t\tCriminal Division Believes OIPR and FBI Concerns Are Overly Cautious\n\nCriminal Division officials consider OIPR\u2019s and FBI\u2019s concern in the Ames case to be overly cautious. In their opinion, the coordination that occurred during the investigation had been carried out properly and, had the case been tried, any challenges to the evidence gathered would have been denied and the prosecution would have been successful.\nMoreover, with regard to FBI and OIPR concerns, Criminal Division officials said that they stemmed from an unduly strict interpretation of the primary purpose test. As noted earlier, the primary purpose test was articulated prior to FISA. Division officials cited the opinion of the Attorney General\u2019s Review Team, which stated, in general, that FISA was not a codification of the primary purpose test and that FISA, itself, with all its attendant procedures and safeguards, was to be the measure by which such surveillance and searches were to be judged. While recognizing that the FBI\u2019s and OIPR\u2019s concerns were well-intentioned, Criminal Division officials said that as a result of these concerns the primary purpose test had been, in effect, interpreted by the FBI and OIPR to mean \u201cexclusive\u201d purpose.\nOIPR officials did not dispute this characterization of OIPR\u2019s historical concerns relative to primary purpose. However, these officials said that OIPR\u2019s current position regarding FBI and Criminal Division coordination was based on their understanding of the FISA Court\u2019s position on the primary purpose issue relating to such coordination. As a result, Division officials contend that they have been unable to provide advice that could have helped the FBI preserve and enhance the criminal prosecution option. For example, the Division could advise the FBI on ways to preserve its intelligence sources against compromise during a subsequent criminal trial. Division officials further contend that their involvement in the investigation can help to ensure that the case the government presents for prosecution is the strongest it can produce.\n\n\t\tConcerns Regarding Revelation of Intelligence Sources and Methods\n\nAccording to OIPR, whenever the government decides to pursue both national security and law enforcement investigations simultaneously, it may have to decide, in some instances, whether, or at what point, one of the investigations must be ended to preserve the integrity of the other.\nOIPR officials said that the possibility of intelligence sources and methods being exposed, if evidence gathered during an intelligence investigation is later used and challenged in a criminal prosecution, remains a concern of FBI investigators. If the intelligence source or method is deemed to be of great value, DOJ may have to decide whether protection of the source or method outweighs the seriousness of the crime and, accordingly, decline prosecution.\nAs discussed previously, the primary legislation governing intelligence investigations of foreign powers and their agents in the United States is FISA. FISA also provides, however, that intelligence information implicating criminal violations may be shared with law enforcement. FISA further contains provisions to help maintain the secrecy of lawful counterintelligence sources and methods where such information is used in a criminal proceeding. Specifically, the act provided that where FISA information is used, introduced, or disclosed in a trial and the Attorney General asserts that disclosure of such information in an adversary hearing would harm the national security of the United States, the Attorney General may seek court review, without the presence of defense counsel, as to whether the surveillance or search was lawfully authorized and conducted. OIPR officials emphasized that while the act may provide for such a review, a judge may decide that the presence of defense counsel was necessary. Furthermore, officials asserted that, as a result, the presence of the defendant\u2019s attorney raised the risk that classified information reviewed during the proceeding could be subsequently revealed, despite these proceedings being subject to security procedures and protective orders. Consequently, they added that intelligence investigators might be reluctant to share with the Criminal Division evidence of a possible federal crime that had been gathered during an intelligence investigation.\n\n\tProcedures Established to Ensure Proper Coordination Led to Problems\n\nStemming, in part, from concerns raised over the timing and extent of coordination on the Aldrich Ames case, the Attorney General in July 1995 established policies and procedures for coordinating FBI foreign counterintelligence investigations with the Criminal Division. One purpose of the 1995 procedures was to ensure that DOJ\u2019s criminal and counterintelligence functions were properly coordinated. However, according to Criminal Division officials and conclusions by the Attorney General\u2019s Review Team, rather then ensuring proper coordination, problems arose soon after the Attorney General\u2019s 1995 procedures were promulgated. As discussed, those problems stemmed from the FBI\u2019s and OIPR\u2019s concerns about the possible consequences that could damage an investigation or prosecution should a court make an adverse ruling on the primary purpose issue.\nIn January 2000, the Attorney General promulgated coordination procedures, which were in addition to the 1995 procedures. These procedures were promulgated to address problems identified by the Attorney General\u2019s Review Team during its review of the FBI\u2019s investigation of the Los Alamos National Laboratory. Criminal Division officials believed that the 2000 procedures had helped to improve coordination, especially for certain types of foreign counterintelligence investigations.\n\n\t\tThe Attorney General\u2019s 1995 Guidelines Were Promulgated to Try to Ensure Proper Coordination\n\nAccording to DOJ officials, following the conviction of Aldrich Ames, OIPR believed that the close relationship between the FBI and the Criminal Division had been near to crossing the line between intelligence and criminal investigations, thereby risking a decision against the government if a court had applied the primary purpose test. To address the concerns raised, in part, by the FBI\u2019s contacts with the Criminal Division in the Ames case, the Attorney General promulgated coordination procedures on July 19, 1995.\nThe purposes of the 1995 procedures were to establish a process to properly coordinate DOJ\u2019s criminal and counterintelligence functions and to ensure that intelligence investigations were conducted lawfully. To accomplish its coordination purpose, the 1995 procedures, among other things, established criteria for when and how contacts between the FBI and the Criminal Division were to occur on foreign counterintelligence investigations. The procedures identify the circumstances under which the FBI was to notify the Criminal Division and set forth procedures to govern subsequent coordination that arises from the initial contact. In investigations involving FISA, the notification procedures established criteria that \u201cIf in the course of an\u2026 investigation utilizing electronic surveillance or physical searches under the Foreign Intelligence Surveillance Act\u2026facts or circumstances are developed that reasonably indicate that a significant federal crime has been, is being, or may be committed, the FBI and OIPR each shall independently notify the Criminal Division.\u201d Following the Criminal Division\u2019s notification, the procedures require the FBI to provide the Criminal Division with the facts and circumstances, developed during its investigation that indicated significant criminal activity. After the initial notification, the FBI and the Criminal Division could engage in certain substantive consultations.\nThe procedures allowed the Criminal Division to provide the FBI guidance to preserve the criminal prosecution option; however, the procedures also established limitations on consultations between the FBI and the Criminal Division. To protect the intelligence purpose of the investigation, the procedures limited the type of advice the Criminal Division could provide the FBI in cases employing FISA surveillance or searches. Specifically, the procedures prohibited the Division from instructing the FBI on the operation, continuation, or expansion of FISA surveillance or searches. Additionally, the FBI and the Criminal Division were to ensure that the Division\u2019s advice did not inadvertently result in either the fact or appearance of the Division directing the foreign counterintelligence investigation toward, or controlling it for, law enforcement purposes.\nCriminal Division officials indicated that they believed the procedures permitted the Division to advise the FBI on ways to preserve or enhance evidence for subsequent criminal prosecutions. The officials said that the Criminal Division might be able to advise the FBI on ways to preserve its intelligence sources, for example, by utilizing other sources to develop the information needed in a prosecution without risking the revelation of its more valuable sources. Moreover, the Criminal Division may also be able to advise the FBI on ways to enhance the evidence needed for prosecution, for example, by developing information that is needed to prove the elements of a criminal offense.\n\n\t\tFBI and OIPR Concerns Affected Implementation of the 1995 Procedures\n\n\u201cIt is critical that the value of the FBI\u2019s most sensitive and productive investigative techniques not be affected by their use for purposes for which they were not principally intended. Careful coordination in these matters by  is essential in order to avoid the inappropriate characterization or management of intelligence investigations as criminal investigations, the potential devaluation of intelligence techniques, or the loss of prosecutive opportunities.\u201d\nAccording to information provided by FBI officials, after issuance of the procedures, agents received training on them. The FBI\u2019s Office of General Counsel developed presentations, which according to FBI officials, were provided to both new agent trainees at the FBI\u2019s Quantico, VA, training facility and to experienced special agents. Additional training on the procedures continued in subsequent years and, on occasion, agents were sent reminders on the importance of reporting evidence of significant federal crimes to FBI headquarters so that it could properly coordinate them with the Criminal Division.\nAccording to the Attorney General\u2019s Review Team\u2019s report, almost immediately following the implementation of the Attorney General\u2019s 1995 procedures, coordination problems arose. Rather than ensuring that DOJ\u2019s criminal and counterintelligence functions were properly coordinated, as intended, the implementation and interpretation of the procedures triggered coordination problems. Those problems stemmed from concerns FBI and OIPR officials had over the possible legal consequences, discussed above, should the FISA Court or another federal court rule that the primary purpose of the surveillance or search was for criminal investigation purposes rather than intelligence gathering. According to Criminal Division officials, coordination of foreign counterintelligence investigations dropped off significantly following the implementation of the 1995 procedures. The Attorney General\u2019s Review Team reported and Criminal Division officials confirmed that when the FBI did notify the Criminal Division about its foreign counterintelligence investigations, the notifications tended to occur near the end of the investigation. As a result, during the investigations the Division would have been playing little or no role in decisions that could have affected the success of potential subsequent criminal prosecutions.\nAn FBI official acknowledged that soon after the implementation of the Attorney General\u2019s 1995 procedures, coordination concerns surfaced. According to the official, after the FBI contacted OIPR about an investigation that needed to be coordinated with the Criminal Division, OIPR would determine whether and when such coordination should occur. Moreover, according to OIPR and FBI officials, when OIPR did permit coordination to take place, it participated in the meetings to help ensure that the contacts between the agents and the prosecutors did not jeopardize the primary intelligence purpose of the FISA\u2019s search and surveillance tools. Thus, OIPR became the gatekeeper for complying with the 1995 procedures. While the 1995 procedures allowed OIPR to participate in consultations between the FBI and the Criminal Division, the procedures did not set out a gatekeeper role for OIPR. Moreover, the procedures permitted the Criminal Division to provide the FBI guidance aimed at preserving its criminal prosecution option.\nSubsequently, DOJ established working groups in 1996 and again in 1997 to address coordination problems and the issues underlying FBI, OIPR, and Criminal Division concerns. But, they were unsuccessful in resolving the concerns. Remedial actions to address the coordination issues were not taken until, as discussed below, (1) another working group was established in August 1999, specifically to address the coordination of intelligence information among the FBI, OIPR, and the Criminal Division and (2) the Attorney General\u2019s Review Team submitted interim recommendations to the Attorney General in October 1999.\n\n\t\tDOJ Promulgated Additional Procedures to Address Some Coordination Problems\n\nIn January 2000, based on the Attorney General\u2019s Review Team\u2019s interim recommendations, the coordination working group recommended to the Attorney General additional procedures to address the FBI\/Criminal Division coordination issues. These procedures were designed to stimulate increased communication between the FBI and the Criminal Division for investigations that met the notification criteria contained in the 1995 procedures. In January 2000, the Attorney General approved these procedures. These procedures, in part, required the FBI to provide the Criminal Division copies of certain types of foreign counterintelligence case summary memorandums involving U.S. persons. In addition, the procedures established a briefing protocol whereby, monthly, FBI National Security Division and Counterterrorism Division officials judgmentally were to select cases that they believed to be their most critical and brief the Principal Associate Deputy Attorney General and the OIPR Counsel on them. These officials together formed what DOJ officials termed a \u201ccore group.\u201d During these \u201ccore group critical-case briefings,\u201d Criminal Division officials were to be briefed on those cases that the core group agreed met the criteria established in the 1995 procedures for Criminal Division notification. According to FBI officials, one criterion used to decide which cases to include in the critical-case briefings was whether a suspected felony violation was involved. The briefing protocol also established procedures for subsequent briefings of pertinent Criminal Division section chiefs and allowed for the Criminal Division to follow up with the FBI in those critical cases that the Division believed it needed more information. According to OIPR and Criminal Division officials, OIPR maintained its gatekeeper role at these briefings. However, in October 2000, core group meetings and the briefing protocol were discontinued. According to DOJ officials, the briefings were discontinued because some participants believed that these briefings somewhat duplicated sensitive-case briefings that the FBI provided quarterly to the Attorney General and Deputy Attorney General. Appendix I provides a chronology of key events related to the coordination issue.\n\n\tDOJ Has Taken Additional Action to Address Coordination, but Some Impediments Remain\n\nSubsequent to its 1999 interim recommendations, the Attorney General\u2019s Review Team, in May 2000, issued its final report to the Attorney General. In its report, the Review Team raised additional coordination issues and provided recommendations to resolve them. To address these issues and recommendations, the coordination working group developed a decision memorandum in October 2000, for the Attorney General\u2019s approval. According to working group officials, the memorandum recommended revisions to the 1995 procedures and included decision options for consideration for the issues on which the working group could not reach agreement, including an option advocated by the Office of the Deputy Attorney General. The primary issue on which the coordination working group could not agree reflects differences of opinion among the Criminal Division, OIPR, and the FBI as to what advice the Division may provide the FBI without jeopardizing either the intelligence investigation or any resulting criminal prosecution. This issue reflects the same underlying concern\u2014judicially acceptable contacts and information sharing between the FBI and the Criminal Division\u2014that affected proper implementation of the 1995 procedures and earlier disagreements over coordination in foreign counterintelligence FISA investigations. As of the completion of our review, no decision on the memorandum had been made. Thus, issues addressed in the memorandum remain. These include the advice issue and varying interpretations of whether certain criminal violations are considered \u201csignificant violations\u201d that would trigger the Attorney General\u2019s coordination procedures, as well as other issues. Another issue identified that could impede coordination, but was not addressed in the memorandum, is the adequacy and timeliness of the FBI\u2019s case summary memorandums.\n\n\t\tWorking Group Continued Efforts to Address Foreign Counterintelligence Coordination Issues\n\nIn May 2000, the Attorney General\u2019s Review Team sent to the Attorney General its final report on and recommendations to address problems identified during its review of the FBI\u2019s investigation of possible espionage at the Los Alamos National Laboratory. To address those problems dealing with coordination between the FBI and the Criminal Division, the established coordination working group, which was led by the Principal Associate Deputy Attorney General and included representatives from FBI, OIPR, and the Criminal Division, was given responsibility to review the report and the Review Team\u2019s recommendations. In addition to the Review Team\u2019s report, the coordination working group considered intelligence coordination issues raised in the DOJ Office of Inspector General\u2019s report on DOJ\u2019s campaign finance investigation. On the basis of its deliberations, the coordination working group developed a decision memorandum and sent it to the Attorney General for approval in October 2000. According to working group officials, the group was able to reach consensus on most issues. For example, these officials said that the group had agreed to recommend that for clarity the reference to the phrase \u201csignificant federal crime\u201d in the 1995 procedures be changed to \u201cfederal felony,\u201d since they believed that the term \u201csignificant\u201d was too ambiguous and that the term \u201cfelony\u201d would be open to less interpretation as the particular elements comprising any particular felony violation are set out in statute.\nThe working group officials told us that on issues on which the group could not reach consensus, the memorandum presented options, including an option advocated by the Office of the Deputy Attorney General. Specifically, working group officials indicated that the group could not reach a consensus regarding the permissible advice the Criminal Division should be allowed to provide to intelligence investigators. Although the working group agreed that the Criminal Division should play an active role in foreign counterintelligence investigations employing FISA tools, it could not agree on the type of advice the Criminal Division should be allowed to provide. For example, OIPR officials indicated that they believed that the FISA Court held a restrictive view on the issue of notification and advice and that this view would affect the FISA Court\u2019s decisions to authorize a FISA surveillance or search. In contrast, a working group official said that the Criminal Division and Attorney General\u2019s Review Team held less restrictive views on the notification and advice issues. Criminal Division officials said that FISA did not prohibit contact between investigators and prosecutors. They said that it was inconceivable that the Division should be left in the dark in these cases, which they characterized as being of extraordinary importance. They argued that in these cases effective coordination was important to develop the best case possible to bring to prosecution. In its report, the Attorney General\u2019s Review Team asserted that there should be little restriction on the advice the Criminal Division should be allowed to provide. The working group left the matter for the Attorney General to decide.\nAfter the Attorney General took no action on the memorandum between October and December 2000, the working group again reviewed their positions for possible areas of consensus and made minor changes to the memorandum, which they resubmitted to the Attorney General in December. Since the basic positions of the working group participants did not change materially, the outstanding issues remained areas of disagreement. The Attorney General did not make a decision on the recommendations before leaving office on January 20, 2001.\nIn March 2001, the decision memorandum was sent to the Acting Deputy Attorney General for the Attorney General\u2019s decision. On the basis of the Acting Deputy Attorney General\u2019s review, a new core group process was implemented. As of the completion of our review, no other action had been taken on the memorandum or the recommendations therein.\n\n\t\tSome Impediments to Coordination Remain\n\nDespite reported improvements in coordination between intelligence investigators and criminal prosecutors, in part, as a result of the implementation of the January 2000 procedures, several of the same coordination impediments remain. Some of these impediments stemmed from the longstanding differences of opinion regarding possible adverse judicial interpretations of what might be acceptable contacts and information sharing between the FBI and the Criminal Division. Also, Criminal Division officials expressed some concerns regarding the case summary memorandums provided by the FBI.\n\n\t\t\tDiffering Opinions on the Requirements and Prohibitions of the Attorney General\u2019s Coordination Procedures Persist\n\nDespite the efforts of the coordination working group, differences of opinion remained regarding the possible consequences of potential adverse judicial interpretation of the notification of the Criminal Division and the type of advice it may provide without crossing the line between an intelligence investigation and a criminal investigation. Furthermore, since the Attorney General had not approved the memorandum, the working group\u2019s recommendation to clarify language in the 1995 procedures that trigger the Criminal Division\u2019s notification was not implemented and, therefore, that issue remains.\nOIPR, FBI, and Criminal Division officials have continued to strongly differ in their interpretation as to when the Criminal Division should be notified of FBI intelligence investigations involving suspected significant federal crimes, and what type of advice the Criminal Division is permitted to provide FBI intelligence investigators without compromising the primary purpose of the intelligence surveillance or search (i.e., risk losing a FISA application or renewal, or future FISA request). Specifically, the issue revolved around the officials\u2019 different perceptions of how restrictively the FISA Court might interpret Criminal Division notification or any subsequent advice the Division may provide. Working group officials indicated that the pertinent parties continued to disagree on procedural issues, such as the type of the advice that the Criminal Division should be allowed to give. For example, a working group official suggested that numerous categories of the types of advice the Criminal Division can provide could be created. However, such distinctions made it difficult to determine what advice under which circumstances could be provided without risking the loss of FISA authority. According to working group officials, these differences were left unresolved in the December 2000 decision memorandum.\nIn addition, the language indicating when the Criminal Division is to be notified remained an issue. Although the working group\u2019s December 2000 memorandum recommended clarifying the language in the 1995 memorandum which triggered the Criminal Division\u2019s notification by changing the term \u201csignificant federal crime\u201d to \u201cfederal felony,\u201d the significant federal crime language remains in effect without the Attorney General\u2019s approval. OIPR officials said that the coordination working- group members had agreed to the proposed change in language in order to make it clearer when the Criminal Division was to be notified. Although the working group members agreed, our interviews with some FBI officials, responsible for recommending that the Criminal Division be notified, indicated that they continued to use the significant threshold and that there were still disagreements as to its meaning. For example, FBI Counterterrorism Division officials told us that there still were disagreements over what constituted significant, and, therefore, differences of opinion as to when the Criminal Division should be notified. The officials said that these differences might have to be resolved at the highest levels of DOJ and the FBI. These FBI officials remained cautious regarding contacts between FBI intelligence investigators and the Criminal Division, preferring a higher threshold. Although addressed in the working group\u2019s memorandum, this issue remains pending action by the Attorney General.\n\n\t\t\tThe Criminal Division Has Concerns About the Adequacy and Timeliness of the Case Summary Memorandums\n\nAccording to Criminal Division officials, while the 2000 procedures had increased intelligence coordination, questions and concerns remained regarding the adequacy of FBI case summary memorandums for the Criminal Division\u2019s purposes and the timeliness of the memorandums.\nCriminal Division officials said that they had questions as to whether some FBI case summary memorandums were sufficiently comprehensive to indicate criminal violations. They said that while it is relatively easy to discern from some FBI case summary memorandums whether criminal violations have been committed, in others it is not. OIPR officials also noted that FBI case summary memorandums were not always clear from the way they were written as to whether intelligence investigators had reason to believe that the criteria established by the Attorney General\u2019s 1995 guidelines for notification had been triggered. According to the Criminal Division and OIPR officials, the case summary memorandum format does not require agents to address whether or not a possible criminal violation was implicated or contain a specific section for doing so.\nCriminal Division officials also asserted that for their purposes the case summary memorandums were not always timely. Criminal Division officials indicated that there could be a significant time lag between the time when a significant criminal violation was revealed or investigative actions in a case occurred and when the memorandums were provided to the Division. They added that the timeliness of the memorandums could be a problem, because events can often overtake an investigation. For example, the officials said that should an investigative target be planning to go overseas, the Criminal Division would like to have information in a timely manner so that it can assess its prosecutorial equities against the risk that the target may flee the country. Division officials said that the Division only receives the initial memorandums within 90 days after the investigation had been opened and, subsequently, annually thereafter. Thus, the memorandums the Criminal Division receives may not be timely enough to protect its prosecutorial equities in a case.\nNo matter what impediments remain, the question exists as to how and how often has the lack of timely coordination adversely affected DOJ prosecutions. In its report on the FBI\u2019s handling of the Los Alamos National Laboratory investigation, the Attorney General\u2019s Review Team found that, by not coordinating with the Criminal Division at an earlier point, the FBI\u2019s intelligence investigation might have been harmed and that had the Criminal Division been allowed to provide advice it could have helped the FBI to better develop its case. Since the 1995 guidelines were implemented, for those intelligence investigations of which they were aware, Criminal Division officials were able to identify one other case in which the prosecution may have been impaired by poor and untimely coordination.\nRegardless of the number of prosecutions that may have been adversely affected by poor or untimely coordination, Division officials argued that due to the significance of these types of cases, it was important that the strongest cases be developed and brought forward for prosecution. The officials said that the practical effect of not being involved during an investigation is that the Criminal Division was not aware of interviews conducted or approaches made, such as certain types of undercover operations, that could have helped make sure the prosecutorial equities were preserved or enhanced. Moreover, commenting on the adverse effects of being informed about investigations at the last minute, the officials said that it takes time to prepare cases for prosecution. They indicated that being informed of an investigation at the last minute could be problematic because it takes more than 2 or 3 days to prepare search warrants or obtain orders to freeze assets.\n\n\tMechanisms Created to Ensure Compliance With the Procedures Have Not Been Institutionalized\n\nIn addition to the impediments noted above, Criminal Division officials continued to question whether all investigations that met the criteria of the 1995 procedures were being coordinated. Such concerns indicate that an oversight mechanism to help ensure compliance with the Attorney General\u2019s 1995 coordination procedures was lacking. Office of the Deputy Attorney General and FBI officials acknowledged that, historically, no mechanisms had been created to specifically ensure compliance with the Attorney General\u2019s 1995 procedures. Recently, two mechanisms have been created to help ensure Criminal Division notification. However, both mechanisms lacked written policies or procedures to institutionalize them and help ensure their perpetuation.\n\n\t\tCriminal Division\u2019s Concerns Indicate That an Oversight Mechanism Was Lacking\n\nCriminal Division officials said that while they knew which investigations were being coordinated, they did not know whether any existed about which they were not being notified. Furthermore, Division officials said they were still concerned that the FBI and OIPR might not notify the Division or provide the Division with the information in sufficient time for it to provide appropriate advice to the investigation or protect its prosecutorial equities in the case. Division officials also questioned whether foreign counterintelligence investigations involving possible federal criminal violations were being closed without the Criminal Division being notified and, thereby, potentially affecting the Division\u2019s ability to exercise its prosecutorial equities in those cases.  These concerns indicate that an oversight mechanism to ensure compliance with the Attorney General\u2019s coordination procedures was lacking.\n\n\t\tDOJ Lacked Oversight Mechanisms to Ensure Compliance With Notification Requirement\n\nHistorically, DOJ had not developed oversight mechanisms specifically targeted at ensuring compliance with the 1995 requirements for notification. DOJ officials noted that ordinarily, DOJ expects components to comply with the Attorney General\u2019s directives. According to the former Principal Associate Deputy Attorney General, no mechanism existed to provide systematic oversight of compliance with the notification procedures.\nOther than its normal oversight of investigations, such as periodic supervisory case reviews and reviews of FISA applications, the FBI did not have a specific or independent oversight mechanism that routinely checked whether FBI investigations complied with the 1995 procedures. FBI Inspection Division officials said that every 3 years the Inspection Division is to review the administration and operation of FBI headquarters and field offices, including whether or not policies and guidelines were being followed. The officials said that in the course of field offices inspections, certain aspects of investigations employing FISA surveillance or searches are reviewed, including whether the applications were properly prepared and accurately supported and whether there were appropriate field office administrative checks of the process. However, the Inspection officials said that, where such investigations had detected possible criminal violations, compliance with the Attorney General\u2019s coordination procedures was not an issue that Inspection reviewed. Thus, the FBI had no assurance that foreign counterintelligence investigations that met the criteria for notification established by the 1995 procedures were being coordinated with the Criminal Division.\n\n\t\tRecently Created Mechanisms Should Help Better Ensure Notification\n\nSince mid-2000, two new mechanisms have been created to help better ensure that FBI foreign counterintelligence investigations meeting the Attorney General\u2019s requirements for notification are coordinated with the Criminal Division. First, in mid-2000, OIPR implemented a practice aimed at identifying from FBI submitted investigation summaries those investigations that met the notification criteria established in the 1995 procedures. Then, in April 2001, DOJ reconstituted the core group and gave it a broader role in overseeing coordination issues and in better ensuring Criminal Division notification. However, these mechanisms have not been institutionalized in writing and, thus, their perpetuation is not ensured. Federal internal control standards require that internal controls be documented.\n\n\t\tOIPR\u2019s Practice Identified FBI Investigations Meeting the Attorney General\u2019s Notification Requirements\n\nOIPR officials said that, based in part on the Attorney General\u2019s Review Team\u2019s findings and to ensure greater compliance with the 1995 procedures, OIPR managers began emphasizing at weekly meetings with OIPR attorneys, and in a February 2001 e-mail reminder to them, the importance of coordinating relevant intelligence investigations with the Criminal Division. According to OIPR officials, OIPR attorneys were instructed that when they reviewed FBI FISA applications, case summary memorandums, or other FBI communications, they were to be mindful of OIPR\u2019s obligation to identify and report to the Criminal Division FBI investigations involving appropriate potential violations. When the OIPR attorneys identify FBI investigations in which there is evidence of violations that meet the criteria established in the 1995 guidelines, they are to notify OIPR management. Management then is to contact both the FBI and the Criminal Division to alert them that in OIPR\u2019s opinion, the notification requirement had been triggered. Then, whenever the FBI and the Criminal Division meet to coordinate the intelligence investigation, OIPR attends to help ensure that the primary purpose of the surveillance or search is not violated.\nOIPR officials believed that its practice has been working well. In commenting on improved coordination, both the Criminal Division Deputy Assistant Attorney General responsible for intelligence matters and the Chief of the FBI\u2019s International Terrorism Section noted instances where OIPR had contacted them to alert them to investigations that met the criteria established by the Attorney General\u2019s coordination procedures. As of April 2001, the Criminal Division Deputy Assistant Attorney General estimated that since OIPR had initiated its practice, it had contacted the Division about approximately a dozen FBI investigations that OIPR believed met the Attorney General\u2019s requirements for notification.\n\n\t\t\tReconstituted Core Group to Provide Broader Oversight to Coordination Issues\n\nIn April 2001, the acting Deputy Attorney General decided to reconstitute the core group and to give it a broader role for overseeing coordination issues. The core group, similar to the prior core group, is comprised of several officials from the Office of Deputy Attorney General, an official representing the Office of Intelligence Policy and Review, and the Assistant Directors of the FBI\u2019s National Security and Counterterrorism Divisions. Whereas the previous core group\u2019s role was to decide which of the FBI\u2019s most critical cases met the requirements of the Attorney General\u2019s coordination procedures and needed to be coordinated with the Criminal Division, the new core group\u2019s role is broader. According to an Associate Deputy Attorney General and core group member, the new group is to be responsible for deciding whether particular FBI investigations meet the requirements of the coordination procedures and to identify for the Attorney General\u2019s attention any cases involving extraordinary situations where compliance with the guidelines requires the Attorney General\u2019s consideration.\nAccording to the Associate Deputy Attorney General, the FBI is to bring to the core group\u2019s attention any investigation in which it is not clear that the Attorney General\u2019s procedures have been triggered. For example, during an FBI investigation should it not be clear whether a criminal violation should be considered a significant federal crime, as indicated in the procedures, the FBI is to bring the matter to the core group for resolution. Thus, this is a much broader scope of responsibility than the prior core group\u2019s which only considered the need for coordination in those critical cases that were judgmentally selected by the FBI. Furthermore, the core group also is to be responsible for identifying for the Attorney General\u2019s attention those extraordinary situations where the FBI believes there may be good reason not to notify the Criminal Division. For extraordinary situations, the Associate Deputy Attorney General opined that it was expected that the number of such questions brought to the core group would be extremely few.\n\n\t\t\tMechanisms Have Not Been Institutionalized\n\nWhile both mechanisms, if implemented properly, should help to ensure notification of the Criminal Division, neither mechanism has been written into policies or procedures. OIPR\u2019s Counsel pointed out that while OIPR would try to ensure better coordination by employing this practice, it was not a part of OIPR\u2019s mission. OIPR\u2019s priority was to make sure that the FBI had what it needed to protect national security. She added that ensuring coordination could not be a priority for OIPR without additional attorney resources. OIPR\u2019s Counsel further said that OIPR frequently has had its hands full trying to process requests for FISA surveillance and searches without having to worry about the criminal implications of those cases. She noted that over the last few years, the FBI has received a significant number of additional agent resources and had increased its efforts to combat terrorism, espionage, and foreign intelligence gathering. As a result, FISA requests had increased significantly, while OIPR resources needed to process those requests had not kept apace.\nWhile the practice may be working well to date, the practice has not been put into writing and, thus, has not been institutionalized. On the basis of our conversations with OIPR, the Criminal Division, and FBI officials, the extent to which OIPR has allowed coordination and advice to occur, currently and in the past, has varied depending upon the views and convictions of the Counsel responsible for OIPR at the time. As OIPR\u2019s coordination practices have varied over the years, the perpetuation of the current practice could depend on future Counsels\u2019 views on the coordination issue and, more importantly, how restrictively they believe the FISA Court views coordination with the Criminal Division.\nLikewise, the core group has not been institutionalized. Although at the time of our review it had met on two occasions since its creation, according to the Associate Deputy Attorney General there has been no written documentation establishing the core group or defining its role and responsibilities. Federal internal control standards require that internal controls need to be clearly documented. Furthermore, these standards require that such documentation appear in management directives, administrative policies, or operating manuals.\n\n\tConclusions\n\nDiffering interpretations within DOJ of adverse consequences that might result from following the Attorney General\u2019s 1995 coordination procedures for counterintelligence investigations involving FISA surveillance and searches have inhibited the achievement of one of the procedures\u2019 intended purpose\u2014to ensure that DOJ\u2019s criminal and counterintelligence functions were properly coordinated. These interpretations resulted in less coordination. Additional procedures implemented in January 2000, requiring the sharing of certain FBI investigative case summaries, creating a core group, and instituting the core group critical-case briefing protocol helped to improve the situation by making the Criminal Division aware of more intelligence investigations with possible criminal implications. Subsequently, the core group and the critical-case briefing protocol were discontinued. However, in April 2001, a revised core group was created with a broader coordination role. It is too early to tell how effective a mechanism the new core group process will be for overseeing the requirement for notification. Nevertheless, other impediments remain.\nThe differing interpretations comprise the main impediment to coordination. Intelligence investigators fear that the FISA Court or another federal court could find that the Criminal Division\u2019s advice to the investigators altered the primary intelligence purpose of the FISA surveillance or search. Such a finding could lead to adverse consequences for the intelligence investigation or the criminal prosecution. As such cases involve highly sensitive national security issues, this is no small matter and caution is warranted. However, this longstanding issue has been reviewed at high-levels within DOJ on multiple occasions and Criminal Division officials believe the concerns, while well intentioned, are overly cautious given the procedural safeguards FISA provides. While the problems underlying the lack of coordination have been identified, the solutions to these problems are complex and involve risk. These solutions require balancing legitimate but competing national security and law enforcement interests. On the one hand, some risk and uncertainty will likely remain regarding how the FISA Court or another federal court might upon review interpret the primary purpose of a particular surveillance or search in light of notification of the Criminal Division and the subsequent advice it provided.  On the other hand, by not ensuring timely coordination on these cases, DOJ may place at risk the government\u2019s ability to bring the strongest possible criminal prosecution. Therefore, a decision is needed to balance and resolve these conflicting national security and law enforcement positions.\nBeyond resolving these differences, DOJ and the FBI can take several actions to better ensure that possible criminal violations are identified and reported and that mechanisms to ensure compliance with the notification requirements of Attorney General\u2019s 1995 procedures are institutionalized. Such actions could facilitate the coordination of  DOJ's counterintelligence and prosecutorial functions.\n\n\tRecommendations for Executive Action\n\nTo facilitate better coordination of FBI foreign counterintelligence investigations meeting the Attorney General\u2019s coordination criteria, we recommend the Attorney General establish a policy and guidance clarifying his expectations regarding the FBI\u2019s notification of the Criminal Division and types of advice that the Division should be allowed to provide the FBI in foreign counterintelligence investigations in which FISA tools are being used or their use anticipated.\nFurther, to improve coordination between the FBI and the Criminal Division by ensuring that investigations that indicate a criminal violation are clearly identified and by institutionalizing mechanisms to ensure greater coordination, we recommend that the Attorney General take the following actions: 1.  Direct that all FBI memorandums sent to OIPR summarizing investigations or seeking FISA renewals contain a section devoted explicitly to identifying any possible federal criminal violation meeting the Attorney General\u2019s coordination criteria, and that those memorandums of investigations meeting the criteria for Criminal Division notification be timely coordinated with the Division. 2.  Direct the FBI Inspection Division, during its periodic inspections of foreign counterintelligence investigations at field offices, to review compliance with the requirement for case summary memorandums sent OIPR to specifically address the identification of possible criminal violations. Moreover, where field office case summary memorandums identified reportable instances of possible federal crimes, the Inspection Division should assess whether the appropriate headquarters unit properly coordinated with the Criminal Division those foreign counterintelligence investigations. 3.  Issue written policies and procedures establishing the roles and responsibilities of OIPR and the core group as mechanisms for ensuring compliance with the Attorney General\u2019s coordination procedures.\n\n\tAgency Comments and Our Evaluation\n\nIn written comments on a draft of this report, the Acting Assistant Attorney General for Administration responding for Justice responded that on two of our recommendations, the Department has taken full or partial action. Concerning our recommendation to institutionalize OIPR\u2019s role and responsibilities for ensuring compliance with the Attorney General's coordination procedures, the Acting Counsel for Intelligence Policy on June 12, 2001, issued a memorandum to all OIPR staff. That memorandum formally articulated OIPR\u2019s policy of notifying the FBI and the Criminal Division whenever OIPR attorneys identify foreign counterintelligence investigations that meet the requirements established by the Attorney General for coordination. We believe this policy should help perpetuate OIPR\u2019s mechanism for ensuring compliance with the 1995 coordination procedures beyond any changes in OIPR management. Moreover, establishing a written policy places the Department in compliance with the documentation standard delineated in our \u201cStandards for Internal Control in the Federal Government.\u201d\nConcerning our recommendation regarding the FBI\u2019s Inspection Division, the Deputy Attorney General directed the FBI to expand the scope of its periodic inspections in accord with our recommendation or explain why it is not practical to do so and, if not, to suggest alternatives. While this is a step in the right direction, full implementation of the recommendation will depend on whether the FBI can expand the scope of its inspections, or develop acceptable alternatives, to address coordination of foreign intelligence investigations where federal criminal violations are implicated. This, in turn, will depend on the extent to which the FBI case summary memorandums seeking FISA renewals, or whatever medium is subsequently used to accomplish that purpose, contains a separate section indicating possible federal criminal violations.\nConcerning our recommendation that the Attorney General establish a policy and guidance clarifying his expectations regarding the FBI\u2019s notification of the Criminal Division and the types of advice the Division should be allowed to provide, DOJ, citing the sensitivity and difficulty of the issue, said that the Attorney General continues to review the possibility of amending the July 1995 coordination procedures. Our report recognizes the complexity of the issue and DOJ\u2019s concerns about the uncertainties that any change in the procedures will create on how the courts may view such changes in their rulings. Nevertheless, as we pointed out, this issue has been longstanding and the concerns that it has generated by some officials has inhibited the achievement of one of the intended purposes of the procedures, that is, to ensure that DOJ\u2019s criminal and counterintelligence functions were properly coordinated. Because such coordination can be critical to the successful achievement of both counterintelligence investigations and criminal prosecutions, the issue needs to be resolved as soon as possible. We remain concerned that delays in resolving these issues could have serious adverse effects on critical cases involving national security issues.\nConcerning our two remaining recommendations\u2014(1) that all FBI memorandums sent to OIPR summarizing investigations seeking FISA renewals contain a section specifically devoted to identifying federal criminal violations and (2) that the Attorney General institutionalize the role of the Core Group--DOJ said that they were being reviewed, but offered no timeframe for their resolution.\nWith respect to other points raised in Justice\u2019s comments, we have incorporated in our report, where appropriate, the Department\u2019s technical comments concerning our discussion of the primary purpose test and the courts\u2019 views on it. Regarding the Department\u2019s point that it is probably more accurate to divide the concept of coordination into an information- sharing component and an advice-giving component, we believe our report adequately differentiates between the two concepts and that we accurately report that the issue concerning the type of advice the Criminal Division can provide has been the primary stumbling block to better coordination. Thus, we made no change regarding this matter. Moreover, while the Department wrote that all relevant Department components agree that information sharing is usually appropriate for all felonies, we found and our report notes that the timing of the information sharing has been an issue. Furthermore, notifications tended to occur near the end of the investigation, with the Criminal Division playing little or no role in decisions that could effect the success of potential subsequent prosecutions. Even with the later procedural changes to coordination, the Criminal Division still had concerns about the timeliness issue. In this regard, the actions DOJ said it has taken in response to our report and our recommendation concerning FBI case summary memorandums, if implemented, should help improve coordination timeliness.\nAs agreed with your office, unless you publicly release its contents earlier, we plan no further distribution of this report until 30 days from its issue date. At that time, we will provide copies of this report to the Chairman of the Committee on Governmental Affairs; the Chairmen and Ranking Minority Members of the Committee on the Judiciary and the Select Committee on Intelligence, United States Senate; the Chairmen and Ranking Minority Members of the Committee on Government Reform, the Committee on the Judiciary, and the Permanent Select Committee on Intelligence, House of Representatives; the Attorney General; the Acting Director of the Federal Bureau of Investigation; and the Director of the Office of Management and Budget. We will also make copies available to others on request.\nIf you should have any questions about this report, please call Daniel C. Harris or me on (202) 512-8777. Key contributors to this report were Robert P. Glick, Barbara A. Stolz, Jose M. Pena III, and Geoffrey R. Hamilton.\n\nAppendix I: Chronology of Key Events Relating to FBI\/DOJ Coordination\n\nThe following table shows key events relating to coordination of FBI foreign counterintelligence investigations with the Criminal Division.\n\nAppendix II: Comments From the Department of Justice\n\nThe following are GAO\u2019s comments on the Department of Justice\u2019s letter dated June 21, 2001.\n\n\tGAO Comments\n\n1.  See \u201cAgency Comments and Our Evaluation\u201d section. 2.  DOJ suggested in its comments that we address the question of whether or not the 1995 coordination procedures were being applied correctly. As we noted in the scope and methodology section of this report, as agreed with the requester of the report, we did not review specific cases to try to identify instances of compliance or noncompliance with the coordination procedures. 3.  DOJ also suggested in its comments that we address whether and how the coordination procedures ought to be changed. Given that since 1995, this issue has been studied by three high-level DOJ working groups and the Attorney General\u2019s Review Team and because of the concerns expressed by some DOJ officials in our report, we believe that DOJ is in the best position to address any changes to its procedures. 4.  The Department suggested that we emphasize to a greater extent throughout our report the sensitivity and complexity of the issues. In addition, it provided additional language for the report to reflect the issues\u2019 sensitivity and complexity. We agree that the issues discussed are sensitive and complex, however, we believe the report adequately conveys these points and, thus, we did not revise our report to address the Department\u2019s suggestion. 5.  DOJ suggested a factual correction to recognize that two decision memorandums were submitted to the Attorney General; one in October 2000, and a second in December 2000. On pages 22 and 23 of our report, we discuss the submission of both memorandums. Concerning DOJ\u2019s suggestion that we note the options that these memorandums presented, we did not adopt this suggestion as DOJ had opted not to provide us with the details of its options when we met to discuss the memorandums.","output":"Why GAO Did This Study\n\nThis report reviews the coordination efforts involved in foreign counterintelligence investigations where the Foreign Intelligence Surveillance Act has been or may be employed. The act established (1) requirements and a process for seeking electronic surveillance and physical search authority in national security investigations seeking foreign intelligence and counterintelligence information within the United States and (2) the Foreign Intelligence Surveillance Court, which has jurisdiction to hear applications for and grant orders approving Foreign Intelligence Surveillance Act surveillance and searches.\n\nWhat GAO Found\n\nGAO found that coordination between the Federal Bureau of Investigation (FBI) and the Department of Justice's (DOJ) Criminal Division has been limited in those foreign counterintelligence cases in which criminal activity is indicated and surveillance and searches have been, or may be, employed. A key factor inhibiting this coordination is the concern over how the Foreign Intelligence Surveillance Court or another federal court might rule on the primary purpose of the surveillance or search in light of such coordination. In addition, the FBI and the Criminal Division differ on the interpretations of DOJ's 1995 procedures concerning counterintelligence investigations. In January 2000, the Attorney General issued additional procedures to address these coordination concerns. These procedures, among other things, required the FBI to submit case summaries to the Criminal Division and established a protocol for briefing Criminal Division officials about those investigations. In addition, the FBI established two mechanisms to ensure compliance with the Attorney General's 1995 procedures. These mechanisms include (1) requiring the Office of Intelligence Policy and Review to notify the FBI and the Criminal Division of investigations it believes meets the requirements of the 1995 procedures and (2) establishing a core group of high-level officials to oversee coordination issues. However, these efforts have not been institutionalized in management directives or written administrative policies or procedures."}
{"id":"crs_R44924","pid":"crs_R44924_0","input":"T he National Park Service's (NPS's) backlog of deferred maintenance (DM)\u2014maintenance that was not done as scheduled or as needed\u2014is an issue of ongoing interest to Congress. The agency estimated its DM needs for FY2016 at $11.332 billion. Although other federal land management agencies also have DM backlogs, NPS's backlog is the largest. Because unmet maintenance needs may damage park resources, compromise visitors' experiences in the parks, and jeopardize safety, NPS DM has been a topic of concern for Congress and for nonfederal stakeholders. Potential issues for Congress include, among others, how to weigh NPS maintenance needs against other financial demands within and outside the agency, how to ensure that NPS is managing its maintenance activities efficiently and successfully, and how to balance the maintenance of existing parks with the establishment of new park units. This report addresses frequently asked questions about NPS DM. The discussion is organized under the headings of general questions, funding-related questions, management-related questions, and questions on Congress's role in addressing the backlog. \n\n\tGeneral Questions\n\n\t\tWhat Is Deferred Maintenance?\n\nThe Federal Accounting Standards Advisory Board defines deferred maintenance and repairs (DM&R) as \"maintenance and repairs that were not performed when they should have been or were scheduled to be and which are put off or delayed for a future period.\" NPS uses similar language to define deferred maintenance . Although NPS uses the term DM rather than DM&R, its estimates also include repair needs. Following NPS's usage, this report uses the term DM to refer to NPS's deferred maintenance and repair needs. Members of Congress and other stakeholders also often refer to DM as the maintenance backlog .\nAs suggested by the above definition, DM does not include all maintenance, only maintenance that was not accomplished when scheduled or needed and was put off to a future time. Another type of maintenance is cyclic maintenance \u2014that is, maintenance performed at regular intervals to prevent asset deterioration, such as to replace a roof or upgrade an electrical system at a scheduled or needed time. Although NPS considers cyclic maintenance separately from DM, NPS has emphasized the importance of cyclic maintenance for controlling DM costs. Cyclic maintenance, the agency has stated, \"prevent[s] the creation of DM and enabl[es] repairs to fulfill their full life expectancy.\" NPS also performs routine, day-to-day maintenance as part of its facility operations activities. Such activities include, for example, mowing and weeding of landscapes and trails, weatherizing a building prior to a winter closure, and removing litter.\n\n\t\tHow Big Is NPS's Maintenance Backlog?\n\nNPS estimated its total DM for FY2016 at $11.332 billion. This amount is nearly evenly split between transportation-related DM in the \"Paved Roads and Structures\" category and mostly non-transportation-related DM for all other facilities (see Table 1 ). The Paved Roads and Structures category includes paved roadways, bridges, tunnels, and paved parking areas. The other facilities are in eight categories: Buildings, Housing, Campgrounds, Trails, Water Systems, Wastewater Systems, Unpaved Roads, and All Other.\nNPS also estimates annually a subset of DM that includes its highest-priority non-transportation-related facilities. For FY2016, DM for this subset of key facilities was estimated at $2.271 billion.\n\n\t\tHas the Maintenance Backlog Been Increasing or Decreasing?\n\nNPS's estimated maintenance backlog increased for most of the past decade before dropping in FY2016. Over the decade as a whole (FY2007-FY2016), Figure 1 and Table 2 show a growth in NPS DM of $1.718 billion in nominal dollars and $0.021 billion in inflation-adjusted dollars. \n\n\t\tWhat Factors Contribute to Growth or Reduction of the Backlog?\n\nMultiple factors may contribute to growth or reduction in the NPS maintenance backlog, and stakeholders may disagree as to their respective importance. One key driver of growth in NPS maintenance needs has been the increasing age of agency infrastructure. Many agency assets\u2014such as visitor centers, roads, utility systems, and other assets\u2014were constructed by the Civilian Conservation Corps in the 1930s or as part of the agency's Mission 66 infrastructure initiative in the 1950s and 1960s. As these structures have reached or exceeded the end of their anticipated life spans, unfunded costs of repair or replacement have contributed to the DM backlog. Further, agency officials point out, as time goes by and needed repairs are not made, the rate at which such assets deteriorate is accelerated and can result in \"a spiraling burden.\"\nAnother key factor is the amount of funding available to the agency to address DM. The sources and amounts of NPS funding for DM are discussed in greater detail below, in the section on \" Funding Questions .\" NPS does not aggregate the amounts it receives and uses each year to address deferred maintenance, but agency officials have stated repeatedly that available funding has been inadequate to meet DM needs. In recent years, Congress has increased NPS appropriations to address DM, in conjunction with the agency's 2016 centennial anniversary. NPS has stated that these funding increases, although helping the agency with some of its most urgent needs, have been insufficient to address the total problem. Some observers have advocated further increases in agency funding as a way to address DM, whereas others have recommended reorienting existing funding to prioritize maintenance over other purposes. The Administration's budget request for FY2018 would reduce some NPS funding for DM while increasing other NPS DM-oriented funding.\nAnother subject of attention is the extent to which acquisition of new properties may add to the maintenance burden. Stakeholders disagree about the role played by new assets acquired by NPS, through the creation of new parks or the expansion of existing parks, in DM growth over the past decade. To the extent that newly acquired lands contain assets with maintenance and repair needs that are not met, these additional assets would increase NPS DM. According to the agency, new additions with infrastructure in need of maintenance and repair have been relatively rare in recent years, and most of the acquired lands have been unimproved or have contained assets in good condition. In past years, NPS also has stated that some acquisitions of \"inholdings\" within existing parks have even facilitated maintenance and repair efforts by providing needed access for maintenance activities. Others have contended that even if new acquisitions do not immediately contribute to the backlog, they likely will do so over time, and that further expansion of the National Park System is inadvisable until the maintenance needs of existing properties have been addressed. For example, the Administration's FY2018 budget proposes to eliminate funding for NPS federal land acquisition projects in order to \"focus fiscal resources toward managing lands already owned by the federal government.\" \nSome observers also have expressed concerns that growth in NPS DM may be at least partially due to inefficiencies in the agency's asset management strategies and\/or the implementation of these strategies. The section of this report on \" Management Questions \" gives further details on NPS's management of its DM backlog. NPS has taken a number of steps over the decade to improve its asset management systems and strategies. The Government Accountability Office (GAO) has recommended further improvements. \nFrom year to year, the completion of individual projects, changes in construction and repair costs, and similar factors play a role in the growth or reduction of NPS DM. For instance, with respect to the reduction in NPS DM for FY2016, the agency stated: \nThe database used to track DM and other facility asset information changes daily as data is entered, updated, closed out, and corrected in the system. The \"snapshot\" of the data taken at the end of Fiscal Year (FY) 2016 is exactly that \u2026 a view of the NPS data as of Sep 30, 2016. Many factors contributed to this almost $600 million decrease, including data cleanup, completion of several large projects, revisions to several large project work orders, and savings from decreases in construction costs. \nStill another issue is that the methods used by NPS and the Department of the Interior (DOI) to estimate DM have varied over time and for different types of maintenance reports. For example, the estimates in Figure 1 and Table 2 , above, draw on two different types of DM reports. For FY2006-FY2013, the estimates are calculated from DM ranges that NPS provided to DOI for annual departmental financial reports. Starting in FY2014, NPS began to publish separate estimates of agency DM on its website, which include some assets\u2014such as buildings that NPS maintains but does not own\u2014that are not included in the DOI departmental estimates. Additionally, during the earlier FY2006-FY2013 period, DOI changed its methods for calculating its estimated DM ranges, and NPS was in the process of completing its database of reported assets. What portion of the overall change in NPS DM over the decade may be attributable to changes in methodology or data completeness, rather than to other factors, is unclear.\n\n\t\tHow Does NPS's Backlog Compare with Those of Other Land Management Agencies?\n\nAlthough all four major federal land management agencies\u2014NPS, the Bureau of Land Management (BLM), the Fish and Wildlife Service (FWS), and the Forest Service (FS)\u2014have DM backlogs, NPS's backlog is the largest. For FY2016, NPS reported DM of more than $11 billion, whereas FS reported DM of roughly half that amount (about $5.5 billion), and FWS and BLM both reported DM of less than $2 billion. DM for the four agencies is discussed further in CRS Report R43997, Deferred Maintenance of Federal Land Management Agencies: FY2007-FY2016 Estimates and Issues .\n\n\t\tWhich States Have the Largest NPS Maintenance Backlog?\n\nNPS reports DM by state and territory in its report titled NPS Deferred Maintenance by State and Park . The 20 states with the highest NPS DM estimates are shown in Table 3 .\nThe states with the highest DM are not necessarily those with the most park acreage. For example, Alaska contains almost two-thirds of the total acreage in the National Park System but accounts for less than 1% of the agency's DM backlog. Instead, the amount, type, and condition of infrastructure in a state's national park units are the primary determinants of DM for each state. For example, transportation assets are a major component of NPS DM, and states with NPS national parkways\u2014the George Washington Memorial Parkway (mainly in Virginia and Washington, DC), the Natchez Trace Parkway (mainly in Mississippi and Tennessee), the Blue Ridge Parkway (North Carolina and Virginia), and the John D. Rockefeller Jr. Memorial Parkway (Wyoming)\u2014are all among the 20 states with the highest DM. \n\n\t\tWhich Park Units Have the Largest Maintenance Backlog?\n\n Table 4 shows the 20 individual park units with the highest maintenance backlogs.\nVarious factors may contribute to the relatively high DM estimates for these park units as compared to others. For example, many of them are older units whose infrastructure was largely built in the mid-20 th century. Some sites, such as Gateway National Recreation Area and Golden Gate National Recreation Area, are located in or near urban areas and may contain more buildings, roads, and other built assets than more remotely located parks. Three of the 10 units with the highest estimated DM are national parkways, consistent with the high proportion of NPS's overall DM backlog that is related to road needs. \n\n\tFunding Questions\n\n\t\tHow Much Has NPS Spent in Recent Years to Address the Maintenance Backlog?\n\nIt is not possible to determine the total amount of funding allocated each year to address NPS's DM backlog, because NPS does not aggregate these amounts in its budget reporting. Funding to address DM comes from a variety of NPS budget sources, and each of these budget sources also funds activities other than DM. NPS does not report how much of each funding stream was used for DM in any given year.\nAlthough it is not possible to determine amounts allocated to NPS deferred maintenance, GAO estimated amounts allocated for all \u00a0NPS maintenance (including DM, cyclic maintenance, and day-to-day maintenance activities) for FY2006-FY2015. GAO estimated that, over that decade, NPS's annual spending for all types of maintenance averaged $1.182 billion per year. GAO did not determine what portion of this funding went specifically to DM. NPS has testified that annual funding of roughly $700 million per year, targeted specifically to DM, would be required simply to hold the maintenance backlog steady without further growth. \n\n\t\tWhat Are the Funding Sources for NPS to Address the Maintenance Backlog?\n\nNPS has used discretionary appropriations, allocations from the Department of Transportation, park entrance fees, donations, and other funding sources to address the maintenance backlog. Most of the funding for DM comes from discretionary appropriations, primarily under two budget activities, titled \"Repair and Rehabilitation\" and \"Line-Item Construction.\" \nThe Repair and Rehabilitation (R&R) budget subactivity, within the NPS's Operation of the National Park System (ONPS) budget account, focuses on large-scale, nonrecurring repair needs, and repairs for assets where scheduled maintenance is no longer sufficient to improve the condition of the facility. R&R funds are used for projects with projected costs of less than $1\u00a0million each. NPS estimated that, over the past five years, a range from 49% to 83% of R&R funds have been specifically targeted to projects on the DM backlog, as opposed to projects associated with other types of maintenance. The Administration's FY2018 budget would fund the R&R subactivity at $99.3 million, a decrease of $25.2 million from FY2017 appropriations provided in P.L. 115-31 . The Line- Item Construction budget activity, within the NPS's Construction account, provides funding for the construction, major rehabilitation, and replacement of existing facilities needed to accomplish approved management objectives for each park. This funding is used for projects expected to cost $1 million or more. NPS prioritizes projects for funding on the basis of their contribution to parks' financial sustainability, health and safety, resource protection, and visitor services, as well as on the basis of a cost-benefit analysis. NPS estimated that, over the past five years, a range from 59% to 87% of Line-Item Construction funds have been used specifically to reduce the DM backlog. The Administration's FY2018 budget would fund the Line-Item Construction activity at $137.0 million, an increase of $5.0 million over FY2017 appropriations provided in P.L. 115-31 . Portions of other NPS discretionary budget activities and accounts also are used for DM. These include various budget activities within the ONPS and Construction accounts, as well as NPS's Centennial Challenge account. The Centennial Challenge account provides federal funds to match outside donations for \"signature\" NPS parks and programs. The funding is used to enhance visitor services, reduce DM, and improve natural and cultural resource protection. The Administration's FY2018 budget justification requests $15.0 million for the Centennial Challenge program, a decrease of $5.0 million from the amount provided for FY2017 in P.L. 115-31 .\nBeyond NPS discretionary appropriations, a number of other, nondiscretionary agency revenue streams also are used partially or mainly to address DM.\nNPS receives an annual allocation from the Highway Trust Fund to address transportation needs, including transportation-related DM. Funds are provided to NPS (and other federal land management agencies) by the Federal Highway Administration, primarily under the Federal Lands Transportation Program. In recent years, these allocations have funded approximately two-thirds of NPS's transportation-related maintenance spending. For FY2018, NPS's allocation from the Federal Lands Transportation Program is $284.0 million, an increase of $8.0 million from the FY2017 allocation. Through related federal highway programs, NPS could potentially receive additional funding. Park entrance and recreation fees collected under the Federal Lands Recreation Enhancement Act (16 U.S.C. \u00a7\u00a76801-6814) may be used for DM, among other purposes. The fees, most of which are retained at the collecting parks, may be used for a variety of purposes benefiting visitors, including facility maintenance and repair, interpretation and visitor services, law enforcement, and others. NPS estimates entrance and recreation fee collections of $256.9 million for FY2017 and $259.5 million for FY2018. NPS collects concessions franchise fees from park concessioners who provide services such as lodging and dining at park units. The fees, collected under the National Park Service Concessions Management Improvement Act of 1998 (54 U.S.C. \u00a7\u00a7101911 et seq.), are available for use without further appropriation and are mainly retained at the collecting parks. They may be used to reduce DM, among other purposes, with priority given to concessions-related DM. NPS estimates concessions franchise fee collections of $127.8 million for FY2017 and $131.3 million for FY2018. The National Park Service Centennial Act ( P.L. 114-289 ) established the NPS Centennial Challenge Fund . In addition to discretionary appropriations (discussed above), the fund is authorized to receive, as offsetting collections, certain amounts from the sales of entrance passes to seniors. NPS estimates that the senior pass sales will provide an additional $15.0 million for the account for FY2018 on top of discretionary appropriations. The funding may be used for a variety of projects but must prioritize DM, improvements to visitor services facilities, and trail maintenance. Federal funds must be matched by nonfederal donations on at least a 50:50 basis. The Centennial Act also established the NPS Second Century Endowment and directed that it receive, as offsetting collections, revenues from senior pass sales totaling $10 million annually. The endowment also is authorized to receive gifts, devises, and bequests from donors. The funds may be used for projects approved by the Secretary of the Interior that further the purposes of NPS, including projects on the maintenance backlog. More broadly, other types of d onations to NPS may be used for projects that reduce DM, among a variety of other purposes. NPS estimated that, through all of these programs combined, the agency would receive donations of $75.0 million in FY2017 and $71.0 million in FY2018 (in addition to the revenues generated from the sales of the senior passes). Under the Helium Stewardship Act of 2013 ( P.L. 113-40 ), NPS will receive $20 million in FY2018 from proceeds from the sale of federal helium, to be used for DM projects requiring a minimum 50% match from a nonfederal funding source. Other NPS mandatory appropriations also have been partially used for DM. These include monies collected under the Park Building Lease and Maintenance Fund, transportation fees collected under the Transportation Systems Fund, and rents and payroll deductions for the use and occupancy of government quarters, among others. NPS estimated varying amounts for these mandatory appropriations for FY2017 and FY2018. \n\n\t\tHave Additional Types of Funding Been Proposed to Address the Backlog?\n\nSome Members of Congress and other stakeholders have proposed sources of additional funding to address NPS's DM needs. Legislative proposals in the 115 th Congress are discussed in the \" Role of Congress \" section, below. Among other sources, stakeholders have proposed to increase NPS DM funding with resources from the Land and Water Conservation Fund, offshore oil and gas revenues that currently go to the General Treasury, income tax overpayments and contributions, motorfuel taxes, and coin and postage stamp sales. By contrast, others have suggested that NPS DM could be reduced without additional funding\u2014for example, by improving the agency's capital investment strategies, increasing the role of nonfederal partners in park management, or disposing of assets.\n\n\tManagement Questions\n\n\t\tHow Does NPS Prioritize Its Deferred Maintenance Needs?\n\nNPS uses computerized maintenance management systems to prioritize its DM projects. Agency staff at each park perform condition assessments that document the condition of park assets according to specified maintenance standards. The information is collected in a software system through which the agency assigns to each asset a facility condition index (FCI) rating\u2014a ratio representing the cost of DM for the asset divided by the asset's replacement value. (A lower FCI rating indicates a better condition.) The agency also assigns an asset priority index (API) rating that assesses the importance of the asset in relation to the park mission. Projects are prioritized based on their FCI and API ratings, as well as on other criteria related to financial sustainability, resource protection, visitor use, and health and safety. The agency's scoring system aligns with criteria identified in its Capital Investment Strategy. \n\n\t\tWhat Types of Challenges May Exist in Managing the Maintenance Backlog?\n\nIn addition to the funding challenges discussed earlier, NPS faces other issues in managing the maintenance backlog. In December 2016, GAO reported on NPS management of maintenance activities, and identified both successes and challenges. In terms of challenges, GAO reported that competing duties often make it difficult for park staff to perform facility condition assessments in a timely manner, that the remote location of some assets contributes to this difficulty, that the agency's focus on high-priority assets likely may lead to continued deterioration of lower-priority assets, and that NPS lacks a process for verifying that its Capital Investment Strategy is producing the intended outcomes. GAO also reported on successes in NPS asset management\u2014for example, that the agency's assessment tools are consistent with federally prescribed standards and that it is working with partners and volunteers to address maintenance needs. \nAn additional challenge, identified in NPS budget documents, relates to the disposal of unneeded assets to reduce the agency's maintenance burden. Part of NPS's asset management includes identifying assets that may be candidates for disposal. For example, some assets may have high FCI ratings, indicating expensive maintenance needs, along with low API ratings, indicating that they are not of high importance to the NPS mission. NPS may favor destroying or disposing of such assets, but the agency has stated that the cost of removing the assets often precludes the use of this option. GAO also identified that legal requirements\u2014such as the requirement in the McKinney-Vento Homeless Assistance Act ( P.L. 100-77 , as amended) that federal buildings slated for disposal must be assessed for their potential to provide homeless assistance before being disposed of by other means\u2014create additional obstacles for NPS disposal of unneeded properties. \n\n\tRole of Congress\n\n\t\tHow Has Congress Addressed NPS's Maintenance Backlog?\n\nCongress has addressed NPS's maintenance backlog through oversight, funding, and legislation. For example, in the 115 th Congress, both the House and the Senate have held oversight hearings to investigate options for addressing NPS DM. Annual appropriations for NPS are discussed in CRS Report R42757, National Park Service: FY2017 Appropriations and Ten-Year Trends . Several recent laws and proposals outside of annual appropriations, including the National Parks Centennial Act of 2016 and bills introduced in the 115 th Congress, are discussed under the following questions. \n\n\t\tHow Did the National Parks Centennial Act of 2016 Address Deferred Maintenance?\n\nThe National Parks Centennial Act ( P.L. 114-289 ), enacted in December 2016, contained a variety of provisions aimed at addressing the NPS maintenance backlog as well as meeting other park goals. The law created two funds that may be used to reduce DM\u2014the National Park Centennial Challenge Fund and the Second Century Endowment for the National Park Service. Both funds receive federal monies from the sale of senior recreation passes, as well as donations. DM projects are a prioritized use of the Centennial Challenge Fund and are among the potential uses of endowment funds. The law also made changes to extend eligibility for the Public Land Corps and increase the authorization of appropriations for the Volunteers in the Parks program. Participants in these programs perform a variety of duties that help address DM, among other activities. In addition, the law authorized appropriations of $5.0 million annually for FY2017-FY2023 for the National Park Foundation to match nonfederal contributions. Contributions to the foundation are used for a variety of NPS projects and programs, including projects on the maintenance backlog. \n\n\t\tWhat Legislation Has Been Proposed in the 115th Congress to Address NPS Deferred Maintenance?\n\nBills in the 115 th Congress related to NPS deferred maintenance include the following.\nH.R. 1577 , the National Park Service Transparency and Accountability Act, would require the Secretary of the Interior to submit to Congress a report evaluating the NPS's Capital Investment Strategy and its results, including a determination of whether the strategy is achieving its intended outcomes and any recommendations for changes. H.R. 2584 \/ S. 751 , the National Park Service Legacy Act of 2017, would establish a National Park Service Legacy Restoration Fund with funding from mineral revenues. Annual amounts deposited into the fund would begin at $50.0 million for FY2018-FY2020 and would rise gradually to $500.0 million for FY2027-FY2047. The funds would be available to NPS for expenditure without further appropriation. They would be used for \"high-priority deferred maintenance needs of the Service,\" with 20% of the funding going to transportation-related maintenance and the remaining 80% going to repair and rehabilitation of non-transportation-related assets. Projects with a nonfederal cost share would receive special treatment in priority rankings. The funding could not be used for land acquisition, and it could not supplant discretionary funding for NPS facility operations and maintenance. H.R. 2863 , the Land and National Park Deferred Maintenance (LAND) Act, would establish a National Park Service Maintenance and Revitalization Conservation Fund. The fund would receive $450.0 million each year from mineral revenues, of which $375.0 million would go to NPS, with $25.0 million going to each of three other agencies: FWS, BLM, and FS. The monies would be available for expenditure without further appropriation and would be used for \"high priority deferred maintenance needs that support critical infrastructure and visitor services.\" Funds could not be used for land acquisition. S. 1460 , Section 5101, would establish a National Park Service Maintenance and Revitalization Conservation Fund as part of a broader energy-modernization bill. Although the fund would have the same name as in H.R. 2863 , the Senate version would provide for deposits to the fund of $150.0 million per year from offshore revenues collected under the Outer Continental Shelf Lands Act (43 U.S.C. 1338 et seq.). The funds would be available for expenditure only when appropriated by Congress. The monies would be used for \"high-priority deferred maintenance needs of the Service that support critical infrastructure and visitor services\" and could not be used for land acquisition.","output":"This report addresses frequently asked questions about the National Park Service's (NPS's) backlog of deferred maintenance\u2014maintenance that was not performed as scheduled or as needed and was put off to a future time. NPS's deferred maintenance, also known as the maintenance backlog, was estimated for FY2016 at $11.332 billion. More than half of the NPS backlog is in transportation-related assets. Other federal land management agencies also have maintenance backlogs, but NPS's is the largest and has drawn the most congressional attention.\nDuring the past decade (FY2007-FY2016), NPS's maintenance backlog grew steadily before decreasing in FY2016. Overall, the deferred maintenance estimate grew by an estimated $1.718 billion in nominal dollars and $0.021 billion in inflation-adjusted dollars over the decade. Many factors might contribute to growth or reduction in deferred maintenance, including the aging of NPS assets, the availability of funding for NPS maintenance activities, acquisitions of new assets, agency management of the backlog, completion of individual projects, changes in construction and related costs, and changes in measurement and reporting methodologies. The backlog is distributed unevenly among states and territories, with California, the District of Columbia, and New York having the largest amounts of deferred maintenance. The amounts also vary among individual park units.\nSources of funding to address NPS deferred maintenance include discretionary appropriations, allocations from the Department of Transportation, park entrance and concessions fees, donations, and others. It is not possible to determine the total amount of funding from these sources that NPS has allocated each year to address deferred maintenance, because NPS does not aggregate these amounts in its budget reporting.\nNPS prioritizes its deferred maintenance projects based on the condition of assets and their importance to the parks' mission, as well as other criteria related to financial sustainability, resource protection, visitor use, and health and safety. NPS has taken a number of steps over the decade to improve its asset management systems and strategies. Some observers, including the Government Accountability Office (GAO), have recommended further improvements.\nSome Members of Congress and other stakeholders have proposed new sources of funding to address NPS's deferred maintenance needs. Bills in the 115th Congress to increase NPS funding for deferred maintenance\u2014including H.R. 2584, H.R. 2863, S. 751, and S. 1460\u2014would draw from mineral revenues currently going to the Treasury. Other proposed funding sources have included monies from the Land and Water Conservation Fund, income tax overpayments and contributions, new motorfuel taxes, and coin and postage stamp sales.\nOther stakeholders have suggested that NPS deferred maintenance could be reduced without additional funding\u2014for example, by improving the agency's capital investment strategies or increasing the role of nonfederal partners in park management. H.R. 1577 would require the Secretary of the Interior to evaluate NPS's Capital Investment Strategy and report on any recommended changes."}
{"id":"gao_GAO-08-680","pid":"gao_GAO-08-680_0","input":"\tBackground\n\nDefinition: When ll people ll timeve  oth phyicnd economic ccess to  sufficient food to meet their dietry need for   prodctive nd helthy life.\nFood ilability\u2014chieved when sufficient  uantitie of food (supplied throgh household prodction, other dometic otpt,  commercil import, or food assnce) re  contently ilable to ll individua within   contry.\nFood insecurity\u2014the lack of access of all people at all times to sufficient,  nutritionally adequate, and safe food, without undue risk of losing such  access\u2014results in hunger and malnutrition, according to FAO. FAO  estimates that 90 percent of the hungry suffer from chronic malnutrition.  About 80 percent of the hungry worldwide live in rural areas\u2014about half  of them are smallholder peasants; 22 percent are landless laborers; and   8 percent live by using natural resources, such as pastoralists. Inadequate  food and nutrition have profound impacts. Undernourished children have  a smaller chance of survival and suffer lasting damage to their mental and  physical development. In addition, work productivity is often impaired  among undernourished adults. Food aid has helped to address the  immediate nutritional requirements of some vulnerable people in the short  term, but food aid has not addressed the underlying causes of persistent  food insecurity.\nFood ccess\u2014ensured when household  nd ll individua within them hve dequate  rerce to oin pproprite food for tritious diet.\nWorld leaders have agreed upon two different goals to halve world hunger  by 2015: the first, established at the 1996 WFS in Rome, is to halve the total  number of undernourished people worldwide; while the second, the first  of eight UN MDGs set in 2000, also referred to as MDG-1, aims to eradicate  extreme poverty and hunger by halving the proportion of undernourished  people from the 1990 level by 2015. Both of these goals apply not only  globally but also at the country and regional levels. Although both the WFS  and MDG targets to cut hunger are based on FAO\u2019s estimates of the  number of undernourished people, because the MDG target is defined as  the ratio of the number of undernourished people to the total population,  it may appear that progress is being made when population increases even  though there may have been no reduction in the number of  undernourished people, according to FAO. Figure 1 is a timeline of some  of the key events related to food security and the WFS and MDG targets.\nTo reach the goal set at the 1996 WFS, world leaders approved a Plan of  Action, the focus of which is to assist developing countries in becoming  more self-reliant in meeting their food needs by promoting broad-based  economic, political, and social reforms at the local, national, regional, and  international levels. The WFS participants endorsed various actions but  did not enter into any binding commitments. They agreed to review and  revise their national plans, programs, and strategies, where appropriate, to  achieve food security that is consistent with the WFS Plan of Action.  Participants also agreed to submit periodic reports to FAO\u2019s Committee on  World Food Security (CFS) on the implementation of the Plan of Action to  track progress on food security.\nTo monitor progress toward the target of halving the number of  undernourished people worldwide, FAO periodically updates its estimates  of the undernourished population at the global level as well as at the  country level. FAO publishes these estimates in its annual report on The  State of Food Insecurity in the World (SOFI), which was first issued in  1999. The same estimates are used by the UN to track progress toward the  MDG hunger goal.\n\n\t\tSub-Saharan Africa Has Made Little or No Progress in Achieving WFS and MDG Goals\n\nAs shown in figure 2, food insecurity in sub-Saharan Africa is severe and  widespread. According to FAO\u2019s estimates, one out of every four  undernourished people in the developing countries lives in sub-Saharan  Africa. This region also has the highest prevalence of food insecurity, with  one out of every three people considered undernourished. In April 2008,  FAO reported that 21 countries in sub-Saharan Africa, out of 37 countries  worldwide, were critically food-insecure and required external assistance.\nSub-Saharan Africa has not made much progress toward the WFS and  MDG hunger goals to halve, respectively, the total number of and the  proportion (or the percentage) of undernourished people by 2015.  Between the periods of 1990 to 1992 and 2001 to 2003, the number of  undernourished people in the region increased from 169 million to 206  million, and decreased in only 15 of the 39 countries for which data were  reported. The prevalence of hunger, or the proportion of undernourished  people in the population, has declined slightly, from 35 percent in 1990 to  1992 to 32 percent in 2001 to 2003\u2014but this change is due to population  growth. According to FAO\u2019s projections, the prevalence of hunger in sub- Saharan Africa will decline by 2015, but the number of hungry people will  not fall below the 1990 to 1992 levels. By 2015, FAO estimates that sub- Saharan Africa will have 30 percent of the undernourished population in  developing countries, compared with 20 percent in 1990 to 1992. These  data suggest that sub-Saharan Africa needs to substantially accelerate  progress if it is to meet the WFS and MDG targets by 2015. Figure 2 shows  the prevalence of undernourishment around the world and also shows, for  each of the four selected countries in East Africa and southern Africa that  we focused on in our review, the progress needed to reduce the number of  undernourished people to meet the WFS and MDG targets by 2015.\n\n\t\tMultiple Development Partners Implement Programs to Advance Agriculture and Food Security in Sub-Saharan Africa\n\nThe principal development partners that implement programs to advance  agriculture and food security in sub-Saharan Africa are as follows:    Regional organizations and host governments: At the regional level, the  primary vehicle for addressing agricultural development in sub-Saharan  Africa is the New Partnership for Africa\u2019s Development (NEPAD) and its  Comprehensive Africa Agriculture Development Program (CAADP). The  African Union (AU) established NEPAD in July 2001 as a strategic policy  framework for the revitalization and development of Africa. In 2003, AU  members endorsed the implementation of CAADP, a framework that is  aimed to guide agricultural development efforts in African countries, and  agreed to allocate 10 percent of government spending to agriculture by  2008. Subsequently, member states established a regionally supported,  country-driven CAADP roundtable process, which defines the programs  and policies that require increased investment and support by host  governments; multilateral organizations, including international financial  institutions; bilateral donors; and private foundations. According to USAID  officials, the CAADP roundtable process is designed to increase  productivity and market access for large numbers of smallholders and  promote broad-based economic growth. At the country level, host  governments are expected to lead the development of a strategy for the  agricultural sector, the coordination of donor assistance, and the  implementation of projects and programs, as appropriate.\nMultilateral organizations: Several multilateral organizations and  international financial institutions implement programs that contribute to  agricultural development and food security\u2014providing about half of the  donor assistance to African agriculture in 2006. These entities include the  following Rome-based UN food and agriculture agencies: FAO, whose  stated mandate is to achieve food security for all and lead international  efforts to defeat hunger; WFP, which is the food aid arm of the UN; and  IFAD, which finances (through loans and grants) efforts in developing  countries to reduce rural poverty, primarily through increased agricultural  productivity, with an emphasis on food production. IFAD and other  international financial institutions, such as the World Bank and the African  Development Bank, play a large role in providing funding support for  agriculture. For example, the World Bank also provides Secretariat  support for the Consultative Group on International Agricultural Research  (CGIAR), a partnership of countries, international and regional  organizations, and private foundations supporting the work of 15  international agricultural research centers, whose work has played an  important role in improving agricultural productivity and reducing hunger  in the developing countries. Together, the World Bank, IFAD, and the  African Development Bank account for about 73 percent of multilateral  ODA to agriculture for Africa from 1974 to 2006. In addition, the New  York-based UNDP is responsible for supporting the implementation of the  MDG targets and houses the UN MDG Support Team.\nBilateral donors, including the United States: The major bilateral donors  have focused on issues of importance to Africa at every Group of Eight  (G8) summit since the late 1990s. In 2005, these donors reiterated their  commitment to focus on Africa as the only continent not on track to meet  the MDG targets by 2015 and further committed themselves to supporting  a comprehensive set of actions to raise agricultural productivity,  strengthen urban-rural linkages, and empower the poor, based on national  initiatives and in cooperation with NEPAD, CAADP, and other African  initiatives. At that time, the commitments of the G8 and other donors were  expected to lead to an increase in ODA to Africa of $25 billion a year by  2010, more than twice the amount provided in 2004. (See app. V for a  summary discussion of the role of other development partners, such as  NGOs and private foundations.)\nIn the wake of the 1996 WFS, the United States adopted a number of  development initiatives for Africa. These initiatives\u2014including the Africa  Food Security Initiative in 1998, the Africa Seeds of Hope Act in 1998, and  the African Growth and Opportunity Act of 2000\u2014reflect U.S. efforts to  improve the deteriorating food security situation in sub-Saharan Africa.  The consistent U.S. positions at the summit were that the primary  responsibility for reducing food insecurity rests with the host  governments, and that it is critical that all countries promote self-reliance  and facilitate food security at all levels. (See app. II for a summary of U.S.  participation in the 1996 summit.)\nIn 2002, the United States launched IEHA, which represents the U.S.  strategy to help fulfill the MDG of halving hunger in Africa by 2015. In  2005, USAID, the primary agency that implements IEHA, committed to  providing an estimated $200 million per year for 5 years through the  initiative, using existing funds from Title II of Public Law 480 food for  development and assorted USAID Development Assistance and other  accounts. IEHA is intended to build an African-led partnership to cut  hunger and poverty by investing in efforts to promote agricultural growth  that is market-oriented and focused on small-scale farmers. IEHA is  currently implemented in three regional missions in Africa as well as in  eight bilateral missions: Kenya, Tanzania, and Uganda in East Africa;  Malawi, Mozambique, and Zambia in southern Africa; and Ghana and Mali  in West Africa.\n\n\tFood Insecurity Persists in Sub- Saharan Africa Due to Several Factors, Including Low Agricultural Productivity\n\nLow agricultural productivity, limited rural development, government  policy disincentives, and poor health are among the main factors  contributing to persistent food insecurity in sub-Saharan Africa.  Additional factors, including rising global commodity prices and climate  change, will likely further exacerbate food insecurity in the region (see   fig. 3).  (For further discussions of factors and interventions affecting food  security, including a framework for addressing food security issues, see  table 2 in app. III. Additional examples of the interventions, as well as the  summary results of our structured panel discussions with donors and  NGOs during fieldwork, are discussed in app. IV.)\n\n\t\tLow Agricultural Productivity\n\nOne of the most important factors that contribute to food insecurity in  sub-Saharan Africa is its low agricultural productivity. Raising agricultural  productivity is vital to all elements of food security: food availability, food  access, and food utilization. Although imports can be used to supplement  domestic agricultural production in some countries, importing staple  foods may not be practical because some main staples, such as cassava,  are generally not traded in the international market. In addition, poor  infrastructure in many African countries makes it extremely costly to  transport imported foods to remote areas. Furthermore, because the  income of the majority of people in developing countries depends directly  or indirectly on agriculture, growth in this sector would have widespread  poverty-reducing benefits and improve food access for the poor. The  World Bank pointed out in its 2008 World Development Report that  agriculture\u2019s ability to generate income for the poor, particularly for  women, is more important for food security than its ability to increase  local food supplies. According to FAO, poverty is a main immediate cause  of food insecurity in sub-Saharan Africa. Agriculture can also help enhance  diet quality and diversity through new and improved crop varieties,  thereby improving food utilization and nutritional status.\nSub-Saharan Africa has lagged behind other developing countries in  improving agricultural productivity. Since the early 1960s, grain yield in  the rest of the world has increased almost 2.5 percent annually (see fig. 4).  In contrast, grain yield in sub-Saharan Africa has stagnated, with an annual  increase of only approximately 1 percent. As a result, yield of basic food  staples in sub-Saharan Africa, such as maize, is much lower than that of  other countries. For example, Zambia produces about 1,800 kilograms of  maize on a hectare of land, while China produces almost 3 times as much  on the same amount of land. Overall, the gap between the average grain  yield in sub-Saharan Africa compared with the rest of the world\u2019s  developing countries has widened over the years. By 2006, the average  grain yield in sub-Saharan Africa was only about 40 percent of the rest of  the world\u2019s developing countries. Research has also shown that the  expansion of food production has taken a very different course in Asia  than in sub-Saharan Africa, where increases in food staples were achieved  largely by expanding the area cultivated, not by increasing the yield on  existing acreage.\nLow agricultural productivity growth in sub-Saharan Africa is partially due  to inadequate investment and the limited use of modern inputs and  farming practice. Panelists in all four countries we visited reported  difficulty in accessing critical inputs, such as land, seed, fertilizer, and  water, due to their high costs and limited availability. The panelists also  noted that farm management practices were weak in all four countries.  FAO data show that the investment per hectare of land in sub-Saharan  Africa is about one third of the world\u2019s average. Less than 1 percent of the  agricultural land in sub-Saharan Africa is irrigated, thereby making  agricultural production prone to natural disasters, such as droughts. Sub- Saharan Africa uses far less inputs, such as fertilizer and pesticide, than  other parts of the world. For example, its pesticide use is only about 5  percent of the world\u2019s average, which was 0.39 kilograms per hectare in  1998 to 2000 (see table 1). The World Bank reports that while scientific  plant breeding has improved agricultural production throughout much of  the world, sub-Saharan Africa lags behind in adoption of these new  varieties. For example, while at least 80 percent of the crop area in Asia  was planted with improved varieties of rice, maize, sorghum, and potatoes,  only about 20 percent to 40 percent of the crop area in sub-Saharan Africa  used new varieties in these categories. According to several USAID  officials, agricultural productivity has also lagged in sub-Saharan Africa, in  part because innovations in science and technologies, such as improved  seed and soil fertility systems, have not been transferred and adapted to  each country\u2019s unique agro-ecosystem.\n\n\t\tLimited Rural Development\n\nLimited rural development has also been a primary factor aggravating food  insecurity in sub-Saharan Africa. The majority of the population, as well as  the majority of the poor, lives in the rural areas of the region. Weak rural  infrastructure and lack of rural investment, among other factors, limit the  potential for agricultural development and opportunities for nonfarm  income. Panels in all four countries we visited cited poor infrastructure  and farmers\u2019 lack of access to microcredit as challenges.\nRural development in sub-Saharan Africa has suffered from weak  infrastructure, such as lack of rural telecommunications, electricity, and  roads. Although the development community has recognized the  importance of improving rural infrastructure for poverty reduction and  agricultural growth, infrastructure in the region is generally in a frail  condition. For example, IFPRI reported that progress in paved roads is  almost nonexistent in sub-Saharan Africa, and the World Bank reported  that less than half of the rural population in this region lives next to an all- season road. The lack of adequate rural roads increases distribution costs,  adds to postharvest food spoilage, and inhibits the development of local  and regional markets as well as access to those markets. Many rural  households also do not have access to safe drinking water, electricity,  modern communication services, or good transportation. For example, in  Burkina Faso, Uganda, and Zambia, walking is the principal means of  transportation for 87 percent of rural residents. IFPRI concluded that it is  the poor households within the rural areas that have the least access to  infrastructure.\nFarmers\u2019 lack of access to credit also hinders rural development. The  World Bank noted that almost all countries in Africa have a large unmet  demand for agricultural credit and rural finance. With inadequate  financing in the short term, farmers find it difficult to buy inputs and  seeds. In the long term, they are unable to invest in land improvement,  better technology, or irrigation development. The International Monetary  Fund (IMF) noted that rural credit in sub-Saharan Africa is hampered by  land tenure systems that prevent the use of land as collateral, the absence  of physical collateral, the high risk associated with rain-fed agriculture and  sharp commodity price fluctuations, and poor transport and  communication facilities. Banks that specialize in agricultural lending have  become insolvent in many sub-Saharan African countries, or have had to  be rescued at large public cost, with many of these banks collapsing  through the 1980s.\n\n\t\tGovernment Policy Disincentives\n\nEach of the panels we conducted in the four countries we visited cited  weak governance or deficient agricultural policies as challenges, with one  panelist noting that government policies can be a disincentive to  agricultural growth. These policies can have a detrimental impact on the  rural poor. While Asia has fostered growth in agriculture by providing  credit to support prices and input subsidies to farmers, sub-Saharan  African governments have taxed agriculture more than the governments of  other regions. For example, according to the government of Tanzania\u2019s  2007\/2008 Agricultural Sector Review, Tanzanian farmers must pay  about 55 taxes, levies, and fees to sell their agricultural products, which is  equivalent to 50 percent of the products\u2019 price. The World Bank noted that  efforts by local governments to raise local revenue in Tanzania have  occasionally added a significant tax burden to agriculture, with little  benefit. A World Bank study found that of the 18 countries studied, the 3  with the highest tax rates on the agricultural sector were all in sub- Saharan Africa\u2014C\u00f4te d\u2019Ivoire (49 percent), Ghana (60 percent), and  Zambia (46 percent).\nWhile progress has been made over the past two decades by numerous  developing countries in reducing these policy biases, many welfare- and  trade-reducing price distortions remain. These policies continue to provide  disincentives for agricultural development and investment. Other  government policies, such as subsidies to agriculture, if used improperly,  can also negatively affect agriculture and food security. For example, a  World Bank report notes that the government of Zambia\u2019s policy of  subsidizing smallholders\u2019 maize production has had a number of long-term  effects, including a loss of farmers\u2019 skills and knowledge and increased  dietary concentration on subsidized maize meal among Zambian people.  We met with officials in Zambia who also expressed concern that Zambian  maize subsidies led to overreliance on maize meal for nutrition and  underreliance on other sources of food, such as vegetables.\n\n\t\tPoor Health\n\nPoor health also exacerbates food insecurity in sub-Saharan Africa,  according to panels in the four countries we visited, through its adverse  impact on the agricultural workforce. For example, HIV has taken a heavy  toll on the population and agricultural production of sub-Saharan Africa,  because two thirds of those in the world who have HIV live in that region.  HIV is concentrated in the most economically productive groups, those  aged 15 to 45 years, with slightly more women infected than men. UNDP  noted that more than one quarter of Africans are directly affected by the  HIV epidemic. HIV\/acquired immunodeficiency syndrome (AIDS) has a  profound impact on poverty by reducing adults\u2019 capability to work and  raising mortality among young adults. In addition, malaria kills over 1  million people each year, according to the World Health Organization  (WHO), mostly in Africa. The World Bank notes that there is a two-way  relationship between malaria and agriculture. Specifically, on one hand,  when farmers become ill or die from malaria, agricultural production  decreases because of lost labor, knowledge, and assets. On the other hand,  some methods that farmers use to increase agricultural production, such  as increased irrigation, can increase the risk of malaria by increasing the  population of mosquitoes. Furthermore, WHO estimates that there were  14.4 million cases of tuberculosis worldwide in 2006, and that Africa has  the highest incidence of the disease\u2014363 cases per 100,000 people.  Tuberculosis spreads particularly rapidly in areas with high  concentrations of livestock.\n\n\t\tRising Global Commodity Prices\n\nGlobal prices for fuel and agricultural commodities have been rising  significantly due to various factors, further exacerbating food insecurity.  From 2000 to 2008, oil prices are estimated to increase by 238 percent,  grain prices by 175 percent, and vegetable oil prices by 184 percent (see  fig. 5). The growing use of agricultural products, such as soybeans and  corn, for biofuels has raised the price of these commodities and reduced  the amount of land available for production of other food commodities.  (See app. VI for further discussion of biofuels and their impacts on food  security.) Economic growth in large countries, such as China and India,  has also raised demand for food\u2014through both increased incomes and  shifting dietary patterns. Droughts in major grain-producing countries,  such as Australia, and record-low grain reserves have further constrained  world supplies and increased the prices of agricultural goods.\nExperts suggest that rising fuel and commodity prices are negatively  impacting African food security efforts through several channels, as  follows:    Higher fuel prices increase the prices of fertilizer and other inputs for  farmers and make harvesting, storage, and transportation of agricultural  production more expensive. Higher fuel import costs also limit available  foreign exchange for imports of food. USDA reports that official  development assistance has fallen well short of rising energy import bills.  Twenty-two countries\u201415 of which are in sub-Saharan Africa\u2014depend on  imported fuel, import grain, and report a prevalence of undernourishment  exceeding 30 percent, according to FAO.\nHigher agricultural prices hurt many of Africa\u2019s food-insecure, including  low-income consumers who spend a large share of their income on grains  and farmers who buy more food than they produce. Food-insecure  populations are likely to be net buyers of food, and many sub-Saharan  African countries are, in fact, net importers of food. In February 2008,  FAO announced that 21 African countries are in crisis as a result, in part,  of higher food prices, while nutritional studies estimate that 16 million  additional people would be affected by food insecurity for every 1 percent  increase in staple food prices, with many of these people being in Africa.  In the long term, while higher grain prices provide incentives to expand  agricultural production, complementary policies and investments in  technology and market development may be required.\nHigher fuel and commodity prices increase delivery costs for emergency  food aid programs to Africa\u2019s most food-insecure. For the largest U.S.  emergency food aid program, USAID has reported that commodity costs  increased by 41 percent and transportation costs increased by 26 percent  in the first half of fiscal year 2008. As a result, USAID projects a $265  million shortfall in this year\u2019s food aid budget. According to our estimates,  that $265 million could provide enough food aid to reach about 4.5 million  vulnerable people in sub-Saharan Africa during a typical peak hungry  season lasting 3 months. Similarly, in March 2008, WFP appealed to the  international community, including the United States, to compensate for  the growing shortfall in its food aid budget.\n\n\t\tClimate Change\n\nClimate change is also an important emerging challenge that is expected to  worsen African food insecurity. Key climate change models conclude that  global warming has occurred and, since the mid-twentieth century, has  been largely attributable to human activities, such as the burning of fossil  fuels and deforestation. Several models predict further global warming,  changed precipitation patterns, and increased frequency and severity of  damaging weather-related events for this century. IFPRI reports that sub- Saharan Africa may be hardest hit by climate change, with one estimate  predicting that temperature increases for certain areas may double those  of the global average. Since sub-Saharan African countries have a lower  capacity to adapt to variable weather, models also predict that climate  change will further reduce African agricultural yields and will increase the  number of people at risk of hunger. Climate change affects agriculture in  several ways: higher temperatures shorten the growing season and  adversely affect grain formation; reduced precipitation levels limit the  availability of water to grow rain-fed crops; variable climates shift  production to marginal lands and intensify soil erosion; rising sea levels  threaten coastal agricultural land; and climate extremes, such as floods  and droughts, result in crop failure and livestock deaths. Accounting for  these effects, numerous studies seek to estimate the impact of climate  change on African agricultural yields. By 2060, for example, the United  Nations Environment Program projects a 33 percent reduction in grain  yield in sub-Saharan Africa, while FAO predicts that the number of  Africans at risk of hunger will increase to 415 million. (For further  discussion of climate change, see app. VI, which also includes a  compendium of the results of several studies that project adverse impacts  from climate change on African agriculture.)\n\n\tEfforts of Host Governments and Donors, Including the United States, Toward Halving Hunger in Sub-Saharan Africa by 2015 Have Been Insufficient\n\nDespite their commitment to halve hunger in sub-Saharan Africa by 2015,  efforts of host governments and donors, including the United States, to  accelerate progress toward that goal have been insufficient. First, host  governments have not prioritized food security as a development goal, and  few have met their 2003 pledge to direct 10 percent of government  spending to agriculture. Second, donors reduced the priority given to  agriculture, and their efforts have been hampered by difficulties in  coordination and deficiencies in estimates of undernourishment used to  measure progress toward attaining the goals to halve hunger by 2015.  Third, limited agricultural development resources, increased demand for  emergency food aid, and a fragmented approach impair U.S. efforts to end  hunger in sub-Saharan Africa.\n\n\t\tLimited Prioritization, Low Agricultural Spending, and Weak Capacity of Government Institutions Hamper Host Government Efforts\n\nHost government efforts in sub-Saharan Africa have been hampered by  limited prioritization of food security in poverty reduction strategies and  slow follow-through on CAADP goals, low agricultural spending levels,  and weak capacity of government institutions to sustain food security  interventions and to report on progress toward goals to halve hunger by  2015.\n\n\t\t\tAchieving Food Security Has Not Been Prioritized by Some Host Governments\n\nDespite their commitment in the November 1996 Rome Declaration on  World Food Security and the World Food Summit Plan of Action to  achieve food security for all, some host governments have not prioritized  food security in their strategies and use of resources. An FAO- commissioned review of the PRSP process found a lack of consistency  among policies, strategies, and interventions for alleviating food insecurity  and poverty. Developing countries prepare a PRSP every 3 to 5 years  through a participatory process with civil society and donors. As   country-owned documents that establish development priorities and serve  as the basis for assistance from the World Bank and other donors, PRSPs  are to include a country poverty assessment and clearly present the  priorities for macroeconomic, structural, and social policies. Of 10 African  PRSPs reviewed in the FAO-commissioned review, only half included  policies to address food insecurity and less than half included interventions  to address food insecurity. Furthermore, several delegates who attended the  2004 Committee on World Food Security meeting expressed concern that  food security and rural development issues were not adequately reflected in  PRSPs of many countries. Similarly, our analysis of World Bank and IMF  joint assessments of current PRSPs for eight countries in East Africa and  southern Africa found that food security and agricultural development  require greater prioritization in more than half of the strategies examined.\nAlthough African leaders pledged their commitment to prioritize  agricultural development in the CAADP framework, both the initial  planning process and the actual implementation of the CAADP framework  at the country level have been slow. According to a World Bank official,  CAADP\u2019s initial planning process did not begin until 2005, 2 years after  the framework was developed, because it involved (1) forming  stakeholder groups at the regional and continental levels and   (2) establishing credibility within the development community. Thus,  country-level implementation did not start until 2007. Regional entities  representing 40 countries in East Africa, West Africa, and southern Africa  have continued to encourage the implementation and acceleration of  CAADP. However, by the end of 2008, only 13 of the 40 countries are  expected to have completed the initial planning process and organized a  roundtable to formally adopt a CAADP compact. The remaining 27  countries are scheduled to complete the entire process by the summer of  2009. However, for those countries that will formally adopt a CAADP  compact, it is unclear whether concrete results will follow. According to  an IFPRI official, because CAADP is still in the early stages of  implementation, it is difficult to demonstrate the impact of CAADP efforts  to date.\n\n\t\t\tLow Agriculture Spending Levels Remain a Significant Challenge\n\nAlthough African leaders in 2003 pledged to devote 10 percent of  government spending on agriculture, according to an IFPRI study issued in  2008, most countries in Africa\u2014with the exception of four countries:  Ethiopia, Malawi, Mali, and Burkina Faso\u2014had not reached this goal as of  2005. Of the four countries we reviewed\u2014Kenya, Mozambique, Tanzania,  and Zambia\u2014none had met the goal as of 2005. Mozambique was close to  reaching the goal, and government spending for agriculture in Zambia has  shown an upward trend since 2002. However, as shown in figure 6,  government spending for agriculture in Kenya and Tanzania from 2002 to  2005 was well below the CAADP goal.\nAccording to estimates by several research organizations, the total  financial investment required for agricultural development and to halve  hunger in sub-Saharan Africa by 2015 is significant, and experts conclude  that the majority of African countries will need to substantially scale up  spending for their agricultural sectors. IFPRI estimated that annual  investments of $32 billion to $39 billion per year would be required for  agriculture in sub-Saharan Africa, more than 3 to 4 times the level in 2004.  Specifically, Kenya\u2019s spending would need to increase by up to 12 times its  2004 levels; Mozambique spending would need to double; Tanzania would  need to triple its 2004 spending levels; and Zambia would need to spend up  to 9 times its 2004 total. (See fig. 6 for a comparison of actual 2004  agricultural sector spending and the annual agricultural sector spending  required under different scenarios to halve hunger by 2015 in Kenya,  Mozambique, Tanzania, and Zambia.)\n\n\t\tWeak Capacity of Host Government Institutions Hinders Long-term Sustainability of Interventions and Reporting on Progress\n\n\t\t\tSome Food Security Interventions Are Unsustainable Due to a Lack of Host Government Capacity\n\nHost governments\u2019 institutional capacity affects whether they can  eventually take over development activities at the conclusion of donor  assistance, and some lack the capacity to sustain donor-assisted food  security interventions over time. In a 2007 review of World Bank  assistance to the agricultural sector in Africa, the World Bank Independent  Evaluation Group reported that only 40 percent of the bank\u2019s agriculture- related projects in sub-Saharan Africa had been sustainable, compared  with 53 percent for its projects in other sectors. For example, the World  Bank found the expected sustainability of two agriculture projects in  Tanzania to be unrealistic, given the government\u2019s limited capacity to  generate the projected public sector resources. Similarly, IFAD maintains  that sustainability remains one of the most challenging areas that require  priority attention. An annual report, issued by IFAD\u2019s independent Office  of Evaluation, on the results and impact of IFAD operations between 2002  and 2006 rated 45 percent of its agricultural development projects  satisfactory for sustainability.\nDonors\u2019 exit strategies vary depending on host governments\u2019 capacity to  continue their assistance activities. For some sub-Saharan African  countries, the handover may be progressive\u2014that is, a relevant  government ministry gradually takes over the responsibilities of certain  food security interventions in specific geographic regions as the  government\u2019s capacity improves. For example, because the government of  Lesotho currently lacks the capacity to run the WFP-funded school-feeding  program throughout the country, WFP has targeted schools in remote,  inaccessible mountainous areas and expects to hand over full  responsibility to the government by 2010. Political instability can also  impact the sustainability of food security, even when the handover is  expected to be successful. For example, although the director of the UN  Millennium Village in Sauri, Kenya, has been relying on effective  coordination with several Kenyan government ministries to enable the  village to continue its operations after the UN\u2019s departure, recent  postelection turmoil in the country has raised uncertainties about the  project\u2019s long-term sustainability.\n\n\t\t\tWeak Reporting on Progress Toward Hunger Goals\n\nAll participating governments and international organizations agreed to  submit a biannual national progress report to FAO\u2019s Committee on World  Food Security on the implementation of the WFS Plan of Action. However,  many governments have not submitted reports, and the quality of the  reports that have been submitted has varied. Successful reporting requires  a lengthy consultation process with government officials and other  stakeholders to answer several questions about indicators of progress that  cover 7 commitments and 27 objectives. To make the process easier, FAO  revised its reporting requirements in 2004, but the reporting rate has  remained low. In 2006, the last time that the reports were due, only 79  member states and organizations, such as the World Bank and WFP, had  submitted progress reports on the WFS Plan of Action to FAO\u2019s  Committee on World Food Security, according to FAO. Of these 79  member states and organizations, only 17 were from sub-Saharan Africa.\nFAO cited the limited capacity of government institutions as one of the  main reasons for low reporting rates on progress toward hunger targets.  According to FAO, government officials working within ministries of  agriculture are responsible for reporting on their country\u2019s national food  security action plan. However, some government ministries that are  responsible for reporting lack the capacity to prepare a comprehensive  report on all seven commitments because they do not have the support  they require from other domestic institutions and agencies.\nAccording to FAO, the poor quality and inconsistency of the national  progress reports have not allowed FAO to draw general substantive  conclusions. While most national progress reports provide information on  policies, programs, and actions being taken to reduce undernourishment,  few of the reports provide information on the actual results of actions  taken to reduce the number of undernourished people. In addition, the  content of the reports varies. Specifically, some countries either   (1) provide only selective information on certain aspects of food security  that they consider most relevant, such as food stocks or reserve policies;  (2) provide variable emphasis on past, ongoing, and future food security  plans and programs; (3) focus on irrelevant issues; or (4) provide more  description than analysis. Despite these concerns, providing feedback or  critical assessments on the submitted reports is beyond the mandate and  the staff capacity of the Committee on World Food Security Secretariat,  according to FAO officials. As a result, the usefulness of the information  submitted and the potential to improve the quality of reporting are limited.  FAO officials acknowledged these limitations and the usefulness of the  information submitted for monitoring and is investigating ways to improve  the WFS monitoring process.\n\n\t\tDeclining Resources, Difficulties in Coordination, and Deficiencies in Undernourishment Estimates Limit Donor Efforts\n\n\t\t\tMultilateral and Bilateral Aid to African Agriculture Has Declined\n\nFor some sub-Saharan Africa countries, a large portion of food security  assistance comes from multilateral and bilateral donors through ODA  provided to the country\u2019s agriculture sector. However, the share of  multilateral and bilateral ODA provided to agriculture for Africa has  declined steadily since peaking in the 1980s. Specifically, ODA data show  that the worldwide share of ODA to the agricultural sector for Africa has  significantly declined, from about 15 percent in the early 1980s to about 4  percent in 2006. According to a World Bank official, in the 1980s, the bank  directed considerable funding toward agricultural development programs in  sub-Saharan Africa that ultimately proved unsustainable. In the 1990s, the  World Bank prioritized health and sanitation programs in the region over  agricultural development programs. By 2005, the bank had started shifting  its priorities back to African agricultural development, investing  approximately $500 million per year in the sector. Bank officials expect that  total to increase by 30 percent by the end of 2008. According to the UN, the  international community needs to increase external financing for African  agriculture from the current $1 to $2 billion per year to about $8 billion by  2010. Figure 7 shows the overall declining trend of multilateral and bilateral  ODA to agriculture for Africa and the percentages of bilateral and  multilateral donor contributions from 1974 to 2006.\nThe decline of donor support to agriculture in Africa is due to competing  priorities for funding and a lack of results from past unsuccessful  interventions. According to the 2008 World Development Report, many of  the large-scale integrated rural development interventions promoted  heavily by the World Bank suffered from mismanagement and weak  governance and did not produce the claimed benefits. In the 1990s, donors  started prioritizing social sectors, such as health and education, over  agriculture. For example, one of the United States\u2019 top priorities for  development assistance is the treatment, prevention, and care of HIV\/AIDS  through the President\u2019s Emergency Plan for AIDS Relief, which is  receiving billions of dollars every year. The increasing number of  emergencies and response required from international donors has also  diverted ODA that could have been spent on agricultural development.  (See fig. 8 for the increasing trend of ODA to Africa for emergencies  compared with ODA to agriculture for Africa.)\nDonor and NGO panels that we convened in the four countries we  visited\u2014Kenya, Mozambique, Tanzania, and Zambia\u2014reported a general  lack of donor coordination as a challenge, despite efforts to better align  donor support with national development priorities, such as those that the  international community agreed upon in the Paris Declaration on Aid  Effectiveness in March 2005. Improved donor coordination was  recommended seven times in four panels that we convened during our  fieldwork.\nCoordination of agricultural development programs has been difficult at  the country level due, in part, to the large number of simultaneous  agricultural development projects that have not been adequately aligned.  According to the 2008 World Development Report, in Ethiopia, almost 20  donors were supporting more than 100 agriculture projects in 2005.  Similarly, government efforts in Tanzania have been fragmented among  some 17 multilateral and bilateral donors in agriculture. A study of the  United Kingdom National Audit Office reported that British country teams  are not sure about specific activities, geographical focus, and donors\u2019  comparative advantage due, in part, to the large number of donors and  projects ongoing at the country level. In addition, bilateral donor  assistance is often not adequately aligned with the strategies and programs  of international financial institutions and private foundations. Specifically,  according to the UN Millennium Project, UN agencies are frequently not  well-linked to the local activities of the large financial institutions and  regional development banks that tend to have the most access in advising  a government, since they provide the greatest resources. The World Bank  in its 2008 World Development Report was critical of the lack of  complementary investments made by other donors at different stages of  the food production and supply process.\nIn an attempt to address inadequate division of labor among donors, the  UN agencies have established new coordination mechanisms. In  September 2007, the UN Secretary-General first convened the UN MDG  Africa Steering Group to identify strategic ways in which the international  community could better coordinate and support national governments\u2019  implementation of MDG programs, including the implementation of  agriculture and food security. The steering group met again in March 2008,  where it identified the unpredictability of aid, poor alignment with country  systems, and inadequate division of labor among donors as major  challenges to African food security. The group expects to publish its  recommendations for achieving MDGs in Africa by the end of May 2008. In  addition, the UN has recently established the One UN initiative at the  country level to facilitate coordination. The purpose of this initiative is to  shift from several individual agency programs to a single UN program in  each country with specific focus areas, one of which could be food  security. Two countries we visited\u2014Tanzania and Mozambique\u2014were  among the eight countries worldwide to pilot the One UN initiative in  2007 and 2008. In addition, to accelerate progress toward MDGs\u2014 particularly MDG-1\u2014WFP, FAO, and IFAD recently agreed to establish  joint Food Security Theme Groups at the country level. The main purpose  of these groups is to enhance interagency collaboration and coordination  to support countries\u2019 development efforts in the areas of food security,  agriculture, and rural development. Between June 2007 and August 2007, a  review of the status of the Food Security Theme Groups showed that they  are present in 55 countries (29 in sub-Saharan Africa). However, according  to the UN Millennium Project, efforts through UN country teams are more  of a forum for dialogue, rather than a vehicle for real coordination.\n\n\t\t\tFAO Estimates of Undernourishment Have Deficiencies\n\nIt is difficult to accurately assess progress toward the hunger goals  because of deficiencies in FAO\u2019s estimates of undernourishment, which  are considered the authoritative statistics on food security. These  deficiencies stem from methodological weaknesses and poor data quality  and reliability, as follows:    Weaknesses in methodology: FAO\u2019s methodology has been criticized on  several grounds. First, FAO relies on total calories available from food  supplies and ignores dietary deficiencies that can occur due to the lack of  adequate amounts of protein and essential micronutrients. Second, FAO  underestimates per capita food availability in Africa, and, according to  several FAO officials in Rome, coverage of noncereal crops, such as  cassava\u2014a main staple food for sub-Saharan Africa\u2014has been inadequate.  Third, FAO estimates are more subject to changes in the availability of  food and less so to changes in the distribution of food, which leads to the  underestimation of undernourishment in regions with relatively better  food availability but relatively worse distribution of food, such as South  Asia. Even when food is available, poor people may not have access to it,  which leads to undernourishment. Lastly, FAO relies on food consumption  data from outdated household surveys to measure inequality in food  distribution. According to FAO, some of these surveys are over 10 years  old.\nPoor data quality and reliability: According to FAO officials, the quality  and reliability of food production, trade, and population data, which FAO  relies on for its estimates of undernourishment, vary from country to  country. For many developing countries, the data are either inaccurate or  incomplete, which directly impacts FAO\u2019s final estimate of  undernourishment. For example, FAO officials told us that the estimated  prevalence of undernourishment in Myanmar was 5 percent, but the  officials questioned the reliability and accuracy of the data reported by the  government of Myanmar. In addition, FAO lacks estimates of  undernourishment for some countries to which a substantial amount of  food aid has been delivered, such as Afghanistan, Iraq, and Somalia. Since  data on production, trade, and consumption of food in some countries are  not available, FAO makes one undernourishment estimate for these  countries as a group and takes this estimate into account to determine  total undernourishment worldwide.\nFurthermore, FAO\u2019s undernourishment estimates are outdated, with its  most recent published estimates covering the 3-year period of 2001 to  2003. In 2007, FAO suspended publication of The State of Food Insecurity  in the World (SOFI) report, which it had been issuing annually since 1999.  FAO also did not submit hunger data for the UN Millennium Development  Report in 2006, and, according to an official from the UN Statistics  Division, FAO is unlikely to do so for 2007 as well. FAO did not publish the  2007 SOFI report or contribute data for the Millennium Development  Report because it is presently revising the minimum caloric requirements,  a key component in FAO\u2019s methodology for estimating undernourishment  to measure progress toward the 2015 hunger goals.\nFAO has acknowledged that it needs to improve its methodology and  consider other indicators to accurately portray progress toward hunger  targets. As part of this effort, FAO sponsored an \u201cInternational Scientific  Symposium\u201d in 2002 for scientists and practitioners to discuss various  measures and assessment methods on food deprivation and  undernourishment. According to FAO, efforts to improve food security  and nutrition measures are a continuous activity of the agency, which has  also been involved in strengthening data collection and reporting capacity  at the regional and country levels. FAO is also developing a new set of  indicators for measuring food security and nutrition status.\n\n\t\tLimited Agricultural Development Resources and a Fragmented Approach Impair U.S. Efforts to End Hunger in Sub-Saharan Africa\n\n\t\t\tUSAID\u2019s Food Aid Funding for Emergencies Has Increased Substantially, While Its Food Aid Funding for Development Has Not Changed Significantly\n\nIn recent years, the levels of USAID funding for development in   sub-Saharan Africa have not changed significantly compared with the  substantial increase in funding for emergencies (see fig. 9). Funding for  the emergency portion of Title II of Public Law 480\u2014the largest U.S. food  aid program\u2014has increased from about 70 percent a decade ago to over  85 percent in recent years. After rising slightly from 2003 to 2005, the  development portion of USAID\u2019S food aid funding fell below the 2003 level  in 2006 and 2007.\nWhile emergency food aid has been crucial in helping to alleviate the  growing number of food crises, it does not address the underlying factors  that contributed to the recurrence and severity of these crises. Despite  repeated attempts from 2003 to 2005, the former Administrator of USAID  was unsuccessful in significantly increasing long-term agricultural  development funding in the face of increased emergency needs and other  priorities. Specifically, USAID and several other officials noted that budget  restrictions and other priorities, such as health and education, have  limited the U.S. government\u2019s ability to fund long-term agricultural  development programs in sub-Saharan Africa. The United States,  consistent with other multilateral and bilateral donors, has steadily  reduced its ODA to agriculture for Africa since the late 1980s, from about  $500 million in 1988 to less than $100 million in 2006 (see fig. 10).\nThe U.S. Presidential Initiative to End Hunger in Africa (IEHA)\u2014the  principal U.S. strategy to meet its commitment toward halving hunger in  sub-Saharan Africa\u2014has undertaken a variety of efforts that, according to  USAID officials, aim to increase rural income by improving agricultural  productivity, increasing agricultural trade, and advancing a favorable  policy environment, including building partnerships with donors and  African leaders. However, USAID officials acknowledged that IEHA lacks  a political mandate to align the U.S. government food aid, emergency, and  development agendas to address the root causes of food insecurity.  Despite purporting to be a governmentwide presidential strategy, IEHA is  limited to only some of USAID\u2019s agricultural development activities and  does not integrate with other agencies in terms of plans, programs,  resources, and activities to address food insecurity in Africa. For example,  because only eight USAID missions have fully committed to IEHA and the  rest of the missions have not attributed funding to the initiative, USAID  has been unable to leverage all of the agricultural development funding it  provides to end hunger in Africa. This lack of a comprehensive strategy  has likely led to missed opportunities to leverage expertise and minimize  overlap and duplication. Our meetings with officials of other agencies  demonstrated that there was no significant effort to coordinate their food  security programs. A U.S. interagency working group that had attempted  to address food security issues since the mid-1990s disbanded in 2003. In  April 2008, USAID established a new Food Security and Food Price  Increase Task Force, but it is not a governmentwide interagency working  group.\nAlthough both MCC and USDA are making efforts to address agriculture  and food insecurity in sub-Saharan Africa, IEHA\u2019s decision-making process  does not take these efforts into consideration. In addition, IEHA does not  leverage the full extent of the United States\u2019 assistance to African  agriculture through its contributions to multilateral organizations and  international financial institutions, which are managed by State and  Treasury. Some of the U.S. agencies\u2019 plans and programs for addressing  food insecurity in Africa involve significant amounts of assistance. For  example, as of June 2007, MCC had committed $1.5 billion for multiyear  compacts in sub-Saharan Africa, of which $605 million (39 percent) was  for agriculture and rural development programs and another $575 million  (37 percent) was for transportation and other infrastructure. Only  recently, USAID has provided MCC with assistance in the development  and implementation of country compacts. USDA, which administers  several food aid programs, also administers a wide range of agricultural  technical assistance, training, and research programs in sub-Saharan  Africa to support the African Growth and Opportunity Act,  NEPAD\/CAADP, and the regional economic organizations. However,  according to USAID Mission officials in Zambia, coordination difficulties  arise when U.S.-based officials from other government agencies, such as  USDA, plan and implement food security projects at the country level with  little or no consultation with the U.S. Mission staff.\n\n\tConclusions\n\nMost donors, including the United States, have committed to halving  global hunger by 2015, but meeting this goal in sub-Saharan Africa is  increasingly unlikely. Although host governments and donors share  responsibility for this failure, especially with regard to devoting resources  to support sub-Saharan Africa\u2019s agricultural sector, host governments play  a primary role in reducing hunger in their own countries. Without  adequate efforts by the host governments coupled with sufficient donor  support, it is difficult to break the cycle of low agricultural productivity,  high poverty, and food insecurity that has contributed to an increase in  emergency needs. The United States\u2019 approach to addressing food  insecurity has traditionally relied on the U.S. food aid programs. However,  in recent years, the resources of these programs have focused on the rising  number of acute food and humanitarian emergencies, to the detriment of  actions designed to address the fundamental causes of these emergencies,  such as low agricultural productivity. Moreover, IEHA does not  comprehensively address the underlying causes of food insecurity, nor  does it leverage the full extent of U.S. assistance to sub-Saharan Africa.  Consequently, the U.S. approach does not constitute an integrated  governmentwide food security strategy. In implementing its food security  efforts, the United States has not adequately collaborated with host  governments and other donors, which has contributed to further  fragmentation of these efforts. Finally, without reliable data on the nature  and extent of hunger, it is difficult to target appropriate interventions to  the most vulnerable populations and to monitor and evaluate their  effectiveness. Sustained progress in reducing sub-Saharan Africa\u2019s  persistent food insecurity will require concerted efforts by host  governments and donors, including the United States, in all of these areas.\n\n\tRecommendations for Executive Action\n\nTo enhance efforts to address global food insecurity and accelerate  progress toward halving world hunger by 2015, particularly in sub-Saharan  Africa, we recommend that the Administrator of USAID take the following  two actions:    work in collaboration with the Secretaries of State, Agriculture, and the  Treasury to develop an integrated governmentwide U.S. strategy that  defines each agency\u2019s actions and resource commitments toward  achieving food security in sub-Saharan Africa, including improving  collaboration with host governments and other donors and developing  improved measures to monitor and evaluate progress toward the  implementation of this strategy, and   prepare and submit, as part of the annual U.S. International Food  Assistance Report, an annual report to Congress on progress toward the  implementation of the first recommendation.\n\n\tAgency Comments and Our Evaluation\n\nUSAID and the Departments of Agriculture and State provided written  comments on a draft of our report. We have reprinted these agencies\u2019  comments in appendixes VII, VIII, and IX, respectively, along with our  responses to specific points. In addition to these agencies, several other  entities\u2014including MCC, Treasury, FAO, IFAD, IFPRI, UNDP, and WFP\u2014 provided technical comments on a draft of our report, which we have  incorporated as appropriate.\nUSAID concurred with our first recommendation\u2014noting that the  responsibility for halving hunger by 2015 lies with the respective countries  while mentioning activities that the United States, through efforts such as  IEHA, and the international community are undertaking to address the  issue of food security. However, USAID expressed concern with our  conclusion that the shift in its focus from emergency food aid to long-term  agricultural development has not been successful. We recognize the  challenges of addressing an increasing number of emergencies within tight  resource constraints. However, it is equally important to recognize that  addressing emergencies\u2014to the detriment of long-term agricultural  development\u2014does not break the cycle of low agricultural productivity,  high poverty, and food insecurity that has persisted in many sub-Saharan  African countries. Regarding our second recommendation, USAID  asserted that the International Food Assistance Report (IFAR) is not the  appropriate vehicle for reporting on progress on the implementation of  our first recommendation. USAID suggested that a report such as the  annual progress report on IEHA (which is not congressionally required)  would be more appropriate. We disagree. We believe that the  congressionally required annual IFAR, in fact, would be an appropriate  vehicle for reporting on USAID\u2019s and other U.S. agencies\u2019 implementation  of our first recommendation. Public Law 480, section 407(f) (codified at 7  U.S.C. 1736a(f)) requires that the President prepare an annual report that  \u201cshall include. . .an assessment of the progress toward achieving food  security in each country receiving food assistance from the United States  Government.\u201d This report is intended to contain a discussion of food  security efforts by U.S. agencies.\nIn addition, USDA stated that our report was timely and provided useful  information and recommendations. Noting its participation in an  interagency food aid policy coordinating process, USDA reaffirmed its  commitment to using its full range of authorities and programs to address  the need for and improve the effectiveness of global food assistance and  development. Although we recognize that an interagency Food Assistance  Policy Council provides a forum for the discussion and coordination of  U.S. food aid programs, a similar forum to address food security issues  had not been established until May 2008 following the release of a draft of  this report. Finally, although USDA administers food assistance programs,  including food aid programs for development, we note that these are not  included in IEHA.\nState identified additional issues for consideration, which we have  addressed as appropriate. Specifically, State disagreed with our statement  that U.S. agencies had made no significant effort to coordinate their food  security programs, citing its ongoing coordination with USAID and USDA  on food security issues. For example, State indicated that several of its  offices and bureaus\u2014such as as the Office of the Director of Foreign  Assistance; the Bureaus of Population, Refugees, and Migration;  Economic, Energy, and Business Affairs; African Affairs; International  Organization Affairs, and others\u2014work closely with USAID and USDA to  coordinate food security issues. However, as we noted in this report, these  efforts, to date, have been focused primarily on food aid, as opposed to  food security, and there is no comprehensive U.S. governmentwide  strategy for addressing food insecurity in sub-Saharan Africa.\nTreasury generally concurred with our findings and provided additional  comments for consideration, which we have addressed as appropriate.\nWe are sending copies of this report to interested Members of Congress;  the Administrator of USAID; and the Secretaries of Agriculture, State, and  the Treasury. We will also make copies available to others upon request. In  addition, this report will be available at no charge on the GAO Web site at  http:\/\/www.gao.gov.\nIf you or your staffs have any questions about this report, please contact  me at (202) 512-9601 or melitot@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 major contributions to this report are  listed in appendix X.\n\nAppendix I: Objectives, Scope, and Methodology\n\nOur objectives were to examine (1) factors that contributed to persistent  food insecurity in sub-Saharan Africa and (2) the extent to which host  governments and donors, including the United States, are working toward  halving hunger in the region by 2015.\nTo examine factors that have contributed to continued food insecurity in  sub-Saharan Africa, we relied on the United Nations (UN) Food and  Agriculture Organization\u2019s (FAO) estimates on the number of  undernourished people, and the prevalence of undernourishment, which is  one of two progress indicators in the Millennium Development Goals  (MDG) target of halving hunger, to illustrate the lack of progress in  reducing hunger in sub-Saharan Africa as compared with other parts of the  developing world. Although we recognize the limitations of FAO\u2019s  estimates (such as the lack of up-to-date information), they are the official  basis of the World Food Summit (WFS) and MDG targets and are largely  consistent with the trends reported by other sources, such as the U.S.  Department of Agriculture\u2019s (USDA) estimates on global hunger. We  discussed the reliability of FAO\u2019s undernourishment data with several  cognizant FAO officials and various U.S. government officials in  Washington and in sub-Saharan Africa. We determined that these  estimates are sufficiently reliable for our purpose, which is to show overall  trends over time at the aggregate level. We also analyzed FAO\u2019s data on  input use, grain production, and grain planting areas to compare  agricultural input use and productivity in sub-Saharan Africa with that of  other parts of the world. We determined that these data are sufficiently  reliable for our purposes. To assess the reliability of the International  Monetary Fund (IMF) data on commodity prices, we reviewed (1) existing  documentation related to the data sources and (2) documents from other  agencies reporting on commodity prices and found collaborating support.  Accordingly, we determined that the data were sufficiently reliable for the  purposes of this report.\nWe selected four countries for fieldwork\u2014Kenya and Tanzania in East  Africa, and Mozambique and Zambia in southern Africa\u2014on the basis of  geographic region, data on undernourished people, and U.S. Agency for  International Development (USAID) programs in-country. We selected  countries in east and southern Africa because those regions have high  prevalence rates of undernourishment and excluded countries with  current conflict. While this selection is not representative in any statistical  sense, it ensured that we had variation in the key factors we considered.  We do not generalize the results of our fieldwork beyond that selection,  using fieldwork primarily to provide illustrative examples.\nIn addition, we reviewed economic literature on the factors that influence  food security and recent reports, studies, and papers issued by U.S.  agencies, multilateral organizations, and bilateral donors. We reviewed the  Rome Declaration on World Food Security and the World Food Summit  Plan of Action, which included 7 commitments, 27 objectives, and 181  specific actions. We recognize the multifaceted nature of factors affecting  food security, but some of them, such as conflict and trade reforms, were  beyond the scope of our study. We reviewed economic studies and recent  reports on the factors that influence food security. These included articles  from leading authors published in established journals, such as World  Development. We also included studies by such organizations as the  International Food Policy and Research Institute (IFPRI), FAO, IMF,  USDA\u2019s Economic Research Service, World Food Program (WFP), and the  World Bank. These sources were chosen because they represent a wide  cross section of the discussion on food security and are written by the  leading authorities and institutions working in the field. To summarize and  organize meaningfully the many factors and interventions that impact and  can address global food security, we created a framework. To ensure that  the framework was comprehensive and rigorous, we based it on relevant  literature and the input of practitioners and experts. Specifically, our first  step was to review relevant research on global food security from  multilateral institutions and academia and consider key policy documents,  such as the Rome Declaration. We presented the first draft of the  framework to a panel of nongovernmental organizations (NGO) and  government representatives in Washington, D.C., and subsequently used  the framework during our panels in the four African countries to help  stimulate discussion. We refined the framework on the basis of  preliminary analysis of the panel results and finalized it on the basis of the  input of a roundtable of food security experts in Washington, D.C.\nIn the four African countries that we selected for fieldwork, we conducted  structured discussions with groups of NGOs and donors, organizing them  into 9 panels with about 80 participants representing more than 60 entities.  To identify the panelists\u2019 views on key recommendations for improvement  and lessons learned, we posed the same questions to each of the 9 panels  and recorded their answers. Subsequently, we coded their  recommendations and lessons according to the factors that were further  refined and are shown in figure 3. We also coded some recommendations  and lessons according to a few additional topics that occurred with some  frequency in the panels but that fell outside the scope of our framework,  such as donor coordination and the targeting of U.S. food aid. Two staff  members performed the initial coding independently and then met to  reconcile any differences in their coding. These lessons and  recommendations that we coded represent the most frequently expressed  views and perspectives of in-country NGOs, donors, and regional  representatives that we met with, and cannot be generalized beyond that  population.\nTo examine the extent to which host governments and donors, including  the United States, are working toward halving hunger by 2015, we  analyzed data on official development assistance (ODA) to developing  countries published by the Organization for Economic Cooperation and  Development (OECD), Development Assistance Committee (DAC).  Specifically, we analyzed the trends in the share of ODA going to  agriculture and to emergencies from multilateral and bilateral donors,  from 1974 to 2006. The DAC Secretariat assesses the quality of aid activity  data each year by verifying both the coverage (completeness) of each  donor\u2019s reporting and the conformity of reporting with DAC\u2019s definitions  to ensure the comparability of data among donors. These data are widely  used by researchers and institutions in studying development assistance  resource flows. OECD\u2019s classification of agriculture may underreport  funding to agriculture. OECD\u2019s ODA to agriculture excludes rural  development and development food aid. For example, the International  Fund for Agricultural Development (IFAD) believes that some of its  multisectoral lending may not have counted as ODA to agriculture.  However, since OECD has consistently used the same classification, we  determined that the data are sufficiently reliable for our purpose, which is  to track trends over time. To determine whether African governments  have fulfilled their pledge to devote 10 percent of their budgets to  agriculture, we relied on the government expenditure data provided by  IFPRI, which is the same data source on which USAID relies. We  determined that these data are sufficiently reliable for the purposes of a  broad comparison of countries\u2019 agricultural spending to the  Comprehensive Africa Agriculture Development Program (CAADP) targets  in the aggregate. IFPRI recognizes that data on government sectoral  spending are weak in many developing countries and is working with  some of these countries to improve data quality. We also analyzed USAID  budget for the Presidential Initiative to End Hunger in Africa (IEHA). We  determined that these data are sufficiently reliable for our purposes. The  information on foreign law in this report does not reflect our independent  legal analysis but is based on interviews and secondary sources.\nIn Washington, D.C., we interviewed officials from U.S. agencies, including  USAID, USDA, the Departments of State and the Treasury, and the  Millennium Challenge Corporation (MCC). We also met with IFPRI and the  World Bank. In New York, we met with UNDP, the Rockefeller  Foundation, the Alliance for a Green Revolution in Africa (AGRA), and  Columbia University; and in Seattle, Washington, we met with the Bill and  Melinda Gates Foundation. In Rome, we met with FAO, WFP, IFAD, and  the Consultative Group on International Agricultural Research (CGIAR).  We also met with the U.S. Mission to the United Nations in Rome and  several bilateral donors\u2019 permanent representatives to the Rome-based UN  food and agriculture agencies. In addition, in Washington, D.C., we  convened a roundtable of 12 experts and practitioners\u2014including  representatives from academia, research organizations, multilateral  organizations, NGOs, and others\u2014to further delineate, on the basis of our  initial work, some of the factors that have contributed to food insecurity in  sub-Saharan Africa and challenges that hamper accelerating progress  toward food security.\nWe conducted this performance audit from April 2007 to May 2008 in  accordance with generally accepted government auditing standards. Those  standards require that we plan and perform the audit to obtain sufficient,  appropriate evidence to provide a reasonable basis for our findings and  conclusions based on our audit objectives. We believe that the evidence  obtained provides a reasonable basis for our findings and conclusions  based on our audit objectives.\n\nAppendix II: U.S. Participation in the 1996 World Food Summit\n\nAs a major participant in the 1996 WFS, the United States supported the  summit\u2019s goal of halving the number of undernourished people in the  world by 2015. During the summit and over the last decade, the U.S.  position on global food security has been predicated on a strong belief that  the primary responsibility for reducing food insecurity rests with each  country, and that it is critical that all countries adopt policies that promote  self-reliance and facilitate food security at all levels, including food  availability, access, and utilization. U.S. policy as represented at the  summit advocated the following national policies and actions to improve  food security:    Governments should act as facilitators rather than intervenors. National  policies that facilitate the development of markets and expand the  individual\u2019s freedom of action are the best guarantor of food security.  Emphasis is placed on democratic institutions, transparency in  government, opposition to graft and corruption, and full participation by  the private sector.\nAll countries should work to promote liberalized trade to maximize the  potential for economic growth (within the context of sustainable  development) and realize the benefits of comparative advantage.\nGovernments should invest in a public goods infrastructure that includes  transportation, communication, education, and social safety nets; and  governments should provide basic health and sanitary services, maintain  basic levels of nutrition, and facilitate the stabilization of vulnerable  populations.\nGovernments should ensure a political system that does not discriminate  against women. All countries must recognize the essential role of women,  who work to produce more than half of the food in developing countries.\nGovernments should establish a general development policy that   (1) neither discriminates against agricultural or fisheries sectors nor  against rural or coastal areas and (2) recognizes that poverty alleviation  requires an integrated approach to rural development.\nAll countries should promote the critical role of sustainable development  in agriculture, forestry, and fisheries sectors, and these policies must be  environmentally sound.\nGreater emphasis needs to be placed on agricultural research and  extension services. Governments should emphasize investment in  agricultural research and technical education.\nDuring negotiations on the summit policy statement and Plan of Action,  the United States opposed any agreement that supported additional  resource pledges by the developed countries or the creation of new  financial mechanisms, institutions, or bureaucracies. Although the United  States was not prepared to commit increased resources for food security,  U.S. government representatives at the summit indicated that the United  States intended to play a major role in promoting food security around the  world. According to a U.S. position paper, the United States planned to  accomplish this objective by    enhancing U.S. government support for research and technology  development in agriculture and related sectors;   employing an integrated approach to sustainable development, with a  strong emphasis on those countries that show a good-faith willingness to  address policy reforms;   continuing support for food security through the use of agriculture  programs, development assistance, and food aid;   continuing support for international efforts to respond to and prevent  humanitarian crises that create a need for emergency food;   continuing efforts to encourage and facilitate implementations of food  security-related actions adopted at international conferences or agreed-to  conventions;   working within the multilateral system to enhance global approaches to    working with all countries to achieve freer trade and ensure that the  benefits are equitably realized, and urging all countries to open their  markets in the interest of achieving greater stability and participation in  the world market.\nAn interagency governmentwide Working Group on Food Security that  was established to prepare for the 1996 summit continued to operate until  2003, issuing two annual reports on a U.S. Food Security Plan of Action in  1999 and 2000. This group was assisted by a Food Security Advisory  Committee composed of representatives from the private agribusiness  sector, NGOs, and educational institutions. (These groups were disbanded  in 2003.) These reports indicated some limited progress in addressing food  security, primarily through the use of existing U.S. food aid and limited  agricultural development and trade initiatives. The establishment of the  African Food Security Initiative in 1998, the Greater Horn of Africa  Initiative, the Africa Seeds of Hope Act in 1998, and the African Growth  and Opportunity Act of 2000 all reflected some limited U.S. government  initiative to improve a deteriorating food security situation in sub-Saharan  Africa.\n\nAppendix III: Factors and Interventions Affecting Food Security\n\nThis appendix provides greater detail and explains the importance of the  factors we used to develop a framework to evaluate findings obtained  during the in-country interviews in Kenya, Tanzania, Mozambique, and  Zambia and the literature on food security, including the 2008 World Bank  Development report and the Rome Declaration. The factors listed in the  framework shown in table 2 are areas on which development efforts can  be focused. They include such areas as agricultural productivity and  development; rural development; governance; and health, education, and  social welfare. All of these factors contribute to food security. For  example, actions to improve agricultural productivity are most effective in  conjunction with rural development, good governance, and good health  and welfare. The framework also identifies actions or interventions that  can be taken to address these development factors. They include such  actions or interventions as increasing access to inputs, improving  infrastructure, and strengthening rural communities. Successful  agricultural development requires coordination of these interventions  across a range of activities. For example, farmers cannot buy inputs unless  there are functioning credit institutions. Also, farmers cannot access  markets if there are no roads. Given that achieving food security is an  extremely difficult and complex process and that there are many different  ways in which to categorize these factors, this list should not be construed  as exhaustive. Nonetheless, this categorization provides a framework with  which to identify the issues on which to base discussion on food security  and summarize the range of programs implemented in various African  countries.\n\nAppendix IV: Summary Results of GAO\u2019s Structured Panel Discussions with Donors and NGOs, with Examples of Interventions\n\nOn the basis of a content analysis of the results from our nine structured  panel discussions in Kenya, Mozambique, Tanzania, and Zambia, we  identified key recommendations for improving food security (see table 3).  For example, the first row of this table indicates that all 9 panels  mentioned the recommendation to improve marketing, and that the  recommendation was mentioned 35 times across all 9 panels.\nThe next several sections of this appendix provides some examples of  interventions that governments, research organizations, NGOs, private  foundations, and other donors have undertaken to address the factors  underlying food insecurity.\n\n\tInterventions to Improve Access to Markets\n\nOur panelists noted that improving markets and farmers\u2019 access to them is  key to improving their food security. Well-functioning markets at all levels  of the marketing chain, among other things, provide accurate price  information, buyer contacts, distribution channels, and buyer and  producer trends. They can be facilitated by encouraging private  investment and establishing private\/public partnerships and developing  the capacity of agrobusiness and processing focused on value-added  production. As an early action under CAADP, an Alliance for Commodity  Trade in East and Southern Africa is being developed to open up national  and regional market opportunities for staple foods produced by millions of  smallholder farmers. Agribusiness, in particular, has an economic interest  in a vibrant agricultural sector. For this reason, USAID supports private  agribusiness development in Africa, working directly with about 900  public\/private partnerships to build capacity and leverage additional  resources in 2006. These include producers, exporters, and their  associations, such as the East African Fine Coffees Association, which is  linking buyers from companies like Starbucks in the United States with  producers and exports of high-value coffee, and the African Cotton and  Textile Industry Federation, which is improving the links of African  farmers to the U.S. market through the African Growth and Opportunity  Act. To facilitate market access in arid and semi-arid areas, USAID\u2019s  Famine Fund has been supporting a pastoral livelihood program.\n\n\tInterventions to Strengthen Rural Communities and Economies\n\nWeak rural development contributes to food insecurity throughout sub- Saharan Africa. Agricultural productivity growth requires fostering  linkages between the agricultural and nonagricultural sections. Growth in  agriculture is more effective if the proper infrastructure is in place, rural  communities are strong and effective and financial systems are able to  provide credit to producers to buy, among other things, inputs for  production. The experts we interviewed noted that efforts to strengthen  rural communities and economies are essential to increasing food security.  Interventions that help to increase rural farmers\u2019 incomes help to  strengthen rural economies. We observed the UN Millennium Villages  helping farmers increase their incomes by using the value chain approach  to link farmers to markets. For example, in Kenya, a local business called  HoneyCare Africa trained farmers in beekeeping. The farmers were  financed to start beekeeping, provide honey, and ensure quality control  and collection. Beekeepers bring their honey to the company\u2019s collection  center where the honey is weighed and is prepared for shipment from  Nairobi. After being processed and packaged in a Nairobi facility,  HoneyCare Africa products are sold in Kenyan and overseas retail outlets.\nThe program trained 44 farmers, who produced an average of 800  kilograms of honey, generating $1,500 per farmer per year.\n\n\tInterventions to Better Target or Manage Nonemergency Food Aid\n\nThe focus of U.S. assistance on commodities creates some problems for  NGOs and donors that would like to see U.S. Title II assistance better  managed. The panelists noted that this food aid can be better managed by  targeting those communities that can absorb the commodities that are  provided by the United States, so that the commodities do not distort  markets. Despite the inherent inefficiency of monetization, there are some  examples of the successful use of monetized Title II funding for food  security. An external evaluation of IEHA\u2019s use of food aid noted that Title  II monetization proceeds have a large realm of possible uses, including  financing small business start-ups; paying the costs of training programs;  locally purchasing commodities, rather than using imported food in  particular situations, where there is a particularly high potential for  disincentives for local producers; and providing start-up capital for  initiating farmer association-based thrift and savings societies.\n\n\tInterventions to Invest in and Improve Infrastructure\n\nAs we have previously noted, improving infrastructure, such as roads and  power, is key to helping rural farmers. Investment in infrastructure links  the local economy to broader markets. Infrastructure, particularly roads, is  important in making technology available to farmers and is key to getting  commodities to markets. Good roads and port facilities reduce the costs of  moving products to markets. Telecommunications bring consumers and  farmers into contact and transmit market signals on prices helping  markets operate efficiently. MCC provides funding to African countries to  improve their infrastructure. As of February 2008, MCC had signed 16  compacts totaling $5.5 billion. Nine of the 16 compacts were with African  countries, and about 70 percent of MCC compacts ($3.8 billion) funded  projects in Africa. This includes two of the four countries that we  reviewed\u2014Tanzania and Mozambique. MCC signed a compact with  Tanzania in 2008 that will provide $698 million in funding for  infrastructure investments in energy, water, and transportation, with the  largest portion (about half) dedicated to transportation. In Mozambique,  the MCC compact signed in July 2007 will include funds to improve water  systems, sanitation, agribusiness, roads, land tenure, and agriculture. In  addition, according to State, while the short-term goal of a WFP road- building operation was to facilitate food aid delivery in southern Sudan, it  also helped contribute to the long-term food security by reducing the cost  of access to food and markets.\n\n\tInterventions to Improve Natural Resource Management Systems\n\nSustainable production increases require resource management. Soil  fertility, water management, and water use efficiency are important for  raising agriculture productivity in a sustainable manner. Natural resource  management, particularly water resources, is key to helping farmers  maintain productivity, even during times of drought and flood. The  Ethiopian government\u2019s Productive Safety Net Program (PSNP) provided  food and cash assistance to 7.2 million people in 2006, and includes water  resources development projects. In Tigray, Ethiopia, we visited a program  focusing on the construction of deep hand-dug wells that provide  accessible and safe water for rural communities. An irrigation program  also focuses on harvesting methods and irrigation development activities.  An IFPRI evaluation of PSNP found that while there were some delays in  payments made to beneficiaries, the well construction and soil and water  conservation projects were valuable.\n\n\tInterventions to Increase Access to Inputs\n\nIncreasing access to inputs, such as improved seed and fertilizer, helps  farmers boost their productivity, which is essential for food security. A  number of research organizations support African agricultural  development, including CGIAR, which was established in 1971 to help  achieve sustainable worldwide food security by promoting agricultural  science and research-related activities. CGIAR has 15 research centers  under its umbrella, including IFPRI, the International Livestock Research  Institute, and the International Institute for Tropical Agriculture (IITA).  IITA and 40 NGO partners, including Catholic Relief Service, worked on a  U.S. government-funded $4.5 million, 19-month project in 6 countries  called the Crop Crisis Control Project (C3P). Officials from this program  said that they have introduced 1,400 varieties of cassava and provided  5,000 farmers with seeds for growing banana trees. In Kenya, beneficiaries  of the C3P project, especially women, said that the project has directly led  to more profitable cassava growth and increased banana production. In  addition, USAID, USDA, and other donors have also been providing direct  support to African Research Institutions at both the national and regional  levels, promoting collective action on problems that cut across borders,  like pests and diseases.\n\n\tParticipants in GAO\u2019s Structured Panel Discussions and Roundtable\n\nAppendix V: Additional Development Partners That Implement Food Security Interventions in Sub-Saharan Africa\n\nIn addition to the efforts of host governments, multilateral organizations,  and bilateral donors, NGOs and private foundations play an active role in  advancing food security in sub-Saharan Africa.\nNongovernmental organizations. NGOs or not-for-profit organizations  may design and implement development-related projects. They are  particularly engaged in community mobilization activities and extension  support services. NGOs include community-based self-help groups,  research institutes, churches, and professional associations. Examples  include implementing partners for USAID and USDA, such as Cooperative  for Assistance and Relief Everywhere, Inc.; Catholic Relief Services; and  Land O\u2019Lakes International Development. Additional examples also  include advocacy groups such as the International Alliance Against  Hunger, founded by the Rome-based food and agriculture agencies and  international NGOs in 2003 to advocate for the elimination of hunger,  malnutrition, and poverty; the National Alliances Against Hunger,  including a U.S. alliance, which brings together civil society and  governments in developed and developing countries to raise the level of  political commitment to end hunger and malnutrition; and the Partnership  to Cut Hunger and Poverty in Africa, which is a coalition of U.S. and  African organizations formed in 2000 to advocate support for efforts to  end hunger and poverty in Africa.\nPrivate foundations. A number of philanthropic private organizations,  such as the Rockefeller Foundation and the Bill and Melinda Gates  Foundation, provide support for African agricultural development. The  Gates Foundation recently became one of the largest funding sources for  agriculture in Africa, announcing in January 2008 a $306 million package  of agricultural development grants to boost the productivity and incomes  of farmers in Africa and developing countries in other parts of the world.  Among the most prominent efforts funded by philanthropic private  organizations is AGRA, headquartered in Nairobi (Kenya) and established  in 2007 with an initial grant of $150 million from the Gates Foundation and  the Rockefeller Foundation to help small-scale farmers lift themselves out  of hunger and poverty through increased farm productivity and incomes.\n\nAppendix VI: New Food Security Challenges: Rising Demand for Biofuels and Climate Change\n\nRising global commodity prices and climate change are emerging  challenges that will likely exacerbate food insecurity in sub-Saharan  Africa. Rising commodity prices are in part due to the growing global  demand for biofuels, and this appendix provides further information on  how biofuels impact food security. This appendix also provides further  information on how climate change is predicted to affect food security in  sub-Saharan Africa, primarily through its impact on agricultural yields.\n\n\tGrowing Biofuel Demand Projected to Increase African Food Insecurity\n\nDriven by environmental concerns and the high price of oil, global demand  for biofuels is rapidly rising. Total biofuel production has been recently  growing at a rate of about 15 percent per year, such that, between 2000  and 2005, production more than doubled to nearly equal 650,000 barrels  per day or about 1 percent of global transportation fuel use. In the United  States, ethanol production will consume more than one third of the  country\u2019s corn crop in 2009, according to USDA. The United States and  other key producers of biofuels have pledged to pursue further growth in  production. In the Energy Independence and Security Act of 2007, the  United States pledged to increase ethanol production nearly five-fold over  current levels by 2022. Similarly, the European Commission has  announced its intentions to expand biofuel production to 10 percent of its  transportation fuel use by 2020. Although potential growth in biofuel  production is uncertain, various estimates suggest that global biofuel  production could grow to supply over 5 percent of the world\u2019s  transportation energy needs.\nGrowth in biofuel demand potentially creates both positive and negative  impacts for African agriculture and food security. For example:    Rural development opportunities could exist for African communities that  are able to produce biofuels. Countries with biofuel production could also  qualify for emission-reduction credits through the international market for  greenhouse gas emission reductions under the Kyoto Protocol. Such  credits would allow these countries to attract additional investment  through the Clean Development Mechanism that could assist them in  further developing their biofuel industries. However, while several African  countries are pursuing biofuel production, commercial production is not  yet widely developed and experts suggest that such production risks  excluding smallholder farmers.\nAfrican biofuel production may compete with food production through  competition for land, water, and other agricultural inputs. The UN reports  concern that commercial biofuel production in sub-Saharan Africa will  target high-quality lands and push food production to less productive  lands. The World Bank reports that 75 percent of the farmland in sub- Saharan Africa is already characterized by soils that are degraded and lack  nutrients.\nRapid growth in demand for grains to produce biofuels has contributed to  rising agricultural prices. Between 2005 and 2007 alone, world prices of  grains rose 43 percent. Biofuel growth has also triggered increases in the  prices of other agricultural commodities as the use of land to grow  biofuels has decreased land available for other crops. Higher grain prices  reduce resources for low-income consumers who spend a large share of  their income on food, farmers who buy more food than they produce, and  food aid programs. In the long term, while higher grain prices provide  incentives to expand agricultural production, complementary policies and  investments in technology and market development may be required.\nOn a net basis, IFPRI has concluded that current growth in biofuels will  result in an increase in African food insecurity. Using their IMPACT model,  IFPRI projects that world prices for maize will rise 26 percent and world  prices for oilseeds will rise 18 percent by 2020 under the assumption that  current biofuel investment plans are realized. In this case, total net calorie  availability in sub-Saharan Africa will decline by about 4 percent.  Worldwide, FAO projects a 15 percent net increase in the 2007 grain  import bills of developing countries, partly as a result of growing biofuel  demand. Concern over the negative impacts of biofuels has also been  widely noted by organizations such as FAO; the World Bank; and the UN  Special Rapporteur on the Right to Food, who has called for a 5-year  moratorium on the production of biofuels.\n\n\tClimate Change Predicted to Increase African Food Insecurity\n\nAlthough global temperatures have varied throughout history, key  scientific studies have found that higher temperatures during the past  century are largely attributable to human activities, and that, as such,  temperatures are likely to rise further during this century. The National  Academy of Sciences has found that global temperatures have been  warmer during the last few decades of the twentieth century than during  any comparable period of the preceding 400 years. These assessments  also predict rising global temperatures for this century, resulting in  changed precipitation patterns and increased frequency and severity of  damaging weather-related events. The Intergovernmental Panel on Climate  Change (IPCC), for example, has predicted a rise in global mean  temperatures of between 1.8 and 4.0 degrees Celsius, depending upon  human and economic behavior. Assuming no fundamental change in that  behavior, a comprehensive review of climate change models finds a 77 to  99 percent likelihood that global average temperatures will rise in excess  of 2 degrees Celsius.\nRegarding climates in Africa, key studies also conclude that warming has  taken place. For example, according to the IPCC, southern Africa has had  higher minimum temperatures and more frequent warm spells since the  1960s, as well as increased interannual precipitation variability since the  1970s. The IPCC also reports that both East Africa and southern Africa  have had more intense and widespread droughts. In the future, IFPRI  reports that Africa may be the continent hardest hit by climate change,  with one estimate predicting temperature increases for certain areas in  Africa that are double those of the global average. One climate study  predicts future annual warming across the continent ranging from 0.2 to  0.5 degrees Celsius, per decade.\nClimate is an important factor affecting agricultural productivity and  experts report that Africa\u2019s agricultural sector is particularly sensitive to  climate change due, in part, to low adaptive capacity. Experts find that  climate change will likely significantly limit agricultural production in sub- Saharan Africa in various ways:    Higher temperatures shorten the growing season and adversely affect  grain formation at night. As a result of climate change, FAO states that the  quantity of African land with a growing season of less than 120 days could  increase by 5 to 8 percent and the World Resources Institute describes  projected future declines in the length of the growing season by 50 to 113  days in certain areas in Africa.\nReduced precipitation limits the availability of water to grow crops. The  World Wildlife Fund reports that water constraints have already reduced  agricultural productivity, as 95 percent of cropland in sub-Saharan Africa  is used for low-input, rain-fed agriculture rather than for irrigated  production. Models referenced by the United Nations Framework on  Climate Change (UNFCC) estimate that more than an additional 600,000  square kilometers of agricultural land in sub-Saharan Africa will become  severely water-constrained with global climate change.\nVariable climates lead farmers to shift agricultural production sites, often  onto marginal lands, exacerbating soil erosion. According to the World  Bank\u2019s 2008 World Development Report, soil erosion can result in  agricultural productivity losses for the east African highlands of 2 to 3  percent a year.\nRising sea levels threaten coastal agricultural land. In its national  communication to the UNFCC, for example, Kenya predicted losses of  more than $470 million for damage to crops from a 1-meter rise in sea  levels.\nClimate extremes aggravate crop diseases and result in crop failures and  livestock deaths. FAO reports that both floods and droughts have  increased the incidence of food emergencies in sub-Saharan Africa.\nTo quantify expected climate change impacts on African agricultural  production and food security, a number of studies employ climate models  that estimate changes in temperature, precipitation, and agricultural  yields. Results vary widely due to the large degree of uncertainty entailed  in climate modeling, as well as differences in assumptions about adaptive  capacity. Despite the wide variation in results, these studies generally  conclude that climate change will increase African food insecurity in both  the short and long term. For example, one study predicts that agricultural  revenues in Kenya could decline between 27 and 34 percent by 2030. FAO  reports a projected increase in the number of Africans at risk of hunger  from 116 million in 1980 to 415 million in 2060. To illustrate potential food  security impacts from climate change, results from several studies are  shown in table 4. (The full citation of the sources in table 4 follow the  table.)\n\n\tAdditional Source Information\n\nAgoumi, Ali. Vulnerability of North African Countries to Climatic  Changes: Adaptation and Implementation Strategies for Climate  Change. International Institute for Sustainable Development, 2003.\nArnell, N.W, M.G.R. Cannell, M. Hulme, R.S. Kovats, J.F.B. Mitchell, R.J.  Nicholls, M.L. Parry, M.T.J. Livermore, and A. White. \u201cThe Consequences  of COMaddison, David, Marita Manley, and Pradeep Kurukulasuriya. The Impact  of Climate Change on African Agriculture: A Ricardian Approach.  CEEPA Discussion Paper No. 15, Centre for Environmental Economics  and Policy in Africa, University of Pretoria, July 2006.\nTubiello, Francesco N. and G\u00fcnther Fischer. \u201cReducing Climate Change  Impacts on Agriculture: Global and Regional Effects of Mitigation, 2000- 2080.\u201d Technological Forecasting and Social Change, vol. 74, 2007.\nUnited Nations Environment Programme. African Regional  Implementation Review for the 14th Session of the Commission on  Sustainable Development: Report on Climate Change. Nairobi, Kenya,  2006.\nWarren, Rachel, Nigel Arnell, Robert Nicholls, Peter Levy, and Jeff Price.  Understanding the Regional Impacts of Climate Change: Research  Report Prepared for the Stern Review on the Economics of Climate  Change. Tyndall Center for Climate Change Research Working Paper 90,  September 2006.\n\nAppendix VII: Comments from the U.S. Agency for International Development\n\nFollowing are GAO\u2019s comments on the U.S. Agency for International  Development letter dated May 16, 2008.\n\n\tGAO Comments\n\n1.  Although some African countries have had robust economic growth in  recent years, to achieve the WFS and MDG-1 goals, the growth,  especially in agriculture, needs to be sustained. As we note in our  report, concerted efforts and sustained growth are needed for many  years to overcome the numerous challenges facing host governments  and donors to halve hunger in sub-Saharan Africa by 2015.  2.  While GAO recognizes the various ongoing coordination efforts at the  international and U.S. government level, our work revealed that  coordination on improving food security in sub-Saharan Africa has  thus far been insufficient. In May 2008, following the release of a draft  of this report, USAID initiated the creation of a sub-Principals  Coordinating Committee on Food Price Increases and Global Food  Security to help facilitate interagency coordination. In addition to  USAID, USDA, State, and Treasury, participating agencies include the  Central Intelligence Agency, the Department of Commerce, MCC, the  National Security Council, the Office of Management and Budget, the  Peace Corps, the U.S. Trade and Development Agency, and the U.S.  Trade Representative.  3.  As we note in our report, while IEHA has undertaken a variety of  efforts to address food insecurity in Africa, these efforts have thus far  been limited in scale and scope. IEHA does not integrate with other  agencies in terms of plans, programs, resources, and activities. In  addition, many IEHA projects are limited in their impact because they  may not necessarily address the root causes of food insecurity. For  example, projects distributing treadle pumps benefit only the farmers  who receive them, but do not address the larger issue of the  underdevelopment of agricultural input markets.  4.  While we recognize that clean water and sanitation are important to  nutrition and food utilization, these issues were outside the scope of  our study.  5.  We recognize the importance of emergency assistance. However, to  break the cycle of poverty, food insecurity, and emergencies,  agricultural development needs to increase in priority. We agree with  USAID that a shift in focus from relief to development should not  translate into reduced emergency food aid in the short term.  6.  We disagree with USAID\u2019s comment that a report such as the annual  progress report on IEHA (which is not congressionally required),  instead of the congressionally required International Food Assistance  Report (IFAR), be used to report on USAID\u2019s and other agencies\u2019  implementation of our first recommendation. Public Law 480, section  407 (f)(codified at 7.U.S.C. 1736a(f) requires that the President prepare  an annual report that \u201cshall include\u2026an assessment of the progress  toward achieving food security in each country receiving food  assistance from the United States Government.\u201d Expanding the scope  of current reporting to include progress on achieving food security  would enhance the usefulness of IFAR, while making it unnecessary to  recommend the promulgation of a separate report.\n\nAppendix VIII: Comments from the U.S. Department of Agriculture\n\nFollowing is GAO\u2019s comment on the U.S. Department of Agriculture letter  dated May 14, 2008.\n\n\tGAO Comment\n\n1.  We acknowledge the role that USDA plays in meeting short- and long- term food needs in sub-Saharan Africa. Although an interagency Food  Assistance Policy Council provides a forum for the discussion and  coordination of U.S. food aid programs, a similar forum to address  food security issues had not been established until May 2008 after the  issuance of a draft of this report. Finally, although USDA administers  food assistance programs, including food aid programs for  development, we note in this report that these are not included in  IEHA.\n\nAppendix IX: Comments from the Department of State\n\nFollowing are GAO\u2019s comments on the Department of State letter dated  May 16, 2008.\n\n\tGAO Comments\n\n1.  We maintain that U.S. agencies\u2019 efforts to coordinate food security  programs have thus far been insufficient. Efforts to date are focused  primarily on food aid, as opposed to food security, and there is no  comprehensive U.S. governmentwide strategy for addressing food  insecurity in sub-Saharan Africa.  2.  A major reason for food spoilage and poor market delivery is poor  infrastructure, as we note in our discussion of rural development.  3.  As we note in our discussion of our objectives, scope, and  methodology (see app. I), although we recognize the multifaceted  nature of factors affecting food security, we excluded some factors,  such as international trade, from the scope of our study. While  international trade is important to global food security, its relative  importance to sub-Saharan Africa is considerably lower. Many  smallholder farmers in sub-Saharan Africa are not in a position to  benefit from international trade due to high transaction costs, and they  generally produce products, such as cassava, that are not traded  internationally.  4.  We did not generate data from FAO\u2019s original estimates of  undernourishment. We relied on FAO\u2019s estimates to assess progress  toward the WFS and MDG goals. As we note in our previously  mentioned objectives, scope, and methodology, we discussed the  reliability of FAO\u2019s undernourishment estimates with cognizant FAO  and U.S. government officials in Washington and in sub-Saharan  Africa, and we determined that these estimates are sufficiently reliable  for our purpose, which is to show overall trends over time at the  aggregate level.  5.  FAO\u2019s estimates are the official indicators used to track progress  toward the WFS and MDG-1 goals. In addition, they are the only  estimates available to assess undernourishment at the global level.  Other UN agencies, such as WFP, conduct assessments and collect  other data on food supply and nutrition for their respective missions.  However, they do not do so at the global level, and their data cannot  replace FAO\u2019s estimates on undernourishment to track long-term  progress toward the WFS and MDG-1 goals.  6.  We added language in appendix IV to reflect the recent experiences in  southern Sudan.  7.  As we previously mentioned in our objectives, scope, and  methodology, although we recognize the multifaceted nature of factors  affecting food security, some factors, such as conflicts, were excluded  from the scope of our study. We disagree with State\u2019s assertion that we  did not adequately address host government issues. Our report points  out that host government policy disincentives are a main factor in food  insecurity. We also note that the lack of the sufficient investment in  agriculture by the host government is one of the challenges hindering  progress to halving hunger by 2015.  8.  In May 2008, the President announced a $770 million initiative that  aims to (1) increase food assistance to meet the immediate needs of  the most vulnerable ($620 million); (2) augment agricultural  productivity programs, especially in Africa and other key agricultural  regions, to boost food staple supplies ($150 million); and (3) promote  an international policy environment that addresses the systemic  causes of the food crisis. However, as of the time of this report,  Congress had not passed legislation implementing this proposal.\n\nAppendix X: GAO Contact and Staff Acknowledgments\n\n\tStaff Acknowledgments\n\nIn addition to the person named above, Phillip J. Thomas (Assistant  Director), Carol Bray, Ming Chen, Debbie Chung, Martin De Alteriis,   Leah DeWolf, Mark Dowling, Etana Finkler, Melinda Hudson, Joy Labez,   Julia A. Roberts, Kendall Schaefer, and Elizabeth Singer made key  contributions to this report.\n\nRelated GAO Products\n\nSomalia: Several Challenges Limit U.S. and International Stabilization,  Humanitarian, and Development Efforts. GAO-08-351. Washington, D.C.:  February 19, 2008.\nThe Democratic Republic of the Congo: Systematic Assessment Is Needed  to Determine Agencies\u2019 Progress Toward U.S. Policy Objectives.   GAO-08-188. Washington, D.C.: December 14, 2007.\nForeign Assistance: Various Challenges Limit the Efficiency and  Effectiveness of U.S. Food Aid. GAO-07-905T. Washington, D.C.: May 24,  2007.\nForeign Assistance: Various Challenges Impede the Efficiency and  Effectiveness of U.S. Food Aid. GAO-07-560. Washington, D.C.: April 13,  2007.\nForeign Assistance: U.S. Agencies Face Challenges to Improving the  Efficiency and Effectiveness of Food Aid. GAO-07-616T. Washington,  D.C.: March 21, 2007.\nDarfur Crisis: Progress in Aid and Peace Monitoring Threatened by  Ongoing Violence and Operational Challenges. GAO-07-9. Washington,  D.C.: November 9, 2006.\nForeign Assistance: Lack of Strategic Focus and Obstacles to  Agricultural Recovery Threaten Afghanistan\u2019s Stability. GAO-03-607.  Washington, D.C.: June 30, 2003.\nForeign Assistance: Sustained Efforts Needed to Help Southern Africa  Recover from Food Crisis. GAO-03-644. Washington, D.C.: June 25, 2003.\nFood Aid: Experience of U.S. Programs Suggest Opportunities for  Improvement. GAO-02-801T. Washington, D.C.: June 4, 2002.\nForeign Assistance: Global Food for Education Initiative Faces  Challenges for Successful Implementation. GAO-02-328. Washington, D.C.:  February 28, 2002.\nForeign Assistance: U.S. Bilateral Food Assistance to North Korea Had  Mixed Results. GAO\/NSIAD-00-175. Washington, D.C.: June 15, 2000.\nForeign Assistance: Donation of U.S. Planting Seed to Russia in 1999  Had Weaknesses. GAO\/NSIAD-00-91. Washington, D.C.: March 9, 2000.\nFood Security: Factors That Could Affect Progress toward Meeting World  Food Summit Goals. GAO\/NSIAD-99-15. Washington, D.C.: March 22, 1999.\nFood Security: Preparations for the 1996 World Food Summit.  GAO\/NSIAD-97-44. Washington, D.C.: November 7, 1996.\nInternational Relations: Food Security in Africa. GAO-T-NSIAD-96-217.  Washington, D.C.: July 31, 1996.","output":"Why GAO Did This Study\n\nIn 1996, the United States and more than 180 world leaders pledged to halve the number of undernourished people globally by 2015 from the 1990 level. The global number has not decreased significantly--remaining at about 850 million in 2001-2003--and the number in sub-Saharan Africa has increased from about 170 million in 1990-1992 to over 200 million in 2001-2003. On the basis of analyses of U.S. and international agency documents, structured panel discussions with experts and practitioners, and fieldwork in four African countries, GAO was asked to examine (1) factors that contribute to persistent food insecurity in sub-Saharan Africa and (2) the extent to which host governments and donors, including the United States, are working toward halving hunger in the region by 2015.\n\nWhat GAO Found\n\nChronic undernourishment (food insecurity) in sub-Saharan Africa persists primarily due to low agricultural productivity, limited rural development, government policy disincentives, and the impact of poor health on the agricultural workforce. Additional factors, including rising global commodity prices and climate change, will likely further exacerbate food insecurity in the region. Agricultural productivity in sub-Saharan Africa, as measured by grain yield, is only about 40 percent of that of the rest of the world's developing countries, and the gap has widened over the years. Low agricultural productivity in sub-Saharan Africa is due, in part, to the limited use of agricultural inputs, such as fertilizer and improved seed varieties, and the lack of modern farming practices. The efforts of host governments and donors, including the United States, to achieve the goal of halving hunger in sub-Saharan Africa by 2015 have thus far been insufficient. First, some host governments have not prioritized food security as a development goal, and, according to a 2008 report of the International Food Policy Research Institute, as of 2005, only a few countries had fulfilled a 2003 pledge to direct 10 percent of government spending to agriculture. Second, donors have reduced the priority given to agriculture, and their efforts have been further hampered by difficulties in coordination and deficiencies in measuring and monitoring progress. Third, limited agricultural development resources and a fragmented approach have impaired U.S. efforts to reduce hunger in Africa. The U.S. Agency for International Development (USAID) funding to address food insecurity in Africa has been primarily for emergency food aid, which has been crucial in helping to alleviate food crises but has not addressed the underlying factors that contributed to the recurrence and severity of these crises. Also, the United States' principal strategy for meeting its commitment to halve hunger in Africa is limited to some of USAID's agricultural development activities and does not integrate other U.S. agencies' agricultural development assistance to the region."}
{"id":"gao_GAO-15-61","pid":"gao_GAO-15-61_0","input":"\tBackground\n\nNurse staffing is a critical part of health care because of the effects it can  have on patient outcomes and nurse job satisfaction. According to VHA,  its staffing methodology aims to maximize nurses\u2019 productivity and  efficiency, while providing safe patient care by ensuring appropriate nurse  staffing levels and skill mix.\n\n\t\tVHA Nurse Workforce\n\nVHA\u2019s nurse workforce is primarily composed of RNs, licensed practical  nurses (LPN), and nursing assistants (NA). These nurses provide  care\u2014ranging from primary care to complex specialty care\u2014in inpatient,  outpatient, and residential care settings at 151 VAMCs across the  country. In addition to the size of the nursing workforce, the nursing skill  mix\u2014i.e., the share of each type of nurse (RNs, LPNs, or NAs) of the  total\u2014is an important component of nurse staffing. Units vary in their  nursing skill mix, depending on the needs of their patients. For example,  intensive care units require higher intensity nursing, and may have a skill  mix that is primarily composed of RNs compared to other types of nursing  units that may provide less complex care. (See table 1 for a general  description of the types of nursing staff position, responsibilities, and  educational requirements.)\nAlthough the number of nurses at VAMCs increased from FY 2009 to   FY 2013, VHA ranked nurses as the second most challenging occupation  to recruit and retain. Specifically, the total number of nurses at VAMCs  increased 13 percent from 72,542 in FY 2009 to 81,940 in FY 2013, with  similarly proportionate increases within each position type\u2014RN, LPN, and  NA. During the same time period, the annual nurse turnover rate at  VAMCs\u2014the percentage of nurses who left VHA through retirement,  death, termination, or voluntary separation\u2014increased from 6.6 percent  to 8.0 percent. Although RNs had the lowest turnover rate among nurses,  VHA noted particular difficulty recruiting and retaining for the position,  particularly for RNs with advanced professional skills, knowledge, and  experience, such as RNs that provide services in medical and surgical   VHA projects that approximately 40,000 new nurses will be  care units. needed through FY 2018 to maintain current staffing levels and to meet  the needs of veterans.\nSee Department of Veterans Affairs, Veterans Health Administration, 2013 Workforce  Succession Strategic Plan (Washington, D.C.: 2013).\n\n\t\tVHA\u2019s Nurse Staffing Methodology\n\nTo help ensure adequate and qualified nurse staffing at VAMCs, in July  2010, VHA issued VHA Directive 2010-034: Staffing Methodology for  VHA Nursing Personnel. ONS, the VHA office responsible for providing  national policies and guidelines for all VHA nursing personnel, led the  development of the nurse staffing methodology, which began in 2007.  (See fig. 1.)\nTo implement the methodology, each VAMC is required to (1) develop a  VAMC-wide staffing plan for its nurse workforce, comprised of individual  unit-level staffing plans, and (2) execute that plan. (See figure 2 for an  outline of the process for implementing VHA\u2019s nurse staffing  methodology.)\nEach VAMC unit is to develop a staffing plan outlining recommendations  on the appropriate nurse staffing levels and skill mix needed in that unit to  support high-quality patient care in the most effective manner possible.  Specifically, staffing plans are to be developed using expert panels and a  data-driven analysis of nursing hours per patient day (NHPPD). VAMC  nurse executives\u2014members of senior management within each VAMC\u2014 are responsible for implementing the staffing methodology in their  respective VAMCs.\nExpert panels: advisory groups\u2014at the unit and facility level\u2014of  VAMC staff with in-depth knowledge of nurse staffing needs. The use  of expert panels is intended to apply principles of shared governance,  which allows nurses to have influence over the delivery of patient care  and involves stakeholders from across the VAMC. VAMC nurse  executives are responsible for ensuring that the unit-based expert  panels represent all nursing types (RN, LPN, NA) and developing the  VAMC\u2019s facility expert panel.\nData-driven analysis of NHPPD: involves determining the number and  skill mix of nurses needed for each unit by calculating the number of  direct patient care nursing hours provided for all patients on that unit  during a 24-hour period. The use of NHPPD represents a move  away from the more traditional nurse-to-patient ratios that assign a  certain number of patients to each nurse. Some research suggests  that NHPPD can better capture changes in nurses\u2019 workloads and  case mix resulting from admissions and discharges, as well as patient  acuity levels, which can impact the amount of time nurses spend with  each patient.\nAfter developing the staffing plan, each unit-based expert panel presents  its plan, which includes staffing recommendations, to the VAMC\u2019s facility  expert panel. Those staffing recommendations may include, for example,  initiatives to change the number and skill mix of nurses needed for each  shift; change the number of nurses required for coverage during predicted  absences, such as annual and sick leave; and develop support services  for nurses, such as designated individuals to transport patients to other  areas of the facility as needed. The facility expert panel\u2014comprised of  staff from across the VAMC\u2014reviews each unit-based panel\u2019s staffing  plan and aggregates all of the unit plans into one VAMC-wide staffing  plan. The VAMC nurse executive reviews the VAMC-wide staffing plan  and forwards it to the VAMC director for review and approval. Once  approved, the VAMC then begins execution of the initiatives outlined in  the VAMC-wide staffing plan. The directive requires each VAMC to  conduct an ongoing staffing analysis to evaluate staffing plans annually,  at a minimum, and for VAMC directors to incorporate projected staffing  needs into their annual budget review.\nThe staffing methodology is being implemented in three phases.\nIn Phase I, VAMCs were to implement the staffing methodology in all  inpatient units no later than September 30, 2011.\nIn Phase II, VAMCs are to implement the staffing methodology for all  other units, including the operating room, emergency department, and  spinal cord injury units. ONS has completed the Phase II pilot for  operating room units, and VAMCs are expected to implement the  methodology in their operating room units by October 1, 2014.  Deadlines for the implementation in other Phase II units have not  been set.\nIn Phase III, VAMCs are to use an automated system developed by  VHA that (1) merges VHA staffing data used in the staffing  methodology and other VHA data, such as human resource data, into  one data system, and (2) incorporates the data into staffing-related  reports, such as quality-of-care reports. A deadline for Phase III  implementation has not been set.\nIn May 2014, the VA OIG found that VAMCs in its review varied in their  implementation of the staffing methodology. Specifically, the VA OIG  reported that 8 of the 28 VAMCs reviewed had not fully implemented all  components of the staffing methodology by September 2013, 2 years  past the implementation date required by the VHA directive. As these  findings were similar to those of its April 2013 report, the VA OIG stated  in its 2014 report, \u201cWe re-emphasize the need for all facilities to fully  implement the methodology and accurately address patient needs with  safe and adequate staffing.\u201d\n\n\t\tImpact of Nurse Staffing on Patient Outcomes and Nurse Job Satisfaction\n\nAdequate and qualified nurse staffing at VAMCs is required to provide  effective and continuous patient care and to maintain a stable and  engaged workplace. The importance of nurse staffing on patient  outcomes and nurse job satisfaction has been emphasized by various  entities, including The Joint Commission; American Nurses  Association; Institute of Medicine; and Agency for Healthcare  Research and Quality.and qualifications of nurse staffing to patient outcomes and nurse job  satisfaction. For example, studies have shown:   Additionally, research has linked the adequacy\nA link between the adequacy of nurse staffing and patient outcomes,  particularly in inpatient units, such as intensive care and surgical  units. For example, medication errors, pressure ulcers, hospital  acquired infections, pneumonia, longer-than-expected stays, and  higher mortality rates each have been associated with inadequate  nurse staffing.\nA link between the qualifications of nursing staff and patient  outcomes. For example, one study found that patients cared for in  units utilizing more licensed and experienced nursing staff (RNs and  LPNs) and fewer unlicensed aides (NAs) had shorter lengths of  stay. Other studies linked baccalaureate-prepared nurses to lower  mortality rates.\nA link between nurse staffing and job satisfaction. For example, some  studies have linked low job satisfaction to heavy workloads and an  inability to ensure patient safety. Other studies found that improving  nurse staffing and working conditions may simultaneously reduce  nurses\u2019 burnout, risk of turnover, and the likelihood of medical errors,  while increasing patients\u2019 satisfaction with their care.\nNon-VA health care organizations use various approaches to ensure  effective nurse staffing. For example, some use fixed nurse-to-patient  ratios while others use adjustable, unit-specific minimum staffing levels,   and there have been several efforts to address nurse staffing using these  different approaches.requiring regulations that mandate specific nurse-to-patient ratios that  limit the number of patients cared for by an individual nurse. Other states  have passed legislation or adopted regulations addressing nurse staffing  without mandating specific ratios or staffing levels. For example, some  states require hospitals to have committees responsible for developing  unit staffing plans or require public reporting of staffing.\n\n\tVAMCs in Our Review Implemented VHA\u2019s Nurse Staffing Methodology, Experienced Problems Developing and Executing Staffing Plans, and Some Reported Improvements in Nurse Staffing\n\nAll seven VAMCs in our review developed staffing plans using VHA\u2019s  nurse staffing methodology and have taken steps to execute them.  However, VAMCs experienced problems in both the development and  execution of their staffing plans. Improvements in nurse staffing were  reported by some of the VAMCs which had taken steps to execute the  staffing plans.\n\n\t\tVAMCs in Our Review Have Implemented VHA\u2019s Nurse Staffing Methodology by Developing Staffing Plans and Taking Steps to Execute Them\n\nThe seven VAMCs in our review have implemented VHA\u2019s nurse staffing  methodology; specifically, each of these VAMCs has developed a facility- wide staffing plan, comprised of unit-level staffing plans for inpatient units,  and has taken steps to execute it. Although each of the seven VAMCs  in our review developed a staffing plan for FY 2013, only one had  developed a plan per VHA\u2019s directive\u2014that is, used both expert panels  and analysis of NHPPD\u2014by September 30, 2011, the deadline specified  in the directive. (See table 2.) Across all 151 VAMCs, according to ONS  officials, VAMCs\u2019 implementation of the nurse staffing methodology  varied, with, for example, some VAMCs completing the development of  their staffing plans during FY 2013, and some only beginning the  development process.\nIn addition to developing staffing plans, all seven VAMCs in our review  had taken steps to execute their respective staffing plans. For example,  VAMCs had taken steps to execute initiatives to increase the number of  unit nurses or change the skill mix of nurses to address patient care  needs. (See table 3 for examples of VAMCs\u2019 staffing plan initiatives.)  VAMC officials told us there are many factors that could affect the  execution of staffing plan initiatives, such as available resources, the  amount of time needed, and other strategic priorities.\n\n\t\tVAMCs Experienced Problems Developing and Executing Staffing Plans, and Many of These Problems Persist\n\nOfficials and nursing staff from the seven VAMCs in our review told us  they experienced problems developing and executing staffing plans. (See  table 4 for examples of problems.) Some VAMCs were able to devise  solutions; however in many cases, the problems have persisted.\nProblems Developing Staffing Plans. Staff and officials from each of  the seven VAMCs in our review reported facing problems developing  staffing plans.\nLack of necessary data resources. Staff and officials at six of the  seven VAMCs in our review said they did not have the appropriate  data resources to effectively calculate NHPPD as required by VHA\u2019s  staffing methodology directive. Specifically, the directive instructs  VAMC staff to calculate NHPPD using a wide range of data, such as  number of admissions, transfers, and discharges; hours used for  planning and treatment; and human resources data. We found that  staff and officials needed to use multiple sources to collect the  necessary data, in some cases manually, a process they said was  time-consuming and potentially error-prone, and required data  expertise they did not always have. For example, at one VAMC, the  staffing methodology coordinator\u2014a VAMC official who assists with  the administrative tasks associated with the implementation process\u2014 told us she struggled with some data analysis techniques, such as  creating a spreadsheet to help track staffing data, but the VAMC did  not have the financial resources to hire additional data analysts to  support the methodology. In contrast, officials from two VAMCs in our  review told us staffing methodology coordinators were assigned in  part based on their data analysis expertise.\nDifficulty completing and understanding training. Staff from six of the  seven VAMCs in our review said the ONS training on the  methodology was time consuming to complete, and difficult to  understand. In 2011, ONS switched from instructor-led, group training  to individual, computer-based PowerPoint training. Many unit staff  reported that because the computer-based training took many hours  to complete, it was difficult to find the time to complete it, while also  carrying out their patient care responsibilities. They told us they often  had to start and stop the training to attend to patients, which  diminished its effectiveness. Further, the course\u2019s complex material  was hard to absorb through an individual, computer-based course,  with many staff suggesting their understanding would have been  greatly improved with an instructor-led, group course where they  could ask questions, ensure consistency of learning, and build  camaraderie among unit expert panel members. To address the  difficulties in completing and understanding the training, one VAMC  developed its own instructor-led, group training provided to all its  units.\nTime required. Staff and officials at all seven of the VAMCs in our  review reported that developing staffing plans required a lot of staff  time due to the complexity of the process. In particular, they said  gaining an understanding of the methodology, collecting the  necessary data, convening the unit expert panels, and preparing  presentations for the facility expert panel were time-intensive tasks  that, in some circumstances, took time away from patient care. For  example, members from one unit expert panel estimated they spent,  in total, about 160 hours (4 weeks) developing the unit staffing plan  during the first year the staffing methodology was implemented in their  unit. Some VAMCs\u2019 staffing methodology coordinators developed  specific processes designed to decrease the burden on nursing staff  and improve efficiency. For example, they created templates for unit  panel members to use in staffing plan development; such templates  improved efficiency because unit panel members did not have to  independently develop their presentation format. Further, facility  expert panel members had to orient themselves to only one template,  and were therefore able to more easily make facility-level  comparisons and decisions.\nLack of communication within VAMC. Unit expert panel members at  four of the seven VAMCs in our review said there was a lack of  communication between nurses and VAMC leadership regarding the  status of the staffing plans, including plans for execution of the staffing  plan initiatives. Staff at one of these VAMCs said they had not  received any feedback on their FY 2012 or FY 2013 unit staffing  plans; they added that developing the 2013 staffing plan without  getting any feedback on the prior year\u2019s plan felt \u201cfrustrating.\u201d In  contrast, at another VAMC, officials told us that all unit staff\u2014not just  staff involved in the unit panel\u2014received regular updates on the nurse  staffing process at their monthly unit staff meetings.\nDifficulty integrating unit staff into expert panels. Staff and officials at  three VAMCs described challenges in integrating unit staff into expert  panels. Some unit panel members told us that although they were  considered members of their respective unit panels, they were not  significantly involved in the development of their units\u2019 staffing plans.  For example, a unit panel member said the VAMC\u2019s staffing  methodology coordinator calculated the unit\u2019s NHPPD, developed the  corresponding unit staffing plan, and presented the unit staffing plan  to the respective facility expert panel almost entirely without her unit\u2019s  input. As a result, there was limited involvement of the unit panel  members in the expert panel and, consequently, limited shared  governance. Officials at these VAMCs said that from their  perspectives, there was interest in the methodology among unit panel  members, but sometimes it was difficult for these staff to attend  relevant meetings because of patient needs. In contrast, unit panel  members at other VAMCs in our review described how they were fully  integrated into the unit panels. They described in detail the data  analyses they prepared, the meetings they participated in, and their  experiences presenting their unit staffing plans to the facility expert  panel. Members from one unit panel told us it was helpful to be able to  use data to validate the unit\u2019s staffing and share this data with the  facility expert panel\u2014VAMC staff \u201cbeyond the typical chain of  command.\u201d Officials at this VAMC noted that unit panel members felt  \u201cempowered\u201d to present their work to the facility expert panels.\nProblems Executing Staffing Plans. Staff and officials from six of the  seven VAMCs in our review noted problems executing staffing plans once  approved by the VAMC director.\nHiring delays. Staff and officials from six of the seven VAMCs in our  review said they often faced hiring delays that impacted their ability to  execute staffing plan initiatives. Some VAMC staff noted it could take  more than 6 months to fill unit vacancies. Although staff from one  VAMC said hiring was slowed by the dearth of qualified nurses in their  community, staff from other VAMCs in our review said the supply of  nurses was not the problem, but rather the problem was the VHA  hiring process, which took months to complete for each candidate.  Additionally, VAMC staff noted that new hires also needed to  complete necessary internal trainings before joining a unit full time,  which added to the delays, and that some new hires were hurried  through this training process because their units were so desperate to  have them on staff.\nBudget constraints. Staff and officials from five of the seven VAMCs in  our review said their VAMCs were not able to fully execute their  staffing plans due to budget constraints. For example, at one VAMC,  one of the approved staffing plan initiatives was the hiring of a large  number of nurses for its units, in part, to address the VAMC\u2019s inability  to increase their nursing staff over a period of years. The official told  us that, due to budget constraints, the VAMC was going to phase in  this hiring initiative over the next few years.\n\n\t\tImprovements in Nurse Staffing Were Reported When VAMCs Executed Staffing Plan Initiatives\n\nSome VAMC staff reported improvements in the adequacy and  qualifications of their units\u2019 nursing staff when nurse staffing plan  initiatives were executed. For example, at two VAMCs at which the  number of nurses was increased or support services for nurses, such as  patient transporters or sitters, were put in place,adequacy of the nursing staff had improved. Furthermore, improvements  in the qualifications of unit nursing staff were noted by staff in VAMC units  where, for example, skill-mix changes were made or the amount of  floating of nurses from their home unit to an unfamiliar unit was  decreased. Both VAMC officials and unit staff noted improvements in  staffing when nurses\u2019 qualifications were more appropriately matched to  the right level of work (for example, having RNs rather than LPNs  available to provide more complex patient care) and to the right units (for  example, the units for which they were hired and trained).\nSome VAMC staff said they also had seen improvements in patient  outcomes and nurse job satisfaction. For example, nursing staff at one  VAMC said that after creating sitter positions\u2014as indicated by their  VAMC\u2019s staffing plan\u2014they saw a decrease in patient falls. The staff said  sitters were able to monitor patients more closely, and as a result,  patients were less likely to fall during walks to the bathroom, for example.  Similarly, nursing staff in a mental health unit at another VAMC said that  by having more staff they had decreased their restraint use because there  were more staff available to meet veterans\u2019 needs. Additionally, nursing  staff we interviewed at one VAMC that had made staffing changes based  on staffing plans said they were better able to provide the type of nursing  care \u201cveterans deserve,\u201d and this made them feel more positive about  their work. Some nurses at this VAMC also said the shared governance  aspect of the methodology was empowering, which, combined with their  enhanced understanding of staffing at their VAMC, helped improve their  overall job satisfaction.\nHowever, some VAMC unit staff reported that unit nurse staffing  continued to be inadequate and that nurse unit assignments and job  duties were not always appropriate for their qualifications. For six of the  VAMCs in our review, staff from at least one unit interviewed said their  unit staffing levels were inadequate. Staff said ensuring adequate staffing  was particularly challenging when there were unplanned staff absences  and they had to \u201cscramble\u201d to provide coverage. Some unit staff noted  that this situation often resulted in units forcing nurses to work overtime or  nurses floating to other units where they did not always have the  qualifications to provide care. At some VAMCs, staff said there were  increased staff injuries due to inadequate staffing. Furthermore, staff at  one VAMC reported that where there had not been any changes made  based on the unit staffing plans, their units continued to be understaffed  to the detriment of both patient care and their job satisfaction.\n\n\tVHA\u2019s Oversight to Ensure Its Nurse Staffing Methodology Is Implemented, Administered Appropriately, and Contributes to an Adequate and Qualified Nurse Workforce Is Limited\n\nOur review of VHA\u2019s oversight of its nurse staffing methodology found  that some internal controls\u2014those related to environmental assessment,  a plan for monitoring compliance, evaluation, timeliness of  communication, and organizational accountability\u2014are limited. The  implementation of internal controls is necessary for ensuring initiatives  achieve intended outcomes and for minimizing operational problems.  Without these internal controls in place, VHA cannot ensure that its  methodology meets department goals, such as establishing a  standardized methodology for determining adequate and qualified nurse  staffing at all VAMCs, and ultimately, having nurse staffing that is  adequate to meet veterans\u2019 health care needs.\nEnvironmental Assessment. VHA did not comprehensively assess each  VAMC to ensure preparedness for implementing its methodology,  including having the necessary technical support and resources, prior to  the issuance of the methodology directive in 2010. Furthermore, as of  August 2014, VHA did not have a plan for assessing whether VAMCs  have the necessary resources to execute their approved nurse staffing  plans. Under federal internal control standards, successful organizations  monitor their internal and external environments continuously and  systematically, and by building environmental assessments into the  strategic planning process, are able to stay focused on long-term goals  even as they make changes to achieve them.\nVHA did not assess VAMCs\u2019 technical resources to determine if all  VAMCs would be able to successfully implement the methodology. For  example, the directive recommended that VAMCs use comparative data  from external sources, such as the National Database of Nursing Quality  Indicators (NDNQI) when analyzing unit-level staffing data. According to  some VAMC officials, due to the costs and complexity of contracting,  not all VAMCs had access to this data source. Each VAMC was  responsible for establishing its own contract to purchase access to  NDNQI data, which some VAMC officials said was expensive and time- consuming to set up, noting that it would have been helpful to have  assistance in coordinating the contracting process. Officials from ONS  reported that they are discussing the possibility of having a VHA-wide  contract so that all VAMCs would have access to NDNQI data. In addition  to access to comparative data, according to the directive, VAMCs need  appropriate data system capabilities\u2014in particular an automated staffing  system for information such as patient admission, transfer and discharge  data, and human resources data\u2014to facilitate implementation of the data- driven methodology and calculation of NHPPD. However, not all VAMCs  in our review had an automated staffing system in place even 3 years  after the release of the directive. Officials at a VAMC without an  automated staffing system told us staff were collecting and inputting data,  in many cases manually, into a spreadsheet to calculate NHPPD, and  that this process was extremely time-consuming and potentially error- prone. ONS officials said they knew VAMCs needed automated staffing  systems when the directive was published in 2010. However, they  thought Phase III\u2014a national automated staffing system\u2014would be  forthcoming, and did not fully review whether VAMCs had alternative data  capabilities to assist them in the interim.\nWhen we asked how they assessed the readiness of VAMCs for  implementation of the methodology, ONS officials told us that they did not  do this as well as they should have for Phase I implementation in  inpatient units, despite its 2009 Phase I pilot evaluation to better  understand the potential capabilities and weaknesses of VAMCs.  According to ONS, it still has not conducted such an assessment of all  VAMCs even though it has moved forward with planning the national  rollout of Phase II in operating room, emergency department, and spinal  cord injury units. ONS, however, has assessed some of the available  resources of the sites that have participated in the pilots for Phase II in  spinal cord injury units. For example, ONS officials told us that they asked  these participating sites questions about their access to data and nurse  turnover within the pilot units to determine their ability to fully and  successfully participate in the pilot. According to ONS officials, all sites  reported that they were able to fully participate in the pilot. By not  comprehensively assessing the VAMCs\u2019 technical support and resources  to determine if they were prepared to implement the methodology, VHA  had no assurance that the VAMCs would be successful.\nPlan for Monitoring Compliance. ONS did not develop a plan for  monitoring VAMCs to ensure they were in compliance with the  implementation and ongoing administration of Phase I of the  methodology. Under federal internal control standards, plans should be  designed to ensure that ongoing monitoring occurs in the course of  normal program operations, and managers should identify performance  gaps in compliance with program policies and procedures.\nONS reported implementing two mechanisms for obtaining information  from VAMCs\u2014a 2013 questionnaire sent to all VAMCs and monthly  methodology conference calls with VAMCs\u2014but neither was an adequate  mechanism for comprehensively assessing the compliance of each  VAMC. The questionnaire, sent nearly 2 years after the deadline for  implementation of Phase I of the methodology, asked VAMCs to report  their status of staffing plan development, but because of lack of clarity in  the questions asked, inconsistency in medical center responses, and lack  of validation of the self-reported responses, it was not reliable for  determining the extent to which VAMCs had developed staffing plans.  ONS officials reported that they have no plans to survey VAMCs again on  their status of developing staffing plans. Furthermore, the monthly  methodology conference calls that started when the directive was  published in 2010 did not provide an adequate mechanism for monitoring  compliance because they too relied on VAMCs to self-report problems. A  VAMC official told us that participants were reluctant to raise problems,  such as not developing staffing plans on time, during these monthly calls.\nIn addition, the directive requires VAMCs to evaluate their staffing plans  for Phase I annually, or more frequently if needed, but ONS officials told  us that they did not have a systematic plan for monitoring compliance with  this evaluation beyond the 2013 questionnaire and the monthly  methodology conference calls. Moving forward, ONS officials said they  plan to review whether all VAMCs implemented both the unit and facility  expert panels, but, as of August 2014, had no detailed plan or timeline for  conducting this review or for monitoring VAMCs\u2019 ongoing evaluation of  their staffing plans. The lack of a plan for monitoring VAMCs\u2019 compliance  with the implementation and ongoing administration of the methodology  hinders VHA from being able to ensure that all VAMCs are staffing their  nurses using the same, standardized methodology.\nEvaluation. There have been limited evaluations of the methodology, and  one of these evaluations has been significantly delayed. Under federal  internal control standards, measuring performance allows organizations  to track the progress they are making towards program goals and  objectives, and provides managers important information on which to  make management decisions and resolve any problems or program  weaknesses.\nEvaluation of Phase I pilot (conducted in September 2009)\u2014ONS  identified VAMC challenges with implementing the methodology\u2014 such as difficulties accessing data, and staff nurses having an overall  lack of knowledge of the methodology process. The evaluation  contained recommendations, such as developing a training guidebook  and providing guidelines on the role of the expert panels, to improve  the methodology process. According to ONS, most of the  recommendations from this 2009 evaluation have been addressed;  however, we found that weaknesses identified in the 2009 evaluation  still existed for all of the seven VAMCs included in our review.\nEvaluations of Phase I national implementation and training (began  early 2014, preliminary results were expected August 2014). Similarly,  ONS did not begin an evaluation of the national implementation of the  methodology until January 2014, more than 2 years after VAMCs  were required to have implemented it, and, as of August 2014, had  still not been completed. According to ONS officials, the Phase I  national evaluation was to review VAMCs\u2019 experiences during  implementation, including a review of the training provided to VAMCs  during that phase. The lengthy delay in the evaluation of Phase I was  potentially problematic because the ongoing difficulties that VAMCs  have experienced during implementation may have been avoided or  resolved more quickly if the evaluation results had been available and  corrective actions put into place. VAMC staff we interviewed told us  they have been struggling with components of the methodology since  the directive was issued. For example, some VAMC staff expressed  difficulty completing and understanding the data analysis process for  calculating NHPPD. An earlier evaluation of the methodology could  have helped identify this problem, as well as potential solutions to  address it. Furthermore, the delay limited ONS\u2019s time to apply lessons  learned from Phase I evaluations to the implementation of Phase II,  portions of which are already nearly complete.\nPhase II pilot training evaluation (began in early 2014 with results  expected November 2014)\u2014ONS is conducting an evaluation of the  training that was provided to the VAMCs involved in the Phase II pilots  in operating room, emergency department, and spinal cord injury units  to determine if the training provided to these units needs to be  changed in preparation for the national rollout. ONS officials told us  that they have completed the operating room pilot; the national rollout  of the methodology in operating room units in all VAMCs began in  February 2014 and is expected to be completed by October 1, 2014.  ONS officials said that it has completed the pilot for the emergency  department units, but has not completed the pilot for spinal cord injury  units; ONS has not scheduled deadlines for their national  implementation.\nVHA\u2019s delays in completing evaluations of the methodology limit its ability  to identify and resolve VAMC implementation and administration  problems, and thus help to ensure successful rollouts of subsequent  phases of the methodology.\nTimeliness of Implementation and Communication. The long timeline  for implementing the pilots and national rollouts of Phases I and II, as well  as evaluating Phase I of the staffing methodology\u2014more than 7 years\u2014 and for communicating methodology-related information to VAMCs may  have hindered the ability of VAMCs to develop their staffing plans and to  execute the initiatives contained in those plans. Under federal internal  control standards, timeliness in the development of a program or  implementation of a policy is needed to maintain relevance and value in  managing operations and making decisions. When information regarding  a policy or program is not provided in a timely manner, there can be a  loss of stakeholder support, which can affect how stakeholders make  decisions. For example, staff from some VAMCs involved in the Phase II  pilot stated that they believed the data and reports generated from the  methodology were only a paper exercise because they had not gotten  any feedback from ONS on next steps. ONS officials told us they have  communicated information on the Phase II pilot, such as the status of the  pilot and feedback obtained from the training sessions, through their  monthly conference calls with VAMCs; however, based on our interviews,  this information did not reach many staff at the VAMCs in our review that  participated in the Phase II pilot.\nFurthermore, ONS officials have not adequately communicated to VAMCs  the status of Phase III of the methodology\u2014development of a national  automated staffing system. According to the directive, a national  automated staffing system was to be developed to support VAMCs in the  implementation of the methodology. Because this automated staffing  system has yet to be developed as per the directive, officials from two  VAMCs told us they bought their own systems, which helped to effectively  administer the methodology. ONS officials told us at the time the directive  was published in 2010, Phase III implementation was an aspirational  goal. ONS officials said they had expected VHA data system teams to  begin the process of developing a national automated system; however, it  was not made a department goal, and is not currently on the list of  projects under consideration for funding. Having a variety of staffing  systems, and thus inconsistent data variables across VAMCs, inhibits  ONS\u2019s ability to adequately evaluate the effectiveness of the staffing  methodology. If an automated staffing system is eventually developed  under Phase III, VAMCs likely will have to dismantle the staffing systems  they have created and restructure their data analysis processes, which  likely will be time-consuming and costly. VHA\u2019s long timelines for the  implementation and communication of methodology-related information  put stakeholder support of the methodology at risk and increase the  potential for duplication of efforts.\nOrganizational Accountability. VHA did not define areas of  responsibility or establish the appropriate line of reporting within the  framework of VA\u2019s management structure for the ongoing administration  and oversight of the methodology. Under federal internal control  standards, an agency\u2019s organizational structure should provide  management with a framework for planning, directing, and controlling  operations to achieve agency objectives; a good internal control  environment requires that the agency clearly defines key areas of  authority and responsibility. VHA does not require VAMCs to submit any  information or reports on the implementation and ongoing administration  of the methodology to ONS or the VISNs. Such information, if it were  shared, may have been used to inform ONS of any systematic problems  that necessitate changes to help ensure the continued viability of its  methodology, as well as identify any best practices that have been  implemented by VAMCs across the country. ONS officials told us that  they did not require the VAMCs to submit any such documentation to  ONS, because they made a conscious decision to not \u201cmicro-manage\u201d  the local process of nurse staffing.\nFurthermore, VHA has not sufficiently utilized the VISN-level  management structure in the implementation or ongoing administration of  the methodology. While the methodology directive described a role for the  VISNs, that role was limited to ensuring that resources are available to  VAMCs as they try to staff their units; the directive did not mention a role  in the implementation or ongoing administration of the actual  methodology. As a result, VISNs have not been consistently aware of  problems experienced by VAMCs in their region, and have not provided  support or education. In our interviews with VISN officials representing  each of the seven VAMCs in our review, we found that three of the VISNs  were not substantively involved in the implementation and ongoing  administration of the methodology. According to ONS, in many VISNs,  discussions of staffing methodology implementation were minimal, and  rather than VISN leadership, the nurse executives, in addition to their  responsibilities within their individual VAMCs, had the responsibility of  disseminating staffing methodology-related information to the VAMCs  within the VISN.\nStaff from three VISNs that were more substantially involved in the  implementation of the methodology provided oversight for the nurse  staffing methodology and acted as liaisons for VAMC nurse executives for  network-level issues. One VISN official we interviewed was developing  oversight mechanisms for VAMCs in the region, including a requirement  for nurse executives to submit a quarterly staffing report. According to the  official, having such a reporting requirement at the VISN level would give  the right amount of emphasis to the process and provide support to nurse  executives implementing the methodology in the VAMCs. The quarterly  report could also help inform VISN officials about issues with the  methodology. This official was developing these mechanisms  independently of ONS, but they could be considered potential best  practices to be shared across all VISNs.\nONS officials told us they thought ideas or problems across VAMCs  related to the methodology would be shared through the VAMC nurse  executives. They also hoped that VISN leadership would be interested in  the methodology and, as a result, schedule VISN-level briefings to aid in  its implementation. VHA, however, did not specify either of these roles in  the directive or take steps to ensure that they were occurring. Moving  forward, ONS officials said they are considering developing a VISN-level  staff position that would specifically focus on educating VAMCs within the  region about the methodology, and assisting them with implementing it.  Without clearly defined roles and responsibilities within VA\u2019s  organizational structure, VHA\u2019s ability to improve its oversight of the  implementation and administration of the staffing methodology and  provide VAMCs with additional resources to assist with problems is  compromised.\n\n\tConclusions\n\nAs the number of veterans requiring care in VAMCs and the complexity of  services needed by many of these veterans increase, the need for an  adequate and qualified nurse workforce is increasingly critical. Although  VHA\u2019s nurse staffing methodology was intended to provide a nationally  standardized methodology for determining and ensuring adequate and  qualified nurse staffing at VAMCs, its ability to do so across all 151  VAMCs is not likely to be realized unless existing weaknesses are  addressed. Although some improvements in nurse staffing were reported  with the implementation of the staffing methodology, the seven VAMCs in  our review experienced problems developing and executing the related  staffing plans, including problems pertaining to data resources, training,  and communication. Many of these problems persist as the seven  VAMCs continue to administer the methodology.\nWe also found that VHA\u2019s oversight of the staffing methodology is limited  and in many cases lacks sufficient internal controls, which could diminish  VHA\u2019s ability to ensure an adequate and qualified nurse workforce. In  particular, VHA has not adequately assessed the needs or preparedness  of VAMCs to effectively implement the methodology, does not have a  formal mechanism to ensure VAMCs\u2019 ongoing compliance with the  methodology, has not clearly defined a role in oversight for VISNs, and  does not regularly communicate with VAMCs or VISNs to cull and share  best practices system-wide. Furthermore, delays in VHA\u2019s evaluations of  early phases of the staffing methodology have made them too late to be  useful in designing future phases or helping VAMCs with implementation.  Because the implementation and administration of the nurse staffing  methodology is ongoing, it is critical that VHA improve its oversight to  help ensure an adequate and qualified nurse workforce across all  VAMCs.\n\n\tRecommendations for Executive Action\n\nTo help ensure adequate and qualified nurse staffing at VAMCs, we  recommend that the Secretary of Veterans Affairs direct the Interim Under  Secretary for Health to enhance VHA\u2019s internal controls through the  following five actions:  1.  Provide support to all VAMCs to meet the objectives of the VHA  a.  training that more clearly aligns with the needs of VAMC staff and  b.  a systematic process for collecting and disseminating staffing  2.  Conduct an environmental assessment of all VAMCs, including an  assessment of their data analysis needs, to determine their  preparedness to implement the remaining phases of the methodology,  and use that information to help guide and provide the necessary  support for the implementation of the remaining phases and for the  ongoing administration of the methodology;  3.  Develop and implement a documented process to assess VAMCs\u2019  ongoing compliance with the staffing methodology, including  assessing VAMCs\u2019 execution of staffing plans and more clearly  defining the role and responsibilities of all organizational components,  including VISNs, in the oversight and administration of the  methodology;  4.  Complete evaluations of Phase I and Phase II and make any  necessary changes to policies and procedures before national  implementation of Phase II in all VAMCs; and  5.  Improve the timeliness and regularity of communication with VAMCs,  including unit-level staff, regarding the status of the various phases of  the methodology.\n\n\tAgency Comments\n\nWe provided a draft of this report to VA for its review and comment. VA  provided written comments, which are reprinted in appendix I. In its  written comments, VA generally agreed with our conclusions and  concurred with all five of the report\u2019s recommendations. To address the  recommendations, VA indicated that VHA will take a number of actions,  such as developing a written document specifying its process for  assessing ongoing compliance with the staffing methodology and  improving the timeliness and regularity of communication with VAMCs  through face-to-face regional training sessions. VA indicated that target  completion dates for implementing these recommendations range from  September 2015 through September 2016. Regarding the  recommendation that VA complete evaluations of Phase I and Phase II  before national implementation of Phase II in all VAMCs, VA indicated  that, by September 2016, it would complete its evaluations and determine  what opportunities exist to modify policies and procedures, but did not  explicitly state that the evaluations would be completed before national  implementation. We continue to emphasize the importance of completing  the evaluations before national implementation of Phase II in all VAMCs.\nAs agreed with your office, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days from the  report date. At that time, we will send copies of this report to appropriate  congressional committees, the Secretary of Veterans Affairs, and other  interested parties. In addition, the report will be available at no charge on  the GAO Web site at http:\/\/www.gao.gov.\nIf you or your staff have any questions about this report, please contact  me at (202) 512-7114 or draperd@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.\n\nAppendix I: Comments from the Department of Veterans Affairs\n\nAppendix II: GAO Contact and Staff Acknowledgments\n\n\tGAO Contact\n\n\tStaff Acknowledgments\n\nIn addition to the contact named above, Janina Austin, Assistant Director;  Jennie Apter; Kathryn Black; Jacquelyn Hamilton; Kelli Jones;   Vikki L. Porter; and Karin Wallestad made key contributions to this report.","output":"Why GAO Did This Study\n\nGAO and others have raised prior concerns about the adequacy and qualifications of VHA's nurse staffing. In part to address these concerns, VHA issued a directive in 2010 requiring all VAMCs to implement a standardized methodology for determining an adequate and qualified nurse workforce, which includes developing and executing nurse staffing plans. It also requires VAMCs to use the methodology on an ongoing basis to evaluate staffing plans.\nGAO was asked to provide information on nurse staffing at VAMCs. This report reviews the extent to which (1) VAMCs have implemented VHA's nurse staffing methodology, and (2) VHA oversees VAMCs' implementation and ongoing administration of the methodology. GAO reviewed documents and interviewed officials from VHA, seven VAMCs selected to ensure variation in factors such as geographic location, and regional offices for these VAMCs. GAO used federal internal control standards to evaluate VHA's oversight. GAO also interviewed representatives of veterans service organizations, nursing organizations, and unions.\n\nWhat GAO Found\n\nThe seven Department of Veterans Affairs medical centers (VAMC) in GAO's review implemented the Veterans Health Administration's (VHA) nurse staffing methodology, experienced problems developing and executing the related nurse staffing plans, and some reported improvements in nurse staffing. Specifically, GAO found that each of the seven VAMCs had developed a facility-wide staffing plan\u2014which outlines initiatives needed to ensure appropriate unit-level nurse staffing and skill mix\u2014and taken steps to execute it. However, VAMCs experienced problems\u2014such as lack of data resources and difficulties with training\u2014in both the development and execution of their staffing plans. Some VAMC staff reported improvements in the adequacy and qualifications of their units' nursing staff when nurse staffing plan initiatives were executed. For example, at two VAMCs where the number of nurses was increased or where support services for nurses were put in place, such as a designated group of staff to assist in transporting patients to and from appointments off the unit, unit staff said the adequacy of the nursing staff had improved. However, some VAMC unit staff reported that unit nurse staffing continued to be inadequate and that nurse unit assignments and job duties were not always appropriate for their qualifications.\nVHA's oversight is limited for ensuring its nurse staffing methodology is implemented and administered appropriately. GAO found the following internal controls were limited in VHA's oversight process:\nEnvironmental assessment. VHA did not comprehensively assess each VAMC to ensure preparedness for implementing the methodology, including having the necessary technical support and resources, prior to the issuance of the directive requiring each VAMC to implement the methodology.\nMonitoring compliance. VHA does not have a plan for monitoring VAMCs to ensure compliance with the implementation and ongoing administration of the methodology.\nEvaluation. VHA has conducted limited evaluations of the methodology, and at least one of these evaluations has been significantly delayed.\nTimeliness of communication. VHA's protracted timeline for communicating methodology-related information may have hindered the ability of VAMCs to appropriately develop their staffing plans and to execute the initiatives contained in those plans.\nOrganizational accountability. VHA did not define areas of responsibility or establish the appropriate line of reporting within VA's management structure for oversight of the implementation and ongoing administration of the methodology.\nWithout these internal controls in place, VHA cannot ensure its methodology meets department goals, such as establishing a standardized methodology for determining an adequate and qualified nurse workforce at VAMCs, and ultimately, having nurse staffing that is adequate to meet veterans' growing and increasingly complex health care needs.\n\nWhat GAO Recommends\n\nGAO recommends VA: (1) assess VAMCs' ability to implement the methodology, (2) monitor VAMCs' ongoing compliance with the methodology, (3) complete timely evaluations, (4) improve the timeliness of communication with VAMCs, and (5) define areas of responsibility and reporting within VA's management structure. VA concurred with the recommendations."}
{"id":"gao_GAO-16-125","pid":"gao_GAO-16-125_0","input":"\tBackground\n\n\t\tTypes of Dialysis\n\nThere are three types of dialysis, which is a process that removes excess  fluids and toxins from the bloodstream: (1) hemodialysis performed   in a facility (referred to as in-center hemodialysis in this report);   (2) hemodialysis performed at home; and (3) peritoneal dialysis, which   is generally performed at home. In-center hemodialysis is the most  common type of dialysis and was used by about 89 percent of dialysis  patients in 2012; the remaining patients received either peritoneal dialysis  (9 percent) or home hemodialysis (2 percent). Similarly, almost all\u2014 approximately 96 percent of\u2014dialysis facilities had in-center hemodialysis  patients in 2012; just over two-fifths of facilities had peritoneal dialysis  patients and nearly one-fifth had home hemodialysis patients.\nThe processes for hemodialysis\u2014performed either in a facility or at  home\u2014and peritoneal dialysis differ. (See fig. 1.) For in-center  hemodialysis treatments, blood flows from the patient\u2019s body through a  surgically created vein or a catheter, known as a vascular access site,  and through tubing to the dialysis machine. The machine pumps the  blood through an artificial kidney, called a dialyzer, to cleanse the excess  fluids and toxins from the bloodstream and then returns the cleansed  blood to the body. Patients typically receive in-center hemodialysis for 3  to 4 hours three times per week. For home hemodialysis treatments, the  process is the same, but the patient performs the treatments and may  perform treatments more frequently and at night. For peritoneal dialysis  treatments, a catheter is used to fill the patient\u2019s abdomen with a dialysis  solution that collects excess fluids and toxins over several hours; those  excess fluids and toxins are removed from the body when the patient  drains the dialysis solution from the abdomen. To conduct the  exchanges\u2014draining and then refilling the abdomen with the dialysis  solution\u2014most peritoneal dialysis patients use a machine that performs  several exchanges during the night while they are asleep, and other  patients do manual exchanges during the day.\nThe three types of dialysis are also associated with various clinical  advantages and disadvantages. For example, some studies have  suggested that more frequent use of home hemodialysis can achieve  better health outcomes for certain patients such as those with  hypertension. In another example, some studies have suggested that  peritoneal dialysis may have a lower risk for death in the first few years of  dialysis therapy, and peritoneal dialysis can also help patients retain  residual kidney function. However, the causes of some differences in  clinical outcomes between the types of dialysis can be challenging to  determine because of differences in patient characteristics; younger  patients, for example, were more likely to receive peritoneal dialysis than  other types, according to USRDS data. In addition, there may also be  clinical disadvantages. For example, home hemodialysis patients\u2019 more  frequent use of the vascular access site may result in a higher risk for  complications such as damage to the site that requires repair.  Additionally, peritoneal dialysis patients may develop peritonitis, an  infection of the peritoneal membrane, and the peritoneal membrane may  become less effective over time, meaning a patient may eventually have  to switch to either home or in-center hemodialysis.\n\n\t\tFactors Affecting Type of Dialysis\n\nPatients\u2019 preferences may influence whether patients receive home  dialysis (either peritoneal dialysis or home hemodialysis) or in-center  hemodialysis. For example, some patients may prefer home dialysis  because they do not need to travel to the facility three times per week,  giving them greater flexibility to work during the day and undergo dialysis  at night in their home. Some patients also may prefer home dialysis  because there may be fewer diet and fluid restrictions and less recovery  time following each dialysis treatment. On the other hand, successfully  performing home dialysis requires patients to undergo training and  assume other responsibilities that they would not otherwise have if they  dialyzed in a facility. As a result, patients who feel unprepared to accept  such responsibilities or who lack a spouse or caregiver to help them may  be less likely to choose home dialysis. For similar reasons, some experts  and stakeholders have indicated that switching from in-center to home  dialysis can be challenging once patients become accustomed to in- center hemodialysis. Furthermore, the greater complexity of home  hemodialysis training\u2014including learning to place needles in the vascular  access site and how to respond to alarms from the dialysis machine\u2014 relative to peritoneal dialysis training could lead some patients to prefer  one type of home dialysis over the other.\nIn addition to patients\u2019 preferences, clinical factors may affect whether  patients receive home dialysis or in-center hemodialysis. One factor is  whether a patient has received care from a nephrologist prior to beginning  dialysis. Patients who did not receive such care and who have an urgent  need to start dialysis often do so with in-center hemodialysis because  training is not required and because a venous catheter can be placed and  used immediately. More lead time can be required for peritoneal dialysis  to allow the site where the peritoneal dialysis catheter was placed to  heal. As another example, a patient with poor vision or dexterity may  have difficulty performing the tasks associated with home dialysis. In  addition, a patient who has received multiple abdominal surgeries may  not be an appropriate candidate for peritoneal dialysis. Finally, patients  with multiple comorbidities (i.e., multiple chronic diseases or disorders)  may choose in-center hemodialysis because it can allow the nephrologist  to more closely manage those other conditions.\n\n\t\tMedicare Payment for Dialysis Care\n\nMedicare uses different methods to pay (1) dialysis facilities for providing  dialysis treatments to patients and for training them to perform home  dialysis and (2) physicians for managing patients\u2019 dialysis care and  educating them about their condition.\n\n\t\t\tPayments to Facilities\n\nFor dialysis treatments\u2014including any training that occurs in the first   4 months of treatment\u2014Medicare has paid facilities a single bundled  payment per treatment since 2011. The bundled payment is designed   to cover the average costs incurred by an efficient facility to provide the  dialysis, injectable drugs, laboratory tests, and other ESRD-related items  and services. In 2015, Medicare paid a base rate of $239.43 per  treatment for up to three hemodialysis treatments per week, and  Medicare sets the daily rate for peritoneal dialysis such that payments for  7 days of peritoneal dialysis would equal the sum of payments for three  hemodialysis treatments. Medicare adjusts the base rate to account for  certain factors that affect the cost of a treatment, including costs to  stabilize patients and to provide training during the first 4 months of  dialysis treatments, as well as certain other patient and facility factors.  CMS implemented its Quality Incentive Program beginning in 2012, which  can reduce Medicare payments for dialysis treatments to facilities by up  to 2 percent based on the quality of care they provided.\nWhen training occurs after the first 4 months of the patient\u2019s dialysis  treatments, Medicare pays dialysis facilities the bundled payment plus an  additional fixed amount (often referred to as the training add-on). The  training add-on is for the facilities\u2019 additional staff time to train the patient.  This training, which can happen in an individual or group setting, is  required to be furnished by a registered nurse. The number of  treatments that include home dialysis training\u2014called training  treatments\u2014varies by type of dialysis and by patient. Medicare currently  pays facilities a training add-on amount of $50.16 per treatment for up to  25 home hemodialysis training treatments or a daily equivalent rate for up  to 15 days of peritoneal dialysis training; CMS increased the training add- on payment from $33.44 to $50.16 in 2014.\n\n\t\t\tPayments to Physicians\n\nMedicare pays physicians (typically nephrologists) a monthly amount per  patient to manage patients\u2019 dialysis care. This monthly amount covers  dialysis-related management services such as establishing the frequency  of and reviewing dialysis sessions, interpretation of tests, and visits with  patients. To receive the payment, Medicare requires the physician to  provide at least one face-to-face visit per month to each patient for  examining the patient\u2019s vascular access site. The monthly amount paid to  the physician for managing in-center patients varies on the basis of the  patient\u2019s age and the number of visits provided to the patient, but the  amount for managing the care of a home patient varies only on the basis  of the patient\u2019s age and not the number of visits. Besides the monthly  payment for patients\u2019 dialysis care, Medicare provides a one-time  payment to physicians of up to $500 for each patient who completes  home dialysis training under the physician\u2019s supervision; this payment is  separate from Medicare\u2019s payments to facilities for training patients.\nMedicare also pays physicians to provide kidney disease education to  patients who have not yet started dialysis. Congress established the  Kidney Disease Education (KDE) benefit as part of the Medicare  Improvements for Patients and Providers Act of 2008 to provide  predialysis education to Medicare patients with Stage IV chronic kidney  disease. Topics to be covered include the choice of therapy (such as in- center hemodialysis, home dialysis, or kidney transplant) and the  management of comorbidities, which can help delay the need for dialysis.\n\n\tPercentage of Patients on Home Dialysis Generally Declined between 1988 and 2008 and then Slightly Increased; Stakeholder Estimates Suggest Potential for Future Growth\n\nHistorical trends in the overall percentage of all dialysis patients on home  dialysis\u2014including both Medicare and non-Medicare patients\u2014show a  general decrease between 1988 and 2008 and a more recent increase  thereafter through 2012. According to USRDS data, 16 percent of  104,200 dialysis patients received home dialysis in 1988. Home dialysis  use generally decreased over the next 20 years, reaching 9 percent in  2008, and then slightly increased to 11 percent of 450,600 dialysis  patients in 2012\u2014the most recent year of data available from USRDS.  (See fig. 2.) More generally, the percentage of all patients on home  dialysis declined from 1988 through 2012 because the number of these  patients increased at a slower rate than the total number of all patients on  dialysis. During the time period from 1988 through 2012, most home  dialysis patients received peritoneal dialysis as opposed to home  hemodialysis. The more recent increase in use of home dialysis is also  reflected in CMS data for adult Medicare dialysis patients, showing an  increase from 8 percent using home dialysis in January 2010 to about 10  percent as of March 2015.\nLiterature we reviewed and stakeholders we interviewed suggested  several factors that may have contributed to the trends in home dialysis  use from 1988 through 2012. Looking at the initial decline between 1988  and 2008, contributing factors may have included increased capacity to  provide in-center hemodialysis and changes in the dialysis population.\nIncreased capacity to provide in-center hemodialysis. The growth  in facilities\u2019 capacity to provide in-center hemodialysis from 1988 to  2008 outpaced the growth in the dialysis patient population over the  same time period. Specifically, the number of dialysis stations, which  include the treatment areas and dialysis machines used to provide   in-center hemodialysis, increased at an average annual rate of   7.3 percent during this time period, while the number of patients  increased at an average annual rate of 6.8 percent. As a result,  dialysis facilities may have had a greater financial incentive to treat  patients in facilities in an effort to use this expanded capacity,  according to literature we reviewed.\nChanges in the dialysis population. The increased age and  prevalence of comorbidities in the dialysis population may have  reduced the portion considered clinically appropriate for home  dialysis. Dialysis patients who are older and those with comorbid  conditions may be less physically able to dialyze at home. From 1988  to 2008, the mean age of a dialysis patient rose from 52.2 years to  58.6 years. Similarly, the proportion of the dialysis population affected  by various comorbid conditions increased during this time period. For  example, the percentage of dialysis patients with diabetes as the  primary cause of ESRD increased from 24.6 percent in 1988 to   43.1 percent in 2008.\nMedicare payment methods and concerns about the effectiveness of  peritoneal dialysis may have played a role in the decline in home dialysis  use between 1988 and 2008, but changes in both factors may have also  contributed to recent increases in use.\nMedicare payment methods for injectable drugs. Medicare  payment methods prior to 2011 may have given facilities a financial  incentive to provide in-center rather than home dialysis. Before 2011,  Medicare paid separately for injectable drugs rather than including  them in the bundled payment. As a result, Medicare payments to  facilities for dialysis care\u2014including the payments for injectable  drugs\u2014could have been lower for home patients because of their  lower use, on average, of injectable drugs. However, the payment  changes in 2011 reduced the incentive to provide in-center  hemodialysis relative to home dialysis because the Medicare payment  for dialysis treatments and related services, such as injectable drugs,  no longer differed based on the type of dialysis received by the  patient.\nConcerns about effectiveness of peritoneal dialysis. Several  studies published in the mid-1990s indicated poorer outcomes for  peritoneal dialysis compared to hemodialysis, and these studies may  have made some physicians reluctant to prescribe peritoneal dialysis,  according to stakeholders and literature we reviewed. However,  stakeholders identified more recent studies indicating that outcomes  for peritoneal dialysis are comparable to hemodialysis. These newer  studies may have contributed to the recent increases in home dialysis  use by mitigating concerns about the effectiveness of peritoneal  dialysis and by making physicians more comfortable with prescribing  it.\nEstimates from dialysis experts and other stakeholders suggest that  further increases in the use of home dialysis are possible over the long  term. The home dialysis experts and stakeholders we interviewed  indicated that home dialysis could be clinically appropriate for at least half  of patients. However, the percentage of patients who could realistically be  expected to dialyze at home is lower because of other factors such as  patient preferences. For example, at a meeting in 2013, the chief medical  officers of 14 dialysis facility chains jointly estimated that a realistic target  for home dialysis would be 25 percent of dialysis patients. To achieve this  target, they said that changes, such as increased patient education and  changes to payment policies, would need to occur. As another example,  physician stakeholders we interviewed estimated that 15 to 25 percent of  dialysis patients could realistically be on home dialysis.\nIn the short term, however, an ongoing shortage of peritoneal dialysis  solution has reduced the use of home dialysis, and this shortage could  have a long-term impact as well. Medicare claims data analyzed by  CMS show that the percentage of Medicare dialysis patients on home  dialysis had reached 10.7 percent in August 2014, when the shortage  was first announced, but has since declined to 10.3 percent, as of March  2015. CMS officials attributed this decline to the shortage in the supply of  peritoneal dialysis solution because the decline did not occur among  facilities owned by one large dialysis facility chain that manufactures its  own peritoneal dialysis solution and has not experienced a shortage.  Some dialysis facility chains told us that, because of this shortage, they  limited the number of new patients on peritoneal dialysis. In addition, one  physician association stated that the shortage could have long-term  implications. They said that some physicians are reluctant to prescribe  this type of dialysis, even when a facility has the capacity to start a patient  on peritoneal dialysis, because of uncertainties about peritoneal dialysis  supplies.\n\n\tIncentives for Facilities to Provide Home Dialysis May Have Limited Impact in Short Term\n\nMedicare payments to dialysis facilities, including those that provided  home dialysis, gave them an overall financial incentive to provide dialysis,  as shown by their generally positive Medicare margins. The average  Medicare margin for all 3,891 freestanding facilities in our analysis was  4.0 percent in 2012\u2014that is, Medicare payments exceeded Medicare  allowable costs for dialysis treatments by 4.0 percent. Similarly, the  average Medicare margin for the 1,569 freestanding facilities that  provided one or both types of home dialysis was 4.20 percent in 2012.  (See table 1.) Focusing on those facilities that provided home dialysis,  nearly all (94 percent) provided both in-center and one or both types of  home dialysis. In addition, although margins were positive, on average,  for these facilities, we found that the Medicare margin for large facilities  (7.21 percent) was considerably higher, on average, than for small  facilities (-3.49 percent). We also found that most of the patient years   (81 percent) were devoted to in-center hemodialysis, followed by  peritoneal dialysis (15 percent) and home hemodialysis (4 percent).  Small and large facilities followed the same pattern.\nIn addition to giving an incentive to provide dialysis in general, Medicare  payments to facilities likely encourage the use of peritoneal dialysis\u2014the  predominant type of home dialysis\u2014over the long term. The payment rate  for peritoneal dialysis is the same as the rate for hemodialysis provided in  facilities or at home, but the cost of providing peritoneal dialysis is  generally lower, according to CMS and stakeholders we interviewed.  When CMS established the current payment system, it stated that its  decision to have a single payment rate regardless of the type of dialysis  would give facilities a powerful financial incentive to encourage the use of  home dialysis, when appropriate. Another financial incentive that exists  for both peritoneal dialysis and home hemodialysis is that facilities can  receive additional months of payments for patients under 65 who undergo  home dialysis training. Specifically, for patients under age 65, Medicare  coverage typically begins in the fourth month after the patient begins  dialysis, but coverage begins earlier if the patient undergoes home  dialysis training. This incentive is augmented because payments to  facilities are significantly higher during the first 4 months of dialysis.  These incentives to provide home dialysis, compared to in-center  hemodialysis, are consistent with CMS\u2019s goal of fostering patient  independence through greater use of home dialysis among patients for  whom it is appropriate.\nAlthough over the long term facilities may have a financial incentive to  encourage the use of one or both types of home dialysis, the impact of  this incentive could be limited in the short term. This is because, in the  short term, we found that expanding the provision of in-center  hemodialysis at a facility generally tends to increase that facility\u2019s  Medicare margin and that the estimated increase is more than would  result if the facility instead expanded the provision of either type of home  dialysis. In particular, we found that, on average, facilities that provided  home dialysis could improve their financial position in the short term by  increasing their provision of in-center hemodialysis. An additional patient  year of in-center hemodialysis improved the margin by an estimated   0.15 percentage points\u2014for example, from 4.20 to 4.35 percent. (See   fig. 3.) In contrast, increasing home dialysis resulted in a smaller benefit.  Adding a patient year of peritoneal dialysis improved the margin by an  estimated 0.08 percentage points and adding a patient year of home  hemodialysis had no statistically significant effect on the margin; the  estimated 0.04 percentage point reduction on average in the margin was  not statistically different from zero. The pattern of the results in figure 3 for  the three types of dialysis was similar for small and large facilities. (See  results in app. I.)\nOur findings on the relative impact of the incentives in the short term are  generally consistent with information on the cost of each type of dialysis  provided to us by CMS and stakeholders we interviewed. First, consistent  with our finding that facilities have a greater short-term incentive for in- center hemodialysis, stakeholders we interviewed said that facilities\u2019 costs  for increasing their provision of in-center hemodialysis may be lower than  for either type of home dialysis. For example, although the average cost  of an in-center hemodialysis treatment is typically higher than the average  cost of a peritoneal dialysis treatment, facilities may be able to add an in- center patient without incurring the cost of an additional dialysis machine  because each machine can be used by six to eight patients. In contrast,  when adding a home patient, facilities generally incur costs for additional  equipment, which is dedicated to a single patient. Second, some  stakeholders said that the cost of providing home hemodialysis, in  particular, can be higher than other types of dialysis in part because  home hemodialysis patients often receive more than three treatments per  week and Medicare\u2019s policy is not to pay for these additional treatments  unless medically justified. Finally, when comparing the two types of  home dialysis, CMS and the stakeholders generally reported that the cost  of home hemodialysis, including training, was higher than for peritoneal  dialysis. They said that home hemodialysis training is more costly  because of the greater complexity such as learning to place needles in  the vascular access site and to respond to alarms. Stakeholders also told  us that Medicare payments cover only a portion of the upfront costs for  training a patient, particularly one on home hemodialysis.\nCMS increased the training add-on payment beginning in 2014 in  response to public comments it received on the cost of home  hemodialysis training, but the agency lacks reliable data for determining  whether the revised payment is adequate. Specifically, CMS lacks  reliable data on the cost of home dialysis treatment and training and on  the staff time needed to provide training.\nWe found that the cost report data on facilities\u2019 costs for each type of  dialysis, including costs for home dialysis training, were not sufficiently  reliable. Although we determined that data on facilities\u2019 total costs  across all types of dialysis were sufficiently reliable for purposes of  our analysis, stakeholders reported that these total costs were not  accurately allocated to each type of dialysis and to training. One  reason for this inaccuracy may be that some facilities allocated certain  types of costs, such as dialysis-related drugs and supplies, based on  the number of treatments for each type of dialysis. Representatives of  these facilities reported that CMS\u2019s Medicare Administrative  Contractors had approved this allocation method. However, the  number of treatments by type of dialysis may not be a reliable basis  for allocating such costs. For example, studies have shown that  utilization of dialysis-related drugs differs by type of dialysis, and  stakeholders reported that supply costs can as well. In addition,  CMS officials told us that they do not regularly review the reliability of  these data.\nWe also found that CMS lacks consistent data on the staff time  required to provide home dialysis training even though the agency  used the number of hours of nursing time as the basis for its training  add-on payment rate. For example, in 2012, CMS acknowledged that  1 hour did not necessarily correspond to the amount of time needed to  train a patient, even though CMS used 1 hour as the basis. More  recently, despite the fact that CMS increased the training add-on by  basing it on 1.5 hours of nursing time, CMS said that the public  comments it received did not provide consistent information on the  number of hours spent on training; the number of hours reported in  these comments varied from 2 to 6 hours per treatment.\nThe adequacy of training payments could affect facilities\u2019 incentives for  providing home dialysis, but it is unclear whether these payments are  adequate given CMS\u2019s lack of reliable data on the cost of training and by  type of dialysis. Reliable cost report data are important for CMS to be  able to perform effective fiscal management of the program, which  involves assessing the adequacy of payment rates. In particular, if the  training payments are inadequate, facilities may be less willing to provide  home dialysis, which could undermine CMS\u2019s goal of encouraging the use  of home dialysis when appropriate.\n\n\tMedicare Payment Policies and Limited Nephrology Training May Constrain Physicians\u2019 Prescribing of Home Dialysis\n\nMedicare physician payments for dialysis care do not consistently result  in incentives for physicians to prescribe home dialysis. In addition, few  Medicare patients have used Medicare\u2019s KDE benefit, and this low usage  may be due to statutory payment limitations on the types of providers  permitted to furnish the benefit and on the Medicare patients eligible to  receive it. Finally, physicians\u2019 limited exposure to home dialysis during  nephrology training programs is a third factor that may constrain the  extent to which physicians prescribe home dialysis.\n\n\t\tMedicare Physician Payments May Not Consistently Result in Incentives to Prescribe Home Dialysis\n\nWe found that the structure of Medicare\u2019s monthly physician payments\u2014 one of several factors that could affect the use of home dialysis\u2014may  give physicians a disincentive for prescribing home dialysis, which could  undermine CMS\u2019s goal of encouraging the use of home dialysis when  appropriate. CMS, when it established the current method of paying  physicians a monthly payment to manage patients\u2019 dialysis, stated that  this method would encourage the use of home dialysis by giving  physicians an incentive to manage home patients. According to CMS,  this incentive would exist because the monthly payment rate for  managing the dialysis care of home patients, which requires a single in- person visit, was approximately equal to the rate for managing and  providing two to three visits to in-center patients. However, we found that,  in 2013, the rate of $237 for managing home patients was lower than the  average payment of $266 and maximum payment of $282 for managing  in-center patients. (See table 2.) This difference in payment rates may  discourage physicians from prescribing home dialysis.\nPhysician associations and other physicians we interviewed told us that  Medicare payments may give physicians a disincentive for prescribing  home dialysis. They stated that, even though the payment levels for  managing home patients are typically lower, the visits with home patients  are often longer and more comprehensive; this is in part because  physicians may conduct visits with individual home patients in a private  setting, but they may be able to more easily visit multiple in-center  patients on a single day as they receive dialysis. The physician  associations we interviewed also said that they may spend a similar  amount of time outside of visits to manage the care of home patients and  that they are required to provide at least one visit per month to perform a  complete assessment of the patient. In addition, while physicians can  receive a higher payment for providing more than one visit to in-center  patients, these additional visits may be provided by nurse practitioners  and certain other nonphysician practitioners, who may be less costly.  CMS has not revised the overall structure for paying for physicians to  manage dialysis patients\u2019 care since 2004, although it has addressed  some stakeholder concerns such as how it paid physicians when home  patients were in the hospital.\nIn contrast to the monthly payments, Medicare physician payments  related to patients\u2019 training may provide physicians with financial  incentives for prescribing home dialysis. For certain patients who start  home training\u2014those under 65 who are eligible for Medicare solely due to  ESRD\u2014the monthly payments to physicians can begin in the first month  rather than the fourth month of treatment, which may provide physicians  with an incentive to prescribe home dialysis. In addition, Medicare makes  a one-time payment of up to $500 for each patient who has completed  home dialysis training under the physician\u2019s supervision. One stakeholder  told us that this training payment may provide an incentive for physicians  to prescribe home dialysis.\n\n\t\tPayment Limitations on Categories of Providers and Patients for Kidney Disease Education Benefit May Constrain Its Use\n\nFew Medicare patients have used the KDE benefit, which covers the  choice of therapy (such as in-center hemodialysis, home dialysis, or  kidney transplant) and the management of comorbidities, and  stakeholders generally told us this low usage was related to payment  limitations on the types of providers who are permitted to furnish the  benefit and on the Medicare patients eligible to receive it. According to  USRDS, less than 2 percent of eligible Medicare patients used the KDE  benefit in 2010 and 2011\u2014the first two years it was available\u2014and use of  the benefit has decreased since then.\nWhen CMS implemented the KDE benefit, the agency identified specific  categories of providers\u2014physicians, physician\u2019s assistants, nurse  practitioners, and clinical nurse specialists\u2014as eligible to receive  payment for furnishing the benefit. Stakeholders, including physician  associations, told us that other categories of trained healthcare providers  (such as registered nurses, social workers, and dieticians who may be  part of the nephrology practice) are also qualified to provide predialysis  education. However, when asked if other types of providers could be  eligible to receive payment, CMS officials said that the statute specified  the categories of providers and that the agency was limited to those  providers. Dialysis facilities are also not eligible to receive payment for  the KDE benefit. Although facility representatives said that they were  equipped to provide education to these patients, including education on  the choice of type of dialysis, CMS and some other stakeholders said  that one reason facilities are not eligible to provide the KDE benefit is  their financial interest in treatment decisions. For example, the KDE  benefit is designed to provide objective education to patients on steps  that can be taken to delay the need for dialysis and on the choice of  therapies, which includes kidney transplant, as well as home dialysis and  in-center hemodialysis. Some of these options could be contrary to  dialysis facilities\u2019 financial interest.\nSimilarly, CMS identified a specific category of patients\u2014those with Stage  IV chronic kidney disease\u2014as eligible to receive the KDE benefit.  Physician stakeholders said that certain other categories of patients, such  as those in Stage III or those in Stage V but who have not started dialysis,  may also benefit from Medicare coverage of timely predialysis education.  However, when asked if other categories of patients could be eligible to  receive the KDE benefit, CMS officials said that the agency was limited by  statute to Stage IV patients.\nThe low usage of the KDE benefit, which may be a result of these  payment limitations, suggests that it may be difficult for Medicare patients  to receive this education, which is designed to help them make informed  treatment decisions. Literature and stakeholders have underscored the  value of predialysis education to help patients make informed treatment  decisions, and also indicated that patients who receive it may be more  likely to choose home dialysis.\n\n\t\tLimited Exposure to Home Dialysis during Nephrology Training May Constrain Extent to Which Physicians Prescribe Home Dialysis\n\nLiterature we reviewed and nearly all of the stakeholders we interviewed  indicated that physicians have limited exposure to home dialysis during  nephrology training programs and thus may not feel comfortable  prescribing it. One study found that 56 percent of physicians who  completed training said they felt well trained and competent in the care of  peritoneal dialysis patients, and 16 percent felt this way in the care of  home hemodialysis patients. Furthermore, another study found that  physicians who felt more prepared to care for peritoneal dialysis patients  were more likely to prescribe it.\nLiterature we reviewed and stakeholders identified two main factors that  may limit physicians\u2019 exposure to home dialysis while they undergo  nephrology training:\nThe nephrology board certification examination administered by the  American Board of Internal Medicine does not emphasize home  dialysis, particularly home hemodialysis. The examination blueprint  published by the board shows that approximately 9 percent of the  board certification examination is dedicated to questions regarding  ESRD, which may include hemodialysis and peritoneal dialysis but,  according to one board official, is unlikely to include home  hemodialysis. Literature and stakeholders suggested that greater  emphasis on home dialysis on certification examinations might lead to  a greater emphasis on home dialysis in nephrology training.\nAccording to an Institute of Medicine report, the way Medicare  provides graduate medical education payments may discourage  nephrology training outside of the hospital, and one stakeholder said  this system may impede physician exposure to home patients.  Medicare pays teaching hospitals directly to help cover the costs of  graduate medical education, including the salaries of the physicians in  training. Hospitals have the option to allow physicians to train at a  second, off-site location\u2014for example, a dialysis facility with a robust  home dialysis program\u2014if the hospital continues to pay the  physicians\u2019 salaries. However, the stakeholder said that hospitals may  be reluctant to allow physicians to train at a second, off-site location,  such as a dialysis facility, because patients at such locations may not  be served primarily by the hospital.\nThe American Society of Nephrology has acknowledged that nephrology  training in home dialysis needs to improve. As a result, the society has  developed and disseminated guidelines identifying training specific to  home dialysis and providing suggestions on curriculum organization to  increase physician exposure to home patients. For example, the  guidelines suggest physicians in training should demonstrate knowledge  of the infectious and noninfectious complications specific to peritoneal  dialysis and home hemodialysis. They also suggest a program\u2019s  curriculum should include observation of and participation in a patient\u2019s  training to conduct home dialysis.\n\n\tConclusions\n\nThe number and percentage of patients choosing to dialyze at home have  increased in recent years, and our interviews with home dialysis experts  and stakeholders indicated potential for future growth. To realize this  potential, it is important for the incentives associated with Medicare  payments to facilities and physicians to be consistent with CMS\u2019s goal of  encouraging the use of home dialysis among patients for whom it is  appropriate. One aspect of payment policy\u2014training add-on payments to  facilities\u2014has a direct impact on facilities\u2019 incentives for providing home  dialysis. However, whether these training payments are adequate  continues to be unclear because CMS lacks reliable data on the cost of  home dialysis treatment and training for assessing payment adequacy. If  training payments are inadequate, facilities may be less willing to provide  home dialysis. In addition, the way Medicare pays physicians to manage  the care of dialysis patients may be discouraging physicians from  prescribing home dialysis. Finally, the limited use of the KDE benefit  suggests that it may be difficult for Medicare patients to receive this  education, which is designed to help them make informed decisions  related to their ESRD treatment, including decisions on the choice of the  type of dialysis, as well as options such as kidney transplant and steps to  delay the need for dialysis.\n\n\tRecommendations\n\nTo determine the extent to which Medicare payments are aligned with  costs for specific types of dialysis treatment and training, the  Administrator of CMS should take steps to improve the reliability of  the cost report data for treatment and training associated with specific  types of dialysis.\nThe Administrator of CMS should examine Medicare policies for  monthly payments to physicians to manage the care of dialysis  patients and revise them if necessary to ensure that these policies are  consistent with CMS\u2019s goal of encouraging the use of home dialysis  among patients for whom it is appropriate.\nTo ensure that patients with chronic kidney disease receive objective  and timely education related to this condition, the Administrator of  CMS should examine the Kidney Disease Education benefit and, if  appropriate, seek legislation to revise the categories of providers and  patients eligible for the benefit.\n\n\tAgency and Third Party Comments and Our Evaluation\n\nWe received written comments on our draft report from the Department of  Health and Human Services (HHS). These comments are reprinted in  appendix II. Because Medicare payments for home dialysis have  implications for patients and the dialysis industry, we also obtained  comments on our draft from groups representing home dialysis patients,  large and small dialysis facility chains and independent facilities, and  nephrologists. Following is our summary of and response to comments  from HHS and these patient and industry groups.\n\n\t\tComments from HHS\n\nIn written comments on a draft of this report, HHS reiterated its goal of  fostering patient independence through greater use of home dialysis  among patients for whom it is appropriate and pointed out that home  dialysis use has increased since 2011 when the bundled payment system  was implemented. HHS concurred with two of our three  recommendations. In response to our first recommendation that CMS  improve the reliability of cost report data for training and treatment  associated with specific types of dialysis, HHS said that it is willing to  consider reasonable modifications to the cost report that could improve  the reliability of cost report data. HHS also stated that it was conducting  audits of cost reports as required by the Protecting Access to Medicare  Act of 2014. HHS also concurred with our second recommendation to  examine Medicare policies for monthly payments to physicians to manage  patients\u2019 dialysis to ensure that these policies are consistent with CMS\u2019s  goal of encouraging home dialysis use when appropriate. HHS said that it  would review these services through CMS\u2019s misvalued code initiative,  which involves identifying and evaluating physician services that may not  be valued appropriately for Medicare payment purposes and then  adjusting Medicare payment as needed. We believe that this examination  and any resulting revisions to these payment policies have the potential to  address our recommendation.\nHHS did not concur with our third recommendation that CMS examine the  KDE benefit and, if appropriate, seek legislation to revise the categories  of providers and patients eligible for the benefit. HHS said that CMS  works continuously to appropriately pay for ESRD services and must  prioritize its activities to improve care for dialysis patients. While we  acknowledge the need for HHS to prioritize its activities to improve  dialysis care, it is important for HHS to help ensure that Medicare patients  with chronic kidney disease understand their condition, how to manage it,  and the implications of the various treatment options available,  particularly given the central role of patient choice in dialysis care. The  limited use of the KDE benefit suggests that it may be difficult for  Medicare patients to receive this education and underscores the need for  CMS to examine and potentially revise the benefit.\n\n\t\tComments from Groups Representing Patients and the Dialysis Industry\n\nWe received comments from five groups: (1) Home Dialyzors United  (HDU), which represents home dialysis patients; (2) the National Renal  Administrators Association (NRAA), which represents small dialysis  facility chains and independent facilities; (3) DaVita, which is one of the  two large dialysis facility chains; (4) Fresenius, which is the other large  dialysis facility chain; and (5) the Renal Physicians Association (RPA),  which represents nephrologists. The groups expressed appreciation for  the opportunity to review the draft, and the three groups that commented  on the quality of the overall report stated that it accurately addressed  issues related to the use of home dialysis.\nThree of the groups commented on some or all of our recommendations,  while the remaining two groups did not comment specifically on this  aspect of our report. Specifically, HDU, NRAA, and RPA agreed with our  first recommendation that CMS improve the reliability of cost report data  for treatment and training associated with specific types of dialysis. A  fourth group\u2014Fresenius\u2014expressed concern about the reliability of data  on the costs of home dialysis, which was consistent with our  recommendation that CMS needs to improve the reliability of these data.  RPA, in addition to agreeing with this recommendation, questioned the  reliability of the data on total facility costs that we used for our analysis.  Although it was beyond the scope of our report to verify the accuracy of  each facility\u2019s cost report, we took several steps to assess the cost report  data that we analyzed. These steps included verifying the cost report data  for internal consistency and checking the number of dialysis treatments  reported against Medicare claims. The fact that implementing these steps  caused us to exclude some facilities\u2019 data from our analysis suggests that  the potential exists to improve the accuracy of these data. CMS\u2019s  implementation of our recommendation and auditing of cost reports under  the Protecting Access to Medicare Act of 2014 create the opportunity for  CMS to begin addressing this issue. NRAA, another group that agreed  with our first recommendation, recommended that we or CMS develop  mechanisms in addition to the cost reports to more accurately capture the  resources devoted to providing home dialysis to each patient, but  developing such mechanisms was beyond the scope of this report.\nOne group (HDU) agreed with our second recommendation that CMS  examine and, if necessary, revise Medicare payment policies for  physicians to manage the care of dialysis patients, but a second group  (RPA) urged us to reconsider the recommendation out of concern that  implementing it could lead to cuts in physician payments for home  dialysis. While RPA agreed that the current payment method gives  physicians a disincentive for prescribing home dialysis, the group  emphasized that it was only one of numerous factors that affect this  treatment decision. RPA also stated that it would support certain payment  changes that would increase physicians\u2019 incentives to prescribe home  dialysis, which could include using performance measures to promote  home dialysis use. However, RPA expressed concern that the process  CMS may use for examining and potentially revising this payment method  could lead to cuts in physician payments for home dialysis, which RPA  asserted would further discourage its use and be contrary to the intent of  our recommendation. We agree that Medicare\u2019s current method of paying  physicians to manage patients\u2019 dialysis care is one of several factors that  could influence physicians\u2019 decisions to prescribe home dialysis and  described these factors in our report. In addition, while we do not know  what changes, if any, CMS will make to physician payments for managing  patients\u2019 dialysis care, we believe the intent of our recommendation\u2014to  ensure that these payments are consistent with CMS\u2019s goal to encourage  the use of home dialysis when appropriate\u2014is clear.\nThree groups (HDU, NRAA, and RPA) agreed with our third  recommendation that CMS examine the KDE benefit and if appropriate  seek revisions to the categories of providers and patients eligible for the  benefit. RPA also emphasized its agreement with our findings that the  statutory limitations on the providers and patients eligible for the benefit  have contributed to the limited use of the benefit. These groups also  urged other changes to the KDE benefit such as removing the  requirement for a copayment and making documentation requirements  more flexible. The limitations in the categories of eligible providers and  patients were cited in our interviews with stakeholders as the main  reasons for the limited use of the KDE benefit, but we acknowledge that  other opportunities may exist for improving the benefit\u2019s design. NRAA  also pointed out that facilities currently educate patients with chronic  kidney disease on the choice of type of dialysis but are not reimbursed by  Medicare for doing so. We stated in the report that, according to the large  and small dialysis facility chains we interviewed, they have the capacity to  educate such patients about their condition. However, we also reported  the concern raised by CMS and certain other stakeholders that the  education provided by facilities may not be objective because they have a  financial interest in patients\u2019 treatment decisions.\nThe patient and industry groups also made several comments in addition  to those described above.\nDaVita, NRAA, and RPA stated that the use of telehealth by  physicians to manage the care of dialysis patients could facilitate the  use of home dialysis. We noted in the report that certain visits for  managing in-center patients can be provided via telehealth. CMS has  established a process for identifying other services\u2014such as  managing home patients\u2014that could be provided via telehealth under  Medicare, and examining this process was beyond the scope of this  report.\nHDU, NRAA, and RPA stressed the importance of patient-centered  dialysis care and of ensuring that patients have sufficient information  to make informed decisions on the type of dialysis. We agree that  patient preferences and patient education are central to decisions  regarding the type of dialysis and have described these and other  factors that could affect these decisions.\nDaVita and RPA stressed the impact of the ongoing shortage of  peritoneal dialysis solution. In particular, DaVita said the shortage is  the biggest barrier to the use of home dialysis. We agree that this  shortage could have a long-term impact on the use of home dialysis  and revised the report to incorporate this perspective.\nDaVita and HDU asserted that Medicare\u2019s method of paying for  dialysis care separately from other services, such as inpatient care,  could affect incentives for providing home dialysis. For example,  DaVita suggested that the incentive to provide home hemodialysis  could increase if a single entity were financially responsible for all  Medicare services provided to a Medicare patient. This incentive  could increase because, according to DaVita, the cost of inpatient  care may be lower for home hemodialysis patients than for in-center  hemodialysis patients. We agree that choosing one type of dialysis  over another could affect the use of other types of Medicare services,  but examining such implications was beyond the scope of this report.\nNRAA and RPA appreciated that our report addressed the role of  nephrology training programs in the use of home dialysis, and both  groups said that we or CMS should further examine how physicians  can receive greater exposure to home dialysis through these  programs. RPA said that this examination could also address the role  of Medicare payments for graduate medical education. While we  acknowledge the importance of these issues, further examination of  them was beyond the scope of our report.\nIn addition to the comments described above, the patient and industry  groups provided technical comments on the draft, which we incorporated  as appropriate.\nAs agreed with your offices, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days from the  report date. At that time, we will send copies to the Secretary of Health &  Human Services and other interested parties. In addition, the report will  be available at no charge on the GAO website at http:\/\/www.gao.gov.\nIf you or your staff have any questions about this report, please contact  me at (202) 512-7114, or cosgrovej@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on  the last page of our report. GAO staff who made key contributions to this  report are listed in appendix III.\n\nAppendix I: Data and Methods for Analysis of Facilities\u2019 Medicare Margins\n\nThis appendix describes the data and methods we used for our analysis  of Medicare margins, which was part of our effort to examine incentives  associated with Medicare payments to dialysis facilities.\n\n\tMedicare Cost Report Data\n\nWe analyzed Medicare cost report data for 2012 from freestanding  facilities located in the 50 states and the District of Columbia. We took  steps to restrict our analysis to data from facilities with similar cost and  payment structures. We did not include hospital-based facilities in our  analysis because these facilities\u2019 reported costs may be driven in part by  hospitals\u2019 methods for allocating overhead costs within these hospitals  rather than by the costs of the dialysis facility itself. Because of possible  differences in cost structures, we excluded facilities that (1) provided any  pediatric or intermittent peritoneal dialysis treatments, (2) were  government-owned, or (3) had cost reporting periods not equal to  calendar year 2012, which generally occurred when facilities changed  ownership, opened, closed, or changed Medicare status during the year.  Because of possible differences in payment structures, we also limited  our analysis to facilities that elected to be paid fully under the bundled  payment system. Implementing these steps resulted in the exclusion of  approximately 19 to 20 percent of the 5,380 freestanding facilities  originally in the cost report data set.\nWe also took several steps to assess the reliability of facilities\u2019 cost report  data on total costs, total Medicare payments, and the number of dialysis  treatments provided. In particular, we checked for and excluded facilities  with internal inconsistencies among variables such as reporting that they  provided more treatments to Medicare patients than to Medicare and non- Medicare patients combined or reporting negative treatment numbers. In  addition, we excluded facilities that reported unusually high or low  average costs or average Medicare payments, which may be indicative of  data entry errors. Finally, we compared the number of Medicare-covered  treatments reported on the cost reports to similar data from Medicare  claims on the number of paid treatments, and we excluded facilities with  inconsistencies. Implementing these steps to assess the reliability of   the data resulted in the exclusion of an additional approximately 8 to   9 percent of the 5,380 freestanding facilities originally in the cost report  data set, leaving 3,891 (72 percent) of these facilities in our analysis. We  focused our analysis primarily on the 1,569 of these 3,891 freestanding  facilities that provided home dialysis (defined as either home  hemodialysis and\/or peritoneal dialysis) to Medicare dialysis patients in  2012. We determined that the data on total costs, total Medicare  payments, and number of dialysis treatments provided were sufficiently  reliable for the purposes of our analysis.\n\n\tCalculating Average Medicare Margins\n\n(\ud835\udc40\ud835\udc40\ud835\udc40\ud835\udc40\ud835\udc40\ud835\udc40\ud835\udc40\ud835\udc40\ud835\udc40\ud835\udc40\ud835\udc40\ud835\udc40\ud835\udc40\ud835\udc40\ud835\udc40\ud835\udc40 \ud835\udc5d\ud835\udc5d\ud835\udc40\ud835\udc40\ud835\udc5d\ud835\udc5d\ud835\udc5d\ud835\udc5d\ud835\udc40\ud835\udc40\ud835\udc5d\ud835\udc5d\ud835\udc5d\ud835\udc5d\ud835\udc5d\ud835\udc5d\u2212 \ud835\udc38\ud835\udc38\ud835\udc5d\ud835\udc5d\ud835\udc5d\ud835\udc5d\ud835\udc40\ud835\udc40\ud835\udc5d\ud835\udc5d\ud835\udc40\ud835\udc40\ud835\udc5d\ud835\udc5d\ud835\udc40\ud835\udc40\ud835\udc40\ud835\udc40 \ud835\udc40\ud835\udc40\ud835\udc40\ud835\udc40\ud835\udc40\ud835\udc40\ud835\udc40\ud835\udc40\ud835\udc40\ud835\udc40\ud835\udc40\ud835\udc40\ud835\udc40\ud835\udc40\ud835\udc40\ud835\udc40 \ud835\udc40\ud835\udc40\ud835\udc50\ud835\udc50\ud835\udc5d\ud835\udc5d\ud835\udc5d\ud835\udc5d\ud835\udc5d\ud835\udc5d)\nWe calculated the Medicare margin for all facilities that provided home  dialysis. (See table 3.) When calculating the average margin for facilities  in our analysis, we weighted the average by the total number of  Medicare-covered patient years of dialysis. We classified facilities as  small or large based on whether their number of Medicare patient years  was below or above the median number of patient years among the  facilities in our analysis that provided home dialysis.\n\n\tEstimating How Facilities\u2019 Medicare Margins Are Associated with Home and In-center Hemodialysis\n\nTo examine incentives associated with each type of dialysis, we used  multiple linear regression analysis to estimate the extent to which adding  a patient year of peritoneal dialysis, home hemodialysis, and in-center  hemodialysis was associated with an increase or decrease in facilities\u2019  Medicare margins. The explanatory variables of our regression model  included, for each type of dialysis, a binary variable for whether or not the  facility provided that type of dialysis and a continuous variable with the  number of patient years for that type of dialysis. To control for other  factors that could affect a facility\u2019s Medicare margin, our model also  included binary variables for whether or not the facility was located in an  urban area or whether or not the facility was affiliated with a large dialysis  facility chain. See table 4 for more information about the characteristics  included in the model.\nAs shown in table 5 and discussed further in the report, the results of our  regression model show the effect on facilities\u2019 Medicare margin from  adding one patient year of a given type of dialysis.\n\nAppendix II: Comments from the Department of Health and Human Services\n\nAppendix III: GAO Contact and Staff Acknowledgments\n\n\tGAO Contact\n\n\tStaff Acknowledgments\n\nIn addition to the contact named above, William Black, Assistant Director;  George Bogart; Andy Johnson; Corissa Kiyan; Hannah Marston Minter;  Richard Lipinski; Elizabeth T. Morrison; Vikki Porter; and Eric Wedum  made key contributions to this report.","output":"Why GAO Did This Study\n\nIn 2013, Medicare spent about $11.7 billion on dialysis care for about 376,000 Medicare patients with end-stage renal disease, a condition of permanent kidney failure. Some of these patients performed dialysis at home, and such patients may have increased autonomy and health-related quality of life.\nGAO was asked to study Medicare patients' use of home dialysis and key factors affecting its use. This report examines (1) trends in home dialysis use and estimates of the potential for wider use, (2) incentives for home dialysis associated with Medicare payments to dialysis facilities, and (3) incentives for home dialysis associated with Medicare payments to physicians. GAO reviewed CMS policies and relevant laws and regulations, and GAO analyzed data from CMS (2010-2015), the United States Renal Data System (1988-2012), and Medicare cost reports (2012), the most recent years with complete data available. GAO also interviewed CMS officials, selected dialysis facility chains, physician and patient associations, and experts on home dialysis.\n\nWhat GAO Found\n\nThe percentage of dialysis patients who received home dialysis generally declined between 1988 and 2008 and then slightly increased thereafter through 2012, and stakeholder estimates suggest that future increases in the use of home dialysis are possible. Dialysis patients can receive treatments at home or in a facility. In 1988, 16 percent of 104,200 dialysis patients received home dialysis. Home dialysis use generally decreased over the next 20 years, reaching 9 percent in 2008, and then slightly increased to 11 percent of 450,600 dialysis patients in 2012\u2014the most recent year of data for Medicare and non-Medicare patients. Physicians and other stakeholders estimated that 15 to 25 percent of patients could realistically be on home dialysis, suggesting that future increases in use are possible. In the short term, however, an ongoing shortage of supplies required for peritoneal dialysis\u2014the most common type of home dialysis\u2014reduced home dialysis use among Medicare patients from August 2014 to March 2015. Some stakeholders were also concerned the shortage could have a long-term impact.\nMedicare's payment policy likely gives facilities financial incentives to provide home dialysis, but these incentives may have a limited impact in the short term. According to the Centers for Medicare & Medicaid Services (CMS) within the Department of Health and Human Services (HHS), setting the facility payment for dialysis treatment at the same rate regardless of the type of dialysis gives facilities a powerful financial incentive to encourage the use of peritoneal dialysis when appropriate because it is generally less costly than other dialysis types. However, GAO found that facilities also have financial incentives in the short term to increase provision of hemodialysis in facilities, rather than increasing home dialysis. This is consistent with information from CMS and stakeholders GAO interviewed. For example, facilities may be able to add an in-center patient without paying for an additional dialysis machine, because each machine can be used by six to eight in-center patients. In contrast, for each new home patient, facilities may need to pay for an additional machine. The adequacy of Medicare payments for home dialysis training also affects facilities' financial incentives for home dialysis. Although CMS recently increased its payment for home dialysis training, it lacks reliable cost report data needed for effective fiscal management, which involves assessing payment adequacy. In particular, if training payments are inadequate, facilities may be less willing to provide home dialysis.\nMedicare payment policies may constrain physicians' prescribing of home dialysis. Specifically, Medicare's monthly payments to physicians for managing the care of home patients are often lower than for managing in-center patients even though physician stakeholders generally said that the time required may be similar. Medicare also pays for predialysis education\u2014the Kidney Disease Education (KDE) benefit\u2014which could help patients learn about home dialysis. However, less than 2 percent of eligible Medicare patients received the benefit in 2010 and 2011, and use has declined since then. According to stakeholders, the low usage was due to statutory limitations in the categories of providers and patients eligible for the benefit. CMS has established a goal of encouraging home dialysis use among patients for whom it is appropriate, but the differing monthly payments and low usage of the KDE benefit could undermine this goal.\n\nWhat GAO Recommends\n\nGAO recommends that CMS (1) take steps to improve the reliability of the cost report data, (2) examine and, if necessary, revise policies for paying physicians to manage the care of dialysis patients, and (3) examine and, if appropriate, seek legislation to revise the KDE benefit. HHS concurred with the first two recommendations but did not concur with the third. GAO continues to believe this recommendation is valid as discussed further in this report."}
{"id":"gao_GAO-11-617T","pid":"gao_GAO-11-617T_0","input":"\tInstituting a More Coordinated and Crosscutting Approach to Achieving Meaningful Results\n\nThe federal government faces a series of challenges that in many instances  are not possible for any single agency to address alone. Many federal  program efforts, including those related to ensuring food safety, providing  homeland security, monitoring incidence of infectious diseases, or  improving response to natural disasters, transcend more than one agency.  Agencies face a range of challenges and barriers when they attempt to  work collaboratively. GPRAMA establishes a new framework aimed at  taking a more crosscutting and integrated approach to focusing on results  and improving government performance. It requires the Office of  Management and Budget (OMB), in coordination with agencies, to  develop\u2014every 4 years\u2014long-term, outcome-oriented goals for a limited  number of crosscutting policy areas. On an annual basis, OMB is to  provide information on how these long-term crosscutting goals will be  achieved.\nAlso, we recently reported that a system of key national indicators  currently under development in the U.S. could contribute to the  implementation of the act\u2019s requirements for establishing crosscutting  goals as well as agency-level goals. Such a system aims to aggregate  essential statistical measures of economic, social, and environmental  issues to provide reliable information on a country\u2019s condition, offering a  shared frame of reference that enables collective accountability. Federal  officials could look to measures included in a system of key national  indicators to highlight areas in need of improvement and could use this  information to inform the selection of future crosscutting and agency-level  goals. Also, by providing information on economic, social, and  environmental conditions and trends across the nation, a key indicator  system may help provide context and a broader perspective for  interpreting how the federal government\u2019s efforts contribute to national  outcomes.\nThe crosscutting approach required by the act will provide a much needed  basis for more fully integrating a wide array of federal activities as well as  a cohesive perspective on the long-term goals of the federal government  that is focused on priority policy areas. It could also be a valuable tool for  governmentwide reexamination of existing programs and for considering  proposals for new programs.\nOur recent report on duplication, overlap, and fragmentation highlights a  number of areas where a more crosscutting approach is needed\u2014both  across agencies and within a specific agency. We found that duplication  and overlap occur because programs have been added incrementally over  time to respond to new needs and challenges, without a strategy to  minimize duplication, overlap, and fragmentation among them. Also, there  are not always interagency mechanisms or strategies in place to  coordinate programs that address crosscutting issues, which can lead to  potentially duplicative, overlapping, and fragmented efforts.\nEffective GPRAMA implementation could help inform reexamination or  restructuring efforts related to these and other areas by identifying the  various agencies and federal activities\u2014including spending programs,  regulations, and tax expenditures\u2014that contribute to each crosscutting  goal. These efforts could also be supported by a system of key national  indicators. For example, to influence positive movement in certain  indicators, federal officials could look at all the programs that contribute  to improving outcomes related to those indicators, examine how each  contributes, and use this information to streamline and align the programs  to create a more effective and efficient approach.\nExamples from our work on duplication, overlap, and fragmentation  include:    Teacher quality programs: In fiscal year 2009, the federal government  spent over $4 billion specifically to improve the quality of our nation\u2019s  3 million teachers through numerous programs across the  government. Federal efforts to improve teacher quality have led to the  creation and expansion of a variety of programs across the federal  government; however, there is no governmentwide strategy to  minimize fragmentation, overlap, or duplication among these many  programs. Specifically, we identified 82 distinct programs designed to  help improve teacher quality, either as a primary purpose or as an  allowable activity, administered across 10 federal agencies. The  proliferation of programs has resulted in fragmentation that can  frustrate agency efforts to administer programs in a comprehensive  manner, limit the ability to determine which programs are most cost  effective, and ultimately increase program costs.\nDepartment of Education (Education) officials believe that federal  programs have failed to make significant progress in helping states  close achievement gaps between schools serving students from  different socioeconomic backgrounds, because in part, federal  programs that focus on teaching and learning of specific subjects are  too fragmented to help state and district officials strengthen  instruction and increase student achievement in a comprehensive  manner. Education has established working groups to help develop  more effective collaboration across Education offices, and has reached  out to other agencies to develop a framework for sharing information  on some teacher quality activities, but it has noted that coordination  efforts do not always prove useful and cannot fully eliminate barriers  to program alignment.\nCongress could help eliminate some of these barriers through  legislation, particularly through the pending reauthorization of the  Elementary and Secondary Education Act of 1965 and other key  education bills. Specifically, to minimize any wasteful fragmentation  and overlap among teacher quality programs, Congress may choose  either to eliminate programs that are too small to evaluate cost  effectively or to combine programs serving similar target groups into a  larger program. Education has already proposed combining 38  programs into 11 programs in its reauthorization proposal, which  could allow the agency to dedicate a higher portion of its  administrative resources to monitoring programs for results and  providing technical assistance.\nMilitary health system: The Department of Defense\u2019s (DOD) Military  Health System (MHS) costs have more than doubled from $19 billion in  fiscal year 2001 to $49 billion in 2010 and are expected to increase to  over $62 billion by 2015. The responsibilities and authorities for the  MHS are distributed among several organizations within DOD with no  central command authority or single entity accountable for minimizing  costs and achieving efficiencies. Under the MHS\u2019s current command  structure, the Office of the Assistant Secretary of Defense for Health  Affairs, the Army, the Navy, and the Air Force each has its own  headquarters and associated support functions.\nDOD has taken limited actions to date to consolidate certain common  administrative, management, and clinical functions within its MHS. To  reduce duplication in its command structure and eliminate redundant  processes that add to growing defense health care costs, DOD could  take action to further assess alternatives for restructuring the  governance structure of the military health system. In 2006, if DOD and  the services had chosen to implement one of the reorganization  alternatives studied by a DOD working group, a May 2006 report by the  Center for Naval Analyses showed that DOD could have achieved  significant savings. Our adjustment of those savings from 2005 into  2010 dollars indicates those savings could range from $281 million to  $460 million annually, depending on the alternative chosen and the  numbers of military, civilian, and contractor positions eliminated. The  Under Secretary of Defense for Personnel and Readiness has recently  established a new position to oversee DOD\u2019s military healthcare  reform efforts.\nEmployment and training programs: In fiscal year 2009, 47 federal  employment and training programs in nine agencies spent about $18  billion to provide services, such as job search and job counseling, to  program participants. Most of these programs are administered by the  Departments of Labor, Education, and Health and Human Services  (HHS). Forty-four of the 47 programs we identified, including those  with broader missions such as multipurpose block grants, overlap with  at least one other program in that they provide at least one similar  service to a similar population. As we reported in January 2011, nearly  all 47 programs track multiple outcome measures, but only five  programs have had an impact study completed since 2004 to assess  whether outcomes resulted from the program and not some other  cause. We examined potential duplication among three selected large  programs\u2014HHS\u2019s Temporary Assistance for Needy Families (TANF)  and the Department of Labor\u2019s Employment Service, and Workforce  Investment Act of 1998 (WIA) Adult programs\u2014and found they  provide some of the same services to the same population through  separate administrative structures.\nColocating services and consolidating administrative structures may  increase efficiencies and reduce costs, but implementation can be  challenging. Some states have colocated TANF employment and  training services in one-stop centers where Employment Service and  WIA Adult services are provided. An obstacle to further progress in  achieving greater administrative efficiencies is that little information is  available about the strategies and results of such initiatives. In  addition, little is known about the incentives that states and localities  have to undertake such initiatives and whether additional incentives  are needed.\nTo facilitate further progress by states and localities in increasing  administrative efficiencies in employment and training programs, we  recommended in 2011 that the Secretaries of Labor and HHS work  together to develop and disseminate information that could inform  such efforts. As part of this effort, Labor and HHS should examine the  incentives for states and localities to undertake such initiatives and, as  warranted, identify options for increasing such incentives. Labor and  HHS agreed they should develop and disseminate this information.  HHS noted that it does not have the legal authority to mandate  increased TANF-WIA coordination or create incentives for such  efforts. As part of its proposed changes to the Workforce Investment  Act of 1998, the administration proposes consolidating nine programs  into three. In addition, the budget proposal would transfer the Senior  Community Service Employment Program from Labor to HHS.  Sustained oversight by Congress could also help ensure progress is  realized.\n\n\tFocusing on Addressing Weaknesses in Major Management Functions\n\nAlthough agencies have made progress improving their operations in  recent years, they need more effective management capabilities to better  implement new programs and policies. As part of the new  governmentwide framework created by GPRAMA, OMB is required to  develop long-term goals to improve management functions across the  government. The act specifies that these goals should include five areas:  financial management, human capital management, information  technology management, procurement and acquisition management, and  real property management. All five of these areas have been identified by  GAO as key management challenges across the government.\nMoreover, some aspects of these areas have warranted our designation as  high risk, either governmentwide or at certain agencies. For example,  although significant improvements have been made since we initially  designated it as high risk in 2001, strategic human capital management in  the federal government remains high risk because of a need to address  current and emerging critical skills gaps that are undermining agencies\u2019  abilities to meet their vital missions. Another example is financial  management at DOD, which we designated as high risk in 1995 due to  pervasive financial and related business management systems and control  deficiencies.\nIn addition, a number of the cost-savings or revenue-enhancement  opportunities we recently identified touch on needed improvements to  management functions. Examples include:    Noncompetitive contracts: Federal agencies generally are required to  award contracts competitively, but a substantial amount of federal  money is being obligated on noncompetitive contracts annually.  Federal agencies obligated approximately $170 billion on  noncompetitive contracts in fiscal year 2009 alone. While there has  been some fluctuation over the years, the percentage of obligations  under noncompetitive contracts recently has been in the range of 31  percent to over 35 percent.\nAlthough some agency decisions to forego competition may be  justified, we found that when federal agencies decide to open their  contracts to competition, they frequently realize savings. For example,  the Department of State (State) awarded a noncompetitive contract for  installation and maintenance of technical security equipment at U.S.  embassies in 2003. In response to our recommendation, State  subsequently competed this requirement, and in 2007 it awarded  contracts to four small businesses for a total savings of over $218  million. In another case, we found in 2006 that the Army had awarded  noncompetitive contracts for security guards, but later spent 25  percent less for the same services when the contracts were competed.\nIn July 2009, OMB called for agencies to reduce obligations under new  contract actions that are awarded using high-risk contracting  authorities by 10 percent in fiscal year 2010. These high-risk contracts  include those that are awarded noncompetitively and those that are  structured as competitive but for which only one offer is received.  While sufficient data are not yet available to determine whether OMB\u2019s  goal was met, we are currently reviewing the agencies\u2019 savings plans to  identify steps taken toward that goal, and will continue to monitor the  progress agencies make toward achieving this and any subsequent  goals set by OMB.\nUndisbursed grant balances: Past audits of federal agencies by GAO  and Inspectors General, as well as agencies\u2019 annual performance  reports, have suggested grant management challenges, including  failure to conduct grant closeouts and undisbursed balances, are a  long-standing problem. In August 2008, we reported that during  calendar year 2006, about $1 billion in undisbursed funding remained  in expired grant accounts in HHS\u2019s Payment Management System\u2014the  largest civilian grant payment system, which multiple agencies use. In  August 2008, we recommended that OMB instruct all executive  departments and independent agencies to track undisbursed balances  in expired grant accounts and report on the resolution of this funding  in their annual performance plan and Performance and Accountability  Reports. As of April 2011, OMB had not issued guidance to all agencies  to track and report on such balances.\nUnneeded real property: Many federal agencies hold real property they  do not need, including property that is excess or underutilized. Excess  and underutilized properties present significant potential risks to  federal agencies because they are costly to maintain. For example, in  fiscal year 2009, agencies reported underutilized buildings accounted  for over $1.6 billion in annual operating costs. In a June 2010  Presidential Memorandum to federal agencies, the administration  established a new target of saving $3 billion through disposals and  other methods by the end of fiscal year 2012; the President reiterated  this goal in his 2012 budget. However, federal agencies continue to  face obstacles to disposing of unneeded property, such as  requirements to offer the property to other federal agencies, then to  state and local governments and certain nonprofits at no cost. If these  entities cannot use the property, agencies may also need to comply  with costly historic preservation or environmental cleanup  requirements before disposing of the property. Finally, community  stakeholders may oppose agencies\u2019 plans for property disposal.\nOMB could assist agencies in meeting their property disposal target by  implementing our April 2007 recommendation of developing an action  plan to address key problems associated with disposing of unneeded  real property, including reducing the effect of competing stakeholder  interests on real property decisions. The President\u2019s fiscal year 2012  budget proposed the Civilian Property Realignment Act (CPRA), which  was recently introduced in the House of Representatives. The act  would establish a Civilian Property Realignment Board modeled on the  Base Closure and Realignment Commission. We are engaged in  discussions with Congress to determine how we can best support  Congress, should the act become law.\n\n\tEnsuring Performance Information Is Both Useful and Used in Decision Making\n\nAgencies need to consider the differing information needs of various  users\u2014such as agency top leadership and line managers, OMB, and  Congress\u2014to ensure that performance information will be both useful and  used in decision making. We have previously reported that to be useful,  performance information must meet diverse users\u2019 needs for  completeness, accuracy, validity, timeliness, and ease of use. GPRAMA  puts into place several requirements that could address these needs.\nCompleteness: Agencies often lack information on the effectiveness of  programs; such information could help decision makers prioritize  resources among programs. Our work on overlap and duplication has  found crosscutting areas where performance information is limited or  does not exist. For example, not enough is known about the  effectiveness of many domestic food assistance programs\u2014an area  where three federal agencies administer 18 programs, covering more  than $62.5 billion in spending in fiscal year 2008. Research suggests  that participation in 7 of the 18 programs\u2014including the Special  Supplemental Nutrition Program for Women, Infants, and Children  (WIC), the National School Lunch Program, the School Breakfast  Program, and SNAP\u2014is associated with positive health and nutrition  outcomes consistent with programs\u2019 goals, such as raising the level of  nutrition among low-income households, safeguarding the health and  well-being of the nation\u2019s children, and strengthening the agricultural  economy. Yet little is known about the effectiveness of the remaining  11 programs because they have not been well studied. In another area,  economic development, where four agencies administer 80 programs,  a lack of information on program outcomes is a current and long- standing problem. In shedding light on these and other areas, the new  crosscutting planning and reporting requirements could lead to the  development of performance information in areas that are currently  incomplete.\nAccuracy and validity: Agencies are required to disclose more  information about the accuracy and validity of their performance  information in their performance plans and reports, including the  sources for their data and actions to address limitations to the data.\nTimeliness and ease of use: While agencies will continue to report  annually on progress towards the rest of their goals, GPRAMA requires  reporting for governmentwide and agency priority goals on a quarterly  basis. By also requiring information to be posted on a governmentwide  Web site, the act will make performance information more accessible  and easy to use by stakeholders and the public, thus fostering  transparency and civic engagement.\nIn addition, to help ensure that performance information is used\u2014not  simply collected and reported as a compliance exercise\u2014GPRAMA  requires top leadership and program officials to be involved in quarterly  reviews of priority goals. During these sessions, they are expected to  review the progress achieved toward goals; assess the contributions of  underlying federal organizations, programs, and activities; categorize goals  by their risk of not being achieved; and develop strategies to improve  performance.\nTo be successful, these officials must have the knowledge and experience  necessary to use and trust the information they are gathering. Building  analytical capacity to use performance information and to ensure its  quality\u2014both in terms of staff trained to do the analysis and availability of  research and evaluation resources\u2014is critical to using performance  information in a meaningful fashion and will play a large role in the  success of government performance improvements. Federal officials must  understand how the performance information they gather can be used to  provide insight into the factors that impede or contribute to program  successes; assess the effect of the program; or help explain the linkages  between program inputs, activities, outputs, and outcomes.\nOur periodic surveys of federal managers on government performance and  management issues have found a positive relationship between agencies  providing training and development on setting program performance goals  and the use of performance information when setting or revising  performance goals. These surveys have also found a significant increase  in training between our initial survey in 1997 and our most recent one in  2007. However, only about half of our survey respondents in 2007  reported receiving any training that would assist in strategic planning and  performance assessment. We previously recommended that OMB ensure  that agencies are making adequate investments in training on performance  planning and measurement, with a particular emphasis on how to use  performance information to improve program performance. Consistent  with this, according to the President\u2019s Fiscal Year 2012 Budget, in the  coming year OMB and the Performance Improvement Council intend to  help agencies strengthen their employees\u2019 skills in analyzing and using  performance information to achieve greater results.\nTo further develop this capacity, within 1 year of enactment, GPRAMA  requires the Office of Personnel Management (OPM), in consultation with  the Performance Improvement Council, to identify the key skills and  competencies needed by federal employees to carry out a variety of  performance management activities including developing goals, evaluating  programs, and analyzing and using performance information. Once those  key skills and competencies are identified, OPM is then required to  incorporate those skills and competencies into relevant position  classifications and agency training no later than 2 years after enactment.\n\n\tSustaining Leadership Commitment and Accountability for Achieving Results\n\nPerhaps the single most important element of successful management  improvement initiatives is the demonstrated commitment of top leaders.  This commitment is most prominently shown through the personal  involvement of top leaders in developing and directing reform efforts.  Organizations that successfully address their long-standing management  weaknesses do not \u201cstaff out\u201d responsibility for leading change. Top  leadership involvement and clear lines of accountability for making  management improvements are critical to overcoming organizations\u2019  natural resistance to change, marshalling the resources needed in many  cases to improve management, and building and maintaining the  organizationwide commitment to new ways of doing business.\nGPRAMA creates several new leadership structures and responsibilities  aimed at sustaining attention on improvement efforts at both the agency  and governmentwide levels. The act designates the deputy head of each  agency as Chief Operating Officer (COO), with overall responsibilities for  improving the management and performance of the agency. In addition,  the act requires each agency to designate a senior executive as  Performance Improvement Officer (PIO) to support the COO. The act also  establishes a Performance Improvement Council\u2014chaired by the OMB  Deputy Director for Management and composed of PIOs from various  agencies\u2014to assist the Director of OMB in carrying out the  governmentwide planning and reporting requirements.\nGPRAMA also creates individual and organizational accountability  provisions that have the potential to keep attention focused on achieving  results. For each governmentwide performance goal, a lead government  official is to be designated and held responsible for coordinating efforts to  achieve the goal. Similarly, at the agency level, for each performance goal,  an agency official, known as a goal leader, will be responsible for  achieving the goal. To promote overall organizational accountability, the  act requires OMB to report each year on unmet agency goals. Where a goal  has been unmet for 3 years, OMB can identify the program for termination  or restructuring, among other actions.\n\n\tEngaging Congress in Identifying Management and Performance Issues to Address\n\nIn order for performance improvement initiatives to be useful to Congress  for its decision making, garnering congressional buy-in on what to  measure and how to present this information is critical. In past reviews,  we have noted the importance of considering Congress a partner in  shaping agency goals at the outset. Congressional committee staff, in  discussing the Program Assessment Review Tool (PART) developed by  the previous administration, told us that communicating the PART  assessment results was not a replacement for the benefit of early  consultation between Congress and OMB about what they consider to be  the most important performance issues and program areas warranting  review.\nWhile GPRA called for agencies to consult with Congress on their strategic  plans, the act did not provide detailed or specific requirements on the  consultation process or how agencies were to treat information obtained.  GPRAMA significantly enhances requirements for agencies to consult with  Congress when establishing or adjusting governmentwide and agency  goals. OMB and agencies are to consult with relevant committees,  obtaining majority and minority views, about proposed goals at least once  every 2 years. In addition, OMB and agencies are to describe on the  governmentwide Web site or in their strategic plans, respectively, how  they incorporated congressional input into their goals.\nBeyond this opportunity to provide input to OMB and agencies as they  shape their plans, Congress can also play a decisive role in fostering  results-oriented cultures in the federal government by using information  on agency goals and results as it carries out its legislative responsibilities.  For example, authorizing, appropriations, and oversight committees could  schedule hearings to determine if agency programs have clear  performance goals, measures, and data with which to track progress and  whether the programs are achieving their goals. Where goals and  objectives are unclear or not results oriented, Congress could articulate  the program outcomes it expects agencies to achieve. This would provide  important guidance to agencies that could then be incorporated in agency  strategic and annual performance plans. Most important, congressional  use of agency goals and measured results in its decision making will send  an unmistakable message to agencies that Congress considers agency  performance a priority.\nOver the years, the Committee on Homeland Security and Governmental  Affairs and its predecessors have done commendable work focusing  attention on improving government management and performance\u2014by  reporting out legislation, such as the original GPRA and GPRAMA, and  through hearings, such as this one. Moving forward, congressional  oversight and sustained attention by top administration officials will be  essential to ensure further improvement in the performance of federal  programs and operations. In fact, as we noted in our recent high-risk  issues report, these two factors were absolutely critical to making the  progress necessary for the DOD Personnel Security Clearance Program  and the 2010 Census to be removed from our high-risk list.\n\n\tGAO\u2019s Role in Evaluating GPRAMA, High Risks, and Other Major Government Challenges\n\nRealizing the promise of GPRAMA for improving government performance  and accountability and reducing waste will require sustained oversight of  implementation. GAO played a major role in evaluating the  implementation of the original GPRA\u2019s strategic and annual performance  planning requirements including various pilot provisions. For example, by  evaluating agency plans during a pilot phase, we were able to offer  numerous recommendations for improvement that led to more effective  final plans. We further supported implementation by reporting on leading  management practices that agencies should employ as they implemented  GPRA. It is worth noting that much of our work on government  performance has been conducted at the request of the Committee on  Homeland Security and Governmental Affairs and your two  subcommittees, showing a sustained commitment to ensure GPRA was  effectively implemented.\nSimilarly, GPRAMA includes provisions requiring GAO to review  implementation of the act at several critical junctures, and provide  recommendations for improvements to implementation of the act. First,  following a period of initial implementation, by June 2013, GAO is to  report on implementation of the act\u2019s planning and reporting  requirements\u2014at both the governmentwide and agency levels.  Subsequently, following full implementation, by September 2015 and 2017,  GAO is to evaluate whether performance management is being used by  federal agencies to improve the efficiency and effectiveness of agency  programs. Also in September 2015 and 2017\u2014and every 4 years  thereafter\u2014GAO is to evaluate the implementation of the federal  government priority goals and performance plans, and related reporting  required by the act.\nLooking ahead, a number of other required recurrent reports will help to  inform Congress about government management and performance. For  example, GAO has an ongoing statutory requirement to report each year  on federal programs, agencies, offices, and initiatives, either within  departments or governmentwide, which have duplicative goals or  activities. In addition, each year GAO reports on its audit of the  consolidated financial statements of the U.S. government and the  condition of federal financial management systems. GAO continues to  report periodically to Congress on the adequacy and effectiveness of  agencies\u2019 information security policies and practices and other  requirements of the Federal Information Security Management Act of  2002.\nAdditionally, the Presidential Transition Act of 2000 identifies GAO as a  source of briefings and other materials to help inform presidential  appointees of the major management issues, risks, and challenges they will  face. During the last presidential transition, we identified for Congress and  the new administration urgent issues and key program and management  challenges in the major departments and across government. Finally, GAO  reports to each new Congress on government operations that it identifies  as high risk due to their greater vulnerabilities to fraud, waste, abuse, and  mismanagement or the need for broad-based transformation to address  economy, efficiency, or effectiveness challenges.\nIn conclusion, everything must be on the table as we address the federal  long-term fiscal challenge. While the long-term outlook is driven on the  spending side of the budget by rising health care costs and demographics,  other areas of the budget should not be exempt from scrutiny. All areas  should be reexamined in light of the contributions they make to achieving  outcomes for the American public. If programs are overlapping,  fragmented, or duplicative, they must be streamlined. Programs and  management functions at significant risk of waste, fraud, and abuse must  be corrected. GPRAMA provides the administration and Congress with  new tools to identify strategies that are achieving results as well as those  that are ineffective, duplicative, or wasteful that could be eliminated. GAO  stands ready to help Congress ensure that the act\u2019s promises are met.\nThank you, Chairmen Akaka and Carper, Ranking Members Johnson and  Brown, and Members of the Subcommittees. This concludes my prepared  statement. I would be pleased to answer any questions you may have.\n\n\tContacts\n\nFor further information on this testimony, please contact Bernice  Steinhardt, Director, Strategic Issues, at (202) 512-6543 or  steinhardtb@gao.gov. Key contributions to this testimony were made by  Elizabeth Curda (Assistant Director), and Benjamin T. Licht. Contact  points for our Congressional Relations and Public Affairs offices may be  found on the last page of this statement.\n\nAppendix I: GPRA Modernization Act of 2010 Implementation\n\nAgency quarterly priority progress reviews, consistent with the requirements of the act, begin  for the goals contained in the Fiscal Year 2011 Budget of the United States Government.\nOMB publishes interim federal government priority goals and prepares and submits a federal  government performance plan consistent with the requirements of the act.\nAgencies adjust their current strategic plans, prepare and submit performance plans, and  identify new or update existing agency priority goals to make them consistent with the  requirements of the act.\nAgencies make performance reporting updates on their fiscal year 2011 performance  consistent with the requirements of the act.\nOMB begins federal government quarterly priority progress reviews.\nOMB launches a single governmentwide performance website.\nFull implementation of the act with a new strategic planning cycle.\nThis 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.","output":"Why GAO Did This Study\n\nThe federal government is the world's largest and most complex entity, with about $3.5 trillion in outlays in fiscal year 2010 that fund a broad array of programs and operations. GAO's long-term simulations of the federal budget show--absent policy change--growing deficits accumulating to an unsustainable increase in debt. While the spending side is driven by rising health care costs and demographics, other areas should also be scrutinized. In addition, there are significant performance and management challenges that the federal government needs to confront. GAO was asked to testify on the Government Performance and Results Act (GPRA) Modernization Act of 2010 (GPRAMA), as the administration begins implementing the act. This statement is based on GAO's past and ongoing work on GPRA implementation, as well as recently issued reports (1) identifying opportunities to reduce potential duplication in government programs, save tax dollars, and enhance revenue; and (2) updating GAO's list of government operations at high risk due to their greater vulnerabilities to fraud, waste, abuse, and mismanagement, or the need for transformation. As required by GPRAMA, GAO will periodically evaluate implementation of the act and report to Congress on its findings and recommendations.\n\nWhat GAO Found\n\nGAO's past and ongoing work illustrates how GPRAMA could, if effectively implemented, help address government challenges in five areas: Instituting a more coordinated and crosscutting approach to achieving meaningful results. GPRAMA could help inform reexamination or restructuring efforts and lead to more effective, efficient, and economical service delivery in overlapping program areas by identifying the various agencies and federal activities--including spending programs, regulations, and tax expenditures--that contribute to crosscutting outcomes. These program areas could include numerous teacher quality initiatives or multiple employment and training programs, among others. Focusing on addressing weaknesses in major management functions. Agencies need more effective management capabilities to better implement their programs and policies. GPRAMA requires long-term goals to improve management functions in five key areas: financial, human capital, information technology, procurement and acquisition, and real property management. GAO's work has highlighted opportunities for improvements in each of these areas and aspects of all of them are on the GAO high risk list. Ensuring performance information is both useful and used in decision making. Agencies need to consider the differing needs of various stakeholders, including Congress, to ensure that performance information will be both useful and used. For performance information to be useful, it must be complete, accurate, valid, timely, and easy to use. Yet decision makers often do not have the quality performance information they need to improve results. To help address this need, GPRAMA requires (1) disclosure of information about accuracy and validity, (2) data on crosscutting areas, and (3) quarterly reporting on priority goals on a publicly available Web site. Sustaining leadership commitment and accountability for achieving results. Perhaps the single most important element of successful management improvement initiatives is the demonstrated commitment of top leaders, as shown by their personal involvement in reform efforts. GPRAMA assigns responsibilities to a Chief Operating Officer and Performance Improvement Officer in each agency to improve agency management and performance. Engaging Congress in identifying management and performance issues to address. In order for performance improvement initiatives to be useful to Congress for its decision making, garnering congressional buy-in on what to measure and how to present this information is critical. GAO has previously noted the importance of considering Congress a partner in shaping agency goals at the outset. GPRAMA significantly enhances requirements for agencies to consult with Congress."}
{"id":"gao_GAO-08-549T","pid":"gao_GAO-08-549T_0","input":"\tBackground\n\nThe problems in the D.C. public school system have persisted for years  despite numerous efforts at reform. In 1989, a report by the D.C.  Committee on Public Education noted declining achievement levels as  students move through grades, the poor condition of the school system\u2019s  physical facilities, and the lack of accountability among D.C. agencies for  the schools. Recent reports have continued to cite these problems. In  2004, the Council of the Great City Schools reviewed the D.C. school  system and cited the continued failure to improve students\u2019 academic  performance. In 2006, an analysis of DCPS reform efforts by a consulting  firm found no progress and recommended a change in governance to  improve student achievement and systemwide accountability.\nIn response to these problems, the D.C. Council (the legislative branch of  the D.C. government) approved the 2007 Reform Act, which significantly  altered the governance of the D.C. public schools. The Reform Act  transferred the day-to-day management of the public schools from the  Board of Education to the Mayor and placed DCPS under the Mayor\u2019s  office as a cabinet-level agency. Prior to the Reform Act, the head of DCPS  reported to the Board of Education. The Reform Act also moved the state  functions into a new state superintendent\u2019s office, moved the facilities  office out of DCPS, and created a D.C. Department of Education headed  by the Deputy Mayor for Education. (See fig. 1.)\nDCPS: DCPS functions as a traditional local educational agency, or school  district. The head of DCPS, the Chancellor, is appointed by the Mayor,  confirmed by the D.C. Council, and serves at the Mayor\u2019s discretion. The  Chancellor sets the academic priorities and the curriculum for public  schools, and works with schools in need of improvement under the No  Child Left Behind Act (NCLBA). School districts have the primary  responsibility for ensuring that underperforming schools receive technical  assistance, as required by NCLBA.\nDepartment of Education: The new D.C. Department of Education is  headed by the Deputy Major for Education and oversees the state  superintendent\u2019s office, facilities office, and the ombudsman\u2019s office. The  department is responsible for planning, coordinating, and supervising all  public education and education-related activities that are under the  purview of these three offices. It also acts as chief advisor to the Mayor for  broad, high-level education strategies that involve more than one District  education office and has responsibility for bringing together key players to  determine who should take the lead on specific initiatives. In addition, the  Deputy Mayor coordinates the work, direction, and agenda of the    Interagency Collaboration and Services Integration Commission  (Interagency Commission), which serves as a high-level policy making  body that coordinates meetings with directors from children and youth- serving agencies. According to the Deputy Mayor, the purpose of the  Interagency Commission is to build consensus and set priorities for how to  best address the needs of District children and youth.\nOffice of the State Superintendent of Education: The state  superintendent\u2019s office is responsible for functions traditionally handled  by a state educational agency. It develops academic standards, helps  develop teacher licensing requirements, and administers funds for federal  and District education programs. The State Superintendent is also  responsible for developing comprehensive assessments, or tests, and  ensuring that DCPS meets federal requirements for elementary and  secondary education under NCLBA. The office also oversees, among  other functions, those related to early childhood education programs and  adult education and literacy.\nState Board of Education: While the Board of Education\u2014renamed the  State Board of Education\u2014no longer has responsibility for day-to-day  operations of the public schools, it is responsible for approving the  District\u2019s academic standards, high-school graduation requirements, and  other educational standards. It is required to advise the State  Superintendent on policies related to the governing of vocational and  charter schools and proposed education regulations. Five of the nine State  Board of Education members are elected and four are appointed by the  Mayor and confirmed by the D.C. Council.\nOffice of Public Education Facilities Modernization (facilities office): The  Reform Act not only moved the facilities office out of DCPS but gave the  new office independent procurement and personnel authority. These  functions were formerly performed by separate divisions within DCPS not  directly accountable to or managed by the DCPS facilities office. The new  facilities office is responsible for modernization and maintenance of D.C.  public schools. DCPS retains oversight of the janitorial services of  individual schools.\nThe Reform Act also gave the D.C. Council an expanded role in overseeing  some aspects of D.C. public school management. For example, the Mayor  is required to submit proposed DCPS rules and regulations to the Council  for review. In addition, the Council has gained new powers over the DCPS  budget. The Mayor submits the budget for Council review and the Council  may modify the funding allocated to individual schools. Previously, the  Council only had authority to approve or disapprove the budget.\n\n\tEarly Initiatives Are Focused on Broad Management Reforms and Establishing a Foundation for Long- Term Improvements\n\nThe early efforts to improve D.C. public schools have focused largely on  broad management reforms and other activities that lay the foundation for  long-term improvements, such as developing new data systems, a school  consolidation plan, academic priorities, and improving school facilities.  Management reforms included the transfer of many functions from DCPS  to the new offices of state superintendent and facilities. According to  District officials, moving state-level education and facility functions out of  DCPS should give the Chancellor more time to focus on issues that  directly affect student achievement. Furthermore, moving state functions  out of DCPS is intended to allow more effective oversight of the District\u2019s  education programs. The management reforms also included specific  human capital initiatives, such as new central office personnel rules and  new systems for evaluating central office and state employee performance  that are designed to improve office efficiency. District education offices  also have begun to lay a foundation for long-term improvements to student  and personnel data systems and management of building maintenance.\n\n\t\tBroad Management Reforms Include Office Restructuring and Human Capital Initiatives\n\nAs required by the Reform Act, state-level education functions previously  performed by DCPS were transferred to the new office of the state  superintendent.  This office developed a transition plan, as required by  the Reform Act, which detailed the transfer of authority and restructuring  of key staff functions and budgets. On October 1, 2007, over 100 staff,  functions, and associated funds were transferred to the office of the state  superintendent. Staff who spent at least half their time working on state- level functions, such as administering funds for federal and state  education programs, became employees of the state superintendent\u2019s  office. The Reform Act moved state functions out of DCPS, in large part, to  provide for independent oversight. Prior to the Reform Act, there was no  clear separation of funding, reporting, and staffing between local and state  functions within DCPS. For example, staff who monitored federal grant  programs reported to the same person as staff who implemented those  programs. As a result of the Reform Act, staff who perform state-related  functions, such as monitoring federal programs, report to the State  Superintendent whereas staff who implement the programs report to the  DCPS Chancellor.\nThe transition plan also laid out immediate and long-term priorities, such  as federal grants management reform and improved teacher quality.  To  improve federal grants management, the State Superintendent has  established priorities and begun to address long-term deficiencies  identified by the U.S. Department of Education (Education) related to  federal program administration, including compliance with NCLBA.  Specifically, the State Superintendent has established a direct line of  accountability by having the director of federal grants report directly to  her and serve on her leadership team. In addition, to meet NCLBA  requirements, the State Superintendent is in the process of establishing a  statewide system of support that will provide technical assistance to  underperforming schools. The State Superintendent has stated that  establishing this process is challenging, given that 75 percent of D. C.  schools have been identified as needing improvement under NCLBA. The  district also ranks as one of the lowest school districts for having qualified  teachers, with only 55 percent of core classes taught by teachers that meet  NCLBA requirements for highly qualified. The transition plan identified  teacher quality as a priority area, but does not outline measurable goals for  increasing the number of highly qualified teachers.  According to the State  Superintendent, the office has started to develop a strategic plan that will  provide more specifics on its goals and objectives. Specifically, this plan  would include measurable goals such as increasing the number of highly  qualified teachers.  According to the state superintendent\u2019s office, this  strategic planning effort will be completed in mid-summer 2008.The state  superintendent\u2019s office also plans to revise the District\u2019s \u201chighly qualified  teacher\u201d definition under NCLBA and is also considering revisions to how  the District certifies teachers to align to the revised definition.\nThe Reform Act also created a new facilities office to improve the  conditions of DCPS school facilities. Unlike state-level functions, DCPS  facilities staff and functions have not yet formally transferred to the new  facilities office. Although the new office took over responsibility for  modernization of school facilities (i.e., major renovations or new  construction) and facility maintenance in the summer of 2007, functions  and staff will not be formally transferred until the facility budget is  \u201creprogrammed\u201d and moved. In addition, the office will oversee general  contractors who are hired for major construction projects such as the  building of new schools. The director of the facilities office told us about  400 staff (building engineers, painters, and general maintenance workers)  will transfer to his office.\nThe District\u2019s broad management reforms also included an emphasis on  human capital initiatives, particularly efforts to hold employees  accountable for their work. Both the State Superintendent and the DCPS  Chancellor include new individual performance evaluations as part of their  efforts to develop high-performing organizations. Previously, performance  evaluations were not conducted for most DCPS staff, including those who  moved to the state superintendent\u2019s office. DCPS officials told us that all  staff had received performance evaluations as of January 2008.  These  evaluation forms were based on District government-wide competencies,  such as maintaining and demonstrating high-quality and timely customer  service and using resources effectively. DCPS officials told us that these  evaluations do not yet link to their offices\u2019 performance goals because  they had limited time to implement the new performance system.  However, they stated that they plan to develop the linkages over the next  year.  Officials at the state superintendent\u2019s office told us that performance  measurement plans have been developed for all staff and performance  evaluations based on those plans will begin in late March 2008. The State  Superintendent has required each staff member to develop an individual  plan that includes specific goals that are linked to the office\u2019s overall goals  as outlined in the office performance plan.\nThe facilities office intends to create and sustain a culture of high  performance and accountability by implementing a performance  management system that will hold employees accountable for their work  and establish a performance feedback process that ensures \u201ca dialogue  between supervisors, managers, and employees throughout the year.\u201d  Linking individual performance evaluations to organizational goals is an  important step in building a high-performing organization. As we noted in  a previous report, organizations use their performance management  systems to support their strategic goals by helping individuals see the  connection between their daily activities and organizational goals.\nOther human capital initiatives included the Chancellor\u2019s effort to improve  the capacity of the central office by terminating central office employees  who were assessed as not meeting expectations on their performance  evaluations and replacing them with staff who have the requisite skills.  Specifically, the Chancellor told us she needs staff who are capable of  providing critical central office services, so that, for example, teachers are  paid and textbooks delivered on time. Several principals we spoke with  told us that school staff  have spent considerable time on repeatedly  calling the central office for support or supplies, time that could otherwise  be spent on instruction. In January 2008, the D.C. Council passed the  Public Education Personnel Reform Amendment Act of 2008, submitted  by the Chancellor and the Mayor, which gave the Mayor greater authority  to terminate certain staff within DCPS\u2019 central office, including non-union  staff and staff hired after 1980.  According to the Chancellor, this  legislation ultimately will allow her to begin building a workforce that has  the qualifications needed for a high-functioning central office.\n\n\t\tOther Activities, Such as Developing New Data Systems, a School Consolidation Plan, and Academic Priorities, Have Begun to Lay the Foundation for Long-Term Improvements\n\nBoth the state superintendent\u2019s office and DCPS are working to improve  their data systems to better track and monitor the performance of  students, teachers, and schools. The superintendent\u2019s office is in the  process of selecting a contractor to build a longitudinal database that will  store current and historical data on students, teachers, and schools.  Currently, there is no one system that tracks the movement of students  among District schools. The new database is being designed to standardize  how data are collected from DCPS and charter schools and to track  student data, such as attendance and test scores across multiple years.  According to the state superintendent\u2019s office, this database will help  stakeholders identify which schools and teachers are improving student  achievement and determine what instructional approaches work best for  which types of students. Education awarded the state superintendent\u2019s  office a 3-year grant totaling nearly $6 million to help fund this effort. The  database is expected to be fully operational by 2012.\nDCPS is also focused on improving the quality of student data, some of  which will be inputted into the state longitudinal database. Currently,  DCPS student data are not consistently reported throughout the numerous  data systems. In addition, the multiple systems often have contradictory  information. For example, the Chancellor told us that one system showed  there were 5,000 special education students in the District while another  showed 10,000. To address these problems, DCPS told us that they are  consolidating its data systems, eliminating duplicate information, and  verifying data accuracy. DCPS officials told us they expect the new  student data management system to be operational by February 2009.\nIn addition to student data systems, DCPS has also taken steps to change  and improve its personnel data systems by moving from a paper-based to  an electronic system. DCPS scanned millions of personnel files into an  electronic data system. According to agency officials, this was necessary  because the files that existed were in unorganized stacks in office closets  and not securely maintained. DCPS officials told us that they had scanned  nearly 5 million documents. The scanning revealed missing personnel  records for some staff members and, in other cases, job descriptions that  did not match the jobs staff were actually performing. In addition, the D.C.  Office of the Inspector General is currently conducting an audit of the  DCPS payroll system, to be released in the summer of 2008, to verify that  every individual who receives a paycheck from DCPS is currently  employed with the school system.\nIn February 2008, DCPS completed its preliminary school consolidation  (closing) plan that identified over 20 schools for closure over the next  several years in an effort to provide more resources to the remaining  schools. Plans to consolidate D.C. public schools have been underway in  recent years and Congress has raised concerns about the inefficiency of  maintaining millions of square feet of underutilized or unused space in  DCPS facilities. (DCPS is currently operating at approximately 330 square  feet per student, while the national average is 150 square feet.) According  to DCPS officials, the cost of administration, staff, and facilities in  underutilized schools diverts resources from academic programs for all  students. However, it is unclear how much long-term savings, if any, will  result from these closings. DCPS officials told us that they are currently  working with the facilities office and the District Office of the Chief  Financial Officer (OCFO) to develop long-term cost estimates. In addition,  some parents, community groups, and the D.C. Council disagreed with the  process the Chancellor and Mayor used to develop the plan. The D.C.  Council expressed concern that the Mayor and Chancellor did not present  the proposal to the Council before it was made public, and some  community members met to express their opposition to the closings. The  Chancellor provided a detailed report of the criteria used to select  schools for closure and held community meetings.  Based on input from  parents and the community, the Chancellor revised the list of schools to be  closed. The consolidation plan was finalized in March 2008.\nIn the area of academic achievement, DCPS has set academic priorities for  the 2007-2008 school year and is in the process of establishing longer-term  priorities. The Chancellor told us that the academic priorities will build on  DCPS\u2019 2006 Master Education Plan, which established key strategies and  goals to direct instruction within DCPS. The Chancellor noted, however,  that the 2006 plan cited copious goals and objectives without prioritizing  and establishing explicit time frames or clear strategies for how DCPS  would meet the goals. In November 2007, DCPS laid out its 2007-2008  academic priorities, which included key objectives and strategies that  focus on improving student achievement, school facilities, parental and  community involvement, and central office operations. For example,  under its objective to improve student achievement, DCPS identified, as a  major initiative, efforts to recruit and hire high-quality principals for  roughly one-third of its schools. According to the Chancellor, getting high- quality principals to serve as instructional leaders is a key step to  improving the quality of teachers and classroom instruction. DCPS has  launched a national recruitment strategy and plans to select candidates by  the end of the 2007-2008 school year. The Chancellor is also focusing on  longer-term priorities, such as developing a districtwide curriculum  aligned to academic standards and assessments, and providing teachers  with professional development on instructional strategies for the  curriculum. DCPS is currently working on a five year academic plan that is  to be completed by March 2008. (See table 1 for key initiative and  completion dates.)\n\n\t\tFacilities Has Begun to Address Back Log of Work Orders and Is Developing a New Process to Respond to Needed Repairs\n\nThe facilities office has worked since the summer of 2007 to address the  backlog of repairs the office inherited from DCPS. The director of the  office told us that he found that school heating and plumbing systems  were inoperable, roofs leaked, and floors needed replacing. In addition, he  told us that many schools were in violation of District fire codes with exit  doors locked from the inside for security. The director of the facilities  office also told us that when his office took responsibility for school  maintenance, he found thousands of work orders that had been submitted  to address these building deficiencies that had not been closed. In some  cases the repairs were completed but the work order was not closed;  however, in many cases, the work orders were several years old and the  repairs had not been completed. In addition, the facilities director found  that most of the work orders did not adequately reflect the scope of the  work needed, and the cost of the repairs was underestimated. For  example, he told us that a work order may request repairs related to the  symptom rather than the cause of the problem, such as painting over a  water stain in the ceiling rather than fixing the more expensive plumbing  problem.\nTo address the backlog and ongoing facilities needs, the new office  undertook several programs this summer and early fall. Repairs were  made to over 70 schools that were not slated to undergo modernization for  years. According to facilities officials, needed painting, plumbing,  electrical, and other work were done at each of the schools. In addition,  systems were assessed at all District schools for heat and air conditioning  repairs. According to the facilities director, all schools with central air  conditioning received upgrades and about 670 new air conditioning units  were installed. The office found, however, that about 1,000 to 1,500  classrooms did not have air conditioning. To ensure classrooms have air  conditioning by spring 2008, the facilities office is planning to upgrade  electrical systems to allow installation of new cooling units. According to  the director, the office has also made repairs to school heating systems  and all schools had heat by October 15, 2007. He noted that many of the  heating repairs could have been avoided if the heating systems had  received adequate maintenance. The office found many schools where  boilers installed only three to four years ago were inoperable due to poor  maintenance. The office also started a \u201cstabilization\u201d program in the fall of  2007, to make improvements to the remaining 70 or so schools. About $120  million is budgeted to correct possible fire code violations and make  plumbing, roofing, and other repairs. According to the facilities director,  the work order backlog should be largely eliminated by these maintenance  and modernization efforts.\nFurthermore, a facility official told us that they are prioritizing work order  requests by the urgency of the request, that is, whether it is a hazard to  students or a routine repair. According to this official, emergency repairs  are addressed the day, or the day after, the work order is submitted.  Routine repairs and maintenance, such as plumbing and painting, are  addressed by the in-house trades (painters, plumbers) while more  complicated repairs are addressed by contractors that have been \u201cpre- qualified\u201d by the facility office. Contracts for major repairs, such as  replacing an entire roof, are put out for competitive bid.\nFinally, District officials told us that the facilities office is in the process of  revising the DCPS 2006 Master Facilities Plan, which outlined how DCPS  planned to use and improve school buildings, offices and other facilities  over a 15 year period.  According to District officials, the revised plan will  align with the Chancellor\u2019s academic priorities and school consolidation  efforts.  The Master Facilities Plan was due on October 1, 2007, but the  facilities director was granted an extension until May 31, 2008.\n\n\tD.C. Mayor Has Begun to Develop a Framework for Accountability\n\nThe Mayor and education officials have introduced a performance-based  process designed to establish accountability for their school reform  efforts. This process includes weekly meetings to track progress and  accomplishments across education offices and annual performance plans  for these offices, including the D.C. Department of Education\u2019s plan.  According to recent studies of the D.C. school system, little was done in  the past to hold offices and education leaders accountable for progress.\nWeekly meetings are a key component of the District\u2019s performance-based  process and, according to the Deputy Mayor for Education, integral to how  the Mayor and D.C. education offices monitor the progress of reform  efforts. The Mayor\u2019s meetings, known as CapStat meetings, are used to  track progress and accomplishments across all D.C. government offices.  Every 3 months, the City Administrator\u2019s office develops a list of topics for  possible discussion at CapStat meetings based, in part, on a review of each  office\u2019s performance plan. According to city officials, issues for CapStat  meetings typically concern agencies having difficulty meeting their  specific performance targets. These issues are given to the Mayor who  then selects which ones will be discussed. The Mayor may also identify  other issues that have emerged as immediate concerns, for example, those  related to the safety and health of D.C. residents.\nAt the CapStat meeting, cognizant managers provide status updates using  performance data. The Mayor then assigns follow-up tasks to particular  managers with agreed-upon timeframes. The Mayor reviews whether  follow-up tasks have been completed. This tracking provides the basis for  the Mayor\u2019s office to monitor progress, and, if inadequate, determine what  further action is needed. For example, during the summer of 2007, a  CapStat meeting focused on school facilities. The data indicated that many  of the schools\u2019 heating systems were not functioning. The Mayor\u2019s office  asked the director of the facilities office to develop a plan within 2 weeks  to ensure that all schools had functional heating systems by mid-October.  Officials told us the Mayor\u2019s office tracked the submission of the plan and  the heating system work. As previously mentioned, District officials  reported that all schools had heat by October 15.\nThe Chancellor and the State Superintendent adopted processes similar to  CapStat\u2014SchoolStat and EdStat, respectively\u2014to hold managers  accountable for their offices\u2019 performance (see table 2 for information on  the three \u201cStat\u201d meetings). The Chancellor uses weekly SchoolStat  meetings to discuss high-priority issues and what actions DCPS  department managers need to take to improve performance. Similarly, the  state superintendent\u2019s office uses weekly EdStat meetings to monitor  progress in administration of federal grants and special education services.  At EdStat meetings, managers analyze performance data, collaborate with  program managers on remediation strategies, and monitor subsequent  performance data to validate the effectiveness of actions taken. The State  Superintendent plans to use EdStat meetings to monitor whether the  office is meeting time frames for providing assistance to schools identified  as in need of improvement under NCLBA.\nIn addition to weekly meetings, the Mayor\u2019s office requires education  offices to develop and follow annual performance plans as another  component of the accountability process. These performance plans  include broad objectives, such as increasing student achievement,  assessing the effectiveness of educational programs, and coordinating  services with city agencies. In addition, the plans detail specific actions to  achieve these objectives, and key performance indicators designed to  measure progress. For example, regarding DCPS\u2019 2007-2008 performance  plan objective to increase student achievement, DCPS plans to provide  training for teachers to help them make better use of student performance  data. Similarly, regarding the State Superintendent\u2019s objective to provide  educators with information needed to improve schools and to assess the  effectiveness of educational programs, the office plans to provide data  from its longitudinal database to educators to help them determine where  specialized programs are needed. The first performance plan for the  facilities office is scheduled to be in place in November 2008.\nThe D.C. Department of Education has taken some steps to coordinate and  integrate the various efforts of the District\u2019s education offices. The Deputy  Mayor for Education told us that the department reviews the individual  annual performance plans of education offices to ensure they are aligned  and not working at cross-purposes. The department also uses CapStat  meetings to monitor the progress of the education offices. In addition,  according to the Deputy Mayor for Education, the department tracks the  goals and activities of city youth agencies, such as the Child and Family  Services Agency, to ensure they are consistent with the goals of the  education offices. D.C. Department of Education officials also told us  they will take additional steps in the future. The Deputy Mayor will review  each education office\u2019s long-term plan, such as the Chancellor\u2019s five year  academic plan and the revised Master Facilities Plan, to ensure they are  coordinated and implemented. The Deputy Mayor also told us that the  department will rely on findings from annual evaluations of DCPS to  assess the progress of the reform efforts.\nOfficials with the D.C. Department of Education told us they have not yet  developed a documented districtwide education strategic plan. According  to department officials, they do not intend to develop a written plan at this  time, in part, because they are addressing immediate and urgent issues.  They questioned the need for a written document as opposed to a  formalized process that would help ensure that the individual District  education offices\u2019 long-term plans are coordinated and executed.\nWhile developing a long-term strategic plan takes time, it is useful for  entities undergoing a major transformation, such as the D.C. public school  system. The District has a new public school governance structure and  newly created education offices. A strategic plan, and the process of  developing one, helps organizations look across the goals of multiple  offices and determine whether they are aligned and connected or working  at cross-purposes. By articulating an overall mission or vision, a strategic  plan helps organizations set priorities, implementation strategies, and  timelines to measure progress of multiple offices. A long-term strategic  plan is also an important communication tool, articulating a consistent set  of goals and marking progress for employees and key stakeholders, from  legislative bodies to community organizations.\n\n\tConclusions\n\nThe problems in the D.C. public school system are long-standing. Past  efforts to reform the system and ultimately raise student achievement have  been unsuccessful. The Reform Act made many changes: new divisions of  responsibility, improved oversight, and greater opportunity for the  Chancellor to focus on academic progress. The Mayor and his education  team recognized that before they could take full advantage of these  changes, they would have to revamp the school system\u2019s basic  infrastructure. Their initial efforts, including those to create a highly  functional central office and repair school buildings to make them safe for  students, provide some of the basics for successful learning environments.  However, the Mayor and his team will need to sustain the momentum  created over the last 6 months and focus as quickly as possible on the  challenges that lie ahead\u2014improving the reading and math skills of  students and the instructional skills of teachers.\nIn addition, the Mayor and his team have taken steps to hold managers and  staff accountable for improving the school system, such as holding weekly  performance meetings, developing annual performance plans, and  coordinating education activities. These changes form the cornerstone of  the Mayor\u2019s effort to transform the organizational culture of the District\u2019s  public education system. However, the Mayor\u2019s team has not yet  developed a long-term districtwide strategic education plan. Given the  significant transformation underway, a strategic plan could provide a  framework for coordinating the work of the education offices and  assessing short-term and long-term progress. Without a plan that sets  priorities, implementation goals, and timelines, it may be difficult to  measure progress over time and determine if the District is truly achieving  success. Additionally, a districtwide strategic education plan would  increase the likelihood that the District\u2019s education offices work in unison  toward common goals and that resources are focused on key priorities,  not non-critical activities. A strategic plan could also help determine when  mid-course corrections are needed. Given that leadership changes, a  strategic education plan would provide a road map for future district  leaders by explaining the steps taken, or not taken, and why.\n\n\tRecommendation to the Mayor of the District of Columbia\n\nTo help ensure the long-term success of the District\u2019s transformation of its  public school system, we recommend that the Mayor direct the D.C.  Department of Education to develop a long-term districtwide education  strategic plan. The strategic plan should include certain key elements  including a mission or vision statement, long-term goals and priorities, and  approaches and time frames for assessing progress and achieving goals. It  may also include a description of the relationship between the long-term  strategic and annual performance goals. In addition, the strategic plan  should describe how coordination is to occur among the District\u2019s  education offices.\nAs you know Mr. Chairman, you have requested that we conduct a second,  longer-term study of changes in D.C. schools\u2019 management and operations,  and results of these changes. We will begin that study this month.\n\n\tComments from the D.C. Mayor\u2019s Office and District Education Offices\n\nWe provided a draft of this report to the offices of the Mayor and District  education officials for review and comment, and on March 11, 2008,  officials from the Mayor\u2019s office discussed their comments with us. They  told us they support the need for an overarching strategy that integrates  the efforts and plans of DCPS, the state superintendent\u2019s office, and the  facilities office.  They said that these offices are in the process of  developing long-term strategic plans to serve as the foundation for an  overall education strategy, and that the Deputy Mayor for Education is  committed to coordinating and sustaining these efforts.  Further, they  noted that a districtwide strategy can take many forms, and that the  Deputy Mayor\u2019s preferred approach is to develop a formal process, rather  than a written document, to ensure efforts are coordinated and executed  as efficiently as possible.  They noted that in the past, plans were written,  \u201cput on a shelf,\u201d and never used.\nWe agree that the Deputy Mayor is taking steps to coordinate the  individual plans of these offices, and that the Mayor\u2019s education team  recognizes the importance of taking a strategic approach to address the  educational needs of District students.  However, as we have said in this  statement, we see value in developing a documented strategy that could  help the District\u2019s education leaders coordinate their efforts and goals, and  provide future leaders the benefit of understanding what worked, what  didn\u2019t, and why.  While past administrations may have developed strategic  plans and not used them, what is unknown is whether these plans could  have been of value if they had been used. The current administration\u2019s  development and implementation of an articulated documented strategy  could provide a foundation that would help coordinate future efforts.\nMr. Chairman, this completes my prepared statement. I would be happy to  respond to any questions you or other Members of the Subcommittee may  have.\n\n\tGAO Contacts\n\nFor further information regarding this testimony, please contact me at  (202) 512-7215. Individuals making key contributions to this testimony  include Harriet Ganson, Elizabeth Morrison, Sheranda Campbell, Jeff  Miller, Bryon Gordon, Susan Aschoff, Sheila McCoy, Sandy Silzer, Sarah  Veale, Janice Latimer, and Terry Dorn.\nThis 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.","output":"Why GAO Did This Study\n\nIn response to long-standing problems with student academic performance, the condition of school facilities, and the overall management of the D.C. public school system, the D.C. Council approved the Public Education Reform Amendment Act of 2007 (Reform Act). The Reform Act made major changes to the operations and governance of the D.C. public school system, including giving the Mayor authority over public schools, including curricula, personnel, and school facilities. While other large urban school districts have transferred governance of schools to their mayors, D.C. is unique because it functions as both local and state offices for many education responsibilities. GAO's testimony focuses on (1) the status of the District's efforts to reform its public school system, and (2) what the District has done to establish accountability for these efforts. To address these issues GAO reviewed documents, interviewed District education officials and interviewed principals from nine D.C. public schools.\n\nWhat GAO Found\n\nThe early efforts to improve D.C. public schools have focused largely on broad management reforms and other activities that lay the foundation for long-term improvements to the D.C. public school system. The broad management reforms included the transfer of many functions from D.C. public schools (DCPS) into the new office of the state superintendent, which could allow for more effective oversight of the District's education programs. Prior to the Reform Act, there was no clear separation of funding, reporting, and staffing between local and state functions. A new facilities office was also created to improve the conditions of DCPS school facilities. Moving state-level education and facilities functions out of DCPS is intended to give the head of DCPS, called the Chancellor, more time to focus on issues that directly affect student achievement. The management reforms also included specific human capital initiatives such as new DCPS central office personnel rules and new systems for evaluating central office and state-level employee performance. In addition, both the State Superintendent and the Chancellor are working to improve their data systems to better track and monitor the performance of students, teachers, and schools. DCPS also completed its school consolidation plan that identified over 20 schools for closure over the next several years. In addition, the school facilities office is working to address the backlog of repairs. The director of the facilities office told us that he found that school heating and plumbing systems were inoperable, roofs leaked, and floors needed replacing. In addition, he said many schools were in violation of District fire codes. To address the backlog and ongoing facilities needs, the new office undertook several repair programs this summer and early fall. The D.C. Mayor and education officials have introduced a performance-based process designed to establish accountability for their school reform efforts. This process includes weekly meetings to track progress and accomplishments across education offices. In addition, the Mayor's office required agencies to develop and follow annual performance plans. D.C. Department of Education officials told us that they review the individual performance plans of District education offices, such as DCPS and the state superintendent's office, to ensure they are aligned and not working at cross-purposes. However, the department has yet to develop a long-term districtwide education strategy that could integrate the work of these offices, even though it included the development of such a strategy in its 2007-2008 performance plan. While developing a strategic plan takes time, it is useful for entities undergoing a major transformation, such as the D.C. public school system. A strategic plan helps organizations look across the goals of multiple offices and identify if they are aligned and connected or working at cross-purposes. Without a plan that sets priorities over time, implementation goals, and timelines, it may be difficult to measure progress over time and determine if the District is truly achieving success. In addition, given that leadership changes, a strategic plan would provide a road map for future District leaders by explaining the steps taken, or not taken, and why."}
{"id":"gao_GAO-12-538","pid":"gao_GAO-12-538_0","input":"\tBackground\n\n\t\tFEMA\u2019s Disaster Assistance Authority and Declaration Process\n\nThe Robert T. Stafford Disaster Relief and Emergency Assistance Act of  1988 (Stafford Act) generally defines the federal government\u2019s role during  the response and recovery after a major disaster. It establishes the  programs and processes through which the federal government provides  disaster assistance to state and local governments, tribes, certain  nonprofit organizations, and individuals. FEMA has steady-state and  emergency organizational structures. Under a steady-state when FEMA is  not in active response to a disaster, FEMA employees conduct activities  that \u201cstrengthen the Homeland Security Enterprise\u201d and perform  functions that align with the Quadrennial Homeland Security Review  (QHSR) goals, which include strengthening capacity to withstand  hazards, and improving preparedness in all levels and segments of  society. However, when a disaster declaration is requested by a  Governor and approved by the President, FEMA executes its emergency  organizational structure as discussed below.\nThe Stafford Act establishes the process for states to request a  presidential major disaster declaration. Once a declaration has been  declared by the President, FEMA may provide disaster assistance  pursuant to the authorities in the Stafford Act. In order to request that the  President issue a major disaster declaration, a Governor submits a  declaration request certifying that the damage requires resources beyond  the state\u2019s capability. The request must also include an estimate of the  amount and severity of damage and losses and preliminary estimates of  the types and amount of disaster assistance needed, among other  things. Once a disaster is declared, FEMA provides assistance primarily  through one or more of the following three assistance programs:  Individual Assistance, Public Assistance, and Hazard Mitigation. Not all  programs are activated for every disaster. The determination to activate a  program is based on the needs identified during the assessment  conducted as part of the declaration request. The Disaster Relief Fund is  the major source of federal disaster recovery assistance when a disaster  is declared. The Disaster Relief Fund is appropriated no-year funding  which allows FEMA to direct, coordinate, manage and fund response and  recovery efforts associated with domestic major disasters and  emergencies.\n\n\t\tFEMA\u2019s Disaster Reserve Workforce and Organizational Structure\n\nUnder the Stafford Act, FEMA has the authority to augment its permanent  full-time staff with temporary personnel when needed, without regard to  the appointment and compensation provisions governing Title 5  appointments of permanent full-time staff. Permanent full-time  employees manage FEMA\u2019s day-to-day activities, and a portion of these  employees are expected to deploy when a disaster is declared. The DAE  is one type of temporary, on-call employee. See appendix II for a detailed  description of categories of disaster workforce employees. DAEs  comprise the largest portion of the disaster workforce employed under  FEMA\u2019s emergency organizational structure. As of February 2012, there  were 9,981 DAEs. DAEs are activated to perform disaster activities  directly related to specific disasters, emergencies, projects, or activities of  a non-continuous nature.paid when they are deployed (including per-diem), and do not receive any  Federal benefits with the exception of sick leave, holiday pay, and  administrative leave. They are assigned to one of 23 functional disaster  cadres. For example, the Individual Assistance cadre provides referrals  and guides individuals through the FEMA assistance process, while the  Hazard Mitigation cadre assists in educating the public and local  governments on methods to reduce the risk of loss of property and life  from a future disaster. See appendix III for a description of each cadre  and their primary duties.\nDAEs serve two-year appointments, are only  FEMA\u2019s organizational structure is decentralized and comprised of  headquarters and ten regional offices. FEMA\u2019s Administrator, in  accordance with the Post-Katrina Emergency Management Reform Act of  2006 (Post-Katrina Act), appoints a Regional Administrator to head each  regional office.tribal governments, and other nongovernmental organizations\u2014provide  emergency management within their respective geographical area. See  appendix IV, FEMA\u2019s organizational chart, and figure 1 for a map of  FEMA\u2019s regions.\n\n\tOpportunities Exist to Strengthen Policies and Procedures That Govern the DAE Program\n\nFEMA has taken steps to enhance its management of the program, but  has not developed or updated policies and procedures that align with the  day-to-day management of the DAE program. FEMA has not provided  guidance for how regional cadre managers should undertake their duties  in the management of DAEs. Furthermore, FEMA could better monitor  both its regions\u2019 implementation of DAE policies and DAEs\u2019  implementation of FEMA\u2019s disaster policies and procedures in order to  reduce the risk of inconsistent application. In addition, FEMA does not  have policies and procedures for how it communicates with DAEs when  they are not deployed.\n\n\t\tFEMA Has Not Yet Provided Guidance to Cadre Managers Related to DAE Management\n\nFEMA has not yet developed guidance for cadre managers that outlines  how they should manage DAEs in their cadre such as guidance for  understanding and handling reserve pay and benefits, the deployment  process, training procedures, and evaluation techniques. Specifically, 14  of 16 regional cadre managers we interviewed said that they have not  seen or are not aware of documented guidance for their duties as cadre  manager such as hiring, training, and developing DAEs from  headquarters, and 10 of 16 stated that having written guidance would be  beneficial to their job. For example, one regional cadre manager said  that there are inconsistencies across regions with how cadre managers  hire, train, and utilize their DAEs. Another cadre manager added that  inconsistent hiring processes affect morale among DAEs. Instructions on  how to manage are handed down from experienced colleagues, but are  not documented for consistent use, according to another cadre manager.  FEMA stated in 1999 that it planned to establish guidelines and  requirements for cadre management functions and intended this guidance  to be applied consistently at headquarters and in the regions, but this  effort was not completed.manager\u2019s handbook; however, the handbook was not finalized or  officially adopted across FEMA. The director of IWMO stated that he did  not know why the cadre manager\u2019s handbook had not been completed  since 2008. In February 2012, during the course of our review, FEMA   In 2008, FEMA officials drafted a cadre  began its Disaster Workforce Transformation.effort includes creating a National Disaster Reservist Program intended to  overhaul the current DAE program and examine issues such as cadre  management. Further, IWMO officials stated that in fiscal year 2012, they  intend to develop a new cadre management handbook, revise FEMA  DAE policy, conduct regularly scheduled meetings and conference calls  with cadre managers, and conduct a national conference designed to  educate cadre managers on their roles. However, FEMA does not have  time frames or milestones for completing and disseminating cadre  manager guidance as part of its Disaster Workforce Transformation and  related activities.\nAccording to FEMA, this  In the absence of cadre manager guidance, IWMO officials stated that  FEMA Instruction 8600.1, issued in 1991, is the best source for  information and guidance on the roles and responsibilities of cadre  managers. The document outlines DAE policy for recruitment and hiring,  reappointment, appraisals, and benefit eligibility. However, many of its  sections are obsolete or inoperative. For example, FEMA Instruction  8600.1 states that the office directors are responsible for the recruitment,  selection, training, use, and management of their DAE cadres. According  to FEMA, the regional cadre managers currently have these  responsibilities; however the 8600.1 policy is not updated to reflect this  change in responsibility. In addition, 9 of 16 regional cadre managers we  interviewed stated that FEMA Instruction 8600.1 was either outdated, in  need of revision, or not applied consistently across the organization. One regional cadre manager said that he would like anything from  headquarters with respect to guidance, but all that he has seen is FEMA  Instruction 8600.1, which is outdated. This manager added that it was  unclear whether any steps have been taken to ensure that FEMA  Instruction 8600.1 is applied consistently across regions. Another regional  manager said when they have to give new hires a copy of FEMA  Instruction 8600.1, they amend the document to reflect recent policy  changes.\nOf the remaining cadre managers we interviewed, 2 said that they were not sure  whether FEMA Instruction 8600.1 was applied consistently across regions, and 5 did not  mention the issue.\nA 2010 DHS OIG report recommended that FEMA review and update key  DAE program benefit policies, procedures, and guidance to eliminate  conflicts and inconsistencies between interim policies and permanent  overall guidance. In response to the IG\u2019s report, FEMA officials stated  that FEMA Instruction 8600.1 was under revision. In March 2012 during  the course of our review, FEMA officials stated that the revision of FEMA  Instruction 8600.1 has been placed on hold pending the results of  FEMA\u2019s fiscal year 2012 workforce transformation initiative to ensure all  issues that result from the transformation effort are identified. According  to standard practices for program management, an organization should  develop a program schedule that establishes the timeline for program  milestones and deliverables.previous efforts to create guidance for cadre managers, establishing time  frames and milestones could help FEMA ensure accountability for  completing and disseminating the cadre manager handbook and a  revised FEMA Instruction 8600.1.\n\n\t\tFEMA Could Better Monitor Implementation of Policies and Procedures\n\nFEMA\u2019s decentralized structure allows for flexibility in responding to  disasters; however, FEMA does not monitor how the regions implement  DAE policies, and how DAEs implement disaster policies and procedures.  Without such a mechanism, it will be difficult for FEMA to provide  assurance that both its regions and DAEs implement DAE policies and  disaster policies and procedures consistently. For example, DAEs in  focus groups we conducted and regional cadre managers we interviewed  expressed concerns about the inconsistency across regions in  interpreting FEMA policy. Specifically, they raised concerns about  inconsistencies across regions or cadres in how supervisors interpret  both DAE administrative policies and\/or cadre-specific disaster policies.  For example, one focus group participant said that although there are  standard policies and procedures, each disaster is different, with different  supervisors that interpret these policies differently. Another focus group  participant reiterated this point, stating that the regions and cadres direct  their DAEs on how to approach disaster tasks differently, which lead to  inefficiencies in providing disaster assistance. Participants in the public  assistance cadre, for example, raised concerns about the variability that  exists in how supervisors and managers interpret public assistance policy  on documenting damage assessments, leading to differences in how well  the worksheets are prepared. One participant stated that there are  inconsistencies across regions when preparing the project worksheets  used to document disaster damage and provide cost estimates and plans  for repair. Specifically, this focus group participant stated that in certain  regions DAEs are instructed to focus on the number of worksheets  passed through the system. Although it is not referred to as a quota, the  participant stated that if a DAE does not achieve this number, he or she  will be sent home before completing his deployment. Conversely, in other  regions, supervisors and other managers do not apply a goal for the  number of worksheets to be completed and are concerned with quality  rather than quantity. These variations can lead to inconsistencies in how  the worksheets are completed. Another focus group participant stated  that the inefficiencies and inconsistencies that run across the board were  problematic adding that when determining eligibility for public assistance,  sometimes things are made eligible in one state that are not eligible in  another state. Moreover, a 2007 Booz Allen Hamilton preliminary report  entitled Restructuring and Enhancement of the Intermittent Disaster  Workforce System also identified inconsistencies in the application of  policies and standard operating procedures across regions and cadres.\nIn March 2012 during the course of our review, FEMA officials stated that  the agency intends to establish a centralized management structure  responsible for the development of FEMA disaster assistance policies  and procedures. FEMA policy states that headquarters is responsible for  developing the agency\u2019s policies and procedures for disaster assistance  and the regional offices are responsible for the implementation of these  policies and procedures. We recognize that FEMA\u2019s decentralized  structure allows for flexibility in handling disasters as each region can  encounter different types of disasters and the regional structure can  facilitate disaster assistance. In a February 2012 FEMA town hall  meeting, FEMA\u2019s Administrator acknowledged that there are  inconsistencies across the FEMA regions, and noted that due to  differences in how regions operate, it is problematic to deploy someone  based in one region to another during a disaster.cadre manager we interviewed cited inconsistency in policy application  saying, \u201cthere is an ongoing problem of the right hand not knowing what  the left hand is doing with respect to when policies are implemented or  are in conflict with one another\u201d. Without routinely monitoring how  disaster policies and procedures are being implemented across regions  by DAEs and how the regions implement DAE policies, FEMA lacks  reasonable assurance that it is administering its disaster assistance  consistently across regions in accordance with its mission.\nStandards for Internal Controls in the Federal Government call for an  organization\u2019s controls to be designed to assure that ongoing monitoring  occurs in the course of normal operations and that it includes regular  management and supervisory activities, comparisons and   Moreover, according to FEMA\u2019s Capstone Doctrine,  reconciliations. which describes FEMA\u2019s mission, purpose, and defines the agency\u2019s  principles, FEMA advocates the practice of consistent decision making by  those with authority to act.monitoring of the regional implementation of DAE policies and  procedures, as well as how DAEs implement disaster policies, could help  provide FEMA with reasonable assurance that disaster assistance is  being implemented by DAEs in accordance with policy and consistently  across regions.\n\n\t\tOpportunities Exist to Communicate Cadre- Specific Information More Consistently with DAEs When Not Deployed\n\nFEMA does not have policies and procedures for how it will communicate  cadre-specific information to DAEs when not deployed. Most DAEs do not  have access to cadre-specific information when not deployed, although  FEMA has recently taken steps to increase communication. The majority  of the cadre-specific information for DAEs is housed on FEMA\u2019s internal  website and is not accessible by DAEs when they are not deployed. This  is because when DAEs are not deployed, they do not have access to their  FEMA-issued equipment such as laptops, as well as their FEMA e-mail  accounts. As a result, DAEs are not able to access information directly,  including changes in policies and procedures that may occur while they  are not deployed, and may not immediately be prepared to provide  assistance to survivors during a disaster. Once DAEs are deployed to a  disaster, they are typically provided equipment, such as laptops, and  FEMA e-mail addresses, which are used to receive policy and procedural  updates. However, DAEs in the focus groups we conducted raised  concerns about their inability to access this type of information prior to  being deployed to a disaster. For example, one focus group participant  told us that it is difficult to keep up with changes as they happen when  they are not deployed because they receive very little information when  they are not deployed. Another focus group participant told us that they  cannot access policy changes because they do not have access to  information behind FEMA\u2019s firewall. We also heard from one DAE that  because she was not provided program information related to her job, it  was difficult for her to feel comfortable representing FEMA to disaster  victims without access to information such as materials related to  applicant services.\nThirteen of 16 regional cadre managers we interviewed said that they  communicate policy and procedural updates to DAEs when they are not  deployed via personal e-mail accounts, however, not all cadre managers  believe that it is their responsibility to convey policy updates to their DAEs  when they are not deployed. For example, one cadre manager who is  responsible for 180 DAEs told us she believes that policy changes should  come from FEMA headquarters and should be posted on FEMA.gov.  Consequently, this cadre manager does not forward policy changes to  personal e-mail accounts.\nAccording to another cadre manager, communicating policies and  procedures to DAEs when they are not deployed is difficult because  DAEs are completely disconnected from the mechanisms typically used  to share information with FEMA staff during non-deployment. Further, he  added that this proved to be a problem during disasters in 2010 where  DAEs that had not been deployed for a while were unfamiliar with FEMA\u2019s  recent policy updates. The manager said this situation was problematic  because management did not always have the time to walk these DAEs  through policy changes. Ultimately, this lack of access to information  among DAEs had an impact on DAE readiness because it extended their  learning curve and potentially created delays in providing service in some  cases.\nAccording to an official from FEMA\u2019s Office of the Chief Information  Officer, cadre managers have developed their own strategy for  communicating with DAEs when they are not deployed. In addition,  officials from IWMO told us that cadre managers are best suited to  determine the precise information and content that will meet the needs of  their respective cadre. Therefore, cadre managers are encouraged by  IWMO to develop informative resource pages for their DAEs. For  example, we found that the Hazard Mitigation cadre has developed a  platform to communicate and share a vast array of resources with DAEs  without access to FEMA\u2019s internal website. Specifically, Hazard  Mitigation\u2019s disaster workforce resources are available on both FEMA\u2019s  internal website as well as the Hazard Mitigation Disaster Workforce  portal on the Homeland Security Information Network (HSIN), which can  be accessed via any Internet connection with a login and password. The  portal provides resources for each of the different functional areas of  Hazard Mitigation, including web links, contact information, tasks books,  job aids, policies, publications, and training materials for the Hazard  Mitigation workforce. However, as of March 2012, these tools were limited  to the Hazard Mitigation Cadre. According to IWMO, other cadres,  including Alternate Dispute Resolution, Community Relations, Individual  Assistance, and Environmental & Historic Preservation have internal  websites that contain programmatic policies and procedures. However,  these sites are not readily available to DAEs who do not have access to  FEMA\u2019s internal website. In a budget-constrained environment,  leveraging existing mechanisms can help agencies achieve efficiencies.  While our prior work has identified issues with the HSIN platform, it could  be used to provide DAEs greater access to FEMA resources. According  to FEMA\u2019s Office of the Chief Information Officer, HSIN would be an  appropriate tool for DAEs to use to stay connected to FEMA because it  would allow them access to pertinent information from anywhere and  would not represent an additional cost to FEMA.\nInconsistent access to information among non-deployed DAEs, in addition  to inconsistent communication strategies with DAEs among regional  cadre managers, may hinder FEMA\u2019s mission of providing assistance to  disaster survivors, by extending the amount of time it takes DAEs to  familiarize themselves with the most current cadre-specific policies and  procedures when they are deployed. However, FEMA has taken some  steps to improve DAEs\u2019 access to information when they are not  deployed. For example, part of FEMA\u2019s Disaster Workforce  Transformation includes plans intended to increase communication to  DAEs. FEMA stated that it plans to have consistent, two-way  communication with DAEs even when they are not deployed. According  to FEMA, this communication will include sending weekly e-mails about  agency activities to each of the personal e-mail addresses it has on file  for its entire workforce and developing a dedicated employee-focused  website accessible to all of its employees. However, the employee- focused website contains a minimal amount of cadre-specific information.  Since FEMA will rely on its cadres to provide their own content, the extent  to which FEMA\u2019s new centralized employee-focused website will include  cadre-specific policies and procedures that DAEs need to perform their  duties while deployed, such as those provided by the Hazard Mitigation  cadre via its HSIN portal, is not clear. For example, as of March 2012,  FEMA\u2019s publicly available website for its employees included an  Employee Information and Resource Center that houses general  information such as travel policies, newsletters, and information related to  the FEMA\u2019s Disaster Workforce Transformation and FQS. Unlike the  Hazard Mitigation portal on HSIN, FEMA\u2019s employee website did not  include cadre-specific information such as Concept of Operations  documents that describe how specific cadre efforts are conducted in the  pre- and post-disaster environment, or field office guides and Go Kits  which contain cadre-specific guidance, which are resources that DAEs  can access to better prepare themselves for future disasters while they  are not deployed.\nAs part of FEMA\u2019s Disaster Workforce Transformation efforts, it  developed an employee-focused website; however, according to FEMA,  the new employee website was not intended to be a long-term solution,  nor was it intended to replace FEMA\u2019s internal website used to  communicate with its workforce. FEMA has not developed a plan with  milestones for how it will communicate not only general information but  cadre-specific information to DAEs when they are not deployed.  According to FEMA, the agency is examining other solutions that would  allow the agency\u2019s entire workforce to have access to all information, but  a specific time frame has not been determined. According to standard  practices for program management, an organization should develop a  program schedule that establishes the timeline for program milestones  and deliverables. As FEMA implements its Disaster Workforce  Transformation, developing a plan with time frames and milestones for  how it will better communicate cadre-specific policies, procedures, and  other information to DAEs when they are not deployed would provide  FEMA with a roadmap to help ensure that it is providing DAEs the tools  they need to be prepared for disaster deployments.\n\n\tFEMA Could Strengthen Human Capital Management Controls\n\nFEMA has not established standardized hiring or salary criteria to help  ensure that basic qualifications are met by prospective DAEs, and that  regional managers consistently determine initial DAE salaries and award  promotions. Moreover, FEMA\u2019s performance appraisal system for DAEs  does not adhere to internal control standards, which would help ensure  that managers have information to better inform performance  management decisions.\n\n\t\tFEMA Has Not Established Standardized Hiring and Salary Criteria for DAEs\n\nFEMA has not established standardized hiring criteria for prospective  DAEs, and FEMA headquarters provides limited guidance to regions on  which to base DAE salary determinations.\nAccording to FEMA Instruction 8600.1 of 1991, the primary document  outlining DAE program policies, regional cadre managers are responsible  for the recruitment, selection, use, and management of their respective  DAE cadres. Our review of policies and interviews with regional cadre  managers as well as officials in FEMA headquarters indicate that DAEs  are hired by regional cadre managers without being assessed against  established criteria to determine their qualification for the position.  Regional cadre managers make the initial hiring selection, and then send  a hiring package with the individual\u2019s qualifications and a proposed salary  to the Office of the Chief Component Human Capital Officer (OCCHCO).  OCCHCO officials stated that they then review the individual\u2019s package to  verify that the selected individual is qualified for the position and that the  proposed salary is appropriate based on experience and skills described  in the individual\u2019s resume. However, criteria used by OCCHCO officials in  assessing the qualifications and pay of a DAE applicant are not  documented; rather, OCCHCO officials stated that these decisions are  based on general knowledge. An OCCHCO official who reviews the hiring  package containing the applicant\u2019s paperwork said that she believes that  regional cadre managers do not always use the same criteria for  evaluating qualifications and selecting a DAE candidate as the OCCHCO  official uses in approving the proposal. In addition, a regional cadre  manager from Hazard Mitigation said that the national cadre manager at  headquarters provides guidance for hiring. In contrast, another regional  manager said that there is no written guidance available, and that  regional cadre managers are on their own in making hiring decisions.\nAccording to OCCHCO, the agency\u2019s hiring criteria for DAEs is contained  within FEMA Instruction 8600.1. This policy states that \u201cconsideration  should be given to the specific job functions, the qualifications required to  perform those jobs, and Equal Employment Opportunity requirements.\u201d  However, the policy does not provide explicit information on the  qualifications for different cadres or positions, such as the relevant  experience, education, or skills. For example, there is no FEMA-wide  guidance on the preferred skills and experience of prospective DAEs for a  given position in the IA cadre or the PA cadre, which focus on different  aspects of assistance, and thus, require different expertise. OCCHCO  officials agreed that it would be useful to have a list of bulleted skills and  qualifications that are desired by each cadre for making hiring decisions.  An OCCHCO official who reviews hiring and salary recommendations  said there is no specific guidance provided to regions related to hiring  criteria, other than FEMA Instruction 8600.1, because they believe that  the regions have competent people hiring DAEs.\nThe 2007 preliminary report by Booz Allen Hamilton on FEMA\u2019s disaster  workforce stated that the lack of standardization in recruitment standards,  interviewing processes, and hiring practices led to a wide disparity in the  qualifications of DAEs across the regions, which the report noted may  impair FEMA\u2019s ability to effectively respond to a disaster. Moreover, one  regional cadre manager said that morale is lowered when unqualified  DAEs are hired, and another said that many DAEs complain that there is  significant variation across regions in terms of the skills required for  different positions. In addition, a DAE who participated in our focus group  stated that if FEMA had asked the right questions, he would not have  been hired, since he did not have the necessary technological skills to  use the laptop, GPS, and digital camera that FEMA provided to him.\nStandards for Internal Controls in the Federal Government call for  agencies to identify appropriate knowledge and skills needed for various  jobs. According to FEMA, when FQS is implemented in 2012, position- specific training and position task requirements will be defined for each of  the 322 positions to provide more specificity; however, FEMA could not  provide details about how or if this will translate into better hiring criteria   By standardizing hiring criteria, FEMA would be  for prospective DAEs. better positioned to hire people with the requisite skills and have  reasonable assurance that hiring decisions are being made consistently  across regions.\nIn addition, FEMA headquarters provides limited guidance for regions to  use to make DAE salary determinations. According to a FEMA official, in  addition to FEMA Instruction 8600.1, the \u201cGrant C. Peterson Memo\u201d  (Peterson Memo) of 1992 put forth guidance for pay levels and  promotions. This guidance outlines five pay grades (A through E), as  well as the three levels within each pay grade and relates these pay  grades to their approximate GS or GM federal grade level.\nFEMA could not provide details about how FQS will translate into better hiring criteria for  prospective DAEs in addition to identifying the requisite training and skills needed by  newly hired DAEs to become qualified under FQS.\nPeterson Memo states that all DAEs will be given a tentative pay grade at  the time of the initial appointment, and within 90 days a decision will be  made as to whether or not that tentative grade is appropriate or should be  changed to a different grade. The Peterson Memo lists position titles that  would be assigned to Grades A through E, but it does not clarify how a  DAE is to be assigned to one of the three levels within each grade. In  addition, the memo does not establish criteria on which to base initial  salary decisions or reconsiderations within the 90-day window.\nAn OCCHCO official stated that it is possible that cadre managers have  developed their own criteria for placing DAE hires in certain pay  categories. For example, the OCCHCO official noted that some cadre  managers bring everyone in on a C-1 level (approximately $21\/hour) until  they are able to \u201clearn about the organization,\u201d a process which is not  quantified or measured. We noted variation among regional cadre  managers with respect to pay determinations, with some managers  proposing pay according to the candidate\u2019s experience, and others basing  pay determinations solely on the job title. For example, six regional cadre  managers said that pay determinations depend on the candidate\u2019s  experience, education, and background and one added that individuals  with the same job title could be paid differently depending on their  experience. In contrast, three different regional cadre managers said that  pay is based on the job title or position the DAE is hired to fill; for  example, one said that a data entry DAE would start in the A or B pay  grade, while construction managers would be assigned to the C pay  grade. Variation in salaries across regions and cadres can lower morale  among DAEs who are deployed in multiple regions and notice DAEs that  are paid more despite having less responsibility, according to two regional  cadre managers. A senior FEMA official in a recent \u201ctown hall meeting\u201d  acknowledged that there have been issues with the pay and promotion  system for DAEs for many years, and that leadership will be looking at the  issue. In addition, the Assistant Administrator for Response said that  there is currently no consistency with pay determinations or raises, and  that changes to the pay system will be a part of FEMA\u2019s Disaster  Workforce Transformation. Additionally, 8 of 16 regional cadre managers  we interviewed stated that they do not receive guidance or would like to  receive more guidance related to salary determinations, including the  criteria used by headquarters. FEMA headquarters could clarify what  kind of professional experience gained prior to joining FEMA is  considered relevant for different positions and cadres or to what extent  disaster-specific responsibilities may factor into salary determinations.  Ten of 16 regional cadre managers said that headquarters has previously  denied pay determinations proposed by the region, and two of these  regional cadre managers responded by asking the applicant to revise his  or her resume and re-send it to headquarters. One of these regional  cadre managers noted that he did not know what headquarters was  looking for when making decisions regarding whether to place a  candidate in pay Grade B or C.\nDuring recent town hall meetings between agency leadership and  employees, a FEMA official acknowledged that pay grade distribution and  pay raise inconsistencies are an issue in the DAE program. The Assistant  Administrator for Response noted that more than 90 percent of DAEs are  in the C category or above, and as a result there are DAEs in higher pay  grades performing work that should be done by lower-paid DAEs.  According to FEMA officials, they will be looking into these issues as part  of FEMA\u2019s Disaster Workforce Transformation. In addition, FEMA officials  noted that FQS will institutionalize pay determinations for DAEs based on  job title, but as of March 2012, they could not provide details regarding  this effort. Standards for Internal Control in the Federal Government state  that good human capital policies and practices should include  establishing appropriate practices for compensating and promoting  personnel. We have reported that agencies may abide by these  standards by basing compensation on achievements and performance.  By establishing standardized criteria for making DAE salary and  promotion determinations, FEMA could increase transparency around  salary determinations and reduce unnecessary variation across regions.\n\n\t\tPerformance Appraisals for DAEs Do Not Adhere to Internal Control Standards\n\nFEMA\u2019s performance appraisal system for DAEs is not consistent with  internal control standards, which would help ensure that managers have  information to better inform performance management decisions.  Standards for Internal Control in the Federal Government state that  agencies should establish appropriate practices for evaluating,  counseling, and disciplining personnel. In addition, these standards  state that effective management of an organization\u2019s workforce include  identifying appropriate knowledge and skills needed for various jobs and  providing candid and constructive counseling, and performance  appraisals. We have previously reported that agencies could adhere to  these internal control standards through a number of actions, such as  ensuring that: promotions and compensation of employees are based on periodic employees are provided with appropriate feedback and given  suggestions for improvement; or that employment is terminated when performance is consistently below  standards.\nPerformance appraisal systems are intended to provide agencies with  information related to the effectiveness of employees and serve as a  mechanism to identify and improve performance deficiencies. FEMA\u2019s  performance management system for DAEs is based on a performance  appraisal form that is not consistent with internal control standards, which  state that counseling should be candid and constructive. According to  FEMA Instruction 8600.1, supervisors are required to complete a  performance appraisal form for DAEs at the end of each DAE\u2019s  deployment. As shown in figure 2, all DAE reservists are rated on seven  elements, and supervisors are rated on an additional seven elements.addition, there is a narrative portion of the performance appraisal form  where supervisors are required to include written comments.\nFor each element, a DAE may be given an \u201cS\u201d for Satisfactory, \u201cU\u201d for  Unsatisfactory, or \u201cN\/A\u201d if a supervisor had no opportunity to observe the  DAE\u2019s performance; these ratings are essentially a pass\/fail system.  However, it is unclear what constitutes successful completion of each  element, and FEMA headquarters has not provided any written guidance  to regions for assigning ratings. For example, FEMA lacks criteria that  can be used to make the determination that a DAE should receive an S or  a U for a given element. FEMA Instruction 8600.1 addresses what cadre  managers should do with the appraisal form, but not specifically how to  assign a rating and what content managers should include in the narrative  portion. Eleven of 16 regional cadre managers we interviewed stated that   These regional cadre managers  DAEs are not given honest appraisals.stated that ratings are not always an accurate reflection of performance  because currently there is a conflict of interest because supervisors (who  are also DAEs) must evaluate subordinate DAEs who could be their  supervisors in the next deployment. According to the Director of IWMO,  when FQS is implemented in fiscal year 2012, DAEs will continue to  supervise other DAEs in the field. This official said that the qualification  requirements under FQS will help ensure that the supervising DAEs have  the professionalism to manage other DAEs. However, given the fact that  DAEs may continue to serve at levels below the one for which they are  qualified, the conflict of interest could continue. While we recognize that  ensuring supervisors provide candid ratings can be challenging for  agencies, strengthening the controls in place for developing performance  ratings could help FEMA provide both managers and DAEs more  meaningful performance information.\nIn addition, the performance appraisal system could be more transparent  by providing managers with additional information to use when making  performance management decisions. For example, because the appraisal  form usually provides little information to managers regarding a DAE\u2019s  performance during a disaster, one regional cadre manager noted that  branch directors contact the regions and let them know of any problems  with their cadre members. The manager added that instead of or in  addition to reviewing the performance appraisal forms, supervisors and  managers must make phone calls and send e-mails to give a picture of a  DAE\u2019s performance and areas for improvement. In addition, it is not clear  how performance appraisals are utilized in decisions related to  reappointment, performance deficiencies, pay, and promotions for DAEs.  FEMA headquarters has not provided guidance to regions to clarify these  issues, according to 13 of 16 regional cadre managers and OCCHCO.  According to an IWMO official, the office previously known as Disaster  Reserve Workforce Division had been actively involved in redesigning the  performance appraisal process, including improving the appraisal form  and maintenance of performance records. However, he said that when  the office was revamped and realigned into IWMO, the effort languished.  IWMO and OCCHCO officials noted in March 2012 that performance  management is a critical component of the supervision of DAEs and  stated that it must be improved in fiscal year 2012 during FEMA\u2019s  Disaster Workforce Transformation effort. However, FEMA does not  currently have specific plans to revamp the performance appraisal  system.\nWe have previously reported that one of the key practices for effective  performance management is making meaningful distinctions in  performance, including providing management with the objective and fact- based information it needs to recognize top performers and providing the    necessary information and documentation to deal with poor performers. Similarly, we have previously reported that performance appraisals  should provide meaningful distinctions in performance for staff, which is  difficult to accomplish with a pass\/fail system. We also reported that a  limited number of performance categories may not provide managers with  the information they need to reward top performers and address  performance issues, as well as deprive staff of the feedback they need to  improve. In addition, 13 of 16 regional cadre managers stated that the  appraisal process could be improved in various ways, such as  implementing a rating scale instead of a pass\/fail rating. Specifically,  using multiple rating levels provides a useful framework for making  distinctions in performance by allowing an agency to differentiate, at a  minimum, between poor, acceptable, and outstanding performance. We  have reported that two-level rating systems by definition will generally not  provide meaningful distinctions in performance ratings, with possible  exceptions for employees in entry-level or developmental bands.  Similarly, a 2007 preliminary report by Booz Allen Hamilton on the DAE  program found that there was a lack of standardization and fairness in the  performance review system, specifically that the system was not  managed evenly and did not distinguish between levels of performance.  The report noted that an inadequate performance review system affects  the development and assignment of DAEs, as well as their contribution to  FEMA\u2019s overall response to disasters. Taking steps to establish a more  rigorous performance management system that addresses the  weaknesses we identified could help provide FEMA with more information  regarding how effectively DAEs are performing and a mechanism to  identify and improve any performance deficiencies. By providing clear  criteria and guidance for assigning ratings, as well as how the ratings are  to be used, FEMA could help to ensure that DAEs\u2019 performance  appraisals better reflect actual performance and provide managers with  information to better inform performance management decisions.\n\n\tFEMA\u2019s DAE Training Is Not Consistent with Key Attributes of Effective Training and Development Programs\n\nFEMA\u2019s DAE training is not consistent with key attributes of effective  training and development programs that could help to ensure that its  training and development investments are targeted strategically. FEMA  does not have a plan to ensure that all DAEs receive required training  under FQS, which would ensure accountability for qualifying DAEs. In  addition, FEMA does not track how much it spends on DAE training,  which hinders FEMA\u2019s ability to plan for future training.\n\n\t\tFEMA Does Not Have a Plan to Ensure DAEs Receive Required Training\n\nFEMA does not have a plan with time frames and milestones to ensure  DAEs receive training, including required training for its new credentialing  program, FQS. FEMA provides the majority of its training to DAEs in the  field during disasters. Under FQS, DAEs must complete required training  and demonstrate successful performance in specific areas in order to be  qualified in their job title. Therefore, DAEs\u2019 career track will be aligned to  their deployments, and subsequently tied to their opportunities to  participate in field training. Regional cadre managers and DAEs we spoke  with had concerns about the amount of training DAEs received during  disasters as well as FEMA\u2019s reliance upon on-the-job training for new  DAEs due to limited training opportunities. Thirteen of 16 regional cadre  managers said that they would like more opportunities for DAEs to  receive training. For example, one Human Resource cadre manager  said that required training courses were not available the past year, and  that some courses, such as those developed for human resource  managers, had not been offered for 3 or 4 years. In addition, one DAE  said that the amount of training they received was insufficient and added  that it was a disservice to the applicants for FEMA assistance because  DAEs may not know how to properly assist the public. Another DAE, who  also holds a management position, told us that half of the DAEs deployed  in Community Relations in his current disaster did not have any training  other than on-the-job training. Furthermore, IWMO officials said some  regions provide general pre-deployment orientation materials, such as  instructions on completing certain administrative tasks; otherwise, it is up  to the cadre manager to provide DAEs information pertinent to their  assignment prior to their deployment. Therefore, the extent to which a  DAE receives orientation depends on the cadre, the region, and the  timing of deployments.\nUnder FQS, DAEs will be assigned job titles, and each DAE will either be  designated as a trainee or qualified for that job title. For a DAE to become  qualified, they must complete required training and meet the minimum  number of deployments and various deployment experiences. According  to FEMA, approximately 20 percent of the current DAEs (2,005 of 9,981)  are considered trainees and will need training and future deployments to  become qualified. However, according to FEMA, as of March 2012, 136  courses were not available because they were being revised or not yet  developed. In addition, FEMA stated that of the 136 courses, 83 are in  various stages of pilot testing and they have developed a schedule to  revise or develop courses through the end of fiscal year 2012. Officials  said that if a course will not be developed in the foreseeable future,  exemptions can be made for the DAE to be fully qualified if they have  completed the remaining requirements.\nAccording to key attributes for federal training programs, agencies should  have agency planning documents such as training plans, and training and  development design and evaluation documents, which focus on  identifying targeted performance improvements and report on progress in  achieving results. As previously mentioned, successful organizations  should also establish timelines for program milestones and deliverables.  According to FEMA officials, the agency has begun an initiative intended  to identify the number of personnel, by position, needed to respond to and  manage various incidents. It is also intended to determine the number of  training courses they will need based on the number of open position task  books. In fiscal year 2012 FEMA plans to implement this initiative as well  as FQS in order to develop a plan to train DAEs, according to the agency.  However, FEMA officials also said that qualifying all DAEs under FQS will  depend on each DAE\u2019s commitment to making themselves available for  deployments and the level of disaster activity. DAEs are required to  update their availability for deployments at least every 30 days, and must  be available for deployments for at least 60 days a year. FEMA does not  have a plan or time frames in place to ensure that all DAEs are qualified  under FQS and receive required training; instead, FEMA is depending on  DAEs to commit to be deployed. A plan with time frames and milestones  for how and when it will train all of its DAEs will provide FEMA with a  roadmap and ensure accountability for qualifying DAEs under FQS.\n\n\t\tSystematically Tracking Training Cost Could Allow FEMA to Better Plan for Future Training Expenses\n\nFEMA does not track how much of the Disaster Relief Fund is spent on  training for DAEs while deployed to JFOs. As a result, FEMA does not  have a comprehensive picture of costs and expenses, and other financial  information related to training and development activities. All expenses  incurred at a JFO, including training costs, are funded by the Disaster  Relief Fund. Comptrollers at the JFO are responsible for approving and  monitoring all the funds used at a JFO; however, they are not required to  track the training costs. The Disaster Field Training Operations cadre is  responsible for developing a training plan based on the training needs of  the DAEs deployed to a particular JFO. The training plan then must be  approved by the Federal Coordinating Officer. FEMA\u2019s Deputy Director  for Field Operations said the plan does not include the costs associated  with the recommended courses unless the training is being provided by a  contractor. Costs associated with training\u2014such as travel expenses, per  diem for the instructors, and copy materials\u2014are all included in the  administrative costs of the JFO. FEMA\u2019s Deputy Director for Field  Operations further stated that there is no accounting code specific to  training costs, therefore, the agency does not currently have the needed  information to identify those costs specific to completed courses. The  official added that FEMA maintains a few codes that have some  relationship to training, such as a code for training-related office supplies  and printing costs. The official noted that it may be possible to  accumulate all of the training-related codes that are currently in existence  and come up with an estimate of the total cost associated with training;  however, this figure would not provide a complete picture of training  costs.\nFEMA\u2019s Disaster Readiness and Support account is part of the Disaster  Relief Fund. It funds generalized, non-disaster specific initiatives such as  training that provides disaster readiness and preparedness support  across FEMA. In fiscal year 2011, the Disaster Readiness and Support  account totaled $304.7 million, of which $9 million was dedicated to  disaster-related training for all FEMA employees, including DAEs. Of the  $9 million, $3 million of this is dedicated to pay for the salaries and  benefits of DAEs while they are deployed solely for training. According to  FEMA, the amount of the Disaster Readiness and Support account is  determined by working with FEMA offices annually to review their  requirements. A spend plan is created and then reviewed and approved  by FEMA\u2019s Deputy Administrator, DHS and the Office of Management  and Budget before transmittal to Congress.\nPrior to fiscal year 2012, the Emergency Management Institute was  responsible for managing the $9 million in disaster specific training funds.  This responsibility is now with IWMO; however, according to IWMO  officials, they are still coordinating their efforts with the Emergency  Management Institute. According to the Emergency Management  Institute, it cannot separate how much of the Disaster Readiness and  Support account is spent on DAE training, except for the $3 million  allocated for salaries and benefits. According to IWMO officials, in fiscal  year 2013 they will begin funding the majority of training courses in JFOs  using the Disaster Readiness and Support account rather than the more  general Disaster Relief Fund. As of March 2012, the fiscal year 2012  spend plan and projected future costs had not been finalized. However,  IWMO officials said that the proposed fiscal year 2012 budget for FQS is  $7.8 million, which was based on the training budget of prior years\u2019  training as well as future needs. According to key practices for training  management, agencies should have accounting, financial, and  performance reporting systems that produce credible, reliable and  consistent data on agency activities, including training and development   Since FEMA does not know how much money it historically  programs.has spent on training at the JFOs using the Disaster Relief Fund, it does  not have a complete picture of the total cost to train DAEs both at the  Emergency Management Institute and at the JFOs each year. Further,  FEMA does not have reasonable assurances that the proposed fiscal  year 2013 FQS budget is at an appropriate level to cover the total training  costs. Without a systematic process to track training costs, FEMA does  not have a complete picture of training, including its total costs.  Developing a systematic process to track such training costs would  provide FEMA with additional information to inform decisions about  allocating future funding for training and assist it in doing so effectively.\n\n\tFEMA Announced Impending Transformation of DAE Program, but It Is Too Soon to Evaluate the Effectiveness of the Agency\u2019s Planned Actions\n\nOn April 17, 2012 FEMA announced plans to transform the DAE program.  Among the changes, FEMA will change the name to the FEMA Reservist  Program. According to FEMA, as of June 1, 2012, the agency will begin  offering DAEs the opportunity to seek new appointments in the Reservist  Program by applying for specific incident management positions within  FQS. The Reservists selected at the end of the application process will be  assigned to nationally managed cadres, which will replace all regionally- based cadres by the end of 2012. FEMA announced that as of July 1,  2012, DAEs who transition to the Reservist Program before the end of  2012 will have their pay \u201cgrandfathered\u201d into the new program and  therefore be exempt from the new rules regarding having pay determined  based on their FQS position. In addition, FEMA stated it will establish a  goal and policy to deploy all Reservists at least once per year with the  length of the deployment depending on operational needs, which is  intended to ensure that all Reservists have the current incident response  experience and demonstrated performance required by FQS.  Furthermore, FEMA stated that it will begin providing Reservists required  FQS training by utilizing a portion of annual deployment days and  allowing Reservists to complete some mandatory training from home.  Moreover, FEMA announced that it would be issuing Reservists mobile  communication and computing equipment upon their first deployment, to  ensure that they are mission ready immediately upon checking into a  disaster and that they have continuous access to the FEMA network and  FEMA e-mail, if they choose, regardless of deployment status. These  efforts, if implemented effectively should address a number of the  challenges we identified with FEMA\u2019s management of the DAE program.  However, FEMA has not identified specifics to these broad plans that  allowed us to evaluate the effectiveness of its planned actions. Therefore,  it is too soon to determine whether the planned actions will be  implemented as stated and whether they will fully address the problems  we identified.\n\n\tConclusions\n\nFEMA relies heavily upon DAEs to respond to disasters. The agency has  taken steps to improve the program, such as establishment of a  credentialing program, FQS, and a planned transformation of the DAE  program; however, it is too soon to assess the extent to which these  efforts will address the challenges we identified with FEMA\u2019s  management of the DAE program, the workforce, and training. For  example, while FEMA intends to provide guidance to cadre managers,  including a revised FEMA Instruction 8600.1 by the end of 2012, FEMA  has experienced difficulty in the past in completing similar efforts, such as  the 2008 cadre management handbook that was never finalized. Thus,  establishing time frames for completing deliverables such as the revised  FEMA Instruction 8600.1 and a cadre manager handbook for DAE  management would help ensure accountability for completing initiatives.  Furthermore, FEMA\u2019s decentralized structure allows for flexibility;  however, establishing a mechanism to ensure ongoing monitoring of  regional implementation of DAE policies and procedures and DAEs\u2019  implementation of FEMA\u2019s disaster policies and procedures can assist  management in ensuring that disaster assistance is conducted in  accordance with policy and consistently applied across regions. In  addition, establishing policies and procedures for how FEMA will  communicate with DAEs and developing a plan with time frames and  milestones for how it will better communicate policies and procedures and  cadre-specific information to DAEs when not deployed would help ensure  that it is providing DAEs with the tools they need to be prepared for  disaster deployments.\nFurther, FEMA\u2019s human capital controls do not adhere to internal control  standards for hiring, compensation, and performance appraisals. By  standardizing criteria for hiring and salary determinations, FEMA would  have greater assurance that DAEs have the necessary skills and  qualifications, as well as ensure consistency across regions. In addition,  taking steps to establish a more rigorous performance management  system would provide FEMA with more information regarding how  effectively DAEs are performing and provide a mechanism to identify and  improve any performance deficiencies.\nMoreover, FEMA\u2019s management of DAE training is not consistent with  training key practices for planning and tracking training costs.  Establishing a plan with milestones for training DAEs would provide  FEMA with a roadmap to train its DAE workforce and ensure  accountability for qualifying DAEs under FQS. Finally, developing a  systematic process for capturing training costs would provide FEMA with  additional information to inform its decisions about allocating future  funding for training and assist it in doing so effectively.\n\n\tRecommendations for Executive Action\n\nTo help DHS improve the management of DAEs and build on some of the  actions taken to date, we recommend that the Secretary of Homeland  Security direct the Administrator of FEMA to take the following seven  actions:  1.  Establish timelines for development and dissemination of DAE cadre  management guidance and revisions to FEMA Instruction 8600.1;  2.  Establish a mechanism to monitor both its regions\u2019 implementation of  DAE policies and procedures and DAEs\u2019 implementation of FEMA\u2019s  disaster policies and procedures to ensure consistency.  3.  Develop a plan with time frames and milestones for how it will better  communicate policies and procedures and cadre-specific information  to DAEs when they are not deployed;  4.  Establish standardized criteria for hiring DAEs that include defined  qualifications and skill sets to make hiring decisions and salary  determinations;  5.  Establish a more rigorous performance appraisal system that includes  criteria and guidance to serve as a basis for performance ratings, as  well as how ratings could be used, and a process to address  performance deficiencies;  6.  Establish a plan with milestones to ensure all DAEs have  opportunities to participate in training and are qualified; and  7.  Develop a systematic process to track training costs.\n\n\tAgency Comments and Our Evaluation\n\nWe provided a draft of this report to DHS for comment. We received  written comments from DHS on the draft report, which are summarized  below and reproduced in full in appendix VIII. DHS concurred with the  recommendations and indicated that FEMA has taken or is taking steps to  address them. The actions DHS reported are important first steps;  however, FEMA\u2019s implementation plans do not fully address one of the  seven recommendations, as discussed below. Moreover, insufficient  detail is provided related to FEMA\u2019s plans for three of the  recommendations; thus it is not clear to what extent these plans will fully  address the three recommendations.\nIn regards to the first recommendation, that FEMA establish time frames  for development and dissemination of DAE cadre management guidance  and revisions to FEMA Instruction 8600.1, DHS agreed and stated that  FEMA Instruction 8600.1, which is now called the FEMA Reservist  Program Directive, was revised and, as of May 11, 2012, is in FEMA\u2019s  Office of the Chief Counsel for final review. Furthermore, DHS stated that  the estimated timeline for approval and publishing of this instruction is  June 1, 2012. In addition, DHS stated that the Cadre Manager\u2019s  Handbook, the FEMA Reservist Program Manual, the Reservist Pay  Directive, and the Reservist Handbook are being developed with an  estimated timeline for development, approval, and dissemination  approximately 90 days after the signing of the FEMA Reservist Program  Directive. It will be important that the FEMA Reservist Program Directive  align with the planned Disaster Workforce Transformation. These actions,  if implemented effectively, would address the intent of the  recommendation.\nIn reviewing the draft of the second recommendation that FEMA establish  a mechanism to monitor disaster policies and procedures to ensure  consistency, FEMA officials requested clarification, stating that the  recommendation was too broad as it focused on FEMA\u2019s disaster policies  rather than DAEs. We agreed and modified the recommendation to more  clearly state that FEMA should monitor how the regions implement DAE  policies and procedures and how DAEs implement disaster policies and  procedures. DHS agreed with our revised recommendation and  discussed several actions it has taken or has underway to address the  recommendation. Specifically, it stated that (1) in December 2011, the  FEMA Administrator directed the agency to identify, review, and centrally  post all agency doctrine, policies, and directives, (2) all documents were  posted to their respective locations on April 13, 2012, and (3) the  agency\u2019s policies guiding DAEs are now available on the FEMA intranet.   Moreover, FEMA stated that it has also established and is working to  improve a number of mechanisms through which it validates compliance  with the agency policies and standards. FEMA also stated that  communication with reservists on disaster policies and procedures will be  initiated from FEMA headquarters to ensure consistency. FEMA has  taken actions to make policies and procedures readily available to  reservists; however, FEMA did not provide details about the mechanisms  it has established for its regions to monitor DAE policies and procedures  or DAEs\u2019 implementation of FEMA\u2019s disaster policies. Thus, it is not clear  to what extent these actions will fully address the recommendation.\nIn regards to the third recommendation, that FEMA develop a plan with  time frames and milestones for how it will better communicate policies  and procedures and cadre-specific information to DAEs when they are  not deployed, DHS agreed and stated that the FEMA Reservist Program  Directive requires Headquarters, Regional, and National Cadre  Management leadership to provide consistent two-way messaging to all  Reservists, deployed or not, through e-mail, websites, webinars, and  other outreach, and estimates that these efforts will be completed by  September 30, 2012. However, DHS did not provide details on the types  of information that it will be providing DAEs. Thus, it is not clear to what  extent FEMA\u2019s planned actions will fully address the recommendation. To  fully meet the intent of the recommendation, FEMA needs to ensure that it  is communicating both cadre-specific and administrative information to  DAEs.\nIn regards to the fourth recommendation, that FEMA establish  standardized criteria for hiring DAEs that include defined qualifications  and skill sets to make hiring decisions and salary determinations, DHS  agreed and stated that the FEMA Qualification System (FQS) Position  Task Books define specific qualifications and skills for each required  position and will be the basis for establishing standardized criteria for  hiring Reservists, including pay. Currently, Position Task Books are used  to document and record tasks performed by the trainees, in order to  become qualified under FQS. It will be important for FEMA to define skills  and\/or necessary experience applicants must have prior to being hired for  each position, and how if at all, any prior experience will impact salary  determinations. Without doing so, DHS will not fully address the intent of  the recommendation.\nIn regards to the fifth recommendation, that FEMA establish a more  rigorous performance appraisal system that includes criteria and  guidance to serve as a basis for performance ratings, as well as how  ratings could be used, and a process to address performance  deficiencies, DHS agreed. DHS stated that upon implementation of the  FEMA Reservist Program Directive and the publishing of various  supporting directives and handbooks, FEMA\u2019s Incident Workforce  Management Office will coordinate with FEMA\u2019s Office of the Chief  Component Human Capital Office to develop a more robust Reservist  performance appraisal system that will, among other things, establish  performance standards, identify successful task completion, and improve  performance deficiencies. These actions, if implemented effectively,  would address the intent of the recommendation.\nIn regards to the sixth recommendation, that FEMA establish a plan with  milestones to ensure all DAEs have opportunities to participate in training  and are qualified, DHS agreed and stated that as part of the changes in  the DAE program through the Disaster Reservist Program, FEMA will  ensure that all DAEs have opportunities to participate in training and are  qualified to serve in a primary disaster-specific job title on the basis of  FEMA\u2019s Force Structure requirements. Furthermore, FEMA plans to  complete this by September 30, 2013. However, DHS did not provide  details on how it plans to ensure that DAEs will become qualified by  September 2013, including when it will complete the FEMA Force  Structure which had not been finalized as of April 2012. It will be  important for FEMA to develop intermediate milestones to provide a  roadmap for how it will qualify its workforce. Thus, it is not clear to what  extent FEMA\u2019s plans will fully address the intent of the recommendation.\nIn regards to the seventh recommendation, that FEMA develop a  systematic process to track training costs, DHS agreed and stated that  FEMA has combined all funding for FQS supportive training into a single  account to ensure a process for tracking training costs, course offerings,  and force structure requirements. DHS also stated that it will include all of  this information in the Incident Qualification Certification System\u2014 intended to be the primary FQS tracking system\u2014to track all FQS-related  training costs. In addition, DHS stated that it should be completed by  October 1, 2012. These actions, if implemented effectively, would  address the intent of the recommendation.\nDHS also provided technical comments that we incorporated, where  appropriate.\nAs agreed with your offices, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days from the  report date. At that time, we will send copies to the appropriate  congressional committees, the Secretary of the Department of Homeland  Security and the Administrator of the Federal Emergency Management  Agency. The report will also be available at no charge on the GAO  website at http:\/\/www.gao.gov.\nIf you or your staff members have any questions about this report, please  contact me at (202) 512-8777 or jenkinswo@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 major contributions to  this report are listed in appendix IX.\n\nAppendix I: Objectives, Scope, and Methodology\n\nThe objectives of this report were to determine (1) to what extent does the  Federal Emergency Management Agency (FEMA) have policies and  procedures in place to govern the Disaster Assistance Employee (DAE)  program; (2) to what extent are FEMA\u2019s human capital controls over the  DAE workforce consistent with internal control standards; and (3) to what  extent does FEMA\u2019s DAE training incorporate key attributes of effective  training and development programs. In addition, we describe FEMA\u2019s  initiative to transform the DAE program announced in April 2012 as it  relates to the three questions above.\nWe addressed each objective by reviewing relevant FEMA documents.  To determine the extent to which FEMA has policies and procedures in  place to govern its DAE program; and to determine the extent to which  FEMA\u2019s human capital management controls over the DAE workforce are  consistent with internal control standards, we analyzed relevant  documents on FEMA\u2019s organizational structure as well as both program- specific and human capital-related guidance, policies, and procedures  produced by FEMA headquarters and regional offices. We also compared  FEMA\u2019s human capital controls with criteria in Standards for Internal  Control in the Federal Government.\nThe Fiscal Year 2010 Department of Homeland Security Appropriations Act required  FEMA to submit a report of quarterly obligations of funds against the Disaster Readiness  and Support (DRS). training attended by DAEs in a JFO. We compared FEMA\u2019s management  of DAE training with key attributes of effective training and development  programs to determine the extent to which they are aligned.\nTo address all three objectives, we reviewed previous Department of  Homeland Security Inspector General Reports, and a FEMA sponsored  study conducted by Booz Allen Hamilton on FEMA\u2019s disaster workforce.\nWe found the conclusions and recommendations drawn in each report to  be sufficient based on the methodologies used. In addition, we conducted  interviews with FEMA officials in headquarters and in the regions. We  interviewed officials in the following offices in FEMA headquarters: Office  of Response and Recovery, Incident Workforce Management Office  (IWMO), Office of the Chief Component Human Capital Officer  (OCCHCO), Emergency Management Institute, Office of Policy, Planning,  and Analysis (OPPA), Field Based Operations, Training Exercise and  Doctrine (TED), Office of the Chief Information Officer (OCIO) and  national cadre managers. In addition to interviews with officials in FEMA  headquarters, we conducted site visits to four FEMA regions. We  selected regions that were geographically dispersed and had a Joint Field  Office with Individual and Public Assistance programs operating as of  September 2011. In each of the four selected regions, we interviewed the  Regional Administrator and Regional Cadre Managers. In addition, we  visited one JFO in each of the selected regions. In each selected JFO, we  interviewed the Federal Coordinating Officer and Branch Chiefs from  selected cadres. We focused our interviews on the following DAE cadres:  (1) Individual Assistance (IA); (2) Public Assistance (PA); (3) Hazard  Mitigation; (4) Disaster Field Training Operations; (5) Human Resources  (HR); and (6) Community Relations. We focused on IA, PA, Hazard  Mitigation, and CR because these cadres are responsible for  administrating the disaster assistance program and interacting with the  public. In addition, we chose HR and Disaster Field Training Operations  because they are responsible for the management and training of DAEs.  In addition, we interviewed officials from the state emergency  management agency, for the state in which the JFO was located. Table 1  lists the FEMA regions, JFO locations, and State Emergency  Management Agencies we visited.\nTo obtain the views of DAEs on issues related to all three of our  objectives, we conducted 16 focus group sessions with a total of 125  DAEs at the four selected JFOs. These sessions involved structured  small-group discussions designed to gain more in-depth information  about issues DAEs face. Discussions were guided by a moderator who  used a list of discussion topics to encourage participants to share their  thoughts and experiences as DAEs. Specifically, discussion topics  included the hiring process, training, policies and procedures, FQS and  communication by regional managers; however, not all topics were  discussed in each group. Each focus group involved 5 to 12 DAE  participants. There were four types of focus groups based on job titles: IA  and PA supervisors, IA and PA non-supervisors, and supervisors and  non-supervisors from other cadres other than IA and PA. We completed  written summaries of each focus group, and used content analysis  software to categorize responses and identify common themes across the  focus groups, using appropriate checks to ensure accuracy. The results  of the focus groups are not generalizable. However, the views we  obtained from them provided us with valuable examples of DAE  experiences. In addition, to obtain further perspectives from regional  management on hiring, training, deployments, policies and procedures  and FQS, we conducted follow-up interviews with 16 regional cadre  managers we interviewed during our site visits. In addition, we reviewed  FEMA\u2019s April 2012 memorandum announcing the transformation of the  DAE program, but did not assess its planned actions to transform the  DAE program because the agency is in the early planning stages.\nWe conducted this performance audit from April 2011 through May 2012  in accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.\n\nAppendix II: Categories of Disaster Workforce Employees\n\nAppendix II: Categories of Disaster Workforce  Employees Description  Stafford Act federal employees who work on an on-call intermittent basis \u201cforming the major  workforce for FEMA in times of emergency or disaster.\u201d They are also known as reservists.  DAEs are temporary personnel appointed and compensated without regard to the  provisions of Title 5, United States Code, governing appointments in competitive service.  They are activated in direct response to a disaster declaration to support the work of FEMA  at the disaster site. FEMA appoints DAEs in 2-year cycles, as intermittent employees who  are deployed as needed for emergencies and\/or disasters.\nFederal employees hired under the authority of the Stafford Act on a temporary full-time  basis for 2- and 4-year terms. These terms are renewable if there is ongoing disaster work  and funding available. Similar to DAEs, COREs are temporary personnel appointed and  compensated without regard to the provisions of Title 5, United States Code, governing  appointments in competitive service.\nTemporary federal employees covered by Title 5 provisions. They do not have specified  appointment periods. Federal Coordinating Officers (FCO) are included in this employment  group.\nPermanent federal employees hired in accordance with Title 5, United States Code.\nStaff locally hired under the authority of the Stafford Act for an initial period of 120 days.  This period of time is renewable. Local hires augment the reservist workforce. They are  hired for positions that \u201cdo not require FEMA-specific expertise, or when limited advance  training or minimal on-the-job orientation or training is sufficient.\u201d In certain instances local  hires may convert to DAEs.   .\nOIG: FEMA\u2019s Management of Disaster Assistance Employee Deployment and Payroll Processes,  Appendix C Director\u2019s Policy 1-99, March 1999.\n\nAppendix III: Cadre List and Descriptions\n\nThere are 23 functional disaster cadres excluding the Disaster Generalist  Group, which was created to augment the External Affairs, Individual  Assistance, and Public Assistance cadres and provide surge staff when  required.\n\nAppendix IV: FEMA Organizational Chart\u2014 Highlight of Response Directorate\u2019s Incident Workforce Management Office\n\nAppendix V: Disaster Assistance Employee Program Office Reorganization Timeline, April 2008 through May 2012\n\nAppendix VI: Incident Workforce Management Office Organizational Structure and Proposed Roles\n\nAppendix VII: FEMA Disaster Assistance Employee Pay Scale, Calendar Year 2011\n\nAppendix VIII: Comments from the Department of Homeland Security\n\nAppendix IX: GAO Contact and Staff Acknowledgments\n\n\tGAO Contact\n\n\tAcknowledgments\n\nIn addition to the contact named above, Leyla Kazaz, Assistant Director,  managed this assignment. Martene Bryan, Landis Lindsey, Lauren  Membreno, Aku Pappoe and Michelle Su made significant contributions  to the work. Cynthia Saunders assisted with design and methodology.  Tracey King provided legal support and analysis. Linda Miller and Debbie  Sebastian provided assistance in report preparation. Robert Robinson  developed the report graphics.","output":"Why GAO Did This Study\n\nSince fiscal year 2007 FEMA has obligated $33 billion in disaster assistance payments. FEMA relies heavily upon its cadre of DAEs, a reserve workforce who interact with disaster survivors. GAO was asked to review the management and training of DAEs. Specifically, this report addresses the extent to which (1) FEMA has policies and procedures in place to govern the DAE program; (2) FEMA\u0092s human capital controls over the DAE workforce are consistent with internal control standards; and (3) FEMA\u0092s DAE training incorporates key attributes of effective training and development programs. In addition, GAO describes FEMA\u0092s initiative to transform the DAE program announced in April 2012. GAO reviewed management documents such as program-specific and human capital-related guidance, interviewed FEMA officials, and conducted 16 focus group sessions with DAEs in four selected joint field offices chosen to provide geographic dispersion, among other factors. The results of the focus groups are not generalizable, but provide valuable insight into DAE experiences.\n\nWhat GAO Found\n\nThe Federal Emergency Management Agency (FEMA) has taken steps to enhance its management of the Disaster Assistance Employee (DAE) program, such as through the establishment of a credentialing program, the FEMA Qualification System (FQS); however, management controls and training could be strengthened. For example, FEMA does not monitor how the regions implement DAE policies and how DAEs implement disaster policies across regions to ensure consistency. FEMA\u0092s Administrator noted that due to differences in how regions operate, it is problematic to deploy someone based in one region to another during a disaster. Establishing a mechanism to monitor both the regional implementation of DAE policies and procedures and DAE\u0092s implementation of disaster policies could help provide FEMA with reasonable assurance that disaster assistance is conducted in accordance with policy and implemented consistently.\nFEMA\u0092s human capital controls could be strengthened. FEMA\u0092s regional DAE managers are responsible for hiring DAEs, but FEMA has not established hiring criteria and has limited salary criteria. By establishing standardized criteria for making hiring and salary decisions, FEMA would be better positioned to hire people with requisite skills and better ensure consistency across regions. Likewise, FEMA\u0092s performance appraisal system for DAEs is not consistent with internal control standards. FEMA does not have criteria for supervisors to assign DAEs satisfactory or unsatisfactory ratings. Thirteen of 16 regional DAE managers GAO interviewed stated that the appraisal process could be improved, such as implementing a rating scale instead of a pass\/fail rating. FEMA officials noted that performance management is a critical component in DAE supervision and must be improved in fiscal year 2012. Establishing a more rigorous performance management system that includes criteria for given performance elements as well as guidance could help FEMA ensure that DAEs\u0092 performance appraisals more accurately reflect performance and provide needed information to managers.\nFEMA\u0092s DAE training is not consistent with key attributes of effective training and development programs, such as a plan for training staff. FEMA does not have a plan to ensure DAEs receive necessary training such as FQS requirements. Further, 13 of 16 regional DAE managers GAO spoke to said that they would like more opportunities for DAEs to receive training. A plan to ensure that all DAEs have opportunities for training and completing FQS requirements with related milestones would provide FEMA with a roadmap and ensure accountability for qualifying DAEs under FQS. In addition, FEMA does not track how much of the Disaster Relief Fund is spent on training for DAEs. Developing a systematic process to track training costs could provide FEMA with information to help it determine whether it is allocating its resources effectively.\nIn an April 2012 memo, FEMA announced plans to transform the DAE program beginning in June 2012; however, this effort is still in the early stages and as a result, it is too soon to evaluate the effectiveness of FEMA\u0092s planned actions.\n\nWhat GAO Recommends\n\nGAO recommends, among other things, that FEMA establish a mechanism to monitor both its regions\u0092 implementation of DAE policies and DAEs\u0092 implementation of disaster policies; criteria for hiring and compensating DAEs; and a plan to train DAEs within a set time frame. DHS concurred with the recommendations."}
{"id":"crs_R42676","pid":"crs_R42676_0","input":"\tIntroduction\n\nThe United States is engaged in negotiations with Japan and 10 other countries to form a regional free trade agreement (FTA)\u2014the Trans-Pacific Partnership Agreement (TPP). In the negotiations, the United States and the other TPP partner-countries seek to build \"a comprehensive, next-generation regional agreement that liberalizes trade and investment and addresses new and traditional trade issues and 21 st century challenges.\" The TPP partners also envision the agreement to be a building block towards the establishment of a broader, Asian-Pacific regional FTA, sometimes referred to as the Free Trade Area of the Asia-Pacific (FTAAP).\nOf the 12 TPP countries, Japan is the most recent to join the negotiations. On March 15, 2013, Japanese Prime Minister Shinzo Abe announced that Japan would formally seek to participate in the negotiations to establish the TPP. The announcement followed an initial expression of interest in November 2011 by then-Prime Minister Yoshihiko Noda. In the intervening months, Japanese supporters of the TPP\u2014including representatives of major companies\u2014and TPP opponents\u2014including representatives of the very vocal and politically influential agricultural sector\u2014engaged in debate. In addition, parliamentary elections led to the formation of a new government under the Liberal Democratic Party (LDP) and Abe as prime minister. In his March 15 statement, Prime Minister Abe acknowledged the interests and sensitivities of the agricultural groups, but he also insisted that Japan needed to take advantage of \"this last window of opportunity\" to enter the negotiations, if it is to grow economically. \nOn April 12, 2013, the United States announced its support for Japan's participation in the TPP. The announcement came after a series of discussions on conditions for U.S. support and outstanding bilateral issues. As a result of the discussions the two sides agreed on measures to address these issues during and in parallel with the main TPP negotiations. On April 20, the then-11TPP countries formally invited Japan to participate in the negotiations, and on July 23 Japan formally joined. \nCongress has a direct and oversight role in U.S. participation in the TPP. It must approve implementing legislation, if a final TPP agreement is to apply to the United States. Some Members of Congress have already weighed in on whether Japan should be allowed to participate in the TPP and under what conditions. More may do so as the process proceeds.\nThe Obama Administration has been proceeding in negotiating the TPP as if trade promotion authority (TPA), which expired on June 30, 2007, were in force. TPA is the authority that Congress gives to the President to enter into trade agreements that can receive expedited legislative consideration. The Administration has been adhering to consultation requirements and notification deadlines that have been an integral part of previous TPA or fast-track statutes. On April 24, then-Acting USTR Demetrios Marantis notified Congress of the United States to begin negotiations with Japan as part of the TPP.\nThe TPP is the leading U.S. trade policy initiative of the Obama Administration and a pillar of its efforts to \"rebalance\" U.S. foreign policy priorities toward the Asia-Pacific region by playing a more active role in shaping the region's rules and norms. As the second-largest economy in Asia, the third-largest economy in the world, and a key link in the global supply chain, Japan's participation would be pivotal to the credibility and viability of the TPP as a regional trade arrangement. The inclusion of Japan would expand the amount of U.S. trade and foreign investment that the TPP would cover if implemented.\nFor Japan, participation in the TPP could potentially transform its economy by providing unprecedented access to the Japanese market for foreign exporters and investors. It could also force Tokyo to confront structural economic problems that have long impeded economic growth. It would also symbolize Japan's continued position as an economic power in East Asia, an image that has been tarnished by decades of economic stagnation and the growth of China.\nJapan's participation in the TPP has important implications for the U.S.-Japan relationship. For example, it already has renewed a focus on long-standing issues, such as access to Japan's markets for autos, agricultural products, and insurance, which have remained irritants in the relationship. New issues will undoubtedly also be raised in the process. \n\n\tAn Overview of the TPP\n\nThe TPP is an evolving regional free trade agreement (FTA). It was originally formed as the Trans-Pacific Strategic Economic Partnership\u2014an FTA now in effect among Singapore, New Zealand, Chile, and Brunei (the so-called \"P-4\"). In the fall of 2008, the United States, along with Australia, Peru, and Vietnam, joined the negotiations to accede to the arrangement. Malaysia joined as the ninth negotiating partner in October 2010.\nOn November 14, 2009, President Obama committed the United States to engage with the TPP countries to transform the original P-4 pact into a regional arrangement with broad-based membership and \"the high standards worthy of a 21 st century trade agreement.\" After several months of discussions, the nine partners announced a framework for the agreement in time for the ministerial meeting of the Asia-Pacific Economic Cooperation (APEC) forum in Honolulu, Hawaii, which was held November 8-13, 2011. The TPP partners conducted a series of rounds since that time and are aiming to complete the agreement by the end of 2013. \nAs reflected in the framework, the TPP partners envision a comprehensive arrangement covering a broad range of trade and trade-related activities, similar in structure to a number of recently concluded U.S. FTAs. These activities include market access for goods and services; government procurement; foreign investment; technical barriers to trade; trade remedies; sanitary and phytosanitary measures; intellectual property rights; worker rights; and environmental protection. The TPP countries also agreed to pursue cross-cutting issues such as regulatory coherence, competitiveness, and business facilitation, also known as transnational supply and production chains; the participation of small and medium-sized companies; economic development; and potential disciplines on the state-owned enterprises (SOEs).\nThe TPP participants also envision the TPP to go beyond typical FTAs by being:\na regional agreement that facilitates trade by minimizing the \"noodle bowl\" effect that has been created by different sets of rules under the more than 100 bilateral and regional FTAs that exist in the Asia Pacific-region; an agreement that addresses trade challenges that are emerging in the 21 st century, for example, cloud computing and SOEs, that have not been addressed in previous FTAs nor fully in the World Trade Organization (WTO) because they did not exist or were considered not as important; and a \"living agreement\" that will not restrict its membership to the 11 countries but will be open to other countries acceding to it as long as they are willing to commit to its provisions and will take on new issues as they arise.\n\n\tSummary of the April 2013 Announcement\n\nMarantis's April 12, 2013, announcement followed a series of U.S.-Japanese discussions that began in February 2012. Regarding autos, as a result of these discussions Japan agreed that under the proposed TPP, U.S. tariffs imports of Japanese motor vehicles will be phased out over a period equal to the longest phase-out period agreed to under the agreement. Japan also agreed to increase the number of U.S.-made vehicles that can be imported into Japan under its Preferential Handling Procedure (PHP), from 2,000 per vehicle type to 5,000 per vehicle type. In addition, the two countries agreed to convene separate negotiations that will address issues regarding non-tariff measures (NTMs) pertaining to auto trade, including transparency in regulations, standards, certification, \"green\" and other new technology vehicles, and distribution. In addition, the parallel auto negotiations are to address the establishment of a special \"safeguard\" provision to deal with injurious surges in auto imports and of a special tariff \"snap-back\" mechanism to deal with a partner's failure to fulfill the commitments on auto trade.\nTo address U.S. concerns regarding insurance, Japan announced that the government would not approve new or modified cancer insurance products and\/or stand-alone medical insurance products for sale by Japan Post until it has been determined that a \"level playing field\" has been established in competition between private insurers and Japan Post. \nFurthermore, the two sides agreed to hold another separate set of bilateral negotiations, parallel to the TPP talks, to address issues regarding non-tariff measures (NTMs) in insurance, government procurement, competition policy, express delivery, and sanitary and phytosanitary (SPS) measures. The parallel negotiations are to achieve \"tangible and meaningful\" results by the completion of the main TPP negotiations and will be legally binding at the time a TPP agreement would enter into force. (Those parallel negotiations were launched on August 7.) \nThe Administration notified Congress on April 24 of its intention to launch negotiations with Japan. Japan officially joined the negotiations on July 23 at the end of the 18 th round of negotiations\n\n\tU.S.-Japan Economic Ties\n\nA brief overview of U.S.-Japan economic ties can provide context for understanding U.S. and Japanese interests in the TPP and the potential implications from various perspectives. It could also shed light on opportunities and challenges presented by an FTA that includes the United States and Japan. A U.S.-Japan FTA is not a new idea, but it is a policy option that has failed to take hold in the past because of some fundamental issues which have been seemingly intractable.\n\n\t\tU.S.-Japan Trade Trends\n\nThe United States and Japan are the world's first and third-largest economic powers. Together they account for over 30% of gross world product. The two countries remain very important economic partners, accounting for large shares of each other's foreign trade and investment, even though their relative economic significance to one another has declined over the last few years. In 1999, Japan slipped from being the second-largest U.S. trading partner to the third largest. In 2004, it slipped to number four, where it has remained. Until 2007, the United States was Japan's largest trading partner, but it slipped to number two since 2007.\nThe global financial crisis and economic downturn added another dimension to the relationship as the two countries have grappled with the severe impact of the crisis on their respective economies, while working with their partners in the G-20 to coordinate a multilateral response. The impact of the March 11, 2011, earthquake and subsequent tsunami and nuclear accidents in northeast Japan also affected trade, although not as much as originally anticipated.\nU.S.-Japanese bilateral trade in goods and services declined significantly in 2009 over 2008 levels because of the global economic downturn but has picked up since. (See Table 1 and Table 2 .) \nRaw trade data likely underestimate Japan's importance because they do not readily measure Japan's role in the East Asian supply and production networks that produce goods exported to the United States. The two countries are also economically tied through investment flows. For example, Japanese investors are the second-largest group (next to China) of foreign holders of U.S. treasury securities and, therefore, U.S. government debt and of direct investments in the U.S. economy.\nIn the 1980s and 1990s, the bilateral economic relationship was the centerpiece of U.S. and Japanese foreign economic agendas. Persistent and increasing U.S. merchandise trade deficits with Japan, sharp increases in Japanese exports to the United States of high-value manufactured products, such as cars, and large volumes of Japanese investments in the United States (including purchases of high-profile properties, such as the Empire State Building) stoked fears in the United States of Japan as an economic threat to the United States. Many scholarly and popular books and journal articles were written on the subject.\nHowever, since the mid-1990s, the trade relationship with Japan has been a lower priority for U.S. officials. One reason for the shift may be the rise of China as a global trade and economic power, and source of challenges and opportunities to U.S. trade policymakers. Symbolic of this rise are the relative merchandise trade balances with Japan and China. While U.S. merchandise trade deficits with Japan have remained relatively constant in recent years, the U.S. deficits with China have risen significantly. In 2012, the U.S. trade deficit with Japan was $76.3 billion, while the trade deficit with China was $315.1 billion.\nAnother reason may have been that Japan's economic problems over the last two decades have made it seem less of a competitive \"threat.\" In addition, the level of Japanese foreign direct investments in the United States has declined. Furthermore, security issues, such as North Korea's nuclear program (the United States and Japan are parties to talks on North Korea's fledgling nuclear program) and the relocation of U.S. troops in Japan, have overshadowed bilateral trade relations as a priority. Nevertheless, trade-related tensions remained, albeit below the surface.\n\n\t\tManaging the Trade Relationship\n\nOver the years, U.S.-Japan economic relations have experienced degrees of friction, sometimes to the point of threatening the stability of the alliance. The United States dominated the economic relationship with Japan for many years after World War II. The United States was by far the largest economy in the world, and Japan was dependent on the United States for national security. The United States set the agenda, and the issues on the agenda were driven by the U.S. demands for Japan to curb exports to the United States and\/or to remove barriers to U.S. exports and investments.\nIn the 1960s and 1970s, the primary issues were Japan's perceived protectionist economic policies that it implemented through high tariffs and other border restrictions. As Japan's economy became more developed and competitive and as it negotiated reductions in its tariffs with other members of the General Agreement on Tariffs and Trade (GATT)\u2014now the World Trade Organization (WTO)\u2014the United States focused on non-tariff barriers, including \"behind the border\" measures, such as government regulations that, while not ostensibly protectionist, may be applied in a way that restricts trade. Certain measures are not covered by WTO agreements and are currently not readily addressed in trade negotiations since they serve non-trade functions. Examples of such measures include\ndomestic taxes on car purchases and other regulations said to discriminate against sales of imported vehicles; a government contract bidding system that favors certain domestic providers of construction services; zoning regulations that discourage the establishment of large retail stores that are more likely to sell imported products than the smaller stores the regulations are designed to protect; government health insurance reimbursement regulations that discourage the purchase of newer, leading-edge pharmaceuticals and medical devices, many of which are imported; and government supplied subsidies for the production of semiconductors.\nTo address these non-tariff barriers Japan and the United States employed, largely at the latter's instigation, special bilateral frameworks and agreements to conduct their government-to-government economic relations. These arrangements included\nthe Market-Oriented Sector-Specific (MOSS) talks started in 1985; the Structural Impediments Initiative (SII), begun in March 1989; the United States-Japan Framework for a New Economic Partnership, begun in 1993; the Enhanced Initiative on Deregulation and Competition Policy (the Enhanced Initiative), begun in 1997; the U.S.-Japan Economic Partnership for Growth (The Economic Partnership) begun in 2001; and the United States-Japan Economic Harmonization Initiative, launched in 2010, which now operates as the primary bilateral forum for bilateral discussions.\nThe two countries also concluded bilateral agreements or memoranda of understanding (MOUs), whereby Japan agreed to address U.S. concerns about its trading practices for specific products, including autos and semiconductors.\nThese arrangements varied in their approaches. However, they shared some basic characteristics: they were bilateral; were designed to remedy U.S.-Japan trade problems by focusing on regulations and other fundamental barriers; and were typically initiated by the United States. However, these arrangements were only of limited success, judging by the fact that many of the issues they were supposed to address remain.\n\n\tPending Challenges and the TPP\n\nMany of the issues that have continually irritated the U.S.-Japan economic relationship could be addressed within the TPP. U.S. policymakers and other stakeholders have identified three issues that, if resolved, would be considered \"confidence-building measures\" that could boost U.S. support of Japan's inclusion in the TPP. The issues relate to Japanese restrictions on imports of U.S. beef; market access in Japan for cars made by Detroit-based U.S. manufacturers; and preferential treatment for insurance and express delivery subsidiaries of state-owned Japan Post.\n\n\t\tMarket Access for U.S. Beef\n\nIn December 2003 Japan imposed a ban on imported U.S. beef (as did some other countries) in response to the discovery of the first U.S. case of bovine spongiform encephalopathy (BSE or \"mad cow disease\") in Washington State. In the months before the diagnosis in the United States, nearly a dozen Japanese cows infected with BSE had been discovered, creating a scandal over the Agricultural Ministry's handling of the issue (several more Japanese BSE cases have since emerged). Japan had retained the ban despite ongoing negotiations and public pressure from Bush Administration officials, a reported framework agreement (issued jointly by both governments) in October 2004 to end it, and periodic assurances afterward by Japanese officials to their U.S. counterparts that it would be lifted soon.\nIn December 2005, Japan lifted the ban after many months of bilateral negotiations, but reimposed it in January 2006 after Japanese government inspectors found bone material among the initial beef shipments. The presence of the bone material violated the procedures U.S. and Japanese officials had agreed on. The then-U.S. Secretary of Agriculture Johanns expressed regret that the prohibited material had entered the shipments.\nIn July 2006, Japan announced it would resume imports of U.S. beef from cattle 20 months old or younger. The first shipments arrived in August 2006. Members of Congress had pressed Japan to lift restrictions on imports of U.S. beef from even older cattle. U.S. officials met with Japanese agricultural officials September 14-15, 2010, for technical discussions but produced no clear indication of resolution of the issue. On August 4, 2011, a bipartisan group of Senators sent a letter to Secretary of Agriculture Vilsack and to USTR Ron Kirk, urging them to press Japan (and China) to end restrictions on imports of U.S. beef. In December 2011 Japan announced that it was reassessing its BSE-related restrictions with the objective to raise the maximum age of cattle from which U.S. beef can be exported to Japan.\nOn February 1, 2013, the Japanese government loosened its restrictions on beef imports from the United States to allow beef from cattle 30 months or younger for the first time since December 2003. According to a joint press release from the Office of the United States Trade Representative and the Department of Agriculture, the Japanese government's Food Safety Commission would continue to monitor shipments of U.S. beef and would consider the possibility of allowing U.S. beef from cattle of any age to be imported into Japan.\n\n\t\tMarket Access for U.S.-Made Autos\n\nAuto and auto-parts-related trade and investment have been a very sensitive set of issues in the U.S.-Japan economic relationship. The issue has its roots in the late 1970s and early 1980s, when U.S. imports of Japanese-made vehicles surged as a result of the increase in U.S. consumer demand for smaller vehicles, largely in response to the rapid increase in gasoline prices, while demand for U.S.\u2013manufactured cars plummeted. Facing pressure from the U.S. auto industry and pressure from Congress in the form of limits on imports of Japanese made cars, the Reagan Administration persuaded Japan to agree in 1981 to voluntary export restraints. Japanese manufacturers responded to the restraints by establishing manufacturing facilities in the United States and exporting high-valued, passenger cars. U.S. manufacturers asserted that Japan employed various measures to restrict sales of foreign-made cars in Japan and the use of U.S.-made parts in Japanese cars manufactured in the United States. These issues were the subject of bilateral negotiations and agreements through the 1990s. The agreements were mostly in the form of Japanese government pledges to ensure that government regulations did not impede the sale of U.S.-made cars in Japan and voluntary efforts on the part of Japanese manufacturers to increase the use of U.S.-made auto parts in cars made in the United States. The U.S. government pledged to implement programs to promote the export of U.S.-made cars in Japan. \nThe intensity of the issue had subsided somewhat but has regained attention in the context of Japan's participation in the TPP negotiations. (See TPP discussion below.) The three Detroit-based car manufacturers\u2014Chrysler, Ford, and General Motors\u2014charge that Japanese government regulations continue to prevent them from obtaining their fair share of Japanese domestic vehicle sales. They cite the traditionally small share of total cars sales in Japan that consist of imported cars\u20146.7%.\n\n\t\tInsurance, Express Delivery, and Japan Post\n\nJapan is the world's second-largest insurance market, next to the United States. U.S.-based insurance providers have found it difficult to enter the market, especially in life and annuity insurance. They have been concerned about favorable regulatory treatment that the government gives to the insurance subsidiary Japan Post Insurance of Japan Post, the national postal system, which holds a large share of the Japanese domestic insurance market. Japan Post subsidizes the insurance operations from revenues from its other operations. Also, Japan Post Insurance is not subject to the same regulations as other, privately owned insurance providers, both domestic and foreign-owned. Similarly, U.S. express delivery providers have charged that Japan Post's express delivery company obtains subsides from the government-owned parent agency that gives it an unfair competitive advantage.\nOn October 1, 2007, the Japanese government of then-Prime Minister Junichiro Koizumi introduced reforms to privatize Japan Post and a major objective of his administration. The Bush Administration and many U.S. companies, particularly insurance companies, supported these reforms. However, successor governments led by the Democratic Party of Japan (DPJ) have taken steps to roll back the reforms. On March 12, 2012, the government introduced, and on April 27, 2012, Japan's legislature passed, a bill into law to loosen regulatory requirements. According to industry reports and other commentaries, the bill reverses the reforms that the Koizumi government introduced. \nAmong other things, the United States wants the Japanese government to refrain from allowing Japan Post to expand its coverage of services until a \"level playing field\" for competition between its services and those offered by privately owned providers. In addition, the U.S. government wants enhanced transparency in the development and implementation of regulations pertaining to Japan Post-provided services. The U.S. government and U.S.-based providers have had similar concerns about insurance services sold by cooperatives ( kyosai ) that are not subject to the same regulatory authorities as private insurers and have argued give them an unfair advantage over U.S. and other privately owned and operated companies. \n\n\t\tJapanese Economic Policies and the Yen\n\nA possible issue that has emerged pertains to recent Japanese economic policies and their potential impact on U.S.-Japan trade. Prime Minister Abe has made it a priority of his administration to grow the economy and eliminate deflation, which has plagued Japan for many years. On assuming power, Abe's government announced a $122 billion stimulus package aimed at spending on infrastructure, particularly in areas affected by the March 2011 disasters. While the package is expected to boost growth somewhat, it will also add to Japan's already large public debt. In addition, the ostensibly independent Bank of Japan (Japan's central bank) announced a continued loose monetary policy with interest rates of 0% quantitative easing measures, and a target inflation rate of 2%. \nA likely by-product of these measures has been a depreciating yen. For the past five years, the yen had exhibited unprecedented strength in terms of the dollar. In January 2007 the yen's average value was \u00a5120.46=$1 during the month, but after rapid appreciation, it reached as high as \u00a576.65=$1 in October 2011. The yen has now been depreciating, having gone down to \u00a596.3 by August 9, 2013. The weaker yen makes Japanese exports cheaper and therefore more price competitive and imports more expensive. Some observers, including Japanese policymakers have argued that the weaker yen is a byproduct of the monetary easing and not the main objective of Japanese economic policies. Others have argued that weaker yen impedes U.S. exports to Japan and should be a subject of the TPP negotiations. \n\n\tOverall U.S. Objectives\n\nJapan's entry into the TPP touches on a range of U.S. trade and foreign policy objectives. Acting USTR Demetrios Marantis greeted positively Prime Minister Abe's March 15, 2013, statement but stipulated:\nSince early last year, the United States has been engaged with Japan in bilateral TPP consultations on issues of concern with respect to the automotive and insurance sectors and other non-tariff measures, and also conducting work regarding meeting TPP's high standards. While we continue to make progress in these consultations, important work remains to be done. We look forward to continuing these consultations with Japan... \nThe United States is also working with Japan on \"gap issues,\" to make sure that Japan would be prepared to take steps to meet goals of the TPP in areas that Japan has not addressed in its previous FTAs. \n\n\t\tMarket Access\n\nJapan's entry into TPP negotiations will likely expand U.S. trade and investment opportunities in Japan. The target for the United States would be to get Japan to liberalize non-tariff measures, such as certain government regulations, which have been a more significant irritant than tariffs in U.S.-Japan trade relations. The TPP, as envisioned and being negotiated by the 12 countries would cover at least some of these non-tariff measures that Japan maintains. The TPP negotiations provide the United States and Japan with a framework within which to address these long-standing market access issues.\n\n\t\tRules-based Trade Framework and Impartial Dispute Settlement\n\nOne drawback of bilateral frameworks that the United States and Japan have used in the past is that they have had no formal dispute settlement mechanism. For example, a number of trade disputes in the 1980s and 1990s\u2014including on market access for U.S.-made autos and autoparts in Japan, Japanese trade practices in semiconductors and access to Japanese markets for construction services\u2014became highly politicized with threats of U.S. unilateral action, potentially undermining the overall relationship. Disputes usually were resolved through brinkmanship but often did not produce meaningful changes in Japan's trade practices or a significant increase of U.S. exports of the products in question. The TPP would provide a set of mutually agreed-upon rules that go beyond the WTO but would likely use an impartial, multi-party dispute settlement mechanism like that used in the WTO that would reduce the role of one-on-one confrontations in resolving issues.\n\n\t\tEnhanced TPP\n\nJapan increases the economic importance of the TPP from the U.S. perspective. It increases the amount of U.S merchandise trade that the TPP covers from 34% (the original 11 countries) to 39% based on 2011 data, and increases trade in services and foreign investment activity within the TPP. (See Figure 1 .) Japan increases the share of the world economy accounted for by TPP countries (including Canada and Mexico), from around about 30% to about 38%.\nJapan's participation might strengthen the U.S. position on many issues within the TPP. The United States and Japan share some common objectives, including strong intellectual property rights protection; protection of foreign investment; clear rules of origin to facilitate trade; and market access for services.\n\n\t\tForeign Policy Interests\n\nIn addition to trade and investment interests, Japan's participation in the TPP could affect U.S. political and foreign policy interests. The U.S. entry into the TPP negotiations is part of the Obama Administration's foreign policy and military \"rebalancing\" to the Asia-Pacific\u2014often referred to as the \"pivot\" to the Pacific\u2014announced in 2011. The pivot refers to a series of diplomatic, military, and economic measures that the United States has taken or plans to initiate to influence the evolving rules and norms of the Asia-Pacific region. Many policymakers and analysts believe that China's pursuit of its own bilateral and multilateral economic arrangements has produced a competition of sorts over the shape of Asia's future economic architecture, in which the United States and several other countries in the Pacific are pushing for a deeper set of regional economic rules and expectations than Chinese leaders prefer. Japan's inclusion as the second-largest economy\u2014and richest economy on a per capita basis\u2014in East Asia could transform this struggle between alternative visions of regional trade rules. Additionally, U.S. and Japanese participation in the same free trade agreement could arguably be viewed as a means to reaffirm their alliance. The long-running bilateral relationship at times over the years has been overshadowed by U.S. and Japanese interests and concerns elsewhere in Asia, for example, China and the Korean Peninsula, and in other parts of the world.\n\n\tJapan's Objectives\n\nUnderlying the arguments for Japan to join the TPP talks is a growing feeling among many Japanese that, after two decades of relatively sluggish growth, Japan's economic and political influence is waning in comparison with China and with middle powers such as South Korea. The rapid aging and gradual shrinking of Japan's population has added to a sense among many in Japan that the country needs to develop new sources of growth to maintain, if not increase, the country's living standards. Japanese proponents of TPP have called for joining the talks for a number of overlapping reasons, some defensive in nature, others more proactive:\nA desire to promote Japanese growth and prevent the hollowing out of Japan\u2014 that is, the relocation of Japanese companies to other countries\u2014by expanding Japanese exports, especially to the fast-growing Asia-Pacific region. The decade-long stalemate in the WTO's \"Doha Round\" of trade talks, plus the explosion in bilateral and multilateral FTAs over the past decade, has led Japan to cautiously pursue its own FTAs. As noted earlier, Japan is an important link in Asia's global supply chains, and the TPP could facilitate operations within the supply chain. Conversely, greater trans-Pacific economic integration could potentially erode Japan's place in these manufacturing and export networks. In his March 15, 2013, press conference announcing his decision to seek entry into the TPP negotiations, Prime Minister Abe spoke of the multiple commercial benefits Japan would derive from joining, and how doing so would help \"leave to our children and our children's children a strong Japan....\" A feeling that Japan is being left behind in negotiating FTAs. Although Japan has signed 13 FTAs\u2014what it calls Economic Partnership Agreements (EPAs)\u2014it has none with a major economic power, with the possible exception of the 2011 Japan-India EPA, and many of them exclude agricultural trade. (See Table 3 .) In contrast, South Korea, the country many Japanese now compare themselves to, has signed FTAs with the United States and the European Union (EU), and in 2012 opened negotiations with China. If Japan is left behind in the FTA race, the feeling runs, its companies will be left at a competitive disadvantage. Japan has belatedly tried to make up for the gap in 2013 by launching FTA negotiations with the EU and with China and South Korea on a trilateral FTA. A desire to help shape the rules of economic activity in the Asia-Pacific and beyond. In his announcement of Japan's bid to participate, Prime Minister Abe said that the TPP would likely serve as \"a basis for rule-making\" in other multilateral trade negotiations. If Japan waited any longer to join the talks, in his view, it would be too late to help write the TPP's rules. \"Now is our last chance,\" Abe said, \"Losing this opportunity would simply leave Japan out from the rule-making in the world. Future historians will no doubt see that \"the TPP was the opening of the Asia-Pacific Century.\"\nA belief that entering the TPP will help promote economic reforms inside Japan. Over the years, many experts and government officials have argued that Japan needs structural reform to spur its economy. A number of Japanese commentators and officials believe that one way to overcome resistance to reform from vested interests is through negotiating a comprehensive, high-standard FTA such as the TPP, which will help reform-minded groups and individuals by giving them political cover. Also, negotiating the TPP could potentially enable Japan to gain benefits by trading structural reforms for concessions from negotiating partners. A hope that entering the TPP will help Japan's strategic situation in Asia. Joining the TPP would complement Japan's moves in recent years to augment the U.S.-Japan alliance by strengthening Tokyo's relationships with middle powers in and around the Asian region. Behind this push is a concern that China's rise is diminishing Japan's influence and jeopardizing its security and economic interests. Since leading his party to power in late 2012, Prime Minister Abe has made one of his top priorities restoring Japanese standing, through revitalizing its economy and strengthening relations with the United States.\n\n\tJapanese Politics and the TPP\n\nUntil Abe's March 2013 announcement, the frequent turnover among Japanese prime ministers\u2014Abe is the seventh premier in as many years\u2014failed to produce the leadership that might unify the pro-TPP camps across the two parties. These political weaknesses exacerbated the traditional institutional limitations of the prime minister's powers, making it easier for motivated interests to effectively veto government action and stymie the efforts of Abe's two predecessors from unambiguously trying to enter the talks. For the moment, Abe appears to have surmounted these obstacles, in part by using his high popularity ratings as leverage against opponents in his LDP and by centralizing decision-making on TPP issues in the prime minister's office. The latter move could blunt opposition to the TPP within the LDP. Abe came to power in December 2012 after leading the LDP to victory in national elections, ending the DPJ's roughly three-year reign.\nJapan's powerful agricultural institutions, most notably the nationwide agricultural cooperative organization (JA), have been the most vocal opponents of joining the TPP, as has been true of virtually all trade liberalization agreements that Japan has pursued for the past 40-50 years. JA has called for over 800 farm items to be exempt from tariff elimination. Japan's farm sector has taken advantage of the fact that Japan's rural areas are over-represented in the Diet. As a result, farm lobbies have significant sway in both the ruling LDP and opposition DPJ and have supported an array of policies that benefit the agricultural sector. For example, many farm products remain protected behind high tariff barriers such as rice (778%) and wheat (252%). (For others, see Table 4 .) Additionally, a range of other policies ensure that Japanese farming remains small scale, performed increasingly by aging and part-time farmers, and generally unproductive compared to farms in most other countries. The Japanese government provides around \u00a51 trillion (about $12 billion) annually in direct income to farming households. The Abe government and the LDP reportedly are considering a new subsidy package that could be offered to Japan's farm sector to compensate for losses that would be expected if a TPP agreement is reached.\nJA has allied with a variety of other powerful interest groups to mount an aggressive campaign against entering the TPP. The most significant of these other groups may be the Japan Medical Association, which argues that TPP will erode if not eliminate Japan's universal healthcare insurance system because it will be forced to pay higher prices for medicines and medical equipment. Many experts argue that until Abe's March 2013 announcement, Japan's traditional agriculture interests, medical lobby, and other TPP opponents successfully controlled the debate about TPP inside Japan. They have gained the support of scores of lawmakers, including over 200 LDP members (over half the LDP's parliamentary caucus) that prior to Abe's decision joined a group calling for Japan not to join the TPP. Nonetheless, in mid-March, after considerable internal debate the LDP formally announced it supported Abe's decision. Around the same time, an LDP panel on the TPP designated five product lines\u2014rice, sugarcane\/sugar products, wheat, dairy products, and beef\u2014as \"important items\" that must be protected. In 2012, prior to the elections that swept Abe into power, the Abe-led LDP had said it opposed entering the negotiations unless the final agreement allowed for some exemptions, a position that many interpreted as designed to appeal to anti-TPP voters. At the time, the LDP also objected to some investor-state dispute settlement requirements that might be agreed to in the TPP, and argued that government procurement and financial services must have their basis in Japan's \"special characteristics.\" It is unclear to what extent these views have or will become Japanese government positions. The reservations about TPP among many LDP members indicate that as Japan participates in the TPP, the Abe government may face difficulties gaining domestic support for making painful concessions, particularly if Abe's public approval ratings decline.\n\n\tThe Views of U.S. Stakeholders\n\nIn a December 7, 2011, Federal Register notice, the Office of the USTR solicited the views of private sector stakeholders on whether Japan should be included in the TPP. USTR received over 100 responses. Around 40% of the responses were from agricultural firms, another 25% came from manufacturing firms, 15% from services providers, and the remainder from various non-government organizations (NGOs) and business associations. Some of the responses came from Japanese companies or associations representing Japanese companies.\nIn a few cases, the respondents expressed outright opposition to Japan's participation. One of the most notable members of this group is the American Automotive Policy Council (AAPC). The AAPC represents the three Detroit-based auto manufacturers\u2014Chrysler, Ford, and General Motors. In its statement, the AAPC said:\nThe AAPC opposes Japan joining the Trans-Pacific Partnership negotiations at this time.... Japan's trade barriers in the auto sector cannot be addressed easily or quickly, and will needlessly slow down the negotiations. To date Japan has not indicated a willingness to change its decades-long practice of maintaining a closed automotive market. Given the systemic trade imbalance and lack of willingness to reform, a U.S. free trade agreement with Japan would only lock-in the already one-way trade relationship that Japan's closed auto market has created, and significantly delay, if not prevent proceeding with a high quality TPP trade agreement with other more compatible trade partners in the important and rapidly growing Pan-Pacific region.\nThe AFL-CIO also opposed Japan's participation in the TPP, having stated:\nGiven the numerous unknowns about the yet unfinished Trans-Pacific FTA, it is difficult to provide significant technical advice or even formulate well-grounded opinion with respect to the possible impacts on working families of Japan's accession to the Trans-Pacific FTA.\nAs such, the AFL-CIO has serious concerns regarding the premature expansion of the Trans-Pacific FTA negotiations to include Japan or any other nation before US negotiators first demonstrate an ability to successfully negotiate an agreement that will produce genuine benefits for American workers and increase domestic production.\n[Japan's] markets are notoriously closed to foreign goods, and this is not the result of high tariff barriers.... To gain significant and substantial market access to Japan, the United States Trade Representative (USTR) would have to adopt a new and revolutionary approach.... If USTR is not willing to 'think outside the box' and abandon its currently slavish approach to free trade, it is difficult to see how Japan's accession to the Trans-Pacific FTA can benefit American working families.\nIn some cases, respondents expressed strong support for Japan's inclusion in the TPP. For example, Caterpillar, Inc. argues that the TPP would be the vehicle for addressing Japan's remaining non-tariff barriers. The U.S. Chamber of Commerce and the U.S.-Japan Business Council, in separate submissions, also expressed support for Japan's participation in the TPP negotiations. However, each group asserted that Japan would have to address issues that have plagued relations with member companies, including regulatory barriers, favored treatment of insurance and express delivery subsidiaries of Japan Post, and government procurement, among others.\nSome Members of Congress have weighed in on the issue. For example, in a November 8, 2011, bipartisan letter to USTR Ron Kirk, the chairmen and ranking Members of the House Ways and Means Committee and the Senate Finance Committee stated that Japan's participation \"would represent an opportunity for much needed change in Japan's approach to international trade.\" They assert that, while Japan is a long-time U.S. ally and friend in Asia,\nparamount considerations in evaluating a request relating to a trade agreement must be whether Japan is willing and able to meet the high standard commitments inherent in U.S. free trade agreements and whether inclusion would truly open this historically closed market to the benefit of our companies, workers, and farmers.\nThese comments and others from stakeholders suggest that the debate within the United States and negotiations with Japan on the TPP will be difficult and complex. The legacies of a sometimes contentious bilateral economic relationship have carried over into the TPP negotiations.\n\n\tPossible Outcomes and Consequences\n\nJapan's participation in the TPP negotiations represents a major change in the shape and dynamic of the U.S.-Japan economic relationship. Over the years, trade policymakers, business representatives, and regional specialists in both countries had floated the concept of a U.S.-Japan FTA. Until the TPP talks began in earnest, the idea had not gained traction because the hurdles\u2014Japanese agricultural policy, problems in auto trade, government regulations and practices\u2014have been too high to overcome. These same hurdles still must be overcome if Japan and the United States are able to work successfully in the TPP.\nThe TPP presents opportunities and challenges for the United States and Japan. On the one hand, if successful, it could reinvigorate an economic relationship that has remained steady but stagnant, by forcing the two countries to address long-standing, difficult issues and allowing them to raise their relationship to a higher level. On the other hand, failure to do so could indicate that the underlying problems are too fundamental to overcome and could set back the relationship. It could signify the failure of the United States and\/or Japan to deal with domestic opposition to a more open trade relationship. \nThe implications for the overall U.S.-Japanese alliance are less certain. While the TPP would likely be viewed as strengthening the alliance and failure of the negotiations could be considered a setback, the alliance is also built on common national security concerns, such as North Korea's nuclear program and the economic and military advancement of China, which could well trump trade problems. \nFurthermore, Japan's entry into the TPP is largely viewed, on the one hand, as an important step in forming a wider Asia-Pacific regional trade arrangement. On the other hand, the absence of Japan could undermine the credibility of the TPP as a viable regional trade arrangement and a setback for Asia-Pacific economic integration.","output":"On July 23, 2013, Japan formally joined negotiations to establish a Trans-Pacific Partnership (TPP) becoming the 12 participant, including the United States. Japan's membership in the TPP with the United States would constitute a de facto U.S.-Japan FTA. On April 12, 2013, the United States announced its support for Japan's participation in the TPP. The announcement came after a series of discussions on conditions for U.S. support and outstanding bilateral issues. As a result of the discussions the two sides agreed on measures to address these issues as part of, and in parallel with, the main TPP negotiations. On April 20, the then-11 TPP countries formally invited Japan to participate in the negotiations. On April 24, then-Acting USTR Demetrios Marantis notified Congress that the United States intended to begin negotiations with Japan as part of the TPP thus beginning a 90-calendar-day consultation period with Congress.\nThe TPP would be a free trade agreement (FTA) among Japan, Australia, Brunei, Canada, Chile, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States, and Vietnam. The United States and its TPP partners envision the agreement as \"a comprehensive, next-generation regional agreement that liberalizes trade and investment and addresses new and traditional trade issues and 21st century challenges.\"\nCongress has a direct and oversight role in the issue of U.S. participation in the TPP. It must approve implementing legislation, if the TPP is to apply to the United States. Some Members of Congress have already weighed in on Japan's in the TPP and under what conditions. More may do so as the process proceeds.\nThe TPP is the leading U.S. trade policy initiative of the Obama Administration and a core component of Administration efforts to \"rebalance\" U.S. foreign policy priorities toward the Asia-Pacific region by playing a more active role in shaping the region's rules and norms. As the second-largest economy in Asia, the third-largest economy in the world, and a key link in global supply\/production chains, Japan's participation would be pivotal to enhancing the credibility and viability of the TPP as a regional free trade arrangement. A large segment of the U.S. business community has expressed support for Japanese participation in the TPP, if Japan can resolve long-standing issues on access to its markets for U.S. goods and services. However, the Detroit-based U.S. auto industry and the UAW union have expressed strong opposition.\nThe TPP presents both risks and opportunities for the United States and Japan. On the one hand, if successful, it could reinvigorate a bilateral economic relationship that has remained steady but stagnant, by forcing the two countries to address long-standing, difficult issues, and allowing them to raise their relationship to a higher level. On the other hand, failure to do so could indicate that the underlying problems are too fundamental to overcome and could set back the relationship. It could signify the failure of the United States and\/or Japan to deal with domestic opposition to a more open trade relationship.\nIn bringing Japan into the TPP talks, Prime Minister Abe has had to confront influential domestic interests that argued against the move. Among the most vocal have been Japanese farmers, especially rice farmers, and their representatives. Abe has acknowledged these domestic sensitivities, but also insisted that Japan needed to take advantage of \"this last window of opportunity\" to enter the negotiations, if it is to grow economically. Other Japanese business interests, including manufacturers, strongly support the TPP."}
{"id":"gao_GAO-04-437","pid":"gao_GAO-04-437_0","input":"\tBackground\n\n\t\tDescription of Biobased Products\n\nBiobased products are industrial and consumer goods composed wholly,  or in significant part, of biological products, renewable domestic  agricultural materials (including plant, animal, and marine materials), or  forestry materials. These biological products and agricultural and forestry  materials are generally referred to as biomass. Corn, soybeans, vegetable  (plant) oils, and wood are the primary sources used to create biobased  products. In some cases, these biobased sources are combined with other  materials such as petrochemicals or minerals to manufacture the final  product. For example, soybean oil is blended with other components to  produce paints, toiletries, solvents, inks, and pharmaceuticals. However,  some biobased products, such as corn starch adhesives, are derived  entirely from the plant feedstock. Table 1 provides further information on  biobased products made from plant-based resources. Appendix II lists  sources for additional information on these and other biobased products.\nThe many derivatives of corn illustrate the diversity of products that can  be obtained from a single plant-based resource. As well as an important  source of food and feed, corn serves as a source for ethanol and sorbitol,  industrial starches and sweetners, citric and lactic acid, and many other  products. Figure 1 shows the many uses of corn, including its industrial  uses.\n\n\t\tImportance of Biobased Products\n\nBiomass resources are naturally abundant and renewable, unlike fossil  resources. According to the DOE, in the continental United States, about  500 to 600 million tons of plant matter can be grown and harvested  annually in addition to our food and feed needs. These abundant resources  can be used in the growing biobased products industry to help meet the  nation\u2019s demand for energy and products while reducing its dependence  on imported oil. In addition, supplementing petroleum resources with  biomass can provide other important benefits such as growth in rural  economies and lower emissions of greenhouse gases and pollutants.\nAccording to DOE, the impacts of the growing biobased products industry  on rural economies have yet to be quantified, but these impacts could be  very positive. Expanding this industry will require an increase in  production and processing of biomass that could provide a boost to rural  areas. For example, expansion could create new cash crops for farmers  and foresters, many of whom currently face economic hardship. In  essence, this growth could move the agricultural and forestry sectors  beyond their traditional roles of providing food, feed, and fiber to  providing feedstock for the production of fuels, power, and industrial  products\u2014making these sectors an integral part of the transportation and  industrial supply chain. In addition, development of a larger biobased  products industry would require new processing, distribution, and service  industries. In general, these industries would likely need to be located in  rural communities close to the feedstock and could potentially result in  positive impacts on rural communities through increased investment,  income, taxes, and employment opportunities.\nRegarding environmental benefits, biomass is carbon-fixing, and  represents a way to produce fuels, power, and products without  contributing to global warming, according to DOE. Although some fossil  resource inputs may be needed for the production of biomass and  biobased products\u2014such as fuel to run farm equipment, petrochemical  fertilizers and pesticides to produce the biomass, and the energy needed to  manufacture the biobased products made from this biomass\u2014biomass  removes carbon dioxide, a significant greenhouse gas, from the  atmosphere through photosynthesis. The carbon component is then  fixed, or bound up, in the biomass and stays in the biobased product made  from this biomass for a relatively long period of time before it is released  through biological decay. According to DOE, when petroleum is used as  the feedstock to manufacture many products, such as plastics, up to 25  percent of the carbon in the petroleum is lost to the atmosphere during  production. However, producing these products directly from biomass  reduces the carbon released during production and increases carbon- fixing plant matter. In addition, as a renewable resource, biomass  represents a way to recycle carbon in the environment; in contrast, the use  of fossil resources results in a net release of carbon to the environment.  Finally, many biobased products are readily biodegradable, meaning they  can be safely placed into a landfill, composted, or recycled and do not emit  hazardous volatile organic compounds or toxic air pollutants.\nAccording to DOE, the potential for biobased products to move into  entirely new and nonconventional markets is substantial. New biobased  products with improved economic and\/or environmental performance  could make significant inroads in markets historically dominated by other  materials. For example, according to the Biobased Manufacturers  Association, about 300 companies are now producing nearly 800 biobased  products to replace other materials. These companies include a number of  major corporations or their subsidiaries. In addition, increasing  environmental consciousness has created \u201cgreen consumerism\u201d\u2014a  segment of consumers who are willing to pay more for products that are  less harmful to the environment. Currently, many of those \u201cgreen\u201d  products are biobased, such as corn-based plastic ware, soy-based engine  lubricants, and citrus-based household cleaners.\nPerhaps the greatest factor driving the growth of biobased products will  be their acceptance by the public, business enterprises, and government as  a solution to some of the nation\u2019s most pressing resource problems.  However, according to USDA, it often takes 15 to 20 years for a new  material to be accepted and adopted by industry; and consumers,  businesses, and government procurement officials are often reluctant to  switch from familiar products to new ones. Thus, to make significant  inroads, biobased products will need to be environmentally sound and  competitive with traditional products in both performance and cost. The  increased use of these products will also require favorable government  policies, such as continued support for biobased research and  development and affirmative procurement programs that emphasize  biobased purchases for government needs. In addition, their increased use  will depend on the nation\u2019s continued desire to reduce its dependence on  imported oil and further technology improvements that will lead to new  applications and more efficient production of biobased products.\n\n\t\tFederal Efforts to Promote the Use of Biobased Products\n\nIn the last 10 years, the federal government has taken steps to promote the  use of biobased products. For example, the President issued an executive  order in 1998, replacing a similar executive order issued in 1993, to  encourage federal agencies to buy products that are environmentally  preferable and\/or biobased. A subsequent executive order was issued in  1999 with the aim of tripling the nation\u2019s use of biobased fuels and  products by 2010. Regarding legislation, the Biomass Research and  Development Act of 2000 directs DOE and USDA to closely coordinate  their research and development efforts on new technologies for the use of  biomass in the production of biobased industrial products. The 2002 farm  bill reauthorized the biomass act, continued funding for biomass research  and development programs, and set forth federal agency purchasing  requirements for biobased products. The legislative history of the farm bill  states that Congress enacted the biobased provisions to energize new  markets for these products and to stimulate their production.\nWith respect to promoting federal purchases of biobased products, the  1998 executive order required USDA to issue a Biobased Products List by  March 1999. Once the list was published, federal agencies were  encouraged to modify their procurement programs to give consideration  to biobased products. USDA published a notice in the Federal Register on  August 13, 1999, to solicit public comments on a process for considering  items for inclusion on this list and on criteria for identifying these items.  As we reported in June 2001, USDA expected to complete this list by  fiscal year 2002\u20143 years later than the executive order required. However,  USDA did not complete the list because the 2002 farm bill set out new  biobased purchasing requirements for USDA to implement. In the  meantime, although the Federal Acquisition Regulation was amended to  implement the executive order, federal agencies generally were waiting  for USDA to publish a list before making any final decisions or  modifications to their procurement programs. Whereas the executive  order encouraged, but did not require, federal agencies to purchase  biobased products, the farm bill generally requires that agencies give  preference to these products.\n\n\tUSDA Delay in Issuing Biobased Purchasing Guidelines Has Slowed Other Agencies\u2019 Efforts\n\nWhile USDA was faced with an ambitious task, its actions and  consequently those of other agencies to implement the farm bill   requirements for purchasing biobased products have been limited. USDA  issued proposed guidelines in the Federal Register on December 19,   2003, more than a year later than the farm bill requirement for final  guidelines. These guidelines take only limited steps toward meeting the  requirements of the farm bill. While the guidelines recommend some  procurement practices and practices for vendor certification, they do not  identify items designated for preferred procurement or provide  information on their availability, relative price, performance, and  environmental and public health benefits. Although USDA hopes to have  some items designated before the end of calendar year 2004, the process  for designating other items discussed in the preamble to the proposed  guidelines will take years, possibly until 2010. In addition, as new biobased  products are developed and enter the market, these items will also need to  be designated. Regarding other biobased-related requirements of the farm  bill, USDA has not yet developed a labeling or recognition program or  completed its work on preferred procurement practices known as the  model procurement program to guide both its own biobased purchases  and those of other agencies. In the meantime, as the top four procuring  agencies await USDA\u2019s fulfillment of these requirements\u2014particularly the  designation of items for preferred procurement\u2014they have taken only  limited steps to procure biobased products. For example, some agencies  are purchasing biobased cleaners, lubricants, deicers, and\/or dining ware  because these products are readily biodegradable and composted.\n\n\t\tUSDA\u2019s Initial Efforts Have Only Partially Met the Farm Bill Requirements\n\nUSDA\u2019s proposed guidelines only partially meet the requirements of the  farm bill. While the guidelines recommend some procurement practices  and practices for vendor certification, they do not identify items  designated for preferred procurement or provide information on their  availability, relative price, performance, and environmental and public  health benefits. However, in the preamble to the guidelines, USDA  discusses possible items for future designation. In the preamble, USDA has  grouped these items by category, with each category consisting of one or  more items and each item consisting of one or more branded biobased  products. For example, \u201cLubricants and Functional Fluids\u201d is one  suggested category, hydraulic fluids is an item within that category subject  to designation, and \u201cABC Hydraulic Fluid\u201d made by the ABC company is a  branded biobased product related to that item. At present, the preamble  discusses 11 categories of items and suggests a minimum biobased content  for the items in these categories. Appendix III provides a complete list of  these categories and the items listed under each, as well as additional  information on provisions of the proposed guidelines. However, the  proposed guidelines do not designate any items for preferred procurement  given that USDA has not yet considered the availability of these items or  the economic or technological feasibility, including life-cycle costs, of  these items as required by the farm bill.\nUnder the proposed rule, once an item is designated, manufacturers will  be able to certify that their biobased products meet the characteristics of a  designated item. USDA has established a biobased information Web site  for this purpose. USDA anticipates that federal procuring agencies will use  this Web site to obtain current information on designated items, contact  information on manufacturers and vendors, and access to information on  product characteristics relevant to procurement decisions. In addition,  USDA anticipates that as the biobased product industry develops, new  items and associated products will enter the market. Thus, new items will  be designated, as necessary.\nIn addition, USDA has only minimally provided information on  recommended procurement practices pending completion of its model  procurement program. For example, the proposed guidelines discuss the  tests that should be used to establish the content, performance  characteristics, and\/or life-cycle costs of a product, including the  standards or specifications applicable. However, USDA officials said the  model procurement program, when complete, will contain considerably  more guidance on recommended procurement practices. USDA expects to  issue the final version of these proposed guidelines by April 2004, but it  does not expect to have adequate information for designating more than a  few items before the end of calendar year 2004. USDA estimates that it  will complete the overall blueprint for a comprehensive, model  procurement program by September 2004, and will have many of the  specific components of the program under development or tested and  implemented by that time.\nThe process for designating items will be time consuming. For example, to  designate the items discussed in the preamble to USDA\u2019s proposed  guidelines, USDA will likely initiate a number of rulemakings over a period  of years. According to the timeline provided by New Uses staff, this  process will likely not be completed until early 2010. USDA officials noted  that these rulemakings may not correspond to the 11 product categories  discussed in the preamble; the agency\u2019s ability to move forward with  designating individual items will depend on the availability of information  needed for this purpose. As a result, a given rulemaking may address items  that span two or more categories. For each rulemaking, a proposed rule  would be developed and published first, followed by a 30- or 60-day  comment period, the time needed to consider these comments, and then  publication of the final rule.\nUSDA must also complete its work on its recommended procurement  practices (the model procurement program), the voluntary recognition  program, and the voluntary labeling program. According to USDA officials,  the model procurement program serves two purposes. First, it will  constitute USDA\u2019s biobased procurement program. All federal agencies,  including USDA, are required to develop such a program. Second, the  model program will serve as a guide to other agencies in developing their  own preferred procurement programs. USDA officials explained that this  will fulfill the farm bill requirement placed on USDA to recommend  procurement practices. USDA plans to incorporate the voluntary  recognition program into its model procurement program. In addition,  once the model procurement program is complete, USDA plans to seek a  change to the Federal Acquisition Regulation to reflect these procurement  practices. Changes to this regulation also require a rulemaking. Finally,  USDA plans to address requirements for the labeling program in a future  rulemaking.\nConsidering the amount of work that remains to be done to fulfill the farm  bill requirements, it seems likely that USDA\u2019s fulfillment of these  requirements will take years, particularly for the designation of items for  preferred procurement that were discussed in the preamble of USDA\u2019s  proposed rule. Thus, although the farm bill required USDA to promulgate  guidelines, including the designation of items for procurement, within 180  days of the legislation\u2019s enactment\u2014by November 2002\u2014it is not likely  that the designation of all of the items discussed in the preamble to the  proposed guidelines will be completed until the spring of 2010, according  to USDA estimates. However, the agency hopes to have at least some of  these items designated by the end of calendar year 2004. In addition, as the  farm bill recognizes by allowing USDA to revise its guidelines from time to  time, the process of designating items is a continual one as new biobased  items will continue to enter the market. Appendix IV provides a timeline  showing the chronology of steps USDA plans to fulfill the farm bill  requirements for the federal procurement of biobased products.\n\n\t\tFederal Agencies Have Procured Small Quantities of Biobased Products\n\nWithout final USDA guidelines designating items for preferred  procurement, the top four procuring agencies generally are reluctant to  undertake an agencywide biobased procurement program. Officials from  these agencies indicated that until they clearly understand whether a  product meets USDA\u2019s definition of a biobased product, it would not be  advantageous to establish a purchasing program agencywide. However,  even though these agencies have not implemented their own biobased  procurement programs, we found that some of them have procured limited  quantities of biobased products. For example:    The Defense Logistics Agency (DLA)\u2014the supplier for DOD and several  civilian agencies\u2014has procured and is now testing such biobased  products as food service cutlery for service personnel overseas and  hydraulic fluid for military helicopters. According to DLA officials, these  products are appealing\u2014assuming they meet necessary performance  specifications\u2014because they are readily biodegradable, which may make  them easier to dispose of. These officials indicated that they are working  closely with USDA to ensure that the products tested will ultimately be  products that will meet USDA\u2019s criteria for biobased products. However,  these officials stated that their agency could test more products if USDA  would publish guidance designating biobased products for purchase.  Figure 2 shows wheat starch-based plastic cutlery that DLA is testing for  field use.\nThe Department of the Interior (Interior) purchases biobased products  directly from manufacturers and has requested that their contractors use  biobased products in some services. In an effort to promote the use of  biobased products in national parks, the National Park Service Facilities  Management Division has covered the incremental costs for park  purchases of biobased products over the use of traditional products; in  2003, they provided $42,000 towards this promotion. For example, a  wildlife reserve located in Alaska purchased a biobased deicer, made from  corn and other agricultural products, to clear roads and sidewalks. Unlike  deicers that rely on salt or petrochemicals, biobased deicers can be  formulated to have less impact on surface waters and vegetation. Several  national parks also are buying biobased fuels and additives for their  snowmobiles because they produce less toxic emissions. In addition,  biobased hydraulic oils are being used in construction equipment at many  park sites because spills of these lubricants pose less environmental risk  and are less costly to clean up. Furthermore, the cafeteria-service  contractor in Interior\u2019s headquarters building in Washington, D.C. uses  biobased plates and bowls, made primarily of potato starch and limestone.  A pilot project undertaken with USDA\u2019s Beltsville Agricultural Research  Center demonstrated the ability to compost the plates and bowls along  with cafeteria food waste. Figure 3 shows the application of a biobased  deicer by an Interior employee. Figure 4 shows other biobased products  used by Interior.\nIn addition to its research activities to develop new uses of agricultural  commodities for producing biobased products, USDA\u2019s Agricultural  Research Service is taking steps to use biobased products as well. For  example, the agency\u2019s Beltsville Agricultural Research Center in Maryland  (the Center) spent about $8,500 in fiscal year 2003 for biobased products\u2014 primarily cleaners, hydraulic fluids, and lubricants used in its farm  machinery. In addition, the Center uses biobased fuels, such as soy-based  biodiesel, in this type of machinery. In fiscal year 2003, the Center  purchased about $523,000 in biobased fuels. Center officials noted that the  clean-up of accidental spills of biobased hydraulic fluids and lubricants is  far less expensive than the petrochemical alternatives because the  biobased products are readily biodegradable. These officials also  expressed their belief that maintenance costs for equipment using these  products has dropped, compared with the costs associated with using  petroleum-based alternatives, although they noted that they have not  thoroughly studied and documented this anecdotal observation. According  to these officials, the Center hopes to increase biobased purchases by 70  percent in fiscal year 2004. In addition to the Center\u2019s direct purchases of  biobased products, some of its service contractors use biobased products  when performing work at Beltsville. Center officials were unable to tell us  how much their contractors spend on biobased products. Figure 5 shows  some of the biobased products used at the Center. Figure 6 shows Center  farm equipment in which biobased lubricants and fuels are used.\n\n\tUSDA Could Accelerate Implementation of the Biobased Procurement Program by Developing a Comprehensive Management Plan and Assigning Adequate Resources\n\nUSDA could more effectively marshal its resources to fulfill the farm bill  biobased procurement requirements in a timely manner with a written,  comprehensive management plan. Such a plan would define tasks and set  milestones, identify available resources and expected outcomes, and  describe how the department will coordinate its efforts to implement the  plan. USDA did not have such a plan to guide its preparation of the  proposed guidelines issued in December, and we believe that this lack of a  plan may have contributed to delays in completing this segment of the  work. Furthermore, except for the development of the model procurement  program and voluntary recognition program, the agency does not have a  comprehensive plan to guide its work to fulfill the farm bill\u2019s other  biobased requirements. Finally, USDA\u2019s implementation of the biobased  provisions could be accelerated if the department assigned more staff and  financial resources to this work and gave it a higher priority.\n\n\t\tNeed for Better Planning and Coordination\n\nUSDA assigned primary responsibility for implementing the farm bill   biobased procurement provisions to its Office of Energy Policy and New  Uses (New Uses office), located within the Office of the Chief Economist.  The conference report for the farm bill encouraged USDA to carry out  these provisions under the aegis of the New Uses office. Among other  things, this office is responsible for developing the procurement  guidelines, including designating items for procurement, recommending  practices for procurement and for certification by vendors of the  percentage of biobased content in their products, and providing  information on the availability, relative price, performance, and  environmental and public health benefits of the items designated. The New  Uses office also is primarily responsible for establishing the voluntary  labeling program. In addition, USDA charged its Office of Procurement  and Property Management (Procurement office) with developing the  model procurement program and the voluntary recognition program.\nWhen we asked New Uses officials in May 2003\u2014a year after farm bill  enactment and 6 months after the legislation deadline for USDA\u2019s  completion of the biobased procurement guidelines\u2014for their written  management plan to implement the farm bill requirements, they indicated  that they did not have a plan. At our request for the agency\u2019s timeline for  complying with these requirements, these officials indicated that they did  not have a timeline either, but offered to create one, which they provided  to us several weeks later in June 2003.\nWhile the timeline is a start, it falls short of being a comprehensive plan in  a number of respects. First, the timeline provides for delays in meeting  milestones, stating \u201cthis is an optimistic schedule; various delays could  push this date  back as much as 6 months or  more, which would similarly push back all following milestones.\u201d Indeed,  there have been delays. For example, the timeline states that the proposed  guidelines will be published in the Federal Register on October 1, 2003,  but they were not published until December 19, 2003. According to USDA  officials, additional delays, not anticipated in the timeline, could postpone  some of the expected completion dates by as much as a year. These  officials noted that these delays may result from the difficulty of working  through the various concerns and conflicting views of the many  stakeholders to this effort, a process that one New Uses official said was  akin to \u201cswimming in molasses.\u201d A comprehensive plan would discuss  possible sources of delay and how they might be mitigated.\nSecond, New Uses staff developed the timeline without consulting with  the USDA office responsible for developing the model procurement  program and the voluntary recognition program\u2014the Procurement office.  When we met with officials from the Procurement office in September  2003, they said that they had not seen the timeline we received from the  New Uses office in June 2003. When we showed these officials the  timeline, they indicated disagreement with some of the dates related to  their portion of the work. A comprehensive plan would discuss how the  work should be coordinated among interested offices to avoid these types  of misunderstandings.\nThird, the timeline does not describe how coordination will be done with  other interested agencies. The farm bill requires that USDA consult with  EPA, GSA, and NIST before developing the procurement guidelines. The  legislation also requires USDA to consult with EPA in establishing the  voluntary labeling program. As a practical matter, it would also be  important for USDA to coordinate with the top four procuring agencies\u2014 DOD, DOE, NASA, and GSA\u2014-as well as other agencies such as the Office  of the Federal Environmental Executive. During our work, we contacted  relevant officials representing these agencies; most expressed concern  about what they considered to be a lack of timely and effective  coordination on USDA\u2019s part, although officials from some of the agencies  seemed generally satisfied. Some of those who expressed concerns about  coordination noted that USDA had been more attentive, relatively  speaking, to interagency consultation in its earlier efforts to develop a list  of biobased products for procurement under the 1998 executive order. In  addition, a senior official of the Office of the Federal Environmental  Executive said that USDA has not effectively coordinated with EPA and  DOE officials responsible for programs that promote government  purchases of environmentally friendly, recycled content, or energy  efficient products. Specifically, this official noted that USDA does not have  a clear understanding of how its biobased guidelines will impact  regulations related to these other programs. In addition, this official  opined that USDA is missing the opportunity to incorporate the lessons  learned from the development of these other programs. In light of these  concerns, during our work we asked the New Uses staff for minutes or  other written documentation of coordination meetings. These staff  indicated that they had not documented internal or external coordination  meetings in writing. A comprehensive plan would identify agencies with  which coordination should occur, describe the frequency and manner of  these contacts, and indicate how the results of these meetings would be  documented.\nFourth, the timeline does not describe how progress reporting will be  done, what form these reports will take, or to whom these reports will be  made. New Uses officials told us that although they do not prepare regular  progress reports, they do discuss the status of their work on the farm bill  biobased provisions at weekly staff meetings with the Chief Economist  and that this official periodically briefs the Secretary of Agriculture. In  addition, these officials indicated that the status of their work is reported  weekly to USDA\u2019s farm bill implementation team and that this team also  reports to agency\u2019s subcabinet officers. However, without a  comprehensive management plan, including clearly delineated tasks and  associated milestones, we believe it would be difficult for managers to put  into context the relative progress being made on this work, to identify  needed adjustments, and to hold accountable the officials responsible for  its completion. A comprehensive plan would describe who the officials  responsible for implementing the farm bill requirements would report to  and the frequency and manner of periodic progress reports.\nIn contrast to the New Uses office\u2019s lack of a management plan, the  Procurement office prepared a detailed written management plan for  conducting its portion of the work. This document contains the elements  of a comprehensive plan, including identifying the work to be done, the  associated tasks and milestones, available resources, anticipated costs,  and the type and frequency of progress reporting. The plan also discusses  the need for coordination with other USDA offices and federal agencies  and how this coordination will be accomplished. Unfortunately, however,  this plan applies only to limited aspects of the work USDA must complete  to fulfill the farm bill requirements. The New Uses office is responsible for  the majority of the work needed to fulfill these requirements; yet, as  discussed, it lacks a comprehensive plan for completing this work.\nWe met with USDA officials, including New Uses staff, in February 2004 to  discuss further the lack of a comprehensive management plan and other  issues identified in our work and their significance. At that meeting, the  New Uses staff provided us a document entitled, \u201cImplementing Section  9002 of the Farm Bill.\u201d This document was attached to an e-mail dated  June 2002 that referred to the attachment as an \u201cearly draft  implementation plan for Section 9002.\u201d New Uses staff indicated that this  document was evidence of their planning. However, our analysis of this  document reveals that it is not a comprehensive management plan for  implementing the farm bill requirements. First, the e-mail refers to the  document as an early draft; apparently it never advanced beyond this  stage. Second, the document lacks most elements of a comprehensive  plan, such as a description of specific tasks, associated milestones, and the  frequency, manner, and documentation of coordination meetings and  periodic progress reporting. Instead, the document generally restates the  farm bill requirements and the related conference report language,  discusses some options for addressing these requirements, and presents a  rationale for hiring a contractor with the requisite skills to implement the  farm bill provisions under the management oversight of the New Uses  office. Interestingly, although a contractor was not hired, the document  notes that, \u201cContractor performance would be evaluated on an annual  basis against pre-agreed-upon achievement milestones, with an  opportunity to re-direct resources if necessary.\u201d Thus, although the New  Uses office apparently planned to use a list of specific tasks and  associated milestones to judge the contractor\u2019s progress and hold this firm  accountable, the New Uses staff, who had to undertake this work without  contractor assistance, did not develop a similar list of tasks and milestones  to guide their work. As discussed, New Uses staff did not develop a list of  milestones until the spring of 2003, and only at our request.\nFurthermore, at our February 2004 meeting, USDA officials expressed the  view that although they had missed the farm bill biobased-related  deadlines and most farm bill biobased procurement requirements remain  unfulfilled, they had made noteworthy progress in publishing the proposed  guidelines in December 2003. These officials discussed and subsequently  provided us with a document listing work activities they had undertaken  leading up to the publication of these guidelines. Among other things, the  list notes that during the summer and fall of 2002, USDA developed the  aforementioned \u201cimplementation plan,\u201d held various internal meetings and  external consultations, and began drafting the guidelines. Thereafter and  throughout calendar year 2003, the list primarily shows that USDA went  through several rounds of vetting and revising the guidelines, based on  reviews done by the OMB and USDA\u2019s Office of General Counsel. In  addition, USDA officials noted that throughout this process their collective  thinking evolved as to the form and content of the guidelines and included  considerations such as (1) whether the list of biobased products that was  being developed by the agency under the 1998 executive order had  relevance in light of farm bill criteria for designating items and (2) whether  a more simplified, less-burdensome approach regarding the content of the  guidelines would still satisfy the legislation\u2019s requirements. Finally, New  Uses officials stated that the notice of proposed rulemaking containing the  proposed guidelines was developed far more quickly\u2014by a measure of  years\u2014than the rulemakings for two other programs that they view as  relevant: the preferred procurement program for recycled products  developed by EPA and the organic product labeling program developed by  USDA.\nIn citing the lack of a management plan, we are not questioning whether  New Uses staff have worked hard or whether the complexity and novelty  of the issues they faced were challenging. Rather we are raising the  question of whether the efficiency of this work has suffered because of a  lack of a comprehensive plan to guide it. Clearly, the other USDA office  involved in implementing the farm bill biobased requirements thought it  was important to develop a thorough management plan to guide its portion  of the work to ensure the efficient use of available resources and timely  completion of the work. Furthermore, we are unable to comment on the  relevance of comparing the development of various rulemakings cited by  New Uses staff because such an analysis is outside the scope of our work.  However, we believe there are probably lessons to be learned from EPA\u2019s  experience in developing the procurement program for recycled products  that would benefit USDA\u2019s efforts to develop a similar program for  biobased products.\nCareful planning for a major initiative is a recognized good business  practice. Furthermore, the need for adequate planning in federal programs  is established in legislation such as the Government Performance and  Results Act of 1993, Presidential executive orders, circulars of OMB, and  agency regulations to ensure that federal program managers know what  they want to accomplish, how they are going to accomplish it, and when it  will be accomplished. Without a comprehensive plan for implementing the  farm bill requirements assigned to the New Uses office, including clearly  defined tasks and milestones, it is difficult for USDA to set priorities, use  resources efficiently, measure progress, and provide agency management  a means to monitor this progress. Furthermore, the lack of a plan only  serves to delay the agency\u2019s completion of legislatively required actions.\n\n\t\tNeed for Additional Resources\n\nUSDA did not allocate the staff needed to expedite the biobased  procurement effort. It assigned responsibility for this effort to two staff in  the New Uses office who also had other responsibilities\u2014in effect, they  worked part-time on biobased procurement. While these New Uses  officials had assistance from time-to-time from staff in other USDA offices,  including staff who had been involved in the agency\u2019s earlier efforts under  the executive order, the availability of these staff was more ad hoc, subject  to the demands of other work to which they were assigned. In addition,  according to these New Uses officials, no one in their office had  experience in writing rules; and they had to wait several months before  staff from another office with this experience could be assigned to help  write the notice of proposed rulemaking containing the guidelines for  publication in the Federal Register. However, New Uses officials said  that while they were waiting for this assistance, they were able to continue  with other aspects of the work. Nevertheless, although these New Uses  officials stated that they do not believe that the guidelines could have been  issued in any case by the farm bill deadline, they believe that the lack of  adequate personnel assigned specifically to this effort was a source of  delay.\nRegarding funding, the farm bill did not specifically authorize any funds  for developing the biobased procurement guidelines, and USDA did not  provide any funds to the New Uses office for this effort from other  programs. In essence, the New Uses office had to absorb these costs from  its operating budget; and as a result, this office assigned only two staff to  work part-time on meeting the farm bill requirements, as discussed. The  New Uses office began its work soon after passage of the farm bill.  However, the farm bill authorized $1 million annually for testing biobased  products. To date, the New Uses office has used these funds to contract  with Iowa State University and NIST to develop testing protocols for  biobased products and an information Web site on biobased products.\nRegarding development of a model procurement program and the  voluntary recognition program, the Procurement office did not begin this  work until the fall of 2003 because of a lack of identified funding for this  purpose until that time. Specifically, in September 2003, USDA\u2019s Rural  Development Mission Area transferred about $500,000 to the Procurement  office for this purpose. In addition, the Procurement office added about  $25,000 of its own funds to this sum. This office used these funds to  contract with the DOE\u2019s Oak Ridge National Laboratory and a consulting  firm to, among other things, assist in developing the office\u2019s  comprehensive plan for implementing this portion of the work. Oak Ridge  also will be involved in the plan\u2019s implementation under the Procurement  office\u2019s direction. In addition, USDA transferred a staff member from its  Office of Small and Disadvantaged Business Utilization to the  Procurement office to oversee this effort. While Procurement office staff  indicated that the funds identified to date should carry them through the  end of fiscal year 2004, they said additional funding will be needed in the  future to continue their work on the model procurement program. For  example, the staff member who oversees this effort estimated that about  $450,000 will be needed in fiscal year 2005 and about $500,000 will be  needed in fiscal year 2006.\n\n\t\tNeed for Assigning a Higher Priority\n\nAccording to USDA staff who worked on developing a biobased products  list under the 1998 executive order, assigning responsibility for developing  the farm bill biobased procurement guidelines to the New Uses office  should have given this effort more agency attention because this office  reports to the Chief Economist who in turn reports directly to the  Secretary of Agriculture. Previously, work on developing a list of biobased  products was split among several line agencies and offices, including the  Agricultural Research Service, the Cooperative State Research, Education,  and Extension Service, and the Procurement office, that do not enjoy this  direct access to the Secretary. However, despite this expectation of  greater agency attention, USDA has made limited progress in fulfilling the  farm bill requirements; and several USDA officials indicated that this work  is not a high priority, relative to other agency initiatives. In addition,  stakeholders outside of USDA also believe that the agency has not given  sufficient management attention to the fulfillment of the farm bill biobased  provisions. For example, representatives of commodity associations and  manufacturers stated that although they had hoped for timely and effective  procurement guidelines from USDA, the issuance of guidelines has been  delayed because this effort is not a priority for the agency.\nIn our earlier work, related to USDA\u2019s implementation of the 1998  executive order, USDA officials indicated that they had made limited  progress in publishing a list of biobased products for procurement  because of a lack of dedicated resources and higher agency priorities.  Although USDA\u2019s issuance of federal procurement guidelines for biobased  products, as well as USDA\u2019s establishment of a voluntary labeling program  and voluntary recognition program, is now legislatively required, this work  still suffers from a lack of adequate resources and management attention.\n\n\tStakeholders Generally Agree That Some Testing of Biobased Products Is Necessary, but They Question the Need For Life-Cycle Analysis\n\nMost federal agencies, testing organizations, commodity associations, and  manufacturers we spoke with generally believe that testing biobased  products for content and performance is appropriate, but they question  the usefulness and costs of life-cycle analysis. According to officials from  the top four purchasing agencies and the two testing organizations,  content testing is important to ensure that products meet minimum  biobased content specifications, and performance testing is a key factor in  making purchasing decisions. These officials generally believe that  manufacturers should bear the costs of these tests, if they want to sell to  the federal government. Biobased manufacturers generally agree with the  need for these tests and with their responsibility for bearing at least some  of the associated costs. However, some manufacturers said that they  should be able to self-certify the biobased content of their products in lieu  of content testing, based on their knowledge of their manufacturing  processes. Regarding life-cycle analysis, most of the agencies and  manufacturers questioned the need for doing this analysis. USDA is  required to consider life-cycle costs in determining whether to designate  an item for preferred procurement and has indicated that if manufacturers  voluntarily provide life-cycle cost information it may help speed the  designation process. Manufacturers would only be required to provide this  information under the rule as proposed if a procurement official requested  the information. However, the agencies generally did not believe that life- cycle information would be useful for purchasing decisions because  procurement staff would find the analysis too detailed to follow and  generally not useful without comparative information on petroleum-based  products; USDA does not expect to provide such comparative information.  Manufacturers generally agreed with this view, noting that the cost of life- cycle analysis is high\u2014as much as $8,000 for a single product\u2014and they  questioned whether they alone should bear this cost in order to make sales  to the federal government.\nThe farm bill authorized USDA to use $1 million per year of the  Commodity Credit Corporation\u2019s funds from fiscal year 2002 through fiscal  year 2007 for testing of biobased products. Initially, as discussed in its  proposed guidelines, USDA plans to use these funds to focus on gathering  the necessary test information on a sufficient number of products within  an item (generic grouping of products) to support regulations to be  promulgated to designate an item or items for preferred procurement.  However, the farm bill also allows that these funds may be used to support  contracts or cooperative agreements with entities that have experience  and special skills to conduct such testing. The $1 million for fiscal year  2002 was used for agreements with testing organizations to establish  standardized tests for determining the biobased content and life-cycle  analysis characteristics of biobased products. Part of this money also was  used to develop a biobased products information Web site. USDA views  the establishment of this Web site as integral to fulfilling the farm bill  requirement for providing information on products. USDA is using the $1  million for fiscal year 2003 to evaluate selected products using the  standardized tests to establish benchmarks for designating items for  preferred procurement. The agency is also using some of this money to  complete and maintain the information Web site. USDA anticipates that $1  million for fiscal year 2004 will be used to cost-share with manufacturers  some of the expenses associated with testing products in order to develop  the information needed to designate items for preferred procurement.\nIn general, USDA plans to bear the cost of any testing that may be needed  to establish baseline information for designating items. Regarding this  testing, in its proposed guidelines USDA indicates that it may accept cost  sharing from manufacturers or vendors for this testing to the extent  consistent with USDA product testing decisions. However, during this  period, USDA will not consider cost sharing in deciding what products to  test. When USDA has concluded that a critical mass of items has been  designated, USDA will exercise its discretion, in accordance with  competitive procedures outlined in the proposed guidelines, to allocate a  portion of the available USDA testing funds to give priority to testing  products for which private firms provide cost sharing for the testing. At  that point, cost-sharing proposals would be considered first for small and  emerging private business enterprises. If funds remain to support further  testing, proposals from larger firms would also be considered.\nUSDA\u2019s proposed guidelines would require manufacturers and vendors to  provide relevant product characteristics information to federal procuring  agencies on request. For example, under the proposed guidelines,  manufacturers would have to be able to verify the biobased content of  their products using a specified standard. In addition, federal agencies  would have to rely on third-party test results showing the product\u2019s  performance against government or industry standards. Furthermore,  manufacturers would have to use NIST\u2019s Building for Environmental and  Economic Sustainability (BEES) analytical tool to provide information on  life-cycle costs and environmental and health benefits to federal agencies,  when asked. USDA recommends that federal agencies affirmatively seek  this information.\n\n\t\tMost Stakeholders Agree that Content and Performance Testing Are Necessary\n\nAccording to officials we contacted from the top four purchasing agencies  and the two testing organizations\u2014Iowa State University and NIST\u2014 content and performance testing are necessary to help federal agencies  make purchasing decisions. Content testing is necessary to ensure that  products meet the biobased content specifications for designated items.  Furthermore, the results of performance testing are a key consideration,  along with product availability and price, for federal procurement officials  when selecting a product for purchase, whether the product is biobased or  not. These agency and testing organization officials also believe that  manufacturers should bear the costs of content and performance testing  because these tests are considered normal business costs associated with  marketing products.\nTen of the 15 biobased manufacturers we contacted agree that content and  performance testing are necessary. Two other manufacturers agreed that  one of these tests was necessary, but they did not agree on which test.  Most of these manufacturers also acknowledged their responsibility for  bearing at least some of the costs for these tests. However, some of the  manufacturers believe that they should self-certify content, based on their  knowledge of their manufacturing process, including the feedstock used.  These manufacturers suggested that USDA could conduct random content  testing to verify these certifications. Similarly, representatives from the  Biobased Manufacturers Association stated that they believe, based on  input from their member companies, that manufacturers should self- certify the content of their products. These association officials suggested  that content testing should only be required when there is a challenge to  these certifications. Most of the manufacturers believed that the  requirement for providing performance testing information is reasonable  and that, because the cost of this testing is an expected cost of doing  business, they should bear this expense.\n\n\t\tStakeholders Generally Question the Need for Life- Cycle Analysis\n\nOfficials representing the top four procurement agencies, manufacturing  companies, the Biobased Manufacturers Association, and commodity  associations generally questioned the need for life-cycle analysis of  biobased products. Under USDA\u2019s proposed guidelines, manufacturers  are invited to voluntarily submit their product to a life-cycle analysis using  the BEES analytical tool developed by NIST, so that USDA can obtain  information it is required to consider in designating items for preferred  procurement. However, once an item has been designated, the  manufacturer would have to provide information on life-cycle costs, if  asked to do so by a procuring agency, using BEES for their particular  product. While some manufacturers indicated that they do not object to  performing life-cycle analysis per se, and a few even indicated that they  have done such an analysis already to use the results in marketing their  product(s), these stakeholders questioned USDA\u2019s decision to rely solely  on one analytical tool\u2014BEES\u2014to perform this analysis. Other  stakeholders pointed out that any life-cycle analysis results for biobased  products would be of limited usefulness without comparable results for  similar products that are petroleum based.\nStakeholders voiced the following opinions regarding whether life-cycle  analysis results are, in general, useful and\/or whether USDA should rely  solely on the BEES analytic tool for doing this analysis:    Many of the officials representing manufacturers and commodity  associations believe that federal purchasers will not find life-cycle analysis  results for biobased products to be useful unless they have comparable  results for competing petroleum-based products. For example, if federal  purchasing officials have information on the economic and environmental  impacts of a biobased product, but do not have similar information for its  petroleum-based alternative, these officials will not be able to determine if  the higher initial purchase cost of the biobased product is offset by its  lower maintenance and disposal costs and\/or lower environmental  impacts. Even officials from USDA and the testing organizations  acknowledged that the usefulness of BEES results for biobased products  would be greater if similar results were available for petroleum-based  alternatives. These officials said that although the farm bill does not  address life-cycle analysis for petroleum-based products, they hope that  manufacturers of these products will submit them to BEES analysis  voluntarily so that comparable data are available. However, other  stakeholders questioned why a manufacturer of a petroleum-based  product would incur this expense voluntarily, especially if the BEES  results could cast the manufacturer\u2019s product in an unfavorable light.  USDA officials added that procuring agencies could, if they choose, also  require manufacturers of petroleum-based products to provide this  information in order to make sales to the agencies, but other stakeholders  opined that the agencies are not likely to do so because they do not now  seek this type of information. USDA officials also noted that to ensure a  level playing field it is important that manufacturers and vendors use the  same life-cycle analysis tool to ensure consistent and comparable results.\nMany manufacturer and commodity association officials stated that the  cost of the life-cycle analysis was too expensive for most small  manufacturers to bear. According to NIST, the cost of testing a product  using the BEES analytic tool is about $8,000. The cost of subsequent  testing of related products from the same manufacturer is about $4,000 per  product tested. For small manufacturers with fewer than 500 employees,  the cost of testing is $4,000 for the first product and $2,000 for each  additional product, assuming similar processing steps and the continued  availability of federal cost-share assistance. Some USDA officials  expressed the view that these costs are not exorbitant, adding that the  costs of content testing is even cheaper, falling in the range of a few  hundred dollars.\nFederal procurement officials indicated that life-cycle analysis is generally  not an important factor in procurement decisions. A product\u2019s price,  availability when needed, and ability to meet performance specifications  are the most important considerations, according to these officials. In  addition, a number of manufacturer and commodity association  stakeholders questioned whether procurement officials would even  understand the significance of the results of a life-cycle analysis. However,  USDA officials noted that the impetus to purchase biobased products also  should come from the agency program officials who generate the  requirements for the goods and supplies that procurement staff purchase.  With this in mind, the Procurement office\u2019s plan for developing the model  procurement program includes major tasks related to training and  outreach to groups other than just the procurement staff. If these other  groups who generate the purchase requirements also understand the  potential benefits of biobased products and the legislative requirements  for giving these products preference in federal purchasing, then they may  stipulate in their purchase requests that procurement staff buy biobased  alternatives. Similarly, these groups may stipulate in service contracts that  firms purchase and use biobased products.\nSome manufacturers, citing the detailed nature of the BEES analysis,  expressed concerns that trade secrets related to their product could be  compromised. However, according to a NIST official primarily responsible  for adapting the BEES analytic tool for evaluating biobased products, the  information submitted for BEES analysis will not be subject to Freedom of  Information Act requests. This official also indicated that contracts made  with third-party testing organizations for conducting BEES analysis will  include language imposing penalties for improperly divulging product  information. In addition, this official said that life-cycle information  generated for designating items through the testing of branded products  will be aggregated in such a way so as not to reveal the \u201crecipe\u201d (contents  and structure) of a given product.\n\n\tConclusions\n\nUSDA has yet to fulfill many of the farm bill biobased procurement  requirements. Among other things, USDA has not issued final procurement  guidelines that designate items for preferred procurement. USDA\u2019s work  has been slowed by the lack of a comprehensive management plan  outlining the tasks, milestones, resources, coordination, and reporting  needed for its completion. In addition, USDA has not assigned sufficient  staff and financial resources or given sufficient priority to this effort to  ensure its timely completion. Because other federal agencies\u2019 procurement  of biobased products largely hinges on USDA\u2019s fulfillment of these farm  bill requirements, USDA action is critical.\n\n\tRecommendations\n\nTo ensure USDA\u2019s timely implementation of the farm bill biobased  purchasing requirements, we recommend that the Secretary of Agriculture  carry out the following three recommendations:    Direct the Office of Energy Policy and New Uses to develop and execute a  comprehensive management plan for completing this work. Among other  things, such a plan should discuss the tasks, milestones, resources,  coordination, and reporting needed for completing this work.\nClearly identify and allocate the staff and financial resources to be made  available for completing this work.\nClearly state the priority to be assigned to this work.\n\n\tAgency Comments and Our Evaluation\n\nWe provided a draft of this report to USDA for review and comment. We  received written comments from the agency\u2019s Chief Economist, which are  presented in appendix V. USDA also provided us with suggested technical  corrections, which we have incorporated into this report as appropriate.\nUSDA indicated that it believes the report does not present a complete and  balanced view of the progress it has made in implementing the farm bill   biobased procurement provisions. Specifically, USDA said that the report  emphasizes negative interpretations without reflecting the very  considerable progress achieved, or how favorably that progress compares  with other government efforts to develop preference programs, such as  the EPA\u2019s program for the purchase of recycled products. We believe the  report provides a fair and accurate description of the farm bill  requirements and USDA\u2019s efforts to comply with these requirements to  date. The scope of our work did not include a comparison of USDA\u2019s  efforts to implement these requirements to the efforts of other agencies to  implement other procurement preference programs. However, we have  previously reported on EPA\u2019s efforts to implement legislative requirements  for the purchase of recycled products, and in doing so we raised issues  similar to those we are raising with USDA in this report. Namely, we  reported that EPA lacked a comprehensive, written strategy for  completing the work and had not given the work adequate staffing and  resources and priority.\nRegarding our recommendation that the New Uses office develop and  execute a comprehensive management plan for completing the work  needed to fulfill the farm bill biobased purchasing requirements, USDA  indicated disagreement. Specifically, USDA said it does not believe such a  plan would have accelerated its work on the proposed rule issued in  December 2003, given the complexity of the issues that had to be resolved  and the substantial amount of consultation across federal agencies and  within USDA that was a necessary component of developing this rule. We  disagree and continue to believe that USDA should develop a  comprehensive, written plan that discusses, among other things, the tasks,  milestones, resources, coordination, and reporting needed for completing  the work necessary to fulfill the farm bill requirements. Such a plan would  also serve as a basis for communicating USDA\u2019s progress with the  Congress and others, including the department\u2019s senior management.\nFurthermore, we believe that factors such as the complexity and breadth  of the issues to be considered, the internal and external consultation  necessary, and the farm bill\u2019s ambitious time frames for the completion of  this work underscore the need for a comprehensive, written plan or  strategy for the completion of this work. Finally, we note that another  USDA office, the Office of Procurement and Property Management,  developed a comprehensive, written plan for the completion of its limited  portion of the biobased work. Among other things, this plan discusses the  need for consultation, identifies the internal and external stakeholders to  consult with, and enumerates specific tasks related to this consultation.\nRegarding our recommendations that USDA clearly identify and allocate  the staff and financial resources to be made available for implementing the  farm bill biobased purchasing requirements and clearly state the priority  to be assigned to this work, USDA did not address these recommendations  directly. However, USDA said that it would draw on GAO\u2019s review and  recommendations as it approaches the development of subsequent  proposed rules for designating items and for development of the labeling  program. We believe that USDA should be more proactive in this regard  and make clear the staff and financial resources to be made available for  completing this work and the priority to be assigned to this work. These  matters could also be addressed in a comprehensive, written plan or  strategy for completing the work.\nWe also obtained comments from the DLA, DOE, Interior, EPA, GSA,  NASA, NIST, and the Office of the Federal Environmental Executive on  excerpts of the report that were relevant to their agencies. Their clarifying  comments were incorporated into this report, as appropriate.\nAs agreed with your office, unless you publicly announce its contents  earlier, we plan no further distribution of this report until 30 days from the  date of this letter. We will then send copies to interested congressional  committees; the Secretary of Agriculture; the Secretary of Energy; the  Director, OMB; and other interested parties. We will make copies available  to others on request. In addition, the report will be available at no charge  on GAO\u2019s Web site at http:\/\/www.gao.gov.\nIf you have any questions about this report, please contact me at (202) 512- 3841. Key contributors to this report are listed in appendix VI.\n\nAppendix I: Objectives, Scope, and Methodology\n\nAt the request of the Ranking Democratic Member of the Senate  Committee on Agriculture, Nutrition, and Forestry, we reviewed issues  related to the federal government\u2019s progress in implementing the biobased  purchasing provisions of the Farm Security and Rural Investment Act of  2002 (the farm bill). Specifically, we agreed to examine (1) actions that the  U.S. Department of Agriculture (USDA) and other agencies have taken to  carry out the farm bill requirement to purchase biobased products; (2)  additional actions that may be needed to enhance implementation of this  requirement; and (3) views of agencies, manufacturers, and testing  organizations on the need for and costs of testing biobased products.\nTo determine the actions USDA has taken to carry out the farm bill  requirement for purchasing biobased products and to determine the  additional actions that may be needed to enhance implementation of this  requirement, we conducted interviews with USDA officials in the Office of  Energy Policy and New Uses (New Uses office) and analyzed documents  they provided to us. We also contacted officials in other USDA offices,  including the Agricultural Research Service; Cooperative State Research,  Education, and Extension Service; Office of General Counsel; and the  Office of Procurement and Property Management (Procurement office). In  addition, we spoke with officials at Iowa State University and the  Department of Commerce\u2019s National Institute of Standards and  Technology (NIST) who are developing testing standards for biobased  products under agreements with USDA. Furthermore, we reviewed  USDA\u2019s Guidelines for Designating Biobased Products for Federal  Procurement, a proposed rulemaking published in the Federal Register on  December 19, 2003. Related to this rulemaking, we attended two public  meetings held by USDA in Washington, D.C.: a biobased workshop held on  October 28, 2003, to discuss USDA\u2019s use of biobased products and the  status of the proposed rulemaking and a meeting on January 29, 2004, to  allow the public an opportunity to comment on the proposed rule.\nTo determine the actions that other federal agencies have taken to carry  out the farm bill requirement to purchase biobased products, we  interviewed officials at the top four procuring agencies\u2014the Department  of Defense (DOD), the Department of Energy (DOE), the General Services  Administration (GSA), and the National Aeronautics and Space  Administration (NASA)\u2014and analyzed the documents that they provided  to us. These agencies account for the majority\u2014about 85 percent\u2014of the  federal government\u2019s purchasing; the DOD alone accounts for about 67  percent of federal purchasing. The officials we contacted included  program staff who identify purchasing requirements and procurement staff  who make the purchasing decisions, including the selection of vendors  and products used. They also included environmental management or  health officials who may be responsible for promoting the use of biobased  products at their agencies. We also interviewed officials at DOE, the  Defense Logistics Agency, the Environmental Protection Agency (EPA),  GSA, NASA, the Office of Management and Budget\u2019s (OMB) Office of  Federal Procurement Policy (OFPP), and the White House\u2019s Office of the  Federal Environmental Executive to determine the extent to which USDA  had coordinated with these agencies in implementing the farm bill  biobased purchasing requirement.\nTo obtain the views of federal agencies, testing organizations,  manufacturers, environmental groups, consumer groups, an advocacy  group, and commodity associations on the need for and costs of testing  biobased products, we contacted the following entities:    Federal agencies: DOD, DOE, EPA, GSA, NASA, OFPP, and White House\u2019s  Office of the Federal Environmental Executive.\nTesting organizations: Iowa State University and NIST.\nManufacturers: Biobased Manufacturers Association and 15 biobased  products manufacturers from a list of member companies provided by the  association. The manufacturers chosen represent a cross section of  biobased products\u2014at least one producer in each of the 11 biobased item  categories proposed by USDA\u2014and feedstock (e.g., corn, soybeans,  vegetable oils, etc.). They are also geographically dispersed: Arizona,  California, Florida, Iowa, Illinois, Maryland, Massachusetts, Minnesota,  Ohio, Texas, Washington, and Wisconsin.\nEnvironmental groups: Environmental and Energy Study Institute and  Green Seal.\nConsumer groups: Center for the New American Dream and Consumer\u2019s  Choice Council.\nAdvocacy group: New Uses Council.\nCommodity associations: American Soybean Association, National Corn  Growers Association, and the United Soybean Board.\nMost of our contacts with these entities occurred prior to USDA\u2019s  publication of its guidelines for designating biobased products for  procurement in December 2003, although we also obtained information  from some of these contacts after this document was published. In either  case, in our interviews with these sources we sought their views on what  the proposed guidelines should contain. In addition, for manufacturers of  biobased products, we sought information on their experiences in selling  to the government, including any impediments encountered. We also  sought their views on the types of testing that should be done on biobased  products; the associated costs of these tests; how testing costs should be  paid; and how available federal funding for testing should be used. We  summarized and contrasted the views of the various stakeholders.\nIn general, our work focused on biobased products other than biofuels  such as ethanol, biodiesel, and biogas because provisions to promote the  production of biofuels are addressed elsewhere in the farm bill. However,  some mention of biofuels was unavoidable in discussing the nature and  importance of biobased products, including their effect on carbon in the  environment and on their potential economic impact on farms and rural  communities.\nWe conducted our review from May 2003 through February 2004 in  accordance with generally accepted government auditing standards.\n\nAppendix II: Sources for Information on Biobased Products\n\nThe following list provides the names, addresses, and Web sites for  sources of information on biobased products used in our work.\n\nAppendix III: Key Provisions of USDA\u2019s Proposed Guidelines\n\nThis appendix summarizes key provisions of USDA\u2019s notice of proposed  rulemaking, Guidelines for Designating Biobased Products for Federal  Procurement, published in the Federal Register (69 Fed. Reg. 3533) on  December 19, 2003. Specifically, table 2 describes proposed biobased  product categories and the items to be included in each as discussed in the  preamble to the proposed guidelines. Table 3 enumerates other key  provisions proposed in the notice.\n\nAppendix IV: Chronology of Steps Completed or Planned by USDA to Comply with the Farm Bill Requirements\n\nAppendix V: Comments from the U.S. Department of Agriculture\n\nThe following are GAO\u2019s comments on the U.S. Department of  Agriculture\u2019s letter dated March 23, 2004.\n\n\tGAO Comments\n\n1.  On page 29 of the draft report (now p. 28), we state USDA\u2019s view that  their progress compares favorably to EPA\u2019s implementation of its  program for the purchase of recycled products. We also state that a  comparison of USDA\u2019s efforts to implement the biobased procurement  provisions in section 9002 of the farm bill with government efforts to  develop other preference programs, such as EPA\u2019s program for the  purchase of recycled products, was outside the scope of our work.  However, we have previously reported on EPA\u2019s efforts to implement  this program. Specifically, in May 1993, we reported that EPA\u2019s efforts  were slowed by a lack of a comprehensive, written strategy for  completing this work. Among other things, we noted that such a  strategy would lay out funding and staff needs, goals and milestones,  information and coordination needs, and a systemic approach to  selecting items for procurement guidelines. We also noted that this  strategy would serve as a basis for communicating EPA\u2019s progress to  the Congress and others, including the agency\u2019s senior management. In  addition, we reported that EPA\u2019s efforts to fulfill the legislative  provisions for the purchase of recycled products lacked priority and  adequate staffing and resources, and because of the agency\u2019s slow  progress in identifying recycled products for preferred procurement,  other federal procuring agencies had made little progress in developing  their own affirmative programs for the purchase of these products. The  conference report for the farm bill notes that the new program for the  purchase of biobased products by federal agencies is modeled on the  existing program for the purchase of recycled materials. Presumably,  there are lessons to be learned from EPA\u2019s experience in implementing  the recycled program. However, more than 10 years after the issuance  of our earlier report, we are now raising similar concerns regarding  USDA\u2019s implementation of the farm bill biobased procurement  provisions.  2.  USDA is correct in stating that we do not offer an opinion on whether  the farm bill time frame for full implementation of the biobased  procurement program is realistic. This is a matter that USDA must  address with the Congress. However, we do offer our views on how  this implementation process might be accelerated. Regarding the  specific factors that USDA cites as slowing this process, we believe  these factors are adequately discussed in the draft report. On page 29  (now p. 28), we acknowledge that the complexity and novelty of the  issues that USDA faces are challenging. On page 26 (now p. 25), we  state that the farm bill requires USDA to consult with other agencies,  including EPA, GSA, and NIST. On page 28 (still p. 28), we also state  that USDA provided us a list of work activities indicating that it  conducted external consultations with other agencies during the  summer and fall of 2002. On page 30 (still p. 30), we state that the farm  bill did not specifically authorize funds for developing the biobased  procurement guidelines. And on page 17 (now p. 16), we note that a  number of rulemakings will be necessary to fulfill the farm bill  biobased purchasing requirements and that the issuance of these  rulemakings will take years to complete. We also describe on that page  the steps in the rulemaking process. Furthermore, we make other  statements in the draft report that reflect the difficulties USDA faces.  For example, on page 4 (now p. 5) we state that USDA faces a  formidable challenge in implementing the farm bill provisions for  purchasing biobased products. On page 14 (still p. 14), we state that  USDA was faced with an ambitious task regarding these provisions.  And on page 25 (still p. 25), we note that USDA officials said that  delays may result from having to work through the various concerns  and conflicting views of the many stakeholders to this effort, a process  that one official described as akin to swimming in molasses.  3.  We believe that factors such as the complexity and breadth of the  issues to be considered, the internal and external consultation  necessary, and the ambitious time frames for completing the work  underscore the need for a comprehensive, written plan or strategy for  the completion of this work was and is necessary.  4.  We did not ask for \u201ca particular style of plan.\u201d Beginning with our  entrance meeting with USDA officials in May 2003, we asked for a copy  of any written plan these officials had prepared that described how  they intended to complete the work necessary to fulfill the farm bill  biobased requirements. At that meeting, officials from the Office of  Energy Policy and New Uses (New Uses office) stated that they did not  have a written plan for this work, although the work had been ongoing  for nearly a year. Approximately 9 months later, at our exit meeting  with USDA officials in February 2004, officials from the New Uses  office provided us a draft document dated June 2002 as evidence of  their planning. In our view, this document falls far short of being a  comprehensive plan for completing this work, as discussed on pages  27 to 28 of the draft report (still pp. 27 to 28). New Uses staff neither  mentioned the existence of an \u201cadaptive plan composed of several  parts\u201d during our work\u2014May 2003 through February 2004\u2014nor did  they provide us documentation of this plan. In contrast, another USDA  office, the Office of Procurement and Property Management  (Procurement office), developed a comprehensive, written plan for the  completion of its limited portion of the biobased work, which it  provided to us in January 2004, soon after it identified funds to begin  this work.   5.  After officials of the New Uses office told us in May 2003 that they did  not have a written plan, we asked these officials if they had developed  a list of tasks and associated milestones for their work. These staff  indicated they had not done so, but would create this list for us. At the  time, these staff indicated it would take them 2-3 weeks to develop this  information. We received this timeline about 3 weeks later, in early  June 2003.  6.  Other than the plan prepared by the Procurement office for its limited  portion of the work, we have seen no evidence that USDA\u2014 specifically the New Uses office\u2014has a comprehensive, written plan  for completing this work.  7.  We agree that in developing a plan it is not possible to anticipate every  exigency. However, agencies frequently prepare \u201cformal definitive\u201d  plans without being able to anticipate every possible exigency,  including planning documents related to the Government Performance  and Results Act, such as strategic and annual performance plans, and  planning documents related to the day-to-day activities of agencies,  such as the implementation of programs, legislative initiatives, and  other activities. USDA appears to draw a distinction between  consultations and planning\u2014that consultations must precede planning.  We believe that the need for consultations, including how these  consultations will be done and documented, should be addressed  along with other considerations in a comprehensive, written plan for  completing the work needed to fulfill the farm bill biobased  requirements. We note that the Procurement office addressed the need  for consultations in the management plan it prepared for completing  its portion of the biobased work.  8.  On page 28 of the draft report (still p. 28), we state that USDA provided  us a list of work activities indicating that it conducted external  consultations with other agencies during the summer and fall of 2002.  During our work, we discussed coordination issues with the agencies  cited by USDA, as noted on page 26 of the draft report (now pp. 25 to  26). In light of comments received from these other agencies on  relevant excerpts of the draft report, the report has been clarified to  identify some of the concerns these agencies cited.  9.  On pages 26 to 27 of the draft report (now p. 26), we state that the New  Uses staff reports to the Chief Economist in periodic staff meetings  and that this official periodically briefs the Secretary of Agriculture.  The report has been clarified to reflect the frequency of these meetings  and other reporting cited by USDA. However, we continue to believe  that without a comprehensive, written plan for completing the  biobased work, it is difficult for managers to put into context the  relative progress being reported, to identify needed adjustments, and  to hold accountable the officials responsible for the work\u2019s  completion.  10.  The draft report does not suggest that there were long periods when  work was not progressing on the implementation of the biobased  procurement program. However, the draft report does raise issues on  whether this work has progressed efficiently in the absence of a  comprehensive, written plan for its completion and a commitment of  sufficient staff and financial resources and management attention.  11.  The report has been adjusted to make clear that the delay in receiving  assistance from another office to help draft the Federal Register notice  did not prevent other aspects of the work from proceeding.  12.  On page 28 of the draft report (still p. 28), we state USDA provided us a  list of work activities indicating that it conducted external  consultations with other agencies during the summer and fall of 2002.  13.  On page 44 of the draft report (now p. 43), we state that most of our  audit work was done prior to USDA\u2019s publication of its proposed rule  in December 2003. This was a function of our need to be responsive to  our requester\u2019s time frames for completing the work and delays in  USDA\u2019s issuance of the proposed rule. However, subsequent to the  rule\u2019s publication, we also obtained relevant information and views  from some contacts, including commentary on the proposed rule  posted in newsletters or on Web sites of organizations such as the  Biobased Manufacturers Association. In addition, we attended the  public meeting held on January 29, 2004, at USDA headquarters in  Washington, D.C., in which stakeholders orally offered comments on  the rule.   14.  The public comment period closed on February 17, 2004. USDA is  currently analyzing and summarizing these comments. Eventually,  USDA will discuss these comments in its final rulemaking for the  biobased procurement guidelines.   15.  The report does not criticize the testing of life-cycle cost analysis and  environmental and health effects as part of the proposed rule. The  report reflects the views of a variety of relevant stakeholders regarding  this and other testing issues. In a number of cases, these stakeholders  offered negative or critical views, or otherwise expressed concerns.  The report accurately reflects these views.   16.  In reviewing a copy of the Senator\u2019s letter, we also note that he  expressed several concerns. For example, he stated that USDA is many  months behind the schedule Congress laid out for biobased product  purchasing in the farm bill. Regarding testing, the Senator said that the  BEES model should probably not be the only model allowed or  required for life-cycle analysis of biobased products; he noted that the  statute does not require it and that agencies themselves could  determine which tests are necessary and incorporate them into their  procurement guidelines. In addition, the Senator said that this  information would be of little value to procurement agents if they do  not have comparable life-cycle analysis results for petroleum-based  counterparts. Furthermore, the Senator expressed concerns about the  potential cost of testing on small and large businesses, suggested that  biobased content be self-certified, and noted that agencies could  require BEES analysis or other third-party testing in the event it is  warranted, such as when the veracity of a manufacturer\u2019s claim is in  dispute.  17.  The report accurately states that USDA has fallen short in  implementing the farm bill biobased purchasing requirements. The  report accurately describes the content of the proposed rule, including  what is addressed specifically in the proposed guidelines or in the  preamble to these guidelines. It is factual that the proposed guidelines  do not designate any items for preferred procurement or include the  voluntary labeling program.    18.  The report states the time likely to be required to designate the items  that USDA identified in the preamble to the proposed rule. This  information is based on a timeline furnished by USDA.  19.  On pages 18 to 22 of the draft report (now pp. 18 to 21), we accurately  reflect the views of some agency officials who believe that the  advantages of biobased hydraulic fluids and lubricants are (1) the  reduced cost and effort of cleanups of product spills, as compared  with fossil resource-based alternatives and\/or (2) the ease of disposal  because these products are biodegradable. However, as noted on page  22 (fnt. 29) of the draft report (now p. 21, fnt. 31), we discussed these  views with EPA. The Director of EPA\u2019s Oil Spill Staff stated that the  agency had not made a specific ruling regarding how spills of biobased  hydraulic fluids and lubricants should be handled; in the absence of a  ruling, this official said that EPA does not make a distinction between  spills of these biobased products and their petroleum-based  alternatives.\n\nAppendix VI: GAO Contacts and Staff Acknowledgments\n\n\tGAO Contacts\n\n\tAcknowledgments\n\nIn addition to the individuals named above, Jeanne Barger, Rani  Chambless, and Carol Herrnstadt Shulman made key contributions to this  report. Important contributions were also made by Oliver Easterwood,  Lynn Musser, Anne Stevens, Amy Webbink, and Linda Kay Willard.\n\nRelated GAO Products\n\nFederal Procurement: Government Agencies Purchases of Recycled\u2013 Content Products. GAO-02-928T. Washington, D.C.: July 11, 2002.\nFederal Procurement: Better Guidance and Monitoring Needed to Assess  Purchases of Environmentally Friendly Products. GAO-01-430.  Washington, D.C.: June 22, 2001.\nSolid Waste: Federal Program to Buy Products With Recovered Materials  Proceeds Slowly. GAO\/RCED-93-58. Washington, D.C.: May 17, 1993.\nSolid Waste: Progress in Implementing the Federal Program to Buy  Products Containing Recovered Materials. GAO\/T-RCED-92-42.  Washington, D.C.: Apr. 3, 1992.","output":"Why GAO Did This Study\n\nThe federal government spends more than $230 billion annually for products and services to conduct its operations. Through its purchasing decisions, it has the opportunity to affirm its policies and goals, including those related to purchases of biobased products, as set out in the 2002 farm bill. A biobased product is a commercial or industrial product, other than food or feed that is composed of, in whole or part, biological products, renewable domestic agricultural materials, or forestry materials. GAO examined (1) actions the U.S. Department of Agriculture (USDA) and other agencies have taken to carry out farm bill requirements for purchasing biobased products, (2) additional actions that may be needed to implement the requirements, and (3) views of stakeholders on the need for and costs of testing biobased products. GAO interviewed officials from USDA, major procuring agencies, testing entities, interested associations, and 15 manufacturers of biobased products.\n\nWhat GAO Found\n\nUSDA and other federal agencies' actions to implement the farm bill requirements for purchasing biobased products have been limited. USDA issued proposed procurement guidelines in December 2003--more than 1 year past the deadline for final guidelines; however, these guidelines do not fully address the farm bill requirements for designating items for purchase and recommending procurement practices. USDA expects to issue final guidelines by April 2004 and a blueprint for the model procurement program by September 2004; but it anticipates that designation of existing items will take years to complete, possibly until 2010. In addition, new items will enter the market requiring further designations. Meanwhile, purchasing agencies do not yet have a basis for planning their own procurement programs and, as a result, have made only limited purchases of biobased products. USDA could accelerate its implementation of the farm bill requirements by developing a comprehensive management plan for this work and by making the work a higher priority. The lack of a management plan describing the tasks, milestones, resources, coordination, and reporting needed to complete this work has slowed USDA in issuing the procurement guidelines. For example, USDA developed a list of milestones only after GAO requested such a list; even then, this list was informal, primarily reflecting the thinking of a few officials. Without a plan, USDA will find it difficult to set priorities, use resources efficiently, measure progress, and provide agency management a means to monitor this progress. According to stakeholders, USDA should make this work a higher priority to speed its completion. Without a sense of priority, USDA's efforts to fulfill farm bill requirements have not had adequate staff and financial resources. Stakeholders GAO spoke with generally believed that USDA's proposals for testing a biobased product's content and performance are appropriate and that manufacturers should bear at least some of the costs. However, stakeholders generally questioned the need for doing life-cycle analysis of a product's long-term costs and environmental impacts."}
{"id":"gao_GAO-11-909","pid":"gao_GAO-11-909_0","input":"\tBackground\n\nThe Department of Commerce chairs the coordinating committee of  federal trade promotion and finance agencies charged with implementing  the NEI. CS is one of four business units within Commerce\u2019s International  Trade Administration. The other units are Market Access and  Compliance, Manufacturing and Services, and Import Administration. CS  is the largest unit in terms of budget and staff, and about two-thirds of its  staff work at posts outside the United States. CS\u2019s statutory purpose is to  promote the export of goods and services from the United States,  particularly by small and medium-sized enterprises (SME), and to  advance and protect United States business interests abroad. While  CS\u2019s mission specifically identifies SMEs, CS assists companies of all  sizes. According to the U.S. Census Bureau, in calendar year 2009, the  total number of identified U.S. export firms was about 276,000, of which  over 97 percent were SMEs. The dollar value of exports associated with  the efforts of SMEs that year amounted to about $308 billion, which  represented approximately one-third of the $939 billion in exports.\n\n\t\tCS Has a Global Network That Includes Domestic and Overseas Posts\n\nCS employs a variety of staff in its global network. Domestically, CS had  about 500 staff working in Washington, D.C., and throughout the United  States in 2010. Overseas, CS mainly employs Foreign Service officers  and locally employed staff. In 2010, CS had over 900 staff overseas,  including both Foreign Service officers and locally employed staff.  \uf0b7  CS operates 108 domestic offices referred to as U.S. Export  Assistance Centers. Staffed by trade specialists, and Foreign Service  officers on domestic tours, the centers deliver the full range of export  promotion services to U.S. companies and connect to CS\u2019s global  network of overseas offices. The centers work cooperatively with key  partner agencies and organizations, especially the Export-Import  Bank, the Small Business Administration, and state trade offices. (See  app. II for the allocation of domestic CS staff in fiscal year 2010, by  state.)  \uf0b7  CS\u2019s 125 offices in more than 75 countries promote U.S. exports and  defend U.S. commercial interests, implementing the full range of  Department of Commerce overseas commercial services. Foreign  Service officers, referred to as commercial officers, manage the  overseas offices and engage in activities requiring a U.S. official.  Locally engaged staff, consisting of commercial specialists and  commercial assistants, provide export promotion services to U.S.  companies and support the commercial officers in other activities.  (See app. III for a table of country groupings and allocation of  overseas CS staff in fiscal year 2010.)\nIn 45 countries where the CS has no presence, it engages in a  Partnership Program with the State Department (State) under which  State Foreign Service officers and locally employed staff provide  some export promotion assistance. In September 2011, the  Departments of Commerce and State agreed to expand the program  to an additional 11 countries. The formal Partnership Program began  in January 2009; however, CS and State have a long history of  working together because, for many years, commercial officers were  part of State until the Commercial Service was established as a  separate entity under Commerce in 1980. (See app. IV for the  locations of State Department partnership posts providing export  promotion services.)  \uf0b7  CS also operates a Trade Information Center, which serves as a  central point of contact for U.S. exporters seeking export advice such  as how to begin exporting; complying with trade documentation  requirements, standards, and regulations; and accessing other U.S.  government trade programs and resources. Additionally, CS\u2019s  Advocacy Center, in Washington, D.C., with support from CS offices  abroad, assists individual firms in various industry sectors competing  for foreign government contracts.\n\n\tCommercial Service\u2019s Goals and Activities Support the National Export Initiative\n\n\t\tCS Provides Services to U.S. Exporters, Particularly to SMEs\n\nThe goals and activities of the U.S. and Foreign Commercial Service  contribute to the National Export Initiative (NEI) goal of doubling the dollar  value of U.S. exports from $1.57 trillion in 2009 to $3.14 trillion by the end  of 2014. CS\u2019s strategic goals include expanding the exports of U.S. goods  and services, removing obstacles to exporting, particularly for small and  medium-sized companies, and advancing U.S. business interests abroad  by advocating on their behalf and helping to remove foreign trade barriers.  CS conducts a variety of activities to advance these goals, generally falling  into four broad categories: (1) trade counseling, (2) fee-for-service  activities, (3) commercial diplomacy, and (4) advocacy. In addition to these  core activities, CS assists other U.S. agencies overseas involved in trade- related activities, mainly at overseas posts. Our interviews with Foreign  Service officers and locally employed staff at the six posts we visited  indicate that counseling and fee-for-service activities are the primary focus  of their day-to-day activities and take most of their time. However, CS also  promotes the export success of U.S. firms and advances U.S. business  interests abroad by helping firms overcome obstacles in specific markets  through commercial diplomacy and by advocating on their behalf for foreign  government contracts. When any CS trade-promotion activity successfully  assists a U.S. company to export a product or service, CS staff document  an \u201cexport success\u201d that is verified by CS management. An export success  is defined as a CS service, rendered by locally employed staff, Foreign  Service officers, or U.S. Export Assistance Centers, that facilitates (1) a  sale of a product or service; (2) a commercial agreement (distribution,  wholesale, or joint venture); or (3) an overseas activity resulting in revenue  for a U.S. company or its affiliate or subsidiary.\nTrade counseling involves assisting U.S. businesses in understanding  foreign markets and developing export marketing plans, as well as  providing information about export finance and public and private export  promotion assistance. CS counsels thousands of firms each year,  particularly SMEs. CS counsels firms that have never exported, as well as  firms already exporting that want to expand their efforts to one or more  new markets or to increase their exports to one or more markets where  they already have a presence. (CS categorizes these types of firms,  respectively, as new-to-export, new-to-market, and increase-to-market.)  From 2008 through 2010, according to CS, it had approximately 68,000  clients, and counseling activities were the primary service provided in  over 18,000 export successes during that period.\nCS\u2019s fee-for-service activities include standardized services such as  matchmaking, which CS generally refers to as a Gold Key\u2014introducing  U.S. businesses to qualified buyers overseas\u2014and providing market  intelligence such as reports on a specific foreign company, which CS  refers to as International Company Profiles. CS also provides customized  services such as Business Facilitation Services, Single Company  Promotions, Customized Market Research, Trade Missions, and  Webinars, among others. CS is authorized to charge a user fee for its  export promotion services. Since May 2008, its standardized fees have  been based on full-cost recovery for large companies and a lower amount  for new-to-export SMEs. Fees for customized services also vary based on  company size, with large companies paying more than SMEs. Large  companies pay 100 percent of both direct and indirect costs, whereas  SMEs pay 100 percent of direct costs but 35 percent of indirect costs.  From fiscal year 2008 through 2010, U.S. firms purchased a total of  27,076 services from CS, of which approximately 68 percent were  purchased by SMEs. CS collected approximately $19 million in fees for  these services.\nCS addresses a wide variety of obstacles that U.S. companies may face  in specific markets by conducting commercial diplomacy on their behalf,  as well as by assisting with formal efforts by the International Trade  Administration\u2019s Market Access and Compliance unit to remove  government-imposed barriers such as standards or technical barriers and  subsidies. Overall, from fiscal year 2008 through 2010, CS successfully  assisted 486 companies through commercial diplomacy efforts, resulting  in at least $17 billion in exports. Commercial diplomacy occurs when  CS\u2019s interactions with foreign governments contribute to achieve one or  more of the following outcomes:  reduce, eliminate, or prevent a foreign trade barrier;  comply with a bilateral or multilateral trade agreement;  \uf0b7  eliminate or reduce a threat to U.S. business interests; and  create market opportunities.\nFor example, if a company comes to CS indicating that a shipment of  mackerel valued at $100,000 is being held by customs in a particular  European country due to a regulation that is inconsistent with its  international trade obligations, CS may assist the company by engaging  the foreign government to advocate that the regulation\u2014in this case  requiring a European Union health certificate\u2014is inconsistent with a  bilateral trade agreement. If CS\u2019s diplomacy efforts are successful in this  case, the European Union member would rescind the regulation and  release the shipment from customs. CS could then count this case as a  commercial diplomacy success.\nCS also assists Market Access and Compliance led teams in overcoming  existing or potential trade barriers facing U.S. companies or exporters.  Because of their overseas presence, CS commercial officers on these  teams generally represent U.S. interests in interactions with foreign  governments. In addition, these teams may work to ensure that U.S.  exporters receive benefits of a trade agreement or avoid potential  inconsistencies in the implementation of an agreement. For example, CS,  in collaboration with Market Access and Compliance, might help a U.S.  firm that is stymied by a country\u2019s arbitrary customs valuations that would  lead to excessive tariffs on the firm\u2019s products. The Market Access and  Compliance team, with CS playing a key role, would advocate on behalf  of such a company in a concerted effort to get the country to honor its  commitments under the World Trade Organization\u2019s Customs Valuation  Agreement. From fiscal year 2008 through 2010, Market Access and  Compliance initiated 664 such cases and reported that it successfully  resolved 248 cases with CS assistance. The average annual percentage  of cases undertaken on behalf of SMEs during that period was 36  percent, and the total export value of the successfully closed cases was  about $59 billion, according to Market Access and Compliance.\nCS also advocates on behalf of U.S. companies interested in competing  for government contracts in foreign countries. This type of activity  involves educating U.S. companies about major overseas projects and  procurements and advocating with the foreign government on behalf of  U.S. companies wanting to bid on such projects. As of February 2011, CS  had a 20-person Advocacy Center in Washington, D.C., but much of the  work takes place in the field. Advocacy activities are often joint efforts  with the State Department because CS regularly engages U.S.  ambassadors and other U.S government officials in efforts to win foreign  government contracts. CS data indicate that advocacy efforts resulted in  108 successful outcomes out of 1,239 cases, and the total value of the  U.S. export content of those \u201cadvocacy wins\u201d was about $44 billion from  fiscal year 2008 through fiscal year 2010.\nWhile CS advocates on behalf of companies of all sizes, advocacy results  are mainly from large companies. For example, in fiscal year 2010, CS  advocated successfully on behalf of 50 U.S. firms, of which 6 were SMEs.  The total U.S. export content value of the 50 advocacy wins was about  $17.1 billion, of which approximately $274 million (less than 1 percent of  the total) reflected exports by SMEs. According to CS officials, SMEs  generally do not seek out advocacy because the large government  contracts are beyond their capabilities; however, many SMEs benefit from  advocacy wins because they provide goods and services required by the  large companies that win the contracts.\nIn addition to its export promotion and advocacy efforts, CS also supports  other trade-related agencies\u2019 efforts\u2014for example, assisting the U.S.  Trade and Development Agency, the U.S. Trade Representative, and the  Export-Import Bank at overseas posts. CS overseas posts also host  important delegations, including high-level federal agency officials, state  trade offices and associations, and congressional delegations, and help  host other official visits. CS overseas posts assisted a total of 1,203  important delegations for fiscal years 2008 through 2010.\nImportant delegations of U.S. and foreign officials also visit sites within  the United States, supported by CS\u2019s domestic staff. The U.S. Export  Assistance Centers supported 53 visits by foreign government officials  and 208 visits by U.S. officials from 2008 through 2010. The centers  also direct potential exporters to other U.S. government assistance, such  as loans provided by the Small Business Administration and the U.S.  Export-Import Bank. In addition, the centers work with District Export  Councils throughout the United States\u2014organizations of volunteer  leaders from the local business community, appointed by the Secretary of  Commerce, including exporters and export service providers, who assist  the centers in export outreach and counseling to U.S. businesses and  promote numerous trade-related activities.\n\n\t\tCS Goals and Activities Align with NEI Priorities, but NEI Prompted New Areas of Emphasis\n\nWe found that CS activities align with six of the NEI\u2019s eight trade  promotion priorities, as shown in table 1. (Two other NEI priorities are not  directly related to export promotion: increasing export credit and  macroeconomic rebalancing, areas in which CS has no direct role.)\nSupporting the NEI has not required CS to undertake any new activities;  however, it has prompted CS to direct more of its efforts toward certain  markets, specific kinds of activities, NEI-priority sectors such as services  and clean-energy technology, and firms currently exporting to one or two  markets but capable of expanding into additional markets.  \uf0b7  The NEI highlighted a desire to focus more U.S. export promotion  efforts in high-growth markets in Brazil, China, and India, and next-tier  emerging markets in Colombia, Indonesia, Saudi Arabia, South Africa,  Turkey, and Vietnam. These were markets where CS already had a  presence. Nevertheless, in response to the NEI, CS arranged trade  missions to several of these markets and indicated that it would also  increase its staff in these markets.  \uf0b7  CS has also given increased attention to certain of its routine activities  that the NEI identified as priorities; for example, CS increased trade  missions abroad and expanded its International Buyer Program, which  recruits qualified foreign buyers, sales representatives, and  distributors to attend U.S. trade shows each year. For example, U.S.  companies participating in CS trade missions increased from 210 in  2008 to 292 in 2010, and the number of International Buyer Program  participants increased from 959 in 2008 to 1,005 in 2010. CS also  provided additional funds in support of these activities. For example, a  CS official stated that Brazil\u2014an NEI priority country\u2014received  additional funds to support the International Buyer Program.  \uf0b7  The NEI also prioritized the services sector and clean-energy  technology. In response, CS led several trade missions focused  specifically on clean energy to China, India, Indonesia, and Mexico in  2010. While CS has always assisted the services sector, including  companies exporting services in information and communication  technology, banking and finance, and logistics, the International Trade  Administration developed an export expansion plan focusing on  service exports to high-growth countries such as Brazil, China, and  India and targeting the top services sectors in terms of export dollar  value, such as construction and travel and tourism services.  \uf0b7  The NEI prompted CS to shift its focus from helping first-time  exporters to encouraging firms already exporting, which supports  NEI\u2019s goal of doubling the dollar value of exports in 5 years. On  average, according to CS, achieving an export success takes longer  when it assists new-to-export firms than when it helps new-to-market  or increase-to-market companies expand their exporting. (See fig. 1  for the different time frames CS estimates for achieving export  success depending on the experience level of the exporter.) As a  result, CS has placed more emphasis on its New Market Exporter  Initiative, which it began in 2008.\nThrough the New Market Exporter Initiative, CS obtains information from  partner firms that provide exporting services, such as FedEx, United  Parcel Service, the U.S Postal Service, and the National Association of  Manufacturers. Partner firms refer SMEs that are already exporting in one  market to CS. CS then works with those SMEs to expand exporting to a  second or additional market. CS has indicated that there are opportunity  costs associated with shifting its focus in this way, including (1) loss of  new-to-export activity in the short term and (2) a reduced pipeline of  export-ready companies. However, to address these opportunity costs,  CS is leveraging the resources of the Small Business Administration and  District Export Councils by having them work with and support companies  that are new-to-export. CS data indicate that the greatest number of CS  export successes have come from firms that were increasing exports into  markets where the firms were already exporting (increase-to-market  firms). For fiscal years 2008 through 2010, increase-to-market firms  accounted for 22,372 export successes, 60 percent of the total (see fig.  2). During the same period, new-to-market firms produced 13,246 export  successes (35 percent), and firms that were new to exporting produced  1,732 export successes (5 percent).\n\n\tCommercial Service Is Modifying Performance Measures to Align More Closely with the NEI\n\nIn fiscal year 2012, CS will implement revised performance measures that  align more closely with the NEI. Although CS did not meet four of six  performance targets in fiscal year 2010, its efforts resulted in increases  for most of its measures as it shifted to address NEI priorities. CS\u2019s new  revised set of performance measures for fiscal year 2012 addresses  some past weaknesses; however, some weaknesses will remain\u2014for  example, underreporting of export successes, especially with regard to  their dollar value. Accurately measuring performance is crucial to results- oriented management. Performance measures enable an organization to  track progress toward its goals and give managers key information that  can be used, among other things, to identify problems and take corrective  action, develop strategy and allocate resources, recognize and reward  performance, and identify and share effective approaches. In short,  performance measures provide powerful incentives to influence  organizational and individual behavior. The Government Performance  and Results Act (GPRA) of 1993 laid the foundation for results-oriented  agency planning, measurement, and reporting in the federal government,  highlighting the important role performance information plays in improving  the efficiency and effectiveness of an agency. The GPRA Modernization  Act of 2010 reinforces these principles.\n\n\t\tCS Exceeded Past Performance for Effectiveness but Did Not Meet Most Targets in Fiscal Year 2010\n\nCS tracked six performance measures to report on progress toward its  goals in the Department of Commerce\u2019s Fiscal Year 2010 Performance  and Accountability Report, as required by GPRA. CS reported that it  exceeded targets for two of its six performance measures, including the  measure for overall effectiveness, while it failed to meet targets for the  other four measures (see table 2 for CS\u2019s fiscal year 2010 performance  targets versus actual performance). Although CS did not meet most of  its 2010 performance targets, its efforts still resulted in increases in the  dollar value of some types of export successes, in the number of  successes, or both. For example, CS reported that while it did not reach  the target increase for the number of commercial diplomacy successes in  2010, the overall dollar value of those successes increased from $974  million in fiscal year 2009 to $4.56 billion in fiscal year 2010. Likewise,  although CS did not meet its target for advocacy wins, the number of wins  increased from 26 in fiscal year 2009 to 50 in fiscal year 2010. CS  reported that it missed the new-to-export target due to its shift in focus  toward new-to-market exporters in support of the NEI\u2019s goal of doubling  exports. Commerce noted that new exporters remain a priority of CS and  the U.S. government. CS reported it is now referring these clients to the  Small Business Administration and other partners so that CS can focus its  efforts where it can best contribute to the goals of the NEI.\nFor fiscal year 2012, CS reconfigured its 2010 GPRA measures, reducing  the total from six to five by eliminating two measures and adding one. In  addition to dropping the growth rate of SME exporters as determined by  Census data, CS dropped its sole measure related to tracking new-to- export firms, as the organization shifted its focus to new-to-market firms.  CS also eliminated reliance on Census data for the 2012 measure related  to new-to-market firms and modified two other measures from 2010. One  retained measure remained unchanged\u2014the number of commercial  diplomacy cases resolved. Finally, CS added a performance measure it  had previously only tracked for internal reporting purposes: the ratio of CS  export value to CS costs. (See table 3 for a summary of changes to CS\u2019s  performance measures for 2012.)\nNEI\u2019s overarching goal is to double the total value of U.S. exports in 5  years. The baseline against which the NEI\u2019s success is being measured  is $1.57 trillion, which was the level of goods and services exported by  U.S. companies in 2009; the NEI goal is to reach $3.14 trillion in U.S.  exports by the end of 2014. In February 2011, the Secretary of  Commerce reported that exports in 2010 had increased 16.6 percent over  2009 levels, putting the U.S. on track to achieve the NEI\u2019s goal. CS export  promotion activities alone cannot achieve the NEI goal of doubling U.S.  exports by the end of 2014. In 2010 CS export promotion activities (which  do not include agriculture or export financing) resulted in $18.7 billion in  export value. However, this represents about 1 percent of the $1.8 trillion  in U.S. exports that year. Advocacy activities in which CS participated  resulted in $17.1 billion in export value or about another 1 percent of U.S.  exports. Commercial diplomacy contributes another $4.6 billion in  exports. Other CS statistics show that they support about 18,000 clients  annually, which is about 7 percent of the approximately 276,000 firms that  export, and about 1 percent of the approximately 27.5 million businesses  in the United States.\nCompared with its 2010 performance measures, CS\u2019s 2012 measures  shift its emphasis in two ways that are consistent with the overarching  NEI goal of doubling the total value of U.S. exports: First, the 2012  measures put new focus on the dollar value generated by CS\u2019s export  promotion activities and on helping firms already exporting to expand to  new markets rather than on helping new-to-export clients. Second, by  tracking the number of clients assisted, CS reported that it will capture  data reflecting its total export counseling and assistance efforts. These  counseling and assistance efforts are a significant CS activity, but they  may not produce an immediate export success or have a dollar amount  attributed to them, though they often lead to CS-assisted export  successes. (See table 4 for CS\u2019s 2012 performance measures with  targets.)\nIn giving greater emphasis to the dollar value of export sales attributable  to its assistance, CS\u2019s new measures may motivate staff to prioritize  activities that are more likely to produce significant dollar value of exports.\nTwo of CS\u2019s fiscal year 2012 measures are based on dollar values,  whereas none of its six measures for fiscal year 2010 reflected dollar  values. In addition, we believe the fiscal year 2012 measures may lessen  CS\u2019s emphasis on helping SMEs. Whereas three out of six of CS\u2019s fiscal  year 2010 measures focused primarily on helping SMEs, which is one  piece of CS\u2019s broad statutory mission, only one of CS\u2019s five measures for  fiscal year 2012 focuses on SMEs. Moreover, because advocacy and the  activities of large firms generate a much higher dollar value of exports  than export promotion activities of SMEs, the focus on export value also  means less focus on SMEs. For example, in fiscal year 2010, CS data  indicate that 50 advocacy wins generated $17.1 billion in exports and 86  percent of the wins were for large companies. Additionally, of the  approximately 12,300 export successes that generated $18.7 billion in  exports in 2010, about 88 percent of the overall dollar value of those  successes was for large companies.\nThe new emphasis in CS\u2019s fiscal year 2012 performance measures  necessitates that CS obtain the dollar value of the export successes that  it claims. While seeking this information is not new for CS, previously it  was not used to measure the organization\u2019s performance. The accuracy  of this information thus takes on greater importance because it is now  being used as a performance measure and helps measure CS\u2019s  contribution toward the NEI\u2019s goal of doubling the value of U.S. exports.\n\n\t\tPerformance Measures for Fiscal Year 2012 Partially Address Some Weaknesses\n\nCS has implemented key elements of good performance management  systems, including defining measures that reflect its goals, ensuring the  accuracy of the data used in its performance reporting, and refining or  changing performance measures in response to recognized weaknesses  with them or because of changing priorities. For example, export  successes, a fundamental measure of CS\u2019s performance, go through a  multistage internal review process: Initial reviews are conducted in the  domestic and international offices, respectively, and CS headquarters  conducts a second review of all export successes over $500,000 in value  on a quarterly basis. This process aims to ensure that each reported case  meets CS\u2019s criteria for \u201csuccess.\u201d CS management also recognizes the  importance of communication as an important element of performance  management, which it demonstrates by communicating its goals to staff  and setting performance expectations in support of those goals.\nWhile CS\u2019s performance management system exhibits important  elements of a good system, we also found that CS\u2019s fiscal year 2010  performance measures exhibit three weaknesses: (1) the use of outdated  Census data, (2) the underreporting of export successes, and (3) the lack  of a performance measure tied to governmentwide customer service  standards. Below, we describe these weaknesses and the steps CS has  taken to address the first two, while also identifying the weaknesses that  remain in CS\u2019s modified performance measures for fiscal year 2012.\nThree of its fiscal year 2010 measures tied CS\u2019s success at meeting  performance targets to volatile national economic trends, as measured by  Census data. (See measures 2, 3, and 5 in table 2.) According to CS  documents, the 2-year lag in available Census data caused the affected  measures to systematically understate CS\u2019s fulfillment of its mission and  its contribution to the U.S. government\u2019s export promotion agenda. CS\u2019s  fiscal year 2012 performance measures eliminate this weakness; the  fiscal year 2012 measures do not use Census data from prior years for  comparison but rather rely solely on performance information generated  within CS.\nFour of CS\u2019s fiscal year 2010 measures were calculated using export  success data (see measures 1 to 4 in table 2). CS acknowledged that  export successes were underreported to some extent. Underreporting  occurred at least in part because of the difficulty of getting clients to  provide CS information on their sales. Additionally, technical problems  associated with Commerce\u2019s client tracking system made inputting export  successes cumbersome and time consuming; as a result, some CS staff  stated that they input only the minimum number of successes needed to  meet their performance goals. Some CS staff also told us that, in an effort  to balance administrative and client responsibilities, they did not always  follow up with exporters to capture all export successes.\nCS has taken steps to address the underreporting of export successes  and problems with its client tracking system that it hopes will make  capturing this information easier. In May 2011, CS finalized new export  success policy guidelines that simplify export success reporting by  eliminating the requirement for a staff-written narrative and replacing it  with verification from the U.S. client or foreign buyer to document the  success. Doing so puts the responsibility on the clients to confirm the  assistance and value that CS provides. CS also created a standardized  reporting format to capture the relevant export success information. In  response to identified weaknesses with its client tracking system, the  International Trade Administration reported it plans to address identified  problems with the system, although it has not begun this effort. These  steps alone, however, do not eliminate the potential for underreporting of  the dollar value of export successes, which assumes new importance in  CS\u2019s fiscal year 2012 performance measures.\nCS has also taken steps to prompt clients to provide sales information  from export successes. Historically, CS has had difficulty obtaining the  dollar value of all export successes, although clients agree to provide this  information when signing a purchase agreement for a CS service.  Collecting this information is wholly dependent on a client\u2019s willingness to  provide such information. At several of the posts we visited, CS staff told  us that some companies are reluctant to provide the dollar value of export  successes, considering that information to be proprietary. To overcome  the reluctance of companies to provide the dollar value of CS-assisted  exports, CS developed a new client intake form, which it began using in  April 2011. The form, like the purchase agreement, contains a statement  indicating that CS \u201cexpects\u201d clients to report export sales related to CS  assistance. While this may improve the situation because the statement is  up-front and explicit, the problem may persist for several reasons. First,  this statement on the intake form is not a binding requirement. Second,  CS data indicate approximately 34 percent of CS\u2019s export successes from  2008 through 2010 had no dollar value; nearly 25 percent of these export  successes were attributed solely to counseling, for which CS does not  collect a fee. Thus, the clients receiving counseling would not see or sign  the new intake form. And third, although clients obtaining fee-based  services from CS sign a purchase agreement, which includes a clause  about reporting export results or feedback, many companies have not  complied with the requirement, and CS has not strictly enforced it as  businesses are sensitive about disclosing such information. Therefore, it  is unclear that the new effort to collect this information will produce any  change, and the problem of underreporting the value of CS\u2019s export  assistance through fee-based services may remain.\nNone of CS\u2019s fiscal year 2010 GPRA performance measures reflected  governmentwide management priorities, such as quality, timeliness, cost  of service, and customer and employee satisfaction. Internally, CS tracks  survey data from its customers regarding their satisfaction with its fee-for- service and counseling activities. For example, CS\u2019s annual customer  satisfaction survey in 2009 and 2010 indicated that 84 percent and 82  percent of respondents, respectively, were very satisfied or satisfied with  the service they received from CS, although the response rates to its  surveys were low\u201410 percent and 19 percent, respectively. CS reported  this information in its annual report for 2010; however, it omitted the  margin of error and confidence level along with the low response rate,  potentially misleading readers of its report about clients\u2019 level of  satisfaction with CS services. One of CS\u2019s new measures for fiscal year  2012 includes a cost component\u2014reporting the ratio of export value to  costs of export promotion efforts, which creates a cost-versus-benefit  measure. If the measure reported a ratio of number of services relative to  costs, it would be an efficiency measure reflecting total cost of service.\nRecently, both Congress and the President have made customer service  a governmentwide priority. The GPRA Modernization Act of 2010, which  became effective in January 2011 and is being fully implemented starting  in fiscal year 2012, requires that agencies establish a balanced set of  performance indicators including, as appropriate, customer service  standards. On April 27, 2011, the President directed agencies of the  U.S. government to put more emphasis on streamlining service delivery  and improving customer service. Among other requirements, the  executive order directs agencies to set clear customer service standards  and expectations, including, where appropriate, performance goals for  customer service required by the GPRA Modernization Act of 2010. CS is  aware of this new requirement, although its 2012 GPRA performance  measures currently do not include a metric addressing the requirement.\n\n\tCommercial Service\u2019s Resource Allocation Process Does Not Make Full Use of Relevant Information to Guide Its Decisions\n\nSystematic use of economic, performance, and activity data can help CS  allocate resources to achieve its goals more efficiently and effectively. In  general, optimal resource allocation requires that managers monitor the  economic environment, operational costs, and performance to identify  strategic advantages that can be gained by realigning resources. In  keeping with good management practices when making resource  allocation decisions, CS is using a data-driven process to prioritize foreign  markets (and domestic locations) and to help it allocate its staff and other  resources to meet its performance goals and to support NEI objectives.  CS is in the process of adjusting to staff levels that are significantly  smaller than in 2004 and addressing resource management challenges.  Our analysis of the quantitative parts of the process found that there may  be opportunities to reallocate overseas resources to better reflect NEI  priorities and better achieve CS\u2019s new performance goals. Furthermore,  important available data related to some CS performance goals and  activities are not systematically considered in the current process.\n\n\t\tCS Has a Data-Driven Process to Inform Its Resource Allocation Decisions\n\nIn making resource allocation decisions, CS management considers a  combination of quantitative and qualitative factors to determine the  number and type of staff at overseas posts and domestic offices. In  response to our previous report, CS is updating and reinstituting a data- driven process that it last used in fiscal year 2007. CS management  does not have a formal process for analyzing how CS staff should be  allocated between the overseas, domestic, and headquarters locations.  The overall needs of the organization are assessed as part of general  workforce planning, which is undergoing changes in response to our  recommendations in 2010. CS management has reviewed the budget and  activities of its headquarters units as part of its ongoing efforts to improve  operations. About 70 percent of CS staff is located overseas, about 17  percent is in domestic field offices, and about 12 percent is at  headquarters in Washington, D.C.\nWith regard to overseas field staff, CS starts with its existing allocation of  more than 900 staff across the more than 75 countries and then goes  through a three-step process to adjust the allocation of staff depending on  available resources. CS managers first consider an Overseas Resource  Allocation Model that assesses market potential; the model ranks  countries and is the starting point for CS management prioritizing which  staff and posts should get more resources and which ones could be cut.  Second, CS managers then consider a cost-benefit model that also  produces rankings to ascertain how posts compare in terms of relative  expense and productivity. Third, CS management additionally evaluates  qualitative factors such as foreign and trade policy priorities in making  adjustments to the models\u2019 strictly quantitative rankings. CS managers  use their professional judgment in balancing the results of the three-step  process, arriving at a final proposal that is sent to the management of the  International Trade Administration. It is not clear how managers balance  the market potential and cost-benefit rankings; however, our discussions  with a high-ranking CS official indicated that cost-benefit rankings were  given less weight. All decisions to hire new staff and where to place them  are reviewed by the International Trade Administration. Proposals to open  and close posts are reviewed by the International Trade Administration  and at the department level and then by the Office of Management and  Budget, as part of the annual appropriation process. Furthermore,  changes in the number of CS officers or locally engaged staff at a post  must be approved by the Chief of Mission to a foreign country, who has  responsibilities for managing and supporting U.S. government personnel  overseas.    \uf0b7  Overseas model. The Overseas Resource Allocation Model includes  factors associated with market structure and size. Market structure  captures the impact of variables representing such factors as the  openness of a market, the level of development and country risk, and  other factors that measure the level of difficulty that U.S. businesses  may have in marketing their goods and services. The more open a  country\u2019s market structure, the higher its ranking and the more likely it  is to get resources. Market size relates to the scale of export  opportunity for U.S. firms related to a particular country and includes  such measures as a country\u2019s total imports, gross domestic product,  and investment flows. Larger markets are generally ranked higher. In  general, CS\u2019s model is weighted 60 percent toward market structure  and 40 percent toward market size. While most of the model\u2019s 20  variables are based on historical trade data, a few are based on  projections, including estimates of future imports by a trading  partner. A score for each country is computed based on a  percentage of the total market potential, and the countries are ranked  accordingly. (See app. V for the average annual U.S. exports to  partner countries for calendar years 2008 through 2010, by country  groupings.)\nWe analyzed the degree to which the overseas model\u2019s export potential  scores were generally consistent with NEI priorities. While the NEI gives  highest priority to high-growth and next-tier emerging markets, the  outcome of the fiscal year 2011 Overseas Resource Allocation Model  showed that traditional markets\u2014the European Union 15 and Japan,  and free trade agreement (FTA) countries\u2014still represent high export  potential for U.S. companies (see fig. 3); this can be seen in terms of  average country scores (1.39 and 0.84, respectively) and in the combined  shares of the traditional market groups (35 percent in the pie chart in fig.  3). It also showed that on average the next-tier emerging markets have a  lower market potential score (0.67), and thus may require a longer-term  outlook and would contribute less toward short-term goals like doubling  U.S. exports by 2014. All \u201cother\u201d countries ranked in the model also had  low average scores, though as a grouping they account for a large share  of the total (54 percent) because of the large number of countries in the  group. The overlapping ranges of individual country scores show that the  market potential within many groupings varies significantly.  \uf0b7  Cost-benefit model. CS\u2019s cost-benefit model seeks to measure the  cost effectiveness of posts in the more than 75 countries where CS  operates. In contrast to the Overseas Resource Allocation Model,  which seeks to establish market potential, this model seeks to capture  actual CS results. A cost-benefit score is calculated using a weighted  measure based on the number and value of export successes in each  country, as well as the cost of operating in that country over a 5-year  period. Costs of CS posts, which include operational and  administrative costs such as salaries, rents, and utilities, can vary  considerably by country. The benefit component of the model gives  four times more weight to the number of export successes than to  their dollar value because not every export success has a dollar value  associated with it. CS management uses the cost-benefit model\u2019s  rankings to ascertain how posts compare in terms of relative expense  and productivity.\nWe analyzed the cost-benefit scores used by CS in fiscal years 2006- 2009. Next-tier emerging markets have better (higher) cost-benefit scores  on average (1.93) when compared with other groups (see fig. 4). Average  scores for the other country groupings are lower, and there is a wide  range of scores for the 37 other CS posts, with the United Arab Emirates  ranking highest in the group (9.44 percent) and Libya lowest (0.13  percent). We also looked at costs and benefits separately. The average  number of export successes in high-growth countries reported by CS (485  successes) was at least twice as large as the average for any other  market group, but there was also a wide range among countries in  several of the groups (see fig. 5). The share of total export successes (26  percent) was lowest for NEI priority (high-growth and next-tier) markets  and highest for traditional markets (38 percent). We discuss costs later in  this report.  \uf0b7  Qualitative factors (overseas). CS considers various qualitative  factors, including foreign policy and trade policy priorities, level of  economic development, geographic coverage, and commercial  environment. For example, CS opened an office in Afghanistan in  2010 in order to help support U.S. foreign policy efforts to develop the  local economy.\nCS managers go through a similar process for allocating over 280 staff  among 108 domestic offices in all 50 states except Delaware and  Wyoming. Puerto Rico, a U.S. territory, is also included as a domestic  location. A quantitative domestic model ranks locations to identify those  with the highest export potential. CS then considers qualitative factors.  While the model takes into account export successes (a measure of  benefit), there is no similar consideration of costs in the domestic  resource allocation process.  \uf0b7  Domestic model. The Domestic Resource Allocation Model uses a  mix of quantitative factors to rank the U.S. metropolitan statistical  areas (MSA) based on the export potential of the small and  medium-sized businesses located in each area. The model relies  primarily on an export intensiveness factor calculated for each of 60  industry sectors based on each industry\u2019s level of exporting activity,  with greater weight given to industries with higher levels of exporting.  Two other variables are also used in the model\u2014the SME percent  growth indicator and SME absolute growth indicator, both of which are  based on forecasted data at the MSA level. The model then uses  Census Bureau county-level data on small and medium-sized  businesses\u2014including both manufacturing and services, as well as  exporters and nonexporters\u2014and applies export intensiveness factors  to the industry groups within each MSA. The MSAs are then ranked  by the resulting weighted SME count.  \uf0b7  Qualitative factors (domestic). CS considers policy priorities, whether  a location is a hub for international business activity, availability of  alternative services, and whether a location encompasses an industry  that the International Trade Administration or the administration has  identified as a priority. In some cases, these qualitative factors lead  CS to change how resources would be allocated based strictly on the  quantitative results of the Domestic Resource Allocation Model.\n\n\t\tCS Is Still Responding to Resource Management Challenges\n\nGiven the current budget pressures of the federal government, CS  management faces tough decisions about how best to allocate existing  resources. We previously reported that CS had management control  weaknesses with regard to its resources from 2004 to 2009. During that  period, CS\u2019s budgets remained essentially flat while per capita personnel  costs and administrative costs increased. CS\u2019s workforce declined almost  14 percent through attrition, and, in response to the \u201ccrisis\u201d situation,  hiring, travel, training, and supplies were frozen, compromising CS\u2019s  ability to conduct its core business. Requested funding increases never  materialized, and CS has not been able to rebuild its workforce as it had  planned.\nAs a result, CS\u2019s current distribution of overseas resources in fiscal year  2010 largely reflects this attrition and its 2007 Transformational  Commercial Diplomacy initiative, which emphasized emerging markets.  The focus under Transformational Commercial Diplomacy was to move  resources from well-developed markets to high-growth markets such as  Brazil, China, and India that would be increasingly important to future  opportunities for U.S. business. Under the initiative, 23 offices, mainly in  Europe, were closed, but the overall size of CS remained the same as it  shifted resources to emerging markets. CS\u2019s constrained resources  limited its ability to continue moving staff. However, in an effort to support  the NEI, CS moved 15 staff from headquarters to domestic offices.  Though CS also hired 17 new Foreign Service officers in 2010, it has not  been able to fully staff all of its posts even in high-priority countries. For  example, CS China had a 27 percent vacancy rate in 2010. CS received  its fiscal year 2011 funding in April, and officials were considering what  reallocations could be made before the end of the fiscal year. CS is also  considering whether it could sustain a presence in more than 75 countries  given its level of resources. CS\u2019s fiscal year 2012 funding is still under  consideration in Congress. A senior CS official told us they plan to have  its repositioning strategy implemented in fiscal year 2012 and its new  structure in place in fiscal year 2013.\nCS's distribution of staff shows that a significant proportion of its staff  resources go to countries that are not NEI priority countries; currently,  about one-third of CS's overseas staff is in NEI priority countries, a little  over a third is in traditional markets, and one-third is in \u201cother\u201d countries  (see pie chart in fig. 6). High-growth markets have the most average staff  per country (41). We found that the current distribution of CS staff closely  mirrors key indicators of market size\u2014U.S. exports to a trading partner  and total imports by the trading partner. As noted, the Overseas  Resource Allocation Model gives greater weight to market structure  variables, and therefore, CS decisions to shift resources in the future may  favor countries with higher market structure rankings.\nCS\u2019s resources include more than staff, though they are the biggest  component of the CS budget, and human capital costs vary by location.  Thus, we also reviewed the distribution of CS\u2019s overseas funding and  found that it follows a different pattern from staffing. High-growth markets  get the largest average budgets ($3.2 million). Almost half of total CS post  funding goes to traditional markets, and less than one-third goes to NEI  priority markets (see pie chart in fig. 7). The upper ranges of traditional  export markets show that some of these countries have relatively high  costs. These results suggest that CS management may need to give  more consideration to what proportion of their staff and funding should be  allocated to NEI priority countries and traditional markets versus other CS  countries.\nWe found that CS\u2019s resource allocation decision making could be  enhanced by including three types of relevant information. First, refined  and simplified data variables could be added to the Overseas Resource  Allocation Model to differentiate more sharply among countries when  ranking countries by U.S. export promotion potential. Second, data on  commercial diplomacy successes and advocacy wins would add relevant  information when considering costs and benefits at various posts; these  benefits are not systematically considered in resource allocation decision  making, even though they are integrated into CS objectives and  performance measures. And third, to enable managers to assess relative  workloads and efficiency in making resource allocation decisions and  calculating costs, CS could include data on activities that consume  considerable staff time and resources, including fee-for-service sales,  trade-counseling sessions, requests for advocacy and commercial  diplomacy, and other support functions such as organizing and hosting  visits by delegations to overseas posts and domestic locations.\nCS uses its Overseas Resource Allocation Model to reflect the potential  of export markets, which it considers in conjunction with the historical  information on the performance of each overseas post in the cost-benefit  model. We assessed the fiscal year 2011 Overseas Resource Allocation  Model and found that the rankings generated by the model closely  approximated the rankings obtained using only the historical imports  variable for each country. The overseas model as currently constructed  includes 5 of 20 variables that are designed to incorporate projections of  future conditions, but these variables comprise only 25 percent of the  market potential score in the model. In addition, these 5 variables only  project a maximum of 3 years into the future. While projections and  indicators of the future economic performance of countries necessarily  involve uncertainty, the Overseas Resource Allocation Model, though  designed to reflect export potential, currently gives greater weight to  historical variables that have a high degree of overlap with the other  historical inputs in the resource allocation process.\nIn addition, the large number of variables also creates complexity without  obvious benefits, as we found a significant statistical correlation  (covariance) among the overseas model\u2019s 20 variables, such as between  U.S. market share, average fixed investment, average annual gross  domestic product (GDP), and per capita GDP. Four variables were  statistically insignificant regarding their individual impact on a country\u2019s  export-potential ranking. Furthermore, the current selection, number, and  weighting of the variables result in a tight distribution of country scores.  Over half the countries ranked by CS have scores of less than one-half a  percent and are within one-quarter percent of each other\u2019s scores. (See  fig. 8.) CS management told us CS uses the model to help it differentiate  the export potential of its overseas locations, especially those with lower  rankings, but the current model provides limited differentiation of those  countries where CS told us the model would be of most value.\nWe found that CS does not systematically use available data on the  number and value of commercial diplomacy successes or advocacy wins  in considering costs and benefits at various posts. These are important  benefits and are reflected in CS objectives and performance measures,  but they are not systematically considered in CS\u2019s resource allocation  decision-making process. Only export successes are considered in  measuring the benefits a CS country generated. In 2010, CS reported  112 commercial diplomacy successes valued at $4.6 billion in exports,  approximately 50 advocacy wins valued at $17.1 billion, and 12,300  export successes valued at $18.7 billion. Because of their high dollar  value relative to export successes, including commercial diplomacy  successes and advocacy wins could have a large impact on CS  management\u2019s cost-benefit calculations and therefore potentially affect its  decisions on allocating resources among posts and whether a post is  worth the expense of operating it. High-growth markets showed the  highest average number of commercial diplomacy successes per year  (5), as shown in figure 9. However, though the average for the EU15 and  Japan was lower (3), the range in that market group was large, and Japan  had the highest number per year (18) of all countries. Nevertheless, the  largest share of commercial diplomacy successes comes from the 39  \u201cother\u201d CS post countries (see the pie chart in fig. 9); for advocacy wins,  however, next-tier emerging markets, on average, showed the largest  dollar value of advocacy wins ($844 million), followed by high-growth and  \u201cother\u201d CS countries (see fig. 10). While countries in the \u201cother\u201d  categories might not be ranked highly in the Overseas Resource  Allocation Model, they accounted for 55 percent of advocacy wins by  country group over the same period. Thus, if advocacy wins are factored  into resource allocation decision making, the importance and value of  some \u201cother\u201d CS markets may increase.\nIn making resource allocation decisions, CS does not systematically  consider activity data, including data on fee-based services such as trade  missions, trade-counseling sessions, requests for advocacy and  commercial diplomacy, hosting official visits, and supporting other trade- related agencies. CS does not collect systematic information on how CS  staff divide their time to carry out mission-critical activities. Such  information would enable managers to assess relative workloads and  efficiency in making resource allocation decisions and calculating  program costs. This information could also be used to inform  management decisions about setting performance targets, determining  the best mix of staff (Foreign Service officers versus locally employed  staff) at specific posts, prioritizing cost reductions, and deciding what fees  should be charged for which services. For example, if CS determined that  a post had a high need for services and little need for advocacy on behalf  of U.S. companies, the post could be staffed with more locally employed  personnel and fewer Foreign Service officers, thus reducing the cost of  the office while maintaining, or improving, its productivity.\nFive examples follow to illustrate how activity data could help inform  resource management decisions. First, CS\u2019s fee-for-service data could be  used to determine whether resources should be shifted to markets with  growing demand, regardless of whether those markets are designated as  NEI priorities. CS data we analyzed showed that about three-fourths of  services are sold to non-NEI priority countries (see fig. 11). However, it is  not clear whether these data reflect customer demand alone, or whether  to some extent they also reflect demand resulting from customers who  were redirected to countries where CS had available resources, when the  customers\u2019 initially requested country could not accommodate their  request for assistance. Some staff in our field visits told us there are times  they have to delay or turn away a request for services, like a Gold Key  (introducing U.S. businesses to qualified buyers overseas), and that  sometimes staff at a U.S. Export Assistance Center will then refer the  exporter to another country where CS staff are not as busy. High-growth  markets averaged 309 services sold per country, while the free trade  agreement partners averaged about 101 and the EU15 and Japan  averaged about 71 services sold per country (see fig. 11). However, when  evaluating average sales per each country\u2019s staff, free trade agreement  countries (15 products sold per staff) are by far more productive than  high-growth markets (see fig. 12), which have many more staff per post.  Analyzing data on fee-for-service activities could help CS management  understand these productivity differences and the capacity of particular  posts to deliver certain services, and the analysis in turn could help CS  determine where its limited resources should be focused to increase  sales of fee-based services.\nSecond, data on trade counseling could also be used to determine  demand for this activity, which, although it does not generate revenue  directly, represented about 50 percent of the services CS provided  exporters and also resulted in approximately 30 percent of its export  successes for fiscal years 2008 through 2010. However, counseling data  are not as complete as data on fee-for-service activities because there is  no purchase agreement for counseling. CS guidelines indicate that only  value-added counseling must be tracked in CS\u2019s client tracking system.  Also, CS staff told us in interviews that they do not record all of their  counseling sessions in the client tracking system because of difficulties  with the system. CS therefore does not know the true demand for  counseling or how much staff time is spent on this activity. A better  understanding of the types of counseling provided and how much time  and effort each type takes would enable CS to make more informed  decisions about how staff should prioritize their time. It would also enable  CS to evaluate the degree to which charging fees for counseling services  could provide additional revenue to the organization. We found that fee- for-service income was very important to the operations of some of the  overseas posts we visited. In order to help fund export promotion  activities in the face of resource constraints, several senior CS officials  told us they felt it necessary to make the selling of CS fee-based services  a local performance target and tried to create incentives for their staff to  sell such services.\nThird, both fee-for-service and counseling data could be used to assess  patterns of collaboration between domestic and international field offices  through a network analysis. Such analysis would enable CS to identify  key hubs that work with a broad array of offices in the global CS network  and less central offices working with a narrower set of countries.  Furthermore, it can be used to identify weak or missing collaboration  between offices to better serve U.S. exporters. (See app. VI for an example  based on our network analysis of these data.)\nFourth, commercial diplomacy and advocacy are significant activities,  especially for Foreign Service officers, because these activities involve  government-to-government discussions. For example, Advocacy Center  officials stated that the center receives about 500-600 requests for  assistance a year, of which they accept about 400 cases. While cases are  initiated in Washington, D.C., the majority of the work on the ground is led  by Foreign Service officers at the post where the competition for the  contract occurs, and it may take years before the pursued contract is  awarded. Although requests from companies for commercial diplomacy  and advocacy services are related to NEI priorities, CS data on these  activities are not systematically considered when setting resource  allocation priorities. CS officials told us that when they make staffing  decisions, they consider workload factors such as demand for commercial  diplomacy and advocacy in particular markets; however, their process for  considering these activities is not systematic across all posts and is not  documented.\nFinally, some posts have significant responsibilities for supporting other  agencies and important delegations. These important activities are  counted in CS highlights\u2014weekly reporting on noteworthy events or  successes in a country or region\u2014but are not systematically considered  when determining resource needs. For fiscal years 2008 through 2010,  CS overseas posts assisted with a total of 1,203 important delegations,  and CS\u2019s domestic offices supported 53 visits by foreign governments  and 208 visits by U.S. officials during the same period. At several of the  posts we visited, CS Foreign Service officers and locally employed staff  described the demands that these visits place on their time. These  supporting-role functions should be taken into account when allocating  resources; moreover, data on staff time and effort should be analyzed to  determine the extent to which these important but ancillary activities may  detract from CS\u2019s primary export promotion objectives.\n\n\tConclusions\n\nThe National Export Initiative lays out a comprehensive strategy for  marshaling the nation\u2019s export promotion resources with the goal of  doubling the dollar value of U.S. exports by the end of 2014. The U.S.  Foreign and Commercial Service (CS) is a critically important agent in  executing the NEI strategy and six of its eight priorities. The NEI targets  specific activities, such as advocacy and trade missions, that may require  changes in CS\u2019s current structure, staffing, and activities and services.  Trade-offs CS faces also have implications for how it allocates resources  between (1) small and medium-sized enterprises versus large companies,  (2) short-term export generation activities versus long-term market  development efforts, (3) new-to-export companies versus experienced  exporters, (4) traditional and FTA markets versus high-growth and next- tier emerging markets, and (5) services that yield high-dollar exports and  reach multiple exporters versus customized services for single exporters.\nCS\u2019s revised set of performance measures for fiscal year 2012 gives  greater emphasis to the dollar value of export sales attributable to its  assistance, prioritizing activities that are more likely to produce significant  dollar value of exports. Moreover, because advocacy and the activities of  large firms generate a much higher dollar value of exports than the export  promotion activities serving small and medium-sized enterprises, the new  measures\u2019 emphasis on export dollar value also is likely to shift the focus  to efforts that contribute to doubling exports but may result in less focus  on smaller firms. While our analysis shows that the fiscal year 2012  performance measures address some problems that we found with CS\u2019s  fiscal year 2010 measures, some issues remain\u2014for example,  underreporting of export successes, especially with regard to their dollar  value. Taking further steps to address these issues is particularly  important given this metric\u2019s greater importance to the NEI. Additionally,  though CS has a role that is inherently customer focused, CS\u2019s survey to  measure customer service satisfaction has a low response rate, making it  difficult to accurately assess client satisfaction with its services, and  customer service satisfaction is currently not a CS GPRA performance  measure.\nTo maximize its value in this time of increasing pressure on government  budgets, CS needs to ensure that its resource allocation decision makers  take into account the most complete and accurate economic,  performance, and activity data available. Currently, CS allocates its  resources (about 1,400 employees and a budget of about $260 million) to  more than 75 countries around the world based on various quantitative  and qualitative factors, but we found that CS does not systematically  consider certain important activities when calculating the export potential  and cost-benefit ratios used to rank locations. CS plans to implement a  repositioning strategy in fiscal year 2013. Financial constraints will require  tough resource allocation decisions based on analyses of trade-offs that  should include weighing the costs and benefits of operating in particular  markets and taking steps to maximize income and eliminate high- cost\/low-yield export promotion activities versus providing a wide range of  affordable services to any exporter seeking assistance. Although CS has  reinstituted its Overseas Resource Allocation Model, limitations with the  model that we identified reduce its ability to reflect key changes in the  global economic outlook and, therefore, in potential U.S. exports to  various countries, thus reducing the model\u2019s usefulness in helping CS  make these difficult decisions. Additionally, CS needs to systematically  incorporate relevant data such as advocacy wins and program activity  data to better understand all of the benefits that its activities create and  the full range of workload demands on its staff. Finally, such data can  also inform other important management decisions such as setting  priorities for particular posts and groups of posts, and identifying  opportunities for increasing fee income or eliminating marginally  productive export promotion services.\n\n\tRecommendations for Executive Action\n\nWe recommend that the Secretary of Commerce direct the Under  Secretary for International Trade and the Assistant Secretary for Trade  Promotion to take the following five actions:  In order for policymakers to have accurate and complete information  to make performance management and resource allocation decisions,  take further steps to achieve greater cooperation by CS clients in  reporting the dollar value of export successes.  \uf0b7  To improve government services in keeping with the Government  Performance and Results Modernization Act of 2010, take steps as  appropriate to improve the CS customer-service survey response rate  and include the measure in its GPRA-related reporting.  \uf0b7  To improve program management and the information that CS  resource allocation decisions are based upon,  review the Overseas Resource Allocation Model to determine  whether the variables and structure best incorporate available  indicators of potential U.S. exports,  include commercial diplomacy and advocacy data in evaluating  cost-benefit ratios of CS locations, and  systematically include program activity data in making resource  allocation decisions.\n\n\tAgency Comments and Our Evaluation\n\nCommerce provided written comments on a draft of this report. We have  reprinted their comments in appendix VII. Commerce also provided  technical comments and updated information, which we have  incorporated throughout the report, as appropriate.\nIn its written comments, Commerce welcomed and generally agreed with  our overall findings and recommendations. Commence noted that CS has  undertaken an initiative to better focus its strategic planning and  alignment of its resources with its mission and the NEI and has improved  its analytical tools and processes, which\u2014as noted in our report\u2014can be  further enhanced. Commerce also stated that corrective actions begun  during the course of our study would benefit from guidance provided by  our recommendations, such as CS\u2019s plan to incorporate customer-service  data into its performance measures and its effort to increase cooperation  from clients in reporting the dollar value of export successes.\nAs agreed with your offices, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days from the  report date. At that time, we will send copies to other interested Members  of Congress and to the Secretary of Commerce. In addition, the report will  be available at no charge on the GAO Web site at http:\/\/www.gao.gov.\nIf you or your staff have any questions about this report, please contact  me at (202) 512-4347 or yagerl@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 major contributions to this report  are listed in appendix VIII.\n\nAppendix I: Scope and Methodology\n\nTo determine the U.S. and Foreign Commercial Service (CS) export  promotion role and the extent to which its goals and activities support the  National Export Initiative (NEI) priorities, we reviewed CS\u2019s statutory  mission, CS services and activity information, and the Report to the  President on the National Export Initiative. We also met with CS officials  in Washington, D.C., who are responsible for managing CS and ensuring  it has the necessary resources to meet its mission and support the NEI,  as well as the International Trade Administration\u2019s Deputy Under  Secretary, Department of Commerce\u2019s NEI Director, and the Director of  the Trade Promotion Coordinating Committee. In addition, we met with  officials from CS\u2019s Advocacy Center and from Commerce\u2019s Market  Access and Compliance unit, as both contribute to CS\u2019s success in  meeting its goals and the goals of the NEI. To determine the types of  services and activities CS undertook from 2008 through 2010, we  analyzed CS fee-for-service activity and performance data for all of CS\u2019s  125 offices in more than 75 countries and its 108 domestic offices for  fiscal years 2008 through 2010, as well as data from the Advocacy Center  for the same time period, to ascertain the size of companies that CS  assists and the types of fee-for-service activities its clients purchase.  Market Access and Compliance also provided data on the number of  cases it initiated and successfully closed as well as the dollar value of  those cases from 2008 through 2010. We also reviewed CS guidance  related to capturing and verifying data on export successes, commercial  diplomacy successes, and advocacy wins, as well as on documenting  Market Access and Compliance and advocacy-related cases. We traveled  to six overseas posts (Brazil, Chile, China, El Salvador, Thailand, and  Vietnam) and interviewed CS commercial officers and locally employed  staff who carry out CS\u2019s mission. The posts we visited differed in staff  size (small, medium, and large) and included posts considered to be key  markets (Brazil and China) or designated as an NEI priority market  (Vietnam). Information from the six posts is not generalizable but was  used to understand how activity data are collected, input, and used at  posts and in headquarters, as well as to identify potential problems with  the data and to learn about data-audit procedures, topics also discussed  in interviews with CS officials in Washington, D.C.\nTo determine if CS performance measures accurately reflect its activities  and align with the NEI, we reviewed CS\u2019s fiscal year 2010 performance  measures and assessed its 2012 performance measures to see if they  changed to align with the NEI. We also reviewed Commerce\u2019s annual  performance and accountability reports from 2008 through 2010. In  addition, we reviewed Commerce\u2019s congressional budget submissions for  2011 and 2012 to identify upcoming changes to CS\u2019s performance  measures. Additionally, we reviewed CS\u2019s annual reports for fiscal year  2009 and 2010 to determine what performance measures CS reported  publicly. We also reviewed data CS provided to us on performance  measures it tracks for its own use but that are not reported in its annual  performance and accountability reports. Since we had CS data on its  activities, including export successes, commercial diplomacy successes,  and advocacy wins, we attempted to verify the data CS reported and  found some discrepancies. (See related discussion below on data  reliability.) We also interviewed the CS officials responsible for developing  and tracking CS\u2019s performance measures to learn about the development  of the 2010 and 2012 measures.\nTo determine the extent to which CS uses relevant data in allocating its  resources to help achieve its strategic goals, we interviewed CS officials  about its resource allocation process, including the use of the Overseas  Resource Allocation Model, the cost-benefit model, and other qualitative  factors CS considers when making resource allocation decisions. We also  analyzed factors associated with market structure and size, and overall  ranking of CS posts in the Overseas Resource Allocation Model and the  degree to which the model\u2019s export potential scores were consistent with  NEI priorities. We also performed a statistical analysis of the model\u2019s  variables to evaluate the model\u2019s ability as to reflect key changes in the  economic outlook and, therefore, potential U.S. exports to various nations,  and we assessed the fiscal year 2011 model\u2019s ability to differentiate the  export potential of overseas locations, especially those with lower ranking.  In addition, we analyzed the cost-benefit scores used by CS in an attempt  to show whether NEI priority markets have better (higher) cost-benefit  scores on average when compared with other export market groups. We  also looked at costs and benefits separately and analyzed the number of  export successes and CS\u2019s distribution of staff and funding among its  posts. We reviewed how each variable contributes to the overall score and  correlation among variables. We reviewed data on commercial diplomacy  successes and advocacy wins that would add relevant information when  considering costs and benefits at various posts, as well as factors that  could enable managers to assess relative workloads and efficiency in  making resource allocation decisions and calculating costs.\nTo assess the reliability of the data on CS activities (export and  commercial diplomacy success), fees-for-service, official events, and  advocacy wins data we (1) interviewed knowledgeable technical and  management personnel at CS, (2) reviewed documentation related to  these data sources such as manuals and other guidance, and (3)  performed a variety of electronic data testing procedures to check for the  internal consistency, completeness, and accuracy of the data.\nRegarding the CS activities data (export success and commercial diplomacy  success), we identified a number of limitations, particularly regarding  potential incompleteness and inaccuracy in these data. In particular, not all  export successes are entered by staff in to the CS data system and in some  cases the dollar value of export successes is not entered.\nRegarding CS\u2019s commercial diplomacy success data, we also noted a  considerable number of instances of missing data on the dollar totals of  specific commercial diplomacy successes. We also found some  discrepancies; for example, CS\u2019s commercial diplomacy dollar value was  sometimes reported as the value of assistance, which amounted to the  total dollar value of the commercial diplomacy success, and sometimes  as the export success value of the U.S. export. According to a CS official,  guidance at the time allowed for such reporting. CS, however, now plans  to report only the value of the U.S. exports resulting from commercial  diplomacy successes. To assess the reliability of the CS staffing data, we  confirmed there were no significant changes to the way the data were  compiled by CS since we last requested, reviewed, and confirmed the  reliability of the data in our previous report.\nWe determined that the CS data on activities (including fee-for-service  activities), export and commercial diplomacy success, official events, and  advocacy wins data were sufficiently reliable for the purposes of this  engagement, in particular to provide information on overall levels of export  and commercial diplomacy success, fees-for-service, advocacy wins, and  official events counts and dollar totals, as well as to provide information on  trends in these levels between 2008 and 2010. We also determined that the  budget and staffing and performance data were sufficiently reliable for the  purposes of this engagement. We conducted this performance audit from  September 2010 to September 2011 in accordance with generally accepted  government auditing standards. Those standards require that we plan and  perform the audit to obtain sufficient, appropriate evidence to provide a  reasonable basis for our findings and conclusions based on our audit  objectives. We believe that the evidence obtained provides a reasonable  basis for our findings and conclusions based on our audit objectives.\n\nAppendix II: Distribution of Domestic CS Staff in U.S. Export Assistance Centers by State, Fiscal Year 2010\n\nAppendix III: Country Groupings and Allocation of Overseas CS Staff in Fiscal Year 2010\n\n\tExport market group Partner group\n\nAppendix IV: Locations of State Department Partnership Posts Providing Export Promotion Services\n\nState Department partnership post (45)\nCommercial Service post (75+)\n\nAppendix V: Country Groupings and U.S. Exports, Calendar Years 2008-2010\n\n\tExport market group Partner group\n\n\tExport market group Partner group\n\nKorea (South)\n\n\tExport market group Partner group\n\n\tExport market group Partner group\n\nAppendix VI: Example of Network Analysis of CS Fee-for-Service Activities\n\nWe conducted network analysis of 3 years of CS\u2019s fee-for-service data  and found that certain domestic field locations tend to have strong  relationships (as measured by the number of fee-based services jointly  sold by a domestic and international office) with particular overseas posts,  while others do not. We examined the pattern of collaboration between  the three high-growth markets\u2014Brazil, China, and India\u2014and the 15  most active U.S. domestic offices. Figure 13 shows five domestic  offices\u2014Chicago, Cleveland, Houston, Newport Beach, and Northern  Virginia\u2014that each collaborated on a large number of participation  agreements with each of the three high-growth markets. However, other  domestic offices have strong relationships with one or two of the three  high-growth markets, but not with the others. For example, San Jose,  Milwaukee, and three others have their strongest relationships with China  and India, but less so with Brazil. Salt Lake City, Boston, and Baltimore  have only one strong relationship with a high-growth market. Such  patterns may suggest markets where personnel or budgetary resources  could be added or moved to expand existing relationships or to establish  new ones.\n\nAppendix VII: Comments from the Department of Commerce\n\nAppendix VIII: GAO Contact and Staff Acknowledgments\n\n\tGAO Contact\n\n\tStaff Acknowledgments\n\nIn addition to the contact named above, Adam Cowles, Assistant Director;  Julie Hirshen, Analyst-in-Charge; Gezahegne Bekele; David Dornisch;  David Dayton; Grace Lui; Emily Suarez-Harris; and Amanda Weldon  made key contributions to this report. Other staff providing technical  assistance included Kathryn Bernet, Ming Chen, Etana Finkler, Mitchell  Karpman, and Jena Sinkfield.","output":"Why GAO Did This Study\n\nRecognizing the potential of increased exports to drive economic growth and create jobs, President Obama in 2010 launched the National Export Initiative (NEI), aimed at doubling the dollar value of U.S. exports by the end of 2014. As requested, GAO examined the extent to which (1) the goals and activities of the U.S. and Foreign Commercial Service (CS) support the NEI, (2) CS performance measures accurately reflect its activities and align with the NEI, and (3) CS incorporates relevant data in allocating resources to help achieve its strategic goals. GAO interviewed Department of Commerce (Commerce) officials, particularly from CS, and CS staff and officials at six overseas posts. GAO analyzed the NEI's priorities, and documents and data related to CS activities and performance.\n\nWhat GAO Found\n\nCS's goals and activities generally support NEI priorities by, for example, arranging trade missions, assisting U.S. exporters with trade problems, and advocating on behalf of U.S. firms competing for foreign government contracts. The NEI has not required CS to undertake new activities; however, it has prompted CS to direct more of its efforts toward certain markets, activities, and sectors and to shift its focus from firms that are new to exporting to firms already exporting, as firms exporting to new markets or increasing exports to markets in which they are already active produce the greatest share of export successes. In fiscal year 2012, CS will implement revised performance measures that align more closely with the NEI. Although CS did not meet four of its six performance targets in 2010, it achieved increases in most of its measures as it shifted to address NEI priorities. CS's revised performance measures for fiscal year 2012 address some past weaknesses; however, some weaknesses will remain--for example, the lack of a measure for customer-service satisfaction and the clients' underreporting of export successes, especially with regard to dollar value. CS's new measures necessitate that export success data be complete and accurate; otherwise, CS's efforts to support the NEI goal will be undervalued and policymakers will not have an accurate picture of CS's performance. CS's resource allocation management process does not make full use of relevant information to guide its decisions. CS is using a data-driven process to prioritize foreign markets (and domestic locations) and to help it allocate staff and other resources to meet its performance goals and support NEI objectives. GAO's analysis of the quantitative parts of the process, however, found that there may be opportunities to reallocate overseas resources to better reflect NEI priorities and better achieve CS's new performance goals. The overseas model, designed to reflect export potential of partner countries, currently gives greater weight to historical variables that have a high degree of overlap with the other historical inputs in the resource allocation process. Also, the process does not systematically consider important available data on commercial diplomacy and advocacy, which are related to CS performance goals, and program activity data on how CS staff divide their time. Including such data in the process would help Commerce managers make decisions informed by the best available information.\n\nWhat GAO Recommends\n\nGAO recommends that the Department of Commerce (1) take steps to improve the CS customer-service survey response rate and include customer-service-related data in its performance measures, (2) take further steps to achieve greater cooperation by CS clients in reporting the dollar value of export successes, (3) review CS's Overseas Resource Allocation Model to determine whether its variables and structure best incorporate available indicators of potential U.S. exports, (4) include commercial diplomacy and advocacy data in evaluating cost-benefit ratios of CS locations, and (5) systematically include activity data in making resource allocation decisions. Commerce welcomed and generally agreed with the overall findings and recommendations in the report."}
{"id":"gao_GAO-02-51","pid":"gao_GAO-02-51_0","input":"\tBackground\n\nThe establishment of DOE brought together a collection of agencies with diverse institutional cultures, structures, and procedures. Since its inception, funding priorities for the department\u2019s varied mission responsibilities have shifted and new challenges have been added. Over the years, DOE\u2019s ability to effectively fulfill these responsibilities has been repeatedly questioned, with calls for dismantling the department reaching a highpoint in the mid-1990s. We concluded at the time that the Congress and the administration needed to rethink DOE\u2019s missions and structure.\n\n\t\tMissions and Organization of DOE\n\nTo foster a secure and reliable energy system that is environmentally and economically sustainable; to be a responsible steward of the Nation\u2019s nuclear weapons; to clean up the department\u2019s facilities; to lead in the physical sciences and advance the biological, environmental, and computational sciences; and to provide premier scientific instruments for the Nation\u2019s research enterprise.\nDOE groups these responsibilities into four \u201cbusiness lines,\u201d which DOE describes as follows:   Energy resources promotes the development and deployment of systems and practices that provide energy that is clean, efficient, reasonably priced, and reliable;   National nuclear security enhances national security through military application of nuclear technology and by reducing global danger from the potential spread of weapons of mass destruction;   Environmental quality cleans up the legacy of nuclear weapons and nuclear research activities, safely managing nuclear materials, and disposing of radioactive wastes; and   Science advances tools to provide the foundation for the department\u2019s applied missions and to provide remarkable insights into the physical and biological world.\nSupporting these mission-related business lines is a \u201ccorporate management\u201d function that constitutes a fifth \u201cbusiness line.\u201d This function includes putting in place an effective organizational structure; efficient management practices and information systems; procedures to ensure the safety and health of the department\u2019s workforce and the public, and to protect the environment; and practices to ensure accountability to the public. According to DOE, \u201cthe department\u2019s success within its diverse portfolio of programs is largely dependent upon a strong and sound corporate management function.\u201d\nDOE\u2019s budget priorities have gradually shifted over the years from energy policy to defense and now environmental cleanup. In fiscal year 2000, the environmental quality business line was the department\u2019s largest budget category, accounting for approximately 34 percent (about $6.7 billion) of its $19.7 billion budget. National nuclear security follows, with 25 percent of the budget (about $5 billion). Science is allotted 16 percent of the budget (about $3.2 billion), and energy resources, the original responsibility of the department, accounts for 13 percent of the budget (about $2.5 billion).\nDOE has a workforce of almost 16,000 employees and over 100,000 contractor staff located at over 50 major installations in 35 states. Crucial to DOE\u2019s missions and performance are its 22 laboratories, 11 of which are responsible for multiple programs. Although each of these 11 multiprogram laboratories conducts work in every DOE business line,  3 concentrate on national security issues, 5 on basic science, 2 on environment, and 1 on energy. DOE\u2019s other laboratories are program- specific. The budgets for all 22 laboratories total nearly $8 billion annually.\nDOE has a complex structure to manage its diverse missions. All staff and support offices at headquarters report to the Secretary of Energy and a deputy secretary, who serves as the chief operating officer. Below them are two under secretaries: one for national nuclear security, who is also the Administrator of the National Nuclear Security Administration (NNSA), and the other for the energy, science, and environmental missions. A variety of deputy administrators, directors, and assistant secretaries are subordinate to the two under secretaries and oversee individual program areas. DOE has an extensive set of field offices, which are responsible for overseeing contractor performance. The field offices include 11 \u201coperations\u201d offices and several smaller, affiliated \u201carea\u201d and \u201csite\u201d offices, which are usually located at contractor sites. For example, DOE has an area office in the Los Alamos National Laboratory that reports to an operations office in Albuquerque, New Mexico. DOE also has other field offices affiliated with the energy resources business line.\nContractors manage and operate DOE\u2019s facilities and sites under the supervision of department employees. Given that DOE spends most of its budget through these contractors, the ability of DOE to direct, oversee, and hold accountable its contractors is crucial for its mission success and overall effectiveness. DOE\u2019s contracting practices are rooted in the development of the atomic bomb under the Manhattan Project during World War II. Special contracting arrangements were developed by DOE\u2019s predecessor agencies, with participating industry and academic organizations, to reimburse all of the contractors\u2019 costs and to indemnify contractors against any liability they might incur. Most of the current contractors are for-profit companies that receive incentives for meeting certain performance objectives. Several large contractors, however, are nonprofit institutions, such as the University of California, which typically operate research institutions for DOE. Some of these nonprofit contractors also have financial incentives for achieving certain DOE goals.\n\n\t\tGAO\u2019s Call for a New Assessment of DOE\n\nIn August 1995 we reported that a fundamental reevaluation of DOE was warranted, based on prior reviews by us, DOE\u2019s Inspector General and other experts, and our survey of experts. All of these reviews identified serious management weaknesses at the department. Our report was neither the first nor the last to recommend rethinking the department\u2019s structure and mission responsibilities.\nOur August 1995 report said that DOE had gone through many evolutionary changes since its creation, in part resulting from shifts in priority among its diverse responsibilities. We concluded that even though the department had embarked on some major restructuring, in line with government-wide initiatives to reduce the federal workforce and become more results-oriented, there was no assurance that these reforms would fundamentally alter and improve the ways that DOE managed its missions. We noted that attempting to resolve management weaknesses without first evaluating and achieving consensus on missions was a risky approach to restructuring the department.\nOverwhelmingly, our survey of experts concurred that DOE must change. While there was general consensus that DOE should retain and concentrate on essential energy activities, opinions differed on where to place other departmental responsibilities. Most experts considered moving the weapons-related and environmental cleanup responsibilities to other federal agencies and creating a new organizational structure for the national laboratories, such as sharing them among federal agencies or, in some cases, privatizing them. We concluded that the ultimate structure of each mission should be determined by the option that encouraged the most cost-effective practices, attracted necessary technical talent, provided ample flexibility to react to changing conditions, and exhibited the highest degree of accountability.\n\n\tDOE Initiated Major Reforms in the 1990s\n\nIn the early to mid-1990s, newly appointed Energy Secretary Hazel O\u2019Leary initiated many reforms to address long-standing criticisms of how DOE conducted its business. As part of this process, DOE commissioned various study groups and panels to make recommendations intended to fundamentally improve the department\u2019s efficiency and effectiveness. Based on these recommendations, DOE launched a series of reforms to realign and downsize the agency, as well as address structural weaknesses and improve its management and oversight of contractors. Many of these reforms achieved their immediate objectives.\nIn 1993, DOE launched an internal initiative to improve safety and awareness of good practices throughout all aspects of the department\u2019s work. The initiative included more attention to risk reduction, improving the qualifications of the workforce, organizational realignment, and moving to external regulation of facilities. In particular, outside reviewers and DOE\u2019s own senior managers questioned the continued justification for the department\u2019s self-regulation of its contractor operated facilities, given that virtually all other federal facilities are externally regulated (including some DOE facilities). In 1994, while legislation was proposed and the Congress held hearings to assess the proposal to move to external regulation, no action was taken. A year later, a DOE advisory committee concluded that secrecy had been used as a shield to deflect public scrutiny of safety and health problems at these facilities, and that the widespread environmental contamination at some facilities was clear evidence that self-regulation had failed.\nAlso in 1993, the Energy Secretary told the Congress that DOE was not adequately in control of its major facility and site contracts and, therefore, \u201cnot in a position to ensure effective and efficient expenditures of taxpayer dollars.\u201d To improve this condition, the Secretary created the Contract Reform Team. (We had previously designated DOE contracting practices as high risk, making the department vulnerable to waste, fraud, abuse, and mismanagement. It remains on our high risk list today.) DOE\u2019s contract reform team made more than 45 recommendations, including a call for strengthening financial information systems, using performance- based contracts, and including performance criteria and incentives in contracts. One significant recommendation urged DOE to shift from making noncompetitive contract awards to adopting a full and open competitive process.\nDOE also commissioned two special task forces in 1993 to examine the quality and effectiveness of the department\u2019s laboratories and the management of its energy research and development (R&D) mission. The Secretary of Energy Advisory Board chartered The Task Force on Alternative Futures for the Department of Energy National Laboratories, chaired by a former chairman of the Motorola Corporation, Robert Galvin, to look at the laboratories. The task force\u2019s final report, issued in February 1995, concluded that DOE\u2019s laboratories were in \u201cserious jeopardy, owing to patterns of management and organization that have grown in complexity, cost, and intrusiveness over a long period.\u201d  The report called for a more disciplined research focus by the national laboratories and recommended improvements in DOE management of these facilities, including moving to an independent management structure resembling a government corporation. In response, DOE created the Laboratory Operations Board, an advisory group whose purpose was to provide dedicated management attention to laboratory issues.\nThe Secretary chartered The Task Force on Strategic Energy Research and Development, chaired by energy analyst Daniel Yergin, to examine DOE\u2019s energy resources business line. The June 1995 report of this task force assessed the rationale for the federal government\u2019s support of energy R&D, reviewed the priorities and management of the overall program, and recommended ways to make it more efficient and effective. The task force recommended that DOE streamline its R&D management, develop a strategic plan for energy R&D, eliminate duplicative laboratory programs and research projects, and reorganize and consolidate the many dispersed R&D programs at DOE laboratories.\nThe Galvin and Yergin reports led to many changes in how DOE interacts with its contractors, including a streamlining of departmental orders and procedures.\nIn addition to these improvement efforts, DOE also established a strategic alignment initiative in the fall of 1994, following the results of its extensive strategic planning process. The strategic plan was developed based on the principles of \u201ctotal quality management\u201d and the desire to increase \u201cstakeholder\u201d participation in decision-making. Under this plan, the department organized itself by \u201cbusiness lines\u201d that were essentially the same as they are today. The first phase of the strategic alignment initiative was employee driven and aimed to identify better, more cost-effective means of performing the core missions of the department as defined in the strategic plan. In May 1995, DOE announced its plan to achieve $1.7 billion in savings over the next 5 years by reducing overhead costs; closing or consolidating field offices; realigning the organizational structure; reducing federal employment; and initiating the delegation of some departmental responsibilities to the private sector (referred to as \u201cprivatization\u201d). A portion of the overhead cost savings was to come from externally regulating environment, safety, and health activities; reforming contracting practices; and streamlining departmental oversight. In August 1995, DOE released the specifics of 45 implementation plans, developed in the second phase of the initiative, to guide the cost-saving efforts and improve the department\u2019s performance and accountability.\nDOE officials were well aware of the criticism aimed at their department in the early 1990s. While maintaining that their own initiatives could transform the department, DOE officials also recognized that others were calling for more radical changes, ranging from organizing the national laboratories under a corporate structure to completely dismantling the department. DOE officials stated in response to our August 1995 report that while there is \u201cno assurance DOE\u2019s initiatives will succeed, we know that no alternative approach can provide that assurance either.\u201d The department continued to assert that its reforms, unprecedented in its history, would transform the department into a \u201cpositive model of organizational change and effectiveness.\u201d According to the Deputy Secretary at the time, the department\u2019s initiative promised to \u201cfundamentally alter how we  look and how we conduct business\u2026.\u201d\n\n\tUnresolved Management Weaknesses Contribute to Performance Problems\n\nUnresolved management weaknesses have led to recurring performance problems within DOE. Our analysis of more than 200 audit and consultant reports issued since 1995 that pertain to the department identified persistent weaknesses in the integration of strategic plans and information systems; clarification of the respective roles and responsibilities between headquarters and field offices; maintenance of a technically qualified workforce; and implementation of contract management reforms. While many of DOE\u2019s reforms have achieved their immediate objectives, weaknesses persist and have been linked to wide-ranging performance problems, including major cost overruns and schedule delays in a variety of noteworthy projects.\n\n\t\tStrategic Plan Not Used to Organize and Integrate Diverse Missions\n\nDOE has steadily improved its strategic and annual performance plans in response to past criticism. However, the department has not been able to use its strategic plan and other corporate management tools, such as a department-wide information system, to organize and integrate its missions. According to DOE, its strategic plan is a composite of plans guiding the activities of its major programs within the four business lines. This approach has created some management problems that have been identified in our past reports, in particular:   Disconnects exist between the current strategic \u201cbusiness lines\u201d and the way the department is actually organized. While DOE\u2019s strategic goals and objectives are stated within the context of the business lines, the department is organized and managed by its multiple programs. In some cases, several programs contribute to the same business line without any apparent integration. While we have called on DOE to rectify this misalignment, it has not done so. DOE has asserted that its structure is affected by external factors and that no single alignment will yield an organization that eliminates crosscutting objectives. DOE told us that it has therefore organized itself around budget decision units and set program performance measures that are linked to each strategic plan business line.\nShortcomings persist in program planning and priority setting, as well as in the use of strategic goals and measures to describe specific activities. For example, we could not determine from DOE\u2019s 1999 and 2000 accountability and performance reports what the department was trying to accomplish. We also noted that DOE had not corrected the problems in its strategic goals and measures that we identified 2 years ago. According to DOE, changes were made in the FY 2001 Annual Performance Plans to track accomplishments by budget decision units rather than the strategic plan.\nDOE has not been able to develop a single strategic plan that integrates its vast laboratory network. The laboratories, particularly the multiprogram ones, operate largely as separate entities. DOE has no central program control over the laboratories, but has instead required that each report to a lead headquarters program office since 1999. Integration into the strategic plan is supposed to occur through the interests of the headquarters offices, even though the major laboratories conduct work in all business lines.   DOE does not have an integrating management information system to consolidate its business, organizational, and operational information throughout the department. In the absence of such an integrating system, mission and program areas have developed their own systems and procedures. A September 2000 DOE Office of Inspector General report noted that duplicative systems existed or were under development at virtually all organizational levels within the department. DOE has acknowledged that a significant barrier to greater departmental integration of information systems has been the Chief Information Officer\u2019s lack of control and influence over the program budgeting processes.\nProblems continue with the validity and verifiability of the data used by the information systems to provide a baseline from which to track performance across many parts of the department.\n\n\t\tRoles and Responsibilities Remain Unclear\n\nSince 1995, there have been a number of attempts to clarify roles and responsibilities between headquarters and field staffs to improve lines of authority and accountability. A resolution for this management issue has been elusive because of the way DOE oversees its contractors. Typically, field office managers sign contracts and rate contractors on their performance, but direction on programs or project work comes from the headquarters program offices. Additionally, at least in the past, headquarters staff offices have been allowed to give direct orders to field offices outside of the formal chain of command. The reports that we reviewed frequently cited problems with such intermingled roles and responsibilities.\nA 1997 study by the Institute for Defense Analyses revealed that the coordination between DOE programs is an \u201cundisciplined, uncoordinated, essentially ad hoc process between the field managers and each of the program assistant secretaries.\u201d The institute concluded that there was no assurance that resource decisions are weighed against each other in a complete and consistent manner.\nA 1999 Panel to Assess the Reliability, Safety and Security of the United States Nuclear Stockpile reported that DOE suffered from a diffusion of functional responsibilities across a range of staff and line organizations that has led to clouded lines of authority and blurred responsibilities and accountability. In 1999, the President\u2019s Foreign Intelligence Advisory Board reported that DOE\u2019s \u201cdecentralized structure, confusing matrix of cross cutting and overlapping management, and shoddy record of accountability has advanced scientific and technological progress, but at the cost of an abominable record of security.\u2026\u201d The board labeled DOE\u2019s organization as a \u201cdysfunctional\u201d structure that has too often resulted in mismanagement of security in weapons-related activities and in a lack of emphasis on counterintelligence. The board concluded that \u201cfor the past two decades, the Department of Energy had embodied science at its best and security at its worst.\u201d\nA 1999 National Research Council review of DOE\u2019s project management problems found that DOE\u2019s \u201corganizational structure makes it much more difficult to carry out projects than in comparable private and public sector organizations.\u201d The council noted that by operating as an aggregate of independent agencies amid various program and field operations offices, DOE had failed to benefit from economies of scale. In 1999 and 2000, we attributed problems at DOE\u2019s Spallation Neutron Source project under construction in Oak Ridge, Tennessee, and at DOE\u2019s National Ignition Facility being built in Livermore, California, to, among other problems, DOE\u2019s complex management and organizational structure and unclear lines of authority.\nA March 2000 National Academy of Public Administration report on DOE\u2019s Energy Efficiency and Renewable Energy Office found that the office had suffered from unclear roles and responsibilities among various organizational levels. The Academy noted that there are \u201csignificant differences in  understanding of the roles and responsibilities for program and project management.\u201d\nRecognizing these problems, DOE has changed reporting relationships between headquarters and field offices in an attempt to clarify lines of authority and to strengthen accountability. The latest major realignment occurred in 1999 with the assigning of field offices to lead program secretarial offices at headquarters. In addition, a Field Management Council was established to coordinate the direction given to the field by program and support offices. DOE\u2019s field offices now report to whichever headquarters program office provides the most funding to the contractor sites overseen by the field managers\u2014an approach used without success in the past. This realignment had to be modified slightly in late 2000 to accommodate the establishment of NNSA. The current reporting arrangement, however, has given rise to some new management problems. We found, for example, that there is considerable uncertainty about reporting relationships in situations where many different headquarters programs support activities at shared facilities and complexes. This problem is particularly acute at DOE\u2019s multiprogram national security laboratories, where work is conducted on all of DOE\u2019s missions, yet field management must report only to NNSA headquarters. Thus, non-NNSA program staff in headquarters must work through NNSA management in the field to accomplish work related to the science and environmental missions. Conversely, some NNSA staff members work in field offices that report to headquarters programs in science or environmental management, even though they can receive direction only from NNSA. Various memorandums of agreement have been created to sort out these arrangements and to provide support services across business lines. However, staff in some field offices that we visited told us that they are unsure how the new reporting relationships will work.\nThe establishment of NNSA has yet to clarify roles and responsibilities within the nuclear security business line and may have exacerbated reporting relationships, at least temporarily. In early 2001, we and the Panel to Assess the Reliability, Safety and Security of the United States Nuclear Stockpile challenged NNSA to develop a plan for fundamentally redefining roles and responsibilities among its headquartered and field organizational units. The panel called on NNSA to \u201cclarify functional authority, reduce management layers, eliminate micromanagement [of the laboratories], and downsize.\u201d As late as April 2001, we found that NNSA had not specified the roles and responsibilities of each of the headquarters offices; the relationship between the headquarters and the field offices; whether headquarters or field offices will direct and oversee contractors; and the relationship between the NNSA staff and the rest of DOE. In NNSA\u2019s May 2001 interim report, the administration stated that it intended to seek expert advice on clarifying relationships between headquarters and the field, as well as on other issues in preparation for an October 2001 status report to the Congress. On June 26, 2001, in testimony before the House Armed Services Committee, the chairman of the Panel to Assess the Reliability, Safety and Security of the United States Nuclear Stockpile noted that \u201csome of the more fundamental management problems [with DOE] still remain to be addressed.\u201d\n\n\t\tLack of Qualified Staff Has Impeded Effective Contractor Oversight\n\nLack of technically qualified staff within DOE is another long-standing management weakness that has been linked to performance problems. We have raised concerns about this weakness since 1991, and many other external reviewers have echoed these concerns since then. For example, a 1997 report by the Institute for Defense Analyses pointed out deficiencies in the technical capabilities of those DOE managers who had survived departmental downsizing. In addition, the Defense Nuclear Facilities Safety Board warned in 1997 that, given likely future reductions in DOE\u2019s budget, the department needed to make advance preparations to avert the loss of technically competent safety personnel.\nResponding to these and other concerns, the department announced a new Workforce for the 21st Century Initiative to strengthen technical and management capabilities for its mission requirements. In particular, a 1998 internal DOE study confirmed the need to develop programs to address workforce management weaknesses in the procurement environment, such as recruitment, retention, and succession planning. However, despite these actions, additional internal and external reports that followed have raised concerns about the qualifications of DOE\u2019s workforce.\nWe reported in 1999 that while the Spallation Neutron Source project appeared to be on schedule, it had already exhibited warning signs of failure because it lacked personnel with technical skills and managerial experience. In 1999, the Commission on Maintaining United States Nuclear Weapons Expertise found that DOE\u2019s aging workforce, the tight market for talent, the lack of a long-term hiring plan, and other constraints had raised serious doubts that the department would be able to maintain its nuclear weapons expertise in the future. In 1999, the National Research Council found that DOE did not have \u201cthe necessary experience, knowledge, skills, procedures or abilities to prepare good performance measures\u201d for its contracts.\nIn its fiscal year 2001 Annual Performance Plan, the department stated that it had \u201cfully addressed\u201d the lack of technical and management skills by establishing a Corporate Education, Training and Development Plan in fiscal year 1999. DOE pointed out that it had training programs in place for procurement professionals, property managers, and information management specialists, and that it was establishing a new program to rebuild a talented and well-trained corps of R&D technical program managers. In particular, DOE reported in March 2000 that it had initiated a program to develop future leaders of the acquisition workforce. The Defense Nuclear Facilities Safety Board\u2019s 2000 report credited DOE with taking steps to improve the technical capabilities of personnel at its defense nuclear facilities, but pointed out the need for DOE\u2019s leadership to pay increased attention to this issue and to follow through with its improvement plan. Notwithstanding these efforts, the department has now acknowledged that its workforce weaknesses represent a much broader challenge encompassing the larger arena of human capital management.\nIn commenting on a draft of this report, DOE said it had additional efforts in workforce restructuring. In support, DOE officials provided us with its September 2001, \u201cFive-Year Workforce Restructuring Plan,\u201d prepared in response to an Office of Management and Budget requirement of all federal agencies. The plan describes itself as a \u201ccorporate roadmap\u201d for, among other things, reducing manager and organizational layers, increasing spans of control, and redeploying positions.\n\n\t\tContract Management Reforms Not Fully Implemented\n\nDOE has made process improvements in its contracting by implementing many of the 1994 contract reform team recommendations. For example, DOE has increased competition, imposed greater contractor liability, phased in performance-based incentives, and begun using results-oriented statements of work. According to DOE, 26 of its 37 major site and facility management contracts have now been competed, up from just 3 prior to 1994. All of these new contracts employ performance-based techniques in defining contractor requirements, evaluating performance, and linking financial incentives to results. In addition, according to DOE, there has been an overhaul and standardization of contract regulations and the issuance of guidance on proper contract administration. Nonetheless, the department has been criticized for not fully implementing its contract reforms, as noted in several reports.\nIn an October 1997 report, DOE\u2019s Inspector General reported problems with performance-based contracting at DOE\u2019s Nevada Operations Office. The report found that performance-measurement milestones had been estimated after the work had actually been completed. In addition, performance measures associated with this aspect of the contract were vague, leading DOE to reward performance that could not be objectively validated. In May 1999, we reported that while DOE laboratory contracts we examined had some performance-based features, there was a wide variance in the number of performance measures and the types of fees negotiated. We also found that DOE had not determined whether giving higher fees to encourage superior performance by laboratory contractors is advantageous to the government.\nThe National Research Council\u2019s 1999 report concluded that DOE has had limited success in establishing and managing performance-based contracts. In its 2001 follow-up report, the Council noted that DOE has yet to devise and implement either a contract performance measurement system or an information system that can track contracts and contractor performance while cycling information back into key decisions.\nDOE\u2019s Inspector General reported in April 2000 that performance-based incentives in the contract for DOE\u2019s Idaho National Engineering and Environmental Laboratory had not been fully successful in improving performance and reducing costs. For some incentives, performance declined or remained unchanged. For other incentives, performance improved, but the gains were overstated, the contractor was compensated twice, improvements either could not be linked directly to actions taken by the contractor during the incentive period or were made for a disproportionately high fee, and the contractor could not demonstrate any reduction in cost.\nDOE\u2019s Inspector General has also identified other areas where contract reforms have not been fully implemented, including the following:   A November 1998 audit determined that 16 of DOE\u2019s 20 major for-profit operating contracts did not incorporate liabilities provisions called for under contract reform.\nA December 1999 audit concluded that the department\u2019s award procedure \u201ceffectively circumvented federal requirements designed to promote and ensure the appropriate use of competition in contracting.\u201d\nA January 2000 audit of outsourcing opportunities at the Los Alamos National Laboratory determined that although the laboratory contractor found that only 4 of 184 support services could potentially be obtained at lower cost from outside entities, in fact at least 128 had outsourcing potential.\nA February 2000 audit found that only one of the four contractors reviewed had fully met a requirement to prepare \u201cmake-or-buy\u201d plans to obtain supplies and services on a least-cost basis.\nA January 2000 summary report on management challenges facing DOE pointed out that while incentives have been included in most contracts, reviews show systemic weaknesses in the way these incentives have been administered. Incentive fees have risen dramatically, but there has been no commensurate increase in financial risk to DOE\u2019s major contractors.\nDOE has also struggled to effectively implement its privatization program, which is intended to keep the department\u2019s environmental cleanup projects on schedule at budgeted costs. For example, the cleanup contracts were terminated at two noteworthy privatization projects\u2014the Hanford tank-waste project and the Idaho Pit 9 cleanup project\u2014because of concerns with rapidly escalating costs and the contractor performance.\nFinally, while DOE has increased the number of major site and facility contracts that it awards competitively, several major contracts have not been, including nine contracts with a combined value of $22 billion. Furthermore, despite glaring performance problems at certain laboratories, DOE has excluded its largest laboratories from full and open competition. For example, DOE\u2019s contracts with the University of California to operate two national laboratories have not been opened to competitive bidding since they were awarded over 50 years ago, despite reported security and project management problems at these laboratories. In commenting on a draft of this report, DOE said that it has not been required to competitively award these types of contracts (Federally Funded Research and Development Centers) and that it \u201cactively considers the use of competitive procedures for such contracts and has competed them where appropriate.\u201d DOE also said that it retained its contracts with the University of California based on \u201cnational security considerations.\u201d\n\n\t\tPersistent Management Weaknesses Contribute to Project Management Problems\n\nSeveral of the unresolved management weaknesses that we identified have been linked to recurring problems with the management of programs and projects. In 1997, we documented that over a 16-year period, of 80 DOE projects started that cost at least $100 million each, only 15 were completed, with most of these experiencing scheduling delays and cost overruns; 31 were terminated; and the 34 ongoing projects were exhibiting scheduling delays and cost increases. Since 1995, DOE and its contractors have drawn a litany of criticism for poor performance on several specific projects, including the following.\nDOE projects commonly overrun their budgets and schedules, leading to pressures for cutbacks that have resulted in facilities that do not function as intended, projects that are abandoned before they are completed, or facilities that have been so long delayed that, upon completion, they no longer serve any purpose. In short, DOE\u2019s record calls into question the credibility of its procedures for developing designs and cost estimates and managing projects.\nThe Council not only reiterated a listing of past project failures, but also noted that 26 major projects under review at the time of its study were showing notable deficiencies in project management. The report concluded that DOE\u2019s prior efforts to solve project management problems had been so unsuccessful that achieving improvements in this area would require fundamental changes in organizational structures, documents, policies and procedures, as well as drastic changes in the \u201cculture\u201d of the department.\nDOE acknowledged the persistence of problems in its project management practices in the department\u2019s fiscal year 2001 performance and accountability report. DOE stated that \u201cthe results from 33 independent external project reviews, undertaken this past year, indicate serious systemic issues needing correction. Among the most prevalent problems are inadequacies in technical scope, schedule planning and control, cost estimating, and lack of clarity on roles and responsibilities.\u201d\nIn response to the Council\u2019s 1999 recommendations for improving project management in DOE, the department created the central Office of Engineering and Construction Management and affiliated support offices in the three largest departmental program offices. These offices intend to create new policies and procedures, conduct independent project reviews, and train staff in project management practices. The department also plans to create a career track for project managers. However, a follow-up report by the Council in January 2001 raised concerns about DOE\u2019s leadership commitment to implementing the report\u2019s recommendations, particularly regarding the role of the Office of Engineering and Construction Management.\nIn commenting on a draft of this report, DOE said that many of its projects are \"unique, one-of-a-kind\" ventures that contain significant research and development which can impact cost and schedule assumptions. We agree with DOE that its projects are often challenging. We also agree that such challenges are not an excuse for poor project management performance, a common problem in many DOE activities.\n\n\tDiverse Missions, Dysfunctional Structure, and Weak Culture of Accountability Are Fundamental Impediments to Improvement\n\nThe persistence of DOE management weaknesses and project problems, despite the many actions taken by the department to improve its performance, are indicative of underlying impediments that have not been addressed. We found that the department\u2019s diverse missions, dysfunctional organizational structure, and weak culture of accountability impede fundamental improvement at DOE. Unless these underlying and interrelated impediments are addressed, DOE\u2019s management and performance problems will likely continue.\n\n\t\tDiverse Missions Resist Integration\n\nFundamental improvement in DOE\u2019s performance is impeded by the difficulty of effectively integrating the management of the department\u2019s diverse missions. DOE\u2019s energy, environmental, science, and national nuclear security staffs operate largely as separate entities within the department, maintaining their own operating styles and decision-making practices. For example, some mission areas retain strong central control over their programmatic actions, as in the science area, while others delegate more of this responsibility to the field, as in the environmental area. Uncoordinated and inconsistent direction from program headquarters offices still places the burden of effectively integrating varying goals, objectives, and management styles on the field managers who must manage this diversity at shared facilities.\nThe National Research Council\u2019s 1999 report on DOE project management noted that \u201ccultures, attitudes and organizational commitments have shaped service delivery, and as DOE\u2019s missions changed in response to external conditions, the diversity of cultures inherited by the department\u2019s collection of agencies did not necessarily change with it.\u201d This diversity of mission cultures under one roof has long prevented DOE from developing a consistent approach in its systems, structures, and interactions with contractors. For example, DOE\u2019s national security programs have a long history of operating in secret, which leads to practices that are quite different from DOE\u2019s science programs, which are more open and flexible\u2014yet these programs operate at shared facilities. This clustering of diverse programs has complicated lines of authority, thus diluting accountability among staff, and has impeded DOE\u2019s ability to oversee contractors.\nIt has been difficult for DOE to meet all the priorities of its mission programs and the requirements of the department staff offices. For example, more management attention has sometimes been given to DOE contractors meeting nuclear weapons program goals than to operating safely and in an environmentally responsible manner. The widely publicized security problems at the Los Alamos National Laboratory in 1999 and 2000 are another example. DOE\u2019s contract with Los Alamos contained few incentives for controlling classified material but many rewards for high quality science work\u2014yet this work was taking place in a top-secret laboratory, whose primary mission is designing nuclear weapons. As a result, although laboratory staff performed security tasks poorly, such lapses had limited impact on the lab contractor\u2019s overall DOE rating and subsequent performance fee.\nIn the future, the task of integrating diverse missions will likely be complicated by the need to place additional emphasis on DOE programs that play a role in ensuring homeland security. Such programs include critical infrastructure protection; nonproliferation programs, which aid in keeping nuclear material and weapons knowledge out of the hands of terrorists; R&D; and emergency preparedness.\n\n\t\tOrganizational Structure Precludes Effective Management and Performance\n\nOver the last decade or so, DOE has undertaken major departmental shake-ups every two or three years. None have stemmed recurring fundamental problems and all have been thwarted by institutional intransigence.\nThe most problematic organizational problems have involved the nuclear weapons complex. Years of tinkering with reporting relationships between the offices that have a role in national nuclear security and the laboratories where most weapons-related work is performed have not yielded many positive results. For example, the Special Investigative Panel of the President\u2019s Foreign Intelligence Advisory Board noted in its 1999 report that \u201cconvoluted, confusing, and often contradictory reporting channels have made the relationships between DOE headquarters and the laboratories, in particular, tense, internecine, and chaotic.\u201d In addition, the panel found that much of the confusion centered on the role and power of the field offices. As the panel reported, \u201csenior DOE officials often described these offices as redundant operations that function as shadow headquarters, often using their political clout and large payrolls to push their own agendas and budget priorities in the Congress.\u201d\nTo address long-standing security problems across the nuclear weapons complex, the panel concluded that because \u201cDOE was incapable of reforming itself\u2014bureaucratically and institutionally\u2014in a lasting way,\u201d an autonomous structure should be established for the national nuclear security business line, free of all other obligations imposed by DOE management. Specifically, the panel recommended creation of a new agency that is far more mission-focused and bureaucratically streamlined. Instead, the semiautonomous NNSA was established within the department.\nDOE and NNSA officials are now attempting to develop and implement an organizational plan that can operate effectively within DOE\u2019s overall field and headquarters structure. Historically, DOE\u2019s efforts to reorganize assumed that current missions will be retained under any new structure. However, as DOE\u2019s Laboratory Operations Board concluded in December 2000, the creation of NNSA will present organizational and management challenges, especially maintaining a national laboratory system that can meet the department\u2019s current mission requirements. Making changes in the current environment is further complicated by the need to consider DOE\u2019s potentially expanded role on homeland security matters on overall departmental missions.\n\n\t\tWeak Culture of Accountability\n\nDOE\u2019s lack of a strong culture of accountability is the third basic impediment to improved performance. A number of factors have weakened accountability in the department. DOE\u2019s organizational structure, which has blurred lines of authority, has made it difficult to hold staff and contractors accountable for poor performance. In addition, DOE has not taken action to improve the accountability of the organization in other areas that were identified in the mid-1990s. These pertain to contracting practices, health and safety regulation, and human capital management.\nThe reluctance of past Secretaries to open all major DOE site and facility contracts to competitive bidding has diluted accountability by weakening the department\u2019s position with its contractors. Only once has DOE fired a contractor for performance problems (at Brookhaven National Laboratory in May 1997), and rarely has it taken aggressive action to hold contractors accountable, even in the face of major project failures.\nDOE\u2019s shifting policies on external regulation also reflect DOE leadership\u2019s ambivalence toward accountability. Despite the position of former Secretary O\u2019Leary\u2014and her internal managers and consultants\u2014 that external regulation would give DOE credibility and make its facilities safer, subsequent leaders reversed course. At first, Secretary Federico Pe\u00f1a, O\u2019Leary\u2019s successor, slowed the process by ordering a pilot program of external regulation concepts. His cautious approach was meant to test how regulators might treat DOE, and at what cost. His successor, Secretary Bill Richardson, concluded that external regulation was not worth pursuing because the costs would likely outweigh the benefits. However, this position conflicted with DOE\u2019s own pilot program results and was inconsistent with conclusions reached by the Nuclear Regulatory Commission and the Occupational Safety and Health Administration\u2014 DOE\u2019s likely regulators.\nFinally, DOE\u2019s leadership has not devoted enough attention to recruiting and training a qualified technical workforce, even though these needs have been known for over a decade. Without such staff, the department lacks the expertise to direct and oversee contractors working on highly technical matters and hold them accountable for poor performance.\n\n\tConclusions\n\nPast DOE leadership has not succeeded in transforming the Department into an effective agency, as shown by the persistence of management weaknesses that have led to the performance problems documented in this report. Historically, DOE has made piecemeal changes in response to problems or criticisms without assessing the root causes of its management weaknesses: DOE\u2019s diverse missions, dysfunctional organizational structure, and weak culture of accountability.\nWhile DOE should take immediate steps to strengthen accountability, addressing the impediments to improved performance stemming from its diverse missions and dysfunctional organizational structure will require consultation with the Congress and other federal agencies. Since 1995, legislation has been introduced each year to eliminate DOE and transfer its missions to other agencies, or to terminate some of its R&D programs and laboratories. The establishment of NNSA might suggest opportunities to reconfigure other business lines, as some have suggested for the Office of Science. While the program activities of the department are important, that does not mean that all can be best managed under one agency or that each is inherently governmental.\nDOE must also have an organizational structure that effectively meets the needs of the department\u2019s missions. However, given the current diversity of these missions, the semi-autonomous status of the NNSA, and shifting mission emphases, such as protecting energy infrastructure, establishing an optimum structure embracing all of DOE\u2019s missions may simply not be possible. New leadership, ongoing organizational changes, and the need to consider how DOE\u2019s responsibilities contribute to homeland security missions, make this an opportune time to address the root causes of performance problems in DOE.\n\n\tRecommendations for Executive Action\n\nTo address its diverse mission and organizational issues, we recommend that the Secretary of Energy, in consultation with the Office of Management and Budget and other federal agencies that might gain or lose missions if DOE were reconstructed, develop a strategy for determining whether some missions would be managed better if located elsewhere, combined with other agencies, or privatized. Once this is accomplished, the Secretary should report his findings and a proposal to realign the various missions to the Congress.\nPending the results of a comprehensive review of DOE\u2019s missions, the Secretary of Energy should take immediate steps to improve the department\u2019s accountability. Such steps should include, for example, ensuring that all contract-reform initiatives already under way are completed, holding staff and contractors strictly accountable for performance, ending self regulation of worker and nuclear safety in its facilities, and developing a more technically competent workforce.\n\n\tAgency Comments\n\nIn commenting on a draft of our report, DOE said that the Secretary \"recognizes and accepts\" many of our points and has already \"instituted a path forward for achieving his vision of excellence.\"  DOE also noted that its management challenges are \"enormous\" and efforts to resolve them \"will take time.\" An important effort under way, according to DOE, is its \"strategic mission review,\" for which a report is due in January 2002. According to DOE, the purpose of this review is to focus the department on activities that best support its \"overarching national security mission.\" DOE also listed several other steps that it said will help clarify roles and responsibilities, streamline its organizational structure, and instill stronger accountability among federal and contractor staff.  Further, DOE said it has launched initiatives to \"determine why previously identified problems have not been addressed.\" Finally, the department said that the sum of its ongoing initiatives should enable it to \"achieve the spirit\" of our recommendations to improve mission, structure, and accountability.\nDOE's many initiatives, if fully implemented, address several management challenges that have long plagued the department. However, while it is too early to assess the effectiveness of these initiatives, we are concerned that they may not adequately address the root causes of DOE\u2019s recurring performance problems, particularly those related to the department's diverse missions. For example, while we applaud the Secretary's efforts to provide a strategic focus to guide all program activities, it is unclear how a \u201cnational security\u201d mission can subsume each of DOE\u2019s highly diverse programs in science, environmental quality, and energy resources. Developing measurable national security objectives for environmental management, DOE\u2019s largest budget category, will be particularly challenging.\nAlso, it appears that DOE's \"strategic mission review\" assumes that each of its many missions is still best managed by the department. As we noted in our report, many of DOE's structure and accountability problems stem from the nearly impossible task of managing diverse (and sometime conflicting cultures) within a common field structure.  The role and responsibility problems that result from this condition will likely persist, absent a comprehensive evaluation of how and where best to manage each mission.  The creation of NNSA was an attempt to resolve some of these issues internally, but the effectiveness of its management structure and associated processes is still highly uncertain.  In particular, DOE has still not clearly defined roles and responsibilities for NNSA\u2019s headquarters and field units or relationships with the rest of the department.  DOE's task of developing an integrated department is made more difficult by an expanding mission emphasis on safeguarding energy infrastructure and enhancing homeland defense against terrorist threats.  We believe that with these new mission emphases and the persistent questions about how NNSA will operate relative to other DOE programs, it is more important than ever for a strategic mission review to focus on determining whether some missions would be managed better if located elsewhere, combined with other agencies, or privatized.  As we explained in our report, a comprehensive mission assessment would require the Secretary to consult with the Office of Management and Budget and other federal agencies that might gain or lose missions if DOE were restructured.\nMany of the organizational changes cited by DOE are positive steps, such as clarifying the roles of the deputy and undersecretary, and creating a Field Management Council to facilitate cooperation among the department\u2019s diverse programs.  However, past experience has shown that such process changes have merely tinkered with a flawed structure. Without a serious effort to consider each mission for its proper placement in or out of DOE, the structural problems that have clouded roles and responsibilities will likely persist. Therefore, we reaffirm our recommendation that DOE develop a strategy for realigning its missions, followed by a proposal to the Congress.\nFinally, while DOE cited numerous initiatives to strengthen accountability, it is too early to judge whether these and other efforts adequately address our recommendation in this area.  In particular, we note that none of the initiatives cited by DOE would end self-regulation of nuclear and worker safety in its facilities.  Moreover, DOE leadership has not been able to fully implement and sustain past initiatives aimed at improving accountability among federal and contractor staff.\nAppendix III includes the full text of DOE's comments and our response.\nWe conducted our review from November 2000 through September 2001 in accordance with generally accepted government auditing standards. Appendix I provides details about the scope and methodology of our review.\nAs arranged with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution of it until 15 days from the date of this letter. We will then send copies to the Secretary of Energy; the Director, Office of Management and Budget; appropriate congressional committees; and other interested parties. We will also make copies available to others on request.\n\nAppendix I: Scope and Methodology\n\nWe conducted our analysis primarily through an assessment of more than 200 external and internal reviews of the Department of Energy (DOE) since August 1995. We selected this date as a baseline because it coincides with our first call to assess DOE\u2019s structure and missions, based on a series of prior reports on the department. In addition, we relied on information from interviews and internal documents obtained previously from DOE headquarters in Washington, D.C., and operations offices in the field that are affiliated with the three largest program offices. These field offices included the Oakland Operations Office in California, aligned with the National Nuclear Security Administration (NNSA); the Chicago Operations Office in Illinois, aligned with the Office of Science; and the Savannah River Operations Office in South Carolina, aligned with the Office of Environmental Management.\nTo describe actions taken by DOE to improve its performance by the mid-1990s, we reexamined our 1995 report on a framework for restructuring DOE and its missions. We also reviewed documents pertaining to the reforms initiated by DOE at the time of our report, including the results of several noteworthy task forces that were established by the department. We relied primarily on the department\u2019s comments on our August 1995 report to represent DOE\u2019s position on the significance of its initiated reforms.\nTo assess DOE progress since the mid-1990s in addressing management weaknesses and improving performance, we searched our database for reviews of DOE that we published between August 1995 and May 2001. Of the more than 225 reports identified, we selected 121 that addressed DOE corporate management functions, including strategic planning; information technologies; retaining, recruiting and training staff; security; environment, safety and health practices; contracting; program and project management; and national laboratory reform. We prepared summaries of the observations and recommendations contained in each of these reports. We chose not to include reports that addressed either independent agencies within the department or issues that do not consume many DOE resources. Specifically, we excluded reports on the Nuclear Regulatory Commission, the Federal Energy Regulatory Commission, the Power Marketing Administration, the Tennessee Valley Authority, and issues related to global climate change. With the exception of our major management challenges reports on DOE, the reports that we included were limited in scope and addressed only specific issues under review. The reports, therefore, do not cover all of the program and project activities of the department. For example, there was limited review of the department\u2019s energy resources business line. To improve our coverage of the department, we searched other sources of reports to identify 87 additional documents that addressed the department\u2019s performance since 1995. The Congressional Research Service, DOE\u2019s Inspector General, the National Research Council, the National Academy of Public Administration, several DOE task forces and commissions, as well as the department, were among those organizations that prepared these reports. Appendix II lists the reports and other documents that we reviewed.\nTo identify any underlying impediments to more effective management and improved performance at DOE, we reviewed our collection of reports to determine the possible causes behind the recurring management weaknesses. While there was no single source among the reports reviewed that explicitly observed all three of our root causes, there were many documents that mentioned one or two of them as contributing to a departmental culture that resists fundamental change. We assessed the strength and pervasiveness of these root causes, as well as the actions of past DOE leadership, to draw our conclusions and recommendations.\nWe conducted our review from November 2000 through September 2001 in accordance with generally accepted government auditing standards.\n\nAppendix II: Documents Reviewed\n\n\tGAO Reports\n\nDepartment of Energy: Views on the Progress of the National Nuclear Security Administration in Implementing Title 32 (GAO-01-602T, Apr. 1, 2001).\nInformation Security: Safeguarding of Data in Excessed Department of Energy Computers (GAO-01-469, Mar. 29, 2001).\nNuclear Cleanup: Progress Made at Rocky Flats, but Closure by 2006 Is Unlikely, and Costs May Increase (GAO-01-284, Feb. 28, 2001).\nHigh Risk Series: An Update (GAO-01-263, Jan. 2001).\nMajor Management Challenges and Program Risks: Department of Energy (GAO-01-246, Jan. 2001).\nNuclear Weapons: Improved Management Needed to Implement Stockpile Stewardship Program Effectively (GAO-01-48, Dec. 14, 2000).\nFinancial Management: Billions in Improper Payments Continue to Require Attention (GAO-01-44, Oct. 27, 2000).\nReinventing Government: Status of NPR Recommendations at 10 Federal Agencies (GAO\/GGD-00-145, Sept. 21, 2000).\nGovernment Performance and Results Act: Information on Science Issues in the Department of Energy\u2019s Accountability Report for Fiscal Year 1999 and Performance Plans for Fiscal Years 2000 and 2001 (GAO\/RCED-00-268R, Aug. 25, 2000).\nNational Ignition Facility: Management and Oversight Failures Caused Major Cost Overruns and Schedule Delays (GAO\/RCED-00-271, Aug. 8, 2000).\nDepartment of Energy: Uncertainties and Management Problems Have Hindered Cleanup at Two Nuclear Waste Sites (GAO\/T-RCED-00-248, July 12, 2000).\nNuclear Security: Information on DOE\u2019s Requirements for Protecting and Controlling Classified Documents (GAO\/T-RCED-00-247, July 11, 2000).\nObservations on the Department of Energy\u2019s Fiscal Year 1999 Accountability Report and Fiscal Year 2000\/2001 Performance Plan (GAO\/RCED-00-209R, June 30, 2000).\nNuclear Waste Cleanup: DOE\u2019s Cleanup Plan for the Paducah, Kentucky, Site Faces Uncertainties and Excludes Costly Activities (GAO\/T-RCED-00-225, June 27, 2000).\nDepartment of Energy: National Security Controls Over Contractors Traveling to Foreign Countries Need Strengthening (GAO\/RCED-00-140, June 26, 2000).\nNuclear Waste: Observations on DOE\u2019s Privatization Initiative for Complex Cleanup Projects (GAO\/T-RCED-00-215, June 22, 2000).\nInformation Security: Vulnerabilities in DOE\u2019s Systems for Unclassified Civilian Research (GAO\/AIMD-00-140, June 9, 2000).\nNuclear Waste: DOE\u2019s Advanced Mixed Waste Treatment Project: Uncertainties May Affect Performance, Schedule, and Price (GAO\/RCED-00-106, Apr. 28, 2000).\nNuclear Waste Cleanup: DOE\u2019s Paducah Plan Faces Uncertainties and Excludes Costly Cleanup Activities (GAO\/RCED-00-96, Apr. 28, 2000).\nFederal Research: DOE Is Providing Independent Review of the Scientific Merit of Its Research (GAO\/RCED-00-109, Apr. 25, 2000).\nLow-Level Radioactive Wastes: Department of Energy Has Opportunities to Reduce Disposal Costs (GAO\/RCED-00-64, Apr. 12, 2000).\nDepartment of Energy: Views on Proposed Civil Penalties, Security Oversight, and External Safety Regulation Legislation (GAO\/T-RCED-00-135, Mar. 22, 2000).\nNuclear Security: Security Issues at DOE and Its Newly Created National Nuclear Security Administration (GAO\/T-RCED-00-123, Mar. 14, 2000).\nNuclear Nonproliferation: Limited Progress in Improving Nuclear Material Security in Russia and the Newly Independent States (GAO\/RCED\/NSIAD-00-82, Mar. 6, 2000).\nDepartment of Energy: Views on DOE\u2019s Plan to Establish the National Nuclear Security Administration (GAO\/T-RCED-00-113, Mar. 2, 2000).\nNuclear Security: Improvements Needed in DOE\u2019s Safeguards and Security Oversight (GAO\/RCED-00-62, Feb. 24, 2000).\nOccupational Safety and Health: Federal Agencies Identified as Promoting Workplace Safety and Health (GAO\/HEHS-00-45R, Jan. 31, 2000).\nNuclear Weapons: Challenges Remain for Successful Implementation of DOE\u2019s Tritium Supply Decision (GAO\/RCED-00-24, Jan. 2000).\nNuclear Waste: DOE\u2019s Hanford Spent Nuclear Fuel Storage Project\u2014 Cost, Schedule, and Management Issues (GAO\/RCED-99-267, Sept. 20, 1999).\nDepartment of Energy: Uncertain Future for External Regulation of Worker and Nuclear Facility Safety (GAO\/T-RCED-99-269, July 22, 1999).\nObservations on the Department of Energy\u2019s Fiscal Year 2000 Performance Plan (GAO\/RCED-99-218R, July 20, 1999).\nDepartment of Energy: Problems in the Management and Use of Supercomputers (GAO\/T-RCED-99-257, July 14, 1999).\nDepartment of Energy: Need to Address Longstanding Management Weaknesses (GAO\/T-RCED-99-255, July 13, 1999).\nNuclear Safety: Department of Energy Should Strengthen Its Enforcement Program (GAO\/T-RCED-99-228, June 29, 1999).\nNuclear Weapons: DOE Needs to Improve Oversight of the $5 Billion Strategic Computing Initiative (GAO\/RCED-99-195, June 28, 1999).\nDepartment of Energy: DOE\u2019s Nuclear Safety Enforcement Program Should Be Strengthened (GAO\/RCED-99-146, June 10, 1999).\nDepartment of Energy: Cost Estimates for the Hanford Tank Waste Remediation Project (GAO\/RCED-99-188R, May 19, 1999).\nNational Laboratories: DOE Needs to Assess the Impact of Using Performance-Based Contracts (GAO\/RCED-99-141, May 7, 1999).\nNuclear Waste: DOE\u2019s Accelerated Cleanup Strategy Has Benefits but Faces Uncertainties (GAO\/RCED-99-129, Apr. 30, 1999).\nDepartment of Energy: Accelerated Closure of Rocky Flats: Status and Obstacles (GAO\/RCED-99-100, Apr. 30, 1999).\nNuclear Waste: Process to Remove Radioactive Waste From Savannah River Tanks Fails to Work (GAO\/RCED-99-69, Apr. 30, 1999).\nDepartment of Energy: Key Factors Underlying Security Problems at DOE Facilities (GAO\/T-RCED-99-159, Apr. 20, 1999).\nDOE Management: Opportunities for Saving Millions in Contractor Travel Costs (GAO\/RCED-99-107, Apr. 1, 1999).\nDepartment of Energy: Usefulness of Performance Plan Could Be Improved (GAO\/T-RCED-99-134, Mar. 24, 1999).\nDepartment of Energy: Challenges Exist in Managing the Spallation Neutron Source Project (GAO\/T-RCED-99-103, Mar. 3, 1999).\nNuclear Nonproliferation: Concerns With DOE\u2019s Efforts to Reduce the Risks Posed by Russia\u2019s Unemployed Weapons Scientists (GAO\/RCED-99-54, Feb. 19, 1999).\nDepartment of Energy: Actions Necessary to Improve DOE\u2019s Training Program (GAO\/RCED-99-56, Feb. 12, 1999).\nMajor Management Challenges and Program Risks: Department of Energy (GAO\/OGC-99-6, Jan. 1999).\nNuclear Weapons: Key Nuclear Weapons Component Issues Are Unresolved (GAO\/RCED-99-1, Nov. 9, 1998).\nDepartment of Energy: Management of Excess Property (GAO\/RCED-99-3, Nov. 4, 1998).\nDepartment of Energy: DOE Needs to Improve Controls Over Foreign Visitors to Its Weapons Laboratories (GAO\/T-RCED-99-28, Oct. 14, 1998).\nNuclear Waste: Department of Energy\u2019s Hanford Tank Waste Project\u2014 Schedule, Cost, and Management Issues (GAO\/RCED-99-13, Oct. 8, 1998).\nNuclear Waste: Schedule, Cost, and Management Issues at DOE\u2019s Hanford Tank Waste Project (GAO\/T-RCED-99-21, Oct. 8, 1998).\nDepartment of Energy: Problems in DOE\u2019s Foreign Visitor Program Persist (GAO\/T-RCED-99-19, Oct. 6, 1998).\nNuclear Waste: Further Actions Needed to Increase the Use of Innovative Cleanup Technologies (GAO\/RCED-98-249, Sept. 25, 1998).\nDepartment of Energy: DOE Lacks an Effective Strategy for Addressing Recommendations From Past Laboratory Advisory Groups (GAO\/T-RCED-98-274, Sept. 23, 1998).\nDepartment of Energy: Uncertain Progress in Implementing National Laboratory Reforms (GAO\/RCED-98-197, Sept. 10, 1998).\nDepartment of Energy: Lessons Learned Incorporated Into Performance- Based Incentive Contracts (GAO\/RCED-98-223, July 29, 1998).\nInformation Technology: Department of Energy Does Not Effectively Manage Its Supercomputers (GAO\/RCED-98-208, July 17, 1998).\nFinancial Management: Fostering the Effective Implementation of Legislative Goals (GAO\/T-AIMD-98-215, June 18, 1998).\nDOE Management: Functional Support Costs at DOE Facilities (GAO\/RCED-98-193R, June 12, 1998).\nDOE Fiscal Year 1999 Budget Request for Energy Efficiency and Renewable Energy and Financial Management Issues (GAO\/RCED-98-186R, June 10, 1998).\nDepartment of Energy: Alternative Financing and Contracting Strategies for Cleanup Projects (GAO\/RCED-98-169, May 29, 1998).\nResults Act: Observations on DOE\u2019s Annual Performance Plan for Fiscal Year 1999 (GAO\/RCED-98-194R, May 28, 1998).\nDepartment of Energy: Clear Strategy on External Regulation Needed for Worker and Nuclear Facility Safety (GAO\/T-RCED-98-205, May 21, 1998).\nDepartment of Energy: Clear Strategy on External Regulation Needed for Worker and Nuclear Facility Safety (GAO\/RCED-98-163, May 21, 1998).\nNuclear Waste: Management Problems at the Department of Energy\u2019s Hanford Spent Fuel Storage Project (GAO\/T-RCED-98-119, May 12, 1998).\nDepartment of Energy: DOE Contractor Employee Training (GAO\/RCED-98-155R, May 8, 1998).\nDepartment of Energy: Problems and Progress in Managing Plutonium (GAO\/RCED-98-68, Apr. 17, 1998).\nResults Act: DOE Can Improve Linkages Among Plans and Between Resources and Performance (GAO\/RCED-98-94, Apr. 14, 1998).\nNuclear Weapons: Design Reviews of DOE\u2019s Tritium Extraction Facility (GAO\/RCED-98-75, Mar. 31, 1998).\nNuclear Waste: Understanding of Waste Migration at Hanford Is Inadequate for Key Decisions (GAO\/RCED-98-80, Mar. 13, 1998).\nBest Practices: Elements Critical to Successfully Reducing Unneeded RDT&E Infrastructure (GAO\/NSIAD\/RCED-98-23, Jan. 8, 1998).\nDepartment of Energy: Subcontracting Practices (GAO\/RCED-98-30R, Nov. 24, 1997).\nDepartment of Energy: Information on the Tritium Leak and Contractor Dismissal at the Brookhaven National Laboratory (GAO\/RCED-98-26, Nov. 4, 1997).\nDepartment of Energy: Clearer Missions and Better Management Are Needed at the National Laboratories (GAO\/T-RCED-98-25, Oct. 9, 1997).\nDepartment of Energy: DOE Needs to Improve Controls Over Foreign Visitors to Weapons Laboratories (GAO\/RCED-97-229, Sept. 25, 1997).\nResults Act: Observations on the Department of Energy\u2019s August 15, 1997, Draft Strategic Plan (GAO\/RCED-97-248R, Sept. 2, 1997).\nResults Act: Observations on Federal Science Agencies (GAO\/T-RCED-97-220, July 30, 1997).\nNuclear Waste: Department of Energy\u2019s Pit 9 Cleanup Project Is Experiencing Problems (GAO\/T-RCED-97-221, July 28, 1997).\nNuclear Waste: Department of Energy\u2019s Project to Clean Up Pit 9 at Idaho Falls Is Experiencing Problems (GAO\/RCED-97-180, July 28, 1997).\nResults Act: Comments on Selected Aspects of the Draft Strategic Plans of the Departments of Energy and the Interior (GAO\/T-RCED-97-213, July 17, 1997).\nResults Act: Observations on the Department of Energy\u2019s Draft Strategic Plan (GAO\/RCED-97-199R, July 11, 1997).\nDepartment of Energy: Status of DOE\u2019s Efforts to Improve Training (GAO\/RCED-97-178R, June 27, 1997).\nHigh-Risk Program: Information on Selected High-Risk Areas (GAO\/HR-97-30, May 1997).\nDepartment of Energy: Opportunity for Enhanced Oversight of Major System Acquisitions (GAO\/RCED-97-146R, Apr. 30, 1997).\nDepartment of Energy: Information on the Distribution of Funds for Counterintelligence Programs and the Resulting Expansion of These Programs (GAO\/RCED-97-128R, Apr. 25, 1997).\nDepartment of Energy: Funding and Workforce Reduced, but Spending Remains Stable (GAO\/RCED-97-96, Apr. 24, 1997).\nDepartment of Energy: Plutonium Needs, Costs, and Management Programs (GAO\/RCED-97-98, Apr. 17, 1997).\nDepartment of Energy: Improving Management of Major System Acquisitions (GAO\/T-RCED-97-92, Mar. 6, 1997).\nDepartment of Energy: Management and Oversight of Cleanup Activities at Fernald (GAO\/RCED-97-63, Mar. 14, 1997).\nHigh-Risk Series: Department of Energy Contract Management (GAO\/HR-97-13, Feb. 1997).\nNuclear Waste: DOE\u2019s Estimates of Potential Savings From Privatizing Cleanup Projects (GAO\/RCED-97-49R, Jan. 31, 1997).\nNuclear Waste: Impediments to Completing the Yucca Mountain Repository Project (GAO\/RCED-97-30, Jan. 17, 1997).\nDepartment of Energy: Contract Reform Is Progressing, but Full Implementation Will Take Years (GAO\/RCED-97-18, Dec. 10, 1996).\nDepartment of Energy: Opportunity to Improve Management of Major System Acquisitions (GAO\/RCED-97-17, Nov. 26, 1996).\nDOE Security: Information on Foreign Visitors to the Weapons Laboratories (GAO\/T-RCED-96-260, Sept. 26, 1996).\nDepartment of Energy: Observations on the Future of the Department (GAO\/T-RCED-96-224, Sept. 4, 1996).\nHanford Waste Privatization (GAO\/RCED-96-213R, Aug. 2, 1996).\nNuclear Weapons: Improvements Needed to DOE\u2019s Nuclear Weapons Stockpile Surveillance Program (GAO\/RCED-96-216, July 31, 1996).\nInformation Management: Energy Lacks Data to Support Its Information System Streamlining Effort (GAO\/AIMD-96-70, July 23, 1996).\nEnergy Management: Technology Development Program Taking Action to Address Problems (GAO\/RCED-96-184, July 9, 1996).\nDOE\u2019s Cleanup Cost Savings (GAO\/RCED-96-163R, July 1, 1996).\nDOE\u2019s Laboratory Facilities (GAO\/RCED-96-183R, June 26, 1996).\nEnergy Research: Opportunities Exist to Recover Federal Investment in Technology Development Projects (GAO\/RCED-96-141, June 26, 1996).\nDepartment of Energy: Progress Made Under Its Strategic Alignment and Downsizing Initiative (GAO\/T-RCED-96-197, June 12, 1996).\nFederal Facilities: Consistent Relative Risk Evaluations Needed for Prioritizing Cleanups (GAO\/RCED-96-150, June 7, 1996).\nManaging DOE: The Department\u2019s Efforts to Control Litigation Costs (GAO\/T-RCED-96-170, May 14, 1996).\nEnergy Downsizing: While DOE Is Achieving Budget Cuts, It Is Too Soon to Gauge Effects (GAO\/RCED-96-154, May 13, 1996).\nSuccess Stories Response (GAO\/OCG-96-3R, May 13, 1996).\nDOE Cleanup: Status and Future Costs of Uranium Mill Tailings Program (GAO\/T-RCED-96-167, May 1, 1996).\nDOE\u2019s Success Stories Report (GAO\/RCED-96-120R, Apr. 15, 1996).\nEnvironmental Protection: Issues Facing the Energy and Defense Environmental Management Programs (GAO\/T-RCED\/NSIAD-96-127, Mar. 21, 1996).\nNuclear Weapons: Status of DOE\u2019s Nuclear Stockpile Surveillance Program (GAO\/T-RCED-96-100, Mar. 13, 1996).\nFederal R&D Laboratories (GAO\/RCED\/NSIAD-96-78R, Feb. 29, 1996).\nNuclear Nonproliferation: Concerns With the U.S. International Nuclear Materials Tracking System (GAO\/T-RCED\/AIMD-96-91, Feb. 28, 1996).\nUranium Mill Tailings: Status and Future Costs of Cleanup (GAO\/T-RCED-96-85, Feb. 28, 1996).\nEnergy\u2019s Financial Resources and Workforce (GAO\/RCED-96-69R, Feb. 28, 1996).\nNuclear Waste: Management and Technical Problems Continue to Delay Characterizing Hanford\u2019s Tank Waste (GAO\/RCED-96-56, Jan. 26, 1996).\nUranium Mill Tailings: Cleanup Continues, but Future Costs Are Uncertain (GAO\/RCED-96-37, Dec. 15, 1995).\nDepartment of Energy: A Framework for Restructuring DOE and Its Missions (GAO\/RCED-95-197, Aug. 21, 1995).\n\n\tOther Reports\n\nReport to Congress on the Plan for Organizing the National Nuclear Security Administration (Department of Energy, National Nuclear Security Administration, May 3, 2001).\nSpecial Report: Performance Measures at the Department of Energy (Department of Energy, Office of Inspector General, DOE\/IG-0504, May 2001).\nPrepared Testimony of John A. Gordon, Under Secretary of Energy and Administrator for Nuclear Security, National Nuclear Security Administration, U.S. Department of Energy, Before the Senate Appropriations Committee, Energy & Water Subcommittee (Apr. 26, 2001).\nStatement of John A. Gordon, Under Secretary of Energy and Administrator for Nuclear Security, National Nuclear Security Administration, U.S. Department of Energy, Before the Special Oversight Panel on Department of Energy Reorganization, Committee on Armed Services, U.S. House of Representatives (Apr. 4, 2001).\nAudit Report: Bechtel Jacobs Company LLC\u2019s Management and Integration Contract at Oak Ridge (Department of Energy, Office of Inspector General, DOE\/IG-0498, Mar. 21, 2001).\nScience and Technology Issues Facing the 107th Congress: First Session (Congressional Research Service-RL30869, Mar. 1, 2001).\nDepartment of Energy: Performance and Accountability Report Fiscal Year 2000 (Department of Energy\/CR-0071, Feb. 16, 2001).\nFederal Managers\u2019 Financial Integrity Act (Department of Energy, Memorandum for the Secretary of Energy from Gregory H. Friedman, Inspector General, CR-L-01-06, Feb. 8, 2001).\nFY 2000 Report to Congress of the Panel to Assess the Reliability, Safety, and Security of the United States Nuclear Stockpile (Feb. 1, 2001).\nEleventh Annual Report to Congress (Defense Nuclear Facilities Safety Board, Feb. 2001).\nH.R. 376\u2014To Abolish the Department of Energy (107th Congress, Jan. 31, 2001).\nInterim Letter Report for the Improved Project Management in the Department of Energy (The National Academies, Jan. 17, 2001).\nThe Department of Energy\u2019s Tritium Production Program (Congressional Research Service-RL30425, Jan. 12, 2001).\nNuclear Energy Policy (Congressional Research Service-IB88090, Jan. 12, 2001).\nCivilian Nuclear Waste Disposal (Congressional Research Service- IB92059, Jan. 10, 2001).\nThe National Ignition Facility: Management, Technical, and Other Issues (Congressional Research Service-RL30540, Jan. 4, 2001).\nDepartment of Energy Research and Development Budget for FY 2001: Description and Analysis (Congressional Research Service-RL30445, Jan. 3, 2001).\nAnnual Performance Plan for FY 2001 (Department of Energy\/CR-0068-9).\nChina: Suspected Acquisition of U.S. Nuclear Weapon Secrets (Congressional Research Service-RL30143, Dec. 20, 2000).\nDOE Science for the Future: A Discussion Paper (Academic Panel, Dec. 14, 2000).\nPerformance-Based Management at the Department of Energy (External Members of the Laboratory Operations Board, Dec. 7, 2000).\nContributions and Value of the Laboratory Operations Board (Department of Energy, Memorandum from Ernest Moniz and John McTague to Bill Richardson, Secretary of Energy, Dec. 7, 2000).\nSpecial Report: Management Challenges at the Department of Energy (Department of Energy, Office of Inspector General, DOE\/IG-0491, Nov. 28, 2000).\nUnited States Department of Energy: Fact Book FY 2000 (Department of Energy, Office of Management and Administration, Office of Management and Operations Support, Nov. 2000).\nEstablishing the National Nuclear Security Administration: A Year of Obstacles and Opportunities (Special Oversight Panel on Department of Energy Reorganization, Committee on Armed Services, U.S. House of Representatives, Oct. 13, 2000).\nDOE\u2019s Civilian Information Technology Program (Congressional Research Service-RS20626, Oct. 5, 2000).\nField Restructuring (Department of Energy, Memorandum for Heads of Departmental Elements from T. J. Glauthier, Sept. 26, 2000).\nRestructuring DOE and Its Laboratories: Issues in the 106th Congress (Congressional Research Service-IB10036, Sept. 13, 2000).\nThe Department of Energy\u2019s Spallation Neutron Source Project: Description and Issues (Congressional Research Service-RL30385, Sept. 12, 2000).\nStrategic Plan: Powering the 21st Century\u2014Strength Through Science (Department of Energy\/CR-0070, Sept. 2000).\nAudit Report: Security Overtime at the Oak Ridge Operations Office (Department of Energy, Office of Inspector General, ER-B-00-02, June 21, 2000).\nRoles and Responsibilities Guiding Principles (Department of Energy, Memorandum from T. J. Glauthier to Under Secretary, Energy, Science, and Environment and Acting Administrator for Nuclear Security, June 2, 2000).\nAudit Report: Central Shops at Brookhaven National Laboratory (Department of Energy, Office of Inspector General, ER-B-00-01, May 11, 2000).\nAudit Report: Performance Incentives at the Idaho National Engineering and Environmental Laboratory (Department of Energy, Office of Inspector General, WR-B-00-05, Apr. 3, 2000).\nStatement of Dan W. Reicher, Assistant Secretary for Energy Efficiency and Renewable Energy, U.S. Department of Energy, Before the Subcommittee on Interior and Related Agencies, Committee on Appropriations, U.S. House of Representatives Oversight Hearing on Energy Conservation Financial Management Procurement (Mar. 30, 2000).\nCharitable Giving Requirements in Department of Energy Contracts (Department of Energy, Memorandum From the Inspector General to the Deputy Secretary, HQ-L-00-01, Mar. 14, 2000).\nA Review of Management in the Office of Energy Efficiency and Renewable Energy (National Academy of Public Administration, Mar. 2000).\nAudit Report: The Department\u2019s Management and Operating Contractor Make-or-Buy Program (Department of Energy, Office of Inspector General, DOE\/IG-0460, Feb. 17, 2000).\nTenth Annual Report to Congress (Defense Nuclear Facilities Safety Board, Feb. 2000).\nStrength Through Science\u2014U.S. Department of Energy FY 2001 Budget Request to Congress\u2014Budget Highlights (Department of Energy, Office of Chief Financial Officer, Feb. 2000)\nCongress and the Fusion Energy Sciences Program: A Historical Analysis (Congressional Research Service-RL30417, Jan. 31, 2000).\nAudit Report: Follow-up Audit of Program Administration by the Office of Science (Department of Energy, Office of Inspector General, DOE\/IG-0457, Jan. 24, 2000).\nAudit Report: The Management of Tank Waste Remediation at the Hanford Site (Department of Energy, Office of Inspector General, DOE\/IG-0456, Jan. 21, 2000).\nAudit Report: Outsourcing Opportunities at the Los Alamos National Laboratory (Department of Energy, Office of Inspector General, WR-B-00-03, Jan. 18, 2000).\nResearch and Development Budget of the Department of Energy for FY2000: Description and Analysis (Congressional Research Service- RL30054, Dec. 16, 1999).\nInspection Report: Inspection of Alleged Improprieties Regarding Issuance of a Contract (DOE\/IG-INS-O-00-02, Dec. 16, 1999).\nContractor Make or Buy Plan Implementation (Department of Energy, Memorandum from Richard Hopf, Director, Office of Procurement and Assistance Management, to Heads of Contracting Activities, Dec. 6, 1999).\nStockpile Stewardship Program: 30-Day Review (Department of Energy, Nov. 23, 1999).\nFY 1999 Report of the Panel to Assess the Reliability, Safety, and Security of the United States Nuclear Stockpile (Nov. 8, 1999).\nDepartment of Energy: Programs and Reorganization Proposals (Congressional Research Service-RL30307, Sept. 17, 1999).\nDOE Security: Protecting Nuclear Material and Information (Congressional Research Service-RS20243, July 23, 1999).\nGlauthier Announces DOE Project Management Reforms (Department of Energy Press Release, June 25, 1999).\nTechnology Transfer to China: An Overview of the Cox Committee Investigation Regarding Satellites, Computers, and DOE Laboratory Management (Congressional Research Service-RL30231, June 11, 1999).\nScience at its Best, Security at its Worst: A Report on Security Problems at the U.S. Department of Energy (A Special Investigative Panel, President\u2019s Foreign Intelligence Advisory Board, June 1999).\nChanges to the Departmental Management Structure (Department of Energy, Memorandum from the Secretary of Energy to Heads of Departmental Elements, Apr. 21, 1999).\nCommission on Maintaining United States Nuclear Weapons Expertise: Report to the Congress and Secretary of Energy (Mar. 1, 1999).\nNinth Annual Report to Congress (Defense Nuclear Facilities Safety Board, Feb. 1999).\nAudit Report: The U.S. Department of Energy\u2019s Implementation of the Government Performance and Results Act (Department of Energy, Office of Inspector General, DOE\/IG-0439, Feb. 4, 1999).\nU.S. National Security and Military\/Commercial Concerns with the People\u2019s Republic of China (Select Committee, United States House of Representatives, Jan. 3, 1999).\nDepartment of Energy: Accountability Report Fiscal Year 1999 (Department of Energy\/CR-0069, 1999).\nImproving Project Management in the Department of Energy (National Research Council, 1999).\nU.S. Department of Energy Strategic Alignment Initiative, Fiscal Year 1998 Status Report (Department of Energy, 1999).\nAudit Report: The U.S. Department of Energy\u2019s Efforts to Increase the Financial Responsibility of Its Major For-Profit Operating Contractors (Department of Energy, Office of Inspector General, DOE\/IG-0432, Nov. 20, 1998).\nAudit Report: Project Hanford Management Contract Costs and Performance (Department of Energy, Office of Inspector General, DOE\/IG-0430, Nov. 5, 1998).\nAudit Report: The U.S. Department of Energy\u2019s Prime Contractor Fees on Subcontractor Costs (Department of Energy, Office of Inspector General, DOE\/IG-0427, Sept. 11, 1998).\nUnlocking Our Future: Toward a New National Science Policy (A Report to Congress by the House Committee on Science, Sept. 24, 1998).\nAudit Report: The Cost Reduction Incentive Program at the Savannah River Site (Department of Energy, Office of Inspector General, ER-B-98-08, May 29, 1998).\nInspection Report: The Fiscal Year 1996 Performance Based Incentive Program at the Savannah River Operations Office (Department of Energy, Office of Inspector General, May 1998).\nAssessing the Need for Independent Project Reviews in the DOE (National Research Council, 1998).\nAudit of Support Services Subcontracts at Argonne National Laboratory (Department of Energy, Office of the Inspector General, DOE\/IG-0416, Dec. 23, 1997).\nDepartmental Reporting Relationships (Department of Energy, Memorandum from J. M. Wilcynski, Manager, Idaho Operations Office, to the Deputy Secretary and Under Secretary, Nov. 26, 1997).\nAudit Report: Audit of the Contractor Incentive Program at the Nevada Operations Office (Department of Energy, Office of Inspector General, DOE\/IG-0412, Oct. 20, 1997).\nRestructuring DOE and Its Laboratories: Issues in the 105th Congress (Congressional Research Service-IB97012, Oct. 15, 1997).\nExternal Members of the Laboratory Operations Board Analysis of Headquarters and Field Structure Issues (Secretary of Energy Advisory Board, Oct. 2, 1997).\nDOE Laboratory Restructuring Legislation in the 104th Congress (Congressional Research Service-97-558SPR, May 13, 1997).\nThe Organization and Management of the Nuclear Weapons Program: 120-Day Study (Institute for Defense Analysis, Feb. 27, 1997).\nSeventh Annual Report to Congress (Defense Nuclear Facilities Safety Board, Feb. 1997).\nDepartment of Energy Strategic Alignment Initiative Status Report\u2014 Fiscal Year 1996 (DOE, Dec. 1996).\nHow to Close Down the Department of Energy (The Heritage Foundation, Nov. 9, 1995).\nDepartment of Energy Abolition? Implications for the Nuclear Weapons Program (Congressional Research Service-95-1020F, Sept. 29, 1995).\nStrategic Alignment: Tracking Our Progress (Department of Energy, Sept. 5, 1995).\nEnergy R&D: Shaping Our Nation\u2019s Future in a Competitive World (Final Report of the Task Force on Strategic Energy Research and Development, June 1995).\nAlternative Futures for the DOE National Laboratories (Task Force on Alternative Futures for the National Laboratories (Secretary of Energy Advisory Board, Feb. 1995).\n\nAppendix III: Comments From the Department of Energy\n\nThe following are GAO's comments on the Department of Energy's letter dated November 30, 2001.\n\n\tGAO Comments\n\n1.  Our response is included in the body of the report. 2.\nIn our report, we acknowledge and support DOE\u2019s efforts to implement performance-based contracting practices and to competitively award more of its contracts.  As suggested, we have revised our report to note that the department has not been required to compete contracts to manage its Federally Funded Research and Development Centers. 3.  As we state in our report, our concern is that some of DOE's largest contracts, notably those with the University of California to manage several national laboratories, have never been opened to competitive bidding.  According to DOE, the decisions related to the most recent contract extension with this university were based on \"national security considerations \" and were not \"contract management decisions \u2026\" The benefits of competing contracts are widely accepted and espoused by DOE in its own policies.  Recent interest shown by another university in competing for the Sandia National Laboratory contract when it expires in 2003 suggests that there may be other capable competitors, and that national security considerations do not inhibit DOE from attracting new performers. 4.  We agree that DOE sponsors many \"unique\" projects that contain significant research and development that can impact cost and schedule assumptions, and we have incorporated this comment in our report.  Nevertheless, we concur with DOE that this circumstance should not be used as \"an excuse for the poor performance in project management\" that was cited in our report. 5.  We do not concur with DOE that the department\u2019s strategic planning process has worked effectively to organize and integrate its diverse missions.  As we said in our report, DOE told us that its strategic plan is a composite of plans that guides the program activities of the department's four \"business lines,\" each of which establishes its own objectives and management systems.  Acknowledging the unfocused nature of the department, the Secretary is just now taking steps to define an overarching departmental objective for all programs and to expand NNSA\u2019s new Planning, Programming, Budgeting and Evaluation system department-wide.  He is also creating a new office under the Chief Financial Officer that \"will analyze and evaluate plans, programs and budgets in relation to the department's objectives\u2026\" The department said that it expects this office will serve as the \"linchpin\" for making improvements in strategic planning in the future. 6.  We reported in 1998 that DOE's Strategic Laboratory Missions plan, which was published in 1996, was essentially a descriptive summary of current laboratory activities; it did not direct change.  Nor did the plan tie DOE's or the laboratories' missions to the annual budget process. As we previously reported, when we asked laboratory officials about strategic planning, most discussed their own planning capabilities, and some laboratories provided us with their own self-generated strategic planning documents.  None of the officials at the multiprogram laboratories we visited at the time mentioned DOE's Strategic Laboratory Missions plan as an essential document for their own strategic planning. 7.  We noted in our report that DOE is attempting to clarify roles and responsibilities.  We also noted that DOE's 1999 reorganization was similar to steps the department had taken previously without success. While we have not assessed the effectiveness of the new Field Management Council, we noted in our report that the establishment of the NNSA appears to have created, at least temporarily, additional confusion regarding roles, responsibilities, and reporting relationships within the department. 8.  We noted in our report that the department has been taking steps to address its workforce problems since the early 1990s, and it continues to do so today.  As we said, we are concerned by the lack of succession planning and progress by DOE in addressing known human capital deficiencies.  We have revised our report, however, to reflect that DOE published, in September 2001, its \"Five-Year Workforce Restructuring Plan.\"  According to DOE, the plan responds to an OMB requirement of all federal agencies and presents a \"corporate roadmap\" for reducing manager and organizational layers, increasing spans of control, and redeploying staff.  The plan describes a variety of ongoing and planned actions.  Regarding DOE's discussion of the many underlying factors affecting its staffing, we agree that building a quality workforce is very challenging.  As DOE notes, these challenges are made more difficult by the constant changes in mission focus that characterize DOE's history.\n\nAppendix IV: GAO Contacts and Staff Acknowledgments\n\n\tGAO Contacts\n\n\tStaff Acknowledgments\n\nIn addition to those named above, Tom Laetz, Dan Feehan, William Lanouette, Tom Kingham, Linda Chu, James Charlifue, and Cynthia Norris made key contributions to this report.","output":"Why GAO Did This Study\n\nThe Department of Energy (DOE) manages the nation's nuclear weapons production complex, cleans up the environmental legacy from the production of nuclear weapons, and conducts research and development into both energy and basic science. DOE launched several reforms in the 1990s to realign its organizational structure, reduce its workforce, strengthen contracting procedures by competitive awards practices, streamline oversight of activities, and delegate some responsibilities to the private sector.\n\nWhat GAO Found\n\nDespite these reforms, GAO found that management weaknesses persist because DOE's reforms were piecemeal solutions whose effect has been muted by three impediments to fundamental improvement: the department's diverse missions, dysfunctional organizational structure, and weak control of accountability. Management weaknesses and performance problems will likely continue unless DOE addresses these impediments in a comprehensive fashion."}
{"id":"gao_GGD-99-147","pid":"gao_GGD-99-147_0","input":"\tBackground\n\nIn 1989, the Pacific Area Office, then called the Western Regional Office, identified several deficiencies in the 935 ZIP Code area and proposed relocating the distribution operations for five post offices in the area into a new facility. The key deficiencies identified by postal officials included the following: space deficiencies for mail processing operations in the Mojave MPO, which is responsible for mail processing operations for all of the post offices in the Antelope Valley; space deficiencies in carrier delivery operations in four of the five post offices affected by the proposed project; and space deficiencies in the Lancaster MPO limited the ability to meet demand for post office boxes, and parking for customers, employees, and postal vehicles.\nFigure 1 shows the locations of the five affected post offices in the cities of Lancaster, Mojave, Palmdale, Tehachapi, and Ridgecrest located in the southern portion of the Antelope Valley.\nSince the 1980 census, the Antelope Valley area, also known as the 935 ZIP Code area, has more than doubled its population. The growth in mail volume has paralleled the population growth. As shown in table 1, growth in this area was somewhat slower in the 1990s than in the 1980s. However, current projections expect that population and mail growth will accelerate again over the next decade.\nOver half of the population growth in the 935 ZIP Code area occurred in two cities, Lancaster and Palmdale. From 1980 to 1990, Lancaster\u2019s population grew from about 48,000 to 97,300, and Palmdale\u2019s population grew from about 12,300 to 68,900. During this same period, Mojave\u2019s population grew from about 2,900 to 3,800. The Southern California Association of Governments has projected that the Lancaster-Palmdale population would increase again over 200 percent by 2010.\nMail scheduled for final delivery in the Antelope Valley originates from all over the United States and the rest of the world and is transported to the Los Angeles Processing and Distribution center located near Los Angeles International Airport. There, the mail undergoes a first-level sort by the first three digits of the ZIP Code. The mail is then transported to smaller mail processing facilities, such as the Mojave MPO, where secondary operations are performed on automated equipment to sort the mail to the five-digit ZIP Code level. Generally at this stage, some of the mail would also be automatically sorted to the carrier-route level and sequenced in the order that carriers deliver it. However, in Mojave, the necessary automated equipment is not available for sorting mail down to the carriers\u2019 delivery sequence order. Thus, the mail is transported to the postal facilities responsible for mail delivery, such as Lancaster, where the mail carriers manually sort the mail into delivery sequence order.\nAdministrative support and mail processing functions for mail to be delivered in the 935 ZIP Code area, as well as local retail and delivery functions, are housed at the MPO in Mojave. According to available postal documents, the Mojave MPO was functioning at its maximum capacity in 1990. Mail processing and customer service operations competed for space in the crowded facility. Operational efficiency was beginning to suffer due to the continual shifting of equipment to allow adequate space for processing operations. More recently, postal documents noted that some automated sorting equipment intended for Mojave processing operations was being stored in warehouses due to insufficient space.\nPostal documents from 1990 also reported that the Lancaster MPO had reached its maximum capacity and could not accommodate the future growth anticipated in Lancaster. Carrier operations had spread onto the loading platform, where mail was being placed to await distribution. Both employees and mail were exposed to weather conditions. There was a demand for additional post office boxes at the MPO, but there was no room to expand the box section. According to the Service, employee support facilities were inadequate; and parking facilities for customer, employee, and postal vehicles were also inadequate. Similar conditions reportedly existed in the Palmdale MPO, and a facility replacement was included in the Western Region\u2019s Five-Year Facility plan. The MPOs in Ridgecrest and Tehachapi were also reported to be experiencing space deficiencies but not to the extent of the problems in Lancaster, Mojave, and Palmdale.\nThe proposed new Antelope Valley facility would  include mail-processing operations and support functions that are currently located at the Mojave MPO, and the secondary mail-processing operations would be relocated from the Palmdale, Ridgecrest, Mojave, and Tehachapi MPOs to the new facility. The Mojave MPO would be retained and would continue to provide retail and delivery services for the area and serve as a transfer point for those areas north and west of Mojave. The existing Lancaster MPO would be retained to serve as a carrier annex for carrier delivery operations. The Palmdale, Tehachapi, and Ridgecrest MPOs would be retained to provide full retail and delivery services for their areas.\n\n\tScope and Methodology\n\nTo evaluate the Service\u2019s approval process for this project, we performed the following: obtained and reviewed Service policies and guidance in effect when the project began and the policies and guidance currently in effect for facility planning, site acquisition, and project approval; obtained and analyzed Service documents related to the proposed Antelope Valley project and project approval process; discussed the proposed project and the review process with Service officials in Headquarters, the Pacific Area Office, the Van Nuys District, and the Lancaster and Mojave MPOs; observed operating conditions at the existing Lancaster and Mojave postal facilities and visited the postal-owned site in Lancaster that was purchased in 1991; reviewed cost estimates for the two alternatives under consideration prior to the project being placed on hold in March 1999; these cost estimates were included in draft project approval documents that were submitted for headquarters review in February 1999; and discussed the impact of the proposed project with community officials in Mojave, Kern County, and Lancaster, CA.\nWe did not evaluate whether this project should be approved or funded. The Service has a process and criteria for assessing and ranking capital facility projects for funding. However, we only reviewed this particular project and, therefore, did not have a basis for comparing its merits with those of other capital projects competing for approval and funding. We also did not independently verify the accuracy of the financial data included in the Postal Service\u2019s analyses of the cost of various alternatives under consideration. Postal officials acknowledged that these preliminary cost estimates might need corrections and revisions because they had not completed their review of the project approval documents. Due to the incomplete status of this project, our assessment generally covered the requirements followed and actions taken by the Service during the period (1) from project initiation in 1989 until the first suspension in 1992 and (2) since its reinstatement in 1995 to August 1999.\nWe conducted our review between December 1998 and August 1999 in accordance with generally accepted government auditing standards. We requested comments on a draft of this report from the Postmaster General. We received written comments from the Postmaster General, which we have included in appendix I. His comments are discussed near the end of this report.\n\n\tThe Service Followed Most of its Key Requirements for Advance Site Acquisition\n\nThe Service followed most of its key requirements for acquiring a site in Lancaster prior to obtaining approval for the proposed Antelope Valley project, although some requirements were vague. One major exception was that the Headquarters CIC did not review and approve the proposed project justification and alternatives under consideration prior to advance site acquisition, as required by Service policies. The Service\u2019s guidance allowed advance site acquisition before all analyses that were required for final project approval were completed if, among other requirements, the Service believed that the preferred site would not be available when project approval was anticipated.\nTable 2 presents the key requirements in the Service\u2019s major facility project approval process and the actions taken by the Service to meet those requirements prior to project suspension in 1992. The key requirements of this project approval process include formal documentation, and the dates provided are based on available documentation.\nThe Postal Service\u2019s guidance detailing its investment policies and procedures for major facilities explains that its purpose is to ensure that major facility investments support the strategic objectives of the Postal Service, make the best use of available resources, and establish management accountability for investment decisions. Postal Service policies also specify the delegation of authority for approving capital facility projects based on total project costs. All capital projects exceeding $10 million in total project costs are considered major facility projects and are required to obtain final approval from the Postal Service\u2019s Board of Governors after being approved through appropriate area and headquarters officials, including the Headquarters CIC. Some facility projects may be funded from the area\u2019s budget. To obtain funding from headquarters capital investment funds, these proposed major capital facility projects must be prioritized along with proposed projects from all other regions\/areas and included by headquarters officials in the Postal Service\u2019s Five-Year Major Facilities Priority List. This list is to be updated annually and included as part of the Service\u2019s annual budget, which is then reviewed and approved by postal management and the Board of Governors.\nAs shown in table 2, the Service generally followed its approval process for advance site acquisition. However, one major requirement that was not completed before the advance site acquisition was the Advance Project Review, which involves the review and approval of the project justification and alternatives by the Headquarters CIC. Postal officials told us that the project had met all of the Service\u2019s requirements prior to approval for advance site acquisition. However, the Service could not provide a date for when the Headquarters CIC meeting occurred or any documentation of the completion of the Advance Project Review stage. The purpose of the Advance Project Review by the Headquarters CIC, according to postal guidance, is \u201cto be sure that the Headquarters CIC concurs with the scope (especially the justification, alternatives, and strategic compatibility) before the expenditure of substantial planning resources.\u201d\n\n\t\tSite Acquisition Permitted Prior to Final Project Approval\n\nAccording to the Service\u2019s requirements that were in effect in 1991, advance site acquisition was permitted prior to completion of the project approval process with the approval of the headquarters senior official responsible for facilities. The regional postmaster general requested site acquisition in advance of project approval for the site in Lancaster on June 25, 1991. The request noted that Western Region officials had approved funding from the region\u2019s budget for site acquisition in fiscal year 1991. In addition, the request noted that the project was a headquarters-funded project scheduled to be presented to the Headquarters CIC for review in mid 1992, go to the Board of Governors for review and approval in August 1992, and begin construction in fiscal year 1992.\nThe request also noted that control of the site expired on June 30, 1991, and that failure to acquire the site as an advance site acquisition may result in its loss. The total project cost was estimated at just over $31 million, with site purchase in the amount of $6,534,000, and site support costs of $100,000 for a total funding request of $6,634,000 for advance site acquisition. The request also noted that the property-owner had offered the Postal Service an additional saving of $250,000, which would reduce the sales price to $6,284,000, if the site acquisition were approved and closing occurred prior to August 1, 1991. The funding request was approved by the appropriate headquarters official, and the site was purchased for $6,534,000 on October 25, 1991.\n\n\t\tAvailable Analyses to Support Advance Site Acquisition Decisions Were Incomplete and Documentation Was Inadequate\n\nService guidance required that alternatives be identified and analyzed before a project could qualify for advance site acquisition but did not clearly state the type or depth of analyses required. At the time of the Lancaster site acquisition, some analyses, such as the space requirements (which determine sizes of buildings and site requirements for operational needs) as well as the cost estimates of project alternatives (which provide information on projected cash flows and return on investment) were still under development. Only the estimated project costs associated with the preferred alternative\u2014construction of a new processing facility in Lancaster\u2014were available prior to site acquisition. Moreover, the available documentation did not explain why this alternative was preferred over the other alternatives considered.\nAccording to documentation provided to us, four alternatives were presented at the project planning meeting held in June 1990. The four alternatives, with the key differences underscored, were as follows: (A) a new area mail processing center in Lancaster for relocated mail processing operations, distribution operations, and delivery services for the 93535 ZIP Code area; the existing Lancaster MPO would retain its retail and delivery services; (B) a new general mail facility in Lancaster for relocated mail processing operations, distribution operations, and delivery services for the 93535 ZIP Code area; the existing Lancaster MPO would retain its delivery services and retail services would be relocated in the area; (C) new area mail processing center in the vicinity of Mojave and Lancaster for relocated mail processing operations and distribution operations; the existing Mojave and Lancaster MPOs would retain retail and delivery services for their respective communities and a new facility would be constructed in Lancaster for delivery services; and (D) lease and modify an existing building for use as a Mail Handling Annex for relocated mail processing operations and distribution operations; the existing Mojave MPO would retain its retail and delivery services. \u201cThe alternatives were discussed at length. Alternative A, B, and C were discussed. It was agreed upon that these alternatives will solve the major operating needs of the Antelope Valley, but will not address all of our needs for delivery and retail facilities. A reassessment of the proposed concept and the requirements for Lancaster and Palmdale Main Post Offices will be conducted following site selection to ascertain whether the specific site is conducive to delivery or retail activities as a result of its location.\u201d \u201cThe existing facilities in Lancaster, Palmdale, and Mojave could not be expanded to provide sufficient space to accommodate the current and projected growth in the Antelope Valley. Continuation of mail processing operations at the Mojave MPO will not meet corporate goals for improved delivery times and efficiencies.\u201d\nHowever, since the proposed project was revised in 1998, expansion of the existing Mojave facility was one of two alternatives under consideration, along with the preferred alternative to construct a new facility on the Service-owned site in Lancaster. Available documentation did not explain why expansion of the existing Mojave facility was not considered viable in 1990 but was considered a viable alternative in 1998.\n\n\t\tNeed to Improve Inadequate Documentation Previously Identified\n\nThe problem of inadequate documentation of the Service\u2019s real estate acquisition decisions is not a new issue. In 1989, we reviewed the Service\u2019s real estate acquisition process. At that time, we reviewed a sample of 246 sites purchased during fiscal year 1987 and made recommendations to improve the Service\u2019s real estate acquisition program. Our 1989 report found that the Service usually purchased sites that exceeded both its operational needs and advertised size requirements. When alternative sites were available for purchase, the Service generally selected the larger, more costly sites without requiring site selection committees to document why less expensive alternative sites were less desirable. The report raised concerns, based on the Service\u2019s requirements for advertising and purchasing practices, that the Service might be spending more than was necessary for land and accumulating an unnecessarily large real estate inventory. The report also recognized that sometimes larger, more costly sites may best meet the Service\u2019s operational requirements but that justification for such selections should be required when smaller, less costly contending sites were available.\nIn the Service\u2019s letter dated August 25, 1989, responding to a draft of that report, the Postmaster General agreed with our recommendation relating to more complete documentation of the selection process. He stated, \u201cThe Postal Service is concerned only with the best value and will make sure that the reasoning behind the determination of best value is more carefully documented in the future.\u201d\nHowever, improvement in documentation was not evident in the documentation related to the proposed Antelope Valley area project, which was prepared soon after our report was issued. We identified inconsistencies in internal postal memorandums related to the required site size and disposition of any excess land. The region\u2019s June 25, 1991, memorandum requesting approval for advance site acquisition in Lancaster stated, \u201cNo excess land is expected to remain.\u201d Another internal memorandum dated October 25, 1991\u2014the date of final settlement for the purchase of the Lancaster site\u2014discussed preparation of the final cost estimates for the proposed Antelope Valley Area project and stated \u201cPlease note that the required site is considerably less than the selected site.\u201d Further, a February 1992 internal memorandum noted that the Lancaster site was purchased in late 1991 and that the site area exceeded Service requirements by 296,000 square feet (about 6.8 acres). The reason for the purchase of a site that was larger than needed was not explained in any available documents. More recent documents related to the proposed project alternatives also noted that the Service-owned site in Lancaster exceeds project requirements, but the alternatives do not discuss how the excess property would be disposed of.\n\n\tProject Delays and Resulting Negative Effects Remain Unresolved\n\nAs of the beginning of July 1999, the Service\u2019s consideration of the proposed Antelope Valley project had been put on hold, and a decision may not be made for some time. Consequently, the status and funding of the proposed project remains uncertain almost 10 years after it was initiated. Consideration of the project has been delayed due to two suspensions, reductions in capital investment spending, and a recent reclassification of the proposed facility. As a result, processing and delivery deficiencies that were identified as critical for this area in 1989 continue to exist, and the Service has not determined how it plans to address these operational deficiencies. In addition, the Service has incurred additional costs that have resulted from the need to repeat analyses and update documents required for final project approval. With the project currently on hold, further costs may be incurred to again update required analyses. Finally, the delays have prolonged the uncertainty related to business development opportunities for the affected communities of Mojave and Lancaster.\n\n\t\tReduced Funding and Classification Inconsistencies Contributed to Project Delays\n\nInitiated in 1989, with an expectation that the project would be funded in fiscal year 1992, the proposed Antelope Valley project was suspended in 1992, while the Service was undergoing a reorganization and had reduced its funding for capital facility projects. Table 3 shows that between 1991 and 1995, the Service committed $999 million less to its facilities improvement program than it had originally authorized in its 1991 to 1995 Capital Improvement Plan.\nPostal Service officials could not explain why the classification of this project, as a processing facility or other type of capital facility, has been changed several times and why it has not yet been submitted for consideration in the headquarters capital facility projects prioritization and funding process. All major mail processing facilities must be funded from the headquarters capital facility budget, while other types of processing and delivery facilities may be funded from regional\/area budgets. At the time that the proposed project was suspended in 1992, it was classified as a mail processing facility in the Western Region\/Pacific Area Major Facility Priority List. It had also been submitted for headquarters funding consideration in the Five-Year Major Facilities Priority List for fiscal years 1991 to 1995. The project was reinstated and reclassified in 1995 as a Delivery and Distribution Center (DDC), with the expectation that it would be funded out of area funds in fiscal year 1998. The Service suspended the project a second time in March 1999, while it was undergoing review by headquarters officials. Based upon the headquarters review, the project was again reclassified from a DDC to a Processing and Distribution Center. The latest reclassification meant that the project would have to be funded by headquarters rather than the Pacific Area Office, and it would have to compete nationally for funding. This means that the project will have to await placement on the next headquarters Five-Year Major Facilities Priority List, which is scheduled to be completed by August 2000.\nIt is also not clear why the proposed project was reinstated and reclassified in 1995 as a DDC when the major purpose and design of this project had not fundamentally changed. Postal officials in the Pacific Area Office and Van Nuys District said that the recently proposed Antelope Valley project is essentially the same as the project that was being planned when the Service acquired the 25-acre Lancaster site in 1991. The major differences in the two projects are in nonmail processing areas. As previously mentioned, the proposed project had not had an Advance Project Review by the Headquarters CIC prior to the suspension in 1992. Such a review might have prevented the unexplained reclassifications of this project that have contributed to delays in its funding.\n\n\t\tOperational Processing And Delivery Deficiencies Remain Unaddressed\n\nTen years after this project began, the operational processing and delivery deficiencies that were identified as critical for this area in 1989 still remain. Because of continued space deficiencies, automated equipment has not been deployed as scheduled, and the projected operating efficiencies and savings have not been realized. The District projected that one of the benefits from automated sorting of the mail to the carriers in delivery walk sequence would be to improve delivery performance by 4.25 percent annually. This additional sorting would decrease the time that the carriers spend in the delivery units preparing the mail for delivery and increase the amount of time the carriers would have to deliver the mail. Another negative effect of the space deficiencies in Mojave was that some of the mail originating in the 935 ZIP Code area (approximately 130,000 pieces per day) was diverted from processing in Mojave to the processing facility in Santa Clarita.  According to local postal officials, the effect of this diversion was to delay by 1 day the delivery of some mail that was to be delivered in the 935 ZIP Code area.  The local area First-Class mail was supposed to be delivered within 1 day to meet overnight delivery standards for First-Class mail.\nSince this project was initiated in 1989, the Service has taken several actions to address mail processing and delivery deficiencies in the Antelope Valley. The Service added 2,417 square feet of interior space to the Palmdale MPO by relocating the post office into a larger leased facility. Some relief was provided to the cramped carrier operations at the Lancaster MPO by relocating 15 of the 89 carrier routes serving Lancaster to the Lancaster Cedar Station. However, as we observed on our visit to the Lancaster facilities, conditions in Lancaster were still very congested. Mail that was waiting to be processed and workroom operations spilled out of the building onto the platform, exposing both employees and the mail to weather conditions.\nIn an effort to provide the Mojave MPO with more mail-processing space, a 2,400 square foot tent was installed in 1998, at a cost of $30,000, next to the loading platform. The tent provided additional space for processing operations and for holding mail that was waiting to be processed, but it did not allow for deployment of any automated equipment scheduled for use in the 935 mail-processing functions. Also, we observed that the tent would not provide adequate shelter from high winds or other weather-related conditions. Some of the equipment was stored at district warehouses. Although these efforts have allowed the district to continue to provide processing and delivery service, it is not clear how the Service intends to meet the operational processing and delivery deficiencies while decisions related to the proposed facility are pending.\n\n\t\tDelays Incur Additional Costs\n\nProject delays have also contributed to higher costs, incurred to repeat and update some of the analyses and cost data needed for final project approval. Given that the process is not completed, additional costs may be incurred to further update required analyses. The Service has incurred additional costs related to developing a second set of documents required for project approval, including Facility Planning Concept documents, appraisals, space requirements, environmental assessments, and DARs. Generally, the Service uses contractors to develop the environmental and engineering studies. Although the total cost of document preparation has not been quantified, available documentation indicates that the Service has incurred about $254,000 for costs related to previous design efforts for this project.\nIn addition, costs that have not been quantified include staff time and travel costs associated with this project. The Area Office Operations Analyst who was responsible for preparing the DAR told us that it took him approximately a year to develop a DAR and the supporting documents and analysis. This did not include the time of the other individuals who provided him with various information needed to complete the analyses or the time of officials responsible for reviewing and approving the project. The Service has also incurred additional costs for travel associated with project reviews, such as the Planning Parameters Meeting, which involved the travel of at least three headquarters officials.\nIt is difficult at this stage to determine what additional analyses may be needed because the Antelope Valley project has been suspended and, according to Service officials, no further action is being taken on reviewing the project until it is submitted by Pacific area officials for prioritization. We reviewed the cost estimates for the two alternatives that were included in the draft DAR that had been submitted to headquarters for review in February 1999. We found some deficiencies in the information presented. Postal officials stated that these types of deficiencies would be identified during their review process that includes reviews by officials in three separate headquarters departments\u2014Facilities, Operations, and Finance. They also said that the cost estimates in the DAR were too preliminary to use as a basis for assessing which of the two alternatives under consideration were more cost effective. The officials noted that significant changes could be made to the cost estimates as the project documentation completes the review process.\nIn addition, the Service has not realized any return on its investment in the site in Lancaster, which has remained unused since 1991. This unrealized investment has an interest cost associated with the Service\u2019s use of funds to purchase the Lancaster site in October 1991. We estimated that the interest cost associated with the Service\u2019s $6.5 million investment totaled about $2.9 million from the time that the site was purchased in October 1991 through June 1999 and that it would likely increase by over $300,000 each year.\n\n\t\tDelays Create Uncertainty for Affected Communities\n\nThe uncertainty of this project over such a long period has also created difficulties, particularly related to business development planning, for the affected Lancaster and Mojave communities. Mojave community officials have raised concerns about the effect that relocating the postal operations would have on their community. They expressed specific concerns relating to the potential lost job opportunities to the Mojave and nearby California City residents and the impact that losing the postal processing operations would have on their effort to attract new homes and retail services. Postal documents indicated that while none of the Mojave employees would lose their jobs, approximately 80 employees working the evening and night shift would be relocated if distribution operations were to be relocated to a new facility in Lancaster. The Service projects that the proposed expanded Mojave Facility would create 10 additional jobs at the facility when it opens.\nThe project delay has also affected the business development opportunities in Lancaster. After the Service selected the Lancaster site in 1991, the Mayor of Lancaster stated in a letter to the Postal Service that he welcomed the new facility and that the facility would anchor the new 160- acre Lancaster Business Park Project. Shortly after the Postal Service selected the 25-acre site, a major mailer, Deluxe Check Printing, acquired a 12-acre site adjacent to the postal property. Recently, the Lancaster City Manager noted that not having the Postal Service facility has made marketing the Business Park to potential developers very difficult. In addition, Lancaster officials stated that the city has spent over $20 million to provide improvements to the business park.  These improvements were conditions of sale when the Postal Service acquired the site in 1991.\n\n\tConclusion\n\nThe Service followed most of its key requirements when it purchased a site in Lancaster in 1991 for the proposed Antelope Valley project before it had obtained overall project approval, although some requirements were vague. One major exception was that the Headquarters CIC did not review and approve the proposed project justification and alternatives under consideration prior to advance site acquisition as required by Service guidance. The Service\u2019s requirements for advance site acquisition were unclear because they did not specify the types or depth of analyses required. The Service\u2019s analyses of alternatives were incomplete because estimated costs of the alternatives and space requirements were still under development. Also, it was not clear why an alternative that was recently under consideration, the expansion of the existing Mojave MPO, was not considered a viable alternative before the site in Lancaster was acquired.\nWe could not determine whether review and approval of the proposed project justification and alternatives by the Headquarters CIC would have resulted in changes in the proposed project justification and alternatives or more in-depth analysis of the alternatives. Such a review may have prevented the unexplained inconsistencies in the classifications of this project that have contributed to delays in its funding. Likewise, it is not known whether the Committee\u2019s review would have suggested a course of action other than acquisition of the Lancaster site. Further, the more recent analysis of the alternative to expand the Mojave MPO is too preliminary to assess or draw any conclusions from because the headquarters review of the proposed project has been suspended. However, what is known is that the Service spent about $6.5 million over 8 years ago to purchase a site that has remained unused. This site may or may not be used by the Service in the future, and its investment has a substantial annual interest cost associated with it. While this interest cost continues, the mail service deficiencies identified nearly 10 years ago remain unaddressed, and projected operating efficiencies and savings anticipated from new equipment are unrealized as the equipment remains in storage.\nGiven this situation, it is not clear why the status of this project has been allowed to go unresolved for such a long time. It is also unclear at this time whether funding for this project will be approved and, if so, for what year of the next 5-year capital projects funding cycle. Thus, the Service\u2019s site investment in unused land and the existing operational deficiencies are likely to continue for some time, and the Service has not determined how it will address these issues if the project is not approved or funded for several years.\n\n\tRecommendation\n\nTo address the long-standing uncertainties related to the proposed Antelope Valley project, we recommend that the Postmaster General take the following actions:\nResolve the internal inconsistencies in the classification of this project, determine whether the site in Lancaster should be retained, and ensure that the project is considered in the appropriate funding and approval process, and\nRequire the Pacific Area office to determine whether immediate action is needed to address the operational deficiencies identified in the Antelope Valley area and report on planned actions and related time frames for implementation.\n\n\tAgency Comments and Our Evaluation\n\nWe received written comments from the Postmaster General on August 20, 1999.  These comments are summarized below and included as appendix I. We also incorporated technical comments provided by Service officials into the report where appropriate.  The Postmaster General responded to our conclusion that the Service did not follow all of its procedures in effect at the time that approval was given to purchase a site for a proposed facility in advance of the proposed Antelope Valley project\u2019s review and approval.  He stated that the Service has revised its procedures for advance site acquisition so that proposed sites are subjected to additional review and approval.   As a result, he stated that the advanced acquisition of a site for project such as Antelope Valley now must receive approval from the Headquarters Capital Investment Committee and the Postmaster General.\nThe Postmaster General generally agreed with our recommendations to address the unresolved status of the Antelope Valley project and the operational deficiencies in the Antelope Valley area.  In response to our first recommendation to resolve the inconsistent classification of the project, he stated that the Service has determined that the proposed Antelope Valley project is properly classified as a mail processing facility. He also stated that the proposed project would be considered for funding along with other such projects during the next round of project review and prioritization.  While clarification of the project\u2019s classification is a good first step, until disposition of the entire project is completed, the status of the project, including the use of the Lancaster site, remains unresolved.\nRegarding our second recommendation to address operational deficiencies in the Antelope Valley area, he stated that officials from the involved Pacific Area offices have met to discuss the most workable alternatives to sustain and improve mail service for Antelope Valley customers.  However, due to the complexity of issues, including the possibility of relocating some operations into leased space on an interim basis, a fully developed distribution and delivery improvement plan may take some time to implement.  He agreed to provide us with action plans and time frames as they are finalized.   If actions are taken as described by the Postmaster General, we believe they would be responsive to our recommendations.\nWe are sending copies of this report to Representative Howard (Buck) McKeon; Representative John McHugh, Chairman, and Chaka Fattah, Ranking Minority Member, Subcommittee on the Postal Service, House Committee on Government Reform; Mr. William J. Henderson, Postmaster General; and other interested parties. Copies will also be made available to others upon request. The major contributors to this report are listed in appendix II. If you have any questions about this report, please call me on (202) 512-8387.\n\nComments From the United States Postal Service\n\nGAO Contacts and Staff Acknowledgments\n\n\tGAO Contacts\n\n\tAcknowledgments\n\nTeresa Anderson, Melvin Horne, Hazel Bailey, Joshua Bartzen, and Jill Sayre made key contributions to this report.\nThe first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent.\nU.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537.\nEach day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touch-tone phone. A recorded menu will provide information on how to obtain these lists.","output":"Why GAO Did This Study\n\nPursuant to a congressional request, GAO reviewed the project approval process the Postal Service used in proposing to relocate postal operations for the Antelope Valley, California, area from the Main Post Office in Mojave, California, to a new facility in Lancaster, California.\n\nWhat GAO Found\n\nGAO noted that: (1) the Service followed most of its key requirements for acquiring a site in Lancaster in 1991 prior to obtaining approval for the proposed Antelope Valley project, although some requirements were vague; (2) one major exception was that review and approval of the proposed project justification and alternatives by the Headquarters Capital Investment Committee did not take place prior to the advance site acquisition in Lancaster, as required by Service policies; (3) Service guidance was unclear because it required that alternatives be identified and analyzed before a project could qualify for advance site acquisition, but it did not clearly state the type or depth of analysis required; (4) at the time of the Lancaster site acquisition, the analysis to support the decision was incomplete; (5) more detailed analyses were still under development; (6) GAO could not determine from available documentation why the alternative to construct a new facility in Lancaster was preferred over other alternatives that had been proposed or why various alternatives were not considered viable; (7) the Lancaster site purchased for $6.5 million in 1991 has remained unused since that time due to the Service's failure to decide how and when it will resolve the long-standing problems that the proposed Antelope Valley project was to address; (8) continuing negative effects have resulted from the incomplete status of the project for almost 10 years; (9) project approval and funding of the project remain uncertain due to delays resulting from two suspensions, limits on capital spending, and changes in project classification; (10) it is unclear how the Service intends to address the space deficiencies that have contributed to operational processing and delivery deficiencies in the Antelope Valley area; (11) because of continued space deficiencies, automated equipment was sitting unused in warehouses, some mail delivery was being delayed, and the projected operating efficiencies and savings have not been realized; (12) the Service has invested $6.5 million in land that has been unused for nearly 8 years; such an investment has a substantial annual interest cost estimated at over $300,000; (13) it has also incurred additional costs to update documents required for project approval and may incur more costs if some of these documents again have to be updated when the project is reviewed for approval; and (14) the Lancaster and Mojave communities have faced uncertainty over business development opportunities as a result of the project delays."}
{"id":"gao_NSIAD-99-39","pid":"gao_NSIAD-99-39_0","input":"\tIntroduction\n\nUntil 1993, most forces based in the United States were not assigned to a single geographic command. Due to their location, these forces had limited opportunities to train jointly with the overseas-based forces they would joint in time of crisis or war. The lack of a joint headquarters to oversee the forces of the four military services based in the continental United States (CONUS) was long considered a problem that the Joint Chiefs of Staff tried twice to fix. The concept of a joint headquarters for U.S.-based forces resurfaced again at the end of the Cold War and led to the establishment of the U.S. Atlantic Command (USACOM) in 1993 as the unified command for most forces based in CONUS.\n\n\t\tA Vision for a New Command\n\nWith the fall of the Berlin Wall and the collapse of the Eastern European communist regimes in 1989, the Cold War was over and a new world order began. Senior Department of Defense (DOD) leadership began considering the implications of such changes on the Department. They recognized that the end of the Cold War would result in reduced defense budgets and forces, especially overseas-based forces, and more nontraditional, regional operations such as peacekeeping and other operations short of a major theater war. In developing a CONUS power projection strategy, they looked at options for changing the worldwide command structure, which included establishing an Americas Command.\nThe initial concept for an Americas Command\u2014a command that would have geographic responsibility for all of North and South America\u2014was not widely accepted by DOD leadership. However, the Chairman, Joint Chiefs of Staff, General Colin Powell, and other senior military leaders during the early 1990s increased attention to the need to place all CONUS-based forces under one joint command to respond to worldwide contingencies. Factors influencing this concept were the anticipation that the overall DOD force drawdown would increase reliance on CONUS-based forces and that joint military operations would become predominant. Chairman Powell believed such a command was needed because CONUS-based forces remained service-oriented. These forces needed to train to operate jointly as a way of life and not just during an occasional exercise. The concept of one command providing joint training to CONUS-based forces and deploying integrated joint forces worldwide to meet contingency operations was recommended by Chairman Powell in a 1993 report on roles and missions to the Secretary of Defense. The mission of this command would be to train and deploy CONUS-based forces as a joint team, and the Chairman concluded that the U.S. Atlantic Command was best suited to assume this mission.\n\n\t\tExpanding Atlantic Command to Become the Joint Force Integrator\n\nThe Chairman\u2019s 1993 report on roles and missions led to an expansion of the roles of the U.S. Atlantic Command. Most notably, the Secretary of Defense, upon review of the Chairman\u2019s report, endorsed the concept of one command overseeing the joint training, integrating, and deploying of CONUS-based forces. With this lead, but without formal guidance from the Joint Staff, USACOM leadership began developing plans to expand the Command. As guidance and the plan for implementing the Command\u2019s expanded roles developed, DOD\u2019s military leadership surfaced many issues. Principal among these issues was whether (1) all CONUS-based forces would come under the Command, including those on the west coast; (2) the Commander in Chief (Commander) of USACOM would remain the Commander of NATO\u2019s Supreme Allied Command, Atlantic; and (3) the Command would retain a geographic area of responsibility along with its functional responsibilities as joint force integrator.\nWhile these issues were settled early by the Secretary of Defense, some issues were never fully resolved, including who would be responsible for developing joint force packages for deployment overseas in support of operations and numerous concerns about who would have command authority over forces. This lack of consensus on the expansion and implementation of USACOM was expressed in key military commands\u2019 review comments and objections to USACOM\u2019s implementation plan and formal changes to the Unified Command Plan. Table 1.1 provides a chronology of key events that led to giving the U.S. Atlantic Command the new responsibilities for training, integrating, and providing CONUS-based forces for worldwide operations.\n\n\t\tInitial Charter Documents Provide Direction for Establishing the Command\n\nThe USACOM implementation plan and revised Unified Command Plan, both issued in October 1993, provided the initial approval and guidance for expanding the responsibilities of the U.S. Atlantic Command. The Unified Command Plan gave USACOM \u201cadditional responsibilities for the joint training, preparation, and packaging of assigned CONUS-based forces for worldwide employment\u201d and assigned it four service component commands. The implementation plan provided the institutional framework and direction for establishing USACOM as the \u201cJoint Force Integrator\u201d of the bulk of CONUS-based forces. As the joint force integrator, USACOM was to maximize America\u2019s military capability through joint training, force integration, and deployment of ready CONUS-based forces to support geographic commanders, its own, and domestic requirements. This mission statement, detailed in the implementation plan, evolved into USACOM\u2019s functional roles as joint force trainer, provider, and integrator.\nThe USACOM implementation plan was developed by a multiservice working group for the Chairman, Joint Chiefs of Staff, and approved by the Secretary of Defense and the Chairman. The plan provided USACOM the basic concept of its mission, responsibilities, and forces. It further detailed the basic operational concept to be implemented in six areas. Three of these areas of particular relevance to USACOM\u2019s new functional roles were (1) the adaptive joint force packaging concept; (2) joint force training and interoperability concepts; and (3) USACOM joint doctrine and joint tactics, techniques, and procedures. The Command was given 12 to 24 months to complete the transition.\nThe Unified Command Plan is reviewed and updated not less than every  2 years. In 1997, USACOM\u2019s functional roles were revised in the plan for the first time to include the following:\nConduct joint training of assigned forces and assigned Joint Task Forcestaffs, and support other unified commands as required.\nAs joint force integrator, develop joint, combined, interagency capabilities to improve interoperability and enhance joint capabilities through technology, systems, and doctrine.\nProvide trained and ready joint forces in response to the capability requirements of supported geographic commands.\nOverview of USACOM DOD has nine unified commands, each of which comprises forces from two or more of the military departments and is assigned broad continuing missions. These commands report to the Secretary of Defense, with the Chairman of the Joint Chiefs of Staff functioning as their spokesman. Four of the commands are geographic commands that are primarily responsible for planning and conducting military operations in assigned regions of the world, and four are functional commands that support military operations. The ninth command, USACOM, is unique in that it has both geographic and functional missions. Figure 1.1 shows the organizational structure of the unified commands.\nIn addition to its headquarters staff, USACOM has several subordinate commands, such as U.S. Forces Azores, and its four service component commands\u2014the Air Force\u2019s Air Combat Command, the Army\u2019s Forces Command, the Navy\u2019s Atlantic Fleet Command and the Marines Corps\u2019 Marine Corps Forces Atlantic. Appendix I shows USACOM\u2019s organizational structure. USACOM\u2019s service component commands comprise approximately 1.4 million armed forces personnel, or about 80 percent of the active and reserve forces based in the CONUS, and more than 65 percent of U.S. active and reserve forces worldwide. Figure 1.2 shows the areas of the world and percentage of forces assigned to the geographic commands.\nWhile USACOM\u2019s personnel levels gradually increased in its initial years of expansion\u2014from about 1,600 in fiscal year 1994 to over 1,750 in fiscal  year 1997\u2014its civilian and military personnel level dropped to about 1,600in fiscal year 1998, primarily because part of USACOM\u2019s geographic responsibilities were transferred to the U.S. Southern Command. During this period, USACOM\u2019s operations and maintenance budget, which is provided for through the Department of the Navy, grew from about $50 million to about $90 million. Most of the increase was related to establishing the Joint Training, Analysis and Simulation Center, which provides computer-assisted training to joint force commanders, staff, and service components. The Command\u2019s size increased significantly in October 1998, when five activities, controlled by the Chairman, Joint Chiefs of Staff, and their approximately 1,100 personnel were transferred to USACOM. The Secretary of Defense also assigned USACOM authority and responsibility for DOD\u2019s joint concept development and experimentation in 1998. An initial budget of $30 million for fiscal year 1999 for these activities was approved by DOD. USACOM estimates it will have 151 personnel assigned to these activities by October 2000.\n\n\t\tObjectives, Scope, and Methodology\n\nIn response to congressional interest in DOD\u2019s efforts to improve joint operations, we reviewed the assimilation of USACOM into DOD as the major trainer, provider, and integrator of forces for worldwide deployment. More specifically, we determined (1) USACOM\u2019s actions to establish itself as the joint force trainer, provider, and integrator of most continental U.S.-based forces; (2) views on the value of the Command\u2019s contributions to joint military capabilities; and (3) recent expansion of the Command\u2019s responsibilities and its possible effect on the Command. We focused on USACOM\u2019s functional roles; we did not examine the rationale for USACOM\u2019s geographic and NATO responsibilities or the effect of these responsibilities on the execution of USACOM\u2019s functional roles.\nTo accomplish our objectives, we met with officials and representatives of USACOM and numerous other DOD components and reviewed studies, reports, and other documents concerning the Command\u2019s history and its activities as a joint trainer, provider, and integrator. We performed our fieldwork from May 1997 to August 1998. A more detailed discussion of the scope and methodology of our review, including organizations visited, officials interviewed, and documents reviewed, is in appendix II.\nOur review was performed in accordance with generally accepted government auditing standards.\n\n\tUSACOM Has Had Successes and Major Redirection in Implementing Its Functional Roles\n\nIn pursuing its joint force trainer role, USACOM has generally followed its 1993 implementation plan, making notable progress in developing a joint task force commander training program and establishing a state-of-the-art simulation training center. The joint force provider and integrator roles were redirected with the decision, in late 1995, to deviate from the concept of adaptive joint force packages, a major element of the implementation plan. For its role as joint force provider, USACOM has adopted a process-oriented approach that is less proactive in meeting force requirements for worldwide deployments and is more acceptable to supported geographic commanders. To carry out its integrator role, USACOM has adopted an approach that advances joint capabilities and force interoperability through a combination of technology, systems, and doctrine initiatives.\n\n\t\tSome Successes Achieved by USACOM as Joint Force Trainer\n\nUSACOM planned to improve joint force training and interoperability through six initiatives laid out in its implementation plan. The initiatives were to (1) improve the exercise scheduling process, (2) develop mobile training teams, (3) train joint task force commanders and staffs, (4) schedule the use of service ranges and training facilities for joint training and interoperability, (5) assist its service components in unit-level training intended to ensure the interoperability of forces and equipment, and (6) develop a joint and combined (with allied forces) training program for U.S. forces in support of nontraditional missions, such as peacekeeping and humanitarian assistance. USACOM has taken actions on the first two initiatives and has responded to the third, fifth, and sixth initiatives through its requirements-based joint training program. While the fourth initiative was included in the Command\u2019s implementation plan, USACOM subsequently recognized that it did not have the authority to schedule training events at the service-owned ranges and facilities.\n\n\t\t\tActions Taken to Improve Exercise Scheduling and to Develop Mobile Teams\n\nThe Chairman of the Joint Chiefs of Staff initially gave USACOM executive agent authority (authority to act on his behalf) for joint training, including the scheduling of all geographic commander training exercises, USACOM\u2019s first initiative. In September 1996, the Chairman removed this authority in part because of resistance from the other geographic commands. By summer 1997, the Chairman, through the Joint Training Policy, again authorized USACOM to resolve scheduling conflicts for worldwide training. While USACOM maintains information on all training that the services\u2019 forces are requested to participate in, the information is not adequately automated to enable the Command to efficiently fulfill the scheduling function. The Command has defined the requirement for such information support and is attempting to determine how that requirement will be met.\nUSACOM does provide mobile training teams to other commands for training exercises. Generally, these teams cover the academic phase of the exercises. The Command, for example, sent a training team to Kuwait to help the Central Command prepare its joint task force for a recent operation. It also has included training support, which may include mobile training teams, for the other geographic commanders in its long-range joint training schedule.\n\n\t\t\tRequirements-Based Joint Training Program Established\n\nTo satisfy its third, fifth, and sixth initiatives, USACOM has developed a joint training program that reflects the supported geographic commanders\u2019 stated requirements. These are expressed as joint tasks essential to accomplishing assigned or anticipated missions (joint mission-essential tasks). The Command\u2019s training program is derived from the six training categories identified in the Chairman of the Joint Chiefs of Staff\u2019s joint training manual and are described in appendix III. USACOM primarily provides component interoperability and joint training and participates in and supports multinational interoperability, joint and multinational, and interagency and intergovernmental training. The Command\u2019s primary focus has been on joint task force training under guidance provided by the Secretary of Defense.\n\n\t\t\tJoint Task Force Commander Training\n\nJoint training, conducted primarily at USACOM\u2019s Joint Training, Analysis and Simulation Center, encompasses a series of exercises\u2014Unified Endeavor\u2014that provide training for joint force commanders and their staffs. The training focuses on operational and strategic tasks and has evolved into a multiphased exercise. USACOM uses state-of-the-art modeling and simulation technology and different exercise modules that allows the exercise to be adapted to meet the specific needs of the training participants. For example, one module provides the academic phase of the training and another module provides all phases of an exercise. Until recently, the exercises generally included three phases, but USACOM added analysis as a fourth phase.\nPhase I includes a series of seminars covering a broad spectrum of operational topics. Participants develop a common understanding of joint issues.\nPhase II presents a realistic scenario in which the joint task force launches crisis action planning and formulates an operations order.\nPhase III implements the operations order through a computer-simulated exercise that focuses on joint task force procedures, decision-making, and the application of doctrine.\nPhase IV, conducted after the exercise, identifies lessons learned, joint after-action reviews, and the commander\u2019s exercise report.\nUSACOM and others consider the Command\u2019s Joint Training, Analysis and Simulation Center to be a world premier center of next-generation computer modeling and simulation and a centerpiece for joint task force training. The Center is equipped with secured communications and video capabilities that enable commands around the world to participate in its exercises. These capabilities allow USACOM to conduct training without incurring the significant expenses normally associated with large field training exercises and help reduce force personnel and operating tempos. For example, before the Center was created, a joint task force exercise would require approximately 45,000 personnel at sea or in the field. With the Center, only about 1,000 headquarters personnel are involved. As of December 1998, USACOM had conducted seven Unified Endeavor exercises and planned to provide varying levels of support to at least 17 exercises\u2014Unified Endeavor and otherwise\u2014per year during fiscal  years 1999-2001. Figure 2.1 shows one of the Center\u2019s rooms used for the Unified Endeavor exercises.\nWe attended the Unified Endeavor 98-1 exercise to observe firsthand the training provided in this joint environment. While smooth joint operations evolved over the course of the exercise, service representatives initially tended to view problems and pressure situations from a service rather than a joint perspective. The initial phase allowed the key officers and their support staff, including foreign participants, to grasp the details of the scenario. These details included the basic rules of engagement and discussions of what had to be accomplished to plan the operation. In the exercise\u2019s second phase, staff from the participating U.S. and foreign military services came together to present their proposals for deploying and employing their forces. As the exercise evolved, service representatives came to appreciate the value and importance of coordinating every aspect of their operations with the other services and the joint task force commander. The third phase of the exercise was a highly stressful environment. The joint task force commander and his staff were presented with numerous unknowns and an overwhelming amount of information. Coordination and understanding among service elements became paramount to successfully resolving these situations.\n\n\t\t\tInteroperability Training\n\nFor interoperability training, units from more than one of USACOM\u2019s service components are brought together in field exercises to practice their skills in a joint environment. USACOM sponsors three recurring interoperability exercises in which the Command coordinates the training opportunities for its component commands, provides specific joint mission-essential tasks for incorporation into the training, and approves the exercise\u2019s design. The goal of the training is to ensure that U.S. military personnel and units are not confronted with a joint warfighting task for the first time after arrival in a geographic command\u2019s area of responsibility. For example, USACOM sponsors a recurring combat aircraft flying exercise\u2014Quick Force\u2014that is designed to train Air Force and participating Navy and Marine Corps units in joint air operations tailored to Southwest Asia. This exercise is devised to train commanders and aircrews to plan, coordinate, and execute complex day and night, long-range joint missions from widely dispersed operating locations.\nUSACOM relies on its service component commands to plan and execute interoperability training as part of existing service field exercises. According to USACOM\u2019s chief for joint interoperability training, the service component commanders are responsible for evaluating the joint training proficiency demonstrated. The force commander of the exercise is responsible for the accomplishment of joint training objectives and for identifying any operational deficiencies in doctrine, training, material, education, and organization. USACOM provides monitors to evaluate exercise objectives. Until recently, USACOM limited its attention to interoperability training, as its primary focus was on its Unified Endeavor training program. As this training has matured, USACOM recently began to increase its attention on more fully developing and planning the Command\u2019s interoperability training. The Command recently developed, with concurrence from the other geographic commanders, a list of joint interoperability tasks tied to the services\u2019 mission-essential task lists. With the development and acceptance of these joint interoperability tasks, Command officials believe that their joint interoperability exercises will have a better requirements base from which to plan and execute. Also, USACOM is looking for ways to better tie these exercises to computer-assisted modeling.\n\n\t\t\tOther Training Support Provided by USACOM\n\nUSACOM provides joint and multinational training support through its coordination of U.S. participation in \u201cpartnership for peace\u201d exercises. The partnership for peace exercise program is a major North Atlantic Treaty Organization (NATO) initiative directed at increasing confidence and cooperative efforts among partner nations to reinforce regional stability. The Command was recently designated the lead activity in the partnership for peace simulation center network.\nUSACOM also supports training that involves intergovernmental agencies. Its involvement is primarily through support to NATO, as Supreme Allied Commander, Atlantic, and to non-DOD agencies. For example, USACOM has begun including representatives of other federal agencies, such as the State Department and Drug Enforcement Administration, in its Unified Endeavor exercises.\n\n\t\tCommand Assumes Much More Limited Role as Force Provider\n\nUSACOM has made substantive changes to its approach to providing forces. Adaptive joint force packaging was to have been the foundation for implementing its force provider role. When this concept encountered strong opposition, USACOM adopted a process-oriented approach that is much less controversial with supported geographic commands and the military services. With over 65 percent of all U.S. forces assigned to it, USACOM is the major source of forces for other geographic commands and for military support and assistance to U.S. civil agencies. However, its involvement in force deployment decisions varies from operation to operation. The Command also helps its service components manage the operating tempos of heavily used assets.\n\n\t\t\tForce Package Concept Was Adopted but Replaced by Process-Oriented Approach\n\nUSACOM\u2019s implementation plan introduced the operational concept of adaptive joint force packages as an approach for carrying out USACOM\u2019s functional roles, particularly the provider and integrator roles. Under this approach, USACOM would develop force packages for operations less than a major regional war and complement, but not affect, the deliberate planning process used by geographic commanders to plan for major regional wars. USACOM\u2019s development of these force packages, using its CONUS-based forces, was conceived as a way to fill the void created by reductions in forward-positioned forces and in-theater force capabilities in the early 1990s. It was designed to make the most efficient use of the full array of forces and capabilities of the military services, exploring and refining force package options to meet the geographic commanders\u2019 needs. The approach, however, encountered much criticism and resistance, particularly from other geographic commands and the military services, which did not want or value a significant role for USACOM in determining which forces to use in meeting mission requirements. Because of this resistance and the unwillingness of the Chairman of the Joint Chiefs of Staff to support USACOM in its broad implementation of the force packaging concept, USACOM largely abandoned it in 1995 and adopted a process-oriented approach. Adaptive joint force packages and their demise are discussed in appendix IV.\nThe major difference between the adaptive joint force packaging concept and the process-oriented approach that replaced it is that the new approach allows the supported geographic commander to \u201cpackage\u201d the forces to suit his mission needs. In essence, USACOM prepares the assets, which are put together as the supported commander sees fit rather than having ready-to-go packages developed by USACOM. The new approach retains aspects of the force packaging concept. Most notably, geographic commanders are to present their force requirements in terms of the capability needed, not in the traditional terms of requests for specific units or forces. Forces are to be selected by the supported commanders, in collaboration with USACOM, from across the services to avoid over-tasking any particular force. The process is shown in figure 2.2 and discussed in more detail in appendix V.\n\n\t\t\tUSACOM Is the Major Provider of Forces\n\nUSACOM, commanding nearly 68 percent of the combat forces assigned to geographic commands, is the major provider of forces for worldwide operations. The size of its assigned forces far exceeds the requirements for operations within the Command\u2019s area of responsibility, which is much less demanding than that of other geographic commands. As a result, USACOM can provide forces to all the geographic commands, and its forces participate in the majority of military operations. The Command also provides military support and assistance to civil authorities for domestic requirements, such as hurricane relief and security at major U.S. events. During 1998, USACOM supported over 25 major operations and many other smaller operations worldwide. These ranged from peacekeeping and humanitarian assistance to evacuation of U.S. and allied nationals from threatened locations. On average, USACOM reported that it had over 30 ships, 400 aircraft, and 40,000 personnel deployed throughout 1998.\nThe Pacific, European, and Special Operations Commands also have assigned forces, but they are unable to provide the same level of force support to other commands as USACOM. The Pacific Command has large Navy and Marine Corps forces but has limited Army and Air Force capabilities. European Command officials said their Command rarely provides forces to other commands because its forces are most often responding to requirements in their own area of responsibility. The Special Operations Command provides specialized forces to other commands for unique operations. The Central and Southern Commands have very few forces of their own and are dependent on force providers such as USACOM to routinely furnish them with forces.\n\n\t\t\tUSACOM\u2019s Involvement in Force Provider Decisions Is Limited\n\nUSACOM provides forces throughout the world for the entire range of military operations, from war to operations other than war that may or may not involve combat. Since the Gulf War in 1991, the U.S. military has largely been involved in operations that focus on promoting peace and deterring war, such as the U.S. military support to the NATO peacekeeping mission in Bosnia and the enforcement of U.N. sanctions against Iraq. The extent of USACOM\u2019s involvement in force decisions varies from operation to operation. In decisions regarding deployment of major combatant forces, the Command plays a very limited role. The military services and USACOM\u2019s service components collaborate on such decisions. Although USACOM\u2019s interaction with geographic commands and service components may influence force decisions, USACOM\u2019s Commander stated that when specific forces are requested by a geographic commander, his Command cannot say \u201cno\u201d if those forces are available.\nUSACOM is not directly involved in the other geographic commands\u2019 deliberate planning\u2014the process for preparing joint operation plans\u2014except when there is a shortfall in the forces needed to implement the plan or the supported commander requests USACOM\u2019s involvement. Every geographic command is to develop deliberate plans during peacetime for possible contingencies within its area of responsibility as directed by the national command authority and the Chairman of the Joint Chiefs of Staff. As a supporting commander, USACOM and its service component commands examine the operation plans of other commands to help identify shortfalls in providing forces as needed to support the plans. USACOM\u2019s component commands work more closely with the geographic commands and their service components to develop the deployment data to sequence the movement of forces, logistics, and transportation to implement the plan.\nDuring crises, for which an approved operation plan may not exist, the responsible geographic command either adjusts an existing plan or develops a new one to respond to specific circumstances or taskings. The time available for planning may be hours or days. The supported commander may request inputs on force readiness and force alternatives from USACOM and its component commands. A European Command official said USACOM is seldom involved in his Command\u2019s planning process for crisis operations because of the compressed planning time before the operation commences.\nUSACOM has its greatest latitude in suggesting force options for military operations other than war that do not involve combat operations, such as nation assistance and overseas presence operations, and for ongoing contingency operations. In these situations, time is often not as critical and USACOM can work with the supported command and component commands to develop possible across-the-service force options.\n\n\t\t\tAttention Given to Balancing Operating and Personnel Tempos\n\nA primary consideration in identifying and selecting forces for deployment is the operating and personnel tempos of the forces, which affect force readiness. As a force provider, USACOM headquarters supports its service component commands in resolving tempo issues and monitors the readiness of assigned forces and the impact of deployments on major contingency and war plans. While tempo issues are primarily a service responsibility, USACOM works with its service component commands and the geographic commands to help balance force tempos to maintain the readiness of its forces and desired quality-of-life standards. This involves analyzing tempo data across its service components and developing force alternatives for meeting geographic commands\u2019 needs within tempo guidelines.\nAccording to USACOM officials, the Command devotes much attention to managing certain assets with unique mission capabilities that are limited in number and continually in high demand among the geographic commands to support most crises, contingencies, and long-term joint task force operations in their regions. These low-density\/high-demand assets, such as the Airborne Warning and Control Systems and E\/A-6B electronic warfare aircraft and Patriot missile batteries, are managed under the Chaiman of the Joint Staff\u2019s Global Military Force Policy. This policy, which guides decisions on the peacetime use of assets that are few in number but high in demand, establishes prioritization guidelines for their use and operating tempo thresholds that can be exceeded only with Secretary of Defense approval. The policy, devised in 1996, is intended to maintain required levels of unit training and optimal use of the assets across all geographic commander missions, while discouraging the overuse of selected assets.\nUSACOM is responsible for 16 of the 32 low-density\/high-demand assets\u2014weapon systems and personnel units\u2014that are included in the Global Military Force Policy. The Pacific and European Commands have some of these 16 assets, but the bulk of them are assigned to USACOM. These assets are largely Air Force aircraft. In this support role, USACOM has initiated several actions to help implement the policy, including bringing the services and geographic commands together to resolve conflicts over the distribution of assets, devising a monitoring report for the Joint Staff, and recommending to the services assets that should be included in future policy revisions. Appendix VI provides a list of the low-density\/high-demand assets currently assigned to USACOM.\nThe Global Military Force Policy does not capture all of the highly tasked assets. For example, the policy does not include less prominent assets such as dog teams, military security police, water purification systems, intelligence personnel, and medical units. There were similar concerns about the high operating tempos of these assets, and USACOM has monitored them closely. Most of these assets, or alternatives to them, were available across the services. Therefore, USACOM has some flexibility in identifying alternative force options to help balance unit tempos.\nAnother Joint Staff policy affecting USACOM as a force provider is the Global Naval Force Presence Policy. This policy establishes long-range planning guidance for the location and number of U.S. naval forces\u2014aircraft carriers and surface combatant and amphibious ships\u2014provided to geographic commands on a fair-share basis. Under this scheduling policy, the Navy controls the operating and personnel tempos for these heavily demanded naval assets, while it ensures that geographic commands\u2019 requirements are met. USACOM has little involvement in scheduling these assets. While this policy provides little flexibility for creating deployment options in most situations, it can be adjusted by the Secretary of Defense to meet unexpected contingencies.\nAccording to an action officer in USACOM\u2019s operations directorate, one of USACOM\u2019s difficulties in monitoring tempos has been the lack of joint tempo guidelines that could be applied across service units and assets. Each service has different definitions of what constitutes a deployment, dissimilar policies or guidance for the length of time units or personnel should be deployed, and different systems for tracking deployments. For example, the Army defined a deployment as a movement during which a unit spends an overnight away from its home station. Deployments to combat training centers were not counted. In contrast, the Marine Corps defines a deployment as any movement from the home station for 10 days or more, including a deployment for training at its combat training center. As a result, it is difficult to compare tempos among the services. An official in USACOM\u2019s operations directorate said the services would have to develop joint tempo guidelines because they have the responsibility for managing the tempos of their people and assets. The official did not anticipate a movement anytime soon to create such guidelines because of the differences in the types of assets and in the management and deployment of the assets. DOD, in responding to a 1998 GAO report on joint training, acknowledged that the services\u2019 ability to measure overall deployment rates is still evolving.\n\n\t\tIntegrator Role Evolves Into a Process to Improve Interoperability and Joint Capabilities\n\nThe integrator role has changed significantly since 1993 and is still evolving. It was originally tied to adaptive joint force packaging. But with that concept\u2019s demise, the Command\u2019s role became to implement a process to improve interoperability and enhance joint force capabilities through the blending of technology, systems, and doctrine. The Command\u2019s force integration objectives are to (1) identify and refine doctrinal issues affecting joint force operations; (2) identify, develop, evaluate, and incorporate new and emerging technologies to support joint operations; and (3) refine and integrate existing systems to support joint operations. The Command\u2019s emphasis since 1996 has been to sponsor advanced concept technology demonstration projects that have a multiservice emphasis and search for solutions to joint interoperability problems among advanced battle systems. It has given limited attention to joint doctrinal issues.\nEstablishing its integration role has not been easy for USACOM. USACOM\u2019s Commander (1994-97) characterized the Command\u2019s integration efforts as a \u201creal struggle\u201d and said the Joint Staff was not supportive. The current USACOM Commander expressed similar comments, citing the integration role as the most challenging yet promising element of his Command\u2019s mission. He told us the Command stumbled at times and overcame numerous false starts until its new integration role emerged. He said that as USACOM\u2019s functional roles mature, the Command may create more friction with the services and other commands, many of which view USACOM as a competitor. Its efforts were significantly enhanced with the October 1998 transfer to the Command of five joint centers and activities previously controlled by the Chairman of the Joint Chiefs of Staff (see  ch. 4).\n\n\t\t\tAdvanced Concept Technology Demonstration Projects Provide Primary Means for Fulfilling Role\n\nUSACOM\u2019s primary means to fulfill its integration role has been to sponsor advanced concept technology demonstration projects. These projects are designed to permit early and inexpensive evaluations of mature advanced technologies to meet the needs of the warfighter. The Command considered such projects to be the best way to achieve integration by building new systems that are interoperable from the beginning. The warfighter determines the military utility of the project before a commitment is made to proceed with acquisition. These projects also allow for the development and refinement of operational concepts for using new capabilities.\nAs an advanced concept technology demonstration project sponsor, USACOM provides an operations manager to lead an assessment to determine the project\u2019s joint military utility and to fully understand its joint operational capability. The Command also provides the personnel for the projects and writes the joint doctrine and concepts of operation to effectively employ these technologies. USACOM only accepts projects that promote interoperability and move the military toward new levels of effectiveness in joint warfighting. Various demonstration managers, such as the Deputy Under Secretary of Defense for Acquisition and Technology, fund the projects. At the completion of our review, USACOM was sponsoring 12 of DOD\u2019s 41 active advanced concept technology demonstrations. It completed work in 1996 on the Predator project, a medium-altitude unmanned aerial vehicle that the Air Force is to acquire. Table 2.1 identifies each USACOM project and its funding through fiscal year 2003.\nWe issued a report in October 1998 on opportunities for DOD to improve its advanced concept technology demonstration program, including the process for selecting candidate projects and guidance on entering technologies into the normal acquisition process, and the risky practice of procuring prototypes beyond those needed for the basic demonstration and before completing product and concept demonstration.\n\n\t\t\tInteroperability and Other USACOM Integration Efforts\n\nIn addition to its advanced concept technology demonstration projects, USACOM has sought opportunities to advance the interoperability of systems already deployed or about to be deployed that make a difference on the battlefield. Particularly critical capabilities USACOM has identified for interoperability enhancements include theater missile defense; command, control, and communications; intelligence, surveillance, and reconnaissance; and combat identification (friend or foe). The military services have a long history of interoperability problems during joint operations, primarily because DOD has not given sufficient consideration to the need for weapon systems to operate with other systems, including exchanging information effectively during a joint operation. We reported on such weaknesses in the acquisition of command, control, communications, computers, and intelligence systems in March 1998.\nA critical question is who pays the costs associated with joint requirements that USACOM identifies in service acquisition programs? The services develop weapon system requirements, and the dollars pass from the Secretary of Defense to the services to satisfy the requirements. If USACOM believes modifications are needed to a weapon system to enable it to operate in a joint environment, the Command can elevate this interoperability issue to the Chairman of the Joint Chiefs of Staff and to the Joint Requirements Oversight Council for action. For example, the USACOM Commander recently told the Chairman and the Council that the Air Force\u2019s unwillingness to modify the Predator and the concept of operations to allow other services to directly receive information from the unmanned aerial vehicle would limit a joint commander\u2019s flexibility in using such vehicles, hurt interoperability, and inhibit the development of joint tactics. According to USACOM\u2019s Operations Manager for this area, the Air Force needs to provide additional funding to make the Predator truly joint but it wants to maintain operational control of the system. As of November 1998, this interoperability concern had not been resolved.\nUSACOM can also enhance force integration through its responsibility as the trainer and readiness overseer of assigned reserve component forces. This responsibility allows USACOM to influence the training and readiness of these reserves and their budgets to achieve full integration of the reserve and active forces when the assigned reserves are mobilized. This is important because of the increased reliance on reserve component forces to carry out contingency missions. The USACOM Commander (1993-97) described the Command\u2019s oversight as a critical step in bringing the reserve forces into the total joint force structure.\n\n\tValue of USACOM\u2019s Contributions to Joint Military Capabilities\n\nUSACOM and others believe that the Command has helped advance the joint military capabilities of U.S. forces. While USACOM has conducted several self-assessments of its functional roles, we found that these assessments provided little insight into the overall value of the Command\u2019s efforts to enhance joint capabilities. The Command has established goals and objectives as a joint trainer, provider, and integrator and is giving increased attention to monitoring and accomplishing tasks designed to achieve these objectives and ultimately enhance joint operational capabilities. Our discussions with various elements of DOD found little consensus regarding the value of USACOM\u2019s contributions in its functional roles but general agreement that the Command is making important contributions that should enhance U.S. military capabilities.\n\n\t\tUSACOM\u2019s Assessments Provide Little Insight on Value of Command\u2019s Contributions\n\nUSACOM has conducted three self-assessments of its functional roles. These appraisals did not specifically evaluate the Command\u2019s contribution to improving joint operational capabilities but discussed progress of actions taken in its functional roles. The first two appraisals covered USACOM\u2019s success in executing its plan for implementing the functional roles, while the most recent appraisal rated the Command\u2019s progress in each of its major focus areas.\nIn quarterly reports to the Secretary of Defense and in testimony before the Congress, USACOM has presented a positive picture of its progress and indicated that the military has reached an unprecedented level of jointness.\n\n\t\t\tEarly Assessments Report Progress on Implementing Functional Roles\n\nIn a June 1994 interim report to the Chairman of the Joint Chiefs of Staff, USACOM\u2019s Commander noted that the Command\u2019s first 6 months of transition into its new functional roles had been eventful and that the Command was progressing well in developing new methodologies to meet the geographic commands\u2019 needs. He recognized that it would take time and the help of the service components to refine all the responsibilities relating to the new mission. He reported that USACOM\u2019s vision and strategic plan had been validated and that the Command was on course and anticipated making even greater progress in the next 6 months.\nUSACOM performed a second assessment in spring 1996, in response to a request from the Chairman of the Joint Chiefs of Staff for a review of the success of USACOM\u2019s implementation plan at the 2-year point. The Command used Joint Vision 2010, the military\u2019s long-range strategic vision, as the template for measuring its success, but the document does not provide specific measures for gauging improvements in operational capabilities. USACOM reported that, overall, it had successfully implemented its key assigned responsibilities and missions. It described its new functional responsibilities as \u201cinterrelated,\u201d having a synergistic effect on the evolution of joint operations. It reported that it had placed major emphasis on its joint force trainer role and noted development of a three-tier training model. The Command described its joint force provider role as a five-step process, with adaptive joint force packaging no longer a critical component. Seeing the continuing evolution of its force provider role as a key factor in supporting Joint Vision 2010, USACOM assessed the implementation plan task as accomplished. The Command considered its joint force integrator role the least developed but the most necessary in achieving coherent joint operations and fulfilling Joint Vision 2010. Although the assessment covered only the advanced concept technology demonstrations segment of its integrator role, USACOM reported that it had also successfully implemented this task.\n\n\t\t\tMost Recent Assessment Cites Progress and Problems in Command\u2019s Major Focus Areas\n\nAs requested by USACOM\u2019s Commander, USACOM staff assessed progress and problems in the Command\u2019s major focus areas in early 1998. This self-assessment covered the Command\u2019s directorate-level leadership responsible for each major focus area. An official involved in this assessment said statistical, quantifiable measures were not documented to support the progress ratings; however, critical and candid comments were made during the process. The assessments cited \u201cprogress\u201d or \u201csatisfactory progress\u201d in 38 of 42 rated areas, such as command focus on joint training, advanced concept technology demonstration project management, and monitoring of low-density\/high-demand asset tempos. Progress was judged \u201cunsatisfactory\u201d in four areas: (1) exercise requirements determination and worldwide scheduling process; (2) training and readiness oversight for assigned forces; (3) reserve component integration and training, and readiness oversight; and (4) institutionalizing the force provider process. This assessment was discussed within the Command and during reviews of major focus areas and was updated to reflect changes in command responsibilities.\n\n\t\t\tCommand Reports Progress in Advancing Joint Operations\n\nUSACOM, like other unified commands, uses several mechanisms to report progress and issues to DOD leadership and the Congress. These include periodic commanders-in-chief conferences, messages and reports to or discussions with the Chairman of the Joint Chiefs of Staff, and testimony before the Congress. Minutes were not kept of the commanders-in-chief conferences, but we obtained Commander, USACOM, quarterly reports, which are to focus on the Command\u2019s key issues. Reports submitted to the Secretary of Defense between May 1995 and April 1998 painted a positive picture of USACOM\u2019s progress, citing activities in areas such as joint training exercises, theater missile defense, and advanced technology projects. The reports also covered operational issues but included little discussion of the Command\u2019s problems in implementing its functional roles. For example, none of the reports discussed the wide opposition to adaptive joint force packaging or USACOM\u2019s decision to change its approach, even though the Secretary of Defense approved the implementation plan for its functional roles, which included development of adaptive joint force packages.\nIn congressional testimony in March 1997, the Commander of USACOM (1995-97) discussed the Command\u2019s annual accomplishments, plans for the future, and areas of concern. The Commander noted that U.S. military operations had evolved from specialized joint operations to a level approaching synergistic joint operations. In 1998 testimony, the current USACOM Commander reported continued progress, describing the military as having reached \u201can unprecedented level of jointness.\u201d USACOM\u2019s ultimate goal is to advance joint warfighting to a level it has defined as \u201ccoherent\u201d joint operations with all battle systems, communications systems, and information databases fully interoperable and linked by common joint doctrine. Figure 3.1 depicts the evolution from specialized and synergistic joint operations to coherent joint operations.\n\n\t\tGoals and Objectives Established, but Assessments of Command\u2019s Impact Not Planned\n\nAt the conclusion of our review, USACOM was completing the development of a new strategic planning system to enhance its management of its major focus areas and facilitate strategic planning within the USACOM staff. Goals, objectives, and subobjectives were defined in each of its major focus areas, and an automated internal process was being established to help the Command track actions being taken in each area. The goals and objectives were designed to support the Command\u2019s overall mission to maximize U.S. military capability through joint training, force integration, and deployment of ready forces in support of worldwide operations. Table 3.1 provides examples of goals, objectives, and subobjectives in the joint force trainer, provider, and integrator major focus areas.\nThe goals and the objectives and subobjectives necessary to achieve the goals are established by officials in each major focus area. The objectives and subobjectives are to be understandable, relevant, attainable, and measurable. Progress in achieving the subobjectives becomes the measures for the objective\u2019s success, and progress on objectives is the measure of success in achieving a goal. The relative importance of each objective and subobjective is reflected in weights or values assigned to each and is used to measure progress. Objective and subjective assessments of progress are to be routinely made and reported. Command officials expect that in some areas progress will not be easy to measure and will require subjective judgments.\nUSACOM officials believed the Command\u2019s new planning system, which became operational on October 20, 1998, meets many of the expectations of the Government Performance and Results Act, which requires agencies to set goals, measure performance, and report on their accomplishments. The Command believed that actions it plans to adopt in major focus areas would ultimately improve the military capabilities of U.S. forces, the mission of the Command. The officials, however, recognized that the planning system does not include assessments or measures that can be used to evaluate the Command\u2019s impact on military capabilities. Under the Results Act, agencies\u2019 performance plans are to include performance goals and measures to help assess whether the agency is successful in accomplishing its general goals and missions. The Congress anticipated that the Results Act principles would be institutionalized and practiced at all organizational levels of the federal government. Establishing such performance measures could be difficult, but they could help USACOM determine what it needs to do to improve its performance.\nDOD has begun to implement the Results Act at all organizational levels, and the Secretary of Defense tasked subordinate organizations in 1998 to align their programs with DOD program goals established under the act. Recognizing that the development of qualitative and quantitative performance measures to assess mission accomplishment has been slow, USACOM has provided training to its military officers on performance objectives. USACOM officials said that while the Command has begun to take steps to implement the principles of the Act, they believed the Command needs additional implementation guidance from the Office of the Secretary of Defense.\n\n\t\tViews Regarding the Value of USACOM\u2019s Contributions\n\nIn the absence of specific assessments of USACOM\u2019s impact on joint operations, we asked representatives from the Joint Staff, USACOM and its service component commands, and supported geographic commands for their views on USACOM\u2019s value and contributions in advancing DOD\u2019s joint military capabilities. Opinions varied by command and functional role and ranged from USACOM having little or no impact to being a great contributor and having a vital role. Generally speaking, Joint Staff officials considered USACOM to be of great value and performing an essential function while views among the geographic commands were more reserved.\n\n\t\t\tJoint Force Training Viewed as Positive but Only Recently Used by Some Commands\n\nUSACOM and its service components believed the Command\u2019s joint task force headquarters training was among the best joint training available. This training has allowed USACOM components\u2019 three-star commanders and their senior staffs to be trained without fielding thousands of troops and to concentrate on joint tasks considered essential to accomplishing a mission anywhere in the world. The Commander of USACOM cited this training as the best example of USACOM\u2019s success in affecting joint operations. He told us that USACOM has secured the funding it needs to do this training and has developed what he described as a \u201cworld-class\u201d joint training program.\nRepresentatives of the geographic commands we visited believed USACOM\u2019s joint task force commander training has provided good joint experience to CONUS-based forces. They believed this training has enabled participants to perform more effectively as members of a joint task force staff. While these commands spoke well of the training, they have been slow to avail themselves of it and could not attribute any improvement in joint tasks force operations to it. The commands have not taken advantage of this training for several reasons. First, other geographic commands considered providing headquarters\u2019 staff joint task force commander training their responsibility and were reluctant to turn to USACOM for assistance. Second, USACOM\u2019s joint task force commander training is conducted at the Command\u2019s Joint Training Analysis and Simulation Center in Suffolk, Virginia. Thus, geographic commands would have to make a significant investment to deploy several hundred headquarters staff for up to 18 days to complete the three phases of USACOM\u2019s training. Third, the commands are not confident that the training at the Center provides a true picture of the way they would conduct an operation. That is, the scenarios USACOM uses may have limited application in the other geographic commands\u2019 regional areas of operational responsibility. The commands have, therefore, preferred to train their own forces, with assistance from the Joint Warfighting Center. Representatives from this Center have gone to the commands and assisted them with their training at no cost to the command. In October 1998, the Center was assigned to USACOM. USACOM officials believed this would enhance the training support provided by the Command to geographic commands (see ch. 4).\nIndications are that the geographic commands are beginning to more fully use USACOM as a training support organization. According to the Commander of USACOM, the current generation of commanders of the geographic commands have been more receptive of USACOM support than their predecessors. Also, as USACOM adjusts its training to make it more relevant to other geographic commanders, the commands are requesting USACOM\u2019s support. In 1998, USACOM sent mobile training teams to the U.S. Central Command in support of an operation in Kuwait. The Command was also supporting the U.S. European Command in one of its major training exercises. U.S. Southern Command has requested support from USACOM for one of its major Caribbean joint exercises and asked the Command to schedule the training exercise for the next 3 years.\nRegarding interoperability training, USACOM\u2019s component commands believed the Command should be more involved in planning and executing training exercises. Most of this training was existing service exercises selected to be used as joint interoperability training. Some service component officials believed that without sufficient USACOM influence, the sponsoring services would be inclined to make these exercises too service-specific or self-serving. For example, the Navy\u2019s annual joint task force exercise has basically been a preparation for a carrier battle group to make its next deployment. The Air Force has participated, but Air Combat Command officials told us they did not believe they gained much joint training experience from the exercise. USACOM officials recognize that the Command has not given interoperability training the same level of emphasis as its joint task force training. They believed, however, that components\u2019 use of the recently developed universal joint interoperability tasks list in planning this training would result in more joint orientation to the training.\n\n\t\t\tUSACOM Adds Value as Joint Force Provider\n\nAs the major joint force provider, USACOM was valued by the Joint Staff, other geographic commands, and its service component commands. The Joint Staff believed that USACOM, as a single joint command assigned the majority of the four services\u2019 forces, has provided a more efficient way of obtaining forces to meet the mission needs of the other geographic commands. Prior to establishing USACOM, the Joint Staff dealt individually with each of the services to obtain the necessary forces. Now, the Joint Staff can go to USACOM, which can coordinate with its service component commands to identify available forces with the needed capabilities and recommend force options. The Chairman of the Joint Chiefs of Staff (1993-97) told us that forces have never been provided as efficiently as USACOM has done it and that forces were better trained and equipped when they arrived where needed.\nThe geographic commands we visited that USACOM primarily supports viewed the Command as a dependable and reliable force provider. The U.S. Central Command stated that forces provided by USACOM have been well trained and have met the Command\u2019s needs. The Command described USACOM forces as having performed exceptionally well in Operation Desert Thunder, in response to Iraq\u2019s denial of access to its facilities to U.N. weapon inspectors in February 1998. The Command also stated that USACOM could provide forces more tailored to fighting in its area of responsibility than the U.S. European or Pacific Commands because USACOM forces have routinely deployed for exercises and missions in support of ongoing operations in their area. Similarly, U.S. European Command officials said that USACOM has been responsive to their Command\u2019s force needs and was doing a good job as a force provider. The U.S. European Command also noted that USACOM has ensured equitable tasking among CONUS-based forces and has allowed the European Command to focus on the operation at hand. The U.S. Southern Command, with few forces of its own, believed that the withdrawal of U.S. forces from Panama throughout 1999 would make the Southern Command more dependent on USACOM for forces to support its exercise and operations requirements.\nIn discussing its contributions as a major provider of forces, USACOM believed that it adds value by providing the Joint Staff with informed force selection inputs based on all capable forces available from across its service components. For example, the European Command requested that an Air Force engineering unit build a bridge in 1997. USACOM identified a Navy Seabees unit already deployed in Spain as an option. The European Command agreed to use this unit. USACOM believed that it has supported other geographic commands by providing well-trained forces and alerting them of any potential training needs when forces are deployed.\nUSACOM and its service component commands viewed the Command as an \u201chonest broker\u201d that has drawn upon the capabilities of all the services, as necessary, to meet the mission requirements of the geographic commands. As pointed out by USACOM\u2019s Commander, while USACOM has not been involved in all deployment decisions concerning its assigned forces\u2014such as the Navy\u2019s carrier battle groups or large Army units\u2014and was not in a position to deny an available force to a supported command, the Command has served as a clearinghouse for high-demand forces. For example:\nUSACOM had provided optometrists for its mobile training teams deployed to Africa to train Africans for peacekeeping activities. Optometrists were needed to diagnose eye problems of African troops, who experienced difficulties seeing with night optical equipment. The Forces Command was unable to provide the needed personnel beyond the first deployment, so USACOM tasked its Atlantic Fleet component to provide personnel for the redeployment. In May 1997, an aerostat (radar balloon) that provided coverage in the Florida straits went down. USACOM tasked the Navy\u2019s Atlantic Fleet to provide radar coverage every weekend with an E-2C aircraft squadron. When the balloon was not replaced as expected and the requirement continued, the Atlantic Fleet asked for relief from USACOM. USACOM adjudicated resources with the Air Combat Command so that the Air Forces\u2019s E-3 aircraft would provide coverage for half of the time.\nUSACOM\u2019s service component commands also saw the benefit in having a single unified command act as an arbitrator among themselves. USACOM can arbitrate differences between two of its component commands that can provide the same capability. It can provide rationale as to why one should or should not be tasked to fill a particular requirement and make a decision based on such things as prior tasking and operating and personnel tempos. Its components also saw USACOM as their representative on issues with DOD and other organizations. In representing its components, for example, USACOM handled politically sensitive arrangements over several months with a U.S. embassy, through the State Department, to provide military support to a foreign government for a counterdrug operation conducted between July 1997 and February 1998. USACOM\u2019s involvement allowed its Air Force component, the Air Combat Command, to limit its involvement in the arrangements and concentrate on sourcing the assets and arranging logistics for the operation.\n\n\t\t\tJoint Force Integrator Value May Lie in Longer-Term Benefits\n\nThe Commander of USACOM told us he considered joint force integration to be the Command\u2019s most important functional role. He believed that over the next 2 years the Command\u2019s integration efforts would gain more recognition for enhancing joint operational capabilities than its efforts in joint training. He said the Command was beginning to gain access to critical \u201clevers of progress,\u201d such as the Joint Requirements Oversight Council, which would enhance its influence. He cited the Command\u2019s development\u2014in collaboration with other geographic commands\u2014of a theater ballistic missile defense capstone requirements document and its August 1998 approval by the Council as a demonstration of the Command\u2019s growing influence and impact. This document is to guide doctrine development and the acquisition programs for this joint mission. While approval was a very significant step for jointness, it raised important questions, including who will pay for joint requirements in service acquisition programs. The services have opposed USACOM\u2019s role and methodology in developing joint requirements and did not believe they should be responsible for funding costs associated with the joint requirements.\nThe USACOM Commander believed the Command has made considerable progress in developing the process by which joint force integration is accomplished. He cited the Command\u2019s advanced concept technology demonstration projects that have a joint emphasis as one of its primary means of enhancing force integration. He said, for example, that the Command\u2019s high-altitude endurance unmanned aerial vehicle project should soon provide aerial vehicles that give warfighters near-real-time, all-weather tactical radar and optical imagery.\nViews and knowledge about USACOM\u2019s integration role varied among the geographic commands we visited. Few commands were knowledgeable of USACOM\u2019s efforts at integration but perceived them to be closely aligned with the Command\u2019s joint force trainer and provider functions. While these commands were aware that USACOM had responded to some specific opportunities (for example, theater ballistic missile defense) in its integrator role, they described the Command\u2019s involvement in refining joint doctrine and improving systems interoperability as a responsibility shared among the commands. A representative of the Joint Staff\u2019s Director for Operational Plans and Interoperability told us USACOM\u2019s integrator role, as originally defined, faded along with adaptive joint force packages. He believed the Command\u2019s staff had worked hard to redefine this role and give it a meaningful purpose and considered the Command as adding value and performing a vital mission in its redefined role.\n\n\tCommand Still Being Assimilated and Roles and Responsibilities Expanded\n\nUSACOM\u2019s evolving functional roles as joint force trainer, provider, and integrator have not been fully embraced throughout DOD. Except for USACOM\u2019s joint force trainer role, its functional roles and responsibilities have not been fully incorporated into DOD joint publications or fully accepted or understood by other commands and the military services. USACOM\u2019s functional responsibilities are expanding with the recent assignment of five additional joint staff activities, a new joint experimentation role, and ownership of the joint deployment process. USACOM\u2019s Commander believes these will have a positive impact on its existing functional roles.\n\n\t\tJoint Training Role Has Been Institutionalized\n\nOver time, the Joint Staff and USACOM have incorporated the Command\u2019s joint force trainer role into joint publications. These documents provide a common understanding among DOD organizations of USACOM\u2019s role in the joint training of forces. USACOM\u2019s training role is identified in the Chairman, Joint Chiefs of Staff, joint training policy and discussed in detail in the Chairman\u2019s joint training manual and joint training master plan.\nThe Chairman\u2019s joint training master plan makes USACOM responsible for the joint training of assigned CONUS-based forces, preparing them to deploy worldwide and participate as members of a joint task force. It also tasks the Command to train joint task forces not trained by other geographic commands. As defined in the joint training manual, USACOM develops the list of common operational joint tasks, with assistance from the geographic commands, the Joint Warfighting Center, and the Joint Staff. These common tasks, which are used by USACOM to train CONUS-based forces, have been adopted by the Chairman as a common standard for all joint training.\nTo further clarify its training role, USACOM issued a joint training plan that defines its role, responsibilities, and programs for the joint training of its assigned forces. This plan also discusses the Command\u2019s support to the Chairman\u2019s joint training program and other geographic commands\u2019 joint training. USACOM has also developed a joint task force headquarters master training guide that has been disseminated to all geographic commands and is used to develop training guides.\n\n\t\tOther Functional Roles Not Yet Institutionalized\n\nWhile USACOM\u2019s force provider and integrator roles are described in broad terms in the Unified Command Plan, these roles have not been incorporated into joint guidance and publications. This lack of inclusion could hinder a common understanding about these roles and what is expected from USACOM. For example, key joint guidance for planning and executing military operations\u2014the Joint Operational Planning and Execution System\u2014does not specifically discuss USACOM\u2019s role as a force provider even though the Command has the preponderance of U.S. forces. The lack of inclusion in joint guidance and publications also may contribute to other DOD units\u2019 resistance or lack of support and hinder sufficient discussion of these roles in military academic education curriculums, which use only approved doctrine and publications for class instruction.\nInternally, USACOM\u2019s provider role is generally defined in the Command\u2019s operations order and has recently been included as a major focus area. However, USACOM has not issued a standard operating procedure for its provider role. A standard operating procedure contains instructions covering those features of operations that lend themselves to a definite or standardized procedure without the loss of effectiveness. Such instructions delineate for staffs and organizations how they are to carry out their responsibilities. Not having them has caused some difficulties and inefficiencies among the force provider staff, particularly newly assigned staff. USACOM officials stated that they plan to create a standard operating procedure but that the effort is an enormous task and has not been started.\nUSACOM\u2019s integrator role is defined in the Command\u2019s operations order and included as a major focus area. The order notes that the training and providing processes do much to achieve the role\u2019s stated objective of enhanced joint capabilities but that effectively incorporating new technologies occurs primarily through the integration process. Steps in the integration process include developing a concept for new systems, formulating organizational structure, defining equipment requirements, establishing training, and developing and educating leaders. The major focus area for the integration role defines the role\u2019s three objectives and tasks within each to enhance joint force operations.\n\n\t\tUSACOM\u2019s Roles and Responsibilities Have Been Further Expanded\n\nThe Secretary of Defense continued to expand USACOM\u2019s roles and responsibilities in 1998, assigning the Command several activities, the new role of joint experimentation, and ownership of the joint deployment process. These changes significantly expand the Command\u2019s size and responsibilities. Additional changes that will further expand the Command\u2019s roles and responsibilities have been approved.\n\n\t\t\tChairman Activities Transferred to USACOM\n\nEffective October 1998, five activities, formerly controlled by the Chairman of the Joint Chiefs of Staff, and about 1,100 of their authorized personnel were transferred to USACOM. Table 4.1 identifies the activities and provides information on their location, missions, and fiscal year 1999 budget request and authorized military and civilian positions.\nAccording to USACOM\u2019s Commander, these activities will significantly enhance the Command\u2019s joint training and integration efforts. Each of the transferred activities has unique capabilities that complement each other and current USACOM organizations and activities. For example, by combining the Joint Warfare Analysis Center\u2019s analytical capabilities with USACOM\u2019s cruise missile support activity, the Command could make great strides in improving the capability to attack targets with precision munitions. Also, having the Joint Warfighting Center work with USACOM\u2019s Joint Training and Simulation Center is anticipated to improve the joint training program, enhance DOD modeling and simulation efforts, and help to develop joint doctrine and implement Joint Vision 2010. USACOM\u2019s Commander also believed the Command\u2019s control of these activities would enhance its capability to analyze and develop solutions for interoperability issues and add to its ability to be the catalyst for change it is intended to be.\nThe transfer of the five activities was driven by the Secretary of Defense\u2019s 1997 Defense Reform Initiative report, which examined approaches to streamline DOD headquarters organizations. Transferring the activities to the field is expected to enable the Joint Staff to better focus on its policy, direction, and oversight responsibilities. The Chairman also expects the transfer will improve joint warfighting and training by strengthening USACOM\u2019s role and capabilities for joint functional training support, joint warfighting support, joint doctrine, and Joint Vision 2010 development. USACOM plans to provide a single source for joint training and warfighting support for the warfighter, with a strong role in lessons learned, modeling and simulation, doctrine, and joint force capability experimentation.\nUSACOM has developed an implementation plan and coordinated it with the Joint Staff, the leadership of the activities, other commands, and the military services. The intent is to integrate these activities into the Command\u2019s joint force trainer, provider, and integrator responsibilities. Little organizational change is anticipated in the near term, with the same level and quality of support by the activities provided to the geographic commands. The Joint Warfighting Center and USACOM\u2019s joint training directorate will merge to achieve a totally integrated joint training team to support joint and multinational training and exercises. Under the plan, USACOM also expects to develop the foundation for \u201cone stop shopping\u201d support for geographic commanders both before and during operations.\n\n\t\t\tUSACOM Designated Executive Agent for Joint Concept Development and Experimentation\n\nIn May 1998, the Secretary of Defense expanded USACOM\u2019s responsibilities by designating it executive agent for joint concept development and experimentation, effective October 1998. The charter directs USACOM to develop and implement an aggressive program of experimentation to foster innovation and the rapid fielding of new concepts and capabilities for joint operations and to evolve the military force through the \u201cprepare now\u201d strategy for the future. Joint experimentation is intended to facilitate the development of new joint doctrine, organizations, training and education, material, leadership, and people to ensure that the U.S. armed forces can meet future challenges across the full range of military operations.\nThe implementation plan for this new role provides estimates of the resources required for the joint experimentation program; defines the experimentation process; and describes how the program relates to, supports, and leverages the activities of the other components of the Joint Vision 2010 implementation process. The plan builds upon and mutually supports existing and future experimentation programs of the military services, the other unified commands, and the various defense research and development agencies. The plan was submitted to the Chairman of the Joint Chiefs of Staff in July 1998, with a staffing estimate of 127 additional personnel by September 1999, increasing to 171 by September 2000. In November 1998, USACOM had about 27 of these people assigned and projected it would have 151 assigned by October 2000.\nUSACOM worked closely with the Office of the Secretary of Defense and the Joint Staff to establish the initial funding required to create the joint experimentation organization. USACOM requested about $41 million in fiscal year 1999, increasing to $80 million by 2002. Of the $41 million, $30 million was approved: $14.1 million was being redirected from two existing joint warfighting programs, and $15.9 million was being drawn from sources to be identified by the Office of the Under Secretary of Defense (Comptroller).\nThe Secretary of Defense says DOD is committed to an aggressive program of experimentation to foster innovation and rapid fielding of new joint concepts and capabilities. Support by the Secretary and the Chairman of the Joint Chiefs of Staff is considered essential, particularly in areas where USACOM is unable to gain the support of the military services who questioned the size and cost of USACOM\u2019s proposed experimentation program. Providing USACOM the resources to successfully implement the joint experimentation program will be an indicator of DOD\u2019s commitment to this endeavor. The Congress has expressed its strong support for joint warfighting experimentation. In the National Defense Authorization Act for Fiscal Year 1999 (P.L. 105-261), it was stated that it was the sense of the Congress that the Commander of USACOM should be provided appropriate and sufficient resources for joint warfighting experimentation and the appropriate authority to execute assigned responsibilities. We plan to issue a report on the status of joint experimentation in March 1999.\n\n\t\t\tUSACOM Assigned Ownership of Joint Deployment Process\n\nIn October 1998, the Secretary of Defense, acting on a recommendation of the Chairman of the Joint Chiefs of Staff, made USACOM owner of the joint deployment process. As process owner, USACOM is responsible for maintaining the effectiveness of the process while leading actions to substantially improve the overall efficiency of deployment-related activities. The Joint Staff is to provide USACOM policy guidance, and the U.S. Transportation Command is to provide transportation expertise. USACOM was developing a charter to be coordinated with other DOD components, and provide the basis for a DOD directive. The deployment process would include activities from the time forces and material are selected to be deployed to the time they arrive where needed and then are returned to their home station or place of origin.\nAccording to the Secretary of Defense, USACOM\u2019s responsibilities as joint trainer, force provider, and joint force integrator of the bulk of the nation\u2019s combat forces form a solid foundation for USACOM to meet joint deployment process challenges. The Secretary envisioned USACOM as a focal point to manage collaborative efforts to integrate mission-ready deploying forces into the supported geographic command\u2019s joint operation area. USACOM officials considered this new responsibility to be a significant expansion of the Command\u2019s joint force provider role. They believed that in their efforts to make the deployment process more efficient there would be opportunities to improve the efficiency of its provider role. As executive agent of the Secretary of Defense for the joint deployment process, USACOM\u2019s authority to direct DOD components and activities to make changes to the deployment process has yet to be defined. A Joint Staff official recognized this as a possible point of contention, particularly among the services, as the draft charter was being prepared for distribution for comment in February 1999.\n\n\t\t\tAdditional Changes Approved\n\nIn October 1998, the Deputy Secretary of Defense approved the realignment or restructuring of several additional joint activities affecting USACOM. These include giving USACOM representation in the joint test and evaluation program; transferring the services\u2019 combat identification activities to USACOM; and assigning a new joint personnel recovery agency to USACOM. USACOM and the Chairman of the Joint Chiefs of Staff believed these actions strengthened USACOM\u2019s joint force trainer and integrator roles as well as its emerging responsibilities for joint doctrine, warfighting concepts, and joint experimentation. USACOM representation on the joint test and evaluation program, which was to be effective by January 1999, provides joint representation on the senior advisory council, planning committee, and technical board for test and evaluation. Command and control of service combat identification programs and activities provide joint evaluation of friend or foe identification capabilities. The newly formed joint personnel recovery agency provides DOD personnel recovery support by combining the joint services survival, evasion, resistance, and escape agency with the combat search and rescue agency. USACOM is to assume these responsibilities in October 1999.\n\n\tConclusions and Recommendations\n\n\t\tConclusions\n\nRetaining the effectiveness of America\u2019s military when budgets are generally flat and readiness and modernization are costly requires a fuller integration of the capabilities of the military services. As the premier trainer, provider, and integrator of CONUS-based forces, USACOM has a particularly vital role if the U.S. military is to achieve new levels of effectiveness in joint warfighting.\nUSACOM was established to be a catalyst for the transformation of DOD from a military service-oriented to a joint-oriented organization. But change is difficult and threatening and it does not come easy, particularly in an organization with the history and tradition of DOD. This is reflected in the opposition to USACOM from the military services, which provide and equip the Command with its forces and maintain close ties to USACOM\u2019s service component commands, and from geographic commands it supports. As a result of this resistance, USACOM changed its roles as an integrator and provider of forces and sought new opportunities to effect change. Indications are that the current geographic commanders may be more supportive of USACOM than past commanders have been, as evidenced by their recent receptivity to USACOM\u2019s support in development and refinement of their joint training programs. Such support is likely to become increasingly important to the success of USACOM. During its initial years the Command made its greatest accomplishments in areas where there was little resistance to its role. The Commander of USACOM said that the Command would increasingly enter areas where others have a vested interest and that he would therefore expect the Command to encounter resistance from the military services and others in the future as it pursues actions to enhance joint military capabilities.\nWhile USACOM has taken actions to enhance joint training, to meet the force requirements of supported commands, and to improve the interoperability of systems and equipment, the value of its contributions to improved joint military capabilities are not clearly discernable. If the Command develops performance goals and measures consistent with the Results Act, it could assess and report on its performance in accomplishing its mission of maximizing military capabilities. The Command may need guidance from the Secretary of Defense in the development of these goals and measures.\nIn addition to its evolving roles as joint force trainer, provider, and integrator, USACOM is now taking on important new, related responsibilities, including the management of five key joint activities. With the exception of training, these roles and responsibilities, both old and new, are largely undefined in DOD directives, instructions, and other policy documents, including joint doctrine and guidance. The Unified Command Plan, a classified document that serves as the charter for USACOM and the other unified commands, briefly identifies USACOM\u2019s functional roles but does not define them in any detail. This absence of a clear delineation of the Command\u2019s roles, authorities, and responsibilities could contribute to a lack of universal understanding and acceptance of USACOM and impede the Command\u2019s efforts to enhance the joint operational capabilities of the armed forces.\nWhile USACOM was established in 1993 by the Secretary of Defense with the open and strong leadership, endorsement, and support of the Chairman of the Joint Chiefs of Staff, General Colin Powell, the Command has not always received the same strong visible support. Without such support, USACOM\u2019s efforts to bring about change could be throttled by other, more established and influential DOD elements with priorities that can compete with those of USACOM. Indications are that the current DOD leadership is prepared to support USACOM when it can demonstrate a compelling need for change. The adoption of the USACOM-developed theater ballistic missile defense capstone requirements document indicates that this rapidly evolving command may be gaining influence and support as the Secretary of Defense\u2019s and Chairman of the Joint Chiefs of Staff\u2019s major advocate for jointness within the Department of Defense.\n\n\t\tRecommendations\n\nIt is important that USACOM be able to evaluate its performance and impact in maximizing joint military capabilities. Such assessments, while very difficult to make, could help the Command better determine what it needs to do to enhance its performance. We, therefore, recommend that the Secretary of Defense direct the Commander in Chief of USACOM to adopt performance goals and measures that will enable the Command to assess its performance in accomplishing its mission of maximizing joint military capabilities.\nAdditionally, as USACOM attempts to advance the evolution of joint military capabilities and its role continues to expand, it is important that the Command\u2019s roles and responsibilities be clearly defined, understood, and supported throughout DOD. Only USACOM\u2019s roles and responsibilities in joint training have been so defined in DOD policy and guidance documents. Therefore, we recommend that the Secretary of Defense fully incorporate USACOM\u2019s functional roles, authorities, and responsibilities in appropriate DOD directives and publications, including joint doctrine and guidance.\n\n\t\tAgency Comments and Our Evaluation\n\nIn written comments (see app. VII) on a draft of this report, DOD concurred with the recommendations. In its comments DOD provided additional information on USACOM\u2019s efforts to establish performance goals and objectives and DOD\u2019s efforts to incorporate USACOM\u2019s functional roles, authorities, and responsibilities in appropriate DOD directives and publications. DOD noted that as part of USACOM\u2019s efforts to establish performance goals and objectives, the Command has provided training on performance measures to its military officers.\nRegarding our recommendation to incorporate USACOM\u2019s functional roles, authorities, and responsibilities in appropriate DOD directives and publications, DOD said the 1999 Unified Command Plan, which is currently under its cyclic review process, will further define USACOM\u2019s functional roles as they have evolved over the past 2 years. It also noted that key training documents have been, or are being, updated. We believe that in addition to the Unified Command Plan and joint training documents, the joint guidance for planning and executing military operations\u2014the Joint Operational Planning and Execution System process\u2014should discuss USACOM\u2019s role as the major provider of forces.","output":"Why GAO Did This Study\n\nPursuant to a congressional request, GAO provided information on Department of Defense (DOD) efforts to improve joint operations, focusing on: (1) the U.S. Atlantic Command's (USACOM) actions to establish itself as the joint force trainer, provider, and integrator of most continental U.S.-based forces; (2) views on the value of the Command's contributions to joint military capabilities; and (3) recent expansion of the Command's responsibilities and its possible effects on the command.\n\nWhat GAO Found\n\nGAO noted that: (1) USACOM has advanced joint training by developing a state-of-the-art joint task force commander training program and simulation training center; (2) the Command has also progressed in developing other elements of joint training, though not at the same level of maturity or intensity; (3) however, USACOM has had to make substantive changes in its approach to providing and integrating joint forces; (4) its initial approach was to develop ready force packages tailored to meet the geographic commands' spectrum of missions; (5) this was rebuffed by the military services and the geographic commands, which did not want or value USACOM's proactive role and by the Chairman of the Joint Chiefs of Staff (1993-97), who did not see the utility of such force packages; (6) by late 1995, USACOM reverted to implementing a force-providing process that provides the Command with a much more limited role and ability to affect decisions and change; (7) the Command's force integrator role was separated from force providing and also redirected; (8) the establishment of performance goals and measures would help USACOM assess and report on the results of its efforts to improve joint military capabilities; (9) Congress anticipated that the Government Performance and Results Act principles would be institutionalized at all organizational levels in federal agencies; (10) the Command's recently instituted strategic planning system does not include performance measures that can be used to evaluate its impact on the military capabilities of U.S. forces; (11) the Office of the Secretary of Defense, the Joint Staff, and USACOM believed the Command was providing an important focus to the advancement of joint operations; (12) the views of the geographic commands were generally more reserved, with some benefitting more than others from USACOM's efforts; (13) the Command's new authorities are likely to increase its role and capabilities to provide training and joint war fighting support and enhance its ability to influence decisions within the department; and (14) although USACOM's roles are expanding and the number of functions and DOD organizational elements the Command has relationships with is significant, its roles and responsibilities are still largely not spelled out in key DOD policy and guidance, including joint doctrine, guidance, and other publications."}
{"id":"gao_GAO-08-63","pid":"gao_GAO-08-63_0","input":"\tBackground\n\nState is authorized to designate acceptance facilities\u2014in addition to its  own passport offices\u2014to provide passport execution services to the  American public. The majority of passport applications are submitted at  acceptance facilities nationwide; these include post offices; federal, state,  and probate courts; some public libraries and public universities; and a  variety of other county, township, and municipal offices. Agents at these  facilities are responsible for, among other things, verifying that the  applicant\u2019s identification documents (driver\u2019s license, for example) and  photo are authentic and match the person standing before the agent.  Acceptance facilities retain the execution fee for this service. Figure 1  depicts the execution process.\nState reported that there were 8,583 active acceptance facilities  nationwide as of September 30, 2006 (see table 1)\u2014post offices comprised  almost two-thirds of all active facilities. According to consular officials,  for fiscal year 2006, post offices executed about 72 percent of applications  for minors and for adults applying for the first time; nonpostal facilities  executed about 25 percent. The remainder (3 percent) were executed by  14 of State\u2019s passport offices. In recent years, State has expanded its  network of acceptance facilities to accommodate increasing passport  demand. We reported previously that there were approximately 7,000  acceptance facilities as of March 2005. In fiscal year 2006, State added 753  new locations to its network of acceptance facilities, of which 636 are post  offices, and 117 are nonpostal facilities.\nState requires that acceptance agents be U.S. citizens, permanent  employees, 18 years or older, and have successfully completed a training  program. We reported in July 2007 that State has taken a number of  measures to ensure the security and quality of passports, including  establishing internal control standards and quality assurance measures  and training of acceptance agents. However, we found that State lacks a  program for oversight of passport acceptance facilities and made a  number of recommendations to improve this oversight. State indicated  that it has begun to take actions that would address our recommendations.\n\n\t\tState Sets Passport Fees; USPS Provides Information for State\u2019s Consideration\n\nThe Secretary of State prescribes fees for passport services that State  provides and has some discretion in setting and collecting passport fees.  The Chief Financial Officers Act of 1990 requires, and Office of  Management and Budget (OMB) guidance in Circular A-25 advises, that  agencies review the fees for their programs biennially. According to OMB  A-25 guidance, fees should be sufficient to recover the full cost to the  federal government of providing the service, resource, or good. \u201cFull cost\u201d  includes all direct and indirect costs to the federal government, such as  direct and indirect personnel costs, including salaries and fringe benefits  such as medical insurance and retirement; physical overhead, material,  and supply costs; rents; and management and supervisory costs.\nIn addition, State and USPS signed a formal, interagency agreement in  2000, which sets forth the terms and conditions of the execution services  that USPS provides on State\u2019s behalf. The agreement states, among other  things, that State will consider the results of any USPS analyses of  passport execution costs and, that before changes in the execution fee are  finalized, State and USPS will mutually agree upon the new amount.  Further, the agreement states that this partnership is voluntary\u2014if, at any  time, State and USPS do not mutually agree to the new fee, either party is  free to consider other options, including ending their partnership.\n\n\t\tState Is Developing Alternative Document to Meet WHTI Requirements\n\nBased on recommendations from the 9\/11 Commission, Congress, in 2004,  mandated the development and implementation of a plan that requires  U.S. citizens to have a passport or other document that demonstrates their  identity and citizenship when entering the United States from any foreign  country or territory. Prior to this legislation, U.S. citizens did not need a  passport to enter the United States if they were traveling from Canada,  Mexico, the Caribbean, or Bermuda. DHS and State implemented this  requirement for airports on January 23, 2007, and are to implement the  requirement for land and sea ports before June 1, 2009 (see fig. 2 for key  dates in WHTI implementation). The departments have indicated that  they will begin to phase in the requirement for land and sea ports in 2008.\nThe current passport book fee is $97 for first time, adult applicants (16  years and older). State reported that there are circumstances where, due  to reasons of both cost and ease of use, the traditional book-style U.S.  passport may not be the optimal solution for international travelers along  the northern and southern land borders of the United States, or  international sea travel between the United States and Canada, Mexico,  the Caribbean, and Bermuda. Thus, in October 2006, State announced  plans to produce a passport card as a lower cost means of establishing  citizenship and identity for U.S. citizens. For the passport card, State has  proposed to charge $45, which includes a $25 execution fee. The current  execution fee is $30 for passport books. The proposed reduction of $5  applies to the execution fee for both passport documents because  acceptance agents will follow the same procedures regardless of the type  of document. Table 2 shows the current passport book fees, as well as the  proposed fees for the passport book and card.\nAccording to State, passport cards, like passport books, would be issued  for a 10-year validity period for U.S. citizens 16 years and older and for a   5-year validity period for U.S. citizens under 16 years of age.\n\n\tState Proposes Reduced Execution Fee Based on Commitment to Congress and Other Factors\n\nState considered several factors, including congressional interest in having  a low-cost travel document and its own estimated execution costs, when  setting the proposed execution fee. Based on an interagency agreement,  State also reviewed information from USPS on its estimated passport  execution costs.\n\n\t\tState\u2019s Cost Estimates One of Several Factors the Department Considered When Lowering the Execution Fee\n\nAccording to State, the information from its cost of service study  supported the fee-setting process in 2006, but the proposal to reduce the  execution fee was not based solely on full cost recovery considerations.  Consular officials told us that they considered several factors when setting  the proposed execution fee. These include:    Commitment to Congress to issue a low-cost document. According to  consular officials, the department made a commitment to issue an  alternative document to meet WHTI requirements that would be, at most,  one-half the cost of the passport book, which currently costs $97.\nState\u2019s estimates of its passport execution costs. State, through an  independent contractor, conducts cost studies for its consular services,  including passport execution, to determine the full costs for providing  these services. Consular officials stated that the department\u2019s policy is to  review these fees on a periodic basis, rather than biennially, due to the  length of time it takes to complete the cost of service studies. State\u2019s  most recent cost of service study estimated the full costs for execution  services to the department for fiscal years 2004 and 2005 to be $24.36.  Because OMB guidance states that subject to exceptions, user charges will  be sufficient to recover the full cost to the federal government, consular  officials told us that the department decided to not lower the execution  fee below the amount estimated in the most recent cost of service study.\nMaintaining State\u2019s network of acceptance facilities. According to  consular officials, State wanted to ensure that, while the cost of the  passport card was lower than the cost for the current passport book, that  its execution fee was not so low that it jeopardized State\u2019s relationship  with its network of acceptance facilities, on which the department  depends to provide passport services to U.S. citizens. State has seen an  increase in passport demand from a base level of 7 million passports  issued in 2003 to an expected more than 17 million issuances in fiscal year  2007. Based, in part, on these data, consular officials concluded that,  even with the reduced execution fee, the department and its acceptance  facilities could continue to expect additional funds from passport services.\nFigure 3 shows that, historically, passport execution fees have been higher  than State\u2019s estimated costs. For example, in 2002, State set the execution  fee at $30 based on a cost estimate of $16.20. Consular officials told us  that, based on policy considerations, there are certain services for which  State does not charge a fee or the fee covers only a portion of the cost of  the service. For example, State may not charge a passport fee from certain  relatives of a deceased member of the Armed Forces proceeding abroad to  visit the grave or to attend a funeral or memorial service for that member.  Consular officials stated that their general management practice has been  to round cost estimates for some services up to cover the cost of those  services for which the public is not charged.\nIn 2005, State kept the passport execution fee at $30 based on the $24.36  cost of service study estimate. For the passport card, State only rounded  up its cost estimate to the nearest dollar to help reduce the total cost of  the card.\n\n\t\tState Considered Information from USPS\n\nBased on a 2000 interagency agreement, consular officials consider cost  information from USPS in setting passport execution fees. In a fiscal year  2001 internal cost study, USPS estimated that its costs were about $13 per  passport. In April 2006, using this study as a baseline, USPS notified  Congress that its projected costs for fiscal year 2005 had increased to  about $19 per passport. According to consular officials, over the next  several months, State and USPS met to discuss the Service\u2019s estimated  passport execution costs. Then, in early August 2006, USPS sent a letter to  State to notify the department that its initial estimate of $19 did not  include a contribution to institutional costs that USPS applies to postal  and nonpostal products and services. According to USPS, its average  contribution to institutional costs was approximately 76 percent of  directly attributed costs. Using this average, USPS told State that its full  costs for passport execution for fiscal year 2005 would total about $33 per  execution (see table 3)\u2014about $19 for costs directly attributable to  passport execution and $14 for institutional cost coverage. USPS\u2019s 2001  study did not address institutional costs. Consular officials stated that  State did not receive more detailed information about USPS\u2019s internal cost  study or how the cost estimates were developed.\nA number of factors affecting costs may have changed since USPS\u2019s 2001  cost study, and USPS did not take these changes into account when  projecting passport execution costs for fiscal year 2005. For example, the  estimates that USPS provided to Congress and State did not account for  the projected increase in passport application volume or the growth in  active postal acceptance facilities. As a result, it is unclear whether USPS\u2019s  estimate accurately reflects its costs.\nIn late August 2006, State notified USPS that it had decided to propose a  $25 execution fee, which was higher than the directly attributable costs for  passport execution services that USPS reported to Congress in April 2006  (see fig. 4 for a time line of communication involving State and USPS on  this issue). Regarding the additional contribution to institutional overhead,  USPS officials told us that they have some flexibility in the percentage of  institutional costs that the Service assigns to each of its products, in  general, including the percentage used to calculate the passport execution  cost estimate provided to State, specifically. For example, in fiscal year  2006, USPS charged an additional 14 percent of its direct and indirect  costs for insured services to cover the institutional cost assigned to this  service, and 197 percent for presorted, first class letter mail. As of August  2007, USPS officials stated that they have agreed, in principle, to State\u2019s  proposed $25 execution fee.\nState notified its network of acceptance facilities in early 2006 that the  department would be proposing a lower execution fee. However, State did  not seek cost information from nonpostal acceptance facilities. According  to State officials, nonpostal acceptance facilities are not organized in a  way that would make systematic data collection feasible. Thus, State  relied on information that these facilities provided to the department  through the public comment period following the publication of the  proposed passport card rule in the Federal Register.\n\n\tLack of Transparency in State\u2019s Most Recent Passport Execution Cost Estimate\n\nWe found that State\u2019s most recent cost of service study, which the  department considered when establishing the reduced passport execution  fee, lacked documentation of several of the contractor\u2019s key decisions.  State is in the initial stages of a new study of fiscal year 2007 costs.\nWe have previously reported that cost estimates are well documented  when they can be easily repeated or updated and can be traced to original  sources through auditing. Rigorous documentation increases the  credibility of an estimate and helps support an organization\u2019s decision- making process. In particular, the documentation should explicitly identify  the primary methods, calculations, results, rationales or assumptions, and  sources of the data used to generate each cost element. Regarding the  passport execution fee, State considered execution cost estimates from its  2004 cost of service study as part of the fee-setting process for the  passport card. We found that this study lacked documentation to justify  key decisions the contractor made when estimating passport execution  costs. We found the following examples:    Estimates of the resources associated with passport execution (both  direct and indirect costs) were integral to the contractor\u2019s calculation of  State\u2019s cost of providing this service. At the time of the 2004 cost of  service study, however, State\u2019s financial systems and processes did not  provide managerial cost information for its activities, such as the full cost  of the department\u2019s passport activities. Thus, State was not able to obtain  necessary cost information directly from the department\u2019s financial system  and made numerous assumptions to estimate the aggregate cost of  consular activities, including the passport execution costs. State\u2019s  contractor used baseline obligations data from fiscal year 2002 to estimate  passport execution costs for fiscal years 2004 and 2005 ($24.36). The  contractor\u2019s final report, however, did not indicate that there may be  limitations in using this information as opposed to actual expenditure  data.\nThe estimated time associated with passport execution was another  important component of the contractor\u2019s methodology. To determine how  much time was spent on passport services and develop a time estimate,  the contractor conducted surveys of State\u2019s consular staff . We requested  documentation from State on the contractor\u2019s sampling plan and survey  results, but officials were not able to provide additional details about the  survey\u2019s sample design, results by office, or how the data was used to  arrive at the final estimated time State officials spend on passport  execution.\nIn the study\u2019s survey of State\u2019s domestic passport agencies, the tasks for  executing and adjudicating a passport were combined into one activity.  Therefore, to estimate the time generally associated with execution  services that State provides, the contractor visited several post offices in  the Washington, D.C., area, and performed time in motion studies at these  facilities. Using the time estimates gathered at the post offices as a proxy,  the contractor concluded that it took State an average of 7.63 minutes for  each passport execution. However, State could not provide documentation  regarding the number, type, and location of post offices visited or detailed  results of the contractor\u2019s time in motion studies. This methodology  supported the specific costs allocated to the passport execution.\nState is beginning a new cost of service study, according to consular  officials, which will estimate fiscal year 2007 costs for all consular  services, including passport book and card execution.\n\n\tConclusion\n\nState considered several factors in proposing to reduce the execution fee  by $5, most notably its commitment to Congress to create a lower cost  document for U.S. citizens that would comply with WHTI documentation  requirements; State\u2019s proposal achieves this commitment. State\u2019s passport  execution cost estimates, while not the sole factor that the department  considered when setting this fee, are important data, as OMB guidance  encourages agencies to recover the full costs of the services they provide.  However, State did not ensure adequate documentation of key aspects of  the study\u2019s assumptions, methodology, and limitations. In addition, USPS  did not provide detailed information regarding its estimated passport  execution costs, which were based on a fiscal year 2001 study. Better  documentation would increase the credibility of State\u2019s estimate and help  support its fee-setting process. Given the potential impact on a significant  number of U.S. citizens, it is imperative that State have a transparent  process for setting the passport execution fee to ensure that passport  execution cost estimates can be used as a reliable basis for decisions.\n\n\tRecommendation for Executive Action\n\nTo improve the transparency of the passport execution fee-setting process,  we are recommending that the Secretary of State instruct the department\u2019s  contractor to provide additional documentation in its forthcoming fee  study to support key methodologies, assumptions, and limitations. Such  documentation should clarify survey and other work performed, disclose  all sources of cost information being used, and identify potential  limitations and uncertainties associated with the cost figures and other  data. The study should also document the extent to which State\u2019s  contractor incorporated estimated passport execution costs from USPS  and other acceptance facilities.\n\n\tAgency Comments and Our Evaluation\n\nWe received written comments from State, which we have reprinted in  appendix III. State agreed with our recommendation and stated that the  department is working with its contractor for State\u2019s new cost of service  study to ensure that the final report identifies primary methods,  calculations, and rationales for any assumptions made. State and USPS  also provided technical comments, which we have incorporated into the  report, as appropriate.\nAs agreed with your offices, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days from the  report date. At that time, we will send copies of this report to the Secretary  of State and the Postmaster General and other interested Members of  Congress. We also will make copies available to others upon request. In  addition, the report will be available at no charge on the GAO Web site at  http:\/\/www.gao.gov.\nIf you or your staff have any questions about this report, please contact me  at (202) 512-4128 or fordj@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 major contributions to this report are  listed in appendix IV.\n\nAppendix I: Scope and Methodology\n\nTo determine the process by which the Department of State (State) set the  proposed passport execution fee, we reviewed current laws and  regulations that authorize the setting of fees, as well as guidance to  agencies on the fee-setting process from the Office of Management and  Budget, and State\u2019s procedures as outlined in the Foreign Affairs Manual.  We also collected and analyzed documentation and interviewed officials  from State\u2019s Bureau of Consular Affairs, which is responsible for  determining the passport card fees, to determine the factors that State  considered.\nTo determine how the execution cost data that State considered was  developed, we reviewed data on State\u2019s estimated execution costs as  outlined in the bureau\u2019s June 2004 consular cost of service study and  interviewed consular officials regarding the study\u2019s scope and  methodology. We also reviewed State\u2019s audited consolidated financial  statements of net costs for the fiscal years 2006, 2005, 2002, and 2001. In  addition, we analyzed data on the U.S. Postal Service\u2019s (USPS) estimated  passport execution costs and interviewed USPS officials responsible for  cost analysis and pricing to determine the process USPS uses to estimate  passport execution costs. In particular, we reviewed USPS\u2019s September  2001 passport execution cost study report, as well as information on its  costs and revenue. We also examined USPS\u2019s audited consolidated  financial statements of net costs for the fiscal years 2006 and 2001. We did  not evaluate the validity of State and USPS\u2019s cost estimates.\nWe conducted our work between May and August 2007 in accordance with  generally accepted government auditing standards.\n\nAppendix II: Passport Adjudication and Issuance Process\n\nUnder U.S. law, the Secretary of State has the authority to issue passports.  Once a passport application has been received by one of the 17 domestic  passport-issuing offices, a passport examiner must examine each  application to determine, through a process called adjudication, whether  the applicant should be issued a passport. Adjudication requires the  examiner to scrutinize identification and citizenship documents presented  by applicants to verify their identity and U.S. citizenship. Once the  passport examiner has determined that an applicant is eligible for a  passport, State personalizes the passport with the applicant\u2019s information  and delivers it to the applicant (see fig. 5). According to State\u2019s proposed  notice on the passport card in the Federal Register, the basis of the  passport card application fee is to be the direct costs of producing  passport cards, the card stock, technology, adjudicating the application,  printing the biographic information on the card, and priority mail return of  the card.\n\nAppendix III: Comments from the Department of State\n\nAppendix IV: GAO Contact and Staff Acknowledgments\n\n\tStaff Acknowledgments\n\nIn addition to the individual named above, John Brummet, Assistant  Director; Robert Owens, Assistant Director; Kathryn H. Bernet; Richard  Cambosos; Joseph Carney; Esther Cha; Peter B. Grinnell; Jeffrey Isaacs;  and Grace Lui made key contributions to this report.","output":"Why GAO Did This Study\n\nAs early as January 31, 2008, U.S. citizens will be required to present a passport or other approved document to enter the United States at all ports of entry. The Department of State (State) is developing a \"passport card\" as a means of establishing U.S. citizenship for individuals crossing U.S. land borders or arriving by sea from Canada, Mexico, the Caribbean, or Bermuda. State proposes to charge $45 for the card, which would include a $25 execution fee. Acceptance facilities, including State's passport offices, as well as post offices and state courts, execute passport applications on State's behalf, and retain this fee. GAO was asked to examine (1) the factors State considered when setting the proposed fee and (2) how execution cost data were developed. GAO reviewed current laws that authorize the setting of fees and met with State officials to determine how they set the execution fee. GAO also met with officials from State and the U.S. Postal Service (USPS) to discuss acceptance facility execution costs and how these costs were estimated.\n\nWhat GAO Found\n\nState considered several factors, including congressional interest in having a low-cost travel document, when setting the proposed passport execution fee. State has proposed to reduce the current execution fee from $30 to $25, which would help the department to issue a lower cost passport card that meets the new documentation requirements. Consular officials told GAO that State made a commitment to Congress to issue a document that would be, at most, one-half the price of the current passport book, which costs $97 for first time, adult applicants. To do this, State needed to reduce its fees, including the execution fee. Consular officials stated that State did not want to reduce the execution fee below $25 because it wanted to recover its costs, which it estimated at $24.36 per execution. In addition, the fee needed to be high enough to avoid jeopardizing State's relationship with acceptance facilities, on which State depends to provide passport services. State concluded that $25 would compensate acceptance facilities based, in part, on data from USPS that initially indicated its passport execution costs were about $19, as well as a projected increase in application volume. USPS later told State that the $19 figure did not include additional indirect costs. GAO found that State's most recent cost of service study, which estimated passport execution costs, lacked documentation of key decisions. Rigorous documentation increases an estimate's credibility and helps support an organization's decision-making process. Documentation of cost estimates should explicitly identify the primary methods, calculations, results, and rationales or assumptions. State was not able to provide documentation of critical components of the study's methodology. For example, consular officials could not provide details of its survey used to estimate the time it takes to execute a passport, including how the data was used to arrive at the final time estimate. State has begun a new cost study that will provide updated estimates of execution costs."}
{"id":"gao_GAO-08-1059","pid":"gao_GAO-08-1059_0","input":"\tBackground\n\nUSAID is headquartered in Washington, D.C., and has field locations in  approximately 90 countries to provide economic, development, and  humanitarian assistance worldwide in support of U.S. foreign policy  goals. Its activities include technical assistance, research, policy advice,  and infrastructure assistance.\n\n\t\tUSAID\u2019s Organizational Structure for Designing and Managing Its Assistance Activities\n\nIn headquarters, USAID is organized into three functional and five  geographic bureaus. The functional bureaus are aligned with the agency\u2019s  three strategic goals\u2014(1) economic growth and trade, (2) democracy and  governance, and (3) global health. The bureaus design and manage  activities that support their specific strategic goal. However, each activity  is typically implemented in multiple countries around the world. The five  geographic bureaus are responsible for oversight of overseas missions that  design and manage activities that support USAID\u2019s strategic goals.\nOverseas, USAID designs and manages its foreign assistance activities and  A&A instruments at several types of missions. These include    bilateral missions that design and manage assistance activities and A&A  instruments in the countries in which they are located, such as the mission  in Indonesia;  regional missions that design and manage assistance activities and A&A  instruments in the countries in which they are located and also for other  countries in the region, such as the mission in Kazakhstan; and  regional missions that provide administrative support, such as acquisition  and assistance, legal and financial, to missions in their region, such as the  mission in Thailand.\nUSAID\u2019s Office of Acquisition and Assistance (OAA) has overall  responsibility for the administration of A&A instruments in headquarters.  Its A&A staff provide professional advisory and technical support to  USAID\u2019s functional and geographic bureaus for developing and managing  A&A instruments. OAA also provides periodic guidance to A&A staff at  overseas missions. OAA is located within USAID\u2019s Management Bureau,  and its director reports to the Deputy Assistant Administrator of the  Management Bureau.\nUSAID A&A staff at overseas missions provide advice and support to  mission staff who design and manage assistance activities; they also have  overall responsibility for the administration of A&A instruments at  overseas missions. A&A offices are typically headed by a contracting  officer (CO) who reports to the mission director or deputy mission  director. At most bilateral missions, COs are co-located with A&A  specialists and CTOs. However, under USAID\u2019s regional mission structure,  COs often provide A&A support to more than one mission and are not  necessarily co-located with either the CTOs or all of the A&A specialists  who assist them. Some missions with no on-site CO may instead have on- site A&A specialists who provide A&A support to CTOs. Appendix II lists  missions with authorized on-site COs as of July 2008, as reported by OAA.\n\n\t\tA&A Workload Trends for Fiscal Years 2002 through 2007\n\nUSAID\u2019s total obligations for A&A instruments doubled from about $5  billion to about $10 billion from fiscal year 2002 through fiscal year 2007.  While total A&A obligations and number of A&A instruments increased  only slightly at headquarters over this time period, A&A obligations  overseas increased by nearly 600 percent, from about $1 billion in fiscal  year 2002 to about $6 billion in fiscal year 2007. In fiscal year 2007, A&A  obligations managed by overseas missions made up the majority\u2014nearly  60 percent\u2014of total A&A obligations. Figure 1 illustrates the A&A  obligations managed by OAA headquarters and overseas missions for  fiscal years 2002 through 2007.\nUSAID\u2019s total number of A&A instruments from fiscal years 2002 through  2007 also increased substantially, from about 6,000 to about 11,000. In  fiscal year 2007, around 71 percent of the total number of A&A  instruments was managed by overseas missions.\n\n\tUSAID Lacks Human Capital Data Needed for a Strategic A&A Workforce Plan That Could Help Address Its Overseas Workload Imbalances\n\nUSAID lacks the capacity to develop and implement a strategic A&A  workforce plan because it lacks two key elements: (1) sufficiently reliable  and up-to-date overseas A&A staff level data and (2) comprehensive  information on the competencies of its overseas A&A specialists, who play  a critical role in assisting COs and CTOs in overseas missions. During our  fieldwork, we found that the numbers of A&A staff with the necessary  competencies did not match A&A workload. Although various USAID has  launched some ad hoc attempts to address the agency\u2019s A&A workforce  issues, these efforts lack critical elements of a strategic A&A workforce  plan, particularly comprehensive information on its A&A specialists  overseas.\n\n\t\tUSAID Lacks Sufficiently Reliable and Up-to-Date Data on A&A Staff Levels\n\nAlthough USAID\u2019s Office of Human Resources (OHR) systematically  collects data on A&A specialists\u2019 staff levels, these data are not sufficiently  reliable. OHR officials acknowledged they had concerns about the  reliability and accuracy of the overseas A&A staff level data, particularly  with regard to the number of overseas A&A specialists. These officials  stated that they receive staffing data from missions but do not know  whether mission staff validate the data. In addition, they told us that  mission staff who prepare these data may not receive adequate guidance  for classification of different overseas staff positions, and as a result,  misclassification and inaccurate reporting of A&A staff levels may occur.\nFurthermore, OHR officials do not validate or confirm the data they collect  from missions, according to these officials.\nThe Office of Acquisition and Assistance (OAA) does not systematically  track the number of overseas A&A specialists, and its data on overseas  A&A staff levels are out of date. According to OAA officials, the office\u2019s  most recent data on the agency\u2019s entire A&A workforce are the result of a  fiscal year 2005 survey of all overseas missions to analyze workload and  staffing within OAA. While OAA\u2019s data are not current, the Office of  Human Resources (OHR) officials told us that OAA\u2019s data may still be  more accurate than the data collected by OHR in fiscal year 2005.\nOur analysis of OAA\u2019s and OHR\u2019s separately collected data on overseas  A&A staff levels for the end of fiscal year 2005 (the most current data  made available to us by OAA) revealed substantial discrepancies. For  example, comparing the two sets of data showed that OAA\u2019s reported total  overseas A&A staff levels for that year were more than 78 percent higher  than those reported by OHR\u2014OAA reported 264 overseas A&A staff, and  OHR reported 148. In addition, we found that, at certain missions, OHR\u2019s  data showed no A&A specialists, whereas OAA\u2019s data indicated several  A&A specialists.\nAlthough ready access to the Office of Human Resources\u2019 databases would  allow other USAID offices to identify and resolve discrepancies in their  staffing data, the offices lack such access. To date, according to OHR  officials, OAA has not specifically requested OHR staffing data in order to  compare them to its own.\n\n\t\tUSAID Lacks Comprehensive Information on A&A Staff Competencies\n\nAlthough A&A obligations have increased significantly at overseas  missions, USAID has not collected comprehensive information on the  competencies, including knowledge, skills, abilities, and experience levels,  of its overseas A&A staff. According to the principles of effective  workforce planning, an agency should determine the critical skills and  competencies needed to achieve current and future programmatic results.  In May 2008, the Office of Acquisition and Assistance (OAA) and the Office  of Human Resources (OHR) jointly conducted competency assessments  for A&A staff in headquarters and COs in overseas missions as part of an  effort to implement the President\u2019s Management Agenda. However, these  assessments did not include A&A specialists at overseas locations. For  staff included in this effort, OAA and OHR conducted a capability  assessment that identified key A&A staff competencies, such as decision  making and written communication skills; assessed competency levels;  identified competency gaps; and established strategies to reduce staff  vacancies and skill gaps through recruitment, retention, and training.  According to OHR officials, USAID expects to implement a similar  assessment for A&A specialists overseas but will likely not begin  implementation until fiscal year 2011 at the earliest. Without sufficiently  reliable data on its entire A&A workforce\u2014including A&A specialists  overseas\u2014USAID cannot collect comprehensive competency information,  identify gaps in the numbers, skills, and competencies of its A&A  workforce, and develop strategies to address them.\n\n\t\tUSAID Has Not Matched A&A Staff to Workload at Missions We Visited\n\nAt the USAID missions we visited, we found that the numbers and  competencies of A&A staff did not match A&A workload. While at some  missions the numbers of A&A staff with the necessary competencies were  considerably less than adequate, at other missions they were more than  adequate, according to mission officials.\nOfficials at five missions we visited\u2014Thailand, Cambodia, Kazakhstan, the  Kyrgyz Republic, and Mali\u2014told us that their A&A staff at times could not  provide adequate and timely support, such as providing guidance to CTOs  and approving A&A documents, primarily because the numbers of A&A  staff with the necessary competencies to manage their workloads were  insufficient. We found several such examples, including the following:    A CO at the regional mission in Thailand\u2014where three COs manage A&A  activities in 12 countries\u2014stated that she sometimes could not address  some missions\u2019 needs in a timely manner because of competing workload  demands. Staff at one of the missions for which the regional mission  provides A&A support\u2014Cambodia\u2014told us that while their A&A  workload has increased, they have at times not received adequate A&A  support. These staff attributed this lack of support to a decline in A&A  specialist staff levels from three in 2007 to one at the time of our visit, as  well as the inexperience of the mission\u2019s one remaining on-site A&A  specialist. This A&A specialist only works on A&A activities part-time  because she has other responsibilities. The mission director told us that as  a result, she has had to perform tasks that are normally considered among  A&A staff\u2019s responsibilities, such as revising A&A documents.\nThe mission director and A&A staff in Kazakhstan\u2014a regional mission  responsible for A&A activities at missions in Kazakhstan and four other  Central Asian countries that do not have on-site A&A specialists\u2014told us  that they could not adequately support A&A activities at the four missions  that do not have on-site A&A specialists. Staff at one such mission, in the  Kyrgyz Republic, noted that when they needed A&A staff on site to provide  more guidance to their less experienced CTOs, the A&A staff were not  available. Officials noted that without such guidance from A&A staff, CTOs  may be more likely to incorrectly manage A&A instruments. A&A staff in  Kazakhstan told us their ability to visit and support A&A activities at such  missions was hindered by a heavy workload and competing demands from  the other missions in the region.\nOfficials at the mission in Mali, which had two on-site A&A specialists and  received A&A support from COs at the regional mission in Ghana, told us  that these remotely located COs were sometimes not available to assist  them in meeting their activities\u2019 goals. For example, they said they had  delayed time-sensitive seasonal agricultural projects because the CO was  not available when needed to approve contracts.\nIn contrast, officials at the other two missions we visited\u2014Peru and  Indonesia\u2014told us they had more than adequate numbers of A&A staff  with the necessary competencies to manage their workload. Some staff  even indicated that these missions may not need all of their assigned COs  to adequately manage their A&A work. For example, one CO who will  soon be leaving the mission in Indonesia may not need to be replaced,  according to some A&A mission staff. A CO at the mission in Peru told us  that because the mission had so many experienced or competent A&A  staff, the A&A workload was more easily managed, and staff even had  sufficient time to volunteer the mission as a location for USAID to pilot a  new system through which USAID A&A instruments will be awarded.\nOur survey of A&A staff overseas generally supported these findings from  our fieldwork. For example, about 70 percent of A&A respondents  overseas reported that it was somewhat or very difficult to alter staffing  patterns to meet the demands of changing workloads. Most notably, one  respondent reported a disparity between the workload, numbers and  competencies of A&A staff levels at the missions to which she was  previously and currently assigned. While the respondent found the  workload to be less manageable at her prior mission with inexperienced  A&A staff, she found the workload at her current mission more easily  manageable because it had more experienced A&A staff.\n\n\t\tUSAID\u2019s Recent Planning Efforts Do Not Comprehensively Address Its Strategic A&A Workforce Planning Needs\n\nIn recent years, USAID has launched some ad hoc attempts to address the  agency\u2019s A&A workforce issues. However, as the following indicates, these  efforts lack critical elements of a strategic A&A workforce plan,  particularly comprehensive information on its A&A specialists overseas:    Proposal to increase OAA staff levels. In May 2008, OAA officials proposed  to the Management Bureau an increase in staff from 133 to 218 in OAA  headquarters. According to Management Bureau officials, OAA has been  approved for 154 positions for fiscal year 2008. This proposal only  addresses A&A staff levels in headquarters, however, and does not  consider A&A staff levels overseas.\nDevelopment Leadership Initiative. This agencywide, multiyear effort is  intended to recruit U.S. staff to be placed overseas. Under this initiative,  USAID plans to hire 120 staff, including 15 COs, in fiscal year 2008.  However, this initiative only seeks to increase the levels of overseas COs,  not the levels of A&A specialists.\nA&A Workforce Capability Assessment. As mentioned earlier, this was a  May 2008 effort to identify and assess the competencies of all COs, as well  as A&A specialists in headquarters. Competency assessments of A&A  specialists overseas are not expected to begin until fiscal year 2011 at the  earliest.\nWorkforce planning model. This agencywide management tool projects  the number, type, and location of staff needed to accomplish the agency\u2019s  mission, based on expectations for future program funds as well as the  size and location of overseas missions. The model does not, however,  incorporate data on either the current A&A staffing levels or the  competencies of existing A&A staff.\nTaken together, these efforts do not constitute a strategic A&A workforce  plan that takes into account the entire A&A workforce. USAID has yet to  take an integrated approach to developing and implementing such a  workforce plan.\n\n\tUSAID Has Not Implemented the Evaluation Mechanism of Its A&A Function\n\nUSAID has not implemented an evaluation mechanism to provide  oversight of its A&A function. OAA\u2019s Evaluation Division is responsible for  providing this oversight to ensure that A&A operations follow USAID  policies, primarily by assessing the agency\u2019s A&A operations worldwide. In  2006, USAID\u2019s OIG found that the division had not met its previously set  target of conducting on-site evaluations of A&A operations at all missions  within a 3-year period, due to resource constraints within the division.  The division has since developed a new evaluation mechanism, the  scorecard evaluation, that relies on COs\u2019 annual self-assessments of A&A  operations and is followed by on-site reviews at selected missions,  conducted by division staff. However, the division has yet to implement  this evaluation mechanism.\n\n\t\tOAA\u2019s Evaluation Division Is Responsible for Evaluating the A&A Function but Did Not Meet Its Previous Target for A&A Evaluations\n\nAmong other responsibilities, OAA\u2019s Evaluation Division is to conduct  evaluations of worldwide A&A operations to ensure USAID\u2019s compliance  with an executive order and certify the effectiveness of USAID\u2019s A&A  function. GAO\u2019s internal control standards state that evaluations\u2014 whether in the form of self-assessments or other means\u2014are necessary to  ensure an agency\u2019s operational effectiveness and compliance with  applicable policies. Furthermore, the President\u2019s fiscal year 1995  Executive Order on Federal Procurement Reform included a requirement  that every U.S. agency evaluates its A&A function against the agency\u2019s  approved criteria. To comply with the order, OAA developed an evaluation  program to assess USAID\u2019s A&A function. This evaluation program was  also designed to enable USAID\u2019s Management Bureau to annually certify  the adequacy and effectiveness of management controls for the A&A  function, as required by USAID directives.\nPrior to fiscal year 2007, the evaluation program required Evaluation  Division staff to make on-site visits to assess A&A operations at OAA  offices in headquarters and missions. Evaluations were designed to be  performed at each mission by teams of two Evaluation Division staff over  a period of about 2 or 3 weeks. After each team had completed its  fieldwork, the OAA director reported to the mission director on  deficiencies that the team had identified in the mission\u2019s A&A operations  and provided recommendations to address those deficiencies.\nIn fiscal year 2006, the OIG found that OAA\u2019s Evaluation Division had not  met its target of conducting evaluations of all A&A operations to ensure  that the agency had responded to the executive order on federal  procurement reform. Although the division had set a goal of conducting  evaluations at all of the approximately 85 missions every 3 years, the OIG  found that for fiscal years 2003 through 2005, the division had evaluated  A&A operations at only 9 missions\u2014about 11 percent of the number of  missions at the time. The OIG report noted that a staffing shortage, as well  as a significant increase in USAID\u2019s A&A operations in Iraq and  Afghanistan, had adversely impacted the division\u2019s ability to meet its target  during that time frame. OAA\u2019s Evaluation Division was unable to certify to  the Management Bureau the overall adequacy and effectiveness of  management controls at the missions on the basis of such a small number  of completed evaluations. The division also could not provide reasonable  assurance that USAID was effectively implementing the executive order.  As a result, the OIG recommended in 2006 that the director of OAA  develop a plan for verifying and ensuring that the agency was effectively  implementing the executive order.\n\n\t\tNew Evaluation Mechanism Relies on COs\u2019 Self-Assessment of A&A Operations\n\nIn fiscal year 2007, in view of the resource constraints that had hampered  its ability to meet its prior evaluation targets, OAA\u2019s Evaluation Division  developed a Web-based self-reporting mechanism for evaluating the A&A  function, referred to as the scorecard evaluation. According to Evaluation  Division officials, the division previously lacked a mechanism to review all  locations every year for systemic problems in A&A operations. With the  scorecard evaluation, all USAID COs who manage A&A offices are to  assess their own operations and thereby assist OAA in identifying areas of  vulnerability in headquarters and missions each year. The scorecard  methodology follows GAO\u2019s Standards of Internal Control to achieve  effectiveness and efficiency of acquisition operations; ensure fiscal  integrity of the agency\u2019s acquisition system; and ensure that applicable  acquisition laws, regulations, guidance, and principles are being followed.  Areas identified in the scorecard are to include COs\u2019 reporting of staffing  patterns, assessment of the A&A operations\u2019 management systems, and the  extent to which A&A award solicitations, negotiations, and administration  comply with USAID guidelines.\nThe Evaluation Division is expected to follow up on the scorecard  evaluations with on-site reviews of a risk-based selection of offices and  missions, followed by evaluation reports that make recommendations for  mitigating risks associated with A&A operations at these locations. After  reviewing the COs\u2019 submitted scorecards\u2014certified by the appropriate  mission director or other management official\u2014the Evaluation Division is  to determine the risk levels associated with all A&A activities in the COs\u2019  self-reported scorecard evaluation responses. Next, the division expects to  select certain missions for on-site visits, using a risk-based approach based  on the scorecard evaluation results and informal, internally generated  criteria, such as COs\u2019 reliance upon less-experienced COs, number of years  lapsed since the last evaluation at the location, high funding levels, and  country-specific issues that might raise concerns in the division about  A&A operations. During the on-site visits, which are expected to last  approximately 1 week, the Evaluation Division staff will conduct a hands- on review of mission documents\u2014including the CO\u2019s work products and  all supporting documents in the A&A file\u2014hold discussions with mission  staff to verify the submitted scorecard responses, and follow up on any  issues mentioned in the scorecards. Finally, on the basis of its findings  from the scorecards and the on-site reviews, OAA is expected to develop  an evaluation report with recommendations on the missions\u2019 A&A  operations that missions are required to address prior to the following  year.\nAs of August 2008, the Evaluation Division had completed pilot scorecard  evaluations\u2014including on-site visits\u2014at four locations with USAID A&A  operations: the East Africa regional mission and missions in Kenya, Peru,  and Sudan. In its evaluation reports for these pilot locations, the  evaluation team assigned risk levels based on the COs\u2019 self-assessments of  A&A areas. For example, at various locations, the evaluation team  identified the following high-risk issues or weaknesses in A&A operations:    a mission lacked resources to monitor contractor performance, and the  CO could not ensure that contractor performance reports were prepared,  as required by USAID policy;    a regional structure was providing insufficient mentoring and oversight of  junior contract officers; and   a regional mission had experienced a sixfold workload increase in the past  3 years, despite resource constraints.\n\n\t\tEvaluation Division Has Not Implemented New Evaluation Mechanism\n\nAlthough the Evaluation Division has developed the new scorecard  evaluation, it has yet to implement it. Approximately 40 percent of the  A&A staff who responded to our survey reported that there is insufficient  oversight to ensure the quality of the A&A process. According to  Evaluation Division staff, in fiscal year 2007 the division set a goal of  ensuring a scorecard review of all A&A operations in headquarters offices  and all of the approximately 80 missions within a 2-year period, and at  least one on-site visit of a mission in each of the five regions of the world.  However, agency officials informed us that the Evaluation Division  currently lacks the staff level and systems needed to implement the  scorecard evaluation to meet its goal. According to Evaluation Division  officials, the number of procurement analysts in the division has declined  from 12 in fiscal year 1992 to 4 in fiscal year 2008. However, according to  these officials, the division needs at least 8 procurement analysts to make  the appropriate number of on-site evaluation visits to missions per year. As  of August 2008, the Evaluation Division was authorized to hire 3 additional  procurement analysts. However, the division has not yet finalized plans for  full implementation of the scorecard evaluations based on this increase in  staff.\nIn addition, according to Evaluation Division staff, USAID headquarters  and missions lack an electronic A&A data system that would facilitate the  evaluation process. Currently, the Evaluation Division reviews the  available A&A documents provided by COs worldwide; while some A&A  units utilize an electronic filing system, A&A operations in many missions  continue to maintain hard-copy A&A documents. Evaluation Division staff  told us they would ideally be able to access a digital repository of A&A  documents remotely while reviewing COs\u2019 completed scorecard  evaluations. Such access would allow the Evaluation Division staff to  review A&A documents in headquarters and reduce their need to conduct  on-site visits, thereby saving resources and time. As of July 2008, USAID  was analyzing information technology options for the OAA Evaluation  Division to achieve its needs, including the implementation of the Global  Acquisition and Assistance System (GLAAS), a new globally accessible  system intended to standardize and automate USAID\u2019s management of  A&A instruments. However, GLAAS has not yet been implemented at all  missions, and the Evaluation Division continues to lack the technology to  access all A&A files electronically in order to conduct scorecard reviews  remotely.\n\n\tConclusions\n\nAs USAID increasingly relies on nongovernmental organizations to  implement its activities, the agency\u2019s responsibility to effectively manage  the implemented activities gains in importance. Critical to its success in  this area is its management of the A&A function. As the amount of its A&A  obligations and the number of A&A instruments continue to increase,  especially at overseas missions, USAID should work to ensure that the  appropriate number of staff with the requisite competencies and skills are  available to manage A&A operations. Despite a past USAID OIG  recommendation calling for USAID to develop an A&A workforce plan, the  agency has yet to analyze the relation of staffing patterns to existing  workload with the goal of better matching its staff to its workload.  Specifically, the agency currently lacks sufficiently reliable and up-to-date  data on its overseas A&A staff levels and comprehensive information on  the competencies of the A&A staff. With these data, which are key  elements of federal workforce planning models, USAID could better  identify its critical staffing needs and adjust its staffing patterns to meet  those needs.\nA critical component of USAID\u2019s oversight of its A&A operations is the  successful implementation of its new evaluation mechanism. The  mechanism is designed to ensure that A&A operations follow USAID  policies, primarily by assessing A&A operations that manage about $10  billion worldwide. Although the agency is in the process of hiring  additional staff for the division, much time has elapsed since USAID\u2019s OIG  noted in 2006 that the division\u2019s resource constraints hampered its ability  to conduct evaluations. Until USAID has the capacity to implement the  evaluation mechanism, the agency lacks the ability to ensure that potential  weaknesses in the A&A process are quickly identified and corrected.\n\n\tRecommendations for Executive Action\n\nTo improve the agency\u2019s management and oversight of its A&A function,  we are recommending that the Administrator of USAID develop and  implement a strategic A&A workforce plan that matches resources to  priority needs, such as the evaluation of the A&A function. Specifically, we  recommend that the strategic A&A workforce plan includes a process to  collect, analyze, and maintain (1) sufficiently reliable and up-to-date data  on the agency's A&A staff levels and (2) comprehensive information on the  competencies of the A&A staff.\n\n\tAgency Comments and Our Evaluation\n\nWe requested and received comments on a draft of this report from  USAID.  These comments are reprinted in appendix III, along with our  responses to specific points.  USAID did not specifically comment on our  recommendations but acknowledged that it needs to rebuild core A&A  management capacity in key areas such as workforce planning and  evaluation in order to sustain effective management of A&A functions.   USAID noted several agencywide initiatives such as the development of a  new Human Capital Strategic Plan and Workforce Plan to address the  agency\u2019s staffing requirements from 2009 to 2013, as well as a competency  management system and a Learning Management System to improve staff  competency information.  In addition, USAID stated that enhancements  must be made to the evaluation function that could strengthen the  oversight of its A&A function.  We acknowledge USAID\u2019s agencywide  efforts to enhance workforce planning, but maintain that the agency  currently lacks sufficiently reliable staff-level data and comprehensive  competency information on its overseas A&A specialists, which are key  elements of a strategic workforce plan.  USAID also provided technical  comments, which we incorporated as appropriate.\nWe are sending copies of this report to interested congressional  committees and the Administrator of the U.S. Agency for International  Development. We will also make copies available to others on request. In  addition, the report will be available at no charge on the GAO Web site at  http:\/\/www.gao.gov.\nIf you or your staffs have any questions about this report, please contact  me at (202) 512-9601 or melitot@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 major contributions to this report are  listed in appendix IV.\n\nAppendix I: Scope and Methodology\n\nTo examine the United States Agency for International Development\u2019s  (USAID) capacity to develop and implement a strategic acquisition and  assistance (A&A) workforce plan, we used GAO\u2019s guidance on human  capital management and GAO\u2019s Framework for Assessing the Acquisition  Function at Federal Agencies. We also reviewed prior assessments of  USAID\u2019s workforce planning efforts by GAO and USAID\u2019s Office of  Inspector General (OIG). To determine A&A staff levels, we analyzed and  compared staffing data that USAID\u2019s Office of Acquisition and Assistance  (OAA) and the Office of Human Resources (OHR) made available to us.  We also interviewed OHR officials to determine the reliability of their data.  We obtained and analyzed data on the number of A&A instruments and the  obligated amounts of A&A instruments for fiscal years 2002 through 2007.  We assessed the reliability of these data by reviewing information about  the data and the system that produced them and by interviewing agency  officials knowledgeable about the data. We found USAID\u2019s data  sufficiently reliable for representing the A&A obligations and instruments.  To report on USAID\u2019s efforts in A&A workforce planning, we reviewed  agency documents and interviewed agency officials, as well as evaluated  these efforts according to key principles for strategic workforce planning  identified in our prior work.\nTo examine the extent to which USAID has implemented a mechanism to  evaluate its A&A function, we analyzed USAID documents and interviewed  relevant USAID agency officials. Documents we examined include the  President\u2019s 1995 Executive Order on Federal Procurement Reform,  applicable agency policies and directives, a past OIG report that audited  USAID\u2019s A&A evaluation program, and documents related to the Global  Acquisition and Assistance System (GLAAS). We also analyzed past A&A  evaluation reports, documents pertaining to the scorecard evaluation  methodology, as well as the scorecard evaluations and on-site evaluation  reports conducted for the piloted locations. In addition, we met with  USAID officials in Washington, D.C., to discuss the A&A evaluation  mechanism.\nTo assess the A&A function overseas, we conducted fieldwork in the  following seven countries: Cambodia, Indonesia, Kazakhstan, the Kyrgyz  Republic, Mali, Peru, and Thailand. We selected these countries to obtain  geographic diversity and ensure representation of various A&A processes  and organizational structures for the A&A function. In all of these  countries, we met with USAID officials. In some of these countries, we  also met with representatives of nongovernmental organizations (NGO)  that implement A&A activities for USAID under A&A instruments.  Although the findings from our fieldwork in each country are not  generalizable to the population of USAID A&A activities, we determined  that the selection of the countries and activities reviewed was appropriate  for our design and objectives.\nTo obtain views from USAID staff with key A&A responsibilities, we also  conducted a survey of USAID\u2019s A&A staff between October 2007 and June  2008. The survey was sent to all USAID contracting officers (CO) in  headquarters and missions, as well as all A&A specialists in headquarters.  The survey contained questions related to work experience, staffing,  workload, and the administration of acquisition and assistance  instruments. We pretested the survey with three COs.\nOur survey of A&A staff received a 95 percent response rate\u2014150  responded out of 158 surveyed. We compared the responding A&A staff  with the nonresponding A&A staff and found no significant differences  between the two groups on several variables. Based on this analysis and  the 95 percent response rate, we assumed that the nonrespondents were  missing at random and generated statistical estimates of the population of  A&A staff from the 95 percent of respondents. Given the high response  rate and no indications of nonresponse bias, we considered estimates from  this survey to be generalizable to the population surveyed. Because we  treated our respondents as a random sample of A&A staff, our results are  estimates of the population and thus are subject to sampling errors that  are associated with samples of this size and type. Our confidence in the  precision of the results from this sample is expressed in 95 percent  confidence intervals, which are expected to include the actual results in 95  percent of the samples of this type. All percentage estimates in this report  have a margin of error of no more than plus or minus 3 percent.\nWe conducted this performance audit from February 2007 through  September 2008 in accordance with generally accepted government  auditing standards. Those standards require that we plan and perform the  audit to obtain sufficient, appropriate evidence to provide a reasonable  basis for our findings and conclusions based on our audit objectives. We  believe that the evidence obtained provides a reasonable basis for our  findings and conclusions based on our audit objectives.\n\nAppendix II: Overseas Locations with Authorized USAID Contracting Officer Presence as of July 2008\n\nAccording to USAID\u2019s Office of Acquisition and Assistance (OAA), the  following bilateral and regional missions were authorized to have at least  one on-site contracting officer (CO) present as of July 2008. These  missions do not include locations with on-site acquisition and assistance  specialists who work with a remotely located CO. Countries are grouped  by regions, as determined by OAA.\n\nAppendix III: Comments from the U.S. Agency for International Development\n\nThe following are GAO\u2019s comments on the U.S. Agency for International  Development\u2019s letter dated September 16, 2008.\n\n\tGAO Comments\n\n1.  USAID noted that our final reporting objectives differed from the  original objectives we provided to the agency when we commenced  our review in early 2007.  In its comments, the agency misinterpreted  our reporting only on certain aspects of the A&A function as an  indication that other aspects of the A&A function are largely in sound  condition.  During the course of GAO engagements, the final reporting  objectives and the scope of the review are sometimes refined based  upon information obtained during the planning and design phase.  For  example, we did not report on the proper organizational alignment of  USAID\u2019s A&A function because USAID officials were unable to  adequately demonstrate significant impediments as a result of its  placement within USAID\u2019s Management Bureau.  2.  USAID stated that the agency does not possess the authority to simply  transfer locally engaged staff to other missions to meet the demands of  missions with greater workloads.  It also noted that overseas programs  and funding fluctuate and mission management can be hesitant to  make abrupt hiring or staff reduction decisions in the short term.  We  recognize that mission management determines how to allocate  resources within missions and some of the staffing decisions  pertaining to overseas A&A specialists are made outside of OAA.  Our  report emphasized that key elements of an agency\u2019s strategic  workforce plan include determining the critical skills and  competencies of its staff, addressing gaps in staff numbers and  deployment, and aligning human capital approaches regardless of  location.  A past OIG report also recommended the development of an  A&A workforce plan that includes a mechanism for collecting and  analyzing A&A data to allow managers to compare current staffing  patterns to developing trends, match staff to workloads, and adjust  quickly when unbalanced workloads develop.  We maintain that  without accurately identifying the number of overseas A&A staff, the  agency can neither determine the appropriate levels of staff with  requisite competencies to manage missions\u2019 A&A workloads, nor  explore ways of making necessary adjustments to gaps in mission A&A  staff levels and competencies as well as imbalances in workloads.  3.  USAID commented that when requested by missions, OAA provides  routine assistance such as temporary duty staff for end-of-fiscal-year  surges.  In our report, we cite several instances of USAID not  addressing staffing imbalances at its overseas missions.  We maintain  that OAA\u2019s approach of providing temporary assistance is not a  substitute for strategic workforce planning that includes key elements  such as reliable and up-to-date data on the number and competencies  of its overseas A&A workforce.  Without this information, USAID  cannot systematically address its critical staffing needs and adjust its  staffing patterns to meet those needs.   4.  USAID commented that it had already begun to enhance the evaluation  function by establishing the Contract Review Board, which reviews all  procurements of $10 million or more at the solicitation, competitive  range, and award stages.  Although we agree that this mechanism is an  important oversight mechanism during the early phases of the A&A  process, our review focused on the oversight of the A&A function at  the administration stage, which commences after the awarding of the  A&A instrument and entails USAID\u2019s monitoring of contractor  performance for the A&A instruments.\n\nAppendix IV: GAO Contact and Staff Acknowledgments\n\n\tStaff Acknowledgments\n\nIn addition to the contact named above, Zina Merritt (Assistant Director),  James Ashley, Debbie Chung, Mark Dowling, Joel Grossman, Tracy  Guerrero, Clarette Kim, John Krump, Victoria Lin, James Strus, and  William Woods made key contributions to this report.","output":"Why GAO Did This Study\n\nThe U.S. Agency for International Development (USAID) over the years has shifted from conducting its own activities to managing acquisition and assistance (A&A) instruments--contracts, grants, and cooperative agreements--awarded to and implemented by mainly nongovernmental entities. For fiscal years 2002 through 2007, USAID's A&A obligations doubled from about $5 billion to $10 billion. A&A staff--contracting officers (CO) and A&A specialists--are primarily responsible for managing A&A instruments. GAO was asked to examine (1) USAID's capacity to develop and implement a strategic A&A workforce plan and (2) the extent to which USAID has implemented a mechanism to evaluate its A&A function. GAO analyzed USAID documents and data, interviewed officials, visited missions in seven countries, and administered a survey to A&A staff.\n\nWhat GAO Found\n\nUSAID lacks the capacity to develop and implement a strategic A&A workforce plan because it is missing two key elements: (1) sufficiently reliable and up-to-date data on its overseas A&A staff levels and (2) comprehensive information on the competencies of its overseas A&A staff. Data on the number of overseas A&A specialists collected by two USAID offices--the Office of Acquisition and Assistance (OAA) and the Office of Human Resources (OHR)--are unreliable or out of date. GAO found significant discrepancies between these offices' data sets, and officials acknowledged that their A&A staff level data are neither reliable nor up-to-date. In addition, USAID has not collected comprehensive competency information on its overseas A&A specialists. GAO's model of strategic human capital planning notes the importance of these data in developing a strategic A&A workforce plan that could enable the agency to better match staff levels to changing workloads. At the missions GAO visited, GAO found that the numbers and competencies of A&A staff did not match A&A workloads. The number of A&A staff with the necessary competencies was less than adequate at some missions, while at others it was more than adequate, according to agency officials. For example, officials at the mission in Mali said they have delayed time-sensitive projects because key A&A staff were not available when needed to approve contracts, while officials at the mission in Indonesia said the current number of A&A staff may be more than adequate. Most of the A&A survey respondents overseas also reported difficulty in altering staffing patterns to meet A&A workload demands. Although USAID has made some efforts to address its A&A workforce issues, these efforts do not constitute a strategic A&A workforce plan that takes into account the entire A&A workforce. Without accurate and reliable A&A staff data, USAID does not have adequate information to address current workload imbalances. USAID has not implemented an evaluation mechanism to provide oversight of its A&A function. OAA's Evaluation Division is responsible for providing oversight to ensure that A&A operations follow USAID policies, primarily by assessing the agency's A&A operations worldwide. However, for fiscal years 2003 through 2005, it conducted on-site evaluations at only 9 of its targeted 85 missions. In fiscal year 2007, the Evaluation Division developed a new evaluation mechanism that is expected to use scorecard evaluations, in which COs self-assess their A&A operations, and a risk-based approach to determine locations for further on-site visits. The division has completed piloting these scorecard evaluations at four missions and identified weaknesses in A&A operations. For example, the division found that 1 mission lacked resources to adequately monitor contractor performance. The division's goal is to implement this evaluation mechanism, including on-site visits to at least 5 missions, within 2 years. However, agency officials informed GAO that the Evaluation Division currently does not have the staff level needed to fully implement this evaluation mechanism. Without implementing the evaluation mechanism, USAID cannot certify the overall adequacy and effectiveness of management controls for the A&A function."}
{"id":"gao_GAO-17-424","pid":"gao_GAO-17-424_0","input":"\tBackground\n\nThis section provides information on (1) the known health effects of lead  in drinking water; (2) how water systems deliver drinking water to the  public and where lead may be present; (3) the requirements of the LCR;  (4) LCR data that states report to EPA; and (5) the roles of federal, state,  and local entities in implementing the LCR.\n\n\t\tHealth Effects of Lead in Drinking Water\n\nEPA, the Centers for Disease Control and Prevention (CDC), and others  have indicated that the rates of lead contamination in the U.S. population  have decreased over the years. However, lead remains a significant  concern to public health because lead is persistent and can accumulate in  the body over time with long-lasting effects, particularly for children and  pregnant women. According to EPA documents, low levels of lead  exposure in children are linked to hyperactivity, anemia, lower intelligence  quotient (IQ), physical and learning disabilities, and slowed growth. In  pregnant women, lead can store in bones and be released as maternal  calcium used to form the bones of the fetus, reduce fetal growth, and  increase risk of miscarriage and stillbirth. For adults, lead can have  detrimental effects on cardiovascular, renal, and reproductive systems;  and, it can prompt memory loss. The presence of lead in the bloodstream  can disappear relatively quickly, but bones can retain the toxin for  decades.\nAccording to the National Institutes of Health and CDC documents,  medications can remove some lead from the body but cannot undo the  damage lead causes, although additional services may mitigate some of  the damage. Recognizing that vigilance and collaboration are necessary  to ensure that children negatively affected by lead exposure receive  services designed to compensate for lead\u2019s effect on the brain, and  behavior of children, some medical experts promote early-childhood  intervention, education, and other programs. According to CDC  documents, early intervention for children can help improve IQ scores,  academic readiness, and language development as well as decrease  placement in special education classes. For these reasons, EPA and  others recommend the prevention of lead exposure before it occurs.\n\n\t\tHow Water Systems Deliver Drinking Water\n\nWater systems depend on distribution systems, both simple and complex,  composed of interconnected components to deliver drinking water from a  source to their customers. Source water can be either surface (streams,  rivers, and lakes) or ground (aquifers). As figure 1 illustrates, the  distribution system used to deliver water from the source can include a  network of pipes and other components. A distribution system comprises  water towers, pipes, pumps, and other components to deliver treated  water from treatment systems to consumers. Particularly among larger  water systems, distribution systems may contain thousands of miles of  pipes, including water mains.\nThere are 1 million miles of drinking water mains in the country, according  to a 2017 American Society of Civil Engineers study. Service lines are  the smaller pipes that connect the water mains to homes and buildings  and can also include smaller pipes used for connecting a service line to  the water mains (e.g., called pigtail and gooseneck pipes). In contrast to  most other drinking water contaminants, lead is rarely found in the source  water. More commonly, lead enters drinking water after the water comes  into contact with water mains; service lines; smaller pipes that connect  the two; and other plumbing materials that contain lead, such as faucets  and water coolers. Schools and day care centers with their own water  supplies generally rely on well-water systems using groundwater to  deliver drinking water.\nAccording to the 2017 American Society of Civil Engineers study and  EPA documents, communities, both urban and rural, have aging and  deteriorating drinking water infrastructure, which, according to EPA  documents, can contribute to lead hazards in drinking water. Since the  early 1970s, when several medical studies confirmed that lead exposure  negatively impacts health, measures have been taken to reduce the  public\u2019s exposure to lead in drinking water, including the enactment of  amendments to the SDWA in 1986 and 1996, the enactment of the Lead  Contamination Control Act in 1988, the issuance of the LCR in 1991, and  amendments to state building codes prohibiting the use of lead pipes.\n\n\t\tThe Lead and Copper Rule\n\nThe LCR generally requires water systems to minimize lead in drinking  water by controlling the corrosion of metals in the infrastructure they use  to deliver water and in household plumbing. EPA has stated that the  LCR is one of the most complicated drinking water regulations for states  to implement because of the need to control the corrosion of pipes and  plumbing fixtures as water is delivered to consumers. The corrosion of  pipes results from a chemical interaction between water and pipes that  wears the metal away and allows particles of metal to flake away over time. All large water systems (serving populations larger than 50,000) are  generally required to install corrosion control treatment. While the majority  of the U.S. population receives its drinking water from medium and large  water systems, most water systems are small.\nCharacteristics of water can affect the occurrence and rate of corrosion.  For example, corrosion occurs more frequently in soft water\u2014water with  low concentrations of calcium and magnesium\u2014and also in acidic water,  or water with low pH. Water systems control corrosion by adjusting the  pH and alkalinity of water or by adding corrosion inhibitors. The LCR  establishes corrosion control as the required treatment technique for large  water systems and, for medium and small systems, the required  treatment technique when the federal lead action level is exceeded (also  known as an action level exceedance). Lead concentrations exceeding  an action level of 15 parts per billion, or 0.015 milligrams per liter (mg\/L),  in over 10 percent of tap water samples (i.e., the 90th percentile level) are  an indicator that corrosion control is needed or is not working correctly.  A water system\u2019s 90th percentile sample result does not exceed the lead  action level if it is equal to or less than 15 parts per billion. As figure 2  illustrates, the LCR also requires water systems to identify locations  where lead may be present and periodically obtain tap water samples  from those locations (of which single-family homes are the highest  priority).\nUnder the LCR, an action level exceedance requires the water system  and state to take a number of additional steps. Those additional steps  require that small and medium water systems install or modify corrosion  control treatment, and water systems of all sizes provide information  (known as public education) about the harmful effects of lead to  consumers and vulnerable populations (e.g., schools, if the water system  serves a school, and public health departments). Water systems are  also required to test and, if necessary, treat the source water. If, after  installing corrosion control and treating source water, a system continues  to have 90th percentile sample results that exceed the lead action level,  the LCR requires the water system to begin replacing lead service lines, if  they exist. In most communities, lead service lines are partially owned by  the water system and partially owned by the homeowner. The LCR allows  for a partial replacement when an owner of a home or building is unable  or unwilling to pay for replacement of the portion of the service line not  owned by the water system.\nIn an October 2016 study, EPA noted that sample requirements under the  LCR are complex for many reasons, one reason being that it is the only  drinking water regulation in which homeowners or consumers collect the  drinking water samples. Water systems are in compliance with the LCR  when they follow the various federal requirements for collecting samples,  reporting, installing treatments, providing public education, and replacing  lead service lines; as well as when they follow any state requirements that  are more stringent than the federal requirements. States and EPA can  take several different types of enforcement actions when water systems  fail to complete requirements in these areas. Sample results that exceed  the lead action level do not by themselves constitute violations of the  LCR.\nThe SDWA, as amended in 1996, requires EPA to review and revise, as  appropriate, each national primary drinking water regulation, including the  LCR, at least once every 6 years. The 1991 LCR was revised in 2000 and  2007. EPA initiated an extensive review of the LCR in 2004 after  widespread increases in lead levels were detected in the District of  Columbia\u2019s water following a water treatment change. EPA promulgated  short-term revisions and clarifications in 2007 and has continued working  on comprehensive revisions. In 2016, the agency announced that it would  revise the LCR and issue proposed revisions in 2017 and a final revised  rule in 2019. EPA also released a Lead and Copper Rule Revisions White  Paper in 2016 that outlined potential elements of the rule under  consideration for revision such as use of corrosion control practices,  requirements for collecting samples, and lead service line replacement.\n\n\t\tLCR Data That States Report to EPA\n\nThe LCR generally requires that water systems submit data to states to  demonstrate their compliance with the treatment technique required by  the rule. The LCR also requires states to submit some of these data to  EPA\u2019s SDWIS\/Fed database on a quarterly basis. Specifically, states are  required to submit the following data to EPA:  for large and medium water systems, all 90th percentile sample  results (i.e., sample results that meet, fall below, and exceed the lead  action level);  for small water systems, 90th percentile sample results that exceed  the lead action level; on water systems that have been designated as having achieved  corrosion control because the state has determined that the source  water is minimally corrosive; on water systems that were required to install corrosion control  treatment, source water treatment, and lead service line replacement  and have completed the applicable requirements as a result of having  sample results exceed the lead action level; on water systems that have begun the process of replacing lead on water systems that have new violations of the LCR; and on enforcement actions taken in response to violations of the LCR.\nFor corrosion control, the LCR requires the states to report what EPA  refers to as \u201cmilestone\u201d data to the SDWIS\/Fed database: data on the status of required actions, such as installing corrosion  control treatment, as required, after reporting sample results that  exceed the lead action level; and data on those water systems deemed to have corrosion already under  control, such as when the water is minimally corrosive.\nThe states collect and manage relevant data (including violations and  enforcement information) in either a database provided by EPA\u2014known  as the Safe Drinking Water Information System\/State\u2014or in a data  system of their own design. States must then transfer the data from one  of those databases into SDWIS\/Fed. In 2010, EPA announced that it  would redesign SDWIS\/Fed. We reported in June 2011 that EPA officials  expected this redesign of SDWIS\/Fed to expand the amount of data that  EPA receives electronically from states. The name of the redesigned  database is SDWIS Prime, which according to EPA officials, is expected  to be complete by 2018.\n\n\t\tRoles of Federal, State, and Local Entities in Implementing the LCR\n\nGenerally, the responsibility for reducing lead in drinking water and  ensuring safe drinking water overall, is shared by EPA, states, and, local  water systems. As shown in figure 3, EPA is responsible for national  implementation of the LCR and setting standards; overseeing states\u2019  implementation of the LCR; providing infrastructure funding, training, and  technical assistance to states and water systems; and conducting some  enforcement activities. However, the primary responsibility for ensuring  that drinking water is free of lead resides with states and local water  systems.\nGenerally, states with primary enforcement responsibility initiate  enforcement actions against water systems that do not comply with the  LCR and other drinking water regulations. However, EPA can also issue  orders necessary to protect human health where a contaminant in a  public water system presents an imminent and substantial  endangerment. According to a 2013 EPA drinking water compliance  report, states generally implement and enforce the LCR, and other  drinking water regulations, in the following ways: provide technical assistance through such actions as offering training,  holding public information meetings, and lending monitoring  equipment;  take informal actions such as field visits, reminder letters, telephone  calls, and notices of violation; and  take formal actions such as issuing citations, administrative orders  with or without penalties, civil and criminal cases, and emergency  orders.\nSince 2009, according to an EPA document, the agency\u2019s enforcement  strategy, in collaboration with states, has focused on identifying water  systems with a history of violations across multiple drinking water rules for  enforcement actions in states, territories, and tribal regions. To facilitate  this strategy, EPA\u2019s headquarters staff are to review data on violations in  EPA\u2019s SDWIS\/Fed using an Enforcement Targeting Tool to identify  systems that merit action by states based on the seriousness of their  violations. EPA staff also are to use these data to determine whether water systems are achieving the agency\u2019s national targets for compliance.  According to the EPA FY 2014-2018 Strategic Plan, the agency\u2019s goal is  for 92 percent of water systems that provide drinking water year-round to  meet all applicable health-based drinking water standards by 2018.\n\n\tAvailable EPA Data Show Sample Results, Use of Corrosion Control, Violations, and Enforcement Actions Taken, but Data Are Not Complete\n\nThe available EPA data show sample results, use of corrosion control,  violations, and enforcement actions taken for the 68,000 water systems  from July 2011 to December 2016, but data are not complete. The  available data reported by states in EPA\u2019s SDWIS\/Fed database show at  least 2 percent of drinking water systems with sample results exceeding  the lead action level (from 2014 to 2016), and at least 10 percent of water  systems being out of compliance with the LCR (i.e., having at least one  reported violation) as of December 31, 2016. In addition, the state- reported data in SDWIS\/Fed show 99 percent of enforcement actions  were taken by states, as expected because states generally have primary  responsibility for monitoring and enforcement of the SDWA requirements,  including the LCR. According to recent EPA assessments, the EPA OIG  report, and our January 2006 and June 2011 reports, some of the data in  the SDWIS\/Fed database are not complete. Specifically, the data are  underreported, and therefore, data available in SDWIS\/Fed likely  understate the number of sample results, violations, and enforcement  actions that actually occurred. In addition, the available EPA data on  water systems\u2019 use of corrosion control are not complete. We also found  that because the LCR does not require states to submit certain data to  EPA, EPA\u2019s SDWIS\/Fed database does not contain data on key parts of  the rule, such as the presence or location of lead pipes\u2014information that  water systems use to identify the locations from which they will draw tap  samples\u2014or complete sample results for small water systems.\n\n\t\tAvailable EPA Data Show Sample Results, Violations, and Enforcement Actions Taken, but Data on Water Systems\u2019 Use of Corrosion Control Are Not Complete\n\nEPA\u2019s SDWIS\/Fed database contains descriptive data on, for example,  drinking water sample results, corrosion control, violations, and  enforcement actions, as required by the LCR.\n\n\t\t\tSample Results\n\nThe available state-reported data in EPA\u2019s SDWIS\/Fed database show  that of the approximately 68,000 drinking water systems subject to the  LCR, at least 1,430 water systems (2 percent) had 90th percentile sample  results that exceeded the lead action level of 15 parts per billion from  2014 to 2016. EPA officials told us that they analyze these sample data  over a 3-year period rather than yearly to ensure that the majority of water  systems will have submitted sample results. These 1,430 systems serve  a population of approximately 3 million people. Of the 1,430 systems with  sample results exceeding the lead action level, 258 (18 percent) were  schools and day care centers with their own water supplies. As we  reported in January 2006, the LCR sample data in SDWIS\/Fed were  underreported; recent EPA file reviews in selected states found that  sample data were not always reported to SDWIS\/Fed; and a 2017 EPA  Office of Inspector General report indicated that sample data, specifically,  are potentially underreported. Appendix II provides additional  information about the available EPA data on sample results, reported  violations, and enforcement. In addition, some state regulators with whom  we interviewed in 2016 told us that homeowners and water systems may  take LCR samples improperly as we discuss later in this report. See  appendix III for these state regulators\u2019 views on challenges associated  with waters systems\u2019 implementation of the sample requirements under  the LCR.\n\n\t\t\tUse of Corrosion Control\n\nThe 2015 Report of the Lead and Copper Working Group to the National  Drinking Water Advisory Council noted the importance of corrosion  control because it is intended to achieve a water quality that minimizes  lead in water. Our analysis of the available state-reported data in EPA\u2019s  SDWIS\/Fed database on corrosion control from July 2011 to December  2016, shows that the database contained milestone data for 904 water  systems on the status of required actions about corrosion control  treatment after a sample result exceeded the lead action level, and 1,479  water systems were deemed to have corrosion already under control. In  addition, 34 water systems had milestone data in SDWIS\/Fed for lead  service line replacement. For the approximately 68,000 water systems  subject to the LCR, 1,665 systems, had milestone data in SDWIS\/Fed, or  about 2 percent of all water systems from July 2011 to December 2016.  According to EPA officials, when including milestone data available prior  to July 1, 2011, almost half of these systems have submitted the required  information regarding corrosion control milestones. Each water system  can have up to three types of milestone data (i.e., status of required  actions about corrosion control, systems deemed to have corrosion  already under control, and lead service line replacement) in SDWIS\/Fed.  In June 2017, EPA officials said that all water systems subject to the LCR  are expected to have data on corrosion control in SDWIS\/Fed.  However, these officials also said that states may not report the data to  SDWIS\/Fed because of technical limitations with some state databases  and confusion among some state officials about how to report the data to  SDWIS\/Fed.\nOf the 983 large systems in the SDWIS\/Fed database, milestone data  were available for 13 from July 2011 to December 2016, and 5 of those  systems had sample results exceeding the lead action level at some point  over that time period. Of the small and medium water systems for this  period that installed corrosion control treatment because their sample  results exceeded the lead action level, milestone data were available for  884 water systems.\nWe reported in January 2006 that EPA did not have complete milestone  data, including data on corrosion control. Specifically, we reported that  EPA had, at that time, collected milestone data for about 28 percent of  water systems. At the time of our 2006 report, EPA officials told us that in  most instances water systems should have data on corrosion control  treatment and that it was more likely the case that states were not  reporting the data rather than a case of noncompliance by water systems.  We recommended that EPA ensure that data on water systems\u2019 test  results, corrective action milestones, and violations were current,  accurate, and complete. EPA generally agreed with our recommendation,  but has not fully implemented it. In 2016, EPA highlighted its response to  our January 2006 recommendation through such efforts as having staff  review SDWIS\/Fed data for accuracy and timeliness and promoting  electronic reporting of the drinking water data states submit to  SDWIS\/Fed.\nIn addition, EPA headquarters officials said in June 2017 that the agency  also worked with the states on reporting corrosion control data by  conducting webinars and in-person training that included information  about reporting data to SDWIS\/Fed. For example, EPA conducted a  three-part series of LCR 101 webinars. EPA officials said that the  webinars in this series reached over 1,600 attendees with individual  webinars ranging from 227 to 551 viewers. EPA\u2019s efforts regarding  training sound promising, but it may be too early to see the impact of  these efforts to work with states on reporting milestone data on corrosion  control to SDWIS\/Fed. We continue to believe that EPA should take steps  to ensure that data, including those on milestones, are current, accurate,  and complete.\n\n\t\t\tViolations\n\nThe available data reported by states in EPA\u2019s SDWIS\/Fed database  show that of the approximately 68,000 drinking water systems subject to  the LCR, states reported that at least 6,567 water systems (about 10  percent) had at least one reported open violation of the LCR as of  December 2016. In total, these 6,567 water systems had a total of at  least 12,884 open violations as of December 2016. As we reported in  January 2006 and June 2011, the violations data in SDWIS\/Fed were  underreported. Recent EPA file reviews in selected states found that  some violations data were not reported to SDWIS\/Fed.\nLCR violations fall into two categories: (1) monitoring and reporting and  (2) treatment technique. Monitoring and reporting violations generally  refer to a water system  failing to collect samples of drinking water from the tap, within the  distribution system, and from source water and  failing to report sample results to the states.\nTreatment technique violations, which EPA considers to be health-based  violations, generally refer to a water system failing to take actions as  required after water samples exceed the federal lead action level.\nThe two most frequent violations were for not following requirements for  (1) monitoring and reporting routine follow-up and (2) initial tap  sampling. Taking samples from homes is the only way that water  systems, states, and ultimately EPA can obtain the indicators needed to  determine whether corrosion control treatment is needed or if corrosion  control treatments already installed are working, in addition to other  treatment technique requirements. The third most frequent violation was  lead consumer notification, which states or water systems are to do in  writing, about the results of the samples taken from homes or buildings  they occupy regardless of the presence of lead in the samples taken,  known as lead consumer notice violations. These notifications are to  provide consumers with information about their drinking water sample  results so that they can determine what actions to take to reduce their  exposure to lead if lead is present.\nOf the approximately 68,000 water systems subject to the LCR,  approximately 7,000 schools and daycare centers make up about 10  percent. As their missions would indicate, these schools and daycare  centers provide drinking water to children, one of the populations most at- risk for adverse health effects from even small amounts of lead. Most of  the schools and daycare centers in the EPA data we analyzed were  classified as small water systems. EPA data show that schools and  daycare centers comprise about 10 percent (664 water systems) of the  6,567 water systems with at least one open violation of the LCR as of  December 31, 2016. Much like the overall group of water systems,  schools and daycare centers were most frequently violating the LCR  requirements for not (1) monitoring and reporting routine follow-up (2)  initial tap sampling, and (3) lead consumer notification.\n\n\t\t\tEnforcement\n\nThe available data reported by states in the SDWIS\/Fed database show  reported information on the enforcement actions taken by states and EPA  against water systems that have violated requirements of the LCR. States  reported taking 98 percent of the enforcement actions from July 1, 2011,  to December 31, 2016, as would be expected given that states generally  have primary responsibility for enforcement of the LCR. In our January  2006 report, we found that because sample results, milestones, and  violations data for the LCR in SDWIS\/Fed were underreported, it was  difficult to assess the adequacy of enforcement. We then found in June  2011 that the enforcement data, generally, in SDWIS\/Fed were  incomplete. States and EPA can take a range of enforcement actions  both formal and informal. Formal enforcement actions include issuing  state administrative orders with or without penalties, filing state or federal  civil and criminal cases, and issuing emergency orders. Informal  enforcement actions include reminder notices of a violation, formal  notices of violation, public notification requests, and state referrals of  cases to EPA. According to a 2013 EPA compliance report, the number of  enforcement actions in a year does not necessarily correlate with the  number of violations that are reported in the same year. The two most  frequently reported enforcement actions taken were informal\uf8e7state  violation\/reminder notice, which inform water systems that the system has  open violations, and state public notification requested, in which the state  requests a copy of the information water systems sent to homeowners.  Most of the EPA officials we interviewed in the 10 regional offices told us that states primarily rely on informal actions and technical assistance and  training because they are the most effective means of getting water  systems to comply with regulations.\n\n\t\tEPA\u2019s SDWIS\/Fed Database Does Not Contain Data on the Presence of Lead Pipes and Complete Sample Results for Small Systems\n\nThe LCR does not require states to submit data to EPA\u2019s SDWIS\/Fed  database on (1) location of lead pipes or (2) all sample results for small  water systems. As a result, EPA does not have available data on either  the location of lead pipes or complete sample results for small water  systems. Water systems were required to collect information on the  presence of lead pipes when the LCR was promulgated in 1991, but there  is currently no requirement that this information be reported to EPA.  States are to submit to SDWIS\/Fed on a quarterly basis all 90th percentile  sample results for large and medium water systems (including those that  exceed the lead action level). However, for small water systems, states  are required to submit data to SDWIS\/Fed only for those 90th percentile  sample results that exceed the lead action level. As a result, sample  results for small water systems are not complete in SDWIS\/Fed.\n\n\t\t\tCollection of Data on the Presence of Lead Pipes Was a 1991 LCR Requirement\n\nWhen the LCR was promulgated in 1991, all drinking water systems were  required to collect information about the infrastructure that delivered water  to customers, including any known lead pipes and lead service lines. The  purpose of this effort, referred to as a materials evaluation, was to identify  locations that may have been particularly susceptible to high lead or  copper concentrations, which would become the pool of targeted sample  sites. Water systems that must replace their lead service lines under the  LCR also must report their materials evaluations to their respective  states. In addition, a 1980 EPA regulation required community water  systems to identify, among other things, whether lead from piping, solder,  caulking, interior lining of distribution mains, alloys, and home plumbing  was present in their distribution system and report this information to the  state. However, the LCR does not require states to report information on  known lead pipes and service lines to EPA\u2019s SDWIS\/Fed database. As  a result, the agency may not have information at the national level about  the lead infrastructure in the country.\nIn February 2016, in light of the events in Flint, Michigan, and other U.S.  cities, EPA asked states to collect information about the locations of lead  service lines and publish the information on local or state websites to  better inform the public. In a July 2016 letter to the Environmental Council  of States and the Association of State and Territorial Health Officials, EPA  noted that some states had successfully taken action to fulfill the request,  citing (1) water systems with online searchable databases that provide  information on lead service lines and (2) several states that were  requiring water systems to update their inventories of lead service lines.  In the letter, EPA also noted that many states identified challenges in  identifying lead service lines but that improving knowledge of lead service  lines is important to ensure that water systems are (1) collecting drinking  water samples from valid high-risk locations, as required under the LCR,  (2) managing the risks associated with disruption of lead service lines,  and (3) providing information to customers on how to assess and mitigate  risks posed by lead.\nIn written responses to EPA\u2019s letter, most (37) of the 50 states (or  primacy agencies) indicated that they had fulfilled or intended to fulfill  EPA\u2019s request to work with water systems to collect and make public  information about lead pipes. Four states indicated that they were  considering EPA\u2019s request. However, 9 states indicated that they would  not or did not intend to fulfill EPA\u2019s request because of challenges in  finding the historical documentation about lead pipes used to create  original sample plans or dedicating staff resources to do so. In addition, in  their responses to EPA\u2019s letter, 13 states noted that the LCR does not  require states to maintain information about water systems\u2019 lead pipes or  to provide the information to the public. EPA stated in its 2016 Lead and  Copper Rule Revisions White Paper that it was considering a proposal in  the upcoming revision to the LCR for water systems to update their  information on lead service lines and share the results of their \u201cmaterials  evaluation.\u201d In June 2017, EPA headquarters officials said that the  agency was evaluating all options outlined in its 2016 white paper as well  as recommendations related to lead pipes by other stakeholders.\nAccording to EPA technical guidance on corrosion control, knowledge  about lead service lines is needed for studies of corrosion control  treatments. In addition, the National Drinking Water Advisory Council  stated in its 2015 final report that knowledge about the location of lead  service lines is essential to ensuring replacement and outreach to  customers who are most likely to have a lead service line. We reported in  March 2013 that, as the nation faces limited budgets and funding for  federal programs, the importance of targeting federal funds to  communities with the greatest need and spending funds efficiently  increases. For example, the Water Infrastructure Improvements for the  Nation Act, enacted in December 2016, directs EPA to establish a grant  program for reducing the lead in drinking water by, among other things,  replacing publicly owned lead service lines and assisting homeowners  with replacing the lead service lines on their property. In addition, EPA\u2019s  2016 action plan identifies the reduction of lead risks as a priority area. By  requiring, in the upcoming revision of the LCR, that states report the  available information about lead pipes in its SDWIS\/Fed (or in future  redesigns, such as SDWIS Prime) database, EPA and congressional  decision makers would have important information at the national level on  what is known about lead infrastructure in the country, thereby facilitating  the agency in its oversight role.\n\n\t\t\tData on Drinking Water Sample Results for Small Systems\n\nIn a 2016 report on how science and technology can address drinking  water challenges, the President\u2019s Council of Advisors on Science and  Technology stated that, sample data are essential for evaluating the  performance of a drinking water system. While the LCR requires small  water systems to report all 90th percentile sample results (i.e., results that  meet, fall below, and exceed the lead action level) to the states, it does  not require the states to report all of this information to EPA through the  SDWIS\/Fed database. EPA headquarters officials said that the agency had not required states to submit the results for all small systems due to  the reporting burden on states. According to EPA\u2019s reporting guidance for  states, however, reporting all sample results to the SDWIS\/Fed database  for small water systems that do not exceed the lead action level is  encouraged and will be accepted. EPA officials told us that SDWIS\/Fed  contained complete sample results for about 20,000 of the approximately  58,000 small water systems, or about 30 percent, of the 68,000 water  systems.\nOfficials we interviewed in 1 of EPA\u2019s 10 regional offices said that the lack  of all 90th percentile sample results for small systems prevents the  agency from observing such systems in SDWIS\/Fed. In June 2017, EPA  headquarters officials said that having all 90th percentile sample results  for small systems would give the agency a more complete national picture  of lead in drinking water. According to information on EPA\u2019s website,  small water systems can face unique managerial, financial and  operational challenges in consistently providing drinking water that meets  EPA standards and requirements. In 2016, EPA\u2019s Office of Inspector  General reported that small water systems are less likely to have the  technical, managerial, and financial capacity to conduct actions that  would ensure safe drinking water. The SDWA requires that EPA assist  states in ensuring that water systems acquire and maintain technical,  managerial, and financial capacity. In addition, the SDWA also authorizes  EPA to provide technical assistance to small public water systems to  enable such systems to achieve and maintain compliance with applicable  national primary drinking water regulations, including the LCR.\nBecause it does not have complete 90th percentile sample results on  small water systems, EPA does not have information on how such  systems are managing the reduction of lead in their drinking water. Small  systems represent the majority of water systems reporting samples that  have exceeded the lead action level, but states are not required to submit  all 90th percentile sample results for small systems in the SDWIS\/Fed  database; this would require a revision to EPA\u2019s regulations. By requiring,  in the upcoming LCR revision, that states report all 90th percentile  sample results for small systems in the SDWIS\/Fed database, EPA would  have data to track the changes in lead levels over time among small  systems and would be better positioned to assist states in early  intervention for small water systems that are near the lead action level  where appropriate. In June 2017, EPA officials said that as states move  toward more modernized data flows using electronic reporting and  SDWIS Prime, the burden for reporting should be significantly lowered.\n\n\tEPA Uses Available Data to Monitor Compliance with the LCR, and Officials Said That They Have Increased the Use of Data in the Last Year\n\nEPA officials said that they analyze data in their SDWIS\/Fed database  and meet quarterly with state regulators to monitor compliance across all  drinking water rules and that, in the last year, in response to the events in  Flint, Michigan, they have increased their use of these data to monitor  compliance and address implementation of the LCR.\nEPA applies its Enforcement Targeting Tool to the violations data  associated with the more than 90 drinking water contaminants regulated  under SDWA for the purpose of identifying systems that merit action by  states based on the seriousness of their violations. Specifically, the  Enforcement Targeting Tool assigns a score to each water system based  on, among other criteria, the types of violations and number of unresolved  violations over the previous 5-year period. The Enforcement Targeting  Tool assigns higher scores to health-based violations, such as treatment  technique violations. Water systems whose scores meet or exceed a  certain threshold are given higher enforcement priority for states (and  EPA, if necessary). EPA officials we interviewed in all 10 of the regional  offices said that they meet quarterly with state regulators to discuss the  results generated by the Enforcement Targeting Tool and generally  considered it to be a success. EPA headquarters officials agreed that the  Enforcement Targeting Tool was a success, even with the agency\u2019s  challenges with the SDWIS\/Fed data, including using data that are not  always complete and accurate. However, these officials also told us that  the Enforcement Targeting Tool was not designed for and therefore would  not be appropriate for monitoring compliance with any single regulation,  including the LCR. In April 2017, EPA headquarters officials told us that  as of January 2017, the Enforcement Targeting Tool includes information  on water systems\u2019 most recent 90th percentile sample result and the  number of 90th percentile sample results exceeding the lead action level  over the previous 5-year time period.\nEPA officials told us that they also conduct on-site file reviews of one to  two states each year. File reviews involve regional staff comparing  information on a sample of water systems in states\u2019 databases with that in  SDWIS\/Fed to identify any discrepancies and to assess states\u2019  compliance decisions. EPA headquarters officials told us that the agency  developed a protocol for conducting file reviews and provided training on  this protocol for the regions. Staff have discretion on how to prioritize the  states in their regions. These file reviews cover all of the drinking water  regulations, which allows them to also periodically assess how well states  were implementing the LCR. According to EPA officials, in 2011, these  file reviews replaced the data verification audits, which were discontinued  in 2010; were designed to be generalizable to all water systems; and  involved contractors comprehensively reviewing states\u2019 water system  inventories and violations and enforcement data and comparing them  against the information in SDWIS\/Fed. Agency officials said that the  agency can no longer conduct these audits due to a lack of resources.\nEPA headquarters officials told us that the agency had begun using  SDWIS\/Fed data, in the last year, in response to the discovery of drinking  water contaminated with elevated levels of lead in Flint, Michigan, as part  of a two-pronged approach for reviewing states\u2019 and water systems\u2019  implementation of the LCR.\nThe first part of EPA\u2019s approach was to identify all of the water  systems that reported sample results exceeding the federal action  level from 2013 to 2016. EPA officials said that they requested that  state officials provide updates on the status of each of the  approximately 2,400 water systems identified as reporting such  results. The purpose of this approach, according to EPA officials, was  to determine whether the states and water systems were properly  following the LCR\u2019s requirements after a water system\u2019s sample  results exceeded the federal lead action level. In addition, the  approach would allow, if necessary, states and EPA to have an  opportunity for early intervention. EPA officials said that previously  they had not systematically and uniformly analyzed all of the water  systems in their database with sample results that exceed the federal  lead action level or asked states, at any one time, to provide updates  on all of the water systems with sample results exceeding the action  level. Instead, EPA headquarters officials said that staff in the regional  offices generally had worked with individual states on individual cases  of water systems with sample results exceeding the action level as a  part of the agency\u2019s routine oversight efforts. EPA headquarters  officials said that one outcome of their effort since the discovery in  Flint, Michigan, was \u201clessons learned\u201d about the importance of  knowing where lead service lines are located and the need for states  to focus more attention on small water systems and schools with their  own water supplies. EPA officials we interviewed in some of the 10  regional offices said that meetings with state officials to discuss the  water systems that had exceeded the lead action level had been  beneficial because agency officials gained a better understanding of  how states understood and implemented the requirements of the  LCR. However, officials in 3 of the 10 regional offices said that they  would ask states to provide these updates less frequently because of  limited staff resources. EPA headquarters officials told us that an  additional outcome of this approach was insight, for EPA staff, into the  types of training state regulators may need about the implementation  of LCR requirements.\nThe second part of EPA\u2019s approach, according to headquarters  officials, was to review state protocols and practices against all of the  requirements of the LCR to ensure that states were implementing the  rule, including protocols and procedures for using corrosion control  treatments. After reviewing state protocols and practices, EPA  requested that states take such actions as providing information on  their websites and documenting protocols and practices for greater  transparency. In addition, EPA staff in the 10 regional offices  conducted meetings with the state officials in their regions. Some of  these EPA officials also told us that the agency determined that  generally states were implementing the LCR appropriately. However,  EPA identified weaknesses among states and water systems with  identifying lead pipes and understanding the requirements for  installing and maintaining corrosion control. In response, EPA officials  told us that they updated guidance to states and water systems and  offered training and written technical guidance on implementing  corrosion control. Specifically, EPA officials said, they offered in- person training for state regulators in each of the 10 EPA regions on  implementing the corrosion control requirements of the LCR.\n\n\tCertain Factors May Contribute to Water Systems\u2019 Noncompliance with the LCR\n\nThrough discussions with state regulators, we identified multiple factors  that may contribute to water systems\u2019 noncompliance with the LCR. To  determine whether such factors were associated with a higher likelihood  of having a reported violation of the LCR, we conducted a statistical  analysis that calculated a system\u2019s likelihood of a violation using selected  factors, such as the size of the population served and source water, and  currently available EPA data and found that incorporating multiple factors  in the analysis may help identify water systems at a higher likelihood of  violating the LCR.\n\n\t\tCertain Factors May Contribute to Water Systems\u2019 Noncompliance with the LCR\n\nBased on our analysis of transcripts of discussion groups, state regulators  representing 41 states and 1 territory identified 29 factors that may  contribute to water systems\u2019 noncompliance with the LCR. We also  reviewed 31 studies and summarized the factors the authors identified.  Table 1 identifies the 10 factors state regulators most frequently  identified.\nDuring our discussion groups, state regulators provided examples of how  these factors contributed to noncompliance with the rule. For example,  regulators in 37 states said that the size of the population served by water  systems may influence noncompliance with the LCR. Regulators in 28 of  the 37 states said that small systems are more likely to have drinking  water sample results that exceed the federal action level, to be in  noncompliance, or to face challenges that may contribute to  noncompliance. Regulators in 5 states explained that this may be  because small systems are generally less likely to have operators with  the knowledge to properly collect samples or manage corrosion control  treatment. Regulators in 28 states said that the required LCR process for  collecting drinking water samples to test for lead levels may contribute to  noncompliance. Regulators in 19 of these 28 states said that collecting  the required number of samples is a challenge for water systems that can  lead to noncompliance, because homeowners are frequently not willing to  collect samples or, if they agree to collect samples, often collect them  improperly. For example, homeowners may sample from an infrequently  used faucet (e.g., outside spigot) instead of the required drinking water  tap. Regulators in 20 states also described how the type of water system  can lead to noncompliance. For example, they said that water systems for  which water management and treatment are not the primary missions,  such as schools, mobile home parks, and other entities, have challenges  complying with the LCR.\nThese regulators also told us that the presence of multiple factors could,  together, contribute to violations of the LCR. For example, a regulator in  one state said that the presence of lead in the pipes, combined with  corrosive water, could lead to sample results that exceed the federal lead  action level for a water system. A 90th percentile sample result that  exceeds the lead action level is not by itself a violation. However, if the  same water system did not conduct the required corrosion control  treatment study for any reason, including because it lacked the financial  capacity to pay for the study, the system would be in violation of the  LCR.  Appendix III provides information on all of the factors that state  regulators in the 41 states and 1 territory identified in our discussions as  well as examples of how those factors, individually and together, may  contribute to violations of the LCR.\nThe 31 academic studies we reviewed associated certain factors with  elevated concentrations of lead in public drinking water, human exposure  to lead in drinking water, or violations of drinking water laws and  regulations. These studies identified the potential effects of, among other  factors,  the presence of lead in pipes or lead solder, within the water system\u2019s  pipes; natural disturbances within drinking water pipes, such as stagnant or  soft water; operator actions to address lead in drinking water, such as the use of  corrosion control to decrease the presence of lead and the use of  chemical treatments to decrease the presence of other contaminants  that may increase the presence of lead; a water system\u2019s capacity to address existing lead challenges, such  as the size of the population it serves and whether the system is  publically or privately owned; and  state and local policies designed to reduce drinking water violations or  human exposure to lead in water.\n\n\t\tUse of a Statistical Analysis Could Help Identify Systems at Higher Likelihood of LCR Violations\n\nOur interviews with state regulators and review of academic studies  suggest that certain factors could indicate whether water systems are at a  higher likelihood for having a reported violation of the LCR. We selected  four system characteristics that were consistent with the factors reported  by state regulators in discussion groups and were available in  SDWIS\/Fed to conduct a statistical analysis:  the population served by (or size of) the drinking water system, whether the drinking water system was publicly- or privately-owned, whether the drinking water system used groundwater or surface water whether the drinking water system was classified as a community  water system or a non-transient non-community water system.\nWe also included the factor of whether a system had sample results that  exceeded the lead action level. SDWIS\/Fed does not include data on  such factors as the presence of lead service lines or technical,  managerial, and financial capacity.\nWe were unable to develop a nationwide statistical model referred to as a  logistic regression analysis. A logistic regression analysis can identify  factors that are associated with a violation and can estimate a drinking  water system\u2019s likelihood of a violation based on these factors. We have  previously found that regression analysis can identify entities, regulated  by a federal program, that pose a higher likelihood for a particular  outcome. However, during our review of the reliability of EPA\u2019s data on  violations, we could not verify that the limitations in the completeness of  the data identified in our June 2011 report had been sufficiently  addressed, nationwide. Specifically, in June 2011, we found that EPA  had not been able, among other things, to resume the comprehensive  and routine data verification audits that would provide it with current  information on the completeness of the data states provide to  SDWIS\/Fed. As a result, in June 2011, we recommended that EPA  resume data verification audits to routinely evaluate the quality of  selected drinking water data on health-based and monitoring violations  that the states provide to EPA. These audits should also evaluate the  quality of data on the enforcement actions that states and other primacy  agencies have taken to correct violations. EPA partially agreed with our  recommendation and stated that it has found that data verification audits  provide valuable information on data completeness but did not commit to  conducting such audits beyond 2011. Instead, EPA said that until the next  generation of SDWIS (SDWIS Prime) is deployed, thus enabling the  agency to view compliance monitoring data and compliance  determinations directly, it will consider using data verification audits to  evaluate data quality. As of October 2016, EPA reported that it has not  conducted another data verification audit.\nBecause of the limitations of using SDWIS\/Fed data to conduct a  nationwide analysis, we sought to use such data to conduct an analysis  for individual states to determine whether factors could predict the  likelihood that a water system would violate the LCR. As such, we used data from Ohio and Texas to examine the potential for developing a  statistical analysis to identify drinking water systems at higher likelihood  of having a reported violation. EPA found few or no discrepancies  between the LCR data in these state systems and in SDWIS\/Fed for the  time period of our statistical analysis, 2013 to 2016. The results of our  analysis are not generalizable to other states.\nTo conduct an analysis for the two states, we developed a series of  logistic regression models for these states using (1) LCR violations data  for Ohio and Texas in SDWIS\/Fed for 2013 and 2014 and (2) the four  factors for which data were available in SDWIS\/Fed (size of the  population served, ownership, source water, and water system type). Our  models estimated the likelihood that a water system in those two states  would have a reported violation of the LCR based on these factors. We  found that water systems with certain factors had a higher likelihood of  having a reported violation of the LCR than water systems without those  factors. For example, in both states, a water system serving 100 people  was more likely to have a reported violation of the LCR than a water  system serving 1,000 people. In addition, systems with a previous sample  result that exceeded the lead action level were more likely to have a  reported violation of the LCR than systems without a previous sample  result that exceeded the lead action level.\nWe then tested the ability of our models to predict subsequent rates of  having reported violations. Specifically, we compared the estimates from  our models to violations that were actually reported in SDWIS\/Fed in  2015 and 2016. We found that water systems that we identified as having  higher likelihoods of having a reported violation, based on our models,  had significantly higher rates of reported violations in 2015 and 2016. The  results of our analysis indicate that multiple factors, in addition to whether  a system had sample results that exceeded the lead action level, could be  used to predict water systems with a higher likelihood of having a  reported violation of the LCR.\nOur analysis suggests that a statistical analysis of EPA data could be  used to identify water systems with a higher likelihood of having a  reported violation of the LCR. However, we identified two key limitations,  among others, based on the state of the data in SDWIS\/Fed as of  December 2016. The first was the quality of the data for the purposes of  conducting an analysis. We could not be confident in the specific results  of a nationwide or, for some states, a state-specific analysis, because we  did not have the necessary assurances of the accuracy and  completeness of the SDWIS\/Fed data, issues about which we previously  reported in January 2006 and June 2011. EPA headquarters officials  told us in June 2011 and April 2016 that their upcoming SDWIS\/Fed  upgrade, SDWIS Prime, could give the agency direct access to state  data. Having complete and accurate data for all states or a nationally  representative sample of states would allow for a nationwide analysis.\nThe second limitation was that data are not available for many of the  factors identified by state regulators that may contribute to water systems\u2019  noncompliance with the LCR. Our analysis was limited to those four  factors for which states submit data to EPA\u2019s SDWIS\/Fed. Because data  were unavailable for all potentially relevant factors, we were unable to  include information on the presence of lead pipes, lack of financial  capacity, and lack of technical capacity. EPA headquarters officials told  us that they were considering the development of indicators of capacity.  For example, these officials said that potential indicators suggesting a  drinking water system is challenged by capacity are the drinking water  system (1) not having raised rates in 20 years; (2) not having recently  used asset management; or (3) having experienced difficulty in retaining  trained operators. Data on the presence of lead pipes, financial capacity,  technical capacity, and other factors may allow for stronger logistic  regression models that more accurately identify water systems with a  higher likelihood for violations. Appendix V provides a technical  description of the statistical analysis we conducted.\nAccording to EPA, the agency promulgated the LCR to protect public  health by minimizing the levels of lead in the drinking water supply.  EPA\u2019s current approach for oversight of the LCR targets water systems  with sample results that exceed the lead action level. This approach is  reasonable because water systems that exceed the action level have a  known and documented lead exposure risk and are required under the  LCR to take actions that are considered health-based. This approach,  however, primarily incorporates one factor\uf8e7sample results that exceed the lead action level\uf8e7and does not include the potential of having  reported violations across all of the requirements of the LCR. In addition,  EPA officials we interviewed in 3 of the 10 regional offices said that they  do not have the resources to sustain the agency\u2019s current approach.  Under federal standards for internal control, management should identify,  analyze, and respond to risks related to achieving the defined objectives.  Although EPA may not have the resources to continue the use of its  current approach of following up on all sample results that exceed the  lead action level, our analysis illustrates that EPA collects data that,  where complete and accurate, could be incorporated into a risk-based  analysis. For example, such an analysis could be used in individual states  or geographical areas, while EPA is taking steps to improve its data and  implement SDWIS Prime. A statistical, risk-based analysis, whether it is  used for individual states or nationwide, may provide EPA with an  additional tool by which it may be able to efficiently target its limited  resources for oversight of water systems and meet its goal of reducing  the risk of lead exposure. By developing a statistical analysis that  incorporates multiple factors\u2014including those currently in SDWIS\/Fed  and others such as the presence of lead pipes and the use of corrosion  control\u2014to identify water systems that might pose a higher likelihood for  violating the LCR once complete violations data are obtained such as  through SDWIS Prime, EPA could supplement its current efforts to better  target its oversight to the water systems that present a higher risk of  violating the LCR.\n\n\tConclusions\n\nEPA has taken several actions to increase transparency about lead  hazards, focus on water systems\u2019 sample results over the federal lead  action level, and ensure a better understanding of how states and water  systems interpret and implement the LCR. However, most states are not  submitting data to the SDWIS\/Fed database on water systems\u2019 use of  corrosion control as required by the LCR. We continue to believe that  EPA should take actions to address our 2006 recommendation. Further,  by requiring that states report the available information about lead pipes  in EPA\u2019s SDWIS\/Fed database nationally, EPA and congressional  decision makers would have important information at the national level  about lead infrastructure, thereby facilitating the agency in its oversight  role.\nThe LCR does not require states to submit data to EPA\u2019s SDWIS\/Fed  database on all 90th percentile sample results for small water systems,  only to provide sample results that exceed the lead action level. EPA has  long acknowledged the challenges experienced by small water systems,  as evidenced in the data for samples that exceed the lead action level  and violations for taking samples as required and reporting sample  results. The upcoming revision of the LCR provides an opportunity for  EPA to require states to report all 90th percentile sample results for small  systems. By doing so, EPA would have data to track the changes in lead  levels over time among small systems and would be better positioned to  assist states in early intervention for small water systems that are near  the lead action level where appropriate. EPA also has an opportunity to  enhance its oversight of the LCR by using statistical analyses to analyze  those data that it currently collects and has determined to be complete.  With the LCR applying to about 68,000 water systems across the country  (or approximately 45 percent of all drinking water systems), it is important  to target limited resources to those water systems that pose the highest  likelihood of a violation. By developing a statistical analysis that  incorporates multiple factors\u2014including those currently in SDWIS\/Fed  and others such as the presence of lead pipes and the use of corrosion  control\u2014to identify water systems that might pose a higher likelihood for  violating the LCR, EPA could supplement its current efforts and better  target its oversight to the water systems that present a higher likelihood of  violating the LCR, particularly when complete violations data are more  readily available through upgrades, such as SDWIS Prime.\n\n\tRecommendations for Executive Action\n\nWe are making the following three recommendations to EPA:\nThe Assistant Administrator for Water of EPA\u2019s Office of Water should  require states to report available information about lead pipes to  EPA\u2019s SDWIS\/Fed (or a future redesign such as SDWIS Prime)  database, in its upcoming revision of the LCR; (Recommendation 1)\nThe Assistant Administrator for Water of EPA\u2019s Office of Water should  require states to report all 90th percentile sample results for small  water systems to EPA\u2019s SDWIS\/Fed (or a future redesign such as  SDWIS Prime) database, in its upcoming revision of the LCR;  (Recommendation 2) and\nThe Assistant Administrator for Water of EPA\u2019s Office of Water and  the Assistant Administrator of EPA\u2019s Office of Enforcement and  Compliance Assurance should develop a statistical analysis that  incorporates multiple factors\u2014including those currently in SDWIS\/Fed  and others such as the presence of lead pipes and the use of  corrosion control\u2014to identify water systems that might pose a higher  likelihood for violating the LCR once complete violations data are  obtained, such as through SDWIS Prime. (Recommendation 3)\n\n\tAgency Comments\n\nWe provided a draft of this report to EPA for review and comment. In its  written comments, reproduced in appendix VII, EPA stated that it  generally agreed with all three of our recommendations and the  importance of ensuring that the agency has the information needed to  ensure effective oversight of the drinking water programs. EPA also  provided technical comments which we incorporated, as appropriate.\nEPA stated that our first two recommendations relate to the LCR  revisions: (1) report available information about lead pipes to EPA\u2019s  database and (2) report all 90th percentile sample results for small water  systems to EPA\u2019s SDWIS\/Fed (or a future design such as SDWIS Prime).  As a result, EPA said that it would consider our recommendations along  with those of other stakeholders as the agency continues to support the  development of the proposed LCR for publication in the Federal Register  and follows the public review and comment process in 2018. In addition,  EPA said that the agency would continue to work with states to develop  SDWIS Prime and another electronic reporting tool, which will facilitate  electronic reporting, which in turn will increase data accuracy and  completeness.\nIn response to our third recommendation, EPA stated that it agrees with  the concept of our third recommendation to develop a national statistical  analysis that could identify water systems with a higher likelihood of  violating the LCR and that the agency previously tried to build a similar  tool but faced challenges due to variations between selected factors and  violations between states. EPA also said that while developing a national  tool would be a challenge, it would be beneficial to both the agency and  state primacy agencies.\nAs agreed with your offices, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days from the  report date. At that time, we will send copies of this report to the  appropriate congressional committees; the Administrator of the  Environmental Protection Agency, and other interested parties. In  addition, this report will be available at no charge on the GAO website at  http:\/\/www.gao.gov.\nIf you or your staff members have any questions about this report, please  contact me at (202) 512-3841 or gomezj@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on  the last page of this report. Key contributors to this report are listed in  appendix VIII.\n\nAppendix I: Objectives, Scope, and Methodology\n\nThis report examines the issue of elevated lead in drinking water and the  Environmental Protection Agency\u2019s (EPA) use of compliance data for  oversight of the Lead and Copper Rule (LCR). Our objectives were to  examine (1) what the available EPA data show about compliance with  and enforcement of the LCR among water systems, including schools; (2)  how EPA uses these data to monitor compliance; and (3) factors, if any,  that may contribute to water systems\u2019 noncompliance with the LCR. We  compared our evidence on EPA\u2019s a use of these data for oversight of the  LCR to Standards for Internal Control in the Federal Government.  According to these standards, internal control is a process by an entity\u2019s  oversight body, management, and other personnel that provides  reasonable assurance that the objectives of an entity will be achieved. An  effective internal control system increases the likelihood that an entity will  achieve its objectives. For this review, we used the standard for one of  the five components of internal control\uf8e7risk assessment\uf8e7as criteria.\nTo examine what the EPA data show about reported compliance and  enforcement, we reviewed LCR data in EPA\u2019s Safe Drinking Water  Information System (SDWIS\/Fed) for the time period July 1, 2011, to  December 31, 2016. We chose this time period because it provided the  most recent history of available compliance data without a change in the  regulations at the time of our analysis. The LCR data contained  information on 67,581 active community water systems and non-transient  non-community water systems, including those that were schools or  daycare centers with their own water supply. Table 2 provides the water  systems, by type and size, included in our analysis. The LCR divides  water systems into three broad categories: small, medium, and large.  Size is a factor in determining the number of samples that must be  collected as well as the applicability and timing of some of the LCR  requirements.\nWe reviewed the available data on corrosion control, drinking water  sample results, violations of the requirements of the LCR, and state and  EPA enforcement actions. We also described the data by population  served\/size, whether the water system was a school or daycare center,  and whether the water system was a community water system or a non- transient non-community water system, among other factors. We  analyzed data on sample results for a 3-year time period (from January  2014 to December 2016) and for a 5 1\/2-year period (from July 2011 to  December 2016). EPA officials told us that they analyze sample data over  a 3-year period rather than yearly to ensure that the majority of water  systems will have submitted sample results. When presenting a  comparison of the sample data and the milestone data on corrosion  control, we used the 5 1\/2-year period for both sets of data. For violations  data, we presented open violations as of December 2016. Violations are  considered open when the state has not determined that a water system  is in compliance with the specific requirement for which it received the  violation. Finally, we presented data on enforcement actions for a 5 1\/2- year period (July 2011 through December 2016) to ensure that we  provided the most complete picture of the range of state and federal  actions taken and to avoid comparisons with the violations data.  According to a 2013 EPA compliance report, enforcement data, in any  one year, do not necessarily correlate with violations data. In addition,  the compliance report states that enforcement actions can be initiated  against violations that occurred in a previous year, one enforcement  action may address numerous violations at the same system; and it can  take several years for a system to return to compliance.\nWe reviewed the data available in the SDWIS\/Fed database and the  compliance requirements in the LCR to evaluate those aspects of the  LCR for which implementation data were available. We interviewed  officials from EPA\u2019s Office of Water and Office of Enforcement and  Compliance Assurance on the reliability, completeness and accuracy of  LCR data in SDWIS\/Fed. In addition, we reviewed EPA data reliability  assessments, recent file reviews for selected states, a 2017 EPA OIG  report on the reliability of SDWIS\/Fed sample data, data verification  reports and past GAO reports on the reliability of the data in SDWIS\/Fed.  For example, EPA\u2019s file reviews in some states found that not all  violations data were reported to SDWIS\/Fed, which could lead to  undercounting. In addition, some state regulators told us that samples  may be collected incorrectly by some homeowners, which could lead to  inaccurate sample results. EPA has stated on its website that the agency  acknowledges challenges related to the data in SDWIS\/Fed, specifically  underreporting of some data by states. GAO has also reported on EPA\u2019s  challenges with SDWIS\/Fed. Based on this, the compliance data in  SDWIS\/Fed likely underreport the actual number of sample results that  exceed the lead action level, milestones, violations, and enforcement  actions, which we note in this report. Because of the incompleteness of  reported data on sample results, violations, and enforcement actions, and  because of concerns raised by state officials about sample data, we  found the data to be of undetermined reliability. For this review, we  describe the data about water systems\u2019 compliance with the LCR  compliance and EPA\u2019s enforcement actions as they are reported in  SDWIS\/Fed for the purpose of providing a current assessment of EPA\u2019s  use of the data.\nTo examine how EPA uses LCR data to monitor compliance we  conducted semistructured interviews with EPA officials. We used a  standard set of questions to interview officials in EPA\u2019s headquarters and  in each of the 10 regional offices. Our standard set of open-ended  questions for EPA\u2019s 10 regional offices asked about state actions  responding to EPA\u2019s requests about, among other things, implementation  of the LCR, the use of SDWIS\/Fed data, enforcement tools, and  compliance with the LCR among water systems and schools. We  conducted in-person interviews with officials responsible for monitoring  compliance in states within EPA regions 1, 2, 3, 4, 5, and 7. We identified  these regions based on a 2016 survey that estimated that these regions  have the highest number of lead service lines. We spoke with officials in  EPA regions 6, 8, 9, and 10 on the telephone. Table 3 provides a list of  the EPA regions and the states under the regulatory jurisdiction of those  regions. Our in-person interviews with officials in EPA regions 1through 5  and 7 were in offices located in Boston, Massachusetts; New York, New  York; Philadelphia, Pennsylvania; Atlanta, Georgia; Chicago, Illinois; and  Lenexa, Kansas, respectively. In these cities, we also met with state  primacy agencies and local water systems and other local officials, when  possible, to obtain examples of compliance and enforcement practices  and implementation challenges. Specifically, we met with state drinking  water officials in Massachusetts and Georgia. We met with officials  representing local water systems in Atlanta, Boston, New York, Chicago,  and Kansas City, Missouri. In total, we held 10 interviews with EPA staff  in the regional offices and seven interviews with state and local officials in  the cities we visited. We also reviewed EPA policy documents that  outlined the agency\u2019s enforcement approach and documents related to  EPA\u2019s request that states take certain actions following the events in Flint,  Michigan. Finally, we reviewed federal regulations; EPA guidance to  states and water systems on how to implement the LCR; the 2016 action  plan; information on what constitutes a violation of the LCR, action plans,  and other relevant documents.\nTo identify the factors that may influence water systems\u2019 risk of  noncompliance with the LCR, we conducted a content analysis of  information provided by state regulators in discussion groups. To assess  whether selected factors available in SDWIS\/Fed could be used to predict  reported violations, we conducted a statistical analysis of EPA data to  develop an illustrative model. We conducted a literature review to identify  factors associated with elevated concentrations of lead in public drinking  water, human exposure to lead in drinking water, or violations of drinking  water laws and regulations.\nDiscussion groups with state regulators. We conducted discussion  groups with a nonprobability sample of state drinking water regulators to  contribute to our understanding of the potential factors that may influence  noncompliance with the LCR. We invited regulators from all states and  territories to participate via email. In total, we conducted eight, 1-hour  discussion groups over the telephone in September and October 2016.  Regulators representing 41 states and 1 territory participated in these  discussion groups. Each discussion group had from 2 to 8 states or  territory, and each state or territory had a primary designated  spokesperson. During each discussion group, the GAO moderator asked  participants to list one or two factors that, in their experience, most  strongly influence a water system\u2019s ability to comply with the LCR. Each  state provided a list of factors. The moderator then asked participants to  elaborate on how the factors reported could influence compliance. When  necessary, the moderator asked probing questions to further clarify  participants\u2019 comments. Two or three analysts transcribed each session  and combined and reconciled notes to develop transcripts for each of the  discussion groups. We conducted a content analysis of the transcripts  from the eight discussion groups to identify the factors most frequently  reported by the participants in the groups. Two GAO analysts  independently classified each comment using qualitative analysis  software. The findings from these discussion groups may not be  generalizable to all state regulators. We provide a narrative description of  the results of our discussions with the state regulators in appendix III and  a technical description of the content analysis we conducted in appendix  IV.\nStatistical analysis. We conducted a statistical analysis to illustrate  whether predictive modeling could be used to identify water systems with  a higher likelihood of a reported violation of the LCR. To conduct our  analysis, we used the same data from EPA\u2019s SDWIS\/Fed for systems  listed as active as of December 31, 2016 as mentioned above. We  selected two states\uf8e7Ohio and Texas\uf8e7because EPA\u2019s file reviews  indicated that there were not significant discrepancies during the scope  and time period of our analysis, which focused on 2013 to 2016, in the  LCR data reported by these states to SDWIS\/Fed. We reviewed EPA\u2019s  2016 file reviews of data the states provide to SDWIS\/Fed and  interviewed EPA and state officials for Texas and received written  responses to our questions from Ohio. For each of the sampled systems,  EPA reviewed state records to determine whether the state was correctly  identifying violations and reporting those violations to SDWIS\/Fed.  Although, unlike EPA\u2019s previous reviews, EPA\u2019s 2016 file reviews are not  based on generalizable samples, they were conducted for a broad range  of drinking water systems in each of the states. Based on the results of  EPA\u2019s reviews, we determined that these two states had sufficiently  reliable data for our purposes of illustrating a statistical approach. The  results of our analysis for these two states are not generalizable to other  states. Our analysis included three steps. We first conducted a bivariate  analysis to determine whether the following four factors correspond to  violations of the LCR for 2013 to 2014: (1) size of the population served;  (2) water source (groundwater or surface water); (3) ownership (public or  private); and (4) whether the system is a community water system or non- transient, non-community water system. We also included the factor of  whether sample results exceeded the lead action level. We then  developed a series of multivariate logistic regression models. Specifically,  multivariate logistic regression modeling is statistical method for analyzing  the potential influence of each individual factor on the likelihood of a  binary outcome (e.g., a violation) while simultaneously accounting for the  potential influence of the other factors. We selected this type of model  because it could account for the factors simultaneously. Lastly, to test  whether our models could be used to identify systems with a higher  likelihood of a future violation, we compared the values generated by our  models to actual violations reported in the SDWIS\/Fed data in 2015 to  2016. We provide a technical description of the statistical analysis we  conducted, including determinations about the reliability of the data and  the limitations of the analysis, in appendix V.\nLiterature review. We reviewed studies concerning detection of lead in  drinking water and violation of drinking water regulations. These studies  were identified through searches by GAO research librarians for peer- reviewed materials in such databases as ProQuest, Scopus, Academic  One-File, and Web of Science. Librarians conducted searches using such  terms and phrases as lead and copper, water supply, drinking water, lead  exposure and lead poisoning alone and in combination with one another.  We also identified and reviewed relevant publications by trade groups,  think tanks, and other nongovernmental organization. We narrowed a  preliminary selection of results by reviewing abstracts and introductions,  where applicable. Based on that preliminary review, we determined that  31 sources fit within the scope of our engagement objectives. We then  reviewed the data and key findings of each of these 31 sources to  formulate and refine some hypotheses concerning violations of the LCR  and detection of lead in drinking water. The hypotheses were reviewed by  a GAO technical expert to ensure that they were sufficiently supported by  the cited corresponding research.\n\nAppendix II: Additional Analysis of Available EPA Data on Reported Sample Results, Violations, and Enforcement for the Lead and Copper Rule\n\nEnvironmental Protection Agency (EPA) data from July 1, 2011, to  December 31, 2016, can provide information on compliance by water  systems and enforcement by states and EPA regarding the Lead and  Copper Rule (LCR). This appendix provides additional information from  our analysis of what the EPA data in the agency\u2019s Safe Drinking Water  Information System (SDWIS\/Fed) show about compliance with and  enforcement of the LCR. The LCR requires water systems to monitor  drinking water at customer taps, and if lead levels are elevated, take  additional actions to control corrosion, inform the public, and in some  circumstances replace lead service lines under the systems\u2019 control.  States generally have primary responsibility for monitoring and  enforcement of Safe Drinking Water Act requirements, including the  LCR. In this appendix, we provide additional results of our analysis of the  LCR data for (1) sample results, (2) violations, and (3) enforcement. We  reported in January 2006, that the LCR data, and in June 2011, the data  in SDWIS\/Fed generally, were not accurate or complete. According to  EPA, some of the violations data are underreported. In addition, a 2017  EPA Office of Inspector General report indicated that sample data,  specifically, are potentially underreported. In addition, some state  regulators with whom we interviewed in 2016 told us that homeowners  and water systems may take LCR samples improperly as we discuss in  this report. See, also, appendix III for these state regulators\u2019 views on  waters systems\u2019 challenges with implementing the sample requirements  under the LCR. We present the data that were available in the  SDWIS\/Fed database at the time of our review.\n\n\tSample Results\n\nThe LCR requires that all water systems periodically obtain tap water  samples and for sample results that exceed an action level of 15 parts per  billion (ppb) to determine if corrosion control treatments are working  properly. EPA requires states to report (1) sample results for any water  system whose 90th percentile sample results exceed the federal action  level of 15 parts per billion; and, (2) sample results for large and medium  water systems even if the sample results do not exceed the lead action  level. From January 1, 2014, to December 31, 2016, there were  approximately 1,430 water systems reporting sample results over the lead  action level (see table 4), the majority of which were small water systems.  EPA officials told us that they analyze these sample data over a 3-year  period rather than yearly to ensure that the majority of water systems will  have submitted 90th percentile sample results.\nThe available EPA data show that almost all of the water systems (1,364,  or 95 percent) reporting sample results that exceeded the lead action  level from 2014 to 2016 were small and, together, served a population of  about 505,000. In contrast, the remaining 66 large and medium water  systems (5 percent) reporting sample results that exceeded the lead  action level from 2014 to 2016, together, served a population of 2.7  million. In addition, as shown in table 5, states within EPA\u2019s regions 1 and  3 had the highest number of water systems that reported sample results  exceeding the lead action level. EPA headquarters officials we  interviewed provided possible explanations for why 90th percentile  sample results would be higher in these states. They said that there are  more lead service lines in the northeastern states, such as those within  regions 1 and 3. See table 5.\nTable 6 provides information on the EPA data available for those water  systems that have results under the federal action level in 2016. As  previously mentioned, states are to report all 90th percentile sample  results for large and medium water systems to EPA\uf8e7those that exceed  and fall below the federal action level.\n\n\tViolations\n\nThe 6,567 water systems (or 10 percent of all water systems) with  reported open violations as of December 2016, had at least one open  violation, based on our analysis of the available EPA data. Violations are  considered open when the state has not determined that a water system  is in compliance with the specific requirement for which it received the  violation. Table 7 provides an overview of the number of water systems  (including schools and day care centers) with violations of the LCR, by  size.\nTable 8 provides a summary of the available EPA data on the violations  of the LCR among schools and daycare centers.\n\n\tEnforcement Actions and Outcomes\n\nThe available EPA data show that from July 1, 2011 to December 31,  2016, 99 percent of the 589,827enforcement actions and outcomes were  taken by states, as would be expected given that states generally have  primary responsibility for enforcement of the LCR . Enforcement actions  in SDWIS\/Fed include actions taken and what we considered in our  analysis as outcomes, such as the receipt of information or a water  system having achieved compliance. The enforcement codes in  SDWIS\/Fed that we defined as outcomes were: federal civil case  concluded, federal bilateral compliance agreement signed, federal public  notification received, federal no longer subject to rule, federal compliance  achieved, federal variance\/exemption issued, state civil case concluded,  state bilateral compliance agreement signed, state public notification  received, state no longer subject to rule, state compliance achieved, and  state variance\/exemption issued. Collectively, outcomes represented 43  percent (256,107) of the enforcement data in the database. Table 9  provides the number of enforcement actions and outcomes reported from  July 1, 2011, to December 31, 2016, at the federal and state levels. The  data show that states in regions 6 and 4 had the highest numbers of  enforcement actions and outcomes.\nTable 10 shows the five most frequently reported enforcement actions  taken by states for LCR violations as they were reported in SDWIS\/Fed  as of December 31, 2016.\nIn a 2009 document outlining its enforcement policy, EPA stated that the  policy would focus on \u201creturn to compliance.\u201d According to this  document, \u201creturn to compliance\u201d is intended to show the effectiveness of  the agency\u2019s protection of public health. The available EPA data show  that from July 1, 2011, to December 31, 2016, 10,702 water systems had  at least one violation of some type and were returned to compliance (see  table 11). As table 11 illustrates, small systems were most frequently  designated as returned to compliance for monitoring and reporting  violations.\n\nAppendix III: Key Factors State Regulators Identified That May Contribute to Noncompliance with the Lead and Copper Rule\n\nState drinking water regulators who participated in discussion groups we  conducted identified 29 factors that may contribute to noncompliance with  the Lead and Copper Rule (LCR). Of these factors, the state regulators  most frequently mentioned size, technical capacity, and sample  collection, among other factors. State regulators mentioned other factors  less frequently, including requirements to comply with multiple drinking  water regulations and the number of water samples required to be  collected by the LCR as also contributing to noncompliance. Regulators in  12 states identified factors that they thought specifically helped water  systems comply with the LCR. We obtained this information from drinking  water state regulators representing 41 states and 1 territory through eight  discussion groups held in September and October 2016. The purpose of  the discussion groups was to develop an understanding of the factors that  may influence noncompliance with the LCR. We analyzed the transcripts  of those discussion groups using a content analysis software package.  For a detailed description of the methodology we used to conduct these  groups and analyze the content of these discussions, see appendix I and  appendix IV.\n\n\tState Regulators Identified 29 Factors That May Contribute to Noncompliance with the LCR\n\nState regulators who participated in our discussion groups identified 29  factors that may contribute to water systems\u2019 noncompliance with the  LCR. The LCR requires water systems to identify locations where lead  may be present and periodically obtain tap water samples from those  locations (of which single-family homes are the highest priority). When a  water system\u2019s 90th percentile sample result for lead exceeds 15 parts  per billion, the system has exceeded the federal action level (also known  as an action level exceedance). Sample results that exceed the lead  action level do not by themselves constitute violations of the LCR.\nUnder the LCR, an action level exceedance requires the water system  and state to take additional steps. Those additional steps require that  small and medium water systems install or modify corrosion control  treatment and water systems of all sizes provide information (known as  public education) about the harmful effects of lead to consumers and  vulnerable populations (such as schools if the water system serves a  school and public health departments). Water systems are also required  to test and, if necessary, treat the source water. If, after installing  corrosion control and treating source water, a system continues to have  90th percentile sample results that exceed the lead action level, the LCR  requires the water system to begin replacing its lead service lines, if they  exist.\nAs part of our analysis, we grouped the 29 factors into seven broad  groups: (1) water system characteristics, (2) water system operations, (3)  characteristics of water, (4) sample procedures required to comply with  the LCR, (5) actions that states take to ensure water systems comply with  the LCR, (6) actions that the Environmental Protection Agency (EPA) can  take to assist with compliance, and (7) features of the LCR regulation.  Figure 4 provides these seven groups and the factors that fell into each  one.\n\n\tState Regulators Most Frequently Identified 10 Factors That May Contribute to Noncompliance with the LCR\n\nState regulators we interviewed most frequently identified 10 factors that  may contribute to noncompliance of the LCR. Among those were size,  technical capacity of operators, and the collection of drinking water  samples. The 10 factors fell into the following broad groups: (1) water  system characteristics, (2) water system operations, (3) characteristics of  water, and (4) sample procedures. To identify the factors most frequently  identified by the state regulators as contributing to noncompliance, we  focused on those factors that were mentioned by regulators in at least 13  of the 41 states participating in the discussion groups (30 percent). Table  12 provides a description of each factor, the definition we used for our  analysis and the number of states in which officials mentioned the factor.\nState regulators who participated in the discussion groups explained how  each of these factors may contribute to noncompliance. In most  instances, regulators also described what they observed as relationships  between factors and how, together, multiple factors could contribute to  noncompliance.\nSize. Regulators in 37 states said that the size of the population  served by water systems may influence noncompliance with the LCR.  Regulators in 28 of the 37 states said that small systems (serving  populations of 3,300 and fewer) are more likely to have drinking water  sample results that exceed the federal action level, to be in  noncompliance, or face challenges that may lead to noncompliance.  Most of these regulators mentioned the size of a system and the  technical, managerial, or financial capacity of the system as factors  that, together, may influence noncompliance. For example,  regulators in 10 states said that small systems are more likely to  receive a violation because they are generally less likely to have  operators with the knowledge to properly collect samples (sample  collection) or manage corrosion control treatment (technical capacity)  or have the financial resources to pay for corrosion control treatment  or to hire professional help to do so (financial capacity). A regulator  from 1 state provided an example of a small water system in  noncompliance because it has a part-time operator with little training  on the rule and with other professional responsibilities, such as snow  removal and animal control, which prevent this operator from  providing drinking water test results to homeowners whose water was  tested within the required timeframe.\nTechnical capacity. Regulators in 33 states said that the technical  capacity of water systems may influence noncompliance with the  LCR. Regulators in 18 of the 33 states said that water systems that do  not have personnel with the knowledge to adequately operate a  system or who understand the LCR are less likely to have the skill set  to interpret and implement the LCR appropriately.\nSample collection. Regulators in 28 states said if systems fail to  collect drinking water samples, improperly collect samples, or have  other problems with collecting samples they may be out of compliance  with the LCR. For example, regulators in 9 of these 28 states said that  some water systems struggle to find enough homeowners willing to  collect water samples for testing and regulators in 3 states said that  this may cause the systems to collect samples from taps that are not  used for drinking water, contrary to the LCR. In addition, regulators in  14 states said that even when systems are able to find homeowners  willing to collect drinking water samples, the homeowners themselves  may collect the samples improperly. A regulator from 1 state provided  an example of a homeowner who was out of town for the weekend  and upon return collected a water sample from tap water that sat  stagnant for 4 days, which is problematic because the sample taken  should be representative of everyday use. Sample results that exceed  the lead action level do not by themselves constitute violations of the  LCR.\nFinancial capacity. Regulators in 28 states said that water systems  that do not have sufficient financial resources will experience  challenges complying with the LCR, including paying for chemicals  and professional help needed to install corrosion control treatment.  For example, a regulator in 1 state said that a system without  adequate financial resources may not be able to pay for the required,  and often costly, corrosion control study.\nPresence of lead. Regulators in 23 states said that the presence of  lead in the pipes may influence noncompliance with the LCR.  Regulators in 9 of the 23 states said that the presence of lead in pipes  increases the likelihood that drinking water samples will exceed the  federal action level; and require a system to perform additional  actions. Regulators in 11 of the 23 states specifically said that a water  system with old infrastructure is more likely have lead service lines.  Regulators in 9 states identified the presence of lead service lines and  managerial capacity as factors that may work together. These  regulators said that water systems that maintain good records of the  materials in their distribution systems know about the presence of  lead service lines and may be better able to collect drinking water  samples from the appropriate locations.\nManagerial capacity. Regulators in 24 states said that the  managerial capacity of water systems may influence noncompliance  with the LCR. Regulators in 16 of the 24 states said that water  systems that do not have effective management structures and  practices will have problems keeping up with the rule requirements  and deadlines. Regulators in 6 states explained that proper data and  records management help systems comply with the LCR.\nWater chemistry. Regulators in 23 states said that the chemistry of  the water may influence noncompliance with the LCR. Regulators in  20 of the 23 states said that having corrosive water increases the  likelihood of samples that exceed the action level\u2014which is not a  violation\u2014and will require a system to perform additional actions. For  example, if these systems do not install corrosion control or manage it  properly\u2014for example, because the operator does not understand  water chemistry\u2014the system will get a violation, according to  regulators in 6 states.\nCorrosion control. Regulators in 16 states said that the corrosion  control may influence noncompliance with the LCR. Specifically,  regulators in 15 of the 16 states said that water systems that have  installed corrosion control treatment are more likely to be in  compliance with the LCR because corrosion control is the primary  method used to prevent lead from entering drinking water. A regulator  from 1 state said that despite the corrosive water that exists in that  state, water systems are not getting samples that exceed the action  level and are staying in compliance because they have corrosion  control installed. Regulators also discussed how the size of the  system and corrosion control, together, can influence compliance.  Regulators in 5 states said that large water systems are generally in  compliance with the LCR because the rule requires them to install  corrosion control treatment.\nType. Regulators in 18 states said that the type of water system may  influence noncompliance with the LCR. Regulators in 14 of the 18  states said schools and daycare facilities with their own water  supplies experience challenges in complying with the LCR, and  regulators in 6 states explained that it is because their primary  mission is not water delivery and management. A regulator in 1 state  said that they had a school submit improper samples because school  officials collected samples after the summer break during which the  faucets had not been used for 6 weeks, thus not being representative  of normal drinking water use. Sample results that exceed the lead  action level do not by themselves constitute violations of the LCR.\nSource. Regulators in 14 states said that the source of drinking water  may influence noncompliance and offered a range of opinions as to  how corrosive or non-corrosive groundwater may influence actions.  State regulators frequently discussed source water, water chemistry,  and corrosion control as factors that presented themselves together.  State regulators in 4 states said that systems using ground water can  more easily comply with the LCR because ground water is non- corrosive compared to surface water. In contrast, regulators in 4  states said that the ground water in other parts of the country is more  corrosive. However, regulators in 5 states said that systems with  corrosive water sources are still able to comply when they properly  install and manage corrosion control treatment.\n\n\tState Regulators Identified Additional Factors That May Influence Noncompliance\n\nState regulators who participated in our discussion groups identified  additional factors that may contribute to water systems\u2019 noncompliance  with the LCR, though less frequently. These regulators cited factors such  as compliance with multiple drinking water rules, the number of samples  that systems are required to collect under the LCR, and the complexity of  the LCR. Table 13 describes each factor less frequently mentioned as  contributing to noncompliance, the definition of the factor, and the number  of states in which officials mentioned the factor. Some of these factors are  more specific attributes that may impact of some the 10 factors that were  most frequently identified by state regulators. For example, regulators told  us about several aspects of water (age, stability, and flow) that may  impact water chemistry.\nThe regulators participating in our discussion groups provided examples  of these less frequently mentioned factors, below:\nSimultaneous compliance. Regulators in nine states said that  systems that have to simultaneously comply with multiple drinking  water regulations can lead to noncompliance with the LCR and  regulators in three of the nine states explained that this is because  changes to water treatment to address one problem can create  additional problems. For example, regulators in five states said that  systems that have to comply with a rule aimed at reducing drinking  water exposure to disinfection byproducts may require a reduction in  the pH level of their water, and this, in turn, may affect the  effectiveness of their control corrosion treatment. Much like other  factors, this causes samples results to exceed the federal action level  which subjects the water system to additional rule requirements.\nLead and Copper Rule. Regulators in seven states said that aspects  of the LCR may influence noncompliance. Regulators in two of the  seven states said that the LCR does not require states to routinely  approve material surveys or for systems to update these surveys  periodically, which can prevent water systems from knowing if they  are collecting samples from high-risk sites. In addition, regulators in  four states said that the LCR allows too much time for systems to  complete requirements, such as the installation of corrosion control  treatment and the issuance of public education notices to consumers.  For example, a regulator in one state provided an example of a  system that started the process of installing corrosion control.  However, the system stopped the treatment installment because, as  allowed by the LCR, the system sampled the water again and did not  exceed the action level. Regulators in three of the states also said that  the LCR does not allow state regulators to invalidate samples that  they know were taken using poor practices at the sample site.,\nEPA guidance. Regulators in seven states said that EPA\u2019s guidance  may contribute to noncompliance, and according to regulators in four  states, this is because the guidance may not be clear which may  cause states and water systems to incorrectly implement the LCR. For  example, regulators in three states said that EPA guidance on sample  procedures and public education was confusing for states and water  systems because it is not clear about the timeframes that systems  should adhere to when repeating the collection of water samples or  providing public education to ensure that they conduct these actions  properly and in accordance with the LCR.\nRegulators also identified several additional factors that could lead to  noncompliance or to 90th percentile sample results over the action level  and thus additional requirements for water systems to implement, which  could increase the chances of a violation. For example, regulators  mentioned that the ownership of a water system could be a factor and  provided the example of privately-owned, small water systems with less  knowledgeable or available operators. Regulators also said that the age  of the water can interfere with corrosion control and that some systems  buying treated water are not doing any treatment themselves. Finally,  regulators in two states said that water systems that are geographically  isolated may not be able to access alternative water sources if their  existing source water is corrosive or to attract operators with the skills to  implement the LCR.\n\n\tRegulators in 12 States Identified Operator Engagement, State Assistance and Local Support as Factors Helping Water Systems Comply with the LCR\n\nRegulators in 12 states specifically identified factors that they thought  helped water systems comply with the LCR (see table 14). Regulators in  7 states said that assistance from the states helps water systems comply  with the LCR by providing systems with information about the  requirements of the rule, training or technical assistance including using  state rural water associations. Regulators in 4 different states said that  the engagement of the water system with the state regulatory office\u2014for  example, through training\u2014places the system in a better position to  implement the LCR because they are gaining an understanding of the  requirements. Further, regulators in 1 state said that support from state  and local decision makers provides water system managers with the tools  they need to implement the rule appropriately.\n\nAppendix IV: Content Analysis of the Transcripts of Discussion Groups on Factors That May Contribute to Noncompliance with the Lead and Copper Rule\n\nWe conducted eight discussion groups with drinking water regulators  representing 41 states and 1 territory to develop an understanding of the  potential factors that may influence noncompliance with the Lead and  Copper Rule (LCR). These were hour-long discussions conducted over  the telephone. We held these discussion groups in September and  October 2016. From two to eight states participated in each discussion  group and each state had a primary designated spokesperson. For more  information about our overall methodology, see appendix I.\n\n\tDiscussion Groups\n\nIn each discussion group, the moderator asked two questions. First, the  moderator asked participants to list one or two factors that most influence  a water system\u2019s ability to comply with the LCR. Each state provided a list  of factors. After all of the states responded, the moderator noted the  factors provided by the group participants and asked for consensus on  the list of factors reported. Second, the moderator asked participants to  elaborate on how the factors reported could influence compliance. When  necessary, the moderator asked probing questions to further clarify  participants\u2019 comments. Two or three analysts transcribed each session  and combined and reconciled notes to develop transcripts for each of the  discussion groups.\n\n\tIdentifying and Defining Factors\n\nUsing the factors that participants mentioned in each discussion group,  we compiled an initial aggregate list of factors. We reviewed the initial list  to determine if certain factors were closely related and could be  combined. To check for completeness, we reviewed the transcripts and  noted factors that participants repeatedly mentioned throughout the  discussion groups but that were missing from the current list, and we  added them to the list. This allowed us to delete some factors and  incorporate them into other factors under which we determined they could  reasonably fit. For example, we determined that \u201cwater chemistry\u201d and  \u201cwater corrosivity\u201d were too closely related to be separate factors, so we  combined them. Our goal was to develop a list of complete, distinct and  mutually exclusive factors based on the information that participants  shared in the discussion groups.\nWe took additional steps to ensure that we identified significant factors by  conducting a word frequency count in all of the discussion group  transcripts using a content analysis software package. We grouped  similar words\uf8e7for example, \u201csystem,\u201d \u201csystems and systems\u2019\u201d\uf8e7 so that  they were counted together. We determined that the top 11 words  identified by the frequency count\u2014which were mentioned 100 times or  more\u2014represented factors that we already had in our list. We also  determined that the top 50 words identified by the frequency count \u2014 which were mentioned 32 times or more\u2014represented factors that were  already on our list.\nTo have a clear and consistent understanding of each factor for  classification purposes, we defined each factor using information from the  LCR, other federal regulations, Environmental Protection Agency  guidance to states and water systems, and published GAO reports. Using  the factors and their definitions, we developed a guide to use in the  classification process.\nTo identify broad themes when classifying comments in the transcripts,  we developed groups under which the factors could reasonably fit. We  took steps to make every group distinct and mutually exclusive and to  ensure that every factor fell into its associated category. For example, we  determined the factors \u201csystem size,\u201d \u201csystem type,\u201d and \u201cfinancial  capacity of system,\u201d could naturally be grouped under \u201cwater system  characteristics\u201d. Over the course of several meetings, four analysts  reviewed and finalized the factors and their associated groups. We  agreed on a final list of 29 factors, which included issues like \u201csystem  size,\u201d \u201ccorrosion control,\u201d and \u201cwater source.\u201d The 29 factors were placed  under seven groups, including \u201cwater system characteristics,\u201d \u201cwater  system operations,\u201d and \u201ccharacteristics of water.\u201d For a detailed  discussion of these factors, see appendix III.\n\n\tAnalysis\n\nTo analyze the content of the discussion groups, using a content analysis  software package, two analysts independently classified each comment in  the transcripts into the factors we defined, and one analyst analyzed the  classification to identify the factors that were most frequently reported.  During the classification process, the analysts classified each participant\u2019s  individual statements in the transcripts separately. For the purposes of  analysis, we defined an individual comment to be a statement made by a  single individual. Across the eight discussion groups, there were a total of  225 such comments. Some comments were brief and covered a single  issue while others were extensive and covered multiple issues. The  analysts applied multiple classifications if statements covered a range of  factors. For example, a statement made by a specific drinking water  regulator could have been classified as relating to the source of the water  and the size of the system. The analysts only coded statements made in  response to the moderators\u2019 questions. The analysts did not code  statements that did not discuss factors or directly answer the moderators\u2019  questions. After independently coding the transcripts, we used software to  run an intercoder reliability report. The two analysts met on three  occasions to compare and discuss the coding results. In instances where  the analysts applied different codes to the same statement, they  discussed their reasoning and reached agreement on which codes were  the most appropriate. Each analyst then updated the database to reflect  the agreements reached.\nWe also used software to identify the factors most frequently reported by  the participants. We determined these by identifying the number of states  that reported each factor (regardless of how many times a factor was  mentioned) because this approach presented the number of states that  agreed on the validity of each factor as contributing to noncompliance. To  do this, we used software to cross-tabulate the factors that were classified  with the states that participated in the discussion groups. During the  classification process, we classified each participant\u2019s statements as (1)  the state the participant represented and (2) the factors that the statement  covered. For example, an individual statement could have been classified  as \u201cTexas\u201d and \u201cwater source.\u201d Thus, for each factor, the cross tabulation  showed which states made statements that were classified into that  factor. We also ran a cross tabulation of the seven broad groups (under  which the factors were grouped) and the states that reported each group.  We identified the factors that were most frequently reported by focusing  on those that were reported by at least 30 percent of the states, and  reported this information in the report.\n\nAppendix V: Statistical Analysis to Identify Water Systems with a Higher Likelihood for LCR Violations\n\nTo identify any factors that may contribute to noncompliance with the  Lead and Copper Rule (LCR), we conducted discussion groups with a  nonprobability sample of state drinking water regulators representing 41  states and 1 territory. We conducted a literature review of 31 academic  studies about the detection of lead in drinking water and violations of  drinking water regulations to corroborate our findings from the discussion  groups. Our discussion groups with state regulators and review of  academic studies suggested that certain factors could indicate whether  water systems are at a higher likelihood for violating the LCR. To  determine whether data on these factors could be used to predict LCR  violations, we developed a series of statistical models, specifically  multivariate logistic regression models. To conduct our analysis, we used  the available data from the Environmental Protection Agency\u2019s (EPA)  Safe Drinking Water Information System (SDWIS\/Fed) database for  community water systems and non-transient non-community water  systems active as of December 31, 2016, in 2 states, Ohio and Texas.  We selected these states because recent EPA file reviews did not find  significant discrepancies in the LCR violations data reported to  SDWIS\/Fed. In both states, we found that water systems with some  factors were significantly more likely to violate the LCR than systems  without those factors. Furthermore, we found that our models, which were  based on data for 2013 and 2014, could predict systems with a higher  likelihood of a violation in 2015 and 2016 significantly better than chance.  Our analysis is limited because it is based on 2 states and thus, not  generalizable to other states. It is also based on a subset of the relevant  factors that might predict LCR violations and therefore is illustrative of the  potential for statistical models to predict violations rather than the  definitive model of violations.\n\n\tAnalytical Approach\n\nIn a review of previous GAO reports and peer-reviewed literature, we  found that statistical models have been used to predict the risk of a  violation for regulated entities. For example, in October 2016, we reported  on the potential for statistical models to identify motor carriers that posed  a high risk of a highway crash. In addition, several peer-reviewed studies  have developed statistical models to predict the likelihood of drinking  water systems violating Safe Drinking Water Act requirements. Based on  this prior research, we considered predictive modeling as a potential  approach to identify drinking water systems with a higher likelihood of  violating the LCR. The specific steps we took to conduct this analysis are  described below.\n\n\tAvailable Data\n\nTo conduct our analysis, we used the available data on community water  systems and non-transient non-community water systems active in  SDWIS\/Fed as of December 31, 2016. We analyzed data for drinking  water systems that serve more than 25 people, which is EPA\u2019s size  threshold for a public drinking water system. EPA\u2019s SDWIS\/Fed database  contains descriptive data on water systems (e.g., size, location, and water  source), drinking water sample results, violations, and enforcement  actions, as required by the LCR. Generally, states with primary  enforcement responsibility initiate enforcement actions against water  systems that do not comply with the LCR and other drinking water  regulations. The LCR requires states to submit certain data to EPA\u2019s  SDWIS\/Fed database on a quarterly basis.\n\n\tSelected Factors\n\nIn our discussion groups with state regulators and review of academic  studies and peer-reviewed literature, we identified 29 factors that may  influence a drinking water system\u2019s noncompliance with the LCR (see  apps. I and III). We examined the SDWIS\/Fed database to identify data  elements that might represent these factors. Of the factors that were  consistent with findings reported in the literature we reviewed and  reported by state regulators in discussion groups, we selected four that  were available in SDWIS\/Fed to conduct a statistical analysis:  the population served by (or size of) the drinking water system, whether the drinking water system was publicly or privately owned, whether the drinking water system used groundwater or surface water  as a source, and whether the drinking water system was classified as a community  water system or a non-transient non-community water system.\nIn addition, EPA\u2019s current approach for targeting oversight of the LCR is  to identify water systems with sample results that exceed the lead action  level. Therefore, we also included the factor of whether the system had  sample results exceeding the lead action level.\n\n\tData Reliability\n\nWe conducted steps to assess the reliability, completeness, and accuracy  of the LCR compliance data in SDWIS\/Fed for the purpose of conducting  this analysis. We determined that data in SDWIS\/Fed were not sufficiently  reliable to conduct a nationwide statistical model of LCR violations. We  could not verify that the limitations in the completeness of the data  identified in our June 2011 report had been sufficiently addressed  nationwide. Thus, we could not be assured that the LCR violations data  submitted to SDWIS\/Fed were sufficiently complete, accurate, or  comparable across the states. Instead, we used the data in SDWIS\/Fed  to conduct an illustrative analysis for two states\uf8e7Ohio and Texas. We  selected these states because EPA\u2019s recent reviews of the completeness  and accuracy of LCR data reported by these states did not find significant  discrepancies in LCR violations data. We examined EPA\u2019s reviews and  either obtained written responses to questions or interviewed EPA and  state officials to determine that these two states had sufficiently reliable  data for this purpose. EPA\u2019s reviews were not based on statistically  representative samples of drinking water systems in these states.  Therefore, we cannot conclude definitively that the agency has addressed  problems with the completeness and accuracy of violations data.  However, we found that these states had sufficiently reliable data for the  purpose of testing the feasibility of statistical modeling to predict drinking  water systems with a higher likelihood of violating the LCR.\n\n\tBivariate Analysis\n\nBefore developing the logistic regression model, we analyzed whether or  not each water system in the two states violated the LCR from January 1,  2013, to December 31, 2014, with respect to each of the four selected  factors. We conducted this analysis with cross tabulations and graphical  analysis. In cross tabulations, each of the factors we examined was  significantly associated with LCR violations, although the nature of these  relationships varied between the states. In general, in both states,  privately owned systems were more likely to violate the LCR than  publically-owned systems, community water systems were less likely to  violate the LCR than non-community non-transient water systems; and  systems that had sample results exceeding the lead action level were  more likely to violate the LCR than those that had not. In Ohio, water  systems that used groundwater were more likely to violate the LCR than  surface water systems, whereas, in Texas, water systems that used  purchased groundwater were less likely to violate the LCR.\nIn graphical analysis, we found that the likelihood of a violation was  related to the size of the population served by the water system. For  example, in Ohio, grouped data plots displayed a negative, linear  relationship between the likelihood of a violation and the number of  people served by a system. In Texas, these plots displayed a negative,  linear relationship for systems serving 3,300 people or fewer and a  positive linear relationship for systems serving larger populations. The  threshold of 3,300 people is the threshold that the LCR uses to  distinguish small systems.\nThe results of these cross tabulations were illustrative of factors  influencing violations, but they provided only a partial assessment of the  relationship between LCR violations and the factors. This is because the  cross tabulations compared LCR violations with each factor individually  without accounting for the influence of the other factors. For example, we  found in our analysis that while systems that had exceeded the lead  action level were more likely to have a violation than systems that had not  exceeded this level, such systems are also more likely to serve smaller  populations. Because these factors are related, bivariate cross  tabulations cannot distinguish between their respective influences on the  likelihood that a system violated the LCR. To account for multiple factors  simultaneously, we developed logistic regression models.\n\n\tLogistic Regression Models\n\nWe developed a series of logistic regression models for each state to  determine whether factors collectively could identify the likelihood that a  water system would violate the LCR. A logistic regression model is an  equation, which is developed through statistical procedures, that  estimates the individual association of each factor with the likelihood of a  violation, while simultaneously accounting for the association between  each of the other factors and the likelihood of a violation. It provides a  basis for combining multiple variables to predict outcomes and is more  inclusive than the bi-variate analysis described in the previous section. ) for groups of systems ranked by the size of  the population served. whether the drinking water system was classified as a community  water system or a non-transient non-community water system.\nWe also included whether the system had a sample result exceeding the  lead action level during the monitoring period from January 1, 2012, to  December 31, 2014. We specified different logistic regression models for  each state because of differences in the distributions of the data between  the states. For example, in Ohio, nearly all non-transient, non-community  water systems used ground water as their primary source water, which  made it difficult to disentangle the unique effects of community water  systems from those of ground water systems. Therefore, we collapsed  non-community water systems using groundwater and non-community  water systems not using ground water into a single group for analysis. In  Texas, the relationship between the likelihood of a violation and size of  the population served shifted as the number of people served by a  system reached 3,300. Therefore, we added a term to our logistic  regression equation for Texas that allowed us to account for the  difference in the relationship between size and the likelihood of a violation  or systems below the 3,300 threshold and systems above that threshold.\nTo test the adequacy of these models, we verified that our data contained  a sufficient number of systems with each combination of characteristics,  that it adequately fit the data based on the chi-squared goodness-of-fit  tests, and that estimated effects were generally stable across multiple  model specifications. We tested for nonlinear relationships between the  likelihood of a violation and the size of the population served by a system  and we transformed the variable accordingly. We also tested for  interaction effects between the categorical system characteristics and the  size of the population served by the system. In each state, we tested  several model specifications to identify the combinations and  transformations of variables that best met these conditions.\nAmong the models we tested, the best-fitting model for Ohio included  explanatory variables for whether the system had a sample result  exceeding the lead action level, whether the system was privately owned,  the size of the population served by the system, whether the system was  a non-community water system using groundwater, and whether the  system was a non-community water system not using ground water. This  model also included an interaction term between community water  systems using groundwater and the size of the population served by the  system. The data for this model included 1,849 systems, of which 137  violated the LCR in the compliance periods that began in 2013 and 2014  and 1,712 of which did not. The model had an adequate fit to the data  based on chi-squared and Hosmer-Lemeshow goodness-of-fit tests, and  it had a good accuracy in predicting LCR violations in 2013 or 2014 based  on the area under the Receiver Operator Characteristic (ROC) curve.\nThe best-fitting model for Texas included explanatory variables for  whether the system had a sample result exceeding the lead action level;  whether the system was privately owned; whether the system was a  community water system; whether the system used groundwater as a  source of water; the size of the population served by the system; and a  linear spline term, which accounted for a different relationship between  system size and the likelihood of a violation for systems served more than  3,300 people. Data for this model included 5,395 systems, of which 2,321  violated the LCR in the compliance periods that began in 2013 and 2014  and 3,074 of which did not. The model had an adequate fit to the data  based on the chi-squared and Hosmer-Lemeshow goodness\u2013of-fit tests,  and a moderate accuracy in predicting violations in 2013-14 based on the  area under the ROC curve.\nIn each model, we found that certain factors were consistently associated  with violations. For example, in both states, water systems that had  reported a previous sample result exceeding the lead action level were  significantly more likely to violate the LCR. The size of the population  served was a statistically significant predictor of a violation in both states  but in different ways. In Ohio, water systems were less likely to violate the  LCR as their size increased. In Texas, water systems were less likely to  violate the LCR as the size of their population increased to 3,300 but  were more likely to violate the LCR as the size of the population over  3,300 increased. These patterns persisted in our models even after  accounting for whether the system was privately owned, whether the  system was a community water system and whether the system used  groundwater as a source of water. These three other factors were also  associated with the likelihood of a violation in some of our models, but the  direction, magnitude and the significance of these associations were not  consistent This could be the result of strong associations among the  factors, which would make it difficult for the models to precisely estimate  their association with violations. Because this imprecision, we do not  report the associations between these three factors and the likelihood of a  violation. Since the purpose of these models was to identify drinking  water systems with a higher likelihood of a violation, rather than to  estimate the influence of specific factors on the likelihood of a violation,  we focus on the predictive accuracy of these models as described in the  next section.\n\n\tPredictive Accuracy\n\nTo test whether our models could be used to predict water systems with a  higher likelihood of a future violation, we compared the predicted violation  results from our models to actual violations that were reported in  SDWIS\/Fed for 2015 and 2016. Our models, which were based on data  from 2013 and 2014, predicted subsequent violations in 2015 and 2016  significantly better than chance. Systems with higher average predicted  probabilities of violations had higher observed rates of violations in the  subsequent year than systems with lower predicted probabilities, and this  difference was statistically significant. To make this determination, we  took three steps. First, we used our models to estimate the likelihood that  each system violated the LCR in 2013 or 2014 based on the factors  identified in the logistic regression models. Second, we divided the water  systems into five equally sized groups, referred to as quintiles, based on  their estimated likelihood of a violation. Third, we compared the  percentage of systems that violated the LCR in 2015 or 2016 across each  of these five groups.\nWe found that systems in the highest likelihood group, based on our  models of 2013 to 2014 data, had significantly higher violation rates in  2015 and 2016 as compared to systems in the lowest likelihood group.  This result was true for each of the two states and for each of the models  that we tested in those states. The tests of predictive accuracy in 2015  and 2016 for the best-fitting models in each state are shown in table 15.  For example, in Ohio, 7.9 percent of systems in the fifth quintile\uf8e7the  group with the highest violation likelihood scores\uf8e7violated the LCR in  2015 or 2016 as compared to 2.4 percent of those in the first quintile, the  group with the lowest likelihood scores. Similarly in Texas, 43.1 percent of  systems with the highest likelihood scores violated the LCR in 2015 or  2016 as compared to 21.4 percent of those in the lowest likelihood group.\n\n\tDiscussion\n\nBased on our illustrative analysis, we found that statistical models could  be used to predict water systems with a higher likelihood of violating the  LCR. However, our analysis was subject to certain limitations. First, our  models used only data for factors available in SDWIS\/Fed. They did not  include other factors that might be important to predicting violations, such  as the treatment technique used by a drinking water system; the  presence of lead pipes in a community; or the technical, financial, and  managerial capacity of a drinking water system. Second, our models were  limited to the two states for which we could obtain reasonable assurances  of data reliability, and therefore, the results are not generalizable to other  states. While we found some commonalities in the factors that may  contribute to violations between the states, we also found several  differences between them, suggesting that specific factors may influence  violations differently in different states. Finally, while we took several  steps to confirm that the data for these states were sufficiently reliable for  the purpose of developing illustrative regression models to predict  violations, we cannot be confident that the inaccuracies and  incompleteness that we and EPA identified in June 2011 have been  addressed nationwide. Reliable and sufficient data for additional states  would increase the external validity of future analysis. Additionally, data  for additional explanatory variables mentioned in the literature and by  state regulators\uf8e7such as the presence of lead service lines and the  technical, financial, and managerial capacity of a system\uf8e7would allow for  a more fully specified model with the potential to increase the explanatory  power of those models. Taken together, reliable data for a broader  sample and a fuller range of explanatory variables could potentially  improve the usefulness of models predicting LCR violations.\n\nAppendix VI: EPA Guidance to the Public on Addressing Lead in Drinking Water\n\nThe Environmental Protection Agency (EPA) provides information on its  website for the public on lead hazards in drinking water. EPA\u2019s website  includes, among other documents, a February 2005 fact sheet for the  public entitled Is There Lead in My Drinking Water? (see fig. 5).\n\nAppendix VII: Comments from the Environmental Protection Agency\n\nAppendix VIII: GAO Contact and Staff Acknowledgments\n\n\tGAO Contact\n\n\tStaff Acknowledgments\n\nIn addition to the individual named above, Diane Raynes (Assistant  Director); Jennifer Beddor; David Blanding, Jr.; Mark Braza; Richard P.  Johnson; Tahra Nichols; Jerry Sandau, and Karen Villafana made key  contributions to this report. In addition, Sarah Gilliland, Lindsay Juarez,  Maureen Lackner, Dan Royer, and Kiki Theodoropoulos made important  contributions to this report.\n\nRelated GAO Products\n\nWater Infrastructure: Information on Selected Midsize and Large Cities  with Declining Populations. GAO-16-785. Washington, D.C.: September  15, 2016.\nWater Infrastructure: EPA and USDA Are Helping Small Water Utilities  with Asset Management; Opportunities Exist to Better Track Results.  GAO-16-237. Washington, D.C.: January, 27, 2016.\nEnvironmental Health: EPA Has Made Substantial Progress but Could  Improve Processes for Considering Children\u2019s Health. GAO-13-254.  Washington, D.C.: August 12, 2013.\nDrinking Water: Unreliable State Data Limit EPA\u2019s Ability to Target  Enforcement Priorities and Communicate Water Systems\u2019 Performance.  GAO-11-381. Washington, D.C.: June 17, 2011.\nEnvironmental Health: High-level Strategy and Leadership Needed to  Continue Progress toward Protecting Children from Environmental  Threats. GAO-10-205. Washington, D.C.: January 28, 2010.\nDrinking Water: The District of Columbia and Communities Nationwide  Face Serious Challenges in Their Efforts to Safeguard Water Supplies.  GAO-08-687T. Washington, D.C.: April 15, 2008.\nDrinking Water: EPA Should Strengthen Ongoing Efforts to Ensure That  Consumers Are Protected from Lead Contamination. GAO-06-148.  Washington, D.C.: January 4, 2006.\nDistrict of Columbia\u2019s Drinking Water: Agencies Have Improved  Coordination, but Key Challenges Remain in Protecting the Public from  Elevated Lead Levels. GAO-05-344. Washington, D.C.: March 31, 2005.\nDrinking Water: Safeguarding the District of Columbia\u2019s Supplies and  Applying Lessons Learned to Other Systems. GAO-04-974T.  Washington, D.C.: July 22, 2004.","output":"Why GAO Did This Study\n\nDrinking water contaminated with lead in Flint, Michigan, renewed awareness of the danger lead poses to the nation's drinking water supply. Lead exposure through drinking water is caused primarily by the corrosion of plumbing materials, such as pipes, that carry water from a water system to pipes in homes. EPA set national standards to reduce lead in drinking water with the LCR, which applies to all water systems providing drinking water to most of the U.S. population, except places where people do not remain for long, such as campgrounds. States generally have primary responsibility for enforcing the LCR, and data help EPA monitor states' and systems' compliance with the LCR.\nGAO was asked to review the issue of elevated lead in drinking water. Among other objectives, this report examines (1) what available EPA data show about LCR compliance among water systems and (2) factors that may contribute to LCR noncompliance. GAO analyzed EPA data on violations and enforcement of the LCR from July 1, 2011, through December 31, 2016, interviewed EPA officials in headquarters and the 10 regional offices; conducted a statistical analysis of the likelihood of reported LCR violations; and held discussion groups with a nonprobability sample of regulators representing 41 states.\n\nWhat GAO Found\n\nAvailable Environmental Protection Agency (EPA) data, reported by states, show that of the approximately 68,000 drinking water systems subject to the Lead and Copper Rule (LCR), at least 10 percent had at least one open violation of the rule; however these and other data are not complete. When the LCR was promulgated in 1991, all water systems were required to collect information about the infrastructure delivering water to customers, including lead pipes (see figure). However, because the LCR does not require states to submit information on known lead pipes to EPA, the agency does not have national-level information about lead infrastructure. After the events in Flint, Michigan, and other cities, EPA asked states to collect information on the locations of lead pipes, and all but nine, which had such difficulties as finding historical documentation, indicated a plan or intent to fulfill the request. According to EPA guidance, knowledge of lead pipes is needed for studies of corrosion control. GAO reported in March 2013 that with limited funding for federal programs, the need to target such funds efficiently increases. By EPA requiring states to report data on lead pipes, key decision makers would have information about the nation's lead infrastructure.\nThrough discussion groups, state regulators identified 29 factors that may contribute to water systems' noncompliance with the LCR. In conducting a statistical analysis using EPA data on selected factors, such as the size of the population served and type of source water, GAO found that such factors were associated with a higher likelihood of water systems having reported violations of the LCR. EPA's current approach to oversight of the LCR targets water systems with sample results that exceed the lead action level. While this approach is reasonable because such water systems have a documented lead exposure risk, EPA officials in 3 of the 10 regional offices told GAO that it is not sustainable over time because of limited resources. Under federal standards for internal control, management should identify, analyze, and respond to risks related to achieving the defined objectives. By developing a statistical analysis that incorporates multiple factors to identify water systems that might pose a higher likelihood for having reported violations of the LCR to supplement its current approach, EPA could better target its oversight to such water systems.\n\nWhat GAO Recommends\n\nGAO is making three recommendations, including for EPA to require states to report data on lead pipes and develop a statistical analysis on the likelihood of LCR violations to supplement its current oversight. EPA agreed with GAO's recommendations."}
{"id":"gao_GAO-01-288","pid":"gao_GAO-01-288_0","input":"\tIntroduction\n\nFor several years, the Department of Defense (DOD) has expressed an  urgent need to acquire new weapon systems to replace its force that it  believes is becoming outdated and too costly to operate. DOD\u2019s annual  weapon system investment has increased from about $90 billion 3 years  ago to almost $100 billion for fiscal year 2001; over the next 5 years, DOD  plans to spend about $516 billion developing and acquiring weapon  systems. DOD would like to get the most out of this investment, and it has  set goals to develop new weapons in half the traditional time and within  budget. Historically, DOD has not received a predictable return on its  investment in major weapon systems as they have cost significantly more  and taken much longer to complete than originally estimated. When one  program runs into problems and needs more money than planned, it comes  at the expense of delaying or canceling other programs, which reduces  buying power and means less overall modernization. The ability to execute  a program more predictably within cost and schedule estimates would  lessen the need to offset cost increases by disrupting other programs. DOD  recognizes that changes are necessary to its acquisition practices to  achieve its modernization goals. Thus, it has advocated adopting the  practices of leading commercial firms.\nOur reviews over the past 20 years have likewise pointed to a need to adopt  new practices. We have seen many of the same problems recur in weapon  system programs\u2014cost increases, schedule delays, and performance  problems. On many occasions, we found that programs required more  resources\u2014time and money\u2014than were estimated for demonstrating  technologies, designing solutions, and providing more production  capabilities in order to meet customer expectations. Because customer  expectations for the system\u2019s performance were set when the decision was  made to invest in the system, adding resources became the primary option  for solving problems when they arose. Despite good intentions and some  progress, our ongoing reviews of DOD\u2019s weapon system acquisitions show  that these persistent problems remain. As a result, we undertook a body of  work that examines weapon system acquisitions issues from a different,  more cross-cutting perspective\u2014one that draws lessons learned from the  best commercial product development efforts to see if they can be applied  to DOD weapon system developments. In past years, leading commercial  firms have developed increasingly sophisticated products in significantly  less time and at lower costs.\nOur past work has shown that leading commercial firms expect their  program managers to deliver high quality products on time and within  budget. Thus, the firms have created an environment and adopted practices  that put their program managers in a good position to succeed in meeting  these expectations. Collectively, these practices comprise a development  process that is anchored in knowledge. The firms demand\u2014and receive\u2014 specific knowledge about a new product at key junctures in the process,  (see fig. 1).  cost, schedule, and There is a synergy in this process, as the attainment of each successive  knowledge point builds on the preceding one. Such a knowledge-based  process is essential to commercial firms getting better\u2014and predictable\u2014 cost, schedule, and performance outcomes. It enables decisionmakers to  be reasonably certain about critical facets of the product under  development when they need it. We have found that when DOD programs  have employed similar practices, they also experience good outcomes. This  knowledge can be broken down into three knowledge points:   when a match is made between the customer\u2019s needs and the available   when the product\u2019s design meets performance requirements, and   when the product can be produced within cost, schedule, and quality  targets.\nThe most important knowledge point occurs at launch\u2014the point at which  the product developer makes a decision to commit (or invest) the  resources necessary to develop a new product that will meet customer  needs. This knowledge point makes it easier to reach the remaining two  knowledge points at the right time. Successful programs are launched only  when a product developer is confident that it has the resources\u2014 technology, engineering, and production knowledge, along with sufficient  time, and money\u2014to develop a product the customer wants. Significant  problems have occurred during development when programs were  launched without this match.\nWe have reported on how a key resource of a developer\u2014advanced  technology\u2014can and must be readied to meet product requirements at the  time a product\u2019s development program is launched. In this report, we  address both sides of the match: how customer needs and product  developer resources can be managed so that a product developer can  predictably deliver a product the customer wants.\n\n\t\tHow Product Requirements Are Set Is Key to Program Outcomes\n\nThe decisions that are made in translating the ideas for a new product into  actual features and characteristics dictate the amount of resources\u2014 knowledge, time, money, and capacity\u2014that will be necessary to bring the  product to market. Thus, they may be the most highly leveraged of all  product development decisions. A product\u2019s requirements are based on  customers\u2019 expectations and justify the developer\u2019s investment of  resources to provide the desired capability. Requirements drive the amount  of capital, time, expertise, and technologies the developer must invest. In  the past, it has not been unusual for weapon system requirements to be set  at such a high level that the initial estimate of the resources necessary to  develop a responsive product proves insufficient, evidenced by cost growth  and schedule slippage. The case to justify the requirements is often so  stridently made that decisionmakers are in a relatively weak position to do  anything other than find more resources.\nFor commercial firms and DOD, the basic process for formulating a  product\u2019s requirements is the same. Each begins with understanding the  customers\u2019 expectations. These expectations are then translated into  product requirements that include the job the product is to perform, the  functions or characteristics it is to possess, the practicality it must have,  and its reliability. Typically, the first understanding of customer  expectations exceeds what the developer can do within available  resources, because the developer has a limited amount of resources at its  disposal for product development. On one hand is knowledge\u2014the  technology and capabilities the developer has to engineer and manufacture  the product. On the other hand is the time and money the developer has to  develop additional knowledge, if need be, and to design, build, test, and  deliver the product. It is not unusual for a customer to want a  high-performing product that does not cost much or take too long to  develop. Such an expectation may exceed the developer\u2019s technology or  engineering expertise or may be more costly and time-consuming to create  than the customer is willing to accept. The developer must stay within its  means if the venture is to remain mutually beneficial. Table 1 characterizes  the divergent interests of the customer and the product developer.\nGiven these different interests, a customer\u2019s wants and a product  developer\u2019s available resources must be matched to form an achievable set  of product requirements. On one hand, the product developer must develop  and produce the product within the time frames the customer needs or the  customer may find an alternative product or source. On the other hand, the  customer must not demand a product that requires so much money or time  to develop that it cannot be afforded or delivered when needed. There is a  delicate balance that must be achieved between these two divergent  interests before a product can be successfully developed and produced.\nOn all product developments, there is an attempt to match expectations  with available resources to define the new product. A customer\u2019s  expectations and a product developer\u2019s resources are more closely  scrutinized during the matching process that attempts to bring the two  together. The outcome is a set of product requirements that represent an agreement that the product will meet the customer\u2019s wants and that the  developer can deliver the product within acceptable cost and schedule  estimates. The requirements then guide the development program. This  basic requirements setting process is illustrated in figure 2.\nThe process of translating general customer expectations into a specific set  of product requirements involves information gathering, analysis,  negotiation, and agreement. In the commercial process, the customer and  the product developer negotiate requirements, matching expectations and  available resources into a documented set of product requirements prior to  committing resources to product development. During this negotiation, the  customer\u2019s relatively unconstrained wants are often reduced to a set of  performance characteristics that are achievable with available resources,  yet still meet the customer\u2019s needs. The commercial process is a two-way  communication between the customer and the product developer. For  example, an airline company may want a certain speed to maximize  revenue per passenger mile from a new aircraft. However, the product  developer may determine that the resources to develop an aircraft with that  speed are not available or must be increased dramatically. Both parties  then work through an iterative process of trades and negotiation to settle  on an aircraft with mutually acceptable performance and resource  requirements.\nThe DOD process is somewhat more complex and involves  communications among at least four major players. On one end is the  customer, which is normally a military organization that belongs to a major  fighting force. On the other end is the product developer, usually a defense  firm that serves as the prime contractor for developing and producing the  weapon system. In between are two other players that actually negotiate  needs and resources to arrive at product requirements. One is referred to  as the user representative, which is an organization separate from the  customer but represents the customer and negotiates on its behalf. The  other player is the DOD program manager, a separate organization that, in  essence, represents the product developer. Figure 3 illustrates how these  different players interact in commercial and DOD requirement-setting  processes.\nBoth commercial and defense organizations are concerned about how  much a product or weapon system is going to cost, how long it is going to  take to build, what resources will be needed to build and maintain it, and  whether it works properly. All of these concerns are translated into the  product\u2019s requirements. Unlike the commercial process, the DOD product  developer does not directly influence the product requirement prior to  launching product development. Once requirements are formalized in what  DOD refers to as the Operational Requirements Document, they are turned  over to the prime contractor, who actually begins product development.\n\n\t\tObjectives, Scope, and Methodology\n\nThe Chairman and the Ranking Member, Subcommittee on Readiness and  Management Support, Senate Committee on Armed Services, requested  that we examine various aspects of the acquisition process to determine  whether the application of best practices can improve program outcomes.  To date, we have issued reports on advanced quality concepts, earned value  management, management of a product from development to production,  management of key suppliers, management of technology insertion,  training, and management of test and evaluation (see related GAO  products).\nThis report covers the beginning of the acquisition process: the  management of product requirements. Our overall objective was to  determine whether best practices offer methods to improve the way DOD  sets product requirements within the framework of a knowledge-based  product development process. Specifically, we assessed (1) the effect of  the timing of the match between the customer\u2019s needs and the developer\u2019s  resources on a product\u2019s cost and schedule; (2) the best practices for  obtaining this match during the requirements setting process, compared  with more traditional DOD practices; and (3) the progress made and  challenges DOD faces in adopting best practices for setting requirements  on individual weapon systems.\nWe follow a similar overall methodology for conducting best practices  reviews in the area of weapon system development. We start by identifying  individual aspects of weapon system development\u2014in this report, the  setting of requirements\u2014that have been shown to be a significant and  recurrent cause of problems. Our sources for such information include our  many reviews of individual weapon systems; studies from other sources,  such as the Defense Science Board; and discussions with defense experts,  including past and current DOD officials, defense industry representatives,  and analysts from private organizations that study defense issues. Before  beginning a review of a particular topic, we confirm with DOD officials that  the topic is one in which the potential for improvement is significant. Once  we have identified the topic, we use a case study approach because case  studies provide the in-depth knowledge needed to understand individual  practices, how they affect program outcomes, and why they are adopted. In  selecting case studies, we look for examples of excellent practices from  leading commercial firms, examples of typical or traditional practices from  DOD, and where possible, DOD examples that exhibit excellent practices.  In making our selections, we are careful to make sure that there is a link  between the practices themselves and the outcomes of the programs.\nTo identify best practices for setting requirements on commercial products,  we reviewed literature and spoke with industry and academic experts to  find companies recognized for managing requirements to help deliver new  products that were both quicker to market and more advanced than their  predecessors. We identified three companies   Caterpillar Construction and Mining Division, Decatur, Illinois;  Bombardier Aerospace, Toronto, Canada; and  Bethlehem Steel, Bethlehem, Pennsylvania We visited each company, discussed the process used for setting  requirements, and obtained an understanding of the overall process used  with emphasis on those practices each felt were critical for success. We  also met with individual program managers and discussed specific product  development examples that further illustrated the process. During our  discussions with the firms, we compared and contrasted the best practices  with DOD\u2019s practices.\nWe developed nine case studies in total. These included two commercial  case studies, one National Aeronautics and Space Administration (NASA)  program that had received excellent results by disciplining its  requirements-setting process, and six DOD weapon system programs that  represented a mixture of traditional and best practices. We reviewed the  requirements-setting process for all nine programs. For each program, we  interviewed key managers and obtained documentation to determine  (1) the process that was used to achieve the match between customer  wants and resources to form the product\u2019s requirements, (2) the timing of  this match and the tools used to achieve it, and (3) the extent to which the  requirements setting process affected the program\u2019s product development  outcome. Descriptions of the nine programs we reviewed follow.\nBombardier\u2019s BRJ-X, a commercial jet in development, designed to carry  between 88 to 110 passengers. It bridges the gap between the current  fleet of regional jets, 20 to 70 passenger capacity and the larger 111 to  170 passenger commercial airlines. The BRJ-X program was launched in  the second quarter of 2000. The first aircraft is scheduled to be delivered  to airlines in late 2003. Bombardier estimates customers for 2,500  aircraft over the next 20 years.\nThe Caterpillar 797 mining truck, the largest mining truck ever built. It  can carry over 360 tons of ore, and features many patented innovations.  Developed in response to mining companies\u2019 desire to reduce cost per  ton of hauling ore in large-scale mining operations, Caterpillar launched  the 797 program in 1997.\nThe Air Force\u2019s Global Hawk, an unmanned aircraft that is intended to  fly at altitudes as high as 65,000 feet and for as long as 40 hours to  provide the Air Force with an intelligence, reconnaissance, and  surveillance capability. The Air Force built five prototype technology  demonstrators that were used to demonstrate the aircraft, and it plans  to launch the product development program in 2001.\nThe Army\u2019s Crusader artillery vehicle program, a self-propelled 155-millimeter howitzer and resupply vehicle. It is expected to be the  first fully automated, computerized, and tracked artillery system. The  Crusader development program began in 1994, and the howitzer is  expected to start production in 2008. The development program is  estimated to cost $4.3 billion.\nThe Army\u2019s Tactical Unmanned Aerial Vehicle, a short-range unmanned  aircraft that is expected to provide the Army with day or night  reconnaissance, surveillance, and target acquisition capability. The  Army began development in March 1999. It plans to buy 44 systems  starting in 2001. Each system includes three unmanned aircraft; a  vehicle to carry the aircraft; two ground control stations mounted on  vehicles; and launch, recovery, and support equipment pulled on trailers  behind the vehicles. The cost to buy the 44 systems is estimated at  $430 million through 2004.\nThe Navy\u2019s Radio Frequency Countermeasures system, an electronics  warfare system that uses a jamming device called a techniques  generator. It is carried onboard an aircraft to produce jamming signals  that are transmitted by fiber optic cable to a towed device that acts as a  decoy for the aircraft. The system is used to protect the aircraft from  radar-controlled weapons like missiles and antiaircraft artillery. It is a  critical component of the Integrated Defensive Electronics  Countermeasure System being developed for some Navy and Air Force  aircraft. System development began in 1995 and is expected to cost over  $200 million. It is expected to enter production in 2002.\nThe Army\u2019s Brilliant Anti-Armor Submunition program, referred to as  BAT, an acoustic and infrared terminally guided submunition that  searches for, detects, tracks and engages moving tanks and armored  combat vehicles. Its mission is to provide deep attack against motorized  rifle and tank divisions. The carrier for the submunition is the Army  Tactical Missile System that is launched from the Multiple Launch  Rocket System. The Army plans to buy 15,707 submunitions at a cost of  $2.5 billion.\nThe Army\u2019s Comanche helicopter, a lightweight, twin engine, stealthy  helicopter that is intended to replace the Army\u2019s OH-58 and AH-1  helicopters. The primary mission of the aircraft will be armed  reconnaissance and attack. It is the Army\u2019s largest aviation acquisition  program, with a projected total development and production cost of $48 billion for 1,213 helicopters. The development program was  launched in 1988, and production is expected to start in 2006.\nThe Far Ultraviolet Spectroscopic Explorer (FUSE), a scientific  telescope that is used for studying the origin and evolution of stars,  galaxies, and planetary systems. The telescope is 18 feet tall and weighs  3,000 pounds. It was developed for NASA by the John Hopkins  University. The FUSE program began in June 1996 and was completed in  June 1999 at a cost of $120 million.\nWe used information from our prior best practices work, including most of  the information on the BAT and Comanche programs. Similarly, we  gathered knowledge about many aspects of the product development  processes, including the setting of requirements, from leading commercial  firms in addition to the firms included in this report. During the past 4 years, we have gathered information on product development practices  from 3M, Boeing Airplane Company, Chrysler Corporation, Ford Motor  Company, Hughes Space and Communications, and Motorola. This  information enabled us to develop an overall model to describe the general  approach leading commercial firms take to developing new products.\nWe also met with experts in the area of setting product requirements from  academia and participated in conferences and workshops with recognized  leaders in the acquisition field to obtain information on how organizations  were improving their acquisition processes. To obtain a general  understanding of DOD\u2019s requirements setting process and improvement  initiatives, we met with officials from the Office of the Secretary of  Defense; Army, Navy, and Air Force Headquarters; and the Joint Staff for  the Joint Chiefs of Staff. We also had discussions with former DOD officials  and industry experts about DOD acquisition policies and practices. With  these officials we discussed the current process, initiatives and the  applicability of best practices to DOD operations. In addition, we visited  NASA to obtain information on their processes and practices for setting  requirements for new product development programs.\nWe conducted our review from November 1999 through December 2000 in  accordance with generally accepted government auditing standards.\n\n\tTimely Matching of Requirements and Resources Is Critical to Product Development Outcomes\n\nThe point in time that a developer for a new product becomes justifiably  confident that it has the resources\u2014knowledge, capacity, time, and  money\u2014to develop a product that a customer wants is critical to the  success of the development effort. Barring program cancellation, the match  between resources and wants is eventually met on just about every product  or weapon system development. A key distinction between successful  products\u2014those that perform as expected and are developed within  estimated resources\u2014and problematic products is when this match is  achieved. Simply put, we found that when wants and resources were  matched before a product development was started, the more likely the  development was able to meet performance, cost, and schedule objectives.  When this match took place later, programs encountered problems such as  increased costs, schedule delays, and performance shortfalls.\nFor successful product or weapon system development program cases,  trade-offs were made either in the design of the product or in the  customer\u2019s expectations to avoid immature technologies or exotic  components that threatened to outstrip the developer\u2019s resources. In the  less successful cases, the opportunity to make such trade-offs before  starting product development was missed either because gaps between  expectations and resources were not identified or because customers were  unwilling to reduce their expectations. When the divergence between  customer expectations\u2014which by then had become firm product  requirements\u2014and developer resources was recognized and confronted,  decisionmakers were reluctant to materially change the requirements.  Consequently, the developer had to invest more resources than originally  planned to meet the requirements.\n\n\t\tEarly Matching of Customer Expectations and Developer\u2019s Resources Is Critical to Program Success\n\nWe found that the timing of the matching process\u2014when the customer\u2019s  expectations were successfully matched with the product developer\u2019s  resources\u2014significantly influenced the likely success of a product\u2019s  development. After reviewing the process for defining product  requirements for nine development programs, we found a relationship  between when expectations were matched with available resources and  when the cost and schedule predictions for the programs were achieved.  This relationship is shown in table 2.\nThe more successful programs had matches before the commitment to  launch the programs was made. In each case, the product developer had  done the initial design of the product and ensured that only proven  technologies, design features, and production processes would be used.  This was accomplished by either making additional investments to  demonstrate uncertainties such as new technology or by reducing the  product\u2019s initial performance requirements. These steps maximized the  knowledge content of the product and enabled the program manager to set  cost and schedule estimates it could reasonably expect to meet. In  contrast, the programs that did not have matches before launch did so  during product development by the unplanned addition of resources. This  contributed significantly to cost and schedule problems. Figure 4 illustrates  the timing of the match between customer\u2019s expectations and a product  developer\u2019s resources.\nThe programs in which expectations and resources were matched before  product development started were in a good position to commit to cost and  schedule estimates that were attainable. In those cases where expectations  and resources were not matched before launch, cost and schedule  estimates had to be made at the time of launch. Such estimates were  necessarily made at levels consistent with the resources the product  developer had available, under the assumption that either (1) no gaps  existed between expectations and resources or (2) any gaps could be  closed within projected resources. Because customer expectations  regarding the performance of the product tended to become set when  product development began, adding resources emerged as the primary  option available to match expectations and resources. These resources  (time and money) were typically needed for maturing technologies,  developing design solutions, and providing more production capabilities.  Perhaps more importantly, they were not estimated or planned for and  often necessitated sacrifices in other needs, such as reducing the resources  of other development programs.\n\n\t\tTrade-offs Are Critical to Matching Customer Expectations With Developer Resources Before Starting Product Development\n\nCaterpillar and Bombardier both matched customer expectations with  available resources prior to setting product requirements and launching the  products\u2019 development programs. In each case, there were differences  between expectations and resources that necessitated trade-offs before  requirements could be set and the product\u2019s development could be  launched. For these cases, expectations and resources were negotiated so  that the product\u2019s requirements could be achieved within available  resources while still meeting the customers\u2019 critical needs. This allowed  the firms to develop and deliver their products quickly and within  acceptable cost limits, thereby maintaining their competitive advantage in  their respective markets.\n\n\t\t\tCaterpillar\u2019s 797 Mining Truck\n\nTo maintain the competitive advantage in its market, Caterpillar\u2019s board of  directors believed it had to develop by the end of 1998 a new product that  was sized to work efficiently with large loading shovels used in mining  operations. This meant that Caterpillar\u2019s product development team would  have about 18 months from the time the product development program was  approved to develop and field the 797, a newly designed truck that could  efficiently haul at least 360 tons of payload. According to Caterpillar, they  met this date because they made trade-offs between the customers\u2019  expectations and the resources available before the product development  program began. Figure 5 shows the 797 mining truck developed and figure 6 shows the history of the truck development.\nProgram launched after requirements that could not be met with available not match resources. Trade-offs needed to technologies were deferred to future was within 5 percent of its cost objective. achieve18-month schedule. versions of the 797.\nExamples of key trade-offs Caterpillar made to close gaps between  customer expectations and its own resources were:   deferring to the next product line, new prognostic technologies wanted  by the customer that could assist in forecasting wear and tear to the  truck, but were immature at the time product development started;  selecting a twin-engine propulsion design to power the 797 rather than a  single engine\u2014despite its potential for lower operating costs\u2014because  it had not yet been developed and was therefore too much of a risk; and  redesigning the wheel and transmission to avoid the need to develop  new gears for the differential unit in the drivetrain, which avoided a  costly and risky development effort that could have impacted the truck\u2019s  development progress.\n\n\t\t\tThe Bombardier BRJ-X Jet\n\nDuring the BRJ-X jet\u2019s concept definition phase, which preceded product  development, Bombardier identified some customer expectations that its  designers believed would put program cost and schedule at risk. The  expectations were analyzed and trade-offs were made to make the design  achievable within resources. For example, both airline customers and  Bombardier wanted to use fly-by-wire flight control technology, which  would replace heavy hydromechanical flight controls with lighter weight  electronic controls, on the BRJ-X to reduce weight and lower fuel costs.  However, Bombardier engineers had some concerns about the technology  since it had never been integrated into a regional jet configuration before.  Consequently, Bombardier decided to invest the time and money to  demonstrate the technology on a surrogate business jet before making it a  program requirement. Another trade-off was made after Bombardier  determined that the desired speed would require design effort and features  not fully proven out. The customers agreed that a slight reduction in speed  would eliminate the design concerns yet still meet their expectations.\n\n\t\t\tNASA\u2019s FUSE Program\n\nFUSE is a telescope used to study the origin and evolution of certain  elements in space to help determine the age and evolution of stars,  galaxies, and planetary systems. The customer initially expressed  expectations in terms of gathering precise images of light from these  elements in space 24 hours per day. When NASA threatened to cancel the  program because requirements were not achievable given available  resources, FUSE program managers negotiated with customers and found  they could still meet the basic expectations with reduced requirements for  a high-resolution mirror, bandwidth detection, and time on orbit; switching  from a highly elliptical orbit to a low earth orbit (see fig. 7).\nThese reductions in requirements allowed the use of existing technologies  such as a new grating technique to spread radiation into different  wavelengths. Matching requirements to resources allowed FUSE to not  only meet schedule targets and be within 20 percent of its cost objective  but also a critical NASA need.\n\n\t\tWhen Matching Did Not Occur Before Program Launch, Developers Were Forced to Add Unplanned Resources\n\nIn cases where the customers\u2019 expectations were not matched with the  developers\u2019 resources before product development began, the matches  took place after opportunities to make trade-offs had passed. Because new  programs had been approved with customer wants formally documented as  requirements, the main avenue available to close gaps between  requirements and resources was for the developers to invest more effort,  time, and money to gain the knowledge and capacity needed to meet the  requirements. This additional investment\u2014manifested by cost increases  and schedule delays\u2014was not planned, which forced trade-offs or cuts to  be made in other programs to free up the additional resources. In some  cases, the developers may have had indications that there was a mismatch  at the launch decision, but they were pressured to go forward anyway. In  other cases, while the developers may not have enough knowledge to be  confident that there was a match before launch, they were at a  disadvantage to argue that there was not. DOD\u2019s Radio Frequency  Countermeasures system and Comanche helicopter programs did not have  matches before their product development programs were launched. In  fact, despite being several years into both programs, it is still uncertain  whether this match has been reached.\n\n\t\t\tNavy\u2019s Radio Frequency Countermeasures System\n\nCustomer expectations and developer resources were not matched on the  Radio Frequency Countermeasures program when product development  began in 1995. Essentially, the performance wanted by the customers  exceeded the time, money, and technologies available to the product  developer to develop an acceptable system. For example, a critical  component is the fiber-optic towed decoy\u2014a component, towed behind the  aircraft in flight, which transmits electronic countermeasures. Before  program launch, the requirement for the power to be transmitted from the  towed decoy was nearly tripled because of a last minute addition to satisfy  the Air Force\u2019s expectations for the F-15 fighter and the B-1 bomber. This  was a demanding requirement that, according to the former program  manager, required some technological invention. According to the manager,  this was complicated by the customer\u2019s refusal to either reduce  performance requirements or accept increases in time and cost to develop  a product that would meet these requirements. The Navy chose to launch  the program with this mismatch, recognizing that it added risk to the  program. Figure 8 shows the timeline for the program.\nDeveloper reports 197% cost increase and 15-month schedule delay As the program proceeded, problems associated with the risk  accompanying the mismatch turned into development problems, and the  additional resources found to be unacceptable to the customer before  launch were accepted as a necessity after launch. Consequently, the costs  rose from $74 million to $221 million and the development schedule was  extended 15 months.\n\n\t\t\tComanche Helicopter\n\nCustomer expectations that became key requirements for the Comanche  helicopter demanded several technologies that were still very immature  when the Army decided to launch the program in 1988. For example, the  integrated avionics and an advanced infrared night vision and targeting  sensor were included on the program when they were still conceptual in  nature. These advanced avionics systems were needed to meet the  customer\u2019s \u201cmust-have\u201d requirements for a very lightweight, stealthy, highly  maneuverable, all-weather reconnaissance and attack helicopter. These  technologies were also critical to meet cost and weight goals for the  program. The Army launched the program despite the low readiness of the  technologies, with the developer having limited design alternatives but  believing that the needed technological invention could be accomplished  within projected resources. At the time of launch, the Army estimated that  product development would cost $3.6 billion and last about 8 years. Due to  problems that developed with these technologies and budgeting and other  changes in the program, development is now estimated to take $8.3 billion  and 18 years\u2014over 100-percent increases. The Army kept the customer\u2019s  requirements essentially unchanged, electing to double the resources  needed to meet them.\n\n\tSeveral Factors Enable Customer Wants and Developer Resources to Be Matched Before Program Launch\n\nThe ability to match a customer\u2019s wants with resources before launching a  development program is key to putting program managers in a better  position to succeed. We found three factors that comprise this ability. First,  developers employed systems engineering to identify gaps between  resources and customer wants before committing to a new product  development. Second, customers and product developers were flexible  before launch. Leeway existed to reduce expectations, defer them to future  programs, or to invest more resources up front to eliminate gaps between  resources and expectations. Third, the roles and responsibilities of the  customer and the product developer were balanced, with the product  developer given the responsibility to determine or significantly influence  product requirements. In cases where these factors were not present at  program launch, product development began with imbalanced product  requirements. Invariably, this imbalance favored meeting expectations at  the expense of resources, putting the developers at a disadvantage to  deliver the products within cost and schedule estimates.\nIn the most successful cases, the effective interplay of these factors  allowed the customers and product developers to arrive at a set of product  requirements that could be developed within cost and schedule targets.  Systems engineering provided knowledge necessary to translate customer  wants into specific capabilities, enabling the developers to identify and  resolve gaps before product development began. With systems engineering  knowledge in hand, flexible requirements were essential to lowering risk  through negotiations because knowledge alone did not produce trade-offs.  Absent such flexibility, resources and wants could still be matched before  product development began, but the options to resolving any gaps were  limited to additional investments on the developers\u2019 part. Finally, with  knowledge gained from systems engineering and flexible requirements as  preconditions, successful product development programs benefited from  an environment in which product developers and customers had balanced  roles and shared responsibilities for setting product requirements.\n\n\t\tSystems Engineering Tools Are Critical for Identifying Gaps Between Developer\u2019s Resources and Customer\u2019s Expectations\n\nWhen product developers employed systems engineering before  committing to product development, they were able to identify areas in  which the customers\u2019 wants exceeded their resources. For those cases in  which developers did not conduct sufficient systems engineering before  committing to the new product development, they were weakened in their  ability to identify gaps between their resources and expectations. These  gaps were later revealed as unexpected problems that required invention,  time, and money to resolve.\nSystems engineering is a process that not only translates customer wants  into specific capabilities, such as individual technologies and  manufacturing processes, but also provides knowledge that enables a  developer to identify and resolve gaps before product development begins.  It is defined as a logical sequence of activities that transforms a customer  want into specific product characteristics and functions and ultimately into  a preferred design (see fig. 9). It is not necessarily the use of systems  engineering in the development of a new product or weapon system, but  when it is used that distinguishes it as a best practice. of the requirements into a set of specific technical and design solutions needed to system must perform. functions.\nThe systems engineering discipline enables the product developer to  translate customer wants into specific product features for which requisite  technological, software, engineering, and production capabilities can be  identified. Once these capabilities are identified, a developer can assess its  own capabilities to determine if gaps exist. It is critical for a developer to  involve the right people\u2014those with the affected areas of expertise\u2014in  this assessment. Gaps identified between what the customer\u2019s wants are  and what the developer possesses then become the focus of analysis. Some  gaps can be resolved by investments the developer makes, while others can  be closed by finding technical or design alternatives. Remaining gaps\u2014 those that represent capabilities the developer does not have or cannot get  without increasing the price and timing of the product beyond what the  customer will accept\u2014must be resolved through trade-offs and  negotiation.\nDuring systems engineering, a product design progresses through at least  three iterations. The first is a notional design\u2014a general concept of what  the product will look like and what it might be capable of that is  unconstrained by resources. The second iteration is the first detailed  design that enables a developer to compare its capabilities with the  demands of the product. The third iteration is the final design, which  captures improvements to the design generated by testing, analysis, and  other forms of learning. These iterations can be seen in figure 10, which  provides a general comparison of the amount of systems engineering  accomplished in the successful and problematic cases prior to launching a  product development program.\n\n\t\t\tSuccessful Programs Used Systems Engineering Before Product Development Began\n\nIn each successful case, the product developer worked closely with the  customer to understand its wants, which were often articulated in a  bottom-line metric, such as cost per passenger mile for a commercial  airplane. By the time the developer had committed to a product  development program, it was well into its systems engineering process and  had developed a preliminary design of the product. This process identified  the gaps between resources and expectations, which could be then  addressed through investments, alternate designs, and, ultimately,  trade-offs. The knowledge produced by the process put the developer in a  good position to negotiate with the customer because consequences could  be associated with attempts to meet those wants that exceeded the  developer\u2019s capabilities. The process also involved the customer through  periodic reviews and acceptance of the product\u2019s final design. According to  some commercial representatives, systems engineering is a good  investment to reduce risk, usually comprising a small percentage to the  overall development cost of a new product. We found two commercial  firms\u2014Caterpillar and Bombardier Aerospace\u2014and two DOD programs\u2014 the Army\u2019s Tactical Unmanned Aerial Vehicle and the Air Force\u2019s Global  Hawk unmanned aerial vehicle\u2014that employed fairly extensive systems  engineering before they committed to product development.\n\n\t\t\t\tCaterpillar\u2019s 797 Mining Truck\n\nCaterpillar\u2019s New Product Introduction process calls for completing a  significant amount of the systems engineering process during the concept  phase for any new product before product development. It applied this  process to its development of the 797 mining truck, a new product design.  It spent significant time and effort prior to beginning product development  establishing the customers\u2019 wants and closing the gap between them and  available resources. Before committing to its development, Caterpillar  gathered information from the mining companies about operating  conditions and the cost per ton of ore hauled desired of the new truck that  they would be willing to accept during the truck\u2019s lifetime. Caterpillar then  made a preliminary determination of what the truck\u2019s performance  requirements would have to be to meet these conditions and costs. For  example, it determined that the truck\u2019s payload, or bed, would have to haul  at least 360 tons, travel at certain speeds, and climb certain grades. This  information served as the starting point for systems engineering to  determine if the performance requirements for the 797 were achievable  given Caterpillar\u2019s resources. Once these requirements were established,  Caterpillar\u2019s engineers began an iterative systems engineering process to  design a product that would meet the customers\u2019 wants and could be  developed within funding, schedule, and resource targets. This process  culminated in a specific product solution that matched requirements to  resources before Caterpillar committed to product development.\nThe systems engineering process for the 797 forced key trade-offs between  performance requirements and design solutions prior to commitment to  product development. For example, to transmit the power from the engine  to the rear wheels, the original design called for using very large differential  gears. Upon reviewing that design, an experienced Caterpillar production  engineer noted that no gear manufacturer made a gear that large and that to  create such a production capability would be risky. Consequently, the  design engineers found an alternative that called for making incremental  changes in the transmission and wheel designs, which enabled existing  differential gears to be used. These design changes and the processes  required to make the changes were demonstrated successfully prior to  product development. Systems engineering also revealed risk on some of  the new hydraulic technology for the 797 that would allow easier and more  reliable unloading. Because this new technology had not been used in the  field before, Caterpillar engineers demanded demonstrations and field tests  of the technology before allowing it onto the 797 truck.\n\n\t\t\t\tBombardier\u2019s New Regional Jet\n\nBombardier set requirements for a new, larger family of regional jets that  will carry up to 115 passengers\u2014the BRJ-X series\u2014using its Bombardier  Engineering System. Beginning with an overall cost-per-passenger-mile  target from the customer, Bombardier employed an iterative systems  engineering process to make trade-offs between performance  requirements\u2014which were based on extensive market analysis\u2014and  available resources to arrive at requirements, design, and cost and schedule  targets before committing to product development. The company plans to  achieve nearly full knowledge of the product\u2019s design before it commits to  product development. At launch, the product\u2019s performance requirements  and its configuration will be frozen.\nDuring Bombardier\u2019s trade study process, customer wants are thoroughly  challenged by the firm\u2019s assessment of technology capability and readiness,  as well as by manufacturing, producibility, logistics, and other implications  of the product\u2019s features. During this process, engineers are cognizant that  product success and profitability hinge on not only product features but  also product price and quantity that market research has determined. This  fact tempers decisions about the viability of key performance or design  parameters. In other words, if Bombardier cannot produce and develop a  product within a customer\u2019s price range, then the customer is not likely to  buy it. Once this process is complete, Bombardier performs a detailed  aircraft review, which results in a trade-off analysis. If this analysis  suggests that key performance requirements\u2014speed or range, for  example\u2014cannot be achieved within the established price and quantity, the  requirements are changed. If product performance is reduced below the  customer\u2019s minimum threshold, profit calculations are upset and the  development program is not initiated.\n\n\t\t\t\tArmy\u2019s Tactical Unmanned Aerial Vehicle\n\nThe Army\u2019s Tactical Unmanned Aerial Vehicle is a DOD program that used  systems engineering to gather knowledge prior to starting development.  The vehicle must meet the brigade commanders\u2019 need for a day or night,  adverse weather, multisensor data collection system with improved  communication with joint forces that provides real-time battle information  and cannot be observed by the enemy. The program grew out of an  Advanced Concept Technology Demonstration program that was started in  1996 and completed in 1998. While the air vehicle that was flown and  evaluated during this demonstration met most of the Army\u2019s close-range  reconnaissance requirements, it did not meet all requirements and was  canceled. Figure 11 shows the Army\u2019s Tactical Unmanned Aerial Vehicle.\nThe technology demonstration provided the Army with knowledge about  the achievability of the customers\u2019 requirements. The product developer  built a prototype system that was used to identify gaps between what the  customer wanted and what was achievable with resources. Through  systems engineering, the developer transformed the wants into a set of  performance requirements that led to the prototype\u2019s design. The Army  used the results of the technology demonstration to define the customer\u2019s  requirements that were geared toward obtaining a system that required  minimal development, based largely on what was demonstrated. Because  of the knowledge gained from systems engineering, the Army was able to  stage a fly-off of four prototype designs within 9 months after the product  development program began. The fly-off results provided additional  knowledge to help match customer wants with the product developer\u2019s  resources through further trades. The Tactical Unmanned Aerial Vehicle  that is now in development closely resembles the design that won that  competition. Another program, the Air Force\u2019s Global Hawk, followed a  similar path by conducting systems engineering and building prototype  systems prior to starting its program.\n\n\t\t\tProblems Arose When Only Limited Systems Engineering Was Done Prior to Launch\n\nIn the problematic cases, product developers had not progressed as far into  the systems engineering process at the time the program was launched. In  most of these cases, the product developers had only notional designs at  that point\u2014not thorough enough to translate expectations into specific  functions against which resources could be compared. It was not until  product development was underway that systems engineering was fully  employed to create a preliminary product design. In each case, this  occurred several years after the acquisition program was started. The lack  of knowledge at the start of each program made well-informed trades  between customer wants and developer resources difficult to see or make.  Nonetheless, cost and schedule targets for each program were set based on  available information. Problems that were discovered during product  development and during the systems engineering process often resulted in  the need for more time or money than had been estimated at program  launch.\nTwo DOD programs we reviewed\u2014the Radio Frequency Countermeasures  system and the Crusader program\u2014initiated a systems engineering process  before product development; however, it was not extensive and performed  by the eventual product developer hired to design the product and only  resulted in a notional product design prior to the decision to commit to  product development. The product developers did not gain significant  knowledge about what was possible, given the availability of resources,  until after the decision was made to commit the resources toward  developing the product.\n\n\t\t\t\tNavy\u2019s Radio Frequency Countermeasures System\n\nThe majority of the systems engineering by the Radio Frequency  Countermeasures product developer\u2014the defense firm that was awarded  the development contract\u2014was not done until after the Navy had launched  the program. The knowledge used to match requirements with funding,  schedule, and other resources was limited before the program was  launched. The Navy did enough analysis\u2014about 25 percent of systems  engineering, according to the former program manager\u2014to form a notional  design of the system. The notional design was based on a top-level analysis  of the functions, which was done primarily by the Navy\u2019s program office.\nThe Navy nonetheless considered this amount of knowledge sufficient to  commit to product development.\nThe Navy entered product development assuming that a large number of  the needed parts would be nondevelopmental items\u2014items already used  on products. The Navy estimated that 90 percent of the parts for one of the  most critical subsystems, the techniques generator, would be mature,  readily available items. According to the program manager, it was not until  the contractor hired to develop the system began the detailed systems  engineering process that it discovered that only about 50 percent of those  parts were still available. Many of the required parts had become obsolete  and had to be replaced with redesigned or newly developed parts\u2014 revealing a gap between what was thought to be within the developer\u2019s  capabilities and what the requirements were. As a result, problems with the  assumptions made about the notional design by the Navy were discovered  in product development, after resources had been determined and the  fielding date had been established. This resulted in significant disruptions  to planned cost and schedule; eventually affecting the product\u2019s fielding.\nArmy\u2019s Crusader Artillery Vehicle The Crusader artillery vehicle is another case in which systems engineering  was not performed by the product developer, to a large extent, until after  the acquisition program had been launched. The development program was  launched based on a notional design done by the Army\u2019s program office,  not extensive systems engineering done by the contractor that would  design and build the product. Key to this notional design was the use of a  liquid propellant\u2014new technology\u2014for firing weapon projectiles. Program  officials stated that the optimal range that the Crusader is required to fire a  weapon is still based on the use of this liquid propellant. The Army  assessed various aspects of the risk of developing the liquid propellant  technology and integrating it into the weapon system between low and  moderately high. Nevertheless, on the basis of the notional design, the  Army committed to launching product development.\nAfter the program was launched in 1994, the product developer was  awarded a contract to develop the Crusader. According to a program  official, it took 2 years of systems engineering to determine if the  requirements were feasible given established cost and schedule targets. In  1996, the product developer determined that the liquid propellant  technology was high risk in all aspects and that it would cost an additional  $500 million to develop. This was much more than originally estimated at  the start of the program and represented a major resource gap. As a result,  the Army elected to use a more traditional, less capable back-up\u2014a solid  propellant\u2014to achieve a match between available resources and  requirements. This decision may impact system performance since,  according to program officials, the Crusader will probably not achieve its  optimal firing range. The firing range and the liquid propellant were part of  the reason for launching the program in the first place. Figure 12 shows the  Crusader artillery vehicle.\n\n\t\tFlexibility in Setting Requirements Is Key to Closing Gaps Between Customer Expectations and Developer Resources\n\nWhile knowledge is essential to identifying gaps between expectations and  resources, it takes flexibility on the part of both the customer and the  product developer to close the gaps. Flexibility represents the customer\u2019s  ability and willingness to lower product expectations, coupled with the  product developer\u2019s willingness and ability to invest more resources to  reduce technical risks and other gaps before program start. Flexibility,  when informed by systems engineering knowledge prior to program  launch, was essential to lowering risk and reducing the cost and length of  product development because knowledge alone does not produce trade-offs. Absent such flexibility, resources and wants can still be matched  before starting product development, but the options to closing any gaps  exposed by systems engineering are limited to additional investments on  the developer\u2019s part. The scenario with the most potential for costly  problems is one in which neither the requirements are flexible nor  sufficient systems engineering has been done to reveal resource gaps  before launch. Several of the DOD programs we reviewed that had  significant problems in meeting product development objectives followed  this scenario.\nWhile there are instances in which flexibility on the part of the customer is  inherent, such as for a unique product that has no predecessor, in most  cases, potential customers for a new product already have expectations. In  these cases, flexibility has to be fostered. We found two factors that  fostered such flexibility before product development started. First, product  development cycle times were limited. This forced product developers and  customers to agree on requirements that were achievable within  established time limits. Second, the developer enlisted the customer\u2019s trust  through an evolutionary approach to product development, which relieved  the customer of the pressure to want all needs met in a single product  iteration. These factors made customers more willing to defer  requirements that demanded more time or unproven technologies for  succeeding versions of the product. In contrast, when these factors were  not present and trade-offs were not made, there was an implicit decision to  accept the risk of not having the product or the capability when needed.\n\n\t\t\tRequirements Were Flexible Until Program Launch on Successful Cases\n\nIn successful cases, requirements were flexible until the decision was made  to commit to product development because both customers and developers  wanted to limit cycle time. This made it acceptable to reduce, eliminate, or  defer some customer wants so that the product\u2019s requirements could be  matched with the resources available to deliver the product within the  desired cycle time. The customer had incentives to trade off some wants,  owing to the desire to get the product within cost and time predictions and  to confidence that future versions of the product would meet many of those  wants. The two commercial companies we visited exhibited these  characteristics. In DOD, we found two programs that had exhibited this  flexibility before launch.\n\n\t\t\t\tCaterpillar\u2019s 797 Mining Truck\n\nBecause of mutual interest on the part of the product developer and the  customer, Caterpillar\u2019s board of director\u2019s mandate for the new mining  truck to be developed before the end of 1998 became a catalyst for  flexibility in requirements and design decisions. For example, Caterpillar  wanted to introduce new prognostic technology on the 797 that could  significantly lower the cost of operating the truck\u2014an expressed want of  the customer. At the heart of this technology were monitoring sensors that  could assist in forecasting wear and tear on the truck\u2014such as on the  powertrain, brakes, and tires\u2014thereby allowing better maintenance  management that would reduce how often components had to be replaced  and increase the truck\u2019s life. However, Caterpillar engineers concluded that  there was not enough time to make this technology mature enough to be  included in the initial design if the 18-month delivery schedule was to be  met. Despite the desire to have the sensors on the 797, the customer  understood the need to make a trade-off and was willing to do without the  sensor on the initial version if it meant getting the truck on time. As a  result, Caterpillar deferred the technology, despite the increased  performance it offered, because it would put other program resources\u2014 most importantly, schedule\u2014at risk. The customer accepted this trade-off.  The trade-off was made possible by Caterpillar\u2019s recognition of the risk, the  customer\u2019s trust in the next generation of the truck, and the mutual desire  to deliver the basic product on time and within cost.\n\n\t\t\t\tBombardier\u2019s New Regional Jet\n\nBombardier\u2019s goal is to limit cycle time on all product developments to 36 months. At the start of a new product\u2019s development process,  decisionmakers ask, \u201cWhat can we accomplish within 36 months?\u201d  Bombardier representatives explained that this forces them to have  significant knowledge about a new product\u2019s cost and performance early in  the process and is consistent with an evolutionary approach to product  development. If a product\u2019s requirements force them to consider longer  development time frames, they must consider a future generation of the  product or a new and different product. This time frame played a role in the  decision to reduce the BRJ-X customer\u2019s requirement for speed. The initial  speed requirement, based on market research, was originally .81 mach.  After subjecting the requirement to systems engineering, Bombardier\u2019s  engineers deduced that, while speeds of up to .78 mach could be achieved  with current off-the-shelf propulsion technology, new and undemonstrated  propulsion technology would be required to achieve .81 mach. After gaining  additional knowledge through wind tunnel testing, the engineers concluded  that to design and develop the needed propulsion and aerodynamics would  create significant risk for the 36-month product development time frame.\nBefore launching the BRJ-X development program, Bombardier\u2019s  marketing staff went back to the customers\u2014over 30 airlines\u2014and  presented the information showing that the additional speed would require  more development time and thus be more costly. On the strength of the  analysis, the customers agreed that .78 mach would still meet their needs.  In fact, they discovered that most European air traffic controllers would  not allow the higher speed. Based on the agreement, Bombardier reduced  the requirement to .78 mach, allowing the use of a low-risk propulsion  system. The 36-month goal forced the developer and the customers to  negotiate between the product\u2019s requirements and resources, while  systems engineering provided the knowledge so that informed trade-offs  could be made.\n\n\t\t\t\tAir Force\u2019s Global Hawk and Army\u2019s Tactical Unmanned Aerial Vehicles\n\nIn two DOD cases that have met product development objectives so far \u2014 the Air Force\u2019s Global Hawk program and the Army\u2019s Tactical Unmanned  Aerial Vehicle program\u2014senior acquisition executives placed resource  constraints on the programs and advocated evolutionary acquisitions,  which provided the customers and product developers the incentives and  the opportunity to cooperate and make mutually beneficial trade-offs. The  Tactical Unmanned Aerial Vehicle had a schedule for first delivery of a  system within 1-\u00bd years after launch and the Army established an  evolutionary acquisition strategy for the product to meet this schedule.  This mandate was driven by a mutual agreement between senior executives  from the Army\u2019s acquisition and requirement setting communities that the  priority is to field it quickly. This agreement fostered a good relationship  between the two communities that allowed a \u201cno bells and whistles\u201d  approach to development.\nThe product manager told us that using the guidance as a foundation, the  customer agreed to collaborate on a basic list of key performance  parameters as the only \u201cmust-have\u201d requirements for the initial Tactical  Unmanned Aerial Vehicle and define the remaining requirements as  tradable against resources, such as cost and schedule. The requirements  that were not key to the initial vehicle were grouped into three categories,  each more important than the next, but none important enough to be added  to the initial vehicle if not achievable within the resources available to the  developer. Product developers stated that several requirements would have  been difficult to achieve without additional time and money to develop  solutions. When they explained this to the customer and pointed out the  associated high risks for achieving the requirements within the time  frames, the customer was willing to defer these requirements to future  versions of the system in order to meet the planned development schedule.\nThe requirement for the Tactical Unmanned Aerial Vehicle\u2019s imagery  capabilities\u2014that is, the electro-optic and infrared sensor systems that are  used for observing targets\u2014is a good example of this flexibility. The  customer originally wanted the imagery to have at least a 90-percent  probability of recognizing and identifying targets from an altitude of 6,000  to 8,000 feet. On the basis of a systems engineering analysis, the product  developer concluded that this was not achievable with the technology  available within the 1-\u00bd year time frame and that more time and money  would be required to develop technology that would meet the capability. As  a result, the customer reduced the requirement to 70 percent, which was  both technically feasible and still useful to the customer, and made  90 percent a goal that might be achieved in future generations.\nA similar combination\u2014a cost limitation and urgent customer need\u2014led to  flexible requirements on the Global Hawk unmanned aerial vehicle. A  development cost limit set by DOD executives forced the customer and the  program office to prioritize requirements into what could be achieved  within the limit. Additionally, the customer, the United States Joint Forces  Command, assessed the usefulness of the system and stated the basic  capability tested during the Advanced Concept Technology Demonstration  could provide utility today. This assessment increased the importance of  quick delivery and forced the requirement setters and the product  developer to look at an evolutionary approach to meeting their needs,  planning for a basic capability in the first product line and more advanced  capabilities added over time. Together, these constraints gave the program  manager leverage in persuading the user to reduce or defer requirements.  For example, the requirements manager wanted a more advanced imagery  system in the first product line. However, the program manager pointed out  to the requirements manager that the cost and time needed to include this  capability would exceed the cost limit. In response, the requirements  manager agreed to defer this capability to a later version of the product.  Figure 13 shows the Global Hawk unmanned aerial vehicle.\n\n\t\t\tLess Successful Cases Maintained Inflexible Requirements Prior to Launch\n\nOn the weapon system programs that did not meet development objectives,  the products\u2019 performance requirements were generally not flexible prior  to launch\u2014a condition compounded by the fact that systems engineering  had not been done in time to reveal gaps between requirements and  resources. The requirements demanded advanced technologies that were  not yet proven or available. The matching of requirements with available  resources was not done until well into the product development program.  However, the requirements were not reduced. Instead, additional  resources, including technologies, time, and money, had to be added. We  have reported on the negative consequences of basing cost and schedule  estimates on the hoped-for success of such technologies. Without the  countervailing presence of systems engineering knowledge from the  product developer or the customer\u2019s acceptance of an evolutionary product  development approach, flexibility was difficult to engender.\n\n\t\t\t\tArmy\u2019s Comanche Helicopter\n\nIn the Comanche program, initial requirements for attacking targets and  performing other tasks, when combined with the desire for small size and  light weight, called for a unique capability compared with existing  helicopters. Meeting the size and weight requirements depended on new  technologies such as advanced forward looking infrared and integrated  avionics. Both size and weight were critical elements of a mission  equipment package that was supposed to reduce the pilot\u2019s workload while  improving aircraft performance in the areas of communications, targeting  range, and pilot capabilities. The program office stated that at program  launch the technologies were still conceptual in nature, needing an  investment in time and funding before they would be mature enough to  satisfy requirements. As a result, Comanche was expected to provide a  quantum leap in product performance using new technologies that were  not fully understood at the time the program began.\nNot only did the customer consider the requirements that made these  technologies necessary as not tradable, they were also confined by weight  and cost restrictions placed on the program. The cumulative effect of  several competing requirements\u2014low cost, reduced weight, long range,  and increased lethality\u2014resulted in solutions that relied on advanced  technologies. For example, a more mature target sensing technology that  might have met performance requirements was rejected because it weighed  too much. The Army decided to launch the program despite the significant  lack of knowledge about the needed technologies, leaving a mismatch  between requirements and available resources, and chose to develop the  new technologies during the product development program. This action  placed the burden of maturing technologies onto the program manager  during product development. Difficulties encountered maturing these  technologies to meet unyielding user requirements contributed, in part, to  the program\u2019s significant cost and schedule increases.\nArmy\u2019s Crusader Artillery Vehicle The Army\u2019s Crusader program also had competing requirements that\u2014 when taken together\u2014resulted in an inflexible system solution.  Requirements for firing range, accuracy, rate of fire, lethality, and resupply  remained inflexible prior to program launch. Similar to the Comanche  program, this inflexibility limited the technical solutions that could meet  the requirements and forced the program to be launched with immature  technologies. Many of these technologies\u2014such as the automated  ammunition loading and handling system and the actively cooled cannon  barrel\u2014were considered technological firsts for U.S. artillery systems. As a  result, the Crusader program is expected to take over 14 years and cost  over $4 billion to develop.\n\n\t\t\t\tArmy\u2019s Brilliant Anti-armor Submunition\n\nThe BAT program also had inflexible requirements that exceeded available  resources at the start of the program. The BAT operational concept is based  on a need to locate targets from great distances using advanced sensor  technologies, which are then required to guide the weapon to closer ranges,  where the submunition would engage the target. The acoustic target  technology was the most important technology needed to meet the  weapon\u2019s performance requirements, and the contractor proposed a  weapon concept based on it. The Army accepted the concept and drafted  performance requirements based on the acoustic technology. In this case,  there was limited flexibility to negotiate trade-offs between requirements  and resources given the small margin of error for a munition to hit the  target. Consequently, the key to matching requirements with resources  depended on committing the necessary resources to close gaps after the  program was launched.\nAt the start of product development, the cost and schedule targets for  BAT\u2019s development were set without knowledge about the feasibility of the  performance requirements. While the requirements were based on a  specific technology, it was not mature enough for inclusion onto a product.  In fact, the technology was still being defined in paper studies. The Army  did not prototype this technology until almost 6 years after the program  was launched. During its product development program, the BAT  experienced significant development cost and schedule increases. Program  officials attribute these increases, at least in part, to unknowns about the  new technologies. Because requirements remained inflexible, the product  developer was forced to add resources to achieve a match between the  two.\n\n\t\tBalance in the Roles of the Customer and Product Developer Makes for Effective Trade-offs\n\nWith knowledge gained from systems engineering and flexible  requirements as preconditions, successful product development programs  benefited from an environment in which product developers and customers  had balanced roles and shared responsibilities for setting product  requirements. In two successful cases, product managers were responsible  for both (1) translating customer wants into product requirements and (2) developing and delivering the products within available resources. This  dual responsibility allowed them to make reasonable trade-offs between  performance requirements and resources prior to committing to product  development. In two other successful cases, requirement setters and  product developers had equal roles in establishing and changing  requirements, using knowledge from systems engineering as a guide. In  unsuccessful cases, there was no parity in decision-making between the  requirement setter and the product developer; the requirement setter held  the upper hand by controlling the requirements without being bound by  cost and schedule considerations or the developer\u2019s resources.\n\n\t\t\tSuccessful Programs Benefited From Parity in Decision-making Between Customer and Developer\n\nIn the successful commercial cases we examined, the product developer  had ultimate responsibility for defining the product\u2019s requirements but  worked intimately with the customers to understand their needs. The firms  established an environment that teamed customer representatives with  product development engineers in setting mutually agreeable product  requirements. Representatives from one commercial firm told us that they  feel responsible for understanding a customer\u2019s operations better than the  customer does. They achieve this through their marketing people. Once the  marketing staff understands a customer\u2019s wants, they can work with the  design and production engineers to develop a product solution that will  meet the customer\u2019s needs and can be met with company resources. The  product manager makes final decisions on the product\u2019s requirements, but  is mindful of the fact that a dissatisfied customer will not buy the product.\n\n\t\t\t\tCaterpillar\u2019s 797 Mining Truck\n\nAn example of how this parity in decision-making worked is the Caterpillar  797 mining truck engine. To meet the customers\u2019 needs, the engine had to  produce at least 3,400 horsepower. For maintenance and serviceability  reasons, some mining companies wanted a single engine to produce this  power, which Caterpillar\u2019s marketing staff translated into a requirement.  However, Caterpillar did not have such an engine and its systems  engineering analysis showed that a new single-engine design could not be  matured and demonstrated within the 18-month cycle time limit. Thus,  product developers proposed a twin-engine design that met the  horsepower requirement but used an existing engine. Caterpillar\u2019s  customer representatives presented this proposal to the customers, as well  as their position that the firm could either deliver the truck powered by  twin engines in 18 months or take longer to deliver a single engine truck\u2014 but not both. Most customers accepted the proposal and the position.\n\n\t\t\t\tBombardier\u2019s New Regional Jet\n\nSimilar parity in decision-making was evident concerning Bombardier\u2019s  fly-by-wire technology. The airlines wanted fly-by-wire on the BRJ-X  aircraft because of the benefits. The benefits, which Bombardier\u2019s systems  engineering confirmed included 96 percent fewer parts and 1,250 fewer  pounds than hydromechanical controls. These benefits would reduce  engine power requirements, saving about 3 percent of fuel capacity and  reducing the need for maintenance significantly. All of these savings  responded directly to the airlines\u2019 performance needs. However, because  this technology had never been integrated onto a regional jet before,  Bombardier\u2019s product development engineers believed it to be risky. Also,  since the workforce of regional jet pilots had never used fly-by-wire, they  would have to be trained on how to use it, and system engineers who had  the authority to accept or reject the technology would not commit to  including the technology unless it was demonstrated first. Bombardier  closed the technology gap by demonstrating it on an existing aircraft. At  that point, Bombardier was confident in including fly-by-wire in the  product requirements for the BRJ-X.\n\n\t\t\tLess Successful Cases Did Not Have Parity Between the Requirement Setter and the Product Developer\n\nIn two less successful cases, the customer set the product requirements  with comparatively little input from the product developer. These programs  were initiated with cost and schedule estimates that were, for the most  part, based on the customer\u2019s requirements and a notional design. The  product developer was not an equal partner in setting product  requirements and had to launch programs without requisite resources.\n\n\t\t\t\tNavy\u2019s Radio Frequency Countermeasures System\n\nBefore product development began, the program manager for the Radio  Frequency Countermeasures system had been working with the F\/A-18 E\/F  customers to match its needs with available resources. The program  manager told us that both parties believed they had a good match because  the technology was mature. Also, both parties agreed that an  approximately 5-\u00bd year development cycle would deliver the desired  product. However, prior to program launch, as part of the normal process  used for approving product requirements, the proposed Navy requirements  were distributed to the other services. The Air Force became interested in  the program and requested that its needs for the F-15 and B-1 be combined  with the Navy\u2019s to develop a common system. The Air Force\u2019s requirements  were much more demanding than the Navy\u2019s because more power was  needed to generate the electronic countermeasures for the F-15, a less  stealthy aircraft than the F\/A-18 E\/F. These additional needs created a  technology gap that required either more time or trade-offs.\nThe product developer analyzed the technology gaps and determined that,  given projected time and money, the effort required to meet them would  take close to 7 years. The Navy customer would not agree to the additional  time and insisted that the product developer deliver a product to meet the  expanded needs within the original 5-\u00bd year time frame. The customers, in  sole control of requirements setting, thus firmed the product requirements.  The program manager informed us that he had little decision-making  authority in the matter and was compelled to accept the customers\u2019  schedule. The result was an imbalance between product requirements and  resources, which also resulted in cost and schedule increases. Because of  the delays in developing the system, the Navy plans to incorporate a less  effective substitute onto the F\/A-18 until the product is ready. These  aircraft will have to be retrofitted with the system when it becomes  available\u2014a costly and inefficient process. Ultimately, the trade-offs that  were unpalatable before launch became unavoidable after launch.\n\n\t\t\t\tArmy\u2019s Comanche Helicopter\n\nParity between the requirement setter and the product developer did not  exist on the Comanche program. As discussed previously, the Comanche  product development program included immature avionics technologies  that were needed to meet demanding and inflexible performance  requirements. These technologies represented significant gaps between  what the customer wanted and what the program office could confidently  deliver given the resources available. Prompted by concerns about the time  needed to advance the necessary technologies, the program manager  proposed trading off some requirements. However, requirements managers  informed us they were unwilling to accept trade-offs and that they believed  the program manager was too risk averse. Consequently, the program was  launched with the requirements intact, despite the program manager\u2019s  concerns, and, cost and schedule estimates for its development have  doubled.\n\n\tCharacteristics of DOD\u2019s Acquisition Process Make It Hard to Match Expectations and Resources Before Program Launch\n\nWithin DOD\u2019s traditional acquisition process, it is difficult to employ  systems engineering in making trade-offs, maintain flexibility in customer  expectations, and put the product developers in a balanced position  relative to the customers. As a result, customer needs\u2014however  legitimate\u2014are translated into product requirements that make  unreasonable demands on available resources. This pattern is perpetuated  because resources are generally added later during product development to  close any gaps between requirements and resources. The mechanics of  obtaining funding and getting approval to start an acquisition program  dictate that events proceed in the following sequence: set requirements,  obtain funding, launch program, and perform systems engineering. This  sequence places the knowledge that is needed to identify resource gaps\u2014 and the power that it gives to the product developer\u2014at a disadvantage to  shape requirements and improve program outcomes. Other aspects of the  process reward behaviors that can put pressure on requirements, making  them less flexible and more difficult to meet. For example, the services  must clearly differentiate a new weapon\u2019s performance characteristics  from alternatives to successfully compete for funding, encouraging  detailed cost and schedule estimates to be made with little knowledge from  systems engineering. The weapon system programs that did match  requirements and resources before launch\u2014the Tactical Unmanned Aerial  Vehicle and the Global Hawk\u2014represented departures from this process  that benefited greatly from the intervention and protection of top-level  individuals.\nDOD has recently changed the requirements setting and acquisition  processes to better reflect best commercial practices. Specifically, DOD  has revised its policy for approving new development programs by  providing more latitude for technology maturation and other knowledge-generating activities to take place before a program is  launched. The acquisition policy also supports the evolutionary  development approach as the preferred method of product development. In  addition, DOD has revised its policy for developing requirements, calling  for a staged or stepped approach that will dovetail with evolutionary  acquisitions. By itself, however, the policy can do little to foster the early  matching of customer wants with developer resources because the  mechanics of obtaining funding and the pressures on requirements setters  are unchanged. The incentives of the process, unlike policy, are more likely  to be seen in decisions made on the funding and approval of individual  programs.\n\n\t\tCurrent Process Puts Requirements Setting and Systems Engineering on Opposite Sides of the Launch Decision\n\nDOD\u2019s acquisition process makes it difficult to know what resources will be  needed to meet requirements before launching a program. Within this  process, systems engineering does not take place until a program has been  launched and cost and schedule targets have been set. One reason for this  is that DOD does not typically sign contracts with product developers, who  are responsible for systems engineering, until after the requirements have  been written. Once an acquisition program is approved and product  development is funded, a product developer can begin systems engineering  and gaps between requirements and resources can be identified. However,  this process does not yield knowledge about the requirements\u2019  achievability until well into product development. Even when requirements  are in draft at the time of launch, they are hard to change because user  representatives have already invested significant effort in preparing them.  This sequence of events\u2014setting requirements, launching an acquisition  program, contracting with a product developer, and conducting systems  engineering\u2014narrows the options for closing gaps primarily to increasing  cost and schedule estimates.\nDOD\u2019s process for setting requirements can begin many years before a  program is launched, and it can be several years after the program is  launched before systems engineering knowledge is obtained. The time  period from the start of the definition of the user\u2019s needs to the arrival of  systems engineering knowledge that often uncovers gaps can approach 10 years in some instances. More than 30 organizations within the  requirements community may have a hand in determining a weapon  system\u2019s performance requirements before a contractor with systems  engineering expertise can identify the gaps between requirements and  available resources. This process means the \u201cdoability\u201d of the requirements  is often not known with certainty until well into product development or  until a significant percentage of funds planned to develop the system has  been invested. By this point in time, customers\u2019 expectations have been set,  making it difficult to change requirements if gaps between requirements  and available resources are found.\nThe process used to set requirements and begin development on the Army\u2019s  Crusader program provides an example that illustrates the mechanics of  the process (see fig. 14).\nThe user\u2019s representative for the Crusader (the Army\u2019s Training and  Doctrine Command artillery school at Fort Sill, Oklahoma) began drafting  the performance requirements for the Crusader in 1990. The process to  define the requirements took approximately 4 years. During this time, the  user representative framed the needed features of the Crusader and  conducted exhaustive analyses and trade studies to identify the optimal  point to set a specific requirement. Also, as required by DOD acquisition  policy, the user representative analyzed a notional Crusader that met these  requirements against other alternatives, such as improved versions of  existing artillery systems. The result of these analyses was a set of  requirements from the user representative and notional design prepared by  the Army program office. In 1994, the requirements for the Crusader system  were approved, the acquisition program was launched and funded, and  program cost and schedule targets were baselined.\nBy this time, key features of the Crusader were defined. For example, the  Crusader would have to use liquid propellant\u2014a revolutionary  technology\u2014to propel the projectiles far enough to meet the optimal range  requirements. Also, because the Crusader was required to stay on the firing  line during rearming and refueling, it would have to have an armored and  automated resupply vehicle to keep the resupply crews protected.\nAfter the program was launched, the Army entered into a contract with  United Defense Limited Partnership to develop the Crusader. Over the next  4 years, the firm applied systems engineering practices to the requirements  in order to develop a preliminary design. During this process, the firm had  to make trade-offs in order to develop a design that could stay within  resources. By 1996\u20142 years into product development and 6 years since  the need for the Crusader was identified and determined\u2014United Defense  Limited Partnership concluded that resources needed to develop a liquid  propellant technology were not available. The firm\u2019s only option was to  accept a less capable technology\u2014a conventional solid propellant,  increasing the risk that the Crusader\u2019s firing range requirement may not be  achieved. According to Crusader officials, United Defense Limited  Partnership did not develop a good preliminary design of the system until  1998 or about 8 years after the user representative began the requirements  setting process.\n\n\t\tIncentives of Current Process Create Pressure on Product Requirements\n\nSeveral factors in the DOD environment create incentives to set  requirements high and to resist trade-offs. The competitive nature of the  process to justify a new program puts great pressure for a potential  weapon\u2019s requirements to stand out. Unlike the commercial environment,  the user representatives are separate from both the customer and the  product developer, and thus play a unique role that has different interests.  Once user representatives get a set of requirements through the very  difficult and lengthy process of approval before a program can be  launched, they are understandably reluctant to change them. Finally, the  DOD customer\u2014unlike its commercial counterpart\u2014is more tolerant of  schedule delays and cost increases.\n\n\t\t\tPressures on the Requirements-setting Process\n\nThe competition within DOD to win funding and get approval to start a new  program is intense; establishing the basic need and writing requirements is  perhaps the most important step in the process. This creates strong  incentives for requirements setters to write performance requirements that  will make their particular weapon system stand out from existing or  alternative systems. Much of the requirement-setting activity prior to  initiating a program is devoted to proving the superior cost-effectiveness of  the preferred system over others, with less consideration given to the  resources that will be needed to develop the system. If user representatives  do not write requirements that will withstand scrutiny and prevail over  alternatives, the program could be killed and no capability is gained for the  customer. Costly, labor-intensive studies, such as analyses of alternatives,  are done to determine the best possible solution to meet the user\u2019s needs  and to beat the competition. At the same time, overall DOD funding  constraints put a high priority on affordability, making it important for  program sponsors to provide cost estimates that will fit within the funding  constraints. Instead of forcing trade-offs, challenging performance  requirements, when coupled with other constraints, such as cost or light  weight, can drive product developers to pursue exotic solutions and  technologies that, in theory, could do it all.\nTo simplify requirements and foster trade-offs, DOD has adopted the  practice of identifying only a limited number of key performance  parameters\u2014\u201cmust-haves\u201d for the customer\u2014for each weapon system.  This practice may help to prioritize requirements. However, if the  parameters are not informed by systems engineering, given the pressures  inherent in the process, they still result in unrealistic demands made of  existing resources. For example, the Army\u2019s Crusader program had only  five key performance parameters, including characteristics such as  rate-of-fire, range, and speed, but they were dependent on about 500 other  subordinate performance requirements that were defined before systems  engineering was done by the product developer.\nThe unique role of the requirement setter in DOD\u2019s acquisition process can  also put pressure on requirements. DOD\u2019s requirement setters are outside  of the acquisition community and often represent an operational function  such as air combat, artillery, or armor. They are not the actual user like an  operating air wing or Army brigade, but serve as a representative of the  user. Unlike the commercial world, where a customer\u2019s wants are  represented by someone within the product developer\u2019s organization,  DOD\u2019s requirement setters are, for the most part, separate and independent  of the customer, program manager, and the product developer. A user  representative can work directly with DOD science and technology  organizations and defense firms to obtain information about new  technology, and thus may be less willing to defer to a program manager\u2019s  advice on these issues. Also, while a customer is focused on current  problems and near-term performance, a user representative tries to look at  longer term needs. In fact, the fear that DOD may not procure another such  system for several years creates incentives for user representatives to  reach for the most capability possible because they do not know when or if  they will get another opportunity to develop and acquire the next weapon  system.\nThe Comanche helicopter program is a good example of these pressures at  work. The Comanche was initiated in the early 1980s as a family of  lightweight, multipurpose helicopters whose operation and support costs  would be 50 percent less than the Vietnam-era fleet. The program was  originally expected to offer as good a technical performance as possible  within clearly stated\u2014and low\u2014unit cost goals. The requirements were  simple at the start. However, once the requirement setting process began,  the program emerged as it is today\u2014a threat-based program to yield the  next-generation, high-performance helicopter\u2014at a cost significantly  higher than the existing Apache. It was justified as being faster, stealthier  and smaller than the Apache helicopter. Resource gaps were identified  after the program was launched, when the product developer began to  obtain knowledge through systems engineering and technology  development about what it would take to meet the requirements.\nLeadership in the Army has called for a transformation in Army forces and  equipment to a lighter, more mobile force that can be deployed more  quickly and easily. The impact this change is having on Crusader\u2019s  requirements further illustrates how DOD incentives can drive  requirements and ultimately impact program outcomes. The preliminary  Crusader design \u2014which met all key requirements\u2014was considered too  heavy for the new, lighter force. In fact, the Army Chief of Staff said he  would like to have the Crusader\u2019s weight reduced to the point that twice as  many vehicles could be moved with the same amount of transport aircraft.  With the program\u2019s future at stake, the user representative, program  manager, and product developer are working together to reduce the overall  design weight of the system from 55 to 38 tons. Because of this new  priority, previously untraded requirements\u2014such as degree of crew  protection, time on the firing line, and the need for tracked vehicles\u2014are  now being examined to see if they can be reduced to save weight.\nA specific Crusader requirement is illustrative. In developing the original  set of requirements, the user representatives determined that the  Crusader\u2019s effectiveness would be maximized if the Crusader could avoid  having to leave its battle station to reload and refuel. To meet this  requirement, the resupply vehicle would have to reload and refuel the  howitzer at the battle station. This requirement necessitated that the  resupply vehicle be armored, tracked, and fully automated so that the crew  would not be exposed to enemy fire. This not only made for a more  effective howitzer but also distinguished the Crusader from other  candidates. In looking for weight reductions, the Army is considering  pulling at least some of the howitzers off station to reload and refuel. If it  relaxes that requirement, the resupply vehicle and crew can do its work  under safer conditions. In turn, the vehicle would not have to be as heavily  armored, automated, or tracked. In fact, the Army is considering using  existing trucks, which are far lighter and less expensive than a new  resupply vehicle. In our view, the changed circumstances of the Crusader  program\u2014past the approval gate, a product developer deep into systems  engineering, and a top level mandate to reduce weight\u2014created incentives  to make requirements trade-offs that were not acceptable before.\n\n\t\t\tCalcification and Customer Acceptance Do Not Encourage Trade-offs\n\nOnce established, system requirements undergo incredible scrutiny and  review by a myriad of interests within DOD\u2019s process. For example, the  Crusader draft requirements were circulated to approximately 30 organizations throughout the Army, other services, operational  commands, and the development community for review. This process  yielded 943 comments. To incorporate or otherwise dispose of each  comment, a joint working group with representatives from all of the  reviewing organizations was established. The group incorporated 702 of  the 943 comments into the requirements, the cumulative effect of which  was to add, rather than to trade, requirements. As one official stated \u201cit is  generally not the practice to reduce or eliminate requirements but to add  more to appease a particular party.\u201d This lengthy and cumbersome review  process tends to calcify weapon system requirements before product  development begins and knowledge from systems engineering can be  obtained.\nThe practice of breaching cost and schedule objectives to meet difficult  requirements would not persist without a customer\u2019s cooperation. Unlike  commercial customers, DOD customers tend to be tolerant of cost  overruns and delays in order to get a high-performance weapon system.  Traditionally, customers have been willing to wait long periods of time for a  highly desirable system that they feel will provide them the longest lasting  capability. They would rather wait for the most desirable system to be  developed than accept a less capable system, thinking that they may not get  the opportunity to acquire a new or modified system in the future. Again,  the Comanche program provides insight. At the time the program was  started, the Army expected to receive the first operational helicopter in  1996. The development program has encountered delays; some related to  weight, cost, and performance requirements that demanded immature  technologies. However, the Army has chosen to keep the requirements  generally intact and to do without the helicopter instead of fielding a less  capable system more quickly. The Army now expects to have an initial  operational capability in 2006, 10 years after the initial target date.\n\n\t\tMore Successful Weapon System Programs Have Departed From the Normal Process\n\nThe two DOD programs we examined\u2014Tactical Unmanned Aerial Vehicle  and Global Hawk\u2014that set requirements in a way that approximates best  commercial practices were departures from DOD\u2019s normal process.  Specifically, (1) their origins as Advanced Concept Technology  Demonstrations enabled them to hire a product developer much earlier  than is traditionally the case and (2) they benefited greatly from the  personal intervention of service and DOD executives who created and  enforced conditions that were conducive to making trade-offs between  wants and resources. Other new programs, such as the Joint Strike Fighter  program, showed that traditional incentives to speed a program along still  existed and could increase risk in product development.\nThe Advanced Concept Technology Demonstrations, for the Tactical  Unmanned Aerial Vehicle and the Global Hawk, showed the feasibility of  developing a system that could do what the customer wanted before a  commitment to product development was made. The sequence of events  leading to program launch on each of these programs was similar to those  of successful commercial firms. The demonstrations involved the  customer, user representative, program manager, and product developer in  a more integrated fashion than is normally the case. Moreover, by building  prototypes for the demonstrations, the product developers had to conduct  a significant amount of systems engineering before the programs were  launched. Consequently, the demonstrations provided valuable knowledge  that allowed the customer, user representative, and product manager to  define a set of product requirements that could be met within resources.  Most importantly, the demonstrations were conducted before program  launch, before cost and schedule targets were set.\nBoth programs had unusual intervention by top-level individuals that set  resource constraints and encouraged evolutionary acquisition strategies.  On the Tactical Unmanned Aerial Vehicle program, the top military  acquisition executive personally met with the head of the user  representative\u2019s organization and struck an agreement that the product was  to be fielded in stages, with the first stage being a very basic system. This  agreement had the effect of establishing mutual interest in the same  program outcome and shielded the program from criticism by either  community. The personal involvement of the Under Secretary of Defense  for Acquisition, Technology, and Logistics helped set the stage for Global  Hawk\u2019s evolutionary approach to meeting requirements. The Under  Secretary insisted on an initial capability that could be developed within a  fixed budget while providing the flexibility to defer other requirements to  succeeding versions. In both cases, this top-level intervention allowed  requirements to be flexible and gave the product developers parity with the  requirements setters in influencing requirements. Equally important, we  believe the intervention signaled support for the programs, which eased  some of the pressures that normally accompany efforts to get programs  approved. In each case, while there was a potential for success, it came not  so much from a well-established process but from exceptional behavior  from senior-level leaders. If, for some reason, leadership or priorities  change, the process may not ensure success.\n\n\t\tConstructive Changes in DOD\u2019s Policy Not Enough to Match Customer Expectations With Developers\u2019 Resources\n\nWhile DOD has taken steps that could help it more efficiently acquire its  weapons, these steps have not substantively changed the mechanics or  incentives of the requirements setting process. While the revised  acquisition policy provides opportunities for improvement, it is not specific  about when to match wants and resources. In fact, the sequence of  events\u2014setting requirements, obtaining funding, launching an acquisition  program, and conducting systems engineering\u2014remains essentially the  same as before the revision. Recent experiences with the Global Hawk and  the Joint Strike Fighter programs indicate that traditional pressures on the  requirements process are still strong.\n\n\t\t\tRecent DOD Policy Revisions Are Supportive of Best Practices\n\nDOD has recently revised its policies for operation of the defense  acquisition and requirements setting processes. The acquisition policy  reflects best commercial practices and emphasizes better use of  evolutionary acquisitions, more reliance on mature technology, and  reduced cycle times and costs. It recognizes shorter acquisition cycle times  as critical to making the best use of advanced technologies and  evolutionary requirements as a way to reduce cycle times. The Under  Secretary of Defense for Acquisition, Technology, and Logistics issued  related guidance stating that DOD\u2019s objective will be to achieve acquisition  cycle times\u2014from program start to initial fielding\u2014no longer than 5 to 7  years. The revised acquisition policy also states a clear preference for  evolutionary acquisitions over \u201csingle step to full capability\u201d acquisitions.  DOD also revised its acquisition process, which is now four phases:  (1) concept and technology development, (2) system development and  demonstration, (3) production and deployment, and (4) operations and  support (see fig. 15). In addition, guidance that directs the requirements  setting process was revised to include an emphasis on the use of  time-phased performance requirements in support of evolutionary  acquisitions.\nThe decision to launch a program would normally take place between the  first and second phases. The revised policy states that the decision is  dependent on three factors: technology maturity, validated requirements,  and funding. Assuming that technology is found to be mature, at the start of  the system demonstration and development phase, the policy requires the  weapon\u2019s requirements to be formally approved and full funding to be  provided for the remainder of the program. This is the point at which a  program manager would commit to performance, cost, and schedule  estimates and DOD would commit to provide that level of resources. DOD  later would award contracts to product developers to conduct the majority  of systems engineering necessary for designing and building the product. In  that regard, little has changed under this revised approach. It is still  difficult to know what resources will be needed to meet a set of  requirements before making the decision to launch the program.\n\n\t\t\tPressures on Requirements Are Still Powerful\n\nWhile DOD policy encourages evolutionary acquisition approaches, it will  not be successful if traditional incentives for setting high and inflexible  requirements persist. Recent developments on the Global Hawk program  indicate the continuing pressure programs face to increase requirements.  The initial Global Hawk system provides a capability for high altitude  reconnaissance that the customer has stated is acceptable for meeting its  short-term needs. Future generations would add capabilities to match the  U-2\u2014a manned reconnaissance airplane\u2014as technology, money, and time  become available. The Air Force had embarked on an evolutionary  acquisition that defines the first generation of the Global Hawk based on  the system already demonstrated with performance, supportability, and  producibility enhancements. However, the Air Combat Command, the user  representative, indicated that it would accept nothing short of the same  capability found in the current U-2, despite the customer\u2019s views. The  Command did not have confidence that the evolutionary approach would  receive the support and resources to attain the U-2\u2019s capabilities in future  generations. As a result of pressure from the user representative, the Air  Force proposed a revised acquisition strategy that while still evolutionary  in nature, accelerated the inclusion of advanced technologies onto the  aircraft to provide U-2 capabilities sooner. In December 2000, the Deputy  Secretary of Defense elected not to approve the revised acquisition strategy  at this time. While we did not review the revised approach in detail, it did  appear risk had been added to the program as requirements increased and  resources changed.\nThe Joint Strike Fighter program is another example in which traditional  incentives can result in decisions contrary to best practices. While DOD  has designated the Joint Strike Fighter as a flagship program for acquisition  reform, it is now 4 years into its acquisition program and has not yet  achieved a match between requirements and resources\u2014particularly in the  form of the technologies needed. By best practice standards, none of the  fighter\u2019s critical technology areas that the program office has identified are  expected to be at readiness levels acceptable for entry into the engineering  and manufacturing development phase, which is scheduled for 2001.  Reminiscent of the Comanche, numerous conflicting demands that the  fighter achieve high performance and low costs have resulted in  requirements that must be satisfied with several technical advances. The  requirements have also proven to be relatively inflexible. As we reported  in May 2000, delaying this phase of the program until technologies are  mature would improve the chances that the Joint Strike Fighter will be  fielded as planned. However, despite not having the requisite knowledge  for the technologies, DOD has deemed the risks manageable and proposes  to proceed with the program as planned. Such a decision reinforces  traditional incentives and increases the likelihood for future problems.\n\n\tConclusions and Recommendations for Executive Action\n\n\t\tConclusions\n\nManaging the setting of a product\u2019s requirements in a way that matches the  customer\u2019s needs with the developer\u2019s resources is critical for a successful  product development. This kind of success\u2014delivering weapons that meet  needs within predicted costs and time frames\u2014is essential if DOD is to get  what it wants from its huge modernization investment. The best practices  for balancing needs and resources before committing to a new product or  weapon system development are to (1) conduct systems engineering to  illuminate what has to be done to match the wants with the resources;  (2) establish fixed cycle times for an initial product within an overall  evolutionary approach to foster flexibility needed to make key trade-offs;  and (3) maintain parity between requirement setters and product  developers when translating customer needs into product requirements.  These practices provide for identifying gaps between wants and resources  as well as solutions\u2014whether by trading off needs or investing more  resources\u2014before setting requirements and starting development.\nThe environment for commercial products provides incentives that  encourage these practices. Like DOD, commercial customers have an  initial advantage in that they have high expectations of a new product, they  do not have unlimited time and money, and ultimately, their needs have to  be met. While firms are motivated to offer a customer a product that meets  these needs, they are keenly aware that promising more than they can  deliver will ultimately disappoint the customer. Consequently, leading firms  consciously attempt to manage customer expectations and put themselves  in a good position to negotiate a reasonable set of product requirements.  They do this in several ways. First, because they are investing their own  resources to develop the product, they are at liberty to conduct systems  engineering early\u2014an investment they consider small relative to the overall  cost of developing a product. Second, they have a proven track record for  delivering products on time and making promised improvements to  succeeding versions of the product. Third, they play a prominent role in  setting and agreeing to product requirements. Together, these factors help  create the credibility, confidence, and trust that are essential to maintaining  the flexibility needed to match their resources with the customer\u2019s needs  before launching a new product development.\nWithin DOD\u2019s traditional acquisition process it is difficult to gain  knowledge and maintain flexibility in requirements prior to committing  resources to an acquisition program. As a result, customer needs are  translated into product requirements that often make unreasonable  demands on available resources. There are several reasons for setting  weapon system requirements this way. Some are the following:   The mechanics of the program approval and funding process force a  sequence of events that keeps a product developer relatively uninvolved  in shaping requirements, compared with best practices, causing product  development to begin with cost and schedule targets untempered by  systems engineering knowledge.\nUnique or demanding requirements can help gain approval to fund a  new program because aiming too low can result in losing out to other  programs, thus denying any new capabilities.\nThere is some mistrust in an evolutionary approach, specifically  regarding whether future improvements will be approved; consequently,  attempting to reach for the full capability in a single step can be seen as  a safer course of action.\nThe challenging and long process to get requirements approved hardens  requirements setters against trade-offs\u2014in fact, the process of getting a  requirement approved can actually encourage additions to garner  support.\nUnlike the commercial world, DOD customers have proven to be  tolerant of cost and schedule increases once a program is underway.\nSeen in this light, while the pattern of weapon system requirements  outstripping planned resources is inefficient, it is not irrational; within the  DOD environment, this approach is successful in starting programs that  eventually provide superior capabilities. This approach also has negative  consequences. First, the additional time and money that must be invested  after launch still yield the same capability called for by the original  requirements, effectively lowering the buying power of the investment.  Second, the unplanned nature of the additional investment generally  requires weapon system quantities to be lowered or money to be taken  from other programs. Third, when a requirements setter is unwilling to  make trade-offs before launch but later elects to accept delivery delays to  meet those requirements, the implicit trade-off is to have the customer do  without any of the new capability for a longer period of time. The challenge  in adopting best practices, therefore, is to make them rational\u2014that is,  critical for success\u2014in the DOD environment. Meeting this challenge will  take changes in both the mechanics and the incentives of the requirements  setting and program approval processes.\nDOD\u2019s recently revised policies could make it possible for a better  matching of customer needs and developer resources before program  launch. While these policies are sound and merit support, they retain the  mechanics of the old policies. Namely, requirements must be set before a  program can be approved and a program must be approved before the  money can be obtained to pay the product developer to conduct systems  engineering. Such mechanics deny the knowledge needed to match wants  with resources before starting a program. Similarly, the new policies must  overcome the still extant pressures brought to bear on requirements setters  to aim high and become inflexible. It took unique circumstances\u2014starting  as Advanced Concept Technology Demonstrations and enjoying the  personal intervention of top DOD executives\u2014to create the incentives on  the Global Hawk and Tactical Unmanned Aerial Vehicle programs for  making the trade-offs needed to match needs with resources. Even so, the  Global Hawk is struggling with pressures to reverse some of the trade-offs  and raise requirements. Other programs, such as the Joint Strike Fighter,  have requirements that outstrip resources, despite efforts to keep  requirements flexible and to treat the price of the aircraft as a requirement.\n\n\t\tRecommendations for Executive Action\n\nTo realign the mechanics of the requirements setting and program approval  processes to bring more knowledge into the process of setting  requirements, we recommend that the Secretary of Defense require that the  systems engineering needed to evaluate the sufficiency of available  resources\u2014knowledge, time, money, and capacity\u2014be conducted in time  to help identify and make the critical trade-offs that precede the  formalization of requirements. One option is to allow the award of well-defined systems engineering contracts to prospective product  developers\u2014contractors\u2014before the system development and  demonstration phase.\nTo realign the incentives of the requirements setting and program approval  processes with the need to match available resources, we recommend that  the Secretary of Defense:  Reduce the pressures put on user representatives to set requirements  high to win the competition for program approval. One way to reduce  these pressures, drawing on the experiences of the Tactical Unmanned  Aerial Vehicle and Global Hawk, is to have higher level officials in the  services and DOD decide on the type of weapon system that is needed to  meet a valid need before the requirements setters begin detailed work  on framing a specific solution. Making such a decision earlier in the  process would ease the pressure on to set overly demanding and  inflexible requirements that will crush alternatives and win program  approval.\nRequire, as a condition for starting the system development and  demonstration phase for a weapon system\u2014program launch\u2014that  sufficient evidence exists to show there is a match between a weapon  system\u2019s requirements and the resources the program manager has to  develop that weapon. Based on our current and past work on the best  practices of leading commercial firms, there is a key tool the Secretary  can use to define what resources DOD is willing to apply\u2014establishing  limits on the time it takes to complete system development, such as not  to exceed 5 years. Further, having a formal agreement among the  requirements setters, program managers, and resource providers on  development and delivery of the required product would emulate the  best practice of establishing accountability for subsequent actions that  stray from the agreement.\n\n\t\tAgency Comments and Our Evaluation\n\nDOD concurred with a draft of this report and its recommendations and  agreed that the requirements process needs to be better informed by  systems engineering in order to allow for the timely leveling of user needs  and developer solutions. It noted that the recently revised acquisition  policy takes the first steps in this new direction with guidance for  evolutionary acquisitions and the identification of knowledge points in the  acquisition process, but agreed that more progress needs to be made.  Specifically, DOD recognized that more knowledge in the setting of  requirements and the potential ability of the producer to meet those  requirements would provide a greater understanding of the time, cost, and  potential success of a program. DOD also recognized that the systems  development and demonstration phase can begin with a higher level  definition of requirements (that is, a higher level than the Operational  Requirements Document), which can be used by the requirements-setter  and the program manager, after some systems engineering work is done, to  facilitate trade-offs earlier and relieve some of the pressure on Operational  Requirements Document. Finally, DOD stated that the Acquisition Program  Baseline should require signatures from both the user and the resource  sponsor prior to program initiation signifying agreement that there is  sufficient evidence\u2014such as determined by systems engineering,  demonstration of technology maturity, and adequacy of funding\u2014that a  match between requirements and resources has been made.","output":"What GAO Found\n\nThis report examines how best practices offer improvements to the way the Department of Defense defines and matches weapon system requirements to available resources such as cost, schedule, and mature technologies. GAO identified three factors that were key to matching needs and resources before product development began. First, developers employed the technique of systems engineering to identify gaps between resources and customer needs before committing to a new product development. Second, customers and developers were flexible. Leeway existed to reduce or defer customer needs to future programs or for the developer to make an investment to increase knowledge about a technology or design feature before beginning product development. Third, the roles and responsibilities of the customer and the product developer were matched, with the product developer being able to determine or significantly influence product requirements. In cases where these factors were not present at program launch, product development began without a match between requirements and resources. Invariably, this imbalance favored meeting customer needs by adding resources, which resulted in increased costs and later deliveries."}
{"id":"gao_GGD-99-147","pid":"gao_GGD-99-147_0","input":"\tBackground\n\nIn 1989, the Pacific Area Office, then called the Western Regional Office, identified several deficiencies in the 935 ZIP Code area and proposed relocating the distribution operations for five post offices in the area into a new facility. The key deficiencies identified by postal officials included the following: space deficiencies for mail processing operations in the Mojave MPO, which is responsible for mail processing operations for all of the post offices in the Antelope Valley; space deficiencies in carrier delivery operations in four of the five post offices affected by the proposed project; and space deficiencies in the Lancaster MPO limited the ability to meet demand for post office boxes, and parking for customers, employees, and postal vehicles.\nFigure 1 shows the locations of the five affected post offices in the cities of Lancaster, Mojave, Palmdale, Tehachapi, and Ridgecrest located in the southern portion of the Antelope Valley.\nSince the 1980 census, the Antelope Valley area, also known as the 935 ZIP Code area, has more than doubled its population. The growth in mail volume has paralleled the population growth. As shown in table 1, growth in this area was somewhat slower in the 1990s than in the 1980s. However, current projections expect that population and mail growth will accelerate again over the next decade.\nOver half of the population growth in the 935 ZIP Code area occurred in two cities, Lancaster and Palmdale. From 1980 to 1990, Lancaster\u2019s population grew from about 48,000 to 97,300, and Palmdale\u2019s population grew from about 12,300 to 68,900. During this same period, Mojave\u2019s population grew from about 2,900 to 3,800. The Southern California Association of Governments has projected that the Lancaster-Palmdale population would increase again over 200 percent by 2010.\nMail scheduled for final delivery in the Antelope Valley originates from all over the United States and the rest of the world and is transported to the Los Angeles Processing and Distribution center located near Los Angeles International Airport. There, the mail undergoes a first-level sort by the first three digits of the ZIP Code. The mail is then transported to smaller mail processing facilities, such as the Mojave MPO, where secondary operations are performed on automated equipment to sort the mail to the five-digit ZIP Code level. Generally at this stage, some of the mail would also be automatically sorted to the carrier-route level and sequenced in the order that carriers deliver it. However, in Mojave, the necessary automated equipment is not available for sorting mail down to the carriers\u2019 delivery sequence order. Thus, the mail is transported to the postal facilities responsible for mail delivery, such as Lancaster, where the mail carriers manually sort the mail into delivery sequence order.\nAdministrative support and mail processing functions for mail to be delivered in the 935 ZIP Code area, as well as local retail and delivery functions, are housed at the MPO in Mojave. According to available postal documents, the Mojave MPO was functioning at its maximum capacity in 1990. Mail processing and customer service operations competed for space in the crowded facility. Operational efficiency was beginning to suffer due to the continual shifting of equipment to allow adequate space for processing operations. More recently, postal documents noted that some automated sorting equipment intended for Mojave processing operations was being stored in warehouses due to insufficient space.\nPostal documents from 1990 also reported that the Lancaster MPO had reached its maximum capacity and could not accommodate the future growth anticipated in Lancaster. Carrier operations had spread onto the loading platform, where mail was being placed to await distribution. Both employees and mail were exposed to weather conditions. There was a demand for additional post office boxes at the MPO, but there was no room to expand the box section. According to the Service, employee support facilities were inadequate; and parking facilities for customer, employee, and postal vehicles were also inadequate. Similar conditions reportedly existed in the Palmdale MPO, and a facility replacement was included in the Western Region\u2019s Five-Year Facility plan. The MPOs in Ridgecrest and Tehachapi were also reported to be experiencing space deficiencies but not to the extent of the problems in Lancaster, Mojave, and Palmdale.\nThe proposed new Antelope Valley facility would  include mail-processing operations and support functions that are currently located at the Mojave MPO, and the secondary mail-processing operations would be relocated from the Palmdale, Ridgecrest, Mojave, and Tehachapi MPOs to the new facility. The Mojave MPO would be retained and would continue to provide retail and delivery services for the area and serve as a transfer point for those areas north and west of Mojave. The existing Lancaster MPO would be retained to serve as a carrier annex for carrier delivery operations. The Palmdale, Tehachapi, and Ridgecrest MPOs would be retained to provide full retail and delivery services for their areas.\n\n\tScope and Methodology\n\nTo evaluate the Service\u2019s approval process for this project, we performed the following: obtained and reviewed Service policies and guidance in effect when the project began and the policies and guidance currently in effect for facility planning, site acquisition, and project approval; obtained and analyzed Service documents related to the proposed Antelope Valley project and project approval process; discussed the proposed project and the review process with Service officials in Headquarters, the Pacific Area Office, the Van Nuys District, and the Lancaster and Mojave MPOs; observed operating conditions at the existing Lancaster and Mojave postal facilities and visited the postal-owned site in Lancaster that was purchased in 1991; reviewed cost estimates for the two alternatives under consideration prior to the project being placed on hold in March 1999; these cost estimates were included in draft project approval documents that were submitted for headquarters review in February 1999; and discussed the impact of the proposed project with community officials in Mojave, Kern County, and Lancaster, CA.\nWe did not evaluate whether this project should be approved or funded. The Service has a process and criteria for assessing and ranking capital facility projects for funding. However, we only reviewed this particular project and, therefore, did not have a basis for comparing its merits with those of other capital projects competing for approval and funding. We also did not independently verify the accuracy of the financial data included in the Postal Service\u2019s analyses of the cost of various alternatives under consideration. Postal officials acknowledged that these preliminary cost estimates might need corrections and revisions because they had not completed their review of the project approval documents. Due to the incomplete status of this project, our assessment generally covered the requirements followed and actions taken by the Service during the period (1) from project initiation in 1989 until the first suspension in 1992 and (2) since its reinstatement in 1995 to August 1999.\nWe conducted our review between December 1998 and August 1999 in accordance with generally accepted government auditing standards. We requested comments on a draft of this report from the Postmaster General. We received written comments from the Postmaster General, which we have included in appendix I. His comments are discussed near the end of this report.\n\n\tThe Service Followed Most of its Key Requirements for Advance Site Acquisition\n\nThe Service followed most of its key requirements for acquiring a site in Lancaster prior to obtaining approval for the proposed Antelope Valley project, although some requirements were vague. One major exception was that the Headquarters CIC did not review and approve the proposed project justification and alternatives under consideration prior to advance site acquisition, as required by Service policies. The Service\u2019s guidance allowed advance site acquisition before all analyses that were required for final project approval were completed if, among other requirements, the Service believed that the preferred site would not be available when project approval was anticipated.\nTable 2 presents the key requirements in the Service\u2019s major facility project approval process and the actions taken by the Service to meet those requirements prior to project suspension in 1992. The key requirements of this project approval process include formal documentation, and the dates provided are based on available documentation.\nThe Postal Service\u2019s guidance detailing its investment policies and procedures for major facilities explains that its purpose is to ensure that major facility investments support the strategic objectives of the Postal Service, make the best use of available resources, and establish management accountability for investment decisions. Postal Service policies also specify the delegation of authority for approving capital facility projects based on total project costs. All capital projects exceeding $10 million in total project costs are considered major facility projects and are required to obtain final approval from the Postal Service\u2019s Board of Governors after being approved through appropriate area and headquarters officials, including the Headquarters CIC. Some facility projects may be funded from the area\u2019s budget. To obtain funding from headquarters capital investment funds, these proposed major capital facility projects must be prioritized along with proposed projects from all other regions\/areas and included by headquarters officials in the Postal Service\u2019s Five-Year Major Facilities Priority List. This list is to be updated annually and included as part of the Service\u2019s annual budget, which is then reviewed and approved by postal management and the Board of Governors.\nAs shown in table 2, the Service generally followed its approval process for advance site acquisition. However, one major requirement that was not completed before the advance site acquisition was the Advance Project Review, which involves the review and approval of the project justification and alternatives by the Headquarters CIC. Postal officials told us that the project had met all of the Service\u2019s requirements prior to approval for advance site acquisition. However, the Service could not provide a date for when the Headquarters CIC meeting occurred or any documentation of the completion of the Advance Project Review stage. The purpose of the Advance Project Review by the Headquarters CIC, according to postal guidance, is \u201cto be sure that the Headquarters CIC concurs with the scope (especially the justification, alternatives, and strategic compatibility) before the expenditure of substantial planning resources.\u201d\n\n\t\tSite Acquisition Permitted Prior to Final Project Approval\n\nAccording to the Service\u2019s requirements that were in effect in 1991, advance site acquisition was permitted prior to completion of the project approval process with the approval of the headquarters senior official responsible for facilities. The regional postmaster general requested site acquisition in advance of project approval for the site in Lancaster on June 25, 1991. The request noted that Western Region officials had approved funding from the region\u2019s budget for site acquisition in fiscal year 1991. In addition, the request noted that the project was a headquarters-funded project scheduled to be presented to the Headquarters CIC for review in mid 1992, go to the Board of Governors for review and approval in August 1992, and begin construction in fiscal year 1992.\nThe request also noted that control of the site expired on June 30, 1991, and that failure to acquire the site as an advance site acquisition may result in its loss. The total project cost was estimated at just over $31 million, with site purchase in the amount of $6,534,000, and site support costs of $100,000 for a total funding request of $6,634,000 for advance site acquisition. The request also noted that the property-owner had offered the Postal Service an additional saving of $250,000, which would reduce the sales price to $6,284,000, if the site acquisition were approved and closing occurred prior to August 1, 1991. The funding request was approved by the appropriate headquarters official, and the site was purchased for $6,534,000 on October 25, 1991.\n\n\t\tAvailable Analyses to Support Advance Site Acquisition Decisions Were Incomplete and Documentation Was Inadequate\n\nService guidance required that alternatives be identified and analyzed before a project could qualify for advance site acquisition but did not clearly state the type or depth of analyses required. At the time of the Lancaster site acquisition, some analyses, such as the space requirements (which determine sizes of buildings and site requirements for operational needs) as well as the cost estimates of project alternatives (which provide information on projected cash flows and return on investment) were still under development. Only the estimated project costs associated with the preferred alternative\u2014construction of a new processing facility in Lancaster\u2014were available prior to site acquisition. Moreover, the available documentation did not explain why this alternative was preferred over the other alternatives considered.\nAccording to documentation provided to us, four alternatives were presented at the project planning meeting held in June 1990. The four alternatives, with the key differences underscored, were as follows: (A) a new area mail processing center in Lancaster for relocated mail processing operations, distribution operations, and delivery services for the 93535 ZIP Code area; the existing Lancaster MPO would retain its retail and delivery services; (B) a new general mail facility in Lancaster for relocated mail processing operations, distribution operations, and delivery services for the 93535 ZIP Code area; the existing Lancaster MPO would retain its delivery services and retail services would be relocated in the area; (C) new area mail processing center in the vicinity of Mojave and Lancaster for relocated mail processing operations and distribution operations; the existing Mojave and Lancaster MPOs would retain retail and delivery services for their respective communities and a new facility would be constructed in Lancaster for delivery services; and (D) lease and modify an existing building for use as a Mail Handling Annex for relocated mail processing operations and distribution operations; the existing Mojave MPO would retain its retail and delivery services. \u201cThe alternatives were discussed at length. Alternative A, B, and C were discussed. It was agreed upon that these alternatives will solve the major operating needs of the Antelope Valley, but will not address all of our needs for delivery and retail facilities. A reassessment of the proposed concept and the requirements for Lancaster and Palmdale Main Post Offices will be conducted following site selection to ascertain whether the specific site is conducive to delivery or retail activities as a result of its location.\u201d \u201cThe existing facilities in Lancaster, Palmdale, and Mojave could not be expanded to provide sufficient space to accommodate the current and projected growth in the Antelope Valley. Continuation of mail processing operations at the Mojave MPO will not meet corporate goals for improved delivery times and efficiencies.\u201d\nHowever, since the proposed project was revised in 1998, expansion of the existing Mojave facility was one of two alternatives under consideration, along with the preferred alternative to construct a new facility on the Service-owned site in Lancaster. Available documentation did not explain why expansion of the existing Mojave facility was not considered viable in 1990 but was considered a viable alternative in 1998.\n\n\t\tNeed to Improve Inadequate Documentation Previously Identified\n\nThe problem of inadequate documentation of the Service\u2019s real estate acquisition decisions is not a new issue. In 1989, we reviewed the Service\u2019s real estate acquisition process. At that time, we reviewed a sample of 246 sites purchased during fiscal year 1987 and made recommendations to improve the Service\u2019s real estate acquisition program. Our 1989 report found that the Service usually purchased sites that exceeded both its operational needs and advertised size requirements. When alternative sites were available for purchase, the Service generally selected the larger, more costly sites without requiring site selection committees to document why less expensive alternative sites were less desirable. The report raised concerns, based on the Service\u2019s requirements for advertising and purchasing practices, that the Service might be spending more than was necessary for land and accumulating an unnecessarily large real estate inventory. The report also recognized that sometimes larger, more costly sites may best meet the Service\u2019s operational requirements but that justification for such selections should be required when smaller, less costly contending sites were available.\nIn the Service\u2019s letter dated August 25, 1989, responding to a draft of that report, the Postmaster General agreed with our recommendation relating to more complete documentation of the selection process. He stated, \u201cThe Postal Service is concerned only with the best value and will make sure that the reasoning behind the determination of best value is more carefully documented in the future.\u201d\nHowever, improvement in documentation was not evident in the documentation related to the proposed Antelope Valley area project, which was prepared soon after our report was issued. We identified inconsistencies in internal postal memorandums related to the required site size and disposition of any excess land. The region\u2019s June 25, 1991, memorandum requesting approval for advance site acquisition in Lancaster stated, \u201cNo excess land is expected to remain.\u201d Another internal memorandum dated October 25, 1991\u2014the date of final settlement for the purchase of the Lancaster site\u2014discussed preparation of the final cost estimates for the proposed Antelope Valley Area project and stated \u201cPlease note that the required site is considerably less than the selected site.\u201d Further, a February 1992 internal memorandum noted that the Lancaster site was purchased in late 1991 and that the site area exceeded Service requirements by 296,000 square feet (about 6.8 acres). The reason for the purchase of a site that was larger than needed was not explained in any available documents. More recent documents related to the proposed project alternatives also noted that the Service-owned site in Lancaster exceeds project requirements, but the alternatives do not discuss how the excess property would be disposed of.\n\n\tProject Delays and Resulting Negative Effects Remain Unresolved\n\nAs of the beginning of July 1999, the Service\u2019s consideration of the proposed Antelope Valley project had been put on hold, and a decision may not be made for some time. Consequently, the status and funding of the proposed project remains uncertain almost 10 years after it was initiated. Consideration of the project has been delayed due to two suspensions, reductions in capital investment spending, and a recent reclassification of the proposed facility. As a result, processing and delivery deficiencies that were identified as critical for this area in 1989 continue to exist, and the Service has not determined how it plans to address these operational deficiencies. In addition, the Service has incurred additional costs that have resulted from the need to repeat analyses and update documents required for final project approval. With the project currently on hold, further costs may be incurred to again update required analyses. Finally, the delays have prolonged the uncertainty related to business development opportunities for the affected communities of Mojave and Lancaster.\n\n\t\tReduced Funding and Classification Inconsistencies Contributed to Project Delays\n\nInitiated in 1989, with an expectation that the project would be funded in fiscal year 1992, the proposed Antelope Valley project was suspended in 1992, while the Service was undergoing a reorganization and had reduced its funding for capital facility projects. Table 3 shows that between 1991 and 1995, the Service committed $999 million less to its facilities improvement program than it had originally authorized in its 1991 to 1995 Capital Improvement Plan.\nPostal Service officials could not explain why the classification of this project, as a processing facility or other type of capital facility, has been changed several times and why it has not yet been submitted for consideration in the headquarters capital facility projects prioritization and funding process. All major mail processing facilities must be funded from the headquarters capital facility budget, while other types of processing and delivery facilities may be funded from regional\/area budgets. At the time that the proposed project was suspended in 1992, it was classified as a mail processing facility in the Western Region\/Pacific Area Major Facility Priority List. It had also been submitted for headquarters funding consideration in the Five-Year Major Facilities Priority List for fiscal years 1991 to 1995. The project was reinstated and reclassified in 1995 as a Delivery and Distribution Center (DDC), with the expectation that it would be funded out of area funds in fiscal year 1998. The Service suspended the project a second time in March 1999, while it was undergoing review by headquarters officials. Based upon the headquarters review, the project was again reclassified from a DDC to a Processing and Distribution Center. The latest reclassification meant that the project would have to be funded by headquarters rather than the Pacific Area Office, and it would have to compete nationally for funding. This means that the project will have to await placement on the next headquarters Five-Year Major Facilities Priority List, which is scheduled to be completed by August 2000.\nIt is also not clear why the proposed project was reinstated and reclassified in 1995 as a DDC when the major purpose and design of this project had not fundamentally changed. Postal officials in the Pacific Area Office and Van Nuys District said that the recently proposed Antelope Valley project is essentially the same as the project that was being planned when the Service acquired the 25-acre Lancaster site in 1991. The major differences in the two projects are in nonmail processing areas. As previously mentioned, the proposed project had not had an Advance Project Review by the Headquarters CIC prior to the suspension in 1992. Such a review might have prevented the unexplained reclassifications of this project that have contributed to delays in its funding.\n\n\t\tOperational Processing And Delivery Deficiencies Remain Unaddressed\n\nTen years after this project began, the operational processing and delivery deficiencies that were identified as critical for this area in 1989 still remain. Because of continued space deficiencies, automated equipment has not been deployed as scheduled, and the projected operating efficiencies and savings have not been realized. The District projected that one of the benefits from automated sorting of the mail to the carriers in delivery walk sequence would be to improve delivery performance by 4.25 percent annually. This additional sorting would decrease the time that the carriers spend in the delivery units preparing the mail for delivery and increase the amount of time the carriers would have to deliver the mail. Another negative effect of the space deficiencies in Mojave was that some of the mail originating in the 935 ZIP Code area (approximately 130,000 pieces per day) was diverted from processing in Mojave to the processing facility in Santa Clarita.  According to local postal officials, the effect of this diversion was to delay by 1 day the delivery of some mail that was to be delivered in the 935 ZIP Code area.  The local area First-Class mail was supposed to be delivered within 1 day to meet overnight delivery standards for First-Class mail.\nSince this project was initiated in 1989, the Service has taken several actions to address mail processing and delivery deficiencies in the Antelope Valley. The Service added 2,417 square feet of interior space to the Palmdale MPO by relocating the post office into a larger leased facility. Some relief was provided to the cramped carrier operations at the Lancaster MPO by relocating 15 of the 89 carrier routes serving Lancaster to the Lancaster Cedar Station. However, as we observed on our visit to the Lancaster facilities, conditions in Lancaster were still very congested. Mail that was waiting to be processed and workroom operations spilled out of the building onto the platform, exposing both employees and the mail to weather conditions.\nIn an effort to provide the Mojave MPO with more mail-processing space, a 2,400 square foot tent was installed in 1998, at a cost of $30,000, next to the loading platform. The tent provided additional space for processing operations and for holding mail that was waiting to be processed, but it did not allow for deployment of any automated equipment scheduled for use in the 935 mail-processing functions. Also, we observed that the tent would not provide adequate shelter from high winds or other weather-related conditions. Some of the equipment was stored at district warehouses. Although these efforts have allowed the district to continue to provide processing and delivery service, it is not clear how the Service intends to meet the operational processing and delivery deficiencies while decisions related to the proposed facility are pending.\n\n\t\tDelays Incur Additional Costs\n\nProject delays have also contributed to higher costs, incurred to repeat and update some of the analyses and cost data needed for final project approval. Given that the process is not completed, additional costs may be incurred to further update required analyses. The Service has incurred additional costs related to developing a second set of documents required for project approval, including Facility Planning Concept documents, appraisals, space requirements, environmental assessments, and DARs. Generally, the Service uses contractors to develop the environmental and engineering studies. Although the total cost of document preparation has not been quantified, available documentation indicates that the Service has incurred about $254,000 for costs related to previous design efforts for this project.\nIn addition, costs that have not been quantified include staff time and travel costs associated with this project. The Area Office Operations Analyst who was responsible for preparing the DAR told us that it took him approximately a year to develop a DAR and the supporting documents and analysis. This did not include the time of the other individuals who provided him with various information needed to complete the analyses or the time of officials responsible for reviewing and approving the project. The Service has also incurred additional costs for travel associated with project reviews, such as the Planning Parameters Meeting, which involved the travel of at least three headquarters officials.\nIt is difficult at this stage to determine what additional analyses may be needed because the Antelope Valley project has been suspended and, according to Service officials, no further action is being taken on reviewing the project until it is submitted by Pacific area officials for prioritization. We reviewed the cost estimates for the two alternatives that were included in the draft DAR that had been submitted to headquarters for review in February 1999. We found some deficiencies in the information presented. Postal officials stated that these types of deficiencies would be identified during their review process that includes reviews by officials in three separate headquarters departments\u2014Facilities, Operations, and Finance. They also said that the cost estimates in the DAR were too preliminary to use as a basis for assessing which of the two alternatives under consideration were more cost effective. The officials noted that significant changes could be made to the cost estimates as the project documentation completes the review process.\nIn addition, the Service has not realized any return on its investment in the site in Lancaster, which has remained unused since 1991. This unrealized investment has an interest cost associated with the Service\u2019s use of funds to purchase the Lancaster site in October 1991. We estimated that the interest cost associated with the Service\u2019s $6.5 million investment totaled about $2.9 million from the time that the site was purchased in October 1991 through June 1999 and that it would likely increase by over $300,000 each year.\n\n\t\tDelays Create Uncertainty for Affected Communities\n\nThe uncertainty of this project over such a long period has also created difficulties, particularly related to business development planning, for the affected Lancaster and Mojave communities. Mojave community officials have raised concerns about the effect that relocating the postal operations would have on their community. They expressed specific concerns relating to the potential lost job opportunities to the Mojave and nearby California City residents and the impact that losing the postal processing operations would have on their effort to attract new homes and retail services. Postal documents indicated that while none of the Mojave employees would lose their jobs, approximately 80 employees working the evening and night shift would be relocated if distribution operations were to be relocated to a new facility in Lancaster. The Service projects that the proposed expanded Mojave Facility would create 10 additional jobs at the facility when it opens.\nThe project delay has also affected the business development opportunities in Lancaster. After the Service selected the Lancaster site in 1991, the Mayor of Lancaster stated in a letter to the Postal Service that he welcomed the new facility and that the facility would anchor the new 160- acre Lancaster Business Park Project. Shortly after the Postal Service selected the 25-acre site, a major mailer, Deluxe Check Printing, acquired a 12-acre site adjacent to the postal property. Recently, the Lancaster City Manager noted that not having the Postal Service facility has made marketing the Business Park to potential developers very difficult. In addition, Lancaster officials stated that the city has spent over $20 million to provide improvements to the business park.  These improvements were conditions of sale when the Postal Service acquired the site in 1991.\n\n\tConclusion\n\nThe Service followed most of its key requirements when it purchased a site in Lancaster in 1991 for the proposed Antelope Valley project before it had obtained overall project approval, although some requirements were vague. One major exception was that the Headquarters CIC did not review and approve the proposed project justification and alternatives under consideration prior to advance site acquisition as required by Service guidance. The Service\u2019s requirements for advance site acquisition were unclear because they did not specify the types or depth of analyses required. The Service\u2019s analyses of alternatives were incomplete because estimated costs of the alternatives and space requirements were still under development. Also, it was not clear why an alternative that was recently under consideration, the expansion of the existing Mojave MPO, was not considered a viable alternative before the site in Lancaster was acquired.\nWe could not determine whether review and approval of the proposed project justification and alternatives by the Headquarters CIC would have resulted in changes in the proposed project justification and alternatives or more in-depth analysis of the alternatives. Such a review may have prevented the unexplained inconsistencies in the classifications of this project that have contributed to delays in its funding. Likewise, it is not known whether the Committee\u2019s review would have suggested a course of action other than acquisition of the Lancaster site. Further, the more recent analysis of the alternative to expand the Mojave MPO is too preliminary to assess or draw any conclusions from because the headquarters review of the proposed project has been suspended. However, what is known is that the Service spent about $6.5 million over 8 years ago to purchase a site that has remained unused. This site may or may not be used by the Service in the future, and its investment has a substantial annual interest cost associated with it. While this interest cost continues, the mail service deficiencies identified nearly 10 years ago remain unaddressed, and projected operating efficiencies and savings anticipated from new equipment are unrealized as the equipment remains in storage.\nGiven this situation, it is not clear why the status of this project has been allowed to go unresolved for such a long time. It is also unclear at this time whether funding for this project will be approved and, if so, for what year of the next 5-year capital projects funding cycle. Thus, the Service\u2019s site investment in unused land and the existing operational deficiencies are likely to continue for some time, and the Service has not determined how it will address these issues if the project is not approved or funded for several years.\n\n\tRecommendation\n\nTo address the long-standing uncertainties related to the proposed Antelope Valley project, we recommend that the Postmaster General take the following actions:\nResolve the internal inconsistencies in the classification of this project, determine whether the site in Lancaster should be retained, and ensure that the project is considered in the appropriate funding and approval process, and\nRequire the Pacific Area office to determine whether immediate action is needed to address the operational deficiencies identified in the Antelope Valley area and report on planned actions and related time frames for implementation.\n\n\tAgency Comments and Our Evaluation\n\nWe received written comments from the Postmaster General on August 20, 1999.  These comments are summarized below and included as appendix I. We also incorporated technical comments provided by Service officials into the report where appropriate.  The Postmaster General responded to our conclusion that the Service did not follow all of its procedures in effect at the time that approval was given to purchase a site for a proposed facility in advance of the proposed Antelope Valley project\u2019s review and approval.  He stated that the Service has revised its procedures for advance site acquisition so that proposed sites are subjected to additional review and approval.   As a result, he stated that the advanced acquisition of a site for project such as Antelope Valley now must receive approval from the Headquarters Capital Investment Committee and the Postmaster General.\nThe Postmaster General generally agreed with our recommendations to address the unresolved status of the Antelope Valley project and the operational deficiencies in the Antelope Valley area.  In response to our first recommendation to resolve the inconsistent classification of the project, he stated that the Service has determined that the proposed Antelope Valley project is properly classified as a mail processing facility. He also stated that the proposed project would be considered for funding along with other such projects during the next round of project review and prioritization.  While clarification of the project\u2019s classification is a good first step, until disposition of the entire project is completed, the status of the project, including the use of the Lancaster site, remains unresolved.\nRegarding our second recommendation to address operational deficiencies in the Antelope Valley area, he stated that officials from the involved Pacific Area offices have met to discuss the most workable alternatives to sustain and improve mail service for Antelope Valley customers.  However, due to the complexity of issues, including the possibility of relocating some operations into leased space on an interim basis, a fully developed distribution and delivery improvement plan may take some time to implement.  He agreed to provide us with action plans and time frames as they are finalized.   If actions are taken as described by the Postmaster General, we believe they would be responsive to our recommendations.\nWe are sending copies of this report to Representative Howard (Buck) McKeon; Representative John McHugh, Chairman, and Chaka Fattah, Ranking Minority Member, Subcommittee on the Postal Service, House Committee on Government Reform; Mr. William J. Henderson, Postmaster General; and other interested parties. Copies will also be made available to others upon request. The major contributors to this report are listed in appendix II. If you have any questions about this report, please call me on (202) 512-8387.\n\nComments From the United States Postal Service\n\nGAO Contacts and Staff Acknowledgments\n\n\tGAO Contacts\n\n\tAcknowledgments\n\nTeresa Anderson, Melvin Horne, Hazel Bailey, Joshua Bartzen, and Jill Sayre made key contributions to this report.\nThe first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent.\nU.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537.\nEach day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touch-tone phone. A recorded menu will provide information on how to obtain these lists.","output":"Why GAO Did This Study\n\nPursuant to a congressional request, GAO reviewed the project approval process the Postal Service used in proposing to relocate postal operations for the Antelope Valley, California, area from the Main Post Office in Mojave, California, to a new facility in Lancaster, California.\n\nWhat GAO Found\n\nGAO noted that: (1) the Service followed most of its key requirements for acquiring a site in Lancaster in 1991 prior to obtaining approval for the proposed Antelope Valley project, although some requirements were vague; (2) one major exception was that review and approval of the proposed project justification and alternatives by the Headquarters Capital Investment Committee did not take place prior to the advance site acquisition in Lancaster, as required by Service policies; (3) Service guidance was unclear because it required that alternatives be identified and analyzed before a project could qualify for advance site acquisition, but it did not clearly state the type or depth of analysis required; (4) at the time of the Lancaster site acquisition, the analysis to support the decision was incomplete; (5) more detailed analyses were still under development; (6) GAO could not determine from available documentation why the alternative to construct a new facility in Lancaster was preferred over other alternatives that had been proposed or why various alternatives were not considered viable; (7) the Lancaster site purchased for $6.5 million in 1991 has remained unused since that time due to the Service's failure to decide how and when it will resolve the long-standing problems that the proposed Antelope Valley project was to address; (8) continuing negative effects have resulted from the incomplete status of the project for almost 10 years; (9) project approval and funding of the project remain uncertain due to delays resulting from two suspensions, limits on capital spending, and changes in project classification; (10) it is unclear how the Service intends to address the space deficiencies that have contributed to operational processing and delivery deficiencies in the Antelope Valley area; (11) because of continued space deficiencies, automated equipment was sitting unused in warehouses, some mail delivery was being delayed, and the projected operating efficiencies and savings have not been realized; (12) the Service has invested $6.5 million in land that has been unused for nearly 8 years; such an investment has a substantial annual interest cost estimated at over $300,000; (13) it has also incurred additional costs to update documents required for project approval and may incur more costs if some of these documents again have to be updated when the project is reviewed for approval; and (14) the Lancaster and Mojave communities have faced uncertainty over business development opportunities as a result of the project delays."}
{"id":"crs_RS20764","pid":"crs_RS20764_0","input":"\tHistorical Overview1\n\nFederal efforts to assist members of the Armed Forces date to 1864, when President Abraham Lincoln issued an order to allow members of the military to return home to cast a ballot if they could not vote absentee according to the laws of their respective states. Eighteen states, all in the North, permitted soldiers to vote absentee by establishing remote voting at military encampments where units were usually organized by state. Some other states permitted an absent military voter to designate a proxy, who would cast a ballot, as directed, on the voter's behalf.\nLittle progress occurred concerning absentee voting by members of the military in the following decades, despite an expansion of state absentee voting laws. Such laws generally extended absentee voting rights to those absent from their voting district, but who were permitted to send an absentee ballot by mail from within the state. Even those state laws designed specifically to assist absent military voters either did not apply to overseas soldiers, or were ineffective because of the barriers to delivering and receiving mail in overseas locations. When the issue arose for overseas soldiers in World War I, the War Department announced that \"it would not conduct or supervise the taking of the service vote,\" but pledged cooperation with the states that could establish their own means to do so. A contradictory statement noted that the \"soldier vote could not be taken in France or on other foreign soil in the theater of war without serious interference with military efficiency,\" and, in the end, \"no states were allowed to poll the vote of soldiers on foreign soil.\" Likewise, the first federal legislation to assist military voters was introduced in 1918, but was not acted upon. The issue subsided until World War II, when the challenge of how to facilitate military voting\u2014especially by those stationed overseas\u2014emerged once again. \nThe first federal absentee voting law was the Soldier Voting Act of 1942 (P.L.\u00a077-712) that guaranteed the right to vote in federal elections to members of the Armed Forces who were absent from their places of residence during wartime. The law allowed members of the Armed Forces to vote for presidential electors and candidates for the U.S. Senate and House, whether or not they were previously registered and regardless of poll tax requirements. The law provided for the use of a postage-free, federal post card application to request an absentee ballot; it also instructed secretaries of state to prepare an appropriate number of \"official war ballots,\" which listed federal office candidates, as well as candidates for state and local office if authorized by the state legislature. The law \"had almost no impact at all\" with respect to assisting Armed Forces voters, or on the outcome of the election itself, because it was enacted on September 16, only weeks before the 1942 November general election. Only 28,000 of 5 million soldiers voted that year.\nUnder congressional war powers, the 1942 law mandated procedures for the states to permit servicemembers to vote, but the law as amended in 1944 recommended that states follow such procedures. Congressional authority to regulate state voting procedures expired once the war ended, because the law noted that its provisions applied \"in time of war.\" The law was amended again in 1946 to include technical changes.\nIn 1951, President Truman asked the American Political Science Association (APSA) to study the military voting problem and make recommendations. APSA completed its study in 1952 and the President endorsed the association's legislative recommendations, which were sent to Congress. The Federal Voting Assistance Act (P.L. 84-296) was subsequently enacted in 1955; it recommended, but did not guarantee, absentee registration and voting for members of the military, federal employees who lived outside the United States, and members of civilian service organizations affiliated with the Armed Forces. The law was amended in 1968 to include a more general provision for U.S. citizens temporarily residing outside the United States, expanding the number of civilians covered under the law. The Overseas Citizens Voting Rights Act of 1975 ( P.L. 94-203 ) guaranteed absentee registration and voting rights for citizens outside the United States, whether or not they maintained a U.S. residence or address and whether or not they intended to return.\n\n\tSummary of the Current Law\n\nThe current law, the Uniformed and Overseas Citizens Absentee Voting Act ( P.L. 99-410 ), was signed into law by President Reagan on August 28, 1986. It consolidated the provisions of the Federal Voting Assistance Act of 1955 that pertained to military voters and their dependents, and the Overseas Citizens Voting Rights Act of 1975 that pertained to American citizens abroad. The law was amended by the Help America Vote Act ( P.L. 107-252 ) in 2002, the National Defense Authorization Act of 2002 ( P.L. 107-107 ), the Defense Authorization Act for FY2005 ( P.L. 108-375 ), the John Warner National Defense Authorization Act for FY2007 ( P.L. 109-364 ), the National Defense Authorization Act for FY2010 ( P.L. 111-84 ), and the FY2015 National Defense Authorization Act ( P.L. 113-291 ). The main provisions of the law require states to do the following:\nPermit uniformed services voters, their spouses and dependents, and overseas voters who no longer maintain a residence in the United States to register absentee (overseas voters are eligible to register absentee in the jurisdiction of their last residence) and to vote by absentee ballot in all elections for federal office (including general, primary, special, and runoff elections). The National Defense Authorization Act of 2002 amended UOCAVA to permit a voter to submit a single absentee application in order to receive an absentee ballot for each federal election in the state during the year. The Help America Vote Act subsequently amended that section of the law to extend the period covered by a single absentee ballot application to the next two regularly scheduled general elections for federal office. The section was repealed in 2009 under the National Defense Authorization Act for FY2010. The Help America Vote Act also added a new section that prohibits a state from refusing to accept a valid voter registration application on the grounds that it was submitted prior to the first date on which the state processes applications for the year; this section was retained when the law was amended in 2009. Accept and process any valid voter registration application from an absent uniformed services voter or overseas voter if the application is received not less than 30 days before the election. The Help America Vote Act amended that section of the law to require a state to provide to a voter the reasons for rejecting a registration application or an absentee ballot request. The law recommends that states accept the federal write-in absentee ballot for general elections for federal office (provided the voter is registered, has made a timely request for a state absentee ballot, the absentee ballot has not arrived with sufficient time to return it, and the ballot is submitted from outside the United States or its territories). The law also stipulates that voting materials be carried \"expeditiously and free of postage.\" It recommends that states accept the Federal Post Card Application (FPCA) from uniformed services voters, their spouses and dependents, and overseas voters, to allow for simultaneous absentee registration and to request an absentee ballot. While all states and territories accept the FPCA, some require that a voter submit the state registration form separately in order to be permanently registered. Other recommendations in the law suggest that states: waive registration requirements for military and overseas voters who do not have an opportunity to register because of service or residence; send registration materials, along with an absentee ballot to be returned simultaneously, if the FPCA is not sufficient for absentee registration; expedite the processing of voting materials; permit any required oath to be administered by a commissioned officer in the military or by any official authorized to administer oaths under federal law or the law of the state where the oath is administered; assure mailing absentee ballots to military and overseas voters at the earliest opportunity; and provide for late registration for persons recently separated from the military.\nIn addition to the amendments to UOCAVA mentioned above, the Help America Vote Act of 2002 did the following:\nrequired the Secretary of Defense to establish procedures to provide time and resources for voting action officers to perform voting assistance duties; established procedures to ensure a postmark or proof of mailing date on absentee ballots; required secretaries of the Armed Forces to notify members of the last day for which ballots mailed at the facility can be expected to reach state or local officials in a timely fashion; required that members of the military and their dependents have access to information on registration and voting requirements and deadlines; and required that each person who enlists receives the national voter registration form; amended UOCAVA to require each state to designate a single office to provide information to all absent uniformed services voters and overseas voters who wish to register in the state; amended UOCAVA to require states to report the number of ballots sent to uniformed services and overseas voters and the number returned and cast in the election; and amended UOCAVA to require the Secretary of Defense to ensure that state officials are aware of the requirements of the law and to prescribe a standard oath for voting materials to be used in states that require such an oath.\nThe Defense Authorization Act for FY2002 also included provisions that (1) required an annual review of the voting assistance program and a report to Congress; (2) guaranteed state residency for military personnel who are absent because of military duty; (3) continued the online voting pilot project begun for the 2000 elections; and (4) permitted the use of DOD facilities as polling places if they had previously been used for that purpose since 1996 or were designated for use by December 2000.\nThe Ronald W. Reagan National Defense Authorization Act of Fiscal Year 2005 ( P.L. 108-375 ) amended UOCAVA to permit absent military voters in the United States to use the federal write-in ballot, previously intended for use only by overseas voters. It repealed the requirement to continue the electronic voting demonstration project for the November 2004 election by delaying continuation of the program until the Election Assistance Commission has established appropriate guidelines and certifies that it will assist in carrying out the project. Finally, it required a report from the Secretary of Defense within 60 days of enactment on actions taken to ensure effective functioning of Federal Voting Assistance Program with respect to members of the Armed Forces deployed in support of Operation Iraqi Freedom, Operation Enduring Freedom, and other contingency operations.\nThe John Warner National Defense Authorization Act for Fiscal Year 2007 ( P.L. 109-364 ) extended the Interim Voting Assistance System (IVAS) ballot request program through the end of 2006 and required the Comptroller General to assess DOD programs to facilitate UOCAVA voting, including progress on an Internet-based voting system.\n\n\t\tProvisions of the Military and Overseas Voter Empowerment Act\n\nThe latest revision of UOCAVA, the Military and Overseas Voter Empowerment Act (MOVE Act), was signed into law by President Obama on October 28, 2009, as part of the National Defense Authorization Act for FY2010 ( P.L. 111-84 ). The Senate had approved the conference committee report ( H.Rept. 111-288 ) on the defense authorization act ( H.R. 2647 ) on October 22 and the House had done so on October 8. The law's provisions included the following:\nStates are required to establish procedures to permit absent uniformed services voters and overseas voters to request voter registration and absentee ballot applications by mail and electronically for all federal elections. States are required to establish procedures to transmit, by mail and electronically, blank absentee ballots to absent uniformed services voters and overseas voters for federal elections. States are required to transmit a validly requested absentee ballot to an absent uniformed services voter or overseas voter no later than 45 days before an election if the request is received at least 45 days before the election. A state can seek a hardship waiver from the requirement under certain circumstances. The presidential designee who administers the law (Secretary of Defense) is required to establish procedures to collect marked general election absentee ballots from absent overseas uniformed services voters for delivery to the appropriate election official. The use of the federal write-in absentee ballot for general elections has been broadened to include special, primary, and runoff elections as well. A state is prohibited from refusing to accept an otherwise valid voter registration application, absentee ballot application or marked absentee ballot from an absent uniformed services or overseas voter on the basis of notarization requirements or restrictions on paper or envelope type, including size and weight. The presidential designee is required to develop online portals of information to inform absent uniformed services voters about voter registration and absentee ballot procedures and make other improvements to the Federal Voting Assistance Program. The presidential designee is required to develop standards for states to report on the number of absentee ballots transmitted to and received from absent uniformed services and overseas voters and to develop standards to store such data. The act repeals subsections of the Uniformed and Overseas Citizens Absentee Voting Act (UOCAVA) which required states to process an official post card form as an absentee ballot request for the next two regularly scheduled general elections, if requested by the voter. The act would retain the subsection that prohibits a state from refusing to accept or process an otherwise valid registration or absentee ballot application because it was submitted before the date on which the state accepts such applications from absentee voters who are not members of the armed services. The presidential designee is required to report to relevant committees in Congress on the implementation of the program to collect and deliver marked ballots from overseas uniformed services voters and to assess the Voting Assistance Officer program at the Department of Defense. The Attorney General is required to submit an annual report to Congress on any civil action brought with respect to UOCAVA during the preceding year. The act authorizes requirements payments under the Help America Vote Act to meet the new requirements of the act. The presidential designee may establish one or more pilot programs to test new election technology to assist absent uniformed services and overseas voters.\n\n\t\t\tMOVE Act Implementation\n\nMost of the provisions of the MOVE Act were effective as of the November 2, 2010, general election. According to the National Conference of State Legislatures (NCSL), 24 states enacted legislation to comply with the new law or certain provisions of it in 2010. A pressing issue for states that had late-occurring primaries was the requirement for absentee ballots to be mailed 45 days before a federal election. Hawaii's primary date was September 18, which was 45 days before the general election, and seven other states and the District of Columbia had primaries scheduled for the 14 th of September, 49 days before the election (Delaware, Maryland, Massachusetts, New Hampshire, New York, Rhode Island, and Wisconsin). Preparing and printing general election absentee ballots may take longer than several days for a number of reasons. Delays in tabulating results are not uncommon, and the results must often be certified or otherwise validated before the names of winning candidates can be included on general election ballots. Election contests can cause further delays. States that changed the primary date in order to achieve compliance with the 45-day ballot availability requirement include Minnesota (August 10) and Vermont (August 24). In Hawaii, a bill to move the primary to the second Saturday in August was approved and signed by the governor, but it did not become effective until January 2011.\nA state could obtain a waiver from the 45-day ballot availability requirement if (1) the primary date prevents the state from complying, (2) a legal contest results in a delay in generating the absentee ballots or, (3) the state constitution prevents compliance. Twelve jurisdictions applied for a waiver based on the date of the primary, including Alaska (August 24), Colorado (August 10), Delaware, the District of Columbia, Hawaii, Maryland, Massachusetts, New York, Rhode Island, the Virgin Islands (September 11), Wisconsin, and Washington (August 17). The Department of Defense issued a press release on August 27 announcing that waiver requests had been approved for five states (Delaware, Massachusetts, New York, Rhode Island, and Washington), and not approved for six jurisdictions (Alaska, Colorado, Hawaii, the Virgin Islands, Wisconsin, and the District of Columbia). Maryland withdrew its waiver application on August 25, 2010. A few days before the general election, the state was ordered by U.S. District Judge Roger Titus to extend the deadline for receiving marked ballots from November 12 to November 22. Maryland reportedly sent ballots that listed federal candidates only, in order to comply with the 45-day ballot availability deadline in the MOVE Act. A member of the Maryland National Guard sued the state board of elections, alleging that the state's actions denied overseas voters sufficient time to vote for state candidates (i.e., governor).\n\n\t\t\tDepartment of Justice Enforcement\n\nWith respect to enforcement, the Department of Justice filed lawsuits against a number of states to ensure that overseas military and civilian voters could fully participate in the November 2 election under the new MOVE Act provisions. The department also drew criticism with respect to its enforcement efforts, as some observers asserted that it had not moved quickly or forcefully enough to ensure that all states would be in compliance for the election. In September 2010, the department filed suit against Wisconsin, and it subsequently filed suit the following month against Guam, Illinois, New York, and New Mexico. Wisconsin and the department reached an agreement (at the same time as the lawsuit was filed) under which the state would accept absentee ballots until November 19 and local election officials would send ballots no later than October 1. The department filed suit against Guam in early October in federal district court in Hagatna, Guam, and also sought emergency relief to extend the deadline for accepting absentee ballots until November 15 and require officials to ensure email delivery of blank ballots. The suit went to trial and Guam was ordered by the federal judge to extend the deadline until November 15. In Illinois, various county election officials failed to send ballots by September 18 and also failed to send ballots electronically to voters who had requested that means of delivery; the ballots were instead sent by mail. The department reached an agreement with Illinois\u2014announced on October 22\u2014under which the state would extend the deadline for receiving voted ballots until November 16 (in six counties), extended the date such ballots must be postmarked from November 1 to November 2, and required counties to send ballots electronically to voters who had requested them. The department announced that it had reached an agreement with New Mexico on October 13; the lawsuit had alleged that election officials in six counties had violated federal law when they failed to send absentee ballots to military and overseas voters by September 18. The agreement extended the deadline for accepting ballots that were requested by September 18 from November 2 to November 6. New York had received a waiver on August 27, provided ballots were transmitted by October 1 and accepted for counting until November 15 for ballots postmarked by November 1. Thirteen counties failed to send ballots by October 1 and the department subsequently filed suit against the state, as well as the State Board of Elections. The parties subsequently signed a consent decree that required extending the deadline for receipt of ballots postmarked by November 1 until November 24. The state was also to make efforts to notify voters of these changes and that they could receive ballots electronically through the state's online ballot delivery wizard. A report on the number of ballots sent, returned, and counted must be filed after the election. \nWith respect to other states that had difficulty meeting the requirement, Alaska, Colorado, the District of Columbia, Hawaii, Kansas, Mississippi, Nevada, North Dakota, and the Virgin Islands each entered into a memorandum of agreement with the Department of Justice concerning the requirement. Under a consent decree issued by the U.S. District Court for the Western District of Wisconsin, the state had agreed to certify the September 14 primary results by September 27 and ordered local election officials to transmit absentee ballots no later than October 1; the state would accept voted ballots that were executed and sent by November 2 and received by November 19 (Wisconsin's deadline for accepting UOCAVA ballots was 10 days after the general election). Alaska expedited its certification of results so that ballots could be prepared by September 18; requests from voters for ballots to be faxed to them would be sent on that day as well. Colorado agreed to \"take all necessary actions\" to ensure that each of its 64 counties transmitted ballots by September 18, to deploy staff from the Secretary of State's office to assist in that endeavor, and to notify the Department of Justice of any failure to do so. The District of Columbia agreed to complete certification of the September 14 primary results by September 24, to make ballots available for transmission to UOCAVA voters no later than October 4, and extended the deadline for accepting such ballots by seven days until November 19 (the District's deadline for accepting UOCAVA ballots is 10 days after the election). Hawaii agreed to send ballots no later than September 24 (barring election contests), and to use express delivery and return of ballots that had been requested by mail. In Kansas, seven counties failed to send ballots by September 18 and the state agreed to extend the deadline for accepting ballots to ensure a 45-day period to vote an absentee ballot. The state would also provide contact information for voters who needed assistance and would file a report on the number of ballots received and counted. Mississippi reached a similar agreement when 22 of its counties failed to send ballots in time to meet the requirement. Ballot acceptance deadlines were to be extended to November 8, in cases where the ballot request was received by September 18, and the state would notify voters of the extension and provide a post-election report. One county in Nevada failed to send ballots to 34 voters who had requested them by September 18, and the state agreed to extend the county deadline for accepting ballots until November 8, provided they were executed and sent by election day. The Virgin Islands had one federal office on the general election ballot, for which there was no primary election. These ballots were to be sent no later than September 18. A second ballot with local candidates was to be sent by October 2, after the primary results have been certified.\nA second issue concerned the new requirement for states to establish procedures to allow UOCAVA voters to request registration and absentee ballot applications electronically and by mail, and for states to transmit the materials to the voter in the same manner. It was unclear how many states either did not provide for electronic means of submission or delivery, or did so only under certain circumstances. With respect to returning marked ballots, 19 states, American Samoa, Guam, and Puerto Rico permitted voters to return ballots by mail only. Thirty one states and the Virgin Islands permitted voters to return ballots by mail and fax and, in some cases, by email as well.\nThe Department of Justice enforces UOCAVA and the MOVE Act included a provision that requires the Attorney General to submit an annual report to Congress (by December 31) on any civil action pursued with respect to its enforcement of the law. In its 2010 report, the department outlined its enforcement efforts regarding the MOVE Act and noted that, in April 2010, it had \"sent letters to all covered jurisdictions reminding them of the MOVE Act's requirements and requesting information about their plans for complying with the law.\" \n\n\tThe Federal Voting Assistance Program\n\nThe Federal Voting Assistance Act of 1955 called for the President to designate the head of an executive department to be responsible for and coordinate the federal functions described in the law. President Eisenhower designated the Secretary of Defense, who delegated the responsibility to the Assistant Secretary of Defense for Public Affairs, as coordinator of the Federal Voting Assistance Program (FVAP). Under the current law, the director of the Federal Voting Assistance Program administers the FVAP for citizens covered by the Uniformed and Overseas Citizens Absentee Voting Act. This office publishes a print and online version of its Voting Assistance Guide , a compilation of state requirements and practices with respect to the federal law. The FVAP office also maintains a toll free phone number to provide assistance to voters and to military and federal government personnel who are responsible for implementing the law; the office also maintains a website at http:\/\/www.fvap.gov . The website includes a fully electronic system for uniformed services and overseas voters to register, request a ballot, and track the ballot for all voting jurisdictions in the country.\n\n\t\tFVAP Programs Since 2000 to Promote Voting Participation\n\n\t\t\tVoting Over the Internet (VOI)\n\nIn the 2000 presidential general election, some members of the military and citizens living abroad cast their votes via the Internet on November 7. Voters who were covered by the UOCAVA and whose legal residence was one of 14 counties participating in the project in Florida, South Carolina, Texas, and Utah were eligible to participate. The program, referred to as the Voting Over the Internet (VOI) pilot project, was limited to a total of 350 potential voters who could request and vote an absentee ballot via the Internet. The project was designed to explore the viability of using the Internet to assist UOCAVA voters, most of whom face unique challenges when registering and voting. To request a ballot, the voter would fill out an electronic version of the request form and sign it with a digital certificate. A local election official would then post an electronic version of the ballot to a secure server, where it would be retrieved by the voter. Once the ballot was completed by the voter, it was digitally signed and encrypted and placed on a FVAP server. The completed ballot could only be decrypted by the appropriate local election official, who printed the ballot and counted it with mail-in absentee ballots. A total of 91 persons used the system to register to vote and 84 (representing 21 states and territories, and 11 countries) cast ballots under the program. A report that evaluated the program was issued in June 2001 by FVAP and noted, among other conclusions, that \"further development is needed before Internet remote registration and voting can be provided effectively, reliably, and securely on a large scale.\"\n\n\t\t\tSecure Electronic Registration and Voting Experiment (SERVE)\n\nAn expanded version of the VOI project was to be used in the 2002 elections according to a provision in the Defense Authorization Act for FY2002 ( P.L. 107-107 ), and it was expected that more states than the four that participated in 2000 would be involved. The provision called for the Secretary of Defense to \"carry out a demonstration project under which absent uniformed services voters are permitted to cast ballots in the regularly scheduled general election for federal office for November 2002 through an electronic voting system\" called the Secure Electronic Registration and Voting Experiment (SERVE). But the law also included a provision under which the Secretary could delay the program until the 2004 general election if the Secretary determined that the demonstration project could \"adversely affect the national security of the United States.\" The law was signed by the President on December 28, 2001. Without sufficient time to develop the project before the 2002 election, the Secretary of Defense sent a letter to the Senate and House Armed Services Committees in May 2002 to request approval to implement the project for the 2004 election. In October 2002, staff from a number of congressional committees were briefed on the SERVE program, which was to provide the capability to identify and authenticate voters and local election officials using unique digital signatures. The voters and officials had to register with SERVE in order to be assigned the digital identity, which would allow them to access servers hosted by the FVAP in order to register and vote. The program was expanded from four states that participated in the Voting Over the Internet project in 2000 to seven, with a target of 100,000 participants.\nThe FVAP assembled a group in 2003, the Security Peer Review Group (SPRG), to review the SERVE program's security design. Several members of the group released their own, unofficial report in January 2004 that asserted that the program had fundamental security problems that made it vulnerable to \"a variety of well-known cyber attacks (insider attacks, denial of service attacks, spoofing, automated vote buying, viral attacks on voter PCs, etc.), any one of which could be catastrophic.\" As a result, the group recommended the following:\nBecause the danger of successful, large-scale attacks is so great, we reluctantly recommend shutting down the development of SERVE immediately and not attempting anything like it in the future until both the Internet and the world's home computer infrastructure have been fundamentally redesigned, or some other unforeseen security breakthroughs appear.\nThe Secretary of Defense subsequently suspended the program later in the year, and the defense authorization act for FY2005, enacted on October 28, 2004, instructed the Secretary to wait until the Election Assistance Commission (EAC) issued guidelines for electronic absentee voting before pursuing another Internet voting project. The EAC has not yet developed guidelines, but issued a report in April 2010 on its objectives and progress to date. The FY2015 NDAA law repealed the section of the FY2002 NDAA authorizing the VOI demonstration project.\n\n\t\t\tInterim Voting Assistance System and Integrated Voting Alternative Site (IVAS)\n\nDOD launched a new program in September 2004, apparently as a result of having to suspend the SERVE program, which allowed registered UOCAVA voters to request and receive absentee ballots over the Internet. Using the Interim Voting Assistance System (IVAS) website on an FVAP server, a previously registered voter in a state that volunteered to participate would request a ballot and the request would be forwarded to the appropriate election official. If the request was approved, the voter was notified by email to retrieve the absentee ballot using the IVAS secure connection. The voter was required to download the ballot, print and complete it, then return it by mail to the local election official.\nUnder P.L. 109-234 , the Emergency Supplemental Appropriations Act for Defense, the Global War on Terror, and Hurricane Recovery, 2006 (enacted on June 15, 2006), the Secretary of Defense was instructed to continue the IVAS program for uniformed services voters, their dependents, and Department of Defense personnel. The Interim Voting Assistance System was subsequently reconfigured in September 2006, and the new system was called the Integrated Voting Alternative Site. It also required a voter to be previously registered and provided two means of requesting and receiving an absentee blank ballot: by email or through a secure server. Both methods relied on a unique identifier that uniformed services personnel, their family members, and DOD overseas personnel and contractors possessed. To use the email method, a previously registered voter would use the unique identifier to connect via the Internet to a tool on the FVAP website. The voter would complete an electronic version of the Federal Post Card Application (FPCA), save it as a PDF file (without an electronic or digital signature), and email the attached file to their local election official for processing. The website included information from the FVAP's Voting Assistance Guide which provided information on each state's acceptable procedures for requesting and receiving absentee ballots (email, facsimile, and postal mail) and local election official contact information. If the request was approved by the local official, a blank ballot was sent to the voter by whatever means the state allowed and the voter would complete and return the ballot. The second method required the voter to connect to a secure server using the unique identifier to complete an electronic version of the FPCA. A local election official would connect to the server to process the application and, if approved, post a PDF version of the blank ballot on the server. The voter would again connect to the server to access and print out the ballot. The voter could then complete and return the ballot to the election official. The IVAS system did not provide the means for the voter to return the completed ballot to the election official, but required the voter to send it by whatever means available in the particular voting jurisdiction (facsimile, email, and postal mail).\n\n\t\t\tElectronic Absentee Systems for Elections (EASE)\n\nIn May 2011, the Federal Voting Assistance Program announced a grants program to support research and development of electronic voting options for UOCAVA voters. The program was designed to address the number one failure with respect to counting military and overseas citizen ballots: they were received by local election officials after the deadline for counting absentee ballots. The goal is that electronic innovations developed through the program will reduce the amount of time required by an individual to register to vote, send a ballot request, receive the ballot, and return it for counting. States, counties, cities, and townships are eligible to apply. Initially funded at $15.5 million, the amount disbursed to grants recipients was $25.4 million as of June 2012. The program represents the first time the Department of Defense has offered grant assistance to election officials.\n\n\tLegislation\n\n\t\t114th Congress\n\nThus far in the 114 th Congress, two bills have been introduced that would amend UOCAVA. First, H.R. 12 (a bill primarily related to other voting issues) would guarantee voting residency for family members of absent military personnel, require changes to reports on absentee ballot availability and transmission, revise the 45-day ballot transmission rule, and permit the use of a single absentee ballot application for subsequent elections. Second, two versions of the FY2017 NDAA bill propose UOCAVA amendments. Most substantially, a Senate version of the FY2017 NDAA bill ( S. 2814 ) introduced \"by request\" but that has not advanced, would have amended UOCAVA to, among other things: revise the 45-day ballot transmission rule, permit the use of a single absentee ballot application for subsequent elections, require expedited ballot delivery for late transmission and establish additional enforcement provisions and penalties for state noncompliance, and change some reporting requirements. Finally, although not otherwise substantially related to UOCAVA, the version of the FY2017 NDAA bill passed by the House ( H.R. 4909 ) would continue FVAP reports to Congress first authorized in FY2010. Those reports require annual summaries of FVAP activities and military and overseas citizens registration and voting participation. \n\n\t\t113th Congress\n\nSix bills were introduced that concerned uniformed services and overseas voters. H.R. 12 and S. 123 , which were identical, included provisions that would have guaranteed voting residency for family members of absent military personnel, required changes to reports on absentee ballot availability and transmission, revised the 45-day absentee ballot transmission rule, and permitted the use of a single absentee ballot application for subsequent elections. H.R. 1655 would have prohibited a state from certifying general election results until ballots from uniformed services voters had been counted. H.R. 2168 would have required notification of the appropriate election official of a change of address for a servicemember who was deployed on active duty for more than 30 days or who was redeployed, would have repealed the waiver from the 45-day ballot availability deadline, would have required express delivery for a failure to meet the deadline, would have required establishing procedures to process military and overseas ballots in the event of a major disaster, and would have prohibited a state from accepting a voter registration and absentee ballot application from an overseas voter because of early submission. \nH.R. 3576 and S. 1728 , as introduced (see discussion of amended version below in this section), were identical and\nwould have required states to submit a pre-election report 43 days before an election on whether absentee ballots were sent to absent uniformed services voters and overseas voters 46 days before an election; would have repealed the waiver from the 45-day ballot availability deadline, would have required express delivery for a failure to meet the deadline; would have permitted the use of a single absentee ballot application for subsequent elections; would have prohibited a state from accepting a voter registration and absentee ballot application from an overseas voter because of early submission; would have applied UOCAVA to the Northern Mariana Islands; would have required a biennial report on the performance of the Federal Voting Assistance Program, to be reviewed by the Comptroller General with a report to the oversight committees for election years 2014 through 2020; would have required providing active assistance to active duty members of the Armed Forces through an online system to facilitate voter registration, updating the voter registration record, and requesting an absentee ballot; would have repealed the voting demonstration project authorized by the National Defense Authorization Act for FY2002; and would have extended a guarantee of residency to family members of absent military personnel (see discussion of S. 1728 , as amended, immediately below).\nThe Senate Committee on Rules and Administration held a hearing on S. 1728 on January 29, 2014. The committee reported the bill on April 10, 2014, with an amendment in the nature of a substitute that retained the provisions discussed above, except for the provision that would have extended a guarantee of residency to family members of absent military personnel, and made the following changes to the bill: \nit would have permitted sending absentee ballots after the deadline by electronic means, if the state allows for it, rather than by express delivery; it would have required a state to notify the Attorney General and take all necessary actions, including seeking judicial relief, to ensure absent uniformed services voters and overseas voters were provided a reasonable opportunity to vote if the state missed the ballot transmission deadline because of a natural disaster; it would have stipulated that a voter who registered to vote using the post card form would not be removed from the voter list except according to the provisions of the National Voter Registration Act of 1993; and it would have changed the effective date from November 2014 to January 1, 2015.\n\n\t\t112th Congress\n\nFive bills were introduced in the 112 th Congress that would have affected UOCAVA voters. H.R. 702 would have amended UOCAVA to prohibit a state from certifying general election results until absentee ballots collected from uniformed services voters and delivered to election officials, as required by the MOVE Act amendments, had been counted. The bill would have delayed counting until the expiration of the 10-day period which begins on the date of the election or the date provided by state law, whichever is later. H.R. 5799 included provisions that would have guaranteed residency for voting to members of absent military personnel, amended UOCAVA to require express or electronic delivery of absentee ballots to voters if the state misses the 45 day ballot availability deadline, allowed for the use of a single absentee ballot application for all elections through the next general election, and applied UOCAVA to the Northern Mariana Islands. H.R. 5828 addressed a situation that resulted from the MOVE Act repeal of a provision of UOCAVA. Before the repeal, a voter registration and absentee ballot application from a UOCAVA voter effectively covered all elections for two general election cycles, if the voter so desired. As a result, local election officials were required to mail ballots to the voter for all primary, primary run-off, and general elections. One consequence was that ballots were mailed to voters\u2014particularly military voters\u2014who were no longer at the address, creating an additional expense to local governments and inflating the number of ballots sent to, but not returned by, UOCAVA voters. H.R. 5828 would have permitted an absentee ballot application to be treated as an application for subsequent elections in the state through the next regular general election.\nS. 331 would have ensured that military voters have the right to bring a civil action under the Uniformed and Overseas Citizens Absentee Voting Act to safeguard their right to vote. The National Defense Authorization Act for 2012, S. 1253 , included a provision that would have amended UOCAVA to prohibit a state from refusing to process a valid voter registration or absentee ballot application from an overseas voter because it was submitted before the date on which the state begins accepting such applications for the year. This would have extended to civilian overseas voters the same protection currently provided to uniformed services voters by UOCAVA. Congress passed a version that originated in the House, H.R. 1540 , which did not include such a provision. S. 3322 would have guaranteed residency for voting to members of absent military personnel, amended UOCAVA to require states to issue pre-election reports about the availability and timely transmission of absentee ballots, repealed the provision that allowed states to seek a waiver from transmission requirements, and established a private right of action with respect to the act.\nOn February 15, 2011, the Committee on House Administration held a hearing on the effectiveness of the MOVE Act in the 2010 election.\n\n\t\t111th Congress\n\nA number of bills that focused on military and overseas voting were introduced in the 111 th Congress. The Senate Rules Committee reported S. 1415 , the Military and Overseas Citizens Voter Empowerment Act, as amended, on July 15, 2009. The text of the bill was subsequently added as an amendment to the National Defense Authorization Act for Fiscal Year 2010 ( H.R. 2647 ), which was passed by the Senate on July 23. The House voted in favor of the conference report to the bill ( H.Rept. 111-288 ) on October 8 and the Senate approved it on October 22; President Obama signed the bill on October 28 ( P.L. 111-84 ). It established procedures for the use of email and facsimile transmittal for registration and absentee ballot applications, established procedures for the collection of marked absentee ballots from overseas uniformed services voters for delivery to the appropriate state election officials, and established additional procedures and requirements to improve UOCAVA voting (see the section of this report entitled \" Provisions of the Military and Overseas Voter Empowerment Act \"). The House Administration Committee also reported H.R. 2393 , the Military Voting Protection Act, on June 10, 2009. The bill would have required the Secretary of Defense to establish procedures for the collection of marked absentee ballots from overseas uniformed services voters for delivery to the appropriate state election officials; the new law, P.L. 111-84 , includes a similar provision. Both the Senate Rules and Administration and House Administration Committees had previously held hearings on UOCAVA voting. The hearings were convened on May 13 in the Senate and May 21 in the House.\nOther bills introduced in the 111 th Congress included two sponsored by Representative Maloney, H.R. 1659 and H.R. 1739 . The first would have amended UOCAVA to require that the presidential designee have experience in election administration that includes oversight of voter registration and absentee ballot distribution, and it would have established an Overseas Voting Advisory Board. H.R. 1739 was a more far-reaching proposal that would have amended UOCAVA to make a series of adjustments concerning balloting materials and related election administration procedures in the states, and would have established a grant program for voter outreach. H.R. 2082 would have amended UOCAVA to require states to accept ballots submitted by overseas voters using a provider of express mail service, as long as the ballot was submitted no later than the day before, and received within 10 days after, the election. The bill would also have required the presidential designee to reimburse the voter for the express mail cost. As noted above, H.R. 2393 would have amended UOCAVA to require the presidential designee to collect marked general election ballots from overseas uniformed services voters for delivery to the appropriate election officials before the polls close, using U.S. Postal Service express mail delivery. The bill would also have required a tracking system so the voter could determine whether the ballot was delivered. It was reported by the House Administration Committee on June 10. A companion measure, S. 1026 , was introduced in the Senate. Finally, H.R. 2823 would have required states to accept and process any otherwise valid voter registration application without any requirement for notarization and would have permitted electronic submission of the official post card form to register and request an absentee ballot.\n\n\t\t110th Congress\n\nSeveral relevant election reform bills were introduced in the 110 th Congress, and two were acted on. On October 1, 2008, the Senate passed S. 3073 , which would have required the Secretary of Defense to collect ballots from overseas military voters and ensure their delivery to election officials using express mail services. On the House side, H.R. 6625 was passed on September 17, 2008; it would have allowed state election officials to designate facilities of the Department of Veterans Affairs as voter registration agencies under the National Voter Registration Act ( P.L. 103-31 , the \"motor-voter\" law).\nOther bills that were not acted on included H.R. 2835 , H.R. 4173 , H.R. 4237 , H.R. 5673 , and S. 1487 . H.R. 2835 would have extended UOCAVA law's provisions to cover legislative and gubernatorial elections in American Samoa. H.R. 4173 would have prohibited states from requiring notarization of absentee ballots, broadened the use of the federal write-in ballot, established a grant program to inform overseas citizens about absentee voting, and required that overseas federal employees be informed about UOCAVA and information about the law included in U.S. passports. H.R. 4237 would have prohibited states from refusing to accept registration or ballot applications because they do not meet nonessential requirements, clarified postage markings on balloting materials, and would have amended the law concerning individuals who never lived in the United States, notification of the rejection of registration or ballot applications, and the use of the diplomatic pouch to transmit absentee ballots. H.R. 5673 would have required the Secretary of Defense to collect marked absentee ballots from overseas uniformed services voters and to guarantee their delivery to the appropriate election officials before the polls close. The bill would also have encouraged the use of private providers of air transportation to deliver ballots, which would allow individual voters to track the progress of their voted ballot. S. 1487 would have prohibited states from refusing to accept registration or ballot applications because they do not meet nonessential requirements and would have permitted accepting a federal write-in ballot from an overseas voter if it is submitted from a location in the United States. \n\n\tReports on UOCAVA Voting and Effectiveness, 2006-2014\n\n\t\t2014 Election\n\nThe Overseas Vote Foundation's sixth post-election survey included 4,425 respondents from countries around the world. There were 37 respondents whose occupation was \"active duty military personnel.\" The survey found that 60.1% of respondents used the Federal Post Card Application to register and request an absentee ballot, while 25.4% did not. Military and overseas voters should submit an FPCA every election cycle to receive an absentee ballot. Among those who tried, but did not complete, submitting an FPCA, most either missed the deadline (29.3%) or had technical difficulties (25.0%). Finally, 74.4% reported that they had received an official ballot, 23.2% said they had not, and 2.4% didn't know or remember whether they had received a ballot. \nThe Election Assistance Commission released its biennial election report in July 2015. In previous years, both the EAC and FVAP conducted surveys to gather information from states and local jurisdictions on UOCAVA voting, but the 2014 report was based solely on the survey by the EAC in an effort to be less burdensome to election officials. The EAC survey\u2014the Election Administration and Voting Survey, administered by the agency after each election\u2014was expanded to include an additional 17 questions on UOCAVA voting from the FVAP survey.\nStates transmitted 420,094 ballots to UOCAVA voters in the 2014 election, of which 51.4% were sent to overseas civilian voters and 46.0% were sent to uniformed services voters. Ballots were transmitted from all of the states, the District of Columbia, American Samoa, Guam, and the Virgin Islands. More than half (277,266) of the ballots transmitted were sent from just four states: California, Florida, New York, and Washington.\nThe number of ballots submitted for counting by UOCAVA voters was 145,509; including Federal Write-in Ballots (FWAB, the fail-safe blank ballot that is used if a requested absentee ballot does not arrive). The rate of return for ballots sent to members of the uniformed services was 34.8% and for overseas civilians, the rate was 31.6%. The overall rate of return, 34.6%, was nearly the same as in the mid-term election of 2010 when 34.7% of transmitted ballots were returned for counting. Election officials in the states and territories counted 94.6% of the ballots returned by UOCAVA voters. Of the 5.4% of returned ballots not counted, nearly half that were rejected were not received in time to be counted (48.9%), while others were not counted because of some \"other reason\" (32.3%), there was a problem with the voter's signature (14.2%), the ballot lacked a postmark (3.3%), or the reason was not categorized (1.3%).\n\n\t\t2012 Election\n\nIn July 2012, the Election Assistance Commission issued its biennial report on voting by members of the uniformed services and overseas citizens. The states transmitted 876,362 ballots to UOCAVA voters for the 2012 general election, of which 606,425 were returned for counting. The disposition of the 270,000 unreturned ballots is unknown, because states \"often lack the ability of resources to track transmitted ballots that are not returned.\" States counted 95.8% of returned ballots, an improvement over the 93.6% that were counted in the 2008 election. Most of the ballots that were rejected\u201440.4%\u2014were returned too late to be counted, while others were rejected because there was a problem with the voter signature, or the ballot lacked a postmark, or for some other reason.\nBallots were transmitted from all 50 states, the District of Columbia, American Samoa, Guam, and Puerto Rico, although more than half (456,363) were sent from seven states: California, Florida, New York, Pennsylvania, Texas, Virginia, and Washington. The report included numerous tables that provided detailed information by state for both uniformed services and overseas civilian voters, including statistics on transmitted ballots, ballots submitted for counting, rejected ballots by reason, and the number of counted ballots.\nThe report was the fifth undertaken by the EAC since it was established in 2003. It noted that \"[t]he quality of information regarding UOCAVA ballots continues to improve, and the 2012 survey data yielded a more complete picture of UOCAVA balloting than past surveys. States are generally making significant strides in designing their data management systems to produce the necessary data on UOCAVA voters. Gaps in State tracking of UOCAVA voters remain, however, and continued attention to data collection on UOCAVA voters and their ballots is needed.\"\nThe Overseas Vote Foundation (OVF) issued its biennial election report in January 2013. The report for 2012 was based on post-election surveys that relied on OVF contact lists for UOCAVA voters, local election officials (LEOs), and domestic voters on the mailing list for OVF's newly launched U.S. Vote Foundation to facilitate absentee voting in the states.\nAmong its findings the report noted that 34.9% of UOCAVA voters used an electronic method to submit the registration and ballot request form in comparison to 23% in 2010 and 18% in 2008. The MOVE Act of 2009 required that states adopt at least one electronic method to facilitate registration and requesting a ballot. With respect to receiving a ballot, those who sent the form by postal method fared slightly better (85.6% received a ballot) than those who submitted the form electronically (81.3%). Most voters returned the marked ballot by regular mail (63.3%), while 14.9% returned it by electronic means (fax, email, or uploading to an election website). From the perspective of election officials, the leading reasons for rejecting a registration and ballot request was that it arrived after the deadline (27.5%), it lacked a signature or date (19.3%), or it was incomplete (14.5%). Of the various electronic methods states used to transmit blank ballots, most were sent as a PDF attachment by email (90.5%). The use of electronic methods for transmission also introduced new problems, however. Among the problems encountered when using electronic means of transmission, LEOs reported that 53.4% of voters who had problems said they did not receive the ballot and 31.9% were unable to open the PDF files. \n\n\t\t2010 Election\n\nThe Inspector General of the Department of Defense issued a report on August 31, 2012, that assessed implementation of the MOVE Act by the Federal Voting Assistance Program. To determine whether UOCAVA voting assistance programs have been effective, the report assessed the most recent FVAP report to Congress in 2010 (discussed in detail below) and whether the MOVE Act requirement to establish voting assistance offices on all military installations was accomplished. FVAP's survey on military voting in 2010 was based on a 15% response rate, which the report noted should be improved.\nThe main focus of the report was the MOVE Act imperative to establish a voting assistance office at every military installation worldwide, except for those in a warzone. Based on an attempt to contact the 224 installation voting assistance offices (IVAOs) listed on the FVAP website, the report authors noted that \"about half the time, we were unable to contact the IVAOs the website identified.\" The report concluded that not all IVAOs had been established as required because no additional funding was provided for the initiative, estimated to cost in excess of $15 million-$20 million a year. As a solution, the report recommended that FVAP and the Under Secretary of Defense for Personnel and Readiness draft a legislative proposal to request relief from the MOVE Act requirement and to permit the Secretaries of the Military Departments to use their discretion in designating the IVAOs, with \"the intent that the Services optimize voting assistance to military personnel and other overseas citizens.\"\nThe Military Voter Protection Project (MVPP) issued a report in August 2012 that also discussed incomplete implementation of MOVE Act provisions and cited, as a consequence, the low number of absentee ballot requests from military voters in selected states. According to the report, the MOVE Act should have increased a voter's opportunity to request an absentee ballot, but \"the 2012 pre-election data shows a remarkable decrease in such requests from military voters, especially when that data is compared to data from 2008.\" The report notes that the number of absentee ballot requests will increase in the lead-up to the election, but the number needed to reach 2008 levels is \"staggering.\"\nOn October 11, 2011, the Election Assistance Commission issued its fourth report to Congress on the number of ballots sent to and received by those persons covered by the UOCAVA. The Federal Voting Assistance Program (FVAP) also provides a regular report to Congress and the President on UOCAVA voting; the report that presented information on the 2010 election was issued on October 18, 2011. It was the first of these reports to cover a nonpresidential general election, as mandated by MOVE Act changes to the UOCAVA in 2009. FVAP's previous 18 reports were issued following a presidential election.\nThe EAC report noted that states counted 93% of UOCAVA ballots that were submitted, a similar figure to what was reported in 2008. Of these, 49% were from uniformed services voters and 41% were from overseas civilians, with the rest identified as \"other\" or \"non-categorized.\" States transmitted 611,058 ballots, of which 211,749 were submitted for counting and 197,390 were counted. As stated in the report, \"[t]he fate of the approximately 400,000 remaining ballots is difficult to discern; unless ballots are returned as undeliverable or spoiled, which accounted for nearly an additional 47,000 ballots, States often lack the ability or resources to track them.\" The most common reason for rejecting a returned ballot was that it was not received by the election official on time. Thirty-two percent of ballots were rejected for this reason. Finally, the report noted a drop in the number of ballots transmitted to UOCAVA voters between 2008 and 2010, from 989,208 to 611,058, which might be expected when presidential and nonpresidential election participation is compared.\nThe FVAP report was based on post-election surveys of active duty military voters, their spouses, overseas citizens, voting assistance officers in DOD and the Department of State, and local election officials. The FVAP adjusted the survey results for members of the active duty military (ADM) because the ADM is \"more male and a much younger population than the overall citizen voting population,\" and both groups participate at lower rates than other groups in the voting population, which \"drives down the voter participation rates of the military, all other things being equal.\" The adjusted results \"allow for a direct comparison to the general voting population.\" The report noted that 85% of ADM were registered, in comparison to 65% of the civilian voting age population (CVAP). In terms of voter turnout, 45.5% of ADM voted, as compared to 46% of the CVAP. Data for overseas citizens are difficult to obtain because the number of overseas citizens is unknown and a random sample cannot be obtained. However, according to the responses of local election officials who were surveyed (53% of 7,296 total jurisdictions), 45% of registered overseas citizens voted in the election. Finally, the report noted that ADM voter registration was virtually the same for 2008 and 2010 (both nonpresidential elections), while a 21% increase in the unadjusted voter participation rate from 2006 to 2010 \"may indicate that the 45-day prior ballot transmission, electronic ballot transmission, and expedited ballot return of overseas military ballot requirements of the MOVE Act have substantially improved the opportunity for active duty military voters to successfully cast a ballot.\" \nThe Overseas Vote Foundation issued its report on the 2010 election on February 10, 2011, which found that 18% of UOCAVA voters in the survey reported that they did not receive a requested ballot and another 16.5% reported that they had received the ballot \"late.\" The report was based on two separate surveys of 5,257 self-selected UOCAVA voters and 1,555 local election officials. Among its results, the survey found that 18% of voters did not receive a ballot and 16.5% of respondents received their ballot after the middle of October. With respect to the MOVE Act's requirement for electronic transmission of registration and ballot applications and blank ballots, the survey found that 80% of respondents used an electronic means to send an application, and 23% received a blank ballot electronically. \n\n\t\t2008 Election\n\nThe Overseas Vote Foundation published a report in February 2009 based on survey responses from approximately 24,000 UOCAVA voters and 1,000 local election officials. The report noted that there is \"some evidence of overall progress\" with respect to voting under UOCAVA, but that \"progress is uneven, and the surveys point to numerous areas ripe for reform.\" For example, one in four respondents did not receive their requested absentee ballot; 8% of these voters used the federal write-in absentee ballot to vote, but 14% did not participate in the election (not all voters are aware that they may use the federal write-in ballot if they have requested a regular state ballot that does not arrive). Furthermore, more than half (52%) of those who tried to vote but failed to do so either received a late ballot or never received one at all.\nThe Pew Center on the States issued a January 2009 report that examined the variety of state practices that can make casting a ballot difficult for UOCAVA voters and made recommendations for improving the voting process. Among its findings, the report noted that \"25 states and Washington, D.C., need to improve their absentee balloting rules for military voters abroad,\" and \"the other 25 states would better serve these voters by giving them additional time to request and return their ballots as well.\" The report recommended eliminating notarization requirements, expanding electronic transmission of election materials, expanding the use of the federal blank ballot if a regular ballot does not arrive in time, and providing for a period of at least 45 days to receive and return a ballot.\nIn October 2007, the Overseas Vote Foundation first launched its website to assist UOCAVA voters by providing a means to electronically register and request a ballot. The OVF, a nonpartisan, nongovernmental entity, offered the necessary information to complete the application process for each of the states, including a database of local election officials to whom the applications would be delivered.\n\n\t\t2006 Election\n\nReports on military and overseas voting in the 2006 election highlighted continuing challenges faced by these voters, despite efforts in the previous several years to improve voting rates. The GAO issued an evaluation of federal efforts to facilitate electronic absentee voting in June 2007, and the EAC reported in September 2007 the results of its survey of military and overseas voters after the 2006 election. According to the EAC report, 33% of ballots requested by these voters were cast or counted in the election; of those that were not counted, nearly 70% were returned to election officials as undeliverable. GAO estimated that there were 6 million UOCAVA voters, and its report outlined a series of recommendations to DOD (the FVAP) and the EAC for electronic solutions to overcome the obstacles posed by time and distance.\n\n\tConcluding Observations\n\nThe inherent difficulties in ensuring the voting rights of Americans scattered around the world, particularly those on active duty in the Armed Forces during wartime, have resulted in frequent revisions to applicable voting laws. Congress has been especially vigilant in recent years, amending the current law\u2014the Uniformed and Overseas Citizens Absentee Voting Act of 1986\u2014multiple times since 2001. It is the only area of election administration law in which legislation has been enacted since passage of the Help America Vote Act of 2002 ( P.L. 107-252 ).\nBased on military and overseas citizen voting participation in the 2012 election, as reported by the Election Assistance Commission, further improvements to the law might be considered in the 114 th Congress. For example, the states counted 96% of ballots that were returned by uniformed services and overseas voters in that election, yet 31% of the ballots requested by and sent to these voters were not returned to the states for counting. In contrast, 16% of domestic absentee ballots transmitted were not returned for counting. In the 2014 midterm election, 34.6% of transmitted UOCAVA ballots were not returned to election officials. Such disparities provide an incentive to seek further improvements for UOCAVA voters and Congress has shown an abiding willingness to do so.","output":"Members of the uniformed services and U.S. citizens who live abroad are eligible to register and vote absentee in federal elections under the Uniformed and Overseas Citizens Absentee Voting Act (UOCAVA, P.L. 99-410) of 1986. The law was enacted to improve absentee registration and voting for this group of voters and to consolidate existing laws. Since 1942, a number of federal laws have been enacted to assist these voters: the Soldier Voting Act of 1942 (P.L. 77-712, amended in 1944), the Federal Voting Assistance Act of 1955 (P.L. 84-296), the Overseas Citizens Voting Rights Act of 1975 (P.L. 94-203; both the 1955 and 1975 laws were amended in 1978 to improve procedures), and the Uniformed and Overseas Citizens Absentee Voting Act of 1986. The law is administered by the Secretary of Defense, who delegates that responsibility to the director of the Federal Voting Assistance Program (FVAP) at the Department of Defense (DOD).\nImprovements to UOCAVA were necessary as the result of controversy surrounding ballots received in Florida from uniformed services and overseas voters in the 2000 presidential election. Both the National Defense Authorization Act for FY2002 (P.L. 107-107) and the Help America Vote Act of 2002 (P.L. 107-252) included provisions concerning uniformed services and overseas voting. The Ronald W. Reagan Defense Authorization Act for FY2005 (P.L. 108-375) amended UOCAVA as well, and the John Warner National Defense Authorization Act for FY2007 (P.L. 109-364) extended a DOD program to assist UOCAVA voters.\nIn the 111th Congress, a major revision of UOCAVA was completed when President Obama signed the National Defense Authorization Act (NDAA) for FY2010 (P.L. 111-84) on October 28, 2009. It included an amendment (S.Amdt. 1764) that contained the provisions of S. 1415, the Military and Overseas Voter Empowerment Act (the MOVE Act).\nIn July 2014, the Election Assistance Commission issued its Election Administration and Voting Survey report that included data on UOCAVA as well as domestic registration and voting in the 2014 election cycle. The biennial UOCAVA report is mandated by the Help America Vote Act and had previously been issued separately from the general survey report. According to the results, ballots were transmitted to UOCAVA voters by election officials in all 50 states and four of the territories, but more than half of all ballots were sent from California, Florida, New York, and Washington. The rate of ballots returned for counting was slightly lower than in the midterm election of 2010, and substantially lower than in the presidential election of 2012. States counted 94.6% of the ballots that were returned. The Overseas Vote Foundation released the results of its 2014 post-election survey in February 2015. Overall, 74% of those who requested an absentee ballot received it and 23% did not (slightly more than 2% did not know or remember whether a ballot was received).\nTwo bills introduced in the 114th Congress would amend UOCAVA. These include H.R. 12 which is primarily related to other voting issues; and S. 2814, a version of the FY2017 NDAA bill introduced \"by request\" but that did not advance. In addition, a provision in the House-passed NDAA bill (H.R. 4909) would continue some UOCAVA reporting requirements, despite terminating some unrelated reports. In the 113th Congress, the Senate Committee on Rules and Administration held a hearing on S. 1728 on January 29, 2014, and reported the bill with an amendment in the nature of a substitute on April 10, 2014. It would have required states to report statistics on the number of absentee ballots sent to UOCAVA voters before the election, established online voter registration and updating for uniformed services voters, and made an absentee ballot request valid for the entire two-year federal election cycle. The legislation did not advance."}
{"id":"crs_R40607","pid":"crs_R40607_0","input":"\tIntroduction\n\nThis report focuses on the relationship between intellectual property rights (IPRs) provisions pursued through international and U.S. trade policy and access to medicines. Patents, a form of IPR, constitute the most common method by which governments encourage research and development (R&D) in order to find treatments and cures for diseases and other illnesses. A patent is a legal, exclusive right granted for the invention of a new product, process, organism, design, or plant that allows the right holder to exclude others from making, using, or selling the protected invention for a period of 20 years. By granting a temporary, exclusive right to the market for the protected product, a patent enables the right holder to generate profits to recover the costs for investment in R&D and to invest in future innovations. However, some express concerns that patents enable right holders to price drugs at levels that greatly surpass marginal costs of R&D and production, raising questions about the role of patents in affecting access to medicines and public health.\nIPR protection and enforcement have evolved from an area primarily of national concern to an area of international trade policy. The World Trade Organization (WTO) Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) established minimum standards for IPR protection and enforcement. Countries have advanced IPR protection and enforcement efforts through multilateral, regional, and bilateral free trade agreements (FTAs) and unilateral trade policies.\nCongress makes and shapes U.S. trade policy by passing statutory authorities that authorize trade programs, governing trade policy in a range of issue areas, setting trade negotiating objectives into law, engaging in consultations with the Executive Branch on trade negotiations, and conducting oversight hearings on U.S. trade policy and programs. Within Congress, there has been significant interest in promoting and protecting IPRs through trade policy for economic, health and safety, and national security reasons. IPR-based industries are viewed as an important contributor to U.S. innovation, productivity, economic growth, employment, and international trade. Advocates of a strong international IPR regime claim that counterfeiting and piracy inflict billions of dollars of revenue and trade losses annually on U.S. IPR-based industries. Some policymakers also have expressed concern about the health and safety implications of counterfeit goods, including pharmaceutical drugs. In addition, there is concern that trade in IPR-infringing products may feed into cross-border organized criminal networks.\nThe Office of the U.S. Trade Representative (USTR) considers the protection and enforcement of international IPR standards to be a high priority for U.S. trade policy. As such, the USTR has pursued strong IPR regimes by participating in multilateral, regional and bilateral FTAs, as well as through unilateral trade policy tools, namely the Special 301 process and the Generalized System of Preferences (GSP).\nIPR provisions in trade policies are among the range of social, economic, and political factors that may affect public health. While patents may provide incentives for innovation, their granting of market exclusivities and impact on prices raise questions about the affordability of medicines, particularly for (but not limited to) low-income countries and their populations. Through their possible impact on innovation and drug prices, patents may affect the ability of countries to provide medicines to their populations and for populations in general to access medicines. For some observers, this may represent a conflict between free market and public health policies. While the commercialization of public health may promote innovation and efficiency, the laws of supply and demand may cause some people to be \"priced out\" of a given market.\nAccording to the World Health Organization (WHO), about one-third of the world's population, primarily residing in poorer parts of Africa and Asia, lacks regular access to essential medicines. Infectious diseases are major contributors of illness, death, and poverty in the developing world. At the end of 2008, an estimated 33.4 million people were living with HIV\/AIDS, with about two-thirds of them in Sub-Saharan Africa. Other infectious diseases, such as tuberculosis, malaria, and influenza, present critical global health challenges as well. Over one billion people, primarily among the world's poorest, also are afflicted with neglected tropical diseases, which largely are infectious parasitic diseases prevalent in \"impoverished\" environments. With the global economic crisis, access to medicines may deteriorate.\nIn 2000, the United Nations established eight Millennium Development Goals (MDGs), to which the United States is a signatory, in an effort to end poverty by year 2015. One of the U.N. targets is to achieve universal access to treatment for HIV\/AIDS by 2010 and to have halted and reversed the spread of HIV\/AIDS, malaria, and other major diseases by 2015. While prevention is key to combating infectious diseases, access to treatment is also critical to controlling epidemics. As such, another MDG target is to cooperate with pharmaceutical companies to provide access to affordable essential drugs in developing countries. Access to medicines has improved dramatically over the past couple of decades. For example, of the approximately 9.5 million people in need of treatment for HIV\/AIDS in 2008 in low- and middle-income countries, 42% had access, compared to 33% in 2007.\nAlthough access to medicines is an important goal and is the focus of the discussion at hand, some public health professionals caution that \"over-access\" also can be a problem. Proponents of this view assert that that the availability of medicines due to lower prices may promote misuse, leading to the faster onset of drug resistance and shorter duration of the drug's usefulness.\nThere is ongoing debate within Congress about the impact that IPR provisions in international and U.S. trade policies may have on access to medicines and public health. At the center of the debate is the question of how to balance providing long-term incentives for innovation through patents and addressing the short-term need to provide affordable access to medicines. The debate over the role of patents and trade policy in affecting access to medicines often has been framed as one in which high-income, developed countries and innovator (\"brand name\") pharmaceutical companies are pitted against low-income, developing countries and global health advocates. However, the number of stakeholders is more diverse, and includes middle-income, industrializing countries, and generic drug manufacturers. In addition, there is debate within the governments of countries about how to balance advancing economic interests and public health outcomes through trade policy.\nThe debate over IPRs and access to medicines represents one component of a broader debate over the relationship between international trade policy and global public health. Over time, these two arenas have shown increasing overlap. In some cases, the linkages have been clear. For instance, international trade in goods that contain dangerous pathogens or counterfeit substances presents clear threats to public health. In other cases, as in the debate at hand, the linkages may not be so clear-cutting, or trade issues may only form one component of the public health issue.\n\n\tBackground\n\nThe global pharmaceutical industry is classified as a high-technology industry by the Organization for Economic Cooperation and Development (OECD). As a high-technology manufacturing industry, the pharmaceutical industry spends a high proportion of its revenues on R&D, which can lead to innovative solutions to treat global health problems.\nThe pharmaceutical industry is heavily reliant on protection of intellectual property rights, specifically patents. Patents are the most common way for governments to encourage R&D and to foster innovation. A patent is a time-limited, legal, exclusive right granted for the invention of new products, processes, organisms, designs, and plants that allows the right holder to exclude others from making, using, or selling the protected invention for a period of 20 years. A patent does not necessarily provide the right holder with the \"right to sell\" the protected invention, as the right holder may need to comply with other regulatory laws. For example, pharmaceutical drugs generally also must be reviewed by a regulatory body (in the case of the United States, the Food and Drug Administration, FDA) for other considerations, such as health and safety, before it may be sold to consumers.\n\n\t\tIncentives for Innovation\n\nBy granting time-limited, exclusive monopolies on the market for a product, patents generate above-market financial returns that are believed to enable pharmaceutical inventors to recoup the costs of R&D and to invest in future innovations. By some estimates, the cost to drug researchers and manufacturers for creating a single new medicine is upwards of $800 million. Pointing to the high costs and uncertainty associated with R&D, supporters of patents argue that they are important for innovation in medicine by allowing right holders to recoup the costs of R&D, earn profits, and invest in future R&D. \nProponents maintain that financial incentives for innovation may be even more critical now with the global economic downturn. Some fear that tighter credit markets may compel pharmaceutical companies to reduce current R&D spending. For example, the World Intellectual Property Organization (WIPO) reported a drop of 4.5% in international patent filings in 2009.\nOthers are skeptical of the reportedly high estimates of the costs of R&D in the creation of new medicines. Some critics argue that PhRMA's cost estimate includes both the actual expenditures and the economic opportunity costs of developing new drugs. They also contend that a growing proportion of the financial returns generated from patented drugs is not directed toward new innovations, but rather to commercial marketing and political lobbying activities.\nAdditionally, pharmaceutical companies often use publicly-funded research to develop drugs for commercialization. For instance, in the United States, the National Institutes of Health (NIH) and the Centers for Disease Control (CDC) provide funding for health-related research. In general, the public sector funds R&D that is focused on basic scientific research. Pharmaceutical companies then build on this research to develop products that are patentable and commercially marketable.\n\n\t\tR&D for \"Developing Country Diseases\"\n\nWhile patents may provide incentives for innovation, some argue that the economic premise behind patents only holds in situations where markets offer sufficient financial incentives for a return on investment. Many developing countries may be unable to provide a profitable market for treatments against diseases that disproportionately affect their populations. The WHO \"Global Strategy and Plan of Action of Public Health, Innovation and Intellectual Property\" acknowledges that IPRs serve an important incentive function, but notes, \"This incentive alone does not meet the need for the development of new products to fight diseases where the potential paying market is small or uncertain (WHA61.21.6).\"\nAccording to a classification system used by the WHO, there are three main types of diseases that vary in the level of market-based incentives they offer for R&D.\nType I diseases (\"chronic diseases\"), such as cancer, diabetes, and cardiovascular disease, are prevalent in developed countries and increasingly in developing countries. Pharmaceutical companies have a strong financial incentive to invest in treatments for these diseases. Type II diseases are prevalent in developing countries. Pharmaceutical companies may have incentives to invest in such diseases if there is sufficient demand by high-income countries for research, as in the case of HIV\/AIDS. For other Type II diseases, such as malaria and tuberculosis, high-income country demand for treatments is limited and consequently, market-based incentives are not sufficient for pharmaceutical companies to invest in R&D. Type III diseases, such as dengue fever and African sleeping sickness, are those that have virtually no developed country demand. These diseases (often referred to as \"neglected tropical diseases\"), largely are concentrated in impoverished areas in developing countries. Pharmaceutical companies have little financial incentive to invest in R&D for these diseases, but may have social motivations. According to one commonly cited statistic, less than 10% of global expenditures on health research and development is directed toward the major health problems of 90% of the world's population (the so-called \"10\/90 gap\"). Some point out that low rates of R&D investment in \"developing country diseases\" may be one of many factors affecting health conditions in impoverished areas. For instance, some neglected tropical diseases are prevalent due to poverty-related conditions such as unsafe water, poor sanitation, and lack of basic health care infrastructure.\nSome of the pharmaceutical needs of developed and developing countries are increasingly converging. For example, many Type I diseases, typically associated with high-income countries (\"age\" diseases), also now account for a growing share of the disease burden in developing countries as they experience economic growth and development. The WHO estimates that 80% of the burden of chronic diseases is concentrated in low- and middle-income countries. Additionally, increasing outbreaks of infectious diseases, such as the H5N1 \"avian influenza\" and H1N1 \"swine influenza,\" and growing resistance to highly infectious diseases, such as tuberculosis, may lead to R&D for diseases that affect all populations.\n\n\t\tDrug Pricing\n\nPharmaceutical patents are among the many factors that may affect the price of medicines. Other factors include the level of economic development, taxes, tariffs, efficiency of global supply and distribution chains, government procurement plans, national health policies, and national and industry pricing decisions. These factors also are potentially significant determinants of drug pricing, but are beyond the scope of this paper.\nBy granting a time-limited monopoly on the sale of a pharmaceutical drug, patents may raise the cost of the drug by delaying the entry of generic competitors into the market. Although the time-limited, exclusive right may serve an incentive function, some public health advocates are critical of the prices charged for patented medicines, arguing that patents enable right holders to price drugs at levels that greatly surpass marginal costs of R&D and production.\nGeneric medicines\u2014typically defined as copies of a patented drugs, predominantly of drugs whose patents have expired \u2014tend to lower the price of drugs in the global marketplace in a number of ways. In general, generic manufacturers do not have to repeat research and clinical trials conducted by name brand pharmaceutical companies in order to obtain regulatory approval, but rather only need to demonstrate the \"bioequivalence\" of their product to the patented, branded medicine. In the United States, the Drug Price Competition and Patent Restoration Act of 1984 (the \"Hatch-Waxman Act of 1984\"), among other provisions, permits the FDA to provide marketing approval for generics on the basis of \"bioequivalence\" data rather than more costly, clinical data. Without this obligation, generic manufacturers are able to enter the market more quickly once patents have expired and to offer the drugs at lower prices.\nBy serving as market competitors, generics also encourage innovator pharmaceutical companies to lower the prices of their branded drugs. In addition, the entry of generic drugs into a market may encourage innovator companies to develop newer drugs, thus increasing the supply of medicines.\n\n\tAccess to Essential Medicines\n\nThe public health landscape has changed dramatically over the past 30 years. The world has witnessed the emergence of the HIV\/AIDS pandemic in the 1980s, as well as an increasing resistance to treatments against malaria, tuberculosis, and a host of bacteria over the past couple of decades. While HIV\/AIDS is a global pandemic, it disproportionately affects developing countries. In addition, many other communicable and infectious diseases have afflicted the developing world.\nPublic health outcomes depend on a wide variety of often inter-related social, economic, and political factors, one of which is access to medicines. According to the U.N. Millennium Development Goals, access to medicines is defined as \"having medicines continuously available and affordable at public or private health facilities or medicine outlets that are within one hour's walk from the homes of the population.\" \nIn discussing access to medicines, many public health advocates focus on \"essential medicines.\" Given that national governments face resource constraints in providing health care, some argue that governments should rationalize their public health policy choices, including the provision of medicines. According to the WHO, essential medicines are \nthose that satisfy the priority health care needs of the population. They are selected with due regard to public health relevance, evidence on efficacy and safety, and comparative cost-effectiveness. Essential medicines are intended to be available within the context of functioning health systems at all times in adequate amounts, in the appropriate dosage forms, with assured quality and adequate information, and at a price the individual and the community can afford. The implementation of the concept of essential medicines is intended to be flexible and adaptable to many different situations; exactly which medicines are regarded as essential remains a national responsibility.\nFor low-income countries and populations, pharmaceutical drug prices may constitute a significant barrier in accessing essential and other medicines. In most parts of the world, health services are offered through a combination of public and private health services. Oftentimes, in developing countries (and in some cases, developed countries such as the United States), consumers bear much of their health care costs directly. In contrast, some countries, such as Thailand, Japan, Turkey, and France, have more publicly-funded pharmaceutical markets, reducing the costs borne by consumers. However, in situations where the government is funding a larger share of health care, higher-priced drugs may add limits to the government's ability to provide public health care.\nThere is considerable debate on the extent to which patent protection affects access to essential medicines. The complexity is fueled by differing definitions of what is meant by \"essential medicines\" and \"access to medicines.\" For instance, there often are no agreed-upon units of analysis for evaluating access to essential medicines. Since 1977, the WHO has maintained a Model Essential Medicines List (EML) to assist national governments to select medicines to address their public health needs and to develop national lists. While the WHO EML often is used as a basis for analysis, some global health activists express concern that the EML may not be comprehensive. They argue that the EML may exclude essential medicines based on cost concerns. They contend that patents raise the cost of medicines, and that the EML includes very few medicines currently under patent. However, the EML notes that cost is not a reason to automatically exclude a medicine and points out that multiple criteria are considered in the decision process.\nMoreover, some argue that the number of essential medicines under patent is under \"constant flux\" because patents will expire for existing medicines, new patents will be sought for new medicines, new medicines will be added to the WHO's Model Essential Medicines List, and others will be removed from the EML.\n\n\tInternational Trade in Pharmaceuticals\n\nLike many other IPR-sensitive industries, the pharmaceutical industry is heavily involved in international trade. IPR-sensitive products generally rank among the fastest-growing trade commodities. International trade in pharmaceutical products is heavily dominated by the developed world, both in terms of supply and demand.\nThe global pharmaceutical market is expected to grow by 4-6% in 2010, down from 7% in 2009. The international economic downturn poses uncertainties and may affect international demand for pharmaceuticals. Although demand for pharmaceutical products tends to be more price-inelastic than for other commodities, the global pharmaceutical market is not wholly insulated from factors affecting the global economy. The international economic slowdown may constrain performance in some pharmaceutical markets more so than others. For instance, the pharmaceutical markets of countries in which consumers bear a large degree of the cost of health care may be particularly susceptible to global economic changes. However, emerging market economies are predicted to fuel growth in the pharmaceutical market sales over the next five years. \n\n\t\tSupply of Pharmaceuticals\n\nAccording to the most recent statistics compiled by the National Science Foundation (NSF), total global production in the pharmaceuticals industry was about $319 billion in 2007 (see Table 1 ). The United States ranked as the largest single-country contributor to global value-added of the pharmaceutical industry, accounting for about one-third (32%) of the world market share. The European Union accounted for another third (31%) of the global share. Other significant contributors to pharmaceutical production were China (9%), Japan (8%), and Korea (3%).\nThe global pharmaceutical industry is comprised mainly of a small number of multinational corporations \"who negotiate with buyers and set prices and volumes for drugs.\" The top corporations are concentrated in the United States, the United Kingdom, Germany, Switzerland, and France. Industry consolidation among branded companies has become more prevalent as generic companies have made greater inroads into the global pharmaceutical market.\nWhile high-income countries constitute the largest source of pharmaceuticals, developing countries have accounted for a growing share of global production in the pharmaceutical industry. For instance, China's share of total pharmaceutical production in 2007 was three times its share in 1997. Likewise, India's share in 2007 was six-fold greater than a decade ago.\nIndia and China have become important exporters of generic drugs and active pharmaceutical ingredients. Several industrializing countries\u2014primarily Brazil, China, Cuba, India, among others\u2014also are developing innovative capacity for biomedical research.\n\n\t\tDemand for Pharmaceuticals\n\nIn terms of demand for pharmaceutical products, the multi-billion dollar global pharmaceutical market is highly polarized. The United States is the world's largest pharmaceutical market, and along with Japan and Europe, account for about 75% of global sales of pharmaceutical products. In total, the thirty wealthiest countries in the OECD account for 80% to 90% of global sales of patented medications. In contrast, the developing world, which comprises over 80% of the world's population, represents about 10% of global pharmaceutical sales.\nHowever, the geographic balance may be shifting toward emerging market economies. A report by IMS Health, a market research firm, identified 17 countries as \"pharmerging\" markets. These 17 countries are expected to generate the largest amount of pharmaceutical market growth over the next five years. The shift in the global pharmaceutical market may be due to a number of factors, including changes in the global economy, such as growing middle classes in some countries; changes in the health care environment, including greater access to health care; and the growth of the generic drug market.\nIn the report, IMS Health categorizes the countries into three levels. China, the only country to be in the first tier, is expected to contribute an additional $40 billion in annual pharmaceutical sales by 2013. The second tier is comprised of Brazil, India, and Russia, which are expected to generate between $5 billion to $15 billion each annually in sales over the next five years. Another thirteen countries (Argentina, Egypt, Indonesia, Mexico, Pakistan, Poland, Romania, Thailand, Turkey, Ukraine, and Venezuela) in the third tier are predicted to contribute between $1 billion to $5 billion each in annual sales in the next five years. Collectively, these seventeen countries are expected to contribute about 48% of annual market growth in 2013.\n\n\t\tU.S. Trade in Pharmaceutical Products\n\nFor the United States, the pharmaceutical industry contributes to U.S. economic growth and employment. After experiencing lower levels of growth in the past few years amid the global and U.S. economic downturn, the U.S. pharmaceutical market is expected to rebound in 2010. Consumer spending on pharmaceuticals is forecasted to grow by 3.3% in 2010. Generic drugs are expected to apply downward pressure on the overall prices for the industry, while making more products available to the public and raising sales. Following a slowdown over the past couple of years, pharmaceutical industrial production is predicted to grow by 7.2% in 2010. \nRecent trends in international trade in the U.S. pharmaceutical industry are similar to those of U.S. high technology industries overall. Through the 1980s and early 1990s, the U.S. high technology industries were net exporters. However, since the late 1990s, the United States has become a net importer of pharmaceuticals. \nFor the U.S. pharmaceutical industry, total trade has grown as both exports and imports of pharmaceuticals have grown. However, imports have grown faster than exports, resulting in a U.S. trade deficit (see Table 2 ). Some observers question whether this is a signal of a decline in the U.S. pharmaceutical industry's competitiveness or simply an indication of the growing role of other countries in the global pharmaceutical industry. Also, these data do not reflect which pharmaceutical products traded by the United States are high-technology and which are low-technology.\n\n\tThe WTO Agreement on Trade-Related Aspects of Intellectual Property Rights\n\nHistorically, intellectual property rights have been a matter of U.S. national concern, but over time, have evolved into a cornerstone of international trade agreements. At the center of the present international IPR system is the World Trade Organization (WTO) Agreement on Trade-Related Aspects of Intellectual Property Rights (\"TRIPS Agreement\"). The conclusion of the Uruguay Round (1986-1994) of the General Agreement on Tariffs and Trade (GATT) resulted in the creation of the WTO, an international organization established in 1995 as the successor to the GATT. The Uruguay Round also culminated in numerous WTO agreements on trade in goods, services, investment and other non-tariff barriers to trade, one of which was the TRIPS Agreement.\nThe TRIPS Agreement sets minimum standards of protection and enforcement for patents, copyrights, trademarks and other forms of intellectual property. The agreement is based on three core commitments of the WTO: minimum standards, national treatment, and most-favored-nation treatment. Adherence to the TRIPS Agreement is a prerequisite for WTO membership, and provisions of the agreement can be enforced through the WTO's Dispute Settlement Understanding Mechanism (DSM).\nEfforts by the United States, European countries, and the IPR business community in the late 1980s were important in elevating IPR as a trade issue on the agenda of the Uruguay Round of the GATT. They argued that the prevailing international IPR regime, largely administered through \"unenforceable\" international treaties, was ineffective. U.S. industry criticized the lack of consistency in the promotion, protection, and enforcement of IPR across countries. Others contended that IPR protection and enforcement should not be viewed as a trade issue. Among those who held this view, some may have agreed that the movement of counterfeit and pirated goods across national borders could be a trade issue, but may have questioned the inclusion of a wider-ranging set of IPR issues on the Uruguay Round agenda.\nAmong the debates about the implications of the TRIPS Agreement, one of the most controversial is its impact on public health. Prior to the TRIPS Agreement, developing country governments regulated public health with little involvement of international IPR regimes. This is because developing countries either did not have IPR systems in place or excluded pharmaceutical products from patents. Proponents of the TRIPS Agreement, mainly developed countries, argued that IPR protection and enforcement contribute to economic growth and development by promoting trade, investment, and technology transfer. Developed countries also asserted that patent protection is critical to public health because patents provide financial incentives for R&D to find pharmaceutical solutions for diseases.\nIn contrast, critics of the TRIPS, including many developing countries and civil society organizations, asserted that developed countries, which are the major producers of intellectual property, would be the prime beneficiaries of the TRIPS Agreement. Some also held the view that the TRIPS Agreement would raise the costs of IPR-sensitive goods, such as public health goods, constrain the ability of governments to provide health services to their populations, and hinder innovation and economic development for low-income countries. In addition, many developing countries preferred to discuss IPR issues under the auspices of the World Intellectual Property Organization (WIPO) instead of the WTO. WIPO is a United Nations agency that administers all international IPR treaties with the exception of TRIPS.\nUltimately, developing countries acceded to the TRIPS Agreement, after being granted delayed compliance periods and after negotiating goals on other issues in the Uruguay Round such as textiles and clothing. They also favored the prospect of operating under a rules-based trading system. Nevertheless, many stakeholders continue to be critical of the TRIPS Agreement. They argue that the IPR regime's architecture is biased toward IP right holders. They also contend that, in negotiations, high-income countries had greater bargaining power than lower-income countries, which are often dependent on developed countries economically. In addition, some argue that the interests of such groups as IP users, consumers, small- and medium-sized manufacturers, and public health advocates were not sufficiently represented in the TRIPS Agreement negotiations.\n\n\t\tDoha Declaration on Public Health\n\nIn agreeing to launch the Doha Round of the WTO trade negotiations, trade ministers adopted a \"Declaration on the TRIPS Agreement and Public Health\" (the \"Doha Declaration\") on November 14, 2001. The Declaration sought to alleviate developing country dissatisfaction with aspects of the TRIPS regime, confirming that the \"TRIPS Agreement does not and should not prevent members from taking measures to protect public health.\" The Declaration committed member states to interpret and implement the agreement to support public health and to promote access to medicines for all. \n\n\tPublic Health Debates Surrounding the WTO TRIPS Agreement and the Doha Declaration\n\nThe provisions in the TRIPS Agreement and the Doha Declaration that affect pharmaceuticals continue to be the subject of ongoing debate. Issues of concern include the transitional implementation of the TRIPS Agreement, compulsory licensing provisions, parallel importing, and trade in counterfeit pharmaceuticals.\n\n\t\tTransitional Implementation of the TRIPS Agreement\n\nIn many ways, the TRIPS Agreement was modeled on the IPR standards of developed countries. Many developing countries would have to devote more resources, to develop more technical expertise and capacity, and to make more significant changes to their laws and enforcement practices to become compliant with the TRIPS Agreement than developed countries. The Doha Declaration acknowledged the burden differential by allowing developing countries to delay implementation of the TRIPS Agreement until 2005, and allowing least developed countries (LDCs) to delay implementation until 2016. The WTO does not designate countries by level of development, and under the Doha Declaration, countries are able to self-identify themselves as developing countries.\nThe TRIPS Agreement does not apply to inventions that already were in the public domain during the time that the Agreement became effective. As such, pharmaceutical inventions that were open to generic competition prior to the implementation of TRIPS do not receive patent exclusivity under TRIPS. Some public health advocates express concerns about how full implementation of the TRIPS Agreement will affect international trade in generic medicines. For example, in the case of HIV\/AIDS treatment, most first-line (initial treatments) ARV treatments are off-patent, available through lower-priced generic suppliers, or are offered at significantly discounted prices by innovator pharmaceutical companies. However, second- and third-line (newer products, often developed due to increasing resistance to initial treatments) ARVs tend to be more recent innovations that are patentable under the TRIPS Agreement. In addition, observers point out that new pharmaceutical solutions for infectious diseases, such as malaria and tuberculosis, and non-communicable diseases such as coronary disease, cancer, diabetes, and asthma may be subject to patents.\nCritics of the TRIPS Agreement maintain that implementation of the agreement will affect countries with strong domestic generic drug industries. For example, in 2005, India began implementing its national patent law as part of its TRIPS Agreement requirements. Accordingly, India has started offering patents (including for the larger number of \"mailbox\" patent applications that were held during the transitional period) for pharmaceutical products. Some question how this provision of patents may affect India's generic supplies of future pharmaceuticals for second-line and third-line ARVS, as well as for new treatments of other diseases.\nSome public health advocates express concern that full implementation of the TRIPS Agreement will affect the ability of countries to take advantage of generic goods from countries that serve as generic suppliers. For instance, the ability of Brazil and Thailand to provide HIV\/AIDS treatments and other medicines to their nationals largely has been a result of access to India's low-priced generic supplies. Others argue that full implementation of the TRIPS Agreement may not greatly change access to medicines, given that a multitude of other social, political, and economic factors affect access to medicines. \nOthers also point out that while many WTO signatories have been amenable to changing their laws to increase IPR protection, enforcement of these IPR laws has sometimes been weak or inconsistent. \n\n\t\tCompulsory Licensing\n\nCompulsory licenses are issued by governments to authorize the use or production of a patented item by a domestic party other than a patent holder (without the permission of the right holder). They are authorized by Article 31 of TRIPS, which places certain limitations on their use, scope, and duration in an attempt to balance promotion of pharmaceutical innovation and access to new medicines. A government can only issue a compulsory license under certain conditions intended to protect the right of the patent holder. The government must have \"made efforts to obtain authorization from the right holder on reasonable commercial terms and conditions.\" This requirement to first seek authorization can be waived in a time of \"national emergency,\" \"other circumstances of extreme urgency,\" \"public non-commercial use,\" or to address anti-competitive practices (Article 31(b)). If a compulsory license is issued, then \"the right holder shall be paid adequate remuneration in the circumstances of each case, taking into account the economic value of the authorization\" (Article 31(h)). The TRIPS Agreement also predominantly restricts production authorized by compulsory licenses to the domestic market (Article 31(f)).\nSome public health advocates view compulsory licenses as an important mechanism for national governments to provide access to medicines at affordable prices. Supporters of strong IPR regimes argue that, while compulsory licensing may increase short-term access to medicines in developing countries, their widespread use may harm long-term access to medicines. Pharmaceutical companies may opt not to offer their products in countries that consistently break or threaten to break patents in the future. In addition, pharmaceutical companies may not be as willing to invest in finding cures for diseases prevalent in developing countries if their profits are undermined. Others contend that because developing country markets are small, issuing compulsory licenses in these markets does not markedly affect pharmaceutical industry profits or research directions.\n\n\t\t\tNational Emergencies\n\nPart of the controversy surrounding compulsory licenses centers on the definition of a \"national emergency\" under Article 31(b) of the TRIPS Agreement. According to the Doha Declaration, each WTO member country has the right to grant compulsory licenses and to determine the grounds upon which such licenses are issued, including defining what constitutes a national emergency or other cases of extreme urgency. The Doha Declaration cites crises related to HIV\/AIDS, tuberculosis, malaria, and other epidemics as situations of potential national emergency or extreme urgency.\n\n\t\t\tLimited Use of Compulsory Licenses By Low- and Middle-Income Countries\n\nLow-income countries have issued compulsory licenses for pharmaceutical drugs under patents on a limited basis. Some speculate that the \"underuse\" of Article 31 of the TRIPS Agreement is due to the prospect of foreign trade sanctions and\/or the threat of corporate litigation. While national governments and multinational companies have expressed support for the Doha Declaration, they reportedly often have opposed the \"practical implementation\" of compulsory licensing provisions under Article 31 of the TRIPS Agreement. Others suggest that low-income countries may not issue compulsory licenses due to a dearth in administrative or legal resources. Some also suggest that low-income countries may be concerned that issuing compulsory licenses may raise concerns about their business environment and deter foreign investment. \nIn contrast, middle-income countries such as Brazil and Thailand, have threatened to issue compulsory licenses for pharmaceutical products in order to negotiate price reductions. Some assert that compulsory license threats may be a viable option limited to countries with sufficient manufacturing capacity and a sizeable market that can affect pharmaceutical companies' profits.\n\n\t\t\tUtility of Compulsory Licenses\n\nDuring the Doha Round of the WTO, the requirement under Article 31(f) of the TRIPS Agreement that compulsory licenses must be issued predominantly for the domestic market became a focal point of negotiations. In effect, Article 31(f) conveys the right of compulsory licensing only to countries with the capability to manufacture a given product and precludes countries without domestic manufacturing capability to take advantage of the flexibility. The Doha Declaration acknowledged that \"WTO members with insufficient or no manufacturing capacities in the pharmaceutical sector could face difficulties in making effective use of compulsory licensing under the TRIPS Agreement.\" As such, the Declaration (\"Paragraph 6\") directed the WTO members to formulate a solution to address the use of compulsory licensing by countries with insufficient or inadequate manufacturing capability.\nPrior to the WTO Cancun Ministerial in August 2003, WTO members agreed on a decision to waive the domestic market provision of the TRIPS article on compulsory licensing (Article 31(f)) for exports of pharmaceutical products for \"HIV\/AIDS, malaria, tuberculosis and other epidemics\" to LDCs and countries with insufficient manufacturing capacity. This decision was incorporated as an amendment to the TRIPS agreement at the Hong Kong Ministerial in December 2005. The amendment must be ratified by two-thirds of the 153 WTO member states. Until then, the 2003 waiver continues in force. To date, 54 countries\/regions (the United States, Switzerland, El Salvador, South Korea, Norway, India, the Philippines, Israel, Japan, Australia, Singapore, Hong Kong, China, the 27 countries of the European Union, Mauritius, Egypt, Mexico, Jordan, Brazil, Morocco, Albania, Macau-China, Canada, Bahrain, Colombia, Zambia, Pakistan, and the Former Yugoslav Republic of Macedonia) have ratified the amendment. The deadline for ratification has been extended to December 31, 2011.\nThe system established by the WTO allows LDCs and countries without sufficient manufacturing capacity to issue a compulsory license to a company in a country that can produce such a good. After a matching compulsory license is issued by the producer country, the drug can be manufactured and exported subject to various notification requirements, quantity and safeguard restrictions. Under the safeguard provisions, the drugs issued must be specially marketed or packaged with identifiable characteristics, such as distinguishable colors or shapes \"provided that such distinction is feasible and does not have a significant impact on price.\" It also declared that importing countries should take measures \"within their means\" to prevent trade diversion. \nWhile the TRIPS Agreement waiver arguably represents a lowering of IPR standards, its supporters assert that the waiver effectively balances the need to promote innovation and protect IPRs with the need for countries with insufficient manufacturing capacity to access medicines through trade. For some public health advocates, the extensive safeguard provisions raise concerns about whether or not manufacturing companies will have sufficient financial incentives to develop such drugs. Moreover, developing countries may not have the resources to protect against the illegitimate export of such drugs to other countries. Some observers argue that the requirements may pose extreme burdens on developing countries that are politically unstable. Some commentators also criticize the case-by-case, country-by-country nature of the notification requirements, which must be fulfilled for every request for parallel importing under a compulsory license. While several exporting countries have established laws and procedures for implementing this system, only Rwanda has availed itself to use the WTO system to import HIV\/AIDS medicines from a generic manufacturer in Canada.\nAn ongoing issue is the extent to \"middle-income\" countries, such as Brazil, Thailand, India, and China, can or should take advantage of TRIPS Agreement waiver. Developing countries range from the poorest, least-developed, and low-income countries to industrializing, middle-income countries. Some supporters of a strong IPR regime argue that a hard line should be drawn between low-income and middle-income countries. Others hold that international trade policies on innovation should acknowledge the unique needs and capacities of middle-income countries. Some observers have expressed concern that compulsory licensing may be used as an \"industrial policy\" tool. Countries may issue compulsory licenses for pharmaceuticals in order to develop their domestic pharmaceutical industries.\n\n\t\tParallel Importation\n\nParallel (\"grey market\") imports are products marketed by the right holder or with the right holder's permission in one country and imported into another country without the approval of the patent owner. Supporters of parallel trade of pharmaceuticals argue that the practice enables public health providers to take advantage of international differences in the prices of patented drugs. For some countries, importing drugs may be a more cost-effective way of accessing lower-priced medicines than manufacturing them directly. Others contend that parallel importing policies avoid addressing \"root\" problems in countries' national drug pricing strategies or manufacturing capacity. Some pharmaceutical companies that oppose parallel importation of pharmaceuticals allege that the practice prevents them from offering tiered-pricing for medicines within and among countries. For instance, some pharmaceutical companies may opt to charge lower prices for drugs in least developed countries compared to other countries. In addition, pharmaceutical companies express concern that, in the process, such drugs may be diverted to higher-income markets. Some also express concern about the impact of parallel importing on the supply of medicines in exporting countries.\nIn the United States, there has been an ongoing debate on parallel importing of pharmaceuticals. U.S. innovator pharmaceutical industries have tended to oppose U.S. imports of generic medicines. In order to increase U.S. access to more affordably-priced medicines, the 111 th Congress introduced several bills that would allow Americans to import prescription drugs from foreign countries for personal use. Although debated, no such provisions were included in the final health care legislation ( P.L. 111-148 , P.L. 111-152 ). If such provisions were passed, Canada likely would be a leading source of parallel imports of prescription drugs. \nSome U.S. consumers and other groups support parallel importation on the basis that it allow Americans to access less expensive drugs. They argue that allowing such importation would reduce drug prices. Prescription drug costs in Canada and the United States may differ due to factors such as government price controls, purchasing power, and negotiating ability. Although \"grey market\" importation of pharmaceuticals is currently prohibited in the United States, Americans are able to do so through Internet pharmacies that enable such transactions. Prosecution of these individuals has been limited. While parallel importation may exert pressure on the price of drugs, some consumers contend that it does not address broader issues in the pricing of drugs in the United States.\nPharmaceutical drug companies have raised concerns that allowing such importation may lead to health and safety threats based on counterfeiting concerns. Canada has expressed concerns that parallel importation has led to shortages of drugs. Because some drug companies reportedly restrict the supply of their products to Canada, the Canadian government has threatened to clamp down on the export of drugs to the United States.\nDebates about parallel trade raise a question of at what point of sale is the patent right exhausted. The TRIPS Agreement does not address the issue of IPR exhaustion. The Doha Declaration further says that the TRIPS Agreement implies that WTO members can chose their own IPR exhaustion regime.\n\n\t\tTrade in Counterfeit Pharmaceuticals\n\nIn the international supply and distribution of pharmaceuticals, there are concerns about the quality of medicines traded. There is broad-based concern about trade in counterfeit pharmaceuticals, which are manufactured and\/or sold with the intent to deceive consumers about their origin, legitimacy, and effectiveness. Both brand name and generic medicines can be vulnerable to counterfeiting. Examples of counterfeit drugs include those that are mislabeled, have no or incorrect active pharmaceutical ingredients (APIs), or have correct APIs but in incorrect quantities.\nIt is difficult to estimate the extent to which counterfeiting occurs. The very nature of IPR infringement\u2014secretive and illicit\u2014makes it difficult to track production and trade in counterfeit goods. Data compiled on counterfeiting comes from many different streams, including national regulatory authorities, enforcement agencies, pharmaceutical companies, non-government organizations, and other groups across geographic regions. These various groups may use different methods to gather their data, which can complicate efforts to compile and compare statistics. In addition, in some cases, companies may be reluctant to release information about IPR infringement problems that they face with their products out of concern that such public information may affect the marketing of their products.\nAccording to previous estimates by the WHO, many countries in Africa, Asia, and Latin America have areas where 10% to 30% of medicines sold are counterfeit. In contrast, in many developed countries, which tend to have stronger regulatory systems, the prevalence of counterfeit drugs is significantly lower. By some estimates, in developed countries, counterfeit medicines constitute less than 1% of market value. In over half of cases in which medicine is purchased over the Internet from unauthorized sites that do not disclose their physical address, the medicines have been found to be counterfeit. \nGeneric medicines are distinguished from counterfeit medicines in that they are legitimately produced, generally copies of off-patent drugs, and their sale or distribution is not intended to deceive consumers about their origin, authenticity, or effectiveness. While generic medicines are legitimately produced, some innovator pharmaceutical companies and public health advocates express concerns that some generic medicines may be sub-standard.\nSome industrialized countries have begun to detain shipments of generic medicines for inspection due to concerns that the drugs are counterfeit. On the one hand, increased IPR seizures may limit instances of counterfeit drugs, thus mitigating health and safety risks. On the other hand, confusion between counterfeit and legitimate generic goods may result in increased incidences of seizures of legitimate generics in transit and delay delivery of medicines. Some non-governmental organizations (NGOs) also assert that industrialized countries are using this strategy to discourage generic drug production and have urged the WTO and the WHO to take action to address this issue.\n\n\tU.S. Trade Policies on Intellectual Property Rights\n\nThe U.S. government has placed significant priority on pursuing stronger international IPR protection and enforcement through U.S. trade policy. In addition to participating in multilateral trade policy negotiations regarding IPRs, the United States seeks stronger international IPR protection and enforcement through regional and bilateral free trade agreements (FTAs) and unilateral trade policy tools.\n\n\t\tFree Trade Agreements\n\nIn pursuing IPR provisions in regional and bilateral FTAs, USTR is guided by three main goals: (1) to promote strong IPR protection and enforcement in FTAs; (2) to secure market access opportunities for U.S. businesses that rely on IPR protection; and (3) to respect the Doha Declaration on the TRIPS Agreement and Public Health. Currently, the United States has two regional FTAs and nine bilateral FTAs in force. Three FTAs (Panama, Colombia, and Korea) have been negotiated and are pending congressional approval. \nIn negotiating FTAs, the USTR frequently has sought levels of protection that exceed the minimum standards of the TRIPS Agreement (the so-called \"TRIPS-plus\" provisions). For pharmaceutical-related IPR provisions in FTAs, the USTR generally has pursued requirements on data exclusivity, patent term extensions, and patent linkage. In some cases, the USTR also has sought provisions to limit the issuance of compulsory licenses and parallel importing, particularly when negotiating FTAs with middle-income countries.\nThe USTR asserts that strong IPR provisions ultimately promote access to medicines for developing countries by encouraging innovation. However, the adoption of \"TRIPS-plus\" provisions in FTAs has garnered much criticism from public health advocates and developing countries. Some critics contend that the FTAs and unilateral U.S. trade actions (discussed below) are eroding developing countries' abilities to exercise their legal rights to issue compulsory licenses and engage in parallel importing under the TRIPS Agreement. Public health advocates also express concerns that these TRIPS-plus standards run contrary to the spirit of the Doha Declaration. Under this viewpoint, these standards \"limit national strategies to provide affordable medicines and limit market access for generic medicines, irrespective of the country's level of development or disease burden.\" \nIn addition, some argue that U.S. rigidity regarding IPRs may take away from potential U.S. gains in other areas of trade negotiation. For, FTA negotiations between the United States and Thailand, initiated in 2003, reportedly have been hampered by U.S. concerns about deficiencies in Thailand's IPR regime and Thailand's concern about the impact that raising IPRs may have on public health in Thailand, including the government's ability to provide generic versions of HIV\/AIDS medicines to its population.\nBecause U.S. trade partners have expressed reservations about the stringent IPR standards pursued by the United States, some question why countries would want to enter into FTAs with the United States. Some argue that for low-income and middle-income countries, \"Securing favorable market access for exports has usually outweighed public-health priorities\u2014even when benefits are likely to be short lived and eroded as tariffs decrease.\"\nIn response to concerns that U.S. trade negotiations may affect public health in developing countries, among other concerns (including environmental issues and labor rights), there has been somewhat of a shift in U.S. trade policy regarding pharmaceutical IPRs. A May 10, 2007 bipartisan trade deal between former President George W. Bush and congressional leaders yielded changes to the provisions in the U.S. FTA template, which is the basic text with which the United States begins FTA negotiations. The deal made optional the previously mandatory requirements for patent linkage and patent term extensions. In addition, the deal includes provisions that may shorten the period of data exclusivity used for providing marketing approval. The bipartisan trade deal scaled down IPR provisions for pharmaceutical patents in U.S. FTAs with Peru, Panama, and Colombia. The Obama Administration is reviewing U.S. trade policy, including IPRs and pharmaceuticals. \n\n\t\tUnilateral Trade Policy\n\nDomestic trade policy tools also are available for U.S. efforts to advance international patent protection and enforcement. Such trade policy tools are often effective in influencing developing countries' decisions because the United States is a significant market for some trade partners. However, the use of these tools has been criticized by various interest groups.\n\n\t\t\tSpecial 301\n\nThe most prominent of these tools is the USTR \"Special 301\" Report. Pursuant to Section 182 of the Trade Act of 1974, as amended ( P.L. 93-618 ), the USTR identifies countries with inadequate IPR protection and enforcement regimes in its yearly Special 301 Report. USTR country identifications under Special 301 consider all forms of IPR and take into account a host of factors, including the level and scope of the country's IPR infringement; the impact of infringement on the U.S. economy; the strength of the country's IPR laws and enforcement of IPR laws; the progress made by the country in improving IPR protection and enforcement; and the sincerity of the country's commitment to multilateral and bilateral trade agreements. The USTR can identify a country as denying sufficient intellectual property protection even if the country is complying with its commitments under the TRIPS Agreement. \nThe USTR identifies countries through a three-tier system, depending on the severity of the country's IPR violations. If a country is named as a \"Priority Foreign Country,\" the USTR must launch an investigation into that country's IPR practices, and the country is subjected potentially to trade sanctions, including the suspension of trade concessions or the imposition of import restrictions or duties. \"Priority Watch List\" countries are those whose acts, policies, and practices warrant concern, but do not meet all of the criteria for identification as a Priority Foreign Country. \"Watch List\" countries have intellectual property protection inadequacies that are less severe than those on the Priority Watch List, but still warrant U.S. attention. Countries identified for \"Section 306\" are monitored for compliance with bilateral intellectual property agreements used to resolve investigations under Section 301. Oftentimes, USTR identification of countries on the Special 301 list prompts countries to take actions to change their IPR practices. \nThe USTR also launches out-of-cycle reviews (OCRs) to monitor certain countries' progress on intellectual property issues. These reviews are conducted on countries that USTR considers to require further review and may result in status changes for the following year's Special 301 report.\n\n\t\t\tGeneralized System of Preferences\n\nAnother domestic policy tool used to protect intellectual property rights is the Generalized System of Preferences (GSP). The United States may consider a developing country's IPR policies and practices as a basis for granting preferential duty-free entry to certain products from the country, and can suspend GSP benefits if IPR protection is lacking. For 2008, the USTR was scheduled to continue evaluating IPR protection in Russia, Lebanon, and Uzbekistan on the basis of petitions by the International Intellectual Property Alliance (IIPA) for ongoing GSP reviews. The citation of a country on the USTR Special 301 watch lists may be grounds for withdrawing GSP benefits from that country. Because it is trade preferences that are being withdrawn, countries are unable to raise the removal of trade concessions as a WTO violation.\n\n\t\tU.S. Trade Policy and Support for Public Health\n\nThe USTR holds the view that its pursuit of a strong international IPR regime advances U.S. economic interests while at the same time supports public health. However, the U.S. government does not necessarily view trade policy as the primary policy tool to promote public health. According to a recent GAO report, \"Trade and IP efforts are only one small part of the larger U.S. government effort to increase access to medicines.\" \nU.S. government efforts directed at increasing access to medicines may be promoted through foreign, health, education, and other policy areas. There are a number of U.S. government initiatives specifically designed to increase developing countries' access to medicines. For instance, the U.S. Department of State \"primarily makes an effort to balance IP rights and access to medicines through public health initiatives it coordinates with other agencies or administers itself ... .\"\nThe United States has advocated for greater availability of certain generic drugs in certain areas of the world. One example of this is through PEPFAR, the U.S. President's Emergency Plan for AIDS Relief. This initiative \"supports the increased availability of safe, effective, low-cost, and generic antiretroviral drugs (ARVs) in the developing world ... \" To meet the need for such ARVs, the FDA introduced an expedited \"tentative approval\" process through which ARVs produced by any manufacturer, including generic manufacturers, internationally could be reviewed quickly for quality standards and approved for purchase under PEPFAR.\n\n\tIssues for Congressional Consideration\n\nPossible issues of interest for Congress include incorporating public health input into the U.S. trade policy advisory process, developing new U.S. trade policy guidance on public health, considering the implications of the U.S. strategy on IPRs and trade for U.S. access to medicines, and reviewing the range of options utilized for expanding global access to medicines. \n\n\t\tPublic Health Representation in U.S. Trade Policy Process\n\nSome observers of the U.S. trade policy process assert that the protection of intellectual property has been given more emphasis than the protection of public health. Advocates of public health maintain that the United States has a legal and moral imperative to ensure that public health is safeguarded through trade policy. They point out that the United States is a signatory to the United Nation's International Covenant on Economic, Social and Cultural Rights. Among the human rights agreed upon in the covenant, Article 12.1 provides \"the right of everyone to the enjoyment of the highest attainable standard of physical and mental health.\" Many human rights organizations view access to medicines as a critical component of the fundamental human right to health. Other observers of the U.S. trade policy process assert that protection of IPRs contributes to the protection of public health, and that U.S. trade policy is one of multiple policy arenas that support public health. \n\n\t\t\tUSTR Advisory Committee\n\nSome proponents of greater public health representation in the U.S. trade policy process often direct their attention to the USTR Advisory Committee structure, the central mechanism through which the USTR consults with the private sector and civil society organizations regarding the U.S. trade policy agenda and negotiations. Critics argue that private sector interests are granted greater representation in the advisory system than public health or other civil society interests. They argue that this \"privileged access to government policy makers\" allows commercial interests to influence the formulation of U.S. trade negotiating positions, which in turn have affected the WTO's agenda. \nAccording to a recent Government Accountability Office (GAO) report, for the review period of the report (November 2006 through November 2007), there were 16 Industry Trade Advisory Committees (ITACs), two of which each had a single public health representative. These committees are the Intellectual Property Committee and the Chemicals, Pharmaceuticals, Health Science Products and Services Committee, which were composed of 20 and 33 members, respectively, during the review period. Defenders of the current advisory system argue that public health representation is included in the ITACs most relevant to public health. Furthermore, according to officials from the USTR, it was \"not necessary to have two public health representatives on one committee representing the same view, and they said they did not find any other viable candidates with additional perspectives beyond the individuals selected.\" \nSome lawmakers have urged the USTR to reform the formal trade advisory committee system. Among the suggestions put forth are creating a new advisory committee that addresses public health issues, including issues pertaining to developing countries, or a committee focusing on trade and development. In the 111 th Congress, H.R. 2293 (Van Hollen) was introduced and referred to the House Ways and Means Committee on May 6, 2009, to ensure that public health views are represented and accommodated in developing U.S. trade policy. Specifically, the bill would require the creation of a Public Health Advisory Committee on Trade, whose membership would be restricted to individuals with expertise in various trade and public health issues, including issues in access to affordable pharmaceuticals. Membership would exclude individuals who represent commercial interests in health services or regulations. This committee would be located in the second tier of the Trade Advisory Committee System. In addition, the bill would require non-governmental public health officials to be appointed to the Advisory Committee for Trade Policy and Negotiations, a first-tier committee. \nIn the 110 th Congress, Representative Van Hollen also introduced legislation to reform the trade advisory system ( H.R. 3204 ) that differed from H.R. 2293 in certain ways. Both pieces of legislation include provisions for creating a Public Health Advisory Committee on Trade. However, H.R. 3204 also would have required that each ITAC must have at least one representative of labor, consumer interest, and public health. This provision was not included in H.R. 2293 in the 111 th Congress. \nWhile many public health advocates applaud legislation to increase public health representation on advisory trade committees, some caution against creating a trade advisory committee that focuses solely on health issues as this may insulate trade policy discussions from public health concerns. For instance, critics express concern that the USTR may limit consultations with the proposed health committee to a narrow set of technical issues and not on the broader implications of trade policy for public health. Among industry advocates, some may be critical of legislation that would dilute industry representation on the ITACs. They may contend that the ITACs were created as a vehicle for the USTR to consult specifically with industry.\nOther channels for input on FTA negotiations include the \"USTR's formal public hearings and the Federal Register comments.\" While the public health input through these alternate mechanisms may be higher, some question the relative weight of such input compared to that received through the ITACs.\n\n\t\t\tSpecial 301\n\nFor some observers of the U.S. trade policy process, another area of concern is the USTR Special 301 report. USTR identification of countries also involves gathering information and analysis based on the USTR's annual trade barriers report, as well as consultations with a wide variety of sources, including government agencies, industry groups, other private sector representatives, congressional leaders, and foreign governments. Some observers express concern that U.S. industry interests, such as those of PhRMA, heavily influence USTR's country identifications and that there is limited input from public health advocates, generic drug manufacturers, and other groups. Although the Special 301 Report is regarded by some as an effective form of U.S. political pressure on trading partners, others express concern that disproportionate representation of industry interests may limit the legitimacy of the Special 301 trade policy tool. \n\n\t\tU.S. Trade Policy Guidance\n\nIn 2002, Congress granted Trade Promotion Authority (TPA) to then President Bush. The TPA included a commitment to ensure that U.S international trade agreements respected public health. Should Congress decide to renew Trade Promotion Authority (TPA) for President Obama, Members may choose to consider what, if any, public health mandate should the TPA include. \nAnother issue that Congress may choose to consider is the extent to which the May 10, 2007 bipartisan trade deal between then President Bush and congressional leaders will serve as a template for the IPR provisions in future FTAs. Some also question whether or not this FTA template will be used for all future FTAs, or if will it be used according to the income status of a country. For instance, the template's scale-down in patent requirements was incorporated into the recently negotiated FTAs with Peru, Panama, and Colombia, which are considered low-income countries. They were not incorporated into the FTA with South Korea, which is considered to be a middle-income country. Some also question whether or not the May 10, 2007 bipartisan trade deal's changes to FTA patent provisions will be applied to existing FTAs. \nSome stakeholders encourage Congress to revisit the IPR provisions in the May 10, 2007, bipartisan trade deal. Among those stakeholders, some innovator pharmaceutical industry representatives hope that the Administration will decided to reverse the previous scale-down in patent provisions. For instance, the National Association of Manufacturers (NAM) believes that the pharmaceutical industry was unfairly singled out in the trade deal. However, others express concern that revisiting the deal may lead to re-evaluation of previously resolved issues. Global health advocates and generic pharmaceutical companies likely would resist changes to the IPR portions and could encourage further weakening of patent provisions in an effort to increase access to medicines. \nThe Trade Reform, Accountability, Development and Employment (TRADE) Act of 2009 ( H.R. 3012 , Michaud) and its companion bill ( S. 2021 , Brown), introduced in the 111 th Congress, would require a review of the economic, environmental, national security, health, safety, and other impacts of certain U.S. free trade agreements and renegotiation of those agreements based on the review. The bills also would require that the implementing bills of new trade agreements would not be expedited unless they met certain standards in fourteen different areas. With respect to IPR, under the bills, terms related to patents in the trade agreements could not limit the flexibilities and rights established in the WTO Doha Declaration on the TRIPS Agreement and Public Health, either overtly or in application. The United States-Peru FTA, which incorporates the provisions of the May 10, 2007, bipartisan trade deal, largely reflects the IPR and public health provisions called for in H.R. 3012 and S. 2021 . \n\n\t\tImplications of U.S. Strategy on IPR and Trade for U.S. Access to Medicines\n\nGiven that the United States is a primary producer of patents, some argue that a strong international IPR regime is economically beneficial to the United States. However, some observers question whether continually seeking higher standards of IPR will always be in the U.S. interest. Situations may arise in which the United States may wish to issue compulsory licenses to address global health or security threats. For instance, when the anthrax scare occurred in 2001, the United States and Canada considered issuing compulsory licenses for Cipro, a drug produced by the German company Bayer, so that their populations could access the drug at affordable prices. Some viewed U.S. and Canadian action as hypocritical, considering that these two countries had pledged to \"opt out\" of using the TRIPS Agreement flexibilities and had pressured other countries to do the same. Some observers saw the incident as a cautionary example of how limiting flexibilities in patent regimes may be detrimental to U.S. interests. Another example is the H5N1 \"avian influenza\" crisis of 2005. The United States threatened to issue a compulsory license for the production of Tamiflu, the anti-viral drug produced by the Swiss company Roche. The United States was concerned that Roche lacked the production capacity to meet global demand for the medication. Roche ultimately agreed to ramp up production for Tamiflu by sub-licensing the patent to other manufacturers. \nHigher vaccine and drug prices associated with IPR protection and enforcement may reduce incentives for developing countries to share virus samples with the WHO in order to find cures for diseases. For instance, during the H5N1 \"avian influenza\" pandemic, Indonesia limited sharing H5N1 virus samples with WHO researchers. Indonesia expressed concerns that the vaccines would be patented and then offered for purchase at marked-up prices unaffordable for Indonesia and other developing countries. In March 2007, Indonesia began sharing virus samples again under the condition that an international agreement would be negotiated for more equitable, affordable sharing of vaccines. \nAs China, India, and other industrializing countries continue to develop, a larger proportion of global patents may originate from these countries. Although the United States continued to rank as the leading source of applications under WIPO's Patent Cooperation Treaty (PCT) in 2009, U.S. patent filings fell by 11.4% from the previous year. In contrast, the growth rate in patent filings stood at 29.4% for China. These shifts in the concentration of patents and the pharmaceutical marketplace may have implications for the cost of medicines for the United States and other developed countries. \n\n\t\tNon-Patent Options for Expanding Access to Medicines\n\nSome public health advocates argue that the public should play a greater role in the provision of pharmaceutical solutions for diseases. Some suggest that U.S. strategies to address public health needs through trade policy should expand beyond patenting and compulsory licensing. The WHO Global Strategy on Public Health, Innovation and Intellectual Property calls for an exploration of a range of incentive mechanisms. In addition to patents, other methods of incentivizing the private sector to target R&D toward addressing public health needs of developing countries may include advance market commitments, patent pools, and innovation prizes. While such mechanisms may direct pharmaceutical R&D toward meeting the needs of developing countries, they may require governments to bear a greater share of the risks associated with R&D.","output":"A patent, which is a form of intellectual property right (IPR), is a legal, exclusive right granted for the invention of a new product, process, organism, design, and plant. It allows the right holder to exclude others from making, using, or selling the protected invention for a period of 20 years. Patents constitute the most common method for governments to encourage research and development (R&D) in order to find pharmaceutical treatments and cures for diseases and other illnesses.\nIPR protection and enforcement have evolved from an area primarily of national concern to an area of international trade policy. The World Trade Organization (WTO) Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) established minimum standards for IPR protection and enforcement.\nThe U.S. government considers the protection and enforcement of international IPR standards, including those for patents, to be an important goal of U.S. trade policy for economic, health and safety, and national security reasons. As such, the United States has pursued strong IPR regimes through multilateral, regional, and bilateral free trade agreement (FTA) negotiations and unilateral trade policy tools, namely the Special 301 process and the Generalized System of Preferences (GSP).\nIPR provisions in trade policies are among the range of social, economic, and political factors that may affect public health, including the ability of countries to deliver health services to their populations. Patents, through their possible impact on innovation and drug prices, may affect access to existing medicines and the development of new medicines. According to the World Health Organization (WHO), about one-third of the world's population, primarily those residing in poorer parts of Africa and Asia, lacks regular access to essential medicines.\nWhile the United States places priority on promoting a strong international IPR regime, some Members of Congress have expressed concern over how to balance the goals of providing long-term incentives for innovation through patents and addressing the short-term need to provide affordable access to medicines.\nThis report focuses on the relationship between IPR provisions in international and U.S. trade policy and access to medicines. This issue represents one component of a broader debate about the relationship between trade policy and public health. Possible issues of interest for Congress include incorporating public health concerns into the U.S. trade policy advisory process, developing new U.S. trade policy guidance on public health, considering the implications of the U.S. strategy on IPRs and trade for U.S. access to medicines, and reviewing the range of options utilized for expanding global access to medicines."}
{"id":"gao_HEHS-96-120","pid":"gao_HEHS-96-120_0","input":"\tBackground\n\nMedicaid funds most publicly supported long-term care services for persons with developmental disabilities. In 1995, Medicaid provided more than $13.2 billion to support over 275,000 individuals with these services. To be eligible for Medicaid, individuals must generally meet federal and state income and asset thresholds. To be considered developmentally disabled, individuals must also have a mental or physical impairment, with onset before they are 22 years old, that is likely to continue indefinitely and they must be unable to carry out some everyday activities, such as making basic decisions, communicating, taking transportation, keeping track of money, keeping out of danger, eating, and going to the bathroom, without substantial assistance from others.\nUntil recently, states provided the bulk of services for this population through the Medicaid ICF\/MR program. The ICF\/MR program funds large institutions and smaller settings of 4 to 15 beds, and both sizes of settings are subject to the same regulatory standards. ICF\/MR program services are available and provided as needed on a 24-hour basis. These services include medical and nursing services, physical and occupational therapy, psychological services, recreational and social services, and speech and audiology services. ICF\/MR program services also include room and board. Providers of ICF\/MR program services must adhere to an extensive set of regulations and are subject to annual on-site inspections as mandated by Medicaid.\nIn 1981, the Congress enacted the 1915(c) waiver allowing states to apply to HCFA for a waiver of certain Medicaid rules to offer home and community-based services. By 1995, 49 states had 1915(c) home and community-based waiver programs for persons with developmental disabilities. Waiver program services vary by state, but include primarily nonmedical services such as chore services, respite care, and habilitation services, which are all intended to help people live more independently and learn to take care of themselves. (See apps. II and III for a list of waiver program services and definitions in the three states we visited). Unlike ICF\/MR program services, waiver program services do not include room and board and are often provided on less than a 24-hour basis.\nHCFA carries out its waiver program oversight responsibilities through review of applications and renewals and monitoring of implementation through on-site compliance reviews. In approving waivers, HCFA reviews applications to ensure that (1) services are offered to individuals who, \u201cbut for the provision of such services . . . would require the level of care provided\u201d in an institutional setting such as an ICF\/MR; (2) total Medicaid per capita costs for waiver program recipients are not greater than total Medicaid per capita costs for persons receiving institutional care; and (3) states properly assure quality.\nThe waiver program enables states to control utilization and costs in ways not permitted under the regular Medicaid program. The waiver program has a cap for the number of persons served at HCFA-approved levels. It also allows states, with HCFA permission, to target services to distinct geographic areas or populations, such as persons with developmental disabilities or the elderly; offer a broader range of services; and serve persons with incomes somewhat higher than normal eligibility thresholds. In contrast, the regular Medicaid program generally requires that each state provide eligible beneficiaries with all federally mandated services and any optional services it chooses to offer.\nStates, however, provide some community-based services to developmentally disabled individuals through the regular Medicaid program. These services include federally mandated services, such as home health care, and other services that states may elect to provide, which are called optional services. Some of the more important optional services for the population with developmental disabilities are rehabilitative services, case management, and personal care. Because the regular Medicaid program operates as an entitlement\u2014that is, all eligible individuals in a state are entitled to receive all services offered by the state\u2014states have less control over utilization and the cost of services than in waiver programs.\n\n\tStates Use Waivers to Expand and Change Programs for Developmentally Disabled\n\nThrough the use of waivers, states have changed long-term care nationally for persons with developmental disabilities in two ways. First, states have significantly expanded the number of individuals being served. Second, states have shifted the program balance from serving most people through the ICF\/MR program to serving most through the waiver program. Generally the shift to the waiver program has been part of an evolution of services away from large and more restrictive settings to providing services in small and less restrictive settings, which are preferred by recipients and their families. Some state waiver programs are continuing to evolve from their earlier approach of providing services primarily in group home settings to one of serving people at home.\n\n\t\tStates Serve More People and Shift Balance by Serving More in Waiver Than in ICF\/MR Program\n\nFrom 1990 to 1995 the number of persons served by the waiver and ICF\/MR programs combined rose at an average annual rate of 8 percent (see table 1). The number served by the waiver program more than tripled to over 142,000 persons during this period and accounted for the entire increase in the number of persons served by both programs. States dramatically increased the number of people who received waiver program services using a variety of strategies, including substituting waiver program for ICF\/MR program services, services provided under state-only programs, and services to persons who were not being served before.\nMore people are now served through the waiver program than the ICF\/MR program. Although the percentage of persons served through the waiver program varies by state, 30 states provide services to more people through the waiver program than the ICF\/MR program (see fig. 1).\nWith the support of recipients and their families, state officials have made changes to serve more people through the waiver program. All three groups have come to believe that the alternatives possible through the waiver can better serve persons with developmental disabilities. They believe that in many cases individuals can have a higher quality of life through greater community participation, including relationships with neighbors, activities in social organizations, attendance at public events, and shopping for food and other items. This can result in expanded social networks, enhanced family involvement, more living space and privacy, and improvements in communication, self-care, and other skills of daily living.\nStates believed that they could use the waiver program to expand services while simultaneously reducing or limiting access to ICF\/MR program care as a means to control growth in expenditures. As a result, many states have closed large institutions or held steady ICF\/MR capacity even as the population in need has grown. Some states have also reduced smaller ICF\/MR settings by converting them to waiver programs. The number of people in ICF\/MR settings has dropped 7 percent from 1990 to 1995. These actions have been part of an overall strategy to change the way services are provided and financed.\n\n\t\tFlexibility of the Waiver Program Has Allowed States to Pursue Distinct Strategies\n\nStates have used the flexibility of the waiver program to pursue distinct strategies and achieve different program results as shown in the three states we visited (see table 2). These states used the waiver program to substitute for ICFs\/MR that were being closed, expand the number of persons being served, or both.\nRhode Island targeted waiver program services as a substitute for ICF\/MR program care with little change in the number of persons served. The state began the 1990s with short waiting lists for services and a goal of closing all large institutions of 16 or more beds. Providing waiver program services to many of its former residents, the state closed the Ladd Center, its last large institution, in 1994 to become one of only two states along with the District of Columbia to close all its large institutions. Rhode Island also substantially reduced the number of recipients of services in smaller ICFs\/MR by converting the ICFs\/MR to the waiver program. As a result, a substantial number of persons who had been supported through the state\u2019s ICF\/MR program are now supported by its waiver program. The number of developmentally disabled persons served through the waiver and ICF\/MR programs in Rhode Island, however, did not expand significantly.\nIn contrast, Florida\u2019s strategy for the waiver program was to expand services to a much broader population rather than using the waiver program to close ICF\/MR settings. Florida began the 1990s with substantial waiting lists for services and fewer ICF\/MR beds than most of the country relative to the size of the population with developmental disabilities. Florida chose to greatly expand the number of persons with developmental disabilities served to include people who had not been served or who needed more services. The overwhelming source of growth has been from the large increase in waiver program recipients, although Florida has also experienced modest growth in the number of ICF\/MR recipients. The state\u2019s increase in waiver program recipients includes persons who were receiving services from state-only programs and persons who were not previously served.\nMichigan used the waiver program in the 1990s to continue pursuing its goals of closing large institutions, offering placements for persons leaving small ICFs\/MR, and expanding services to those with unmet needs. Michigan, like Florida, began the 1990s with many persons who needed but had not received services. Michigan, however, had more ICF\/MR capacity than Florida. Most of Michigan\u2019s ICF\/MR capacity was in smaller settings, many of which had been developed to help the state close some of its large institutions. As a result, Michigan has closed all but about 400 beds in large institutions and significantly increased the number of persons served. State officials told us that by 1995, Michigan was serving more individuals in the waiver program than in its ICF\/MR program.\n\n\t\tStates Are Changing Their Waiver Programs to Serve More Individuals at Home\n\nIn the continuing evolution of services for persons with developmental disabilities, some states, such as Florida, Michigan, and Rhode Island, are changing the focus of waiver program services from group home care to more tailored services to meet individuals\u2019 unique needs and preferences at home. These states and most others began their waiver programs by providing services primarily in group homes. Recently, state officials have come to believe that for many persons, services are best provided on a more individualized basis in a recipient\u2019s home\u2014his or her family\u2019s home or own home or an adult foster care home\u2014rather than in group home settings. The three states we visited became convinced that this was possible even for persons with severe disabilities, in part, because of their success in using this approach in the recently concluded Community Supported Living Arrangements (CSLA) program.\nSlightly more than one-half of all waiver program recipients nationally are estimated to have been living in settings other than group homes in 1995.In each of the three states we visited, many 1915(c) waiver recipients now live in their family\u2019s home or their own home. In Florida, more than one-half of all waiver recipients live in settings other than group homes, including nearly 50 percent who live in their family\u2019s homes. The majority of Michigan\u2019s waiver program recipients live in small settings other than licensed group homes. Just under one-half of Rhode Island\u2019s recipients live in settings other than group homes. Each state expects the percentage of waiver program recipients living in nongroup home settings to increase.\nOfficials in the states we visited and other experts told us that serving individuals with developmental disabilities who live in their own or their family\u2019s home and receive less than 24-hour support often requires changes in the service delivery model. For example, these settings may need environmental changes and supports to make them suitable for persons with developmental disabilities. Such changes could include the installation of ramps for persons with physical disabilities or emergency communication technology and other equipment for persons with communication or cognitive impairments or a history of seizures who may need quick assistance. Paid assistance may also be needed to provide a variety of other services, such as supervision of or assistance in toileting, dressing, bathing, carrying out routine chores, managing money, or accessing public transportation and other community services. Assistance for such services is often provided on an individual basis rather than for several persons in a group home. Respite care may also be provided for family caregivers.\nAlthough the three states we visited have made major commitments to convert their waiver programs to individualized supports at home, these changes will require significant change on the part of everyone involved and could take years to fully implement. For example, some public agencies own or have long-term contracts for the use of group homes or have encouraged the development of private group homes. In addition, state officials told us that public agencies and other service providers may find it difficult to adapt to designing services for each individual living at home rather than offering services in the more familiar group home program setting. In addition, some family members and advocates have expressed concern that the level of funding available for and the range of services offered under the waiver program may not be sufficient for individuals who require constant supervision and care.\n\n\tMedicaid Costs Rose During Planned Expansion in Persons Served\n\nNationwide, Medicaid costs for long-term care services for persons with developmental disability rose at an average annual rate of 9 percent between 1990 and 1995 as states implemented their planned increases in the number of persons served. Costs rose from $8.5 billion in 1990 to $13.2 billion in 1995. (See table 3.) Most of the increase reflected increased costs for waiver program services, but increased ICF\/MR program costs also were a factor. Waiver program costs grew primarily because more people were served as per capita waiver costs increased slightly less than inflation. ICF\/MR program cost increases resulted solely from growth in per capita ICF\/MR program costs, which rose somewhat faster than inflation, as the number of residents declined. In 1995, per capita waiver program costs ($24,970) remained significantly lower than per capita ICF\/MR spending ($71,992).\n\n\t\tState Costs and Cost Increases Vary\n\nIn the three states we visited, average per capita costs and average increases in per capita costs varied according to each state\u2019s waiver program strategy and other factors (see table 4). Florida per capita waiver costs, for example, were among the lowest in the nation, in part, as a result of the state\u2019s strategy to expand services to more persons. According to state officials, limited resources were stretched to cover as many people as possible by providing each individual with the level of services required to prevent institutionalization rather than providing all the services from which an individual might benefit.\nBy contrast, from 1990 to 1994 Rhode Island\u2019s per capita costs under the waiver and ICF\/MR programs were much higher than the national average.The large increase in per capita waiver program costs resulted because unlike Florida and Michigan, Rhode Island substituted waiver program services for persons receiving high-cost ICF\/MR care and closed its last large institution. As a result, Rhode Island was serving a substantial number of persons through the waiver program who had previously received expensive ICF\/MR care. At the same time, ICF\/MR per capita costs were also higher, in part, because as the number of people in ICF\/MR settings declined, the fixed costs were spread over a smaller population. In addition, the population that remained in ICF\/MR settings was substantially disabled and required intensive services.\n\n\tEnrollment Caps and Management Practices Helped Limit Cost Growth\n\nCost growth has been limited by two factors. First is a cap on the number of program recipients. Second, states have employed a variety of management practices to control per capita spending.\nFundamental to waiver program cost control has been the federal Medicaid rule which, in effect, capped the number of recipients who could have been served each year. HCFA approves each state\u2019s cap, and states are allowed to deny admission for services to otherwise qualified individuals when the cap is reached. By contrast, under the regular Medicaid program, all eligible recipients must be served and no limits exist on the number of recipients. As a result, waiver caps have given states a greater ability to control access and thereby cost growth than would have been possible if they had expanded services through the regular Medicaid program.\nStates have also used several management practices to help contain costs. In the three states we visited, these management practices include fixed agency budgets for waiver services and linking management of care plan and use of non-Medicaid services to individual budgets for each person served.\n\n\t\tFixed Agency Budgets\n\nStates have developed fixed agency budgets within limits established under waiver rules. In Florida, Michigan, and Rhode Island, appropriations for waiver program and other services are in the budgets of developmental disability agencies. In Florida, budgets are allocated among 15 state district offices. In Michigan, budgets for serving persons with developmental disabilities are allocated among 52 local government community mental health boards and three state-operated agencies, each responsible for serving a local area. State or local agencies are responsible for approving individual service plans, authorizing budgets for the costs of these services, and monitoring program expenditures on an ongoing basis to ensure that total expenditures are within appropriated budgetary amounts as the three states transition to a person-centered planning basis in their waiver programs.\n\n\t\tManagement of Care Plan Linked to Individual Budgets\n\nThe three states we visited require that case managers or service providers in consultation with case managers develop a plan of care linked to an individual budget for each person being served in the person-centered planning approach. This care plan and its costs must be approved by the state developmental disability agency, state district office, or community mental health board, depending upon the state. Upon agency approval, the case manager oversees the implementation of the care plan and monitors it on an ongoing basis. Significant variation from the plan requires agency approval and changes in service and budget authorizations. This process provides more stability for the budget process and allows state agencies to monitor their overall spending on an ongoing basis and plan for contingencies to remain within budget levels.\n\n\t\tUse of Non-Medicaid Services Linked to Individual Budgets\n\nState developmental disability agencies in the three states we visited also require that case managers build into the care planning process and individual budget determination the use of non-Medicaid services, both paid and unpaid. State officials told us that this is a part of better integration of persons with developmental disabilities into the community and making it possible to extend available waiver dollars to serve as many people as possible. When paid services are needed, states try to take advantage of services funded for broader populations, such as recreation or socialization in senior citizen centers or the use of public transportation. States also attempt to use unpaid services when possible by increasing assistance from families, friends, and volunteers. State officials told us that use of these paid and unpaid services reduces the need for Medicaid-financed supervision and care.\n\n\tChange in Federal Rule Could Result in Higher Caps and Costs\n\nA change in federal rules could result in high waiver caps on enrollment and therefore higher costs. Until August 24, 1994, HCFA limited the number of waiver recipients in a state under the so-called cold bed rule. This rule required that each state document for HCFA approval that it either had an unoccupied Medicaid-certified institutional bed\u2014or a bed that would be built or converted\u2014for each individual waiver recipient the state requested to serve in its application. However, in 1994, HCFA eased waiver restrictions by eliminating the cold bed rule so that states were no longer required to demonstrate to HCFA that they had \u201ccold beds.\u201d\nHCFA took this action because it believed that the cold bed rule placed an unreasonable burden on states by requiring them to project estimates of additional institutional capacity. HCFA now accepts a state\u2019s assurance that absent the waiver the people served in the waiver program would receive appropriate Medicaid-funded institutional services. As HCFA recognized when it eliminated the cold bed rule, this change could result in higher waiver costs if states elect to increase the number of waiver recipients more rapidly than before. HCFA, however, recognized that the state budget constraints could play a restrictive role in waiver growth.\nState officials told us that elimination of the cold bed rule allows them to expand waiver services more rapidly than in the past, both to persons not currently receiving services and to others receiving services from state-only programs. State officials told us that converting state program recipients to the waiver was particularly advantageous given the federal Medicaid match. Officials in Florida and Michigan told us that they are planning to expand the number of people served in the waiver program more rapidly than they could have under the cold bed rule. This could increase costs more rapidly than in the past. Officials in Florida and Michigan said that they will phase in increases in the number of waiver recipients to stay within state budget constraints and to allow for a more orderly expansion of services to the larger numbers of new recipients.\n\n\tMore Development of Promising Quality Assurance Approaches Needed to Reduce Potential Risks\n\nTo increase quality for recipients and families, states are introducing promising quality assurance innovations while simultaneously building in more flexibility in traditional quality assurance mechanisms. These changes are intended to provide recipients and families with a greater choice of services within appropriate budget and safety limits. However, until states more comprehensively develop and test these approaches, some recipients may face health and safety risks and others may not have access to the range of choices state programs seek to provide.\n\n\t\tStates Continue to Use Traditional Mechanisms to Assure Adequate Quality\n\nOne of the most important mechanisms that states use to assure adequate quality is service standards. Each state, as required by HCFA guidelines, adopts or develops standards for each waiver service. Waiver standards are specified in state and local laws, regulations, or operating guidelines and are enforced by specific agencies. As a result, waiver standards reflect specific state processes and choices in how states assure quality, and are not uniform across the nation as are ICF\/MR standards. (For example, see app. IV for a summary of how Florida meets HCFA requirements for specifying waiver standards.) Waiver standards may include professional licensing standards, minimum training requirements for staff, and criminal background checks for providers. The standards may also include requirements for certification of group home or other facilities and compliance with local building codes and fire and safety requirements.\nStates review providers and services on an ongoing basis and have abuse and neglect reporting procedures in place. Florida, Michigan, and Rhode Island, for example, conduct routine and unannounced reviews of providers. As a result of these reviews, providers can be required to provide plans of correction for identified problems and implement improvements. In some cases, providers have lost their certification to participate in the program. These states also have formal grievance procedures and a grievance unit, such as a state agency or human rights committee, to investigate complaints on a statewide, regional, or agency basis. Through these processes, the states have also identified problems in quality and taken steps to ensure corrective action.\nIn addition to state quality assurance efforts, HCFA regional staff conduct a compliance review of each state\u2019s waiver program before its renewal. HCFA uses a compliance review document for this process. HCFA reviews involve random selections of recipients for interviews and visits to their homes. The reviews also involve interviews with and visits to service providers and advocates. If HCFA determines that quality is not satisfactory, it can require that a state take corrective action before a waiver can be renewed.\n\n\t\tStates Are Introducing Innovations to Promote Better Quality for Recipients\n\nStates are taking steps to develop or enhance existing mechanisms to promote better quality in waiver program services. Many of these mechanisms were used in the recently concluded CSLA program to provide individualized services to people at home and are now being incorporated into the home and community-based waiver program even for persons with substantial disabilities. Advocates, family members, and recipients have been generally positive about this shift to support individuals in more integrated community settings.\nPerson-centered planning is a key element of providing better quality in waiver services, according to officials in the three states we visited and national experts. The planning process and the resulting plans are individualized to incorporate substantial recipient and family input on how the individual will live and what assistance the individual will need. The case manager, called support coordinator in some states, has primary responsibility in person-centered planning, which includes working with the recipient to develop the plan, arranging for needed services, monitoring service delivery and quality, and revising the plan as necessary. A budget for the individual is established to provide the services identified as appropriate and cost-effective. Recipients and case managers choose providers on the basis of their satisfaction with services. State officials told us that this approach not only gives recipients more say in how they are served but that the resulting competition motivates providers to increase service quality.\nLinking persons living in the community with volunteers who can provide assistance and serve as advocates is seen as another important mechanism for promoting quality. For example, some states, including the three we visited, have a circle of friends or similar process for individual recipients. A circle of friends is a group of volunteers, which can include family, friends, community members, and others, who meet regularly to help persons with disabilities reach their goals. These volunteers help plan how to obtain needed supports; help persons participate in community, work, or leisure activities they choose; and try to help find solutions to problems. By integrating recipients in the community, recipients have more choice and can get better quality services, according to national experts and state officials we interviewed. This community integration increases the number of persons who can observe and identify problems in service quality and notify appropriate officials when there are deficiencies.\nBecause program quality depends on the active participation of recipients, families, and service providers, states are also providing substantial training to these groups to encourage and strengthen their participation. Training can include informing recipients and families of available service providers, procedures for providing feedback about services, and steps to take if quality is not improved. Training for service providers may focus on reinforcing the fact that the recipient and family have the right to make choices about services and that staff must be responsive to those choices unless they are inappropriate for safety concerns or for other compelling reasons, such as available financial resources.\nStates are also modifying how they monitor quality. Traditionally, they emphasized compliance with certain criteria, such as maintaining a minimum level of staff resources and implementing standard care processes. Some states are focusing their quality monitoring more on outcome measures for each individual while still assessing providers\u2019 compliance with program standards. For example, states, including the three we visited, are trying to determine whether the recipients are living where and with whom they chose, whether they are safe in this environment, and whether they are satisfied with their environment and the services they receive.\nStates are also attempting to make their oversight less intrusive for the recipients. For example, some states use trained volunteers to interview recipients at their homes on a periodic basis to check the quality of services received. In other instances, although case managers are required to meet recipients on a regular basis, meetings can be arranged at the recipient\u2019s convenience, including in the evening or on weekends or at a place the recipient likes to meet at, such as at his or her home or local park or library. Case managers talk with the recipients and their families about the quality of the services they receive and take any actions necessary to correct deficiencies.\n\n\t\tSome Recipients May Face Avoidable Risks Until States More Fully Develop and Implement Evolving Approaches to Quality\n\nWhile officials in the three states we visited and other experts agree that many persons prefer services provided at home to services provided in institutions or other group settings, they also note that providing services at home presents unique problems in ensuring quality. Because the new focus is on providing individual choice, the types of services that are offered and the means for providing these services can vary greatly. To promote quality and ensure that minimum standards are met requires a broad range of approaches.\nAlthough states continue to develop quality assurance mechanisms, state officials acknowledge that these are not yet comprehensive enough to assure recipient satisfaction and safety. In the three states we visited, state officials and provider agencies told us that they are still developing guidance and oversight in a number of key areas. Michigan, for example, is revising its case management standards and statewide quality assurance approaches. Rhode Island is developing a more systematic monitoring approach statewide, and Florida is continuing to implement and evaluate its independent service coordinator approach.\nOne of the greatest difficulties in developing quality mechanisms for services in alternative settings is balancing individual choice and risks.Where greater choice is encouraged and risks are higher, more frequent monitoring and contingency planning need to be built into the process. Yet some professional staff and agency providers in the states we visited believe that they do not have sufficient guidance on where to draw the line between their assessment of what is appropriate for the disabled person and the individual\u2019s choice. For example, some persons with mental retardation cannot speak clearly enough to be understood by people who do not know them; cannot manage household chores, such as cooking in a safe manner; or have no family member to perform overall supervision to keep them from danger. Yet these people express a desire to live independently, without 24-hour staff supervision.\nFlorida, Michigan, and Rhode Island each attempt to customize supports to reduce risks for individuals who live in these situations. They may arrange for roommates, encourage frequent visits and telephone contact by neighbors and friends, enroll individuals in supervised day activities, install in-home electronic access to emergency help, and provide paid meal preparation and chore services. As this new process evolves, states and providers seek to develop a better understanding of how to manage risks and reduce them where possible. This should lead to improved guidance for balancing risks and choices for each recipient\u2019s unique circumstances.\nDetermining what recipients\u2019 choices are can be difficult for a number of reasons. First, many of these individuals have had little experience in making decisions and may also have difficulty in communicating. In addition, some recipients have complained that they are not being provided the range of choices to which they should have access and that quality monitoring is too frequent or intrusive despite the changes states have introduced. However, concern has been expressed that quality assurance is not rigorous enough to reduce all health or safety risks and that the range of choices is too great for some individuals.\nState officials and other experts we interviewed have emphasized the need for vigilance to protect recipients and ensure their rights. They have been especially concerned with assuring quality for recipients who are unable to communicate well and for those who do not have family members to assist them. The states we visited are taking special precautions to try to assure quality in these cases\u2014such as recruiting volunteers to assist and asking recipient groups to suggest how to assure quality for this vulnerable population. However, state officials and HCFA agree that more development of quality assurance approaches is needed.\n\n\tAgency Comments\n\nOfficials from the Office of Long-Term Care Services in HCFA\u2019s Medicaid Bureau and from Florida, Michigan, and Rhode Island reviewed a draft of this report. They generally agreed with its contents and provided technical comments that we incorporated as appropriate.\nWe are sending copies of this report to the Secretary of Health and Human Services; the Administrator, Health Care Financing Administration; and other interested parties. Copies of this report will also be made available to others upon request.\nIf you or your staff have any questions, please call me at (202) 512-7119; Bruce D. Layton, Assistant Director, at (202) 512-6837; or James C. Musselwhite, Senior Social Science Analyst, at (202) 512-7259. Other major contributors to this report include Carla Brown, Eric Anderson, and Martha Grove Hipskind.\n\nScope and Methodology\n\nWe focused our work on Medicaid 1915(c) waivers for adults with developmental disabilities. We also examined related aspects of institutional care provided through ICF\/MR, state plan optional services, and the CSLA program, all under Medicaid.\nTo address our study objectives we (1) conducted a literature review, (2) interviewed national experts on mental retardation and other developmental disabilities, (3) collected national data on expenditures and the number of individuals served, and (4) collected and analyzed data from three states. National experts interviewed included officials at HCFA; the Office of the Assistant Secretary for Planning and Evaluation (ASPE) in the Department of Health and Human Services; the Administration on Developmental Disabilities; the President\u2019s Committee on Mental Retardation; the National Association of Developmental Disabilities Councils; the Administration on Aging; the National Association of State Directors of Developmental Disabilities Services, Inc. (NASDDDS); and the ARC, formerly known as the Association for Retarded Citizens. We also interviewed researchers at University Affiliated Programs (UAP) on developmental disabilities at the Universities of Illinois and Minnesota and Wayne State University.\nWe conducted our case studies in Florida, Michigan, and Rhode Island. We chose these states for several reasons. The three states provide a range of state size and geographic representation. Each state has a substantial developmental disability waiver program that serves more people than its ICF\/MR program. Experts told us that these states would provide examples of different state strategies for utilizing the Medicaid waiver. This included their policies regarding large and small institutions as well as the design and implementation of their waiver programs. The three states also have important differences in the administrative structure of their developmental disability programs. Rhode Island administers its waiver program statewide through the Division of Developmental Disabilities in the Department of Mental Health, Retardation and Hospitals. Florida places statewide administration and oversight responsibility for its waiver program in Developmental Services, the Department of Health and Rehabilitative Services, but operational responsibility rests with its 15 district offices of Developmental Services. Michigan places statewide administration and oversight responsibility for its waiver programs in the state Department of Mental Health, but operating responsibilities rest with 52 Community Mental Health Boards (CMHB), which are local government entities covering one or more counties and three state-operated agencies each responsible for serving a local area. Florida district offices and Michigan CMHBs have discretion in the design and implementation of waiver program and other services within the broad outlines of state policy.\nWe visited each state to conduct interviews with state and local officials, researchers, service providers, advocates, families, and recipients. These interviews included state Medicaid officials and developmental services officials and officials in agencies on aging and developmental disability councils. In Florida, we also visited state district offices in Pensacola and Tallahassee to conduct interviews with district government and nongovernment representatives. In Michigan, we visited the Detroit-Wayne and Midland\/Gladwin CMHBs to conduct interviews with government and nongovernment representatives. We followed up with state agencies to collect additional information.\nThe national waiver and ICF\/MR program expenditure and recipient data used in this report are from the UAP on developmental disabilities at the Research and Training Center on Community Living, Institute on Community Integration, at the University of Minnesota. The Institute collects these data, with the exception of ICF\/MR expenditures, directly from state agencies. The Institute uses ICF\/MR expenditure data, compiled by the Medstat Group under contract to HCFA. National data from the Institute were available through 1995. The expenditure and recipient data we report for Florida, Michigan, and Rhode Island were provided to us by the state agencies responsible for developmental services and the Medicaid agencies. The latest complete data available from these three states were for 1994. We therefore used 1994 national data for comparison purposes.\nSome differences occur in the recipient counts among the national data we used from the Institute and data we collected from agencies in Florida, Michigan, and Rhode Island. These differences could affect some aspects of our comparisons of national trends and trends in the three states. Institute data on recipients show the total number of persons receiving services on a given date\u2014June 30 of each year\u2014whereas data for the three states show the cumulative number of persons receiving services over a 12-month period. Therefore, data supplied by the states could result in a larger count of program recipients than the methodology used by the Institute. This could have the impact of making per capita expenditure calculations smaller for the state data than for the national data. Our comparisons of data from the two sources, however, showed few substantial differences in the data for the three states.\nWe excluded children from our analysis because (1) their needs are different in many respects from those of adults, (2) family responsibilities for the care of children are more comprehensive than for adults, and (3) the educational system has the lead public responsibility for services for children. Recipient and expenditure data in this report, however, include some children because it was not possible to systematically exclude them. However, the percentage of children in these services is small. In 1992, for example, about 11 percent of ICF\/MR service recipients were less than 21 years old.\nWe conducted our review from May 1995 through May 1996 in accordance with generally accepted government auditing standards.\n\nMedicaid Waiver Program Services Offered for Persons With Developmental Disabilities in Florida, Michigan, and Rhode Island\n\nStates, with HCFA\u2019s approval, choose which services they offer through waiver programs and how the services are defined. States can choose from a list of standard services and definitions in the HCFA waiver application or design their own services. In designing their own services, states can add new services or redefine standard services. States can also extend optional services to offer more units of these services to waiver program recipients than are available to other recipients under the regular Medicaid program.\nThe three states we visited chose to offer a number of standard services under their waiver program. Each state also modified the definition of some standard services that it provides or offered services not on the standard waiver list. (See fig II.1.) For example, Florida modified the definition of case management to include helping individuals and families identify preferences for services. Florida also added several nonstandard, state-defined services such as behavior analysis and assessments and supported living coaching. Rhode Island\u2019s modified definition of homemaker services includes a bundle of services often offered separately, including standard homemaker services, personal care services, and licensed practical nursing services. Rhode Island also added nonstandard services to provide minor assistive devices and support of family living arrangements. Michigan modified the standard definition of environmental accessibility adaptations to include not only physical adaptations to the home, but to the work environment as well. Michigan also recently added a new state-defined service, community living supports, which is a consolidation of four services\u2014in-home habilitation, enhanced personal care, personal assistance, and transportation\u2014 previously provided separately. Florida and Michigan also chose to offer several optional services in their waiver programs.\nRhode Island\u2019s definition of homemaker includes not only homemaker services as typically defined, but personal care and licensed practical nursing services as well.\nThe HCFA definition for each standard waiver service offered in Florida, Michigan, and Rhode Island is shown in appendix III.\n\nStandard Services as Defined in HCFA\u2019s 1915(c) Waiver Application Format\n\nThis appendix shows HCFA\u2019s definition for each standard waiver service offered in Florida, Michigan, and Rhode Island. These service names and definitions are written as they appear in the latest version of the HCFA 1915(c) waiver application format, dated June 1995. Because states have the flexibility to modify these definitions, the definitions and how services are implemented vary among the states.\nAdult Companion Services: socialization, provided to a functionally impaired adult. Companions may assist or supervise the individual with such tasks as meal preparation, laundry and shopping, but do not perform these activities as discrete services. The provision of companion services does not entail hands-on nursing care. Providers may also perform light housekeeping tasks which are incidental to the care and supervision of the individual. This service is provided in accordance with a therapeutic goal in the plan of care, and is not purely diversional in nature.\nNon-medical care, supervision and Case Management: Services which will assist individuals who receive waiver services in gaining access to needed waiver and other State plan services, as well as needed medical, social, educational and other services, regardless of the funding source for the services to which access is gained.\nChore Services: Services needed to maintain the home in a clean, sanitary and safe environment. This service includes heavy household chores such as washing floors, windows and walls, tacking down loose rugs and tiles, moving heavy items of furniture in order to provide safe access and egress. These services will be provided only in cases where neither the individual, nor anyone else in the household, is capable of performing or financially providing for them, and where no other relative, caregiver, landlord, community\/volunteer agency, or third party payor is capable of or responsible for their provision. In the case of rental property, the responsibility of the landlord, pursuant to the lease agreement, will be examined prior to any authorization of service.\nEnvironmental accessibility adaptations: Those physical adaptations to the home, required by the individual\u2019s plan of care, which are necessary to ensure the health, welfare and safety of the individual, or which enable the individual to function with greater independence in the home, and without which, the individual would require institutionalization. Such adaptations may include the installation of ramps and grab-bars, widening of doorways, modification of bathroom facilities, or installation of specialized electric and plumbing systems which are necessary to accommodate the medical equipment and supplies which are necessary for the welfare of the individual. Excluded are those adaptations or improvements to the home which are of general utility, and are not of direct medical or remedial benefit to the individual, such as carpeting, roof repair, central air conditioning, etc. Adaptations which add to the total square footage of the home are excluded from this benefit. All services shall be provided in accordance with applicable State or local building codes.\nFamily Training: Training and counseling services for the families of individuals served on this waiver. For purposes of this service, \"family\" is defined as the persons who live with or provide care to a person served on the waiver, and may include a parent, spouse, children, relatives, foster family, or in-laws. \"Family\" does not include individuals who are employed to care for the consumer. Training includes instruction about treatment regimens and use of equipment specified in the plan of care, and shall include updates as necessary to safely maintain the individual at home. All family training must be included in the individual\u2019s written plan of care.\nHabilitation: Services designed to assist individuals in acquiring, retaining and improving the self-help, socialization and adaptive skills necessary to reside successfully in home and community-based settings.This service includes: retention, or improvement in skills related to activities of daily living, such as personal grooming and cleanliness, bed making and household chores, eating and the preparation of food, and the social and adaptive skills necessary to enable the individual to reside in a non-institutional setting. Payments for residential habilitation are not made for room and board, the cost of facility maintenance, upkeep and improvement, other than such costs for modifications or adaptations to a facility required to assure the health and safety of residents, or to meet the requirements of the applicable life safety code. Payment for residential habilitation does not include payments made, directly or indirectly, to members of the individual\u2019s immediate family. Payments will not be made for the routine care and supervision which would be expected to be provided by a family or group home provider, or for activities or supervision for which a payment is made by a source other than Medicaid. -- Day habilitation: Assistance with acquisition, retention, or improvement in self-help, socialization and adaptive skills which takes place in a non-residential setting, separate from the home or facility in which the individual resides. shall normally be furnished 4 or more hours per day on a regularly scheduled basis, for 1 or more days per week unless provided as an adjunct to other day activities included in an individual\u2019s plan of care. Day habilitation services shall focus on enabling the individual to attain or maintain his or her maximum functional level and shall be coordinated with any physical, occupational, or speech therapies listed in the plan of care. In addition, they may serve to reinforce skills or lessons taught in school, therapy, or other settings. -- Prevocational services not available under a program funded under section 110 of the Rehabilitation Act of 1973 or section 602(16) and (17) of the Individuals with Disabilities Education Act (20 U.S.C. 1401 (16 and 17)). Services are aimed at preparing an individual for paid or unpaid employment, but are not job-task oriented. Services include teaching such concepts as compliance, attendance, task completion, problem solving and safety. Prevocational services are provided to persons not expected to be able to join the general work force or participate in a transitional sheltered workshop within one year (excluding supported employment programs). Prevocational services are available only to individuals who have previously been discharged from a SNF , ICF [intermediate care facility], NF  or ICF\/MR [intermediate care facility for mental retardation]. Activities included in this service are not primarily directed at teaching specific job skills, but at underlying habilitative goals, such as attention span and motor skills. All prevocational services will be reflected in the individual\u2019s plan of care as directed to habilitative, rather than explicit employment objectives. -- Educational services, which consist of special education and related services as defined in sections (15) and (17) of the Individuals with Disabilities Education Act, to the extent to which they are not available under a program funded by IDEA. -- Supported employment services, which consist of paid employment for persons for whom competitive employment at or above the minimum wage is unlikely, and who, because of their disabilities, need intensive ongoing support to perform in a work setting. Supported employment is conducted in a variety of settings, particularly work sites in which persons without disabilities are employed. Supported employment includes activities needed to sustain paid work by individuals receiving waiver services, including supervision and training. When supported employment services are provided at a work site in which persons without disabilities are employed, payment will be made only for the adaptations, supervision and training required by individuals receiving waiver services as a result of their disabilities, and will not include payment for the supervisory activities rendered as a normal part of the business setting. Supported employment services furnished under the waiver are not available under a program funded by either the Rehabilitation Act of 1973 or P.L. 94-142.\nHomemaker: Services consisting of general household activities (meal reparation and routine household care) provided by a trained homemaker, when the individual regularly responsible for these activities is temporarily absent or unable to manage the home and care for him or herself or others in the home. Homemakers shall meet such standards of education and training as are established by the State for the provision of these activities.\nPersonal care services: Assistance with eating, bathing, dressing, personal hygiene, activities of daily living. This service may include assistance with preparation of meals, but does not include the cost of the meals themselves. When specified in the plan of care, this service may also include such housekeeping chores as bedmaking, dusting, and vacuuming, which are incidental to the care furnished, or which are essential to the health and welfare of the individual, rather than the individual\u2019s family. Personal care providers must meet State standards for this service.\nPersonal Emergency Response Systems (PERS): PERS is an electronic device which enables certain individuals at high risk of institutionalization to secure help in an emergency. The individual may also wear a portable \"help\" button to allow for mobility.The system is connected to the person\u2019s phone and programmed to signal a response center once a \"help\" button is activated. The response center is staffed by trained professionals. PERS services are limited to those individuals who live alone, or who are alone for significant parts of the day, and have no regular caregiver for extended periods of time, and who would otherwise require extensive routine supervision.\nPrivate duty nursing: Individual and continuous care (in contrast to part time or intermittent care) provided by licensed nurses within the scope of State law. These services are provided to an individual at home.\nRespite care: Services provided to individuals unable to care for themselves; furnished on a short-term basis because of the absence or need for relief of those persons normally providing the care.\nSkilled nursing: Services listed in the plan of care which are within the scope of the State\u2019s Nurse Practice Act and are provided by a registered professional nurse, or licensed practical or vocational nurse under the supervision of a registered nurse, licensed to practice in the State.\nSpecialized Medical Equipment and Supplies: Specialized medical equipment and supplies include devices, controls, or appliances, specified in the plan of care, which enable individuals to increase their abilities to perform activities of daily living, or to perceive, control, or communicate with the environment in which they live. This service also includes items necessary for life support, ancillary supplies and equipment necessary to the proper functioning of such items, and durable and non-durable medical equipment not available under the Medicaid State plan. Items reimbursed with waiver funds shall be in addition to any medical equipment and supplies furnished under the State plan and shall exclude those items which are not of direct medical or remedial benefit to the individual. All items shall meet applicable standards of manufacture, design, and installation.\nTransportation: Service offered in order to enable individuals served on the waiver to gain access to waiver and other community services, activities and resources, specified by the plan of care. This service is offered in addition to medical transportation required under 42 CFR 431.53 and transportation services under the State plan, defined at 42 440.170(a) (if applicable), and shall not replace them. Transportation services under the waiver shall be offered in accordance with individual\u2019s plan of care.Whenever possible, family neighbors, friends, or community agencies which can provide this service without charge will be utilized.\n\nLicensure, Certification, and Other Standards for Waiver Program Services\n\nHCFA requires that each state specify licensure, certification, or other standards for each service in its waiver application. These requirements are detailed in state and local laws, regulations, or operating guidelines and enforced by state and local agencies. Such requirements may include professional standards for individuals providing services, minimum training requirements, criminal background checks, certification for facilities, local building codes, and fire and health requirements. For example, the information below shows how Florida addresses HCFA requirements for licensure, certification, and other standards for each of its waiver program services. The information, unless otherwise noted, was obtained from Florida\u2019s Department of Health and Rehabilitative Services\u2019 July 1995 Services Directory, which provides the details of service standards in Florida\u2019s approved waiver.\n\n\tServices\n\n\t\tBehavioral Analysis and Assessment\n\n\t\t\tProvider Types\n\nPsychologists, clinical social workers, marriage and family therapists, mental health counselors, or providers certified by the Department of Health and Rehabilitative Services (HRS) Developmental Services (DS) Behavior Analysis Certification program.\n\n\t\t\tLicensure\/Registration\n\nPsychologists shall be licensed by the Department of Business and Professional Regulation in accordance with Chapter 490, Florida statutes (F.S.). Clinical social workers, marriage and family therapists, and mental health counselors shall be licensed in accordance with Chapter 491, F.S. Others must be certified under the HRS Behavior Analysis Certification program.\n\n\t\t\tOther Standards\n\nBackground screening is required for those certified under the HRS Developmental Services Behavior Analysis Certification program.\n\n\t\tChore\n\n\t\t\tProvider Types\n\nHome health agencies, hospice agencies, and independent vendors.\n\n\t\t\tLicensure\/Registration\n\nHome health and hospice agencies must be licensed by the Agency for Health Care Administration. In accordance with Chapter 400, Part IV or Part VI, F.S. Independent vendors are not required to be licensed or registered.\n\n\t\t\tOther Standards\n\nIndependent vendors must have at least 1 year of experience working in a medical, psychiatric, nursing, or child care setting or working with developmentally disabled persons. College or vocational\/technical training, equal to 30 semester hours, 45 quarter hours, or 720 classroom hours can substitute for the required experience. Background screening required of independent vendors.\n\n\t\tCompanion\n\n\t\t\tProvider Types\n\nHome health agencies, hospice agencies, and independent vendors.\n\n\t\t\tLicensure\/Registration\n\nHome health and hospice agencies shall be licensed by the Agency for Health Care Administration, Chapter 400, Part IV or Part VI, F.S. Independents shall be registered with the Agency for Health Care Administration as companions or sitters in accordance with Section 400.509, F.S.\n\n\t\t\tOther Standards\n\nBackground screening required for independent vendors.\n\n\t\tDay Training (Adult)\n\n\t\t\tProvider Types\n\nCenters or sites designated by the district DS office as adult day training centers.\n\n\t\t\tLicensure\/Registration\n\nLicensure\/registration is not required.\n\n\t\t\tOther Standards\n\nBackground screening required for all direct care staff.\n\n\t\tEnvironmental Modifications\n\n\t\t\tProvider Types\n\nContractors, electricians, plumbers, carpenters, handymen, medical supply companies, and other vendors.\n\n\t\t\tLicensure\/Registration\n\nContractors, plumbers, and electricians will be licensed by the Department of Business and Professional Regulation in accordance with Chapter 489, F.S. Medical supply companies, carpenters, handymen, and other vendors shall hold local occupational licenses or permits in accordance with Chapter 205, F.S.\n\n\t\t\tOther Standards\n\nNone.\n\n\t\tHomemaker\n\n\t\t\tProvider Types\n\nHome health agencies, hospice agencies, and independent vendors.\n\n\t\t\tLicensure\/Registration\n\nHome health and hospice agencies shall be licensed by the Agency for Health Care Administration in accordance with Chapter 400, Part IV or Part VI, F.S. Independent vendors must be registered as homemakers with the Agency for Health Care Administration in accordance with Section 400.509, F.S.\n\n\t\t\tOther Standards\n\nBackground screening required for independents.\n\n\t\tNonresidential Support\n\n\t\t\tProvider Types\n\nIndependent vendors and agencies.\n\n\t\t\tLicensure\/Registration\n\nLicensure\/registration is not required.\n\n\t\t\tOther Standards\n\nIndependent vendors must have at least 1 year of experience working in a medical, psychiatric, nursing, or child care setting or in working with developmentally disabled persons. College or vocational\/technical training that equals at least 30 semester hours, 45 quarter hours, or 720 classroom hours may substitute for the required experience. Agency employees providing this service must meet the same requirements. Background screening required of agency employees who perform this service and of independent vendors.\n\n\t\tOccupational Therapy and Assessment\n\n\t\t\tProvider Types\n\nOccupational therapists, occupational therapy aides, and occupational therapy assistants. Occupational therapists, aides, and assistants may provide this service as independent vendors or as employees of licensed home health or hospice agencies.\n\n\t\t\tLicensure\/Registration\n\nOccupational therapists, occupational therapy aides, and occupational therapy assistants shall be licensed by the Department of Business and Professional Regulation in accordance with Chapter 468, Part III, F.S. and may perform services only within the scope of their licenses. Home health and hospice agencies shall be licensed by the Agency for Health Care Administration in accordance with Chapter 400, Part IV or Part VI, F.S.\n\n\t\t\tOther Standards\n\nNone.\n\n\t\tPersonal Care Assistance\n\n\t\t\tProvider Types\n\nHome health and hospice agencies and independent vendors.\n\n\t\t\tLicensure\/Registration\n\nHome health and hospice agencies shall be licensed by the Agency for Health Care Administration in accordance with Chapter 400, Part IV or Part VI, F.S. Independent vendors are not required to be licensed or registered.\n\n\t\t\tOther Standards\n\nIndependent vendors shall have at least 1 year of experience working in a medical, psychiatric, nursing, or child care setting or working with developmentally disabled persons. College or vocational\/technical training that equals at least 30 semester hours, 45 quarter hours, or 720 classroom hours may substitute for the required experience. Background screening is required of independent vendors.\n\n\t\tPersonal Emergency Response System (PERS)\n\n\t\t\tProvider Types\n\nElectrical contractors and alarm system contractors.\n\n\t\t\tLicensure\/Registration\n\nElectrical contractors and alarm system contractors must be licensed by the Department of Business and Professional Regulation in accordance with Chapter 489, Part II, F.S.\n\n\t\t\tOther Standards\n\nNone.\n\n\t\tPhysical Therapy and Assessment\n\n\t\t\tProvider Types\n\nPhysical therapist and physical therapist assistants. Physical therapist and assistants may provide this service as independent vendors or as employees of licensed home health or hospice agencies.\n\n\t\t\tLicensure\/Registration\n\nPhysical therapists and therapist assistants shall be licensed by the Department of Business and Professional Regulation in accordance with Chapter 486, F.S., and may perform services only within the scope of their licenses. Home health and hospice agencies shall be licensed by the Agency for Health Care Administration in accordance with Chapter 400, Part IV or Part VI, F.S.\n\n\t\t\tOther Standards\n\nNone.\n\n\t\tPrivate Duty Nursing\n\n\t\t\tProvider Types\n\nRegistered nurses and licensed practical nurses. Nurses may provide this service as independent vendors or as employees of licensed home health or hospice agencies.\n\n\t\t\tLicensure\/Registration\n\nNurses shall be registered or licensed by the Department of Business and Professional Regulation in accordance with Chapter 464, F.S. Home health or hospice agencies shall be licensed by the Agency for Health Care Administration in accordance with Chapter 400, Part IV or Part VI, F.S.\n\n\t\t\tOther Standards\n\nNone.\n\n\t\tPsychological Services\n\n\t\t\tProvider Types\n\nPsychologists.\n\n\t\t\tLicensure\/Registration\n\nPsychologists shall be licensed by the Department of Business and Professional Regulation, Chapter 490, F.S.\n\n\t\t\tOther Standards\n\nNone.\n\n\t\tResidential Habilitation\n\n\t\t\tProvider Types\n\nGroup homes, foster homes, and adult congregate living facilities and independent vendors.\n\n\t\t\tLicensure\/Registration\n\nGroup and foster homes facilities shall be licensed by the Department of Health and Rehabilitative Services in accordance with Chapter 393, F.S. Adult congregate living facilities shall be licensed by the Agency for Health Care Administration in accordance with Chapter 400, Part III, F.S. Licensure or registration is not required for independent vendors.\n\n\t\t\tOther Standards\n\nIndependent vendors must possess at least an associate\u2019s degree from an accredited college with a major in nursing; education; or a social, behavioral, or rehabilitative science. Experience in one of these fields shall substitute on a year-for-year basis for required education. Background screening required of direct care staff employed by licensed residential facilities and independent vendors.\n\n\t\tRespite Care\n\n\t\t\tProvider Types\n\nGroup homes; foster homes; adult congregate living facilities; home health agencies; hospice agencies; other agencies that specialize in serving persons who have a developmental disability; and independent vendors, registered nurses, and licensed practical nurses.\n\n\t\t\tLicensure\/Registration\n\nGroup and foster homes shall be licensed by the Department of Health and Rehabilitative Services in accordance with Chapter 393, F.S. Adult congregate living facilities shall be licensed by the Agency for Health Care Administration in accordance with Chapter 400, Part III, F.S. Home health and hospice agencies shall be licensed by the Agency for Health Care Administration in accordance with Chapter 400, Part IV or Part VI, F.S.\nNurses who render the service as independent vendors shall be licensed or registered by the Department of Business and Professional Regulation in accordance with Chapter 464, F.S. Licensure or registration is not required for independent vendors who are not nurses.\n\n\t\t\tOther Standards\n\nBackground screening is required of direct care staff employed by licensed residential facilities and other agencies that serve persons who have a developmental disability and of independent vendors who are not registered or licensed practical nurses. Independent vendors who are not nurses must have at least 1 year of experience working in a medical, psychiatric, nursing, or child care setting or working with developmentally disabled persons. College or vocational\/technical training that equals at least 30 semester hours, 45 quarter hours, or 720 classroom hours may substitute for the required experience.\n\n\t\tSkilled Nursing Care\n\n\t\t\tProvider Types\n\nRegistered nurses and licensed practical nurses. Nurses may provide this service as independent vendors or as employees of licensed home health or hospice agencies.\n\n\t\t\tLicensure\/Registration\n\nNurses shall be registered or licensed by the Department of Business and Professional Regulation in accordance with Chapter 464, F.S. Home health and hospice agencies shall be licensed by the Agency for Health Care Administration in accordance with Chapter 400, Part IV or Part VI, F.S.\n\n\t\t\tOther Standards\n\nNone.\n\n\t\tSpecial Medical Home Care\n\n\t\t\tProvider Types\n\nGroup homes that employ registered nurses, licensed practical nurses, or licensed nurse aides.\n\n\t\t\tLicensure\/Registration\n\nGroup homes shall be licensed by the Department of Health and Rehabilitative Services in accordance with Chapter 393, F.S. Nurses shall be registered or licensed by the Department of Business and Professional Regulation in accordance with Chapter 464, F.S. and may perform services only within the scope of their license or registration.\n\n\t\t\tOther Standards\n\nBackground screening required of direct care staff employed by licensed group homes.\n\n\t\tSpecialized Medical Equipment and Supplies\n\n(See Florida\u2019s approved waiver renewal application for 1993-98.)\n\n\t\t\tProvider Types\n\nMedical supply companies, licensed pharmacies, and independent vendors.\n\n\t\t\tLicensure\/Registration\n\nPharmacies must be licensed by the Department of Business and Professional Regulation in accordance with Chapter 465, F.S. Medical supply companies and independent vendors must be licensed under Chapter 205, F.S.\n\n\t\t\tOther Standards\n\nNone.\n\n\t\tSpeech Therapy and Assessment\n\n\t\t\tProvider Types\n\nSpeech-language pathologists and speech-language pathology assistants. Speech-language pathologists or assistants may provide this service as independent vendors or as employees of licensed home health or hospice agencies.\n\n\t\t\tLicensure\/Registration\n\nSpeech-language pathologists and pathology assistant shall be licensed by the Department of Business and Professional Regulation in accordance with Chapter 468, Part I, F.S. Home health and hospice agencies shall be licensed by the Agency for Health Care Administration in accordance with Chapter 400, Part IV or Part VI, F.S.\n\n\t\t\tOther Standards\n\nNone.\n\n\t\tSupport Coordination (Case Management)\n\n\t\t\tProvider Types\n\nSingle practitioner vendors or agency vendors.\n\n\t\t\tLicensure\/Registration\n\nLicensure is not required.\n\n\t\t\tOther Standards\n\nSingle practitioners and support coordinators employed by agencies shall have a bachelor\u2019s degree from an accredited college or university and 2 years of professional experience in mental health, counseling, social work, guidance, or health and rehabilitative programs. A master\u2019s degree shall substitute for 1 year of the required experience. Providers (single practitioners and agency directors\/managers) are required to complete statewide training conducted by the Developmental Services Program Office, as well as district-specific training conducted by the district DS office. Support coordinators employed by agencies are also required to be trained on the same topics covered in the statewide and district-specific training; however, this training may be conducted by the support coordination agency if approved by the district and the agency trainer meets specific requirements described in Chapter 10F-13, Florida Administrative Code.\n\n\t\tSupported Living Coaching\n\n\t\t\tProvider Types\n\nIndependent vendors and agency vendors.\n\n\t\t\tLicensure\/Registration\n\nLicensure is not required.\n\n\t\t\tOther Standards\n\nIndependent vendors and employees of agencies who render this service shall have a bachelor\u2019s degree from an accredited college or university with a major in nursing; education; or a social, behavioral, or rehabilitative science or shall have an associate\u2019s degree from an accredited college or university with a major in nursing; education; or a social, behavioral, or rehabilitative science and 2 years of experience. Experience in one of these fields shall substitute on a year-for-year basis for the required college education. Agency employees are required to attend at least 12 hours of preservice training and independent vendors must attend at least one supported living-related conference or workshop before certification. All providers and employees are also required to attend human immunodeficiency virus\/acquired immunodeficiency syndrome (HIV\/AIDS) training. Background screening is required.\n\n\t\tTransportation\n\n\t\t\tProvider Types\n\nIndependent vendors and commercial transportation agencies.\n\n\t\t\tLicensure\/Registration\n\nProviders shall hold applicable licenses issued by the Department of Highway Safety and Motor Vehicles and shall secure appropriate insurance. Proof of license and insurance shall be provided to the district DS office.\n\n\t\t\tOther Standards\n\nBackground screening required for independent vendors.\n\nRelated GAO Products\n\nMedicaid Long-Term Care: State Use of Assessment Instruments in Care Planning (GAO\/PEMD-96-4, Apr. 2, 1996).\nLong-Term Care: Current Issues and Future Directions (GAO\/HEHS-95-109, Apr. 13, 1995).\nMedicaid: Spending Pressures Drive States Toward Program Reinvention (GAO\/HEHS-95-122, Apr. 4, 1995).\nLong-Term Care: Diverse, Growing Population Includes Millions of Americans of All Ages (GAO\/HEHS-95-26, Nov. 7, 1994).\nLong-Term Care Reform: States\u2019 Views on Key Elements of Well-Designed Programs for the Elderly (GAO\/HEHS-94-227, Sept. 6, 1994).\nLong-Term Care: Other Countries Tighten Budgets While Seeking Better Access (GAO\/HEHS-94-154, Aug. 30, 1994).\nFinancial Management: Oversight of Small Facilities for the Mentally Retarded and Developmentally Disabled (GAO\/AIMD-94-152, Aug. 12, 1994).\nMedicaid Long-Term Care: Successful State Efforts to Expand Home Services While Limiting Costs (GAO\/HEHS-94-167, Aug. 11. 1994).\nLong-Term Care: Status of Quality Assurance and Measurement in Home and Community Based Services (GAO\/PEMD-94-19, Mar. 31, 1994).\nLong-Term Care: Support for Elder Care Could Benefit the Government Workplace and the Elderly (GAO\/HEHS-94-64, Mar. 4, 1994).\nLong-Term Care: Private Sector Elder Care Could Yield Multiple Benefits (GAO\/HEHS-94-60, Jan. 31, 1994).\nHealth Care Reform: Supplemental and Long-Term Care Insurance (GAO\/T-HRD-94-58, Nov. 9, 1993).\nLong-Term Care Reform: Rethinking Service Delivery, Accountability, and Cost Control (GAO\/HRD-93-1-SP, July 13, 1993).\nThe first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent.\nU.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000  or by using fax number (301) 258-4066, or TDD (301) 413-0006.\nEach day, GAO issues a list of newly available reports and testimony.  To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone.  A recorded menu will provide information on how to obtain these lists.","output":"Why GAO Did This Study\n\nPursuant to a congressional request, GAO reviewed states' experiences in utilizing the Medicaid waiver program to provide care for developmentally disabled adults in alternative settings, focusing on: (1) expanding state use of the waiver program; (2) controlling long-term care costs for developmentally disabled individuals; and (3) the strengths and limitations in states' quality assurance approaches in community settings.\n\nWhat GAO Found\n\nGAO found that: (1) based on national data and three case studies, states' use of the waiver program has changed long-term care for developmental disabled persons by providing such persons with a broader range of services that they and their families prefer; (2) the waiver program has increased the number of persons served and the use of group home settings while allowing states to close many institutional care facilities and to expand services to persons in state-financed programs; (3) states now serve more developmentally disabled persons through the waiver program than the institutional program; (4) the waiver program has allowed states to pursue distinct strategies and achieve different program results; (5) from 1990 to 1995, Medicaid costs for long-term care for developmentally disabled persons increased an average of 9 percent annually due to increased costs for waiver and institutional program services, but per capita costs and cost increases varied by state; (6) the cap on the number of program recipients and state management practices helped contain these costs; (7) changes in the Health Care Financing Administration's (HCFA) process for setting waiver program caps could increase program costs, but HCFA believes that state budget constraints could limit program growth; and (8) although states are changing their quality assurance procedures for waiver program services, such as customizing quality assurance to individual circumstances, more needs to be done to improve quality oversight mechanisms and reduce participants' risk as these mechanisms evolve."}
{"id":"gao_GAO-06-840T","pid":"gao_GAO-06-840T_0","input":"\tRegional Enforcement Activities Vary Substantially\n\nEPA\u2019s enforcement program depends heavily upon inspections by regional  or state enforcement staff as the primary means of detecting violations  and evaluating overall facility compliance. Thus, the quality and the  content of the agency\u2019s and states\u2019 inspections, and the number of  inspections undertaken to ensure adequate coverage, are important  indicators of the enforcement program\u2019s effectiveness. However, as we  reported in 2000, EPA\u2019s regional offices varied substantially on the actions  they take to enforce the Clean Water Act and Clean Air Act. Consistent  with earlier observations of EPA\u2019s Office of Inspector General and internal  agency studies, we found these variations in regional actions reflected in  the (1) number of inspections EPA and state enforcement personnel  conducted at facilities discharging pollutants within a region, (2) number  and type of enforcement actions taken, and (3) the size of the penalties  assessed and the criteria used in determining the penalties assessed. For  example, as figure 1 indicates, the number of inspections conducted under  the Clean Air Act in fiscal year 2000 compared with the number of  facilities in each region subject to EPA\u2019s inspection under the act varied  from a high of 80 percent in Region 3 to a low of 27 percent in Regions 1  and 2.\nWhile the variations in enforcement raise questions about the need for  greater consistency, it is also important to get behind the data to  understand the cause of the variations and the extent to which they reflect  a problem. For example, EPA attributed the low number of inspections by  its Region 5, in Chicago, to the regional office\u2019s decision at the time to  focus limited resources on performing detailed and resource-intensive  investigations of the region\u2019s numerous electric power plants, rather than  conducting a greater number of less intensive inspections.\nWe agree that regional data can be easily misinterpreted without the  contextual information needed to clarify whether variation in a given  instance is inappropriate or whether it reflects the appropriate exercise of  flexibility by regions and states to tailor their priorities to their individual  needs and circumstances. In this regard, we recommended that it would  be appropriate for EPA to (1) clarify which aspects of the enforcement  program it expects to see implemented consistently from region to region  and which aspects may appropriately be subject to greater variation and  (2) supplement region-by-region data with contextual information that  helps to explain why variations occur and thereby clarify the extent to  which variations are problematic.\nOur findings were also consistent with the findings of EPA\u2019s Inspector  General and OECA that regions vary in the way they oversee state- delegated programs. In this regard, contrary to EPA policy, some regions  did not (1) conduct an adequate number of oversight inspections of state  programs, (2) sufficiently encourage states to consider economic benefit  in calculating penalties, (3) take more direct federal actions where states  were slow to act, and (4) require states to report all significant violators.  Regional and state officials generally indicated that it was difficult for  them to ascertain the extent of variation in regional enforcement activities,  given their focus on activities within their own geographic environment.  However, EPA headquarters officials responsible for the air and water  programs noted that such variation is fairly commonplace and does pose  problems. The director of OECA\u2019s water enforcement division, for  example, told us that, in reacting to similar violations, enforcement  responses in certain regions are stronger than they are in others and that  such inconsistencies have increased.\nSimilarly, the director of OECA\u2019s air enforcement division said that, given  the considerable autonomy of the regional offices, it is not surprising that  variations exist in how they approach enforcement and state oversight. In  this regard, the director noted, disparities exist among regions in the  number and quality of inspections conducted and in the number of permits  written in relation to the number of sources requiring permits.\nIn response to these findings, a number of regions have begun to develop  and implement state audit protocols, believing that having such protocols  could help them review the state programs within their jurisdiction with  greater consistency. Here, too, regional approaches differ. For example:    Region 1, in Boston, has adopted a comprehensive \u201cmultimedia\u201d approach  in which it simultaneously audits all of a state\u2019s delegated environmental  programs.\nRegion 3, in Philadelphia, favors a more targeted approach in which air,  water, and waste programs are audited individually.\nIn Region 5, in Chicago, the office\u2019s air enforcement branch chief said that  he did not view an audit protocol as particularly useful, noting that he  prefers regional staff to engage in joint inspections with states to assess  the states\u2019 performance in the field and to take direct federal action when  a state action is inadequate.\nWe recognize the potential of these protocols to achieve greater  consistency by a region in its oversight of its states, and the need to tailor  such protocols to meet regional concerns. However, we also believe that  EPA guidance on key elements that should be common to all protocols  would help engender a higher level of consistency among all 10 regions in  how they oversee states.\n\n\tSeveral Factors Contribute to Variations in Regional Enforcement Programs\n\nWhile EPA\u2019s data show variations in key measures associated with the  agency\u2019s enforcement program, they do little to explain the causes of the  variations. Without information on causes, it is difficult to determine the  extent to which variations represent a problem, are preventable, or reflect  appropriate regional and state flexibility in applying national program  goals to unique circumstances. Our work identified the following causes:  (1) differences in philosophical approaches to enforcement, (2)  incomplete and inaccurate national enforcement data, and (3) an  antiquated workforce planning and allocation system.\n\n\t\tRegions Differ in Their Philosophical Approaches to Enforcement\n\nWhile OECA has issued policies, memorandums, and other documents to  guide regions in their approach to enforcement, the considerable  autonomy built into EPA\u2019s decentralized, multilevel organizational  structure allows regional offices considerable latitude in adapting  headquarters\u2019 direction in a way they believe best suits their jurisdiction.  The variations we identified often reflect different enforcement  approaches in determining whether the region should (1) rely  predominantly on fines and other traditional enforcement methods to  deter noncompliance and to bring violators into compliance or (2) place  greater reliance on alternative strategies, such as compliance assistance  (workshops, site visits, and other activities to identify and resolve  potential compliance problems). Regions have also differed on whether  deterrence could be achieved best through a small number of high-profile,  resource-intensive cases or a larger number of smaller cases that establish  a more widespread, albeit lower profile, enforcement presence. Further  complicating matters are the wide differences among states in their  enforcement approaches and the various ways in which regions respond  to these differences. Some regions step more readily into cases when they  consider a state\u2019s action to be inadequate, while other regions are more  concerned about infringing on the discretion of states that have been  delegated enforcement responsibilities. While all of these approaches may  be permissible, EPA has experienced problems in identifying and  communicating the extent to which variation either represents a problem  or the appropriate exercise of flexibility by regions and states to apply  national program goals to their unique circumstances.\n\n\t\tNational Enforcement Data Are Incomplete and Inaccurate\n\nOECA needs accurate and complete enforcement data to determine  whether regions and states are consistently implementing core program  requirements and, if not, whether significant variations in meeting these  requirements should be corrected. The region or the state responsible for  carrying out the enforcement program is responsible for entering data into  EPA\u2019s national databases. However, both the quality of and quality  controls over these data were criticized by state and regional staff we  interviewed. \u201cmanagers in the regions and in OECA headquarters have become increasingly frustrated  that they are not receiving from  the reports and data analyses  they need to manage their programs\u2026 has been less attention to the data in the  national systems, a commensurate decline in data quality, and insufficient use of data by  enforcement\/compliance managers.\u201d\nConsistent with our findings and recommendations, EPA\u2019s Office of  Inspector General recently reported that, \u201cOECA\u2019s 2005 publicly-reported  GPRA  performance measures  do not effectively characterize changes in compliance or other outcomes  because OECA lacks reliable compliance rates and other reliable outcome  data. In the absence of compliance rates, OECA reports proxies for  compliance to the public and does not know if compliance is actually  going up or down. As a result, OECA does not have all the data it needs to  make management and program decisions. What is missing most, the  biggest gap, is information about compliance rates. OECA cannot  demonstrate the reliability of other measures because it has not verified  that estimated, predicted, or facility self-reported outcomes actually took  place. Some measures do not clearly link to OECA\u2019s strategic goals.  Finally, OECA frequently changed its performance measures from year to  year, which reduced transparency.\u201d For example, between fiscal years  1999-2005, OECA reported on a low of 23 performance measures to a high  of 69 measures, depending on the fiscal year.\nAlthough EPA is working to improve its data, the problems are extensive  and complex. For example, the Inspector General recently reported that  OECA cannot generate programmatic compliance information for five of  six program areas; lacks knowledge of the number, location, and levels of  compliance for a significant portion of its regulated universe; and  concentrates most of its regulatory activities on large entities and knows  little about the identities or cumulative impact of small entities.  Consequently, the Inspector General reported, OECA currently cannot  develop programmatic compliance information, adequately report on the  size of the universe for which it maintains responsibility, or rely on the  regulated universe data to assess the effectiveness of enforcement  strategies.\n\n\t\tEPA\u2019s Workforce Planning and Allocation System Is Not Adequate for Effectively Deploying Staff to Regions\n\nAs we reported, EPA\u2019s process for budgeting and allocating resources  does not fully consider the agency\u2019s current workload, either for specific  statutory requirements, such as those included in the Clean Water Act, or  for broader goals and objectives in the agency\u2019s strategic plan. Instead, in  preparing its requests for funding and staffing, EPA makes incremental  adjustments, largely based on historical precedents, and thus its process  does not reflect a bottom-up review of the nature or distribution of the  current workload. While EPA has initiated several projects over the past  decade to improve its workload and workforce assessment systems, it  continues to face major challenges in this area  If EPA is to substantially improve its resource planning, we reported, it  must adopt a more rigorous and systematic process for (1) obtaining  reliable data on key workload indicators, such as the quality of water in  particular areas, which can be used to budget and allocate resources, and  (2) designing budget and cost accounting systems that are able to isolate  the resources needed and allocated to key enforcement activities.\nWithout reliable workforce information, EPA cannot ensure consistency in  its enforcement activities by hiring the right number or type of staff or  allocating existing staff resources to meet current or future needs. In this  regard, since 1990, EPA has hired thousands of employees without  systematically considering the workforce impact of changes in  environmental statutes and regulations, technological advances in  affecting the skills and expertise needed to conduct enforcement actions,  or the expansion in state environmental staff. EPA has yet to factor these  workforce changes into its allocation of existing staff resources to its  headquarters and regional offices to meet its strategic goals. Consequently,  should EPA either downsize or increase its enforcement and compliance  staff, it would not have the information needed to determine how many  employees are appropriate, what technical skills they must have, and how  best to allocate employees among strategic goals and geographic locations  in order to ensure that reductions or increases could be absorbed with  minimal adverse impacts in carrying out the agency\u2019s mission.\n\n\tEPA Has Initiated or Planned Actions to Achieve Greater Consistency in Enforcement Activities\n\nOver the past several years, EPA has initiated or planned several actions to  improve its enforcement program. We believe that a few of these actions  hold particular promise for addressing inconsistencies in regional  enforcement activities. These actions include (1) the creation of a State  Review Framework, (2) improvements in the quality of enforcement data,  and (3) enhancements to the agency\u2019s workforce planning and allocation  system.\n\n\t\tEPA\u2019s State Review Framework Holds Promise, but It Is Too Early to Assess Its Effectiveness\n\nThe State Review Framework is a new process for conducting  performance reviews of enforcement and compliance activities in the  states (as well as for nondelegated programs implemented by EPA  regions). These reviews are intended to provide a mechanism by which  EPA can ensure a consistent level of environmental and public health  protection across the country. OECA is in the second year of a 3-year  project to make State Review Framework reviews an integral part of the  regional and state oversight and planning process and to integrate any  regional or state corrective or follow-up actions into working agreements  between headquarters, regions, and states. It is too early to assess whether  the process will provide an effective means for ensuring more consistent  enforcement actions and oversight of state programs to help ensure a level  playing field for the regulated community across the country. Issues that  still need to be addressed include how EPA will assess states\u2019  implementation of alternative enforcement and compliance strategies,  such as strategies to assist businesses in their efforts to comply with  environmental regulations; encourage businesses to take steps to reduce  pollution; offer incentives (e.g., public recognition) for businesses that  demonstrate good records of compliance; and encourage businesses to  participate in programs to audit their environmental performance and  make the results of these audits and corrective actions available to EPA,  other environmental regulators, and the public.\n\n\t\tEfforts Are Underway to Improve Data, but Critical Gaps Remain\n\nRegardless of other improvements EPA makes to the enforcement  program, it needs to have sufficient environmental data to measure  changes in environmental conditions, assess the effectiveness of the  program, and make decisions about resource allocations. Through its  Environmental Indicators Initiative and other efforts, EPA has made some  progress in addressing critical data gaps in the agency\u2019s environmental  information. However, the agency still has a long way to go in obtaining  the data it needs to manage for environmental results and needs to work  with its state and other partners to build on its efforts to fill critical gaps in  environmental data. Filling such gaps in EPA\u2019s knowledge of  environmental conditions and trends should, in turn, translate into better  approaches in allocating funds to achieve desired environmental results.  Such knowledge will be useful in making future decisions related to  strategic planning, resource allocations, and program management.\nNevertheless, most of the performance measures that EPA and the states  are still using focus on outputs rather than on results, such as the number  of environmental pollution permits issued, the number of environmental  standards established, and the number of facilities inspected. These types  of measures can provide important information for EPA and state  managers to use in managing their programs, but they do not reflect the  actual environmental outcomes that EPA must know in order to ensure  that resources are being allocated in the most cost-effective ways to  improve environmental conditions and public health.\nEPA also has worked with the states and regional offices to improve  enforcement data in its Permit Compliance System and believes that its  efforts have improved data quality. EPA officials said that the system will  be incorporated into the Integrated Compliance Information System,  which is being phased in this year. According to information EPA  provided, the modernization effort will identify the data elements to be  entered and maintained by the states and regions and will include  additional data entry for minor facilities and special regulatory program  areas, such as concentrated animal feeding operations, combined sewer  overflows, and storm water. Regarding the National Water Quality  Inventory, the Office of Water recently began advocating the use of  standardized, probability-based, statistical surveys of state waters so that  water quality information would be comparable among states and from  year-to-year.\nWhile these efforts are steps in the right direction, progress in this area has  been slow and the benefits of initiatives currently in the discussion or  planning stages are likely to be years away from realization. For example,  initiatives to improve EPA\u2019s ability to manage for environmental results  are essentially long-term. They will require a long-term commitment of  management attention, follow-through, and support\u2014including the  dedication of appropriate and sufficient resources\u2014for their potential to  be fully realized. A number of similar initiatives in the past have been  short-lived and unproductive in terms of lasting contributions to improved  performance management. The ultimate payoff will depend on how fully  EPA\u2019s organization and management support these initiatives and the  extent to which identified needs are addressed in a determined,  systematic, and sustained fashion over the next several years.\n\n\t\tEPA Has Improved the Management of its Human Capital System, but Challenges Remain in Allocating Staff to Match Enforcement Requirements in its Regions\n\nSince the late 1990s, EPA has made progress in improving the management  of its human capital. EPA\u2019s human capital strategic plan was designed to  ensure a systematic process for identifying the agency\u2019s human capital  requirements to meet strategic goals. Furthermore, EPA\u2019s strategic  planning includes a cross-goal strategy to link strategic planning efforts to  the agency\u2019s human capital strategy. Despite such progress, effectively  implementing a human capital strategic plan remains a major challenge.  Consequently, the agency needs to continue monitoring progress in  developing a system that will ensure a well-trained and motivated  workforce with the right mix of skills and experience. In this regard, the  agency still has not taken the actions that we recommended in July 2001 to  comprehensively assess its workforce\u2014how many employees it needs to  accomplish its mission, what and where technical skills are required, and  how best to allocate employees among EPA\u2019s strategic goals and  geographic locations. Furthermore, as previously mentioned, EPA\u2019s  process for budgeting and allocating resources does not fully consider the  agency\u2019s current workload. With prior years\u2019 allocations as the baseline,  year-to-year changes are marginal and occur in response to (1) direction  from the Office of Management and Budget and the Congress, (2) spending  caps imposed by EPA\u2019s Office of the Chief Financial Officer, and (3)  priorities negotiated by senior agency managers.\nEPA\u2019s program offices and regions have some flexibility in realigning  resources based on their actual workload, but the overall impact of these  changes is also minor, according to agency officials. Changes at the margin  may not be sufficient because both the nature and distribution of the  workload have changed as the scope of activities regulated has increased  and as EPA has taken on new responsibilities while shifting others to the  states. For example, controls over pollution from storm water and animal  waste at concentrated feeding operations have increased the number of  regulated entities by hundreds of thousands and required more resources  in some regions of the country. However, EPA may be unable to respond  effectively to changing needs and constrained resources because it does  not have a system in place to conduct periodic \u201cbottom-up\u201d assessments of  the work that needs to be done, the distribution of the workload, or the  staff and other resource needs.\nMr. Chairman, to its credit, EPA has initiated a number of actions to  improve its enforcement activities and has invested considerable time and  resources to make these activities more effective and efficient. While we  applaud EPA\u2019s actions, they have thus far achieved only limited success  and illustrate both the importance and the difficulty of addressing the  long-standing problems in ensuring the consistent application of  enforcement requirements, fines and penalties for violations of  requirements, and the oversight of state environmental programs. To finish  the job, EPA must remain committed to continuing the steps that it has  already taken. In this regard, given the difficulties of the improvements  that EPA is attempting to make and the time likely to be required to  achieve them, it is important that the agency remain vigilant. It needs to  guard against any erosion of its efforts by factors that have hampered past  efforts to improve its operations, such as changes in top management and  priorities and constraints on available resources.\nMr. Chairman, this concludes my prepared statement. I would be happy to  respond to any questions that you or Members of the Committee may  have.\n\n\tContact and Staff Acknowledgments\n\nIf you have any questions about this testimony, please contact me at (202)  512-3841 or stephensonj@gao.gov. Major contributors to this testimony  include Ed Kratzer, John C. Smith, Ralph Lowry, Ignacio Yanes, Kevin  Bray, and Carol Herrnstadt Shulman.\nThis is a work of the U.S. government and is not subject to copyright protection in the  United States. It may be reproduced and distributed in its entirety without further  permission from GAO. However, because this work may contain copyrighted images or  other material, permission from the copyright holder may be necessary if you wish to  reproduce this material separately.","output":"Why GAO Did This Study\n\nThe Environmental Protection Agency (EPA) enforces the nation's environmental laws and regulations through its Office of Enforcement and Compliance Assurance (OECA). While OECA provides overall direction on enforcement policies and occasionally takes direct enforcement action, many enforcement responsibilities are carried out by EPA's 10 regional offices. In addition, these offices oversee the enforcement programs of state agencies that have been delegated the authority to enforce federal environmental protection regulations. This testimony is based on GAO's reports on EPA's enforcement activities issued over the past several years and on observations from ongoing work that is being performed at the request of the Senate Committee on Environment and Public Works, and the Subcommittee on Interior, Environment and Related Agencies, House Committee on Appropriations. GAO's previous reports examined the (1) consistency among EPA regions in carrying out enforcement activities, (2) factors that contribute to any inconsistency, and (3) EPA's actions to address these factors. Our current work examines how EPA, in consultation with regions and states, sets priorities for compliance and enforcement and how the agency and states determine respective compliance and enforcement roles and responsibilities and allocate resources for these purposes.\n\nWhat GAO Found\n\nEPA regions vary substantially in the actions they take to enforce environmental requirements, according to GAO's analysis of key management indicators that EPA headquarters uses to monitor regional performance. These indicators include the number of inspections performed at regulated facilities and the amount of penalties assessed for noncompliance with environmental regulations. In addition, the regions differ substantially in their overall strategies to oversee states within their jurisdictions. For example, contrary to EPA policy, some regions did not require states to report all significant violators, while other regions adhered to EPA's policy in this regard. GAO identified several factors that contribute to regional variations in enforcement. These factors include (1) differences in philosophy among regional enforcement staff about how best to secure compliance with environmental requirements; (2) incomplete and unreliable enforcement data that impede EPA's ability to accurately determine the extent to which variations occur; and (3) an antiquated workforce planning and allocation system that is not adequate for deploying staff in a manner to ensure consistency and effectiveness in enforcing environmental requirements. EPA recognizes that while some variation in environmental enforcement is necessary to reflect local conditions, core enforcement requirements must be consistently implemented to ensure fairness and equitable treatment. Consequently, similar violations should be met with similar enforcement responses regardless of geographic location. In response to GAO findings and recommendations, EPA has initiated or planned several long-term actions that are intended to achieve greater consistency in state and regional enforcement actions. These include (1) a new State Review Framework process for measuring states' performance of core enforcement activities, (2) a number of initiatives to improve the agency's compliance and enforcement data, and (3) enhancements to the agency's workforce planning and allocation system to improve the agency's ability to match its staff and technical capabilities with the needs of individual regions. However, these actions have yet to achieve significant results and will likely require a number of years and a steady top-level commitment of staff and financial resources to substantially improve EPA's ability to target enforcement actions in a consistent and equitable manner."}
{"id":"gao_RCED-98-156","pid":"gao_RCED-98-156_0","input":"\tBackground\n\nAs a grouping of eight major islands located near the center of the Pacific Ocean, Hawaii has a geography that bears significantly on the manner in which goods and people can move throughout the state. In addition, Hawaii\u2019s relative lack of industry means that most finished goods must be imported from the mainland. Unlike much of the mainland\u2014where transport relies on air, sea, rail, and highway\u2014Hawaii must rely primarily on the first two means. For cargo customers, air shipment is the faster and more expensive option, and sea transport is the slower but less expensive option. Most cargo for which the speed of delivery is not critical moves by sea, both among the islands and between Hawaii and the mainland. However, other goods\u2014particularly, perishable produce, mail, and time-sensitive items\u2014move by air.\nThe bulk of interisland cargo shipments moves among four islands\u2014Oahu, Maui, Kauai, and the \u201cBig Island\u201d of Hawaii. Honolulu, Oahu\u2019s urban center, is the largest city in the islands and the center of the state\u2019s economic activity. Its airport, Honolulu International, is by far the busiest in the state. The island of Hawaii, the state\u2019s second most populous, has two key airports, at Kona and Hilo, which serve distinct economic regions. The airport at Kona supports an active tourism trade and offers direct flights to the mainland. By contrast, the airport at Hilo supports no direct flights to the mainland but serves as a key distribution point for tropical plants and flowers, the cultivation of which is becoming increasingly important to Hawaii\u2019s economy. The islands of Maui and Kauai also support scheduled commercial jet service. Figure 1 shows the major Hawaiian islands, their key communities, and their scheduled air cargo service; table 1 summarizes key operating statistics for Hawaii\u2019s airports.\nPrior to AIC\u2019s November 1995 entry into scheduled interisland service,Aloha Airlines and Hawaiian Airlines were the chief providers of air cargo transport throughout the state. Aloha began its service to Hawaii\u2019s \u201couterisland\u201d residential and commercial centers in 1946. In addition to over 180 daily jet flights among Oahu, Maui, Kauai, and the Big Island of Hawaii, Aloha operates a nighttime cargo service using some passenger aircraft with the seats removed. Aloha also operates an \u201cAloha Island Air\u201d service using small propeller-driven aircraft to reach remote rural areas. Hawaiian Airlines, for its part, has provided air service among the islands since 1929. Hawaiian\u2019s cargo service is conducted in conjunction with its passenger service; all cargo is carried below deck on more than 150 daily flights among the state\u2019s major communities.\n\n\tUnder FAA\u2019s Reinterpretation of Turnaround Service, AIC Must Use Stage 3 Aircraft or Discontinue Interisland Operations\n\nIn 1990, the federal government acted to reduce aviation noise. Specifically, the Congress passed the Airport Noise and Capacity Act, requiring the gradual phaseout on the U.S. mainland of Stage 2 aircraft weighing over 75,000 pounds by December 31, 1999. The law did not cover any aircraft operations in Hawaii. In October 1991, the act was amended in part to require that no airline operate a greater number of Stage 2 aircraft in the state of Hawaii than it had operated on November 5, 1990, when the act was first passed. According to the amendment\u2019s legislative history, this amendment was included to ensure that Hawaii does not become a \u201cdumping ground\u201d for Stage 2 aircraft as these aircraft are phased out on the mainland.\nThus, in order to use Stage 2 aircraft within Hawaii, an airline must have provided turnaround service on November 5, 1990. As long-standing incumbents, Aloha Airlines and Hawaiian Airlines meet this qualification and currently serve all major communities in Hawaii using Stage 2 aircraft. On May 25, 1995, in response to a formal request from AIC, FAA determined that AIC also had provided qualifying turnaround service during November 1990. As described, in November 1990, AIC was operating an air cargo service routed from Los Angeles to Honolulu to Hilo and then back to Los Angeles. In a subsequent letter to AIC, FAA explained that because the airline\u2019s service involved at least one takeoff-and-landing cycle in Hawaii, the airline qualified to provide scheduled interisland service with Stage 2 aircraft between Honolulu and Hilo.\nHowever, in May 1996, FAA issued a revised interpretation of turnaround service. Earlier, in February 1996, FAA had received a complaint from Aloha Airlines in which this airline challenged AIC\u2019s legal right to operate scheduled interisland service with Stage 2 aircraft in Hawaii. According to an FAA attorney, the agency reexamined its position on turnaround service because of comments submitted as part of a related rulemaking action begun on May 11, 1995. In its reinterpretation, FAA quoted language from the 1991 amendment\u2019s legislative history, which described turnaround service as \u201clocal flights between two Hawaii cities and\/or counties which also serve as the origin and destination. . . .\u201d FAA cited further language from the legislative history, emphasizing that the 1991 amendment was designed to \u201censure that Hawaii does not become a dumping ground for Stage 2 aircraft. . . .\u201d On the basis of these statements, FAA concluded that the Congress had intended to preclude an airline from flying an aircraft from the mainland to Hawaii, and then flying that same aircraft between two points in Hawaii in order to qualify the latter segment as turnaround service.\nAlthough AIC argued to FAA that one takeoff and one landing constituted a flight, under the 1991 amendment a flight qualifying as turnaround service consists of operation among \u201ctwo or more points, all of which are within the state of Hawaii.\u201d Thus, the 1991 provision clearly contemplates that such a flight may consist of more than one takeoff and one landing. There is no indication either in the statute or in the legislative history that turnaround service may include points outside of Hawaii. The use of the word \u201clocal\u201d in the Senate report also supports the assertion that only points within Hawaii may be considered to constitute turnaround service.\nAccording to AIC, the procompetition mandates of the Federal Aviation Act, as well as other public policy encouraging competition in air transportation, should also bear on any legal interpretation of turnaround service. AIC has maintained that two sections of the Airport Noise and Capacity Act direct the Secretary of Transportation to consider various competitive impacts of the requirements to phase out Stage 2 aircraft.However, these sections are not relevant for operations in Hawaii because the noise legislation\u2019s mandatory phaseout of Stage 2 aircraft applies only in the contiguous 48 states on the U.S. mainland.\nAs a result, from our own review of the statutory provision set forth in the act\u2019s 1991 amendment and the relevant Senate committee report, we found that FAA\u2019s most recent interpretation of the law is correct. We believe that a route from Los Angeles to two points in Hawaii and back to Los Angeles does not qualify as turnaround service within the meaning of the 1991 amendment. Because AIC did not provide turnaround service at the time the Airport Noise and Capacity Act was passed, under an October 1996 amendment it must either cease serving Hawaii\u2019s interisland cargo markets after September 30, 1998, or provide service with Stage 3 aircraft, as a company official has indicated it may do. Alternatively, the Congress could pass legislation temporarily extending AIC\u2019s right to operate Stage 2 aircraft, which would allow the airline to continue interisland service without modifying the single aircraft that provides it.\n\n\tAIC\u2019s Entry Into Interisland Markets Has Enhanced Competition\n\nAIC\u2019s November 1995 entry has enhanced competition in Hawaii\u2019s interisland air cargo markets, most markedly by offering new service options for some customers. For example, executives with a small-package delivery firm and a freight forwarding company told us that they have benefited primarily because AIC provides them with a daytime all-cargo service and convenient connections to the mainland. Additionally, many Big Island agricultural producers with whom we spoke consider certain specialized features of AIC\u2019s service\u2014such as its ability to handle large shipping containers and its ability to refrigerate cargo at Honolulu International Airport\u2014as crucial to their immediate and long-term needs.\nWe also found that many customers consider each of the three competing airlines\u2019 interisland cargo rates when making shipping decisions but that they seldom select an airline on the basis of rate considerations alone. Three customers told us that they had observed a price decrease during the past 2 years and that they attribute this to AIC\u2019s presence in interisland markets. We could not obtain sufficient data to draw broad, marketwide conclusions about the airline\u2019s effect on interisland rates. Nevertheless, if AIC exits from interisland markets, the breadth of services provided would decrease discernibly unless one or more airlines were to initiate similar service.\n\n\t\tAIC Has Become the Second-Largest Airline Serving Hawaii\u2019s Air Cargo Markets\n\nSince November 1995, when AIC began providing scheduled interisland cargo service, it has acquired nearly one-fifth of the total market. According to data from Hawaii\u2019s Department of Transportation, this made AIC the second-largest cargo airline in the state during 1997, in terms of the volume of cargo shipped. AIC has achieved this rapid growth primarily by using one cargo-dedicated Boeing 727 aircraft. Although the B-727\u2019s fuselage has virtually the same circumference as that of the Boeing 737s used by Aloha Airlines, the AIC aircraft\u2019s interior space is larger because, as a cargo aircraft, it contains no overhead luggage bins. Consequently, AIC\u2019s aircraft can accommodate the same basic type of cargo container used by Aloha and can also carry taller containers. At the time of our study, AIC provided twice-daily service to Maui, Kona, and Hilo\u2014once during the day and once at night\u2014with onward connections to the mainland.\nSome of AIC\u2019s growth represents the provision of entirely new air transportation services. For example, some customers who had previously shipped by sea are now shipping by air with AIC. Another portion of AIC\u2019s growth has occurred at the expense of Aloha and Hawaiian. Figure 2 shows cargo being unloaded from AIC\u2019s B-727 at Honolulu International Airport. Figure 3 shows the three airlines\u2019 volume of cargo shipped and their respective market shares.\nOthers include several small cargo airlines providing service among the islands using propeller-driven aircraft.\nFigures sometimes do not add to the total because of rounding.\nBetween 1995 and 1997, Aloha Airlines was the dominant cargo airline in Hawaii\u2019s interisland markets. As shown in figure 3, in 1997 Aloha was estimated to have carried over 3.5 times the cargo volume that AIC carried. None of the B-737 aircraft that Aloha uses to carry interisland cargo is permanently dedicated to cargo service; instead, Aloha reconfigures five aircraft nightly by removing the passenger seats. This activity, which takes about 15 minutes per aircraft, is reversed each morning. However, Aloha cannot remove the overhead luggage bins, thus somewhat limiting the height of cargo containers that its aircraft will hold. Aloha uses its \u201cquick-change\u201d aircraft extensively throughout the night, operating multiple flights into and out of Kona, Hilo, Maui, and Kauai. For example, Aloha makes five nightly roundtrips between Honolulu and Maui and four nightly roundtrips between Honolulu and Kona. Figure 4 shows Aloha employees moving cargo into one of its five quick-change B-737s.\nHawaiian Airlines, which in 1995 was the state\u2019s second-largest cargo airline, has carried a decreasing total cargo volume since then, as have several smaller airlines. Hawaiian provides no service dedicated solely to cargo. Rather, Hawaiian offers cargo customers the opportunity to ship their items in the belly of its daytime DC-9 passenger flights. The relatively small space available in the belly of these aircraft limits the size and weight of cargo that can be shipped, and passengers\u2019 luggage and the U.S. mail must take priority over other types of belly cargo. Hawaiian also operates to 4 destinations on the mainland, and another 13 destinations via marketing agreements with other airlines. Finally, several major U.S. airlines\u2014including American Airlines, Delta Air Lines, United Airlines, and United Parcel Service (UPS)\u2014also carried interisland cargo during part or all of the 1995-97 period, but did not report data to the state of Hawaii. Figure 5 shows cargo being loaded into the belly of one of Hawaiian\u2019s aircraft.\n\n\t\tAIC Has Expanded Shipping Options and Has Opened New Markets for Agricultural Producers, but Many Customers Still Prefer Competitors\u2019 Services\n\nSmall-package delivery companies and freight forwarders have benefited from AIC\u2019s presence in interisland markets because the airline provides new services that have increased the customers\u2019 shipping options. A senior official with FedEx, which alone accounts for half of AIC\u2019s customer base, told us that it contracts with AIC primarily because the airline provides convenient daytime departures to key outerisland destinations. According to the official, this daytime service is crucial to satisfying FedEx\u2019s overriding need, which is to guarantee on-time delivery for its customers at certain key points during a business day. Additionally, several freight forwarders that transport cargo among the islands confirmed that AIC\u2019s daytime service and convenient mainland connections are key to meeting their own needs. For example, a senior official with a forwarder that arranges for cargo transport from the mainland, through Honolulu, to key outerisland destinations explained that AIC\u2019s presence provides the company with greater choice than would otherwise be the case. An additional forwarder mentioned that AIC\u2019s focus on cargo service encourages more careful handling of cargo than is the case with competing airlines. Finally, several customers expressed satisfaction that, because AIC operates an all-cargo service, none of their freight will get \u201cbumped\u201d in favor of passengers\u2019 needs.\nAIC\u2019s all-cargo service is also expanding the number of mainland markets in which Big Island agricultural producers can offer their large tropical plants for sale. AIC\u2019s service has accomplished this by decreasing the transport time from 10 days to less than 1 day, allowing plants to arrive fresh at their destinations. Alternative air transportation is not a viable option because no competing airline accommodates the size of container necessary to ship these plants properly. Prior to AIC\u2019s entry, cultivators of tropical plants relied on ships for the trans-Pacific voyage to California. After the 10-day voyage, the plants had to be \u201crefreshed\u201d at a greenhouse, at substantial additional cost. Typically, even with this care, the plants could not be fully restored to their original condition and therefore could not sustain additional transport to markets on the East Coast or elsewhere on the mainland. By contrast, a 12-hour voyage by air eliminates the need for such greenhousing. Sealed at Hilo for shipment to the mainland, the plants arrive at Los Angeles International Airport in nearly original condition. This allows the farmers to sell them at any mainland location at a price commensurate with their original quality. Big Island farmers also cultivate a wide variety of tropical flowers for sale to mainland florists. In this case as well, AIC\u2019s Hilo to Los Angeles service allows the flowers to arrive fresh and to be shipped onward from Los Angeles to any U.S. destination in a timely manner. The president of the Hawaii Florists\u2019 & Shippers\u2019 Association told us that members of his organization prefer AIC\u2019s unique services, which include refrigerated storage in Honolulu and \u201cseamless\u201d connections to the mainland, offered jointly with FedEx.\nNevertheless, other air cargo customers, including national small-package delivery companies, local freight forwarders, and at least one bakery need not make use of the larger container used exclusively by AIC. In their cases, a variety of alternative considerations is more important. Several company executives whom we interviewed cited successful sustained business relationships with Aloha and Hawaiian but also explained that these two incumbents offer both a frequency and quality of service that AIC has not yet demonstrated. According to the president of a local bakery, Aloha\u2019s frequent nighttime flights and its effective backup strategies in the event of an aircraft\u2019s mechanical breakdown are persuasive reasons to continue signing long-term contracts with this airline. The bakery president stated that his company\u2019s credibility with consumers depends entirely on the distribution of his baked goods every morning. Only Aloha, he said, currently maintains an ability to deliver his appreciable amount of cargo on time daily, with few delays. In addition, according to two freight forwarders with whom we spoke, Aloha\u2019s consistency in following up on damage claims is a similarly compelling reason to select the airline\u2019s interisland service.\nFinally, for some customers, the business relationships that they have maintained with Aloha and Hawaiian during more than five decades of interisland service are more important than the new services that AIC has begun to offer. According to one senior state official, the uniqueness of Hawaii\u2019s remote island geography creates a situation in which customers throughout a variety of local industries place high value on long-term market presence. For these customers, this consideration may take precedence over an immediate economic benefit, such as a lower interisland cargo rate or a new service feature. These customers know that, in Hawaii, air service is essential to their business, and they are therefore inclined to contract with long-serving incumbents that have a proven ability to provide frequent, consistent service. Having recently witnessed the entry, and subsequent exit, of several passenger airlines that also carry cargo\u2014including MidPacific Airlines, Discovery Airlines, and Mahalo Air\u2014these customers prefer the long-term stability of the two largest incumbents.\n\n\t\tCustomers\u2019 Service Needs Weigh Heavily in Their Consideration of Rates\n\nAIC\u2019s, Aloha\u2019s, and Hawaiian\u2019s primary types of customers\u2014small-package delivery firms, freight forwarders, and agricultural producers\u2014have distinct shipping needs. The three airlines have responded to these distinctions by pricing their cargo services in a variety of ways. For example, with small-package delivery firms such as FedEx, UPS, and Airborne Express, the airlines typically prenegotiate a standard set of interisland rates for an established period of time. By contrast, the airlines often negotiate with freight forwarders to meet the forwarders\u2019 need to move individual cargo shipments. A forwarder often seeks the best option available for a shipment of heavy cargo on the basis of which airline can offer the best combination of a low rate, adequate space, and a timely departure. Finally, AIC typically works with the agricultural producers to prenegotiate a \u201cthrough-rate\u201d from Hilo to Los Angeles.\nThe dissimilar nature of competing airlines\u2019 interisland services\u2014and customers\u2019 concerns about confidentiality\u2014made broad empirical conclusions about interisland rates impossible. We discussed rate considerations during 10 interviews with small-package delivery firms, freight forwarders, the U.S. Postal Service (USPS), Big Island agricultural producers, and one bakery. Also, as part of a structured survey, we solicited rate data from USPS and 36 private companies. Because the rates charged for interisland cargo shipments are negotiated privately between the customers and the airlines, many customers cited the need to keep these data confidential and declined to provide them to us; others explained that data searches would be time-consuming or that they lacked historical records. (See app. I for full details on our data-gathering efforts.)\nNevertheless, we discovered a recurring view about rates. While several of the customers we contacted considered rates to be an important factor in their shipping decisions, they explained that rates must only be viewed relative to the services provided and to the extent to which an airline\u2019s performance meets their expectations.\nFor example, a manager for one small-package delivery firm explained to us that, while the rates AIC charges his company are reasonable and competitive, this is outweighed by its poor performance with regard to its aircraft\u2019s availability: In December 1997, he said, AIC\u2019s only aircraft was out of service on several occasions for mechanical reasons. He added that he would not like to see AIC\u2019s exit because this would likely encourage Aloha and Hawaiian to increase their own rates. Still, he explained, spotty reliability to date has kept his company from selecting AIC as a long-term partner and has kept AIC from bringing meaningful competitive pressure to interisland markets as a whole.\nAccording to some freight forwarders whom we interviewed, AIC\u2019s service is valuable primarily because it provides an additional shipping option as they make daily decisions regarding how to move individual shipments at a given price. However, for one executive, the additional option is meaningful only when AIC\u2019s rates are set below those of its competitors.\nAccording to this executive, when AIC\u2019s and Aloha\u2019s rates are comparable for a particular interisland shipment, he often selects Aloha because it consistently arrives on time and always provides a backup aircraft quickly in the event of a mechanical breakdown.\nOne freight forwarder expressed a preference for the daytime belly-cargo service offered by Hawaiian Airlines because this service is typically priced far below all-cargo service. Nevertheless, this customer asserted, the most important factor is that an airline retain its ability to offer timely, reliable delivery of its goods. Precisely because belly cargo can be bumped from a daytime interisland passenger flight, some customers prefer Aloha\u2019s and AIC\u2019s all-cargo services.\nFor their part, many Big Island agricultural producers told us that rates are important but emphasized that their primary concern is retaining the \u201cthrough-service\u201d that AIC operates from Hilo to the mainland. Retaining this service, they said, outweighs rate considerations. An official with the Hawaii Export Nursery Association confirmed the farmers\u2019 remarks and added that it is impossible to compare the rates that AIC charges for its through-service to the rates charged either for Aloha\u2019s nighttime all-cargo service or for Hawaiian\u2019s belly-cargo service because all of the services provided are so dissimilar.\n\n\t\tAIC\u2019s Exit or Other Emerging Trends Could Change the Dynamics of the Interisland Markets\n\nUnless new legislation is enacted extending AIC\u2019s right to operate Stage 2 aircraft, after September 30, 1998, AIC will have to serve its interisland customers using aircraft powered by quieter engines. Alternatively, the airline may decide to exit interisland markets. If AIC takes such a step, there could be a discernible effect on a variety of interisland customers. AIC\u2019s exit would likely reduce the types of services offered to customers. The effect would probably be more dramatic for agricultural producers than it would be for customers in other industries, as Big Island farmers who have contracted with AIC would lose the ability to sell their goods in a variety of U.S. mainland markets. In remarks reflecting the importance of agriculture to the state\u2019s economy, Hawaii\u2019s agriculture secretary explained to us that, unless another airline fills the void, AIC\u2019s exit from interisland markets would affect the pace at which Hawaii recovers from the stagnant economic growth of recent years. The extent to which rates might increase in AIC\u2019s absence remains unclear because there were only a few instances in which we were able to determine the effect AIC\u2019s market presence has had on rates. As a result, it is possible only to speculate on the extent to which the airline\u2019s exit would cause cargo rates to increase, if at all, on a marketwide basis.\nOther emerging trends could also change the dynamics of Hawaii\u2019s interisland air cargo markets. Major U.S. cargo airlines could begin to provide scheduled interisland service using Stage 3 aircraft, in direct competition with Aloha\u2019s and AIC\u2019s all-cargo services. For instance, FedEx may decide to operate its own interisland service, and could do so if greater volumes of interisland cargo in future years were to make this service cost-efficient. Such a decision would likely lead FedEx to sign fewer contracts with AIC for interisland service. This would affect AIC\u2019s economic fortunes, as the airline would lose the business of tropical flower cultivators and other customers who must ship time-sensitive items. In addition, several major passenger airlines could expand nonstop service from outerisland communities to the mainland or initiate additional interisland cargo services. According to a state official with whom we spoke, several services that are planned or proposed would affect incumbent airlines\u2019 pricing, as well as the types of services that these airlines continue to offer.\n\n\tAgency Comments\n\nWe provided copies of a draft of this report to the Department of Transportation (DOT) and the Federal Aviation Administration (FAA) for their review and comment. To obtain comments, we held discussions with DOT and FAA officials, including DOT\u2019s Director, Office of Aviation and International Economics, and the FAA staff attorney responsible for the agency\u2019s interpretation of turnaround service. DOT and FAA generally agreed with the information in our report and provided technical corrections, which were incorporated into the report where appropriate.\n\n\tScope and Methodology\n\nTo determine the basis on which FAA revised its interpretation of turnaround service, we obtained detailed legal positions prepared by AIC, Aloha Airlines, and Hawaiian Airlines. In Washington, D.C., we met with attorneys for AIC and Aloha, as well as with the FAA attorney responsible for drafting the agency\u2019s initial and revised interpretations of turnaround service. The FAA attorney provided us with the agency\u2019s current position on whether AIC has the legal right to operate interisland service after September 30, 1998, and with documentation indicating how FAA\u2019s interpretation evolved over time.\nTo determine the effect of AIC\u2019s entry on competition in Hawaii\u2019s interisland air cargo markets, we prepared a structured survey to solicit information pertaining both to the rates charged and to the services provided. However, we were unable to obtain sufficient rate data from this survey to conduct a comprehensive marketwide analysis. We then conducted 17 personal interviews during January 1998 in Hawaii. In Honolulu, we met with AIC, Aloha, and Hawaiian; interisland cargo customers; state officials responsible for transportation, agriculture, justice, and natural resources policy; and an independent private economist. In Hilo, we met with agricultural producers who cultivate tropical plants and flowers destined primarily for U.S. mainland markets. See app. I for a complete description of our scope and methodology. We conducted our review from August 1997 through April 1998 in accordance with generally accepted government auditing standards.\nAs arranged with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 10 days after the date of this letter. At that time, we will send copies to the Secretary of Transportation; the Administrator, FAA; the Director, Office of Management and Budget; and other interested parties. We will send copies to others upon request.\nIf you have any questions, please call me at (202) 512-2834. Major contributors to this report are listed in app. II.\n\nScope and Methodology\n\nTo gain perspectives on whether, legally, American International Cargo (AIC) can continue to provide turnaround service, we obtained detailed legal positions from AIC, Aloha Airlines, and Hawaiian Airlines. In Washington, D.C., we conducted personal and\/or telephone interviews with attorneys for AIC, Aloha, and the state of Hawaii. Also in Washington, we met with the Federal Aviation Administration (FAA) attorney responsible for drafting the agency\u2019s initial and revised interpretations of turnaround service. The attorney provided us with the agency\u2019s current position on whether AIC has the legal right to operate interisland service after September 30, 1998, and submitted documentation indicating how FAA\u2019s interpretation has evolved over time.\nTo gain a full understanding of the key factors affecting the transport of air cargo throughout Hawaii, we solicited information pertaining both to the rates charged and the services provided. We attempted to obtain data on rates charged for interisland service during calendar years 1994, 1995, 1996, and 1997 (through October). Obtaining a substantial amount of empirical data from this 4-year period would have permitted us to conduct a complete economic analysis and to draw meaningful conclusions regarding the effect that AIC\u2019s November 1995 entry may have had on the rates charged by all airlines operating in the interisland markets. However, we were unable to obtain sufficient rate data to conduct such an analysis and to draw such conclusions.\nWe used two methods to gather information regarding the potential effect of AIC\u2019s entry on interisland rates. First, we sought data from AIC, Aloha, and Hawaiian, which are the three airlines carrying significant amounts of cargo throughout the state of Hawaii. Although AIC provided us with the basic rates that it charged its 20 largest customers during 1996, these data alone could not provide us with the historical perspective necessary to draw meaningful conclusions. For a proper historical analysis of the rates charged prior to AIC\u2019s entry as well as since its entry, we would have needed to obtain similar data from other airlines and from these airlines\u2019 customers. Although Aloha provided us with cargo yields per pound since 1993 and with a list of its key customers, neither Aloha nor Hawaiian was able to share historical, customer-specific rate information.\nSecond, in a mailed survey, we solicited information from 37 of AIC\u2019s, Aloha\u2019s, and Hawaiian\u2019s interisland customers. These customers included small-package delivery firms, freight forwarders, and agricultural producers. Thirty customers declined to provide us with the level of detail that we needed, despite our pledge of confidentiality. Customers cited concerns ranging from confidentiality clauses with airlines and the time-consuming nature of data searches to the absence of historical records as reasons for failing to provide the information. Taken together, the level of detail that we obtained was not sufficient to allow for meaningful analysis of interisland air cargo rates. Although we were unable to collect sufficient data with regard to the rates paid, we were able to use the survey as a means to identify candidates for structured personal interviews conducted during January 1998.\nDuring January 1998, we conducted 17 structured interviews in order to understand further the impact that AIC\u2019s entry may have had on interisland air cargo markets. In Honolulu, we met with officials from AIC, Aloha, and Hawaiian, and we toured the airport facilities of AIC and Aloha, observing both airlines\u2019 cargo operations there. Also in Honolulu, we interviewed several freight forwarding companies; two national small-package delivery firms; officials from Hawaii\u2019s departments of Transportation, Agriculture, Justice, and Land & Natural Resources; an independent economist with the Bank of Hawaii; an official of the U.S. Postal Service; and a Delta Air Lines cargo representative. In Hilo, we met with a variety of agricultural producers who cultivate tropical plants and flowers destined primarily for mainland markets. We also met with the executive officers of two key agricultural associations\u2014the Hawaii Export Nursery Association and the Hawaii Shippers\u2019 and Florists\u2019 Association. We did not provide a pledge of confidentiality for information obtained from personal or telephone interviews.\n\nMajor Contributors to This Report\n\nAaron Casey Alice Feldesman David Hooper Joseph Kile Steve Martin Marnie Shaul John Skeen The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent.\nU.S. General Accounting Office P.O. Box 37050 Washington, DC  20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000  or by using fax number (202) 512-6061, or TDD (202) 512-2537.\nEach day, GAO issues a list of newly available reports and testimony.  To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone.  A recorded menu will provide information on how to obtain these lists.","output":"Why GAO Did This Study\n\nPursuant to a congressional request, GAO reviewed the basis for the Federal Aviation Administration's (FAA) revision of its interpretation of turnaround service in Hawaii, focusing on determining how American International Cargo's (AIC) November 1995 entry into the Hawaiian inter-island air cargo market with relatively noisy Stage 2 aircraft has affected--and how its potential future exit could affect--competition in Hawaii's air cargo markets.\n\nWhat GAO Found\n\nGAO noted that: (1) in May 1995, FAA determined that one segment of a flight AIC had been operating in November 1990 with a single Stage 2 aircraft included a takeoff and a landing in Hawaii and that it therefore qualified as inter-island turnaround service; (2) consequently, FAA concluded that, under the Airport Noise and Capacity Act, AIC could legally initiate scheduled inter-island service using its single Stage 2 aircraft; (3) however, after a formal inquiry from Aloha Airlines and a broader assessment of the legislation's intent, FAA revised its interpretation of turnaround service; (4) this revised decision held that the flight AIC was operating in November 1990 did not constitute turnaround service because it included points outside Hawaii; (5) GAO's review of relevant legislation and the legislative history found FAA's revised interpretation to be legally sound; (6) in particular, the flight that AIC conducted at the time the federal noise legislation was passed does not qualify as turnaround service--defined in a 1991 amendment as consisting of the operation of a flight between two or more points, all of which are within the state of Hawaii--and therefore does not render the airline exempt from statutory noise requirements; (7) AIC's November 1995 entry into Hawaii's inter-island markets has enhanced competition markedly by providing new services to a variety of customers; (8) for instance, since that date, AIC has offered scheduled daytime flights using large cargo containers--a service that its competitors do not offer; (9) this service has facilitated the delivery of time-sensitive express cargo and has helped to create new mainland markets for some of Hawaii's agricultural producers, who previously had to rely on ocean transportation; (10) in addition, although the airlines and their customers could not provide GAO with sufficient data to determine AIC's overall impact on rates, anecdotal information indicates that the company has introduced some price competition into inter-island markets; (11) consequently, while there could be a discernable effect on the breadth of services provided if AIC exits Hawaii's inter-island markets after September 30, 1998, the extent to which rates might increase remains unclear; (12) AIC told GAO that it wishes to continue serving Hawaii's inter-island markets after this date; and (13) however, absent federal legislation extending AIC's right to use Stage 2 aircraft, the airline will need to use Stage 3 aircraft to remain in these markets."}
{"id":"gao_GAO-01-873","pid":"gao_GAO-01-873_0","input":"\tBackground\n\nThe FHLBank System and the enterprises are GSEs. Congress created GSEs to help make credit available to certain sectors of the economy, such as housing and agriculture, in which the private market was perceived as not effectively meeting credit needs. GSEs receive benefits from their federal charters that help them fulfill their missions. The federal government\u2019s creation of and continued relationship with GSEs have created the perception in the financial markets that the government would not allow a GSE to default on its obligations, even though intervention is not required. As a result, GSEs can borrow money in the capital markets at lower interest rates than comparably creditworthy private corporations that do not enjoy federal sponsorship, and market discipline is reduced. In fact, during the 1980s, the government did provide limited regulatory and financial relief to Fannie Mae when it experienced significant financial difficulties, and, in 1987, Congress authorized $4 billion to bail out the Farm Credit System, another GSE. Additional background on the FHLBank System, the enterprises, FHFB, OFHEO, and financial risks are presented in appendix II.\nOur mandate directs us to analyze interest rate, credit, and operations risks. Interest rate risk is a component of what is commonly called market risk. Market risk is the potential for financial losses due to the increase or decrease in the value or price of an asset or liability resulting from broad movements in prices, such as interest rates, commodity prices, stock prices, or the relative value of foreign exchange. Credit risk is the potential for financial loss because of the failure of a borrower or counterparty to perform on an obligation. Credit risk may arise from either an inability or unwillingness to perform as required by a loan, a bond, an interest rate swap, or any other financial contract. Operations risk is the potential for unexpected financial losses due to inadequate information systems, operational problems, breaches in internal controls, or fraud. It is associated with problems of accurately processing or settling transactions and with breakdowns in controls and risk limits. Individual operating problems are considered small-probability but potentially high-cost events for well-run firms. Operations risk includes many risks that are not easily quantified, but controlling these risks is crucial to a firm\u2019s successful operation.\n\n\tA More Permanent Capital Structure Is Being Established for the FHLBank System\n\nThe FHLBank System is establishing a new capital structure that will include new risk-based and leverage capital requirements and will also make capital more permanent. FHLBank capital will continue to differ from capital issued by publicly traded corporations, however, because of the cooperative nature of the FHLBank System. Additionally, each FHLBank\u2019s capital is potentially available throughout the System, because the FHLBanks are jointly and severally liable for the System\u2019s outstanding debt securities. The unique characteristics of FHLBank capital and the potential for risk taking within the System heighten the importance of supervisory oversight by FHFB.\n\n\t\tThe FHLBank System\u2019s New Capital Structure Will Include Risk-based and Leverage Capital Standards\n\nThe new capital structure being implemented by the FHLBank System will include risk-based and leverage capital standards. In January 2001, FHFB published a final rule to comply with the provisions of GLBA that required regulations prescribing uniform capital standards applicable for all FHLBanks. These new capital standards, when fully implemented, will replace the current \u201csubscription\u201d capital structure for the FHLBanks. Under the current structure, the amount of capital that each FHLBank issued was determined by a statutory formula that dictated how much FHLBank stock each member had to purchase. A principal shortcoming of the subscription capital structure was that the amount of capital each FHLBank maintained bore little relation to the risks inherent in the FHLBank\u2019s assets and liabilities. Under the new structure, FHLBanks will be required to maintain longer-term permanent capital and total capital in amounts sufficient for the FHLBanks to comply with the minimum risk- based and leverage capital requirements established by GLBA.\nWe have consistently supported the concept of risk-based capital standards applied in combination with a leverage ratio that requires a minimum capital-to-asset ratio for the FHLBanks. A risk-based capital standard has a number of benefits. First, it gives the government a mechanism to influence risk-taking without involving itself in the FHLBanks\u2019 daily business. Second, it gives FHLBanks\u2019 shareholders an incentive to demand that management not take undue risks, since increased risk taking would impose additional costs resulting from raising additional capital. Third, it provides a buffer that should be adequate to absorb unforeseen losses to FHLBanks and thus helps prevent or reduce potential taxpayer losses.\n\n\t\tFHLBank System Capital Will Become More Permanent\n\nThe new capital structure the FHLBank System is implementing will also result in more permanent capital. After the enactment of GLBA in 1999, membership in the FHLBank System became all voluntary. Voluntary members can generally redeem stock with 6 months\u2019 notice. Capital redeemable on such short notice does not provide a cushion against unexpected losses. Therefore, the change to all voluntary members increased the need for more permanent capital that could not necessarily be redeemed with 6 months notice, and GLBA required implementation of a more permanent capital structure.\nUnder the new capital structure, the FHLBanks are permitted to issue Class A stock, which can be redeemed with 6 months\u2019 notice, and Class B stock, which can be redeemed with 5 years\u2019 notice, or both. To help ensure that capital does not dissipate due to redemption in time of stress, GLBA does not allow a FHLBank to redeem or repurchase capital if following the redemption the FHLBank would fail to satisfy any minimum capital requirement. Based on discussions with FHFB officials and their review of draft capital plans, it appears that a majority of FHLBanks might initially implement an exclusive Class B stock structure, while other FHLBanks might implement a mixed structure. The presence of 5-year capital, combined with the requirement that member institutions lose benefits of membership in the System if they withdraw capital, acts to create a financial interest that mirrors some, though certainly not all, characteristics of publicly traded perpetual equity stock.\nPermanent capital is defined in GLBA as amounts paid in for Class B stock plus the retained earnings. Class A stock plus permanent capital is to be at least 4 percent of assets. Class A stock plus 1.5 times permanent capital is to be at least 5 percent of assets. Therefore, a FHLBank meeting the 4 percent requirement will also meet the 5 percent requirement if its permanent capital equals at least 2 percent of assets. In addition, only permanent capital is included in the capital definition for the risk-based capital component of the minimum capital standards.\n\n\t\tFHLBank Capital Will Continue to Differ From Capital Issued by Publicly Traded Corporations\n\nAlthough the new capital structure will result in more permanent capital, FHLBank capital will continue to differ from the capital issued by publicly traded corporations such as the enterprises or banks. The voluntary, cooperative nature of the FHLBank System means that capital in this system has characteristics different from capital issued by publicly traded corporations.\nFirst, the FHLBank stock will not be perpetual equity stock like that issued by publicly traded corporations. Stock issued by publicly traded corporations can be bought and sold freely and publicly at a market- determined price. In contrast, a FHLBank member institution can redeem FHLBank stock at par value as long as all restrictions are met. For example, a member can withdraw capital with prior notice (i.e., of 6 months or 5 years) if after redemption the FHLBank satisfies all minimum capital requirements. However, FHLBank member institutions lose benefits of membership in the System if they withdraw minimum capital required for membership. This lessens incentives to remove capital, if, for example, FHLBank earnings declined.\nSecond, investors cannot be obligated to buy the stock of publicly traded corporations. However, FHLBank members can be required to buy additional FHLBank stock to ensure that the FHLBank meets its capital requirements. Third, corporations with publicly traded stock have responsibilities to maximize the value of their stock. In contrast, FHLBanks have incentives to provide the best mix of services and dividend payments to their member-owners.\n\n\t\tEach FHLBank\u2019s Capital Is Potentially Available Throughout the FHLBank System\n\nUnder the new capital structure, the capital of each FHLBank will continue to be available to other FHLBanks in the System because the FHLBanks are jointly and severally liable for the System\u2019s outstanding debt securities, called consolidated obligations. Joint and several liability for the payment of consolidated obligations gives investors confidence that System debt will be paid. Another related characteristic of joint and several liability is that it potentially creates a large pool of capital from all FHLBanks to provide a cushion in the event of unexpected System losses. However, joint and several liability also puts all FHLBanks at risk because of the possibility that one FHLBank could become troubled and not be able to meet its debt obligations. In such a situation, the troubled FHLBank would have incentives to undertake risky activities because profits would accrue to the FHLBank\u2019s owners, whereas losses and erosion of capital could fall on others. This scenario creates incentives for the FHLBanks to monitor each other\u2019s activities, which FHLBank officials told us they do through a number of System-wide bodies of representatives from the 12 FHLBanks.\nIn theory, joint and several liability appears to make most System capital available in the event of large, unexpected losses in the System. However, concerns about how joint and several liability would operate in the event of a default or delinquency on a consolidated obligation prompted FHFB to issue regulations in 1999. The regulations establish a process by which FHFB will look first to the assets of a FHLBank that received the proceeds of the consolidated obligation. The regulations also contain certification and reporting requirements with which the FHLBanks must comply. For example, the FHLBanks must certify before the end of the each calendar quarter that they will remain in compliance with the liquidity requirements and will remain capable of making full and timely payments on their consolidated obligations. A FHLBank that is unable to provide the required certification must provide additional notifications to FHFB, such as a payment plan specifying the measures the FHLBank will take to make full and timely payments of all its obligations. The regulations also specify that FHFB may order any FHLBank to make principal and interest payments due on any consolidated obligation in the System. In this case, each contributing FHLBank is entitled to reimbursement from the FHLBank that was responsible for making the payment. Liability is to be allocated among the other FHLBanks on a pro rata basis in proportion to each FHLBank\u2019s participation in all consolidated obligations.\nJoint and several liability provides incentives for the FHLBanks to monitor each other and appears to make most System capital available in the event of large, unexpected losses in the System. However, joint and several liability in a cooperative system has never been tested. The FHLBanks have never defaulted on principal or interest payments due on a consolidated obligation. Another cooperative GSE with joint and several liability, the Farm Credit System (FCS), experienced severe economic stress in the middle-1980s. To provide a broader perspective on joint and several liability, we obtained information on the FCS experience during and following its financial rescue by the federal government. Figure 1 describes the collapse and bailout of FCS in the 1980s and describes the problems invoking joint and several liability in FCS.\n\n\t\tSafety and Soundness Oversight Is Important\n\nFHFB supervisory oversight is a very important aspect of implementing a new capital structure. The extent to which the new structure results in an improvement over the old one depends on how the structure is implemented and on FHFB\u2019s oversight of the process. Many of the details of the new capital structure will be contained in the capital plans the FHLBanks are currently submitting to FHFB. The approach and criteria FHFB will use to review and approve the capital plans are being determined.\nWe looked at the Basel Committee on Banking Supervision\u2019s New Capital Accord, which is based on three pillars: minimum capital requirements, a supervisory review process, and effective use of market discipline. Although the New Capital Accord is to be applied to banks and their holding companies, its principles can be applied to GSEs as well.\nHowever, GSE status reduces market discipline, increasing the importance of supervision.\nBeyond the FHLBank System\u2019s status as a GSE, the unique characteristics of FHLBank capital and the potential for risk taking within the System heighten the importance of supervisory oversight by FHFB. First, even after the new capital structure is in place, FHLBank capital will be less permanent than perpetual equity stock. Therefore, more so than other regulators, FHFB must be prepared to act in case a FHLBank\u2019s financial condition weakens. Second, although joint and several liability creates incentives for the FHLBanks to monitor each other\u2019s activities, the FHLBanks do not have the authority to direct a financially troubled FHLBank to take corrective actions. However, FHFB does have authorities it can use to take enforcement actions in such a situation.\nWe last examined FHFB\u2019s supervisory oversight of the FHLBank System in 1998. We concluded that FHFB\u2019s safety and soundness regulation is increasingly important to protect taxpayer interests due to the System\u2019s expanding activities and the changing business environment. We found deficiencies in FHFB\u2019s oversight of FHLBanks and made a number of recommendations to improve it. FHFB officials told us they have made progress in implementing these recommendations. However, we have not examined FHFB\u2019s supervisory oversight since completing our 1998 report, and therefore we have not verified the completeness of these actions.\n\n\tRisk Management Policies and the New Capital Structure Can Mitigate the Increased Risks Associated With Advances and Mortgage Acquisitions\n\nExpansion in the types of eligible collateral and increased direct mortgage acquisition will increase interest rate, credit, and operations risks in the FHLBank System. Interest rate risk, however, will remain unaffected by the new forms of collateral. The overall amount of risk introduced will depend on the type and amount of advances and mortgage acquisitions undertaken by the FHLBanks, the implementation of risk management practices by the FHLBanks, and oversight provided by FHFB. The new capital structure has the potential to address the risks associated with advances and mortgage acquisitions, because of greater capital permanence, leverage capital requirements, and the development of risk- based capital standards. However, capital requirements will not be finalized until FHFB approves capital plans developed by the FHLBanks.\nGLBA authorizes advances to member community financial institutions that utilize small business and agricultural loan collateral. These advances are inherently more risky than traditional advances backed by mortgages and generate credit risk that is more difficult to evaluate. However, the financial management policies of the FHLBanks, as reported to FHFB, that we have reviewed reflect the perception that the new collateral will entail greater credit risks than residential mortgage collateral, and the policies call for higher collateral levels compared to traditional advances.\nThe FHLBanks have also begun implementation of direct mortgage acquisitions with the program begun by the FHLBank of Chicago accounting for a majority of the System\u2019s acquisition activity to date. Based on existing direct mortgage acquisition activity, direct acquisition appears to provide regional diversification of mortgage acquisitions and incentives for sound underwriting by member institutions from member exposure to credit risks. However, this activity is relatively new, and its level is expected to grow, thereby increasing risks. In addition, risks could be affected if changes are made in the risk-sharing agreements between the FHLBanks and their member institutions. Increased activity in direct mortgage acquisitions by FHLBanks could also increase competition with the enterprises in the secondary mortgage market. Such increased competition could provide benefits to borrowers, but could also generate additional risks for the FHLBanks, the enterprises, depository institutions, and taxpayers.\n\n\t\tNew Forms of Collateral for Advances Will Increase Credit and Operations Risks\n\nCredit and operations risks for traditional advances utilizing home loan and related types of collateral are relatively low. However, GLBA authorized advances to community financial institutions utilizing small business and agricultural loan collateral that will likely introduce greater credit and operations risk. Interest rate risk will not change, and FHLBanks will continue to manage this risk as they have managed it for traditional advances. The FHLBanks have extensive experience in managing their traditional advance business and have developed financial management policies for managing risks, as required by FHFB. In addition, according to FHFB, the FHLBanks typically require 10 to 25 percent more than the value of an advance in collateral. Largely due to collateral protection and the System\u2019s lien status, FHLBanks have never experienced a credit loss on their advance business.\nIn contrast to their traditional advance business, advances to community financial institutions utilizing small business and agricultural loan collateral are inherently riskier and generate credit risk that is more difficult to evaluate. First, small business and agricultural loans are more heterogeneous than single-family residential mortgage loans. In particular, small business loans finance businesses involved in a wide range of economic activities. Unlike mortgage loans that have fairly homogeneous characteristics, loans to a wide variety of sectors are more difficult to analyze. In addition, the value of each business is determined largely by the performance of those operating it. In contrast, appraising the value of a housing unit providing collateral for a single-family residential mortgage loan is more straightforward. Operations risk would also increase, because FHLBanks have not fully developed the expertise, information systems, and operational procedures necessary for these new activities.\nBoth FHFB and the FHLBanks recognize that the new collateral will entail greater credit risks than residential mortgage collateral. FHFB requires a FHLBank, prior to accepting the new collateral for the first time, to file a notice to demonstrate that the FHLBank has the capacity to manage the risks associated with the new types of collateral to be accepted.According to FHFB, the FHLBanks are requiring 65 to 150 percent more collateral over the size of advances when the collateral is loans secured by small businesses or farms. Consistent with the stringency of their financial management policies, officials from the FHLBanks told us that they currently anticipate a low level of funding utilizing small business and agricultural collateral.\n\n\t\t\tNew Forms of Collateral Will Not Change Interest Rate Risk\n\nThe FHLBanks have tools to manage interest rate risk, and the introduction of the new forms of collateral for advances will not change the way this risk is managed. The principal source of funds for FHLBanks is the consolidated debt obligations of the System. According to FHFB, each FHLBank calculates various measures of its exposure to interest rate risk. One of the measures is duration of equity. This measures the sensitivity of market value of equity to changes in interest rates. FHFB\u2019s financial management policy specifies duration of equity limits, and the FHLBanks are to report the results of their duration of equity calculations to FHFB each quarter. If interest rate risk is well hedged, the market value of equity will change little as interest rates fluctuate.\n\n\t\t\tLien Status May Result in Increased Costs to Federal Deposit Insurance Funds\n\nThe FHLBanks have lien status in which their rights to the collateral they hold generally have priority over other security interests, including insured deposits, in the assets of failed insured financial institutions. Historically, all advances have been secured with collateral. More recently, FHLBanks have also required collateral to secure member-provided credit enhancements on mortgages FHLBanks acquire directly. By statute, FHLBank security interests generally have priority over the claims and rights of any party, including receivers, conservators, and trustees. This preference can result in increased costs to the Federal Deposit Insurance Corporation (FDIC) in resolving a possible bank or thrift failure. Potential expansion in FHLBank System advances, collateral, and direct mortgage acquisition activities could therefore also increase resolution costs to the FDIC.\n\n\t\tDirect Mortgage Acquisitions Will Increase Interest Rate, Credit, and Operations Risks\n\nInterest rate, credit, and operations risks will increase from the direct mortgage acquisition programs implemented by the FHLBanks. Holding mortgage assets exposes FHLBanks to interest rate risk, because the FHLBanks assume the risk for any changes in the market value of the retained mortgage assets. If interest rates increase at a time when new debt has to be issued, borrowing costs will increase while returns from fixed-rate mortgage asset holdings remain constant. Because borrowers tend to prepay and refinance their mortgages when interest rates decline, falling interest rates carry another form of interest rate risk called prepayment risk. To the extent that FHLBanks rely on long-term debt that cannot be refinanced, returns will fall without a corresponding decline in debt costs. The prepayment risk associated with mortgage holdings differs from that associated with advances, because the advances to member institutions carry prepayment penalties. The FHLBanks, however, currently have experience in managing prepayment risk because they have investment holdings of mortgage-backed securities (MBS) and the associated prepayment risk. The FHLBanks and the enterprises tend to use financial instruments such as long-term, callable debt to limit their exposure to interest rate risk from holdings of mortgage assets.\nFHLBanks use derivatives and callable debt to hedge interest rate risk resulting from direct investments in mortgage assets. To the extent that the duration of mortgage assets differs from that of debt obligations, FHLBanks often enter into a matching interest rate exchange agreement. This agreement is one form of financial derivative called an interest rate swap, in which the counterparty pays cash flows to the FHLBank designed to mirror, in timing and amount, the cash outflows the FHLBank pays on the consolidated obligation. The FHLBanks also use other financial arrangements to manage interest rate risk. For example, callable debt allows the FHLBank as issuer to buy (i.e., call) back issued debt when interest rates decline. Callable debt is attractive as a source of funds for mortgage asset holdings, because borrowers tend to prepay their mortgages and refinance when interest rates decline. FHLBanks had $224.5 billion of callable debt outstanding as of December 31, 2000, out of total consolidated obligations of about $592 billion.\nDirect mortgage acquisitions expose the FHLBanks to credit risk. To qualify for FHLBank purchase, as is true for purchase by the enterprises, mortgage insurance is required for mortgage loans with loan to value ratios of over 80 percent. FHLBank purchases have included conventional mortgage loans with private mortgage insurance as well as mortgage loans with federal guarantees or insurance. The FHLBanks\u2019 credit risk management includes enforcement of lender guidelines for member institutions participating in direct mortgage acquisition. The FHLBanks have established stated actions they will take to ensure that member institutions follow these guidelines. For example, the FHLBanks are to collect quality control reports from participating members and perform a quality control review on a sampling of the mortgages purchased from each member. Participating members are also subject to audit by the FHLBank or its designated agents. FHLBank establishment and enforcement of guidelines for participating members help the FHLBanks mitigate credit risk by increasing the degree of assurance that lenders meet fundamental standards for originating and servicing mortgages. The FHLBanks credit risk management also includes implementation of lender credit enhancement requirements that subject participating member institutions to credit risk. For example, the FHLBank establishes an account in which payments to member institutions are reduced in the event of mortgage defaults. These credit enhancements further help the FHLBanks mitigate credit risk by creating incentives for sound mortgage underwriting and servicing by participating members. The FHLBanks also seek wide geographic distribution of their mortgage acquisitions to limit their exposure to any particular regional economic downturn.\nLenders who hold mortgages and member institutions use an infrastructure to manage their credit risk that is different from the infrastructure used by secondary market entities, such as the enterprises. These institutions can benefit in their management of credit risk from their potential ability to better understand their local markets and thereby the credit risk associated with mortgages they fund or mortgages they sell in which they still take on credit risk. In addition, institutions that take on credit risk from mortgages they originate do not face the moral hazard problems secondary market entities have when they purchase mortgages and take on the associated credit risks. To address the moral hazard problem, secondary market entities develop infrastructures to oversee the lending and servicing practices of lenders from whom they purchase mortgages.\nDirect mortgage acquisitions expose the FHLBanks to operations risk, because in the past the FHLBanks had not developed the expertise, information systems, and operational procedures to approve and oversee lenders. Exposure to operations risk is related to the FHLBanks\u2019 exposure to credit risk, because new operating infrastructure and procedures are necessary to the extent that member exposure to credit risk reduces the moral hazard problem faced by the FHLBanks. If the FHLBanks have little exposure to credit risk and moral hazard, then operations risk will be lower. The actions taken to avoid moral hazard, including systems used to provide lender oversight, entail operations risk. In contrast, credit and operations risks from traditional advances have been minimal because of collateral requirements.\nAs of December 31, 2000, the FHLBanks held slightly over $15 billion in fixed, long-term, single-family mortgages compared to about $1.4 billion as of year-end 1999. The FHLBank of Chicago held about half of total mortgage loans in the System.\n\n\t\t\tThe FHLBank of Chicago Has Developed a Direct Acquisition Program\n\nThe majority of direct acquisition activity to date has been accounted for by the program begun by the FHLBank of Chicago, which is named Mortgage Partnership Finance (MPF). MPF was initiated on a pilot basis beginning in 1997. The 10 FHLBanks from Boston, New York, Pittsburgh, Atlanta, Indianapolis, Chicago, Des Moines, Dallas, Topeka, and San Francisco, currently participate in MPF.\nAlthough MPF offers multiple products, they share some common characteristics. First, mortgage purchases are limited to mortgage loans below the conforming loan limit for the enterprises, which is currently $275,000 for a single-family housing unit. Second, the FHLBank holds an account with funds generated from transactions between the FHLBank and the member bank. This account takes the first-loss position after primary mortgage insurance payments; that is, costs due to borrower mortgage defaults are taken from this account before other sources of funds are utilized to cover credit losses. The funds are generated by providing the FHLBank a price deduction at time of sale and\/or from an annual flow of payments. The latter device is often called a spread account, because it represents a spread between payments due to the member institution from the FHLBank (e.g., to compensate the member for taking on credit risk) and payments actually made by the FHLBank.Third, for some MPF products the member institution is required to supply additional credit enhancements in the form of direct loss guarantees and\/or supplemental insurance to provide a second-loss position before the FHLBank is exposed to credit losses. The loss positions taken by the first-loss account and the second-loss supplemental insurance and lender guarantees are lender provided credit enhancements. By FHFB regulation, the FHLBank requires the member institution to provide collateral to secure direct loss guarantees provided by the lender. The collateral is protected by the lien status applicable to collateral used to secure advances.\nThe FHLBank of Chicago has two primary means of achieving regional diversification of its credit risk. First, it purchases mortgages from member institutions that are affiliated with large, nationwide lenders, and second, it invests in the mortgage acquisitions (called participations) made by the nine other FHLBanks that participate in MPF. Table 1 presents the geographic distribution of MPF mortgages as of year-end 2000. Based on all MPF mortgage loans to date, it appears that regional diversification has been achieved. According to FHLBank of Chicago officials, MPF serves both large and small FHLBank member institutions.\nThe FHLBanks of Cincinnati, Indianapolis, and Seattle participate in the other direct mortgage acquisition program, which is named the Mortgage Partnership Program (MPP). MPP was initiated near year-end 2000. As of year-end 2000, less than $500 million in mortgage loan holdings were accounted for by the FHLBanks participating in MPP.\nMPP is in its infancy compared to MPF. The products share some of the basic characteristics of MPF. A notable difference between MPP and MPF is that to date MPP participants have only been larger member institutions. Another difference is that the FHLBank MPP participants generally do not expect to enter into participations with the other MPP FHLBanks, even though the program parameters allow for such participations. Without joint participation among the three FHLBanks on individual mortgage pools, geographic diversification of mortgage assets might be limited if small member institutions, which are not diversified geographically, provide a large share of MPP activity.\n\n\t\tRisks Can Be Sensitive to Changes in Risk-Sharing Arrangements\n\nTwo major FHFB regulatory requirements that limit the risks of MPF and MPP are (1) the member institution is to assume the first-loss position in the transaction as defined by FHFB and (2) each loan pool is to receive an investment grade rating based on FHFB approved rating criteria and loan pools with ratings below AA (i.e., double-A) must be supported by additional retained earnings or reserves.\n\n\t\t\tThe Member Institution Assumes the First-Loss Position\n\nFHFB regulations require member institutions to be in the first-loss position (i.e., after primary mortgage insurance). FHFB uses an economic definition of first-loss position in implementing its regulation. In an accounting sense, it may not be apparent that the member is in a first-loss position, because the account that takes the first-loss might not be on the balance sheet of the member institution. However, the member institution is at risk because defaults reduce payments from the first-loss account to the member institution. These payments represent a fee paid to members for assuming credit risk. When losses from defaults occur, the account covers the losses and payments to the member are subsequently reduced. Therefore, this structure should help provide incentives to member institutions through the sharing of credit risks for sound underwriting and loan servicing practices.\n\n\t\t\tEach Loan Pool Is Required to Receive an Investment Grade Rating to Mitigate FHLBank Credit Risk\n\nAnother FHFB regulatory requirement that limits the risks of MPF and MPP is the requirement that each loan pool receive an investment grade rating based on FHFB approved rating criteria, and loan pools with ratings below double-A must be supported by additional retained earnings or reserves. FHFB has approved rating criteria contained in the computer package LEVELS, a product of the rating agency Standard & Poors. To date, participating FHLBanks have required a double-A rating. A double-A rating is the second highest rating attainable. LEVELS considers credit risk characteristics for loans in a mortgage pool, such as loan-to-value ratio, mortgage insurance coverage, economic conditions and expected house price changes in the metropolitan area where the residence is located, and borrower credit history. Based on these characteristics, LEVELS calculates the credit support necessary from the first-loss account and, when applicable, supplemental insurance to achieve the double-A rating. Standard & Poors officials we interviewed stated that LEVELS provides a comprehensive credit analysis of a mortgage pool. They also told us that LEVELS does not consider some factors that could affect FHLBank risk exposure such as the capacity of the member institution and the first-loss account to meet continuing obligations.\nFHFB\u2019s required investment grade rating, especially if participating FHLBanks require a double-A rating from LEVELS, should help to limit credit risk faced by the FHLBanks based on a thorough credit analysis of each mortgage pool. Participating FHLBanks can further limit credit risk and thereby improve the performance of their acquired mortgage portfolios above what the LEVELS\u2019 model predicts by achieving regional diversification of their portfolios. In addition, LEVELS does not consider factors such as concentrations of FHLBank credit risk with individual member institutions that may have limited capacity to meet their continuing obligations. Due in part to strategies to limit credit risk that can be implemented by participating FHLBanks and risk factors not considered by LEVELS, capital supervision of direct mortgage acquisitions by FHFB is important to ensure the safety and soundness of the System.\n\n\t\tThe Capital Structure Being Established Has the Potential to Address the Increased Risks of New Activities\n\nFHFB published a risk-based capital regulation on January 30, 2001, that, if properly implemented, can establish a capital structure with the potential to address the increased risks of new activities. The capital regulation establishes classes of capital with varying degrees of permanence, leverage requirements, and risk-based capital requirements to be implemented. Each FHLBank is expected to hold capital commensurate with its credit, interest rate, and operations risk. FHFB\u2019s risk-based capital regulation requires credit risk to be calculated using four broad categories based on an evaluation of the credit risk associated with different types of assets and positions. This evaluation is based in part on the loss history of relevant assets with particular ratings and maturities. FHFB directed each FHLBank to develop its own internal risk-based model to estimate interest rate exposures and calculate risk-based capital requirements for interest rate risk. These internal models are to be approved by FHFB in connection with the approval of each FHLBank\u2019s capital plan, which is to be submitted to FHFB by October 29, 2001. The internal models must meet FHFB\u2019s technical restrictions and use interest rate scenarios approved by FHFB. FHFB\u2019s regulation includes a risk-based capital requirement to cover operations risk.\nFHFB\u2019s minimum leverage requirement establishes two activity-based minimum capital ratios; both ratios must be met. The simplest measure is total capital equal to 4 percent of assets. The second measure is total capital equal to 5 percent of assets when permanent capital is weighted by 1.5 and other capital is weighted by 1. Only permanent capital is included in the capital definition for the risk-based capital component of the minimum capital standards.\nFHFB\u2019s capital regulation included capital requirements for the credit risk of assets in two categories: advances and rated mortgage assets.According to the published regulation, the credit risk capital requirement for advances was based on the highest estimated (proportional) loss by rating category and maturity class observed over a 2-year period of actual corporate bond data from the interval 1970 to 1999. FHFB also used its judgment to establish capital requirements. FHFB officials told us that the numeric capital requirements are subject to refinement based on FHFB\u2019s ongoing research.\nFHFB\u2019s risk-based capital requirement for advances assumes little credit risk exists. Although FHLBanks have never incurred credit losses on advances backed by traditional mortgage collateral or securities, FHFB decided to impose capital requirements on advances. The capital requirement on long-term advances is higher than on short-term advances. FHFB used its judgement to set a capital requirement on all advances that includes some credit risk. This capital requirement is intended to reflect the potential credit risks created by new types of collateral. FHFB oversight of collateral policies and other aspects of FHLBank risk management of new collateral will be important, because all advances are included in the same category, and the new collateral entails greater credit risk than traditional advances collateral.\nCredit risk percentage requirements for residential mortgage assets are based on FHFB\u2019s analysis of residential MBS and their ratings. In developing the capital requirements for mortgage assets, FHFB also took into account the requirements set by other regulators. In general, the risk- based capital requirements for mortgage assets, such as mortgages on both single-family and multifamily units or MBS, vary with the creditworthiness of the assets.\nFHFB\u2019s capital regulation, with its rating-based approach, allows capital requirements to vary based on the credit risk of the mortgage assets. In the case of MPF and MPP, participating FHLBanks have required a credit rating of double-A on each mortgage pool acquired. As stated earlier in this report, the double-A rating is to be based on a thorough credit analysis of each mortgage pool acquired. MPF and MPP assets are expected to become an increasing part of the assets held by the FHLBanks.\nFHFB directed each FHLBank to create its own internal risk-based model to estimate interest rate risk exposures and calculate risk-based capital requirements for interest rate risk. The exposure to interest rate risk in each model is to depend on the level of stress from interest rate movements taking into account any hedges that affect the actual exposure to interest rate movements. These internal models must meet FHFB\u2019s technical requirements and use interest rate scenarios approved by FHFB.\nFHFB\u2019s regulation contains a stated preference that the internal models created by the FHLBanks be based on a value at risk approach. Using this approach, the loss is estimated based on several possible interest rate patterns in the future. FHFB must approve the interest rate scenarios used in the internal models and has placed some technical requirements on the models themselves. Each FHLBank is required to have sufficient permanent capital to meet the value at risk level established by FHFB, as well as other capital requirements.\nFHFB\u2019s regulation requires that the FHLBanks maintain sufficient risk- based capital to cover operations risk, although GLBA did not stipulate such a requirement. FHFB\u2019s capital requirement for operations risk is 30 percent of the total capital required to cover interest rate and credit risk, but it may be reduced to no lower than 10 percent if a FHLBank can demonstrate to the satisfaction of FHFB that it has insurance or some other means to justify the reduction.\nAppendix IV contains further discussion of FHFB\u2019s capital regulation.\n\n\t\tBusiness With GSEs Affects Members\u2019 Capital Requirements and Risks\n\nAs alternatives to holding mortgages on their own balance sheet, depository institutions have a number of ways to obtain GSE funding for mortgage assets and thereby transfer some or all of the related risks. How these assets are funded and how the risks are transferred or shared has important implications for regulatory capital treatment at both the depository institution and at the GSE. For example, when mortgages along with all the attendant risks are sold outright to a GSE, the only relevant capital requirement would be at the GSE level. Alternatively, when a depository institution purchases an MBS issued by a GSE, there is a capital charge imposed at the depository level that is to reflect the credit risk of GSE obligations as well as a capital charge at the GSE level. For those funding arrangements in which credit risk is maintained, in whole or in part, at the depository institution level, the capital treatment by the depository institution regulators and the GSE regulators interact. From an integrated perspective it is important that risks and capital requirements are in proper relation to one another. Otherwise certain arrangements can be disadvantaged if capital charges are too high or advantaged if they are too low. As such, supervision is particularly important.\nDepository institutions that engage in secondary market transactions with GSEs must hold capital based on (1) the amount of GSE obligations in their portfolios, (2) their capital investment in the GSEs, and (3) the risks retained when selling or transferring mortgage assets to a GSE. The depository regulators we interviewed told us that they generally assign relatively low credit risk weights to depository institution holdings of GSE obligations, because they take into account the perception of implied federal backing of GSE obligations. The regulators told us that depository institution holdings of FHLBank debt, enterprise debt, and enterprise MBS are in the 20 percent risk category. Thus, rather than the general requirement of $8 in capital for each $100 of assets in the 100 percent risk category, such as unsecured loan assets, $1.60 of capital is required (that is, 8 percent of $20). Therefore, depository institutions that sold mortgages in the secondary market and purchased an equivalent amount of GSE backed MBS would lower their credit risk and their capital requirements. In fact, the combined capital requirement, including the capital requirement at the GSE level, would be lower possibly reflecting the GSEs\u2019 ability to reduce overall credit risk through geographic diversification. Currently, depository institutions are required to hold $4 in capital for each $100 in mortgage loan holdings and $1.60 of capital for each $100 in enterprise MBS holdings, and the enterprises are required to hold capital equal to 0.45 percent of MBS issued and held by outside investors. Thus, the transfer can result in $2.05 of total capital required rather than $4 of capital required without the transfer of assets.\nThe depository institution regulators have also established capital requirements for the risk associated with depository institution investments in GSE equity. The regulators told us that currently FHLBank capital is in the 20 percent risk category although they are actively reviewing this capital treatment and considering the new capital structure being established for the FHLBank System. In addition, they told us that enterprise equity is generally in the 100 percent risk category; the one exception is the Office of the Comptroller of the Currency, the regulator of national banks, which places enterprise equity in the 20 percent risk weight category. The regulators stated that their supervision activities address concentrations of pledged assets and risks at individual depository institutions that could result from heavy reliance on FHLBanks as a funding source.\nThe depository institution regulators have provided guidance on the risk- based capital treatment of only one MPF program, MPF 100. Under this program, the member institution acts as agent for the FHLBank, underwriting, servicing and providing a credit enhancement for residential mortgage pools. The member receives fees for the credit enhancement that it provides. The FHLBank provides a first-dollar loss protection cushion equal to 100 basis points of the total mortgage pool\u2019s unpaid balance. As the FHLBank incurs credit losses allocable to this protection, the credit enhancement fees paid by the FHLBank to the member are reduced. However, the credit enhancement fees are not recorded on the balance sheet of the member institution until received. The second-loss credit enhancement provided by the member institution is sized so that the senior piece held by the FHLBank would have the credit quality equivalent to a double-A rating.\nThe depository institution regulators determined that since expected receipt of the guarantee fees by the member institution is not a balance sheet asset, and since the member institution is under no obligation to pay anything to the FHLBank, there is no risk of loss to the member\u2019s capital. The only consequence to the member institution in the case of credit losses is the receipt of a lower level of credit enhancement fees. Because expected credit losses would not affect the member\u2019s balance sheet, the depository institution regulators determined that the FHLBank is in the first-loss position. They determined that the member institution\u2019s capital requirement would be based on the face value of the second-loss credit enhancement.\nIn contrast, the FHFB analysis of the credit enhancement structure of MPF 100 leads to a different result. According to the FHFB analysis, because the member institution\u2019s credit enhancement fees are reduced if the FHLBank incurs losses from the first-loss cushion due to mortgage defaults, the member\u2019s fees are contingent upon the performance of the mortgage pools. FHFB determined that because the member bears the economic responsibility of the expected credit losses from the first dollar of loss, the member is effectively in the first-loss position.\nWhile the depository institution regulators have provided guidance on one particular mortgage participation product, they have yet to opine on others. It is also likely that new products could arise with various combinations of credit risk sharing arrangements. The depository institution regulators have issued proposed regulations that would change the risk-based capital treatment of credit enhancements. The rules currently in effect provide for differing capital treatment for credit enhancements that have the same economic effect, depending on whether the credit enhancement is retained in a sale of assets or acquired in some other way. The regulators have proposed a more consistent treatment of economically equivalent credit enhancements. The cost of regulatory capital associated with credit enhancements could change based on the content of final regulations.\n\n\t\t\tThe Enterprises Questioned the Adequacy of the FHLBank System\u2019s Capital Structure to Support Direct Mortgage Acquisitions\n\nDuring the course of this assignment, enterprise officials we interviewed raised questions about the adequacy of the capital structure of the FHLBank System as it relates to the risks posed by the direct acquisition of mortgages. In particular, it was suggested that if you view the FHLBank System, including its membership, as if it were a holding company then the System, in certain cases, could be viewed as engaging in \u201cdouble leveraging.\u201d According to this view, the member financial institutions use their own capital to directly support their own activities but finance their purchases of FHLBank stock with deposits, debt, or other instruments not acceptable as regulatory capital. Figure 2 provides more information on double leveraging.\nEnterprise officials told us that FHLBank capital is not adequate to support the risks of direct mortgage acquisition, because debt issued to finance the investment is a liability on the balance sheet of the FHLBank, the investment is an asset on the balance sheet of the FHLBank, and the capital of the FHLBank is downstreamed noncapital proceeds from member institutions.\nThis approach appears to be an analogy based on accounting flows resulting from on-balance sheet investments by the FHLBanks. Based on our analysis, there appear to be countervailing factors that lessen the applicability of the analogy as a way of analyzing the ability of capital to address the risks of FHLBank mortgage acquisitions. First, the approach focuses on leverage directly, rather than on the relationship between capital and risks. The present risk sharing arrangements, which include the requirement that the member institution be in the first-loss position, limit credit risk to the FHLBank. At the member institution level, depository institution regulators rely on supervisory tools to limit exposure to potential risks resulting from FHLBank mortgage acquisitions.\nAs a second countervailing factor, MPF and MPP are not the only secondary mortgage market programs that reduce total capital requirements. When the enterprises purchase mortgages from depository institutions, capital requirements for the depository institutions are reduced without a corresponding increase in enterprise capital requirements. As stated above, depository institution regulators generally assign relatively low credit risk weights to depository institution holdings of GSE obligations. One reason why the capital requirements at the enterprise level are lower is that the enterprises can reduce credit risk through geographic diversification of their mortgage servicing portfolios.\nHowever, the relationship between the credit risk reduction from geographic diversification and the reduction in total capital required has not been established. As in the case of FHLBank mortgage acquisitions, depository institution regulators rely on regulatory oversight.\nAs a third countervailing factor, even if capital should be consolidated between FHLBanks and member institutions in some manner, the holding company analogy lacks sufficiency as a method of analysis. Consolidation of balance sheets has the most merit in the case of a parent holding company that controls a subsidiary in which the parent funds the closely controlled subsidiary with instruments not acceptable as regulatory capital and in turn uses the subsidiary as an investment vehicle. In the case of the FHLBank System, a parent holding company does not exist. The FHLBank System is a cooperative in which member institutions provide System capital, but no one member appears to hold a controlling interest in the corporate governance decisions of any one FHLBank. In addition, joint and several liability combined with all voluntary membership motivates the FHLBanks to monitor each other\u2019s financial activities.\nWhile we have treated the concept of double leveraging as a distinct issue, the more fundamental concern raised by the enterprises appears to be associated with the nature of FHLBank capital. While we agree that the capital is not perpetual equity capital, it will become more permanent. However, we have not addressed the issue as to whether 5-year capital combined with statutory and regulatory restrictions on withdrawal of capital will result in the optimal level of permanence.\n\n\t\tIncreased Secondary Market Competition Can Generate Risks\n\nMPF and MPP, while structured differently than the secondary market products offered by the enterprises, can generate increased competition in the secondary mortgage market. In a 1996 report, we addressed the implications of authorizing another GSE to compete with the enterprises.In that report, we assumed that the newly authorized GSE would have a similar charter and be subject to the same regulatory requirements to compete with the enterprises. Therefore, the GSE would also operate in a similar manner to the enterprises. We indicated that such authorization could increase the overall amount of GSE activity in the mortgage market and, as a result, raise the potential amount at risk in case of a government bailout; increase the level of GSE risk, because entities operating in new markets often have greater managerial and operations risk than those operating in established markets; increase credit risk if the new entity attempted to establish market share by lowering underwriting standards; and increase competition and thereby reduce mortgage interest rates to borrowers.\nRisks in the FHLBank System will increase from its direct mortgage acquisition activity. The acquisition activity could also generate benefits to borrowers and potential risks for the enterprises. The degree to which increased competition could affect risk-taking by the FHLBanks and the enterprises is among the unknowns in this competitive process. However, such developments also create potential risks for taxpayers and therefore challenges for both FHFB and OFHEO.\nThe introduction of the mortgage acquisition programs by the FHLBank System has implications for competition between and the regulatory oversight of the System and the enterprises. The mortgage acquisition programs of the FHLBank System increase competition between the System and the enterprises. In past reports we have recommended, and we still support, combining the GSE regulators into one agency and authorizing the agency to oversee both the safety and soundness and mission compliance of the FHLBanks, Fannie Mae, and Freddie Mac. We have pointed out the advantages of combining oversight responsibilities in one agency. Such an agency could be more independent and objective than the separate regulatory bodies and could be more prominent than either one alone. Although the GSEs operate differently, the risks they manage and their missions are similar. The regulators\u2019 expertise in evaluating GSE risk management could be shared more easily within one agency. In addition, a single regulator would be better positioned to be cognizant of specific mission requirements, such as special housing goals and new programs or initiatives any of the GSEs might undertake, and should be better able to assess the competitive effect on all three housing GSEs and better ensure consistency of regulation for GSEs that operate in similar markets. Having all staff in one regulatory agency should also facilitate coordination and sharing of expertise among staff responsible for safety and soundness and mission compliance. Given the introduction of mortgage acquisition programs by the FHLBanks, the ability of a single regulator to assess competitive effects among the three housing GSEs and to better ensure consistency of regulation for the housing GSEs becomes relatively more important.\n\n\tFHFB and OFHEO Approach Risk-Based Capital Regulations Differently\n\nFHFB and OFHEO risk-based capital regulations are meant to ensure that the FHLBanks and enterprises maintain sufficient capital to weather stressful economic conditions and address credit, interest rate, and operations risks. However, we are unable to assess the relative stringency of each regulator\u2019s approach to risk-based capital, for two reasons. First, the final specifications of the risk models for both OFHEO and FHFB are not yet available. Second, even if the final specifications were available, differences in the assets and liabilities held by the FHLBanks and the enterprises create different risk patterns. These differences, in turn, led to different modeling approaches, making comparisons difficult. Although we cannot provide an overall assessment of the stringency of each regulator\u2019s approach, we can compare certain attributes of the modeling approaches and their strategies and procedures for estimating credit, interest rate, and operations risk. We also provide a comparison of the effects of the leverage requirement on the FHLBanks and the enterprises.\n\n\t\tFHFB\u2019s Risk-Based Capital Regulation\n\nGLBA gave FHFB discretion to establish credit and interest rate scenarios to be covered by permanent capital. In implementing GLBA, FHFB decided to require FHLBanks to hold capital for operations risk. The amount of permanent capital required under the risk-based capital regulation is the sum of capital for credit risk, interest rate risk, and operations risk. Figure 3 is a simplified illustration of FHFB\u2019s approach to risk modeling and calculating capital.\n\n\t\tOFHEO\u2019s Risk-Based Capital Regulation\n\nThe Federal Housing Enterprises Financial Safety and Soundness Act of 1992 (the 1992 act) established OFHEO as an independent regulator within the Department of Housing and Urban Development (HUD). OFHEO\u2019s mission is to ensure the enterprises\u2019 safety and soundness. The 1992 act also authorized OFHEO to develop a risk-based capital regulation that addresses credit, interest rate and operations risks. OFHEO began developing its regulation upon its creation in 1993. OFHEO has developed its own cash flow model to estimate risks and calculate the total capital needed to cover credit and interest rate risk. The 1992 act specified the stresses that the model must address. The risk-based capital regulation also requires capital for operations risk. For risk-based capital, total capital is the sum of a general allowance for foreclosure losses, common stock, perpetual noncumulative preferred stock, paid-in capital, and retained earnings.\nOFHEO did its own modeling of the risks for both enterprises so that the enterprises would face identical analytical measures of their risks based on their own assets, liabilities, and off-balance sheet positions. However, the model this approach uses does not reflect any business strategies that are unique to either enterprise.\nFigure 4 is a simplified illustration of OFHEO\u2019s approach to risk modeling and risk-based capital calculation. OFHEO runs a single model in which the capital calculations for credit risk and interest rate risk are based on the model\u2019s estimates of how much capital each enterprise needs. This approach ensures that both credit risk, which is based on benchmarklosses, and interest rate risk are integrated in a cash flow model. Appendix IV provides a more detailed description of FHFB\u2019s and OFHEO\u2019s risk- based capital requirements.\n\n\t\tFHFB\u2019s and OFHEO\u2019s Modeling Approaches Differ\n\nGenerally, FHFB has not directly modeled risks in its risk-based capital regulation. For credit risk, FHFB has depended on data on historic losses, the loss history of relevant assets with particular ratings and maturities, and its own judgments to determine appropriate levels of risk-based capital. For interest rate risk, FHFB decided to establish a framework that each FHLBank must adhere to when it models its own interest rate risk. This approach made it possible for FHFB to publish its regulation within 15 months of GLBA. However, we have not been able to evaluate the interest rate risk models that are yet to be developed by each FHLBank and subsequently approved by FHFB.\nIn contrast, OFHEO used a complex modeling approach to determine risks and calculate required capital. This approach permitted OFHEO to fine- tune feedbacks between interest rate risk and credit risk and explicitly model the factors that created losses associated with particular assets. However, this approach was difficult to implement and created delays in the actual implementation of risk-based capital regulations for the enterprises.\nUnder the 1992 act, Congress set criteria for OFHEO to use in establishing the stress test for credit, interest rate, and operations risk in risk-based capital regulation. In contrast, GLBA required FHFB to create risk-based capital requirements for the FHLBanks taking due consideration of any risk-based capital test established by OFHEO pursuant to the 1992 act. GLBA allowed FHFB to choose the economic scenarios used in modeling credit and interest rate risks. On its own initiative, FHFB added operations risk to its version of risk-based capital regulation.\nFHFB developed capital calculations based on balance sheet data, the market value of the portfolio for interest rate risk, and expected losses for credit risk. OFHEO developed capital calculations that begin with initial balance sheet positions but then use a 10-year cash flow stress test based on specified interest rate scenarios and credit stresses over the 10-year period. In the 1992 act, OFHEO was directed to run its model assuming that no new business would occur during the 10-year stress period except for already committed business of the enterprises. Therefore, enterprise assets, liabilities, and off-balance sheet positions decline over time in OFHEO\u2019s model. FHFB\u2019s balance sheet approach estimates the market value of the FHLBank\u2019s portfolio at risk under the financial stress scenarios and thus does not require an assumption about new business. FHFB\u2019s test is to be applied monthly while OFHEO\u2019s test is to be applied quarterly.\n\n\t\tFHFB\u2019s and OFHEO\u2019s Strategies and Procedures for Calculating Capital Requirements Differ\n\nFHFB and OFHEO have different strategies for calculating the capital needed to cover risks. FHFB requires that the FHLBanks calculate the capital needed to cover credit risk and interest rate risk separately. OFHEO jointly calculates capital needed for credit risk and interest rate risk. FHFB stated that in periods of stress, a positive correlation exists between interest rate risk and credit risk. Given this positive correlation, they stated that a separate calculation of interest rate risk and credit risk is a conservative approach to calculating required capital. In contrast, OFHEO officials stated that their single calculation of the capital needed to cover credit and interest rate risk permits the model to deal with real- world feedbacks between interest rate movements and credit losses. FHFB and OFHEO also calculate capital required for operations risk based on the amount of capital required for credit and interest rate risk, although FHFB may reduce the amount required if a FHLBank demonstrates that it qualifies for a lower requirement.\n\n\t\t\tFHFB and OFHEO Take Different Approaches to Calculating Capital Requirements for Credit Risk\n\nFHFB\u2019s and OFHEO\u2019s actual procedures for estimating credit stresses and calculating the capital required to cover credit risk differ. FHFB uses asset and position credit risk categories and assigns credit risk capital requirements for assets and positions in each category. In making these determinations, FHFB uses its own judgment and available information on factors such as default losses, credit ratings, and capital regulations for other regulated firms. For mortgage assets acquired from members with credit risk-sharing arrangements, FHFB depends on the results of a model from a credit rating agency to estimate and limit credit risk. In contrast, OFHEO uses a more granulated approach based on detailed econometric modeling. This approach allows the agency to address the effects of numerous variables on credit losses directly in its own model.\n\n\t\t\tFHFB and OFHEO Have Different Procedures to Calculating Capital Requirements for Interest Rate Risk\n\nFHFB\u2019s and OFHEO\u2019s approaches to calculating the capital required to cover interest rate risk differ. FHFB uses a value at risk model that estimates changes in the value of capital based on hundreds of historical interest rate scenarios that represent possible stresses on the FHLBanks. The scenarios are to be applied to each FHLBank\u2019s balance sheet and should represent periods of significant economic stress. The interest rate scenarios are based on actual interest rate changes during periods that last 120 business days and cover historical interest rate movements since 1978. The test requires the FHLBank to hold capital sufficient to cover all but the worst 1 percent of potential losses. In contrast, OFHEO uses a 10-year cash flow model and two interest rate scenarios\u2014one for a rising rate and the other for a falling rate. In each OFHEO interest rate scenario, the interest rate adjusts during the first year and then remains at the new level for the remainder of the 10-year period. According to OFHEO officials, both interest rate changes are greater than what has been observed historically over any 1-year period. The amount of capital required to cover interest rate risk is the amount of capital needed to cover the worst of the two mandated interest rate scenarios.\n\n\t\t\tFHFB and OFHEO Have Different Procedures to Calculate Capital Requirements for Operations Risk\n\nAlthough GLBA did not require FHFB to establish a risk-based capital requirement to cover operations risk, FHFB decided such a requirement was needed. FHFB\u2019s capital requirement for operations risk is 30 percent of the total capital required to cover interest rate and credit risk but may be reduced to no lower than 10 percent if a FHLBank can demonstrate to the satisfaction of FHFB that it has insurance or some other means to justify the reduction. In contrast, the 1992 act that directed OFHEO to establish risk-based capital requirements for operations risk specified that capital for operations risk be equal to 30 percent of the total capital required for credit and interest rate risks.\n\n\t\tFHFB and OFHEO Minimum Leverage Requirements May Affect the Regulated Entities Differently\n\nMinimum leverage requirements establish minimum capital levels a firm must hold irrespective of the level of risk it assumes. The leverage ratios required by statute differ for the FHLBanks and enterprises. The minimum leverage ratio for FHLBanks is measured in two ways; both ratios must be met. The simplest measure sets total capital at 4 percent of assets. The second measure sets total capital at 5 percent of assets, with permanent capital weighted by 1.5 and other capital weighted by 1. For the enterprises, the minimum leverage requirement is based on both the on- balance sheet and off-balance sheet positions. Off-balance sheet positions are generally guaranteed mortgage-backed securities held by investors but managed by the enterprises. Thus, the OFHEO rule includes more than just the assets held by the enterprises. The required leverage ratio for on- balance sheet assets is 250 basis points (2.5 percent), while the ratio for off-balance sheet positions is generally 45 basis points (.45 percent).\nFHFB and OFHEO also define capital for the leverage ratios differently. OFHEO uses core capital in the minimum leverage requirement. Core capital is the sum of outstanding common stock, outstanding perpetual noncumulative preferred stock, paid-in capital, and retained earnings.\nFHFB\u2019s total capital for the leverage ratio includes shorter-term Class A stock, longer-term Class B stock, and retained earnings. FHFB\u2019s alternative 5-percent leverage ratio reflects the longer-term nature of Class B stock and retained earnings by valuing Class B stock and retained earnings at 150 percent of par value when calculating capital for the 5- percent leverage ratio. To the extent that FHLBanks develop a capital structure based on Class B stock, they will be using more permanent capital. In contrast, enterprise capital is never redeemable.\n\n\t\t\tFHFB\u2019s Leverage Requirement Will Initially Affect FHLBank Capital Levels More Than the Risk-Based Capital Requirement\n\nFHFB officials said they anticipate that when the capital plans are implemented, the risk-based capital requirement for all FHLBanks will be below the minimum leverage requirements under GLBA. This will be the case, in part, because FHLBanks are expected to establish an exclusive Class B or a mixed Class A and B capital structure. FHFB officials told us that based on seven draft capital plans submitted to FHFB, six of the FHLBanks indicated that they expect to establish an exclusively Class B structure initially because of the adverse tax consequences associated with a multiple class structure. However, three of these FHLBanks indicated that they anticipate issuing Class A stock in the future. Over time, issuing Class A stock and increasing mortgage acquisitions could cause a FHLBank\u2019s risk-based capital requirement to exceed its leverage requirement. However, FHFB\u2019s risk-based capital requirement is unlikely to constrain operations initially, given the current business of the FHLBanks.\n\n\t\t\tOFHEO\u2019s Risk-Based Capital Requirement May Limit the Enterprises More Than Its Leverage Requirement\n\nOFHEO\u2019s risk-based capital requirement may limit the enterprises more than the leverage requirement. In the Second Notice of Proposed Rulemaking, OFHEO estimated that Fannie Mae would not have had sufficient capital to meet its the risk-based capital requirement on either September 30, 1996, or June 30, 1997, although Freddie Mac would have been in compliance with its risk-based capital requirement. However, both Fannie Mae and Freddie Mac had sufficient capital to meet the leverage requirement.\n\n\t\tFHFB\u2019s and OFHEO\u2019s Risk- Based Capital Regulations Are Subject to Transition Rules With Differing Effective Dates\n\nIn FHFB\u2019s risk-based capital regulation, the capital structure plan of each FHLBank is to specify the date on which the plan shall take effect and may provide for a transition period of up to 3 years to allow the FHLBank to come into compliance. During the transition period the FHLBanks are expected to remain in compliance with the preexisting leverage based requirement. FHFB officials told us that the implementation of the risk- based capital requirements depends on the submission of capital plans, including internal models for interest rate risk, from all FHLBanks by October 29, 2001. In addition, FHFB must approve the plans, including any transition plans needed to ensure that the FHLBanks attain compliance with risk-based capital requirements.\nFor the enterprises, the risk-based requirement becomes effective when the final rule is published in the Federal Register and can be enforced 1 year after it is published. The rule for the capital requirement was cleared by the Office of Management and Budget on July 16, 2001.\n\n\tConclusions\n\nThe FHLBank System is currently establishing a new capital structure that, if properly implemented, is likely to be an improvement over the historic structure. Capital will become more permanent and new risk-based and leverage capital requirements will also be implemented. The new capital structure has the potential to address the risks associated with advances as well as the direct acquisition of mortgages. However, it is too early to assess the overall adequacy of the structure, because the capital plans and risk management practices to be implemented by the FHLBanks and capital supervision practices to be followed by FHFB are not yet known.\nBased on activity to date, direct acquisition appears to provide regional diversification of mortgage acquisitions and incentives to member institutions for sound mortgage underwriting and servicing through the sharing of credit risks. However, risks could be affected if changes are made in the level of mortgage acquisition activity and in the risk-sharing agreements that are currently present between the FHLBanks and their member institutions. Such changes might also increase the importance of risk-based capital requirements compared to FHFB leverage requirements.\nGoing forward, risks in the FHLBank System will increase due to expanded collateral provisions in GLBA and direct mortgage acquisition activity. Effective mitigation of that risk will depend on risk management by the FHLBanks, the adequacy of the capital structure, and oversight by FHFB. In addition to the FHLBanks, the acquisition activity could also generate additional risks for the enterprises. Although currently the FHLBank System and the enterprises primarily engage in different business activities, these differences may decrease if direct mortgage acquisition activity grows dramatically. Having one housing GSE regulator for safety and soundness and mission compliance would provide greater independence and objectivity, greater prominence, improved ability to assess the competitive impact of new initiatives on all housing GSEs, and improved ability to ensure consistency of regulation of GSEs that operate in similar markets.\n\n\tRecommendations\n\nThis report does not contain any new recommendations.\n\n\tAgency Comments\n\nThe Chairman of FHFB provided written comments on a draft of this report, and these comments are reprinted in appendix V. FHFB and OFHEO provided technical comments on a draft of this report. The FHLBanks, enterprises, and depository institution regulators also provided technical comments on draft excerpts of this report that we shared with them. We incorporated technical comments into this report where appropriate.\nThe Chairman of FHFB stated that we did a commendable job of analyzing important and complex FHLBank System issues. His letter drew attention to some of our findings related to the potential of the new capital structure for the FHLBanks to address risks and the MPP and MPF programs. His letter also stated that our past recommendations, with regard to regulatory oversight, have been well received with many having been implemented.\nFHLBank of Chicago officials wanted us to characterize the MPF first-loss account as an account established by the FHLBank, rather than as a lender provided credit enhancement. Our characterization is based on the FHFB requirement that the member institution bear the economic cost of expected credit losses. For example, the MPF arrangement in which the FHLBank is reimbursed by the member institution when defaults occur through the reduction of fees paid to the member is a mechanism in which the lender\u2019s credit enhancement is used to improve the rating of the mortgage pool acquired by the FHLBank.\nA Freddie Mac official provided comments addressing Freddie Mac\u2019s concern about \u201cdouble leveraging.\u201d He stated that in addition to the risks posed by the direct acquisition of mortgages, Freddie Mac also has a broader concern that relates to the overall fragility of the FHLBank System. He stated that the risk of member institutions withdrawing their capital in response to FHLBank losses is a direct result of the nonpermanent nature of the FHLBank System capital stock even after the GLBA reforms. He specifically referred to the potential for a run on the FHLBank System if member institutions had advanced knowledge of potential future financial losses.\nWe have addressed the question of capital adequacy directly by analyzing the relationship between capital and risks. We have treated the concept of double leveraging as a separate issue. In our discussion of the double leveraging concept, we made revisions to reflect the concern about the nature of FHLBank capital.\nWe will send copies of this report to the Chairman of the Board of FHFB, Director of OFHEO, Presidents of the FHLBanks, Chief Executive Officer of Fannie Mae, and Chief Executive Officer of Freddie Mac. We will also make copies available to others upon request.\nPlease contact me or William B. Shear at (202) 512-8678 if you or your staff have any questions concerning this report. Key contributors to this report were Rachel DeMarcus, Kristi A. Peterson, and Mitchell B. Rachlis.\n\nAppendix I: Scope and Methodology\n\nTo describe the capital structure of the Federal Home Loan Bank (FHLBank) System, we reviewed Federal Housing Finance Board (FHFB) capital standards and regulations; conducted research on the role of capital in government-sponsored enterprises (GSE) with a cooperative system; reviewed our prior work addressing risk-based capital and the FHLBank System; and interviewed financial institution regulatory body and GSE officials. To analyze the adequacy of the capital structure of the FHLBanks, we also reviewed relevant literature on interest rate, credit, and operations\u2019 risks; analyzed FHLBank proposals for the use of expanded collateral provisions and permissible uses of advances under the Gramm-Leach-Bliley Act (GLBA) of 1999; and analyzed FHLBank applications to FHFB and other information on FHLBank direct mortgage acquisition programs.\nDuring the course of this assignment, officials from Fannie Mae and Freddie Mac made presentations to us and provided extensive information reflecting their perspectives on the adequacy of the capital structure of the FHLBank System. On May 17, 2001, Freddie Mac provided us a consultant\u2019s report addressing the adequacy of the capital structure of the FHLBank System. We considered the information provided by the enterprises in conducting our work.\nWe analyzed information the FHLBanks considered to be proprietary. Therefore, we did not report specific details of the various FHLBank products. For example, due to this limitation, we did not report data on the Mortgage Partnership Program and provided general information on Mortgage Partnership Finance. To compare and contrast the risk-based capital standards proposed by FHFB to the standard proposed by OFHEO, we analyzed the standards; reviewed information provided by and interviewed officials from the enterprises, the FHLBanks, FHFB, and OFHEO; and reviewed comments on the proposed standards. The FHLBanks are yet to complete their capital plans implementing their new capital structures, which limited the scope of our analysis. In addition, although we made observations of some elements of risk management that appear to be present at the FHLBanks, we did not analyze risk management procedures employed by the FHLBanks, FHFB\u2019s oversight of risk management, nor the risks associated with FHLBank investments. Furthermore, we did not verify the accuracy of data provided by FHFB and the FHLBanks. We also did not analyze the risks of activities that have been or might be undertaken by either Fannie Mae or Freddie Mac. We conducted our work in Washington, D.C., between February 2001 and June 2001, in accordance with generally accepted government auditing standards. Written comments on a draft of this report from FHFB appear in appendix V. We also obtained technical comments from the FHLBanks, enterprises, depository institution regulators, FHFB, and OFHEO that have been incorporated where appropriate.\n\nAppendix II: Background Information on the FHLBank System, Fannie Mae, Freddie Mac, and Their Regulators\n\nThe FHLBank System is a GSE consisting of 12 federally chartered FHLBanks and the System\u2019s Office of Finance that are privately and cooperatively owned by member institutions. The FHLBanks are located in Boston, MA; New York, NY; Pittsburgh, PA; Atlanta, GA; Cincinnati, OH; Indianapolis IN; Chicago, IL; Des Moines, IA; Dallas, TX; Topeka, KS; San Francisco, CA; and Seattle, WA; with each FHLBank serving a defined geographic region of the country. The FHLBanks raise funds by issuing consolidated debt securities in the capital markets. The System was set up in 1932 to extend mortgage credit by making loans, called advances, to its member institutions, which in turn lend to home buyers for mortgages. Home mortgage loans and other collateral secure advances. These advances help member institutions, originally limited to thrifts and insurance companies, by enhancing liquidity and providing access to national capital markets. In 1989, as part of the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA), Congress opened membership to nonthrift federally insured depository institutions that offer residential mortgage loans. Thrifts with federal charters remained in the System as mandatory members while nonthrift institutions were voluntary members. GLBA created all voluntary membership and expanded the purposes of System advances with corresponding expansion in eligible collateral for community financial institutions. As of December 31, 2000, the FHLBanks held about $438 billion in advances to members; $186 billion in investments, $16 billion in directly acquired mortgage assets; and $31 billion in capital, of which $728 million was in the form of retained earnings. In addition, the System had 7,777 members, which included 5,681 commercial banks, 1,547 thrifts, and 549 credit unions and insurance companies. Additional financial information on the FHLBanks is presented in appendix III.\nCongress chartered Fannie Mae and Freddie Mac as government- sponsored, privately owned and operated corporations to enhance the availability of mortgage credit across the nation during both good and bad economic times. Fannie Mae\u2019s headquarters is located in Washington, D.C. and Freddie Mac\u2019s is in McLean, Virginia. The enterprises are to accomplish this mission by purchasing mortgages from lenders (banks, thrifts, and mortgage bankers) who can then use the proceeds to make additional mortgage loans to home buyers. The enterprises issue debt to finance mortgage assets that they retain in their portfolios. A majority of purchased mortgages, however, are pooled to create mortgage-backed securities (MBS) that are sold to investors. The enterprises collect fees for guaranteeing the timely payment of principal and interest on MBS held by investors. At year-end 2000, the enterprises had combined debt obligations of about $1.1 trillion and combined MBS obligations to investors of about $1.3 trillion (a total of about $2.4 trillion). Additional financial information on the enterprises is presented in appendix III.\nFIRREA created FHFB as an independent agency within the executive branch, with a five-member board of directors. FHFB is organized into 6 offices and had about 95 permanent employees as of December 31, 2000. FHFB\u2019s annual budget is about $24 million, which is financed with assessments on the FHLBanks. The functions of three offices are most relevant to capital supervision of the FHLBanks. The primary responsibility of the Office of Supervision is to ensure the safety and soundness and mission-compliance of the FHLBanks; it conducts the federally mandated annual examinations of all FHLBanks. The Office of Policy and Office of General Counsel provide assistance to and share oversight responsibility with the Office of Supervision. These three offices have about 54 employees, of which 14 are in the Office of Supervision.\nThe Federal Housing Enterprises Financial Safety and Soundness Act of 1992 (the 1992 act) established OFHEO as an independent regulator within the Department of Housing and Urban Development (HUD) whose mission is to help ensure the enterprises\u2019 safety and soundness. Under the 1992 act, OFHEO\u2019s director has independent authority pertaining to matters of safety and soundness. OFHEO\u2019s primary means for fulfilling its mission are establishing capital standards for the enterprises and conducting on- site examinations to assess their management practices and financial condition. OFHEO has about 87 full-time equivalent employees and an annual budget of about $20 million. OFHEO\u2019s expenses are funded with assessments on the enterprises. However, unlike FHFB, OFHEO is subject to the annual appropriations process.\n\nAppendix III: Financial Information on the FHLBank System, Fannie Mae, and Freddie Mac\n\nThis appendix provides basic financial information on the FHLBank System, Fannie Mae, and Freddie Mac. Table 2 is a consolidated summary balance sheet of the FHLBank System. Table 3 presents information on the advances and total assets of each FHLBank as of December 31, 2000. Tables 4 and 5 provide selected financial highlights for Fannie Mae and Freddie Mac.\nAs indicated in table 2, the FHLBank System has grown substantially over the past 5 years. The total assets in the FHLBank System increased 124 percent between December 31, 1996 and December 31, 2000; and advances increased 171 percent over the same time period. At the end of 2000, the assets in the FHLBank System totaled nearly $654 billion. In comparison, the assets of Fannie Mae and Freddie Mac totaled $675 billion and $459 billion, respectively. (See tables 4 and 5.)\nTable 3 presents the level of advances and total assets at each FHLBank at the end of 2000. The FHLBanks vary significantly in size. Total assets ranged from about $27 billion at the FHLBank of Topeka to $140 billion at the FHLBank of San Francisco. The amount of advances outstanding ranged from about $18 billion to $110 billion at the same FHLBanks. The percentage of total assets made up of advances also varied among the FHLBanks. At the FHLBank of Chicago, advances made up only 52 percent of total assets, while at the FHLBank of San Francisco, advances made up 78 percent of assets. Other assets at FHLBanks may include cash or investments such as U.S. government-agency securities or high-quality, short-term investments like federal funds sold, certificates of deposit, and commercial paper.\nAs shown in Tables 4 and 5, Fannie Mae and Freddie Mac have also grown substantially over the past 5 years. Fannie Mae\u2019s total assets increased 92 percent between December 31, 1996 and December 31, 2000; while Freddie Mac\u2019s assets increased 164 percent over the same time period. Their off- balance sheet obligations also increased. For example, Fannie Mae\u2019s outstanding net MBSs increased 29 percent from $548 billion in 1996 to $706 billion at the end of 2000. Freddie Mac\u2019s participation certificates (PC) increased 22 percent from $473 billion to $576 billion.\n\nAppendix IV: Summary of FHFB\u2019s and OFHEO\u2019s Risk-Based Capital Requirements\n\nThis appendix summarizes FHFB\u2019s and OFHEO\u2019s risk-based capital requirements for the FHLBanks and the enterprises, respectively.\n\n\tFHFB\u2019s Risk-Based Capital Requirement\n\nFHFB\u2019s risk-based capital requirements are meant to ensure that the FHLBanks maintain sufficient capital to weather stressful economic conditions. The requirements address credit, interest rate, and operations risks.\n\n\t\tFHFB\u2019s Capital Requirements for Credit Risk\n\nFHFB\u2019s capital requirements separate FHLBank assets and positions into four credit risk categories and establish capital levels within these categories. The four categories are (1) advances, (2) rated mortgage assets, (3) rated assets and positions other than advances or mortgages, and (4) unrated assets. For the first three categories, maturity and\/or a credit rating from a nationally recognized credit rating agency are the factors determining the capital charge for an asset or position. Longer terms to maturity and lower credit ratings increase the capital requirement because they tend to increase credit risk. All unrated items have an 8- percent capital requirement, except for cash, which has a zero capital requirement. The capital requirements extend to off-balance sheet items; also credit enhancements such as guarantees can reduce the credit requirements, if the providers have credit ratings superior to that of the FHLBank asset or position.\n\n\t\t\tRisk-Based Capital Required for Advances Assumes Little Credit Risk Exists\n\nAlthough FHLBanks have never incurred credit losses on advances backed by traditional mortgage collateral or securities, FHFB decided to impose capital requirements on all advances, including short-term advances. FHFB\u2019s requirement assumes that advances will exhibit the same losses as the highest investment grade (triple-A) corporate bonds and that advances would have a recovery rate of 90 percent. FHFB stated this recovery rate is consistent with overcollateralization and other protections afforded advances. Additionally, longer term advances have higher capital requirements, because risks tend to increase with terms to maturity.\nEven though traditional advances have little credit risk, FHFB recognized that new expanded collateral available to support advances may have greater credit risk. As a result, it set a capital requirement for advances that includes some credit risk. The expanded collateral includes real estate related collateral, such as commercial mortgages and home equity lines of credit, as well as nonmortgage agricultural loans and small business loans. Because of the unknown risk created by new types of collateral, FHFB used its judgment to set the capital requirement on all advances. For example, advances with less than 4 years maturity have a 7 basis point capital requirement even though FHFB had calculated the appropriate capital requirement to be 0 basis points. This imposition of 7 basis points reflects, in part, concerns about potential credit risks in the new types of collateral. In contrast, when the term to maturity on advances exceeds 10 years, the capital requirement is 35 basis points.\nTo ensure sufficient collateral protection is available against advances, the extent of overcollateralization for different assets varies. Overcollateralization is the extent to which the book value of collateral exceeds the book value of the advances it secures. Overcollateralization increases for riskier assets. FHFB expects FHLBanks to determine the appropriate level of overcollateralization to be imposed on nontraditional collateral permitted by GLBA. During the regular examination of FHLBanks, FHFB will examine the amount of overcollateralization required by the FHLBanks for different assets, if they permit nontraditional collateral to back advances. Based on FHFB\u2019s supervision and examination approach to collateral policies, the risk-based capital regulation assumes that credit risk is equalized across all advances.\n\n\t\t\tRisk-Based Capital Requirements for Residential Mortgage Assets Reflect Credit Ratings\n\nThe credit risk requirements for residential mortgage assets was based on credit ratings by major credit rating agencies. When developing the capital requirements for mortgage assets, FHFB also took into account the requirements set by other regulators. In general, the risk-based capital requirements for mortgage assets, such as mortgages on both single-family and multifamily units or MBSs, vary with the creditworthiness of the assets.\nThe final rule is based on the assumption that the collateral underlying the residential mortgage assets will typically consist of conforming, prime quality loans with loan-to-value ratios below 80 percent as well as loans with higher loan-to-value ratios with appropriate mortgage insurance. FHFB also assumes that the performance of any credit enhancement is reasonably ensured in all relevant economic stress scenarios and that the FHLBank\u2019s portfolios of residential mortgage assets will have appropriate diversification and that credit enhancements will take account of any geographic or other concentrations that increase credit risk.\nBased on the above constraints, FHFB assigned credit risk requirements. For example, for unsubordinated residential mortgage assets in the highest investment grade\u2014triple A\u2014residential mortgage assets have a 37 basis point capital requirement; unsubordinated mortgage assets in the second investment grade\u2014double A\u2014have 60 basis points capital requirement, and unsubordinated mortgage assets in the fourth highest investment grade\u2014triple B\u2014have a 120 basis points capital requirement.\nIn contrast, subordinated residential mortgage assets with ratings below triple-A can have higher capital requirements. For example, subordinated residential mortgage assets with a triple-B rating have a 445 basis point capital requirement.\nRisk-based capital requirements are set on residential mortgages assets acquired by the FHLBank, where the FHLBank and the member selling the mortgage asset share credit risk as is the case in MPF and MPP. To date, participating FHLBanks have required the equivalent of a double-A on each residential mortgage asset acquired based on a model created by S&P. These mortgage assets have a 60 basis points capital requirement\u2014 the requirement for any double-A rated residential mortgage asset. Mortgage assets, where credit-risk is shared with members, are expected to become an increasing part of the assets held by the FHLBanks.\n\n\t\t\tFHFB Risk-Based Capital Requirements for Assets Other Than Advances and Mortgages\n\nFHFB has established risk-based capital requirements for assets other than advances or mortgages that are also rated. Risk-based capital requirements for such assets increase with decreasing creditworthiness and increasing terms to maturity. For example, U.S. securities of any maturity have 0 basis point capital requirement while for triple-A rated corporate assets the requirement ranges from 15 basis points to 220 basis points, with the requirement increasing with an increasing term to maturity. Lower rated assets carry a 100-percent capital requirement.\n\n\t\t\tUnrated Items Are Given Specific Risk-Based Capital Requirements\n\nCapital requirements for unrated assets are set according to type of asset. This category includes cash, premises and equipment, and investment assets that have not received ratings from the major rating agencies. Cash has a zero capital requirement, while premises and equipment have an 8- percent capital requirement. FHFB has assigned an 8-percent capital requirement to all investment assets that are unrated. This is the same as the requirement that the Basel Committee of Bank Supervisors assigns to unrated assets in its proposed revision of the bank capital standards.\n\n\t\tFHFB\u2019s Capital Structure Encompasses Off-Balance Sheet Items and Credit Enhancements\n\nRisk-based capital requirements are also established for off-balance sheet assets such as commitments to purchase loans and standby letters of credit. The risk-based capital rule establishes credit conversion factors that convert off-balance sheet positions into asset equivalents. Each position is multiplied by its credit conversion factor, measured as a percent, to obtain the nominal value needed to determine the credit risk capital requirement.\nRisk-based capital requirements for derivatives are based on their current and potential risks and vary by type of derivative and term to maturity. Potential future risk exposures can be determined from a table in the regulation or a FHFB approved internal model. For example, in the table, interest rate derivative contracts with a term less than 1 year have a conversion factor of 0 percent, while for equities, the conversion factor is 6 percent. When the term exceeds 5 years, the conversion factor for interest rate derivative contracts is 1.5 percent, and the conversion factor for equities is 10 percent. The final regulation also establishes procedures to address the effects of multiple derivatives between two parties.\nThe FHFB\u2019s capital requirements can reflect credit enhancements such as third-party guarantees of an asset held by a FHLBank. If the credit enhancement or its provider has a rating from a major rating agency, the capital requirement will accord with the enhancement, if the FHLBank asset is lower rated or unrated.\n\n\t\tFHFB Requires Each FHLBank to Hold Capital for Interest Rate Risk Based on the FHLBanks\u2019 Internal Models\n\nThe risk-based capital regulation requires each FHLBank to hold capital for interest rate risk equal to the sum of two calculations. One calculation estimates the potential losses in the FHLBank\u2019s portfolio under parameters specified by FHFB. The other measure is the amount by which the market value of total capital falls short of the adjusted book value of capital, in the event that the market value of capital is below this accounting benchmark.\nFHFB prefers that the internal models be based on a value at riskapproach, which estimates level of capital that will prove sufficient to absorb losses in all but the worst 1 percent of the time. In a value at risk approach, the loss is estimated based on alternative possible interest rate patterns over the chosen time period. However, if approved by FHFB, a cash flow model can be used by a FHLBank as an alternative to a value at risk approach. When estimating interest rate risk and calculating capital required, each FHLBank is required to have sufficient permanent capital to meet the value at the risk level established by FHFB. The exposure to interest rate risk in each model is to depend on the level of stress from interest rate movements and any hedges used which affect the actual exposure to interest rate movements. These internal models must meet FHFB\u2019s technical restrictions and use interest rate stress scenarios approved by FHFB.\nAdditionally, added permanent capital will be required if the FHLBank\u2019s current market value of total capital, based on the estimated market value of assets minus market value of liabilities, at the time of the capital requirement analysis, is less than 85 percent of the FHLBank\u2019s book value of capital. The added capital will be the difference between the market value of the capital and 85 percent of the book value of the FHLBank\u2019s capital. This requirement was implemented because FHFB was concerned that the book value of capital might not adequately reflect the economic value of capital in some cases. This requirement forces the capital available to cover interest rate risk to have a market or economic value of at least 85 percent of the book capital value. This requirement is consistent with a value at risk approach, which calculates the market value of capital available under different economic stresses.\nFHFB also established technical restrictions on how the internal value at risk model was to be designed in its risk-based capital regulation. FHFB required that the probability of a loss greater than the estimate of the market value of the bank\u2019s portfolio at risk shall not exceed 1 percent.Thus, the estimated net market value of the portfolio will cover estimated losses 99 percent of the time. In the regulation, FHFB directed each FHLBank to assume a stress period of 120-business days, based on historic interest rates from 1978 to 1 month before the capital requirement is calculated. FHFB stated that the periods chosen should be representative of the periods of greatest potential stress in the market given the FHLBank\u2019s portfolio. FHFB officials told us that the 120-day periods will overlap. A new period will start at the first of each month since 1978. This provides about 270 periods for the analysis. In a value at risk analysis with a 1 percent confidence interval, this means capital required for interest rate risk will be sufficient to cover estimated losses in 267 out of a total of 270 stress periods.\nFHFB directed each FHLBank to develop a model that is comprehensive given the FHLBank\u2019s capabilities. In addition, FHFB stated that the internal models may incorporate empirical correlations among interest rates or other market prices. Lastly, FHFB required that the model be independently validated and satisfactory to FHFB.\n\n\t\tFHFB Requires Capital for Operations Risk\n\nAlthough GLBA did not require FHFB to establish a risk-based capital requirement to cover operations risk, FHFB decided such a requirement was needed. FHFB\u2019s capital requirement for operations risk is 30 percent of the total capital required to cover interest rate and credit risk, but it may be reduced to no lower than 10 percent if a FHLBank can demonstrate to the satisfaction of FHFB that it has insurance or some other means to justify the reduction.\n\n\tOFHEO\u2019s Risk-Based Capital Requirement\n\nOFHEO\u2019s risk-based capital requirements are meant to ensure that the enterprises maintain sufficient capital to weather stressful economic conditions. These requirements also address credit, interest rate, and operations risks.\n\n\t\tOFHEO Calculates Risk- Based Capital Requirements for Credit and Interest Rate Risk in an Integrated Model\n\nOFHEO has developed its own cash flow model to estimate risks and calculate total capital needed to cover credit and interest rate risk. OFHEO runs a single model in which the capital calculations for credit risk and interest rate risk are based on the model\u2019s calculation of how much capital is needed by each enterprise. To determine credit risks the model must include information on housing prices, vacancies and credit enhancements, as well as other variables that affect credit risk. To determine interest rate risk the model must include information on interest rates, interest rate hedges and other variables that affect interest rate risk.\nThe purpose of OFHEO\u2019s stress test is to calculate whether sufficient capital was set aside at the beginning of the 10-year stress test period to cover all benchmark losses and interest rate stress losses and to leave the enterprise with a positive capital amount in each accounting period and at the end of the stress period. Once the capital needed for credit and interest rate risk is calculated in the stress test, total required capital is the sum of capital for interest rate risk and credit risk plus 30 percent of this sum to cover operations risk.\nThe intent in integrating the stresses for credit risk and interest rate risk is to permit the OFHEO model to better deal with feedbacks between interest rate movements and losses due to credit risk. For example, when interest rates fall, prepayments accelerate, and this leads to a decline in the value of mortgages on the balance sheets of each enterprise. At the same time, the level of credit risk in the remaining mortgages may increase if borrowers with poorer credit ratings cannot prepay. In addition, other factors such as the recent history of interest rates and the number of mortgages at different interest rates may interact with declining rates to affect prepayments. Consequently, the cash flow model can only calculate credit risk changes due to prepayments, if the values of all variables that affect prepayments and credit risk are fully specified in the model. To fully understand how interest rate risk and credit risk interact, a modeler would have to test different mixes of input variables, including interest rate changes. However, the accuracy of any feedbacks found in the model would depend on the quality of the model and how well it specified the underlying economic relationships that create losses due to interest rate movements and defaults.\n\n\t\t\tCongress Established Criteria to Create Benchmark Losses for Credit Risk Stress in the 10- Year Stress Test\n\nThe credit stress, during the stress period, is specified in the 1992 act. The benchmark loss for credit risk is the \u201cworst cumulative credit losses for 2 consecutive years in contiguous states encompassing at least 5 percent of the U.S. population\u201d. The actual area chosen by OFHEO to create benchmark credit losses is Arkansas, Louisiana, Mississippi, and Oklahoma, in 1983 and 1984.\nOFHEO determined the factors or input variables that affected losses and prepayments due to credit stress. To identify the input variables, it reviewed the available literature on defaults and modeled defaults separately for single family and multifamily mortgages as well as other assets held by the housing enterprises. To actually estimate potential losses due to credit risk, OFHEO created numerous asset classifications based on factors such as:   single-family or multifamily;  loan-to-value ratio;  retained in portfolio or in MBS;  type of recourse available;  fixed or variable rate mortgage;   conventional, FHA, or VA mortgages;  interest rate at origination; and   origination date.\nGiven these characteristics, each loan is placed in a loan group, which determines its expected default loss. Credit enhancements can affect default losses in OFHEO\u2019s model, but the credit risk of the credit enhancer is also taken into account. Similar classification schemes are developed for other assets. Given this level of detail, OFHEO was able to create a finely granulated sense of what creates losses and what credit losses would occur during the stress test.\n\n\t\t\tCongress Established Interest Rate Scenarios for the 10-Year Stress Test for the Enterprises\n\nThe 1992 act, which created OFHEO, established criteria for the size of the interest rate shocks the enterprises are required to withstand over the 10- year stress period. The criteria was based on a 10-year stress period for both an increasing rate and decreasing rate environment that could affect losses for an enterprise. In both environments, the rates move during the first year and stay constant for the rest of the 10-year period. The act specifies that capital must be sufficient to cover the more stressful of the two interest rate environments. (See fig. 5 for a detailed enumeration of the interest rate environments that the 1992 act required OFHEO to use.)\nAccording to the 1992 act, OFHEO must assume that the enterprises acquire no new mortgages other than those deliverable under existing commitments at the beginning of the 10-year stress period. This approach focuses on the risks embedded in the book of business that existed at the beginning of the stress test period. This restriction on new business forces the model to act as if the enterprises are winding down their business during the stress period.\n\n\t\tCongress Established the Stress for Operations Risk as 30 Percent of the Sum of Capital for Interest Rate and Credit Risk\n\nOperations risk is also specified in the 1992 act and is equal to 30 percent of the sum of interest rate risk and credit risk. Consequently, total capital requirement for the enterprises for risk-based capital is always equal to 130 percent of the sum of capital needed to cover interest rate and credit risk.\n\nAppendix V: Comments From the Federal Housing Finance Board\n\nRelated GAO Products\n\nComparison of Financial Institution Regulators\u2019 Enforcement and Prompt Corrective Action Authorities (GAO-01-322R, Jan. 31, 2001).\nCapital Structure of the Federal Home Loan Bank System (GAO\/GGD-99- 177R, Aug. 31, 1999).\nFarmer Mac: Revised Charter Enhances Secondary Market Activity, but Growth Depends on Various Factors (GAO\/GGD-99-85, May 21, 1999).\nFederal Housing Finance Board: Actions Needed to Improve Regulatory Oversight (GAO\/GGD-98-203, Sept. 18, 1998).\nFederal Housing Enterprises: HUD\u2019s Mission Oversight Needs to Be Strengthened (GAO\/GGD-98-173, July 28, 1998).\nGovernment-Sponsored Enterprises: Federal Oversight Needed for Nonmortgage Investments (GAO\/GGD-98-48, Mar. 11, 1998).\nFederal Housing Enterprises: OFHEO Faces Challenges in Implementing a Comprehensive Oversight Program (GAO\/GGD-98-6, Oct. 22, 1997).\nGovernment-Sponsored Enterprises: Advantages and Disadvantages of Creating a Single Housing GSE Regulator (GAO\/GGD-97-139, July 9, 1997).\nHousing Enterprises: Investment, Authority, Policies, and Practices (GAO\/GGD-97-137R, June 27, 1997).\nComments on \u201cThe Enterprise Resource Bank Act of 1996\u201d (GAO\/GGD- 96-140R, June 27, 1996).\nHousing Enterprises: Potential Impacts of Severing Government Sponsorship (GAO\/GGD-96-120, May 13, 1996).\nLetter from James L. Bothwell, Director, Financial Institutions and Markets Issues, GAO, to the Honorable James A. Leach, Chairman, Committee on Banking and Financial Services, U.S. House of Representatives, Re: GAO\u2019s views on the \u201cFederal Home Loan Bank System Modernization Act of 1995\u201d (B-260498, Oct. 11, 1995).\nFHLBank System: Reforms Needed to Promote Its Safety, Soundness, and Effectiveness (GAO\/T-GGD-95-244, Sept. 27, 1995).\nHousing Finance: Improving the Federal Home Loan Bank System\u2019s Affordable Housing Program (GAO\/RCED-95-82, June 9, 1995).\nGovernment-Sponsored Enterprises: Development of the Federal Housing Enterprise Financial Regulator (GAO\/GGD-95-123, May 30, 1995).\nFarm Credit System: Repayment of Federal Assistance and Competitive Position (GAO\/GGD-94-39, Mar. 10, 1994).\nFarm Credit System: Farm Credit Administration Effectively Addresses Identified Problems (GAO\/GGD-94-14, Jan. 7, 1994).\nFederal Home Loan Bank System: Reforms Needed to Promote Its Safety, Soundness, and Effectiveness (GAO\/GGD-94-38, Dec. 8, 1993).\nImproved Regulatory Structure and Minimum Capital Standards are Needed for Government-Sponsored Enterprises (GAO\/T-GGD-91-41, June 11, 1991).\nGovernment-Sponsored Enterprises: A Framework for Limiting the Government\u2019s Exposure to Risks (GAO\/GGD-91-90, May 22, 1991).\nGovernment-Sponsored Enterprises: The Government\u2019s Exposure to Risks (GAO\/GGD-90-97, Aug. 15, 1990).","output":"What GAO Found\n\nThe Federal Home Loan Bank (FHLBank) System is establishing a new capital structure that, if properly implemented, is likely to be an improvement over the historic structure. Capital will become more permanent, and new risk-based and leverage capital requirements will also be implemented. The new capital structure has the potential to address the risks associated with advances as well as the direct acquisition of mortgages. However, it is too early to assess the overall adequacy of the structure. So far, direct acquisition appears to provide regional diversification of mortgage acquisitions and incentives to member institutions for sound mortgage underwriting and servicing through the sharing of credit risks. However, risks could be affected if changes are made in the level of mortgage acquisition activity and in the risk-sharing agreements between the FHLBanks and their member institutions. Such changes might also increase the importance of risk-based capital requirements compared to the leverage requirements of the Federal Housing Finance Board (FHFB). Risks in the FHLBank System will increase because of expanded collateral provisions in the Gramm-Leach-Bliley Act and direct mortgage acquisition activity. Mitigation of that risk will depend on risk management by the FHLBanks, the adequacy of capital structure, and oversight by FHFB. In addition to the FHLBanks, the acquisition activity could also generate additional risks for the enterprises. Although the FHLBank System and the enterprises primarily engage in different business activities, these differences may decrease if direct mortgage acquisition activity grows dramatically. Having one housing government sponsored enterprise (GSE) regulator for safety and soundness and mission compliance would provide greater independence and objectivity, greater prominence, improved ability to assess the competitive impact of new initiatives on all housing GSEs, and improved ability to ensure consistency of regulation of GSEs that operate in similar markets."}
{"id":"gao_GAO-10-571T","pid":"gao_GAO-10-571T_0","input":"\tBackground\n\nThe Coast Guard is one of the five armed forces of the United States and  the only military organization within the Department of Homeland  Security. Coast Guard is charged with carrying out 11 statutory missions  with approximately 50,000 personnel: 42,000 active duty military and 8,000  civilians.\nCRD\u2019s mission is to foster and maintain a model EO\/EEO workplace that  supports mission execution. CRD\u2019s principal functions are to facilitate the  Coast Guard\u2019s (1) EEO program for its civilian employees and (2) EO  program for its military members. Under the EEO program, CRD is  responsible for ensuring Coast Guard compliance with the federal statutes  prohibiting employment discrimination as well as EEOC\u2019s regulations and  directives, including MD-715, which explains the basic elements necessary  to create and maintain a model EEO program. Under the EO program,  while military members are not covered by the antidiscrimination statutes  and EEOC regulations and directives, Coast Guard policy provides that  military equal opportunity policies are generally based upon principles set  forth in civilian EEO policy, including affording military members with  discrimination complaint procedures that mirror the EEO process to the  extent possible.\nCRD is led by a Director who reports to the Commandant of the Coast  Guard and is responsible for all EEO\/EO activities within the Coast Guard.  The Chief of the Office of Policy, Planning, and Resources reports directly  to the Director of the CRD and serves as the acting Director in the  Director\u2019s absence. The Office of Policy, Planning, and Resources also  acquires, allocates, and oversees resources for CRD in compliance with  the Chief Financial Office\u2019s policies. The Chief of the Office of Civil Rights  Operations reports to the Director of CRD and oversees and manages all  full-time 45 Coast Guard civil rights service providers through three Civil  Rights Regional offices.\nAs stated previously, EEOC\u2019s MD-715 provides guidance to federal  agencies to identify the basic elements necessary to create and maintain a  model EEO program. EEOC instructions state that an agency should  review its EEO and personnel programs, policies, and performance  standards against six elements to identify where their EEO program can  become more effective. The six essential elements EEOC describes for a  model EEO program are:    Demonstrated commitment from agency leadership,   Integration of EEO into the agency\u2019s strategic mission,    Management and program accountability,    Proactive prevention of unlawful discrimination,    Efficiency, and    Responsiveness and legal compliance.\n\n\tAgency Leadership Is the Primary EEOC Model Program Element Addressed by Coast Guard Action Plans\n\nOver one-third of the 2009 recommendations dealt with agency leadership  issues, as did the recommendations of the prior reviews. CRD developed  29 action plans to address the recent 53 recommendations, with 13  focusing on leadership. Table 1 shows a summary of the distribution of  these action plans across EEOC\u2019s six model elements.\nThe priority given by CRD to address agency leadership is based on the  most recent recommendations they received and is also consistent with  the focus of earlier third-party recommendations provided to the Coast  Guard on EO\/EEO issues. According to EEOC, the leadership element of  a model program includes allocating sufficient resources to the EEO  program, such as personnel with training and experience, staff with  relevant knowledge and skills, adequate data collection and analysis  systems, and training programs for all employees. Issuing an effective EEO  program policy statement and ensuring that all employees are informed of  EEO programs are also part of the demonstrated commitment element.  Examples of the action plans that focus on demonstrated commitment  from agency leadership include:    Develop a comprehensive training program for Civil Rights Service    Schedule Office of Civil Rights headquarters and field-level senior staff for  the Center for Creative Leadership North America Leadership workshops;  and    Task regional managers with identifying skills and managing the training  needs of their staffs.\n\n\tAlthough CRD Established Processes to Develop and Review Selected Action Plans, Documentation of Key Decisions and Outcomes Needs Improvement\n\nCRD took several steps to develop and review action plans to address  recommendations from the most recent external review, such as  developing a functional review team, assigning project officers, meeting  with the Commandant and agency leadership, and consulting the agency  financial officer. CRD officials stated that they organized with a sense of  urgency to address the recommendations and complete their planning and  implementation of action plans. The key players in the planning and  implementation of action plans were:    Functional Review Team: According to CRD staff, a team of senior CRD  staff, called the \u201cTiger Team,\u201d was created to serve as the functional  review team. This team aimed to effectively and efficiently address the  recommendations with limited resources. Members of the Tiger Team  included the Director of CRD, the executive assistant, the Chief of the  Office of Policy and Planning, and Chief of the Office of Civil Rights  Operations. The Tiger Team guided the development of the action plans  and also reviewed and approved the implementation of the action plans.  The Tiger Team formulated strategies to implement action plans, assigned  project officers, set deadlines for project officers to complete action plans,  and reviewed documentation submitted by project officers to support their  position that an action plan was complete.\nProject Officers: Project officers, appointed by the Tiger Team, were  responsible for providing weekly updates to the Tiger Team and for  overseeing the execution of the action plans. CRD told us that the project  officers were chosen based on their job responsibilities and knowledge of  the subject matter. The project officers reported to the Tiger Team  through an appointed lead project officer.\nCommandant: CRD staff told us that the Director and executive assistant  met regularly with the Commandant to provide updates and receive  feedback on the action plans. According to CRD staff, during these  meetings the Commandant provided guidance on the action plans and  helped formulate the decision on time frames to complete the action plans.\nAgency Leadership: Coast Guard leadership, including the Commandant,  was involved mainly with the action plan to restructure civil rights  operations. The Commandant charged the Leadership Council, an advisory  body of the Coast Guard\u2019s senior leadership, with evaluating CRD\u2019s  organizational structure, human resource practices, and needs related to  their EEO program, diversity, and climate, among other related  responsibilities. CRD briefed the Leadership Council twice and the council  provided guidance and feedback to CRD on aspects of the restructuring  action plan.\nCoast Guard\u2019s Restructuring Team: The Commandant\u2019s Intent Action  Order Reorganization Review Team is an intra-agency body that reviews  organizational restructuring proposals for compliance with rules of  engagement and conformity to overall Coast Guard organizational rules  and policies. The review team\u2019s approval was necessary for CRD to  restructure its operations; CRD completed a checklist that was required to  gain the review team\u2019s approval.\nCoast Guard Directorates: CRD staff also met with senior officials in  other directorates for feedback on action plans that related to their  respective offices. For example, the Director and executive assistant met  with Planning, Resources, and Procurement Directorate staff to review all  the action plans for financial implications and to receive status updates  from CRD on the execution of the action plans. The Planning, Resources,  and Procurement Directorate staff advised the Commandant on the budget  implications of the proposed action plans and recommended budget- related decisions. Although the Chief Financial Officer did not have  approval responsibilities, he received periodic status updates from CRD  on the execution of the action plans. CRD officials also stated that the  Engineering and Logistics Directorate and the Command, Control,  Communications, Computers and Information Technology Directorate  reviewed the restructuring action plan.\n\n\t\tCRD Did Not Consistently Document Key Decisions Related to the Development and Review of the Action Plans\n\nWhen developing and reviewing the action plans, CRD did not maintain  documentation as recommended in federal internal control standards. As  a result, CRD lacks transparency and accountability to stakeholders. Lack  of documentation also impedes the ability to track progress, make  midcourse corrections, and illustrate to stakeholders that it is effectively  solving these issues. According to the internal control standards, accurate  and timely documentation of actions and events is necessary for the  management of an organization and for making effective decisions.\nCRD was not able to provide documentation for recording minutes and  decisions made at internal meetings, meetings with the Commandant,  briefings to the Leadership Council, or meetings related to the action  plans. They primarily tracked the action plans and the status of their  completion through the functional review recommendation sheet. In  addition, they used memos and e-mails to document some decisions and as  a way to delegate responsibility.\nThe Functional Review Recommendation (FRR) Spreadsheet: The  FRR spreadsheet was the primary tool that CRD used to update the  Commandant and CRD leadership on action plan development and  implementation. The Tiger Team designed the FRR spreadsheet using the  Commandant\u2019s guidance on important elements to track. For each  recommendation, this spreadsheet included the responsible project  officer, actions taken, the priority of the action plan, deadlines, days until  deadlines, and completion status. After receiving status notes from the  project officers through the CRD executive assistant, the lead project  officer would update the FRR sheet by deleting previous entries in the  \u201cAction Taken\u201d columns. As a result, CRD only has documentation of the  most recent actions taken and in the future will not be able to assess the  effectiveness of their approach to the action plans. Decisions or  directions from the Commandant as a result of these status reviews were  not recorded.\nMemos: CRD used memos to document some decisions, such as the  rationale behind restructuring the directorate, the assignment of a  modernization officer to oversee the logistics of CRD\u2019s modernization, the  Commandant\u2019s approval of resources for training, staffing, and other  program support, and the assignment of a PII privacy officer to ensure that  safeguards are in place for proper handling of complaint records.\nE-mails: CRD used e-mails to document when meetings were held and  who was invited to meetings. CRD provided e-mails as the sole  documentation of certain actions related to the planning and  implementation of the action plans, such as the designation of tasks to  staff, outreach to stakeholders, and submission of action plan status  updates.\nCRD officials stated that their priority was to complete the action plans in  a timely manner rather than assure that development and review  processes were documented. However, without timely and reliable  documentation of decisions and actions, CRD cannot communicate or  provide a historical track of its approach to the action plans. Ultimately,  this lack of documentation may weaken CRD\u2019s transparency. When an  organization is undergoing change, as is the case with CRD and Coast  Guard, transparency becomes even more important as it can increase the  staff\u2019s confidence in the changes.\nAccording to CRD officials, the CRD executive assistant\u2014an integral part  of the action plan implementation process\u2014serves at CRD on a rotating  basis and will leave the position in June of 2010. Without documentation of  the decisions made in the design, implementation, and review of the action  plans, the knowledge the official has may leave with him.\nDocumentation of decisions may also allow CRD to demonstrate to Coast  Guard leadership and other stakeholders its progress in addressing long- standing issues identified in the two previous external reviews of CRD.  Both the reviews of CRD highlighted issues related to the office\u2019s  organizational structure, complaint process, and effectiveness, among  other issues. Clear documentation is necessary so that the directorate can  track progress, make midcourse corrections, and illustrate to stakeholders  that it is effectively solving long-standing issues.\nThe following are examples of the types of records that CRD could have  maintained:    Documentation of the action plan development process and its products,  such as minutes from the internal CRD meetings. Minutes from these  meetings could have included concerns that were raised, decisions that  were made, follow-up issues, and individuals in attendance. Decisions  from the Commandant, Leadership Council, and other directorates should  also have been documented.\nDocumentation of the review process, such as the individuals tasked with  reviewing the action plans, dates when completed action plans were  approved or denied, and criteria for approving the completion of the  action plans.\nHistorical record of the weekly status updates of the action plans on the  FRR spreadsheet, without which CRD officials may not be able to  determine if they are on track to meet their goals or course-correct if  necessary. They also cannot use this historical record to fine-tune action  planning in the future.\n\n\tSelected Action Plans Implemented Some Project Planning Practices, but Did Not Fully Implement Other Practices\n\nAccording to the Project Management Institute, a project plan is used to  guide the execution and the internal controls for a project. The plan  documents planning assumptions, project decisions, approved scope, cost,  and schedules. Among other benefits, this facilitates communication  among stakeholders. The following seven practices are adapted from  generally accepted project management practices:  1.  Identifying measurable performance goals;  2.  Defining specific tasks to complete the action plan;  3.  Identifying the person(s) accountable for completing the tasks to  complete the action plan;  4.  Identifying interim milestones\/checkpoints to gauge the completion of  5.  Identifying the needed resources to complete the action plan;  6.  Consulting stakeholders; and  7.  Defining how to evaluate the success of completing the action plan.\nWe reviewed the following four action plans that are related to key issues  identified in the external review. These action plans encompass 13 of the  53 recommendations that were made to CRD.\nComplete a New PII Handbook. This action plan was intended to create  a PII handbook. To do so, CRD needed to complete a number of complex  tasks including developing Standard Operating Procedures for personal  and confidential information, developing a records management system  for EEO\/EO-related records, instituting a privacy and records management  program, and assigning a privacy officer in Coast Guard headquarters.\nTrain Senior Staff to Address Office Climate. This action plan was  intended to improve the interpersonal dynamics of CRD\u2019s senior staff.  Elements of the action plan included using workshops to help senior staff  understand their own and others\u2019 underlying interests and concerns,  guiding the Director, Deputy Director, and senior staff to pursue more  collaborative methods of working with each other, and strengthening  leadership effectiveness in group dynamics.\nRestructure Civil Rights Operations. This action plan was intended to  centralize the management of the EEO\/EO services. Formerly, the civil  rights service providers who receive EEO\/EO complaints were  geographically dispersed and reported to their command leader within the  geography in which they were located. In the centralized structure, full- time civil rights service providers report to three civil rights regional  managers, each responsible for a multistate region. As the regional  managers report to CRD rather than Field Commanders, they are in the  direct line of command of CRD headquarters.\nRevise the EO Manual. This action plan was intended to address the  recommendation to revise the manual and add content that addresses the  roles of field and headquarters personnel throughout the complaint  process and the appropriate statutory references and citations. CRD  contracted this undertaking to a third party to complete while providing  the oversight intended to achieve a standardized administration of  complaints throughout the commands.\n\n\t\tAction Plans Only Partially Identified Measurable Performance Goals and Did Not Define How to Evaluate the Success of Completing a Plan\n\nWe analyzed the four selected action plans to determine the extent to  which generally accepted project management practices have been  integrated in their development and implementation process. Table 2  shows the results of our assessment of the extent to which each action  plan implemented the practices. For purposes of our analysis, fully means  all of the conditions of the project management practices were met,  partially means the criteria did not meet all of the conditions of the project  management practice, and did not implement means CRD did not provide  evidence to meet any of the conditions of the project management practice  or the evidence provided was inadequate.\nIdentifying Measurable Performance Goals. All the selected action  plans describe an output goal, such as revising the EO manual or attending  training, but do not identify measurable objectives or identify the intended  results of completing the action plans. In order to fully meet the criteria,  CRD needed to define an outcome goal for each of the selected action  plans that had measurable objectives against which actual achievements  can be compared. For example, conducting training to address office  climate is an output goal, but also establishing an outcome goal, such as  improving the results of CRD\u2019s organizational assessment survey\u2014a  measure of personnel attitudes across Coast Guard\u2014would more fully  measure the success of the action plan in achieving its intent.\nDefined Specific Tasks to Complete the Action Plan. Three of the  four action plans defined specific tasks to complete the action plan;  however, the action plan related to attending training to address CRD\u2019s  office climate did not. CRD\u2019s senior officials attended six 45-minute  training sessions over the course of two months. CRD officials stated that  since this action plan was undertaken, a training manager has been  appointed to plan longer-term training for CRD.\nIdentified the Person(s) Accountable for Completing the Action  Plan. All four selected action plans fully implemented the project planning  practice of identifying a person or persons accountable for completing the  action plan. CRD designated a project officer, or person accountable for  the completion of the action plan, at the beginning of the action plan  implementation process. Each project officer was responsible for updating  the lead project officer on the week\u2019s progress, as part of the process CRD  had established.\nIdentified Interim Milestones and Checkpoints to Gauge the  Completion of the Action Plan. The contract to revise the EO manual  was the only action plan that fully implemented checkpoints and  milestones to gauge the completion of the manual. The remaining three  action plans, creating the PII handbook, restructuring civil rights  operations, and training to address office climate, used their weekly status  reporting system to judge process. Establishing milestones for the action  plans before or during the planning process would have allowed CRD not  only to judge weekly progress, but also to benchmark where weekly  progress stood against where they intended. Further, CRD did not keep a  record of the weekly status reports or checkpoints; instead, they replaced  the prior week\u2019s status with the newest status, thus reducing their ability  to track the action plans\u2019 long-term progress.\nIdentified the Needed Resources to Complete the Action Plan. The  action plan to create a PII handbook was the only plan that did not identify  the needed resources to complete the specific action plan. Although CRD  officials stated that all of the action plans were reviewed by Coast Guard  directorates responsible for Budget, Information Technology, and  Infrastructure to determine needed resources, CRD was unable to provide  documentation of any of the directorate reviews. Training to address  office climate partially implemented this practice. CRD provided  documentation of the financial cost of training; however, the  documentation did not discuss any other training resources, such as staff  time and equipment or training materials. The other two selected action  plans, restructuring civil rights operations and revising the EO manual,  fully implemented the practice of identifying all of the needed resources to  complete action plans. CRD used approved funding and staffing requests  to document the identification of resources needed for both of these  action plans.\nConsulted Stakeholders. For two of the selected action plans, creating  the PII handbook and restructuring civil rights operations, CRD provided  documentation demonstrating that they consulted the stakeholders they  deemed relevant\u2014civil rights service providers and unions respectively.  One of the action plans, related to training to address office climate, did  not have any documentation of stakeholder consultation. According to  CRD officials, the action plan to revise the EO manual will consult all  directorates once it is complete. We assessed this action plan as partially  implemented because the end users of the manual were not consulted  while the manual was being drafted.\nEvaluated the Success of Completing the Action Plan. None of the  selected action plans that we reviewed identified how CRD would evaluate  the success of completing the action plan. CRD officials stated that they  were primarily focused on completing the action plans to address the  recommendations to improve the EO\/EEO program, and if they had more  time, they would have planned to evaluate the action plans. This planning  practice\u2014planning to evaluate success\u2014is linked to the earlier planning  practice of identifying performance goals. Outcome measures as  performance goals, as opposed to output measures, would provide the  basis for evaluating the success of the action plans in achieving the  intended improvements in CRD. While it is too early to evaluate the  effectiveness of the action plans, strategizing about how they would be  evaluated is a key step in identifying any necessary midcourse corrections  and ensuring that change will go in the right direction.\n\n\tConclusions and Observations\n\nNearly half of the CRD action plans address issues focused on agency  leadership. Coast Guard has received recommendations for addressing  these issues in previous years but the issues continue to be identified by  external reviews as needing improvement. Although the current CRD  action plans are intended to address these longstanding issues, effective  implementation of the action plans is key to achieving measurable  outcomes and making progress to resolve long-standing issues.\nCRD established an internal organization and process to address all the  recommendations for improvement. When developing and implementing  action plans, it is important to incorporate a systematic approach to  documenting decisions, outcomes, and actions. Without reliable  documentation, CRD cannot demonstrate the clear purpose, planning,  actions, and outcomes of its efforts. In addition, documentation provides  an opportunity for transparency and facilitates the transfer of knowledge  when employees leave the office to serve in other roles, which is  especially important in military organizations.\nGenerally accepted project planning practices include identifying  measurable objectives and the intended results of completing action plans.  Although all of the selected action plans identified output goals, the plans  consistently lacked evidence of planning in relation to outcomes. Without  measurable performance goals, CRD cannot know if an action plan  achieves its intended goals. Additionally, the application of generally  accepted project management practices facilitates the evaluation of  success and completion of the action plan. By not systematically  evaluating success, CRD risks using time and resources ineffectively. More  importantly, it also could be more difficult for CRD to know when it has  arrived at its overall intended goal\u2014achieving a productive and effective  EEO\/EO program that will work to ensure a workplace free from  discrimination.\n\n\tRecommendations for Executive Action\n\nWe recommend that the Secretary of the Department of Homeland  Security direct the Commandant of the Coast Guard to take the following  three actions:    Going forward, ensure internal controls are in place to maintain the  documentation necessary to facilitate oversight and course corrections as  plans are designed and implemented.\nEstablish measurable performance goals for the action plans to support  the management decision as to the completion status of the action plans.\nDefine an evaluation plan for each action plan to assess the degree to  which the plan yielded the intended outcomes.\n\n\tAgency Comments\n\nWe provided a draft of this testimony to the Secretary of the Department  of Homeland Security for review and comment. In written comments,  which are reprinted in appendix V, the Director of DHS\u2019s Departmental  GAO\/OIG Liaison Office concurred with our recommendations. Coast  Guard also provided technical comments, which we incorporated as  appropriate.\nMr. Chairman, this concludes my prepared statement. I would be pleased  to respond to any questions that you or other Members of the  Subcommittee might have.\n\n\tContact and Staff Acknowledgments\n\nFor further information about this testimony, please contact Laurie E.  Ekstrand on (202) 512-6806 or by email esktrandl@gao.gov. Contact points  for our Offices of Congressional Relations and Public Affairs may be found  on the last page of this statement. Individuals making key contributions to  this testimony included William J. Doherty, Assistant Director, Amber G.  Edwards, analyst-in-charge, Karin Fangman, Robert Gebhart, Juliann  Gorse, David Maurer, Tamara F. Stenzel, and Gregory Wilmoth.\n\nAppendix I: Third-Party Recommendations to the Coast Guard\u2019s Civil Rights Directorate\n\nEqual Opportunity Review\u2014Design and implement metrics to measure process efficiency and for valuing benefits  of Equal Opportunity Review process. Develop and implement a mechanism to track and report these metrics  against performance targets.\nEqual Opportunity Manual Revision\u2014To provide specificity regarding the purpose, format, and structure of Equal  Opportunity reviews.\nTraining Requirements\u2014Assess Office of Civil Right\u2019s current training program and develop a training suite for  Civil Rights Service Providers, supervisors, and managers that is tailored to the specific audience.\nWorkload Analysis\u2014Maximize workflow efficiencies and workforce planning by basing staffing decisions and  training requirements on valid and reliable data. This would include developing a Work Breakdown Structure  (WBS) that delineates the discrete work elements of Office of Civil Rights operations.\nConduct a training needs assessment of the U.S. Coast Guard civil rights organization to assess current training  programs and knowledge gaps. This assessment should also consider regulatory requirements, business drivers,  and the skills and abilities of Civil Rights Service Providers.\nUse facilitated workshops to help Office of Civil Rights senior staff members to understand their own and other  stakeholders\u2019 underlying interests and concerns and thereafter to focus on those interests rather than on stated  positions and demands.\nThrough coaching sessions, guide the Director, Deputy Director, and senior staff to pursue more collaborative  methods of working with each other. This could be accomplished through the strategic planning process and  other Office of Civil Rights initiatives such as the Management Directive-715 Report.\nConduct a skills inventory of current staff to measure skills versus organizational need, and to identify skill sets  required for the job.\nConduct a skills assessment to identify core competencies by assessing existing job descriptions and key skills  required to support each programmatic function. Refine job vacancy announcements to ensure that candidates  have the required skills.\nSkills Assessment\u2014Determine whether an adequately skilled civil rights workforce is available, trained, and  prepared to achieve the Office of Civil Rights and U.S. Coast Guard\u2019s civil rights objectives.\nDevelop a Training Course for Equal Opportunity Review team members on various data collection methods and  the process of applying statistical techniques to analyze, describe, and evaluate trend data.\nEnsure that all Civil Rights Service Providers receive training on intake and complaint processing at both the  Informal and Formal stages. This would include training designed to ensure that Civil Rights Service Providers  understand their role of neutrality throughout the counseling process.\nTraining\u2014Provide Strategic Plans and Resources Management Team Lead with additional training in budget  development and justifications.\nEnsure Office of Civil Rights Budget Personnel undergo training in statutory and regulatory obligations of the  office.\nAssess and take appropriate action regarding Equal Opportunity Review Team participants training needs.\nRestructure U.S. Coast Guard Civil Rights Operations\u2014This restructuring can be accomplished by placing the  Field Civil Rights Service Providers under the direct oversight of the Director of Office of Civil Rights with Area  Equal Opportunity Managers reporting to the Director instead of directly to Field Commanders.\nConvert the Instructional Systems Specialist position currently residing in the Policy and Plans Division to an  Operations Manager position reporting to the Deputy. This position would, among other duties, be responsible for  operations management and training requirements oversight.\nTransition training oversight responsibilities from the Policy and Plans Division to a newly created Operations  Manager (reporting to the Deputy) who will manage all aspects of OCR training processes.\nCreate a Senior Advisor Position\u2014This position will provide programmatic guidance to the Director.\nDesignate Privacy and Records Manager\u2014Assign to CG-00H one GS-14 billet.\nLeverage 0-6 Deputy Responsibility\u2014Responsible for operational and nonstatutory activities including budgeting,  resource management, strategic planning, and oversight. Align the Strategic Plans and Resource Management  Team and the Policy and Plans Division under the Deputy.\nEstablish a solid-line reporting relationship of field Civil Right Service Providers\u2014have all Civil Rights Service  Providers report to the Director.\nDevelop an integrated strategic plan to better enable the organization to execute and deliver on its mission. This  strategic plan should incorporate input from key stakeholders, be well communicated to employees, and  cascaded across Office of Civil Rights and throughout the Field to ensure consistency of focus across all areas of  the U.S. Coast Guard civil rights organization.\nMove CG-00H-3 Program Analyst billet to CG-00H-2\u2014to assist with Equal Opportunity Reviews.\nMove Administrative Specialist from CG-00H-2 to CG-00H-4\u2014to assist with administrative functions.\nStandard Operating Procedures\u2014Develop Standard Operating Procedures for CG-00H-3 to handle all aspects of  budget requests for Office of Civil Rights.\nRevise the Equal Opportunity Manual to include statutory references and citations so that a reader can cross- reference relevant statutory language with the guidance provided. In addition, add content that addresses the  roles of Field and Office of Civil Rights personnel throughout the complaint process.\nInstitute a privacy and records management program\u2014based on Department of Homeland Security policies and  procedures.\nRedesign the Equal Opportunity Review process to increase the value and effectiveness of this function.\nStrategic Planning\u2014Ensure that each division develops a strategic plan that feeds into the Director\u2019s overall  strategic plan.\nDevelop Standard Operating Procedures for handling Personally Identifiable Information and Confidential  information.\nDevelop a records management system that describes, for each type of record, where it should be retained, the  various classifications of records, the applicable policies, and how the complaint records should be maintained.\nEqual Opportunity Manual Revision\u2014Enter detailed Instruction for handling Personally Identifiable Information.  Also, revise the Equal Opportunity Manual such that it provides a step-by-step process to determine whether the  release of documents is appropriate.\nInstitute a mandatory annual training requirement for supervisors and managers through which participants are  taught their responsibilities with respect to Equal Employment Opportunity and affirmative employment. Provide  refresher training in a computer-based format that can be used in any location.\nDevelop a business case for Equal Opportunity Reviews. This analysis should consider the specific reasons for  an established number of Equal Opportunity Reviews, the rationale for particular site selections, quantifiable  measures of success, available dedicated resources, and any other strategic or regulatory drivers that would  necessitate Equal Opportunity Reviews.\nEqual Opportunity Reviews\u2014redesign position requirements for individuals participating in the Equal Opportunity  Review process to reflect the specific skills and abilities required to conduct substantive analysis and high-level  technical writing.\nRevise the U.S. Coast Guard service-specific portion of the Defense Equal Opportunity Management Institute  Equal Opportunity Advisors Program to include training by civilian Equal Employment Opportunity Commission  certified trainers who would provide instruction in the areas of Equal Employment Opportunity Counseling and  complaint processing. This training curriculum would include, among other topics, instruction in basic Equal  Employment Opportunity Counseling and other related activities, such as writing reports of counseling, identifying  issues, conducting inquiries, and pursuing resolution options.\nTraining Program\u2014Professionalized Equal Employment Opportunity Counseling training program to include  mandatory training required by Equal Employment Opportunity Commission, including the eight-hour Refresher  and the 32-hour training requirement for new federal Equal Employment Opportunity Counselors. In addition,  require counselors to fulfill a bi-annual training requirement by taking an Interviewing Techniques, Conflict  Resolution, or Facilitation course.\nEqual Opportunity Manual\u2014Revise the Equal Opportunity Manual such that it effectively serves as the guiding  document for enterprise-wide civil rights operations.\nStandard Operating Procedures\u2014Develop Comprehensive Standard Operating Procedures to standardize Office  of Civil Rights operations. This would include Standard Operating Procedures for each team\/division within the  Office of Civil Rights and the compilation of an accessible master volume.\nPerform gap analysis to determine where the current staff meet core competencies and identify where  competency gaps exist by comparing the core competencies required to support the Office of Civil Rights roles  with the results of the skills inventory of the current staff.\nDetermine whether current program functions are statutorily required or necessary to support the Office of Civil  Rights mission and to determine resource needs.\nHire or contract for final agency decision (FAD) analysts.\nCreate a Separate spend plan for Training Needs Assessment.\nIdentify \u201cstrategic initiatives\u201d\u2014that would be drivers of the Office of Civil Rights strategy as well as that of U.S.  Coast Guard. These initiatives should then be prioritized for funding and implementation in any given fiscal year  based on their expected impact.\nUse Office of Civil Rights Strategic Plan to advocate for resource requirements by demonstrating how  performance goals align with budget requests.\nRecruit and hire full-time experienced Equal Employment Opportunity Counselors and Civil Rights Service  Providers and discontinue the use of collateral duty staff.\nAssess CG-00H-4 funding needs.\nUse the Official U.S. Coast Guard Blog to refute misinformation and protect the credibility of the U.S. Coast Guard  workforce.\nEstablish an Official U.S. Coast Guard Blog to convey key message and to minimize confusion and  misinformation   Disable access to negative unofficial blog sites at U.S. Coast Guard work locations.\nStrengthen leadership effectiveness in group dynamics and find tools to address effectiveness.\nEnsure that individuals are held accountable for acts of insubordination.\n\nAppendix II: Summary of the Equal Employment Opportunity Commission Model Elements\n\nCommitment to equal opportunity should be embraced by agency leadership and  communicated through the ranks from the top down. Among other things, an agency shall  provide sufficient staffing and resources to operate the Equal Employment Opportunity (EEO)  program in an effective manner. For example, staff and resources should also be sufficient to  enable accurate collection and analysis of data and other employment factors, including  applicant information, to enable the efficient identification of barriers. This will necessarily  require staff beyond the EEO office, particularly information management\/services.\nThis model element provides that the agency\u2019s EEO program should be organized and  structured in such a manner as to maintain a work place that is free from discrimination in any  of its management policies, practices or procedures and supports the agency\u2019s strategic  mission. Agency leadership should fully utilize EEO staff as a consultant prior to making  decisions which effect workplace opportunities. The EEO Director should be a regular  participant in senior staff meetings and regularly consulted on workplace issues and not  solely delegated to responding to discrimination complaints.\nThis model element provides that agencies should hire, develop, and retain supervisors and  managers who have effective managerial, communication, and interpersonal skills in order to  supervise most effectively in a workplace with diverse employees and avoid disputes arising  from ineffective communications. Also, the agency should meaningfully evaluate managers  and supervisors on efforts to ensure equality of opportunity for all employees.\nThis model element provides that as part of its ongoing obligation to prevent discrimination on  the bases of race, color, national origin, religion, sex, age, reprisal and disability, and to  eliminate barriers that impede free and open competition in the workplace, an agency must  conduct a self-assessment on at least an annual basis to monitor progress, identify areas  where barriers may operate to exclude certain groups, and develop strategic plans to  eliminate identified barriers.\nThis model element provides that an agency must evaluate its EEO complaint resolution  process to ensure it is efficient, fair, and impartial. It also provides that an agency\u2019s complaint  process must provide for neutral adjudication; consequently, the agency\u2019s EEO office must  be kept separate from the legal defense arm of the agency (i.e., the Office of General  Counsel) or other agency offices having conflicting or competing interests.\nResponsiveness and legal compliance  This model element provides that the head of the agency or agency head designee shall  certify to the Equal Employment Opportunity Commission (EEOC) that the agency is in full  compliance with the EEO laws and EEOC regulations, policy guidance, and other written  instructions. It also provides that all agencies shall report their EEO program efforts and  accomplishments to the EEOC and respond to EEOC directives and orders, including final  orders contained in administrative decisions, in accordance with instructions, time frames,  and deadlines.\n\nAppendix III: Excerpt from Coast Guard Civil Rights Directorate Functional Review Recommendation Sheet\n\nRestructure U.S.  Coast Guard Civil  Rights Program \u2013 This  restructuring can be  accomplished by  placing the Field Civil  Rights Service  Providers under the  direct oversight of the  Director of Office of  Civil Rights with Area  Equal Opportunity  Managers reporting to  the Director instead of  directly to Field  Commanders.\n\nAppendix IV: Summary of Generally Accepted Project Management Practices\n\nThis practice defines the project\u2019s goals, describing how they will be achieved and defines  measures of performance. The Government Performance Results Act of 1993 (GPRA)  defines performance goals and measures with the intention of improving the effectiveness,  accountability, and service delivery of federal programs This framework informs federal  practice and describes measures as either output or outcome measures. Outcomes describe  the intended result of carrying out the activity while outputs describe the level of activity that  will be provided over time including the characteristics established as standards for the  activity, such as timeliness.\nThis practice identifies and documents the specific activities that must be performed in order  to complete the project. This aids project completion by facilitating such activities as  identifying the resource requirements, developing an appropriate time table for completion,  and necessary stakeholder involvement in the project.\nThis practice identifies and documents who is assigned and responsible for the completion of  project tasks. This aids project completion by facilitating internal controls and reporting  processes.\nThis practice identifies and documents interim milestones and checkpoints to gauge the  completion of the project. A milestone is a significant event in the project that marks the  completion of a deliverable or phase. A checkpoint is a point at which the status check is  performed. This aids project completion by identifying not only the distance the team has  traveled toward completing the project, but the direction traveled.\nThis practice identifies and documents the determination of what resources (people,  equipment, materials, and money) are needed to complete an action plan. This aids project  completion by assuring that resource availability can be assured or alternate plans  established to reach the goal of the action plan.\nThis practice identifies stakeholders\u2014individuals and organizations that are involved in or  may be affected by project activities\u2014and ensures that they are included in developing and  executing the project plan allowing them contribute appropriately. This aids project  completion by ensuring that employees understand and are committed to the goals.\nThis practice establishes and documents quantifiable criteria that must be met for the project  to be considered successful. Prior GAO work on designing evaluations discusses the  importance of evaluating actions because it is a safeguard against using time and resources  ineffectively. Evaluating the success of completing the action plan also increases the  likelihood that a person, a team, or an agency will know when an action is complete and one  has arrived at the intended goal, which should be attaining the results the action plans were  intended to accomplish.  nce nd Result Act of 199 (GPRA), Pub. L. No. 10-62, 107 St. 285   (Ag. , 199).  igning Evuation, GAO\/PEMD-10.1.4, (Washington, D.C.: My 1991).\n\nAppendix V: Comments from the Department of Homeland Security\n\nThis 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.","output":"Why GAO Did This Study\n\nAllegations of management weaknesses, unsecured personal information, and employee dissatisfaction have been made against U.S. Coast Guard's Civil Rights Directorate (CRD). To address these allegations, the Director of CRD commissioned an external review of civil rights operations. In February 2009, the review made 53 recommendations to improve the civil rights operations. CRD developed action plans to address these recommendations. As requested, GAO reviewed (1) how Coast Guard's action plans align with EEOC's elements of a model equal employment opportunity program (2) how Coast Guard developed and reviewed its action plans, and (3) the extent to which Coast Guard's action plans align with generally accepted project management practices. To conduct this work GAO reviewed documentation from CRD, EEOC, internal control standards, and literature on project management. We also interviewed CRD officials.\n\nWhat GAO Found\n\nOf the Equal Employment Opportunity Commission's (EEOC) six equal employment opportunity program model elements, CRD's action plans focus mainly on the first--agency leadership. Of the 29 action plans developed and implemented by CRD to address the 53 recommendations in the recent external review, almost half center on the leadership element. For example, one action plan involved scheduling training for headquarters and field staff. CRD took several steps to develop and review action plans to address recommendations from the external review, such as developing a functional review team, assigning project officers, meeting with the Commandant and agency leadership, and consulting the agency financial officer. However, CRD did not consistently document key decisions related to the development and review of the action plans as recommended in federal internal control standards. As a result, CRD lacks transparency and accountability to stakeholders. Lack of documentation also impedes the ability to track progress, make mid-course corrections, and illustrate to stakeholders that it is effectively solving these issues. According to CRD officials, their priority was to complete the action plans in a timely manner rather than ensure that development and review processes were documented. GAO reviewed four of CRD's action plans in relation to generally accepted project management practices to determine the extent to which recommended practices were followed. The recommended practices are: (1) identifying measurable performance goals, (2) defining specific tasks, (3)identifying the person(s) accountable, (4) identifying interim milestones and checkpoints, (5) identifying the needed resources, (6)consulting stakeholders, and (7) defining how to evaluate success. The selected action plans showed some elements of the project management practices, such as identifying accountable individuals, but fell short in relation to other elements. Specifically, performance goals were identified in the form of a product, such as development of a manual, rather than in relation to a desired outcome, such as demonstrating an increase in the number of staff who know how to properly safeguard personal information. All four action plans we reviewed lacked plans for evaluating their success. CDR officials stated that they were more focused on completing the plans rather than evaluating them, but early evaluation can identify and guide mid-course corrections to ensure positive change."}
{"id":"gao_GAO-17-681SP","pid":"gao_GAO-17-681SP_0","input":"\tAgency Comments\n\nWe provided a draft of this report to State, DOD, and USAID for review.  None of the agencies provided formal comments. However, State  provided technical comments, which we have incorporated as  appropriate.\nWe are sending copies of this report to the appropriate congressional  committees, the Secretaries of State and Defense, and to the USAID  Administrator. In addition, the report is available at no charge on the GAO  website at http:\/\/www.gao.gov.\nIf you or your staff members have any questions about this report, please  contact me at (202) 512-8980 or courtsm@gao.gov, or the individual(s)  listed at the end of each enclosure. Contact points for our Offices of  Congressional Relations and Public Affairs may be found on the last page  of this report. GAO staff members who made key contributions to this  report are listed in appendix VII.\nBackground  The Department of State\u2019s (State)  Bureau of Diplomatic Security  (Diplomatic Security) manages  much of the security-related  funding within State\u2019s Diplomatic  and Consular Programs budget,  the largest category of which  comes from the Worldwide  Security Protection account.  Salaries for Diplomatic Security  personnel are managed  separately by State\u2019s Bureau of  Budget and Planning.\nIssue  Total funding for Diplomatic Security operations was almost $4.8 billion in  fiscal year 2016. Total funding for Diplomatic Security includes its bureau  managed funds as well as other funding\u2014such as personnel salaries\u2014 managed by other bureaus and offices but necessary for Diplomatic  Security operations. Diplomatic Security\u2019s bureau managed funds ($3.3  billion in fiscal year 2016) are composed of funds received through  annual appropriations, fees collected through visa processing,  reimbursements from other agencies, and appropriated funds carried  over from prior fiscal years. These funds support regular, ongoing  operations and Overseas Contingency Operations (OCO) for temporary,  war-related operations. State directed an additional $1.5 billion to  Diplomatic Security and its employees in 2016, through other bureaus  and offices.\nKey Findings  In fiscal year 2016, Diplomatic Security\u2019s bureau managed funds totaled  approximately $3.3 billion. Bureau managed funds have increased in  response to multiple security incidents since the 1998 bombings of the  U.S. embassies in Kenya and Tanzania. (Fig. 1 shows that Diplomatic  Security\u2019s bureau managed funds had tremendous growth from 1998  through 2016 in both real and nominal dollars.)\nF Figure 1: Historical Trend in Department of State Bureau of Diplomatic Security Managed Funds, 1998-2016  From 1995 to 1998, Diplomatic Security\u2019s bureau managed funds  averaged about $173 million annually. After the 1998 bombings in Africa,  bureau managed funds grew to $784 million in 1999 as Congress  provided Diplomatic Security with emergency supplemental funding to  address security vulnerabilities at posts worldwide. By fiscal year 2009,  bureau managed funds had grown to about $2.0 billion, largely due to  new security procedures put in place after 1998 as well as the need to  provide security for diplomats in the conflict zones of Iraq and  Afghanistan. Bureau managed funds increased in 2010 to $2.7 billion and  in 2012 to $3.3 billion, as the U.S. military began to withdraw from Iraq  and Diplomatic Security assumed many of the protective and security  functions previously provided by the U.S. military in that country.  Congress appropriated less funding in 2013 to the Worldwide Security  Protection account because, according to Diplomatic Security,  appropriated funds were carried over from prior years. The subsequent  increases in funding for that account in 2014 through 2016 followed the  2012 attack in Benghazi, Libya.\nSince 2012, OCO supplemental funding has made up 34-62 percent of  Diplomatic Security\u2019s bureau managed funds. For example, in fiscal year  2016, OCO funding totaled over $2.0 billion\u2014or 62 percent\u2014of bureau  managed funds for that year. According to a bureau official, State\u2019s OCO  funding was intended to be temporary funding to support operations in  Iraq, Afghanistan, and Pakistan but continues to exist, given the security  situation in those countries, and has expanded beyond those three  countries. Some State officials are concerned that if OCO is discontinued,  State would not have sufficient funding to provide necessary security  services. For fiscal year 2018, the administration is requesting less OCO  funding than the final appropriated amount for fiscal year 2017.\nFunding for Diplomatic Security operations totaled almost $4.8 billion in  fiscal year 2016. This amount includes both bureau managed funds\u2014 which were almost $3.3 billion\u2014and other funding directed to Diplomatic  Security and its employees but managed by other bureaus and offices  within State (personnel salaries, Antiterrorism Assistance funding, guard  services funding, and fraud prevention and detection fees), which totaled  almost $1.5 billion. For example, State\u2019s Bureau of Budget and Planning  manages the salaries of Diplomatic Security personnel. Funding for  Diplomatic Security personnel increased from $12 million in 2000 to $419  million in 2016. In addition, State allocates funding to its Bureau of  Overseas Buildings Operations for security construction at overseas  facilities.\nPoint of Contact  For more information, contact:  Michael J. Courts, (202) 512- 8980, courtsm@gao.gov   1.  What impact has Diplomatic Security\u2019s increased funding had on its  ability to carry out its mission? Are current funding levels sufficient?  2.  What are State\u2019s plans for utilizing future Diplomatic Security funding?\nWill there be additional carryover funds in future years, as in 2013?\nBackground  The Department of State\u2019s (State)  Bureau of Diplomatic Security  (Diplomatic Security), which is  responsible for the protection of  State\u2019s people, property, and  information, relies on a broad  workforce to carry out its mission  and activities. Its workforce  includes direct-hire personnel,  military support, and contractors.  Posts also engage locally  employed staff.\nIssue  Over the last 2 decades, Diplomatic Security\u2019s mission and activities have  expanded in response to a number of security incidents, which has led to  a dramatic increase in the size of its workforce. The growth in its  responsibilities overseas began with the 1998 attacks in Africa and  continued with the U.S. policy of maintaining a diplomatic presence in war  zones such as Afghanistan and Iraq and other increasingly hostile  environments. In addition, the September 11, 2001, terrorist attacks  underscored the importance of enhancing domestic security, including  Diplomatic Security\u2019s investigative capacity, technical programs, and  counterintelligence work. This sustained and at times rapid growth has  taxed Diplomatic Security\u2019s ability to staff positions with the appropriate  level of experience and skills.\nKey Findings  Diplomatic Security\u2019s workforce\u2014numbering over 51,000 direct-hire,  other U.S. government, and contract personnel as of May 2017\u2014has  experienced continued growth in almost all staffing categories. We  previously reported in 2009 that Diplomatic Security\u2019s direct-hire work  force doubled from 1998 to 2008. Since then, it has increased by another  36 percent to 3,488 personnel in 2017. If State\u2019s current hiring freeze is  lifted, Diplomatic Security officials told us that they plan to hire an  additional 384 special agents in 2017 through 2018. The number of other  U.S. government personnel reporting to Diplomatic Security increased by  60 percent, driven largely by the expansion of the Marine Security Guard  program after the 2012 Benghazi attacks. Diplomatic Security increased  its contracted and support staff by 22 percent. (Table 1 provides  information on the increases in Diplomatic Security staff from 2008  through 2017; see app. IV for further staffing details.)\nIn response to a Benghazi Accountability Review Board recommendation,  State established a panel to reexamine Diplomatic Security\u2019s organization  and management. In 2013, the panel reported that, in part, Diplomatic  Security had become more focused on its law enforcement and personnel  protection functions. This was not surprising, according to the panel,  given that Diplomatic Security provided security in two war zones and  numerous other high-threat posts. Simultaneously, Diplomatic Security  had experienced an increased demand on its domestic criminal  investigative and dignitary protection programs.\nNonetheless, the panel noted that Diplomatic Security\u2019s primary mission  is \u201cto provide a secure environment for the conduct of U.S. foreign  policy\u201d and stated that Diplomatic Security should reflect this priority in  its allocation of manpower and other resources. For example, the panel  recommended that Diplomatic Security review personnel allocations  both domestically and abroad. As of June 2017, Diplomatic Security had  completed an initial classified review of its staffing and begun a follow- on study to (1) determine how Diplomatic Security has distributed its  staff relative to its priorities; and (2) develop a methodology to assess  the quantity, mix, and distribution of Diplomatic Security staff worldwide.  According to Diplomatic Security, the second study is expected to result  in two tools that Diplomatic Security can use for evaluating its staffing  levels: one for domestic staffing and one for overseas staffing.\nIn fiscal year 2010, we reported that 34 percent of Diplomatic Security\u2019s  positions were filled with officers below the position\u2019s grade. In 2013, the  organization and management panel noted that many Diplomatic  Security regional director positions were filled by officers holding ranks  below the levels established for that position (not including agents  posted to Baghdad, Iraq). The panel recommended that Diplomatic  Security prioritize filling these positions with at-grade personnel. While  State concurred, as of June 2017, it had not identified any new, concrete  actions for implementing this recommendation. Instead, State noted that  it \u201cwill continue to make every effort to place at-grade, experienced, and  highly qualified individuals into these positions.\u201d\nAs of December 2016, Diplomatic Security had 422 staffed language- designated positions (LDP), of which 304\u2014or 72 percent\u2014were filled  with special agents who met the language requirement. This is an  improvement since 2009, when we reported that only 47 percent of  Diplomatic Security special agents at LDPs met the requirement.  Officials cited two reasons for this increase in compliance: (1) greater  agency emphasis on the need for agents to have language skills  following the 2012 Benghazi attacks and (2) increased emphasis on  speaking rather than reading skills. As a result, Diplomatic Security has  an increased number of \u201casymmetrical\u201d language requirements, where  the speaking-level requirement is higher than the reading-level  requirement. Diplomatic Security also adopted the \u201cAlert\u201d language  training program, which provides special agents with speaking skills  relevant to their technical work, particularly for languages spoken at  certain high-threat posts. State officials told us that agents can become  proficient in 10 weeks using this program, versus 30 weeks typically  required for traditional methods.\nMichael J. Courts, (202) 512- 8980, courtsm@gao.gov  ensure that it has the appropriate quantity, mix, and distribution of  staff to address its overseas and domestic responsibilities?  2. What steps has Diplomatic Security taken to ensure that its positions  are filled with appropriately experienced staff?  3. What is State doing to further close the gaps in Diplomatic Security\u2019s  LDPs?\nBackground  Responsibility for the security of  the Department of State\u2019s (State)  diplomatic facilities falls principally  on State\u2019s Bureaus of Overseas  Buildings Operations (OBO) and  Diplomatic Security (Diplomatic  Security). OBO is responsible for  the design, construction,  acquisition, maintenance, and sale  of U.S. diplomatic property abroad.  Diplomatic Security is responsible  for establishing security and  protective procedures at posts and  developing and implementing the  physical security programs.\nMaintaining the physical security of U.S. diplomatic facilities is a critical  component of ensuring the safety of U.S. personnel, property, and  information. According to OBO, State maintains approximately 1,600  work facilities at 275 diplomatic posts worldwide under chief-of-mission  authority. In addition, State has a limited number of temporary work  facilities, mostly in dangerous locations such as Afghanistan. All facilities  at a post are expected to meet physical security standards set by the  Overseas Security Policy Board. In fiscal years 2009 through 2016, State  allocated about $11.1 billion to the construction of new, secure facilities  and physical security upgrades to existing and acquired facilities. While  Diplomatic Security has a few small programs to provide physical security  upgrades to facilities abroad, OBO managed most of the allocated funds.\nKey Findings  Following the 1998 attacks on U.S. embassies in Kenya and Tanzania,  State determined that diplomatic facilities in over 180 posts\u2014more than  half of U.S. overseas missions\u2014needed to be replaced to meet security  standards. In 1999, State began a new embassy construction program,  administered by OBO, to replace these posts. To expedite the delivery of  new, secure compounds, OBO adopted a standard embassy design  (SED) approach. However, some stakeholders raised concerns about the  aesthetics, quality, location, and functionality of those facilities. For  example, the 10-acre lot specified by the SED sometimes required  situating an embassy far from urban centers, where foreign government  offices and other embassies are located. In response to these concerns,  State established the \u201cExcellence\u201d approach in 2011. (See fig. 3 for a  picture of an embassy built under SED and a rendering of a consulate to  be delivered under the Excellence approach.)\nOBO\u2019s changes under the Excellence approach focus on producing more  innovative, functional, and sustainable embassies that are just as secure  as those built using the SED. However, some stakeholders have raised  concerns that the new approach may result in embassies that take longer  and cost more to build. This would delay getting U.S. personnel into   facilities that meet current security standards. In 2017, we reported that,  while the Excellence approach may result in improvements, it carries  increased risk to cost and schedule\u2014including up to 24 additional months  to develop designs. While OBO is attempting to manage this risk, it does  not have performance measures specific to the Excellence goals and,  therefore, cannot fully assess the merits of the new approach. We made  four recommendations to strengthen performance measures and  reporting, monitoring mechanisms, and data systems. While State  concurred with these recommendations, they remain open.\nWhen facilities do not or cannot meet certain security standards, State  works to mitigate identified vulnerabilities through various construction  programs and its waivers and exceptions process. However, in 2014, we  reported that the waivers and exceptions process had weaknesses. Of  the 43 facilities we reviewed, none met all applicable security standards  and therefore required waivers, exceptions, or both. However, we found  that neither posts nor headquarters systematically tracked the waivers  and exceptions and that State had no process to reevaluate waivers and  exceptions when the threat or risk changes. Furthermore, posts did not  always request required waivers and exceptions or consistently take  required mitigation steps. We concluded that with such deficiencies, State  cannot be assured it has all the information needed to mitigate facility  vulnerabilities. We made 13 recommendations for State to address gaps  in its security-related activities, standards, and policies. State generally  agreed with our recommendations and, as of June 2017, had addressed  five of them.\nFuture State construction in dangerous posts\u2014such as Kabul,  Afghanistan\u2014will likely entail the continued use of temporary office or  residential facilities, especially in conflict areas. However, in 2015, we  found that in Kabul\u2014without security standards or other guidance to  guide temporary facility construction in conflict environments\u2014State  inconsistently applied alternative security measures that resulted in  insufficient and different levels of security for temporary offices and  housing as well as increased costs and extended schedules. We  concluded that without temporary facility security standards or guidance,  future construction in conflict environments could encounter similar  problems. We recommended that State consider establishing security  standards or guidance for temporary facilities in conflict zones. State  partially concurred and subsequently reported that it was developing  additional guidance relating to physical security systems such as  Hardened Alternative Trailer Systems, surface-mounted, antiram barriers,  and anticlimb wall toppings. As of May 2017, State was continuing to  address this recommendation.\nMichael J. Courts, (202) 512- 8980, courtsm@gao.gov   schedules associated with the Excellence approach to building new  embassies?  2.  To what extent do State\u2019s facilities have or require waivers and  exceptions to security standards? What steps has State taken to  address weaknesses in its waivers and exceptions program?  3.  How extensively does State rely on temporary facilities that have been  in place for extended periods of time? What progress has State made  in creating additional guidance relating to temporary facilities?\nBackground  The Secretary of State, in  consultation with the heads of  other federal agencies, is  responsible for protecting U.S.  government personnel on official  duty abroad, along with their  accompanying dependents. At  overseas posts, the Department  of State\u2019s (State) Bureaus of  Diplomatic Security (Diplomatic  Security)\u2014represented by a  Regional Security Officer  (RSO)\u2014and Overseas Buildings  Operations share responsibility  for the security of residences and  other soft targets overseas.\nMore than 25,000 U.S. diplomatic personnel live overseas with their  families in an environment that presents myriad security threats and  challenges. While State has taken measures to enhance security at its  embassies and consulates since the 1998 East Africa embassy  bombings, these same actions have given rise to concerns that would-be  attackers may shift their focus to what they perceive as more accessible  targets, such as diplomatic residences, schools, and other places  frequented by U.S. personnel and their families. For example, a 2014  posting on a jihadist website called for attacks on American and other  international schools in the Middle East. (See fig. 4 for examples of  diplomatic residences.)\nKey Findings  State acquires housing for overseas personnel by leasing, purchasing, or  constructing various types of residences, each of which is subject to a set  of security standards. State assesses risks to residences using a range of  activities\u2014including a periodic security survey to identify and address  vulnerabilities. In fiscal years 2010 through 2016, State allocated about  $175 million for residential security upgrades. However, in 2014, we  found that State did not complete all residential surveys as required,  thereby limiting its ability to address vulnerabilities. In addition, we  reviewed 68 overseas diplomatic residences and found that 38 did not  meet all of the applicable standards, potentially placing their occupants at  risk. In instances when a residence does not and cannot meet applicable  security standards, posts are required to either seek other residences or  request exceptions, which identify steps to mitigate vulnerabilities.  However, we found that Diplomatic Security had an exception on file for  only 1 of the 38 residences that did not meet all standards. We concluded  that without documenting the necessary exceptions, State lacked a  complete picture of security vulnerabilities at residences and information  that would enable it to make better risk management decisions. In  addition, more rigorous security standards that went into effect in July  2014 would likely increase posts\u2019 need for exceptions and lead to costs  for upgrades. We made four recommendations regarding the  management of risks to residences. State concurred with all four and, as  of May 2017, had addressed one. (Fig. 5 portrays key security standards  at a notional residence.)\nState has taken a variety of actions to manage risks to schools and other  soft targets. These actions fall into three main categories: (1) funding  security upgrades at K-12 schools with enrolled U.S. government  dependents and off-compound employee association facilities, (2) sharing  threat information and providing advice for mitigating threats at schools  and other soft targets, and (3) conducting security surveys to identify and  manage risks to schools and other soft targets. However, RSOs at most  of the posts we reviewed in 2015 were unaware of some guidance and  tools for securing these facilities\u2014such as a booklet and compact disc  entitled \u201cSecurity Guide for International Schools\u201d aimed at assisting  international schools in designing and implementing a security program.  As a result, we concluded that RSOs may not have been taking full  advantage of State\u2019s programs and resources for managing risks at soft  targets. We recommended that State take steps to ensure that RSOs are  aware of existing guidance and tools regarding the security of soft targets.  In response, State issued a cable to all diplomatic and consular posts  updating policies and procedures for State's Soft Targets Security  Upgrade Program for overseas schools and department-chartered  employee associations, thereby distributing important information to  security personnel who were previously unaware of available guidance  and information.\nMichael J. Courts, (202) 512- 8980, courtsm@gao.gov  standards at overseas residences? Have the standards implemented  in July 2014 affected the number of waivers and exceptions  requested?  2.  What steps has State taken to ensure that posts conduct residential  physical security surveys and request security exceptions, when  needed, in a timely manner?  3.  To what extent has State adapted its Soft Targets Security Upgrade  Program in light of recent public terrorist attacks?\nBackground  To help safeguard and prepare  U.S. personnel to live and work in  some of the most dangerous  overseas locations, the  Department of State\u2019s (State)  Bureau of Diplomatic Security  (Diplomatic Security) provides  training on personal security skills  necessary for recognizing,  avoiding, and responding to  potential terrorism and other  threat situations.  Diplomatic  Security  also provides refresher  briefings on certain topics, as well  as cyber and technical security  training. To consolidate the  hands-on training that Diplomatic  Security provides, State is  constructing a training center in  Fort Pickett, Virginia, which it  expects will be completed in  2019.\nIssue  State has a robust security awareness training program provided by  Diplomatic Security. For example, State requires specified U.S. personnel  traveling for less than 45 days in a calendar year to certain posts to  complete its online High Threat Security Overseas Seminar (HTSOS). If  specified U.S. personnel are traveling for 45 days or more in a calendar  year, State requires that they complete the 5-day Foreign Affairs Counter  Threat (FACT) training before departure. Diplomatic Security designed  the FACT course to address the dangers that U.S. personnel might face  in a number of high-threat, high-risk locations overseas. The course  provides hands-on instruction in topics such as detection of surveillance,  familiarization with firearms, and awareness of improvised explosive  devices (see fig. 6 for examples of other FACT training topics).\nKey Findings  State\u2019s oversight of compliance with the FACT training requirement has  weaknesses that limit its ability to ensure that U.S. personnel are  adequately prepared for work in high-threat environments. We reported in  2011 and 2014 that State did not have the ability to systematically identify  which people required to take the course had not taken it. We made  several recommendations to State to improve its management oversight  of compliance with mandatory FACT training. These included four  recommendations for State to update its policy guidance to reflect  changes made to the FACT training requirement in June 2013 (State had  doubled the number of countries for which it required FACT training) and  to provide clear information on which personnel are required to take  FACT training. State concurred with the recommendations and took steps  to address them. However, our recommendation that State monitor or  evaluate overall levels of compliance with the FACT training requirement  remains open. In May 2015, State officials said they were developing a  plan to utilize various electronic systems to monitor overall levels of  compliance with the FACT training requirement. As of June 2017, State  reported that it continues to work on this issue. This lack of oversight is  particularly concerning given the significant increase in the number of  students taking Diplomatic Security-provided FACT training, from 912 in  fiscal year 2006 to 4,482 in fiscal year 2016 (see fig. 7).\nIn addition, in July 2014, State expanded the FACT training requirement  to apply to all posts (not just those in high-threat, high-risk locations) by  2019. The gaps we have previously identified in State oversight may  increase the risk that personnel do not complete FACT training,  potentially placing their own and others\u2019 safety in jeopardy.\nWe reported in 2016 that weaknesses exist in State\u2019s guidance on and  management oversight of refresher briefings related to transportation  security, potentially putting U.S. personnel overseas at greater risk. We  found that personnel had difficultly remembering key details covered in  new arrival briefings or described the one-time briefings as inadequate.  We found that State lacked a clear requirement for Diplomatic Security to  provide and track compliance with periodic refresher briefings that could  help reinforce information covered in new arrival briefings. In part, this  may result from State guidance lacking clarity and comprehensiveness on  this matter. Specifically, its guidance states that regional security officers  must conduct refresher briefings \u201cperiodically\u201d at \u201ccertain posts where  personnel live under hostile intelligence or terrorist threats for long  periods\u201d but does not define \u201cperiodically\u201d or \u201clong periods.\u201d Further,  according to Diplomatic Security officials, there is no requirement for  affirming that post personnel have received refresher briefings. We  recommended that State clarify existing guidance on refresher briefings,  such as by delineating how often briefings should be provided at posts  facing  different types and levels of threats, which personnel should  receive them, and how their completion should be documented.  Diplomatic Security headquarters officials stated that most violations of  post travel policies are due to personnel forgetting the information  conveyed in new arrival briefings. Without effective reinforcement of the  information that is covered in new arrival briefings, State cannot ensure  that U.S. personnel and their families overseas have the knowledge they  need to protect themselves from transportation-related security risks.\n\n\t\tPoint of Contact\n\n\t\t\tFor more information, contact:\n\nMichael J. Courts, (202) 512-8980,  courtsm@gao.gov  compliance with all applicable security training requirements, including  mandatory HTSOS and FACT training? 2.  Does State have the capacity to train the number of U.S. personnel  required to take Diplomatic Security-provided FACT training? 3.  What steps is State taking to reinforce information covered in new  arrival briefings with U.S. personnel and their families?\nBackground  The Department of State\u2019s (State)  Bureau of Diplomatic Security  (Diplomatic Security) is  responsible for ensuring that  overseas post personnel and  their family members are  prepared for crisis situations and  evacuations.\nIssue  From October 2012 to September 2016, in response to various threats,  such as terrorism, civil unrest, and natural disasters, State evacuated staff  and family members from 23 overseas posts. During this period, several  posts\u2014such as Embassy Bujumbura in Burundi and Consulate Adana in  Turkey\u2014evacuated post staff or family members on more than one  occasion. Overseas posts undergoing evacuations generally experience  authorized departure or ordered departure of specific post staff or family  members before leading to suspended operations. To help mitigate risks,  State requires posts to create Emergency Action Plans (EAP), practice  security drills and, if an evacuation is needed, review the event in order to  learn from the experience.\nKey Findings  State requires every post to update its EAP on an annual basis. EAPs  contain information to assist overseas posts in responding to  emergencies, such as checklists of response procedures and decision  points to help determine when to evacuate post staff or family members.  In 2017, we found that, from fiscal years 2013 through 2016, a quarter of  overseas posts, on average, were late completing required annual EAP  updates. While the completion rate improved from 46 percent to 92  percent of posts completing updates on time in fiscal years 2013 and  2016, respectively, our review of a nongeneralizable,  judgmental sample  of EAPs from 20 posts that had been approved by Diplomatic Security  showed that only 2 of 20 had updated all key EAP sections. We also  found that EAPs are viewed as lengthy and cumbersome documents that  are not readily usable in emergency situations, as required by State  policy. We recommended that State take several actions to improve their  EAPs, such as developing a procedure to ensure that overseas posts  complete comprehensive, annual EAP updates on time; develop  a  monitoring and tracking process to ensure EAP updates are reviewed;  and make  the EAP more readily usable during emergency situations.  State agreed with all of our recommendations and reported that it has  started to address them. For example, State is developing a redesigned  EAP that will minimize redundancy, group content according to posts\u2019  planning and response needs, and make the EAP better organized and  more user-friendly.\nPosts are required to conduct nine types of drills each fiscal year to  prepare for crises and evacuations. In 2017, we found that, on average  for fiscal years 2013 through 2016, posts worldwide reported completing  52 percent of required annual drills; posts rated high or critical for political  violence or terrorism reported completing 44 percent of these drills.  Overall, less than 4 percent of posts reported completing all required drills  during fiscal years 2013 through 2016. As shown in figure 8 below, 78  percent of posts reported completing duck-and-cover drills, but only 36  percent of posts reported completing evacuation training drills. We  recommended that State improve the completion and reporting of  required drills. State concurred and is updating the system it uses to  report drills.\nAfter an authorized or ordered departure has terminated, State\u2019s Foreign  Affairs Handbook requires post staff to transmit an after-action report  listing any lessons learned from the experience to State headquarters. In  2017, we found that, during fiscal years 2013 through 2016, there were  31 evacuations from overseas posts; however, according to State  officials, none of the posts submitted the required lessons learned report.  These reports could have been used to modify the post\u2019s guidance on  how to best respond to an emergency situation. According to State  officials, these reports also could help staff at other posts learn about the  challenges faced by the evacuated posts, identify relevant best practices,  and prepare for potential future evacuations. We recommended that State  take steps to improve the completion and submission of required lessons  learned reports following evacuations from overseas posts. State  concurred and has developed tools to improve the process.\nMichael J. Courts, (202) 512- 8980, courtsm@gao.gov   annually update their EAPs and (2) Diplomatic Security  comprehensively reviews key EAP sections?  2.  What efforts is Diplomatic Security making to ensure that posts  complete and report completion of required crisis and evacuation drills  within required time frames?  3.  What steps is State taking to ensure that overseas posts complete  required lessons learned reports following evacuations and submit  those reports to State headquarters for analysis?\nBackground  The Department of Defense  (DOD) has long provided military  protection and support for the  security and safety of U.S.  diplomatic missions and  personnel during normal  operations and emergencies.  This support is particularly critical  in times of crisis, such as when  DOD provides security  reinforcements to facilities under  threat or assists with evacuations.  Several entities within DOD and  the Department of State (State)  prepare for and coordinate these  efforts. Memoranda of Agreement  between State and DOD  establish frameworks for  cooperation on scenarios  requiring security augmentation,  crisis response, and evacuation  for U.S. diplomatic and consular  missions overseas.\nThe September 2012 attacks in Benghazi, Libya, and the related wave of  protests and threats to U.S. missions in Africa and the Middle East  prompted a reexamination of how State and DOD collaborate to provide  emergency military protection and other support to overseas posts. The  possibility of similar threats and attacks requiring additional DOD support  at U.S. diplomatic facilities is spread across a large geographic area.  Given the chaos and complexities inherent in such acute crises, and the  possibility that unrest could affect multiple U.S. facilities at one time, the  need for DOD support will likely continue. From 2013 to 2016, 24  overseas posts experienced some level of increased threat resulting in  the evacuation of some or all U.S. personnel. While not all periods of  increased threat warrant additional DOD assistance, many do. For  instance, in 2014 alone, the U.S. military provided support for embassy  reinforcement, military-assisted departures, or evacuations, including in  South Sudan, Libya, and Iraq. (Fig. 9 shows one of the DOD units and  aircraft that may be used in evacuations or other emergencies.)\nKey Findings  As part of the reorganization following the 2012 attacks, DOD\u2014in  coordination with State\u2014increased the military resources provided to  overseas posts. According to State and DOD officials, this represented a  whole-of-government approach to countering threats to U.S. overseas  personnel and facilities. Drawing from existing U.S. Marine Corps and  U.S. Army units, DOD created three dedicated military forces to respond  to crises across Africa and the Middle East: (1) a Special Purpose Marine  Air-Ground Task Force for Crisis Response (SPMAGTF-CR) assigned to  DOD\u2019s U.S. Central Command, which supports U.S. diplomatic missions  in the Middle East; (2) a SPMAGTF-CR assigned to U.S. Africa  Command, which supports U.S. missions in North and West Africa;  and (3) the East Africa Response Force, a U.S. Army force that supports  U.S. diplomatic missions in East Africa. These forces can provide a  variety of functions, from security reinforcement during increased threats,  to military-assisted departures and evacuation support. According to DOD  officials, in 2014, U.S. Africa Command experienced some logistical  challenges associated with covering such a large geographic area, with  particular concern should multiple crises occur simultaneously.\nIn 2014, State and DOD announced several changes to the Marine  Security Guard (MSG) program, which deploys units of marines to  provide certain types of security to U.S. overseas missions. Specifically,  in coordination with State\u2019s implementation of the Benghazi Accountability  Review Board recommendations, DOD has since increased the size of  MSG detachments at all posts, with further increases at high-threat posts;  accelerated the deployment of additional detachments to other U.S.  diplomatic facilities; and created a Marine Security Guard Security  Augmentation Unit based in Quantico, Virginia, to provide additional  support on short notice. State and DOD officials reported in June 2017  that they have experienced some challenges associated with deploying  the increased MSG units, including obtaining sufficient numbers of  marines to fill the desired number of units and logistical and other support  at some posts. The agencies continue to work to add certain nonlethal  weapons to the MSG equipment set.\nIn 2015, we reported on State and DOD\u2019s post-Benghazi approach to  provide additional military support to U.S. overseas posts. While State  and DOD had updated some guidance to reflect the new approach, we  recommended that the departments more clearly define the roles,  responsibilities, and circumstances under which DOD support would be  provided and that they update related interagency and departmental  guidance. In response to our recommendations, State and DOD have  taken steps to update such interagency guidance. These steps included  interdepartmental exercises and other collaboration, which resulted in a  joint concept paper and a subsequent December 2016 State-DOD  memorandum of agreement outlining common terms, roles,  responsibilities, and scenarios under which DOD assistance may be  requested, among other things. State and DOD officials have indicated  that each department will produce further department-specific guidance in  the form of a forthcoming diplomatic cable; a DOD update to a 2013  military order; and a new, related DOD instruction. DOD officials expect to  issue the updated order by the end of fiscal year 2017 and to complete  the instruction in fiscal year 2018.\nJohn H. Pendleton, (202) 512-  3489, pendletonj@gao.gov   to ensure support to U.S. missions in crisis situations?  2.  What is the progress of increasing MSG detachments at identified  diplomatic facilities? What challenges exist to providing the personnel  or support needed for these additional units?  3.  What steps have been taken to ensure that recent State and DOD  policy and procedure updates are institutionalized and readily  available in future emergencies?\nBackground Issue  The Department of State\u2019s (State) Diplomatic Security and overseas posts have processes for  Bureau of Diplomatic Security communicating threat information to post personnel (U.S. employees and  (Diplomatic Security) is locally employed staff) as well as U.S. citizens in country. However, these  responsible for disseminating populations do not always receive important threat information in a timely  threat information to posts. At manner. Diplomatic Security\u2019s Office of Intelligence and Threat Analysis,  posts, the Emergency Action based at State headquarters, analyzes threat information from multiple  Committee (EAC), which includes sources, including the U.S. Intelligence Community, and shares the results  the Regional Security Officer of its analysis with posts\u2019 RSOs via cables and other reports. Before  (RSO) and Consular Officer, analyzing the information, Diplomatic Security sends an initial notification  among other subject matter to posts, according to bureau officials. In addition, posts collect, analyze,  experts, disseminates threat and report threat information to headquarters for further distribution. At  information to post personnel, as posts, RSOs, at the direction of the EAC, may adjust the post\u2019s security  appropriate. In addition, consular posture and disseminate threat information to post personnel. In addition,  officers are responsible for if State shares information with the official U.S. community, its policy is to  disseminating information to the make the same or similar information available to the nonofficial U.S.  nonofficial U.S. community\u2014U.S. community if the threat applies to both. (See fig. 10 for a schematic of  citizens living in or traveling State\u2019s threat information dissemination process.)  through the affected area.\nKey Findings  State has taken steps to improve RSOs\u2019 reporting of terrorism-related threat  information to headquarters. In June 2015, we found that RSOs at some  posts designated critical for terrorism were not complying fully with directions  from the Secretary of State to use terrorist reporting cables to report all  terrorism-related incidents or threats to ensure proper handling and  dissemination of the information. For example, we found that in some cases,  terrorism-related incidents were not reported in required terrorist reporting  cables. We concluded that without comprehensive and accurate reporting,  State may lack assurance that it received complete information about  terrorist threats that could help prevent and mitigate such threats. We  recommended that Diplomatic Security take steps to remind RSOs and posts   of the critical importance of using the proper type of cable to report all  terrorism-related threats. In December 2015, State sent guidance to all  posts specifying that terrorism-related threats must be reported through  terrorist reporting cables to ensure appropriate dissemination of the  information. Further, in January 2017, State provided reporting  instructions to RSOs to help ensure the timely and accurate reporting of  all security-related information through the correct reporting channels.\nDiplomatic Security uses various methods to communicate threat  information to overseas post personnel\u2014both U.S. and locally employed  staff. However, in our 2016 report on transportation security, we reported  that post personnel do not always receive threat information in time to  avoid potential threats. We found that several factors can lead to untimely  receipt of transportation-related threat information. We recommended that  State address these factors. First, some RSOs reported that they send  security notices exclusively to state.gov e-mail addresses; however, not  all post personnel have state.gov e-mail addresses. In one case, this  resulted in post personnel traveling through a prohibited area and an  embassy vehicle being attacked with rocks and seriously damaged.  Second, limited guidance existed for RSOs on how to promote timely  communication of threat information. Third, RSOs and other staff at some  posts mistakenly believed that RSOs cannot share threat information with  the official U.S. community until consular officials received approval from  State to share the same information with the nonofficial U.S. community\u2014 a clearance process that can take as long as 8 hours. State reported that  it is reviewing the option to forward e-mails outside its system. It also  reported that it is developing a two-way emergency notification system  that would provide a redundant method for distributing messages during  crises. In addition, State updated its policy manual to clarify that RSOs\u2019  sharing of threat information should not be delayed by the clearance  process, according to Diplomatic Security officials.\nTo ensure that overseas posts can disseminate information to U.S.  citizens in country in the event of an emergency, disaster, or threat, State  requires posts to annually conduct a drill of the consular warden system.  The consular warden system is a pyramidal contact system designed to  reach the U.S. citizen population. However, we found in 2017 that, on  average between fiscal years 2013 and 2016, 78 percent of overseas  posts did not report the completion of required consular warden system  drills. We concluded that this gap in State\u2019s crisis and evacuation  preparedness creates a risk that U.S. citizens in country may be  insufficiently warned about emergency situations. We recommended that  State take steps to improve the completion and reporting of required  drills, and State concurred, noting it is forming a working group to review  its policies.\nMichael J. Courts, (202) 512- 8980, courtsm@gao.gov  nonofficial U.S. community been in past emergencies?  2.  What is the status of State\u2019s plan to use new technology to  disseminate information to U.S. personnel and U.S. citizens  overseas?   3.  What steps has State taken to ensure that posts complete the annual  tests of the consular warden system?\nBackground  The Department of State\u2019s (State)  Counterintelligence Division\u2014 under the Office of Investigations  and Counterintelligence in the  Bureau of Diplomatic Security  (Diplomatic Security)\u2014is  responsible for overseeing  State\u2019s counterintelligence efforts,  including assisting Regional  Security Officers (RSO) with  implementation at overseas  posts.\nForeign intelligence entities from host nations and third parties are  motivated to collect information on a variety of sensitive topics of national  importance, including intelligence, defense, and economic information.  These entities may attempt to collect information through the use of  sophisticated overt, covert, and clandestine means, including human  intelligence collection. Because State operates diplomatic posts in many  countries, State and other U.S. agency employees at these posts\u2014and  their family members\u2014can be targeted by host governments and other  entities. National counterintelligence guidance requires that State and  other executive agencies implement programs to counter the intelligence  threat to U.S. national security and interests by protecting personnel and  information.\nKey Findings  State has established several measures to counter the human  intelligence threat at overseas posts. Those measures include  (1) requiring all State and other agency personnel serving at these posts  to report contacts with foreign nationals, particularly those from countries  with critical human intelligence posts; (2) prescreening State personnel  assigned to certain posts against 13 criteria designed to identify  vulnerabilities and directing other agencies to prescreen their personnel;  and (3) briefing personnel about what to expect when working and living  in potentially hostile intelligence environments. While State prepares  personnel at all posts to be aware of human intelligence threats, it uses  enhanced counterintelligence strategies for personnel assigned to posts  designated as \u201ccritical threat\u201d for human intelligence. For example,  personnel at critical threat posts receive counterintelligence briefings  before departure and annually while serving at these posts. (See fig. 11.)\nDiplomatic Security assesses counterintelligence efforts at overseas  posts through Counterintelligence Post Surveys and Post Security  Program Reviews, making recommendations to improve any gaps  identified in countermeasures. In addition, as part of a government-wide  effort, the Office of the Director of National Intelligence evaluates State\u2019s  counterintelligence activities to identify gaps and make recommendations  to strengthen State\u2019s counterintelligence program.\nMichael J. Courts, (202) 512- 8980, courtsm@gao.gov  by State domestically and overseas changed in recent years?   2.  How does State ensure that personnel are prepared to live and work  at posts facing a high or critical human intelligence threat?  3.  How does State evaluate the effectiveness of its human intelligence  countermeasures domestically and at overseas posts? How does  State adjust its countermeasures, if warranted?\nBackground  The Department of State (State)  created its information security  program to address requirements  in both the Omnibus Diplomatic  Security and Antiterrorism Act of  1986 and the Federal Information  Security Modernization Act of  2014 (FISMA). State\u2019s Bureaus of  Diplomatic Security (Diplomatic  Security) and Information  Resource Management (IRM)  share responsibility for  implementing the information  security responsibilities in these  laws. In May 2017, Diplomatic  Security created the new  Directorate for Cyber and  Technology Security to  consolidate relevant elements  from other directorates.\nIssue  Since 1997, GAO has designated federal information security as a  government-wide high-risk area and in 2003 expanded this area to  include computerized systems supporting the nation\u2019s critical  infrastructure. The number of information security incidents reported by  federal agencies\u2014including State\u2014increased from 5,503 in fiscal year  2006 to 77,183 in fiscal year 2015. Cyberattacks forced State to shut  down its unclassified e-mail system and parts of its public website in both  2014 and 2015 after finding evidence that its systems had been  breached. Cyber-based threats to federal systems and information come  from unintentional sources, such as natural disasters, coding errors, and  careless employees, or from intentional sources, such as disgruntled  insiders, hackers, or hostile nations. State\u2019s outdated technology makes it  increasingly difficult to ensure security. In addition, State\u2019s information  security program is split between two bureaus, each responsible for  aspects of the program. Further, State makes extensive use of  contractors to perform information security functions such as the  monitoring and assessment of systems. Protecting those systems and  information from unauthorized disclosure or alteration is particularly  important at State, where inappropriate disclosure could cause  catastrophic harm to the nation\u2019s diplomacy and security.\nKey Findings  In 2016, we surveyed 24 federal agencies\u2014including State\u2014to identify  the sources of malicious attacks on their high-impact systems\u2014any  system that holds sensitive information, the loss of which could cause  individuals, the government, or the nation catastrophic harm.  Consequently, these systems warrant increased security to protect them.  Eighteen of these 24 agencies\u2014including State\u2014identified cyberattacks  originating from nation states as the most serious and frequent threat to  the security of their systems. They identified e-mail cyberattacks as the  most serious and frequent delivery method. We made recommendations  to the Office of Management and Budget (OMB) to improve security over  federal systems, including those at State.\nState relies on several aging and obsolete technology systems, which  require significant resources to operate and create challenges to ensuring  information security. We found that State spent about 87 percent of its  information technology budget on operating and maintaining its computer  systems in 2015. This segment of State\u2019s technology budget increased by  approximately $109 million between 2010 and 2015. A State official  stated that the increase is largely due to the cost of maintaining the  infrastructure, including meeting security requirements. For example,  three of State\u2019s visa systems were more than 20 years old. The software  for one of these systems is no longer supported by the vendor, creating   challenges related to information security. State is planning to upgrade  the software to a newer version that also is not supported by the vendor.  As a result, we recommended that State identify and plan to modernize or  replace legacy systems, consistent with OMB guidance.\nFISMA directs State and other agencies to designate a Chief Information  Security Officer (CISO)\u2014who, at State, reports to the Chief Information  Officer in IRM\u2014to develop, document, and implement a department-wide  information security program that protects the agency from cyberattacks.  In a 2016 report, we evaluated 24 federal agencies to determine whether  they followed FISMA and other requirements defining the CISO\u2019s  responsibilities. Twenty-two of the 24 agencies\u2014including State\u2014had  defined almost all CISO responsibilities properly. However, we found that  State had assigned responsibility for responding to information security  incidents\u2014a FISMA-designated CISO responsibility\u2014to Diplomatic  Security without also defining the CISO\u2019s role in that activity. We  concluded that not having a defined role may limit the CISO\u2019s ability to  effectively oversee State\u2019s information security incident response  process. We recommended that State define the CISO\u2019s role in  department policy for ensuring that State had procedures for incident  detection, response, and reporting. State concurred with the  recommendation and noted that IRM and Diplomatic Security coordinate  communications for the incident response process.\nGregory C. Wilshusen, (202)  512-6244, wilshuseng@gao.gov  contractors, what unique information security challenges, if any, does  it face? How does it manage its global cybersecurity program?  2.  Given the rapidly changing nature of technology, how does State  assess and address threats to its systems and users from changing  cyber threats?  3.  How will the new Directorate for Cyber and Technology Security  improve State\u2019s capability to address cybersecurity issues?   4.  To what extent, if any, does assigning CISO responsibilities to  multiple bureaus increase State\u2019s risk for duplication, overlap, or  fragmentation of information security responsibilities?\nBackground  The Secretary of State is  generally required by law to  convene Accountability Review  Boards (ARB) in cases of serious  injury, loss of life, or significant  destruction of property involving  U.S. diplomatic missions or  personnel abroad, and in any  case of a serious breach of  security involving intelligence  activities of a foreign government  directed at a mission abroad.  State has convened 12 ARBs  since 1998. ARBs are  responsible for reporting their  findings about the circumstances  of the attack and making  recommendations.\nIssue  On September 11, 2012, the acquired facilities at the U.S. Special  Mission in Benghazi, Libya, came under attack (see fig. 13). Tragically,  four U.S. officials were killed, including the U.S. Ambassador. In response  to the attack, the Department of State (State), working with the  Department of Defense, formed Interagency Security Assessment Teams  to evaluate the security at 19 dangerous posts. Those teams made a  number of recommendations to improve physical and procedural security  at each post. In addition, an ARB was convened in response to the  Benghazi attack; it resulted in 29 recommendations, including several  concerning how State manages risk at dangerous posts. Furthermore,  two of State\u2019s actions resulting from that ARB led to additional reports  that included more recommendations.\nKey Findings  The Interagency Security Assessment Teams assessed all facilities at the  19 posts for any security vulnerabilities\u2014physical or procedural. Their  assessments resulted in 287 recommendations including for State to  install physical security upgrades, improve security procedures, and  construct or acquire new or replacement facilities. State officials told us  that State immediately began implementing the recommendations. In  addition, State created the new High Threat Programs Directorate within  its Bureau of Diplomatic Security (Diplomatic Security) to ensure that  those posts facing the greatest risk receive additional, security-related  attention. As of June 2017, State reported having addressed 268 of the  287 recommendations.\nIn December 2012, the ARB that State convened to investigate the  Benghazi attack released the report of its investigation. The ARB made  23 unclassified recommendations in six areas: (1) overarching security  considerations; (2) staffing dangerous posts; (3) training and awareness;  (4) security and fire safety equipment; (5) intelligence and threat analysis;  and (6) personnel accountability. In addition, the ARB, according to State,  made six classified recommendations. State accepted   all 29 of the ARB\u2019s recommendations and pledged to fully implement  them. For example, in response to the ARB, State expanded the  mandatory Foreign Affairs Counter Threat training requirement to all  dangerous posts (and, subsequently, to all posts by 2019). As of June  2017, State reported having addressed all but three of the ARB\u2019s  recommendations.\nIn response to the Benghazi ARB\u2019s second recommendation, State  established a panel to evaluate the organization and management of  Diplomatic Security. In May 2013, the panel provided its report to State. It  made 35 recommendations in three areas: (1) organization, (2) training,  and (3) management. State accepted 29 of the panel\u2019s 35  recommendations. For instance, State did not accept a recommendation  for Diplomatic Security to establish a chief of staff position at the GS-15  level within its Principal Deputy Assistant Secretary\u2019s office, noting that no  other bureau has an equivalent position. As of June 2017, State reported  having addressed 28 of the 29 recommendations it accepted. For  example, as a result of the panel\u2019s report, Diplomatic Security is  undertaking a strategic review of its staffing.\nIn response to the Benghazi ARB\u2019s fourth recommendation, State  established a panel to help Diplomatic Security identify best practices for  operating in dangerous environments. The panel provided its report to  State in August 2013. It made 40 recommendations in 12 areas, including  organization and management; program criticality and acceptable risk;  lessons learned; training and human resources; intelligence, threat  analysis, and security assessments; and host nations and guard forces\u2019  capability enhancement, among others. State accepted 38 of the panel\u2019s  40 recommendations. State did not accept the panel\u2019s first  recommendation, that it establish an Under Secretary for Diplomatic  Security. It asserted that doing so would compound the \u201cstove-piping\u201d that  the ARB and others reported in the wake of the Benghazi attack. In  addition, State did not accept the panel\u2019s 13th recommendation, which  stated that waivers to established security standards should only be  provided subsequent to the implementation of all mitigating measures.  State noted that in time-sensitive situations, exceptions might be  appropriate when some mitigating measures are in place. As of June  2017, State reported having addressed 36 of the 38 recommendations it  accepted. For example, as a result of the panel\u2019s report, Diplomatic  Security created a Strategic Advisory Unit within Diplomatic Security to  advise and perform ad hoc analysis for the Assistant Secretary.\nMichael J. Courts, (202) 512- 8980, courtsm@gao.gov  recommendations?  2.  What effect, if any, has implementing the Benghazi-related  recommendations had on the security of diplomatic facilities,  personnel, and information?  3.  Since 1998, 12 attacks have resulted in the formation of ARBs. What  is the status of all recommendations made by the 12 ARBs?\n\nAppendix I: Scope and Methodology\n\nThis special publication is largely based on previously published GAO  work. To generate a list of possible key issues, we reviewed past  products concerning the Department of State\u2019s (State) Bureau of  Diplomatic Security (Diplomatic Security), by GAO, State\u2019s Inspector  General, and the Congressional Research Service. Working with GAO\u2019s  subject matter experts, we narrowed the list of issues and identified  potential oversight questions. We interviewed cognizant agency officials  in Washington, D.C., and Arlington, Virginia, from State\u2014including from  the Bureaus of Management, Diplomatic Security, Overseas Buildings  Operations (OBO), and Information Resource Management\u2014the  Department of Defense, and the U.S. Agency for International  Development. We used these interviews to refine our key issues, gain  updated information and data, follow up on actions taken regarding our  past recommendations, and identify relevant lessons learned. We also  worked with the officials to determine what portions of our past classified  or restricted work could be presented in a public product. We then  synthesized this information to provide a balanced and comprehensive  overview for each issue and to formulate oversight questions.\nWe updated relevant data when possible and performed additional data  reliability assessments when necessary. These additional assessments  were conducted only on data that we had not previously reported; all  other data were assessed as part of our work for our previously  published reports. We assessed the reliability of various types of data\u2014 funding, staffing, and training\u2014from Diplomatic Security and, as  appropriate, its partner agencies. Specifically, we assessed the reliability  of the following data:\nDiplomatic Security bureau managed funds, from fiscal years 2010  to 2016. (We used previously reported data for fiscal years 1998 to  2007, and updated previously reported data for fiscal years 2008 to  2009.)\nDedicated allocations to Diplomatic Security and OBO for physical  security at diplomatic facilities for fiscal years 2015 to 2016. (We  used previously reported data for fiscal years 2009 to 2014.)\nDiplomatic Security staffing numbers for its workforce of direct-hire  employees, other U.S. government support staff, and contractors.  (We used previously reported data for 1998, 2008, and 2011.)\nNumber of students who completed Diplomatic Security-provided  Foreign Affairs Counter Threat training for fiscal years 2011 to 2016.  (We used previously reported data for fiscal years 2006 to 2010.)\nTo assess the reliability of the data, we interviewed cognizant officials  about how the data were produced and their opinion of the quality of the  data, specifically the data\u2019s completeness, accuracy, and comparability  to previously reported data. We also worked with the cognizant officials  to identify any limitations associated with the data and to mitigate those  issues or note these limitations in our report, as appropriate. In addition,  we updated previously reported data on the percentage of Diplomatic  Security employees who do not speak and read foreign languages at the  level required by their positions and interviewed knowledgeable officials  to corroborate and clarify the data. We determined that the data  mentioned above were sufficiently reliable for our purposes.\nWe prepared this report under the authority of the Comptroller General to  conduct work on his initiative because of broad congressional interest in  the oversight and accountability of providing security to U.S. personnel  working at diplomatic missions and to assist Congress with its oversight  responsibilities.\nWe conducted this performance audit from January 2017 to September  2017 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.\n\nAppendix II: Attacks against U.S. Diplomatic Missions and Subsequent Legal and Policy Changes\n\nU.S. diplomatic missions have faced numerous attacks that were followed  by legal and policy changes. Between 1998 and 2016, there were 419  attacks against U.S. diplomatic interests, according to the Department of  State\u2019s Bureau of Diplomatic Security. Several of the deadly attacks  against U.S. personnel and facilities overseas were followed by new  legislation, independent reviews with corresponding recommendations, or  both. For example, the Omnibus Diplomatic Security and Antiterrorism  Act of 1986, which followed the attacks against the U.S. embassy in  Beirut, Lebanon, in 1983, established the Bureau of Diplomatic Security  and set forth its responsibility for post security and protective functions  abroad. The Secure Embassy Construction and Counterterrorism Act of  1999, which followed the Africa embassy bombings of 1998, set  requirements for colocation of all U.S. government personnel at an  overseas diplomatic post (except those under the command of an area  military commander) and for a 100-foot perimeter setback for all new U.S.  diplomatic facilities.\nIn addition, the Secretary of State is generally required by law to convene  an Accountability Review Board (ARB) following incidents that result in  serious injury, loss of life, or significant destruction of property involving  U.S. diplomatic missions or personnel abroad. An ARB is responsible for  reporting its findings about the circumstances of an attack and making  recommendations as appropriate. Since 1998, 12 attacks have resulted in  the formation of an ARB, the most recent of which was formed in  response to the 2012 attacks in Benghazi. (See fig. 14 for a time line of  selected attacks and related laws and reports.)\n\nAppendix III: Diplomatic Security Responsibilities, Components, and Collaboration with Other U.S. Agencies\n\nThe Department of State\u2019s (State) Bureau of Diplomatic Security  (Diplomatic Security) has responsibilities set forth in State\u2019s Foreign  Affairs Manual; to help meet its responsibilities, the bureau relies on  multiple organizational components within State. (Fig. 15 highlights State  offices with key security responsibilities.) State also collaborates with  other U.S. government agencies to secure U.S. missions overseas.\n\n\tDiplomatic Security- Related Responsibilities\n\nAs established by the 1961 Vienna Convention on Diplomatic Relations,  host country governments are required to protect the diplomatic  personnel and missions of foreign governments. More than two decades  later, following an attack against the U.S. embassy in Beirut, Lebanon,  Congress enacted the Omnibus Diplomatic Security and Antiterrorism Act  of 1986 to provide enhanced diplomatic security and to combat  international terrorism. The act assigns the Secretary of State  responsibility for providing security for all diplomatic operations, in  consultation with the heads of other federal agencies that have personnel  or missions abroad. The act also created Diplomatic Security to provide a  broad range of security and protective functions internationally and  domestically. In addition, the act specifies that other federal agencies will  cooperate with State to fulfill all security operations of a diplomatic nature.\n\n\tDiplomatic Security Components\n\nThe Bureau of Diplomatic Security is State\u2019s security and law  enforcement arm. The bureau\u2019s eight operational directorates\u2014listed  below\u2014are collectively known as the Diplomatic Security Service. In  addition, Diplomatic Security has three administrative offices that assist  the mission: Executive Office, Strategic Advisory Unit, and Public Affairs.\nInternational Programs: Directs the formulation, planning,  coordination, policy development, and implementation of security  programs that protect U.S. diplomatic missions for most posts.  Manages high-profile security programs such as the Embassy Local  Guard Program, Emergency Action Planning, the Worldwide  Protective Services Program, Surveillance Detection, and the Marine  Security Guard Program.\nHigh Threat Programs: Directs the formulation, planning, coordination,  policy development, and implementation of security programs that  protect U.S. diplomatic missions at high-threat, high-risk posts.  Manages security programs to include personnel recovery, tactical  and strategic planning, special operations, evacuation operations, and  State\u2019s responses to international crises at high-threat, high-risk  posts. Diplomatic Security created this directorate following the 2012  attack on Benghazi to ensure that those posts facing the greatest  risk\u2014now designated as high-threat, high-risk posts\u2014received  additional, security-related attention.\nDomestic Operations: Oversees criminal investigations domestically  and abroad related to State personnel, facilities, and visiting foreign  dignitaries, including passport and visa violations, counterintelligence  investigations, and use of force incidents involving State personnel.  Oversees the protection of the Secretary of State, the U.S.  Ambassador to the United Nations, foreign dignitaries, and other  persons of interest.\nTraining: Formulates and implements all security and law enforcement  training programs and policies for Diplomatic Security. Directs the  formulation, coordination, and implementation of security and law  enforcement training programs that promote the professional  development of Diplomatic Security personnel. Oversees specialized  security training at overseas posts on a regular and emergency basis  and provides emergency security support to posts abroad during  periods of high threat, crisis, or natural disaster.\nThreat Investigations and Analysis: Directs, coordinates, and  conducts the analysis of terrorist threats and hostile activities directed  against U.S. government personnel, facilities, and interests abroad.  Conducts protective intelligence investigations, coordinates foreign- government and private-sector requests for assistance relating to  terrorist incidents, and directs the operations of the Diplomatic  Security Command Center and the Overseas Security Advisory  Council.\nSecurity Infrastructure: Manages all matters relating to security  infrastructure in Diplomatic Security functional areas of personnel  security and suitability and insider threats. Formulates strategic  operational planning, priorities, and funding for security infrastructure  operations.\nCountermeasures: Manages, plans, and develops policy for worldwide  physical and technical security countermeasures programs.  Represents State in negotiations with other federal agencies on  issues regarding physical and technical security countermeasures.  Directs the offices of Physical Security Programs, Security  Technology, and Diplomatic Courier Service.\nCyber and Technology Security: Manages cyber and technical  elements of State\u2019s security program. In May 2017, Diplomatic  Security created this new directorate by consolidating cyber  technology and investigative support elements from other  directorates. The goal is to increase State\u2019s ability to enable secure  innovation in areas such as e-mail messaging services, Wi-Fi, cloud  services, mobile communications, and social media.\n\n\tOther State Bureaus and Offices Collaborate with Diplomatic Security\n\nTo complete parts of its mission, Diplomatic Security collaborates with  other State entities, most notably the overseas missions and the Bureaus  of Overseas Buildings Operations (OBO) and Information Resource  Management (IRM).\nOverseas Missions: At posts, the Chief of Mission (Ambassador or  Principal Officer), is ultimately responsible for the security of facilities,  information, and all personnel under chief-of-mission authority. He or  she is assisted by Diplomatic Security, which is represented at post by  a head special agent known as the Regional Security Officer (RSO).  RSOs\u2014working with assistant RSOs and other security personnel\u2014 are responsible for implementing a wide range of duties such as  protecting personnel and property, documenting threats and  residential vulnerabilities, and identifying possible mitigation efforts to  address those vulnerabilities. The overseas missions also play a role  in setting post-specific security measures and funding some physical  security upgrades, with approval from Diplomatic Security. In addition,  each post has an Emergency Action Committee (EAC) that provides  guidance in preparing for and responding to potential changes in risk  that might affect the safety and security of the post and the American  citizens in country. The EAC may include the Ambassador, Deputy  Chief of Mission, Principal Officer, Defense Attach\u00e9, Political Officer,  Economic Officer, RSO, Management Officer, Consular Officer, Public  Affairs Officer, Human Resources Officer, Medical Officer, U.S.  Agency for International Development (USAID) Mission Director,  Community Liaison Office Coordinator, and others, including non- State officials, as appropriate. Further, as the 2005 Iraq Accountability  Review Board (ARB) noted, all mission personnel bear \u201cpersonal  responsibility\u201d for their own and others\u2019 security.\nOverseas Buildings Operations (OBO): OBO manages the acquisition,  design, construction, maintenance, and sale of U.S. government  diplomatic property abroad. Through the Capital Security Construction  Program, OBO replaces and constructs diplomatic facilities to provide  U.S. embassies and consulates with safe, secure, functional, and  modern buildings. In addition, OBO tracks information on State\u2019s real  properties, including residences; provides funding for certain  residential security upgrades; and funds and manages the Soft  Targets Program, State\u2019s program for providing security upgrades to  schools attended by U.S. government dependents and off-compound  employee association facilities.\nInformation Resource Management (IRM): State\u2019s Chief Information  Officer leads IRM to provide the information technology and services  State needs to carry out its foreign policy mission. The Federal  Information Security Modernization Act of 2014 (FISMA) directs the  heads of federal agencies, including State, to designate a Chief  Information Security Officer to develop, document, and implement a  department-wide information security program.\nIn addition, the Office of Management Policy, Rightsizing, and Innovation  (M\/PRI) tracks State\u2019s implementation of ARB recommendations.  Diplomatic Security, OBO, IRM, and M\/PRI all report to the Under  Secretary for Management.\n\n\tOther U.S. Agencies Also Play a Role in Securing U.S. Missions Overseas\n\nDiplomatic Security coordinates its work overseas with a number of U.S.  government entities and agencies:\nThe Overseas Security Policy Board (OSPB) develops security  standards for executive agencies working overseas. Chaired by the  Assistant Secretary for Diplomatic Security, OSPB includes  representatives from approximately 20 U.S. agencies with personnel  overseas, including intelligence, foreign affairs, and other agencies.\nState incorporates the OSPB\u2019s physical security standards in the  Foreign Affairs Handbooks. Diplomatic facilities overseas\u2014whether  permanent, interim, or temporary\u2014and residences are required to  meet the standards applicable to them. The OSPB standards vary by  facility type, date of construction or acquisition, and threat level. If  facilities do not meet all applicable standards, posts are required to  request waivers, exceptions, or both.\nThe Department of Defense (DOD) has long provided military  protection and support for the security and safety of U.S. diplomatic  missions and personnel during normal operations and emergencies.  For example, DOD provides Marine Security Guards at some U.S.  diplomatic missions to help protect U.S. personnel, classified material,  and property. DOD support is particularly critical in times of crisis,  such as when DOD provides security reinforcements to facilities under  threat or assists with evacuations. Several entities within State, DOD,  and the military branches prepare for and coordinate these efforts.  Memoranda of Agreement between State and DOD establish  frameworks for cooperation on scenarios requiring security  augmentation, crisis response, and evacuation for U.S. diplomatic and  consular missions overseas.\nUSAID maintains its own Office of Security, which is responsible for  the physical security of its facilities and coordination with Diplomatic  Security.\nOther agencies operating overseas\u2014such as the Departments of  Commerce or the Treasury\u2014may also have security offices, but none  of them operating under chief-of-mission authority maintain their own  facilities outside of Diplomatic Security\u2019s responsibility.\n\nAppendix IV: Bureau of Diplomatic Security Staffing Levels\n\nThe Department of State\u2019s Bureau of Diplomatic Security (Diplomatic  Security) employs a broad workforce of over 51,000 individuals to carry  out its mission and activities. Its workforce includes direct-hire security  specialists and management support staff, military support, and  contractors. See table 2 for a description of each position and a  comparison of Diplomatic Security staffing levels in fiscal years 2008,  2011, and 2017.\n\nAppendix V: GAO Recommendations regarding the Bureau of Diplomatic Security\n\nOver the course of our work on the Department of State\u2019s (State) Bureau  of Diplomatic Security (Diplomatic Security) and related efforts, we have  identified conditions that affect the success of its programs and  recommended a range of improvements that should be considered in  program planning and implementation. For example, we have made  recommendations on the need for State to address gaps in its security- related activities, standards, and policies, such as developing a process  to ensure that mitigating steps agreed to in granting waivers and  exceptions for older, acquired, and temporary work facilities have been  implemented. We have also made recommendations on the need for  improved information sharing between Diplomatic Security directorates,  such as sharing information with each other on the residential security  exceptions they have processed to help provide Diplomatic Security with  a clearer picture of security vulnerabilities at residences and enable it to  make better risk management decisions. State and its partner agencies  have generally concurred with our recommendations and have taken  steps to address a number of them, several of which are noted in the  enclosures. In addition, we have identified several existing conditions\u2014 such as gaps in State oversight of personnel compliance with mandatory  security training and many overseas diplomatic residences not meeting all  applicable security standards\u2014that continue to challenge the U.S.  government\u2019s ability to protect its people, property, and information  around the world.\nIn letters addressed to the Secretary of State, we identified which of these  recommendations we believe should be given high priority for  implementation. As of August 14, 2017, State had 27 open  recommendations that have been deemed by GAO as being among the  highest priorities for implementation. Of the 27 priority recommendations,  24 are listed below (see table 3) and are related to this report in four  areas, as follows:\nSecurity of overseas personnel. Fully implementing GAO\u2019s priority  recommendations on personnel security, such as those related to the  Foreign Affairs Counter Threat (FACT) training, would help ensure  that State personnel are prepared to operate in dangerous situations.\nSecurity of overseas facilities. Fully implementing GAO\u2019s priority  recommendations on physical security at overseas posts, such as  those regarding risk management associated with physical security of  diplomatic facilities, will improve the safety and security of personnel  serving overseas, particularly in high-threat locations.\nTransportation security. Fully implementing recommendations related  to transportation security would improve State\u2019s efforts to manage  transportation-related security risks overseas.\nInformation security. Fully implementing GAO\u2019s priority  recommendation regarding obsolete computer systems will improve  State\u2019s ability to secure its information technology systems and  access to potentially sensitive information.\nGAO will continue to monitor State\u2019s progress in implementing these  recommendations and will update their status on the GAO website at  http:\/\/www.gao.gov.\n\nAppendix VI: Related GAO Products\n\nThis appendix provides a list of recent GAO products related to each  enclosure. Copies of most products can be found on our website:  http:\/\/www.gao.gov\/.\nGAO also has done work on some of the key issues identified in the  enclosures that resulted in Sensitive But Unclassified or Classified  products. (Report numbers with an SU suffix are Sensitive But  Unclassified, and those with a C suffix are Classified.) Sensitive But  Unclassified and Classified reports are available to personnel with the  proper clearance and need-to-know, upon request. For a copy of a  Sensitive But Unclassified or Classified report, please call or e-mail the  point of contact listed in the related enclosure.\n\nEnclosure I: Diplomatic Security Funding\n\nState Department: Diplomatic Security Challenges. GAO-13-191T.  Washington, D.C.: November 15, 2012.\nState Department: Diplomatic Security's Recent Growth Warrants  Strategic Review. GAO-10-156. Washington, D.C.: November 12, 2009.\n\nEnclosure II: Diplomatic Security Staffing Challenges\n\nDepartment of State: Foreign Language Proficiency Has Improved, but  Efforts to Reduce Gaps Need Evaluation. GAO-17-318. Washington,  D.C.: March 22, 2017.\nState Department: Diplomatic Security Challenges. GAO-13-191T.  Washington, D.C.: November 15, 2012.\nState Department: Diplomatic Security's Recent Growth Warrants  Strategic Review. GAO-10-156. Washington, D.C.: November 12, 2009.\n\nEnclosure III: Physical Security of U.S. Diplomatic Facilities\n\nEmbassy Construction: State Needs to Better Measure Performance of  Its New Approach. GAO-17-296. Washington, D.C.: March 16, 2017.\nAfghanistan: Embassy Construction Cost and Schedule Have Increased,  and Further Facilities Planning Is Needed. GAO-15-410. Washington,  D.C.: May 19, 2015.\nDiplomatic Security: Overseas Facilities May Face Greater Risks Due to  Gaps in Security-Related Activities, Standards, and Policies.  GAO-14-655. Washington, D.C.: June 25, 2014.\nDiplomatic Security: Overseas Facilities May Face Greater Risks Due to  Gaps in Security-Related Activities, Standards, and Policies.  GAO-14-380SU. Washington, D.C.: June 5, 2014.\n\nEnclosure IV: Physical Security of Diplomatic Residences and Other Soft Targets\n\nDiplomatic Security: State Department Should Better Manage Risks to  Residences and Other Soft Targets Overseas. GAO-15-700. Washington,  D.C.: July 9, 2015.\nDiplomatic Security: State Department Should Better Manage Risks to  Residences and Other Soft Targets Overseas. GAO-15-512SU.  Washington, D.C.: June 18, 2015.\n\nEnclosure V: Security Training Compliance\n\nDiplomatic Security: State Should Enhance Its Management of  Transportation-Related Risks to Overseas U.S. Personnel. GAO-17-124.  Washington, D.C.: October 4, 2016.\nDiplomatic Security: State Should Enhance Management of  Transportation-Related Risks to Overseas U.S. Personnel.  GAO-16-615SU. Washington, D.C.: September 9, 2016.\nDiplomatic Security: Options for Locating a Consolidated Training Facility.  GAO-16-139T. Washington, D.C.: October 8, 2015.\nDiplomatic Security: Options for Locating a Consolidated Training Facility.  GAO-15-808R. Washington, D.C.: September 9, 2015.\nCountering Overseas Threats: Gaps in State Department Management of  Security Training May Increase Risk to U.S. Personnel. GAO-14-360.  Washington, D.C.: March 10, 2014.\nCountering Overseas Threats: Gaps in State Department Management of  Security Training May Increase Risk to U.S. Personnel in High-Threat  Countries. GAO-14-185SU. Washington, D.C.: February 26, 2014.\nDiplomatic Security: Expanded Missions and Inadequate Facilities Pose  Critical Challenges to Training Efforts. GAO-11-460. Washington, D.C.:  June 1, 2011.\n\nEnclosure VI: Embassy Crisis and Evacuation Preparedness\n\nEmbassy Evacuations: State Should Take Steps to Improve Emergency  Preparedness. GAO-17-714. Washington, D.C.: July 17, 2017.\nEmbassy Evacuations: State Should Take Steps to Improve Emergency  Preparedness. GAO-17-560SU. Washington, D.C.: June 28, 2017.\n\nEnclosure VII: Department of Defense Support to U.S. Diplomatic Missions\n\nInteragency Coordination: DOD and State Need to Clarify DOD Roles and  Responsibilities to Protect U.S. Personnel and Facilities Overseas in  High-Threat Areas. GAO-15-219C. Washington, D.C.: March 4, 2015.\n\nEnclosure VIII: Dissemination of Threat Information\n\nEmbassy Evacuations: State Should Take Steps to Improve Emergency  Preparedness. GAO-17-714. Washington, D.C.: July 17, 2017.\nEmbassy Evacuations: State Should Take Steps to Improve Emergency  Preparedness. GAO-17-560SU. Washington, D.C.: June 28, 2017.\nDiplomatic Security: State Should Enhance Its Management of  Transportation-Related Risks to Overseas U.S. Personnel. GAO-17-124.  Washington, D.C.: October 4, 2016.\nDiplomatic Security: State Should Enhance Management of  Transportation-Related Risks to Overseas U.S. Personnel.  GAO-16-615SU. Washington, D.C.: September 9, 2016.\nCombating Terrorism: Steps Taken to Mitigate Threats to Locally Hired  Staff, but State Department Could Improve Reporting on Terrorist Threats.  GAO-15-458SU. Washington, D.C.: June 17, 2015.\n\nEnclosure X: Ensuring Information Security\n\nFederal Chief Information Security Officers: Opportunities Exist to  Improve Roles and Address Challenges to Authority. GAO-16-686.  Washington, D.C.: August 26, 2016.\nInformation Technology: Federal Agencies Need to Address Aging  Legacy Systems. GAO-16-468. Washington, D.C.: May 25, 2016.\nInformation Security: Agencies Need to Improve Controls over Selected  High-Impact Systems. GAO-16-501. Washington, D.C.: May 18, 2016.\nFederal Information Security: Agencies Need to Correct Weaknesses and  Fully Implement Security Programs. GAO-15-714. Washington, D.C.:  September 29, 2015.\nInformation Security: Agencies Need to Improve Oversight of Contractor  Controls. GAO-14-612. Washington, D.C.: August 8, 2014.\nState Department Telecommunications: Information on Vendors and  Cyber-Threat Nations. GAO-17-688R. Washington, D.C.: July 27, 2017.\n\nEnclosure XI: Status of Recommendations Made in Reports following the Benghazi Attack\n\nDiplomatic Security: Overseas Facilities May Face Greater Risks Due to  Gaps in Security-Related Activities, Standards, and Policies.  GAO-14-655. Washington, D.C.: June 25, 2014.\nDiplomatic Security: Overseas Facilities May Face Greater Risks Due to  Gaps in Security-Related Activities, Standards, and Policies.  GAO-14-380SU. Washington, D.C.: June 5, 2014.\n\nAppendix VII: GAO Contact and Staff Acknowledgments\n\n\tGAO Contact\n\n\tStaff Acknowledgments\n\nIn addition to the contact named above, the following individuals made  key contributions to this report: Thomas Costa (Assistant Director),  Miriam Carroll Fenton (Analyst-in-Charge), Esther Toledo, Mason  Calhoun, David Dayton, Neil Doherty, David Hancock, Thomas Johnson,  Owen Starlin, and Sally Williamson.\nThe following individuals provided technical assistance and additional  support: Joshua Akery, J.P. Avila-Tournut, Jeffrey Baldwin-Bott, Amanda  Bartine, John Bauckman, Aniruddha Dasgupta, Mark Dowling, Wayne  Emilien, Ian Ferguson, Justin Fisher, Brian Hackney, Brandon Hunt, Guy  LoFaro, Michael Rohrback, and Martin Wilson.\nIn addition, each GAO report cited in the preceding enclosures and in  appendix VI includes a list of staff who contributed to that product.","output":"Why GAO Did This Study\n\nTerrorist attacks against U.S. diplomats and personnel overseas have led to increased attention of State's diplomatic security efforts. In this special publication, GAO identifies key issues affecting Diplomatic Security for Congressional oversight. These issues were identified from a body of related GAO work and State and other reports. GAO also interviewed U.S. officials from State and other agencies to obtain their views on key issues, obtain updated information and data, and follow up on actions they have taken on past GAO and other oversight report recommendations.\n\nWhat GAO Found\n\nIn response to increasing threats to U.S. personnel and facilities at overseas diplomatic posts since 1998, the Department of State (State) has taken a number of steps to enhance its risk management and security efforts. State's Bureau of Diplomatic Security (Diplomatic Security) leads many of these efforts with assistance from other bureaus and U.S. government agencies. Given the ongoing threats and the amount of resources needed to counter them, GAO has identified 11 key issues regarding Diplomatic Security that warrant significant Congressional oversight to monitor the cost, progress, and impact:\nDiplomatic Security Funding : Diplomatic Security funding has increased considerably in reaction to a number of security incidents overseas and domestically. In fiscal year 2016, total funding for Diplomatic Security operations--which includes its bureau managed funds as well as other funding such as personnel salaries--was almost $4.8 billion.\nDiplomatic Security Staffing Challenges : Diplomatic Security's workforce--including 3,488 direct-hire, 1,989 other U.S. government, and 45,870 contract personnel--continues to grow. However, potential challenges exist regarding the distribution of domestic and overseas positions, posting fully qualified individuals in the assignments with the greatest needs, and ongoing efforts to fill language-designated positions.\nPhysical Security of U.S. Diplomatic Facilities : Diplomatic Security and the Bureau of Overseas Buildings Operations collaborate to meet safety standards when constructing new embassies and mitigating risks at existing facilities. However, GAO made recommendations to address gaps in State's security related activities and processes.\nPhysical Security of Diplomatic Residences and Other Soft Targets : State has taken steps to address residential security vulnerabilities and manage risks at schools and other soft targets overseas. However, GAO recommended actions to address weaknesses in State's efforts.\nSecurity Training Compliance : While State has robust security training requirements, it lacks consistent monitoring and enforcement processes, particularly for its Foreign Affairs Counter Threat training and for security refresher briefings at posts.\nEmbassy Crisis and Evacuation Preparedness : Gaps in State's implementation and monitoring of crisis and evacuation preparedness could endanger staff assigned to overseas posts and the family members accompanying them. GAO has recommended actions to address these issues.\nDepartment of Defense (DOD) Support to U.S. Diplomatic Missions : Following the Benghazi attacks, DOD increased its support to U.S. diplomatic missions by creating dedicated military forces to respond to crises and expanding the Marine Security Guard program at overseas missions. However, State and DOD reported that they have experienced some logistical and other challenges.\nDissemination of Threat Information : State has processes for communicating threat information to post personnel and U.S. citizens in-country. However, post personnel--including locally employed staff--have not always received important information in a timely manner. GAO has recommended steps State needs to take to address this concern.\nCountering Human Intelligence Threats : Foreign intelligence entities from host nations and third parties are motivated to collect information on U.S. operations and intentions. State has established measures to counter the human intelligence threat and works with other U.S. government agencies to identify and assess this threat.\nEnsuring Information Security : GAO has designated federal information security as a government-wide high-risk area and made recommendations to address these issues. State faces evolving threats and challenges to maintaining obsolete technology, defining clear roles and responsibilities for information security, and overseeing technology contractors.\nStatus of Recommendations Made in Reports following the Benghazi Attack : In response to the Benghazi attack, State formed interagency teams to evaluate the security at 19 dangerous posts, convened an Accountability Review Board (ARB) to investigate the attack, and established panels to conduct further assessments. As of June 2017, State reported having addressed recommendations as follows: 268 of 287 made by the interagency teams, 26 of 29 by the ARB, and 64 of 75 by the panels.\n\nWhat GAO Recommends\n\nWhile State has taken steps to close recommendations made in past GAO reports, GAO identified 27 open recommendations from these reports (as of August 2017) that it believes should be given high priority for implementation. Of the 27 priority recommendations, 24 were related to diplomatic security."}
{"id":"gao_GGD-99-102","pid":"gao_GGD-99-102_0","input":"\tBackground\n\nThe automation of mail sorting and distribution activities with state-of-the- art technology is a core component of the Service\u2019s strategy to achieve its goals for efficiency, effectiveness, and financial performance. According to the Service, the success of this strategy relies, in considerable part, on the Service\u2019s ability to provide address management services that help mailers accurately address their mail and adopt automation-compatible address standards. The NCOA program is one of several Service address management programs under the direction of the Manager, Address Management, located at the National Customer Support Center in Memphis, TN. The Manager reports to the Vice President, Operations Planning, at Service headquarters.\nThe NCOA program began in 1986 and extended the use of change-of- address information submitted by postal customers to the Service by providing that information to business mailers for updating their mailing lists. This is important to the Service because sorting, transporting, delivering, and, in some cases, disposing of improperly addressed mail costs the Service money\u2014estimated by the Service in 1996 at about $1.5 billion a year. The Service estimated that of the 191 billion pieces of mail it processed in 1997, incomplete or inaccurate address elements adversely affected the delivery of about one-third, or over 63 billion pieces.\nNCOA change-of-address data are widely disseminated to business mailers through a network of 21 private businesses licensed, for a fee, by the Service. Licensees are responsible for maintaining a complete and current NCOA master file. Every week, the NCOA program office is to provide licensees a copy of the latest NCOA file update via computer tape. Licensees are to use these tapes to update the NCOA files they maintain. These tapes include address deletions, additions, and changes.\nLicensees are to use their updated NCOA master files and the address- matching logic designed into their computer software to update addresses on their and their customers\u2019 mailing lists. Each licensee\u2019s address matching software is to be tested and approved by the NCOA program office. The Service requires the software to meet strict performance standards as specified in the licensing agreement, and licensees are to use only the approved software to provide the NCOA service. In providing this service, licensees are to update an address on a mailing list only when a name and address on that list match a name and old address in the NCOA file.\nService authority to disclose address information about its customers is limited by certain privacy guarantees in two federal laws. One of them, Section 412 of the Postal Reorganization Act of 1970, as amended (39 U.S.C. 412), provides that no officer or employee of the Postal Service shall make available to the public by any means or for any purpose any mailing or other list of names or addresses of postal patrons or other persons, except for census purposes or as otherwise specifically provided by law.\nThe Privacy Act of 1974 (5 U.S.C. 552a) provides individuals broader protection from the unauthorized use of records that federal agencies maintain about them and gives them right of access to those records. Subsection (n) of the act specifically restricts certain uses of a name and address as follows: \u201cAn individual\u2019s name and address may not be sold or rented by an agency unless such action is specifically authorized by law.\u201d More generally, under the Privacy Act, agency records may be disclosed provided such disclosures are compatible with the purpose for which the records were collected. Under subsection (m)(1) of the act, NCOA licensees operate on behalf of the Service and are subject to the provisions of the act to the same extent that employees of the Service would be.\n\n\tScope and Methodology\n\nTo determine the actions the Service has taken in response to our recommendations that it prepare and implement formal written procedures to strengthen its oversight of the NCOA program, we interviewed the Manager, Address Management and National Customer Support Center; technical managers who oversee certain Service- administered address management processes and programs, including the NCOA program; and the NCOA program manager. We obtained and reviewed the two procedures manuals the Service prepared in response to our earlier recommendations.\nThe \u201cNCOA Procedure Guide\u201d was undated but, according to the program manager, became effective beginning in about September 1996. It prescribes oversight procedures and processes for (1) reviewing and documenting reviews of licensees\u2019 proposed NCOA-related advertisements and sales methods; (2) receiving, responding to, and documenting Service responses to postal customer NCOA-related inquiries and complaints; and (3) scheduling, conducting, and managing the results of Service audits of NCOA program licensees. The second manual, the \u201cNCOA Integrity Procedures Manual,\u201d dated October 1998, describes seed records, their purposes, and the procedures and organizational responsibilities for carrying out the seeding process.\nTo verify that written procedures were being followed and assess whether they responded to our recommendations, we (1) discussed the procedures with the NCOA program manager and other managers and staff responsible for program operations and oversight; and (2) reviewed records and files documenting the oversight processes of seeding, responding to and resolving postal customer inquiries and complaints, reviewing licensee\u2019s proposed advertisement, and auditing licensees. Specifically, we discussed the seeding process with the program office\u2019s project leader, who had primary responsibility for carrying out the process. We reviewed reports and documentation related to the seeding process, including tests of the process for alerting NCOA program officials to the possible release of seed record addresses, during the January 1996 through March 1999 period.\nWe had discussions with the program manager responsible for handling customer inquiries and complaints and reviewed program files and records. We had no way to determine whether all inquiries and complaints received at the program office were logged and responded to. However, we randomly selected 18 of the 32 file drawers where inquiry and complaint records were stored, and we reviewed the entire contents of each. We discussed selected examples with the program office technical staff responsible for researching and responding to customer concerns.\nWe examined documentation of licensees\u2019 NCOA-related advertisements that had been submitted to and reviewed and approved\/disapproved by the Service as required by the licensing agreement and specified in the NCOA Procedure Guide. We reviewed all available documentation in the program office\u2019s official licensee files, and we discussed selected examples of advertisements with the program office staff responsible for the review and approval process.\nFor the licensee audit process, we reviewed the results of all audits conducted from September 1995 through March 1999 that were documented in the program office\u2019s audit files. We discussed the audits with the program manager and reviewed examples of audit results with responsible program office staff.\nTo assess the Service\u2019s response to our recommendation that the Privacy Act-related restriction on the use of NCOA-linked data to create new- movers lists be communicated explicitly to licensees\u2019 customers, we discussed the issue with the Service\u2019s Chief Counsel, Consumer Protection Law; a Service Senior Attorney in Washington, D.C.; and the Manager, Address Management, in Memphis.\nWe conducted our review between September 1998 and May 1999 in accordance with generally accepted government auditing standards. We requested comments on a draft of this report from the Service and received written comments from the Postmaster General, which we have included in appendix I.  His comments are discussed near the end of this report.\n\n\tProgram Oversight Strengthened, but Seeding Process Weaknesses Still Exist\n\nThe Service has taken steps to strengthen its oversight of the NCOA program and help ensure that the program operates in compliance with the privacy provisions of federal laws. The Service has developed and implemented written procedures formalizing its oversight processes and responsibilities for (1) seeding NCOA address change updates released to licensees, (2) addressing customer NCOA-related inquiries and complaints, and (3) reviewing and approving licensees\u2019 proposed advertisements promoting NCOA-related services. However, our review revealed that the procedures the Service developed to ensure that mail sent to seed record addresses is appropriately identified, and the program office alerted to a possible release of a seed record address by a licensee, were not working as intended. As a result, the Service has no assurance that the seeding process provided an effective oversight mechanism.\n\n\t\tUse of Seed Records\n\nIn 1996, we found several weaknesses in the Service\u2019s practice of using seed records as an oversight measure to detect the improper release of NCOA data by licensees. We recommended that the Service develop and implement formal, written procedures that addressed the responsibilities and timetables for using the seeding process as an oversight mechanism. Our more recent work at the NCOA program office showed that, in response to our recommendations, the Service prepared formal written procedures that delineate program office responsibilities for carrying out the seeding process. Further, our work showed that the written procedures were generally being followed. However, we found another problem\u2014the program\u2019s process for alerting program officials that mail was sent to a seed record address (and therefore a licensee had possibly released a seed record address) was not working as intended. As a result, the Service had no assurance that the seeding process was providing the program oversight intended.\nAccording to NCOA program officials, the process of seeding NCOA files provides program oversight by helping to detect and deter the improper release of NCOA data by licensees. They said that NCOA file updates have been seeded since the program began in 1986. Seed records are fictitious name and address data that the program office periodically places in NCOA file updates provided to licensees. These names and addresses are designed uniquely and do not identify postal customers who have moved and submitted mail-forwarding forms to the Service, or any other postal customer. Therefore, licensees should not be able to match the seed record names and addresses with names and addresses on their mailing lists or their customer\u2019s mailing lists when using the Service-approved name and address-matching computer software.\nService procedures state that mail sent to a seed record address is to be intercepted by the local post office and photocopied. The photocopy is to be returned to the NCOA program office, thereby alerting program officials of the possibility that a licensee has improperly released a seed record address. Program officials could then identify the licensee that released the seed record by tracing it back to the licensee that received (and subsequently released) the seed record. According to program officials, licensees are aware that NCOA file updates are seeded but are not able to identify the seed records.\nIn our 1996 review, we found that the Service had informal, unwritten procedures for seeding. Specific responsibilities and timetables for carrying out the seeding process were not delineated. We found that, because of inattention to program management, seed record addresses for a 9-month period in 1993 and 1994 were inadvertently not included in licensee file updates. Thus, the Service\u2019s oversight of the program through use of the seeding process was not in effect during this period.\nSubsequent to our 1996 review, the Service developed written procedures that describe seed records; their purpose; and the procedures, responsibilities, and timetables for implementing and using the seeding process as an oversight mechanism. The procedures include steps such as developing the seed record addresses, placing them into the licensees\u2019 NCOA file updates at specified times, and testing the retrieval process for mail sent to seed record addresses. On the basis of our discussions with NCOA officials and our review of seeding files and reports, it appears that program office staff were following most of the written procedures. For example, files we examined showed that 10,000 to 20,000 seed records were implanted in licensees\u2019 databases continuously throughout the period January 1996 through March 1999. Also, as required by the procedures, the Service annually added new seed records to the licensees\u2019 master file updates.\nHowever, we found that Service \u201ctests\u201d of the seeding process revealed that procedures for alerting program officials that mail had been sent to a seed record address were not working as intended. Specifically, we found that the NCOA program office was not always alerted by postal delivery units when test mail was sent to seed record addresses. As a result, the Service could not be assured that it would be appropriately alerted if actual mail were to be sent to seed record addresses. In turn, the Service could not be assured that it would always be made aware that a licensee had released a seed record address, should this occur.\nAccording to the Service, instructions for appropriately identifying and notifying program officials of mail sent to seed record addresses are sent by the program office to affected postal delivery units throughout the postal system each year. Periodically, the program office sends mail to seed record addresses to test whether the identification and notification process for mail sent to seed record addresses is working properly. If it is working properly, the applicable delivery units will identify mail sent to seed record addresses and return a photocopy of it to the program office, thereby alerting program officials that mail was sent to a seed record address.\nHowever, we found that local delivery units were not always appropriately alerting program officials when test mail was sent to seed record addresses. Data provided to us by the program office showed that program officials were appropriately notified of only about 6 percent of nearly 1,000 test mailings sent out during the period October 1998 to February 1999. The program office did not have complete records showing the results of test mailings prior to this period.\nAlthough the program office has procedures for following up with delivery units when these units do not handle test mail appropriately, program office reports on test mail results showed that these procedures were not always followed. The program manager said that the process of sending test mail to seed record addresses, and following up with the appropriate delivery units when test mail was not returned, had been a manual process; however, because the process was labor intensive, it was automated in early 1999. The program manager said that, because the process is automated, when program officials are not appropriately notified that a delivery unit received test mail, the system will automatically generate correspondence advising the delivery unit manager that procedures were not followed for test mail sent to a seed record address. According to program officials, the automated process was only recently implemented. Therefore, its effectiveness in identifying and correcting problems in handling test mail sent to seed record addresses had not been determined at the time of our review.\nDetermining why delivery units did not always appropriately notify NCOA program officials when test mail was received was not within the scope of our review. Further, delivery units are in a different Service organizational component and are not under the authority of NCOA program officials. However, until the process for appropriately identifying test mail and notifying program officials when test mail is sent to seed record addresses is working completely as intended, the Service cannot be assured that program officials would be appropriately notified if actual mail were sent to seed record addresses. In turn, the Service cannot be assured that the seeding process would detect an improper release of NCOA data by a licensee.\n\n\t\tProgram-Related Inquiries and Complaints\n\nIn our 1996 review, we found that the NCOA program office\u2019s complaint investigation process was informal and lacked structure. We were therefore unable to assess the effectiveness of the complaint process as a program oversight mechanism. We recommended that the NCOA program office develop and implement written oversight procedures providing for the systematic recording of all NCOA-related complaints received, including actions taken to resolve the complaints. On the basis of our recent review, we believe that the actions taken by the Service provide the formal structure needed to ensure that the complaint investigation process could be an effective licensee oversight mechanism.\nIn our earlier review, NCOA program officials told us that they investigate program-related inquiries and complaints from postal customers, licensees, and the licensees\u2019 customers to provide another program oversight and control mechanism. They said that inquiries and complaints were important because they can alert the Service to possible problems involving the quality of NCOA program services that licensees are providing, as well as to instances of licensees\u2019 noncompliance with the terms and provisions of the licensing agreement. However, the office could not provide us with any evidence of a process for logging inquiries and complaints received, investigating them, and reporting the results of the investigations internally or to the inquirers or complainants.\nIn our most recent review, we found that the procedure guide contained written procedures providing formal structure to the program\u2019s process for receiving, researching, and responding to customer inquiries and complaints and documenting the results of these actions. Our examination of the program office\u2019s inquiry and complaint files, combined with our discussions with program office managers and staff, showed that the procedures had been implemented. Specifically, we found documentation showing that (1) NCOA-related inquiries and complaints had been entered into an electronic tracking system and (2) research and analysis needed to respond to inquiries and complaints had been conducted and, where appropriate, responses provided.\nThe NCOA program manager told us that since about September 1997, over 38,000 inquiries and complaints had been logged into a database at the program office. Documentation relating to these inquiries and complaints was retained in 32 file drawers located in the program office. Although we had no way to verify that all inquiries and complaints received were logged in and responded to, we randomly selected 18 of these drawers and reviewed the entire contents of each. On the basis of this review and our discussions with program managers and staff, it appears that the Service was following procedures and appropriately utilizing inquiries and complaints as a program oversight mechanism.\n\n\t\tProgram\u2013Related Advertising\n\nWe reported in 1996 that we had been unable to fully evaluate the effectiveness of the NCOA program office\u2019s oversight of licensees\u2019 program-related proposed advertising as prescribed in the licensing agreement because program officials had not documented their oversight efforts. We recommended that the Service develop and implement written oversight procedures for obtaining and reviewing licensees\u2019 program- related proposed advertisements, documenting the review, and notifying licensees of the results within the time period prescribed in the licensing agreement. On the basis of the results of our current review, we believe that the Service has substantially complied with our recommendations and has in place a formalized process for ensuring generally that licensees\u2019 proposed advertising is in compliance with the provisions of the licensing agreement.\nThe licensing agreement requires licensees to adhere to Service guidelines relating to the wording, content, and design of proposed advertisements that mention the NCOA program to ensure that the relationship between licensees and the Service is correctly represented. In addition, the licensing agreement requires that all licensee advertisements be pre- approved by the NCOA program office prior to their use. According to the agreement, the program office is to provide licensees a written notice of its approval or disapproval of proposed advertisements within 20 days of receipt of this material, or the licensees may consider the proposed advertisement approved.\nIn our earlier review, however, we found little documentation of an advertisement review process, and it appeared that NCOA program officials did not always review licensees\u2019 program-related advertisements. For example, we found that at least two licensees had submitted proposed advertisements for review that contained material promoting the availability of new-movers lists linked to NCOA data, which was in violation of the licensing agreement. Even though licensees were precluded by the licensing agreement from advertising the availability of new-movers lists based in any part on NCOA-related data, program officials took no action to disapprove the advertisements.\nIn our most recent review, we found that the program office\u2019s oversight of NCOA-related proposed advertisements had improved, and licensees were generally meeting the terms of the licensing agreement related to advertising. Specifically, we found that licensee files in the program office contained varying types and amounts of proposed advertisements. In addition, most of the advertisements submitted for approval had a document noting either the approval or disapproval of the advertisement within the 20-day period prescribed. If the advertisement had been disapproved, reasons for the disapproval and suggested changes were also documented.\nAlthough we reviewed all advertisements contained in the program office files, we had no way to determine whether licensees had submitted all of their advertisements for review. Program officials told us, however, that office staff regularly review publications where licensees are known to advertise frequently to help verify that the licensees are using only approved advertisements. In addition, we found examples of advertisements that had not been approved and the related follow-up correspondence with the licensees. Program officials told us that when these situations are discovered, they contact the licensee and require a written explanation. In December 1998, the program office sent letters to all of the licensees stating that effective January 1, 1999, if a licensee fails three times within a 1-year period to obtain program office approval before an NCOA-related advertisement is used, the licensee may be suspended from the NCOA program.\n\n\tRequirements for Licensee Audits and Suspensions Not Met\n\nOur 1996 review disclosed that licensee audit files at the NCOA program office were poorly maintained, and that the number of licensee audits conducted by the program office was unclear. As a result, we could not determine whether the Service\u2019s licensee audits were providing effective and meaningful oversight of licensees\u2019 compliance with the licensing agreement or the applicable privacy provisions of federal law. We recommended that the Service enforce the provision of the licensing agreement that licensees be audited a prescribed minimum number of times each year and suspend or terminate, as appropriate, licensees that fail consecutive audits.\nOur follow-up review of licensee audit files at the program office revealed that problems similar to what we found earlier still existed. Specifically, we found that the program office had not (1) performed the required minimum number of annual licensee audits, (2) performed the required minimum number of on-site licensee audits every 24 months, (3) performed timely licensee reaudits after a failed audit, and (4) always or promptly suspended or terminated licensees that failed two consecutive audits. Further, it appears that the licensee audit files at the program office were still incomplete because program officials told us that they had performed more on-site audits than could be verified by documentation in the audit files. Nevertheless, even when these additional audits are taken into consideration, we determined that the Service did not perform all audits required.\nThe licensing agreement requires licensees to pass three audits each year, and the Service\u2019s procedure guide specifies that the program office is to audit each licensee a minimum of three times per year. Also, at least one on-site audit is to be conducted at the premises of each licensee every 24 months. On-site audits can be unannounced and include both tests of the licensees\u2019 NCOA software accuracy and verification of the licensees\u2019 compliance with other provisions of the licensing agreement, such as the provision that licensees prevent unauthorized access to the NCOA file. Audits not conducted on-site are administered by the program office through a test computer tape mailed to the licensees. According to program officials, these audits focus on the comprehensive assessment of the accuracy of the licensees\u2019 NCOA name and address-matching software.\nThe licensing agreement sets a strict standard of 99-percent accuracy for licensees\u2019 name and address-matching software that is to be rigorously tested in the audit process. Licensee software that does not meet the standard is to fail the audit. NCOA program officials told us that when a licensee fails an audit, they notify the licensee by telephone. Additionally, the Service\u2019s Contracting Officer, who is located at the Service\u2019s headquarters in Washington, D.C., officially notifies the licensee of the audit failure by sending a written 30-day \u201cCure Notice\u201d with a description of the deficiencies identified in the audit. When the licensee notifies the program office that the deficiencies have been corrected, or after the 30- day period has expired, whichever comes first, the NCOA program office is to reaudit the licensee.\nAlthough in practice the Service does not suspend licensees that fail an initial audit, its procedure guide states that the Service can suspend licensees that fail audits and do not correct the deficiencies identified by the end of the 30-day period. The suspension may continue until the deficiencies have been corrected and confirmed by a reaudit. Further, the license agreement provides that licensees that fail two consecutive audits are to be suspended or terminated. Upon a third consecutive audit failure, licensees are to be terminated. Because of the contractual relationship between the Service and the licensees, only the Contracting Officer, who is not under the authority of the NCOA program office, may suspend or terminate licensees.\nService licensee audits are designed to check for both the failure of the software to make correct name and address matches and for instances where the software produces an incorrect match. The failure of a licensee\u2019s software to make appropriate matches can result in the licensee not providing its customers all the address corrections that should be provided through the NCOA program service. Incorrect matches, which are more serious, can result in the licensee improperly releasing new addresses from the NCOA database in violation of privacy law. The procedure guide states that incorrect matches found during an initial audit will result in an automatic audit failure, and that the licensee will be required to immediately make the necessary software corrections and will be reaudited.\nAccording to the licensing agreement, Service licensee audits are an important oversight measure for helping to ensure that the provisions and performance standards of the licensing agreement are met, the integrity of the address correction services licensees provide is maintained, and the program operates in compliance with privacy guarantees of federal law. Because licensees\u2019 NCOA software that fails an audit is not performing to the prescribed licensing standards, we believe that (1) performing the required number of licensee audits, (2) promptly reauditing licensees that fail audits, and (3) promptly suspending or terminating licensees that fail successive audits are important features of the Service\u2019s responsibility to help ensure the integrity of the NCOA program.\nHowever, according to the documentation in the licensee audit files at the program office and other information provided by the Service indicating that additional audits had been performed, the program office did not perform the minimum number of annual licensee audits prescribed by its procedure guide during fiscal years 1996 through 1998. Table 1 illustrates that in fiscal year 1996, the Service did not audit 7 of 25 licensee systems the required minimum number of 3 times; in fiscal year 1997, 10 of 25 licensee systems were not audited the required minimum number of 3 times; and in fiscal year 1998, 8 of 25 licensee systems were not audited the required minimum number of 3 times.\nMoreover, because the program office did not always perform the minimum number of annual licensee systems\u2019 audits prescribed by its procedure guide, licensees were not always required to prove the integrity of their systems by passing at least three audits each year, as specified in the licensing agreement. Specifically, documentation in the licensee audit files at the program office, combined with additional documentation provided to us by program officials, showed that in fiscal year 1996 only 12 (48 percent) of 25 licensee systems passed the minimum of 3 audits; in fiscal year 1997, only 7 (28 percent) of 25 systems passed 3 audits; and in fiscal year 1998, only 9 (36 percent) of 25 systems passed 3 audits. Thus, the Service cannot be assured that licensees are consistently providing the address correction services intended by the program or consistently releasing only name and address data permitted by law.\nIn addition, according to documentation in the audit files and additional information provided by program officials, the program office did not conduct at least one on-site audit of each licensee system every 24 months as prescribed by the procedure guide. Only 18 licensee systems received on-site audits during the 42-month period we reviewed; also, as of May 1999, 14 licensee systems were overdue for an on-site audit.\nFurther, according to documentation in the audit files and the additional information provided by program officials, the program office did not always do timely reaudits of licensees that failed initial audits. We believe that promptly reauditing licensees that fail initial audits is important to ensure program integrity because after failing an initial audit, licensees are permitted to continue providing NCOA program services with software that does not comply with performance standards specified in the licensing agreement. However, as table 2 shows, of 35 licensee system audit failures during the period we reviewed, 9 systems were not reaudited until 61 to 90 days after the initial audit failure; and 3 were not reaudited until over 90 days after the initial audit failure.\nWe noted that one licensee system reaudit in the \u201cover 90 days\u201d category was not completed until 210 days after the failed initial audit. Because this audit failure involved an incorrect name and address match\u2014an automatic failure because of the possibility that the licensee was releasing name and address data in violation of privacy law\u2014for this 210-day period, the licensee could have been inappropriately releasing NCOA-related data.\nFinally, we found three instances where licensees failed two consecutive audits yet were not promptly suspended, suspended at all, or terminated from the program. One licensee failed two successive audits and was not suspended until 17 days after the second audit. Another licensee failed two successive audits and was not suspended until 67 days after failing the second audit. A third licensee failed two successive audits and was never suspended. That licensee received a passing score on the third audit, which was conducted 147 days after the initial failed audit. According to the licensing agreement, licensees that fail two successive audits are to be either suspended or terminated from the program. By not promptly suspending or terminating these licensees, the Service allowed these licensees to continue providing NCOA program services for varying periods of time with software that was not in compliance with the performance standards specified in the licensing agreement.\nProgram officials told us they had performed more on-site audits than could be verified by evidence in the audit files, but they were initially unable to provide us with supporting documentation. However, after we had completed our audit work at the program office, program officials sent us documentation indicating that 18 licensee systems had received on-site audits during the period we reviewed\u201410 more than indicated by documentation we had found in the program office audit files. The documentation the Service sent us consisted of recently signed statements from officials of some licensees indicating that these additional on-site audits had been performed.\nEven after counting these additional audits reported by the Service, we determined that it did not perform the minimum number of annual audits or on-site audits required during the periods included in our review. This deficiency in the number of audits performed, coupled with the lack of documentation in the audit files evidencing all of the audits reported by the Service, indicated that the NCOA program audit process was not a fully effective oversight mechanism.\nThe NCOA program manager attributed these problems\u2014not performing the required minimum number of annual audits and on-site audits, not performing timely reaudits, and not promptly suspending or terminating licensees that failed successive audits\u2014to (1) an insufficient number of staff to handle the program office\u2019s increasing workload; (2) high rates of turnover among program audit staff during this period, which reduced the number of experienced auditors; and (3) the need to assign program office staff to respond to an unexpectedly high volume of customer calls to the program office regarding the Service Move Update program implemented in 1997.\n\n\tService Believes Privacy Restrictions Do Not Apply to the Secondary Use of NCOA Data\n\nPreviously, we reported that the Service had not clearly communicated through NCOA program licensees to the licensees\u2019 customers the privacy law-related restriction on the use of NCOA-linked data to create or maintain new-movers lists. Specifically, the Service had not stated in the NCOA Processing Acknowledgment Form that NCOA data are not to be used to create or maintain new-movers lists. The licensing agreement requires licensees to have their customers sign this form before receiving NCOA-linked services.\nThe Service, however, had communicated this restriction to the licensees in the licensing agreement. The licensing agreement stated, in part, that \u201cInformation obtained or derived from the NCOA File or service shall not be used by the Licensee, either on its own behalf or knowingly for its customers, for the purpose of creating or maintaining new-movers lists.\u201d The Service stated that it placed this restriction on licensees as a \u201cgood business practice\u201d and to address concerns raised by Congress and the public, not because use of the NCOA-linked data to create or maintain new-movers lists was restricted under the Privacy Act.\nWe disagreed with the Service\u2019s assessment of the Privacy Act and expressed our view that use of NCOA-linked data by a licensee to create a new-movers list would not be consistent with the limitations imposed by the act. We recommended that the Service use the acknowledgment form that licensees\u2019 customers are to sign to explicitly notify the customers that the use of NCOA-linked data to create or maintain new-movers lists is not permitted.\nThe Service disagreed with our recommendation in 1996 and stated that it believed that (1) a restriction on the creation and maintenance of new- movers lists from NCOA-linked data was not required by privacy law, (2) enforcement of such a restriction on customers of licensees would be impracticable, and (3) we had misinterpreted the purpose of the acknowledgment form when we said that it was \u201cto limit the use of NCOA- linked data by the customers of licensees.\u201d\nOur recent review showed that the Service has not implemented our recommendation that it amend or revise the acknowledgment form to explicitly convey this restriction to the customers of licensees. Service officials believe that the design and implementation of the NCOA program fully complies with applicable federal privacy laws.\nService attorneys responsible for this issue told us that the Service continues to believe that the use of NCOA-linked data to create or maintain new-movers lists is not restricted by the Privacy Act. With regard to licensees, the Service\u2019s position stems from the view that a licensee wears two hats\u2014one when performing address correction services as an agent of the Service and another as a private business. In the Service\u2019s view, after a licensee performs address correction services as an agent of the Service, it is then free under the Privacy Act to use NCOA-linked data to create or maintain new-movers lists. With regard to the licensees\u2019 customers, the attorneys said that the Service has no responsibility to attempt to restrict the use of NCOA-linked data by a private business with which it has no legal relationship.\nWe disagree. The Service collects change-of-address information from postal customers for the limited purposes of address list correction and mail forwarding, not for the purpose of creating and maintaining new- movers lists. Therefore, we continue to believe that use of NCOA-linked data to create or maintain new-movers lists by licensees of the Service, who are viewed under the Privacy Act as if they were employees of the Service, would not be consistent with the limitations imposed by the Privacy Act. Further, we continue to believe that more specific language in the acknowledgment form that licensees\u2019 customers sign could help ensure that use of NCOA-linked data is limited to the purposes for which it was collected.\n\n\tConclusions\n\nThrough the NCOA program, the Service has extended the use of address change information that its customers report for mail forwarding purposes to provide business mailers with current name and address and address- format information for customers on their mailing lists. This program helps ensure that postal customers\u2019 mail is more accurately addressed and thereby reduces Service costs associated with additional handling of improperly and inaccurately addressed mail. However, by creating a postal customers\u2019 change-of-address database, the Service is obligated to use and protect the data in compliance with the constraints of applicable federal privacy laws.\nThe Service has been partially responsive to our previous recommendations to strengthen oversight of the NCOA program in that it developed and implemented written procedures for (1) seeding NCOA file updates released to licensees and (2) reviewing, responding to, and documenting customers\u2019 NCOA-related inquiries and complaints and licensees\u2019 NCOA-related advertising. However, the Service has not effectively implemented program procedures and requirements for (1) ensuring that it is appropriately alerted when mail is sent to seed record addresses, (2) auditing and reauditing licensees, and (3) suspending or terminating licensees that fail successive audits.\nAlthough in early 1999 the Service made procedural changes that it believes will help ensure that mail sent to seed record addresses is appropriately brought to its attention, it is too early to determine the effectiveness of those changes. In addition, the Service reported that it had performed more licensee on-site audits than were documented in licensee audit files at the NCOA program office. However, the effectiveness of the licensee audit process as a program oversight mechanism is diminished when the Service does not perform all required audits and does not document the audit results.\nUntil these program oversight and enforcement procedures are effectively implemented and documented, the Service cannot be assured that (1) the process of seeding NCOA file updates provided to licensees will be effective in alerting the Service to licensees\u2019 improper releases of NCOA data, (2) licensees are audited to ensure that they are in full compliance with federal privacy law and NCOA program requirements, and (3) licensees not in compliance are precluded from continuing to receive and disseminate program data.\nAlthough the NCOA program office is responsible for auditing and reauditing licensees, the problems we identified related to ensuring the effectiveness of seeding NCOA file updates as an oversight mechanism, and delays in suspending or terminating licensees that fail two consecutive audits do not appear to be completely under its control. Local postal delivery units that are in a different Service organizational component and are not under the authority of NCOA program officials appear to be involved in the former problem. Only the Contracting Officer, also in a different organizational component and not under the authority of NCOA program officials, has authority to suspend or terminate licensees from the NCOA program.\nFinally, in spite of the recommendation we made in our previous report, the Service has not changed the acknowledgment form to explicitly convey to licensees\u2019 customers the restriction against using NCOA-linked data to create or maintain new-movers lists. The Service also has not changed its position that it has no responsibility to attempt to restrict the use of NCOA -linked data by licensees\u2019 customers with whom it has no legal relationship. We disagree with the Service. We continue to believe that by including specific language in the acknowledgment form signed by licensees\u2019 customers that they should not use NCOA-linked data to create or maintain new-movers lists, the Service would help to ensure that NCOA program data are used only for the purposes for which such data were collected.\n\n\tMatter for Congressional Consideration\n\nIf Congress is concerned about the failure of the Postal Service to implement the recommendation we made in our prior report concerning the creation and maintenance of new-movers lists by customers of its licensees, it may wish to amend the Postal Reorganization Act of 1970. An amendment could either (1) expressly prohibit the use of change-of- address data by licensees and their customers in the creation or maintenance of new-movers lists or (2) specifically require the Service to have its licensees and their customers acknowledge in writing that they have been informed and understand that change-of-address data may not be used for any purpose not authorized by law, including the creation or maintenance of new-movers lists.\n\n\tRecommendations\n\nTo help ensure that the NCOA program operates in compliance with applicable provisions of federal privacy law and NCOA program requirements, we are making the following recommendations.\nThe Postmaster General should ensure that NCOA program officials (1) conduct the minimum number of annual and on-site audits, as well as reaudits of licensees as required by the licensing agreement and the program procedure guide and (2) document in the program office files licensee audits performed, the results of those audits, and actions taken.\nThe Postmaster General should also ensure that NCOA program officials and other appropriate Service officials coordinate actions to identify and correct weaknesses in the process of alerting program officials when mail is sent to seed record addresses so that the process works as intended and ensure that licensees that fail successive audits are promptly suspended or terminated, as appropriate, from the program or that the licensing agreement is revised to reflect Service policy regarding when licensees will be suspended or terminated.\n\n\tAgency Comments and Our Evaluation\n\nOn July 19, 1999, we received written comments from the Postmaster General on a draft of this report.  Among other points he made about the NCOA program, the Postmaster General stated that the Service believes that the program is a valuable service that directly benefits ratepayers by contributing to the stabilization of postage rates.  Regarding the Matter for Congressional Consideration and our position that the Service should explicitly convey to licensees\u2019 customers the restriction against using NCOA-linked data to create or maintain new-movers lists, he stated that the Service continued to believe that it has neither the legal responsibility nor the practical ability to regulate how the owners of mailing lists may use those lists once they have been matched against the NCOA database. He said that without an effective way to enforce a prohibition on the creation of new-movers lists, such as sending Postal Inspectors into mailers\u2019 plants, revising the acknowledgment form to explicitly prohibit their use would be an empty gesture.\nWe recognize the Service\u2019s view regarding the challenges associated with enforcing a restriction on licensees\u2019 customers with whom they have no contractual relationship. Nevertheless, as discussed in this report, the Service collects change-of-address information for the limited purposes of address list correction and mail forwarding, not for the purposes of creating and maintaining new-movers lists. Thus, in our view, the challenges associated with enforcement should not preclude the Service from notifying and receiving acknowledgment from licensees\u2019 customers that use of NCOA-linked data to create new-movers lists is not permitted. Given that our views on this issue differ from the Service\u2019s, we believe that our suggestion that Congress consider the issue remains appropriate.\nThe Postmaster General generally agreed with our recommendations for improving oversight of the NCOA program.  Specifically, he stated that regarding our recommendation concerning the periodic audits and reaudits of licensees as required by the license agreement and the program procedure guide, the Service understands the importance of licensee oversight through regularly scheduled audits and has taken steps to ensure that the required audits will be performed for each licensee each year.  He stated, however, that because these audits, particularly the on-site audits, are labor intensive and can be performed only by technically knowledgeable staff, on occasion it may be necessary to defer some audits temporarily in order to have the resources available for other high-priority tasks.  He stated that, nevertheless, the Service would make every effort to keep the licensee audit schedule current.\nThe Postmaster General stated that the Service also agreed with the second part of our recommendation concerning the need for more thorough documentation of licensee audits, the results of those audits, and the actions taken.  He stated that the NCOA program office has already implemented the recommendation and developed a standardized documentation process that accurately reports the results of audits.\nRegarding our recommendation to strengthen the process for alerting program officials when mail is sent to seed record addresses, the Postmaster General stated that the Service believes that the improvements currently being implemented will fully respond to the concerns we raised and that these improvements should be implemented nationally by September 1999.  Regarding our proposed recommendation that the Service comply with the provisions of the licensing agreement to suspend or terminate licensees that fail successive audits, the Postmaster General stated that while the Service agrees with the recommendation, it thinks it is important to evaluate each audit failure on its own merits because it is in the best interest of the Service to work with licensees in ensuring that their systems work properly and are compatible with NCOA\u2019s programs.  He further stated that, when warranted and appropriate, the Service would invoke these provisions against licensees to preserve the integrity of the program and to protect the privacy of customers\u2019 change-of-address information.\nWe believe that the actions taken or planned described by the Postmaster General are responsive to our recommendations to him. Furthermore, we believe that the Postmaster General\u2019s position that it is in the best interest of the Service to work with licensees in ensuring that their systems work properly and are compatible with the NCOA\u2019s programs and that licensees would be suspended or terminated when warranted and appropriate is reasonable. However, we believe that the Service should change its licensing agreement to reflect such a policy. Accordingly, we have revised our recommendation to state that the Service should either suspend or terminate licensees that fail successive audits in accordance with the licensing agreement or change the licensing agreement to reflect the Service policy that licensees will be suspended or terminated when the Service believes that such actions are warranted.\nWe are sending copies of this report to Representative Chaka Fattah, Ranking Minority Member of your Subcommittee; Senator Thad Cochran, Chairman, and Senator Daniel Akaka, Ranking Minority Member, Subcommittee on International Security, Proliferation, and Federal Services, Senate Committee on Governmental Affairs; William J. Henderson, Postmaster General; and Karla W. Corcoran, Postal Service Inspector General. We will make copies available to others upon request.\nMajor contributors to this report are acknowledged in appendix II. If you have any questions about this report, please call Bernard L. Ungar on (202) 512-8387 or Sherrill Johnson on (214) 777-5600.\n\nComments From the U.S. Postal Service\n\nGAO Contacts and Staff Acknowledgments\n\n\tGAO Contacts\n\n\tAcknowledgments\n\nIn addition to those named above, Robert T. Griffis, Dorothy M. Tejada, Alan N. Belkin, and Jill P. Sayre made key contributions to this report.\nThe first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent.\nU.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537.\nEach day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touch-tone phone. A recorded menu will provide information on how to obtain these lists.","output":"Why GAO Did This Study\n\nPursuant to a congressional request, GAO updated its previous report on the U.S. Postal Service's National Change of Address (NCOA) program, focusing on: (1) the actions the Service has taken in response to GAO's 1996 report; and (2) whether any additional actions are needed to strengthen the Service's oversight of the program.\n\nWhat GAO Found\n\nGAO noted that: (1) as recommended, the Service has developed and implemented written procedures that addressed its NCOA program oversight and control responsibilities for: (a) using seed records to help detect the unauthorized disclosure of NCOA data by licensees, should it occur; and (b) reviewing, responding to, and documenting NCOA-related complaints and inquiries from postal customers and NCOA-related proposed advertisements by licensees; (2) however, procedures designed by the Service to ensure that it is alerted when mail is sent to seed record addresses were not working as intended; thus, the Service lacked assurance that the seeding process provided an effective program oversight mechanism; (3) further, even though required to do so by the licensing agreement or by prescribed program procedures, during the 1996 through 1998 period GAO examined, the Service did not always: (a) conduct the minimum number of licensee audits, including on-site audits; (b) promptly reaudit licensees that failed initial audits; or (c) promptly or always suspend or terminate licensees that failed successive audits; (4) also, the Service reported that it had performed more licensee audits than were documented in its audit files; however, even when GAO included these additional audits in its data, GAO determined that the Service did not perform all audits required; (5) the Service has taken no action on GAO's recommendations that it explicitly state, in the acknowledgement form signed by customers of licensees, that NCOA program-linked data are not to be used to create or maintain new-movers lists; and (6) GAO continues to believe that more specific language in the acknowledgement form could help ensure that use of NCOA program-linked data is limited to the purposes for which they were collected."}
{"id":"gao_NSIAD-96-172","pid":"gao_NSIAD-96-172_0","input":"\tBackground\n\nAfter the Cold War, DOD\u2019s base structure was larger than required to meet changing national security needs. Consequently, the Congress enacted two separate laws that instituted base closure rounds in 1988, 1991, 1993, and 1995. Through these four BRAC rounds, DOD has closed or scheduled to close 311 bases, installations, and activities and realigned or planned to realign an additional 112 bases. Table 1 shows the number of closures and realignments for each BRAC round.\nAs a result of military base downsizing, DOD has had to phase down base operations, expedite the sale or transfer of unneeded base property for future reuse, properly account for cost and savings attributable to base closures, and perform environmental cleanup of contaminated property no longer needed. Because of congressional interest in the impact of base closures on DOD and affected states and communities, we have issued several reports on these issues. In August 1996, we reported on the status of bases closed during the BRAC 1988, 1991, and 1993 rounds. In February 1995, we reported on the environmental impact at DOD closing bases. In November 1994 and August 1995, we reported on property reuse issues arising from the BRAC 1988 and 1991 rounds. In March 1993 and April 1996, we reported on BRAC cost and savings issues.\nThe severity of contamination at a large number of BRAC bases has turned environmental cleanup into a major challenge for DOD. Before BRAC, DOD had begun addressing environmental contamination at its active military bases through ongoing compliance and restoration programs. Types of hazardous waste found at military installations include solvents and corrosives; paint strippers and thinners; metals, such as lead, cadmium, and chromium; and unique military substances, such as nerve agents and unexploded ordnance. Contamination has usually resulted from storage and disposal practices that were accepted at the time but which have proved damaging to the environment.\nCleanup issues faced at closing bases are similar to those at active bases. Base closures have underscored the importance and urgency of environmental cleanup. Because cleanup is, in most instances, a prerequisite for the title transfer of BRAC property to nonfederal parties, DOD must begin to address environmental issues early in the closure process to expedite property transfer. In doing so, DOD must comply with existing federal and state laws and regulations. Two federal environmental statutes\u2014the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) and the Resource Conservation and Recovery Act (RCRA)\u2014and state laws and regulations govern most of the environmental compliance and restoration activities at closing bases. In general, CERCLA governs the cleanup of inactive waste sites, and RCRA regulates the management of facilities that treat, store, and dispose of hazardous wastes. Appendix I summarizes selected federal and state laws and regulations pertinent to BRAC environmental cleanup.\nThe Congress established separate BRAC funding accounts to help ensure that DOD could devote high-priority attention to base closure and property transfer. Although the Congress appropriates overall funding for BRAC based on DOD budget requests and not directly for environmental cleanup purposes, it may specify either maximum (ceiling) or minimum (floor) dollar amounts to be used for environmental efforts in any given budget year. DOD uses overall BRAC appropriations to allocate funds to the services based on requirements in each of several BRAC subaccounts, including the environmental subaccount. This subaccount includes multiyear funding for each of the BRAC rounds, thereby allowing the services greater flexibility in executing the environmental cleanup program. Further, with a floor, unneeded funds from other BRAC subaccounts may be transferred into the environmental subaccount throughout the year. With a ceiling, environmental funding can be shifted into other subaccounts. We review BRAC budget account issues on an annual basis; we issued our latest report in July 1996 on the validity of DOD\u2019s fiscal year 1997 BRAC budget submission.\n\n\tEnvironmental Cleanup Is Costly\n\nThe cleanup of contaminated base property has been costly, and with the majority of base cleanup work still to be done, costs will continue to grow. Although $3.4 billion had been allocated for BRAC environmental cleanup through March 1996, it is likely that costs will exceed $11 billion before cleanups are completed well into the next century. In the earlier years of the BRAC program, the Congress had expressed concern about DOD\u2019s slow progress in obligating funds for environmental cleanup. Our analysis shows that in recent years DOD has greatly increased the rate at which it has obligated funds. As of September 1995, for example, DOD had obligated 96 percent of available funds, which was substantially higher than the 50-percent rate 2 years earlier.\nThrough March 1996, DOD had allocated $3.4 billion, obligated $2.8 billion, and expended $1.6 billion on BRAC environmental cleanup. Tables 2 and 3 show these amounts by BRAC round and military component, respectively.\nAppendix II provides additional detail on allocations, obligations, and expenditures by military component for each BRAC round.\n\n\t\tEstimated BRAC Environmental Program Costs Will Be Substantial\n\nThe estimated cost for the BRAC environmental cleanup program is uncertain but will be much higher than amounts allocated thus far. The $3.4 billion allocation through March 1996 included only initial funding for BRAC 1995 bases and was insufficient to complete cleanup at prior round BRAC bases. Even though the Congress has established a 6-year period for closing a base, there are no statutory deadlines for the cleanup process. All indicators point to cleanups extending well into the next century. At the time of our review, DOD did not have a total BRAC environmental cleanup cost but was in the process of collecting the data to make such a projection. Our analysis showed that many base cleanups are expected to be very costly. Available DOD data indicate, for example, that cleanup costs for 27 closing bases will likely exceed $100 million each. Further, with the use of available DOD financial data, we estimate that the total cost is likely to exceed $11 billion, as shown in table 4.\nOur total cost estimate was based on the best available data at the time of our review, but we believe the estimate is likely to be conservative for several reasons. First, environmental cleanup cost estimates for many of the 1995 BRAC bases are based on projected costs developed while they were active installations. DOD officials told us that cost estimates for these bases would likely increase as additional environmental studies are performed, more work is identified, and cleanup timelines are accelerated. Second, according to DOD officials, certain Navy and Air Force environmental compliance costs that are funded under the BRAC program are not included in the above estimate. Finally, previous DOD estimates were generally understated. For example, in September 1994, DOD reported that it would cost about an additional $3.1 billion to complete base-level environmental cleanups of its 1988, 1991, and 1993 BRAC bases. However, in September 1995, that estimate had increased to $4.7 billion.\n\n\t\tObligations Have Increased Recently, but Significant Funding Remains Unexpended\n\nIn recent years, DOD has significantly increased the rate at which it has obligated environmental funds for the BRAC program. As shown in figure 1, DOD obligated $2.5 billion, or 96 percent, of the $2.6 billion available for the BRAC environmental program as of September 1995. In comparison, DOD had obligated 50 percent of the funding available in September 1993. Low obligation rates in the early years of the BRAC program raised concerns on the part of the Congress.\nDOD officials offered a variety of reasons for the low obligation rate in the early BRAC years and the high obligation rate in recent years. First, during the early BRAC years, DOD officials acknowledged they (1) were probably overly optimistic in the level of funds requested, (2) did not have all the necessary expertise to better estimate requirements and timing, and (3) were slow in actually obligating funds through existing contract mechanisms. Second, because BRAC funds are available for use on a multiyear basis, there was no overriding pressure to quickly obligate funds. Due in large part to heightened congressional interest in the issue, however, DOD made a concerted effort to increase obligations. Further, with the expiration of BRAC 1988 funds on September 30, 1995, DOD focused its attention on obligating as much of the available money as possible for remaining BRAC 1988 cleanup requirements.\nAlthough the obligation rate has increased and the relative amount of unobligated funds has decreased, a large unexpended balance of funds remains. As of September 1995, BRAC environmental expenditures were about 48 percent of obligations\u2014a modest increase from the 34-percent rate existing in September 1993. DOD officials told us that the large amount of unexpended funds was typical of other environmental programs and were relatively low because of (1) widespread service use of large cost-reimbursable contracts for environmental work where major projects are in the early stages and (2) the lag involved in contractor payments and subsequent reporting in the financial system. DOD officials also told us that the services had been able to obligate funds quicker through the use of large cost-reimbursable contracts than through previous contracting vehicles. However, because the contracts are often for time-consuming studies or site cleanups, expenditures have a tendency to lag well behind the obligated amounts.\nFurther, the gap between expenditures and obligations has widened, since many projects are deferred or planned for execution in later years. As this practice continues, there is greater uncertainty as to when and how much of the funds will actually be spent. Charleston Naval Shipyard officials, for example, told us they were expending funds at a slower rate than expected because of uncertain cleanup requirements and state regulatory reviews that were delaying many contracted site contamination surveys. In addition, at Pease Air Force Base, BRAC officials, citing that available BRAC 1988 funds were due to expire, obligated about $8 million in September 1995 for future environmental monitoring and operating requirements extending into fiscal year 1998. The amount of this money that will actually be spent will not be known for several years.\n\n\tKey Factors Drive the High Cost of Cleanup\n\nOur review of selected base closure sites and other analysis showed that BRAC environmental costs are driven by several key factors. Among these factors are (1) the large number of contaminated sites and associated extent of contamination, (2) the requirements of federal and state environmental laws and regulations, (3) the lack of cost-effective cleanup technology, and (4) property reuse plans.\n\n\t\tIdentifying Full Extent of Contamination at BRAC Sites Is Difficult and Costly\n\nThe sheer magnitude of the BRAC program, coupled with the severe soil and water contamination that has developed over decades of base operations, is a key cause for the high cost of cleanup. The closing bases have a large number of contaminated sites, and it often becomes very difficult and costly to determine the full extent and severity of site contamination. Further, the number of BRAC contaminated sites has grown as more bases have been selected for closure and additional contaminated sites have been identified. In addition, further study often reveals a number of areas of environmental concern on the bases, thereby increasing fund expenditures to resolve the concerns. DOD officials told us that typically after a base is slated for closure, the likelihood increases that additional contaminated sites will be identified as more investigative work is performed. For example, before the closure of Pease Air Force Base, Air Force officials had identified 18 contaminated sites; as the closure process progressed and more investigative work was performed, the number of sites grew to 55. Table 5 shows the number of BRAC contaminated sites and their disposition.\nDOD officials told us that the extent of site contamination is often difficult, time-consuming, and costly to detect and may not be fully determined until environmental cleanup is actually underway. At Pease Air Force Base landfill sites, for example, it was not known whether contaminants existed below the water table level until excavation was underway. Also, according to Army officials, the Army spent over $45 million\u2014$20 million more than originally estimated\u2014for radioactive contamination cleanup at the Army Material Technology Laboratory in Massachusetts. The cost underestimation was due largely to difficulties in accurately determining the extent of the contamination caused by the reactor.\nUnexploded ordnance is another concern for many closing bases. At Mare Island Naval Shipyard, for example, potential unexploded ordnance sites, which include dredge ponds and the waterfront, are the result of decades of ordnance manufacturing, storage, and disposal. Navy engineers estimate that cleaning up these sites could cost about $60 million.\n\n\t\tEnvironmental Laws and Regulations Contribute to High Costs\n\nThe requirements of federal and state environmental laws and regulations have a significant impact on the cost of environmental cleanup. Under the existing environmental legal framework, DOD must comply with cleanup standards and processes associated with existing laws, regulations, and executive orders in conducting assessments and cleanups of its base closure property. Although CERCLA and RCRA are two of the primary drivers for the BRAC environmental program and the ones that impact most closing bases, other laws or executive orders, such as the Endangered Species Act or Executive Order 11990 (Protection of Wetlands), are directed to more unique areas of concern that may exist at a BRAC base. At Pease Air Force Base, for example, BRAC officials had to consider threatened and endangered species, sensitive habitats, wetlands, and historic sites in their cleanup plans. In response to the requirements to protect wetlands, these officials were creating a 2.5-acre wetlands parcel at a cost of about $100,000 to replace wetlands destroyed during cleanup at another site. Further, environmental laws and regulations vary by state and often have more stringent requirements that tend to increase cost. For example, California\u2019s standard for clean drinking water is 10 times more stringent than the federal standard, thereby increasing cleanup costs when this standard is applied.\nBRAC officials told us that the current assessment and cleanup process, as dictated by legal requirements, was complex, costly, and time-consuming. This description is consistent with our findings in our review of high-priority site cleanup efforts at active bases. For example, under CERCLA, DOD follows a detailed four-phase process\u2014preliminary assessment, site inspection, remedial investigation\/feasibility study, and remedial design\/remedial action\u2014in cleaning up property for transfer. Embodied in the process are extensive requirements for documentation, studies, and the need to interact frequently with Environmental Protection Agency (EPA) and state officials and the public. BRAC officials told us that cleanups could require sustained action over many years\u201410 years in many cases\u2014to achieve targeted goals. Site studies can take 4 or more years to complete, remedial designs may require 3 years, and cleanup may take another 3 years. Delays are frequent as federal and state regulators review and approve documents.\nAn inherent part of the process that has undergone criticism is the amount of time and money devoted to base contamination studies. Our prior work on environmental issues, for example, showed that DOD has spent large amounts of money on studies but that actual cleanup progress has been slow. We recognize that the cleanup process is driven largely by regulation and involves time-intensive steps. Therefore, many of the BRAC sites have not reached the actual cleanup stage while several sites have been closed out as a result of study. The Congress has expressed concern and directed DOD to establish a goal to limit, by the end of fiscal year 1997, spending for administration, support, studies, and investigations to  20 percent of the funding for its active base program. No such restriction has been enacted for the BRAC program. Although DOD does not have readily available data that show overall funding devoted to studies at BRAC bases, officials have stated that the amount has been substantial. However, DOD now states that more funding is being devoted to actual cleanups, particularly for earlier round BRAC bases. Our review of the six bases we visited indicated considerable amounts of money are being expended on studies. Pease Air Force Base officials estimated, for example, that about one-half of the $140 million they expected to spend would be for studies.\n\n\t\tAvailable Cleanup Technology Is Not Always Cost-Effective\n\nThe technology used to clean contaminated property can be a key cost factor. In many cases, a cost-effective cleanup technology may not be available. Cleaning up unexploded ordnance, for example, may be not be practical or affordable, especially when there are large parcels of property. Removal work can involve burning and clearing thousands of acres to apply existing cleanup techniques, which are labor-intensive, dangerous, time-consuming, and costly. For example, preliminary estimates by the Army Corps of Engineers indicate that cleaning up unexploded ordnance at Fort Ord may cost over $200 million. Most of the cost would be attributable to an 8,000-acre impact range. \u201cPump and treat\u201d systems, which are shown in figure 2 and commonly used to treat groundwater contamination, can also cost millions and, depending on site conditions, be only marginally effective in some cases. Further, such systems may need to operate for decades after the base has closed and the property has been transferred. As this occurs, DOD continues to incur costs for operating and maintaining the system as well as monitoring water quality results. At Norton Air Force Base, for example, the Air Force spent over $10 million between 1980 and 1992 to investigate contamination of a groundwater plume that extends beyond the base boundary and threatens water supplies in a nearby community. A small-scale pump and treat system was initially installed in 1989; beginning in 1991, a larger-scale pilot system was constructed and subsequently upgraded in 1995. Further, in March 1993, the Air Force contracted for a $5.5-million pump and treat system to be located near the base boundary, and in August 1994, it increased the funding by $1.6 million. Even though the project was costly, its effectiveness was not certain, and Air Force officials agreed to modify the system to treat the off-base water or reimburse the community if the remediation action was not effective.\n\n\t\tProperty Reuse Plans Impact Costs\n\nIntended property reuse can also increase the costs associated with cleaning up contaminated property. In particular, reuse plans are a major determinant most often in the cleanup standard levels (e.g., residential or industrial) used as criteria in cleanup plans. Cleanup of a site that will be transferred to the Department of Interior for nonpublic use, for example, will typically not be as thorough or costly as a site that will be used for residential purposes.\nWe noted several cases in which reuse or public concern associated with reuse has, or could, impact costs. For example, the Air Force has been conducting site investigations since 1982 in search of radioactive wastes in soils and groundwater on or near Norton Air Force Base. In fiscal year 1995, it obligated $2.7 million, and in May 1996 was planning to obligate an additional $185,000. The Air Force cited high community interest, scrutiny, and review as significant in its search for the waste. At Lowry Air Force Base, a change the community has proposed for the 77-acre landfill site could cost the Air Force an additional $1 million to $5 million for cleanup. The Air Force had originally planned for limited use (e.g., nature trails) at the site; however, in March 1996, the redevelopment authority identified alternative uses for the property, such as a golf course and facility to be used along with the adjacent existing golf course or polo and soccer fields.\nAir Force officials told us they were studying these alternatives because they would require more extensive and costlier remediation actions.\n\n\tOpportunities for Reducing Cleanup Costs and Their Impact on Programmatic Goals\n\nPotential options exist for reducing the cost of cleanup. We are not taking a position on these options because of policy and legislative implications associated with them. Rather, we are presenting them in the context of tradeoffs they represent so that congressional and defense decisionmakers have the information for their consideration as they explore ways to reduce program costs while achieving environmental cleanup goals. The options we analyzed are (1) deferring or extending certain cleanup actions, (2) modifying existing laws and regulations, (3) adopting more cost-effective cleanup technologies, and (4) sharing costs with transferees.\n\n\t\tDeferring or Extending Cleanup Actions\n\nDeferring or extending certain cleanup actions for those sites where there is no immediate danger to human health or the environment has the potential for reducing environmental costs at closing bases. Under current policy, DOD is advocating an expedited approach to BRAC cleanups in the interest of making property quickly available to communities and others for reuse. Because of the higher priority given to cleanups, DOD officials told us that preclosure cleanup schedules are typically accelerated after a base is slated for closure. However, although accelerating cleanup may offer faster transfer possibilities, it may also cause program cost increases, according to DOD officials. For example, McClellan Air Force Base officials estimate that their cleanup efforts, originally targeted to cost between $705 million and $925 million through fiscal year 2034, could cost $1.2 billion to $1.8 billion under an accelerated program ending in fiscal year 2018. The officials said longer time frames allow for more cost-effective sequencing of the cleanup work and the use of new technologies that become available.\nDeferring or extending cleanup within acceptable bounds of risk may decrease costs but not without programmatic tradeoffs and cost risks. It would delay transfer of property to users and be contrary to the spirit of the President\u2019s base closure community reinvestment program, announced in July 1993, for the economic recovery of those communities affected by the closure process. Delaying cleanup could promote significant community dissatisfaction and delay reuse\u2014even for clean parcels that may be adjacent to contaminated property.\nIt must be recognized that, on a case-by-case basis, deferring or extending cleanups may increase costs. Because DOD may be required to retain unneeded property for a longer period of time, it may incur added caretaker costs. However, according to DOD officials, the caretaker costs would be relatively minor in comparison to the cleanup cost. Further, environmental costs may increase if contamination spreads or is not otherwise contained while cleanup is deferred.\nDeferring or delaying cleanup at certain sites requires that a priority system be in place to provide decisionmakers with a means to determine the sequence in which projects are funded. The order in which sites are cleaned can impact the overall cost of environmental cleanup. DOD has stated that its highest priorities for BRAC environmental cleanup are for those sites that pose an immediate danger to human health or the environment or are needed for prompt reuse. With regard to protecting health and the environment, in September 1994, DOD issued guidance for a prioritization framework, referred to as Relative Risk Site Evaluation, that categorizes contaminated sites into high-, medium-, and low-relative risk groups. Relative risk is based on an evaluation of contaminants, hazards, pathways, and receptors in groundwater, surface water, sediment, and surface soils. Even though relative risk categorizations are important, service officials said that relative risk is one of many factors they consider in prioritizing funding at BRAC bases. Other considerations include reuse plans; cultural, social, and economic factors; and statutory requirements and legal agreements. These officials said that, with the exception of immediate health and safety threats, reuse plans are often the most important factor for funding and that some sites with lower environmental risk are funded in the interest of reuse.\nAlthough most interested parties we spoke to endorsed the need for setting priorities, many had concerns about DOD\u2019s current efforts. For example, EPA officials were concerned about the (1) lack of objectivity in DOD\u2019s relative risk model, (2) large number of sites not included in the evaluation, and (3) lack of regulatory involvement in the development of the criteria. State environmental representatives were also concerned that a large number of sites, some of which may be high priority, had not been evaluated. One state official indicated many states had already established cleanup priorities that may differ from DOD\u2019s because of differences in risk evaluations. DOD officials told us that the use of Restoration Advisory Boards, as advisors in the prioritization process, have had strong input in community-based decisions, taking into account risk and other factors. We did not evaluate the effectiveness of these efforts.\n\n\t\tModifying Existing Laws and Regulations\n\nModifying laws and regulations that must be considered when performing environmental cleanup at closing bases could ease the severity of requirements and help reduce costs. However, the benefits of modifying certain aspects of existing laws and regulations may not be achieved without tradeoffs. For example, easing cleanup standards and associated requirements may increase environmental risk and create unacceptable danger to human health and the environment, thereby increasing public resistance and dissatisfaction.\nDOD has supported a number of proposed legislative and administrative changes that would reduce the cost of environmental cleanup and expedite the closure process. Many of these have been debated by the Congress in the past and are still under consideration. In this regard, DOD supports efforts to improve the remedy selection process by using realistic site-based risk assumptions and foreseeable future land uses in the decision-making process. According to Navy environmental officials, emphasizing site-based risk assumptions over specific cleanup standards has the potential for reducing costs. Further, DOD supports wider use of generic or presumptive remedies in certain cases to reduce lengthy study time and cost. DOD also supports legislative revision as to what constitutes an uncontaminated parcel and further clarification that such parcels be excluded from placement on the National Priorities List. This revision would reduce cost and allow more expedited transfer of uncontaminated property. EPA has indicated its support for many of DOD\u2019s proposals, but state officials and private representatives we talked to were more skeptical.\nChanging regulatory requirements can have a significant impact on costs, as illustrated by recent changes being recommended in California\u2019s approach to remediating contamination resulting from leaking underground fuel storage tanks. In late 1995, a report by the Department of Energy\u2019s Lawrence Livermore National Laboratory, California, concluded that, where soil conditions were favorable, natural processes, rather than other cleanup actions, could be relied on to clean up petroleum contaminants left by leaking underground fuel storage tanks. The report estimated that traditional cleanup costs had been averaging $150,000, thereby prompting state water control board officials to recommend the use of natural processes for cleanup of those sites where contamination was deemed to be of low risk.\nIf these same procedures were used at DOD facilities where favorable soil conditions existed, costs could be reduced. At Norton Air Force Base, the Air Force has spent about $5 million to remediate about 20,000 cubic yards of contaminated soil at former underground storage tank sites. Air Force officials estimate that about 20 percent of the cleanup may not have been needed and could have been left to natural processes. At Pease Air Force Base, officials estimated that about $2.5 million was spent to clean up fuel contaminated soils around 10 pumphouses. Figures 3 and 4 show underground tank removal operations at Pease Air Force Base. At Mare Island Naval Shipyard, Navy officials estimate that about 50 underground storage tanks and about 42,000 feet of abandoned underground fuel lines require cleanup at an estimated cost of $26.9 million. Under the new policy for underground storage tank cleanups, this estimate may be reduced to $13.5 million. However, Air Force and Navy officials noted that the new policy is not statewide at this point and is being adopted only in certain regions of the state.\nIn another example, bases were once required, before the issuance of EPA guidance in September 1993, to develop cleanup plans for certain groundwater problems, even though the proper technology was not available. However, EPA guidance now recognizes that some groundwater cleanups are technically not possible. According to Air Force BRAC officials, the Air Force was thus permitted to cease further consideration of several remedial actions proposed for one site contaminated by a waste solvent that could not be removed with known technology. The officials said this change saved between $2.3 million and $7 million, depending on which remedial action alternative would have been selected.\n\n\t\tDeveloping and Using More Cost-Effective Technology\n\nNew and more cost-effective technology may offer cost reduction potential for cleaning up groundwater, unexploded ordnance, and other contaminants. The Congressional Budget Office has reported that (1) DOD could reduce costs by delaying expensive remediation projects when contamination posed no imminent threat and cost-effective technology was lacking and (2) in the long run, new cleanup technologies represented the best hope of addressing environmental problems with available DOD funds. The replacement of many of the current remediation technologies with more cost-effective methods of environmental cleanup could have a significant effect on reducing the cost of cleanup.\nHowever, although new technologies may offer significant cost reduction potential, there are programmatic tradeoffs or risks involved with awaiting for the emergence of more cost-effective technology. First, because many BRAC bases are being cleaned up under accelerated schedules, many new technologies now under development may not be available for widespread use for years after the technology is needed. Awaiting for new technology would thus delay program progress. Second, newer technology may not be more cost-effective than existing technology. Third, the outlook for DOD research and development funding of new technology may not be as optimistic as in previous years, as DOD\u2019s budget has been drastically reduced for this activity in the last 2 fiscal years. Last, contractors and regulators who have become comfortable with certain cleanup methods may be reluctant to adopt new technologies and unwilling to risk using an unfamiliar cleanup technology.\nOur discussions with interested parties showed a wide range of views on environmental technology issues. The likelihood that entirely new technologies will quickly and inexpensively solve major contamination site problems is slim, according to Air Force and Navy environmental program managers. They said more gains could be made by improving and refining cleanup standards and existing technologies. Army officials told us that, with the exception of unexploded ordnance, they had the technology needed for addressing most contamination at their BRAC bases. EPA officials told us that new technology could reduce the costs of cleanup and that deferring cleanup until new technology becomes available might be an option in certain situations. One state regulator said that new technology was needed for many contaminants because no cost-effective treatment was available and some prevalent problems were not being addressed. Another state official said that, except for unexploded ordnance and groundwater contamination, the services had the necessary technology and should not delay cleanups.\n\n\t\tSharing Costs With Transferees\n\nAllowing the receiving party, or transferee, to pay fully or in part for environmental cleanup would reduce DOD\u2019s costs, but there are several barriers to achieving cost reduction in this manner. Existing legislation to encourage sharing costs has not been effective, in part, because of unknown future liabilities and difficulty establishing the value of the property. According to DOD officials, communities have not expressed an interest in assuming the cost of cleanup to receive property more quickly because there is apparently little incentive to do so.\nCurrent legislation allows DOD to transfer property without cleaning it up, provided that the recipient agrees to do so. Specifically, section 2908 of the National Defense Authorization Act for Fiscal Year 1994  (P.L. 103-160) authorizes DOD to enter into an agreement to transfer by deed real property or facilities with any person who agrees to perform all environmental restoration, waste management, and all environmental compliance activities that are required under federal and state laws, administrative decisions, agreements, and concurrences. However, this transfer may be made only if DOD certifies to the Congress that cleanup costs are equal to or greater than the fair market value of the property or facilities. If, however, the cleanup costs are lower, the recipient must pay the difference between the fair market value and such costs. Although less revenue would be received from the property transfer, DOD would not incur the cost of cleanup.\nOfficials we talked to were unaware of any instances in which property had been transferred under the above provision. They cited a number of reasons for this situation, including (1) difficulty in determining the fair market value of property to be transferred, (2) little incentive for investors to assume the risks of unknown liabilities, and (3) stipulations that the transferee gives up the right for future indemnification if further contamination is found.\n\n\tAgency Comments and Our Evaluation\n\nWe requested written comments on a draft of this report from DOD, but none were received. However, officials from the Office of the Deputy Under Secretary of Defense (Environmental Security), Under Secretary of Defense (Comptroller), and the Navy provided us with oral comments.\nDOD concurred with the findings and the general tone of the report. The officials, however, offered a number of technical clarifications to improve the accuracy of the report. We considered their comments and have made changes as necessary in the appropriate sections of this report. For example, DOD commented that our use of specific environmental terminology was inconsistent throughout the report. We agree and have clarified our use of the terms.\n\n\tScope and Methodology\n\nTo determine the amount of money devoted to the BRAC environmental program, we interviewed DOD and military service comptroller officials and reviewed documentation that tracked BRAC financial information. We analyzed data to determine the relative growth over time in the amounts of money allocated, obligated, and expended for cleanup efforts. We inquired as to the rationale underlying financial growth trends. To determine the estimated total cost for the BRAC environmental program, we aggregated (1) actual DOD fund allocations through fiscal year 1995 for all BRAC rounds, (2) estimated base program completion costs reported in the Defense Environmental Restoration Program Annual Report to Congress for Fiscal Year 1995, and (3) estimated program management costs through completion.\nTo find out how funds are being used and gain insight as to why cleanup efforts are so costly, we visited six closing bases, interviewed DOD headquarters and base-level BRAC officials, discussed cleanup actions with selected state and community representatives, reviewed base cleanup documentation, and observed site cleanup actions underway. Our base-level visits were intended to get a mix of military services\u2019 1988, 1991, and 1993 BRAC round bases that had obligated significant funds for environmental cleanup. We did not visit 1995 BRAC round bases because, at the time our review, DOD was in the early stages of the closure process at these bases and had not obligated significant BRAC funds for environmental efforts. We visited the following BRAC bases: Norton Air Force Base, California; Pease Air Force Base, New Hampshire; Army Material Technology Laboratory, Massachusetts; Fort Ord, California; Charleston Naval Shipyard, South Carolina; and Mare Island Naval Shipyard, California.\nWe also visited the following military service agencies involved in the award and management of contracts associated with environmental study and cleanup actions: Air Force Center for Environmental Excellence, Texas; Army Environmental Center, Maryland; Army Corps of Engineers, Sacramento District, California; and Naval Facilities Engineering Command, Engineering Field Activity (West), California.\nTo identify potential opportunities and tradeoffs for reducing environmental costs, we analyzed a number of cost reduction proposals that have surfaced in recent years. We reviewed documentation to include past work by us, DOD, the Congressional Budget Office, and the Congressional Research Service, along with congressional efforts to revise existing environmental legislation. We discussed cost and programmatic tradeoffs with affected parties, including BRAC officials; EPA officials; community environmental representatives; and state environmental officials overseeing BRAC issues in California, New York, South Carolina, and Texas.\nWe performed our work between April 1995 and May 1996 in accordance with generally accepted government auditing standards.\nUnless you publicly announce its contents earlier, we plan no further distribution of this report until 10 days after its issue date. At that time, we will send copies to other congressional committees; the Secretaries of Defense, the Air Force, the Army, and the Navy; the Director, Office of Management and Budget; the Administrator, EPA; and other interested parties. We will also make copies available to others on request.\nIf you have any questions, please call me on (202) 512-8412. Major contributors to this report are listed in appendix III.\n\nSelected Environmental Laws and Regulations Pertinent to Cleanup at Closing Bases\n\n\tBase Closure and Realignment Act of 1988 (P.L. 100-526, 102 Stat. 2623) and the Defense Base Closure and Realignment Act of 1990 (P.L. 101-510, 104 Stat. 1808), 10 U.S.C. 2687\n\nRequires the Department of Defense (DOD) to comply with a variety of laws\u2014including the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) and National Environmental Policy Act\u2014to effect federal real property disposal at most base realignment and closure (BRAC) installations.\nDefines the roles for the Environmental Protection Agency (EPA), state agencies, and DOD components. CERCLA section 120 compliance is required for all federal facilities, including BRAC bases. Requires for property transfer that all remedial action necessary to protect human health and the environment has been taken. Also requires the federal government to assume financial responsibility for any additional cleanup of DOD-caused pollution discovered in the future.\nSets criteria for an installation\u2019s inclusion on the National Priorities List (NPL).\nAuthorizes DOD components to conduct site investigations and cleanups.\nUsed as the basis for the Defense Environmental Restoration Program. Authorizes removal of unexploded ordnance and unsafe buildings and debris on BRAC bases.\nDefines the process for examining potential impacts to the environment that may result from disposition of BRAC installation property. Requires that reuse alternatives are identified and characterized and that the environmental impacts associated with each are disclosed.\nCERCLA section 120(a)(4) states that \u201cState laws concerning removal and remedial actions, including State laws regarding enforcement, shall apply to removal and remedial action at facilities owned or operated by a department, agency, or instrumentality of the United States when such facilities are not included in the National Priorities List.\u201d\nOther relevant federal environmental laws Resource Conservation and Recovery Act (RCRA),  42 U.S.C. 6901, et seq.\nEstablishes the framework for managing solid wastes, including hazardous substances. Applies to both NPL and non-NPL installations.\nRegulates specific chemical substances, including polychlorinated biphenyls and asbestos.\nFederal Water Pollution Control Act (\u201cClean Water Act\u201d),  33 U.S.C. 1251, et seq.\nRegulates discharges of pollutants into waters. Requires the establishment of criteria and standards to protect water quality. Requires federal permits for dredge and fill operations.\nSafe Drinking Water Act, 42 U.S.C. 300f, et seq.\nEstablishes regulations to protect human health from contaminants in drinking water.\nRegulates releases of pollutants into the air.\nFederal Insecticide, Fungicide, and Rodenticide Act,  7 U.S.C. 135, et seq.\nEstablishes a registration program for pesticides. Governs disposal of pesticides.\nProtects and preserves access to religious sites of Native Americans.\nProtects historic or archaeological resources threatened by federal dams or construction projects. (continued)\nGoverns activities and facilities that may threaten protected birds.\nRequires federal agencies to observe state Coastal Zone Management Plans for activities near shorelines.\nProtects the habitat of threatened or endangered species by controlling land use and regulating construction.\nRequires federal agencies to consider the effect of their land and water use activities on fish and wildlife.\nEstablishes a program for the preservation of designated historic properties throughout the nation.\nEstablishes a national goal of no net loss of wetlands. Provides for mitigation of negative effects of water resource projects on fish and wildlife.\nPreserves and protects the free-flowing condition of designated rivers.\n\nEnvironmental Cleanup Allocations, Obligations, and Expenditures by BRAC Round and Military Component\n\nMajor Contributors to This Report\n\n\tNational Security and International Affairs Division, Washington, D.C.\n\n\tLos Angeles Regional Office\n\nLionel C. Cooper, Jr.\nThe first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent.\nU.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000  or by using fax number (301) 258-4066, or TDD (301) 413-0006.\nEach day, GAO issues a list of newly available reports and testimony.  To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone.  A recorded menu will provide information on how to obtain these lists.","output":"Why GAO Did This Study\n\nPursuant to a congressional request, GAO reviewed the costs of the Department of Defense's (DOD) environmental cleanup efforts under the base realignment and closure (BRAC) process, focusing on the: (1) reasons that cleanups are so costly; and (2) potential for reducing costs and the impact on program goals.\n\nWhat GAO Found\n\nGAO found that: (1) as of March 1996, DOD had allocated about $3.4 billion for the BRAC environmental cleanup program; (2) as more bases are closed and more cleanup actions are underway, program costs are likely to increase significantly; (3) although DOD has not computed a total cost estimate for the program, available DOD financial data indicate that program costs are likely to exceed $11 billion; (4) the key reasons for the high cost of closing base cleanups include the large number of contaminated sites and difficulties associated with types of contamination, requirements of federal and state laws and regulations, lack of cost-effective cleanup technology for certain contaminants, and intended property reuse; (5) DOD has identified over 5,300 potentially contaminated sites at its BRAC bases; (6) the laws and regulations DOD must abide by in expediting property transfer for reuse have proven to be time- consuming, complex, and costly; (7) technology limitations in cleaning property of certain contaminants (such as unexploded ordnance) have proved costly; (8) options for reducing cleanup costs at closing bases include deferring or extending certain cleanup actions, modifying existing laws and regulations, adopting more cost-effective cleanup technologies, and sharing costs with the ultimate user of the property; (9) all of these options may adversely impact programmatic goals, thereby presenting decisionmakers with difficult choices in developing a cost-effective environmental cleanup program; (10) deferring or extending cleanup actions may delay property transfer and reuse, hurt the economic revitalization of communities affected by the closure process, and harm the environment and health as well; (11) modifying law and regulations may increase environmental risk, thereby increasing public resistance and dissatisfaction; (12) adopting more cost- effective technologies may delay the program because new technologies currently under development may not be available for years and the new technologies may not be more cost- effective than existing technologies; and (13) sharing costs with the ultimate user could present problems because of unknown future liabilities and difficulty establishing the value of the property."}
{"id":"gao_HEHS-96-129","pid":"gao_HEHS-96-129_0","input":"\tBackground\n\nStudies have shown that uninsured children are less likely than insured children to get needed health and preventive care. The lack of such care can adversely affect children\u2019s health status throughout their lives. Without health insurance, many families face difficulties getting preventive and basic care for their children. Children without health insurance or with gaps in coverage are less likely to have routine doctor visits or have a regular source of medical care. When they do seek care, they are more likely to get it through a clinic rather than a private physician or health maintenance organization (HMO). They are also less likely to get care for injuries, see a physician if chronically ill, or get dental care. They are less likely to be appropriately immunized to prevent childhood illness\u2014which is considered by health experts to be one of the most basic elements of preventive care.\nThe Medicaid program is the major public funding source for children\u2019s health insurance. It is a jointly funded federal-state entitlement program that provides health coverage for both children and adults. It is administered through 56 separate programs, including the 50 states, the District of Columbia, Puerto Rico, and the U.S. territories. States are required to cover some groups of children and adults and may extend coverage to others. Children and their parents must be covered if they receive benefits under the Aid to Families With Dependent Children (AFDC) program. Children and adults may also be eligible for the program if they are disabled and have low incomes or, at state discretion, if their medical expenses are extremely high relative to family income.\nBeginning in 1986, the Congress passed a series of laws that expanded Medicaid eligibility for pregnant women on the basis of family income, and for children on the basis of family income and age. Before these eligibility expansions, most children received Medicaid because they were on AFDC. Before 1989, coverage expansions were optional for states, although many states had expanded coverage. Starting in July 1989, states had to cover pregnant women and infants with family incomes at or below 75 percent of the federal poverty level. Two subsequent federal laws further expanded mandated eligibility for pregnant women and children. By July 1991, states were required to cover (1) pregnant women, infants, and children up to 6 years old with family income at or below 133 percent of the federal poverty level and (2) children 6 years old and older born after September 30, 1983, with family income at or below 100 percent of the federal poverty level. Current law expands the group of poor children over 6 years old eligible for Medicaid year by year until all poor children up to 19 years old are eligible in the year 2002. In addition, states may expand Medicaid eligibility for infants and children beyond these requirements by either phasing in coverage of children up to 19 years old more quickly than required, by increasing eligibility income levels, or both. (See table II.2 for current eligibility levels in states.)\nThese expansions partially fueled the increase in Medicaid costs in the 1990s, but children still represent less than one-fourth of Medicaid expenditures. In 1994, nondisabled children represented a large percentage of Medicaid recipients\u201449 percent\u2014compared with the percentage of Medicaid expenditures for medical care that they accounted for\u201416 percent. Nonetheless, Medicaid\u2019s overall cost and the rate of cost increases have raised concerns about the program\u2019s impact on the federal budget. Medicaid costs are projected to increase from about $156 billion in 1995 to $243 billion by the year 2000, according to the Congressional Budget Office. The Congress has recently considered different options to lower the cost of the program, including removing guaranteed eligibility for some types of current recipients and giving capped funding to the states as block grants.\n\n\tHealth Insurance Coverage for Children at Lowest Reported Level Since 1987\n\nIn 1994, the percentage of children with private health insurance reached the lowest level reported in the last 8 years\u201465.6 percent or 46.3 million children. (See fig. 1 and table II.1.) Mirroring this trend, the percentage of children who were uninsured rose to its highest reported level since 1987\u201414.2 percent or 10 million children. (See figs. 2 and 3 and table II.1.) Compared with adults 18 to 64 years old, for whom private insurance coverage has slightly increased in the last 2 years, coverage for children appears to be decreasing.\n\n\t\tDecreased Coverage Reported Despite Increase in Parents Working Full-Time\n\nThe estimated decrease in children\u2019s coverage occurred although slightly more children were reported to be in families with a parent who worked full-time in 1994 than in 1993. Children of a parent who worked full-time for the entire previous year are more likely to have private health insurance than other children. However, in 1994, almost 25 percent of children with a parent working full-time did not have privately funded employment-based health insurance. Almost 12 percent of children with a parent working full-time were uninsured.\nChildren whose parents worked at less than a full-time job for the entire year were worse off for health insurance than children whose parents did not work at all in 1994. Only 37 percent had employment-based insurance (36.8 percent). More children of parents who worked less than full-time all year were uninsured (21.7 percent) than were children of parents who did not work at all in 1994 (14.6 percent). This is because children of parents who are not working tend to be enrolled in Medicaid.\n\n\t\tMore Poor Children Estimated as Uninsured in 1994 Compared With 1993\n\nA higher percentage of poor children were reported as uninsured in 1994\u201422.3 percent\u2014than in 1993\u201420.1 percent. In contrast, reported rates of being uninsured did not differ significantly between 1993 and 1994 for children above poverty. (See table 1.)\n\n\tMedicaid Continues to Be a Significant Source of Coverage for Children, but Many Eligible Children Do Not Enroll\n\nIn 1994, Medicaid covered 22.9 percent of U.S. children\u201416.1 million children. This number was lower than the Bureau of the Census estimated in 1993. The difference may be due partially to a reduction in the number of children on AFDC (who are automatically eligible for Medicaid) and partially to changes in CPS methodology that reduced the 1994 estimate, relative to the 1993 estimate. (See app. I.)\nNevertheless, Medicaid\u2019s role as an insurer for children in working families not depending on welfare has grown. In 1994, 62 percent of children on Medicaid had a working parent. Thirty percent of children on Medicaid had a parent who worked full-time for the entire previous year and another 18.8 percent had a parent who worked full-time but for less than the entire year. Another 13 percent had a parent who worked part-time. Only 38 percent had no working parent. In 1994, more than 50 percent of the children on Medicaid did not receive AFDC or other public assistance.\n\n\t\tAt Least 30 Percent of Uninsured Children Eligible for Medicaid by Federal Mandate\n\nMany uninsured children who are eligible for Medicaid do not enroll. Present law mandates eligibility for children from birth to 5 years old with income at or below 133 percent of the federal poverty level and for poor children born after September 30, 1983. This means that poor children under 13 years old are now eligible and, year by year, more poor children will become eligible until all poor children under 19 years old will be eligible in 2002. States have the option to expand age and income eligibility beyond this mandate for pregnant women, infants, or children, and 40 states have done so. (See table II.2 for states that have expanded eligibility beyond federal requirements.)\nWe estimate that 14.3 million children in 1994 were eligible for Medicaid by federal mandate because of their age and family income. Of those children, 11.4 million had private or public insurance coverage and 2.9 million were uninsured (20.3 percent). The 2.9 million uninsured, Medicaid-eligible children accounted for 30 percent of all uninsured children.\nCompared with children on Medicaid, higher percentages of uninsured, Medicaid-eligible children had a working parent in 1994 (80.4 percent). Almost three-fourths of these uninsured, Medicaid-eligible children lived in the South (41 percent) or the West (30.4 percent). Over one-half were African-American (21.7 percent) or Hispanic (34.7 percent).\n\n\t\tMore Uninsured Teens Will Become Eligible for Medicaid Coverage in the Next 6 Years\n\nPoor teens under 19 years old will be phased into Medicaid eligibility in the next 6 years if current federal Medicaid eligibility mandates for children are maintained. In 1994, an estimated 4.1 million children 13 to 18 years old were poor. In 1994, 32 percent of poor teens 13 to 18 years old\u20141.3 million teens\u2014were uninsured.\n\n\t\tParents May Not Enroll Eligible Uninsured Children in Medicaid for Various Reasons\n\nAs we have previously reported, there are several possible reasons why families may not enroll their children in Medicaid. First, low-income families may not know that their children could be eligible for Medicaid even if a parent works full-time or if the family has two parents. A study that interviewed current AFDC recipients and former recipients who had begun working found that 41 percent of AFDC recipients and 23 percent of former recipients did not understand that a parent could work full-time and receive AFDC for his or her children and an even larger percentage did not understand that children in two-parent families could be eligible for Medicaid.\nFamilies participating in other programs for low-income persons also have low rates of Medicaid enrollment. In 1992, only 48 percent of the women, infants, and children enrolled in the Special Supplemental Program for Women, Infants, and Children (WIC) were enrolled in Medicaid, even though over 72 percent were in families with incomes below 130 percent of the federal poverty level. In 1993, only 68 percent of children in Head Start, an early childhood education program for low-income children, were enrolled in Medicaid.\nSecond, getting enrolled in Medicaid is difficult for low-income families. In a previous report, we found that many Medicaid applicants never complete the eligibility determination process and about one-half are denied for procedural reasons; that is, applicants did not or could not provide the basic documentation needed to verify their eligibility or did not appear for eligibility interviews. Finally, some families may not seek Medicaid until they face a medical crisis or may not want to enroll in Medicaid because they consider it a welfare program and therefore stigmatizing.\nStates can obtain federal matching funds to conduct outreach programs about the Medicaid program. States determine their own outreach programs\u2014both the amount and the focus. According to one Health Care Financing Administration (HCFA) official, Medicaid outreach to children\u2019s families has focused more on encouraging the use of preventive care by enrolled children than on informing nonenrolled families that their children might be eligible. Some states do try to inform low-income families that they can get health insurance for their children through Medicaid\u2014either by using informational billboards, 800 telephone referral numbers, or other means. In addition, HCFA and the Agency for Children and Families have developed a cooperative agreement to work together and with states and localities to improve outreach to families of potentially eligible low-income children, particularly those enrolled in federally funded child care and Head Start programs.\nFiscal pressures may have made some states less interested in expanding the number of children receiving Medicaid than they were several years ago. Even though children represent a relatively small percentage of Medicaid expenditures (about 16 percent of expenditures are for nondisabled children under 21 years old), growth in the number of children on Medicaid has contributed to program expenditure increases. Medicaid spending increases have become one of the largest budget problems for states\u2014representing 19.4 percent of state expenditures in 1994.\n\n\tConclusions\n\nPrivate health insurance is overwhelmingly employment-based in the United States, but many children do not get this benefit even if their parents work. Health insurance is less likely to be offered in the firms that employ low-income workers. If health insurance is available through work but is costly for workers, it is less likely to be affordable for low-income workers.\nPart of the reason that families with children may have difficulty affording health insurance is that many children live in low-income families. Twenty-four percent of children lived in poor families in 1994, and another 21 percent lived in families with income between 101 and 200 percent of the federal poverty level. Moreover, families with employer-sponsored health insurance have faced sharply rising costs over the last decade to purchase family coverage through their employer. These rising costs may prove to be much more of a burden for lower-income families.\nPrivate health insurance coverage has continued to decrease for children. As private coverage has decreased, Medicaid has become a more important source of health insurance coverage, especially for children in working families. Nevertheless, despite the expansion in public insurance funding, 10 million children were uninsured in the United States in 1994. Even more notable, the largest percentage of uninsured children were in families with a working parent or parents. In addition, at least 30 percent of uninsured children were eligible for Medicaid, which means that many uninsured children are not getting the advantage of publicly funded insurance.\nAs long as private coverage continues to decrease for children, the number of children uninsured or on Medicaid will continue to grow. This strains public resources\u2014either to pay for Medicaid coverage or to provide direct care or subsidies to hospitals to care for the uninsured. In the past, providers have had various sources of funds to recoup some of the cost of caring for the uninsured patient. In the era of managed care and cost-cutting, it is becoming more difficult for hospitals and physicians to care for patients without insurance. As these trends continue, it will likely become even more difficult to get care without insurance.\nMedicaid cost increases are pressuring states and the federal government toward different types of program changes. Changes to the Medicaid program that remove guaranteed eligibility or alter the financing and responsibilities of the federal and state governments may strongly affect health insurance coverage for children in the future. Other types of changes that strengthen the private insurance market may also have significant effects on children\u2019s coverage in the future.\n\n\tAgency Comments\n\nWe did not seek agency comments because this report does not focus on agency activities. We did, however, discuss relevant sections of this report with responsible officials in the Department of Health and Human Services, HCFA, and the Department of Commerce, Bureau of the Census. They offered technical suggestions that we included where appropriate in the report.\nAs agreed with your office, we plan no further distribution of this report for 30 days. At that time, we will make copies available on request. Please contact me at (202) 512-7114 or Michael Gutowski at (202) 512-7128 if you or your staff have any further questions. This report was prepared by Michael Gutowski, Sheila Avruch, and Paula Bonin.\n\nChanges in the CPS and Their Effect on Estimated Insurance Coverage and Other Methodological Considerations\n\nThe Bureau of the Census has made recent efforts to improve the accuracy and ease of administering the CPS. These changes should improve estimates of coverage, particularly for children. However, these changes can affect the estimates reported. As a result, estimates for 1994 and subsequent years may not be entirely equivalent to those for previous years. Several changes completely or partially implemented this year appear to have affected specific estimates of health insurance coverage.\n\n\tCPS Improved, but Estimates Before 1994 May Not Be Comparable\n\nCensus reworded and reordered existing questions about health insurance and added new ones for the March 1995 CPS, which reports 1994 data. This was done as part of changing to a computer-assisted telephone interviewing methodology. Census also changed the sample frame\u2014or types of families sampled to get a statistically representative estimate\u2014from one based on the 1980 census to one based on the 1990 census. These changes appear to have affected the 1994 estimates of the percentage of people (particularly children) whose private insurance coverage is employer-based versus privately purchased and the percentage of children on Medicaid compared with previous years\u2019 estimates.\nMost people in the United States who have private insurance get their insurance through their employer or union. The previous CPS questionnaire asked first whether a person had any private insurance, then if that person was the policyholder. Only after that did the questionnaire ask whether the insurance was obtained through an employer or union. The new questionnaire first asks directly whether a person has private insurance through an employer or union. The questionnaire then asks about private, individually purchased coverage.\n\n\tPrivate Insurance Comparable, but Type of Private Insurance May Not Be\n\nOfficials at Census believe that the 1994 estimate of overall private insurance agrees well with previous years\u2019 estimates, and the estimates for individually purchased insurance and employment-based insurance are superior to previous years\u2019 estimates. However, the number of people who report that their private insurance came from an employer or union has increased, while the number who report that their private insurance was individually purchased has decreased. Therefore, because these apparent differences may be due to the questionnaire change rather than actual changes in the composition of private insurance coverage, comparisons of employment-based or private individual coverage in 1994 to previous years may not be appropriate to understand trends in coverage. This is why we compared private coverage rather than employment-based coverage of children over time in this report.\nIn addition, we are using a different definition of children on Medicaid for this report than our previous report and correspondences. For this report, our group of children on Medicaid are children with any Medicaid coverage, even if they also have employment-based coverage. Previously, we had excluded children with Medicaid coverage who also had employment-based insurance in the same year from the Medicaid group. We considered employment-based insurance their primary source of coverage and included them in that group. But defining insurance coverage this way led to a lower overall number and percentage of children with Medicaid coverage. Therefore, for this report, we are including children with both private and Medicaid coverage reported in both categories. Figure 1 shows the overlap.\n\n\tMedicaid Estimates for Children May Be Affected by Decreases in AFDC Enrollment Rates and Change in Sampling Frame\n\nIn the past, researchers have been concerned that the CPS underreports Medicaid coverage, because CPS estimates of Medicaid enrollment have historically been lower than HCFA numbers on Medicaid program enrollment. Even if the CPS underreported Medicaid enrollment, consistent estimates can be useful to follow overall insurance trends over time. However, the calendar year 1994 CPS estimates of Medicaid coverage for children are lower than the calendar year 1993 estimates. This is puzzling to some researchers who have used the CPS in the past because HCFA data on Medicaid program enrollment showed an increase in coverage between fiscal year 1993 and fiscal year 1994. The apparent drop may be partially due to a reported drop in the number of children enrolled in AFDC and it may also be due to the change in the CPS sampling frame.\nBetween 1993 and 1994 the percentage of children who were reported to be receiving AFDC or other assistance dropped from 10.6 percent to 9.6 percent\u2014about 600,000 fewer children. Because children on AFDC are entitled to Medicaid coverage, Census assigns Medicaid coverage to AFDC children even if their parents do not report them as receiving Medicaid. This partially explains why Medicaid coverage may have appeared to decrease. Department of Health and Human Services\u2019 data also show a small drop in the average monthly enrollment of children in AFDC between calendar years 1993 and 1994, although because of the differences between months included in calendar years and fiscal years, the drop does not show up in fiscal year data until fiscal year 1995. In fiscal year 1995, average monthly enrollment of children continued to drop.\nMedicaid coverage also may have appeared to decrease because Census changed the sample frame\u2014or types of families that Census interviews\u2014from one based on the 1980 census to one based on the 1990 census. Because the March 1995 CPS was a transitional one for the sample frame, half the families were chosen based on the 1980 frame and half were chosen based on the 1990 frame. The percentage of children on Medicaid was lower in the half chosen from the 1990 frame (22.3 percent) than the half chosen from the 1980 frame (23.4 percent). While the sample chosen from the 1990 frame should be a more accurate report of Medicaid coverage, the differences between the two parts of the sample indicate that reported differences between 1993 and 1994 Medicaid coverage levels may be due in part to sampling frame changes rather than actual changes in coverage.\nOther types of health insurance coverage did not appear to be affected much by sampling frame differences. Health insurance coverage estimates for workers with private insurance or with CHAMPUS were almost the same in the two halves of the sample frame.\nAnother issue with the 1993 estimate of children with Medicaid coverage\u2014which Census informed us has been resolved\u2014concerns miscoding. Last year, Census officials discovered some children appeared to be miscoded as receiving Medicaid. Census officials attempted to fix this through editing the CPS data tape, but the edited 1993 data tape may still contain inadvertently included data that show some children in the group with Medicaid who should not be in that group. According to Census, the coding issue was resolved for the 1994 estimates.\n\n\tEffect on Comparing 1994 With Our Previous Estimates\n\nThese changes in reported coverage make some comparisons with our previous reports and others\u2019 reports based on the CPS problematic. While the estimate of the uninsured should not be affected to any great extent by changes in the questionnaire, estimates of employment-based insurance and private, individually purchased insurance are not comparable from 1994 to previous years. However, estimates of private insurance (the combination of both) appear more comparable. Therefore, for this letter we are reporting on comparisons of private coverage. Similarly, whether private coverage came from employment or individual purchase can affect other estimates when using a hierarchy to assign one source of coverage. In addition, we are reporting children on Medicaid if they had any Medicaid coverage (including those who also had employment-based coverage) because this definition of Medicaid coverage should not be as affected by the questionnaire change and is more comparable to previous years\u2019 data and better captures the full extent of U.S. children enrolled in Medicaid.\n\n\tMethodology for Matching Children and Determining Parental Work Status\n\nTo determine characteristics of children\u2019s parents, we followed a methodology discussed in our previous report (see app. II of Health Insurance for Children: Many Remain Uninsured Despite Medicaid Expansion (GAO\/HEHS-95-175)). We matched children to a parent (18 to 64 years old) in their household (or a related adult who served as a parent, such as a grandparent or sister) and then linked that parent to a spouse, if any. We matched about 98 percent of children, but fewer Medicaid and uninsured children matched (about 96 percent) than did children with employment-based insurance. We determined parental work status by searching for a parent with the highest work status\u2014full-time all year, less than full-time all year, or not working. Figures 1 through 4 and table II.1 are based on the total number of children\u2014that is, unmatched children. Any discussions of employment status of parents are based on matched children, as are figure 5 and table 1.\n\nInsurance Status of Children, 1987-94, and Medicaid Eligibility, by State, 1996\n\nAge under which children are eligible (continued)\nAge under which children are eligible (continued)\n\nRelated GAO Products\n\nMedicaid: Spending Pressures Spur States Toward Program Restructuring (Testimony, GAO\/T-HEHS-96-75, Jan. 18, 1996).\nHealth Insurance for Children: State and Private Programs Create New Strategies to Insure Children (GAO\/HEHS-96-35, Jan. 18, 1996).\nMedicaid and Children\u2019s Insurance (GAO\/HEHS-96-50R, Oct. 20, 1995).\nHealth Insurance for Children: Many Remain Uninsured Despite Medicaid Expansion (GAO\/HEHS-95-175, July 19, 1995.)\nMedicaid: Spending Pressures Drive States Toward Program Reinvention (GAO\/HEHS-95-122, Apr. 4, 1995).\nMedicaid: Restructuring Approaches Leave Many Questions (GAO\/HEHS-95-103, Apr. 4, 1995).\nMedicaid: Experience With State Waivers to Promote Cost Control and Access Care (GAO\/HEHS-95-115, Mar. 23, 1995).\nUninsured and Children on Medicaid (GAO\/HEHS-95-83R, Feb. 14, 1995).\nBlock Grants: Characteristics, Experience, and Lessons Learned (GAO\/HEHS-95-74, Feb. 9, 1995.)\nHealth Care Reform: Potential Difficulties in Determining Eligibility for Low-Income People (GAO\/HEHS-94-176, July 11, 1994).\nMedicaid Prenatal Care: States Improve Access and Enhance Services, but Face New Challenges (GAO\/HEHS-94-152BR, May 10, 1994).\nEmployer-Based Health Insurance: High Costs, Wide Variation Threaten System (GAO\/HRD-92-125, Sept. 22, 1992).\nAccess to Health Insurance: State Efforts to Assist Small Businesses (GAO\/HRD-92-90, May 14, 1992).\nThe first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent.\nU.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000  or by using fax number (301) 258-4066, or TDD (301) 413-0006.\nEach day, GAO issues a list of newly available reports and testimony.  To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone.  A recorded menu will provide information on how to obtain these lists.","output":"Why GAO Did This Study\n\nPursuant to a congressional request, GAO provided information on the number of uninsured Medicaid-eligible children in 1994.\n\nWhat GAO Found\n\nGAO found that: (1) the percentage of children without health insurance was 14.2 percent in 1994; (2) the percentage of children with private health insurance has steadily decreased since 1987; (3) while there has been a decline in coverage for poor children, coverage for nonpoor children has remained stable; (4) Medicaid coverage for children was lower in 1994 due to methodological changes in the Current Population Survey; (5) there were 2.9 million Medicaid-eligible children that were not enrolled in Medicaid in 1994; (6) these children represented 30 percent of all uninsured children from birth to 5 years old, and had family incomes that fell below the federal poverty level; (7) the number of children eligible for Medicaid will increase in the next 6 years to include poor teens aged 13 to 19 years old; and (8) Medicaid will cover even more uninsured children as soon as the families of eligible uninsured children learn that they qualify for Medicaid."}
{"id":"gao_GAO-10-1015","pid":"gao_GAO-10-1015_0","input":"\tBackground\n\nThe North Atlantic Treaty was signed on April 4, 1949, by 12 European  and North American countries to provide collective defense against the  emerging threat that the Soviet Union posed to the democracies of  Western Europe. Since its inception, NATO\u2019s key objective has been to  achieve a lasting peace in the North Atlantic area that is based on the  common values of democracy, rule of law, and individual liberty.\nCurrently, 28 countries are members of NATO. Article 10 of the treaty  permits accession of additional European states if they are in a position  to further the treaty\u2019s principles and contribute to North Atlantic  security. Under Article 5 of the North Atlantic Treaty, members of NATO  agree that an armed attack against any member is considered to be an  attack against them all.\nThe NATO PfP program was launched at the January 1994 NATO summit  in Brussels as a way for the alliance to engage the former members of the  Warsaw Pact and other former communist states in Central and Eastern  Europe. Currently, 22 countries from Europe, Eurasia, and Central Asia  are in the PfP program. The objectives of the partnership are to (1)  facilitate transparency in national defense planning and budgeting  processes; (2) ensure democratic control of defense forces; (3) maintain  the capability and readiness to contribute to crisis response operations  under the United Nations (UN) and other international organizations; (4)  develop cooperative military relations with NATO for the purposes of  joint planning, training, and exercises for peacekeeping; search and  rescue; and humanitarian operations; and (5) develop forces that are  better able to operate with NATO members. NATO also uses the PfP to  support countries interested in NATO membership, although it does not  promise eventual membership. NATO does not extend Article 5  protection to PfP countries or any country other than NATO members.\nIn addition to the PfP program, NATO has established partnerships with  other groups of countries located beyond Europe, Eurasia, and Central  Asia to build security relationships and maintain dialogue with countries  in other regions of the world. NATO established the MD partnership in  1994\u2014the same year as the PfP. As of September 2010, it includes seven  African and Middle Eastern countries. At the June 2004 NATO Summit  in Istanbul, NATO established the ICI, and invited six countries of the  Gulf Cooperation Council to participate. NATO has also established  formalized partnership relationships with additional countries, referring  to them as \u201cPartners across the Globe.\u201d\nSince the mid-1990s, NATO has initiated several military operations, most  notably the International Security Assistance Force (ISAF) in  Afghanistan. Initially, ISAF was a coalition of volunteering countries  deployed under the authority of the UN Security Council. In August  2003, the Alliance assumed strategic command, control, and coordination  of the mission and established a permanent ISAF headquarters in Kabul.  Since then, the operation has grown to about 120,000 troops from 47  countries, including all NATO members, as of August 2010. NATO also  intervened militarily in the aftermath of the disintegration of the former  Yugoslavia to halt conflict in Bosnia-Herzegovina in 1995, Kosovo in 1999,  and Macedonia in 2001. Since December 2004, the NATO-led Kosovo  Force (KFOR) has been the only remaining large-scale Allied force  deployment in the Balkans, although NATO maintains headquarters in  Sarajevo, Bosnia-Herzegovina; and Skopje, Macedonia; to assist the host  governments in defense reform and NATO integration. In addition,  NATO\u2019s naval forces lead Operation Active Endeavour, a maritime  surveillance operation, launched after the September 11, 2001, terrorist  attacks, to detect, deter, and protect against terrorist activity in the  Mediterranean. NATO vessels started patrolling the Eastern  Mediterranean in October 2001 and eventually expanded to the entire  Mediterranean in March 2004. NATO also has a noncombat training  mission in Iraq, begun in 2004; and a counterpiracy mission off the Horn  of Africa, known as Operation Ocean Shield, begun in 2009.\nDOD launched the WIF program in July 1994 to support countries that are  members of the PfP program. DOD uses defense-wide Operation and  Maintenance, and Research and Development funds for the WIF program  according to the laws and policies governing these types of funds. The  WIF program\u2019s goals include:    assisting PfP partners in building defense institutions that are  transparent, accountable, and professional; improving U.S.\/NATO-PfP partner interoperability to enhance partner  contributions to coalition operations;   supporting PfP partner integration with NATO; and    ensuring democratic control of the armed forces.\nWIF funding supports the participation of PfP countries in bilateral and  multilateral military exercises and military contact programs, including  seminars, workshops, conferences, exchanges, and visits. Within DOD,  different components are responsible for the implementation of the WIF  program. Appendix II provides descriptions of these components and the  level of WIF funding allocated to them in the fiscal year 2010 budget. WIF  funding may also be used in conjunction with other security cooperation  programs that support the goals of the WIF and PfP programs. Appendix  III provides descriptions of these related programs and the level of  funding they provided to PfP countries in fiscal year 2009. DOD relies on  other funding, such as the Coalition Support Fund, to cover the cost of  partner countries\u2019 participation in NATO operations.\n\n\tThe PfP Has Evolved in Several Key Ways Due to Changing Political Circumstances and Security Threats\n\nThe PfP program has evolved in four key ways since July 2001, when we  last reported on the program. First, several PfP countries from Central  and Eastern Europe have become members of NATO, resulting in a  decline in the total number of PfP countries and the number of PfP  countries aspiring to NATO membership. Second, NATO has developed  additional mechanisms for engaging with PfP countries, allowing partners  additional opportunities to tailor their participation in the PfP based upon  their individual objectives and capacities. Third, the growing size and  significance of the NATO operation in Afghanistan has increased NATO\u2019s  emphasis on developing PfP countries\u2019 capabilities for participating in  NATO military operations and the strategic importance of the Caucasus  and Central Asian PfP countries to NATO, given their proximity to  Afghanistan. Fourth, as NATO has taken steps to wind down its  peacekeeping efforts in the Balkans, it has increasingly used the PfP to  build cooperative relationships with countries in the region, marking a  shift in its role in stabilizing that part of Europe.\n\n\t\tThe Number of PfP Countries Aspiring to Membership Has Declined\n\nSince 2001, several PfP countries from Central and Eastern Europe have  become members of NATO, resulting in a decline in the total number of  PfP countries and the number of PfP countries aspiring to NATO  membership. While NATO has utilized the PfP for a variety of purposes,  historically, NATO\u2019s primary focus for the program has been to assist  interested countries in preparing to become NATO members. However,  the PfP\u2019s function as a pathway to membership has diminished as the  composition of countries in the program has changed. As figure 1 shows,  12 former PfP countries have joined NATO since the PfP\u2019s establishment  in 1994, including 9 countries since our previous report on the PfP in  2001.\nWhile 9 countries have left the PfP since 2001, 5 new countries have also  joined\u2014Bosnia-Herzegovina, Malta, Montenegro, Serbia, and  Tajikistan\u2014bringing the total number of current PfP members to 22 (see  fig. 2).\nWhile the PfP has always included some countries that did not aspire to  join NATO, NATO and U.S. officials with whom we spoke noted that the  number of PfP countries seeking NATO membership has declined as the  majority of those countries interested in joining have already done so. Of  the 22 countries currently in the PfP, only 4 are actively pursuing NATO  membership: Bosnia-Herzegovina, Georgia, Macedonia, and Montenegro.  Ukraine had previously pursued NATO membership, but is no longer  doing so, given the outcome of the country\u2019s February 2010 presidential  elections.\nThree of the countries aspiring to membership\u2014Bosnia-Herzegovina,  Montenegro, and Macedonia\u2014have been offered a MAP, the final step  that countries complete before NATO offers membership. Nine of 26 PfP  countries had MAPs at the time of our previous report in 2001. During the  MAP process, countries are required to undertake an intensive set of  reforms that extend beyond their defense institutions, in order to bring  the countries in line with NATO standards. Macedonia has had a MAP  since 1999, and NATO has committed to offering it membership as soon  as it resolves its dispute with Greece over its constitutional name. NATO  has offered the other two countries a MAP only within the last year.  NATO\u2019s Foreign Ministers offered Montenegro a MAP in December 2009.  In April 2010, the NATO Foreign Ministers voted to offer Bosnia- Herzegovina a MAP; however, the Foreign Ministers decided that Bosnia- Herzegovina can only fully participate in MAP once it takes the necessary  steps to transfer ownership of various immovable military assets (such as  bases) from its two entity governments to the central government.\nMost current PfP countries have not indicated an interest in joining  NATO, or, in the case of the five Central Asian PfP countries, are not  eligible for NATO membership because of their geographic location  outside of Europe. According to NATO, U.S., and PfP country officials,  these countries participate in the PfP for a variety of reasons including  the opportunity for dialogue with NATO on security issues, the ability to  access NATO training and technical assistance to support reform efforts  and build interoperability with NATO, the opportunity to contribute to  NATO operations, and the desire to counter external pressures from  other countries.\n\n\t\tNATO Has Created a Range of Partnership Mechanisms in which PfP Countries Can Participate Based upon Their Differing Needs\n\nSince our report in 2001, NATO has created a variety of new partnership  mechanisms and modified existing mechanisms to allow PfP countries to  tailor their participation in the program based upon their unique  capacities and objectives. With nine PfP countries having joined NATO  since 2001, leaving fewer countries aspiring to membership, these  mechanisms enable current PfP countries to structure their cooperation  with NATO in ways other than the MAP process. The 22 countries  currently in the PfP differ significantly in terms of geographic location,  military capabilities, political systems, and economic development,  ranging from developed Western European democracies, such as  Switzerland, to developing, authoritarian states in Central Asia, such as  Turkmenistan. These mechanisms allow this diverse group of PfP  countries the flexibility to shape their participation in the PfP based upon  their unique needs (see table 1). Three of the mechanisms in table 1, the  Individual Partnership Programme, the Planning and Review Process, and  the Operational Capabilities Concept focus primarily on PfP countries\u2019  defense and military goals. The three other mechanisms in figure 3, the  Individual Partnership Action Plan, the Annual National Programme, and  the MAP, also allow PfP countries to establish defense and military goals.  However, these mechanisms are broader in scope with countries also  identifying political, legal, economic, security, and other goals they would  like to work with NATO to achieve.\nIndividual Partnership Programme. Since NATO established the PfP  program in 1994, all participating countries prepare, at a minimum,  Individual Partnership Programme documents. Individual Partnership  Programmes identify each country\u2019s national policy for participating in  the PfP, the forces and assets they are willing to make available for PfP  activities, and the areas in which they would like to pursue cooperation  with NATO. In developing Individual Partnership Programmes, countries  select partnership activities and events in which they would like to  participate. To improve this process, NATO developed the Euro-Atlantic  Partnership Work Plan (EAPWP) in 2004. The EAPWP, which is  developed for a 2-year period, lists activities and events offered by NATO,  as well as by individual NATO members and other PfP countries. In the  2010-2011 EAPWP, there are over 1,200 activities sorted into 34 areas of  cooperation (for more details about these areas of cooperation, see app.  IV).\nPlanning and Review Process. NATO established the Planning and  Review Process in 1994, and modeled it on NATO\u2019s own force planning  system. The Planning and Review Process allows PfP countries to work  more closely with NATO to enhance their interoperability with NATO  forces and strengthen their defense institutions. The 18 countries  participating in the Planning and Review Process work with NATO to  assess their defense capabilities, identify potential contributions to NATO  exercises and operations, and select specific goals for developing their  defense capabilities and building interoperability (see app. V for further  information on partnership goals participating countries have selected  through the Planning and Review Process). NATO has made  modifications to the Planning and Review Process over time. For  instance, in 2004, NATO modified the Planning and Review Process\u2019 goals  to further support defense reform, defense institution building, and the  fight against terrorism.\nOperational Capabilities Concept. In 2004, NATO introduced the current  version of the Operational Capabilities Concept to assist PfP countries in  improving their ability to work effectively with NATO forces during  military operations. Thirteen countries participate in the Operational  Capabilities Concept. Through this process, countries identify specific  military units that they want to develop to NATO standards. NATO then  evaluates and certifies these units as ready to participate in NATO  operations.\nIndividual Partnership Action Plan. NATO created the Individual  Partnership Action Plan mechanism in 2002 to allow PfP countries to  develop deeper and more individualized cooperation with NATO than the  Individual Partnership Programme, without having to commit to pursuing  NATO membership. The Individual Partnership Action Plan process is a 2- year cycle in which participating partners identify specific goals for  cooperation with NATO related to political, economic, and other reforms  in addition to their defense and military goals. As part of the Individual  Partnership Action Plan process, NATO also conducts assessments of the  progress participating partners are making toward meeting these goals.  Of the five countries currently with Individual Partnership Action Plans,  only Bosnia-Herzegovina aspires to become a NATO member.\nAnnual National Programme and MAP. Annual National Programmes  are associated with countries aspiring to become NATO members. The  Annual National Programme process is similar to that for the Individual  Partnership Action Plan and they address similar types of issues;  however, Annual National Programmes are updated every year and NATO  expects participating countries to establish more ambitious reform  objectives that will bring their institutions in line with NATO standards.  Additionally, NATO assesses participating countries\u2019 progress in  achieving reform objectives annually instead of biennially and places  greater scrutiny on the extent and pace of progress. In the past, only  countries in the MAP process completed Annual National Programmes.  However, in 2008, NATO offered Georgia and Ukraine Annual National  Programmes, but not MAPs, to acknowledge their membership  aspirations, reward them for the progress they had already demonstrated  in undertaking reforms, and encourage them to set goals and undertake  additional reforms consistent with NATO standards. When NATO\u2019s  Foreign Ministers voted to offer Bosnia-Herzegovina a MAP in April 2010,  they decided that NATO would not accept Bosnia-Herzegovina\u2019s first  Annual National Programme until it had taken the necessary steps to  transfer ownership of its immovable military assets from its two entity  governments to the central government.\n\n\t\tNATO Has Placed an Increased Emphasis on Obtaining Support from PfP Countries for Its Operation in Afghanistan\n\nThe growing size and significance of the NATO operation in Afghanistan  has increased both NATO\u2019s emphasis on developing PfP countries\u2019  capabilities for participating in NATO military operations and the  strategic importance of the Caucasus and Central Asian PfP countries to  NATO, given their proximity to Afghanistan. In recent years, NATO has  made the operation in Afghanistan its top priority and ISAF has grown  from 5,000 to approximately 120,000 troops since NATO assumed  command of the force in August 2003. Consequently, NATO has placed an  increased emphasis on obtaining support from PfP countries for this  operation. This focus has been highlighted in NATO summit statements.  For instance, at their 2004 Istanbul Summit, NATO Heads of State  declared their intention to provide partners with increased opportunities  to enhance their contributions to NATO-led operations, and to help  transform their defenses in keeping with NATO\u2019s own evolving  operational roles and capabilities. At their 2008 Bucharest Summit, NATO  Heads of State affirmed the high value they place on partners\u2019  contributions to NATO operations and stated they would continue to  strive to increase interoperability between NATO and partner forces. The  importance of PfP countries to NATO\u2019s efforts in Afghanistan has also  been emphasized by various NATO and NATO member country officials.  For instance, during a 2010 speech on NATO\u2019s partnerships, the U.S.  Ambassador to NATO stated that partner assistance to NATO\u2019s operation  in Afghanistan is the best example of what partnerships can accomplish.\nAs shown in figure 3, a range of PfP countries have contributed troops for  ISAF. NATO reports that 11 PfP countries had almost 2,000 troops  deployed in Afghanistan, as of August 2010. None of the Central Asian  countries, or Russia, Belarus, Moldova, and Malta contribute troops to  ISAF. Eight additional NATO partner countries that are not in the PfP  program also contribute troops to ISAF, including Australia, which  contributes approximately 1,450 troops.\nSome PfP countries that do not provide troop contributions to NATO  operations offer other types of support, such as overflight access, land  access, or basing rights. Four of the five Central Asian PfP countries  provide logistic and\/or host nation support to ISAF. For instance, in May  2009, Uzbekistan signed an agreement with NATO that allowed for the  rail transit of nonmilitary goods through its territory to Afghanistan to  support NATO operations. Turkmenistan is the only Central Asian  country that has not provided such support. In addition to contributing  troops to ISAF, two Caucasus countries, Georgia and Azerbaijan, also  provide logistic support, including allowing overflight rights and the rail  transit of nonmilitary goods. NATO and U.S. officials with whom we met  stated that this type of assistance from the Caucasus and Central Asian  PfP countries is critical to NATO\u2019s execution of the war in Afghanistan.  Additionally, NATO has noted that the relationships developed through  the PfP have laid the basis for many of these agreements.\nIn addition to ISAF, NATO has looked to partners to provide troop  contributions to KFOR. As figure 4 shows, six PfP countries contributed  troops to NATO\u2019s operation in Kosovo, as of February 2010. These six  countries include five Western European partners and Ukraine. Morocco,  an MD partner, also contributed 213 troops to KFOR, as of February 2010.  82.2% NATO has noted that partners\u2019 contributions to ISAF and KFOR have  helped ease the burden on its members from conducting multiple  operations.\n\n\t\tNATO Has Utilized the PfP to Increase Stability in the Balkans as NATO Forces Have Drawn Down\n\nA fourth key way the PfP has evolved since our previous report on the  PfP centers on NATO\u2019s efforts in the Balkans. As figure 5 shows, NATO  has established several peacekeeping missions in the Balkans since the  mid-1990s. However, as NATO has taken steps to wind down its  peacekeeping efforts in the Balkans, it has increasingly used the PfP to  build cooperative relationships with countries in the region, marking a  shift in its role in stabilizing that part of Europe. NATO has relied on the  promise of these cooperative relationships and eventual NATO  membership to encourage reforms in the Balkan countries designed to  reduce the risk of future violence.\nSince our report in 2001, NATO has continued to invite additional  countries in the Balkans to participate in the PfP. As of 2010, NATO has  invited all the Balkan countries to participate in the PfP, with the  exception of the newly independent Kosovo. Before inviting Bosnia- Herzegovina, Montenegro, and Serbia to join the PfP in 2006, NATO  placed various requirements on the three countries. For instance, NATO  required the countries to cooperate fully with the International Criminal  Tribunal for the former Yugoslavia. Additionally, NATO required that  Bosnia-Herzegovina eliminate its two entities\u2019 parallel defense structures  and develop a unified command and control structure.\nMontenegro and Bosnia-Herzegovina have progressed in their  membership aspirations since joining the PfP in 2006. Montenegro joined  the MAP process in December 2009 and NATO invited Bosnia- Herzegovina to do so in April 2010; however, it must resolve the issue of  transferring its immovable defense property, such as military bases, to  state control before it can fully participate. The two countries have also  cooperated with NATO on various reforms. For instance, a representative  from Montenegro\u2019s delegation to NATO noted that his country has  worked closely with NATO to complete a Strategic Defense Review and  has made significant progress in tailoring the size and composition of its  military to its actual needs. A representative from Bosnia-Herzegovina\u2019s  delegation to NATO stated that his country has made strides in ensuring  civilian control over the military through Bosnia-Herzegovina\u2019s  participation in the PfP. A NATO official based in Sarajevo also noted that  Bosnia-Herzegovina has almost completed the process of unifying its  military under state control. While Serbia has not engaged with NATO to  the same extent as Bosnia-Herzegovina or Montenegro, it has also taken  steps to further its participation in the PfP. For instance, it joined the  Planning and Review Process in 2007. Additionally, NATO and Serbia  created a Serbia-NATO Defense Reform Group in 2006 to support Serbia\u2019s  efforts to reform and modernize its military.\nTwo Balkan countries\u2014Albania and Croatia\u2014became NATO members in  April 2009. A year earlier at NATO\u2019s Bucharest summit, the heads of state  from NATO countries noted that the two countries had demonstrated  their commitment to the promotion of collective security among the  NATO countries and had embraced NATO\u2019s shared values. The  President\u2019s Report to Congress on the Future of NATO Enlargement in  2009 highlighted the role the PfP had played in preparing the two  countries to assume the responsibilities of membership. For instance, the  report noted that the PfP had assisted the two countries in making  significant progress in reforming their militaries and developing forces  that were interoperable with NATO. In addition, NATO has determined  that Macedonia has also successfully met the requirements for  membership and will be admitted into NATO once it has resolved its  dispute with Greece over its name.\n\n\tNATO Is Considering Ways to Strengthen Its Partnerships as Part of the Development of Its New Strategic Concept\n\nNATO\u2019s new Strategic Concept is expected to highlight the importance of  the PfP and other NATO partnerships and discuss ways to strengthen  these partnerships further. Specifically, NATO is debating how to (1)  strengthen its partnerships with countries outside of the PfP, (2) enhance  routine and crisis consultations with PfP countries on security issues, (3)  more effectively engage with PfP countries, such as those in Central Asia,  that are not seeking membership, and (4) balance PfP countries\u2019  aspirations for membership with Russian concerns about NATO  expansion.\n\n\t\tNATO Is Considering How to Strengthen Partnerships with Countries outside the PfP\n\nNATO\u2019s new Strategic Concept is expected to highlight the importance  of the PfP and NATO\u2019s other partnerships, given the widespread  acknowledgment among NATO members that partnerships are critical to  NATO\u2019s ability to address many of the security challenges it faces,  including terrorism and the proliferation of weapons of mass  destruction. The Group of Experts\u2019 May 2010 report to NATO\u2019s  Secretary General highlighted the importance of partnerships, citing the  strengthening of partnerships as one of NATO\u2019s four core tasks for the  next 10 years. As figure 6 shows, NATO\u2019s partnerships extend beyond  the PfP and include countries from around the world that fall into various  partnership groupings including the MD, the ICI, and Partners across the  Globe.\nSome NATO members, including the United States, have advocated for  NATO to pursue a more global partnership agenda. According to a U.S.  mission to NATO official, the United States had previously proposed  eliminating the distinctions between NATO\u2019s various partnership  programs and creating one consolidated, global partnership program.  Some NATO stakeholders have argued that NATO is an organization  facing global security threats and that by strengthening partnerships with  key countries around the world, it will allow NATO to better draw upon  these partnerships as such threats arise. However, some NATO members,  such as France and Germany, have been reluctant to make these  partnerships a key focus for NATO, believing that it pushes NATO away  from its traditional focus on Europe. These NATO members believe that  NATO should continue to place the PfP above its other partnership  efforts, given the PfP countries\u2019 geographic proximity to NATO territory.  Various NATO stakeholders have also raised concerns that if NATO  increases its engagement with partners outside of the PfP it will result in  declining NATO resources for PfP countries, given NATO\u2019s expected  budget shortfalls in upcoming years.\nAs the scope of NATO\u2019s partnerships is debated, NATO is also  considering steps to work more effectively with its partners in the MD  and the ICI. The Group of Experts noted in its report that the  accomplishments of the MD and ICI programs have been relatively  modest to date. Accordingly, various NATO stakeholders have  recommended that NATO focus its efforts on areas of mutual concern  such as nonproliferation, terrorism, missile defense, and Iran. To this end,  the Group of Experts recommends that NATO develop a statement of  shared interests with the two partnerships to further cooperation in such  areas. Additionally, NATO\u2019s Allied Command Transformation  recommends that NATO should seek to review and reenergize its  relationships with partners in the two programs in order to increase the  scope and frequency of both its formal and informal engagements with  these partners. One option NATO is considering is to increase MD and ICI  countries\u2019 access to partnership mechanisms that are currently only  available to PfP countries. For example, these countries do not have  access to all of the activities in the EAPWP. They are also not entitled to  participate in the Planning and Review Process or develop Individual  Partnership Action Plans.\nUnlike the MD and ICI, NATO has not developed a formal partnership  structure for cooperation and dialogue with its Partners across the Globe;  however, it is assessing ways to deepen its partnership with these  countries. Several of these partners are key contributors to NATO\u2019s  operation in Afghanistan. For example, Australia has contributed more  troops than many NATO members. Japan, while not contributing troops,  has funded billions of dollars in reconstruction projects. Both NATO\u2019s  Allied Command Transformation and the Group of Experts have  recommended that NATO provide mechanisms to enable global partners  to have a meaningful role in shaping strategy and decisions on missions  to which they contribute. U.S. officials with whom we spoke noted that  these countries are not seeking formalized partnerships with NATO, but  are seeking such mechanisms to allow for better coordination with NATO  on joint efforts.\n\n\t\tNATO Is Seeking to Strengthen Routine and Crisis Consultations with PfP Countries\n\nNATO stakeholders have cited the need for NATO to strengthen its  existing commitments to PfP countries to hold consultations with those  countries facing security threats. The PfP Framework Document states  that, \u201cNATO will consult with any active participant in the Partnership if  that Partner perceives a direct threat to its territorial integrity, political  independence, or security.\u201d Some NATO stakeholders view NATO\u2019s  failure to hold such consultations with Georgia during the August 2008  Russia-Georgia war as evidence that NATO\u2019s current commitments to  hold consultations with PfP countries in such situations are insufficient.  In recognition of such concerns, the Group of Experts recommended that  NATO strengthen crisis consultations, as provided for in the PfP  Framework Document. However, a U.S. official with whom we spoke  noted that some NATO members are reluctant to strengthen such  commitments due to concerns that it may involve NATO in conflicts that  are not in NATO\u2019s best interests or create unrealistic expectations among  PfP countries regarding potential NATO assistance.\nRevitalizing existing NATO-PfP councils may also be needed to improve  ongoing dialogue between NATO and the PfP countries. The Euro- Atlantic Partnership Council (EAPC) is the forum in which all NATO  members and PfP countries come together to discuss relevant political  and security issues. NATO and the PfP countries are currently  considering various proposals to make the EAPC more dynamic and  relevant, including linking the agenda more closely with that of the North  Atlantic Council and focusing more on practical issues, such as energy  security, where there is opportunity for mutual cooperation. Some NATO  stakeholders with whom we met noted that the diversity of countries in  the PfP has made substantive and frank discussion at the EAPC  challenging, because some PfP countries are reluctant to discuss their  security concerns, given other countries that attend. Additionally,  stakeholders noted that because the EAPC is not a decision-making body,  its meetings seldom result in specific outcomes.\nSome NATO stakeholders have also cited the need for NATO to revitalize  its commitment to conduct routine and crisis consultations with the  priority countries of Russia, Ukraine, and Georgia through existing  bilateral councils or commissions. For instance, NATO leaders noted at  their 2009 summit that the NATO-Russia Council has not always been  adequately utilized and recommended that NATO use the Council to  focus on areas where there are opportunities for cooperation, such as  nonproliferation, arms control, and counterterrorism. The Group of  Experts recommended that NATO regularly make use of the NATO- Ukraine and NATO-Georgia Commissions to discuss mutual security  concerns and foster practical cooperation in areas such as defense  reform. Other NATO stakeholders have called for NATO to ensure that it  honors its commitments to Ukraine and Georgia to, through the two  commissions, provide the countries with additional assistance in  implementing political and defense reforms.\n\n\t\tNATO Is Seeking More Effective Engagement with PfP Countries Not Aspiring to NATO Membership\n\nNATO is also considering how it might increase the effectiveness of its  efforts to encourage reforms in PfP countries that are not aspiring to  NATO membership. In particular, NATO has cited Central Asia, which has  no PfP countries aspiring to membership, as a key area of focus for the  PfP since 2004; however, it has struggled to effectively engage with the  five countries in the region. For instance, only one of the five countries in  the region, Kazakhstan, has elected to develop an Individual Partnership  Action Plan. NATO has identified various challenges in engaging these  partners, including their reluctance to have their defense ministries  scrutinized, their limited financial resources and personnel available for  participation in NATO activities, their close relationship with Russia, and  their distance from Europe.\nTo enhance engagement with Central Asian countries, NATO is seeking  better coordination among members\u2019 bilateral assistance programs. One  initiative centers on NATO\u2019s clearinghouse mechanisms. These  clearinghouses are designed to bring together PfP country  representatives and security cooperation officials from NATO countries.  Through the clearinghouses, partners can discuss their needs and then  NATO members are able to volunteer to provide assistance to meet those  needs. NATO has already established such clearinghouses for some PfP  countries, such as those in the Caucasus, and is considering establishing  one for Central Asia. A NATO official noted that NATO should do a better  job of leveraging the types of assistance that individual members can  provide that NATO itself cannot, such as the provision of equipment. As  an example, the official noted that a Central Asian country has requested  radar equipment to support border security requirements. The official  noted that if a NATO member would commit to providing this equipment,  NATO could use this as an opportunity to encourage the country to take  certain actions, including providing additional support for its operation in  Afghanistan. As part of its strategy, NATO intends to place a liaison  officer in Central Asia to assist in the coordination of NATO members\u2019  bilateral assistance and to increase communication between NATO and  Central Asian government officials.\n\n\t\tNATO Is Debating How to Support PfP Countries\u2019 Membership Aspirations, while Not Escalating Tensions with Russia\n\nVarious NATO stakeholders have stated that NATO needs to maintain a  credible \u201cOpen Door Policy\u201d that supports the aspirations of those PfP  countries that are seeking NATO membership. Some NATO members and  PfP countries have expressed concern that NATO has allowed Russia  undue influence in enlargement decisions, particularly for Georgia. In  February 2010, U.S. Secretary of State Hillary Clinton stated that NATO  membership should be a process between the country and NATO, with no  outside party being able to adversely influence the outcome. In addition,  the Group of Experts report emphasized the need for a strong Open Door  policy stating that NATO should ensure consistency with Article 10 of the  North Atlantic Treaty and its principles for enlargement by allowing  states interested in joining NATO to move forward as they fulfill their  requirements for membership. Certain NATO members have advocated  for a slower approach to the prospective membership of some PfP  countries to avoid antagonizing Russia. At NATO\u2019s January 2010 Strategic  Concept seminar, some participants stated that Russian concerns about  enlargement should be taken into account. Additionally, some  stakeholders have noted that, while NATO should reaffirm its  commitment to maintain an open door policy, a slow path to membership  for Georgia, would help ease tensions with Russia and provide greater  possibilities for NATO-Russia cooperation.\n\n\tAlthough Eligible Countries and the Focus of the WIF Program Have Changed, DOD Has Not Evaluated the Program since 2001\n\nAs a result of the changing composition of countries in the PfP program,  total WIF funding dropped significantly in 2006, and the majority of funds  are no longer distributed to countries aspiring to join NATO. DOD also  established the DIB program in 2006 as a key focus of the WIF program;  however, this relatively new program has faced challenges with its  implementation. DOD last formally evaluated the WIF program in 2001  before key changes to both the WIF and PfP programs were implemented.\n\n\t\tAmount and Distribution of WIF Funding Reflect Changing Composition of Countries in PfP Program\n\nSince 1999, 12 PfP countries have become NATO members. As a result,  fewer PfP countries remain eligible for WIF funding. In 2001, when we  last reported on the WIF program, 21 countries were eligible for WIF  funding; in 2010, 16 are eligible. According to DOD officials, the decline  in the number of WIF-eligible countries contributed to the decreases in  WIF budgets. From fiscal years 1996 through 2005, total annual WIF  funding averaged about $43 million. From fiscal years 2006 through 2010,  annual WIF funding has averaged about $29 million.\nThe distribution of WIF funding among eligible PfP countries also has  changed since the initial years of the program. In our 2001 report on the  WIF program, we found that WIF funding was primarily targeted to  countries aspiring to become members of NATO. From 1994 through  2000, about 70 percent of WIF funding was distributed to 12 aspiring  countries, according to the 2001 report. With the exception of Macedonia,  these countries became NATO members and lost WIF funding. As of  September 2010, only four countries aspire to join NATO. As a result, as  table 2 shows, the fiscal year 2010 WIF budget only distributes about 20  percent of its funding to aspiring countries.\nIn addition, a significant share of the fiscal year 2010 WIF budget\u2014about  35 percent\u2014was devoted to supporting the participation of eligible PfP  countries in bilateral or multilateral military exercises. WIF funding was  budgeted to support the participation of PfP countries in a number of  exercises in fiscal year 2010 ranging from 10 for Georgia to 2 for  Turkmenistan and Uzbekistan. DOD views these exercises, which are  sponsored by the United States, NATO, or other countries, as a key means  of building participating countries\u2019 military capability and interoperability  with U.S. and NATO forces. According to DOD officials, WIF provides a  key source of funding to enable PfP developing countries to participate in  these exercises.\nAccording to DOD officials, exercises are occasionally cancelled due to  political factors in host countries. In fiscal year 2009, four exercises were  cancelled, according to DOD. For example, a U.S.-sponsored multilateral  exercise, known as Sea Breeze, hosted by Ukraine was cancelled in 2009  when the Ukrainian Parliament failed to authorize foreign troops to enter  the country to participate. Consequently, the actual number of exercises  WIF supports and amount of WIF funding devoted to exercises are likely  to be lower than the budget reflects.\n\n\t\tDIB Program is Key Focus of WIF Program, but Has Faced Implementation Challenges\n\nDOD established the DIB program in 2006 as a key focus of the WIF  program. The DIB program, which received about 20 percent of the fiscal  year 2010 WIF budget, is designed to help eligible PfP countries develop  accountable, professional, and transparent defense establishments. The  DIB program is also intended to complement NATO\u2019s Partnership Action  Plan on Defense Institution Building, which NATO established with  similar objectives in 2004.\nApproved activities in the fiscal year 2010 budget for the DIB program  included assisting with strategic defense reviews; developing defense  planning, budgeting, and resource management systems; developing  professional military education programs; improving human resource  management systems; and preparing countries to contribute to  peacekeeping operations. In its initial years, the DIB program conducted  surveys of PfP countries\u2019 defense institutions and developed \u201croadmaps\u201d  to outline key steps the countries needed to take to achieve required  reforms. According to DOD, the program has surveyed 11 PfP countries.\nThe DIB program has faced a variety of challenges in its first few years,  which have contributed to frequent cancellations of DIB-sponsored  activities. In fiscal year 2009, the DIB program executed only about  $650,000 in originally approved activities in its $6.4 million budget. We  also found that the DIB program did not execute any of its five originally  approved activities in the fiscal year 2010 budget for Georgia and only  one of seven for Bosnia-Herzegovina. DOD officials attributed the lack of  execution to the existence of similar assistance provided through FMF- funded contracts in some countries and limited interest in DIB program  activities in others.\nFirst, DOD officials told us that Bosnia-Herzegovina and Georgia were  already receiving similar assistance funded through the FMF program.  For example, the DIB program included activities in its fiscal year 2010  budget to help Bosnia-Herzegovina implement its strategic defense  review and create a human resource management system. However, FMF- funded advisors were already embedded in Bosnia-Herzegovina\u2019s Ministry  of Defense and Joint Staff assisting with these efforts. In Georgia, both  FMF and DIB funding were directed to help Georgia with its \u201cdefense  transformation,\u201d according to DOD documents. FMF funding provided  $3.8 million in fiscal year 2009 and $2.5 million in fiscal year 2010 for a  contract that provides advice and assistance to Georgia\u2019s Ministry of  Defense and Air Force for defense sector transformation, according to  DOD. This included the building of institutions and systems, the  development of doctrine and curricula, the conduct of a National Security  Review, and the training of Ministry of Defense and Air Force personnel  to improve professionalism and NATO interoperability. At the same time,  the DIB program included $750,000 for defense transformation in its fiscal  year 2010 budget for Georgia. According to a DOD official, the DIB  program did not implement this assistance, primarily because of  Georgia\u2019s preference to work through the FMF-funded advisors, who  were available to provide full-time assistance, rather than intermittent  guidance visits offered through the DIB program.\nSecond, DOD officials noted that some PfP countries have been unwilling  to participate in the DIB program\u2019s surveys of their defense institutions or  have lost interest in participating in follow-up activities after the surveys  were completed. For example, according to a DOD official at the U.S.  post in Sarajevo, Bosnia-Herzegovina\u2019s Ministry of Defense and Joint Staff  were not receptive to findings from a DIB assessment, which contributed  to their decision to pursue reforms through FMF-funded advisors instead.  DOD officials also noted that the PfP countries from Central Asia resist  outside assessments of their defense institutions or undertaking reforms  to increase transparency and accountability of these institutions. As  shown in figure 7, the fiscal year 2010 WIF budget indicates that the DIB  program planned limited assistance for Central Asian countries compared  to countries in other regions.\nDOD officials noted that the DIB program is still relatively new, although  it was first developed in 2006. The Office of the Secretary of Defense only  recently transferred management responsibility for the DIB program to  the Center for Civil-Military Relations at the Naval Postgraduate School in  Monterey, California. The Center established a management team in  January 2010 and intends to develop a plan for evaluating the DIB  program, according to an official there.\n\n\t\tDOD Last Evaluated the WIF Program in 2001\n\nTwo DOD-commissioned assessments of the WIF program were  completed in 2000 and 2001. These assessments sought to analyze the  objectives, activities, and accomplishments of Warsaw Initiative  programs and identify the lessons learned from program implementation  and results. The assessments found that the majority of WIF activities  were successful in enhancing the ability of recipient countries\u2019 militaries  to contribute to NATO operations and to operate with NATO forces. The  assessments also found that the WIF program should do a better job of  taking into account the recipient countries\u2019 capacities to absorb or apply  the assistance provided. According to DOD officials, no formal  evaluations specifically of the WIF program have taken place since these  two assessments were conducted in 2000 and 2001. Federal standards  for internal controls indicate that U.S. agencies should monitor and  assess the quality of performance over time. Moreover, GAO\u2019s Internal  Control Tool states that separate evaluations are often prompted by  events such as major changes in management plans or strategies. In  commenting on our draft of this report, DOD noted that the Department  has conducted periodic reviews of the WIF program and as a result, the  program has evolved over time to keep pace with changes in NATO.\nWIF program managers conduct midyear budget reviews and program  management reviews each year. The budget review is designed primarily  to assess the execution of WIF funds for the first half of the year and  determine if any funds should be reallocated; however, the Defense  Security Cooperation Agency (DSCA) did not have data readily available  on how funds were reprogrammed when events were cancelled.  According to DOD officials, the program management review is a forum  for program managers and stakeholders to discuss ways the program can  be improved and any lessons learned. Program implementers also  prepare after action reports on individual events supported by WIF  funding that include evaluations of results, according to DSCA officials.  In addition, DOD officials also noted that while the department does not  assess results of the WIF program specifically, it monitors progress  countries make in achieving broader U.S security cooperation goals,  which are supported by a variety of programs and funding streams,  including WIF.\n\n\tConclusion\n\nThe WIF program provides a key source of DOD funding to support  eligible countries\u2019 participation in NATO\u2019s PfP program. NATO\u2019s new  Strategic Concept, due at the end of 2010, will likely lead to further  changes to the PfP program and other partnerships that could have  implications for the WIF program. For example, DOD may need to  reconsider how it defines eligibility for WIF funding to complement  efforts by NATO to increase the level of cooperation activities with  partner countries outside of the PfP program. DOD\u2019s current policy is that  WIF funding is only available to NATO partner countries in the PfP  program. While DOD officials noted that they have undertaken efforts to  periodically review and adapt the WIF program to changes in the PfP  program, the last formal evaluation of the WIF program took place in  2001. This was before the focus of the PfP and WIF programs changed in  response to the changing composition of participating countries and the  critical need for partner contributions to the NATO-led war in  Afghanistan. In addition, the challenges DOD has faced in implementing  the WIF-funded DIB program, including potential duplication of other  U.S.-funded assistance, heighten the need to assess whether the WIF  program is effectively supporting PfP countries\u2019 goals for cooperation  with NATO and NATO\u2019s efforts to deepen its relationships with partner  countries.\n\n\tRecommendation for Executive Action\n\nWe recommend that, following the establishment of NATO\u2019s new  Strategic Concept, which could result in changes to NATO\u2019s PfP program,  the Secretary of Defense conduct an evaluation of the U.S. WIF program  to ensure that it effectively supports the goals of NATO\u2019s PfP program.\n\n\tAgency Comments and Our Evaluation\n\nWe provided a draft of this report to the Secretaries of Defense and State  for their review and comment. DOD provided oral comments stating that  the Department concurs with our recommendation. In commenting on  our draft, DOD noted that the Department has conducted periodic  reviews of the WIF program and, as a result, the program has evolved  over time to keep pace with changes in NATO. DOD and State also  provided technical comments, which we incorporated in the report as  appropriate.\nAs agreed with your office, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days from the  report date. At that time, we will send copies of this report to the  Secretaries of Defense and State and other interested congressional  committees. In addition, this report will be available at no charge on the  GAO Web site at http:\/\/www.gao.gov.\nIf you or your staff have any questions about this report, please contact  me at (202) 512-8979 or christoffj@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 VI.\n\nAppendix I: Scope and Methodology\n\nOur objectives were to (1) describe how the Partnership for Peace (PfP)  program has evolved since GAO last reported on it; (2) describe options  the North Atlantic Treaty Organization (NATO) is considering for the  future of the PfP and other partnership programs under the new Strategic  Concept; and (3) analyze support to PfP countries through the U.S.  Warsaw Initiative Fund (WIF) program. To address these objectives, we  analyzed NATO, Department of Defense (DOD), and Department of State  (State) documents; academic literature related to PfP and WIF programs;  and WIF funding data for fiscal years 2006 through 2010. We met with DOD  and State officials in Washington, D.C., and the U.S. Mission to NATO in  Brussels, Belgium. We also met with NATO officials at both NATO  Headquarters in Brussels and at Supreme Headquarters Allied Powers  Europe in Mons, Belgium, as well as with representatives from five PfP  countries and one NATO member country. In addition, we conducted  phone interviews with geographic U.S. combatant command officials who  have PfP countries in their areas of responsibility\u2014European Command  (EUCOM) in Stuttgart, Germany, and Central Command (CENTCOM) in  Tampa, Florida. We also reviewed relevant GAO and Congressional  Research Service reports to obtain additional background information on  NATO, the PfP, and NATO and the United States\u2019 security cooperation  relationships with PfP countries.\nIn addition, we selected three countries\u2014Bosnia-Herzegovina, Georgia,  and Kazakhstan\u2014to examine NATO\u2019s bilateral relationship with PfP  partners and U.S. support through the WIF program in greater depth. We  sought to pick countries that differed, among other things, in terms of their  geographic location, level of participation in the PfP, interest in NATO  membership, and contributions to NATO operations. We met with State  and DOD officials at the U.S. Embassy in Tbilisi, Georgia; Government of  Georgia officials; and NATO officials based in Tbilisi. We also conducted  telephone interviews with U.S. officials in Sarajevo, Bosnia-Herzegovina;  and Astana, Kazakhstan; and with an official from NATO Headquarters,  Sarajevo. This sample of three countries is not intended to be  representative of all countries participating in the PfP program or  receiving WIF funding.\nTo describe how the PfP program has evolved since 2001 when GAO last  reported on it, we reviewed a variety of relevant NATO documents that  provided information on the PfP and analyzed how it has evolved over  time. These documents included background materials that NATO has  produced on the PfP generally and on specific PfP mechanisms. We also  reviewed materials NATO has produced describing NATO enlargement  since the PfP was created in 1994 and materials describing the  organization\u2019s cooperative efforts with specific PfP countries.  Additionally, we assessed the results of NATO reviews of the PfP  conducted in 2002 and 2004 and reviewed NATO summit statements from  1999 through 2009 to identify decisions NATO leaders have made about  the PfP. We also reviewed NATO guidance on the PfP, such as NATO\u2019s  Handbook, the 2009 Euro-Atlantic Partnership Work Plan (EAPWP)  Overarching Guidance, and the 2009 Planning and Review Process (PARP)  Ministerial Guidance. In order to assess PfP countries\u2019 level of engagement  with NATO and their use of key mechanisms, we also reviewed examples  of Individual Partnership Action Plans, Annual National Programmes, and  PARP documents. We also reviewed corresponding assessments for these  documents that describe NATO\u2019s findings about partners\u2019 progress in  achieving these goals. To identify troop contributions to NATO\u2019s  operations in Afghanistan and Kosovo, we analyzed publicly available  NATO data that provided approximate figures of troop contributions by  participating countries. We found these data to be sufficiently reliable for  presenting the extent to which countries are contributing troops to these  operations. To gather further information on how the PfP has changed  since 2001, we also assessed findings in State\u2019s annual reports to Congress  on PfP developments for years 2007 through 2009. We also used  information gathered in our interviews with U.S., NATO, and PfP country  officials to further identify ways that the PfP program has changed since  2001.\nTo describe options NATO is considering for the future of the PfP and  other partnership programs under the new Strategic Concept, we reviewed  and synthesized findings from several NATO analyses, conducted in 2009  and 2010, including the Group of Experts\u2019 final report, NATO\u2019s Multiple  Futures Project Final Report, NATO Allied Command Transformation\u2019s  report, \u201cBuilding the Alliance\u2019s New Strategic Concept,\u201d and the NATO  Parliamentary Assembly\u2019s recommendations regarding the new Strategic  Concept. We also reviewed summary reports from two NATO conferences  held in 2010 discussing the future of NATO\u2019s partnership efforts.  Additionally, we reviewed proposals by some PfP countries regarding how  the Strategic Concept should address the issue of partnerships. To gain  further information on considerations about NATO\u2019s Strategic Concept  and options for NATO\u2019s partnerships, we reviewed academic articles,  Congressional testimonies by NATO experts, speeches by key U.S. and  NATO officials, and interviewed U.S., NATO, and PfP country officials  during our visit to NATO Headquarters.\nTo analyze support to PfP countries through the U.S. WIF program, we  discussed WIF-funded activities and program monitoring with DOD  officials at the Office of the Secretary of Defense, Defense Security  Cooperation Agency (DSCA), EUCOM, and CENTCOM. We also discussed  the WIF program with security assistance officers at U.S. embassies in  Bosnia-Herzegovina, Georgia, and Kazakhstan. In addition, we discussed  the WIF program with an official from the Center for Civil-Military  Relations at the Naval Postgraduate School in Monterey, California, which  is responsible for managing the WIF-funded Defense Institution Building  (DIB) program. We also reviewed DSCA guidance on the WIF program,  and annual budget submissions and memos. In addition, to assess the  extent of DOD\u2019s past evaluations of the WIF program, we reviewed the  findings of two independent assessments of the WIF program completed in  2000 and 2001, a July 2005 audit of the WIF program by the DOD Inspector  General, and our July 2001 report on the NATO PfP and WIF programs.\nTo present information on WIF funding priorities and the distribution of  funding among eligible countries, we analyzed WIF summary budget data  for fiscal years 2006 through 2010 from DSCA. According to DOD, no  reliable data showing the distribution of WIF budgets among eligible  countries were available before fiscal year 2006. We also analyzed all  approved activities in the fiscal year 2010 WIF budget to determine how  WIF funding was distributed among eligible PfP countries and by type of  activity. We focused on fiscal year 2010 budget data because, for fiscal  years 2006 through 2009, DOD grouped a significant share of the WIF  budget into a multiple country category. For example, in fiscal year 2009,  the WIF budget allocated about $11 million out of a total of about $30  million in WIF funding to the multiple country category. The fiscal year  2010 WIF budget attributed more of the funding to specific countries and  allocated only about $2 million to the multiple country category.  Consequently, country breakouts in the fiscal year 2010 budget are more  meaningful than in previous years. We also analyzed data on canceled  activities approved in the WIF budgets for fiscal years 2009 and 2010 from  DSCA and corroborated this information through interviews or emails  with officials from DSCA; combatant commands; and the U.S. posts in  Bosnia, Georgia, and Kazakhstan.\nTo assess the reliability of DOD\u2019s WIF budget data, we interviewed DSCA  officials about the data and reviewed all the approved activities in the WIF  budgets for fiscal years 2009 and 2010. We also discussed WIF funding  with security assistance officers at U.S. posts in Bosnia-Herzegovina,  Georgia, and Kazakhstan to help verify the accuracy of DSCA budget data  in these countries. We found the WIF budget data used in this report to be  sufficiently reliable to present the distribution of the fiscal year 2010 WIF  budget among eligible countries and specific types of activities, such as  support for PfP countries\u2019 participation in military exercises and the DIB  program.\nWe conducted this performance audit from November 2009 to September  2010 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.\n\nAppendix II: Description of DOD Components Responsible for Executing the WIF Program\n\nWithin DOD, multiple components implement the WIF program. The  Office of the Secretary of Defense is responsible for the development,  coordination, and oversight of policy and other activities related to the  WIF program. DSCA manages the program and provides the funding to  different implementing components that are responsible for executing the  program. Table 3 describes these implementing components. The portion  of WIF funding that supports PfP countries\u2019 participation in military  exercises comes from WIF budget allocations to the relevant combatant  commands. The combatant commands also use some of their WIF funding  for military contact programs.\n\nAppendix III: Other U.S. Security Cooperation Programs Supporting WIF and PfP Goals\n\nTable 4 describes U.S. security cooperation programs that provide  assistance related to the goals of the WIF program and NATO\u2019s PfP  program. The relevant geographic combatant commands (COCOM) and  security assistance officers based at U.S. posts in recipient countries play  a key role in ensuring that the WIF program complements the other  available sources of funding in support of U.S. security cooperation goals.\nFigure 8 shows the level of funding of these programs and the WIF  program to eligible PfP countries in fiscal year 2009.\n\nAppendix IV: NATO Areas of Cooperation\n\nPfP countries are able to select partnership activities and events in which  they would like to participate from the EAPWP. The EAPWP lists activities  and events offered by NATO, as well as by individual NATO members and  other PfP countries. It is revised every 2 years. In the 2010-2011 EAPWP,  there are over 1,200 activities sorted into 34 areas of cooperation. PfP  countries determine the areas of cooperation on which they wish to focus  and select relevant activities in each area. Table 5 lists these areas of  cooperation.\n\nAppendix V: PfP Countries\u2019 PARP Partnership Goals\n\nEighteen PfP countries participate in PARP. Russia, Tajikistan,  Turkmenistan, and Malta are the only four PfP countries that do not  currently participate in the PARP process. PARP is modeled on NATO\u2019s  own force planning system and allows interested PfP countries to work  more closely with NATO to develop the interoperability of their forces and  strengthen their defense institutions. Countries participating in PARP  work with NATO to assess their defense capabilities, identify potential  contributions to NATO exercises and operations, and select specific  partnership goals for developing their defense capabilities and building  interoperability. There are over 150 partnership goals that partners can  choose from. There are general goals related to defense-wide issues, such  as defense planning and budgeting, as well as goals specific to countries\u2019  land, maritime, and air forces. Table 6 shows the 14 partnership goals most  commonly selected by partners in 2008.\nThe 18 countries selected an average of 37 partnership goals in 2008.  Ukraine selected the most goals with 96, while Kyrgyz Republic selected  the least with 15. The types of goals selected by countries varied. For  instance, Western European partners\u2019 goals for participation in the PfP  program focused primarily on improving military capabilities and  interoperability with NATO. The European Union (EU) and NATO have  committed to adhere to common standards in the development of their  armed forces, so PfP countries that are also EU members are fulfilling EU  requirements by developing interoperability with NATO. The Western  European PfP countries already have developed civilian-run defense  institutions and, therefore, do not generally pursue goals related to those  issues. Countries from the Balkans and the former Soviet Union selected  goals related to improving their military capabilities and interoperability  with NATO as well. However, many of these countries also identified  additional objectives related to defense institution building, including  goals focusing on civilian control of the military, defense budgeting and  planning, and effective personnel and resource management.\n\nAppendix VI: GAO Contact and Staff Acknowledgments\n\n\tStaff Acknowledgments\n\nKey contributors to this report include Judith McCloskey, Assistant  Director; Ashley Alley; Debbie Chung; Howard Cott; David Dayton; David  Dornisch; Etana Finkler; and Ryan Vaughan.","output":"Why GAO Did This Study\n\nThe North Atlantic Treaty Organization (NATO) established the Partnership for Peace (PfP) to increase cooperation with former Warsaw Pact members and provide many of these countries with a path to NATO membership. As NATO confronts new security challenges, including the war in Afghanistan, its relationships with partner countries have grown in scope and importance. Additionally, NATO is developing a new Strategic Concept to clarify its mission and activities, including its relationship with PfP countries and other partners. The Department of Defense (DOD)-funded Warsaw Initiative Fund (WIF) supports the goals of the PfP program. GAO was asked to review (1) how the PfP program has evolved since GAO last reported on it in 2001; (2) options NATO is considering for the future of the PfP and other partnership programs; and (3) support to PfP countries through the U.S. WIF program. GAO analyzed NATO, DOD, and State Department (State) documents; and WIF funding data. GAO also interviewed DOD, State, NATO, and selected country officials.\n\nWhat GAO Found\n\nThe PfP program has evolved in four key ways since July 2001, when GAO last reported on it. First, several former PfP countries from Central and Eastern Europe have become NATO members, resulting in both a decline in the number of countries participating in the PfP and in the number of PfP countries seeking NATO membership. Second, NATO has developed additional mechanisms for engaging with PfP countries, allowing partners additional opportunities to tailor their participation in the PfP based upon their individual objectives and capacities. Third, the growing size and significance of the NATO operation in Afghanistan has increased NATO's emphasis on developing PfP countries' capabilities for participating in NATO military operations and the strategic importance of the Caucasus and Central Asian PfP countries. Fourth, as NATO has taken steps to wind down its peacekeeping efforts in the Balkans, it has increasingly used the PfP to build cooperative relationships with countries in the region, marking a shift in its role in stabilizing that part of Europe. NATO's new Strategic Concept is expected to highlight the importance of the PfP and other NATO partnerships, and discuss ways to strengthen them further. First, NATO is debating how to strengthen its partnerships with a growing number of countries outside of the PfP. Some NATO members disagree about the extent to which NATO should pursue a more global partnership agenda. Second, NATO is considering options to enhance its routine and crisis consultations with PfP countries on security issues. Third, NATO is evaluating how to more effectively engage with PfP countries, such as those in Central Asia, that are not seeking NATO membership. Fourth, NATO is debating how to best balance PfP countries' aspirations for membership with Russian concerns about NATO expansion. The changing composition of countries participating in the PfP program has affected the budget and focus of the WIF program, which supports the participation of PfP countries in military exercises and military contact programs. The decline in the number of countries in the PfP program contributed to a drop in average annual WIF funding from about $43 million in fiscal years 1996 through 2005 to about $29 million in fiscal years 2006 through 2010, according to a DOD official. Moreover, WIF funding is no longer concentrated on PfP countries aspiring to join NATO, as it was in the initial years of the program. In 2006, DOD established the Defense Institution Building program as a key focus of the WIF program to help PfP countries develop more professional and transparent defense establishments. Planned activities included assisting with strategic defense reviews; and developing defense planning, budgeting, and resource management systems, among others. DOD has encountered challenges implementing this program, including potential duplication with other U.S. assistance in some countries and limited interest from other countries, which have contributed to frequent cancellations of planned activities. DOD has not formally evaluated the WIF program since 2001, although there have been changes since then in the composition of participating countries and the focus of the WIF program.\n\nWhat GAO Recommends\n\nGAO recommends that, following the establishment of NATO's new Strategic Concept, which could result in changes to NATO's PfP program, the Secretary of Defense conduct an evaluation of the U.S. WIF program to ensure that it effectively supports the goals of NATO's PfP program. DOD concurred with the recommendation."}
{"id":"gao_RCED-96-252","pid":"gao_RCED-96-252_0","input":"\tBackground\n\nThe increased threat of terrorism is an urgent national issue. The President directed the establishment of a commission on July 25, 1996, headed by Vice President Gore, whose charter included reviewing aviation security. The commission was charged with reporting to the President within  45 days its initial findings on aviation security, including plans to (1) deploy technology capable of detecting the most sophisticated explosive devices and (2) pay for that technology. In a classified report, we made recommendations to the Vice President, in his capacity as chairman of the commission, that would enhance the effectiveness of the commission\u2019s work. Detection technologies are also important in the effort to stem the flow of drugs into the United States.\nDetection technologies are typically developed for specific applications\u2014some for aviation security, some for drug interdiction, and some for both. The major applications for the aviation security efforts of the Federal Aviation Administration (FAA) include the screening of checked baggage, passengers, cargo, mail, and carry-on items such as electronics, luggage, and bottles. FAA\u2019s need for detection technology comes from its security responsibilities involving more than 470 domestic airports and 150 U.S. airlines, annually boarding over 500 million passengers with their checked baggage and carry-on luggage, and transporting mail and cargo.\nSome advanced detection technologies are commercially available to serve aviation security applications. However, only one technology is currently deployed in the United States. That technology is being operationally tested at two U.S. airports.\nMajor applications for the drug interdiction efforts of the U.S. Customs Service include screening of cargo and containers, pedestrians, and vehicles and their occupants. Customs\u2019 need for detection technology emanates from its responsibilities to control 301 ports of entry. Currently, over 400 million people, almost 120 million cars, and 10 million containers and trucks pass through these points each year.\nCurrently, Customs\u2019 screening is done manually by inspectors with relatively little equipment beyond hand-held devices for detecting false compartments in containers.\nThe challenges in detecting explosives are significantly different than the challenges in detecting narcotics, as are the consequences in not detecting them. Customs and other drug enforcement agencies are concerned with much larger quantities than are aviation security personnel. Consequently, greater technical challenges are posed in attempting to detect explosives that might be used to bring down a commercial aircraft.\nTwo general groups of technologies, with modifications, can be used to detect both explosives and narcotics. The first group uses X-rays, nuclear techniques involving neutron or gamma ray bombardment, or electromagnetic waves, such as radio frequency waves. These technologies show anomalies in a targeted object that might indicate concealed explosives and narcotics or detect actual explosives and narcotics. The second group, referred to as trace detection technologies, uses chemical analyses to identify particles or vapors characteristic of narcotics or explosives and deposited on, or surrounding, objects, such as carry-on electronics or surfaces of vehicles. In addition to technologies, dogs are considered a unique type of trace detector because they can be trained to respond in specific ways to smells of narcotics or explosives.\n\n\tSpending on Detection Technologies\n\nSince 1978, the federal government has spent about $246 million for research and development (R&D) on explosives detection technologies, including over $7 million for ongoing demonstration testing at the Atlanta, San Francisco, and Manila airports. During the same period, the government has spent about $100 million for R&D on narcotics technologies and a little more than $20 million procuring a variety of equipment to assist Customs inspectors, such as hand-held devices for detecting false compartments. The majority of the spending has occurred since 1990.\nAs shown in table 1, annual R&D spending on explosives detection technologies fluctuated from $23 million to $28 million during the first part of this decade, before increasing to $39 million for fiscal year 1996. The $14 million, or over 50 percent, increase from fiscal year 1995 is due principally to FAA\u2019s funding of demonstration testing of a technology for screening checked baggage and to the funding of a counterterrorism application by the Technical Support Working Group (TSWG).\nAnnual spending on narcotics detection technology increased during the first part of the decade from $14 million to a peak of $20 million in fiscal year 1994 and then dropped $3 million from that peak, or 15 percent. The reason for this decline is reduced spending by the Department of Defense (DOD) as it shifted emphasis from one type of narcotics detection technology to other, less costly types of technologies to satisfy Customs\u2019 needs.\n\n\t\tCongressional Direction\n\nThe spending on detection technologies that has occurred since 1990 has been due in large part to congressional direction. The Aviation Security Improvement Act of 1990 (Public Law 101-604) directed FAA to increase the pace of its R&D. The act also set a goal of deploying explosives detection technologies by November 1993. However, it prohibited FAA from mandating deployment of a particular technology until that technology had first been certified as capable of detecting various types and quantities of explosives using testing protocols developed in conjunction with the scientific community.\nFAA initially concentrated its efforts on developing protocols and technologies for screening checked baggage to address one of the security vulnerabilities that contributed to the bombing of Pan Am flight 103 in December 1988. However, the goal of deploying such technology has still not been met. FAA has certified one system, and it is being operationally tested at two domestic airports and one airport overseas.\nCongress tasked DOD in 1990 to develop narcotics detection technologies for Customs and other drug enforcement organizations. DOD has focused on developing \u201cnon-intrusive inspection\u201d technologies to screen containers without the need for opening them. Customs is deploying a DOD-developed technology for trucks and empty containers, but it rejected another DOD-developed technology for fully loaded containers (see p. 8). Customs has identified containerized cargo at commercial seaports as its greatest unsolved narcotics detection requirement. According to Customs, it may be necessary to explore new methods of financing the systems that are technologically feasible for seaports, but high in cost.\n\n\tCharacteristics and Limitations of Detection Technologies\n\nBoth aviation security and drug interdiction depend on a complex mix of intelligence, procedures, and technologies, which can partially substitute for each other in terms of characteristics, strengths, and limitations. For example, FAA evaluates information from the intelligence community in determining a level of threat and mandating security procedures appropriate to a specific time and place. These security procedures include bag matching and passenger profiling. FAA estimates that incorporating bag matching in everyday security could cost up to $2 billion, while profiling could reduce to 20 percent the number of passengers requiring additional screening. The Customs\u2019 drug interdiction task has an analogous set of procedures and technologies and trade-offs.\nRelevant trade-offs in selecting detection technologies for a given application involve their characteristics and costs, including issues of their effectiveness in detecting explosives or narcotics, safety risks to users of the technology, and impacts on the flow of commerce. For example, some highly effective technologies could be deployed now, but they are expensive, raise safety concerns, or slow the flow of commerce. These trade-offs are required for each of the major detection technology applications for FAA and Customs.\nWhile areas of overlap exist, FAA\u2019s aviation security applications generally relate to checked baggage, passengers, and carry-on items, and Customs\u2019 drug interdiction applications generally relate to screening of cargo, containers, vehicles, and baggage. In addition to detection technologies, teams of dogs and their handlers are used for both aviation security and drug interdiction applications.\n\n\t\tAviation Security Applications\n\n\t\t\tChecked Baggage\n\nA system is available today for screening checked baggage that has been certified by FAA as capable of detecting various types and quantities of explosives likely to be used to cause catastrophic damage to a commercial aircraft, as is required by the Aviation Security Improvement Act of 1990. However, the certified system is costly and has operational limitations, including a designed throughput of about 500 bags an hour with actual throughput much less than that number. Other less costly and faster systems are available, but they cannot detect all the amounts, configurations, and types of explosive material likely to be used to cause catastrophic damage to commercial aircraft.\nFAA\u2019s plans for developing detection technologies for checked baggage include efforts to improve the certified system, develop new technologies, and evaluate a mix of technologies. FAA believes that an appropriate mix of systems that individually do not meet certification requirements might eventually work together to detect the amounts, configurations, and types of explosive material that are required by the act.\nAppendix I provides additional information about the various types of technologies available and under development for screening checked baggage, including the characteristics and limitations of those technologies, their status, the estimated range of prices for the technologies, and federal government funding for the technologies.\n\n\t\t\tPassengers\n\nThe National Research Council recently reported that X-ray and electromagnetic technologies produce images of sufficient quality to make them effective for screening passengers for concealed explosives. Future development efforts by FAA and TSWG are generally focusing on devices that detect explosives on boarding documents passengers have handled and portals that passengers would walk through. One type of portal uses trace detection technologies that collect and analyze traces from the passengers\u2019 clothing or vapors surrounding them. The other type uses electromagnetic waves to screen passengers for items hidden under clothing.\nThe National Research Council also recently observed that successful deployment of these technologies is likely to depend on the public\u2019s perception about the seriousness of the threat and the effectiveness of devices in countering the threat, which might also be considered intrusive or thought to be a health risk. (See App. II for more information about the various types of technologies available and under development for passenger screening.)\n\n\t\t\tCarry-on Items\n\nTechnologies available today for screening carry-ons for hidden explosives include conventional X-ray machines, an electromagnetic system, and trace detection devices. FAA has recently developed trace detection standards for inspecting carry-on electronics for explosives. In addition, FAA has \u201cassessed as effective,\u201d but not certified, three trace detection systems to be used during periods of heightened security. FAA expects to soon \u201cassess as effective\u201d three more trace detection systems. The more expensive trace technologies used for carry-on baggage are capable of detecting smaller amounts of explosives and narcotics. FAA\u2019s future efforts are expected to include developing an enhanced X-ray device and screeners for bottles. (See app. III for more detailed information about technologies for screening carry-on items.)\n\n\t\tDrug Interdiction Applications\n\n\t\t\tContainers\n\nTests have shown that fully loaded containers can be effectively screened for narcotics with available high energy X-ray technologies (about 8 million electron volts or the equivalent of 50 to 70 times the energy of a typical airport-passenger X-ray). However, Customs rejected a DOD-developed high energy technology because it cost $12 million to $15 million per location, required a large amount of land for shielding, and raised safety concerns. Available low-energy technologies (the equivalent of 3 to 4 times the energy of a passenger X-ray) are less costly and safer but cannot penetrate full containers, so their use is limited to screening for hidden compartments in empty containers and objects concealed in trucks and trailers. About 4 to 25 containers per hour can be processed through low- and high-energy X-ray technologies depending on their configurations.\nAccording to DOD and Customs officials, future efforts in container screening will include developing less expensive X-ray systems with higher energy levels, mobile X-ray systems, and more capable hand-held trace detection systems. Those efforts will also include evaluating nuclear-based techniques for inspecting empty tankers at truck and rail ports. (See  app. IV for additional information about technologies for screening cargo and containers.)\n\n\t\tDog Teams\n\nDogs can be trained to alert their handlers upon detecting explosives and narcotics. FAA-certified dogs are trained to detect various types of explosive substances that might be concealed in aircraft, airport vehicles, baggage, cargo, and terminals. Customs\u2019 dogs are trained to detect narcotics and in 1994 almost 6,000 drug seizures were attributable to dog teams. Currently funded projects include efforts to develop methods of bringing air samples to the dogs, or swabs from objects they are to inspect.\n\n\tCurrent Deployments of Detection Technologies\n\nDespite the limitations of currently available detection technologies, other countries have deployed some of these technologies to detect explosives and narcotics because of differences in their perception of the threat and their approaches to counter the threat. These countries\u2019 experiences provide opportunities to learn lessons about operational measures taken to deploy detection technologies, such as the amount of airport modifications needed to incorporate new technologies and the types of training provided to the operators of the new equipment, as well as the actual effectiveness of the technologies.\nWhile Customs has deployed equipment such as hand-held devices, it is also deploying up to 12 low-energy X-ray systems to screen empty containers and trucks for narcotics along the Southwest border. On the other hand, some countries are using high-energy systems to screen fully loaded containers. The high-energy systems installed at ports of entry in the United Kingdom, France, Germany, and China would have similar uses at seaports here, but Customs officials told us that the systems are too new for reliable operational data. They also told us that tests have not been conducted against Customs\u2019 requirements and the technologies would also be too expensive in the quantities needed for nationwide deployment.\nA high-energy nuclear system is being considered for deployment at the Euro Tunnel between France and the United Kingdom. The system would be used to screen for explosives concealed in trucks and their cargo being transported under the English Channel. This system could also be used to detect narcotics.\nIn the United Kingdom, Germany, the Netherlands, and Belgium, we observed governments working closely with airport authorities to deploy explosives detection technologies. In two countries, airport authorities have generally embraced an approach that entails successive levels of review of checked baggage to resolve uncertainty about checked baggage. This approach can require complex systems for tracking throughout the entire baggage handling system. Instead of using only the FAA-certified system for checked baggage, these countries are using a mix of technologies. Their approach has been to implement technology that is an improvement on existing technology or procedures, rather than waiting for perfected technology.\nOfficials in the two other countries are waiting for the next generation of explosives detection technologies. They believe that X-ray technologies have generally reached their limits in detecting explosives.\nAll of the countries have also deployed trace detection technology for screening checked baggage or carry-on items, especially electronics.\nFAA officials told us they cannot mandate the types of approaches used by other countries, although airlines could voluntarily adopt them, because of the statutory prohibition against mandating technology that is not certified.\nWith a combination of the best available technologies and procedures, including the use of the certified system for screening checked baggage, FAA estimates the incremental cost of the most effective security system for U.S. air travellers to be $6 billion over the next 10 years. On a per-passenger basis, FAA estimates the equivalent cost to be about $1.30 per one-way ticket.\nCustoms and FAA have deployed dog teams widely. Customs has deployed about 450 dog teams to airports, seaports, and land border ports. The cost to train a Customs\u2019 dog and handler is about $6,000. FAA\u2019s canine explosives detection program includes 29 U.S. airports with a total of 72 FAA-trained and certified dog teams. Of the 19 largest U.S. airports, 14 have FAA-trained and certified dogs. The five airports without certified dogs are Washington-National, Washington-Dulles, Baltimore-Washington International, New York-John F. Kennedy, and Honolulu. According to an FAA official, these airports do not have FAA-certified dog teams because airport officials are concerned about cost. The cost to train an FAA dog and handler is about $17,000 and the annual operating cost of a team, including the handler\u2019s salary, is about $60,000.\n\n\tAgency Comments\n\nFive agencies\u2014FAA, DOD, Customs, TSWG, and ONDCP\u2014provided comments on the technical accuracy of information contained in a draft of this report. We have incorporated their comments in this final report where appropriate.\n\n\tScope and Methodology\n\nTo determine the amount of federal government spending for R&D on explosives and narcotics detection technologies, we obtained funding information from Customs, FAA, DOD, ONDCP, and TSWG covering periods as far back as the information was available. Although we identified the historical and current levels of funding, we generally focused on the period 1990 to the present because most technologies were developed and deployed during this period.\nTo obtain information on the characteristics and limitations of available and planned technologies for containers, checked baggage, passengers, and carry-on items, we requested project information from the same five agencies for each detection technology project they had undertaken since 1990. Additionally, we received briefings from developers of technology and manufacturers of equipment currently available on the market.\nWe analyzed major categories of technologies to identify a few characteristics common to each that can be used in making comparisons. We did not attempt to evaluate the effectiveness of the technologies, nor did we assess whether the current funding level is adequate to develop reliable detection technologies.\nWe interviewed officials and gathered data primarily from the FAA, DOD, Customs, ONDCP, and TSWG to develop information on available and planned detection technologies. We also interviewed officials and visited ports of entry in Miami, Florida; San Juan, Puerto Rico; and Otay Mesa, California; and airports in Belgium, Germany, the Netherlands, United Kingdom, and the United States.\nWe are sending copies of this report to the Vice President of the United States; Chairmen and Ranking Minority Members of appropriate congressional committees; the Secretaries of Treasury, State, Defense, and Transportation; the Attorney General, Department of Justice; the Administrators, FAA and Drug Enforcement Administration; the Commissioner, U.S. Customs Service; and the Directors, ONDCP, Central Intelligence, and Federal Bureau of Investigation.\nIf you or your staff have any questions concerning explosives detection technology, please contact Gerald L. Dillingham at (202) 512-2834. If you have any questions regarding narcotics detection technologies, please call David E. Cooper on (202) 512-4841. Major contributors to this report are listed in appendix V.\n\nApplication: Checked Baggagea\n\nFunding (FYs 78-96)\nX-ray source rotates around a bag obtaining a large number of cross-sectional images that are integrated by a computer, which displays densities of objects in the bag. $850,000 to $1 million $22.2 million (FAA)\nAutomatically alarms when objects with high densities, characteristic of explosives, are detected.\nRelatively slow throughput; certified system requires two units to meet throughput requirement.\nCommercially available. Achieved Federal Aviation Administration (FAA) certification in December 1994. FAA currently funding operational testing at three airports and also funding projects to improve throughput rate, reduce unit cost, and improve overall capabilities. Department of Defense (DOD) recently tested technology for detecting drugs in small packages.\nTwo different X-ray energies determine the densities and average atomic numbers of the target material.\nCommercially available. FAA is developing an enhanced version that may meet certification standards. The U.S. Customs Service (Customs) plans to test this technology for drug detection. $2.1 million (FAA)\nCurrently none of the X-rays in this group meets certification standards for checked bags because they do not detect the quantities and configurations of the full range of explosives specified in the standards. (continued)\nFunding (FYs 78-96)\nBackscatter detects reflected X-ray energy, providing an additional image to highlight organic materials such as explosives and drugs near the edge of a bag.\nCommercially available. FAA has several projects aimed at assisting this group of X-ray devices meet certification standards. $100,000 to $140,000 $100,000 (Customs) $2.2 million (FAA)\nThis group of X-ray devices generally does not automatically alarm and therefore requires an operator to interpret the image.\nTechnology is based on the detection of scatter patterns as X-rays interact with crystal lattice structures of materials.\nFAA and Customs terminated projects due to significant technical problems. A foreign government and contractor are supporting development of this technology. $4.5 million (FAA) $270,000 (Customs)\nAccelerator produces gamma rays that penetrate bags to detect presence of chlorine compounds in narcotics.\nDOD is building a prototype to demonstrate proof-of-principle for airport baggage carousel application. Demonstration is expected in December 1996. $8.6 million (DOD)\nEventual system expected to be very expensive.\nSix machines built and tested since 1989. FAA discontinued checked baggage portion of project in 1994, but it is now investigating carry-on application. DOD contractor now using FAA machines to test drug detection. radioactive source probe bags for presence of nitrogen or chlorine compounds. $6.6 million (FAA) $280,000 (DOD) $27,000 (Customs)\nAutomatically alarms on explosives or narcotics.\nCost, size, and false alarm rate were of concern to airline industry, President\u2019s Commission on Terrorism and Aviation Security, and Customs. (continued)\nFunding (FYs 78-96)\nRadio frequency pulses probe bags to elicit unique responses from explosives and drugs.\nNonimaging technology that provides chemically specific detection and automatically alarms on explosives or drugs.\nCommercially available. FAA has a prototype capable of detecting two types of explosives. Customs has a prototype capable of detecting cocaine base. $1 million (DOD) $350,000 Office of National Drug Control Policy (ONDCP) $0.7 million (FAA) $1.6 million Technical Support Working Group (TSWG)\nCurrently does not meet FAA certification standards.\nDetection of certain cocaine compounds needs improvement.\nThe Funding column indicates whether a specific technology was developed or is being developed for explosives detection, narcotics detection, or both. Generally, FAA and TSWG funding has supported explosives detection, while funding by DOD, Customs, and ONDCP has supported narcotics detection. Where a technology funding cell shows FAA or TSWG in combination with DOD, Customs, or ONDCP, that technology is generally capable of detecting both narcotics and explosives.\n\nApplication: Passengersa\n\nFunding (FYs 78-96)\nSystem is nonimaging, but will automatically alarm if drug is detected in the digestive tract of a swallower.\nRequires about 30 seconds to screen a suspect.\nPrototype developed and tested at an airport. Project was terminated because system emitted radio frequencies that interfered with airport operations and Customs decided against spending additional $165,000 on needed shielding. System is now sitting idle at a Customs\u2019 storage facility. $1.3 million (ONDCP) $123,000 (Customs)\nSystem will scan 360 degrees around a passenger and automatically pinpoint the location of all undeclared objects on the surface of the body.\nUnder development by FAA. Factory and airport testing to occur in 1997. $110,000 to $200,000 $1.6 million (FAA)\nSystem will be capable of processing 500 passengers per hour.\nSystem provides 360- degree imaging of the human body in order to detect weapons, explosives, and drugs concealed underneath clothing.\nUnder development by FAA. Fieldable prototype to be completed mid-1997 with airport testing to follow. $100,000 to $200,000 $5.3 million (FAA)\nSystem does not provide automatic detection, but relies on an operator to spot the contraband.\nSystem expected to process 360- 600 passengers per hour. (continued)\nFunding (FYs 78-96)\nUnder development by FAA. Fieldable prototype completed in 1995. Factory and airport testing will begin in late 1996. $4.0 million (FAA) clothing collect vapor and particles while passengers are walking through the portal.\nSystem will automatically alarm if explosive is detected.\nThroughput is estimated to be 360 per hour.\nAir flow dislodges vapor or particles from passengers walking through portals to test for explosives.\nTwo prototypes are being developed by FAA. $300,000 to $500,000 $2.5 million (FAA)\nSystems automatically alarm if explosive is detected.\nThroughput goal is 360 per hour.\nTrace samples collected from passengers\u2019 hands either through a token or document.\nUnder development by FAA. Field prototype to be available sometime in 1996. $65,000 to $85,000 $125,000 (FAA)\nSystem will automatically alarm if explosive is detected.\nThroughput is estimated to be 425 per hour.\nIMS Document Screeners Collects trace samples $65,000 to $85,000 $430,000 (TSWG) from passengers\u2019 documents.\nUnder development by TSWG. Project started in April 1996 and to be completed in 1998.\nSystem will automatically alarm if explosive is detected.\nThroughput is estimated to be 450 per hour. (Table notes on next page)\nThe Funding column indicates whether a specific technology was developed or is being developed for explosives detection, narcotics detection, or both. Generally, FAA and TSWG funding has supported explosives detection, while funding by DOD, Customs, and ONDCP has supported narcotics detection. Where a technology funding cell shows FAA or TSWG in combination with DOD, Customs, or ONDCP, that technology is generally capable of detecting both narcotics and explosives.\n\nApplication: Carry-on Luggagea\n\nFunding (FYs 78-96)\nMeasures mobility of various chemicals through a gas in an electrical field.\nCommercially available. For example, 125 units of a particular IMS system have been deployed overseas. $45,000 to $152,000 $2.3 million (FAA)\nFast, portable, and inexpensive.\nLower chemical specificity than mass spectrometry. $100,000 to $170,000 chromatography and mass spectrometry or chemiluminescence that separates mixtures using an absorbent material.\nCommercially available. For example, 154 units of a chemiluminescence system have been deployed overseas. $2 million (FAA) $230,000 (TSWG)\nHigh sensitivity and chemical specificity.\nProduces evidence acceptable in court.\nExpensive, slow, and bulky.\nDo not automatically alarm, so dependent on operator interpretation of enhanced images.\nUnder development. $325,000 (FAA) $250,000 (TSWG)\nLimited penetration of target objects. (continued)\nFunding (FYs 78-96)\nRadio frequency pulses probe hags to elicit unique responses from explosives and drugs.\nCommercially available. A field prototype capable of handling small size packages was tested in Atlanta during the Olympics by airlines to screen electronics.\nThis is a product derived from funding the same technology listed in appendix I.\nNonimaging technology that provides chemically specific detection and automatically alarms on explosives or drugs.\nDetection of certain cocaine compounds needs improvement.\nSystem uses microwave technology to penetrate bottles and will discover when bottles do not contain the liquid that is expected. It is basically a discovery rather than detection system.\nThis is an FAA in-house project working with a commercially available device. FAA is currently testing field prototypes. $19,000 to $25,000 $77,000 (FAA)\nSystem does not identify the liquid in the bottle.\nSystem throughput is expected to be 720 bottles per hour. However, system is unable to penetrate certain types of bottles.\nAutomatically alarms if explosives detected.\nPrototypes are available. $75,000 to $125,000 $974,000 (FAA)\nAnalysis time varies between 20 and 70 seconds per target. Manufacturer is working to shorten analysis time.\nThe Funding column indicates whether a specific technology was developed or is being developed for explosives detection, narcotics detection, or both. Generally, FAA and TSWG funding has supported explosives detection, while funding by DOD, Customs, and ONDCP has supported narcotics detection. Where a technology funding cell shows FAA or TSWG in combination with DOD, Customs, or ONDCP, that technology is generally capable of detecting both narcotics and explosives.\n\nApplication: Containers, Trucks, and Cargoa\n\nFunding (FYs 78-96)\nAn accelerator generates gamma rays to penetrate the object to be screened. The gamma rays are preferentially absorbed by nitrogen nuclei. A significant decrease in the number of detected gamma rays indicates the possible presence of explosives.\nProject was originally intended for checked bags and has been inactive since 1993. FAA may reactivate project for screening air cargo containers. $12.1 million (FAA)\nSystem requires less shielding than other nuclear technologies.\nAn accelerator generates neutrons for bombarding target; induced gamma rays are measured to detect presence of narcotics or explosives.\nSystem automatically alarms based on 3 dimensional images of elemental ratios of hydrogen, oxygen, nitrogen, and carbon.\nDOD completed the project, but the system was not transitioned to Customs due to Customs\u2019 concern with cost, size, operational, and safety issues. FAA conducted limited testing for checked baggage application in 1993 and it is now considering a new project for screening air cargo. TSWG is funding a counterterrorism application. $8 to $10 million $19 million (DOD) $ 5.3 million (FAA)  $6.2 million (TSWG)\nSystem takes 20 minutes per analysis and would typically be combined with an X-ray system to speed throughput.\nRequires a large amount of space and shielding, a radiation permit, and an FDA permit for use on food.\nAlso uses an accelerator to generate fast neutrons to probe bags; measurement of the transmitted neutron spectrum is used to detect explosives.\nFAA has two ongoing projects and now believes technology might be more suitable for screening air cargo or containerized checked baggage than individual bags. $3.5 million (FAA) (continued)\nFunding (FYs 78-96)\nSystem is designed for propane and other gas or liquid tanker trucks but is adaptable to scan railcars.\nPrototype being evaluated by DOD and Customs. $382,000 (ONDCP)\nWhile open and unsheltered, system requires a radiation permit to operate.\nSystems are designed to scan loaded trucks\/containers and have throughput of 12-25 per hour depending on configurations.\nCommercially available. DOD completed the project in Tacoma, Washington, but system was not transitioned to Customs due to Customs\u2019 concerns with cost, safety, and operational issues. $12 to $15 million $15 million (DOD) $224,000 (Customs)\nRequired extensive shielding, radiation permit, and FDA permit if used on food.\nSystem relies on operator\u2019s interpretation of the X-ray images.\nSystem is designed to scan empty trucks or containers.\nThroughput is about six trucks per hour.\nCommercially available. Customs has deployed one machine at Otay Mesa, California, and plans to deploy up to 11 more along the Southwest border. $3.7 million (DOD)\nRelies on operator\u2019s interpretation of the X-Ray images.\nSystems are designed to scan empty or loaded trucks and containers depending on the energy level and to complement the fixed-site X-ray systems.\nDOD is testing 450 KeV system and still developing machines at other energy levels. $1.75 to $6 million $10.8 million (DOD)\nA 1 MeV system is designed for aircraft size cargo containers.\nMay also be useful for scanning passenger vehicles. (continued)\nFunding (FYs 78-96)\nRadio frequency wave probes objects, except that a magnet aligns hydrogen atoms prevalent in liquids.\nAbandoned machine is in storage at major Southeastern seaport. $130,000 (Customs)\nAbandoned FAA prototype for checked baggage was modified for Customs to scan frozen shrimp packages.\nMachine short-circuited during storm and Customs decided against spending for machine repair.\nSystems are based on gas chromatography, chemiluminescence, mass spectroscopy, surface acoustic wave, ion mobility spectroscopy, and biosensor technologies.\nMany commercially available. DOD is developing some prototypes for use by Customs. $2,500 to $170,000 $240,000 (Customs) $2.4 million (TSWG) $4.7 million (DOD)\nSample collection steps are highly critical for the effectiveness of systems. Most existing systems use vacuum or wiping with a swab.\nMost existing systems are not currently capable of detecting the extremely low vapor pressures of cocaine and heroin. (continued)\nFunding (FYs 78-96)\nSystem differs from other vapor detectors in that it draws air sample from a barometric chamber into which the object to be inspected has been shaken and subjected to heat cycles.\nUnder development by FAA. A fieldable prototype is expected to be tested by October 1996. $1.8 million (TSWG)\nSystem automatically alarms if explosive is detected.\nSystem may not work on a tightly sealed object.\nSystem concentrates 400 litres of air to .5 cc of liquid.\nUnder development by FAA. $35,000 to $42,000 $1.3 million (FAA)\nBiosensor specifically identifies the explosives detected.\nSystem is suitable for use in cargo holds and interiors of aircraft, etc.\nThe Funding column indicates whether a specific technology was developed or is being developed for explosives detection, narcotics detection, or both. Genrally, FAA and TSWG funding has supported explosives detection, while funding by DOD, Customs, and ONDCP has supported narcotics detection. Where a technology funding cell shows FAA or TSWG in combination with DOD, Customs, or ONDCP, that technology is generally capable of detecting both narcotics and explosives.\n\nMajor Contributors to This Report\n\n\tNational Security and International Affairs Division, Washington, D.C.\n\n\tResources, Community, and Economic Development Division, Washington, D.C.\n\nThomas F. Noone Matthew E. Hampton Marnie S. Shaul Gerald L. Dillingham The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent.\nU.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000  or by using fax number (301) 258-4066, or TDD (301) 413-0006.\nEach day, GAO issues a list of newly available reports and testimony.  To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone.  A recorded menu will provide information on how to obtain these lists.","output":"Why GAO Did This Study\n\nPursuant to a congressional request, GAO provided information on explosives and narcotics detection technologies that are available or under development, focusing on: (1) funding for those technologies; (2) characteristics and limitations of available and planned technologies; and (3) deployment of these technologies by the United States and foreign countries.\n\nWhat GAO Found\n\nGAO found that: (1) aviation security and drug interdiction depend on a complex and costly mix of intelligence, procedures, and technologies; (2) since 1978, federal agencies have spent about $246 million for research and development on explosives detection technologies and almost $100 million on narcotics detection technologies; (3) most of this spending has occurred since 1990, in response to congressional direction, and has been for technologies to screen checked baggage, trucks, and containers; (4) difficult trade-offs must be made when considering whether to use detection technologies for a given application; (5) chief among those trade-offs are the extent to which intelligence-gathering and procedures can substitute for technology or reduce the need for expensive technology; (6) decisionmakers also need to evaluate technologies in terms of their characteristics and limitations; (7) some technologies are very effective and could be deployed now, but they are expensive, slow the flow of commerce, and raise issues of worker safety; (8) other technologies could be more widely used, but they are less reliable; (9) still others may not be available for several years at the current pace of development; (10) despite the limitations of the currently available technology, some countries have already deployed advanced explosives and narcotics detection equipment because of differences in their perception of the threat and their approaches to counter the threat; (11) should the United States start deploying the currently available technologies, lessons can be learned from these countries regarding their approaches, as well as capabilities of technology in operating environments; and (12) the Federal Aviation Administration estimates that use of the best available procedures and technology for enhancing aviation security could cost as much as $6 billion over the next 10 years or alternatively about $1.30 per one-way ticket, if the costs were paid through a surcharge."}
{"id":"gao_GAO-08-231T","pid":"gao_GAO-08-231T_0","input":"\tBackground\n\nIraq\u2019s national government was established after a constitutional  referendum in October 2005, followed by election of the first Council of  Representatives (Parliament) in December 2005, and the selection of the  first Prime Minister, Nuri Kamal al-Maliki, in May 2006. By mid-2006, the  cabinet was approved; the government now has 34 ministries responsible  for providing security and essential services\u2014including electricity, water,  and education\u2014for the Iraqi people. The Ministry of Finance is  responsible for tracking and reporting government expenditures. The Iraqi  government uses single-year budgeting, which generally requires that  funds be used by December 31, the end of Iraq\u2019s fiscal year.\nIn March 2003, the United States\u2014along with the United Kingdom,  Australia, and other members of the coalition\u2014began combat operations  in Iraq. The original \u201ccoalition of the willing\u201d consisted of 49 countries  (including the United States) that publicly committed to the war effort and  also provided a variety of support, such as direct military participation,  logistical and intelligence support, over-flight rights, or humanitarian and  reconstruction aid. Many nations and various international organizations  are supporting the efforts to rebuild Iraq through multilateral or bilateral  assistance. U.N. Security Council Resolution 1511 of October 16, 2003,  urged member states and international and regional organizations to  support the Iraq reconstruction effort. On October 23-24, 2003, an  international donors conference was held in Madrid, with 76 countries, 20  international organizations, and 13 nongovernmental organizations  participating.\n\n\tLimited Progress Has Been Made in National Reconciliation\n\nSince GAO last reported on the status of the 18 Iraqi benchmarks in  September 2007, the number of enemy attacks in Iraq has declined. While  political reconciliation will take time, Iraq has not yet advanced key  legislation on equitably sharing oil revenues and holding provincial  elections. In addition, sectarian influences within the Iraqi ministries  continue while militia influences divide the loyalties of Iraqi security  forces.\nThe January 2007 U.S. strategy, New Way Forward in Iraq, is designed to  support Iraqi efforts to quell sectarian violence and foster conditions for  national reconciliation by providing the Iraqi government with the time  and space needed to help address differences among the various segments  of Iraqi society. The number of enemy-initiated attacks on civilians, Iraqi  Security Forces, and coalition forces increased dramatically after the  February 2006 bombing of the Golden Mosque in Samarra. The increase in  the number of monthly attacks generally continued through June 2007. To  help quell the violence, the United States deployed about 30,000 additional  troops to Iraq during the spring of 2007, bringing the total number of U.S.  military personnel to about 164,700 as of September 2007.\nAs depicted in figure 1, enemy-initiated attacks declined from a total of  about 5,300 in June 2007 to about 3,000 in September 2007. However, the  recent decrease in monthly attacks was primarily due to a decrease in the  number of attacks against coalition forces. Attacks against Iraqi Security  Forces and civilians have declined less than attacks against coalition  forces.\nAccording to the Defense Intelligence Agency (DIA), the incidents  captured in military reporting do not account for all violence throughout  Iraq. For example, they may underreport incidents of Shi\u2019a militias fighting  each other and attacks against Iraqi security forces in southern Iraq and  other areas with few or no coalition forces.\nIn addition, according to a UN report released October 15, 2007, the Iraqi  people and government continue to confront major challenges resulting  from the devastating effects of violence. The UN reported that widespread  insecurity continues to make national dialogue challenging, and increasing  levels of displacement are adding to an alarming humanitarian crisis.\nThe Iraqi government continues to make limited progress in meeting eight  legislative benchmarks intended to promote national reconciliation. As of  October 25, 2007, the Iraqi government had met one legislative benchmark  and partially met another. Specifically, the rights of minority political  parties in the Iraqi legislature were protected through existing provisions  in the Iraqi Constitution and Council of Representatives\u2019 by-laws. In  addition, the Iraqi government partially met the benchmark to enact and  implement legislation on the formation of regions; this law was enacted in  October 2006 but will not be implemented until April 2008.\nThe benchmark requiring a review of the Iraqi Constitution has not yet  been met. Fundamental issues remain unresolved as part of the  constitutional review process, such as expanded powers for the  presidency, the resolution of disputed areas (such as Kirkuk), and power  sharing between federal and regional governments over issues such as the  distribution of oil revenue. In addition, five other legislative benchmarks  requiring parliamentary action have not yet been met. Figure 2 highlights  the status of the benchmarks requiring legislative enactment and  implementation.\nAlthough State and Multinational Force-Iraq report progress in promoting  reconciliation at local levels such as Anbar province, at the national level,  sectarian factions within the Iraqi government ministries continue to  undermine reconciliation efforts. For example, ministries within the Iraqi  government continued to be controlled by sectarian factions and are used  to maintain power and provide patronage to individuals and groups.  According to an August 2007 U.S. interagency report, the withdrawal of  members of the Iraqi cabinet ended the Shi\u2019a-dominated coalition\u2019s claim  to be a government of national unity and further undermined Iraq\u2019s already  faltering program of national reconciliation. In late August 2007, Iraq\u2019s  senior Shi\u2019a and Sunni Arab and Kurdish political leaders signed a unity  accord signaling efforts to foster greater national reconciliation. The  accord covered draft legislation on de-Ba\u2019athification reform and  provincial powers laws, and established a mechanism to release some  Sunni detainees being held without charges. However, these laws have not  been passed as of October 25, 2007.\nThe Iraqi government has made limited progress in developing effective  and non-sectarian forces. Since 2003, the United States has provided about  $19.2 billion to train and equip about 360,000 Iraqi soldiers and police  officers, in an effort to develop Iraqi security forces, transfer security  responsibilities to them and to the Iraqi government, and ultimately  withdraw U.S. troops from Iraq. Iraqi security forces have grown in size  and are increasingly leading counterinsurgency operations. However, only  about 10 of 140 Iraqi army, national police, and special operations forces  are operating independently as of September 2007.\nSeveral factors have complicated the development of effective and loyal  Iraqi security forces. First, the Iraqi security forces are not a single unified  force with a primary mission of countering the insurgency in Iraq. Second,  high rates of absenteeism and poor ministry reporting result in an  overstatement of the number of Iraqi security forces present for duty.  Third, sectarian and militia influences have divided the loyalties of Iraqi  security forces. According to the Independent Commission on the Security  Forces of Iraq, the Iraqi National Police is not viable and should be  disbanded. Fourth, Iraqi units remain dependent upon the coalition for  their logistical, command and control, and intelligence capabilities.\n\n\tUnited States and Iraq Lack Clear Strategies for Key Efforts\n\nThree GAO reports illustrate a recurring problem with U.S. efforts in  Iraq\u2014the lack of strategies with clear purpose, scope, roles and  responsibilities, and performance measures. Our reports assessing (1) the  National Strategy for Victory in Iraq (NSVI), (2) U.S. efforts to develop  planning and budget capacity in Iraq\u2019s ministries, and (3) U.S. and Iraqi  efforts to rebuild Iraq\u2019s energy sector show that clear strategies are needed  to guide U.S. efforts, manage risk, and identify needed resources.\n\n\t\tDeveloping a National Strategy for Iraq\n\nThe National Strategy for Victory in Iraq was intended to clarify the  President\u2019s strategy for achieving overall U.S. political, security, and  economic goals in Iraq. In our 2006 report, we found that the strategy was  incomplete.  First, it only partially identified the agencies responsible for  implementing key aspects of the strategy. Second, it did not fully address  how the United States would integrate its goals with those of the Iraqis  and the international community, and it did not detail Iraq\u2019s anticipated  contribution to its future needs. Third, it only partially identified the  current and future costs of U.S. involvement in Iraq, including maintaining  U.S. military operations, building Iraqi government capacity, and  rebuilding critical infrastructure. Without a complete strategy, U.S. efforts  are less likely to be effective. We recommended that the National Security  Council (NSC), along with DOD and State, complete the strategy by  addressing all six characteristics of an effective national strategy,  including detailed information on costs and roles and responsibilities.  NSC, State, and DOD did not comment on GAO\u2019s recommendations. In  commenting on the report, State asserted that GAO misrepresented the  NSVI\u2019s purpose\u2014to provide the public a broad overview of the U.S.  strategy in Iraq, not to set forth details readily available elsewhere.  However, without detailed information on costs and roles and  responsibilities, the strategy does not provide Congress with a clear road  map for achieving victory in Iraq.\nIn addition, we have provided the Congress classified reports and briefings  on the Joint U.S. Embassy \u2013 Multinational Force-Iraq\u2019s classified campaign  plan for Iraq.\n\n\t\tBuilding Capacity in Iraq\u2019s Ministries\n\nThe development of competent and loyal Iraqi ministries is critical to  stabilizing and rebuilding Iraq. To help Iraq develop the capability of its  ministries, the United States has provided about $300 million between  fiscal years 2005 to 2007. The Administration has requested an additional  $255 million for fiscal year 2008 to continue these efforts. However, U.S.  efforts lack an overall strategy, no lead agency provides overall direction,  and U.S. priorities have been subject to numerous changes. U.S. efforts  also face four challenges that pose risks to their success and long-term  sustainability. First, Iraqi government institutions have significant  shortages of personnel with the skills to perform the vital tasks necessary  to provide security and deliver essential services to the Iraqi people.  Second, Iraq\u2019s government confronts significant challenges in staffing a  nonpartisan civil service and addressing militia infiltration of key  ministries. Third, widespread corruption undermines efforts to develop  the government\u2019s capacity by robbing it of needed resources. Fourth,  violence in Iraq hinders U.S. advisors\u2019 access to Iraqi ministries, increases  absenteeism among ministry employees, and contributes to the growing  number of professional Iraqis leaving the country.\nWithout a unified U.S. strategy that clearly articulates agency roles and  responsibilities and addresses the risks cited above, U.S. efforts are less  likely to succeed. We recommended that the State Department complete  an overall integrated strategy for U.S. capacity development efforts.  Congress should also consider conditioning future appropriations on the  completion of the strategy. State recognized the value of such a strategy  but expressed concern about conditioning further capacity development  investment on completion of such a strategy.\n\n\t\tReconstructing Iraq\u2019s Energy Sectors\n\nThe weaknesses in U.S. strategic planning are compounded by the Iraqis\u2019  lack of strategic planning in its critical energy sector. As we reported in  May 2007, it is difficult to identify the most pressing future funding needs,  key rebuilding priorities, and existing vulnerabilities and risks given the  absence of an overarching strategic plan that comprehensively assesses  the requirements of the energy sector as a whole. While the Iraqi  government has crafted a multiyear strategic plan for Iraq\u2019s electricity  sector, no such plan exists for the oil sector. Given the highly  interdependent nature of the oil and electricity sectors, such a plan would  help identify the most pressing needs for the entire energy sector and help  overcome the daunting challenges affecting future development prospects.  For fiscal years 2003 to 2006, the United States made available about $7.4  billion and spent about $5.1 billion to rebuild Iraq\u2019s oil and electricity  sectors. However, production in both sectors has consistently fallen below  U.S. program goals of 3 million barrels per day and 6,000 megawatts of  electrical peak generation capacity.\nBillions of dollars are still needed to rebuild, maintain, and secure Iraq\u2019s  oil and electricity infrastructure, underscoring the need for sound strategic  planning. The Ministry of Electricity\u2019s 2006-2015 Electricity Master Plan  estimates that $27 billion will be needed to reach its goal of providing  reliable electricity across Iraq by 2015. According to DOD, investment in  Iraq\u2019s oil sector is \u201cwoefully short\u201d of the absolute minimum required to  sustain current production, and additional foreign and private investment  is needed. Moreover, U.S. officials and industry experts estimate that Iraq  would need $20 billion to $30 billion over the next several years to reach  and sustain a crude oil production capacity of 5 million barrels per day.  We recommended that the Secretary of State, in conjunction with relevant  U.S. agencies and international donors, work with Iraqi ministries to  develop an integrated energy strategy. State commented that the Iraqi  government, not the U.S. government, is responsible for taking action on  GAO\u2019s recommendations. We believe that the recommendations are still  valid given the billions made available for Iraq\u2019s energy sector and the U.S.  government\u2019s influence in overseeing Iraq\u2019s rebuilding efforts.\n\n\tIraqi and International Contributions Have Played a Limited Role in Rebuilding Iraq\n\nFrom the onset of the reconstruction and stabilization effort, the U.S.  strategy assumed that the Iraqis and the international community would  help finance Iraq\u2019s development needs. However, the Iraqi government has  a limited capacity to spend reconstruction funds, which hinders its ability  to assume a more prominent role in rebuilding Iraq\u2019s crumbling  infrastructure. The international community has provided funds for Iraq\u2019s  reconstruction, but most of the funding offered has been in the form of  loans that the Iraqis have not accessed.\n\n\t\tIraqi Government Has Spent a Small Portion of Its Funds on Reconstruction\n\nThe government of Iraq allocated $10 billion of its 2007 revenues for  capital projects and reconstruction, including capital funds for the  provinces based on their populations. However, available data from the  government of Iraq and analysis from U.S. and coalition officials show  that, while 2007 spending has increased compared with 2006, a large  portion of Iraq\u2019s $10 billion in capital projects and reconstruction budget  will likely go unspent through the end of this year. Iraq\u2019s ministries, for  example, spent only 24 percent of their 2007 capital budgets through mid- July 2007.\nU.S. government, coalition, and international agencies have identified a  number of factors that affect the Iraqi government\u2019s ability to spend  capital budgets. In addition to the poor security environment and \u201cbrain  drain\u201d issues, U.S. and foreign officials also noted that weaknesses in Iraqi  procurement and budgeting procedures impede completion of capital  projects. For example, according to the State Department, Iraq\u2019s  Contracting Committee requires about a dozen signatures to approve  projects exceeding $10 million, which slows the process.\nAs a possible reflection of Iraq\u2019s difficulty in spending its capital budgets,  Iraq\u2019s proposed 2008 capital budget declines substantially (57 percent)  from 2007 (see table 1).\nAs a percentage of its overall budget, Iraq\u2019s capital expenditures will  decline from 24 percent in 2007 to 12 percent in 2008. We are conducting a  review of U.S. efforts to help Iraq spend its budget and will issue a  separate report at a later date.\n\n\t\tInternational Donor Contributions\n\nAs of April 2007, international donors have pledged about $14.9 billion in  support of Iraq reconstruction. In addition, some countries exceeded their  pledges by providing an additional $744 million for a total of about $15.6  billion, according to the State Department. Of this amount, about $11  billion is in the form of loans. As of April 2007, Iraq had accessed about  $436 million in loans from the International Monetary Fund. The remaining  $4.6 billion is in the form of grants, to be provided multilaterally or  bilaterally; $3 billion of that amount has been disbursed to Iraq. See  appendix I for pledges made at Madrid and thereafter for Iraq  reconstruction. In addition, 16 of the 41 countries that pledged funding for  Iraq reconstruction also provided troops to the multinational force in Iraq.\nIn addition to funds, some countries also contribute troops to the U.S.-led  coalition. As of September 2007, 26 countries were contributing 12,300  troops to multinational forces in Iraq. Compared with the 164,700 forces  from the United States, other coalition countries represent about 7 percent  of Multinational Forces in Iraq. From December 2003 through September  2007, the number of non-U.S. coalition troops decreased from 24,000 to  12,300 and the number of coalition nations contributing troops to military  operations decreased from 33 to 26. See appendix II for a comparison of  U.S and coalition troops from December 2003 through September 2007.\n\n\tConclusion\n\nAs this committee is called upon to provide more resources to help  stabilize and rebuild Iraq, continued oversight is needed of the key issues  highlighted in today\u2019s testimony. While U.S. troops have performed  courageously under difficult and dangerous circumstances, the continued  violence and polarization of Iraqi society as well as the Iraqi government\u2019s  continued difficulties in funding its reconstruction needs diminishes the  prospects for achieving current U.S. security, political, and economic goals  in Iraq.\nOf particular concern is the lack of strategic plans to guide U.S. and Iraqi  efforts to rebuild and stabilize the country. Our assessment of the U.S.  strategy for Iraq and recent efforts to build central ministry capacity show  that U.S. planning efforts have been plagued by unclear goals and  objectives, changing priorities, inadequate risk assessments, and uncertain  costs. Weaknesses in U.S. strategic planning are compounded by the lack  of strategic planning in Iraq\u2019s energy sector, the sector that provides the  most government revenues.\nMadam Chair this concludes my statement. I would be pleased to answer  any questions that you or other Members may have.\nFor questions regarding this testimony, please contact me on (202) 512- 8979 or christoffj@gao.gov. Other key contributors to this statement were  Stephen Lord, David Bruno, Thomas Costa, Lynn Cothern, Mattias Fenton,  Muriel Forster, Lisa Helmer, Dorian Herring, Patrick Hickey, Bruce  Kutnicky, Tetsuo Miyabara, Judith McCloskey, and Mary Moutsos.\n\nAppendix I: Donor Pledges for Iraq Reconstruction (in thousands)\n\nAppendix II: U.S. and Coalition Troops in Iraq (in thousands)\n\n152.\n126.\n12.\nThis 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.","output":"Why GAO Did This Study\n\nSince 2003, the Congress has obligated nearly $400 billion for U.S. efforts in Iraq, of which about $40 billion has supported reconstruction and stabilization efforts. Congressional oversight of this substantial investment is crucial as the Administration requests additional military and economic funds for Iraq. This testimony summarizes the results of recent GAO audit work and proposes three areas for which continued oversight is needed: (1) progress in improving security and national reconciliation, (2) efforts to develop clear U.S. strategies, and (3) Iraqi and international contributions to economic development. We reviewed U.S. agency documents and interviewed agency officials, including the departments of State, Defense, and Treasury; and the U.S. Agency for International Development; the UN; and the Iraqi government. We also made multiple trips to Iraq as part of this work.\n\nWhat GAO Found\n\nSince GAO last reported in September 2007, on the status of the 18 Iraqi benchmarks, the number of enemy attacks in Iraq has declined. While political reconciliation will take time, Iraq has not yet advanced key legislation on equitably sharing oil revenues and holding provincial elections. In addition, sectarian influences within Iraqi ministries continue while militia influences divide the loyalties of Iraqi security forces. U.S. efforts lack strategies with clear purpose, scope, roles, and performance measures. The U.S. strategy for victory in Iraq partially identifies the agencies responsible for implementing key aspects of the strategy and does not fully address how the United States would integrate its goals with those of the Iraqis and the international community. U.S. efforts to develop Iraqi ministry capability lack an overall strategy, no lead agency provides overall direction, and U.S. priorities have been subject to numerous changes. The weaknesses in U.S. strategic planning are compounded by the Iraqi government's lack of integrated strategic planning in its critical energy sector. The U.S. strategy assumed that the Iraqis and international community would help finance Iraq's reconstruction. However, the Iraqi government has limited capacity to spend reconstruction funds. For example, Iraq allocated $10 billion of its revenues for capital projects and reconstruction in 2007. However, a large portion of this amount is unlikely to be spent, as ministries had spent only 24 percent of their capital budgets through mid-July 2007. Iraq has proposed spending only $4 billion for capital projects in 2008, a significant reduction from 2007. The international community has pledged $15.6 billion for reconstruction efforts in Iraq, but about $11 billion of this is in the form of loans."}
{"id":"crs_RS21903","pid":"crs_RS21903_0","input":"By some estimates there are approximately 1.2 billion Muslims in the world, of which 60% live in Asia. Only 15% of Muslims are Arab, while almost one third live in South Asia. The four nations with the largest Muslim populations, Indonesia (194 million), India (150 million), Pakistan (145 million), and Bangladesh (130 million), are in Asia. China also has a population of 39 million Muslims. Despite this, the Muslims of Asia are perceived to be on the periphery of the Islamic core based in the Arab Middle East. Muslims are a majority in Kirgizstan, Uzbekistan, Tadjikistan and Turkmenistan in Central Asia, Afghanistan, Pakistan, and Bangladesh in South Asia and Malaysia, Brunei, and Indonesia in Southeast Asia. (See map below) There are also significant minority populations in Khazakstan, India, Thailand, and the Philippines. Sizable Muslim communities are also found in Sri Lanka, China, Burma, and Singapore.\nIslam is by some estimates the world's fastest growing religion. Mecca, in Saudi Arabia, is the spiritual center of Islam because Mohammad founded the religion there in 610. In 2002, Muslims constituted approximately 19% of the world's population as compared to 30% that were Christian. These percentages are projected by some to shift to 25% Christian and 30% Muslim by the year 2025.\nIslam in Southeast Asia is relatively more moderate in character than in much of the Middle East. This moderation stems in part from the way Islam evolved in Southeast Asia. Islam came to Southeast Asia with traders rather than through military conquest as it did in much of South Asia and the Arab Middle East. Islam also was overlaid on animist, Hindu, and Buddhist traditions in Indonesia, which are said to give it a more syncretic aspect. Islam spread throughout much of Southeast Asia by the end of the seventeenth century. Islam in Asia is more politically diverse than in the Middle East.\nIslam has been undergoing a revival in Asia. RAND analyst Angel Rabasa points to several factors that contribute to this Islamic resurgence in Asia. These include both domestic and external factors. Internally, the forces of globalization and the impact of Western culture have played a role, especially the effect of rapid industrialization and resulting urbanization. The Asian financial crisis of 1997 resulted in the overthrow of the authoritarian Suharto regime and created political space for Islamists in Indonesia. Muslim separatist insurgents have continued their struggle in the Philippines and Thailand while the Parti Islam se Malaysia has worked through the political system to promote an Islamist agenda while in opposition in Malaysia. External factors include the current situation in Iraq and Afghanistan, the Arab-Israeli conflict, the 1979 Islamic revolution in Iran, the export of Saudi-backed Wahhabi Islamic fundamentalism, the conflict between India and Pakistan over Kashmir, and the Afghan war against the Soviets.\n\n\tDifferent Schools of Islamic Tradition\n\nThe majority of Muslims are of the Sunni tradition, while 10-15% are Shiite. This difference stems from disagreement over the succession to the prophet Mohammad. In South and Southeast Asia, Shiites are a significant portion of the population in only Afghanistan and Pakistan. The puritanical Sunni sect of Wahhabism has played an important role in the resurgence of Islam in Asia. It stems from a 18 th Century movement founded by Muhammad ibn Abd al-Wahhab that preached a literal interpretation of the Quran and an orthodox practice of Islam. Historically there has been a close relationship between Wahhabism and the Saudi dynasty. Sufism is another more \"mystical\" variant of Islam, though its presence in Asia is small except for parts of South Asia.\nThe decline of Islamic power in the wake of European colonial expansion provoked two key schools of thought within Islam that continue to have relevance today. The traditionalist school believed that the cause for the decline of Islam could be traced to \"moral laxity and departure from the true path of Islam.\" As a result, their response was to call for an Islamic revival. Others, known as reformers, felt that the decline was due to \"a chronic failure to modernize their societies and institutions.\" The path of the reformers presents the question of whether it is possible to modernize without Westernizing. At its core this is a struggle over values: \"... how to protect a society's cultural heritage and traditional practices in an age of globalization and how to develop a creative coexistence between modernization and traditionalism without Westernization.\"\nIt is thought by some analysts that if the United States and the West seek to make common cause with moderate elements within the Islamic world against violent extremists they would be well advised to do so in a way that is not perceived to be a threat to the Islamic world. The United States, through its association with globalization and a globalizing culture, is perceived as a threat by many leaders of the Islamic world who are seeking to preserve, or restore, traditional culture even as segments of the populations they lead are drawn to American culture. The disconnect between Muslim elites and their people in Asia can also be seen in the decreasing popularity of United States's foreign policy even as regional leaders seek to maintain close ties. Some analysts believe that as long as the Muslim world views the U.S.-led war against terror as a war against Islam there will be significant limits on the extent to which Muslim states will be able to cooperate with the United States in the war against terror. The problem is exacerbated by widespread Muslim opposition to United States policy on the Arab-Israeli conflict.\n\n\tIslamic Revival, Political Islam, Extremists, and Terrorists\n\nThe Islamic revival is changing the face of political Islam in Asia. The distinction to be drawn is between revivalists, who see religious change as an end in itself, and political Islam, or Islamists, who seek the Islamic revival as a means to the end of transforming the state. A further distinction is to be drawn between those who would work through the political process and those who would use violence to achieve their ends. The Islamic revival has a complex relationship to the level of extremism in Asia. While Islam in Southeast Asia has been moderate in character, it is undergoing a process of revivalist change in some segments of society. The resurgence is in part inspired by links to the Middle East, Afghanistan, and Pakistan. Some Southeast Asians returning from Islamic religious schools in the Middle East and Pakistan have returned with a new, radical, militant, Islamist, and extremist form of Islam that is more likely to be anti-American or anti-Western in character. There is also a significant number of violent extremists of returned Southeast Asians, and a larger number of South Asians, who had participated in the war against the Soviet Union in Afghanistan. Some of the South and Southeast Asians who have been radicalized through these experiences have gone on to spread extremist ideology, particularly by linking with local Muslim extremist groups who tend to have more nationally or regionally defined goals and who are largely opposed to local moderate Muslims. From one perspective \"the most effective policies towards Muslim Asia will be those that contain extremism while working with, rather than against, the Muslim majority's aspirations for social and economic improvement.\"\nConnections between Islamic extremism and terrorist organizations in South Asia appear to be more extensive than they are in Southeast Asia. This stems in large part from closer interaction with the Middle East, strengthened recently by the presence of Al Qaeda in Afghanistan and Pakistan. It is also a function of long term conflict in Afghanistan and in Kashmir. The extremist Taliban regime gave sanctuary to Al Qaeda until it was crushed. Since that time remnant Al Qaeda forces have linked up with other Sunni extremist groups in South Asia including Lashkar-e-Taiba, Jaish-e-Mohammad, Sipah-e-Sahaba Pakistan and Lashkar-i-Jhangvi. Pakistan has also experienced Sunni-Shiite conflict. An extensive array of Islamic schools known as madrassas , including some that teach a militant anti-Western and anti-Hindu perspective, operate in Pakistan. A coalition of Islamist political parties controls approximately 20% of the seats in Pakistan's legislature, as well as the Northwest Frontier Province. They also lead a coalition in Baluchistan. It has been reported that Al Qaeda fighters escaped to Bangladesh after the fall of Afghanistan to American and Afghan Northern Alliance forces and that Bangladesh veterans of the conflict in Afghanistan have played a role in establishing radical madrassas in Bangladesh. In India, while there exists significant inter-communal strife between Hindus and Muslims it is largely domestically focused with the exception of Pakistani based groups operating in Kashmir.\nThere are a number of Islamist groups in Southeast Asia that have linkages, either direct or indirect, to terrorist organizations. The Moro Islamic Liberation Front (MILF), and Abu Sayyaf are examples of groups in the Philippines where Islamist ideology, secessionism, criminality, and linkages to international terrorist networks are evident. The terrorist Jemaah Islamiya (JI) organization, which seeks to establish an Islamic Khalifate across much of Southeast Asia and establish Islamic law, has ties to Al Qaeda. In Indonesia, the now reportedly disbanded Lashkar Jihad incited inter-communal strife between Muslims and Christians in Sulawezi and the Moluccas that created a struggle that can be exploited by terrorist groups such as JI. Lashkar Jundullah is another group that has been involved in inter-communal violence in the Moluccas and Sulawezi. The extremist Kampulan Mujahidin Malaysia (KMM) is an example of an organization in Southeast Asia established by veterans of the fight against the Soviets in Afghanistan. In Thailand, separatists have mounted an insurrection in the Muslim southern provinces.\nThe relatively few Muslims of Northeast Asia are found in China for the most part. China is home to an estimated 17.5 to 36 million Muslims. The largest, most concentrated group is the Uighurs of Xinjiang Province in western China. The Uighur minority has experienced unrest of an Islamic character in recent years. Many Uighurs seek autonomy within China. Demographic trends arising from Han-Chinese in-migration are projected to make the Uighurs a minority in their home province.\nThe scope of the Islamic revival in Asia, and the extent to which increased religious fervor will translate into extremist positions or political power that will express itself in violent ways towards the West, is debated. Some see this phenomenon manifesting itself more in terms of increased piety among individuals within society without necessarily expressing itself politically. Karen Armstrong, author of Islam: A Short History , believes that because fear feeds extremism the war against terror should include a better appreciation of Islam in the West. It has been observed that U.S. counter-terrorism policy \"tends to conflate political Islam and terrorism worldwide.\" A key distinction for some in this debate is the distinction between cultural or religious identity and political identity. An Islamic revival that finds its expression through cultural or religious means is not necessarily a threat, even as some in the Islamic world would manipulate it to their anti-American or anti-Western ends. \nAn examination of recent developments with political Islam in Malaysia and Indonesia illustrate this point. Radical Islamist or extremist parties have not demonstrated broad appeal among Indonesian or Malaysian voters in recent elections even as some segments of these societies have experienced a resurgence of Islamic belief. The Islamist Parti Islam se Malaysia experienced significant electoral setbacks in the 2004 elections to the relatively more secular Barisan National Coalition of Prime Minister Badawi, who is himself regarded as a respected Islamic scholar. In Indonesia, Islamist parties, such as the Prosperous Justice Party (PKS), made small gains based not on their Islamist agenda but on their anti-corruption and good governance policies. Secular and nationalist parties clearly are preferred by voters in Indonesia and Malaysia even as Islam remains a core value of the people. There are also fundamentalists in Southeast Asia that would introduce strict Islamic law but would not advocate the use of violence to do so. There is also a distinction to be made between those who would focus primarily on sub-national, national and regional objectives, such as secession for a Muslim province, rather than focus on the international agenda advocated by Al Qaeda.\nAlienation and humiliation appear to be key concepts for understanding the Islamic resurgence in Asia and for understanding why individuals are drawn to terrorist groups. In discussing madrassas and pesantren in Indonesia, from which extremists have been recruited, Zachary Abuza has taken the position that the \"radical fringe (of Islam) will continue to grow, as modernization leaves people more isolated and the political process leaves people more disenfranchised. The Islamists and their supporters will continue to gain in power unless the more secular Muslim community again provides a successful model of tolerant and modernist Islam that it has done fairly successfully for forty years.\" In this way, some analysts believe frustration from diminished expectations driven by economic malaise, the lack of effective political participation, and a sense of humiliation are at the core of why many Asian Muslims have become radicalized. It is thought by some that U.S. policies can help best by assisting moderate elements in Asia to \"respond to mainstream Muslims' hopes for economic improvement and political participation ... education, balanced development, participatory governance, and civil peace\" that will give hope to alienated individuals who might otherwise drift towards radicalism. Some observers feel that diminishing the ranks of alienated Asian Muslims will in turn restrict room for maneuver by extremists and terrorists by limiting active or passive support from the societies within which they operate.","output":"There exists much diversity within the Islamic world. This is particularly evident in Asia. This diversity is to be found in the different ethnic backgrounds and in the different practices of Islam. The Muslim world of Asia has been experiencing an Islamic revival. This has had an effect on moderate as well as radical Muslims. An understanding of the dynamics of Islam in Asia should help inform United States' policy to develop respect between America and Muslim peoples, to foster economic policies to encourage development of open societies, to support education in Muslim states, and to identify and prioritize terrorist sanctuaries in order to pursue more effectively the war against terror. This report will be updated."}
{"id":"gao_GAO-10-772","pid":"gao_GAO-10-772_0","input":"\tBackground\n\nThe Homeland Security Act, as well as other statutes, provide legal  authority for both cross-sector and sector-specific protection and  resiliency programs. For example, the purpose of the Public Health  Security and Bioterrorism Preparedness and Response Act of 2002 is to  improve the ability of the United States to prevent, prepare for, and  respond to acts of bioterrorism and other public health emergencies, and  the Pandemic and All-Hazards Preparedness Act of 2006 addresses public  health security and all-hazards preparedness and response. Also, the  Cyber Security Research and Development Act of 2002 authorized funding  for the National Institute of Standards and Technology and the National  Science Foundation to facilitate increased research and development for  computer and network security and to support research fellowships and  training. CIKR protection issues are also covered under various  presidential directives, including HSPD-5 and HSPD-8. HSPD-5 calls for  coordination among all levels of government as well as between the  government and the private sector for domestic incident management, and  HSPD-8 establishes policies to strengthen national preparedness to  prevent, detect, respond to, and recover from threatened domestic  terrorist attacks and other emergencies. These separate authorities and  directives are tied together as part of the national approach for CIKR  protection through the unifying framework established in HSPD-7.\nThe NIPP outlines the roles and responsibilities of DHS and its partners\u2014 including other federal agencies, state, local, territorial, and tribal  governments, and private companies. Within the NIPP framework, DHS is  responsible for leading and coordinating the overall national effort to  enhance protection via 18 CIKR sectors. HSPD-7 and the NIPP assign  responsibility for CIKR sectors to SSAs. As an SSA, DHS has direct  responsibility for leading, integrating, and coordinating efforts of sector  partners to protect 11 of the 18 CIKR sectors. The remaining sectors are  coordinated by 8 other federal agencies. Table 1 lists the SSAs and their  sectors.\nThe DHS\u2019s Office of Infrastructure Protection (IP), located in the National  Protection and Programs Directorate, is responsible for working with  public- and private-sector CIKR partners and leads the coordinated  national effort to mitigate risk to the nation\u2019s CIKR through the  development and implementation of the CIKR protection program. Using a  sector partnership model, IP\u2019s Partnership and Outreach Division (POD)  works with owners and operators of the nation\u2019s CIKR to develop,  facilitate, and sustain strategic relationships and information sharing,  including the sharing of best practices. The POD also works with public  and private partners to coordinate efforts to establish and operate various  councils intended to protect CIKR and provide CIKR functions to  strengthen incident response. These councils include the aforementioned  SCCs, which coordinate sectorwide CIKR activities and initiatives among  private sector owners, operators, and trade associations in each of the 18  sectors, and the GCCs that represent federal, state, and local government  and tribal interests to support the effort of SCCs to develop collaborative  strategies for CIKR protection for each of the 18 sectors. The partnership  model also includes various cross-sector councils, including the CIKR  Cross-Sector Council, which addresses cross-sector issues and  interdependencies among SCCs; the NIPP Federal Senior Leadership  Council, which focuses on enhanced communication and coordination  between and among federal departments and agencies responsible for  implementing the NIPP and HSPD-7; and the State, Local, Tribal, and  Territorial Government Coordinating Council, which promotes  coordination across state and local jurisdictions. The model also includes  a Regional Consortium Coordinating Council, which bring together  representatives of regional partnerships, groupings, and governance  bodies to foster coordination among CIKR partners within and across  geographical areas and sectors.\nFigure 1 illustrates the sector partnership model and the interrelationships  among the various councils, sectors, and asset owners and operators.\nIP\u2019s Protective Security Coordination Division (PSCD) also operates the  Protective Security Advisor Program, which deploys critical infrastructure  protection and security specialists, called PSAs, to local communities  throughout the country. Established in 2004, the program has 93 PSAs  serving in 74 districts in 50 states and Puerto Rico, with deployment  locations based on population density and major concentrations of CIKR  throughout the United States. PSAs lead IP\u2019s efforts in these locations and  act as the link between state, local, tribal, and territorial organizations and  DHS infrastructure mission partners. PSAs are to assist with ongoing state  and local CIKR security efforts by establishing and maintaining  relationships with state Homeland Security Advisors, State Critical  Infrastructure Protection stakeholders, and other state, local, tribal,  territorial and private-sector organizations. PSAs are to support the  development of the national risk picture by conducting vulnerability and  security assessments to identify security gaps and potential vulnerabilities  in the nation\u2019s most critical infrastructures. PSAs also are to share  vulnerability information and protective measure suggestions with local  partners and asset owners and operators. In addition, PSAs are to  coordinate training for private-and public-sector officials in the  communities in which they are located; support incident management; and  serve as a channel of communication for state, local, tribal, and territorial  officials and asset owners and operators seeking to communicate with  DHS.\n\n\t\tCritical Infrastructure and the Concept of Resiliency\n\n\u201cDespite ongoing vigilance and efforts to protect this country and its citizens, major  accidents and disasters, as well as deliberate attacks, will occur. The challenge is to build  the capacity of American society to be resilient in the face of disruptions, disasters, and  other crises. Our vision is a Nation that understands the hazards and risks we face; is  prepared for disasters; can withstand the disruptions disasters may cause; can sustain  social trust, economic, and other functions under adverse conditions; can manage itself  effectively during a crisis; can recover quickly and effectively; and can adapt to conditions  that have changed as a result of the event.\u201d\nThe report also articulates that one of the goals for this mission is to  \u201cRapidly Recover.\u201d The two objectives associated with this goal are to (1)  enhance recovery capabilities: establish and maintain nationwide  capabilities for recovery from major disasters and (2) ensure continuity of  essential services and functions: improve capabilities of families,  communities, private-sector organizations, and all levels of government to  sustain essential services and functions.\n\n\tDHS Efforts to Incorporate Resiliency into Programs Used to Work with Asset Owners and Operators Is Evolving but Program Management Could Be Strengthened\n\nConsistent with recent changes to the NIPP, DHS has begun to increase its  emphasis on resiliency in the various programs it uses to assess  vulnerability and risk at and among CIKR facilities so that it can help asset  owners and operators identify resiliency characteristics of their facilities  and provide suggested actions, called options for consideration, to help  them mitigate gaps that have been identified. However, DHS has not  developed an approach to measure owners\u2019 and operators\u2019 actions to  address resiliency gaps identified as a result of these assessments. DHS  has also begun to train PSAs about resiliency and how it applies to asset  owners and operators, but it has not updated guidance that discusses  PSAs\u2019 roles and responsibilities to explicitly include resiliency and  resiliency strategies.\n\n\t\tDHS Has Increased Emphasis on Resiliency in Programs, but Has Not Developed an Approach to Measure Performance\n\nIn March 2010 we reported that DHS has increased its emphasis on  resiliency in the 2009 NIPP by, among other things, generally pairing it  with the concept of protection. We further stated that DHS has encouraged  SSAs to emphasize resiliency in guidance provided to them in updating  their sector-specific plans. Consistent with these efforts, DHS has also  taken action to develop or enhance the programs it uses to work with  asset owners and operators to bring a stronger focus to resiliency.\n\n\t\t\tThe Regional Resiliency Assessment Program (RRAP) and the Mini-Resiliency Assessment Program (Mini- RAP)\n\nIn 2009 DHS developed the RRAP to assess vulnerability and risk  associated with resiliency. The RRAP is an analysis of groups of related  infrastructure, regions, and systems in major metropolitan areas. The  RRAP evaluates CIKR on a regional level to examine vulnerabilities,  threats, and potential consequences from an all-hazards perspective to  identify dependencies, interdependencies, cascading effects, resiliency  characteristics, and gaps. In conducting the RRAP, DHS does an analysis  of a region\u2019s CIKR and protection and prevention capabilities and focuses  on (1) integrating vulnerability and capability assessments and  infrastructure protection planning efforts; (2) identifying security gaps and  corresponding options for considerations to improve prevention,  protection, and resiliency; (3) analyzing system recovery capabilities and  providing options to secure operability during long-term recovery; and (4)  assessing state and regional resiliency, mutual aid, coordination, and  interoperable communication capabilities. RRAP assessments are to be  conducted by DHS officials, including PSAs, in collaboration with SSAs:  other federal officials; state, local, tribal, and territorial officials; and the  private sector depending upon the sectors and facilities selected as well as  a resiliency subject matter expert(s) deployed by the state\u2019s homeland  security agency. The results of the RRAP are to be used to enhance the  overall security posture of the facilities, surrounding communities, and the  geographic region covered by the project and are shared with the state.  According to DHS officials, the results of specific asset-level assessments  conducted as part of the RRAP are made available to asset owners and  operators and other partners (as appropriate), but the final analysis and  report is delivered to the state where the RRAP was conducted.\nOne of the assessment tools DHS developed for the RRAP analysis is a  \u201cresiliency assessment builder,\u201d which contains a series of questions  designed to help officials identify resiliency issues associated with  facilities included in the RRAP. The resiliency assessment builder, among  other things, focuses on:  the impact of loss associated with the facility, including any national  security, sociopolitical, and economic impacts; interdependencies between the facility under review and other  infrastructure\u2014such as electrical power or natural gas suppliers,  water, and supply chain systems\u2014that if disrupted, could cause  deterioration or cessation of facility operations; the impact of the loss of significant assets\u2014such as an electrical  substation to provide power or a rail spur to transport supplies\u2014 critical to the operation of the facility and backup systems available to  maintain operations if losses occur; and  specific vulnerabilities, unusual conditions, threats, or events\u2014such as  hurricanes, transportation chokepoints, or hazardous materials  issues\u2014that could disrupt operations and whether the facility is  prepared to address the situation via specific capabilities or an action  plan.\nSenior IP officials told us that they believe the RRAP has been successful  in helping DHS understand resiliency in the context of interdependencies  among individual assets. For example, while the focus of the Tennessee  Valley Authority RRAP was energy sector sites and resources, DHS and its  partners examined sites and resources in those sectors, like water and  dams, which appeared to be obvious interdependencies. However, they  also found that they needed to examine sites and resources in those  sectors that appeared less obvious but were interdependent because they  were intricately connected to the Tennessee Valley Authority operations,  like sites and resources in the transportation sector. Also, in fiscal year  2010, DHS started an RRAP in Atlanta that focused primarily on  commercial facilities. DHS\u2019s related vulnerability assessment of sites (see  the discussion below for additional details of these assessments) and  resources associated with the water sector in Atlanta showed that an  accident or attack involving one component of the water sector could  disrupt the operations of sites or resources of other sectors in the  geographic area covered by the RRAP. By discovering this vulnerability,  and taking steps to address it, asset owners and operators in various  sectors that were provided this information were better positioned to be  able to work together to mitigate this potential problem. Senior IP officials  said that the overall RRAP effort was piloted in five projects, but they no  longer consider it a pilot program. They added that they plan to conduct  five other RRAPs in 2010 in addition to the one already started in Atlanta.  They further stated that because the program focuses only on areas with a  high density of critical assets, they plan to develop a new \u201cmini-RAP.\u201d  According to these officials, the mini-RAP is intended to provide  assessments similar to those provided during an RRAP (but on a reduced  scale) to groups of related infrastructure or assets that are not selected to  receive an RRAP. An IP official stated that he anticipates that the mini- RAP, which is under development, will be finalized in October 2010.\n\n\t\t\tSite Assistance Visits (SAVs)\n\nDHS is also revising another vulnerability assessment called the SAV to  foster greater emphasis on resiliency at individual CIKR sites. The SAV,  which is a facility-specific \u201cinside-the-fence\u201d vulnerability assessment  conducted at the request of asset owners and operators, is intended to  identify security gaps and provide options for consideration to mitigate  these identified gaps. SAVs are conducted at individual facilities or as part  of an RRAP and are conducted by IP assessment teams in coordination  with PSAs, SSAs, state and local government organizations (including law  enforcement and emergency management officials), asset owners and  operators, and the National Guard, which is engaged as part of a joint  initiative between DHS and the National Guard Bureau. The National  Guard provides teams of subject matter experts experienced in conducting  vulnerability assessments. The private sector asset owners and operators  that volunteer for the SAV are the primary recipient of the SAV analysis,  which produces options for consideration to increase their ability to  detect and prevent terrorist attacks. In addition, it provides mitigating  options that address the identified vulnerabilities of the facility. The SAV is  developed using a questionnaire that focuses on various aspects of the  security of a facility, such as vulnerabilities associated with access to  facility air handling systems; physical security; and the ability to deter or  withstand a blast or explosion. Our review of the SAV questionnaire  showed that it focuses primarily on vulnerability issues related to the  protection of the facility. The SAV questionnaire also contains some  questions that focus on resiliency issues because it asks questions about  backup systems or contingencies for key systems, such as electrical  power, transportation, natural gas, water, and telecommunications  systems. Officials with IP\u2019s PSCD said that they are working with IP\u2019s Field  Operations Branch to update the SAV to include more questions intended  to capture the resiliency of a facility, especially since the SAV is used  during the RRAP. They said that the effort is ongoing and, as of June 8,  2010, DHS had developed a time line showing the revised SAV is to be  introduced in October or November 2010.\n\n\t\t\tEnhanced Critical Infrastructure Protection (ECIP) Security Survey\n\nDHS is also revising its ECIP security survey to further focus on resiliency  at individual facilities. Under the ECIP survey, PSAs meet with facility  owners and operators in order to provide awareness of the many  programs, assessments, and training opportunities available to the private  sector; educate owners and operators on security; and promote  communication and information sharing among asset owners and  operators, DHS, and state governments. ECIP visits are also used to  conduct security surveys using the ECIP security survey, a Web-based tool  developed by DHS to collect, process, and analyze vulnerability and  protective measures information during the course of a survey. The ECIP  security survey is also used to develop metrics; conduct sector-by-sector  and cross-sector vulnerability comparisons; identify security gaps and  trends across CIKR sectors and sub-sectors; establish sector baseline  security survey scores; and track progress toward improving CIKR  security through activities, programs, outreach, and training. Our review of  the ECIP security survey showed that the original version of the survey  made references to resiliency-related concepts\u2014business continuity plans  and continuity of operations. The newest version of the survey, published  in June 2009, contains additional references to resiliency and resiliency- related concepts, including identifying whether or not a facility has backup  plans for key resources such as electrical power, natural gas,  telecommunications, and information technology systems. It is also used  to identify key dependencies critical to the operation of the facility, such  as water and wastewater, and to state whether backup plans exist for  service or access to these dependencies in the event of an interruption.  Further, senior IP officials told us that in addition to the updates on  resiliency in the latest version of the ECIP security survey, they plan to  incorporate 22 additional questions to a subsequent update of the survey  that will focus on determining the level of resiliency of a facility.  According to these officials, DHS also intends to use the updated survey to  develop a resiliency \u201cdashboard\u201d for CIKR owners and operators that is  intended to provide them a computerized tool that shows how the  resiliency of their facility compares with other similar facilities (see the  discussion below for a more detailed discussion of DHS\u2019s ECIP  dashboard). A DHS document on revisions to the SAV showed that the  revised ECIP security survey is to be introduced at the same time as the  revised SAV (October or November 2010) so that data collection  associated with each remains compatible. DHS\u2019s current projected release  of the updated ECIP security survey is planned for October 2010.\n\n\t\t\tProgram Management Could Be Improved by Measuring Efforts to Mitigate Resiliency Gaps Identified during Vulnerability Assessments\n\nDHS intends to take further actions to enhance the programs and tools it  uses to work with asset owners and operators when assessing resiliency,  but it has not developed an approach to measure its effectiveness in  working with asset owners and operators in their efforts to adopt  measures to mitigate resiliency gaps identified during the various  vulnerability assessments. According to the NIPP, the use of performance  measures is a critical step in the NIPP risk management process to enable  DHS and the SSAs to objectively and quantitatively assess improvement in  CIKR protection and resiliency at the sector and national levels. The NIPP  states that while the results of risk analyses help sectors set priorities,  performance metrics allow NIPP partners to track progress against these  priorities and provide a basis for DHS and the SSAs to establish  accountability, document actual performance, facilitate diagnoses,  promote effective management, and provide a feedback mechanism to  decision makers. Consistent with the NIPP, senior DHS officials told us  that they have recently begun to measure the rate of asset owner and  operator implementation of protective measures following the conduct of  the ECIP security survey. Specifically, in a June 2010 memorandum to the  Assistant Secretary for NPPD, the Acting Director of PSCD stated that 234  (49 percent) of 437 sites where the ECIP security survey had been  conducted implemented protective measures during the 180-day period  following the conduct of the ECIP survey. The Acting Director reported  that the 234 sites made a total of 497 improvements across the various  categories covered by the ECIP security survey, including information  sharing, security management, security force, physical security, and  dependencies while 239 sites reported no improvements during the period.  The Acting Director stated that the metrics were the first that were  produced demonstrating the impact of the ECIP program, but noted that  PSCD is reexamining the collection process to determine whether  additional details should be gathered during the update to the ECIP  security survey planned for October 2010. However, because DHS has not  completed its efforts to include resiliency material as part of its  vulnerability assessment programs, it does not currently have performance  metrics of resiliency measures taken by asset owners and operators.\nMoving forward, as DHS\u2019s efforts to emphasize resiliency evolve through  the introduction of new or revised assessment programs and tools, it has  the opportunity to consider including additional metrics of resiliency  measures adopted at the facilities it assesses for vulnerability and risk,  particularly as it revises the ECIP security survey and develops the  resiliency dashboard. Moreover, DHS could consider developing similar  metrics for the SAV at individual facilities and the RRAP and mini-RAP in  the areas covered by RRAPs and mini-RAPs. By doing so, DHS could be  able to demonstrate its effectiveness in promoting resiliency among the  asset owners and operators it works with and would have a basis for  analyzing performance gaps. Regarding the latter, DHS managers would  have a valuable tool to help them assess where problems might be  occurring or alternatively provide insights into the tools used to assess  vulnerability and risk and whether they were focusing on the correct  elements of resiliency at individual facilities or groups of facilities.\n\n\t\tDHS Has Made Training on Resiliency Available to PSAs, but Guidelines on PSA Roles and Responsibilities Do Not Reflect DHS\u2019s Growing Emphasis on Resiliency\n\nDHS uses PSAs to provide assistance to asset owners and operators on  CIKR protection strategies. Although DHS had begun to train PSAs about  resiliency and how it applies to the owners and operators they interact  with, DHS has not updated PSAs\u2019 guidance that outlines their roles and  responsibilities to reflect DHS\u2019s growing emphasis on resiliency. In April  2010, DHS provided a 1-hour training course called \u201cAn Introduction to  Resilience\u201d to all PSAs at a conference in Washington, D.C. The training  was designed to define resilience; present resilience concepts, including  information on how resilience is tied to risk analysis and its link to  infrastructure dependencies and interdependencies; discuss how  resilience applies to PSAs, including a discussion of the aforementioned  updates to programs and tools used to do vulnerability assessments; and  explain how DHS\u2019s focus on resilience can benefit asset owners and  operators. According to the Acting Deputy Director of PSCD, PSCD is  expected to deliver the training to PSAs again during regional conferences  to foster further discussions about resiliency and to give PSAs an  additional opportunity to ask questions about the training they received in  April 2010.\nAlthough DHS\u2019s training discusses how resiliency applies to PSAs and how  it can benefit asset owners and operators, DHS has not updated guidance  that discusses PSA roles and responsibilities related to resiliency. The  guidance DHS has provided to PSAs on certain key job tasks, issued in  2008, includes discussions about how PSAs are to (1) implement their role  and responsibilities during a disaster; (2) conduct vulnerability  assessments; and (3) establish or enhance existing strong relationships  between asset owners and operators and DHS, federal, state, and local law  enforcement personnel. However, the guidance does not articulate the role  of PSAs with regard to resiliency issues, or how PSAs are to promote  resiliency strategies and practices to asset owners and operators. For  example, our review of DHS\u2019s engagement guidance for PSAs showed that  the guidance does not explicitly discuss resiliency; rather, it focuses  primarily on protection. Specifically, the executive summary of the  guidance states that one of the key infrastructure protection roles for DHS  in fiscal year 2008 was to form partnerships with the owners and operators  of the nation\u2019s identified high-priority CIKR, known as level 1 and level 2  assets and systems. The guidance describes particular PSA responsibilities  with regard to partnerships, including (1) identifying protective measures  currently in place at these facilities and tracking the implementation of  any new measures into the future; (2) informing owners and operators of  the importance of their facilities in light of the ever-present threat of  terrorism; and (3) establishing or enhancing existing relationships  between owners and operators, DHS, and federal, state, and local law  enforcement personnel to provide increased situational awareness  regarding potential threats, knowledge of the current security posture at  each facility, and a federal resource to asset owners and operators. There  is one reference to a resiliency-related concept in an appendix where DHS  indicated that the criteria to identify level 2 assets in the Information  Technology sector should be \u201cthose assets that provide incident  management capabilities, specifically, sites needed for rapid restoration or  continuity of operations.\u201d\nPSA program officials said that they are currently developing guidelines on  a number of issues as DHS transitions from a CIKR program heavily  focused on protection to one that incorporates and promotes resiliency.  They said that PSAs do not currently have roles and responsibilities  specific to \u201cresiliency\u201d because resiliency is a concept that has only  recently gained significant and specific attention. They added that PSA  roles and responsibilities, while not specifically mentioning resiliency,  include component topics that comprise or otherwise contribute to  resiliency as it is now defined. Nonetheless, the Acting Deputy Director of  IP\u2019s PSCD said that he envisions updating PSA guidance to incorporate  resiliency concepts and that he intends to outline his plan for doing so in  October 2010 as part of IP\u2019s program planning process. However, he was  not specific about the changes he plans to make to address resiliency  concepts or whether the PSA\u2019s roles and responsibilities related to  resiliency would be articulated. According to standards for internal  control in the federal government, management is responsible for  developing and documenting the detailed policies and procedures to  ensure that they are an integral part of operations. By updating PSA  guidance that discusses the role PSAs play in assisting asset owners and  operators, including how PSAs can work with them to mitigate  vulnerabilities and strengthen their security, PSA program officials would  be better positioned to help asset owners and operators have the tools  they need to develop resilience strategies. This would be consistent with  DHS efforts to train PSAs about resiliency and how it affects asset owners  and operators. Updating PSA guidelines to address resiliency issues would  also be consistent with DHS\u2019s efforts to treat resiliency on an equal footing  with protection, and would comport with DHS guidance that calls for SSAs  to enhance their discussion of resiliency and resiliency strategies in SSPs.\n\n\tDHS Could Better Position Itself to Disseminate Information about Resiliency Practices with Asset Owners and Operators within and across Sectors\n\nDHS\u2019s efforts to emphasize resiliency in the programs and tools it uses to  work with asset owners and operators also creates an opportunity for DHS  to better position itself to disseminate information about resiliency  practices to asset owners and operators within and across sectors.  Currently, DHS shares information on vulnerabilities and protective  measures on a case-by-case basis. However, while it is uniquely positioned  and has considered disseminating information about resiliency practices,  DHS faces barriers in doing so and has not developed an approach for  sharing this information more broadly, across sectors.\n\n\t\tDHS Shares Information on Vulnerabilities and Protective Measures on a Case-by-Case Basis\n\nAccording to the NIPP, its effective implementation is predicated on active  participation by government and private-sector partners in meaningful,  multidirectional information sharing. The NIPP states that when asset  owners and operators are provided with a comprehensive picture of  threats or hazards to CIKR and participate in ongoing multidirectional  information flow, their ability to assess risks, make prudent security  investments, and develop appropriate resiliency strategies is substantially  enhanced. Similarly, according to the NIPP, when the government is  provided with an understanding of private-sector information needs, it can  adjust its information collection, analysis, synthesis, and dissemination  accordingly. Consistent with the NIPP, DHS shares information on  vulnerabilities and potential protective measures with asset owners and  operators after it has collected and analyzed information during SAVs and  ECIP security surveys performed at their individual facilities. This  information includes vulnerabilities DHS has identified, and corresponding  steps these owners and operators can take to mitigate these  vulnerabilities, including options for consideration, which are suggestions  presented to owners and operators to help them resolve vulnerabilities  identified during DHS\u2019s assessments. For example, DHS issues SAV  reports to owners and operators that, among other things, identify  vulnerabilities; help them identify their security posture; provide options  for consideration to increase their ability to detect and prevent terrorist  attacks; and enhance their ability to mitigate vulnerabilities. Regarding the  ECIP security survey, DHS provides owners and operators an ECIP  \u201cdashboard\u201d which shows the results for each component of the survey for  a facility using an index, called the Protective Measures Index (PMI),  which are scores DHS prepares for the facility and individual components  that can be compared to other similar facilities\u2019 scores. SAV reports and  the ECIP dashboard generally focus on similar protection issues, such as  facility or physical security, security personnel, and access control. The  SAV reports and the ECIP dashboard discuss some continuity of  operations issues that could be considered resiliency related. For example,  the ECIP dashboard contains PMIs focused on whether the facility has a  continuity plan and conducts continuity exercises, while the SAV report  discusses whether the facility would be able to operate if resources such  as electricity, water, or natural gas were not available. As discussed  earlier, DHS is currently updating the SAV to include, among other things,  an assessment of resiliency characteristics and gaps, and is taking action  to develop a resiliency dashboard similar to that used under the ECIP  security survey.\nSenior IP officials also stated that they share information on steps owners  and operators can take to protect their facilities via Common  Vulnerabilities, Potential Indicators, and Protective Measures (CV\/PI\/PM)  reports. DHS develops and disseminates these reports to various  stakeholders, generally on a need-to-know basis, including specific owners  and operators, such as those that have been included in assessments by  PSAs; law enforcement officials, emergency responders, and state  homeland security officials; and others who request access to the reports.  These reports, which focus on vulnerabilities and security measures  associated with terrorist attacks, are intended to provide information on  potential vulnerabilities and specific protective measures that various  stakeholders can implement to increase their security posture. According  to DHS, these reports are developed based on DHS\u2019s experiences and  observations gathered from a range of security-related vulnerability  assessments, including SAVs, performed at infrastructures over time, such  as the chemical and commercial facilities sectors and subsectors and asset  types within those sectors, such as the chemical hazardous storage  industry or the restaurant industry, respectively. For example, like other  CV\/PI\/PM reports, DHS\u2019s report on the restaurant industry gives a brief  overview of the industry; potential indicators of terrorist activity; common  vulnerabilities; and protective measures. Common vulnerabilities include  unrestricted public access and open access to food; potential indicators of  terrorist activity include arson, small arms attack, persons wearing  unusually bulky clothing to conceal explosives, and unattended packages;  and protective measures include developing a comprehensive security  plan to prepare for and respond to food tampering and providing  appropriate signage to restrict access to nonpublic areas. The CV\/PI\/PM  reports discuss aspects of resiliency such as infrastructure  interdependencies and incident response, but they do not discuss other  aspects of resiliency. For example, the report on restaurants discusses  protective measures including providing security and backup for critical  utility services, such as power or water\u2013\u2013efforts that may also enhance the  resiliency of restaurants. Moving forward, as its efforts to emphasize  resiliency evolve, DHS could consider including other aspects of resiliency  in the CV\/PI\/PM reports.\n\n\t\tDHS Is Uniquely Positioned to Disseminate Information about Resiliency Practices but Faces Barriers\n\nSenior IP officials told us that they have considered ways to disseminate  information that DHS currently collects or plans to collect with regard to  resiliency. However, they have not explored the feasibility of developing  an approach for doing so. Senior IP officials explained that given the  voluntary nature of the CIKR partnership, DHS should not be viewed as  identifying or promoting practices, particularly best practices, which could  be construed to be standards or requirements. They said that DHS goes to  great lengths to provide assurance to owners and operators that the  information gathered during assessments will not be provided to  regulators. They also stated that they provide owners and operators  assurance that they will not share proprietary information with  competitors. For example, certain information that they collect is  protected under the Protected Critical Infrastructure Information (PCII)  program, which institutes a means for the voluntary sharing of certain  private sector, state, and local CIKR information with the federal  government while providing assurance that the information will be exempt  from disclosure under the Freedom of Information Act, among other  things, and will be properly safeguarded. DHS has established a PCII  program office, which among other things, is responsible for validating  information provided by CIKR partners as PCII, and developing protocols  to access and safeguard information that is deemed PCII.\nIP senior officials further explained that DHS relies on its private-sector  partners to develop and share information on practices they use to  enhance their protection and resilience. They said that the practices  shared by sector partners, including best practices, are largely identified  and developed by the private sector, at times with the support of its  partners in government such as the SSAs. DHS facilitates this process by  making various mechanisms available for information sharing, including  information they deem to be best practices. For example, according to  senior IP officials, DHS\u2019s Homeland Security Information Network-Critical  Sectors (HSIN-CS) was designed to provide each sector a portal to post  useful or important information, such as activities or concepts that  private-sector partners discern to be best practices on protection and  resiliency topics. They also said that one factor to consider is that  resiliency can mean different things to different sectors, as measures or  strategies that are applicable or inherent to one sector may not be  applicable to another given the unique characteristics of each sector. For  example, the energy sector, which includes oil refineries, is inherently  different than the government facilities sector, which includes government  office buildings. In our March 2010 report on DHS\u2019s increased emphasis on  resilience in the NIPP, we reported that DHS officials told us that the  balance between protection and resiliency is unique to each sector and the  extent to which any one sector increases the emphasis on resiliency in its  sector-specific plans will depend on the nature of the sector and the risks  to its CIKR. Further, the Branch Chief of IP\u2019s Office of Information  Coordination and Analysis Office explained that differences in corporate  cultures across the spectrum of companies could be a barrier to widely  disseminating information on resiliency practices because it is often  challenging to translate information, such as what constitutes a success or  failure, from one company to another. He further stated that differences in  the regulatory structures affecting different industries may be a factor that  could limit the extent to which certain types of information could be  disseminated.\nWe recognize that DHS faces barriers to sharing information it gathers on  resiliency practices within and among sectors. However, as the primary  federal agency responsible for coordinating and enhancing the protection  and resiliency of critical infrastructure across the spectrum of CIKR  sectors, DHS is uniquely positioned to disseminate this information which  would be consistent with the NIPP\u2019s emphasis on information sharing. By  working to explore ways to address any challenges or barriers to sharing  resiliency information, DHS could build upon the partnering and  information-sharing arrangements that CIKR owners and operators use in  their own communities. For example, our work at CIKR assets along the  Gulf Coast in Texas and in southern California showed that asset owners  and operators viewed resiliency as critical to their facilities because it is in  their best interests to either keep a facility operating during and after an  event, or rebound as quickly as possible following an event. They said that  they rely on a variety of sources for information to enhance their ability to  be more resilient if a catastrophic event occurs, including information- sharing or partnering arrangements within and among CIKR partners and  their local communities. Each of the 15 owners and operators we  contacted in Texas and California said that they have partnering  relationships with their sector coordinating councils, local\/state  government, law enforcement, emergency management, or mutual aid  organizations. Furthermore, 14 of the 15 said that they work with these  organizations to share information, including best practices and lessons  learned, from recent disasters. Among the owners and operators we  contacted:    Representatives of one facility said that following a recent event, their  company shared lessons learned with the local mutual aid association  and various trade associations. These officials said that they also share  best practices within the industry and across their facilities in other  locations on an ongoing basis and that the company is currently  organizing a committee made up of security staff from each facility  within the organization whose primary responsibility is expected to be  the sharing of best practices.\nOfficials representing another facility told us that following an event or  a drill, they critique the event and their response to garner any lessons  learned or best practices. They said that they share information with  the local fire department and a regional trade association. These  officials stated that they will share information with other trade  association members if they believe that it would be beneficial to  others, but will not discuss proprietary information.\nOfficials representing a different facility said that, following a  hurricane in the same area, the company\u2019s managers from various  facilities met to share lessons learned and adopted best practices from  other facilities within the same company and with external partners,  including a mutual aid organization and local emergency responders.  They said that they also have learned from the experiences of others\u2014 after an explosion at a similar company\u2019s facility, they became aware  that the other company had located its administration building too  close to the company\u2019s operations, thereby jeopardizing employee  safety.\nBy developing an approach for disseminating information it gathers or  intends to gather with regard to resiliency, DHS would then be in a  position to reach a broader audience across sectors or in different  geographic locations. Senior IP officials said that they agree that  disseminating information on resiliency practices broadly across the CIKR  community would be a worthwhile exercise, but questioned whether they  would be the right organization within DHS to develop an approach for  sharing resiliency information. They said that IP does not currently have  the resources to perform this function and suggested that an organization  like the Federal Emergency Management Agency (FEMA) might be more  appropriate for sharing information on resiliency because it already has  mechanisms in place to share information on practices organizations can  adopt to deal with all-hazards events, including terrorism. For example,  FEMA manages DHS\u2019s Lessons Learned Information Sharing portal, called  LLIS.gov, which is a national online network of lessons learned and best  practices designed to help emergency response providers and homeland  security officials prevent, prepare for, and respond to all hazards,  including terrorism. According to FEMA officials, LLIS.gov contains  information on critical infrastructure protection and resiliency and system  users, such as state and local government officials, are encouraged to  submit content which is then vetted and validated by subject matter  experts before being posted to the system. FEMA officials explained that  FEMA does not actively collect information from system users, but  encourages them to submit documents for review and possible inclusion  into LLIS.gov. According to FEMA, access to LLIS.gov is restricted to  members that request access to the system, particularly emergency  response providers and homeland security officials. In March 2010,  FEMA\u2019s Outreach and Partnerships Coordinator for Lessons Learned  Information Sharing told us that LLIS.gov had about 55,000 members, of  which approximately 89 percent were representatives of state and local  government; about 6 percent were representatives of private-sector  organizations; and about 5 percent were representatives of the federal  government.\nRegardless of which DHS organization would be responsible for  disseminating information on resiliency practices, we recognize that DHS  will face challenges in addressing any barriers it believes could hinder its  ability to disseminate resiliency information. As part of this effort, DHS  would have to determine what resiliency information it is collecting or  plans to collect that might be most appropriate to share and what  safeguards would be needed to protect against the disclosure of  proprietary information within the confines of the voluntary nature of the  CIKR partnership. Also, in doing so, DHS could consider some of the  following questions:    What additional actions, if any, would DHS need to take to convey that  the information is being gathered within the voluntary framework of  the CIKR partnership?\nTo what extent does DHS need to take additional actions, if any, to  provide assurance that the information being disseminated is  nonregulatory and nonbinding on the owners and operators that  access it?\nWhat additional mechanisms, if any, does DHS need to establish to  provide assurance that reinforces the PCII process and how can  resiliency practices information be presented to avoid disclosures of  information that is PCII security sensitive or proprietary in nature?\nWhat mechanism or information system is most suitable for  disseminating resiliency practices information, and which DHS  component would be responsible for managing this mechanism or  system?\nWhat approach should DHS take to review the information before it is  disseminated to ensure that resiliency practices identified by DHS at  one facility or in one sector are valid and viable, and applicable across  facilities and sectors?\nWhat additional resources and at what additional cost, if any, would  DHS need to devote to gathering and broadly disseminating  information about resiliency practices across facilities and sectors?\nWhat actions can DHS take to measure the extent to which asset  owners and operators are using resiliency information provided by  DHS, and how can DHS use this information to make improvements, if  needed?\nBy determining the feasibility of overcoming barriers and developing an  approach for disseminating resiliency information, DHS could better  position itself to help asset owners and operators consider and adopt  resiliency strategies, and provide them with information on potential  security investments, based on the practices and experiences of their  peers both within and across sectors.\n\n\tConclusions\n\nIn the wake of concerns by stakeholders, including members of Congress,  academia, and the private sector that DHS was placing emphasis on  protection rather than resilience, DHS has increased its emphasis on  critical infrastructure resiliency in the NIPP. Consistent with these  changes, DHS has also taken actions to increase its emphasis on resilience  in the programs and tools it uses to assess vulnerability and risk that are  designed to help asset owners and operators identify resiliency  characteristics and gaps. These actions continue to evolve and could be  improved if DHS were to strengthen program management by developing  measures to assess the extent to which asset owners and operators are  taking actions to address resiliency gaps identified during vulnerability  assessments; and updating PSA guidelines to articulate PSA roles and  responsibilities with regard to resiliency during their interactions with  asset owners and operators. By developing performance measures to  assess the extent to which asset owners and operators are taking actions  to resolve resiliency gaps identified during the various vulnerability  assessments, DHS would, consistent with the NIPP, be better positioned to  demonstrate effectiveness in promoting resiliency among the asset owners  and operators it works with and would have a basis for analyzing  performance gaps. DHS managers would also have a valuable tool to help  them assess where problems might be occurring, or alternatively provide  insights into the tools used to assess vulnerability and risk and whether  they were focusing on the correct elements of resiliency at individual  facilities or groups of facilities. Furthermore, by updating PSA guidance to  discusses the role PSAs play during interaction with asset owners and  operators, including how PSAs can work with them to mitigate  vulnerabilities and strengthen their security, DHS would have greater  assurance that PSAs are equipped to help asset owners and operators have  the tools they need to develop resilience strategies. This would also be  consistent with DHS efforts to train PSAs about resiliency and how it  affects asset owners and operators.\nRelated to its efforts to develop or update its programs designed to assess  vulnerability at asset owners\u2019 and operators\u2019 individual facilities and  groups of facilities, DHS has considered how it can disseminate  information on resiliency practices it gathers or plans to gather with asset  owners and operators within and across sectors. However, it faces barriers  in doing so because it would have to overcome perceptions that it is  advancing or promoting standards that have to be adopted and concerns  about sharing proprietary information. We recognize that DHS would face  challenges disseminating information about resiliency practices within and  across sectors, especially since resiliency can mean different things to  different sectors. Nonetheless, as the primary federal agency responsible  for coordinating and enhancing the protection and resiliency of critical  infrastructure across the spectrum of CIKR sectors, DHS is uniquely  positioned to disseminate this information. By determining the feasibility  of overcoming barriers and developing an approach for disseminating  resiliency information, DHS could better position itself to help asset  owners and operators consider and adopt resiliency strategies, and  provide them with information on potential security investments, based on  the practices and experiences of their peers within the CIKR community,  both within and across sectors.\n\n\tRecommendations for Executive Action\n\nTo better ensure that DHS\u2019s efforts to incorporate resiliency into its  overall CIKR protection efforts are effective and completed in a timely and  consistent fashion, we recommend that the Assistant Secretary for  Infrastructure Protection take the following two actions:    develop performance measures to assess the extent to which asset  owners and operators are taking actions to resolve resiliency gaps  identified during the various vulnerability assessments; and   update PSA guidance that discusses the role PSAs play during  interactions with asset owners and operators with regard to resiliency,  which could include how PSAs work with them to emphasize how  resiliency strategies could help them mitigate vulnerabilities and  strengthen their security posture and provide suggestions for  enhancing resiliency at particular facilities.\nFurthermore, we recommend that the Secretary of Homeland Security  assign responsibility to one or more organizations within DHS to  determine the feasibility of overcoming barriers and developing an  approach for disseminating information on resiliency practices to CIKR  owners and operators within and across sectors.\n\n\tAgency Comments and Our Evaluation\n\nWe provided a draft of this report to the Secretary of Homeland Security  for review and comment. In written comments DHS agreed with two of  our recommendations and said that it needed additional time to internally  consider the third. Regarding our first recommendation that IP develop  performance measures to assess the extent to which asset owners and  operators are taking actions to resolve resiliency gaps identified during  vulnerability assessments, DHS said that IP had developed measures on  owners\u2019 and operators\u2019 efforts to implement enhancements to security and  resilience, and NPPD officials are reviewing these new performance  metrics. With regard to our second recommendation to update guidance  that discusses the role PSAs play during interactions with asset owners  and operators about resiliency, DHS said that IP is actively updating PSA  program guidance to reflect the evolving concept of resilience and will  include information on resilience in the next revision to the PSA program  management plan. Finally, regarding our third recommendation that DHS  assign responsibility to one or more organizations within DHS to  determine the feasibility of developing an approach for disseminating  information on resiliency practices, DHS said that its components need  time to further consider the recommendation and will respond to GAO and  Congress at a later date. DHS also provided technical comments which we  incorporated as appropriate.\nAs agreed with your office, unless you publicly announce its contents  earlier, we plan no further distribution of this report until 30 days after its  issue date. At that time, we will send copies of this report to the Secretary  of Homeland Security, the Under Secretary for the National Protection  Programs Directorate, appropriate congressional committees, and other  interested parties. If you have any further questions about this report,  please contact me at (202) 512-8777 or caldwells@gao.gov. Contact points  for our Offices of Congressional Relations and Public Affairs may be found  on the last page of this report. Key contributors to this report are listed in  appendix II.\n\nAppendix I: Comments from the Department of Homeland Security\n\nAppendix II: GAO Contact and Staff Acknowledgments\n\n\tStaff Acknowledgments\n\nIn addition to the contact named above, John F. Mortin, Assistant Director,  and Katrina R. Moss, Analyst-in-Charge, managed this assignment.  Katherine M. Davis, Anthony J. DeFrank, Michele C. Fejfar, Tracey L. King,  Landis L. Lindsey, Thomas F. Lombardi, Lara R. Miklozek, Steven R.  Putansu, Edith N. Sohna, and Alex M. Winograd made significant  contributions to the work.\n\nRelated GAO Products\n\nCritical Infrastructure Protection: Updates to the 2009 National  Infrastructure Protection Plan and Resiliency in Planning. GAO-10-296.  Washington, D.C.: March 5, 2010.\nThe Department of Homeland Security\u2019s (DHS) Critical Infrastructure  Protection Cost-Benefit Report. GAO-09-654R. Washington, D.C.: June 26,  2009.\nInfluenza Pandemic: Opportunities Exist to Address Critical  Infrastructure Protection Challenges That Require Federal and Private  Sector Coordination. GAO-08-36. Washington, D.C.: October 31, 2007.\nCritical Infrastructure: Sector Plans Complete and Sector Councils  Evolving. GAO-07-1075T. Washington, D.C.: July 12, 2007.\nCritical Infrastructure Protection: Sector Plans and Sector Councils  Continue to Evolve. GAO-07-706R. Washington, D.C.: July 10, 2007.\nCritical Infrastructure: Challenges Remain in Protecting Key Sectors.  GAO-07-626T. Washington, D.C.: March 20, 2007.\nCritical Infrastructure Protection: Progress Coordinating Government  and Private Sector Efforts Varies by Sectors\u2019 Characteristics. GAO-07-39.  Washington, D.C.: October 16, 2006.\nCritical Infrastructure Protection: Challenges for Selected Agencies and  Industry Sectors. GAO-03-233. Washington, D.C.: February 28, 2003.\nCritical Infrastructure Protection: Commercial Satellite Security Should  Be More Fully Addressed. GAO-02-781. Washington, D.C.: August 30, 2002.\n\n\tCyber Security\n\nCritical Infrastructure Protection: Current Cyber Sector-Specific  Planning Approach Needs Reassessment. GAO-09-969. Washington, D.C.:  September 24, 2009.\nCybersecurity: Continued Federal Efforts Are Needed to Protect Critical  Systems and Information. GAO-09-835T. Washington, D.C.: June 25, 2009.\nInformation Security: Cyber Threats and Vulnerabilities Place Federal  Systems at Risk. GAO-09-661T. Washington, D.C.: May 5, 2009.\nNational Cybersecurity Strategy: Key Improvements Are Needed to  Strengthen the Nation\u2019s Posture. GAO-09-432T. Washington, D.C.: March  10, 2009.\nCritical Infrastructure Protection: DHS Needs to Better Address Its  Cybersecurity Responsibilities. GAO-08-1157T. Washington, D.C.:  September 16, 2008.\nCritical Infrastructure Protection: DHS Needs to Fully Address Lessons  Learned from Its First Cyber Storm Exercise. GAO-08-825. Washington,  D.C.: September 9, 2008.\nCyber Analysis and Warning: DHS Faces Challenges in Establishing a  Comprehensive National Capability. GAO-08-588. Washington, D.C.: July  31, 2008.\nCritical Infrastructure Protection: Further Efforts Needed to Integrate  Planning for and Response to Disruptions on Converged Voice and Data  Networks. GAO-08-607. Washington, D.C.: June 26, 2008.\nInformation Security: TVA Needs to Address Weaknesses in Control  Systems and Networks. GAO-08-526. Washington, D.C.: May 21, 2008.\nCritical Infrastructure Protection: Sector-Specific Plans\u2019 Coverage of Key  Cyber Security Elements Varies. GAO-08-64T. Washington, D.C.: October  31, 2007.\nCritical Infrastructure Protection: Sector-Specific Plans\u2019 Coverage of Key  Cyber Security Elements Varies. GAO-08-113. October 31, 2007.\nCritical Infrastructure Protection: Multiple Efforts to Secure Control  Systems are Under Way, but Challenges Remain. GAO-07-1036.  Washington, D.C.: September 10, 2007.\nCritical Infrastructure Protection: DHS Leadership Needed to Enhance  Cybersecurity. GAO-06-1087T. Washington, D.C.: September 13, 2006.\nCritical Infrastructure Protection: Challenges in Addressing  Cybersecurity. GAO-05-827T. Washington, D.C.: July 19, 2005.\nCritical Infrastructure Protection: Department of Homeland Security  Faces Challenges in Fulfilling Cybersecurity Responsibilities.  GAO-05-434. Washington, D.C.: May 26, 2005.\nCritical Infrastructure Protection: Improving Information Sharing with  Infrastructure Sectors. GAO-04-780. Washington, D.C.: July 9, 2004.\nTechnology Assessment: Cybersecurity for Critical Infrastructure  Protection. GAO-04-321. Washington, D.C.: May 28, 2004.\nCritical Infrastructure Protection: Establishing Effective Information  Sharing with Infrastructure Sectors. GAO-04-699T. Washington, D.C.:  April 21, 2004.\nCritical Infrastructure Protection: Challenges and Efforts to Secure  Control Systems. GAO-04-628T. Washington, D.C.: March 30, 2004.\nCritical Infrastructure Protection: Challenges and Efforts to Secure  Control Systems. GAO-04-354. Washington, D.C.: March 15, 2004.\nPosthearing Questions from the September 17, 2003, Hearing on  \u201cImplications of Power Blackouts for the Nation\u2019s Cybersecurity and  Critical Infrastructure Protection: The Electric Grid, Critical  Interdependencies, Vulnerabilities, and Readiness\u201d. GAO-04-300R.  Washington, D.C.: December 8, 2003.\nCritical Infrastructure Protection: Challenges in Securing Control  Systems. GAO-04-140T. Washington, D.C.: October 1, 2003.\nCritical Infrastructure Protection: Efforts of the Financial Services  Sector to Address Cyber Threats. GAO-03-173. Washington, D.C.: January  30, 2003.\nHigh-Risk Series: Protecting Information Systems Supporting the  Federal Government and the Nation\u2019s Critical Infrastructures.  GAO-03-121. Washington, D.C.: January 1, 2003.\nCritical Infrastructure Protection: Federal Efforts Require a More  Coordinated and Comprehensive Approach for Protecting Information  Systems. GAO-02-474. Washington, D.C.: July 15, 2002.\nCritical Infrastructure Protection: Significant Challenges in  Safeguarding Government and Privately Controlled Systems from  Computer-Based Attacks. GAO-01-1168T. Washington, D.C.: September 26,  2001.\nCritical Infrastructure Protection: Significant Challenges in Protecting  Federal Systems and Developing Analysis and Warning Capabilities.  GAO-01-1132T. Washington, D.C.: September 12, 2001.\nCritical Infrastructure Protection: Significant Challenges in Developing  Analysis, Warning, and Response Capabilities. GAO-01-1005T.  Washington, D.C.: July 25, 2001.\nCritical Infrastructure Protection: Significant Challenges in Developing  Analysis, Warning, and Response Capabilities. GAO-01-769T.  Washington, D.C.: May 22, 2001.\nCritical Infrastructure Protection: Significant Challenges in Developing  National Capabilities. GAO-01-323. Washington, D.C.: April 25, 2001.\nCritical Infrastructure Protection: Challenges to Building a  Comprehensive Strategy for Information Sharing and Coordination.  GAO\/T-AIMD-00-268. Washington, D.C.: July 26, 2000.\nCritical Infrastructure Protection: Comments on the Proposed Cyber  Security Information Act of 2000. GAO\/T-AIMD-00-229. Washington, D.C.:  June 22, 2000.\nCritical Infrastructure Protection: \u201cILOVEYOU\u201d Computer Virus  Highlights Need for Improved Alert and Coordination Capabilities.  GAO\/T-AIMD-00-181. Washington, D.C.: May 18, 2000.\nCritical Infrastructure Protection: National Plan for Information  Systems Protection. GAO\/AIMD-00-90R. Washington, D.C.: February 11,  2000.\nCritical Infrastructure Protection: Comments on the National Plan for  Information Systems Protection. GAO\/T-AIMD-00-72. Washington, D.C.:  February 1, 2000.\nCritical Infrastructure Protection: Fundamental Improvements Needed  to Assure Security of Federal Operations. GAO\/T-AIMD-00-7. Washington,  D.C.: October 6, 1999.\nCritical Infrastructure Protection: Comprehensive Strategy Can Draw  on Year 2000 Experiences. GAO\/AIMD-00-1. Washington, D.C.: October 1,  1999.\n\n\tDefense Critical Infrastructure Protection\n\nDefense Critical Infrastructure: Actions Needed to Improve  Identification and Management of Electrical Power Risks and  Vulnerabilities to DoD Critical Assets. GAO-10-147. October 23, 2009.\nDefense Critical Infrastructure: Actions Needed to Improve the  Consistency, Reliability, and Usefulness of DOD\u2019s Tier 1 Task Critical  Asset List. GAO-09-740R. Washington, D.C.: July 17, 2009.\nDefense Critical Infrastructure: Developing Training Standards and an  Awareness of Existing Expertise Would Help DOD Assure the  Availability of Critical Infrastructure. GAO-09-42. Washington, D.C.:  October 30, 2008.\nDefense Critical Infrastructure: Adherence to Guidance Would Improve  DOD\u2019s Approach to Identifying and Assuring the Availability of Critical  Transportation Assets. GAO-08-851. Washington, D.C.: August 15, 2008.\nDefense Critical Infrastructure: DOD\u2019s Risk Analysis of Its Critical  Infrastructure Omits Highly Sensitive Assets. GAO-08-373R. Washington,  D.C.: April 2, 2008.\nDefense Infrastructure: Management Actions Needed to Ensure  Effectiveness of DOD\u2019s Risk Management Approach for the Defense  Industrial Base. GAO-07-1077. Washington, D.C.: August 31, 2007.\nDefense Infrastructure: Actions Needed to Guide DOD\u2019s Efforts to  Identify, Prioritize, and Assess Its Critical Infrastructure. GAO-07-461.  Washington, D.C.: May 24, 2007.\n\n\tElectrical Power\n\nElectricity Restructuring: FERC Could Take Additional Steps to Analyze  Regional Transmission Organizations\u2019 Benefits and Performance.  GAO-08-987. Washington, D.C.: September 22, 2008.\nDepartment of Energy, Federal Energy Regulatory Commission:  Mandatory Reliability Standards for Critical Infrastructure Protection.  GAO-08-493R. Washington, D.C.: February 21, 2008.\nElectricity Restructuring: Key Challenges Remain. GAO-06-237.  Washington, D.C.: November 15, 2005.\nMeeting Energy Demand in the 21st Century: Many Challenges and Key  Questions. GAO-05-414T. Washington, D.C.: March 16, 2005.\nElectricity Restructuring: Action Needed to Address Emerging Gaps in  Federal Information Collection. GAO-03-586. Washington, D.C.: June 30,  2003.\nRestructured Electricity Markets: Three States\u2019 Experiences in Adding  Generating Capacity. GAO-02-427. Washington, D.C.: May 24, 2002.\nEnergy Markets: Results of FERC Outage Study and Other Market Power  Studies. GAO-01-1019T. Washington, D.C.: August 2, 2001.\n\n\tOther\n\nCombating Terrorism: Observations on National Strategies Related to  Terrorism. GAO-03-519T. Washington, D.C.: March 3, 2003.\nCritical Infrastructure Protection: Significant Challenges Need to Be  Addressed. GAO-02-961T. Washington, D.C.: July 24, 2002.\nCritical Infrastructure Protection: Significant Homeland Security  Challenges Need to Be Addressed. GAO-02-918T. Washington, D.C.: July 9,  2002.","output":"Why GAO Did This Study\n\nAccording to the Department of Homeland Security (DHS), protecting and ensuring the resiliency (the ability to resist, absorb, recover from, or successfully adapt to adversity or changing conditions) of critical infrastructure and key resources (CIKR) is essential to the nation's security. By law, DHS is to lead and coordinate efforts to protect several thousand CIKR assets deemed vital to the nation's security, public health, and economy. In 2006, DHS created the National Infrastructure Protection Plan (NIPP) to outline the approach for integrating CIKR and increased its emphasis on resiliency in its 2009 update. GAO was asked to assess the extent to which DHS (1) has incorporated resiliency into the programs it uses to work with asset owners and operators and (2) is positioned to disseminate information it gathers on resiliency practices to asset owners and operators. GAO reviewed DHS documents, such as the NIPP, and interviewed DHS officials and 15 owners and operators of assets selected on the basis of geographic diversity. The results of these interviews are not generalizable but provide insights.\n\nWhat GAO Found\n\nDHS's efforts to incorporate resiliency into the programs it uses to work with asset owners and operators is evolving but program management could be strengthened. Specifically, DHS is developing or updating programs to assess vulnerability and risk at CIKR facilities and within groups of related infrastructure, regions, and systems to place greater emphasis on resiliency. However, DHS has not taken commensurate efforts to measure asset owners' and operators' actions to address resiliency gaps. DHS operates its Protective Security Advisor Program, which deploys critical infrastructure protection and security specialists, called Protective Security Advisors (PSA), to assist asset owners and operators on CIKR protection strategies, and has provided guidelines to PSAs on key job tasks such as how to establish relationships between asset owners and operators and DHS, federal, state, and local officials. DHS has provided training to PSAs on resiliency topics, but has not updated PSA guidelines to articulate the role of PSAs with regard to resiliency issues, or how PSAs are to promote resiliency strategies and practices to asset owners and operators. A senior DHS official described plans to update PSA guidelines and the intent to outline this plan in October 2010, but did not provide information on what changes would be made to articulate PSA roles and responsibility with regard to resiliency. By developing measures to assess the extent to which asset owners and operators are addressing resiliency gaps and updating PSA guidance, DHS would be better positioned to manage its efforts to help asset owners and operators enhance their resiliency. DHS faces barriers disseminating information about resiliency practices across the spectrum of asset owners and operators. DHS shares information on potential protective measures with asset owners and operators and others including state and local officials (generally on a case-by-case basis) after it has completed vulnerability assessments at CIKR facilities. DHS officials told GAO that they have considered ways to disseminate information that they collect or plan to collect with regard to resiliency. However, DHS faces barriers sharing information about resiliency strategies. For example, given the voluntary nature of the CIKR partnership, DHS officials stated that DHS should not be viewed as identifying and promoting practices which could be construed by CIKR partners to be standards. Also, according to DHS officials, the need for and the emphasis on resiliency can vary across different types of facilities depending on the nature of the facility. For example, an oil refinery is inherently different than a government office building. DHS's efforts to emphasize resiliency when developing or updating the programs it uses to work with owners and operators creates an opportunity for DHS to position itself to disseminate information about resiliency practices within and across the spectrum of asset owners and operators. By determining the feasibility of overcoming barriers and developing an approach for disseminating information on resiliency practices within and across sectors, DHS could better position itself to help asset owners and operators consider and adopt resiliency strategies.\n\nWhat GAO Recommends\n\nGAO recommends that DHS develop resiliency performance measures, update PSA guidelines, and determine the feasibility of developing an approach to disseminate resiliency information. DHS is taking action to implement two recommendations and is internally considering the third."}
{"id":"crs_R40915","pid":"crs_R40915_0","input":"\tIntroduction\n\nAs the debate surrounding health care reform continues, there has been considerable discussion about creating a new, independent entity to determine Medicare policy. Currently, Medicare policy is made largely by Congress and, to varying degrees, the Centers for Medicare and Medicaid Services (CMS). CMS, housed within the Department of Health and Human Services (DHHS), is the federal agency responsible for administering the Medicare, Medicaid, and Children's Health Insurance (CHIP) programs. The proposals being debated would essentially create an independent body of health care experts with the power to make fundamental decisions affecting Medicare.\nAdvocates of these types of proposals argue that creating an independent, policymaking entity in Medicare is necessary if we hope to achieve any real health care reform. Supporters claim that members of Congress are easily influenced by special interests and lobbyists when making Medicare policy decisions, particularly those related to provider reimbursement. As a result, some of the decisions that are made may not be fiscally sustainable or in the best interest of beneficiaries. Advocates also contend that lawmakers do not have the necessary technical or operational expertise required to govern a program as complex as Medicare. Every year lawmakers, many of whom have limited experience in health care financing or delivery, make detailed operational decisions related to Medicare's provider payment systems. The perception, at least by some, is that an independent body of experts, insulated from politics, would produce more fiscally responsible and efficient policy decisions. \nOpponents of these proposals express concern about reducing Congress's role in the policymaking and oversight process. The proposals being discussed would establish a new policymaking body with the authority to make changes in the program without congressional approval. By delegating certain lawmaking functions to an independent entity, Congress would be ceding some of its oversight responsibilities. For example, today, when it examines the merits of a particular policy, Congress can hold hearings and debates, both of which are open to the public. Although these proposals include certain oversight mechanisms, such as annual reports and studies, the day-to-day deliberations of the new entity or council would not necessarily be available to the public.\nOn June 25, 2009, Senator Jay Rockefeller introduced S. 1380 , the Medicare Payment Advisory Commission (MedPAC) Reform Act of 2009, which would elevate MedPAC, a congressional advisory commission, to an executive branch agency with the authority to determine Medicare payment and coverage policies. The Obama administration submitted a similar proposal to Congress, titled the Independent Medicare Advisory Council Act (IMAC) of 2009, on July 17, 2009. The Administration's proposal would create an independent five-member executive council charged with issuing recommendations on Medicare payment policy to the President. Finally, the Senate Finance Committee included a provision to establish an independent Medicare advisory board in its health reform legislation, the Patient Protection and Affordable Care Act ( H.R. 3590 ), which passed the Senate on December 24, 2009. Although different in structure and scope, all of these proposals would alter the role Congress has traditionally played in the Medicare policymaking process. \nThis report introduces readers to the concept of creating an independent, policymaking entity in Medicare. The report begins with a discussion of the types of policymaking entities that have been proposed in the current health care reform debate, as well as in Medicare. The report then provides an overview of the role that Congress and CMS play in determining Medicare policy. The report concludes with a comparison of some of the key features of S. 1380 , the Administration's draft IMAC proposal, and H.R. 3590 . \n\n\tBackground\n\nThe current health care reform debate has included discussions about creating new independent entities to conduct certain administrative and policymaking functions in the health care system. In addition to proposals to establish this type of entity in Medicare, the concept has been offered as a tool for performing research on comparative effectiveness, managing the private health insurance market, making payment and coverage decisions, and proposing broader reforms to the health care system. At least one of the rationales for creating independent entities with policymaking authority is the assumption that, because these organizations are insulated from both the congressional and executive decision-making processes, they can make better policy decisions. \nIndependent entities typically share certain characteristics. First, they are usually governed by boards or commissions composed of members who are appointed by the President and confirmed by the Senate. Representatives are usually appointed for long, fixed terms to reduce the likelihood that they will be influenced by either the White House or congressional politics. Additionally, terms are usually staggered to ensure that not all of the members are appointed during one presidential administration. Other features associated with independence include requiring the President to consider political orientation when appointing members and mandating that the membership represent a diverse mix of professional experience or expertise.\nOne prominent model of an independent health care entity discussed throughout the current reform debate is the Federal Health Board. Endorsed by former Senator Tom Daschle, a Federal Health Board would be modeled after the Federal Reserve Board and have broad authority over private and public health care programs. The Federal Reserve, which establishes the nation's monetary policy, is composed of a national Board of Governors consisting of seven members and 12 regional banks. The Board of Governors has significant authority to oversee and regulate the banking system. As envisioned by Daschle and others, a Federal Health Board would play a substantial role in making benefit and coverage recommendations, regulating the private health insurance market, conducting research, and improving the quality of care. \nSome of the other models that have been discussed are more modest in scope. For example, in addition to including a provision establishing a Medicare advisory board, H.R. 3590 would establish a private, non-profit corporation titled the Patient-Centered Outcomes Research Institute to conduct comparative clinical effectiveness research. The corporation, which would be overseen by a Board of Governors composed of 17 members appointed by the Comptroller General, would be charged with identifying national priorities for performing comparative effectiveness research and contracting with public and private organizations to conduct such research. Another proposal would create an organization or entity to oversee the market for private health insurance. These entities, which are referred to as health insurance exchanges, would be responsible for establishing and enforcing standards for private health plans related to benefits, coverage, enrollment, and beneficiary cost-sharing.\nProposals to establish an independent entity in Medicare also vary in scope and structure. Some measures would create an independent commission, board, or entity with the authority to determine specific Medicare policies, particularly those related to provider reimbursement and benefit coverage. Others would create a governance structure with a broader scope of authority. For example, in a recent paper for the New America Foundation on reforming Medicare's governance, certain health experts advocate creating a new independent board called the Medicare Guardians. Under this proposal, the Medicare Guardians would function like a board of directors for Medicare with broad authority to enact policies directed at restructuring how the program pays for and delivers health care. \nCongress has debated the merits of creating a new administrative entity in Medicare several times throughout the program's history, most recently in the Medicare reform discussions of 2000 and 2001. At that time, Congress was considering adding a new prescription drug benefit to the program and exploring options to foster competition among private Medicare plans. However, there were concerns that CMS (at that time the Health Care Financing Administration, or HCFA), already overwhelmed with new responsibilities, would not be able to manage an increase in its workload. Various reform proposals recommended a number of solutions to rectify the agency's management problems, including expanding its authority to perform its responsibilities, increasing the agency's annual budget, creating separate agencies to administer parts of the program, and establishing a Medicare Board to manage competition among private plans and traditional Medicare. \n\n\tOverview of the Medicare Policymaking Process\n\nCurrently, Medicare policy is determined largely by Congress and the three congressional committees that have jurisdiction over the program: the House Committee on Ways and Means, the House Committee on Energy and Commerce, and the Senate Committee on Finance. These committees regularly propose and draft legislation to modify all aspects of the Medicare program, including payment policy, benefits, coverage, and program administration. In some areas, Congress has created legislative language that is very detailed and prescriptive. For example, policymakers have established sophisticated payment systems and methodologies for reimbursing providers participating in Medicare Parts A and B. Congress has also mandated specific criteria for benefit coverage (i.e., beneficiary co-insurance and cost sharing amounts, day limits on coverage, and patient eligibility requirements).\nIn other areas, congressional involvement in Medicare policy is less developed. For example, although Congress has outlined broad benefit categories for Medicare coverage in Title XVIII of the Social Security Act (SSA), it has given CMS substantial discretion and flexibility to make individual coverage determinations. CMS executes this authority by implementing both national and local coverage determinations, otherwise known as NCDs and LCDs. NCDs and LCDs grant, limit, or exclude Medicare coverage for a specific medical service, procedure, or device. To date, CMS has issued approximately 308 NCDs. The vast majority of Medicare coverage decisions, however, are LCDs, which are made at the local level by private contractors. \nTo assist with its policymaking efforts, Congress relies on the analytic and research support of its legislative branch agencies: the Congressional Budget Office (CBO), the Congressional Research Service (CRS), the Government Accountability Office (GAO), and the 17-member Medicare Payment Advisory Commission, otherwise known as MedPAC. Congress established MedPAC with the Balanced Budget Act of 1997 ( P.L. 105-33 ). Specifically, Congress charged the commission with reviewing and making recommendations to Congress regarding Medicare payment policies, including payments to private Medicare+Choice health plans (now called Medicare Advantage plans). \nThe statute also requires the commission to examine other issues affecting the Medicare program, such as changes in the health care delivery system, changes in the market for health care services, Medicare payment policies and their relationship to quality and access, and factors affecting the efficient delivery of health care services in different sectors (e.g., hospitals, skilled nursing facilities). \nThe commission issues the majority of its policy recommendations through two annual reports to Congress: a March report on Medicare payment policy and a June report on other policy issues affecting the Medicare program. The types of recommendations range from broad, long-term policies such as implementing pay for performance and quality measurement programs to detailed payment update recommendations for Medicare's fee-for-service (FFS) providers. When formulating its recommendations, the commission takes into account the adequacy of current provider payments and the efficiency of providers. For example, in its March 2009 report, the commission recommended eliminating or reducing payment updates for skilled nursing facilities, home health services, and inpatient rehabilitation facilities in FY2010. The commission also testifies regularly for various congressional committees on its findings and recommendations. \nIn establishing MedPAC, Congress merged two previous Medicare advisory commissions: the Prospective Payment Assessment Commission (ProPAC) and the Physician Payment Review Commission (PPRC). Congress created ProPAC in 1983 to provide guidance on implementing the hospital prospective payment system and the PPRC in 1985 to make recommendations to Congress on reforming Medicare's physician payment system. ProPAC and PPRC were established, at least in part, because Congress had become increasingly distrustful of the executive branch and HCFA. By creating an independent advisory body to assist lawmakers in their policymaking efforts, Congress was able to obtain its own source of objective expertise on Medicare payment policy and buffer members of Congress from pressures from interest groups. \nMedPAC, like its predecessor agencies, does not have the authority to actually implement its recommendations without congressional approval or regulatory action by CMS. Although the actual number of MedPAC recommendations implemented by Congress is difficult to measure, the perception is that the commission has been relatively influential in shaping Medicare policy. According to the commission's FY2010 budget request, MedPAC assesses its impact on the policymaking process by publicly reporting its outputs (e.g., number of requests for information from Congress, number of policy briefs published, and number of testimonies) and qualitatively describing the outcomes of its recommendations. \n\n\tCharacteristics of Proposals to Establish an Independent Entity in Medicare\n\nOn June 25, 2009, Senator Rockefeller introduced S. 1380 , the Medicare Payment Advisory Commission (MedPAC) Reform Act of 2009. S. 1380 would establish the MedPAC as an executive branch agency with broad policymaking authority in the areas of Medicare payment and coverage. July 17, 2009, the President submitted a draft proposal to Congress titled the Independent Medicare Advisory Council Act of 2009, otherwise known as the IMAC proposal. The IMAC proposal would establish a five-member council to advise the President on Medicare payment rates for certain providers. Although the proposal provides the council with the authority to recommend broader policy reforms, its authority outside of Medicare payment policy would be limited. Finally, the Senate Finance Committee included a provision (Sec. 3403) to establish an independent Medicare advisory board in its health reform legislation, the Patient Protection and Affordable Care Act ( H.R. 3590 ). Under this option, an independent board would be required to develop and submit detailed proposals to Congress and the President to reduce Medicare spending. In the sections that follow, more detailed information comparing these proposals across key categories such as membership, scope of authority, presidential and congressional review procedures, cost control mechanisms, and funding are presented. See Table 1 for highlights from these sections. \n\n\t\tMembership\n\nAll three proposals would create an independent entity composed of members appointed by the President, with the advice and consent of the Senate. S. 1380 , however, would replace the current 17-member MedPAC advisory commission with an 11-member executive commission, essentially elevating MedPAC to an executive branch agency. This is in contrast to the Administration's proposal that would create a new five-member executive council, and H.R. 3590 , which would establish a new 15-member independent Medicare advisory board.\nMembers would serve staggered six-year terms in S. 1380 and H.R. 3590 , and five-year terms under the Administration's proposal. Under all three options, the President, with the advice and consent of the Senate, would appoint a Chair for the entity from among its members. H.R. 3590 includes an additional requirement that the Senate Majority Leader, Speaker of the House, Senate Minority Leader, and House Minority Leader each present three recommendations for appointees to the President for his consideration. The Secretary, the Administrator of CMS, and the Administrator of the Health Resources and Services Administration (HRSA) would serve as ex-officio, non-voting members of the Board. \nFor the entities that would be established by S. 1380 and H.R. 3590 , qualifications for membership would be the same or similar to those currently authorized for MedPAC. The only qualifications for membership stipulated in the Administration's proposal are that appointees be physicians or have specialized expertise in medicine or health care policy. \n\n\t\tScope of Authority\n\nAll three proposals would provide a new independent entity with the explicit authority to make decisions related to provider payment. S. 1380 , however, is the only proposal to provide the Commission with the authority to make Medicare coverage decisions. Under all three proposals, CMS would retain its responsibility for issuing regulations to implement the entity's recommendations. \nS. 1380 would elevate MedPAC from a legislative advisory body to an executive branch agency and provide the new commission with broad authority in the areas of Medicare payment and coverage. The Commission would be responsible for developing payment policies, methodologies, and reimbursement rates (including payment updates) for all Medicare providers and suppliers. The Commission would also be responsible for developing Medicare coverage policy, a function currently executed by CMS and its private contractors. To assist in its policymaking functions, S. 1380 requires that the Commission establish three advisory councils: a Council of Health and Economic Advisors, a Consumer Advisory Council, and a Federal Health Advisory Council. \nThe Administration's proposal would establish a separate independent entity with a narrower scope of authority. The IMAC's primary responsibility would be recommending annual payment updates for certain Medicare providers. Although the proposal provides the Council with the authority to recommend broader Medicare reforms, the legislation specifies many exceptions to this authority. Among these are recommendations relating to Medicare financing, capital payments to inpatient hospitals, certain Medicare administrative activities such as claims processing and fraud control, conditions of participation, and physician and hospital quality reporting. The proposal does not explicitly exclude Medicare coverage policy from the Council's jurisdiction.\nThe Independent Medicare Advisory Board established by H.R. 3590 would have the authority to develop and submit recommendations, in certain years, to Congress and the President to reduce Medicare spending. The provision lays out specific criteria for the Board to meet when making its recommendations. For example, when developing and submitting proposals, the Board would be required to develop recommendations that would reduce spending in Medicare Parts C and D; prioritize recommendations that would extend Medicare solvency; improve the health care delivery system and health outcomes by promoting integrated care, care coordination, prevention, wellness, and quality improvement; protect beneficiary access to care (including in rural and frontier areas); and consider the effects of changes in provider and supplier payments on beneficiaries.\nH.R. 3590 also clearly exempts certain areas from the Board's authority. Specifically, the Board would be prohibited from making recommendations that would ration care, raise revenues, increase beneficiary premiums, increase beneficiary cost-sharing, restrict benefits, or modify eligibility. Additionally, prior to 2020, the Board could not make any recommendation that would reduce payments to providers and suppliers scheduled to receive a reduction in their payment updates in excess of a reduction due to productivity (i.e., hospitals and physicians).\n\n\t\tPresidential Review Procedures\n\nThe Administration's proposal is the only proposal of the three that requires explicit presidential approval or disapproval of the Council's recommendations. Specifically, the Administration's proposal would require that the Council submit two annual reports to the President containing its recommendations for payment updates to Medicare providers. The President would have 30 days to approve or disapprove of the Council's report in its entirety. The President would not have the authority to disapprove individual recommendations. \nH.R. 3590 requires the transmission of the Independent Medicare Advisory Board's proposals to the President but does not stipulate specific procedures for the President to review and comment on the Board's recommendations. However, the Board would be required to submit a copy of the proposal to the Secretary for the Secretary's review and comment. Further, if the Board fails to submit a proposal to the President and Congress by January 15, the Secretary would be required to submit a contingent proposal, meeting the same fiscal policy requirements. \n\n\t\tCongressional Review Procedures\n\nUnder all three options, the Commission or Board's recommendations would automatically go into effect without congressional action. Congress would need to pass legislation that would either supersede the entity's recommendations or block their implementation. Each proposal specifies different procedures for Congress to follow to initiate this process. For example, under S. 1380 , Congress would need a three-fifths majority in the House or Senate (67 in the Senate or 290 in the House) to consider a measure that would overrule a payment or coverage determination made by the Commission. \nTo prevent the implementation of recommendations proposed by the IMAC, the Administration's proposal would require that Congress enact a joint resolution of disapproval within 30 days from the date the President approves the Council's recommendations. All joint resolutions of disapproval are required to be approved and signed by the President. Given that the IMAC proposal would require presidential approval of the Council's recommendations, it is unlikely that the President would then approve a congressional resolution to nullify those recommendations. To prevent the proposal from becoming law, Congress would then need two-thirds majorities in both Houses of Congress to override the President's veto of the resolution.\nH.R. 3590 is the only proposal that includes expedited or \"fast track\" procedures for congressional consideration of the Board's recommendations. Expedited procedures help ensure that Congress take action on particular legislation that might otherwise never make it out of committee. Under this option, the Board would be required to submit its annual recommendations to Congress and the President by January 15. By April 1, the Senate Finance Committee, the Committee on Ways and Means, and the Committee on Energy and Commerce would be required to report out either the Board's proposal or an amended version of the proposal or be discharged from further consideration of the proposal. If Congress does not enact legislation that supersedes the Board's proposal by August 15, the Secretary would be required to automatically implement the Board's proposal, subject to certain conditions. To discontinue the automatic implementation of the Board's recommendations beyond 2019, Congress would have to pass a joint resolution of disapproval no later than August 15, 2017.\n\n\t\tTimeline for Recommendations\n\nS. 1380 would require that the Commission propose its first set of payment recommendations by December 1, 2012, for implementation beginning in 2013. Under the Administration's proposal and H.R. 3590 , the first set of recommendations would be required in 2014 for implementation in 2015. \n\n\t\tCost Control Mechanisms\n\nAll proposals contain mechanisms designed to control spending in the Medicare program. Under S. 1380 , the new MedPAC Commission would be required to reduce Medicare expenditures by at least 1.5% annually. If the Chief Actuary of CMS concludes that the Commission's policies would not reduce expenditures by this amount, the Secretary would be required to implement an automatic reduction in payment to Medicare providers and suppliers to achieve the 1.5% savings, subject to certain requirements. \nH.R. 3590 specifies annual savings targets that the Board would be required to meet. Specifically, the Board would be required to develop recommendations that would reduce projected Medicare spending by the lesser of 0.5 percentage points in 2015, 1.0 percentage points in 2016, 1.25 percentage points in 2017, and 1.5 percentage points in years 2018 and beyond, and the amount by which the rate of growth in Medicare spending exceeds a rate of inflation (as defined in statute). The bill also includes a budget neutrality provision. The Board's recommendations could not increase Medicare expenditures, over the next 10-year period, over and above what they would have been without the recommendations. In its estimate of the Patient Protection and Affordable Care Act released on December 19, the Congressional Budget Office (CBO) predicted that the provision would reduce Medicare spending by $28.2 billion between years 2015-2019, taking into account reductions anticipated for other provisions in the legislation.\nThe Administration's proposal also includes a 10-year budget neutrality provision. Proposals that did not meet this budget neutrality requirement could not be implemented. The CBO analysis of the President's IMAC proposal estimated minor savings from the proposal, $2 billion in savings over 2010-2019 with all of the savings realized in fiscal years 2016 through 2019. To achieve larger savings, the agency recommended including explicit targets for reductions in spending, similar to S. 1380 and H.R. 3590 , as well as providing the Council with broader authority to make other changes in the program.\n\n\t\tFunding for Activities\n\nBoth S. 1380 and the Administration's proposal would authorize funding, in such sums as necessary, for the Commission or Council's activities. Sixty percent of the appropriation would be payable from the Medicare Part A Trust Fund and 40% from the Part B Trust Fund. H.R. 3590 would appropriate $15 million for the Board's activities beginning in 2012. This amount would increase by the rate of inflation annually thereafter. \n\n\tConcluding Observations\n\nIn the current health care reform debate, the idea of creating an independent, policymaking entity in Medicare has gained prominence. This report illustrates some of the key characteristics for three of the legislative options that have been proposed. Although not a new concept, the idea of creating an independent commission or governing entity in Medicare has garnered attention in recent months because it is perceived as a viable approach for containing health care spending. However, as this comparison demonstrates, determining the appropriate size, scope of authority, cost control mechanisms, and level of independence for a new policymaking body presents challenges for lawmakers and health care experts. As policymakers continue to debate options for health reform, examining and assessing the various approaches for creating these types of entities will become increasingly important.","output":"Current health care reform discussions have included debates about the merits of creating an independent entity in Medicare to make changes in the program. Currently, Medicare policy is made largely by Congress and, to varying degrees, the Centers for Medicare and Medicaid Services (CMS), the federal agency responsible for administering the program. The proposals being debated would essentially create an independent body of experts with the power to set provider payment rates and make other Medicare policy decisions.\nAdvocates of these types of proposals argue that creating a new independent entity or governance structure in Medicare is necessary if we hope to achieve any real health care reform, particularly reductions in overall spending. According to supporters, members of Congress are easily influenced by special interests and lobbyists when developing Medicare policies, particularly those related to provider reimbursement. As a result, some of the decisions that are made may not be fiscally sustainable or in the best interest of beneficiaries. Additionally, proponents argue that members do not have the technical expertise or professional experience required to manage a health insurance program as complex as Medicare. They contend that the public would be better served by having independent experts, insulated from political pressures, responsible for making Medicare policy.\nOpponents of these proposals express concern about reducing Congress's role in the Medicare policymaking and oversight process. Under the proposals being discussed, recommendations made by the new commission or decision-making entity would automatically become law without congressional action. Critics contend that giving too much power to an entity composed of unelected officials would reduce its accountability to Congress and the public.\nOver the past year, several proposals have been introduced by Congress to create a new administrative or governing structure in Medicare. On June 25, 2009, Senator Jay Rockefeller introduced S. 1380, the Medicare Payment Advisory Commission (MedPAC) Reform Act of 2009, which would elevate MedPAC, a congressional advisory commission, to an executive branch agency. The Obama Administration submitted a similar proposal to Congress titled the Independent Medicare Advisory Council Act (IMAC) on July 17, 2009. The Administration's draft proposal would create an independent five-member executive council to make recommendations to the President. Finally, the Senate Finance Committee included a provision establishing an independent Medicare advisory board in its health reform legislation, the Patient Protection and Affordable Care Act (H.R. 3590), which passed the Senate on December 24, 2009. All proposals would transfer certain Medicare oversight and decision-making responsibilities to an independent, policymaking entity.\nThis report introduces readers to the concept of creating an independent, policymaking entity in Medicare. The report begins with a discussion of the types of policymaking entities that have been proposed in the current health care reform debate, as well as in Medicare. The report then provides an overview of the role that Congress and CMS play in determining Medicare policy. The report concludes with a comparison of some of the key features of S. 1380, the Administration's draft IMAC proposal, and H.R. 3590."}
{"id":"gao_GAO-15-674","pid":"gao_GAO-15-674_0","input":"\tBackground\n\n\t\tTypes of Fuel Used in Military Operations\n\nMilitary operations generally rely on petroleum-based fuels that power  communication equipment, forward deployed bases, tactical and combat  ground vehicles, aircraft, naval vessels, and other platforms. For military  operations, DOD primarily uses jet and naval distillate fuels. With regard  to jet fuel, until recently DOD predominately used two types: Jet  Propellant-8 and Jet Propellant-5. Jet Propellant-8 is the primary fuel  used in DOD land-based aircraft, tactical and combat ground vehicles,  and ground support equipment. Aircraft, ground vehicles, and support  equipment deployed aboard maritime vessels (such as aircraft carriers)  use Jet Propellant-5 since this jet fuel\u2014which is stored in large  quantities\u2014is less combustible than other types of jet fuel, which is  important for fire safety reasons. The standards for these two fuels are  listed in the DOD technical fuel specification documents maintained by  the Departments of the Air Force and Navy, respectively, and approved  for use by all DOD departments and agencies. Jet Propellant-8 fuel is  similar to commercial jet fuels\u2014known as Jet A and Jet-A-1. The  standards for these fuels are listed in the technical fuel specification  document issued by ASTM International. As of the end of calendar year  2014, DOD reported completing conversion from Jet Propellant-8 fuel to  Jet A\u2014with the inclusion of specific additives for military unique  requirements\u2014at military installations within the United States. DOD uses  naval distillate fuel, known as F-76, to power nonnuclear ships. This fuel  can be burned in shipboard boilers, diesel engines and gas turbines. The  standards for this fuel are listed in the DOD technical fuel specification  document maintained by the Department of the Navy. Unlike the case of  jet fuel, according to DOD officials, there is no commercial equivalent that  meets the Navy\u2019s maritime needs.\n\n\t\tDOD Guidance on Alternative Fuels\n\nDOD Directive 4180.01, DOD Energy Policy, among other things,  establishes that DOD will diversify and expand its energy supplies and  sources, including alternative fuels.responsibilities for various matters, including the following:\nThe Assistant Secretary of Defense for Operational Energy Plans and  Programs for development, certification, qualification, field demonstration, and  ongoing purchases of alternative fuels for operational platforms in  accordance with the U.S. Code;   is to develop policy and guidelines and provide oversight\nThe Director, Defense Logistics Agency is to (1) manage energy  commodities and related services to support the qualification of alternative fuels and support field  demonstration activities; and  ; and (2) provide energy expertise\nThe Secretaries of the military departments are to develop and  implement doctrine, guidance, and strategies consistent with the  directive and implementing instructions.\nThis position was recently merged with the former Deputy Under Secretary of Defense  (Installations & Environment) position to create the Assistant Secretary of Defense for  Energy, Installations, and Environment. See Carl Levin and Howard P. \u201cBuck\u201d McKeon  National Defense Authorization Act for Fiscal Year 2015, Pub. L. No. 113-291, \u00a7 901(f)  (2014) (amending 10 U.S.C. \u00a7 138(b)(9)). Many of the responsibilities of the Assistant  Secretary of Defense for Operational Energy Plans and Programs were transferred from  section 138c of Title 10, U.S. Code, to section 2926. See id. \u00a7 901(g).\nThis responsibility is to be carried out in accordance with Department of Defense  Directive 4140.25, DOD Management Policy for Energy Commodities and Related  Services (Apr. 12, 2004). This directive was reissued as Department of Defense  Instruction 4140.25 on June 25, 2015. alternative fuels are obtained using the DOD\u2019s standard fuel alternative fuels for operational purposes are purchased when cost- competitive with traditional fuels and when qualified as compatible  with existing equipment and infrastructure; and  fuel systems are qualified to use available commercial-type fuels,  including alternative fuels.\nDOD\u2019s Alternative Fuels Policy for Operational Platforms lists the  department\u2019s primary alternative fuels goal as, among other things,  furthering flexibility of military operations through the ability to use  multiple, reliable fuel sources. for the department\u2019s investment in alternative fuels, to include: increasing  DOD\u2019s resilience against strategic supply disruptions, reducing the effect  of petroleum price volatility, and increasing fuel options for operational  commanders. This policy indicates alternative fuels can serve as a  mechanism for mitigating anti-access\/area denial effects, and for enabling  flexibility in supply chain logistics. The policy stresses that the desired  end-state of investments in alternative fuels is operational military  readiness and battlespace effectiveness.\nAdditionally, it articulates considerations  DOD\u2019s Operational Energy Strategy and related Operational Energy  Implementation Plan identify the high-level goal of expanding DOD\u2019s  operational energy supply options. Promoting the development of  alternative fuels\u2014in the form of testing and approving them for use by  existing military platforms, and helping to catalyze a competitive biofuels  industry\u2014constitutes one means for achieving this goal.\nDepartment of Defense Alternative Fuels Policy for Operational Platforms (July 5,  2012).\nEach of the three military departments has energy guidance documents  that address alternative energy or alternative fuels. Two of DOD\u2019s  military departments\u2014the Navy and the Air Force\u2014have also established  usage goals for alternative fuels. The Department of the Navy\u2019s guidance  sets a goal of deriving 50 percent of total energy consumption from  alternative sources\u2014including alternative fuels\u2014by 2020, which,  according to Navy estimates, would require using about 336 million  gallons of alternative fuels (both naval distillate and jet fuels) annually by  2020. In addition to setting quantitative goals, the guidance established a  goal of demonstrating (which the Department of the Navy completed in  July 2012) and deploying (by 2016) the Great Green Fleet\u2014that is, ships  and aircraft fueled by alternative fuels and other alternative energy  sources or utilizing other energy conservation measures. The  Department of the Air Force\u2019s guidance includes a goal of increasing, to  50 percent of total consumption, the use of cost-competitive drop-in  alternative jet fuel blends for non-contingency operations by 2025.  Although the Department of the Army uses jet fuel in its tactical and  combat ground vehicles, aircraft, and other ground support equipment  (such as generators) and engages in efforts to test and approve  alternative jet fuel for use in these platforms, the Army does not have  specific alternative fuel usage goals in its energy guidance. For additional  details about each military department\u2019s guidance as related to alternative  fuels, see appendix I.\n\n\t\tGAO\u2019s Prior Work\n\n) Strategy (May 1, 2015). select federal agencies\u2014including DOD\u2014to sponsor research that  specifically targets alternative jet fuel development or provide direct  support for its future commercial production, or both. For example, we  described multiple non-DOD research and development projects that  provide federal support for helping to develop technologies and  processes necessary for the commercial production of biofuels.  Regarding DOD, we noted DOD\u2019s activities to test and approve  alternative jet fuel, in particular. In addition, we underscored that while  federal government activities help to address the main challenge of  alternative jet fuel\u2019s price-competitiveness, it is market factors that affect  the long-term commercial viability of alternative jet fuels.\n\n\t\tDefense Production Act\n\nThe Defense Production Act (DPA) generally provides the authority to,  among other things, expedite and expand the supply of critical resources  from the U.S. industrial base to support the national defense. Title III of  the Act\u2014Expansion of Productive Capacity and Supply\u2014allows military  and civilian agencies to provide a variety of financial incentives to  domestic firms to invest in production capabilities, so as to ensure that the  domestic industrial and technological base is capable of meeting the  national defense needs of the United States.Title III authorizes the president to provide for the following in order to  create, maintain, protect, expand, or restore domestic industrial base  capabilities essential for the national defense: purchases of or commitments to purchase an industrial resource or encouragement of exploration, development, and mining of critical  and strategic materials, and other materials; development of production capabilities; and increased use of emerging technologies in security program  applications and rapid transition of emerging technologies.\nUse of the authorities is subject to conditions and requirements  established by statute. For example, prior to using the above DPA  authorities, the president must determine that the industrial resource,  material, or critical technology item is essential to the national defense,  that U.S. industry cannot reasonably be expected to provide the capability  in a timely manner, and that purchases, purchase commitments, or other  actions are the most cost effective, expedient, and practical alternative  method for meeting the need. According to DOD officials, the focus of  Title III is to establish commercially viable industrial capabilities that will  continue to prosper after federal government assistance ends.\nThe DPA fund manager is the Secretary of Defense. Within DOD, the  Under Secretary of Defense for Acquisition, Technology, and Logistics  provides guidance to implement the DPA and monitors the Title III  program. III program and maintains a program office to manage and administer  aspects of individual Title III projects. Program Office activities include  conducting market research and analysis when assessing potential Title  III projects; monitoring the technical and business performance of firms  receiving Title III financial incentives; and overseeing aspects of  contracting for Title III projects.\nSee Department of Defense Directive 4400.01E, Defense Production Act Programs,  paras. 4.1.2, 4.1.10 (Oct. 12, 2001) (certified as current as of Sept. 14, 2007). According  to DOD, the Under Secretary of Defense for Acquisition, Technology, and Logistics is  assisted by the Deputy Assistant Secretary of Defense (Manufacturing & Industrial Base  Policy) and the Program Director of the Defense Production Act Title III Program.\n\n\tDOD Purchases Alternative Fuels to Test and Validate that the Fuel Can Meet Safety, Performance, and Reliability Standards\n\n\t\tDOD Has Purchased Small Quantities of Alternative Fuels\n\nDOD has purchased small quantities of alternative fuels for research,  development, and demonstration purposes but not large quantities for  military operations yet. DOD\u2019s energy and alternative fuels guidance  discusses the research and development aspects of alternative fuels\u2014to  include testing and approving fuels, as well as demonstrating their use in  an operational environment\u2014and DOD\u2019s Operational Energy Strategy  lists conditions for investment in the research, development, testing, and  evaluation of alternative fuels. The guidance notes that DOD is currently  purchasing alternative fuels for testing purposes, at a premium price\u2014 that is, prices higher than those for conventional fuels. The marginal unit  cost of producing a commodity at small scale with new processes being  researched and developed is typically much higher than the cost of  producing the same or similar commodities using existing large-scale  commercial production facilities.\nThe military departments purchased about 2.0 million gallons of  alternative jet and naval distillate fuels from fiscal years 2007 through  2014 to conduct the department\u2019s testing, approving, and demonstration  activities, at a total cost of about $58.6 million (adjusted for inflation to  fiscal year 2015 dollars using the gross domestic product price index).  This total amount includes about 450,000 gallons for the Department of  the Navy\u2019s July 2012 Great Green Fleet demonstration with a group of  ships and aircraft fueled by alternative fuels in an operational environment  that was part of a larger, biennial multinational maritime exercise, known  as the Rim of the Pacific exercise.funding sources for the quantities of alternative fuels purchased include  each military department\u2019s Research, Development, Test, and Evaluation  funds and the Department of the Navy\u2019s Operations and Maintenance  funds\u2014for the Great Green Fleet demonstration\u2014as well as other funds  that DOD identified as being associated with the American Recovery and  Reinvestment Act of 2009.\nAccording to DOD officials, the  By contrast, over the same period of time, the military departments  purchased approximately 32.0 billion gallons of jet and naval distillate  conventional petroleum fuel at a total cost of about $107.2 billion  (adjusted for inflation to fiscal year 2015 dollars using the gross domestic  product price index). Figure 1 shows the total quantities and costs of the military departments\u2019 jet and naval distillate alternative and conventional  petroleum fuels purchases from fiscal years 2007 through 2014. For more  details on the quantity and cost of the military departments\u2019 jet and naval  distillate alternative and conventional petroleum fuels purchases by each  fiscal year, see appendix II.\n\n\t\tDOD\u2019s Testing Process Validates Whether Alternative Fuels Can Meet Safety, Performance, and Reliability Standards of Military Equipment and Platforms\n\nBefore any alternative fuel can be used in military operations, DOD tests  the fuel to validate whether it can meet unique safety, performance, and  reliability standards of military equipment and platforms. These standards  reflect the disparate environments in which the military operates\u2014from  extreme cold weather to desert geography\u2014and the different types of  functionality present in military equipment and platforms\u2014such as flying  at high altitudes for military reconnaissance purposes or the afterburner  thrust augmentation in military aircraft engines. Two examples of fuel  properties important to these standards include a liquid fuel\u2019s flash  point\u2014the temperature at which existing vapors will combust, or ignite\u2014 and its freeze point\u2014the temperature at which it freezes, which affects  how it behaves at low temperatures. Jet fuel (specifically Jet Propellant-5)  used on military ships is required to have a substantially higher flash point  than other jet fuels for safety reasons, since this fuel is stored in large  quantities on aircraft carriers and other vessels. A liquid fuel\u2019s freezing  point potentially can have an effect on certain long-range, high-altitude  missions during which extreme cold temperatures are encountered.  Requirements for alternative fuels are set out in the relevant DOD  technical fuel specification documents. For more details about fuel  properties, see appendix III.\nThe Departments of the Navy, Air Force, and Army test alternative fuels  to ensure that they can be used in and on tactical and combat ground  vehicles and ground support equipment, ships, aircraft, and fuel  distribution systems. The military departments follow a testing and  approval process that is similar to that used in evaluating whether to  include prospective alternative fuels in the commercial jet fuel standard  issued by ASTM International. captures technical data through laboratory, component, engine, and  weapon system platform tests that evaluate the effects of alternative fuels  on the performance and reliability of military hardware. The chemical  properties of an alternative fuel may be tested in a laboratory using small  quantities of fuel\u2014as little as 500 milliliters. As that fuel progresses  through the testing process, however, fuel quantity requirements  increase. For example, testing alternative fuels in jet engines could  require 60,000 gallons of fuel. For more details about the overall testing  process, see appendix IV.\nASTM International, formerly known as the American Society for Testing and Materials,  develops and delivers international voluntary consensus standards. ASTM Standard  D7566 covers the manufacture of jet fuel containing blends of conventional and  synthesized hydrocarbons (those not derived from petroleum hydrocarbons) for  commercial use.\nDepartments of the Navy and Air Force. Consequently, according to DOD  officials, they do not duplicate tests previously conducted by another  military department; however, when necessary, a department may  conduct additional tests if there are fuel properties that are specifically  important in certain military applications. In addition, DOD officials stated  that they are streamlining the number of specific tests they conduct as  they gain more expertise with alternative fuels. Other DOD stakeholders  who need to know about fuel issues\u2014such as platform program  managers\u2014review the testing results and share their feedback. Once  these stakeholders concur that test results demonstrate the prospective  alternative fuel meets safety, performance, and reliability expectations  and share their approval, the applicable DOD technical fuel specification  documents are updated.\n\n\t\tDOD Has Approved the Use of Alternative Fuels Made from Two Production Processes and Continues to Test Others\n\nCertain alternative fuels made from the Fischer-Tropsch and  Hydroprocessed Esters and Fatty Acids production processes have been  tested and approved for use in Navy aviation and ship platforms, Air  Force aviation assets, and Army tactical and combat ground vehicles and  ground support equipment, but not yet for Army aviation assets. Under  the previously mentioned DOD technical fuel specification documents,  alternative fuels produced through these two processes are approved for  up to a 50 percent blend with conventional fuel. According to DOD  officials, the alternative fuels made from these production processes that  were used in the testing process included fuels derived from natural gas,  coal, and renewable biomass (such as camelina, algal oil, and tallow)  feedstock sources.\nThe military departments continue to have some alternative fuel testing  efforts underway. Currently, according to Department of the Army  officials, the testing process for alternative fuels made from the two  production processes discussed above, as well as fuel made from the  Alcohol to Jet production process, for use in Army aviation assets is  complete. Further, they stated that the test results are undergoing  review in order to decide whether to approve the use of these fuels in  Army aviation assets. Also, according to Department of the Army officials,  they plan to complete the testing of alternative fuels made from the  Alcohol to Jet production process for use in tactical and combat ground  vehicles and ground support equipment by the end of calendar year 2015.  They stated they plan to start considering, just for these platforms,  alternative fuels made from the Synthesized Iso-Paraffins and Catalytic  Hydrothermolysis production processes before the end of fiscal year 2015  by purchasing fuel and beginning some testing. According to a Navy  official, the testing for alternative fuel made from the Alcohol to Jet and  Synthesized Iso-Paraffins production processes in aviation platforms is  complete while testing of these fuels in ship platforms is ongoing. In  addition, the Department of the Navy has begun testing alternative fuels  made from the Catalytic Hydrothermolysis and Hydroprocessed  Depolymerized Cellulosic production processes. According to an Air  Force official, beyond updating previously conducted tests of alternative  fuels made from other production processes\u2014such as Alcohol to Jet\u2014 there are no ongoing or planned efforts within the Department of the Air  Force to complete additional testing and approval. According to Air Force  officials, if other fuel production processes appear likely to become  commercially viable, the Air Force will revisit resuming its alternative fuel  testing and approval efforts.\nAs discussed above, DOD recently reported converting from purchasing  military-specification Jet-Propellant 8 jet fuel in the United States to  purchasing commercial-grade jet fuel\u2014Jet A\u2014with specific additives for  military-unique requirements as a means for cost savings and broadening  the fuel provider supply pool. While commercial-grade jet fuels blended  with alternative fuels are not being produced on a commercial scale in the  United States, ASTM International has approved, for commercial aviation,  the use of three types of alternative fuels produced through the (1)  Fischer-Tropsch and Hydroprocessed Esters and Fatty Acids production  processes discussed above for up to a 50 percent blend with  conventional fuel and (2) Synthesized Iso-Paraffins production process  referenced above for up to a 10 percent blend with conventional fuel. In  addition, ASTM International continues to evaluate and consider  approving alternative fuels made from other production processes,  including those cited above for use in commercial aviation. Consequently,  DOD could use alternative fuels in the future via Jet A fuels once those  fuels are available on a commercial scale and a widespread basis in the  fuel marketplace. According to DOD officials, unless DOD continues to  test and approve additional alternative fuels that are being approved by  ASTM International, DOD runs the risk of having to develop a separate  supply chain for jet fuel\u2014in other words, buying a specialty jet fuel  product\u2014as it cannot be assured that commercial-grade jet fuel will meet  military safety, performance, and reliability standards.\n\n\tDOD Has a Standard Process to Purchase All Fuels for Military Operations and is Currently Required to Ensure Alternative Fuel Purchases for Operational Purposes Are Cost-Competitive with Conventional Fuels\n\n\t\tDOD Uses a Standard Process to Purchase Large-Scale Volumes of Fuel for Military Operations\n\nDOD has a standard process in place for purchasing large-scale volumes  of fuel, including alternative fuels, for military operations. In support of  DOD\u2019s large-scale fuel program, the Defense Logistics Agency Energy  (DLA-E) activity provides worldwide energy support, including for large- scale fuel purchasing, transportation, and storage for the military and   As depicted in figure 2 below, DLA-E  other government customers.purchases fuel worldwide in large volumes via four major regions:  Inland\/East\/Gulf Coast\/Offshore; Rocky Mountain\/West Coast\/Offshore;  Atlantic\/European\/Mediterranean; and Western Pacific. DLA-E considers  two primary factors\u2014technical acceptability and price\u2014when evaluating  fuel vendors\u2019 submitted proposals. The fuel must first meet DOD\u2019s  technical fuel specifications and other technical evaluation factors as part  of the consideration. DOD officials indicated that DLA-E typically awards  multiple 1-year contracts in these purchase programs. Because the price  of energy commodities changes frequently, DOD documents indicate that  DLA-E and DOD establish fuel purchase contracts that are tied to market  price indicators with fixed margins. The fuel is moved through a  commercial distribution system (via tankers, railcars, barges, tank trucks,  and pipelines) to intermediary storage locations for redistribution, or  directly to the end use military customer.\nDLA-E utilizes its Defense-wide Working Capital Fund for large-scale fuel  purchases for its military and other government customers. According to  DOD\u2019s Financial Management Regulation, working capital funds were  established to satisfy recurring DOD requirements using a businesslike  buyer-and-seller approach. The fund covers DLA-E\u2019s costs for purchasing large quantities of fuel and is reimbursed through its sale of  the fuel to the military at a standard price. The standard price is also  based on, among other things, an estimate for non-product costs such as  transportation and storage costs. The standard price is intended to  remain unchanged until the next fiscal year. To simplify cost planning and  budgeting, the standard price for a given fuel is the same globally.\n\n\t\tDOD is Currently Required to Consider Whether Alternative Fuels Are Cost- Competitive with Conventional Fuels for Military Operations\n\nAs DOD seeks to purchase alternative fuels for military operations, it is  required to consider whether alternative fuels are cost-competitive with  conventional fuels. Under the previously mentioned DOD technical fuel  specifications, fuels produced through the Fischer-Tropsch and  Hydroprocessed Esters and Fatty Acids production processes are  approved to be used in Navy aviation and ship platforms, Air Force  aviation assets, and Army tactical and combat ground vehicles and  ground support equipment but not yet for Army aviation assets for a blend  of up to 50 percent with conventional fuel.  From a technical  requirements perspective, DOD can purchase and use alternative fuels  produced via these approved processes for military operations. However,  in conforming to the law and to departmental guidance, DOD must  currently consider whether alternative fuels are cost-competitive with  conventional fuels. For example, DOD may not obligate or expend funds  made available for fiscal year 2015 to make a large-scale purchase of  alternative fuel for operational purposes unless the fully burdened cost\u2014 that is, the commodity price of the fuel plus the total cost of all personnel  and assets required to move and, when necessary, protect the fuel from  the point at which the fuel is received from the commercial supplier to the  point of use\u2014of that fuel is cost-competitive with the fully burdened cost  of conventional fuel. However, with the requisite notice to the  congressional defense committees, the Secretary of Defense may waive  this limitation and the Secretary is required to notify the congressional  defense committees no later than 30 days before the purchase date if  DOD intends to purchase an alternative fuel for operational use that has a  fully burdened cost that is in excess of 10 percent more than the fully  burdened cost of conventional fuel for the same purpose. A similar  provision was in effect for fiscal year 2014 funds, but it did not reference  the fully burdened cost of fuel, nor was the 10 percent notice requirement  included. DOD guidance also discusses consideration of cost with  regard to alternative fuel purchases for operational purposes, and DOD\u2019s  Operational Energy Strategy indicates that the department will acquire  such fuels for military operations at prices that are competitive with the  market price for conventional fuels. DOD has also recently issued  updated guidance establishing it is DOD\u2019s policy that alternative fuels for  operational purposes are purchased when cost-competitive with  traditional fuels and when qualified as compatible with existing equipment  and infrastructure.\nIn December 2013, the Secretaries of the Departments of Agriculture and  the Navy announced an initiative, called Farm to Fleet, which is intended  to help the Department of the Navy meet its alternative fuels usage goals.  Related to this initiative, DOD intends to purchase, through its regular  domestic fuel purchases, Jet Propellant 5 jet and naval distillate fuels  meeting DOD\u2019s technical fuel specifications and that are blended with at  least 10 percent but no more than 50 percent alternative fuels\u2014 specifically biofuels\u2014for the Department of the Navy\u2019s use in military  operations. The Department of Agriculture plans, under the authority of  the Commodity Credit Corporation Charter Act, to contribute up to       $161 million to alternative fuel purchases to help defray some of the extra  costs\u2014which may include the costs of feedstocks\u2014that would have  caused the final alternative fuel to be more expensive than the price of  conventional fuels for DOD.  To be eligible for the Department of  Agriculture\u2019s Commodity Credit Corporation funding, the specific amounts  per gallon of which are provided in DOD\u2019s fuel solicitation documents, fuel  vendors have to provide an alternative fuel that was produced from an  approved domestic feedstock\u2014such as crop and tree residues,  algae\/algal oil, or animal waste and by-products of animal waste.\nIn the event of a contract award with fuel vendors providing alternative  fuels, the vendors would receive separate payments from the Department  of Agriculture\u2019s Commodity Credit Corporation and DOD. The Department  of Agriculture\u2019s Commodity Credit Corporation would pay the incentive  amount per gallon indicated in the solicitation to the fuel vendors in order  to help them defray some of their costs, including domestic feedstock  costs. DOD would pay the remainder of these alternative fuel vendors\u2019  prices. However, the incentive is not an additional sum paid to a fuel  vendor over and above the price submitted in its proposal, but rather  provides Commodity Credit Corporation funds to cover the portion of the  total submitted price that exceeds the price DOD would otherwise pay. In  no event would fuel vendors providing alternative fuels be paid more than  the price they submitted in their proposals. We note that such an  arrangement means that the cost of the alternative fuel to the federal  government as a whole may be higher than the cost of conventional fuel.  This is because, while DOD would be paying a price that is competitive  with the price of conventional fuel, the Department of Agriculture would be  paying an additional subsidy.\nDOD\u2019s first attempt to purchase alternative fuels for military operations,  through its large-scale fuel program, occurred in June 2014, when DOD  issued a solicitation, through its regular domestic large-scale fuel  purchase program for the Inland\/East\/Gulf Coast\/Offshore region of the  United States, for the purchase of Jet Propellant-5 jet and naval distillate  fuels for which blended fuels with between 10 to 50 percent alternative  fuels were to be considered. The solicitation listed the estimated  maximum quantity of Jet Propellant-5 and naval distillate fuels as  approximately 392.5 million gallons. As such, the maximum amount of  biofuel to be blended into the desired fuel amount would be equivalent to  approximately 39 million gallons (at 10 percent blend) to 196 million  gallons (at 50 percent blend). The Department of Agriculture made  available approximately $27 million in Commodity Credit Corporation  funds to support successful biofuel contract awards. According to DOD  officials, proposals with biofuel bids for only naval distillate fuel but not Jet  Propellant-5 jet fuel were received. However, according to DOD officials,  none of the submitted proposals successfully met all of the technical  evaluation factors. The fuel contract awards under this solicitation were  announced on February 20, 2015. According to DOD officials, none were  for alternative fuels.\nDOD\u2019s second attempt to purchase alternative fuels for military  operations, through its large-scale fuel program, began in April 2015. At  that time, DOD issued a solicitation, through its regular domestic large- scale fuel purchase program for the Rocky Mountain\/West  Coast\/Offshore region of the United States, for the purchase of Jet  Propellant-5 jet and naval distillate fuels for which blended fuels with  between 10 to 50 percent alternative fuels were to be considered. The  solicitation listed the estimated maximum quantity of Jet Propellant-5 and  naval distillate fuels as approximately 290.6 million gallons. As such, the  maximum amount of biofuel to be blended into the desired fuel amount  would be equivalent to approximately 29 million gallons (at 10 percent  blend) to 145 million gallons (at 50 percent blend). The Department of  Agriculture has made available approximately $66 million in Commodity  Credit Corporation funds to support successful biofuel contract awards.  Fuel vendors had until May 18, 2015, to submit proposals, and DOD  plans to make contract awards before October 1, 2015.\nAccording to a Navy official, the Department of Agriculture\u2019s Commodity  Credit Corporation funds will not be available for DOD\u2019s regular fuel  purchase programs for the Atlantic\/European\/Mediterranean and Western  Pacific regions because those are international rather than domestic fuel  purchases.\n\n\tDOD Has Used Defense Production Act Authorities in Collaboration with Private Industry to Promote Domestic Biofuel Production\n\n\t\tDefense Production Act Allows DOD to Provide Financial Incentives to Private Firms to Meet Critical National Defense Needs\n\nTitle III of the Defense Production Act (DPA)\u2014Expansion of Productive  Capacity and Supply\u2014generally allows military and civilian agencies to  provide a variety of financial incentives to domestic firms to invest in  production capabilities, so as to ensure that the domestic industrial and  technological base is capable of meeting the national defense needs of  the United States. Use of certain Title III authorities requires a  determination that, among other things, the industrial resource, material,  or critical technology item is essential to national defense and U.S.  industry cannot reasonably be expected to provide the capability needed   Title III financial incentives can reduce the risks for  in a timely manner.domestic suppliers associated with the capitalization and investments  required to establish, expand, or preserve production capabilities.  According to DOD officials, the focus of Title III is to establish  commercially viable industrial capabilities that will continue to prosper  after federal government assistance ends. Funding for Title III projects  comes from appropriations for DPA purchases, DOD components, or  other federal agencies.\n\n\t\tDOD Has Used DPA Title III Authority for Two Biofuel Production Projects\n\n\t\t\tBio-Synthetic Paraffinic Kerosene Project\n\nDOD first used Title III authority in relation to alternative fuels in 2010, for  the purpose of producing Bio-Synthetic Paraffinic Kerosene, an  alternative jet and naval distillate fuel made from the Hydroprocessed  Esters and Fatty Acids production process. Alternative fuels made from  this process can meet DOD\u2019s technical fuel specifications when blended  with conventional fuels. The modified biorefinery resulting from this  project is to produce Bio-Synthetic Paraffinic Kerosene fuels and other  co-products from natural oils, fat, and grease feedstocks via the  Hydroprocessed Esters and Fatty Acids production process.\nAccording to DOD officials, the project originated from the Department of  Defense Appropriations Act for Fiscal Year 2010. The explanatory  statement for that act listed Bio-Synthetic Paraffinic Kerosene Production  among the DPA projects for that year. In September 2009, the Air  Force, as Executive Agent for the DPA Title III program, issued a Request  for Information inviting the private sector to provide information about  establishing manufacturing capability for Bio-Synthetic Paraffinic  Kerosene fuel derived from renewable biomass feedstock sources.  According to DOD officials, only one private company responded to the  request. In December 2010, the Under Secretary of Defense for  Acquisition, Technology, and Logistics issued a determination that (1) the  industrial resource or technology item of Bio-Synthetic Paraffinic  Kerosene fuel is essential for national defense, and (2) U.S. industry  cannot reasonably be expected to provide this fuel in a timely manner  without action under the Defense Production Act. This written  determination was submitted to relevant congressional committees.Before awarding the Bio-Synthetic Paraffinic Kerosene production  agreement, DOD made a second attempt to identify other private  companies with expertise in this area. With no additional responses, DOD  entered into a technology investment agreement in September 2012 with  the sole private company that had previously responded to the Request  for Information.\nAccording to DOD officials, the modified biorefinery project began in  September 2012 and the biorefinery is expected to be completed and  operational in September 2015. They stated that it has an end goal of  producing alternative fuels and co-products in a volume between 20 and  28 million gallons per year as of when DPA Title III assistance ends, and  will have the capability to blend the alternative fuel with conventional  petroleum fuel for its customers. DOD\u2019s financial contribution for this  project comprises approximately $4 million of its total cost, with the  awarded private company paying the remainder. A commercial airline has  announced that it has entered into an agreement with the biofuel refinery  to purchase 15 million gallons of the jet fuel produced by this project over  3 years. Also, the biofuel refinery announced that it has a strategic  partnership with a fuel distributor that supplies aviation fuel. DOD officials  noted that, although the department has not entered into any agreement  to purchase alternative fuel from this modified biorefinery, the biofuel  refinery would be able to compete for a fuel contract with DOD via      DLA-E\u2019s existing large-scale fuel purchase process.\n\n\t\t\tAdvanced Drop-In Biofuels Production Project\n\nDOD\u2019s second use of Title III authority in relation to alternative fuels  began in 2012 with the Advanced Drop-in Biofuels Production Project.  The goal of the project is to establish one or more domestic integrated  biofuels production enterprise capable of annually producing at least 10  million gallons of alternative jet and\/or naval distillate fuel that can meet  DOD\u2019s technical fuel specifications. This enterprise would include  feedstock acquisition and logistics, conversion facilities (Integrated  Biorefineries), and fuel blending, transportation, and logistics. The effort  would include the design, construction or retrofit, validation, qualification,  and operation of a domestic commercial-scale integrated biofuels  production enterprise.\nIn June 2011, the Department of Agriculture, Department of Energy and  Department of the Navy signed a memorandum of understanding that  initiated a cooperative effort to assist in the development and support of a  sustainable commercial biofuels industry. This occurred in response to  the president\u2019s March 2011 Blueprint for a Secure Energy Future, which  challenged the Secretaries of these three departments to investigate how  they might work together to speed the development of drop-in biofuels  substitutes for diesel and jet fuel. The Blueprint noted that competitively  priced drop-in biofuels could help meet the fuel needs of the Navy, as well  as the commercial aviation and shipping sectors. The memorandum of  understanding explained that given the current economic environment,  significant start-up risks, and the competitive barriers posed by the firmly  established conventional fuels market, private industry would not assume  all of the uncertainty and risk associated with providing a commercially  viable production capability for drop-in biofuels. Accordingly, it was  necessary for the federal government to cooperate with industry to create  a strong demand signal and to make targeted investments to achieve the  necessary alternative fuels production capacity. The stated objective was  to construct or retrofit multiple domestic commercial- or pre-commercial- scale advanced drop-in biofuel plants and refineries. Specific  characteristics for these facilities include the capability to produce biofuels  meeting DOD\u2019s technical fuel specifications at a price that would be  competitive with conventional fuel, and that they would cause no  significant impact on the supply of agricultural commodities for the  production of food. Under the memorandum of understanding, the three  departments stated their intentions to equally contribute funding over a  period of 3 years. The Departments of Energy and the Navy plan to apply  their funds through the DPA. The Department of Agriculture plans to  provide its contribution via the Commodity Credit Corporation funds, as  discussed above.\nIn August 2011, the Air Force, as Executive Agent for the DPA Title III  program, issued a Request for Information to the private sector to obtain  information related to advanced drop-in hydrocarbon biofuels production,  including the technical, manufacturing, and market barriers to establishing  a viable business for producing biofuels. According to DOD officials, an  interagency team was formed to review the responses and use the  findings as guidance to develop the requirements for the biofuel project.  In June 2012, DOD announced the initiation of and a solicitation for the  Advanced Drop-in Biofuels Production Project, which would provide  awards for biofuels production facilities over two phases. Phase I  awards would be for planning and preliminary designs for biofuel  production facilities; and Phase II awards would be for constructing,  commissioning, and performance testing of biofuel production facilities. In  January 2013, the Under Secretary of Defense for Acquisition,  Technology and Logistics issued a determination that (1) an advanced  drop-in biofuels production capability is essential to the national defense;  and (2) without action under DPA authority, U.S. industry could not  reasonably be expected to provide the capability in a timely manner. This  written determination was submitted to relevant congressional  committees. In May and June 2013, DOD selected four private  companies to receive Phase I awards totaling $20.5 million, with private  industry contributing funds for the remainder of the Phase I costs (at least  50 percent).\nOnly Phase I awardees were eligible to apply for the Phase II awards. In  August 2014, three of the four Phase I awardees received Phase II  awards totaling $210 million, with private industry contributing funds for  the remainder of the costs (which are to be more than 50 percent). Phase  II awardees are currently performing activities in preparation for  constructing their biorefinery facilities, including conducting environmental  analyses and securing financing. According to DOD officials, DOD will  monitor the Phase II awardees by conducting biweekly teleconferences,  quarterly status reporting updates, and site visits. In general, monitoring  activities will monitor factors such as whether there are any changes to  the company\u2019s project scope, implementation, or timelines; and if the  company\u2019s amount of spending correlates to how much of the biofuel  production facility has been completed. As shown in Table 1 below, the  Phase II awardees will be making alternative fuel from different  production processes and deriving it from various feedstock sources.  According to DOD program officials, the Advanced Drop-in Biofuels  Production Project should provide, between 2017 to 2018, production  capacity for about 106 million gallons per year of alternative jet and naval  distillate fuels that meet DOD\u2019s technical fuel specifications and are  available at a price that is competitive with that of conventional fuels.\nDOD applied $100 million in fiscal year 2012 procurement funds to this  project. For fiscal year 2013, the explanatory statement for the  Consolidated and Further Continuing Appropriations Act, 2013, listed    $60 million for this project. The National Defense Authorization Act for  Fiscal Year 2013 provided that amounts made available to DOD under  the DPA for fiscal year 2013 for biofuels production could not be obligated  or expended for the construction of a biofuel refinery until matching  contributions were received from the Department of Energy and  equivalent contributions from the Department of Agriculture. For fiscal  years 2014 and 2015, the Department of Energy received authorization to  transfer up to $45 million each year for DPA purposes. The Department  of Energy has contributed those funds to the DPA fund for this project.  For the Department of Agriculture\u2019s equivalent contribution, it has  committed to expenditures of Commodity Credit Corporation funding  through the initiative described above. Two commercial airlines have  announced they are entering into fuel purchase agreements with two of  the Phase II awardees. The third Phase II awardee, according to DOD  officials, is also in talks with potential non-DOD customers. DOD officials  noted that, although the department has not entered into any agreement  to purchase alternative fuels from these private companies, they would be  able to compete for a contract with DOD via DLA-E\u2019s existing large-scale  fuel purchase process.\n\n\tAgency Comments\n\nWe are not making any recommendations in this report. We provided  DOD with a draft of this report for review. DOD provided technical  comments on our findings, which we have incorporated where  appropriate.\nWe are sending copies of this report to the appropriate congressional  committees, the Secretary of Defense; the Deputy Assistant Secretary of  Defense (Manufacturing & Industrial Base Policy); the Assistant Secretary  of Defense (Installations, Energy, and Environment); the Director,  Defense Logistics Agency, and the Secretaries of the Army, Navy, and Air  Force. In addition, the report is available at no charge on the GAO  website at http:\/\/www.gao.gov.\nIf you or your staff have any questions about this report, please contact  me at (202) 512-5257 or merritz@gao.gov Contact points for our Office of  Congressional Relations and Public Affairs may be found on the last page  of this report. GAO staff who made major contributions to this report are  listed in appendix V.\n\nAppendix I: Military Department Guidance on Alternative Fuels\n\nThe Department of the Navy includes two military services\u2014the Navy and the Marine  Corps. the Air Force purchased more than 2 billion gallons of petroleum- based jet fuel in fiscal year 2014. This was about 97 percent of all of  the Department of the Air Force\u2019s fiscal year 2014 petroleum and  other fuel product purchases. The plan indicates that using  alternative jet fuels could help to diversify the types of energy and  obtain the quantities of energy that are needed to perform the Air  Force\u2019s missions, which are currently \u201cheavily dependent\u201d upon  petroleum and petroleum-derived fuels, thereby posing significant  strategic and security vulnerabilities.\nThe Department of the Army uses jet fuel in its tactical and ground  combat vehicles, aircraft, and other ground support equipment (such  as generators) and engages in efforts to test and approve alternative  jet fuel made from different production processes for use in these  platforms. However, the Army does not have specific alternative fuel  usage goals in its energy guidance. The Department of the Army\u2019s  2015 Energy Security and Sustainability Strategy includes the  strategic goals, among others, of: optimizing use and assuring  access.  To accomplish these goals, the Department of the Army  plans to minimize overall energy demand and improve efficiency,  while securing access to renewable\/alternative energy sources to  diversify and expand its resource supply, among other actions. The  Department of the Army purchased more than 350 million gallons of  petroleum-based jet fuel in fiscal year 2014. This was about 76  percent of all of the Department of the Army\u2019s fiscal year 2014  petroleum and other fuel product purchases. ) Strategy (May 1, 2015).\n\nAppendix II: Detailed Quantity and Cost Data of Military Departments\u2019 Alternative and Conventional Fuel Purchases\n\nTables 2 and 3 show detailed quantity and cost data by fiscal year of the  alternative and conventional petroleum jet and naval distillate fuels that  the military departments purchased from fiscal years 2007 through 2014.\n\nAppendix III: Fuel Properties\n\nBefore any alternative fuel can be used in military operations, it is tested  and approved to meet unique safety and performance standards. Listed  below are examples of fuel properties important to these standards.  Requirements for alternative fuels are set out in the relevant DOD  technical fuel specification documents.\nFlash point \u2013 A liquid fuel\u2019s flash point indicates the temperature at  which existing vapors will combust, or ignite. Fuels with higher flash  points contribute to a less flammable, less hazardous fuel for better  safety and combat survivability. Jet fuel (specifically Jet Propellant-5)  used on military ships is required to have a substantially higher flash  point than other jet fuel for safety reasons since this fuel is stored in  large quantities on aircraft carriers and other vessels.\nEnergy density is evaluated for both the mass and volume of fuel required. the components coming in contact with the liquid fuel can remain.  Also, it can affect the rate of deposits forming when the fuel  temperature is elevated; these deposits on components can affect  their performance, such as reducing the fuel flow through fuel filters.\nLubricity \u2013 A liquid fuel\u2019s lubricity refers to its effectiveness in reducing  friction between moving parts in equipment such as pumps and fuel  control units.\nViscosity \u2013 A liquid fuel\u2019s viscosity\u2014which is critical to proper  equipment operations\u2014is a measure of its internal resistance to  motion or flow.\n\nAppendix IV: Alternative Fuel Testing Protocols\n\nThe Departments of the Navy, Air Force, and Army test alternative fuels  to ensure that they can be used in and on tactical and combat ground  vehicles and ground support equipment, ships, aircraft, and fuel  distribution systems. In general, the military departments use the test  protocols listed below, which are similar steps to those used in evaluating  whether to include prospective alternative fuels in the commercial jet fuel  standard issued by ASTM International.\nSpecification properties \u2013 This laboratory testing protocol evaluates  how a prospective alternative fuel\u2019s basic chemical and physical  properties\u2014such as its freezing and flash points\u2014compare with the  baseline properties of conventional jet or naval distillate petroleum  fuel. These required properties are outlined in the associated  technical fuel specification documents.\nFit for purpose \u2013 This laboratory testing protocol involves evaluating  additional properties that are inherent to conventional jet or naval  distillate petroleum fuel, such as how compatible a prospective  alternative fuel is with specific metallic and non-metallic materials and  various additives that, among other things, inhibit corrosion and  dissipate static.\nComponent\/Rig testing - This testing protocol involves evaluating how  a prospective alternative fuel performs in major components found in  the military department\u2019s ground vehicles and support equipment,  ships, and aircraft. Examples of these components include injectors  and the section of an engine where combustion occurs.\nFull scale testing \u2013 This testing protocol involves evaluating how a  prospective alternative fuel performs in engines of ground vehicles  and support equipment, ship and aircraft engines, auxiliary power  units, and fuel handling systems.\nPlatform testing - This testing protocol involves evaluating how a  prospective alternative fuel performs when different types of ground  vehicles and support equipment, ships, aircraft, and fuel support  equipment run on the fuel. Typically, these equipment and platforms  are the military department\u2019s assets that are running on alternative  fuel in settings and under conditions that mimic environments where  military operations may occur.\n\nAppendix V: GAO Contact and Staff Acknowledgments\n\n\tGAO Contact\n\n\tStaff Acknowledgments\n\nIn addition to the individual named above, Marilyn K. Wasleski, Assistant  Director; Jerome A. Brown; Nirmal Chaudhary; Lindsey M. Cross; Philip  G. Farah; Shvetal Khanna; Michael Shaughnessy; Amie Steele; Cheryl  Weissman; and Alexander Welsh made key contributions to this report.","output":"Why GAO Did This Study\n\nDOD is the single largest consumer of energy in the federal government, spending billions of dollars annually on petroleum fuels to support military operations. One of DOD's strategic operational energy goals is to expand its energy supply options. Investing in alternative fuels\u2014liquid fuels, derived from non-petroleum feedstocks, whose use does not necessitate any modifications to platforms and equipment\u2014represents one means of potentially achieving this goal.\nGAO was asked to examine aspects of DOD's investment in alternative fuels. GAO reviewed the extent to which DOD (1) has purchased alternative fuels, and has demonstrated these fuels can meet its safety, performance, and reliability standards; (2) has a process for purchasing alternative fuels for military operations that takes into consideration any cost differences between alternative and conventional fuels; and (3) has used the DPA authorities to promote the development of a domestic biofuel industry.\nGAO reviewed past alternative and conventional petroleum fuel procurements, as well as statutes, regulations, and DOD guidance related to fuel purchases. Also, GAO reviewed various documents on biofuel projects initiated under the DPA authority and interviewed cognizant DOD officials involved with purchasing and using fuel and administering the biofuel projects.\nGAO is not making recommendations in this report. DOD provided technical comments on the findings, which GAO has incorporated where appropriate.\n\nWhat GAO Found\n\nThe Department of Defense (DOD) has purchased small quantities of alternative fuels\u2014jet and naval distillate (known as F-76, to power ships)\u2014for testing and demonstration purposes, but has not done so yet for military operations. DOD's testing process validates the ability of alternative fuels to meet safety, performance, and reliability standards for military equipment and platforms. From fiscal years 2007 through 2014, DOD purchased about 2.0 million gallons of alternative fuel for testing purposes, at a cost of about $58.6 million. Over the same period, it purchased about 32.0 billion gallons of petroleum fuel at a cost of about $107.2 billion. DOD has approved alternative fuels made from two production processes for use in certain items and is continuing to test others.\nDOD is currently required by law to ensure alternative fuel purchases for operational purposes are cost-competitive with conventional fuels and has a standard process to purchase large-scale volumes of all fuels. Proposals are evaluated according to technical acceptability and price. To help the Navy purchase alternative jet and naval distillate fuels blended with conventional fuels, the Department of Agriculture plans to provide funding directly to alternative fuel vendors that meet certain requirements and receive awards from DOD. These funds are intended to defray some of the alternative fuel producer's extra costs\u2014such as costs of domestic feedstocks. Per DOD, no alternative fuel vendors have received awards so none of these funds have been paid out yet.\nDOD has used financial incentives provided for by Title III of the Defense Production Act (DPA) to help facilitate the development of commercially viable plants for producing biofuels for the military and commercial sectors. To date, DOD has used this authority for two ongoing projects: Bio-Synthetic Paraffinic Kerosene and Advanced Drop-In Biofuels Production Project and the federal government's cost share for these projects was about $234.1 million."}
{"id":"crs_R43127","pid":"crs_R43127_0","input":"\tIntroduction\n\nSince 2009, the Environmental Protection Agency (EPA) has begun to address emissions of greenhouse gases (GHGs) from both mobile and stationary sources, using broad regulatory authority provided by Congress decades ago in the Clean Air Act. Although Congress has never specifically directed EPA to regulate emissions of GHGs, the Clean Air Act as enacted in 1970 and as amended in 1977 and 1990 gave the agency authority to identify air pollutants and promulgate regulations to limit their emission. \nFrom the late 1990s until 2007, EPA and various interested parties debated whether that authority covered greenhouse gases. This debate was settled by the Supreme Court in April 2007, in Massachusetts v. EPA . In a 5-4 decision, the Court found that greenhouse gases are unambiguously air pollutants:\nThe Clean Air Act's sweeping definition of 'air pollutant' includes ' any air pollution agent or combination of such agents, including any physical, chemical ... substance or matter which is emitted into or otherwise enters the ambient air... (emphasis added). ... Carbon dioxide, methane, nitrous oxide, and hydrofluorocarbons are without a doubt 'physical [and] chemical ... substances[s] which [are] emitted into ... the ambient air.' The statute is unambiguous.\nSince the Court's Massachusetts decision, EPA has addressed GHG emissions in a number of steps, among them: \nIn December 2009, the agency laid the groundwork for regulations by finding that emissions of greenhouse gases may reasonably be anticipated to endanger public health and welfare, and that GHGs from new motor vehicles cause or contribute to that endangerment. In May 2010, the agency promulgated GHG emission standards for model year 2012-2016 cars and light trucks. In January 2011, the agency began requiring permits and the imposition of Best Available Control Technology on new stationary sources (and major modifications of existing sources) that emit more than a threshold amount of GHGs. In September 2011, EPA promulgated GHG emission standards for model year 2014-2018 medium- and heavy-duty trucks. In October 2012, the agency promulgated a second phase of GHG emission standards for cars and light trucks, covering model years 2017-2025.\nAs extensive as these actions may seem, they have had relatively minor impacts on GHG emissions to date. The rules are prospective, and in most cases have not yet taken effect.\nThe auto and truck manufacturing industries have been the major focus of the GHG regulations; in both cases, they are eager to improve fuel economy (coincidentally reducing GHG emissions), because the high cost of fuel has affected consumer purchasing decisions over the last five years. \nThe stationary source permitting requirement has yet to affect most sources. As of early September 2013, EPA and the states have issued only 110 GHG permits to stationary sources since the requirement was implemented in January 2011. (For comparison, EPA estimates that there are more than 6 million stationary sources.) EPA set the emission threshold for requiring permits at a high level, exempting most new sources of GHGs; and few new facilities have been constructed in the recession's aftermath.\nUltimately, if EPA is to reduce the nation's GHG emissions, as the President has committed to do, it will have to issue emission standards for broad categories of existing stationary sources. EPA took the first step toward setting such standards on April 13, 2012, with the proposal of standards for new electric generating units (EGUs). In a June 25, 2013, memorandum to the EPA Administrator, the President directed the agency to re-propose those standards by September 20, 2013, finalize them \"in a timely fashion after considering all public comments,\" and propose guidelines for existing EGUs by June 1, 2014. The re-proposed standards for new sources were announced on September 20, 2013.\nAs shown in Table 1 , EGUs\u2014principally, coal-fired power plants\u2014are the most significant U.S. source of greenhouse gases, accounting for about one-third of the nation's total emissions. With the principal mobile source categories already subject to GHG regulations, EPA will have addressed the sources of more than half of all U.S. emissions once it promulgates regulations for existing EGUs.\n\n\tNew Source Performance Standards (NSPS)\n\nTo control GHG emissions from stationary sources, EPA intends to use Section 111 of the Clean Air Act, which requires the agency to set New Source Performance Standards (NSPS) when, in the Administrator's judgment, a category of sources causes, or contributes significantly to, air pollution which may reasonably be anticipated to endanger public health or welfare. As noted, EPA proposed the first such NSPS\/GHG standard, for electric generating units, on April 13, 2012, and following extensive public comment, at the President's direction, re-proposed the standard on September 20, 2013. The agency has also committed to the promulgation of NSPS for petroleum refineries, although it is unclear when those standards will be proposed. \nUnder Section 111, the EPA Administrator is required to set standards for categories of new (or substantially modified) major sources if, in her judgment, they cause or contribute significantly to air pollution which may reasonably be anticipated to endanger public health or welfare. Over the past four decades, EPA Administrators have used this authority to set emission standards for numerous sources of conventional pollutants, such as sulfur dioxide or nitrogen oxides. The standards are to reflect the degree of emission limitation achievable through application of the best \"adequately demonstrated\" system of emission reduction. The Administrator can take costs, health impacts, environmental impacts, and energy requirements into account in setting the standards; she can distinguish among classes, types, and sizes of sources; and she must review the standards at least every eight years.\n\n\t\tRegulating Existing Sources Under Section 111\n\nIn addition to standards for new sources, Section 111 requires that EPA develop guidelines applicable to GHG emissions from existing units whenever it promulgates GHG standards for new sources in a category (Section 111(d)). Using the guidelines, states would be required to develop performance standards for existing sources. These standards could be less stringent than the NSPS, taking into account, among other factors, the remaining useful life of the existing source to which the standard applies. Nevertheless, these standards might have far greater impact than the NSPS, given that existing power plants are the largest U.S. source of GHG emissions. \nThe authority to control existing sources is particularly important in sectors like the electric utility industry, where old units can continue operating for decades. The average coal-fired power plant in the United States is more than 40 years old. Without the authority to control emissions from such existing facilities, it could be decades before emissions from most power plants would be controlled.\nHow quickly Section 111(d) standards will be applied to existing sources has been an open question, however. EPA must first propose and promulgate guidelines, following which the states will be given time to develop implementation plans. In the President's June 25 memorandum, he requested that EPA:\n(i) issue proposed guidelines for modified, reconstructed, and existing power plants by no later than June 1, 2014;\n(ii) issue final guidelines by no later than June 1, 2015; and \n(iii) include in the guidelines addressing existing power plants a requirement that states submit to EPA the implementation plans required under section 111(d) of the Clean Air Act by no later than June 30, 2016.\nFollowing approval of the plans, the act envisions case-by-case determinations of emission limits. Thus, it is likely to be several years before existing power plants or other stationary sources are subject to emission limits for GHGs.\n\n\tEPA's NSPS Proposals for EGU Greenhouse Gas Emissions\n\nAs noted, the President directed EPA in his June 25 memorandum to re-propose the NSPS standards for power plant carbon pollution. To understand what issues the agency has addressed in the re-proposed standards, this report discusses both the 2012 proposal and the September 2013 re-proposal.\n\n\t\tEmission Limits9\n\nThe re-proposed standard would set a limit of 1,100 pounds of carbon dioxide (CO 2 ) per megawatt-hour (MWh) of electricity generated for coal-fired EGUs, and a standard of 1,000 or 1,100 lbs\/MWh (depending on the size of the unit) for new natural gas-fired plants. The standard is to be measured on a gross output basis; it requires reduction of emissions whether the electricity is used on site (e.g., for the operation of pollution control equipment) or is sold to customers. \nThe standards can be met by new natural gas combined cycle plants without add-on emission controls. Coal-fired plants, however, would find it impossible to meet the 1,100 lb. standard without controls to capture and store some of the CO 2 they produce. EPA estimates that a supercritical pulverized coal-fired power plant without such controls produces roughly 1,800 lbs. CO 2 \/MWh of electricity, so a plant subject to the standard would need to reduce emissions by about 40%. \nCarbon capture and storage (CCS) technology that might be used to reduce CO 2 emissions has been the subject of much recent research and demonstration. It poses a number of challenges, not the least of which is the additional energy it consumes. The energy required to run equipment that can remove CO 2 from an emission stream (referred to as the \"parasitic load\") is currently in the range of 30% on most demonstration projects. In addition, a CCS-equipped unit might incur costs for underground storage of the captured CO 2 (unless it is used for enhanced oil recovery) and possibly significant costs for building and operating a pipeline to transport the CO 2 to the storage location. \nTo address the concerns of those who maintain that CCS technology is not yet available, or who expect the technology to improve (bringing down costs) as research and demonstration continue, the agency's 2012 proposal included an alternative under which coal-fired facilities would have been allowed to average their emissions over a 30-year period: during the first 10 years, such facilities could have emitted up to 1,800 lbs. CO 2 \/MWh; the facility would then have needed to reduce emissions to 600 lbs\/MWh for the following 20 years. This option is not included in the September 2013 re-proposal, but the proposal does include two optional compliance periods. Compliance can be measured using a rolling average of emissions for 12-month periods or it can be measured using the rolling average for 84-month periods. If the facility chooses the longer compliance measurement period, it would gain flexibility to exceed the proposed standard over longer periods of time, but it would need to meet a lower standard overall: EPA has proposed somewhere in a range of 1,000 to 1,050 lbs\/MWwh for the 84-month standard. The agency requests comments on the appropriate number.\nNSPS are different from other Clean Air Act emission standards in that, once a standard is final, it applies to sources that commenced construction after the date of proposal in the Federal Register , rather than taking effect after the date of the final standard's promulgation. EPA has identified only three facilities with construction permits that might be affected by this retroactive application of a final standard: the Wolverine project in Rogers City, MI; a Washington County, GA, project; and a Holcomb, KS, project. The developers of the latter two maintain that they have commenced construction. Assuming this is the case, these sources would not be considered new sources and would not be subject to the NSPS. The status of the third facility, the Wolverine project, is less certain, but EPA is proposing to exempt it from the NSPS, stating: \nThe EPA has not formulated a view as to the project's status in the development process or as to whether the proposed 1,100 lb CO 2 \/MWh standard or some other CO 2 standard of performance would be representative of BSER [Best System of Emission Reduction] for this project, and invites comment on these questions.\n\n\t\tEPA's Cost-Benefit Analysis\n\nEPA's Regulatory Impact Analysis (RIA) for the 2012 proposal concluded that \"even in the absence of this rule, existing and anticipated economic conditions in the marketplace will lead electricity generators to choose technologies that meet the proposed standards.\" EPA repeats this conclusion in nearly identical language in the RIA for the September 2013 proposal. The economic conditions referred to include the abundance and low projected cost of natural gas, the many state requirements that increasing amounts of electricity come from renewable sources, and the increasing cost of coal-fired electricity due to higher coal prices and new emission standards for emissions of conventional and toxic air pollutants. These factors combined make it likely that almost all new generation will come from natural gas combined cycle or renewable sources, according to EPA. \nIn preparing the 2012 NSPS proposal, EPA ran the Integrated Planning Model\u2014a model developed by ICF Inc. that EPA and many industry sources have used to analyze the impacts of regulations since the 1980s\u2014to analyze the sensitivity of the results to various assumptions. (The agency does not appear to have conducted new model runs for the 2013 re-proposal, but it reviewed its analysis using the Energy Information Administration's latest Annual Energy Outlook [AEO2013] and concluded that the 2012 results held.)\nThe IPM scenarios tested included a high electricity demand scenario, a low gas recovery scenario (which results in higher prices for natural gas), and a scenario combining both assumptions. None of these assumptions caused the model to project construction of new coal-fired capacity. The analyses found that \"the price of natural gas would have to increase to approximately $10\/mmBtu [million Btu] for coal boilers without CCS to become competitive with combined cycle natural gas units, which is projected to be very unlikely.\" Similarly, the 2013 RIA states, \"It is only when natural gas prices exceed $10\/MMBtu on a levelized basis (in 2011 dollars) that new coal-fired generation without CCS approaches parity with NGCC [Natural Gas Combined Cycle].... \" The RIA adds: \nFor context, a natural gas price level of $10\/MMBtu (in 2011 dollars) is higher than any annual natural gas price to the electric power sector since at least 1996, when the EIA data series stops. In addition, the highest projected average annual natural gas price during the analysis period in any of the [EIA's] AEO2013 scenarios cited in this chapter is $6.64\/MMBtu in the Low Oil and Gas Resource scenario.\nWith no new coal plants on the horizon (except for those already under construction or demonstration projects), EPA sees little quantifiable impact from its prospective NSPS promulgation. As the 2013 RIA states:\nEPA anticipates that the proposed EGU New Source GHG Standards will result in negligible CO 2 emission changes, energy impacts, benefits or costs for new units constructed by 2020. Likewise, the Agency does not anticipate any notable impacts on the price of electricity or energy supplies. Additionally, for the reasons described above, the proposed rule is not expected to raise any reliability concerns, since reserve margins will not be impacted and the rule does not impose any requirements on existing facilities.\nThe 2012 RIA argued the case for the rule as a backstop, in case its projections of market conditions were inaccurate: \nThis NSPS provides legal assurance that any new coal-fired plants must limit CO 2 emissions. Rather than relying solely on changeable energy market conditions to provide low emissions from new power plants in the future, this rule prevents the possible construction of uncontrolled, high-emitting new sources that might continue to emit at high levels for decades, contributing to accumulation of CO 2 in the atmosphere.\u2026 In addition, EPA intends this rule to send a clear signal about the future of CCS technology that, in conjunction with other policies such as Department of Energy (DOE) financial assistance, the agency estimates will support development and demonstration of CCS technology from coal-fired plants at commercial scale\u2026.\nThe proposed rule, in EPA's view, will assist in the deployment of CCS technology, by removing regulatory uncertainty that may have hindered its deployment:\nThe rule will reduce regulatory uncertainty by defining requirements for emission limits for GHG from new fossil fuel-fired EGU sources. In addition, the EPA intends this rule to send a clear signal about the current and future status of CCS technology. Identifying partial implementation of CCS technology as the best system of emission reductions (BSER) for coal-fired power plants promotes further development of CCS, which is important for long-term CO 2 emission reductions.\nAn example of how the absence of a regulatory requirement has hindered the development of CCS technology is provided in the re-proposed rule's preamble: \nIn 2011, AEP [American Electric Power] deferred construction of a large-scale CCS retrofit demonstration project on one of their coal-fired power plants because the state's utility regulators would not approve cost recovery for CCS investments without a regulatory requirement to reduce CO 2 emissions. AEP's chairman was explicit on this point, stating in a July 17, 2011 press release announcing the deferral:\n\"We are placing the project on hold until economic and policy conditions create a viable path forward \u2026 We are clearly in a classic 'which comes first?' situation. The commercialization of this technology is vital if owners of coal-fueled generation are to comply with potential future climate regulations without prematurely retiring efficient, cost-effective generating capacity. But as a regulated utility, it is impossible to gain regulatory approval to recover our share of the costs for validating and deploying the technology without federal requirements to reduce greenhouse gas emissions already in place. The uncertainty also makes it difficult to attract partners to help fund the industry's share.\"\nBesides addressing regulatory uncertainty, the promulgation of New Source Performance Standards, even if the standards have little or no effect on new sources, serves as the precondition for standards affecting existing units. The latter are described in Section 111(d) of the Clean Air Act as \"standards of performance for any existing source ... to which a standard of performance under this section would apply if such existing source were a new source.\" EPA would have no legislative authority to promulgate such standards if it did not first establish standards for new sources.\n\n\tQuestions Regarding the Re-proposed Rule\n\nMany in the electric power and coal industries view the proposed and re-proposed standards, if either were finalized, as effectively prohibiting the construction of new coal-fired power plants other than those granted exemptions. Whether carbon capture and storage (CCS) technology has been \"adequately demonstrated\" is the key question they raise. Other questions involve whether the cost of compliance, assuming CCS is available, and the increased energy required to capture and store carbon should lead the Administrator to propose a less stringent standard. Whether the proposed standard is barred by statutory language that prohibits the Administrator from requiring the installation and operation of any particular emission reduction system is another issue that has been raised.\n\n\t\tHas CCS Been Adequately Demonstrated?\n\nEPA maintains that the components of CCS technology have been demonstrated on numerous facilities. In the preamble to the 2012 proposal, the agency stated, \"\u2026 at present, CCS is technologically feasible for implementation at new coal-fired power plants and its core components (CO 2 capture, compression, transportation, and storage) have already been implemented at commercial scale.\" Specifically, the agency said:\nCapture of CO 2 from industrial gas streams has occurred since the 1930s using a variety of approaches to separate CO 2 from other gases. Carbon dioxide has been transported via pipelines in the U.S. for nearly 40 years. Approximately 50 million metric tons of CO 2 are transported each year through 3,600 miles of pipelines. Moreover, a review of the 500 largest CO 2 point sources in the United States shows that 95% are within 50 miles of a possible geologic sequestration site, which would lower transportation costs. With respect to carbon sequestration\/storage, there are at least four commercial integrated CCS facilities sequestering CO 2 into deep geologic formations and applying a suite of technologies to monitor and verify that the CO 2 remains sequestered.\nSimilar statements are made in the re-proposal.\nCritics of the agency maintain that even if the components have been demonstrated, there is no plant that captures and stores CO 2 on the scale of a large coal-fired power plant. There are several large power plants currently under development that will demonstrate CCS at commercial scale when completed, but none of these is currently operational, and several planned projects have been abandoned for a variety of reasons. \nIn the supporting materials for the re-proposed rule, EPA identified five plants that are incorporating CCS on a commercial scale: Southern Company's Kemper County (Mississippi) Energy Facility; SaskPower's Boundary Dam CCS Project in Estevan, Saskatchewan, Canada; Summit Power's Texas Clean Energy Project, near Odessa, Texas; the Hydrogen Energy California Project in Kern County, California; and NRG Energy's post-combustion carbon capture project at the company's W.A. Parish generating station southwest of Houston, Texas. Three of these (the latter three) are still in the planning stages, and the other two (Kemper and Boundary Dam) are still under construction. Both of the latter have experienced large cost overruns. \n\n\t\tShould Cost and\/or Energy Considerations Have Led EPA to Propose a Less Stringent Standard?\n\nAlthough it maintains that CCS has been adequately demonstrated, EPA stated in 2012, based on DOE estimates, that \"using today's commercially available CCS technologies would add around 80 percent to the cost of electricity for a new pulverized coal (PC) plant, and around 35 percent for a new advanced gasification-based (IGCC) plant.\" The statement was not specific, but presumably referred to the cost of capturing and storing a plant's total CO 2 emissions. The Congressional Budget Office, in a June 2012 report, reached essentially the same conclusion. Since the proposed rule would require capture of only 40% of a coal-fired plant's carbon emissions, the added cost would be lower. The preamble to the proposed rule states that an 1,100 lb.\/MWh standard would add 20% to the cost of electricity from a supercritical pulverized coal plant, without accounting for revenues from the use of the CO 2 for enhanced oil recovery. \nMuch of the increased cost results from what is termed a \"parasitic\" energy load: capturing all of a coal-fired plant's CO 2 emissions, and compressing, transporting, and injecting them underground would use as much as 30% of the electricity that the plant produces. As CBO explained it, a CCS-equipped plant will cost more to build and operate for two main reasons: \nThe equipment a CCS plant requires to capture and compress CO 2 is large, complex, and expensive; and Capturing and compressing CO 2 consumes a substantial fraction of the plant's total output. Consequently, to produce the same amount of electricity for customers, a plant with CCS capabilities has to be bigger than a plant without them.\nBoth EPA and the Congressional Budget Office, among others, assume that the cost and energy penalty can be reduced through research, development, and demonstration, and both view EPA regulation as one of the policy tools that could lead to reduced cost by forcing the development of better technology. Experience suggests that such \"learning by doing\" will lower the cost, but the road to what might be a competitive technology can be a long one, and given the availability of other power sources (such as natural gas, renewables, and nuclear) with lower or no carbon emissions, it is not clear that the electric power industry will be motivated to pursue it. \nLegal challenges to EPA's judgment that such a costly technology can be considered \"adequately demonstrated\" and that the degree of emission reduction required is \"achievable\" as required by Section 111 would have to be filed in the D.C. Circuit Court of Appeals. D.C. Circuit decisions on NSPS have made clear that while EPA has some discretion in determining what is \"adequately demonstrated,\" that discretion is not unlimited. In 1973, in Essex Chemical Corp. v. Ruckelshaus , the court explained that to be adequately demonstrated, a system must be one \"which has been shown to be reasonably reliable, reasonably efficient, and ... [not] exorbitantly costly in an economic or environmental way.\" In turn, an \"achievable\" standard is one that is \"within the realm of the adequately demonstrated system's efficiency and which, while not at a level that is purely theoretical or experimental, need not necessarily be routinely achieved within the industry prior to its adoption.\" In Portland Cement Ass'n v. Ruckelshaus the same year, the circuit made clear that \"adequately demonstrated\" does not confine EPA to presently available technology: \"The Administrator may make a projection based on existing technology, though that projection is subject to the restraints of reasonableness and cannot be based on 'crystal ball' inquiry.\" Much later, in 1999, the D.C. Circuit in Lignite Energy Council v. EPA reiterated the point: \"Because it applies only to new sources, we have recognized that section 111 looks toward what may fairly be projected ... , rather than the state of the art at present.\" Where data are not currently available, the court continued, EPA \"may compensate ... through the use of other qualitative methods, including the reasonable extrapolation of a technology's performance to other industries.\"\nDespite the potentially high cost of currently available CCS technology, the agency stated in both its 2012 and 2013 Regulatory Impact Analyses that it does not anticipate that the rule will have any impacts on the price of electricity, employment or labor markets, or the US economy. Other than demonstration projects supported by DOE or other incentives, EPA sees no new coal-fired units incorporating CCS in the next 10 years: given the low cost and projected abundance of natural gas, all new fossil-fueled units are likely to be powered by gas.\nEPA's finding of no new, unplanned conventional coal-fired capacity (and therefore, no projected costs or quantified benefits) is robust beyond the analysis period (past 2030 in both EIA and EPA baseline modeling projections) and across a wide range of alternative potential market, technical, and regulatory scenarios that influence power sector investment decisions.\n\n\t\tShould EPA Promulgate Separate Standards for Coal- and Gas-Fired Units?\n\nUnlike the standard proposed in 2012, the September 2013 re-proposal would set separate standards for coal-fired and gas-fired EGUs. In this regard, the re-proposal is similar to most New Source Performance Standards promulgated previously for conventional pollutants (such as sulfur dioxide) emitted by electric generating units. As EPA noted in the preamble to the 2012 proposal, in setting standards for conventional pollutants or air toxics, it was not appropriate to combine coal-fired and gas-fired units in a single category, because \"although coal-fired EGUs have an array of control options for criteria and air toxic air pollutants to choose from, those controls generally do not reduce their \u2026 emissions to the level of conventional emissions from natural gas-fired EGUs.\"\nCritics of the 2012 GHG proposal took EPA's statement a step further, stating frequently that combining coal-fired and gas-fired units in a single category, as the 2012 proposal did, was \"unprecedented.\" This is not actually the case: in 1998, EPA promulgated NSPS for emissions of nitrogen oxides (NOx) that imposed a single emission standard on all fossil-fueled EGUs. In Lig nite Energy Council v. U. S. EPA , the D.C. Circuit Court of Appeals squarely addressed the argument that a single fuel-neutral standard was impermissible and rejected that argument, thus upholding EPA's authority to issue a single standard applicable to all fossil-fueled sources.\nNevertheless, EPA reversed course in the 2013 re-proposal, and now proposes to set separate standards for coal-fired and gas-fired units.\n\n\t\tIs the Standard Barred by Statutory Language?\n\nCritics of the proposed 2012 standard maintained that in setting the standard at 1,000 lbs. CO 2 \/MWh, EPA would effectively have required coal-fired power plants to add CCS to any new unit. The same argument is likely to be used against the re-proposed standard for coal-fired units. The critics maintain that such a requirement violates Section 111(b)(5) of the Clean Air Act, which states that unless she determines that it is not feasible to prescribe or enforce a standard of performance, the EPA Administrator is not authorized to require a new source \"to install and operate any particular technological system of continuous emission reduction to comply with any new source standard of performance.\"\nWhether a court would find that EPA is imposing a \"particular technological system\" might come down to an interpretation of the term. There are several different technologies for carbon capture under development. Does the fact that they all result in capturing CO 2 make them a \"particular technological system\"? Or would a court find that the option of switching fuels to lower emissions means that sources can comply with the standard without having to install and operate a particular technological system? \n\n\tGuidelines for Existing Power Plants\n\nThe potential impacts of the NSPS rule extend beyond new sources, because the agency is obligated under Section 111(d) of the act to promulgate guidelines for existing sources within a category whenever it promulgates GHG standards for new sources. Using these guidelines, states will be required to develop performance standards for existing sources. These could be less stringent than the NSPS\u2014taking into account, among other factors, the remaining useful life of the existing source to which the standard applies. But the standards could have far greater impact than the NSPS, given that existing plants account for one-third of total U.S. GHG emissions.\nThe average coal-fired power plant is about 40 years old; some are more than 60 years old. The older plants are generally less efficient than newer units, and most operate only a small percentage of the time. Thus, the agency might choose to set a guideline based on a less costly approach than application of CCS to the units' emissions. In presentation slides that the agency has used in stakeholder discussions, emphasis has been placed on improving efficiency as a preferred approach to reducing GHG emissions. \nIn recent months, considerable attention has been given to a proposal by the Natural Resources Defense Council (NRDC) as to how Section 111(d) guidelines might be structured. Under NRDC's plan, each state would be given an emission \"budget\" or cap based on the mix of fuels used by EGUs in the state to generate electricity in a base period (2008-2010 in the NRDC proposal). States with more coal-fired generation would receive higher budgets than those with more natural gas or renewable sources. The state budgets would be reduced in phases, with a target reduction of about 26% in GHG emissions overall by 2020, compared to 2005 emission levels\u2014significantly less stringent than the re-proposed standard for new units. \nUnder this approach, EGUs could comply in a variety of ways: by shifting power dispatch to lower emitting plants (and thus running higher emitting plants less often), by switching fuels, by co-firing lower emitting fuels with coal, by retiring their least efficient plants, by efficiency improvements at existing plants, or by reducing demand. EGUs could average, bank, or trade emission credits; as a result, individual units would have an emissions target, but they could exceed the target if they had sufficient credits obtained from earlier reductions or from other units in the state's electric system. Since the goal would be to reduce emissions overall, rather than in specific states, states might also combine their markets for allowances, giving individual electric generating units and companies additional flexibility.\nWhatever their form, a key question regarding the 111(d) guidelines has been when EPA would propose them. In his Climate Action Plan, the President resolved this question, as noted earlier, directing the agency to propose the guidelines by June 1, 2014, finalize them by June 1, 2015, and require the states to submit implementation plans by June 30, 2016. In cases where a state fails to submit a satisfactory plan, Section 111(d) also gives EPA the authority to prescribe and enforce a federal plan. \n\n\tCongressional Responses\n\nMany in Congress oppose EPA standards for GHG emissions. The House passed two bills in 2011 ( H.R. 1 and H.R. 910 ) that would have prohibited EPA from promulgating GHG emission standards for any source, and it repeated itself in September 2012 with H.R. 3409 , the Stop the War on Coal Act. The Senate did not follow suit. \nLegislation to limit or prevent EPA regulatory action is considered possible in the 113 th Congress, and may be given a boost by EPA's re-proposal of the Carbon Pollution Standard. \nEnacting such legislation faces hurdles similar to those encountered in the last Congress, however. Although the House could take action to block NSPS regulations, the Senate is less likely to do so. If the House and Senate did act to limit executive branch authority, a bill sent to President Obama would almost certainly be subject to a veto, given the President's recent statements regarding the importance of dealing with climate issues. \n\n\tConclusion\n\nThe debate over EPA's proposed carbon pollution standard for new power plants is largely symbolic, and is characterized by exaggeration on both sides. \nIt is symbolic because this rule by itself will have little impact. Its real significance is that without the promulgation of a rule for new sources, EPA cannot, under the Clean Air Act, proceed to regulate existing sources. It is the standards for those existing plants that may actually reduce the nation's GHG emissions, and in the process, could have significant impacts on coal-fired electricity. It is exaggerated because both EPA and the affected industries describe the rule itself as having far more impact than it will.\nIf EPA (among many sources) is correct that no new coal-fired power plants (other than demonstration projects) will be built in the foreseeable future even in the absence of the proposed rule, then the rule will have little effect. It will have little impact on the coal industry or the electric power industry in the near term, and it will not cause emission reductions from these industries. Both are adjusting to a new set of economic conditions, in which coal finds it harder to compete with natural gas. Gas is projected by most experts to be cheap and abundant for the foreseeable future. Since the early 1990s, new coal-fired plants have accounted for less than 10% of new power-generating capacity (see Figure 1 ). In these conditions, the electric power industry is likely to continue what it has already been doing for two decades: building gas-fired plants (or relying on renewable sources) when it needs new capacity. \nThe coal industry is unhappy with this, and has tended to place the blame for its current difficulties on EPA; but, actually, the market is the key factor in coal's recent decline. This market is affected by a number of elements, including the development of new technologies that have revolutionized production of natural gas, by state-level requirements for the use of renewable power sources, by stagnant growth in demand for electricity, and by environmental regulations mandated by Congress in the 1990 Clean Air Act amendments that are only now being implemented. \nThe net result is that coal is simply not competitive with natural gas in most areas of the country when power producers consider new generation facilities in current and foreseeable conditions. EPA's analysis finds that natural gas would need to triple in price for coal to be competitive with it, even without the potential cost of this rule. Further, the agency concludes, in every year since 1996, the economics of gas have made it a more cost-effective choice when planning new power generation. This rule will tilt the playing field even further against new coal-fired generation, but the field was already tilted far in that direction. To say that the rule will effectively prohibit the construction of new coal-fired power plants, as many in the coal and electric power industries do, is to focus on only one among many factors.\nWhile EPA is essentially correct in saying that this rule will have little effect on industry, the agency seems to exaggerate the benefits of the rule. In her speech at the National Press Club on September 20, EPA Administrator McCarthy maintained that \nThe standards set the stage for continued public and private investment in technologies like Carbon Capture and Sequestration (CCS). With these investments, technologies will eventually mature and become as common for new power plants as scrubbers have become for well-controlled plants in generation today. \nIf the standards won't have any cost or impact, because no new coal-fired capacity subject to them will be built, then they will do little to stimulate the development of CCS technology.\nThe rule does not mean the end of coal mining, or the end of coal-fired power, however. Existing coal-fired plants, which have amortized much of their capital cost, still generate about 40% of the nation's electricity, even with the low price of natural gas and even with the costs of current environmental regulations. Since power plants can last for decades, coal could play an important role in the nation's energy future for decades to come. Furthermore, as many in the utility industry maintain, power producers have an interest in maintaining a diverse mix of fuel sources. Projections regarding the cost of generation a decade or more in the future are uncertain at best: few would have predicted the current glut of natural gas a decade ago. Energy markets are notoriously volatile and difficult to foresee. With that in mind, coal is likely to remain in the mix, in part as an insurance policy against uncertain future conditions, especially at plants that are already in operation and meeting existing standards for other pollutants. \nBut here the spotlight returns to EPA. The future of coal and coal-fired electricity could be greatly affected by the next carbon pollution standard, the guidelines for existing units. The fight over that rule, which is due to be proposed in June 2014, should place the current debate in its true perspective.","output":"As President Obama announced initiatives addressing climate change on June 25, 2013, a major focus of attention was the prospect of greenhouse gas (GHG) emission standards for fossil-fueled\u2014mostly coal-fired\u2014electric generating units (EGUs). EGUs (more commonly referred to as power plants) are the largest anthropogenic source of greenhouse gas emissions, accounting for about one-third of total U.S. GHGs. If the country is going to reduce its GHG emissions by significant amounts, as the President has committed to do, emissions from these sources will almost certainly need to be controlled.\nThe President addressed this issue by directing EPA to re-propose GHG emission standards for new EGUs by September 20, 2013. He also directed the agency to propose guidelines for existing power plants by June 2014, and finalize them a year later.\nEPA had already proposed standards for new sources in April 2012, but the public comment period had generated more than 2.5 million comments\u2014the most ever for a proposed EPA rule\u2014and the agency had not yet finalized the rule.\nThe re-proposed standards were released September 20. They would set an emissions limit of 1,100 pounds of carbon dioxide (CO2) per megawatt-hour (MWh) of electricity generated by new coal-fired EGUs, and a standard of either 1,000 or 1,100 lbs\/MWh (depending on size) for new natural gas-fired plants. Coal-fired plants would find it impossible to meet the standard without controls to capture, compress, and store underground about 40% of the CO2 they produce\u2014a technology referred to as carbon capture and storage (CCS).\nUnder the Clean Air Act, the EPA Administrator has a great deal of flexibility in setting these standards. The statute requires that New Source Performance Standards (NSPS) reflect the degree of emission limitation achievable through application of the best system of emission reduction that has been \"adequately demonstrated.\" The Administrator can take costs, health impacts, environmental impacts, and energy requirements into account in determining what has been adequately demonstrated.\nMany in the electric power and coal industries maintain that CCS has not been adequately demonstrated. Given the high cost and energy use of CCS components, they view the re-proposed standards as effectively prohibiting the construction of new coal-fired power plants.\nEPA, on the other hand, states that the components of CCS technology have been demonstrated on numerous facilities. Details are provided in the preamble to the proposed rule. Despite this, the agency concludes that no coal-fired EGUs (other than DOE-sponsored or other demonstration projects) will be built in the next 10 years regardless of whether the rule is finalized, and therefore no units will be required to use CCS before EPA must review the standard. Given the projected low cost and abundance of natural gas, all new fossil-fueled units are likely to be powered by gas, according to EPA. The standard proposed for these facilities (combined cycle natural gas units) can be met without add-on emission controls, according to the agency.\nAlthough the September 20 proposal would only affect new EGUs, the potential impacts of the rule's issuance extend beyond these sources, because the agency is obligated under Section 111(d) of the Clean Air Act to promulgate guidelines for existing sources within a category when it promulgates GHG standards for new sources. The President directed EPA to propose such guidelines by June 2014 and to finalize them a year later. Using these guidelines, states will be required to develop performance standards for existing sources. These could be less stringent than the NSPS\u2014taking into account, among other factors, the remaining useful life of the existing source\u2014but the standards could have far greater impact than the NSPS, given that they will affect all existing sources.\nMany in Congress oppose GHG emission standards. In the 113th Congress, hearings have been held and several bills to prohibit or limit EPA GHG standards have been introduced. The proposed standards have stirred new interest in congressional action."}
{"id":"crs_RS20425","pid":"crs_RS20425_0","input":"RS20425 -- Satellite Television: Historical Information on SHVIA and LOCAL\nUpdated December 15, 2004\n\n\tThe Satellite Home Viewer Improvement Act (SHVIA)\n\nThe 1999 Satellite Home Viewer Improvement Act (1) (SHVIA) expands on and extends some provisions of the 1988Satellite Home Viewer Act (SHVA), as amended, regarding consumer reception of television signals via satellitedishes. Two major companies, EchoStar and DirecTV (a subsidiary of News Corp.), offer satellite televisionservicestoday through their direct broadcast satellite (DBS) systems. EchoStar's service is called Dish TV. DirecTV'sprogramming is also distributed through the National Rural Telecommunications Cooperative (NRTC) and byPegasusCommunications. Another company, Rainbow DBS (a subsidiary of Cablevision) offers a comparatively smallnumber of satellite channels though a service called Voom. Historical information on SHVA and the issuesCongressfaced in revising it are available in CRS Report 98-942.\nThe 1999 law, SHVIA, provides consumers greater access to broadcast network television programming via theirsatellite dishes. The original law permitted rebroadcast of distant network signals to consumers wholived outside the\"Grade B contour\" of broadcast network affiliate stations. The 1999 law continues to permit that activity, but also allows satellite companies to rebroadcast local network signals back into the same localmarket area. They are notrequired to do so, however.\nLocal versus Distant Network Signals. The distinction between local and distant network signals is important to understanding SHVIA. A local signal is received within a networktelevision affiliate's local area. A distant signal is from elsewhere in the country. If a consumer lives in Denver andisreceiving a signal from a Denver network affiliate, that is a local signal. If a consumer lives in West Virginia andisreceiving a signal from that Denver network affiliate via satellite, it is a distant network signal.\nWho May Receive Distant Network Signals. The original SHVA established the \"Grade B\" (2) contour as thedetermining factor as to whether a particular household was eligible toreceive distant network signals via satellite. Consumers living inside the Grade B contour were not allowed toreceivesuch signals while those outside the contour (in so-called \"white areas\") were allowed to receive them. Somesatellitecompanies transmitted distant network signals to consumers inside Grade B contours, however, leading to courtchallenges by the networks to try to force the satellite companies to obey the law. Based on decisions by a Miamijudge in 1998, over 2 million consumers reportedly had, or were scheduled to have, distant network signalsterminatedby their satellite companies. EchoStar appealed the decision to the Supreme Court in 2002, which declined to hearthecase.\nIn the 1999 law, Congress \"grandfathered\" consumers who had been receiving distant network signals illegally as longas they could not receive a signal of \"Grade A\" 2 intensity. For new subscribers, however, the originalrules apply. Toreceive distant network signals, new subscribers must not be able to receive a signal of Grade B intensity asdetermined using the Individual Location Longely-Rice (ILLR) method for predicting signal strength establishedbythe Federal Communications Commission (FCC) in February 1999. SHVIA directed the FCC to review whethertheGrade B standard should still be used for the purposes of SHVIA. The FCC concluded it should (FCC-016, ETDocket No. 00-90).\nConsumers who believe they are not receiving a Grade A or Grade B signal despite predictive models showing thatthey are may seek a waiver to receive distant network signals via satellite. Consumers must apply to their satellitecompany for the waiver. The satellite company forwards the request to the local network affiliate. There is no timelimit for the satellite company to take that action. Once the request is received, the local affiliate has 30 days todecidewhether or not to grant the waiver. If the waiver is granted, or if no action is taken by the affiliate, the consumermaythen receive distant network signals from the satellite company. If a waiver is denied, consumers may then requestasignal intensity test from their satellite company. The satellite company and the local affiliate are required jointlytochoose someone to conduct the test. The consumer does not bear the cost of the test. Instead, the \"loser\" pays(eitherthe satellite company or the affiliate), or the satellite company and the affiliate may choose some other method ofpaying the costs as long as the consumer does not pay. Exceptions were made for recreational vehicles (as definedbyDepartment of Housing and Urban Development regulations), commercial trucks (as defined by Department ofTransportation regulations), and for consumers using large \"C-band\" satellite dishes. The RV or commercial truckcannot be a fixed dwelling.\nIn summary, the following consumers may receive distant network signals until December 31, 2004, the period forwhich the compulsory license (see below) was extended: \nif they do not receive a signal of Grade B intensity from the local affiliate of a particular network; \nif their satellite dish is installed on an RV or commercial truck, or \nif they had been receiving distant network signals illegally and those signals were terminated orscheduled to be terminated under the 1998 Miami court rulings, and they do not receive a signal ofGrade A intensityfrom the local affiliate of the network.\nConsumers using \"C-band\" dishes are not subject to the five year limitation. They may receive distant network signalsthey were receiving before October 31, 1999 indefinitely.\nWho May Receive Local Signals. SHVIA permits DBS companiesto provide \"local-into-local\" service, where a local broadcast TV signal is transmitted up to the satellite and backdown to consumers in that same \"designated market area\" (DMA). The law does not require the DBScompanies toprovide this service. There is considerable confusion on this point, stemming, in part, from the fact the lawalsocreated a \" must carry \" provision. Under must carry, each DBS company must provide all local broadcast stations ina particular market if it provides any local station in that market. This does not mean that DBScompanies must carrylocal broadcast programming throughout the country . Instead, if a DBS provider chooses to provide local broadcastprogramming in a market, it must carry all local TV stations in that market that wish to be carried (with exceptionsforduplicative programing and educational stations). The DBS companies still may choose not to providelocal-into-local service in any particular market.\nCable companies already were subject to must carry rules (depending on the size of the cable system). The must carryprovisions for DBS went into effect on January 1, 2002. (3) The DBS companies oppose the must carry requirement(see below) and unsuccessfully attempted to overturn it in court.\nAccording to their respective websites, as of October 2004, EchoStar offered local-into-local in 152 markets andDirecTV in 106 markets. Both plan to add more markets as additional capacity becomes available. There are 210designated market areas (DMAs) in the United States as identified by Nielsen Media Research, meaning that manysmaller communities do not receive local signals via satellite. DMAs differ in size, so the number of DMAs servedisnot necessarily indicative of the percentage of the population able to receive local-into-local. When EchoStar passedthe 100 DMA mark, it reported that 83% of the population could receive its local-into-local service. DirecTVassertsthat it will provide local-into-local in at least 130 DMAs by the end of 2004, which it says represents 92% of TVhouseholds. Congress passed the LOCAL Act (see below) in 2000 to help ensure that small and rural areas thatcannotobtain local-into-local service from EchoStar or DirecTV can receive local television via other satellite or terrestrialtechnologies.\nCompulsory Copyright License. Another issue regarding satellite retransmission of television programming concerns compensation to those who own the copyright on theprogramming. Under both the 1988 and 1999 laws, satellite carriers were given a compulsory copyright license forrestransmitting distant network and superstation signals. That means that the copyright owners must make thatprogramming available to the satellite companies at government-set prices. (4) Without such a license, the satellitecompanies would have to negotiate with each copyright owner individually. The 1999 law extended the compulsorylicense for distant network signals for five years, until December 31, 2004. The 108th Congress isconsidering whetherto extend it further, and whether to change how the prices are set (see CRS Report RS21768 ). For retransmittinglocalsignals, however, Congress gave the satellite companies a royalty-free permanent compulsory copyright license. Cable has a permanent compulsory copyright license. (Copyright compensation is separate from businessarrangements negotiated to obtain retransmission consent, which is explained in footnote 3 below.)\nTable 1: Summary of SHVIA Provisions \npermits satellite companies to offer local-into-localtelevision service;\nmakes must-carry requirements effective for satellites on January 1, 2002;\nmakes syndicated exclusivity, sports blackout, and network nonduplication applicable to satelliteretransmission of nationally distributed superstations, but for network stations, only sports blackout applies and onlyiftechnically feasible and not economically prohibitive;\nallows subscribers who do not receive a Grade A intensity signal and whose distant networksignals were terminated or were going to be terminated because of 1998 Miami court rulings to have those signalsrestored or continued until December 31, 2004 (\"grandfathering\" many of the subscribers affected by the 1998 courtdecision);\nretains the Grade B signal intensity standard as the criterion for who may receive distant networksignals;\nallows subscribers unable to receive a Grade B signal, as well as recreational vehicles andcommercial trucks that are not fixed dwellings, to receive no more than two distant network signals of eachtelevisionnetwork on a single day;\nestablishes a process for consumers to seek waivers from local affiliates to receive distantnetwork signals if signal strength is in doubt, at no cost to the consumer;\nallows C-band satellite customers to continue receiving distant network signals they werereceiving as of October 31, 1999 indefinitely;\nextends the existing satellite copyright compulsory license for distant network and superstationsignals until December 31, 2004 and creates a new compulsory license for local network signals with no sunsetdate;\nreduces the rate set in 1997 for copyright royalty payments satellite companies must pay by 45%for distant network signals and 30% for superstation signals (no copyright fees may be charged for localsignals);\neliminates the 90-day waiting period for cable subscribers; and\nallows satellite companies to offer a national Public Broadcasting Service (PBS) feed throughJanuary 1, 2002; after that, local PBS stations would have to be carried in markets where local-into-local serviceisprovided.\n\n\tThe LOCAL Act: Loan Guarantees, and \"Northpoint\"\n\nIn 1999, the conference version of H.R. 1554 would have created a loan guarantee program to help ensure that subscribers in small and rural markets benefit from the local-into-local provisions even though EchoStarand DirecTV do not plan to offer such service in all areas. The provision was deleted before final passage becauseofobjections by Senator Gramm that the proposal had not been sufficiently debated. Congress subsequently passedthe\"Launching Our Communities Access to Local Television Act\" (LOCAL) as Title X of the FY2001Commerce-Justice-State Appropriations Act as enacted by the FY2001 District of Columbia Appropriations Act( P.L.106-553 ). \nLoan Guarantees. LOCAL created a four-person board, consisting of the Secretaries of Treasury, Agriculture, and Commerce, and the Chairman of the Federal Reserve, or theirdesignees, to select recipients of loan guarantees for up to $1.25 billion in loans (generally, 80% of the loan maybeguaranteed). The loans may be used to build systems to ensure that consumers throughout the country can receivelocal television signals. The Board is to take into account whether a project serves \"nonserved\" or \"underserved\"areas and whether it would provide high-speed Internet access. The act is technology neutral in that it does notspecifywhether local TV stations would be provided by satellite, cable, or other transmission media, but places some limitson which cable companies are eligible. The Board's website is http:\/\/www.usda.gov\/rus\/localtvboard\/ . The Boardissued regulations for the LOCAL Television Loan Guarantee Program in the December 23, 2003 FederalRegister (pp. 74411-74433). An application period ended April 21, 2004. One application was received. On May 24, theBoard voted 3-1 to return that application because it was incomplete, and then voted unanimously to open another60-day application period. However, the Board rescinded the latter decision on July 6.\nThe loan guarantee program is administered by the Rural Utilities Service in the Department of Agriculture, whichreceived $280 million in the FY2002 Agriculture appropriations act ( P.L. 107-76 ) for the program. Section 6404ofthe Farm Security and Rural Investment Act ( P.L.107-171 , H.R. 2646 ) allocated $80 million for theprogram from the Commodity Credit Corporation through December 31, 2006. GAO is required to review theprogram annually, and criticized the slow progress of the program in its first such report (GAO-04-134, October2003). Its second report (GAO-05-18R, October 2004) stressed the need for the Board to accurately accumulateandreport administrative costs to meet federal cost accounting requirements and determine what portion must berecovered through fees.\nThe \"Northpoint Provision\". LOCAL required the FCC to select an independent entity to conduct tests to determine whether terrestrial systems operating in the same frequency bandas DBS satellites (12.2-12.7 Gigahertz) would cause unacceptable interference to DBS systems. This is often called\"the Northpoint provision\" because a company called Northpoint Technology, through its Broadwave subsidiary,wants to operate a terrestrial wireless system offering TV programming similar to that provided by DBS, and dataservices. It is seeking a license from the FCC for that terrestrial service, designated MVDDS (Multichannel VideoDistribution and Data Service). Until now, the 12.2-12.7 GHz band has been assigned only to satellites. The FCCchose the MITRE Corporation to conduct the interference tests in 2001, and it concluded that the two systems couldnot co-exist unless the MVDDS systems use a number of mitigating techniques. DBS operators hailed the MITREreport because it concluded that MVDDS would cause interference to their operations. Northpoint hailed the reportbecause it said there were mitigating steps that could be taken. \nThe FCC decided that MVDDS and DBS could co-exist, but dismissed without prejudice applications by Northpointand two other companies to provide MVDDS (FCC 02-116, ET Docket 98-206), deciding to auction the frequenciesinstead. Northpoint objected to that decision, and chose not to participate in the auction. Other companies did,however, and the auction was completed on January 27, 2004, raising $118.7 million http:\/\/hraunfoss.fcc.gov\/edocs_public\/attachmatch\/DOC-243253A1.pdf . \nS. 564 , and H.R. 1320 as reported from the Senate Commerce Committee ( S.Rept. 108-168 ), would have eliminated the auction requirement for fixed terrestrial services (such as MVDDS) other thanmobile phones in the 12.2-12.7 GHz band. Similar language was in the Senate-passed version of the FY2004Commerce, Justice, State Appropriations bill (Sec. 626 of S. 1585 ), but not in the final version of the bill(part of the FY2004 Consolidated Appropriations Act, H.R. 2673 , P.L. 108-199 ).","output":"Congress has passed several laws to provide consumers greater access tolocal network television stations, particularly via satellite. The 1988 Satellite Home Viewer Act (SHVA), amendedin1994, was expanded in 1999 with the Satellite Home Viewer Improvement Act (SHVIA). SHVIA allows (notrequires) satellite companies to retransmit a local broadcast network signal back into the same localmarket area fromwhich it originates (\"local-into-local\"). Concerned that satellite TV companies do not plan to offer local-into-localinall parts of the country, Congress then passed the Launching Our Communities Access to Local Television Act(LOCAL). That act creates a loan guarantee program to help ensure that consumers in small and rural marketsreceivelocal network TV stations via satellite or other technologies. This historical report summarizes SHVIA andLOCAL,and the debate over whether a company called Northpoint should be able to use the same frequencies as satellitestotransmit data and television using terrestrial systems. It does not address the 2004 Satellite Home Viewer Extensionand Reauthorization Act (SHVERA). See CRS Report RS21768 instead. This report will not be updated."}
{"id":"gao_RCED-96-186","pid":"gao_RCED-96-186_0","input":"\tPaperwork Reduction: Burden Reduction Goal Unlikely to Be Met\n\nMr. Chairman and Members of the Committee: We are pleased to be here today to discuss the implementation of the Paperwork Reduction Act of 1995. As you requested, we have reviewed selected aspects of the act\u2019s implementation by the Office of Management and Budget (OMB) and three agencies\u2014the Internal Revenue Service (IRS), the Environmental Protection Agency (EPA), and the Occupational Safety and Health Administration (OSHA). In your request letter, you noted that participants at last year\u2019s White House Conference on Small Business believed these three agencies impose the most significant paperwork burdens on small businesses.\nWe will focus on three main issues today: (1) changes in paperwork burden governmentwide and in the three selected agencies, (2) OMB\u2019s responsibility to set goals for reducing such burden and whether agencies will achieve the burden reductions envisioned in the act, and (3) actions each of the three agencies have taken since the passage of the act. We will also discuss some measurement issues Congress needs to consider as it assesses agencies\u2019 progress in reducing paperwork burden.\n\n\t\tBackground\n\nFirst, however, a little background information is needed. The Paperwork Reduction Act of 1995 amended and recodified the Paperwork Reduction Act of 1980, as amended. The 1995 act reaffirmed the principles of the original act and gave new responsibilities to OMB and executive branch agencies. Like the original statute, the 1995 act requires agencies to justify any collection of information from the public by establishing the need and intended use of the information, estimating the burden that the collection will impose on the respondents, and showing that the collection is the least burdensome way to gather the information. at the end of the fiscal year, and agency estimates of the burden for the coming fiscal year.\nThe 1995 act also makes several changes in federal paperwork reduction requirements. For example, it requires OIRA to set goals of at least a 10-percent burden reduction governmentwide for each of fiscal years 1996 and 1997, a 5-percent governmentwide burden reduction in each of the next 4 fiscal years, and annual agency goals that reduce burden to \u201cthe maximum practicable\u201d extent. The act also redefines a \u201ccollection of information\u201d to include required disclosures of information to third parties and the public, effectively overturning the Supreme Court\u2019s 1990 Dole v. United Steelworkers of America decision. Finally, the 1995 act details new agency responsibilities for the review and control of paperwork. For example, it requires agencies to establish a 60-day public notice and comment period for each proposed collection of information before submitting the proposal to OMB for approval.\nOIRA uses the ICB information to assess whether agencies\u2019 burden reduction goals are being met. OIRA classifies changes in burden-hour estimates as caused by either \u201cprogram changes\u201d or \u201cadjustments.\u201d Program changes are additions or reductions to existing paperwork requirements which are imposed either through new statutory requirements or an agency\u2019s own initiative. Adjustments are changes in burden estimates caused by factors other than changes in the actual paperwork requirements, such as changes in the population responding to a requirement or agency reestimates of the burden associated with a collection of information. OIRA counts both program changes and adjustments when calculating an agency\u2019s burden-hour baseline at the end of each fiscal year. However, OIRA does not count changes that are due to adjustments in determining whether an agency has achieved its burden reduction goal.\n\n\t\tChanges in Paperwork Burden Over Time\n\nFigure 1 shows changes in reported burden-hour estimates governmentwide and at IRS between September 30, 1980, and September 30, 1995\u2014the day before the new act took effect. rose dramatically in 1989, and rose every year since then with the exception of 1993. In each year since fiscal year 1989, IRS\u2019 paperwork burden has accounted for more than three-quarters of the governmentwide total. Increases or decreases in IRS\u2019 total number of burden hours have had a dramatic effect on the governmentwide total. For example, the near tripling of the governmentwide burden-hour estimate during fiscal year 1989 was primarily because IRS changed the way it calculated its information collection burden, which increased its paperwork estimate by about 3.4 billion hours. Because the IRS paperwork burden is such a large portion of the governmentwide total, the success of any governmentwide effort to reduce burden largely depends on reducing the burden imposed by IRS.\nFigures 2 and 3 show the changes in the paperwork burden at EPA and OSHA, respectively, during the same 1980 to 1995 period.\nStatement  Paperwork Reduction: Burden Reduction Goal Unlikely to Be Met Burden hours (in millions)\nStatement  Paperwork Reduction: Burden Reduction Goal Unlikely to Be Met Burden hours (in millions)\nEPA\u2019s burden-hour estimate rose sharply in the late 1980s, fell somewhat in 1991 (because third-party information collections were no longer being counted as a result of the Dole decision), and rose again between 1991 and 1995. OSHA\u2019s burden-hour estimate increased gradually through 1987, rose rapidly in 1988, fell back to its previous level by 1990, and decreased slightly until it rose sharply between 1994 and 1995.\nFigure 4 shows the month-by-month changes in the governmentwide paperwork burden between September 30, 1994, and March 30, 1996\u2014the period including the date the 1995 act was signed by the President (May 22, 1995) and its effective date (October 1, 1995).\n6.90 billion hours on September 30, 1995. IRS increased its burden-hour estimate by more than 147.6 million burden hours (about 3 percent) between August and September; EPA\u2019s estimate went up more than 21 million hours (more than 25 percent) during that month. OSHA\u2019s burden-hour estimate rose most dramatically shortly before the effective date, from about 1.5 million hours on June 30, 1995, to about 208 million hours on September 30, 1995.\nDocuments we reviewed and officials we talked to indicated that these increases occurred during this period because agencies were trying to get proposed information collections approved before the new act took effect on October 1, 1995. Some of the proposals at OSHA and EPA were third-party and public disclosures that had previously been removed from the agencies\u2019 estimates because of the Dole decision. Other proposals, particularly those at OSHA, were third-party and public disclosures that had been added after the Dole decision. By getting these third-party and other proposed information collections approved before the act\u2019s effective date, agencies were able to avoid the new requirements imposed by the act, including the 60-day public notice and comment period at the agencies. OIRA approved some of these collections of information for less than 1 year so that the agencies would have to clear the collections under the new process during fiscal year 1996.\nHowever, submitting the proposals for review and approval before the act took effect also raised the burden-hour baseline against which the agencies\u2019 paperwork reduction goals would be judged. For example, the increase in OSHA\u2019s burden-hour baseline from about 1.5 million hours to about 208 million hours between June and September 1995 meant that OSHA had to cut more burden hours to achieve a 10 percent reduction (20.8 million hours) than it would have had to cut before the increase (about 150,000 hours).\n\n\t\tBurden Reduction Goals Not Set and Reductions Likely to Fall Short of Act\u2019s Target\n\nOne of the key features of the Paperwork Reduction Act of 1995 is the requirement that OIRA set both governmentwide and agency-specific burden reduction goals for fiscal year 1996 and for the next 5 fiscal years. However, as of May 31, 1996, OIRA had not set any such goals. More importantly, information that the agencies submitted to OIRA indicated that the burden reduction target that the act specified for fiscal year 1996 is unlikely to be reached.\n\n\t\t\tAgencies\u2019 Planned Burden Reduction Goals Will Average 1 Percent\n\nOIRA staff told us that they plan to set the fiscal year 1996 burden reduction goals in a soon-to-be-published ICB. As part of the ICB development process, in September 1995, OIRA asked agencies to project what their burden-hour levels would be at the end of fiscal year 1996. Agencies submitted that information to OIRA between December 1995 and February 1996.\nOIRA staff said that they will establish a governmentwide burden reduction goal of 10 percent for fiscal year 1996, as the act requires. They also said that agency goals will reflect the end-of-fiscal year 1996 burden-hour estimates that the agencies provided in their ICB submissions unless changed as a result of OIRA review. According to unpublished information we obtained from OIRA and the agencies, the weighted average of the agencies\u2019 burden reduction projections is about 1 percent. If these projections are accurate, the fiscal year 1996 goal of a 10-percent reduction in governmentwide paperwork burden that the 1995 act calls for will not be accomplished. Figure 5 shows the actual month-to-month governmentwide paperwork estimates from March 1995 to March 1996 and, according to our calculations, what the number of burden hours would have been by the end of fiscal year 1996 if the 10-percent burden reduction goal had been achieved and what the burden-hour total is expected to be on the basis of agencies\u2019 projections.\nStatement  Paperwork Reduction: Burden Reduction Goal Unlikely to Be Met Burden hours (in billions) that will not add up to the governmentwide goal of a 10-percent reduction in burden. \u201cindividual agency goals negotiated with OIRA may differ depending on the agency\u2019s potential to reduce the paperwork burden such agency imposes on the public. Goals negotiated with some agencies may substantially exceed the Government-wide goal, while those negotiated with other agencies may be substantially less.\u201d\n\n\t\t\tOIRA Did Not Keep Congress Informed\n\nIn addition to setting goals for paperwork reduction, the act requires OIRA to \u201ckeep the Congress and congressional committees fully and currently informed of the major activities under this chapter.\u201d However, as of May 31, 1996, the OIRA Administrator had not informed Congress or congressional committees (1) about why OIRA has not established any burden reduction goals to date and (2) that agency projections OIRA received at least 3 months ago indicated that the 10 percent governmentwide paperwork reduction goal called for in the act would not be achieved. Both of these issues appear to us to be \u201cmajor activities\u201d subject to the act\u2019s requirement that the OIRA Administrator keep Congress fully and currently informed.\n\n\t\t\tAgencies Contend Statutory Requirements Impede Burden Reduction\n\nInformation collection is one method by which agencies carry out their missions, and those missions are established by Congress through legislation. For the past several years, the ICBs have indicated that agencies\u2019 burden-hour estimates increased because of congressionally imposed statutory requirements. For example, the fiscal year 1993 ICB noted that title IV of the Clean Air Act Amendments of 1990 established new permitting requirements for emission sources that produce nitrous oxides, resulting in a 1.8 million hour increase to EPA\u2019s burden-hour estimate. As a result of such requirements, some agencies contend that they are limited in the amount to which they can reduce their paperwork burden. If agencies\u2019 paperwork requirements are truly statutorily mandated, those agencies may not be able to reduce their burden-hour estimates by the amounts envisioned in the 1995 act without changes in the legislation underlying those requirements.\nHowever, neither we nor OIRA have assessed the extent to which the paperwork burden agencies impose is directly a consequence of statutory requirements and, therefore, is out of agencies\u2019 control. Even though a statute may require an agency to take certain actions, the agency may have discretion regarding whether paperwork requirements need to be imposed and, if so, the manner or frequency with which the information is collected. For example, although several statutes require employers to provide training to employees, OSHA may have discretion to determine whether employers need to submit paperwork to demonstrate their compliance with these provisions.\n\n\t\tEPA, IRS, and OSHA Burden Reduction Targets and Actions Differ\n\nAs a part of their ICB submissions to OIRA, EPA, IRS, and OSHA each projected what it believed its total number of burden-hours would be as of September 30, 1996. Each agency also took different steps to reduce its paperwork burden.\n\n\t\t\tEnvironmental Protection Agency\n\nEPA has its own effort to reduce paperwork that began before the Paperwork Reduction Act of 1995 took effect. EPA has set an internal burden-reduction target and expects to reach that target by the end of this year. Despite these efforts, EPA reported that their burden-hour reductions will be largely offset by increases in statutorily-based information collections.\nIn March 1995, the EPA Administrator committed to reducing the agency\u2019s January 1, 1995, estimated paperwork burden by 25 percent by June 1996. Initially, EPA estimated that its January 1995 baseline was about 81 million burden hours, so a 25-percent reduction would bring the agency\u2019s total to about 61 million hours. In March of this year, we provided a statement for the record to the House Committee on Small Business indicating that, despite these planned reductions, EPA projected that its burden-hour total would increase to about 117 million hours by September 30, 1996\u2014an increase of about 44 percent from EPA\u2019s January 1995 baseline. projection for September 30, 1996, from 117 million hours to about 100 million hours. EPA officials said their projection was revised because some planned information collections would not be approved by OIRA by the end of the fiscal year and because their original estimate did not include all of the burden-hour reductions that EPA now expects to make by the end of the fiscal year.\nUsing EPA\u2019s most recent estimates, figure 6 shows EPA\u2019s burden-hour baseline as of January 1, 1995, the 25-percent reduction goal that EPA expects to accomplish by December 31, 1996, and the total number of burden hours that EPA currently projects will be in place as of September 30, 1996. As you can see, despite EPA\u2019s burden-reduction efforts during this period, EPA\u2019s burden-hour estimate at the end of this fiscal year is expected to be about what it was at the start of those efforts. This is because, at the same time EPA has been reducing its January 1995 paperwork inventory, new burden hours have been added to that inventory. According to EPA, those additions are primarily third-party burden hours that are now being counted as a result of the Paperwork Reduction Act of 1995 and new information collections associated with the Clean Air Act Amendments of 1990 and the Residential Lead-Based Paint Hazard Reduction Act of 1992.\nStatement  Paperwork Reduction: Burden Reduction Goal Unlikely to Be Met Burden hours (in millions)\nDoes not include about 9 million hours of third party burden. Does not include about 5 million hours of TRI burden.\n5 million hours of burden associated with the Toxic Release Inventory (TRI).\nAlthough EPA\u2019s efforts to reduce burden hours have been almost totally offset by new information collection requirements, EPA\u2019s attempt to reduce its paperwork burden may prevent what would otherwise be a significant increase in the agency\u2019s paperwork burden. As of May 1996, EPA said that it had completed reductions of about 15 million hours and had identified about 8 million more hours of burden for elimination. If these figures are accurate, EPA would need to eliminate the 8 million burden hours it had identified and identify and eliminate about 2 million more hours to reach its goal of reducing its 101 million burden-hour baseline by 25 percent. Without the burden-hour reductions EPA says it has accomplished or has in progress, the agency\u2019s paperwork burden could have increased by 25 percent by the end of the year.\nAlthough EPA\u2019s initiative to reduce the burden it imposes is promising, its burden-reduction claims warrant continued scrutiny. As we reported in our March 1996 statement for the record to the House Small Business Committee, some of EPA\u2019s February 1996 burden reduction estimates were overstated. For example,\nEPA initially claimed that a recently adopted TRI reporting option reduced the burden associated with TRI by about 1.2 million hours. However, EPA did not offset this reduction by the additional paperwork burden it created\u2014about 800,000 hours\u2014that would be incurred by those choosing this option. Therefore, the real burden reduction was about 400,000 hours.\nEPA estimated that it had reduced the burden associated with its land disposal restrictions program by 1.6 million hours, but its January 1, 1995, baseline indicated that the entire program only accounted for about 800,000 hours. to revise its January 1, 1995, baseline from which the burden-hour reductions are being taken.\n\n\t\t\tInternal Revenue Service\n\nReducing burden on the taxpayer is one of the primary goals in IRS\u2019s Business Master Plan, in which the agency identifies a number of burden-reduction actions that it plans to take. In its ICB submission, IRS said that it plans to reduce its measured paperwork burden by about 50 million hours (0.9 percent) during fiscal year 1996 by simplifying forms and instructions, changing reporting thresholds, and moving eligible taxpayers to \u201cE-Z\u201d versions of required forms.\nIRS officials said they are limited in the amount to which they can reduce the agency\u2019s paperwork burden because most of IRS\u2019 information collections are statutorily mandated in the tax code. They said that unless changes are made to the substantive requirements in the code, IRS will not be able to substantially reduce its paperwork burden.\nIRS officials also said that significant portions of the agency\u2019s efforts to reduce its burden focus on types of burden that are not covered by the Paperwork Reduction Act. For example, they said that a major part of the real paperwork burden on the taxpayer comes from responding to IRS notices, and IRS has a major initiative under way to determine which notices can be eliminated, combined, or simplified. However, they said that notices are not covered by the act because they focus on information collected from a single individual in the course of an investigation or inquiry.\n\n\t\t\tOccupational Safety and Health Administration\n\nOSHA officials said that they assumed their agency would be responsible for reducing its burden by 10 percent during fiscal year 1996 as its share of the governmentwide goal. In its 1995 ICB submission to the Department of Labor, OSHA said that it would reduce its fiscal year 1995 paperwork burden by 8.7 million hours (about 4 percent) during fiscal year 1996 by dropping a number of certification requirements. Although OSHA has begun the process of eliminating these certification requirements, in the spring of 1996 OSHA officials told us that the process may not be completed in time to eliminate the requirements by the end of the fiscal year.\nAfter submission of its ICB, OSHA officials discovered that they could claim additional burden reductions. OSHA\u2019s Process Safety Management of Highly Hazardous Chemicals Standard is a third-party information collection that the agency added to its burden-hour total in August 1995. At that time, OSHA officials estimated the paperwork requirements associated with the standard at 135 million burden hours. In keeping with a schedule established by the standard when it was issued in 1992, the burden imposed on employers declined in May 1996 because they were no longer required to perform certain recordkeeping functions after that date. OSHA officials said that they initially considered the decline in employer responsibilities an adjustment, which could not be counted toward the agency\u2019s 10 percent burden reduction goal in their ICB submission. However, they said the Department of Labor paperwork clearance official told them the change should be considered a program change, and therefore should be counted as part of OSHA\u2019s paperwork reduction effort. Consequently, OSHA reduced its 135 million burden-hour estimate by 17 million hours\u20148 percent of OSHA\u2019s total fiscal year 1995 burden.\n\n\t\tMeasurement Issues\n\nAs Congress exercises oversight in this area, it is important that it keep in mind several measurement issues. As noted previously, OIRA does not count any adjustments (because of reestimates or population changes) that agencies submit with their information collection requests in determining whether an agency has met its paperwork burden reduction goals. Therefore, an agency that initially submits a high estimate and later revises it downward does not get credit from OIRA for the reduction. Conversely, if an agency initially submits a low paperwork estimate and later increases the estimate, OIRA never counts the increase against the agency for goal attainment purposes. In fact, the governmentwide increase of about 1 billion burden hours between 1990 and 1995 was primarily driven by adjustments that never counted against agencies\u2019 goals. OIRA staff told us they were not aware of any evidence that agencies were systematically underestimating the burden associated with their information collections and then revising them upward. interpreting the official burden-hour statistics. Most or all of the burden-hour increase may have actually existed since 1980 when the original Paperwork Reduction Act became effective. If this were the case, the statistics available to policymakers would seriously underestimate the burden actually imposed on the public, and figure 1 would overstate the degree to which paperwork burden actually increased since 1980.\nThe increase in measured burden as a consequence of the inclusion of third-party and public disclosures in September 1995 was similar to the IRS reestimate; the burden already existed but had just not been previously measured. Likewise, the burden felt by the public does not diminish when an agency recalculates a lower estimate of its paperwork burden without eliminating any existing requirements.\nRelatedly, it is important that Congress be aware that certain elements of agencies\u2019 information collection burden are not reflected in some burden-hour estimates. As we mentioned earlier, OIRA does not count about 5 million hours of paperwork burden associated with EPA\u2019s TRI reporting form because the form is not submitted for OIRA approval. IRS\u2019s burden-hour estimates do not include such information collections as notices involving errors, nonfilings, and delinquencies because they are exempted from coverage under the act.\nFinally, as we have said in previous reports and testimonies, users of paperwork burden-hour estimates should proceed with great caution. The degree to which such estimates reflect real burden and the factors that cause changes to the burden-hour totals are often unclear. Nevertheless, they are the best indicators of paperwork burden available, and we believe that they can be useful as long as their limitations are borne in mind.\nMr. Chairman, this completes our prepared statement. We would be pleased to answer any questions.\nThe first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent.\nU.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000  or by using fax number (301) 258-4066, or TDD (301) 413-0006.\nEach day, GAO issues a list of newly available reports and testimony.  To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone.  A recorded menu will provide information on how to obtain these lists.","output":"Why GAO Did This Study\n\nGAO discussed governmentwide implementation of the Paperwork Reduction Act of 1995, and three federal agencies' actions to implement the act.\n\nWhat GAO Found\n\nGAO noted that: (1) between 1980 and 1995, reported governmentwide paperwork burden hours increased from about 1.5 billion to 6.9 billion; (2) the Internal Revenue Service (IRS) accounts for most of the federal paperwork burden; (3) IRS accounted for a three-fold increase in 1989 because it changed the way it calculated its information collection burden; (4) governmentwide burden hours increased almost 8 percent in the month before the act's effective date because agencies were trying to get proposed information collection activities approved before that date; (5) as of May 1996, the Office of Management and Budget's Office of Information and Regulatory Affairs had not set burden reduction goals or kept Congress informed about implementation progress; (6) agencies' weighted average burden reduction is likely to be 1 percent for fiscal year (FY) 1996, but the act's FY 1996 reduction goal is 10 percent; (7) agencies believe that statutory mission-related requirements limit their ability to reduce paperwork burdens; and (8) Congress should consider several measurement issues, including counting adjustments toward or against reduction goals, the difference between measured and actual paperwork burdens, and potentially incomplete agency burden estimates."}
{"id":"crs_R40982","pid":"crs_R40982_0","input":"\tIntroduction\n\nThe U.S. House and Senate have produced two major bills ( H.R. 2454 , the American Clean Energy and Security Act of 2009 (also known as the Waxman-Markey bill) and S. 1733 , the Clean Energy Jobs and American Power Act of 2009 (also known as the Kerry-Boxer bill)) addressing greenhouse gas (GHG) emissions associated with concerns over global Climate Change. This report summarizes and compares provisions for green jobs training and worker adaptation assistance for climate change impacts. \nUnder a two-part subtitle for \"Green Jobs & Worker Transition\" (Title IV Subtitle B of H.R. 2454 , and Title III, Subtitle A of S. 1733 ), essentially identical provisions are focused (in Part I) on the development of programs to provide training and education in energy efficiency and renewable energy, and (in Part II) on providing retraining and financial assistance for workers made redundant (or whose earnings have been substantially reduced) by climate change mitigation measures. Since the provisions in both bills are so similar, this report will focus on the provisions as discussed in S. 1733 . A \"Chairman's Mark\" of S. 1733 was released in October 2009. Any resulting modifications to applicable areas of the original Kerry-Boxer version are discussed in the report. \nReducing GHG emissions will likely require the curtailed use of fossil fuels for generating electricity, powering vehicles, and fuelling the furnaces of industrial production. Current legislation envisions an economic \"price\" on high-carbon fossil fuels to encourage switching to cleaner energy alternatives. Since fuel costs are often the third-highest cost component in manufacturing a product (after materials and labor), any increase in fuel costs could significantly affect the competitiveness of such products and therefore the profitability of an enterprise. Some companies may be able to adapt, finding more efficient ways to manufacture their products, while other businesses will cut labor costs.\nThe legislative provisions examined in this report are intended to assist the development of green jobs training programs and to establish an internet-based clearinghouse for information on the green jobs industry. The provisions also seek to provide employment retraining and financial assistance for workers found to have been made redundant by climate change mitigation requirements, or those whose earnings have been significantly reduced.\n\n\tSummary of S. 1733 Provisions\n\nA summary of provisions in S. 1733 , \"Clean Energy Jobs and American Power Act\" Title III, Subsection A follows. Essentially the same organization and titles exist in H.R. 2454 , \"American Clean Energy and Security Act,\" Title IV, Subtitle B, with only the section numbering differing. Green jobs training provisions in Part 1 of both bills focuses on the development of training programs in renewable energy and energy efficiency. Part 2 of both bills focuses on a new government program specifically to assist workers impacted by climate change mitigation measures. \n\n\tTitle III\u2014Transition and Adaptation, Subtitle A\u2014Green Jobs and Worker Transition\n\n\t\tPart 1. Green Jobs\n\n\t\t\tSec. 301. Clean Energy Curriculum Development Grants\n\nThe Secretary of Education (in consultation with the Secretaries of Energy and Labor) is authorized to competitively award grants to eligible partnerships to develop programs of study in the fields of clean energy, renewable energy, energy efficiency, climate change mitigation and climate change adaptation. An eligible partnership can submit an application describing the partnership, its qualifications, area of focus, need of the labor market addressed, methodology and approach to meeting student needs, description of applied learning programs, placement of students in nontraditional fields, and description of applicant's proposed plan to consult with labor, apprenticeship and job training programs in the area for which a curriculum is proposed. Applications will be subject to a peer review process for recommendations to the Secretary for grant awards.\n\n\t\t\tSec. 302. Development of Information and Resources Clearinghouse for Vocational Education and Job Training in Renewable Energy Sectors\n\nAn internet-based information and resources clearinghouse is to be established no later than 18 months after the date of enactment to aid career and technical education and job training in renewable energy by collecting and providing information on technological changes, best practices in training, and education, with an emphasis on renewable energy industry and job training program collaboration. In establishing the clearinghouse, the Secretary is to solicit information and expertise from the renewable energy industry, and institutions of higher education, technical schools, and community colleges that provide training in renewable energy. Separate sections of the clearinghouse are to focus on solar and wind energy systems, energy transmission systems, geothermal systems for energy and heating, and energy efficiency technical training. Each of these sections shall include information on basic environmental science and processes needed to understand renewable energy systems, federal government and industry resources, and points of contact.\n\n\t\t\tSec. 303. Green Construction Careers Demonstration Project\n\nA \"Green Construction Careers\" demonstration project is to be established not later than 180 days after enactment. The purpose of the demonstration projects is to promote \"middle class careers\" and \"quality employment practices\" in the green construction sector on construction projects related to this act for \"targeted workers\" who reside in the same area as the project. The Secretaries of Education, Energy, and Labor are to evaluate the initial projects at the end of three years with an eye to identifying further projects, if they are deemed successful. Qualified pre-apprenticeship and apprenticeship programs aimed at targeted workers are to be used by contractors on the projects, or approved alternatives if contractor apprenticeship programs are outside the residence area of the project. The Government Accountability Office will report on the projects to Congress. \n\n\t\tPart 2. Climate Change Worker Adjustment Assistance\n\n\t\t\tSec. 311. Petitions, Eligibility Requirements, and Determinations\n\nA petition for eligibility for adjustment assistance can be filed by a group of workers, a union or other duly authorized representative of such workers, employers, or other entities acting on the behalf of such workers. The petition is to be filed simultaneously with the Secretary of Labor and the governor of the state in which the workers' employment site is located. The Secretary will publish the filing in the Federal Register and initiate an investigation to determine eligibility. The governor shall ensure that rapid response activities and appropriate core services authorized under federal law are made available to workers covered by the petition, and shall assist the Secretary by verifying such information and providing such other assistance as the Secretary may request. Workers may be eligible to apply for such assistance if: (a) they are employed in energy producing or transforming industries; industries dependent on energy industry; energy-intensive manufacturing industries; consumer goods manufacturers; or other industries determined by the Secretary to be adversely affected by any requirement of Title VII of the Clean Air Act (CAA); (b) the Secretary determines a significant number of workers become separated partially or totally from employment; (c) sales, production, or delivery of goods and services have decreased as a result of any requirement of Title VII of CAA, including the shift from fossil fuels to other sources of energy (including renewables) that results in the closing of a facility or layoff of employees at a facility that mines, produces, processes, or uses fossil fuels to generate electricity; a substantial increase in cost of energy for a manufacturing facility (not offset by assistance under title VII of CAA); or other situations the Secretary determines are adverse impacts of any requirement of Title VII of CAA. Public agency and service workers are also eligible for assistance if they are found to be adversely impacted by provisions of Title VII of CAA. \nThe Secretary is authorized to collect such information as may be necessary to verify applications, with protection afforded to information considered confidential as noted in the section. A determination of eligibility would be due not later than 40 days after a petition was filed. Representatives of the domestic industry (including employers, union representatives or other duly authorized representatives) would be notified as to the result of a determination by the Secretary. Procedures for applying for benefits would follow certification of eligibility.\n\n\t\t\tSec. 312. Program Benefits\n\nClimate change adjustment assistance payments are to be made to certified, eligible workers for any week of unemployment on or after the date of certification, as long as specified conditions are met (including the circumstances of separation and length of previous employment). Workers receiving assistance payments under this section shall be ineligible to receive any other form of unemployment insurance during the period the worker is receiving climate change adjustment assistance under this section. Workers are to enroll in a training program unless circumstances exist to waive this requirement such as: a recall to work; the worker has \"current marketable skills;\" the worker is within two years of eligibility for old-age benefits under social security or a private pension; or the worker's health precludes participation in a training program (but such a health issue may not necessarily preclude the worker from other requirements for benefits). Climate change adjustment payments shall be equal to 70% of the average weekly wage of the worker, but are not to exceed the average weekly wage for all workers in the worker's state of residence. Such benefits are to be payable for a maximum of 156 weeks. \nEligible workers will also receive information and employment services such as skills and diagnostic testing, information on financial aid and career counseling and training available locally and regionally, job vacancy listings, and information on the availability of support services such as childcare and transportation. Training would be approved for a worker if the Secretary determines that there is no suitable employment available and the worker would have a reasonable expectation of employment once trained. The worker must be qualified to take the training program (which must be available at a reasonable cost). States will receive funds for the administrative costs of the program of approximately 15% of assistance each fiscal year, and for employment services training. A state may decline such funding if it chooses. A one-time, lump sum reimbursement for job search expenses is authorized for an eligible worker up to $1,500 for workers who have completed the training program and are no longer eligible for climate change adjustment assistance. Relocation assistance is authorized (a one-time, lump sum up to three times the worker's weekly wage, not to exceed $1,500) if an eligible worker cannot secure suitable employment in the commuting areas in which the worker resides and, among other qualifiers, has a bona fide job offer in the area of relocation. Health insurance coverage for eligible workers will be continued and 80% of the premium will be paid (to the insurer) while the worker is receiving assistance under this section.\n\n\t\t\tSec. 313. General Provisions\n\nThe Secretary is authorized to enter into agreements with any state or state agency to meet the requirements of this part including data reporting. Each cooperating state or state agency shall advise each worker applying for benefits of procedures and deadlines, eligibility for training, benefits and climate change adjustment assistance. Adversely affected workers receiving benefits under this part are not eligible for benefits of other unemployment insurance under the laws of the state. A finding by a cooperating state agency on eligibility for benefits can only be reviewed under the laws of that state. If no agreement is in force with a state or state agency, the Secretary shall promulgate regulations for assistance under Section 312. Apprenticeship or other on-the-job training programs under this part shall not displace an employed worker, or impair an existing contract for services or collective bargaining agreement. The total amount of funds to be disbursed for the purposes of Section 312 shall not exceed the amount deposited into the Worker Transition Fund established in Section 209 of Division B. The Secretary may waive any section of this part to ensure that a member of the Armed Forces reserve serving on a period of duty (as described in the section) and who is an adversely affected worker is eligible to receive climate change assistance, training, and other benefits. A study on the circumstances of older workers is prescribed in the section. \n\n\t\tRelated Provisions\n\nSec. 20 8 . Energy Efficiency and Renewable Energy Worker Trainin g . An \"Energy Efficiency and Renewable Energy Worker Training Fund\" is to be established in the U.S. Treasury, funded by [the Environmental Protection Agency's Administrator from] auction proceeds from emission allowances. The Department of Energy's Secretary is to use these funds in accordance with section 171(e)(8) of the Workforce Investment Act of 1998.\nSec. 209. Worker Transition. A separate account is to be established in the Treasury known as the \"Worker Transition Fund\" to receive proceeds from emissions auctions and is to be made available to carry out Part 2 of Subtitle A of Title III of Division A.\n\n\tDifferences Between Kerry-Boxer Version and Chairman's Mark\n\nEssentially, there are no differences in content between the original Kerry-Boxer version of the bill and the Chairman's Mark except for Section 313, General Provisions. In the Chairman's Mark, definition (10) was added to correct the omission of the term \"industries dependent upon energy industries.\"\n\n\tComparison of S. 1733 with Provisions in H.R. 2454, Subtitle B\u2014Green Jobs and Worker Transition\n\nA summary of differences between the House and Senate bills follows, with section numbers referring to the Senate bill (unless otherwise stated). Overall, these differences do not appear to be material.\nSection 313, General Provisions . In the Chairman's Mark, definition (16) defines \"State\" to include the District of Columbia and the Commonwealth of Puerto Rico; and the term \"United States\" when used in the geographic sense is defined to include such Commonwealth. This definition is not in H.R. 2454 .\nSection 313, General Provisions . In the Chairman's Mark, definition (20) adds citation (45 U.S.C. 351, et seq.) for the Railroad Insurance Act. This cite is not in H.R. 2454 .\nSection 313, General Provisions . The Spending Limit designation of where funding for the Climate Change Worker Assistance Fund is to be established in a proposed Title VII of the Clean Air Act differs with H.R. 2454 . In the Senate version, Section 209 of Division B has proceeds of allowance auctions being available pursuant to section 771(b)(5) of the CAA. The House version has amounts deposited per section 782(j) of the CAA. This appears to be a result of differences in House-Senate organization for proposed new sections of the CAA.\nIncreased Funding for Energy Worker Training Program: Section 422 of H.R. 2454 adds another $25 million in funding to Section 171(e)(8) of the Workforce Investment Act of 1998, and establishes a separate account in the U.S. Treasury to be known as the \"Energy Efficiency and Renewable Energy Worker Training Fund.\"\n\n\tSimilar Provisions in Other Legislation\n\nTitle IV of the American Recovery and Reinvestment Act of 2009 (ARRA) specifies that $100 million of the $4.5 billion made available to the U.S. Department of Energy's Office of Electricity Delivery and Energy Reliability be used for worker training.\nTitle VIII of ARRA provides $500 million to the U.S. Department of Labor under \"Training and Employment Services\" for research, labor exchange, and job training projects that prepare workers for careers in renewable energy and energy efficiency. \n\n\tGeneral Comments\n\nBoth the House and Senate bills contain essentially the same provisions intended to provide employment retraining with a focus on jobs in renewable energy and energy efficiency in Part 1\u2014Green Jobs, and financial assistance for workers found to have been made redundant by climate change mitigation requirements, or those whose earnings have been significantly reduced in Part 2\u2014Climate Change Worker Adjustment Assistance. \nThe source of funding for the provisions of Part 1, while apparently associated with the establishment of the \"Energy Efficiency and Renewable Energy Worker Training Fund,\" is not clearly established in either bill.\nThe term \"Green Jobs\" is undergoing definition at the Labor Department as to what these jobs are, and the sector or sectors they will be classified in under the North American Industry Classification System (NAICS). The NAICS is used by the federal government to collect and analyze data with regard to the U.S. economy. There is agreement that Green Jobs will relate to renewable energy and energy efficiency, but the extent to which these jobs will be exclusive to these areas is under debate as the skills and training necessary may be transferable from and to other job classifications. The level and specialization of these jobs could vary from tradesmen such as electricians and welders, to technical engineers or financial managers, and from intellectual design to maintenance workers. \nPart 2 of the legislation focuses on assisting workers impacted by climate change mitigation measures. Climate change mitigation may adversely affect the competitiveness of U.S. industries as legislation requiring adaptation to a low-carbon future has the potential to increase the costs of manufactured products. As such, if a group of workers can show how their current or prospective employment is impaired by such measures, then these workers may apply for climate change adjustment assistance. Assistance may include a monetary allowance while workers are retrained or otherwise seeking new jobs or seeking full employment if their work hours are reduced. The proposed legislation appears to be adaptable to the training needs of affected workers from various employment levels and backgrounds, as assistance may be provided for up to three years for eligible workers.\nTraining for Part 1\u2014Green Jobs seems to be focused on providing qualified workers for renewable energy construction projects, i.e., wind and solar projects, energy transmission systems, and energy efficiency jobs envisioned by the act. It is likely that while certain of these jobs will require new skills, many of these jobs can be filled by tradesmen with existing skills in electrical wiring and welding. Other skills in machining and parts fabrication may also be directly transferable. Many of these jobs may require workers to follow projects as they are won and built, and require moving on to where the jobs are. Many of these projects will be built where the renewable resources are best, and for large scale wind or solar thermal projects, this means the broad plains of the Midwest or the sunny arid desert regions of the Southwest. \nFunds are to be made available to states to carry out the retraining, on-the-job training, career counseling, or other employment services. The federal government may seek to audit use of funds and applicants to guard against fraud or misuse of funds. Eligible workers must be citizens or nationals of the United States, or have \"satisfactory immigration status\" to receive program benefits. Linkages of \"apprenticeship\" and \"pre-apprenticeship\" programs with business and industry needs must be addressed (and eventually with potential employers' needs), and secondary schools prepared to advise students on apprenticeship career options. \nThe separate jobs retraining and assistance program envisioned by S. 1733 appears to be more comprehensive than existing workforce (such as at \"One Stop Career Center\") and Employee Retirement Income Security Act apprenticeship programs, perhaps raising issues of equity for unemployed workers not eligible for Climate Change Worker Adjustment Assistance. \n\"Middle class careers\" and \"quality employment\" are described as goals of the Green Construction careers demonstration project in Section 303. But over the longer term, higher paying, less transient jobs are more likely to come from positions in manufacturing companies rather than jobs in construction. Development of a competitive, domestic renewable energy industry which designs and produces the turbines, solar panels, and related parts and components is the likely source of these jobs, but may require a longer-term focus on the needs of future markets.\nMore clarity may be sought with regard to the federal policies, oversight, and planning for the support or development of industries and businesses expected to absorb retrained workers. Retraining programs and climate adjustment assistance benefits are projected up to three years for eligible workers, during which time the worker may or may not be placed. The worker may then apply for a lump sum for job search assistance or relocation, or both if suitable employment is not found. At the same time, adjustment assistance to climate change-impacted industries is to be made available through allocations and auctions of emissions allowances, but such businesses are likely to downsize to survive. Growth in green industries and other sectors is assumed to provide future employment as companies look to climate change business opportunities. Coordination of government, education, and retraining providers and potential employers on one hand, and corresponding efforts to create or rebuild competitive industrial sectors on the other hand will likely be crucial if the desired economic growth and employment results are to be realized.","output":"This report summarizes and compares provisions for green jobs training and worker adaptation assistance for climate change mitigation impacts in two recent bills: H.R. 2454, the American Clean Energy and Security Act of 2009 (also known as the Waxman-Markey bill), and S. 1733, the Clean Energy Jobs and American Power Act of 2009 (also known as the Kerry-Boxer bill). Under a two-part subtitle for \"Green Jobs & Worker Transition\" (Title IV Subtitle B of H.R. 2454, and Title III, Subtitle A of S. 1733), essentially identical provisions are focused (in Part I) on the development of programs to provide training and education in energy efficiency and renewable energy, and (in Part II) on providing retraining and financial assistance for workers made redundant (or whose earnings have been substantially reduced) by climate change mitigation measures. Since the provisions in both bills are so similar, this report will focus on the provisions as discussed in S. 1733. A \"Chairman's Mark\" of S. 1733 was released in October 2009. Any resulting modifications to applicable areas of the original Kerry-Boxer version are discussed in the report.\nThe green jobs training provisions in Part 1 of S. 1733 focuses on the development of training programs in climate change mitigation, renewable energy and energy efficiency, the authorization of competitive grants to organizations and partnerships developed to provide relevant education, training, and an internet-based clearinghouse for general information on the programs and technologies.\nPart 2 of S. 1733 focuses on assisting workers impacted by climate change mitigation measures. If a group of workers can show how their current or prospective employment is impaired by climate change mitigation measures, then these workers would apply for climate change adjustment assistance. Assistance would include a monetary allowance while workers are retrained or otherwise seeking new jobs or seeking full employment if their work hours are reduced. Assistance may be provided for up to three years for eligible workers. Workers receiving assistance under Part 2 would not be eligible for any other form of unemployment insurance.\nThe separate jobs retraining and assistance program envisioned by S. 1733 appears to be more comprehensive than existing workforce and apprenticeship programs, perhaps raising issues of equity for unemployed workers not eligible for Climate Change Worker Adjustment Assistance.\nMore clarity may be sought with regard to the federal policies, oversight, and planning for the support or development of industries and businesses expected to absorb retrained workers. Growth in green industries and other sectors is assumed to provide future employment as companies look to climate change business opportunities. Coordination of government, education and retraining providers and potential employers on one hand, and corresponding efforts to create or rebuild competitive industrial sectors on the other hand, will likely be crucial if the desired economic growth and employment results are to be realized.\n\"Middle class careers\" and \"quality employment\" are described as goals of the Green Construction careers demonstration projects. But over the longer term, higher paying, less transient jobs are more likely to come from jobs in manufacturing companies rather than jobs in construction. Development of a competitive, domestic renewable energy industry which designs and produces the turbines, solar panels and related parts and components may provide these jobs, but may require a longer-term focus on the needs of future markets."}
{"id":"gao_GAO-04-678","pid":"gao_GAO-04-678_0","input":"\tBackground\n\nTo protect the security of the United States, DOD relies on a complex  array of computer-dependent and mutually supportive organizational  components, including the military services and defense agencies. It also  relies on a broad array of computer systems, including weapon systems,  command and control systems, financial systems, personnel systems,  payment systems, and others. These systems are, in turn, connected with  other systems operated by contractors, other government agencies, and  international organizations. In addition, performance requirements for  weapon systems have become increasingly demanding, and breakthroughs  in software capability have led to a greater reliance on software to provide  more weapon capability when hardware limitations are reached. As such,  DOD weapon systems are subject to many risks that arise from exploitable  software vulnerabilities. Software code that is poorly developed or  purposely injected with malicious code could be used to disrupt these and  other DOD information systems, and potentially others connected to the  DOD systems.\nDOD has reported that countries hostile to the United States are focusing  resources on developing information warfare strategies. For example, a  DSS report noted that in 2001 there was a significant increase in  suspicious attempts by foreign entities to access U.S. technology and  information and that trend is expected to continue. Information systems  technology was the most sought after militarily critical technology by  these entities. Forty-four countries were associated with attempts at  accessing U.S. information technology, with 33 percent of the activity  coming from foreign government-sponsored or affiliated entities. Because  the U.S. defense industry is at the forefront of advanced design and  development of weapon systems that include militarily critical  technologies, access is sought after for industrial and financial purposes.  Access to these technologies by potential adversaries could enhance the  performance of their military systems and may be used to counter U.S.  capabilities. DSS specifically noted a concern with exploitation or  insertion of malicious code with the use of foreign research facilities and  software development companies located outside the United States  working on commercial projects related to classified or sensitive  programs.\nMultiple requirements and guidance are in place to ensure the protection  of U.S. national security interests. They generally acknowledge the  inherent risk associated with foreign access to classified and   export-controlled information and technology by establishing procedures  to manage such access. For example, the National Industrial Security  Program Operation Manual establishes mandatory procedures for the  safeguarding of classified information that is released to U.S. government  contractors. It generally limits access to U.S. citizens with appropriate  security clearances and establishes eligibility policies for U.S. contractors  determined to have foreign ownership, control, or influence. Further, an  additional DOD directive requires programs containing classified military  information to have controls to prevent the unauthorized release of this  information to foreign recipients. In addition, the International Traffic in  Arms Regulations (ITAR) controls foreign access to defense articles and  services through the establishment of the export license and authorization  process.  U.S. entities, including defense contractors, may apply to the  Department of State for authorization to export controlled information  and technology to qualified foreign recipients, which is determined  through the approval or denial of license requests.\nDOD estimates that it spends about 40 percent of its Research,  Development, Test, and Evaluation budget on software\u2014$21 billion for  fiscal year 2003. Furthermore, DOD and industry experience indicates that  about $8 billion of that amount may be spent on reworking software  because of quality-related issues. Carnegie Mellon University\u2019s Software  Engineering Institute (SEI), recognized for its expertise in developing best  practices for software processes, has developed models and methods that  define and determine organizations\u2019 software process maturity. Better  software development practices are seen as a way to reduce the number of  software defects and therefore improve overall software quality, but alone  the practices cannot be expected to address malicious software  development activities intended to breach security. To underscore the  importance of securing software-related products, the Office of the  Assistant Secretary of Defense (Networks and Information Integration)  and the Federal Aviation Administration Chief Information Office are co- sponsoring, with the involvement of the Department of Energy, the  National Aeronautics and Space Administration, and SEI, a project aimed  at developing ways to provide safety and security assurance extensions to  integrated software maturity models.\n\n\tDOD\u2019s Approach to Software Security Does Not Fully Address Risks from Foreign Suppliers\n\nDOD\u2019s approach to software development and acquisition generally  focuses on improving overall quality, leaving decision making on software  suppliers and security with individual program managers. Despite the risks  associated with foreign access to defense systems, DOD acquisition policy  does not require program managers to identify and manage the amount of  foreign involvement for software development in weapon systems. DOD  information system security requirements focus on operational software  threats, rather than potential threats posed by software developers. While  recent DOD initiatives could increase DOD\u2019s focus on software security,  efforts to date have not translated into greater knowledge for program  managers about foreign software development activities.\n\n\t\tDOD Acquisition Policy Allows Discretion in Managing Foreign Software Suppliers\n\nDOD acquisition policy allows program managers discretion in managing  foreign suppliers used for software development. This policy consists of  general guidance for meeting overall acquisition management principles  and instructs program managers to use systems engineering practices,  when applicable, that focus on cost, schedule, and performance of the  system. For software acquisition, program managers are encouraged to  develop open software systems architectures, use COTS computer system  products, and allow incremental improvements based on reusable  software. All of these practices, while having the potential to benefit cost  and schedule for weapon programs, could result in greater software  vulnerabilities by introducing potentially malicious code from unknown  software development sources. While DOD acquisition policy requires  major weapon programs to maintain information about the software  project\u2019s size, effort, schedule, and quality to track the cost-related  implications of software development, it does not require program  managers to identify and manage suppliers or the potential security risks  from foreign suppliers.\nOn October 30, 2002, DOD issued the Interim Defense Acquisition  Guidebook, which contained the following security considerations to be  used when foreign nationals participate in software development.\nThe change control process shall indicate whether foreign nationals, in  any way, participated in software development, modification, or  remediation.\nForeign nationals employed by contractors or subcontractors to  develop, modify, or remediate software code specifically for DOD shall  each have a security clearance commensurate with the level of the  program in which the software is being used.\nPrimary vendors on DOD contracts may have subcontractors who  employ cleared foreign nationals that work only in a certified or  accredited environment.\nDOD software with coding done in foreign environments or by foreign  nationals shall be reviewed by software quality assurance personnel for  malicious code.\nVendors of COTS software that demonstrate efforts to minimize the  security risks associated with foreign nationals that have developed,  modified, or remediated the COTS software being offered shall be  given preference during the contracting process in product selection or  evaluation.\nSoftware quality assurance personnel shall check software sent to  locations not directly controlled by DOD or its contractors for  malicious code when returned to the DOD contractors\u2019 facilities.\nWhile this guidance acknowledges the additional risks from using foreign  nationals in software development, it is not mandatory and, according to  the Guidebook, is to be used at the discretion of acquisition program  managers as best practices or lessons learned. Even if the suggested  guidance was implemented, the procedures for addressing software  security are generally for use after software suppliers have been selected,  and do not provide the program manager the opportunity to evaluate  whether the risks associated with using those suppliers for software  development are acceptable. Further, several of these procedures would  not apply when contractors use foreign nationals to develop unclassified  portions of software programs. In support of DOD guidance, Air Force,  Army, and Navy regulations implement DOD-wide acquisition policies. As  such, they defer to DOD guidance and do not specifically address software  security issues and related risks that may be inherent with foreign  software development.\n\n\t\tInformation Assurance Focuses on Mitigating Operational Software Security Risks, Leaving Internal Software Development Vulnerable\n\nLaws, requirements, and policies that are intended to provide information  assurance for operational security do not fully address risks during  software development. Under the Federal Information Security  Management Act of 2002, all executive agencies, including DOD, are  required to ensure that information security policies, procedures, and  practices are adequate. In this regard, DOD is required to carry out an  information assurance program that includes the development of essential  information assurances technologies and programs. Generally, this  includes a review of security features and information technology system  safeguards. For example, DOD\u2019s information assurance policy establishes  procedures to maintain the integrity of DOD information systems. It sets  out a process for all DOD information systems to achieve, among other  things, an appropriate level of confidentiality, integrity, knowledge of  threats and vulnerabilities, trustworthiness of users and interconnecting  systems, and cost effectiveness. These procedures are intended to mitigate  system vulnerabilities from operational threats, such as external hacking  and unauthorized access to information systems. However, they do not  apply to internal threats that could affect the integrity of the software,  such as the insertion of malicious code during software development. In  implementing its information assurance policy, DOD also relies on other  governmentwide policies and standards. For example, DOD requires the  evaluation and validation of information assurance software products,  such as firewalls and intrusion detection systems, in accordance with  National Security Telecommunications and Information Systems Security  Policy No. 11. This policy requires the use of one of three nationally  recognized evaluation and validation standards. However, these policies  and standards do not include criteria to specifically identify and manage  the use of foreign software suppliers.\nTo assist systems in meeting information assurance requirements, DOD  has developed the Defense Information Technology Security Certification  and Accreditation Process (DITSCAP) as a standardized evaluation  process. This process includes a review by a designated approving  official who certifies that the security features and information technology  system safeguards will maintain information assurance through the life  cycle of a system. The process results in an agreement between the  program manager, the intended user of the system being certified, and the  approval authorities that defines critical schedule, budget, security,  functionality, and performance issues. The process includes a requirement  for a threat assessment, but does not articulate how this information  should be developed or reported. As such, it does not direct program  managers to consider foreign involvement in software development as a  risk or threat that needs to be addressed for information system security.  In addition, while the process is mandatory, the implementation details  may be tailored and, in some cases, integrated with other acquisition  activities and documentation. According to DOD Software Assurance  Program officials, the DITSCAP approving authority is not expected to  evaluate whether the risks have been identified appropriately, only that  the process will mitigate the risks identified. If the program manager has  not identified risks from foreign suppliers, the process cannot be expected  to mitigate them.\nDOD also requires weapon programs to protect certain types of  information during transfer of technology to foreign entities. For example,  documents such as the Technology Assessment\/Control Plan and the  Program Protection Plan address the risks associated with the potential  release of information to foreign governments through cooperative  programs and foreign military sales, but the documents do not provide  information on specific suppliers who will be performing work, such as  software developers. The Technology Assessment\/Control Plan establishes  planning requirements for the potential release of sensitive information to  foreign entities involved in cooperative programs or purchasing military  equipment. It evaluates the risk of releasing critical military capability or  sensitive information and technology against the benefit of the sale to the  United States. The plan also outlines the security requirements to prevent  compromise. The purpose of the Program Protection Plan is to identify  measures to protect Critical Program Information from hostile collection  efforts and unauthorized disclosure during the acquisition process.\n\n\t\tInitiatives to Address Software Concerns Have Yet to be Implemented\n\nWhile DOD has taken steps to strengthen software acquisition practices, it  has yet to implement practices to better manage software development  security risks in weapon programs. Currently, each of the military services  is developing plans for improving software acquisition. The improvement  plans are each at varying stages of development and include practices  such as pilot programs for providing information on software metrics,  additional training programs, and teaming arrangements with SEI for  improved overall software management. DOD has also begun policy-level  initiatives focused on better software management and on identifying and  specifying software security processes and technologies to protect  systems and network capabilities from various internal and external  threats. Specific initiatives include the following:    The Tri-Service Assessment Initiative began in 1999 to strengthen  software acquisition and development as well as address repeated  performance shortfalls attributed to software. Task forces conducted  detailed assessments of software-intensive programs to identity  potential improvements in overall software acquisition processes.\nA source selection criteria working group is tasked with clarifying the  policy on source selection criteria for software intensive systems and  the application of software product maturity measures. Another  working group is tasked with developing a proposal for a centralized  clearinghouse of software best practices, but DOD has not approved  any proposals.\nIn October 2003, the Office of the Assistant Secretary of Defense  (Networks and Information Integration) established the position of  Deputy Director for Software Assurance that is, as part of its function,  to coordinate software security efforts with other existing initiatives  concerning software protection, antitamper technologies, and software  producibility. In addition, since its inception, the office has initiated  working groups intended to focus on mitigating software risks and  improving software security. To date, while these initiatives have  presented top level findings and recommendations within DOD and in  public forums, they have not externally published reports or obtained  funding for implementing the recommendations.\nWhile these plans and initiatives may help to increase DOD\u2019s focus on  software security and may lead to the development and identification of  several potential software security best practices, DOD software  assurance officials acknowledge that significant effort remains to  adequately mitigate software risks to weapon systems.\n\n\tProgram Officials Generally Did Not Manage Risks from Foreign-Developed Software\n\nWhile DOD initiatives have begun to recognize potential risks from foreign  software suppliers, this is not always the case within the weapon programs  where software is developed or acquired. Program officials for most of the  systems we reviewed did not make foreign involvement in software  development a specific element of their risk identification and mitigation  efforts. As a result, program officials\u2019 knowledge of the foreign-developed  software included in their weapon systems varied. In addition, risk  mitigation efforts emphasized program level risks, such as meeting  program cost and schedule goals, instead of software security risks.  Further, program managers often delegated risk mitigation and source  selection to their prime contractors who tended to be concerned with  software functionality and quality assurance, rather than specifically  addressing software development risks associated with foreign suppliers.\n\n\t\tProgram Office Knowledge of Software Suppliers Varied Across Weapon Systems\n\nKnowledge of the extent of foreign involvement in software development  varied greatly for the 16 weapon system programs we reviewed. Overall,  the knowledge program managers had was based on the function of the  software being developed, the manner in which it was acquired, and the  specific handling requirements. While none of these programs could fully  identify all foreign-developed software for their systems, six program  offices had significant knowledge of foreign software developers.\nKnowledge of software developed for weapon systems can vary based on  the different functions needed to meet mission requirements. Program  offices were most knowledgeable about the foreign-developed software  for the onboard portions of their programs, with 4 program offices able to  identify all the software produced by foreign suppliers, and 11 program  offices able to identify at least some of the software produced by foreign  suppliers. Onboard software is that which actually runs the weapon  system, even if that software is not located on the main component  (aircraft, missile, satellite, etc). For example, onboard software for a  missile system could include software located on a remote platform used  to guide the missile toward its target. Because onboard software is the  most critical for meeting mission requirements and other program goals,  program managers placed greater emphasis on the quality, functionality,  and usually, the security of this software. In 9 of the systems we reviewed,  either prime contractors or major subcontractors conducted software  development for the onboard systems. However, in meeting with prime  contractors, we found that while this increased their knowledge about  foreign software suppliers, the information was not always shared with  government program managers, and therefore was not available for them  to use to make risk management decisions to address software security.\nProgram offices and contractors reported very little knowledge about the  level of foreign involvement for offboard software. This software,  sometimes referred to as ground based, interacts with the onboard system  to provide updated information in support of operational activity. For  example, one program uses standard mission planning software that  interacts with the onboard flight software to provide information used for  navigation and targeting. In addition, offboard software is often used to  check for errors or malicious code and to produce, maintain, or verify  onboard software. Program officials from 10 of the programs we reviewed  indicated they had very little knowledge of the developers for their  offboard software, including those portions that may have been developed  by foreign suppliers.\nAs DOD is attempting to find new ways of reducing the time and money it  takes to develop software code, the increased use of COTS software may  introduce additional risks and further limit visibility into the existence of  foreign-developed software. Officials for 13 of the programs reviewed had  almost no insight into the use of foreign developers for any COTS software  placed on their systems. Even when procured directly from a known  supplier, program officials could not guarantee whether additional  subcontractors were used for software development. According to DOD  and program officials, visibility into COTS software is limited by the  willingness of the producers of that software to share information on how  the code was developed. For one program we reviewed, a substantial  portion of the system was a commercial acquisition. As such, the software  product was not originally developed for DOD and therefore the program  office had no knowledge of software development suppliers because it did  not purchase the rights to the software. Further, officials from five  programs told us that the cost of identifying and managing foreign  software suppliers, especially for COTS software, could be substantial.  Officials from two programs said that even if available, this information  would not offer significant software security improvements in light of the  cost required for identifying foreign suppliers of COTS software. DOD and  program officials have indicated that commercial software producers  often demand a cost premium to share software and source code  information that would be required to determine this information.\nSimilar to COTS, software from other applications and embedded software  is often accepted without full knowledge of the source of development.  Legacy, or reused code, is most prevalent when software programs are  updated into newer versions or when software just requires editing and  enhancing the older code rather than developing new code. When asked to  produce software similar to what they have developed previously,  manufacturers can use all or part of the legacy code as a basis for  developing or modifying the new code. Ten of the programs reviewed  accepted legacy software without fully identifying the sources of  development. Software is also developed as part of the hardware  components it is tasked with managing. This embedded software is used to  control other electronic hardware products, either onboard or offboard  the weapon system, and is often purchased from lower tier  subcontractors. While we did not specifically ask for information on  foreign suppliers responsible for embedded software, officials for two of  the programs reviewed stated that this software tends to include more  reused and COTS software. These officials indicated that this could limit  the visibility of the software suppliers because acceptance testing was  usually only performed to prove functionality and the software was not  further evaluated to determine the actual source that developed the  software code. Further, DOD and prime contractor officials told us that it  is sometimes difficult to determine whether the actual hardware  subcontractor developed embedded software, or if it was done by a  software developer hired by that subcontractor, thus further reducing  visibility of software suppliers.\nWhile most of the program offices we reviewed did not specifically track  foreign software suppliers for security purposes, almost all of the  programs had opportunities to gain such knowledge through practices  designed to collect other information. One way program offices obtained  information on software suppliers was through requirements in their  prime contracts. Many of the program offices in our review were able to  obtain some information on software suppliers, either directly or  indirectly, because it was contractually required. In some cases, this  information was available early in the proposal process when bidders  were required to identify suppliers they intended to use in the  development and manufacturing phases, including potential foreign  suppliers and components they were expected to provide. For example,  officials from one program office said they were effective in determining  software suppliers at the prime and subcontractor levels because they  were intimately involved with source selection and contract negotiation.  However, only five of the prime contractors reported that they were  required to notify the program office concerning their decisions on  software subcontracting. Once a winning bidder is selected, more  information is often available to the program manager. For example,  contracts for 12 programs contained a requirement that the contractors  provide a software development plan that included information on some  of their planned suppliers, development risks, and action plans for the  contract period. In at least two cases, program software managers became  aware of foreign software suppliers while collecting information requested  for this review.\nProgram officials also said that some knowledge of foreign software  development was available as a result of procedures in place because their  programs contained classified or technical program information. For  example, of the six programs that had significant knowledge of foreign  software suppliers, four reported they had very few foreign suppliers  because handling restrictions for classified information precluded the  involvement of such suppliers, not because they were specifically  managing software development risks. Similarly, contractors for 12  programs had information available from the export license process. While  limited information on the supplier and location of foreign entities  performing software work was available from export licenses, contractors  request approval directly from the State Department, which may not refer  the application to DOD or the individual program offices. Consequently,  program managers likely did not have this information available for use in  software risk management decisions.\n\n\t\tProgram Risk Mitigation Efforts Are Focused on Meeting Performance Requirements and Are Often Delegated to Contractors\n\nThe relative importance of software security in risk mitigation efforts also  varied greatly across the systems we reviewed. For 11 of the 16 systems,  program managers have not identified foreign supplier involvement in  software development as a significant risk to the security of their weapon  systems. Instead, program managers concerned with completing their  programs on budget and on schedule generally focused risk mitigation  efforts on program level risks associated with the performance of system  components, not on internal software development security risks. When  specifically identified, software risks are usually defined by their impact  when integrated with these system level risks and do not specifically focus  on foreign suppliers used in software development. Software generally  only becomes a concern for program managers as it begins to affect the  cost or schedule of the program. For example, one of the programs we  reviewed lists \u201csoftware executibility\u201d as a program level risk. The risk is  based on potential cost and schedule overruns should the software not  function as needed to allow related system components to meet mission  requirements, rather than potential vulnerabilities from foreign suppliers.  For these programs, security risks have generally been implemented to  prevent unauthorized access to classified or technical program  information, provide security at contractor facilities, and limit access to  export-controlled technical information in accordance with ITAR license  requirements, rather than specifically for software security. In addition,   12 of the programs used the Technology Assessment\/Control Plan and the  Program Protection Plan to ensure that risks associated with foreign  participation on the program were addressed.\nPrograms that identified software security as a risk focused on limiting  foreign access to software development facilities and denying foreign  access to software code. In addition, these programs employed various  measures to address software security consistent with information  assurance requirements. These measures included the use of password  protection, firewalls, or encrypted software, but they did not always focus  on risks from foreign involvement in software development. Further,   11 programs mentioned using DITSCAP as a means for addressing general  software security. However, interpretation and implementation of this  requirement can vary across programs. For example, according to officials  from two programs, the current DITSCAP requirements do not govern  contractors in cases where the requirements were not included as part of  the original contract. Representatives from two of the programs we  reviewed noted that guidance for implementing DITSCAP was confusing  and that they were uncertain whether the process applied to their  programs. Program officials responsible for software development on one  other program indicated that they had no knowledge of this process. In  cases where DITSCAP is being implemented, the certification and  accreditation process requirements are determined based on the program  manager\u2019s assessment of risks. If the program manager has not identified  foreign software development as a program risk or threat, it will not be  addressed by the process.\nBecause security and software risks are generally defined in terms of  programmatic elements, program managers often delegate the  identification and mitigation responsibility to the contractors who are  developing the system and are therefore more knowledgeable about what  functions are needed from the software. Officials from eight of the  programs we reviewed said they expect contractors to ensure quality and  security on their systems because their software development processes  are more mature than those required by DOD, and that such practices  could indirectly address foreign software risks. For example, contractors  for these eight programs were presumed to be addressing software  security because they were employing practices such as peer review  and  software testing consistent with SEI development models. Peer review is  recognized as a best practice for improving software development and is  generally performed to improve the quality and functionality of software  code. In terms of security, peer review can reduce the likelihood that an  individual programmer can insert malicious or other harmful code.  Through dedicated software testing, teams assess the quality of the  software to uncover gaps and make it as defect-free as possible. However,  on eight of the programs we reviewed, decisions on the amount of  software code to test were made based upon the risks and benefits to the  functionality of the system to be tested, not on the benefits to security.  DOD and SEI officials said that the amount of effort needed to  comprehensively test every line of code to ensure complete security could  be physically impossible and would require immense resources.\nBecause contractors for the weapon systems we reviewed had not  received specific direction from program managers to address risks from  foreign suppliers in software development, they tended to focus on  development efforts aimed at meeting stated requirements, such as  software quality and functionality. In fact, officials from the 15 contractors  that responded to our review indicated this was the focus of their software  development activities. While SEI representatives told us that rigorous  software development could help improve the quality and functionality of  software by decreasing the number of errors in software code, they also  said that alone their models should never be expected to completely  address software security risks. Officials from one contractor we  interviewed that employs practices consistent with SEI\u2019s highest level  indicated that unless software security is a specific contract requirement,  they would not modify their practices to address associated risks. SEI  experts confirmed that the models they have developed do not include a  security element and are not intended to certify that improved processes  will address risks related to software security. In fact, it is possible that  using software development practices to increase efficiency could lead to  an increase in security vulnerability by encouraging the use of legacy and  COTS software, unless risks are managed appropriately.\nFor several programs we reviewed, contractors made risk identification  and mitigation decisions for business reasons and to avoid additional  resource burdens (i.e., cost and access) associated with incorporating  foreign suppliers necessary for software development, as opposed to being  done for security reasons. For example, prime contractors for two  programs did not use foreign subcontractors for economic reasons;  namely the company wanted to maintain the software expertise within the  company. While restricting foreign access solely for economic reasons  could result in a decrease in software development security risks, it might  also preclude foreign suppliers that could offer new capability or lower  costs to the government. For example, contractor officials for three  weapon systems told us that they restrict foreign involvement in software  development because it costs too much to develop and monitor security  procedures to separate foreign nationals from classified and sensitive  information, not because they feel their involvement is a risk to the  program. In yet another case, the contractor did not want to create  dedicated partitions, such as firewalls, required to prevent employees from  a foreign subcontractor from accessing unauthorized information in the  system design database and instead contracted with a domestic supplier.  Finally, software managers for one program told us that when foreign  nationals modify or update software they had developed, it was necessary  to isolate test facilities to meet security requirements, which resulted in  increased cost and delays to other test activities. The officials said that, in  similar cases, contracting decisions might sometimes be made in favor of  U.S. suppliers to avoid costs and delays.\n\n\tConclusions\n\nBecause software is increasingly responsible for advances in weapon  system capabilities, it is essential that DOD and program managers take  appropriate steps to identify and manage software-related risks. While  DOD has made improvements to system engineering and software  development practices that can reduce the likelihood of defects in  software code, current methods of testing focus on the quality of software  and related functionality and failures, which will not necessarily uncover  malicious intent. As the amount of software on weapon systems increases,  it becomes more difficult and costly to test every line of code. Further,  DOD cannot afford to monitor all worldwide software development  facilities or provide clearances for all potential software developers,  especially for COTS software. Given the global nature of the software  industry, which offers benefits to software cost and functionality needed  by weapon systems, DOD also cannot afford to exclude all foreign  suppliers from its programs. While program managers should be allowed  discretion in managing their acquisitions, they are responsible for knowing  more about who is developing software and where and for working with  DOD\u2019s software assurance resources, and other organizations as  necessary, so that risks can be identified and assessed accordingly. Unless  this is done early in the software acquisition process, it cannot be included  as part of software source selection and risk mitigation decisions and  could result in increased cost and less effective security measures if risks  have to be addressed later in the acquisition process.\n\n\tRecommendations for Executive Action\n\nWe have previously made recommendations to DOD to adopt more  effective software development practices and to increase oversight of  software intensive systems to improve acquisition outcomes. While DOD  attempts to better its software acquisition policies and implement new  initiatives, it must take steps to ensure that security is an integral element  in decision making and that program managers mitigate risks accordingly.  We recommend that the Secretary of Defense take the following three  actions to address risks attributable to software vulnerabilities and  threats:    Require program managers, working with software assurance experts,  acquisition personnel, and other organizations as necessary, to  specifically define software security requirements, including those for  identifying and managing software suppliers. These requirements  should then be communicated as part of the prime development  contract, to be used as part of the criteria to select software suppliers.\nBased on defined software security requirements, require program  managers to collect and maintain information on software suppliers,  including software from foreign suppliers. This information should be  evaluated periodically to assess changes in the status of suppliers and  adjustments to program security requirements.\nRequire the Office of the Assistant Secretary of Defense for Networks  and Information Integration and the Office of the Undersecretary of  Defense for Acquisition Technology and Logistics, as part of their role  to review, oversee, and formulate security and acquisition practices, to  work with other organizations as necessary to ensure that weapon  program risk assessments include specific attention to software  development risks and threats, including those from foreign suppliers.  For example, certification and accreditation processes, such as  DITSCAP, should include verification that software development  practices contain adequate security measures to address identified  risks and threats.\n\n\tAgency Comments and Our Evaluation\n\nIn written comments on a draft of this report, DOD agreed with our  findings that malicious code is a threat that is not adequately addressed in  current acquisition policies and security procedures and stated that the  department is working to strengthen software related risk management  activities. DOD also noted the need to enhance its risk management  processes to factor in vulnerabilities analysis of proposed software  products, security risks of suppliers\u2019 processes, and counterintelligence  threat information. DOD partially concurred with our three  recommendations based on the concern that they place too much  responsibility for risk mitigation on program managers. Although the draft  report recognized that software assurance experts from the Office of the  Assistant Secretary of Defense for Networks and Information Integration  were necessary to support program managers in risk mitigation efforts, we  broadened two of our recommendations to include acquisition and other  organizations to address this concern. DOD also provided separate  technical comments that we incorporated into the report as appropriate.  DOD\u2019s letter is reprinted in appendix II.\nDOD agreed that software security risks should be defined for DOD  weapon programs, but noted that program managers should not be solely  responsible for defining security requirements, including those for  identifying and managing software suppliers. Instead, DOD stated that  program managers should be able to rely on external resources to gain  threat information on suppliers and that formulation and oversight of  security practices should be a collaborative function among several offices  within DOD. While we continue to believe that program managers and  software assurance experts play a critical role in defining software  security requirements, we do see the value of involving other DOD  resources to provide coordinated evaluation of broader security concerns.  As such, we modified our recommendation to reflect the inclusion of  acquisition personnel and other organizations as necessary.\nDOD also agreed that information on software suppliers, including foreign  suppliers, should be collected and that this information should be  periodically assessed to determine if adjustments to security requirements  are needed. However, DOD indicated that centralized information on  software suppliers is necessary because the cost of collecting and  maintaining this information would require resources and assets beyond  those of individual program managers. DOD indicated its intent to develop  a database to identify, track, and maintain information on security risks  from specific software suppliers, which could be used by program  managers across various weapon and other programs for developing  acquisition strategies, plans, requests for proposals, and contracts. While  we agree that such a database would be helpful to program managers in  collecting and maintaining information on software suppliers, we made no  change to the recommendation because the program managers should be  responsible for collecting this information until such a database is  developed and for directing the collection of information from the  database once it is completed.\nFinally, DOD agreed that it should ensure that program risk assessments  include specific attention to software development risks, including those  from foreign suppliers. However, DOD suggested that this might be best  accomplished through collaboration between the Office of the Assistant  Secretary of Defense for Networks and Information Integration, the Office  of the Undersecretary of Defense for Acquisition Technology and  Logistics, and the Office of the Undersecretary of Defense for Intelligence.  This seemed reasonable, and we adjusted our recommendation to reflect  the inclusion of other organizations. Further, DOD agreed certification  activities such as DITSCAP can assist in addressing insider threats in  software development, but that additional guidance is necessary to ensure  that software security risks are addressed during system design and  development or when selecting software sources.\nWe are sending copies of this report to interested congressional  committees; the Secretary of Defense; the Secretaries of the Air Force,  Army, and Navy; the Commandant of the Marine Corps; and the Director,  Office of Management and Budget. We will also make copies available to  others upon request. In addition, this report will be available at no charge  on the GAO Web site at http:\/\/www.gao.gov.\nIf you or your staff have any questions about this report, please contact me  at (202) 512- 4841. Staff acknowledgments are listed in appendix III.\n\nAppendix I: Scope and Methodology\n\nTo determine how the Department of Defense (DOD) measures the extent  of foreign involvement in software development in weapon systems and  how risks associated with using foreign suppliers for software  development are measured and mitigated, we reviewed relevant DOD  guidance, policies, regulations, and procedures. In addition, we spoke with  DOD officials from the Office of the Under Secretary of Defense  (Acquisition Technology & Logistics), the National Security Agency, the  Defense Information Systems Agency, the Defense Advanced Research  Projects Agency, the Office of the Assistant Secretary of Defense  (Networks and Information Integration), the Department of the Army, the  Department of the Air Force, and the Department of the Navy. We met  with software experts at the Software Engineering Institute of Carnegie  Mellon University to obtain information on software development  practices and risk identification and mitigation techniques used by the  software industry. Additionally, we met with the Association of Old Crows  (The Electronic Warfare and Information Operations Association) whose  membership includes individuals and companies involved in the design  and development of software used in DOD weapon programs.\nTo document and analyze how programs specifically measure and manage  their use of foreign-developed software, we identified 16 DOD weapon  systems and solicited information from each program office and prime  contractor. We selected these weapon systems based on recommendations  from DOD officials and on our internal knowledge of the systems. While  our selection of programs cannot be generalized to the population of all  DOD systems, the systems selected varied by product type, represented  each of the military services, and represented a range of DOD contractors.  The systems reviewed were the Abrams System Enhancement Package,  AH-64D Apache, Bradley Upgrade, C-130 Avionics Modernization Program,  C-130 J Hercules, C-17 Globe Master, Comanche Reconnaissance Attack  Helicopter (RAH-66), F\/A-18 Super Hornet, F\/A-22 Raptor, Future Combat  Systems, Global Hawk Unmanned Aerial Vehicle, Joint Helmet Mounted  Cueing System, Joint Strike Fighter, Patriot Missile System, Tactical  Tomahawk Missile, and Wideband Gapfiller Satellites.\nUsing their respective command liaisons to initially contact each office,  we distributed a structured set of questions to solicit information from  software managers designated by individual program managers to respond  to our inquiry. To further determine how programs manage and mitigate  their use of foreign-developed software, we then tailored follow-up  questions to solicit information and documentation in areas such as  program risk identification and management practices, security policies  and procedures, and software contracting management practices. To learn  more about program practices for managing and mitigating the use of  foreign-developed software, we solicited information and documentation  from the prime contractor for each system using contacts provided by  program office officials. Information requested from contractors included  government guidance for software practices, company software  development and security practices, software risk mitigation efforts,  software testing procedures, and software sourcing decision processes.  We received information from 15 of the prime contractors through written  responses, on-site interviews, and other means such as telephone  conversations. We also obtained several security and software related  documents such as the Program Protection Plan, the Software  Development Plan, and other program specific documents, such as the  contract, for the systems we reviewed.\n\nAppendix II: Comments from the Department of Defense\n\nAppendix III: Staff Acknowledgments\n\n\tAcknowledgments\n\nJohn Neumann, Brian Mullins, Delores Cohen, Shelby S. Oakley,  Christopher Miller, Gary Middleton, and Marie Ahearn made key  contributions to this report.","output":"Why GAO Did This Study\n\nThe Department of Defense (DOD) is increasingly reliant on software and information systems for its weapon capabilities, and DOD prime contractors are subcontracting more of their software development. The increased reliance on software and a greater number of suppliers results in more opportunities to exploit vulnerabilities in defense software. In addition, DOD has reported that countries hostile to the United States are focusing resources on information warfare strategies. Therefore, software security, including the need for protection of software code from malicious activity, is an area of concern for many DOD programs. GAO was asked to examine DOD's efforts to (1) identify software development suppliers and (2) manage risks related to foreign involvement in software development on weapon systems.\n\nWhat GAO Found\n\nDOD acquisition and software security policies do not fully address the risk of using foreign suppliers to develop weapon system software. The current acquisition guidance allows program officials discretion in managing foreign involvement in software development, without requiring them to identify and mitigate such risks. Moreover, other policies intended to mitigate information system vulnerabilities focus mostly on operational software security threats, such as external hacking and unauthorized access to information systems, but not on insider threats, such as the insertion of malicious code by software developers. Recent DOD initiatives may provide greater focus on these risks, but to date have not been adopted as practice within DOD. While DOD has begun to recognize potential risks from foreign software content, this is not always the case within the weapon programs where software is developed or acquired. Program officials for the systems in this review did not make foreign involvement in software development a specific element of their risk identification and mitigation efforts. As a result, program officials' knowledge of the foreign developed software included in their weapon systems varied. In addition, risk mitigation efforts emphasized program level risks, such as meeting program cost and schedule goals, instead of software security risks. Further, program officials often delegated risk mitigation and source selection to contractors who are primarily concerned with software functionality and quality assurance, rather than specifically addressing software security for development risks associated with foreign suppliers. Unless program officials provide specific guidance, contractors may favor business considerations over potential software development security risks associated with using foreign suppliers. As the amount of software on weapon systems increases, it becomes more difficult and costly to test every line of code. Further, DOD cannot afford to monitor all worldwide software development facilities or provide clearances for all potential software developers. Therefore, the program manager must know more about who is developing software and where early in the software acquisition process, so that it can be included as part of software source selection and risk mitigation decisions."}
{"id":"gao_HEHS-99-56","pid":"gao_HEHS-99-56_0","input":"\tBackground\n\nMany individuals suffering from advanced chronic obstructive pulmonary disease or other respiratory and cardiac conditions are unable to meet their bodies\u2019 oxygen needs through normal breathing. Supplemental oxygen has been shown to assist many of these patients and is considered a life-sustaining therapy. Physicians prescribe the volume of supplemental oxygen required in liters per minute, or liter flow. Medicare covers supplies and equipment necessary to provide supplemental oxygen if the beneficiary has (1) an appropriate diagnosis, such as chronic obstructive pulmonary disease; (2) reduced levels of oxygen in the blood, as documented with clinical tests; and (3) a physician\u2019s certificate of medical necessity that documents that supplemental oxygen is required.\nThere are three methods, or modalities, for the delivery of supplemental oxygen: oxygen concentrators, which are electrically operated machines about the size of a dehumidifier that extract oxygen from room air; liquid oxygen systems, which consist of both large stationary reservoirs and portable units; and compressed gas systems, which use tanks of various sizes, from large stationary cylinders to small portable cylinders.\nFor most patients, each of the three modalities is equally effective for use as a stationary unit, and clinicians indicated that concentrators can meet the stationary oxygen needs of most patients. Oxygen concentrators account for about 89 percent of the stationary systems used by Medicare patients. Liquid oxygen systems account for about 11 percent of the stationary systems used by Medicare patients. Liquid oxygen systems are preferred by many pulmonologists and respiratory therapists for the less than 2 percent of patients who need a high liter flow\u2014defined by Medicare as 4 or more liters of oxygen per minute. Liquid systems are also sometimes preferred by highly mobile patients because patients can refill lightweight portable liquid units directly from their home stationary reservoirs. Liquid oxygen is usually the most expensive modality for many reasons, including the cost of equipment and the need to use specially equipped delivery trucks, adhere to various regulatory requirements, and replenish a patient\u2019s supply on a regular basis. Compressed gas accounts for less than 1 percent of the stationary systems used by Medicare patients.\nIn addition to a stationary unit for use in the home, about 79 percent of Medicare home oxygen patients have portable units that allow them to perform activities away from their stationary unit and outside the home. The most common portable unit is a compressed gas E tank set on a small cart that can be pulled by the user. Pulmonologists and respiratory therapists advise that patients using supplemental oxygen get as much exercise as possible and believe that lightweight portable equipment can facilitate this activity. Such equipment options for active individuals include portable liquid oxygen units and lightweight gas cylinders, which can be carried in a backpack or shoulder bag.\nA recent technological improvement in the provision of oxygen is the use of conserving devices, which are more efficient in delivering oxygen and therefore maximize the time a lightweight gas cylinder can last. Without a conserving device, very small tanks only last between 1 and 2 hours at a flow rate of 2 liters per minute, making them impracticable for all but short trips away from home. However, not all patients who need lightweight equipment can use conserving devices. Pulmonary clinicians recommend that all patients be tested to ensure they are proper candidates for this technology, since some patients cannot maintain adequate blood oxygen levels when using conserving devices.\nIn 1997, the monthly fee schedule allowance for a stationary oxygen system was about $300, and in 1998 the allowance was reduced to about $225. Medicare pays 80 percent of the allowance, and the patient is responsible for the remaining 20 percent. The Medicare oxygen allowance covers use of the equipment; all refills of gas or liquid oxygen; supplies such as tubing; and services such as equipment delivery and setup, training for patients and caregivers, periodic maintenance, and repairs. The Medicare monthly allowance for a portable unit was about $48 in 1997 and $36 in 1998. Medicare does not pay an additional allowance for a conserving device, but these devices can lower suppliers\u2019 costs by reducing the frequency of deliveries to their patients.\nRegardless of the type of oxygen system supplied to a patient, Medicare pays a fixed monthly rate. This type of payment system is intended to give suppliers a financial incentive to lower their costs because they can keep the difference between their Medicare payments and their costs. Suppliers can reduce their costs in various ways, including streamlining operations or utilizing new technology to become more efficient, switching patients to less expensive modalities, and reducing the number or type of patient support services. Some of these approaches can reduce costs while maintaining the quality and adequacy of services. Others, however, could potentially compromise the effectiveness of home oxygen therapy for some Medicare beneficiaries.\nMost suppliers accept Medicare\u2019s allowance as full payment for home oxygen equipment and file claims directly with the Medicare program through a process known as \u201cassignment.\u201d Suppliers do not have to accept assignment, however, and if they do not, there is no limit to the amount they can charge.\nThe businesses that supply home oxygen to Medicare beneficiaries are diverse, varying in size from small companies run by one or two respiratory therapists to large publicly traded corporations with branches throughout the country. Home oxygen suppliers also include hospital affiliates, franchises, and nonprofit corporations. Some suppliers specialize in home oxygen and other respiratory services, others provide various types of medical equipment and services such as home infusion, and still others are part of a full-service pharmacy. Medicare is the single largest payer for home oxygen for most suppliers we met with, except those who specialize in VA and other large-volume contracts. Some states require that home oxygen suppliers be licensed and have respiratory therapists on staff, but others do not. Many suppliers are accredited by the Joint Commission for Accreditation of Healthcare Organizations, but this accreditation is not required by the Medicare program.\n\n\tAccess to Home Oxygen Equipment Is Substantially Unchanged\n\nPreliminary information indicates that access to home oxygen equipment remains largely unchanged, despite the 25-percent Medicare payment reduction that took effect in January 1998. Medicare claims data revealed little change in use patterns during the first 6 months after the January 1998 payment reduction, and virtually all oxygen suppliers continue to accept assignment for home oxygen. Some beneficiaries are expensive or difficult to serve because they live in rural areas served by few providers, require lightweight portable equipment, or require high-liter-flow liquid oxygen systems. These beneficiaries are, therefore, vulnerable to cutbacks by suppliers. Nevertheless, hospital discharge planners we interviewed said they can still arrange appropriate home oxygen equipment for most patients. In addition, we were told that, in general, the limitations on the availability of certain types of equipment that exist now were present before the payment reductions. Also, although there has been about a 6.5-percent decrease in the number of Medicare home oxygen suppliers, most Medicare patients can still choose from among competing firms.\n\n\t\tMedicare Home Oxygen Use Has Changed Little\n\nThe full range of oxygen modalities continues to be available to Medicare beneficiaries, according to the Medicare claims reports, although oxygen concentrators predominate as the system most commonly provided for home oxygen. As the technology of concentrators continues to improve, oxygen concentrators have been slowly replacing stationary liquid systems. This trend is observed in the aggregate data, which show that claims for liquid stationary systems declined by approximately 12 percent between the first half of 1997 and the first half of 1998. During the same period, the use of portable liquid oxygen systems declined by 11 percent, even though the use of portable systems rose overall. (See table 1.)\nAnother indication that home oxygen access has not been impaired is that the oxygen supplier assignment rates for all modalities have remained relatively unchanged since the 1998 payment reduction. In fact, the claims data show that assignment rates for home oxygen increased slightly between the first half of 1997 and the first half of 1998, leading us to conclude that the suppliers are willing to furnish home oxygen equipment and services even at the reduced rates.\nAlthough claims data for the first half of 1998 are not final, our claims data analysis from prior periods indicates that use rates established from preliminary data closely approximate the final results. However, subtle shifts in the kinds of oxygen equipment provided are not evident in aggregate claims data. For example, claims data do not identify the types of portable tanks provided to beneficiaries. Therefore, it is not possible to determine from the claims data how many beneficiaries are receiving lightweight portable tanks and how many are using the cart-mounted E tanks. Similarly, claims data do not indicate the number of refills provided to patients each month, so we could not determine if the frequency of tank refills has changed since the rate reduction.\n\n\t\tHome Oxygen Equipment Options Have Not Been Affected in Most Cases\n\nOverall, we found no evidence that home oxygen patients who are more expensive or difficult to serve\u2014such as those who live in rural areas, need lightweight portable equipment, or require high-liter-flow systems\u2014were adversely affected by the payment cuts. In response to the substantial payment reductions, suppliers could have been expected to try to reduce costs, making these higher-cost patients more vulnerable to treatment changes. Although we looked for indications that suppliers had refused to serve these special needs patients, limited the types of equipment made available, or reduced service levels, our interviews with suppliers, discharge planners, patient advocates, and physicians indicated that most Medicare beneficiaries continued to have access to appropriate equipment options.\nThe only indication of access problems that we found occurred in Anchorage, Alaska, where pulmonary clinicians stated that liquid systems are no longer available on assignment to their Medicare patients.\n\n\t\t\tAccess in Rural Areas\n\nBeneficiaries in rural areas have always faced restrictions on home oxygen options, but their access, according to hospital discharge planners we interviewed, appears unchanged. These beneficiaries are more expensive to serve because they are farther from suppliers\u2019 facilities and distances between patients are greater. Suppliers who serve patients in remote areas informed us that it is difficult to support the full range of equipment options because of such factors as vast distances, poor road conditions, and unpredictable weather but that this situation existed before the 1998 payment reductions. Several suppliers told us that they generally cannot provide liquid oxygen to people who live 40 to 60 miles from their facility. However, hospital discharge planners in New Mexico and South Dakota told us that the Medicare payment reduction has not affected their ability to arrange appropriate home oxygen services for their patients, even those who live in the most remote parts of those states.\nAnother challenge in providing adequate options in rural areas is the number of suppliers and the degree of competition for patients. A patient who lives in an isolated South Dakota town may have only one or two suppliers to choose from. Thus, the need to maintain market share may not motivate suppliers in these areas to provide certain costlier equipment and services. In contrast, a representative of a major regional supplier in the Washington, D.C., area said that it had begun to evaluate patients more carefully before providing them liquid systems. Nevertheless, the supplier intended to keep liquid oxygen as an option to maintain positive relationships with referral sources, who can choose from numerous suppliers. Discharge planners in a hospital on Cape Cod, Massachusetts, told us they have not had any problems finding suppliers to take Medicare assignment on liquid oxygen for their patients because Boston and Providence are nearby, and there are many suppliers in the area. In many rural areas, the choice of home oxygen supplier is much more limited.\n\n\t\t\tAccess to Lightweight Portable Equipment\n\nAlthough the equipment and refill needs of highly mobile patients are more expensive to meet than those of relatively inactive patients, most discharge planners, pulmonary rehabilitation professionals, and suppliers we interviewed believe these patients\u2019 needs are increasingly being met with lightweight, portable gas tanks with conserving devices. This relatively new technology can be less expensive than liquid units and, for patients who can tolerate an oxygen conserving device, still provide greater mobility than heavier gas tanks mounted on carts.\n\n\t\t\tAccess to High-Liter-Flow Equipment\n\nWe found no indication that patients who require a high-liter-flow system have less access to the proper equipment now than before the payment reduction, except in Alaska. High-liter-flow patients are more expensive to serve than other patients because they require more frequent deliveries of gas or liquid oxygen. The Medicare payment system recognizes that suppliers\u2019 costs are higher for these patients and allows a 50-percent increase in the payment for a stationary unit for patients who require over 4 liters of oxygen per minute. Medicare does not reimburse suppliers separately for the portable unit if the high-liter-flow adjustment is paid, but many of the suppliers we met with agreed that the adjustment adequately compensated them for their added costs. Fewer than 2 percent of paid home oxygen claims were for high-liter-flow patients, which was consistent with information we received from clinicians.\nThough advances in technology have made oxygen concentrators more effective at delivering flow rates of up to 6 liters per minute, several pulmonologists and respiratory therapists we met with said that liquid oxygen is the preferred option for these patients. Even before the Medicare payment reductions, many suppliers were not providing liquid oxygen for high-liter-flow patients who lived far from their facilities. For these patients, suppliers sometimes provide a high-liter-flow concentrator, link two concentrators together to increase the overall liter flow, or supply compressed gas. The hospital discharge planners and suppliers we talked with said they were able to make arrangements with suppliers for all patients with high-liter-flow needs.\nIn contrast to our findings looking at the country as a whole, we did identify concerns about lack of access to liquid oxygen systems in the Anchorage, Alaska, area. According to the Pulmonary Education and Research Foundation, letters from Medicare beneficiaries, and interviews with a pulmonologist and respiratory therapists in Anchorage, since the Medicare payment reduction, no home oxygen suppliers there have been willing to accept Medicare assignment for liquid oxygen. While liquid oxygen systems had not generally been available in remote areas of Alaska, as in the remote parts of other states, at least one supplier was providing home liquid oxygen systems to patients in the Anchorage area on assignment before the payment reduction. After the payment reduction, the supplier replaced its liquid systems with concentrators for stationary units and either E tanks or lightweight gas tanks with conserving devices for portable use, depending on the patient\u2019s activity level. For most patients, this was an acceptable alternative. However, some patients cannot tolerate the conserving devices or are unable to maneuver E tanks on carts, especially in the snow. Respiratory therapists in Anchorage informed us that some patients are now unable to leave their homes without help. Because there are no suppliers willing to take Medicare assignment for liquid oxygen, these patients have no other options for lightweight portable systems without incurring significant out-of-pocket costs.\n\n\t\tIndustry Make-Up and Business Practices Have Changed Since the Payment Reduction\n\nThe mid-1990s was a period of expansion for the home oxygen industry, characterized by growth in the total number of home oxygen suppliers. This trend was reversed in 1998 after the lower Medicare payment rates took effect, as some supply companies merged or left the marketplace. Nevertheless, sufficient competition remained, providing most patients with a choice of suppliers. In addition to industry consolidation, suppliers have implemented a variety of strategies to improve the efficiency of operations and reduce costs.\nOverall, the number of Medicare home oxygen suppliers has declined by about 6.5 percent since the January 1998 payment reduction. The market share of the largest suppliers increased slightly from 40 percent in the first half of 1997 to 43 percent in the first half of 1998. (See table 2.) Many of the suppliers that have stopped submitting claims to Medicare for home oxygen had not previously offered the full range of home oxygen equipment options to beneficiaries but had supplied predominantly oxygen concentrators. In 1994, over 1,300 Medicare suppliers, or 22 percent, received at least 98 percent of their Medicare home oxygen revenues for concentrators and focused on serving the least costly patients. By the first half of 1998, this number had fallen to just over 1,000 firms. (See table 3.)\nWhen we asked suppliers how they have responded to the payment cuts, many said they have developed strategies to improve efficiency and maintain their profitability. These strategies include operational adjustments, such as making less frequent deliveries and service visits, purchasing more reliable equipment, reducing staff, and using fewer credentialed respiratory therapists. According to suppliers and industry representatives, some suppliers have reevaluated their product lines because, prior to the payment cuts, oxygen revenues had often subsidized less profitable medical equipment items. Other suppliers have switched patients from liquid oxygen to less expensive systems or are screening new patients more carefully before setting them up with a liquid unit. These strategies have left overall access to home oxygen equipment substantially the same, but they have changed the way that home oxygen equipment and services are provided to Medicare beneficiaries.\nSome suppliers we interviewed said they are maintaining their current levels of service, including providing a range of equipment options and using credentialed therapists for patient visits, for two reasons: their internal standards of patient care and their need to remain competitive with other suppliers. Many other suppliers said that they have reviewed the services they provide to determine where to reduce costs. Their strategies include more completely assessing patients\u2019 need for liquid oxygen, carefully planning delivery routes, calling patients in advance to find out what supplies they need, keeping their trucks stocked with supplies to avoid extra trips, and reducing the frequency of maintenance visits. There is also anecdotal evidence that some suppliers, contrary to Medicare rules, have refused to deliver portable tanks when patients need refills or have limited their patients to a fixed number of refills per month. We were unable to document these practices.\nOne supplier we talked with conducted a review of patients already on liquid oxygen to determine who could be switched to concentrators and portable lightweight gas systems equipped with an oxygen conserving device. This supplier said he consulted every patient\u2019s physician and obtained permission to make the equipment change. Further, the patients were tested to ensure that they were able to tolerate the new lightweight portable equipment. Other firms stated that while they will not change the oxygen delivery systems they are currently providing to patients, they will provide liquid systems to new patients only if they have high-liter-flow needs or if their ambulatory needs cannot be met with the compressed gas systems available.\n\n\tHCFA Is Not Doing All It Can to Assess and Ensure Access to Home Oxygen\n\nIn a November 1997 report, we made several recommendations to HCFA about its implementation of the BBA provisions, including that it monitor trends in Medicare beneficiaries\u2019 access to the various types of home oxygen equipment; restructure the modality-neutral payment, if warranted; educate prescribing physicians about their right to specify the home oxygen systems that best meet their patients\u2019 needs; and establish service standards for home oxygen suppliers. HCFA has made only modest beginnings in addressing the BBA provisions and our recommendations.\n\n\t\tHCFA Has Contracted for an Evaluation of Access to Home Oxygen\n\nAs required by the BBA, HCFA has contracted with a PRO to evaluate access to and quality of home oxygen equipment and services provided to Medicare patients. The PRO plans to gather evidence from various sources, including Medicare claims data on equipment use patterns, hospitalization rates, and utilization of home health services by home oxygen patients. An important component of this study will be a survey of beneficiaries, suppliers, and physicians. Changes in supplier practices will be an indicator of the impact of the payment reduction. The PRO will use this information to assess whether the payment reduction has affected the types of equipment and level of services provided to home oxygen patients. HCFA has not decided whether this will be a one-time assessment or an ongoing effort to monitor trends. Results from the PRO study are not expected until January 2000.\n\n\t\tHCFA Could Do More to Determine If Changes to the Modality-Neutral Payment System Are Warranted\n\nThe BBA gave HHS the authority to restructure the modality-neutral payment system for home oxygen, but HCFA has not established an ongoing process for monitoring access to determine if such a restructuring is warranted. HCFA officials said they will use the results of the PRO study and the competitive bidding demonstration project to evaluate the need to restructure the oxygen payment system. However, the PRO study will not be completed until at least January 2000, or 2 years after the first payment reduction, and neither project will provide HCFA information on access problems as they develop.\nHCFA has the ability to monitor access indicators but has not done so. For example, HCFA could ask its contractors to track beneficiary complaints, such as insufficient refills of portable tanks or, as occurred in Anchorage, problems with access to liquid oxygen systems. Although HCFA\u2019s claims processing contractors can specially code and track beneficiary inquiries and complaints about specific equipment and services, such as home oxygen, HCFA has not asked them to do so.\nPrescribing physicians and patients could better help HCFA identify access problems if they were fully informed about the home oxygen benefit. Although HCFA is able to identify both groups from claims data, HCFA has not provided these groups with information about the Medicare payment cuts or encouraged them to report access problems. For example, the pulmonary physician and therapists at the Anchorage clinic we spoke with did not know what equipment and services the Medicare home oxygen benefit covers. The National Association for Medical Direction of Respiratory Care believes that HCFA has done little to help educate doctors about their options when prescribing home oxygen. Similarly, patients may be unaware that the Medicare allowance covers all their oxygen needs, including home delivery of equipment and needed refills of portable tanks. In contrast, many VA Medical Centers provide brochures to home oxygen patients outlining the responsibilities of both the patient and the supplier.\n\n\t\tHCFA Has Not Implemented Service Standards for Oxygen Suppliers\n\nDespite the BBA mandate and our recommendations and those of HHS\u2019s Office of the Inspector General, HCFA has not developed service standards for oxygen suppliers beyond generic requirements for all durable medical equipment suppliers. In contrast, most VA and managed care contracts specifically define service requirements, such as the frequency of maintenance visits and the level of patient education. Service standards would define what Medicare is paying for and what beneficiaries should expect from suppliers. Standards are even more important as suppliers respond to reduced payment rates. One HCFA official told us that HCFA must address those BBA requirements that have specific target dates, as well as Year 2000 computer issues, before attending to our recommendations and those of the Office of the Inspector General.\nHCFA has developed a set of service standards that will apply only to home oxygen suppliers that participate in the competitive pricing demonstration project. HCFA officials informed us that they will consider the effectiveness of these standards in the development of service standards applicable to all home oxygen suppliers. However, some industry representatives have criticized the demonstration project standards as being too limited to ensure an acceptable level of service for home oxygen patients.\n\n\tConclusions\n\nEarly evidence suggests that the reduction in Medicare payment rates for home oxygen has not had a major impact on access. Generally, the access problems that we found existed before the payment reductions occurred. The PRO study HCFA has contracted for will provide a more in-depth look at this issue.\nSuppliers are responding in various ways to the lower payment rates. Consolidation continues to occur in the home oxygen industry, leaving fewer small firms that do not provide a full range of oxygen services. Most companies have developed varying strategies to mitigate the impact of the payment reduction, including reevaluations of operations, which have led to increased operating efficiencies and changes in how suppliers provide their patients with equipment and services.\nDespite these early indications that access to home oxygen has not diminished since the implementation of the payment reductions, subtle access issues may not be readily apparent, and additional problems could emerge as more and better information becomes available. Given the importance of this benefit to some vulnerable Medicare beneficiaries, especially those who live in rural areas, are highly active, or require a high liter flow, HCFA needs to be vigilant in its efforts to detect any problems. Beyond contracting for the PRO study, HCFA has not established an ongoing method for monitoring the use of this benefit and gathering the information essential to assessments of the modality-neutral payment system. Nor has HCFA developed service standards for home oxygen suppliers as required by the BBA. The continued absence of specific service standards allows suppliers themselves to decide what services they will provide home oxygen patients.\n\n\tRecommendations\n\nWe recommend that the Administrator of HCFA do the following: monitor complaints about and analyze trends in Medicare beneficiaries\u2019 use of and access to home oxygen equipment, paying special attention to patients who live in rural areas, are highly active, or require a high liter flow; on the basis of this ongoing review, as well as the results of the PRO study, consider whether to modify the Medicare payment method to preserve access; and make development of service standards for home oxygen suppliers an agency priority in accordance with the BBA\u2019s requirement to develop such standards.\n\n\tAgency and Industry Comments and Our Evaluation\n\nWe provided draft copies of this report to HCFA, representatives of the home oxygen industry, and officials of associations representing respiratory care specialists and physicians who treat patients with chronic lung disease. The reviewers suggested some technical corrections, which we incorporated into the report.\nGenerally, HCFA agreed with the report\u2019s contents and concurred with our recommendations. HCFA emphasized that it has contracted for the BBA-mandated PRO study, which it believes will provide an assessment of access to home oxygen equipment. In the interim, HCFA said it is relying on this report to alert the agency to any immediate access problems. Further, HCFA believes that the payment reduction will not disrupt patient access to the home oxygen benefit, given the previous excessive rates. In light of efforts to address the Year 2000 computer issues confronting the agency and its limited resources, HCFA felt it had adequately addressed the need to monitor access to the home oxygen benefit.\nHCFA acknowledged that it has not developed specific service standards for the home oxygen benefit as required by law. However, officials stated that the agency intends to publish new service standards applicable to all durable medical equipment suppliers in the next few months. After that, it plans to develop specific service standards for the home oxygen benefit.\nWhile we acknowledge the extent of HCFA\u2019s responsibilities, we believe that waiting for the PRO study to evaluate access issues is not prudent, considering the life-sustaining nature of this benefit to its users. We believe that HCFA could take steps now, with a minimal expenditure of resources, that could not only supplement the results of the PRO study but also alert the agency to access problems before the PRO study is released. HCFA stated that it will have its regional offices and contractors monitor complaints regarding access to home oxygen. The full text of HCFA\u2019s comments is included as an appendix.\nIndustry representatives and directors of associations representing respiratory care specialists and physicians also generally agreed with the report\u2019s contents. However, industry representatives believe that our definition of access to home oxygen equipment should include not only the equipment provided Medicare beneficiaries but also the types of services provided them and their frequency. These industry representatives are concerned that any service standards developed by HCFA will be inadequate to ensure an acceptable level of care. They believe that clinical studies of the effects of various services on patient outcomes are necessary to fully evaluate the impact of the payment reduction. They also believe that the cost savings resulting from the payment reduction for home oxygen could be offset by higher hospital readmissions or other services used by oxygen users. Finally, they stated that the full impact of the payment reduction has not yet been felt and that monitoring of access should continue.\nFor the purposes of this report, we based our definition of access on the Medicare coverage guidelines for the home oxygen benefit. HCFA has not defined specific service standards for this benefit, and it would not be appropriate for us to expand HCFA\u2019s current definition of what is covered by the home oxygen benefit. Further, while evaluating patient outcomes was beyond the scope of this report, the PRO study will include specific patient outcomes, such as hospital readmissions and use of home health services, in its evaluation.\nWe are sending copies of this report to Ms. Nancy-Ann Min DeParle, Administrator, Health Care Financing Administration, and appropriate congressional committees. We will also make copies available to others upon request.\nThis report was prepared by Anna Kelley, Frank Putallaz, and Suzanne Rubins under the direction of William Reis, Assistant Director. Please call Mr. Reis at (617) 565-7488 or me at (202) 512-7114 if you or your staff have any questions about the information in this report.\n\nComments From the Health Care Financing Administration\n\nThe first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent.\nU.S. General Accounting Office P.O. Box 37050 Washington, DC  20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000  or by using fax number (202) 512-6061, or TDD (202) 512-2537.\nEach day, GAO issues a list of newly available reports and testimony.  To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone.  A recorded menu will provide information on how to obtain these lists.","output":"Why GAO Did This Study\n\nPursuant to a legislative requirement, GAO provided information on Medicare beneficiaries' access to home oxygen equipment, focusing on: (1) changes in access to home oxygen for Medicare patients since the payment reduction mandated by the Balanced Budget Act (BBA) of 1997 took effect; and (2) actions taken by the Health Care Financing Administration (HCFA) to fulfill the BBA requirements and respond to GAO's November 1997 recommendations.\n\nWhat GAO Found\n\nGAO noted that: (1) preliminary indications are that access to home oxygen equipment remains substantially unchanged, despite the 25-percent reduction in Medicare payment rates that took effect in January 1998; (2) the number of Medicare beneficiaries using home oxygen equipment has been increasing steadily since 1996, and this trend appears to have continued in 1998; (3) while Medicare claims for the first 6 months of 1998 showed a decrease in the proportion of Medicare patients using the more costly stationary liquid oxygen systems, this decline was consistent with the trend since 1995; (4) hospital discharge planners and suppliers GAO talked with said that even Medicare beneficiaries who are expensive or difficult to serve are able to get the appropriate systems for their needs; (5) further, suppliers accepted the Medicare allowance as full payment for over 99 percent of the Medicare home oxygen claims filed for the first half of 1998; (6) although these indicators do not reveal access problems caused by the payment reductions, issues such as sufficiency of portable tank refills and equipment maintenance could still arise; (7) HCFA has responded to only one BBA requirement; (8) as required by the BBA, HCFA has contracted with a peer review organization (PRO) for an evaluation of access to, and quality of, home oxygen equipment; (9) results from this evaluation are not expected before 2000; (10) meanwhile, HCFA has not implemented an interim process to monitor changes in access for Medicare beneficiaries--a process that could alert the agency to problems as they arise; (11) although not required by the BBA, such monitoring is important because of the life-sustaining nature of the home oxygen benefit; (12) until HCFA gathers more in-depth information on access and the impact of payment reductions, HCFA cannot assess the need to restructure the modality-neutral payment; (13) HCFA has not yet implemented provisions of the BBA that require service standards for Medicare home oxygen suppliers to be established as soon as practicable; and (14) service standards would define what Medicare is paying for in the home oxygen benefit and what beneficiaries should expect from suppliers."}
{"id":"crs_R42823","pid":"crs_R42823_0","input":"\tOverview\n\nThis report provides an overview of current U.S.-India security engagement, a topic of interest to the U.S. Congress, where there is widely held and generally bipartisan support for a deepened U.S. partnership with the world's largest democracy, not least on issues of shared security interests. It begins with a brief discussion of the most important U.S. security interests related to India, then moves to a more detailed review of current U.S.-India security engagement in the realm of military-to-military contacts, counterterrorism and intelligence cooperation, and defense trade. Obstacles to deeper cooperation in each of these realms\u2014variously including historical distrust and accompanying Indian wariness, geostrategic considerations, mismatched bureaucracies, and procedural hurdles, among others\u2014are discussed throughout. The report closes with a brief conclusion addressing the outlook for future engagement and discussion of the ways in which congressional action and foreign policy oversight responsibilities can affect both the pace and scope of this engagement.\nWith the lifting of Cold War geopolitical constraints and the near-simultaneous opening of India's economy two decades ago, the world's largest democracy has emerged as an increasingly important player on the global stage. India dominates the geography of the now strategically vital South Asia region, and its vibrant economy, pluralist society, cultural influence, and growing military power have made the country a key focus of U.S. foreign policy attention in the 21 st century. This attention is to some degree motivated by China's longer-standing and more rapid rise, with many analysts viewing U.S. and Indian geopolitical interests as convergent on many fronts, perhaps especially in the area of Asian power balances. Beginning under President George W. Bush, and continuing with President Barack Obama, the U.S. and Indian governments have been seeking to sustain and deepen a substantive \"strategic partnership,\" even as bilateral commercial and people-to-people contacts flourish of their own accord. Secretary of State Hillary Clinton describes the United States \"making a strategic bet on India's future\" on the assumption that \"India's greater role on the world stage will enhance peace and security.\" As articulated in a late 2011 Pentagon report,\nThe United States and India are natural partners, destined to be closer because of shared interests and values and our mutual desire for a stable and secure world. A strong bilateral partnership is in U.S. interests and benefits both countries. We expect India's importance to U.S. interests to grow in the long-run as India, a major regional and emerging global power, increasingly assumes roles commensurate with its position as a stakeholder and a leader in the international system.\nIn a major October 2012 policy speech, Deputy Secretary of State William Burns declared, \n[T]here is growing confidence in both our countries about ... a steady convergence of interests and values.... The essence of the vital partnership that we're building lies in a simple truth. For the first time, for both of us, our individual success at home and abroad depends significantly on our cooperation.\nWith this bilateral partnership based on shared values such as democracy, pluralism, and rule of law, numerous economic, security, and global initiatives are underway, among them unprecedented plans for civilian nuclear cooperation. The two countries also inked a 10-year defense framework agreement in 2005 to facilitate expanded bilateral security cooperation. In the new century, large-scale combined military exercises have become commonplace, and bilateral cooperation on intelligence and counterterrorism is increasing. Unprecedented major U.S. arms sales to India are completed and underway; more are anticipated. Enthusiasm and positive trends can be seen in an array of bilateral security-related activities. Evidence of a mind change in India since the Cold War period includes convincing signs that the U.S. military presence in the Indian Ocean Region (IOR) is now widely viewed as being benign. \nStill, many concerns remain that India is unable and\/or unwilling to be the kind of international security actor U.S. leaders would like to see it become. The current coalition government at the federal level, in power since 2004, has lately appeared fragile and often shies from undertaking bold initiatives, given its acute dependence on sometimes mercurial regional allies, and with its stature weakened by multiple corruption scandals. The country's endemic poverty is exacerbated by a wider societal corruption and\u2014despite the growth of a large \"middle-class\" and booming information technology sector\u2014India's gross domestic product per capita in 2011 was only $3,632, compared to $8,466 for China and $48,442 for the United States. High rates of economic growth seen in India during the 2000s have lately declined even as the population soars, bringing into question whether New Delhi's growing but still relatively paltry resources and military capabilities can continue to increase as projected. At present, the sometimes touted equipment and capabilities of India's armed forces\u2014in particular their ability to project power over air and sea\u2014remain quite modest in comparison with those of China. \nIn a broad sense, there has emerged no consensus in New Delhi about what India can and should seek through its security cooperation with the United States. Those who do offer a set of expectations and demands of the relationship can fail to recognize that, for an American audience, \"A viable strategic partnership calls for reciprocity,\" as flatly put by one senior scholar. Many in Washington were discouraged in 2011 when New Delhi \"deselected\" two U.S.-built combat aircraft (the F-16 and F\/A-18) from consideration for India's planned $11 billion purchase of 126 new frontline planes. No less importantly, Indian leaders continue to demonstrate an aversion to assuming the kinds of new security-related postures and activities the United States seeks for India\u2014their tepid response to the \"Arab Spring\" is a case in point\u2014and they face domestic electoral calculations that can reinforce this aversion. India's focused effort to maintain \"strategic autonomy\" is likely to keep progress in U.S.-India security cooperation measured, incremental, and largely bereft of dramatic breakthroughs such as that involving civilian nuclear power.\nEven recognizing these circumstances, there is widespread, bipartisan support in the U.S. Congress for sustaining and expanding the partnership with India, not least in the areas relevant to U.S. and global security. In funding U.S. foreign aid programs such as Anti-Terrorism Assistance and International Military Education and Training, Congress makes budgetary choices that can directly affect the scope and pace of U.S.-India military-to-military ties and bilateral cooperation in counterterrorism. Congressional oversight powers provide a role in shaping the course of progress in these areas, and Congress has a role in allowing major defense trade with India. In mid-2012, the co-chairs of the Senate India Caucus penned a letter to the Deputy Secretary of Defense strongly urging him to press the Indian government to continue its efforts to improve its defense procurement procedures, as well as to \"aggressively pursue co-development or co-production opportunities,\" which they contend \"would prove mutually beneficial not just to the U.S. and Indian defense industries, but also to the long-term relationship of our two militaries.\"\n\n\tCurrent U.S. Security Interests Related to India11\n\nThe 21 st century rise of Asia lies at the heart of Washington's revaluation vis-\u00e0-vis India. Booming Asian economies\u2014and the accompanying spike in demand for energy resources\u2014have prioritized the region as a key concern for the United States. The United States is increasingly dependent on Asian markets for trade and investment to sustain and grow its own economy. As a result, it seeks to encourage and foster stability across the newly conceived Indo-Pacific region by working with allies and partners to bolster security, widen open markets, and ensure freedom of navigation across the Indian Ocean Region (IOR), from the Persian Gulf to the Straits of Malacca, and extending throughout the western Pacific and East and South China Seas. This region contains Sea Lanes of Communication (SLOCs) that are crucial to Asia's trade with the rest of the world and for the transit of energy resources that fuel Asian economic growth (see Figure 1 ). In this context, geopolitical realignments after 1991\u2014and India's significantly increased economic and military capabilities over the past decade\u2014have dramatically increased India's visibility and potential utility in U.S. security calculations. India is today described as being a defense cooperation \"linchpin\" in the Obama Administration's strategy of \"rebalancing\" toward Asia, a strategy that includes \"expanding military partnerships\" in South Asia. \nPerhaps the key security concern for Washington in Asia is China's growing military capabilities and assertiveness, and a U.S. strategy that seeks to prevent the emergence of a hegemonic power in Asia. An increasingly assertive and even aggressive Beijing can potentially leverage its military clout in a fractured geopolitical neighborhood to obstruct both the American presence and the realization of U.S. goals in the region. Any U.S. military withdrawal from the Asia-Pacific could seriously undercut Washington's economic and political influence there. The resulting strategy for Washington has been to \"pivot\" or \"rebalance\" toward the Asia-Pacific, while strengthening existing alliances and partnerships with countries across Asia.\nIslamist extremism and militancy have been a growing security threat to the United States in recent decades, peaking with Al Qaeda's attacks of September 2001. South Asia has been a particular focus of U.S.-led counterterrorism efforts. As the largest, most populous and most economically successful country in the region, India has long suffered from Islamist terrorism and is an avid proponent of countering the threat, particularly that emanating from Pakistan. Despite sometimes contrasting policies toward Islamabad, Washington and New Delhi have moved forward rapidly with bilateral counterterrorism cooperation, especially in the wake of the 2008 terrorist attack in Mumbai. The United States and India also share important interests in fostering Afghan stability, and U.S. officials welcome India's role and cooperation in that effort. \nIn championing changes in U.S. law to allow civil nuclear trade with India, the George W. Bush Administration argued that the new arrangements would benefit nonproliferation efforts by better aligning India with global regimes and norms. While this is yet to be realized in any substantive way, a continuing and significant U.S. interest is halting, or at least slowing, the proliferation of nuclear weapons in South Asia, and in mitigating the potential for nuclear war between India and Pakistan. Washington has a long history of encouraging regional restraint in the proliferation of nuclear arms and the systems for their delivery, especially given potential for India-Pakistan conflict to again escalate to the level of open warfare, as it most recently did in 1999. \nWashington's security planners often identify representative government and open markets as being key facilitators of international stability and, therefore, U.S. security. From this perspective, India is seen as an important example of successful, large-scale democracy, as well as a potential partner in encouraging the spread of liberal political systems. India is also a major emerging global market, one on a steady path toward greater liberalization, and it is projected to play an anchoring role in \"New Silk Road\" or \"Grand Trunk Road\" initiatives that seek to increase land-based trade extending from India to Central Asia. Moreover, Washington hopes to enlist New Delhi's stronger voice in support of international human rights norms, particularly in India's own neighborhood. Finally, Washington sees in India\u2014and especially the Indian Navy\u2014an important partner for disaster relief and humanitarian missions in the region. U.S. officials thus find national security interests several relevant in areas beyond traditional military security. \n\n\tThe Current Status of U.S.-India Security Engagement\n\nSince September 2001, and despite a concurrent U.S. rapprochement with Pakistan, U.S.-India security cooperation has flourished. Both countries acknowledge a desire for greater bilateral cooperation and a series of measures have been taken to achieve this. The India-U.S. Defense Policy Group\u2014moribund after India's 1998 nuclear tests and ensuing U.S. sanctions\u2014was revived in late 2001 and meets annually. In 2005, then-Indian Defense Minister Pranab Mukherjee visited Washington, DC, where the United States and India signed a 10-year defense framework agreement that refers to a \"new era\" for bilateral relations and calls for collaboration in multilateral operations, expanded two-way defense trade, increasing opportunities for technology transfers and co-production, expanded collaboration related to missile defense, and establishment of a bilateral Defense Procurement and Production Group. \nWhile U.S. and Indian officials consistently present an optimistic outlook for this bilateral security relationship, many independent analysts\u2014perhaps in particular those who share the official optimism\u2014counsel patience in Washington and the maintenance of realistic short-term expectations. One expert contends that the considerable potential longer-term benefits to be accrued through cooperation may be put in jeopardy by an American overemphasis on shorter-term goals, such as those related to Iran's nuclear program or to Indian-Pakistani rapprochement. Another suggests that Washington should minimize its short-term expectations for the relationship while taking comfort in the (disputed) notion that the two countries' strategic goals are fundamentally compatible, and that major differences relate only to tactics. In the context of the practical conduct of foreign relations in Asia, a more skeptical observer opines that, \"The Indians might quietly coordinate their policies with ours, but will not go beyond that in the foreseeable future, much loose talk of 'natural allies' notwithstanding.\" Each of these perspectives conceives of U.S.-India security engagement with a representative sense of sanguinity accompanied by cautious realism and emphasis on the long view.\n\n\t\tBilateral Military-to-Military Cooperation\n\nOver the past decade, the United States and India have held a series of unprecedented and increasingly substantive combined exercises involving all military services. Such military-to-military relations have been a key aspect of U.S.-India relations in recent years\u2014India now conducts more exercises and personnel exchanges with the United States than with any other country; more than 50 formal events are occurring annually. Navy-to-navy collaboration appears to be the most robust in terms of exercises and personnel exchanges. Convergent strategic interests in maritime security in the IOR largely explain the higher level of contact between the two navies. Moreover, the U.S. and Indian navies have had a longer history of contact than other services, and this is being augmented and routinized at a more rapid pace than the others. Although the respective armies and air forces hold regular dialogues and conduct periodic exercises, it appears that the strategic and logistical thresholds for securing closer cooperation in the air and land realms have yet to be defined to the satisfaction of both parties. \n\n\t\t\tSea\n\nJoint U.S.-Indian naval exercises have grown steadily in both scope and complexity in the 21 st century. The two countries conduct one large-scale war-game exercise, codenamed \"Malabar,\" along with multiple smaller training exercises such as \"Habu Nag\" (naval aspects of amphibious operations), \"Spitting Cobra\" (explosive ordnance destruction), and \"Salvex\" (diving and salvage). However, the Malabar exercises, first held in 1992 and conducted three times before the United States imposed proliferation-related sanctions in 1998, are today by far the most high-profile and of the largest scale (they were resumed in 2002). Malabar maneuvers are \"designed to advance participating nations military-to-military coordination and capacity to plan and execute tactical operations in a multinational environment.\" They have variably included Japan, Australia, and Singapore; the 2007 iteration was the most recent to include all five nations. Shortly after that exercise, China sent demarches requesting information on the intent of the multilateral exercise. In subsequent years, Malabar has tended to include third countries only when the exercises are held far from the Indian coast, as in 2009 near Japan. Somewhat averse to multilateral naval exercises, New Delhi reportedly turned down Japan's request to send ships to India for Malabar '12, which was held in April and included elements of the U.S. Seventh Fleet's Carrier Task Force 70 built around the USS Carl Vinson . \nSome analysts note that since 2007 India has shied from conducting multilateral naval exercises off its own coast, even as it has been willing to send its warships to participate in Pacific waters. U.S. officials familiar with U.S.-India naval ties suggest that New Delhi's circumspect posture should be seen as an expression of caution, meant to signal to Beijing that India's participation in multilateral defense activities is not directed against China. Many analysts agree that the New Delhi government, with its goal of remaining free of constraining alliances and to avoid even the appearance of junior partner status vis-\u00e0-vis the United States, generally prefers to conduct multilateral naval exercises in the IOR only under the aegis of U.N. initiatives such as those meant to counter piracy. \nNevertheless, U.S. government officials interviewed for this report appeared confident in New Delhi's broad commitment to strengthening navy-to-navy familiarity and non-combat security objectives, despite evident differences in geostrategic approaches. The relationships among flag officers are described as personable, with higher levels of trust than were seen in previous decades. As an example, during his visit to India during Malabar '12, the top U.S. naval officer was invited to board Indian submarines and warships, signaling a new level of comfort for the Indians. Informal contacts between senior officers of both navies have also become more common. While the United States continues to send a significant number its U.S. military officers on training exchanges to India, visits of Indian military officers to the United States are generally more restricted by New Delhi. According to Department of Defense, 198 Indian officers trained in the United States under IMET between FY2008 and FY2012.\n\n\t\t\tAir\n\nThe \"Cope India\" exercise is the centerpiece of U.S.-Indian air force cooperation. The focus typically is humanitarian assistance and disaster relief operations. During Cope India '09, more than 110 U.S. and Indian paratroopers conducted jumps in the first known airdrops of IAF personnel from U.S. C-17 and C-130J aircraft. India subsequently acquired similar aircraft from the United States. Since then, U.S. Air Force personnel have provided the IAF training on those transports, as well as on U.S.-supplied P-8I maritime reconnaissance planes, further deepening the extent of cooperation between forces. \nIn 2008, India participated for the first time in the annual multilateral \"Red Flag Nellis\" air-to-air combat exercise hosted by the United States. The exercise involves interdiction, attack, air superiority, defense suppression, airlift, air refueling, and reconnaissance aircraft. One Indian air force officer said that the exercise was helpful in familiarizing the IAF with U.S. network-centric warfare (India is currently building its own network-centric capabilities). The IAF is also reported to have sent its younger pilots to the United States in order to gain longer-term benefits from training and exposure to a multi-national war-game environment provided by the Nellis base. \nThe IAF is slated to participate in Red Flag in 2013 and possibly will increase the complexity of its participation with the introduction of more fighter jets and airborne warning and air control system (AWACS) platforms; the use of the latter appears not to have been authorized by New Delhi in 2008. American pilots reportedly have been impressed with the skills exhibited by their Indian counterparts. Mock air combat in 2004 saw Indians in late-model Russian-built fighters hold off Americans flying older F-15Cs, and Indian successes were repeated versus U.S. F-16s in 2005 (in both cases the American pilots flew without their best weapons radars and air-to-air missiles). For Red Flag Nellis '08, India debuted its latest Su-30MKIs, pitting them against the new America F-22 Raptor .\nHistorically, the U.S. sale of frontline aircraft to friendly countries has provided the framework for close cooperation between Washington and its defense partners. According to one India analyst, from a strategic perspective, air force-to-air force cooperation is constrained by insufficient collaboration beyond traditional defense trade paradigms used by the U.S. Air Force. In light of India's 2011 decision to not purchase U.S. fighter jets, alternative means of strengthening bilateral air force cooperation, including greater personnel exchanges, may need to be more energetically explored. \n\n\t\t\tLand\n\nU.S.-Indian army cooperation is centered around the annual \"Yudh Abhyas\" (\"training for war\") exercise, conceived in 2001 and first held in 2004, marking the first joint conventional forces exercise for the United States and India in more than four decades. This exercise has since expanded from company-sized field training to battalion-level, live fire maneuvers, as well as brigade-level command post exercises. Yudh Abhyas '12 saw three American tanks land on Indian soil for the first time ever, along with 200 armored personnel carriers. The previous round, held in India in 2009, was the largest ever and included tanks, combat vehicles, anti-tank missiles, and UAVs. In 2010 during a Yudh Abhyas exercise held in Alaska, the U.S. army also trained visiting Indian forces on the Javelin anti-tank missiles system in which India has shown interest. In general, the exercise focuses primarily on challenges of mutual concern such as counterinsurgency, counterterrorism, and peace-enforcement. Indian army units have also visited the United States for smaller scale exercises. \nU.S. and Indian special forces soldiers have held at least seven \"Vajra Prahar\" joint exercises focused on advanced rifle marksmanship, combat marksmanship, close-quarters combat, helicopter insertion, medical evacuation, combined mission planning, and scenario-based missions. Moreover, hundreds of U.S. Special Forces soldiers have attended India's Counter-Insurgency Jungle Warfare School.\n\n\t\t\tOther Joint Exercises\n\nIn addition to the Varja Prahar exercises noted above, the special forces of both countries regularly participate in navy-, army-, and air force-sponsored exercises. Although there are no joint exercises exclusively involving the U.S. Marines, given India's lack of a direct counterpart, New Delhi's interest in developing the capabilities of its amphibious units has led to direct contact between the U.S. Marines and the Indian military through exercises held between other services. In addition, since 2010, company-sized \"Shatrujeet\" exercises have focused on exchanges in amphibious doctrine and exercises. During the 2010 Habu Nag naval exercise, Indian military officers were able to observe coordination of U.S. Navy and Marine personnel on a forward-deployed U.S. amphibious assault ship. One Indian army colonel reportedly commented that his forces \"had learned a lot about the U.S. Marine Corps and how they function and work with the naval element,\" adding that Indians aspire to learn how the Marines perform landings and facilitate more fluid interaction between their own naval and amphibious elements. Also in 2010, the U.S. Pacific Command (PACOM) and the Indian Integrated Defense Staff (IDS) conducted the inaugural Joint Exercise India (JEI) tabletop exercise in Alaska. This bilateral multiservice exercise was the first of its kind and was seen as a significant step in U.S.-Indian military-to-military cooperation. \n\n\t\t\tThe Logistics Support Agreement (LSA) and Military-to-Military Relations\n\nAmong the defense-related pacts Washington has sought to conclude with New Delhi is the Logistics Support Agreement (LSA), which would permit the armed forces of both countries to enjoy reciprocal use of facilities for maintenance, servicing, communications, refueling, and medical care. Such reciprocity has obvious implications for military-to-military cooperation, and some in Washington believe that relevant U.S.-Indian ties will be hamstrung in the absence of an LSA. However, New Delhi is wary of the LSA's provisions, which some there believe could lead to India's being entangled in U.S. military operations in the region.\nIndian sensitivities have led U.S. officials to downplay the LSA's importance in recent years. During his mid-2012 visit to India, Secretary of Defense Leon Panetta was asked if he had discussed the LSA (and two other outstanding defense agreements) in his meetings with senior Indian officials. The Secretary stated that there had been no such discussion and went on to offer his view that, while the United States and India \"might not always agree with regards to the specific agreements that we're discussing,\" he did not see those disagreements \"as barriers to improving our relationship with India.\"\nIn the absence of a bilateral LSA, special exceptions have been made to provide for India's logistical support for U.S. operations. For example, during Operation Desert Shield\/Storm in 1991, U.S. military aircraft were allowed to refuel in Mumbai. This, however, led to considerable domestic political uproar in India, threatening the stability of the incumbent government. Later, in the run-up to Operation Iraqi Freedom in 2003, India publicly stated that the refueling option for U.S. aircraft would not be repeated, reportedly preempting an official request by Washington. During the early stages of Operation Enduring Freedom in Afghanistan, India facilitated coalition ship repairs at its navy yards and naval port calls. It also provided an escort for coalition ships through the Malacca Straits and reportedly offered the United States use of its airbases and airspace in conducting operations (the U.S. alliance with Pakistan made this unnecessary). In another instance of ad hoc logistics cooperation, during 2005-2006 tsunami relief efforts in the IOR, both the U.S. and Indian navies temporarily exchanged communications equipment so as to help coordinate their operations. This trend toward operation-specific exceptions is likely to continue so long as no LSA is concluded. \n\n\t\t\tMissile\/Space Issues\n\nIndia was among the first (and few) countries to welcome President Bush's mid-2001 call for continued development of ballistic missile defense (BMD) systems. Expanded dialogue on missile defense was among the four issue-areas of the Next Steps in Strategic Partnership framework for bilateral relations at the time, and the 2005 defense pact calls for expanded collaboration on BMD. India is among a handful of countries with an indigenous BMD research and development program; in May 2012, Indian researchers announced their readiness to launch the first phase of their tactical BMD system. The United States remains willing to discuss potential sales to India of missile defense systems. While New Delhi did in 2005 and 2006 request and receive classified briefings on U.S.-Israeli coproduced Arrow and\/or Patriot anti-missile systems for limited area use, the Ministry of Defense has not shown interest in procurements to date. Budgetary restrictions and a focus on indigenously developed systems are likely reasons for this. \nThere remain no signs that bilateral engagement on BMD systems has moved beyond a nascent stage. During his mid-2012 visit to New Delhi, Deputy Secretary of Defense Carter reiterated the U.S. view that missile defense is an important area for potential collaboration in the future. He added, however, that \"strategic decisions\" on BMD\u2014ostensibly to be made mainly in New Delhi\u2014must precede technical discussions. \u00a0Some Indian commentary on missile defense has counseled against Indian purchases of U.S.-made systems, asserting that these are unlikely to be effective, could be overwhelmed by augmented Chinese and Pakistani missile inventories, and would only increase regional insecurities.\nU.S.-India cooperation on space issues has remained wholly within the civilian sphere. However, the issue of multilateral codes of conduct for use of space is an emerging security consideration. The 1967 Outer Space Treaty, which includes India as a signatory, does not effectively address more recent developments in the militarization of space. At present, negotiations on use of space in the U.N. Conference on Disarmament appear to be stalled. China and Russia are pushing for an international agreement to ban space weapons. Their proposals do not include a ban on ground-based anti-satellite (ASAT) weapons, which both countries have tested. The European Union is also drafting a space code which is yet to be adopted by member states. One senior analyst suggests that Asian countries such as India and Japan would do best to play a more proactive role in shaping space-use codes, in particular to ensure that they are not \"intrusive\"\u2014for example, by requiring states to establish national procedures that could constrain policy options\u2014while at the same time establishing legally binding mechanisms to limit or curtail the deployment of weapons in space. The codes under discussion have obvious relevance to the potential deployment of ASAT systems, which India reportedly intends to develop. \u00a0 \n\n\t\t\tAnalysis\n\nOverall, military-to-military ties between the United States and India are energetic and growing. Both armed forces are becoming increasingly familiar with their counterparts, while also expanding the scope of their cooperation. The two navies appear to be ahead of other services with regard to the depth and complexity of engagement. Challenges with the pace of military-to-military cooperation appear to involve an overarching disconnect between targets for engagement set through joint bilateral service workshops at the service level and the civilian Indian Ministry of Defense, which has come under criticism for cancelling scheduled exercises without providing adequate explanation. Where possible, New Delhi remains partial to U.N.-endorsed multilateral initiatives over purely bilateral exercises with the United States. Nevertheless, cooperation over the past decade has encouraged professional relationships, varying levels of newfound familiarity across services, and increasing interoperability on common missions such as anti-piracy, counterterrorism, and disaster relief, among others. Although India is cautious not to project an alliance relationship by pursuing extensive interoperability with the U.S. military, the sustained interaction between U.S. and Indian armed forces appears to signal India's commitment to deepening the military-to-military relationship over the middle- and longer-term. \n\n\t\tBilateral Counterterrorism and Intelligence Cooperation\n\nAlong with military-to-military relations, another major facet of the emerging U.S.-India strategic partnership is greatly increased intelligence sharing and counterterrorism (CT) cooperation. Such engagement predates the September 2001 Al Qaeda attacks and in fact has taken place over a period of decades, but has become far more substantive and, in some respects, routinized in recent years. In 2000, the two governments established a U.S.-India Joint Working Group on Counterterrorism to coordinate bilateral efforts in this realm. In 2002, India and the United States launched the Indo-U.S. Cyber Security Forum to safeguard critical infrastructures from cyber attack. The 2005 \"New Framework for the U.S.-India Defense Relationship\" listed \"defeating terrorism and violent religious extremism\" as one of four key shared security interests, and it called for a bolstering of mutual defense capabilities required for such a goal. A bilateral Counterterrorism Cooperation Initiative was formally launched in 2010. \nCT cooperation is today described by the Obama Administration as a pillar of the bilateral relationship. Historic Indian distrust\u2014rooted mostly in Washington's close engagement with Pakistan's security and intelligence services\u2014has been ameliorated as the U.S. government increasingly concurs with Indian analyses of the terrorist threat posed by Pakistan-based groups and with Indian convictions that Pakistan's main intelligence service is a sponsor of anti-India terrorism and has been complicit in attacks on Indian soil.\nThe United States and India both prioritize terrorism among the security threats facing their citizens and interests. Yet, at a tactical level, Washington and New Delhi have many times failed to coordinate their efforts, owing largely to their divergent geopolitical perspectives, as discussed above. Despite these constraints, some analysts suggest that U.S.-India CT cooperation is among the most resilient components of security cooperation between the two countries, one that is (barring any major unforeseen shifts) bound to grow steadily through diverse mechanisms and contexts for collaboration. \n\n\t\t\tThe Historical Evolution of Counterterrorism Cooperation\n\n\t\t\t\tPre-9\/11\n\nThe United States and India first engaged CT cooperation during the Cold War. Under the Reagan Administration, Indian intelligence personnel received training in dealing with hostage situations and aviation security. Apart from limited capacity-building exchanges, Washington took some steps to assist New Delhi with the Sikh insurgency in northern India during the 1980s. However, it was not until the mid-1990s that more U.S. support was provided on this front. In 1996, Washington banned fundraising activities of designated terrorist groups, among them two Sikh organizations operating in the United States. Many U.S. and Indian CT analysts contended that the full potential of bilateral cooperation on Sikh terrorism could not be realized due to the political influence of the Sikh community in the United States. \nSince the early 1990s, CT efforts have evolved as a natural conceptual arena for U.S.-India cooperation. Islamist terrorists began targeting U.S. citizens and interests shortly after the 1989 Soviet withdrawal from Afghanistan. Notable attacks include bombings of the World Trade Center in 1993, U.S. Embassies in Kenya and Tanzania in 1998, and on the USS Cole in 2000. U.S. and Indian counterterrorism officials cooperated closely in addressing the 1995 kidnapping of two American tourists in Kashmir. In 1997, Washington and New Delhi signed a landmark U.S.-India extradition treaty, which led to the U.S. extradition of Sikh militants wanted in India. However, just as joint CT efforts were beginning to gain momentum, the 1998 sanctions on India abruptly ended contacts between the countries' respective counterterrorism establishments, and also curtailed the sale of U.S. counterterrorism equipment to India. The sanctions did not, however, prevent the two governments from establishing a Joint Working Group on Counterterrorism in 2000. \n\n\t\t\t\tPost-9\/11\n\nThe 9\/11 attacks simultaneously posed the first test of and opportunity for deepening U.S.-India CT cooperation. On the one hand, the attacks brought into stark relief the clearly common security interests and vulnerabilities that Washington and New Delhi shared. On the other hand, Pakistan reemerged as a key geopolitical facilitator of militarized U.S. policies in Afghanistan. Islamabad had more immediate benefits to offer the United States and it, too, pivoted (under pressure) toward cooperating with Washington, albeit with arguably less pure motives. \nThe key question in New Delhi was which geostrategic facilitator the Americans would choose. Early signals emanating from both Washington and New Delhi suggested that India was well positioned for the role; India's was the first government to offer unconditional support to the United States in dealing with the Afghan Taliban and their Al Qaeda allies. New Delhi offered intelligence on terrorist networks, over-flight rights, refueling and repair of U.S. military aircraft, port facilities in Mumbai and Cochin for U.S. naval vessels, and search-and-rescue missions. President Bush and then-Prime Minister Atal Vajpayee immediately began regular telephone consultations. Yet within days it became clear that a renewed U.S. embrace of Pakistan\u2014and its military regime with a record of supporting Islamist militant groups\u2014was unfolding. \nNew Delhi was frustrated by this development, but there was no lack of understanding Washington's motives. As India's discomfort diffused, the two governments pushed ahead with building their own bilateral CT ties. Some early milestones included the October 2001 signing of a U.S.-India Mutual Legal Assistance Treaty, which provides certain legal privileges related to terrorism-related investigations. Months later, a new U.S.-India Cyber Security Forum was established to safeguard critical infrastructures from cyber attack. In mid-2004, a senior-level U.S. Army delegation visited India's 15 Corps Battle School (CBS) in India's Jammu and Kashmir state with an interest in adopting new training techniques on anti-militancy and unconventional operations for U.S. troops being deployed to Iraq. CT cooperation also expanded to include mutual maritime security efforts for ports and container vessels, as well as the prevention of WMD terrorism. \nAs noted above, the landmark 2005 \"framework\" for the U.S.-India defense relationship made prominent mention of terrorism as a shared threat. Bilateral initiatives since then have included exchanges of law enforcement best practices, reciprocal visits of senior-level officials, joint military training exercises, and joint approaches in relevant international fora. The FBI's Quantico laboratory has hosted numerous visits by senior Indian forensics experts, and the agency regularly shares best-practices with senior Indian law enforcement officials. The State Department's Anti-Terrorism Assistance (ATA) Country Assistance Plan for India emphasizes critical incident response; post-incident investigation; human rights; border security; international threat finance; extradition and prosecution; and the protection of critical infrastructure, including port, rail, and airport security as strategic objectives. Through the ATA program, State has conducted scores of training courses for more than 2,000 Indian law enforcement officials to date and plans as many as two dozen more for 2013. ATA objectives in India focus on building capacity in critical incident management, infrastructure security, and investigations, as well as promoting Indian law enforcement participation in regional counter-terrorism cooperation.\nBeyond counterterrorism seminars and training, CIA and FBI personnel have worked in India to help with investigations of terrorist attacks, including a major 2006 bombing in Mumbai, as well as the 2008 attack on the same city. The FBI reported having unprecedented access to evidence and intelligence following the latter incident, interviewing some 70 individuals, including the only surviving attacker, Ajmal Kasab. U.S. know-how in preserving and analyzing forensic evidence was also shared with Indian intelligence officials. FBI forensics experts later provided in-person testimony to the Indian court trying Kasab. \nThe United States and India are also gradually overcoming institutional obstacles to the provision of access to legal detainees. In 2010, after considerable delays that frustrated the Indians, the U.S. Department of Justice granted Indian investigators access to David Headley, an American national of Pakistani descent who had confessed to participating in planning the 2008 Mumbai assault. Then-U.S. Ambassador to India Tim Roemer identified the development as \"historic in the nature of security cooperation\" and expressed optimism about multiple U.S.-India partnerships in this area. Despite such progress, bureaucratic and political sensitivities have tended to hamper the development of more fluid cooperation. As an example, during the 2012 Strategic Dialogue, Indian External Affairs Minister Krishna raised the issue of India's interest in further access to suspects involved in the Mumbai attacks who are in U.S. custody. \nWhile on his late 2010 visit to India, President Obama inaugurated the new Homeland Security Dialogue between the U.S. Department for Homeland Security and the Indian Ministry of Home Affairs. This initiative replaced the Joint Working Group on Counterterrorism begun a decade earlier. Homeland Security Secretary Janet Napolitano subsequently traveled to India in mid-2011 and met with then-Indian Home Minister P. Chidambaram, as well as representatives of private industry, in an effort to promote bilateral counterterrorism and law enforcement cooperation. Agency-to-agency engagements are being fostered on a wide array of relevant issues, including counternarcotics, counterfeit currency, illicit financing and transnational crime, infrastructure security, transportation and trade, coastal security, and large-city policing. Later in the year, the United States further signaled its commitment to supporting India's counter-terrorism efforts by formally designating the Indian Mujahideen, an India-based militant group with links to Pakistan, as a Foreign Terrorist Organization.\nAs of mid-2012, the State Department was reporting that air and sea port, and law enforcement exchange visits to multiple cities in the United States and India have taken place under this initiative. The goal is to share best practices, training, tactics, techniques, and procedures to address terrorist threats. Through the State Department's Anti-Terrorism Assistance programs, courses ranging from bomb blast investigation, critical incident management, and tactical commanders training to cyber investigations and forensics were conducted throughout 2011 and into 2012. Recent meetings on cyber security cooperation discussed the establishment of international norms in cyberspace, as well as internet governance. The State Department further offers that robust operational cooperation continues between the U.S. Computer Emergency Readiness Team (U.S.-CERT) and India's Computer Emergency Response Team (CERT-IN).\n\n\t\t\tAnalysis\n\nBilateral CT and intelligence cooperation is now recognized in Washington and New Delhi as an area ripe with potentially huge dividends to be realized for both countries. Unprecedented successes have been achieved post-2001 and more are expected. Yet constraints and obstacles are not insignificant. Despite progress and deepened bilateral engagement, there appears to be an asymmetry in the willingness of the two governments to move forward: Washington wants more cooperation from India and is willing to give more in return, but officials in New Delhi remain hesitant and their aspirations are more modest. \nSerious structural impediments to future cooperation also exist in the view of observers in both countries. Chief among these is the fact that, in India, state governments are the primary domestic security actors and there is no effective national-level body with which the U.S. government can engage and coordinate. This authority of individual state governments in maintaining security within their borders further complicates the central government's plans for and progress in reform. India's difficulties with reforming its counterterrorism establishment, and its acute sensitivities about exposing its intelligence structures to foreign governments, pose another significant obstacle to more robust U.S.-India cooperation in the near-term.\nIndia is struggling with the institutional reform of its federal counterterrorism apparatus. Recent efforts to reorganize all CT agencies under a new National Counter-Terrorism Center (NCTC) have resulted in entrenched infighting among various agencies. Indian proponents of the creation of an NCTC modeled on the one in the United States became more vocal in 2012, but some observers argue that the U.S. model is unsuited to the Indian context. Then-Home Minister Chidambaram's NCTC proposal was met with opposition primarily because, in its most recent incarnation, the agency would be part of India's Intelligence Bureau (and thus not an independent institution). It would also be granted powers of arrest without prior knowledge of state law enforcement agencies (in most democracies, intelligence agencies do not possess such powers). \nOne longtime analyst contends that a focus on establishing new national-level security institutions misdirects India's limited capabilities and resources, especially when they are to be modeled on those of a country (the United States) that has access to much greater resources and faces a differing threat environment. This observer has called the proposed Indian NCTC \"an ill-conceived, redundant and derivative vanity project which aspires to imitate its namesake in the United States without the strength, the sinews, the resources, or the constitutional context that would make such aspirations attainable.\" \nSome commentators contend that cooperation has continued to fail to meet its full potential on account of one crucial third state actor of common interest: Pakistan. There is a sense among many in New Delhi that the United States has yet to adequately assure India that its counterterrorism interests will not be undermined by Washington's relationship with Pakistan. By some accounts, U.S. credibility has suffered to the extent that Washington has demonstrated neither sufficient energy nor seriousness in pressuring Pakistan to arrest and convict anti-India militants, including those accused for the 2008 Mumbai attack.\nAs is the case in other areas of cooperation, many counterterrorism experts urge a revision of Washington's and New Delhi's respective expectations in the CT realm so as to establish more realistic goals for both countries. These analysts contend that, so long as the United States and India do not share compatible threat perceptions, CT cooperation will remain limited. There is a further broad sense among both U.S. officials and Indian observers that current efforts to build trust around this issue are genuine, albeit halting. Intelligence sharing remains ad hoc and sporadic, but at the same time is sustained and supported by both sides. Most analysts point to the 2008 Mumbai terrorist attacks as a significant milestone in bilateral CT cooperation, offering both more motivation and more space for collaboration. These same analysts are also quick to point out the persistent constraints, many of which entail non-strategic considerations. \nThese general points are consistently raised by close followers of this aspect of the U.S.-India partnership. For example, during 2011 testimony before a House panel, one U.S. expert listed what he sees as five key challenges to future U.S.-India CT cooperation: (1) Suboptimal alignment of U.S. and Indian bureaucracies , resulting in poor interagency communication and coordination in both countries, and a lack of clarity about issue-area responsibilities; (2) India's limited bureaucratic capacity and its highly centralized and often opaque decision making processes; (3) primary law enforcement role of Indian states ; (4) sometimes divergent views of the terrorist threat itself, related primarily to differing perceptions on the role played by Pakistan; and (5) Indian doubts about the U.S. commitment to CT cooperation due to perceptions that Washington's conduct is not always fully transparent. \nAssisting with the equipping and training of tactical-level India security personnel is an area ripe for the United States. In the words of one New Delhi authority, \"The Indian security-intelligence complex is, in its greatest part, extremely antiquated, and virtually every segment can be improved by external inputs.\" In short, this entails \"outfitting the fighting man,\" and \"short term programs, preferably offered in India and designed to result in the development of specific skills and capabilities across the intelligence-policing spectrum, would be of tremendous use.\"\nAnother leading Indian nongovernmental expert asserts that Indian law enforcement agencies face many debilitating problems, some of which offer fruitful potential areas for closer U.S.-India collaboration. India's police forces are widely seen as being woefully ill-prepared to deal with CT work, even four years after the devastating Mumbai attack. The poor forensic capabilities of Indian law enforcement seriously hinder CT investigations. India has no national training center for rank-and-file officers (the National Police Academy in Hyderabad trains upper management only); establishment of a national police training center could significantly strengthen police capabilities. Lower-ranking Indian police officers often have the best \"ground knowledge\" of the working of extremist groups, but this knowledge is rarely transmitted through the mostly high-level U.S.-India CT cooperation seen to date. The U.S. government is considered well poised to provide assistance in each of these areas. Moreover, while many Indian police officers receive training in the United States, few return to training positions in India, meaning much of the imparted knowledge fails to be disseminated in the Indian system. \nTwo additional obstacles include Indian sensitivity to exposing its intelligence personnel to the United States and fears of being treated as a junior partner. The former concerns are closely linked to instances of apparent U.S. efforts to recruit intelligence assets inside India's own institutions. With regard to the latter concerns, one American counterterrorism analyst noted that each conversation with Indian counterterrorism officials is begun ritualistically with an acknowledgement that both sides have much to learn from each other. The intention here is to convey a message of peer engagement. Some Indian analysts are not hesitant to point out that U.S. counterterrorism and counterinsurgency efforts at home and abroad have been less than stellar and fraught with controversy. Examples offered include the \"accidental\" arrests of the so-called shoe bomber and underwear bomber, warrantless domestic surveillance, and, of course, years-long insurgencies in Iraq and Afghanistan, among others. Whether or not such critiques are justified or tell the whole story, this narrative can form the basis of an argument that the United States is poorly positioned to claim superiority in the CT realm. For its part, New Delhi's own domestic efforts have realized some modest successes\u2014in Kashmir, northeastern states, and against Maoist rebels and terrorist plotters\u2014despite the many acknowledged weaknesses in Indian capabilities and effectiveness. \nA significant number of analysts, however, express broad satisfaction with the progress of the relationship, even bearing in mind significant constraints and instances of back-sliding. These observers argue that, in light of continuing geopolitical complexities and decades of mistrust between the two governments, reservations should be allowed to thaw gradually and expectations should be kept realistic. At present, the most optimistic observers counsel avoidance of any \"rush\" to develop this CT and intelligence relationship, and they view the leverage of tactical gains in the short term as best for trust-building, with a secondary focus on the alignment of broad strategic agendas that may never fully match.\n\n\t\tBilateral Defense Trade\n\nThe issue of U.S. arms sales to India has taken a much higher profile in the new century. New Delhi is undertaking a major military modernization program, with plans to spend some $100 billion over the 7-10 years to update its mostly Soviet-era arsenal. U.S. weapons makers are eager to gain a slice of this lucrative pie, and American companies also see in India a potentially huge new market for sophisticated equipment such as surveillance and detection systems. Increased defense trade may be a means of reviving and\/or sustaining what some have perceived as stagnant U.S.-India relations. Still, many Indians continue to be wary of closer defense ties with the United States and are concerned that these could lead to future strings, such as conditionality and\/or cutoffs, and perhaps constrain New Delhi's foreign policy freedom in times of conflict. Nevertheless, the value of new and unprecedented major defense sales to India has continued to grow\u2014some $8 billion in deals since 2001\u2014with the United States now offering to sell India some of its most sophisticated military hardware. However, Indian defense purchases from the United States represent only a small percentage of the country's overall purchases over the past decade. A listing of major arms transfers over the past decade is found in Table 1 .\nThe 2005 New Framework for Defense Cooperation was the first step to promote sustained defense trade between the United States and India. Yet efforts to realize the perceived geostrategic benefits, as well immense business potential, of opening a significant new defense trade pipeline from the world's largest arms exporter (the United States) to the world largest arms importer (India) are complicated by myriad legal, political, strategic, historical, and bureaucratic obstacles. \nDefense trade in the United States and India appears guided by certain distinct considerations in each country. Arms sales by private U.S. firms to foreign countries are heavily regulated by Washington's strategic and national security calculations. Within these broader constraints, Washington seeks to improve bilateral military-to-military relations by enhancing \"interoperability\" through shared defense platforms. Interoperability allows friendly militaries to better understand one another's operational capabilities, increase military-to-military contact through training and information exchanges on equipment usage and tactics, and communicate with greater ease on the ground. Similar equipment can also provide the basis for broader doctrine and strategic discussions on the deployment of particular systems and act as a force multiplier making cooperation among militaries seamless. The United States is also intent on protecting its most advanced defense technology from being acquired by competitors, especially rivals such as Russia and China. In contrast to other major defense exporters to India for which profit expectations tend to be primary defense sale considerations (for example, Russia and France), defense trade calculations in the United States are more deeply embedded in the country's strategic outlook. \nIndian defense imports are influenced by more immediate considerations: protecting the country's foreign policy autonomy, enhancing its power projection capabilities, cost, and poor procurement procedures. Foreign policy autonomy, a top priority among New Delhi's defense import considerations, involves procuring reliable defense platforms that are not subject to stringent end-user requirements that can limit the country's operational decisions. India has displayed a long-standing aversion to signing paperwork or agreements that it \"perceives will impinge on its sovereignty.\" More recently, India has stepped up efforts to increase its strategic autonomy by focusing on its domestic defense production capabilities. In 2011, India instituted the Defense Production Policy, which focuses heavily on boosting domestic production through co-production with foreign defense firms. \nAs New Delhi safeguards its autonomy, it is simultaneously attempting to build an arsenal that affords it a reliable land, air and sea based defensive posture. This has led India to seek advanced platforms and technologies that are possessed by major military powers. Despite the country's desire to acquire and produce world-class systems, India's budget tends to prioritize pressing domestic development related allocations over defense. Therefore, low cost, formalized through the \"L1,\" or lowest bidder, system is an important factor in determining the country's foreign defense procurements. A weak, disorganized, and too often corrupt procurement process adds yet another layer of complexity to India's defense trade decisions. \n\n\t\t\tOutstanding Defense Agreements and End-Use Monitoring90\n\nWashington's eagerness to pursue advanced technology defense sales to India is no doubt welcome in New Delhi, but is also met with circumspection. Commonly topping the list of concerns offered by observers are U.S. interoperability and technology protection agreements that some Indian officials believe would erode their country's foreign policy autonomy. In particular, Washington's inability to win Indian accession to two major interoperability agreements\u2014the Communication Interoperability and Security Memorandum of Agreement (CISMOA) and the Basic Cooperation and Exchange Agreement (BECA) for Geospatial Cooperation\u2014and its as yet unsuccessful campaign to obtain New Delhi's fullest cooperation on End-Use Monitoring (EUM) of defense sales\u2014have limited the types of advanced technology the United States will share. \n\n\t\t\t\tThe CISMOA and BECA\n\nIn short, the CISMOA and BECA agreements allow the transfer of advanced U.S. communication and guidance technologies to signatory states. These technologies can include satellite navigation, secure communications equipment, and synchronized laser guidance systems, among other unique American know-how used by the U.S. military. Specifically, the CISMOA requires purchasers of U.S. defense equipment to ensure that equipment supplied is compatible with other American systems. The BECA provides for mutual logistical support and enables exchanges of communications and related equipment. Washington's efforts to bring the Indians on board with these two pacts have met with considerable resistance.\nNew Delhi has, in fact, forgone acquisition of some advanced U.S. technologies in recent procurements such as the C-130J and P-8I, in part because officials there shy away from entering into any agreements with the United States that could signal a nascent defense alliance. The relatively high visibility of the CISMOA and BECA issue diminished following the delivery of the first C130-J Hercules in early 2011, and American officials have since that time refrained from raising the issue in bilateral meetings. Senior Indian air force officials reportedly contend that their lack of the restricted equipment has not made a significant difference to IAF operational capabilities. India of course has the option of purchasing similar, if less advanced equipment from third countries without signing these kinds of agreements. As noted above, the Obama Administration has expressed a view that failure to bring India on board with these agreements does not necessarily hinder bilateral military-to-military relations. \n\n\t\t\t\tEnd-Use Monitoring\n\nWhile CISMOA and BECA are required by U.S. law for the sale of certain high technology equipment, End-Use Monitoring agreements (EUMAs) and Enhanced End-Use Monitoring Agreements (EEUMAs) are mandated by the Arms Export Control Act 22 U.S.C. 2785 for the sale of any and all U.S. defense articles and services. In 2009, EUMA negotiations with India overcame a major obstacle and both governments publically agreed on the mandatory requirement of EUM and EEUM agreements with the sale of defense items. Until that time, customized EUMAs were included with each defense sale to India, as both countries were unable to reach an overarching agreement. For example, the EUMA signed for Boeing business jets purchased to transport the Indian Prime Minister and President stipulated that certain defense articles would be detached from the plane and inspected separately if the need arose. While the final 2009 EUMA has not been made public, the solution reportedly allows for the United States and India to predetermine the timing and location of inspections, therefore restricting access of U.S. inspectors to Indian forward operating positions, and so ameliorating a key Indian concern. The EUMA's \"customization\" is symbolic of an emergent trend in U.S.-India defense relations, with increasing realization from both parties that, for the time being, solutions may most easily be found in such special arrangements. \nSince 2009, it appears that EUMA and EEUMA inspections have been conducted. EUMA checks, mostly conducted through the State Department's Blue Lantern program, are gradually being regularized. EUMA inspections on India reportedly average a response time much greater than the estimated worldwide average of 45 days, a matter of some frustration for processing officials. In the case of EEUMA checks, primarily handled by the Pentagon's Golden Sentry program, some inspections reportedly have taken place and, barring the USS Trenton incident (see footnote 91 ), cooperation and trust in this area appears to be strengthening, albeit gradually. At this early stage, levels of flexibility are being tested by both parties. \nThe limitations on the sale of advance technology arms sales posed by the EUMA seem to be identified with each proposal and sale. For example, India reportedly has turned down the purchase of U.S.-made Javelin anti-tank missiles in a sale that would come with a co-production offer. Instead, New Delhi is said to have chosen to acquire similar equipment from another country, citing a considerably lower price and the absence of EEUMA requirements as deciding factors. While the signing of the 2009 EUMA constituted an important step for defense trade between the two countries, end-use monitoring will most likely remain an important factor in India's acquisition of defense items from the United States, significantly complicating the task of encouraging high-end sales to India. \n\n\t\t\tThe Greater Trust Deficit\n\nSince the mid-1980s, India has consistently expressed interest in access to U.S. high-technology goods. U.S. restrictions on the sale of sensitive dual-use equipment to non-NPT signatories (including India), and Washington's 1998 sanctions against New Delhi, curtailed any meaningful technology sharing between the two countries. The 2005 defense partnership agreement and subsequent removal of most Indian defense organizations from the U.S. Department of Commerce Entity List in 2011 has largely eliminated broad licensing restrictions to technology sharing. The U.S. Commerce Department approved more than 99% of India's license requests for dual-use technology in FY2010-2011. The State Department also approves a vast majority of munitions licenses requested from India. \nU.S. officials appear to be satisfied with India's efforts to protect dual-use technology and to limit its application to non-defense uses. Nonetheless, the potential for leakage of sensitive advanced technology to U.S. rivals remains of significant concern in Washington. Even if India signs CISMOA and BECA in addition to EUM agreements, New Delhi will not be guaranteed license approval for items the U.S. government considers highly sensitive. While most U.S. officials interviewed for this report said they trusted the Indian government, they also added that genuine concerns remained about the safeguards in place to protect technologies from leaking. Some U.S. officials also noted that these technologies were denied not only to India, but to U.S. allies as well, a factor that New Delhi may not adequately appreciate when reflecting upon Washington's reluctance on technology sharing requests. \nMany Indian analysts suggest that New Delhi is averse to becoming dependent upon the United States to supply its front-line munitions. Indian skepticism about U.S. reliability as an arms supplier is long-standing. The 2011 \"de-selection\" of U.S.-made F-16 and F\/A-18 jets for India's fleet was in part attributed to this strain of leeriness. Many Indians are concerned that, in a time of crisis, U.S. refusal to approve licenses for spare parts of U.S. defense equipment could indirectly, but significantly constrain New Delhi's foreign policy freedom. The 1990 U.S. suspension of fighter jet deliveries to Pakistan is an oft-cited example. India's own bitter experience with the suspension of nuclear fuel supply to its Tarapur reactor in the 1970s has not been forgotten. The sweeping 1998 sanctions on India provide another case in point. More recently, in 2009, a shipment of General Electric engines for India's Shivalik -class stealth warships was frozen pending license approval, causing controversy. The episode sent ripples through the defense community, seemingly justifying critics' claims that the United States was not a reliable defense supplier. According to one Indian analyst, a simple bureaucratic glitch had caused the incident. India's limited faith in U.S. reliability may underlie its decision to favor acquisitions of U.S. transport and reconnaissance platforms, such as the C-130J, P-8I, C-17 Globemaster III and Apache helicopters, rather than more sensitive items. India is also procuring U.S. artillery (M777 howitzers) and various types of missiles, which assume less risk from licensing delays. \nWashington and New Delhi are taking steps to reduce the mistrust between them. While the United States may not be willing to sell India many highly sensitive technologies at present, it has taken significant strides in closing the trust gap by removing Indian defense subsidiaries from the Entity List and approving the bulk of license requests submitted. The United States is also increasing its efforts to find mutually valuable defense item sales for co-production and technology transfer. For its part, India is cooperating on end-use monitoring requirements, despite its reservations. Barring strategic limits to defense sales, both governments have shown a willingness to work seriously on eliminating barriers to greater levels of trust. Most analysts and U.S. government officials interviewed for this report agreed that the process of trust-building will involve simultaneously nudging forward incremental steps on a wide array of fronts, ranging from high-profile strategic convergence to eliminating mundane bureaucratic obstacles. \n\n\t\t\tProcedural and Bureaucratic Hurdles\n\nThe United States and India each have convoluted defense trade bureaucracies. A lack of familiarity with one another's respective procurement and licensing procedures further compounds frustration in both countries. Indeed, bureaucratic complexities and unfamiliarity are said to commonly result in missed bilateral defense trade opportunities. In a September 2012 interview, Deputy Secretary of Defense Ashton Carter emphasized a common concern that buyers of U.S. defense items have about U.S. export control procedures:\nSecretary Gates used to say [there were concerns]; Secretary Panetta does, Secretary of State Clinton [does], and so [there is] tremendous frustration with how arcane the export control system is.\u00a0And those problems are particularly acute when it comes to India because India and we were separate industrially and technologically for a long time, all during the Cold War.\u00a0So we are trying to match up how they do things and how we do things.\u00a0There's no history there.\u00a0We have to create that history. \u00a0\nThe Foreign Military Sales (FMS) program is America's government-to-government method for selling U.S. defense equipment. To many U.S. officials and analysts, the FMS system, which directs defense sales through the Department of Defense, is often described as being overly rigid and unsuitable for India's competitive bidding procurement process. Nevertheless, the acceptance of American F-16 and F\/A-18 jets into the early rounds of the MMRCA competition signaled that the FMS system could be competitive in India, a matter of some relief to U.S. officials working on the bid. Strict U.S. FMS regulations against making unauthorized deals restrict the ability of U.S. firms to negotiate with Indian procurement officials, thus placing them at a disadvantage relative to those countries willing to propose concessions upfront, even if such concessions are not made in the final sale. Non-U.S. firms can be far more flexible in their negotiations and are known to make promises without first vetting it with their governments. The United States tends to be at further disadvantage when competing in the L1 system. The lowest bidder is the company that provides the specifications listed on the Request for Proposal at the lowest cost. Some analysts suggest that the L1 system does not take into consideration the technological benefits gained at greater expense, typically a strong suit of U.S. defense wares.\nAmerican defense firms often find it difficult to navigate India's defense procurement environment. Executives have raised concerns about unclear taxation guidelines at the time of sale. In some instances, they reportedly claim the application of retroactive taxes fuels their reluctance to engage India's fluid defense policy environment. India's procurement system is highly favorable to known suppliers; Russia, France, and, more recently, Israel, have robust defense relationships with India of a kind that will take the United States time to build. Personal ties can also play important roles in facilitating deals. Boeing's relative success among U.S. defense firms selling to India seems in part owed to its prior experience with India's commercial aircraft market. \nLate 2012 saw indications that the FMS process is realizing more consistent success with India's own L1 bidding system. In August, India announced its intention to purchase 22 Boeing AH-64D Apache Longbow attack helicopters for $1.2 billion, having found the Apache superior to the Russian Mi-28N. Two months later, an MOD official stated that Boeing's CH-47F Chinook heavy-lift helicopter had bested a Russian-made competitor in extensive field trials and had been selected for purchase after issuing the L1 bid. Both helicopter sales would come through FMS.\n\n\t\t\tDefense Trade Offsets\n\n\"Offsets\" are the practice by which the award of contracts by foreign governments or companies is exchanged for commitments to provide industrial compensation. In defense trade, offsets typically include mandatory co-production, licensed production, technology transfer, and foreign investment. Offsets may be direct, indirect, or a combination of both. Direct offsets refer to compensation, such as co-production or subcontracting, directly related to the system being exported. Indirect offsets apply to compensation unrelated to the exported item, such as foreign investment or purchases of goods or services. According to the U.S. Commerce Department's Bureau of Industry and Security, \nHistorically, offsets have served important foreign policy and national security objectives of the United States, such as increasing the industrial capabilities of allied countries, standardizing military equipment, and modernizing allied forces.... However, offsets may be detrimental to the strength of the U.S. defense industrial base, particularly small and medium-sized defense subcontractors. Offsets can displace U.S. subcontractors, enhance foreign competitors and create excess defense capacity overseas. \nOffsets have become a highly contentious issue in U.S. defense trade with India. Following legal changes in 2005, New Delhi now requires 30% of any defense deal valued at more than Rs3 billion (about $56 million) to be reinvested in the India as a \"defense offset.\" India reportedly has attracted at least $4.27 billion in such offsets over the past five years. Until 2011, offsets were required to be reinvested in the Indian defense industry, which included the defense public sector undertakings (DPSUs) and, more recently, private Indian defense companies. Since 2011, the MOD, in response to foreign supplier and domestic industry pressures, has steadily expanded the range of reinvestment options for offsets. In addition to the Indian defense sector, offsets currently include civil aviation, homeland security, training, technology transfer, and potentially foreign parts purchased by Indian offset partners. Co-production of defense articles with domestic arms producers is a key feature that offsets were originally intended to encourage. \nMany international arms suppliers claim that ambiguity about what counts as offsets, combined with the poor capacity of the Indian defense sector to absorb billions of offset dollars, and poor administrative policy and oversight by the Indian government, all serve to hinder bilateral defense trade. U.S. firms have also criticized the requirement that at least 74% of related FDI be directed to domestic (Indian) firms as being a major disincentive to fulfilling offset provisions through co-production. Some Indian defense analysts and MOD officials refute these arguments and express concerns that the dilution of offsets to benefit foreign suppliers is compromising the potential for development of the defense sector. They argue that foreign companies are eager to meet their offset requirements easily and cost effectively, while the MOD approves offset proposals smoothly in the interest of facilitating a given sale. Recently, high-level U.S. officials such as Defense Secretary Panetta and Ambassador Powell have weighed in on the offset issue, calling on India to clarify its policy, strengthen its oversight, and raise the controlling stake of foreign companies in defense joint ventures. India is considering a revision of its 74\/26 percent defense sector FDI policy; however, progress appears to have stalled at present. \n\n\t\t\tThe Direction of U.S.-India Defense Trade\n\nThe de-selection of U.S. fighter jets in the MMRCA competition sparked a heated debate on the future of U.S.-India defense trade, as well as on the broader U.S.-India relationship. In the run-up to India's April 2011 MMRCA announcement, many U.S. officials and analysts had hoped that the sale of U.S. jets would catalyze a relationship they argued was frustratingly stagnant. A year after U.S. firms were denied a MMRCA bid, the United States appears to have redoubled its efforts to bolster defense trade relations with India. The enthusiasm with which the Pentagon and State Department are pursuing such ties with India has in large part to do with India's growing importance in the context of the U.S. \"pivot\" toward the Asia-Pacific, or what is sometimes called the \"Indo-Pacific.\" Deputy Defense Secretary Carter summarizes the current U.S. push for defense sales to India: \"[O]ur objective, the joint objective we have with the Indians, is to make sure that only our strategic differences\u2014and we'll always have them\u2014and not our bureaucratic impediments, stand in the way of how this relationship can be all that it can be.\"\nAs a result of this push in defense-trade, U.S. officials now seek mutually beneficial co-production opportunities to demonstrate America's sincere interest in the further development of India's indigenous defense sector. From the American perspective, the willingness to strengthen defense ties with India through defense sales (in addition to other means) does not appear to be waning. Interviews with numerous U.S. officials found a broad consensus on the importance of working closely to remove current obstacles on defense trade, despite enormous frustrations that have accrued over the years. Expectations on what specific types of trade are likely also appear to have been re-calibrated since the loss of the MMRCA deal. \nIndia has long expressed an urgent interest in acquiring advanced U.S. technology, including defense technology. Although India's own strategic hesitations and budgetary restrictions have meant only measured acquisition of U.S. defense equipment, many analysts suggest that the expected $10 billion in sales to India over a decade-long partnership is significant. Moreover, the momentum within India to reduce corruption in the defense sector may make America's relatively rigid, yet corruption-free sales procedure more enticing for New Delhi's leaders. \nThe U.S. government and U.S. defense firms are in the process of learning how to operate in a competitive Indian market that has deep trade ties with other foreign arms suppliers. Both the United States and India are actively reforming their defense procurement and licensing practices. Washington and New Delhi are becoming increasingly accustomed to negotiating contracts that reflect one another's strategic and security interests, without reverting to skepticism and mistrust. The verdict is still out on whether U.S. defense companies will be sufficiently incentivized to pursue joint production in India or whether the United States will approve the co-production of advanced technologies. Likewise, it remains to be seen whether India will gain sufficient confidence to buy frontline U.S. platforms or take active steps to signal a closer partnership. Despite these uncertainties, both governments are bracing for the long haul in bilateral defense trade, as they are with the security relationship overall. \n\n\tConclusion\n\nThe new breadth and depth of U.S.-India security engagement detailed in this report constitute a gradual, but steady strengthening of bilateral defense relations over past decade. In notable contrast to the pre-2001 period, this present-day collaboration has endured political and diplomatic highs and lows without any serious suggestion that it be curtailed. As the U.S. government assesses its (deepening) strategic interests across the Asia-Pacific, India's geographic setting has no doubt increased its visibility as an important and potentially major actor. This trend is only hastened by America's \"rebalancing\" approach to the Asia-Pacific, which is seen to encompass the Indian Ocean region. New Delhi's leaders are mindful of the precariousness of their region's stability, and they arguably appreciate the value of leveraging an American presence in pursuing their strategic goals. Converging U.S. and Indian interests in a fluid geopolitical order have led the two governments to explore myriad new cooperative initiatives, and both are investing considerable time and effort to overcome the sometimes significant obstacles to these. \nIn the latter half of the previous decade, the U.S. Congress took the formal and landmark steps required to amend U.S. nonproliferation and export control laws so as to provide an exception and special status for India in the realm of nuclear and high-technology trade. The changes also served to open doors to both broader and smoother engagements in bilateral security cooperation and defense trade. While the (ostensible) proximate goals of the breakthrough 2008 civilian nuclear deal were to boost India's electricity generating capacity and benefit the U.S. economy through nuclear trade\u2014goals as yet unmet\u2014few observers will dismiss the more far-reaching goal of paving the way for truly strategic cooperation with New Delhi by engendering Indian trust and confidence in Washington as a partner. \nAlthough no similar potential breakthrough bilateral initiatives involving U.S. legislation are on the horizon, the role of the U.S. Congress in overseeing the conduct of U.S. foreign relations with India remains important. In years to come, the pursuit of closer security and defense trade ties with India\u2014should it continue as U.S. policy\u2014will entail many hurdles and occasional risks, some of the kind that Washington has not traditionally faced with existing international partnerships and alliances. Sales of technologically advanced weapons to India, in lieu of that country signing certain key defense agreements, are in part symbolic of the exceptional nature of the evolving relationship. To date, officials in both capitals have shown a clear willingness to work as effectively as possible within legal and political constraints they face, with some content to move forward through ad hoc procedures when necessary.\nAt present, difficulties surrounding sensitive issues such as end-use monitoring continue to fester, with both governments operating at what appear to be the margins of their mandates. India's insistence on co-production and technology sharing can undermine the potential for major future opportunities and constrain the scope of those that are manifest. Disagreements in such issue-areas suggest the possible need for more active congressional oversight and potentially even legislation. Congress can also play a role in the progress of military-to-military ties and defense trade with an eye toward encouraging Administration action on U.S. security interests involving India. While the foundation of the U.S.-India security relationship appears to be increasingly stable, and as mutual confidence grows, interested congressional parties can play a role in shaping the extent to which this partnership serves and protects American interests in the 21 st century.","output":"U.S.-India engagement on shared security interests is a topic of interest to the U.S. Congress, where there is considerable support for a deepened U.S. partnership with the world's largest democracy. Congressional advocacy of closer relations with India is generally bipartisan and widespread; House and Senate caucuses on India and Indian-Americans are the largest of their kind. Caucus leaders have encouraged the Obama Administration to work toward improving the compatibility of the U.S. and Indian defense acquisitions systems, as well as to seek potential opportunities for co-development or co-production of military weapons systems with India. In the 112th Congress, the Senate Armed Services Committee (S.Rept. 112-26) opined that a deepened partnership with India is critical to the promotion of core mutual national interests.\nThe United States and India have since 2004 been pursuing a \"strategic partnership\" that incorporates numerous economic, security, and global initiatives. Defense cooperation between the two countries remains in relatively early stages of development. However, over the past decade\u2014and despite a concurrent U.S. engagement with Indian rival Pakistan and a Cold War history of bilateral estrangement\u2014U.S.-India security cooperation has flourished. American diplomats now rate military links and defense trade among the most important aspects of transformed bilateral relations in the 21st century. The United States views security cooperation with India in the context of common principles and shared national interests such as defeating terrorism, preventing weapons proliferation, and maintaining regional stability. After initial uncertainty, under President Barack Obama, senior Pentagon officials assured New Delhi that the United States is fully committed to strengthening ties through the enhancement of the defense relationship made newly substantive under President George W. Bush.\nMany analysts view increased U.S.-India security ties as providing a perceived \"hedge\" against or \"counterbalance\" to growing Chinese influence in Asia, although both Washington and New Delhi repeatedly downplay such motives. While a complete congruence of U.S. and Indian national security objectives is unlikely in the foreseeable future, meaningful convergences are identified in areas such as the emergence of a new balance-of-power arrangement in the region. Still, indications remain that the perceptions and expectations of top U.S. and Indian strategic planners are divergent on several key issues, perhaps especially on the role of Pakistan, as well as on India's relations with Iran. Moreover, given a national foreign policy tradition of \"nonalignment,\" Indian leaders are averse to forming any \"alliance\" with the United States and are clear in their intention to maintain India's \"strategic autonomy.\" Questions remain about the ability of the Indian economy to grow at rates sufficient to improve its security capabilities at the pace sought in both Washington and New Delhi. Despite these factors, U.S. leaders only expect India's importance to U.S. interests to grow steadily, and they foresee India taking on new security roles commensurate with its status as a major power and stakeholder in the international system. This expectation is a key aspect of the Obama Administration's policy of \"rebalancing\" toward the Asia-Pacific, which is conceived as including the Indian Ocean region.\nThis report reviews the major facets of U.S.-India security relations with a focus on military-to-military contacts, counterterrorism and intelligence cooperation, and defense trade, while also discussing some of the many obstacles to deeper cooperation in each of these areas. The strategic aspects of the bilateral security relationship are in the companion CRS Report R42948, U.S.-India Security Relations: Strategic Issues, by [author name scrubbed] and [author name scrubbed]. U.S.-India relations are discussed more broadly in CRS Report RL33529, India: Domestic Issues, Strategic Dynamics, and U.S. Relations, coordinated by [author name scrubbed]."}
{"id":"crs_R44025","pid":"crs_R44025_0","input":"T he Livestock Mandatory Reporting Act ( P.L. 106-78 , Title IX; LMR ) requires that meat packers report prices and other information on purchases of cattle, hogs, lamb, boxed beef, wholesale pork, and lamb carcasses and boxed lamb to the U.S. Department of Agriculture (USDA). Authority for mandatory reporting was set to expire on September 30, 2015. Livestock industry stakeholders supported the reauthorization of the act, and producer groups put forward proposals amending mandatory reporting. The House passed a reauthorization bill ( H.R. 2051 ) in June 2015. In September 2015, the Senate amended the House-passed bill, and Congress reauthorized LMR until September 30, 2020, in the enacted Agriculture Reauthorizations Act of 2015 ( P.L. 114-54 ).\n\n\tBackground\n\nBefore livestock mandatory price reporting was enacted by Congress in 1999, the USDA's Agricultural Marketing Service (AMS) collected livestock and meat price and related market information from meat packers on a voluntary basis under the authority of the Agricultural Marketing Act of 1946 (7 U.S.C. \u00a71621 et seq.). AMS market reporters collected and reported prices from livestock auctions, feedlots, and packing plants. The information was disseminated through hundreds of daily, weekly, monthly, and annual written and electronic USDA reports on sales of live cattle, hogs, and sheep and wholesale meat products from these animals. The goal was to provide all buyers and sellers with accurate and objective market information.\nBy the 1990s, the livestock industry had undergone many sweeping changes, including increased concentration in meat packing and animal feeding, more production specialization, and more vertical integration (firms controlling more than one aspect of production). Fewer animals were sold through negotiated (cash; or \"spot\") sales, and more frequently sold under alternative marketing arrangements (e.g., formula sales based on a negotiated price established in the future) with prices not publicly disclosed or reported. Some livestock producers, believing such arrangements made it difficult or impossible for them to determine \"fair\" market prices for livestock going to slaughter, called for mandatory price reporting for packers and others who process and market meat. USDA had estimated in 2000 that the former voluntary system was not reporting 35%-40% of cattle, 75% of hog, and 40% of lamb transactions.\nDuring debate on mandatory price reporting, opponents, including some meat packers and other farmers and ranchers, argued that a mandate would impose costly new burdens on the industry and could cause the release of confidential company information. Nonetheless, some of these earlier opponents decided to support a mandatory price reporting law. Livestock producers had been hit by very low prices in the late 1990s and were looking for ways to strengthen the markets. Some meat packers also decided to support a national consensus bill at least partly to preempt what they viewed as an emerging \"patchwork\" of state price reporting laws that could alter competition between packers operating under different state reporting laws.\n\n\tLegislative and Rulemaking History\n\nThe Livestock Mandatory Reporting Act of 1999 (LMR, P.L. 106-78 , Title IX; 7 U.S.C. \u00a71635 et seq.) was enacted in October 1999 as part of the FY2000 Agriculture appropriations act. The law mandated price reporting for live cattle, boxed beef, and live swine and allowed USDA to establish mandatory price reporting for lamb sales. The law authorized appropriations as necessary and required USDA to implement regulations no later than 180 days after the law was enacted. Mandatory price reporting was authorized for five years, until September 30, 2004.\nUSDA issued a final rule on December 1, 2000. Although reporting for lamb was optional in the LMR statute, USDA established mandatory reporting for lamb in the final rule. The rule was to be implemented on January 30, 2001, but USDA delayed implementation for two months until April 2, 2001, to allow for additional time to test the automated LMR program to ensure program requirements were being met.\nThe implementation of mandatory reporting did not affect the continuation of the AMS voluntary price-reporting program. AMS continues to publish prices from livestock auctions, and feeder cattle and pig sales, through voluntary-based market news reports.\nLMR authority lapsed briefly in October 2004 before Congress extended mandatory price reporting for one year to September 30, 2005. Authority for LMR lapsed again on September 30, 2005. At that time, USDA requested that all packers who were required to report under the 1999 act continue to submit required information voluntarily. About 90% of packers voluntarily reported, which allowed USDA to publish most reports. In October 2006, Congress passed legislation to reauthorize reporting through September 30, 2010. This act also amended swine reporting requirements from the original 1999 law, by separating the reporting requirements for sows and boars from barrows and gilts, among other changes. Because statutory authority for the program had lapsed, USDA determined that it had to reestablish regulatory authority through rulemaking in order to continue LMR operations.\nOn May 16, 2008, USDA issued the final rule to reestablish and revise the mandatory reporting program. This rule incorporated the swine reporting changes and was intended to enhance the program's overall effectiveness and efficiency based on AMS' experience in the administration of the program. The rule became effective on July 15, 2008.\nMandatory wholesale pork price reporting was not included in the original price-reporting act because the hog industry could not agree on reporting for pork. Section 11001 of the 2008 farm bill ( P.L. 110-246 ) directed USDA to conduct a study on the effects of requiring packers to report the price and volume of wholesale pork cuts, which was a voluntary reporting activity at the time. The farm bill study on wholesale pork pricing was released in November 2009 and concluded that there would be benefits from a mandatory pork reporting program.\nOn September 27, 2010, the Mandatory Price Reporting Act of 2010 ( P.L. 111-239 ) was enacted, reauthorizing mandatory price reporting through September 30, 2015. The act added a provision for mandatory reporting of wholesale pork cuts, directed the Secretary to engage in negotiated rulemaking to make required regulatory changes for mandatory wholesale pork reporting, and established a negotiated rulemaking committee to develop these changes. The committee was composed of representatives of pork producers, packers, processors, and retailers. The committee met three times, was open to the public, and developed recommendations for mandatory pork reporting. USDA released the final rule on August 22, 2012, and the regulation was implemented on January 7, 2013.\nSee the Appendix for a description of selected LMR reporting provisions, marketing definitions, confidentiality rules, and USDA reporting and enforcement. \n\n\tLMR Reauthorization in 2015\n\nThe House Agriculture Subcommittee on Livestock and Foreign Agriculture started the reauthorization process by holding a hearing on April 22, 2015, that included producer representatives from the National Pork Producers Council (NPPC), the National Cattlemen's Beef Association (NCBA), and the American Sheep Industry Association (ASI) and a representative from the North American Meat Institute (NAMI), which represents meat packers. All representatives voiced support for mandatory reporting, and the producer representatives identified changes to specific reporting requirements they would like to see incorporated into LMR. All stakeholders agreed that the loss of reporting during the October 2013 government shutdown was disruptive to the market, and they would like LMR to be deemed an \"essential\" service that operates if another government shutdown should occur.\nOn April 28, 2015, the Mandatory Price Reporting Act of 2015 ( H.R. 2051 ) was introduced in the House. The House Committee on Agriculture marked up the bill on April 30. H.R. 2051 reauthorized LMR through September 30, 2020, and included several sections that addressed hog and lamb market issues that livestock stakeholders raised about LMR. (See \" Livestock Sector Issues for Reauthorization in 2015 \" for a discussion of LMR issues of interest to the livestock industry.) On June 9, 2015, the House passed H.R. 2051 on a voice vote.\nOn September 17, 2015, by voice vote, the Senate Agriculture Committee marked up and reported to the full Senate an amended version of the House-passed H.R. 2051 . Amended H.R. 2051 , the Agriculture Reauthorizations Act of 2015, included provisions to reauthorize Mandatory Price Reporting, the U.S. Grain Standards Act, and the National Forest Foundation Act, three laws that were set to expire on September 30, 2015. On September 21, 2015, the Senate passed the bill by unanimous consent, and the House passed the Senate-amended bill on September 28 by voice vote. The Agriculture Reauthorizations Act of 2015 ( P.L. 114-54 ) was signed into law on September 30, 2015.\n\n\t\tLMR Provisions Enacted in 2015\n\nThe Agriculture Reauthorizations Act of 2015 ( P.L. 114-54 ) extended mandatory price reporting until September 30, 2020. In addition, the act makes several changes to swine reporting, revises definitions in lamb reporting, and requires USDA to conduct a study on LMR ahead of the next reauthorization.\nThe provisions in P.L. 114-54 on swine and lamb were proposed to Congress by livestock industry stakeholders as measures that would improve LMR (see \" Livestock Sector Issues for Reauthorization in 2015 \" for selected industry proposals for reauthorization). The cattle industry did not formally propose any changes to cattle LMR requirements, but several swine and lamb industry proposals were incorporated in the House-passed Mandatory Price Reporting Act of 2015 ( H.R. 2051 ).\nThe Senate-amended version included most of the House-passed provisions. However, the section of the House-passed bill that granted emergency authority to USDA to continue price reporting in the event of a government shutdown because of a lapse in appropriations, which was widely supported by the cattle, swine, and lamb industries, was not included in the enacted law. (See \" LMR as an \"Essential\" Service \" below for industry views.)\n\n\t\t\tSwine Reporting\n\nThe enacted legislation establishes the new negotiated formula purchase reporting category. Under this category, swine purchases are based on a formula, negotiated on a lot-by-lot basis, and the swine are scheduled for delivery to the packer no later than 14 days after the formula is negotiated and the swine are committed to packers.\nThe enacted legislation also amends swine LMR by requiring the reporting of the low and high range of net swine prices, to include the number of barrows and the number of gilts within the ranges, and the total number and weighted average price of barrows and gilts. Lastly, the act requires that next-day reports include transaction prices that were concluded after the previous day's reporting deadlines.\nThe enacted swine reporting provisions are the same as those in Section 3 of the House-passed bill. (See \" New Reporting Proposals for Swine \" below for industry views.)\n\n\t\t\tLamb Definitions\n\nP.L. 114-54 amends the regulations (7 C.F.R. 59.300) for lamb reporting to redefine lamb importers and lamb packers. Now, importers are defined as entities that import an average of 1,000 metric tons of lamb meat per year during the immediately preceding four years. The original limit was 2,500 metric tons. If an importing entity does not meet the volume limit, the Secretary still may determine that an entity should be considered an importer.\nIn P.L. 114-54 , lamb packers are defined as entities having 50% or more ownership in facilities, and include federally inspected facilities that slaughter and process an average of 35,000 head per year over the immediately preceding five years. The original threshold was 75,000 head. Also, other facilities may be considered packers if the Secretary determines they should be considered a packer based on processing plant capacity.\nThese enacted revised definitions for lamb importers and packers are the same as those in Section 4 of the House-passed bill. (See \" Concentrated Lamb Markets \" below for industry views.)\n\n\t\t\tStudy on Livestock Mandatory Reporting\n\nUSDA is required to conduct a study of the price-reporting program for cattle, swine, and lamb in P.L. 114-54 . The study is to be submitted to the House and Senate Agriculture Committees by March 1, 2018. The study, to be conducted by USDA's Agricultural Marketing Service and the Office of Chief Economist, is directed to analyze current marketing practices and to identify legislative and regulatory recommendations that are readily understandable; reflect current market practices; and are relevant and useful to producers, packers, and other market participants. Also, the study is to analyze USDA reporting services.\nThis LMR study provision was included in Section 5 of the House-passed bill, but with a later deadline of January 1, 2020.\n\n\tLivestock Sector Issues for Reauthorization in 2015\n\nA simple reauthorization of mandatory reporting would amend the termination date in Section 260 of the Agricultural Marketing Act of 1946 (7 U.S.C. 1636i). However, like past reauthorizations, livestock industry stakeholders suggested changes that were intended to improve mandatory reporting and to address issues that emerged since the last reauthorization. Several of the issues are discussed below.\n\n\t\tLMR as an \"Essential\" Service\n\nDuring the nearly 15 years that LMR has been in place, livestock producers, processors, and industry analysts have come to rely on the AMS mandatory price reporting data to make marketing decisions. Many livestock contracts between buyers and sellers are based on prices reported under LMR. In October 2013, during the government shutdown when most federal operations came to a standstill, meat packers continued to report LMR data to AMS, but mandatory daily and weekly reports were not published. In addition to the loss of price information for producers, the gap in LMR data affected the futures market because the CME Group uses LMR data to settle live hog contracts. CME also uses LMR-reported cattle carcass characteristics to settle live cattle futures contracts. CME has noted that LMR price data are trusted and that few other public alternatives to the LMR data exist.\nDuring the reauthorization debate, livestock stakeholders urged USDA to deem mandatory reporting an \"essential\" service in order to avoid the loss of livestock price information if another government shutdown, such as in October 2013, occurs due to a lapse in appropriations. Many contend that any gap in mandatory reporting is disruptive to livestock markets. Although the House-passed version ( H.R. 2051 ) contained such a provision, it was not included in the final bill.\n\n\t\tNew Reporting Proposals for Swine\n\nThe NPPC recommended that AMS add another purchase category for swine called negotiated formula purchase . Under this purchasing arrangement, a producer negotiates the sale of swine on a lot-by-lot basis, but the price will be determined by formula at a later date. NPPC believes this represents a negotiated sale, but under AMS reporting it is classified as a swine or pork market formula purchase because there is no established price at the time of purchase. Negotiated purchases , or cash sales, are often viewed as the true measure of price discovery, but negotiated purchases as a share of total hog sales has dropped to less than 4%. According to NPPC testimony before the Subcommittee on Livestock and Foreign Agriculture of the House Agriculture Committee, the total number of hogs that would trade under this new category is not known, but possibly could increase the number of reported negotiated hog sales by 50-100%. Boosting the volume of negotiated purchases would be expected to increase price discovery.\nSome livestock sales occur after the afternoon reporting deadline for packers to send reports to AMS and are not reported in a daily report. Pork producers believe that sales of hogs after the afternoon deadline are usually delivered to packing plants the next day. To provide more timely hog marketing and price information, NPPC recommends that hog trades that occur late in the day be reported in the next day's morning or afternoon daily reports. The additional reporting would better reflect the daily hog market; increase trade volume, thus reducing data disclosure issues; and result in more complete reports.\nThese swine proposals were included in P.L. 114-54 . \n\n\t\tConcentrated Lamb Markets\n\nThe U.S. sheep and lamb industry is confronted with a very concentrated market that results in price-reporting challenges not necessarily experienced by the larger cattle and hog sectors. The sheep and lamb industry as a whole (production, feeding, and processing) believes that LMR is crucial for creating a transparent market, and the American Sheep Industry Association (ASI) worked with AMS from 2012-2014 to amend LMR in ways to improve lamb reporting ahead of reauthorization. Although the ASI effort did not result in rulemaking, proposals developed in earlier years are the basis for the lamb industry's proposals during current reauthorization. \nU.S. lamb imports account for half of the lamb consumed in the United States. Therefore, the pricing of lamb imports is crucial for U.S. lamb producers in making marketing decisions. ASI recommended that the reporting threshold for lamb imports be lowered to 1,000 metric tons from the current 2,500 metric tons to capture prices for a greater share of lamb imports.\nIn addition, smaller or mid-size lamb processors have entered the business to capture specialty lamb markets, but because of the smaller size, these businesses are often exempt from reporting. To capture pricing data from mid-size lamb slaughters and processors, ASI recommended that the threshold for packer reporting be reduced to an average of 35,000 head slaughtered per year during the immediately preceding five years from the current 75,000 head.\nThese two threshold changes for importers and packers were designed to pick up a larger share of the total lamb market and better reflect average prices in the market. Both proposals were included in P.L. 114-54 .\nThe sheep and lamb industry also faces the situation where there are few participants in the processing sector. This leads to problems with non-reporting because of confidentiality requirements. Also, a substantial share of lamb processing is conducted on a \"custom slaughter\" basis, which is not counted as a buyer-seller transaction, and thus not reported under LMR. In addition, almost one-third of U.S. lambs are processed by one cooperative that does not report under LMR because its business structure is treated as a packer-owned operation, even though, reportedly, the cooperative is willing to report under LMR. ASI recommended that AMS be flexible with its packer definitions to allow such an operation to report under LMR. P.L. 114-54 granted USDA discretion to determine that importers and packers not meeting the threshold requirements may still be required to report.\n\n\t\tCattle Proposals\n\nThe cattle industry supported the reauthorization of LMR, but the new law does not contain any cattle-specific proposals. During the markup of the House bill, House Agriculture Committee Chairman Conaway indicated that the cattlemen and meat packers were working on proposals that could be included as amendments to the bill. Various cattle stakeholders raised some issues with mandatory reporting, but no consensus developed to amend LMR cattle provisions.\nThe NCBA recommended that AMS have flexibility to request additional information, as needed, to identify and report appropriate industry standards as cattle marketing changes. Also, NCBA recommended that LMR include a new category for fed-cows, to be added to reporting for steers and heifers, and cows and bulls. Currently, AMS reports cover all cows, but a breakout of fed-cows could have provided additional price and marketing information beneficial for cattle producers who market fed-cows.\nIn a letter to the Senate Agriculture Committees, the Ranchers-Cattlemen Action Legal Fund, United Stockgrowers of America (R-CALF) expressed specific concerns about new types of cattle purchases that are not captured in LMR. These include (1) negotiated basis trade-type contracts that do not appear to be reported when negotiated, (2) negotiated cash sales that have extended delivery dates, and (3) \"Tops\" trades, where a negotiated premium is offered on a cash trade and is then reported as a formula purchase. R-CALF also raised concern about the frequency of late-day transactions that miss the day's reporting deadline, thus possibly distorting the day's price.\nThe National Farms Union (NFU) expressed its support for the reauthorization of mandatory reporting as an important tool for combating market concentration. In letters to the Senate and House Agriculture Committees, NFU suggested changes to LMR for cattle that would have addressed confidentiality rules, reporting on imported cattle that go into feedlots, reporting on weekly market concentration, and separate data from forward contracts from those tied to the futures market.\n\n\t\t\tDescription of the LMR Program\n\nThe following sections discuss some of the main Livestock Mandatory Reporting Act (LMR) reporting requirements, as well as confidentiality rules, Agricultural Marketing Service reporting, and enforcement of LMR. The text box, included below, provides definitions for selected terms used in LMR.\nSelected Reporting Requirements\nPackers that are subject to mandatory reporting are defined as federally inspected plants that have slaughtered a minimum annual average of 125,000 head of cattle, 100,000 head of swine, 200,000 head of sows and boars or a combination thereof, and 35,000 lambs during the immediate five preceding years. If a plant has operated for fewer than five years, USDA will determine, based on capacity, if the packer must report. Packers are required to report the prices established for steers and heifers twice daily (10 a.m. and 2 p.m. central time); cows and bulls twice daily (10 a.m. central for current day, and 2 p.m. for previous-day purchases); barrows and gilts three times daily (7 a.m. central for prior-day purchases, and 10 a.m. and 2 p.m. central); sows and boars once daily (7 a.m. central for prior-day purchases); and lambs once daily (2 p.m. central). Besides the established prices, packers report premiums and discounts and the type of purchase (e.g., negotiated, formula, or forward contract). Packers are required to report, depending on the species, the quantity delivered for the day; the quantity committed to the packer; the estimated weight on a live weight basis or a dressed weight basis; and quality characteristics, such as Choice grade. In addition to daily reporting, on the first reporting day of the week, packers file a cumulative weekly report of the previous week's purchases of steers and heifers, and swine. Lamb packers are required to report the previous week's purchases on the first and second reporting day of the week, depending on the data. Steer and heifer and lamb packers are to include data on type of purchase (negotiated, formula, or forward contract), premiums and discounts, and some carcass characteristics (e.g., quality grade and yield, average dressing percentage). Swine packers are required to report the amount paid in premiums that are based on noncarcass characteristics (e.g., volume, delivery timing, hog breed). Also, packers must make available to producers a list of such premiums. In addition to livestock purchase prices, packers are required to report sales data for boxed beef, wholesale pork, and carcass and boxed lamb. Sales are reported twice daily for beef and pork; once daily for lamb. Packers are required to provide price, quantity, quality grade for beef and lamb, and type of cut. Packers report beef and pork domestic and export sales and domestic boxed lamb sales. Lamb importers who have imported a minimum average of 1,000 metric tons of lamb in the immediate five preceding years are required to report such information as weekly lamb prices, quantities imported, the type of sale (negotiated, formula, or forward contract), cuts of lamb, and delivery period.\nConfidentiality\nThe LMR law requires that price reporting be confidential to protect the identity of packers and contracts and proprietary business information. In determining what data could be published, AMS initially adopted a \"3\/60\" confidentiality guideline (commonly used throughout the federal government), i.e., at least three entities in the regional or national reporting area, and no single entity could account for more than 60% of the reported market volume. Otherwise, the data cannot be published in order to protect the identity of those reporting. AMS found that the \"3\/60\" guideline resulted in large gaps in data reporting. For example, during April 2, 2001, and June 15, 2001, 24% of daily reports and 20% of weekly reports were not published because of confidentiality provisions.\nIn order to address the data gaps, AMS adopted a \"3\/70\/20\" guideline in August 2001. It required that at least three entities report 50% of the time over a 60-day period; no one entity could account for more than 70% of volume over a 60-day period; and in cases where only one entity reports, the entity cannot be the only reporter more than 20% of the time over a 60-day period. These new guidelines substantially eliminated the data gaps.\nAMS Reporting\nThe Livestock, Poultry, and Grain Market News Division (LPGMN) of the AMS Livestock, Poultry, and Seed Program is responsible for compiling and disseminating the information collected under LMR. In addition, LPGMN continues to operate a voluntary reporting program for livestock not covered under LMR, poultry and grain. Under LMR, LPGMN publishes 62 daily reports and 47 weekly reports. AMS publishes 29 daily reports for cattle, 20 for swine, 6 for beef, 4 for pork, and 3 for lamb. Weekly reports total 24 for cattle, 2 for swine, 11 for beef, 8 for pork, and 2 for lamb. According to AMS budget documents, mandatory reporting currently provides data for 79% of total slaughtered cattle, 94% of hogs, and 46% of sheep. For meat products, LMR covers 94% of boxed beef production, 87% of wholesale pork, and 57% of lamb meat. Small plants, which fall below required thresholds, or non-federally inspected plants account for the remaining percentage of slaughter and production. AMS market news operates on an annual appropriation of about $34 million, and the LMR program accounts for about $5 million to $6 million of that amount.\nEnforcement\nAMS compliance staff enforces LMR through audits once every six months. AMS reviews support documentation for randomly sampled lots. If non-compliance is found, AMS will ask the packer to correct the problem. If the packer does not correct the problem, AMS may issue a warning letter, and ultimately, the packer could be fined $10,000 for each violation if corrective action is not taken. AMS published quarterly compliance reports through September 2014, and then released a six month (October 2014-March 2015) compliance report.","output":"The U.S. Department of Agriculture's (USDA's) Agricultural Marketing Service (AMS) collected livestock and meat price and related market information from meat packers on a voluntary basis under the authority of the Agricultural Marketing Act of 1946 (7 U.S.C. \u00a71621 et seq.). However, as the livestock industry became increasingly concentrated in the 1990s, fewer animals were sold through negotiated (cash; or \"spot\") purchases and more frequently sold under alternative marketing arrangements that were not publicly disclosed under voluntary reporting. Some livestock producers, believing such arrangements made it difficult or impossible for them to determine \"fair\" market prices for livestock going to slaughter, called for mandatory price reporting for packers and others who process and market meat.\nIn response, Congress passed the Livestock Mandatory Reporting Act of 1999 (P.L. 106-78, Title IX; LMR). The law mandated price reporting for live cattle, boxed beef, and live swine and allowed USDA to establish mandatory price reporting for lamb sales. USDA issued a final rule in December 2000 that went into effect in April 2001. The final rule included mandatory reporting for lamb. The law has been amended to include more detail on swine and to add wholesale pork. The act has been reauthorized three times, and the last reauthorization was set to expire September 30, 2015.\nIn September 2015, the Senate and House passed the Agriculture Reauthorizations Act of 2015 (H.R. 2051), a Senate-amended version of the House-passed Mandatory Price Reporting Act of 2015, which reauthorized mandatory price reporting until September 30, 2020. The act was signed into law (P.L. 114-54) on September 30, 2015. Reauthorization was widely supported by livestock industry stakeholders. As in past years, stakeholders proposed changes that were intended to improve mandatory reporting as issues emerged between reauthorizations.\nIn response to livestock stakeholders, the act makes several changes to swine reporting, creating a new negotiated formula purchase category and requiring that transactions reported after the day's reporting deadline be reported in the next-day price reports. It revises the definitions of lamb importers and packers by lowering the volume thresholds for determining if an importer or packer is subject to reporting requirements. Lastly, the act requires USDA to conduct a study on LMR ahead of the next reauthorization.\nHowever, the act did not include a provision to grant emergency authority to USDA to continue price reporting in the event of a government shutdown because of a lapse in appropriations. This provision was widely supported by livestock industry stakeholders and had been included in the House-passed version of H.R. 2051."}
{"id":"gao_GAO-04-872T","pid":"gao_GAO-04-872T_0","input":"\tSocial Security\u2019s Long-Term Financing Problem Deserves Timely Action\n\nToday the Social Security program faces a long-range and fundamental  financing problem driven largely by known demographic trends. The lack  of an immediate solvency crisis affects the nature of the challenge, but it  does not eliminate the need for action. Acting soon reduces the likelihood  that the Congress will have to choose between imposing severe benefit  cuts and unfairly burdening future generations with the program\u2019s rising  costs. Acting soon would allow changes to be phased in so the individuals  who are most likely to be affected, namely younger and future workers,  will have time to adjust their retirement planning. Since there is a great  deal of confusion about Social Security\u2019s current financing arrangements  and the nature of its long-term financing problem, I would like to spend  some time describing the nature, timing, and extent of the financing  problem.\n\n\t\tDemographic Trends Drive Social Security\u2019s Long- Term Financing Problem\n\nAs you all know, Social Security has always been largely a pay-as-you-go  system. This means that current workers\u2019 taxes generally pay current  retirees\u2019 benefits. As a result, the relative number of workers and  beneficiaries has a major impact on the program\u2019s financial condition. This  ratio, however, is changing. In 1950, before the Social Security system was  mature, the ratio was 16.5:1. In the 1960s, the ratio averaged 4.2:1. Today it  is 3.3:1, and it is expected to drop to around 2.2:1 by 2030. The retirement  of the baby boom generation is not the only demographic challenge facing  the system. People are retiring early and living longer. A falling fertility  rate is the other principal factor underlying the growth in the elderly\u2019s  share of the population. In the 1960s, the fertility rate was an average of 3  children per woman. Today it is a little over 2, and by 2030 it is expected to  fall to 1.95 \u2014a rate that is below the level necessary to replace the  population. Taken together, these trends serve to threaten the financial  solvency and sustainability of this important program. (See fig. 1.)\nThe combination of these trends means that annual labor force growth will  begin to slow after 2010 and by 2025 is expected to be less than a third of  what it is today. (See fig. 2.) Relatively fewer workers will be available to  produce the goods and services that all will consume. Without a major  increase in productivity, low labor force growth will lead to slower growth  in the economy and to slower growth of federal revenues. This in turn will  only accentuate the overall pressure on the federal budget.\nThis slowing labor force growth is not always recognized as part of the  Social Security debate. Social Security\u2019s retirement eligibility dates are  often the subject of discussion and debate and can have a direct effect on  both labor force growth and the condition of the Social Security  retirement program. However, it is also appropriate to consider whether  and how changes in pension and\/or other government policies could  encourage longer workforce participation. To the extent that people  choose to work longer as they live longer, the increase in the share of life  spent in retirement would be slowed. This could improve the finances of  Social Security and mitigate the expected slowdown in labor force growth.  It could also help to encourage additional economic growth.\n\n\tSocial Security\u2019s Cash Flow Is Expected to Turn Negative in 2018\n\nToday, the Social Security Trust Funds take in more in taxes than they  spend. Largely because of the known demographic trends I have  described, this situation will change. Although the trustees\u2019 2004  intermediate estimates project that the combined Social Security Trust  Funds will be solvent until 2042, program spending will constitute a  rapidly growing share of the budget and the economy well before that  date. In 2008, the first baby boomers will become eligible for Social  Security benefits, and the future costs of serving them have already  become a factor in the Congressional Budget Office\u2019s (CBO) 10-year  projections. Under the trustees\u2019 2004 intermediate estimates, Social  Security\u2019s cash surplus\u2014the difference between program tax income and  the costs of paying scheduled benefits\u2014will begin a permanent decline in  2009. To finance the same level of federal spending as in the previous year,  additional revenues and\/or increased borrowing will be needed.\nBy 2018, Social Security\u2019s tax income is projected to be insufficient to pay  currently scheduled benefits. At that time, Social Security will join  Medicare\u2019s Hospital Insurance Trust Fund, whose outlays are projected to  begin to exceed revenues this year, as a net claimant on the rest of the  federal budget. The combined OASDI Trust Funds will begin drawing on  the Treasury to cover the cash shortfall, first relying on interest income  and eventually drawing down accumulated trust fund assets. The Treasury  will need to obtain cash for those redeemed securities either through  increased taxes, and\/or spending cuts, and\/or more borrowing from the  public than would have been the case had Social Security\u2019s cash flow  remained positive. Neither the decline in the cash surpluses nor the cash  deficit will affect the payment of benefits. The shift from positive to  negative cash flow, however, will place increased pressure on the federal  budget to raise the resources necessary to meet the program\u2019s ongoing  costs.\nUltimately, the critical question is not how much a trust fund has in assets,  but whether the government as a whole can afford the benefits in the  future and at what cost to other claims on scarce resources. As I have said  before, the future sustainability of programs is the key issue policy makers  should address\u2014i.e., the capacity of the economy and budget to afford the  commitment. Fund solvency can help, but only if promoting solvency  improves the future sustainability of the program.\n\n\t\tDecline in Budgetary Flexibility Absent Entitlement Reform\n\nFrom the perspective of the federal budget and the economy, the  challenge posed by the growth in Social Security spending becomes even  more significant in combination with the more rapid expected growth in  Medicare and Medicaid spending. This growth in spending on federal  entitlements for retirees will become increasingly unsustainable over the  longer term, compounding an ongoing decline in budgetary flexibility.  Over the past few decades, spending on mandatory programs has  consumed an ever-increasing share of the federal budget. In 1964, prior to  the creation of the Medicare and Medicaid programs, spending for  mandatory programs plus net interest accounted for about 33 percent of  total federal spending. By 2004, this share had almost doubled to  approximately 61 percent of the budget. (See fig. 4.)\nIn much of the last decade, reductions in defense spending helped  accommodate the growth in these entitlement programs. Even before the  events of September 11, 2001, however, this ceased to be a viable option.  Indeed, spending on defense and homeland security will likely grow as we  seek to combat new threats to our nation\u2019s security.\nGAO prepares long-term budget simulations that seek to illustrate the  likely fiscal consequences of the coming demographic tidal wave and  rising health care costs. These simulations continue to show that to move  into the future with no changes in federal retirement and health programs  is to envision a very different role for the federal government. Assuming,  for example, all expiring tax provisions are extended and discretionary  spending keeps pace with the economy, by midcentury federal revenues  may be adequate to pay no more than interest on the federal debt. To  obtain balance, massive spending cuts, tax increases, or some combination  of the two would be necessary. (See fig. 5.) Neither slowing the growth of  discretionary spending nor   This testimony is not about the complexities of Medicare, but it is  important to note that Medicare presents a much greater, more complex,  and more urgent fiscal challenge than does Social Security. Medicare  growth rates reflect not only a burgeoning beneficiary population, but also  the escalation of health care costs at rates well exceeding general rates of  inflation. Increases in the number and quality of health care services have  been fueled by the explosive growth of medical technology. Moreover, the  actual costs of health care consumption are not transparent. Third-party  payers generally insulate consumers from the cost of health care  decisions. These factors and others contribute to making Medicare a much  greater and more complex fiscal challenge than even Social Security. GAO  has developed a health care framework to help focus additional attention  on this important area and to help educate key policy makers and the  public on the current system and related challenges.\nIndeed, long-term budget flexibility is about more than Social Security and  Medicare. While these programs dominate the long-term outlook, they are  not the only federal programs or activities that bind the future. The federal  government undertakes a wide range of programs, responsibilities, and  activities that obligate it to future spending or create an expectation for  spending. GAO has described the range and measurement of such fiscal  exposures\u2014from explicit liabilities such as environmental cleanup  requirements to the more implicit obligations presented by life-cycle costs  of capital acquisition or disaster assistance. Making government fit the  challenges of the future will require not only dealing with the drivers\u2014 entitlements for the elderly\u2014but also looking at the range of federal  activities. A fundamental review of what the federal government does and  how it does it will be needed.\nAt the same time it is important to look beyond the federal budget to the  economy as a whole. Figure 6 shows the total future draw on the economy  represented by Social Security, Medicare, and Medicaid. Under the 2004  Trustees\u2019 intermediate estimates and CBO\u2019s long-term Medicaid estimates,  spending for these entitlement programs combined will grow to 15.6  percent of GDP in 2030 from today\u2019s 8.5 percent. Taken together, Social  Security, Medicare, and Medicaid represent an unsustainable burden on  future generations.\nWhen Social Security redeems assets to pay benefits, the program will  constitute a claim on real resources at that time. As a result, taking action  now to increase the future pool of resources is important. To echo Federal  Reserve Chairman Greenspan, the crucial issue of saving in our economy  relates to our ability to build an adequate capital stock to produce enough  goods and services in the future to accommodate both retirees and  workers in the future. The most direct way the federal government can  raise national saving is by increasing government saving, i.e., as the  economy returns to a higher growth path, a much more balanced and  disciplined fiscal policy that recognizes our long-term challenges can help  provide a strong foundation for future economic growth and can enhance  future budgetary flexibility. In the short term, we need to realize that we  are already facing a huge fiscal hole. The first thing that we should do is  stop digging.\nTaking action soon on Social Security would not only promote increased  budgetary flexibility in the future and stronger economic growth but  would also make the necessary action less dramatic than if we wait. Some  of the benefits of early action\u2014and the costs of delay\u2014can be seen in  figure 7. This compares what it would take to achieve actuarial balance at  different points in time by either raising payroll taxes or reducing  benefits. If we did nothing until 2042\u2014the year the Trust Funds are  estimated to be exhausted\u2014achieving actuarial balance would require  changes in benefits of 30 percent or changes in taxes of 43 percent. As  figure 7 shows, earlier action shrinks the size of the adjustment.\nThus both sustainability concerns and solvency considerations drive us to  act sooner rather than later. Trust Fund exhaustion may be almost 40  years away, but the squeeze on the federal budget will begin as the baby  boom generation starts to retire. Actions taken today can ease both these  pressures and the pain of future actions. Acting sooner rather than later  also provides a more reasonable planning horizon for future retirees.\n\n\tEvaluating Social Security Reform Proposals\n\nAs important as financial stability may be for Social Security, it cannot be  the only consideration. As a former public trustee of Social Security and  Medicare, I am well aware of the central role these programs play in the  lives of millions of Americans. Social Security remains the foundation of  the nation\u2019s retirement system. It is also much more than just a retirement  program; it pays benefits to disabled workers and their dependents,  spouses and children of retired workers, and survivors of deceased  workers. Last year, Social Security paid almost $471 billion in benefits to  more than 47 million people. Since its inception, the program has  successfully reduced poverty among the elderly. In 1959, 35 percent of the  elderly were poor. In 2000, about 8 percent of beneficiaries aged 65 or  older were poor, and 48 percent would have been poor without Social  Security. It is precisely because the program is so deeply woven into the  fabric of our nation that any proposed reform must consider the program  in its entirety, rather than one aspect alone. Thus, GAO has developed a  broad framework for evaluating reform proposals that considers not only  solvency but other aspects of the program as well.\nThe analytic framework GAO has developed to assess proposals  comprises three basic criteria:  the extent to which a proposal achieves sustainable solvency and how it  would affect the economy and the federal budget; the relative balance struck between the goals of individual equity and  income adequacy; and   how readily a proposal could be implemented, administered, and  explained to the public.\nThe weight that different policy makers may place on different criteria will  vary, depending on how they value different attributes. For example, if  offering individual choice and control is less important than maintaining  replacement rates for low-income workers, then a reform proposal  emphasizing adequacy considerations might be preferred. As they fashion  a comprehensive proposal, however, policy makers will ultimately have to  balance the relative importance they place on each of these criteria.\n\n\t\tFinancing Sustainable Solvency\n\nOur sustainable solvency standard encompasses several different ways of  looking at the Social Security program\u2019s financing needs. While 75-year  actuarial balance is generally used in evaluating the long-term financial  outlook of the Social Security program and reform proposals, it is not  sufficient in gauging the program\u2019s solvency after the 75th year. For  example, under the trustees\u2019 intermediate assumptions, each year the 75- year actuarial period changes, and a year with a surplus is replaced by a  new 75th year that has a significant deficit. As a result, changes made to  restore trust fund solvency only for the 75-year period can result in future  actuarial imbalances almost immediately. Reform plans that lead to  sustainable solvency would be those that consider the broader issues of  fiscal sustainability and affordability over the long term. Specifically, a  standard of sustainable solvency also involves looking at (1) the balance  between program income and costs beyond the 75th year and (2) the share  of the budget and economy consumed by Social Security spending.\nAs I have already discussed, reducing the relative future burdens of Social  Security and health programs is essential to a sustainable budget policy for  the longer term. It is also critical if we are to avoid putting unsupportable  financial pressures on future workers. Reforming Social Security and  health programs is essential to reclaiming our future fiscal flexibility to  address other national priorities.\n\n\t\tBalancing Adequacy and Equity\n\nThe current Social Security system\u2019s benefit structure attempts to strike a  balance between the goals of retirement income adequacy and individual  equity. From the beginning, benefits were set in a way that focused  especially on replacing some portion of workers\u2019 pre-retirement earnings.  Over time other changes were made that were intended to enhance the  program\u2019s role in helping ensure adequate incomes. Retirement income  adequacy, therefore, is addressed in part through the program\u2019s  progressive benefit structure, providing proportionately larger benefits to  lower earners and certain household types, such as those with  dependents. Individual equity refers to the relationship between  contributions made and benefits received. This can be thought of as the  rate of return on individual contributions. Balancing these seemingly  conflicting objectives through the political process has resulted in the  design of the current Social Security program and should still be taken  into account in any proposed reforms.\nPolicy makers could assess income adequacy, for example, by considering  the extent to which proposals ensure benefit levels that are adequate to  protect beneficiaries from poverty and ensure higher replacement rates for  low-income workers. In addition, policy makers could consider the impact  of proposed changes on various subpopulations, such as low-income  workers, women, minorities, and people with disabilities. Policy makers  could assess equity by considering the extent to which there are  reasonable returns on contributions at a reasonable level of risk to the  individual, improved intergenerational equity, and increased individual  choice and control. Differences in how various proposals balance each of  these goals will help determine which proposals will be acceptable to  policy makers and the public.\n\n\t\tImplementing and Administering Proposed Reforms\n\nProgram complexity makes implementation and administration both more  difficult and harder to explain to the public. Some degree of  implementation and administrative complexity arises in virtually all  proposed changes to Social Security, even those that make incremental  changes in the already existing structure. However, the greatest potential  implementation and administrative challenges are associated with  proposals that would create individual accounts. These include, for  example, issues concerning the management of the information and  money flow needed to maintain such a system, the degree of choice and  flexibility individuals would have over investment options and access to  their accounts, investment education and transitional efforts, and the  mechanisms that would be used to pay out benefits upon retirement.  Harmonizing a system that includes individual accounts with the  regulatory framework that governs our nation\u2019s private pension system  would also be a complicated endeavor. However, the complexity of  meshing these systems should be weighed against the potential benefits of  extending participation in individual accounts to millions of workers who  currently lack private pension coverage.\nContinued public acceptance of and confidence in the Social Security  program require that any reforms and their implications for benefits be  well understood. This means that the American people must understand  why change is necessary, what the reforms are, why they are needed, how  they are to be implemented and administered, and how they will affect  their own retirement income. All reform proposals will require some  additional outreach to the public so that future beneficiaries can adjust  their retirement planning accordingly. The more transparent the  implementation and administration of reform, and the more carefully such  reform is phased in, the more likely it will be understood and accepted by  the American people.\n\n\tExamining Social Security\u2019s Effects on Distribution of Benefits and Taxes\n\nUnder Social Security, retired workers can receive benefits at age 65 that  equal about 50 percent of pre-retirement earnings for an illustrative  worker with relatively lower earnings but only about 30 percent of  earnings for one with relatively higher earnings. To help ensure that  beneficiaries have adequate incomes, Social Security\u2019s benefit formula is  designed to be \u201cprogressive,\u201d that is, to provide disproportionately larger  benefits, as a percentage of earnings, to lower earners than to higher  earners. However, the benefit formula is just one of several program  features that influence the way benefits are distributed. Other such  program features include provisions for disabled workers, spouses,  children, and survivors. Changes in the program over time also affect the  distribution of benefits across generations. So the distribution of Social  Security benefits can vary by eligibility, household type, and birth year as  well as by earnings level.\nOver the past few years, we have been developing an increasing capacity  at GAO to estimate quantitatively the effects of Social Security reform on  individuals. Such estimates speak directly to applying our second  evaluation criterion to reform proposals. We have just issued a new report  that, in part, uses such estimates to illustrate the varying effects of  different policy scenarios on how Social Security benefits and taxes are  distributed relative to earnings levels. Today, I would like to share our  findings regarding how to define and describe \u201cprogressivity,\u201d defining  appropriate benchmarks for assessing the future outlook for individuals\u2019  Social Security benefits, what factors influence the distributional effects of  the current Social Security program, and how various reform proposals  might vary in their distributional effects. Still, remember that progressivity  is only one of several aspects of our criterion of balancing adequacy and  equity, which in turn is only one of three criteria that each consist of  several dimensions.\n\n\t\tDifferent Distributional Measures Reflect Different Perspectives\n\nTwo distinct perspectives on Social Security\u2019s goals suggest different  approaches to measuring progressivity. Both perspectives provide  valuable insights. An adequacy perspective focuses on benefit levels and  how well they help ensure a minimal subsistence or maintain pre- entitlement living standards. For example, replacement rates measure  annual benefits as a percentage of annual earnings before receiving  benefits. An equity perspective focuses on rates of return and other  measures relating lifetime benefits to lifetime contributions. This  perspective gauges whether the system gives all participants a \u201cfair deal\u201d  on their contributions. The measures themselves describe either adequacy  or equity, but their distribution with respect to earnings level describes  progressivity. Note however that equity measures cannot accurately assess  the distributional effects of reform proposals that rely on general revenue  transfers. Such proposals do not generally specify what kind of future  taxes or spending cuts will finance the transfers or who will bear the  related burden; but evaluating progressivity from an equity perspective  requires that all taxes and benefits be clearly allocated.\n\n\t\tBenchmark Policy Scenarios Illustrate a Range of Possible Outcomes\n\nEstimating future effects on Social Security benefits should reflect the fact  that the program faces a long-term actuarial deficit and benefit reductions  and\/or revenue increases will be necessary to restore solvency. To  illustrate a full range of possible outcomes, we developed hypothetical  benchmark policy scenarios that would restore solvency over the next 75  years either by only increasing payroll taxes or by only reducing benefits.  Our tax-increase-only benchmark simulates \u201cpromised benefits,\u201d or those  benefits defined under current law, while our benefit-reduction-only  benchmarks simulate \u201cfunded benefits,\u201d or those benefits for which  currently scheduled revenues are projected to be sufficient. The benefit  reductions are phased in between 2005 and 2035 to strike a balance  between the size of the incremental reductions each year and the size of  the ultimate reduction. At our request, Social Security actuaries scored our  benchmark policies and determined the parameters for each that would  achieve 75-year solvency. For our benefit reduction scenarios, the  actuaries determined these parameters assuming that disabled and  survivor benefits would be reduced on the same basis as retired worker  and dependent benefits. If disabled and survivor benefits were not reduced  at all, reductions in other benefits would be deeper than shown in this  analysis.\n\n\t\tProgram\u2019s Distributional Effects Reflect Various Program Features and Demographic Patterns\n\nSocial Security\u2019s distributional effects reflect program features, such as its  benefit formula, and demographic patterns among its recipients, such as  marriage between lower and higher earners. The retired worker benefit  formula favors lower earners by design, replacing about 50 percent of pre- retirement earnings at age 65 for an illustrative low earner but only about  30 percent of pre-retirement earnings for an illustrative high earner. (See  fig. 8.) The disability benefit formula also favors lower earners, and  disability recipients are disproportionately lower earners. Our simulations  suggest that for individuals born in 1985, compared with a hypothetical  program without disability insurance, Social Security\u2019s disability  provisions increase lifetime Social Security benefits for the bottom fifth of  earners by 43 percent, compared with 14 percent for the top fifth of  earners. The extent to which the benefit formula and disability benefits  favor lower earners may be offset to some degree by demographic  patterns. Household formation tends to reduce the system\u2019s tilt toward  lower earners because some of the lower-earning individuals helped by the  program live in high-income households. For example, many of the lower- earning individuals that the system favors through spouse and survivor  benefits actually live at some point in higher-income households because  of marriage. In our simulations, the ratio of benefits received to payroll  taxes contributed is higher for lower earners than for higher earners, but  this difference is reduced when we account for household formation. Also,  differences in mortality rates may reduce rates of return for lower earners,  as studies show they may not live as long as higher earners and therefore  would receive benefits for fewer years.\n\n\t\tDistributional Effects Vary across Reform Proposals\n\nAlternative Social Security reform proposals would have different  distributional effects, reflecting the variety of provisions in them. The  various provisions include different ways, within the current program  structure, of reducing certain benefits, enhancing selected benefits, and  enhancing revenues. The various reform provisions also include creating a  new system of individual retirement savings accounts with different  account contribution levels and different ways of adjusting Social Security  defined benefits to reflect the diversion of Social Security contributions  into the accounts. Individually and in combination, these provisions would  affect the distribution of benefits and taxes relative to earnings levels.\nFor example, Model 2 of the President\u2019s Commission to Strengthen Social  Security (CSSS) proposes a new system of voluntary individual accounts  along with a combination of certain benefit reductions for all beneficiaries  and selected benefit enhancements for selected low earners and survivors.  One of its provisions would reduce Social Security defined benefits  proportionally for all workers by modifying the benefit formula. At the  same time, benefits would be enhanced for certain lower earners and  surviving spouses, and 4 percentage points of individuals\u2019 payroll taxes (up  to a $1,000 annual limit) would be diverted into individual accounts.\nIn contrast, a proposal offered by Peter Diamond and Peter Orszag would  also include a provision to reduce Social Security defined benefits  proportionally for all workers by modifying the benefit formula. It also has  provisions to enhance benefits for selected lower earners and surviving  spouses. However, it does not contain a provision for individual accounts,  and it does have a variety of provisions for enhancing revenues. The  Diamond-Orszag proposal also has other benefit reduction and benefit  enhancement provisions, such as modifying the benefit formula to reduce  benefits for higher earners only. Another provision would maintain  disability benefits and benefits for survivors of workers who die before  retirement in spite of the other benefit reductions.\nAlso in contrast to CSSS Model 2, a proposal offered by Peter Ferrara  provides for a new system of voluntary individual accounts but does not  contain any provisions to make changes to Social Security defined  benefits, except for individuals participating in the individual accounts.  Moreover, it would provide for substantially larger contributions to the  accounts than would the CSSS Model 2 proposal. Under this provision,  individual account contributions would be a larger percentage of payroll  for lower earners than for higher earners. Also, for those who participate  in the accounts, Social Security defined benefits would be reduced to  reflect the payroll taxes redirected into the accounts; this account offset  uses a different formula than does CSSS Model 2.\nTo illustrate the distributional effects of CSSS Model 2, we used a  microsimulation model to estimate benefits under it and under our  benchmark policy scenarios. We did not examine the distribution of equity  measures such as benefit-to-tax ratios or rates of return, because the  proposal\u2019s individual account feature requires general revenue transfers.   Since account participation is voluntary, we used two simulations to  examine the effects of the Model 2 provisions, one with universal account  participation (Model 2-100 percent) and one with no account participation  (Model 2-0 percent). We also assumed that all account participants would  invest in the same portfolios; consequently we did not capture any  distributional effect that might occur if lower earners were to make  different account participation or investment decisions than higher  earners.\nAccording to our simulations, the distribution of benefits under Model 2  could favor lower earners more than the distribution of benefits under  either currently promised or currently funded benefits. For example,  assuming universal account participation, households in the lowest fifth of  earnings may receive about 14 percent of all lifetime benefits under Model  2, compared with about 12.5 percent under the current program. (See fig.  9.)\nIt should be noted that while the simulations suggest that the distribution  of benefits under Model 2 is more progressive than under the benchmarks,  this does not mean benefit levels are always higher for the bottom fifth  under Model 2. Progressivity is about how the \"pie\" is divided up, not  about how big the pie is.  So, while Model 2 may improve the relative  position of lower earners, it may not improve the adequacy of their  benefits. (See fig. 10.) According to our simulation, median household  lifetime benefits for the bottom fifth under Model 2-0 percent would be 3  percent higher than under the funded benefits scenario but 21 percent  lower than under the promised benefits scenario. Median household  lifetime benefits for the bottom fifth under Model 2-100 percent would be  26 percent higher than under the funded benefits scenario but 4 percent  lower than under the promised benefits scenario.\nWe also simulated each of Model 2\u2019s core features, assuming 100 percent  participation in the individual accounts, to illustrate the distributional  effect of each feature. (See fig. 11.) First we simulated a version of Model  2-100 percent that included the individual accounts and the reductions in  Social Security defined benefits, but not the $1,000 cap on account  contributions or the enhanced benefits for low earners and survivors. Next  we simulated a version that included the defined-benefit reductions and  the individual accounts with the $1,000 cap on account contributions.  Finally, we simulated the complete Model 2-100 percent scenario, which  included the enhanced benefits to lower earners and survivors. While the  proposal\u2019s individual accounts and benefit reductions together may favor  higher earners, this is more than offset by a limit on account contributions  and the enhanced benefits for low earners and survivors. Again, this  assumes that all account participants would invest in the same portfolios.  However, if individuals\u2019 investment decisions varied by earnings level,  then the distribution of income from the accounts would differ from our  simulations.\nIt should be emphasized that these simulations are only for individuals  born in 1985, and the distributional impact of Model 2 could be different  for individuals born in later years. For example, under the proposal, initial  Social Security defined benefits only grow with prices, while initial  benefits from account balances grow with wages. Since wages generally  grow faster than prices, Social Security defined benefits will decline as a  proportion of total benefits, reducing the importance of the progressive  benefit formula, disability benefits, and the enhanced benefits for low  earners and survivors.\nIt should also be noted that the account feature of Model 2-100 percent  likely exposes recipients to greater financial risk. Greater exposure to risk  may not affect the shares of benefits received by the bottom and top fifths  of earnings. However, greater risk may be more problematic for lower  earners, who likely have fewer resources to fall back on if their accounts  perform poorly.\n\n\tConclusion\n\nBy design, Social Security distributes benefits and contributions across  workers and their families in a variety of ways. These distributional effects  illustrate how the program balances the goal of helping ensure adequate  incomes with the goal of giving all workers a fair deal on their  contributions. Any changes to Social Security would potentially alter those  distributional effects and the balance between those goals. Therefore,  policy makers need to understand how to evaluate distributional effects of  alternative policies.\nSeveral key themes inform this understanding. First, it should be noted  that greater benefit progressivity is not the same thing as greater benefit  adequacy. Under some reform scenarios, Social Security could distribute  benefits more progressively than under current law while providing lower,  less adequate benefits. Secondly, our analysis illustrates that it that is  possible for some reform provisions that may not favor lower earners to  be counterbalanced by other, more favorable ones. Finally, benefit  progressivity is only one of several aspects of balancing adequacy and  equity. As our framework suggests, besides balancing adequacy and equity,  a proposal\u2019s effect on the economy and whether it achieves sustainable  solvency should also be considered, as well as how readily it could be  implemented and explained to the public.\nAs we have noted in the past before this committee and elsewhere, a  comprehensive evaluation is needed that considers a range of effects  together. Focusing on comprehensive packages of reforms will enable us  to foster credibility and acceptance. This will help us avoid getting mired  in the details and losing sight of important interactive effects. It will help  build the bridges necessary to achieve consensus.\nThe fundamental nature of the program\u2019s long-term financing challenge  means that timely action is needed. I believe it is possible to craft a  solution that will protect Social Security benefits for the nation\u2019s current  and near-term retirees, while ensuring that the system will be there for  future generations. Stated differently, I believe that it is possible to reform  Social Security in a way that will assure the program\u2019s solvency and  sustainability while exceeding the expectations of all generations of  Americans.  In this regard, the sooner we act, the greater the opportunity  to achieve this desirable outcome. It is my hope that we will think about  the unprecedented challenge facing future generations in our aging  society. We need to act now before the approaching demographic tidal  wave makes the imbalances more dramatic and meaningful reform less  feasible. We at GAO look forward to continuing to work with this  Committee and the Congress in addressing this and other important issues  facing our nation. In doing so, we will be true to our core values of  accountability, integrity, and reliability.\nMr. Chairman, and members of the Committee, that concludes my  statement. I\u2019d be happy to answer any questions you may have.\n\n\tGAO Contact and Staff Acknowledgments\n\nFor information regarding this testimony, please contact Barbara D.  Bovbjerg, Director, Education, Workforce, and Income Security Issues, at  (202) 512-7215. Individuals making key contributions to this testimony  include Ken Stockbridge, Charles Jeszeck, and Gordon Mermin.\n\nRelated GAO Products\n\nSocial Security: Distribution of Benefits and Taxes Relative to Earnings  Level (GAO-04-747, June 15, 2004).\nSocial Security Reform: Analysis of a Trust Fund Exhaustion Scenario  (GAO-03-907, July 29, 2003)\nSocial Security and Minorities: Earnings, Disability Incidence, and  Mortality Are Key Factors That Influence Taxes Paid and Benefits  Received (GAO-03-387, Apr. 23, 2003)\nSocial Security: Analysis of Issues and Selected Reform Proposals,  (GAO-03-376T, Jan. 15, 2003).\nSocial Security Reform: Analysis of Reform Models Developed by the  President\u2019s Commission to Strengthen Social Security (GAO-03-310,  Jan. 15, 2003).\nSocial Security: Long-Term Financing Shortfall Drives Need for Reform  (GAO-02-845T, June 19, 2002).\nSocial Security: Program\u2019s Role in Helping Ensure Income Adequacy  (GAO-02-62, Nov. 30, 2001).\nSocial Security Reform: Potential Effects on SSA\u2019s Disability Programs  and Beneficiaries (GAO-01-35, Jan. 24, 2001).\nSocial Security: Evaluating Reform Proposals (GAO\/AIMD\/HEHS-00-29,  Nov. 4, 1999).\nSocial Security: Issues in Comparing Rates of Return with Market  Investments (GAO\/HEHS-99-110, Aug. 5, 1999).\nSocial Security: Criteria for Evaluating Social Security Reform  Proposals (GAO\/T-HEHS-99-94, Mar. 25, 1999).\nSocial Security Financing: Implications of Government Stock Investing  for the Trust Fund, the Federal Budget, and the Economy  (GAO\/AIMD\/HEHS-98-74, Apr. 22, 1998).\nThis is a work of the U.S. government and is not subject to copyright protection in the  United States. It may be reproduced and distributed in its entirety without further  permission from GAO. However, because this work may contain copyrighted images or  other material, permission from the copyright holder may be necessary if you wish to  reproduce this material separately.","output":"Why GAO Did This Study\n\nUnder the current Social Security benefit formula, retired workers can receive benefits at age 65 that equal about 50 percent of preretirement earnings for an illustrative low-wage worker but only about 30 percent for an illustrative high-wage worker. Factors other than earnings also influence the distribution of benefits, including the program's provisions for disabled workers, spouses, children, and survivors. Changes in the program over time also affect the distribution of benefits across generations. Social Security faces a long-term structural financing shortfall. Program changes to address that shortfall could alter the way Social Security's benefits and revenues are distributed across the population and affect the income security of millions of Americans. The Chairman of the Senate Special Committee on Aging asked us to discuss how selected Social Security reform proposals might affect the distribution of benefits and taxes.\n\nWhat GAO Found\n\nTwo distinct perspectives on Social Security's goals suggest different approaches to measuring \"progressivity,\" or the distribution of benefits and taxes with respect to various earnings levels. Both perspectives provide valuable insights. An adequacy perspective focuses on benefit levels and how well they maintain pre-retirement living standards. An equity perspective focuses on rates of return and other measures relating lifetime benefits to contributions. Both perspectives examine how their measures are distributed across earnings levels. However, equity measures take all benefits and taxes into account, which is difficult to calculate for reform proposals that rely on general revenue transfers because it is unclear who will bear the relative burden for those general revenues. The Social Security program's distributional effects reflect both program features and demographic patterns among its recipients. In addition to the benefit formula, disability benefits favor lower earners because disabled workers are more likely to be lower lifetime earners. In contrast, certain household patterns reduce the system's tilt toward lower earners, for example, when lower earners have high-earner spouses. The advantage for lower earners is also diminished by the fact that they may not live as long as higher earners and therefore would get benefits for fewer years on average. Proposals to alter the Social Security program would have different distributional effects, depending on their design. Model 2 of the President's Commission to Strengthen Social Security proposes new individual accounts, certain benefit reductions for all beneficiaries, and certain benefit enhancements for selected low earners and survivors. According to our simulations, the combined effect could result in lower earners receiving a greater relative share of all benefits than under the current system if all workers invest in the same portfolio."}
{"id":"crs_R44005","pid":"crs_R44005_0","input":"\tIntroduction\n\nA question of the privileges of the House is a formal declaration by a Member of the House asserting that a situation has arisen that affects \"the rights of the House collectively, its safety, dignity, and the integrity of its proceedings.\" When making the declaration, the Member submits a resolution providing detail on the situation and typically urging action of some sort.\nA question of privilege has been held to take precedence over all questions except a motion to adjourn. In explaining this unique privilege, House Speaker Thomas Reed said:\nThe rights and privileges of all the Members of the House, in the discharge of their functions, are sacred, and the House can undertake no higher duty than the conservation of all those rights and privileges intact. And even if the case arises under dubious circumstances, it is proper for the House to pause and give suitable heed to any question which any Member raises with regard to his rights and privileges as a Member. It is for the House alone to determine what they are.\nOnce a question of the privileges of the House is raised, the Speaker must, at some point, entertain the question and rule on its validity. The Speaker makes a ruling regarding whether a question constitutes a valid question of the privileges of the House with guidance from the House Parliamentarian based on House Rule IX and House precedent. If valid, a question of the privileges of the House will be considered on the House floor. \nThe first section of this report provides information on raising and considering such questions to provide assistance in anticipating potential House action. Information is provided on restrictions governing when a question can be raised and when the Speaker must rule on the question's validity. Further information is provided on actions the House may take after the Speaker's ruling on the question's validity, including how the House may consider and dispose of a valid question. Appendix A provides scripts of parliamentary language used on the House floor when such a question is raised. \nThe second section of this report focuses on the content of questions in an effort to provide guidance as to what the Speaker may determine constitutes a valid question. It includes information on, and examples of, types of questions that have been ruled valid and not valid. Appendix B provides a list of all valid questions offered in the past two decades. \nThe final section of the report provides extensive data on questions raised in the past two decades, such as the number of valid questions raised per Congress and the proportion of questions offered by the minority party. In addition, this section provides data on how valid questions were disposed of, which varied significantly depending on whether the Member offering the question belonged to the majority or the minority party. This section also includes information on the categories of questions offered, as well as the categories of questions ultimately agreed to by the House. \n\n\t\tRestrictions Governing When Questions of the Privileges of the House Can Come to the Floor\n\nHouse Rule IX states that under most circumstances, a Member must give notice of his or her intention to raise a question of the privileges of the House. Within two legislative days of giving such notice, the Member will be recognized to offer the resolution. In practice, the Member will be notified of the date and time when he or she should rise to offer the resolution after having given notice. \nUnder specific circumstances, however, a question of the privileges of the House has precedence to interrupt the daily flow of business. In these situations, the Speaker will make an immediate ruling as to the validity of the question, and if valid, the question is privileged for immediate floor consideration. The three circumstances comprise:\n1. A resolution that has been reported from committee; 2. A resolution that has been offered on the floor by the majority leader or the minority leader; or 3. A resolution that has been offered as privileged under the Origination Clause, which is the House's constitutional right to originate all revenue measures (Article I, Section 7, clause 1, of the Constitution).\nDespite this privilege, under House precedent some restrictions govern when a question can be raised on the floor. For example, a question of the privileges of the House cannot be raised in Committee of the Whole. Also, a Member rising to a question of privilege is not permitted to take the floor from another Member who has already been recognized for debate. Likewise, a question of privilege may not interrupt a roll call or yea-or-nay vote, and a Member may not rise to a question of privileges during a call of the House in the absence of a quorum unless it relates to the immediate proceedings. Moreover, in the event that a question of privilege is pending, another Member will not be recognized to raise a different question of the privileges of the House.\n\n\t\tHouse Action in the Event That the Question Is Ruled Not Valid\n\nIf the Speaker rules that the question does not qualify as a valid question of the privileges of the House, the House may move to different business. Any Member who disagrees with the ruling, however, may appeal, allowing the House to decide if the decision of the Speaker will stand as the judgment of the House. If the appeal is successful, the House would consider the question of the privileges of the House. Very often, however, a motion is made to table the appeal, and the House votes instead on the motion to table. \nIn the event that a question has been ruled not valid, a Member may attempt to introduce a different resolution that may meet the criteria of a valid question of the privileges of the House. Alternatively, the Member may instead use other means of communicating concern, such as periods designated for non-legislative debate (special order speeches, one-minute speeches, and morning hour debate). Information on the content of questions ruled valid and not valid can be found below. \n\n\t\tHouse Action in the Event That the Question Is Ruled Valid\n\nOnce the Speaker rules the question to be valid (or the House overrules the Speaker's ruling that the resolution is not valid), the House may take any number of actions on the resolution, either immediately or after debate occurs. \nA question of the privileges of the House is considered under the \"hour rule,\" which means generally that a maximum of one hour of debate may occur on the resolution. Debate time is divided between (a) the proponent of the resolution and (b) the majority leader, the minority leader, or a designee, as determined by the Speaker. Each controls 30 minutes of time and may yield portions of that time to Members wishing to speak on the resolution. Members must confine remarks in debate to the question raised. While uncommon, during consideration of the resolution, amendments may be offered but only (1) if the amendment is offered by the Member raising the question of privilege, (2) if the Member raising the question yields to a Member for the purpose of offering an amendment, or (3) in the event that the previous question (described below) is not successful. \nAt the end of the hour (or before), a Member may \"move the previous question,\" which is a non-debatable motion that seeks to bring debate on the resolution to a close. If the House defeats the previous question, another hour of debate would occur, and amendments could be offered. If the House votes to agree to the previous question, a vote on agreeing to the resolution typically follows. \nTo prevent further consideration of the resolution and\/or a vote on agreement, a Member may make a motion to lay the resolution on the table. While the motion to table may be offered while the resolution is under debate, it is often made immediately after consideration begins. While tabling a resolution is considered a final adverse disposition of that particular resolution, the question may be rephrased and presented anew on a subsequent day.\nInstead of voting on the resolution, the House may choose to refer the resolution to a committee. A Member may offer this motion, which is debatable for up to an hour, in an attempt to send the resolution to committee for further work or consideration and may even include specific instructions to the underlying committee. The motion may refer the resolution to one or more standing committees without regard to the usual rules governing committee jurisdiction, or it may seek to refer to a committee that is established pursuant to the motion. \nA Member could make a motion to postpone consideration of the resolution, although this is uncommon for questions of the privileges of the House in the modern Congress. A motion to postpone is debatable for up to an hour. If agreed to by the House, a motion to postpone the resolution would suspend consideration of the measure either indefinitely or until a specific time, depending on the language used in the motion. \nAdditionally, a sponsor may choose to withdraw a resolution after it has been offered. This does not require unanimous consent; the Member has the right to withdraw the resolution offered even after debate has occurred. \n\n\t\t\tDecorum During Debate\n\nBy their nature, questions of the privileges of the House address perceived threats to the dignity or integrity of the chamber that have the potential to be controversial and contentious. House rules and precedents require that decorum be maintained during debate. Rule XVII, clause 1(b) states that remarks in debate shall be confined to the question under debate. The Speaker often states that Members should refrain from references in debate to conduct of other sitting Members and, in addition, specifies that indecent language either against the proceedings of the House or its membership is out of order. When a question of the privileges of the House is raised, the prohibition on debate referencing the conduct of a Member or the House may become complicated. Because of this, the Speaker often states that an exception to the general rule is in order but that it is closely limited. Specifically, the Speaker states that, while a wide range of discussion is permitted during debate on such a resolution, the rule still \"prohibits the use of language which is personally abusive.\" The Speaker states that this extends to language that is \"profane, vulgar, or obscene and to comportment which constitutes a breach of decorum.\" \nOnce a question of the privileges of the House is no longer pending, the House prohibition against references in debate to the official conduct of other Members where such conduct is not under consideration is restored, and the prohibition applies to debate that includes reciting the content of a resolution raising a question of the privileges of the House that is no longer pending. \nDebate on questions of the privileges of the House has sometimes become more raucous than is typical on the House floor. One example occurred during debate on a question of privileges of the House related to the actions of a committee chairman who had requested that the Capitol Police remove minority-party committee Members from a committee room. A Member objected to the remarks of another Member and demanded that the \"words be taken down\" because they violated the House's rules on decorum. The offending Member then asked unanimous consent to withdraw his remarks. \nAnother example occurred in the 113 th Congress when a Member raised a question condemning the behavior of a committee chairman during a hearing. Dozens of Members gathered behind the Member raising the question, holding electronic devices displaying pictures of the specified committee chairman during the hearing. The presiding officer suspended consideration several times, informing Members that consideration would be delayed until Members lowered their displays and decorum was restored, and he reminded Members that under House precedent, Members may not stage an exhibition. \n\n\t\tSubjects Constituting Valid Questions of the House\n\nHouse precedent states, \"The tradition of Anglo-American parliamentary procedure recognizes the privileged status of questions related to the honor and security of a deliberate body and its Members.\" While the notion of questions of privilege predates Congress, the House demonstrated a historical reluctance to define such a question as early as 1795. The principle was not articulated in House rules until 1880, and even then, it was only to restrict the process of considering such questions. According to the House rules manual, the rule governing questions of the privileges of the House was adopted to \"codify long established practice that the House had hitherto been unwilling to define.\" The manual goes on to say that the rule \"was adopted 'to prevent the large consumption of time which resulted from Members getting the floor for all kinds of speeches under the pretext of raising a question of the privileges of the House.'\"\nHouse Rule IX states simply that valid questions shall be those \"affecting the rights of the House collectively, its safety, dignity, and the integrity of its proceedings.\" House precedent can provide guidance as to what the Speaker may determine constitutes a valid question of the privileges of the House, and several categories of examples are provided below to assist in determining what may be ruled valid. This information may be helpful when crafting a resolution or when anticipating whether questions noticed might be ruled valid. The Office of the Parliamentarian of the House should be consulted for specific and authoritative guidance.\nAt the outset, it is important to note a few general requirements for valid questions of the House. To begin with, when presenting a matter, the text in the resolution must \"show on its face an invasion of those rights\" articulated in the House rule and so presumably may not rely on argument made verbally. Second, the situation that has affected the rights of the House must be actual events and not potential forthcoming events. Listed below in the section Categories of Questions Held N ot to B e Valid are general categories of questions that have historically been found not to be valid.\n\n\t\t\tCommon Categories of Questions Held to Be Valid\n\n\t\t\t\tQuestions Relating to Organization\n\nQuestions may relate to the organization of the House and the rights of Members to their seats or their leadership positions. For example, a resolution providing for an investigation into the election of a Member presented a question of privilege, as did a resolution proposing the exclusion of a delegate from his seat. Valid questions have also included a resolution declaring a vacancy in the House because a Member-elect is unable to take the oath of office or to expressly resign because of an incapacitating illness, as well as questions dismissing an election contest. Questions have also related to removal of a committee chairman pending an investigation.\n\n\t\t\t\tQuestions Relating to Constitutional Prerogatives\n\nMatters related to the House's constitutionally granted powers have been recognized as valid questions of the privileges of the House. Often, Members raise questions related to the Origination Clause (which requires that revenue bills originate in the House) and typically state that the Senate has infringed on the House's privilege to originate revenue measures. Such questions are typically presented by the chairman of the Ways and Means Committee (since that committee has jurisdiction over revenue measures). \nQuestions have also involved constitutional functions such as impeachment, as well as the power to expel Members. The House merely having a constitutional power or duty, however, does not allow any matter related to those duties to be raised as a question of the privileges of the House. For example, a question of the privileges of the House raised in 1996, stating that the House ought to pass an adjustment to the public debt limit, was found not to be valid. The presiding officer quoted an earlier ruling that a resolution presenting a legislative proposition as a question of constitutional privilege under the 14 th Amendment did not qualify as a question of the privileges of the House and stated:\nIt is a strained construction to say that because the Constitution gives a mandate that a thing shall be done, it therefore follows that any Member can insist that it shall be brought up at some particular time and in the particular way which he chooses. If there is a constitutional mandate, the House ought by its rules to provide for the proper enforcement of that, but it is still a question for the House how and when and under what procedure it shall be done.\n\n\t\t\t\tQuestions Relating to Conduct\n\nCertain questions relating to the conduct of Members, officers, and employees have been held to be valid. For example, a proposition to remove an officer of the House for misconduct has been recognized as a valid question, as have resolutions directing investigations into Member misconduct such as illegal solicitation of political contributions in the House office building by unnamed sitting Members and improper conduct by a former Member with regard to the House page program and insufficient response thereto by the House leadership. Questions also commonly seek the release of information gathered by the House Committee on Ethics during a pending or completed investigation into Member or staff conduct. \n\n\t\t\t\tQuestions Relating to Integrity of Proceedings\n\nQuestions of the privileges of the House have included matters related to the integrity of the legislative process, both in committee and on the House floor. \nQuestions related to alleged improprieties in committee procedure have dealt with the use of an allegedly forged document at a committee hearing, as well as the unilateral release of committee records in violation of its adopted rules. A question was ruled valid that condemned a committee chairman for adjourning a hearing before allowing the ranking Member to make a statement or ask questions. While a charge of unfair and improper action on the part of a committee has been held to involve a question of privilege, this does not extend to any committee action considered objectionable. For example, an allegation that a committee had refused either to give hearings or to allow petitions to be read before it was not considered a valid question of the privileges of the House.\nQuestions addressing improprieties on the House floor have dealt with the presence on the floor of unauthorized persons, the conduct of those in the press gallery, and the integrity and regularity of an electronic vote.\nThese have also extended to the integrity and accuracy of House documents and messages, as well as entries in the Journal and the Congressional Record . For example, a resolution providing for the correction in the Congressional Record of an exchange between two Members was considered valid. A question alleging factual inaccuracy in the contents of a speech recorded in the Congressional Record (without alleging an error in the Congressional Record , however) was not recognized as a valid question.\n\n\t\t\t\tQuestions Relating to Comfort, Convenience, and Safety\n\nCertain matters related to the comfort and conveniences of Members have constituted valid questions of the privileges of the House. A proposition concerning the comfort and convenience of Members in relation to the construction of an elevator for the House, as well as a proposal for the removal of desks from the hall, were held to be valid. A resolution directing that the clerk employ additional laborers in the bathroom, however, was not recognized as a valid question, nor was a resolution relating to a new House restaurant. \nMatters relating to Members' physical safety have constituted valid questions, such as resolutions directing investigations into structural deficiencies in the Capitol, the ceiling in the hall, and alleged fire safety deficiencies. This category of Members' safety expands beyond physical safety to cybersecurity. For example, a resolution alleging that computers were compromised directed the Sergeant at Arms to ensure that House personnel be alerted to the dangers of electronic security breaches.\n\n\t\t\tCategories of Questions Held Not to Be Valid\n\nHouse precedent demonstrates that certain categories of questions have been held not to constitute valid questions of the privileges of the House. \nA motion to amend the rules of the House does not present a question of privilege. For example, a resolution to permit the delegate of the District of Columbia to vote on a specific legislative matter was held to be tantamount to a change in the rules and therefore determined not to constitute a question of the privileges of the House.\nAlso, a question of the privileges of the House may not be invoked to alter or prescribe a special order of business for the House (also referred to as a special rule). For example, in 2010 the presiding officer ruled that a resolution prescribing House consideration of specific legislation was not a valid question of the privileges of the House:\nUnder such an approach, each individual Member of the House could constitute himself or herself as a virtual Rules Committee. Any Member would be able to place before the House at any time whatever proposed order of business he or she might deem advisable, simply by alleging an insult to dignity or integrity secondary to some action or inaction. In such an environment, anything could be privileged, so nothing would enjoy true privilege.\nA resolution that alleges the failure of the House to take specified legislative actions brings it discredit, impairs its dignity and the integrity of its proceedings, and lowers it in public esteem does not present a question of the privileges of the House. The presiding officer stated:\nTo rule that a question of the privileges of the House under rule IX may be raised by allegations of perceived discredit brought upon the House by legislative action or inaction, would permit any Member to allege an impact on the dignity of the House based upon virtually any legislative action or inaction.\nA resolution expressing legislative sentiment does not present a question of the privileges of the House. In response to such a resolution, the presiding officer stated: \nA resolution expressing the legislative sentiment that the President should take specified action to achieve desired public policy end does not present the question affecting the rights of the House, collectively, its safety, dignity, or integrity of its proceedings as required under rule IX.\nSimilarly, in response to a question raised that made several assertions about a governor and called upon that governor and others to take action, the presiding officer stated:\nA resolution merely asserting the position of the House with regard to an external issue cannot be the basis of a question of privilege.... According privilege to such a resolution would allow any Member to place before the House at any time whatever topic he or she might deem advisable. In such an environment, anything could be privileged, so nothing would enjoy true privilege.\n\n\t\tData on Questions Offered and House Action\n\nFrom the 104 th Congress through the 113 th Congress (1995-2014), Members offered 140 questions of the privileges of the House. Of the total number offered, 102 of the questions (73%) were ruled valid and were therefore considered by the House. The number of valid questions offered each Congress varied significantly, with some Congresses considering as few as two and others considering more than 20. The minority party offered 72% of the total number of valid questions, and the proportion of questions offered by the minority remained consistent during most of the period, as illustrated in Figure 1 . \nHow valid questions were disposed of varied significantly depending on whether the Member offering the question belonged to the majority or the minority party. Of the questions offered by majority Members, 69% were agreed to, 14% were referred to committee, 10% were tabled, and 7% were withdrawn. All questions offered by the majority party that were voted on were agreed to, perhaps suggesting that in some cases if a majority party resolution was not likely to receive an affirmative vote, it did not receive a vote but was disposed of alternatively (e.g., by referring the resolution to committee). \nOf the valid questions offered by the minority party, a large majority (82%) were tabled, meaning that the House chose to dispose of the resolution adversely but without taking a vote on the resolution. This may be done to avoid either political or practical situations that are inopportune for the majority party. For example, it prevents a vote that might be used by the minority as a \"messaging vote.\" Also, a motion to table may be made in order to stop consideration of the resolution so that the House may engage in the business previously planned by the majority party. Of the other questions offered by the minority, 12% were referred to committee, 4% were agreed to, and 2% were not agreed to. \n\n\t\tData on Categories of Questions Offered and Agreed To\n\nAs mentioned above, from the 104 th Congress through the 113 th Congress (1995-2014), Members offered 102 questions that were ruled valid. As displayed in Figure 4 , the greatest number of questions related to conduct (39%) and to the House's constitutional prerogatives (23%), followed by questions related to the integrity of proceedings (19%) and questions relating to organization (17%). One question dealt with comfort, convenience, and safety, and two did not fit into any of these general categories. \nOf the 102 questions considered by the House in the period between the 104 th Congress and the 113 th Congress, 23 of those were agreed to by the House, as shown in Figure 5 . Of those 23 questions, 18 (78%) related to the House's constitutional prerogatives. (Thirteen related to the House's constitutional authority to originate revenue measures, four dealt with impeachment, and one was to expel a Member.) Two of the measures agreed to were related to conduct, two related to integrity of proceedings, and one related to comfort, convenience, and safety. \n\n\tConclusion\n\nAn examination of questions of the privileges of the House illuminates several characteristics of their use, content, and consideration. \nQuestions possess several distinctive features. The notion of questions of privilege predates Congress. The House, however, demonstrated a historical reluctance to define such a question for over a century until the chamber found it necessary to create a definition as part of a rule that would \"prevent the large consumption of time which resulted from Members getting the floor for all kinds of speeches under the pretext of raising a question of the privileges of the House.\"\nDespite the creation of the rule, raising a question of the privileges of the House allows any Member to be recognized and to have a resolution read on the floor, even if the question is later ruled not to be valid. This represents an uncommon opportunity, particularly for Members of the minority party, to draw attention to a specific matter in a chamber where the majority party leadership characteristically sets the floor agenda. Also unique is that, by their nature, questions of the privileges of the House allow potentially controversial assertions to be read on the floor, such as criticisms of another Member's conduct. The combination of these characteristics (the question's potential use by any Member, its reading requirement, and the subject matter's potentially controversial nature) make such resolutions exceptional in the House. \nThere is a contrast between the types of questions raised and the types of questions agreed to. The ratios of the types of questions offered and the types of questions agreed to by the House varied. As displayed in Figure 4 , the greatest number of questions raised related to conduct (39%) and to the House's constitutional prerogatives (23%). Of the resolutions agreed to, however, most (78%) related to the House's constitutional prerogatives, while a relative few (9%) related to conduct. This might reflect a general disinclination to agree to conduct-related resolutions. Consideration of questions reflect the roles and relations of the majority and the minority. An examination of questions of the privileges of the House might offer insights into the roles and relationship of the majority party and the minority party in the House. First, recall that the minority party offered a majority (72%) of the total number of valid questions, and the proportion of questions offered by the minority remained consistent during most of the period, as illustrated in Figure 1 .\nSecond, the manner in which questions were disposed of varied significantly depending on whether the Member offering the question belonged to the majority or the minority party. Of the questions offered by majority Members, a majority (69%) were agreed to. In fact, all questions offered by the majority party that were voted on were agreed to, perhaps suggesting that if a majority party resolution was not likely to receive an affirmative vote, it did not receive a vote but was disposed of alternatively (e.g., by referring the resolution to committee). \nOf the questions offered by the minority party, a large majority (82%) were tabled, meaning that the House chose to dispose of the resolution adversely but without taking a vote on the resolution. This may be done to avoid political and\/or practical situations that are inopportune for the majority party. For example, a motion to table prevents a vote that might be used by the minority as a messaging vote and, in addition, halts consideration of the resolution so that the House may engage in the business previously planned by the majority party. \nAppendix A. Scripts of Parliamentary Language Used on the Floor \nParliamentary Language Used When a Member Gives Notice of a Resolution\nIn most cases, a Member (other than the majority leader of minority leader) must first give notice of his or her intention to offer the resolution. The parliamentary language used in such situations is generally some variation of the following:\nMember: Mr. Speaker, pursuant to clause 2(a)(1) of Rule IX, I rise to give notice of my intent to raise a question of the privileges of the House. The form of my resolution is as follows: ( At this point, the Member reads the resolution in its entirety, although he or she may also ask unanimous consent to dispense with the reading . )\nSpeaker: Under Rule IX, a resolution offered from the floor by a Member other than the majority leader or the minority leader as a question of the privileges of the House has immediate precedence only at a time designated by the chair within two legislative days after the resolution is properly noticed.\nPending that designation, the form of the resolution noticed by the gentlelady (or gentleman) from (Member's home state) will appear in the Record at this point. The chair will not at this point determine whether the resolution constitutes a question of privilege. That determination will be made at the time designated for consideration of the resolution.\n( W ithin two legislative days the Member will be notified of the date and time when he or she should rise to offer the resolution.)\nParliamentary Language Used When a Member Offers the Resolution\nWhen the resolution is offered, the parliamentary language used in such situations is generally some variation of the following:\nMember: Mr. Speaker, I rise to a question of the privileges of the House and offer the resolution previously noticed. \nSpeaker: The Clerk will report the resolution. ( The C lerk reads the resolution. ) Does the gentlelady (or gentleman) from (Member's home state) wish to present argument on the parliamentary question whether the resolution presents a question of the privileges of the House?\nMember: Yes.\nSpeaker: The gentlelady (or gentleman) from (Member's home state) is recognized for that purpose.\nMember: I rise today to ... ( In the event that a Member's remarks deviate from the subject of a question of the privileges of the House, the Speaker pro tempore will remind the Member to confine his or her remarks to the question .)\nSpeaker: Are there any other Members that want to be heard on this point?\nSpeaker: The resolution does not qualify ( with explanation ). \n\u2014or\u2014\nSpeaker: The resolution qualifies. The Clerk will report the resolution. ( T he Clerk reads the resolution . ) The resolution presents a question of the privileges of the House. Pursuant to clause 2 of Rule IX, the gentlelady (or gentleman) from (Member's home state) and the gentlelady (or gentleman) from (Member's home state) each will control 30 minutes. The chair recognizes the gentlelady (or gentleman) from (Member's home state).\nAppendix B. Questions of the Privileges of the House (105 th Congress-113 th Congress [1995-2014])","output":"A question of the privileges of the House is a formal declaration by a Member of the House asserting that a situation has arisen affecting \"the rights of the House collectively, its safety, dignity and the integrity of its proceedings.\" Once a question of the privileges of the House is raised, the Speaker must, at some point, entertain the question and rule on its validity. The Speaker makes such a ruling with guidance from the House Parliamentarian based on House rule and precedent. If it is ruled to be valid, a question of the privileges of the House will be considered and possibly voted on by the House.\nThe notion of questions of privilege predates Congress, but the House demonstrated a reluctance to define such a question for over a century. The chamber eventually found it necessary to create a definition as part of a rule that would prevent Members from consuming floor time under the pretext of raising a question of the privileges of the House. Despite the creation of the rule, however, raising a question of the privileges of the House continues to allow any Member to be recognized and to have a resolution read on the floor, even if the question is later ruled not to be valid.\nQuestions recognized as valid comprise several categories, such as:\nquestions related to the organization of the House and the rights of Members to their seats or leadership positions, questions related to the House's constitutional prerogatives, such as their power to originate revenue legislation, questions related to the conduct of Members, officers, and employees of the House, questions related to the integrity of the legislative process, both in committee and on the House floor, and questions related to the comfort, convenience, and safety of Members.\nCertain categories of questions have been held not to constitute valid questions of the privileges of the House, such as questions that are tantamount to a change in House rules, questions that seek to alter or prescribe a special rule reported from the House Rules Committee, and questions expressing legislative sentiment.\nFrom the 104th Congress through the 113th Congress, Members offered 140 questions of the privileges of the House, 73% of which were ruled valid. The number of valid questions offered each Congress varied significantly, with some Congresses considering as few as two and others considering more than 20. The minority party offered 72% of the total number of valid questions, and the proportion of questions offered by the minority remained consistent during most of the period.\nHow valid questions were disposed of during this time period varied significantly depending on whether the Member offering the question belonged to the majority or the minority party. A majority of questions offered by the majority party were agreed to, while a majority of the questions offered by the minority party were tabled, meaning that the House chose to dispose of the resolution adversely but without taking a vote on the resolution.\nA contrast exists between the types of questions raised and the types of questions agreed to by the House. The greatest number of valid questions raised related to the conduct of Members, officers, and employees of the House (39%) and to the House's constitutional prerogatives, such as their power to originate revenue legislation (23%). Of the resolutions agreed to, however, most (78%) related to the House's constitutional prerogatives, while a relative few (9%) related to conduct."}
{"id":"crs_RL32113","pid":"crs_RL32113_0","input":"\tI. Introduction\n\nThe inevitable tension between Congress and the Executive created by our constitutionally mandated system of separated but shared powers has been the source of continual interbranch conflict. One manifestation of this struggle occurs when congressional committees engage in oversight of the administrative bureaucracy; another when Members of Congress attempt to intervene in administrative proceedings on behalf of private constituents or other private entities with interests affecting the Member's constituency. Both such interventions involve varying degrees of intrusion into agency decisionmaking processes. On relatively rare occasions these interventions have resulted in court actions challenging the congressional intercession as exertions of undue political influence on agency decisionmakers which violate the due process rights of participants in the proceedings in question and impugn the integrity of the agency decisional processes; or in disciplinary proceedings before ethics committees of either House alleging that such Member actions violated institutional rules or other ethical standards. Such challenges have arisen in the context of congressional intercessions into rulemakings, ratemakings, informal decisionmaking, adjudications, and agency investigations that arguably would lead to an adjudicatory proceeding.\nPast high profile incidents raising questions regarding the legal and ethical propriety of congressional exertions of influence on administrative decisionmaking have surprisingly produced only a paucity of authoritative commentary on and analysis of the guiding principles and standards applicable to the constitutional bases of the roles Members play when they act as part of the committee oversight process or in their individual representative capacities. This report is designed to provide a contemporary overview of applicable guidelines and considerations in the judicial and congressional forums. Toward that end, Part II reviews the judicial development and application of standards for determining whether congressional pressure or influence will be deemed to have tainted an agency proceeding. It concludes that the courts, in balancing Congress's performance of its constitutional and statutory obligations to oversee the actions of agency officials against the rights of parties before agencies, have shown a decided predilection for protecting the congressional prerogatives. Thus where informal rulemaking or other forms of informal decisionmaking are involved, the courts will look to the nature and impact of the political pressure on the agency decisionmaker and will intervene only where that pressure has had the actual effect of forcing the consideration of factors Congress did not intend to make relevant. Where agency adjudication is involved a stricter standard is applied and the finding of an appearance of impropriety can be sufficient to taint the proceeding. But even here the courts have required that the pressure or influence be directed at the ultimate decisionmaker with respect to the merits of the proceeding and that it does not involve legitimate oversight and investigative functions before they will intervene.\nPart III of the report examines the conduct of Members of Congress and their staffs intervening in administrative matters from the perspective of ethics and conflict of interest rules, statutes and guidelines bearing upon a Member's and staffer's official duties in this area. It notes that since congressional intervention and expressions of interest in administrative matters from a Member's office are recognized as legitimate, official representational and oversight functions and duties of Members of Congress, the primary focus of these ethical and statutory conduct restraints is limited to(1) any improper enrichment or financial benefit accruing to the Member in return for or because of his or her official actions and influences, including the receipt of gifts or payments, or existing financial interests in, or relating to the matter under consideration; and (2) any overt coercion or threats of reprisals, or promises of favoritism or reward to administrators from the Member's office which could indicate an arguable abuse of a Member's official representational or oversight role. Additionally, there are ethical guidelines in Congress incorporating broad \"appearance' standards for Members which could raise ethical concerns in relation to the acceptance of gifts, favors, donations, and benefits, including campaign contributions, by Members from those who are directly affected by the Member's official duties, even in the absence of a showing of any corrupt bargain, express payment, or any direct connection to an official act. While campaign contributions from private individuals to Members have a facial legitimacy and necessity in our government and electoral system which other forms of monetary transfers to legislators (such as gifts) do not, and may be treated differently, both Houses of Congress advise members and staff to avoid any appearance of a \"linkage\" between campaign contributions and interventions. Such guidance would counsel a Member to adopt office procedures and systems for evaluating requests for assistance which would prevent any appearance that interventions decisions are based upon the receipt of things of value, particularly legitimate campaign contributions, and which would assure that decisions to intervene are, rather, based on the merits of a particular matter.\n\n\tII. Current Judicial Standards Governing Congressional Influence on Agency Decisionmaking\n\nSupport for claims that an exercise of congressional influence in an agency proceeding may serve as basis for a challenge to the end product of that decisional process rest on two foundation cases, a 1966 decision of the Fifth Circuit Court of Appeals in Pillsbury Co. v. FTC and a 1971 ruling of the District of Columbia Circuit Court of Appeals in D.C. Federation of Civic Associations v. Volpe , and a relative handful of judicial rulings since then which have grappled with the question of whether particular instances of exertion of congressional pressure would serve to taint such a proceeding. While this case law makes it clear that there are limits to congressional intercession, whether those limits have been breached in a particular instance is often far less clear. Analysis has been made difficult by the relative dearth of decisions and the reluctance of courts in those cases to venture beyond the factual confines of the dispute. The absence of a congressional spokesperson in most of the cases to present the legislative interest may also be a complicating factor.\nClose analysis of the apparently disparate and sometimes seemingly conflicting judicial decisions, however, reveals a consistent underlying pattern that allows for rationalization of the holdings and for the formulation of guidelines for application in future situations. The determinative factors for the courts appear to be the nature of the proceeding involved, the impact the political pressure had on the decisionmaker, and whether the object of the political intercession is to reflect the views of members on issues of law and policy. This part of the report will examine the extant case law to explicate the manner in which the courts are formulating the differing standards that are applied to the various types of administrative proceedings and the underlying rationale for their actions.\n\n\t\tA. The Nature of the Proceeding\n\nThe law of undue influence is a still-evolving, difficult to define area of jurisprudence that does not as yet yield ready answers when applied to particular complex and often politically charged fact situations. The relatively small body of case law that has developed, however, reflects the growing sensitivity of the courts to appearing to be engaging in unwarranted intrusions into the political process.\nProblems in this area are not subject to easy categorization or generalizations; case by case evaluations have been the norm. However, the case law does provide broad guidelines within which analysis may proceed: Where agency actions resembles judicial action, where it involves formal or informal adjudication, or formal rulemaking, insulation of the decisionmaker from political influence through public pressure or unrevealed ex parte contacts has been deemed justified by basic notions of due process to the parties involved. But where agency action involves informal rulemaking of generally applicable policy, thus closely resembling the legislative process, there is deemed to be far less justification for judicial intervention to protect the integrity of the process\nIn practice, however, these categorizations serve only as useful starting points for analysis. The courts have eschewed mechanical application of these categories. That is, an agency proceeding that has adjudicatory elements will not be pigeonholed automatically as a case requiring the highest level of judicial scrutiny. Similarly, an informal rulemaking may not be reflexively dealt with as a matter of pure policymaking and accorded extreme deference. Rather, the courts appear to be making their determinations in this area by ascertaining where on the adjudication\/policymaking continuum the proceeding falls and then applying the factors most appropriate to that particular situation. The task of analysis in such cases is thus threefold: (1) determination of the type of proceeding involved; (2) identification and application of the factors relevant to that type of proceeding; and, if taint is involved, (3) determining the remedies that may be available. The following discussion will treat each of these issues in turn. It seems useful, however, to start with an overview and description of the distinguishing elements of the various proceedings in the continuum as it moves from adjudication toward varieties of informal, non-record decisionmaking.\nAdministrative action pursuant to the Administrative Procedure Act (APA) is either adjudication or rulemaking. The two processes differ fundamentally in purpose and focus and as a consequence have imposed on them sharply divergent statutory and constitutional procedural requirements. Thus the APA defines \"adjudication\" as the \"agency process for the formulation of an order.\" The term \"order\" is then defined as \"the whole or part of a final disposition, whether affirmative, negative, injunctive, or declaratory in form, of an agency in a matter other than a rulemaking but including licensing.\" A \"rulemaking\" is the \"agency process for formulating, amending, or repealing a rule.\" Finally, a \"rule\" is defined to mean:\n. . . the whole or a part of an agency statement of general or particular applicability and future effect designed to implement, interpret, or prescribe law or policy or describing the organization, procedure, or practice requirements of an agency and includes the approval or prescription for the future of rates, wages, corporate or financial structures or reorganizations thereof, prices, facilities, appliances, services or allowances therefor or of valuations, costs, or accounting, or practices bearing on any of the foregoing.\nThe definitive explanation of the interrelationship of these definitions and the dichotomous scheme of the APA was provided the Attorney General in 1947.\nThe object of the rule making proceeding is the implementation or prescription of law or policy for the future, rather than the evaluation of a respondent's past conduct. Typically, the issues relate not to the evidentiary facts, as to which the veracity and demeanor of witnesses would often be important, but rather to the policy-making conclusions to be drawn from the facts . . . Conversely, adjudication is concerned with the determination of past and present rights and liabilities. Normally, there is involved a decision as to whether past conduct was unlawful, so that the proceeding is characterized by an accusatory flavor and may result in disciplinary action.\nIn sum, then, rulemaking involves the formulation of a policy or interpretation which the agency will apply in the future to all persons engaged in the regulated activity. Adjudication is the administrative equivalent of a judicial trial. It applies policy to a set of past actions and results in an order against (or in favor of) the named party. The focus of rulemaking is prospective. The primary focus of adjudication is retrospective.\nAdministrative rulemaking and adjudication may be conducted pursuant to either informal or formal procedures. Informal rulemaking requires the administrative agency, following publication of a proposed rule in the Federal Register, to provide \"interested persons an opportunity to participate in the rulemaking through submission of written data, views or arguments.\" Courts reviewing such proceedings are required to uphold informal rulemaking decisions unless those decisions are \"arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.\nFormal rulemaking is invoked when \"rules are required by statute to be made on the record after opportunity for agency hearing.\" Under the APA, formal rulemaking must include a trial-type hearing at which a \"party is entitled to present his case or defense or oral or documentary evidence, to submit rebuttal evidence, and to conduct such cross-examination as may be required for a full and true disclosure of the facts.\" Judicial review of formal rulemaking requires a court to set aside a rule that is \"unsupported by substantial evidence\" on the record.\nFormal adjudication is governed by section 554 of the APA and arises in \"every case of adjudication required by statute to be determined on the record after opportunity for an agency hearing.\" Section 554 incorporates the procedural requirements of section 556 and 557 and affords parties to a formal adjudication the right to present evidence and to conduct cross examination. Judicial review of formal adjudication, like that of formal rulemaking, is governed by the substantial evidence standard.\nInformal adjudication occurs when an agency determines the rights or liabilities of a party in a proceeding to which section 554 does not apply. The APA makes no provision for informal adjudications\u2014adjudications unaccompanied by the protections of an on the record, formal, judicial-like trial. But since these informal adjudications involve individual rights rather than issues of general policy, the courts have recognized they implicate constitutional due process values. Thus, although due process does not generally require a full scale judicial trial, informal adjudications must nevertheless conform \"with the notion of a fair hearing and with the principles of fairness implicit in due process.\" In such proceedings, the agency's final decision is reviewed under the APA's arbitrary and capricious standard which requires a court to conduct a \"searching and careful\" inquiry based upon \"the full administrative record that was before the [agency decisionmaker] at the time he made his decision.\"\nIt is important to note that informal decisionmaking, that is, governmental actions that are taken without an evidentiary hearing and formal record, constitute by far the vast bulk of government decisionmaking. As one commentator has noted:\n... However defined, informal action is the mode in which government operates. A common and loose figure is that ninety percent of the government's business is accomplished by informal action. The figure is much too low. In terms of quantity, surely much less than one percent of the actions of the federal government are based upon evidentiary hearings. And, if one were possessed of a divine calibrator that could measure \"importance,\" it is doubtful that weighing the transactions by their importance would reduce the predominance of informal action in the operations of government.\nAs a consequence, this category of decisionmaking has been accorded special attention by the courts.\nA final important category of agency action that has been the subject of undue influence litigation is investigation. Most administrative action, including much of that which occurs in an informal as well as in a formal proceeding, is conditioned by information obtained through an agency's prior investigation. Administrative agencies do not have unrestricted power to demand information merely for satisfying their curiosity. The agency's command can be enforced only if it is authorized by law and issued in a lawful manner. Additionally, constitutional limitations hedge administrative power to investigate. Within these constraints, the courts have acknowledged the importance of judicial deference to administrative agencies in conducting investigations. Agency decisions to conduct investigations are deemed \"committed entirely to agency discretion\" and are unreviewable except where they are made in \"bad faith\" and the enforcement of the administrative process would be an abuse of the judicial process.\nThe cases indicate, at least in their rhetoric, that identification and categorization of the subject proceedings are significant. We turn now to a review of the pertinent case law which serves to illustrate the types of factors the courts have identified as relevant in different kinds of proceedings.\n\n\t\tB. The Foundation Cases\n\n\t\t\t1. Pillsbury Co. v. FTC\n\nThe seminal case with respect to the nature and extent of permissible congressional intercession into agency adjudicatory or quasi-adjudicatory proceedings is the 1966 decision of the Court of Appeals for the Fifth Circuit in Pillsbury Company v. Federal Trade Commission, which held a Federal Trade Commission (FTC) divestiture order invalid because the Commission's decisional process had been tainted by impermissible congressional influence. At issue was an intense interrogation at a Senate subcommittee hearing of the FTC Chairman and several members of his staff on a key issue in an antitrust adjudication involving the Pillsbury Company which was then pending before the Commission. The Senators expressed opinions on the issue and criticized the FTC for its interpretation of section 7 of the Clayton Act in a previous interlocutory order in Pillsbury's favor. The clear message of the Senate committee criticism was that the FTC should have ruled against Pillsbury. In its subsequent final decision the Commission ruled as the Committee had suggested. The appeals court found the Senate inquiry to be an \"improper intrusion into the adjudicatory process of the Commission.\" The court based its holding on the fact that the agency was acting in a judicial capacity. As a consequence, the private litigants had a \"right to a fair trial\" and the \"appearance of impartiality\" as part of the general guarantees of procedural due process when the agency is acting in a judicial or quasi-judicial capacity. The court emphasized the judicial nature of the function the agency was performing and explained that in order to protect the integrity of that type of process, it was proscribing the subcommittee's action because it cast doubt upon the \"appearance of impartiality\" of the decisionmakers, and not because of any finding that the Commission had actually been influenced.\n... However, when [a congressional] investigation focuses directly and substantially upon the mental decisional processes of a Commission in a case which is pending before it, Congress is no longer intervening in the agency's legislative function, but rather, in its judicial function. At this latter point, we become concerned with the right of private litigants to a fair trial and, equally important, with their right to the appearance of impartiality, which cannot be maintained unless those who exercise the judicial function are free from powerful external influences ...\nTo subject an administrator to a searching examination as to how and why he reached his decision in a case still pending before him, and to criticize him for reaching the \"wrong\" decision, as the Senate subcommittee did in this case, sacrifices the appearance of impartiality\u2014the sine qua non of American judicial justice\u2014in favor of some short-run notions regarding the Congressional intent underlying an amendment to a statute, unfettered administration of which was committed by Congress to the Federal Trade Commission.\nIt may be argued that such officials as members of the Federal Trade Commission are sufficiently aware of the realities of governmental, not to say \"political,\" life as to be able to withstand such questioning as we have outlined here. However, this court is not so \"sophisticated\" that it can shrug off such a procedural due process claim merely because the officials involved should be able to discount what is said and to disregard the force of the intrusion into the adjudicatory process. We conclude that we can preserve the rights of the litigants in a case such as this without having any adverse effect upon the legitimate exercise of the investigative power of Congress. What we do is to preserve the integrity of the judicial aspect of the administrative process.\n\n\t\t\t2. D.C. Federation of Civic Associations v. Volpe\n\nD.C. Federation of Civic Associations v. Volpe, decided by the D.C. Circuit five years later, provides an apt counterpoint to Pillsbury . D.C. Federation also involved a claim of undue congressional influence but not within the context of a judicial or quasi-judicial proceeding. The principles enunciated by the court as necessary to establish a claim of taint in such a situation mark out the boundaries of permissible congressional action which have influenced courts since then. D.C. Federation involved the approval by the Secretary of Transportation of construction of the Three Sisters Bridge across the Potomac River. Two issues were presented: first, whether the Secretary failed to comply within statutory requirements prior to approval of construction; and second, whether the Secretary's determinations were tainted by extraneous pressures. With regard to the first issue, a majority of the court found that in a number of critical respects the Secretary had failed to comply with applicable statutory standards which therefore required a remand for further agency determinations.\nAlthough this finding would have been sufficient to dispose of the case, Judge Bazelon chose to deal with the \"taint\" issue. That involved the allegation that threats by the Chairman of the House appropriation subcommittee, which had jurisdiction over the funding of District of Columbia's transportation construction projects to deny funds for the District's proposed subway system unless the bridge project was approved and whether those threats had a legal impact on the Secretary's subsequent approval decision. Judge Bazelon stated that he was \"convinced that the impact of this is sufficient, standing alone, to invalidate the Secretary's action. Even if the Secretary had taken every formal step required by every applicable statutory provision, reversal would be required, in my opinion, because extraneous pressure intruded into the calculus of considerations on which the Secretary's decision was based.\"\nJudge Bazelon pointed out that he was alone in this opinion: \"Judge Fahy, on the other hand, has concluded that since critical determinations cannot stand irrespective of the allegations of pressure, he finds it unnecessary to decide the case on this independent ground.\" But it is to be noted that the disagreement between Judges Bazelon and Fahy was not as to the applicable principle of law but rather as to whether the district court below had found there had been any consideration by the Secretary of extraneous influence:\nWhile Judge Fahy is not entirely convinced that the District Court ultimately found as a fact that the extraneous pressure had influenced the Secretary\u2014a point which is for me clear\u2014he has authorized me to note his concurrence in my discussion of the controlling principle of law: namely, that the decision would be invalid if based in whole or in part on the pressures emanating from Representative Natcher. Judge Fahy agrees, and we therefore hold, that on remand the Secretary must make new determinations based strictly on the merits and completely without regard to any considerations not made relevant in the applicable statute.\nJudge Bazelon's opinion makes it clear that the court's standard\u2014that extraneous congressional influences actually shown to have had an impact on an agency decision will taint such administrative action \u2013is crafted for the special administrative circumstances of the situation before it: where the decisional process was neither judicial or legislative in nature.\nThe District Court was surely correct in concluding that the Secretary's action was not judicial or quasi-judicial, and for that reason we agree that much of the doctrine cited by plaintiffs is inapposite. If he had been acting in such a capacity, plaintiffs could have forcefully argued that the decision was invalid because of the decisionmaker's bias or because he had received ex parte communications. Well-established principles could have been invoked to support these arguments, and plaintiffs might have prevailed even without showing that the pressure had actually influenced the Secretary's decision. With regard to judicial decisionmaking, whether by court or agency, the appearance of bias or pressure may be no less objectionable than the reality. But since the Secretary's action was not judicial, that rationale has no application here.\nIf, on the other hand, the Secretary's action had been purely legislative, we might have agreed with the District Court that his decision could stand in spite of a finding that he had considered extraneous pressures. Beginning with Fletcher v. Peck , the Supreme Court has maintained that a statute cannot be invalidated merely because the legislature's action was motivated by impermissible considerations (except, perhaps, in special circumstances not applicable here). Indeed, that very principle requires us to reject plaintiffs' argument that the approval of the bridge by the District of Columbia City Council was in some sense invalid. We do not sit in judgment of the motives of the District's legislative body, nor do we have authority to review its decisions. The City Council's action constituted, in our view, the approval of the project required by the statute.\nThus, the underlying problem cannot be illuminated by a simplistic effort to force the Secretary's action into a purely judicial or purely legislative mold. His decision was not \"judicial\" in that he was not required to base it solely on a formal record established at a public hearing. At the same time, it was not purely \"legislative\" since Congress had already established the boundaries within which his discretion could operate. But even though his action fell between these two conceptual extremes, it is still governed by principles that we had thought elementary and beyond dispute. If, in the course of reaching his decision, Secretary Volpe took into account \"considerations that Congress could not have intended to make relevant,\" his action proceeded from an erroneous premise and his decision cannot stand. The error would be more flagrant, of course, if the Secretary had based his decision solely on the pressures generated by Representative Natcher. But it should be clear that his action would not be immunized merely because he also considered some relevant factors.\nThus, the court appeared to view undue influence cases as classifiable on a continuum, with the applicable standard dependant on where on the continuum the nature of the case places it. If a proceeding is one in which judicial or quasi-judicial functions are being exercised, then the highest standard of conduct is required, and only a showing of interference with merely the \"appearance of impartiality,\" without proof of actual partiality or other effect of the extraneous influences, is necessary. If the decisionmaking is \"purely legislative\" (policymaking) in nature, such as takes place in informal rulemaking, then the courts will be most deferential, even in the face of heavy extraneous pressures, to the political nature of the process. Finally, where a decisional process involves application of ascertainable legislative standards by an agency official in a situation that cannot be categorized as either judicial or legislative, i.e. , informal decisionmaking, then a claim of impermissible interference will be sustained only on a showing of actual effect. The courts appear to have been guided by this suggested mode of analysis.\n\n\t\t\t3. The Critique of Pillsbury and D.C. Federation\n\nThe rulings in Pillsbury and D.C. Federation have received surprisingly limited attention over the years, but what commentary there is has been generally critical, emphasizing both courts' failure to give proper weight to the values of the political process in such cases. An influential 1990 article by Professor Richard J. Pierce, Jr., a leading administrative law scholar, reflects practical concerns raised by the decisions. Pierce agrees that the Pillsbury court reached a defensible result in light of the circumstances presented: the contested issues of fact were at least arguably adjudicatory in nature rather than legislative and the intense interrogation could be viewed as pressure to resolve the facts against Pillsbury, thereby creating the appearance of impropriety. Thus, even though it is impossible to determine whether the FTC's resolution of those facts was in fact influenced by the hostile questions, Pierce argues that one could infer that the FTC purposely resolved adjudicative facts against Pillsbury in response to the committee's attacks. Pierce's concern, however, is that the 5 th Circuit did not decide the case on this narrow ground, but announced the far broader principle that \"[w]hen [a congressional] investigation focuses directly and substantially upon the mental decisional processes of a Commission in a case before it, Congress is . . . intervening [impermissibly] in the agency's adjudicatory function.\" Application of such a broadly stated prohibition in future cases, Pierce asserts, could result in findings attributable to congressional pressure without regard to the actual context of the congressional proceeding and\nwould constitute an unjustified judicial interference with the political process of policymaking. Whether to apply the rule of reason or a per se rule to acquisitions under the Clayton Act is purely a policy decision . . . Legislators should be free to express their views on this policy issue, and FTC commissioners should be free to change their minds and adopt those views. This is the political process functioning properly. It is of no consequence to the judiciary whether the FTC changes its policy because it is persuaded by the merits of the legislators' arguments, or because it fears that the legislature will retaliate . . . Similarly, the courts should not distinguish between policy decisions made through rulemaking and policy decisions developed in adjudicatory proceedings. To paraphrase Justice Holmes, judicial process values should trump political process values only when an agency has singled out an individual for adverse treatment.\nWhile finding Pillsbury ' s holding defensible, Professor Pierce deems D.C. Federation indefensible, \"stand[ing] for the principle that two politically accountable branches cannot compromise their frequently differing policy preferences.\" In Pierce's view, the case was about a political dispute over the allocation of transportation funds between the administering agency and the key congressional appropriating subcommittee. The secretary preferred seeing a subway built; the subcommittee (and Congress) wanted a bridge built. After a heated public dispute, a political compromise was effected whereby both projects would go forward. But the appeals court intervened finding that the secretary's decisions, which were part of the political deal, were infected with impermissible bias as a result of legislative branch pressure. In the words of the court, \"the impact of this pressure is sufficient, standing alone, to invalidate the Secretary's action.\" In Professor Pierce's view:\nD.C. Federation is hard to explain in a democracy in which two politically accountable branches of government share the power to make policy. The agency was not adjudicating a dispute involving individual rights; nor was it resolving contested issues of adjudicative fact. Perhaps the case stands for the principle that the two politically accountable branches cannot compromise their frequently differing policy preferences. But if so, it is a singularly arrogant decision. The Constitution created a system of shared and coordinated policymaking by the two politically accountable branches. The Framers included many features to force compromise between the two branches: The President's role in the legislative process, the Senate's role in approving policymaking officials for the executive branch, the Senate's role in ratifying treaties and the exclusive power of the House to initiate tax and appropriations bills. Our nation would be ungovernable in the absence of constant policy compromises between the executive and legislative branches.\nAs will be seen in the following review of the undue influence case law since the decisions in Pillsbury and D.C. Federation , Professor Pierces's pragmatic views appear to have been influential.\n\n\t\tC. Adjudicatory Rulings Since Pillsbury\n\nSince the decision in Pillsbury, while courts have continued to recognize verbally the vitality of that precedent, only one court has actually overturned a quasi-judicial agency proceeding on grounds of undue political influence, and the most recent judicial rulings have evinced a clear predilection to defer to congressional actions where they involve the legitimate exercise of legislative oversight and investigative functions.\n\n\t\t\t1. Koniag v. Kleppe\n\nThe solitary ruling referred to occurred in Koniag v. Kleppe, in which a district court set aside adjudicatory decisions of the Secretary of the Interior with respect to the eligibility of several communities to receive land and money under the Alaska Native Claims Settlement Act (ANSCA), at least in part because it found improper congressional pressure exerted on the Department and the Secretary. There, a congressional subcommittee held oversight hearings on the administration of the Act while the proceedings in question were pending. The district court, however, found that the hearings went substantially beyond the oversight function.\nThe hearings took place during the time that the validity of certain claims being advanced by the plaintiffs was being litigated before the Secretary and following upon earlier correspondence which the Congressman had addressed to various subordinates of the Secretary. The stated purpose of the hearings was to present a forum for discussing the implementation of the Act but in fact the Committee, through its chairman and staff members, probed deeply into details of contested cases then under consideration, indicating that there was \"more than meets the eye.\" The entire rule-making process was re-examined, travel vouchers and other information were sought to probe the adequacy of the investigations made, all papers in the pending proceedings were demanded, the accuracy of data and procedures was questioned, and constantly the Committee interjected itself into aspects of the decisionmaking process.\nWhen the departmental officials expressed concern about the integrity of the quasi-judicial administrative process, the Chairman several times stated that it was not his purpose to pressure the Department, but he many times stated his doubts that the law was being properly carried out. The court noted: \"On key issues now in dispute before the Court, representatives of the Government were obligated to take positions as to the interpretation of the Act. A strenuous effort was made by the Chairman to encourage protest and appeals, coupled with comments indicating his clear impression that all that could be done was being done and that some of the results being reached were contrary to congressional intent.\"\nTwo days before the Secretary made his determination on the eligibility of the villages, the Chairman sent a letter to him requesting that he postpone his decision on the matter pending a review and opinion by the Comptroller General because it \"appears from the testimony [at the hearings] that village eligibility and Native enrollment requirements of ANSCA have been misinterpreted in the regulations and that certain villages should not have been certified as eligible for land selections under ANSCA.\" On these facts the district court vacated the Secretary's eligibility decisions and reinstated the decisions initially rendered by the Bureau of Indian Affairs (BIA).\nOn appeal, the District of Columbia Circuit Court of appeals disagreed in part with the lower court's application of the relevant law but not with its validity. Thus, with regard to the Chairman's conduct of the hearings, the appeals court found fault with the district court's ruling because none of the agency officials subjected to the Chairman's interrogations was an agency decisionmaker.\nThe hearings in question were called by Congressman Dingell in June of 1974 at the time the Board and the Secretary were considering most of these cases.... During the hearings Congressman Dingell made no secret of his displeasure with some of the initial BIA eligibility determinations. Nevertheless, we think the Pillsbury decision is not controlling here because none of the persons called before the subcommittee was a decisionmaker in these cases. One possible exception was Mr. Ken Brown, a close advisor to the Secretary who briefed him on the cases at the time he decided to approve the Board's recommended decisions. However, even if we assume that the Pillsbury doctrine would reach advisors to the decisionmaker, Mr. Brown was not asked to prejudge any of the claims by characterizing their validity. See Pillsbury Co. v. FTC, supra at 964. The worst cast that can be put upon the hearing is that Brown was present when the subcommittee expressed its belief that certain villages had made fraudulent claims and that the BIA decisions were in error. This is not enough.\nWith regard to the Chairman's letter, however, the court of appeals found \"it compromised the appearance of the Secretary's impartiality,\" and thereby tainted the decision, citing Pillsbury approvingly. But rather than reinstate the BIA decisions, the matter was remanded to the Secretary since three and a half years had passed and a new Secretary of a new Administration had taken office, thus making possible a fair and dispassionate treatment of the matter.\n\n\t\t\t2. Gulf Oil Corporation v. FPC\n\nOther than Koniag, reviewing courts have consistently upheld congressional intercessions into adjudicatory proceedings against undue political influence challenges. In Gulf Oil Corporation v. FPC, for example, petitioners sought to overturn a Federal Power Commission (FPC) order requiring delivery of larger quantities of natural gas. In upholding the order, the appeals court rejected a claim that members and staff of the FPC had been subjected to improper interrogation and interference in the decision of the matter by the Subcommittee on Oversight and Investigations of the House Interstate and Foreign Commerce Committee at hearings and in correspondence. The court recognized the relevance of Pillsbury to such an adjudicatory proceeding but acknowledged that it had to be sensitive to the legislative importance of congressional committees in oversight and investigation and recognized that \"their interest in the objective and efficient operation of regulatory agencies serves a legitimate and wholesome function with which we should not lightly interfere.\" Balancing the interests of integrity of an adjudicatory proceeding and congressional oversight, the court found determinative distinctions between Pillsbury and the case before it. First, the court found that the subcommittee was not concerned with the merits of the agency's decision, as was the situation in Pillsbury, but \"was directed at accelerating the disposition and enforcement of the FPC's compliance procedures.\" Nor did the court find any effort to influence the Commission in reaching any decision on the specific facts of the case or any factual prejudice. Any intrusions into the merits of the FPC's decision were found to be \"incidental to the purpose of accelerating\" the agency's disposition of the case. Those \"incidental intrusions\" were found not to have had serious influence on the agency because (1) the interrogation did not reflect the majority view of the subcommittee; (2) the agency did not accede to Members' requests and continued with the show cause proceeding; and (3) the ultimate resolution of the issue was the same as it had been in proceedings concluded a year prior to the hearings in question. Concluding that the claim of prejudice could not be sustained under the facts and circumstances of the case, the court recapitulated the factors it had taken into consideration:\nWeighing these factors\u2013the importance and need for Congressional oversight of regulatory agencies, the Commission's evident strong backbone in resisting subcommittee pressure, the Commission's identical resolution of each issue in its prior decision, the entirely legal nature of the Commission's decision, and our agreement with that decision\u2013against our commitment to the principle that administrative agencies must be allowed to exercise their adjudicative functions free of Congressional pressure, we conclude that the legislative conduct in this case did not affect the fairness of the Commissions proceedings and does not warrant our setting aside the Commission's order.\n\n\t\t\t3. Peter Kiewit Sons' Co. v. U.S. Army Corps of Engineers\n\nIn Peter Kiewit Sons ' Co. v. U.S. Army Corps of Engineers, the appeals court dealt with the effects of the conduct of a Senator at prior congressional investigations on the subject of debarment of government contractors convicted of bid-rigging and similar offenses, and his recommendations and status inquiries contemporaneous with an ongoing debarment proceeding. The plaintiff, the subject of the debarment proceeding, claimed that the Senator's persistence in the subject area, and his particular interest in its case, compromised the integrity of the administrative proceeding. The district court agreed. On appeal, the District of Columbia Circuit Court reversed.\nThe appeals court acknowledged that a judicial or quasi-judicial proceeding could be invalidated by the appearance of bias or pressure and that under that standard \"pressure on the decisionmaker alone, without proof or effect on the outcome, is sufficient to vacate a decision.\" Thus, \"[t]he test is whether 'extraneous factors intruded into the calculus of consideration' of the individual decisionmaker.\" In the case before it, the court found neither actual nor apparent congressional interference since the Senator had never communicated directly with the ultimate decisionmaker in the debarment, the Assistant Judge Advocate General for Civil Law, nor was it shown that that official was even aware of the Senator's communications.\n\n\t\t\t4. Power Authority of the State of New York v. FERC\n\nChallenged congressional communications in an adjudicatory setting were next rejected in Power Authority of the State of New York v. FERC . This was an action for review of a series of decisions by the Federal Energy Regulatory Commission (FERC) which involved, inter alia, the claim that four Members of Congress allegedly engaged in ex parte communications with FERC in connection with a proceeding for a declaratory order regarding the allocation of power generated by waters of the Niagara River. The communications in question consisted of a letter from two House Members to President Reagan which the President forwarded to the Chairman of FERC, and a press conference attended by the four defendants, FERC officials and the public, at which the petitioners urged reversal of an administrative law judges's decision against them. At the time FERC was considering petitions for rehearing, one of the petitioners filed a motion with FERC to deny rehearing because the proceeding had been tainted. The Commission denied the motion on the ground that the ex parte communications had not undermined \"the integrity of ... [the Commission's] processes.\" That same decision also resolved the merits of the proceeding and the Municipal Electric Utilities Association of New York (MEUA) and other parties sought appellate review.\nThe Second Circuit Court of Appeals summarily rejected MEUA's contentions with the following analysis:\nEx parte communications by Congressmen or any one else with a judicial or quasi-judicial body regarding a pending matter are improper and should be discouraged. On the other hand, the mere existence of such communications hardly requires a court or administrative body to disqualify itself. Recusal would be required only if the communications posed a serious likelihood of affecting the agency's ability to act fairly and impartially in the matter before it. Gulf Oil Corp. v. FPC, 563 F. 2d 588, 611-12 (3d Cir. 1977). In resolving that issue, one must look to the nature of the communications and particularly to whether they contain factual matter or other information outside of the record, which the parties did not have an opportunity to rebut. See Professional Air Traffic Controllers Organization v. FLPA, 672 F. 2d 109, 112-13 (D.C. Cir. 1982); United States Lines v. Federal Maritime Commission, 584 F.2d 519, 533-34 (D.C. Cir. 1978).\nThe communications here fall far short of meeting these requirements. No new evidence was introduced. There was nothing secret about the letters. MEUA was promptly made aware of the correspondence by the Commission and had a full opportunity to comment and respond. Since MEUA had no rebuttal evidence to offer\u2013 indeed, none was called for - an evidentiary hearing was unnecessary. The Commission properly denied MEUA's motion.\n\n\t\t\t5. State of California v. FERC\n\nThe two most recent appellate court rulings continue the trend of the courts not to interfere with congressional attempts to influence quasi-adjudicatory proceedings, emphasizing judicial recognition of the important constitutional role of oversight and investigation and the demonstrated ability of agencies to shield their sensitive adjudicatory processes from due process intrusions. In State of California v. FERC , an applicant for a license to build a hydroelectric facility challenged the award of a conditioned license on the grounds, among others, that letters from the Chairman of the House Energy and Commerce Committee unduly influenced, and thereby tainted, the entire sequence of Federal Energy Regulatory Commission orders which resulted in the conditioned license, relying on the Pillsbury case. In three letters to FERC, the Chairman complained that the agency had not followed the recently enacted dispute resolution procedures under the Federal Power Act. In response to those complaints, FERC reopened dispute resolution negotiations with State and federal fish and wildlife agencies prior to the conclusion of the licensing process. The Chairman also sent two letters to the agency urging it to review its two decades old interpretation of the Federal Land Policy and Management Act (FLPMA) that a hydroelectric project sponsor was not required to obtain a right-of-way permit over public lands from the Bureau of Lands Management of the Department of Interior because FERC had exclusive jurisdiction over federal hydroelectric development. The Chairman put forth a contrary view and requested and received support for that view in a report by the General Accounting Office (GAO). FERC, after initially rejecting the Chairman's contention and reaffirming its long held interpretation during the course of the licensing proceeding, reversed its course after receiving the GAO report.\nThe appeals court rejected both objections, holding that neither rose \"to the level of undue congressional influence described in Pillsbury nor do they adversely affect the appearance of impartiality in this case.\" FERC's decision to open the dispute resolution process after receipt of the Chairman's letters was designed, the court found, to \"correct a procedural problem\" and \"was based on its own independent analysis of the record in this proceeding, and was an effort to establish fair procedures to allow the parties and the Commission to investigate.\" Since the negotiation requirements were so recent both the Chairman \"and the Commission were understandably concerned about getting off to a good start.\" With respect to the successful urging that FERC change its long held interpretation of FLPMA, the court explained that Pillsbury was not implicated because \"FERC gave a reasoned explanation for its reversal of its original interpretation of FLPMA, and this provides substance for its claim that it addressed and resolved the right-of-way issue under its own independent and detailed analysis of the issue.\" The court further noted that the fact that it found (later in its ruling) that the reversal of its past interpretation was legally incorrect was irrelevant since the record of the proceeding supported that it had gone through a process of reasoned analysis. \"In short, [the Chairman's] letters, expressing his views on the 10(j) and FLPMA issues, do not constitute the type of intense and undue congressional influence that was present in Pillsbury. \"\n\n\t\t\t6. ATX, Inc. v. U.S. Department of Transportation\n\nFinally, in ATX , Inc. v. U.S. Department of Transportation , the appeals court found that vocal, hostile, and intense opposition of Members of Congress to the application of ATX, Inc. to operate a new airline in Boston, Atlanta and Baltimore\/Washington, did not fatally flaw the proceeding held by the Department of Transportation (DOT), and that DOT's denial of the application on the ground that ATX was unfit was reasonable.\nThe pertinent facts of the controversy are essentially as follows. Congressional opposition to ATX arose even prior to the filing of its application, based largely on the perceived reputation of Frank Lorenzo, its founder and majority owner, from his previous record of management of a major airline. Twenty one Members of Congress wrote the Secretary of DOT urging him to deny ATX's application even before it had been filed, because of Lorenzo's alleged unfitness to own and operate an airline. Most of the signatures on the letter were members of the House committee with jurisdiction over DOT, including the chair of the full committee, the chair of the Aviation Subcommittee, and the chair of the Oversight Subcommittee. After ATX filed its application, 125 House and Senate members wrote the Secretary to declare their opposition to Lorenzo. Two congressmen introduced legislation to prohibit Lorenzo from re-entering the airline industry. The Secretary responded by acknowledging receipt of the letters, refusing to comment on the merits, and putting the correspondence in a file for \"contacts outside the record of the case.\" During the hearing on the application one of the congressional letter writers was allowed to testify as to his opposition. Ultimately the Department rejected the application on the ground that ATX \"lacked both managerial competence to operate an airline and a disposition to comply with regulatory requirements.\"\nIn rejecting the undue influence challenge, the court acknowledged that the size, vocality, and source of the congressional opposition toward the applicant in this quasi-judicial proceeding required close judicial scrutiny to allay due process concerns with the alleged appearance of bias. The court explained\n... In the nonjudicial context, we have suggested that the way to cure the appearance of bias may be to establish \"a full scale administrative record which might dispel any doubts about the true nature of [the agency's] action.\" Volpe, 459 F. 2d at 1249. With respect to the nexus requirements, we have never questioned the authority of congressional representatives to exert pressure, see id., and we have held that congressional actions not targeted directly at the decision makers-such as contemporaneous hearings\u2013do not invalidate an agency decision. See Koniag, 580 F. 2d at 610. Under this framework, it is apparent that none of the congressional pressure challenged by ATX is sufficient to invalidate the adjudication.\nThe court commented that the influence with which it was concerned is \"when congressional influence shapes the determination of the merits.\" The court commented that the lengthy opinion supporting the decision based on the administrative record \"was clear and open to scrutiny and [the] decision was fully supported by the record. There is no reason for us to infer that the letters influenced his decision inasmuch as he did not reverse the ALJ's recommendation nor was the merits decision a close one on the record.\" The testimony of the congressman at the hearing did not create \"a fatal appearance of bias as it was based almost entirely on information already available to the ALJ, was void of threats and was not relied on in any of the decisions, which were accompanied by extensive findings and reasons.\" The court concluded:\nIn addition we find no evidence that the legislative activity actually affected the outcome on the merits. See Kiewit, 714 F. 2d at 169; Volpe, 459 F. 2d at 1246. Neither the Department's final decision nor the ALJ's two decisions mentioned the testimony of the congressman, the congressional letters or the proposed legislation. All of the congressional contacts were placed in the administrative record and ATX responded to them. . . . Finally, the record manifests that both the Secretary and his acting Assistant Secretary were non-committal in their reactions to the congressional contacts. Secretary Pe\u00f1a's response to the correspondence stressed that it was inappropriate for him to discuss the merits of the case with the congressmen.\n* * *\n. . . Here, the nexus between the pressure exerted and the actual decision makers is so tenuous and the evidence so adequately establishes ATX's ineligibility for an airline certificate that we conclude political influence did not enter the decision maker's \"calculus of consideration.\"\n\n\t\tD. Informal Decisionmaking Rulings Since D.C. Federation\n\n\t\t\t1. American Public Gas Association v. FPC\n\nAmerican Public Gas Association v. FPC was a case that arose from a FPC ratemaking conducted pursuant to section 553 of the APA. The Commission first issued Opinion 770, in July 1976, and on rehearing, issued Opinion 770-A in November of the same year. In August 1976, while the rehearing was pending, Representative John Moss, chairman of the Oversight Subcommittee of the House Interstate and Foreign Commerce Committee, summoned the Commissioners to appear at a hearing. Representative Moss, who with three other members of the subcommittee had been parties to the proceeding before the FPC, subjected the Commissioners to what the reviewing court described as an \"intensive examination.\" Decisions underlying Opinion 770 came under attack, notwithstanding the fact that the Commission had warned the congressmen that those decisions were subject to reconsideration on rehearing. In the D.C. Circuit's words:\nThe questioning was not confined to explication of \"what the Opinion means and what its implications are.\" Chairman Moss went further, stating: \"I am most committed as an adversary. I find that I am outraged by Order 770. I find it very difficult to comprehend any standard of just and reasonableness in the decision and I would not want the record to be ambiguous on that point for one moment.\"\nThese expressions, coupled with what the court characterized as the Subcommittee Counsel's adversarial interrogation about particular factors in the cost analysis of Opinion No. 770, formed the basis of the claim of prejudice.\nIn reaching the question whether the Commission should be disqualified, the Court related the facts of Pillsbury and described its holding at length. It then observed:\nWe doubt the utility of classifying the ratemaking undertaken in the present proceedings by the Power Commission as entirely a judicial, or a legislative function, or a combination of the two, for in any event the need for an impartial decision is obvious ... Congressional intervention which occurs during the still-pending decisional process of an agency endangers, and may undermine, the integrity of the ensuing decision, which Congress has required be made by an impartial agency charged with responsibility for resolving controversies within its jurisdiction. Congress as well as the courts has responsibility to protect the decisional integrity of such an agency.\nHowever, despite this rhetorical obeisance to the spirit of Pillsbury , the court did not disqualify the agency, because the producers, though fully aware of all these facts, failed to ask the Commission to disqualify itself. The court said that a party cannot, with knowledge of the alleged taint, stay silent in hopes of a favorable decision, and then, when the decision is unfavorable, seek its reversal on the ground of partiality: \"A party, knowing of a ground for requesting disqualification, cannot be permitted to wait and decide whether he likes subsequent treatment that he receives.\" But the court did not end its analysis there. It went on to ask whether the interference was so serious as to require it sua sponte to void the result and set forth the factors it took into account in concluding that it would not:\n...the character and scope of the interference alleged; the fact that the parties who raise the disqualification question seem not to have deemed what occurred to impair the impartiality of the Commission itself independent of the result it reached; the fact that in one important respect, and indeed the issue that was most vehemently examined by the Congressmen, namely the correctness of the Commission's decision respecting the income tax component, the Commission left standing the disposition criticized at the Subcommittee hearing; the fact that there is nothing to lead the court to find that actual influence affected Opinion No. 770-A; and the fact that insofar as any actions of the Commissioners themselves are concerned no appearance of partiality is evident.\nIn essence, then, the court's decision turned on its finding of no actual impact of the congressional intervention on the agency decision. Since the court earlier made clear it understood the differing standards applied by the Pillsbury and D.C. Federation rulings, it would appear to have considered the proceeding closer in type or form to D.C. Federation .\n\n\t\t\t2. Town of Orangetown v. Ruckelshaus\n\nIn Town of Orangetown v. Ruckelshaus, the Town sought to prevent the Environmental Protection Agency (EPA) and the New York State Department of Environmental Conservation (NYSDEC) from approving grants that would modernize an outmoded and overloaded sewage treatment plant. It was argued that improper political pressure by state and local officials on EPA caused EPA to reconsider and relax certain conditions on the grants that it had originally imposed that were important to the Town. The Second Circuit held that in a non-adjudicatory proceeding involving the disbursement of funds it had to be shown that \"political pressure was intended and did cause the agency's action to be influenced by factors not relevant under the controlling statute.\" Here, the court stated, \"The potential effect of proposed grant on area development is one of the relevant factors for the EPA to consider . . . and elected officials should not be precluded from bringing those factors to administrators' attention. [citing Sierra Club v. Costle ] Orangetown 'may not rest upon mere conclusory allegations' of improper political influence as a means of obtaining a trial.\" Since the EPA decision whether to impose conditions on the grants was not adjudicatory in nature but \"an administrative one dealing with the disbursement of grant funds, and required no adversary proceeding,\" the appeals court concluded that he Town did not have the status of a party and was not entitled to notice and opportunity to be heard. \"Consequently, such communications as the EPA had with the two public officials did not deprive [the Town] of due process.\"\n\n\t\t\t3. Chemung County v. Dole\n\nChemung County v. Dole involved a protest over the award of a contract by the Federal Aviation Administration (FAA) to locate and build a flight service station. The contract was originally awarded to Elmira, New York (in Chemung County) but was rescinded and then awarded to Buffalo, New York. It was claimed that the change was improperly effected by the political pressure brought on the FAA by two New York congressmen. Adopting the rule announced in its Town of Orangetown ruling, the appeals court found no undue political influence:\nThe full extent of Representatives Kemp and Nowak's efforts on behalf of the NFTA was their having written letters to the FAA and their staffs and having met with the GAO investigator. Appellees object to the Representatives' letter to the FAA asking it to refrain from formally entering into a contract with Chemung County while the GAO audit was underway. The FAA had a right to suspend performance of a contract pending a GAO audit. If the audit proved that NFTA had submitted the lowest bid (as it did so prove), the FAA had the obligation to award the contract to NFTA. See 41 U.S.C. \u00a7253b (1982). Thus this letter urged the FAA to take action directly authorized by the statutory scheme governing the award of contracts.\nSimilarly, the Representatives' letter to the FAA urging the agency to re-evaluate its telecommunications cost estimates in light of the GAO's findings was also proper. This letter was also an attempt to persuade the FAA to abide by its statutory obligations, not ignore them. As noted above, an award of a government contract to anyone except the bidder with the most advantageous proposal would violate the FAA's statutory obligations, and the Representative acted properly in bringing a possible violation of this duty to the agency's attention\u2013even if it helped their home districts.\n\n\t\t\t4. DCP Farms et al v. Yeutter\n\nFinally, in DCP Farms et al v. Yeutter the 5 th Circuit addressed the issue whether the denial of farm subsidy payments had been tainted by the intercession of a powerful congressman prior to commencement of a Department of Agriculture adjudication and thereby required the application of Pillsbury ' s \"mere appearance of bias\" standard. The adjudication was to be held to determine whether an aggregation of 51 irrevocable agricultural trusts was entitled to large subsidies in the face of a statute that limited farm subsidies to $50,000 per \"person.\" The effect of the trust scheme would have been to allow DCP Farms $1.4 million in subsidies for the 1989 crop year. Prior to the award decision, the Department's Inspector General (IG) issued a report on abuses of the farm subsidy program which highlighted DCP Farms as an example of \"egregious violations of the $50,000 per person limit.\" The report received considerable publicity and reached the attention of the jurisdictional subcommittee of the House Agriculture Committee. Staff of the subcommittee chairman met with Department officials to discuss the issues raised by the IG report in late 1989. DCP Farms was specifically discussed. In December 1989 the Chairman wrote to the Secretary of Agriculture about the reports of abuses in the subsidy program and cited DCP Farms as an example of the continued abuse of the statutory limit. He urged careful review of schemes involving irrevocable trusts, particularly in light of the fact that he had had assurances in the past from USDA officials that no legislative action was needed with respect to the treatment of such trusts. The chairman received assurance from the Secretary that the DCP Farms case was under administrative review and that the Department would \"take a very aggressive position in dealing with this case.\" In June 1990 an administrative decision was issued finding that DCP Farms had adopted schemes to evade the payment limitation provisions of the law and was ineligible to receive any subsidy payments for the 1989, 1990 and 1991 crop years. DCP Farms appealed and requested a hearing, which was set for December 12, 1990. Before the hearing date DCP Farms learned of the meeting with the chairman's staff and of the chairman's letter and successfully sued to enjoin the hearing on the ground, among others, that improper congressional interference denied then due process.\nThe Fifth Circuit rejected the argument in an opinion that recognizes the need to permit political oversight with respect to policy issues Congress has entrusted to agency decisionmakers. The appeals court first rejected the applicability of Pillsbury because \"the contact here occurred well before any proceeding which could be considered judicial or quasi-judicial . . . There was no hearing on the merits of DCP Farms' application for farm subsidy payments because DCP Farms abandoned the administrative process for this litigation.\" The court saw the dispute between DCP Farms and the Department as part of a larger policy debate and rejected any connection between the preliminary processing of DCP Farms' application and the appeals hearing that would raise Pillsbury issues:\nIn short, the congressional communication here was not aimed at the decisionmaking process of any quasi-judicial body. Congressman Huckaby was concerned about the administration of a congressionally created program. The dispute between the USDA and DCP Farms was part of a larger policy debate. Applying Pillsbury ' s stringent \"mere appearance of bias\" standard at this juncture of administrative process would erect no small barrier to Congressional oversight. It reflects an insular view of these administrative processes for which we find no warrant. We are unwilling to so dramatically restrict communications between Congress and the executive agencies over policy issues. Appearance of bias is not the standard.\nThe proper standard for this type of case, the court advised, is whether the communication actually influenced the agency's decision. This is appropriate, the court explained, because it protects the proper and effective workings of the political process:\nThis focus on the intrusion of improper extraneous factors into the agency's decision-making process recognizes the political reality that \"members of Congress are requested to, and do in fact, intrude in varying degrees, in administrative proceedings.\" S.E.C. v. Wheeling-Pittsburgh Steel Corp ., 648 F. 2d 118, 126 (3d Cir. 1981) (en banc). It would be unrealistic to require that agencies turn a deaf ear to comments from members of Congress. The agency's duty, so long as it is not acting in its quasi-judicial capacity, is simply to \"give congressional comments only as much deference as they deserve on the merits.\" Id.\nWe are cautious in reading extraneous factors too broadly, lest they impair agency flexibility in dealing with Congress. In particular, an agency's patient audience to a member of Congress will not by itself constitute the injection of an extraneous factor. Nor would a simple plea for more effective enforcement of a law be the injection of an improper factor. A truly extraneous factor must take into account \"considerations that Congress could not have intended to make relevant,\" D.C. Federation , 459 F. 2d at 1247.\nCongressional \"interference\" and \"political pressure\" are loaded terms. We need not attempt a portrait of all their sinister possibilities, even if we were able to do so. We can make plain that the force of logic and ideas is not our concern. They carry their own force and exert their own pressure. In this practical sense they are not extraneous. That a congressman expresses the view that the law ought not sanction the use of fifty-one irrevocable trusts to gain $1.4 million in subsidies is not impermissible political \"pressure.\" It certainly injects no extraneous factor. We find no due process right in these preliminary efforts to persuade the government to grant farm subsidies sufficient to exclude the political tugs of the different branches of government, and we see nothing more here. We reject the holding of the district court that DCP Farms could ignore the administrative procedure yet available to it and turn to the consequence of this bypass of remedies.\n\n\t\tE. Interference With Agency Rulemaking Proceedings\n\n\t\t\t1. Texas Medical Association v. Mathews\n\nIn one of the first cases to be decided after D.C. Federation , a district court applied its principles to find an impermissible congressional intervention in an agency rulemaking proceeding. In Texas Medical Association v. Mathews , the court considered plaintiff's contention that congressional pressure should invalidate a decision of the Department of Health, Education and Welfare (HEW) dividing Texas into nine Professional Standards Review Organizations (PSRO). HEW, after consulting with the plaintiff and several other interested groups, first announced it would form one statewide PSRO. But after a lengthy meeting with Senator Wallace Bennett, sponsor of the PSRO legislation, and a senior staff member of the Senate Finance Committee, an HEW official abruptly changed his mind and called for the division of Texas into nine PSRO's.\nThe court noted that while it had no evidence as to what Senator Bennett or the staffer may have said during the meeting, HEW was unable to adequately explain its sudden reversal of decision with regard to the number of PSRO's so soon after the meeting. Moreover, the court found \"proof of a pattern of undue influence by the same Congressional sources permeating HEW's entire administrative process relative to PSRO designation for Texas.\" Applying D.C. Federation ' s principle that \"agency action is invalid if based, even in part, on pressures emanating from Congressional sources,\" the court concluded that \"the fact that an agency decision is a 'little pregnant' with pressures emanating from Congressional sources is enough to require invalidation of the agency action. Especially should this be the law where, as here, the invasive Congressional source has financial leverage on the involved agency.\"\nThe fact that the agency action involved in Mathews was in the nature of a rulemaking would not appear to be an inapt or inconsistent application of D.C. Federation . When Judge Bazelon noted there that the courts would give absolute deference to legislative actions, it is clear from the context that he was referring to such action by a legislative body , there the D.C. Council, a political body directly accountable to its constituency in the electoral process. Where similar legislative action (informal rulemaking) is taken by an administrative agency, the courts accord great but not absolute deference to that process since it is not directly accountable to the electorate. A finding of taint in an informal rulemaking is therefore not foreclosed by the D.C. Federation rationale. Thus the court in Mathews held that the normal presumption in favor of the agency's decision was overcome by the evidence of the pervasive and invasive nature of the congressional intrusions. However, while the ruling is not inconsistent with D.C. Federation , the holdings in U.S. ex rel Parco v. Morris , and Sierra Club v. Costle , to be discussed next, appear to reflect more accurately the nature and extent of the currently prevailing judicial deference to congressional attempts to influence policymaking in the rulemaking process.\n\n\t\t\t2. United States ex rel Parco v. Morris\n\nUnited States ex rel Parco v. Morris involved a challenge by deportable aliens to the rescission by the Immigration and Naturalization Service of a longstanding operating instruction which would have allowed them to extend the date of their voluntary departure. Plaintiff's contended, inter alia , that the change in policy was precipitated by the direct pressure applied by Representative Peter Rodino who was then chairman of the subcommittee responsible for the oversight of the administration of the immigration laws. It was conceded that Representative Rodino's request was the direct impetus for the change in policy. The court rejected the contention based on its reading of the D.C. Federation . That holding, it said, was based upon a \"public and enforceable threat\" by a congressman to withhold public funds for a particular purpose unless an agency official acceded to the congressman's wishes, and evidence that the official's decision was based in part on that pressure. The court went on to note the importance of the nature of the proceeding in analysis of such cases.\nHowever, Judge Bazelon's analysis of this principle distinguishes sharply between agency action which is \"judicial\" or \"quasi-judicial\" and agency action which is \"legislative.\" The former concept related to agency adjudication of a particular, individual case, or when it renders a decision on the record compiled in formal hearings; in such instance the consideration of extraneous pressuring influences undermines the fairness of the hearing accorded the adverse parties. Id . at 1246; accord, Pillsbury Co . v. FTC , 354 F. 2d 952, 964 (5 th Cir. 1966); Texas Medical Assoc v. Mathews , 408 F. Supp. 303 (W.D. Tex. 1976); Koniag, Inc. v. Kleppe , 405 F. Supp. 1360, 1371-73 (D.D.C. 1975) (Gesell, J.). On the other hand, when the agency action is purely \"legislative,\" as in the informal rulemaking involved here, the decision \"cannot be invalidated merely because the ... action was motivated by impermissible considerations\" any more than can that of a legislature. D.C. Federation, supra , 459 F. 2d at 1247; cf. Fletcher v. Peck , 10 U.S. (6 Cranch) 87, 129-313, 3 L.Ed. 162 (1810).\nThe court concluded that since plaintiffs did not claim that Representative Rodino had interfered with the \"quasi-judicial decision to deny them extended voluntary departure,\" but rather were attacking the motivation of the official in changing the agency's policy, a \"purely' legislative action, they had to meet a more stringent standard of proof. The court ruled they had failed to do so.\n\n\t\t\t3. Sierra Club v. Costle\n\nThe seminal case in this line is Sierra Club v. Costle , in which the appeals court found no taint of the rulemaking proceeding there for failure to docket post-comment period meetings with the Senate majority leader. The court concluded that it would not set aside a rulemaking simply on the grounds that political pressure had been exerted in the process. It ruled that there has to be a showing that \"the content of the pressure on this [decisionmaker] is designed to force him to decide upon factors not made relevant by Congress in the applicable statute\" and also that the determination made \"must be affected by those extraneous considerations.\" More particularly, it was alleged that an \" ex parte blitz\" conducted after the comment period for an informal rulemaking had caused the Environmental Protection Agency (EPA) to back away from its support of a more stringent emission standard and was therefore unlawful and prejudicial. Post-comment period communications included a number of oral conversations and briefings between agency officials and private parties and other government officials, including the majority leader of the United States Senate and the President of the United States.\nThe appeals court initially noted that the statute in question there did not require the docketing of all post-comment period conversations and meetings and refused to apply a blanket rule requiring such docketing. To the contrary, where the nature of the rulemaking is general policymaking, the court expressed the view that \"the concept of ex parte contacts is of more questionable utility.\" Indeed, the court deemed informal contacts vital to the effectiveness and legitimacy of our governmental processes.\nUnder our system of government, the very legitimacy of general policymaking performed by unelected administrators depends in no small part upon the openness, accessibility, and amenability of these officials to the needs and ideas of the public from whom their ultimate authority derives and upon whom their commands must fall. As judges we are insulated from these pressures because of the nature of the judicial process in which we participate; but we must refrain from the easy temptation to look askance at all face-to-face lobbying efforts, regardless of the forum in which they occur, merely because we see them as inappropriate in the judicial context. Furthermore, the importance to effective regulation of continuing contact with a regulated industry, other affected groups, and the agency to win needed support for its program, reduce future enforcement requirements by helping those regulated to anticipate and shape their plans for the future, and spur the provision of information which the agency needs.\nHowever, the court inferred from the statutory scheme that oral comments \"of central relevance to the rulemaking\" should be placed in the record. Although the court conceded that this allows the agency to decide in its own discretion which comments are relevant, the court did not find this to be a persuasive enough consideration to require a more stringent rule.\nEDF is understandably wary of a rule which permits the agency to decide for itself when oral communications are of such central relevance that a docket entry for them is required. Yet the statute itself vests EPA with discretion to decide whether \"documents\" are of central relevance and therefore must be placed in the docket; surely EPA can be given no less discretion in docketing oral communications concerning which the statute has no explicit requirements whatsoever. Furthermore, this court has already recognized that the relative significance of various communications to the outcome of the rule is a factor in determining whether their disclosure is required. A judicially imposed blanket requirement that all post-comment period oral communications be docketed would, on the other hand, contravene our limited powers of review, would stifle desirable experimentation in the area by Congress and the agencies, and is unnecessary for achieving the goal of an established, procedure-defined docket, viz ., to enable reviewing courts to fully evaluate the stated justification given by the agency for its final rule.\nThe appeals court concluded that none of the non-docketed post-comment meetings, including those with the Senate majority leader and the President, required docketing. It underlined its view that informal rulemaking involving general policymaking is akin to the legislative process and therefore the courts should be wary of attempting to probe too deeply. It stated that before an administrative rulemaking could be overturned simply on the grounds of political pressure, it had to be shown that \"the content of the pressure on the [decisionmaker] is designed to force him to decide upon factors not made relevant by Congress in the applicable statute\" and also that the determination made \"must be affected by those extraneous considerations.\" Although the meetings were called at the behest of the majority leader \"in order to express 'strongly' his views\" on the subject of the rulemaking, it found that the agency made no commitments to him nor was there evidence that he used \"extraneous\" pressures to further his position. The court characterized the Senator's efforts, since they were exerted in a rulemaking proceeding, as within the accepted boundaries of the political process.\n... Americans rightly expect their elected representatives to voice their grievances and preferences concerning the administration of our laws. We believe it entirely proper for Congressional representatives vigorously to represent the interests of their constituents before administrative agencies engaged in informal, general policy rulemaking, so long as individual Congressmen do not frustrate the intent of Congress as a whole as expressed in statute, nor undermine applicable rules of procedure. Where Congressmen keep their comments focused on the substance of the proposed rule\u2014and we have no substantial evidence to cause us to believe Senator Byrd did not do so here\u2014administrative agencies are expected to balance Congressional pressure with the pressures emanating from all other sources. To hold otherwise would deprive the agencies of legitimate sources of information and call into question the validity of nearly every controversial rulemaking.\nSimilarly, with regard to a meeting involving the President, the court held that as long as there is factual support in the record for the agency's outcome, it does not matter that \"but for\" the Presidential input it would have gone the other way.\nOf course, it is always possible that undisclosed Presidential prodding may direct an outcome that is factually based on the record, but different from the outcome that would have obtained in the absence of Presidential involvement. In such a case, it would be true that the political process did affect the outcome in a way the courts could not police. But we do not believe that Congress intended that the courts convert informal rulemaking into a rarified technocratic process, unaffected by political considerations or the presence of Presidential power.\n\n\t\tF. Influence That Could Abuse the Agency Investigatory Process\n\n\t\t\t1. SEC v. Wheeling-Pittsburgh Steel Corp.\n\nOn rare occasions the claim is made that an agency investigation has been instigated by congressional pressure or influence and the claim is made by the subject of such investigation that it is tainted by the political intervention. On even rarer occasions agencies have sought to fend off congressional oversight of closed or ongoing investigations because of concern that present and future open cases could be compromised by turning over requested internal deliberative documents. Agencies argue that such disclosures, even from closed investigations, might be utilized by attorneys representing potential targets of investigations, or defendants in civil and criminal actions, as evidence that the investigations or prosecutions are politically motivated and not driven by legitimate investigatory concerns and are thereby tainted. This notion is said to be supported by the appellate court ruling in SEC v. Wheeling-Pittsburgh Steel Corp. It is argued that Wheeling-Pittsburgh precludes any agency contact with Members of Congress which would give the appearance that an agency is acting at the behest of a Member or committee and that its proper course is to avoid any appearance that its enforcement efforts are being pursued at Congress' bidding. The claim, however, does not appear to be an accurate portrayal of either the Wheeling-Pittsburgh ruling or the case law that preceded or followed it. The Wheeling-Pittsburgh court made it clear that a court will deem a request for the enforcement of an administrative subpoena an abuse of the judicial process only if it was in fact shown that the subpoena was issued because of congressional influence, the agency knew its process was being abused, that it knowingly did nothing to prevent the abuse, and that it vigorously pursued the frivolous charges. Under the standard articulated by the appeals court the motivation of the Members of Congress is irrelevant; the focus is on the actual impact of the congressional intercession on the motivation of the agency itself. Simply the appearance of impropriety is not enough to taint the proceeding.\nSEC v. Wheeling-Pittsburgh Steel Corp . involved the initiation of an informal investigation of Wheeling-Pittsburgh Steel Corporation after the receipt by the Securities and Exchange Commission of a letter from a United States Senator suggesting that Wheeling had violated Section 10(b) of the Securities Exchange Act of 1934, and rule 10b-5a promulgated thereunder. During the period of the initial informal investigation, there was considerable contact between the SEC staff attorney conducting the investigation and the Senator's office and with competitors of Wheeling who were in alleged complicity with the Senator. The Senator was also actively pursuing the passage of legislation that would prevent Wheeling from obtaining Federal loan guarantees if it was under investigation by a Federal agency. Thereafter, the SEC ordered a formal investigation of the matter. Pursuant to the formal investigation order, the SEC issued a subpoena duces tecum to Wheeling and its chief executive officer. He refused to answer certain questions and the agency sought enforcement. Wheeling defended on the grounds, inter alia , that the subpoena was issued in bad faith and for the purpose of harassment; and that the investigation constituted an abuse of the SEC's investigatory power by competitors of Wheeling who were opposed to the grant of certain Federal loan guarantees to Wheeling.\nThe district court refused to enforce the subpoena. Although it specifically rejected the claim of bad faith on the part of the agency, it concluded that, \"under the totality of circumstances,\" enforcement would be an abuse of the court's process. The court reached this conclusion because it believed that the SEC had allowed biased third parties to improperly influence the investigation process, although it conceded that the agency did not adopt the biased motives of the third parties.\nA panel of the Third Circuit reversed, concluding that a court could not refuse to enforce administrative subpoenas issued in good faith pursuit of a statutorily authorized purpose. The court concluded that bias of third parties was irrelevant where the agency had proceeded in good faith and that to invalidate agency action on the basis of an abuse of process theory independent of the bad faith defense was improper.\nThe case was reargued before the Third Circuit en banc , which by a 6-4 vote remanded the case to the district court in light of its ruling that even in the absence of bad faith on the part of an agency, it would not enforce an administrative subpoena if it was issued because of congressional influence and it was shown that the agency knew its process was being abused, that it knowingly did nothing to prevent the abuse, and that it vigorously pursued the frivolous charges.\nWe do not doubt the usefulness to administrative agencies of information gained from third parties. Nor do we doubt that frequently the motivations of informants are less than altruistic. See United States v. Cortese , 614 F.2d 914 (3d Cir. 1980). But we cannot simply avert our eyes from the realities of the political world: members of Congress are requested to, and do in fact, intrude, in varying degrees, in administrative proceedings. One commentator has said recently of the Internal Revenue Service:\n[A]though the IRS ultimately must be accountable to Congress, whose members are in turn accountable to the people, the IRS also has a constitutional duty to execute the tax law faithfully by determining and administering it properly. The IRS must give congressional comments only as much deference as they deserve on the merits, for the agency has no duty to placate particular congressmen or committees. Given the fine line between lawmaking and law enforcement, it is always difficult to say when one shades into the other, but clearly there is an inevitable tension between congressional oversight powers and the executive exercise of delegated powers to interpret, articulate, and execute the tax laws.\nParnell, Congressional Interference in Agency Enforcement: The IRS Experience, 89 Yale L.J. 1360, 1368 (1980) (footnotes omitted). The duty of the SEC, therefore is not to ignore information given to it by congressmen, but to \"give congressional comments only as much deference as they deserve on the merits.\" Id. An administrative agency that undertakes an extensive investigation at the insistence of a powerful United States Senator \"with no reasonable expectation\" of proving a violation and then seeks federal court enforcement of its subpoena could be found to be using the judiciary for illicit purposes. We need not lend the process of the federal courts to aid such behavior.\nThe appeals court made it clear that the bad faith defense need not be the sole basis for denial of enforcement, and that agency acquiescence in an abuse of its own process may lead to a finding of abuse of the court's process. The court distinguished between the two, noting that \"bad faith connotes a conscious decision by an agency to pursue a groundless allegation,\" while \"an agency may be found to be abusing the court's process if it vigorously pursued a charge because of the influence of a powerful third party without consciously and objectively evaluating the charge.\"\nThe court also emphasized the point that it was improper for the district court to have taken into account the motivation of third parties in determining either bad faith or abuse of process. \"This court has previously made clear that the proper focus in a challenge to an administrative subpoena is motivation of the agency itself, not that of third parties,\" citing United States v. Cortese , 614 F.2d 914, 921 (3d Cir. 1980). The requirement of a finding of \"institutional\" bad faith rather than that of an individual agent, or the refusal to allow attributing the motives of third parties to an agency, is well established.\nThe court concluded:\nAt bottom, this case raises the question whether, based on objective factors, the SEC's decision to investigate reflected its independent determination, or whether that decision was the product of external influences. The reality of prosecutorial experience, that most investigations originate on the basis of tips, suggestions, or importunings of third parties, including commercial competitors, need hardly be noted. That the SEC commenced these proceedings as a result of the importunings of Senator Weicker or CF&I, even with malice on their part, is not a sufficient basis to deny enforcement of the subpoenas. See Cortese , 614 F.2d at 921. But beginning an informal investigation by collecting facts at the request of a third party, even one harboring ulterior motives is much different from entering an order directing a private formal investigation pursuant to 17 C.F.R. \u00a7 202.5 (1980), without an objective determination by the Commission and only because of political pressure. The respondents are not free from an informal investigation instigated by anyone, in or out of government. But they are entitled to a decision by the SEC itself, free from third-party political pressure, that a \"likelihood\" of a violation exists and that a private investigation should be ordered. See 17 C.F.R. \u00a7 205.2(a). The SEC order must be supported by an independent agency determination, not one dictated or pressured by external forces. If an allegation of improper influence and abdication of the agency's objective responsibilities is made, and supported by sufficient evidence to make it facially credible, respondents are entitled to examine the circumstances surrounding the SEC's private investigation order. The court should be guided by twin beacons: the court's process is focus of the judicial inquiry and the respondent may challenge the summons on any appropriate ground.\nIn sum, then, it would appear that the Third Circuit, while accepting the possibility of finding that political pressure can taint an investigative proceeding under a variety of theories, has imposed on a litigant the burden of establishing the factual predicate to support such a determination which may prove quite formidable. It certainly appears no less an obstacle than the showing of actual effect required in other non-adjudicatory situations.\nOn the other hand, Wheeling-Pittsburgh represents something of a liberalization in an area where court review of agency requests for enforcement of administrative subpoenas has traditionally been severely circumscribed and narrow. Indeed, the development has been severely criticized, and some courts appear to have rejected Wheeling-Pittsburgh and are adhering to the traditional standard of high deference to agency subpoena issuance decisions. In fact, it may be that the somewhat more expansive review of such situations afforded by Wheeling-Pittsburgh may be limited to cases arising in the Third Circuit. In any event, we are aware of no court that has utilized the Wheeling-Pittsburgh standard to refuse to enforce an administrative subpoena because of alleged undue congressional influence. Indeed, the Wheeling-Pittsburgh court itself did not find that the SEC had been guilty of an abuse judicial process; it remanded the case to the district court to make findings consonant with its opinion.\n\n\t\t\t2. United States v. Armada Petroleum Corp.\n\nSeveral courts have subsequently applied the Wheeling-Pittsburgh rationale in cases involving the issuance of subpoenas by the Department of Energy to resellers of petroleum products who had refused to voluntarily supply documents in the course of a valid agency audit. In each case the defendant company claimed, inter alia , that the Chairman of the Oversight and Investigations Subcommittee of the House Energy and Commerce Committee had exerted improper influence on the agency official making the decision to issue the subpoena. In each instance the courts rejected the claims. In United States v. Armada Petroleum Corp. , for example, the court acknowledged Wheeling-Pittsburgh ' s holding that an agency may not order an investigation \"because of political pressure to do so,\" but found that where, as in the case before it, \"the Congressional involvement is directed not at the agency's decision on the merits but at accelerating the disposition and enforcement of the pertinent regulations, it has been held that such legislative conduct does not affect the fairness of the agency's proceedings and does not warrant setting aside its order.\"\n\n\t\t\t3. United States v. American Target Advertising, Inc.\n\nIn the most recent decision in which the target of an administrative investigation invoked Wheeling-Pittsburgh principles, the 4 th Circuit, in United States v. American Target Advertising, Inc., rejected the claim of the defendant that the issuance of an investigative subpoena was a tool of harassment and intimidation exercised by the agency (the Postal Service) at the behest of a Senator who, the court conceded, \"has demonstrated a fair degree of hostility toward\" the defendant. But the appeals court reiterated that that was not enough. The appellant \"must show that the party actually responsible for initiating the investigation, i.e., the Postal Service, has done so in bad faith.\" The court found no evidence of bad faith and rejected American Target's request for discovery before the district court, noting \"that such discovery is prohibited in these types of summary enforcement proceedings absent 'extraordinary circumstances.'\" The appeals court advised that in order to obtain discovery, the target must distinguish himself \"from the class of the ordinary respondent, by citing special circumstances.\" The 4 th Circuit concluded that it had not done so there, stating: \"when presented with evidence of unlawful conduct, the Government is not bound to investigate only those potential wrongdoers who support its policies. Because American Target failed to distinguish itself from the ordinary disgruntled respondent, it is not entitled to discovery regarding the genesis of the Postal Service's inquiry.\"\nIn sum, it would appear that the assertions with respect to the Wheeling-Pittsburgh precedent is unduly restrictive. That case does not establish an \"appearance of partiality\" standard with respect to congressional contacts. A high degree of proof is needed to demonstrate that the agency's motivation in continuing an investigation is solely in acquiescence to congressional influence and without any regard to the adequacy of the grounds of the allegations.\n\n\t\tG. Summary and Conclusions\n\nA review of the undue influence case law since 1966 indicates that the courts, in balancing Congress's performance of its constitutional and statutory obligations to oversee the actions of agency officials against the rights of parties before agencies, have increasingly looked to the role of the political process in all types of agency decisionmakings and have attempted to give weight to that process on a case-by case basis. The result has been a strong predilection of the courts to accept congressional prerogatives. Thus where informal rulemaking or other forms of informal decisionmaking are involved, the courts will look to the nature and impact of the political pressure on the agency decisionmaker and will intervene only where that pressure has had the actual effect of forcing the consideration of factors Congress did not intend to make relevant. Where agency adjudication is involved a stricter standard is applied and the finding of an appearance of impropriety can be sufficient to taint the proceeding. But even here the courts have required that the pressure or influence be directed at the ultimate decisionmaker with respect to the merits of the proceeding and that it does not involve legitimate oversight and investigative functions before they will intervene. And where congressional intrusion in an agency's investigative process is involved the courts will intervene only if it is in fact shown that an inquiry was instituted and subpoenas issued because of congressional influence, the agency knew its process was being abused, that it knowingly did nothing to prevent abuse, and that it rigorously pursued frivolous charges.\nA 1989 legal commentary has severely criticized this decisional trend, arguing that the case law in this area means that:\n... Members of Congress can intervene in ongoing agency proceedings by contacting either the close personal aides or the immediate superiors of the ultimate decisionmaker, convey their judgments on how those questions should be decided and avoid judicial review of their actions while knowing full well that their message will find its way to the relevant agency official. In short, the actual influence standard of D.C. Federation is manipulable at the whim of Congress and, in the words of Judge Gesell, those seeking to invoke the Pillsbury doctrine must now \"shoulder the virtually impossible burden of proving whether and in what way ... the agency was actually influenced\" by congressional intervention.\nAs a remedy, the author calls for the judicial application of Pillsbury ' s \"appearance of impartiality\" standard to any instance of informal congressional intercession, regardless of the nature of the proceeding in question, \"as a legitimate and useful tool for controlling congressional abuse of the informal oversight mechanisms which are likely to see wider use in the post- Chadha era.\" The comment suggests that the use of such informal oversight mechanisms is an unlawful circumvention of the Supreme Court's decision in INS v. Chadha , which invalidated the use of legislative veto devices, because it allowed Congress to evade the presentment and bicameralism requirements of the legislative process mandated by the Constitution. \"If Congress determines through the use of oversight mechanisms that an agency has misinterpreted a statute, the appropriate response is to take the formal step of amending the law, not to use informal means to alter the agency's interpretation.\"\nThe comment would appear to misconceive the nature and scope of Congress' constitutional oversight and investigatory authority and the judicial recognition and approbation of informal congressional techniques to influence agency actions as both directly flowing from that authority and as being an integral part of the checks and balances mechanism underlying our scheme of separated but shared powers. Thus it is well settled that Congress in legislating pursuant to the powers granted it under Article I, section 8 of the Constitution, has the authority, under the Necessary and Proper Clause, Art. I, sec. 8, cl. 18, to create the bureaucratic infrastructure of the Executive branch and to determine the nature, scope, and power of the duties so created. Moreover, as a general matter, the Supreme Court has spoken very broadly of the legislative power over offices. Where Congress deals with the structure of an office \u2013 its creation, location, abolition, powers, duties, tenure, compensation and other such incidents \u2013 its power is virtually plenary. Only where the object of the exercise of the power is clearly seen in the particular situation as an attempt to effect an unconstitutional purpose, e.g. , congressional appointment or removal of an officer, have the courts felt constrained to intervene.\nEqually well settled is the breadth of Congress' authority to effectively monitor the work of its creations. Supreme Court rulings have firmly established that the oversight and investigatory power of Congress is so essential to the legislative function as to be implied from the general vesting of legislative power in Congress. In the absence of a countervailing constitutional privilege or a self-imposed statutory restriction upon its authority, the Congress (and its committees) has plenary power to compel information needed to discharge its legislative function from executive agencies, private persons, and organizations, and within certain constraints, the information so obtained may be made public.\nMoreover, Congress' power to influence executive and other governmental conduct is not confined to its utilization of its lawmaking authority. The courts have long recognized congressional authority to investigate, and to express its opinion, in an attempt to influence the manner in which the laws are executed. In upholding the exercises of similar kinds of authority, courts have acknowledged that the issuance of a subpoena to the executive, the mandate of a report and wait provision, and the expression of disapprobation or the focusing of public attention on executive action, do not themselves constitute improper control of executive decisionmaking.\nThe Supreme Court has also recognized Congress' right to investigate the Government's conduct of civil and criminal litigation. In the leading case of McGrain v. Daugherty , the Senate had appointed a select committee to investigate the alleged failure of the Justice Department to prosecute and defend certain civil and criminal actions to which the government was a party. The Supreme Court upheld the action of the Senate in citing the brother of the Attorney General for contempt of Congress for failure to comply with a subpoena issued by the select committee. The Court determined that the subject of the investigation\u2013\"whether the Attorney General and his assistants were performing or neglecting their duties in respect of the institution and prosecution of proceedings to punish crimes and enforce appropriate remedies against the wrongdoers\"\u2013was clearly one on which legislation could be enacted and was within the jurisdiction of the Senate to investigate.\nAdditionally, the courts have explicitly held that agencies may not deny Congress access to agency documents, even in situations where the inquiry may result in the exposure of criminal corruption or maladministration by agency officials. As the Supreme Court has noted, \"But surely a congressional committee which is engaged in a legitimate legislative investigation need not grind to a halt whenever responses to its inquiries might potentially be harmful to a witness in some distinct proceeding . . . or when crime or wrongdoing is exposed.\"\nThus, the courts have recognized the potentially prejudicial effect congressional hearings can have on pending cases. While not questioning the prerogatives of Congress with respect to oversight and investigation, the cases pose a choice for the Congress: congressionally generated publicity may result in harming the prosecutorial effort of the Executive; but access to information under secure conditions can fulfill the congressional power of investigation and at the same time need not be inconsistent with the authority of the Executive to pursue its case. Nonetheless, it remains a choice that is solely within Congress' discretion to make, irrespective of the consequences.\nThe foregoing review of the case law concerning Congress' oversight and investigatory authority appears to abundantly demonstrate that the decisional law development in the area of undue influence is hardly aberrational but is, rather, a subset, and therefore a mirror, of the broad oversight power the courts have accorded Congress over Executive agencies generally. In all such cases the courts balance Congress' constitutional oversight and investigatory prerogatives against the interests of the agencies or private parties involved. In a non-adjudicatory setting involving general policymaking, it is hardly surprising that the congressional prerogatives are likely to be weighed and found persuasive unless the subject matter implicates countervailing constitutional privileges of the President or the pressure brought to bear results in a decision that ignores applicable statutory considerations or procedures. Thus the Sierra Club court noted that a rulemaking would be overturned because of congressional pressure only if two conditions were met: first, if the content of the pressure was designed to force the decisionmaker to decide on the basis of factors not made relevant by Congress in the applicable statute and, second, if the decision was in fact affected by those extraneous considerations. The court explained its rationale as follows: \"We believe it entirely proper for Congressional representatives vigorously to represent the interests of their constituents before administrative agencies engaged in informal, general policy rulemaking, so long as individual Congressmen do not frustrate the intent of Congress as a whole as expressed in statue, nor undermine applicable rules of procedure.\"\nOn the other hand, underlying the greater judicial sensitivity to public or secret ( ex parte ) exertions of political pressure on an agency adjudication is the premise that such adjudications, whether formal or informal, involve individual rights rather than issues of general policy, and thus implicate constitutional due process values. Although due process does not generally require a full-scale judicial trial, informal adjudications must nonetheless conform to the \"fundamental notions of fairness implicit in due process.\" Both public and secret congressional attempts to influence agency decisionmaking may undermine the due process rights of parties to informal adjudications in several respects. Where the contacts are unrevealed, parties to the adjudication are deprived of notice and an opportunity to respond with relevant information, a violation of fundamental canons of fairness. Moreover, whether overt or concealed, political pressure compromises the appearance of impartiality and objectivity of the decisionmaker, qualities traditionally regarded as essential to due process. Thus the decisions in this area reflect a common purpose of the courts \"to preserve the integrity of the judicial aspect of the administrative process.\"\nBut even in the adjudicatory setting the judicial deference to congressional prerogatives is apparent. Taint will not be found unless the pressure is directly on the decisionmaker, concerns the merits of the case, and is not minimal. The Gulf Oil MEUA, California v. FERC and ATX litigations serve to illustrate the current judicial practice. All four cases involved proceedings adjudicatory in nature but in none was taint found. In Gulf Oil the court found the following factors determinative: the subcommittee interrogations were not concerned with the merits of the agency's decision but with its compliance procedures; there was no attempt to influence a factual determination of the agency; the Commission in fact resisted the political pressure as evidenced by its resolution of key issues in a manner identical to the way it had decided them before the committee hearings; and the fact that the nature of the agency's decision was entirely legal. In the MEUA case, the Second Circuit found the ex parte communications involved there to be de minimis . The challenged communications were not secret and were in fact promptly placed in the public record; they contained no new factual information; and no opportunity for rebuttal was either required or necessary. In California v. FERC the court emphasized that the congressional intercessions were meant to correct procedural problems and to question whether the agency was applying the proper legal standard and that the agency determination made in each instance was based on its own independent, on-the-record analysis of the congressional objections and was accompanied by a reasoned explanation. The court viewed the matter as properly involving the congressional interest in policymaking and policy application. Finally, the intense congressional pressure in ATX to deny an application to operate a new airline was found not to taint the proceeding because close examination showed that it did not affect the outcome of proceeding. The court pointed to the absence of threats, the insulation of the immediate decisionmaker, and that the findings of material facts were very well supported by the evidentiary record, including the extensive evidence of previous wrongdoing and maladministration by the applicant. In short, the courts are looking to see if the agency itself protected the integrity of its own decisional process.\nGulf Oil , MEUA, FERC and ATX then may be said to be reflective of the marked preference of the courts for upholding agency action wherever it is on the decisionmaking continuum. It would appear that unless a decisionmaker in an adjudication is directly contacted with respect to the merits of the case before him, or the situation involves particularly outrageous and\/or pervasive congressional interference in a rulemaking, informal decisionmaking or investigative context which actually influences the decisionmaker, it is unlikely that a court will void a challenged agency action. Indeed, since the Pillsbury decision in 1966, only one challenge based on adjudicatory interference has been successful ( Koniag v. Andrus ) and that turned on the fact of a direct communication by letter to the agency decisionmaker by the chairman of a congressional committee which pointedly addressed the merits of the pending proceeding. Similarly, only one rulemaking has been found tainted during that same period ( Texas Medical Association v. Mathews ). And in all instances in which a proceeding has been found tainted, the judicial remedy has been a remand to the agency for reconsideration of the decision in question.\nIn the final analysis, judicial deference in this area appears to reflect the pragmatic conclusion that maintenance of Congress' ability to communicate as freely as possible with the administrative bureaucracy is essential to sustaining the public acceptability of the modern administrative state. As one commentator has explained:\nThe legitimacy and acceptability of the administrative process depends on the perception of the public that the legislature has some sort of ultimate control over the agencies. It is through the Congress that the administrative system is accountable to the public. If members of Congress \"be corrupt, others may be chosen.\" The public may not, however, directly remove agency officials. The public looks to its power to elect representatives as its input into the administrative process. The public will perceive restrictions on Congress's power to influence agency action as reducing the accountability of agency officials. This will negatively affect the legitimacy of agency actions, as well as seriously erode notion of popular sovereignty. Even administrators, who may not perceive legislative intrusions into the administrative process as being particularly desirable, recognize congressional supervision as a necessary function in a democratic society. The nature of the government requires that the legislature maintain a careful supervision over agency action.\n\n\tIII. Ethical Standards and Considerations\n\nThis part of the report discusses the ethical considerations and issues which may arise when a congressional office or a Member of Congress contacts an administrative or regulatory agency or otherwise intervenes in an administrative matter on behalf of a private constituent or other private entity with interests affecting the Member's constituency.\nAny discussion of the \"ethics\" of a Member of Congress intervening in an administrative matter on behalf of a constituent or other individual must be set within the context of the traditional role of a Member of Congress, in which the Member is often seen as his or her constituents' most immediate elected \"representative\" to the entire United States Government. Contacting an agency, department or Government bureau, and representing or intervening in administrative matters on behalf of constituents have often been characterized as among the official responsibilities of Members of Congress on behalf of those whom they represent, and such \"representational\" duties, above and beyond purely \"legislative\" acts, have evolved as a traditional and longstanding discretionary practice of Members of Congress.\nIn discussing the theoretical, as well as the ethical context for these representational activities, the late Senator Paul Douglas of Illinois, in his valued work Ethics in Government, noted that congressional intervention in the administrative and executive process is grounded firmly in our concepts of checks and balances in a representative democracy, as well as our natural and historical distrust, as a nation, of unelected governments:\nMuch of the mail and time of members of Congress is devoted to the requests of constituents about matters concerning which they, the constituents, are dealing with the administrative agencies of the government. In countries dominated by civil servants, such as imperial Germany and to a lesser degree Great Britain, any intervention by legislators in such administrative matters is severely discouraged. The bureaucracy in these countries contends that the function of the legislators is to make the laws and that of the public administrators is to administer them, and that consequently neither should interfere with the work of the other. ... These men, consciously or unconsciously, regard the civil service officials as devoted public servants ... [in contrast to] the \"impure\" legislator .... [Such attitude] is fostered by those who would create an \"administrative state\" in which the real directing power would be exercised by self-selecting and self-perpetuating group of officials rather than by elected representatives of the people. At its roots there is a concealed but deep distrust of democratic government and democratic processes.\n* * *\nThe truth is that legislation and administration should not be kept in air-tight and separate compartments. In order that each group may perform its own job adequately, it should within limits interest itself in the work of the other. There is then, a sound ethical basis for legislators to represent the interests of constituents and other citizens in their dealings with administrative officials and bodies.\nBesides this ethical justification, there is a practical necessity for it. Out of a deep instinctive wisdom, the American people have never been willing to confide their individual or collective destinies to civil servants over whom they have little control. They distrust and dislike a self-perpetuating bureaucracy, because they believe that ultimately it will not reflect the best interests of the people. They therefore turn to their elected representatives to protect their legitimate interests in their relationship with the public administrators.\nThe importance of the case-work or service function of representing constituents' individual interests before the agencies and officials of the federal executive bureaucracy was recognized and discussed in an important treatise on congressional ethics authored by the Association of the Bar of the City of New York, Congress and the Public Trust :\nThe casework or service function has become a major responsibility of Members of Congress today. In the performance of this function, a Senator or Representative negotiates in his constituent's behalf a whole range of problems and difficulties that arise out of their relations with the Federal government. This can involve the Member in helping to obtain a federal contract for his district, interceding on behalf of a selective service registrant, inquiring why a constituent's Social Security check has not been delivered, setting up a meeting with a Federal official, and arranging for a tour of the White House for an important constituent.\nThe practice of intervening in administrative and executive matters on behalf of constituents and other individuals has, therefore, not been perceived historically in the United States as an inherently wrongful act, necessarily involving undue or improper \"political\" influence over executive or administrative matters, but rather has customarily been seen as a discretionary, and arguably, an expected function of one's representative in Congress. The House Committee on Standards of Official Conduct, for example, advises Members and employees of the House that: \"An important aspect of a House Member's representative function is to act as a 'go-between' or conduit between his constituents and administrative agencies of the Federal Government.\" Similarly, the Senate Select Committee on Ethics has stated that: \"It is a necessary function of a Senator's office to intervene with officials of the executive branch and independent regulatory agencies on behalf of individuals when the facts warrant ....\"\nThere are, of course, opportunities and potential for abuse in this area, and there are, therefore, statutory as well as ethical restraints and considerations in relation to such activities, as there are for most official activities and duties of Members of Congress and their staff. The most prominent and clear restriction is upon the receipt of compensation or anything of value in return for, or because of, such representational activity.\nThe Supreme Court of the United States in 1905 had occasion to rule on the propriety of a United States Senator intervening in an executive matter, and noted that such activity, although not required of a Member, is within the Member's discretion, may be done \"without impropriety,\" and is not violative of statutory restraints as long as no compensation is accepted for the activity. The Court in Burton v. United States, in ruling that a statute barring a Senator from receiving compensation for representing an individual before the agencies of the Government did not unduly interfere with a Member's constitutional duties to represent and present his views before those agencies, explained:\nA statute like the one before us ... can be executed without in any degree ... interfering with the discharge of the legitimate duties of a Senator. The proper discharge of those duties does not require a Senator to appear before an executive Department in order to enforce his particular views, or the views of others, in respect of matters committed to that Department for determination. He may often do so without impropriety, and, as far as existing law is concerned, may do so whenever he chooses, provided he neither agrees to receive nor receives compensation for such services.\nThe initial ethical considerations thus concern the receipt of things of value by a Member or staff from persons or organizations on whose behalf interventions before or inquiries to federal agencies were made. Prudence and caution must, of course, be exercised by Members of Congress and staff in accepting gifts at any time from private individuals or groups, and even more so in accepting any gifts, offers of entertainment, or other things of value which could be interpreted as a reward, payment or additional compensation for doing one's official duties in assisting constituents or others in matters before federal agencies. Since campaign contributions are a more common, and arguably a more acceptable and necessary monetary transfer from private individuals to Members of Congress than are outright gifts, some of the more common, but difficult questions in this area concern the receipt, acceptance, or solicitation of campaign contributions from those whom the Member or his or her staff has assisted in matters before federal agencies.\nIn addition to statutory and rule restrictions relating to such things as the receipt of payments or gifts in return for representational activity, or concerning a Member's or staff's own personal interest in a matter, there are also general ethical considerations and guidelines which are concerned with the prevention of undue or improper influence by those in the legislative branch over the duties and functions of executive officers and employees, separate from the issue of compensation or reward. These considerations and guidelines are based in some respects on the separation of powers doctrine, as well as on the notions of due process and fairness in administrative proceedings, and the issues of the use or abuse of political influence over matters which are expected to be based substantially on competitive, merit principles, or which are to be decided strictly on particular statutory or regulatory criteria. Executive or administrative decisions on some matters, such as certain federal contracts or hiring in the civil service, are often expressly required to be made on a competitive, merit basis, and may be expressly required not to be made on the basis of political affiliation or influence.\n\n\t\tA. House and Senate Guidelines\n\n\t\t\t1. Opinion of the House Committee on Standards of Official Conduct\n\nThe House Committee on Standards of Official Conduct in 1973 incorporated several generally accepted ethical standards and principles into an advisory opinion on Members' offices dealing with the administrative agencies of the Federal Government. Advisory Opinion No. 1, \"On the Role of a Member of the House of Representatives in Communicating With Executive and Independent Agencies,\" provides, in part, as follows:\nREPRESENTATIONS\nThis Committee is of the opinion that a Member of the House of Representatives, either on his own initiative or at the request of a petitioner, may properly communicate with an Executive or Independent agency on any matter to:\nRequest information or a status report;\nUrge prompt consideration;\nArrange for interviews or appointments;\nExpress judgment;\nCall for reconsideration of an administrative response which he believes is not supported by established law, Federal Regulation, or legislative intent;\nPerform any other service of a similar nature in this area compatible with the criteria hereinafter expressed in this Advisory Opinion.\nPRINCIPLES TO BE OBSERVED\nThe overall public interest, naturally, is primary to any individual matter and should be so considered. There are also other self-evident standards of official conduct which Members should uphold with regard to these communications. The Committee believes the following to be basic:\n1. A Member's responsibility in this area is to all his constituents equally and should be pursued with diligence irrespective of political or other considerations.\n2. Direct or implied suggestion of either favoritism or reprisal in advance of, or subsequent to, action taken by the agency contacted is unwarranted abuse of the representative role.\n3. A Member should make every effort to assure that representations made in his name by any staff employee conform to his instruction.\n\n\t\t\t2. Senate Rule on Intervention\n\nThe Senate adopted in 1992 a specific Senate Rule dealing with constituent service and intervention into administrative matters. This Rule was adopted after the Senate Select Committee on Ethics conducted disciplinary proceedings concerning five Senators and their personal interventions into executive branch investigations of failed savings and loan institutions. The Senate Rule, at Rule 43, provides:\nCONSTITUENT SERVICE\n1. In responding to petitions for assistance, a Member of the Senate, acting directly or through employees, has the right to assist petitioners before executive and independent government officials and agencies.\n2. At the request of a petitioner, a Member of the Senate, or a Senate employee, may communicate with an executive or independent government official or agency on any matter to:\n(a) request information or a status report;\n(b) urge prompt consideration;\n(c) arrange for interviews or appointments;\n(d) express judgments;\n(e) call for reconsideration of an administrative response which the Member believes is not reasonable supported by statutes, regulations or considerations of equity or public policy; or\n(f) perform any other service of a similar nature consistent with the provisions of this rule.\n3. The decision to provide assistance to petitioners may not be made on the basis of contributions or services, or promises of contributions or services, to the Member's political campaigns or to other organizations in which the Member has a political, personal, or financial interest.\n4. A Member shall make a reasonable effort to assure that representations made in the Member's name by any Senate employee are accurate and conform to the Member's instructions and to this rule.\n5. Nothing in this rule shall be construed to limit the authority of Members, and Senate employees, to perform legislative, including committee, responsibilities.\n\n\t\tB. Intervention and Receipt of Things of Value\n\nOne of the more fundamental ethical concerns and direct prohibitions concerning administrative intervention, or any other \"casework\" function by a congressional office, relates to the receipt of things of value in connection with such services. Depending on the circumstances of the receipt of money, gifts or contributions, and the \"nexus\" of such items of value to the services performed or agreed to be performed by a Member or staff, such conduct may implicate various criminal laws as well as ethical rules and guidelines.\n\n\t\t\t1. Bribery\n\nThe federal bribery law at 18 U.S.C. \u00a7201 provides criminal penalties for any public official who \"corruptly\" seeks, accepts, or agrees to receive anything of value \"personally or for any other person or entity, in return for being influenced in the performance of any official act ....\" Within the bribery statute is also the so-called \"illegal gratuities\" clause, discussed below, which penalizes a public official who, other than as provided by law, agrees to accept anything of value personally \"for or because of\" any official act performed or to be performed.\nThe bribery provision of federal law requires in the first place that \"anything of value\" be corruptly sought or received in return for being influenced in an official act. The term \"anything of value\" is interpreted broadly, and could include cash, gifts, discounts, or even campaign contributions, \"because the words 'anything of value' comprehend anything that conceivably can be offered or given as a bribe.\"\nThe bribery provisions, furthermore, cover things of value such as gifts, bequests or contributions which are sought not only for oneself (as is an \"illegal gratuity\"), but also things of value which are sought for third parties, that is, \"for any other person or entity.\" As noted in the legislative history of this provision: \"This subsection also forbids an attempt to influence a public official by an offer or promise of something of value which will be to the advantage of somebody else in whose well-being he may be interested.\" Contributions of funds or things of value to third parties and other entities such as to campaign committees or to charitable foundations, may thus be covered by the statute when the other elements of the law are satisfied.\nThe operative crux of the bribery statute specifically requires that the thing of value be \"corruptly\" received or sought by the public official \"in return for being influenced\" in the performance of an official act. The central element of intent which is characteristic of a bribe is thus a \"corrupt\" or wrongful bargain or agreement, often described as some express or implied quid pro quo , that is, a corrupt or wrongful understanding or agreement to do something in return for something else. For a bribe to occur, the bribe must be shown to be the \"prime mover or producer of the official act\" performed or promised to be performed. General contributions, donations or payments to causes, entities or to other persons, or so-called \"goodwill\" payments, which are given to create a favorable atmosphere or feeling of gratitude in the recipient, or with \"some generalized hope or expectation of ultimate benefit on the part of the donor,\" but which are not given nor received in the context of any express or implied agreement to perform some official act, that is, without a specific quid pro quo , are not considered \"bribes\" under the statute.\n\n\t\t\t2. Illegal Gratuities\n\nWithin the federal bribery statute is the so-called \"illegal gratuities\" clause at 18 U.S.C. \u00a7201(c). This provision has been found to be a \"lesser included offense\" of a \"bribe,\" and does not require a \"corrupt\" intent for a violation. The different intent elements for an illegal gratuity, that is, the absence of a required \"corrupt\" intent, and the absence of a need to show an intent to influence or be influenced, are among the principal distinctions between a bribe and an illegal gratuity.\nWhat is required for a violation of the illegal gratuities clause is that a public official receive or seek something of value, other than as provided by law, \"personally\" (or \"for himself\"), \"for or because of\" an \"official act\" done or to be done by him. There does not have to be an express quid pro quo or a corrupt bargain for an illegal gratuity, but the thing of value must be received for the official, and must be \"for or because of\" an official act done or to be done, that is, connected in some way to some official duty or function. An illegal gratuity may be received even after an official act is performed, as a \"thank you\" or in appreciation for doing an act that would have been done in any event, uninfluenced by the gratuity; while a bribe, on the other hand, must be shown to be the \"prime mover\" influencing the act.\nAlthough no specific wrongful bargain, or \"corrupt\" intent, in receiving an illegal gratuity need be shown, there is a criminal intent required of an illegal gratuity which would distinguish this wrongful receipt of a payment from a mere gift unrelated to any official act, or from such things as lawful campaign contributions given to an elected public official \"because of\" his stand, vote, or position on an issue. The intent has been described by one court as the knowledge that one is being compensated or rewarded for a particular official act or acts:\n...[U]nder the gratuity section, \"otherwise than as provided by law ... for or because of any official act\" carries the concept of the official act being done anyway, but the payment only being made because of a specifically identified act, and with a certain guilty knowledge best defined by the Supreme Court itself, i.e. , \"with knowledge that the donor was paying him compensation for an official act ... evidence of the Member's knowledge of the alleged briber's illicit reasons for paying the money is sufficient.\"\nWhile some cases in the circuits had gone so far as to find that a specific official act need not be contemplated or identified for a payment or compensation to constitute an \"illegal gratuity\" as long as payments were given to a recipient who is in a \"position to use his authority in a manner which could affect the gift giver,\" the Supreme Court in Sun-Diamond in 1999 clarified that such so-called \"status gifts,\" unconnected to any identified official act, were not a violation of the illegal gratuities provision.\nIn addition to the intent requirement, under the illegal gratuities clause it must be shown that the compensation received by the public official was received \"personally,\" or as stated in the earlier version of the law, \"for himself.\" If things of value are directed to independent third parties or entities, such payments might not be considered to have been received or sought with the requisite intent to \"compensate\" the public official \"personally\" for his acts, because they were not received by the official \"for himself\" or \"personally,\" but rather by another entity or person.\n\n\t\t\t3. Compensation\/Conflicts of Interest\n\nMembers of Congress, as well as all other officers and employees of the government, are prohibited under the provisions of a conflict of interest statute at 18 U.S.C. \u00a7203(a) from receiving or sharing in any private \"compensation\" for \"representational services\" rendered by themselves or another for a private party before any agency of the United States Government. The required proof of \"compensation\" for services rendered, the necessary intent, and the evils at which the statute are directed, are similar to the \"illegal gratuities\" clause of the bribery statute. That is, \"corrupt\" intent is not required to be proven, but it is required to show that \"compensation\" was knowingly received for the services rendered.\nIn May v. United States, supra , a Member of Congress who was the Chairman of the Military Affairs Committee contacted the War Department about military contracts to a private firm, after having received complaints from the owners and officers of that firm that the War Department was being unfair and discriminatory towards them. The court found that regardless of \"whether the complaints were or were not well-founded,\" and regardless of whether or not the contacts and intercession by the Member \"were patriotic, legitimate and within the scope of his legitimate duties as a Congressman,\" the statute in question would be violated by receiving private compensation for such activities. The court thus found that the services may have been \"proper,\" but the compensation for them was not:\nIt was alleged that on numerous occasions May telephoned, called personally or wrote officials of the War Department in respect to these matter in which the Garssons were interested, and brought his official prestige and influence to bear upon those officers in order to promote the interests of the Garssons.\n* * *\nIf the money was received by May as compensation for acts done by him for the Garssons, it is immaterial that those acts were patriotic, legitimate and within the scope of his official duties as a Congressman. ... [I]f a judge receives payment from a party for rendering a correct decision, he is, nevertheless, guilty of a criminal act in receiving a bribe. So, if a Congressman receives compensation for services rendered by him to a person in relation to any matter in which the United States is interested, before any Government department, he is guilty of violating the statute, even though the service rendered was a proper act on his part. A Congressman cannot legally receive compensation from a private person for doing his duty in respect to something in which that person and the United States have interests. The gist of the offense is the receipt of compensation, not the nature of the act done by the recipient in consequence thereof.\nAlthough similar in nature and necessary proof to the illegal gratuities clause, the statute is not necessarily duplicative of the illegal gratuities provision because the \"services\" rendered, for which compensation may not be accepted under \u00a7203, need not be within the \"official duties\" of the officer or employee accepting such compensation, as it must be for the illegal gratuities clause of the bribery law. Section 203 may therefore cover a broader and wider range of representational activities for private parties than would the illegal gratuities clause. Furthermore, the statute bars an officer or employee from sharing in or receiving compensation even for someone else's representational services before a federal agency.\n\n\t\t\t4. Extortion\n\nSomewhat related to the bribery offense is the \"extortion\" provision of federal law, commonly known as the \"Hobbs Act,\" which prohibits the interference with commerce by way of \"extortion,\" defined as the \"obtaining of property from another, with his consent, induced by wrongful use of actual or threatened force, violence or fear, or under color of official right .\" Demands by elected public officials on private citizens for payments, such as for campaign contributions, even when the payments are to be made to third parties such as campaign committees, may fall within the extortion provisions when there is some wrongful use of one's official position to induce or coerce the contribution. As stated by one court, the Hobbs Act would \"penalize those who, under the guise of requesting 'donations,' demand money in return for some act of official grace.\" Federal courts have noted that the crime of \"extortion\" and the crime of bribery under federal law, \"are really different sides of the same coin,\" and that the intent requirements of the two federal offenses are parallel. That is, under the extortion provisions of the \"Hobbs Act,\" there is generally, with respect to such things as campaign contributions which have a facial legitimacy, a need to demonstrate a quid pro quo , a wrongful bargain or understanding, that the campaign contribution solicited is exchanged for an official act requested or desired.\n\n\t\t\t5. Conspiracy to Defraud the Government\n\nIt is possible that a scheme or agreement between two or more people to wrongfully exert influence upon an agency of the government might arguably sustain a theory of a violation of 18 U.S.C. \u00a7371, conspiracy to defraud the United States. The conspiracy statute is quite broad in its application, and could cover schemes to defraud the United States even when the object is not to defraud the United States out of money or property, but rather to defraud the United States out of the proper and impartial duties it should expect from its officers and employees, or which interferes with the proper functioning of an agency. As noted by the Supreme Court, a conspiracy to \"defraud the United States\" does not necessarily require a showing that the government was cheated out of money or property, nor does it necessarily require that an illegal act be done:\nTo conspire to defraud the United States ... also means to interfere with or obstruct one of its lawful governmental functions by deceit, craft or trickery, or at least by means that are dishonest. It is not necessary that the Government shall be subjected to property or pecuniary loss by the fraud, but only that its legitimate official action and purpose shall be defeated by misrepresentation, chicane or the overreaching of those charged with carrying out the governmental intention.\nSome cases have even found that a charge of conspiracy to \"defraud the United States,\" that is, to interfere with or obstruct a lawful government function, need not even allege any specific \"deceit, craft, trickery or dishonesty\" in carrying out that scheme. To establish a conspiracy it must be shown that there existed an agreement, either tacit or express, to \"defraud the United States\" or to do an illegal act, that the person charged knew of the conspiracy and joined it or \"intended to associate himself with its objectives,\" and that at least one overt act was committed in furtherance of the conspiracy.\nConspiracies to defraud the United States have been found in improper, wrongful or corrupt legislative attempts to influence federal agencies. In United States v. Sweig, count one of a grand jury indictment was sustained which charged defendants Martin Sweig and Nathan Voloshen with conspiracy to defraud the United States in connection with the exertion of improper influence upon government agencies and their officials from the office of the Speaker of the United States House of Representatives. Specifically, Count One of the indictment charged that Sweig, a congressional employee, and Voloshen, who was not an employee of the government, conspired:\nwith each other and other persons to the grand jury known and unknown, to defraud the United States and agencies thereof, in connection with its lawful government functions hereinafter described, to wit: (a) its lawful function to have its business and affairs conducted honestly and impartially as the same should be conducted, free from fraud, improper and undue influence, dishonesty, unlawful impairment and obstruction; (b) its lawful right to have its officers and employees, free to transact the official business of the United States unhindered, unhampered, unobstructed, unimpaired and undefeated by the exertion upon them of dishonest, unlawful, impaired and undue pressure and influence.\nThe indictment charged that the defendants had misused the office and influence of the Speaker of the House and had pressured various federal agencies and their employees concerning certain matters pending before the agency. The court discussed the activities in which the defendants were alleged to have been involved:\nParagraph 4 of the indictment says it was part of the conspiracy (a) that Voloshen \"would and did accept fees from various persons with matters pending before [federal] departments and agencies ... to exert the influence of the office of the Speaker of the House to said agencies, on behalf of said persons,\" (b) that Voloshen \"would and did use the offices, telephone, secretarial staff, and goodwill of the Speaker,\" (c) that both defendants would agree to have Sweig, \"by various means, express the interest of the Office of the Speaker ... in said matters ... on behalf of said persons,\" (d) that Voloshen \"would and did falsely assume and pretend\" to be a member of the Speaker's staff and (e) that Sweig \"would and did act as agent or attorney for persons before departments and agencies of the Government in connection with ... matters in which the United States was a party and in which it had a direct and substantial interest.\" Paragraph 5 alleges the use of telephone calls, from the Speaker's offices and elsewhere, and of personal visits by both defendants to \"express the interest of the office of the Speaker of the House in said matters pending before said agencies.\"\nAlthough Voloshen was said to have received fees for his representations, Sweig, the congressional employee, was not alleged to have done so. Nevertheless the court sustained the indictment against Sweig:\nThe fact that Sweig is not alleged to have taken money or other things for his part in the alleged conspiracy does not justify dismissal of Count One for facial insufficiency. It may be doubted whether a jury would - or could be permitted to - convict unless it found evidence to show for each alleged conspirator some meaningful \"stake\" in the enterprise. But the interest need not have been monetary, or material at all. [Citations omitted].\nNathan Voloshen pleaded guilty to one count of conspiracy and three counts of perjury. Martin Sweig, who unlike Voloshen, was actually in the employ of the office of the Speaker and was not alleged to have accepted fees, was acquitted by the jury on the \"influence peddling\" conspiracy charges, but was found guilty on one charge of perjury. As reported by the press in 1970:\nThe verdict was a personal triumph for defense counsel Smith, who argued that Sweig's efforts in contacting federal agencies were a customary practice on Capitol Hill and not unlawful even if the jurors might find the practice unfair.\nEarlier, the press had quoted Sweig's defense attorney concerning this argument relevant to the practice and ethics of congressional intervention on behalf of individuals before federal agencies:\n\"Congress has never made criminal the acts alleged against Sweig\" says Smith. \"It would be presumptuous in the extreme and in clear violation of constitutional separation of powers for the judiciary to impose standards of conduct on legislative employees when the Congress has declined to do so.\"\nIn United States v. Burgin, the court found that the count of conspiracy to defraud the government could be sustained where a former State senator and a current member of the State Legislature were involved in a \"silent scheme\" to exert influence over a State agency administering federally financed contracts, finding that \u00a7371 \"not only reaches financial or property loss through employment of a deceptive scheme, but also is designed and intended to protect the integrity of the United States and its agencies, programs and policies.\" In this case, the court found that the fact that the public official involved in the conspiracy had a covert financial interest in the contracts, provided the \"overreaching of an agent of the United States by a public official having a financial quid pro quo interest in a federally financed contract,\" which amounted to an \"obstruction of a lawful governmental function.\" The court's finding agreed with the government's charge that \"the meaning of 'defraud' includes any scheme of 'influence peddling' whereby a public official receives remuneration for the exertion of influence upon other officials....\"\nThe underlying motive or indirect financial interest in performing or influencing an official act affecting an agency decision might thus be relevant to a \"conspiracy\" to defraud charge, and could arguably provide the \"wrongful\" nature of the actions to influence federal agency decisions if such actions are motivated by factors other than the general public interest which one is elected to serve. In a conflict of interest case, United States v. Podell , the court noted the principle of a \"breach of trust\" by a Member of Congress when the Member \"shed[s] the duty of disinterested advocacy owed the government and his constituents in favor of championing private interests potentially inconsistent with this charge.\" This wrongful \"breach of trust\" may arguably exist even when the means in conducting such intervention and exercising such influence are not in themselves improper or wrongful, if the motivation is improper.\n\n\t\t\t6. Campaign Contributions and Interventions\n\nOne of the more persistent and difficult issues in relation to interventions is the one concerning any connection, \"nexus\" or \"linkage\" between official interventions and the making, promising, or solicitation of campaign contributions from those persons for whom such interventions were made. Campaign contributions, unlike personal gifts and favors to officials, are necessary and encouraged in our system of government where campaigns to congressional office are privately financed, and thus have a facial legitimacy that other transfers of things of value to Members may not have. The ethical inferences that might be raised concerning unrestricted personal gifts or entertainment provided to a legislator, might not be relevant in the case of congressional campaign contributions which are legitimate, acceptable, and necessary economic and monetary transfers to Members of Congress.\nBoth the House and Senate ethics committees thus note that it is perfectly acceptable, and often necessary, for Members of Congress to represent the interests of a constituent before a federal agency even when that constituent has made substantial campaign contributions to the Member's campaign. It would be an unusual rule, at best, which would work to prohibit a Member of Congress from representing those who have supported his candidacy, and limit a Member's representations to only those who have not supported him. Any interventions and representations, however, should not be based on, nor consider, the campaign support that a Member has received from a particular petitioner, but should, rather, be based on the merits of the particular matter and the general public interest \u2013 the matter's impact, importance or significance to the Member's constituents, district or State.\n\n\t\t\t\tCampaign Contributions, Interventions, and Bribery\n\nCertainly, campaign contributions, whether of soft money or regulated hard money, could be the \"thing of value\" in a \"bribe,\" and can be implicated in a bribery scheme if the other elements of the crime of bribery are present. However, for a \"bribe\" to be present in the case of campaign contributions, there must be shown a specific quid pro quo , that is, a corrupt agreement or understanding between the parties that the public official will do some specific official act in return for the receipt of certain valuable consideration. When such a corrupt agreement exists ( e.g. , \"I will intervene in this matter in return for your providing a campaign contribution to my political committee\"), there exists the requisite element of being \"influenced\" to do the act \"in return for\" the campaign contribution. When there is only a campaign contribution and a subsequent official act favorable to the donor, or an official intervention with an agency and a later campaign contribution, but no evidence of such an agreement directly linking the motivation for the official act to the contribution, then there is no bribe. This is why the Supreme Court has noted that bribery is among the least subtle, and most blatant forms of public corruption.\nAs to campaign contributions generally, the courts have noted that: \"No politician who knows the identity and business interests of his campaign contributors is ever completely devoid of knowledge as to the inspiration behind the donation.\" While campaign contributions can be bribes where there exists a corrupt bargain (a quid pro quo arrangement), campaign contributions given to a candidate or official merely as support, or in appreciation or thank you for certain official acts, positions or votes taken, as is the case for many or most campaign contributions, are not considered to be bribes. The Court of Appeals for the District of Columbia Circuit, in United States v. Anderson, supra, for example, where a conviction of a lobbyist was upheld for bribing a Senator with \"campaign contributions\" to influence the Senator on particular postal rate legislation, approved the jury instructions given by the trial judge which \"exonerated campaign contributions inspired by the recipient's general position of support on particular legislation.\"\nCampaign contributions may also be in the nature of general contributions, donations or payments to causes, entities or to other persons, sometimes called \"goodwill\" payments, which are given merely to create a favorable atmosphere or feeling of gratitude in the recipient, or with \"some generalized hope or expectation of ultimate benefit on the part of the donor,\" but which are not given nor received in the context of any express or implied agreement, and are therefore not considered \"bribes\" under the statute. Political contributions to entities such as a candidate's political campaign committee do not in themselves constitute bribes \"even though many contributors hope that the official will act favorably because of their contributions.\" A Court of Appeals in United States v. Allen , interpreting a bribery statute being used as a predicate offense for a RICO charge, explained as follows:\n[A]ccepting a campaign contribution does not equal taking a bribe unless the payment is made in exchange for an explicit promise to perform or not perform an official act. Vague expectations of some future benefit should not be sufficient to make a payment a bribe.\nThe concept of the lack of a corrupt agreement generally in campaign contributions, as distinguished from bribes, was discussed in terms of reciprocity and \"obligation\" by Judge John T. Noonan, Jr., in his work entitled Bribes . Discussing what he calls \"donations of democracy,\" Judge Noonan raises the issue of the differences between such contributions and bribes, and later in his work attempts to answer the question raised:\nNormally, at any rate, money is given to an officeseeker whose views on important issues coincide with the giver's. The money is given with the hope, expectation, purpose that particular views will be translated into particular votes. A tacit reciprocity exists. How is money given a candidate different from a bribe?\n* * *\nCampaign contributions are imperfect gifts because they are usually not set in a context of personal relations; they are intended to express ... an identification with a cause. They are not wholly the recipient's \u2013 their purpose is restricted. They are given in response to work done or expected to be done. ... They do not express or create overriding obligations, that is, there is no absolute obligation on the part of the contributor to recognize past work by the candidate, and there is no absolute obligation on the part of the candidate to do the work the contributor expects. Absence of absolute obligation creates one difference between contributions and bribes.\nIt has been theorized that there may be some incidental \"reciprocity\" expected between donor and recipient in our political process. Legislators in Congress, unlike judges, have a specific constituency which they represent and on whom, in return, they rely for the donation of funds to their campaigns. Judge Noonan argued that to some extent, campaign contributions, or at least large ones, may be a kind of \"access\" payment to our representative which is expressly permitted in practice in our system of private funding of campaigns for elective office:\nCampaign contributions may be considered a subspecies of a larger class \u2013 access payments. \"I'm not paying for my congressman's vote,\" the large contributor will say. \"I simply want to be sure he will listen to my side of the case.\" ... The access payment in fact and function, if not in hairsplitting theory, is a payment to establish reciprocity.\n* * *\n...[T]he access buyer is paying not only for attention but for favorable attention. The payment is close to what would be called a bribe if made to a judge; but access to and favorable attention by, a legislator has not generally been regarded in the same way as an approach to a judge. ...\nThe hypotheticals show that a legislator is not in the position of a judge. The judge's office is modeled on the paradigm of the transcendent Judge of the Bible and a sharp line distinguishes him from the litigants before him. The legislator, on the contrary, is his constituent's representative .... A certain identity of interest is expected to exist between constituent and legislator.... Given the acceptance of this mutuality of purpose between contributor and legislator, the prevailing assumption in America has been that campaign contributions normally fall in the range of cases where specific votes are not being bought. ... At times \"campaign contribution\" has been a code word used as a flimsy cover for a payment intended to enrich an official personally in exchange for an official act benefitting the payor. These cases have not disturbed the normal assumption that a campaign contribution is different from a bribe.\nThat there may be some tacit reciprocity, particularly concerning \"access\"to an elected official by a large contributor, has not as yet been considered sufficient to satisfy the corrupt bargain or agreement required for a bribe, in part because mere access to, that is, meeting with an individual, is not necessarily considered an \"official act\" performed or agreed to be performed by the elected representative.\n\n\t\t\t\tCampaign Contributions, Interventions, and Illegal Gratuities\n\nAlthough for an \"illegal gratuity\" (unlike a \"bribe\"), no specific illegal bargain or \"corrupt\" intent need be shown, there is a criminal intent required of an illegal gratuity which would distinguish this wrongful receipt of a payment from a lawful campaign contribution given to a Member of Congress, even given \"because of\" the Member's acts, such as intervention in an agency matter on behalf of a donor. As noted by the court in Brewster : \"Every campaign contribution is given to an elected public official probably because the giver supports the acts done or to be done by the elected official.\" The criminal intent required for an illegal gratuity as stated by the court, however, is a knowing and willful receipt of a payment as \"compensation,\" other than as provided by law such as one's salary, for doing an official act. The court in Brewster explained:\nNo politician who knows the identity and business interests of his campaign contributors is ever completely devoid of knowledge as to the inspiration behind the donation. There must be more specific knowledge of a definite official act for which the contributor intends to compensate before an official's action crosses the line between guilt and innocence.\n* * *\n...[U]nder the gratuity section, \"otherwise than as provided by law ... for or because of any official act\" carries the concept of the official act being done anyway, but the payment only being made because of a specifically identified act, and with a certain guilty knowledge best defined by the Supreme Court itself, i.e. , \"with knowledge that the donor was paying him compensation for an official act ... evidence of the Member's knowledge of the alleged briber's illicit reasons for paying the money is sufficient.\"\nIn addition to providing evidence of the guilty knowledge that a public official had of being compensated for an official act, it must be shown that the compensation received by the public official was received \"personally\" or \"for himself.\" Even if things of value such as contributions were arguably sought and received with the requisite guilty knowledge that they were given \"for or because of\" an act to be done or which had been done by the Member, if they were directed to a lawful campaign committee, even a Representative's or Senator's principal campaign committee, or another independent entity such as a charitable organization, such payments might not be considered to have been received or sought with the requisite intent to \"compensate\" the Member \"personally\" for his acts, because they were not received for himself or personally, but rather for another entity or person.\nIf campaign contributions for federal elections are the \"thing of value\" received, therefore, it may then be difficult to satisfy this element of the offense that the thing of value was received by the official \"for himself\" or for the official \"personally.\" Under federal law all candidates for Congress must have a principal campaign committee to which campaign contributions are given and from which they are expended under authority of their treasurer, for campaign or other designated purposes, and candidates and Members of Congress may not convert campaign contributions to their own \"personal\" use under statute and congressional rule. Thus, even contributions to a congressman\/candidate's own personal campaign committee would arguably, as a general matter, not be considered contributions to the individual Member\/candidate \"for himself\" or to him or her \"personally,\" and thus would not come within the illegal gratuities provision.\nIn the Brewster case the court there found that the \"contributions\" were, however, given by a lobbyist to a sham committee which was merely the \"alter ego\" of the Senator, which did not file public reports nor keep records such as other political committees under the federal law at that time (the old Federal Corrupt Practices Act), and from which the Senator freely drew funds for his own personal use. As such, these \"illegal gratuity\" payments were distinguishable from bona fide campaign contributions, which are not prohibited as illegal gratuities because they are not for the candidate\/official himself.\nIf the facts are developed that contributions or payments ostensibly made to a third party or entity \"for or because of\" official acts done or to be done by a Member were in fact used or expended in a manner to financially enrich or financially benefit the Member personally, then it might be argued that such funds were received \"for himself.\" Contributions to a committee or any third party, therefore, which are used, for example, to pay for personal living expenses of a Member, one's personal car or other personal expenses such as transportation, clothing, or food, might arguably be considered payments for the Member \"himself.\"\n\n\t\t\t\tCampaign Contributions, Interventions, and Extortion\n\nThe Supreme Court has found that elected officials who ask for bona fide campaign contributions, only violate the \"Hobbs Act\" extortion law when there is evidence of a specific quid pro quo , similar to the bribery statute. The Court noted in McCormick v. United States , that the mere nearness in time of official acts by a recipient public official and campaign contributions from the beneficiaries of those acts, that is, \"shortly before or after campaign contributions are solicited and received from those beneficiaries,\" does not evidence \"extortion\" under the law, and is an \"unrealistic assessment\" of the requirements of the crime, particularly in light of how \"election campaigns are financed by private contributions and expenditures.\" Rather, the Court found that the statute would be violated by a request from an elected official to a member of the public for a voluntary campaign contribution \"only if the payments are made in return for an explicit promise or undertaking by the official to perform or not to perform an official act,\" where the \"official asserts that his official conduct will be controlled by the terms of the promise or undertaking.\" The Supreme Court in McCormick explained:\nServing constituents and supporting legislation that will benefit the district and individuals and groups therein is the everyday business of a legislator. It is also true that campaigns must be run and financed. Money is constantly being solicited on behalf of candidates, who run on platforms and who claim support on the basis of their views and what they intend to do or have done. Whatever ethical considerations and appearances may indicate, to hold that legislators commit the federal crime of extortion when they act for the benefit of constituents or support legislation furthering the interests of some of their constituents, shortly before or after campaign contributions are solicited and received from those beneficiaries, is an unreal assessment of what Congress could have meant by making it a crime to obtain property from another, with his consent, \"under color of official right.\" To hold otherwise would open to prosecution not only conduct that has long been thought to be well within the law but also conduct that in a very real sense is unavoidable so long as election campaigns are financed by private contributions or expenditures, as they have been from the beginning of the Nation.\nIn a similar vein as the bribery provision, the making of campaign contributions, either on one's own initiative or in response to a request from an official or the official's campaign, with the mere hope or expectation that one might be treated favorably in the future because of one's generosity and support in making such campaign contributions, does not provide the necessary quid pro quo or corrupt character for an extortion charge:\n[T]he explicitness requirement serves to distinguish between contributions that are given or received with the \"anticipation\" of official action and contributions that are given or received in exchange for a \"promise\" of official action. ... When a contributor and an official clearly understand the terms of a bargain to exchange official action for money, they have moved beyond \"anticipation\" and into an arrangement that the Hobbs Act forbids.\n\n\t\t\t\tCampaign Contributions, Interventions, and Conspiracy\n\nIt is not explicitly clear from case law whether a conspiracy to defraud the government would exist if the \"nexus\" or connection between campaign contributions and the intervention activity by a Member of Congress does not also rise to or satisfy the elements of a \"bribe\" (18 U.S.C. \u00a7201(b)), an \"extortion\" (18 U.S.C. \u00a7 1951(b)(2)), an \"illegal gratuity\" (18 U.S.C. \u00a7201(c)), or \"compensation\" for services rendered before an agency (18 U.S.C. \u00a7203(a)). However, if the connection or linkage could be shown to be such that the campaign donations were in fact the \"inducement,\" \"reward,\" \"motivation\" or \"reason\" for the intervention on behalf of such donor, it might then be argued that the donations and inducements provided the \"wrongful\" or \"improper\" character of the influence exerted upon a federal agency sufficient to sustain a \"conspiracy\" theory.\nIn United States v. Johnson, the Supreme Court reviewed a conviction of a Member of Congress for conflicts of interest (18 U.S.C. \u00a7203), and for conspiracy to defraud the United States (18 U.S.C. \u00a7371) for involvement in a scheme whereby:\nThe two Congressmen approached the Attorney General and the Assistant Attorney general in charge of the Criminal Division and urged them \"to review\" the indictment [of savings and loan officers]. For these services Johnson received substantial sums in the form of a \"campaign contribution\" and \"legal fees.\" The Government contended, and presumably the jury found, that these payments were never disclosed to the Department of Justice, and that the payments were not bona fide campaign contributions or legal fees but were made simply to \"buy\" the Congressman.\nThe bulk of the evidence submitted as to Johnson dealt with his financial transactions with the other conspirators, and with his activities in the Department of Justice. As to these aspects of the substantive counts and the conspiracy count, no substantial question is before us. 18 U.S.C. \u00a7371 has long been held to encompass not only conspiracies that might involve loss of government funds, but also \"any conspiracy for the purpose of impairing, obstructing or defeating the lawful function of any department of Government.\" Haas v. Henkel, 216 U.S. 462, 479. 383 U.S. at 172.\nIf there is thus found a sufficient nexus or connection between financial remuneration to one's campaign coffers, and an official's actions in intervening in an administrative process and attempting to influence an agency decision, then it might be contended, at least in theory, that the \"wrongful\" nature and motivation for the influence exerted, which attempts to interfere with, thwart or overturn the impartial, fair and due administration of the law by the agency, could arguably raise such concerted activities by the individuals involved to the level of a \"conspiracy\" to defraud the United States.\n\n\t\t\t\tCampaign Contributions and \"Linkages\" and \"Appearances\"\n\nBoth the House Committee on Standards of Official Conduct and the Senate Select Committee on Ethics have warned Members and staff about the \"appearances\" of impropriety that may occur or be drawn from certain \"linking\" of campaign contributions with offers or efforts to assist constituents with matters before federal agencies and departments, regardless of whether such conduct rises to the level of a federal criminal offense. The Senate Rules now specifically provide that: \"The decision to provide assistance to petitioners may not be made on the basis of contributions or services, or promises of contributions or services, to the Member's political campaigns or to other organizations in which the Member has a political, personal, or financial interest.\" In its report on an investigation of Members' interventions with an agency on behalf of a particular campaign contributor, colloquially known as the \"Keating Five\" investigation, the Select Committee on Ethics explained:\nBecause Senators occupy a position of trust, every Senator always must endeavor to avoid appearance that the Senator, the Senate, or the governmental process may be influenced by campaign contributions or other benefits provided by those with significant legislative or governmental interests. Nonetheless, if an individual or organization has contributed to a Senator's campaigns or causes, but has a case which the Senator reasonably believes he or she is obliged to press because it is in the public interest or the cause of justice or equity to do so, then the Senator's obligation is to pursue that case. In such instances, the Senator must be mindful of the appearance that may be created and take special care to try to prevent harm to the public's trust in the Senator and the Senate. This does not mean, however, that a Member or employee is required to determine if one is a contributor before providing assistance.\nThe House Committee on Standards of Official Conduct has similarly explained that Members should avoid appearances of linking contributions to actions, but that this could not mean that Members are prohibited from assisting their supporters like any other constituent, based on the merits of the matter:\nBecause a Member's obligations are to all constituents equally, considerations such as political support, party affiliation, or campaign contributions should not affect either the decision of a Member to provide assistance or the quality of help that is given. While a Member should not discriminate in favor of political supporters, neither need he or she discriminate against them.\nConcerning the \"appearances\" in the receipt of campaign contributions from one for whom the Member has interceded before a federal agency, the late Senator Paul Douglas in his work, Ethics in Government, suggested caution specifically as to the receipt of such campaign contributions:\nIt is probably not wrong for the campaign managers of a legislator before an election to request contributions from those for whom the legislator has done appreciable favors, but this should never be presented as a payment for the services rendered. Moreover, the possibility of such a contribution should never be suggested by the legislator or his staff at the time the favor is done. Furthermore, a decent interval of time should be allowed to lapse so that neither party will feel there is a close connection between the two acts. Finally, not the slightest pressure should be put upon the recipients of the favors in regard to the campaign. It should be clearly understood that any gift they make is voluntary and there will be no question of reprisals or lack of future help by the legislator if the gift is withheld. In other words, any contribution should not be a quid pro quo but rather a wholly voluntary offering based upon personal friendship and belief in the effectiveness of the legislator sharpened perhaps by individual experience.\nProviding office management and workload systems and mechanisms whereby constituent requests for intervention assistance are routinely and consistently evaluated on the merits of the matter, independently of campaign contributions or support from the requesting individual or entity, could provide protection from appearances that decisions are based on campaign support considerations. This may involve establishing certain criteria for authorizing interventions or assistance, including prioritizing decisions on whether or not to intervene based on such factors as the strength of the constituent's case, the issues of justice and equity involved, the type or level of intervention required, consistency with regular office practices, and the importance of the underlying issues to the district, State, or the Nation.\nThe Senate Select Committee on Ethics set out several possible considerations and suggestions for offices to take into account in the case of requested interventions:\nThe merits of the constituent's case.\nThe continuing viability of the constituent's claim. If the constituent's claim initially appeared to have merit, has the Senator acted despite facts or circumstances that later undermined the merits of that claim?\nThe kind of agency involved and the nature of its proceedings. Is the agency performing in a quasi-judicial, adjudicative or enforcement function?\nIf the Senator or staff members knows that an individual is a contributor, the following issues should also be considered. (If the Senator or staff member does not know if an individual is a contributor, he or she is not required or encouraged to find out. Most Senate staff members are not provided with information regarding contributions and are unaware of whether an individual seeking assistance is a contributor.)\nThe amount of money contributed. Has the contributor given or raised more than an average contribution?\nThe history of donations by a contributor. Has the constituent made contributions to the Senator previously?\nThe nature and degree of the action taken by the Senator. To what extent does the action or pattern of action deviate from that Senator's normal conduct?\nThe proximity of money and action. How close in time is the Senator's actions to his or her knowledge of or receipt of the contribution(s)?\n\n\t\t\t7. Gifts\n\nThe receipt of gifts from private individuals by Members and employees of the House or Senate, even unconnected to any specific official act, have raised ethical issues and concerns for a number of years because of the potential for subtle influence of, dependency upon and favoritism towards one's private benefactors. Gifts to Members and employees of both Houses of Congress are now regulated by both statute and internal House and Senate rules. Federal law provides the basic prohibition that an officer or employee of the Federal Government may not receive any gift from certain \"prohibited sources,\" that is, those doing business with, seeking some official action from, or who are regulated by the agency or department of the official, or those whose interests may be substantially affected by the performance or nonperformance of the officer's official governmental duties. The statute notes that each supervisory ethics office may make rules and regulations for the receipt of gifts by the employees and officers under their jurisdiction, carving out certain exceptions and circumstances. Under this provision, as well as by virtue of Congress' constitutional rule-making authority, each House of Congress has promulgated detailed rules and regulations for the acceptance of gifts.\nWhen discussing gifts, and the gifts rules, it should be noted that a \"gift\" may be distinguished from more sinister rewards, remunerations, or monetary transfers. Things of value, presents, items or tokens of appreciation received by Members and congressional staff employees may be considered either as \"gifts,\" \"gratuities,\" \"bribes\" or \"compensation,\" depending on the intent of the transaction and its connection to an official act. A \"gift\" is something of value given with the requisite \"donative\" intent, that is, colloquially, without \"strings attached,\" and unconnected to any reciprocal action or official act on the part of the recipient. This may include gifts of general appreciation or \"goodwill\" towards an office, a Member or an employee, in gratitude for one's public service in general , and not connected or tied to any specific act or duty performed for the constituent group or person. If the thing of value, however, is received personally by a congressional staffer with the knowledge or understanding that it is given in appreciation or gratitude, or as a reward, \"for or because of\" a particular official act performed or to be performed by the staffer, then such transaction may fall within the purview of the \"illegal gratuities\" provision, or be an impermissible private \"compensation\" for that official act. When something of value is given or received in exchange for being influenced in the performance of an official act, that is, where there is a \"corrupt\" bargain or agreement to receive something of value in return for doing an official act (often called a quid pro quo ), then the bribery provision is implicated.\n\n\t\t\t\tHouse and Senate Gift Rules\n\nThe Rules of the House of Representatives and of the Senate provide that \"gifts\" from private, outside sources may generally not be accepted by Members and staff, except when such gifts are expressly permitted by the respective Rule. In addition to allowing the normal receipt and exchange of gifts among relatives and personal friends, the House and Senate Rules also permit the receipt of gifts of \"nominal value\" such as baseball caps, pens, or t-shirts, and provide a general de minimis exception allowing staff and Members to receive gifts of under $50 in value (and cumulating no more than $100 from one source in a year). Additionally, there are numerous other explicit exceptions to the general \"no gifts\" rule which are of only marginal relevance to the performance of intervention in administrative matters on behalf of constituents.\n\n\t\t\t\tCode of Ethics For Government Service\n\nAlthough not a formal congressional rule, or an enforceable \"law,\" another potentially applicable ethical \"guideline\" was adopted by Congress in 1958 in the \"Code of Ethics for Government Service,\" as a concurrent resolution. That provision states:\nAny person in Government service should:\n5. ... never accept, for himself or his family, favors and benefits under circumstances which might be construed by reasonable persons as influencing the performance of his governmental duties.\nConcurrent resolutions, which are not sent to the President for his signature, are not considered a form of legislation which have legal or binding effect on parties outside of Congress. Although a concurrent resolution might bind that Congress which adopted it, precedents exist which suggest that a concurrent resolution technically expires at the end of that Congress. The Code of Ethics for Government Service was expressly not intended by Congress as legislation establishing new or different ethical standards in government, nor creating new enforceable \"laws,\" but rather as a means of expressing existing ethical principles. However, the ethical standards in the Code have been generally recognized as continuing guidance and principles for both elected and appointed officials in the Government. The Rules of Procedure of the Senate Select Committee on Ethics (revised 1999) specifically note in Part III that one of the \"sources of the subject matter jurisdiction of the Select Committee\" is the \"Code of Ethics for Government Service.\" The House of Representatives has expressly recognized the terms of the Code as continuing ethical standards and has used the provisions of the Code of Ethics as the basis for disciplinary charges and actions against Members, although the Senate has apparently never done so.\nParagraph 5 of the Code of Ethics was intended substantially as a \"gift\" rule, barring the receipt of gifts, favors and benefits from those persons and in those situations where it might be deemed to affect or influence the performance of one's official duties. As noted, this rule has never been specifically applied in a Senate disciplinary ruling, nor interpreted in the Senate, but has been applied to certain fact situations involving gifts and favors in the House of Representatives. There is no specific indication whether the provision, if considered an actionable standard of conduct, would go beyond current congressional rules on receipt of \"compensation\" for influence improperly exerted, or the current \"gifts\" rules of the House or Senate, or apply to conduct at all in connection with such things as lawful campaign contributions. It is possible to argue, however, that the terms \"benefit\" or \"favor\" in the Code of Ethics could go beyond and be broader than either the terms \"gifts\" or \"compensation\" in congressional rules. Under this ethical standard it might not be required that there be any specific or provable \"connection\" or linkage between the \"favor\" received and any official act done, but rather the standard is apparently concerned merely with \"appearances of impropriety\" in the receipt and acceptance of such items.\n\n\t\t\t\tIncidental and Perishable Items Received in Appreciation of Services\n\nSome of the more common questions in the area of constituent service arise when a constituent, grateful for assistance of a Member's staff with such things as lost or missing social security checks, veterans' benefits that stop unexplainedly, or a myriad other problems with the federal bureaucracy, send as a \"thank you\" for such help a small item purchased or made by the constituent. The problem with the receipt of these small gifts is not the House or Senate gifts rules, which as noted above, specifically exempt inexpensive items (anything under $50 in value), but rather that such items are a thing \"of value\" that are accepted \"because of\" an official act performed by the staffer, that is, inquiries, follow-ups or other intervention into administrative matters in a federal agency. As such, these items may implicate and technically satisfy the elements of the illegal gratuities clause of the bribery statute.\nThe illegal gratuities provision of federal law has no de minimis exception expressly provided within the statute. Therefore, items such as boxes of candy, flowers, or home-made goods, while often perishable and inexpensive, have some apparent value, even if only de minimis , and may therefore still generally be considered \"anything of value\" as used in the federal illegal gratuities provision. Such things of value, if accepted by congressional staff for themselves with the knowledge that they are being rewarded or thanked for a particular \"official act\" performed (or to be performed), may, under a close reading of the illegal gratuities clause, involve a technical violation of that provision.\nSince the statute itself has no express de minimis exception, the under-$50 exception for gifts in the House and Senate Rules may not necessarily create an absolute \"safe harbor\" under the federal criminal \"illegal gratuities\" law for all tokens of appreciation received under that amount when such presents are connected to, that is, are \"for or because of,\" an official act. There are, however, indications that the Department of Justice would recognize reasonable permitted practices which are expressly provided in conduct rules and regulations of a Federal agency, and which may include reasonable de minimis exceptions to prohibitions on the receipt by federal officials of certain things of value from the public. In the executive branch of Government, for example, the Office of Government Ethics has promulgated, in consultation with the Attorney General, standards of conduct regulations for executive branch employees which expressly provide for a de minimis exception to the executive branch \"gift\" prohibitions, for gifts of $20 or less. When such rules and exceptions are followed, the regulations expressly provide that the receipt of things of value will not constitute an \"illegal gratuity\" under 18 U.S.C. \u00a7 201(c). The examples presented by the Office of Government Ethics indicate that this \"safe harbor\" extends even to de minimis things of value (other than cash or securities) given in appreciation or gratitude for an act within the scope of one's official duties, such as for example, when an employee of the Defense Mapping Agency is invited by a private organization \"to speak about his agency's role in the evolution of missile technology,\" and receives a token of appreciation from such group for that presentation.\nSimilarly, the House Committee on Standards of Official Conduct has explained that although they are not responsible for the enforcement of the criminal illegal gratuities law, they consider such inexpensive tokens of appreciation in the form of perishable items from constituents to be outside of the \"illegal gratuities\" law when such items are physically placed in the office to be shared with staff and office visitors. The Committee stated:\nWhile responsibility for enforcing this statute rests with the Justice Department, in the view of this Committee, these provisions do not extend to token gifts of appreciation or goodwill, intended as a courtesy, and consisting of either:\n\u2013 perishable items (e.g., candy or flowers) that the Member or employee shares with staff and constituents or donates to charity, or\n\u2013 decorative items that are displayed in the office or donated to charity.\nThe Senate Select Committee on Ethics has given similar advice with respect to perishable items and the gifts rule.\n\n\t\tC. Personal Financial Interest in the Matter\n\nThere is now a congressional rule, similar in both the House and the Senate, that expressly prohibits staff employees who are required to file annual personal financial disclosure reports from participating in an agency intervention into any nonlegislative matter affecting a non-governmental person or entity in which that employee has a significant financial interest. This restriction can be waived in writing by the employing Member of Congress when the staff employee's participation is deemed necessary.\nEven without this express prohibition, and even though the prohibition does not apply expressly to Members of Congress, all Members and employees are under similar ethical rules and guidelines which establish what might be considered a general \"conflict of interest\" rule or principle. Specifically, a Member or staff employee is instructed not to allow benefits or compensation to accrue to himself or herself, or to his or her beneficial interest, \"by virtue of influence improperly exerted from his position in Congress.\"\nThis rule would appear to require the showing of some degree of connection or \"linkage\" between \"compensation\" or financial rewards, on the one hand, and the exertion of influence by a Member or employee, on the other hand. In the Senate, although the rule expressly covers only the receipt of \"compensation\" for influence \"improperly\" exerted, the provision as adopted by the Senate was not intended to be read in a narrow legalistic manner, but rather \"should be read as a broad prohibition against Members, officers and employees deriving financial benefit, directly or indirectly, from the use of their official position.\" As instructed by the Senate Report on this measure, although the receipt of \"compensation\" for certain official duties, such as intervention before an agency, may be \"also covered by the Federal bribery statute 18 U.S.C. \u00a7\u00a7201, 203,\" the Senate Rule \"should be read to cover situations not covered by the bribery statute.\" The Senate Select Committee on Ethics found that a Senator's offer \"to use his official influence to obtain government contracts for a business venture in which he had a personal financial interest\" was a violation of this provision of Senate Rule 37.\nAs noted, the provision prohibits influence \"improperly\" exerted in connection with the receipt of such compensation. It does not appear, however, that the rule was intended to be limited only to influence which would, standing alone, be considered \"improper\" or \"undue\" even without regard to the compensation received in connection with that influence; nor does the Rule appear to require, either in the House or the Senate, further evidence that the means of the influence consisted of undue pressure, threats or coercion of agency officials, beyond mere intervention, if the end result or motive was improper. As stated in the Senate Report on the measure:\nFor example, if a Senator or Senate employee intervened with an executive agency for the purpose of influencing a decision which would result in measurable personal financial gain to him, the provisions of this paragraph would be violated.\nThe Rule in the Senate was patterned after and is substantially identical to the Rule of the House of Representatives, House Rule 43(3). The House Rule was adopted in 1968 as part of the Code of Official Conduct, and was at that time seen substantially as a measure to deal with the difficult \"conflict of interest\" issue, that is, a rule establishing a \"standard seeking to prevent conflicts of interest [which] would be reasonably meaningful and to some degree enforceable.\" The rule is concerned with the potentially improper use of official influence or of one's office to benefit \"personal economic interests\" or financial holdings in derogation of a public official's duty to the general interests of one's constituents.\nIn 1987 the House Committee on Standards of Official Conduct conducted an investigation into the activities of then Representative Fernand J. St Germain concerning several allegations relating to his interests in financial institutions, including an allegation that he:\nimproperly exerted influence for his personal benefit, as Chairman of the House Committee on Banking, Finance and Urban Affairs, on the Federal Home Loan Bank Board (Bank Board) in an effort to achieve and expedite conversion of Florida Federal to a stock association and Florida Federal's acquisition of First Mutual Savings Association of Pensacola, Florida (First Mutual).\nSuch allegations arguably implicated a potential violation of House Rule 43(3). The Committee, however, could not find evidence which showed that the Member \"had an improper motive\" for the agency intervention. Even though the actual intervention and influence exerted may not in itself have been \"undue,\" \"excessive,\" or \"improper,\" the implication of the Committee's decision was that the Committee would apparently have found \"improper influence\" or \"improper action\" if it could have proven an \"improper motive\" for the intervention. The Committee reported its conclusions:\nThe investigation established that, in 1983, while Representative St Germain was chairman of the Committee on Banking, Finance and Urban Affairs, which had regulatory oversight of federally insured savings and loan institutes and the Federal Home Loan Bank Board (Bank Board), Paul Nelson, a Banking Committee staff member, made telephone calls, apparently on behalf of the congressman, to Richard Pratt, then chairman of the Bank Board. Mr. Nelson's stated purpose for the calls was to check on the status of the Bank Board's deliberations regarding Florida Federal Savings & Loan's application to convert from a mutual to a stock ownership financial institution.\nThere is no evidence (or claim by the congressman) supporting a contention that Mr. Nelson's calls had a \"constituency basis\"....\n* * *\nThere is circumstantial evidence that the purpose of the calls might have been to expedite the Bank Board's processing of the conversion application in an effort to obtain approval during a particular time frame. While there is no evidence that any such effort was successful or otherwise influenced the ultimate agency disposition - the Bank Board's approval - the calls were made during a time when Representative St Germain was a depositor at Florida Federal. He stood to derive personal economic benefit from the ownership interest such deposit gave him. His ownership interest gave him the option to purchase shares immediately upon conversion. One could speculate that a motive for him seeking expedited conversion would be that it could give him the opportunity to purchase stock at a bargain price relative to the after-market for the stock. Conversions to stock institutions had resulted in substantial price increases after the initial offering in the then recent past. However, the Committee firmly believes that speculation about motive is not evidence. And, there is no direct evidence that the congressman had any such improper motive or for that matter, caused Mr. Nelson to make the calls.\nIn mid-1983, the congressman did purchase $30,000 worth of Florida Federal stock upon conversion. He failed to report this as a \"transaction\" in his 1983 Financial Disclosure Statement. ...\nIn light of the above, the Committee believes it would be inappropriate to attribute improper action to an individual based solely on inferences and speculation and, thus, does not reach this conclusion. Nevertheless, the Committee would admonish all Members to avoid situations in which even an inference might be drawn suggesting improper action.\nIt is possible that a concealed personal financial interest in a matter about which a Member or staff employee makes an intervention with a federal agency could provide the grounds for a finding that such contact and conduct created a fraud against the United States. In United States v. Gallup, for example, an employee of the Department of Housing and Urban Development was charged with conspiracy to defraud the United States in influencing the granting of a contract in which he had an undisclosed financial interest, in violation of HUD conflict of interest regulations. The conspiracy count upheld in that case charged that the defendant and his brother-in-law, with whom he shared a \"finder's fee\" for that contract, had conspired and agreed:\n[T]o defraud the United States department of Housing and Urban Development of and concerning its governmental and contractual functions and rights, that is, of and concerning the right of the United States Department of Housing and Urban Development to have its development contracts with local housing authorities performed in accordance with the laws of the United States, HUD rules and regulations and the provisions of said contract, and in honest and impartial manner, free from deceit, corruption, misconduct, fraud, improper influence and conflict of interest.\n\n\t\tD. Conduct During Interventions\n\nAdvisory Opinion No. 1 from the House Committee on Standards of Official Conduct, and Senate Rule XXXVII on interventions and constituent service, while recognizing a Member's legitimate role in intervening in administrative matters, provides that certain conduct could render the means of a Member's intervention activity \"improper,\" or an \"abuse\" of the representational role of a Member, regardless of the issue of the receipt or existence of any compensation or financial benefits connected to one's intervention. Such problematic conduct may concern such things as threats made against administrators, or promises of favors or benefits to such agency personnel. The guidelines adopted or recognized by either House of Congress with regard to such \"conduct\" during interventions are more general ethical considerations and guidelines of propriety concerning a legislator's \"proper\" or \"improper\" conduct towards regulators and respect for the \"due process\" of the administration of the law.\nMany of the general ethical considerations involved in the guidelines on conduct of a Member or his or staff in intervention in administrative matters were explored in the 1950's by Senator Paul Douglas of Illinois. A Subcommittee of the Senate Labor and Public Welfare Committee, chaired by the late Senator Douglas, issued a committee print in 1951 entitled Ethical Standards in Government , which made a number of recommendations and proposals in the area of governmental ethics. In discussing what was then called the \"problem of reference,\" which the subcommittee recognized as an important function of a Member of Congress, the subcommittee discussed the ethical considerations and standards which might apply to congressional intervention in administrative matters. The Subcommittee concluded that it is ethically permissible to recommend specific action on an administrative agency matter, and even to argue \"at length\" for such result, as long as the matter is argued on its merits and the means used in the intervention are not themselves \"inherently damaging\" to the administrative process:\nThere are a number of ways in which the legislator may proceed in raising these matters. He may simply introduce the constituent and ask for fair consideration. If he wishes to be very correct, he will also state that he is asking for nothing more than fair consideration on the merits of the case. A second procedure is to vouch for the applicant in some way; this amounts to a recommendation for the constituent, although not necessarily of his request. The third step is to recommend that favorable action be taken on the matter at issue. This may be done indirectly as well as directly, and may be simply stated or argued at length with supporting data and explanations. It is this third procedure which gives rise to ethical problems.\n* * *\nLegislators have at least two moral obligations in these matters of reference. One is to make sure that they are seeking to push cases only on their merits. It is always possible to make sure that there is no personal economic interest which is involved. But it is more difficult for a legislator to draw the line between proper and improper personal interests which are essentially political in character. That is, a legislator who is seeking support in a pending election (and elections are always pending) may feel that the noble objective of reelecting a stout defender of the public interests may justify his guiding the hand of justice just a little in a relatively minor matter.\nA second moral obligation is to make sure that the methods of intervening in administrative matters are not themselves so inherently damaging to the administrative process or to legislative-administrative relations that they offset any public benefit that might be gained from any such legislative pressure.\nSenator Douglas in his later work and collection of lectures entitled Ethics in Government expressed general ethical principles in relation to congressional intervention into administrative matters which he propounded with the caveat that: \"Probably there can be no fixed set of rules governing the relationships between legislators and administrators which will be perfectly satisfactory in all respects.\" The ethical principles which Senator Douglas submitted \"for consideration\" included the following:\n(1) A legislator should not immediately conclude that his constituent is always right and the administrator is always wrong, but as far as possible should try to find out the merits of each case and only make such representations as the situation permits.\n(2) A legislator should, of course, not accept any money for representing constituents or anyone else before government departments.... If a legislator accepts money, entertainment, or valuable presents in return for his services, he is using his public office in reality not for the common good but for private gain.\n(3) In representing individual interests before administrative bodies, the legislator should be courteous and know the merits of the case; he should not try to bully or intimidate the officials involved and he should make it clear that the final decision is in their hands.\n\n\t\t\tHouse Committee's Wright Investigation\n\nThe ethical guidelines expressed by the House Committee on Standards of Official Conduct in Advisory Opinion No. 1, and as suggested for consideration by the late Senator Douglas, came into play in the investigation of the former Speaker of the House, Representative James C. Wright. One of the charges investigated by the Committee and its special counsel concerned the \"possible exercise of undue influence in dealing with officials of the Federal Home Loan Bank Board.\" Although there were several incidents of intervention and contacts between Speaker Wright and members of the Bank Board, and although certain Bank Board members such as Edwin Gray felt that the Speaker \"attempted to coerce them,\" the House Committee on Standards of Official Conduct did not find reason to believe that the Speaker exercised undue influence over the Board, as there was no evidence of \"a reprisal or threat to agency officials.\"\nThe Special Counsel's Report in the Wright matter argued that \"undue influence\" could be evidenced by either the \"exercise of influence for improper ends or by the use of improper means.\" The first intervention examined concerned a meeting in Congressman Wright's office between Edwin Gray, then Bank Board Chairman, several Bank Board staff and four Members of Congress from Texas, including Representative Wright. The substance of the meeting was that the Members of Congress had heard of reports that Bank Board regulators were using \"heavy handed\" and \"Gestapo-like\" tactics against certain savings and loan banks in Texas, and the Members present expressed and \"passed their concerns on\" to the Bank Board members. They emphasized the poor economic conditions in Texas, and their belief that such conditions were only temporary. Representative Wright had left the meeting early, and the other Congressmen stayed. The Special Counsel found that the meeting between the Congressmen and the Bank Board staff \"represented a proper interaction.\"\nThe second intervention and contact concerned inquiries and statements by Representative Wright to Edwin Gray about an individual (Hall) and his financial institution, and the conduct of a representative of the Bank Board who the Speaker felt was not \"as flexible or understanding\" as he should be. The Speaker asked Chairman Gray \"if there wasn't anything I [Gray] could do about this.\" Gray testified that Representative Wright \"did not threaten him or use coercive terms,\" but that because of the Member's position, Gray felt that he had to do something, and believed that the Congressman \"wanted the Bank Board to change its position regarding Hall.\" It further appears that Representative Wright may later have held up a recapitalization bill affecting the Bank Board \"to show his displeasure with the Bank Board's treatment of Hall specifically and of Texas savings and loans in general.\" Although the Special Counsel argued that these actions may have constituted improper activity because no merits of the case were argued in asking for reconsideration of an agency decision, and because of the alleged use of holding legislation \"hostage\" to express the Member's displeasure, the House Committee on Standards of Official Conduct, as noted above, did not issue even a \"statement of alleged violations\" because of such activity, and thus dropped all charges of undue influence concerning these contacts.\nOther activities and interventions included: \"intercession on behalf of a constituent who expressed a complaint\" about the Bank Board, and the Congressman's expression to the Board for his hope for \"improved\" regulatory conditions; complaints from the Congressman to Edwin Gray that a friend and political fundraiser had been \"mistreated\" by Bank Board regulators, that Gray needed to meet with his friend personally to hear his story, and that because of Speaker Wright's power, Gray decided to appoint an independent counsel to investigate the constituent's treatment by the Bank Board; that in expressing complaints to then Chairman Gray about over-zealous regulators, the Congressman said that he had heard that certain regulators were homosexuals and had \"established a ring of homosexual lawyers\" in Texas, and that the Member asked if Chairman Gray could \"get rid of\" one regulator in particular; Representative Wright's intervention directly with the Chairman Gray to ask for a delay in a closing of a thrift institution in Texas, and asking Gray to report back; a meeting initiated by Bank Board personnel, and an alleged indirect request from Representative Wright to have another Bank Board litigator removed.\nThe House Committee on Standards of Official Conduct, examining the activity of Speaker Wright concerning all of these interventions and contacts, found no undue influence or abuse of his official influence or position in his expressions of interest in agency regulatory matters. The Committee believed that some of the Congressman's conduct may have been \"intemperate,\" but that displeasure with the personality and techniques of a Member in his expressions of interest in a matter to an executive agency can not be used to interfere with or override the important duty of a Member to \"effectively represent persons and organizations having concern with the activities of executive agencies.\" Specifically, in dismissing these charges against Speaker Wright, the Committee found:\nIt is clear that under our constitutional form of government there is a constant tension between the legislative and executive branches regarding the desires of legislators on the one hand and the actions of agencies on the other in carrying out their respective responsibilities. The assertion that the exercise of undue influence can arise based upon a legislator's expressions of interest jeopardizes the ability of Members effectively to represent persons and organizations having concern with the activities of executive agencies.\nAccordingly, while it may well be that Representative Wright was intemperate in his dealings with representatives of the Federal Home Loan Bank Board, the Committee is not persuaded that there is reason to believe that he exercised undue influence in dealing with that agency. In sum, such a finding cannot rest on pure inference or circumstance or, for that matter, on the technique and personality of the legislator, but, instead, must be based on probative evidence that a reprisal or threat to agency officials was made.\n\n\t\tE. Issues in Particular Intervention Contexts\n\n\t\t\t1. Federal Employment and Personnel Matters\n\nMembers of Congress are often asked by constituents to provide a reference, referral or recommendation for employment in the Federal Government. There is no current statutory prohibition on Members of Congress providing a recommendation or referral letter for an applicant for a federal position; however, hiring officials in the Federal Government are expressly instructed by law only to receive and consider such \"recommendations\" from a Member as to the \"character or residence\" of the applicant. Additionally, hiring officials may consider and receive \"statements\" based on a Member's personal knowledge or records, which evaluate such things as an applicant's work performance, ability, aptitude, qualifications and suitability.\nThe statute on federal personnel recommendations is a fairly long-standing provision which had been changed for a period of a few years, where congressional recommendations had actually been prohibited as part of the so-called \"Hatch Act\" revisions enacted in the 103 rd Congress. These amendments, which were passed in 1993 and went into effect in February of 1994, had expressly prohibited a Member of Congress from making a recommendation on behalf of an applicant for federal employment to most positions in the Federal Government on any basis, including the basis of one's political affiliation, except that a Member may have provided a \"statement\" which \"relates solely to the character and residence of the employee or applicant.\" Additionally, the amended statute had prohibited an applicant or an employee from seeking or requesting from a Member of Congress or from a congressional employee any recommendation for employment or other personnel action, other than the character reference described above. However, in 1996 Congress amended the prohibitions on referrals and recommendations which had been in effect since 1994, and returned the state of the law to that which it was prior to those 1994-effective changes. The current statutory language is identical to the language of the law prior to the now-repealed 1994 changes:\n5 U.S.C. \u00a7 3303. An individual concerned in examining an applicant for or appointing him in the competitive service may not receive or consider a recommendation of the applicant by a Senator or Representative, except as to the character or residence of the applicant.\nThe current provisions of the law prohibit officials in the executive branch from receiving and considering any recommendations from a Member of Congress of an applicant for a federal position in the competitive service except as to the character and\/or residency of the applicant, but do not expressly prohibit a Member of Congress from making such recommendations on any basis. This language has in the past been interpreted as actually anticipating that such referrals and recommendations will be made, and as indicating that Members are not necessarily prohibited from taking such action on behalf of applicants. Current federal law continues to protect against potential political abuses in civil service hiring by prohibiting the consideration of political factors by appointing officials in referrals from Members, the general prohibition for anyone in the federal service to consider in recommendations or statements factors other than those that evaluate work performance, ability, qualifications and suitability, and the express prohibition on discriminating in employment matters on the basis of \"political affiliation.\"\nConsidering the statutory restraints on referrals, the rules against the consideration of factors other than evaluation of work performance and suitability, and the prohibitions on political influence in federal hiring, the House Committee on Standards of Official Conduct has advised that with respect to competitive service employments:\nIf the Member does not have personal knowledge of the applicant's work ability or performance, the letter of recommendation may address only the applicant's character or residence.\nFurthermore, the Committee notes that if a Member does not have personal knowledge of the applicant's work ability or performance, either through that constituent's work for or with the Member's office, then such \"recommendation\" for the competitive civil service should not be on official congressional letterhead stationery, but rather on the Member's personal stationery.\nWith regard to letters of recommendations concerning positions in the competitive service the Senate Select Committee on Ethics has advised its Members that:\n...Members are now free to write a letter on behalf of or relating to a persons who is applying or under consideration for a position, or who is up for a promotion in the Executive Branch, and may include any information bearing on the suitability of the person for the position. However, Executive Branch employees may only be able to take such a letter (whether in the form of a recommendation or statement) into consideration if it is based on the Member's personal knowledge or records, or if the recommendation is limited to the applicant's character and residence.\"\nIn addition to the permissibility of statements and recommendations for competitive service positions which are made on the basis of a Member's personal knowledge or records of the constituent's work, Member recommendations may also be made generally for \"political\" positions in the federal or State governments, and with respect to appointments to the military academies. However, recommendations are expressly prohibited by statute with respect to employment in the United States Postal Service.\n\n\t\t\t2. Federal Contracts\n\nIndividual Government contracts are let according to federal acquisition rules and guidelines, generally on a competitive basis, and while there is certainly some discretion to be exercised in some cases, Government contracts are not to be awarded on the basis of political or personal influence or pressure from a Member of Congress or other Government officer. A contract with the United States Government is intended to be let with terms that are the most favorable to the United States, that is, contract terms which favor the general public interest in terms of overall value and performance. Price and overall cost to the Government are generally the principle considerations in all Government contacting.\nContracts may not be awarded on the basis of personal or political favoritism, and all potential contractors should be treated \"with complete impartiality and with preferential treatment for none.\" General ethical standards in the executive branch similarly note that an executive official is to \"act impartially and not give preferential treatment to any private organization or individual.\" Depending on the nature of communications, therefore, the intervention of a congressional office in a procurement procedure to attempt to \"influence\" the letting of a contract by a federal agency based on terms or factors other than those which the agency may properly consider may involve conduct contrary to proper federal contracting principles and administration, as well as general ethical precepts.\nIf a Member of Congress does wish to communicate with an agency on behalf of a business or individual in his or her district or State, it is sometimes the practice to provide a letter of introduction for the constituent business entity or individual, to ask for fair and prompt consideration in the award of the contract or contracts, to request to be kept informed of the process and, if the Member or the Member's staff knows or has experience with the individuals involved in the business personally, the office may also choose to vouch for the character and reputation of the business in the community. In some cases it may be appropriate to arrange for interviews or appointments with officials of a federal agency. House and Senate guidance indicate that all of these activities should be based primarily on the concept of the \"overall public interest,\" treating similarly-situated constituents equally, and undertaking such actions irrespective of political contributions or other political considerations. In communicating with agencies and advocating a position and outcome, Members and staff are advised to address only the merits of a matter, and as in all communications, the office may not use the \"[d]irect or implied suggestion of either favoritism or reprisal ... [for] action taken by the agency contacted.\" Members are advised to assure that representations made on their behalf \"are accurate and conform to the Member's instructions....\"\n\n\t\t\t3. Judicial Intervention\n\nMembers' offices are strongly cautioned by the ethics committees in both the House and Senate regarding any informal interventions into or communications to a court with respect to the merits of matters in the judicial process. As a general matter, the separation of powers concept dictates that the authority over resolution of individual legal cases and challenges resides within the judicial branch of Government, and not the legislative branch. Furthermore, it is intended under our system of Government that this judicial branch be composed of an \"independent\" judiciary which will, in consideration of basic notions of due process and fairness, make decisions on the facts before it grounded in the rule of law and\/or equity, and not based upon political pressures, partisan considerations or personal influences of those wielding authority in other branches of Government.\nMore specifically, there are provisions of law and rule which limit, restrict and prohibit the receipt of ex parte communications by a decision maker in an adjudicatory process, and efforts to circumvent such rules may place a judge or magistrate in an uncompromising ethical position, and thus prove counterproductive to one's objective. The general ethical standards of conduct for judges prohibit them from receiving or considering any ex parte communications on a pending matter, that is, off-the-record or other informal communications from persons who are not parties to the legal proceeding in question. The American Bar Association's Model Code of Judicial Conduct, in a provision which has been adopted by the Judicial Conference of the United States for federal judges, provides at Canon 3 that: \"A judge should ... , except as authorized by law, neither initiate nor consider ex parte or other communications concerning a pending or impending proceeding.\" Similar ethical obligations concerning the making or the receipt of ex parte communications attach to administrative law judges or other administrative personnel in adjudicatory matters before federal agencies, under the provisions of the Administrative Procedures Act.\nCertain requests may, of course, be made from Members of Congress and Members' offices to the judiciary, including seeking from a clerk of the court information on the status of a judicial matter, and the request for information on the public docket. Furthermore, while informal attempts at persuasion or influence of a court or over a judge are not deemed proper, it is acceptable for a Member of Congress who feels strongly about a legal matter, such as when the outcome of the matter may affect large numbers of his or her constituents or otherwise impact his or her State or district, to seek to formally intervene in a legal proceeding as a party, or to file a brief amicus curiae (friend of the court) in a matter on appeal.\nThe Senate Select Committee on Ethics specifically advises as follows:\nThe general advice of the Ethics Committee concerning pending court actions is that Senate offices should refrain from intervening in such legal actions (unless the office becomes a party to the suit, or seeks leave of the court to intervene as amicus curiae ) until the matter has reached a resolution in the courts. The principle behind such advice is that the judicial system is the appropriate forum for the resolution of legal disputes and, therefore, the system should be allowed to function without interference from outside sources.\nSimilarly, the House Committee on Standards of Official Conduct explains:\nWhere a Member believes it necessary to attempt to affect the outcome in a pending case, he or she has a variety of options. A Member who has relevant information could provide it to a party's counsel, who could then file it with the court and notify all parties. Alternatively, the Member could seek to file an amicus curiae, or friend of the court brief. Yet another option, in an appropriate case, might be to seek to intervene as a formal party to the proceeding. A Member could also make a speech on the House floor or place a statement in the Congressional Record as to the legislative intent behind the law. A Member should refrain, however, from making an off-the-record communication to the presiding judge, as it could cause the judge to recuse him- or herself from further consideration of the case.\nWhere a Member does have personal knowledge about a matter or a party to a proceeding, the Member may convey that information to the court through regular channels in the proceeding (e.g., by submitting answers to interrogatories, being deposed, or testifying in court). Members and employees should also be aware that special procedures are to be followed whenever they receive a subpoena seeking information relating to official congressional business.\n\n\t\tF. Conclusions Concerning Ethical Issues\n\nContacting regulatory and administrative agencies or intervening into administrative matters by a Member of Congress on behalf of constituents and others with interests affecting the Member's district or State, is considered an important discretionary function of an elected representative for those whom he or she represents. It has become a fairly traditional role for Members of Congress to express concern for, and to sometimes act as a \"liaison\" or spokesman for their constituents to the unelected, and arguably less responsive, bureaucracy of the Federal Government. In the process of such intervention it is expected that some \"tension\" between the desires of legislators and those in the executive branch will naturally exist in our constitutional form of government.\nWhile it may be a common, discretionary practice for a Member to intervene with or contact an agency for a constituent there may, similar to any other official acts of Members, be several ethical issues that arise in such interventions. In the first instance, it is important to assure that nothing of value from a private source is received in connection with, in return for, because of, or as compensation for the Member's or the office's intervention. Campaign contributions are of a particular concern in this area. Although outright \"bribes\" or \"extortion\" in relation to the receipt of campaign contributions and official interventions would require specific factual evidence of corruption and would cover only the most blatant forms of misconduct, there are other, more common and subtle ethical concerns concerning such contributions. Members have been advised to avoid any indications of a connection or \"linkage\" between donations or solicitations of campaign funds to or for the Member, and the assistance provided by that Member.\nIn light of the guidance, opinions and rules in the House and Senate on administrative intervention and campaign funds, Members may be advised to institute office practices and procedures which assure that requests for intervention are handled and evaluated in a substantially similar manner for all constituents, and that decisions whether to act on any particular request are made on the merits of the matter. The strength of the constituent's position and case, the principles of fairness or justice that may be involved in the matter, the overall public interest in the matter, the consistency with past practices of the office, and the consideration of the type of administrative proceeding involved and the type of intervention that would be necessary, are all factors that may be involved in decisions on whether to intervene or not. In no event should decisions be based on whether or not a constituent or other private petitioner has contributed to or assisted the Member's campaign; and merely because one has contributed to the Member's campaign does not disqualify that person from representation by the Member.\nMembers and staff should also be aware that there is no personal financial interest in the subject matter of the intervention. As far as staff are concerned, recusals or written waivers may be pursued in those instances.\nFinally, the means and methods of intervention by Members and the Members' offices are matters of ethical standards and guidelines expressed by the House and the Senate. The ethical \"guidance\" expressed on the subject of the methods of intervention is generally directed at assuring that a Member of Congress does not attempt to exert \"undue influence\" upon, and therefore cause an unfair or unjustified governmental decision or action by, an agency through coercive activities such as threats of reprisal against or promises of rewards for federal regulators and administrators. This does not mean that a Member or staff may not, when appropriate, express an opinion on a policy matter, argue a matter on the merits, or ask for consideration or reconsideration of an action or decision based on statutory, regulatory, or legal interpretative factors. While an office should not attempt to intimidate an administrator, it is obvious that some administrators and regulators are more \"thin skinned\" than others, and a Member's conduct will most likely be judged not on the subjective feelings of the administrator, but on the more objective conduct of the Member involved. In most of the cases of constituents asking for assistance, a contact or intervention consisting of no more than a status inquiry, a request to be kept informed of the process, an introduction of the constituent to the agency, and\/or a request for a fair and expeditious resolution of the issue, will be sufficient to express, and to alert the agency of, the interest of the Member and the Member's office in the matter.","output":"When congressional committees engage in oversight of the administrative bureaucracy, or when Members of Congress intervene in agency proceedings on behalf of private constituents or other private entities with interests affecting the Members's constituency, such interventions involve varying degrees of intrusion into agency decisionmaking processes. This report will briefly examine the currently applicable legal and ethical considerations and standards that mark the limits of such intercessions.\nThe report initially reviews the judicial development and application of standards for determining whether congressional pressure or influence will be deemed to have tainted an agency proceeding. It concludes that the courts, in balancing Congress's performance of its constitutional and statutory obligations to oversee the actions of agency officials against the rights of parties before agencies, have shown a decided predilection for protecting the congressional prerogatives. Thus where informal rulemaking or other forms of informal decisionmaking are involved, the courts will look to the nature and impact of the political pressure on the agency decisionmaker and will intervene only where that pressure has had the actual effect of forcing the consideration of factors Congress did not intend to make relevant. Where agency adjudication is involved a stricter standard is applied and the finding of an appearance of impropriety can be sufficient to taint the proceeding. But even here the courts have required that the pressure or influence be directed at the ultimate decisionmaker with respect to the merits of the proceeding and that it does not involve legitimate oversight and investigative functions, before they will intervene.\nThe report next examines the conduct of Members of Congress and their staffs intervening in administrative matters from the perspective of ethics and conflict of interest rules, statutes and guidelines bearing upon a Member's and staffer's official duties. It notes that since congressional intervention and expressions of interest in administrative matters from a Member's office are recognized as legitimate, official representational and oversight functions and duties of Members of Congress, the primary focus of the ethical and statutory conduct restraints is limited to(1) any improper enrichment or financial benefit accruing to the Member in return for, or because of, his or her official actions and influences, including the receipt of gifts or payments, or existing financial interests in, or relating to the matter under consideration; and (2) any overt coercion or threats of reprisals, or promises of favoritism or reward to administrators from the Member's office which could indicate an arguable abuse of a Member's official representational or oversight role. Additionally, ethical guidelines in Congress incorporate an \"appearance\" standard for Members which would counsel a Member to adopt office procedures and systems which would prevent an appearance of a \"linkage\" between interventions and the receipt of things of value, particularly legitimate campaign contributions, and which would assure that decisions to intervene are based on the merits of a particular matter."}
{"id":"gao_GAO-10-895","pid":"gao_GAO-10-895_0","input":"\tBackground\n\n\t\tOverview of the U.S. Public Transit Systems\n\nThe nation\u2019s transportation system is a vast, interconnected network of  diverse modes.  Key modes of transportation include aviation, freight rail,  highway, maritime, transit, and pipeline.  The nation\u2019s public transit  system includes multiple-occupancy vehicle services designed to provide  regular and continuing general or special transportation to the public, such  as transit buses, light rail, commuter rail, subways, and waterborne  passenger ferries.  According to APTA, buses are the most widely used  form of transit, providing almost two-thirds of all passenger trips.  Light  rail systems are typically characterized by lightweight passenger rail cars  that operate on track that is not separated from vehicular traffic.   Commuter rail systems typically operate on railroad tracks and provide  regional service (e.g., between a city and adjacent suburbs).  Subway  systems, like the Metropolitan Transportation Authority\u2019s New York City  Transit, typically operate on fixed heavy lines within a metropolitan area  and have the capacity for a heavy volume of traffic.  Waterborne passenger  ferries provide a link across many of the nation\u2019s waterways and, in some  cases, present drivers with an alternative travel option.  Public transit  systems in the United States are typically owned and operated by public  sector entities, such as state and regional transportation authorities.  In  addition, while some transit agencies rely on their local police department  to secure their systems, others, such as the Bay Area Rapid Transit system  in San Francisco, have established their own dedicated police department.\nMass transit and passenger rail systems carry a high number of passengers  every day and are open and fully accessible.  Multiple stops and transfers  lead to high passenger turnover, which is difficult to monitor effectively,  and a terrorist attack on public transit systems could result in a large  number of casualties.  While there have been no successful terrorist  attacks against U.S. public transit systems to date, terrorist attacks on  public transit systems around the world, such as the March 2010 subway  bombings in Moscow, Russia, and the recent plot to detonate explosives  on the New York City subway system, illustrate the potential threat to  public transit systems.\n\n\t\tMultiple Stakeholders Have Responsibility for Sharing Security-Related Information with Public Transit Agencies\n\nSecuring the nation\u2019s public transit systems is a shared responsibility  requiring coordinated action on the part of federal, state, and local  governments; the private sector; and passengers who ride these systems.   A component of this shared responsibility is ensuring that those within the  private and public sector have access to quality security-related  information to enhance prevention and protection efforts.  DHS is the lead  department involved in securing the nation\u2019s homeland.  As required by  the Homeland Security Act of 2002, the department is responsible for  coordinating homeland security efforts across all levels of government and  throughout the nation, including with federal, state, tribal, local, and  private sector homeland security stakeholders.\nThe Aviation and Transportation Security Act established TSA as the  federal agency with primary responsibility for securing the nation\u2019s  transportation systems.  As part of this responsibility, TSA serves as the  lead DHS component responsible for assessing intelligence and other  information to identify individuals who pose a threat specifically to  transportation security and to coordinate countermeasures with other  federal agencies to address such threats.  TSA is also charged with serving  as the sector-specific agency for the transportation community.  Within  TSA, several offices, including the Office of Transportation Sector  Network Management and the Office of Intelligence, play a role in sharing  security-related information with transportation stakeholders.  In addition  to TSA, a number of other entities are responsible for sharing security- related information with internal and external stakeholders, including  public transit agencies.  Table 1 below provides details on roles and  responsibilities of some of the various entities involved in sharing security- related information with public transit agencies.\n\n\tPT-ISAC and HSIN-PT Were Established to Serve as the Primary Security Information- Sharing Mechanisms for Public Transit Agencies\n\nAccording to APTA and TSA officials, the PT-ISAC and the public transit  subportal on DHS\u2019s HSIN (HSIN-PT) were designed to serve as the primary  mechanisms for sharing security-related information with public transit  agencies.  The PT-ISAC, which is implemented by APTA under a  cooperative agreement with FTA, was designed to serve as the one stop  shop for public transit agencies seeking to obtain security-related  information.  The PT-ISAC collects, analyzes, and distributes security and  threat information from the federal government and open sources on a  24\/7 basis.  It provides public transit agencies with unclassified and open- source documents obtained from numerous sources, including DOT, DHS,  and DOJ.  According to PT-ISAC officials, this mechanism disseminates  this information through daily E-mails with attachments summarizing and  analyzing recent security and cybersecurity information, news, threats,  and vulnerabilities within the transportation sector.  In addition, the PT- ISAC has a searchable library of government and private security  documents, and PT-ISAC analysts hold top secret security clearances.  HSIN-PT is also focused on providing security-related information  pertaining to the public transit industry.  According to DHS officials, HSIN  was designed to serve as the department\u2019s primary information-sharing  mechanism for the larger homeland security community engaged in  preventing, protecting from, responding to, and recovering from all  threats, hazards, and incidents under DHS jurisdiction.  HSIN is  comprised of a network of communities, referred to as communities of  interest, such as Intelligence and Analysis, Law Enforcement, Emergency  Management, and Critical Sectors (CS).  Within HSIN-CS, each of the 18  critical sectors maintains its own site.  Under the transportation sector,  the public transit mode maintains its own subportal on HSIN.  According  to TSA officials, HSIN-PT is maintained and populated by mass transit and  passenger rail private and government stakeholders.  HSIN, including its  public transit subportal, is accessible via the Internet, but users must first  be vetted against established criteria to obtain a user name and password  from DHS to access the network and retrieve information.  As an  additional feature, HSIN users may elect to receive E-mail alerts that  include notices of ongoing events or direct the user to a particular location  within HSIN to obtain additional information.\nWhile the PT-ISAC and HSIN-PT are focused on providing security-related  information to public transit agencies, the agencies we surveyed did not  rely solely on these two mechanisms for their information needs.  Figure 1  below illustrates the 12 key information-sharing mechanisms, identified by  the agencies we surveyed, that disseminate security-related information to  public transit agencies.  These mechanisms were cited as sources of  security-related information by more than 40 percent of the public transit  agencies we surveyed.\nForces (JTTF)\nTransit Security and Safety Roundtables  The information-sharing mechanisms described in figure 1 vary by  intended users of the mechanism, the type and source of information  offered, and how the information is distributed.  Table 2 provides  additional details on the 12 information-sharing mechanisms public transit  agencies cited most frequently as sources for security-related information.\nAlthough all of these mechanisms are used by some segment of the public  transit agencies we surveyed to obtain security-related information, access  to the information disseminated through the mechanisms illustrated in  table 2 may vary by, among other factors, whether the transit agencies  have a dedicated police department, the size of transit agency, and  accessibility of the information.  For example, some public transit  agencies with a dedicated police department receive security-related  information through their law enforcement representative on the local  JTTF.  According to FBI officials, public transit agencies that do not have  a dedicated police department are less likely to receive information from  the JTTF.  In addition, the Transit Security and Safety Roundtables are  specifically tailored for the nation\u2019s largest mass transit and passenger rail  agencies, typically those ranked within the top 50 or 60 by ridership.   Smaller transit agencies are less likely to receive information disseminated  through this mechanism since they are typically not invited to participate  in these roundtables.  Also, of the mechanisms identified by the public  transit agencies we interviewed and surveyed, all but one send information  directly to transit agencies instead of requiring users to log on to a system  to retrieve information (\u201cpush\u201d vs. \u201cpull\u201d).\nIn addition to the information-sharing mechanisms identified in table 2,  TSA-OI implemented its TS-ISAC in March 2010 as another means for  sharing security-related information with the transportation industry,  including public transit agencies.  Specifically, TSA\u2019s vision for the TS- ISAC is to serve as the one stop shop to obtain TSA-OI reports and  documentation, such as SBU intelligence products and other documents  from other transportation security partners and stakeholders.  The TS- ISAC aims to enhance collaboration between operators, law enforcement  personnel, and security directors from all transportation modes.  Similar  to HSIN-PT, the TS-ISAC is a subportal of HSIN-CS, and therefore users  must have a HSIN password to access it.  Once access is obtained, TS- ISAC users can set up alerts to be notified when a new document has been  posted to the site.\n\n\tPublic Transit Agencies We Surveyed Were Generally Satisfied with Federal Efforts to Share Security- Related Information, but Opportunities Exist to Improve These Efforts\n\n\t\tLarge Transit Agencies and Rail Agencies Were Generally More Satisfied with Information-Sharing Efforts Than Midsized Agencies and Non-Rail Agencies\n\nOur survey results indicate that public transit agencies\u2019 satisfaction with  the security-related information they received varied with the type of  transportation service provided and whether the agency was large or  midsized.  As highlighted in table 3 below, three-fourths of public transit  agencies that responded to this question in our survey (57 of 76) were  generally satisfied with the security-related information they received,  while less than one-sixth (11 of 76) were generally dissatisfied.  The  agencies that provide heavy rail, light rail, or commuter rail service (rail  agencies) were generally more satisfied with the information they received  than the agencies that provide bus or ferry service, but not rail service  (non-rail agencies).  Specifically, most rail agencies (30 of 36) were  generally satisfied with the security-related information they received, as  opposed to approximately two-thirds (27 of 40) of non-rail agencies.\nIn addition, the larger agencies we surveyed were generally more satisfied  with security-related information-sharing than the midsized agencies.   Specifically, nearly all of the large agencies that responded to the survey  (14 of 15) were generally satisfied with the security-related information  they received, and nearly half (7 of 15) were \u201cvery satisfied.\u201d  By contrast,  43 of 61 midsized agencies were generally satisfied with the information  they received, and less than one-sixth (10 of 61) were \u201cvery satisfied.\u201d  Table 3 illustrates public transit agencies\u2019 overall satisfaction with the  security-related information they received.\nThe agencies we surveyed reported using several different mechanisms to  receive security-related information, and in general they were satisfied  with the information they received through these mechanisms.  Of the  mechanisms included in the survey, 12 were used by or accessible to at  least 40 percent of the agencies that responded to the survey.  The two  mechanisms most often cited were E-mail alerts from FTA officials (65 of  76) and E-mail alerts from TSA officials (56 of 76); overall general  satisfaction with these two mechanisms was 86 percent and 74 percent,  respectively.  Transit Security and Safety Roundtables were the highest- rated mechanism for overall general satisfaction, with 33 of 36 agencies  generally satisfied.  With respect to information relevance, validity, and  timeliness\u2014three of the six dimensions of quality we included in the  survey\u2014regional emergency operations centers received the highest  general satisfaction ratings.  For actionable information, respondents rated  the information they received from other public transportation systems  the highest for general satisfaction (28 of 33).  Among the 12 most  frequently cited mechanisms, public transit agencies were the least  satisfied with HSIN, both in terms of overall general satisfaction (19 of 33)  and for each of the six dimensions of quality.  Public transit agencies in  our survey viewed the PT-ISAC more favorably than HSIN; approximately  three-fourths (37 of 49) of PT-ISAC users indicated they were generally  satisfied with the security-related information they received from this  mechanism.  See appendix III for additional data on public transit  agencies\u2019 satisfaction with individual information-sharing mechanisms.\nPublic transit agencies also expressed their views on the \u201ccross-sector\u201d  information they receive.  Most agencies that responded to our survey  indicated that receiving cross-sector information is important or very  important (63 of 78), and this view was shared by both rail and non-rail  agencies.  However, these two groups characterized differently the amount  of cross-sector information they received.  Specifically, approximately half  of responding rail agencies indicated that they received \u201cabout the right  amount\u201d of cross-sector information (18 of 37).  The remaining rail  agencies either wanted to receive additional cross-sector information (7 of  37) or felt that they already received too much (10 of 37).  Conversely,  about half of non-rail agencies (22 of 41) reported receiving \u201ctoo little\u201d or  \u201cfar too little\u201d cross-sector information. Rail and non-rail agencies also  differed with respect to their satisfaction with cross-sector information.  Approximately two-thirds of rail agencies that responded to this question  (24 of 37) were generally satisfied with cross-sector information, whereas  less than half of non-rail agencies (16 of 41) were generally satisfied.  See  table 4 for public transit agencies\u2019 views on cross-sector security  information sharing.\n\n\t\tOpportunities Exist to Streamline Security Information-Sharing Efforts\n\nAccording to TSA\u2019s 2007 Transportation Systems Sector-Specific Plan  Mass Transit Modal Annex, a streamlined and effective system to share  mass transit and passenger rail information is needed to facilitate  information sharing among the federal government and public and private  stakeholders.  Additionally, in September 2009, we reported that multiple  information systems can create redundancies that make it difficult for end  users to discern what is relevant and can overwhelm users with  duplicative information from multiple sources.\nPublic transit agencies currently receive similar security-related  information from a variety of sources.  In addition to identifying the 12 key  mechanisms most frequently used by public transit agencies to obtain  security-related information, our survey also identified that nearly 80  percent of respondents (63 of 80) used 5 mechanisms or more to receive  security information.  Further, through interviews with public transit  agencies of various sizes around the country, we identified at least 21  mechanisms through which these agencies receive security-related  information. Moreover, the Mass Transit SCC\/ Transit, Commuter, and  Long-Distance Rail Government Coordinating Council (GCC) joint  Information Sharing Working Group (SCC\/GCC Information Sharing  Working Group)\u2014which is cochaired by TSA and comprised of federal  and industry stakeholders and was formed to improve information sharing  with public transit agencies\u2014compiled a list that includes 59 different  information products distributed to public transit agencies by 17 different  sources.\nWe identified the potential for overlap between three mechanisms that are  each designed to communicate similar unclassified and SBU security- related information to public transit agencies: the PT-ISAC, the HSIN-PT  subportal, and the newly-formed TS-ISAC.  According to APTA, the PT- ISAC is intended to be a one stop shop for public transit agencies\u2019  information needs.  However, according to DHS, the HSIN platform is  intended to serve as the agency\u2019s primary mechanism for sharing  unclassified and SBU information with homeland security stakeholders,  and TSA officials stated that the agency intends for the HSIN-PT subportal  to be the primary mechanism for sharing such information with public  transit agencies.  Moreover, the TS-ISAC\u2014which is hosted on HSIN-CS  and is intended to serve as a collaborative information-sharing platform  for the public transit and other transportation modes\u2014includes  unclassified and SBU transportation-related information products  produced by TSA-OI.  According to TSA officials, the TS-ISAC, which  services the larger transportation community, is not intended to compete  with or replace HSIN-PT or the PT-ISAC, but in the future it may include a  separate Web page that is specific to public transit.\nFTA, TSA, APTA, and public transit agency officials we interviewed  expressed the desire to streamline information sharing to reduce the  volume of overlapping information public transit agencies receive.  For  example, the then-Acting Manager of TSA's Mass Transit Division stated  that the current number of sources available to public transit agencies to  receive security-related information is \u201coverwhelming.\u201d  Additionally,  officials from 16 of 27 agencies we interviewed also suggested that  information sharing could be improved by reducing redundancies and  consolidating existing mechanisms.  Our survey of public transit agencies  also indicated a desire for a more streamlined approach to information  sharing.  In an open-ended question asking how information sharing could  be improved, 24 of 80 agencies provided comments in favor of  consolidating existing information-sharing mechanisms.  For example,  according to one respondent who favored streamlining the existing  mechanisms, \u201cthere are so many purported analysis centers pushing out  redundant information that an inordinate amount of my time is spent  filtering these many reports to find the high-value nuggets.\u201d  Our  interviews and survey data are consistent with the Administration\u2019s March  2010 Surface Transportation Security Priority Assessment, which  recommended, among other things, that TSA implement an approach for  sharing transportation security information that provides all relevant  threat information and improves the effectiveness of information flow.\nFederal and industry stakeholders have efforts under way intended to  improve the efficiency of information sharing with public transit agencies  and reduce the volume of overlapping information public transit agencies  receive.  Specifically, TSA, FTA, APTA, and other government and private  sector stakeholders are participating in the SCC\/GCC Information Sharing  Working Group, which is reviewing how the PT-ISAC, the HSIN-PT  subportal, the TS-ISAC, and other related information-sharing mechanisms  (including direct E-mails from FTA and TSA officials) might be  streamlined or consolidated to better serve the public transit industry.   This working group is considering, among other things, whether the PT- ISAC could produce a daily (or twice daily) 2 to 3 page unclassified\/For  Official Use Only (FOUO) information product using open-source  information as well as intelligence products from TSA, DHS, and other  entities.  This would mark a shift in the PT-ISAC\u2019s activities, as it would  replace a longer information product (10 to 15 pages) the PT-ISAC  prepares using primarily open-source information.  Working group  participants are still debating how this new information product would be  disseminated to the public transit industry (e.g., through direct E-mails to  public transit agencies, through HSIN-PT, or both), and whether products  could be archived on HSIN-PT or another system to facilitate later viewing.   In addition, the working group is considering ways to scale back the  number of direct E-mails public transit agencies receive, while still  maintaining the capability to disseminate information in this manner when  necessary.\nParticipants in this working group have not yet agreed on a path forward  to improve information sharing with public transit agencies.  As of July  2010, TSA officials stated that the working group had not yet (1) drafted  options for improving information sharing with public transit agencies, (2)  documented the group\u2019s current working proposal, or (3) established a  time frame for completing either of these activities.  Additionally, the  working group has not yet determined how it will incorporate the TS-ISAC  into its proposed options.  While TSA, through the working group, is  assessing, among other things, the extent to which information-sharing  mechanisms can be streamlined, there are no time frames established for  completing these efforts.  Developing such time frames to guide the  working group\u2019s activities\u2014including its assessment of opportunities to  streamline existing information-sharing mechanisms that target similar  user groups with similar information\u2014could assist TSA in completing this  important effort.\n\n\t\tThe PT-ISAC Is Not Completing Agreed-Upon Responsibilities and Tasks\n\nStandards for Internal Control in the Federal Government provide that  internal controls should be designed to assure that ongoing monitoring  occurs in the course of normal operations.  The cooperative agreement  between FTA and APTA that provides funding for the PT-ISAC specifies  that the ISAC perform several functions related to the HSIN-PT  subportal.  For example, the agreement states that the PT-ISAC is to  control access to the HSIN-PT subportal, manage the information that is  available on the subportal, and take steps to enhance its user-friendliness. As specified in the cooperative agreement, TSA and FTA monitor the PT- ISAC\u2019s expenditures and activities through quarterly financial and  operational reports to help ensure the PT-ISAC fulfills the se tasks.\nHowever, while TSA and FTA oversee PT-ISAC expenditures, they are not  currently taking steps to ensure that the PT-ISAC performs all of the  activities that are specified under the cooperative agreement.  For  example, the PT-ISAC does not post its analytical products (or other  security-related information) to the HSIN-PT subportal, nor has it  organized and archived HSIN-PT content to facilitate better access to  information, as specified by the agreement.  As a result, HSIN-PT is not  regularly updated with security-related information, including PT-ISAC  analytical products, which could be beneficial to public transit agencies.\nTSA, FTA, APTA, and PT-ISAC officials agree that the PT-ISAC is not  performing the HSIN-related functions specified in the FTA\/APTA  cooperative agreement.  These officials told us that through the SCC\/GCC  Information Sharing Working Group, they are reviewing the specific roles  and responsibilities of the PT-ISAC\u2014including activities related to the  HSIN-PT subportal.  However, regardless of whether the working group  redefines the PT-ISAC\u2019s roles and responsibilities, it is important to ensure  that the activities specified in the cooperative agreement are carried out.   Taking steps to ensure the PT-ISAC fulfills its responsibilities and  completes agreed-upon tasks could help assure TSA and FTA that this  mechanism meets the security information needs of public transit  agencies.\n\n\t\tAwareness and Use of PT- ISAC and HSIN among Some Public Transit Agencies Could Be Increased\n\nIn March 2004, we recommended that agencies take actions to better  target federal outreach efforts, and internal control standards call for  management to ensure adequate means of communicating with external  stakeholders who may have a significant impact on agency goals.   Security officials at the public transit agencies we surveyed were not  always aware of the existence of the PT-ISAC and HSIN, particularly non- rail agencies, midsized agencies, and agencies that do not have their own  dedicated police department.  For example, of the 80 agencies we  surveyed, 23 indicated they did not receive security information from the  PT-ISAC and 8 did not know whether they used this mechanism.   Moreover, 15 of the 23 agencies that did not receive information from the  PT-ISAC had never heard of it (see table 5).\nAccording to FTA officials, the PT-ISAC is meant to serve as a valuable  resource for midsized and smaller public transit agencies.  However, our  survey results indicate that fewer non-rail and midsized agencies received  information from the PT-ISAC than rail and large agencies (19 of 41 non- rail and 35 of 65 midsized agencies, as opposed to 30 of 39 rail agencies  and 14 of 15 large agencies, respectively).  Moreover, nearly all of the  agencies we surveyed that had not heard of the PT-ISAC were non-rail  agencies (14 of 15), midsized agencies (15 of 15), or agencies without their  own dedicated police department (14 of 15).\nAPTA conducts some PT-ISAC outreach through E-mails and newsletters  to its members and other stakeholders, and FTA officials stated that they  promote the PT-ISAC at Transit Security and Safety Roundtables.  Both  APTA and FTA officials agreed, however, on the need for additional  outreach to public transit agencies to increase awareness and use of the  PT-ISAC.  TSA did not provide information on any existing PT-ISAC  outreach efforts, but officials stated that the agency\u2019s future actions with  respect to the PT-ISAC, including outreach activities, will depend on the  proposed options that arise from the SCC\/GCC Information Sharing  Working Group.  However, as noted above, there are no time frames for  this working group to draft or finalize its proposals for improving  information sharing, including who will be responsible for conducting  outreach activities for the PT-ISAC or what these activities will entail.   Conducting targeted outreach to agencies that are not currently using the  PT-ISAC\u2014particularly non-rail agencies, midsized agencies, and agencies  that do not have their own dedicated police department\u2014could help to  increase awareness and use of this mechanism.\nTSA and APTA officials also stated that not all public transit agencies are  aware of HSIN and those that are may not view the system as a valuable  resource.  The results of our survey are consistent with this view and  illustrate that public transit agencies\u2019 awareness of HSIN could be  increased.  For example, less than half of public transit agencies (34 of 77)  reported that they had log-in access to HSIN and had not lost or forgotten  their log-in information (see table 6).\nAs with PT-ISAC usage, a greater proportion of large agencies, rail  agencies, and agencies that maintain their own dedicated police  departments indicated they had log-in access to HSIN and had not lost or  forgotten their log-in information (9 of 15 large agencies, 20 of 39 rail  agencies, and 17 of 29 agencies with dedicated police departments, as  opposed to 25 of 65 midsized agencies, 14 of 41 non-rail agencies, and 17  of 51 agencies without dedicated police departments, respectively).   Moreover, our survey also identified that, of the 19 agencies that do not  have HSIN access, 12 had never heard of the mechanism, and an additional  11 agencies did not know whether they had access to HSIN.  Of the 12  agencies that had never heard of HSIN, nearly all were non-rail agencies  (10 of 12), midsized agencies (12 of 12), or agencies without their own  dedicated police department (12 of 12).\nMultiple entities have a role in conducting outreach to public transit  agencies about HSIN.  DHS\u2019s Office of Operations, Coordination, and  Planning is generally responsible for conducting HSIN outreach, but DHS  officials from this office told us that outreach efforts for HSIN-CS,  including the HSIN-PT subportal, are under the purview of DHS IP.   However, DHS IP officials told us that they are deferring to APTA and TSA  (the sector coordinator and sector-specific agency for mass transit,  respectively), as described in the NIPP, to conduct outreach to public  transit agencies on the HSIN-PT subportal.  TSA has conducted some  outreach to the public transit industry about HSIN by including HSIN  reminders when it distributes security information via E-mail to public  transit agencies.  However, as table 6 illustrates, past outreach efforts have  not resulted in widespread HSIN awareness and use among public transit  agencies that we surveyed (particularly midsized agencies, non-rail  agencies, and agencies without a dedicated police department), and our  survey results suggest that access to HSIN remains a concern.  TSA  officials stated that the agency recognizes the need for additional outreach  to increase public transit agencies\u2019 awareness and use of the HSIN-PT  subportal and added that future outreach efforts will depend on the  proposed options that arise from the SCC\/GCC Information Sharing  Working Group.  However, there are no time frames for this working  group to draft or finalize its proposals for improving information sharing.   Conducting targeted outreach to agencies that are not currently using  HSIN\u2014particularly non-rail agencies, midsized agencies, and agencies that  do not have their own dedicated police department\u2014could help to  increase awareness and use of this mechanism.\nRegarding the newly-formed TS-ISAC, TSA has conducted initial outreach  to increase public transit agencies\u2019 awareness.  For example, TSA  distributed a TS-ISAC marketing package via E-mail to transportation  stakeholders, and TSA officials stated that the agency is outreaching to  other DHS components, state and local stakeholders, and other ISACs (in  addition to the PT-ISAC).  According to TSA data from April 2010, officials  from 46 public transit agencies had been granted access to the public  transit Web page of the TS-ISAC within the first 4 weeks of its operation.   However, we did not collect data from public transit agencies on their  awareness or use of the TS-ISAC because it was not implemented until  March 2010, after we developed our survey.  As a result, we could not  determine the extent to which outreach efforts have increased awareness  and use of the TS-ISAC in the public transit industry.\n\n\t\tConcerns with Accessibility, User- Friendliness, and Information Value May Hinder HSIN from Meeting the Security Information Needs of Public Transit Agencies\n\nStandards for Internal Control in the Federal Government call for  agencies to ensure adequate means of communicating with external  stakeholders that may have a significant impact on agency goals, and  effective information technology management is critical to achieving  useful, reliable, and continuous communication of information.   However, concerns among public transit agencies about HSIN\u2019s  accessibility may reduce its value as a source of security-related  information.  Industry officials characterized HSIN as a \u201cpull\u201d system that  requires users to log in and extract what is relevant to their agency.   Security officials at 11 of 27 public transit agencies we interviewed told us  they prefer security information to be \u201cpushed\u201d out to them (e.g., through  E-mails, phone calls) instead of having to log into a system to retrieve it  themselves.  APTA officials stated that public transit security personnel do  not have time to log into a \u201cpull\u201d system, such as HSIN, every day and sift  through excess information to extract what is relevant to their agency.  In  addition, when a HSIN password expires (which occurs after 90 days for  security reasons) users must call the HSIN help desk to obtain a new one.   However, the contact information for the HSIN help desk is not located on  the main HSIN log-in page, so users may not know how to get help if they  experience log-in challenges.  Of the 27 agencies we interviewed, 8  indicated they had experienced problems accessing HSIN.  In June 2010,  DHS implemented a new agency policy to identify HSIN users that have  not accessed the system in 180 days and notify them via E-mail every 3  months instructing them to contact the HSIN help desk to obtain a new  password.  DHS officials also told us that the phone number for the HSIN  help desk would be added to the HSIN log-in page, but the agency had not  done so as of August 2010.\nIn addition to accessibility concerns, certain aspects of HSIN are not user- friendly, and the security-related information available on the HSIN-PT  subportal is not always valuable to public transit agencies.  Of the 11  agencies we interviewed that had access to HSIN and used it to receive  security-related information, 5 reported problems with using the system  once they logged in.  These problems included configuring E-mail alerts to  notify them when information is discovered or changed in a particular area  of HSIN (e.g., the HSIN-PT subportal).  We experienced similar problems  using these E-mail alerts.  After setting up alerts to notify us when  documents are discovered or changed on the HSIN-PT subportal, we  received multiple notifications on a near-daily basis with links to outdated  documents, such as job announcements last modified in 2007, a threat  advisory for the New York City subway system last modified in 2006, and a  map of power outages caused by Hurricane Wilma in 2005.  Further, we  found that security-related information on HSIN that could be useful to  public transit agencies was not always posted to the HSIN-PT subportal.   For example, in the days following the Moscow subway bombings in  March 2010, certain documents pertaining to the attack were available on  the HSIN-CS portal, but did not appear on HSIN-PT, despite their direct  relevance to public transit agency users.  The E-mail alerts we had set up  for HSIN-PT did not notify us of any of this information, which included a  document describing heightened security measures a large U.S. public  transit agency took in response to the Moscow attack.  This information  could have been of interest to other public transit agencies, but HSIN-PT  users would not have known about it unless they logged into the system  without an E-mail prompt, navigated to the HSIN-CS portal, and found the  information themselves.  Based on our survey results\u2014which indicate that  only 3 of 77 agencies use HSIN daily\u2014agencies may not have known that  information pertaining to the Moscow bombings was available to them on  HSIN.\nDHS and TSA agree that the HSIN-PT subportal is not widely used by the  public transit industry and that improvements are needed.  One such  improvement is related to DHS\u2019s efforts to develop a replacement system  for the HSIN platform, known as HSIN Next Generation.  This new system,  which DHS began to develop in 2008, is intended to provide increased  security and access to SBU information for public transit agencies and  other user communities, including law enforcement, intelligence,  immigration, and emergency and disaster management.  According to DHS  officials, the agency intends to move the subportals on HSIN-CS, including  HSIN-PT, to the new HSIN Next Generation platform during the last  quarter of calendar year 2010.  Taking steps to ensure public transit  agencies can access and readily use HSIN\u2014and ensuring the HSIN-PT  subportal contains security-related information that is of value to these  agencies\u2014could help DHS improve HSIN\u2019s capacity to meet public transit  agencies\u2019 security-related information needs.\n\n\tDHS\u2019s Information- Sharing Efforts Could be Enhanced by Developing More Specific Goals and Measures and Obtaining Additional Industry Feedback\n\n\t\tDHS and TSA Have Established Goals and Measures Related to Information Sharing, but Their Goals Are Not Specific to Public Transit and Existing Measures May Limit Program Assessment\n\nDHS and TSA have established goals and output-oriented performance  measures for their information-sharing activities to help gauge the  effectiveness of their overall information-sharing efforts with security  stakeholders.  However, they have not developed performance goals and  outcome-oriented measures to gauge the effectiveness of their  information-sharing efforts specific to public transit agencies.  Specifically,  DHS and TSA have not developed such goals and measures for HSIN-PT  and the PT-ISAC\u2014mechanisms designed to serve as the primary  information sources for the public transit agencies\u2014or the recently  established TS-ISAC.  As a result, DHS and TSA may not be fully informed  of the effectiveness of their information-sharing activities for the public  transit industry.  TSA officials recognize the importance of establishing  specific goals and developing outcome-oriented measures, but they are in  the beginning stages of doing so and could not provide time frames for  when they plan to complete these efforts.  Table 7, below, details DHS\u2019s  current goals and performance measures related to information sharing.\nThe performance goals and measures established by DHS and TSA are  primarily focused on information-sharing efforts with homeland security  stakeholders and the transportation community as a whole, and are not  specific to their efforts to share security-related information with the  public transit industry.  TSA has developed some output-oriented  performance measures specifically for assessing its efforts to share  security-related information with public transit agencies.  According to  TSA officials, the agency currently tracks: (1) the number of meetings held  between the GCC and the Mass Transit SCC and the number of Transit  Security and Safety Roundtables; (2) the number of teleconferences it  conducts with the peer advisory group and the number of  intelligence\/information products it releases; and (3) the usage of the  public transit subportal on HSIN as an indicator of stakeholders\u2019 interest  in the information provided.  TSA-OI is also collecting output data to  measure the performance of the TS-ISAC, such as the number of users, the  length of time each user is logged-on to the site, and the number of times  users access information from the Web site.\nWe have previously reported that decision makers use performance  measurement information, including output measures and information on  program operations, to help identify problems in individual programs,  identify causes of the problems, and modify services or processes to  address problems.  However, leading management practices emphasize  that successful performance measurement focuses on assessing the results  of individual programs and activities.  We have also previously reported  that without effective performance measurement, especially data on  program outcomes, decision makers may have insufficient information to  evaluate the cost-effectiveness of their activities.  While output measures,  such as those developed by TSA, are useful because they indicate the  quantity of direct services a program delivers, they do not reflect the  overall effectiveness of their activities.  We recognize and have previously  reported on the challenge of assessing the effectiveness of security-related  activities such as information sharing and developing outcome-oriented  measures, but have called on agencies to take steps towards establishing  such measures to hold them accountable for the investments they make.   Furthermore, developing such measures provides agencies with valuable  information for evaluating the effectiveness of their programs and the  extent to which they are meeting their goals.\nFurthermore, TSA has not developed specific performance goals or  outcome-oriented measures for the PT-ISAC or HSIN-PT, which were both  established as primary information-sharing mechanisms for public transit  agencies.  According to TSA and APTA officials, they plan to develop  specific goals and measures for the PT-ISAC through the GCC\/SCC  Information Sharing Working Group.  However, the working group is still  finalizing its options for enhancing information-sharing efforts with public  transit agencies, including assessing opportunities to streamline existing  information-sharing mechanisms, and TSA officials were unable to provide  us with time frames concerning the completion of these efforts.  In  regard to HSIN-PT, TSA has developed an output-oriented performance  measure which tracks the number of users of this mechanism; however,  this measure provides limited information on which the agency can assess  the results and progress of this information-sharing mechanism.  TSA-OI,  however, has not developed specific goals or outcome-oriented  performance measures for HSIN-PT.  Moreover, TSA-OI officials reported  that for the newly established TS-ISAC, they are focusing on providing  security-related products to 100 percent of homeland security  stakeholders, including public transit agencies.  However, TSA has not  developed goals or related performance measures for this mechanism and  could not provide time frames for doing so.  Once the SCC\/GCC  Information Sharing Working Group has developed options for improving  information sharing with public transit agencies, establishing time frames  for developing goals and related, outcome-oriented measures for the PT- ISAC, HSIN-PT, and TS-ISAC could assist TSA in obtaining more  meaningful information from which to gauge the effectiveness of these  information-sharing mechanisms.\n\n\t\tDHS Has Taken Steps to Gather Feedback on Public Transit Agencies\u2019 Satisfaction with the Security-Related Information They Receive, but Has Not Established a Systematic Process for Collecting Such Information\n\nDHS and TSA have taken some steps to gather feedback on public transit  agencies\u2019 satisfaction with the security-related information they receive.   For example, DHS and TSA developed forms to periodically gather  feedback on security-related products from their customers, including  public transit agencies.  TSA officials also reported that they informally  gather feedback during the Transit Security and Safety Roundtables.   However, a systematic process for obtaining feedback on the usefulness of  the PT-ISAC and HSIN-PT does not currently exist.  We have previously  reported that agencies with a systematic process for gathering feedback  use surveys and other methods to identify the importance or depth of  customers\u2019 issues in a single, centralized framework, and integrate the  feedback information obtained in a standard and consistent manner.  In  December 2009, we reported that additional DHS actions to obtain  feedback on the utility and quality of information shared could strengthen  the department\u2019s efforts in this area.  Research of best practices for  customer satisfaction suggests that multiple approaches to customer  feedback, such as focus groups and complaint programs that provide  qualitative and quantitative data, and the integration of feedback data, are  needed to effectively listen and understand customers\u2019 needs and to take  appropriate action to meet those needs.\nIn March 2010, DHS I&A began attaching a survey to each of its FOUO  intelligence products that are disseminated to all its customers, including  state and local partners, who receive FOUO products, to better understand  customer information needs.  Public transit agencies that receive I&A\u2019s  FOUO intelligence products will therefore have an opportunity to provide  feedback on the information provided.  I&A officials stated that they plan  to use these results to better inform them of product usefulness and the  security information needs of their customers.  In addition, TSA-OI posted  a feedback form on the TS-ISAC to gather users\u2019 views, including public  transit agencies, on TSA-OI products.  However, TSA-OI\u2019s marketing  materials on the TS-ISAC did not reference this feedback survey, nor has  the agency informed users of this survey\u2019s existence through any other  method.  In addition, according to TSA-OI officials, this survey was posted  shortly after the TS-ISAC was implemented in March 2010, but as of May  27, 2010, TSA-OI had not received any feedback through this survey.  Due  to the recent timing of these survey efforts, it may be too early to assess  the insights that will be provided through this mechanism.\nAlthough TSA officials have established a process to gather user views,  including public transit agencies, on TSA-OI products, TSA has not  established a systematic process to obtain public transit agencies\u2019  feedback on information shared through the PT-ISAC and through HSIN- PT\u2014 the primary mechanisms designed to share security-related  information with public transit agencies.  Also, as of July 2010, TSA  officials stated that they are uncertain about whether or not they will  continue to use the TS-ISAC feedback form as a mechanism to gather  public transit agency feedback.  However, they stated that the agency does  not have a systematic process in place to request, collect, and analyze  feedback in order to gauge public transit agencies\u2019 overall satisfaction  with its information-sharing activities, and that such a process is needed.   TSA officials could consider using various survey tools and other methods  to assist them in collecting public transit agency feedback, which could  better inform them of the effectiveness of their information-sharing  efforts.  For example, through our survey, we were able to assess the  extent to which these public transit agencies used and were satisfied with  a variety of information-sharing mechanisms, including TSA mechanisms.   DHS\u2019s and TSA\u2019s efforts to share security-related information with public  transit agencies could be enhanced by developing a systematic process for  gathering feedback on these agencies\u2019 satisfaction with the information  they receive.\n\n\tConclusions\n\nThe recent bombings on the Moscow subway and planned attempts to  detonate explosives in the New York City subway system have highlighted  the continued threat to public transit systems in foreign countries and in  the United States.  While the SCC\/GCC Information Sharing Working  Group\u2019s efforts to enhance information sharing with public transit  agencies reflects the joint stakeholder commitment to this area,  opportunities for strengthening information sharing exist.  Until TSA  establishes time frames for the SCC\/GCC Information Sharing Working  Group to complete its efforts, including assessing opportunities to  streamline existing information-sharing mechanisms and conducting  targeted outreach efforts to increase awareness of the PT-ISAC and HSIN,  the agency is limited in its ability to take further action to strengthen  information sharing.  In addition, without taking steps to ensure that the  PT-ISAC fulfills its responsibilities and completes agreed-upon tasks, TSA  and FTA cannot be assured that this mechanism meets the security  information needs of public transit agencies.  Further, while DHS and TSA  are taking steps to improve information sharing with public transit  agencies, this effort will not be complete until the accessibility and user- friendliness of HSIN are addressed.  Moreover, the HSIN-PT subportal will  likely continue to be underutilized until DHS takes steps to ensure that  this mechanism contains security-related information that is of value to  public transit agencies.\nOnce the SCC\/GCC Information Sharing Working Group develops options  for improving information sharing with public transit agencies, it will be  important for DHS and TSA to continue with other efforts to strengthen  this area of information sharing.  Specifically, until DHS establishes time  frames for developing goals and related outcome-oriented performance  measures for the PT-ISAC, HSIN-PT, and TS-ISAC, the department will be  limited in its ability to gauge the effectiveness of its information-sharing  efforts with the public transit industry.  Finally, while we are encouraged  by the department\u2019s efforts to gather feedback on public transit agencies\u2019  satisfaction with the security-related information they receive, a  systematic process for obtaining such feedback on the PT-ISAC and HSIN- PT is lacking.  Such a process could help DHS and TSA assess the  effectiveness of their efforts to share security-related information with  public transit agencies.\n\n\tRecommendations for Executive Action\n\nTo help strengthen information sharing with public transit agencies, we  recommend that the Secretary of Homeland Security direct the Assistant  Secretary for the Transportation Security Administration to take the  following action in coordination with FTA and public transit agencies:    Establish time frames for the SCC\/GCC Information Sharing Working  Group to develop options for improving information sharing to public  transit agencies and complete this effort, including the Working  Group\u2019s efforts to:      assess opportunities to streamline existing information-sharing  mechanisms that target similar user groups with similar information  to reduce overlap, where appropriate; and    conduct targeted outreach efforts to increase awareness of the PT- ISAC and HSIN among agencies that are not currently using or  aware of these systems.\nTo help ensure that the PT-ISAC is meeting its objectives for sharing  security-related information with public transit agencies, we recommend  that the Secretaries of Homeland Security and Transportation direct the  Assistant Secretary of the Transportation Security Administration and  Administrator of the Federal Transit Administration to take the following  action:    Take steps to ensure the PT-ISAC fulfills its responsibilities and  completes agreed-upon tasks.\nTo help strengthen DHS\u2019s efforts to share security-related information  with public transit agencies, we recommend that the Secretary of  Homeland Security take the following three actions:    Take steps to ensure that public transit agencies can access and readily  utilize HSIN and that the HSIN-PT subportal contains security-related  information that is of value to public transit agencies.\nOnce the SCC\/GCC Information Sharing Working Group has developed  options for improving information sharing with public transit agencies,  establish time frames for developing goals and related outcome- oriented performance measures specific to the PT-ISAC, HSIN-PT, and  TS-ISAC.\nDevelop a process for systematically gathering feedback on public  transit agencies\u2019 satisfaction with the PT-ISAC and HSIN-PT.\n\n\tAgency Comments and Our Evaluation\n\nWe provided a draft of this report and its accompanying e-supplement  (GAO-10-896SP) to DHS, DOJ, and DOT for review and comments.  We  received written comments from DHS on the draft report, which are  summarized below and reproduced in full in appendix IV.  DHS concurred  with the report and recommendations and indicated that it is taking steps  to address the recommendations.  DHS also provided technical comments  that we incorporated where appropriate.  In an E-mail received September  7, 2010, the FBI liaison stated that the Bureau had no comments on the  draft report.  DOT did not provide comments on the findings and  recommendations but did provide technical comments to the draft report,  which we have incorporated where appropriate.  DHS, DOJ, and DOT did  not provide comments on the e-supplement.\nIn commenting on the draft report, DHS described the efforts the  department has underway or planned to address our recommendations.  These efforts are intended to improve information sharing with public  transit agencies.  However, although the actions DHS reported are  important first steps, additional efforts are needed to help ensure that our  recommendations are fully implemented, as discussed below.  With regard to our first recommendation that TSA coordinate with FTA  and public transit agencies to establish time frames for the SCC\/GCC  Information Sharing Working Group for completing efforts to develop  options for improving information sharing to public transit agencies,  including assessing opportunities for streamlining existing mechanisms  and conducting targeted outreach, DHS stated that TSA is continuing to  work with members of the working group to identify options on how to  streamline the flow of information and described one such option.   According to DHS, the working group has identified at least one product  option for streamlining information sharing that would match the needs of  stakeholders.  This product would be \u201cpushed\u201d out to stakeholders and  also be posted on appropriate websites.  DHS also stated that TSA is  taking steps to improve targeted outreach through collaboration of the  Surface Transportation Information Sharing and Analysis Center and the  PT-ISAC in the development of periodic intelligence summaries and plans  to work with both ISACs, as well as DHS to ensure further outreach is  conducted with stakeholders.  TSA\u2019s efforts to streamline information  sharing with public transit agencies and improve its outreach are  important first steps toward improving the information provided to the  public transit industry.  In order to meet the full intent of our  recommendation, TSA should establish time frames for completing these  efforts.  In addition, TSA did not indicate whether it has identified other  options or is considering taking additional steps to streamline existing  information sharing mechanisms or how its outreach to public transit  agencies will be targeted to those agencies not currently using or aware of  these systems.  Taking such actions would be necessary to fully address  the intent of this recommendation.\nRegarding our second recommendation that TSA and FTA take steps to  ensure the PT-ISAC fulfills its responsibilities and completes agreed-upon  tasks, DHS stated that the purpose for including HSIN-PT content  management and other elements currently in the cooperative agreement  with APTA\/PT-ISAC was to fill gaps in the information sharing process  used by the mass transit and passenger rail community.  DHS also stated  that TSA intends to ensure compliance with the contract elements by  \u201cphasing in PT-ISAC contributions and requirements to achieve maximum  effectiveness.\u201d  TSA\u2019s stated plan for ensuring compliance with contract  elements appears to be a positive step. However, DHS\u2019s response did not  indicate the specific steps that will be taken to ensure that the PT-ISAC  fulfills its responsibilities and completes agreed-upon tasks.  Taking such  action would more fully address our recommendation.\nIn regards to our third recommendation that DHS take steps to ensure that  public transit agencies can access and readily utilize HSIN and that the  HSIN-PT subportal contains security-related information that is of value to  public transit agencies, DHS stated that it supports changes to HSIN and  the intensification of efforts to expand its use for the broader range of  transit and passenger rail agencies.  DHS also stated that in fiscal year  2010, the HSIN program increased its efforts to raise the awareness of  HSIN through a targeted marketing strategy.  DHS also stated that the  HSIN program\u2019s requirements management process and operator  representation on the HSIN Mission Operators Committee governance  board will ensure that public transit sector requirements are assessed,  prioritized, and implemented.  While DHS\u2019s reported efforts to expand  HSIN use with the public transit community are noteworthy, in order to  meet the full intent of our recommendation, DHS should also take steps to  ensure that public transit agencies can readily access and use HSIN, as we  recommended.  Additionally, DHS did not clearly identify the actions it  will take to ensure that the HSIN-PT subportal contains security-related  information that is of value to public transit agencies.  Identifying and  implementing such steps would be necessary to fully address the intent of  our recommendation.\nWith regard to our fourth recommendation that DHS establish time frames  for developing goals and related outcome-oriented performance measures  specific to the PT-ISAC, HSIN-PT, and TS-ISAC, DHS agreed that  developing outcome-oriented measures for information sharing is  important.  Specifically, DHS stated that TSA will work with DHS, APTA,  and the PT-ISAC to develop a series of goals and measures to assess the  effectiveness of its information-sharing efforts.  DHS added that these  measures, once developed, can be expected to evolve and improve over  time as systematic improvements are made.  DHS plans to share the  developed measures with its stakeholders to obtain their comments.  In  order to meet the full intent of our recommendation, DHS should establish  time frames for developing such goals and measures.\nConcerning our fifth recommendation that DHS develop a process for  systematically gathering feedback on public transit agencies\u2019 satisfaction  with the PT-ISAC and HSIN-PT, DHS stated that updates to HSIN will  enable the department to efficiently capture user feedback.  DHS also  stated that it would need to collaborate with TSA and DOT as well as  industry stakeholders to develop additional stakeholder feedback  mechanisms. DHS also noted that is will continue to obtain stakeholder  feedback through its survey on the TS-ISAC subportal.  While the  development of the customer survey on the TS-ISAC is an important step  in obtaining feedback on the satisfaction of this mechanism, DHS should  ensure that its process for gathering feedback on public transit agencies\u2019  satisfaction with the PT-ISAC and HSIN-PT is systematic, as we  recommended.  Taking such action is necessary to fully address this  recommendation.\nWe are sending copies of this report to the Secretaries of Homeland  Security and Transportation, and the Attorney General.  The report is also  available at no charge on GAO\u2019s Web site at http:\/\/www.gao.gov.  If you or  your staff have any questions about this report, please contact me at (202)  512-4379 or lords@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 major contributions to this report are  listed in appendix V.\n\nAppendix I: Objectives, Scope, and Methodology\n\nThis report addresses the following questions: (1) What mechanisms has  the federal government established or funded as primary information- sharing sources for public transit agencies? (2) To what extent are public  transit agencies satisfied with federal efforts to share security-related  information, and how, if at all, can these efforts be improved? (3) To what  extent has the Department of Homeland Security (DHS) identified goals  for sharing security-related information with public transit agencies and  developed measures to gauge its progress in meeting those goals?\nTo identify the mechanisms established or funded by the federal  government to serve as primary information sources for public transit  agencies, we reviewed and assessed relevant documentation, such as the  Homeland Security Information Network (HSIN) Program Management  Plan, and interviewed officials from DHS components including the Office  of Infrastructure Protection (IP) within the National Protection and  Programs Directorate (NPPD), the Office of Intelligence and Analysis  (I&A), the U.S. Coast Guard, and the Transportation Security  Administration (TSA), as well as officials from the Federal Transit  Administration (FTA) and the Federal Bureau of Investigation (FBI) to  discuss the mechanisms they use to share security-related information  with public transit agencies.  We also conducted site visits, or held  teleconferences, with security and management officials from a  nonprobability sample of 27 public transit agencies across the nation to  determine which mechanisms are most routinely used by these agencies to  obtain security-related information.  These transit agencies were selected  to generally reflect the variety of transit agencies in terms of size, location,  transportation mode, and law enforcement presence and represent about  63 percent of the nation\u2019s total public transit ridership based on  information we obtained from FTA\u2019s National Transit Database.  Because  we selected a nonprobability sample of transit agencies to interview, the  information obtained cannot be generalized to the overall population of  transit agencies.  However, the interviews provided illustrative examples  of the perspectives of various transit agencies about federal government  information-sharing mechanisms and corroborated information we  gathered through other means.  Table 8 lists the public transit agencies we  interviewed.\nTo assess the satisfaction of public transit agencies with federal security- related information- sharing efforts and related opportunities for  improvement, in March and April 2010, we surveyed 96 of the of the 694  U.S. public transit agencies as of 2008, by ridership statistics, on their  satisfaction with information-sharing efforts.  The 96 public transit  agencies surveyed represent about 91 percent of total 2008 ridership. For  the purposes of this survey, we defined the six aspects of quality security- related information as (1) relevance (i.e., is the information sufficiently  relevant to be of value to a public transit agency?); (2) validity (i.e., is the  information accurate?); (3) timeliness (i.e., is information received in a  timely manner?); (4) completeness (i.e., does the information contain all  the necessary details?); (5) actionability (i.e., would the information allow  a public transit agency to change its security posture, if such a change was  warranted?); and (6) access\/ease of use (i.e., is information available  through this mechanism easy to obtain?).  To develop the survey  instrument, we conducted pretest interviews with four public transit  agencies and obtained input from GAO experts.  Out of the original  population of 96 transit agencies, we received completed questionnaires  from 80 respondents\u2014a response rate of 83 percent; however, not all  respondents provided answers to every question.\nThe final instrument, reproduced in an e-supplement we are issuing  concurrent with this report\u2014GAO-10-896SP\u2014displays the counts of  responses received for each question. The questionnaire asked those  public transit officials responsible for security operations to identify the  modes of transportation they provide, the extent to which they house their  own law enforcement component, the mechanisms they use to obtain  security information, and their satisfaction with each of these  mechanisms.\nWhile we surveyed 96 agencies of the largest U.S. public transit agencies,  and thus our data are not subject to sampling error, the practical  difficulties of conducting any survey may introduce other errors in our  findings.  We took steps to minimize errors of measurement, nonresponse,  and data processing.  In addition to the questionnaire development and  testing activities described above, we made multiple follow-up attempts by  E-mail and telephone to reduce the level of nonresponse throughout the  survey period.  Finally, analysis programs and other data analyses were  independently verified.\nTo further address this question, we assessed relevant documentation,  including interagency agreements between TSA and FTA, as well as  marketing materials on the Transportation Security Information Sharing  and Analysis Center (TS-ISAC).  We also interviewed American Public  Transportation Association (APTA), Public Transportation Information  Sharing and Analysis Center (PT-ISAC), TSA, FBI, FTA, and DHS  Operations, Coordination, and Planning Directorate officials to discuss  efforts to streamline existing information-sharing mechanisms, oversee the  results of the PT-ISAC, and conduct outreach on various information- sharing mechanisms.  We compared these efforts to internal control  standards, as well as our previous work on the need to consolidate  redundant information systems and target outreach efforts.  In addition,  we interviewed select public transit agencies and included questions in  our Web-based survey of public transit agencies on the various  information-sharing mechanisms available to them.\nTo assess the extent to which DHS has identified goals for sharing  information with public transit agencies and developed measures to gauge  its progress in meeting those goals, we reviewed DHS\u2019s Annual  Performance Report, TSA\u2019s Transportation Security Information Sharing  Plan (TSISP), and available performance data and measures for fiscal  years 2007 through 2010 related to information-sharing efforts with public  transit agencies and compared them to leading management practices and  our previous work on program assessments.  We also interviewed relevant  DHS and TSA officials to obtain information on their efforts to revise and  develop performance measures and goals for this area of information  sharing, as well as their efforts to obtain feedback from public transit  agencies on their satisfaction with the security-related information they  receive.  In addition, we compared TSA\u2019s efforts to evaluate their  information-sharing efforts with guidance on performance measurement  contained in our previous reports.\nWe conducted this performance audit from August 2009 through  September 2010 in accordance with generally accepted government  auditing standards.  Those standards require that we plan and perform the  audit to obtain sufficient, appropriate evidence to provide a reasonable  basis for our findings and conclusions based on our audit objectives.  We  believe that the evidence obtained provides a reasonable basis for our  findings and conclusions based on our audit objectives.\n\nAppendix II: National Strategies, Plans, and Reports Designed to Enhance Information Sharing\n\nSince the terrorist attacks on September 11, 2001, the federal government  has developed strategies to enhance the sharing of terrorism-related  information among federal, state, local, and tribal agencies, and the private  sector.  These strategies include the following:    National Strategy for Information Sharing: Issued in October 2007, this  strategy identifies the federal government\u2019s information sharing  responsibilities.  These responsibilities include gathering and documenting  the information that state, local, and tribal agencies need to enhance their  situational awareness of terrorist threats.  The strategy also calls for  authorities at all levels of government to work together to obtain a  common understanding of the information needed to prevent, deter, and  respond to terrorist attacks.  Specifically, the strategy discusses the need  to improve the two-way sharing of terrorism-related information on  incidents, threats, consequences, and vulnerabilities, including enhancing  the quantity and quality of specific, timely, and actionable information  provided by the federal government to critical infrastructure sectors.\nDHS Information Sharing Strategy: Issued in April 2008, this strategy  describes the guiding principles for DHS\u2019s efforts to share information  within the department, across the federal government, and with state,  local, tribal, territorial, private sector, and international partners. Among  other things, the strategy notes that DHS must take steps to ensure that  the right information gets to the right people at the right time.  The  strategy also discusses the department\u2019s need to institute performance  measures to provide an accurate assessment of the department\u2019s progress  towards meeting its information-sharing goals.\nThe National Infrastructure Protection Plan (NIPP): Updated in 2009, the  NIPP is intended to provide the framework for a coordinated national  approach to address the full range of physical, cyber, and human threats  and vulnerabilities that pose risks to the nation\u2019s critical infrastructure.  Among other things, the NIPP names TSA as the primary federal agency  responsible for coordinating critical infrastructure protection efforts  within the transportation sector and emphasizes the importance and  benefits of sharing security-related information with critical sector  partners.\nTransportation Security Information Sharing Plan (TSISP): Established  by TSA in July 2008 pursuant to the 9\/11 Commission Act and  subsequently updated in December 2009.  The stated purpose of the  TSISP is to establish a foundation for sharing transportation security  information between all entities that have a stake in protecting t transportation system, including federal, state, local, and tribal agencies  and governments, the private sector, and foreign partners.\nSurface Transportation Security Priority Assessment: Issued in March  2010 by the Administration\u2019s Transborder Security Interagency Policy  Committee, Surface Transportation Subcommittee.  The study identified  10 issue areas to examine, obtained input from surface transportation  sector stakeholders, and analyzed the responses to reach a consensus set  of priorities and recommendations related to surface transportation.   Among other things, the assessment included a recommendation that that  TSA collaborate with DHS and the Department of Transportation (DOT) to  more effectively share transportation security information.\n\nAppendix III: Public Transit Agencies\u2019 General Satisfaction with the 12 Most Frequently-Cited Information-Sharing Mechanisms\n\nThe table below illustrates, for the public transit agencies we surveyed, the  general satisfaction along 6 quality dimensions with the 12 most  frequently-cited information-sharing mechanisms.  The quality dimensions  rated for level of satisfaction were: relevance (i.e., is the information  sufficiently relevant to be of value to a public transit agency?); validity  (i.e., is the information accurate?); timeliness (i.e., is information received  in a timely manner?); completeness (i.e., does the information contain all  the necessary details?); actionability (i.e., would the information allow a  public transit agency to change its security posture, if such a change was  warranted?); and access\/ease of use (i.e., is information available through  this mechanism easy to obtain?).  The numbers in parentheses below each  mechanism represent the number of agencies in our survey that indicated  they use this mechanism to receive security-related information.  For each  mechanism and quality dimension, the table indicates (1) the number of  agencies that indicated they were either \u201cvery satisfied\u201d or \u201csomewhat  satisfied\u201d with the information they receive through the mechanism (or, in  the case of \u201caccess \/ ease of use,\u201d the mechanism itself); (2) the total  number of agencies that provided a response to the question; and (3) the  percentage of responding agencies that were generally satisfied.  The  mechanisms are organized in the order they were presented in the survey.\n\nAppendix IV: Comments from the Department of Homeland Security\n\nAppendix V: GAO Contact and Staff Acknowledgments\n\n\tAcknowledgments\n\nIn addition to the contact named above, Jessica Lucas-Judy, Assistant  Director, managed this assignment.  Vanessa Dillard, Jeff C. Jensen, Nancy  Meyer, Octavia Parks, and Meg Ullengren made significant contributions  to the work.  Tracey King provided significant legal support and analysis.   Stanley J. Kostyla assisted with design and methodology.  Carl Ramirez  and Joanna Chan assisted with the survey design, implementation, and  data analysis.  Christopher Currie, Lara Miklozek, and Debbie Sebastian  provided assistance in report preparation.  Tina Cheng and Robert  Robinson developed the report graphic.","output":"Why GAO Did This Study\n\nThe Transportation Security Administration (TSA), in the Department of Homeland Security (DHS), is committed to sharing information with public transit agencies. The Implementing Recommendations of the 9\/11 Commission Act directed GAO to report on public transit information sharing. This report describes (1) the primary mechanisms used to share security information with public transit agencies; and evaluates (2) public transit agencies' satisfaction with federal efforts to share security-related information (e.g., security threats) and opportunities to improve these efforts; and (3) the extent to which DHS has identified goals and measures for sharing information. GAO surveyed 96 of the 694 U.S. public transit agencies based on 2008 ridership and received 80 responses. The 96 public transit agencies surveyed represent about 91 percent of total 2008 ridership. GAO also reviewed documents, such as DHS's Information Sharing Strategy, and interviewed agency officials.\n\nWhat GAO Found\n\nAccording to the American Public Transportation Association (APTA)--which represents the public transit industry--and TSA officials, the Public Transportation Information Sharing and Analysis Center (PT-ISAC) and the public transit subportal on DHS's Homeland Security Information Network (HSIN-PT) were established as primary mechanisms for sharing security-related information with public transit agencies. The public transit agencies GAO surveyed also cited additional mechanisms for obtaining such information, including other public transit agencies. Further, in March 2010 TSA introduced the Transportation Security Information Sharing and Analysis Center (TS-ISAC), which is a subportal on HSIN focused on sharing security-related information with transportation stakeholders. Seventy-five percent of the public transit agencies GAO surveyed reported being generally satisfied with the security-related information they received; however, federal efforts to share security-related information could be improved. Specifically, three-fourths of public transit agencies reported being either very satisfied or somewhat satisfied with the information they received. Public transit agencies also reported that among the 12 most frequently cited mechanisms, they were the least satisfied with HSIN in terms of general satisfaction (19 of 33) and for each of six dimensions of quality--relevance, validity, timeliness, completeness, actionability, and ease of use. Twenty-four survey respondents also cited the need to streamline the information they received. GAO identified the potential for overlap between the PT-ISAC, the HSIN-PT, and the TS-ISAC, which all communicate similar unclassified and security-related information to public transit agencies. Federal and transit industry officials that GAO interviewed reported the need to streamline information sharing. Moreover, a greater proportion of survey respondents who were unaware of the PT-ISAC or HSIN were from midsize agencies, nonrail agencies, and those without their own police department. Federal and industry officials formed a working group to assess the effectiveness of information-sharing mechanisms, including developing options for streamlining these mechanisms. TSA officials stated that these options will also impact future outreach activities; however, no time frame has been established for completing this effort. Establishing such a time frame could help to ensure that this effort is completed. DHS and TSA have established goals and performance measures for some of their information-sharing activities to help gauge the effectiveness of their overall information-sharing efforts; however, they have not developed goals and outcome-oriented measures of results of activities for the mechanisms established as primary information sources for the public transit industry. TSA officials acknowledged the importance of establishing such goals and measures, but were unable to provide time frames for doing so. Establishing time frames for developing goals and outcome measures, once the working group effort is complete, could assist TSA in gauging the effectiveness of its efforts to share information with public transit agencies.\n\nWhat GAO Recommends\n\nGAO recommends that DHS, among other things, (1) establish time frames for its working group to develop options for improving information sharing, including assessing opportunities to streamline mechanisms and conducting targeted outreach; and (2) establish time frames for developing goals and outcome-oriented measures of results. DHS concurred. GAO is issuing an electronic supplement with this report--GAO-10-896SP--which provides survey results."}
{"id":"gao_GAO-12-859","pid":"gao_GAO-12-859_0","input":"\tBackground\n\n\t\tTactical Wheeled Vehicles\n\nDOD and the military services classify TWVs by weight or payload  capacity into three categories\u2014light, medium, and heavy\u2014although the  definitions of each class vary among the services. Each class generally  includes multiple variants or models built on a common chassis. For  example, the Army\u2019s FMTV consists of 2.5- and 5-ton capacity trucks,  each with the same chassis and includes cargo, tractor, van, wrecker,  and dump truck variants. Table 1 lists the TWVs acquired by the military  services over five fiscal years, fiscal years 2007 through 2011.\nRequirements for TWVs have evolved over the last decade, in part, due  to the operational threats encountered in Afghanistan and Iraq. TWVs  were traditionally viewed as utility vehicles that required little armor  because the vehicles operated behind the front lines. However, the tactics  used against forces in these countries dictated that vehicles needed more  protection. For example, the HMMWV was conceived and designed to  support operations in relatively benign environments behind the front line,  but it proved to be highly vulnerable to attacks from improvised explosive  devices, rocket-propelled grenades, and small arms fire when it was  required to operate in urban environments. As a result, DOD identified an  urgent operational need for armored tactical vehicles to increase crew  protection and mobility of soldiers. Although the initial solution\u2014the Up- Armored HMMWV\u2014provided greater protection, the enemy responded by  increasing the size, explosive force, and type of improvised explosive  devices, which were capable of penetrating even the most heavily  armored vehicles. Consequently, the Mine Resistant Ambush Protected  (MRAP) vehicle was approved in 2007 as a rapid acquisition capability.  DOD recognized that no single manufacturer could provide all of the  vehicles needed to meet requirements quickly enough, so it awarded  contracts to multiple manufacturers.\nThe AECA authorizes the President to control the export of arms, such as  TWVs. The authority to promulgate regulations on these items has been  delegated to the Secretary of State. State administers arms transfer  controls through the International Traffic in Arms Regulations and  designates, with the concurrence of DOD, the articles and services  deemed to be arms. These arms constitute the United States Munitions  List (USML). DOD\u2019s TWVs are generally designated as Category VII  (Tanks and Military Vehicles) items on the USML.\nArms, including TWVs, can be sold and exported to foreign governments  through the FMS program or DCS. Under the FMS program, the U.S.  government procures items on behalf of eligible foreign governments  using the same acquisition process used for its own military needs. While  State has overall regulatory responsibility for the FMS program and  approves such sales of arms to eligible foreign governments, DOD\u2019s  Defense Security Cooperation Agency administers the program.  Alternatively, the DCS process allows foreign governments to directly  negotiate with and purchase arms from U.S. manufacturers. For TWVs  controlled on the USML, manufacturers must generally apply for an  export license to State\u2019s Directorate of Defense Trade Controls, which  authorizes the export of arms to foreign governments.\nState officials assess all arms export requests through the FMS program  and DCS license applications against 12 criteria specified in the  Conventional Arms Transfer Policy, as summarized in table 2. DOD officials assess the technical risks of the sensitive or classified electronic  equipment associated with the sale of TWVs to foreign governments,  including the type of armor, sensors or weapons attached to the vehicle,  and any signature information. Aside from these technologies, State and  DOD officials said the departments generally consider the technology  associated with TWVs comparable to commercially available trucks and  do not have any additional policies pertaining to the sale of TWVs to  foreign governments.\nIn accordance with the AECA, recipient countries of arms, including  TWVs, must generally agree to a set of U.S. arms transfer conditions,  regardless if sold through the FMS program or DCS. The conditions  include agreeing to use the items only for intended purposes without  modification, not to transfer possession to anyone not an agent of the  recipient country without prior written consent of the U.S. government,  and to maintain the security of any defense article with substantially the  same degree of protection afforded to it by the U.S. government. To  ensure compliance with these conditions, recipient countries must permit  observation and review by U.S. government representatives on the use  and possession of U.S. TWVs and other arms.\nWhile the majority of TWVs that DOD purchases are regulated on the  USML, a small number that lack armor, weapons, or equipment that  would allow armor or weapons to be mounted are considered to be dual- use items\u2014having both commercial and military applications. These  items are controlled under the Export Administration Act of 1979, which  established Commerce\u2019s authority to control these items through its  Export Administration Regulations and Commerce Control List.  On the  Commerce Control List, DOD\u2019s TWVs are generally designated as  Category 9 (Propulsion Systems, Space Vehicles, and Related  Equipment) items. For DCS of such items, U.S. manufacturers must  comply with the Export Administration Regulations to determine if an  export license from the Commerce\u2019s Bureau of Industry and Security is  required.\n\n\tU.S. TWV Industrial Base Includes a Number of Manufacturers Whose Reliance on Sales to DOD Vary\n\n\t\tNumerous Vehicle Manufacturers and Suppliers Comprise the U.S. TWV Industrial Base\n\nThe U.S. TWV industrial base includes seven vehicle manufacturers, over  90 major subsystem suppliers, and potentially thousands of parts and  component suppliers. Four of the seven manufacturers provided  approximately 92 percent of all TWVs purchased by DOD in fiscal years  2007 through 2011. Figure 1 identifies the manufacturers, the vehicles  they produced, and the percent of all vehicles purchased by DOD from  each manufacturer in fiscal years 2007 through 2011.\nAlthough these manufacturers produced 11 different families of TWVs,  which included over 50 vehicle variants, they generally relied on common  suppliers for major subsystem components. For example, the  manufacturers relied on six or fewer suppliers to provide components,  such as engines or tires. In contrast, the manufacturers relied on more  than 25 armor suppliers, in part, because there was a shortage of vehicle  armor during initial MRAP production. DOD reported that the  requirements for armor, in response to the conflicts in Iraq and  Afghanistan, provided an opportunity for several suppliers to begin  producing armor, which eventually resolved the armor shortage. In  addition to these suppliers, manufacturers we met with reported there  were potentially thousands of other companies that produced parts for  these vehicles. See figure 2 for more information on the number of  suppliers that produced major subsystems on DOD\u2019s TWVs.\nDOD purchased over 158,000 TWVs in fiscal years 2007 through 2011  but plans to buy significantly less from now through fiscal year 2017. DOD  demands for TWVs increased dramatically in response to the operational  demands and threats experienced by U.S. forces during Operation  Enduring Freedom and Operation Iraqi Freedom. For example, between  fiscal years 1998 through 2001, before these two wars began, Army  budget documents indicate plans to purchase approximately  5,000 HMMWVs. After the start of Operation Enduring Freedom, Army  budget documents in 2003 reflected an increased requirement for  HMMWVs and, at the time, it planned to purchase approximately 23,000  though fiscal year 2009. However, after Operation Iraqi Freedom began,  the need for HMMWVs increased further and the Army reported that it  ultimately purchased approximately 64,000 between 2003 through 2009.\nAs U.S. forces began to draw down from the conflicts in Iraq and  Afghanistan, DOD\u2019s operational requirements for TWVs declined. For  example, while DOD bought over 100,000 TWVs in fiscal years 2007 and  2008, DOD plans to purchase less than 1,000 TWVs in fiscal years 2015  and 2016. In all, DOD plans to purchase approximately 8,000 TWVs in  fiscal years 2012 through 2017, as shown in figure 3.\nFuture defense budgets will likely constrain new vehicle purchases and  the size of a fleet the military services will be able to sustain. Army  officials told us that it would cost approximately $2.5 billion per year to  sustain its current fleet of approximately 260,000 TWVs and meet any  new TWV requirements. Officials stated, however, that the Army can no  longer afford and does not need such a sized fleet, in part, due to budget  cuts and potential force structure changes. The Army is re-evaluating how  many TWVs it needs and can afford, which will be outlined in a revised  TWV strategy. In developing this revised strategy, Army officials  recognize that the Army has a relatively young fleet of TWVs, averaging  9 years of age, many of which will be part of its fleet through 2040.\nWhile this revised strategy has not been completed, the Army has already  made changes to reduce its TWV costs. For example, in February 2012  the Army reduced the number of FMTVs it planned to purchase by  approximately 7,400 vehicles. At that time, the Army also terminated a  HMMWV modernization effort, known as the Modernized Expanded  Capability Vehicle, which was intended to improve vehicle performance  and crew protection on over 5,700 HMMWVs. Officials stated that this  effort was terminated, in part, because of DOD-wide funding constraints.  Army officials estimate that these actions will result in a total savings of  approximately $2.7 billion in fiscal years 2013 through 2017. Furthermore,  Army officials stated that the Army plans to reduce the size of its TWV  fleet to match force structure requirements. They also stated that, as of  July 2012, the Army plans to reduce its total fleet by over 42,000 vehicles.  Officials added that more vehicles could be divested depending on any  future force structure changes and budget constraints.\nDespite budget constraints, the industrial base will have some  opportunities over the next several years to produce a new TWV for DOD.  The Joint Light Tactical Vehicle (JLTV) is a new DOD program, designed  to fill the gap between the HMMWV and MRAP by providing near-MRAP  level protection while maintaining all-terrain mobility. As we previously  reported, the Army and Marine Corps are pursuing a revised  developmental approach for JLTV and awarded technology development  contracts to three industry teams. The program completed the  technology development phase in January 2012. Last month, the Army  awarded three contracts for the JLTV\u2019s engineering and manufacturing  development phase. While production contracts will not be awarded for  some time, DOD reports that it plans to purchase approximately  55,000 JLTVs over a 25-year period with full rate production beginning in  fiscal year 2018. With production of other TWVs for DOD largely coming  to an end in fiscal year 2014, DOD considers the JLTV program to be  critical in maintaining an industrial base to supply TWVs to the military.\nIn addition to new production, the Army and Marine Corps also plan to  invest in sustainment efforts that could be completed by the U.S. TWV  industrial base. These efforts include restoring or enhancing the combat  capability of vehicles that were destroyed or damaged due to combat  operations. For example, Marine Corps officials reported that it plans to  recapitalize approximately 8,000 HMMWVs beginning in fiscal year 2013.  In addition, the Army is in the process of resetting the portion of its FMTV  fleet that was deployed through at least fiscal year 2017 as well as  recapitalizing some of its heavy TWVs.\n\n\t\tManufacturer Reliance on Sales to DOD Varied\n\nDespite the significant decrease in DOD TWV purchases, the four  manufacturers we met with generally reported that these sales remain an  important part of their revenue stream. However, there is a wide range in  the degree to which the manufacturers were reliant on DOD in a given  year. For example, as shown in table 3, one manufacturer reported that  for 2007 its revenue from sales to DOD accounted for 4 percent of its total  revenue while another manufacturer reported such revenue was as high  as 88 percent, with the other two manufacturers falling within that range.\nAmong the four manufacturers, the extent of reliance on revenue from  DOD sales varied, in part, because of vehicles sold in the commercial  truck and automotive sectors. Aside from producing TWVs,  manufacturers produced or assembled commercial vehicles, such as  wreckers, fire trucks, school buses, and handicap-accessible taxis, as  well as vehicle components, such as engines, transmissions, and  suspensions.\nAccording to the four manufacturers, their suppliers of TWV major  subsystem components generally produced items in the commercial  automotive and truck industries. For example, according to  manufacturers, suppliers generally produced parts, such as engines,  transmissions, axles, and tires for their commercial vehicles in addition to  supplying parts for the TWVs they produce. However, vehicle armor, a  major TWV component, is primarily a defense-unique item and those  suppliers were not typically used in the manufacturers\u2019 commercial  vehicles.\n\n\t\tDOD Has Several Studies Under Way to Assess the U.S. TWV Industrial Base\n\nDOD currently has several studies under way to better understand the  U.S. TWV industrial base, its capabilities, and how declining DOD sales  may affect it. In 2011, DOD\u2019s Office of Manufacturing and Industrial Base  Policy began a multifaceted review of the U.S. TWV industrial base that  includes surveying suppliers, conducting site visits, and paneling experts.  The Army\u2019s TACOM Life Cycle Management Command also has ongoing  studies, including a review to assess the health of the industrial base and  others intended to identify its supplier base and any risks associated with  sustaining DOD\u2019s TWV fleet. Some of the goals of these different studies  are to better understand how different vehicle supply chains affect others,  identify single point failures in the supply chain, and provide DOD  leadership with improved information so they may better tailor future  acquisition policies.\n\n\tTWV Sales to Foreign Governments Were Relatively Few and Generally Purchased with U.S. Funds\n\nU.S. manufacturers sold relatively few TWVs for use by foreign  governments in fiscal years 2007 through 2011, when compared to the  158,000 vehicles sold to DOD over that same period. However, most of  the manufacturers we met with stated that while sales of TWVs to foreign  governments have not equaled those sold to DOD, such sales are  becoming an increasingly important source of revenue as DOD  purchases fewer vehicles. According to data provided by DOD and the  four manufacturers, foreign governments purchased approximately  28,000 TWVs, either through the FMS program or through DCS, in fiscal  years 2007 through 2011. In addition to these sales to foreign  governments, manufacturers reported they exported approximately  5,000 other TWVs that were different vehicles than those DOD purchased  during that time period. Nearly all TWVs sold to foreign governments  were sold through the FMS program rather than through DCS. DOD  reports that about 27,000 TWVs were sold through the FMS program,  while the four manufacturers we met with reported that about  700 vehicles were sold through DCS in fiscal years 2007 through 2011.See figure 4 for a comparison of TWVs sold to DOD and to foreign  governments through the FMS program and DCS in fiscal years 2007  through 2011.\nApproximately 95 percent of TWVs purchased through the FMS program  from fiscal year 2007 through 2011 were paid for using U.S. government  funding through different security and military assistance programs. The  U.S. Congress authorizes and appropriates funds for assistance  programs that support activities, such as security, economic, and  governance assistance in foreign countries. Examples of such assistance  programs include the Afghanistan Security Forces Fund and Iraq Security  Assistance Fund, which were sources of funding for TWVs purchased for  Afghanistan and Iraq through the FMS program. While Afghanistan and  Iraq were the largest recipients of U.S. manufactured TWVs through such  assistance programs, DOD officials informed us that as the war efforts  conclude there, U.S. funding for TWVs for these two countries\u2019 security  forces has declined and is not planned to continue. In addition, a smaller  number of TWVs were sold through the FMS program to countries using  their own funds. Figure 5 identifies the countries that purchased the most  U.S. manufactured TWVs with U.S. or their own funds through the FMS  program.\n\n\tU.S. Manufacturers and Foreign Governments Identified Multiple Interrelated Factors That May Affect TWV Foreign Sales\n\nU.S. manufacturers of TWVs and foreign government officials we met  with identified a number of interrelated factors that they perceive as  affecting whether a foreign government decides to purchase U.S.  manufactured TWVs. These included potential future competition from  transfers of excess (used) U.S. military TWVs, competition from foreign  manufacturers, and differing foreign requirements for TWVs. In addition,  these U.S. manufacturers and foreign government officials expressed  mixed views on the effect the U.S. arms transfer control regimes may  have on foreign governments\u2019 decisions to buy U.S. vehicles. These  officials said that processing delays and end-use restrictions can  influence foreign governments\u2019 decisions to buy U.S. TWVs. Despite  these issues, foreign government officials said the U.S. arms transfer  control regimes would not adversely affect their decisions to purchase a  U.S.-manufactured TWV that best meets their governments\u2019  requirements.\n\n\t\tPotential Transfers of Used Army TWVs Viewed as Risk by Manufacturers to Future Sales of U.S. TWVs to Foreign Governments\n\nThe U.S. manufacturers we met with regard the Army\u2019s intent to reduce  its TWV fleet size as a risk to their future sales of TWVs to foreign  governments. Army officials said it is still assessing its TWV requirements  and potential plans to divest over 42,000 vehicles, but they acknowledge  that a number of these TWVs could be transferred through the FMS  program. The four U.S. manufacturers consider these used vehicles to be  a risk to their future sales of U.S. TWVs to foreign governments because  foreign governments could be less likely to purchase new vehicles from  U.S. manufacturers if the U.S. Army transfers these used vehicles  through foreign assistance programs. U.S. manufacturers told us they  would like more involvement in DOD\u2019s decisions on its plans for these  divested vehicles so they may provide input on potential effects on the  industrial base. Commerce\u2019s Bureau of Industry and Security reviews  proposed FMS of divested items to identify effects on the relevant  industry. During this review, Commerce provides industry with the  opportunity to identify any impacts of the potential FMS on marketing or  ongoing sales to the recipient country. When approving these transfers,  State and Defense Security Cooperation Agency officials said the  U.S. government must also weigh national security and foreign policy  concerns, which could outweigh industrial base concerns with transfers of  used DOD TWVs to foreign countries.\nWhile concerned about the potential for competition from the FMS of  these retired vehicles, U.S. manufacturers also view these planned  divestitures as a potential to provide repair or upgrade business that  could help sustain their production capabilities during a period of low  DOD demand. Some manufacturers we met with stated that they would  like to purchase DOD\u2019s used TWVs, before they are made available to  foreign governments, so they may repair or upgrade them and then sell  them to foreign governments. DOD is currently reviewing its policies to  determine which vehicles, if any, could be sold back to manufacturers.  Another manufacturer, while not interested in purchasing the vehicles,  expressed interest in providing repair or upgrade services on the used  TWVs before they are sold to foreign governments. Defense Security  Cooperation Agency officials stated that excess defense articles, such as  the used TWVs, are generally made available to foreign governments in  \u201cas is\u201d condition and recipient countries are responsible for the cost of any  repairs or upgrades they may want to make. They added that in such  instances, it could be possible for U.S. manufacturers to perform such  services, but it would be at the direction of the purchasing country, not the  U.S. government.\n\n\t\tForeign Competition, Different Vehicle Requirements, and Concerns Associated with U.S. Arms Transfer Control Regimes Affect Foreign Governments\u2019 Decisions to Purchase U.S. TWVs\n\nForeign government and manufacturer officials that we interviewed  identified a number of TWV manufacturers that compete with U.S.  manufacturers for international sales. Examples of foreign manufacturers  are shown in table 4.\nOfficials from two countries that had not purchased U.S. manufactured  TWVs explained that their countries have a well established automotive  industrial base capable of producing TWVs that meet their governments\u2019  needs. While all of the foreign officials we interviewed reported that their  countries had no policies that favor their domestic manufacturers,  governments that have not purchased U.S. TWVs generally purchased  vehicles from domestic manufacturers. For example, foreign officials from  one country said that all of their government\u2019s TWVs are assembled  within its borders.\nWhile all of the competitors to U.S. TWV manufacturers are not  headquartered in the purchasing countries, foreign officials reported that  many of these companies have established dealer and supplier networks  within their countries. Foreign officials reported that these domestic dealer  and supplier networks make vehicle sustainment less expensive and  more manageable, in part, because it is easier and quicker to obtain  replacement parts or have vehicles repaired. In contrast, foreign officials  said that U.S. TWV manufacturers do not generally have the same dealer  and supplier networks within their countries. They added that this can  make maintenance of the U.S. vehicles more expensive, in part, due to  the added cost of shipping.\nIn addition to the number of TWV manufacturer competitors, foreign  officials also reported that there is limited foreign demand for TWVs.  Foreign officials reported that their governments purchase relatively few  TWVs compared to the U.S. government, in part, because their fleet size  requirements are much smaller. Foreign officials we interviewed reported  TWV fleets that ranged in size from 2 to 9 percent the size of the U.S.  Army\u2019s fleet. For example, foreign officials from one country stated that  their military was in the process of upgrading its entire fleet of  approximately 7,500 vehicles, which is less than 3 percent of the size of  the U.S. Army\u2019s TWV fleet.\nForeign government officials also explained that U.S. manufacturers can  generally produce TWVs to meet their governments\u2019 requirements, but  the vehicles U.S. TWV manufacturers are producing for DOD do not  necessarily align with these requirements. Foreign government officials  identified the following areas where their governments\u2019 requirements  differ from those of DOD:\nDOD\u2019s TWVs are generally larger than what their government can  support. For example, officials from one foreign government reported  that its military considered purchasing U.S. manufactured MRAP  vehicles but did not have the cargo planes required to transport a  vehicle the size and weight of DOD\u2019s MRAP vehicles. Instead,  according to the official, this country purchased a mine and ambush  protected vehicle developed by one of its domestic manufacturers that  is smaller and lighter than the DOD\u2019s MRAP vehicles and better  aligned with its transportation capabilities.\nTheir governments do not always require the same level of  capabilities afforded by DOD\u2019s TWVs and, in some cases,  requirements may be met by commercially available vehicles. For  example, foreign government officials identified a number of vehicles  in their governments\u2019 tactical fleets that are based on commercial  products from automobile companies such as Jeep and Land Rover.\nTheir governments have different automotive or design standards for  military vehicles that do not always align with those produced for DOD  by U.S. manufacturers. For example, officials from one country said  that their military is required to purchase right-side drive vehicles,  which are not always supported by U.S. manufacturers. While their  military can obtain a waiver to purchase a left-side drive vehicle, this  presents training challenges as the majority of the vehicles in its fleet  are right-side drive vehicles. Foreign officials said that while U.S.  manufacturers are capable of meeting these requirements, foreign  competitors may be more familiar with these requirements.  Manufacturers that we interviewed said they produce or are  developing TWVs to better meet foreign customers\u2019 requirements. For  example, one U.S. manufacturer said it was developing a right-side  drive variant of one of its vehicles and another manufacturer said that  it has a line of TWVs for its international customers that better meets  those requirements.\nU.S. manufacturers and foreign officials expressed mixed views on the  effect the U.S. arms transfer control regimes may have on the sale of  U.S.-manufactured TWVs to foreign customers. Officials we met with  reported that, generally, the U.S. arms transfer control regimes do not  inhibit foreign governments from purchasing U.S. manufactured TWVs.  Accordingly, we found that once the FMS and DCS process was initiated,  no eligible foreign sales or licenses for U.S. TWVs were denied. For  example, State officials reported that no countries eligible to participate in  the FMS program were denied requests to purchase TWVs in fiscal years  2007 and 2011. Similarly, State DCS license data indicated that no  licenses for vehicle purchases were denied from fiscal years 2008  through 2011.\nWhile sales of TWVs to foreign governments are generally approved by  the U.S. government once initiated, U.S. manufacturers and foreign  officials said that foreign governments may prefer to purchase vehicle  manufactured outside the United States, in part, due to the amount of  time to process sales and licenses requests and end-use restrictions  associated with the U.S. arms transfer control regimes. Specifically,  manufacturers said the congressional notification process can result in  lengthy delays during the FMS and DCS approval process. The AECA  requires notification to Congress between 15 and 45 days in advance of  its intent to approve certain DCS licenses or FMS agreements.  Preceding the submission of this required statutory notification to the U.S.  Congress, State provides Congress with an informal review period that  does not have a fixed time period for action. One manufacturer stated that  this informal review period, in one case, lasted over a year and, after  which, the prospective customer decided to not continue with the  purchase. Another manufacturer said that the informal congressional  notification process is unpredictable because there is no set time limit for  review, making it difficult for the manufacturer to meet delivery  commitments to foreign customers. State officials acknowledged that the  informal congressional notification period can delay the DCS and FMS  process because there is no designated time limit for review. According to  State officials, the department established a new tiered review process in  early 2012 to address this issue by establishing a time bounded informal  review period that is based on the recipient country\u2019s relationship with the  U.S. government. The formal notification period remains unchanged.\nForeign officials said when TWVs that meet their governments\u2019  requirements are available from manufacturers outside the United States,  AECA restrictions on third party transfers and end-use administrative  requirements associated with U.S. manufactured vehicles could affect  their governments purchasing decisions. Foreign officials explained that  there are a number of TWV manufacturers outside the United States that  can meet their requirements and vehicles sold by those manufacturers do  not necessarily come with the same end-use restrictions as U.S. vehicles.  For example, the AECA restricts the transfer of arms, including U.S.  manufactured, TWVs to a third party without consent of the U.S.  government. Some foreign officials said their governments prefer to use  private companies, when possible, to make repairs and maintain its TWV  fleet because it can reduce costs compared to government repair work.  These foreign officials said that U.S. third party transfer restrictions  require that their governments obtain permission from the U.S.  government before transferring a U.S. TWV to a private company for  repairs, which creates an administrative burden. Additionally, foreign  governments are required to maintain information on U.S. TWVs\u2019 end-use  and possession that must be available to U.S. officials when requested to  ensure compliance with U.S. end-use regulations. Foreign officials from  one country said the maintenance of this information is an administrative  burden and will be more difficult to manage as their government tries to  reduce its workforce in a limited budget environment. Foreign officials  said that TWVs purchased from manufacturers outside of the Untied  States are not generally encumbered with these same restrictions and  administrative burdens, making maintenance of these vehicles easier and  cheaper, in some cases. State officials acknowledged these concerns  from foreign governments but said these restrictions play an important  role in protecting U.S. national security interests.\nForeign officials reported, however, that the U.S. arms transfer control  regimes would not adversely affect their decision to purchase a U.S.  vehicle that best meets their governments\u2019 requirements in terms of  capabilities and cost. Foreign officials said that U.S. manufacturers make  vehicles that are reliable and highly capable. When their governments  have requirements that align with those associated with U.S.  manufactured vehicles, foreign officials said that the U.S. arms transfer  control regimes would not be a factor in their governments\u2019 decisions to  purchase the vehicles. Foreign officials that we interviewed also said their  governments are experienced buyers of U.S. arms and are able to  successfully navigate the FMS and DCS processes and U.S. end-use  restrictions to obtain the military equipment they require.\n\n\tConcluding Observations\n\nThe volume of TWVs DOD purchased to meet operational requirements  in Iraq and Afghanistan was unique due to specific threats. Many of these  vehicles are no longer needed and DOD\u2019s need for new TWVs is  expected to decline in coming years. Further, given the current budgetary  environment, DOD cannot afford to support the size of its current fleet or  buy as many vehicles as it once did. Though U.S. manufacturers  increased their production to meet those past needs, they will be  challenged in responding to the sharp decline in DOD\u2019s TWV  requirements in future years. As DOD continues its studies of the U.S.  TWV industrial base, it may be better positioned to address these  challenges and how DOD can mitigate any risks to sustaining its TWV  fleet. It is unlikely that sales to foreign governments will ever offset  declines in sales to DOD, but foreign sales may be more important to the  industrial base now more than ever. U.S. manufacturers, however, are  presented with a number of factors that affect their ability to sell TWVs to  foreign governments. While no foreign officials indicated that their  governments would not buy U.S. TWVs, there has been relatively limited  demand for the vehicles U.S. manufacturers have produced for DOD.  Further, there are many foreign manufacturers that can supply vehicles  that meet foreign governments\u2019 requirements. Each of the U.S.  manufacturers we met with was either selling or developing alternative  vehicles that better meet foreign governments\u2019 requirements, but the  extent to which those efforts will stimulate additional sales has yet to be  seen. Further, U.S. manufacturers raised concerns that their competitors  could eventually include the U.S. military as it makes plans to divest itself  of used TWVs that it could make available to foreign governments at  reduced costs or for free. Additionally, while U.S. manufacturers  perceived the U.S. arms transfer control regimes to be more burdensome  than those of other countries, the regimes are not a determining factor  when foreign governments seek to purchase TWVs.\n\n\tAgency Comments and Third-Party Views\n\nWe provided a draft of this report to DOD, State, and Commerce, as well  as the four manufacturers and five foreign governments with whom we  met, for their review and comment. DOD and State provide technical  comments and two of the manufacturers provided clarifications, which we  incorporated into the report as appropriate. Commerce, two  manufacturers, and the five foreign governments informed us that they  had no comments.\nWe are sending copies of this report to the Secretary of Defense; the  Secretaries of the Army and the Navy; the Secretary of State; Secretary  of Commerce; and the four manufacturers and five foreign governments  with whom we met. In addition, the report also is available at no charge  on the GAO website at http:\/\/www.gao.gov.\nIf you or your staff have any questions concerning this report, please  contact me at (202) 512-4841 or martinb@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 members who made key  contributions to this report are listed in appendix I.\n\nAppendix I: GAO Contact and Staff Acknowledgments\n\n\tGAO Contact\n\n\tAcknowledgments\n\nIn addition to the contact name above, the following staff members made  key contributions to this report: Johana R. Ayers, Assistant Director;  Patrick Dudley; Dayna Foster; Beth Reed Fritts; Justin Jaynes; Julia  Kennon; Roxanna Sun; Robert Swierczek; Bradley Terry; Brian Tittle; and  Alyssa Weir.","output":"Why GAO Did This Study\n\nDOD\u0092s need for TWVs dramatically increased in response to operational demands and threats experienced in Afghanistan and Iraq. TWVs primarily transport cargo and personnel in the field and include the High Mobility Multi-purpose Wheeled and Mine Resistant Ambush Protected vehicles. The U.S. TWV industrial base, which includes manufacturers and suppliers of major subsystems, increased production to meet DOD\u0092s wartime requirements. That base now faces uncertainties as DOD\u0092s budget declines and operational requirements for these vehicles decrease. In addition to sales to DOD, U.S. manufacturers sell vehicles to foreign governments.\nThe Senate Armed Services Committee Report on a bill for the National Defense Authorization Act for Fiscal Year 2012 directed GAO to (1) describe the composition of the U.S. TWV industrial base, (2) determine how many U.S. manufactured TWVs were purchased by foreign governments from fiscal years 2007 through 2011, and (3) identify factors perceived as affecting foreign governments\u0092 decisions to purchase these vehicles. GAO analyzed data from DOD on U.S. and foreign government TWV purchases, as well as sales data from the four primary U.S. TWV manufacturers. GAO also collected data from five foreign governments, including those that did and did not purchase U.S. TWVs.\n\nWhat GAO Found\n\nThe U.S. tactical wheeled vehicle (TWV) industrial base includes seven manufacturers that utilize common suppliers of major subsystems, such as engines and armor. Four of these manufacturers reported that their reliance on sales to the Department of Defense (DOD) varies, in part, as they also produce commercial vehicles or parts. Collectively, the seven manufacturers supplied DOD with over 158,000 TWVs to meet wartime needs from fiscal years 2007 through 2011. DOD, however, plans to return to pre-war purchasing levels, buying about 8,000 TWVs over the next several years, in part, due to fewer requirements.\nAlmost 28,000 U.S.-manufactured TWVs were purchased for use by foreign governments from fiscal years 2007 through 2011. Approximately 92 percent of these vehicles were paid for using U.S. security assistance funds provided to foreign governments. Iraq and Afghanistan were the largest recipients of such assistance, but officials stated that DOD does not plan to continue funding TWV purchases for these countries. While sales to foreign governments are unlikely to offset reductions in DOD purchases, manufacturers reported that foreign sales are becoming an increasingly important part of their revenue stream.\nSales of U.S.-manufactured TWVs to foreign governments may be affected by multiple interrelated factors, including the availability of used DOD vehicles for sale, foreign competition, differing vehicle requirements, and concerns associated with U.S. arms transfer control regimes. U.S. manufacturers said sales of used Army TWVs to foreign governments could affect their ability to sell new vehicles. U.S. manufacturers and foreign governments also identified a number of non-U.S. manufacturers that produce TWVs that meet foreign governments\u0092 requirements, such as right-side drive vehicles. While U.S. manufacturers can produce vehicles that meet these requirements, vehicles they produced for DOD generally have not. Finally, manufacturers and foreign officials had mixed views on how the U.S. arms transfer control regimes may affect foreign governments\u0092 decisions to purchase U.S. vehicles. U.S. manufacturers and foreign officials expressed concerns with processing times and U.S. end-use restrictions, but foreign officials also said that such concerns have not been a determining factor when purchasing TWVs that meet their requirements.\n\nWhat GAO Recommends\n\nGAO is not making recommendations in this report. DOD, the Department of State, and two manufacturers provided technical or clarifying comments on a report draft that were incorporated as appropriate."}
{"id":"crs_R45258","pid":"crs_R45258_0","input":"\tIntroduction and Overview\n\nThe Energy and Water Development appropriations bill includes funding for civil works projects of the U.S. Army Corps of Engineers (Corps), the Department of the Interior's Central Utah Project (CUP) and Bureau of Reclamation (Reclamation), the Department of Energy (DOE), and a number of independent agencies, including the Nuclear Regulatory Commission (NRC) and the Appalachian Regional Commission (ARC). Figure 1 compares the major components of the FY2019 Energy and Water Development bill at each stage of consideration, along with the FY2018 enacted levels.\nPresident Trump submitted his FY2019 budget proposal to Congress on February 12, 2018. The budget requests for agencies included in the Energy and Water Development appropriations bill totaled $36.341 billion\u2014$6.878 billion (16%) below the FY2018 appropriation. (See Table 3 .) A $375 million increase (3.5%) was proposed for DOE nuclear weapons activities. In contrast to the Administration proposal, the House and Senate versions of the FY2019 Energy and Water Development appropriations bill (Divison A of H.R. 5895 , H.Rept. 115-697 , S.Rept. 115-258 ) provided total appropriations above the FY2018 level. The conference agreement on H.R. 5895 ( H.Rept. 115-929 ) provided total Energy and Water Development appropriations of $44.66 billion\u20143% above the FY2018 level, excluding supplemental funding. It was signed by the President on September 21, 2018 ( P.L. 115-244 ).\nFY2018 Energy and Water Development funding was included in the Consolidated Appropriations Act, 2018 ( P.L. 115-141 ), signed by the President on March 23, 2018. FY2018 emergency supplemental appropriations totaling $17.419 billion were provided to the Corps and DOE for hurricane response by the Bipartisan Budget Act of 2018 ( P.L. 115-123 ), signed February 9, 2018. For more details, see CRS Report R44895, Energy and Water Development: FY2018 Appropriations , by Mark Holt and Corrie E. Clark, and CRS Report R45326, Army Corps of Engineers Annual and Supplemental Appropriations: Issues for Congress , by Nicole T. Carter. \nThe FY2019 budget request proposed substantial reductions from the FY2018 level for DOE energy research and development (R&D) programs, including a cut of $1.320 billion (65.5%) in energy efficiency and renewable energy, $224.7 million (30.9%) in fossil fuels, and $448.0 million (37.2%) in nuclear energy. DOE science programs would have been cut by $868.9 million (13.9%). Programs targeted by the budget for elimination or phaseout included energy efficiency grants, the Advanced Research Projects Agency\u2014Energy (ARPA-E), loan guarantee programs, and ARC. Funding would have been reduced for the Corps by $2.042 billion (29.9%), and Reclamation and CUP by $423.0 million (28.6%).\nThe House Appropriations Committee approved its version of the FY2019 Energy and Water Development appropriations bill ( H.R. 5895 ) on May 16, 2018, by a vote of 29-20. H.R. 5895 was subsequently combined into a \"minibus\" with the FY2019 Legislative Branch and Military Construction and Veterans Affairs appropriations bills and passed the House 235-179 on June 8, 2018. The Energy and Water Development division of the House-passed bill (Division A) had total funding of $44.751 billion without scorekeeping adjustments\u2014$1.533 billion above the FY2018 enacted level and $8.411 billion above the Administration request. The House-passed bill would have provided more than the Administration's proposed funding increase for DOE weapons activities, funding for Yucca Mountain, and continued funding for DOE's loan programs and energy efficiency grants. Most of the Administration's proposed reductions in R&D on energy efficiency and renewable, nuclear, and fossil energy were not agreed to by the House.\nThe Senate Appropriations Committee approved its version of the Energy and Water Development appropriations bill ( S. 2975 ) on May 24, 2018. The Senate passed H.R. 5895 on June 25, 2018, after substituting the text of S. 2975 in Division A, with total funding of $43.872 billion\u2014$653 million above FY2018 and $7.531 billion above the Administration request, before rescissions and offsets. The Senate-passed version of the bill would have increased funding for DOE's weapons activities, established a pilot interim storage facility for nuclear waste, provided nearly level funding for energy efficiency and renewable energy R&D, and continued the Title 17 Loan Guarantee program. The Senate bill did not eliminate ARPA-E, instead providing an increase from the FY2018 enacted level.\nThe final Energy and Water Development and Related Agencies Appropriations Act, 2019 (Division A of P.L. 115-244 ) increases Corps funding by $171.5 million (3%) over the FY2018 enacted level (excluding supplemental appropriations), Reclamation and CUP by $85 million (6%), and DOE by $1.139 billion (3%). The Administration's proposals to eliminate energy efficiency grants, ARPA-E, and loan guarantee programs were not adopted. The enacted measure did not provide funding for the Yucca Mountain nuclear waste project. Funding for DOE nuclear weapons activities was increased by $457.9 million (4.3%) over the FY2018 level.\n\n\t\tBudgetary Limits\n\nCongressional consideration of the annual Energy and Water Development appropriations bill is affected by certain procedural and statutory budget enforcement measures. The procedural budget enforcement is primarily through limits associated with the budget resolution on total discretionary spending and allocations of this amount that apply to spending under the jurisdiction of each appropriations subcommittee. Statutory budget enforcement is derived from the Budget Control Act of 2011 (BCA; P.L. 112-25 ).\nThe BCA established separate limits on defense and nondefense discretionary spending. These limits are in effect for each of the fiscal years from FY2012 through FY2021, and are primarily enforced by an automatic spending reduction process called sequestration, in which a breach of a spending limit would trigger across-the-board cuts of spending within that spending category.\nThe BCA's statutory discretionary spending limits were increased for FY2018 and FY2019 by the Bipartisan Budget Act of 2018 (BBA 2018; P.L. 115-123 ), enacted February 9, 2018. For FY2018, BBA 2018 increased the defense limit by $80 billion (to $629 billion) and increased the nondefense limit by $63 billion (to $579 billion); for FY2019 it increased the defense limit by $85 billion (to $647 billion) and increased the nondefense limit by $68 billion (to $597 billion).\nThe House and Senate Appropriations Committees allocated the FY2019 BBA discretionary spending limits among their 12 subcommittees in May 2018. For Energy and Water Development, the House Committee allocated $44.7 billion, up $1.5 billion (3.5%) from FY2018 ( H.Rept. 115-710 ). The Senate Committee allocation for Energy and Water Development was $43.766 billion, an increase of $553.9 million (1.3%), found in S.Rept. 115-267 . These allocations under Section 302(b) of the Congressional Budget Act provide ceilings for appropriations bills being brought to the floor.\n(For more information, see CRS Report R44874, The Budget Control Act: Frequently Asked Questions , by Grant A. Driessen and Megan S. Lynch.)\n\n\tFunding Issues and Initiatives\n\nSeveral issues generated controversy during congressional consideration of Energy and Water Development appropriations for FY2019. The issues described in this section\u2014listed approximately in the order the affected agencies appear in the Energy and Water Development bill\u2014were selected based on the total funding involved and the percentage of proposed increases or decreases, the amount of congressional attention received, and potential impact on broader public policy considerations.\n\n\t\tCorps and Reclamation Budgets\n\nFor the Corps, the Trump Administration requested $4.785 billion for FY2019, which is $2.042 billion (29.9%) below the FY2018 appropriation. The request included no funding for initiating new studies and construction projects (referred to as new starts). The President requested $872 million for Corps construction; the FY2018 appropriation was $2.09 billion. The House provided a 6.6% total increase in FY2019 for the Corps and a 4.8% increase for Reclamation over the FY2018 appropriation. The Senate approved a 1.3% increase for the Corps and a 5.7% boost for Reclamation from their FY2018 levels. The enacted FY2019 appropriations measure provided increases of 2.5% for the Corps and 5.5% for Reclamation over FY2018. For more details, see CRS In Focus IF10864, Army Corps of Engineers: FY2019 Appropriations , by Nicole T. Carter; CRS In Focus IF10841, Bureau of Reclamation: FY2019 Appropriations , by Charles V. Stern; and CRS Report R45326, Army Corps of Engineers Annual and Supplemental Appropriations: Issues for Congress , by Nicole T. Carter. \n\n\t\tCorps Reorganization\n\nThe Trump Administration has proposed to move the civil works activities from the Department of Defense (DOD) to the Department of Transportation (DOT) and the Department of the Interior (DOI) \"to consolidate and align\" the Corps' civil works missions with these agencies. The conference report on the FY2019 Energy and Water Development Appropriations Act, H.Rept. 115-929 , states the following:\nThe conferees are opposed to the proposed reorganization as it could ultimately have detrimental impacts for implementation of the Civil Works program and for numerous non-federal entities that rely on the Corps' technical expertise, including in response to natural disasters.\u2026 Further, this type of proposal, as the Department of Defense and the Corps are well aware, will require enactment of legislation, which has neither been proposed nor requested to date. Therefore, no funds provided in the Act or any previous Act to any agency shall be used to implement this proposal.\nThe agency's central civil works responsibilities are to support coastal and inland commercial navigation, reduce riverine flood and coastal storm damage, and protect and restore aquatic ecosystems in U.S. states and territories. Additional project benefits also may be developed, including water supply, hydropower, recreation, fish and wildlife enhancement, etc. The Corps performs certain regulatory responsibilities that Congress has assigned to the Secretary of the Army; these include issuing permits for private actions that may affect navigation, wetlands, and other waters of the United States. As part of its military and civil responsibilities and under the National Response Framework, the Corps participates in emergency response activities.\n\n\t\tPower Marketing Administration Reforms: Divestiture, Rate Reform, and Repeal of Borrowing Authority\n\nDOE's FY2019 budget request included three mandatory proposals related to the Power Marketing Administrations (PMAs)\u2014Bonneville Power Administration (BPA), Southeastern Power Administration (SEPA), Southwestern Power Administration (SWPA), and Western Area Power Administration (WAPA). PMAs sell the power generated by the dams operated by Reclamation and the Corps. The Administration proposed to divest the assets of the three PMAs that own transmission infrastructure: BPA, SWPA, and WAPA. These assets consist of thousands of miles of high voltage transmission lines and hundreds of power substations. The budget request projected that mandatory savings from the sale of these assets would total approximately $5.8 billion over a 10-year period.\nThe budget also proposed eliminating the statutory requirement that PMAs limit rates to amounts necessary to recover only construction, operations, and maintenance costs; the budget proposed that the PMAs instead transition to a market-based approach to setting rates. The Administration estimated that this proposal would yield $1.9 billion in new revenues over 10 years. The Administration's budget also called for repealing $3.25 billion in borrowing authority provided to WAPA for transmission projects enacted under the American Recovery and Reinvestment Act of 2009 ( P.L. 111-5 ). The proposal is estimated to save $640 million over 10 years. \nAll of these proposals would need to be enacted in authorizing legislation, and no congressional action has been taken on them to date. The proposals have been opposed by groups such as the American Public Power Association and the National Rural Electrical Cooperative Association, and they have been the subject of opposition letters to the Administration from several regionally based bipartisan groups of Members of Congress. \n\n\t\tTermination of Energy Efficiency Grants\n\nThe FY2019 budget request proposed to terminate both the DOE Weatherization Assistance Program and the State Energy Program (SEP). The Weatherization Assistance Program provides formula grants to states to fund energy efficiency improvements for low-income households to reduce their energy bills and save energy. The SEP provides grants and technical assistance to states for planning and implementation of their energy programs. Both the weatherization and SEP programs are under DOE's Office of Energy Efficiency and Renewable Energy (EERE). The weatherization program received $251 million and SEP $55 million for FY2018. According to DOE, elimination of the grant programs is intended \"to reduce Federal intervention in State-level energy policy and implementation and to focus funding on limited, early-stage applied energy research and development activities where the Federal role is stronger.\" However, the proposed FY2019 cuts were not adopted by the House and Senate, and the enacted bill provided a small increase from the FY2018 level.\n\n\t\tProposed Restructuring of Electricity Delivery and Energy Reliability\n\nThe FY2019 budget request proposed to split the DOE Electricity Delivery and Energy Reliability appropriation into two appropriations: Electricity Delivery (OE), and Cybersecurity, Energy Security, and Energy Reliability (CESER). The request states that proposing a separate account for CESER \"supports the Administration's commitment to protecting energy infrastructure security.\" The Trump Administration's combined request for these offices was $157 million\u2014roughly a 37% reduction from the FY2018 enacted level of $248 million.\nAccording to H.Rept. 115-712 , the House approved DOE's proposal to split the appropriations accounts into two\u2014OE and CESER\u2014and would have provided a combined appropriation of $323 million ($176 million for OE and $147 million for CESER). However, according to S.Rept. 115-258 , the Senate replaced the Electricity Delivery and Energy Reliability appropriation account with the CESER account, which included programs that the Administration had proposed to be in a separate OE account. S. 2975 and the Senate-passed H.R. 5895 would have provided funding for the combined CESER account at $260 million. The enacted FY2019 appropriations measure includes $120 million for CESER and $156 million for OE, for a total of $276 million.\nFor further background, see CRS In Focus IF10874, DOE Office of Electricity Delivery and Energy Reliability: Organization and FY2019 Budget Request , by Corrie E. Clark.\n\n\t\tProposed Cuts in Energy R&D\n\nAppropriations for DOE R&D on energy efficiency, renewable energy, nuclear energy, and fossil energy would have been cut from $3.948 billion in FY2018 to $1.955 billion (-50.5%) under the Administration's FY2019 budget request. Major proposed reductions included coal programs (-28.7%), nuclear fuel cycle R&D (-76.9%), sustainable transportation (-75.6%), renewable energy (-66.3%), advanced manufacturing (-75.4%), and building technologies (-74.2%). The proposed reductions within building technologies included limiting rulemaking and enforcement for equipment and buildings standards to \"the minimum required to maintain compliance with statute.\" The request also stated that the equipment and buildings standards program would rely on \"reimbursable funding from the Environmental Protection Agency\" for costs related to test procedure development and performance verification of ENERGY STAR products.\nThe House-passed bill included substantially smaller reductions in sustainable transportation (-9.2%) and renewable energy (-15.7%) than proposed by the Administration. An increase over the FY2018 enacted level was included for coal R&D (10.7%). The Senate also would have provided more funding for energy R&D than requested by the Administration. The Senate bill included small decreases for sustainable transportation (-1%) and renewable energy (-1.9%), and a reduction in coal R&D programs (-3.8%). The enacted FY2019 appropriations measure provided increases from the FY2018 levels for R&D on fossil energy (1.8%), energy efficiency and renewable energy (2.5% with increases of 6.4% and 1.5% for sustainable transportation and renewable energy, respectively), and nuclear energy (10.0%). For more information, see CRS In Focus IF10589, FY2019 Funding for CCS and Other DOE Fossil Energy R&D , by Peter Folger.\n\n\t\tEnergy R&D Policy and Reorganization\n\nThe Administration's FY2019 budget justification included numerous proposals to terminate late-stage technology development and commercialization activities \"to focus on early stage R&D.\" According to DOE, \"The Federal role in supporting advanced technologies is strongest in the early stages of research and development.\" A Statement of Administration Policy issued before the House floor debate criticized the House Energy and Water appropriations bill for providing \"excessive funding for the Department's applied energy programs\" and called for \"Congress to restrain funding levels in these programs and focus resources on early-stage R&D across the applied energy technology spectrum rather than late stage or near commercial ready technology.\"\nHowever, the conferees rejected that view, ordering DOE to implement activities in all stages of energy technology development:\nThe Department is directed throughout all of its programs to maintain a diverse portfolio of early-, mid-, and late-stage research, development, and market transformation activities. The Department is further directed to fully execute the funds appropriated in a timely manner and to keep the Committees on Appropriations of both Houses of Congress apprised of progress in implementing funded programs, projects, and activities. \nThe Administration also issued a government reorganization plan that included a proposal to consolidate DOE's applied energy R&D offices\u2014focusing on fossil fuels, nuclear, renewables, and energy efficiency\u2014into a single Office of Energy Innovation. The proposal's objective is to \"reduce a practice of picking energy technology winners and losers and pitting fuel types against one another for government funding and attention.\" Instead of \"presupposing the fraction of the budget necessary for certain energy technologies or sources,\" the proposed office would require all R&D activities \"to compete for resources in the new environment.\" However, the enacted FY2019 appropriations measure continued to include separate R&D funding for each fuel category.\n\n\t\tNuclear Waste Management\n\nThe Administration's FY2019 budget request would have provided new funding for the first time since FY2010 for a proposed nuclear waste repository at Yucca Mountain, NV; a similar funding request for FY2018 was not agreed to by Congress. Under the FY2019 request, DOE was to receive $120 million to seek an NRC license for the repository and to develop interim nuclear waste storage capacity. NRC would have received $47.7 million to consider DOE's application. DOE's total of $120 million in nuclear waste funding would have come from two appropriations accounts: $90 million from Nuclear Waste Disposal and $30 million from Defense Nuclear Waste Disposal (to pay for defense-related nuclear waste that would be disposed of in Yucca Mountain).\nDOE submitted a license application for the Yucca Mountain repository in 2008, but NRC suspended consideration in 2011 for lack of funding. The Obama Administration had declared the Yucca Mountain site \"unworkable\" because of opposition from the State of Nevada. The House voted to provide the Yucca Mountain funding requested for FY2018 and a $100 million increase for FY2019, but the Senate Appropriations Committee did not include it for FY2018, and it was not included in the Senate-passed bill for FY2019. Also as in FY2018, the FY2019 Senate bill included an authorization for a pilot program to develop an interim nuclear waste storage facility at a voluntary site (\u00a7304). The enacted FY2019 appropriations measure did not include the House-passed funding for Yucca Mountain or the Senate's nuclear waste pilot program provisions. For more background, see CRS Report RL33461, Civilian Nuclear Waste Disposal , by Mark Holt.\n\n\t\tElimination of Energy Loans and Loan Guarantees\n\nThe FY2019 budget request would have halted further loans and loan guarantees under DOE's Advanced Technology Vehicles Manufacturing Loan Program and the Title 17 Innovative Technology Loan Guarantee Program. A similar proposal to eliminate the programs in FY2018 was not enacted. Under the FY2019 budget proposal, DOE was to continue to administer its existing portfolio of loans and loan guarantees. Unused prior-year authority, or ceiling levels, for loan guarantee commitments would have been rescinded. Neither the House- nor Senate-passed bills would have eliminated the two programs, nor does the enacted FY2019 appropriations measure. The conference report directed that DOE \"shall not use funds to plan, develop, implement, or pursue the elimination of the Title 17 Innovative Technology Loan Guarantee Program.\"\n\n\t\tInternational Thermonuclear Experimental Reactor\n\nThe International Thermonuclear Experimental Reactor (ITER), under construction in France by a multinational consortium, continues to draw congressional concerns about management, schedule, and cost. \"ITER will be the first fusion device to maintain fusion for long periods of time\" and is to lay the technical foundation \"for the commercial production of fusion-based electricity,\" according to the consortium's website. The United States is to pay 9.09% of the project's construction costs, including contributions of components, cash, and personnel. Other collaborators in the project include the European Union, Russia, Japan, India, South Korea, and China. The total U.S. share of the cost was estimated in 2015 at between $4.0 billion and $6.5 billion, up from $1.45 billion to $2.2 billion in 2008. The Consolidated Appropriations Act for FY2018 provided $122 million for the project. The FY2019 budget request was $75 million, but the House approved $163 million and the Senate voted to provide $122 million\u2014the same as the FY2018 appropriation. In its report on the FY2019 bill, the House Appropriations Committee said, \"The Committee continues to believe the ITER project represents an important step forward for energy sciences and has the potential to revolutionize the current understanding of fusion energy.\" The enacted FY2019 appropriations measure includes $132 million for ITER\u2014a $10 million increase from the FY2018 amount.\n\n\t\tElimination of Advanced Research Projects Agency\u2014Energy\n\nThe Trump Administration's FY2019 budget would have eliminated the Advanced Research Projects Agency\u2014Energy (ARPA-E), which funds research on technologies that are determined to have potential to transform energy production, storage, and use. The Administration also proposed to terminate ARPA-E in its FY2018 budget request, but Congress instead increased the program's funding by 15.5%\u2014to $353.3 million. The FY2018 request contended that ARPA-E should end because \"the private sector is better positioned to finance disruptive energy research and development and to commercialize innovative technologies.\"\nBecause ARPA-E provides advance funding for projects for up to three years, oversight and management of the program would still be required during a phaseout period. The FY2018 budget justification called for $20 million in new appropriations to be supplemented by $45 million in previous funding provided for research projects, which would have been reallocated for closing out the program. The FY2019 budget request proposed to carry out the same termination plan described in the FY2018 request. The House-passed FY2019 funding bill would have reduced ARPA-E funding by $28.3 million from the FY2018 enacted level, while the Senate approved a $22 million increase over FY2018, to $375 million. \"The Committee definitively rejects the short-sighted proposal to terminate ARPA-E,\" according to the Senate Appropriations Committee report.\nThe enacted FY2019 appropriations measure increased ARPA-E funding by 3.6%, to $366 million. The conference report directed that DOE \"shall not use any appropriated funds to plan or execute the termination of ARPA-E.\"\n\n\t\tLow-Yield Nuclear Warhead\n\nDOE's FY2019 budget documents called for a low-yield version of the W76 LEP (Life Extension Program) nuclear warhead. The FY2019 budget justification notes that \"the 2018 Nuclear Posture Review states that the United States will modify a small quantity of existing SLBM [submarine-launched ballistic missile] warheads to provide a low-yield option in the near-term.\" This proposed warhead has been referred to as the W76-2.\nNuclear warhead development is conducted by the National Nuclear Security Administration (NNSA), an agency within DOE. The initial FY2019 budget request for NNSA did not request any funding specifically allocated to this modification but said, \"As the Nuclear Weapons Council translates policy into military requirements, the Administration will work with Congress for appropriate authorizations and appropriations to develop options that support the modification.\" The White House included $65 million for this modification in a budget amendment package submitted to Congress on April 13, 2018. This document stated that the amendment would \"authorize the production of low-yield ballistic missiles to replace higher-yield weapons currently deployed, maintaining the overall number of deployed U.S. ballistic missile warheads.\" It said a delay in the program past FY2019 \"would require a restart of the W76 production line, increase costs, and delay delivery to the Department of Defense.\" The House- and Senate-passed bills both included the requested funding for the low-yield warhead, as did the enacted FY2019 appropriations measure. For more information, see CRS Report R44442, Energy and Water Development Appropriations: Nuclear Weapons Activities , by Amy F. Woolf.\n\n\t\tSurplus Plutonium Disposition\n\nThe Mixed-Oxide (MOX) Fuel Fabrication Facility (MFFF), which would make fuel for nuclear reactors out of surplus weapons plutonium, has faced sharply escalating construction and operation cost estimates. Because of the rising costs and schedule delays, the Obama Administration proposed terminating MFFF in FY2015, FY2016, and FY2017 and pursuing alternative ways to dispose of surplus plutonium. However, Congress continued to appropriate construction funds for MFFF, located in South Carolina, including $335 million for FY2017. For FY2018, the Trump Administration also proposed to end the MFFF project, requesting $220 million to begin the termination process. The Trump Administration requested $59 million to begin a new Surplus Plutonium Disposition Project that would dilute surplus plutonium for disposal in a deep repository. The Obama Administration had also recommended the dilute-and-dispose option.\nThe National Defense Authorization Act for FY2018 ( P.L. 115-91 , \u00a73121) authorized DOE to pursue an alternative plutonium disposal option if its total costs were determined to be \"less than approximately half of the estimated remaining lifecycle cost of the mixed-oxide fuel program.\" The Consolidated Appropriations Act for FY2018 (\u00a7309) continued MFFF funding at $335 million but allowed DOE to pursue an alternative disposal method using the procedure in the defense authorization act. Energy Secretary Rick Perry sent a letter to Congress May 10, 2018, certifying that the cost-saving requirement for termination of MFFF would be met. However, South Carolina filed a lawsuit to prevent DOE from terminating MFFF construction, and a federal district court issued a preliminary injunction against DOE on June 7, 2018.\nFor FY2019, the House-passed Energy and Water Development appropriations bill included a similar provision to the FY2018 enacted appropriations measure, allowing DOE to terminate MFFF with a cost certification. The Senate version of the bill provided funding for halting MFFF, \"consistent with the budget request and the Secretary's waiver to terminate the project.\" The John S. McCain National Defense Authorization Act for Fiscal Year 2019 ( P.L. 115-232 ) continued the waiver authority established by the FY2018 defense authorization. The enacted FY2019 Energy and Water Development Appropriations Act provided $220 million, the same as the request, to begin shutting down the project. It did not include the $59 million requested for construction of an alternative disposition project but provided $25 million for design of the dilute and dispose option. The Joint Explanatory Statement by the appropriations conferees said the funding was consistent with the Defense Authorization language.\nSupporters of MFFF contend that the project is needed to satisfy an agreement with Russia on disposition of surplus weapons plutonium and promises to the State of South Carolina, where MFFF is located (at DOE's Savannah River Site). For more information, see CRS Report R43125, Mixed-Oxide Fuel Fabrication Plant and Plutonium Disposition: Management and Policy Issues , by Mark Holt and Mary Beth D. Nikitin.\n\n\t\tCleanup of Former Nuclear Sites\n\nDOE's Office of Environmental Management (EM) is responsible for environmental cleanup and waste management at the department's nuclear facilities. The total FY2019 appropriations request for EM activities was $6.601 billion, a decrease of $525 million (-7.4%) from the FY2018 enacted appropriation. The three EM appropriations accounts are Defense Environmental Cleanup, which the Administration proposed to reduce by $358 million (-6.0%) from FY2018; Non-Defense Environmental Cleanup, down $80 million (-26.8%); and the Uranium Enrichment Decontamination and Decommissioning (D&D) Fund, down $87 million (-10.4%). The House voted to provide $6.869 billion for EM, a decrease of $257 million (-3.6%). The Senate approved $7.182 for EM, an increase of $56 million (0.8%). The enacted FY2019 appropriations measure included $7.175 billion for EM, a 0.7% increase over the FY2018 funding level.\nAlthough the Administration's FY2019 request generally called for continued funding for ongoing cleanup and waste management projects across the complex of sites (with some decreases for specific projects), DOE noted that it may seek to negotiate with federal and state regulators to modify the \"milestones\" for certain projects. Milestones establish schedules for the completion of specific work under enforceable compliance agreements. Renegotiation of milestones was also called for in the Trump Administration's FY2018 budget request. Previous Administrations have also pursued such a strategy, contending that some established milestones had become infeasible to attain due to resource constraints or technical challenges.\n\n\tBill Status and Recent Funding History\n\n Table 1 indicates the steps taken during consideration of FY2019 Energy and Water Development appropriations. (For more details, see the CRS Appropriations Status Table at http:\/\/www.crs.gov\/AppropriationsStatusTable\/Index .)\n Table 2 includes budget totals for energy and water development appropriations enacted for FY2010 through FY2019.\n\n\tDescription of Major Energy and Water Programs\n\nThe annual Energy and Water Development appropriations bill includes four titles: Title I\u2014Corps of Engineers\u2014Civil; Title II\u2014Department of the Interior (Central Utah Project and Bureau of Reclamation); Title III\u2014Department of Energy; and Title IV\u2014Independent Agencies, as shown in Table 3 . Major programs in the bill are described in this section in the approximate order they appear in the bill. Previous appropriations and recommendations for FY2019 are shown in the accompanying tables, and additional details about many of these programs are provided in separate CRS reports as indicated. For a discussion of current funding issues related to these programs, see \" Funding Issues and Initiatives ,\" above.\n\n\t\tAgency Budget Justifications\n\nFY2019 budget justifications for the largest agencies funded by the annual Energy and Water Development appropriations bill can be found on the following websites:\nTitle I, Army Corps of Engineers, Civil Works, http:\/\/www.usace.army.mil\/Missions\/CivilWorks\/Budget.aspx Title II Bureau of Reclamation, https:\/\/www.usbr.gov\/budget\/ Central Utah Project, https:\/\/www.doi.gov\/sites\/doi.gov\/files\/uploads\/fy2019_cupca_budget_justification.pdf Title III, Department of Energy, https:\/\/www.energy.gov\/cfo\/downloads\/fy-2019-budget-justification Title IV, Independent Agencies Nuclear Regulatory Commission, https:\/\/www.nrc.gov\/docs\/ML1802\/ML18023B460.pdf Defense Nuclear Facilities Safety Board, https:\/\/www.dnfsb.gov\/about\/congressional-budget-requests Nuclear Waste Technical Review Board, http:\/\/www.nwtrb.gov\/about-us\/plans \n\n\t\tArmy Corps of Engineers\n\nThe U.S. Army Corps of Engineers is an agency in the Department of Defense with both military and civilian responsibilities. Under its civil works program, which is funded by the Energy and Water appropriations bill, the Corps plans, builds, operates, and in some cases maintains water resources facilities for coastal and inland navigation, riverine and coastal flood risk reduction, and aquatic ecosystem restoration. In recent decades, Congress has generally authorized Corps studies, construction projects, and other activities in omnibus water authorization bills, typically titled Water Resources Development Acts (WRDA), prior to funding them through appropriations legislation. Congress enacted omnibus water resources authorization acts in June 2014, the Water Resources Reform and Development Act of 2014 (WRRDA, P.L. 113-121 ), and in December 2016, the Water Resources Development Act of 2016 (Title I of P.L. 114-322 , the Water Infrastructure Improvements for the Nation Act [WIIN]). These acts authorized new Corps projects and altered numerous Corps policies and procedures.\nUnlike highways and municipal water infrastructure programs, federal funds for the Corps are not distributed to states or projects based on a formula or delivered via competitive grants. Instead, the Corps generally is directly involved in the planning, design, and construction of projects that are cost-shared with nonfederal project sponsors.\nIn addition to site-specific project funding included in the President's annual budget request for the Corps, Congress has identified many additional Corps projects to receive funding during the discretionary appropriations process or adjusted the funding levels for the projects identified in the President's request. In the 112 th Congress, site-specific project line items added by Congress (i.e., earmarks) became subject to House and Senate earmark moratorium policies. As a result, Congress generally has not added funding at the project level since FY2010. In lieu of the traditional project-based increases, Congress has included \"additional funding\" for select categories of Corps projects and provided direction and limitations on the use of these funds. For more information, see CRS In Focus IF10864, Army Corps of Engineers: FY2019 Appropriations , by Nicole T. Carter. Previous appropriations and recommendations for FY2019 are shown in Table 4 .\n\n\t\tBureau of Reclamation and CUP\n\nMost of the large dams and water diversion structures in the West were built by, or with the assistance of, the Bureau of Reclamation. While the Corps of Engineers built hundreds of flood control and navigation projects, Reclamation's original mission was to develop water supplies, primarily for irrigation to reclaim arid lands in the West for farming and ranching. Reclamation has evolved into an agency that assists in meeting the water demands in the West while working to protect the environment and the public's investment in Reclamation infrastructure. The agency's municipal and industrial water deliveries have more than doubled since 1970.\nToday, Reclamation manages hundreds of dams and diversion projects, including more than 300 storage reservoirs, in 17 western states. These projects provide water to approximately 10 million acres of farmland and a population of 31 million. Reclamation is the largest wholesale supplier of water in the 17 western states and the second-largest hydroelectric power producer in the nation. Reclamation facilities also provide substantial flood control, recreation, and fish and wildlife benefits. Operations of Reclamation facilities are often controversial, particularly for their effect on fish and wildlife species and because of conflicts among competing water users during drought conditions.\nAs with the Corps of Engineers, the Reclamation budget is made up largely of individual project funding lines, rather than general programs that would not be covered by congressional earmark requirements. Therefore, as with the Corps, these Reclamation projects have often been subject to earmark disclosure rules. The current moratorium on earmarks restricts congressional steering of money directly toward specific Reclamation projects.\nReclamation's single largest account, Water and Related Resources, encompasses the agency's traditional programs and projects, including construction, operations and maintenance, dam safety, and ecosystem restoration, among others. Reclamation also typically requests funds in a number of smaller accounts, and has proposed additional accounts in recent years.\nImplementation and oversight of the Central Utah Project (CUP), also funded by Title II, is conducted by a separate office within the Department of the Interior. \nFor more information, see CRS In Focus IF10841, Bureau of Reclamation: FY2019 Appropriations , by Charles V. Stern. Previous appropriations and recommendations for FY2018 are shown in Table 5 .\n\n\t\tDepartment of Energy\n\nThe Energy and Water Development bill has funded all DOE programs since FY2005. Major DOE activities include research and development (R&D) on renewable energy, energy efficiency, nuclear power, and fossil energy; the Strategic Petroleum Reserve; energy statistics; general science; environmental cleanup; and nuclear weapons and nonproliferation programs. Table 6 provides the recent funding history for DOE programs, which are briefly described further below. \n\n\t\t\tEnergy Efficiency and Renewable Energy\n\nDOE's Office of Energy Efficiency and Renewable Energy (EERE) conducts research and development on transportation energy technology, energy efficiency in buildings and manufacturing processes, and the production of solar, wind, geothermal, and other renewable energy. EERE also administers formula grants to states for making energy efficiency improvements to low-income households and for state energy planning.\nThe Sustainable Transportation program area includes electric vehicles, vehicle efficiency, and alternative fuels. DOE's electric vehicle program aims to reduce the cost of electric vehicle batteries \"by more than half to less than $100\/kWh\" (kilowatt-hour) by 2028. Additional 2028 targets include increasing the driving range to 300 miles and decreasing charge time to less than 15 minutes. The fuel cell program targets a cost of $40 per kilowatt (kw) and a durability of 5,000 hours (equivalent to 150,000 miles) for automotive systems by 2025. For hydrogen production, the target is to bring the production cost below $2 per gasoline gallon-equivalent (gge)\u2014less than $4\/gge with delivery\u2014by 2020. Bioenergy goals include the development of \"drop-in\" fuels\u2014fuels that would be largely compatible with existing energy infrastructure and vehicles. \nRenewable power programs focus on electricity generation from solar, wind, water, and geothermal sources. DOE's SunShot Initiative is aimed at making solar energy a low-cost electricity source, with a goal of achieving costs of 3 cents per kwh for unsubsidized, utility-scale photovoltaics (PV) by 2030. For land-based windfarms, there is a cost target of 5.2 cents\/kwh by 2020. For offshore wind settings, the target is 14.9 cents\/kwh by 2020. The Water Power program has cost targets for several technologies, including 27 cents\/kwh by 2030 for marine and hydrokinetic technologies. The geothermal program aims to lower the risk of resource exploration and cut power production costs to 6 cents\/kwh for newly developed technologies by 2030.\nIn the energy efficiency program area, the advanced manufacturing program has a goal to improve manufacturing energy intensity by 17.5% by 2022 compared to a 2015 average technology-specific baseline. The building technologies program has a goal of reducing building energy use intensity by 30% by 2030. According to EERE, the program is \"paving the way for high performing buildings that could use 50-70% less energy than typical buildings.\"\nFor more details, see CRS Report R44980, DOE's Office of Energy Efficiency and Renewable Energy (EERE): Appropriations Status , by Corrie E. Clark.\n\n\t\t\tElectricity Delivery, Cybersecurity, Energy Security, and Energy Reliability\n\nOn February 14, 2018, Energy Secretary Perry created the Office of Cybersecurity, Energy Security, and Emergency Response (CESER). CESER was created from programs that were previously part of the Office of Electricity Delivery and Energy Reliability (OE). The programs that were not moved into CESER became part of the DOE Office of Electricity (OE).\nUnder the reorganization, OE is funded under the Electricity Delivery appropriations account. OE's mission is to support more economically competitive, environmentally responsible, secure, and resilient U.S. energy infrastructure. Funding for Electricity Delivery, which totaled $156 million for FY2019, includes resilient distribution systems, energy storage, and transformer resilience and advanced concepts. OE activities in those areas include research and development, demonstration projects, partnerships, facilitation, and modeling and analytics. The office also includes the DOE power marketing administrations, which are funded from separate appropriations accounts.\nCESER is the federal government's lead entity for energy sector-specific responses to energy security emergencies\u2014whether caused by physical infrastructure problems or by cybersecurity issues.\nDOE's Multiyear Plan for Energy Sector Cybersecurity describes the department's strategy to \"strengthen today's energy delivery systems by working with our partners to address growing threats and promote continuous improvement, and develop game-changing solutions that will create inherently secure, resilient, and self-defending energy systems for tomorrow.\" DOE has established three goals as part of the strategy:\nstrengthen energy sector cybersecurity preparedness; coordinate cyber incident response and recovery; and accelerate game-changing [research, development, and demonstration] of resilient energy delivery systems.\nFor further information, see CRS In Focus IF10874, DOE Office of Electricity Delivery and Energy Reliability: Organization and FY2019 Budget Request , by Corrie E. Clark, and CRS Report R44357, DOE's Office of Electricity Delivery and Energy Reliability (OE): A Primer, with Appropriations for FY2017 , by Corrie E. Clark.\n\n\t\t\tNuclear Energy\n\nDOE's Office of Nuclear Energy (NE) \"focuses on three major mission areas: the nation's existing nuclear fleet, the development of advanced nuclear reactor concepts, and fuel cycle technologies,\" according to DOE's FY2019 budget justification. It calls nuclear energy \"a key element of United States energy independence, energy dominance, electricity grid resiliency, national security, and clean baseload power.\"\nThe Reactor Concepts program area includes research on advanced reactors, including advanced small modular reactors, and research to enhance the \"sustainability\" of existing commercial light water reactors. Advanced reactor research focuses on \"Generation IV\" reactors, as opposed to the existing fleet of commercial light water reactors, which are generally classified as generations II and III. R&D under this program focuses on advanced coolants, fuels, materials, and other technology areas that could apply to a variety of advanced reactors. To help develop those technologies, the Reactor Concepts program is developing a Versatile Test Reactor that would allow fuels and materials to be tested in a fast neutron environment (in which neutrons would not be slowed by water, graphite, or other \"moderators\"). The program also is supporting NRC efforts to develop a new, \"technology neutral\" licensing framework for advanced reactors. Research on extending the life of existing commercial light water reactors beyond 60 years, the maximum operating period currently licensed by NRC, is being conducted by this program with industry cost-sharing. This program is also conducting research to understand the Fukushima disaster and to develop accident prevention and mitigation measures.\nNE completed a program in FY2017 that provided design and licensing funding for small modular reactors (SMRs), which range from about 40 to 300 megawatts of electrical capacity. Support under this subprogram was provided to the NuScale Power SMR, which has a generating capacity of 60 megawatts, and for licensing two potential SMR sites. Under the company's current concept, up to 12 reactors would be housed in a single pool of water, which would provide emergency cooling. A design certification application for the NuScale SMR was fully submitted to NRC on January 25, 2017. Funding for first-of-a-kind (FOAK) engineering and other support for next-generation reactors, including SMRs, has continued under the Advanced Reactor Technologies subprogram. DOE awarded NuScale a $40 million FOAK matching grant on April 27, 2018. \nThe Fuel Cycle Research and Development program conducts generic research on nuclear waste management and disposal. One of the program's primary activities is the development of technologies to separate the radioactive constituents of spent fuel for reuse or to be bonded into stable waste forms. Other major research areas in the Fuel Cycle R&D program include the development of accident-tolerant fuels for existing commercial reactors, evaluation of fuel cycle options, and development of improved technologies to prevent diversion of nuclear materials for weapons. The program is also developing sources of high-assay low enriched uranium (HALEU), in which uranium is enriched to between 5% and 20% in the fissile isotope U-235, for potential use in advanced reactors.\n\n\t\t\tFossil Energy Research and Development\n\nMuch of DOE's Fossil Energy R&D Program focuses on carbon capture and storage for power plants fueled by coal and natural gas. Major activities include the following:\nCarbon Capture subprogram for separating CO 2 in both precombustion and postcombustion systems; Carbon Storage subprogram on long-term geologic storage of CO 2 , including storage site characterization, brine extraction storage tests, and postinjection monitoring technologies; Advanced Energy Systems subprogram on advanced fossil energy systems integrated with CO 2 capture and sequestration; and Cross-Cutting Research and Analysis on innovative systems.\nFor more information, see CRS In Focus IF10589, FY2019 Funding for CCS and Other DOE Fossil Energy R&D , by Peter Folger; CRS In Focus IF10589, FY2019 Funding for CCS and Other DOE Fossil Energy R&D , by Peter Folger; and CRS Report R44472, Funding for Carbon Capture and Sequestration (CCS) at DOE: In Brief , by Peter Folger. \n\n\t\t\tStrategic Petroleum Reserve\n\nThe Strategic Petroleum Reserve (SPR), authorized by the Energy Policy and Conservation Act ( P.L. 94-163 ) in 1975, consists of caverns built within naturally occurring salt domes in Louisiana and Texas. The SPR provides strategic and economic security against foreign and domestic disruptions in U.S. oil supplies via an emergency stockpile of crude oil. The program fulfills U.S. obligations under the International Energy Program, which avails the United States of International Energy Agency (IEA) assistance through its coordinated energy emergency response plans, and provides a deterrent against energy supply disruptions. DOE has been conducting a major maintenance program to address aging infrastructure and a deferred maintenance backlog at SPR facilities.\nBy early 2010, the SPR's capacity reached 727 million barrels. The federal government has not purchased oil for the SPR since 1994. Beginning in 2000, additions to the SPR were made with royalty-in-kind (RIK) oil acquired by DOE in lieu of cash royalties paid on production from federal offshore leases. In September 2009, the Secretary of the Interior announced a transitional phasing out of the RIK Program. \nIn the summer of 2011, President Obama ordered an SPR sale in coordination with an International Energy Administration sale under treaty obligation because of Libya's supply curtailment. The U.S. sale of 30.6 million barrels reduced the SPR inventory to 695.9 million barrels.\nIn March 2014, DOE's Office of Petroleum Reserves conducted a test sale that delivered 5.0 million barrels of crude oil over a 47-day period that netted $468.6 million in cash receipts to the U.S. government (SPR Petroleum Account). \nIn 2015, DOE purchased 4.2 million barrels of crude oil for the SPR using proceeds from the 2014 test sale. According to the FY2019 DOE budget justification, the SPR's drawdown capacity in FY2019 will be 4.13 million barrels per day (mbd), down from 4.4 mbd in FY2018. Currently, the SPR contains about 660 million barrels.\nThe Bipartisan Budget Act of 2015 ( P.L. 114-74 ) authorizes the sale of 58 million barrels of oil from the SPR. The authorized sales total 5 million barrels per fiscal year for 2018-2021, 8 million barrels in FY2022, and 10 million barrels per year in FY2023-FY2025. In addition, the Fixing America's Surface Transportation Act ( P.L. 114-94 ) authorizes the sale of 66 million barrels of oil from the SPR. The authorized sales would total 16 million barrels in FY2023 and 25 million barrels in each of fiscal years 2024 and 2025.\nFor more information, see CRS Report R42460, The Strategic Petroleum Reserve: Authorization, Operation, and Drawdown Policy , by Robert Pirog, and CRS In Focus IF10869, Reconsidering the Strategic Petroleum Reserve , by Robert Pirog. \n\n\t\t\tScience and ARPA-E\n\nThe DOE Office of Science conducts basic research in six program areas: advanced scientific computing research, basic energy sciences, biological and environmental research, fusion energy sciences, high-energy physics, and nuclear physics. According to DOE's FY2019 budget justification, the Office of Science \"is the Nation's largest Federal sponsor of basic research in the physical sciences and the lead Federal agency supporting fundamental scientific research for our Nation's energy future.\"\nDOE's Advanced Scientific Computing Research (ASCR) program focuses on developing and maintaining computing and networking capabilities for science and research in applied mathematics, computer science, and advanced networking. The program plays a key role in the DOE-wide effort to advance the development of exascale computing, which seeks to build a computer that can solve scientific problems 1,000 times faster than today's best machines. DOE has asserted that the department is on a path to have a capable exascale machine by the early 2020s.\nBasic Energy Sciences (BES), the largest program area in the Office of Science, focuses on understanding, predicting, and ultimately controlling matter and energy at the electronic, atomic, and molecular level. The program supports research in disciplines such as condensed matter and materials physics, chemistry, and geosciences. BES also provides funding for scientific user facilities (e.g., the National Synchrotron Light Source II, and the Linac Coherent Light Source-II), and certain DOE research centers and hubs (e.g., Energy Frontier Research Centers, as well as the Batteries and Energy Storage and Fuels from Sunlight Innovation Hubs).\nBiological and Environmental Research (BER) seeks a predictive understanding of complex biological, climate, and environmental systems across a continuum from the small scale (e.g., genomic research) to the large (e.g., Earth systems and climate). Within BER, Biological Systems Science focuses on plant and microbial systems, while Biological and Environmental Research supports climate-relevant atmospheric and ecosystem modeling and research. BER facilities and centers include four Bioenergy Research Centers and the Environmental Molecular Science Laboratory at Pacific Northwest National Laboratory. \nFusion Energy Sciences (FES) seeks to increase understanding of the behavior of matter at very high temperatures and to establish the science needed to develop a fusion energy source. FES provides funding for the International Thermonuclear Experimental Reactor (ITER) project, a multinational effort to design and build an experimental fusion reactor. According to DOE, ITER \"aims to provide access to burning plasmas with fusion power output approaching reactor levels of hundreds of megawatts, for hundreds of seconds.\" However, many U.S. analysts have expressed concern about ITER's cost, schedule, and management, as well as the budgetary impact on domestic fusion research.\nThe High Energy Physics (HEP) program conducts research on the fundamental constituents of matter and energy, including studies of dark energy and the search for dark matter. Nuclear Physics supports research on the nature of matter, including its basic constituents and their interactions. A major project in the Nuclear Physics program is the construction of the Facility for Rare Isotope Beams at Michigan State University. \nA separate DOE office, the Advanced Research Projects Agency\u2014Energy (ARPA-E), was authorized by the America COMPETES Act ( P.L. 110-69 ) to support transformational energy technology research projects. DOE budget documents describe ARPA-E's mission as overcoming long-term, high-risk technological barriers to the development of energy technologies. \nFor more details, see CRS Report R45150, Federal Research and Development (R&D) Funding: FY2019 , coordinated by John F. Sargent Jr.\n\n\t\t\tLoan Guarantees and Direct Loans\n\nDOE's Loan Programs Office provides loan guarantees for projects that deploy specified energy technologies, as authorized by Title 17 of the Energy Policy Act of 2005 (EPACT05, P.L. 109-58 ), and direct loans for advanced vehicle manufacturing technologies. Section 1703 of the act authorizes loan guarantees for advanced energy technologies that reduce greenhouse gas emissions, and Section 1705 established a temporary program for renewable energy and energy efficiency projects.\nTitle 17 allows DOE to provide loan guarantees for up to 80% of construction costs for eligible energy projects. Successful applicants must pay an up-front fee, or \"subsidy cost,\" to cover potential losses under the loan guarantee program. Under the loan guarantee agreements, the federal government would repay all covered loans if the borrower defaulted. Such guarantees would reduce the risk to lenders and allow them to provide financing at below-market interest rates. The following is a summary of loan guarantee amounts that have been authorized (loan guarantee ceilings) for various technologies:\n$8.3 billion for nonnuclear technologies under Section 1703; $2.0 billion for unspecified projects from FY2007 under Section 1703; $18.5 billion for nuclear power plants ($8.3 billion committed); $4 billion for loan guarantees for uranium enrichment plants; $1.18 billion for renewable energy and energy efficiency projects under Section 1703, in addition to other ceiling amounts, which can include applications that were pending under Section 1705 before it expired; and In addition to the loan guarantee ceilings above, an appropriation of $161 million was provided for subsidy costs for renewable energy and energy efficiency loan guarantees under Section 1703. If the subsidy costs averaged 10% of the loan guarantees, this funding could leverage loan guarantees totaling about $1.6 billion.\nThe only loan guarantees under Section 1703 were $8.3 billion in guarantees provided to the consortium building two new reactors at the Vogtle plant in Georgia. DOE conditionally committed an additional $3.7 billion in loan guarantees for the Vogtle project on September 29, 2017. Another nuclear loan guarantee is being sought by NuScale Power to build a small modular reactor in Idaho.\n\n\t\t\tNuclear Weapons Activities\n\nIn the absence of explosive nuclear weapons testing, the United States has adopted a science-based program to maintain and sustain confidence in the reliability of the U.S. nuclear stockpile. Congress established the science-based Stockpile Stewardship Program in the National Defense Authorization Act for Fiscal Year 1994 ( P.L. 103-160 ). The goal of the program, as amended by the National Defense Authorization Act for Fiscal Year 2010 ( P.L. 111-84 , \u00a73111), is to ensure \"that the nuclear weapons stockpile is safe, secure, and reliable without the use of underground nuclear weapons testing.\" The program is operated by the National Nuclear Security Administration (NNSA), a semiautonomous agency within DOE that Congress established in the National Defense Authorization Act for Fiscal Year 2000 ( P.L. 106-65 , Title XXXII). NNSA implements the Stockpile Stewardship Program through the activities funded by the Weapons Activities account in the NNSA budget.\nMost of NNSA's weapons activities take place at the nuclear weapons complex, which consists of three laboratories (Los Alamos National Laboratory, NM; Lawrence Livermore National Laboratory, CA; and Sandia National Laboratories, NM and CA); four production sites (Kansas City National Security Campus, MO; Pantex Plant, TX; Savannah River Site, SC; and Y-12 National Security Complex, TN); and the Nevada National Security Site (formerly Nevada Test Site). NNSA manages and sets policy for the weapons complex; contractors to NNSA operate the eight sites. Radiological activities at these sites are subject to oversight and recommendations by the independent Defense Nuclear Facilities Safety Board, funded by Title IV of the annual Energy and Water Development appropriations bill.\nThe President's budget requested $11.017 billion for the Weapons Activities account in FY2019. The House approved $11.224 billion, while the Senate recommended $10.850 billion, and the enacted appropriation was $11.100 billion. All would provide increases from the FY2018 enacted level for Weapons Activities of $10.642 billion.\nThere are three major program areas in the Weapons Activities account.\nDirected Stockpile Work involves work directly on nuclear weapons in the stockpile, such as monitoring their condition; maintaining them through repairs, refurbishment, life extension, and modifications; conducting R&D in support of specific warheads; and dismantlement. The number of warheads has fallen sharply since the end of the Cold War, and continues to decline. As a result, a major activity of Directed Stockpile Work is interim storage of warheads to be dismantled; dismantlement; and disposition (i.e., storing or eliminating warhead components and materials). \nResearch, Development, Test, and Evaluation (RDT&E) includes five programs that focus on \"efforts to develop and maintain critical capabilities, tools, and processes needed to support science based stockpile stewardship, refurbishment, and continued certification of the stockpile over the long-term in the absence of underground nuclear testing.\" This area includes operation of some large experimental facilities, such as the National Ignition Facility at Lawrence Livermore National Laboratory. \nInfrastructure and Operations has as its main funding elements material recycle and recovery, recapitalization of facilities, and construction of facilities. The latter included two controversial and expensive projects: the Uranium Processing Facility (UPF) at the Y-12 National Security Complex (TN) and the Chemistry and Metallurgy Research Replacement (CMRR) Project, which deals with plutonium, at Los Alamos National Laboratory (NM).\nNuclear Weapons Activities also has several smaller programs, including the following:\nSecure Transportation Asset, providing for safe and secure transport of nuclear weapons, components, and materials; Defense Nuclear Security , providing operations, maintenance, and construction funds for protective forces, physical security systems, personnel security, and related activities; Information Technology and Cybersecurity , whose elements include cybersecurity, enterprise secure computing, and Federal Unclassified Information Technology; and Legacy Contractor Pensions , providing supplemental funds for pensions for retirees from Los Alamos and Lawrence Livermore National Laboratories who began employment when the University of California was the contractor for those labs.\nFor more information, see CRS Report R44442, Energy and Water Development Appropriations: Nuclear Weapons Activities , by Amy F. Woolf, and CRS Report R45306, The U.S. Nuclear Weapons Complex: Overview of Department of Energy Sites , by Amy F. Woolf and James D. Werner. \n\n\t\t\tDefense Nuclear Nonproliferation\n\nDOE's nonproliferation and national security programs provide technical capabilities to support U.S. efforts to prevent, detect, and counter the spread of nuclear weapons worldwide. These nonproliferation and national security programs are administered by NNSA's Office of Defense Nuclear Nonproliferation.\nGlobal Materials Security has three major program elements. International Nuclear Security focuses on increasing the security of vulnerable stockpiles of nuclear material in other countries. Radiological Security promotes the worldwide reduction and security of radioactive sources, including the removal of surplus sources and substitution of technologies that do not use radioactive materials. Nuclear Smuggling Detection and Deterrence works to improve the capability of other countries to halt illicit trafficking of nuclear materials.\nMaterials Management and Minimization conducts activities to minimize and, where possible, eliminate stockpiles of weapons-useable material around the world. Major activities include conversion of reactors that use highly enriched uranium (useable for weapons) to low-enriched uranium, removal and consolidation of nuclear material stockpiles, and disposition of excess nuclear materials.\nNonproliferation and Arms Control works to \"control the spread of nuclear material, equipment, technology, and expertise\" and pursue strategies for arms control and verification, according to the FY2019 justification. This program conducts reviews of nuclear export applications and technology transfer authorizations, implements treaty obligations, and analyzes nonproliferation policies and proposals.\nOther programs under Defense Nuclear Nonproliferation include research and development and construction, which advances nuclear detection and nuclear forensics technologies. The Nonproliferation Construction program consists of the Mixed Oxide (MOX) Fuel Fabrication Facility (described under \" Surplus Plutonium Disposition \" above), which both the Obama and Trump Administrations have proposed to terminate. Nuclear Counterterrorism and Incident Response provides \"interagency policy, contingency planning, training, and capacity building\" to counter nuclear terrorism and strengthen incident response capabilities, according to the FY2019 budget justification.\n\n\t\t\tCleanup of Former Nuclear Weapons Production and Research Sites\n\nThe development and production of nuclear weapons for national defense purposes during half a century since the beginning of the Manhattan Project resulted in a waste and contamination legacy that continues to present substantial challenges today. In 1989, DOE established the Office of Environmental Management primarily to consolidate its responsibilities for the cleanup of former nuclear weapons production sites that had been administered under multiple offices.\nDOE's nuclear cleanup efforts are broad in scope and include the disposal of large quantities of radioactive and other hazardous wastes generated over decades; management and disposal of surplus nuclear materials; remediation of extensive contamination in soil and groundwater; decontamination and decommissioning of excess buildings and facilities; and safeguarding, securing, and maintaining facilities while cleanup is underway. The Office of Environmental Management also is responsible for the cleanup of DOE sites that were involved in civilian nuclear energy research, which also generated wastes and contamination. These research sites add a nondefense component to the office's mission, albeit smaller in terms of the scope of their cleanup and associated funding.\nDOE has identified more than 100 \"geographic\" sites in over 30 states that historically were involved in the production of nuclear weapons and nuclear energy research for civilian purposes. The geographic scope of these sites is substantial, collectively encompassing a land area of approximately 2 million acres. Cleanup remedies are in place and operational at the majority of these sites. The responsibility for the long-term stewardship of these sites has been transferred to the Office of Legacy Management and other offices within DOE for the operation and maintenance of cleanup remedies and monitoring. Some of the smaller sites for which DOE initially was responsible were transferred to the Army Corps of Engineers in 1997 under the Formerly Utilized Sites Remedial Action Program (FUSRAP). Once the Corps completes the cleanup of a FUSRAP site, it is transferred back to DOE for long-term stewardship under the Office of Legacy Management.\nThree appropriations accounts fund the Office of Environmental Management. The Defense Environmental Cleanup account is the largest in terms of funding, and it finances the cleanup of former nuclear weapons production sites. The Non-Defense Environmental Cleanup account funds the cleanup of federal nuclear energy research sites. Title XI of the Energy Policy Act of 1992 ( P.L. 102-486 ) established the Uranium Enrichment Decontamination and Decommissioning Fund to pay for the cleanup of three federal facilities that enriched uranium for national defense and civilian purposes. Title X of P.L. 102-486 also authorized the reimbursement of uranium and thorium licensees for their costs of cleaning up contamination at sites that processed nuclear materials for national defense purposes at these federal facilities. The three federal uranium enrichment facilities are located near Paducah, KY; Piketon, OH (Portsmouth plant); and Oak Ridge, TN.\nThe adequacy of funding for the Office of Environmental Management to attain cleanup milestones across the entire site inventory has been a recurring issue. Cleanup milestones are enforceable measures incorporated into compliance agreements negotiated among DOE, the Environmental Protection Agency, and the states. These milestones establish time frames for the completion of specific actions to satisfy applicable requirements at individual sites.\n\n\t\t\tPower Marketing Administrations\n\nDOE's four Power Marketing Administrations were established to sell the power generated by the dams operated by the Bureau of Reclamation and the Army Corps of Engineers. Preference in the sale of power is given to publicly owned and cooperatively owned utilities. The PMAs operate in 34 states; their assets consist primarily of transmission infrastructure in the form of more than 33,000 miles of high voltage transmission lines and 587 substations. PMA customers are responsible for repaying all power program expenses, plus the interest on capital projects. Since FY2011, power revenues associated with the PMAs have been classified as discretionary offsetting receipts (i.e., receipts that are available for spending by the PMAs), thus the agencies are sometimes noted as having a \"net-zero\" spending authority. Only the capital expenses of WAPA and SWPA require appropriations from Congress.\n\n\tIndependent Agencies\n\nIndependent agencies that receive funding in Title IV of the Energy and Water Development bill include the Nuclear Regulatory Commission (NRC), the Appalachian Regional Commission (ARC), and the Defense Nuclear Facilities Safety Board. NRC is by far the largest of the independent agencies, with a total budget of more than $900 million. However, as noted in the description of NRC below, about 90% of NRC's budget is offset by fees, so that the agency's net appropriation is less than half of the total funding in Title IV. The recent appropriations history for all the Title IV agencies is shown in Table 7 .\n\n\t\tNuclear Regulatory Commission\n\nNRC is an independent agency that establishes and enforces safety and security standards for nuclear power plants and users of nuclear materials. Major appropriations categories for NRC are shown in Table 8 . NRC is required by law to charge fees to nuclear reactors and other regulated entities that are equal to about 90% of its total budget, excluding specified items. As a result, NRC's net appropriation is typically about 10% of its total funding level, depending on the activities that are excluded from fee recovery. Excluded items in NRC's FY2019 enacted appropriation are prior-year balances, development of advanced reactor regulations, and international activities. \n\n\tCongressional Hearings\n\nThe following hearings were held by the Energy and Water Development subcommittees of the House and Senate Appropriations Committees on the FY2019 budget request. Testimony and opening statements are posted on most of the web pages cited for each hearing, along with webcasts in many cases.\n\n\t\tHouse\n\nCorps of Engineers (Civil Works) and the Bureau of Reclamation , March 14, 2018, https:\/\/appropriations.house.gov\/calendararchive\/eventsingle.aspx?EventID=395119 . Department of Energy , March 15, 2018, https:\/\/appropriations.house.gov\/calendararchive\/eventsingle.aspx?EventID=395124 . National Nuclear Security Administration , March 20, 2018, https:\/\/appropriations.house.gov\/calendararchive\/eventsingle.aspx?EventID=395134 .\n\n\t\tSenate\n\nDepartment of Energy and National Nuclear Security Administration, April 11, 2018, https:\/\/www.appropriations.senate.gov\/hearings\/review-of-the-dept-of-energy-and-nnsa-budget-requests-for-fy2019 . U.S. Army Corps of Engineers and Bureau of Reclamation , April 18, https:\/\/www.appropriations.senate.gov\/hearings\/review-of-the-fy2019-budget-request-for-the-us-army-corps-of-engineers-and-bureau-of-reclamation . Nuclear Regulatory Commission , April 25, 2018, https:\/\/www.appropriations.senate.gov\/hearings\/review-of-the-fy2019-budget-request-for-the-us-nuclear-regulatory-commission .","output":"The Energy and Water Development appropriations bill provides funding for civil works projects of the Army Corps of Engineers (Corps); the Department of the Interior's Bureau of Reclamation (Reclamation) and Central Utah Project (CUP); the Department of Energy (DOE); the Nuclear Regulatory Commission (NRC); and several other independent agencies. DOE typically accounts for about 80% of the bill's total funding.\nPresident Trump submitted his FY2019 budget proposal to Congress on February 12, 2018. The President's budget requests for agencies included in the Energy and Water Development appropriations bill totaled $36.341 billion\u2014$6.871 billion (15.9%) below the FY2018 appropriation. A $375 million increase (3.5%) was proposed for DOE nuclear weapons activities. In contrast, the two versions of the FY2019 Energy and Water Development appropriations bill passed by the House and Senate (Division A of H.R. 5895, H.Rept. 115-697, S.Rept. 115-258) provided for total appropriations above the FY2018 level. The enacted FY2019 Energy and Water Development Appropriations Act, which was signed into law September 21, 2018 (Division A of P.L. 115-244), increased total funding to $44.660 billion (up 3.3%). FY2018 Energy and Water Development funding was included in the Consolidated Appropriations Act, 2018 (P.L. 115-141).\nMajor Energy and Water Development funding issues for FY2019 include the following:\nWater Agency Funding Reductions. The Trump Administration requested reductions of 29.9% for the Corps and 28.6% for Reclamation for FY2019. Those cuts were largely not followed by the House and Senate or the enacted FY2019 appropriations measure (P.L. 115-244). Termination of Energy Efficiency Grants. DOE's Weatherization Assistance Program and State Energy Program would have been terminated under the FY2019 budget request. Congress did not eliminate the grants for FY2018 and the proposed cuts were not included in the FY2019 House and Senate bills or the enacted appropriation. Reductions in Energy Research and Development. Under the FY2019 budget request, DOE research and development appropriations would have been reduced for energy efficiency and renewable energy (EERE) by 65.5%, nuclear energy by 37.2%, and fossil energy by 30.9%. The House and Senate bills largely did not include the proposed reductions. P.L. 115-244 increased R&D funding for fossil energy by 1.8% from the FY2018 level, energy efficiency and renewable energy by 2.5%, and nuclear energy by 10.0%. Nuclear Waste Repository. The Administration's budget request would have provided new funding for the first time since FY2010 for a proposed nuclear waste repository at Yucca Mountain, NV. DOE would have received $110 million to seek an NRC license for the repository, and NRC was to receive $47.7 million to consider DOE's application. DOE would also have received $10 million to develop interim nuclear waste storage facilities. The House bill included an additional $100 million for DOE above the request for Yucca Mountain licensing. The Senate bill provided no Yucca Mountain funds, nor did the enacted FY2019 appropriations measure. A similar Administration funding request for FY2018 also was not enacted. Elimination of Advanced Research Projects Agency\u2014Energy (ARPA-E). The Trump Administration proposed to eliminate funds for new research projects by ARPA-E in FY2019, and called for terminating the program after currently funded projects were completed. The House approved an 8.0% cut and the Senate voted for a 6.1% increase. The enacted FY2019 appropriations measure boosted ARPA-E funding by 3.6%. A similar proposal to terminate ARPA-E in FY2018 was also not enacted. Low-Yield Warhead. DOE's FY2019 budget documents proposed a low-yield version of the W76 LEP nuclear warhead. DOE's initial FY2019 budget request did not include any funding specifically allocated to this modification, but the White House requested $65 million for it in a budget amendment package submitted to Congress on April 13, 2018. The House- and Senate-passed bills both included the requested funding for the low-yield warhead, as does the enacted FY2019 appropriations measure. Plutonium Disposition Plant Termination. The Administration proposed in FY2018 and FY2019 to terminate construction of the Mixed-Oxide Fuel Fabrication Facility (MFFF), which would make fuel for nuclear reactors out of surplus weapons plutonium. The FY2018 Consolidated Appropriations Act conformed to provisions in the National Defense Authorization Act, 2018 (P.L. 115-91) that allow DOE to pursue an alternative plutonium disposal program if sufficient cost savings are projected. The enacted FY2019 Energy and Water Development Appropriations Act also conformed to the Defense Authorization provisions and provided $220 million, the same as the request, to begin shutting down the South Carolina project. The Administration certified under P.L. 115-91 on May 10, 2018, that the cost-saving requirement for termination of MFFF would be met, although the certification has been challenged in court."}
{"id":"crs_RS21981","pid":"crs_RS21981_0","input":"\tPolitical Situation\n\nAlthough a small country with a population of just over 3.6 million people, Moldova has been of interest to U.S. policy makers due to its position between NATO and EU member Romania and strategic Ukraine. Some experts have expressed concern about Russian efforts to extend its hegemony over Moldova through various methods, including a troop presence, manipulation of Moldova's relationship with its breakaway Transnistria region, and energy supplies and other trading links. Moldova's political and economic weakness has made it a source of organized criminal activity of concern to U.S. policy makers, including trafficking in persons.\nThe Party of Communists of the Republic of Moldova (PCRM) held power in Moldova for most of the 2000s after winning parliamentary elections in 2001, 2005, and April 2009. The PCRM's leader is Vladimir Voronin, who was elected by the parliament as president of Moldova during the period of the PCRM's rule. \nAfter July 2009 parliamentary elections, a group of opposition parties formed a new governing coalition, the Alliance for European Integration. As its name suggests, the AEI was pledged to carry out reforms with the goal of closer integration into Europe. In March 2012, the parliament elected Nicolae Timofti as president of Moldova. Timofti was a judge with long experience in the Moldovan judicial system dating back to the Soviet era. He had a very low political profile, which may have been a major consideration in his selection. \nThere are few ideological differences among the governing parties, which are mainly vehicles for key political leaders and politically-connected big businessmen. A scandal over an apparently accidental death in a hunting accident involving high-ranking judiciary officials in December 2012 caused unseemly, public infighting among party leaders, ending in the government's collapse in March 2013. \nThe coalition was reconstituted in May 2013, in part because the European Union urged Moldovan leaders to reassemble the coalition in order to keep the country's European integration prospects on track. It controls 53 of the 101 seats in the parliament. It is composed of the Liberal Democrats, the Democratic Party, and the Liberal Reformist Party. Iurie Leanca of the Liberal Democrats is Prime Minister. Igor Corman of the Democratic Party is chairman of the parliament. The largest opposition party, the PCRM, holds 34 seats. New parliamentary elections are expected in November 2014. \n\n\t\tTransnistria and Gagauzia\n\nConflict between Moldovan forces and those of the breakaway \"Dniestr Republic\" (a separatist entity proclaimed in 1990 by ethnic Russian local officials in the Transnistria region of Moldova, also referred to as Transnistria) erupted in March 1992. Hundreds of people died in the violence. \nA cease-fire was declared in July 1992 that provided for Russian, \"Dniestr Republic,\" and Moldovan peacekeepers to patrol a \"security zone\" between the two regions. Each of the peacekeeping contingents has roughly 400 personnel. They are overseen by a Joint Control Commission, which includes the three sides, as well as the OSCE as an observer.\nThe causes of the conflict are complex, involving issues of national identity and maneuvering for power and wealth among elite groups. Ethnic Russians and Ukrainians together make up a majority of Transnistria's population of fewer than 500,000 persons, while Moldovans are the single largest ethnic group, at 40%. \nMany analysts believe a significant factor obstructing a settlement is the personal interests of the leaders of the \"Dniestr Republic\" and associates in Moldova, Russia, and Ukraine, who control the region's economy. They also allegedly profit from illegal activities that take place in Transnistria, such as smuggling and human trafficking. The 2013 State Department human rights report sharply criticized the poor human rights record of the \"Dniestr Republic,\" noting its record of harassment of political opponents, independent media, many religious groups, and Romanian speakers.\nNegotiations over the degree of autonomy to be accorded the Transnistria region within Moldova have been stalled for many years. The two sides have negotiated over Transnistria's status with the mediation of Russia, Ukraine, and OSCE. In 2005, at the urging of Ukraine and Moldova, the United States and the European Union joined the talks as observers, resulting in what is called the \"5+2\" format. From 2006 until late 2011, formal 5+2 talks were not held, due to Transnistrian leaders' anger at Moldova's cooperation with the EU and Ukraine to monitor Moldova's Transnistria border with Ukraine, in an effort to deter smuggling. Informal 5+2 consultations were held regularly, however. Expert groups discussed confidence-building measures between the two sides, but no progress occurred on larger political questions. Formal 5+2 talks resumed in late 2011, with some progress in confidence-building measures, but none on political status. \nThe Moldovan leadership favors a substantial degree of autonomy for Transnistria, but only as part of a united Moldova. It is seeking the withdrawal of all foreign (i.e., Russian) troops from Transnistria and the replacement of the current peacekeeping force by civilian observers, preferably led by the EU. In an effort to secure Russian support for a resolution, Moldova is willing to reaffirm its military neutrality. Moldovan leaders are also reportedly willing to guarantee Russian property rights in Transnistria as part of a deal. They have also said that they hope to improve the climate for Transnistria's reintegration into Moldova by improving non-governmental, person-to-person links between the people in Transnistria and the rest of Moldova. They also hope that Moldova's growing integration with the EU will increase Moldova's attractiveness to people living in Transnistria. \nFor their part, Transnistrian leaders reject autonomy. In September 2006, Transnistria held a referendum on independence and union with Russia, which passed with 97% of the vote. The Transnistrian leadership demanded that Russia recognize the independence of their republic, as Moscow did with Abkhazia and South Ossetia, two secessionist regions in Georgia, in 2008. Russia rejected these entreaties, however. \nIn 2011, Yevgeni Shevchuk was elected \"president\" of Transnistria, beating longtime hardline leader Igor Smirnov in a runoff vote. Observers have characterized the election as a vote by people in Transnistria for a normal life, as opposed to the image of a besieged fortress projected by the Smirnov leadership. Shevchuk made a clean sweep of the government, replacing supporters of the former regime, often with young people who have grown up in a de facto independent Transnistria, never having felt themselves as part of Moldova or the Soviet Union. Shevchuk called for focusing on practical issues such as lifting trade restrictions between Transnistria and Moldova, and restoring communications links such as trains and telephone service. \nMoldovan leaders have hoped progress on these small steps will eventually lead to progress on the issue of Transnistria's status. However, that appears unlikely. Shevchuk has rejected discussing the status issue at the 5+2 talks and stressed his support for Transnistria's independence. He has rejected Moldova's call to replace the multinational peacekeeping force stationed between Transnistria and right-bank Moldova with a civilian mission, saying that the Russian troops there as part of the force protect Transnistria's security. He has called for closer economic integration between Russia and Transnistria, including Transnistria's eventual membership in the Russian-led Customs Union and Eurasian Union. After Russia's annexation of Crimea in March 2014, Transnistrian leaders again asked Russia to recognize their regime as an independent country. \nGagauzia is a small region in southern Moldova with a population of a little over 160,000, where the Gagauz (an Orthodox Christian, Turkic-speaking people) form the majority. Tensions in the late Soviet and early post-Soviet period between the region's leaders and the Moldovan central government were reduced in 1994, when the Moldovan parliament adopted a law establishing Gagauzia as a \"national-territorial autonomous unit\" within Moldova. The region has its own elected legislative and executive authorities and would be entitled to secession from Moldova in the case of Moldova's unification with Romania.\n\n\tEconomy\n\nAccording to the World Bank, Moldova's per capita Gross National Income of $1,980 in 2011 makes it the poorest country in Europe. More than one-fifth of the country's population lives in poverty. More than one-quarter of Moldova's economically active population works abroad. Remittances from those working abroad amounted to 20% of the country's Gross Domestic Product in 2011, according to the Economist Intelligence Unit. \nMoldova's main natural resource is its rich soil. Agriculture, especially fruit, wine, and tobacco, plays an important role in Moldova's economy. In 2011, agriculture accounted for 12% of GDP, 41% of exports, and 28% of employment in Moldova. Most of Moldova's industry is located in the breakaway Transnistria region. Transnistria's economy has also suffered as a result of the global economic crisis, resulting in large-scale emigration. Transnistria's economy is dependent on remittances from Transnistrians working abroad and on aid from Russia, including direct aid and indirect subsidies in the form of unpaid debts for energy supplies. \nThe global financial crisis had a negative impact on Moldova. The leu, Moldova's currency, weakened and remains under pressure. Remittances dropped, as Moldovan emigrants lost jobs in other hard-hit countries. Foreign direct investment also dropped sharply. Moldova's GDP dropped by 6% in 2009, but rebounded to grow by 6.9% in 2010 and 6.5% in 2011. However, GDP contracted by 0.8% in 2012, due to the slowdown in the Eurozone. \nIn 2013, Moldova's GDP grew by a rapid 8.9%, spurred by strong consumer spending and a good agricultural harvest, as compared to a drought the previous year. The weakening Moldovan currency has also boosted exports. Growth in 2014 may be affected somewhat by the unstable situation in neighboring Ukraine and a possible slowdown in Russia due to the threat of sanctions against that country. Despite a Russian ban on Moldovan wine imports, Russia still accounts for a quarter of Moldova's exports. \nIn 2010, the Moldovan government unveiled a medium-term economic reform plan, dubbed \"Rethink Moldova.\" The plan is aimed at improving the business climate in the country; increasing exports, including agricultural exports; and upgrading the country's infrastructure. International donors, including the International Monetary Fund, the World Bank, the European Union, and the United States, pledged $2.6 billion for the period 2010-2013 to implement the plan. The country's prospects for increased foreign investment remain hindered by serious problems with corruption and shortcomings in the rule of law. However, Moldova ranked 81 st out of 183 countries in a 2012 World Bank ranking on ease of doing business, a significant improvement over its past rankings.\n\n\tForeign Policy\n\n\t\tRussia's Strategy toward Moldova\n\nA key goal of Russia's policy toward Moldova has been to block moves by Moldova toward Euro-Atlantic integration. Moldova is a neutral country that does not seek NATO membership. It is a member of NATO's Partnership for Peace program. Russia has objected to cooperation between NATO and Moldova, and influential Russian politicians have claimed, apparently falsely, that Moldova is secretly seeking NATO membership. Russian officials have also echoed charges made by Transnistrian and Gagauz leaders that Moldova intends to unite with neighboring Romania. However, Moldovan leaders have strongly rejected unification with Romania. Public opinion polls and recent election results for pro-unification parties have shown Moldovan support for union with Romania at 10% or less.\nRussia urged Moldova not to initial its Association Agreement with the EU in November 2013 and instead to join the Customs Union Moscow has formed with Belarus and Kazakhstan. Russia has imposed de facto economic sanctions against Moldova, perhaps in order to give it a sample of what it could expect if it initialed and then signed the Association Agreement. In September 2013, Russia banned imports of Moldovan wine and spirits, allegedly on health grounds, repeating a similar tactic it had pursued between 2005 and 2007. The European Union responded to the most recent Russian move by abolishing quotas that it had placed on Moldovan wine exports to the EU. In April 2014, Russia banned Moldovan pork products, again allegedly for health reasons.\nRussia has also used Moldova's energy dependency to exert pressure on Chisinau. More than 90% of Moldova's energy imports come from Russia. Moldova has accumulated large debts to Russian energy firms, which has provided Russia with leverage. On January 1, 2006, Gazprom cut off natural gas supplies to Moldova, after Moldova rejected Gazprom's demand for a doubling of the price Moldova pays for natural gas. Gazprom restored supplies on January 17, in exchange for a slightly smaller price increase. Moldova also agreed to give Gazprom, already the majority shareholder, a higher equity stake in Moldovagaz, which controls Moldova's natural gas pipelines and other infrastructure. Gazprom also sought to complete the purchase of Transnistria's stake in Moldovagaz. \nMoldova continues to face pressure from Gazprom. As a signatory to the Energy Community Treaty, Moldova is obliged to implement the EU's Third Energy Package, which prohibits an energy supplier from monopolizing the pipelines used to transport that energy. Gazprom strongly objects to this policy and has tried to secure an exemption from it. Other difficult issues between Moldova and Gazprom include Moldova's gas debts, which are mainly those of Transnistria, for which Moldovagaz is currently responsible. Moldova is also trying to secure a lower gas price, so far without success. Gazprom has offered a lower price if it is exempted from the Third Energy Package.\nRussia has also taken steps against some of the large number of Moldovan labor migrants (estimates range as high as 400,000 persons) living in Russia by more strict enforcement of rules against short-term visa overstays. Remittances from Moldovans working abroad (more than half of them in Russia) account for nearly a quarter of Moldova's gross domestic product, according to the World Bank. \nFinally, many analysts believe that Russia is trying to undermine the current Moldovan government by playing on the country's political and territorial fractures. The Transnistria issue is complicated by the continued presence of about 1,500 Russian troops in the breakaway region (including the approximately 400-person peacekeeping contingent in the security zone), as well as huge stockpiles of weapons and ammunition. Russia has refused to honor commitments it made at the 1999 OSCE summit in Istanbul to withdraw its forces from Moldova. Russian leaders have conditioned the withdrawal of Russian troops and weapons stocks on the resolution of Transnistria's status. Russia has provided financial support to Transnistria, including grants and loans as well as energy supplies for which Transnistria does not pay. In return, Russian firms have assumed control over most of Transnistria's key economic institutions.\nThe leaders of Gagauzia, Transnistria, and the opposition Moldovan Communist Party have all adopted Moscow's view that the Association Agreement with the EU will lead to the country's loss of sovereignty and eventual merger with neighboring Romania. They say that Moldova (or just their enclave, if necessary) should join the Russia-led Customs Union. On February 2, 2014, the Gagauz government held a non-binding referendum to ask voters if they wish to join the EU or the Customs Union. Gagauz leaders have sharply criticized Moldova's initialing of the Association Agreement and called for Moldova to join the Customs Union. Voters were also asked if Gagauzia should secede from Moldova if Moldova agreed to become part of Romania. The government announced that over 98% of those participating supported the Customs Union and secession from Moldova if it joined Romania. The Moldovan government condemned the referendum as illegal. \nTransnistrian officials have also strongly objected to Moldova's initialing of the Association Agreement. Moldovan officials say Transnistria representatives were invited by Moldova to participate in the Association Agreement talks and were given full information on them, but they refused to participate actively, and acted only as observers. Moldovan officials also say that while the Moldovan government would start implementing the Association Agreement immediately upon its ratification by the Moldovan parliament, Transnistria will have until the end of 2015 to implement the accord. If this does not occur, Transnistrian firms that export to the EU could be excluded from the Deep and Comprehensive Free Trade Agreement (DCFTA) included in the Association Agreement and thus suffer substantial losses. On the other hand, if Transnistria accepts the DCFTA, it risks losing energy subsidies from Russia, which could prove even more devastating.\nLikewise, the Transnistrian regime may also be challenged by Moldova's visa-free travel agreement with the Schengen zone countries (most EU and some non-EU countries in Europe), which goes into effect in late April 2014. Moldovan officials say that, in anticipation of such an agreement, over half of the inhabitants of Transnistria have sought biometric Moldovan passports already, and their number continues to increase.\nThe Moldovan government has responded to recent events in Ukraine with great concern. Over 170,000 people in Transnistria have Russian citizenship. This large population of Russian citizens could serve as a pretext for Russian action, as Russian leaders have asserted the right to intervene militarily in Ukraine to protect Russian citizens and Russian-speaking \"compatriots.\" Ukraine has stopped armed men trying to cross the border from Transnistria to Ukraine to \"participate\" in \"demonstrations\" against Ukraine's government. In April 2014, Russian President Vladimir Putin claimed that there was an economic blockade of Transnistria, which both Chisinau and Kyiv denied.\nIn March 2014, NATO Supreme Allied Commander Europe General Philip Breedlove expressed concern that Russian forces could sweep across eastern and southern Ukraine to link up with Transnistria. Such a move, while very ambitious, would have the advantage of linking the region directly with Russia. \nHowever, while Moscow has shown hostility toward the Moldovan government, it is unclear whether Russia would take military action against Moldova. Russia has so far continued to refuse to recognize Transnistria's independence and has continued to support the 5+2 talks. Many observers believe Russia will continue to try to turn Moldova away from a pro-Western orientation by using indirect tactics: de facto trade sanctions, increasing support for Transnistria and separatism in Moldova's Gagauzia region, and supporting the Communist opposition to the government in the run-up to Moldova's parliamentary elections in November. However, given that Russia has little left to lose in its relationship with the EU and United States due to its Ukraine policy, it cannot be ruled out that Russia may recognize Transnistria's independence in the future.\n\n\t\tNATO and the European Union\n\nAs a self-declared neutral country, Moldova does not seek NATO membership, but participates in NATO's Partnership for Peace (PFP) program. Moldova's main foreign policy objective currently is to sign an Association Agreement with the EU. While the agreement would not recognize Moldova as an EU membership candidate, it would enhance EU-Moldova cooperation in many areas, including the establishment of a free trade zone. Moldova and the EU hope to sign the agreement in late June 2014. In April 2014, Moldova was also granted visa-free travel in the Schengen zone of countries (which includes most EU countries and some non-EU European countries). \nFrom 2011 to 2013, Moldova was allocated 273.14 million Euro ($372.9 million) in aid from the EU. The aid is targeted at bolstering Moldova's reform efforts, including fostering good government, the rule of law, and the protection of fundamental freedoms. Other programs help Moldova improve its social protections, and its health care and education systems. EU aid also is allocated to help Moldova diversify its energy mix and improve energy efficiency. EU aid totals for Moldova for 2014-2020 are expected to be announced soon. \nThe EU has granted Moldova trade preferences that permit it to sell more of its wine and agricultural goods to the EU, enabling it to reduce its dependence on the Russian market. The EU is Moldova's largest trading partner, accounting for 54% of its trade. Russia accounted for 12%. Since 2005, an EU mission has helped to monitor Moldova's Transnistria border with Ukraine, in an effort to deter smuggling. Many Transnistrian companies have registered in Moldova in order to benefit from EU trade preferences, a move that it is hoped will reinforce Moldova's sovereignty. \nMoldova hopes to become a candidate for EU membership. However, many EU member states are unlikely to accept Moldova as a candidate in the foreseeable future, due to Moldova's poverty and the EU's own internal challenges. Some EU countries may also be concerned that a Moldovan candidacy could set an unwelcome precedent for the possible candidacy of other former Soviet states, particularly Ukraine. \nMoldova's ties with Romania are a sensitive issue in both countries. Many Romanians consider Moldovans in fact to be Romanians, and support the eventual unification of the two countries. Although most independent experts consider the \"Moldovan language\" to be Romanian, the issue is a matter of political controversy in Moldova. After the incorporation of Moldova into the Soviet Union during World War II, Soviet authorities promoted the idea of a separate Moldovan language (using the Cyrillic rather than the Latin script), as a means of countering possible secessionist ideas. Those favoring the term \"Moldovan\" tend to favor Moldova's independence or close ties with Russia. Many persons favoring the term \"Romanian\" support eventual union with Romania.\nIn a 1994 referendum, more than 90% of Moldovans rejected unification with Romania. Recent opinion polls in Moldova show that Moldovan support for union with Romania remains at less than 10%. The most significant pro-Romanian party in Moldova, the Liberal Party, won about 10% of the vote in the last parliamentary election, and had to downplay pro-union views to avoid harming its electoral chances. However, it should be noted that Romania's 2007 entry into the EU led to hundreds of thousands of Moldovan applications to Romania for dual Romanian-Moldovan citizenship. Over 400,000 Moldovans had Romanian citizenship in 2012, according to a survey by the Soros Romania Foundation. \nThe Moldovan government has moved to improve relations with Romania, which deteriorated sharply under the Communists. It signed an agreement with Romania to liberalize small-scale border traffic, and removed barbed wire obstructions from the border dating from the Soviet period. In 2010, Romania agreed to provide 100 million Euro in aid to Moldova over the following three years. Moldova and Romania are planning to build a gas pipeline between the two countries. It is hoped that the pipeline will help Moldova to reduce its energy dependence on Russia. \n\n\tU.S. Policy\n\nThe United States and Moldova have enjoyed good relations since the country's independence in 1991. U.S. officials have repeatedly expressed support for Moldova's sovereignty and territorial integrity within its internationally recognized borders. In a signal of U.S. support, Secretary of State John Kerry visited Moldova on December 4, 2013, to congratulate the country on initialing its Association Agreement with the EU. Kerry said the United States would sponsor a trip by Moldovan winemakers to research opportunities in the U.S. market and that the United States would partner with Sweden on energy efficiency projects in Moldova. The United States and the EU are working to enhance market opportunities for wine and other Moldovan products in part in order to reduce the impact of possible future Russian embargoes. \nOn March 3, Prime Minister Leanca met with President Obama, Vice President Biden, and Secretary Kerry in Washington. During a visit to Moldova on March 30, Assistant Secretary of State Victoria Nuland confirmed U.S. support for Moldova's path toward European integration and for continued U.S. aid for anti-corruption efforts, strengthening border security (for which Ms. Nuland announced an additional $10 million in U.S. aid), boosting Moldovan exports (including Moldovan wines), energy security, and other areas. \nAccording to State Department figures, the United States provided $21.855 million in foreign aid to Moldova in FY2013 and an estimated $20.66 million for FY2014. Before Ms. Nuland's visit in late March, the Administration requested $20.23 million in assistance for Moldova for FY2015. U.S. aid is aimed at helping Moldova fight corruption and transnational crime, including trafficking in persons. U.S. assistance also supports independent media and non-governmental organizations in Moldova, as well as rule of law programs. Other U.S. aid is aimed at improving the business climate in Moldova, and helping the country diversify its exports. Moldova receives very modest U.S. security assistance: an estimated $1.25 million in Foreign Military Financing in FY2014, as well as $750,000 in IMET military training funds. U.S. security assistance is used to develop Moldova's peacekeeping capacity and interoperability with NATO. \nThis aid does not include assistance Moldova has been receiving since 2010 under a five-year, $262 million grant from the Millennium Challenge Corporation. This assistance is being used to improve Moldova's road network and its irrigation systems in order to boost the country's agricultural exports.\nIn testimony before the Europe Subcommittee of the Senate Foreign Relations Committee on April 10, Assistant Secretary Nuland said the Moldovan government needs to strengthen its efforts to educate the Moldovan public on the benefits of association with the EU. Experts have noted that Moldova has not done enough to expand communications in the Russian language, to supplement current efforts heavily weighted toward Romanian\/Moldovan. Nuland also stressed that Moldova needs to continue its fight against corruption. Some observers are concerned that Moldovan leaders could incorrectly believe that, for geopolitical reasons, the United States and the EU would tacitly excuse corruption and other reform shortcomings in order to support a \"pro-Europe\" government against their \"pro-Russia\" opponents. \nIn June 2012, the Congressional Moldova Caucus was formed, in order to promote U.S.-Moldova cooperation on a wide range of issues, including Euro-Atlantic integration and granting of Normal Trade Relations status for Moldova (which was achieved in 2012). Since 1999, Moldova and the state of North Carolina have worked together in such areas as civil emergency, expansion of markets, and cultural, scientific, and academic exchanges.\nThe United States has called on Russia to withdraw troops from Transnistria deployed there without the consent of the Moldovan government. The United States refused to ratify the adapted Conventional Forces in Europe (CFE) treaty until several conditions were met, including the withdrawal of Russian troops from Moldova. In 2007, Russia suspended its observance of the CFE Treaty, attributing the move to the failure of the United States and other countries to ratify the adapted treaty.\nThe United States has called for continued cooperation on weapons proliferation and trafficking in persons. In 2003, the United States imposed missile proliferation sanctions on two Moldovan firms for transferring equipment and technology to Iran. The 2013 State Department Trafficking in Persons report notes that Moldova is a source of women and girls trafficked for commercial sexual exploitation, as well as men and women for forced labor. Moldova is a \"Tier 2\" country. Tier 2 denotes a country that \"does not fully comply with the minimum standards for the elimination of trafficking,\" but is \"making significant efforts to do so.\" \nU.S. aid has helped Moldova interdict attempted sales of highly-enriched uranium (HEU). In an incident in June 2011, Moldovan police, including some officers who had received U.S. counter-proliferation training, conducted a \"sting\" operation against persons offering HEU for sale. The material, which probably came from Russia, transited Transnistria. \n\n\t\tCongressional Action\n\nMoldova has long sought permanent normal trade relations (PNTR) from the United States by terminating the application of the Jackson-Vanik amendment to Moldova. On November 16, 2012, the House approved H.R. 6156 , which extends PNTR to Russia and Moldova. The Senate passed the bill on December 6. It was signed by the President on December 14 ( P.L. 112-208 ).\nThe crisis in Ukraine has caused Members of Congress to call for greater U.S. efforts to bolster Moldova's sovereignty and territorial integrity against possible Russian threats, including during visits to those countries. P.L. 113-96 , passed by the Senate on March 27, 2014, and the House on April 1, was signed by the President on April 3. The bill requires Radio Free Europe\/Radio Liberty to conduct a \"programming surge\" in Ukraine and Moldova in order to counter \"inaccurate and inflammatory\" broadcasts by Russia.\nOn March 5, Representative Ted Poe introduced H.R. 4155 , the Fight Russian Energy Exploitation Act (FREE). The bill would amend Section 3(c) of the Natural Gas Act (15 U.S.C. 717b(c)) in order to make Moldova eligible to import U.S. natural gas.\nOn April 3, Senator Inhofe introduced S.Res. 411 , which sharply criticizes Russian policy toward Ukraine as violating the principles of sovereignty and territorial integrity. The resolution notes that Russia has used energy resources, its military presence in Transnistria, and other means to intimidate Moldova. The resolution affirms U.S. policy to support Moldova's sovereignty, independence, and territorial integrity; calls on Russia to remove its military forces from Moldova; and urges the President to consider increasing security and intelligence cooperation with the Government of Moldova, among other provisions.","output":"Although a small country, Moldova has been of interest to U.S. policy makers due to its position between NATO and EU member Romania and strategic Ukraine. In addition, some experts have expressed concern about Russian efforts to extend its hegemony over Moldova through various methods, including a troop presence, manipulation of Moldova's relationship with its breakaway Transnistria region, and energy supplies and other economic links. Moldova's political and economic weakness has made it a source of organized criminal activity of concern to U.S. policy makers, including trafficking in persons. U.S. and Moldovan experts have expressed concern about whether Russian President Putin's annexation of Crimea and attempted destabilization of eastern Ukraine presages a similar effort toward Moldova, including Russian recognition of the independence of Transnistria.\nAfter July 2009 parliamentary elections, a group of opposition parties to the then-ruling Party of Communists of the Republic of Moldova (PCRM) formed a governing coalition that pledged to carry out reforms with the goal of closer integration with the European Union. There are few ideological differences among the governing parties, which are mainly vehicles for key political leaders and politically connected big businessmen. New parliamentary elections are expected to be held in November 2014.\nMoldova is Europe's poorest country, according to the World Bank. Moldova's GDP grew by a rapid 8.9% in 2013, spurred by strong consumer spending and a good agricultural harvest, rebounding from a drought the previous year. Growth in 2014 may be affected by the unstable situation in neighboring Ukraine and a possible slowdown in Russia due to the threat of sanctions against that country.\nAs a self-declared neutral country, Moldova does not seek NATO membership, but participates in NATO's Partnership for Peace (PFP) program. In June 2014, Moldova expects to sign an Association Agreement with the European Union (EU), which includes a free trade agreement, and closer cooperation in a wide variety of spheres. Moldova hopes to become a candidate for EU membership, although the EU is unlikely to accept Moldova in the foreseeable future, due to Moldova's poverty, the EU's own internal challenges, and possibly also due to concerns that it would set a precedent for the candidacy of other former Soviet states, such as Ukraine.\nThe United States and Moldova have enjoyed good relations since the country's independence in 1991. In a signal of U.S. support, Secretary of State John Kerry visited Moldova on December 4, 2013, to congratulate the country on initialing its Association Agreement with the EU in Moldova. The United States and the EU are working to enhance market opportunities for wine and other Moldovan products in part in order to reduce the impact of current and possible future Russian embargoes. During a visit to Moldova on March 30, Assistant Secretary of State Victoria Nuland confirmed U.S. support for Moldova's path toward European integration and for continued U.S. aid for anti-corruption efforts, strengthening border security (for which Ms. Nuland announced an additional $10 million in U.S. aid), boosting Moldovan exports (including Moldovan wines), energy security, and other areas. The 112th Congress addressed a long-standing Moldovan concern by adopting legislation to grant the country permanent normal trade relations (PNTR) with the United States (P.L. 112-208)."}
{"id":"crs_R43440","pid":"crs_R43440_0","input":"\tThe Volcker Rule: Dodd-Frank Act \u00a7619\n\n\t\tOverview\n\nOn December 10, 2013, more than two years after the statutorily mandated deadline, five federal financial regulators published final regulations (hereinafter, the regulations) implementing Section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (hereinafter, Section 619 or the statute). Together these are known as the Volcker Rule (hereinafter, the Volcker Rule or the Rule), which is designed to prohibit banks and their affiliates from engaging in risky, short-term, speculative trading and investing in private equity and hedge funds. These are practices long condemned by the Rule's namesake, former Federal Reserve Chairman Paul A. Volcker, for being at odds with conventional banking principles and potential risks to overall financial stability that could trigger the need for future bailouts. \nThe same day that the regulations were issued, the Federal Reserve Board (FRB) set the date when conformance with the Rule is required as July 21, 2015, although that date could be extended an additional two years, and banking institutions and their affiliates are under an obligation to undertake good faith efforts to meet that date with full compliance. \nThe Volcker Rule, which according to an analysis by one of the issuing regulators might impose significant costs on covered institutions, prohibits \"banking entities\" from engaging in \"proprietary trading\" and from making investments in or having relationships with hedge and similar \"covered funds\" that fall into certain exemptions from registering with the Commodity Futures Trading Commission (CFTC) as commodity pool operators or with the Securities and Exchange Commission (SEC) under the Investment Advisors Act. In concert with these broad prohibitions, the Rule carves out numerous exclusions and designates myriad activities as permissible so long as various terms and conditions are met. The statutory language provides only general outlines of prohibited activities and exceptions, while empowering the Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System (FRB), the Federal Deposit Insurance Corporation (FDIC), the SEC, and CFTC (together, the federal financial regulators or the Agencies) to issue coordinated rulemakings to fill in the details and complete the difficult task of crafting regulations to distinguish prohibited activities from activities considered essential to the safety and soundness of banking institutions or to the maintenance of strong capital markets.\nWhat follows is a legal overview of the Volcker Rule. The report begins by analyzing the integral definition of \"banking entity,\" which serves as the foundation for the applicability of the Rule. It then separately analyzes the two distinct components of the Rule: (1) restrictions on proprietary trading; and (2) restrictions on investing in and sponsoring covered funds. The basic framework of the Rule is to broadly prohibit banking entities from engaging in these two broad categories of activities, while also carving out specific exclusions from the scope of the two categories and exceptions for certain activities that otherwise would generally fall within the broad prohibitions. These excepted activities are designated as permissible under the Rule unless they would involve or result in a material conflict of interest; a material exposure to high-risk assets or high-risk trading strategies; pose a threat to the safety and soundness of the banking entity; or pose a threat to the financial stability of the United States. The report concludes by addressing other aspects of the Rule that apply generally to banking entities, including various compliance programs and reporting and recordkeeping obligations designed to implement the statute's anti-evasion provisions, as well as the requirements for divesting of legacy holdings and activities that do not conform with the Rule.\n\n\t\tStatutory Delegation to the Financial Regulators\n\nCongress has delegated extensive discretion to the federal financial regulators to craft the Volcker Rule to meet a list of widely divergent objectives. The statute states the prohibitions and conditions in very broad terms and applies them to an array of financial institutions subject to a variety of regulatory regimes and separate regulators, foreign and domestic. It applies to community and global banks, every variety of insurance firm, securities firms, and foreign banking institutions operating in the United States, among others. The federal financial regulators have been tasked with diverse objectives, among which are the following: promoting safety and soundness of the entities covered by the Rule; protecting taxpayers and consumers; limiting inappropriate transfers of the safety net provided by FDIC deposit insurance; reducing conflicts of interests between the entities and their clients; limiting unduly risky activities by these entities; \"appropriately\" accommodating the business of insurance; and \"appropriately\" timing divestiture of illiquid assets affected by the Rule. \nThe statutory language requires the regulators to explicate such critical terms as \"banking entity,\" \"covered fund,\" \"illiquid fund,\" \"trading account,\" \"hedge fund,\" \"reasonably expected near term demands of clients,\" \"specific risks,\" and \"ownership interest.\" It includes a broad explicit delegation of discretion to exclude from the basic prohibitions of the statute \"[s]uch other activity as the appropriate [federal financial regulators] determine, by rule ... would promote and protect the safety and soundness of the banking entity and the financial stability of the United States.\" \nConsequently, the Volcker Rule is not likely to remain static over time. Rather, regulators likely will modify and clarify the requirements through regulations and guidance to address unforeseen complexities. In fact, as is discussed in the \"Definition of 'Ownership Interest'\" section of this report, the regulators have already issued an interim final rule that makes changes to the regulations as originally issued on December 10, 2013.\n\n\t\tApplicability\u2014\"Banking Entities\"\n\nThe thrust of the Volcker Rule's restrictions applies to \"banking entities.\" \"Banking entity\" is defined as:\n1. FDIC-insured depository institutions. T his includes national and state banks, federal and state savings associations, thrifts, and similarly chartered banking institutions that offer FDIC-insured deposits. 2. Companies that own FDIC-insured depository institutions. This includes companies that own or control FDIC-insured depositories (by holding a certain percentage of voting stock or otherwise exerting a controlling influence over a company's decision making, such as the election of directors). Such companies are typically organized as bank holding companies (BHCs), financial holding companies (FHCs), or savings and loan or thrift holding companies. 3. Foreign-based companies that are treated like bank holding companies pursuant to the International Banking Act of 1978. This includes foreign-based banks that are permitted to operate branches in the U.S. or that own certain other domestic lending companies. An affiliate is \"any company that controls, is controlled by, or is under common control with [a company described in categories 1-3].\" 4. Affiliates and subsidiaries of companies described in 1-3. This covers \"any company that controls, is controlled by, or is under common control with [a company described in categories 1-3].\" \nIn short, the Volcker Rule applies broadly to all depository institutions and to most companies that are owned by or have a common ownership interest with a depository. As a result, the Volcker Rule applies to the approximately 10,000 \"community banks\" scattered across the country. On the other side of the spectrum, the Volcker Rule applies to global financial conglomerates like Bank of America, Citigroup, JPMorgan, Wells Fargo, and Goldman Sachs, which are organized as FHCs and thus control at least one FDIC-insured depository institution. The rule also generally applies to hundreds of depository and non-depository affiliates and subsidiaries of these FHCs. However, the regulations provide certain exceptions to the definition of \"banking entity,\" as discussed below. \nAdditionally, the applicability of certain exemptions, recordkeeping and reporting requirements, and other aspects of the Rule vary to some degree according to the organization or typical activities of a particular banking entity. For example, because they may engage in little or no activities that are banned by the Volcker Rule, the recordkeeping and reporting requirements and other compliance standards that apply to community banks and their subsidiaries and affiliates generally will not be as onerous as those imposed on the country's largest FHCs. As another example, foreign banks and foreign affiliates of U.S. banking entities under certain circumstances will be permitted to trade foreign government obligations, but these activities generally are prohibited under the Volcker Rule's ban on proprietary trading for U.S.-based banking entities and U.S.-based affiliates of foreign banks.\n\n\tRestrictions on Proprietary Trading\n\nThe Volcker Rule establishes an outright prohibition on proprietary trading by a \"banking entity.\" Subsequent provisions of the legislation, however, provide activities that are excluded from the definition of \"proprietary trading,\" as well as exceptions to the general ban as long as various conditions are met. The exact language provides a broad prohibition. It reads, \"a banking entity shall not \u2026 engage in proprietary trading, ...\" Under the statute, \"proprietary trading\" covers buying and selling of \"financial instruments\" by banking entities as \"principal\" for their \"trading accounts.\" \"Financial instruments\" include securities, derivatives, and contracts for future sale or for options on any commodity other than foreign exchange or currency, but not loans. However, as described more fully below, certain types of financial instruments and operations are excluded.\nThe regulation focuses on restricting short-term trades. It establishes a rebuttable presumption that any financial instrument held for fewer than 60 days is a banned proprietary trade unless all relevant facts and circumstances rebut the presumption. It defines \"trading account\" as any account used to buy or sell one or more financial instruments \"principally\" for \"short-term resale,\" to benefit from \"short-term price movements,\" to realize \"short-term arbitrage profits,\" or to hedge any of these. \"Trading account\" also covers trades by banking entities that are securities dealers and swap or swap-based securities dealers\u2014both in the United States and abroad\u2014as well as market risk capital transactions and hedges of such transactions by banking entities that calculate such ratios under the banking agencies' Market Risk Capital Rules.\n\n\t\tExclusions from Definition of \"Proprietary Trading.\"\n\nThe Rule, embodied in the regulations, expressly provides that certain activities are not included in the definition of \"proprietary trading,\" including the following: \nacquisitions or sales of financial products pursuant to a repurchase and reverse repurchase agreement; acquisitions or sales of financial products pursuant to a securities lending agreement; acquisitions or sales of \"highly liquid\" securities as part of a valid liquidity management plan, which \"the banking entity does not reasonably expect to give rise to appreciable profits or losses as a result of short-term price movements\"; various derivative clearing activities; acquisitions or sales of financial products for the satisfaction of delivery obligations, such as in connection with a judicial or administrative proceeding; acquisitions or sales of financial products \"by a banking entity acting solely as agent, broker, or custodian\"; acquisitions or sales of financial products while acting as a trustee for an employee compensation plan; and acquisitions or sales of financial products in the \"ordinary course of collecting a debt,\" as long as the products are divested \"as soon as practicable.\"\n\n\t\tPermitted Proprietary Activities\n\nIn addition to the above exclusions from the definition of \"proprietary trading,\" the Rule identifies exceptions to the blanket prohibition of proprietary trades by listing permitted activities and setting conditions under which those activities may be conducted. However, it excludes from permitted activities any transaction or class of activities, otherwise permitted, that would involve or result in a material conflict of interest, a material exposure by the banking entity to \"high-risk assets or high-risk trading strategies\" as defined by the regulators, or a threat to safety and soundness of the banking entity or to the financial stability of the United States. It provides standards by which the regulators may set further limits or conditions on these activities and includes authority for the regulators to add to the list of permitted activities. The regulators may impose additional capital and quantitative limits as \"appropriate to protect the safety and soundness of banking entities engaged in such activities.\" \nSubject to those conditions, the exceptions or permitted activities are:\nUnderwriting Activities. The statute's ban on proprietary trading does not apply to a banking entity's underwriting activities so long as its underwriting position is \"designed not to exceed the reasonably expected near term demands of clients, customers, or counterparties.\" The regulations further stipulate that, to be permissible, such underwriting activities must be related to the banking entity's role as a securities underwriter, the banking entity must have an internal compliance program, and certain other requirements must be met. Market Making Activities. The statute's ban on proprietary trading does not apply to a banking entity's \"market making activities, to the extent that any such activities ... are designed not to exceed the reasonably expected near term demands of clients.... \" In devising the provisions in the regulations regarding permissible market making, the agencies sought to provide covered institutions sufficient flexibility to engage in the full scope of current \"market making-related activities\" provided there are \"clearly defined, verifiable, and monitored risk parameters.\" The regulation's requirements include that \"[t]he amount, types, and risks of the financial instruments ... are designed not to exceed, on an ongoing basis, the reasonably expected near term demands of clients, customers, or counterparties\"; the banking entity \"routinely stands ready to purchase and sell ... financial instruments ... in commercially reasonable amounts and throughout market cycles on a basis appropriate for the liquidity, maturity, and depth of the market ... \"; and, that, in addition to other criteria, the banking entity has an internal compliance program. Whether the goal of the agencies for flexibility sufficient to maintain robust capital markets has been achieved, particularly with respect to some specialty markets with limited participants, awaits time and experience. Risk Mitigating Hedging Activities . The statute authorizes \"[r]isk-mitigating hedging activities\" that are \"related to individual or aggregated positions ... that are designed to reduce the specific risks to the banking entity in connection with and related to such positions.... \" The regulations track the language of the statute and permit \"risk-mitigating hedging activities\" that are \"positions, contracts, or other holdings of the banking entity and designed to reduce specific risks to the banking entity in connection with and related to such ... holdings.\" The final rule seeks to make it clear that portfolio hedging will not be permitted; banking entities will be required to document any investment undertaken as a hedge by linking it to the specific risks or exposures being offset. This provision is aimed at preventing incidents like the $6 billion loss that JPMorgan & Co. suffered in 2012 as a result of derivatives trades, designed to hedge against risks of the entire financial conglomerate, which were conducted by a trader known as the London Whale and which were documented in a Senate investigation. Government and GSE Obligations . The statute authorizes the purchase and sale of U.S. obligations; obligations of federal agencies; obligations of Ginnie Mae, Fannie Mae, Freddie Mac, the Federal Home Loan Banks, Farmer Mac, and Farm Credit System institutions; and obligations of any state or political subdivision of a state. Under the regulations, banking entities may purchase and sell \"any municipal security\" and other domestic government obligations without running afoul of the prohibition against proprietary trading. Although foreign governments lobbied the financial regulators to include a similarly broad exclusion for foreign government obligations, under the final regulations, foreign banks and foreign affiliates of U.S. banks under certain circumstances will be permitted to trade foreign government obligations, but U.S. banks and U.S.-based affiliates of foreign banks generally may not. Fiduciary Activities. The ban on proprietary trading does not apply to a banking entity's fiduciary activities that are conducted on behalf a customer and where the banking entity does not acquire a beneficial interest in the associated financial instruments. Riskless Principal Transactions. Riskless principal transactions, where a banking entity buys or sells a financial product \"to offset a contemporaneous sale or purchase\" of a customer, are exempt from the Volcker Rule's ban on proprietary trading. Insurance Company Portfolio Investments. The statute permits trading by insurance companies for their general accounts. Under the regulation, a banking entity that is an insurance company or an affiliate of an insurance company is permitted to buy or sell financial instruments for its own account if the transaction \"is conducted in compliance with, and subject to, the insurance company investments laws\" of the applicable state. However, the relevant federal banking regulators, in consultation with the Financial Stability Oversight Council (FSOC) and relevant state or foreign insurance regulators, may jointly proscribe otherwise permissible insurance company investment activities if the state regulation of those activities \"is insufficient to protect the safety and soundness of the banking entity or the financial stability of the United States.\" Proprietary Trading by Foreign Companies Conducted Outside the United States. The statute authorizes investments permitted under Sections 4(c)(9) and 4(c)(13) of the Bank Holding Company Act, provided they are conducted solely outside the United States by a banking entity that is not \"controlled by a banking entity organized under the laws of the United States or of one or more States.\" The regulation also includes various other restrictions. In the preamble accompanying the final regulations, the agencies stated that these conditions have been structured \"to ensure that any foreign banking entity engaging in trading activity under this exemption does so in a manner that ensures the risk, decision-making, arrangement, negotiation, execution and financing of the activity resides solely outside the United States and limits the risk to the U.S. financial system from trades by foreign banking entities with or through U.S. entities.\" Other Investments . The statute provides the agencies with discretion to permit proprietary trading for any other activity that they \"determine, by rule, ... would permit promote and protect the safety soundness of the banking entity and the financial stability of the United States.\" The agencies used this broad authority to define the scope of the permissible trading by foreign banking entities.\n\n\tLimitation on Relationships with Hedge Funds, Private Equity Funds, and Other \"Covered Funds\"\n\nThe Volcker Rule regulations broadly prohibit banking entities from, \"directly or indirectly, acquir[ing] or retain[ing] any ownership interest in or sponsor[ing] a covered fund,\" as principal for its own account, rather for a customer. Due to the customer focus of the following activities, the prohibition does not apply to holding an ownership interest in a covered fund, if the interest is acquired by a banking entity while\n\"acting solely as agent, broker, or custodian,\" fiduciary, or trustee for a customer, as long as neither the banking entity nor its affiliates acquire a beneficial interest in the investments; acting as a trustee for an employee compensation plan organized for the benefit of the banking entity's current and former employees; and acting in the \"ordinary course of collecting a debt,\" as long as the products are divested \"as soon as practicable.\"\n\n\t\tDefinition of \"Ownership Interest\"\n\nThe Volcker Rule regulations broadly define \"ownership interest\" to mean \"any equity, partnership, or other similar interest.\" A banking entity's ownership interest in a covered fund will be considered an \"other similar interest\" if the banking entity has any of the following:\n1. any control over the removal or hiring of a covered fund's managers, directors, or investment advisors, except when exercising creditor rights upon a default or acceleration trigger; 2. a right to share in a covered fund's \"income, gains, or profits\"; 3. a right, other than rights as a creditor upon a default or acceleration trigger, to a covered fund's assets \"after all other interests have been redeemed and\/or paid in full\"; 4. a \"right to receive all or a portion of excess spread\" of a covered fund; 5. a duty to pay a covered fund for the ownership interest that could be reduced based on lower interest rates owed on such ownership interest or as a result of a loss in value of the fund's assets; 6. any earnings of pass-through income from the covered fund or of income that varies in accordance with the value of the covered fund's assets; or 7. \"any synthetic right to have, receive, or be allocated any of the rights in [1-6].\"\nThe regulations state that, under certain circumstances, \"restricted profit interests\" held by a banking entity or one of its current or former employees that served as a trading or investment advisor, manager, or similar service provider is not considered an ownership interest for the purposes of the Volcker Rule.\nThis broad definition of ownership interest, in particular the provision involving the control to hire or remove advisors, managers, and directors, has caused some consternation among banking entities. For example, as a result of the definition of ownership, certain collateralized debt obligations (CDO) backed by trust preferred securities (TruPS), a type of financial instrument that many banking entities, particularly community banks, used as a way to raise capital, generally was a prohibited investment under the original Volcker Rule regulations, and thus would have to be divested. The American Bankers Association and several community banking organizations promptly filed a lawsuit challenging this aspect of the financial regulators' interpretation of the Volcker Rule. The financial regulators responded by issuing an interim final rule on January 14, 2014, that will serve as a companion to the December 10 Volcker Rule regulations, establishing terms and conditions by which banking entities will be permitted to continue to hold interests in and sponsor a CDO (or similar investment vehicle) backed by TruPS. Shortly after the regulators issued the interim final rules, the plaintiffs withdrew their lawsuit. \nWhile the focus of the interim final rule is on TruPS issued and held by community banking organizations, similar issues likely exist regarding the applicability of the Volcker Rule to securities, issued and held by banking entities both large and small, that are backed by other types of debts, such as commercial paper, automobile loans, and mortgages.\n\n\t\tDefinition of \"Covered Fund\"\n\nThe Volcker Rule regulations define \"covered fund\" to largely encompass entities that are exempt from various registration requirements with either the SEC or CFTC, as well as certain foreign funds. More specifically, the term includes\nissuers that rely on Investment Company Act of 1940 Sections 3(c)(1) or 3(c)(7) to avoid being considered investment companies for the purpose of that law; commodity pools that have an exempt status under CFTC Rule 4.7; CFTC-registered commodity pools, whose participation units are substantially owned by and only offered to certain \"qualified eligible persons\" in accordance with CFTC regulations; and foreign-based funds that raise money to sell or invest in securities and whose ownership interests are offered and sold exclusively outside the U.S., that either are sponsored by a banking entity or have ownership interests held by a banking entity, unless such funds could qualify for an exemption, other than exemptions under Section 3(c)(1) or Section 3(c)(7), from the Investment Company Act of 1940 if such funds were subject to U.S. securities laws.\n\n\t\t\tExclusions from the Definition of \"Covered Fund\"\n\nThe rule explicitly excludes a number of activities and products from the \"covered fund\" definition. These exclusions include the following:\nForeign Public Funds. Issuers that are not organized or established in the United States that \"issue ownership interests to retail investors in [their] home jurisdiction\" and such interests are sold \"predominantly through one or more public offerings outside of the United States.\" This exemption only applies if \"the ownership interests in the issuer are sold predominately to persons other than such sponsoring banking entity, such issuer,\" and their affiliates, directors, and employees. Wholly Owned Subsidiaries. Entities that are directly or indirectly owned entirely by the banking entity or one of its affiliates. Joint Ventures. Joint ventures between a banking entity or its affiliates and up to ten unaffiliated entities, as long as the venture is not raising money primarily by investing or trading in securities. Merger and Acquisition Vehicles. Issuers established for the sole purpose of effectuating \"a bona fide merger or acquisition.\" Foreign Retirement and Pension Funds. Retirement or pension funds that are organized in, subject to regulation in, and provide benefits to residents or citizens of a foreign jurisdiction. Separate Insurance Accounts. \"A separate account, provided that no banking entity other than the insurance company participates in the account's profits and losses.\" Separate Life Insurance Accounts. A separate account established for a banking entity (or multiple banking entities) to acquire life insurance policies for its benefit so long as the banking entity does not control the account's investment decisions and does not have an interest in the account's profits and losses except as permitted by regulatory guidance. Certain Asset-Backed Securitizations. Issuers of certain asset-backed securitizations, including certain loans, foreign exchange derivatives, and interest rate derivatives, but generally excluding debt and equity securities, subject to various terms and conditions. Certain Asset-Backed Commercial Paper Conduits. Issuers of an asset-backed commercial paper conduit \"that issues only asset-backed securities comprised of a residual interest and securities with a legal maturity of 397 days or less,\" and that meet other conditions. Covered Bonds Vehicles. Funds holding a pool of loans or certain other permissible assets \"for the benefit of holders of covered bonds,\" which are issued or guaranteed by a foreign banking organization. Smaller Business Investment Companies (SBICs) and Other Public Welfare Investment Funds . Small business investment companies and similar companies organized \"to make investments [d]esigned primarily to promote the public welfare\" or investments in certain qualified historic tax credit programs. Registered Investment Companies and Business Development Companies (BDCs). Issuers registered under the Investment Company Act of 1940 and business development companies regulated by the SEC as business development companies and seeding vehicles intending to be registered investment companies or business development companies. FDIC Conservatorship or Receivership. Issuers organized \"to facilitate the disposal of assets acquired in the FDIC's capacity as a conservator or receiver [of a depository institution or non-bank financial institution supervised by the FRB].\" Other Investments . Any issuer that the federal financial regulators jointly determine to be excluded. \n\n\t\tPermitted Covered Fund Investments and Activities\n\nIn addition to outright exclusions from the definition of \"covered fund,\" the Rule expressly exempts certain activities that otherwise would fall under the general prohibition against sponsoring or investing in a covered fund, subject to specified terms and conditions. However, even if a banking entity acquires an investment in or sponsorship of a covered fund that meets one of the permissible exceptions described below, it could still be barred by the Volcker Rule if it results in: \"a material conflict of interest\"; \"a material exposure by the banking entity to high-risk assets or high-risk trading strategies\" as defined by the regulators; or \"a threat to the safety and soundness of [the] banking entity ... or to the financial stability of the United States.\"\nThe Rule also provides standards by which the regulators may set further limits or conditions on these permissible activities and includes authority for the regulators to add to the list of permitted activities. The regulators may impose additional capital and quantitative limits as \"appropriate to protect the safety and soundness of banking entities engaged in such activities.\"\n\n\t\t\tDe Minimis Investments in Covered Funds\n\nBanking entities, subject to certain limitations, are permitted to make and retain de minimis investments in covered funds, which are subject to both per fund and aggregate caps. \nPer Fund De Minimis Cap. A de minimis investment made by a banking entity and its affiliates must \"not exceed 3 percent of the total number or value of the outstanding ownership interests of the fund,\" unless the banking entity, in the context of investing in an asset-backed securities issuer, is required to acquire a greater percentage to comply with the credit risk retention requirements of Section 15G(a)(3) of the Exchange Act. The Rule establishes various methods for calculating per fund de minimis investment caps based on the type of fund in question (i.e., asset-backed securities issuer, feeder funds, fund-of-funds, and all other types of covered funds).\nAggregate De Minimis Cap. The total ownership interests in covered funds by a banking entity and its affiliates \"may not exceed 3 percent of the tier 1 capital of the banking entity.\" For those banking entities that must report tier 1 capital levels to appropriate banking regulators in accordance with other law, the calculation will remain the same for the purposes of the Volcker Rule. However, the final regulations establish how tier 1 capital should be calculated for those banking entities that are not otherwise required to maintain and report capital levels.\n\n\t\t\tInitial \"Seed\" Investments to Establish Covered Funds\n\nBanking entities are permitted to make initial seed investments to establish covered funds and help make them become attractive investments for unaffiliated third parties, but to do so they must: actively work to replace their investments with that of unaffiliated third parties; comply with the aggregate de minimis investment requirements; and generally within one year of the establishment of the covered fund, be in compliance with the per fund de minimis investment cap. Upon an application by a banking entity, the FRB may provide up to two additional years to conform with the per fund de minimis cap if such an extension \"would be consistent with safety and soundness and not detrimental to the public interest.\"\nAdditionally, certain SEC-registered business development companies, investment companies, and foreign public funds, which generally are excluded from the definition of \"covered fund\" as described above, will not be considered an affiliate of a banking entity for the purposes of the de minimis seed investment limits if the banking entity \n(1) Does not own, control, or hold with the power to vote 25 percent or more of the voting shares of the company or fund; and \n(2) Provides investment advisory, commodity trading advisory, administrative, and other services to the company or fund.... \"\n\n\t\t\tOrganizing and Advising Covered Funds in Connection with Fiduciary or Trust Services\n\nThe Volcker Rule authorizes banking entities to acquire ownership interests in, sponsor, organize, and offer covered funds to the extent that (1) the banking entity provides \"bona fide trust, fiduciary, or investment advisory services\"; (2) \"the fund is organized and offered only in connection with bona fide trust, fiduciary, or investment advisory services to persons that are customers of such services of the banking entity\"; (3) the banking entity retains only a de minimis interest in the funds; (4) the banking entity and its affiliates engage in no transaction with the fund that would be designated as a \"covered transaction\" under Federal Reserve Act (FRA) Section 23A and other transactions with the fund are conducted only on terms specified in FRA Section 23B, as if the banking entity were a member bank and the fund an affiliate of that bank; (5) the banking entity does not guaranty the obligations of the covered fund; (6) the covered fund does not have the word \"bank\" in its name or share a name with the banking entity; (7) no director or employee of the banking entity, other than those directly engaged in providing investment advisory or other services to the covered fund, acquires an interest in the fund; and (8) the banking entity takes certain steps to assure the investors in the covered fund that losses of the fund will be borne solely by its investors.\n\n\t\t\tInvesting in, Sponsoring, Organizing, and Offering Asset-Backed Securities Issuers\n\nThe Volcker Rule allows banking entities to act as a securitizer or, in accordance with the credit risk retention requirements of Section 15G(a)(3) of the Exchange Act, to hold investments in a covered fund that is an issuer of asset-backed securities so long as (1) the banking entity retains only a de minimis interest in the funds; (2) the banking entity and its affiliates engage in no transaction with the fund that would be designated as a covered transaction under FRA Section 23A and other transactions with the fund are conducted only on terms specified in FRA Section 23B, as if the banking entity were a member bank and the fund an affiliate of that bank; (3) the banking entity does not guaranty the obligations of the covered fund; (4) the covered fund does not have the word \"bank\" in its name or share a name with the banking entity; (5) no director or employee of the banking entity, other than those directly engaged in providing investment advisory or other services to the covered fund, acquires an interest in the fund; and (6) the banking entity takes certain steps to assure the investors in the hedge fund or private equity fund that losses of the fund will be borne solely by its investors.\n\n\t\t\tUnderwriting and Market Making for Covered Funds\n\nAlthough not explicitly excepted by the statute, pursuant to the regulations, banking entities generally may engage in underwriting and market making activities for covered funds so long as they meet the same terms and conditions necessary to comply with the exceptions for underwriting and market making from the ban on proprietary trading. According to the preamble to the final regulations, \n[t]he Agencies believe that providing a separate provision relating to permitted underwriting and market making-related activities for ownership interests in covered funds is supported by [12 U.S.C. \u00a71851(d)(1)(B)]. The exemption for underwriting and market making-activities ... by its terms, is a statutorily permitted activity and exemption from the prohibitions in [12 U.S.C. \u00a71851(a)], whether on proprietary trading or on covered fund activities. \nFor underwriting activities, the requirements include that the positions must relate to the banking entity's role as a securities underwriter; a banking entity's underwriting positions must be \"designed not to exceed the reasonably expected near term demands of clients, customers, or counterparties\"; and it must have an internal compliance program. For market making activities, the requirements include that the banking entity \"routinely stands ready to purchase and sell ... financial instruments ... in commercially reasonable amounts and throughout market cycles on a basis appropriate for the liquidity, maturity, and depth of the market ... \"; its market making positions must be \"designed not to exceed the reasonably expected near term demands of clients, customers, or counterparties\"; and the banking entity must have an internal compliance program. \nAdditionally, any ownership interest acquired by a banking entity conducting underwriting or market making activities with a covered fund must be included in both the per fund and aggregate de minimis investment cap calculations discussed above.\n\n\t\t\tHedging\n\nSimilar to the exemption from the ban on proprietary trading, banking entities are permitted to take ownership stakes in covered funds for hedging purposes subject to important limitations. Such acquisitions are only permissible to the extent that they are \"designed to demonstrably reduce or otherwise significantly mitigate the specific, identifiable risk to the banking entity in connection with a compensation arrangement with an employee of the banking entity or an affiliate thereof that directly provides investment advisory, commodity trading advisory or other services to the covered fund.\" The limitation to \"specific, identifiable risk[s]\" appears to prohibit portfolio hedging akin to the JPMorgan London Whale trades discussed in the Proprietary Trading section above. Additionally, banking entities must have written internal programs in place to ensure that hedges comply with the Volcker Rule both at the time of acquisition, as well as through the life of the investment.\n\n\t\t\tForeign Activities\n\nBanking entities that are organized in a foreign country and are not controlled, either directly or indirectly, by a U.S.-based banking entity may be exempt from the Volcker Rule's restrictions on investments in covered funds if several other terms and conditions are met, including that the investments in the covered fund are not held by or offered to U.S. residents, all associated activities with and investments in the covered fund are conducted outside of the U.S., and generally the majority of the banking entity's overall business takes place in a foreign country.\n\n\t\t\tInsurance Activities\n\nInsurance companies and their affiliates generally may sponsor or acquire ownership interests in covered funds if those interests are retained solely for the insurance company's or its affiliate's own account and the company is subject to, and such investments comply with, a state insurance regulatory regime, unless the federal banking regulators jointly determined that the state law permitting such investments \"is insufficient to protect the safety and soundness of the banking entity, or the financial stability of the United States.\"\n\n\t\t\tAffiliation Restrictions with Covered Funds\n\nExcept as otherwise permitted under one of the exceptions to the covered fund investment prohibition described above and for certain prime brokerage transactions, banking entities and their affiliates that provide advisory or investment management services to or hold a permissible interest in a covered fund are prohibited from entering into a transaction that would be considered a \"covered transaction\" for the purposes of FRA Section 23A with the covered fund. Additionally, any permissible transactions between covered funds and banking entities and their affiliates must be entered into in accordance with the \"arms-length\" requirements of FRA Section 23B.\n\n\tOther General Provisions\n\n\t\tAnti-Evasion Provisions: Compliance Program, Reports, and Recordkeeping Requirements\n\nThe statute requires the federal financial regulators to issue regulations to \"insure compliance with [Section 619].\" In response, the final regulations require banking entities to develop and maintain compliance programs, internal controls, and recordkeeping systems to control and monitor the risk of trading and investment activities. Compliance requirements vary in accordance with the size of the banking entity, as well as the scope, complexity, and types of trading and investment activities. \nBanking entities conducting no proprietary trading activity (other than trading of federal, agency, or state and local obligations) and having no investments in covered funds are not required to develop a Volcker Rule-specific compliance program but must do so if they begin to conduct such activities. Similarly, banking entities with total assets below $10 billion may fold Volcker Rule compliance measures into existing compliance programs. The standard compliance requirements, which are set forth in Appendix A to the regulations, apply to banking entities with assets of $10 billion or more and for those banking entities that otherwise are required to do so by the financial regulators. In addition to complying with the standard compliance program, banking entities with assets of $50 billion or more are subject to Enhanced Minimum Standards, which are set forth in Appendix B to the regulations.\nThe standard compliance program includes requirements for (1) written policies and procedures documenting compliance and verifying exemptions, (2) internal control systems, (3) management frameworks, (4) independent testing and review, (5) personnel training, and (6) recordkeeping. For banking entities subject to the standard compliance program, the final regulations also require and establish methods of calculating quantitative measurements that banking entities must furnish for seven aspects of each trading desk: (1) risks and position limits and usage, (2) risk factor sensitivities, (3) value-at-risk and stress value-at-risk, (4) position limits and usage, (5) comprehensive profit and loss attribution, (6) inventory turnover and aging, and (7) customer facing trade ratio. \nAppendix A sets forth non-exclusive recordkeeping and reporting requirements, including quantitative metrics, for banking entities with \"significant trading assets and liabilities.\" The preamble to the final regulations make clear, however, that these are not safe harbors for banking entities, but that, helpful as these metrics may be, \"banking entities [must ensure] that they have robust measures in place to identify and monitor the risks taken in their trading activities, to ensure the activities are within the risk tolerances established by the banking entity, and to monitor for compliance with proprietary trading restrictions in the proposed rule.\" \nThe Enhanced Minimum Standards include instructions as to the specific ingredients of the entity's policies and procedures applicable to its trading desks and to its covered fund activities or investments. For the trading desks of banking entities that are subject to the heightened compliance program, there are specific requirements regarding how the trading desk \"identif[ies], authoriz[es], and document[s] financial instruments to be purchased or sold\"; \"types and amounts of risks allocated\" to each trading desk; how those risks will be measured; why those risks are appropriate; \"the process for setting new or revised limits\"; \"the process for identifying, documenting and approving new products, trading strategies, and hedging strategies\"; types of permissible customers and counterparties; and compensation arrangements. There are also provisions on describing the firm's risks and risk management process; how it authorizes risks, specific instruments, and products; what its hedging policies and procedures are; the specifics of its analytical policies and procedures and quantitative measurements; as well as how it will remediate violations. \nFor covered fund activities or investments, the Enhanced Minimum Standards requirements include management involvement in reviewing and testing the identification and documentation of all covered funds sponsored or organized by components of the organization; identification of the lines of authority with respect to such funds; explanations of monitoring for and prohibition of material conflicts of interest, threats to safety and soundness, or exposure to high-risk assets or trading strategies; documentation of plans for seeking unaffiliated investors to meet investment limits; board of director and senior management involvement; and CEO attestation.\n\n\t\tDivestiture of Nonconforming Activities\n\nGenerally, the regulations require any banking entity engaging in any activity or making an investment in violation of the Volcker Rule to terminate the activity and divest the investment promptly. They also authorize the agencies to \"take any action permitted by law to enforce compliance ..., including directing the banking entity to restrict, limit, or terminate any or all activities under this part and dispose of any investment.\" \nThe statute generally requires divestiture of nonconforming activities within two years of the Rule becoming effective and provides the FRB with authority to extend this two-year period one year at a time, not to exceed an aggregate of three years. Under the FRB's recent extension, the conformance date is July 21, 2015. This means that a company that was a banking entity or a subsidiary or affiliate of a banking entity on July 21, 2010, must bring its activities into conformance before July 21, 2015. For a company that was not a banking entity or a subsidiary or affiliate of a banking entity on that date, conformance is required before the later of July 21, 2015, or two years after the date on which the company becomes a banking entity or a subsidiary or an affiliate of a banking entity. A company becoming a banking entity on July 21, 2015, thus, would have two years, until July 21, 2017, to conform its activities and investments.\n\n\t\t\tGood Faith Efforts\n\nBanking entities are expected to engage in good faith efforts to be in compliance with the rules by July 21, 2015, by not expanding covered activities or expecting more time to conform, developing an appropriately specific conformance plan, and immediately terminating any stand-alone proprietary trading operations. During the conformance period, banking entities with significant trading operations will remain subject to the data reporting and recordkeeping requirements of the Rule that are discussed in the previous section of this report.\n\n\t\t\tIlliquid Funds\n\nThe July 15, 2015, conformance date may be extended by the FRB for one-year periods, not to exceed two additional years. In addition to a two-year extension, if a banking entity is required by contract to take or retain its ownership interest in, or provide additional capital to, an illiquid fund, the entity may apply to the FRB for an extension which may be granted for no more than five years; at the end of which divestiture would be required either at the end of the five years or on the contractual date\u2014whichever is earlier.","output":"This report provides an introduction to the Volcker Rule, which is the regulatory regime imposed upon banking institutions and their affiliates under Section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (P.L. 111-203). The Volker Rule is designed to prohibit \"banking entities\" from engaging in all forms of \"proprietary trading\" (i.e., making investments for their own \"trading accounts\")\u2014activities that former Federal Reserve Chairman Paul A. Volcker often condemned as contrary to conventional banking practices and a potential risk to financial stability. The statutory language provides only general outlines of prohibited activities and exceptions. Through it, however, Congress has empowered five federal financial regulators with authority to conduct coordinated rulemakings to fill in the details and complete the difficult task of crafting regulations to identify prohibited activities, while continuing to permit activities considered essential to the safety and soundness of banking institutions or to the maintenance of strong capital markets. In December 2014, more than two years after enactment of the law, coordinated implementing regulations were issued by the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC), the Board of Governors of the Federal Reserve System (FRB), the Securities and Exchange Commission (SEC), and the Commodity Futures Trading Commission (CFTC).\nThe Rule is premised on a two-pronged central core restricting activities by \"banking entities\"\u2014a term that includes all FDIC-insured bank and thrift institutions; all bank, thrift, or financial holding companies; all foreign banking operations with certain types of presence in the United States; and all affiliates and subsidiaries of any of these entities. Specifically, the Rule broadly prohibits banking entities from engaging in \"proprietary trading\" and from making investments in or having relationships with hedge and similar \"covered funds\" that are exempt from registering with the CFTC as commodity pool operators or with the SEC under the Investment Advisors Act. The Rule couples its broad prohibitions with numerous exclusions and by designating myriad activities as permissible so long as various terms and conditions are met, unless they otherwise would involve or result in a material conflict of interest; a material exposure to high-risk assets or high-risk trading strategies; pose a threat to the safety and soundness of the banking entity; or pose a threat to the financial stability of the United States.\nThe exceptions to the ban on proprietary trading include underwriting by securities underwriters; market-making \"designed not to exceed the reasonably expected near term demands of clients\"; trading in government securities; fiduciary activities; insurance company portfolio investments; and risk-mitigating hedging activities. The ban on investing in and owning \"covered funds\" exempts certain types of funds, under specified conditions, and permits de minimis investment in any such fund up to 3% of the outstanding ownership interests of the fund with an aggregate cap on the total ownership interest in \"covered funds\" of 3% of the banking entity's core capital.\nTo prevent evasion, the Rule has extensive requirements mandating comprehensive compliance programs that include ongoing management involvement, precise metrics measuring risk assessment, verification and documentation of any activities conducted under one of the Rule's exceptions or exclusions, and recurring reports and assessments. Full compliance is required by July 21, 2015, subject to the possibility that further extensions may be provided by the regulators. In the case of investments involving \"illiquid funds\" subject to contractual provisions seriously impacting their marketability or sale, full divestiture might not be required until July 21, 2022."}
{"id":"crs_R41547","pid":"crs_R41547_0","input":"\tIntroduction\n\nIn the last two decades, organized crime has grown more complex, posing evolving challenges for U.S. federal law enforcement. This is largely because these criminals have transformed their operations in ways that broaden their reach and make it harder for law enforcement to define and combat the threat they pose. Globalization and technological innovation have not only impacted legitimate commerce, but they have simultaneously revolutionized crime. In response to these forces, organized criminals have adopted more-networked structural models, internationalized their operations, and grown more tech savvy. Criminals have become more elusive. They see international borders as opportunities while law enforcement views them as obstacles. Criminals have expanded their range of tools and targets as well. Meanwhile, law enforcement \"plays by yesterday's rules and increasingly risks dealing only with the weakest criminals and the easiest problems,\" according to the Strategic Alliance Group, a partnership of seven law enforcement agencies from five nations. \nMotivated by money, organized crime fills needs not met by licit market structures and\/or exploits businesses, consumers, and nations for profit. Organized criminals have capitalized on commercial and technological advances that have bolstered communication and international business. They use innovative methods of moving illegal proceeds around the world. Some nations have also witnessed the creation of ties between powerful business figures, politicians, and criminals.\nModern organized criminals may prefer cellular or networked structural models for their flexibility and avoid the hierarchies governed by elaborate initiation rituals that were favored by their predecessors. Fluid network structures make it harder for law enforcement to infiltrate, disrupt, and dismantle conspiracies. Many 21 st century organized crime groups opportunistically form around specific, short-term schemes. Further, these groups may outsource portions of their operations rather than keeping all of their expertise \"in-house.\"\nIn July 2011, to address these and other issues, the Obama Administration issued its Strategy to Combat Transnational Organized Crime ( 2011 Strategy ) . It described transnational organized crime (TOC) as a strategic threat to national security, laid out a definition of TOC, and set forth five policy objectives and six categories of priority actions in an attempt to devise a cohesive federal response to transnational organized crime. Complicating all of this, since the terrorist attacks of September 11, 2001 (9\/11), there has been a shift in law enforcement attention and resources more toward counterterrorism-related activities and away from traditional crime fighting activities\u2014including the investigation of organized crime.\nThis report provides an analysis of how organized crime has capitalized on globalization by using borders as opportunities, relying on fast-paced technological change, and adapting its organizational structures. It illustrates how these transformations can impact U.S. persons, businesses, and interests. The report includes a discussion of how U.S. law enforcement conceptualizes organized crime in the 21 st century and concludes by examining potential issues for Congress, including the extent to which organized crime is a national security threat (partly to be tackled by U.S. law enforcement agencies), congressional oversight regarding the federal coordination of organized crime investigations, and the utility of current resources appropriated to combat organized crime.\nThis report employs a broad conceptualization of organized crime in its narrative discussion of criminal activity. In other words, the analysis includes groups engaged in sustained criminal enterprises, such as\u2014but not limited to\u2014drug traffickers, mafia families, smugglers, violent gangs, and fraudsters. These operations may or may not have a transnational dimension to them (which is a requirement under the guidelines of the 2011 Strategy) , but they directly impact U.S. persons, businesses, and\/or interests. While this conceptualization may be broader than the definition laid out in the 2011 Strategy , it incorporates a range of criminality that may inform Congress in future legislation impacting organized crime. The cases and examples discussed in this report are not intended to set definitional boundaries for organized crime.\n\n\tOrganized Crime Adapting to Globalization\n\nOrganized crime targeting the United States has internationalized, and its structures have flattened. The popular image of mobsters employing elaborate initiation rituals and strict codes of conduct to control crews that assail their own communities is outmoded. Today, nimble, adaptive, loosely structured small groups with global reach harm consumers, businesses, and government interests on a daily basis. Commercial and technological innovations are behind this transformation. They have helped to reduce national trade barriers, widen transportation infrastructure, and bolster volumes of international business. Smugglers have taken advantage of growing international commerce to hide illicit trade. The Internet and extensive cellular telephone networks have fostered rapid communication, simultaneously revolutionizing licit and illicit commerce. For example, integrated financial systems allow for easy global movement of money. Estimates suggest that money laundering annually equals between 2% and 5% of world GDP. Criminal organizations targeting the United States operate in many of the world's nations. Areas wracked by social disorder, inadequate policing, and poor governance offer opportunities for organized crime to take root. These groups exploit diaspora communities in the United States as cover for their operations, situating elements of their global operations among immigrant enclaves.\nOrganized crime groups are becoming more entrepreneurial or market focused, reacting to changes in both illicit and licit economies. Of course, they are still heavily involved in activities such as narcotics trafficking and money laundering (which have been greatly impacted by globalization), but organized criminals are increasingly involved in less \"traditional\" high-tech operations encompassing identity theft, counterfeiting of goods, and various types of fraud. \n\n\t\tBorders and Organized Crime\n\nModern organized criminals prey upon weaknesses in international transportation and customs security regimens. Border policing efforts have attempted to keep pace with the expansion of international commerce. Organized criminals attempting to smuggle goods, people, or information across borders also face enhanced border security regimens resulting from the terrorist attacks of 9\/11. Regardless, specialized criminal networks smuggle items such as narcotics, counterfeit goods, stolen goods, and bulk cash, as well as humans, around the world and into the United States. They have hidden their contraband within the growing volume of legitimate global trade. Prior to the global recession, between 1995 and 2008 the volume of global containerized traffic tripled. Drug traffickers move large loads of cocaine, eventually destined for U.S. markets, from South America to Mexico via containerized shipping. International counterfeiters use containers to smuggle their fake goods into the United States. As Mois\u0117s Na\u00edm has succinctly put it, most illicit trade involves copycats, smugglers, and traffickers. While individuals can and do engage in these activities, a good deal can be attributed to organized crime. \n\n\t\t\tCopycats and Smugglers\n\nCriminal groups engage in counterfeiting and smuggling across and within the borders of the United States. This activity includes a wide range of products and influences the lives of everyday Americans, U.S. businesses, and government. \n\n\t\t\t\tCounterfeiting and Piracy\n\nCounterfeiting highlights the nexus between globalization and the modernization of organized crime. Although it is difficult, if not impossible, to determine how deeply immersed organized criminals are in this activity, at least one study has suggested serious involvement. Further, in a recent speech before the International Intellectual Property Summit, Attorney General Holder reinforced the need for the international law enforcement community to combat \"the international networks of organized criminals now seeking to profit from IP [intellectual property] crimes.\" In areas such as film piracy, counterfeiting does not necessarily involve high entry costs or large legal penalties when compared to more conventional criminal activity such as drug trafficking. It is also potentially very lucrative. With little infrastructure\u2014a high-speed Internet connection, scanner, and copier and off-the-shelf software\u2014criminals around the globe can easily imitate the branding and packaging that accompanies products, let alone copy the products themselves. Counterfeiting and pirating goods involves the violation of intellectual property rights (IPR), essential to creative and high-tech industries particularly reliant on copyrights, trademarks, and patents to protect innovation. Counterfeiting and piracy potentially harm legitimate businesses and consumers, sapping profits and brand value and flooding markets with inferior and even dangerous products masquerading as legitimate goods. Aside from enforcement outlays, the activity also costs governments tax revenue and may slow economic growth by driving down incentives to innovate. \nIn FY2011, the domestic value of IPR-related law enforcement seizures of contraband in the United States was $178.9 million, a 5% drop from the previous year. Federal officials attributed the decline to \"a shift toward using international mail, express courier and consolidated shipping services to import counterfeit and pirated goods.\" Products originating in China\u2014both Mainland China and Hong Kong\u2014accounted for 80% of these IPR seizures. \n\n\t\t\t\tAuto Theft Rings\n\nAnother example of organized criminals viewing borders as opportunity involves auto theft. Although international automobile theft has existed almost as long as cars have been around, the integration of worldwide markets and expansion of international shipping have greatly impacted it by facilitating international transport of stolen automobiles. Assessing the level of such activity is very difficult since few metrics for it exist. Regardless, today's international automobile theft rings benefit from the high levels of cargo container traffic ushered in by globalization. These groups profit by stealing vehicles in the United States and shipping them abroad, where they are sold. Such illicit operations react to global demand for luxury vehicles, and in some instances are extremely responsive to market forces. They trawl large U.S. metropolitan areas that have assortments of vehicles and rely on rail or port facilities to move stolen vehicles abroad. \nIn 2011, the Department of Justice (DOJ) brought a civil suit against a money laundering network with ties to Mexican drug traffickers and the terrorist group Hezbollah. The scheme reportedly involved used auto sales in the United States. The December 2011 suit targeted the Lebanese Canadian Bank (LCB) and two Lebanese exchange houses\u2014the Hassan Ayash Exchange Co. and Ellissa Holding\u2014regarding more than $300 million that was allegedly part of a money laundering operation. DOJ also asserts that the money laundering network's U.S. operations included about 30 U.S. automobile buyers and a shipping firm. In essence, the network reportedly comingled criminal proceeds held by LCB and the two exchange houses with other monies and transferred these funds to U.S. automobile buyers. The cash transfers supposedly paid for used car purchases in the United States. According to DOJ, the cars were then shipped to and sold in West Africa, and some of the profits returned to Hezbollah via LCB accounts and the exchange houses.\n\n\t\t\t\tHuman Smuggling and Trafficking\n\nCriminal organizations are taking advantage of an unprecedented era of international migration, including illegal migration to the United States. However, since 2007 illegal immigration to the United States has declined. This may be attributable, in part, to dwindling job opportunities resulting from the global recession and increased immigration enforcement activity along the U.S. Southwest border. Nonetheless, criminal organizations continue to capitalize on the desire of unauthorized immigrants to enter the United States. Networks of human smugglers and others\u2014including Mexican drug trafficking organizations (DTOs) that have broadened their money-generating activities to include human and weapon smuggling, counterfeiting, kidnapping for ransom, and extortion\u2014bring unauthorized immigrants across the border and into the United States. In one well-known case, Cheng Chui Ping\u2014also known as \"Sister Ping\"\u2014sentenced in March 2006, had led an international human smuggling ring that was responsible for smuggling Chinese villagers to the United States between the early 1980s and April 2000. In a 2006 press release, DOJ described her as \"one of the first, and ultimately most successful, alien smugglers of all time.\" At the start, Ping's smuggling ring brought small numbers of villagers to the United States via aircraft, using fake immigration documents. She turned from exclusive reliance on air transit to include the use of maritime shipping as her operation matured. This way, Ping likely exploited increasing volumes of international seaborne cargo engendered by globalization to mask her illegal movement of human beings. She eventually developed the capability to smuggle hundreds of victims at a time via cargo ships, where the villagers could be stashed below the deck until they reached their U.S. destination and eventually paid her exorbitant smuggling fees. Criminals who smuggle individuals into the United States may also turn the smuggling into a trafficking situation by increasing the immigrants' debts owed once they have been smuggled to the United States. The smugglers\/traffickers may then require their victims to work for a period of time to pay off the debts. \nOrganized crime exploits individuals through both labor and sex trafficking. In 2006, the FBI reported that human trafficking generates about $9.5 billion for organized crime annually. However, as the Government Accountability Office (GAO) has noted, estimates regarding the global scale of human trafficking are questionable; as such, any estimates regarding the proceeds generated through these crimes may not be representative of their true scope. These criminal organizations target both U.S. citizens and foreign nationals who are drawn to visions of better lives in the United States. \nInternational borders often play a central role in the dynamics involved in forced labor and sex trafficking. In many instances, victims likely perceive borders and border security regimens as insurmountable barriers via legitimate means, requiring them to turn to illicit methods of transit offered by traffickers. Organized criminals prey on victims' powerful desires to live or work in other countries. While the following two cases may not have been prosecuted by DOJ as traditional \"organized crime,\" the networks involved highlight some of the dynamics involved in labor and sex trafficking. In August 2010, federal law enforcement announced an indictment of six individuals for participation in an alleged conspiracy to exploit Thai nationals through forced labor in the United States. The defendants allegedly enticed workers to the United States by offering opportunities for lucrative jobs. Once in the United States, the approximately 400 Thai workers had their passports confiscated, were threatened with economic harm and deportation, and were forced to work on farms in Washington and Hawaii. In another case, four individuals from the United States, Mexico, and Guatemala were sentenced in April 2010 for involvement in a sex trafficking organization that targeted young Mexican women. They lured these women to the United States on the promise of better lives or legitimate employment. Once the women were brought to the United States, they were instead physically threatened, beaten, intimidated, and forced to engage in commercial sex. DOJ has also reported an uptick in Asian organized crime groups becoming involved as pimps or brokers in domestic human sex trafficking. Although the increase is noted for Asian organized crime groups, involvement in sex trafficking is certainly not limited by ethnic or geographic origin; these criminals collaborate with other, non-Asian groups to further their sex trafficking enterprises. In September 2012, the Obama Administration expanded its anti-trafficking efforts, including training and guidance to federal prosecutors, judges, and law enforcement.\n\n\t\t\tDrug Trafficking\n\nIn the last decade, cocaine has become a truly global commodity reacting to illicit market fluctuations. Traffickers now can leverage wide, international distribution networks to ride out pressures or changes that may make their traditional illicit markets less hospitable. According to media reports, some Colombian and Mexican cocaine suppliers have shifted sizeable amounts of product using containerized shipping\u2014hiding their illicit material within the daily globalized flow of legitimate seaborne international commerce. And some of the Mexican Gulf Cartel's smuggling activity involving European markets has used the United States as a transshipment point. \nWhen it comes to the internationalization of cocaine markets, not all the news involves the growth of supply, however. Global demand for cocaine has partly impacted U.S. bound supplies of the drug. Cocaine availability levels in the United States have decreased since 2006. Diversion of cocaine to European and Latin American markets by Colombian and Mexican drug cartels has fueled this downturn in availability, as have coca eradication efforts, large seizures, law enforcement pressure on Mexican cartels, and violent inter-cartel rivalries.\nWhile the story of globalized drug smuggling impacting the United States often revolves around big Colombian and Mexican cartels specializing in drugs such as cocaine, marijuana, heroin, and methamphetamine, criminal groups trafficking narcotics come in all sizes and handle a variety of drugs. Also, partly because international communications, travel, and transportation networks are readily exploitable, large-scale Latin American drug trafficking organizations are not the only ones to have significant worldwide reach. \nIn November 2012, U.S. Immigration and Customs Enforcement (ICE) announced the extradition of a reputed criminal syndicate leader from Albania to the United States. According to ICE, Arif Kurti led an organization with hundreds of members that allegedly imported tens of thousands of kilograms of hydroponic marijuana into the United States from Canada and Mexico. The group also supposedly smuggled the drug ecstasy (MDMA, 3,4-methylenedioxy-N-methylamphetamine) into the United States from the Netherlands and Canada as well as cocaine from Mexico, Colombia, Venezuela, and Peru. Additionally, ICE asserts that Arif's network diverted prescription pills, such as oxycodone. The group is said to have distributed the narcotics throughout the United States, Canada, and Europe. In another case, Phuong Thi Tran pled guilty in February 2010 for her involvement in what has been described in press reports as an Asian drug trafficking ring that smuggled ecstasy pills and other drugs into the United States from Canada, where they were manufactured. Tran, who lived in Canada, is originally from Vietnam and served as the group's ringleader. She oversaw an operation that smuggled millions of ecstasy pills into the United States between 2002 and 2008, when she was arrested. \n\n\t\t\tMoney Laundering\n\nMaking ill-gotten gains appear legitimate is critical to the success of organized criminals. For many criminals, the movement of money\u2014either as bulk cash or digital transactions\u2014across international borders plays an integral role in this process. They use many techniques to launder money, often exploiting legitimate financial structures to mask the illegal origins of their profits. Money laundering includes three fundamental steps: (1) placement, the introduction of illicit funds into licit financial systems; (2) layering, the movement (often international) of illicit funds through a variety of business structures to obscure its origins; and (3) integration, the use of illicit funds that at this stage appear legitimate in lawful business transactions. \nIn June 2012, DOJ announced an indictment charging 14 defendants, including Miguel Angel Trevi\u00f1o Morales (Trevi\u00f1o), for laundering millions of dollars in drug trafficking proceeds in the United States. The scheme purportedly involved the racing of quarter horses. According to DOJ, since 2008, Trevino\u2014a leader within Los Zetas, a Mexican drug trafficking organization\u2014oversaw the operation, which funneled money to his brother, Jos\u00e9, in the United States. The indictment filed in the case asserts that Jos\u00e9 laundered drug proceeds by pretending to be a legitimate quarter horse breeder. He purchased, trained, and raced horses, relying on front companies to conceal the origin of the money used to fuel these efforts.\nIt is impossible to determine with any accuracy the amount of money that is laundered by organized criminals whose operations impact the United States. However, U.S. government estimates suggest that Mexican and Columbian drug trafficking organizations earn between $18 billion and $39 billion annually from sales in the United States. Annually, perhaps between $20 billion and $25 billion in bank notes is smuggled across the Southwest border into Mexico. How much of this is profit and then laundered is unclear. \nBulk cash smuggling is an important means by which criminals move illegal profits from the United States into Mexico, but drug traffickers have also turned to stored-value cards to secretly transport their illegal earnings. With these cards, criminals are able to avoid the reporting requirement under which they would have to declare any amount over $10,000 in cash crossing the border. Aside from bulk cash smuggling and stored-value cards, Mexican traffickers move and launder money by using digital currency accounts, e-businesses that facilitate money transfers via the Internet, online role-playing games or virtual worlds that enable the exchange of game-based currencies for real currency, and \"mobile payments through cell phones that provide traffickers with remote access to existing payment mechanisms such as bank and credit card accounts and prepaid cards.\"\nOrganized criminals also use the globalized international financial system in the layering stage of money laundering. The United States is impacted by this from at least two directions. Criminals operating abroad can exploit U.S. structures to launder money while those operating domestically can wash their illicit profits abroad in an attempt to avoid U.S. law enforcement. Large financial markets such as New York, where criminal activity is potentially hidden within voluminous legitimate business, are used by criminals. Criminals use banks and businesses to launder money in offshore locations with strict privacy laws such as Panama, the Cayman Islands, or the Isle of Man. In these locales, law enforcement struggles to determine the true ownership of assets. \nInternational or domestic shell companies can be used for money laundering. They are legal entities that have no independent operations or assets of their own and largely exist only on paper. Shell companies have legitimate purposes, for example, \"they may be formed to obtain financing prior to starting operations.\" Regardless, DOJ has identified U.S.-based shell companies as especially difficult to investigate because \"lax company formation laws [allow] criminals [to] form [them] quickly and cheaply and obtain virtual anonymity.\" One study has suggested that establishing a shell company is \"easier in the U.S. than in the rest of the world.\"\nOrganized criminals likely rely on the veneer of legitimacy conferred by U.S.-based shell companies, which in many instances allow criminals to conceal their ownership. Most U.S. states do not require owner information when companies are formed or even on annual or biennial reports. Individuals can distance themselves from the actual formation of specific shell companies by using company formation agents (registered agents) to establish them. Shell companies enable criminals to move money around the globe through legitimate bank accounts without attracting law enforcement scrutiny. With relative ease, a criminal organization can open multiple shell companies worldwide and systematically distance ill-gotten gains from their criminal origins, leaving behind a hard-to-untangle web of accounts, legitimate corporations, and transactions. Both Mexico's Sinaloa Cartel and alleged Eurasian organized crime figure Semion Mogilevich have likely used U.S. shell companies to launder money.\n\n\t\tOrganized Crime and Technological Change\n\nOrganized criminals have expanded their technological \"toolkits.\" They have adapted to incorporate technology-driven fraud into their capabilities. Their operations can harm U.S. citizens without ever having a physical presence in the country. Organized crime groups engage in a wide variety of tech savvy mass marketing frauds. Even traditional arenas of criminal activity such as illegal gambling have been transformed by the Internet. For example, illegal gambling has been a staple in the Cosa Nostra's criminal diet for decades. In recent years, they have branched out into Internet gambling, which debuted in the mid-1990s. Operation Heat, an investigation by the New Jersey Division of Criminal Justice, led to the arrest of Brian Cohen, who allegedly facilitated the Lucchese family's offshore gambling activities. According to law enforcement officials, the family earned billions of dollars via offshore Internet activity that included a website and a Costa Rican wire room that handled transactions, both managed by Cohen. \n\n\t\t\tMass Marketing Fraud\n\nThe International Mass-Marketing Fraud Working Group defines mass marketing fraud as\nFraud schemes that use mass-communications media\u2014including telephones, the Internet, mass mailings, television, radio, and even personal contact\u2014to contact, solicit, and obtain money, funds, or other items of value from multiple victims in one or more jurisdictions.\nMass marketing fraud involves a wide range of criminal activity that has been transformed by globalization and technological change. It can be perpetrated by individuals, small groups, or sophisticated criminal enterprises. Parsing out exactly how much of this activity can be attributed to organized criminals is tricky, but experts suggest that \"fraudulent mass marketing operations are increasingly transnational, interconnected, and fluid.\" \nIn December 2012, DOJ announced arrests in Romania, the Czech Republic, the United Kingdom, and Canada related to what the department described as an \"international organized crime cyber fraud ring\" that bilked victims of more than $3 million. DOJ asserts that the criminal network tricked U.S. consumers into sending it money by creating false advertisements for non-existent merchandise that the network's operatives posted on websites such as eBay.com and Cars.com. Some of the individual instances of fraud allegedly perpetrated by the group entailed sham sellers with elaborate back stories\u2014phony auto dealerships, fake websites, fraudulent documents (such as certificates of title), and authentic looking invoices from online payment services such as PayPal, for example.\n\"Boiler room\" scams, one type of mass marketing fraud with a long history, entail groups of fraudsters making high-pressure deceptive merchandise pitches and misleading service offers to unwitting customers around the world. Recently, criminals have innovated based on tried-and-true boiler room schemes by outsourcing some activity to specialists, internationalizing their operations, and adopting sophisticated concealment strategies for their communications capabilities and locations. \nThe Cosa Nostra and other organized criminals use boiler rooms. In June 2010, the FBI raided an alleged boiler room operation involving Anthony Guarino, a purported Bonnano family soldier. According to law enforcement officials, the boiler room hoodwinked elderly investors into buying shares of companies, and 40% of the money taken in was handed over to the boiler room operators as commissions.\n\n\t\t\t\tTechnology Transforms Advance Fee Fraud (AFF)\n\nSince the 1970s, technological advancements have revolutionized advance fee fraud (AFF) operations\u2014a form of mass marketing fraud used by criminal organizations and individual fraudsters. Today, these schemes often involve criminals appealing for money via unsolicited (spam) emails. These emails typically request an initial cash payment from recipients. The initial cash payment supposedly facilitates the disbursement of a much larger sum of money to the email recipients. The later sum never arrives. A recent AFF email scam attempting to dupe people into believing they had been contacted by the FBI's Detroit Field Office asked email recipients to forward $14,300 in return for the release of over $18 million to their accounts. In one of the emails associated with this scheme, the fraudsters suggest that \"the International clamp down on Terrorist [sic]\" has frozen the larger pot of money. \nAlso known as \"419 scams\" after a section in the Nigerian criminal code, the broad outlines of the modern version of AFF originated in Nigeria during the 1970s and early 1980s, and perhaps even earlier. AFF's original incarnation may stretch back to the 1500s in the \"Spanish Prisoner\" scheme. Wealthy English business owners were asked to help pay for a rescue mission to save someone held captive in Spain. In return, they would supposedly receive part of the vast alleged reward payment. Of course, it never came. In the late 1970s and early 1980s, Nigerian fraudsters became known for mailing unsolicited letters requesting monetary assistance in transferring frozen or hidden funds out of West African countries. When fax machines became commonplace, perpetrators quickly reached many more victims with less effort. The Internet and email further revolutionized AFF operations. \nToday, these schemes are global, emanating from many other countries. The spamming networks involved often have short lives focusing on specific schemes. Recent estimates suggest that AFF networks may have swindled over $2 billion from U.S. companies and citizens in 2009. \nIn July 2011, six defendants were sentenced for running an AFF scam that tricked U.S. sweepstakes participants into believing that they had won substantial cash prizes. This money would have purportedly been sent to the victims once they paid the required taxes and fees. Ultimately, there was no lottery prize, and the fraud netted about $2 million. \nEstimates indicate that today's AFF networks only need to dupe 1% of the people or businesses they reach to turn a profit.\n\n\t\t\tCyberspace, Electronic Information, and Organized Crime\n\nAs the history of AFF may indicate, organized criminals have adapted to the digital age by becoming expert at stealing information stored and shared electronically. Many are adept at manipulating and defrauding victims in the virtual world. All of this covers a range of activity including cyber intrusions into corporate databases, the theft of individual consumer credit card information, and a wide variety of fraudulent online activity. The criminal groups operating in cyberspace can be broken into two categories: (1) part-timers\u2014those who leverage digital information to enhance other activities, and (2) full-timers\u2014those who solely commit and specialize in online or digital crimes. While this is a helpful distinction to draw for discussion purposes, it is difficult to attribute specific volumes of criminal activity to each category of actors. General statistics suggest that organized criminals from both categories play a large role in online data theft. For instance, a study of 855 data breaches involving businesses around the globe in 2011 noted that \"Organized criminals were up to their typical misdeeds and were behind the majority of [cases].\" They accounted for 83% of all breaches committed by actors outside of the targeted business or organization. \n\n\t\t\tOnline Identity Theft and Sophisticated Credit Card Fraud\n\nOrganized criminals are involved in stealing the identities of online consumers and have engaged in technologically advanced credit card fraud. These illicit ventures pilfer from the bank accounts of ordinary citizens and often cast a wide net to maximize the number of victims. \nEurasian criminals in California have engaged in identity theft in which they leveraged technological savvy, old-school organized crime strategies, and Internet connectivity to reap thousands of dollars in profits. In 2009 in the city of Redondo Beach in Southern California, Armenian or Russian criminals allegedly targeted a gas station with an Armenian owner (exploiting their own ethnic group). They placed one of their crew members as an employee at the station, where he implanted high-tech skimming devices at gas pumps to steal customer credit card information, victimizing more than 1,000 individuals, including Redondo Beach police officers. The employee quit work and the group made off with more than $300,000 from people's accounts. Another case, this time in the Las Vegas area in 2008, involved an alleged Armenian criminal group that reportedly skimmed more than 1,000 credit and debit cards using insiders at restaurants, bars, and smoke shops. In some instances, the crew manufactured its own cards using stolen information. Losses approached $1.5 million. In 2009, Las Vegas authorities also uncovered a skimming scheme complete with a credit card manufacturing lab. This crew used skimmers that captured information from magnetic strips on credit cards as well as pin numbers using a camera. \nIn March 2010, Albert Gonzalez, the leader of the largest identity theft and retail hacking ring prosecuted by the United States, was sentenced to 20 years in prison. Through \"wardriving\"\u2014a technique in which individuals drive around in a car with a laptop computer and search for unsecured wireless networks\u2014the ring hacked into credit card payment systems at retailers including TJX Companies, BJ's Wholesale Club, OfficeMax, Boston Market, Barnes & Noble and Sports Authority, and stole more than 40 million credit and debit card numbers. Gonzalez also provided malware to hackers to aid them in evading anti-virus programs and firewalls in order to access companies' networks and payment systems. The conspirators, located in the United States, Ukraine, and Estonia, laundered their illicit proceeds through banks in Eastern Europe.\n\n\t\t\tOrganized Retail Crime and Online Fencing\n\nWhile not necessarily viewed as \"organized crime\" by U.S. law enforcement agencies, as its name implies organized retail crime (ORC), or organized retail theft, bears some of the hallmarks of organized criminal activity. ORC typically refers to large-scale retail theft and fraud by organized groups of professional shoplifters, or \"boosters.\" ORC involves a host of retail crimes ranging from retail, manufacturing, distribution, and cargo theft to gift card fraud, receipt fraud, and ticket switching. The organized crime rings resell illegally acquired merchandise in a variety of fencing operations such as flea markets, swap meets, pawn shops, and, more recently, online marketplaces. Most stolen merchandise is sold to a low-level fence, commonly called a \"street fence.\" Street fences will either sell these goods directly to the public or will sell the merchandise to mid-level fences who run \"cleaning operations\" that remove security tags and store labels as well as repackage stolen goods so they appear as though they came directly from the manufacturer. This \"cleaning\" may even involve changing the expiration date on perishable goods such as over-the-counter medication and infant formula.\nGlobalization and technological innovation have allowed more and more transactions to take place online rather than face-to-face. This holds true for retail crime, where thieves have turned to \"e-fencing\"\u2014using the Internet and online marketplaces as means to fence ill-gotten goods. This has increased criminals' anonymity, global reach, and profitability. Online markets allow criminals to easily distribute stolen goods across the nation and around the globe. E-fencing has also proven to be more profitable to criminals than has fencing at physical locations. While criminals may profit about 30 cents on the dollar (30% of the retail price) by selling goods at physical fencing locations, they can make about 70 cents on the dollar via e-fencing.\nA criminal network based in Baltimore serves as an example of an operation that integrated traditional as well as more technologically advanced fencing techniques. As of April 2011, at least 13 defendants, including the owners of pawn shops implicated in the scheme, had pled guilty to roles in this organized retail crime ring. In this conspiracy, boosters stole products, including over-the-counter medications, health and beauty aids, gift cards, DVDs, and tools, from retailers such as Target, Safeway, Wal-Mart, and Kohl's. Several pawn shops bought these stolen goods from boosters, cleaned them, and then transported them to other locations for resale. Some co-conspirators used online marketplaces such as eBay and Amazon.com to fence the stolen goods. In all, the case involved about $20 million in stolen goods. \n\n\t\t\tBulk Narcotics Smuggling and Technology\n\nTechnological advances have transformed cocaine and other narcotics trafficking. In the early 1990s, Colombian traffickers\u2014moving narcotics to the United States and elsewhere around the globe\u2014began experimenting with semisubmersible maritime smuggling vessels, which at first were likely too impractical, costly, and risky to operate. Hybrids of traditional submarines and boats, these craft have small above-water profiles\u2014about 18 inches. Increased law enforcement seizures of cocaine shipments carried by more traditional surface vessels encouraged traffickers to adopt semisubmersible technology. Colombian traffickers likely co-opted experts from the legitimate world to develop this technology. Semisubmersibles can have their cargo \"unloaded in shallow waters or transported to shore by small boats.\" They have been interdicted in both the Eastern Pacific and the Caribbean. While their current use likely responds in part to interdiction pressures, it also reflects the global availability of expertise, designs, and materials. Vast illicit global cocaine markets have also made such endeavors possible, producing huge profits for traffickers that are then tilled into technology to circumvent law enforcement. But semisubmersibles, which according to figures provided by the U.S. Coast Guard in 2010, accounted for 27% of the maritime movement of cocaine toward the United States, themselves are not immune to capture. Since 2006, law enforcement has regularly seized semisubmersible cocaine smuggling vessels from Colombian drug traffickers on the high seas or in clandestine shipyards hidden in coastal mangrove swamps. The Drug Trafficking Vessel Interdiction Act of 2008 ( P.L. 110-407 ) enhanced the federal government's ability to prosecute traffickers operating submersible and semisubmersible vessels by making it a federal crime to operate, embark on, or conspire to operate these vessels in international waters with the intent to avoid detection.\nIn early July 2010, police in Ecuador seized a fiberglass submarine designed to operate fully submerged at a depth of 65 feet. The diesel-powered, twin-screw sub, a marked step forward in technology, was likely intended to transport cocaine on the high seas and could carry 10 tons of cocaine on a 10-day voyage. This vessel represented a large improvement over the semisubmersibles that have been regularly seized from traffickers since 2006. \nMexican drug traffickers have increasingly relied upon ultralight aircraft to smuggle drugs across the Southwest border into the United States. These small planes can fly as low as tree level and are less easily detected than the larger aircrafts that were used by the traffickers prior to 2007. While some traffickers may land the ultralights on the U.S. side of the border to pass off drug loads to distributors, others attach drop baskets that can carry over 300 pounds of marijuana or other drugs. These drop baskets release packages of drugs that will fall to the ground when a lever in the aircraft is activated, and then local gangs or traffickers can pick up and distribute the drugs. In May 2009, a low-flying ultralight aircraft carrying about 275 pounds of marijuana, estimated to be worth $220,480, crashed in Yuma, AZ. The pilot escaped, but two suspected co-conspirators were arrested.\n\n\t\t\t\tCross-Border Tunnels\n\nMexican drug traffickers use underground, cross-border tunnels to smuggle drugs from Mexico into the United States. Tunneling, while not in and of itself a new phenomenon (having been used for hundreds of years during conflicts and for escapes), has increased not only in prevalence but in sophistication. Early drug tunnels were rudimentary, \"gopher hole\" tunnels dug on the Mexican side of the border, traveling just below the surface, and popping out on the U.S. side as close as 100 feet from the border. Slightly more advanced tunnels began to rely on existing infrastructure, which may be shared by neighboring border cities such as the tunnel shared by Nogales, AZ, in the United States and Nogales, Sonora, in Mexico. Some of these interconnecting tunnels tap into storm drains or sewage systems in order to move drugs even further than smugglers could move them by digging tunnels alone. The most sophisticated tunnels can have rail, ventilation, and electrical systems. In January 2006 in Otay Mesa, CA, a tunnel, stretching nearly three-quarters of a mile in length and traveling over 85 feet below the surface of the earth, was discovered, where more than two tons of marijuana was seized. The tunnel had lighting, ventilation, and groundwater drainage systems. In November 2010, the San Diego Tunnel Task Force\u2014created in 2003 as a partnership between ICE, DEA, and the U.S. Border Patrol working along with state law enforcement and Mexican counterparts\u2014uncovered a 600-yard passageway stretching from Tijuana to Otay Mesa. About 30 tons of marijuana, with an estimated street value of about $20 million, were seized in the United States and Mexico. About a year later, the task force unearthed two other tunnels in Otay Mesa within a two-week period. One of them stretched 612 yards and had electric rail cars, lighting, reinforced walls, and wooden floors. In July 2012, three drug smuggling tunnels were uncovered along the Southwest border in less than a week.\nU.S. law enforcement uses various tactics and simultaneously faces numerous challenges in detecting these cross-border tunnels. More than 150 tunnels have been discovered since the 1990s \u2014primarily in Arizona and California\u2014and more than 75 of these have been found since 2006. One such method of tunnel detection is the use of ground penetrating radar (GPR). However, this technology is limited by factors including soil conditions, tunnel diameter, and tunnel depth. Law enforcement may also use sonic equipment to detect the sounds of digging and tunnel construction and seismic technologies to detect blasts that may be linked to tunnel excavation. U.S. officials have acknowledged that law enforcement currently does not have technology that is reliably able to detect sophisticated tunnels. Tunnels are more effectively discovered as a result of human intelligence and tips rather than technology.\n\n\t\tExploitation of Ethnic Diaspora Communities\n\nCriminal organizations structured along ethnic lines sometimes base their operations in immigrant communities. They use these enclaves to provide cover for their dealings and occasionally also exploit their ethnic compatriots. Historically, criminal groups have burrowed into their immediate surroundings, but now this is enhanced by the fact that they can leverage Internet connectivity and extensive, international transportation linkages from localities around the globe. A number of recent cases highlight these issues. \nIn October 2010, a total of 73 individuals were indicted in the largest single Medicare fraud ever charged. As described by DOJ, the Mirzoyan-Terdjanian organization, an Armenian criminal group, ran fake clinics in 25 states, but had its leadership based in Los Angeles and New York City, two areas with large immigrant populations from the former Soviet Union, (e.g., Glendale, in the Los Angeles region, is home to 200,000 Armenian Americans). According to the president of the Los Angeles chapter of the Armenian-American Chamber of Commerce, this community is exploited by a handful of criminals who were \"raised under communist rule in the former Soviet republic of Armenia, where exploiting a corrupt government was seen as fair game.\" \nMembers of the Mirzoyan-Terdjanian group allegedly billed Medicare for more than $163 million in fraudulent medical services. They reaped about $35 million in profits. The case involves the stolen identities of both doctors and Medicare beneficiaries and the creation of at least 118 spurious medical clinics across at least 25 states, all part of a largely \"virtual\" operation. FBI Assistant Director in Charge Janice K. Fedarcyk described the organization as \ncompletely notional. There were no real medical clinics behind the fraudulent billings, just stolen doctors' identities. There were no colluding patients signing in at the clinics for unneeded treatments, just stolen patient identities. The whole doctor-patient interaction was a mirage. But the money was real, while it lasted.\nThe indictment in the case also linked Armen Kazarian to the scheme. Arrested in Los Angeles, Kazarian, an Armenian residing in the United States, had substantial influence in the criminal underworld as a vor v zakone , a Russian term meaning \"thief-in-law.\" Kazarian had reputedly lied to federal authorities to obtain asylum after emigrating to the United States in 1996. In the course of the scheme, Kazarian mediated disputes for the Mirzoyan-Terdjanian group and allegedly threatened to assault and kill an associate. In July 2011, Kazarian pled guilty to racketeering in the case. The indictment suggests that members of the organization, many of them Armenian nationals or immigrants, sent criminal proceeds to Armenia, purchasing real estate and operating businesses with the funds.\nIn June 2010, DOJ charged five Ukrainian brothers with extortion and conspiring to engage in a pattern of racketeering activity. This far-flung operation based out of Philadelphia and Ukraine had allegedly trafficked about 30 Ukrainians into the United States via Mexico, exploiting them in cleaning crews operating in stores, private residences, and office buildings in Pennsylvania, New York, New Jersey, Maryland, and Washington, DC. According to DOJ, the brothers failed to pay their victims, threatened them with violence, physically abused them, and housed them in overcrowded quarters. One of the brothers is accused of raping a trafficked woman on several occasions. The victims of this scheme likely trusted the brothers as fellow immigrants who had ties to the United States and were willing to help others start new lives in the country.\nIn another case, at least five Chinese citizens involved in operating Asian massage parlors in Kansas were sentenced between April and October of 2009 for their roles in exploiting Chinese women in the United States. The defendants recruited women from China to work in the United States as masseuses. They then confiscated the women's identification documents and used these documents to fraudulently wire proceeds from illegal activities back to China. They forced the women to work for 14 hours every day, locked them inside the massage parlors to sleep at night, and forced them to perform sexual services for the male patrons of the massage parlors.\nWest African criminal networks specializing in AFF operate in many nations including the United States, where members have assimilated into local ethnic communities. Many West African fraudsters based outside of their home countries direct proceeds back to organizations in their homelands. More recently, it appears that some of these diaspora-based criminals are operating independently and retaining their ill-gotten gains. \n\n\t\tChanging Structures\n\nThe traditional image of organized crime involves elaborate hierarchies, behavioral codes, and initiation rituals. Some criminal organizations like the Cosa Nostra retain a strong element of hierarchy. However, in the last 20 years, the criminal underworld has likely moved away from rigid hierarchical organizational structures and toward decentralized and more flexible \"network\" models. One scholar has argued that the public is still wedded to hierarchical archetypes particularly when conceptualizing how smugglers operate:\nStill infused with images of cartels and syndicates\u2014rigid, top-down organizations\u2014we are not accustomed to thinking of flexible, even unchartable networks of intermediaries that operate across many borders and provide different services. Some are permanently linked and others vary in their composition, activities, and geographical scope depending on markets and circumstances. Thus, brokers and agents with access to multiple suppliers, conveyors, and buyers are more significant in the drug trade than are old-fashioned \"kingpins.\" For all these brokers, expanding into new product lines, legal or illegal is just a logical business step.\nAs discussed elsewhere in this report, criminals (much like legitimate businesses) have internationalized their operations, particularly in the last two decades. The fast movement of people, goods, and information stimulated by globalization and technological change has encouraged decentralization and outsourcing. Networks are especially suited for this type of environment. Global businesses and criminal organizations now give critical roles to individuals or groups outside of an organization's core that are often physically separated by thousands of miles. In some cases, such as Colombian drug trafficking organizations, law enforcement successes against criminal hierarchies may have encouraged the adaptation of networks. Criminals conduct more business offshore because of the efficiencies offered by the Internet and advances in the world's transportation and communication infrastructures. In the underground economy, these changes have encouraged the abandonment of exclusivity implied by the elaborate codes of behavior, ethnic bonds, and rigid hierarchy that once typified organized crime. \nNetworked structures shield organized criminals from law enforcement efforts. Beyond its immediate duties, one element or node in a network can have little understanding of the entire network's criminal activity. It is possible for a network to operate without a single constituent part knowing the entire scheme. In larger networks with clear cut leaders, layers of peripheral nodes likely do not know who directs them. Disruption of peripheral network elements by law enforcement may alert core players to shut down the enterprise.\n\n\t\t\tNetwork Models\n\nIllicit networks broadly follow two models. \"Hub and spoke\" networks involve peripheral nodes tied to a leadership core. Core players initiate schemes, settle conflicts, and provide guidance to others. In this model, activity moves from core to peripheral players while the peripheral entities do not interact with one another. \"Chain\" networks involve the flow of information or movement of criminal goods from node to node in linear fashion without a discernable center of gravity or central command. They often lack obvious individual focal points for policing efforts. \nNetworks can quickly adapt to changing market conditions or the elimination of nodes by law enforcement by quickly recruiting replacement specialists. Unlike hierarchies such as the Cosa Nostra, networks have few membership requirements, initiation rituals, or loyalty tests. These organizations can also shift allegiances easily, opportunistically drawing in participants for specific tasks.\n\n\t\t\t\tBlurring of Forms\n\nSome powerful criminal groups that still favor traditional hierarchical structures featuring distinct lines of authority simultaneously exhibit networked characteristics as well, especially a flattening of leadership arrangements and outsourcing of some activities to criminals outside their immediate command and control structures. For example, in the United States hierarchical Mexican drug cartels rely on networks to handle aspects of trafficking. Violent U.S. gangs transport wholesale quantities of narcotics into the United States and procure weapons for some cartels. Prison gangs, for instance, are highly structured, and both national- and regional-level prison gangs have formed alliances with Mexican DTOs. For example, the Barrio Azteca prison gang\u2014operating primarily in southwestern Texas and southeastern New Mexico\u2014has partnered with the Ju\u00e1rez cartel and generates much of its money from smuggling marijuana, heroin, and cocaine across the Southwest border. Similarly, one author of a broad study of criminal organizations in Mexico, Brazil, and Colombia has noted that these groups embody characteristics of what he dubs the \"Godfather Model\"\u2014rigid hierarchy\u2014and the \"Facebook Model\"\u2014dynamic network.\n\n\t\t\t\tAdvantage: Networks Challenge Law Enforcement\n\nThe shift to networked structures may suggest that criminals are more elusive than ever as the illicit world evolves rapidly, while law enforcement \"plays by yesterday's rules and increasingly risks dealing only with the weakest criminals and the easiest problems.\" According to one study, when combating agile drug cartels, a number of impediments hobble law enforcement officials. Most broadly, the hierarchical authority embodied in bureaucratic structures complicates the decision-making process. Additionally, law enforcement potentially faces\ninteragency coordination problems that further complicate, and decelerate, decision making, comprehensive legal and bureaucratic constraints to action, and ambiguous incentive structures that undermine some agents' willingness to share information\u2014and others' commitment to winning the war on drugs.\nYet another challenge for law enforcement investigating more-networked organized criminal groups may arise from constraints in extraterritorial jurisdiction. While some criminal actors in a network may conduct business offshore or overseas and federal law enforcement does have extraterritorial jurisdiction to investigate and prosecute individuals who criminally violate U.S. interests abroad, this jurisdiction does not necessarily cover all crimes committed by organized crime groups. Further, jurisdictional issues can present substantial diplomatic and practical challenges for law enforcement.\n\n\t\t\t\tDisadvantage: Networks Have Exploitable Weaknesses\n\nSome of the strengths suggested by network structure can also be interpreted as weaknesses. Their inherent compartmentalization potentially impedes efficient information sharing, as key players keep peripheral actors in the dark about important aspects of complex schemes. This suggests that highly networked organizations more effectively engage in simpler criminal conspiracies. Decentralization can undermine the development of strategy and slow down decision making. It may also encourage excessive risk taking by peripheral actors who are not controlled by hierarchical roles rooted in rules enforced by the organization. Decentralization possibly also nurtures challengers who compete with core leaders and foster organizational instability. Maintaining networks also likely requires \"time-consuming\" effort geared toward \"building and fostering relationships.\"\n\n\t\tCorruption\n\nSome criminal networks co-opt or attract participants from the licit realm, using their specialized skills to provide \"logistical advantages.\" These skills are especially valuable in a globalized, high tech era in which technology is critical in overcoming geographical barriers that once slowed international trade. Corrupt individuals maintain their status in above-board business or governmental jobs, providing criminals with clean assets, closely guarded information, specialized access, sensitive information, or resources. Corrupt licit-realm actors also potentially lend criminal enterprises a sense of legitimacy. Because of globalization, it is likely harder to disprove a criminal's claims that he is a legitimate businessman, especially if the proof lies overseas or in multiple jurisdictions. The efforts of organized criminals to draw into their organizations legitimate persons can be described from three broad perspectives: ground-level, private sector criminal infiltration of businesses; co-optation of powerful business leaders; and public corruption.\n\n\t\t\t\"Ground-Level\" Exploitation of Private Businesses\n\nNon-executive employees or self-employed individuals can provide criminal organizations with highly specialized capabilities in our highly networked age. The possibilities for co-opted private sector specialists are plentiful. The three examples below suggest this.\nViktar Krus operated a network that illegally brought foreign workers into the United States. He relied on legitimate facilitators such as Beth Ann Broyles, an Illinois immigration attorney who prepared fraudulent immigration petitions for the organization. Broyles claimed that she initially did not know that she was involved in criminal activity. When she eventually discerned that she was, Broyles rationalized her participation by believing that she was actually somehow assisting immigrants. She was among two dozen co-defendants who worked in Krus's network. Additionally, Krus likely relied on bribing hotel employees to inflate the number of workers they needed to hire. Between 2003 and 2008, he used at least 10 shell companies and evaded millions of dollars in taxes while bringing in 3,800 immigrants, many illegally, to work in the service sector and industrial jobs in the Norfolk, VA, region and elsewhere around the United States. He grossed $34 million, forced people to live 12-15 to an apartment, garnered fees from their wages, and charged legitimate businesses $10 per hour for their labor. Krus received a seven-year prison sentence for conspiracy, tax fraud, visa fraud, and money laundering. According to DOJ, the Tran organization, a criminal group that cheated approximately 27 casinos in the United States and Canada out of more than $7 million, bribed card dealers and supervisors at casinos to advance its scheme. In what has been dubbed \"the largest cheating ring of all time,\" corrupt dealers rigged their shuffles during mini-baccarat and blackjack games. The group also used technologically advanced tools such as hidden transmitters and custom software to predict the order in which cards would reappear during games. The organization began its operations in 2002, and the initial indictment was returned against the group in May 2007. DOJ's Organized Crime and Racketeering Section helped prosecute Victor Kaganov in connection with an illegal money transmitting business he allegedly ran in Oregon. In March 2011, Kaganov pled guilty to operating an illegal money transmitting business. DOJ has not publicly linked Kaganov, who was indicted in March 2010, to any organized crime figures. However, Kaganov purportedly opened multiple shell corporations in Oregon on behalf of Russian clients. He used the shells to shuttle more than $172 million via more than 4,200 wire transactions \"in and out of the United States to more than 50 countries,\" according to DOJ. His supposed criminal activity highlights services that organized criminals could potentially use to launder money.\n\n\t\t\tBig Business and Organized Criminals\n\nIn his Annual Threat Assessment for 2010, then-Director of National Intelligence Dennis Blair noted that government, organized crime, intelligence services, and big business figures are growing increasingly close in their interactions. He stated, \nan increasing risk from Russian organized crime is that criminals and criminally linked oligarchs [powerful Eurasian businessmen who rose to power in the immediate post-Soviet period] will enhance the ability of state or state-allied actors to undermine competition in gas, oil, aluminum, and precious metals markets. \nHowever, based on open source information, it is often difficult to determine with any degree of certainty whether oligarchs or other powerful international entrepreneurs with interests in U.S. markets or investors have criminal connections. \nRussian billionaire Oleg Deripaska exemplifies this difficulty. According to unnamed U.S. federal officials cited in news reports, Deripaska has struggled to maintain a U.S. visa because of his alleged ties to organized crime. Prior to the global financial crisis, he possessed a $28 billion fortune and was the ninth-wealthiest person in the world. He obtained a U.S. visa in 2005, but it was revoked soon thereafter. According to press reporting, in 2009 the FBI set up two U.S. visits by Deripaska for undisclosed reasons on a limited entry permit from the Department of Homeland Security (DHS). Claims of criminal connections have publicly dogged him for years. But Deripaska has never been convicted of a crime and has strongly denied all accusations. His difficulty getting a U.S. visa may have kept some U.S. bankers from participation in an initial public offering (IPO) involving his aluminum company, UC Rusal. The IPO occurred in January 2010 on the Hong Kong stock exchange.\nLike Deripaska, Stanley Ho, a billionaire casino magnate from Macau, has routinely denied accusations of ties to organized crime. According to media reports, U.S. officials have long suspected Ho had links to Chinese criminal groups known as triads. These suspicions resurfaced in 2009 and 2010 involving his daughter, Pansy, and a casino venture in Macau. At the time, Pansy and Nevada-based MGM Resorts International (MGM) each controlled half of the MGM Macau, which opened in December 2007. \nPansy Ho's co-ownership of MGM Macau emerged as an issue for New Jersey gaming regulators because MGM also possessed a 50% share in Atlantic City's Borgata Hotel Casino and Spa. According to New Jersey law, MGM had to prove \"by clear and convincing evidence, its 'good character, honesty and integrity' on a continuing basis\" to maintain its 50% share in the Borgata. In essence, the company and its partners had to be found suitable to operate in New Jersey. \nIt appears that MGM's direct ties to the Ho family were troubling to New Jersey regulators. In May 2009, the New Jersey Division of Gaming Enforcement (DGE) published a report based on its own investigation of MGM's partnership with Pansy Ho in Macau. The DGE report recommended that both Pansy and Stanley Ho be found \"unsuitable persons\" by the New Jersey Casino Control Commission. The DGE noted the elder Ho's \"continued business ties to persons associated with organized crime\" and his daughter's \"direct, substantial, and continuing business and financial ties to her father.\" In March 2010, MGM decided to sell its interest in the Borgata rather than sever ties with Pansy Ho. \n\n\t\t\tCorruption of Public Officials\n\nOrganized criminals corrupt public employees, especially individuals who have sensitive jobs. In many cases, criminals seek people who have skills, particular access to information, or job responsibilities that lend themselves to specific schemes. For example, some criminals whose operations depend on personal identification documents seek to inveigle employees with unique access to such information, and smugglers lure people charged with protecting borders into their operations. \nIn August 2010, Vitaly Fedorchuk was sentenced to 46 months in prison for leading a criminal organization in the Cleveland, OH, area that fraudulently procured Ohio driver's licenses and identification cards for foreign nationals. To do so, Fedorchuk's group relied on Sonya Hilaszek, a corrupt employee at the Deputy Registrar's Office in Parma, OH. She also pled guilty in the case and received a prison sentence of 33 months. DOJ accused Hilaszek of producing documents for between 300 and 500 individuals. The criminal group charged foreign nationals\u2014many were from Ukraine or Uzbekistan and in the United States illegally\u2014between $1,500 and $3,000 for the documents. Fedorchuk's group also allegedly cooperated with criminals in Ukraine to fraudulently obtain non-immigrant visas from the U.S. Embassy in Kyiv. They purportedly relied on corrupt Ukrainian nationals employed by the Embassy and charged $12,000 per visa.\nMexican drug traffickers corrupt employees of federal agencies charged with protecting the Southwest border. The number of cases involving corruption at Customs and Border Protection (CBP) reported by the DHS Office of Inspector General rose from 245 in FY2006 to 731 in FY2011. While the figures do not establish exactly how many of these corruption cases are attributable to organized criminals suborning CBP employees, they do suggest a growing challenge for federal law enforcement focused on combating smuggling and trafficking groups along the border. In an attempt to prevent corruption, federal investigation and law enforcement agencies may vet potential employees. Typically, \"CBP finds 60 percent of applicants subjected to a polygraph exam ineligible for employment because of prior drug use or criminal histories.\"\nTwo cases highlight the potential for corruption by organized crime along the Southwest border. In May 2010, Martha Garnica, a former CBP technician and officer, pled guilty to corruption and drug and alien smuggling charges. She played a significant role in smuggling operations for the Ciudad Juarez-based La Linea criminal organization. In another case, Jose Raul Montano, Jr. was sentenced to 140 months in prison for bribery, cocaine trafficking, and alien smuggling while assigned as a CBP officer at the Brownsville Gateway Port of Entry (POE) in Brownsville, TX. He allowed Mexican drug traffickers and alien smugglers to illegally transport drugs and people into the United States. At the POE, Montano permitted vehicles containing illicit shipments to pass\u2014without inspection\u2014through the lane he worked. In return, Mexican criminals bribed him. By the time of his arrest in April 2009, he received between $8,000 and $10,000 per vehicle. \n\n\tOrganized Crime, a \"National Security\" and \"Public Security\" Concern\n\nClearly, organized crime can be seen as a public security concern, largely endangering people, businesses, and property. In fact, in 1995 the National Intelligence Council (NIC) produced a National Intelligence Estimate (NIE) on international organized crime that emphasized just this. However, the U.S. intelligence community's view of international organized crime has shifted critically in the intervening years. In early 2010, the NIC issued a second NIE on the topic. While, according to DOJ officials, most of the salient issues in the 2010 NIE are consistent with those discussed in the 1995 NIE, a key difference emerged. The 2010 NIE argues that international organized crime has evolved into a national security concern as well. DOJ officials have described these national security threats in five broad categories: (1) penetrating or influencing state institutions\u2014particularly in those states with weak governance; (2) threatening the global economy by infiltrating financial and commercial markets, driving out legitimate businesses, and using a variety of illegal business practices; (3) engaging in cybercrimes across a range of fraudulent activities impacting individuals, businesses, and global trust systems; (4) partnering with terrorist organizations and insurgent groups such as the Revolutionary Armed Forces of Colombia (FARC), Taliban, and Hezbollah; and (5) expanding the reach of drug trafficking such that DTOs ally with other criminal organizations\u2014regardless of ethnic background\u2014and with local drug distributors.\nAlleged Eurasian mob boss Semion Mogilevich embodies both the public and national security dimensions of organized crime. In October 2009, the FBI placed Mogilevich on its Ten Most Wanted Fugitives list. He is wanted for leading a financial scheme that defrauded investors of $150 million between 1993 and 1998. The company that he allegedly controlled at the heart of the operation, YBM Magnex, was based in Newtown, PA, and was incorporated in Canada. Mogilevich was also likely involved in laundering money through YBM Magnex and a network of offshore companies. By purportedly swindling investors, Mogilevich ran an operation that harmed members of the public. More broadly\u2014and involving national security interests\u2014the FBI and DOJ have suggested that the reputed mob boss also has his hands in Eastern European natural gas markets and that he uses his ill-gotten gains to influence \"governments and their economies.\" Russian law enforcement arrested Mogilevich in January 2008 on tax evasion charges but released him in July 2009 on an oath not to flee.\nAlthough analysts have assessed organized crime as being a threat to both public security as well as a national security, these threats cannot be fully evaluated without a clearer understanding of the scope of organized crime.\n\n\t\tConceptualizing Organized Crime\n\nOne of the primary challenges in conceptualizing organized crime is that it is usually not thought of as a specific crime, but rather as a large number of illicit activities committed by groups of individuals who are often so loosely connected that the members themselves do not know who their criminal associates may be. This has historically led to a lack of consistency in the way different groups\u2014scholars, policymakers, various federal law enforcement agencies, and nation states\u2014view what constitutes organized crime and think about how to combat it. The inconsistent conceptualization of organized crime has also made it difficult to measure its impact. \nThe 2011 Strategy laid out the federal government's first broad conceptualization of \"transnational organized crime,\" focusing on it as a national security concern. To what extent this definition will drive Administration policy is unclear. In evaluating the 2011 Strategy , policymakers may exercise their oversight authority regarding both the adequacy of the Administration's definition of transnational organized crime as well as its utilization in driving counter-crime policies.\n\n\t\t\tTransnational Organized Crime Defined\n\nThe 2011 Strategy offers the following definition of organized crime:\nTransnational organized crime refers to those self-perpetuating associations of individuals who operate transnationally for the purpose of obtaining power, influence, monetary and\/or commercial gains, wholly or in part by illegal means, while protecting their activities through a pattern of corruption and\/or violence, or while protecting their illegal activities through a transnational organizational structure and the exploitation of transnational commerce or communication mechanisms. There is no single structure under which transnational organized criminals operate; they vary from hierarchies to clans, networks, and cells, and may evolve to other structures. The crimes they commit also vary. Transnational organized criminals act conspiratorially in their criminal activities and possess certain characteristics which may include, but are not limited to:\nIn at least part of their activities they commit violence or other acts which are likely to intimidate, or make actual or implicit threats to do so;\nThey exploit differences between countries to further their objectives, enriching their organization, expanding its power, and\/or avoiding detection\/apprehension;\nThey attempt to gain influence in government, politics, and commerce through corrupt as well as legitimate means;\nThey have economic gain as their primary goal, not only from patently illegal activities but also from investment in legitimate businesses; and\nThey attempt to insulate both their leadership and membership from detection, sanction, and\/or prosecution through their organizational structure. \nAs the term \"transnational organized crime\" (TOC) may suggest, any definition of it should detail three elements: (1) \"transnationality,\" (2) organization, and (3) crime. While the above TOC definition, and more generally the 2011 Strategy 's text, hit on all three elements, key gaps in understanding the Administration's framing of TOC remain.\n\n\t\t\t\tTransnationality\n\nThe strategy's definition addresses the concept of \"transnationality\" in the broadest terms, suggesting that TOC is transnational because it operates transnationally. At least three factors\u2014none of which are discussed in the definition\u2014may determine how transnational a group is: residence, product provenance, and supply chain complexity. \nRegarding residence, a transnational criminal group's members can reside in multiple countries, clearly making it a transnational network. However, if all members reside in a single country, but a seemingly minor aspect of the group's activities is situated outside this home country, is the criminal network still considered transnational? \nDoes controlling a bank account in one country while committing crimes in another make a network transnational? Can a group be considered transnational simply if its communications concerning criminal activity are routed outside of its home country via international communications networks? \nIn terms of product provenance, it seems clear that illicit trade (whether it involves people, goods, services, or information) from one country to another is a transnational activity. However, can a domestically based group be considered transnational if the illicit product it handles in the United States had a foreign origin but the group played no role in getting it across international borders? \nA street-level cocaine dealer may have never directly colluded with foreign criminals, but the cocaine he retails originated abroad. Does this automatically make him part of a transnational criminal network? \nSupply chain complexity is also likely a prominent feature of TOC. This involves managing the routes that illicit products take. \nDoes the complexity of a group's supply chain factor into measurement of how transnational the group is? This complexity can include elements such as the number of borders a product crosses as well as the resources a group expends to move a product. These resources can include money used for things such as bribing public officials, protecting illicit routes from other criminals, the acquisition and retention of technical expertise, and the development of tools and infrastructure to maintain the route (e.g., shell companies, front companies, drug smuggling semi-submersibles, cross-border smuggling tunnels). \nThese factors suggest a broader question: does the level of transnationality inherent in a network impact how the U.S. government views it as a threat? In other words, if one network is more transnational than another, is it a greater concern? Would an organized crime group with transnational ties necessarily be a larger threat than a criminal network based solely in the United States? \n\n\t\t\t\tOrganization\n\nThe TOC definition includes almost any form of organization. This is reflected in the strategy's emphasis on the organizational fluidity of TOC. As this may suggest, the definition lacks precise baselines for the concept of \"organization.\" Two baselines seem central here. The first involves routine. In essence, to qualify as \"organized\" does a network have to routinely cooperate? If so, what constitutes routine cooperation? The second baseline is size. How small is \"organized\"\u2014can it be as basic as two individuals collaborating? Low thresholds for these two baselines\u2014allowing TOC to include groups as small as two individuals who do not routinely interact\u2014may render the concept of \"organization\" meaningless. In other words, with low thresholds, almost any criminal activity that does not involve a sole operator could be defined as \"organized.\" In an attempt to clarify matters, the definition suggests that transnational criminal groups are \"self-perpetuating,\" but the definition does not explain what this concept entails. Seemingly, any group not construed and controlled by some external authority or environmental condition is \"self-perpetuating.\"\n\n\t\t\t\tCrime\n\nThe TOC definition in the 2011 Strategy broadly describes some of the activities transnational groups can engage in to turn profits and protect themselves\u2014violence, exploiting the \"differences between countries,\" and gaining influence in legitimate sectors. Going beyond the definition, the strategy's text lays out 10 areas of illicit activity in which TOC poses \"a growing threat to national and international security.\" These 10 areas encompass a wide swath of federal law enforcement activity.\n1. Penetration of State Institutions, Corruption, and Threats to Governance\n2. Threats to the Economy, U.S. Competitiveness, and Strategic Markets\n3. Crime-Terror-Insurgency Nexus\n4. Expansion of Drug Trafficking\n5. Human Smuggling\n6. Trafficking in Persons\n7. Weapons Trafficking\n8. Intellectual Property Theft\n9. Cybercrime\n10. The Critical Role of Facilitators.\nIt is unclear what sway the 2011 Strategy 's definition will hold over what is practically investigated as \"transnational organized crime\" by federal agencies. This is because these 10 areas touch on a range of U.S. law enforcement activity that involves many federal agencies, including numerous components of both DOJ and DHS. The 10 areas clearly enumerate crimes such as drug and weapons trafficking. However, the areas can subsume other illegal activity. For example, many crimes related to financial fraud and identity theft potentially fall under \"Cybercrime,\" \"Intellectual Property Theft,\" or \"Threats to the Economy, U.S. Competitiveness, and Strategic Markets.\" In the past, numerous investigative programs within the federal government have been developed to combat crimes subsumed by the 10 areas without specifically characterizing them as \"organized crime.\" \nComplicating things, neither the definition nor the 2011 Strategy lays out a methodology for somehow differentiating among transnational criminal actors in terms of the potential impact of their crimes\u2014namely, the threat they pose to U.S. national security or public interests. Without a methodology establishing thresholds based on severity, vastly different criminals potentially fall under the strategy's purview. A 15-year-old gang member and his friends who illegally download Hollywood movies from a foreign website is arguably a much different target for law enforcement than a powerful international mobster with vast economic resources and an army of foot soldiers. However, the strategy potentially targets both. A threat assessment rubric could guide federal efforts, thus narrowing the number of groups or individuals targeted by the strategy.\nWhile the 2011 Strategy does not articulate a threat assessment methodology, two items suggest that Administration efforts supporting the strategy involve some calculation of threat. First, an interagency \"Threat Mitigation Working Group\" has been given the responsibility of identifying transnational networks \"present[ing] a sufficiently high national security risk.\" Whether or not the networks identified by this working group will be the only ones targeted by efforts embraced under the strategy is unclear. Second, transnational criminal groups were listed in an annex to a new executive order issued in conjunction with the 2011 Strategy . The order established a sanctions program \"to block the property of and prohibit transactions with significant transnational criminal networks that threaten national security, foreign policy, or economic interests.\" While it is unclear exactly how or why these groups were chosen, presumably some calculation of threat was involved.\n\n\t\t\t\tThe Definition, 2011 Strategy, and Key Questions\n\nBecause the strategy's TOC definition is broad, it may be difficult to ascertain answers to a number of questions critical to policymaking (see Figure 1 ). First, how much harm is imposed by transnational organized crime? Second, how many federal resources are directly and indirectly dedicated to combating TOC? Third, which federal agencies are primarily responsible for fighting TOC? Fourth, how are threats prioritized by the new strategy? Are national security concerns weighed against other concerns such as public security when targeting specific transnational groups? Without clear answers to these questions, it may be difficult for Congress to exercise both legislative and oversight responsibilities in order to bolster the federal government's abilities to counter organized crime. \n\n\t\t\tStatutory Definition\n\nThere is no current statutory definition of organized crime. The Omnibus Crime Control and Safe Streets Act of 1968, as amended (P.L. 90-351), had at one point defined organized crime as \"the unlawful activities of the members of a highly organized, disciplined association engaged in supplying illegal goods and services, including but not limited to gambling, prostitution, loan sharking, narcotics, labor racketeering, and other unlawful activities of members of such organizations.\" This definition\u2014repealed in the Justice System Improvement Act of 1979 ( P.L. 96-157 )\u2014appears to be even broader than DOJ's or the FBI's conceptualizations. Similarly, in the Racketeer Influenced and Corrupt Organizations (RICO) provisions, organized crime is described in terms of an \"enterprise\" and a \"pattern of racketeering activity.\" The predicate offenses for racketeering include a host of state and federal crimes listed in 18 U.S.C. \u00a71961. \nAlthough RICO does not define organized crime, it provides a definition for an \"enterprise.\" It does not, however, describe those attributes of a criminal enterprise that distinguish it from a legal enterprise. In addition, this provision describes organized crime more in terms of the illegal activities committed by conspirators rather than in terms of the criminal organization. As such, these statutory provisions could encompass the activities of not only organized crime groups but of terrorist groups and corrupt businesses as well. Largely describing organized crime as a list of crimes may help in the effective prosecution of these groups, but it provides little aid in developing an understanding of the groups themselves. Moreover, the statutory provisions offer limited guidance regarding criminal organizations and the nature of their operational structure. \n\n\tIssues\n\n\t\tDefining Organized Crime in Statute\n\nCurrently, there is no statutory definition of organized crime. RICO provisions describe organized crime in terms of an \"enterprise\" and a \"pattern of racketeering activity.\" The U.S. Code does not, however, provide guidance and information surrounding the nature of criminal organizations and their operational structure. There also appears to be a divergence between the RICO provisions and what federal law enforcement\u2014namely the FBI\u2014considers to be organized crime. For instance, patterns of racketeering activity specified under RICO indicate that criminal organizations may be engaged in a host of crimes including, but not limited to, an act or threat involving murder, kidnapping, gambling, arson, robbery, bribery, extortion, dealing in a controlled substance, and other illegal activities. Although drug trafficking is included in RICO's predicate offenses, law enforcement does not necessarily consider drug trafficking or DTOs to be within the purview of organized crime investigations. One reason for this may be that federal law enforcement tends to segment investigations more on the basis of the criminal violation than on the basis of the criminal actor. While legislating a federal definition of organized crime may not necessarily solve this disconnect with law enforcement, it might lead to changes in the way law enforcement views and investigates organized crime.\nA second statutory issue that Congress may consider is that of organized crime in the U.S. Criminal Code. For instance, while there is a Chapter (113B) in Title 18 that deals specifically with terrorism and related crimes, there is no centralized section that speaks specifically to organized crime. Yet organized crime has been described as a leading threat to U.S. security. Though the lack of centralization of organized crime-related statutes may not impact law enforcement's abilities to investigate and prosecute organized crime, it is indicative of the approach by which the federal government views it. And, as mentioned, the harm caused by organized crime may not be clearly estimated without a common understanding of what defines organized crime. Building on this, accurately gauging the public and national security threat posed by organized crime may be complicated without a solid notion of the harm it routinely causes.\n\n\t\tCongressional Commission\n\nBeginning in the 1950s, congressional concern about organized crime has resulted not only in legislative efforts to combat it, but in commissions and in various series of hearings aimed at gathering information on the scope of organized crime. One of the first such efforts was the Senate Special Committee to Investigate Organized Crime in Interstate Commerce in 1950 and 1951 led by Senator Kefauver. Another example of such congressional attention is the series of Senate hearings on organized crime in 1958 and 1963 led by Senator McClellan. There was also the 1967 Commission on Crime in the United States led by Attorney General Katzenbach. More recently, and particularly since the terrorist attacks of September 11, 2001, congressional attention has shifted away from traditional crime fighting\u2014including organized crime\u2014toward counterterrorism.\nOf the more recent hearings involving organized crime topics, focus has primarily been on threats posed by the DTOs in Mexico. While this is one of the most visible organized crime threats\u2014not only are some of the actors exceedingly violent, but this violence is seen directly along the U.S. Southwest border\u2014it is likely not the sole serious organized crime threat to the United States. As discussed, numerous other organized crime groups, though perhaps not as violent, commit crimes that impact the economic stability, public safety, and domestic security of the United States. As such, one option that Congress may ultimately consider is the convening of a congressional commission to evaluate the scope of organized crime. Such an evaluation might help policymakers determine whether they have provided law enforcement with the appropriate tools to combat today's threats posed by organized crime. It may also result in a clarification of how the federal government defines organized crime and consequently how investigative efforts at the federal level are organized. The Administration has also proposed a legislative package related to the 2011 Strategy. In light of this, Congress may consider exploring the issue of transnational organized crime more extensively.\n\n\t\tIncentives for Investigating Organized Crime\n\nWhile the effects of certain, high-profile crimes\u2014such as terrorism\u2014are readily seen, the aftermath of organized crime is not always as striking, nor does it produce the same negative visceral reactions. Some argue that this may be one reason for the shift in law enforcement attention and resources more toward counterterrorism-related activities and further away from traditional crime fighting activities since the terrorist attacks of September 11, 2001. However, although the effects of organized crime may not be seen in a consolidated attack resulting in the physical loss of life, the effects are far-reaching. As mentioned, organized crime impacts economic stability, public health and safety, and national security. Consequently, some experts argue that there should be some form of incentive (as well as disincentive) to entice law enforcement to target more monetary and manpower resources toward investigating organized crime.\nOne such form of incentive that Congress may consider is federal grants to state and local law enforcement for training and technical assistance to investigate and prosecute organized crime. There are several grant programs\u2014such as the Community Oriented Policing Services (COPS) grant program and the Edward Byrne Memorial Justice Assistance Grant (JAG) program \u2014through which state and local law enforcement assistance is available for a variety of purpose areas. However, these purposes do not directly specify as a purpose area the use of funds for combating organized crime. Therefore, policymakers may consider a specific grant program providing not only funding, but technical training and assistance.\nOther suggestions that experts have put forward involve the use of negative peer reviews to incentivize law enforcement around the world to focus resources toward combating organized crime. As discussed, various state and federal law enforcement agencies investigate organized crime in the United States. As such, one option Congress may consider could be to direct the formation of a domestic peer review system for law enforcement agencies charged with investigating organized crime. Participation in some form of peer review system could be tied to law enforcement assistance and grant funding eligibility. \n\n\t\tImplementing the National Strategy to Combat TOC\n\nCongress may wish to consider oversight of the national strategy's implementation by federal law enforcement agencies. In part, the strategy involves many law enforcement agencies, their investigative resources, and their intelligence collection efforts. A critical issue may be the coordination of these activities.\n\n\t\t\tCoordination of Domestic Efforts\n\nAs mentioned, the federal investigation of organized crime matters has not historically been a centralized effort, and even with the 2011 Strategy, there is no single lead agency charged with investigating organized crime. Specific agencies have had jurisdiction over an organized crime case based on the criminal violations involved. For instance, organized crime cases built around drug trafficking offenses have generally been investigated by the DEA, whereas those cases built around human trafficking cases are typically investigated by ICE. However, many organized crime cases may involve offenses that fall under the jurisdiction of multiple investigative agencies. For example, organized crime groups involved in crimes ranging from counterfeiting and financial institution fraud to identity crimes, computer crimes, and money laundering may be investigated by the U.S. Secret Service (USSS), FBI, ICE, and any number of other federal, state, and local law enforcement agencies. As a result of structuring organized crime investigations around the alleged crimes, it is not always clear which agency will take the lead on a particular case. This can lead to inter-agency conflicts, and if case information is not effectively communicated between agencies, each agency involved may not have a comprehensive view of the case. There are, however, several law enforcement fusion centers, such as the Organized Crime Drug Enforcement Task Force (OCDETF) Fusion Center (OFC), the International Organized Crime Intelligence and Operations Center (IOC-2), and the El Paso Intelligence Center (EPIC), that are charged with consolidating and disseminating intelligence on various organized crime matters. Additionally, different agencies across federal, state, and local levels participate in these centers. \nFor instance, the OFC assimilates information for the OCDETF Program, which targets major drug trafficking and money laundering organizations. Federal agencies that participate in the OCDETF Program include the DEA; FBI; ICE; Bureau of Alcohol, Tobacco, Firearms, and Explosives (ATF); U.S. Marshals; Internal Revenue Service (IRS); U.S. Coast Guard (USCG); 94 U.S. Attorneys Offices; and DOJ's Criminal and Tax Divisions. These federal agencies also collaborate with state and local law enforcement.\nIn May 2009, DOJ announced the creation of the IOC-2\u2014housed at the OFC\u2014which brings together the FBI; ICE; DEA; IRS; ATF; U.S. Secret Service; U.S. Postal Inspection Service (USPIS); U.S. Department of State, Bureau of Diplomatic Security; U.S. Department of Labor, Office of the Inspector General; and DOJ's Criminal Division in partnership with the 94 U.S. Attorneys' Offices and the U.S. Department of the Treasury, Office of Terrorism and Financial Intelligence. Unlike the OFC, the IOC-2 has yet to be funded. It is charged with analyzing and resolving conflicts in information on a host of organized crime cases, not solely those that center on drug trafficking.\nEPIC was originally established as an intelligence center to collect and disseminate information relating to drug, alien, and weapon smuggling in support of field enforcement entities throughout the Southwest border region. Following 9\/11, counterterrorism also became part of its mission. Though these crimes are not exclusively committed by organized crime groups, they may be, and thus EPIC is involved in combating organized crime. EPIC is jointly operated by the DEA and U.S. Customs and Border Protection (CBP), and other participating agencies include ICE, USCG, U.S. Secret Service, Department of Defense (DOD), Department of the Interior, FBI, ATF, U.S. Marshals Service, Federal Aviation Administration, National Drug Intelligence Center (NDIC), IRS, National Geospatial-Intelligence Agency, Joint Task Force-North, Joint Interagency Task Force-South, Texas Department of Public Safety, Texas Air National Guard, and El Paso County Sheriff's Office.\nIn evaluating the most effective means to share organized crime intelligence, Congress may consider several options. One option may include increasing support for intelligence fusion centers such as the OFC, IOC-2, and EPIC. Another option could involve the creation of an interagency organization similar to the National Counterterrorism Center (NCTC), but centered around organized crime. Such an organization would be responsible for \"analyzing the [organized crime] threat, sharing that information with \u2026 partners, and integrating all instruments of national power to ensure unity of effort\" against organized crime. On the prosecution end, DOJ has already consolidated the Organized Crime and Racketeering Section (OCRS), the Criminal Division's gang unit, and the National Gang Targeting, Enforcement, and Coordination Center (GangTECC) into a single Organized Crime and Gang Section. This harmonizes the prosecution of organized crime and gang cases, which DOJ has cited as being similar.\nOne non-legislative option that Congress may consider regarding the coordination of federal law enforcement efforts to combat organized crime is enforcing its oversight over existing fusion centers. In June 2010, the DOJ Office of the Inspector General (OIG) issued a review of EPIC. The OIG found that EPIC's users value its products, but that EPIC could benefit from improvement in fully developing the National Seizure System and coordinating the High Intensity Drug Trafficking Area (HIDTA) program, consistently coordinating with intelligence organizations across the country, maintaining and analyzing current information from all available sources, and creating objective performance measures by which to evaluate its programs, among other things. Similarly, in November 2009 the OIG reviewed DOJ's anti-gang intelligence and coordination centers. As a result of the review, the OIG determined that the National Gang Intelligence Center had not created a gang information database, as had been directed by Congress.","output":"In the last two decades, organized crime has grown more complex, posing evolving challenges for U.S. federal law enforcement. These criminals have transformed their operations in ways that broaden their reach and make it harder for police to combat them. They have adopted more-networked structural models, internationalized their operations, and grown more tech savvy. They are a significant challenge to U.S. law enforcement.\nModern organized criminals often prefer cellular or networked structural models for their flexibility and avoid the hierarchies that previously governed more traditional organized crime groups such as the Cosa Nostra. Fluid network structures make it harder for law enforcement to infiltrate, disrupt, and dismantle conspiracies. Many 21st century organized crime groups opportunistically form around specific, short-term schemes and may outsource portions of their operations rather than keeping it all \"in-house.\"\nGlobalization has revolutionized both licit and illicit commerce. Commercial and technological innovations have reduced national trade barriers, widened transportation infrastructure, and bolstered volumes of international business. The Internet and extensive cellular telephone networks have fostered rapid communication. Integrated financial systems, which allow for easy global movement of money, are exploited by criminals to launder their illicit proceeds. Estimates suggest that money laundering annually accounts for between 2% and 5% of world GDP. Simultaneously, borders are opportunities for criminals and impediments to law enforcement.\nOrganized criminals have expanded their technological \"toolkits,\" incorporating technology-driven fraud into their capabilities. They can harm U.S. citizens without ever having a physical presence in the country via crimes such as cyber intrusions into corporate databases, theft of individual consumer credit card information, fencing of stolen merchandise online, and money laundering. Further, criminal organizations\u2014which have historically burrowed into and exploited local ethnic communities\u2014can now rely on Internet connectivity and extensive, international transportation linkages to target localities around the globe.\nSince the terrorist attacks of September 11, 2001, there has been a shift in law enforcement attention and resources toward counterterrorism-related activities and away from traditional crime fighting activities including the investigation of organized crime. Although the effects of organized crime may not be seen in a large-scale attack, they are far-reaching\u2014impacting economic stability, public health and safety, and national security.\nIn July 2011, the Obama Administration issued its Strategy to Combat Transnational Organized Crime. It addresses the fact that federal investigation of organized crime matters has not historically been a centralized effort. Regardless, there still is no single agency charged with investigating organized crime in the way the Federal Bureau of Investigation (FBI) has been designated the lead investigative agency for terrorism. Further, resources to tackle this issue are divided among many federal agencies. As such, Congress may exert its oversight authority regarding the federal coordination of organized crime investigations via the 2011 strategy. Policymakers may also debate the efficacy of current resources appropriated to combat organized crime."}
{"id":"gao_RCED-99-39","pid":"gao_RCED-99-39_0","input":"\tBackground\n\nAfter a possible hazardous waste site is reported to EPA, it is evaluated to determine whether it should be placed on the National Priorities List (NPL), EPA\u2019s list of sites that present serious threats to human health and the environment. The cleanup at an NPL site consists of several phases. First, through the remedial investigation and feasibility study, the conditions at a site are studied, problems are identified, and alternative methods to clean up the site are evaluated. Then, a final remedy is selected, and the decision is documented in a record of decision. Next, during an engineering phase, called the remedial design, technical drawings and specifications are developed for the selected remedy. Finally, in the remedial action phase, a cleanup contractor begins constructing the remedy according to the remedial design. Under the Comprehensive Environmental Response, Compensation, and Liability Act, (CERCLA), which established the Superfund program, EPA must give preference to those long-term cleanup actions that permanently and significantly reduce the volume, toxicity, or mobility of hazardous substances at a site. Under CERCLA, parties responsible for cleaning up sites can include site owners and operators, as well as generators and transporters of hazardous waste.\nAs of August 1998, 1,193 sites were listed on the NPL, and another 56 were proposed for listing. Remedies had been constructed at 526 sites. Since the Superfund program began, 175 sites have been deleted from the NPL. In addition, the program has conducted about 5,000 removal actions\u2014short-term response actions to address emergency and other situations\u2014at NPL and other sites.\nOur reviews have shown that the Superfund cleanup process can be long and expensive. In March 1997, we reported that the cleanup of nonfederal sites completing the cleanup process in 1996 had taken an average of 10.6 years after placement on the NPL and that remedy selection at sites completing that phase of the cleanup process in 1996 had taken an average of 8.1 years after a site\u2019s listing. In September 1997, we reported on a growing number of expensive Superfund cleanups. We said that in 1996 EPA had spent $10 million or more in that year alone on nine sites, up from two sites with the same level of annual spending in 1989. Spending on the nine sites, which represented less than 3 percent of the sites where EPA spent money for remedial actions, totaled about $238 million, almost 57 percent of remedial action spending at all sites.\nBeginning in 1993, EPA launched a series of administrative reforms to address a wide range of Superfund concerns. These reforms have attempted to speed up site investigations, choose more cost-effective remedies, reduce litigation, and make other improvements. According to EPA officials, the reforms have begun to work. EPA officials believe that cleanup durations have recently been reduced to an average of 8 years. In addition, the National Remedy Review Board EPA created to review proposed site cleanup remedies, had saved $37 million as of November 1997 through its examination of 20 remedies. EPA has also encouraged its regions to revisit remedy decisions when new information or technical advances indicate that the intended level of health or environmental protectiveness might be achieved at less cost. According to EPA, these remedy updates had saved at least $725 million at over 120 sites as of November 1997. EPA also made it easier for parties with only minimal responsibility for site contamination to settle their liability with lower legal expenses.\nAll 50 states have established their own clean up programs for hazardous waste sites, according to a 1998 survey by the Environmental Law Institute. Some of these state programs can handle highly contaminated sites, whose risks could qualify them for the Superfund program, as well as less dangerous sites. Some states initially patterned their cleanup programs after the Superfund program, but over the years, in an effort to clean up more sites faster and less expensively, have developed their own approaches to cleaning up sites.  States accomplish cleanups under three programs: (1) voluntary cleanup programs that allow parties to clean up their sites without enforcement action, often to increase the site\u2019s economic value; (2) brownfields programs that encourage the voluntary cleanup of sites in urban industrial areas to reuse the sites and avoid the expansion of industry into \u201cgreenfields,\u201d that is, undeveloped land; and (3) enforcement programs that oversee the cleanup of the most serious sites and force uncooperative responsible parties to clean up their sites.States generally use their voluntary and brownfields programs to clean up less complex sites by offering various incentives to responsible parties, such as reduced state oversight. Some states maintain cleanup funds to pay all or a portion of the costs of cleanups at sites for which responsible parties able to pay for full cleanups cannot be found.\n\n\tState Practices That Officials Believe May Facilitate Faster, Less Costly Hazardous Waste Cleanups\n\nHazardous waste officials in each of the seven states we contacted identified practices used at sites sufficiently contaminated to be included in the Superfund program that they believe achieve faster and less costly cleanups than would occur under the Superfund program. Some of these practices are designed to facilitate faster remedy selection, thereby saving time or money before site cleanup begins. Other practices allow the implementation of less expensive cleanup remedies that officials believe are nonetheless protective of human health and the environment. Two states have adopted practices that reduce the liability of parties who might be responsible for cleanup costs under Superfund\u2019s liability rules. State officials said that these practices have been applied to some state program sites that are sufficiently contaminated to qualify for the NPL. Although the officials described instances in which these practices have yielded benefits, none could formally document the time and cost savings of the practices.\n\n\t\tStates Contend Approaches to Site Assessment and Remedy Selection Can Save Time\n\nState officials from all seven states described practices that they believe facilitate faster remedy selection at contaminated sites, including sites contaminated enough to qualify for Superfund cleanups. These officials said that the use of preestablished cleanup standards or of presumptive remedies, that is, remedies proven to be effective for certain cleanup problems, without extensive consideration of alternate remedies, can expedite remedy selection. Officials of five states said that more flexible public involvement requirements can save time when cleanups are not controversial.\n\n\t\t\tFixed Standards for Soil and Groundwater\n\nOfficials representing six state programs said that selecting cleanup remedies for sites on the basis of preestablished standards that specify the maximum concentrations of contaminants in soil and water after cleanup, without conducting time-consuming, site-specific risk assessments, speeds up the remedy-selection process. Illinois, for example, allows the use of \u201clook-up tables\u201d that specify maximum concentration levels for about 150 specific soil and groundwater contaminants. These look-up tables, according to the state officials, quickly and clearly defined the end goal of the site cleanup without a risk assessment, allowing the state and the responsible parties to determine how best to achieve this standard.\nAccording to the state officials, the use of the statewide standards offers a time savings when compared to the approach that the sites in EPA\u2019s Superfund program follow. EPA has developed a few soil cleanup standards and may in certain circumstances apply standards from its water programs and state standards at Superfund sites; however, the Superfund regulations require that each site receive a baseline risk assessment showing the need for action. These risk assessments characterize the current and potential threats to human health and the environment posed by contaminants at the site. Officials in both Illinois and Pennsylvania said that eliminating risk assessments can save considerable time. According to an Illinois official, while the duration of risk assessments varies by site, a risk assessment can add as much as 2 years to the remedy-selection process, while a Pennsylvania official said that many months can be saved.\n\n\t\t\tMore Limited Public Involvement Efforts\n\nOfficials in five states said that, in comparison to EPA, they have less rigorous requirements for extensive public involvement in remedy selection. According to New Jersey program officials, state law requires that program officials notify local officials\u2014such as the mayor\u2019s office or the municipal health department\u2014about an impending site cleanup. The state then generally defers the decision about public meetings or other more extensive forms of public outreach to local officials. State officials explained that more extensive public involvement measures are not required\u2014although the state may pursue them if it sees the need\u2014because public meetings are often sparsely attended, and the results of such efforts do not justify the time and resources required.\nNew Jersey\u2019s approach contrasts with EPA\u2019s more extensive public involvement requirements. The Superfund program\u2019s regulations require that at each NPL site, EPA develop a community relations plan describing a community\u2019s information needs and outlining ways that the agency will meet these needs. Furthermore, EPA must notify groups affected by the site of the availability of technical assistance grants that can be used to hire experts to explain technical information about the site. EPA must also allow adequate opportunity for public comment, such as at a public meeting. A transcript of the public meeting must be made available to the public as well. The final cleanup plan must include a response to each significant comment and question received. EPA headquarters officials said that they could tailor community involvement procedures at sites, depending on the circumstances, but according to the officials, the minimum EPA requirements exceeded the simple notice procedures New Jersey used.\n\n\t\t\tGreater Use of Presumptive Remedies\n\nTexas officials said that their program\u2019s greater use of standard cleanup approaches\u2014known as presumptive remedies\u2014has significantly reduced the time and expense involved in the remedy-selection process. Presumptive remedies are remedies that have proven effective in cleaning up a particular kind of hazardous waste site and would presumably work at similar sites in the future. Such remedies can be viewed as off-the-shelf solutions that can be selected with less study of alternative remedies in the absence of site-specific conditions requiring such consideration. Because presumptive remedies allow the state to focus quickly on one or a limited range of remedies, they can save considerable time and expense in the remedy-selection process. On the basis of a comparison of a limited number of state sites, Texas officials estimated that the studies at presumptive remedy sites were less than half as costly as the full feasibility studies that were conducted at other sites. Officials of three other states said that they also had a greater number of presumptive remedies than did EPA.\nEPA has also developed presumptive cleanup remedies for some types of NPL sites. However, as table 1 indicates, Texas has developed presumptive remedies for four contaminants\u2014metals, semivolatile organic compounds, pesticides, and polychlorinated biphenyls (PCB)\u2014for which EPA has not.These contaminants are frequently found at Superfund sites.\n\n\t\tPotential for Cleaning Up Sites at Lower Costs\n\nSome states have adopted two practices that state officials believe result in less expensive remedies than those used in the Superfund program and that could be useful even at highly contaminated sites. These practices are (1) greater acceptance of remedies that contain waste on site rather than removing or destroying it and (2) more willingness to assume that sites will be used for industrial or commercial rather than residential purposes.\n\n\t\t\tAcceptance of Containment Remedies\n\nState officials in Illinois, Pennsylvania, and Texas told us that their states\u2019 authorizing statutes do not contain a preference for permanent cleanup remedies. Permanent cleanup remedies are those that remove or treat the principal waste threats, permanently eliminating hazardous waste from the site or reducing the volume, toxicity, or mobility of the waste, through techniques such as incineration or bioremediation. Because the state programs lack such preferences, more nonpermanent containment cleanup remedies may be used. Nonpermanent remedies typically prevent human contact with contaminants by containing the waste in place\u2014by, for example, placing a clay cap or a parking lot over contaminated soil, restricting the land\u2019s use, or placing barriers around the contamination. These remedies tend to be less expensive to implement than permanent ones.\nAlthough the states had no studies documenting cost reductions from containment remedies, some officials did cite cases in which cost savings resulted. Pennsylvania officials described how a change in the state cleanup statute that eliminated a preference for permanence had reduced cleanup costs for a site. The remedy proposed by the state for the site under the old statute\u2014a $30 million- to $40 million-permanent remedy consisting of the excavation and treatment of contaminants\u2014was changed with the passage of the new statute to an excavation and containment remedy with a cost of $2 million to $3 million. According to state officials, containment remedies remain protective of human health and the environment if properly controlled and maintained. We reported in April 1997 that cleanup managers for Illinois, Minnesota, and New Jersey estimated that containment methods were used for at least half of the cleanups of contaminated soil in their voluntary cleanup programs.\nIn contrast, the Superfund program operates under the requirements of CERCLA, which establishes a preference for permanent remedies. EPA\u2019s remedy-selection criteria require the selection of a permanent remedy to the maximum extent practicable, though other factors, such as cost and implementation concerns must also be taken into account. EPA officials said that they attempt to adhere to the preference whenever possible. EPA officials also noted that in recent years the agency has moved away from a \u201ctreatment for treatment\u2019s sake\u201d approach to one of applying treatment to principal threats. Principal threats include liquids, areas contaminated with high concentrations of toxic compounds, and highly mobile materials. According to a September 1997 EPA analysis, between 1988 and 1993, 70 percent of all remedies dealing with the source of contamination involved treatment, while in 1995, this number dropped to 53 percent. Where contaminants are left on site, EPA requires periodic site reviews to monitor and analyze the implementation and effectiveness of the containment remedies.\n\n\t\t\tConsideration of Future Land Use\n\nSome of the states believed that, in setting cleanup standards and selecting remedies, their cleanup programs were more likely than Superfund to determine that sites would be used for future industrial or commercial purposes rather than for residential purposes. The determination of how sites will be used in the future is important because a site whose expected use is industrial or commercial may be cleaned to less strict standards, resulting in less costly cleanups. The states that believe they base site cleanups on assumptions of industrial or commercial uses more readily than EPA have established specific cleanup standards for industrial sites.\nUntil several years ago, EPA generally assumed that a residential use of land was possible in the future, unless there was substantial evidence to the contrary. Because EPA cannot control local zoning or other institutional controls that restrict the land\u2019s use, its guidance suggested that those assessing the sites\u2019 risk assume that in the future the land would be residential even though no one was living there at the time. Critics contended that EPA was assuming residential uses for sites that would be used solely for industrial purposes in the foreseeable future. In 1995, however, EPA issued new guidance for considering future land use in making remedy selection decisions at NPL sites. The guidance encouraged parties cleaning up sites to collect as much information as possible about the site\u2019s future use and to obtain the local community\u2019s consensus regarding its future. Furthermore, EPA officials believe that as a result of this policy, EPA has evolved toward a new balancing of the various mandates contained in CERCLA and that now EPA is as likely as the states to opt for nonresidential future land-use scenarios. An EPA analysis found that only 38 percent of remedies selected in 1995 included residential land-use scenarios.\nStates did not have data to confirm their beliefs that they base cleanup decisions on future industrial or commercial uses of sites more often than does EPA. However, our April 1997 report noted that voluntary cleanup programs in four of the states we covered in our current review used industrial standards most frequently for their cleanups. Some states believed that EPA\u2019s requirement for obtaining a local community\u2019s consensus on the future uses of sites could make it more difficult to consider a land use other than residential. EPA officials, however, believe that early community involvement, with a particular focus on the community\u2019s desired future use of the property associated with an NPL site, can result in a more democratic decision-making process; greater community support for remedies selected as a result of this process; and more expedited, cost-effective cleanups. In addition, EPA officials said that communities were willing to accept cleanups based on continued nonresidential uses of sites.\n\n\t\tState Liability Policies Are Intended to Reduce Litigation and Speed Up Cleanups\n\nTwo of the states we surveyed had adopted policies on the cleanup liability of parties associated with sites that they believed reduce litigation costs and encouraged faster cleanups. These policies involved reducing the liability of site owners and operators for cleanups and making the cleanup of municipal landfills a state responsibility.\n\n\t\t\tMichigan Limits Liability for Owners and Operators\n\nA Michigan law adopted in 1995 provides that the owners and operators of contaminated sites are liable only if they are responsible for an activity causing a release of hazardous substances into the environment. By contrast, under CERCLA, responsible parties\u2014including owners and operators\u2014are liable regardless of whether they actually caused the release. Thus, anyone seeking to recover cleanup costs under Michigan law from owners and operators must prove causation, while parties seeking to recover cleanup costs under CERCLA generally need not address the issue.\nThe causation standard, according to a state official, results in more expeditious cleanups of facilities because it reduces litigation and transaction costs and disruptions or delays. In addition, a Michigan survey of 33 municipalities indicated that the causation standard has facilitated the redevelopment of sites. A state official also noted, however, that some fraction of the contaminated sites that would have been cleaned up by owners and operators under a strict liability standard may need to be addressed at public expense.\n\n\t\t\tMinnesota Assumes Cost of Closed Municipal Landfills\n\nMinnesota state officials cited the state\u2019s Closed Landfill Program as a better way to clean up and care for landfills and protect innocent parties. Under this program, the state performs cleanup actions, takes over the long-term operation and maintenance of the cleanup remedy, and reimburses eligible parties for past cleanup costs. Although this approach is costly to the state, which assumes the cost of remediating the site, it reduces litigation costs and protects parties that may have made a very small contribution to site contamination but that could be caught up in litigation if all contributors were liable. According to state officials, it is difficult to assign responsibility to the many parties that contribute to the contamination of municipal landfills, and very small contributors often face potentially bankrupting lawsuits. State officials said that it is preferable that the cost of addressing the problems of closed landfills be viewed as a societal cost. The officials said that Minnesota is the only state that has adopted this program, and it has signed an agreement with EPA to end federal involvement in 10 closed landfills on the NPL within the state.\nIn contrast, EPA\u2019s \u201cpolluter pays\u201d approach, according to Minnesota officials, does not work well for most landfills, where a large portion of the waste comes from many small businesses and households. However, EPA is currently mitigating the impact of Superfund liability on the smallest contributors by offering expedited or low-cost settlements to parties that contribute small amounts of hazardous substances. These settlements protect the parties from further litigation.\n\n\tEPA and Other Stakeholders Identified Potential Disadvantages of Applying State Practices to the Superfund Program\n\nEnvironmental policy stakeholders that we interviewed, including EPA, state and national environmental organizations, and representatives of state and local government associations, generally did not dispute that the state practices had the efficiency benefits described by state officials. Some of the environmental organizations and a local government organization, however, identified potentials risks of applying these practices to the Superfund program. Since the state practices can reduce cleanup costs, they are generally advantageous for businesses and others responsible for cleaning up sites. (See app. III for the list of stakeholders that we contacted.)\n\n\t\tStakeholders\u2019 Views on State Practices That Could Facilitate Faster Remedy Selection\n\nThe stakeholders that we contacted generally supported the broader use of presumptive remedies in the Superfund program. A representative of Resources for the Future (RFF), an independent environmental research organization, said that the use of presumptive remedies where particular contaminants predominate\u2014as Texas does for pesticides, PCBs and semivolatile organic compounds\u2014is a sound approach because there are only a limited number of ways to deal with certain contaminants. A representative of citizens groups and environmental organizations in Texas noted that presumptive remedies can make sense, as long as the remedies that have been designed are truly protective. Similarly, the representatives of an environmental organization cautioned that the value of presumptive remedies depends on the level of protection they provide.\nEPA officials cited another advantage of presumptive remedies: consistency in remedy selection from site to site.\nThe stakeholders were more cautious about the use of preestablished standards to specify the goal of the remediation process without a site-specific risk assessment and with reduced public involvement. EPA regional officials believed that the use of the automatically applied standards without a risk assessment is more appropriate for sites that have fairly simple contamination problems, but would not be appropriate for the very large and complex sites that come under the Superfund program. Superfund sites can be over 100 acres, with 30 contaminant sources and 100 different contaminants, and according to EPA officials, using a look-up table would be too simplistic an approach to remedy selection at such sites. These tables are based on assumptions about exposure to contaminants that they said needed to be verified at more complex sites through a risk assessment. An Illinois official said, however, that the preestablished standards could be appropriate for portions of complex sites, even if they could not be used throughout the site.\nOther stakeholders were not familiar with the details of the state cleanup standards. However, a representative of RFF said that while the standards may reduce debate about appropriate cleanup levels, there is a tradeoff involved if the standard is not sufficiently protective of public health. Representatives of the Sierra Club said that use of look-up tables to define the end goal can be overly simplistic, and it was important that parties responsible for the original contamination remain liable if events prove that the cleanup to specified standards was not adequate.\nRegarding reduced requirements for public involvement based on a presumed lack of public interest, an EPA regional official said that low attendance at meetings arranged for public input may be less a reflection of public indifference than a sign that the public has not been sufficiently informed of issues surrounding a contaminated site. This official said that it is necessary to be very proactive in public outreach efforts. For example, he said that it may be necessary to contact churches in order to reach some ethnic communities. A representative of an environmental organization noted that while limiting public involvement may conserve resources in the short term, it may lead to greater costs in the long run if members of the public believe that they have been excluded from the process and decide to litigate. The representative emphasized that the Superfund cleanup process should produce no surprises, and an effective public involvement effort is critical.\n\n\t\tStakeholder\u2019s Views on Practices That Could Lead to Lower-Cost Remedies\n\nThe representatives of the environmental groups and others that we contacted, such as the Sierra Club, John Snow Institute, RFF, and EPA regions, generally believed that the states\u2019 lack of preference for permanent cleanup remedies and their greater readiness to consider that sites will not be used for residential purposes in the future tend to weaken the long-term effectiveness of site remediation programs. These groups were concerned that nonpermanent remedies, like clay caps designed to isolate contaminants, would not be maintained over time, and that institutional controls, like zoning or deed restrictions needed to prevent the residential or other higher-risk use of sites, would be changed or not enforced. Representatives of the International City\/County Management Association (ICMA) said that the land-use and other institutional controls required by nonpermanent remedies require better cooperation and communication between state and local governments than often currently exists. Furthermore, according to an ICMA representative, a recent ICMA focus group indicated that many state and local officials do not fully appreciate the long-term demands\u2014including oversight and enforcement\u2014that institutional controls may place upon local governments. According to an EPA official, some contaminants cannot be contained over the long term (50 to 100 years) and that Superfund\u2019s preference for permanent cleanup remedies is necessary for such long-term protection. In addition, EPA officials said that the costs of long-term operations and maintenance of nonpermanent remedies may partially offset initial cost savings.\nA report by RFF conducted under a grant from EPA, discussed the implications of basing remedy selection on land-use assumptions. The report stated that land-use categories (such as residential, industrial, and commercial) are used to estimate the future exposure of people to contaminants; yet the relation between land use and exposure is often not known and may vary widely. Anticipating the likely future use of a site is no easy task, according to the report, given the competing interests that want different land uses. The report noted that EPA does not have the authority to ensure that local land-use controls are maintained and enforced over time at sites where residual contamination precludes unrestricted use. Local land-use restrictions are typically the province of local government and private property law. The report observed that land-use controls are subject to various pressures, such as demands for property development, that may limit their effectiveness. Two major challenges result from a cleanup policy linking land use to remedy selection, according to the report: first, how to involve the public more effectively in cleanup and reuse decisions, and second, how to ensure the effectiveness of property-use restrictions when the legal authority for such controls is the private property laws of each state.\n\n\t\tStakeholders\u2019 Views on State Liability Practices\n\nSome stakeholders were not supportive of the changes Michigan made in its liability provision. A representative of the Michigan Environmental Council said that causation would increase public expense for cleanup and that because there would be fewer responsible parties available for cleanup, fewer contaminated sites would be remediated. According to an EPA official, CERCLA establishes a defense to liability for innocent landowners who obtain property without knowing that it was contaminated, despite taking due care to discover potential contaminants. However, an EPA official acknowledged that owners are generally unable to qualify for this defense because it is rare that an in-depth investigation of a contaminated site would not detect the contamination.\nWhile not disagreeing with Minnesota\u2019s policy of assuming the cost of closed municipal landfills, representatives of the Sierra Club said that it is important that the policy not be extended to privately owned landfills because this would burden the taxpayers with costs that are the responsibility of a private party. EPA officials said that Minnesota\u2019s approach is a potentially very costly program from the government\u2019s standpoint, and EPA could probably not afford to adopt such a policy without significant additional funding.\n\n\t\tViews on the Importance of the Superfund Program\u2019s Continued Role\n\nSeveral state officials told us that, although they believe the practices of their state programs facilitate faster and less costly cleanup, they also wanted to stress the importance of an ongoing Superfund program. For example, officials in Massachusetts said that the existence of the federal program, with what they characterized as more daunting requirements and procedures than exist in state programs, was an important element in obtaining the cooperation of responsible parties in the state program. If these parties are not cooperative and the site is sufficiently dangerous, responsible parties risk being brought into the Superfund program.\n\n\tAgency Comments\n\nWe provided a draft of this report to EPA for its review and comment. We spoke with EPA officials, including the Director of the State, Tribal, and Site Identification Center, in EPA\u2019s Office of Solid Waste and Emergency Response, to obtain the agency\u2019s comments. EPA generally agreed with the description of the Superfund practices presented in the report but made technical comments and corrections, which we incorporated as appropriate. In addition, EPA officials said that the agency\u2019s recent administrative reforms had reduced the cost and duration of Superfund cleanups. The officials provided us with data on the cost and time savings achieved by certain of these reforms,which we included in our report. EPA also believed that the report should highlight the fact that containment remedies require long-term management and monitoring and may fail without such attention. We pointed out that this issue was addressed in the report\u2019s section summarizing stakeholders\u2019 views.\nWe also provided selected portions of this report to officials responsible for the state programs we discussed. We incorporated state comments and corrections as necessary.\n\n\tScope and Methodology\n\nTo identify practices that may facilitate cleanups of hazardous waste sites that are faster or less costly in comparison with the federal Superfund program, we selected seven states\u2014Illinois, Massachusetts, Michigan, Minnesota, New Jersey, Pennsylvania, and Texas\u2014with cleanup programs that are among the largest in the nation and that were recommended by various stakeholders\u2014including EPA, industry organizations, and environmental groups\u2014as states that had implemented time- and cost-saving practices. We then conducted interviews with these states\u2019 program officials, who identified and described program practices that, in comparison with the practices of the federal Superfund program, they believe facilitated faster or less costly cleanup of hazardous waste sites. We also reviewed pertinent laws, regulations, and other available documentation describing these practices. We did not independently verify the officials\u2019 statements regarding time and cost savings.\nTo identify issues that should be considered before these practices would be adopted by the Superfund program, we talked with officials from environmental and local governmental organizations, and EPA regional and headquarters offices. Where possible, we obtained references to these organizations from states and EPA. We interviewed officials in each of EPA\u2019s regional offices whose jurisdiction includes the selected states, environmental groups in the selected states, and national environmental groups.\nWe conducted out work from July through December 1998 in accordance with generally accepted government auditing standards.\nAs arranged with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 10 days from its date. At that time, we will send copies of this report to appropriate congressional committees; interested Members of Congress; the Administrator of EPA; state program managers; and other interested parties. We will also make copies available to others upon request.\nPlease call me at (202) 512-6111 if you or your staff have any questions. Major contributors to this report are listed in appendix IV.\n\nState Program Profiles as of Fiscal Year 1997\n\nState Practices That State Officials Believe Facilitate Faster or Less Costly Hazardous Waste Site Cleanup\n\nList of Organizations GAO Contacted\n\n\tFederal Agencies\n\n\tState Agencies\n\n\tEnvironmental Organizations\n\n\tState and Local Government and Other Organizations\n\nWe contacted this organization in a preliminary phase of our work in order to obtain its views on the best states to survey.\n\nMajor Contributors to This Report\n\n\tResources, Community, and Economic Development Division\n\n\tOffice of the General Counsel\n\nRichard Johnson The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent.\nU.S. General Accounting Office P.O. Box 37050 Washington, DC  20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000  or by using fax number (202) 512-6061, or TDD (202) 512-2537.\nEach day, GAO issues a list of newly available reports and testimony.  To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone.  A recorded menu will provide information on how to obtain these lists.","output":"Why GAO Did This Study\n\nPursuant to a congressional request, GAO: (1) identified practices that are both used in selected state programs at sites that may be contaminated enough to qualify for long-term cleanup under the Superfund program and that are believed by state officials to reduce the time and expense of cleanups; and (2) obtained the views of the Environmental Protection Agency (EPA), environmentalists, and other stakeholders about whether the states' practices may be applicable to the Superfund program.\n\nWhat GAO Found\n\nGAO noted that: (1) state hazardous waste program officials identified cleanup practices that they believe lead to faster or less costly cleanup of sites and that have been applied at sites that qualify for the Superfund Program, and said that the practices facilitated cleanups in that: (a) some practices promoted faster decisionmaking about how to clean up sites, that is, decisions about which cleanup remedies to use; (b) their programs allow less costly cleanup remedies than the Superfund law requires, which are nevertheless, they believe, protective of health and the environment; and (c) two state programs reduce litigation costs, speed up cleanups, and improve the fairness of the cleanup process by not holding some parties responsible for cleanup who would be liable under the Superfund law; (2) although the officials provided some anecdotal evidence illustrating the benefits of these practices, none could provide a formal assessment of time and cost savings; (3) environmental policy stakeholders that GAO interviewed, including EPA, state and national environmental organizations, and representatives of local governments, generally did not dispute that the state practices identified can facilitate faster or less costly cleanups; (4) because they can reduce costs, the state practices are generally advantageous to private companies and others responsible for cleaning up sites; (5) however, EPA and environmental and local government groups said that applying some of the practices to the Superfund program could have disadvantages; (6) environmental groups, as well as representatives of state and local officials, noted that containment remedies leaving contamination at sites would require control over the use of the sites, such as restrictive zoning, to reduce human exposure to the contaminants; (7) a number of stakeholders, including state officials, said that a lessening of the Superfund program's more rigorous cleanup requirements or liability standards could negatively affect the state programs; (8) they noted that states can refer sites at which parties responsible for cleanup refuse to comply with state requirements to EPA for possible action under the Superfund program; and (9) the belief of responsible parties that the Superfund requirements are more onerous than the states' is a powerful incentive for cooperation with state authorities that might be weakened if the Superfund program became more like the state programs."}
{"id":"gao_GAO-05-1052T","pid":"gao_GAO-05-1052T_0","input":"\tBackground\n\nSince the onset of OIF and OEF, over 1 million servicemembers have been  deployed. As of the end of June 2005, more than 393,000 active duty,  Reserve, and National Guard servicemembers from OIF and OEF have  separated from active duty. Of these, over 100,000 have sought health care  services from VA, including over 2,400 who received inpatient care at VA  medical centers. The Reserves and National Guard account for about  54,000 of those servicemembers who sought health care services from VA.  The three most common health problems have been musculoskeletal  ailments (primarily joint and back disorders), dental problems, and mental  health disorders.\nServicemembers injured during OIF and OEF are surviving injuries that  would have been fatal in past conflicts. In World War II, 30 percent of  Americans injured in combat died; this proportion dropped to 24 percent  for those injured in the Vietnam War and further dropped to about   10 percent for those injured in OIF and OEF. Many of the injured OIF and  OEF servicemembers are returning with severe disabilities, including  traumatic brain injuries and missing limbs.\nAbout 65 percent of OIF and OEF combat injuries are from improvised  explosive devices, blasts, landmines, and fragments. Of those injured  personnel, about 60 percent have some degree of traumatic brain injury  and may require comprehensive inpatient rehabilitation services to  address complex cognitive, physical, and mental health issues resulting  from trauma. Traumatic brain injuries may cause problems with cognition  (concentration, memory, judgment, and mood), movement (strength,  coordination, and balance), sensation (tactile sensation and vision), and  emotion (instability and impulsivity). The Department of Health and  Human Services\u2019 Centers for Disease Control and Prevention reports that  an estimated 15 percent of persons who sustain a mild brain injury  continue to experience symptoms 1 year after injury.\nInitially, most severely injured servicemembers, including Reserve and  National Guard members, are brought to Landstuhl Regional Medical  Center in Germany for treatment. From there, they are transported to  appropriate U.S. military medical facilities, with most of the seriously  injured admitted to Walter Reed Army Medical Center or the National  Naval Medical Center, both located in the Washington, D.C., area. Once  these servicemembers are medically stabilized, many are relocated closer  to their homes or military commands and continue recovering either on an  inpatient or outpatient basis at a VA medical facility, a DOD military  treatment facility (MTF), or DOD civilian provider.\nThose who have served, or are now serving, in OIF and OEF may receive  care from VA for conditions that are or may be related to their combat  services for a 2-year period following the date of their separation from  active duty without copayment requirements. Following this 2-year period,  they may continue to receive VA care but may be subject to a copayment  for their health care.\nTo ensure that servicemembers engaged in conflicts receive the health  care services they need, Congress passed legislation in May 1982 that  authorized VA to provide medical services to members of the armed forces  during and immediately following wartime or national emergencies  involving the armed forces in armed conflict. The law authorized the  Secretary of VA to give servicemembers responding to or involved in a war  or national emergency a higher priority for medical services than all  veterans, except those with a service-connected disability. VA has  established an enrollment system to manage veterans\u2019 access to care. This  system includes eight priority categories for enrollment, with higher  priority given to veterans with service-connected disabilities, lower  incomes, or other recognized statuses such as former prisoners of war.\nSeparation from the military and return to civilian life may entail the  exchange of individually identifiable health information between DOD and  VA. The exchange of this information must comply with the Health  Insurance Portability and Accountability Act of 1996 (HIPAA) and the  HIPAA Privacy Rule, which became effective April 14, 2001. The HIPAA  Privacy Rule permits DOD and VA to share servicemembers\u2019 health  information under certain circumstances, such as for continuity of health  care treatment or if the individual signs a proper authorization.\n\n\t\tVA Has Established Policies and Outreach Efforts Intended to Smooth the Transition from DOD Health Care\n\nVA has taken several steps to provide OIF and OEF servicemembers with  timely access to health care and information on health care services.  These steps include setting policies and developing outreach efforts  targeting OIF and OEF servicemembers.\n\n\t\t\tRecent VA Policies Designed to Facilitate Transition to VA Health Care\n\nSince 2002, VA has issued a memorandum and four directives addressing  eligibility criteria and the health care needs of recently discharged  servicemembers.\nA September 2002 directive established policies and procedures for  offering hospital care, medical services, and nursing home care to recently  discharged servicemembers for a 2-year period, beginning on their  discharge date, for any illness, without requiring proof of its link to  military service. Under this directive, these veterans are enrolled in the  lowest priority category for service-connected veterans.  In April 2003, when the President declared a national emergency with  respect to the conflict in Iraq, the Secretary of VA issued a memorandum  authorizing VA to give priority health care to servicemembers who  sustained an injury, over veterans and others eligible for VA care, except  those with service-connected disabilities.\nAn October 2003 directive (1) provided instructions to VA employees for  determining the eligibility of recent combat veterans to be enrolled for VA  health care; (2) required each VA medical facility to designate a clinically  trained combat case manager, usually a social worker or nurse, to  coordinate all of the medical care and services provided to recent combat  veterans by VA and non-VA agencies until the veterans no longer need  care; and (3) required VA medical facilities to designate a point of  contact\u2014administrative staff, social worker, or nurse\u2014to receive and  expedite transfers of servicemembers from MTFs to VA medical facilities  and coordinate with VA\u2019s combat case managers.\nA June 2005 directive specified the dates of service and combat locations  to determine whether recent combat veterans are eligible for health care  services.\nAnother June 2005 directive expanded the scope of care at VA\u2019s four  regional traumatic brain injury rehabilitation centers and redefined these  facilities as polytrauma rehabilitation centers. These centers\u2019 inclusion of  psychological treatment for family members and rehabilitation services  using high-technology prosthetics reflect VA\u2019s intention to provide more  coordinated care for patients, including the growing number of OIF and  OEF servicemembers with severe and disabling trauma. The directive  states that coordination of care, including intensive clinical and social  work case management services, is essential in these severe trauma  cases, as patients transition from acute hospitalization through acute  rehabilitation and ultimately to their home communities.\nIn addition to VA\u2019s directives, a joint DOD and VA program was  established in August 2003 to assign VA social workers to selected MTFs  to coordinate patient transfers between MTFs and VA medical facilities.  The social workers make appointments for care, ensure continuity of  therapy and medications, and followup with patients to verify success of  the discharge. By mid-July 2005, the social workers had received 3,907  requests for transfer of care\u2014almost two-thirds of them had been  transferred to VA facilities; the rest were pending. Further, VA benefits  counselors work with the social workers to inform servicemembers about  VA benefits and to initiate paperwork for disability compensation claims,  vocational rehabilitation and employment assistance, and other VA  benefits.\nAlso in August 2003, VA created the Taskforce for the Seamless Transition  of Returning Service Members. The taskforce, composed of senior VA  leadership, focused on developing and implementing VA policies to  improve the transition of injured servicemembers to civilian life. In  January 2005, VA established the Seamless Transition Office to further  improve coordination within the Veterans Benefits Administration and the  Veterans Health Administration as well as between DOD and VA. The  goals of the Seamless Transition Office include improving communication,  coordination, and collaboration within VA and with DOD with respect to  health care; educating VA staff about veteran\u2019s health care and other  needs; and ensuring that policies and procedures are in place to enhance  the transition from servicemember to veteran. The Seamless Transition  Office uses the taskforce in an advisory capacity.\nTo help ensure that VA staff assisting OIF and OEF servicemembers can  be responsive to their health care needs, the agency created an internal  Web site to provide a single source of access to VA policies, procedures,  and directives for wounded, ill, and seriously injured servicemembers and  veterans. According to VA, the internal Web site also includes a list of the  points of contact at medical facilities and articles about transition-related  activities.\n\n\t\t\tVA Outreach Efforts to OIF and OEF Servicemembers\n\nVA has instituted several outreach strategies to provide information about  the health care services available to OIF and OEF servicemembers who  have been discharged. These include the use of newsletters, personal  letters, an external Web site, counseling services, and briefings on VA  benefits and services.\nUsing DOD rosters of OIF and OEF servicemembers who have separated  from active duty, VA sends newsletters and personal letters with pertinent  information to these new veterans. VA has sent three newsletters since  December 2003, with information on benefits and health issues specific to  OIF and OEF veterans. In addition, the Secretary of VA sends these new  veterans a letter thanking them for their service to the country and  informing them about VA health care services and assistance to aid in their  transition to civilian life. The letter includes a toll-free number for  obtaining information on VA health care and two brochures on VA health  care as well as benefit information, including disability compensation,  education and training, vocational rehabilitation and employment, home  loans, and life insurance. In addition, the Secretary of VA has sent letters  to all the Adjutants General and Chiefs of the Reserves to inform them of  VA services and benefits.\nVA has also sought to improve access to health care information. It  created a Web site that provides information specific to those who served  in OIF and OEF, such as information on VA health and medical services;  dependents\u2019 benefits and services; transition assistance; and benefits for  active duty military, Reserve, and National Guard personnel. In addition,  VA developed a wallet-sized card with relevant toll-free telephone  numbers and Web site addresses. VA officials reported that the agency has  distributed 1 million copies of this wallet card.\nVA has enhanced outreach to those who served in OIF and OEF and their  families through its Vet Center Readjustment Counseling Service,  consisting of 207 centers. Vet Centers function as community points of  access by providing information and referrals to VA medical facilities.  Additionally, they offer counseling, employment services, and a range of  social services to assist individuals in readjusting from wartime military  service to civilian life. VA reported that during 2004, it hired 50 peer  counselors and placed them at Vet Centers where significant numbers of  servicemembers were returning from OIF and OEF. According to a VA  official, VA is in the process of hiring an additional 50 peer counselors.\nBriefings are another form of outreach used by VA to inform OIF and OEF  servicemembers about health care services.\nFrom fiscal year 2001 through the third quarter of fiscal year 2005, VA held  more than 30,800 briefings on VA benefits for more than 1.1 million  servicemembers. These briefings include about 3,700 predeployment and  postdeployment briefings for about 230,000 activated Reserve and  National Guard servicemembers.\nFor OIF and OEF servicemembers who may potentially use VA  services, DOD and VA share some types of administrative data, such as  individuals\u2019 names and addresses; however, the sharing of health  information between the two departments remains limited.\nVA could not report how many of these were OIF and OEF servicemembers.\nMOU for the sharing of individually identifiable health information. The  MOU constitutes an agreement on the circumstances under which DOD  and VA will exchange individually identifiable health information and  includes references to provisions of the HIPAA Privacy Rule and  applicable laws that permit sharing. The MOU does not specify particular  types of individually identifiable heath information that will be exchanged  and when the information will be shared. The absence of specific data  sharing procedures continues to hinder VA\u2019s efforts to obtain needed  health information from DOD.\nFor example, DOD does not have specific procedures to routinely provide  VA with health information on servicemembers who have injuries or  illnesses that preclude them from continuing on active duty and, as a  result, are being evaluated by a DOD physical evaluation board (PEB) for  separation from the military. According to VA officials, if a list of these  individuals were transmitted routinely to VA, it would enable VA to  contact the individuals to make the appropriate transfer of health care to a  VA medical facility before the individuals are discharged from the military.  Such information could reduce the potential for interruption to these  individuals\u2019 health care treatment plans. DOD officials told us that they are  in the process of developing a policy directive that would establish  procedures for sharing information with VA on servicemembers who are  entering the PEB process, but they could not determine when this policy  directive would become effective.\nRecent progress in VA and DOD data sharing involves a health assessment  questionnaire that DOD requires servicemembers to complete following  deployment. This document contains, among other things, self-reported  information about a servicemember\u2019s potential exposure to toxic  substances and includes four questions that can be used to identify  individuals at risk of developing post-traumatic stress disorder. In July  2005, DOD transmitted to VA postdeployment health assessment data for  those individuals who have been discharged from the military. According  to VA officials, DOD is expected to transmit these data monthly beginning  in October 2005. For these individuals, VA clinicians will be able to access  the data through VA\u2019s computerized medical record system when the  individuals seek VA health care services. However, according to VA  officials, DOD is not providing health assessment information to VA for  Reserve and National Guard members, who comprise 35 percent of the  OIF and OEF forces.\nIn addition to individual health information from the postdeployment  questionnaire, VA officials state that the agency could use aggregate data  from the questionnaire to plan for the needs of current servicemembers  who may one day be eligible for health care and benefits from VA. This is  consistent with an observation made by the President\u2019s task force that  comprehensive servicemember health data are essential for forecasting  and preparing for changes in the demand for health care services.  Currently, the data from the individual postdeployment assessments are  not accessible in a format that can be aggregated and manipulated to  provide the desired trend information.\nMr. Chairman, this concludes my prepared remarks. I will be pleased to  answer any questions you or other members of the committee may have.\n\n\tContacts and Acknowledgments\n\nFor further information regarding this testimony, please contact   Cynthia A. Bascetta at (202) 512-7101 or bascettac@gao.gov.   Michael T. Blair, Jr., Assistant Director; Mary Ann Curran; Hannah Fein;  Cynthia Forbes; Marcia Mann; Kevin Milne; and Cherie Starck also  contributed to this statement.\n\nRelated GAO Products\n\nMilitary and Veterans\u2019 Benefits: Improvements Needed in Transition  Assistance Services for Reserves and National Guard. GAO-05-844T.  Washington, D.C.: June 29, 2005.\nMilitary and Veterans\u2019 Benefits: Enhanced Services Could Improve  Transition Assistance for Reserves and National Guard. GAO-05-544.  Washington, D.C.: May 20, 2005.\nDOD and VA: Systematic Data Sharing Would Help Expedite  Servicemembers\u2019 Transition to VA Services. GAO-05-722T. Washington,  D.C.: May 19, 2005.\nVocational Rehabilitation: VA Has Opportunities to Improve Services,  but Faces Significant Challenges. GAO-05-572T. Washington, D.C.:   April 20, 2005.\nVA Disability Benefits and Health Care: Providing Certain Services to  the Seriously Injured Poses Challenges. GAO-05-444T. Washington, D.C.:  March 17, 2005.\nVocational Rehabilitation: More VA and DOD Collaboration Needed to  Expedite Services for Severely Injured Servicemembers. GAO-05-167.  Washington, D.C.: January 14, 2005.\nVA and Defense Health Care: More Information Needed to Determine if  VA Can Meet an Increase in Demand for Post-Traumatic Stress Disorder  Services. GAO-04-1069. Washington, D.C.: September 20, 2004.\nMajor Management Challenges and Program Risks: Department of  Veterans Affairs. GAO-03-110. Washington, D.C.: January 2003.\nThis is a work of the U.S. government and is not subject to copyright protection in the  United States. It may be reproduced and distributed in its entirety without further  permission from GAO. However, because this work may contain copyrighted images or  other material, permission from the copyright holder may be necessary if you wish to  reproduce this material separately.","output":"Why GAO Did This Study\n\nOperation Iraqi Freedom (OIF) and Operation Enduring Freedom (OEF) servicemembers and those who are discharged from military service may receive health care from the Department of Veterans Affairs (VA). Since the onset of OIF and OEF, the Department of Defense (DOD) has reported that more than 15,000 servicemembers have been wounded in combat. Those who are seriously injured require comprehensive health care services and may be treated at either DOD or VA medical facilities. Because VA is expected to provide health care to many of the injured OIF and OEF servicemembers, concerns have been raised about the ease with which these individuals and their health care information transition from DOD's to VA's health care system. This statement is based on GAO's preliminary work on \"seamless transition\" and focuses on (1) the policies and outreach efforts that VA has instituted to provide timely access to health care to OIF and OEF servicemembers and (2) the extent to which individually identifiable health information is shared systematically between DOD and VA. Since GAO's work is still in the early stages of review, the statement is limited to information gathered to date.\n\nWhat GAO Found\n\nSince 2002, VA has developed policies and procedures that direct its medical facilities to provide OIF and OEF servicemembers timely access to care. Most notably, VA assigned VA social workers to selected military treatment facilities in August 2003, directed VA facilities to designate combat case managers in October 2003, and directed the establishment of four VA polytrauma centers for OIF and OEF servicemembers in June 2005. In January 2005, VA established the Seamless Transition Office to further improve coordination within the Veterans Benefits Administration and the Veterans Health Administration as well as between DOD and VA. In addition, VA has increased outreach efforts by providing OIF and OEF servicemembers who have been discharged with personal letters and newsletters, a Web site for health information tailored to OIF and OEF servicemembers, counseling services, and briefings on available VA health care services. GAO is in the beginning stages of reviewing VA's efforts to provide a smooth transition from DOD health care and has not yet evaluated the effectiveness of VA's related policies, procedures, and outreach initiatives. An important issue associated with transitioning servicemembers to VA health care is the sharing of health care information between DOD and VA. The two departments have signed a memorandum of understanding for sharing individually identifiable health information, but the memorandum does not specify the particular types of individually identifiable health information that will be exchanged and when the information will be shared. The absence of specific procedures continues to hinder VA's efforts to obtain needed health information from DOD. Recently, DOD has begun to share certain health assessment information with VA on individuals who have been discharged from the military, and the transmitting of this information to VA on a routine basis is expected to occur in October 2005. However, according to VA officials, DOD is not providing health assessment information to VA for Reserve and National Guard members, who comprise 35 percent of the OIF and OEF forces."}
{"id":"gao_GAO-13-760","pid":"gao_GAO-13-760_0","input":"\tBackground\n\nNIH conducts and sponsors biomedical research through its institutes and  centers (IC), each of which is charged with a specific mission. ICs\u2019  missions generally focus on a given disease; a particular organ; or a  stage in development, such as childhood or old age. ICs accomplish their  missions chiefly through intramural and extramural research. Intramural  research entails government scientists working in the ICs\u2019 own  laboratories and clinics, whereas extramural research is conducted at  outside research institutions, primarily universities, by scientists who have  been awarded extramural research grants from an IC through NIH\u2019s  competitive process.$30 billion in fiscal year 2012 was used to support extramural research.  Of this $25.2 billion in extramural research grant funding, NIH provided  about $16.1 billion to universities.\n\n\t\tComponents of Direct and Indirect Costs\n\nExtramural research grants reimburse universities for the direct costs of  each research project covered by the grants and a portion of the indirect  costs of maintaining their facilities for research use and covering the  administrative expenses of the university. Direct costs can be specifically  identified with or directly assigned to individual research projects and are  relatively easy to define and measure. They include, for example, the  researcher\u2019s salary, subawards, equipment, and travel. Indirect costs  represent a university\u2019s general support expenses and cannot be  specifically identified with individual research projects or institutional  activities. They include, for example, building utilities, administrative staff  salaries, and library operations. OMB Circular No. A-21 establishes the  principles for determining the types of direct and indirect costs that are  allowed to be claimed and the methods for allocating such costs to  federally funded research at educational institutions, including the  establishment and use of indirect cost rates.\nIndirect costs are divided into two main components, facilities costs and  administrative costs. Facilities costs include operations and maintenance expenses, such as for utilities; allowances for depreciation and use of buildings and equipment; interest on debt associated with building and equipment; and  library expenses, such as for the use of the library and library  materials purchased for research use. general administration expenses, such as the costs associated with  executive functions like financial management; departmental administration expenses, including clerical staff and  supplies for academic departments;  sponsored projects\u2019 administration expenses, which are the costs  associated with the office responsible for administering projects and  awards funded by external sources; and  student administration and services expenses, such as the  administration of the student health clinic.\n\n\t\tCalculation of the Indirect Cost Rate\n\nBecause indirect costs cannot be specifically attributed to a particular  research grant, they are charged via an indirect cost rate that serves as  the mechanism for determining the proportion of indirect costs that may  be charged to federally funded research awards. OMB Circular No. A-21  outlines the process for establishing an indirect cost rate for universities  performing federally funded research. Each university develops a  proposed indirect cost rate that is based on university cost data from prior  years, which is subsequently negotiated with the federal government to  arrive at a final indirect cost rate, in compliance with the principles of  OMB Circular A-21.\nTo calculate a university\u2019s indirect cost rate, a percentage of each indirect  cost component is allocated to the university\u2019s research function on the  basis of benefits received from that component by the research function.  For example, a university can measure the square footage of floor space  used for research and use this measure to allocate the amount of costs it  claims for operating and using the space as a component in its indirect  cost rate proposal. Each indirect cost component allocated to research is  applied to a modified set of direct costs referred to as \u201cmodified total  direct costs\u201d (MTDC) to obtain an individual rate for each component. MTDC includes the salaries and wages of those conducting the research,  fringe benefits (e.g., pensions), materials and supplies, travel, and the  first $25,000 of each subaward. MTDC excludes costs such as equipment  costs, capital expenditures, tuition remission, equipment or space rental  costs, and the portion of each subaward in excess of $25,000. (See   fig. 1.)\nUniversities use a standard format, also known as the long form, for submitting their  indirect cost rate proposals to their cognizant rate-setting agency. However, universities  whose total direct costs on federal awards do not exceed $10 million in a fiscal year may  use a simplified method for determining the indirect cost rate applicable to all federal  awards. Whereas universities above the $10 million threshold must use an MTDC base,  universities using the simplified method may use either salaries and wages as their base,  or MTDC. As already noted, this report focuses on those universities that used the  standard format for proposal submission.\n\n\t\tProposed Changes to OMB Circular No. A-21\n\nIn February 2013, OMB issued proposed guidance that includes revisions  to cost principles of OMB Circular No. A-21. The proposed guidance  reflects input from the federal and nonfederal financial community,  including the Interagency Council on Financial Assistance Reform. The  proposed guidance would, among other things, allow more items to be  directly charged rather than included as a component of the indirect cost  rate. As of September 2013, OMB had not issued final guidance.\n\n\tFrom 2002 to 2012, NIH Indirect Cost Reimbursements to Universities Increased Faster than for Direct Costs, with Most Going to a Small Number of Universities\n\nFrom fiscal year 2002 to fiscal year 2012, NIH reimbursements to  universities for indirect costs associated with NIH-funded extramural  research increased at a slightly faster rate than those for direct costs, and  during some portions of this period indirect cost growth increased notably  faster than direct cost growth. In fiscal year 2012, the 50 universities with  the largest research programs received over two thirds of total indirect  cost reimbursement. Higher indirect cost rates tended to be associated  with universities located in high-cost-of-living areas and privately owned  universities.\n\n\t\tFrom 2002 to 2012, Reimbursements for Indirect Costs Increased Slightly Faster than Those for Direct Costs, but Increased Notably Faster During Some Periods\n\nReimbursements for indirect costs from fiscal year 2002 through fiscal  year 2012 increased slightly faster than reimbursements for direct costs,  but increased notably faster during some periods. Over this period, NIH  reimbursements for indirect costs grew by about 28.1 percent, from   $3.6 billion to $4.6 billion. Over the same period, NIH reimbursement for  direct costs grew by about 27.0 percent, from $9 billion to $11.5 billion.  However, because there were large differences between indirect and  direct growth in some years, indirect cost reimbursements increased  notably faster than direct cost reimbursements during some periods. For  example, from fiscal year 2002 to 2003, the first year of this period, there  was a large increase in direct costs that compensated for greater growth  in indirect costs during other years. As a result, from fiscal year 2003 to  2012 indirect costs increased 16.9 percent, from about $3.9 billion to   $4.6 billion, while direct costs increased 11.7 percent, from about   $10.3 billion to $11.5 billion. Furthermore, in 6 of the 10 years,  reimbursements for indirect costs increased relative to those for direct  costs, by either increasing at a faster rate or declining at a slower rate.  After fiscal year 2005, annual changes in reimbursements were generally  small but consistent, with reimbursements for indirect costs increasing  relative to direct costs in 5 of 7 years. (See fig. 2 for more details on the  annual change in costs.)\nNIH officials noted that, historically, NIH\u2019s reimbursements for indirect  costs have remained a stable percentage of NIH\u2019s total funding for all NIH  awards overall. Our analysis specifically for university research, which  accounted for almost two-thirds of NIH\u2019s funding for extramural research  in fiscal year 2012, indicates that in 2003 about 27.7 percent of NIH  reimbursement for university research was for indirect costs, and in 2012  this percentage increased slightly to 28.6 percent. This occurred while  NIH\u2019s budget for extramural research conducted at universities\u2014which  needs to cover both the direct and the indirect costs of research\u2014slowed  in the last few years. For example, during the most recent 5 years (fiscal  year 2008 to fiscal year 2012), NIH\u2019s total funding for extramural research  conducted at universities increased about 5 percent, whereas it had  increased about 21 percent in the 5 previous years (fiscal year 2002 to  fiscal year 2007).\n\n\t\tIn 2012 the 50 Universities with the Largest Research Programs Received Most of the Indirect Cost Reimbursements\n\nIn fiscal year 2012, almost 70 percent of NIH indirect cost reimbursement  to universities was provided to about 10 percent of the universities (50 of  a total of about 500) receiving NIH funding for extramural research.(See app. I for the indirect cost reimbursements for these top 50  universities.) These top 50 universities had the largest research  programs, as defined by the largest amount of reimbursement for direct  costs and a relatively large number of research grants.\nIndirect cost rates for 5 universities out of the top 50 were not available from DCA. adjustment.the highest indirect cost rates among the 50 universities receiving the  highest amounts of indirect cost reimbursement in fiscal year 2012.  Among the 10 universities in the table, those with the highest indirect cost  rates were Mount Sinai Medical School and New York University School  of Medicine; Johns Hopkins University and Yale University had the largest  research programs as measured by the number of NIH grants awarded.\n\n\tStakeholders Identified Factors Related to Facilities and Administrative Costs That May Increase Reimbursements for Indirect Costs, but NIH Has Not Assessed Their Potential Impact\n\nStakeholders\u2014university officials, DCA officials, and others\u2014whom we  interviewed identified several key factors that may lead to increases in  reimbursements for indirect costs provided to universities. Some factors  are related to the facilities costs, and others are related to administrative  costs. NIH has not assessed the potential impact of future increases in  indirect costs on its research mission, including planning for how to deal  with these potential increases.\n\n\t\tUncapped Facilities Component of the Indirect Cost Rate Provides Few, If Any, Incentives to Control Costs\n\nSome stakeholders underscored the importance to the research effort of  providing funding for the costs of facilities. They explained that  reimbursements for the facilities component of indirect costs\u2014such as the  amount of reimbursable square footage, operations and maintenance,  building depreciation, and interest costs\u2014help to support research  innovation by providing funding for the development and maintenance of  state-of-the-art research facilities. Some university officials we  interviewed noted that these research facilities are necessary for  conducting innovative biomedical research, such as research devoted to  the role of genetic mutation for breast cancer that uses advanced lab  space and equipment. They also noted that costs for these facilities have  increased over time as biomedical research has become increasingly  sophisticated. For example, a university\u2019s officials stated that from fiscal  year 2002 to fiscal year 2009, the cost of its facilities to support  research\u2014including those used to support advancement in data and  computing\u2014has grown from about $88 million to about $145 million.\nDCA officials stated that the uncapped facilities component of the indirect  cost rate provides universities few, if any, incentives for controlling these  potentially increasing costs. For example, DCA officials noted that there is  no limit on reimbursement for interest costs under the facilities  component. DCA officials stated that while reimbursements for interest  costs may allow universities to support needed renovations or  construction of new facilities, the fact that these reimbursements are not  capped may also encourage universities to borrow money to build new  facilities, which could lead to the building of more new space than is  necessary for research needs. Officials also noted that these interest  costs are out of DCA\u2019s control and may vary. For example, at the time of  our work, interest rates\u2014which are used to determine interest costs\u2014 were very low, but they could increase over time, which could increase  costs for ongoing building projects or buildings that have already been  completed, regardless of future building decisions by universities.  Because of this factor, the indirect cost rate could be expected to  increase, resulting in a potential increase in the amount of indirect cost  reimbursements provided by NIH.\nIn addition, some stakeholders noted that, at the time of our work, 65 of  about 500 universities receiving reimbursement for indirect costs in fiscal  year 2012 were eligible for a rate increase of 1.3 percent to account for  the higher cost of utilities. DCA officials added that OMB\u2019s proposed  revisions to Circular No. A-21 would allow all universities to receive some  reimbursement for utility costs based on a revised formula. As a result,  NIH reimbursements for indirect costs could be expected to increase as  more universities would be eligible to include this cost in their indirect cost  rates.\n\n\t\tAdministrative Cap Controls Potential Increases in Cost Reimbursement due to Growth in Administrative Costs Incurred by Universities\n\nSome stakeholders noted that while the cap on the reimbursement rate  for administrative costs\u201426 percent\u2014helps to control reimbursements for  indirect costs, it does not account for the recent increases in  administrative costs reportedly incurred by universities. For example,  university officials explained that their administrative costs have increased  in order to comply with recent changes in regulatory reporting  requirements, such as those related to reporting conflicts of interest.  Some university officials explained that they have hired additional full-time  staff to review and manage various reporting requirements as well as  invested in additional information technology (IT) to support new software  related to regulatory requirements. Additionally, some stakeholders noted  that administrative costs also have increased due to trends in the way  biomedical research is conducted, such as an increase in collaboration  between universities in research studies and an increased use of IT for  biomedical research. For example, some university officials explained that  many biomedical research projects now use advanced technology\u2014such  as high-sequencing technology or imaging\u2014that requires greater  investment in computing resources by the university. Additionally, one  university\u2019s officials noted that the advancements in IT provide support for  interconnectivity, complex data security and data privacy requirements,  and requirements for long-term storage and maintenance of electronic  data. According to university officials at another university, in some  instances they may charge some advanced computing equipment as a  direct cost because it is specifically related to research; however, in most  instances these computing resources are included in the administrative  component of the indirect cost rate.\nAccording to DCA officials, if costs that are part of the capped  administrative component increase significantly, indirect cost  reimbursements overall could increase if universities begin to categorize  some of the costs as part of the uncapped facilities component.  Specifically, DCA officials explained that currently there is a provision in  Circular No. A-21 that advises certain limits on changing the  categorization of certain costs\u2014such as those costs incurred by a  university that are associated with increased use of information  technology\u2014from the administrative to the facilities component. However,  they noted that the proposed revisions to Circular No. A-21 did not  include such a provision. DCA officials stated that they may be limited in  their ability to control increases in reimbursements associated with these  categorization changes if this provision is removed and if university  administrative costs continue to increase.\n\n\t\tNIH Has Not Assessed the Potential Impact of Increases in Indirect Costs on Its Mission\n\nNIH has not assessed the potential impact of future increases in indirect  costs on its research mission, including planning for how to deal with  potential future increases of these costs. As we previously reported, NIH  has a program to periodically identify, analyze, and manage significant  risks to its objectives, strategy and mission. NIH officials noted that they  assess risks related to all extramural research funding as part of this  program, and that this assessment does not specifically focus on indirect  costs for universities. According to NIH officials, NIH has not conducted  such planning because overall indirect costs have remained around 27  percent of NIH\u2019s total budget for all extramural research, and, in their  opinion, future cost increases are unlikely to change this figure  significantly in spite of factors that may contribute to increased indirect  costs.\nTherefore, NIH officials stated that they do not anticipate the need to  consider adjusting reimbursements for indirect costs for most grants  below the amount determined by a university\u2019s negotiated indirect cost  rate, which would require a change in law or regulation. However, NIH  officials told us that should indirect costs rise significantly, they may need  to reduce the number of research projects, which have already been  reduced in part because of budget limitations and increases in the direct  costs of research. NIH noted that the reduced budget in fiscal year 2013  resulted in 700 fewer individual research grants. Even at current levels,  indirect costs constitute a significant portion of NIH\u2019s budget at about 20  percent. Therefore, over time, increases in indirect costs could cause  further reductions in the number of research projects that NIH could  support.\n\n\tConclusions\n\nNIH has indicated that NIH funding for both the indirect and the direct  costs of university research provides critical support for biomedical  research, covering the indirect costs of operating a research institution  and the direct costs of specific research projects. NIH faces uncertainty  related to the potential impact of increasing indirect costs on its funding of  future research. Among research grants to universities specifically, NIH\u2019s  indirect costs are increasing at a faster rate than direct costs. While  changes in recent years have generally been small, annual changes in  reimbursement for indirect costs have consistently increased relative to  those for direct costs, by either increasing at a faster rate or declining at a  slower rate. Further, this has occurred while the growth in NIH\u2019s budget  for extramural research has slowed in recent years, putting pressure on  NIH to find ways to continue to maximize its support of innovative  biomedical research. Several factors are expected to contribute to future  growth in indirect costs for NIH. These factors include that NIH\u2019s current  system of reimbursing indirect costs\u2014through indirect cost rates for each  university calculated according to OMB guidance\u2014provides few, if any,  incentives for universities to control facilities costs. At the same time, the  cost of university facilities to support biomedical research is increasing  over time, as cutting-edge research requires more advanced labs and  equipment.\nNIH has not made plans for options that might address these trends\u2014in  part because it views increases in indirect costs as having been modest.  However, indirect costs already represent one-fifth of NIH\u2019s overall budget  and about one-quarter of NIH\u2019s budget for extramural research. NIH has  experienced small but consistent increases in indirect costs, and factors  suggest that indirect costs could increase more quickly over time in the  future. If so, such increases could have an effect over the long term on  the number and size of research grants that could be funded, thus posing  a risk to scientific discoveries and knowledge.\n\n\tRecommendation\n\nTo help address the uncertainty NIH faces related to the potential impact  of increasing indirect costs on its funding of future research, we  recommend that the Director of NIH assess the impact of growth in  indirect costs on its research mission, including, as necessary, planning  for how to deal with potential future increases in indirect costs that could  limit the amount of funding available for total research, including the direct  costs of research projects.\n\n\tAgency Comments and Our Evaluation\n\nWe provided a draft of this report to HHS, and HHS provided written  comments (reprinted in app. II). HHS also provided technical comments,  which we incorporated as appropriate.\nHHS indicated that it agreed with our recommendation and that NIH had  already taken steps to implement it, but HHS disagreed with a number of  our conclusions. Specifically, HHS stated that NIH assesses the impact of  indirect costs through its annual budget projections, through planning and  congressional justifications, and as part of its risk management program.  The draft report acknowledged NIH\u2019s efforts in assessing risk facing its  extramural research program. However, NIH has not indicated how these  actions would address our recommendation by assessing the potential  ongoing impact of indirect costs for universities on its funding of future  research. Moreover, NIH has not developed a plan for how to deal with  potential continuing increases in indirect costs for universities. Instead,  HHS indicated that, in past years, increases in indirect costs have been  proportionally consistent with increases in direct costs, and therefore,  there is not an immediate risk to NIH\u2019s research portfolio. While the draft  report acknowledged that indirect costs have remained a stable  percentage of NIH\u2019s overall research costs, it also noted that, for  universities\u2014which received almost two-thirds of NIH\u2019s funding for  extramural research\u2014indirect costs increased notably faster than direct  costs during some recent periods. Further, as indicated in the draft report,  there are multiple indications that, for universities, indirect costs are likely  to increase at a faster rate in the future, so past stability may not be  sustained in future years. We remain convinced that increases in indirect  costs could have an effect over the long term on the number and size of  research grants that could be funded, thus posing a risk to scientific  discoveries and knowledge.\nIn addition, in its comments, HHS included an analysis of indirect costs  over the past decade for its overall extramural research portfolio. This  analysis was different from our analysis because it focused generally on  extramural research rather than specifically on university research. As  noted in the draft report, our research questions were focused specifically  on universities. Moreover, as institutions of higher education, universities  generally have a broader focus on education than research institutions.  Further, as noted in the draft report, universities are subject to OMB  Circular No. A-21 and their administrative costs are capped, unlike other  research institutions. Because of the unique issues that universities face,  our analysis of indirect costs excluded nonuniversity research institutions  to avoid the possibility of data from these other NIH grantees masking  trends for universities, which are the recipients of the largest portion of  NIH\u2019s grant funding.\nFinally, HHS stated that we did not provide an opportunity for the  department to provide input on our review of NIH\u2019s assessment of the  potential impact of indirect costs on NIH\u2019s research mission. We disagree  with this characterization. NIH provided input on this issue to us during  three separate meetings. For all three meetings, we provided discussion  questions in advance. During one of the meetings, we and NIH officials  discussed the key facts that were to be included in the draft report,  including this issue. In addition, we offered NIH officials the opportunity to  provide additional information in writing, as appropriate.\nAs agreed with your office, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days from the  report date. At that time, we will send copies of this report to the  Secretary of the Department of Health and Human Services, the Director  of the National Institutes of Health, and other interested parties. In  addition, the report will be available at no charge on GAO\u2019s website at  http:\/\/www.gao.gov.\nIf you or your staff have any questions about this report, please contact  me at (202) 512-7114 or at kohnl@gao.gov. Contact points for our Office  of Congressional Relations and Office of Public Affairs can be found on  the last page of this report. Other major contributors to this report are  listed in appendix III.\n\nAppendix I: Indirect Costs and Rates for the Top 50 National Institutes of Health\u2014Funded Universities, Fiscal Year 2012\n\nWeill Medical College of Cornell University  Indiana University\u2014Purdue University at Indianapolis  n\/a = not available: this institution does not negotiate its indirect cost rate with DCA.\n\nAppendix II: Comments from the Department of Health and Human Services\n\nAppendix III: GAO Contact and Staff Acknowledgments\n\n\tGAO Contact\n\n\tAcknowledgments\n\nIn addition to the contact named above, Will Simerl, Assistant Director;   N. Rotimi Adebonojo; George Bogart; Amy Leone; and Roseanne Price  made key contributions to this report.","output":"Why GAO Did This Study\n\nNIH reimburses universities for both the direct and indirect costs of conducting research. Indirect costs cover general facility and administrative expenses, and are paid as a percentage, or rate, of certain direct costs of awarded grants. GAO was asked to look at the indirect costs of NIH-funded research. This report (1) identifies changes in reimbursements by NIH to universities for indirect costs of NIH-funded research; and (2) examines key factors affecting NIH reimbursement to universities for indirect costs and what assessment NIH has done to address any impact of these costs on NIH's research mission. GAO analyzed NIH data and interviewed officials at NIH, six universities, and other stakeholders. Universities were selected based on the number of grants and amount of funding received from NIH and their negotiated indirect cost rates.\n\nWhat GAO Found\n\nFrom fiscal year 2002 to fiscal year 2012, indirect cost reimbursements from the National Institutes of Health (NIH) to universities increased slightly faster than those for direct costs, but increased notably faster during some periods. Specifically, from fiscal years 2002 to 2012, indirect costs increased 28.1 percent while direct costs increased 27.0 percent. However, for the fiscal years 2003 to 2012, indirect costs increased notably faster than direct costs, at 16.9 percent and 11.7 percent, respectively. In more recent years, annual changes were generally small but consistent. This increase occurred during a time when growth in NIH's budget for extramural research slowed to 5 percent from fiscal years 2008 to 2012, compared to about 21 percent from fiscal years 2002 to 2007. In fiscal year 2012, about 10 percent of the universities (50 out of about 500) receiving NIH extramural research funding received almost 70 percent of all indirect cost reimbursement provided to universities. Higher indirect cost rates tended to be associated with universities located in high-cost-of-living areas and privately owned universities.\nStakeholders--university officials, Department of Health and Human Services (HHS) officials, and others--whom GAO interviewed identified several key factors that may lead to increases in reimbursements for indirect costs provided to universities. Some stakeholders reported that reimbursements for one part of indirect costs--the facilities component--help to support research innovation by providing funding for the development and maintenance of state-of-the-art research facilities. However, officials in HHS's Division of Cost Allocation, which is responsible for determining indirect cost rates, stated that the uncapped facilities component of the indirect cost rate provides universities with few, if any, incentives for controlling these costs. For example, these officials noted that there is no limit on reimbursement for interest costs under the facilities component. This may encourage universities to borrow money to build new facilities, which could lead to building more new space than is necessary for research. Some stakeholders also noted that a 26 percent cap on the reimbursement rate for administrative costs--a second component of indirect costs--helps to control reimbursements for those costs; however, they reported it does not account for the recent increases in costs, such as those for regulatory reporting requirements and changing research needs that require advanced medical and information technologies that are considered administrative.\nThe combination of these trends and factors results in indirect costs growing at a faster rate than direct costs. Indirect costs are one-fifth of NIH's total budget--or $6.2 billion in fiscal year 2012--but NIH officials reported that they have not taken steps to assess the significance of future indirect cost growth for universities, or planned for options that might address these trends or factors--in part because they view increases in indirect costs as having been modest. However, factors suggest that indirect costs could increase more quickly in the future. Over the long term, they could lead to a reduction in the number of research grants that could be funded, thus potentially affecting scientific discoveries and knowledge.\n\nWhat GAO Recommends\n\nGAO recommends that NIH assess the impact of growth in indirect costs on its mission, including, as necessary, planning for how to deal with potential future increases in indirect costs that could limit the amount of funding available for total research. HHS agreed with GAO's recommendation but disagreed with a number of GAO's conclusions, stating that risk to NIH's mission is low because indirect costs remain a stable percentage of NIH's budget. Due to indications that indirect costs for universities may increase in the future, GAO believes that continually assessing and planning for the impact of growth over the long term is important."}
{"id":"gao_GAO-04-250","pid":"gao_GAO-04-250_0","input":"\tBackground\n\nThe WTO administers rules for international trade, provides a mechanism  for settling disputes, and offers a forum for conducting trade negotiations.  Such negotiations periodically involve comprehensive \u201crounds,\u201d with  defined beginnings and ends, in which a large package of trade concessions  among members is developed and ultimately agreed on as a single package.  A total of eight rounds have been completed in the trading system\u2019s 56-year  history. Each of the last 3 rounds cut industrial nations\u2019 tariffs by about  one-third overall.\nWTO membership has increased since the organization\u2019s creation in 1995 to  146 members, up from 90 contracting parties of the General Agreement on  Tariffs and Trade (the WTO\u2019s predecessor) when the Uruguay Round of  negotiations was launched in 1986. WTO membership is also diverse in  terms of economic development, consisting of most developed countries  and numerous developing countries. The WTO has no formal definition of a  \u201cdeveloping country.\u201d However, the World Bank classifies 105 current WTO  members, or approximately 72 percent, as developing countries. In  addition, 30 members, or 21 percent of the total, are officially designated by  the United Nations as \u201cleast developed countries.\u201d\nThe ministerial conference is the highest decision-making authority in the  WTO and consists of trade ministers from all WTO members. The outcome  of ministerial conferences is reflected in a fully agreed-upon ministerial  declaration. The substance of these declarations is important because it  guides future work by outlining an agenda and deadlines for the WTO until  the next ministerial conference. The WTO General Council, made up of  representatives from all WTO members, implements decisions that  members adopt in between ministerial conferences. Decisions in the WTO  are made by consensus\u2014or absence of dissent\u2014among all members rather  than on a majority of member votes, as it is in many other international  organizations.\nAt the fourth ministerial conference in Doha, Qatar, in November 2001,  WTO members were able to reach consensus on a new, comprehensive  negotiating round, officially called the Doha Development Agenda. The  Doha Round is the first round of global trade negotiations since the  conclusion of the Uruguay Round in 1994. The Doha Declaration sets forth  a work program for the negotiations on agriculture, services,  nonagricultural market access, and other issues. In addition, the work  program emphasizes the development benefits of trade and the need to  provide assistance to developing countries to help them take advantage of  these benefits. The Doha Declaration also sets forth a structure and series  of interim deadlines for the negotiations. Specifically, it established a Trade  Negotiations Committee (TNC) open to representatives from all WTO  members to oversee the negotiations, as well as several subsidiary bodies.  In addition, it laid out several deadlines and other milestones through the  next ministerial conference by which time negotiators were to make  decisions on issues under negotiation. In the months following Doha, WTO  members agreed that the next ministerial conference would occur in  Cancun, Mexico, in September 2003. Figure 1 presents key milestones  through the Cancun Ministerial Conference.\nThe Doha Declaration also set several general goals for the next (Cancun)  ministerial conference, namely, to take stock of progress at midpoint of the  Doha negotiations, to provide necessary political guidance, and to make  decisions as necessary. However, at their fifth ministerial conference held  in Cancun, Mexico, from September 10 to 14, 2003, WTO ministers were  neither able to achieve these goals nor bridge wide differences on  individual negotiating issues. They concluded the conference with only an  agreement to continue consultations and convene a meeting of the General  Council by mid-December 2003 to take actions necessary to move toward  concluding the negotiations.\n\n\tStalemate Loomed on Eve of Cancun Ministerial, as Preparatory Process Was Slow to Yield Progress\n\nThe Cancun Ministerial Conference provided an opportunity for both  symbolic and practical progress in the Doha Round of negotiations. These  opportunities were of heightened importance because negotiators had by  their own admission failed to make sufficient progress to meet interim  deadlines set out in the Doha Declaration, at least in part because members  were awaiting the results of the agricultural reform efforts in the EU.  Consequently, real give-and-take did not truly begin until the final weeks  before the ministerial, leaving little time to bridge the substantial  differences that existed on key issues.\n\n\t\tCancun Ministerial Held Symbolic and Practical Importance for the Negotiations\n\nThe September 2003 WTO Ministerial Conference held in Cancun, Mexico,  had symbolic and practical importance for the Doha Round of negotiations.  On the symbolic level, several WTO officials we met prior to the meeting  noted that the Cancun Ministerial Conference might be a means to regain  the momentum needed to bring the Doha Round to a successful  conclusion. The Doha Round promised to be the most comprehensive  round of global trade negotiations yet, involving a commitment to further  liberalize trade, update trade rules, and further integrate developing  countries into the world economy. The Cancun Ministerial Conference  occurred at roughly the midpoint in the 3-year negotiations. However,  based on our meetings with country delegations and WTO officials in  Geneva and public statements by WTO officials, on the eve of the  ministerial there was a sense true negotiations had not really begun. In  particular, although WTO member governments had succeeded in actively  submitting and discussing many proposals to achieve the general goals laid  out at Doha, they had been less successful in narrowing their differences  on these proposals or coming up with workable plans for developing  specific national commitments (or schedules) to lower trade barriers.\nWTO members held differing views on the symbolic importance of the  Cancun Ministerial Conference. For instance, U.S. and some other member  country officials, as well as WTO officials, expressed hope that the Cancun  Ministerial Conference would create the political will to achieve a  meaningful and ambitious agreement by the deadline that would benefit all  participants. WTO officials we spoke with, for example, stressed that  Cancun needed to provide a \u201cboost\u201d of fresh momentum to the flagging  talks. Other members planned to use the meeting to focus on the centrality  of agriculture reform. However, some members downplayed the symbolic  importance of the ministerial and viewed it merely as an opportunity to  take a mid-point assessment of the negotiations.\nAt a practical level, Cancun was viewed as critical to provide negotiators  with direction in key areas that had thus far eluded consensus, according  to WTO and member country officials. With just 16 months before the  agreed-upon deadline of January 1, 2005, for concluding the negotiations,  working-level progress in resolving outstanding issues was effectively  stalled. Breaking the logjam hinged upon receiving clear ministerial  direction in several key areas. For example, guidance was needed on the  specific goals and methods that would be used to liberalize trade in  agriculture.\n\n\t\tLack of Progress in Negotiations Required Scaling Back Expectations for Cancun\n\nProgress on narrowing substantive differences in advance of the Cancun  ministerial proved slow. As late as July 2003, observers and participants in  the negotiations noted that WTO members were simply restating long-held  positions on key issues and had yet to engage in real negotiations. For  instance, in July 2003, the WTO Director General said that negotiators had  been waiting to see what others are willing to offer without showing  flexibility themselves. The chairmen of some of the negotiating groups  repeated this sentiment in their statements to the July meeting of the Trade  Negotiations Committee. (See app. II for a discussion of significant events  in the WTO negotiations before and during the Cancun Ministerial  Conference.)\nA key factor hindering the progress of Doha Round talks had been the pace  and extent of reform of the EU\u2019s Common Agricultural Policy (CAP).  Agriculture was considered by many WTO members to be a linchpin to  achieving progress in all other areas of the Doha negotiating agenda. After  considerable internal debate, on June 26, 2003, the EU agreed to CAP  reform. Among other things, the reform would ensure that for many  agricultural products, the amount of subsidy payments made to farmers  would be independent from the amount they produce. Yet even after the  EU CAP reform was announced, other members stated that they were still  waiting to see the EU\u2019s internal reform translated into a significantly more  ambitious WTO negotiating proposal. The EU resisted making a new WTO  proposal, arguing that in effect it was being forced to pay for reform twice  by reforming its internal policy once and then being asked by WTO  negotiators to reform again to be able to conclude an agreement.\nAnother factor hindering overall progress was perceived linkages between  various negotiating topics.The Doha Round\u2019s outcome is to be a \u201csingle  undertaking,\u201d meaning a package deal involving results on the full range of  issues under negotiation such as agriculture, services, and nonagricultural  market access. As a result, trade-offs are expected to occur among issues  to accomplish an overall balance satisfactory to all members. Thus, it is  difficult to make progress on one issue without achieving progress on other  issues. For example, many developing nations consider agriculture their  number one priority and have been unwilling to make offers to open up  their services markets until they see more progress on agricultural reform.  On the other hand, the EU and Japan, who expect to make concessions on  agriculture, wanted a commitment at Cancun to begin negotiations on  several issues that were new to the trading system--investment,  competition (antitrust), government procurement, and trade facilitation\u2014 which are collectively known as Singapore issues.\nBy our mid-July meetings in Geneva it was clear that expectations for  Cancun were being scaled back because of the overall lack of progress.  Instead of issuing \u201cmodalities,\u201d (numerical targets, timetables, formulas,  and guidelines for countries\u2019 commitments), for example, WTO officials  and country representatives we met with suggested that \u201cframeworks,\u201d or  more general guidance on what types of concessions each participant  would make, might be a more appropriate goal for Cancun. In other words,  instead of ministers agreeing on some specific target, such as \u201call nations  will cut tariffs by one-third,\u201d they would agree to something more general,  such as all nations are expected to cut tariffs by a certain method and with  the following kinds of results (e.g., substantially liberalizing trade and  reducing particularly high tariffs).\n\n\t\tReal Negotiations Finally Began in the Weeks Just Before the Cancun Ministerial\n\nThe negotiations began to make some progress at the end of July, when  trade ministers from a diverse group of approximately 30 WTO members  met in Montreal, Canada, to discuss the status of the negotiations. During  this meeting, ministers encouraged the United States and the European  Union to provide leadership in the negotiations by narrowing their  differences on the key issue of agriculture. The United States and the  European Union agreed to do so, and in August they presented a joint  framework on agriculture.\nIn addition, in late August, the General Council removed a potential  obstacle to progress at the Cancun ministerial by approving an agreement  involving implementation of the Agreement on Trade-Related Aspects of  Intellectual Property Rights (TRIPS) and public health declaration adopted  in Doha. The Doha TRIPS and public health declaration directed WTO  members to find a way for members with insufficient pharmaceutical  manufacturing capacity to effectively use the flexibilities in TRIPS to  acquire pharmaceuticals to combat public health crises. U.S. and WTO  officials and representatives from other WTO members we met with had  identified this as an important symbolic issue for the WTO as an institution,  especially for WTO members from Africa. They had urged its prompt  resolution to create a more favorable climate for the Cancun ministerial  meeting. Despite resolving the TRIPS issue and attaining some movement  on agriculture in the final weeks before the Cancun ministerial, differences  persisted on other key issues in the negotiations on the eve of the meeting.\n\n\tDifferences on Key Issues Remain Unresolved after the Cancun Ministerial\n\nThe Cancun Ministerial Conference failed to resolve substantive  differences on key issues: agriculture (including cotton), the \u201cSingapore  issues,\u201d market access for nonagricultural goods, services, and  development issues that included special and differential treatment for  developing countries. Key countries\u2019 principal positions were far apart, and  certain aspects of each issue were particularly contentious. Although many  looked to the Cancun ministerial to provide direction that would enable  future progress, it ultimately ended without resolving any of the members\u2019  wide differences on these issues.\n\n\t\tProgress on Agriculture Was Central to Movement on Other Issues\n\nAgriculture is central to the Doha Round of trade negotiations, both in its  own right and because many WTO members say that progress on other  negotiating fronts is not possible without significant results in agriculture.  The Doha Declaration calls for negotiations to achieve fundamental  agricultural reform through three \u201cpillars\u201d or types of disciplines (rules):  (1) substantially improving market access; (2) reducing, with a view to  phasing out, all forms of export subsidies (export competition); and (3)  substantially reducing trade-distorting domestic support (subsidies).  Additionally, the declaration imposed two interim deadlines on WTO  agriculture negotiators: a March 31, 2003, deadline for establishing  modalities (rules and guidelines for subsequent negotiations), and a  deadline to submit draft tariff and subsidy reduction commitments at the  Cancun meeting. Negotiators missed both deadlines. As a result, the goal  for the Cancun ministerial was to adopt a framework and set new deadlines  for subsequent work on the three main pillars of the agriculture  negotiations. The delay in EU CAP reform, as well as the 2002 U.S. Farm  Bill, which was projected to increase U.S. agricultural support spending  complicated resolution of these issues. Many WTO members felt this bill  undermined the relatively bold negotiating stance the United States  assumed in the WTO, which called for making substantial reductions in  trade-distorting domestic support and tariffs.\nVarious countries or groups of countries differ in their objectives for the  agriculture negotiations. The Cairns Group of net agriculture exporting  countries and the United States envisioned an ambitious agricultural  liberalization agenda. The United States proposed a two-phase process to  reform agriculture trade in the WTO. The first phase of the proposal would  eliminate export subsidies and reduce and harmonize tariff and trade- distorting domestic support levels over a five-year period. The second  phase of the proposal is the eventual elimination of all tariffs and trade- distorting domestic support. Other developed country members such as the  EU, Japan, Korea, and Norway favored a more limited agenda. This group  and several other small developed countries argued for flexibility to  maintain higher tariffs in order to protect their domestic agriculture  production. Finally, many developing countries wanted a reduction in  developed country agriculture subsidies and market access barriers while,  at the same time, wanting less ambitious obligations to liberalize their own  market access barriers.\n\n\t\t\tDifferences on Agricultural \u201cPillars\u201d Remained Wide\n\nDomestic support. Arguing that such programs resulted in lower world  prices and displacement of their producers from global markets, many  developing countries forcefully pressed the developed countries to make  significant cuts to their trade-distorting domestic support programs,  particularly the United States and the European Union, which in 1999  totaled $16.9 billion and 47.9 billion euros ($45 billion at 1999 exchange  rates), respectively. Although they agreed in principle on the desirability  of reducing trade-distorting subsidies, both the United States and the  European Union resisted further disciplines on their abilities to support  domestic agriculture in ways that present WTO rules consider to be non-  trade distorting. For example, they opposed calls to cap and reduce  subsidies that are not currently subject to spending limits under the WTO.  The EU argued that its CAP reform already addressed developing country  demands by making domestic support payments independent of  production, in principle making the payments less trade distorting, even  though total expenditures will not be lowered. However, several WTO  members indicated that the reforms were not ambitious enough. In  addition, the United States said that it would not reduce its domestic  support for agriculture unless other members, namely the EU, made cuts  that substantially reduced the wide disparities in allowed trade-distorting  domestic support. The United States also demanded that developing  countries provide something in return for cutting subsidies, such as  lowering their tariffs on U.S. exports.\nMarket access. The United States viewed attaining additional market  access as an important objective in the negotiations. U.S. and Cairns Group  negotiators proposed a harmonizing formula for tariff reduction known as  the Swiss formula that would subject the higher tariffs to larger cuts. Other  members, including the EU, Japan, and Korea, favored an across-the-board  average cut and a minimum cut per product (tariff line). As illustrated in  figure 2, this approach would generally result in less liberalization than if  the harmonizing formula were used. Many developing countries, and the  Cairns Group, proposed substantially less liberalizing developing country  tariff reductions, in part to counter continued use of subsidies in developed  countries. Finally, according to their official statements, numerous smaller  developing countries emphasized the importance of trade preferences to,  and the negative effects that erosion of trade preferences would have on,  smaller, more vulnerable economies.\nExport competition. The United States, the Cairns Group, and many  developing countries wanted to eliminate export subsidies for agricultural  products. The EU, the primary employer of export subsidies, envisioned a  substantial reduction and elimination of export subsidies for certain  products but not a total elimination. It also tied any cuts in export subsidies  to the adoption of stricter disciplines on U.S. food aid and export credits.\nLike the United States, the EU also sought stricter disciplines on export  state-trading enterprises.\nAs previously noted, the United States and the European Union had  responded to calls to provide leadership by narrowing their differences on  the three pillars of agricultural reform before the Cancun meeting. In a mid- August framework, the U.S. and the EU proposed reductions in trade- distorting domestic agricultural support, with those members with higher  subsidies making deeper cuts and a three-pronged strategy to reduce  agricultural tariffs. With respect to export subsidies, the framework  eliminated export subsidies for some agricultural products and committed  members to reduce budgetary and quantity allowances for others. Reaction  to the framework was negative and swift, in part because it implied less  ambitious reductions in domestic support and market access barriers  than the original U.S. proposal, which U.S. officials emphasize is still on the  table, and did not completely eliminate export subsidies. For example,  within a week a newly formed group of developing countries, commonly  referred to as the Group of 20 (G-20) for its 20 members, presented a  counter framework that implied deeper cuts in domestic agricultural  subsidies by developed countries, a tariff reduction formula that allowed  developing countries to make less substantial cuts, and the total  elimination of export subsidies. The draft ministerial declaration presented  to ministers in late August contained elements of both proposals.\nAlthough extensive discussions on agriculture did occur at Cancun, they  ultimately failed to bridge the substantial gaps that remained. Sharp  divisions remained on the extent to which the developing countries should  be required to open their markets and whether it was possible to eliminate  all export subsidies. On domestic support, divisions remained concerning  the extent of cuts in trade-distorting domestic support and the question of  whether additional disciplines on non trade-distorting support were  desirable. Furthermore, the prominence of the G-20 of developing  countries relative to the more diverse Cairns Group at the meeting imposed  a North-South dynamic on the agriculture negotiations. Specifically, several  developed countries criticized the G-20\u2019s negotiating tactics, including their  failure to offer market access concessions such as tariff cuts in exchange  for substantial cuts in developed country subsidies and their demands for a  long list of changes to the Conference Chairman\u2019s draft text, even though  very little time remained to negotiate. Meanwhile, representatives from the  G-20 argued that the developed country proposals and framework offered  very modest gains and maybe even some steps backward in efforts to  liberalize world agricultural trade.\n\n\t\t\tCotton Issues Involved Subsidy Elimination and Compensation\n\nIn addition to the three main agricultural pillars that were the agreed focus  of the Doha agriculture negotiations, the Sectoral Initiative in Favour of  Cotton put forward by four West and Central African countries figured  prominently in the Cancun ministerial discussions. The initiative was  added to the ministerial agenda in the weeks leading up to Cancun and  does not appear in the Doha Declaration. The proposal by these cotton  exporting countries singled out three WTO members--the United States, the  European Union, and China--as the primary cotton subsidizers. They  claimed that these subsidies were driving down world prices and that many  of their farmers no longer found it profitable to produce cotton, a concern  given their contention that cotton plays an essential role in their  development and poverty reduction efforts.\nThe cotton initiative\u2019s guidelines called for immediately establishing a  mechanism at Cancun to eliminate all subsidies on cotton and a transitional  mechanism to compensate farmers in cotton-producing least developed  countries (LDC) that suffered losses in export revenue as a result of cotton  subsidies. Specifically, the proposal called for reducing all cotton support  measures by one third annually for 3 years, thereby eliminating all support  for cotton by year-end 2006. In addition, the proposal stipulated that any  cotton-subsidizing WTO member would be a potential contributor to a  proposed transitional compensation mechanism. The transitional  compensation mechanism would last up to 3 years. The sectoral initiative  did not specify the total amount of compensation to be paid but cited a  recent study that the direct and indirect losses for the 3 years\u20141999 to  2002\u2014were $250 million and $1 billion, respectively, for the countries of  West and Central Africa.\nThe cotton initiative was discussed at length in Cancun; however, there was  no resolution. The reason for the failure was that certain members had  difficulty supporting a transitional compensation mechanism within the  context of the WTO and saw the issue of cotton as hard to separate from  the larger agricultural agenda. U.S. efforts to respond to the region\u2019s  immediate concerns on cotton by broadening the original initiative made  little headway, despite some evidence that falling world cotton prices were  also attributable to other factors such as competition from manmade  fibers. The failure to resolve the cotton initiative to the satisfaction of the  developing countries had a negative impact on the overall tone of the  Cancun meeting, because certain developing countries viewed the issue as  a litmus test for the WTO and thought the proposed response fell far short  of addressing their pressing needs. The issue also took on symbolic  importance, becoming a political rallying point for a number of countries\u2019  frustrations.\n\n\t\tSingapore Issues Remained Contentious\n\nThe Doha Declaration established a deadline for deciding how to handle  negotiations aimed at adding four new issues, called the Singapore issues,  to the global trading system. The four Singapore issues are investment,  competition (antitrust), transparency (openness) in government  procurement, and trade facilitation (easing cross-border movement of  goods). According to the draft ministerial text presented to ministers  before Cancun, ministers were to decide by explicit consensus the basis for  starting actual negotiations on these issues, or to continue exploratory  discussions on them.   However, the wording of the Doha Declaration left  unclear what was to specifically occur in Cancun. Certain members  thought the declaration implied that formal negotiations were to begin in  Cancun and that the only issue for Cancun was the type of negotiation.  Others thought the declaration implied that formal negotiations could only  begin if there were explicit consensus among the members at Cancun to do  so.\nKey players\u2019 positions were divided into three main camps. A group of  developed and developing country members led by the European Union,  Japan, and South Korea strongly advocated starting negotiations on all four  issues, including investment and competition, which were particularly  controversial. These nations had succeeded at Doha in getting the four  issues included as part of the round\u2019s overall package but only on the  condition that explicit agreement be reached at Cancun on the parameters  to negotiate these issues. Many developing countries, on the other hand,  had consistently expressed their strong opposition to the inclusion of the  Singapore issues in the WTO negotiating agenda and several viewed  Cancun as their opportunity to block negotiations on these issues. For  example, India argued that for many of these countries, undertaking new  obligations in these areas would have presented too great a burden, since  they were still having difficulty implementing their Uruguay Round  obligations. They also were not convinced of the development benefits that  would result. A third group of countries, including the United States and  some developing nations, were willing to negotiate but wanted each issue  considered on its own merit. However, some of the developing countries  linked their willingness to negotiate with progress in other areas such as  agriculture. The United States had been pushing the issues of transparency  in government procurement and trade facilitation. The United States was  also willing to negotiate on competition policy and investment, but had  some concerns that included whether negotiations could call into question  its enforcement of strong antitrust laws and match the high standards that  are a feature of its bilateral investment agreements.\nThe discussions at Cancun on the Singapore issues were contentious and  contributed to the breakdown of the ministerial. Early in the week, a group  of 16 developing countries argued that because there was no clear  consensus on the modalities for the negotiations as required by the Doha  Declaration, the matter of whether to add these four new issues to the  negotiations should be dropped from the Cancun agenda and moved back  to Geneva for further discussion. The draft text issued later that week  called for beginning negotiations on two issues and setting deadlines for  trying to reach agreement on possible bases for addressing the other two  issues. This text was discussed on the last day of the conference, but in the  end, compromise on this divisive subject proved impossible.\n\n\t\tProposed Tariff Formulas for Nonagricultural Market Access Were Divisive\n\nLowering barriers to market access of nonagricultural goods was also an  important point of contention leading into the Cancun ministerial. The  Doha Declaration stated that negotiations on nonagricultural market  access should be aimed at reducing or, as appropriate, eliminating tariffs  for nonagricultural products, including reducing or eliminating tariff  peaks and tariff escalation, as well as nontariff barriers. The Doha  Declaration also said that the liberalization of nonagricultural goods should  take fully into account the principle of special and differential treatment  for developing countries, including allowing for \u201cless than full reciprocity\u201d  in meeting tariff reduction commitments. Because WTO members missed a  May 31, 2003, deadline for reaching agreement on modalities for  nonagricultural market access that would govern preparation of national  schedules of barrier-cutting commitments, the goal for Cancun was to  establish a \u201cframework\u201d or basic approach to tariff and nontariff barrier  liberalization that would then be supplemented by more detailed modalities  later.\nEven though there are important differences in the situations and  individual positions of various developing countries\u2014a fact the United  States likes to emphasize--WTO members were largely divided along North- South lines in nonagricultural market access talks going into the Cancun  meeting. The United States and other developed countries were pushing for  substantial cuts in tariffs and wanted the high overall tariffs of key  developing countries like India and Brazil to come down. For example,  India has an average bound tariff of 34 percent on nonagricultural  products, while China and C\u00f4te d\u2019Ivoire have average bound tariffs of 10  percent or less. The United States also aimed to seek a high level of  ambition in opening markets and expanding trade for all countries through  a harmonizing formula that cuts tariffs in all countries. In addition, it  wanted to reduce wide disparities among members\u2019 tariffs as well as  reduce low tariffs. Publicly, the developing countries were fairly united in  saying that any liberalization needed to leave them sufficient flexibility to  address their special needs and should involve greater cuts by richer  countries than poor ones. In May 2003, the chairman of the negotiating  group on market access issued a \u201cchair\u2019s proposal,\u201d attempting to reconcile  WTO members\u2019 various positions, including on tariff cutting formulas,  sectoral liberalization, and special and differential treatment.\nComing into Cancun, two major proposals for cutting tariffs--one from the  market access chairman and another from the United States, EU, and  Canada--were under active discussion, though all of the numerous original  proposals submitted by WTO members remained \u201con the table.\u201d These two  proposals differed in the type of mathematical formula that would be used  to determine how much each member would be expected to reduce its  tariffs. The proposed tariff formula developed by the chairman as a  compromise would largely differentiate among countries according to their  current overall average bound tariff rate. Specifically, a country with higher  average bound tariffs would have to reduce its bound tariffs at a lesser rate  than a country with lower average bound tariffs. To use an illustrative  example, Brazil, with higher overall bound rates to begin with, would have  to cut a 10 percent bound tariff on a particular product to approximately  7.5 percent, or by 25 percent. Malaysia, with lower overall bound tariffs,  would have to slash a 10 percent bound tariff to 6 percent, or by 40 percent  (see fig. 3). Proponents argue that this formula would recognize each  country\u2019s differing starting points for liberalization while still  accomplishing significant cuts in bound tariff rates. Some officials counter  that average bound tariffs are not a direct or good indicator of development  status or needs. Moreover, they expressed concern that this formula would  require more reduction from nations that have lower overall bound tariffs.  The United States was concerned that this would effectively punish  countries that have previously liberalized, while rewarding countries that  had not liberalized. In addition, the United States was concerned that this  proposal was based on average bound tariff rates, which would not  necessarily lead to lower applied rates. Many developing countries\u2019 bound  tariff rates are higher than the tariffs they currently apply. For example,  Brazil has an average bound tariff of 31 percent and a 15 percent average  applied rate. Real liberalization will only occur if countries reduce bound  tariffs to below currently applied rates.\nOn the other hand, the United States, the European Union, and Canada  developed an alternative framework for negotiations. This framework calls  for all countries to use a single harmonizing formula, such as a Swiss  formula, where the coefficient of reduction does not depend on a country\u2019s  average bound tariff rate. For example, if a Swiss formula using a  coefficient of 8 were used, all countries would have to cut a 10 percent  tariff on a particular product to 4 percent. Nevertheless, the U.S., EU,  Canada framework does foresee some differentiation among countries. For  example, it suggested that countries could be rewarded for \u201cgood behavior\u201d  by giving credits to countries that commit to do things that are considered  sound trade policy, such as putting a ceiling on, or binding, a high  percentage of their tariffs. According to U.S. Trade Representative  (USTR) officials, the credits would allow them to lower tariffs by a lesser  amount than that implied by the formula. Developing countries, however,  say this approach is inconsistent with the Doha mandate, which states  developing countries as a whole will be allowed to make lesser  commitments. In addition, they fear that they would have to cut tariffs  much more than developed countries in absolute terms. As a result, just  prior to the Cancun meeting, a few nations such as India reasserted their  interest in an across-the board or linear approach to cutting tariffs on  nonagricultural goods, similar to that depicted in figure 2. Under a linear  approach, all tariffs would be cut at the same rate and therefore the results  would not be harmonizing. The discussions at Cancun never got into the  detailed proposals that had been debated before Cancun and failed to  bridge these gaps on tariff formulas.\nAt Cancun, WTO members were also considering the complete elimination  of tariffs in to-be-agreed-upon sectors, including ones that are particularly  important to developing countries. However, the issues of choice of sectors  and participation in the elimination remained controversial. Many  developing countries wanted sectoral elimination to be voluntary. Also  under debate was whether sectoral elimination should result in zero tariffs,  harmonization, or a differentiated outcome for developed versus  developing countries. The United States and many other countries thought  that sectoral initiatives were an important way to supplement the general  tariff cutting formula and to achieve their ambitious liberalization  objectives. The United States wanted to make sure all countries  competitive in a given sector would participate in sectoral elimination  regardless of their level of development.\nConsistent with the Doha mandate, WTO members were also considering  special treatment for developing countries and new entrants such as  recently acceded members in implementing their tariff commitments. This  included longer periods to implement the tariff reductions, differentiation  in how sectoral initiatives would be applied, and not making reduction  commitments mandatory. The developed countries recognized that many  nations, particularly least developed and other vulnerable economies, need  flexibility to deal with sensitive sectors and other adjustment needs.  However, they opposed across-the-board flexibility for all developing  countries, including the more advanced ones.\nAt Cancun, some steps were taken to address the inherent trade-off  between committing to ambitious tariff liberalization and retaining  flexibility. The World Bank and the International Monetary Fund, for  example, provided assurances that they were prepared to work with  developing nations to help offset lost tariff revenue and address concerns  related to erosion of preferences. Nevertheless, ministers did not resolve  the debates over tariff-cutting formulas, the mandatory nature of sectoral  elimination, and the degree of flexibility to accord to developing countries.  Progress was not made on these issues because progress was not made or  expected in agriculture nor on the Singapore issues.\n\n\t\tEnergizing Services Negotiations Was a Key U.S. Goal for the Cancun Ministerial\n\nThe Doha Declaration set a deadline for WTO members to complete the  work they had initiated in January 2000 to further open services markets  under the General Agreement on Trade in Services. In contrast with  agriculture and industrial market access, the services group had already  agreed on how to conduct these talks, which are under way. The goal for  Cancun\u2014particularly for the United States\u2014was to energize the ongoing  services negotiations and to set a deadline for submission of improved  offers to lower barriers to services. According to a WTO official, only 38  (counting the EU as one member) of the WTO\u2019s 146 members had  submitted offers before the Cancun ministerial. Although 18 of these  offers were from developing countries, as defined by the World Bank, many  large developing countries such as India, South Africa, Egypt, and Brazil  had not submitted offers. Some of these nations, as well as others such as  Argentina, China, and Mexico had their own market access ambitions,  including further easing of the temporary movement of their services  suppliers across national borders.\nServices negotiations regained some momentum before Cancun due to two  important events. First, the language contained in the draft Cancun  Ministerial Declaration incorporated several of the demands from  developing countries such as the need to conclude negotiations in rule- making in areas such as emergency safeguard measures for services.  Second, the adoption of modalities on September 3, 2003, for the special  and differential treatment of LDCs was expected to boost the  participation of LDCs in the services negotiations. However, little progress  was made in the services negotiations at Cancun because advances on  other issues under negotiation, especially in agriculture, were needed in  order to enable further movement.\n\n\t\tSpecial Treatment Was Highest Priority for Many Developing Country Members\n\nMany developing countries were greatly concerned about receiving special  treatment in the form of making lesser commitments in ongoing global  trade talks and receiving assistance in implementing existing WTO  agreements. Global trade rules have long included the principle that  developing countries would be accorded special and differential treatment  consistent with their individual levels of development, including the notion  that they would not be expected to fully reciprocate tariff and other  concessions made by developed countries. In the Doha Declaration, WTO  members agreed that all special and differential treatment provisions in  existing WTO agreements should be reviewed with a view to strengthening  them in order to make them more precise, effective, and operational. The  declaration requires the WTO\u2019s Committee on Trade and Development to  identify those special and differential treatment provisions that are  mandatory and those that are nonbinding and to consider the legal and  practical implications of turning the nonbinding ones into mandatory  obligations. According to USTR officials, part of the continuing difficulty of  this work has been the problems of separating work on special and  differential treatment from the work underway in actual individual  negotiating groups (e.g., agriculture) and the lack of progress on related  issues such as graduation\/differentiation, which is also part of the  Committee on Trade and Development\u2019s work programme.\nAlso, as part of the Doha Declaration, WTO members committed  themselves to address outstanding implementation issues and set a  December 2002 deadline for recommending appropriate action on them,  but they missed that deadline. Although there was agreement on a number  of implementation issues at Doha, outstanding issues remain in areas like  trade related investment measures, anti-dumping rules, and textiles. These  issues have proved divisive, even among developing countries.\nAt Cancun, ministers were asked to endorse and immediately implement a  subset of the numerous proposals for special and differential treatment as  well as to set a new deadline for resolving outstanding special and  differential treatment and implementation issues. For some developing  countries, progress on these issues at Cancun was key to their willingness  to negotiate further market liberalization in other areas. In addition, the  African Group in particular wanted to better ensure that the needs of the  WTO\u2019s poorest member countries would be satisfactorily addressed in the  overall package of Doha Round results.\nHowever, developed and developing countries fundamentally disagreed in  their interpretation and use of special and differential treatment. For  example, government officials from several developed countries echoed  their desire to better target special and differential treatment by adopting a  needs-based approach. According to these officials, special and differential  treatment provisions should be tailored to match the various levels of  development and the particular economic needs of developing countries.    Many developing countries, on the other hand, wanted an expansion of  special and differential treatment. Their expansionist ambition was  reflected in 88 proposals for additional special treatment obligations,  mostly from the African Group and the group of least developed countries.  Among other things, the proposals sought additional technical support and  called for an exemption for developing countries and LDC members from  requirements to comply with existing WTO obligations that they believed  would be prejudicial to their individual development, financial, or trade  needs or beyond their administrative and institutional capacity. Developed  countries and more advanced developing countries considered many of  these demands to be problematic because some changes proposed would  alter the balance of the Uruguay Round agreements.\nIn the end, however, developed countries and some developing countries  appeared ready to move forward on some of these proposals at Cancun,  had the ministerial proved successful. The General Council Chairman  worked carefully with a diverse group of key countries to put this package  together. A total of 24 special and differential treatment proposals,  including some related to implementation issues, were included in the draft  Cancun Ministerial Declaration sent to Cancun from Geneva. An additional  three proposals were added during the course of the Cancun meeting.  While some developing nations argued that these proposals were of little  economic value and felt agreeing to these proposals at Cancun would  create a false sense of progress, other developing countries were willing to  accept the package in return for assurances of future advances.\nAs for implementation issues, discussions on developing country proposals  in this area were overshadowed at Cancun by another issue--a push by the  EU and other European countries to secure greater recognition and  protection of geographical indications (place names) for specialty  agricultural products. Many countries, including the United States,  Australia, New Zealand, and some Latin American nations, strongly  resisted, because they produce and market products under widely used  terms such as \u201cChampagne\u201d and \u201cRoquefort cheese\u201d that the European  nations were seeking to protect and monopolize.\nIn the end, no agreement was reached at Cancun on special and differential  treatment or on implementation issues.\n\n\t\tCancun Meeting Ended without Resolving Any Major Issue\n\nDespite a full ministerial agenda of issues requiring resolution, the only  actual decision taken relating to the negotiations at Cancun was that the  WTO\u2019s General Council should meet by December 15, 2003. The closing  session on Sunday, September 14, adopted a short ministerial statement  expressing appreciation to Mexico for hosting the talks, welcoming  Cambodia and Nepal to the WTO, and stating that participants had worked  hard to make progress in the Doha mandate but that \u201cmore work needs to  be done in some key areas to enable us to proceed toward the conclusion  of the negotiations.\u201d To achieve this, the concluding ministerial statement  directed officials to continue working on outstanding issues with a  renewed sense of urgency and purpose. The failure to make progress in  resolving the major substantive issues at Cancun left the Doha Round in  limbo and resulted in a major setback that will make attaining an overall  world trade agreement by January 1, 2005, more difficult, according to  WTO Director General Supachai and key WTO member country  representatives. Specifically, no further negotiating sessions have been  scheduled, although informal efforts to get the talks back on track have  continued.\nThe Cancun ministerial declaration directed the Chairman of the General  Council to coordinate this work and to convene a meeting of the General  Council at the senior officials level no later than December 15, 2003 \u201cto  take the action necessary to move toward a successful and timely  conclusion of the negotiations.\u201d However, on December 9, WTO General  Council Chairman Perez del Castillo notified the heads of delegation that  there was a lack of \u201creal negotiation\u201d or \u201cbridging of positions\u201d in the  informal talks. Because he believed insufficient convergence had occurred  to take \u201cnecessary action to conclude the round,\u201d he presented a Chair\u2019s  report outlining key issues and possible ways ahead. He also recommended  that all negotiating bodies be reactivated in early 2004, after new chairs are  chosen. The December 15, 2003, General Council meeting generally  accepted this recommendation, according to the chairman\u2019s closing  remarks.\n\n\tSeveral Factors Cited in the Talks\u2019 Collapse\n\nAccording to government officials, trade negotiations observers,  authoritative reports, and GAO observations and analysis, several other  factors contributed to the Cancun meeting\u2019s collapse. The ministerial  agenda was complex, and unwillingness by some nations to work with the  text presented by the General Council Chairman hampered progress. In  addition, the large number of participants and emerging coalitions  influenced the meeting\u2019s dynamic. Competing visions and goals for the  Doha Round, particularly between developed and developing countries,  and a high-profile initiative on cotton, fueled North-South tensions.  Meanwhile, the WTO\u2019s cumbersome decision-making process did not lend  itself to building consensus.\n\n\t\tComplex and Full Agenda Presented\n\nThe agenda for Cancun was not only complex, it was also overloaded. This  situation was due to the stalemate that had characterized the Doha Round  up to Cancun, in which the negotiators had missed virtually all self- imposed deadlines. The Doha Declaration already had specified that  certain items were to be on the agenda for the next (Cancun) ministerial,  such as deciding how to handle negotiations on the Singapore issues (see  fig. 4). But as interim deadlines came and went without agreement, other  issues were added to the Cancun agenda.\nAlthough the goal of reaching agreement on these issues for achieving  trade liberalization had eluded negotiators during the previous 22 months  of work in Geneva, they proposed to reach agreement on all of them in  Cancun, even though they had just 5 days to do so.\n\n\t\tNo Agreed Starting Point for Discussion\n\nAdding to the complexity of the task, the Cancun ministerial began without  an agreed-upon text as a starting point for discussion. In late August, the  General Council Chairman issued a revised draft ministerial declaration.  This version included draft frameworks for modalities for agriculture,  nonagricultural market access, and the Singapore issues. These draft  frameworks still included multiple bracketed items (items to be agreed  upon) and lacked specific details in several areas. However, not all WTO  members agreed to use this draft as the basis for ministers\u2019 discussion in  Cancun.\nEfforts to produce a new text of a ministerial declaration from which to  work took considerable time at Cancun. The first 3 days of the 5-day  conference were devoted to formal and informal meetings. The Conference  Chairman, the Mexican Foreign Minister finally presented a draft text at a  meeting on the fourth day of the 5-day conference (September 13). Just 30  hours remained until the scheduled close of the conference, yet ministers  needed 6 hours to study the new text. The meeting to obtain reactions to  the text took another 6 hours. More than 115 nations spoke, one after the  other, with most ministers criticizing various points of the draft and  repeating well-established positions. A WTO spokesman later reported that  the only consensus evident that night was that the text was unacceptable to  many WTO members. The U.S. Trade Representative advocated moving  forward when he took the floor about halfway through the meeting. He  expressed willingness to work with the draft, urged a collective sense of  responsibility, and warned fellow trade ministers that they should not let  the perfect become the enemy of the good. Certain other members such as  Sri Lanka, Uruguay, Chile, and China were among the few other countries  that made positive statements. After another several hours of critical  interventions, however, the Conference Chairman closed the meeting,  expressing concern that with less than 15 hours remaining, members did  not appear to be willing to reach a consensus. A WTO spokesperson later  reported that they could see a clear problem emerging because differences  in positions were hardening.\n\n\t\tLarge Number of Participants and New Developing Country Coalitions Add Complexity\n\nAchieving consensus at Cancun was a very complex undertaking due to the  large number of participants and the emerging coalitions that affected the  meeting\u2019s dynamics. Participants in the WTO talks at Cancun included 146  members with vastly different economic interests, levels of development,  and institutional capacities. Moreover, the number of delegates at Cancun  was substantially larger than the number of delegates at the Doha  ministerial, which occurred shortly after September 11, 2001.  Nongovernmental organizations (NGO) were also participating. The 1,578  registered NGO participants included business as well as a range of public  interest (labor, environment, consumer, development, and human rights)  groups, and both were active in seeking to influence the negotiations. For  example, NGOs, such as the development advocacy group Oxfam,  underwrote the literature being distributed on the cotton initiative, and  poverty relief organization Action Aid\u2019s press release immediately called  the Conference Chairman\u2019s draft text \u201ca stab in the back of poor countries.\u201d\nThe emergence of two developing country coalitions also affected the  dynamics of the Cancun meeting. Brazil was widely seen as the leader of  the G-20 group of developing countries pressing for bigger cuts in  developed country agricultural subsidies. The United States and the  European Union, traditionally at odds over agriculture, complained that the  group was engaged in confrontational tactics that were more directed at  making a point than at making a deal. However, the group claimed that it  took a businesslike and professional approach to the negotiations and had  succeeded in highlighting the centrality of agricultural reform to the Doha  Round\u2019s success. Another strong coalition that emerged in Cancun was a  group of 92 countries made up of the African, Caribbean, Pacific (ACP)  African Union \/LDC countries. This group\u2019s main objective was to ensure  that the WTO\u2019s poorest countries\u2019 interests were taken into account. In the  end, their views were decisive, as their refusal to accept negotiations on the  Singapore issues and other members\u2019 insistence to negotiate these issues  triggered the Conference Chairman\u2019s decision to end the ministerial.\n\n\t\tDeveloped and Developing Countries Had Competing Visions of Doha\u2019s Promise\n\nIn addition to a complex agenda and volatile meeting dynamics, the  participants appeared to have competing visions of what the round had  promised. Noting that the negotiations were titled the \u201cDoha Development  Agenda,\u201d developing countries still expected that the talks would focus  primarily on their needs. For many, this meant progress on agriculture,  while others stressed meaningful accommodation of their special needs.  U.S. officials, on the other hand, told us that they would like to see further  differentiation of the as-yet-undefined term \u201cdeveloping countries.\u201d Some  U.S. officials told us that developing countries\u2019 reluctance to open their  markets is contrary to sound development policies, because lowering trade  barriers is pro-, not anti-development. Moreover, various studies had  shown that a significant share of the estimated economic benefits of the  Doha Round would be due to an expansion of trade between developing  countries as they reduced their trade barriers to each other\u2019s goods.\nAs the days of the ministerial wore on without consensus, frustrations  increased. The developed nations accused the developing countries of  grandstanding and of not making an effort to reach agreement. Officials  from some developed countries complained, for example, that developing  countries had not approached the negotiations in the spirit of reciprocity  but instead were focused on making demands without expecting to make  concessions. In essence, developing countries were not seen as negotiating  in good faith.\nDeveloping countries also felt frustrated and believed that the lack of  progress in the negotiations was due to an absence of political will by the  developed countries to fulfill the promises at Doha. For example,  developing countries believed that the developed countries had not offered  enough on agriculture, the issue that many developing countries cared  about the most.\nThe differences in expectations are illustrated in reactions to the cotton  initiative, which served as a focal point for concerns about developed  country agriculture subsidies. The WTO Director General personally urged  ministers to give the matter full consideration and held consultations with  the interested parties in an attempt to forge a compromise. While the  African proponents believed that agreement on this issue would have been  a sign of good faith, the United States viewed the request for monetary  compensation as inappropriate and better suited to a development  assistance venue. When the Conference Chairman issued his draft text,  many countries reacted negatively to the proposed compromise on cotton.  Brazil, speaking on behalf of the G-20, referred to the proposal as totally  insufficient. The Chairman\u2019s text did not mention the elimination of  subsidies but instead suggested that West African countries diversify out of  cotton. The fact that the cotton initiative is one of the four key issues that  the General Council Chairman has focused on after the ministerial, along  with agriculture, industrial market access, and the Singapore issues,  demonstrates its continued importance.\n\n\t\tWTO Consensus-Building Process Broke Down\n\nFinally, certain participants have also cited the WTO\u2019s cumbersome process  for achieving consensus as contributing to the collapse of the talks. The  WTO operates by consensus, meaning that any one participant opposing an  item can block agreement. In the EU Trade Commissioner\u2019s closing press  conference in Cancun, he expressed frustration that there was no reliable  way within the WTO to get all 146 member nations to work toward  consensus. Relatively few formal meetings involving all members actually  occurred in Cancun, although plenary sessions and working groups took  place. Moreover, formal negotiating sessions involving all members were  not conducive to practical discussion or to achieving consensus. Instead,  they often involved formal speeches. As a result, small group meetings  were used to obtain frank input and conduct actual negotiations. Although  efforts were made to keep the whole membership involved through daily  heads of delegations meetings, certain members expressed a sense of  frustration and confusion as epitomized by indignation by some members  at the subjects being discussed during the green room meeting on the last  day.\nThe Conference Chairman\u2019s decision to make the controversial Singapore  issues, and not agriculture, the first and last item for discussion on the last  day of the ministerial conference caused a backlash by a group of  developing countries that ultimately precipitated the meeting\u2019s collapse. As  opposed to the day-to-day negotiations, which are overseen in Geneva by  the Director General acting as the head of the TNC and by the General  Council Chairman, WTO ministerial conferences are unusual in that the  Conference Chairman is the only person with the power to call and adjourn  meetings, to invite participants, and to choose the topics for discussion. At  Cancun, after the heads of delegations meeting the night before, the  Chairman decided, after consulting with certain ministers, that he needed  to see if there was any way to reach consensus on the Singapore issues,  which seemed to him to be intractable. As a result, he convened a closed- door meeting of about 30 ministers broadly representative of the whole  WTO membership on the morning of the final day of the conference to  discuss them. According to reports, the EU representative reiterated at the  beginning of this final, closed-door meeting his long-standing position that  all four Singapore issues must be negotiated. Some developing countries,  on the other hand, opposed starting negotiations on those issues. As the  meeting progressed, the EU agreed to drop two (investment and  competition), maybe even three (government procurement), of the  Singapore issues\u2014leaving trade facilitation on the table. This EU  concession reportedly prompted some traditional opponents such as  Malaysia and India to show some flexibility. The Chairman then recessed  the meeting and asked the ministers to confer with other ministers who  were not present in the \u201cgreen room\u201d to see whether there was consensus  to negotiate on at least one of the Singapore issues.\nDuring the break, at a meeting of the African, Caribbean, Pacific (ACP),  LDC, and African Union members, many of the ministers present voiced  surprise and indignation over the sequencing of topics under discussion in  the closed-door meeting. They were upset that the Singapore issues were  being discussed rather than agriculture. The Singapore issues were seen as  rich members issues, while agriculture and cotton resonated with the  poorer countries. Finally, members of the ACP\/African Union\/LDC  coalition believed that no deal was better than a bad deal, and a deal on the  Singapore issues in the absence of any agreement on agriculture or the  cotton initiative was deemed a bad deal. As one country member  rhetorically asked during the debate\u2014 \u201cWhat are we taking home for the  poor? We must say no.\u201d\nWhen the 30-country meeting reconvened, Botswana reported the decision  of the ACP countries to the group, indicating that they could not accept  negotiation on any of the Singapore issues, including trade facilitation,  because \u201cnot enough was on the table.\u201d According to reports, Korea, on the  other hand, said it could not accept dropping any of the Singapore issues.\nThe Conference Chairman then said that consensus could not be reached  and decided to close the conference without agreement on any issue. At a  press briefing later that afternoon after the collapse of the talks, the  Chairman explained that he had begun with the Singapore issues because  of the dissent voiced on that issue during the meeting the night before. He  further explained that he had decided to end the ministerial because it was  clear to him that consensus could not be reached. Some countries,  including certain EU member states and some developing countries,  however, complained about what they saw as a precipitous decision to end  the talks.\n\n\tConcluding Observations\n\nThe Cancun Ministerial Conference highlighted the challenge of meeting  the high and sometimes competing expectations created at Doha of both  developing and developed countries, particularly with respect to  negotiations on critical agricultural issues. While the issue has been  contentious for many years, the Cancun experience demonstrates that  forward movement on agriculture is central to the possibility of making  further progress in the Doha Development Round. Although the Cancun  meeting ended because of the lack of consensus on negotiating the  Singapore issues, what many developing nations wanted from the  developed world were concessions on agriculture, in particular dramatic  reductions in export subsidies and domestic support.\nAt this point, it is difficult to predict how the setback at Cancun will  ultimately affect the Doha Development Round negotiations. There are  some signs that both developed and developing countries are rethinking  their positions. The United States and the European Union have shifted  away from taking an active leadership role, but have recently signaled  some willingness to engage in further negotiations. Although a number of  G-20 members have abandoned the group or made statements undercutting  its unanimity of views, the group\u2019s founders still appear intent to play a  leadership role in pushing for global agriculture reform. While progress  remains possible, political events scheduled to occur over the next year  may add uncertainty to the negotiating process. For example, in the United  States, the 2004 presidential and congressional elections are looming, and  protectionist pressures are rising along with the U.S. trade deficit.  Elections in Europe and in one of the largest developing countries, India,  may also have an impact on the negotiations. Finally, how WTO members  handle long-simmering disputes on such topics as corporate tax subsidies  and steel could also affect the negotiating climate. In this regard, President  Bush\u2019s recent decision to lift safeguard tariffs on steel may be viewed as an  important development.\nAs we have noted in previous reports, the WTO has often found it difficult  to achieve consensus and bridge its members\u2019 strongly held, disparate  views on politically sensitive issues, in part because it is an ever-growing,  more complex, and diverse organization. Various devices, such as interim  deadlines, were put in place for the first stage of Doha negotiations to  redress these significant organizational challenges, but they fell short of  achieving desired progress. The WTO Director General and General  Council Chairman have been given the green light to work with WTO  members to narrow differences on key issues in hopes that they can still  salvage an agreement by the January 1, 2005, deadline. However, the failure  to achieve substantive progress by mid-December casts further doubt.\nOne important consideration is that the delay in WTO negotiations could  intensify momentum for concluding bilateral, subregional, or regional trade  agreements. This has already happened in the United States, which, though  remaining engaged in the WTO, has recently concluded three such  agreements (Chile, Singapore, and Central America), is currently  conducting negotiations on three others (Australia, Morocco and Southern  African Customs Union), and has committed to begin negotiations on five  others (Dominican Republic, Bahrain, Thailand, Panama, and the Andean  region) as well as the 34-nation Free Trade Area of the Americas.  Additional possibilities are in the wings. The effect that a proliferation of  these kinds of agreements would have on the WTO is unclear.\n\n\tAgency Comments and Our Evaluation\n\nWe requested comments on a draft of this report from the U.S. Trade  Representative, the Secretary of Commerce, the Secretary of Agriculture,  and the Secretary of State, or their designees. USDA\u2019s Foreign Agricultural  Service agreed with our report\u2019s factual findings and analysis. Commerce\u2019s  Deputy Assistant Secretary for Agreements Compliance provided us with  technical oral comments on the draft, which we incorporated into the  report as appropriate. The Secretary of State declined to comment on our  report. The U.S. Trade Representative provided formal comments (see app.  IV), indicating that many of the issues identified in GAO\u2019s analysis are  consistent with the U.S. assessment of issues that must be addressed to put  negotiations back on track in 2004. He stressed the United States is ready  to exercise leadership provided other countries are prepared to negotiate  meaningfully. The Assistant U.S. Trade Representative for WTO and  Multilateral Affairs and other USTR staff also provided us with oral  comments. While agreeing with much of the report\u2019s information, they  provided a number of factual and technical comments, which we  incorporated as appropriate. In addition, USTR staff expressed some  concern that the overall tone of the report placed too much emphasis on  the importance of the Cancun ministerial itself and on the North-South  divide, particularly given the meeting\u2019s mandate from Doha and individual  country positions. While we stand by the overall balance struck in our  report, we did add some information to reflect the diversity within  developing country ranks evident on certain issues.\nWe are sending copies of this report to interested congressional  committees, the U.S. Trade Representative, the Secretary of Agriculture,  the Secretary of Commerce, and the Secretary of State. We will also make  copies available to others upon request. In addition, the report will be  available at no charge on the GAO Web site at http:\/\/www.gao.gov.\nIf you or your staff have any questions about this report, please contact me  at (202) 512-4347. Additional GAO contacts and staff acknowledgments are  listed in appendix V.\n\nObjectives, Scope, and Methodology\n\nThe Chairman of the Senate Committee on Finance and the Chairman of  the House Committee on Ways and Means asked us to analyze (1) the  overall status of the World Trade Organization\u2019s (WTO) negotiations on the  eve of the WTO\u2019s ministerial conference at Cancun, Mexico, in September  2003; (2) the key issues for the Cancun Ministerial Conference and how  they were dealt with at Cancun; and (3) the factors that influenced the  outcome of the Cancun Ministerial Conference.\nWe followed the same overall methodology to complete the two first  objectives. From the WTO, we analyzed the 2001 Doha Ministerial  Declaration and related documents, the July and August versions of the  draft Cancun Ministerial Declaration, and other speeches and proposals  from WTO officials, as well as some negotiation proposals from WTO  members. From the WTO, U.S. government agencies, and foreign country  officials, we obtained background information regarding negotiating  proposals and positions.\nWe met with a wide variety of U.S. government and private sector officials,  foreign government officials, and WTO officials. Before the Cancun  ministerial, we met with officials from the Office of the U.S. Trade  Representative (USTR) and the U.S. Departments of Commerce,  Agriculture, and State. We also met with officials from the Grocery  Manufacturers of America and the Pharmaceutical Researchers and  Manufacturers of America. In addition, we met with representatives from  developed and developing countries in Washington, D.C., including  Australia, Malaysia, Brazil, and Costa Rica. Further, we traveled to the  WTO\u2019s headquarters in Geneva, Switzerland, where we met with WTO  officials and member country representatives from developed and  developing countries, including Australia, Canada, the European Union  (EU), Japan, Brazil, China, Malaysia, Mexico, and India.\nTo analyze the factors that influenced the outcome of the Cancun  ministerial, we attended the Cancun Ministerial Conference in Mexico in  September 2003. In Cancun, we attended USTR congressional briefings and  went to press conferences and meetings open to country delegates. Also,  we reviewed domestic and international news media reports; news releases  on the developments at the ministerial conference and statements about  the outcome of the ministerial conference from the WTO, the U.S. and  foreign governments, and other international organizations. and the final tariff rate resulting from the negotiations is t. The expression, which relates  the two tariff rates, where c is a constant parameter, would be: t\u00d7 a ------------- t\u00d7 B t\u00d7------------------------ tt is the final rate, to be bound in ad valorem terms t  is the base rate t is the average of the base rates B is a coefficient with a unique value to be determined by the participants. For purposes of  our analysis, we assumed a coefficient of 1 would be used for all countries. However, the  Chair\u2019s proposal does not specify the value of coefficient and leaves open the possibility that  a different coefficient could be used. with would differ for countries with average tariffs of 4 percent, 15 percent,  and 30 percent. We selected the United States, Malaysia, and Brazil as  examples of countries that respectively fit into those categories on the  basis of WTO annual World Trade Report data on average overall bound  tariff rates.\nWe performed our work from June to October 2003 in accordance with  generally accepted government auditing standards.\n\nSignificant Events in the WTO Negotiations before and during the Cancun Ministerial Conference\n\nTrade Negotiations Committee (TNC) meets The Chairman of the TNC, which had been established to oversee the Doha Round of global trade  talks, reported that while the work of the TNC and its subsidiary bodies intensified in 2003, real  negotiations had not yet begun.\nWTO General Council Chairman prepares draft ministerial declaration The text is intended as a first draft of an operational text through which ministers at Cancun would  register decisions and give guidance and instruction in the negotiations. It reflects a lack of progress  on key issues, as shown by its skeletal nature and the bracketed (disputed) items relating to  \u201cmodalities\u201d (rules and guidelines for subsequent negotiations) for agriculture, nonagricultural market  access, and the Singapore issues (investment, competition , government procurement, and  trade facilitation).\nMontreal mini-ministerial occurs Approximately 30 trade ministers from WTO members meet in Montreal to prepare for the Cancun  Ministerial Conference. At the meeting, the ministers encourage the United States and the EU to  narrow their differences on the central issue of agriculture.\nU.S. and EU submit joint agriculture framework The framework includes reductions in domestic support, with those members with higher subsidies  making deeper cuts, a three-pronged strategy to reduce tariffs, and reduction of export subsidies.\nGroup of 20 Developing countries submit agriculture counterproposal The proposal includes substantial cuts in domestic subsidies by developed countries, a tariff reduction  formula that allows developing countries to make less substantial cuts, and the elimination of export  subsidies.\nGeneral Council Chairman and WTO Director General submit revised draft ministerial  declaration Now 23 pages, the text continues to reflect significant differences between members on many issues.  It includes frameworks for modalities in agriculture and nonagricultural market access as well as  proposed modalities on each of the Singapore issues. Additionally, it includes a section related to a  proposal by Burkina Faso, Benin, Chad, and Mali to eliminate cotton subsidies and provide  compensation to the four countries while the subsidies are phased out.\nGeneral Council approves Agreement on Trade-Related Aspects of Intellectual Property Rights  (TRIPS) and public health solution WTO members complete discussions mandated in Doha to make it easier for poorer countries to  import cheaper generic drugs made under compulsory licensing if they are unable to manufacture the  medicines themselves. The United States, previously the only member preventing an agreement, joins  the consensus after the General Council Chairman provides a statement regarding WTO members\u2019  shared understanding of the interpretation and implementation of the decision.\nDay 1 of Cancun Ministerial Conference Mexican President opens the ministerial conference, and ministers start work on key issues. The  Conference Chairman appoints ministers to facilitate discussions on key issues\u2014agriculture,  nonagricultural market access, development issues, Singapore issues, and other issues. Ministers  also debate a proposal on cotton from four African members.\nDay 2 The first informal heads of delegation meeting occurs, and the Director General is appointed to  facilitate discussions on the cotton initiative. Group discussions also take place on agriculture,  nonagricultural market access, the Singapore issues, development issues, and other issues.\nDay 3 A second informal heads of delegation meeting occurs in the morning and includes reports by the  facilitators on each issue. Working group meetings continue throughout the day and conclude with a  heads-of-delegation meeting at night. The Conference Chairman commits to draft a new version of the  ministerial text and circulate it by the middle of the following day.\nDay 4 The Conference Chairman distributes a new draft ministerial text at a meeting with heads of  delegations and then asks them to study the text and reconvene in the evening. After ministers  reconvene, many criticize the draft text, arguing that their particular concerns have not been included.  At the close of the meeting, the Conference Chairman warns ministers that if the ministerial  conference fails, the negotiations might take a long time to recover.\nDay 5 The Conference Chairman begins closed-door consultations with 30 ministers representing a wide  range of regional and other groups on the subject of the Singapore issues. During these consultations,  positions shift, allowing the possibility of dropping two or possibly three of the issues. The Conference  Chairman then suspends the meeting to allow participants to meet with their respective groups. When  they return, there is no consensus on three, and the Conference Chairman decides to close the  ministerial conference. Ministers subsequently approve a ministerial statement that instructs members  to continue working on outstanding issues and to convene a meeting of the General Council by  December 15 to take necessary action.\n\n\u201cDeveloping Countries\u201d in the World Trade Organization\n\nDeveloping country status in the WTO brings certain rights. For example, provisions in  some WTO agreements provide developing countries with the right to restrict imports to  help establish certain industries, longer transition periods before they fully implement  agreement terms, and eligibility to receive technical assistance. See article XVIII of the  General Agreement on Tariffs and Trade (GATT), articles IV,  XII, and XXV of the General  Agreement on Trade in Services, and articles 66 and 67 in the Agreement on Trade-Related  Aspects of Intellectual Property Rights. In addition, developing countries may benefit from  the Generalized System of Preferences, under which developed countries may offer  nonreciprocal preferential treatment (such as zero or low duties on imports) to products  originating in those developing countries the preference-giving country so designate. See  Decision on Differential and More Favourable Treatment, Reciprocity and Fuller  Participation of Developing Countries, adopted under GATT in 1979. \u201clower middle income,\u201d $736 - $2,935; \u201cupper middle income,\u201d $2,936 -  $9,075; and \u201chigh income,\u201d $9,076 or more.\nUnder the World Bank definition, the WTO membership currently has 105  developing economies, 30 of which are defined by the United Nations as  LDCs. This includes 44 low  income countries; 35 lower middle income  countries; and 26 upper middle income countries. There are 40 high income  WTO members (not counting the EU\u2019s separate membership). The Cancun  ministerial also recognized that upon ratification in their national  parliaments, Cambodia and Nepal will accede to the WTO, both of which  are LDCs.\n\nComments from the Office of the U.S. Trade Representative\n\nGAO Contacts and Staff Acknowledgments\n\n\tGAO Contacts\n\n\tStaff Acknowledgments\n\nIn addition to the individuals named above, Jason Bair, Etana Finkler, R.  Gifford Howland, David Makoto Hudson, Jos\u00e9 Martinez-Fabre, Rona  Mendelsohn, Jon Rose, and Richard Seldin made key contributions to this  report.\n\n\tGAO\u2019s Mission\n\nThe General Accounting Office, the audit, evaluation and investigative arm of  Congress, exists to support Congress in meeting its constitutional responsibilities  and to help improve the performance and accountability of the federal government  for the American people. GAO examines the use of public funds; evaluates federal  programs and policies; and provides analyses, recommendations, and other  assistance to help Congress make informed oversight, policy, and funding  decisions. GAO\u2019s commitment to good government is reflected in its core values of  accountability, integrity, and reliability.\n\n\tObtaining Copies of GAO Reports and Testimony\n\nThe fastest and easiest way to obtain copies of GAO documents at no cost is  through the Internet. GAO\u2019s Web site (www.gao.gov) contains abstracts and full- text files of current reports and testimony and an expanding archive of older  products. The Web site features a search engine to help you locate documents  using key words and phrases. You can print these documents in their entirety,  including charts and other graphics.\nEach day, GAO issues a list of newly released reports, testimony, and  correspondence. GAO posts this list, known as \u201cToday\u2019s Reports,\u201d on its Web site  daily. The list contains links to the full-text document files. To have GAO e-mail this  list to you every afternoon, go to www.gao.gov and select \u201cSubscribe to   e-mail alerts\u201d under the \u201cOrder GAO Products\u201d heading.\n\n\t\tOrder by Mail or Phone\n\n\tTo Report Fraud, Waste, and Abuse in Federal Programs\n\n\tPublic Affairs","output":"Why GAO Did This Study\n\nTrade ministers from 146 members of the World Trade Organization (WTO), representing 93 percent of global commerce, convened in Cancun, Mexico, in September 2003. Their goal was to provide direction for ongoing trade negotiations involving a broad set of issues that included agriculture, nonagricultural market access, services, and special treatment for developing countries. These negotiations, part of the global round of trade liberalizing talks launched in November 2001 at Doha, Qatar, are an important means of providing impetus to the world's economy. The round was supposed to be completed by January 1, 2005. However, the Cancun Ministerial Conference ultimately collapsed without ministers reaching agreement on any of the key issues. GAO was asked to analyze (1) the divisions on key issues for the Cancun Ministerial Conference and how they were dealt with at Cancun and (2) the factors that influenced the outcome of the Cancun Ministerial Conference.\n\nWhat GAO Found\n\nMinisters attending the September 2003 Cancun Ministerial Conference remained sharply divided on handling key issues: agricultural reform, adding new subjects for WTO commitments, nonagricultural market access, services (such as financial and telecommunications services), and special and differential treatment for developing countries. Many participants agreed that attaining agricultural reform was essential to making progress on other issues. However, ministers disagreed on how each nation would cut tariffs and subsidies. Key countries rejected as inadequate proposed U.S. and European Union reductions in subsidies, but the U.S. and EU felt key developing nations were not contributing to reform by agreeing to open their markets. Ministers did not assuage West African nations' concerns about disruption in world cotton markets: The United States and others saw requests for compensation as inappropriate and tied subsidy cuts to attaining longer-term agricultural reform. Unconvinced of the benefits, many developing countries resisted new subjects--particularly investment and competition (antitrust) policy. Lowering tariffs to nonagricultural goods offered promise of increasing trade for both developed and developing countries, but still divided them. Services and special treatment engendered less confrontation, but still did not progress in the absence of the compromises that were required to achieve a satisfactory balance among the WTO's large and increasingly diverse membership. Several other factors contributed to the impasse at Cancun. Among them were a complex conference agenda; no agreed-upon starting point for the talks; a large number of participants, with shifting alliances; competing visions of the talks' goals; and North-South tensions that made it difficult to bridge wide divergences on issues. WTO decision-making procedures proved unable to build the consensus required to attain agreement. Thus, completing the Doha Round by the January 2005 deadline is in jeopardy."}
{"id":"gao_GAO-06-237","pid":"gao_GAO-06-237_0","input":"\tBackground\n\nThe electricity industry is based on four distinct functions: generation,  transmission, distribution, and system operations. (See fig. 1.) Once  electricity is generated\u2014whether by burning fossil fuels; through nuclear  fission; or by harnessing wind, solar, geothermal, or hydro energy\u2014it is  sent through high-voltage, high-capacity transmission lines to electricity  distributors in local regions. Once there, electricity is transformed into a  lower voltage and sent through local distribution wires for end-use by  industrial plants, commercial businesses, and residential consumers.\nA unique feature of the electricity industry is that electricity is consumed at  almost the very instant that it is produced. As electricity is produced, it  leaves the generating plant and travels at the speed of light through  transmission and distribution wires to the point of use, where it is  immediately consumed. In addition, electricity cannot be easily or  inexpensively stored and, as a result, must be produced in near-exact  quantities to those being consumed. Because electric energy is generated  and consumed almost instantaneously, the operation of an electric power  system requires that a system operator balance the generation and  consumption of power. The system operator monitors generation and  consumption from a centralized location using computerized systems and  sends minute-by-minute signals to generators reflecting changes in the  demand for electricity. The generators then make the necessary changes in  generation in order to maintain the transmission system safely and reliably.  Absent such continuous balancing, electrical systems would be highly  unreliable, with frequent and severe outages.\nHistorically, the electric industry developed initially as a loosely connected  structure of individual monopoly utility companies, each building power  plants and transmission and distribution lines to serve the exclusive needs  of all the consumers in their local areas. Such monopoly utility companies  were typically owned by shareholders and were referred to as investor- owned utilities. In addition to these investor-owned utilities, several types  of publicly owned utilities, including rural cooperatives, municipal  authorities, state authorities, public power districts, and irrigation districts,  also began to sell electricity. About one-third of these publicly owned  utilities are owned collectively by their customers and generally operate as  not-for-profit entities. Further, nine federally owned entities, including the  Tennessee Valley Authority and the Bonneville Power Administration, also  generate and sell electricity\u2014primarily to cooperatives, municipalities, and  other companies that resell it to retail consumers.\nBecause the utilities operated as monopolies, wholesale and retail  electricity pricing was regulated by the federal government and the states.  The Public Utility Holding Company Act of 1935 (PUHCA) and the Federal  Power Act of 1935 established the basic framework for electric utility  regulation. PUHCA, which required federal regulation of these companies,  was enacted to eliminate unfair practices by large holding companies that  owned electricity and natural gas companies in several states. The Federal  Power Act created the Federal Power Commission\u2014a predecessor to  FERC\u2014and charged it with overseeing the rates, terms, and conditions of  wholesale sales and transmission of electric energy in interstate  commerce. FERC, established in 1977, approved interstate wholesale rates  based on the utilities\u2019 costs of production plus a fair rate of return on the  utilities\u2019 investment. States retained regulatory authority over retail sales of  electricity, electricity generation, construction of transmission lines within  their boundaries, and intrastate transmission and distribution. Generally,  states set retail rates based on the utility\u2019s cost of production plus a rate of  return.\n\n\tThe Federal Government Has Taken Steps to Increase Competition in the Electricity Industry and Wholesale Markets\n\nThe goal of federal efforts to restructure the electricity industry is to  increase competition in order to provide benefits to consumers, such as  lower prices and access to a wider range of services, while maintaining  reliability. Over the past 13 years, the federal government has taken a series  of steps to encourage this restructuring that generally fall into four key  categories: (1) market structure, (2) supply, (3) demand, and (4) oversight.\nRegarding market structure, federal restructuring efforts have changed  how electricity prices are determined, replacing cost-based regulated rates  with market-based pricing in many wholesale electricity markets. In this  regard, efforts undertaken predominantly by FERC have helped to  encourage a shift from a market structure that is based on monopoly  utilities providing electricity to all customers at regulated rates to one in  which prices are determined largely by the interaction of supply and  demand. In prior work, we reported that increasing competition required  that at least three key steps be taken:  increasing the number of buyers and  sellers, providing adequate market information, and allowing potential  market participants the freedom to enter and exit the industry.\nIn terms of supply, federal restructuring efforts have generally focused on  allowing new companies to sell electricity, requiring the owners of the  transmission systems to allow these new companies to use their lines, and  approving the creation of new entities to fairly administer these markets.  The Energy Policy Act of 1992 made it easier for new companies, referred  to as nonutilities, to enter the wholesale electricity market, which  expanded the number of companies that can sell electricity. For example,  we reported that from 1992 through 2002, FERC had authorized 850  companies to sell electricity at market-based rates. To allow these  companies to buy and sell electricity, FERC also required that transmission  owners under its jurisdiction, generally large utilities, allow all other  entities to use their transmission lines under the same prices, terms, and  conditions as those that they apply to themselves. To do this, FERC issued  orders that required the regulated monopoly utilities\u2014which had  historically owned the power plants, transmission systems, and  distribution lines\u2014to separate their generation and transmission  businesses. In addition, in response to concerns that some of these new  companies received unfair access to transmission lines, which were mostly  still owned and operated by the former utilities, FERC encouraged the  utilities that it regulated to form new entities to impartially manage the  regional network of transmission lines and provide equal access to all  market participants, including nonutilities. These entities, including  independent system operators (ISOs) and regional transmission  organizations (RTOs), operate transmission systems covering significant  parts of the country.  One of these, the California ISO, currently oversees  the electricity network spanning most of the state of California.  Another  important effort to facilitate the interaction of buyers and sellers was  FERC\u2019s approval of the creation of several wholesale markets for  electricity. These markets created centralized venues for market  participants to buy and sell electricity. Finally, FERC has undertaken  efforts to improve the availability and accuracy of price information used  by suppliers, such as daily market prices reported to news services, and has  established guidelines for the conduct of sellers of wholesale electricity,  requiring these entities to, among other things, accurately report prices and  other data to news services.\nFederal efforts to affect demand at the wholesale level have focused on  encouraging prices in wholesale markets to be established by the direct  interaction between buyers and sellers in these markets. We previously  reported that there were several centralized markets in which suppliers  and buyers submitted bids to buy and sell electricity and that other types of  market-based trading were also emerging, such as Internet-based trading  systems. However, there have been few federal efforts to directly affect  prices at the retail level, where most electricity that is consumed is  purchased, because states, and not the federal government, have regulatory  authority for overseeing retail electricity markets. As part of its efforts to  have prices set by the direct interaction of supply and demand, FERC has  approved proposals to incorporate so-called \u201cdemand-response\u201d programs  into the markets that it oversees. These programs, among other things,  allow electricity buyers to see electricity prices as they change throughout  the day and provide the choice to sell back electricity that they otherwise  would have used. For example, we reported that FERC had approved one  such program in New York State that allows consumers to offer to sell back  specific amounts of electricity that they are willing to forgo at prices that  they determine. More recently,  the Energy Policy Act of 2005 requires  FERC to study issues such as demand-response and report on its findings  to the Congress.\nFinally, restructuring has fundamentally changed how electricity markets  are overseen and regulated. Historically, FERC had ensured that prices in  wholesale electricity markets were \u201cjust and reasonable\u201d by approving  rates that allowed for the recovery of justifiable costs and providing for a  regulated rate of return, or profit. To ensure that prices are just and  reasonable in today\u2019s restructured electricity markets, FERC has shifted its  regulatory role to approving rules and market designs, proactively  monitoring electricity market performance to ensure that markets are  working rather than waiting for problems to develop before acting, and  enforcing market rules. As part of its decision to approve the creation of  market designs that include ISOs and RTOs, FERC approved the creation  of market monitoring units within these entities. These market monitors  are designed to routinely collect information on the activities in these  markets including prices; perform up-to-the-minute market monitoring  activities, such as examining whether prices appear to be the result of fair  competition or market manipulation; and can impose penalties, such as  fines, when they identify that rules have been violated. More recently, the  Energy Policy Act of 2005 granted FERC authority to impose greater civil  penalties on companies that are found to have manipulated the market.\n\n\tElectricity Markets Have Changed in Several Important Ways Since Restructuring Began\n\nFederal restructuring efforts, combined with efforts undertaken by states,  have created a patchwork of electricity markets, broadened electricity  supplies, disconnected wholesale and retail markets, and shifted how the  electricity industry is overseen. Taken together, these developments have  produced some positive and some negative outcomes for consumers.\nIn terms of market structure, we previously reported that the combined  effects of the federal efforts and those of some states have created a  patchwork of wholesale and retail electricity markets. In the wholesale  markets, there is a combination of restructured and traditional markets  because FERC\u2019s regulatory authority is limited. As a result, some entities\u2014 including municipal utilities and cooperatively owned utilities\u2014have not  been required to make the changes FERC has required others to make. As  shown in figure 2, collectively the areas not generally subject to FERC  jurisdiction span a significant portion of the country. In addition, even  where FERC has clear jurisdiction, it has historically approved a variety of  different rules that govern how each of the transmission networks is  controlled and what types of wholesale markets may exist. In the retail  electricity markets, state utility commissions or local entities historically  have controlled how prices were set, as well as approved power plants,  transmission lines, and other capital investments. Because each state  performed these functions slightly differently, these rules vary. In addition,  many states also have shifted the retail markets that they oversee toward  competition. As we reported in 2002, 24 states and the District of Columbia  had enacted legislation or issued regulations that planned to open their  retail markets to competition. As of 2004, 17 states had actually opened  their retail markets to competition, according to the Energy Information  Administration. One of these states, California, opened its retail markets to  competition but has taken steps to limit the extent of competition.\nIn terms of supply, efforts to restructure the electricity industry by the  federal government and some states have broadened electricity markets  overall\u2014shifting the focus from state and\/or local supply to multistate or  regional supply. In particular, efforts at wholesale restructuring have led to  a significant change in the way electricity is supplied in those markets. The  introduction of ISOs and RTOs in many areas has provided open access to  transmission lines, allowing more market participants to compete and sell  electricity across wide geographic regions and multiple states. In addition,  in some parts of the country, overall supply has grown as a result of the  large increase in new generating capacity that has been built by nonutility  companies, while other regions have witnessed smaller increases in supply.  For example, we reported that, by 2002, Texas had added substantial  amounts of generating capacity\u2014more than double the forecasted amount  needed through 2004. In contrast, in California only about 25 percent of  the forecasted need had been built over the same period, and the region  witnessed a historic market disruption costing consumers billions of  dollars. Similarly, the opening of retail markets has also widened the scope  of electricity markets by allowing new and different entities to sell  electricity, which works to further broaden markets because these retail  sellers must either build or buy a power plant or rely on wholesale markets.  Finally, FERC has improved the transparency of wholesale markets, a key  requirement of competitive markets, by increasing the availability and  accuracy of price and other market information.\nIn terms of demand, while federal efforts have encouraged price setting by  the interaction of supply and demand, this approach has not been widely  adopted in retail markets. Even though FERC and other electricity experts  have determined that it is important for demand to be responsive to prices  and other factors for competitive markets to operate efficiently, as we  reported in 2004, the use of these programs remains limited. In many  retail markets, including some states where retail markets have been  opened to competition, prices are still set so that rates are either flat or  have been frozen. In either case, prices are not reflective of the hourly costs  of providing electricity. In some cases, demand-response programs are in  place but are aimed at only certain types of customers, such as some  commercial and industrial customers. Overall, these customers account for  only a small share of total demand. As a result, in this hybrid system,  wholesale and retail markets remain disconnected, with competition  setting wholesale prices in many areas, and state regulation setting retail  prices in many states.\nRegulatory oversight of the electricity industry remains divided among  federal, regional, and state entities. As we have previously reported, FERC  initially did not adequately revise its regulatory and oversight approach to  respond to the transition to competitive energy markets. However, it has  made progress in recent years in defining its role, developing a framework  for overseeing the markets, and beginning to use an array of data and  analytical tools to oversee the market. In particular, FERC established the  Office of Market Oversight and Investigations in 2002, which oversees the  markets by monitoring its enforcement hotline for tips on misconduct;  conducting investigations and audits; and reviewing large amounts of  data\u2014including wholesale spot and futures prices, plant outage  information, fuel storage level data, and supply and demand statistics\u2014for  anomalies that could lead to potential market problems. In addition to  FERC\u2019s own efforts, substantial oversight also now occurs at the regional  level, through ISO and RTO market monitoring units. These units monitor  their region\u2019s market to identify design flaws, market power abuses, and  opportunities for efficiency improvements and report back to FERC  periodically. Finally, states\u2019 oversight roles vary. Those states that have not  restructured their markets retain key roles in overseeing and regulating  electricity markets directly and indirectly through such activities as setting  rates to recover costs and siting of power plants and transmission lines and  other capital investments needed to supply electricity. The ability of states  that have restructured their retail markets, to oversee their markets is more  limited, according to experts.\nThe effects of restructuring on consumers have been mixed. While most  studies evaluating wholesale electricity markets, including our own  assessment, have determined that progress has been made in introducing  competition in wholesale electricity markets, results at the retail level have  been difficult to measure. For example, in 2002, we reported that prices  generally fell after restructuring and fell in particular in many areas that  had implemented retail restructuring. However, we were unable to  attribute these price decreases solely to restructuring, since several other  factors, such as lower prices for natural gas and other fuels used in the  production of electricity, could have contributed to the price decreases.  Furthermore, while some consumers had benefited by paying lower prices,  others have experienced high prices and market manipulation. For  example, in 2002, we reported that nationally, consumers benefited from  price declines of as much as 15 percent since federal restructuring efforts  began. However, as consumers in California and across other parts of the  West will attest, there have been many negative effects, including higher  prices and market manipulation. More recently, electricity prices have  risen, potentially the result of higher prices for fuels such as natural gas  and petroleum, and other factors.\n\n\tFour Key Challenges Remain Unresolved\n\nWe have identified four key challenges that, if addressed, could benefit  consumers and the restructured electricity markets that serve them.\n\n\t\tMaking Wholesale Market Structures Work Better Together\n\nWith several fundamentally different electricity market structures in place  simultaneously in various parts of the country, it is important that these  markets work together better in order to meet regional needs. As we  previously reported, two aspects of the current electricity markets serve to  limit the benefits expected from restructuring. First, FERC\u2019s limited  authority has meant that significant parts of the market and significant  amounts of transmission lines have not been subject to FERC\u2019s effort to  restructure wholesale markets\u2014creating \u201choles\u201d in the national  restructured wholesale market. These gaps, where efforts to open  wholesale markets have not been undertaken, may limit the number of  potential participants and the types of transactions that can occur, thereby  limiting the benefits expected from competition. Second, where FERC  has clear authority, it has historically approved a range of rules for how the  different transmission systems and centralized wholesale markets  operate\u2014creating \u201cseams\u201d where these different jurisdictions meet and the  rules change. We have previously noted that the lack of consistent rules  among restructured wholesale markets limits the extent of competition  across wholesale markets and, in turn, limits the benefits expected from  competition. California experienced this firsthand, as it tried to \u201ccap\u201d  wholesale electricity prices in its state market\u2014establishing rules different  from those in the markets surrounding California. The lower price cap in  California, coupled with an exemption for electricity imports, created  incentives to sell electricity to areas outside the state (where prices were  higher) and later import it (because imports were exempt from the price  cap).\nFERC has acknowledged that the lack of consistent rules can lead to  discrimination in access, raise costs, and lead to reliability problems. As a  result, FERC made an effort to standardize the various wholesale market  designs under its jurisdiction. However, these efforts met with sharp  criticism from some industry stakeholders. FERC ended its effort to  require a single market design in all regions and has, instead, promoted  voluntary participation in RTOs and having the RTOs work together to  reconcile their differences. In the end, today\u2019s patchwork of wholesale  market structures, with holes and seams, is at odds with the physics of the  interdependent electricity industry, where electrons travel at the speed of  light and do not stop neatly at jurisdictional boundaries. Successfully  developing markets will require the alignment of market structures and  rules in order to reconcile them with these physical certainties.\n\n\t\tProviding Timely, Clear, and Consistent Signals to Help Ensure Adequate Regional Supplies\n\nBroadening of restructured electricity markets has made the federal  government, the states, and localities more dependent on each other in  order to ensure a sufficient supply of electricity. We previously concluded  that, as federal and state restructuring efforts broaden electricity markets  to span multiple states, states will become more interdependent on each  other for a reliable electricity supply. Consequently, one state\u2019s problems  acquiring and maintaining an adequate supply can now affect its neighbors.  For example, in the lead up to the western electricity crisis in 2000-2001,  few power plants were built to meet the rising demand in California, which  became dependent on power plants located outside the state. However,  when prices began to rise, this affected consumers, both inside and outside  California. We previously reported these higher prices had implications for  California consumers such as higher electricity bills, as well as others  located outside the state, costing billions of additional dollars. Because of  these negative outcomes, some have questioned whether restructuring will  eventually benefit consumers.\nMore broadly, rising interdependence has significant implications for many  industry stakeholders, especially in light of the shift in how plants are  financed and built. In the past, monopoly utilities proposed, and regulators  approved, the construction of new power plants and other infrastructure.  Today, policymakers at all levels of government must recognize that  providing consumers with reliable electricity in competitive markets  requires private investors to make reasoned investments. We have reported  that these private investors make decisions on investing by balancing their  perceptions of potential risk and profitability. Further, we concluded that  the reliability of the electricity system and, more generally, the success of  restructuring, now hinges on whether these developers choose to enter a  market and how quickly they are able to respond to the need for new  power plants. The implications of this broadening of electricity markets are  important, since it has occurred while most of the primary authorities  associated with building new power plants, such as state energy siting or  local land use planning, still rest with states and localities. As we have  reported, there is sometimes considerable variation across states and  localities in how long these processes take and how much they cost, and  building new power plants can take a year or more once all the approvals  are obtained. Because of the broader electricity markets, one state\u2019s or  locality\u2019s processes and decisions provide signals affecting private  investors\u2019 perceptions of  the risk or profitability of making investments in  local areas and can have long-lasting implications for the entire region. In  this context of growing interdependence for adequate electricity supplies,  our work shows that it is important for federal, state, and local entities to  provide timely, clear, and consistent signals that allow private developers  to make the kinds of reasonable and long-term investments that are  needed.\n\n\t\tConnecting Wholesale and Retail Markets\n\nAs we have previously reported, for competitive wholesale electricity  markets to provide the full benefits expected of them, it is essential that  they be connected to the retail markets, where most electricity is sold and  consumed. Otherwise, hybrid electricity markets\u2014wholesale prices set  by competition and retail prices set by regulation\u2014will be difficult to  manage because consumers at the retail level can unknowingly drive up  wholesale prices during periods when electricity supplies are limited. This  occurs when consumers do not see prices at the retail level that accurately  reflect the higher wholesale market prices. Seeing only these lower  electricity prices, consumers use larger quantities of electricity than they  would if they saw higher prices, which raises costs and can risk reliability.  We have noted that, in this environment (consumers seeing low retail  prices during periods of high wholesale prices) consumers have little  incentive to reduce their consumption during periods when prices are high  or reliability is at risk.  The appeal of seeming to insulate retail consumers  from wholesale market fluctuations may be compelling, but most experts  agree that the lack of significant demand response can actually lead to  higher and more volatile prices.  In 2004, we concluded that this system  makes it difficult for FERC to ensure that prices in wholesale markets are  just and reasonable. We further concluded that connecting wholesale and  retail markets through demand-response programs such as real-time  pricing or reliability-based programs  would  help competitive electricity  markets function better, enhance the reliability of the electricity system,  and provide important signals that consumers should consider investments  into energy-efficient equipment. Such signals would work to reduce  overall demand in a more permanent way.\nWhile FERC has been supportive of increasing the role of demand-response  programs in the wholesale markets that it oversees, there have been limited  efforts to do so in retail markets\u2014these markets are outside FERC\u2019s  jurisdiction and overseen by the states. Some states, such as California,  have a long history with demand-response programs and have conducted  more recent experiments with using it in more widespread ways. Sharing  and building upon these and other examples could help develop efficient  ways to bring the consumers who flip the light switches into the markets  responsible for ensuring that their lights go on. Since electricity travels at  the speed of light, retail markets where electricity is consumed are tightly  connected to the wholesale markets that supply these retail markets. As a  result, much of the success of federal restructuring of the wholesale  markets relies on actions taken at the state level to bring consumers into  the market.\n\n\t\tResolving Divided Regulatory Responsibilities\n\nSignificant changes in how oversight is carried out in competitive markets,  combined with the divided regulatory authority over the electricity  industry, has made effective oversight difficult. We previously reported that  FERC, the states, and other market monitors were neither fully monitoring  the overall performance of all wholesale and retail markets nor collecting  sufficient data to do so, thus limiting the opportunity to meaningfully  compare performance. At the federal level, FERC protects customers  primarily through ensuring that prices in the wholesale markets are just  and reasonable. In prior work, we found that FERC did not initially revise  its oversight approach adequately in response to restructured markets,  resulting in markets that were not adequately overseen. However, more  recently, we reported that FERC has made significant efforts to revise its  oversight strategy to better align with its new role overseeing restructured  markets, has taken a more proactive approach to monitoring the  performance of markets, and has better aligned its workforce to fit its  needs in these new markets. Recent actions will require further changes  to FERC\u2019s role. The Energy Policy Act of 2005 provided FERC additional  authority to establish reliability rules for all \u201cusers, owners, and operators\u201d  of the transmission system. We had previously reported that this change  would be desireable, but it is too early to judge its success. At the state  level, oversight varies widely. States that have retained traditionally  regulated retail markets continue to require substantial amounts of  information to help them set the regulated prices that consumers see. The  states that now feature restructured retail markets face a sharply different  oversight role of policing their state-level retail markets for misbehavior  and signs of market malfunction. The introduction of the market  monitoring units within ISOs and RTOs adds a new layer of regional  oversight to the existing federal and state roles. While authority over the  electricity industry is divided, restructuring has served to make the success  of each of the oversight efforts more interdependent, and FERC and the  states will have to rely on each other, as well as on new entities, to a greater  degree than before to be successful.\n\n\tConcluding Observations\n\nIt is becoming increasingly clear that many of the challenges facing the  electricity industry are rooted in the interdependence of actions taken by  federal, state, local, and private entities, as well as consumers. Accordingly,  the individual challenges we have discussed follow a central theme\u2014the  need to integrate the various ongoing activities and efforts and harmonize  them in a way that improves the functioning of the marketplace while  providing adequate oversight to protect electricity consumers. This will not  be easy because it requires what is, at times, most difficult: collaboration  and cooperation among entities with a history of independence.\nSuccessfully restructuring the electricity industry is an ongoing process  that will require rethinking old issues, such as jurisdictional  responsibilities, and applying new and creative ideas to help bridge the  current gap between wholesale and retail markets. Only if interdependent  parties work together will electricity restructuring succeed in delivering  benefits to U.S. consumers by way of healthy, viable, and competitive  markets. Not adequately addressing these issues could result in an  electricity industry that does not provide consumers with sufficient  quantities of the reliable, reasonably priced electricity that has been a  mainstay of our nation\u2019s economic and social progress.\nAs agreed with your office, unless you publicly announce its contents  earlier, we plan no further distribution until 15 days after the report date. At  that time, we will send copies of this report to appropriate congressional  committees. We will also make copies available to others on request. In  addition, the report will be available at no charge on the GAO Web site at  http:\/\/www.gao.gov.\nIf you or your staff have any questions about this report, please contact me  at (202) 512-3841 or wellsj@gao.gov. Contact points for our Office of  Congressional Relations and Office of Public Affairs may be found on the  last page of this report. GAO staff who contributed to this report are listed  in the appendix.\n\nGAO Contact and Staff Acknowledgments\n\n\tGAO Contact\n\n\tAcknowledgments\n\nIn addition to the contact named above, Dan Haas, Jon Ludwigson, and  Kris Massey made key contributions to this report. Barbara Timmerman,  Susan Iott, and Nancy Crothers also made important contributions.\n\nRelated GAO Products\n\n\tElectricity and Energy Markets\n\nMeeting Energy Demand in the 21st Century:  Many Challenges and Key  Questions. GAO-05-414T. Washington, D.C.: March 16, 2005.\nElectricity Markets: Consumers Could Benefit from Demand Programs,  but Challenges Remain. GAO-04-844. Washington, D.C.:  August 13, 2004.\nEnergy Markets:  Additional Actions Would Help Ensure That FERC\u2019s  Oversight and Enforcement Capability Is Comprehensive and  Systematic. GAO-03-845. Washington, D.C.:  August 15, 2003.\nElectricity Markets: FERC\u2019s Role in Protecting Consumers. GAO-03-726R.   Washington, D.C.:  June 6, 2003.\nEnergy Markets: Concerted Actions Needed by FERC to Confront  Challenges That Impede Effective Oversight. GAO-02-656.  Washington,  D.C.:  June 14, 2002.\n\n\tElectricity Restructuring\n\nElectricity Restructuring: 2003 Blackout Identifies Crisis and  Opportunity for the Electricity Sector. GAO-04-204. Washington, D.C.:   November 18, 2003.\nElectricity Restructuring: Action Needed to Address Emerging Gaps in  Federal Information Collection. GAO-03-586.  Washington, D.C.:  June 30,  2003.\nLessons Learned from Electricity Restructuring: Transition to  Competitive Markets Underway, but Full Benefits Will Take Time and  Effort to Achieve. GAO-03-271. Washington, D.C.:  December 17, 2002.\nRestructured Electricity Markets: California Market Design Enabled  Exercise of Market Power. GAO-02-828. Washington, D.C.:  June 21, 2002.\nRestructured Electricity Markets: Three States' Experiences in Adding  Generating Capacity. GAO-02-427.  Washington, D.C.:  May 24, 2002.\nElectric Utility Restructuring: Implications for Electricity R&D. T-RCED- 98-144.  Washington, D.C.:  March 31, 1998.\n\n\tWestern Electricity Crisis\n\nRestructured Electricity Markets: California Market Design Enabled  Exercise of Market Power. GAO-02-828.  Washington, D.C.:  June 21, 2002.\nCalifornia Electricity Market: Outlook for Summer 2001. GAO-01-870R.   Washington, D.C.:  June 29, 2001.\nCalifornia Electricity Market Options for 2001: Military Generation and  Private Backup Possibilities. GAO-01-865R. Washington, D.C.:  June 29,  2001.\nEnergy Markets: Results of Studies Assessing High Electricity Prices in  California. GAO-01-857.  Washington, D.C.:  June 29, 2001.\n\n\tFederal Power\n\nBonneville Power Administration: Better Management of BPA\u2019s  Obligation to Provide Power Is Needed to Control Future Costs. GAO-04- 694. Washington, D.C.: July 9, 2004.\nBonneville Power Administration: Long-Term Fiscal Challenges. GAO-03- 918R. Washington, D.C.: June 27, 2003.\nFederal Power:  The Evolution of Preference in Marketing Federal Power.  GAO-01-373. Washington, D.C.: February 8, 2001.","output":"Why GAO Did This Study\n\nThe electricity industry is in the midst of many changes, collectively referred to as restructuring, evolving from a highly regulated environment to one that places greater reliance on competition. This restructuring is occurring against a backdrop of constraints and challenges, including a shared responsibility for implementing and enforcing local, state, and federal laws affecting the electricity industry and an expected substantial increase in electricity demanded by consumers by 2025, requiring significant investment in new power plants and transmission lines. Furthermore, several recent incidents, including the largest blackout in U.S. history along the East Coast in 2003 and the energy crisis in California and other parts of the West in 2000 and 2001, have drawn attention to the need to examine the operation and direction of the industry. At Congress's request, this report summarizes results of previous GAO work on electricity restructuring, which was conducted in accordance with generally accepted government auditing standards. In particular, this report provides information on (1) what the federal government has done to restructure the electricity industry and the wholesale markets that it oversees, (2) how electricity markets have changed since restructuring began, and (3) GAO's views on key challenges that remain in restructuring the electricity industry.\n\nWhat GAO Found\n\nOver the past 13 years, the federal government has taken a variety of steps to restructure the electricity industry with the goal of increasing competition in wholesale markets and thereby increasing benefits to consumers, including lower electricity prices and access to a wider array of retail services. In particular, the federal government has changed (1) how electricity is priced--shifting from prices set by regulators to prices determined by markets; (2) how electricity is supplied--including the addition of new entities that sell electricity; (3) the role of electricity demand--through programs that allow consumers to participate in markets; and (4) how the electricity industry is overseen--in order to ensure consumer protection. Federal restructuring efforts, combined with efforts undertaken by states, have created a patchwork of wholesale and retail electricity markets; broadened electricity supplies; disconnected wholesale markets from retail markets, where most demand occurs; and shifted how the electricity industry is overseen. Taken together, these developments have produced some positive outcomes, such as progress in introducing competition in wholesale electricity markets, as well as some negative outcomes, such as periods of higher prices. We have identified four key challenges to the effective operation of the restructured electricity industry: making wholesale markets work better together so that restructuring can deliver the benefits to consumers that were expected; providing clear and consistent signals to private investors when new plants are needed so that there are adequate supplies to meet regional needs; connecting wholesale markets to retail markets through consumer demand programs to keep prices lower and less volatile; and, resolving divided regulatory authority to ensure that these markets are adequately overseen. The theme cutting across each of these challenges is the need to better integrate the various market structures, factors affecting supply and demand, and various efforts at market oversight."}
{"id":"crs_R44006","pid":"crs_R44006_0","input":"\tIntroduction\n\nFederal crimes are usually punishable by a statutory maximum term of imprisonment\u2014for example, \"imprisoned for not more than 5 years.\" A surprising number also have statutory minimum terms of imprisonment\u2014for example, \"imprisonment which may not be less than 10 years or for life.\" Under some circumstances, mandatory minimums have proven controversial. Opponents contend that in some instances they can be arbitrary and unduly severe. Proponents contend that they ensure the offenders of the most serious offenses will receive at least some minimum punishment. Legislative proposals in the 114 th Congress reflect both perspectives.\n\n\tA General Exception\n\nFederal courts are required to weigh the standards listed in 18 U.S.C. 3553(a) before sentencing a defendant. The standards include things like \"the need for the sentence imposed ... to provide just punishment for the offense\" and \"the need to avoid unwarranted sentence disparities ...\" In doing so, however, the courts may not disregard any applicable statutory mandatory minimums.\nS. 353 (Senator Paul) and H.R. 706 (Representative Scott (VA)) would permit federal courts to impose a sentence below an otherwise applicable mandatory minimum when necessary to avoid violating the sentencing standards found in Section 3553(a). When exercising the authority, the court would have to provide the government and the defendant a chance to be heard, and to provide a written statement of the Section 3553(a) factors that justify the decision to sentence below the mandatory minimum.\n\n\tDrug Offenses\n\nThe Controlled Substances Act and the Controlled Substances Import and Export Act establish a series of mandatory minimum sentences for violation of their prohibitions. Trafficking\u2014that is, importing, exporting, manufacturing, growing, or possessing with the intent to distribute\u2014a very substantial amount of various highly addictive substances such as more than a kilogram of heroin is punishable by imprisonment for not less than 10 years or more than life. A subsequent conviction carries a sentence of imprisonment for not less than 20 years or more than life. When substantial but lesser amounts are involved, such as100 grams of heroin, sentences of imprisonment for not less than five years or more than life are called for, and imprisonment for not less than 10 years or more than life in the case of a subsequent conviction.\nAs noted in Table 1 below, S. 502 (Senator Lee) and H.R. 920 (Representative Labrador) would reduce the mandatory minimum sentences for drug traffickers engaged in manufacture, cultivation, or distribution. They would not reduce the mandatory minimum sentences for traffickers engaged in importing or exporting, other than those who were simply acting as couriers (mules). This is a departure from the proposals in the 113 th Congress, which would have reduced the mandatory minimum sentences for traffickers generally, without regard to whether they manufacture or import\/export.\n\n\t\tSafety Valve\n\nThe so-called safety valve provision of 18 U.S.C. 3553(f) allows a court to sentence qualified defendants below the statutory mandatory minimum in controlled substance trafficking and possession cases. To qualify, a defendant may not have used violence in the course of the offense. He must not have played a managerial role in the offense if it involved group participation. The offense must not have resulted in a death or serious bodily injury. The defendant must make full disclosure of his involvement in the offense, providing the government with all the information and evidence at his disposal. Finally, the defendant must have a virtually spotless criminal record, that is, not more than 1 criminal history point.\nCriminal history points and categories are a feature of the U.S. Sentencing Commission's Sentencing Guidelines. The Guidelines assign points based on the sentences imposed for prior state and federal convictions. For example, the Guidelines assign 1 point for any past conviction that resulted in a sentence of less than incarceration for 60 days; 2 points for any conviction resulting in a sentence of incarceration for at least 60 days; and 3 points for any conviction resulting in a sentence of incarceration of more than a year and a month. Criminal History Category I consists of zero or 1 point, Criminal History Category II of 2 or 3 points.\nThe Sentencing Commission's report on mandatory minimum sentences suggested that Congress consider expanding safety valve eligibility to defendants with 2 or possibly 3 criminal history points. The report indicated that under the Guidelines a defendant's criminal record \"can have a disproportionate and excessively severe cumulative sentencing impact on certain drug offenders.\" It explained that the Guidelines are construed to ensure that the sentence they recommend in a given case calls for a term of imprisonment that is not less than an applicable mandatory minimum. In addition, the drug offenses have escalated mandatory minimums for repeat offenders. Moreover, similarly situated drug offenders may be treated differently, because states punish simple drug possession differently and prosecutors decide when to press recidivism qualifications differently.\nThe Lee and Labrador bills ( S. 502 \/ H.R. 920 ) would expand safety valve eligibility from defendants with no more than 1 criminal history point to those with no more than 3 points. S. 1410 , as voted out of the Senate Judiciary Committee during the last Congress, would have expanded safety valve eligibility from defendants with no more than 1 criminal history point to those with no more than 2 points, if they avoided certain disqualifications. A defendant would have been ineligible for the expanded 2-point criminal history safety valve threshold if he had a prior conviction for a federal firearms offense, sex offense, crime of terrorism, RICO predicate offense, or conspiracy to use or invest drug profits. The current proposals have no such limitation.\n\n\t\tCocaine Sentencing\n\nOriginally, the Controlled Substances Act made no distinction between powder cocaine and crack cocaine (cocaine base). The 1986 Anti-Drug Abuse Act introduced a 100-1 sentencing ratio between the two, so that trafficking in 50 grams of crack cocaine carried the same penalties as trafficking in 5,000 grams of powder cocaine. The 2010 Fair Sentencing Act replaced it with the present 500-28 ratio, so that trafficking in 280 grams of crack cocaine carries the same penalties as 5,000 grams of powder cocaine. It also abolished the mandatory minimum for simple crack cocaine possession that the 1988 Anti-Drug Abuse Act had established. The Sentencing Commission subsequently revised the Sentencing Guidelines to reflect the change, and made the modification retroactively applicable at the discretion of the sentencing court.\nH.R. 1255 (Representative Scott (VA)) would eliminate the sentencing distinction between powder and crack cocaine by eliminating the cocaine base specific references. Trafficking in cocaine would carry the same penalties regardless of whether the substance was powder or crack cocaine.\n\n\t\t\tFair Sentencing Retroactivity\n\nThe Fair Sentencing Act reductions apply to cocaine offenses committed thereafter. They also apply to offenses committed beforehand when sentencing occurs after the time of enactment. Federal courts have discretion to reduce a sentence imposed under a Sentencing Guideline that was subsequently substantially reduced. The Fair Sentencing Act (FSA), however, does not apply to sentences imposed prior to its enactment, and it does not apply in sentence reduction hearings triggered by new Sentencing Guidelines. In such proceedings, the courts remain bound by the mandatory minimums in effect prior to enactment of the FSA. \nS. 502 (Senator Lee) and H.R. 920 (Representative Labrador) would allow a court to reduce a previously imposed sentence for crack cocaine possession or trafficking, consistent with the FSA, on its own or at the behest of the defendant, prosecutor, or Bureau of Prisons. They would also permit a court to reduce such sentences, but would have limited the authority to instances in which the defendant had not been previously granted or denied a similar reduction. The Judiciary Committee's version of S. 1410 (113 th Cong.) contained identical provisions.\n\n\t\t\tSentencing Guideline Reconciliation\n\nS. 502 and H.R. 920 would direct the U.S. Sentencing Commission to review and propose amendments to the federal Sentencing Guidelines in order to reflect the changes the bills call for and the changes the FSA introduced.\nThe Sentencing Reform Act created the Sentencing Commission and authorizes it to propose Sentencing Guidelines. It also authorizes the commission to periodically review and propose amendments to the Guidelines. Once considered binding, the Guidelines still substantially limit the sentences a federal court may impose. A court must correctly calculate the Guidelines' recommended sentencing range, and it must justify any deviation.\nThe bills would instruct the commission to conduct this reexamination with six factors in mind: \nthe need to minimize the risk that the federal prison population would exceed the system's capacity; the findings and recommendations of the Commission's report on mandatory minimum sentences; the fiscal implications of any changes to the Guidelines; relevant public safety concerns; congressional intent to maintain appropriately severe penalties for violent, repeat, and serious drug traffickers; and the need to reduce and prevent racial sentencing disparities.\n\n\t\tMarijuana Sentencing\n\nThe Controlled Substances Act prohibits cultivation, distribution, possession with intent to distribute, and simple possession of marijuana. Those prohibitions carry with them mandatory minimum sentences when substantial amounts of marijuana are involved. Thus, cultivation, distribution, or possession with intent to distribute \" 1,000 kilograms [2,204.6 lbs.] or more of a mixture or substance containing a detectable amount of marihuana, or 1,000 or more marihuana plants regardless of weight\" is punishable by\n[A] term of imprisonment which may not be less than 10 years or more than life and if death or serious bodily injury results from the use of such substance shall be not less than 20 years or more than life ... If any person commits such a violation after a prior conviction for a felony drug offense has become final, such person shall be sentenced to a term of imprisonment which may not be less than 20 years and not more than life imprisonment and if death or serious bodily injury results from the use of such substance shall be sentenced to life imprisonment ... If any person commits a violation of this subparagraph ... after two or more prior convictions for a felony drug offense have become final, such person shall be sentenced to a mandatory term of life imprisonment without release and fined in accordance with the preceding sentence.\nIf the offense instead involves a lesser amount, that is, less than 1,000 kilograms, but \"100 kilograms (220.46 lbs.) or more of a mixture or substance containing a detectable amount of marihuana, or 100 or more marihuana plants regardless of weight,\" the offense is punishable by\n[A] term of imprisonment which may not be less than 5 years and not more than 40 years and if death or serious bodily injury results from the use of such substance shall be not less than 20 years or more than life ... If any person commits such a violation after a prior conviction for a felony drug offense has become final, such person shall be sentenced to a term of imprisonment which may not be less than 10 years and not more than life imprisonment and if death or serious bodily injury results from the use of such substance shall be sentenced to life imprisonment.... \nH.R. 1013 (Representative Polis) would eliminate mandatory minimum sentences for trafficking in marijuana by removing marijuana from the coverage of the Controlled Substances Act.\n\n\tAttorney General Reports\n\nS. 502 (Senator Lee) and H.R. 920 (Representative Labrador) would also direct the Attorney General to prepare two reports covering federal criminal statutes, generally both those that feature mandatory sentencing provisions and those that do not. The first would address the impact of the bill's provisions, including an indication of how the savings realized from the reduction in mandatory minimum sentences would be used to reduce prison overcrowding and to contribute to crime prevention.\nThe second would provide an inventory of federal criminal statutory and regulatory offenses. The report would be required to indicate the range of penalties that accompany each offense, the mens rea element for each offense, and the regularity with which each offense has been prosecuted. For the regulatory offenses, inventory and related information would have to be broken down on an agency-by-agency basis.\nThe same provisions appeared in S. 1410 as it was taken to the floor during the 113 th Congress.\n\n\tFirearms\n\nSection 924(c), in its current form, imposes one of several different minimum sentences when a firearm is used or possessed in furtherance of another federal crime of violence or drug trafficking. The mandatory minimums, imposed in addition to the sentence imposed for the underlying crime of violence or drug trafficking, vary, depending upon the circumstances:\nimprisonment for not less than five years, unless one of the higher mandatory minimums below applies; imprisonment for not less than seven years, if a firearm is brandished; imprisonment for not less than 10 years, if a firearm is discharged; imprisonment for not less than 10 years, if a firearm is a short-barreled rifle or shotgun or is a semi-automatic weapon; imprisonment for not less than 15 years, if the offense involves armor-piercing ammunition; imprisonment for not less than 25 years, if the offender has a prior conviction for violation of Section 924(c); imprisonment for not less than 30 years, if the firearm is a machine gun or destructive device or is equipped with a silencer; and imprisonment for life, if the offender has a prior conviction for violation of Section 924(c) and if the firearm is a machine gun or destructive device or is equipped with a silencer.\nH.R. 1254 (Representative Scott (VA)) would convert all of Section 924(c)'s mandatory minimum penalties to maximum penalties. Each of its not-less-than penalties would become not-more-than penalties. So, for example, possession of a shotgun in furtherance of a crime of violence or of drug trafficking would be punishable by imprisonment for not more than 10 years. Possession of a machine gun in furtherance of such an offense would be punishable by imprisonment for not more than 30 years.\nThe Scott bill would append in large measure the procedure used in Controlled Substance Act cases to establish the existence of a qualifying prior conviction, 21 U.S.C. 851. It would, however, drop the provision in Section 851 that affords the defendant the right to have the question presented to the grand jury in the case of serious enhancements. It would also abandon the provision that bars questioning the validity of remote convictions. H.R. 1254 is a twin of a proposal offered by Representative Scott in the 113 th Congress.\nS. 847 (Senator McCain) and H.R. 1588 (Representative McSally), in contrast, would enlarge the coverage of Section 924(c) by adding alien smuggling, 8 U.S.C. 1324(a), 1327, or 1328, to violent crimes and drug trafficking as predicate offenses which trigger Section 924(c)'s mandatory minimum sentences. Thus, for example, a defendant, in possession of a firearm in furtherance of alien smuggling, would be subject to imprisonment for not less than five years. The proposal has a number of antecedents in the 113 th Congress.\n\n\tSex Offenses\n\nThe Mann Act (travel or transportation for unlawful sexual purposes) and 18 U.S.C. 1591 (commercial sex trafficking) contain several provisions which outlaw sexual misconduct punishable by mandatory minimum sentences. A number of proposals would either clarify or expand the reach of those provisions.\n\n\t\tCommercial Sex Trafficking\n\n\t\t\tLiability of Patrons\n\nSection 1591 outlaws commercial sex trafficking. More precisely, it outlaws\nknowingly recruiting, enticing, harboring, transporting, providing, obtaining, or maintaining another individual knowing or with reckless disregard of the fact that the individual will be used to engage commercial sexual activity either as a child or by virtue of the use of fraud or coercion when the activity occurs in or affects interstate or foreign commerce, or occurs within the special maritime or territorial jurisdiction of the United States.\nIt outlaws separately profiting from such a venture.\nOffenders face the prospect of life imprisonment with a mandatory minimum term of not less than 15 years (not less than 10 years if the victim is between the ages of 14 and 18). The same penalties apply to anyone who attempts to violate the provisions of Section 1591.\nThere have been suggestions to expand Section 1591 to cover advertisers and to more explicitly cover the customers of a commercial sex trafficking scheme. At first glance, Section 1591 does not appear to cover the customers of a sex trafficking enterprise. Moreover, in the absence of a specific provision, mere customers ordinarily are not considered either co-conspirators or accessories before the fact in a prostitution ring. Nevertheless, the U.S. Court of Appeals found that the language of Section 1591(a) applied to the case of two customers caught in a law enforcement \"sting\" who attempted to purchase the services of what they believed were child prostitutes. \"The ordinary and natural meaning of 'obtains' and the other terms Congress selected in drafting \u00a71591 are broad enough to encompass the actions of both suppliers and purchasers of commercial sex acts,\" the court declared.\nS. 178 , H.R. 181 , and a number of other bills would explicitly confirm this construction by amending Section 1591(a) to read in part \"Whoever knowingly ... recruits, entices, harbors, transports, provides, obtains, maintains, or patronizes, or solicits by any means any person ...\" (language of the proposed amendment in italics).\n\n\t\t\tAge: Prosecutors' Burden\n\nThe same bills often amend the \"knowledge of age\" element in Section 1591(c) to reflect its clarifying amendment with respect to the customers of a commercial sex trafficking venture. The law now absolves the government of the obligation to prove that the defendant knew the victim was a child, if it can show that the defendant had an opportunity to \"observe\" the victim. The proposal would make it clear that the government would be equally absolved regardless of whether the defendant were a consumer or purveyor of a child's sexual commercial services, as long as it establishes that the defendant had an opportunity to observe the child: \"In a prosecution under subsection (a)(1) in which the defendant had a reasonable opportunity to observe the person so recruited, enticed, harbored, transported, provided, obtained, maintained, patronized, or solicited the Government need not prove that the defendant knew, or recklessly disregarded the fact , that the person had not attained the age of 18 years,\" 18 U.S.C. 1591(c) (language of the proposed amendment in italics).\n\n\t\t\tAdvertisers\n\nProposals to explicitly cover advertisers might also be seen as a matter of simply sharpening existing law. Anyone who aids and abets the commission of a federal crime by another merits the same punishment as the individual who actually commits the crime. Liability for aiding and abetting requires that a defendant embrace the crime of another and consciously do something to contribute to its success.\nOne of Section 1591's distinctive features is that its action elements\u2014recruiting, harboring, transporting, providing, obtaining\u2014are activities that might be associated with aiding and abetting the operation of a prostitution enterprise. Section 1591, read literally, does not outlaw operating a prostitution business; it outlaws the steps leading up to or associated with operating a prostitution business\u2014recruiting, harboring, transporting, etc. Strictly construed, advertising in aid of recruitment, harboring, transporting, or one of the other action elements might qualify as aiding and abetting a violation of Section 1591; advertising the availability of a prostitute might not.\nYet one court suggests that Section 1591 does outlaw operating a prostitution business, at least for purposes of aiding and abetting liability, and that by implication advertising might constitute aiding and abetting a violation of the section:\nPringler first argues that the evidence is insufficient to support his conviction for aiding and abetting the sex trafficking of a minor [in violation of Section 1591].... We disagree. The record is not devoid of evidence to support the jury's verdict and show Pringler's integral role in the criminal venture. Pringler took the money that Norman and B.L. earned from their prostitution and used some of it to pay for hotel rooms where the women met their patrons. Pringler bought the laptop Norman and B.L. used to advertise their services. He drove Norman and B.L. to \"outcall\" appointments, and he took photographs of Norman, which he had planned for use in advertisements.\nSome bills, H.R. 285 and S. 572 , for example, would amend Section 1591(a)(1) to outlaw knowingly advertising a person, knowing the victim would be used for prostitution. Proponents might suggest that \"advertising\" would seem to fit snugly within the litany of Section 1591's action elements.\nSection 1591 now requires the government to prove either that the defendant knew of the victim's underage or coerced status or recklessly disregarded it. The proposal would expose the trafficker and the profiteer to liability based on different levels of knowledge. The liability for advertising traffickers would require that they knew of or recklessly disregarded the victim's status. The liability for advertising profiteers would require that they knew of the victim's status.\nKnowledge is obviously a more demanding standard than reckless disregard, but the dividing line between the two is not always easily discerned, in part because of the doctrine of willful blindness. The doctrine describes the circumstances under which a jury may be instructed by the court that it may infer knowledge on the part of a defendant. Worded variously, the doctrine applies where evidence indicates that the defendant sought to avoid the guilty knowledge.\nSince the element is worded in the alternative\u2014knowing or in reckless disregard of the fact\u2014the courts have rarely distinguished the two. One interpretation comes from comparable wording in an immigration offense which outlaws transporting an alien knowing or acting in reckless disregard of the fact that the alien is in this country illegally: \"To act with reckless disregard of the fact means to be aware of but consciously and carelessly ignore facts and circumstances clearly indicating that the person transported was an alien who had entered or remained in the United States illegally.\" The courts refer to a similar unreasonable indifference standard when speaking of the veracity required for the issuance of a warrant.\n\n\t\tMann Act\n\nThe Mann Act criminalizes, among other things, (1) interstate or foreign transportation of a child for purposes of prostitution or other unlawful sexual purposes; (2) interstate or foreign travel for purposes of engaging in \"illicit sexual activity\" with a child; and (3) overseas travel of U.S. nationals followed by illicit sexual activities with a child.\nDefendants enjoy an affirmative defense in \"illicit sexual activity\" cases, if they can establish by a preponderance of the evidence that they reasonably believed that the victim was over 18 years of age.\nS. 178 , H.R. 181 , and other bills would limit the defense to cases where the defendant establishes the reasonableness of his belief by clear and convincing evidence. The difference between preponderance of the evidence and clear and convincing is the difference between more likely than not and highly probable. Many of these same proposals would amend the \"illicit sexual activity\" definition to include child pornography cases, with the result that interstate or foreign travel associated with the production of child pornography would be clear violations of the Mann Act's Section 2423(b)(interstate or foreign travel for purposes of such production), Section 2423(c)(foreign travel followed by such production), and Section 2423(d)(commercially facilitating such travel), each of which is punishable by imprisonment for not more than 30 years.","output":"A surprising number of federal crimes carry mandatory minimum terms of imprisonment; that is, they are punishably by imprisonment for a term of not less than some number of years. During the 114th Congress, Members have introduced a number of related proposals. Some would expand the scope of existing mandatory minimum sentencing provisions; others would contract their reach.\nThe most sweeping proposal is that of Representative Scott (VA) (H.R. 706) and Senator Paul (S. 353), which impacts mandatory minimum sentencing across the board, allowing federal courts to disregard statutory mandatory minimum sentencing requirements in order to avoid conflicts with general sentencing standards.\nOther proposals are more narrowly drawn, and speak to a particular class of crime. Representative Polis (H.R. 1013), for example, has suggested decriminalizing marijuana, thereby eliminating the mandatory minimum sentencing provisions now associated with marijuana.\nSeveral bills, including those offered by Senators Cornyn (S. 178), Feinstein (S. 140), and Kirk (S. 572), as well as those offered by Representatives Poe (H.R. 181, H.R. 296), Granger (H.R. 1201), and Wagner (H.R. 285), would clarify or expand the coverage of a number of federal sex trafficking offenses, in one way or another, thereby increasing the number of defendants facing mandatory minimum sentences.\nWhile proposals relating to sex trafficking would largely increase the number of mandatory minimum sentences imposed, most of the proposals relating to drug trafficking would have the opposite impact. Senator Lee's S. 502 and Representative Labrador's H.R. 920, for instance, would reduce the mandatory minimum sentences that accompany a number of drug trafficking offenses. The same bills would expand the so-called safety valve which allows a court to sentence certain low-level drug offenders below the otherwise applicable mandatory minimum sentence. Finally, Representative Scott's H.R. 1255 would eliminate the distinction between powder and crack cocaine, and as a consequence potentially reduce the number of defendants subject to the more severe drug trafficking mandatory minimums.\nFirearms legislation is more varied. Existing law imposes a series of mandatory minimum sentences when a firearm is associated with the commission of a crime of violence or drug trafficking (18 U.S.C. 924(c)). Representative Scott's H.R. 1254 would convert all of Section 924(c)'s mandatory minimums (not-less-than) to statutory maximums (not-more-than). Senator McCain's S. 847 and Representative McSally's H.R. 1588, on the other hand, would make Section 924(c)'s mandatory minimums available not only in cases involving crimes of violence or drug trafficking, but also those involving the smuggling of aliens.\nMany of the proposals in the 114th Congress built upon earlier offerings in the 113th Congress, as described in CRS Report R43296, Mandatory Minimum Sentencing Legislation in the 113th Congress, by [author name scrubbed]."}
{"id":"gao_NSIAD-96-170","pid":"gao_NSIAD-96-170_0","input":"\tBackground\n\nIn its October 1993 Bottom-Up Review of the nation\u2019s defense needs, DOD, among other things, judged that it is prudent to maintain the capability to fight and win two nearly simultaneous MRCs. In the review, DOD also determined the forces, enhancements to force capabilities, and funding necessary to execute this element of the national military strategy. Since the Bottom-Up Review, DOD has conducted various studies to examine the two-MRC requirement. In an August 1994 memorandum, the Chairman of the Joint Chiefs of Staff authorized DOD to conduct the Nimble Dancer exercise. The primary objective of the exercise was to assess the capability of the programmed Bottom-Up Review force to fight and win two nearly simultaneous MRCs during different time periods, and the secondary objective was to identify critical issues for further resolution or study. The Chairman\u2019s memorandum generally stated that the exercise would test the sufficiency of forces by examining various areas, such as lift, intelligence, and sustainment, and provide a forum for conducting sensitivity analyses.\nIn preparing to conduct Nimble Dancer, DOD developed terms of reference and a study plan. These documents, among other things, identified various analyses for testing the sensitivity of game assumptions. They also established specific measures of effectiveness to evaluate each scenario, such as the level of risk, days of battle, and specific territory lost or gained. According to DOD officials, the terms of reference and study plan were draft documents that were never finalized or formally approved as official guidance. Rather, these documents were used to generate discussion among the participants about the types of analyses that might be conducted. They stated that other than the Chairman\u2019s general memorandum, no official guidance governed the specific conduct of the war game.\nNimble Dancer, conducted from November 1994 to July 1995, consisted of baseline computer modeling, separate analyses on selected two-MRC topics, and seminars to discuss modeling and other analytical results. The computer modeling simulated force deployment and combat in various two-MRC scenarios involving a North Korean invasion of South Korea and an Iraqi invasion of Kuwait. According to DOD, this modeling assessed the scenarios in the years 1997, 2001, and 2005. Seminar participants were mid- and senior-level military officers and DOD civilians, including the Secretary of Defense, the Chairman of the Joint Chiefs of Staff, and the commanders of selected combatant commands. Since conducting Nimble Dancer, DOD has continued to analyze issues related to the two-MRC requirement.\nBased on Nimble Dancer, DOD concluded that the United States can fight and win two nearly simultaneous MRCs in the 1997 and 2001-2005 time frames, provided that the force enhancements anticipated in the Bottom-Up Review are completed as programmed and that national command authorities make timely decisions at the onset of the first MRC.In reaching this conclusion, DOD identified several issues that it deemed critical to ensuring the success of U.S. forces. In press statements and congressional hearings, the Secretary of Defense and the Chairman of the Joint Chiefs of Staff said that Nimble Dancer tested and validated basic Bottom-Up Review assumptions, and they characterized the war game as extensive, intensive, rigorous, and robust.\n\n\tNimble Dancer Promoted Interaction Within DOD and Identified Critical Issues\n\nNimble Dancer served as a means to promote interaction among DOD organizations and identify critical issues related to the two-MRC requirement. In Nimble Dancer, DOD included numerous modeling and analytical efforts that resulted in what officials described as an unprecedented sharing of data among participants. Officials told us these factors ensured a thorough discussion of the two-MRC scenario and related critical issues.\n\n\t\tGame Participants Included Experienced Officials From Key Organizations\n\nNimble Dancer participants represented many offices and levels within the defense community responsible for planning and executing the two-MRC requirement. For example, participants included representatives from the Office of the Secretary of Defense; the Joint Staff; unified commands; the Army, the Navy, the Air Force, and the Marine Corps; and defense agencies. Military officers from these organizations served as participants in the issues identification and senior officer phases of the war game. Participants from combatant commands included those with responsibilities for developing U.S. war plans for the MRCs addressed in Nimble Dancer. Additionally, the military\u2019s highest ranking military and civilian officials participated in the war game. For example, the Secretary of Defense and the Chairman of the Joint Chiefs of Staff were among the participants in the final phase of the war game. According to DOD officials, the war game provided for continuity in that approximately 60 percent of the officials who participated in the Nimble Dancer 1997 assessment also participated in the 2001 and 2005 assessments.\n\n\t\tCollaborative Modeling Efforts Described as Unprecedented\n\nAccording to DOD officials, Nimble Dancer promoted the sharing of model assumptions and data, which was unprecedented. Models used in the war game, among other things, examined the execution of the conflicts, conduct of deployment, use of airpower, impact of chemical weapons, and employment of theater ballistic missile defense. According to DOD officials, for the first time, the Navy, the Air Force, and the Army exchanged detailed data on each other\u2019s weapon systems for use in their respective service models. For example, the Navy, using data from both the Air Force (on fighters) and the Army (on helicopters), modeled a complete joint air campaign. In addition, DOD used contractors to perform modeling using Joint Staff inputs. For example, DOD contracted with BDM Federal, Inc., and the Johns Hopkins University Applied Physics Laboratory to perform modeling for chemical warfare and theater ballistic missile defense, respectively, because DOD believed their models could examine the issues in greater depth. BDM and Applied Physics Laboratory officials told us that they also shared information while performing their respective analyses.\n\n\t\tParticipants Say Critical Issues Were Identified\n\nAccording to Nimble Dancer participants, the war game served as a useful tool for identifying and discussing critical issues for fighting and winning two MRCs. Such issues included the sufficiency of strategic mobility, timeliness of national level decision-making, sufficiency of combat and support forces to meet desired conflict end mitigation of the impact of chemical and biological warfare, impact of extracting forces from peace operations, effectiveness of intelligence capabilities, availability of Bottom-Up Review force enhancements, planning to optimize the apportionment of forces and lift assets for two mitigation of the impact of mine warfare threats, and mitigation of the impact of ballistic missile threats.\nIn addition, Nimble Dancer led to follow-on Joint Staff studies of intelligence capabilities and the extraction of forces from peace operations. It should also be noted that DOD had previously identified some of these critical issues. For example, a DOD mobility study that preceded the conclusion of Nimble Dancer emphasized the importance of acquiring sufficient airlift and sealift assets and prepositioning equipment and supplies overseas.\n\n\tNimble Dancer Testing of Key Assumptions Was Limited\n\nDuring Nimble Dancer, DOD used many key assumptions in modeling the two MRCs that were identical or similar to assumptions in the May 1994 Defense Planning Guidance (DPG), which implemented the Bottom-Up Review. These assumptions were generally favorable; that is, they minimized risks to U.S. forces and objectives. DOD officials originally considered performing analyses to test the sensitivity of several key assumptions to more adverse circumstances. However, because of guidance to adhere to the DPG and other factors, certain sensitivity analyses were not done. Furthermore, in some cases, the scope of the analyses that were performed was limited. These limitations precluded DOD from analyzing the robustness of U.S. forces to execute the two-MRC strategy under more adverse circumstances. Furthermore, DOD lost the opportunity to identify additional critical issues that could have emerged.\nWe examined several key assumptions used in Nimble Dancer to determine the extent that they were derived from the DPG, were favorable, and were tested against more adverse circumstances. As discussed below, these assumptions involved national command authorities\u2019 decisions on mobilizing reserves and activating the Civil Reserve Air Fleet; separation time (that is, the time between conflicts); warning times before enemy attack; and the location of MRC end states (that is, the point where hostilities cease). We focused on a particular two-MRC scenario that DOD said created the greatest risks to U.S. forces and objectives. Information on other assumptions appears in appendix I.\n\n\t\tReserve Mobilization\n\nIn Nimble Dancer, DOD used DPG assumptions about the timing of the presidential selected reserve call-up authority and the partial mobilization authority. These assumptions appear favorable in that DOD assumed the national command authorities will decide very early in the scenario to mobilize reserves. According to the study plan, DOD considered performing sensitivity analyses on the mobilization of reserves to determine the timing and level that would be required to support two MRCs. However, as discussed later, DOD did not conduct these sensitivity analyses.\n\n\t\tActivation of the Civil Reserve Air Fleet\n\nIn Nimble Dancer, DOD used DPG assumptions on when the national command authorities will activate the Civil Reserve Air Fleet\u2014civilian aircraft that augment the military in wartime. These assumptions are again favorable because they assume that the national command authorities activate the fleet very early. According to the study plan, DOD considered conducting sensitivity analyses related to fleet activation to determine the timing and level that would be required to support two MRCs. These analyses would also have examined the economic impact of activation and the potential contribution of foreign airlines to move personnel. However, DOD did not conduct these sensitivity analyses.\nDOD officials cited a variety of reasons why they did not conduct certain sensitivity analyses. They stated that the Chairman requested that they adhere to the DPG as much as possible and to not use a worst-case scenario. The Chairman also requested that Nimble Dancer be completed by March 1995. Further, they said time and manpower constraints prevented them from doing all of the sensitivity analyses originally considered in the terms of reference and study plan and still generally meet the time frames set by the Chairman. For example, the Joint Staff requested modeling assistance from some DOD organizations that could not meet such requests due to competing work priorities. Finally, they said that if assumptions were deemed reasonable by most game participants, no sensitivity analysis was considered to be needed.\n\n\t\tAmount of Separation Time Between MRCs\n\nIn Nimble Dancer, DOD assumed a separation time between the beginning of the two MRCs similar to that in the DPG. According to some Nimble Dancer documents, this separation time between MRCs could be interpreted as advantageous. Combatant commands, specifically the Pacific Command and the Central Command, estimate different separation times.\nAccording to the terms of reference and study plan, DOD considered conducting sensitivity analyses to use combatant commands\u2019 views on separation time to determine whether U.S. forces could meet requirements using different assumptions. During Nimble Dancer, there were two analyses that varied separation time from the baseline\u2014one by U.S. Central Command representatives participating in the game and another by DOD\u2019s Office of Program Analysis and Evaluation. According to command and DOD officials, these analyses were conducted in a relatively short period of time and were not structured or intended to comprehensively examine the implications of shortening the separation time. The scope of these analyses did not include reexamining the allocation and flow of forces to the second MRC based on the different separation time and covered only a 1997 scenario. Furthermore, these analyses used different measures of effectiveness than the Nimble Dancer baseline scenario. In commenting on a draft of this report, DOD noted that the analyses provided insights concerning risk and other issues associated with the different separation times.\n\n\t\tAmount of Warning Time Before the Attack\n\nIn Nimble Dancer, DOD used assumptions similar to the DPG about warning times\u2014the number of days warning before the enemy attacks. These warning times are more favorable than those used by the combatant commands, which estimate significantly different warning times.\nAccording to the terms of reference, DOD considered performing sensitivity analyses on warning times. Representatives from two combatant commands\u2014U.S. Central Command and U.S. Forces Korea\u2014participating in the game performed analyses that included different warning times than the baseline scenario. According to command officials, these analyses were conducted in a relatively short period of time and were not structured or intended to comprehensively examine the warning time issue. The scope of these analyses covered individual MRC scenarios in the 1997 time frame and did not address a two-MRC situation or the 2001-2005 time frame. Furthermore, the Central Command analysis used different measures of effectiveness than DOD used in the Nimble Dancer baseline scenario.\n\n\t\tLocation of End States\n\nIn Nimble Dancer, DOD assumed end states (the point where hostilities cease in the MRCs) based on U.S. forces achieving certain objectives similar to those in the DPG and used by combatant commands. However, the Joint Staff and combatant commands differ on the geographic location where these end state objectives would be achieved.\nAs part of the different warning analyses previously described, U.S. Forces Korea and U.S. Central Command representatives participating in the game examined the implications of achieving more aggressive end states than used in the baseline scenario. According to command officials, their review of the implications of using more aggressive end states was done relatively quickly and was not structured or intended to be a comprehensive assessment. The scope of their analyses addressed individual MRC scenarios in 1997 and did not cover a two-MRC situation. The analyses also did not address the 2001-2005 time frame.\n\n\tDOD Did Not Fully Analyze the Impact of Some Critical Issues\n\nDuring Nimble Dancer, DOD did not fully analyze certain issues that it deemed critical to the success of fighting and winning two MRCs. For example, DOD\u2019s analyses on chemical warfare and the extraction of forces from peace operations were limited in scope and did not fully assess the impact of these issues on the MRCs. Furthermore, DOD\u2019s analysis of other critical issues, such as the sufficiency of support forces, effectiveness of intelligence capabilities, and the use of the Army National Guard enhanced brigades primarily consisted of discussions, and in some cases, DOD deferred detailed analysis to other studies. Because of its limited analysis, DOD lost opportunities to acquire additional information on the impact of some critical issues on U.S. capabilities. DOD relied on military judgment\u2014an integral part of any war game\u2014throughout Nimble Dancer. In those cases where modeling and other analytical results were not available, DOD based its conclusions exclusively on military judgment.\n\n\t\tChemical Warfare\n\nDOD identified chemical warfare as a critical issue, but it did not fully examine the issue during Nimble Dancer. In the game\u2019s 1997 baseline modeling, the Joint Staff modeled only a limited amount of chemical weapons. Because of the amount of chemical weapons used in the baseline scenario, some Nimble Dancer participants did not believe the scenario provided a realistic representation. DOD did not adjust the 1997 baseline to increase the volume of chemical attacks.\nDuring Nimble Dancer\u2019s 2001 and 2005 assessments, DOD excluded chemical weapons from the baseline modeling. Instead, DOD contracted with BDM Federal, Inc., to conduct a separate analysis on the use of chemical weapons in a specific individual MRC scenario. DOD officials said that BDM had a proprietary model that was superior to DOD models for simulating chemical warfare. BDM, as tasked by DOD, did not examine the impact of chemical weapons on some key factors that could affect the outcome of the conflict and did not perform sensitivity analyses on certain key assumptions. The BDM analysis also did not use certain measures of effectiveness established for Nimble Dancer. The Nimble Dancer terms of reference and study plan identified the number of days to halt the enemy advance, start the counterattack phase, and complete U.S. objectives as measures of effectiveness. However, in accordance with DOD tasking, BDM limited its analysis to the halt phase. Additionally, the final results of the separate BDM analysis became available at the second phase of the Nimble Dancer 2001-2005 war game. Thus, the results were unavailable to earlier participants.\n\n\t\tExtraction of Forces From Peace Operations\n\nIn Nimble Dancer, DOD identified the extraction of forces from peace operations as a critical issue, but its analysis of the issue has some limitations. In the 1997 scenario, DOD officials told us they identified the types of forces that might need to be extracted to fight the MRCs by taking a \u201csnapshot\u201d of forces engaged in peace operations as of August 1994. Although DOD identified potential shortages in certain types of units, they did not examine the impact of those shortages. In addition, they did not analyze any delays or lift requirements associated with extracting such forces from the peace operations and transporting them to the MRCs.\nDOD conducted a separate analysis to examine the issue of extracting forces from a peace operation in the 2001-2005 time frame. Specifically, DOD examined the impact of extracting 25,000 U.S. troops from Bosnia and redeploying them to a MRC. DOD\u2019s analysis, however, did not test the sensitivity of its assumption that sufficient strategic lift would be available. This is particularly critical because of the competing demands for lift between the peace operation and both MRCs. Additionally, DOD did not complete the separate analysis until the final phase of the war game. Thus, the results were unavailable to participants in the first two phases of the war game.\n\n\t\tSufficiency of Support Forces\n\nIn Nimble Dancer, DOD identified the availability of sufficient support forces as critical to the outcome of the conflict and determined that shortages could delay the start of the counterattack in the second MRC. However, DOD did not model or analyze in detail the sufficiency of combat support forces. For example, DOD did not examine actual requirements or the readiness or adequacy of support forces to meet those requirements. For the purpose of the baseline modeling, DOD assumed that support forces would accompany combat units when they deployed. While game participants acknowledged the shortages in support forces, the impact of these shortages on the conflict was not analyzed. Treatment of these issues was limited to identifying and discussing functional areas where shortages were anticipated, such as seaport operations, trucking, heavy construction engineering, and police work. DOD officials also discussed alternative ways to resolve support shortages, including increased allied\/host nation support and use of contractor support.\nIn-depth analysis was deferred to an ongoing Army study\u2014the Total Army Analysis\u2014a biennial process for determining support needs. This process identifies the numbers and types of units needed to support combat units in two MRCs and the personnel needed to fill these units. The Total Army Analysis, completed in January 1996, concluded that about 60,000 required positions are presently unfilled. DOD and the Army are continuing to examine options for meeting support force requirements.\nAn example of a key combat support function for which DOD did not perform any modeling or meaningful analysis involved the medical treatment of casualties. In Nimble Dancer, DOD assumed that medical support would be adequate to handle all U.S. casualties and postponed further examination pending the outcome of the Total Army Analysis and other ongoing studies within DOD, such as the update of the section 733 study. Although the study plan specified casualty rates as one measure of effectiveness, DOD did not analyze either U.S. or allied casualty rates in Nimble Dancer. Casualties greatly affect support requirements and the flow of forces into the theater. High casualty estimates translate into high support requirements (for example, consumables such as water, blood, and surgical supplies; lift assets for evacuating casualties out of theater; and engineers to assemble hospital structures in-theater).\n\n\t\tEffectiveness of Intelligence Capabilities\n\nBased on Nimble Dancer, DOD concluded that continued enhancements to intelligence capabilities (such as increased timeliness and interoperability and more systems such as the Joint Surveillance and Target Attack Radar System) were critical for U.S. forces to fight and win two MRCs. These enhancements are closely linked to precision-guided munitions because improved intelligence capabilities are required for effective targeting of these weapons. The services project that inventories of these precision-guided munitions will increase dramatically between the 1997 and 2001-2005 time frames.\nWhile DOD originally considered performing some sensitivity analyses during Nimble Dancer, it did not model or otherwise conduct in-depth analyses on intelligence capabilities. DOD officials said existing models were inadequate for such analyses and that they reached conclusions about intelligence by reviewing the earlier Intelligence Bottom-Up Review and applying the military judgment of Nimble Dancer participants. Some participants, including flag officers, were concerned about reaching such conclusions without detailed supporting analyses. DOD officials said that because they could not model certain intelligence capabilities, they deferred more in-depth analysis to a subsequent war game (known as Nimble Vision), which they plan to complete in the summer of 1996.\n\n\t\tArmy National Guard Enhanced Combat Brigades\n\nAccording to the Bottom-Up Review, 15 Army National Guard enhanced brigades are part of the Army\u2019s force structure needed to fulfill the two-MRC requirement. In Nimble Dancer, DOD identified these brigades as available to respond during two MRCs. These brigades were also included in the list of force enhancements that DOD deemed critical to the U.S. success in fighting and winning two MRCs. During Nimble Dancer, DOD officials discussed the brigades in seminar discussions. However, they did not perform any detailed analysis on how deploying the brigades would affect U.S. capability. Although DOD\u2019s baseline modeling of combat scenarios for 1997, 2001, and 2005 assumed that 15 brigades would be mobilized early in the first MRC and that 5 of the brigades would be ready to deploy within 90 days, none of the brigades actually deployed. They were, therefore, not part of the forces used in either MRC.\nAccording to DOD officials, Nimble Dancer did not conduct detailed analyses on enhanced brigades because the scenarios in the modeling did not involve adverse conditions, including the need for additional capability to counter high-intensity chemical attacks or to prosecute a more aggressive end state. Therefore, they assumed that 10 active Army divisions provided sufficient combat capability. During senior-level seminar discussions, Army and combatant command officials emphasized that enhanced brigades would be needed in two MRCs; however, opinions varied as to the number and type of brigades required and the capability of the brigades to meet the Bottom-Up Review\u2019s goal of being ready to deploy 90 days after call-up.\n\n\t\tDOD Relied Heavily and Sometimes Exclusively on Military Judgment During Nimble Dancer\n\nDOD relied heavily on the military judgment of seminar participants throughout Nimble Dancer. DOD officials told us that in reaching the overall conclusion that the war game tested and validated Bottom-Up Review assumptions and showed that U.S. forces can fight and win two MRCs, participants applied their judgment based on extensive military experience when assessing the implications of modeling and other analytical results. The use of military judgment in providing input to the war game models and in analyzing the output is a necessary part of any war game because models by themselves are not predictive.\nIn some cases where analytical results were not available, military judgment was the sole basis for reaching conclusions. For example, DOD officials told us that because current models used by the Joint Staff cannot simulate the impact of specific force enhancements, such as precision-guided munitions and upgrades in intelligence capabilities, they judged\u2014based on their collective experience\u2014these enhancements to be critical to the success of U.S. forces to respond to two MRCs. Also, as previously discussed, DOD deferred analyses of certain critical issues, such as sufficiency of support forces and intelligence capabilities. In these cases, Nimble Dancer participants relied solely on their military judgment to determine that potential vulnerabilities associated with these issues would not preclude U.S. forces from fighting and winning two MRCs. In commenting on a draft of our report, DOD stated that in assessing issues where modeling support is not sufficiently mature or timely, it is common to rely on the combined judgment of senior players to arrive at a conclusion.\n\n\tAgency Comments and Our Evaluation\n\nDOD provided written classified comments on the classified version of this report. We summarized their comments below. We also incorporated their comments in the report where appropriate.\nDOD disagreed with our finding that key assumptions used in Nimble Dancer were generally favorable and that DOD generally did not perform sensitivity analyses to test the impact of using more adverse assumptions.\nDOD stated that it based game scenarios and assumptions on the May 1994 DPG to provide a common reference point for game participants. DOD noted that it conducted considerable analyses and war game discussions on the assumptions to assess their impact on U.S. ability to fight and win two MRCs. These analyses and discussions, according to DOD, provided various insights, including potential risks associated with more adverse assumptions and the importance of timely national decision-making, and helped support recommendations for continuing programmed force enhancements. In its comments, DOD summarized the extent of analysis conducted on certain game assumptions.\nWe recognize that Nimble Dancer involved analyses and discussions of key assumptions, enabling game participants to gain insight into various aspects of the two-MRC requirement. Based on additional information provided by DOD, we modified the text to reflect the extent of DOD\u2019s analyses on the sensitivity of certain assumptions and our assessment of these analyses. We continue to believe that certain game assumptions were favorable because they set conditions that were mostly advantageous to U.S. forces, thereby minimizing risk. Based on DOD\u2019s public comments that the game involved rigorous and robust analyses, we expected that DOD performed considerable and varied sensitivity analyses to test the sensitivity of scenario assumptions. We agree that DOD examined the impact of adverse circumstances for some assumptions. However, we found that in some cases the scope of analysis was limited, such as focusing on individual MRCs rather than a two-MRC situation or covering only part of the Nimble Dancer time frame.\nDOD partially concurred with our finding that certain critical issues were not fully examined. DOD acknowledged that some issues were not analyzed exhaustively and were deferred to follow-on studies; however, it noted that considerable analysis was conducted during Nimble Dancer. DOD also stated that its leadership recognized that there would be practical limits to the scope of analysis within the time frames and resources available and fully considered these limitations in constructing and executing Nimble Dancer. Based on DOD\u2019s comments, we modified the text to clarify the extent of analysis provided on critical issues and our evaluation of this analysis. We continue to believe that Nimble Dancer did not fully examine certain critical issues to the level implied in DOD\u2019s public comments that the game involved rigorous and robust analyses.\nDOD also believed that we implied that the game relied too heavily on military judgment. We do not believe that the report gives this impression.\nRather, as reflected in the text, we recognize the role and value of military judgment in a game like Nimble Dancer. We did not reach a conclusion about the appropriateness of DOD\u2019s application of military judgment. Rather, we describe the circumstances in which such judgment was applied, including those instances where it was the sole basis for reaching conclusions.\n\n\tScope and Methodology\n\nTo review the methodology, assumptions, and results of Nimble Dancer, we interviewed knowledgeable officials at the Office of the Secretary of Defense; the Joint Chiefs of Staff; the Defense Intelligence Agency; the Central Intelligence Agency; the Army, the Air Force, the Navy, and the Marine Corps headquarters; and two defense contractors\u2014BDM Federal, Inc., and the Johns Hopkins University Applied Physics Laboratory. Our scope was limited to reviewing the Nimble Dancer war game. We did not attempt to independently assess the ability of U.S. forces to meet the Bottom-Up Review\u2019s two-MRC requirement.\nWe also interviewed or obtained written responses from officials at the U.S. Central Command, the U.S. Pacific Command, and U.S. Forces Korea to obtain information on their participation in Nimble Dancer and their views on its methodology, assumptions, and results.\nWe reviewed relevant documentation, including briefing slides and information papers prepared for Nimble Dancer discussion seminars, DOD and contractor analyses of selected two-MRC issues, and other pertinent documentation. DOD officials denied us access to specific supporting documentation on DOD\u2019s baseline modeling, and we therefore could not verify the specific nature and results of the modeling effort. DOD did not write an after-action report on Nimble Dancer to summarize its analyses or conclusions. Accordingly, we reviewed briefing slides summarizing the modeling effort. However, these slides lacked specific details such as information about the types and quantities of force enhancements used for the 2005 scenario.\nWe performed our review between August 1995 and March 1996 in accordance with generally accepted government auditing standards.\nWe are providing copies of this report to the Chairmen and Ranking Minority Members, Senate Committee on Armed Services, the Subcommittee on Defense, Senate Committee on Appropriations, and the Subcommittee on National Security, House Committee on Appropriations; the Secretaries of Defense, the Air Force, the Army, and the Navy; the Commandant of the Marine Corps; and the Director, Office of Management and Budget. We will also make copies available to others upon request.\nIf you have any questions concerning this report, please call me on (202) 512-3504. Major contributors to this report were Sharon Pickup, Stephen L. Caldwell, Marc Schwartz, and Vincent Truett.\n\nGAO Responses to Specific Questions From the House National Security Committee\n\nIn the letter requesting our review, the Committee asked 15 specific questions. Table I.1 provides information on those questions that we were able to address in an unclassified manner. The format of the questions has been changed to better match the table below.\nAssumed all U.S. active and reserve forces were 100 percent ready upon deployment (i.e., manned, trained, and equipped).\nAssumption appears favorable. Sensitivity analysis was considered by the Joint Staff but was not done.\nAssumed all units deployed as scheduled with no delays at ports or airfields.\nAssumption appears favorable. Sensitivity analysis was considered by the Joint Staff, but was not done.\nIn 1997 and 2001 scenarios, DOD assumed Bottom-Up Review force enhancements would be available as scheduled and in quantities programmed in 1996-2001 Future Years Defense Program. In 2005 scenario, assumed quantities as projected by military services.\nAvailability of force enhancements identified as a critical issue. Assumptions appear favorable. No sensitivity analysis done to examine impact if program schedule delays occur. Modeling adjusted to reflect quantities in 1997, 2001, and 2005. Modeling results reflect aggregate contributions of precision-guided munitions and accelerated force flow due to additional prepositioning and lift. Model unable to isolate impact of individual force enhancements. We were unable to verify enhancement types and quantities because DOD officials denied us data.\nCasualty rates were not analyzed.\nDOD originally identified casualties as a measure of effectiveness but decided not to use this measure.\nBaseline modeling included limited use of chemical weapons.\nMitigating the impact of chemical and biological warfare identified as a critical issue. Use of chemicals in baseline scenario for certain time frame considered unrealistic by some participants due to amount of chemicals used. No adjustments made to change amount. Baseline assumptions for another time frame were favorable because no chemicals were used. A separate analysis done by BDM Federal, Inc., had some limitations: used some favorable assumptions, did not examine certain factors, and used different measures of effectiveness than baseline.\nWhen chemical weapons were factored into scenario (i.e., 1997 baseline scenario and 2005 BDM analysis) DOD and BDM analyses assumed U.S. forces were prepared to operate in a contaminated environment. Allied nuclear, biological, and chemical readiness not addressed.\nMitigating the impact of chemical and biological warfare identified as a critical issue. Assumption appears favorable. No sensitivity analysis done. (continued)\nAssumed Bottom-Up Review force structure would be in place for 1997 and 2001-2005 scenarios. Assumed entire force would participate in the MRCs, except for the 15 National Guard enhanced brigades because circumstances not considered adverse enough for their use.\nForce participation consistent with the DPG. Combatant commands describe importance of enhanced brigades as a strategic reserve force. Modeling was not adjusted to account for redeployment of forces from peace operations. (See separate entry on peace operations.)\nUsed the 1996-2001 Future Years Defense Program for 1997 and 2001 scenarios. DOD stated service projections were used for the 2005 scenario.\nNo sensitivity analysis done to test impact if enhancements not available as planned. DOD officials denied us access to 2005 weapon system and weapon quantities.\nAssumed rapid decision-making by national command authorities.\nTimeliness of national decision-making identified as important. Assumptions are the same as DPG and appear favorable. Sensitivity analysis was considered by the Joint Staff, but was not done.\nAssumed rapid activation by national command authorities.\nTimeliness of national decision-making identified as a critical issue. Assumptions are the same as DPG and appear favorable. Sensitivity analysis was considered by the Joint Staff but was not done.\nAssumed there would be no access problems.\nAssumptions appear favorable. No sensitivity analysis done.\nNo use of nuclear weapons by U.S. or enemy forces.\nObjectives were to assess ability of programmed U.S. forces to fight and win two nearly simultaneous MRCs in 1997 and 2001-2005 time frames and to identify critical issues related to the two-MRC requirement.\nDOD used measures of effectiveness (risk; forward line of troops; and days to complete halt, buildup, and counterattack) in modeling results. DOD relied on military judgment throughout game. DOD concluded U.S. forces could fight and win two MRCs in 1997 and 2001-2005 time frames, stating that Nimble Dancer tested and validated basic Bottom-Up Review assumptions. DOD emphasized importance of continuing force enhancements and timely decision-making.\nEnd state conditions required U.S. forces to achieve certain objectives.\nEnd state conditions consistent with DPG. U.S. Central Command and U.S. Forces Korea did analyses using alternative end states. Per command officials, analyses were done quickly and not structured or intended to be comprehensive. Scope limited to individual MRCs in 1997 and did not address a two-MRC situation or 2001-2005 time frame.\nGame used more than 15 models. Key model to simulate war was TACWAR. Other models included FDE and MIDAS (for deployment), ITEM (maritime and air battle), THUNDER (air battle), and METRIC (chemical warfare). (continued)\nTACWAR models ground battle at operational level but cannot model intelligence capabilities, combat support forces, or maneuver warfare. FDE and MIDAS model intertheater force flow but cannot model intratheater transport. ITEM (Navy) models naval warfare and airpower but cannot model the ground battle. THUNDER (Air Force) models airpower and the ground battle but cannot model naval surface warfare or amphibious operations.\nNo single model can simulate everything. DOD recognizes limitations and has a joint model improvement program underway.\nModels alone are not predictive or conclusive. Seminar provided forum for discussing model results and critical issues.\nSeminar results were not documented in an after-action report. No format can provide a definitive assessment\u2014only fighting the war can.\nComplete sensitivity analyses done on sequence of MRCs. Limited sensitivity analyses on strategic warning, separation time between the MRCs, and war termination conditions (end states). Separate analyses done on chemical warfare and extracting forces from peace operations.\nDOD officials originally considered conducting several sensitivity analyses, but some were not done, and others had limited scope, making comparisons with the baseline difficult. (See separate entries on mobilization, Civil Reserve Air Fleet, strategic warning, separation time between the MRCs, war termination conditions, enemy use of weapons of mass destruction, and peace operations.)\nAssumed unambiguous warning times similar to those used in the DPG.\nU.S. Central Command and U.S. Forces Korea did analyses using different warning times. Per command officials, analyses were done quickly and not structured or intended to be comprehensive. Scope was limited\u2014only addressed individual MRCs in 1997. Central Command\u2019s analysis used different measures of effectiveness than the baseline.\nAssumed a separation time between the two MRCs that was consistent with the DPG.\nAssumption is consistent with the DPG and appears favorable. U.S. Central Command and DOD\u2019s Program Analysis and Evaluation office did analyses using different separation times. Per command and DOD officials, analyses were done relatively quickly and not structured or intended to be comprehensive. Scope of analysis was limited\u2014addressed 1997 only, did not reallocate force flows, and used different measures of effectiveness than the baseline.\nAssumed a series of flexible deterrent options.\nAssumptions used in war fighting and deployment models. Flexible deterrent options in 2001-2005 scenario were exercised earlier and were more aggressive than in 1997 scenario. (continued)\nBaseline modeling assumed support forces (combat support and combat service support) were sufficient to support combat forces.\nSufficiency of support forces identified as a critical issue. War modeling implicitly assumes support forces available. Identified possible shortages of types of units (e.g., engineers, port handlers, military police, transport). In-depth analysis deferred to Total Army Analysis 2003.\nBaseline 1997 and 2001-2005 scenarios assumed that peace operation forces would be extracted and redeployed to support MRCs when needed. The 1997 scenario used a \u201csnapshot\u201d in time (Aug. 18, 1994) to identify forces that might be needed in the MRCs but did not model the impact of extracting these forces.\nImpact of extracting forces from peace operations identified as a critical issue. Baseline assumptions appear favorable. Separate analysis done on impact of extracting and redeploying 25,000 forces from Bosnia peace operation to an MRC in the 2001-2005 time frame. No sensitivity analysis done on sufficiency of lift, nor was the impact on peace operations examined.\nChange in key assumptions (e.g., separation and warning times, timing of decision-making, enemy capabilities, and access to ports and bases) could affect risk, location of end states, and length of each MRC.\nLimited sensitivity analysis done on key assumptions.\nAssumptions based primarily on existing guidance and studies (DPG, Mobility Requirements Study Bottom-Up Review Update, Defense Intelligence Agency data).\nAssumptions appear generally favorable.\nParticipants disagreed on some key issues.\nWhen applicable, disagreements were resolved by using assumptions in the DPG. For issues not addressed by the DPG, the Joint Staff made the final decision after participants discussed the issues.\nAssumed there would be no access problems.\nNo sensitivity analysis done. Assumptions used in war modeling.\nThe first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent.\nU.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000  or by using fax number (301) 258-4066, or TDD (301) 413-0006.\nEach day, GAO issues a list of newly available reports and testimony.  To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone.  A recorded menu will provide information on how to obtain these lists.","output":"Why GAO Did This Study\n\nPursuant to a congressional request, GAO reviewed the the Department of Defense's (DOD) Nimble Dancer war game, a simulation designed to assess U.S. forces' ability to fight and win two nearly simultaneous major regional conflicts (MRC), focusing on whether the methodology, scope, and results were reasonable.\n\nWhat GAO Found\n\nGAO found that: (1) DOD statements that Nimble Dancer tested basic Bottom-Up Review assumptions through intensive and extensive war-gaming suggest a more rigorous level of analysis than occurred during the exercise; (2) Nimble Dancer was a useful forum for promoting interaction among DOD organizations and in identifying critical issues in fulfilling the two-MRC requirement; (3) however, Nimble Dancer used many of the same favorable assumptions contained in DOD guidance implementing the Bottom-Up Review; (4) although DOD originally considered examining the sensitivity of certain key assumptions, this type of analysis in some cases was not done, and in other cases its scope was limited; (5) furthermore, DOD did not fully examine the impact of certain critical issues; (6) for example, DOD's analyses of chemical warfare and the extraction of forces from peace operations were limited in scope and did not fully identify the impact of these issues on MRCs; (7) also, DOD deferred detailed analyses of the sufficiency of support forces and intelligence capabilities to other studies; (8) the limited sensitivity analysis of certain key assumptions and limited analysis of some critical issues precluded DOD from analyzing the robustness of the programmed Bottom-Up Review force to meet the two-MRC requirement under more adverse circumstances; (9) in addition, DOD lost opportunities to acquire additional information about the impact of specific critical issues on U.S. capabilities; (10) military judgment is an integral part of any DOD war game or analysis; (11) during Nimble Dancer, DOD relied on the professional military judgment of participants to reach its conclusions, especially where modeling and other analytical results were not available; and (12) all of these factors--favorable assumptions, limited sensitivity analysis, the lack of full analysis of certain critical issues, and heavy reliance on military judgment in some cases where analysis was lacking--should be considered in evaluating DOD's conclusions that Nimble Dancer tested and validated Bottom-Up Review assumptions."}
{"id":"crs_RS21892","pid":"crs_RS21892_0","input":"\tOrganizations Eligible for \u00c2\u00a7 501(c)(3) Status1\n\nNonprofit organizations that meet the criteria in Internal Revenue Code \u00c2\u00a7 501(c)(3) qualify to be exempt from the federal income tax. The organization may be formed as a corporation, trust, or unincorporated association. Organizations are formed under state law, and the specific requirements vary by state. In general, a state's secretary of state will be able to provide information on how to form an organization.\nIn order to be eligible for tax-exempt status, the organization must meet the requirements in IRC \u00c2\u00a7 501(c)(3). Section 501(c)(3) reads:\nCorporations, and any community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment), or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private shareholder or individual, no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation (except as otherwise provided in subsection (h)) , and which does not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office.\nThus, there are basically four requirements:\nThe organization must be operated and organized for at least one of the listed exempt purposes. This means that no more than an insubstantial amount of the organization's activities may be for nonexempt purposes, and the organization must serve a public, as opposed to private, interest. The organization's earnings may not be used to benefit any person having a personal and private interest in the organization's activities. No more than an insubstantial amount of the organization's activities may be lobbying. The organization may not participate in any political campaign activity.\nOrganizations that meet these qualifications must generally apply to the Internal Revenue Service (IRS) for recognition of their \u00c2\u00a7 501(c)(3) status. Some religious organizations, such as churches, do not have to seek recognition from the IRS of their tax-exempt status. Additionally, organizations, other than private foundations, with normally no more than $5,000 in annual gross receipts do not have to apply for recognition.\n\n\tWhen to File\n\nAn organization should try to file the application soon after its formation. If the application is filed within 27 months of the organization's formation, the exemption will generally be effective back to the date of formation. The IRS may grant an extension depending on the circumstances. If the organization does not file its application in a timely manner, it will generally not be treated as an exempt organization for the period between its formation and the postmark date on the application.\n\n\tFiling Requirements\n\nAn organization seeking \u00c2\u00a7 501(c)(3) status must file an application (Form 1023) that shows it meets the organizational and operational requirements. The application asks questions concerning a variety of areas related to the organization's activities. The organization's operations must be described and organizing documents, such as articles of incorporation or association, must be included. There are detailed questions about the compensation of and dealings with directors and highly-compensated employees, and the organization must complete financial statements. Additionally, the application must include the organization's Employer Identification Number (EIN), which may be obtained online or by telephone, and, if applicable, a power of attorney authorization, among other documents. The IRS may require additional information.\n\n\t\tUser Fee\n\nAs part of the application, organizations must pay a user fee. The fee is $300 for organizations with average annual gross receipts of not more than $10,000 and $750 for all other organizations. A new organization should use its expected average receipts to determine which fee is appropriate.\n\n\tPublic Charity v. Private Foundation\n\nOn the application, the organization will need to tell the IRS that it is either a public charity or a private foundation. In general, private foundations receive contributions from limited sources and do not directly provide charitable services. Due to fear of abuse, private foundations are subject to stricter regulation than public charities. An organization is a private foundation unless it shows the IRS that it meets the requirements to be a public charity. Some organizations, such as churches, schools, and hospitals, automatically qualify to be public charities. Other organizations will be classified as public charities if they can show the IRS that they receive substantial public support.\n\n\t\tAdvance Rulings\n\nAn advance ruling allows a new organization to be treated as a public charity even though it is unable to show the IRS that it receives sufficient public support. The intent is to allow an organization to have five years in which to develop operations to obtain the necessary level of support. An organization can request an advance ruling on Form 1023. The organization should be able to show that it reasonably expects to be publicly supported during the advance ruling period. If the IRS grants the request, the organization will be treated as a public charity for five years and then must prove to the IRS that it receives substantial public support for the treatment to continue.\n\n\tIRS Determination of \u00c2\u00a7 501(c)(3) Status\n\nApplications are sent to IRS Exempt Organization (EO) Determinations. EO Determinations determines whether the organization meets the exemption requirements by looking at the statutory language, IRS regulations, and such sources as IRS revenue rulings. EO Determinations may ask an organization for further information. Difficult cases, e.g., where there is no precedent or technical advice is needed, are referred to IRS Headquarters. An organization may request a referral to this office for an issue requiring technical advice.\nIf the IRS approves the application, a favorable determination letter is sent to the organization. As discussed above, if the application for \u00c2\u00a7 501(c)(3) status was filed in a timely manner, the exemption will generally be effective back to the date of the organization's formation. The exemption will not be effective back to formation if the IRS requires the organization to make changes in its structure or operations in order to receive the exemption or if the application was not timely filed. In both cases, the effective date of the exemption will be provided in the determination letter.\nOnce the exemption has been approved, the organization may generally continue to rely on its \u00c2\u00a7 501(c)(3) status unless there is a material change in the organization's purpose or activities that is inconsistent with the exemption requirements. Additionally, events outside of the organization's control may affect its status, including new laws, treaties, court decisions, or regulations.\n\n\t\tAdverse Determinations\n\nIf the IRS issues an adverse determination, then the organization may protest the decision to the IRS Appeals Office or, if appropriate, IRS Headquarters. Once the organization has exhausted its administrative appeals, it may, subject to numerous requirements, file an appeal in the federal courts.\n\n\tLength of Determination Process\n\nThe IRS expects to respond to an exemption application within four months of the application's receipt. In 2002, the IRS estimated the average review was 91 days. A common reason for delays is that the organization's application has incomplete information.\n\n\t\tExpedited Review\n\nThe IRS has internal procedures that allow for expedited review of an application when:\nan organization has a pending grant and the failure to secure the grant may have an adverse impact on the organization's ability to continue operations, an organization is intended to provide relief to disaster victims, the determination process was delayed due to the fault of the IRS, or EO Determinations management determines that expedited review is warranted for a situation not listed above.\nAn organization must request expedited review in its application. The management at EO Determinations decides whether the application will be given priority treatment.\nAn example of the IRS using an expedited review procedure occurred after September 11, 2001. On September 18, 2001, the IRS announced it would give priority treatment to applications of charities formed to respond to the events of September 11. The IRS estimated that the average review of these applications was seven days. The IRS also used the expedited review procedure after Hurricane Katrina for organizations seeking \u00c2\u00a7 501(c)(3) status to provide relief to the victims.","output":"Charities and other entities seeking tax-exempt status as \u00c2\u00a7 501(c)(3) organizations generally must apply to the Internal Revenue Service. This report provides an overview of the application process."}
{"id":"crs_RL34109","pid":"crs_RL34109_0","input":"T his report summarizes the federal civil remedies and criminal penalties that may be available for violations of the rights granted by the federal intellectual property laws: the Copyright Act of 1976, the Patent Act of 1952, the Trademark Act of 1946 (conventionally known as the Lanham Act), and the Economic Espionage Act of 1996.\n\n\tIntroduction\n\nIntellectual property (IP) law has four major branches, applicable to different types of subject matter: copyright (original artistic and literary works of authorship), patent (inventions of processes, machines, manufactures, and compositions of matter that are useful, new, and nonobvious), trademark (commercial symbols), and trade secret (confidential, commercially valuable business information). The source of federal copyright and patent law originates with the Copyright and Patent Clause of the U.S. Constitution, which authorizes Congress \"To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries.\" By contrast, the Commerce Clause provides the constitutional basis for federal trademark law and trade secret law.\nThe Copyright Act, Patent Act, and Lanham Act provide legal protection for intellectual property against unauthorized use, theft, and other violations of the rights granted by those statutes to the IP owner. The Copyright Act provides copyright owners with the exclusive right to control reproduction, distribution, public performance, and display of their copyrighted works. The Patent Act grants patent holders the right to exclude others from making, using, offering for sale, or selling their patented invention throughout the United States, or importing the invention into the United States. The Lanham Act allows sellers and producers of goods and services to prevent a competitor from\n(1) using any counterfeit, copy, or imitation of their trademarks (that have been registered with the U.S. Patent and Trademark Office), in connection with the sale of any goods or services in a way that is likely to cause confusion, mistake, or deception, or\n(2) using in commercial advertising any word, term, name, symbol, or device, or any false or misleading designation of origin or false or misleading description or representation of fact, which: (a) is likely to cause confusion, mistake, or deception as to affiliation, connection, or association, or as to origin, sponsorship, or approval, of his or her goods, services, or commercial activities by another person, or (b) misrepresents the nature, characteristics, qualities, or geographic origin of his or her or another person's goods, services, or commercial activities.\nIn addition, the Lanham Act grants to owners of \"famous\" trademarks the right to seek injunctive relief against another person's use in commerce of a mark or trade name if such use causes dilution by blurring or tarnishment of the distinctive quality of the famous trademark.\nAn alternative to patent law protection may be found in trade secret law, which grants inventors proprietary rights to particular technologies, processes, designs, or formula that may not be able to satisfy the rigorous statutory standards for patentability. Until 1996, trade secret protection was primarily governed by state law. Congress enacted the federal Economic Espionage Act of 1996 to provide criminal penalties (and authorize the Attorney General to seek injunctive relief) for the theft of trade secrets by domestic and foreign entities, in certain circumstances. The Defend Trade Secrets Act of 2016 amended the Economic Espionage Act to provide private parties with a federal civil remedy for trade secret misappropriation.\nEnforcement of IP rights may be accomplished by the IP owner bringing a lawsuit against an alleged infringer. The U.S. Department of Justice may also criminally prosecute particularly egregious violators of the IP laws in order to impose greater punishment and possibly deter other would-be violators. In certain circumstances, a variety of federal agencies may become involved in IP rights enforcement: for example, the U.S. Customs and Border Protection agency has the power to seize counterfeit goods upon their attempted importation in the United States; the International Trade Commission may investigate and adjudicate allegations of unfair trade practices due to the importing of goods that were produced as a result of trade secret theft or that infringe U.S. patents, trademarks, or copyrights; and the U.S. Trade Representative, the U.S. Department of Commerce's International Trade Administration, and the U.S. State Department are all involved in promoting and seeking IP rights enforcement by trading partners and other foreign countries.\nIn copyright cases, the statute of limitations for initiating a civil action is within three years after the claim accrued, while a criminal proceeding must be commenced within five years after the cause of action arose. Although there is no express federal statute of limitations for civil trademark infringement claims, federal courts generally follow the limitations period for the most analogous state-law cause of action from the state in which the claim is heard; courts have also applied the equitable doctrine of laches (unreasonable, prejudicial delay in commencing a lawsuit) to determine whether a trademark infringement claim is untimely. One federal appellate court has determined that criminal trademark infringement prosecutions are governed by the general five-year statute of limitations for non-capital offenses under Title 18 of the U.S. Code. Although there is no statute of limitations in patent infringement actions, the Patent Act specifies a time limit on monetary relief for patent infringement claims: damages are available only for infringement that occurs within the six years prior to the filing of the complaint or counterclaim for patent infringement. Finally, federal law provides a three-year statute of limitations period for a civil action involving the misappropriation of a trade secret.\nThe Lanham Act, Copyright Act, and Economic Espionage Act have criminal and civil provisions for violations of their respective provisions, while the Patent Act only provides civil remedies in the event of patent infringement. Federal courts determine the civil remedies in an action for infringement brought by the IP owner. If the federal government chooses to prosecute individuals or organizations for IP violations, the imprisonment terms are set forth in the substantive statutes describing the particular IP crime, while the criminal fine amount for violations of the trademark and copyright laws is determined in conjunction with 18 U.S.C. Section 3571 (which specifies the amount of the fine under Title 18 of the U.S. Code). In comparison, the criminal fine amount for economic espionage or trade secret theft is specified in the Economic Espionage Act itself.\nInformation regarding the civil remedies and criminal penalties for violations of the copyright, trademark, patent, and trade secret laws is presented on the following pages in table-format. These penalties may be imposed upon conviction of the defendant in the case of a criminal prosecution, and the civil remedies follow a judgment of infringement reached by a federal judge or jury in a civil action. (Certain injunctive relief may be available prior to final judgment, such as temporary injunctions or impounding of infringing articles.) For any offense that provides forfeiture penalties, criminal forfeiture is available upon the conviction of the owner of the offending property; civil forfeiture is available if the government establishes that the infringing goods are subject to confiscation by a preponderance of the evidence. Restitution is available when the defendant is convicted of a criminal property offense.\n\n\tCivil Remedies\n\n\t\tCopyright\n\n\t\tTrademark\n\n\t\tPatent\n\n\t\tUnfair Competition\n\n\t\tTrade Secrets\n\n\tCriminal Penalties\n\n\t\tCopyright\n\n\t\tTrademark\n\n\t\tTrade Secrets\n\n.","output":"This report provides information describing the federal civil remedies and criminal penalties that may be available as a consequence of violations of the federal intellectual property laws: the Copyright Act of 1976, the Patent Act of 1952, the Trademark Act of 1946 (conventionally known as the Lanham Act), and the Economic Espionage Act of 1996. The report explains the remedies and penalties for the following intellectual property offenses:\n17 U.S.C. \u00a7501 (copyright infringement); 17 U.S.C. \u00a7506(a)(1)(A) and 18 U.S.C. \u00a72319(b) (criminal copyright infringement for profit); 17 U.S.C. \u00a7506(1)(B) and 18 U.S.C. \u00a72319(c) (criminal copyright infringement without a profit motive); 17 U.S.C. \u00a7506(a)(1)(c) and 18 U.S.C. \u00a72319(d) (pre-release distribution of a copyrighted work over a computer network); 17 U.S.C. \u00a71309 (infringement of a vessel hull or deck design); 17 U.S.C. \u00a71326 (falsely marking an unprotected vessel hull or deck design with a protected design notice); 17 U.S.C. \u00a7\u00a71203, 1204 (circumvention of copyright protection systems); 18 U.S.C. \u00a72319A (bootleg recordings of live musical performances); 18 U.S.C. \u00a72319B (unauthorized recording of films in movie theaters); 15 U.S.C. \u00a71114(1) (unauthorized use in commerce of a reproduction, counterfeit, or colorable imitation of a federally registered trademark); 15 U.S.C. \u00a71125(a) (trademark infringement due to false designation, origin, or sponsorship); 15 U.S.C. \u00a71125(c) (dilution of famous trademarks); 15 U.S.C. \u00a7\u00a71125(d) and 1129 (cybersquatting and cyberpiracy in connection with Internet domain names); 18 U.S.C. \u00a72318 (counterfeit\/illicit labels and counterfeit documentation and packaging for copyrighted works); 35 U.S.C. \u00a7271 (patent infringement); 35 U.S.C. \u00a7289 (infringement of a design patent); 35 U.S.C. \u00a7292 (false marking of patent-related information in connection with articles sold to the public); 28 U.S.C. \u00a71498 (unauthorized use of a patented invention by or for the United States, or copyright infringement by the United States); 19 U.S.C. \u00a71337 (unfair practices in import trade); 18 U.S.C. \u00a72320 (trafficking in counterfeit trademarks); 19 U.S.C. \u00a71526(e), 15 U.S.C. \u00a71124 (importing merchandise bearing counterfeit marks),18 U.S.C. \u00a72320(h) (transshipment and exportation of counterfeit goods); 18 U.S.C. \u00a71831 (trade secret theft to benefit a foreign entity); and 18 U.S.C. \u00a71832 (theft of trade secrets for commercial advantage)."}
{"id":"gao_T-HEHS-98-157","pid":"gao_T-HEHS-98-157_0","input":"\tBackground\n\nThe National Cemeteries Act of 1973 (P.L. 93-43) authorized NCS to bury eligible veterans and their family members in national cemeteries. Before 1973, all national cemeteries were operated under the authority of the Department of the Army. However, P.L. 93-43 shifted authority to VA for all national cemeteries except Arlington National Cemetery and the U.S. Soldiers\u2019 and Airmen\u2019s Home National Cemetery.\nNCS operates and maintains 115 national cemeteries located in 39 states and Puerto Rico. NCS offers veterans and their eligible family members the options of casket interment and interment of cremated remains in the ground (at most cemeteries) or in columbaria niches (at nine cemeteries). NCS determines the number and type of interment options available at each of its national cemeteries. The standard size of casket grave sites, the most common burial choice, is 5 feet by 10 feet, and the grave sites are prepared to accommodate two caskets stacked one on top of the other. A standard in-ground cremains site is 3 feet by 3 feet and can generally accommodate one or two urns. The standard columbarium niche used in national cemeteries is 10 inches wide, 15 inches high, and 20 inches deep. Niches are generally arrayed side by side, four units high, and can hold two or more urns, depending on urn size.\nIn addition to burying eligible veterans and their families, NCS manages the State Cemetery Grants Program, which provides aid to states in establishing, expanding, or improving state veterans\u2019 cemeteries. State veterans\u2019 cemeteries supplement the burial service provided by NCS. The cemeteries are operated and permanently maintained by the states. A State Cemetery grant may not exceed 50 percent of the total value of the land and the cost of improvements. The remaining amount must be contributed by the state. The State Cemetery Grants Program funded the establishment of 28 veterans\u2019 cemeteries, including 3 cemeteries currently under development, located in 21 states, Saipan, and Guam. The program has also provided grants to state veterans\u2019 cemeteries for expansion and improvement efforts.\n\n\tNCS Has Strategic Plan for Addressing Burial Demand, but Plans Beyond 2003 Are Unclear\n\nAs the veteran population ages, NCS projects the demand for burial benefits to increase. NCS has a strategic plan for addressing the demand for veterans\u2019 burials up to fiscal year 2003, but the plan does not address longer term burial needs\u2014that is, the demand for benefits during the expected peak years of veteran deaths, when pressure on the system will be greatest. Beyond the year 2003, NCS officials said they will continue using the basic strategies contained in the current 5-year plan.\n\n\t\tFive-Year Plan Has Multiple Strategies\n\nAccording to its 5-year strategic plan (1998-2003), one of NCS\u2019 primary goals is to ensure that burial in an open national or state veterans\u2019 cemetery is an available option for all eligible veterans and their family members. The plan sets forth three specific strategies for achieving this goal. First, NCS plans to build, when feasible, new national cemeteries. NCS is in various stages of establishing four new national cemeteries and projects that all will be operational by the year 2000.\nA second strategy for addressing the demand for veteran burials is through expansion of existing cemeteries. NCS plans to complete construction in order to make additional grave sites or columbaria available for burials at 24 national cemeteries. NCS also plans to acquire land needed for cemeteries to continue to provide service at 10 cemeteries.\nThird, NCS plans to encourage states to provide additional grave sites for veterans through participation in the State Cemetery Grants Program. According to the plan, NCS plans to increase the number of veterans served by a state veterans\u2019 cemetery by 35,000 per year beginning in fiscal year 1998. Also, NCS is in the early stages of developing information designed to assist states in the establishment of a state veterans\u2019 cemetery. veterans who will have access to a veterans\u2019 cemetery stop at the year 2003.\n\n\t\tNCS Plans to Address Burial Demand Beyond the Year 2003 Are Unclear\n\nAlthough NCS has a 5-year strategic plan for addressing the demand for veterans\u2019 burials during fiscal years 1998 through 2003, plans to address the demand beyond 2003 are unclear. For example, NCS\u2019 strategic plan does not articulate how NCS will mitigate the effects of the increasing demand for burial services. According to NCS\u2019 Chief of Planning, although its strategic plan does not address long-term burial needs, NCS is always looking for opportunities to acquire land to extend the service period of national cemeteries. Also, to help address long-range issues, NCS compiles key information, such as mortality rates, number of projected interments and cemetery closures, locations most in need of veterans\u2019 cemeteries, and cemetery-specific burial layout plans.\nIn addition, NCS officials pointed out that the Government Performance and Results Act of 1993 (the Results Act) requires a strategic plan to cover a 5-year period. However, the Results Act requires that an agency prepare a strategic plan that covers at least a 5-year period and allows an agency to articulate how it plans to address future goals. For example, the National Aeronautics and Space Administration\u2019s plan articulates a \u201cstrategic roadmap\u201d that outlines agencywide goals. This roadmap lists separate goals for near-, mid-, and long-term time periods over the next 25 years and beyond. The Environmental Protection Agency\u2019s plan also articulates goals that are not bound by the 5-year time period. For example, it includes an objective to reduce toxic air emissions by 75 percent in 2010 from 1993 levels. Although NCS projects annual interments to increase about 42 percent from 73,000 in 1995 to 104,000 in 2010, peaking at 107,000 in 2008, its strategic plan does not indicate how the agency will begin to position itself to handle this increase in demand for burial benefits. We believe that, given the magnitude of the projected increase in demand for burial benefits, NCS\u2019 strategic plan should discuss how its current strategies will be adjusted to address the demand during the peak years of veterans\u2019 deaths. through the State Cemetery Grants Program. According to NCS\u2019 Chief of Planning, NCS will encourage states to locate cemeteries in areas where it does not plan to operate and maintain national cemeteries. Since the State Cemetery Grants Program\u2019s inception in 1978, fewer than half of the states have established veterans\u2019 cemeteries, primarily because, according to NCS officials, states must provide up to half of the funds needed to establish, expand, or improve a cemetery as well as pay for all equipment and annual operating costs. Furthermore, the Director of the State Cemetery Grants Program told us that few states, especially those with large veteran populations, have shown interest in legislation that VA proposed in its 1998 and 1999 budget submission in order to increase state participation. This proposed legislation would increase the federal share of construction costs from 50 to 100 percent and permit federal funding for up to 100 percent of initial equipment costs. In fact, according to the Director, state veterans\u2019 affairs officials said they would rather have funding for operating costs than for construction.\nNCS officials told us they will continue to evaluate locations for additional national cemeteries in the future, based on demographic needs. However, according to NCS officials, VA currently has no plans to request construction funds for more than the four new cemeteries, which will be completed by the year 2000. Officials said that even with the new cemeteries, interment in a national or state veterans\u2019 cemetery will not be \u201creadily accessible\u201d to all eligible veterans and their family members. According to NCS officials, the majority of areas not served will be major metropolitan areas with high concentrations of veterans, such as Atlanta, Georgia; Detroit, Michigan; and Miami, Florida.\n\n\tColumbarium Option Offers Opportunity for Extending Service Period of Existing Cemeteries\n\nthe average columbarium interment cost would be about $280, compared with about $345 for in-ground cremains burial and about $655 for casket burial. Our analysis also showed that the service delivery period would be extended the most using columbarium interment. For example, using columbarium interment in a total of 1 acre of land could extend the service delivery period by about 50 years, while in-ground cremains interment would extend the service period about 3 years and casket burials about half a year.\nWhile historical data imply that the majority of veterans and eligible dependents prefer a casket burial, NCS national data show that the demand for cremation at national cemeteries is increasing. For example, veterans choosing cremation increased about 50 percent between 1990 and 1996, and NCS officials expect demand for cremation to continue to increase in the future. The incidence of cremation also continues to increase in the general population. The Cremation Association of North America projects that cremation will account for about 40 percent of all burials by 2010.\n\n\tConclusion\n\ndesigned to increase state participation by increasing the share of federal funding. Therefore, NCS needs to rely more on extending the service periods of its existing cemeteries. Columbaria can more efficiently utilize available cemetery land at a lower average interment cost than the other interment options and can also extend the service period of existing national cemeteries. Using columbaria also adds to veterans\u2019 choice of services and recognizes current burial trends. While we recognize that cremation may not be the preferred interment option for many veterans, identifying veterans\u2019 burial preferences, as NCS plans to do, would enable it to better manage limited cemetery resources and more efficiently meet veterans\u2019 burial needs.\nMr. Chairman, this concludes my prepared statement. I will be glad to answer any questions you or Members of the Subcommittee may have.\nThe first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent.\nU.S. General Accounting Office P.O. Box 37050 Washington, DC  20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000  or by using fax number (202) 512-6061, or TDD (202) 512-2537.\nEach day, GAO issues a list of newly available reports and testimony.  To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone.  A recorded menu will provide information on how to obtain these lists.","output":"Why GAO Did This Study\n\nGAO discussed the National Cemetery System's (NCS) plans to accommodate the increasing demand for burial benefits and what it can do to extend the service period of existing cemeteries.\n\nWhat GAO Found\n\nGAO noted that: (1) NCS has adopted a 5-year strategic plan for fiscal years 1998 through 2003 with the goal of ensuring that burial in a national or state veterans' cemetery is an available option for all veterans and their eligible family members; (2) strategies outlined in NCS' plan include: (a) building new national cemeteries; (b) expanding existing cemeteries; and (c) encouraging states to provide additional burial sites through participation in the State Cemetery Grants Program; (3) however, it is unclear how NCS will address the veterans' burial demand during the peak years, when pressure on it will be greatest, since NCS' strategic plan does not indicate how it will begin to position itself to handle the increasing demand for burial benefits; (4) NCS officials stated that beyond 2003, NCS will continue using the basic strategies contained in its current 5-year plan; (5) for example, NCS plans to encourage states to establish veterans' cemeteries in areas where it does not plan to operate national cemeteries; (6) however, since the grant program's inception in 1978, fewer than half of the states have established veterans' cemeteries; (7) states have also shown limited interest in a legislative proposal designed to increase state participation by increasing the share of federal funding; (8) given the magnitude of the projected increase in demand for burial benefits, GAO continues to believe that it is important for NCS to articulate to Congress and other stakeholders how it plans to address the increasing demand; (9) as annual interments increase, cemeteries reach their burial capacity, thus increasing the importance of making the most efficient use of available cemetery space; (10) to identify feasible approaches to extending the service period of existing cemeteries, GAO analyzed the impact of adding burial sites to an acre of land in an existing cemetery; (11) GAO's analysis of three interment options showed that columbaria offered the most efficient option because they would involve the lowest average interment cost and would significantly extend a cemetery's service period; and (12) morever, while the majority of veterans and eligible family members prefer a casket burial, cremation is an acceptable interment option for many, and the demand for cremation, which varies by region, continues to increase."}
{"id":"crs_R41897","pid":"crs_R41897_0","input":"An issue for Congress and state and local governments is whether the pay and benefits of public workers are comparable to those of workers in the private sector. The effect of the recession that officially began in December 2007 and ended in June 2009 on government budgets increased the interest of policy makers in the compensation of public sector employees. According to the Congressional Budget Office (CBO), the federal deficit has fallen since FY2009. But, CBO projects that the deficit for FY2014 will be $514 billion. Several state and local governments also face budget shortfalls. Among the ways to reduce budget deficits, policy makers are considering the pay and benefits of public sector employees. \nThis report begins with an analysis of the trends in employment in the private and public sectors. The public sector is separated into employees of the federal government, state governments, and local governments. Next, the report analyzes selected characteristics of private and public sector workers. These characteristics are often used in comparisons of the compensation of different workers. The report does not compare the actual pay or benefits of private and public sector workers or compare the characteristics of workers to try to explain any differences in the pay or benefits of private and public sector workers. \n\n\tTrends in Private and Public Sector Employment\n\nThe first part of this report examines the trends in employment in the private and public sectors in the United States. The data are from the Current Employment Statistics (CES) survey, which is an employer survey conducted by the Bureau of Labor Statistics (BLS). Employment includes all full-time and part-time workers of any age. Data are for 1955 to 2013. The beginning year of 1955 is used because that is the first year that the CES survey provides data on the number of employees by level of government (i.e., federal, state, and local governments). In the CES, federal employment includes civilian employees only; the military is not included. \nThe number of people employed in both the private and public sectors has increased steadily as the U.S. economy has grown. From 1955 to 2013, employment in the private sector increased by 70.8 million jobs (from 43.7 million to 114.5 million), while employment in the public sector grew by 14.8 million jobs (from 7.0 million to 21.9 million after rounding). (See Figure 1 .)\nFrom 2007 to 2010\u2014during and after the 2007-2009 recession\u2014private sector employment fell by an estimated 7.9 million jobs, while public sector employment increased by almost 272,000 jobs. Conversely, from 2010 to 2013, private sector employment grew by approximately 6.7 million jobs, while public sector employment fell by an estimated 626,000 jobs. \nThe period from 1955 to 2013 shows that, until 1975, public employment increased as a share of total employment, but has fallen since. In 1955, public sector employment accounted for 13.8% of total employment. This percentage increased to 19.2% in 1975, and then fell to 15.7% in 1999. From 1999 to 2010, public sector employment increased from 15.7% to 17.3% of total employment. Reflecting the effects of the 2007-2009 recession on the budgets of state and local governments, from 2010 to 2013 public sector employment fell from 17.3% to 16.0% of total employment. (See Figure 2 .)\nFrom 1955 to 2013, the growth in public sector employment occurred mainly among local governments. At the local level, employment rose by an estimated 10.5 million jobs (from 3.6 million to 14.1 million). Employment at the state level rose by about 3.9 million jobs (from 1.2 million to 5.0 million after rounding). Employment in the federal government (including the Postal Service) grew by approximately 471,000 jobs (from 2.3 million to 2.8 million). (See Figure 3 .) \nSince the end of the 2007-2009 recession, public sector employment has fallen. In 2013, local governments had 521,000 fewer jobs than in 2008. State governments had 129,000 fewer jobs than in 2008. In 2013, there were approximately 211,000 fewer federal jobs than in 2010. \nThe share of total employment accounted for by local governments peaked at 11.4% in 1975. This percentage fell through the late 1980s and then rose to 11.1% in 2009. From 2009 to 2013, the share of total employment at the local level fell from 11.1% to 10.3%. (See Figure 3 .)\nThe share of total employment accounted for by state governments also peaked in 1975, at 4.1%. By 2013, this percentage had fallen to 3.7%. \nIncluding the Postal Service, in 2013 the federal government employed an estimated 471,000 more workers than in 1955 (an increase from 2.3 million to 2.8 million). (See Figure 3 .) Nevertheless, from 1955 to 2013, federal employment as a share of total employment fell from 4.5% to 2.0% (a decline of 2.5 percentage points). (See Figure 4 .)\n\n\t\tThe Number and Percent of Workers Covered by a Collective Bargaining Agreement\n\nSome workers who are represented by a union are dues-paying members of the union. Other workers may be represented by a union but pay reduced, or no, dues. A worker who is covered by a union contract but does not pay dues may work in a right-to-work state, where workers are not required to provide financial support to a union. Federal workers who are covered by a union contract are not required to pay dues. Some state and local government employees who are covered by a collective bargaining agreement are not required to pay dues. \nThe data in this section are for workers who are represented by a union (i.e., whether or not they pay dues). The data include all full-time and part-time wage and salary workers ages 16 and over. (The data on union coverage in the section titled \"Occupation\" later in this report are for wage and salary workers ages 18 to 64 who work full-time.) \nThe number of American workers covered by a collective bargaining agreement has declined since 1979. In 1979, an estimated 23.5 million workers were covered by a union contract. By 2013, this number had fallen to 16.0 million. In 2009, for the first time, a majority of workers covered by a collective bargaining agreement were employed in the public sector (8.7 million workers in the public sector, compared to 8.2 million private sector workers). By 2013, the situation had reversed; a slight majority of workers covered by a collective bargaining agreement were employed in the private sector (8.1 million private sector workers, compared to 7.9 million public sector workers). \nIn the public sector, most workers who are covered by a collective bargaining agreement are employed by local governments (59.0% in 2013). Another 27.2% of covered public sector workers are employed by state governments, 8.0% are employed by the federal government, and 5.8% are employed by the Postal Service. \n Figure 5 shows the percentage of private and public sector workers who are covered by a collective bargaining agreement. Because union coverage is higher in the Postal Service than in the rest of the federal government, data for the Postal Service and the rest of the federal government are shown separately. The data are for 1983 through 2013. The beginning year of 1983 is used because that is the year when the CPS began to collect monthly data on union coverage. \nThe number of workers covered by a collective bargaining agreement is greater in the private sector than in the public sector. However, the percentage of workers covered by a union contract is greater in the public sector. In 2013, 38.7% of all public wage and salary workers were covered by a collective bargaining agreement, compared to 7.5% of private sector wage and salary workers. Nevertheless, since 1983, the percentage of workers represented by a union has fallen in both the private and public sectors. In the private sector, union coverage fell from 18.5% to 7.5% of all wage and salary workers (a decline of 11.0 percentage points). In the public sector, union coverage fell from 45.5% to 38.7% of workers (a decline of 6.8 percentage points). \nIn the public sector, the largest decrease in union coverage has been in the Postal Service, where coverage fell from 83.5% of workers in 1983 to 67.2% of workers in 2013 (a decline of 16.3 percentage points). In the rest of the federal government, coverage fell from 29.4% to 22.4% (a decline of 7.0 percentage points). Coverage fell from 51.0% to 44.1% among employees of local governments (a decline of 6.9 percentage points after rounding) and from 35.9% to 33.8% among state government workers (a decline of 2.1 percentage points).\nUnion coverage can affect the relative pay of union and nonunion workers. Workers who are represented by a union generally receive higher wages and more or better benefits than workers who are not represented by a union. The percent of workers covered by a collective bargaining agreement is higher in the public sector than in the private sector. To the extent that public sector workers can bargain over pay and benefits, greater unionization in the public sector could raise the pay of public sector workers, compared to the pay of private sector workers. \nIn the federal government, most employees do not bargain over wages. Salaried employees generally receive an annual pay adjustment and a locality pay adjustment, effective each January. Federal employees who are paid by the hour usually receive pay adjustments equal to those received by salaried workers in the same locality. \nSome federal workers can bargain over wages. The Postal Reorganization Act of 1970 (P.L. 91-375) gave postal workers the right to bargain over wages and benefits (excluding retirement benefits). Air traffic controllers can bargain over wages because the Federal Aviation Administration (FAA) is required to recognize a union chosen by a majority of employees, but is allowed to develop its own pay system. The Tennessee Valley Authority (TVA) has a long-standing policy that allows employees to bargain over wages.\n\n\tIndividual, Occupational, and Employer Characteristics of Private and Public Sector Workers\n\nThe second part of this report examines selected characteristics that may affect the relative pay of private and public sector workers. These characteristics include age, gender, educational attainment, and the distribution of employees by occupation. The data are from the monthly Current Population Survey (CPS) and the Annual Social and Economic (ASEC) supplement to the CPS. The CPS is a household survey conducted by the U.S. Census Bureau for BLS. The monthly CPS does not include persons on active duty in the military. The ASEC supplement includes military personnel living in civilian households.\nThe analysis in this section covers the period from 1976 to 2013. The national unemployment rates in 1976 and 2013 were roughly comparable (7.7% and 7.4%, respectively). Unlike the analysis of union coverage in the first part of this report, which included all full-time and part-time workers ages 16 and over, the analysis in this section is of working-age adults only. These are workers between the ages of 18 and 64. Because a larger share of workers in the public sector than in the private sector work full-time (87.2% and 80.6%, respectively, in 2013), the analysis in this section is of full-time workers only. Full-time workers are persons who usually work 35 hours or more a week. In 2013, 81.6% of workers ages 18 to 64 were employed full-time. \n\n\t\tAge\n\nReflecting the aging of the U.S. labor force, workers in both the private and public sectors have become older. Nevertheless, employees in the public sector are older than private sector workers. In 2013, 51.7% of full-time public sector workers were between the ages of 45 and 64, compared to 42.4% of full-time private sector workers. (See Figure 6 .) \nFederal workers are older than employees of state and local governments. In 2013, 56.7% of federal workers were between the ages of 45 and 64, compared to 49.7% of state employees and 52.1% of employees of local governments. \nThe age gap between private and public sector workers increased from 1976 to 2001, but has fallen since. In 1976, 35.5% of public sector workers were between the ages of 45 and 64, compared to 33.8% of private sector workers (a gap of 1.6 percentage points after rounding). By 2001, the gap had increased to 14.3 points. In 2013, the gap had fallen to 9.3 points.\nOlder workers typically have more years of work experience than younger workers. Employees with more work experience generally earn more than workers with less experience. Thus, the age difference between private and public sector workers may indicate that public sector workers have more years of experience than private sector workers. In turn, a difference in work experience may be reflected in differences in earnings between private and public sector workers. \n\n\t\tGender\n\nReflecting the increased participation of women in the labor force, the share of jobs held by women has increased in both the private and public sectors. However, women hold a higher share of jobs in the public sector than in the private sector, and this difference has increased over time. (See Figure 7 . ) The higher share of jobs held by women in the public sector is due mainly to the higher share of jobs held by women in state and local governments. \nIn 2013, women held almost three-fifths of full-time jobs in state and local governments (57.7% for both state and local governments). By contrast, women held approximately two-fifths of full-time jobs in the federal government and in the private sector (42.2% and 41.7%, respectively). \nThe largest increase in the share of jobs held by women has been in state governments. From 1976 to 2013, the share of state jobs held by women increased by 13.7 percentage points (from 44.0% to 57.7%). By contrast, over the same period, the share of jobs held by women in local governments increased by 8.8 points (from 48.9% to 57.7%), in the federal government by 10.7 points (from 31.5% to 42.2%), and in the private sector by 9.2 points (from 32.5% to 41.6% after rounding). \nThe effect of the increased employment of women on the difference in pay between private and public sector workers may be an empirical question. The share of jobs held by women in the public sector has increased more than the share of jobs held by women in the private sector. Although women, on average, earn less than men, the gap has narrowed. Evidence indicates that the pay gap between men and women is narrower in the public sector than in the private sector. \n\n\t\tEducation\n\nOn average, public sector employees have more years of education than private sector workers. In 2013, 53.6% of workers in the public sector had a bachelor's, advanced, or professional degree, compared to 34.9% of private sector workers. \nAmong public sector workers, state and local government employees are more likely than federal workers to have a bachelor's, advanced, or professional degree. In 2013, 57.9% of state workers and 53.5% of local government workers had at least a bachelor's degree, compared to 46.9% of federal workers.\nBeginning in 1992, the CPS changed the way educational attainment is coded. For years before 1992, the CPS reported the number of years of education that a person completed, whether or not they received a degree. In 1992, the CPS began to report whether a person received a degree. Therefore, data for the years 1992 and later are not completely comparable to earlier years. (See the discussion of \"CPS Values for Educational Attainment\" in the Appendix .) For private and public sector workers, the percentage point changes in educational attainment discussed in this section are the sum of the percentage point changes over two periods: 1976 to 1991, and 1992 to 2013. \nFor public sector workers, the CPS began to collect information on employment by level of government (i.e., federal, state, or local) in 1988. Accordingly, for federal, state, and local workers, the percentage point changes in educational attainment discussed in this section are the sum of the percentage point changes from 1988 to 1991 and 1992 to 2013.\nReflecting the general rise in years of education, educational attainment has improved among both private and public sector workers. Educational attainment has improved more in the private sector than in the public sector, however. From 1976 to 2013, the percentage of private sector workers with a bachelor's degree or better increased by 19.9 percentage points, compared to a 15.2-point increase for public workers. Among private sector workers, the largest gain was in the percentage of workers with a bachelor's degree (a gain of 13.2 percentage points for private sector workers, compared to a gain of 3.8 percentage points for public sector workers). (See Figure 10 .) By contrast, the largest gain among public sector workers was among workers with an advanced or professional degree (a gain of 11.4 percentage points for public sector workers, compared to a gain of 6.6 percentage points for private sector workers). (See Figure 10 .)\n Figure 10 shows changes in the level of educational attainment, from 1988 to 2013, for federal, state, and local government employees. The largest gains in educational attainment were among federal workers. The percentage of federal employees with a bachelor's, advanced, or professional degree increased by 17.0 percentage points, compared to a 13.7 point increase for employees of state governments and a 5.3 point increase for employees of local governments. The percentage of federal employees with a bachelor's degree increased by 6.4 percentage points, while the percentage with an advanced or professional degree increased by 10.6 points. \nWorkers with more education generally earn more than workers with less education. Other things being equal, the higher educational attainment of public sector workers, especially workers with an advanced or professional degree, likely affects the relative pay of private and public sector workers.\n\n\t\tOccupation\n\nThe CPS provides occupational data for both major and detailed occupations. A comparison of private and public sector employment using major occupational categories shows that there are private and public workers in all major occupations. An analysis of detailed occupations, however, shows that many occupations are concentrated in either the private or public sectors. \nContinuing with the methodology used in the second part of this report, the analysis in this section is of full-time workers who are between the ages of 18 and 64. Because self-employed workers are not covered by federal labor relations statutes, the analysis is of wage and salary workers only. (The analysis in the first part of this report of the number of workers covered by a collective bargaining agreement was for all full-time and part-time wage and salary workers ages 16 and over.)\n\n\t\t\tMajor Occupations\n\nTable 1 shows the distribution of employment in the private and public sectors by five broad occupational categories. These five categories are subdivided into 22 major occupations. The estimates are monthly averages for calendar year 2013. \nAll of the occupations in Table 1 are common to both the private and public sectors. However, in 2013, a larger share of public sector than private sector workers were employed in \"management, professional, and related occupations\" (56.2% of public sector workers, compared to 37.8% of private sector workers). In part, more public sector workers were employed in these occupations because 25.7% of all public sector workers were employed in \"education, training, and library\" occupations, compared to 2.3% of all private sector workers. Public sector employees in these occupations work mainly for state and local governments (25.5% of employees in state governments and 34.4% of employees in local governments). In general, the median weekly earnings of full-time workers employed in management, professional, and related occupations are higher than the earnings of workers in other occupations.\nA larger percentage of public sector than the private sector workers were employed in \"protective service\" occupations (11.8% and 0.7%, respectively). On the other hand, more workers in the private sector were employed in \"sales and related\" occupations (10.9% in the private sector and 0.8% in the public sector). Similarly, more workers in the private sector were employed in \"production\" occupations (7.9% in the private sector and 1.2% in the public sector).\n\n\t\t\tUnion Coverage by Major Occupation\n\n Table 1 also shows the percentage of private and public sector workers in each of 5 sectors and 22 major occupations who were covered by a collective bargaining agreement in 2013. In all major occupations for which data are available (21 of 22 occupations), union coverage was higher in the public sector than in the private sector.\nIn the private sector, 7.9% of all full-time employees were covered by a collective bargaining agreement. But, only 2.0% of employees in legal occupations and 2.4% of employees in management occupations were represented by a union. By contrast, 18.9% of workers in education, training, and library occupations; 18.6% of workers in construction and extraction occupations; 16.1% of workers in transportation and material moving occupations; 15.9% of workers in installation, maintenance, and repair occupations; and 14.5% of production workers were represented by a union. \nIn the public sector, 41.3% of full-time employees were covered by a collective bargaining agreement in 2013. Among employees in education, training, and library occupations, 56.5% were represented by a union, as were 52.6% of employees in protective service occupations. A majority of employees in the latter two occupations are employed by local governments. By contrast, 18.8% of public employees employed in legal occupations and 21.6% of employees in management occupations were represented by a union. (See Table A-1 .)\n\n\t\t\tDetailed Occupations\n\nBroad occupational categories may not fully distinguish between detailed occupations that are concentrated in either the private or public sectors. Many detailed occupations may require similar skills, however. The Appendix shows the top 100 occupations, by the number of persons employed full-time in the private sector and the top 100 occupations by the number of persons employed full-time in the public sector. In 2013, the top 100 occupations in the private sector accounted for 74.0% of total full-time employment in the sector. The top 100 occupations in the public sector accounted for 83.9% of full-time employment in the sector.\nPay comparisons between the private and public sectors that rely on broad occupational categories may not capture differences in detailed occupations. On the other hand, pay comparisons that use detailed occupations may be difficult if employment in the occupation is concentrated in either the private or public sectors. For example, in 2013, 12.7% of full-time jobs in the private sector and 8.1% of full-time jobs in the public sector were in management. (See Table 1 .) But, 94.8% of chief executives worked in the private sector. (See line 12 of Table A-2 .) Similarly, 99.1% of first-line supervisors of retail sales workers and 97.7% of first-line supervisors of nonretail sales workers were employed in the private sector. (See lines 1 and 5 of Table A-3 .) On the other hand, virtually all (100.0%) first-line supervisors of police officers and detectives were employed in the public sector. (See line 10 of Table A-4 .) \nOn average, chief executives likely earn more, and first-line supervisors probably earn less, than mid-level managers. Whether employed in the private or public sectors, management occupations may require similar skills.\nData by detailed occupation also show that union coverage is higher in the public sector than in the private sector. (For example, see Table A-2 and Table A-4 .)\n\n\t\tMetropolitan Area\n\n Figure 11 shows the percentage of private and public sector workers who live in metropolitan areas with populations of 1 million or more or with populations of 5 million or more. Persons who live in areas with populations of 5 million or more are included with persons who live in areas with populations of 1 million or more. The estimates are for a worker's place of residence at the time of the 2013 ASEC supplement survey.\nThe cost of living is generally higher in metropolitan than nonmetropolitan areas. Thus, earnings across areas may vary because of differences in the cost of living. In 2013, private and federal employees were as likely to live in metropolitan areas of 1 million or more (57.8% for private sector workers and 58.8% for federal workers). By contrast, state employees were less likely (39.3%) than private or federal workers to live in areas with 1 million people or more. \nHowever, private sector workers were more likely than federal workers to live in areas with 5 million or more people. In 2013, 20.5% of private sector workers lived in the largest metropolitan areas, compared to 12.9% of federal workers. On the other hand, employees of local governments were as likely (21.0%) as private sector workers to live in metropolitan areas of 5 million or more people. \n\n\t\t\tAppendix. Detailed Data and Description of Data Source and Methodology\n\nThis appendix provides detailed information on employment and union coverage by occupation in the private and public sectors. It also describes the survey data and methodology used in the report. \nTable A-1 shows the data used to calculate the percentages shown in Table 1 .\nTable A-2 , Table A-3 , and Table A-4 show the largest 100 occupations in 2013 in the private sector and the largest 100 occupations in the public sectors. The tables show the total number of persons employed, the number of workers employed in the private and public sectors, the percentage of total employment that was in the private sector, and the percentage of workers in the private and public sectors who were covered by a collective bargaining agreement.\nIn 2013, among the top 100 occupations in the private sector and the top 100 occupations in the public sector, 56 occupations were common to both sectors. These 56 occupations are shown in Table A-2 . The occupations are listed in descending order of the total number of workers employed. To illustrate, of the 2,941,000 workers employed as \"managers, all other,\" 2,503,000 were employed in the private sector and 438,000 were employed in the public sector. Of the total number of workers employed as \"managers, all other,\" 85.1% worked in the private sector. Of the 2,941,000 \"managers, all other\" employed in the private sector, 1.8% were covered by a collective bargaining agreement, while 19.1% of public sector workers in this occupation were represented by a union. \nConsidering those occupations where less than 90% were employed in either the private or public sectors, occupations that were common to both the private and public sectors include managers; elementary and middle school teachers; registered nurses; secretaries and administrative assistants; accountants and auditors; janitors and building cleaners; managers of office and administrative support workers; and general and operations managers. \nA disproportionate share of workers in some occupations common to both the private and public sectors were employed in only one sector. For example, for 21 of the 56 occupations in Table A-2 , at least 90.0% of workers were employed in the private sector. These occupations include cashiers; laborers and material movers; stock clerks and order fillers; drivers; customer service representatives; chief executives; maids and housekeeping cleaners; financial managers; automotive service technicians and mechanics; software developers; management analysts; cooks; receptionists and information clerks; electricians; and pipelayers, plumbers, pipefitters, and steamfitters.\nOn the other hand, large shares of workers employed in occupations common to both the private and public sector were employed in the public sector. These occupations include elementary and middle school teachers; postsecondary teachers; education administrators; social workers; counselors; and preschool and kindergarten teachers.\nTable A-3 shows the 44 occupations, among the top 100 occupations in the private sector, that were not present among the top 100 occupations in the public sector. These occupations are listed in descending order by the number of workers employed in the private sector. Of the workers employed in these 44 occupations, 97.6% worked in the private sector. These occupations were mainly in sales, food preparation and serving, construction, production, automotive service, real estate, farming, and the clergy. \nTable A-4 shows the 44 occupations, among the top 100 occupations in the public sector, that were not present among the top 100 private sector occupations. The occupations are listed in descending order by the number employed in the public sector. Of the workers employed in these 44 occupations, 62.2% worked in the public sector. These occupations were mainly in public safety (e.g., bailiffs, correctional officers, and jailers; police officers; fire fighters; probation officers and correctional treatment specialists; and detectives and criminal investigators); the Postal Service; education (e.g., special education, secondary school teachers, librarians, and teaching assistants) highway maintenance; eligibility interviewers for government programs; and legal occupations (e.g., court, municipal, and license clerks and legal support occupations).\nData and Methodology\nThis report analyzes data from the Current Employment Statistics (CES) survey and the Current Population Survey (CPS).\nThe CES is an employer survey conducted by the Bureau of Labor Statistics (BLS). The CES survey counts the number of persons on employer payrolls for any part of the pay period that includes the 12 th day of the month. Persons who are on the payroll of more than one establishment are counted in each establishment. Government employment includes civilian employees only; persons in the military are not included. Also excluded are employees of the Central Intelligence Agency, the National Security Agency, the National Imagery and Mapping Agency, and the Defense Intelligence Agency.\nThe CPS is a household survey conducted by the U.S. Census Bureau for BLS. The monthly CPS is the source of the national unemployment rate and other labor market information. The survey is representative of the civilian noninstitutional population. The sample does not include persons living in institutions (such as psychiatric hospitals, nursing homes, or correctional facilities). The monthly survey does not include individuals who are on active duty in the military. Approximately 55,500 households are interviewed each month. The data for occupations and union coverage ( Table 1 in the text and the tables in the Appendix ) are from the monthly CPS. Union coverage is for a worker's occupation at the time of the monthly CPS.\nEach year, the CPS conducts the Annual Social and Economic (ASEC) supplement to the monthly CPS. The sample for the ASEC supplement is representative of the civilian noninstitutional population of the United States. The sample for the supplement includes members of the Armed Forces living in civilian housing units on a military base or in a household not on a military base, provided that at least one civilian adult lives in the same household. The supplement does not ask active members of the Armed Forces the monthly CPS labor force questions. The supplement does not include persons living in military barracks. For the 2013 supplement, 75,500 households were interviewed.\nIn this report, data on the characteristics of private and public sector workers are from the ASEC supplement. Data for employment by level of government are for are a person's current job. \nThe data that are available to public users of the CPS may not be the same as the data available to BLS. In order to protect the confidentiality of persons in the survey, the Census Bureau modifies (or \"masks\") the age variable in the data available to public users. As a result, some estimates produced by public users of the CPS may not match estimates published by BLS.\nChanges in the Reporting of Educational Attainment in the Current Population Survey (CPS)\nIn 1992, the CPS changed the way educational attainment is recorded. Table A-5 shows the values for educational attainment for the years 1975 to 1991 and the values for 1992 to 2013. For 1976 to 1991, the CPS recorded the number of years of school that a person attended. Another variable recorded whether the person finished that year of school. Since 1992, the CPS has reported whether a person graduated from high school or college.\nBecause of the change in the way the CPS records educational attainment, estimates of the number of high school and college graduates for the years 1992 to 2013 are not comparable to estimates for earlier years. For the earlier period, persons who completed 12 years of high school may or may not have graduated from high school. Similarly, persons who finished 16 or more years of education may or may not have received a bachelor's, advanced, or professional degree. Because of the change in coding for educational attainment, changes in educational attainment discussed in this report are the sum of changes over two periods: the period to 1991 and the period since 1992.","output":"An issue for Congress and state and local governments is whether the pay and benefits of public workers are comparable to those of workers in the private sector. In addition, among the ways to reduce budget deficits, policy makers are considering the pay and benefits of public sector employees.\nThe number of people employed in both the private and public sectors has increased steadily as the U.S. economy has grown. However, after increasing to 19.2% of total employment in 1975, the percentage of all jobs that are in the public sector fell to 15.7% in 1999. In 2013, public sector jobs accounted for 16.0% of total employment.\nThe recession that officially began in December 2007 and ended in June 2009 affected employment in both the private and public sectors. From 2007 to 2010, the number of jobs in the private sector fell by an estimated 7.9 million, while the number of jobs in the public sector increased by almost 272,000. Conversely, from 2010 to 2013, private sector employment grew by approximately 6.7 million jobs, while public sector employment fell by about 626,000 jobs. Reflecting the effects of the 2007-2009 recession on the budgets of state and local governments, from 2010 to 2013, public sector employment as a share of total employment fell from 17.3% to 16.0%.\nAmong all full-time and part-time workers ages 16 and over, the number of workers covered by a collective bargaining agreement has fallen in both the private and public sectors. The decline has been greater in the private sector. In 2009, for the first time, a majority of workers who were covered by a collective bargaining agreement were employed in the public sector (8.7 million workers in the public sector, compared to 8.2 million private sector workers). By 2013, the situation had reversed; a slight majority of workers covered by a collective bargaining agreement were employed in the private sector (8.1 million private sector workers, compared to 7.9 million public sector workers). In the federal government, except for the Postal Service and some smaller agencies, employees do not bargain over wages.\nAmong workers ages 18 to 64 who work full-time, differences in characteristics that may affect the relative pay and benefits of private and public sector workers include the following:\nAge. Reflecting the aging of the U.S. labor force, workers in both the private and public sectors have become older. Nevertheless, employees in the public sector are older than private sector workers. In 2013, 51.7% of public sector workers were between the ages of 45 and 64, compared to 42.4% of full-time private sector workers. Federal workers are older than employees of state and local governments. In 2013, 56.7% of federal workers were between the ages of 45 and 64, compared to 49.7% of state employees and 52.1% of employees of local governments. Workers who have more years of work experience generally earn more than workers with less experience. Gender. Reflecting the increased participation of women in the labor force, the share of jobs held by women has increased in both the private and public sectors. In 2013, women held almost three-fifths (57.7%) of full-time jobs in state and local governments. By contrast, women held approximately two-fifths of full-time jobs in the federal government and in the private sector (42.2% and 41.7%, respectively). Education. On average, public sector employees have more years of education than private sector workers. In 2013, 53.6% of workers in the public sector had a bachelor's, advanced, or professional degree, compared to 34.9% of private sector workers. Generally, workers with more years of education earn more than workers with less years of education. Occupation. A larger share of public sector than private sector workers are employed in \"management, professional, and related occupations.\" In 2013, 56.2% of public sector workers and 37.8% of private sector workers were employed in these occupations. In part, more public sector workers were employed in these occupations because 25.7% of all public sector workers were employed in \"education, training, and library\" occupations, compared to 2.3% of all private sector workers. Workers in management and professional occupations generally earn more than workers in other occupations. However, comparisons of the compensation of private and public sector workers that use broad occupational categories may miss differences between detailed occupations. Many detailed occupations are concentrated in either the private or public sectors. Nevertheless, many detailed occupations may require similar skills. Union coverage. Although the number of workers covered by a collective bargaining agreement is greater in the private sector than in the public sector, the percentage of workers covered by a collective bargaining agreement is greater in the public sector than in the private sector. Metropolitan area. Private sector workers are more likely than federal workers to live in major metropolitan areas (i.e., areas with 5 million or more people)."}
{"id":"gao_GAO-13-345","pid":"gao_GAO-13-345_0","input":"\tBackground\n\nPEPFAR\u2019s original authorization in 2003 established the Office of the U.S.  Global AIDS Coordinator (OGAC) at the Department of State (State) and  gave OGAC primary responsibility for the oversight and coordination of all  resources and international activities of the U.S. government to combat  the HIV\/AIDS pandemic. OGAC also allocates appropriated funds to  PEPFAR implementing agencies, particularly CDC and USAID. CDC and  USAID obligate the majority of PEPFAR funds for HIV treatment, care,  and prevention activities through grants, cooperative agreements, and  contracts with selected implementing partners, such as U.S.-based  nongovernmental organizations (NGO) and partner-country governmental  entities and NGOs.\nThis includes the 33 countries and three regions that developed PEPFAR annual  operational plans for fiscal year 2012. The 33 countries were Angola, Botswana, Burundi,  Cambodia, Cameroon, China, C\u00f4te d\u2019Ivoire, Democratic Republic of the Congo,  Dominican Republic, Ethiopia, Ghana, Guyana, Haiti, India, Indonesia, Kenya, Lesotho,  Malawi, Mozambique, Namibia, Nigeria, Russia, Rwanda, South Africa, South Sudan,  Swaziland, Tanzania, Thailand, Uganda, Ukraine, Vietnam, Zambia, and Zimbabwe. The  three regions were the Caribbean, Central America, and Central Asia. that also provide support to HIV programs. Moreover, UNAIDS data  indicate that support for HIV programs in many countries is increasingly a  mix of resources from the country government, Global Fund, PEPFAR,  and other donors. PEPFAR strategy stresses the importance of having  the partner-country government play the coordinating role.\nPEPFAR funding supports country programs that provide comprehensive  HIV treatment\u2014a broad continuum of treatment, care, and supportive  services. This continuum begins with HIV testing and associated  counseling, during which patients learn their HIV status and receive  interventions to help them understand test results and link them to  subsequent HIV treatment services. For individuals who are HIV positive,  eligibility for ARV treatment is assessed by means of standard clinical or  laboratory criteria\u2014using CD4 count tests to measure the strength of a   Patients eligible for treatment receive ARV  patient\u2019s immune system. drugs as well as regular clinical assessment and laboratory monitoring of  the treatment\u2019s effectiveness. Patients on ARV treatment also receive  various care and support services such as treatment of opportunistic  infections including TB co-infection, nutritional support, and programs to  promote retention and adherence to treatment. Patients are expected to  take ARV drugs on a continuing, lifelong basis once they have initiated  treatment.\nCD4 (cluster of differentiation antigen 4) cells are a type of white blood cell that fights  infection. The CD4 count test measures the number of CD4 cells in a sample of blood.  Along with other tests, the CD4 count test helps determine the strength of the person\u2019s  immune system, indicates the stage of the HIV disease, guides treatment, and predicts  how the disease may progress. Normal CD4 counts range from 500 to 1,000 cells\/mm. never been on ARV treatment, pediatric patients, and pregnant and  breastfeeding women. In 2010, WHO updated its guidelines to  recommend ARV treatment for all people with CD4 counts of less than  350 cells\/mm Treatment and Care include many of the clinical, laboratory,  and support services that make up the comprehensive HIV treatment  continuum as well as support services for orphaned and vulnerable  children. Prevention includes interventions to prevent HIV infection, such  as preventing mother-to-child transmission of HIV, sexual prevention, and  medical male circumcision. The program area known as Other includes  PEPFAR funds for efforts to strengthen health care systems, establish or  enhance laboratory infrastructure, and provide strategic health  information. For additional detail on the services budgeted in each  PEPFAR program area and associated PEPFAR budget codes, see  appendix II.\n\n\tLower-Priced ARV Drugs, Economies of Scale, and Program Maturity Have Helped Reduce Per-Patient Costs and Contributed to Expanding Treatment Programs PEPFAR\u2019s Reported Per- Patient Treatment Costs Have Declined Substantially\n\nDeclining prices for ARV drugs have been a key source of per-patient  cost savings, with most of these savings coming from the purchase of  generic ARV drugs. Costs have also declined because programs have  benefited from economies of scale and program maturity as they have  expanded. These savings have contributed to substantial growth in  treatment programs\u2014both in the number of patients that PEPFAR directly  supports on treatment, as well as the number of patients treated within  the country programs that PEPFAR supports more broadly.\nOGAC has reported a substantial decline in PEPFAR per-patient  treatment costs, from $1,053 in 2005 to $339 in 2011. Using available  program information, PEPFAR calculated these costs by dividing specific  elements of its budgets for HIV treatment in a given year by the number  of reported patients for the subsequent year (see fig. 1). For this  calculation, PEPFAR defined its HIV treatment budget as the total amount  budgeted for ARV drugs (hereafter referred to as ARVs), adult treatment,  pediatric treatment, and laboratory infrastructure. The number of patients  currently on ARV treatment directly supported by PEPFAR is routinely  reported by country teams at the end of each fiscal year. PEPFAR  officials told us that they use HIV treatment budgets to approximate  trends in PEPFAR\u2019s per-patient treatment costs because they lack  detailed information on the costs of comprehensive HIV treatment over  time. They acknowledged that the calculation is a rough approximation  that does not capture the full scope of PEPFAR funds spent to support  the broad continuum of services under comprehensive HIV treatment.  The calculation also does not capture funds from other funding sources.\nDetailed PEPFAR studies of the estimated costs of providing  comprehensive HIV treatment services in eight countries also show  declining per-patient treatment costs. The average of PEPFAR\u2019s  estimates includes costs not only to PEPFAR but also to other funding  sources for PEPFAR-supported treatment programs. Using the data from  the country treatment-cost studies, PEPFAR estimated that in fiscal year  2011 the per-patient cost of providing comprehensive HIV treatment  services averaged $768, with PEPFAR\u2019s share amounting to an  estimated $335. In comparison, the estimated per-patient treatment cost  in fiscal year 2010 was $812, with PEPFAR\u2019s share amounting to an  estimated $436 of the total. These estimates represent average costs  because per-patient treatment costs vary by country, by treatment facility  within a country, and by different types of patients, such as adult patients  on ARV treatment versus pediatric patients on ARV treatment.\n\n\t\tGeneric Products and Lower Prices Paid for ARV Drugs Have Been Key Factors Contributing to Declining Per-Patient Treatment Costs\n\nTwo key factors have contributed significantly to declining per-patient  ARV drug costs in PEPFAR-supported treatment programs: (1) the  increasing use of generic products and (2) decreasing prices for specific  ARV drugs.\nFrom fiscal year 2005 to 2011, PEPFAR-supported treatment programs  substantially increased their use of generic products, as shown by  PEPFAR\u2019s data on ARV purchases. In fiscal year 2005, the first year  when PEPFAR purchased ARVs, generics represented about 15 percent  of ARV purchases (by volume). By fiscal year 2008, generic ARV  products had risen to 89 percent of purchases. By fiscal year 2011, 98  percent of all ARVs PEPFAR purchased were for generic products.  Although PEPFAR\u2019s overall increases in generic ARV purchases have  been steady and substantial over the 7 years of data that we reviewed,  the percentage of PEPFAR purchases for generic ARVs each year has  varied across countries based on the availability of quality-assured  generic products in each country. This is because PEPFAR purchases  only quality-assured ARV products that comply with the laws\u2014including  patent and drug-registration laws\u2014that apply in each partner country. For  example, because of country-specific requirements in South Africa, in  fiscal year 2008 only 25 percent of the ARVs that PEPFAR purchased in  South Africa were generic products. In 2010 and 2011, PEPFAR worked  with the South African government to update its ARV procurement  processes, and in fiscal year 2011 almost 97 percent of PEPFAR- purchased ARVs in South Africa were generic.\nPEPFAR estimates that in fiscal years 2005 to 2011, it saved almost $934  million by buying generic versions of ARVs instead of equivalent branded  products. PEPFAR estimated these savings by determining the amount it  spent each year on quality-assured generic products that have an  equivalent branded product. for those generics with internationally negotiated prices for the equivalent  branded products. (See table 1.) Purchasing generic ARVs has also  allowed PEPFAR to broaden the selection of ARVs it purchases to  include WHO-recommended products, particularly fixed-dose combination  products that do not have an equivalent branded formulation. However,  PEPFAR has not estimated savings associated with purchasing these  fixed-dose combination products because there are no branded  equivalents.\nAn equivalent branded product is one that contains the same active ingredients and is  available in the same form\u2014tablet, capsule, liquid\u2014and dose (for example, 100 mg and  300 mg).\n\n\t\t\tDecreasing Prices for Specific ARV Drugs\n\nPEPFAR has also benefited from declining prices for specific ARV  products, which have led to declining prices for the ARV treatment  regimens recommended for use in resource-limited settings. WHO  recommends that most patients starting ARV treatment for the first time  receive one of several first-line regimens that combine three ARV drugs.  Based on updated 2010 WHO treatment guidelines, these first-line  regimens are built from combinations of the following six ARVs: tenofovir  disoproxil furmarate (tenofovir), zidovudine, lamivudine, emtricitabine,  nevirapine, and efavirenz. WHO\u2019s 2010 guidelines recommended that  countries move away from including stavudine, a previously  recommended ARV, in first-line regimens, because of toxicities  associated with the drug. Instead, WHO recommended that countries use  tenofovir or zidovudine. At the time, stavudine had been a preferred  component of many countries\u2019 first-line regimens and was relatively  inexpensive. In contrast, tenofovir and zidovudine were relatively more  expensive. While prices for tenofovir-based regimens remain higher than  prices for the stavudine regimens they replace, tenofovir prices have  declined to the point where they are, on average, lower than prices for  zidovudine, the current first-line alternative. Figure 2 shows how average  prices have declined for three comparable first-line treatment regimens.\nPEPFAR has analyzed program characteristics that affect per-patient  costs as treatment has expanded in PEPFAR-supported programs.  PEPFAR evaluated treatment costs using a cost estimation approach that  includes detailed country treatment-cost studies as its primary  information source. These studies collect data through patient records  and interviews from a selected number of delivery sites. PEPFAR has  conducted country treatment-cost studies in eight countries. Five studies  were completed in 2009 (Botswana, Ethiopia, Nigeria, Uganda, and  Vietnam); two studies were completed in 2011 (Mozambique and  Tanzania); and one study was completed in 2012 (Kenya). In the country  treatment-cost studies, ARV and non-ARV drug costs (e.g., equipment,  personnel, and supplies) were identified and evaluated over a period of at  least 1 year as the treatment program expanded. Each country treatment- cost study stated that per-patient treatment costs declined over its  evaluation period, from a 6 percent decline in Kenya\u2019s 2012 study to a 74  percent decline in Vietnam\u2019s 2009 study.\nIn addition, a November 2012 peer-reviewed journal article summarized  findings from PEPFAR-supported studies of the costs of providing  comprehensive HIV treatment services. This analysis used available data  (collected from 54 delivery sites across six country treatment-cost  studies) to analyze the factors that contribute to declining per-patient   The summary analysis concluded that program scale  treatment costs. and maturity had the most significant relationship with per-patient costs.\nThe 2012 summary analysis of the 54 delivery sites from six country treatment-cost  studies was conducted by selecting possible factors (excluding ARV drugs) that might  describe site characteristics and influence costs. The analysis used statistical modeling to  identify the relationship between selected factors and costs. See N. A. Menzies, A. A.  Berruti, and, J. M. Blandford, \u201cThe Determinants of HIV Treatment Costs in Resource  Limited Settings,\u201d PLOS ONE, vol. 7, issue 11 (2012). supported by the site in a defined period\u2014and reduced per-patient  treatment costs. This analysis estimated a 43 percent decline in per- patient costs if an additional 500 to 5,000 patients are put on ARV  treatment, and a 28 percent decline in per-patient costs if an additional  5,000 to 10,000 patients are put on ARV treatment. Program scale was  also identified in the eight country treatment-cost studies as a factor  affecting per-patient treatment costs, as each country experienced large  increases in the number of people put on ARV treatment after rapid  expansion in clinic capacity and infrastructure in PEPFAR-supported  treatment programs. Officials told us that these reductions with program  scale are due to the efficiencies gained with larger patient cohorts.\nThe 2012 summary analysis also identified a relationship between the  program maturity\u2014the time elapsed since sites began expanding their  treatment programs\u2014and reduced per-patient treatment costs. The  summary analysis determined that per-patient costs declined an  estimated 41 percent from 0 to 12 months, and declined an estimated 25  percent from 12 to 24 months. The majority of country treatment-cost  studies found that the first year following expansion saw the greatest  reduction in costs, followed by minor cost reductions in later evaluation  periods. In each country studied, the expansion of treatment programs  included one-time investments, such as training and equipment costs, as  well as ongoing costs, such as personnel and laboratory supplies, that  were analyzed over time. After the large increase in funding at the  beginning of the study period, one-time costs fell by the end of the study  period in all eight countries, ranging from a 9 to 93 percent decline.  Ongoing costs also fell from the beginning to the end of the evaluation  period, ranging from a 16 to 59 percent decline. PEPFAR attributes the  relationship between declining per-patient treatment costs and program  maturity as due primarily to the reduction in one-time investments and in  part to fewer resources needed for ongoing investments as the programs  expanded treatment. Officials also told us that as treatment programs  mature, experience providing comprehensive HIV treatment can lead to  program efficiencies\u2014such as maximizing work flow in outpatient  clinics\u2014that reduce per-patient costs.\n\n\t\tAs Per-Patient Costs Have Declined, PEPFAR Has Supported Treatment for More People\n\nAs per-patient treatment costs have declined in PEPFAR-supported  programs, savings have contributed to substantial increases in the  number of people on ARV treatment, including both people directly  supported by PEPFAR and those who receive treatment through country  programs (see fig. 3). Since the end of fiscal year 2008, PEPFAR has  directly supported ARV treatment for over 3.3 million additional people.\nMoreover, in fiscal year 2012 PEPFAR added more people to ARV  treatment than in any previous year.\nAs a result of the recent increases in the number of people on ARV  treatment, PEPFAR reports that it has met the requirement in the 2008  Leadership Act to increase the number of patients on ARV treatment  proportional to changes in appropriated funds and per-patient treatment  costs. PEPFAR calculations indicate that, while funding for PEPFAR  increased by about 10 percent and average per-patient treatment costs  declined by almost 67 percent from fiscal year 2008 to 2011, the number  of people under treatment due to direct PEPFAR support increased by  125 percent compared with the 2008 baseline. On the basis of these  results, PEPFAR anticipates that it will continue to exceed the mandated  treatment targets and is also making progress towards meeting another  target\u2014set by the President in December 2011\u2014that calls for PEPFAR to  provide direct support for ARV treatment for more than 6 million people by  the end of fiscal year 2013.\nIn addition to increasing the number of people it directly supports on ARV  treatment, PEPFAR has supported partner countries in expanding their   Declining per-programs to provide ARV treatment to more people. patient treatment costs have contributed to the countries\u2019 abilities to  expand their programs. Additionally, PEPFAR has increased its efforts to  strengthen the capacity of partner-country programs to deliver treatment  services. Some country governments are also contributing additional  resources to treatment programs. As a result, national programs have  also expanded rapidly. For example, in South Africa an estimated 1.7  million people were on ARV treatment at the end of 2011, almost 1 million  more than were on ARV treatment at the end of 2008, according to  UNAIDS data. Similarly, in Kenya almost 540,000 people were on ARV  treatment at the end of 2011, an increase of almost 290,000 since 2008.\n\n\tPEPFAR Cost Information Supports Efforts to Expand Country Treatment Programs but Has Limitations\n\nPEPFAR expects that total costs for country programs will increase over  the near term if country treatment programs expand to reach unmet  needs and adhere to updated international guidelines. PEPFAR\u2019s current  cost information could help partner countries expand treatment because  the information is useful for planning and identifies cost-cutting  opportunities. However, PEPFAR\u2019s cost estimation and expenditure  analysis approaches have certain limitations\u2014primarily relating to the  timeliness and comprehensiveness of data\u2014that do not allow PEPFAR to  capture the full costs of treatment programs.\n\n\t\tTotal Treatment Costs Are Expected to Increase over the Near Term as More People Receive Treatment\n\nDespite decreasing per-patient treatment costs, PEPFAR expects that  country treatment programs will continue to expand to address large  unmet needs, resulting in increases in total treatment costs. For example,  in Uganda\u2019s treatment cost study, although the estimated per-patient  treatment cost in Uganda fell by 53 percent over the course of the  evaluation, the total site-level costs grew as the program expanded to  treat more people. As of 2011, Uganda had provided ARV treatment to  about 290,000 people\u2014half the number of those eligible for ARV  treatment. In its 2012 country operational plan, Uganda set a goal of  providing ARV treatment to 347,000 people with direct PEPFAR support.  Given the magnitude of the unmet need for treatment in Uganda and  other PEPFAR partner countries, higher treatment goals will continue to  drive the expansion of treatment programs, and PEPFAR expects this will  add to the amount of resources required.\nPEPFAR partner countries are also considering treatment program  expansion on the basis of emerging scientific evidence. The new  evidence demonstrates that ARV treatment can be highly effective not  only for treating people with HIV but also for preventing HIV-positive  people from transmitting the virus to others. In early 2012, WHO updated  its guidance for certain elements of ARV treatment that advises countries  to expand treatment programs to new groups, which will increase total  treatment costs. The 2012 updates did not change WHO\u2019s  recommendations about when to initiate ARV treatment; however, the  revised guidance described the long-term benefits of expanding eligibility  for ARV treatment in several categories of HIV-positive people, including  all pregnant and breastfeeding women and certain high-risk populations,  in order to prevent HIV transmission. Some countries are beginning to  expand eligibility for ARV treatment to some of these groups, particularly  by initiating lifelong ARV treatment for all HIV-positive pregnant and  breastfeeding women as part of concerted efforts to eliminate mother-to- child transmission of HIV. UNAIDS estimates that expanding programs to  these groups would increase the number of people in low- and middle- income countries who are eligible for ARV treatment by over 50 percent,  from 15 million to 23 million.\nPEPFAR and its partner countries use cost information to plan for  expanding treatment programs. For example, some of PEPFAR\u2019s country  treatment-cost studies have projected total costs under different  scenarios of expanded treatment. Four of the eight country treatment-cost  studies we reviewed included scenarios that project total costs with  different patterns and rates of treatment expansion over a 3- or 5-year  period. For example, Nigeria\u2019s 2009 country treatment-cost study  projected costs under three scenarios: (1) keeping its treatment targets at  2008 levels, (2) adding 100,000 patients, and (3) adding more than  200,000 patients, which represented half of those estimated to need ARV  treatment in 2008.\n\n\t\tPEPFAR Has Detailed Cost Information but Needs More Timely and Comprehensive Data\n\nor  including more widespread approach to HIV testing with immediate initiation of ARV  treatment for those found to be HIV positive. These estimates would increase the number  of people eligible for ARV treatment to 25 million and 32 million people, respectively. routine cost monitoring and in-depth facility-based cost studies\u2014that  countries can use to produce robust information on costs at local and  national levels.and help identify opportunities for greater efficiency.\nSuch information can be used to analyze program costs  PEPFAR uses two complementary approaches to analyze costs in the   One approach provides comprehensive in-depth programs it supports. analysis of treatment costs, while the other approach will provide routine  monitoring of spending data specific to PEPFAR. However, neither  approach captures the full costs to country treatment programs of  meeting increasing demand and resource needs in environments that are  continually changing.\nPEPFAR\u2019s cost estimation approach identifies the costs of providing  comprehensive HIV treatment services in a partner country, examines the  range of the costs across delivery sites and types of patients, and  analyzes the costs over a period of at least 1 year. This approach\u2014and  the country treatment-cost studies conducted as its primary information  source\u2014provides valuable information on the costs of delivering  comprehensive HIV treatment services. The country treatment-cost  studies consist of in-depth analysis from patient record data and  interviews from a selected number of delivery sites\u2014outpatient clinics  that provide comprehensive HIV treatment services. Each delivery site\u2019s  data is grouped by cost unit and segmented into 6-month periods in  order to examine ARV drug and non-ARV drug costs over time. Cost  estimation allows PEPFAR to assess costs to itself and to other funding  sources\u2014country governments, including Global Fund contributions, and  other local and international organizations. However, there are three key  limitations.\nFirst, the cost estimation approach has provided valuable information on  the costs of delivering comprehensive HIV treatment services, but a lack  of timely data is a significant limitation, particularly given the rapid pace of  change in treatment programs. Data for five of the eight country  treatment-cost studies were collected between April 2006 and March  2007\u2014before the significant expansion of country treatment programs.  PEPFAR officials noted that changes in treatment program costs can  happen too fast to be captured, and because the data collection and  analysis for country treatment-cost studies are time and resource  intensive, the reported results from the studies lag behind conditions on  the ground. PEPFAR collects retrospective data for a determined period  of time\u2014typically a few months\u2014and analyzes that data for treatment  costs and results, which requires a period of typically 2 years. For  example, Nigeria\u2019s treatment-cost study involved data collection at nine  delivery sites and supporting organizations from April to October 2006,  but the final report on the results was completed in December 2009.  Moreover, most country cost estimates included data collected in 6-month  periods beginning at or around the start of PEPFAR support, thus  providing cost information on the impact of treatment expansion with  PEPFAR funds. Only one country treatment-cost study\u2014Kenya\u2019s 2012  study\u2014covered a time period of data collection that could indicate how  costs changed after PEPFAR\u2019s increased support of expanded treatment  programs.\nSecond, PEPFAR\u2019s cost estimation approach has been limited in the  scope of information it has provided because of the small number and  type of delivery sites selected. For seven of the eight country treatment- cost studies, patient record data consist mostly of data that typically were  collected from nine outpatient clinics per country that received direct or  indirect PEPFAR support. In addition, PEPFAR reports that the selected  sites vary in how representative they are of the respective country  program.among sites because the services provided may differ widely.  Additionally, services and costs at sites in one country may not represent  the type of services provided under comprehensive HIV treatment  available across other PEPFAR partner countries, which makes it difficult  to identify best practices that can be applied to other programs to  increase program efficiency. However, PEPFAR\u2019s most recent country  treatment-cost study (completed in Kenya in October 2012) included 29  delivery sites and was the first study to use random sampling to select  sites. PEPFAR officials characterized the study as a representative  sample of the country\u2019s delivery sites. Separately, limited information is  available for sites not supported by PEPFAR. Although entities outside  PEPFAR have conducted studies to estimate treatment costs at different  sites, PEPFAR reports that these studies have not assessed as many  services (e.g., services for people living with HIV who are not yet on ARV  treatment), and, as a result, there were not sufficient, comparable data  available for a meaningful comparison of costs.\nThe costs of comprehensive HIV treatment services vary  Third, although PEPFAR\u2019s cost estimation process enables it to analyze  costs at the treatment facility level for PEPFAR and other funding  sources, it does not include program management costs incurred above  the facility level. In addition, PEPFAR has identified but not analyzed  possible cost benefits associated with improved patient outcomes from  standardization and extended monitoring intervals for stable patients, and  continued decreases in ARV drug pricing because of better tolerated  regimens and declines in second-line regimen formulations. Challenges in  linking cost data to patient outcomes data was identified as a limitation by  all of the country treatment-cost studies. Information on program  management costs and outcomes will become increasingly important as  countries take on additional responsibility for supporting treatment  delivery and allocating resources across all program sites.\nTo obtain more timely cost information, PEPFAR began piloting the use of  expenditure analysis in 2009 to review country-specific PEPFAR  spending across program activities, including treatment. PEPFAR\u2019s  expenditure analysis approach involves collecting data from PEPFAR  implementing partners on amounts that each partner spent to provide  direct or indirect treatment services, and links that spending to the  numbers of patients receiving support for treatment through the partner.  The expenditure analysis approach updates costs rapidly and includes  information on PEPFAR costs above the facility level. Between 2009 and  2012, PEPFAR completed nine expenditure analysis pilots in eight  countries. PEPFAR officials told us that, during fiscal year 2012, it  began to use its formal expenditure analysis approach in a different set of  nine countries, and these analyses were completed and disseminated to  countries in February 2013. PEPFAR uses expenditure analysis to  identify spending outliers among its implementing partners. PEPFAR  officials said they use that information to discuss with implementing  partners the causes of their relatively high or low expenditures per patient  and to identify potential efficiencies that other partners can implement.  For example, in Mozambique\u2014the first country to complete a second  expenditure analysis\u2014PEPFAR officials found that the variation of per- patient expenditures for non-ARV drug costs narrowed among five  implementing partners between 2009 and 2011. PEPFAR attributed the  smaller range of expenditures in part to their ability to use expenditure  analysis data to stress efficient delivery of services.\nExpenditure analysis does not provide a comprehensive picture of  treatment costs, because it only includes spending by PEPFAR  implementing partners. Although expenditure analysis enables PEPFAR  to allocate resources more efficiently by comparing its implementing  partners, it does not include spending from partner-country resources and  other funding sources. Because PEPFAR cannot require reporting for  non-PEPFAR resources, PEPFAR officials stated that using diplomatic  efforts with country governments has been a priority to enable sharing of  expenditure data. PEPFAR has reported that the vast majority of patients  on PEPFAR-supported ARV treatment receive services in the public  sector (36 of the 43 delivery sites among the five country treatment-cost  studies completed by 2009 were government-run facilities). As a result,  cost information across all treatment partners at the facility and country  level is important for facilitating fully informed discussions among those  partners about current and future resource allocation. (The features of  PEPFAR\u2019s cost estimation and expenditure analysis approaches for  obtaining cost information are described in table 2.)\nEach of PEPFAR\u2019s complementary approaches provides cost information  that can help countries to plan for the efficient expansion of treatment  programs, and PEPFAR has made some plans to strengthen each  approach. As of February 2013, PEPFAR was preparing three additional  country treatment-cost studies, including a follow-up study in Tanzania\u2014 PEPFAR\u2019s first repetition of a study in a partner country. In addition,  PEPFAR has shortened the time frame for examining costs, compared  with the time frames for earlier studies. In the Kenya, Mozambique, and  Tanzania treatment-cost studies that were completed in 2011 and 2012,  the data collection period for all facilities was a maximum of 1 year (or two  6-month periods). PEPFAR officials told us that cost estimation is  important for identifying cost drivers, especially because it includes non- PEPFAR costs and can be used to develop cost projections for various  treatment scenarios. However, because the studies are in-depth  analyses, requiring extensive field work, they will continue to be time and  resource intensive. PEPFAR officials told us that conducting country  treatment-cost studies more regularly has not been their highest priority;  they noted that their efforts have been focused on implementing  processes for routine expenditure analysis in PEPFAR partner countries.  Although PEPFAR has taken steps to strengthen cost estimation, country  treatment-cost studies have been conducted in only a small number of  countries (eight partner countries) and delivery sites (usually about nine  clinics per country). In addition, although PEPFAR-supported treatment  programs are changing rapidly, for five of the eight studies that have been  completed, data were collected between 2006 and 2007. PEPFAR  currently does not have a plan for systematically conducting or repeating  country treatment-cost studies, as appropriate, in partner countries.  Without such a plan, PEPFAR may be missing opportunities to identify  potential savings, which are critical for expanding HIV treatment programs  to those in need.\nUsing the expenditure analysis approach to obtain more rapid cost  information to inform planning efforts by country teams addresses the  timeliness limitations of the country treatment-cost studies, but does not  capture non-PEPFAR costs. However, PEPFAR officials told us that non- PEPFAR spending data are difficult to obtain because the budget  processes of each partner are often not aligned and country systems may  not be structured to aggregate HIV-specific data. For example, in an  expenditure analysis pilot in Guyana, officials said that aligning  expenditure categories across all treatment partners (PEPFAR, Global  Fund, and Guyana Ministry of Health) was a time-consuming process  requiring negotiation with the country government on the level of  alignment needed. PEPFAR reports that it has engaged with country  governments and multilateral partners to address the ability to capture full  country-expenditure data. Further, it has begun collaborating with up to  three countries to obtain expenditure data for the full country program  during 2013. Although we recognize the difficulties involved in capturing  non-PEPFAR expenditures, these spending data are important for  decision makers as countries take on additional responsibility for  allocating resources. PEPFAR officials told us that, by the end of fiscal  year 2014, they plan to roll out formal expenditure analysis to all PEPFAR  countries as part of annual reporting requirements; however, they said  there are no current plans to routinely capture non-PEPFAR costs in  those analyses. Without comprehensive data on expenditures, PEPFAR- supported programs will not be fully informed when making decisions  about how to allocate resources.\n\n\tUsing OGAC\u2019s Budgetary Formula, PEPFAR Has Met the Treatment Spending Requirement, but the Formula Does Not Fully Account for All Funds\n\nThe 2008 Leadership Act requires that more than half of PEPFAR funds  be used to support specific aspects of treatment and care for people living  with HIV. Using an OGAC-developed budgetary formula, PEPFAR has  met this treatment spending requirement. Since PEPFAR was  reauthorized in 2008, PEPFAR country teams\u2019 budgets allocated to  capacity building have increased. However, funding for capacity building  is excluded from OGAC\u2019s formula. OGAC currently does not have a  methodology to account for the extent to which these funds contribute to  HIV treatment and care. As a result, it is not possible to determine the full  amount of PEPFAR funds that are allocated to support the HIV treatment  and care services identified in the spending requirement.\n\n\t\tUsing OGAC\u2019s Budgetary Formula, PEPFAR Has Met the Treatment Spending Requirement\n\nBudgets for \u201ctreatment and care for people living with HIV\u201d  (Budgets for Treatment + Care + Prevention program areas)\nTo determine the amount of the PEPFAR budget that constitutes  \u201ctreatment and care for people living with HIV,\u201d OGAC sums the amounts  allocated by all country teams each year to six of the seven budget codes  within the Treatment and Care program areas (see app. II for more details  regarding this calculation).\nPEPFAR budget data indicate that, using OGAC\u2019s budgetary formula, the  program met the spending requirement each year since reauthorization.  Between fiscal years 2008 and 2012, the calculated budget for \u201ctreatment  and care for people living with HIV\u201d ranged from approximately 54 to 52  percent of total budgets for the Treatment, Care, and Prevention program  areas.\n\n\t\tCurrent Budgetary Formula Does Not Account for Increased Proportion of Funding Allocated to Country Capacity Building\n\nOGAC\u2019s budgetary formula implementing the treatment spending  requirement does not account for the increasing proportion of funds that  PEPFAR country teams have allocated to country capacity building. The  2008 Leadership Act identifies health capacity building in order to  promote the transition toward greater sustainability through country  ownership as one of the purposes of the law. Consistent with this  principle, PEPFAR country teams have increased investments to  strengthen country health systems. These funds, which are typically  allocated in the \u201cOther\u201d program area budget codes\u2014health systems  strengthening, strategic information, and laboratory infrastructure\u2014are  excluded from OGAC\u2019s budgetary formula. However, from fiscal year  2008 to fiscal year 2012, country team budgets for the Other program  area increased from $574 million to $710 million. Over the same time  frame, OGAC-defined budgets for \u201ctreatment and care for people living  with HIV\u201d declined from about $1.8 billion to $1.4 billion. Total budgets for  the Treatment, Care, and Prevention program areas were relatively  constant from fiscal year 2008 to 2011 but declined to $2.6 billion in fiscal  year 2012. (See fig. 4.) By fiscal year 2012, budgets in the Other program  area represented more than 21 percent of all program area budgets, up  from about 15 percent in fiscal year 2008.\nOGAC officials told us that the current budgetary formula was developed  based on OGAC\u2019s interpretation of the intent of the treatment spending  requirement. Calculating the proportion of funds allocated to specific  activities as a percentage of total country budgets allocated to the  Treatment, Care, and Prevention program areas\u2014excluding budgets for  the Other program area\u2014is consistent with the methods OGAC used to  track spending under the first PEPFAR authorization. OGAC officials said  that this approach allows OGAC to isolate budgeted funds that support  the direct services that PEPFAR delivers to patients at the facility level,  consistent with PEPFAR\u2019s early focus on directly delivering treatment  services as part of a broad emergency response.\nAs PEPFAR\u2019s role in each country has evolved, the components of  PEPFAR country team budgets that contribute to the HIV treatment and  care services specified in the spending requirement have also evolved.  However, some of those funds are not accounted for in the current  budgetary formula. In particular, although budgets allocated to capacity  building have increased, those funds are not accounted for in either  component of OGAC\u2019s budgetary formula: the budget for \u201ctreatment and  care for people living with HIV\u201d or the total budgets for the Treatment,  Care, and Prevention program areas. Some capacity-building efforts,  such as enhancements to drug supply chain systems that are budgeted  under health systems strengthening, also contribute to HIV treatment and  care services. Other health systems strengthening activities may have a  less direct effect on those services. Moreover, OGAC officials said that  some funds budgeted for prevention activities\u2014particularly funds for  prevention of mother-to-child transmission of HIV that cover ARV  treatment and care services for HIV-positive pregnant and breastfeeding  women\u2014also contribute to HIV treatment and care services. Those  contributions are likewise not accounted for in the calculated budget for  \u201ctreatment and care for people living with HIV.\u201d\nOGAC officials told us that they currently do not have an agreed  methodology that would allow them to determine the extent to which  funds for capacity building, or certain prevention activities, contribute  directly to HIV treatment and care. As a result, it is currently not possible  to determine accurately the proportion of total country budgets that  support the services specified in the treatment spending requirement, if  the contributions of PEPFAR country teams\u2019 capacity-building and  prevention budgets are taken into account. OGAC officials acknowledged  that as PEPFAR continues to evolve, addressing the challenge of  accounting for the contributions that funds from budgets for capacity  building and prevention make to HIV treatment and care programs may  require revisions to the current budgetary formula. However, the  treatment spending requirement expires at the end of September 2013.\n\n\tConclusions\n\nPEPFAR has supported rapid expansion of HIV programs since 2008,  providing direct support for more than half of the estimated 8 million  people on ARV treatment in low- and middle-income countries. Data from  the last 4 years indicate that the growth in treatment programs is  accelerating. Substantial declines in the costs of providing treatment to  each individual have contributed to recent accomplishments. Despite this  progress, there is substantial unmet need. More than 15 million people  are estimated to be eligible for ARV treatment based on current WHO  guidelines. Moreover, 23 million would be eligible if programs expanded  eligibility to include groups such as all pregnant and breastfeeding women  and certain high-risk populations, consistent with recommendations in  recent updates to WHO guidelines.\nIn order for the country programs that PEPFAR supports to be able to  expand to meet these needs, it will be important that they maximize how  efficiently they use available resources. Given the scale of the unmet  need, countries\u2019 plans to expand HIV treatment may continue to drive up  the total costs of providing treatment even if per-patient treatment costs  further decline. Each country\u2019s ability to expand treatment, then, hinges  on thorough planning based on data-driven analyses of the cost of  delivering the full scope of comprehensive HIV treatment services. This is  a complex task as cost inputs often cut across PEPFAR budget codes,  and costs are incurred by PEPFAR and other donors, partner-country  governments, and multilateral partners. Although PEPFAR has used its  cost estimation and expenditure analysis approaches to assist countries\u2019  planning efforts and describe opportunities for savings, treatment costs  have not yet been fully studied. In particular, existing data are not always  timely, come from a limited number of sites in select countries, and do not  always capture non-PEPFAR costs. Thus, PEPFAR may be missing  opportunities to identify further savings. Given the rapid pace of change in  PEPFAR-supported programs, effectively identifying potential savings  requires more timely and comprehensive information on treatment costs  than PEPFAR\u2019s approaches currently provide.\nThe 2008 Leadership Act has required PEPFAR to spend half of the  funds appropriated to PEPFAR on specific HIV treatment and care  services and has also set a major policy goal of promoting country  ownership. Using OGAC\u2019s budgetary formula, PEPFAR has met the  current spending requirement. Over the same time frame, PEPFAR funds  have been devoted increasingly to building country capacity. However,  because OGAC cannot fully account for the contributions that its country  capacity building activities have made to the HIV treatment and care  services identified in the treatment spending requirement, it cannot  provide complete information on how PEPFAR funds are being allocated  to meet both the treatment spending requirement and the goal of  promoting country ownership. The current treatment spending  requirement, however, is in effect only until September 30, 2013, when it  expires.\n\n\tRecommendations for Executive Action\n\nTo improve PEPFAR\u2019s ability to help countries expand their HIV treatment  programs to address unmet need, and do so through the efficient  allocation of resources and effective program planning, the Secretary of  State should direct PEPFAR to develop a plan to do the following:  systematically expand the use of country treatment-cost studies to  additional sites and partner countries, where it is cost-effective to do  so, to help estimate costs and examine country-specific  characteristics of comprehensive HIV treatment that may result in cost  savings; and work with partner countries, where feasible, to broaden PEPFAR\u2019s  expenditure analysis to capture treatment costs across all partners  that support each country program and develop more timely  information on the full costs of comprehensive HIV treatment.\n\n\tAgency Comments and Our Evaluation\n\nWe provided a draft of this report to State, USAID, and HHS\u2019s CDC for  comment. Responding jointly with CDC and USAID, State provided  written comments, reproduced in appendix III. In its comments, State  agreed with our findings and conclusions and concurred that high-quality  information on costs and expenditures is vital for program management.  State\u2019s comments also emphasized that, because in-depth cost studies  are time- and resource-intensive to conduct, those studies should be  complemented with more timely data from expenditure analysis to help  ensure that PEPFAR-supported programs have a portfolio of information  that can be used to inform program decision making. In response to our  first recommendation, State commented that PEPFAR is developing  guidance on an optimal schedule for evaluating costs\u2014at the country  level and across the program\u2014to balance in-depth analysis with more  timely data from expenditure analyses. This approach is consistent with  our recommendation that PEPFAR develop a plan to expand country  treatment-cost studies where it is cost effective to do so. In response to  our second recommendation, State agreed that expenditure analysis  would be more valuable if it included non-PEPFAR spending, but noted  that PEPFAR cannot compel its partners to routinely report on their  spending. However, State said that PEPFAR designed its expenditure  analysis approach so that it can be adapted to capture spending from  other partners. Moreover, State commented that in the last year PEPFAR  has collaborated with multilateral partners in up to three countries to plan  expenditure analyses that will capture non-PEPFAR spending. While we  recognize that PEPFAR cannot require its partners to report on their  spending, because HIV treatment costs are increasingly supported  through a mix of funding from PEPFAR, other donors, partner-country  governments, and multilateral partners such as the Global Fund, it is  critical that PEPFAR continue exploring opportunities to work with  partners, where feasible, to broaden the use of expenditure analysis. In  addition, State and CDC each provided technical comments that were  incorporated, as appropriate.\nAs agreed with your offices, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days from the  report date. At that time, we will send copies to the Secretary of State and  the U.S. Global AIDS Coordinator. The report also will be available at no  charge on the GAO website at http:\/\/www.gao.gov.\nIf you or your staff have any questions about this report, please contact  me at (202) 512-3149 or gootnickd@gao.gov, or contact Marcia Crosse at  (202) 512-7114 or crossem@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 major contributions to this report are  listed in appendix IV.\n\nAppendix I: Objectives, Scope, and Methodology\n\nIn this report, we examine  1.  changes in per-patient treatment costs and their effect on program  2.  how PEPFAR\u2019s cost information supports countries\u2019 efforts to expand  3.  how PEPFAR has met the treatment spending requirement.\nTo describe how per-patient costs have changed and their effect on  program implementation in treatment programs supported by the  President\u2019s Emergency Plan for AIDS Relief (PEPFAR), we focused our  work on PEPFAR\u2019s reported trends in cost information relating to fiscal  years 2005 through 2011. We also reviewed agency documents on  PEPFAR\u2019s detailed cost estimation approach, results from eight country  treatment-cost studies, and summary information that PEPFAR has  published on available cost estimates and characteristics of HIV  treatment programs. These included two PEPFAR reports summarizing  estimated per-patient treatment for fiscal years 2010 and 2011, including  how the estimates varied across partner countries. Separately, we  analyzed data on PEPFAR\u2019s antiretroviral (ARV) drug purchases in fiscal  years 2005 through 2011 to identify trends in drug prices across  PEPFAR-supported countries. We also reviewed PEPFAR\u2019s estimates for  savings attributable to purchasing generic ARV products. To assess the  reliability of the ARV drug data used in our analysis, we interviewed  PEPFAR officials and officials from a supply chain contractor that  manages the bulk of PEPFAR\u2019s ARV drug purchases and collects data  annually on almost all ARV purchases by PEPFAR implementing  partners. We also reviewed documentation on their data collection  processes. Finally, we performed checks, such as examining the data for  missing values and discussing the results of our analyses with officials  responsible for the data. On the basis of these steps, we determined that  the ARV drug data were sufficiently reliable for our purposes. In addition,  we conducted field work in three PEPFAR partner-countries\u2014Kenya,  South Africa, and Uganda\u2014in June 2012 to obtain information costing  activities and challenges faced in implementing treatment programs. We  selected these countries on the basis of program size, estimates of HIV  disease burden, travel logistics, and other factors. We interviewed key  implementing partners, technical experts in costing methodology, and in- country officials and reviewed documentation from the selected countries.  Finally, we examined trends in the number of patients treated in  PEPFAR-supported country treatment programs, including PEPFAR data  reported by its country teams as well as global figures from the Joint  United Nations Programme on HIV\/AIDS (UNAIDS). On the basis of our  reviews of documentation for these data as well as interviews with  PEPFAR officials, we determined that the data were sufficiently reliable  for our purposes.\nTo describe how PEPFAR\u2019s cost information supports countries\u2019 efforts to  expand treatment, we assessed the timeliness and completeness of  information generated through PEPFAR\u2019s cost estimation and  expenditure analysis approaches. Specifically, we assessed PEPFAR\u2019s  cost estimation approach and eight country treatment-cost studies for  their ability to provide key information for program planning and resource  allocation. We assessed PEPFAR\u2019s expenditure analysis approach by  examining PEPFAR documentation on expenditure analysis and results  to date. We also interviewed PEPFAR officials about the strengths and  weaknesses of the cost estimation and expenditure analysis approaches,  and any plans to revise these approaches. In addition, we reviewed  PEPFAR country operational plans and country treatment-cost studies for  information on expected cost trends and country goals for expanding  treatment programs. Last, we reviewed World Health Organization (WHO)  HIV treatment guidelines and their impact on the estimated number of  people requiring treatment as country programs expand.\nSee: Department of State, Office of the U.S. Global AIDS Coordinator, PEPFAR  Blueprint: Creating an AIDS-free Generation (Washington, D.C.: November 2012); The  U.S. President\u2019s Emergency Plan for AIDS Relief: 5-year Strategy (Washington, D.C.:  December 2009); PEPFAR Fiscal Year 2012 Country Operational Plan (COP) Guidance  (Washington, D.C.: August 2011); PEPFAR Fiscal Year 2013 Country Operational Plan  (COP) Guidance, Version 2.0 (Washington, D.C.: October 2012). budget data for fiscal years 2008 through 2012. We interviewed PEPFAR  budget officials about the budget data to ensure the completeness of the  data and discuss any changes in budget methodology over time. We also  interviewed OGAC officials regarding the budgetary formula that OGAC  uses to implement the treatment spending requirement.\n\nAppendix II: PEPFAR Program Areas, Budget Codes, and Budgetary Formula for Treatment Spending Requirement\n\nPEPFAR support for country programs is categorized into four broad  program areas\u2014Treatment, Care, Prevention, and Other\u2014each  comprising multiple budget codes. The types of services captured within  each program area and the associated budget codes are shown in table 3  below.\nSection 403 of the 2008 Leadership Act required that, in each fiscal year,  more than half of the funds appropriated pursuant to section 401 of the  act shall be expended for the following: (1) ARV treatment; (2) clinical  monitoring of HIV-positive people not in need of ARV treatment; (3) care  for associated opportunistic infections; (4) nutrition and food support for  people living with HIV; and (5) other essential HIV-related medical care  for people living with HIV.\nBudgets for \u201ctreatment and care for people living with HIV\u201d  (Budgets for Treatment + Care + Prevention program areas)\nTo determine the amount of the PEPFAR budget that constitutes  \u201ctreatment and care for people living with HIV,\u201d OGAC sums the amounts  allocated by all country teams each year within six of the seven budget  codes within the Treatment and Care program areas: adult treatment, adult care and support,\nARV drugs, pediatric treatment, pediatric care and support, and\nTB\/HIV.\n\nAppendix III: Comments from the Department of State\n\nAppendix IV: GAO Contacts and Staff Acknowledgments\n\n\tGAO Contacts\n\n\tStaff Acknowledgments\n\nIn addition to the contact named above, Jim Michels, Assistant Director;  Chad Davenport; E. Jane Whipple; David Dayton; Fang He; Todd M.  Anderson; Kay Halpern; Brian Hackney; Erika Navarro; Katy Forsyth;  Grace Lui; and Etana Finkler made key contributions to this report.\n\nRelated GAO Products\n\nPresident\u2019s Emergency Plan for AIDS Relief: Agencies Can Enhance  Evaluation Quality, Planning, and Dissemination. GAO-12-673.  Washington, D.C.: May 31, 2012.\nPresident\u2019s Emergency Plan for AIDS Relief: Program Planning and  Reporting. GAO-11-785. Washington, D.C.: July 29, 2011.\nGlobal Health: Trends in U.S. Spending for Global HIV\/AIDS and Other  Health Assistance in Fiscal Years 2001-2008. GAO-11-64. Washington,  D.C.: October 8, 2010.\nPresident\u2019s Emergency Plan for AIDS Relief: Efforts to Align Programs  with Partner Countries\u2019 HIV\/AIDS Strategies and Promote Partner  Country Ownership. GAO-10-836. Washington, D.C.: September 20,  2010.\nPresident\u2019s Emergency Plan for AIDS Relief: Partner Selection and  Oversight Follow Accepted Practices but Would Benefit from Enhanced  Planning and Accountability. GAO-09-666. Washington, D.C.: July 15,  2009.\nGlobal HIV\/AIDS: A More Country-Based Approach Could Improve  Allocation of PEPFAR Funding. GAO-08-480. Washington, D.C.: April 2,  2008.\nGlobal Health: Global Fund to Fight AIDS, TB and Malaria Has Improved  Its Documentation of Funding Decisions but Needs Standardized  Oversight Expectations and Assessments. GAO-07-627. Washington,  D.C.: May 7, 2007.\nGlobal Health: Spending Requirement Presents Challenges for Allocating  Prevention Funding under the President\u2019s Emergency Plan for AIDS  Relief. GAO-06-395. Washington, D.C.: April 4, 2006.\nGlobal Health: The Global Fund to Fight AIDS, TB and Malaria Is  Responding to Challenges but Needs Better Information and  Documentation for Performance-Based Funding. GAO-05-639.  Washington, D.C.: June 10, 2005.\nGlobal HIV\/AIDS Epidemic: Selection of Antiretroviral Medications  Provided under U.S. Emergency Plan Is Limited. GAO-05-133.  Washington, D.C.: January 11, 2005.\nGlobal Health: U.S. AIDS Coordinator Addressing Some Key Challenges  to Expanding Treatment, but Others Remain. GAO-04-784. Washington,  D.C.: June 12, 2004.\nGlobal Health: Global Fund to Fight AIDS, TB and Malaria Has Advanced  in Key Areas, but Difficult Challenges Remain. GAO-03-601. Washington,  D.C.: May 7, 2003.","output":"Why GAO Did This Study\n\nThrough PEPFAR--first authorized in 2003--the United States has supported major advances in HIV\/AIDS treatment, care, and prevention in more than 30 countries, including directly supporting treatment for almost 5.1 million people. However, millions more people still need treatment. Congress reauthorized PEPFAR in 2008--authorizing up to $48 billion over 5 years--making it a major policy goal to help partner countries develop independent, sustainable HIV programs. Congress also set spending and treatment targets. OGAC leads PEPFAR by allocating funding and providing guidance to implementing agencies. As requested GAO reviewed PEPFAR-supported treatment programs. GAO examined (1) how perpatient treatment costs have changed and affected program implementation, (2) how PEPFAR cost information supports efforts to expand treatment, and (3) how PEPFAR has met a legislated treatment spending requirement. GAO reviewed cost analyses and reports and analyzed ARV drug data relating to fiscal years 2005 through 2011; conducted fieldwork in three countries selected on the basis of program size and other factors; and interviewed PEPFAR officials and implementing partners.\n\nWhat GAO Found\n\nThe Department of State's (State) Office of the U.S. Global AIDS Coordinator (OGAC) has reported that per-patient treatment costs declined from about $1,053 to $339 from 2005 to 2011. Purchasing generic antiretroviral (ARV) drugs, together with declining drug prices, has led to substantial savings. OGAC estimates that the President's Emergency Plan for AIDS Relief (PEPFAR) has saved $934 million since fiscal year 2005 by buying generic instead of branded products. PEPFAR's analyses of data from eight country treatment-cost studies indicate that per-patient costs also declined as programs realized economies of scale while taking on new patients. Furthermore, the analyses suggest that costs decreased as countries' treatment programs matured, particularly in the first year after programs expanded, and reduced one-time investments. Per-patient cost savings have facilitated substantial increases in the number of people on ARV treatment. In September 2012, an estimated 8 million were on treatment in lowand middle-income countries, of which PEPFAR directly supported 5.1 million-- an increase of 125 percent since 2008, the year the program was reauthorized.\nDespite substantial declines in per-patient treatment costs, it is important that countries continue to improve the efficiency of their programs to expand to meet the needs of the estimated 23 million people eligible for ARV treatment under recent international guidelines. PEPFAR's cost estimation and expenditure analysis approaches provide complementary information that can help partner countries expand treatment and identify potential cost savings. However, as currently applied, these approaches do not capture the full costs of treatment. Cost estimation provides in-depth information, but data are limited because detailed cost studies have been done in only eight partner countries, at a small number of sites. Moreover, although treatment programs are changing rapidly, key data for most of the studies are no longer timely, since they were collected in 2006 and 2007. PEPFAR does not have a plan for systematically conducting or repeating cost studies in partner countries. Data from expenditure analyses, while more timely, are limited because they do not include non-PEPFAR costs. Without more timely and comprehensive information on treatment costs, PEFPAR may be missing opportunities to identify potential savings, which are critical for expanding HIV treatment programs to those in need.\nUsing an OGAC-developed budgetary formula, PEPFAR has met the legislative requirement that more than half of its funds be spent each year to provide specific treatment and care services for people living with HIV. From fiscal year 2008 to fiscal year 2012, PEPFAR funds allocated to capacity building--to strengthen health systems, laboratory capacity, and strategic information systems--increased from 15 percent to 21 percent of PEPFAR's total funds to support country programs. However, the current formula does not include the capacity building funds. These funds--which support PEPFAR country teams' efforts to meet another legislative goal of promoting sustainable country-owned programs--and other PEPFAR activities also contribute to HIV treatment and care services. PEPFAR does not currently have a methodology to account for those contributions. Without such a methodology, it is not possible to determine the full amount of PEPFAR funds that are allocated to support the HIV treatment and care services identified in the spending requirement. However, the treatment spending requirement expires at the end of September 2013.\n\nWhat GAO Recommends\n\nGAO recommends that State develop a plan for (1) expanding the use of indepth cost studies to additional countries and sites, where appropriate, and (2) broadening expenditure analysis to include non-PEPFAR costs, as feasible. State generally agreed with the report's recommendations."}
{"id":"crs_R42880","pid":"crs_R42880_0","input":"\tIntroduction\n\nMost Americans enter the health care system through their local physician's office, which is the setting for 84% of primary care visits. Historically, physicians have operated in what the American Medical Association and others have called a \"cottage industry\" of small or solo practices around the country. Even now, the majority of the approximately 972,376 doctors and residents in the United States work mainly from smaller, office-based practices. This decentralized network has served to deliver medical services to most Americans, but it has also been cited by analysts as a reason that the health care market is inefficient, with patients seeing duplicate providers who may prescribe overlapping treatments or deliver widely divergent, uncoordinated care. \nDuring the past several years, however, physician practices appear to be changing, as a number of doctors merge their offices into larger practices; sell their practices to hospitals, insurance companies, and physician management firms; contract to provide exclusive services to providers such as hospitals; or go to work for larger providers as salaried employees. While there are no definitive statistics, a 2011 American Hospital Association (AHA) survey found the number of doctors on hospital payrolls had increased by 32% from 2000 to 2010, with the rate of increase accelerating after 2005. According to the AHA, about 20% of practicing physicians now work for hospitals. The Medical Group Management Association (MGMA), which represents larger medical practices and outpatient clinics, has noted an increase in the share of medical groups owned by U.S. hospitals, while other surveys have also found rising hospital employment of doctors, with some regional variations. For example, an American College of Cardiology survey found the share of physician-owned cardiology practices declined to 60% in 2012 from 73% in 2007, while the share of such practices owned by hospitals grew from 8% to an estimated 24%.\nThe changes appear to be the result of a number of factors, including broad consolidation in the overall health care industry that has created dominant hospitals and insurers in many areas. In order to gain negotiating leverage with large providers and payers, a number of physicians have merged their practices into larger groups or entered into business arrangements with them. Lifestyle preferences are at play, with younger doctors more willing than their predecessors to work for an outside institution to secure a set schedule and salary; about half of doctors hired out of residencies or fellowships in 2010 took jobs at hospitals. Physicians may be having a harder time finding doctors to buy or join a small practice, as management becomes more complex and average compensation declines. \nAt the same time, hospitals and insurers are eager to hire doctors, given forecasts of a pending physician shortage by the end of the decade (see \" Physician Supply \"). The shortfall is predicted to occur in the midst of rising demand for medical services by aging baby boomers and millions of Americans who could gain insurance coverage under the 2010 Patient Protection and Affordable Care Act (ACA, P.L. 111-148 as amended). According to some experts, financial incentives in the ACA may provide further incentives for consolidation and integration of services. For example, the health care law creates integrated delivery systems called Accountable Care Organizations (ACO) that contract with payers who agree to be responsible for the entire continuum of care provided to a group of patients. If the treatment costs less than set targets, and certain quality measures are met, the ACO and the payer share in the savings. Hundreds of physician practices, insurers, and hospitals have announced financial and clinical integration to quality as ACOs.\nThe ongoing changes in practice organization\u2014if they alter the way that physicians deliver care\u2014could help determine whether the U.S. health care system expands access, improves quality of treatment, and addresses the growth of government and private health care spending, according to analysts. Though physician payments account for about 20% of medical spending, studies suggest that physicians direct as much as 90% of total health care spending through referrals, tests, hospital admissions, and other actions. \nCongress is playing dual roles regarding the consolidation. On the one hand, lawmakers designed the ACA in part to reduce health delivery fragmentation and help control government and private spending. In addition, Congress and federal regulators have been monitoring, and continue to monitor, the health care system for signs that mergers and acquisitions may be having negative effects on costs, competition, and consumer access such as distorting prices or creating conflicts of interest in provision of services. Analysts and lawmakers are aware that the health care sector went through a similar round of restructuring during the 1980s and 1990s, as physicians sold their practices and managed care insurance plans expanded. The changes ultimately prompted a consumer backlash, and many of the deals were dissolved. In contrast to the previous round of consolidation, where doctors were seen as gatekeepers for managed care plans that attempted to limit services, the ACA envisions \"patient-centered\" care where doctors and other providers are rewarded for necessary treatment that improves quality of outcomes. Still, it is not clear how the new round of changes ultimately will play out.\nThis report provides background on factors contributing to changes in physician practice organization, including physician supply, lifestyle changes, and government incentives. Next it examines different types of integration, the legal intricacies of affiliation, and the possible implications for consumer and federal policy.\n\n\tPhysician Supply\n\nMost U.S. physicians are MDs, or doctors of medicine, who have completed four years of medical school and a minimum of three years of residency, with specialists undergoing additional training. About 7% of the more than 972,376 physicians and residents are osteopaths, who have completed medical education and additional training in areas including the musculoskeletal system. The physician population is about one-third primary care physicians and two-thirds specialists, a distribution that some experts suggest is not optimal. A quarter of U.S. doctors are graduates of international medical schools. The ratio of physicians to the population varies across the country, with New England and the Middle Atlantic regions having the highest number of doctors per capita, and the West South Central and Mountain regions having the fewest. Rural areas are struggling to attract enough physicians.\nIn the 1980s, after a congressional effort to fund an expansion of U.S. medical education, experts forecasted a possible surplus of doctors. More recently, however, analysts have predicted that the country faces a potential shortage, particularly in primary care. The federal Health Resources and Services Administration in 2006 predicted a shortfall of 55,000 to 150,000 physicians by 2020, while the nonprofit Association of American Medical Colleges (AAMC) in 2008 said there could be a dearth of 130,600 patient care physicians by 2025. Following up in 2012, the AAMC found that 33 states had documented current physician shortages or were anticipating shortages. \nAdding to concerns, nearly a third of physicians are age 55 or older and nearing retirement. In addition, studies indicate that doctors of both sexes and from varying backgrounds are working fewer hours each week, a change more pronounced among younger doctors. A 2010 study found a nearly 6% decrease in hours among nonresident physicians from 1996-1998 to 2006-2008. The reduction in hours was akin to a loss of 36,000 doctors, had the number of hours worked not changed. Some analysts have suggested that the combination of retirements and lifestyle changes will put a tremendous stress on the system and hasten the need for doctors to find more efficient ways to practice. \nThe forecast supply shortage and changes in work patterns are already having impacts, according to analysts. For example, some hospitals have been having increasing difficulty finding physicians to take voluntary duty and have hired more full-time staff doctors, including hospitalists, who oversee patient care in hospitals, and emergency room physicians (see \" Hospital Affiliation and Employment \"). A number of hospitals are seeking to hire or affiliate with primary care physicians, to ensure supply, staff outpatient centers, gain access to referral networks, and form ACOs. A 2010 survey by the American Hospital Association found 80% of hospitals were looking to hire primary care physicians.\n\n\t\tSupporting Practitioners\n\nMitigating the projected physician shortage somewhat is the growing use of professionals who are not doctors but who have specialized training and can perform some basic functions of physicians, including nurse practitioners and physician assistants. In 2009, nearly half of all office-based physician practices included nurse practitioners, certified nurse midwives, or physician assistants. However, state laws vary in terms of the scope of services that nurse practitioners and physician assistants are allowed to provide.\nNurse practitioners must complete graduate education beyond the bachelor's degree needed to become a registered nurse. They can work with physicians or separately in such areas as taking case histories, performing basic exams, ordering lab work and prescribing some medications, and providing health education and counseling. There are approximately 155,000 active U.S. nurse practitioners.\nPhysician assistants complete at least two years of college courses in basic science and behavioral science before applying to one of the 170 accredited physician assistant programs. Most physician assistants have a bachelor's degree, another 27 months of specialized training, and 2,000 hours of clinical rotations. Physician assistants, once licensed by state boards, generally can take patient medical histories, examine patients, treat minor injuries, order and interpret laboratory tests, and make rounds in medical facilities. There are about 86,000 certified physician assistants in the United States. \n\n\tPractice Consolidation\n\nHistorically, physicians have operated in small or solo practices, with a number of factors limiting integration with other health care providers. In states such as California, laws designed to bar the corporate practice of medicine complicated efforts at affiliation between physician practices and insurance companies or hospitals. Doctors and hospitals have been paid separately for services, minimizing the need for tight coordination, though physicians benefited from access to and affiliations with hospitals, including serving on voluntary staff or taking call.\nThere has long been a debate about the efficiency of the decentralized physician practice structure. During the 1930s, for example, a health sector-created blue ribbon \"Committee on the Costs of Medical Care\" suggested improving health care by moving toward a more coordinated system centered on hospitals, including affiliation between doctors and hospitals. The recommendations created controversy, with some groups concerned that such a change would lead to the corporate practice of medicine, affecting quality and physician independence. \nIn the 1980s and 1990s, the type of broad system changes that some health experts had advocated appeared to take root, including the growth of managed care plans, where health insurers coordinate use of health care for enrollees by directly arranging for services through affiliated physicians, hospitals, and other providers. A number of physicians sold their practices to hospitals or specialty physician management companies, as health plans were able to pressure providers to accept lower payment rates and assume some financial risk for patient care. \nBut as consumers protested the managed care restrictions on services, and hospitals and physician management firms found they had overpaid for some physician practices, managed care plans loosened their controls and a number of mergers and acquisitions were dissolved. For example, in California from 1998 to 2002 nearly 150 physician organizations that served millions of patients closed or went into bankruptcy. Though consolidation slowed, it continued (see Table 1 ). \nAccording to one estimate, the share of doctors with an ownership stake in their practices declined from 62% in 1996-1997 to 54% in 2004-2005. The percentage of office visits to physicians in solo practices declined from 38.7% in 1997 to 30.5% in 2007, while the share visiting physicians in practices of 6-10 physicians rose from 12.1% in 1997 to 17.7% in 2007. \nMore recently there has been what some analysts call a reconsolidation of physician practices. While there are limited data at the individual office level, general surveys and studies have found a decline in the number of solo practices and an increase in the number of larger practices. There appears to be a rise in the number of practices owned by hospitals and insurers, and in the share of doctors in private practices working under exclusive contract to hospitals and insurance companies. The Center for Studying Health System Change, in a 2010 survey of 12 communities, found rising hospital employment of physicians, with some regional variations. Separately, a 2008 survey by the American Medical Association, which includes more solo and smaller practices than the MGMA data, did not show that the share of physicians working for hospitals had increased significantly since 2000, but did indicate that fewer doctors owned their practices and more were working as employees. \nThe consulting firm Accenture predicted that just a third of U.S. doctors would be truly independent by 2013, which Accenture defines as physicians who are in a partnership or have an ownership share in a practice. The 33% figure compares to 57% in 2000 and 43% in 2009. A 2012 report by the California Health Care Foundation listed a number of factors for the trends in that state, including the complexity and cost of running a practice; health care providers' concern about a potential shortage of physicians; declining reimbursement for services, including Medicare and Medicaid; and the cost of implementing new systems such as electronic health records. \n\n\t\tMarket Trends\n\nThe practice changes are taking several forms. There is horizontal consolidation, where businesses in the same part of the production process band together for economies of scale and to forestall competition, including mergers of specialty practices. There is vertical consolidation, where different industry segments form financial and clinical affiliations to seek potential efficiency gains. Examples of such consolidation and integration include hospitals buying physician practices or hiring physicians; physicians affiliating with insurers; and formation of ACOs. While not consolidation per say, the growth of concierge practices is another response to economic and other factors, and could affect physician supply and patient care. \n\n\t\t\tLarger Group Practices and Physician Organizations\n\nThe share of solo and small practices has been declining, while the number of larger practices is increasing, with some spanning a number of counties or entire states. Larger physician practices, particularly specialty practices, have advantages such as increased leverage in negotiations with insurance companies, greater purchasing power, and efficiencies in overhead and in their ability to use advanced technology and other patient-management tools. \nPhysicians can organize into different configurations, from mergers to independent practice associations, which are organizations of physicians who maintain their independent corporate status but can integrate financially or clinically and contract as a group. In addition, activity by for-profit practice management companies, which buy and run physician practices, has been growing, particularly those that contract with hospitals. There is also growth in private equity investment in physician practices.\nThere are no definitive figures regarding practice consolidation. However, the accounting and consulting firm Moss Adams has documented a doubling of mergers, acquisitions, and private equity investments in specialty physician practices between 2008 and 2012. In 2008 there were 125 mergers, acquisitions, public offerings, or private equity investments involving specialty practices, according to the firm. In 2010 there were nearly 240, and more than 260 were estimated for 2011. Moss Adams says the ACA \"is bringing about or accelerating\" changes in the health care system, including creation of larger medical group practices and \"transactions among specialty physician groups, medical clinics, hospitals, and other organizations looking to take advantage of scale and cost savings.\" \nSome recent examples of growing physician organizations include the 2011 merger of Cogent HMG and the Hospitalists Management Group, which created the largest private hospitalist company in the country. (Hospitalists are physicians who coordinate patient care in hospital settings.) Cogent now contracts with about 130 hospitals around the country. Another example is IPC The Hospitalist Company. The company in 2011 employed or was affiliated with about 1,200 hospitalists, including doctors and other health professionals, and had employment agreements with about 600 additional professionals. Mednax, a physician management firm, oversees 1,400 doctors and nurse practitioners in its Pediatrix division who specialize in neonatal and pediatric care, as well as more than 400 doctors and 500 nurse anesthetists in its American Anesthesiology group. \n\n\t\t\tHospital Affiliation and Employment\n\nThe AHA survey finding a 32% increase in hospital employment of doctors from 2000 to 2010 is one indication of the growing consolidation in this area. In another example, the physician search and consulting firm Merritt Hawkins told the House Committee on Small Business in July 2012 that from April 1, 2011, to March 31, 2012, company employees conducted more than 2,700 physician search assignments for hospitals, medical groups, and small physician practices. Only 2% of those physician searches were on behalf of entities seeking doctors to start a practice in an area or to join a solo practitioner as a partner, compared with 42% in 2004. Overall, 63% of the group's physician search assignments were carried out for hospitals that wanted to hire doctors, compared with 11% in 2004. \nLikewise, a 2011 survey by the American College of Cardiology found that 40% of hospital administrators had acquired or considered acquiring a cardiology practice during the previous two years, and 20% were considering a future acquisition. In one example of the changes, the number of hospitalists has risen from less than 1,000 in the late 1990s to nearly 30,000 in 2011. \nPhysician-hospital affiliation can take a number of forms, from contracts for specific services with physician practices or organizations, such as those outlined above, to full-time employment of doctors (see Figure 1 ). \nOver time, physician-hospital arrangements have shifted as financial incentives have changed. Some general examples of possible affiliations include the following:\nPhysician practices can contract to provide doctors and other staff for a hospital independently or work through intermediaries like physician management companies. Hospitals can directly employ doctors. In states that have laws barring the corporate practice of medicine, some hospitals have created non-profit foundations to secure physician services. Doctors and hospitals can form physician-hospital organizations or other forms of joint ventures to provide services, bid for insurance contracts, or achieve financial and clinical integration.\nAccording to the AHA, affiliations involving independent groups of physicians have been declining in prevalence, while arrangements in which physicians are salaried employees have been increasing. For physicians, selling a practice to a hospital or entering into a close financial agreement can reduce overhead, while providing predictable schedules and compensation. For hospitals, buying or affiliating with practices allows development of areas of excellence, ensures staff, provides a network of referrals from physicians, and can give the combined entity more leverage with insurers. Affiliation in the form of a joint venture such as an outpatient center can be a way for the hospital to increase revenues and ward off competition from independent doctors and practices that open such centers. \nDiffering Medicare reimbursement based on provider status may also be providing incentives for physician-hospital affiliations. In 2011, Medicare paid more for a 15-minute evaluation and management physician visit in a hospital outpatient setting than it did for a visit in an independent physician's office. Because hospitals also charge facility fees for physician visits, costs are not only higher costs for payers but also for patients, since the fees are subject to deductibles and coinsurance. In a 2012 report to Congress, Medpac, noting increased outpatient billing as more hospitals employ physicians or buy physician practices, said that if current trends continue, Medicare costs could rise by $2 billion annually by 2020: \nThis payment difference creates a financial incentive for hospitals to purchase freestanding physician offices and convert them into (outpatient departments) OPDs without changing their location or patient mix. Indeed, (evaluation and management) clinic visits provided in OPDs increased 6.7% in 2010, potentially increasing Medicare and beneficiary expenditures without any change in patient care.\nAs the experience of the 1990s showed, hospital employment of physicians has not always been successful. Hospitals may not make as much money as expected, and may incur initial losses. An analysis in The New England Journal of Medicine estimated that hospitals lose $150,000 to $250,000 per year for the first three years they employ a doctor, as physicians adapt to the new system. During the 1990s, some hospitals found that physician productivity declined after practices were purchased by hospitals. Merritt Hawkins data indicate that even though a number of hospitals are now preparing to make the transition to coordinated systems such as ACOs, they are still basing physician compensation on a fee-for-service or volume basis\u2014offering new hires a salary with a productivity bonus. \n\n\t\t\tAffiliation with Insurers and Other Payers\n\nInsurance companies are affiliating with physicians as they attempt to meld coverage and delivery systems to better control costs. Some analysts suggest that physicians may find their financial and professional interests are more aligned with insurers, given that emerging payment systems such as medical homes and ACOs increase pressure to reduce costs and increase quality by improving preventive care and follow-up care to avoid hospitalizations. However, the AMA in a manual for members notes that the success of such arrangements, as with other ACO configurations, depends on a number of factors regarding the amount of decision making insurers are willing to give physicians and other professional and financial concerns.\nSome recent examples of affiliation include the following: UnitedHealth Group, a large California insurer, in 2011 bought the management arm of Monarch HealthCare, the largest physician group in Orange County, California. Health insurance firm Cigna has expanded its accountable care network via deals with physician practices in seven states, and now has more than 20 such plans. Pennsylvania-based Highmark Inc., a major insurer in the Blue Cross\/Blue Shield system, has been working on an acquisition of the West Penn Allegheny Health System, a physician-led hospital and multi-group practice network. The move is part of a larger effort by Highmark to develop an integrated care system. \n\n\t\t\tDelivery Reforms\n\nPhysician practices, hospitals, and other health care providers in recent months have announced affiliations to qualify as accountable care organizations (ACOs) under the ACA. Group practices, independent practice associations, and networks or independent practitioners can participate if they meet HHS standards. In the simplest case, an ACO contracts with payers to be accountable for the continuum of care provided to a defined population. If the costs of care provided are less than targeted amounts, and certain quality measures are achieved, the ACO and the payer share the savings. Under the Medicare Shared Savings Program, the government will contract with ACOs that will assume responsibility for improving quality of care and coordinating care across providers. ACOs must be financially and organizationally integrated. \nSome industry analysts say the ACOs could have a notable effect on the health care marketplace. Morgan Stanley in a June 2011 analysis predicted the ACA would accelerate health care consolidation, noting that the share of physicians in independent practices was declining by 1% to 3% a year as doctors entered into financial arrangements with hospitals and other providers. While most of the initial ACOs that formed were sponsored by hospitals, however, a growing number are being built around physician practices or insurers. \nThe ACA includes other provisions intended to increase health system coordination that could help to drive additional integration. One is medical homes, where the primary physician's office assumes the role for coordinating care across other providers to improve outcomes and reduce costs. The ACA also includes Medicare \"bundled\" payments, where billing is based on the totality of a treatment, and the law gives physicians new ability to form health co-ops or affiliate with insurers and managed care plans. A GAO examination of bundled payments found they are difficult to set up and administer without provider affiliation.\nSome analysts predict the market changes now underway will be more long-lasting and pervasive than was the case during the 1990s, given moves toward integrated care. For example, private equity firms looking at investing in health care providers are targeting companies that can capitalize on consolidation by providing management services or physician staff for health care providers. Bain & Co. in a recent report predicted that health care providers and services will become more significant for investors. As Bain analysts wrote: \"We expect significant strategic interest in accountable-care oriented investments, including investments that stretch across traditional boundaries (such as UnitedHealth Group's acquisition of Monarch Care).\" \n\n\t\t\tConcierge Practices\n\nWhile the main trends appear to be consolidation, a small but growing number of doctors are responding to pressures to change health care delivery and reimbursement by creating concierge practices, where physicians see fewer patients who pay an annual fee to receive care. In return, patients get enhanced services such as longer office visits, more in-depth physicals, and other preventive and continuous care. Because physicians in concierge practices see fewer patients on average, there have been questions about the potential impact on physician supply. To date, however, the number of such practices remains relatively small.\nA 2010 study by researchers at the University of Chicago and Georgetown University for Medpac found there were at least 756 retainer-based physicians providing care (a number the report said probably represented the minimum), with average fees from about $1,500 to $2,000, although the physicians interviewed charged anywhere from $600 to $5,400. The physicians interviewed by the researchers had 100 to 425 patients in their practices, compared to more than 2,000 before starting or joining a concierge practice. Large, regional concierge groups include MDVIP, headquartered in Boca Raton, FL, and New York-based Concierge Choice Physicians. \nSeveral states have examined whether concierge medicine is in compliance with their insurance laws, and there have also been issues regarding whether the additional fee is in compliance with government and other insurance policies. For example, concierge practices can only include Medicare patients if (1) the physician elects to opt out of Medicare and does not treat any Medicare beneficiaries for two years, or (2) the physician contracts to provide concierge care only for non-Medicare covered services. \n\n\tLegal Issues\n\nAs physicians seek to affiliate with other practices or providers, through ACOs or other means, they must comply with state and federal laws designed to ensure fair competition and transparency, as well as prevent over-utilization of services in the health care sector. Among the laws are federal antitrust and anti-kickback statutes, state laws barring the corporate practice of medicine, and the Stark law that imposes limitations on physician self-referrals.\nFederal antitrust laws are directed at ensuring that markets remain competitive. Antitrust is a means of governing market behavior that is, in essence, the flip side of market regulation accomplished via regulatory oversight. The consolidation or integration of health care entities, or other behavior by them (joint and\/or unilateral), even if prompted by or taken in furtherance of achieving some level of joint functioning deemed necessary to achieve the stated goals of the ACA or other improvements in the health care sector, could create cause for antitrust concern. Joint negotiation over fees or terms of reimbursement by physicians or other providers is an example of behavior that might implicate the antitrust laws, for example. \nApplicable antitrust or antitrust-related provisions include Sections 1 and 2 of the Sherman Act (15 U.S.C. \u00a7\u00a71, 2), which prohibit, respectively, \"contracts or conspiracies in restraint of trade\" and monopolization or attempted monopolization; and Section 7 of the Clayton Act (15 U.S.C. \u00a718), the so-called \"anti-merger\" provision; both are enforceable by the antitrust agencies (Antitrust Division of the Department of Justice, FTC), as well as by individual plaintiffs. Section 5 of the FTC Act, which prohibits \"unfair methods of competition in or affecting commerce,\" is enforceable only by the commission. The FTC and the DOJ have issued guidance regarding ACOs and other configurations that could pass antitrust review, and those that might be problematic. The DOJ and FTC have been investigating some hospital physician mergers. \nMedicare and Medicaid anti-kickback law (42 U.S.C. \u00a71320a-7b(b)) makes it a felony for a person to knowingly and willfully offer, pay, solicit, or receive anything of value (i.e., \"remuneration\") in return for a referral or to induce generation of business reimbursable under a federal health care program. The statute prohibits both the offer or payment of remuneration for patient referrals, as well as the offer or payment of anything of value in return for purchasing, leasing, ordering, or arranging for, or recommending the purchase, lease, or ordering of any item or service that is reimbursable by a federal health care program. Persons found guilty of violating the anti-kickback statute may be subject to a fine of up to $25,000, imprisonment of up to five years, and exclusion from participation in federal health care programs for up to one year.\nThe Stark provisions that impose limitations on physician self-referrals were enacted in 1989 under the Ethics in Patient Referrals Act (42 U.S.C. \u00a71395nn). The Stark law, as amended, and its implementing regulations prohibit certain physician self-referrals for designated health services that may be paid for by Medicare or Medicaid. In its basic application, the Stark law provides that if (1) a physician (or an immediate family member of a physician) has a \"financial relationship\" with an entity, the physician may not make a referral to the entity for the furnishing of designated health services (for which payment may be made under Medicare or Medicaid), and (2) the entity may not present (or cause to be presented) a claim to the federal health care program or bill to any individual or entity for DHS furnished pursuant to a prohibited referral. The general idea behind the prohibitions in the Stark law is to prevent physicians from making referrals based on financial gain, thus preventing overutilization and increases in health care costs.\nThe laws include some exceptions for direct employment arrangements, and some legal experts say direct employment of physicians may be the most straightforward way for hospitals and other providers to integrate with physicians, given the legal complexities that can be involved in other arrangements. There can be financial downsides to direct employment, as hospitals discovered during the 1990s when they did not realize expected financial gains after buying physician practices. \n\n\tIssues for Congress\n\nCongress has been paying close attention to consolidation in the health care industry, and specifically in physician practices, including hearings in the Ways and Means Committee and the House Committee on Small Business during the 112 th Congress. There are a number of reasons that lawmakers are taking an active interest in the market developments, including physician complaints about federal policies and concerns that a decline in smaller, independent practices could exacerbate existing physician shortages in areas such as rural regions. Lawmakers also want to ensure that the market changes are meeting the goals of expanding access and addressing government and private health care spending. Because health care is highly regulated, and government payments make up an increasing share of physician revenues, congressional action can affect the pace of practice consolidation and other market trends. In general, Congress is monitoring developments in several broad areas: \n\n\t\tMedical Spending\n\nRising health care costs have led to federal, state, and private efforts to rein in medical spending, including controlling physician payments and providing incentives for consolidation to realize greater efficiency. One question surrounding affiliation between physicians and other health organizations such as hospitals is whether they will help to reduce costs. There is concern that such affiliations could instead lead to higher prices for consumers and the government as the larger entities gain negotiating leverage with insurers and can charge more for some Medicare-covered services. To date, studies have provided mixed results on whether closer affiliation improves efficiencies and leads to reduction in prices for health care services. \nA study of integration between physician practices and hospitals that took place in California during the 1990s did not find evidence that such affiliations increased prices. There was evidence that such vertical integration may have reduced prices, though the findings were not precise nor statistically significant. Other studies have found differing effects, while a review of research on doctor-hospital affiliation found that such alignments were often designed to increase market power by reducing competition, and that the limited evidence on price impacts was mixed. The study noted that most of the arrangements studied thus far have involved coordination of services, but not clinical integration of the type envisioned in programs such as ACOs. \nWhile the emerging incentives are different, given quality-based initiatives in the ACA and in a number of private insurance plans, some analysts express concerns that large organizations\u2014such as ACOs built around a major regional hospital or large physician group\u2014could gain more market share and negotiating leverage with insurers, which could lead to higher prices. Anecdotally, a growing number of news reports indicate that patients are facing higher charges for services when physicians provide services in hospital outpatient settings, partly due to differences in Medicare payment. Some analysts say pricing concerns can be mitigated with stronger antitrust oversight and have noted an increase in FTC and DOJ investigations of proposed mergers due to concerns about their impact on the competitive landscape. \nAt the same time, coordinated care delivery systems are in the nascent stage, and health care payments are still mainly based on volume of services rather than quality improvements. As Merritt Hawkins data indicate, many hospitals now hiring physicians or buying practices are basing physician compensation partly on productivity, which, combined with higher Medicare reimbursement for hospital-based services, could result in a higher number of physician services going forward. \n\n\t\tAccess\n\nAccording to some experts, the unfolding efforts at physician coordination could improve access to care, by increasing competition in health care markets and creating networks that provide additional services and access to specialists to underserved consumers, such as Medicaid patients.\nBut lawmakers and analysts have expressed concerns that as more doctors work in larger practices, there could be a change in the traditional doctor-patient relationship and potentially fewer entry points into the health care system if physician offices, outpatient clinics, or other facilities in a local area close. Another open question, as government and private payers base more payments on quality improvement measures, is whether such patient-driven systems could perpetuate disparities in the health care system. For example, some experts have asked whether ACOs and other quality-based systems could have a disincentive to treat sicker, more expensive patients and be more selective in their choice of patients, though HHS has designed the ACOs to make such so-called cherry picking difficult. \nSome lawmakers have suggested that consolidation could make it harder for rural areas to attract physicians. Rural areas have long had trouble recruiting doctors. But precisely because there are fewer physicians in rural areas, they may have more individual clout in negotiating with local hospitals during the current market evolution, some analysts say. \nThe issue of access also goes to the question of whether consumers will have as much freedom to see the doctor of their choice, or visit a specialist, in integrated health care systems where physicians work for insurers or hospitals. In other words, will ACOs and medical homes be managed differently than the managed care plans that created consumer unrest in the 1990s? Some analysts say it will be important to analyze required information on patients' access to primary and specialty physicians in the emerging health organizations.\nAccess is also linked to the issue of physician supply, such as the potential for growth in concierge practices that accept fewer patients and the projected shortage of primary care doctors. In an effort to increase supply, and possibly reduce prices for certain services, state legislatures and Congress have debated initiatives to expand the scope of allowable care provided by nurse practitioners and physician assistants. \n\n\t\tCoordinated Care\/Quality\n\nNew payment and delivery systems in Medicare and private plans are based on the theory that coordinated care can bring about increased quality, thereby reducing costs and allowing payers to enhance physician reimbursement. Some demonstration programs have shown potential for savings, though the scale is as yet unclear. A Congressional Budget Office analysis of past demonstration programs designed to reduce Medicare spending by implementing quality care initiatives concluded that a number cut hospitalizations and improved measures of patient care, but most did not meet their spending goals. The report also noted that physicians may have incentives to upcode, or increase the severity of an initial diagnosis, in order to show larger quality improvements. A 2012 analysis of a coordinated care pilot study at the University of Washington at St. Louis hospital found notable improvements in quality of care, as well as health savings.\nThere may also be differences in the ability of smaller versus larger physician practices to experiment with new quality-based systems such as medical homes. Practices bear many of the up-front costs of creating new coordinated care services, while many savings may be dispersed through the broader health care system. \nAnother potential factor that could affect efforts to improve coordination of care is increased segmentation of physicians as a result of ongoing market changes. A 2012 report on the future of medical practices noted:\nThese changes in the practice environment have given rise to a large segment of the physician community that no longer hospitalizes patients, but rather manages them exclusively in ambulatory settings (imaging, surgery, chemotherapy, etc.) ... In an increasing number of places, there are now two non-overlapping physician communities: physicians who never visit the hospital and physicians who never leave it, as is the case in most of Europe.\nUnder many quality-based systems, primary care physicians are envisioned as the focal point for managing patient care. In some scenarios, coordinating physicians or medical groups can face financial penalties based on the quality of care by other providers whose actions they do not directly control. With the rise of hospitalists, emergency room physicians, and other hospital-based physicians with segmented roles, such coordination can be more challenging, according to some analysts. For example, many lower-income consumers use emergency rooms as their entree to care. The growing use of specialized emergency room doctors and other hospital-based physicians who make the decision to admit patients may mean that primary care physicians are not brought into the decision-making loop in an early fashion. Such issues could be addressed in structured care organizations, analysts say.\n\n\t\t\tAppendix. Physician Income and Practice Costs\n\nAlthough doctors are among the best-paid professionals in the country, they have less ability than some other white collar workers to determine prices for their services, which are largely set by the federal payment rates in the Medicare and Medicaid programs or via negotiations with insurers. \nPhysician income can be affected by factors including (1) specialty, (2) source of payment (public vs. private), and (3) productivity, in terms of the volume or range of services offered. General practitioners and pediatricians make less than specialists such as cardiologists and oncologists, for example. Annual survey data from the MGMA provide detailed information on median compensation for physicians in different medical specialties (see Table A-1 ).\nSome studies indicate that physician income has been declining in real terms in recent years. According to one analysis, inflation-adjusted physician fees declined by 25% from 1995 to 2006, a time period during which physicians also worked fewer hours. Income did not appear to decline as much as time worked, however, suggesting that some doctors may have found other ways to earn money, such as performing more tests in their offices, opening outpatient clinics, increasing intensity of services, or providing more expensive services. A second study found that average physician net income declined about 7% after inflation from 1995 to 2003, though there were differences among specialties. \nThe recession that began in December 2007 and ended in June 2009 may have had an impact on physician income. Physician visits by privately insured patients under age 65 declined by 17% from spring 2009 to the end of 2011. The decline in the share of people covered by private insurance during that period was smaller than the decline in visits.\nPhysician practice operating costs have not been declining in concert with real compensation, according to the MGMA. That may not only make it more financially challenging for some small practices, it may also mean that practices that want to enter into new payment and coordinated care systems such as ACOs or medical homes may have more difficulty raising necessary capital unless they affiliate with other health providers.\nFederal Policies Affecting Compensation\nMost physicians accept patients insured through the federal Medicare program for the elderly and disabled. Determining the proper level of Medicare physician payments has been a challenge for lawmakers. In the Balanced Budget Act of 1997 (BBA97, P.L. 105-33 ), Congress created the Medicare Sustainable Growth Rate (SGR) formula, a system for making annual updates to the physician fee schedule. Since 2002, the SGR formula has resulted in spending above targets and mandated annual cuts in physician reimbursement. With the exception of 2002, when a 4.8% cut went into effect, Congress has voted to override the planned cuts. The ACA did not address the SGR issue, but includes financial incentives to increase some primary care, including a 10% bonus for Medicare primary care services from 2011 to 2016. The ACA also introduced new Medicare payment systems such as the Medicare Shared Savings Program, where doctors who are part of ACOs receive a part of any savings to Medicare from higher quality, more efficient care. \nSolo and group physician practices face costs for acquiring and using electronic health record (EHR) technology to replace paper-based systems. The transition is being driven by Medicare and Medicaid incentive programs, authorized under the Health Information Technology for Economic and Clinical Health (HITECH) Act, which provide financial assistance to help offset the costs of the systems. In its 2010 final rule establishing the EHR incentive programs, CMS said average EHR implementation costs can be as much as $54,000 per physician, with subsequent annual maintenance costs as much as $20,600 per physician. Physicians who meet certain criteria can receive incentive payments under Medicare of up to $44,000 over five years\u2014plus an additional 10% if practicing in a designated medically underserved area. The payments phase out over time and are replaced by financial penalties. Beginning in 2015, physicians who are not meaningful users of EHR technology will see a slight reduction in Medicare Part B reimbursement.","output":"A growing number of U.S. physicians are combining their practices; affiliating with hospitals, insurance companies, and specialty management firms; or going to work directly for such organizations. The moves are part of a broader trend toward consolidation in health care, with the overall number of mergers and acquisitions in the sector at the highest level in a decade.\nAlterations in physician practice appear to be a response to a number of factors. Younger doctors are more eager than their predecessors to work for an outside institution, such as a hospital, to secure a set schedule and salary. Private practices have become more complex to manage, even as physician compensation has been declining. Doctors see financial advantages to building larger practices, in terms of ability to control expenses and negotiate higher fees with insurers. Further, not all trends are toward consolidation. A small but growing number of doctors are reacting to market incentives by moving in a different direction: creating concierge practices in which they see a limited number of patients who pay an annual retainer.\nAccording to experts, physician practices also may be affected, in part, by provisions of the 2010 Patient Protection and Affordable Care Act (ACA, P.L. 111-148, as amended), designed to spur closer financial and clinical affiliation among health care providers. For example, the ACA creates health care delivery systems called Accountable Care Organizations (ACOs), under which providers contract to oversee a patient's total course of care in a bid to manage costs and improve quality. A number of physician practices, insurers, and hospitals have announced affiliations to qualify as ACOs. In another move partly spurred by the ACA, hospitals and health plans have been hiring physicians to ensure they will have adequate staff to treat the millions of Americans projected to gain insurance during the next few years. Several major studies have warned of a looming shortage of physicians, particularly primary care doctors.\nCongress is playing dual roles regarding the consolidation. On the one hand, the ACA was designed, in part, to prompt affiliation among doctors and other health care providers in order to reduce fragmentation and help control government and private health spending. At the same time, lawmakers are monitoring the health care system for signs that consolidation is having negative effects on consumer access, prices, and competition. The health care sector went through a similar round of restructuring during the 1980s and 1990s, including mergers and acquisitions of physician practices, ultimately prompting a backlash from some consumers who complained they were being blocked from specialists and procedures. The ACA envisions a different system of \"patient-centered care,\" where doctors and other providers are given incentives to improve quality and efficiency, rather than to limit services. Still, it remains to be seen how the current round of changes will play out as physicians and other providers form larger organizations. This report provides background on factors contributing to changes in physician practice organization, including physician supply, sources of revenue, operating costs, and government incentives. It also examines the different types of integration, the legal intricacies of affiliation, and the possible implications for consumer and federal policy."}
{"id":"gao_GAO-14-480","pid":"gao_GAO-14-480_0","input":"\tBackground\n\nThe AFWCF relies on sales revenue rather than regular appropriations to  finance its continuing operations. The AFWCF is intended to (1) generate  sufficient resources to cover the full cost of its operations and (2) operate  on a break-even basis over time\u2014that is, neither make a gain nor incur a  loss. Customers primarily use appropriated funds to finance orders placed  with the AFWCF. Cash generated from the sale of goods and services is  the AFWCF\u2019s primary means of maintaining an adequate level of cash to  sustain its operations. The ability to generate cash consistent with DOD\u2019s  regulations depends on (1) accurately projecting workload, such as the  number of aircraft, engines, missiles, and components needed to be  repaired during the year or annual transportation requirements needed to  move United States forces, equipment, and supplies around the globe,  and (2) accurately setting prices to recover the full costs of producing  goods and services. DOD policy requires the AFWCF to establish its  sales prices prior to the start of each fiscal year and to apply these  predetermined or \u201cstabilized\u201d prices to most orders received during the  year\u2014regardless of when the work is accomplished or what costs are  incurred. Stabilized prices provide customers with protection during the  year of execution from prices greater than those assumed in the budget  and permits customers to execute their programs as approved by  Congress.\nDeveloping accurate prices is challenging because the process to  determine the prices begins about 2 years in advance of when the work is  actually received and performed. In essence, the AFWCF\u2019s budget  development has to coincide with the development of its customers\u2019  budgets so that they both use the same set of assumptions. To develop  prices, the AFWCF estimates (1) labor, material, overhead, and other  costs based on anticipated demand for work as projected by customers;  (2) total direct labor hours for each type of work performed, such as work  related to aircraft, engines, and repairable inventory items; (3) the  workforce\u2019s productivity; and (4) savings because of productivity and  other cost avoidance initiatives. In order for the AFWCF to operate on a  break-even basis, it is extremely important that the AFWCF accurately  estimate the work it will perform and the costs of performing the work.  Higher-than-expected costs or lower-than-expected customer demand for  goods and services can cause the working capital fund to incur losses.  Conversely, lower-than-expected costs or higher-than-expected customer  demand for goods and services can result in profits. With sales prices  based on assumptions that are made as long as 2 years before the prices  go into effect, some variance between expected and actual costs is  inevitable.\nIf projections of cash disbursements and collections indicate that cash  balances will drop below the minimum cash requirement, the AFWCF  may need to generate additional cash. One method that may be used is  to bill customers in advance for work not yet performed. Advance billing  generates cash almost immediately by billing AFWCF customers for work  that has not been completed. This method is a temporary solution and is  only used when cash reaches critically low balances because it requires  manual intervention in the normal billing and payment processes.\n\n\t\tDescription of the AFWCF\n\nDuring fiscal year 2013, the AFWCF earned $21.2 billion in revenue. The  AFWCF consists of three business entities: the Consolidated Sustainment  Activity Group (CSAG), the Supply Management Activity Group-Retail  (SMAG-R), and the Transportation Working Capital Fund (TWCF). The  Air Force manages the CSAG and the SMAG-R and acts as an executive  agent for the TWCF. The Air Force assumed responsibility for TWCF  cash in fiscal year 1998 and TWCF cash is included in the AFWCF cash  balance. However, USTRANSCOM rather than the Air Force has the  day-to-day management responsibility for TWCF operations. The  following is a description of the three business entities.\nCSAG: During fiscal year 2013, the CSAG earned $7.4 billion in  revenue. The CSAG provides repairable supply items and  consumable supply items as well as maintenance services. The Air  Force operates two CSAG divisions: the supply division and the  maintenance division. The supply division is primarily responsible for  managing repairable and consumable spare parts unique to the Air  Force. The supply division issued about 1.7 million repairable or  consumable spare parts in fiscal year 2013. The maintenance division  is responsible for economically repairing, overhauling, and modifying  aircraft, engines, missiles, and components to meet customer  demands. The Air Force operated three air logistics complexes  performing about 21 million direct labor hours of work in fiscal year  2013.\nSMAG-R: During fiscal year 2013, the SMAG-R earned $3.3 billion in  revenue. The Air Force\u2019s SMAG-R manages inventory items,  including weapon system spare parts, medical-dental supplies and  equipment, and other supply items used in non-weapon system  applications. It also procures material and makes spare parts  available to authorized customers. The SMAG-R comprises three  divisions: the General Support Division, the Medical-Dental Division,  and the United States Air Force Academy Division. The General  Support Division manages nearly 1.4 million items procured from the  Defense Logistics Agency  and the General Services Administration to support field and depot maintenance of aircraft, ground and  airborne communication, and electronic systems. The Medical-Dental  Division manages items for 74 medical treatment facilities worldwide.  Finally, the United States Air Force Academy Division purchases  uniforms and uniform accessories for sale to approximately 4,000  cadets at the Air Force Academy.\nTWCF: During fiscal year 2013, the TWCF earned $10.5 billion in  revenue. USTRANSCOM\u2019s mission is to provide air, land, and sea  transportation for DOD in times of peace and war, with a primary  focus on wartime readiness. USTRANSCOM submits the TWCF  budget as a distinct subset of the AFWCF budget submission. It  reflects the authority needed to meet peacetime operations, overseas  contingency operations, the surge\/readiness requirements to  support military strategy, and other priorities needed to meet its  transportation mission. According to the USTRANSCOM fiscal year  2012 annual report, the airlift component of USTRANSCOM flew  almost 85,000 sorties supporting 31,181 missions around the world  and transported over 1.8 million passengers and 659,000 short tons of  cargo to their destinations in fiscal year 2012. Further, the sealift and  surface movement components of USTRANSCOM moved more than  500,000 measurement tons of cargo (sea transportation) and 14.5  million square feet of cargo (surface transportation) in support of U.S.  forces worldwide in fiscal year 2012.\n\n\t\tDOD Cash Management Policy\n\nEffective cash management in DOD largely depends on managers  receiving accurate and timely data on cash balances, collections, and  disbursements. Currently, DOD cash balances are visible only in official  reports at the end of each month. According to DOD\u2019s Financial  Management Regulation, volume 2B, chapter 9, DOD working capital  funds are to maintain the minimum cash balance necessary to meet  disbursement requirements in support of both operations and the capital  asset program. The DOD working capital funds are to maintain a  minimum cash balance sufficient to pay bills, such as (1) paying  employees\u2019 salaries for repairing aircraft, weapon systems, and  equipment; (2) purchasing inventory items (spare parts) from vendors;  and (3) transporting troops, equipment, and supplies worldwide. DOD\u2019s  Financial Management Regulation requires that \u201ccash levels should be  maintained at 7 to 10 days of operational cost and cash adequate to meet  six months of capital disbursements.\u201d Thus, the minimum cash  requirement consists of cash that is sufficient to meet 6 months of capital  requirements plus 7 days of operational cost. The maximum cash  requirement consists of 6 months of capital requirements plus 10 days of  operational cost. The regulation further provides that a goal of DOD  working capital funds is to minimize the use of advance billing of  customers to maintain cash solvency unless advance billing is required to  avoid Antideficiency Act violations.\nIn June 2010, the DOD Financial Management Regulation was amended  to allow DOD working capital fund activities, with the approval of the  Office of the Under Secretary of Defense (Comptroller), Director of  Revolving Funds, to incorporate into the formula for calculating the  minimum and maximum cash requirements three new adjustments.  These adjustments would increase the minimum and maximum cash  requirements. First, a working capital fund may increase the minimum  and maximum cash requirements for the amount of accumulated  operating results planned for return to customer accounts. The working  capital fund returns accumulated profits back to its customers by reducing  future prices so it can operate on a break-even basis over time. The  second adjustment allowed by the revised DOD Financial Management  Regulation is an allowance for funds appropriated directly to a working  capital fund that are obligated in the year received but not fully spent until  future years. The adjustment allows the working capital fund to retain  these amounts as an addition to its normal operational costs. Finally, a  working capital fund may increase the minimum and maximum cash  requirements by the marginal cash required to purchase goods and  services from the commodity\/business market at a higher price than was  submitted in the President\u2019s Budget. The adjustment reflects the cash  impact of the specified market fluctuation.\n\n\tAFWCF Monthly Cash Balances Did Not Consistently Fall within the Minimum and Maximum Cash Requirements\n\nThe AFWCF\u2019s monthly cash balances fell within the minimum and  maximum cash requirements about one-third of the time during fiscal  years 2009 through 2013. Our analysis of AFWCF cash data showed that  the AFWCF monthly cash balances fluctuated significantly from fiscal  years 2009 through 2013 but were almost equally distributed above,  between, and below the minimum and maximum cash requirements. The  AFWCF monthly cash balances were above the maximum cash  requirement for 19 of the 60 months, between the minimum and  maximum cash requirements for 21 of the 60 months, and below the  minimum cash requirement for 20 of the 60 months. Figure 1 shows the  AFWCF monthly cash balances compared to the minimum and maximum  cash requirements for fiscal years 2009 through 2013.\nOur analysis of the AFWCF monthly cash balances showed that the  average monthly cash balance declined each year from fiscal year 2009  through fiscal year 2013. Further, as monthly cash balances declined (1)  more months were above the maximum cash requirement in fiscal years  2009 and 2010 compared to the next 3 fiscal years and (2) more months  were below the minimum cash requirement in fiscal years 2012 and 2013  compared to the prior years. Table 1 shows AFWCF monthly cash  balance information for each of the 5 fiscal years reviewed and the  number of months the AFWCF cash balances were above, between, or  below the minimum and maximum cash requirements.\nOur analysis of AFWCF financial documents and discussions with Air  Force headquarters, Air Force Materiel Command, and USTRANSCOM  officials provided the following information on the AFWCF monthly cash  balances and the relationship of the monthly cash balances to the  minimum and maximum cash requirements from fiscal years 2009  through 2013. First, the monthly cash balances were generally high in  fiscal years 2009 and 2010 because the Air Force charged more than it  cost for spare parts. Second, the monthly cash balances fluctuated  because of the cyclical nature of events, such as the DOD operating  under a continuing resolution. Finally, large-dollar transactions, such as  transfers in and out of the AFWCF, affected the monthly cash balances.  These factors affecting the AFWCF cash balance are discussed further in  the sections that follow.\n\n\t\tMonthly Cash Balances Were High in Fiscal Years 2009 and 2010 Because the Air Force Set Its Rates Too High for Supply Items\n\nThe AFWCF entered fiscal year 2009 with a cash balance of $1,384  million\u2014about $224 million or 19 percent above the maximum cash  requirement for fiscal year 2009. Air Force headquarters officials informed  us that when they set the rates to be charged to CSAG and SMAG-R  customers for supply items in fiscal years 2009 and 2010, they wanted  the cash balance to be at the maximum cash requirement because the  AFWCF changed the method for charging customers for supply items.  Specifically, the Air Force changed the method for charging customers for  spare parts from (1) selling individual parts to customers on a transaction- by-transaction basis to (2) charging customers for spare parts based on  actual hours flown by aircraft. Because the Air Force did not have  historical data on applying the new method, the Air Force wanted to make  sure it charged customers enough for supply items so that the AFWCF  would have a sufficient cash balance. In doing so, the Air Force charged  more than it cost for spare parts, which resulted in a higher-than-expected  cash balance. According to Air Force headquarters and Air Force Materiel  Command officials and our analysis of financial documents, the monthly  cash balance was above the maximum amount for 14 of the 24 months  during fiscal years 2009 and 2010.\n\n\t\tMonthly Cash Balances Fluctuated Because of the Cyclical Nature of Events\n\nAir Force headquarters, Air Force Materiel Command, and  USTRANSCOM officials informed us that fluctuations in the AFWCF  monthly cash balances occurred because of the cyclical nature of events  that affect the AFWCF. Customer orders do not execute in a smooth  pattern throughout the fiscal year but instead fluctuate on a seasonal  basis as discussed below. These seasonal fluctuations can result in cash  balances falling below the minimum cash requirement early in the fiscal  year and rising above the maximum in the second half of the fiscal year.\nIn the beginning of the fiscal year, the monthly cash balances  generally decrease if DOD operates under a continuing resolution  because AFWCF customers\u2019 funding is constrained, which, in turn,  suppresses customer demand for AFWCF goods and services. For  fiscal years 2009 through 2013, except for fiscal year 2009, DOD  operated under a continuing resolution. For example, our analysis of  fiscal year 2012 financial reports showed that for November 2011,  December 2011, and January 2012, the AFWCF monthly cash  balances were below the minimum cash requirement. In another case,  our analysis of fiscal year 2010 financial reports showed that for the  first 3 months of fiscal year 2010, the AFWCF monthly cash balances  were lower than the ending cash balance for fiscal year 2009. The  October and December 2009 cash balances were below the minimum  cash requirement.\nBeginning in the April and May time frame and continuing through the  summer months, the AFWCF monthly cash balances generally  increase because the Air Force flies more training missions during  these months because of the better weather conditions. The  additional hours flown results in the CSAG and SMAG-R earning  more revenue, which, in turn, increases AFWCF collections and its  monthly cash balance. For example, our analysis of financial reports  showed that in fiscal year 2009, the three highest AFWCF monthly  cash balances were in June, July, and August, as shown in figure 1.  For these 3 months, the monthly cash balances were above the  maximum cash requirement by over $500 million. In another case, our  analysis of financial reports showed that in fiscal year 2011, the two  highest AFWCF monthly cash balances were in July and August, as  shown in figure 1. For these 2 months, the monthly cash balances (1)  were the highest cash balances for the fiscal year and (2) were the  only two months when the monthly cash balance was above the  maximum cash requirement.\n\n\t\tMonthly Cash Balances Were Affected by Large- Dollar Transactions\n\nAir Force headquarters, Air Force Materiel Command, and  USTRANSCOM officials stated that fluctuations in the AFWCF monthly  cash balances also occurred because of large-dollar transactions, such  as appropriations received by the AFWCF or large transfers to and from  the AFWCF. These fluctuations occurred in the month that a transaction  was made and resulted in large fluctuations in the cash balance from  month to month as well as the monthly cash balances fluctuating from  below the minimum cash requirement to above the maximum cash  requirement or vice versa. For example, at the end of August 2010, the  AFWCF monthly cash balance was $1,395 million (above the maximum  cash requirement). During August 2010, the AFWCF received an $847  million appropriation to fund fuel increases. If the AFWCF had not  received this appropriation, the August 2010 monthly cash balance would  have been $548 million (below the minimum cash requirement).\nOn the other hand, the AFWCF cash balance fluctuated downward and  was reduced when transfers were made from the AFWCF to other  appropriations. For example, the Air Force transferred $251 million out of  the AFWCF in the last quarter of fiscal year 2009. These transfers ($105  million in July 2009 and $146 million in September 2009) reduced the  amount of cash that was over the maximum cash requirement.  Specifically, the September 2009 AFWCF cash balance was over the  maximum cash requirement by about $249 million. If the $251 million had  not been transferred, the AFWCF fiscal year 2009 ending cash balance  would have been over the maximum cash requirement by about $500  million.\nFurther, large transactions can affect the monthly cash balances for  several months and thus affect the AFWCF\u2019s ability to fall within the  minimum and maximum cash requirements. In developing the fiscal year  2013 AFWCF budget, the Air Force set its fiscal year 2013 rates to return  prior year gains to its customers. Air Force officials informed us that the  fiscal year 2013 rates were expected to lower the AFWCF cash balance  by about $500 million and the projected cash balance would be close to  the minimum cash requirement. However, the cash balance fell below the  minimum cash requirement because of an unplanned $370 million  transfer from the AFWCF made in August 2012. The transfer was  needed to fund overseas contingency operations requirements, such as  aircraft depot maintenance. From September 2012 through May 2013, the  monthly cash balance was below the minimum cash requirement for 8 of  the 9 months. If the $370 million transfer had not occurred, the monthly  cash balance would have been above the maximum cash requirement for  4 months, between the minimum and maximum cash requirements for 3  months, and below the minimum cash requirement for 2 months. From  June 2013 through September 2013, the monthly cash balance was  between or above the cash requirement.\nFor further details on the cash balances for fiscal years 2009 through  2013, see appendix II.\n\n\tAFWCF Monthly Cash Balances Are Projected to Be Above the Maximum Requirement in Fiscal Year 2014 but to Fall Below the Minimum Requirement by the End of Fiscal Year 2015\n\nThe AFWCF\u2019s fiscal year 2015 budget information shows that the fund\u2019s  projected monthly cash balances are only expected to fall within the  minimum and maximum cash requirements about 25 percent of the time  in fiscal years 2014 and 2015. Specifically, our analysis of the AFWCF\u2019s  fiscal year 2015 budgeted information that contains its cash management  plans for fiscal years 2014 and 2015 showed that the projected monthly  cash balances are expected to be above the projected maximum cash  requirement for the first 17 months, between the projected minimum and  maximum cash requirements for the next 6 months, and below the  projected minimum cash requirement for the final month. Figure 2 shows  the AFWCF projected monthly cash balances compared to the projected  minimum and maximum cash requirements for fiscal years 2014 and  2015.\nOur analysis of AFWCF financial documents and interviews with AFWCF  headquarters officials identified two reasons for the fiscal year 2014  projected AFWCF cash balances being above the projected maximum  cash requirement: (1) the AFWCF entered fiscal year 2014 with a cash  balance ($1,458 million) that was above the projected maximum cash  requirement for fiscal year 2014 by about $260 million or 22 percent and  (2) the AFWCF is building or maintaining a higher cash balance in  preparation for the October 1, 2014, implementation of a Treasury  initiative to provide visibility over daily cash balances for all  appropriations, including the AFWCF. The higher cash balance is needed  to cover the volatility in the daily cash balance. By the final month of fiscal  year 2015, the projected AFWCF cash balance is expected to decrease  below the projected minimum cash requirement. The projected decline  occurred because of an expected shortfall of $927 million in the Airlift  Readiness Account (ARA) resulting from the Air Force including only a  portion ($150 million) of the total projected fiscal year 2015 ARA  requirement ($1,077 million) in the fiscal year 2015 Air Force operation  and maintenance appropriated budget request. Further, achieving the  AFWCF projected cash balances in fiscal year 2015 depends on the Air  Force and USTRANSCOM successfully implementing cost reduction and  efficiency initiatives to save $620 million during that fiscal year.\n\n\t\tDaily Cash Balance Reporting Could Increase Minimum and Maximum Cash Requirement for the AFWCF\n\nTreasury is modernizing and streamlining its reporting processes through  its government-wide accounting initiative. One result of this initiative will  be for Treasury to provide daily cash balances for all appropriations,  including the AFWCF, beginning in fiscal year 2015. Currently, the cash  balance is visible only in official reports at the end of each month. In  preparation for DOD\u2019s implementation of Treasury\u2019s initiative, the Office of  the Under Secretary of Defense (Comptroller) initiated a study in  February 2013 to evaluate the impact daily cash reporting will have on  working capital fund policies and management. The goal of the study was  to assist working capital fund managers to identify necessary  modifications to current controls, processes, and policies needed to  prevent potential Antideficiency Act violations. As part of the study, the Air  Force and USTRANSCOM collected daily disbursement and collection  data from their systems to determine the impact these transactions had  on their daily cash balances. In analyzing these data, they noted the  following.\nThe AFWCF\u2019s day-to-day cash balances are more volatile than cash  balances measured on a monthly basis and can fluctuate by hundreds  of millions of dollars on a given day. These fluctuations increase the  risk that the cash balance could become negative on a particular day.\nDOD systems generally bill customers once or twice a month. The  billing systems run in the middle of the month and at the end of the  month. Since disbursements are made daily, the daily cash balance is  generally at its lowest level at about the middle of the month before  the first billing cycle occurs for that month.\nAir Force and USTRANSCOM officials informed us that managing cash  daily rather than monthly will require them to take two actions. First, these  officials stated that the AFWCF will need to maintain a higher cash  balance to offset the day-to-day volatility of cash during the month. The  higher cash balance will reduce the risk that (1) the AFWCF daily cash  balance will become negative on a particular day during the month and  (2) the AFWCF will incur a potential Antideficiency Act violation. However,  the Air Force and USTRANSCOM have not determined how much the  minimum and maximum cash requirements should be increased to cover  the additional cash needed. Second, the Air Force is considering adding  another billing cycle for the work performed by depot maintenance to  increase collections during the early part of the month and offset  disbursements made during the same time period.\nThe implementation of Treasury\u2019s initiative to provide daily cash balances  was planned for October 1, 2014 (beginning of fiscal year 2015).  However, according to Office of the Under Secretary of Defense  (Comptroller) officials, DOD systems will not be ready to provide the  necessary data to meet the implementation date because (1) DOD has  multiple disbursing systems and nonintegrated disbursing locations and  (2) DOD has a requirement to protect classified or sensitive information.  As of May 2014, the officials stated that they have not established a new  implementation date.\nSee DOD Financial Management Regulation 7000.14-R, Accounting for Cash and Fund  Balances with Treasury, vol. 4, ch. 2, p. 2-14 (December 2009). monthly basis, our analysis showed that this policy will need to be  updated to recognize that DOD has visibility over daily cash balances,  especially if the cash balances become negative during the month.  For example, if the cash balance becomes negative on a particular  day during the month, a reconciliation will need to be performed to  determine if the cash balance is actually negative or if an error had  occurred in determining the cash balance.\nWhile DOD realizes that the Financial Management Regulation needs to  be revised to effectively implement Treasury\u2019s initiative to provide daily  cash balances, DOD has not revised it to include guidance on (1)  Treasury\u2019s initiative to provide daily cash balances instead of monthly  cash balances, (2) maintaining sufficient cash balances on a daily basis  to avoid potential Antideficiency Act violations, and (3) the reconciliation  of daily cash balances to ensure the integrity and accuracy of the data.  Further, DOD has not determined the full impact of Treasury\u2019s initiative to  provide daily cash balances for the AFWCF or developed an analytical  approach for calculating the minimum and maximum cash requirements  to adjust for the day-to-day volatility of cash balances in the AFWCF and  reduce the risk that the AFWCF may incur an Antideficiency Act violation.  Once the updated cash requirement is determined, this will affect whether  the projected AFWCF cash balances for fiscal year 2015 will be above,  between, or below the cash requirement. Internal control standards state  that policies, procedures, techniques, and mechanisms are needed to  enforce management\u2019s directives, such as the process of adhering to  requirements for budget development and execution. They help ensure  that actions are taken to address risks.Financial Management Regulation does not reflect the effect that daily  cash balances will have on the AFWCF and thereby increases the risk of  a cash shortage and an Antideficiency Act violation.\n\n\t\tARA Funding Is Expected to Be Sufficient in Fiscal Year 2014, but a Funding Shortfall May Occur in Fiscal Year 2015 That Could Affect AFWCF Cash\n\nThe DOD Financial Management Regulation contains a provision that  pertains to the airlift services provided by USTRANSCOM and that affects  the TWCF as well as the AFWCF cash balances. To enable it to better  compete with commercial providers, USTRANSCOM\u2019s airlift rates are set  to compete with private sector rates and do not cover the full cost of the  Air Force\u2019s readiness requirements for military airlift operations. The  difference between the full cost and the revenue received from airlift  customers is to be provided to USTRANSCOM in the ARA through the  use of Air Force appropriated funds. This requirement exists in both  peacetime and contingency environments.\nUSTRANSCOM officials stated that since they set rates that are  benchmarked to private sector rates, USTRANSCOM does not recover its  full cost of operations and the TWCF incurs losses that in turn result in a  lower cash balance. To recover these losses, the TWCF identifies the  peacetime and contingency airlift requirements and the customers include  these amounts in their budget requests. During the year of execution, the  TWCF bills the services once a month. Specifically, the TWCF receives  funding from (1) the Air Force to pay for the peacetime airlift requirement  (Air Force Operation and Maintenance appropriation) and (2) the military  services for the contingency airlift requirement (overseas contingency  operations appropriation). Over the last several years, the TWCF has  received hundreds of millions of dollars that has helped it maintain cash  solvency.\nAccording to the TWCF budget request, USTRANSCOM estimates the  fiscal year 2014 ARA funding requirement to be $150 million plus $691  million for the contingency airlift requirement, for a total of $841 million.  However, in the fiscal year 2015 TWCF budget, USTRANSCOM  estimates the fiscal year 2015 ARA funding requirement to be $1,077  million, while the fiscal year 2015 Air Force Operation and Maintenance  budget provides for $150 million for the ARA. This estimated shortfall of  $927 million could negatively affect the TWCF as well as the AFWCF  cash balances. Maintaining sufficient cash balances in the TWCF and  AFWCF while minimizing the overall ARA bill to the Air Force presents  major management challenges for Air Force and USTRANSCOM. If the  ARA is overfunded, the Air Force may not be using its resources  efficiently to fund other Air Force program priorities to meet mission  requirements. Alternatively, if the ARA is underfunded, reductions to Air  Force programs may be required to maintain adequate levels of cash in  the AFWCF.\nThe Air Force and USTRANSCOM have had a history of problems with  the Air Force requesting full funding in the Air Force\u2019s budget for the  USTRANSCOM ARA requirement. For example, according to the TWCF  budget, USTRANSCOM included a requirement for $294 million to fund  the ARA in fiscal year 2013, but the Air Force did not include funding for  the ARA in the fiscal year 2013 Air Force operation and maintenance  budget request. Though the Air Force did not request funding for the ARA  in the fiscal year 2013 budget, the Air Force paid its fiscal year 2013 ARA  bill.\nIn reviewing past AFWCF budgets, the Office of the Under Secretary of  Defense (Comptroller) has also been concerned with ARA funding issues.  To address its concerns on these funding issues, in February 2012, the  Office of the Under Secretary of Defense (Comptroller) directed (1) the Air  Force to ensure that both the AFWCF and TWCF cash levels are  adequate to support operational and mobilization requirements in fiscal  years 2013 and subsequent years; (2) the Air Force and USTRANSCOM  to determine the appropriate methodology for fully funding  USTRANSCOM, including the ARA, and estimating the funding sources  for fiscal year 2014; and (3) the Air Force to ensure that it funds its  responsibilities for USTRANSCOM, including the ARA, updated for more  current workload assumptions, in the fiscal year 2014 budget and all  future budgets.\nAlthough the Office of the Under Secretary of Defense (Comptroller) has  previously raised concerns about ARA funding issues, the funding issues  are projected to continue into fiscal year 2015. As stated above, the  estimated funding shortfall of $927 million could negatively affect the  TWCF and AFWCF cash balances in fiscal year 2015. Air Force officials  stated that although the AFWCF projected cash balance is expected to be  above the projected maximum cash requirement at the beginning of fiscal  year 2015, they expect the cash balance to decrease to $853 million and  below the projected minimum cash requirement by fiscal year-end. This  decline is expected to occur because Air Force did not fully fund the  estimated ARA requirement in the fiscal year 2015 budget. Air Force  officials informed us that it did not fully fund the ARA requirement  because it funded other higher-priority requirements.\nAir Force officials are aware of the estimated funding shortfall and stated  that the ARA funding requirement will be best managed in fiscal year  2015 when they can better estimate the actual ARA funding requirement.  Air Force officials stated that Air Force and USTRANSCOM senior  leadership currently meet monthly to collaborate on AFWCF cash  challenges and will be evaluating the ARA funding during fiscal year  2015\u2014the year of execution. They stated that workload and cash levels  are monitored closely during the year of execution and that any potential  issues involving workload and cash levels, including ARA funding, would  be identified several months in advance and brought to senior  leadership\u2019s attention. If a shortfall in the AFWCF cash balance begins to  materialize in the year of execution because of the unfunded ARA  requirement, Air Force officials stated that they have several options,  including (1) reviewing ongoing programs funded by the Air Force  operation and maintenance appropriation accounts to identify where  requirements have changed that would allow the AFWCF to obtain  additional funds for the ARA or (2) reviewing their investment accounts for  excess funding to transfer to the AFWCF. Air Force officials believe any  potential cash shortfall would be identified in sufficient time to take action.  While USTRANSCOM officials understand the Air Force\u2019s position on  funding the ARA, USTRANSCOM officials informed us that they believe it  is more prudent for the Air Force to request a significant amount of  funding for the ARA in the Air Force budget. These officials further stated  that if a funding shortfall occurs, the Air Force faces the risk of  transferring large amounts in the year of execution to cover the unfunded  requirement.\nBecause the Air Force plans to address potential ARA cash shortfalls in  the year of execution, the AFWCF projected cash balances are currently  expected to decline during fiscal year 2015 and be below the minimum  cash requirement by the end of fiscal year 2015, which could impair the  ability of the AFWCF to maintain adequate cash balances. The ARA  funding issue could affect the Air Force\u2019s efforts to build cash in  anticipation of the Treasury initiative to provide daily cash balances.  Because daily cash balances are more volatile, the lower projected cash  balance caused by the lack of funding for the fiscal year 2015 ARA  requirement increases the risk of a cash shortfall and the risk of a  potential Antideficiency Act violation.\n\n\t\tAchieving Expected Savings from AFWCF Initiatives Is Necessary to Meet AFWCF Fiscal Years 2014 and 2015 Projected Monthly Cash Balances\n\nAs stated previously, our analysis of fiscal year 2015 AFWCF budget  information that contains the AFWCF cash management plans for fiscal  years 2014 and 2015 showed that the projected monthly cash balances  are expected to be above the maximum cash requirement in fiscal year  2014 and decline in fiscal year 2015 and fall below the minimum cash  requirement in September 2015. According to Air Force and  USTRANSCOM officials, achieving the AFWCF projected monthly cash  balances for fiscal years 2014 and 2015 depends on the Air Force and  USTRANSCOM successfully implementing cost reduction and efficiency  initiatives for fiscal years 2014 and 2015. Specifically, the savings from  these initiatives were a factor used to (1) set prices to charge customers  in fiscal years 2014 and 2015 and (2) estimate projected disbursements.\nAir Force and USTRANSCOM documentation shows that the fiscal year  2015 AFWCF budget includes $114 million and $620 million in budgeted  savings for fiscal years 2014 and 2015, respectively. For fiscal year 2014,  the $114 million in budgeted savings represents less than 10 percent of  the projected cash balance for any month during fiscal year 2014. On the  other hand, $620 million in budgeted savings represents about 73 percent  of the $853 million projected cash balance at the end of September  2015\u2014the lowest projected balance in fiscal year 2015. If the budgeted  savings are not achieved, the AFWCF cash balance would be adversely  affected because disbursements would be higher than expected, which  would reduce the AFWCF cash balance below that already projected.\nThe Air Force and USTRANSCOM have cost reduction and efficiency  initiatives that are designed to reduce costs and related disbursements for  fiscal years 2014 and 2015, as discussed below.\nThe fiscal year 2015 AFWCF budget includes $503 million in fiscal  year 2015 budgeted savings associated with Air Force initiatives. Air  Force initiatives to reduce costs and related disbursements include (1)  reducing the Air Force workforce at CSAG locations by up to 2,000  personnel, (2) refining forecasting models to more accurately reflect  future parts requirements, and (3) reducing government travel and  contracts where appropriate.\nThe fiscal year 2015 AFWCF budget includes budgeted savings of  $114 million and $117 million for fiscal years 2014 and 2015,  respectively, for USTRANSCOM initiatives. USTRANSCOM initiatives  to reduce costs and related disbursements include (1) reducing  management overhead costs by 20 percent by fiscal year 2019, (2)  reducing spending on information technology projects, and (3)  transferring base operating support costs to Air Force operations and  maintenance.\nSince the $620 million in savings initiatives represents 73 percent of the  September 2015 projected cash balance, it is critical that the Air Force  and USTRANSCOM achieve these savings. If these savings are not  realized, it can put a further strain on the AFWCF cash balance, which is  already projected to be under the minimum cash requirement at the end  of fiscal year 2015. In managing the AFWCF projected cash balance in  fiscal year 2015, there are several factors that may affect these balances  and increase the risk of an Antideficiency Act violation, including (1) the  Treasury cash initiative that will require additional cash to cover the  volatility of cash on a day-to-day basis, (2) the lack of funding for the  fiscal year 2015 ARA requirement, and (3) initiatives to achieve savings. If  a cash shortfall occurs, regardless of the reason, the Air Force will have  to determine how to fund the shortfall.\n\n\tConclusions\n\nThe work that the AFWCF performs supports military readiness by  repairing aircraft and engines; selling inventory items (spare parts); and  providing air, land, and sea transportation for DOD in times of peace and  war. Maintaining the AFWCF cash balance within the minimum and  maximum cash requirements as defined by DOD regulation is critical for  the Air Force and USTRANSCOM to continue to provide maintenance,  supply, and transportation services for their fund\u2019s customers. Over the  past 5 years, the AFWCF has managed to maintain a sufficient cash  balance to pay its bills and sustain operations without disruption even  though the cash balances were outside the minimum and maximum cash  requirements about two-thirds the time. While the projected cash  balances are expected to be above the maximum cash requirement for  fiscal year 2014 and the first half of fiscal year 2015, Air Force officials  face challenges in managing the AFWCF cash in fiscal year 2015. The  challenges include Treasury\u2019s initiative to provide visibility over daily cash  balances for all appropriations, including the AFWCF; funding ARA  requirements; and meeting established savings goals for AFWCF cost  reduction and efficiency initiatives. First, the Air Force has not determined  the appropriate minimum and maximum cash requirements for the  AFWCF that will be needed to cover the volatility of daily cash balances  that can fluctuate by hundreds of millions of dollars each day and reduce  the risk that the AFWCF will incur an Antideficiency Act violation, nor has  DOD updated its policies to reflect daily reporting of working capital fund  cash balances versus monthly cash balances. Second, the Air Force did  not fully fund the ARA requirement in its operations and maintenance  budget for fiscal year 2015, which increases the risk of a cash shortfall in  fiscal year 2015. Third, it is critical that the Air Force and USTRANSCOM  achieve the estimated $620 million savings in fiscal year 2015 as this  represents a significant amount of the fiscal year 2015 year-end cash  balance.\n\n\tRecommendations for Executive Action\n\nWe are making three recommendations to the Secretary of Defense to  improve the management of the AFWCF\u2019s cash balances.\nWe recommend that the Secretary of Defense direct the Under Secretary  of Defense (Comptroller) to take the following action:\nUpdate the DOD Financial Management Regulation to include  guidance on (1) maintaining sufficient cash balances on a daily basis  to avoid potential Antideficiency Act violations and (2) the  reconciliation of daily cash balances to ensure the integrity and  accuracy of the data once DOD implements Treasury\u2019s initiative.\nWe recommend that the Secretary of Defense direct the Secretary of the  Air Force, in conjunction with the Under Secretary of Defense  (Comptroller), to take the following action:\nDevelop an analytical approach for calculating the minimum and  maximum cash requirements to take into consideration the additional  cash needed to cover the day-to-day volatility in the cash balances  once DOD implements Treasury\u2019s initiative.\nWe recommend that the Secretary of Defense direct the Secretary of the  Air Force and the Commander of USTRANSCOM to take the following  action:\nTake steps to help ensure that the AFWCF receives the appropriate  funding if a cash shortfall occurs because of (1) the implementation of  the daily cash requirement, (2) a lack of fiscal year 2015 ARA funding,  and (3) fiscal year 2015 budgeted savings not being realized.\n\n\tAgency Comments\n\nDOD provided written comments on a draft of this report. In its comments,  which are reprinted in appendix III, DOD concurred with the three  recommendations and cited actions planned or under way to address  them. Specifically, DOD commented that consistent with forthcoming  instructions from Treasury regarding daily cash balances, the Under  Secretary of Defense (Comptroller) will revise the Financial Management  Regulation on or about the implementation date for daily cash reporting.  In addition, DOD stated that while the Financial Management Regulation  is in draft, guidance consistent with this recommendation will be published  for component submissions of each Program and Budget Review and  President\u2019s Budget. Further, DOD stated that in the upcoming Program  and Budget review (fiscal year 2016), the working capital fund activities  will submit information that will provide more clarity to minimum and  maximum cash requirements. Finally, DOD indicated that cash levels and  potential shortfalls will be monitored closely, and if an unfavorable trend  develops, appropriate actions will be taken.\nWe are sending copies of this report to the appropriate congressional  committees, the Secretary of Defense, the Secretary of the Air Force, the  Under Secretary of Defense (Comptroller), and the Commander,  USTRANSCOM. In addition, the report is available at no charge on the  GAO website at http:\/\/www.gao.gov.\nIf you or your staff have any questions about this report, please contact  me at (202) 512-9869 or khana@gao.gov. Contact points for our Offices  of Congressional Relations and Public Affairs may be found on the last  page of this report. Key contributors to this report are listed in appendix  IV.\n\nAppendix I: Scope and Methodology\n\nTo determine to what extent the Air Force Working Capital Fund  (AFWCF) monthly cash balances were within the Department of Defense  (DOD) minimum and maximum cash requirements for fiscal years 2009  through 2013, we (1) obtained the DOD regulation on calculating the  minimum and maximum cash requirements, (2) calculated the cash  requirements for fiscal years 2009 through 2013 based on the regulation,  and (3) obtained monthly cash balances for fiscal years 2009 through  2013. We compared the minimum and maximum cash requirements to  the end-of-month reported cash balances. If the cash balances were  above the maximum amount or were below the minimum amount, we met  with Air Force and United States Transportation Command  (USTRANSCOM) officials and reviewed AFWCF budgets and other Air  Force and USTRANSCOM documentation to ascertain the reasons. In  addition, we performed a walk-through of the Defense Finance and  Accounting Service\u2019s (DFAS) processes for reconciling the Department of  the Treasury (Treasury) trial balance monthly cash amounts for the  AFWCF to the balances reported on the AFWCF cash management  reports. Further, to determine the extent cash transfers for fiscal years  2009 through 2013 resulted in the AFWCF cash balances either falling  below the minimum cash requirement or being above the maximum cash  requirement, we (1) analyzed DOD budget and accounting reports to  determine the dollar amount of transfers made for fiscal years 2009  through 2013 and (2) obtained journal vouchers from DFAS that  documented the dollar amount of the cash transfers. We analyzed cash  transfers to determine if any of the transfers resulted in the cash balances  falling outside the minimum or maximum cash requirements and, if so, the  amount outside those requirements. We also obtained and analyzed  reprogramming documents and journal vouchers and interviewed key Air  Force and USTRANSCOM officials to determine the reasons for the  transfers.\nTo determine to what extent the AFWCF projected monthly cash  balances were within the minimum and maximum cash requirements for  fiscal years 2014 and 2015 and if not why, we obtained and analyzed  AFWCF budget documents and cash management plans for the 2 fiscal  years. We used the DOD regulation to calculate the minimum and  maximum cash requirements for each of those years and compared it to  the projected cash balances. If the projected cash balances were above  or below the cash requirement, we met with Air Force and  USTRANSCOM officials to ascertain the reasons. Further, we interviewed  Office of the Under Secretary of Defense (Comptroller), Air Force,  USTRANSCOM, and DFAS officials on the initiative to begin receiving  daily cash balances in fiscal year 2015 and the potential effect on the  management of the AFWCF cash. We also interviewed Air Force and  USTRANSCOM officials to determine what actions the AFWCF plans to  take to increase collections or decrease disbursements to avoid potential  AFWCF cash shortages.\nWe obtained the AFWCF financial data in this report from official budget  documents and accounting reports. To assess the reliability of these data,  we (1) reviewed and analyzed the factors used in calculating the  minimum and maximum cash requirements for the completeness of the  elements included in the calculation; (2) interviewed Air Force,  USTRANSCOM, and DFAS officials knowledgeable about the cash data;  (3) compared AFWCF cash balance information, including collections and  disbursements that were contained in different reports, to ensure that the  data reconciled; (4) obtained an understanding of the process used by  DFAS to reconcile AFWCF cash balances with Treasury records; and (5)  obtained and analyzed documentation supporting the amount of funds  transferred in and out of the AFWCF. On the basis of procedures  performed, we have concluded that these data were sufficiently reliable  for the purposes of this report. We performed our work at the  headquarters of the Office of the Under Secretary of Defense  (Comptroller) and the Office of the Secretary of Air Force in Washington,  D.C.; Air Force Materiel Command at Wright-Patterson Air Force Base,  Ohio; USTRANSCOM at Scott Air Force Base, Illinois; and DFAS in  Columbus, Ohio.\nWe conducted this performance audit from July 2013 to July 2014 in  accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.\n\nAppendix II: Reasons for Year-to-Year Changes in AFWCF Cash Balances from Fiscal Years 2009 through 2013\n\nOver the 5-year period from fiscal years 2009 through 2013, our analysis  of Air Force Working Capital Fund (AFWCF) data showed that the  number of months each year (1) above the maximum cash requirement  generally decreased and (2) below the minimum cash requirement  generally increased. AFWCF officials stated that AFWCF monthly cash  balances generally decreased at the beginning of the fiscal year when the  Department of Defense (DOD) operated under continuing resolutions  because AFWCF customers\u2019 funding was constrained, which, in turn,  suppressed customer demand for AFWCF goods and services. Beginning  in the April and May time frame each year, AFWCF monthly cash  balances generally increased because the AFWCF generated more  revenue from customers for spare parts that result from the Air Force  flying more training mission hours during the spring and summer months  because of better weather conditions.\nThis appendix contains the year-to-year analysis of the reasons for  fluctuations in the AFWCF cash balances from fiscal years 2009 through  2013. Actual AFWCF cash balances fluctuated each year because of the  dollar amounts that were collected by, disbursed by, appropriated to, and  transferred to or from the AFWCF.\n\n\tReasons for the Change in the Fiscal Year 2009 AFWCF Cash Balance\n\nThe AFWCF ended fiscal year 2009 with a cash balance of $1,409  million\u2014$25 million more than the beginning balance. Our analysis of  financial documents and interviews with AFWCF officials identified three  reasons for the net increase in the fiscal year 2009 cash balance. First,  the AFWCF collected about $200 million more than it disbursed because  the rates charged to customers of the Consolidated Sustainment Activity  Group (CSAG) and the Supply Management Activity Group-Retail for  flying hours were higher than the anticipated costs. Second, the AFWCF  received about $76 million in direct appropriations to fund the  transportation of fallen heroes killed in military operations and to pay for  medical and dental war reserve materials.transferred $251 million from the AFWCF to other DOD appropriations in   Third, the Air Force  the last quarter of fiscal year 2009. If the $251 million had not been  transferred, the AFWCF fiscal year 2009 ending cash balance would have  been $1,660 million or $500 million above the maximum cash  requirement.\n\n\tReasons for the Change in the Fiscal Year 2010 AFWCF Cash Balance\n\nThe AFWCF ended fiscal year 2010 with a cash balance of $945 million\u2014 $464 million less than the fiscal year 2010 beginning balance of $1,409  million. The ending cash balance for fiscal year 2010 was between the  fiscal year 2010 minimum and maximum cash requirements. Our analysis  of financial documents and interviews with AFWCF officials identified  three reasons for the net decrease in the fiscal year 2010 cash balance.  First, AFWCF disbursements exceeded collections by $1,054 million  primarily because (1) CSAG reduced customer billings associated with  the Air Force flying hour program in July and August 2010 to return gains  to its customers collected in prior years and (2) the United States  Transportation Command reduced its rates for transportation services,  relieved the Air Force of its requirement to fund the Airlift Readiness  Account, and waived the military services\u2019 overseas contingency  operations funding requirement (known as the cash recovery charge)  because of high balances in the Transportation Working Capital Fund  (TWCF) cash account in fiscal year 2010. Second, the AFWCF  transferred $337 million to other DOD appropriations in fiscal year 2010.  Specifically, (1) $250 million was transferred to the Air Force operation  and maintenance appropriation to compensate for an equivalent reduction  in that appropriation, which was described as excess AFWCF cash; (2)  $47 million was transferred to the Air Force military personnel  appropriation to cover shortages in the account; and (3) $40 million was  transferred to the Defense Logistics Agency in support of a process  improvement initiative. Third, offsetting some of these reductions, the  AFWCF received direct appropriations of about $927 million that  increased the AFWCF cash balance. The appropriations were for TWCF  and CSAG fuel price increases, medical and dental war reserve materiel,  and support for the transportation of fallen heroes.\n\n\tReasons for the Change in the Fiscal Year 2011 AFWCF Cash Balance\n\nThe AFWCF ended fiscal year 2011 with a cash balance of $1,026  million\u2014$81 million more than the fiscal year 2011 beginning balance of  $945 million. The ending cash balance for fiscal year 2011 was between  the fiscal year 2011 minimum and maximum cash requirements. For the  fiscal year, financial documents showed that disbursements exceeded  collections by about $3 million. The AFWCF ending cash balance was  higher because the AFWCF received direct appropriations of about $84  million in fiscal year 2011 for medical and dental war reserve material,  support for the transportation of fallen heroes, and a TWCF container  deconsolidation project.\n\n\tReasons for the Change in the Fiscal Year 2012 AFWCF Cash Balance\n\nThe AFWCF ended fiscal year 2012 with a cash balance of $811 million\u2014 $215 million less than the fiscal year 2012 beginning balance of $1,026  million. The ending cash balance for fiscal year 2012 was below the  minimum cash requirement. Our analysis of financial documents identified  three reasons for the net decrease in the fiscal year 2012 cash balance:  (1) AFWCF collections exceeded disbursements by about $78 million; (2)  the AFWCF received direct appropriations of $77 million for medical and  dental war reserve material, support for the transportation of fallen  heroes, and a TWCF container deconsolidation project; and (3) $370  million was transferred from the AFWCF to the Air Force operation and  maintenance appropriation in the last quarter of fiscal year 2012 to fund  overseas contingency operations requirements. According to a DOD  financial document, the transfer would reduce available cash, but  available cash would be sufficient to support AFWCF disbursements.\n\n\tReasons for the Change in the Fiscal Year 2013 AFWCF Cash Balance\n\nThe AFWCF ended fiscal year 2013 with a cash balance of $1,458  million\u2014$647 million more than the fiscal year 2013 beginning balance of  $811 million or $344 million above the maximum cash requirement. Our  analysis of financial documents and interviews with AFWCF officials  identified three reasons for the net increase in the fiscal year 2013  AFWCF cash balance. First, collections exceeded disbursements by $250  million. Second, the AFWCF received $56 million in direct appropriations  for medical and dental war reserve material and support for the  transportation of fallen heroes. Finally, $341 million was transferred from  the Air Force aircraft procurement appropriation to the AFWCF in August  and September 2013.\n\nAppendix III: Comments from the Department of Defense\n\nAppendix IV: GAO Contact and Staff Acknowledgments\n\n\tGAO Contact\n\n\tStaff Acknowledgments\n\nIn addition to the contact named above, Greg Pugnetti (Assistant  Director), Steve Donahue, Keith McDaniel, and Hal Santarelli made key  contributions to this report.","output":"Why GAO Did This Study\n\nThe AFWCF earned revenue of $21.2 billion in fiscal year 2013 by, among other things, (1) repairing aircraft and engines; (2) selling inventory items (parts); and (3) providing air, land, and sea transportation. Cash generated from the sale of goods and services is used by the AFWCF to cover its expenses, such as paying employees. As requested, GAO reviewed issues related to AFWCF cash management.\nGAO's objectives were to determine to what extent (1) the AFWCF monthly cash balances were within the DOD minimum and maximum cash requirements for fiscal years 2009 through 2013 and (2) the AFWCF projected monthly cash balances were within the minimum and maximum cash requirements for fiscal years 2014 and 2015 and if not why. To address these objectives, GAO reviewed relevant DOD cash management guidance, analyzed AFWCF actual and projected cash balances and related data, and interviewed Air Force and United States Transportation Command officials.\n\nWhat GAO Found\n\nGAO's analysis of Air Force Working Capital Fund (AFWCF) cash data showed that monthly cash balances fell within the minimum and maximum cash requirements about one-third of the time in fiscal years 2009 through 2013. GAO identified three reasons why monthly cash balances were above the maximum or below the minimum cash requirements. First, the cash balance began fiscal year 2009 above the maximum requirement and generally remained above the maximum requirement in fiscal years 2009 and 2010 because the AFWCF charged more than it cost for spare parts. Second, cash balances fluctuated each year because of the cyclical nature of events. For example, in the spring and summer months, the Air Force flies more training missions, which increases revenue for parts and thus the cash balance. Finally, large-dollar transactions caused cash balances to fluctuate above and below cash requirements. These transactions were used to increase cash to pay for costs such as fuel price increases or reduce cash if it was above the maximum requirement.\nAFWCF projected monthly cash balances are expected to fall within cash requirements about 25 percent of the time in fiscal years 2014 and 2015. In managing cash for those fiscal years, the AFWCF faces three challenges:\nThe AFWCF plans to implement a Department of the Treasury initiative to provide daily cash balances, instead of monthly balances, in October 2014. Because daily balances are more volatile, the AFWCF faces a greater risk that a cash shortfall would occur. However, the Department of Defense (DOD) has not updated its regulation on receiving daily cash balances.\nBecause airlift rates are set to compete with private sector rates, they do not cover the full cost. The difference between the full cost and revenue received is to be provided by the Airlift Readiness Account (ARA) funded by the Air Force. The projected cash balance declines in fiscal year 2015 because the Air Force did not fully fund the ARA by $927 million. If a cash shortfall materializes, the Air Force stated its intent to fund the requirement from other programs. Without sufficient ARA funding, the AFWCF cash balance is at risk of falling below the minimum cash requirement in fiscal year 2015.\nThe AFWCF has included $620 million in savings from Air Force and United States Transportation Command initiatives in its fiscal year 2015 projected monthly cash balances. If these saving are not realized, the Air Force may need to take action to reduce the risk of a cash shortfall.\n\nWhat GAO Recommends\n\nGAO is making three recommendations to DOD that are aimed at implementing the Department of the Treasury's daily cash balance initiative and ensuring that the AFWCF receives the appropriate funding if a cash shortfall occurs because of a lack of ARA funding or estimated savings not being realized. DOD concurred with GAO's recommendations and cited related actions planned or under way."}
{"id":"gao_NSIAD-98-143","pid":"gao_NSIAD-98-143_0","input":"\tBackground\n\nAs a result of a 1995 Base Closure and Realignment (BRAC) Commission decision, Kelly Air Force Base, Texas, is to be realigned, and the San Antonio Air Logistics Center, including its Air Force maintenance depot, is to be closed by July 2001. Similarly, McClellan Air Force Base, California, and the Sacramento Air Logistics Center, including its Air Force maintenance depot, is to be closed by July 2001. To mitigate the impact of the closures on the local communities and center employees, the administration announced its decision to maintain certain employment levels at these locations. Privatization-in-place was one initiative for achieving these employment goals.\nSince that time, Congress and the administration have debated the process and procedures for deciding where and by whom the depot maintenance workloads at the closing depots should be performed. Central to this debate are concerns about the excess facility capacity at the Air Force\u2019s three remaining maintenance depots and the legislative requirement in  10 U.S.C. 2469 that, for workloads exceeding $3 million in value, a public-private competition must be held before the workloads can be moved from a public depot to a private sector company. Because of congressional concerns raised in 1996, the Air Force revised its privatization-in-place plans to provide for competitions between the public and private sectors as a means to decide where the depot maintenance workloads would be performed. The first competition was for the C-5 aircraft depot maintenance workload, which had been performed at the San Antonio depot. The Air Force awarded the workload to the Warner Robins depot in Georgia on September 4, 1997. During 1997, Congress continued to oversee DOD\u2019s strategy for allocating workloads currently performed at the closing depots.\nThe 1998 Defense Authorization Act required that we and DOD analyze various issues related to the competitions at the closing depots and report to Congress regarding several areas, which are discussed in appendix I. One of these areas involves the combination into single solicitations of aircraft and multi-commodity workloads at the Sacramento depot and multiengine workloads at the San Antonio depot. Appendix II provides additional information about the maintenance workloads currently performed at these facilities. As required by the act, a solicitation may be issued for a single contract for the performance of multiple depot-level maintenance or repair workloads. However, the Secretary of Defense must first (1) determine in writing that the individual workloads cannot be performed as logically and economically without combination by sources that are potentially qualified to submit an offer and be awarded a contract to perform those individual workloads and (2) submit a report to Congress setting forth the reasons for the determination. Further, the Air Force cannot issue a solicitation for combined workloads until at least 60 days after the Secretary submits the required report.\nOur January 20, 1998, report made two key points about DOD\u2019s determinations. First, we stated that there was no analysis of the logic and economies associated with having the workload performed individually by potentially qualified offerors. Consequently, there was no support for determining that the individual workloads cannot as logically and economically be performed without combination. Second, we noted that the reports and available supporting data did not adequately support DOD\u2019s determinations. Appendix III contains a summary of this report.\nWe discussed our findings in a February 24, 1998, hearing conducted by the Subcommittee on Military Readiness, House National Security Committee, and a March 4, 1998, hearing conducted by the Subcommittee on Readiness, Senate Armed Services Committee. At those hearings, Office of Secretary of Defense and Air Force officials provided additional rationale supporting DOD\u2019s determinations to combine the workloads. Subcommittee members expressed their concerns regarding whether the new data provided adequate support for the determinations. Both subcommittees requested that we analyze the additional data and report to them on our findings.\n\n\tAir Force Rationale for Workload Combination Determinations\n\nOn February 24, 1998, the Air Force provided additional information in support of DOD\u2019s December 19, 1997, determinations. This information included two documents: a white paper containing the rationale for combining the Sacramento depot\u2019s aircraft and commodity workloads into a single solicitation and a report containing the rationale for combining the San Antonio depot\u2019s engine workloads into a single solicitation.\nAir Force officials stated that the decision to combine most of the aircraft and commodity workloads at the Sacramento depot and the engine workloads at the San Antonio depot was made before the mandate in the 1998 National Defense Authorization Act. The officials also said that the process used to make the decision was valid and that a reassessment of alternative acquisition strategies was not required in response to the act.\nThe Sacramento white paper described the rationale supporting the workload combination determination as an iterative process that evolved over a 2-1\/2-year period beginning in September 1995. This process included conferences and discussions with potential offerors, strategy panels with Air Force acquisition experts, repair base analyses,unsolicited input from industry representatives, and reviews of recent DOD outsourcing efforts. Sacramento officials explained that the initial approach involved a privatization-in-place strategy, including separate solicitations for seven individual workloads and separate transition schedules for some of the individual workloads. In July 1996, the Air Force decided to conduct a public-private competition combining the Sacramento KC-135 and A-10 aircraft and various commodity workloads, including hydraulics, instruments and avionics, and electrical accessories. According to Air Force officials, the Air Force has pursued workload combination as its acquisition strategy since that time.\nThe San Antonio report recognized that the Air Force had not conducted an economic analysis regarding the potential savings of issuing single versus multiple solicitations. Instead, the Air Force relied on reviews of engine workload data, repair processes, and market surveys to identify the acquisition strategy for determining how San Antonio\u2019s engine workloads will be performed in the future.\nBoth documents discuss the logic and economies supporting DOD\u2019s determinations to combine workloads into a single solicitation at each of the closing depots. The key points in the Air Force\u2019s rationale and support for DOD\u2019s determinations are summarized below.\n\n\t\tLogic Factors Cited to Support Workload Combinations\n\nThe Air Force stated that its decisions to combine the Sacramento and San Antonio workloads into single solicitations at each location were based on the following logic factors:\nWorkload commonality and overhead sharing. The Air Force believes that shared personnel skills and backshops provide an opportunity for achieving improved efficiencies and lower prices in peacetime while providing flexibility to better plan for wartime surge requirements. Air Force officials noted that shared fixed overhead costs for such functions, such as planning, scheduling, and providing materiel support over a larger workload base, provide opportunities for improved economies and reduced costs at both the Sacramento and San Antonio depots. Further, using the same backshops for multiple workloads should reduce the overall cost of the combined work at each location.\nAvoidance of multiple transitions and personnel turbulence. The Air Force believes that managing multiple transitions increases the readiness risks associated with closing complex, integrated industrial facilities. Further, delaying the award of the contract by splitting the competition into multiple awards could subject the workforce to multiple reduction-in-force actions, which would disrupt the skill mix and result in productivity losses and production delays that adversely affect the readiness of the Air Force\u2019s operational units.\nWorkload stability. This factor was also cited to support the rationale at the Sacramento depot. The Air Force stated that, because the aircraft workload is stable, it can be competed using a guaranteed minimum quantity. However, the Air Force noted that many of the commodity workloads have been erratic and therefore cannot be competed with a minimum guaranteed workload. Consequently, the Air Force stated that combining the aircraft and commodity workloads into one solicitation would allow the winning offeror to smooth peaks in one workload segment and offset valleys in other workload segments, providing a more stable production capability. Further, the Air Force stated that a more stable workload would increase efficiency and savings by providing potential offerors a more reliable basis for employment levels and cost planning.\nMarket surveys. To support workload consolidation at the San Antonio depot, the Air Force said that the majority of respondents to its October 1995 market survey indicated a preference for a single contract for the C-5 aircraft and a single contract for the combined engine workloads. Further, the Air Force concluded from survey results that more competitors would participate under the single solicitation for the multiple engine workloads.\n\n\t\tEconomic Factors Cited to Support Workload Combinations\n\nThe Air Force cited the following factors supporting the economies of workload combination at the closing depots:\nTime delays. The Sacramento white paper stated that separating the Sacramento workload into five segments would delay contract award and transition completion dates by 16 months, which would impact closure, increase costs, and reduce projected BRAC savings. Similarly, the San Antonio report stated that separating the San Antonio engine workloads into three solicitations would extend the planned contract award from  225 to 740 days, impacting closure and increasing costs.\nCost increases. The Air Force stated that conducting multiple competitions at Sacramento could result in cost increases to the offerors and the government, which the Air Force estimates to be between $22 million and $130 million. At San Antonio, the Air Force estimated the increased cost to be between $92 million and $259 million.\nIncreased risks. The Air Force believes that changing the strategy from single to multiple awards would increase risks and translate into higher costs.\n\n\tDOD\u2019s Determinations to Combine Workloads Are Not Well Supported\n\nThe additional rationale that the Air Force provided to further justify DOD\u2019s December 19, 1997, determinations is not well supported. We identified significant weaknesses in both the logic and economic rationale presented to support combining workloads at the Sacramento and San Antonio depots into single solicitations at each location.\n\n\t\tSignificant Weaknesses in Supporting Logic\n\nWe identified significant weaknesses in the rationale presented by the Air Force to support DOD\u2019s determinations to combine workloads at the closing Sacramento and San Antonio depots into single solicitations at each location. First, the Air Force did not adequately consider some other viable alternatives as a part of its assessment. Second, some assumptions are creditable only if the combined workloads are performed in place. Third, each of the supporting points has specific weaknesses that create additional questions regarding the adequacy of DOD\u2019s support for workload combination determinations. Our concerns regarding the economic rationale are discussed in the following section.\n\n\t\t\tLimited Consideration of Alternatives\n\nAlthough the Air Force gave limited consideration to options other than combining the workloads at the two locations, they did not consider, or gave only limited consideration to, some other feasible alternatives. According to the 1998 Defense Authorization Act, alternatives that appear logical and potentially cost-effective should have been evaluated. Options not considered include (1) using solicitations that permit the competitors to offer on any combination of workloads, from one to all and (2) having another contracting activity conduct simultaneous competitions for segments of the Sacramento or San Antonio workloads to avoid delays from sequential competitions for individual segments of the competition.\n\n\t\t\tQuestionable Assumptions\n\nOur review indicates that several of the assumptions supporting the Air Force\u2019s rationale are questionable unless the workload remains at the existing locations. For example, the Air Force states that combining workloads will preclude multiple workload transitions, thereby avoiding multiple reduction-in-force actions, limiting personnel turbulence, and minimizing readiness impacts. Further, the Air Force states that, for the Sacramento workload, combining aircraft and commodities into a single solicitation would provide the winning offeror the ability to shift employees between workload segments. The advantages cited by the Air Force are not likely to occur if the workloads are performed at a single location other than Sacramento and San Antonio or at multiple locations.\n\n\t\t\tOther Weaknesses\n\nWe identified other weaknesses or deficiencies with each of the factors cited by the Air Force, including the following:\nWorkload commonality and sharing of overhead. The Air Force\u2019s position that realizing efficiencies from shared personnel and facilities at Sacramento and San Antonio is best achieved with a single solicitation for combined workloads is questionable. The efficiencies that are achievable from shared facilities and personnel may be greater if the workloads being combined are the same or more similar than the workloads being combined under the Sacramento and San Antonio solicitations. For example, the Air Force may achieve greater efficiency by combining (1) the management of the Sacramento KC-135 workloads with other KC-135 workloads to be competed and\/or (2) the San Antonio Air Force T-56 engine workloads with other engine workloads also to be competed. Both of these options provide opportunities for significant cost savings that were not considered by the Air Force.\nAvoidance of multiple transitions and personnel turbulence. We realize that risks can be associated with the transition of any depot maintenance workload. However, we have reported that there is no inherent reason why these workloads cannot be transitioned without impacting equipment readiness if the transition is properly planned and effectively implemented. Further, DOD has successfully closed 17 depots over the past 10 years and has successfully managed multiple transitions and the resulting sequential personnel reductions.\nWorkload stability for commodities and aircraft repair at Sacramento. The Air Force data does not support the conclusion that the inherent inefficiencies of the commodity workload are improved by combining it with the more predictable and consistent aircraft workload. For example, even though the Air Force states that stability will come from being able to transfer employees between the aircraft and commodity workloads, this transfer has rarely happened. Although the Air Force has had the ability to shift workers among the aircraft and commodity workloads, Sacramento depot personnel data shows that on average, each year over the last  7 years, only 22 of the approximately 1,500 wage grade depot employees have been shifted between aircraft and commodities.\nResults of market surveys. We question whether the results of the 1995 market survey are applicable to the Air Force\u2019s current position that combining the San Antonio workloads is more logical and economical than issuing individual solicitations. The survey was designed to collect potential offeror preferences under the then-current acquisition strategy of privatizing the San Antonio aircraft and engine workloads in place. However, in 1996 the Air Force revised this acquisition strategy and adopted a public-private competition strategy. Further, in 1997 the Air Force conducted a market analysis of engine manufacturing companies to determine the availability and interest of public and private sector sources to perform the required repair of engines currently maintained in Air Force depots. In this survey, engine manufacturers indicated a preference for repairing their own engines and were less interested in repairing other engines. Additionally, our discussions with four potential offerors for the engine workload indicated that they are interested in participating regardless of whether the workloads are combined into a single solicitation.\n\n\t\tSignificant Weaknesses in Economic Analyses\n\nWe also identified two significant weaknesses in the Air Force\u2019s economic analyses supporting the combination of workloads into single solicitations at each site. First, and most significantly, the analyses were not comprehensive or consistent estimates of the comparative costs associated with the alternatives examined. Second, the cost estimates are questionable for several key categories.\n\n\t\t\tIncomprehensive or Inconsistent Comparative Cost Analyses\n\nThe Air Force analyses stated that workload combination would save $22 million to $130 million at Sacramento and $92 million to $259 million at San Antonio. These figures represent estimates of costs associated with administering the additional contracts and delaying contract award and transition. However, the estimates contain two significant weaknesses.\nFirst, all costs associated with performing the work are not included. For example, the analyses did not consider the cost of performing maintenance operations, including the costs of labor, parts, and overhead required to perform the repair under the two alternatives considered, or the additional layer of cost associated with subcontracting under the combined workload package scenario. Also, the possibility of the cost benefits of increased competition resulting from solicitations for individual workloads was not recognized. Further, because the estimated value of the workload at these locations is $2.4 billion at Sacramento and $8 billion at San Antonio, the effect of not considering these costs could significantly impact the outcome of the analyses. To illustrate the significance, a small difference of, for example, 5 percent between cost estimates for single versus multiple solicitations would represent $120 million and $400 million, for the Sacramento and San Antonio workloads respectively. These amounts would materially affect the savings ranges projected by the Air Force.\nSecond, the cost estimates for the two locations did not use consistent cost elements. For example, the San Antonio estimate included a $40-million cost associated with delaying depot closure, which would reduce the amount of estimated savings, whereas the Sacramento estimate did not consider such costs. We do believe costs associated with delaying closure are relevant to both locations, although we have some questions about the accuracy of the $40-million cost estimate.\n\n\t\t\tQuestionable Cost Estimates\n\nNotwithstanding our concerns about the comprehensiveness and consistency of the cost analysis, our review of the cost data provided indicates that the estimates are overstated or questionable in several areas, including the following:\nContract administration costs at Sacramento. The Sacramento estimate included a 1.9 percent estimate for contract administration costs resulting from having more than one contract for the Sacramento workload. This estimate was based on a contractor industrial performance metrics study.This estimate may be overstated because participants in the original study found the cost impacts projected by the contractor were significantly overstated. For example, five participants prepared estimates of the top 10 cost drivers identified in the contractor study and found that the study estimates were overstated from 14 to 70 percent.\nClosure savings costs. As mentioned above, the San Antonio cost estimate included a $40-million cost associated with delaying depot closure.However, this estimate is overstated. The $40-million estimate is based on the closure of all logistics operations, some of which will not close until 2001. According to the BRAC estimates, savings from closing the depot maintenance operations provided only 21 percent of the estimated annual savings from closure. At this rate, the cost of delay should be no higher than $8.4 million rather than the $40 million estimated in the San Antonio report.\nTransition costs. Sacramento included a cost estimate for extending the transition period. Under the multi-contract approach, Sacramento assumed workload segments would be transitioned incrementally over a 20- to 24-month period. Although the Air Force may incur additional transition costs under a multiple contract strategy, we found transition costs were overstated. The Air Force\u2019s transition cost methodology assumed that each individual winning offeror would require the full 20 to 24 months to complete the transition. However, Sacramento officials recognized that the contractors\u2019 transitions for the individual workload segments will not require the entire 20- to 24-month period. The officials stated that they were unable to separately identify a more precise cost estimate.\n\n\tConclusions\n\nThe Air Force\u2019s support for DOD\u2019s determinations that it is more logical and economical to combine the workloads being competed at the closing depots is based on a wide variety of information accumulated during the acquisition strategy development process started in September 1995. We recognize that this substantial body of data includes certain information relevant to the determinations required by the National Defense Authorization Act of 1998. We also recognize that the determinations ultimately represent a management judgment based on various qualitative and quantitative factors.\nHowever, our assessment of these factors, as presented by the Air Force in its February 24, 1998, Sacramento white paper and San Antonio report shows significant weaknesses in logic, assumptions, and data. Consequently, DOD\u2019s determinations may well be appropriate, but its rationale is not well supported.\n\n\tAgency Comments\n\nOn April 10, 1998, we provided a draft of this report for comment. DOD informed us that, given the short amount of time available, it chose not to comment on the report at this time.\n\n\tScope and Methodology\n\nTo determine the reasons the Air Force believes it is more logical and economical to combine the workloads at the Sacramento and San Antonio depots, we reviewed the December 19, 1997, reports DOD provided to Congress, as required by 10 U.S.C. 2469a; the Sacramento white paper and San Antonio report provided to Congress on February 24, 1998, which expanded on DOD\u2019s rationale for combining workloads into single solicitations; and other information relevant to the preparation of these reports.\nTo analyze the rationale for DOD\u2019s determination, we reviewed (1) information contained in the reports; (2) documentation and other data supporting the reports; (3) discussions with Air Force officials responsible for preparing the reports and managing depot maintenance workloads; (4) discussions with contractor officials who are planning to participate in the competitions for workloads currently performed at the Sacramento and San Antonio depots; (5) discussions with Air Force Audit Agency officials who provided advice on the preparation of the Sacramento white paper and San Antonio report; (6) a review of related Air Force studies, reports, and data; (7) our prior work regarding related depot maintenance issues; and (8) a review of applicable laws and regulations.\nWe conducted our review between February and April 1998 in accordance with generally accepted government auditing standards.\nWe are sending copies of this report to the Secretaries of Defense and the Air Force; the Director, Office of Management and Budget; and interested congressional committees. Copies will also be made available to others on request.\nIf you or your staff have any questions about this report, please contact me at (202) 512-8412. Major contributors to this report are listed in  appendix IV.\n\nRequirements for Reports on Depot-Level Maintenance\n\nThe National Defense Authorization Act for Fiscal Year 1998 contains several depot-related reporting requirements. 1. Report on DOD\u2019s Compliance with 50-Percent Limitation (section 358)  The act amends 10 U.S.C. 2466(a) by increasing the amount of depot-level maintenance and repair workload funds that the Department of Defense (DOD) can use for contractors from 40 to 50 percent and revises 10 U.S.C. 2466(e) by requiring the Secretary of Defense to submit a report to Congress identifying the percentage of funds expended for contractors\u2019 performance by February 1 of each year.\nWithin 90 days of DOD\u2019s submission of its annual report to Congress, we must review the DOD report and report to Congress whether DOD has complied with the 50-percent limitation. 2. Reports Concerning Public-Private Competitions for the Depot Maintenance Workloads at the Closing San Antonio and Sacramento Depots (section 359)\nThe act adds to 10 U.S.C. a new section, 2469a, which provides for special procedures for public-private competitions for the workloads of these two closing depots. It also requires that we report in the following areas: First, the Secretary of Defense is required to submit a determination to Congress if DOD finds it necessary to combine any of the workloads into a single solicitation. We must report our views on the DOD determination within 30 days.\nSecond, we are required to review all DOD solicitations for the workloads at San Antonio and Sacramento and to report to Congress within 45 days of the solicitations\u2019 issuance whether the solicitations provide \u201csubstantially equal\u201d opportunity to compete without regard to performance location and otherwise comply with applicable laws and regulations.\nThird, we must review all DOD awards for the workloads at the two closing Air Logistics Centers and report to Congress within 45 days of the contract awards whether the procedures used complied with applicable laws and regulations and provided a \u201csubstantially equal\u201d opportunity to compete without regard to performance location, determine whether \u201cappropriate consideration was given to factors other than cost\u201d in the selection, and ascertain whether the selection resulted in the lowest total cost to DOD for performance of the workload.\nFourth, within 60 days of its enactment, the 1998 Defense Authorization Act requires us to review the C-5 aircraft workload competition and subsequent award to the Warner Robins Air Logistics Center and report to Congress on whether the procedures used provided an equal opportunity for offerors to compete without regard to performance location, whether the procedures complied with applicable laws and the Federal Acquisition Regulation, and whether the award resulted in the lowest total cost to DOD. 3. Report on Navy\u2019s Practice of Using Temporary Duty Assignments for Ship Maintenance and Repair (section 366)\nThe act requires us to report by May 1, 1998, on the Navy\u2019s use of temporary duty workers to perform ship maintenance and repairs at homeports not having shipyards.\n\nSacramento and San Antonio Depot Maintenance Workloads\n\n\tSacramento\n\nAt the time it was identified for closure during the 1995 Base Closure and Realignment (BRAC) process, the Air Force\u2019s Sacramento depot had responsibility for the repair of four aircraft and four commodity groups. The depot also had a significant body of manufacturing or repair work it performed in small quantities for various non-Air Force customers. Additionally, it had a microelectronics facility that performed reverse engineering on parts to provide technical data for manufacturing support parts or for developing repair procedures.\nTwo of the four aircraft repaired at the Sacramento depot will not be included in the competition package\u2014the F-15 and EF-111. F-15 repairs are being consolidated at the Warner Robins depot, which is the F-15 center of excellence and already performs most of the F-15 work. The EF-111 repair requirement is expected to end as the aircraft is phased out of operations. KC-135 and A-10 aircraft requirements are expected to be included in the Sacramento competition package. The KC-135 aircraft is currently repaired at the Oklahoma City depot and at a contractor facility in Birmingham, Alabama. Table II.1 shows the production hours for 1995, 1996, and 1997 for the KC-135 and A-10 aircraft. The KC-135 workload may be increased in the competition package, but the A-10 workload is expected to decrease and to be erratic as the aircraft is phased out of the inventory.\nIn accordance with a 1995 BRAC Commission decision, the Sacramento depot\u2019s largest commodity grouping\u2014ground communications and electronics\u2014which has a projected workload of about 825,000 hours, is being transitioned to the Tobyhanna Army Depot between 1998 and 2001. The Sacramento depot\u2019s software maintenance workload has declined significantly, and the remaining software work is expected to be transferred outside the competition process to the Ogden depot. The remaining commodity groups currently repaired at Sacramento include hydraulics, instruments and avionics, and electrical accessories.\nTable II.2 provides an overview of the actual direct labor hours used during fiscal years 1995-97 for the commodity groupings that are currently repaired at the Sacramento depot and are expected to be a part of the competitive package.\nThe Air Force assessed Sacramento\u2019s core capabilities and analyzed the private sector\u2019s repair base. Through this process, which was approved by the Defense Depot Maintenance Council, none of the Sacramento workload was determined to be core.\n\n\tSan Antonio\n\nAt the time of its closure, the San Antonio depot largely did modifications and repairs of aircraft, turbine engines, and support equipment, and did a smaller amount of work on nuclear ordnance and engine software. The source of repairs for the C-5 aircraft was determined through a separate public-private competition. That workload was won by the Warner Robins depot, which assumed responsibility for the C-5 in November 1997; work-in-process will continue at San Antonio until the summer of 1998. The Warner Robins depot inducted its first C-5 aircraft in January 1998. The nuclear ordnance commodity management workload is being transferred outside the competition to the Ogden and Oklahoma City depots and Kirkland Air Force Base, with the bulk of the work going to Ogden.\nTable II.3 shows a breakout of the San Antonio engine workload based on direct production actual hours for fiscal years 1995 through 1997.\nFor various reasons, the competition for engine workloads will not include all of the workload at the San Antonio depot. For example, the Navy is making independent source-of-repair decisions for its T56 engine workloads. Further, core engine workload will be moved outside the competition process to the Oklahoma City depot. The Air Force assessed the core engine capabilities at the San Antonio and Oklahoma City depots and analyzed private industry\u2019s repair base. As a result of this process, the Air Force determined that it should retain the capability to repair about 24 percent of the annual F100 engine module workload and 50 percent of the workload required to maintain the capability to repair and check out whole engines\u2014or about nine whole engines. Accordingly, the Air Force is moving the F100 core workload to the Oklahoma City depot outside the engine competition. Finally, it is uncertain whether the Air Force could outsource all the engine workload in the competitive package given the statutory limits on the percentage of depot maintenance work that can be performed by the private sector.\n\n\tAir Force Management Structure for the Sacramento and San Antonio Competitions\n\nThe Air Force is using a management structure for administering and managing the Sacramento and San Antonio competitions similar to the one it used for the C-5 competition. The structure includes a program office and evaluation team at each center as well as an advisory council and source selection official at Air Force headquarters. The program office has general responsibility for preparing and managing the request for proposals. The evaluation team will report its assessments to a council made up of representatives from the Office of the Secretary of Defense, Air Force headquarters, and Air Force Materiel Command staff. The council will review the team\u2019s assessment and advise the source selection official.\n\nSummary of January 20, 1998, GAO Report on DOD\u2019s Determinations to Combine Depot Maintenance Workloads\n\nIt may be that the individual workloads at the closing San Antonio, Texas, and Sacramento, California, Air Force depots cannot as logically and economically be performed without combination by sources that are potentially qualified to submit an offer and be awarded a contract for individual workloads. However, DOD reports and data do not provide adequate information to support DOD\u2019s determinations.\nFirst, DOD has not analyzed the logic and economies associated with having the workload performed individually by potentially qualified offerors. Consequently, it has no support for determining that the individual workloads cannot as logically and economically be performed without combination by sources that would do them individually. Air Force officials stated that they were uncertain as to how they would analyze the performance of workloads on an individual basis. However, Air Force studies indicate that the information to make such an analysis is available. For example, in 1996 the Air Force performed analyses for six depot-level workloads performed by the Sacramento depot to identify industry capabilities and capacity. Individual analyses were accomplished for hydraulics, software, electrical accessories, flight instruments, A-10 aircraft, and KC-135 aircraft depot-level workloads. As a part of these analyses, the Air Force identified sufficient numbers of qualified contractors interested in various segments of the Sacramento workload to support a conclusion that it could rely on the private sector to support the workloads.\nSecond, reports and available data did not adequately support DOD\u2019s determinations \u201cthat the individual workloads cannot as logically and economically be performed without combination by sources that are potentially qualified to submit an offer and to be awarded a contract to perform those individual workloads.\u201d For example, DOD\u2019s determination report relating to the Sacramento Air Logistics Center, McClellan Air Force Base, California, states that all competitors indicated throughout their Sacramento workload studies that consolidating workloads offered the most logical and economical performance possibilities. This statement was based on studies performed by the offerors as part of the competition process. However, one offeror\u2019s study states that the present competition format is not in the best interest of the government and recommends that the workload be separated into two competitive packages. We were unable to determine whether the other two contractor studies support the statement in the DOD report that all competitors favored consolidating the workloads because the Air Force did not provide us adequate or timely access to the studies cited in the report.\n\nMajor Contributors to This Report\n\n\tNational Security and International Affairs Division, Washington, D.C.\n\n\tDallas Field Office\n\n\tOffice of the General Counsel\n\nRelated GAO Products\n\nDefense Depot Maintenance: DOD Shifting More Workload for New Weapon Systems to the Private Sector (GAO\/NSIAD-98-8, Mar. 31, 1998).\nDex pot Maintenance: Lessons Learned From Transferring Alameda Naval Aviation Depot Engine Workloads (GAO\/NSIAD-98-10BR, Mar. 25, 1998).\nPublic-Private Competitions: Access to Records Is Inhibiting Work on Congressional Mandates (GAO\/T-NSIAD-98-111, Mar. 4, 1998).\nPublic-Private Competitions: Access to Records Is Inhibiting Work on Congressional Mandates (GAO\/T-NSIAD-98-101, Feb. 24, 1998).\nPublic-Private Competitions: DOD\u2019s Determination to Combine Depot Workloads Is Not Adequately Supported (GAO\/NSIAD-98-76, Jan. 20, 1998).\nPublic-Private Competition: Processes Used for C-5 Aircraft Award Appear Reasonable (GAO\/NSIAD-98-72, Jan. 20, 1998).\nDOD Depot Maintenance: Information on Public and Private Sector Workload Allocations (GAO\/NSIAD-98-41, Jan. 20, 1998).\nAir Force Privatization-in-Place: Analysis of Aircraft and Missile System Depot Repair Costs (GAO\/NSIAD-98-35, Dec. 22, 1997).\nOutsourcing DOD Logistics: Savings Achievable but Defense Science Board\u2019s Projections Are Overstated (GAO\/NSIAD-98-48, Dec. 8, 1997).\nAir Force Depot Maintenance: Information on the Cost-Effectiveness of B-1B and B-52 Support Options (GAO\/NSIAD-97-210BR, Sept. 12, 1997).\nNavy Depot Maintenance: Privatizing the Louisville Operations in Place Is Not Cost-Effective (GAO\/NSIAD-97-52, July 31, 1997).\nDefense Depot Maintenance: Challenges Facing DOD in Managing Working Capital Funds (GAO\/T-NSIAD\/AIMD-97-152, May 7, 1997).\nDepot Maintenance: Uncertainties and Challenges DOD Faces in Restructuring Its Depot Maintenance Program (GAO\/T-NSIAD-97-111, Mar. 18, 1997 and GAO\/T-NSIAD-97-112, May 1, 1997).\nNavy Ordnance: Analysis of Business Area Price Increases and Financial Losses (GAO\/AIMD\/NSIAD-97-74, Mar. 14, 1997).\nDefense Outsourcing: Challenges Facing DOD as It Attempts to Save Billions in Infrastructure Costs (GAO\/T-NSIAD-97-110, Mar. 12, 1997).\nHigh-Risk Series: Defense Infrastructure (GAO\/HR-97-7, Feb. 1997).\nAir Force Depot Maintenance: Privatization-in-Place Plans Are Costly While Excess Capacity Exists (GAO\/NSIAD-97-13, Dec. 31, 1996).\nArmy Depot Maintenance: Privatization Without Further Downsizing Increases Costly Excess Capacity (GAO\/NSIAD-96-201, Sept. 18, 1996).\nNavy Depot Maintenance: Cost and Savings Issues Related to Privatizing-in-Place the Louisville, Kentucky, Depot (GAO\/NSIAD-96-202,  Sept. 18, 1996).\nDefense Depot Maintenance: Commission on Roles and Mission\u2019s Privatization Assumptions Are Questionable (GAO\/NSIAD-96-161, July 15, 1996).\nDefense Depot Maintenance: DOD\u2019s Policy Report Leaves Future Role of Depot System Uncertain (GAO\/NSIAD-96-165, May 21, 1996).\nDefense Depot Maintenance: More Comprehensive and Consistent Workload Data Needed for Decisionmakers (GAO\/NSIAD-96-166, May 21, 1996).\nDefense Depot Maintenance: Privatization and the Debate Over the Public-Private Mix (GAO\/T-NSIAD-96-146, Apr. 16, 1996, and GAO\/T-NSIAD-96-148, Apr. 17, 1996).\nMilitary Bases: Closure and Realignment Savings Are Significant, but Not Easily Quantified (GAO\/NSIAD-96-67, Apr. 8, 1996).\nDepot Maintenance: Opportunities to Privatize Repair of Military Engines (GAO\/NSIAD-96-33, Mar. 5, 1996).\nClosing Maintenance Depots: Savings, Personnel, and Workload Redistribution Issues (GAO\/NSIAD-96-29, Mar. 4, 1996).\nNavy Maintenance: Assessment of the Public-Private Competition Program for Aviation Maintenance (GAO\/NSIAD-96-30, Jan. 22, 1996).\nDepot Maintenance: The Navy\u2019s Decision to Stop F\/A-18 Repairs at Ogden Air Logistics Center (GAO\/NSIAD-96-31, Dec. 15, 1995).\nMilitary Bases: Case Studies on Selected Bases Closed in 1988 and 1991 (GAO\/NSIAD-95-139, Aug. 15, 1995).\nMilitary Base Closure: Analysis of DOD\u2019s Process and Recommendations for 1995 (GAO\/T-NSIAD-95-132, Apr. 17, 1995).\nMilitary Bases: Analysis of DOD\u2019s 1995 Process and Recommendations for Closure and Realignment (GAO\/NSIAD-95-133, Apr. 14, 1995).\nAerospace Guidance and Metrology Center: Cost Growth and Other Factors Affect Closure and Privatization (GAO\/NSIAD-95-60, Dec. 9, 1994).\nNavy Maintenance: Assessment of the Public and Private Shipyard Competition Program (GAO\/NSIAD-94-184, May 25, 1994).\nDepot Maintenance: Issues in Allocating Workload Between the Public and Private Sectors (GAO\/T-NSIAD-94-161, Apr. 12, 1994).\nDepot Maintenance (GAO\/NSIAD-93-292R, Sept. 30, 1993).\nDepot Maintenance: Issues in Management and Restructuring to Support a Downsized Military (GAO\/T-NSIAD-93-13, May 6, 1993).\nAir Logistics Center Indicators (GAO\/NSIAD-93-146R, Feb. 25, 1993).\nDefense Force Management: Challenges Facing DOD as It Continues to Downsize Its Civilian Workforce (GAO\/NSIAD-93-123, Feb. 12, 1993).\nThe first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent.\nU.S. General Accounting Office P.O. Box 37050 Washington, DC  20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000  or by using fax number (202) 512-6061, or TDD (202) 512-2537.\nEach day, GAO issues a list of newly available reports and testimony.  To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone.  A recorded menu will provide information on how to obtain these lists.","output":"Why GAO Did This Study\n\nPursuant to a congressional request, GAO reviewed the Department of Defense's (DOD) supporting rationale for combining certain depot-level maintenance and repair workloads.\n\nWhat GAO Found\n\nGAO noted that: (1) the Air Force's support for DOD's determinations that it is more logical and economical to combine the workloads being competed at the closing depots is based on a wide variety of information accumulated during the acquisition strategy development process started in September 1995; (2) while GAO recognizes that the determinations ultimately represent a management judgment based on various qualitative and quantitative factors and that DOD's determinations may well be appropriate, the rationale presented in the February 24, 1998, Sacramento white paper and San Antonio report for combining the workloads in single solicitations at each location is not well supported; (3) GAO's assessment indicates that there are significant weaknesses in logic, assumptions, and data; (4) DOD did not consider other alternatives that appear to be logical and potentially cost-effective, and its assumption that efficiencies from shared personnel and facilities are best achieved with a single solicitation for combined workloads at each location is questionable; (5) also, the Air Force's claim that the effects of sequential personnel reductions and transition delays can be problematic is questionable in view of DOD's demonstrated success in the past handling multiple transitions and sequential reductions; (6) in addition, the workload stability rationale for Sacramento is questionable because the inherent inefficiencies of the commodity workload are not likely to be improved by combination with the more predictable and consistent aircraft workload; and (7) finally, the Air Force's cost analysis, which concluded that workload combination would save $22 million to $130 million at Sacramento and $92 million to $259 million at San Antonio, is questionable because it did not consider all cost factors, such as the cost benefits of increased competition resulting from solicitations for individual workloads."}
{"id":"gao_GAO-02-893T","pid":"gao_GAO-02-893T_0","input":"\tBackground\n\nFederal, state, and local government agencies have differing roles with  regard to public health emergency preparedness and response. The federal  government conducts a variety of activities, including developing  interagency response plans, increasing state and local response  capabilities, developing and deploying federal response teams, increasing  the availability of medical treatments, participating in and sponsoring  exercises, planning for victim aid, and providing support in times of  disaster and during special events such as the Olympic games. One of its  main functions is to provide support for the primary responders at the  state and local level, including emergency medical service personnel,  public health officials, doctors, and nurses. This support is critical because  the burden of response falls initially on state and local emergency  response agencies.\nThe President\u2019s proposal transfers control over many of the programs that  provide preparedness and response support for the state and local  governments to a new Department of Homeland Security. Among other  changes, the proposed legislation transfers HHS\u2019s Office of the Assistant  Secretary for Public Health Emergency Preparedness to the new  department. Included in this transfer is the Office of Emergency  Preparedness (OEP), which currently leads the National Disaster Medical  System (NDMS) in conjunction with several other agencies and the  Metropolitan Medical Response System (MMRS). The Strategic National  Stockpile, currently administered by the Centers for Disease Control and  Prevention (CDC), would also be transferred, although the Secretary of  HHS would still manage the stockpile and continue to determine its  contents. The President\u2019s proposal would also transfer the select agent  registration enforcement program from HHS to the new department.  Currently administered by CDC, the program\u2019s mission is the security of  those biologic agents that have the potential for use by terrorists. The  proposal provides for the new department to consult with appropriate  agencies, which would include HHS, in maintaining the select agent list.\nUnder the President\u2019s proposal, the new department would also be  responsible for all current HHS public health emergency preparedness  activities carried out to assist state and local governments or private  organizations to plan, prepare for, prevent, identify, and respond to  biological, chemical, radiological, and nuclear events and public health  emergencies. Although not specifically named in the proposal, this would  include CDC\u2019s Bioterrorism Preparedness and Response program and the  Health Resources and Services Administration\u2019s (HRSA) Bioterrorism  Hospital Preparedness Program. These programs provide grants to states  and cities to develop plans and build capacity for communication, disease  surveillance, epidemiology, hospital planning, laboratory analysis, and  other basic public health functions. Except as otherwise directed by the  President, the Secretary of Homeland Security would carry out these  activities through HHS under agreements to be negotiated with the  Secretary of HHS. Further, the Secretary of Homeland Security would be  authorized to set the priorities for these preparedness and response  activities.\nThe new Department of Homeland Security would also be responsible for  conducting a national scientific research and development program,  including developing national policy and coordinating the federal  government\u2019s civilian efforts to counter chemical, biological, radiological,  and nuclear weapons or other emerging threats. This would include  establishing priorities and directing and supporting national research and  development and procurement of technology and systems for detecting,  preventing, protecting against, and responding to terrorist acts using  chemical, biological, radiological, or nuclear weapons. Portions of the  Departments of Agriculture, Defense, and Energy that conduct research  would be transferred to the new Department of Homeland Security. For  example, the Department of Energy\u2019s (DOE) chemical and biological  national security research and some of its nuclear smuggling and  homeland security activities would be transferred to the new homeland  security department. The Department of Homeland Security would carry  out civilian health-related biological, biomedical, and infectious disease  defense research and development through agreements with HHS, unless  otherwise directed by the President. As part of this responsibility, the new  department would establish priorities and direction for a program of basic  and applied research on the detection, treatment, and prevention of  infectious diseases to be conducted by the National Institutes of Health  (NIH).\n\n\tTransfer of Certain Public Health Programs Has Potential to Improve Coordination\n\nThe transfer of federal assets and resources in the President\u2019s proposed  legislation has the potential to improve coordination of public health  preparedness and response activities at the federal, state, and local levels.  Our past work has detailed a lack of coordination in the programs that  house these activities, which are currently dispersed across numerous  federal agencies. In addition, we have discussed the need for an  institutionalized responsibility for homeland security in federal statute.  We have also testified that one key consideration in evaluating whether  individual agencies or programs should be included or excluded from the  proposed department is the extent to which homeland security is a major  part of the agency or program mission.\nThe President\u2019s proposal provides the potential to consolidate programs,  thereby reducing the number of points of contact with which state and  local officials have to contend. However, coordination would still be  required with multiple agencies across departments. Many of the agencies  involved in these programs have differing perspectives and priorities, and  the proposal does not sufficiently clarify the lines of authority of different  parties in the event of an emergency, such as between the Federal Bureau  of Investigation (FBI) and public health officials investigating a suspected  bioterrorist incident. Let me provide you with more details.\nWe have reported that many state and local officials have expressed  concerns about the coordination of federal public health preparedness and  response efforts. Officials from state public health agencies and state  emergency management agencies have told us that federal programs for  improving state and local preparedness are not carefully coordinated or  well organized. For example, federal programs managed by the Federal  Emergency Management Agency (FEMA), Department of Justice (DOJ),  OEP, and CDC all currently provide funds to assist state and local  governments. Each program conditions the receipt of funds on the  completion of a plan, but officials have told us that the preparation of  multiple, generally overlapping plans can be an inefficient process. In  addition, state and local officials told us that having so many federal  entities involved in preparedness and response has led to confusion,  making it difficult for them to identify available federal preparedness  resources and effectively partner with the federal government.\nThe proposed transfer of numerous federal response teams and assets to  the new department would enhance efficiency and accountability for these  activities. This would involve a number of separate federal programs for  emergency preparedness and response, whose missions are closely  aligned with homeland security, including FEMA; certain units of DOJ; and  HHS\u2019s Office of the Assistant Secretary for Public Health Emergency  Preparedness, including OEP and its NDMS and MMRS programs, along  with the Strategic National Stockpile and the select agent program. In our  previous work, we found that in spite of numerous efforts to improve  coordination of the separate federal programs, problems remained, and we  recommended consolidating the FEMA and DOJ programs to improve the  coordination. The proposal places these programs under the control of  the Under Secretary for Emergency Preparedness and Response, who  could potentially reduce overlap and improve coordination. This change  would make one individual accountable for these programs and would  provide a central source for federal assistance.\nThe proposed transfer of MMRS, a collection of local response systems  funded by HHS in metropolitan areas, has the potential to enhance its  communication and coordination. Officials from one state told us that  their state has MMRSs in multiple cities but there is no mechanism in  place to allow communication and coordination among them. Although  the proposed department has the potential to facilitate the coordination of  this program, this example highlights the need for greater regional  coordination, an issue on which the proposal is silent.\nBecause the new department would not include all agencies with public  health responsibilities related to homeland security, coordination across  departments would still be required for some programs. For example,  NDMS functions as a partnership among HHS, the Department of Defense  (DOD), the Department of Veterans Affairs (VA), FEMA, state and local  governments, and the private sector. However, as the DOD and VA  programs are not included in the proposal, only some of these federal  organizations would be brought under the umbrella of the Department of  Homeland Security. Similarly, the Strategic National Stockpile currently  involves multiple agencies. It is administered by CDC, which contracts  with VA to purchase and store pharmaceutical and medical supplies that  could be used in the event of a terrorist incident. Recently expanded and  reorganized, the program will now include management of the nation\u2019s  inventory of smallpox vaccine. Under the President\u2019s proposal, CDC\u2019s  responsibilities for the stockpile would be transferred to the new  department, but VA and HHS involvement would be retained, including  continuing review by experts of the contents of the stockpile to ensure  that emerging threats, advanced technologies, and new countermeasures  are adequately considered.\nAlthough the proposed department has the potential to improve  emergency response functions, its success depends on several factors. In  addition to facilitating coordination and maintaining key relationships  with other departments, these factors include merging the perspectives of  the various programs that would be integrated under the proposal and  clarifying the lines of authority of different parties in the event of an  emergency. As an example, in the recent anthrax events, local officials  complained about differing priorities between the FBI and the public  health officials in handling suspicious specimens. According to the public  health officials, FBI officials insisted on first informing FBI managers of  any test results, which delayed getting test results to treating physicians.  The public health officials viewed contacting physicians as the first  priority in order to ensure that effective treatment could begin as quickly  as possible.\n\n\tNew Department\u2019s Control of Essential Public Health Capacities Raises Concern\n\nThe President\u2019s proposal to shift the responsibility for all programs  assisting state and local agencies in public health emergency preparedness  and response from HHS to the new department raises concern because of  the dual-purpose nature of these activities. These programs include  essential public health functions that, while important for homeland  security, are critical to basic public health core capacities. Therefore, we  are concerned about the transfer of control over the programs, including  priority setting, that the proposal would give to the new department. We  recognize the need for coordination of these activities with other  homeland security functions, but the President\u2019s proposal is not clear on  how the public health and homeland security objectives would be  balanced.\nUnder the President\u2019s proposal, responsibility for programs with dual  homeland security and public health purposes would be transferred to the  new department. These include such current HHS assistance programs as  CDC\u2019s Bioterrorism Preparedness and Response program and HRSA\u2019s  Bioterrorism Hospital Preparedness Program. Functions funded through  these programs are central to investigations of naturally occurring  infectious disease outbreaks and to regular public health communications,  as well as to identifying and responding to a bioterrorist event. For  example, CDC has used funds from these programs to help state and local  health agencies build an electronic infrastructure for public health  communications to improve the collection and transmission of  information related to both bioterrorist incidents and other public health  events. Just as with the West Nile virus outbreak in New York City, which  initially was feared to be the result of bioterrorism, when an unusual case  of disease occurs public health officials must investigate to determine  whether it is naturally occurring or intentionally caused. Although the  origin of the disease may not be clear at the outset, the same public health  resources are needed to investigate, regardless of the source.\nStates are planning to use funds from these assistance programs to build  the dual-purpose public health infrastructure and core capacities that the  recently enacted Public Health Security and Bioterrorism Preparedness  and Response Act of 2002 stated are needed. States plan to expand  laboratory capacity, enhance their ability to conduct infectious disease  surveillance and epidemiological investigations, improve communication  among public health agencies, and develop plans for communicating with  the public. States also plan to use these funds to hire and train additional  staff in many of these areas, including epidemiology.\nOur concern regarding these dual-purpose programs relates to the  structure provided for in the President\u2019s proposal. The Secretary of  Homeland Security would be given control over programs to be carried  out by HHS. The proposal also authorizes the President to direct that these  programs no longer be carried out through agreements with HHS, without  addressing the circumstances under which such authority would be  exercised. We are concerned that this approach may disrupt the synergy  that exists in these dual-purpose programs. We are also concerned that the  separation of control over the programs from their operations could lead  to difficulty in balancing priorities. Although the HHS programs are  important for homeland security, they are just as important to the day-to- day needs of public health agencies and hospitals, such as reporting on  disease outbreaks and providing alerts to the medical community. The  current proposal does not clearly provide a structure that ensures that the  goals of both homeland security and public health will be met.\n\n\tTransfer of Control and Priority Setting over Dual-Purpose Research and Development Raises Concern\n\nThe proposed Department of Homeland Security would be tasked with  developing national policy for and coordinating the federal government\u2019s  civilian research and development efforts to counter chemical, biological,  radiological, and nuclear threats. In addition to coordination, we believe  the role of the new department should include forging collaborative  relationships with programs at all levels of government and developing a  strategic plan for research and development. However, we have many of  the same concerns regarding the transfer of responsibility for the research  and development programs that we have regarding the transfer of the  public health preparedness programs. We are concerned about the  implications of the proposed transfer of control and priority setting for  dual-purpose research. For example, some research programs have broad  missions that are not easily separated into homeland security research and  research for other purposes. We are concerned that such dual-purpose  research activities may lose the synergy of their current placement in  programs. In addition, we see a potential for duplication of capacity that  already exists in the federal laboratories.\nWe have previously reported that while federal research and development  programs are coordinated in a variety of ways, coordination is limited,  raising the potential for duplication of efforts among federal agencies.  Coordination is limited by the extent of compartmentalization of efforts  because of the sensitivity of the research and development programs,  security classification of research, and the absence of a single  coordinating entity to ensure against duplication. For example, DOD\u2019s  Defense Advanced Research Projects Agency was unaware of U.S. Coast  Guard plans to develop methods to detect biological agents on infected  cruise ships and, therefore, was unable to share information on its  research to develop biological detection devices for buildings that could  have applicability in this area.\nThe new department will need to develop mechanisms to coordinate and  integrate information on research and development being performed  across the government related to chemical, biological, radiological, and  nuclear terrorism, as well as user needs. We reported in 1999 and again in  2001 that the current formal and informal research and development  coordination mechanisms may not ensure that potential overlaps, gaps,  and opportunities for collaboration are addressed. It should be noted,  however, that the legislation tasks the new department with coordinating  the federal government\u2019s \u201ccivilian efforts\u201d only. We believe the new  department will also need to coordinate with DOD and the intelligence  agencies that conduct research and development efforts designed to  detect and respond to weapons of mass destruction. In addition, the first  responders and local governments possess practical knowledge about  their technological needs and relevant design limitations that should be  taken into account in federal efforts to provide new equipment, such as  protective gear and sensor systems, and help set standards for  performance and interoperability. Therefore, the new department will  have to develop collaborative relationships with these organizations to  facilitate technological improvements and encourage cooperative  behavior.\nThe President\u2019s proposal could help improve coordination of federal  research and development by giving one person the responsibility for  creating a single national research and development strategy that could  address coordination, reduce potential duplication, and ensure that  important issues are addressed. In 2001, we recommended the creation of  a unified strategy to reduce duplication and leverage resources, and  suggested that the plan be coordinated with federal agencies performing  research as well as state and local authorities. The development of such a  plan would help to ensure that research gaps are filled, unproductive  duplication is minimized, and that individual agency plans are consistent  with the overall goals.\nThe proposal would transfer parts of DOE\u2019s nonproliferation and  verification research and development program to the new department,  including research on systems to improve the nation\u2019s capability to  prepare for and respond to chemical and biological attacks. However, the  legislation is not clear whether the programmatic management and dollars  only would move or the scientists carrying out the research would also  move to the new department. Because the research is carried out by  multiprogram laboratories that employ scientists skilled in many  disciplines who serve many different missions and whose research  benefits from their interactions with colleagues within the laboratory, it  may not be prudent to move the scientists who are doing the research. One  option would be rather than moving the scientists, the new department  could contract with DOE\u2019s national laboratories to conduct the research.\nThe President\u2019s proposal would also transfer the responsibility for civilian  health-related biological defense research and development programs to  the new department, but the programs would continue to be carried out  through HHS. These programs, now primarily sponsored by NIH, include a  variety of efforts to understand basic biological mechanisms of infection  and to develop and test rapid diagnostic tools, vaccines, and antibacterial  and antiviral drugs. These efforts have dual-purpose applicability. The  scientific research on biologic agents that could be used by terrorists  cannot be readily separated from research on emerging infectious  diseases. For example, NIH-funded research on a drug to treat  cytomegalovirus complications in patients with HIV is now being  investigated as a prototype for developing antiviral drugs against  smallpox. Conversely, research being carried out on antiviral drugs in the  NIH biodefense research program is expected to be useful in the  development of treatments for hepatitis C.\nThe proposal to transfer responsibility to the new department for research  and development programs that would continue to be carried out by HHS  raises many of the same concerns we have with the structure the proposal  creates for public health preparedness programs. Although there is a clear  need for the new department to have responsibility for setting policy,  developing a strategy, providing leadership, and overall coordinating of  research and development efforts in these areas, we are concerned that  control and priority-setting responsibility will not be vested in those  programs best positioned to understand the potential of basic research  efforts or the relevance of research being carried out in other, non- biodefense programs.\nIn addition, the proposal would allow the new department to direct, fund,  and conduct research related to chemical, biological, radiological, nuclear,  and other emerging threats on its own. This raises the potential for  duplication of efforts, lack of efficiency, and an increased need for  coordination with other departments that would continue to carry out  relevant research. We are concerned that the proposal could result in a  duplication of capacity that already exists in the current federal  laboratories.\n\n\tConcluding Observations\n\nMany aspects of the proposed consolidation of response activities are in  line with our previous recommendations to consolidate programs,  coordinate functions, and provide a statutory basis for leadership of  homeland security. The transfer of the HHS medical response programs  has the potential to reduce overlap among programs and facilitate  response in times of disaster. However, we are concerned that the  proposal does not provide the clear delineation of roles and  responsibilities that is needed. We are also concerned about the broad  control the proposal grants to the new department for research and  development and public health preparedness programs. Although there is  a need to coordinate these activities with the other homeland security  preparedness and response programs that would be brought into the new  department, there is also a need to maintain the priorities for basic public  health capacities that are currently funded through these dual-purpose  programs. We do not believe that the President\u2019s proposal adequately  addresses how to accomplish both objectives. We are also concerned that  the proposal would transfer the control and priority setting over dual- purpose research and has the potential to create an unnecessary  duplication of federal research capacity.\nMr. Chairman, this completes my prepared statement. I would be happy to  respond to any questions you or other Members of the Committee may  have at this time.\n\n\tContact and Acknowledgments\n\nFor further information about this testimony, please contact Janet  Heinrich at (202) 512-7118. Gene Aloise, Robert Copeland, Marcia Crosse,  Greg Ferrante, Gary Jones, Deborah Miller, Roseanne Price, and Keith  Rhodes also made key contributions to this statement.\n\nRelated GAO Products\n\n\tHomeland Security\n\nHomeland Security: Proposal for Cabinet Agency Has Merit, but  Implementation Will Be Pivotal to Success. GAO-02-886T.   Washington, D.C.: June 25, 2002.\nHomeland Security: New Department Could Improve Coordination but  May Complicate Public Health Priority Setting. GAO-02-883T.  Washington, D.C.: June 25, 2002.\nHomeland Security: Key Elements to Unify Efforts Are Underway but  Uncertainty Remains. GAO-02-610. Washington, D.C.: June 7, 2002.\nHomeland Security: Responsibility and Accountability for Achieving  National Goals. GAO-02-627T. Washington, D.C.: April 11, 2002.\nHomeland Security: Progress Made; More Direction and Partnership  Sought. GAO-02-490T. Washington, D.C.: March 12, 2002.\nHomeland Security: Challenges and Strategies in Addressing Short- and  Long-Term National Needs. GAO-02-160T. Washington, D.C.:   November 7, 2001.\nHomeland Security: A Risk Management Approach Can Guide  Preparedness Efforts. GAO-02-208T. Washington, D.C.: October 31, 2001.\nHomeland Security: Need to Consider VA\u2019s Role in Strengthening Federal  Preparedness. GAO-02-145T. Washington, D.C.: October 15, 2001.\nHomeland Security: Key Elements of a Risk Management Approach.  GAO-02-150T. Washington, D.C.: October 12, 2001.\nHomeland Security: A Framework for Addressing the Nation\u2019s Efforts.  GAO-01-1158T. Washington, D.C.: September 21, 2001.\n\n\tPublic Health\n\nBioterrorism: The Centers for Disease Control and Prevention\u2019s Role in  Public Health Protection. GAO-02-235T. Washington, D.C.:   November 15, 2001.\nBioterrorism: Review of Public Health Preparedness Programs. GAO-02- 149T. Washington, D.C.: October 10, 2001.\nBioterrorism: Public Health and Medical Preparedness. GAO-02-141T.  Washington, D.C.: October 9, 2001.\nBioterrorism: Coordination and Preparedness. GAO-02-129T.  Washington, D.C.: October 5, 2001.\nBioterrorism: Federal Research and Preparedness Activities. GAO-01- 915. Washington, D.C.: September 28, 2001.\nChemical and Biological Defense: Improved Risk Assessment and  Inventory Management Are Needed. GAO-01-667.   Washington, D.C.: September 28, 2001.\nWest Nile Virus Outbreak: Lessons for Public Health Preparedness.  GAO\/HEHS-00-180. Washington, D.C.: September 11, 2000.\nChemical and Biological Defense: Program Planning and Evaluation  Should Follow Results Act Framework. GAO\/NSIAD-99-159.   Washington, D.C.: August 16, 1999.\nCombating Terrorism: Observations on Biological Terrorism and Public  Health Initiatives. GAO\/T-NSIAD-99-112. Washington, D.C.:   March 16, 1999.\n\n\tCombating Terrorism\n\nNational Preparedness: Technologies to Secure Federal Buildings. GAO- 02-687T. Washington, D.C.: April 25, 2002.\nNational Preparedness: Integration of Federal, State, Local, and Private  Sector Efforts Is Critical to an Effective National Strategy for Homeland  Security. GAO-02-621T. Washington, D.C.: April 11, 2002.\nCombating Terrorism: Intergovernmental Cooperation in the  Development of a National Strategy to Enhance State and Local  Preparedness. GAO-02-550T. Washington, D.C.: April 2, 2002.\nCombating Terrorism: Enhancing Partnerships Through a National  Preparedness Strategy. GAO-02-549T. Washington, D.C.: March 28, 2002.\nCombating Terrorism: Critical Components of a National Strategy to  Enhance State and Local Preparedness. GAO-02-548T. Washington, D.C.:  March 25, 2002.\nCombating Terrorism: Intergovernmental Partnership in a National  Strategy to Enhance State and Local Preparedness. GAO-02-547T.  Washington, D.C.: March 22, 2002.\nCombating Terrorism: Key Aspects of a National Strategy to Enhance  State and Local Preparedness. GAO-02-473T. Washington, D.C.:   March 1, 2002.\nChemical and Biological Defense: DOD Should Clarify Expectations for  Medical Readiness. GAO-02-219T. Washington, D.C.: November 7, 2001.\nAnthrax Vaccine: Changes to the Manufacturing Process. GAO-02-181T.  Washington, D.C.: October 23, 2001.\nChemical and Biological Defense: DOD Needs to Clarify Expectations for  Medical Readiness. GAO-02-38. Washington, D.C.: October 19, 2001.\nCombating Terrorism: Considerations for Investing Resources in  Chemical and Biological Preparedness. GAO-02-162T.   Washington, D.C.: October 17, 2001.\nCombating Terrorism: Selected Challenges and Related  Recommendations. GAO-01-822. Washington, D.C.: September 20, 2001.\nCombating Terrorism: Actions Needed to Improve DOD Antiterrorism  Program Implementation and Management. GAO-01-909.   Washington, D.C.: September 19, 2001.\nCombating Terrorism: Comments on H.R. 525 to Create a President\u2019s  Council on Domestic Terrorism Preparedness. GAO-01-555T.   Washington, D.C.: May 9, 2001.\nCombating Terrorism: Accountability Over Medical Supplies Needs  Further Improvement. GAO-01-666T. Washington, D.C.: May 1, 2001.\nCombating Terrorism: Observations on Options to Improve the Federal  Response. GAO-01-660T. Washington, DC: April 24, 2001.\nCombating Terrorism: Accountability Over Medical Supplies Needs  Further Improvement. GAO-01-463. Washington, D.C.: March 30, 2001.\nCombating Terrorism: Comments on Counterterrorism Leadership and  National Strategy. GAO-01-556T. Washington, D.C.: March 27, 2001.\nCombating Terrorism: FEMA Continues to Make Progress in  Coordinating Preparedness and Response. GAO-01-15.   Washington, D.C.: March 20, 2001.\nCombating Terrorism: Federal Response Teams Provide Varied  Capabilities; Opportunities Remain to Improve Coordination. GAO-01- 14. Washington, D.C.: November 30, 2000.\nCombating Terrorism: Need to Eliminate Duplicate Federal Weapons of  Mass Destruction Training. GAO\/NSIAD-00-64. Washington, D.C.:   March 21, 2000.\nCombating Terrorism: Chemical and Biological Medical Supplies Are  Poorly Managed. GAO\/T-HEHS\/AIMD-00-59. Washington, D.C.:   March 8, 2000.\nCombating Terrorism: Chemical and Biological Medical Supplies Are  Poorly Managed. GAO\/HEHS\/AIMD-00-36. Washington, D.C.:   October 29, 1999.\nCombating Terrorism: Observations on the Threat of Chemical and  Biological Terrorism. GAO\/T-NSIAD-00-50. Washington, D.C.:   October 20, 1999.\nCombating Terrorism: Need for Comprehensive Threat and Risk  Assessments of Chemical and Biological Attacks. GAO\/NSIAD-99-163.  Washington, D.C.: September 14, 1999.\nChemical and Biological Defense: Coordination of Nonmedical Chemical  and Biological R&D Programs. GAO\/NSIAD-99-160. Washington, D.C.:  August 16, 1999.\nCombating Terrorism: Use of National Guard Response Teams Is  Unclear. GAO\/T-NSIAD-99-184. Washington, D.C.: June 23, 1999.\nCombating Terrorism: Observations on Growth in Federal Programs.  GAO\/T-NSIAD-99-181. Washington, D.C.: June 9, 1999.\nCombating Terrorism: Analysis of Potential Emergency Response  Equipment and Sustainment Costs. GAO\/NSIAD-99-151.   Washington, D.C.: June 9, 1999.\nCombating Terrorism: Use of National Guard Response Teams Is  Unclear. GAO\/NSIAD-99-110. Washington, D.C.: May 21, 1999.\nCombating Terrorism: Observations on Federal Spending to Combat  Terrorism. GAO\/T-NSIAD\/GGD-99-107. Washington, D.C.: March 11, 1999.\nCombating Terrorism: Opportunities to Improve Domestic Preparedness  Program Focus and Efficiency. GAO\/NSIAD-99-3. Washington, D.C.:  November 12, 1998.\nCombating Terrorism: Observations on the Nunn-Lugar-Domenici  Domestic Preparedness Program. GAO\/T-NSIAD-99-16. Washington, D.C.:  October 2, 1998.\nCombating Terrorism: Observations on Crosscutting Issues. GAO\/T- NSIAD-98-164. Washington, D.C.: April 23, 1998.\nCombating Terrorism: Threat and Risk Assessments Can Help Prioritize  and Target Program Investments. GAO\/NSIAD-98-74. Washington, D.C.:  April 9, 1998.\nCombating Terrorism: Spending on Governmentwide Programs  Requires Better Management and Coordination. GAO\/NSIAD-98-39.  Washington, D.C.: December 1, 1997.\n\n\tDisaster Assistance\n\nDisaster Assistance: Improvement Needed in Disaster Declaration  Criteria and Eligibility Assurance Procedures. GAO-01-837.   Washington, D.C.: August 31, 2001.\nChemical Weapons: FEMA and Army Must Be Proactive in Preparing  States for Emergencies. GAO-01-850. Washington, D.C.: August 13, 2001.\nFederal Emergency Management Agency: Status of Achieving Key  Outcomes and Addressing Major Management Challenges. GAO-01-832.  Washington, D.C.: July 9, 2001.\n\n\tBudget and Management\n\nBudget Issues: Long-Term Fiscal Challenges. GAO-02-467T.   Washington, D.C.: February 27, 2002.\nResults-Oriented Budget Practices in Federal Agencies. GAO-01-1084SP.  Washington, D.C.: August 2001.\nManaging for Results: Federal Managers\u2019 Views on Key Management  Issues Vary Widely Across Agencies. GAO-01-592. Washington, D.C.:   May 25, 2001.","output":"What GAO Found\n\nSince the terrorist attacks on September 11, 2001, and the subsequent anthrax incidents, there has been concern about the ability of the federal government to prepare for and coordinate an effective public health response given the broad distribution of responsibility for that task at the federal level. More then 20 federal departments and agencies carry some responsibility for bioterrorism preparedness and response. The President's proposed Homeland Security Act of 2002 would bring many of these federal entities with homeland security responsibilities--including public health preparedness and response--into one department to mobilize and focus assets and resources at all levels of government. The proposed reorganization has the potential to assist in the coordination of public health preparedness and response programs at the federal, state, and local levels. There are concerns, however, about the proposed transfer of control of public health assistance programs that have both basic public health and homeland security functions from Health and Human Services to the new department. Transferring control over these programs, including priority setting, to the new department has the potential to disrupt some programs critical to basic public health responsibilities. The President's proposal is unclear on how both the homeland security and the public health objectives would be accomplished."}
{"id":"crs_R41007","pid":"crs_R41007_0","input":"\tIntroduction\n\nThis report is designed to provide Congress with a perspective on the contemporary political system of China, the world's second-largest economic power, one of five permanent members of the United Nations Security Council, and the only Communist Party-led state in the G-20 grouping of major economies. By introducing some of the distinct features and governance challenges of China's political culture, the report aims to help Congress understand the ways in which political actors in China interact, or in some cases, fail to interact, with implications for China's relationship with its neighbors and the world. By introducing some of the leading political institutions and political actors in China, the report aims to help Congress understand where Chinese interlocutors sit within the Chinese political system, gauge their relative influence, and judge the authoritativeness of their statements with respect to official policy. Where appropriate, the report also seeks to highlight ways in which China's political culture affects official Chinese interactions with the U.S. government.\nThe Chinese Communist Party (CCP or Party) has been in power in China for 63 years, a record of longevity that rivals and could in six years surpass that of the Communist Party of the Soviet Union. The CCP assumed power in 1949 by means of a civil war victory over the forces of Chiang Kai-shek's Nationalists, who moved the seat of their Republic of China government to the island of Taiwan. The Communists named their new regime the People's Republic of China (PRC). Although the CCP has been continually in power since, China's political institutions and political culture have evolved significantly over those decades, with the CCP's willingness to adapt helping to explain why it has, so far at least, avoided the fate of its sister parties in the Soviet Union and Eastern Europe. \nToday, although the Party is committed to maintaining a permanent monopoly on power and is intolerant of those who question its right to rule, analysts consider the political system to be neither monolithic nor rigidly hierarchical. Jockeying among leaders and institutions representing different sets of interests is common at every level of the system. Sometimes fierce competition exists among the members of the Communist Party's seven-man Politburo Standing Committee and 25-member Politburo, China's highest decision-making bodies. It also exists among ministries; between ministries and provincial governments, which are equals in bureaucratic rank; among provinces; and among the headquarters departments and service branches of the military. The military and the Foreign Ministry are often on different pages. Deputies to the National People's Congress, China's weak legislature, sometimes attempt to push back against the government, the courts, and the public prosecutor's office. As part of a trend of very modest political pluralization, moreover, other political actors are increasingly able to influence policy debates. Such actors, who may join forces to advance particular causes, include an increasingly diverse media, micro-bloggers, state-owned and private corporations, official and quasi-official research institutes, university academics, officially sponsored associations and societies, and grassroots non-governmental organizations.\nOne test of a political system is its ability to manage political transitions. In the run-up to a once-in a decade change in the Communist Party's leadership in November 2012, Communist Party Politburo member and Chongqing Municipality Party Secretary Bo Xilai fell from grace, exposing at least one serious rift in the leadership, raising questions about the unity and probity of China's remaining leaders, and, because of Bo's ties to senior military figures, raising questions about the loyalty of parts of the military to the central Party authorities. (See text box on p. 19.) In the same period, the leadership was also shaken by revelations in the foreign media about the vast personal fortunes amassed by relatives of the outgoing premier, Wen Jiabao, and the incoming Party General Secretary, Xi Jinping. Despite the turmoil in its top ranks, the Party convened its 18 th National Congress in November 2012 without public displays of discord, and immediately afterwards appointed a new leadership. Xi Jinping was named both General Secretary of the Communist Party and Chairman of the body that oversees the military, the Party's Central Military Commission. He added the title of State President at the first session of the 12 th National People's Congress in March 2013. The NPC meeting also produced a new Premier of the State Council, Li Keqiang, and other new top state officials.\nMany analysts, both in China and abroad, have questioned the long-term viability of China's current political system, in which the Party remains above the law, leadership politics is a black box, and civil society and the right to free speech and association are severely constrained. While he was in office, China's recently retired Premier, Wen Jiabao, called for political reform, including reform of \"the leadership system of the party and the state,\" warning that, \"Without the success of political structural reform, it is impossible for us to fully institute economic structural reform. The gains we have made in reform and development may be lost, new problems that have cropped up in China's society cannot be fundamentally resolved and such historical tragedy as the Cultural Revolution may happen again.\" Wen never elaborated, though, on precisely what sort of political reform he hoped to see. \nChina's new Communist Party General Secretary Xi Jinping raised hopes for a change in the Communist Party's relationship to the law when he called in December 2012 for full implementation of China's state constitution and declared that, \"No organization or individual has the special right to overstep the Constitution and law, and any violation of the Constitution and the law must be investigated.\" Xi has also repeatedly mentioned the need for the Party to police itself, rather than allowing any outside body to do so, however. Perhaps tellingly, in a January 2013 speech, he urged Party organizations and members to abide not by the state constitution, but rather by the Party's constitution, a separate document. The apparent contradictions among Xi's statements make his attitude toward political reform unclear.\n\n\tOverview of China's Political Institutions\n\nTrue to its Leninist roots, the Chinese Communist Party dominates state and society in China. Its power rests on four pillars: its control of China's approximately 2.25 million person-strong military, the People's Liberation Army (PLA) , its 1.5 million person-strong paramilitary force, the People's Armed Police , and its 800,000 other internal security forces; its control of personnel appointments across all political institutions, the military, state-owned corporations, and public institutions; its control of the media; and its control of the judiciary and the internal security apparatus. (For discussion of the Party organs in charge of these functions, see \" The Party Bureaucracy .\") The Party's leadership role is referenced five times in the preamble to the PRC's 1982 constitution, but is not mentioned in any of the articles of the constitution, creating ambiguity about the legal basis for the Party's vast powers. \nThe Party entrusts implementation of its policies and day-to-day administration of the country to the institution of the State , headed by the State Council and including the State's ministries and commissions and layers of \"people's governments\" below the national level. The top State officials at every level of administration usually concurrently hold senior Party posts, to ensure Party control. \nAccording to China's state constitution, the National People's Congress (NPC) oversees the State Council, as well as four other institutions: the Presidency, the Supreme People's Court, the public prosecutors' office, and the military. In practice, the NPC, like People's Congresses at every level of administration, is controlled by the Communist Party and is able to exercise little oversight over any of the institutions officially under its supervision. NPC deputies are expected to approve all budgets, agency reports, and personnel appointments put before them. The NPC's most significant power is its ability to initiate and shape legislation. \nThe formal political system also includes two other categories of institutions, although they have little substantive power. The first is People's Political Consultative Conferences (PPCCs), the most senior level of which is known as the Chinese People's Political Consultative Conference (CPPCC) National Committee. The Party and State ostensibly \"consult\" with PPCCs on policy issues. The second set of institutions is China's eight minor political parties , known as the \"democratic parties.\" All the parties were established before the Communists came to power, pledge loyalty to the Communist Party, and accept its leadership. The existence of the PPCCs and the minor parties allows the Communist Party to describe China's political system as one of \"multi-party cooperation and political consultation led by the Communist Party of China.\"\n\n\tFeatures of China's Formal Political Culture\n\nThe formal Chinese political system has a number of distinct features. Awareness of these features can be helpful for congressional interactions with Chinese officials and institutions, and can inform Congress's understanding of official Chinese behavior. \n\n\t\tCollective Leadership\n\nChina has had no supreme leader since the death of Deng Xiaoping in 1997. The seven men who sit on the country's most senior decision-making body, the Communist Party's Politburo Standing Committee (PSC), form a collective leadership in which each man has a rank, from one to seven, and shoulders primary responsibility for a specific portfolio. (See Table 1 for the names and offices of all seven members.) Party General Secretary Xi Jinping is ranked first among the seven and has responsibility for convening PSC and larger Politburo meetings. He also controls some of the most consequential portfolios, including military and foreign affairs. Unlike his predecessor, who had to wait two years after becoming head of Party to be named head of the military, Xi was awarded the top military post immediately upon taking over leadership of the Party, a development that has enhanced his authority. Like all his colleagues, however, Xi must still win consensus from the rest of the group for major decisions. Forging agreement can be difficult, in part because members of the PSC owe their jobs to horse trading among different constituencies, interest groups, and influential retired Party elders, whose interests they represent informally on the PSC.\nThe collective leadership feature of the Chinese political system is designed to guard against a repeat of the excesses of the era of the PRC's founding father, Mao Zedong, when a single out-sized leader was able to convulse the nation with a series of mass political campaigns. It is also meant to guard against the emergence in China of a figure like Mikhail Gorbachev, whose decisions are widely blamed in China for the collapse of the Soviet Union. Before his death in 1997, China's supreme leader, Deng Xiaoping, served as the ultimate check on the power of the Party general secretary, cashiering two reformist General Secretaries, Hu Yaobang in 1987 and Zhao Ziyang in 1989, before settling on Jiang Zemin in the aftermath of the 1989 Tiananmen massacre. It is unclear whether Jiang, age 86, or other retired leaders would today have the authority to remove the general secretary if he were to pursue policies with which they profoundly disagreed. \n\n\t\tThe Military as an Armed Wing of the Communist Party\n\nChina's military, the People's Liberation Army (PLA), is not a national army belonging to the state. Rather, it is an armed wing of the Communist Party, with the Party's exercise of \"absolute leadership\" over the military a fundamental guarantee of Communist Party rule. The PLA's willingness to put the Communist Party's interests first was tested in 1989, when the Party ordered tanks into the streets of Beijing to clear unarmed protestors from Tiananmen Square. The PLA did as the Party ordered, killing hundreds of protestors in the process\u2014no authoritative death toll has ever been released. The PLA also served the Party by enforcing seven months of martial law in the capital before and after the killings, even though its actions badly damaged the PLA's image within China and around the world. \nA heavy emphasis on political indoctrination\u2014and particularly on the need for the PLA to be unswervingly loyal to the Communist Party\u2014has been a hallmark of the PLA from its earliest days. Among the five \"core values\" for the military outlined by China's most recent Party and military chief, Hu Jintao, \"loyalty to the Party\" came first, ahead of \"ardent love for the people,\" and \"service to the country.\" In remarks to troops in December 2012, China's new top Party and military leader, Xi Jinping, described obeying the Party's command as \"the soul of the military\" and the military's ability to engage in combat and win battles as a \"top priority.\"\nA major tool for Party control of the military is the General Political Department (GPD), one of the four \"general departments\" of the PLA headquarters, all of which are represented on the Party's Central Military Commission. Among other things, the GPD is responsible for political training and military personnel matters, including management of personnel dossiers, promotions, and job assignments. GPD political commissars (known at lower levels as political directors and political instructors) serve side-by-side with military commanders at all levels of the PLA, and head the Party committees in all PLA units. Almost all PLA officers are Party members. Only two uniformed officers serve on the Party's Politburo, however, and none serve on China's most senior leadership body, the Politburo Standing Committee.\nScholars and others in China have sometimes broached the possibility of strengthening the PLA's institutional ties to the State by \"de-politicizing\" it, or \"nationalizing\" it. The Party has repeatedly rejected such notions. In 2012, at a press conference marking the 85 th anniversary of the founding of the PLA, a military spokesman denounced talk of de-politicization as \"erroneous ideas\" raised with \"ulterior motives.\" Communist Party General Secretary Xi Jinping reportedly confirmed his opposition to de-politicization in leaked remarks in December 2012 in which he blamed the collapse of the Soviet Union on Moscow's decision to depoliticize the Soviet military.\n\n\t\tThe Legislature: Strong on Paper, Weak in Practice\n\nChina's 1982 state constitution, adopted six years after the death of Mao Zedong, describes the country's unicameral legislature, the National People's Congress, as \"the highest organ of state power.\" The constitution gives the NPC the power to amend the constitution; supervise its enforcement; enact and amend laws; ratify and abrogate treaties; approve the state budget and plans for national economic and social development; elect and impeach top officials of the state and judiciary; and supervise the work of the State Council, the State Central Military Commission, the Supreme People's Court, and the Supreme People's Procuratorate. In reality, however, the NPC exercises many of those powers in name only. \nOne major reason for the NPC's weakness is the Communist Party's insistence that it serve as little more than a rubber stamp for Party decisions. While the constitution gives the NPC the right to \"elect\" such top state officials as the President, Vice President, and Chairman of the State Central Military Commission, for example, in practice, the Party decides who will fill those positions. The NPC's role is simply to ratify the Party's decisions. \nSome analysts see a related reason for the NPC's weakness in the dual identity of most of its deputies and the way they are \"elected.\" The Party nominates all candidates for positions as deputies, usually nominating 20% to 50% more candidates than available positions. Provincial-level People's Congresses and the People's Liberation Army elect deputies from among the nominees. Campaigning is forbidden. Because China rejects the principle of the separation of powers, the heads of all the constitutional branches of government over which the NPC is meant to exercise oversight are themselves NPC deputies, including the President and the Premier of the State Council. In all, according to calculations by a leading Chinese media organization, 85% of the current NPC's nearly 3,000 deputies hold concurrent posts as Communist Party or state officials or civil servants. Holders of state, judicial, and procuratorial positions are barred, however, from serving on the NPC Standing Committee, the elite body that carries out the work of the NPC when the full NPC is out of session, as it is for all but approximately 10 days a year. As a guarantee of Party control of the legislature, a member of the Party's seven-man Politburo Standing Committee serves concurrently as chairman of the NPC Standing Committee.\nProposals for political reform in China often involve empowering the NPC to play the role envisioned for it in the constitution. Proposals have focused, for example, on incentivizing the NPC to enforce the state constitution by creating a dedicated committee under the NPC Standing Committee to review laws passed nationwide for compliance with the constitution. Others have suggested that the Party rule through the NPC, using only the NPC's powers as outlined in the constitution. If the Party were to do so, however, it would be significantly curbing its powers and, for the first time, submitting them to constitutional restraints. \n\n\t\tThe Power of Provincial Governments\n\nProvincial leaders are powerful players in the Chinese political system. Six of them, all Party Secretaries, sit on the Party's Politburo, making them among the 25 most powerful officials in the country. All provincial leaders share at least the same bureaucratic rank as central government ministers. With the 2011 inauguration of a U.S.-China Governors Forum, designed to bring together U.S. governors and Chinese provincial Party secretaries and governors, outreach to provincial leaders has become an important element of U.S. policy toward China. \nFiscal decentralization has been a major force empowering provincial governments. Provinces have their own revenue streams, and governments at the provincial level and below are responsible for the lion's share of the country's public expenditure, including almost all public spending on education, health, unemployment insurance, social security, and welfare. Provinces also have the right to pass their own laws and regulations, which may extend national laws and regulations, but not conflict with them. Beijing gives provinces considerable leeway in adopting policies to boost economic growth and encourages provinces to undertake approved policy experiments. \nBeijing sometimes seems to struggle to impose its will on the provinces. Central government ministries have bureaus in the provinces, but they report both to their ministry in Beijing and to the provincial leadership. When priorities are in conflict, the leaders of such bureaus tend to put the provincial leadership's interests first, not least because the provincial leadership controls personnel assignments. China operates a unitary political system, not a federal system, however, and ultimately, Beijing has the upper hand. Provinces do not have their own constitutions and do not have the power to appoint their own leaders. The Party's Organization Department in Beijing manages the appointments and promotions of all provincial Party Secretaries and governors, and routinely moves those provincial leaders from province to province, and in and out of posts in Beijing, to ensure that they do not build up regional powerbases. For the same reason, the Party also ensures that military region boundaries do not overlap with provincial boundaries. Beijing's leverage over the provinces includes its ability to send the Party's Central Disciplinary Inspection Commission into provinces to investigate corruption allegations, and to send the General Auditor's Office into provinces to check their books. \n\n\t\tDocument-Based Culture\n\nIn the Chinese system, the statements of individual leaders are almost always less authoritative than documents approved by the collective leadership, with the most authoritative documents being those approved by the Communist Party Central Committee. A corollary is that the officially sanctioned published form of a leader's words is almost always more authoritative than the words as originally delivered, with the act of publication providing an important stamp of party approval. Notably, former Premier Wen Jiabao used interviews with the foreign media to discuss his ideas for political reform, but the Chinese state media never reported the substance of those interviews, limiting their authority and impact in China.\nChina's document-based culture also includes a heavy reliance on paper documents, even in a digital age, with the circulation of paper documents, and the accumulation of signatures on them, helping to build consensus. In the U.S.-China relationship, the great store China places in documents helps explain why the Chinese side has pushed so hard for the issuance of a series of detailed joint statements between the two countries. The Chinese side considers these to be highly authoritative texts containing guiding principles for the relationship, although U.S. officials generally do not accord them similar importance, a disconnect that creates a potentially dangerous expectation gap.\n\n\t\tThe Importance of Ideology\n\nIdeology matters more in China than in many other political systems. As the Chinese Communist Party has sought to adapt itself to a changing world, it has had to wrestle with ways to revise its ruling ideology to allow the change necessary for its survival, without changing its ideology so much as to undermine further its already tenuous justifications for maintaining a permanent monopoly on power. The CCP waged a successful revolution and established the People's Republic of China with the promise that it would help farmers and workers overthrow their \"exploiters,\" the landlords and capitalists, and establish socialism and ultimately communism, in which all property would be publicly owned, and all classes would cease to exist. In its constitution, the Party still officially proclaims the \"realization of communism\" to be its \"highest ideal and ultimate goal.\" \nAs a ruling party, rather than a revolutionary party, however, the CCP now defines itself as representing \"the fundamental interests of the overwhelming majority of the Chinese people,\" including capitalists. In 2007, long after privately owned businesses began driving double digit economic growth rates in its coastal provinces, and long after its real estate markets began to boom, China finally passed a law protecting private property rights. Each time the Party edges further away from its Marxist roots, even if only to catch up with reality on the ground, it faces howls of protest from China's marginalized but still vocal Marxists. China's preferential treatment of state-owned enterprises (SOEs), a point of friction in U.S.-China relations, is caught up in this ideological debate. The Preamble to CCP's constitution today still holds that, \"The Party must uphold and improve the basic economic system, with public ownership playing a dominant role.\"\n\n\t\tThe Ideal and Reality of Meritocracy\n\nAn important element of the Communist Party's bid for ideologically based legitimacy is the notion that people rise within the Party or State hierarchy based on what the Party constitution describes as \"their moral integrity and their professional competence,\" and \"on their merits without regard to their origins.\" The Party, which manages personnel appointments across the Chinese political system, the military, and all public institutions, argues that this arrangement helps make China's political system superior to the political systems of countries that elect their leaders in competitive, multi-party elections. The degree to which China really does operate a meritocracy is a subject of debate, however. A detailed 2012 study conducted by scholars in the United States and China found no evidence of a correlation between rank in the Communist Party hierarchy and success in delivering \"exceptional economic growth\"\u2014a strong indicator of professional competence. The authors did, however, find that the Party awarded promotions based on factional ties, familial ties to senior leaders, and educational qualifications. The children of high-level officials, dubbed \"princelings\" ( taizi ) in colloquial Chinese, are particularly prominent at the highest levels of the Chinese political system, with four of the seven members of the current Politburo Standing Committee meeting that description. China's most prominent princeling is Communist Party General Secretary Xi Jinping, the son of revered early revolutionary Xi Zhongxun. Meanwhile, corruption and sex scandals have undermined the Party's claim to appoint leaders with \"moral integrity.\" China has also seen a rise in the practice of the buying and selling of public office, in which officials illegally auction off posts. \n\n\t\tAge and Term Limits for Official Positions\n\nAlthough a relatively recent innovation, introduced beginning in 1997, enforcement of age and term limits for top Party and State positions has brought a degree of predictability into otherwise opaque Chinese elite politics. At the last three quinquennial Party Congresses, in 2002, 2007, and 2012, no one older than 67 was appointed or reappointed to the Politburo Standing Committee or the broader Politburo. In 2012, the Party extended that age limit to all members of the Central Military Commission. Unless they serve concurrently on higher bodies, ministers, provincial Party Secretaries, and governors cannot be older than 62 when appointed to new terms, and have a retirement age of 65, although those in the middle of their terms are often permitted to stay on a little longer. Meanwhile, all top officials are limited to two five-year terms in the same posts. Those age and term limits define the number of positions that will turn over at each Party Congress and limit the pool of possible candidates. Age limits mean that five of the seven members of the current Politburo Standing Committee are expected to serve only one five-year term; only Xi Jinping and Li Keqiang are young enough to serve a second term. By virtue of their age, the two youngest members of the newly appointed 25-member Politburo have emerged as possible future national leaders in waiting. They are Hu Chunhua, the Party Secretary of Guangdong Province, and Sun Zhengcai, the Party Secretary of provincial-level Chongqing Municipality, both aged 49.\n\n\t\tPenchant for Long-Term Planning\n\nAs a legacy of the centrally planned economic system of the 1950s and 1960s, the Chinese political system places a heavy emphasis on long-term planning. At five-year intervals, the Communist Party General Secretary presents a report to the Party Congress outlining the Party's priorities for the country. It is one of the most authoritative documents in the Chinese political system. China also prepares \"Five-Year Plans\" that set economic, demographic, and social targets and identify priority industries for development. Other official plans lay out roadmaps for development in various fields over longer time-frames. A roadmap for scientific development, for example, covers the period through 2050. Such plans are not followed to the letter, but they have a powerful role in guiding official policy.\nThe Communist Party has also tried to apply a long-term planning approach to grooming future political leaders. The most prominent example of an official groomed for high office over a lengthy period is former Party General Secretary Hu Jintao, who was appointed to China's top decision-making body as heir apparent to then General Secretary Jiang Zemin in 1992, a full decade before he finally ascended to the top job, which he held for another decade. China's current top two Party leaders, Xi Jinping and Li Keqiang, had shorter, five-year-long apprenticeships. \n\n\t\tEmphasis on Political Stability\n\nIn 1989, China's Communist Party faced the challenge of large-scale protests in Beijing's Tiananmen Square and in more than 100 other cities around the country. Disagreements about how to respond split the top Party leadership and forced out the Party General Secretary at the time, Zhao Ziyang. As noted earlier, the decision by Deng Xiaoping, then China's supreme leader, to order in the army to clear the Beijing protesters by force undermined the Party's legitimacy and severely damaged China's standing in the world. Since then, the Party has made maintenance of social stability one of its top priorities, deploying a vast internal security apparatus to head off protests or, once they erupt, to prevent them from spreading. \nThe domestic security apparatus includes an 800,000-strong police force under the Ministry of Public Security and a 1.5 million-strong paramilitary force, the People's Armed Police, which reports to both the Party's Central Military Commission and, through the Ministry of Public Security, to the State Council. The 2.25 million-strong People's Liberation Army also has a domestic stability mandate, on top of its national defense mandate. Other agencies involved in internal security include the Party's Propaganda Department, which plays an important role in censoring the media to prevent discussion of subjects that might feed movements for change; the Ministry of State Security, which focuses on internal security threats as well as conducting intelligence-gathering abroad; and the Ministry of Justice, which operates China's prison system. All but the Propaganda Department are overseen by the Party's Central Commission of Politics and Law and all are powerful bureaucratic players in the Chinese political system, although as of November 2012, the head of the Commission now sits at the Politburo level, alongside the head of the Propaganda Department, rather than at the level of the more senior Politburo Standing Committee. Since 2010, China's spending on such internal security agencies as the police, the People's Armed Police, the courts, and the prison system has outstripped its spending on the military. The 2013 national budget contained planned spending of $123.7 billion on internal security (not including the PLA), compared to $119 billion on defense.\n\n\tGovernance Challenges in the Chinese Political System\n\nSince 1978, the CCP has worked to build, almost entirely from scratch, a set of governing institutions and a system of laws capable of handling rapid economic and social development at home and ever more complex interactions with the global community. The Communist Party's insistence on the principle of unchallenged Communist Party rule atop this system has been one of the few constants in the process. China has carried out seven sweeping re-organizations of government in the last 30 years, establishing new agencies and coordinating committees, spinning off of the old \"line\" ministries, merging other ministries, and adjusting the bureaucratic status and\/or jurisdiction of many government bodies. Keeping track of the changes adds to the challenge of understanding China's policy process. These institutional reforms have not, however, managed to solve some enduring challenges in the Chinese system undermining effective governance.\n\n\t\t\"Stove-Piping\" and Bureaucratic Competition\n\nAmong the Chinese political system's governance difficulties is the phenomenon known as \"stove-piping,\" in which individual ministries and other hierarchies share information up and down the chain of command, but not horizontally with each other. China has no coordinating body analogous to the U.S. National Security Council. \"Leading Small Groups\" at the top of the Party and the State seek to bring together representatives from multiple agencies to coordinate and build consensus around policy in specific areas, but they have small staffs, vary widely in their level of activity, and are usually unwilling to get involved in forcing day-to-day coordination among their member agencies. In the U.S.-China relationship, one of the values U.S. officials see in the Strategic & Economic Dialogue (S&ED) mechanism is that it forces multiple Chinese agencies to come together under one roof to talk with the U.S. government about issues in the relationship, and, as a side benefit, to talk to each other. \nA related governance issue is unproductive competition among official entities. It is not uncommon in China for multiple entities to attempt to assert jurisdiction over the same issue, competing with each other for scarce budget resources, power, and recognition from higher government officials. A government restructuring carried out in March 2013 attempted to address some of the most glaring cases of overlapping jurisdiction, disbanding the country's National Population and Family Planning Commission and merging its family planning divisions into the Ministry of Health, for example, and combining multiple competing maritime law enforcement agencies under a single organization, the State Oceanic Administration. In the latter case, however, bureaucratic competition may still be a problem because while the State Oceanic Administration reports to the Ministry of Land and Resources, operational control of the Administration's maritime law enforcement forces was assigned to the Ministry of Public Security.\n\n\t\tThe Distorting Influence of Bureaucratic Rank\n\nChinese political culture features carefully observed systems of ranks that identify the relative importance of people, official agencies, public institutions, state-owned corporations, and geographic units. Rank consciousness affects the way that officials and their agencies interact with each other. Most damagingly, it contributes to the political system's difficulty in achieving successful inter-agency coordination and frequently undermines lines of authority. \nAmong the rules that govern rank in China is that entities of equivalent rank cannot issue binding orders to each other. Often, they cannot even compel coordination, although Party entities and security agencies have more clout in that respect than other entities. An entity of lesser rank seeking to coordinate with an entity of higher rank faces a daunting challenge. Many analysts attribute the well documented communication problems between the People's Liberation Army (PLA) and the Foreign Ministry to the large gap in their respective ranks. The PLA's Central Military Commission is of equivalent rank to the State Council, China's cabinet, while the Foreign Ministry is a mere ministry under the State Council. For the Foreign Ministry to liaise with the PLA, it must report up to the State Council, which may have to report up further up to the Politburo in order to secure PLA cooperation. \nIn another example of the distorting influence of rank, state-owned enterprises sometimes outrank the Party and state leaders in the geographic jurisdictions in which they are based, making it impossible for the local government to issue binding orders to them. The rank system can also impede effective regulatory oversight when regulators share the same bureaucratic rank as entities they are charged with regulating. For example, while China's banking regulator, the China Banking Regulatory Commission (CBRC), has ministerial rank, and China's five largest banks have quasi-ministerial rank, at the province level they have equal rank, resulting in resistance from the banks' provincial branches to the provincial CBRC's oversight. \nOne solution periodically proposed for some of these rank-related governance issues is to abolish administrative ranks for the leaders of state-owned enterprises, financial institutions, and universities. In 2000, a central government commission issued trial \"basic norms\" requiring large and medium-sized state-owned enterprises to give up administrative rank, but so far only the cities of Shanghai and Guangzhou have shown any interest in implementing it. One reason for the slow pace of reform may be the unwillingness of corporate and educational leaders to give up the array of privileges that accompany administrative rank. According to a 2012 article in China's respected Southern Weekend newspaper, officials with the rank of full ministers are assigned a car costing up to $71,000, with a full-time driver; provided state funds for the purchase of residences up to 2,400 square feet in size; and given access to exclusive health care, including single-person VIP hospital rooms and the convenience of having all medical bills automatically settled by the Ministry of Health. All those privileges continue for life, with health privileges being the most prized. Retired full minister-rank officials are also assigned a full-time secretary for life.\nA long-time challenge for the U.S.-China relationship has been that China considers U.S. Cabinet Secretaries to be of equivalent rank to Chinese ministers, rather than to China's more senior vice premiers and state councilors. The creation of the U.S.-China Strategic and Economic Dialogue (S&ED) allowed the United States to bypass the rank system and find a way for the U.S. Secretaries of the Treasury and State to deal directly with their real counterparts above the ministerial level. The U.S. Secretary of Defense, however, is still hosted by the Chinese Minister of Defense, who is the third most senior uniformed member of the Central Military Commission and is outside the operational chain of command.\n\n\t\tWeak Rule of Law\n\nA long-standing source of frustration for U.S. government officials is the seeming inability or unwillingness of their Chinese counterparts to enforce policies, decisions, regulations, and laws, much less the state constitution. Scholars of China have identified many factors that contribute to this situation. A fundamental one is considered to be the Chinese Communist Party's attitude toward the law. The Party is widely perceived to support rule by law\u2014law as a tool for governance\u2014but not rule of law. The Party is particularly unwilling to submit itself to legal restraints. As noted earlier, although the Party is China's dominant political institution, with its leadership mentioned five times in the preamble to the state constitution, the Party and its bureaucracy are not mentioned in any of the articles of the constitution, leaving an unclear legal basis for the Party's powers. The Party holds itself above the law when it insists that judicial authorities cannot investigate Party members without the Party's consent. In the case of a Party official accused of wrongdoing, such as the former Chongqing Party Secretary Bo Xilai, for example, the Party conducts its own investigation and then chooses whether to hand the accused over to the state judiciary. The Party also explicitly denies the judiciary independence, insisting that Party Commissions of Politics and Law oversee the work of the police, the prosecutor's office, and the courts. The commissions are empowered to intervene to obtain outcomes in the Party's interest, undermining the authority of the law. In a 2012 article, the Vice President of China's Supreme Court rued the fact that for officials across China, economic development is \"the first imperative,\" and preserving stability is \"the first responsibility,\" whereas ruling lawfully is a \"second or third\" tier consideration. Civil society groups have long lobbied for a greater role in monitoring enforcement of rules and regulations, but the CCP continues to resist, fearing empowering groups outside its control. \n\n\t\tFactionalism\n\nAlthough China is effectively a one party state, multiple coalitions, factions, and constituencies exist within the political system. Political mentorship, place of birth, the affiliations of one's parents, and common educational or work history may lead individuals to form political alliances. Former Party General Secretary Jiang Zemin, for example, was known for promoting and relying upon a group of officials he had known from his days as Mayor and then Party Secretary of Shanghai, who also shared his interest in fast-paced economic growth and breaking down ideological barriers to the growth of the private sector. Jiang emerged from retirement before the Communist Party's 18 th National Congress in November 2012 and is reported to have played an outsized role in placing factional allies on the new Politburo Standing Committee that emerged from the Congress. Former Party General Secretary Hu Jintao, for his part, promoted a number of officials who, like him, worked for the Communist Youth League. Increasingly, scholars see competition within the party and the state based on bureaucratic constituencies, too. The Ministry of Industry and Information Technology backs industry, for example, against the Ministry of Environment, which seeks to rein in industrial pollution. \n\n\t\tCorruption\n\nCorruption in China is widespread. Among its forms are lavish gifts and expensive meals bestowed on officials by those seeking favors; bribes explicitly provided in exchange for permits, approvals, and jobs; privileged opportunities offered to officials or their extended families to acquire corporate shares, stock, and real estate; embezzlement of state funds; and exemption of friends, relatives, and business associates from enforcement of laws and regulations. As China's economy has expanded over the last 30 years, the scale of corruption has grown dramatically. A 2011 report released by China's central bank estimated that from the mid-1990s to 2008, corrupt officials who fled overseas took with them $120 billion in stolen funds. Estimates of illicit financial flows out of China are many times higher. In a 2012 report, Global Financial Integrity, a Washington, DC-based research and advocacy organization, estimated that total illicit financial flows out of China in the decade from 2001 through 2010 amounted to $2.74 trillion, with $420 billion leaving China illicitly in 2010 alone. The international non-governmental organization Transparency International ranks China 80 th on its Corruption Perceptions Index, with the top ranking countries being the least corrupt. China ranks just below Sri Lanka and above Serbia. The United States is ranked 19 th . \nImmediately following his appointment as Communist Party General Secretary in November 2012, Xi Jinping identified corruption and graft within the Party as \"pressing problems.\" He pledged to \"work with all comrades in the party, to make sure the party supervises its own conduct and enforces strict discipline.\" Many observers believe, however, that the Party's insistence on supervising its own conduct, rather than accepting supervision from outside, has been part of the reason that corruption has flourished. Critics charge, moreover, that when the Party's corruption-fighting agency, the Central Discipline Inspection Commission, conducts investigations, they are frequently politically motivated, even if they uncover real wrongdoing. Officials who keep on the right side of their superiors and colleagues may engage in large-scale corruption, while other officials may be investigated for lesser infractions because they have fallen afoul of powerful officials.\nMedia commentators and academics have suggested a variety of measures to tackle corruption, including allowing the media to play more of a watchdog role and requiring officials to make their family assets public. So far, neither proposal has advanced significantly.Journalists who expose wrongdoing do so at their peril. In recent years, however, microbloggers have successfully exposed a string of corrupt officials. In one high-profile case, microbloggers drew attention to photographs of a local official showing him wearing at least 11 different luxury wristwatches on various occasions. Just one of the timepieces was worth more than twice the man's annual salary. \n\n\tChina's Political Institutions in Detail\n\n\t\tThe Chinese Communist Party (CCP)\n\nThe Communist Party's 82.6 million members constitute approximately 6% of China's population of 1.34 billion. Any Chinese citizen over the age of 18 who is willing to accept and abide by the Party's constitution and policies, which include a requirement that Party members be atheists, can apply for Party membership. In 2011, however, of 21.6 million applicants, fewer than 15% were accepted. The Party is heavily male, with female members making up less than a quarter of the total. Nearly 85% of members work for the Party or the State. Party membership is considered prestigious, although not to the degree that it was in earlier eras.\nEvery Party member, irrespective of position, is required to be organized into a branch, cell, or other specific unit of the Party to participate in the regular activities of the Party organization. Party units exist in all official and semi-official organizations and institutions, including state-owned enterprises and universities. As of the end of 2011, they also existed in nearly 1 million private businesses and foreign-owned enterprises and in nearly every officially registered civil society organization. These Party bodies can wield great power within an institution, even though in some cases, as in foreign-owned companies, they may have little formal authority. With the Party controlling all avenues for public sector advancement, it is thought that many young people join the Party for career reasons.\nParty policy is communicated down the layers of the Party organization by means of directives and Party committee meetings. The Party also ensures ideological conformity through nationwide study campaigns. In September 2008, for example, the Party launched an 18-month-long campaign for Party members to study Communist Party General Secretary Hu Jintao's \"scientific concept of development.\" Party members throughout the system were required to study speeches and documents related to the concept. Party publishing houses published study guides. In another example, in 2009, as part of a broader study campaign on \"the theory of socialism with Chinese characteristics,\" the Party's Propaganda Department ordered Party organizations nationwide to lead study sessions on a set of concepts known as the \"Six Why's.\" Among the six why's were why separation of powers and a Western-style multi-party system were not right for China.\n\n\t\t\tParty Leadership Bodies\n\nAt the top of the Party's hierarchy, the most powerful policy- and decision-making entity is the Politburo Standing Committee (PSC), currently comprised of seven men. They are all members of the broader Politburo , which has a membership of 25. The PSC and the Politburo are supported by the seven-man Party Secretariat . Politburo members are all members of the broadest senior grouping of Communist Party officials, the Central Committee, which has 205 full members and 171 alternate members (see Figure 3 for an illustration of the Party hierarchy).\nAs noted above, each member of the PSC has a rank, from one to seven, and is responsible for a specific portfolio. (See \" Collective Leadership .\") To ensure Party control, the top-ranked members of the PSC serve concurrently as the heads of other parts of the political system. The top ranked PSC member, Party General Secretary Xi Jinping, for example, serves concurrently as Chairman of the Central Military Commission , and as State President. The second-, third-, and fourth-ranked PSC members serve respectively as State Premier and as heads of the NPC and the CPPCC.\nPSC members also head Party \"Leading Small Groups\" (LSGs) for their policy areas. LSGs are secretive bodies intended to facilitate cross-agency coordination in implementation of Politburo Standing Committee decisions. The National Security Leading Small Group and the Foreign Affairs Leading Small Group, for example, were both headed by Hu Jintao when he was Communist Party General Secretary, and are believed to be headed by Xi Jinping now.\nThe next highest decision-making body is the full Politburo . Table 3 breaks down the 25 members into several categories. The current Politburo has only two female members, State Councilor Liu Yandong and Tianjin Party Secretary Sun Chunlan. Because of its relatively unwieldy size and the geographic diversity of its members, the full Politburo is not involved in day-to-day decision-making. In 2012, it is reported to have met eight times, with its meetings often focused on a single major policy area or on preparations for major national meetings.\nAccording to the Party's constitution, the PSC and Politburo derive their power from the Central Committee , whose full and alternate members together \"elect\" the Politburo, Politburo Standing Committee, and Party General Secretary, and \"decide\" on the composition of the Party's Central Military Commission. In practice, incumbent top officials provide a list of nominees to the Central Committee, which ratifies it. The 17 th Central Committee (including alternates), whose term concluded in November 2012, was made up of leaders from the provinces (41.5%), central ministries (22.6%), the military (17.5 %), central Party organizations (5.9%), and state-owned enterprises, educational institutions, \"mass organizations\" such as the Communist Youth League, and other constituencies (12.4%). \nThe Central Committee, in turn, is elected by the approximately 2,000 delegates to Party National Congresses , which are held every five years. Congress delegates also approve the Party General Secretary's report to the Congress, which serves as a statement of the Party's positions and an outline of the Party's agenda for the coming five years. \nIn the years between Party Congresses, the Central Committee is required to meet at least once a year, with each meeting known as a plenum (or plenary session ). Plenums usually focus on setting the direction for the country in a specific area, while also approving major personnel decisions. In October 2010, for example, the Fifth Plenum of the 17 th Central Committee discussed and approved a draft of the 12 th Five-Year Plan for China's economy, covering the years 2011 to 2015. It also approved the appointment of Xi Jinping to be first vice chairman of the CMC, a move widely seen as the last step in Xi's preparation to become the top ranked official in the Communist Party in 2012. At the end of each plenum, the Party issues a public document, known as a c ommuniqu\u00e9 , announcing the major decisions taken.\n\n\t\t\tThe Party Bureaucracy\n\nUnder the Central Committee and the Party Secretariat, the CCP operates an expansive bureaucracy that reaches into many aspects of government and society, and parts of which extend deep down into local governments. The Party's anti-corruption body, the Central Discipline Inspection Commission , is represented on the Politburo Standing Committee. The heads of the next three most powerful departments in the Party bureaucracy sit one level lower, on the Politburo. Those departments are:\nThe Organization Department : responsible for the recruitment of Party members and their training, career development, and assignment to jobs across the party and state, the legislatures, state-owned corporations, universities, and other public institutions. The Propaganda (or \"Publicity\") Department : responsible for the Party's messaging and for control of the media and ideology. In coordination with the Organization Department, the Propaganda Department manages the leaders of the Ministry of Culture; the newly constituted General Administration Press and Publication, Radio, Film, and Television; the Chinese Academy of Social Sciences; The People's Daily ; the Xinhua News Agency; and other media organizations. The Central Commission of Politics and Law : responsible for ensuring Party control over the internal security apparatus. Its full membership is not publicized. Known members include the President of the Supreme People's Court, the Procurator-General of the Supreme People's Procuratorate (China's chief prosecutor), the Minister of Public Security, the Minister of State Security, and the Minister of Justice. \nNotable departments not represented at levels below the Politburo include the United Front Work Department , which is responsible for relations with the people of Taiwan, Hong Kong, and Macau, non-Communist groups, and ethnic minorities and Chinese living outside mainland China. The International Department handles relations with foreign political parties. It is a particularly influential player in China's relationships with fellow socialist countries, including North Korea. The Foreign Affairs Leading Small Group Office coordinates foreign policy.\n\n\t\tThe People's Liberation Army (PLA)\n\nThe Party's 2.25 million person army, the People's Liberation Army, reports to both a Party Central Military Commission (CMC) and a State CMC . Party General Secretary Xi Jinping heads both and the two bodies have identical memberships. They are effectively a single body, with the Party CMC the real locus of authority, exercising unified command over all China's armed forces. The Party CMC currently has a civilian chairman, two uniformed vice chairmen, and eight uniformed regular members. The eight are the Minister of Defense, the directors of the PLA's four headquarters departments, and the commanders of the Navy, Air Force, and strategic missile forces, known as the Second Artillery Corps. (See Table 4 for details.)\nThe CMC directs the armed forces through the four general departments, listed below in order of rank:\nGeneral Staff Department : responsible for operations, intelligence, training, force structure, mobilization, and foreign affairs; General Political Department : responsible for Communist Party affairs, personnel, military media, and security; General Logistics Department : responsible for financial affairs and audits; housing, food, uniforms, and other supplies; military healthcare; military transportation; and capital construction; and General Armament Department : responsible for the PLA's weapons and equipment needs, its electronics and information infrastructure, and the manned space program\nThe four general departments direct the service branches: the Army, the Navy, the Air Force, and the Second Artillery Corps. They also direct the seven military regions, also known as military area commands or theaters of war. The PLA Reserve Force and a paramilitary force, the People's Armed Police Force, which plays a major role in putting down domestic unrest, both report to both the Central Military Commission and the State's leading body, the State Council (see Figure 4 for an organization chart). \nThe PLA's role in politics has been much debated. One leading U.S. expert describes the Party as having made \"a deliberate decision to remove the military from elite politics and the most powerful decision-making councils, and to regularize and institutionalize its role in the policy process as a professional force.\" As evidence of that trend, he cites statistics on uniformed military representation on top Party bodies. The Communist Party's top decision-making body, the PSC, has had no uniformed military representation since 1997. Uniformed military officers hold just 2 of the current 25 spots on the Politburo, although nearly 20% of the members of the 17 th Central Committee had military affiliations. Yet the military has a direct line to the Communist Party General Secretary, the top official in the Chinese political system, through the Central Military Commission. Senior military officers also sit on Party \"Leading Small Groups\" on such issues as foreign affairs, national security, and Taiwan affairs. \nMilitary officers in academic positions have emerged in recent years as influential and generally hawkish media commentators and bloggers, although it is not clear how authoritative their statements are. Most are affiliated either with the Academy of Military Sciences (AMS), which the PLA describes as its \"highest-level research institute and center of military science,\" or the National Defense University, which educates and trains China's senior commanding and staff officers and military researchers. \n\n\t\tThe State\n\nThe second major institution of the Chinese political structure is the State. During the early decades of Communist rule, the Party and the State operated as one under a slogan trumpeting \"the Party's absolute and unified leadership.\" In the late 1970s, however, the Communist Party began moves to separate Party and government functions, authorizing a cabinet, the State Council, and \"people's governments\" at lower levels to manage the day-to-day administration of the country. To ensure its control over the State system, the Party still maintains a robust presence inside the system. The top officials at each level of the State system routinely hold concurrent Party posts, although they often do not publicize them, and Party committees are embedded in the State Council, ministries, and government departments at every level. While powerful Communist Party bodies that exist in parallel to the State bodies set policy at all levels and make major decisions, the State system implements and executes policy. In recent decades, State leaders have been particularly focused on managing China's economy, leaving \"political\" matters, such as ideology, personnel, and security, to the Party.\nThe personnel working for the government are civil servants. While most senior government officials are CCP members, party membership is not a requirement for higher government positions. In 2007, the newly appointed Minister of Health became the first person to rise to ministerial rank without being a member of the Communist Party or any of the satellite parties loyal to the Communist Party. He joined and became head of one of the minor parties shortly before stepping down from the Minister's post in March 2013. The Minister of Science and Technology is chairman of another satellite party, the Zhigong Party. \nChina's highest ranking state officials are the State President ( guojia zhuxi ) and Vice President ( guojia fuzhuxi ). The positions are largely ceremonial and involve few duties. Since 1993, however, China's Communist Party General Secretaries have found it useful to serve concurrently as State President because General Secretaries have no counterparts outside the non-Communist world. When Hu Jintao traveled to the United States for a state visit in January 2011, he did so in his capacity as China's State President, although his real power derived from his position as General Secretary of the Communist Party. \nThe locus of power in the State system is the State Council , China's cabinet. It is headed by a Premier (zongli) , also sometimes referred to in English as Prime Minister, who serves concurrently on the Party's Politburo Standing Committee. Because the State system manages the economy on a day-to-day basis, the Premier is effectively China's most senior economic official, although he has other portfolios, too. On official organization charts, all ministries report to the State Council and ultimately to the Premier. In practice a number of ministries, including the Ministry of National Defense, the Ministry of State Security, the Ministry of Public Security, and the Ministry of Culture, report directly to the Communist Party entities that oversee their work.\nBelow the Premier are four State Council Vice Premiers , one of whom (Zhang Gaoli) serves concurrently on the Politburo Standing Committee, and the remainder of whom serve concurrently as regular members of the Communist Party Politburo. Slightly below the Vice Premiers in rank are five State Councilors , none of whom serve on the Politburo. Each Vice Premier and State Councilor has a specific portfolio. The foreign affairs portfolio is not represented at the Vice Premier level or on the Politburo. Rather, China's most senior diplomat is a State Councilor, Yang Jiechi, who oversees the Ministry of Foreign Affairs.\nChina's ministries and commissions, which are subordinate to the State Council, are a fractious, highly competitive group of institutions with sometimes overlapping jurisdiction. Ministries are headed by Ministers and commissions by Chairmen . Each ministry or commission has an embedded Communist Party committee that makes major decisions for the institution and oversees ideology and personnel matters. In most cases, the Minister or Chairman serves concurrently as the head of his institution's Communist Party committee. One exception is the Ministry of Foreign Affairs, where the top ranking vice minister has traditionally served as the ministry's party secretary. \nDespite their subordination to the State Council and CCP, and the CCP's role in appointing their leaders, the ministries can wield decisive tactical influence over policy by virtue of their role in drafting laws and regulations and implementing the sometimes ambiguous national policy goals set by top leaders. After General Secretary Hu Jintao's 2006 call for \"indigenous innovation\" to be \"the core of national competitiveness,\" for example, the Ministry of Industry and Information Technology (MIIT) led the way in developing often controversial industrial policies and regulations to support domestic firms over their foreign rivals, fleshing out just what \"indigenous innovation\" meant. MIIT's moves included attempts to make a domestic technology the standard for 3G mobile telecommunications in China, to require that all new computers in China be sold with Chinese-made censorship software pre-installed, and to require preference for domestic suppliers in Chinese government procurement. Not all ministries and commissions are created equal. MIIT and the National Development and Reform Commission, both considered \"super-ministries,\" are more powerful in policy debates than other ministries. \nEntities under the State Council include four State Council offices, each with its own professional staff. The State Council's Legislative Affairs Office (SCLAO) plays a frequently decisive role in the formulation of national regulations and laws. It drafts the government's legislative agenda on a year-to-year basis and then works with relevant government ministries and agencies to implement the agenda, including overseeing the drafting of regulations and laws. Regulations are promulgated by the State Council or by individual ministries. Laws must be passed by the National People's Congress. The State Council's Hong Kong and Macao Affairs Office advises the Chinese leadership on matters related to the two Special Administrative Regions, both of which returned to Chinese sovereignty in the 1990s after long periods as colonies of Britain and Portugal respectively. The other two offices are a Research Office and an Overseas Chinese Affairs Office.\n\n\t\tThe National People's Congress (NPC)\n\nThe public theater of the NPC's work is centered on its 10-day-long annual full session. It is held every March and attended by all of the NPC's nearly 3,000 deputies. The full session in March 2013 marked the start of a new five-year Congress, the 12 th , and approved new State and Congress leaders, including a new President, Vice President, and Premier, and new Vice Premiers and State Councilors. At the annual full sessions, NPC deputies almost always vote to approve the reports, laws, and candidates put before them, usually by overwhelming margins. NPC delegates do occasionally push back, however. At the March 2013 session of the NPC, 25% of deputies withheld their support from the Supreme People's Court's report to the Congress, and nearly 22% withheld their support from the Ministry of Finance's budget report. Unlike the U.S. Congress, the National People's Congress does not pass spending bills. Rather, it votes to approve the budget presented by the Minister of Finance. The power of individual NPC deputies to exercise oversight is largely restricted to the right to submit proposals advocating for reforms or demanding better implementation of laws or regulations, to which officials are required to respond in writing.\nBecause the annual full session of the congress is so brief, much of the NPC's work is undertaken by its Standing Committee, which currently has 175 members and convenes every two months. The Standing Committee is composed of recently retired senior Party and state officials, the heads of the eight democratic parties, and \"leading figures from every field or profession.\" Other important NPC bodies that meet outside of the annual session include nine specialized committees of deputies, and six staff and expert bodies under the Standing Committee. Like the State Council, the NPC has a Communist Party organization embedded within it. (For more on the NPC, see \" The Legislature: Strong on Paper, Weak in Practice \" and \" Weak Rule of Law .\")\nThe NPC is the uppermost layer of a nation-wide system of People's Congresses. These congresses are loosely linked together in process and function. Only deputies for the lowest level of People's Congresses are directly elected. Traditionally, even at the lowest level, candidate lists are controlled by the Party, and elections are uncontested. Since 2011, however, China has seen a wave of independent candidates contesting elections for People's Congresses in city districts and townships. Such candidates have faced forms of official harassment, including intrusive surveillance, extra-legal detention, intimidation of their supporters, censorship, and election irregularities aimed at keeping them off ballots or preventing their votes from being counted. Nonetheless, several independent candidates have succeeded in being elected.\n\n\t\tThe Chinese People's Political Consultative Conference (CPPCC)\n\nThe Chinese People's Political Consultative Conference (CPPCC) system officially exists to engage in \"political consultation\" with the Communist Party, perform \"democratic supervision\" of the Party, and \"participate in the deliberation and administration of state affairs.\" The Communist Party routinely holds up the PPCC system as a core part of China's \"socialist democracy,\" characterized by \"multi-party cooperation and political consultation led by the Communist Party of China.\" In practice, the CPPCC system gives select prominent citizens, including non-Communists, an approved platform to make suggestions about aspects of public policy, but does not oblige the Communist Party to act upon those suggestions. The institution can thus ignite and influence policy debates, but is essentially powerless. The Chinese government refers to CPPCC members as \"political advisors.\"\n\n\t\tThe Minor Political Parties\n\nAs mentioned above, in addition to the Chinese Communist Party, China has eight other minor political parties. Their role is strictly circumscribed, but the Communist Party uses their existence to argue that China operates a \"multi-party cooperation system,\" and is therefore not strictly a one-party state. Crucially, the minor political parties are all required to accept the permanent leadership of the Communist Party. They are expected to work \"hand in hand\" with the Communist Party in \"developing socialism with Chinese characteristics,\" and they are barred from operating as opposition parties. With each party's yearly intake of new members capped by the Communist Party, the combined members of the minor parties number fewer than 1 million, compared to the Communist Party's 82.6 million members. The smallest of the parties claims a membership of just 2,100. The minor parties exercise modest influence in the political system by virtue of the Communist Party's policy of allotting the minor parties leadership positions in the state bureaucracy, the legislatures, and the political advisory bodies. The heads of the minor parties all serve as vice-chairmen of the National People's Congress, making them state leaders for protocol purposes. In 2007, the current Minister of Science and Technology, Wan Gang, became the first minor party member in the post-Mao era to be named to a ministerial post. He serves concurrently as chairman of the Zhi Gong Party, whose mandate is to represent Chinese who have returned to China after living overseas or who have relatives living overseas. As of 2011, the leadership teams of the Supreme People's Court, the Supreme People's Procuratorate, and the ministries, commissions, offices, and bureaus under the State Council included just 19 non-Communist Party members.\n\n\tOther Political Actors\n\nIn addition to the formal institutions of government and party power, the PRC political system is increasingly influenced by other political actors, sometimes referred to as \"policy entrepreneurs.\" Some of these influential actors operate opaquely and behind the scenes, making it difficult to determine the exact extent of their influence on any given policy issue. Others are playing an increasingly visible role in debating, recommending, and influencing particular policy actions. The media plays an important role in amplifying the voices of the other actors.\n\n\t\tTraditional Media, New Media, and a Wired Citizenry\n\nControl of the media has always been an important plank of Communist Party rule in China, enabling the Party to \"guide public opinion\" with its version of events, and to exclude narratives that might challenge Party positions or actions. Party media controls remain in place, managed by the Party Central Committee's Propaganda Department. With the reduction of state subsidies to the traditional media, the rise of commercially driven media, and the rapid spread of new information technologies, however, the Chinese media landscape has become increasingly diverse, eroding the Party's ability to control public discourse as comprehensively as it once did. \nTraditional, tightly controlled Communist Party media outlets, such as the Communist Party Central Committee's People's Daily , now co-exist with more lively commercially driven publications. Such publications put a provocative spin on Party-approved news, expose scandals, and report on policy debates, even though they may share the same owners as staid Party papers and are also subject to Party Propaganda Department censorship. One of China's most muscular tabloids, the Global Times , is a sister paper to the People's Daily . The crusading Southern Metropolis News and Southern Weekend , both known for their daring investigative journalism, are sister papers to the mouthpiece of the Guangdong Communist Party Committee, Southern Daily . China's financial media, which tend to be less tightly censored than the mainstream media, often showcase some of the most probing analysis of policy issues, with publications such as Caixin New Century Weekly and Caijing being particularly closely read by elites. Because of its reach, television is the most tightly controlled medium in China. China Central Television (CCTV), which operates multiple channels on multiple platforms, serves as a tool of the Communist Party, relaying Party-approved messages to China's citizens. It also, however, hosts numerous talk shows and magazine-style programs that offer a range of opinions on policy issues. \nThe most significant development in the media landscape in recent years has been the explosive growth of Twitter-like services known as \"weibo\" (literally micro-blogs), which have empowered citizens to share news and views directly with each other, and thus put pressure on the traditional media to cover stories they might otherwise have ignored, and on the authorities to address problems they might otherwise have swept under the carpet. Some micro-bloggers have millions of followers and the power to change the terms of public debate with a single post. As of January 2013, 42.1% of Chinese were online, with the total number of Internet users reaching 564 million. Nearly 75% of Chinese users accessed the Internet on mobile devices, and 309 million Chinese were weibo users. Authorities police weibo posts. In the wake of the scandal involving the former Party Secretary of Chongqing, they boasted of deleting 210,000 weibo posts and making six arrests for online \"rumor mongering.\" In an attempt to turn weibo to the Party's advantage, however, the CCP has also encouraged official agencies and officials to open weibo accounts as a new tool in their propaganda toolboxes, and the official Xinhua News Agency now releases news on weibo as well as on its other platforms. Many Chinese officials monitor weibo and other Internet discussions as a guide to public opinion, even though in China, as in many societies, extreme views tend to dominate Internet-based discourse. Chinese officials sometimes tell foreign officials about the pressure they feel from the nationalist views of China's \"netizens,\" suggesting that it may be a factor in Chinese foreign policy.\n\n\t\tBig Business\n\nBoosted by government policies restricting foreign investment and private investment in \"strategic industries,\" flagship Chinese state-owned enterprises (SOEs) in such fields as oil, electric power, finance, telecommunications, and defense have emerged as global powerhouses in recent years. Three Chinese SOEs are among the top 10 firms on the Fortune Global 500 list for 2012. The leaders of such firms, and indeed all Chinese SOEs, are assigned to their jobs by the Party's Organization Department and thus may move back and forth between jobs in business and government, and have a formal place in the Chinese political system. In the 17 th Central Committee, 22 SOE bosses were alternate members of the Party's Central Committee, and 1 was a full member. The State-owned Assets Supervision and Administration Commission of the State Council (SASAC) currently oversees 115 central government-level SOEs.\nAnalysts say SOE bosses are able to influence policymaking and agenda-setting by virtue of their bureaucratic rank, their technical knowledge of their industries and global markets, and the economic might of their firms. With their career advancement in the Party's hands, however, SOE bosses understand that they are expected not just to produce strong corporate results, but also to ensure that their firms advance the Party's interests.\nThe leaders of the largest private firms are outside the Party's personnel assignment system, but are often also significant players in the Chinese political system. One scholar identifies property developers, a group that includes both private and state-owned giants, as \"one of the most powerful special interest groups in present-day China,\" blaming it for holding up passage of an anti-monopoly law and resisting government efforts to rein in a dangerous property bubble. \nThe Party has routinely awarded prominent businesspeople, from both state-owned and privately owned firms, positions as deputies to national and local People's Congresses and Political Consultative Conferences. According to Bloomberg News, as of 2011, the richest 70 delegates to the National People's Congress had a combined net worth of $89.8 billion. In 2002, the Party formally welcomed private business leaders into its ranks.\n\n\t\tOfficial and Quasi-Official Research Institutes\n\nAccording to University of Pennsylvania global rankings that have been embraced in China, the country now has 429 think tanks, the second-largest number in the world after the United States, with 6 Chinese think tanks ranked among the top 100 globally. Most of the institutions on the list would be better known in China as public policy research institutes . Many are affiliated either with an official agency, such as the Ministry of State Security's China Institutes for Contemporary International Relations (CICIR), or with universities. Such centers make their influence felt in the policy process in part by accepting commissions from the Party or state to write reports on policy issues, and by self-generating reports that they submit to policymakers. Experts attached to the institutes also often serve as formal and informal advisors to official bodies, publish broadly, and may maintain a domestic media profile, accepting interviews, participating in television chat shows, and penning media commentaries. Such experts also play an important role in informing the outside world about Chinese policy discourse through meetings at home and abroad with foreign scholars, officials, and visitors from the U.S. Congress, as well as through attendance at international conferences and publications in international journals.\nNotably, all of the Chinese think tanks named in the University of Pennsylvania survey are located in either Beijing or Shanghai, the two cities that dominate the policy discourse in China. Only one of the Chinese think tanks named in the rankings could be described as independent (Unirule Institute of Economics), and it is in the category of think tanks with small budgets. \n\n\t\tUniversity Academics\n\nChina's academic community includes more than 1,100 degree-granting institutions. Their faculty, even if not attached to policy research institutes, may be players in policy debates as authors of reports and influential articles and books, as government advisors, and as media commentators. More than four dozen Chinese universities are under the management of the military or central government ministries other than the Ministry of Education; many of them have a direct line into policy as a result. Notably, universities in China are not independent. They have Communist Party committees that act like Party Committees in other institutions, making major decisions for the university and managing ideology, personnel, propaganda, and financial matters. As noted above, 32 universities have quasi ministerial bureaucratic rank. (See \" The Distorting Influence of Bureaucratic Rank .\") The China University Alumni Association ranks universities by the number of members of the current Communist Party Central Committee they can count among their alumni. The 2013 list is shown in Table 6 .\n\n\t\tOfficially Sponsored Associations and Societies\n\nIn 2011, China had 1,834 officially registered \"social organizations\" at the national level, and nearly 25,000 at the provincial level. Most are what Western scholars refer to as GONGOs, or \"government-organized non-government organizations.\" Some such organizations have been criticized as little more than retirement homes for officials who have had to leave office because of age limits. Others, however, play an influential role. The fact that GONGO leaders are usually recently retired senior officials means that they have status and deep relationships in government that can make them effective bureaucratic players. Under-staffed ministries and Communist Party departments often outsource parts of their work to GONGOs, from drafting standards and staffing legislative drafting committees, to organizing conferences. GONGOs also sometimes act as proxies for the government at international meetings. The number of GONGOs that each agency sponsors varies. The Foreign Ministry sponsors 14, including the China Arms Control and Disarmament Association, a frequent participant in international arms control dialogues. The Ministry of Industry and Information Technology sponsors 41, many of them industry associations that bring perspectives from corporate leaders to bear on policy issues. \n\n\t\tGrassroots NGOs\n\nGrassroots non-governmental organizations (NGOs) also exist in China, although in most of the country, to be officially registered as \"social organizations\" they need to find a government department willing to serve as their sponsor. Guangdong Province is the first to experiment with a policy of waiving this requirement. Unable to line up sponsors, some register as \"civil non-commercial institutions\" and others as businesses. Despite official obstacles, which include harassment from China's security apparatus, a number of grassroots NGOs have been successful in raising public awareness about such issues as environmental protection and public health and in providing services to under-served populations, such as the disabled. The Beijing Yirenping Center, for example, focuses on combating discrimination on the basis of health status or disability. Yirenping's advocacy has involved exploiting openings in the Chinese political system to draw attention to its causes, usually with the help of sympathetic journalists. Among other tactics, it has launched lawsuits, filed official information disclosure requests, organized petitions and open letters, and persuaded People's Congress and People's Political Consultative Conference delegates to submit proposals on their behalf calling for revision of laws discriminating against such groups as carriers of Hepatitis B and HIV.\n\n\tChinese Authorities' View of Political Reform\n\nChina's Premier Wen Jiabao, who retired in March 2013, made tantalizing comments over the years about the need for political reform in China. In a 2008 interview with the U.S. network CNN, Wen spoke of the need \"to gradually improve the democratic election system,\" \"build an independent and just judicial system,\" and have the government \"accept oversight by the news media and other parties.\" In a second interview with CNN in 2010, Wen declared that \"freedom of speech is indispensable,\" and that \"All political parties, organizations, and all people should abide by the constitution and laws without any exception.\" In March 2012, at a press conference marking the closing of the annual full session of the National People's Congress, Wen spoke of the need for \"political structural reform,\" and particularly of the need for \"reform in the leadership system of the Party and the state,\" although he did not clarify what kind of reform the \"leadership system\" needed. He also startled journalists by embracing the Arab spring, declaring that, \"The Arab people's demand and pursuit of democracy must be respected and realistically answered. Further, I feel that this trend of democracy is unstoppable by any forces.\"\nReflecting the diversity of views among top leaders, however, other top officials have instead insisted on the limits of political reform in China. In widely reported remarks to the annual full session of the National People's Congress in March 2011, Wu Bangguo, at the time the NPC Chairman and the Party's number two-ranked official, reinforced the Party's insistence on its permanent, unchallenged rule. He declared that China's leaders had \"made a solemn declaration that we'll not employ a system of multiple parties holding office in rotation.\" He also foreswore any separation of executive, legislative, and judicial powers, and any adoption of a bicameral or federal system, warning that China would risk an \"abyss of internal disorder\" if it deviated from the \"correct political orientation.\" \nCommunist Party General Secretary Xi Jinping echoed Wen's call for abiding by the constitution when he said in December 2012 that no one \"has the special right to overstep the Constitution and law.\" He also declared in January 2013 remarks that, \"Power should be restricted by the cage of regulations.\" He has not, however, called for an independent judiciary. Rather, he has stressed the need \"to uphold the principle that the Party should supervise its own conduct.\" \nOver the years, the Communist Party's Propaganda Department has been active in justifying the Party's permanent monopoly on power. In a 2009 political tract, Six 'Why's': Answers to Some Major Questions , it took on such questions as, \"Why must we uphold the system of multi-party cooperation and political consultation under the leadership of the Chinese Communist Party, and not have a Western-style multi-party system?\" Many of the answers the book offered focused on claims that Western political systems are inefficient and unable to deliver the kind of fast-paced economic growth that China needs to pull all its people out of poverty. Among the many ills associated with competitive two-party or multi-party politics, the book argued, are deepened social divisions and an unstable political situation, which hobbles economic development.\nWhile the Communist Party has shown little to no interest in reforms that might threaten its rule, for most of the last 30 years it has been undertaking what a leading Chinese political scientist, Yu Keping, calls \"reform of state governance and the administrative systems of the state,\" intended to improve China's governance in ways that might help solidify the Party's hold on power. Recent efforts have focused on ways of increasing the legitimacy of the political system by making it more competitive, transparent, and participatory, without going so far as to cede the Party's ultimate control over all major decisions. \nIn the 1980s, in an effort to foster greater support for local leaders among the community, create incentives for more effective local governance, and provide a disincentive for local government corruption, the Party sanctioned limited direct elections for leaders at level of the village, an administrative unit outside the formal Chinese administrative hierarchy. Those elections continue, although village party officials, who are not subject to popular vote, determine what name or names may appear on the ballot. The rules also bar candidates from running on behalf of a political party or as part of a slate of candidates and restrict public campaigning to a few minutes of public remarks immediately before the vote. In his March 2012 press conference, then-Premier Wen pronounced village elections a success and said he saw no reason why such direct elections could not eventually move up to the level of the township, and even the county. \nMore recent innovations include efforts to introduce elections on a limited scope in workplaces. The Party has also introduced public hearings, begun posting select draft legislation for public comment, and adopted a set of open government information regulations to improve the transparency of government. Comprehensive ministerial and provincial government websites are a product of this initiative. Although the Party has touted these and other political reforms with great fanfare, they have their limitations and appear to be designed to head off demands for Chinese citizens to have a direct role in selecting their top leaders, rather than to pave the way for citizens to claim such a role.","output":"This report is designed to provide Congress with a perspective on the contemporary political system of China, the only Communist Party-led state in the G-20 grouping of major economies. China's Communist Party dominates state and society in China, is committed to maintaining a permanent monopoly on power, and is intolerant of those who question its right to rule. Nonetheless, analysts consider China's political system to be neither monolithic nor rigidly hierarchical. Jockeying among leaders and institutions representing different sets of interests is common at every level of the system.\nThe report opens with a brief overview of China's leading political institutions. They include the Communist Party and its military, the People's Liberation Army; the State, led by the State Council, to which the Party delegates day-to-day administration of the country; and the National People's Congress (NPC), China's unicameral legislature. On paper, the NPC has broad powers. In practice, the legislature is controlled by the Communist Party and is able to exercise little of its constitutionally mandated oversight over the state and the judiciary. Following its 18th Congress in November 2012, the Communist Party ushered in a new Party leadership. New State and NPC leaders took office following the opening session of the 12th NPC in March 2013.\nFollowing the overview, this report introduces a number of distinct features of China's formal political culture and discusses some of their implications for U.S.-China relations. Those features include the fact that China is led not by one leader, but by a committee of seven; that the military is not a national army, but rather an armed wing of the Communist Party; that provincial leaders are powerful players in the system; and that ideology continues to matter in China, with the Communist Party facing vocal criticism from its left flank each time it moves even further away from its Marxist roots. Other themes include the role of meritocracy as a form of legitimization for one-party rule, and ways in which meritocracy is being undermined; the introduction of an element of predictability into elite Chinese politics through the enforcement of term and age limits for holders of public office; the Chinese system's penchant for long-term planning; and the system's heavy emphasis on maintaining political stability. The next section of the report discusses governance challenges in the Chinese political system, from \"stove-piping\" and bureaucratic competition, to the distorting influence of bureaucratic rank, to factionalism, corruption, and weak rule of law.\nThe second half of the report is devoted to detailed discussion of China's formal political structures\u2014the Party, the military, the State, the National People's Congress, a consultative body known as the China People's Political Consultative Conference, and China's eight minor political parties, all of which are loyal to the Communist Party. Also discussed are other political actors who play a role in influencing policy debates, including the media, big business, research institutes, university academics, associations, and grassroots non-governmental organizations. The report concludes with a discussion of prospects for political reform, noting that while China's new Communist Party chief has called for everyone to be bound by the constitution and law, Party policy is to reject vigorously the notion of a multi-party system, separation of powers, a bicameral legislature, or a federal system, on the grounds that all are unsuited to China's conditions."}
{"id":"gao_GGD-95-88","pid":"gao_GGD-95-88_0","input":"\tBackground\n\nThe legislative history of AMT refers to three distinct measures of income: economic income, financial statement or \u201cbook\u201d income, and income as defined for tax purposes. A calculation of economic income would include all types of income, recognize all income when it is earned rather than when it is received, subtract all the costs of earning the income, and make adjustments for inflation. Because such a comprehensive measurement would not be based solely on market transactions, it is not done in practice. Financial statements include a comprehensive measure of income based on historical records that can be verified. In contrast to economic income, financial statement or book income does not adjust values for inflation and does not recognize certain items of income until they are received. The definition of income implicit in the tax code combines a measure of taxpayers\u2019 ability to pay taxes with the desire to encourage certain activities through the tax code and to minimize the difficulty of administering and complying with the tax law. Despite many similarities, the three measures are substantially different from each other. The purpose of AMT is to better coordinate the definition of income for tax purposes with that of economic income and financial statement income.\nCorporations are required to calculate their tax liability under two sets of rules\u2014computing their regular tax liability and their tentative AMT liability, and paying whichever is greater. If the tentative AMT is more than the regular tax, the difference between them is AMT. AMT is described in sections 55 through 59 of the Internal Revenue Code.\nCorporations have to keep records to calculate AMT as well as the regular tax. For tax year 1994, a corporation had to file Form 4626\u2014used to figure AMT\u2014if its taxable income or loss before the net operating loss deduction, plus its adjustments and preferences, totaled more than the lesser of $40,000 or the corporation\u2019s allowable exemption amount. The corporate AMT was cited by all 17 corporations we interviewed in preparing for testimony last year as among the provisions in the Internal Revenue Code with the largest recordkeeping and compliance cost burden.\nThe AMT rate is 20 percent, lower than the regular corporate tax rate of 35 percent now or 34 percent through 1992. However, AMT is levied on a broader tax base than the regular tax because the AMT tax base includes certain regular tax preferences and adjustments that either delay the time when income is recognized or exclude income items altogether.\nTwo important AMT adjustments are related to depreciation and financial statement income. Depreciation is the cost incurred by a business reflecting the reduction in value of certain of its assets over time. For both the regular tax and AMT, the amount of depreciation deductions taken in a year is a certain fraction of the original purchase price of the assets. Compared with the regular tax, deductions for depreciation under AMT are smaller in the early years after an asset is placed in service and are spread out over a longer time.\nThe book income and the adjusted current earnings (ACE) adjustments were established to ensure that firms reporting large earnings on their financial statements in a given year paid some tax in that year. Book income reported on financial statements may not equal taxable income on tax returns because some items of revenue and expenses are never included in one or the other or are reported in different years. As a result, book income may not be equal to the taxable income figure on tax returns, as explained in appendix III. The book income adjustment was part of AMT from 1987 through 1989. It was replaced by the ACE adjustment in 1990. The ACE adjustment relies on income tax principles to define income in a way that Congress intended to be as broad as the definition of book income.\nAMT limits the amount of a corporation\u2019s net operating losses from prior years that can be deducted in calculating current year\u2019s income to 90 percent of tentative taxable income computed under AMT rules. In addition, it disallows the use of many credits available in the regular tax and specifically restricts the amount of foreign tax credit that can be taken for tax payments abroad.\nAMT is also linked to the regular tax through the AMT credit. Corporations that have paid AMT can credit these payments against their regular tax liability in future years when they pay the regular tax. However, the credit cannot be used to reduce regular tax liability below tentative AMT liability in future years. With this crediting mechanism, AMT operates partially as a prepayment of tax rather than as a permanent increase in tax liability. (App. I provides a more complete discussion of the history and mechanics of AMT.)\n\n\tHow Much AMT Was Paid?\n\nThe amount of corporate AMT paid rose from $2.2 billion in 1987 to $8.1 billion in 1990, before declining to $4.9 billion in 1992. These numbers must be combined with the fact that recovery of AMT liability via the AMT credit has been growing, albeit slowly, as shown in figure 1. Most corporations that paid AMT in 1987 had not fully recovered their payment by 1991, the last year we were able to examine, but the total dollar volume of credits used rose from year to year.\n\n\tWhich Corporations Paid AMT?\n\nThe total number of corporations paying AMT was small. About 28,000, or about 1.3 percent of the 2.1 million corporations subject to AMT in 1992, paid AMT in 1992. The corresponding percentage ranged from 0.7 to 1.5 percent in the 1987 through 1992 period.\nAlthough only about 28,000 firms paid AMT in 1992, many more corporations were affected by it. For example, almost 400,000 corporations filed the AMT form with IRS in 1992 even though they owed no AMT.\nOf the approximately 2.1 million corporations that were subject to AMT in 1992, about 2,000 corporations with assets of $100 million or more paid 85 percent of the total corporate AMT liability. This was a pattern that generally held true for 1987 through 1991 also. As shown in figure 2, corporations with assets of $500 million or more paid 75 percent of all AMT in 1992, irrespective of the credit they may have received.\nHowever, most corporations that paid AMT from 1987 through 1992 were relatively small. In most years, more than 70 percent of corporations paying AMT had less than $10 million in assets. In 1992, 75 percent of AMT payers had less than $10 million in assets, as is also shown in figure 2. Nevertheless, relatively large corporations were more likely than smaller corporations to pay AMT. For instance, in all years except one, about 20 percent of corporations with assets of $500 million or more paid AMT; in contrast, no more than half of 1 percent of corporations with less than $1 million in assets paid AMT.\nThe industries in which corporations paid the most AMT were manufacturing, transportation, and finance. At the industry level, AMT generally increased the amount of tax paid by about 1 or 2 percent of taxable income. Eight specific industry subclasses that we examined\u2014auto, steel, chemicals, utilities, transportation, paper, oil and gas extraction, and mining other than oil\u2014had generally higher percentages of AMT payers than existed in the nation as a whole during the 6 years we examined.\nFirms differed from each other in how often they paid AMT and the extent to which AMT increased their taxes. Of approximately 10,000 corporations with over $50 million in assets that we tracked over a 5-year period, about half paid AMT in at least one year. Of those that paid AMT at least once, most paid it for only one year. Only about 160 of the 10,000 corporations we studied paid AMT in all five years. In the larger universe of all AMT payers, about a third of the AMT payers that also paid regular tax had their taxes at least doubled by AMT.\n\n\tWhy Did Corporations Pay AMT?\n\nBy far the most important elements that caused corporations to pay AMT were the depreciation adjustment for property placed in service after 1986 and the book income and adjusted current earnings adjustments. For instance, in 1992 the depreciation adjustment was included on about 87 percent of AMT returns and raised taxable income by about $23 billion. The ACE adjustment was included on about 67 percent of AMT returns and raised taxable income by about $19 billion. No other preference item or adjustment was present in more than 10 percent of AMT returns.\nAMT also caused corporations to pay tax by limiting their ability to take net operating loss deductions and the foreign tax credit (FTC). About 32 percent of AMT payers in 1992 included net operating losses in their AMT calculations, and about 19 percent reached the limitation on the use of the deduction. About 3 percent of AMT payers had FTC as part of their AMT computation, and about one-fourth of FTC claimants were constrained by the 90 percent FTC limit. FTC claims reduced overall AMT before credits by 32 percent.\n\n\tHas AMT Achieved Its Purposes?\n\nAMT has partially achieved the congressional objectives of ensuring that taxpayers with substantial economic income in a given year, and taxpayers with positive book income in a given year, pay some tax in that year. By including tax preferences in its tax base and by more closely approximating economic depreciation when inflation is low, AMT leads to a tax more closely based on economic income. In addition, in every year from 1987 through 1992, at least 6,000 corporations with positive book income that paid no regular tax paid some AMT, and at least 9,000 corporations with positive book income subject to regular tax paid an additional AMT amount, as shown in appendix III.\n\n\t\tAMT Leads to a Closer Measurement of Economic Income When Inflation Is Low\n\nA corporate tax based on economic income would deny many of the preferences and exclusions now in the regular tax code, index the value of assets and costs for inflation, and base depreciation deductions on economic depreciation. AMT moves the tax code closer to taxing economic income by including several preferences and exclusions in its tax base. With respect to inflation, neither the regular tax nor AMT rules adjust the measurement of income for inflation. Concerning depreciation, AMT depreciation rules lead to deductions that more closely approximate economic depreciation when inflation is low. However, AMT depreciation deviates further from economic income than does regular tax depreciation in the presence of moderate or high rates of inflation. AMT may also reduce the generous deductions of nominal interest expense (rather than inflation-adjusted interest expense) that corporations can claim at high rates of inflation. (App. III provides additional information on corporations\u2019 book income, economic income, and AMT depreciation rules.)\n\n\t\tAMT Has Made More Corporations With Positive Book Income Pay Taxes\n\nIn 1992, AMT provisions were successful in making about 9,900 corporations with positive book income and no regular tax liability pay some AMT, as shown in table 1. Also, about 13,800 corporations with positive book income subject to regular tax paid an additional AMT amount. About 4,300 corporations with negative book income also paid AMT\u20141,800 of these corporations paid both regular tax and AMT, and almost 2,500 of these corporations paid AMT but no regular tax. This payment of taxes by corporations with losses may have been due to the fact that some revenues were recognized for financial accounting purposes after they were included on tax returns and\/or expenses were recorded in accounting records before they were deducted for tax purposes, as explained in appendix III.\nOn the other hand, AMT did not reach all corporations with positive book income. Of 2.1 million corporate returns subject to AMT in 1992, about 306,000 corporate returns reported positive book income but did not pay regular or alternative minimum tax. The vast majority of these corporations were small and had less than $40,000 in net income, so they probably qualified for the AMT exemption. Of the larger corporations with positive book income, most were investment companies, which generally flow out all their income to shareholders. Because of this feature of their business, these companies are exempt from the book income and ACE adjustments.\n\n\tHow Might AMT Affect Corporate Investment?\n\nThe effects of AMT on corporate investment are not clear. Studies and comments by economists have examined two ways in which AMT might affect investment: by (1) reducing cash flow and thus discouraging investment, or (2) changing marginal incentives to invest, leading to changes in investment.\n\n\t\tCash Flow\n\nCorporations finance investment through internal funds\u2014retained earnings or profits\u2014or external funds such as debt or new stock issues. For corporations that must use external sources and pay significantly higher costs compared to their opportunity costs (earnings from investing their own funds), investment could be sensitive to the current profitability or cash-flow position of the firm.\nA number of recent studies have found significant effects of cash flow on investment, and some authors have concluded that some corporations find external funds significantly more expensive than internal funds. These studies have concluded that this is more likely to be the case for smaller firms, firms that pay relatively small amounts of dividends, firms that do not participate in the corporate bond market, and firms that cannot use working capital to smooth investment spending over time. Thus, for such firms, AMT might reduce investment by reducing cash flow and forcing them to finance investment with costly external funds.\nIt is not clear how many AMT payers meet these conditions. No study has directly tested the extent to which such cash-flow constraints affect corporations that paid AMT. The tax return data we used were limited in their ability to directly test many of these factors. However, the data did show that most AMT is paid by relatively large corporations. To the extent that investment by large corporations is less dependent on current cash flow than is the case for small corporations, the effect of the AMT on investment would be limited. In addition, as AMT credits are reclaimed in the future, cash flow would increase at that time, possibly increasing investment.\n\n\t\tMarginal Incentives to Invest\n\nMany studies have been done on the effects of corporate income taxes on marginal incentives to invest, and several have directly investigated the effects of the AMT on marginal incentives to invest. These studies have investigated how the regular corporate income tax and AMT might affect the incentive to invest through their tax rates, depreciation provisions, the deductibility of interest payments and the nondeductibility of dividends, loss provisions, and credits for certain types of investment. Relative to the regular tax, AMT has a lower rate, a generally slower depreciation schedule, and additional limitations on credits and losses. Because the lower tax rate by itself would lower the cost of investment but the other two features would raise the cost of investment, investment incentives may be increased or decreased relative to the regular tax.\nSeveral studies have investigated how AMT affects incentives to invest for corporations that are consistently paying AMT or recovering AMT credits over long periods. Studies we reviewed contained the following conclusions: Incentives to invest were greater under AMT than under the regular tax for firms permanently paying AMT that financed investments with equity. In this case, the value of the lower tax rate more than offset slower depreciation deductions, so the effective tax rate was lower. Investment incentives were reduced under AMT relative to the regular tax for debt-financed investments. Because interest is deductible under both AMT and the regular tax, a dollar of interest payments will reduce taxes by a greater amount under the higher regular tax rate.\nFor investments financed with a mixture of debt and equity, investment incentives under AMT can be higher or lower than the regular tax, depending on the amount of debt used. For the mix of debt and equity described as typical by two authors, investment incentives are greater under AMT than under the regular tax.\nAnother study addressed the more general situation where firms could switch from the regular tax to AMT or pay AMT and then return to the regular tax and recover all their AMT credits. In this circumstance, the effect of AMT on investment incentives is more complicated. In this case, the effect of taxes on the cost of capital investment will depend on the timing of investment relative to when and how long the corporation pays AMT, as well as on the source of financing for the investment. If depreciation deductions are taken when the firm is paying the regular tax, and income from the investment is received when the firm is paying AMT, the cost of investment is relatively low. If depreciation deductions are taken when the firm is paying AMT and income is taxed at the higher regular tax rate, the cost of investment is higher.\nOur analysis showed that the circumstance envisioned in this later study was the more common for AMT corporations\u2014such firms were more likely to switch between the regular tax and AMT. We tracked the 1987 through 1991 tax situations of 10,000 corporations with assets of $50 million or more. Fifty-one percent did not pay AMT in any year. About 13 percent either paid AMT or had unrecovered AMT credits in all 5 years. The remaining 36 percent switched back and forth from the regular tax to AMT.\nOur review of the available studies indicated that determining the effect of AMT on investment is further complicated by the lack of consensus on how significantly actual investments are affected by changes in investment incentives. Analysts have widely differing views on how responsive investment is to changes in tax rules. Some studies have concluded that investment is very responsive to changes in tax incentives, while others have found small effects. The difficulty stems from a lack of consensus on the nontax determinants of investment; without a clear model of how other factors affect investment, it is difficult to isolate the effects of taxes, holding other factors fixed.\n\n\tObjectives, Scope, and Methodology\n\nOur objectives for this report were to (1) determine which corporations paid AMT and why they were liable for it, (2) examine whether AMT has achieved its purpose, and (3) discuss how AMT might affect corporate investment.\nTo meet our first objective, we analyzed the IRS Statistics of Income corporate databases for 1987 through 1992, the most recent data available at the time of our review. These data files of over 70,000 tax returns per year include all corporations with assets of over $100 million and a stratified probability sample of all other corporations organized for profit. Results from firms with assets of less than $100 million are thus subject to sampling errors. With the large sample sizes, the calculations of sampling errors for 1989 and 1990 showed that the 95-percent confidence intervals for statistics based on all AMT-paying firms were within 5 percentage points of percentage estimates and within 5 percent of the value of other estimates. Where larger confidence intervals were found, they are noted in the report. We also constructed a database consisting of tax returns for corporations that filed returns in each year from 1987 through 1991. This database included about 10,000 corporations that had assets of over $50 million in each of these years. Corporations in this database paid 73 percent of the total regular tax liability and 77 percent of all AMT paid in 1991. We tracked these corporations over time to assess their experience with AMT. The major limitations of this database are that it does not include (1) all corporations and (2) larger corporations that either went out of business between 1987 and 1991 or merged with another corporation and therefore did not file their own tax returns.\nTo address the second objective, we reviewed AMT\u2019s legislative history. Using the previously described tax return data, we also analyzed the relationship between the income or losses corporations showed on their books and the regular tax and\/or AMT they paid. To assess whether AMT effectively taxes corporate economic income, we compared the AMT tax base with the tax base proposed by the Treasury Department in 1984. Treasury\u2019s proposal was to change the tax system so that real economic income would be taxed. We also compared the AMT tax base with the list of tax expenditures published by the Joint Committee on Taxation to determine the extent to which AMT includes items that are preferences or exclusions in the regular tax. To determine whether the AMT depreciation provisions are consistent with economic depreciation, we obtained estimates of the present value of economic depreciation deductions under the regular tax and AMT from the Congressional Research Service. These estimates, while comprehensive and widely used by researchers, were based on work on economic depreciation published in 1981. Therefore, the estimates are subject to error and would not reflect any changes in economic depreciation rates that might have occurred since 1981.\nTo meet the third objective, we reviewed various academic studies and articles. In addition, we reviewed the literature on the determinants of business investment.\nWe did not obtain IRS comments on this report because we did not address tax administration issues.\nWe did our work in Washington, D.C., between May 1993 and February 1995 in accordance with generally accepted government auditing standards. Appendixes II through IV provide more detail on our findings as they relate to our objectives.\nWe are sending copies of this report to various congressional committees and Members of Congress, the Secretary of the Treasury, and other interested parties. Copies will be made available to others upon request.\nThe major contributors to this report are listed in appendix V. If you have any questions, please contact me on (202) 512-5407.\n\nAMT\u2019s Purpose: Taxpayers With Substantial Income Should Pay Some Tax\n\nIn addition to the regular income tax, both corporations and individuals are subject to an alternative minimum tax (AMT). The tax system has historically tried to achieve two potentially conflicting goals. One goal has been to raise revenue in relation to taxpayers\u2019 ability to pay, which is generally measured by annual income. Another has been to encourage certain types of economic activity thought to be beneficial to society. This goal has been pursued through provisions (tax preferences) that exclude various types of income from tax, delay the payment of tax on certain types of income, or grant tax credits for certain activities.\nThese two goals can conflict with each other. At various times, reports that individuals and corporations were able to pay no tax through the direct use of tax preferences and through interactions of preferences and other features of the tax code led to concerns that the ability-to-pay goal was not being met. These concerns led Congress to set limits on preferences in the regular tax code and to create AMT.\n\n\tLegislative History of AMT\n\nThe idea of AMT was originally developed by the Treasury Department in 1969. Treasury studies found that some high income individuals paid little or no tax, and that many high income individuals paid tax at a lower rate than individuals with lower income. In response to these findings, Treasury proposed establishing a minimum tax for individuals.\nThe Tax Reform Act of 1969 included an add-on minimum tax for both noncorporate and corporate taxpayers on certain tax preferences. A 10-percent tax was levied on the corporate minimum tax base, which was the sum of corporate tax preferences minus a $30,000 exemption amount and a corporation\u2019s regular tax liability. Levied in addition to the taxpayer\u2019s regular tax liability, this was an add-on rather than an alternative tax. The Tax Reform Act of 1976 added preferences and changed the exemption amount.\nIn 1978, concerns about the effectiveness of the individual AMT led to changes. In contrast to an add-on minimum tax, the tax introduced in 1978 developed the AMT concept of levying a tax on an alternative income base when the liability under the alternative base is greater than the regular tax liability. From 1978 to 1982, individuals were subject to both AMT and the add-on minimum tax. In 1982, the add-on tax for individuals was repealed and the AMT base broadened. Throughout this period, the corporate add-on tax was essentially unchanged.\nIn its 1984 tax reform proposal, the Treasury Department proposed changing business taxes, including the corporate income tax, so that the tax base more closely approximated the real economic income of businesses. In addition to several important structural changes, Treasury recommended eliminating over 45 existing tax preferences and limiting many others. In particular, Treasury proposed eliminating most of the preferences in the regular tax that were included in the add-on tax. Treasury concluded that a minimum tax or an add-on tax would not be necessary if the preferences in the tax code were eliminated directly.\nIn contrast to the Treasury Department proposal, the administration\u2019s 1985 tax reform proposal recommended that the corporate add-on minimum tax be replaced with an AMT. Also in contrast to the Treasury proposal, the President\u2019s proposal included additional preferences in the regular tax, did not repeal others, and did not index the corporate tax base for inflation. The proposal called for an AMT under which taxpayers would calculate their income under two systems and pay AMT when it reflected greater tax liability. The President\u2019s proposal also called for an expanded list of preferences to be covered by AMT. \u201cCongress concluded that the minimum tax should serve one overriding objective: to ensure that no taxpayer with substantial economic income can avoid significant tax liability by using exclusions, deductions, and credits. Although these provisions may provide incentives for worthy goals, they become counterproductive when taxpayers are allowed to use them to avoid virtually all tax liability.... \u201cIn particular, Congress concluded that both the perception and the reality of fairness have been harmed by instances in which corporations paid little or no tax in years when they reported substantial earnings, and may even have paid substantial dividends, to shareholders. Even to the extent that these instances may reflect deferral, rather than permanent avoidance, of corporate tax liability, Congress concluded that they demonstrated a need for change.\u201d\nSince the passage of TRA, several other important changes have been made to the corporate AMT. However, the overall structure of AMT has remained essentially the same. AMT is governed by sections 55 to 59 of the Internal Revenue Code.\n\n\tOverview: How the Corporate AMT Works\n\nUnder current law, corporations are to calculate tax liability under two separate systems\u2014the regular tax and AMT. To comply with the AMT provisions, taxpayers go through the following process:\nFirst, they calculate Alternative Minimum Taxable Income (AMTI). To do this, taxpayers start with their taxable income, add the value of a number of preference items and adjustments, and then deduct any available AMT net operating losses. Table I.1 shows this calculation.\nTaxable income before net operating loss (NOL) deduction AMT NOL deduction (limited to 90 percent of  tentative AMTI)\nNext, taxpayers calculate Tentative Alternative Minimum Tax (TAMT). To do this, they reduce AMTI by an exemption amount and multiply the remainder by the AMT tax rate, which is 20 percent. They then subtract any allowable credits, primarily the AMT foreign tax credit.\nFinally, taxpayers compare TAMT liability with regular tax liability. If TAMT is more than the regular tax, the taxpayer is subject to AMT. The taxpayer will pay the government the amount of TAMT liability. The difference between TAMT and the regular tax is the amount of AMT actually owed. If regular tax is more than TAMT, the taxpayer is subject to the regular tax. The calculation of regular tax owed can include a credit for AMT paid in earlier years. Because of the AMT credit, any AMT paid may be recouped in future years when the taxpayer returns to the regular tax. In this regard, AMT more closely resembles a prepayment of tax than a permanent increase in tax liability. However, taxpayers cannot reduce their regular tax liability below TAMT through the use of the AMT credit. Table I.2 shows this calculation.\nGenerally $40,000; phased out for corporate taxpayers with AMTI above $150,000.\nAMT rate (20 percent)\nLimit rules require worldwide AMTI to be calculated; AMT foreign tax credit (in conjunction with allowable investment credits) cannot reduce AMT liability by more than 90 percent; the credit can be carried back 2 years or forward 5 years.\nCredits cannot reduce AMT by more than 25 percent.\nTentative AMT (TAMT)\nIf tentative AMT > regular tax, tentative AMT is owed; net AMT is the amount by which TAMT exceeds regular tax liability; net AMT can be carried forward and credited against regular tax in future years.\nAn example will illustrate how AMT works. If a corporation computed its regular tax as $1 million and its tentative AMT as $1.5 million, it would pay $1.5 million. One million dollars of this payment would be classified as regular tax, and $0.5 million would be classified as AMT.\nIf the same corporation found that in the next year it owed $2 million as its regular tax liability and $1 million of TAMT, the corporation would then be subject to just the regular tax. The corporation could claim a credit against its regular tax for the $0.5 million in AMT it paid the year before and then send $1.5 million to the government. In this case, it would recoup its AMT payment quickly. However, the AMT credit cannot reduce current year regular tax liability below current year AMT liability. If the corporation\u2019s TAMT in the second year had been $1.75 million instead of $1 million, it could only have claimed a credit of $0.25 million and would have had to carry the remaining $0.25 million in uncredited AMT payments ahead to future years.\n\n\tAMT Preferences and Adjustments\n\nIn general, AMT preferences and adjustments reflect aspects of the regular tax that either (1) defer tax by rapidly recognizing expenses or by delaying revenue recognition, or (2) always exclude certain income from the definition of taxable income.\n\n\t\tAMT Preferences\n\nAMT preferences under the post-TRA AMT generally maintain the preferences that were in place under the add-on minimum tax. Table I.3 lists the AMT preference items and describes how their regular tax treatment differs from their AMT treatment.\nReal estate depreciation (pre-1987 property)\nCertified pollution control facilities amortization (pre-1987 property)\nAppreciated capital gain property contributed to charity (repealed in the Omnibus Budget Reconciliation Act (OBRA) of 1993)\n\n\t\tAMT Adjustments\n\nAMT adjustments differ from AMT preferences in that adjustments can be positive or negative. Thus, adjustments related to the deferral of tax will generally be positive in the early years of an asset\u2019s useful life, increasing AMTI, and negative in the later years, decreasing AMTI. Table I.4 describes their regular and AMT tax treatments.\nReal estate depreciation (post-1986 structures)\nPersonal property depreciation (post-1986 equipment)\nLimited use of completed-contract method of accounting is allowed (income is not recognized until contract is completed)\nPercentage-completed method of accounting must be used (except for home construction contracts)\nAmortization of pollution control facilities (post-1986)\nCertain costs can be expensed (deducted immediately)\n\n\t\tBook Income and ACE Adjustments\n\n\u201cWith respect to corporations, Congress concluded that the goal of applying the minimum tax to all companies with substantial economic incomes cannot be accomplished solely by compiling a list of specific items to be treated as preferences. In order to achieve both real and apparent fairness, Congress concluded that there must be a reasonable certainty that, whenever a company publicly reports significant earnings, that company will pay some tax for the year. \u201cFor the years from 1987 through 1989, Congress concluded that this goal should be accomplished by means of a preference based upon financial statement or book income reported by the taxpayer pursuant to public reporting requirements or in disclosures made for nontax reasons to regulators, shareholders, or creditors. Congress concluded that it was particularly appropriate to base minimum tax liability in part upon book income during the first three years after enactment of the Act, in order to ensure that the Act will succeed in restoring public confidence in the fairness of the tax system. \u201cFor taxable years beginning after 1989, Congress concluded that the book income preference should be replaced by the use of a broad-based system that is specifically defined by the Internal Revenue Code. Congress intended that this system should generally be at least as broad as book income, as measured for financial reporting purposes, and should rely on income tax principles in order to facilitate its integration into the general minimum tax system.\u201d\n\n\t\tBook Income Adjustment\n\nThe book income adjustment was in effect from 1987 through 1989. Under its rules, if a corporation\u2019s adjusted net book income exceeded AMTI, 50 percent of the difference was added to AMTI. Although the book income adjustment was described as an adjustment, it was similar to a preference because it could not be negative. If net book income was less than AMTI, no adjustment was made. Because the AMT tax rate was 20 percent, effectively book income (if greater than AMTI) was taxed at a rate of 10 percent (20 percent of 50 percent).\nTRA specified the financial statements to be used to calculate the book income adjustment. For example, if a corporation had filed a financial statement with the Securities and Exchange Commission, this statement was to be used in the calculation. If the corporation was not required to file this statement, other audited financial statements prepared for nontax purposes could be used.\n\n\t\tACE Adjustment\n\nThe ACE adjustment replaced the book income adjustment in 1990. The ACE adjustment is a modified version of the calculation of earnings and profits. Conceptually, earnings and profits are a measure of the economic resources available to corporations to pay dividends without drawing down their capital. While not specifically defined in the tax code, the earnings and profit concept is developed in several code sections and regulations.\nMany of the adjustments required to calculate ACE involve items that are also AMT adjustments and preferences. Once ACE is calculated, it is compared to AMTI, and 75 percent of the difference between the two is added to AMTI. Unlike the book income adjustment, ACE can be a negative amount (to the extent to which positive ACE adjustments were made in prior years) and can therefore reduce AMT liability. Table I.5 summarizes the ACE calculation.\n\n\tAMT Limits on Net Operating Loss Deductions and Tax Credits\n\n\u201cIn addition, Congress concluded that a change was necessary with regard to the use of net operating losses, foreign tax credits and investment tax credits to avoid all U.S. tax liability. Absent a special rule, a U.S. taxpayer with substantial economic income for a taxable year potentially could avoid all U.S. tax liability for such year so long as it had sufficient such credits and losses available. While Congress viewed allowance of the foreign tax credit and net operating loss deduction, along with the transitional relief relating to the investment tax credit, as generally appropriate for minimum tax purposes, it was considered fair to mandate at least a nominal tax contribution from all U.S. taxpayers with substantial economic income.\u201d\n\n\t\tNet Operating Loss Deduction\n\nLosses are generally recognized when they occur for financial accounting purposes, and corporations can report negative amounts of income on their tax returns. However, under current law, a corporation that loses money in a given year does not get a tax refund for that tax year. This means that expenses that would reduce taxable income and reduce taxes had the firm made money do not reduce taxes if the firm loses money. Without a carryforward or carryback provision, corporations that made profits in each year would pay less tax over time than corporations that earned the same profits over time but had some years with profits and some years with losses. Under current law, corporations can carry losses forward to 15 future years and deduct them when they have positive income. Corporations can also carry losses back 3 years.\nAlthough deductions for net operating losses are allowed in the calculation of AMTI, the deduction cannot exceed 90 percent of AMTI. With an AMT tax rate of 20 percent, this guarantees that (aside from the exemption amount and other credits) corporations subject to AMT will pay tax equal to at least 2 percent of AMTI (20 percent times at least 10 percent of AMTI).\n\n\t\tForeign Tax Credit (FTC)\n\nIn general, U.S. corporations are subject to U.S. income tax on their worldwide income. However, corporations that operate abroad may also be subject to foreign income taxes. Like most countries, the United States allows taxpayers a tax credit for foreign income taxes paid so that corporations that operate internationally are not taxed twice on the same income. At the same time, the amount of foreign tax that can be credited is limited so that FTCs do not offset U.S.-source income.\nUnder AMT, taxpayers must recalculate their foreign-source income and the FTC limitations according to AMT rules. AMT also places an additional limit on FTC. The AMT FTC cannot reduce AMT (determined without regard to the AMT net operating loss deduction) by more than 90 percent. If the AMT FTC exceeds 90 percent, the excess amount can be carried back 2 years or forward 5 years, as can the regular tax FTC.\n\n\t\tOther Tax Credits\n\nHistorically, taxpayers who have undertaken a variety of activities have qualified for credits. Before TRA, corporations could earn investment tax credits for investing in qualified capital assets. Currently, corporations can earn tax credits for qualified research and development spending, income earned in U.S. possessions, spending on rehabilitation of qualified structures, wages on qualified jobs, and other tax-related activity. The purpose of these credits is to encourage certain types of activity that is thought to lead to social benefits. The regular tax places limits on the extent that corporations can use credits to reduce their tax liability.\nUnder AMT, these credits generally cannot be used to reduce AMT liability.Additionally, many tax credits cannot be used for the regular tax if they reduce regular tax liability below AMT liability. An exception to this rule exists for the possessions credit; it cannot reduce AMT, but it is included in the calculation of regular tax.\nTable I.6 compares the tax rules for the deduction of net operating losses with those for tax credits under the regular tax and AMT.\nNet operating loss deduction Can be carried back 3 years or forward 15 years; can be used to eliminate all current year tax liability.\nAlternative tax net operating loss can reduce AMTI by at most 90 percent; unused alternative losses can similarly be carried forward or back.\nCan be carried back 2 years and forward 5 years; can eliminate all U.S. tax on foreign-source income.\nCalculated on AMTI base; limited to 90 percent of AMT.\nCan be carried back 3 years and forward 15 years; cannot exceed difference between regular tax and tentative AMT, or 25 percent of regular tax liability in excess of $25,000.\nGenerally cannot be used to reduce AMT; before 1991, corporations could use the investment credit to reduce AMT by up to 25 percent.\nCredit for U.S. tax on income earned in active business in U.S. possession.\nPossessions income not included in AMTI; credit cannot reduce AMT.\nCannot exceed difference between regular tax and tentative AMT; no carryforwards or carrybacks.\nCannot be used to reduce AMT.\nCannot exceed difference between regular tax and tentative AMT; no carryforwards or carrybacks.\nCannot be used to reduce AMT.\n\n\t\tAMT Credit\n\n\u201cFinally, Congress concluded that it was desirable to change the underlying structure of the minimum tax in certain respects. In particular, to the extent that tax preferences reflect deferral, rather than permanent avoidance, of tax liability, some adjustment was considered necessary with respect to years after the taxpayer has been required to treat an item as a minimum tax preference, and potentially to incur minimum tax liability with respect to the item. Absent such an adjustment, taxpayers could lose altogether the benefit of certain deductions that reflect costs of earning income.\u201d\nThe rationale behind the AMT credit can be illustrated for the case of depreciation. As shown in table I.3, the depreciation rates for AMT purposes are slower and useful lives are longer than under the regular tax. This means that depreciation deductions early in an asset\u2019s useful life are smaller than under the regular tax. Later in the asset\u2019s useful life, depreciation deductions will be greater under the AMT schedule than under the regular tax. If a taxpayer is under AMT when an asset is purchased and later returns to the regular tax, the total amount of depreciation deductions the taxpayer claimed for the asset could be significantly less than the original cost. In this case, the taxpayer\u2019s larger regular tax depreciation deductions are effectively disallowed by AMT in favor of smaller deductions. The AMT credit allows the taxpayer to eventually deduct the cost of the asset, either through depreciation deductions directly or through AMT credits that restore the previously disallowed depreciation deductions.\nBefore 1989, the AMT credit carryforward was limited to those items involving deferral of tax only. In OBRA 1989, this rule was changed so that all items that generate AMT, whether timing or permanent differences, lead to a creditable carryforward for tax years after 1989. Unlike the net operating loss deduction carryforward or foreign tax credit carryforward for the regular tax, the AMT credit has no time limit. Like these other deductions and credits, the carryforward does not earn interest. Therefore, taxpayers who use AMT credit carryforwards lose the time value of money (potential interest) on the amount of AMT paid from the time AMT liability is incurred until they can use the credit.\n\nWhich Corporations Paid AMT and Why?\n\nThis appendix contains information on the amount of corporate AMT payments, the size of the firms paying AMT, the industry breakdown of these firms, the frequency of AMT payments and AMT credits claimed, the significant elements of AMT, and the relationship of AMT to net operating losses (NOL) and to the foreign tax credit (FTC).\n\n\tAMT Accounts for Significant Revenues From Corporations\n\nTable II.1 shows regular tax and AMT revenues for the years since the major revision of AMT in 1986. AMT revenues were between $2.7 and $8.6 billion, or between 3 and 9 percent of the regular tax revenues collected during the period. The table also shows that the use of the AMT credit has grown as more firms that paid AMT use the credit against regular tax liability.\nAMT revenue is likely to decline in the future for several reasons. First, the Omnibus Budget and Reconciliation Act (OBRA) of 1993 made two changes that should reduce the number of taxpayers using AMT. OBRA eliminated the ACE depreciation adjustment for property placed in service after 1993. The Joint Committee on Taxation estimated that this change would reduce revenue by about $4.3 billion from 1994 through 1998. OBRA also increased the useful life for nonresidential real estate under the regular tax from 31.5 to 39 years. Because the 39 years is only slightly different from the 40 years for AMT purposes, less in AMT revenues related to this real estate can be expected than otherwise.\nA second reason for the likely decline in AMT revenue is related to the relatively short-lived equipment placed in service since the 1986 TRA that has added to the depreciation adjustment. Much of this equipment should reach the point in its useful life where depreciation under the AMT system will be less than that under the regular tax, generating a negative adjustment.\nA third reason is that more taxpayers may be subject to the regular tax as the economy moves out of the recession. With fewer taxpayers paying AMT, AMT revenue should fall and recovery of past AMT credits should speed up.\n\n\tWhile Few Corporations Have Paid AMT, Large Firms Are More Likely to Pay AMT\n\nAs table II.2 shows, only 0.7 to 1.5 percent of corporations paid AMT in any given year. For example, about 32,000 of 2.1 million 1990 corporate returns included AMT.\nTable II.3 shows that a high percentage of corporate AMT payers were relatively small corporations. The relationship between firm size and AMT payment stems from the fact that there are many more small corporations than large corporations. For most of the years between 1987 and 1992, more than 70 percent of AMT payers had less than $10 million in assets. Large corporations represented a small percentage of AMT payers.\nTable II.4 shows the percentage of corporations in each size class that paid AMT. While table II.3 showed that most AMT payers were relatively small, small corporations were much less likely to be paying AMT than large corporations. While less than half of 1 percent of corporations with less than $1 million in assets were paying AMT, more than 20 percent of the corporations with more than $1 billion in assets were. However, since there were so many more small corporations than large ones, most AMT payers were relatively small.\nTo further understand the relative importance of AMT, we calculated the percentage of corporate assets that were in firms that paid AMT and in those that did not. Because large corporations paid AMT more frequently, the percentage of assets that were in firms paying AMT was much larger than the percentage of taxpayers paying AMT. Thus, even though less than 2 percent of taxpayers paid AMT, table II.5 shows that about a quarter of corporate assets were in firms that paid AMT.\nTable II.6 shows the percentage of AMT liability paid by corporations by asset size class. Despite the fact that most AMT payers were relatively small, most AMT liability came from the largest firms. Referring to table II.3, large corporations, generally comprising about 2 to 3 percent of AMT payers, usually paid about 75 percent of AMT liability. In contrast, the smallest two size classes contained 75 percent of AMT payers, but they paid less than 10 percent of the AMT liability.\n\n\tAMT Liability by Industry\n\nTable II.7 shows the percentage of firms paying AMT by industry. The industry classifications are the major industry groups as defined by IRS. The table shows that corporations in the mining, manufacturing, and transportation industries were more likely to have paid AMT. Corporations in wholesale and retail trade and services were less likely to have paid AMT.\nTable II.8 shows AMT liability by industry. The data show that the manufacturing, transportation, and finance industries paid the most AMT.\nIn order to see the importance of AMT relative to the regular tax for different industries, we calculated industry average tax rates for the regular tax and for AMT. The regular tax rate is regular tax (not including the AMT credit) divided by taxable income (as defined under the regular tax). The AMT average tax rate is the regular tax and AMT less the AMT credit, also divided by taxable income. The difference between the two figures shows the extent to which AMT (both tax and credit) changes the aggregate tax payment of the industry. Table II.9 shows that AMT generally resulted in relatively small changes at the industry level.\nAs requested, we computed the same information for eight industry subclasses. Table II.10 shows the percentage of firms paying AMT in these industry subclasses. The percentage of corporations that paid AMT in these subclasses was above the average for all corporations, with the possible exception of utilities due to the statistical imprecision in the percentage of that subclass.\nTable II.10: Percentage of Corporations Paying AMT in Eight Industry Subclasses than oil)\nTable II.11 shows AMT liability for these industries. than oil)\nTable 11.12 shows the average tax rate without and with AMT for these eight industry subclasses. than oil)\n\n\tAMT Significantly Increased Tax Liability for Some Taxpayers\n\nFor many AMT payers, AMT led to a large percentage increase in taxes owed. To determine whether AMT led to only very small tax changes or to large tax changes for AMT payers, we calculated the percentage increase in tax from AMT. For AMT taxpayers who had no regular tax liability, AMT was 100 percent of the taxes paid. As shown in appendix III (table III.8), about 40 percent of AMT payers owed no regular tax in the year they paid AMT. Table II.13 shows the percentage increase in tax resulting from AMT for AMT taxpayers who also had positive regular tax liability. In 1990, for example, 8.5 percent of AMT payers had their total tax increased by less than 5 percent by AMT. On the other hand, a third of AMT payers had their taxes at least doubled by AMT.\n\n\tAbout Half of Large Corporations Paid AMT at Some Time\n\nIn order to see whether corporations paid AMT consistently between 1987 and 1991 or fluctuated between the regular tax and AMT, it is necessary to track individual corporations over time. To do this, we developed a database containing 5 years of tax returns for corporations that had total assets of more than $50 million in each year from 1987 through 1991. This database also allows us to determine how quickly AMT payers were able to use the AMT credit. Of the approximately 10,000 corporations in the database, about 50 percent did not pay AMT at any time over the 5-year period, as shown in table II.14. Very few (about 3.2 percent of AMT payers, or about 1.6 percent of the 10,000 corporations in the database) paid AMT in all 5 years. The greatest percentage of AMT payers paid once in the 5 years. Table II.14 also shows the percentage of assets in different categories as a percentage of the sum of all corporate assets over the 5 years.\n1 year 2 years 3 years 4 years 5 years (percent) (percent)\nTo understand whether corporations tended to pay AMT in consecutive years or moved back and forth between AMT and the regular tax, we tracked the years that taxpayers paid and did not pay AMT. Table II.15 shows the percentage of taxpayers that paid AMT in consecutive years by the number of years that they paid AMT. About two-thirds of the corporations that paid AMT twice in the 5 years did so in consecutive years. About half of 3-year payers paid in 3 consecutive years.\nTo determine how long it took AMT payers to recover their payments via the AMT credit, we calculated the percentage of firms that had fully recovered their payment by year of AMT liability. In making this calculation, we assumed that receipt of an AMT credit recovered the first possible year of AMT payments. Table II.16 shows that the majority of AMT payers for tax year 1987 had not fully recovered their 1987 AMT payment via the AMT credit by the 1991 tax year.\nTable II.17 shows the percentage of AMT payments recovered via the AMT credit. In contrast to the preceding table, table II.17 shows the amount of credit recovered by firms that fully recovered their AMT payment and by those that only partially recovered their credits. These calculations also assume that credits claimed are allocated to the first year of AMT liability for which AMT has not been fully recovered. The table shows that less than half of 1987 AMT liability had been recovered via the AMT credit by 1991.\nTable II.18 shows the percentage of corporations and the percentage of assets of firms in the database that either paid AMT or paid regular tax and had not been able to reclaim all outstanding AMT credits in a particular year. The data indicate that about 40 percent of the large corporations in the database were in this position after tax year 1991. This percentage may have fallen in tax year 1992 as the amount of AMT credits claimed rose significantly, as shown in table II.1. (percent)\nAssets (percent)\nWe also calculated the length of time that corporations spent either paying AMT or recovering credits. Table II.19 shows the percentage of corporations that either paid AMT or had unusable AMT credits by the number of years that they were in this position. For example, the table shows that 9.2 percent of companies paid AMT or had unusable credits in only 1 year, which means that they paid AMT in 1 year and fully recovered the payment with the AMT credit in the following year. About 10 percent of firms either paid AMT in 2 years and recovered their credits in the next year or they paid AMT in 1 year and were unable to recover credits for an additional year. Thirteen percent of the companies either paid AMT or had outstanding credits in all 5 years. These firms could have been AMT payers in all 5 years, paid AMT once but never recovered their credits, or paid AMT in several years and never recovered credits. Thus, while table II.14 showed that only 1.6 percent of the companies in the database paid AMT in all 5 years, 13 percent of the companies were either paying AMT or had excess AMT credits in all 5 years.\nAMT 1 year 2 years 3 years 4 years 5 years (percent) (percent)\n\n\tThe Book\/ACE Adjustment and Depreciation Were the Most Significant AMT Components\n\nTable II.20 shows the relative size of the AMT preferences and adjustments. As can be seen, the book income and ACE adjustments were relatively large. The replacement of the book income adjustment with the ACE adjustment coincided with a large increase in the amount of the adjustment. Before 1990, the book income adjustment had been declining in importance.\nThe depreciation adjustment for post-1986 property grew as more depreciable assets were placed into service after the introduction of the adjustment. As time passes from the imposition of the tax, more new assets are put into service, increasing the adjustment. At the same time, more assets reach the point where depreciation is greater under the AMT rules than under the regular tax, leading to a negative adjustment. A similar pattern is apparent for the depreciation preferences related to pre-1986 assets; as time passes, fewer assets generate positive adjustment amounts.\nCompared to the book\/ACE adjustment and post-1986 property depreciation, the other components of AMTI were small overall, although they could be important for particular firms or industries.\nThe importance of the depreciation and the book income and adjusted current earnings adjustments is also apparent from data on the frequency of occurrence of different AMT components, as table II.21 shows. These items increased AMTI for most AMT payers. In contrast, the other preferences and adjustments increased AMTI for only a small percentage of AMT payers.\n\n\tAMT Limits Tax Credits and Deductions for Prior Losses\n\nIn order to ensure at least a small tax liability from corporations with prior year losses and foreign tax credits, the AMT rules include limits on the amounts these deductions and credits can reduce AMTI and AMT. The rules also include an overall limit on the amount by which both the AMT net operating loss deduction and the AMT FTC together can reduce AMT liability.\nTo determine how these rules affected AMT payers, we calculated the percentage of AMT payers that included NOLs and FTCs in their AMT computations. We also calculated the percentage by which AMT payers were able to reduce AMTI and AMT before credits, respectively, to determine whether the limitations had prevented firms from fully claiming deductions and credits.\nTable II.22 shows the percentage of AMT payers that claimed a deduction for prior year net operating losses. The table shows that about a third of AMT payers claimed the deduction, and in recent years the deduction reduced tentative AMTI by about 15 percent.\nTo determine whether corporations were constrained by the 90-percent net operating loss limit, we calculated the percentage reduction in AMTI for AMT payers who had a deduction for AMT net operating losses. Table II.23 shows that a significant percentage of AMT payers with NOL deductions may have been constrained by the limitation.\nPercentage reduction in AMTI from AMT NOL limit)\nAMT payers can also claim AMT foreign tax credits for foreign taxes paid. Table II.24 shows that despite the fact that very few AMT payers claimed an AMT FTC, the credit reduced AMT before credits to a large extent on an aggregate level.\nTable II.25 shows the distribution of the percentage reduction of AMT before credits for corporations that claimed AMT FTC. The credit cannot be used to reduce AMT before credits by more than 90 percent. The table indicates that between 25 and 37 percent of AMT FTC claimants may have been constrained by the limitation.\nPercentage reduction in TAMT from AMT FTC limit)\nTaxpayers who claim the AMT NOL deduction and\/or AMT FTC are also subject to an overall limit. The AMT NOL deduction and AMT FTC combined cannot reduce AMT liability by more than 90 percent. Few taxpayers claimed both NOL and FTC. Table II.26 shows the extent to which AMT payers reduced AMTI through the use of the credit and the deduction. It shows that the percent of firms that may have been constrained by the overall limitation varied, ranging from 29 percent in 1989 to 49 percent in 1992.\nPercentage reduction in AMTI from AMT FTC and AMT NOL limit)\n\nHas AMT Achieved Its Goals?\n\nAccording to the legislative history, the goals of AMT are to ensure that taxpayers with substantial economic income pay some tax, and to ensure that taxpayers with positive book income pay tax in the year of positive income.\n\n\tIs AMT Designed to Tax Economic Income?\n\nBecause we are not aware of the existence of an agreed-upon, detailed definition of economic income for corporations, we compared AMT to the proposals made by the Department of the Treasury in November 1984.The Treasury proposals were designed to tax the real economic income of individuals and businesses, both corporate and noncorporate. We also compared the AMT provisions to the Joint Committee on Taxation\u2019s list of corporate tax expenditures, which are generally preferences and exclusions in the regular tax that deviate from a tax on economic income. The Treasury proposals provide a broad outline of a corporate tax based on economic income; the tax expenditure list goes into greater detail on particular tax code provisions.\nOur comparisons showed that AMT moves the tax system closer to taxing economic income by including several tax preferences. In addition, firms paying AMT will have depreciation deductions that more closely match economic depreciation than do depreciation deductions under the regular tax if inflation rates are low. However, if inflation is moderate or high, depreciation deductions under AMT can be less generous than estimates of economic depreciation would dictate, leading to an overstatement of economic income. In times of moderate or high inflation, the overstatement of income due to the depreciation provisions may indirectly reduce the understatement of income that occurs when corporations deduct nominal, rather than inflation-adjusted, interest costs on debt incurred to finance investments. However, such indirect effects would not apply to investments financed by equity.\n\n\t\tTreasury Proposal\n\nTreasury proposed three major structural changes to the corporate tax in order to tax economic income.\nFirst, it proposed that the double taxation of dividends be reduced. Under the regular corporate tax, dividends are taxed when received by shareholders but are not deducted by the corporation when paid. In contrast, interest paid is taxed when received by bondholders and is deducted by the corporation.\nSecond, Treasury proposed that capital assets, inventories, and interest paid be indexed to inflation.\nThird, Treasury recommended that depreciation schedules be adjusted to more closely match estimates of economic depreciation. Economic depreciation is the reduction in the market value of a particular asset over a year. If the tax provisions for depreciation deductions matched economic depreciation, businesses would deduct the actual reduction in the value of their assets as a business cost each year.\nTreasury maintained that these provisions and a reduction in the preferences and exclusions in the tax code would result in a tax more closely based on economic income. Using this proposal as a basis for comparison, we analyzed the tax base of AMT to judge whether AMT has moved the tax base closer to economic income.\nFirst, AMT does not relieve the double taxation of dividends. The ACE adjustment further restricts the deductibility of dividends received by corporations and therefore moves the tax base further from a definition of economic income and closer to book income, reflecting another goal of AMT.\nSecond, AMT does nothing explicitly to adjust for inflation. Many items in the Treasury proposal related to the mismeasurement of income due to inflation. Inflation reduces the value of depreciation deductions because the amount of depreciation deducted reflects the historical cost of the asset when purchased, not its current replacement value. On the other hand, inflation increases the real value of the deduction for interest paid because interest costs unadjusted for inflation are deducted rather than the inflation-adjusted interest costs. However, the Tax Reform Act of 1986 did not include comprehensive indexing provisions.\nThird, AMT depreciation schedules are closer to economic income at 0 percent inflation, but not when the inflation rate is 3 percent or higher. The data in appendix II showed that the depreciation adjustment is a key component of AMT, responsible for $23 billion of AMTI and included on 87 percent of AMT returns in 1992. The question then is whether the AMT depreciation provisions are closer to economic depreciation than the provisions under the regular tax. Under the current tax system, depreciation deductions are calculated using the historical cost of acquiring the asset. Because neither the regular tax nor the AMT depreciation schedules include adjustments for inflation, the value of these deductions erodes as the inflation rate increases. One justification for accelerating depreciation relative to economic depreciation is to offset the effects of inflation.\nTable III.1 shows one set of estimates of the present value of depreciation deductions under the regular tax and AMT per dollar invested in 22 types of equipment and 6 types of structures, for different inflation rates. The table also shows estimates for the present value of economic depreciation for these asset classes. If the value for the regular tax or AMT for a particular asset is greater than that for economic depreciation, the tax schedules allow a more generous deduction than economic depreciation. If the values are smaller, the tax schedules allow for slower, less generous depreciation deductions.\nFor example, if a corporation purchases an automobile, it is entitled to depreciation deductions over the useful life that will eventually total the purchase price of the auto. However, since the deductions occur over time, they are worth less than the purchase price today. Table III.1 indicates that with no inflation, depreciation deductions under the regular tax today are worth 91 percent of the original investment, 89 percent under AMT depreciation, and 87 percent under economic depreciation. The table also shows the effects of inflation on depreciation deductions for regular tax and AMT; as inflation increases from 0 to 3 to 6 percent, the present value of depreciation deductions falls.\nTable III.2 shows the percentage difference between economic depreciation and regular and AMT depreciation. The table shows that the current regular tax depreciation schedule is generous relative to economic depreciation when there is no inflation and in most cases when inflation is 3 percent. AMT depreciation is closer to economic depreciation than regular depreciation at 0-percent inflation, but for 3- or 6-percent inflation it is less generous than economic depreciation for many assets. As the inflation rate rises to 6 percent, both regular tax and AMT would be less generous than economic depreciation would dictate for many assets.\nTo the extent that the AMT depreciation provisions are less generous than economic depreciation at moderate or high inflation rates, they tend to overstate economic income. However, as mentioned above, interest expenses are overstated in real terms when inflation exists. In this context, AMT may indirectly offset this inflation advantage for corporations with sizeable debt-financed capital investment and function as an implicit limit on interest deductions.\nWhether such a limit is consistent with a tax on economic income depends largely on whether the personal tax is considered as well as the corporate tax. While corporations deduct interest unadjusted for inflation, this interest is in turn taxed when received at the individual level. Thus, income earned by the corporation is in fact taxed, but the revenue is received through the individual income tax rather than the corporate tax. However, many individuals are taxed at a rate lower than the corporate rate, so the deduction at the corporate level reduces taxes by an amount more than taxes are raised at the individual level. In addition, if the recipient of the interest is a pension fund, no tax is levied until the income is ultimately received by the pension recipient.\nFor shareholders, corporate income can be received as dividends or as capital gains when stock shares are sold. Dividends are not deductible under the corporate tax, so there is no inflation-driven advantage at the corporation level for dividends. Capital gains are taxed on their amount unadjusted for inflation, overstating their real value, but have commonly been taxed under preferential rates and are taxed only when shares are sold (realized), allowing potentially substantial tax deferral. While AMT depreciation provisions may indirectly counteract inflation biases for debt at the corporate level, they do not do so for income received by shareholders.\n\n\t\tAMT Includes Several Tax Expenditures in Its Base\n\nAMT adjustments and preferences include some, but not all, tax expenditures to broaden the tax base and move the tax base closer to economic income. Table III.3 shows corporate tax expenditures, as defined by the Joint Committee on Taxation, that have an estimated revenue loss of over $100 million in 1995. The table shows which tax expenditures are included directly in AMT as preferences or adjustments and which are included indirectly through the ACE adjustment.\nAccelerated depreciation on rental housing Exclusion of interest on private purpose Exclusion of interest on governmental Exclusion of income of foreign sales Inventory property sales source rules Deferral of income from controlled foreign Interest allocation rules exception for Expensing of research and development Expensing of exploration and development costs (fuels and nonfuel minerals)\nExcess of percentage over cost depletion (fuels and nonfuel minerals)\nExpensing of multiperiod timber growing Investment tax credit for rehabilitation of Excess bad debt reserves of financial Exclusion of interest on life insurance Small life insurance company taxable Special treatment of life insurance (continued)\n\n\tHas AMT Ensured That Corporations With Positive Book Income in a Given Year Paid Some Tax in That Year?\n\nAMT has generated tax from some firms with positive book income that otherwise would not have paid regular tax, but the percentage of firms with book income that paid tax in a given year was not changed very much by AMT. The data indicate that AMT has been successful in ensuring that large firms with book income paid some tax in that year. The corporations with book income that did not pay AMT or regular tax were generally small, and most had net income under $40,000, the AMT exemption amount. The large corporations that had book income but paid no tax were predominately mutual funds and investment companies, which generally pass all income to shareholders. Because of this feature of their business, these companies are exempt from the book income and ACE adjustments.\n\n\t\tDifferences Between Taxable Income and Financial Statement Income\n\nThe measurement of income for financial statement purposes and measurement for tax purposes differ in important ways. These differences make it possible for the same corporation to report positive income for financial statement purposes (book income) and a loss for tax purposes, or the opposite.\nSome items of revenue and expense enter into the calculation of either taxable income or book income without ever affecting the other under current provisions of the tax laws. One example of a permanent difference between the two income measures is the treatment of income from tax-exempt securities. Corporations will include income from tax-exempt securities on their financial statements, but this income will never be included in taxable income. Another permanent difference is the treatment of dividends received by a corporation. For financial statements, dividends received are included in income. For tax purposes, only a fraction of dividends received are taxed. The purpose of the deduction for dividends received is to compensate in part for the lack of a deduction for dividends paid. Without a deduction for dividends received, income flowing through several corporations and ultimately to shareholders would be taxed at all levels.\nSome items of revenue and expense are eventually recognized by both tax and financial accounting but are recognized at different times. Book income before tax can exceed taxable income if (1) revenue is recognized for accounting purposes prior to its recognition on the tax return, or (2) expenses are recognized for accounting purposes after their deduction on the tax return. On the other hand, book income before tax can be less than taxable income if (1) revenue is recognized for accounting purposes after its inclusion on the tax return, or (2) expenses are recognized for accounting purposes prior to their deduction for tax purposes. In contrast to permanent differences, timing differences affect the timing of the recognition of income or expense; over time, the same amount of income and expense will be recognized for both book and tax purposes.\n\n\t\tHow Different Are Tax and Book Income?\n\nTo show how book income and taxable income are related, we calculated the percentage of corporations in each of the classes in table III.4. The first row shows the percentage of corporations that reported a positive amount of book income and a positive amount of net income on their tax returns in a particular year. The middle two rows of the table show the percentage of corporations that differ in the sign of the two income measures in the year. The last row shows the percentage of corporations that reported losses on both their financial statements and for tax purposes in the year.\nTable III.5 repeats this calculation after allowing for the deduction of dividends received and net operating losses from net income. The table shows that these two provisions have significant effects. In 1992, 13 percent of taxpayers with positive book income and positive current year net income reduced their current year taxable income to zero by using deductions for dividends received and prior year losses.\nRegular tax owed on taxable income is further reduced by any allowable credits. Table III.6 shows the percentage of corporations that have positive and zero regular tax liability while reporting positive or negative book income.\nAs one goal of AMT is to get taxpayers with positive book income in a given year to pay tax in that year, its design must \u201cundo\u201d many of the differences between regular tax income and book income. Many of the preference items and the adjustments serve this purpose, as do the book income and ACE adjustments.\n\n\t\tMany AMT Payers Did Not Owe Any Regular Tax\n\nTable III.8 shows the percentage of AMT payers that also paid regular tax and the percentage that reported no regular tax liability. The percentages, which were consistent across time, show that about half of AMT payers owed regular tax as well as AMT. However, a significant percentage of AMT payers had no regular tax liability at the time they paid AMT.\nTable III.9 examines the relationship between regular tax status and AMT payment in more detail. The table groups AMT taxpayers into four categories. The first category includes those taxpayers that had positive taxable income and paid some regular tax. The second category covers those taxpayers with positive net income but no regular tax; these taxpayers had credits that could have eliminated all regular tax or sufficient NOL deductions to eliminate all taxable income. The third category is for those taxpayers with a current year regular tax loss. A small number of AMT payers paid regular tax but did not fall into one of the other categories.\nThe table shows that the majority of AMT payers had positive taxable income and also owed regular tax. Fewer AMT payers had positive taxable income and owed no regular tax. A large percentage of AMT payers owed no regular tax due to net operating loss deduction carryforwards. A smaller but significant percentage of AMT payers had a current year regular tax loss but had positive AMTI leading to an AMT liability.\nTable III.10 shows the share of AMT liability that is raised from each of the groups shown in table III.9.\n\n\t\tMost AMT Payers Had Positive Book Income\n\nThe legislative history of AMT indicates that Congress was concerned that confidence in the tax system could be undermined if corporations that reported significant income on their books paid no tax. Table III.11 shows that most AMT payers had positive book income, as might be expected because of the large percentage of AMT returns that included the book income and ACE adjustments. However, a significant percentage of AMT payers had negative book income.\nTo determine whether AMT significantly reduced the number of taxpayers that reported positive income and paid no tax, we calculated the percentage of taxpayers with positive book income that paid AMT and had no regular tax liability. Table II.12 shows the tax status of those corporations that reported positive book income. Most taxpayers with positive amounts of book income paid regular tax. AMT had a very small effect on the overall percentage.\nHowever, AMT raised a significant amount of revenue from firms that reported book income and did not pay regular tax. Table III.13 shows the percentage of total AMT liability paid by corporations according to their regular tax and book income situation. Corporations with positive book income and no regular tax liability paid a significant portion of AMT.\n\n\t\tWhy Did Companies With Positive Book Income Not Pay AMT?\n\nTo determine why AMT had not forced all corporations with positive book income to pay some tax, we analyzed the information that was available for these corporations from their regular tax returns. The IRS database that we used had little AMT information for non-AMT payers. In particular, small taxpayers who qualify for the exemption are not required to file a Form 4626, so IRS does not have AMT information for these taxpayers. Without a 4626, we could not completely identify the reasons why firms would not be paying AMT. However, we were able to characterize these firms by their regular tax returns.\nAbout 98 percent of the corporations with positive book income and no tax payment were relatively small, having less than $10 million in assets.\nAbout 85 percent had less than $40,000 in net income. Thus, it is likely that they would qualify for the AMT exemption.\nMost firms with $1 billion or more in assets were regulated investment companies (RIC) and real estate investment trusts (REIT), which are technically subject to AMT but are exempt from the book income and ACE adjustments. (See table III.14.)\n\nHas AMT Affected Corporate Investment?\n\nStudies and comments by economists on the potential effect of AMT on investment have considered two ways in which AMT might affect investment. First, by increasing the average tax rate, AMT could reduce cash flow, discouraging investment. Second, AMT could change the marginal tax rate, which is the additional tax owed from an additional dollar of income. If AMT changed the incentives to invest, this in turn could lead to changes in investment. The material that follows summarizes the results and ideas of the various studies and comments.\n\n\tEffects of AMT on Cash Flow and Investment\n\nCorporations can finance investment through internal funds (retained earnings or profits) or external funds, such as debt or new stock issues. If a corporation must pay significantly higher costs for borrowed funds or newly issued stock than the opportunity cost of retained earnings, investment could be sensitive to the current profitability or cash-flow position of the firm. In circumstances where securities markets do not have the same information as managers in evaluating the potential investments of the firm, firms that must borrow from the markets may have to pay a premium for funds. If such premiums had to be paid, potential investments that could be profitable if the firm had sufficient cash flow might not be profitable, and investment could be curtailed or delayed until sufficient cash flow was available.\nA number of recent studies have found significant effects of cash flow on investment, and some authors have concluded that some corporations find external funds significantly more expensive than internal funds. These studies have concluded that this is more likely to be the case for smaller firms, firms that pay relatively small amounts of dividends, firms without access to the corporate bond market, and firms that cannot use working capital to smooth investment spending over time.\nIt is not clear how many AMT payers meet these conditions. No study has directly tested the extent to which such cash-flow constraints affect corporations that paid AMT. The tax return data we used were limited in their ability to directly test many of these factors. However, the data did show that most AMT is paid by relatively large corporations. To the extent that investment by large corporations is less dependent on current cash flow than is the case for small corporations, the effect of the AMT on investment would be limited. In addition, as AMT credits are reclaimed in the future, cash flow would increase at that time, possibly increasing investment.\n\n\tTaxes Affect Investment Incentives\n\nSeveral studies have analyzed the effects of AMT on incentives to invest. These studies have attempted to measure the extent to which AMT changes incentives to invest. While AMT increases the average tax rate paid by corporations, it may increase or decrease the marginal tax rate on new investment.\nA common approach to analyzing the effects of taxes on investment has been to calculate the extent that taxes increase the before-tax profit rate or pretax rate of return needed to generate a given after-tax profit or return on investment. Under these analyses, business income taxes have been found to effectively raise the price of investments. If investments cost more than they otherwise would, only those that earn relatively high profits over time will be worthwhile. One advantage to this type of analysis is that it can include all the features of the tax code that may affect the after-tax return to an investment.\nResearchers have studied how several business income tax provisions may affect incentives to invest. In particular, the incentives to invest can be affected through the tax rate, depreciation provisions, the deductibility or nondeductibility of interest payments and dividends, whether inflation is accounted for, loss provisions, and credits for certain types of investment. First, the lower the statutory business tax rate is, the lower is the cost of capital investments, and the greater is the incentive to invest. Second, the more accelerated the depreciation method and shorter the useful lives of business assets are, the lower is the cost of investment. For example, an immediate deduction of all investment spending (expensing) reduces the tax cost on investment to zero. Third, inflation can reduce the value of deductions that are based on historical cost. Indexing provisions would lower the cost of capital in times of inflation. Fourth, the deductibility or nondeductibility of sources of finance and the tax rates that apply to those sources in the individual income tax can affect the cost of investment. Fifth, the deductibility of prior-year losses from taxable income and whether such loss carryforwards earn interest to preserve their present value can affect the cost of capital. Finally, if tax credits are allowed for certain types of investment, the cost of those investments falls.\nAs shown in table IV.1, relative to the regular tax, AMT has a lower rate, a generally slower depreciation schedule, and additional limitations on credits and losses. Since the lower tax rate by itself would lower the cost of investment but the other two features would raise the cost of investment, it is not immediately clear whether the cost of investment would rise or fall. An evaluation of the effects of AMT must include all these features.\nAccelerated relative to economic depreciation (with low to moderate inflation)\n\n\t\tStudies of AMT and Incentives to Invest\n\nThe studies we reviewed found that relative to the regular tax, investment incentives can be increased or reduced by AMT, depending on several factors. In general, these studies focused on investment incentives for small projects that would not by themselves affect whether the corporation would be subject to the regular tax or AMT.\nFor firms permanently paying AMT, the incentives to invest were found to be greater under AMT than the regular tax for investments financed by equity. In this case, the value of the lower tax rate more than offset slower depreciation deductions, so the effective tax rate was lower.\nOn the other hand, investment incentives can be lower under AMT relative to the regular tax for debt-financed investments. Since interest is deductible under both AMT and the regular tax, the higher rate under the regular tax is a relative advantage because a dollar of interest payments will reduce taxes by a greater amount if the tax rate is higher. Since the regular tax code favors debt-financed over equity-financed investment at the corporate level because interest payments are deductible and dividends are not, AMT may reduce this distortion.\nFor investments financed with a mixture of debt and equity, the effective rate under AMT can be higher or lower depending on the amount of debt used. For an investment with the average mix of approximately one-third debt, effective rates are higher under the regular tax than under AMT.\nThe results cited above hold for firms that are either permanently paying only the regular tax or paying AMT. However, the effect of AMT on investment incentives is further complicated if firms switch back and forth from AMT status to regular tax status. In this case, the cost of capital will depend on the timing of investment relative to the time during which AMT is paid and the length of time the firm pays AMT and recovers its credits, as well as the source of financing for the investment. Investment incentives will depend on the timing of investment because of the differences in the depreciation rules and the tax rates between the two systems. If depreciation deductions are taken when the firm is paying the regular tax, and income from the investment is received when the firm is paying AMT, the cost of investment is relatively low. If depreciation deductions are taken when the firm is paying AMT and income is taxed at the higher regular tax rate, the cost of investment is higher.\nA recent study also showed that AMT may change the incentives to invest in the United States or abroad. Since the AMT tax rate is lower than the regular tax rate, firms operating abroad may find that AMT status presents an opportunity to bring profits back to the United States and pay tax at a temporarily lower tax rate. If these additional profits are reinvested here, domestic investment may rise. On the other hand, the depreciation schedule under AMT is closer to that for foreign investment under the regular tax, narrowing the differential that exists under the regular tax. AMT may thus reduce the relative disincentive to invest abroad, encouraging more investment abroad than otherwise.\nThe literature does not cover the effect of AMT on investment when an investment is large enough to potentially change the tax status of the firm from the regular tax to AMT or from a current net operating loss position to AMT. Some studies have examined investment incentives when corporations can be either in a net operating loss carryforward position or paying the regular tax. In this case, the size of net operating loss outstanding has an effect on incentives; a firm with a relatively small NOL carryforward is penalized for investment because of the loss of the time value of money on the loss. However, a large NOL carryforward could indicate that the firm will effectively be tax-exempt for the foreseeable future and investment may be encouraged. It is not clear at this time how AMT might change these incentives.\n\n\t\tHow Sensitive Is Investment to the Price or Cost of Capital?\n\nThe effect of AMT on investment is further complicated by the lack of consensus on the size of the effect on investment of changes in the incentive to invest. Analysts have widely differing views on how responsive investment is to changes in tax rules. Some studies have concluded that investment is very responsive to changes in tax incentives, while others have found small effects. The difficulty stems from a lack of consensus on the nontax determinants of investment; without a clear model of the other determinants of investment, it is difficult to isolate the effects of taxes, holding other factors fixed.\nIn particular, it has been difficult for investment models to isolate the effects of output and price. If output is the major determinant of investment as firms add capacity when output is growing, then investment may be relatively insensitive to the price of capital goods. If investment is sensitive to the price of capital goods, then taxes, including AMT, may have an important effect on investment by changing the effective price.\n\nMajor Contributors to This Report\n\n\tGeneral Government Division, Washington, D.C.\n\nJose R. Oyola, Assistant Director, Tax Policy     and Administration Issues Lawrence M. Korb, Assignment Manager Edward J. Nannenhorn, Economist-in-Charge Patricia H. McGuire, Senior Computer Specialist The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent.\nU.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000  or by using fax number (301) 258-4066, or TDD (301) 413-0006.\nEach day, GAO issues a list of newly available reports and testimony.  To receive facsimile copies of the daily list or any list from the past 30 days, please call (301) 258-4097 using a touchtone phone.  A recorded menu will provide information on how to obtain these lists.\n\n\t\tAddress Correction Requested","output":"Why GAO Did This Study\n\nPursuant to a congressional request, GAO provided information on the corporate alternative minimum tax (AMT), focusing on: (1) the corporations that paid AMT between 1987 and 1992; (2) whether AMT achieved its purpose; and (3) how AMT might affect corporate investment.\n\nWhat GAO Found\n\nGAO found that: (1) AMT accelerated tax payments of $27.4 billion and corporations used credits totalling $5.8 billion from 1987 to 1992; (2) at the end of 1992, corporations had accumulated $21.6 billion in credits that would result in lower tax revenues in the future; (3) of the 2.1 million corporations subject to AMT, 2,000 large corporations paid 85 percent of all AMT in 1992; (4) the two AMT provisions that produced the largest increases in taxable income were the depreciation adjustment, used by 87 percent of all AMT payers, and the adjusted current earnings adjustment, used by 67 percent of all AMT payers; (5) manufacturing, transportation, and finance industries paid the most AMT; (6) AMT has achieved its objectives of making profitable corporations pay tax and causing corporations that report positive amounts of income in a particular year to pay some tax in that year; (7) the effects of AMT on corporate investment are unclear due to insufficient data; and (8) while AMT might reduce present cash flows, future cash flows may be enhanced as taxpayers recover AMT credits."}
{"id":"gao_GAO-16-204T","pid":"gao_GAO-16-204T_0","input":"\tBackground\n\nThe federal government invests more than $80 billion annually in IT, but  many of these investments fail to meet cost and schedule expectations or  make significant contributions to mission-related outcomes. We have  previously testified that the federal government has spent billions of  dollars on failed IT investments, such as  the Department of Defense\u2019s (DOD) Expeditionary Combat Support  System, which was canceled in December 2012, after spending more  than a billion dollars and failing to deploy within 5 years of initially  obligating funds;  the Department of Homeland Security\u2019s Secure Border Initiative  Network program, which was ended in January 2011, after the  department obligated more than $1 billion to the program, because it  did not meet cost-effectiveness and viability standards;  the Department of Veterans Affairs\u2019 (VA) Financial and Logistics  Integrated Technology Enterprise program, which was intended to be  delivered by 2014 at a total estimated cost of $609 million, but was  terminated in October 2011 due to challenges in managing the  program;  the Farm Service Agency\u2019s Modernize and Innovate the Delivery of  Agricultural Systems program, which was to replace aging hardware  and software applications that process benefits to farmers, was halted  after investing about 10 years and at least $423 million, while only  delivering about 20 percent of the functionality that was originally  planned.  the Office of Personnel Management\u2019s Retirement Systems  Modernization program, which was canceled in February 2011, after  spending approximately $231 million on the agency\u2019s third attempt to  automate the processing of federal employee retirement claims;  the National Oceanic and Atmospheric Administration, DOD, and the  National Aeronautics and Space Administration\u2019s National Polar- orbiting Operational Environmental Satellite System, which was a tri- agency weather satellite program that the White House Office of  Science and Technology stopped in February 2010 after the program  spent 16 years and almost $5 billion; and  the VA Scheduling Replacement Project, which was terminated in  September 2009 after spending an estimated $127 million over 9  years.\nThese and other failed IT projects often suffered from a lack of disciplined  and effective management, such as project planning, requirements  definition, and program oversight and governance. In many instances,  agencies had not consistently applied best practices that are critical to  successfully acquiring IT investments.\nFederal IT projects have also failed due to a lack of oversight and  governance. Executive-level governance and oversight across the  government has often been ineffective, specifically from chief information  officers (CIO). For example, we have reported that not all CIOs had the  authority to review and approve the entire agency IT portfolio and that  CIOs\u2019 authority was limited.\n\n\tRecent Legislation Can Improve Agencies\u2019 Management of IT\n\nRecognizing the severity of issues related to government-wide  management of IT, in December 2014, Congress enacted IT reform  legislation, FITARA. The law holds promise for improving agencies\u2019  acquisition of IT and enabling Congress to monitor agencies\u2019 progress  and hold them accountable for reducing duplication and achieving cost  savings. FITARA includes specific requirements related to seven areas.\nAgency CIO authority enhancements. Agency CIOs are required  to (1) approve the IT budget requests of their respective agencies, (2)  certify that IT investments are adequately implementing the Office of  Management and Budget\u2019s (OMB) incremental development  guidance, (3) review and approve contracts for IT, and (4) approve the  appointment of other agency employees with the title of CIO.\nEnhanced transparency and improved risk management. OMB  and agencies are to make publicly available detailed information on  federal IT investments, and agency CIOs are to categorize their IT  investments by risk. Additionally, in the case of major IT investments  rated as high risk for 4 consecutive quarters, the law requires that the  agency CIO and the investment\u2019s program manager conduct a review  aimed at identifying and addressing the causes of the risk.\nPortfolio review. Agencies are to annually review IT investment  portfolios in order to, among other things, increase efficiency and  effectiveness, and identify potential waste and duplication. In  developing the associated process, the law requires OMB to develop  standardized performance metrics, to include cost savings, and to  submit quarterly reports to Congress on cost savings.\nFederal data center consolidation initiative (FDCCI). Agencies are  required to provide OMB with a data center inventory, a strategy for  consolidating and optimizing the data centers (to include planned cost  savings), and quarterly updates on progress made. The law also  requires OMB to develop a goal of how much is to be saved through  this initiative, and provide annual reports on cost savings achieved.\nExpansion of training and use of IT cadres. Agencies are to update  their acquisition human capital plans to address supporting the timely  and effective acquisition of IT. In doing so, the law calls for agencies  to consider, among other things, establishing IT acquisition cadres or  developing agreements with other agencies that have such cadres.\nMaximizing the benefit of the federal strategic sourcing initiative.  Federal agencies are required to compare their purchases of services  and supplies to what is offered under the Federal Strategic Sourcing  initiative. OMB is also required to issue related regulations.\nGovernment-wide software purchasing program. The General  Services Administration is to develop a strategic sourcing initiative to  enhance government-wide acquisition and management of software.  In doing so, the law requires that, to the maximum extent practicable,  the General Services Administration should allow for the purchase of  a software license agreement that is available for use by all Executive  Branch agencies as a single user.\nIn addition, in June 2015, OMB released guidance describing how  agencies are to implement the law. OMB\u2019s guidance states that it is  intended to, among other things: assist agencies in aligning their IT resources to statutory  requirements; establish government-wide IT management controls that will meet the  law\u2019s requirements, while providing agencies with flexibility to adapt to  unique agency processes and requirements;  clarify the CIO\u2019s role and strengthen the relationship between agency  CIOs and bureau CIOs; and  strengthen CIO accountability for IT cost, schedule, performance, and  security.\nIn this regard, the guidance reiterates OMB\u2019s existing guidance on  PortfolioStat, the IT Dashboard, and the federal data center consolidation  initiative, and expands its existing guidance on TechStat sessions.\nThe guidance includes several actions agencies are to take to establish a  basic set of roles and responsibilities (referred to as the \u201ccommon  baseline\u201d) for CIOs and other senior agency officials that are needed to  implement the authorities described in the law. For example, agencies  were required to conduct a self-assessment and submit a plan describing  the changes they will make to ensure that common baseline  responsibilities are implemented. Agencies were to submit their plans to  OMB\u2019s Office of E-Government and Information Technology by August  15, 2015, and make portions of the plans publicly available on agency  websites no later than 30 days after OMB approval. As of October 30,  2015, none of the 24 Chief Financial Officers Act agencies had made  their plans publicly available.\nThe guidance also noted that OMB will help support agency  implementation of the common baseline by, for example, requiring the  Federal CIO Council to, on quarterly basis, discuss topics related to the  implementation of the common baseline and to assist agencies by  sharing examples of agency governance processes and IT policies.  Further, by June 30, 2015, the President\u2019s Management Council was to  select three members from the council to provide an update on  government-wide implementation of FITARA on a quarterly basis through  September 2016. However, as of October 28, 2015, OMB officials stated  that the President\u2019s Management Council had not yet selected members  to provide these updates.\nIn addition, OMB recently issued a memorandum regarding commodity IT  acquisitions and noted that agencies buy and manage their IT in a  fragmented and inefficient manner which conflicts with the goals of  FITARA. Among other things, the memorandum directed agencies to  standardize laptop and desktop configurations for common requirements  and reduce the number of contracts for laptops and desktops by  consolidating purchasing. The memorandum notes that OMB intends for  agencies to implement standard configurations over time by using  approved contracts, with a government-wide goal of 75 percent of  agencies using approved contracts by fiscal year 2018. The  memorandum requires agencies to develop transition plans to achieve  this goal and submit them to OMB by February 28, 2016.\n\n\tIT Acquisitions and Operations Recently Added as a GAO High-Risk Area\n\nOur government-wide high-risk area Improving the Management of IT  Acquisitions and Operations highlights critical IT initiatives, four of which  align with provisions in FITARA: (1) an emphasis on incremental  development, (2) a key transparency initiative, (3) efforts to consolidate  data centers, and (4) efforts to streamline agencies\u2019 portfolios of IT  investments. Our high-risk report notes that implementation of these  initiatives had been inconsistent, and more work remained to demonstrate  progress in achieving IT acquisition outcomes. Implementing the  provisions from the law, along with our outstanding recommendations, will  be necessary for agencies to demonstrate progress in addressing this  high-risk area.\nOMB has emphasized the need to deliver investments in smaller parts, or  increments, in order to reduce investment risk, deliver capabilities more  quickly, and facilitate the adoption of emerging technologies. In 2010, it  called for agencies\u2019 major investments to deliver functionality every 12  months and, since 2012, every 6 months. However, we recently reported  that less than half of selected investments at five major agencies planned  to deliver capabilities in 12-month cycles. Accordingly, we  recommended that OMB develop and issue clearer guidance on  incremental development and that selected agencies update and  implement their associated policies. Most agencies agreed with our  recommendations or had no comment.\nIn January 2010, the Federal CIO began leading TechStat sessions\u2014 face-to-face meetings to terminate or turn around IT investments that are  failing or are not producing results. These meetings involve OMB and  agency leadership and are intended to increase accountability and  improve performance. OMB reported that federal agencies achieved over  $3 billion in cost savings or avoidances as a result of these sessions in  2010. Subsequently, OMB empowered agency CIOs to hold their own  TechStat sessions within their respective agencies.\nWe have since reported that OMB and selected agencies held multiple  TechStats, but additional OMB oversight was needed to ensure that these  meetings were having the appropriate impact on underperforming  projects and that resulting cost savings were valid. We concluded that  until OMB and agencies develop plans to address these investments, the  investments would likely remain at risk. Among other things, we  recommended that OMB require agencies to address high-risk  investments. OMB generally agreed with this recommendation.\nHowever, as of October 28, 2015, OMB has only conducted one TechStat  review in the last 2 years. In particular, between March 2013 and October  2015, OMB held one TechStat on the Department of State\u2019s legacy  consular systems investment in July 2015. Moreover, OMB has not listed  any savings from TechStats in any of its required quarterly reporting to  Congress since June 2012.\nTo help the government achieve transparency while managing legacy  investments, in June 2009, OMB established a public website (referred to  as the IT Dashboard) that provides detailed information on major IT  investments at 27 federal agencies, including ratings of their performance  against cost and schedule targets. Among other things, agencies are to  submit ratings from their CIOs, which, according to OMB\u2019s instructions,  should reflect the level of risk facing an investment relative to that  investment\u2019s ability to accomplish its goals.\nAs of August 2015, according to the IT Dashboard, 163 of the federal  government\u2019s 738 major IT investments\u2014totaling $9.8 billion\u2014were in  need of management attention (rated \u201cyellow\u201d to indicate the need for  attention or \u201cred\u201d to indicate significant concerns). (See fig. 1.)\nOver the past several years, we have made over 20 recommendations to  help improve the accuracy and reliability of the information on the IT  Dashboard and to increase its availability. Most agencies agreed with  our recommendations or had no comment.\nIn addition to spending money on new IT development, agencies also  plan to spend a significant amount of their fiscal year 2016 IT budgets on  the operations and maintenance (O&M) of legacy (i.e., steady-state)  systems. From fiscal year 2010 to fiscal year 2016, this amount has  increased, while the amount invested in developing new systems has  decreased by about $7.1 billion. (See figure 2.) This raises concerns  about agencies\u2019 ability to replace systems that are no longer cost- effective or that fail to meet user needs.\nOf the more than $79 billion budgeted for federal IT in fiscal year 2016,  26 federal agencies plan to spend about $60 billion, more than three- quarters of the total budgeted, on the O&M of legacy investments. Figure  3 provides a visual summary of the relative cost of major and nonmajor  investments, both in development and O&M.\nGiven the size and magnitude of these investments, it is important that  agencies effectively manage the O&M of existing investments to ensure  that they (1) continue to meet agency needs, (2) deliver value, and (3) do  not unnecessarily duplicate or overlap with other investments. To  accomplish this, agencies are required by OMB to perform annual  operational analyses of these investments, which are intended to serve  as periodic examination of an investment\u2019s performance against, among  other things, established cost, schedule, and performance goals.\nHowever, we have reported that agencies were not consistently  performing such analyses and that billions of dollars in O&M investments  had not undergone needed analyses. Specifically, as detailed in our  November 2013 report, only 1 of the government\u2019s 10 largest O&M  investments underwent an OMB-required operational analysis. We  recommended that operational analyses be completed on the remaining 9  investments. Most agencies generally agreed with our recommendations.\nTo improve the efficiency, performance, and environmental footprint of  federal data center activities, OMB established the federal data center  consolidation initiative in February 2010. In a series of reports, we found  that, while data center consolidation could potentially save the federal  government billions of dollars, weaknesses existed in the execution and  oversight of the initiative.\nMost recently, we reported that, as of May 2014, agencies collectively  reported that they had a total of 9,658 data centers; as of May 2015,  they had closed 1,684 data centers and were planning to close an  additional 2,431\u2014for a total of 4,115\u2014by the end of September 2015.  We also noted that between fiscal years 2011 and 2017, agencies  reported planning a total of about $5.3 billion in cost savings and  avoidances due to the consolidation of federal data centers. In  correspondence subsequent to the publication of our report, DOD\u2019s Office  of the CIO identified an additional $2.1 billion in savings to be realized  beyond fiscal year 2017, which increased the total savings across the  federal government to about $7.4 billion. Further, since our May 2014  report we received additional information from other agencies about their  actual 2014 cost savings and revised plans for future savings. This  information is shown in table 1, which provides a summary of agencies\u2019  total data center cost savings and cost avoidances between fiscal years  2011 and 2017, as well as DOD cost savings and cost avoidances to be  realized beyond 2017.\nHowever, in our September 2014 report, we noted that planned savings  may be understated because of difficulties agencies encountered when  calculating savings and communicating their estimates to OMB. We made  recommendations to ensure the initiative improves efficiency and  achieves cost savings. Most agencies agreed with our recommendations  or did not comment.\nTo better manage existing IT systems, OMB launched the PortfolioStat  initiative, which requires agencies to conduct an annual, agency-wide IT  portfolio review to, among other things, reduce commodity IT spending  and demonstrate how their IT investments align with the agency\u2019s mission  and business functions. In November 2013, we reported that agencies  continued to identify duplicative spending as part of PortfolioStat and that  this initiative had the potential to save at least $5.8 billion through fiscal  year 2015; however, weaknesses existed in agencies\u2019 implementation of  the initiative, such as limitations in the CIOs\u2019 authority. We made more  than 60 recommendations to improve OMB\u2019s and agencies\u2019  implementation of PortfolioStat. OMB partially agreed with our  recommendations, and responses from 21 of the agencies varied, with  some agreeing and others not.\nIn April 2015, we reported that agencies decreased their planned  PortfolioStat savings to approximately $2 billion\u2014a 68 percent reduction  from the amount they reported to us in 2013. Additionally, although  agencies also reported having achieved approximately $1.1 billion in  savings, inconsistencies in OMB\u2019s and agencies\u2019 reporting made it difficult  to reliably measure progress in achieving savings. Among other things,  we made recommendations to OMB aimed at improving the reporting of  achieved savings, with which it agreed.\nWe have also recently reported on two additional key areas of agency\u2019s  IT spending portfolio: software licensing and mobile devices.\nRegarding software licensing, we recently reported that better  management was needed to achieve significant savings government- wide. In particular, 22 of the 24 major agencies we reviewed did not  have comprehensive license policies, and only 2 had comprehensive  license inventories. We recommended that OMB issue needed  guidance to agencies and made more than 130 recommendations to  the agencies to improve their policies and practices for managing  software licenses. OMB disagreed with the need for guidance.  However, we believe that without such guidance, agencies will likely  continue to lack the visibility into what needs to be managed. Most  agencies generally agreed with the recommendations or had no  comments.\nWe have also reported that most of the 15 agencies in our mobile  devices review did not have an inventory of mobile devices and  associated services, and only 1 of the 15 agencies we reviewed had  documented procedures for monitoring spending. Accordingly, we  recommended that the agencies take actions to improve their  inventories and control processes and that OMB measure and report  progress in achieving cost savings. OMB and 14 of the agencies  generally agreed with the recommendations or had no comment. The  Department of Defense partially agreed, and we maintained that  actions were needed.\n\n\t\tActions Needed to Address High-Risk Area\n\nIn our February 2015 high-risk report, we identified actions that OMB and  the agencies need to take to make progress in this area. These include  implementing the recently enacted statutory requirements promoting IT  acquisition reform, as well as implementing our previous  recommendations, such as updating the public version of the IT  Dashboard throughout the year. As noted in that report, we have made  multiple recommendations to improve agencies\u2019 management of their IT  acquisitions, many of which have been discussed in this statement. In the  last 6 years we made approximately 800 recommendations to multiple  agencies. As of October 2015, about 32 percent of these  recommendations had been implemented.\nAlso in our high-risk report, we stated that OMB and agencies will need to  demonstrate measurable government-wide progress in the following key  areas:  implement at least 80 percent of GAO\u2019s recommendations related to  the management of IT acquisitions and operations within 4 years. ensure that a minimum of 80 percent of the government\u2019s major  acquisitions deliver functionality every 12 months. achieve no less than 80 percent of the planned PortfolioStat savings  and 80 percent of the planned savings planned for data center  consolidation.\nIn conclusion, with the recent passage of IT reform legislation, the federal  government has an opportunity to improve the transparency and  management of IT acquisition and operations, and strengthen the  authority of CIOs to provide needed direction and oversight. Further, by  identifying the management of IT acquisitions and operations as a new  government-wide high-risk area we are bringing necessary attention to  several critical IT initiatives in need of additional congressional oversight.  OMB and federal agencies should expeditiously implement the  requirements of the legislation and continue to implement our previous  recommendations. To help ensure that these improvements are achieved,  continued congressional oversight of OMB\u2019s and agencies\u2019  implementation efforts is essential.\nChairmen Meadows and Hurd, Ranking Members Connolly and Kelly,  and Members of the Subcommittees, this completes my prepared  statement. I would be pleased to respond to any questions that you may  have at this time.\n\n\tGAO Contacts and Staff Acknowledgments\n\nFor additional information about this high-risk area, contact David A.  Powner at (202) 512-9286 or pownerd@gao.gov, Carol Cha at (202) 512- 4456 or chac@gao.gov, or Valerie Melvin at (202) 512-6304 or  melvinv@gao.gov. Individuals who made key contributions to this  testimony are Kevin Walsh (Assistant Director), Chris Businsky, Rebecca  Eyler, Kaelin Kuhn, and Jessica Waselkow.\n\nRelated GAO Products\n\nTelecommunications: Agencies Need Better Controls to Achieve  Significant Savings on Mobile Devices and Services. GAO-15-431. May  21, 2015.\nInformation Technology: Additional OMB and Agency Actions Needed to  Ensure Portfolio Savings Are Realized and Effectively Tracked.  GAO-15-296. April 16, 2015.\nFederal Chief Information Officers: Reporting to OMB Can Be Improved  by Further Streamlining and Better Focusing on Priorities. GAO-15-106.  April 2, 2015.\nHigh-Risk Series: An Update. GAO-15-290. February 11, 2015.\nData Center Consolidation: Reporting Can be Improved to Reflect  Substantial Planned Savings. GAO-14-713. September 25, 2014.\nFederal Software Licenses: Better Management Needed to Achieve  Significant Savings Government-Wide. GAO-14-413. May 22, 2014.\nInformation Technology: Agencies Need to Establish and Implement  Incremental Development Policies. GAO-14-361. May 1, 2014.\nIT Dashboard: Agencies Are Managing Investment Risk, but Related  Ratings Need to Be More Accurate and Available. GAO-14-64. December  12, 2013.\nInformation Technology: Agencies Need to Strengthen Oversight of  Multibillion Dollar Investments in Operations and Maintenance.  GAO-14-66. November 6, 2013.\nInformation Technology: Additional OMB and Agency Actions Are Needed  to Achieve Portfolio Savings. GAO-14-65. November 6, 2013.\nInformation Technology: Additional Executive Review Sessions Needed  to Address Troubled Projects. GAO-13-524. June 13, 2013.\nInformation Technology: Agencies Need to Strengthen Oversight of  Billions of Dollars in Operations and Maintenance Investments.  GAO-13-87. October 16, 2012.\nIT Dashboard: Accuracy Has Improved, and Additional Efforts Are Under  Way to Better Inform Decision Making. GAO-12-210. November 7, 2011.\nThis 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.","output":"Why GAO Did This Study\n\nThe federal government invests more than $80 billion annually in IT. However, these investments frequently fail, incur cost overruns and schedule slippages, or contribute little to mission-related outcomes. As GAO has previously reported, this underperformance of federal IT projects can be traced to a lack of disciplined and effective management and inadequate executive-level oversight. Accordingly, in December 2014, IT reform legislation was enacted, aimed at improving agencies' acquisition of IT. Further, earlier this year GAO added improving the management of IT acquisitions and operations to its high-risk list\u2014a list of agencies and program areas that are high risk due to their vulnerabilities to fraud, waste, abuse, and mismanagement, or are most in need of transformation.\nThis statement provides information on FITARA and GAO's designation of IT acquisitions and operations as a high-risk area. In preparing this statement, GAO relied on its previously published work in these areas.\n\nWhat GAO Found\n\nThe law commonly known as the Federal Information Technology Acquisition Reform Act (FITARA) was enacted in December 2014 and aims to improve federal information technology (IT) acquisition and operations. The law includes specific requirements related to seven areas. For example, it addresses\nAgency Chief Information Officer (CIO) authority enhancements . Among other things, agency CIOs are required to approve the IT budget requests of their respective agencies and certify that IT investments are adequately implementing the Office of Management and Budget's (OMB) incremental development guidance.\nEnhanced transparency and improved risk management . OMB and agencies are to make publicly available detailed information on federal IT investments, and agency CIOs are to categorize IT investments by risk. Additionally, if major IT investments are rated as high risk for 4 consecutive quarters, the agencies are to conduct a review of the investment.\nPortfolio review. Agencies are to annually review IT investment portfolios in order to, among other things, increase efficiency and effectiveness, and identify potential waste and duplication. OMB is required to develop standardized performance metrics, to include cost savings, and to submit quarterly reports to Congress on cost savings.\nFederal data center consolidation initiative. Agencies are required to provide OMB with a data center inventory, a strategy for consolidating and optimizing the data centers (to include planned cost savings), and quarterly updates on progress made. OMB is required to develop a goal of how much is to be saved through this initiative, and report on progress annually.\nMaximizing the benefit of the federal strategic sourcing initiative . Federal agencies are required to compare their purchases of services and supplies to what is offered under the Federal Strategic Sourcing initiative.\nOMB has released guidance for agencies to implement provisions of FITARA, which includes actions agencies are to take regarding responsibilities for CIOs. The guidance also reiterates OMB's existing guidance on IT portfolio management, a key transparency website, and the federal data center consolidation initiative; and expands its existing guidance on reviews of at-risk investments. Agencies were to conduct a self-assessment and submit a plan to OMB by August 2015 describing the changes they will make to ensure that responsibilities are implemented. Further, portions of these plans are required to be made publicly available 30 days after OMB's approval; as of October 30, 2015, none of the 24 Chief Financial Officers Act agencies had done so.\nFurther, FITARA's provisions are similar to areas covered by GAO's high-risk area to improve the management of IT acquisitions and operations. For example, GAO has noted that improvements are needed in federal efforts to enhance transparency, consolidate data centers, and streamline agencies' IT investment portfolios. To demonstrate progress in addressing this high-risk area, agencies will need to implement the legislation's provisions and GAO's outstanding recommendations.\n\nWhat GAO Recommends\n\nOver the last 6 years, GAO made about 800 recommendations to OMB and agencies to improve acquisition and operations of IT. As of October 2015, about 32 percent of these had been implemented. It will be critical for agencies to implement the remaining GAO recommendations and the requirements of FITARA to achieve improvements.\n, Carol Cha at (202) 512-4456 or chac@gao.gov , or Valerie Melvin at (202) 512-6304 or melvinv@gao.gov ."}
{"id":"gao_AIMD-99-17","pid":"gao_AIMD-99-17_0","input":"\tBackground\n\nThe federal government levies excise taxes on entities and individuals for the purpose of financing general federal activities and specific government programs. Several different bureaus and offices within Treasury collected about $59 billion of excise taxes in fiscal year 1997. The Bureau of Alcohol, Tobacco, and Firearms accounted for about $13 billion in excise taxes on alcohol, tobacco products, and firearms while the U.S. Customs Service accounted for about $1 billion in excise taxes on imported and exported goods and services.\nHowever, the majority of excise taxes are accounted for by IRS. In fiscal year 1997, IRS collected about $45 billion in excise taxes on the purchase, use, or inventory of various types of goods or services, such as gasoline and airline tickets. The various excise taxes accounted for by IRS are deposited into the general fund of the Treasury and into nine different trust funds, which are administered by six agencies or federal entities. The trust funds that received fiscal year 1997 tax revenues are shown in table 1. A list of excise taxes by trust fund is included in appendix II.\nAdministering agencies for the trust funds receiving excise tax revenue rely on the Treasury to accurately collect and distribute federal tax revenue to the appropriate trust funds. Because it collects federal tax revenue and then distributes it to government trust funds, Treasury is considered a servicing organization by agencies administering the trust funds as well as by the auditors of these agencies. Consequently, the administering agencies and their auditors need to rely on Treasury, through its various bureaus and offices, including IRS, to properly account for and distribute the amounts transferred from the government\u2019s general fund to the applicable trust funds.\nExcise taxes are deposited into the general fund as received. However, the information that ultimately determines how these receipts are actually distributed is generally submitted via the Form 720, Quarterly Federal Excise Tax Return. Because data are not available to allocate excise taxes to the appropriate trust funds when deposits are made, Treasury uses a process to estimate the initial distribution of excise taxes. This process involves the use of economic models prepared by the Office of Tax Analysis (OTA) to estimate the initial distribution of tax receipts. Treasury\u2019s Financial Management Service (FMS) uses these estimates to prepare entries for the initial distributions to the trust funds, which are recorded by the Bureau of the Public Debt (BPD) in the books and records of the trust funds maintained by Treasury. Subsequent to this initial distribution, IRS certifies quarterly the amounts that should have been distributed to the excise tax-related trust funds based on the tax returns. FMS uses these certifications to prepare adjustments to the initial trust fund distributions. These adjustments are recorded by BPD. There is typically a 6-month lag between the quarter end and the excise tax certification by IRS. Figure 1 provides an overview of the entire process of collecting, distributing, and certifying excise tax revenue reported to the trust funds.\nIRS relies on a combination of manual and automated procedures to prepare its certification of excise taxes to be distributed to the trust funds. IRS calculates the trust fund distributions based on assessment information in the master file. As quarterly excise tax returns are received, IRS personnel input the liability amounts by type of excise tax, such as Diesel Fuel Tax, into its master file. The tax types are identified by IRS numbers, or abstract numbers, which are preprinted on the Form 720. It is these abstract numbers that ultimately determine how amounts are distributed to the appropriate trust funds.\nThe assessment information by type of excise tax is electronically transmitted from the master file to IRS\u2019 Automated Quarterly Excise Tax Listing (AQETL) system. An IRS analyst, who has sole responsibility for preparing the excise tax certifications, accesses this system, analyzes the data for reasonableness by, for example, comparing current period assessments to amounts reported in prior periods, and makes adjustments, as necessary. The analyst may identify necessary adjustments by analyzing significant variations from prior quarter reported assessment amounts. After making any needed adjustments, the analyst generates a report from the AQETL system which summarizes the assessment data by excise tax type. The analyst uses this report to prepare the certifications for all tax distributions other than taxes related to the Highway, Airport & Airway, and Inland Waterways Trust Funds.\nFor the Highway, Airport & Airway, and Inland Waterways Trust Funds, the analyst manually enters the assessment data from the report generated from the AQETL system onto electronic spreadsheets. These spreadsheets contain distribution rates to allocate the assessments between the trust funds and the general fund based on the assessment data entered by the analyst. The distributions from these spreadsheets, and the AQETL-system report for the other taxes, become the basis for preparing the quarterly excise tax certification letters. IRS submits the certification letters to FMS, which uses it to prepare adjustments to the initial distributions based on the OTA estimates to bring them in line with the IRS certified amounts. These adjustments are sent to BPD, which records the entries in the books and records of the trust funds maintained by Treasury. Figure 2 shows IRS\u2019 process for certifying the trust fund distributions.\nExcise Tax Section  (Cincinnati Service  Center)\nReview Master File   and AQETL data.   Research apparent  errors and correct  data in Master File  as necessary.\nReview assessment  information, make any  adjustments in AQETL,  generate AQETL  report.\nEnter assessment data  for Highway Trust  Fund into electronic  spreadsheet.\n\n\tObjectives, Scope, and Methodology\n\nThe objective of the agreed-upon procedures work was to assist the Inspectors General of the Department of Transportation and Department of Labor in ascertaining whether the net excise tax collections and excise tax certifications reported by IRS for the fiscal year ended September 30, 1997, were supported by the underlying records. The objectives of this report are to discuss the underlying internal control weaknesses that allowed errors identified in the agreed-upon procedures work to occur and to provide recommendations for correcting these weaknesses. See appendix I for a detailed discussion on the scope and methodology used to accomplish the objectives.\nWe conducted our work primarily from October 1997 through February 1998, with some follow-up work through June 1998, in accordance with generally accepted government auditing standards.\n\n\tTaxpayer Errors Not Identified\n\nFor the majority of excise taxes reported on the Form 720, taxpayers are required to provide the purchase, use, or inventory amounts of the goods or services (e.g., number of gallons of fuel) used in determining the tax assessment. The taxpayer multiplies these amounts against the preprinted tax rates on the Form 720 to report the excise tax assessment. Thus, information contained on the tax form allows IRS to mathematically verify liability amounts reported by the taxpayer.\nHowever, we found that IRS did not require its personnel to verify that the tax assessment amounts calculated by the taxpayers and reported on the returns agree with the supporting information provided on the tax returns. This led to inconsistencies between the assessed amount and supporting information provided by taxpayers, which IRS did not detect and correct. In 13 of the 230 taxpayer returns we reviewed, either assessment amounts we recalculated based on information contained in the return differed from the tax assessment reported on the return or all the required information was not included on the return to verify the assessment amount calculated by the taxpayer.\nIRS procedure manuals required that IRS personnel review tax returns that contain $1 million or more in excise tax assessments for reasonableness and accuracy. The manuals provided guidance for performing the reviews; however, this guidance was too general. As a result, the types of reviews performed by IRS analysts varied. In some cases, tax calculations were verified and taxpayers were contacted if data were missing, while in other cases, the return was only scanned for reasonableness.\nThe lack of adequate and consistent review procedures increases the likelihood that incorrect assessment amounts reported by the taxpayer on the tax return would not be detected and corrected by IRS.\nAs a result of our agreed upon procedures work, IRS officials indicated that IRS has acted to address the internal control weaknesses discussed above.\nSpecifically, these officials indicated that IRS implemented procedures to improve the review of tax returns over $1 million. Also, IRS now requires the math verification of all tax assessments, as applicable, and analysts are required to follow-up with taxpayers to clarify inconsistent information on tax returns.\nWe also noted that IRS centralized its excise tax processing in the Cincinnati Service Center to improve the consistency of processing and reviewing excise tax returns and to more closely monitor refund claims. Within that center, IRS established an Excise Program Section that specializes in reviewing excise tax returns and refund claims. It is significant that many of the errors we identified during our agreed upon procedures work related to tax returns processed at other service centers prior to IRS centralizing its excise tax processing.\n\n\tInputting Errors Not Caught Through Review\n\nAs discussed above, taxpayers report the majority of excise taxes to IRS quarterly using the Form 720. Taxpayers record on the Form 720 assessment amounts owed for each abstract number listed on the form.  IRS uses the Form 720 to input assessment information into the master files.\nWe found errors in this input process in fiscal year 1997. Specifically, we found that all or a portion of the assessment amounts for 13 of the 230 taxpayer returns reviewed were recorded in incorrect abstract numbers in the master file. In one case, IRS incorrectly recorded assessments of $176 million from the tax return in one abstract, yet the tax return indicated that this amount should have been divided among eight different abstracts. Because the abstract numbers identify the type of excise tax (for example, Diesel Fuel Tax) to which the assessment applies and are used in the certification of amounts ultimately distributed to the various trust funds, this directly affected the accuracy of IRS\u2019 certifications. IRS officials indicated that these errors would be corrected in subsequent certifications made in fiscal year 1998.\nThe structure of the Form 720 itself contributed to several errors. The Form 720 tax return is a complex tax form consisting of three distinct parts and two additional schedules. Information on the schedules includes details on excise tax assessments by semimonthly period (Schedule A), and adjustments to correct errors in previously filed Form 720s and claims against previously paid taxes (Schedule C). The information on Schedule C containing the claim and adjustment data is broken down by abstract number; however, it is aggregated into one total line on page 2 of the Form 720. Consequently, taxpayers record on the Form 720 assessment amounts owed for each abstract number listed on the form but do not reflect claims and adjustments, by abstract, on pages 1 and 2 of the Form 720. To assist in processing the tax return, IRS requires its staff to copy claims and adjustments listed on Schedule C, by abstract, to pages 1 and 2 of the Form 720. This procedure provides the data entry staff with the capability of inputting assessment, claim, and adjustment amounts, by abstract, directly off the first two pages of the tax return form without having to scan the schedules for claim and adjustment amounts to be input. However, the procedure of IRS staff manually copying claim and adjustment amounts from the schedules prepared by taxpayers increases the risk of errors, and consequently the likelihood that assessment, claim, and adjustment amounts will be incorrectly recorded in the master files.\nNine of the 13 errors that we identified were the result of (1) IRS personnel incorrectly copying the adjustment information from the Schedule C to pages 1 and 2 of the tax return, (2) IRS personnel failing to copy adjustment information from the Schedule C to pages 1 and 2 of the tax return, or (3) data entry personnel misreading the handwritten adjustments made by other IRS staff on the Form 720 when inputting this information into the master files. For example, in one case, a taxpayer claimed a credit of $683,000, consisting of a $685,000 decrease for gasoline tax and a $2,000 increase for aviation fuel tax. However, IRS staff incorrectly recopied the credit amounts from the Schedule C to page 1 of the Form 720, resulting in the entire amount being recorded as gasoline tax. In another case, a taxpayer claimed a credit for $681,000 for taxed diesel fuel. An IRS employee copied the abstract number unclearly to page 1 of the Form 720, and the amount was erroneously recorded as a credit to tax on dyed diesel fuel used in trains.\nIn total, in the 13 cases, we identified $179 million of IRS errors in inputting excise tax return information to the master files. The Comptroller General\u2019s Standards for Internal Controls in the Federal Government specifies that transactions are to be promptly recorded and properly classified. The identified errors may have been avoided had procedures been in place to verify the input process. Also, errors resulting from the need for IRS staff to transfer information from the attached schedules to pages 1 and 2 of the Form 720 for each abstract could be avoided by revising the tax return form so that taxpayers, and not IRS personnel, enter the claim and adjustment amounts by abstract from Schedule C to pages 1 and 2 of the tax return.\n\n\tCertification Errors Not Prevented or Detected\n\nAs discussed previously, one analyst is responsible for compiling the quarterly certifications. This involves accessing quarterly the assessment information from the AQETL system, analyzing and adjusting these data as necessary and, for the Highway Trust Fund, inputting these data into an electronic spreadsheet, provided by OTA, to derive the quarterly certifications. We found that there is no supervisory review of the analyst\u2019s work until the certification letters are prepared, at which point they are forwarded to the Branch Chief for a high-level review and signature. We found no evidence that a detailed supervisory review is performed of the documentation supporting the certifications at any point during the certification process. Finally, we found that IRS does not review the distribution rates contained on the OTA-provided spreadsheet used to allocate certain assessments between the general fund and the Highway Trust Fund. The absence of such reviews was a factor in not detecting numerous errors in the certifications performed in fiscal year 1997 with respect to the Highway Trust Fund and the general fund.\n\n\t\tSupport for Certifications Not Adequately Reviewed\n\nIRS\u2019 AQETL system contains the assessment data electronically transmitted from the master file. Because it is not integrated with the electronic spreadsheet used to prepare the certifications for the Highway Trust Fund, manual data entry is necessary to accomplish the calculations and summarize the information. This information is a basis for preparing the certifications. Without adequate supervisory review of these tasks, all of which are performed by one individual, there is a high risk that errors will be made and not detected and corrected. The Comptroller General\u2019s Standards for Internal Controls in the Federal Government specifies that qualified and continuous supervision is to be provided to ensure that internal control objectives are achieved. The lack of adequate supervisory review can lead to incorrect certifications and inaccurate distributions to the trust funds.\nWe found a number of such errors that occurred in fiscal year 1997. For example, we found that assessment amounts were (1) inadvertently omitted from the certifications and (2) did not agree with supporting documentation. In one case related to heavy vehicle use tax, the supporting schedule summarizing the tax return information reflected an assessment amount of $195 million but the amount certified was $128 million. As a result, the certified amount for the Highway Trust Fund was understated by $67 million. In another case, assessments for compressed natural gas totaling over $500,000 were omitted from the Highway Trust Fund certification. IRS officials indicated that both of these errors were corrected in a subsequent certification that was made in fiscal year 1998. However, proper supervisory review of the analyst\u2019s work would likely have detected these errors and prevented these inaccurate distributions.\n\n\t\tDistribution Rate Problems Affected Highway Trust Fund Distributions\n\nIRS does not have procedures for verifying the accuracy of distribution rates contained on the electronic spreadsheet provided by OTA. These rates, many of which are based on complex formulas derived from provisions of laws, are used to allocate assessments between the general fund and the Highway Trust Fund. The lack of IRS review of the distribution rates on this spreadsheet resulted in errors in the excise tax certifications for the Highway Trust Fund going undetected. For example, we found the following problems in the electronic spreadsheet provided by OTA: incorrect application rates to allocate gasohol taxes, which resulted in an overstatement to the Highway Trust Fund and a corresponding understatement to the general fund of $89,000; misapplied application rates between the Highway Account and Mass Transit Account for diesel fuel inventory in the certifications for the quarters ending December 1996 and March 1997, which resulted in a net understatement of the Highway Account and a corresponding net overstatement of the Mass Transit Account of $19,000; and missing distribution rate formulas from the spreadsheet, which resulted in tax assessment amounts of $1,000 and $7,000 being excluded from the Highway Trust Fund certification.\nAn IRS review of the distribution rates contained on the spreadsheet could have identified these problems and prevented the distribution errors.\n\n\tConclusions\n\nThe errors we found in the review of the fiscal year 1997 excise tax certification process are the direct result of weaknesses in fundamental internal controls, specifically the lack of appropriate verification and review procedures, at all critical points in the excise tax certification process. These weaknesses led to taxpayer, IRS, and OTA errors going undetected and directly resulted in inaccurate distributions of excise tax revenue to the trust funds in fiscal year 1997.\n\n\tRecommendations\n\nTo strengthen internal controls over IRS\u2019 process of inputting tax return information into the master file, we recommend that IRS:\nDetermine if it would be cost effective to develop and implement procedures requiring either key verification of the assessment amount by excise tax type before final processing or to implement other post-input controls to verify the accuracy of assessment amounts by excise tax type on the master file. In making this determination, IRS should consider establishing a dollar threshold that would ensure coverage of 90 percent of total excise tax assessments from the tax returns.\nRevise the Form 720 tax return to reflect a separate column adjacent to the column for entering the tax assessment, by abstract number, for the taxpayer to report on pages 1 and 2 of the tax return claims and adjustments, by abstract number, based on the information the taxpayer reports on Schedule C.\nTo strengthen internal controls over IRS\u2019 process of certifying excise tax distributions to the general fund and federal trust funds, we recommend that IRS:\nDevelop, document, and implement review procedures over the adjustment and summarization of assessment data used in the certifications. Specifically, IRS should require detailed supervisory review be performed and documented to ensure that adjustments are reasonable and adequately supported, calculations are appropriately performed, and the certification letter agrees with the supporting schedules. IRS recently changed its procedures to certify excise taxes based on estimated collections. Despite this change, review procedures are still necessary.\nEstablish and implement specific procedures requiring that IRS personnel review the distribution rates provided by OTA prior to those rates being used in the certification of Highway Trust Fund distributions and document evidence of these reviews.\n\n\tAgency Comments and Our Evaluation\n\nIn commenting on this report, the IRS Commissioner stated that overall he agreed with our findings and recommendations. The Commissioner noted actions either planned or already in process or implemented to address most of the issues raised in this report. These include (1) implementing post-input controls to include a 100 percent review of all returns with tax assessments of $1 million or more, (2) developing review procedures over the adjustment and summarization of collection data used in the certifications, including supervisory reviews prior to final certification, and (3) reviewing, as part of a recently-formed Intra-Treasury Working Group, distribution rate charts provided by OTA prior to using these rates in the certification of Highway Trust Fund distributions.\nHowever, the Commissioner disagreed with our recommendation to revise the Form 720 tax return to require taxpayers to report claims and adjustments information on pages 1 and 2 of the tax return form. He expressed concern with how the draft report characterized the tax return form and the accompanying Schedules A and C of the form. Additionally, he noted it would be inappropriate to require the taxpayer to net the tax liability by the claim and adjustment amounts reported on the accompanying Schedule C.\nWe have modified the report to more appropriately reflect the nature of the Form 720 and its accompanying schedules. Consistent with these changes, we modified the recommendation to eliminate the reference to having the taxpayer net the tax liability, by abstract number, for any adjustments or claims, by abstract number, as reported on the accompanying Schedule C. However, we believe that revisions to the tax return form are needed because of the frequency of errors made by IRS in either copying claim and adjustment information from Schedule C to pages 1 and 2 of the tax return or in inputting information copied from the tax return to the master files. Specifically, the Form 720 tax return should be revised to reflect a separate column in which the taxpayer would report claims and adjustments from the Schedule C, by abstract number, adjacent to the column reflecting the tax assessment, by abstract number, on pages 1 and 2 of the Form 720. The complete text of the IRS Commissioner\u2019s response to our draft report is presented in appendix IV.\nThis report contains recommendations to you. The head of a federal agency is required by 31 U.S.C. 720 to submit a written statement on actions taken on these recommendations to the Senate Committee on Governmental Affairs and the House Committee on Government Reform and Oversight within 60 days after the date of this letter. A written statement also must be sent to the House and Senate Committees on Appropriations with the agency\u2019s first request for appropriations made over 60 days after the date of this letter.\nWe are sending copies of this report to Director of the Office of Management and Budget, the Secretary of the Treasury, the Secretary of Transportation, the Secretary of Labor, and the Inspectors\u2019 General of the Department of Transportation and Department of Labor. Copies of this letter will be made available to others upon request.\nIf you have any questions, please call me at (202) 512-9505 or Steven J. Sebastian, Assistant Director, at (202) 512-9521.\n\nObjectives, Scope, and Methodology\n\nThe objective of the agreed-upon procedures work was to assist the Inspectors General of the Department of Transportation and Department of Labor in ascertaining whether the net excise tax collections and excise tax certifications reported by IRS for the fiscal year ended September 30, 1997, were supported by the underlying records. We did not perform work on excise taxes collected by other Treasury bureaus, such as the Customs Service and the Bureau of Alcohol, Tobacco, and Firearms. We did include in our review the Federal Aid to Wildlife Restoration Fund because IRS uses different procedures to certify this trust fund.\nIn performing the agreed-upon procedures, we gained an understanding of the internal controls over the excise tax collection and certification process. The objectives of this report were to discuss the underlying internal control weaknesses that allowed errors identified in the agreed upon procedures work to occur and to provide recommendations for correcting these internal control weaknesses.\nTo accomplish our objectives, we examined, on a test basis, evidence supporting the net excise tax collection amounts reported on the fiscal year 1997 Custodial Financial Statements; specifically, we used Dollar Unit Sampling to select a sample of 396 combined excise tax collection and refund transactions from the master file for the first 9 months of fiscal year 1997, using a confidence level of 80 percent, a test materiality of $400 million, and an expected error amount of $200 million. Of this total, 390 transactions represented collections and six transactions represented refunds; verified sampled excise tax transactions to source documents to determine if the transactions were accurately recorded, posted to the proper tax class, and reported in the appropriate period; performed a predictive test of excise tax revenue collections for the final 3 months of the fiscal year to determine if reported fiscal year 1997 revenue appears consistent and reasonable; reviewed IRS\u2019 revenue receipts and refund reconciliations between its records and Treasury for fiscal year 1997, to determine whether year-end excise tax collection balances from the general ledger materially agree with IRS\u2019 master files and Treasury records; and obtained an understanding of internal controls related to safeguarding assets, compliance with laws and regulations, and financial reporting.\nIn addition, to assess the reliability of key data inputs and assumptions used in the excise tax certification, we:\nRecalculated the excise tax assessments on the 230 tax returns associated with the sample of 390 excise tax collections based on the information provided on the returns (e.g., number of gallons of fuel multiplied by the tax rate equals the assessed tax). We reviewed only 230 returns because in some instances more than one receipt transaction related to the same return. Because the sample was selected based on excise tax collections, we were not able to project any errors identified on the corresponding tax assessment amounts.\nVerified that the excise tax assessment amounts by abstract number on the 230 tax returns were accurately recorded in the IRS master file and in the AQETL report.\nDetermined if the rates used to allocate assessments between selected trust funds and the general fund for the final quarter of fiscal year 1997 were adequately supported. verified the mathematical accuracy for selected excise tax certifications and traced, on a selected basis, excise tax certifications to supporting schedules.\nWe conducted our work primarily from October 1997 through February 1998, with some follow-up work through June 1998, in accordance with generally accepted government auditing standards.\n\nTypes of Excise Taxes by Trust Fund\n\n\tHighway Trust Fund\n\n\tAirport and Airways Trust Fund\n\nTicket tax\nFacilities use\nAir freight\nAviation gasoline\nAviation fuel (other than gasoline)\nAviation fuel (other than gasoline) for use in commercial aviation\nAviation fuel (floor stocks)\nAviation gasoline (floor stocks)\n\n\tOil Spill Liability (Expired December 31, 1994)\n\n\tAquatic Resources\n\n\tHazardous Substance Superfund\n\n\tLeaking Underground Storage Tank (Not in Effect During Fiscal Year 1997)\n\n\tBlack Lung Disability\n\n\tVaccine Injury Compensation\n\n\tInland Waterways\n\nQuarterly Federal Excise Tax Return, Form 720\n\nComments From the Internal Revenue Service\n\nThe following are GAO\u2019s comments on the Internal Revenue Service\u2019s letter dated September 25, 1998.\n\n\tGAO Comments\n\n1. The technical comments from the Chief Counsel have been incorporated as appropriate, but the enclosure has not been included in this appendix. 2. Discussed in \u201cAgency Comments and Our Evaluation\u201d section.\n\nMajor Contributors to This Report\n\n\tAccounting and Information Management Division, Washington, D.C.\n\n\tLos Angeles Field Office\n\nCharles Payton, Assistant Director Barbara House, Senior Evaluator Ted Hu, Senior Auditor Eric Johns, Senior Auditor Stacey Osborn, Auditor The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent.\nU.S. General Accounting Office P.O. Box 37050 Washington, DC  20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000  or by using fax number (202) 512-6061, or TDD (202) 512-2537.\nEach day, GAO issues a list of newly available reports and testimony.  To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone.  A recorded menu will provide information on how to obtain these lists.","output":"Why GAO Did This Study\n\nPursuant to a legislative requirement, GAO conducted a follow-up review of the Internal Revenue Service's (IRS) controls over its process for certifying excise taxes for distribution to the federal trust funds.\n\nWhat GAO Found\n\nGAO noted that: (1) IRS does not have adequate controls over its process for certifying excise taxes for distribution to the federal government trust funds; (2) the lack of fundamental internal controls resulted in errors in the certifications going undetected; (3) these errors ultimately affected the amounts distributed to the trust funds during fiscal year 1997; (4) IRS' ineffective controls over the certification process resulted in undetected: (a) mistakes by taxpayers in preparing excise tax returns; (b) input errors by IRS when entering excise tax return information in its master files; and (c) errors by IRS in preparing the excise tax certifications; (5) as a result of these errors, trust funds did not receive the appropriate amount of excise tax revenue; (6) these errors are particularly important to the Highway Trust Fund, which receives over half of the excise taxes that are accounted for by IRS; (7) these weaknesses were a contributing factor in the Department of Transportation's (DOT) Inspectors General's: (a) qualified opinion on the Highway Trust Fund financial statements; (b) disclaimer of opinion on the Federal Aviation Administration's financial statements; and (c) disclaimer of opinion on DOT's consolidated financial statements; (8) the errors GAO found relating to taxpayer mistakes, IRS data input, and certification preparation could have been detected or prevented by effective IRS procedures; and (9) IRS has taken some actions to improve certain controls over the excise tax certification process."}
{"id":"gao_GAO-03-89","pid":"gao_GAO-03-89_0","input":"\tBackground\n\nBefore the 1990s, individuals who wanted to place a casino- or sports-type bet in the United States basically had two choices: they could travel to a legitimate brick-and-mortar gaming establishment or place an illegal wager through a bookmaker. However, with the emergence of the Internet in the mid-1990s, a new form of gambling appeared\u2014on-line gaming casinos and sports wagering. Internet gambling can take place on any electronic device that offers Internet access anywhere on the globe. In 2001, some gaming analysts were projecting that gross revenues from Internet gambling would exceed $6 billion by 2003. However, analysts lowered revenue estimates for a number of reasons, including increased pressure from U.S. lawmakers and the blocking of Internet gambling transactions by many large U.S. credit card issuers. (U.S. customers are reported to constitute anywhere from 50 to 70 percent of total operator revenues from Internet gambling.) And, despite the recent revenue reduction, the e-gaming industry continues to grow. In a recent report, gaming analysts estimate that in 2003 revenues from Internet gambling industrywide will be $5.0 billion, or approximately 4.3 percent of the total $116 billion in business- to-consumer global e-commerce. In the view of gaming analysts, the international markets (non-U.S. customers) represent the future of the industry\u2019s growth.\nCurrently, individuals wishing to gamble via the Internet can choose from several types of payment options other than credit cards. These include: VISA and MasterCard debit cards (also called check cards): These cards, which carry the logo of one of the two largest credit card associations, are tied directly to the cardholder\u2019s bank account. Funds for all transactions are deducted directly from the cardholder\u2019s bank account, but cardholders can make credit card-type transactions that do not require a personal identification number. A personal identification number is not required to use this card on line, for example, since the transactions are processed through the VISA and MasterCard systems. Check card gaming transactions carry the same gaming merchant code as credit card transactions and thus can also be blocked.\nPrivate-label debit cards: These cards are similar to the check cards described above but are issued by private companies rather than credit card associations.\nOn-line payment providers (also known as payment aggregators): These companies send and receive funds electronically for such uses as on-line auctions and purchases.\nWire transfers: Some gaming Web sites promote this method of payment, which allows Internet gaming customers to wire money directly from a bank account to a gaming Web site. In some instances, bank wire information is posted on individual gaming sites, and gaming operators frequently use wire transfers to pay customers. \u201cE-cash\u201d or digital cash: This method of payment is a digital representation of real money that can be placed on a computer hard drive, smart card,other devices with memory, (including cellular phones and other electronic communication devices), or in an on-line repository. Consumers purchase e-cash from an authorized provider. These funds can then be transferred among vendors and individuals using compatible electronic systems, in some cases without resorting to banks or other financial intermediaries. When customers spend the e-cash, it is credited to the retailer\u2019s e-cash account and later transferred to the retailer\u2019s regular bank account.\nInternet gambling sites also offer money orders; traveler\u2019s checks; bank drafts; cashier\u2019s, certified, and personal checks; and a number of other electronic banking systems or processors as payment options.\nThe House of Representatives recently passed the Leach-LaFalce Internet Gambling Enforcement Act (H.R. 556) to further limit opportunities for gambling over the Internet in the United States. H.R. 556, which passed a House vote on October 1, 2002, has been referred to the Senate Committee on the Judiciary. If H.R. 556 is enacted, it will prohibit any person engaged in the business of gambling from knowingly accepting bank instruments such as credit cards, electronic fund transfers, or checks for illegal Internet gambling. Additionally, the Comprehensive Internet Gambling Prohibition Act of 2002 (S. 3006), introduced in the Senate in late September 2002, would, if enacted, amend certain sections of the Wire Act to include the use of all interstate or international communication facilities transmitting to or from the United States and expand the prohibited gambling activities covered by the act. H.R. 5760, introduced in November 2002, represents a different approach.  If enacted, it would establish a commission to conduct a comprehensive study of Internet gambling and recommend alternative means of effectively regulating such gambling.\n\n\t\tTwo Types of Credit Card Organizations Function in the U.S. Market\n\nTwo types of credit card organizations handle the four major U.S. credit cards: (1) credit card associations such as VISA International (VISA) and MasterCard International Inc. (MasterCard) and (2) full-service credit card companies such as American Express Company (American Express) and Discover Financial Services, Inc. (Discover). Credit card associations and full-service credit card companies vary dramatically in size, market reach, and organizational structure. As of December 31, 2001, for example, the two major credit card associations had dramatically higher numbers of issued credit cards than the major credit card companies (fig. 1).\n\n\t\tCredit Card Associations Set Policies, and Members Issue Cards and Acquire Merchants\n\nEach of the two major associations in our review is owned by its member financial institutions. Around 21,500 member financial institutions own VISA, and about two-thirds of them are located in the United States. About 20,000 financial institutions participate in MasterCard worldwide. As described in a prior GAO report, MasterCard has a two-tier membership structure composed of principals and affiliates. Principal members have a direct membership relationship with the association and serve as sponsors to affiliates. For example, a U.S. or foreign bank can apply to become an affiliate member if a principal member agrees to sponsor the bank and the bank satisfies the association\u2019s membership criteria and clears the approval process.\nWhile the associations do not provide credit card services directly to cardholders or businesses, they establish the operating standards that define the policies, roles, and responsibilities of their member institutions and provide the data processing and telecommunications systems that transfer transaction data between members. The member institutions issue the credit cards to customers, acquire (sign up) merchants to accept credit cards, or both, along with providing other services directly to the cardholders and merchants. Member institutions generally fall into two categories: Issuing banks that solicit potential customers, approve applications, and issue credit cards. These banks extend credit to cardholders, establish the terms of cardholders\u2019 accounts (for example, credit limits and treatment of delinquent accounts), collect debts, and maintain accounts and cardholder records.\nAcquiring banks that solicit potential merchants and approve and license merchants to accept credit cards. These banks, also known as merchant banks, enter into agreements authorizing merchants to accept the association\u2019s credit cards, submit their merchants\u2019 transactions into the association\u2019s system for payment from issuing banks, and maintain accounts and related records on their merchant clients.\nThird-party processors are also part of the industry. They contract with acquiring and issuing banks to provide transaction processing and other services. As part of the services they provide for their banking clients\u2014 members of the credit card associations\u2014processors block Internet gambling transactions and ensure that Internet gambling sites do not become approved merchants.\n\n\t\tFull-Service Credit Card Companies Issue Cards and Acquire Merchants\n\nThe two full-service credit card companies in our review, American Express and Discover, issue their own brands of cards directly to customers and authorize merchants to accept those cards. Discover, an affiliate of Morgan Stanley, provides primarily credit card services. American Express, a publicly held company, also provides travel, financial, and network services. Each company owns a U.S. bank.\nAmerican Express and Discover assume primary responsibility for providing credit card services directly to both customers and merchants. They perform all major aspects of issuing cards, including approving applications from customers, mailing cards to customers, authorizing transactions, and sending out bills. They also perform all major aspects of acquiring merchants to accept their cards, including signing up merchants, distributing credit card terminals, and settling merchant accounts. By acting as both issuer and acquirer, the two companies represent what the industry refers to as a \u201cclosed loop\u201d system. Both companies own and operate the electronic networks that handle all information on transactions for cardholders and merchants.\nAmerican Express and Discover market their credit card business to consumers and potential merchants in the United States. Both companies issue cards to individuals, and American Express also issues cards to businesses. In addition, American Express has arrangements in some overseas markets to license foreign banks to issue its cards and acquire merchants. As of December 31, 2001, American Express had arrangements with 74 institutions located in 77 countries other than the United States.\n\n\tThe Legal Framework for Internet Gambling Is Complex\n\nBoth federal and state laws apply to Internet gambling in the United States. In general, gambling is a matter of state law, with each state determining whether individuals can gamble within its borders and whether gaming businesses can legally operate there. Since Internet gambling typically occurs through interstate or international means, with a Web site located in one state or country and the gambler in another, federal law is used to protect the states from having their laws circumvented. To date, the Wire Act is the federal statute that has been used to prosecute federal Internet gambling cases, although courts sometimes disagree on the applicability of certain provisions of the statute. In addition, the Travel Act and the Illegal Gambling Business Act have been used to prosecute gambling entities that take interstate or international bets over the telephone and would likely be applicable to Internet gambling activity. Some states have taken specific legislative actions to address Internet gambling, in some cases criminalizing it and in others relying on existing gambling laws to bring actions against entities engaging in or facilitating Internet gambling. Like the U.S. states, other countries have enacted laws that explicitly prohibit or permit Internet gambling under certain conditions or rely on existing laws to prosecute Internet gaming activity.\n\n\t\tThe Federal Government Regulates Gambling That Involves Interstate or International Activity\n\nAlthough gambling regulation is generally left to the states, the federal government has the authority, under the Commerce Clause of the Constitution, to regulate gambling activity that affects interstate commerce. Internet gambling falls into this category, as bets are generally placed at a personal computer in one state or country and received at a server in another state or country. Of the three federal statutes that appear to have direct applicability to on-line gambling\u2014the Wire Act, the Travel Act, and the Illegal Gambling Business Act\u2014to date only the Wire Act has been applied in the federal prosecution of activity relating to Internet gambling. The other two federal gambling statutes have been used in the closely analogous situation of telephone wagering, including telephone calls made to place wagers with offshore bookmakers.\n\n\t\t\tThe Wire Act Prohibits Gambling Businesses from Receiving or Sending Bets over Interstate and International Wires\n\nThe Wire Act prohibits gambling businesses from knowingly receiving or sending certain types of bets or information that assists in placing bets over interstate and international wires. Thus, if an Internet gaming Web site operating in any country (including the United States) receives a bet transmitted by an individual located in the United States, the operator has violated the Wire Act. For this reason, foreign entities offering gambling to U.S. citizens through the Internet would be subject to the Wire Act. Although some Internet gambling businesses, including foreign entities, have been successfully prosecuted under the Wire Act, courts do not agree on the applicability of certain sections of the statute.\nFirst, individual courts have reached different conclusions about the types of gambling covered by the act. The statute prohibits the transmission of \u201cinformation assisting in the placing of bets or wagers on any sporting event or contest.\u201d This language has led some courts to interpret the Wire Act as covering bets only on contests that involve sports.\nSecond, the phrase \u201ctransmission of a wire communication\u201d is somewhat ambiguous as it applies to the Internet. Depending on how the phrase is interpreted, the act might not apply to Internet gambling in some instances\u2014for example, when information is only received over the Internet. Some courts have held that \u201ctransmission\u201d means receiving as well as sending information, while others have held that it means only sending. \u201cothing in this section shall be construed to prevent the transmission . . . of information assisting in the placing of bets or wagers on a sporting event or contest from a State or foreign country where betting on that sporting event or contest is legal into a State or foreign country in which such betting is legal.\u201d\nIn other words, transmitting information to assist in placing bets on a certain event is legal if two conditions are met: (1) betting on the event is legal in both the place where the transmission originates and the place where it is received, and (2) the transmission is limited to information that assists in the placing of bets\u2014that is, it does not include the bets themselves. Certain courts have stated that this language means that when the betting activity is legal in both jurisdictions, interstate gambling would not be a violation of the Wire Act. Most courts disagree with this interpretation of Section 1084(b), and based upon the language of Section 1084(b) and clear statements in the legislative history, DOJ disagrees with this interpretation as well.\nFinally, the Wire Act mandates that a wire communication facility must be involved in order for a violation to occur. Currently, all Internet communications are dependent in some way on some type of wire communication, such as telephone or data lines. Depending on how Internet technology develops, however, future Internet communications may no longer be wire communications covered under the Wire Act.\n\n\t\t\tOther Federal Gambling Laws Apply to Internet Gambling\n\nThe two other federal statutes with direct applicability to Internet gambling are the Travel Act and the Illegal Gambling Business Act. The Travel Act provides criminal penalties for anyone who undertakes interstate or foreign commerce with the intent to distribute the proceeds of any unlawful activity. The Illegal Gambling Business Act makes it a crime to operate an \u201cillegal gambling business.\u201d\nThe Travel Act imposes criminal penalties for those who utilize interstate or foreign commerce with the intent to distribute the proceeds of any unlawful activity. Under the Travel Act, unlawful activity includes any business enterprise involving gambling in violation of the laws of the state where the gambling takes place or of the United States. Thus, gambling over the Internet generally would violate the Travel Act because an interstate facility, the Internet, is used to conduct gambling.\nThe Illegal Gambling Business Act makes it a crime to operate an illegal gambling business, which is defined as any gambling business that meets three conditions: it violates a law of the state where it takes place, it involves at least five people (not even the same five people) at all times during a 30-day period, and it operates for the most part continuously for longer than 30 days or takes in gross revenues of $2,000 in a single day.\nOperating a gambling Web site for over 30 days in a state under the conditions described above would violate this act. A Web site could easily meet these conditions, including the requirement that at least five individuals be involved in its operation. The five people do not need to be directly involved in the gambling but must only be considered \u201cnecessary and helpful\u201d to the operation. Computer operators, computer maintenance crews, accountants, and owners could all be included as \u201cnecessary and helpful\u201d in the operation of an Internet gambling Web site.\nLike the Wire Act, the Illegal Gambling Business Act applies only to gambling businesses, not individual gamblers. The Illegal Gambling Business Act does not require that the casino operators be convicted in state court, but the gambling activity must violate state law. The proof requirements associated with the Illegal Gambling Business Act are minimal; the government must prove only that the business has met the three conditions. The 30-day requirement is satisfied if there is a \u201crepeated pattern of gambling activity.\u201d\nTwo other statutes have some applicability to Internet gambling\u2014the Indian Gaming Regulatory Act (IGRA) and the Interstate Horseracing Act (IHA). Certain types of gaming on Indian reservations are permitted under IGRA, with the regulatory jurisdiction determining the type of gambling that is permissible.  A recent case addressed some of the issues and raised the question of whether Internet gambling takes place on tribal lands when bettors who are not on tribal lands use their home computers to access Internet lotteries via computer servers that are. The case involved the question of whether the state of Missouri could prevent a Native American tribe in Idaho from accepting money from Missouri residents via a lottery Internet site. After dismissals, removals, and appeals, the case was eventually settled, but it is unclear whether the court resolved the issue of whether Internet gambling takes place on tribal lands when the Web site is located on those lands. For more information on IGRA, see our interim report.\nPari-mutuel wagering on state-licensed horse races takes place over the Internet in a number of states. Federal and state laws govern this activity. In 1978, Congress passed the IHA to regulate interstate commerce with respect to pari-mutuel wagering on horse races. The IHA provides that no person may accept an interstate off-track wager without the consent of the appropriate host racing association, the host racing commission, the off- track racing commission, and nearby race tracks. An interstate off-track wager is defined as \u201ca legal wager placed or accepted in one State with respect to the outcome of a horse race taking place in another State.\u201d Pari- mutuel wagers fall into this category if they are legal in both of the states, are made by telephone or other electronic device, and are accepted by an off-track betting system in any state, as well as the combination of any pari-mutuel wagering interstate pools. The language of the statute appears to allow the electronic transmission of interstate bets as long as the appropriate consent is obtained.\nWagering on horses over the Internet is generally done using a closed-loop subscriber-based system designed to limit access. In March 2000, DOJ officials testified that it was a violation of the Wire Act for an entity to offer bets on horse races over the Internet; however, to date, DOJ has not brought any cases against any state-licensed horse racing tracks for accepting wagers from out-of-state bettors using the Internet or any other wire communication. In addition, IHA was amended in December 2000, after DOJ testified in March 2000 to explicitly expand interstate off-track wagers to include wagers through the telephone or other electronic media. For more information on IHA, see appendix II.\n\n\t\tState Laws Affecting Internet Gambling Vary\n\nFive states (Illinois, Louisiana, Nevada, Oregon, and South Dakota) have enacted laws that specifically prohibit aspects of Internet gambling. In states that have not specifically enacted legislation prohibiting Internet gambling, existing state gambling laws could apply, and new legislation would not be necessary. For example, in states that prohibit all types of gambling, such as Utah, Internet gaming also would be illegal. In some states the status of Internet gambling is unclear, as laws may prohibit some types of gaming, but may not be interpreted as applying to Internet gambling.\nWe reviewed the gambling laws of five selected states\u2014Massachusetts, Nevada, New Jersey, New York, and Utah\u2014to determine how their existing laws would affect Internet gambling. We chose these states because they have a wide range of gambling provisions, from total prohibition to allowing certain types of legalized land-based casino gambling. Massachusetts, for instance, has legalized dog and horse racing under the supervision of the state racing commission and certain statewide lotteries and raffles by certain organizations under the supervision of the State Lottery, a division of the state Treasury department. But Massachusetts law prohibits most other types of gambling, including transmitting a bet or wager using the telephone. However, Massachusetts does not have a statute specifically addressing Internet gambling. Nevada has legalized land-based casino gambling, but Internet gambling is illegal. However, the state has authorized the Nevada Gaming Commission to adopt regulations governing the licensing and operation of Internet gambling if the Commission determines that interactive gaming can be operated in compliance with all applicable laws.\nIn New Jersey, gambling can be made legal only by referendum, and only land-based casino gambling in Atlantic City, licensed horse racing, state lotteries, bingo and raffles for certain groups, and amusement games have been approved via referendum. New York has authorized certain lotteries, certain types of pari-mutuel betting on horse races and bingo, lotto games, and local games of chance that operate under specific conditions, but prohibits most other types of gambling. Utah prohibits all forms of gambling, including state-run lotteries, and the Assistant Attorney General has stated that Utah believed that gambling of any type from a computer located in Utah would constitute gambling within the state. The attorneys general of New Jersey and New York have recently initiated actions or investigations against entities that either engage in or facilitate Internet gambling businesses. For more information on the approaches these states have taken to Internet gambling, please see our interim report.\n\n\t\tOther Countries Face Similar Legal Challenges in Dealing with Internet Gambling Issues\n\nLike the United States, a number of other countries have commissioned detailed reviews to determine the implications of gambling, including Internet gambling, within their countries. These countries take a variety of approaches to regulating Internet gambling. For a number of reasons, we were unable to determine how many countries explicitly prohibit Internet gambling. For example, gaming laws in many countries, like those in many U.S. states, apply to gaming in general rather than to Internet gambling. Although we were unable to determine the exact number, an interactive gaming industry services group reported that over 50 countries and foreign jurisdictions, mostly in Europe, the Caribbean, and the Australia\/Pacific region, have legalized Internet gambling. To illustrate the different approaches countries take to regulating Internet gambling, we reviewed four jurisdictions: Australia, Canada, Hong Kong, and the United Kingdom (U.K.). Appendix III contains more detailed information about each of these jurisdictions.\n\n\t\t\tAustralia\n\nIn July 2001, following a year-long moratorium on the development of the interactive gaming industry, the Australian Parliament enacted the Interactive Gambling Act of 2001 that prohibits operators from providing an Internet gambling service to Australian residents. The act applies to interactive casinos and games on the Internet but does not apply to sports wagering or lotteries, which continue to be regulated by existing state and territorial legislation. It covers all interactive gambling service providers, including those based in Australia and offshore, and both Australian and foreign-owned businesses. The maximum penalty for violations is $220,000 AUD ($121,000 USD) per day for individuals and $1.1 million AUD ($606,000 USD) per day for corporate bodies.  The act also makes it an offense to provide such services to people in a \u201cdesignated country\u201d\u2014that is, one that has asked for and received that designation from the Australian Minister of Communication, Information Technology, and the Arts to prohibit interactive gaming operators licensed in Australia from offering services to its citizens.\n\n\t\t\tCanada\n\nThe Criminal Code of Canada makes it illegal to gamble or conduct any gaming activities within Canada unless they fall within recognized exceptions set out in the Criminal Code. The exceptions include \u201clottery schemes\u201d that are conducted and managed by a province (such as casinos and electronic gambling), a narrower range of lottery schemes that are licensed by a province (to a charity, a fair or exhibition, and, rarely, to a private individual), bets made between individuals not engaged in the business of betting, pari-mutuel betting on horse races (regulated by the federal Minister of Agriculture) and some lottery schemes conducted in Canada on international cruise ships. Under the Criminal Code, only provincial governments are permitted to offer a lottery scheme on or through a computer and only to residents of that province; they may not license others to conduct one. Therefore, in order to offer on-line gambling in Canada, a provincial government would have to operate the sites itself. It would also need to ensure that residents of other provinces could not participate unless cooperative agreements existed.\nIn addition, commercial land-based betting on single sporting events is prohibited in Canada and therefore would not be permitted over the Internet. A recent case from the Prince Edward Island Supreme Court (Appeal Division) held that an Internet lottery ticket Web site licensed by the Province of Prince Edward Island would not be conducted and managed in the province as required by the Criminal Code. The court found that even though the server was located in the province, the lottery would violate the Criminal Code by offering gambling to a worldwide market. In addition, since it was licensed to a charity and not conducted by the province, it violated the Criminal Code requirement that only provinces conduct computerized lottery schemes. This case is now on appeal to the Supreme Court of Canada.\n\n\t\t\tHong Kong\n\nGambling is unlawful in Hong Kong unless specifically permitted by law. In May 2002, the Hong Kong Legislative Council voted to ban offshore gambling, including offshore Internet gambling, by passing the Gambling (Amendment) Ordinance. This law makes both offshore betting and bookmaking criminal offenses and provides for criminal penalties against offshore gambling agents that promote, facilitate, or advertise their products to Hong Kong residents. The maximum punishment for brokers is 7 years in prison and a penalty of $5 million HKD ($641,000 USD), while individual bettors face 9 months in prison and a penalty of $30,000 HKD ($3,800 USD). However, it is legal for the Hong Kong Jockey Club\u2014the legal gambling monopoly\u2014to offer its services on-line to Hong Kong residents.\n\n\t\t\tUnited Kingdom\n\nThe U.K. has several laws and regulatory schemes that apply to gambling, but there are no specific laws governing Internet gambling. Some forms of gambling can be carried out on the Internet under existing law, while others cannot. In July 2001, the UK Gambling Review Body published its report (\u201cthe Budd Report\u201d), which states that prohibiting on-line gambling by British consumers would be an unrealistic objective. In response to the Budd Report, the UK\u2019s Department for Culture, Media, and Sport is working to develop a timetable for introducing new gambling legislation sometime between 2003 and 2004. The new legislation is to contain a number of major gambling reforms, including legislation on Internet gambling.\n\n\tFull-Service Companies and Credit Card Associations Take Different Approaches to Restricting Internet Gambling\n\nFull-service companies and credit card associations have taken different approaches to restricting the use of their cards for Internet gambling. Credit card companies have focused primarily on prohibiting Internet gambling sites from becoming credit card merchants. Credit card associations and their members have focused primarily on facilitating the blocking of Internet gambling transactions. Most large U.S. association members that issue credit cards told us that they have chosen to block these transactions. For a variety of reasons, however, they cannot always identify all Internet gambling transactions. For example, both association and bank officials told us that some gambling Web sites deliberately miscode gambling transactions. The credit card associations monitor transactions and take action against acquiring banks when they are not properly coding Internet gambling transactions. In addition, U.S.-based acquiring banks that belong to associations do not acquire Internet gambling merchants as customers, although association members in other countries do.\n\n\t\tFull-Service Companies Focus on Keeping Internet Gambling Sites from Becoming Merchants\n\nAmerican Express and Discover have companywide policies that restrict the use of credit cards for Internet gambling, but officials stated that the restrictions apply to all gambling activities because the companies do not, as a matter of policy, want to do business with what they consider to be a high-risk industry. Both credit card companies have developed specific procedures to help ensure that Internet gambling sites do not become credit card merchants. First, Internet businesses applying to become merchants are screened, generally through routine visits and reviews of the applicants\u2019 Web sites, to verify that they have accurately represented the business they are in and are not engaged in any gambling activities. Second, existing Internet credit card merchants are monitored to ensure that they do not discreetly transform into Internet gambling sites\u2014 something that, according to officials, has happened. One credit card company told us that it had contracted with a third-party vendor to help implement an Internet monitoring system designed to identify improper use of its card. This initiative entailed identifying and testing Internet gambling sites attempting to secure payments using the company\u2019s credit card, including existing merchants that may have expanded into Internet gambling activities. Company officials noted that the vendor had also identified several Internet gambling sites that were illegally using the company\u2019s logo to give the sites legitimacy. The second company told us that it uses its own employees, rather than an outside vendor, to conduct similar reviews of Internet gambling sites in general and of the company\u2019s existing Internet merchants in particular. The results of our survey of Internet gambling Web sites showed that most do not promote full-service credit card companies, although the cards were advertised as a possible form of payment on 8 of the 162 we reviewed. Appendix IV provides additional information on our survey.\nIn spite of these efforts, credit card company officials recognize that some Internet gambling sites that attempt to secure credit card payments may still go unidentified. Thus, as part of their overall efforts to monitor fraud, both companies have also implemented procedures to monitor transactions for patterns that might indicate that credit cards are being used for Internet gambling activity. However, like issuing bank officials, credit card company officials acknowledged that identifying Internet gambling transactions after the fact is difficult. They also agreed that on- line payment providers present a challenge to credit card companies that are trying to restrict the use of their cards for Internet gambling. Officials for both companies stated that they had reached an agreement with one major on-line provider stipulating that the provider would block Internet transactions using the companies\u2019 technology and were working on similar agreements with other on-line payment providers.\n\n\t\tCredit Card Associations Have Focused on Enabling Members to Block Payments\n\nNeither VISA nor MasterCard has issued policies to its members that restrict the use of the association\u2019s credit cards for Internet gambling. Instead, both associations have developed procedures that enable member banks wanting to block Internet gambling transactions to do so. Officials from both associations explained that reaching a consensus on a blanket policy among members around the world would likely be difficult. Some members are located in countries where Internet gambling is legal and, according to one official, represents an expanding business market. Policy decisions to restrict the use of credit cards for Internet gambling are therefore left to the discretion of individual member institutions. Association officials note, however, that their members agree with operating regulations for both VISA and MasterCard stipulating that only legal transactions may be introduced into the systems.\nVISA and MasterCard have each developed a system of coding that allows member institutions, at their discretion, to block Internet gambling transactions. Both associations have had a long-standing uniform coding system designed to facilitate the processing and authorization of credit card payments for member banks. About 4 years ago, the associations refined their systems to include a cross-indexed scheme of merchant and commerce codes so that Internet gambling transactions could be identified. Internet gambling merchants that accept VISA or MasterCard payments are required to use a combination of a gaming merchant category code and an electronic commerce indicator code. These two codes, which are transmitted through the credit card network to the card issuer as part of the requested authorization message, inform the card issuer that the transaction is an Internet gambling transaction. The issuer can then deny authorization.\nOfficials explained that the coding system informs card issuers that the transaction is an Internet gambling transaction but cannot signal whether the particular transaction is legal or illegal. The existing coding system does not capture enough information to distinguish between legal and illegal Internet gambling transactions. Moreover, an official pointed out that the distinction between legal and illegal transactions is difficult to make because of the complexities involved in determining which laws govern any particular Internet transaction and the practical limitations of determining where a cardholder may actually be when engaging in the transaction. As a result, a member bank\u2019s decision to block Internet gambling transactions may result in blocking all properly coded Internet gambling transactions\u2014both in jurisdictions where on-line gaming is legal and illegal. For example, a U.S. cardholder may visit a country where Internet gambling is legal and, while there, attempt to use a credit card to pay for on-line gambling transactions. If the credit card issuer has chosen to block Internet gambling transactions and the transaction has been properly coded, authorization for payment will be denied.\nAlthough the credit card issuer is responsible for making the policy decision on whether to deny authorization for Internet gambling transactions, actual blocking of transactions can occur at different points in the credit card transaction process. In some cases, the issuer has asked the association to block the transactions on its behalf. Other issuers do the blocking themselves, while still others instruct their third-party processors to do the blocking (fig. 2).\nInformation on the number of member institutions belonging to credit card associations that have opted to systematically block Internet gambling transactions is not readily available. However, association officials noted that many of the largest U.S. credit card issuers have chosen to follow this course of action. Officials from the eight large U.S.- based issuing member banks we reviewed, which represent more than 80 percent of the purchase volume of cards issued by VISA and MasterCard in the United States, all indicated that they had implemented policies to deny payment authorization for Internet gambling transactions coming through their automated systems. Officials of a trade association for community banks and the processor of its members\u2019 credit card transactions stated that most, if not all, of the small community bank issuers had also chosen to block Internet gambling transactions. However, some association members\u2014primarily those in foreign jurisdictions where Internet gambling may be legal\u2014continued to acquire Internet gambling sites as merchants.\nThe eight issuing banks in our review implemented their blocking policies between the early months of 2000 and June 2002. Internet gambling transactions can be blocked in two ways: either the issuer blocks the payment directly, or another party, such as a third-party processor or an association, does it instead. Five of the eight issuers told us that they blocked Internet gambling transactions themselves; the other three relied on a major third-party processor or an association to block on their behalf. Issuers that do their own blocking stated that by doing the blocking themselves, they were able to maintain control over transactions. For example, they were able to perform their own risk management of these transactions or contact their customers to discuss the transactions. Officials at two issuing banks told us they believed that authorizing or denying all transactions themselves gave them a better chance of catching Internet gambling merchants seeking to disguise the transactions. Although denials of payment for Internet gambling had decreased significantly since the company began blocking Internet gambling transactions, an issuing bank official noted that, in the previous quarter, their system had identified eight merchants that were conducting inappropriate activities, including disguising Internet gambling transactions.\nOne of the major reasons some issuers gave for their decision to block Internet gambling transactions was their belief that Internet gambling is a high-risk industry, vulnerable to fraud and other illegal activities. Most of the issuing banks explained that they blocked Internet gambling transactions primarily because of on-line gambling\u2019s unclear legal status, which they believed could cause them to unknowingly facilitate illegal Internet gambling, and because of the financial impact (for example, potential legal costs and charge-offs) that could result if the customers refused to pay their gambling charges. Since the legality of Internet gambling is questionable, debts incurred through such activities may be unenforceable. Using this argument, some bettors have refused to pay their gambling debts, claiming that the issuing banks facilitated the \u201cillegal\u201d activities. In addition, in a number of lawsuits in U.S. courts, bettors have claimed that the credit card issuer is liable for allowing bettors to use its services for an illegal activity under state law. In one case, the bank that had issued the credit card sued the bettor when the bettor refused to pay the credit card bills for her gambling losses. In a countersuit, the bettor claimed that the bank was liable for letting the bettor gamble with the credit card when such gambling activity was illegal in her state. The case was settled before the trial. One of the provisions of the settlement required the Internet gaming sites to pay the bettor\u2019s Internet gambling debts to the banks that issued the credit cards. Half of the issuing banks in our review told us that they have explicit disclosures in their cardholder agreements stating that their cards cannot be used for Internet gambling and two of these banks said they had added the explicit reference only recently because of these lawsuits. Other issuing banks said that their cardholder agreements state that their cards cannot be used for illegal activities but do not specifically mention Internet gambling.\nAccording to gaming analysts, issuing banks\u2019 efforts to block Internet gambling transactions could reduce the projected growth of the Internet gaming industry from 43 to 20 percent. What was estimated to be a $5.0 billion industry worldwide could now be reduced to $4.2 billion. In the meantime, some Internet casino operators now estimate that four out of every five requests for credit card payments are denied.\n\n\t\tThe Associations\u2019 Transaction Coding Systems Can Be Compromised\n\nAssociation and banking industry officials told us that the effectiveness of efforts issuing banks make to block transactions involving Internet gambling depends on the integrity of the associations\u2019 coding systems as implemented by merchants and acquiring members throughout the world. However, the coding systems can be compromised in two ways: (1) by Internet gambling merchants that attempt to disguise transactions by miscoding them, and (2) by cardholders who attempt to circumvent the system by using on-line payment providers.\n\n\t\t\tMerchants May Disguise Transactions Codes\n\nAccording to an association official, Internet gambling merchants have a strong incentive to miscode and thus try to disguise their transactions since proper coding could result in a denial of authorization. Circumventing the coding system in this way, according to the issuers, presents a significant challenge. Issuers have no control over the merchants and no way to immediately identify and block all such transactions. Issuing bank officials emphasized the difficulty of identifying attempts to conceal Internet gambling transactions, regardless of any proactive efforts to find instances of miscoding. One official noted that some disguised Internet gambling transactions are identified only by chance, if at all. Most of the issuers acknowledged that Internet gambling merchants have circumvented the coding system primarily by submitting improperly coded transactions that do not represent Internet gambling or by failing to use the electronic commerce code. In some cases, a merchant engaged in more than one business has a secondary merchant code available and uses it to code what is really an Internet gambling transaction. In other cases, a merchant moves into Internet gambling after having been accepted by the acquirer as a different type of business. Unless the acquirer monitors the merchant, it will not know that the merchant is actually processing Internet gambling transactions.\nTwo issuers noted that Internet merchants are able to circumvent the coding system by engaging in factoring. According to the issuers, factoring occurs when a merchant, possibly one engaged in Internet gambling, submits credit card transactions through another merchant\u2019s terminal using that merchant\u2019s identification number and merchant category code, and pays that merchant a percentage of the submitted transactions. Officials from both associations agreed that factoring as described by the issuers can be used to circumvent the coding system and violates the associations\u2019 rules. They also noted that this type of factoring is distinguishable from legitimate factoring. An issuer told us that in one case a merchant circumvented the coding system by setting up a bogus site and processing numerous transactions using a telephone and rogue terminal. The issuer believed this situation could have been avoided if the acquirer had exercised adequate due diligence on the merchant.\n\n\t\t\tUsing On-Line Payment Providers Can Circumvent Restrictions on Using Credit Cards for Internet Gambling\n\nIssuing banks also viewed as problematic cardholders\u2019 use of on-line payment providers or payment aggregators to pay for Internet gambling activities. These entities enable consumers to use their credit cards to set up accounts with many kinds of Internet-based merchants, including on- line casinos. The issuers indicated that while on-line payment providers did not circumvent the coding system, most aggregators\u2019 transactions were not coded to reflect the purpose or type of transaction such as Internet gambling. Because credit card transaction codes can be obscured as the transactions pass through such intermediaries, issuing banks cannot determine whether credit card funds are being used for Internet gambling. Nevertheless, most of the issuers said they would continue to accept credit card transactions from payment aggregators because they believed that these transactions were mostly legitimate or because the transactions represented a very small percentage of their total volume of credit sales. Officials from one major U.S. payment aggregator told us, recognizing the potential for abuse, that they had established policies in accordance with the U.S. Department of the Treasury\u2019s Suspicious Activity Reporting requirements and file reports weekly. Additionally, one issuer expressed confidence in conducting business with a leading U.S. aggregator, PayPal, because this aggregator no longer does business with Internet gambling merchants.\nOur survey of Internet gambling Web sites, conducted during summer 2002, showed that four different payment providers were advertised as payment options. The one that appeared most often, PayPal, was on two- thirds of the sites in our survey, while the one that appeared the least frequently, EZPay, was on about 1 percent of the sites. In some cases, the sites suggested that gamblers use an on-line payment provider to fund their accounts if their credit cards were blocked. We also found instances of the sites offering bonuses to gamblers who chose to fund their accounts through on-line payment providers.\nRather than developing an audit program to address Internet gambling issues, one association chose to focus on dealing proactively with these on-line payment providers, which it viewed as a potential loophole in the system. An official from one association explained that the association had a policy of not doing business with on-line payment providers without reaching an understanding about Internet gambling with the provider\u2019s acquirer. The acquirer would have to agree that any funds the provider obtained through the association\u2019s systems would not be used for Internet gambling unless the transaction was properly coded, so the issuing bank could deny the charge at its discretion. The official cited an example in which such an understanding could not be reached. The provider stopped accepting cards bearing the association\u2019s brand name rather than comply with the coding requirements.\nOfficials of the other association noted that on-line payment providers are responsible for ensuring that credit cards are not used to pay for Internet gambling activities unless the funds transfer is explicitly coded as an Internet gambling transaction at the time of the authorization. In such cases, issuers that have decided to block Internet gambling transactions can deny authorization for those made through an on-line payment provider. Officials were aware that at least one major on-line payment provider was regularly using the Internet gambling transaction codes when they were warranted.\n\n\t\tIssuers Rely on Fraud Monitoring to Identify Internet Gambling Transactions and Take Action on Them\n\nIssuers learn from customer complaints or their own monitoring that a credit card transaction is a disguised Internet gambling transaction. The issuers we spoke with told us that they used their fraud monitoring systems to identify potential Internet gambling transactions. The systems, according to the issuers, provide initial clues by identifying deviations from expected patterns of transactions, and the issuers investigate these deviations for potential Internet gambling transactions. Some issuers told us that they also periodically reviewed and analyzed authorization logs generated by their systems for departures from established operating rules. Several issuers noted that they also identified Internet gambling transactions from investigating customer disputes. Most of the issuers said that as a result of their total monitoring effort, they ultimately were able to identify Internet gambling merchants that miscoded transactions to disguise them and had programmed the monitoring systems to identify, track, and block these merchants\u2019 transactions. Two issuers told us that in egregious cases they blocked the merchant\u2019s identification number and thus denied all transactions from that source. But the issuers acknowledged that their monitoring efforts did not capture all transactions involving Internet gambling and could not always identify where the transactions took place.\nIssuers can take other actions against Internet gambling merchants that they identify \u201ccloaking\u201d transactions. First, if they learn about the Internet gambling activity within the time limits established by association rules, some issuers attempt to charge the transactions back to these merchants.One issuer said that it used a modified chargeback procedure that required searching posted billing transactions for indications that Internet gambling might be involved. The issuer reportedly was able to charge back \u201chundreds of thousands\u201d of improperly coded transactions, putting several Internet gambling operators out of business. The issuers also told us they reported the Internet gambling merchants to the credit card associations so that the associations could notify the acquiring banks, which could exercise due diligence over the merchants.\n\n\t\tBanks that Acquire Internet Gambling Merchants Are Based Overseas\n\nThe six acquirers in our review were all U.S.-based members of the credit card associations. Officials from five of these acquirers told us they do not have any overseas operations, and five indicated that, as a matter of policy, they acquire merchants only in the United States. Because Internet gambling merchants tend to be located overseas, these U.S.-based acquirers would not acquire these merchants in any case. One of the other acquirers told us it had relationships with foreign merchants through arrangements with foreign banks but did not acquire Internet gambling merchants overseas. According to an association official, member banks based outside the United States acquire Internet gambling merchants in jurisdictions where Internet gambling may be a legal enterprise. The associations did not conduct any additional due diligence on member banks that acquired Internet gambling merchants. One association provided its members with additional requirements and best practices for acquiring such merchants.\nBased on our survey of Internet gambling sites, we estimate that about 85 percent advertised MasterCard as a form of payment, with a similar percentage of sites advertising VISA. However, although Internet gambling sites may advertise a specific association, such as VISA or MasterCard, transactions using the cards of issuing banks that attempt to block Internet gambling may be denied. Some of the sites in our survey alerted their clients to this potential problem and suggested the use of other payment options, including on-line payment providers, wire transfers, and checks. Some Internet gambling Web sites offer bonuses to promote payment mechanisms such as direct wire transfers. In our review, about 47 percent of the Internet gambling sites advertised Western Union. Our survey also revealed that Internet gambling Web sites encouraged the use of money orders and various forms of checks\u2014about 28 percent of the reviewed sites said they allowed money orders, while 8 percent said they accepted traveler\u2019s checks. In addition, 40 percent of Internet gambling Web sites noted that they would recognize bank drafts, certified checks, and cashier\u2019s checks. Our survey results also showed that 79 of the sites reviewed indicated they had established a relationship with an electronic banking system or a processor. Appendix IV provides more information on our survey.\n\n\t\tAcquirers Take a Variety of Actions to Identify Merchants Engaged in Internet Gambling\n\nU.S.-based acquirers told us that they exercised due diligence on Internet- based merchants to ensure that the merchants were not engaged in Internet gambling. The acquirers\u2019 due diligence of Internet merchants consisted of screening applicants and monitoring approved merchants. In screening merchant applicants, the acquirers generally verified applications and reviewed Web sites to ensure that the merchants were not engaged in Internet gambling. Two acquirers also said that they reviewed merchants\u2019 business plans and products to understand the nature of the operations and determine if international transactions would occur in the course of the business. The acquirers in our review said they assigned approved merchants a merchant category code identifying the type of business activity the merchant was engaged in and required them to use the code to transmit credit card transactions. Individual merchants engaged in more than one type of business activity could receive more than one code.\nThe acquirers\u2019 monitoring efforts included periodic visits to the Web sites of approved merchants to ensure that the nature and distribution of their products had not changed. They also analyze any changes in merchants\u2019 transaction volumes and transactions for all e-commerce sites. Most of the acquirers told us that they were unable to screen out all Internet gambling merchants despite these due diligence efforts. Acquirers gave different reasons for not detecting all Internet gaming merchants. For example, two acquirers cited factoring, while others cited merchant fraud or misrepresentation of business activity. While the acquirers in our review did not deny that Internet gambling merchants had circumvented the coding system by entering erroneous merchant category codes, they denied direct knowledge that their Internet merchants had engaged in this activity. Nevertheless, the acquirers told us that as a matter of policy they would terminate merchants that were found repeatedly miscoding credit card transactions or misrepresenting their activities.\n\n\t\tAssociations Impose Penalties on Acquiring Banks for Miscoded Transactions\n\nAssociation officials told us that both of their associations monitored transactions for fraud, looking for and investigating suspicious activity. These monitoring efforts, which may identify miscoded transactions from Internet gambling merchants, are designed to detect many different types of fraudulent schemes. Association officials also noted that consumer complaints and concerns raised by issuers had been helpful in identifying coding errors related to Internet gambling.\nAssociations\u2019 efforts in support of issuer policies to block Internet gambling transactions focused primarily on requiring acquiring member banks to ensure the accuracy of merchant and commerce codes. The associations did not monitor the adequacy of due diligence exercised by acquiring banks in screening and monitoring merchants. They relied on federal and state banking regulators to supervise and examine acquirers\u2019 due diligence and \u201cexpected\u201d the acquiring banks to comply with association contracts, agreements, and operating regulations. The regulations specifically impose on all acquirers the responsibility for ensuring that their merchants properly code transactions and impose penalties on the acquirers for improper merchant and transaction codes. Association officials said that they shared the results of their investigations of merchants with acquirers, enabling the acquirers to take action against these merchants. For example, an official said that his association had detected several instances in which merchants had submitted false information on applications and thus had been assigned category codes for businesses other than gambling. The association said that it had told the acquirers about these merchants and that the acquirers promptly terminated them.\nIn November 2001, one of the credit card associations implemented an Internet gambling audit program to help minimize the extent of coding errors related to Internet gambling. Rather than monitoring actual transactions, the program focuses on monitoring Internet gambling Web sites to identify merchants that may be disguising their credit card transactions. The association\u2019s staff sample Internet gambling Web sites and test the reliability of their coding efforts by submitting \u201cdummy\u201d transactions. If the testing reveals that a gambling site uses incorrect coding, the merchant\u2019s acquirer is notified and given 30 days to correct the coding with the merchant. The association then audits the site to verify that the coding has been corrected. When an Internet gambling merchant is cited for using incorrect codes, the responsible acquiring bank can be fined $25,000 per merchant outlet. To date, the association has imposed more than $100,000 in penalties on six acquiring banks for improper coding by merchants.\n\n\t\tThird-Party Processors Implement the Issuers\u2019 and Acquirers\u2019 Policies on Internet Gambling\n\nTwo of the four third-party processors in our review told us that they blocked Internet gambling transactions for their issuing bank clients. Three of these processors also told us that while they acquired Internet merchants on behalf of their acquiring bank clients, they did not acquire Internet gambling sites because their clients did not want these merchants as customers. The processors noted that they always carried out the policies and procedures specified by the issuing and acquiring clients regarding the types of transactions to block or the types of merchants to acquire.\nThe processors provided a variety of services for their client banks. For example, they provided software programs, technical assistance, fraud monitoring, e-banking services, and services related to card processing, such as issuing cards, authorizing transactions, and billing customers. The three processors providing merchant acquisition services said that they conducted due diligence on the Internet merchants, screened merchant applicants and monitored those approved. The three processors said that their screening procedures required due diligence to ensure that the new Internet merchants were not engaged in Internet gambling. Officials of one of these processors underscored their view that Internet gambling sites represented a significant financial and legal risk and said that the company did complete Web site reviews to evaluate merchants\u2019 practices and confirm the types of products sold. The two other processors also provided monitoring services, including on-going reviews of merchants\u2019 Web sites and changes in merchants\u2019 transaction activity, to verify whether these businesses had expanded into Internet gambling.\n\n\t\tNew Technologies Are Being Developed to Facilitate Payment for Internet Gambling Transactions\n\nWith financial institutions restricting the use of credit cards, many gaming representatives believe that e-cash will become the currency of the future for Internet gambling. E-cash comes in two basic forms: smart card e-cash and computer e-cash. A report on emerging cyberspace technology outlined the four types of cyberpayment systems that exist; however, they are not all currently in use for Internet gambling. The models are the merchant issuer model, the bank issuer model, the nonbank issuer model, and the peer-to-peer model.\nThe merchant issuer model. The merchant issues the smart card. An example of this model can be found in the subway system in Washington, D.C., which sells Smart Trip farecards directly to riders for use on the subways. Riders can simply add money to the cards and continue using them.\nThe bank issuer model. A financial institution issues the smart card, and the transactions are cleared through the traditional financial systems.\nThe nonbank issuer model. Users buy electronic cash from issuers using traditional money and spend the electronic cash at participating merchants. The issuer subsequently redeems the electronic cash for the merchant.\nThe peer-to-peer model. A bank or other entity issues electronic cash, which is then transferred between users. The only points of contact between the traditional payments system and the electronic cash are the initial purchase and the redemption from the individual or merchant.\nRepresentatives of the Internet gambling industry noted that while using e- cash is not as convenient as using credit cards, it does offer advantages. For example, there are no global constraints, transaction costs are lower, transactions are processed immediately, and the risk of identity theft is substantially lower. However, in their view, in the United States, e-cash has struggled because U.S. citizens are comfortable using credit cards for e-commerce and thus have not generally used alternative payment mechanisms. But, according to Internet gambling representatives, as financial institutions increasingly block credit card transactions for Internet gambling, they expect the demand for alternative payment methods will increase. Further, one gaming analyst commented that because the Internet gambling market is saturated, many business plans now being presented to Internet gaming consultants are proposals for alternative payment systems, including digital cash, Automated Teller Machine features, digital cards, affinity cards backed by acquiring banks, and automated clearinghouse systems and transfers. According to the gaming analyst, market demand is driving the industry to shift away from establishing Internet gambling Web sites and toward developing payment mechanisms.\n\n\tViews on the Vulnerability of Internet Gambling to Money Laundering Are Mixed\n\nRepresentatives of law enforcement agencies, regulatory bodies, and the credit card and gaming industries expressed mixed views regarding the vulnerability of Internet gambling to money laundering. Law enforcement officials believed that money laundering activities could potentially be conducted on both legitimate and complicit Internet gambling sites.Representatives of the credit card and gaming industries believed that Internet gambling was not necessarily more susceptible to money laundering than any other type of on-line transaction. However, gaming industry representatives suggested that eliminating traditional forms of payment such as credit cards could potentially heighten money laundering concerns.\n\n\t\tDespite Concerns about the Vulnerability of Internet Gambling to Money Laundering, Few Cases Have Been Prosecuted\n\nLaw enforcement officials told us they believed that Internet gambling can be a significant vehicle for laundering criminal proceeds, especially to move illicit funds among financial institutions at the layering stage. The officials said that the volume, speed, and international reach of Internet transactions and the fact that many Internet gambling sites are located offshore increased the potential for misuse. In their view, these characteristics can promote a high level of anonymity and give rise to difficult jurisdictional issues.\n\n\t\t\tFew Cases of Money Laundering through Internet Gambling Have Been Prosecuted\n\nLaw enforcement officials acknowledged the lack of adjudicated cases involving money laundering but said they believed that Internet gambling offered many potential ways of laundering money. One U.S. law enforcement official attributed the lack of adjudicated cases involving money laundering through Internet gambling sites to several factors, most notably the lack of any industry regulations or oversight. Currently, the Federal Bureau of Investigation (FBI) has two open cases involving Internet gambling as a venue for money laundering activities.\nIn Treasury Enforcement\u2019s view, one key reason that Internet gambling is vulnerable to money laundering and other forms of financial crime, including tax evasion, is that the gambling sites are frequently located in areas with weak or nonexistent supervisory regimes. The U.S. experience with all types of money laundering is that criminals will seek out and exploit areas of the world with ineffective supervisory regimes. The multinational Financial Action Task Force (FATF) has also noted this trend and, according to Treasury, initiated the Non-Cooperative Countries and Territories process to help bring countries with weaker anti-money laundering laws and supervisory regimes up to international norms. Although specifics were not provided, a February 2001 FATF report stated that some member jurisdictions had evidence that criminals were using Internet gambling to launder their illicit funds. In a March 2002 report, the State Department said that Internet gambling involving credit cards and offshore banks was a powerful vehicle for criminals seeking to launder funds from illicit sources and to evade taxes.\nTreasury Enforcement officials also noted with concern how certain gaming merchants have attempted to circumvent the credit card coding system through factoring. In appropriate circumstances, they believed the use of factoring could be a key step in facilitating money laundering, since factoring is used to disguise from enforcement and regulatory officials the true source of funds and how they were obtained.\n\n\t\t\tHypothetical Money Laundering Scenarios Involve Both Legitimate and Complicit Internet Gambling Sites\n\nIn the FBI\u2019s view, because of the nature of Internet gambling, money laundering could be conducted through either legitimate or complicit sites. In law enforcement\u2019s view, legitimate Internet gambling sites provide an opportunity to transfer high volumes of money in and out of a number of accounts within a single \u201cinstitution.\u201d An individual could potentially deposit illicit funds into a legitimate Internet gambling account under a false name and wager a small amount in order to make the account appear genuine to the site operator. After a few losses, the individual could withdraw the rest of the illicit funds from the account. The transaction\u2019s \u201cpaper trail\u201d would register a lawful Internet gambling transaction, mingling legitimate money with illicit. For example, a bettor who wanted to launder $100,000 could potentially place bets on opposing teams in a sporting event with two different sites, betting on both teams for $100,000. Regardless of the outcome, and if the bet were structured properly, the bettor would lose the bet wagered on the losing team but be paid double for the bet on the winning team. The only money that the bettor would lose would be the processing charges and related fees, and the money would appear to be legitimate winnings.\nIn addition, law enforcement officials believe a money launderer would not necessarily have to place a wager in order to \u201cclean\u201d illicit funds. A legitimate on-line gaming account could be used as a potential storehouse for illicit funds until they could be transferred to an offshore account. For instance, a money launderer could locate several legitimate Internet gambling sites that had few or no deposit requirements and deposit the maximum amount at one or more of them. The funds could later be transferred into an offshore account as \u201clegitimate\u201d winnings.\nU.S. law enforcement officials said they also believed that money launderers could develop Internet gambling sites for the sole purpose of laundering money. An operator of a complicit site could theoretically program casino gaming software to react to a specific password or sign-on command, automatically taking a percentage of the deposit and cloaking it as a gaming loss. In essence, however, such a deduction would be the operator\u2019s service fee for laundering the illicit funds. Such a site would also need legitimate gamblers in order to mask the true nature of the operation.\n\n\t\tFinancial and Gaming Industries Did Not View Internet Gambling as a Money Laundering Threat\n\nBanking and gaming regulatory officials did not view Internet gambling as being particularly susceptible to money laundering, especially when credit cards, which create a transaction record and are subject to relatively low transaction limits, were used for payment. Likewise, credit card and gaming industry officials did not believe Internet gambling posed any particular risks in terms of money laundering. As noted earlier, the credit card industry has other reasons for restricting the use of credit cards in Internet gambling transactions. The associations, a credit card company, and a few issuers told us that they believed their broad anti-money laundering program or coding system covered potential money laundering through Internet gambling. Officials of one association specifically told us its transaction coding system for Internet gambling was designed to address risks, including money laundering, by allowing issuers to block any and all Internet gambling transactions. This system does not, however, enable issuers to block transactions that are not properly coded.\nIn general, gaming industry officials did not believe that Internet gambling was any more or less susceptible to money laundering than other electronic commerce businesses and noted that the financial industry\u2014 which is responsible for the payments system\u2014is better suited to monitoring for related suspicious activity in the area than the gaming industry itself. A few officials commented that, in their view, on-line casinos should probably be subject to anti-money laundering requirements similar to those required of brick-and-mortar casinos. One U.S. gaming establishment has obtained an Internet gambling license and has begun offering Internet gambling from a jurisdiction with legalized and strictly regulated Internet gambling. To avoid jeopardizing the status of its U.S. state gaming license, this entity was trying to anticipate and address all the potential risks of expanding into Internet gambling, including any reputational risks that could be associated with money laundering.\nIndustry gaming officials also cautioned that, in their view, Internet gambling could become more susceptible to money laundering as U.S. financial institutions continue to block the payment of Internet gambling activities through credit cards. They explained that credit cards would likely be replaced by newer forms of electronic payments that might not be subject to the same level of record keeping or transaction limits as credit cards and could thus be more susceptible to money laundering. In these analysts\u2019 view, the new payment methods are attractive to Internet gamblers because they offer certain advantages: security, lower transaction costs, anonymity, and speed. These are important marketing tools for the Internet gambling industry. However, the very features that appeal to Internet gamblers offer the potential to bypass traditional money laundering controls, possibly creating an ideal vehicle for money laundering. In addition, officials pointed out the likelihood that some emerging electronic gambling schemes that made identifying gamblers and enforcing regulations more difficult would become more popular. Such schemes could include, for example, player-to-player wagering that allows individuals to place bets directly with other bettors without involving a bookmaker or operator. According to gaming officials, the absence of the bookmaker or operator who normally assigns the odds or monitors the betting action increases the potential for illegal activity, including money laundering.\n\n\tAgency Comments and Our Evaluation\n\nWe requested comments on a draft of this report from the Departments of Justice and the Treasury. DOJ had no comments on it. Treasury provided technical comments on the money laundering section that we incorporated, where appropriate.\nWe are sending copies of this letter to the Chairman and Ranking Minority Member of the Senate Committee on Banking, Housing, and Urban Affairs and to the Ranking Minority Members of the House Subcommittee on Financial Institutions and the House Subcommittee on Oversight and Investigation, Committee on Financial Services. This report will be available on GAO\u2019s Internet home page at http:\/\/www.gao.gov.\nPlease contact Barbara Keller, Assistant Director, or me at (202) 512-8678 if you or your staff have any questions concerning this work. Key contributors to this work are acknowledged in appendix V.\n\nAppendix I: Scope and Methodology\n\nTo develop the legal framework for Internet gambling activities in the United States and our selected states, we researched federal laws, the laws of five judgmentally selected states whose statutes included a wide range of gambling provisions, court cases interpreting these laws, and related studies. We also spoke with representatives of the Department of Justice (DOJ), the Department of the Treasury and the offices of the attorneys general for the states of Massachusetts, Missouri, Nevada, New Jersey, New York, and Utah. Finally, we spoke with private attorneys who specialize in gaming law and with representatives of the gaming commission from Nevada and New Jersey. To develop information on the legal framework in selected foreign countries, we contacted gaming and government officials in those countries and researched secondary sources describing their laws. We reviewed various reports, including the Internet Gambling Report, policy papers, and other publications describing the laws of Australia, Canada, Hong Kong, and the United Kingdom to determine the approaches these countries and jurisdictions take to regulating Internet gambling. We contacted the supreme audit institution in each country or jurisdiction to determine whether any work had been done on Internet gambling there. In addition, we researched the Web sites of selected foreign regulators and reviewed available documentation on their Internet gambling regulations, policies, and guidelines. Information was collected solely from secondary sources and does not reflect our independent legal analysis.\nTo obtain an understanding of the nature and extent of policies and procedures implemented by the credit card industry to restrict the use of credit cards as a form of payment for Internet gambling, we interviewed officials from the four major credit card organizations, some large issuing and acquiring member banks, third-party processors, on-line payment providers, bank regulators, and banking trade associations. The criteria we used to select the entities for our review included the level of responsibility for significant credit card activity in domestic and foreign markets and oversight by the various federal banking regulators. Seven of the 8 issuing banks we selected rank among the top 10 issuers in the United States, and together with the credit card companies are responsible for over 71 percent of the credit cards issued by U.S. card issuers in 2001, according to The Nilson Report. Five of the 6 acquiring banks we selected were among the top 10 acquirers in the United States in 2001 and were affiliated with the issuing banks in our review. These acquiring banks have nearly 2 million merchant clients, representing over 40 percent of the outlets in the United States for 2001, according to The Nilson Report. We selected four major credit card processors in the United States, including three that provided services for issuers in our review. We requested documentation on Internet gambling policies and procedures from industry representatives; however, only three entities provided us with any written documentation. The others described their policies and procedures but were unwilling to provide documentation to support their descriptions because of concern about the confidentiality of proprietary policies.\nIn addition, we conducted an electronic survey of Internet gambling Web sites to gather data about payment options customers can use to make deposits to gamble, payment acceptance policies, and other topics. We were interested in how gaming Web sites presented information about payment options and how credit cards fit into that presentation.\nTo obtain views on the vulnerability of Internet gambling to money laundering, we interviewed gaming and Internet gambling industry experts, knowledgeable U.S. state representatives, and law enforcement officials (including appropriate officials in Treasury\u2019s Office of the Undersecretary for Enforcement and DOJ\u2019s Criminal Division, the FBI, and the Executive Office of US Attorneys, and the state attorneys general listed above) to obtain their views on the susceptibility of Internet gambling to money laundering and on some of the legal issues pertaining to on-line gaming and betting. We conducted structured interviews with the credit card industry, issuing and acquiring banks, and Internet merchant aggregators to understand their anti-money laundering policies and procedures in general and as they relate to Internet gambling in particular. We also reviewed documentation\u2014correspondence, training materials, publicly released reports, and written statements\u2014presented by law enforcement officials that highlighted their concerns about the potential for using Internet gambling as a vehicle for money laundering.\nWe performed our work in Washington, D.C.; Las Vegas, Nevada; and San Francisco, California, between March and October 2002 in accordance with generally accepted government auditing standards.\n\nAppendix II: Interstate Horseracing Act\n\nPari-mutuel wagering on state-licensed horse races takes place over the Internet in a number of states. Both federal and state laws govern this activity. In 1978, Congress passed the Interstate Horseracing Act (IHA) to regulate interstate commerce with respect to pari-mutuel wagering on horse races. The intent of the statute was not only to give states primary responsibility for determining what forms of gambling can legally take place within their borders, but also to \u201cfurther the horseracing and legal off-track betting industries in the United States\u201d by regulating interstate wagering activities.\nPari-mutuel horse racing has been conducted in the United States under state authority for over 75 years. In states that allow wagering on horse racing, a state agency\u2014usually a racing commission\u2014regulates the betting, licenses the participants (including the track and horse owners, trainers, jockeys, and drivers), and promulgates and enforces regulations. Under the IHA, wagers may be placed or accepted in one state on a race taking place in another state. However, the IHA stipulates that no entity can accept an interstate, off-track wager without the consent of the track where the live race takes place (the host racing association), the entity regulating the host racing association (the host racing commission), the entity regulating the establishment that takes the bets, and all race tracks operating within 60 miles of the location where the wager is accepted.\nThe IHA also imposes limits on the commission that interstate off-track betting systems can charge. The IHA is a civil statute, meaning that under its terms, the host state, the host racing association, or a neighboring race track may file a civil action against establishments that violate the law. These suits may seek to keep such establishments from accepting wagers for races at the host track without the required consent, and for damages resulting from such conduct. Because the IHA is not a criminal statute, the U.S. government cannot bring a criminal action against off-track establishments that violate the law.\nOriginally, an interstate off-track wager was defined as \u201ca legal wager placed or accepted in one State with respect to the outcome of a horserace taking place in another State.\u201d The definition of an interstate off-track wager was expanded in December 2000 with amendments to the IHA to include \u201cpari-mutuel wagers, where lawful in each State involved, placed or transmitted by an individual in one State via telephone or other electronic media and accepted by an off-track betting system in the same or another State, as well as the combination of any pari-mutuel wagering pools.\u201d This provision appears to explicitly extend the provisions of IHA to the Internet medium. Indeed, in opposing this amendment to the IHA, Congressman Wolf of Virginia stated that it \u201cwould legalize interstate pari- mutuel gambling over the Internet.\u201d However, in a March 2000 hearing before the House Subcommittee on Crime of the Committee on the Judiciary, in connection with a bill attempting to prohibit Internet gambling, an official from DOJ testified that despite the IHA, gambling businesses offering bets on horse racing over the Internet were violating the Wire Act (18 U.S.C. \u00a7 1084). However, this hearing took place before the December 2000 amendments to the IHA, and we were unable to obtain DOJ\u2019s current position on the legality of interstate wagering on state- licensed horse races over the Internet. But in explaining the rationale of DOJ\u2019s testimony to us, DOJ officials stated that since IHA is a civil statue and the United States would not be a party to any action brought under it, IHA could not override the Wire Act, which is an existing criminal statute.\nMany industry participants disagreed with the positions set forth in DOJ\u2019s March 2000 testimony. For example, the Chairman of the Oregon Racing Commission testified at that hearing that DOJ\u2019s interpretation disregards the purpose behind the Wire Act, which is to combat organized crime. He noted that the Wire Act was not intended to make activities licensed and regulated by the states illegal and that the IHA was enacted for the express purposes of ensuring proper regulation of interstate off-track betting and furthering the horse racing and legal off-track betting industries in the United States. He concluded that DOJ\u2019s interpretation apparently disregards Congress\u2019s intent in enacting the IHA and noted that DOJ has never brought an action against a state-licensed entity offering pari-mutuel wagering on horse races over the Internet.\nIndustry participants have stated that the industry has made efforts to monitor Internet-based pari-mutuel wagering on horse races.  An official from the Oregon Racing Commission told us that such wagering is generally conducted on a closed-loop, subscriber-based system designed to circumvent the \u201copen nature\u201d of the Internet, to ensure adherence to state laws, and to ensure that bettors are of legal age and qualified to participate.  Such systems operate through Internet Web sites that are protected by passwords and are not available to the general public.  Only registered members may sign on to use a site\u2019s services, and those wishing to register must provide notarized verification of age, a photo identification, and proof of residency.  To prevent identity theft, a letter requesting verification of the information is sent to the address used to open the account.\nDespite these protections and the view that pari-mutuel wagering on horses via the Internet is legal, officials from the National Thoroughbred Racing Association (NTRA) told us that entities offering online pari-mutuel wagering have encountered difficulty with banks, which increasingly refuse to accept credit card transactions for this type of betting. Apparently, many banks use the same coding for pari-mutuel wagering on horses over the Internet and for other types of on-line gambling, such as online casinos and sports betting. According to NTRA officials, this problem is the result of current limitations in credit card coding programs. NTRA officials have stated that they are working with credit card issuers to create a unique transaction code for lawful domestic pari-mutuel wagers that will distinguish them from other forms of on-line gambling. A unique transaction code would still allow the credit card issuers to reject payment for unlawful on-line gambling activities, while accepting Internet wagers on horse races.\n\nAppendix III: Internet Gambling Regulation in Foreign Jurisdictions\n\nThe regulation of Internet gambling in foreign countries and jurisdictions varies widely, with some countries permitting it, others banning it, and others taking a mixed approach by prohibiting some forms of Internet gambling and regulating other forms. We focused on four countries and jurisdictions\u2014Australia, Canada, Hong Kong, and the United Kingdom (U.K.)\u2014that vary in their approaches to regulating Internet gambling. We found that Australia has a federal law that prohibits Australian and offshore entities from providing Internet gambling services to Australian residents. Canada allows only provincial governments to offer gaming through a computer, and provincial governments may not license others to conduct such gambling. Hong Kong permits Internet gambling only if it is run by the legal monopoly, the Hong Kong Jockey Club, in the form of pari-mutuel betting on horse races and certain types of lotteries. Hong Kong does not allow offshore Internet gambling in Hong Kong. The U.K. permits betting operations to operate using the Internet, because bookmakers are permitted to accept telephone bets (subject to licensing requirements) and Internet betting operations have been licensed as a form of telephone bet. Other forms of gambling, such as casino, gaming, bingo, and lotteries, are illegal on the Internet.\n\n\tAustralia\n\nAustralia has a federal law that prohibits Australian and offshore entities from providing Internet gambling services to Australian residents. After a year-long moratorium on the development of the interactive gambling industry, Australia enacted federal legislation, the Interactive Gambling Act 2001 (the Act), that prohibits operators from providing an Internet gambling service to Australian residents. Under the Act, an Internet gaming service is defined as an Internet casino or interactive gaming Web site. The prohibitions of the Interactive Gambling Act apply to all Internet gambling service providers\u2014Australian and offshore, whether owned by Australians or foreigners\u2014and carries a maximum penalty of $220,000 AUD per day for individuals and $1.1 million AUD per day for corporate bodies. The Act also makes it an offense to provide such services to people in a \u201cdesignated country,\u201d although we are not aware that any foreign countries have received this designation.\nThe Act does not prohibit on-line sports wagering and lotteries. Instead, these activities are regulated by Australian state and territorial legislation. Generally, state and territorial legislation prohibits on-line sports wagering and lotteries unless the operator is licensed in the relevant jurisdiction. The Act provides both for self-regulation and government monitoring. Internet service providers are tasked with developing a code of practice relating to Internet gambling matters. If the industry fails to act, the Australian Broadcasting Authority (the Authority) may set industry standards that, among other things, ensure that Internet service providers provide customers with appropriate filtering software or similar devices to prevent access to prohibited sites. The Authority is empowered to implement a complaints-based regime aimed at further preventing interactive gambling service providers from targeting Australian customers. The Authority can initiate investigations of interactive gambling activities and can also accept complaints from the public. Violations are referred to the police. The Act also incorporates processes designed to ensure appropriate government review and, if required, revision. The act is scheduled to be reviewed before July 1, 2003, taking into account the growth of interactive gambling services, their social and commercial impact, and other matters.\n\n\tCanada\n\nThe Criminal Code of Canada makes it illegal to gamble or conduct any gaming activities within Canada unless they fall within recognized exceptions set out in the Criminal Code. The exceptions include \u201clottery schemes\u201d that are conducted and managed by a province (such as casinos and electronic gambling), a narrower range of lottery schemes that are licensed by a province (to a charity, fair, or exhibition, and, rarely, to a private individual), bets made between individuals not engaged in the business of betting, pari-mutuel betting on horse races (regulated by the federal Minister of Agriculture) and some lottery schemes conducted in Canada on international cruise ships. Under the Criminal Code, only provincial governments are permitted to offer a lottery scheme on or through a computer and they may not license others to conduct one. Further, any lottery would have to be restricted to residents of the province operating it. In order to offer on-line gambling in Canada then, a provincial government would not only have to operate the sites itself but also ensure that residents from other provinces did not participate unless cooperative agreements between the provinces were in place. In addition, commercial land-based betting on single sporting events is prohibited in Canada and therefore would not be permitted over the Internet. A recent case from the Prince Edward Island Supreme Court (Appeal Division) held that an Internet lottery ticket Web site licensed by the Province of Prince Edward Island would not be conducted and managed in the province as required by the Criminal Code. The court found that even though the server was located in the province, the lottery would violate the Criminal Code by offering gambling to a worldwide market. In addition, since it was licensed to a charity and not conducted by the province, the lottery violated the Criminal Code\u2019s requirement that provinces run computerized lottery schemes. This case is now on appeal to the Supreme Court of Canada.\nAccording to an official from Canada\u2019s Department of Justice, the matter of betting with an offshore betting shop or on-line casino located offshore has not yet been before Canadian courts. The official further stated that this situation reflected the difficulty of conducting offshore investigations and arraigning foreign suspects before Canadian courts, particularly when no \u201cdual criminality\u201d exists and extradition is not possible, or when no extradition treaty exists.\n\n\tHong Kong\n\nGambling is illegal in Hong Kong unless specifically permitted under the Gambling Ordinance, which sets out the jurisdiction\u2019s overall gaming policy and statutes. The ordinance permits several forms of gambling, specifically pari-mutuel betting and lotteries, which are conducted as a legal monopoly by the Hong Kong Jockey Club. In May 2002, the Hong Kong Legislative Council voted to ban offshore gambling, including offshore Internet gambling, by passing the Gambling (Amendment) Ordinance 2002. This legislation, which criminalizes both offshore betting and bookmaking, applies to both operators and bettors.\nHong Kong residents may legally participate in some forms of Internet gambling. The passage of the 2002 Amendment gave the Hong Kong Jockey Club complete control of the gaming market. The club solicits pari- mutuel bets from around the world and operates Hong Kong\u2019s twice- weekly government lottery, the Mark 6. Hong Kong residents can legally place on-line pari-mutuel wagers with the club. The betting duty paid by the Jockey Club accounts for about 10 percent of government revenues.\nHowever, Hong Kong law provides for criminal penalties for any offshore gambling agent promoting or advertising a gaming \u201cproduct\u201d to Hong Kong residents or facilitating residents\u2019 use of such a product. The maximum punishment for brokers is 7 years imprisonment and a penalty of $5 million HKD ($641,000 USD), while individual bettors face 9 months imprisonment and a penalty of $30,000 HKD ($3,800 USD) if convicted. The bill also prohibits financial institutions, such as banks and credit card companies based in Hong Kong, from processing betting transactions, preventing Hong Kong residents from placing Internet gambling bets using credit cards or similar means of payments. In addition, Hong Kong\u2019s Home Affairs Bureau could potentially use the law\u2019s provisions, in conjunction with anti-money laundering legislation, to prevent local banks from providing banking services to known operators of offshore gambling sites.\n\n\tUnited Kingdom\n\nThe U.K. has several different laws and regulatory schemes that apply to gaming, betting and lotteries, but there are no specific laws governing Internet gambling operations or making it illegal for private citizens to gamble on-line. Some types of gambling can be carried out legally by operators on line and others cannot. For example, betting operations can operate via the Internet because bookmakers have long been permitted to accept telephone bets subject to licensing requirements and Internet betting operations fall within the same legislative provisions. Other forms of gambling, such as casino gaming, bingo, and most lotteries, are illegal on the Internet due to specific legal requirements for conducting these types of gambling. The laws applicable to casino gaming and bingo require that the persons taking part in the gaming be present on the gaming premises. The laws applicable to lotteries have been interpreted to prevent most Internet sale of tickets because they cannot be sold by machine.\nThe Gaming Board for Great Britain (the Gaming Board) is the body that regulates casinos, bingo clubs, gaming machines, and charity lotteries. As part of its mandate to advise the Home Secretary on developments in gaming, the Gaming Board did a study on Internet gambling that raised public policy issues based on the Internet\u2019s potential to offer unregulated, unlicensed, and low- or no-tax gambling. According to the report, Internet gambling sites fall into two primary categories: sites that offer an entry to land-based gambling, and interactive gaming sites. Sites that serve as a means of facilitating land-based gambling are often just alternatives to other means of entry such as the post or telephone\u2014that is, they use the Internet simply as a communications tool. Examples of this type of site are football pools and betting on horse racing and other sports. Interactive gaming, however, is run exclusively on the Internet and includes sites offering virtual casinos, slot machine gaming, and interactive lotteries. The report summarized the legal status of using the Internet for each type of gaming as follows   Betting. Bookmakers can accept telephone bets from clients with credit accounts, and football pools can accept entries by post. Neither is prevented from accepting bets by e-mail. Bookmakers have chosen offshore locations for their telephone and Internet betting operations because taxes are lower in those jurisdictions.\nCasinos, bingo, and gaming machines. These types of gaming are only permitted on licensed and registered premises, and the persons taking part in the gaming must be on the premises at the time the gaming takes place. These stipulations effectively prevent an operator from obtaining a license for Internet gaming in the U.K. The Gaming Board stated that it would take action to enforce this prohibition.\nLotteries. Tickets for lotteries can be sold in almost any location, other than in the street, including at people\u2019s homes and over the telephone, but they cannot be sold by machine. The Gaming Board has taken the position that running a lottery entirely by computer over the Internet amounts to selling tickets by machine and has refused to authorize such lotteries. However, some companies that manage lotteries have presented proposals to the Gaming Board for lotteries that would use the Internet as a means of communication, much like a telephone. The Gaming Board has approved two of those proposals.\nFinally, the report outlined what it saw as the three main policy options for Internet gambling regulation in the U.K.: retaining the status quo, encouraging measures to prevent offshore Internet gambling, and creating legislation to permit regulated and taxed Internet gambling.\nAnother report, \u201cGambling Review Report of 2001\u201d (\u201cthe Budd report\u201d), commissioned by the Home Office, recommended that on-line gambling be regulated and that the activity \u201cbe seen as just another way of delivering a service.\u201d According to the Budd Report, the key objectives of gambling laws and regulations are that gambling should be free of crime, honest, and conducted in accordance with regulation; that players should know what to expect and be confident that they will get it without being exploited; and that children and other vulnerable persons should be adequately protected. The Budd Report recommendations would potentially permit the following in the U.K.: on-line gaming and betting (including in football pools), remote gaming on live games, and betting on the National Lottery.\nAccording to a U.K. government official, the U.K. is developing a timetable for introducing new gambling legislation sometime between 2003 and 2004. The new legislation will contain a number of major gambling reforms, including provisions covering Internet gambling.\n\nAppendix IV: Survey of Internet Gambling Web Sites\n\nWe conducted a survey of Internet gambling Web sites to gather data about the payment options offered to those wishing to gamble. We were primarily interested in the way these sites presented information about credit cards and other payment options.\n\n\tSampling\n\nInternet gambling, as defined for this survey review, is an activity that takes place through a non-redirected, live Web site that allows monetary transactions in one or more of the following categories of gaming: casinos, lotteries, sports betting, or horse and dog racing. To conduct this survey, we reviewed a simple random sample of Internet gambling Web sites. For our purposes, we defined the universe of Internet gambling sites using the most recent list, published in 2002, of Internet gaming URLs compiled and published by the River City Group LLC, Christiansen Capital Advisors LLC, for the gaming industry. From this list of 1,783 unique gaming Web addresses, we selected a representative random sample of 202 for our review. This number was based on a conservative estimate of the number of \u201clive\u201d sites as well as on a precision level. We systematically reviewed the Web sites in our sample using an electronic data collection instrument (DCI).\n\n\tOverview of Results\n\nOf the Internet gambling Web sites in our sample, 162 of 202 were \u201clive.\u201d The survey also highlighted other aspects of the Internet gambling Web site in addition to the payment options. For example, the following table identifies two variables that demonstrate the global reach of Internet gambling\u2014the licensing country and a potential contact. Not all the sites listed a licensee or a location address, however. Other than the initial Web site review, GAO staff did not specifically verify each individual reference of the licensing country or the contact address. This nominal information is based on our review of individual Web sites and is subject to error.\n\n\t\tReliability\n\nIn order to be sure that an analyst filling in the DCI for a particular URL would have the same responses as another analyst, we selected a subsample of 50 sites from the 202 original sites for recoding. We ensured that analysts did not recode any of the same Web sites they had coded originally. The odds of consistency were significantly higher than those of inconsistency at a 99 percent confidence level for each of the 11 key variables used for the reliability testing.\nThe inconsistencies that did occur between the original coding and the recoding of the DCI could have resulted from changes in the content of a Web site since the original coding. In addition, the presentation of information in gambling Web sites may be ambiguous, potentially causing coders to identify characteristics differently. Also, because of the nature of our research, we were unable to determine whether an advertised payment option was actually a viable way to pay for gambling. Our research identified only the presence of information about the use of payment options on a Web site.\nThe following table outlines the categorical variables assessed by the DCI. The number of occurrences indicates the instance out of 162, unless otherwise indicated. The percent is a weighted estimate. We used normal approximations to calculate 95 percent confidence intervals where appropriate. When the estimates approached 0 percent or 100 percent, we used asymmetric methods instead.\n\n\tData Collection Instrument\n\nThe following is the DCI that GAO analysts developed to capture the information presented on individual Internet gambling Web sites. GAO analysts used Microsoft Access to construct the electronic survey. Therefore, in order to show all categories represented in the drop-down tabs on the electronic form (reproduced in figure 3). We also have provided all the text from the form on the following pages.\n\n\tText of the Data Collection Instrument\n\nPlease enter the name of the site Please check here if there is no Web site found at this URL Is this a gambling site?\nPlease indicate the type of gambling available on this Web site: Casino Sportsbook Lottery Bets on Horse\/Dog Racing   Are other types of gambling available on this Web site?\nIf yes, please specify.\nIs the geographic location of the host identified?\nIf yes, please specify.\nIs the license location of the site specified?\nIf yes, please specify.\nPlease indicate whether the following disclaimers are posted on the Web Legality of gambling? Tax on winnings?\nPlease check any credit cards that may be used to pay for gambling directly: VISA MasterCard American Express Discover If the allowable issuing banks are named for any credit cards, please enter the bank name and address below: VISA MasterCard American Express Discover If the site has information about any other credit cards, enter their name(s): If allowable issuing banks are named for the \u201cother\u201d credit cards, please enter the bank name and address here:   Are there any monetary limits on credit card deposits posted on the Web site?\nIf yes, please describe any limits here:   Does the site provide information about when credit card deposits are available?\nIf yes, when? Provide details if credit card deposits are not available immediately. Please enter any further information about the use of credit cards on the Web site for direct payment in the box below.\nAre any of the following third-party payment transfer services indicated as acceptable payment options on this Web site?\nPayPal Firepay NETeller EZPay Equifax   Please enter any additional third-party payment transfer services that are indicated on this Web site: -Information about these payment systems.\nAre any of the following direct wire transfers indicated as direct payment options on the Web site?\nIs a name or address provided for sending bank wires or Western Union deposits?\nYes or No If so, please enter the name and address shown here:   Are there any monetary limits to the wire transfer deposits posted on the site?\nIf yes, please specify any limits here:   Does the site provide any information about when wire deposits are available?\nIf yes, when? Provide details if wire deposits are not available immediately:   Are any of the following types of checks or money orders indicated as acceptable for deposits for gambling?\nMoney orders? Traveler\u2019s checks? Bank drafts\/Cashier\u2019s checks, or certified checks? Personal checks?\nIs a payee name\/address for check\/money order deposits identified?\nIf yes for payee name and address, please list either or both of them here:   Are there any monetary limits to check deposits identified on the site?\nIf yes, please specify any limits here:   Does the site provide information about when check deposits are available?\nIf yes, when? Please provide details if check deposits aren\u2019t available immediately:   Are there any other forms of payment identified on the Web site?\nIf yes, please enter the information here:   Does the Web site promote any particular form of payment over other options?\nElectronic Financial Services (EFS)? iDollar? Other banking systems?\n\nAppendix V: GAO Contacts and Staff Acknowledgments\n\n\tGAO Contacts\n\n\tAcknowledgments\n\nIn addition to those named above, Evelyn Aquino, Kriti Bhandari, Emily Chalmers, Edda Emmanuelli-Perez, Jason Holsclaw, Ron La Due Lake, Elizabeth Olivarez, Sindy Udell, and Darleen Wall made key contributions to this report.","output":"Why GAO Did This Study\n\nInternet gambling is a fast-growing industry with estimated 2003 revenues of more than $4 billion. However, concerns have been raised about its social and economic impacts. In light of recent recommendations by a Congressionally appointed commission, which advocated restricting Internet gambling within the United States, GAO was asked to examine the U.S. payments system, particularly credit cards, as it relates to interactive on-line gaming. We examined (1) the legal framework for Internet gambling domestically and abroad; (2) the credit card industry's policies regarding the use of credit cards to pay for Internet gambling and actions taken to restrict such usage; and (3) the views of law enforcement, banking regulators, and the credit card and gaming industries on the vulnerability of Internet gambling to money laundering. We issued an interim report on these issues in September 2002. GAO makes no recommendations in this report.\n\nWhat GAO Found\n\nThe global legal framework for Internet gambling is a complicated mix of laws and regulations. In the United States, both federal and state statutes apply. Gambling is generally regulated at the state level, with federal law supporting state laws and regulations to ensure that interstate and foreign commerce do not circumvent them. The Wire Act, which prohibits gambling businesses from using interstate or international telecommunications wires to knowingly transmit or receive bets, is the main federal statute used to prosecute such activity. Foreign countries and jurisdictions have taken a variety of approaches to regulating on-line gaming, including legalizing some forms, seeking effective regulatory approaches, and prohibiting it entirely. The major participants in the credit card industry have tried to restrict the use of their cards for Internet gambling by prohibiting cardholders from using the cards to gamble on line and developing transaction codes that banks can use to block payments at their discretion. Many large U.S. credit card issuers also use codes to deny authorization for Internet gambling transactions, and U.S.-based banks do not accept gambling Web sites as merchants. Despite attempts to circumvent these efforts by using improper coding, the success of these restrictions has caused gaming analysts to lower their 2003 revenue projections for the on-line gaming industry. Representatives of law enforcement agencies told us that Internet gambling could be used to launder money, but others viewed the threat as less serious. Law enforcement representatives said that the anonymity and jurisdictional issues characteristic of Internet gambling make on-line gaming a potentially powerful tool for money launderers. They noted that few money laundering cases involving Internet gambling had been prosecuted but attributed the small number of cases primarily to a lack of regulation and oversight. However, regulatory agencies and officials from the credit card and gaming industries did not believe that Internet gambling was any more susceptible to money laundering than other forms of e-commerce."}
{"id":"crs_RS22211","pid":"crs_RS22211_0","input":"\tBackground: Europe's Muslim Communities\n\nEstimates of the number of Muslims in Europe vary widely, depending on the methodology and definitions used, and the geographical limits imposed. Excluding Turkey and the Balkans, researchers estimate that as many as 15 to 20 million Muslims live on the European continent. Muslims are the largest religious minority in Europe, and Islam is the continent's fastest growing religion. Substantial Muslim populations exist in Western European countries, including France, Germany, the United Kingdom, Spain, Italy, the Netherlands, and Belgium. Most Nordic and Central European countries have smaller Muslim communities. Europe's Muslim population is ethnically and linguistically diverse; Muslim immigrants hail from Middle Eastern, African, and Asian countries, as well as Turkey. Many Muslim communities have their roots in Western European labor shortages and immigration policies of the 1950s and 1960s that attracted large numbers of North Africans, Turks, and Pakistanis especially. In recent years, there have been influxes of Muslim migrants and political refugees from other regions and countries, including the Balkans, Iraq, Somalia, and the West Bank and Gaza Strip.\nHistorically, European countries have pursued somewhat different policies with respect to managing their immigrant and minority populations. However, none has been completely successful. A disproportionately large number of Muslims in Europe are poor, unemployed, or imprisoned, and many feel a sense of cultural alienation and discrimination. For decades, countries such as Germany, Austria, and Switzerland viewed Muslim immigrants as temporary \"guest workers.\" As a result, little effort was made at integration, and parallel societies developed. Britain and the Netherlands embraced the notion of multiculturalism\u2014integration while maintaining identity\u2014but in practice, this concept helped entrench discrete Muslim communities, functioning apart from the culture of the host country. Nor has France's assimilation policy prevented the segregation of its Muslim communities, as seen most vividly in the riots that erupted throughout France in the fall of 2005 in working class suburbs populated largely by North Africans. The protests in several European cities in early 2006 sparked by the publication in European newspapers of cartoons of the prophet Muhammad also highlight the disaffection and alienation that many European Muslims feel.\n\n\tIslamist Extremists in Europe and Links to Terrorist Groups\n\nAlthough the vast majority of Muslims in Europe are not involved in radical activities, Islamist extremists and fringe communities that advocate terrorism exist and reportedly have provided cover for terrorist cells. Europe's largely open borders and previously non-existent or lax terrorism laws have also allowed some Islamist terrorists to move around freely. Following the September 11, 2001 attacks on the United States, Germany and Spain were identified as key planning bases; numerous terrorist arrests were also made in Belgium, France, Italy, and the UK. The March 11, 2004, bombings of commuter trains in Madrid, Spain that killed 191 people were carried out by an Al Qaeda-inspired group of North Africans, mostly Moroccans resident in Spain.\nEven before terrorists struck London's mass transport system in July 2005, many analysts believed that the UK had become a breeding ground for Islamist extremists. Radical mosques in London apparently indoctrinated Richard Reid, the airplane \"shoe bomber,\" and Zacarias Moussaoui, the \"20 th \" September 11 hijacker. UK authorities have named four young British Muslims as the perpetrators of the July 7, 2005 London attacks that killed 52 people, plus the four bombers, and injured over 700. Three of the alleged bombers were of Pakistani descent and had recently traveled to Pakistan, where some suspect they received terrorist training from remaining Al Qaeda operatives. On July 21, 2005, four Muslim immigrants tried but failed to set off four other explosions on London's metro and bus lines; no casualties resulted. And in August 2006, British police arrested several British Muslims suspected of involvement in a plot to detonate liquid explosives on airliners flying from the UK to the United States.\nNationals aligning their beliefs with Al Qaeda or radical Islam are not unique to Europe. The United States has captured or identified several U.S. citizens with similar views in the course of the fight against terrorism. However, some assert that the failure of European governments to fully integrate Muslim communities into mainstream society leaves some European Muslims more vulnerable to extremist ideologies. Many experts say that some European Muslim youth, many of whom are second or third generation Europeans, feel disenfranchised in a society that does not fully accept them; they appear to turn to Islam as a badge of cultural identity, and are then radicalized by extremist Muslim clerics. Traditionally liberal asylum and immigration laws in Western Europe, as well as strong free speech and privacy protections, have attracted numerous such clerics and Middle Eastern dissidents.\nSome experts also believe that the recent wars in Afghanistan and Iraq have radicalized more European Muslims, and strengthened terrorist recruitment efforts. Many European Muslims claim common cause with suffering brethren in the Israeli-occupied Palestinian territories, as well as in Iraq, Chechnya, and elsewhere. They tend to view the \"war on terrorism\" as a war on Islam, and perceive an unjust double standard at work in the foreign policies of many European governments, especially those that supported the U.S.-led war in Iraq. Before being captured in September 2005, Al Qaeda training camp manager Abu Musab al-Suri noted in a communique that he had overseen the training of both Arab and non-Arab Muslims, including some individuals born or raised in Britain, the United States, and other Western countries. Al-Suri called upon the mujahideen in Europe to act quickly and strike the UK, the Netherlands, Italy, Denmark, Germany, France, and other countries with a military presence in Iraq, Afghanistan, or on the Arabian peninsula. Media reports indicate instances of French Muslim teenagers being recruited to fight in Iraq; German, Italian, and Spanish law enforcement authorities also report that they have disrupted efforts by Islamist extremists to recruit European youths for Iraq. In November 2005, a Belgian woman and convert to Islam blew herself up in an attempted suicide attack on U.S. forces in Iraq. Some analysts suggest that religious converts to Islam may be more susceptible to radicalization as a result of a mistaken desire to prove themselves in their new faith.\nOthers note that Europe's physical location\u2014within a few days driving distance to Iraq or Chechnya\u2014makes it vulnerable to fighters returning from conflict zones who have either European roots or are unable to return to their countries of origin. Press reports suggest that Iraqis and others tied to the insurgency have been active in Europe. In December 2004, German authorities arrested three Iraqis suspected of plotting to assassinate the interim Iraqi prime minister during a visit to Berlin; the three Iraqis allegedly belong to Ansar al-Islam, which has organized strikes against U.S. troops and others in Iraq. In January 2006, a German court convicted an Iraqi man of both recruiting young men for the Iraqi insurgency and smuggling extremists from Iraq into Germany, Britain, and other European countries.\nCentral and Eastern Europe has not been reported to be as important a haven for Al Qaeda and other terrorist groups; most countries in the region have not attracted significant numbers of Muslim immigrants. However, concerns have been raised about several countries in Southeastern Europe with large Muslim populations (e.g., Bosnia-Herzegovina). One legacy of the 1992-1995 war in Bosnia is the presence of Islamist fighters from other countries who stayed behind and became Bosnian citizens. Some Islamic charities that proliferated during and after the war reportedly served as Al Qaeda money-laundering fronts. Terrorist groups have also operated from Albania. At the same time, opposition to terrorism among indigenous Muslims in the Balkans has been strong. Most view themselves as part of Europe and are grateful for the U.S. role in defending them against Serbian aggression in the 1990s. U.S. officials say that efforts by Islamist extremists to recruit local Muslims have met with limited success, and they praise these countries' anti-terrorism efforts, especially after September 11. Nevertheless, some experts assert that Central and Southeastern Europe may pose a more significant threat than often acknowledged. The region's weak governing institutions and problems with organized crime and corruption may make it vulnerable to infiltration by terrorist groups. Observers caution that the Balkans in particular may play a role as a transit point for terrorists, a target area for recruitment, and a potential source of weapons or explosives.\n\n\tEuropean Responses\n\nThe November 2004 murder of Dutch filmmaker Theo van Gogh brought the issue of Islamist extremism in Europe to the forefront of European political debate. Van Gogh, an outspoken critic of the treatment of women in Islam, was killed by a 27-year-old Dutch citizen of Moroccan descent and a follower of radical Islam. Since the murder, many European officials and social commentators have proclaimed that multiculturalism in Europe has failed, and called for greater integration of Muslims and other immigrants into mainstream European society. They believe that Muslims and others must embrace the native cultures of their new countries, including secularism. Some European governments have been pursuing initiatives aimed at fostering integration and promoting secularism for several years. The French government, for example, has banned \"conspicuous\" religious symbols in public schools, including headscarves for Muslim girls, yarmulkes, and large crucifixes. Moderate Muslim groups in France supported the ban as a means to reduce tensions in the school system and in broader society. The UK is introducing new citizenship classes to ensure that immigrants can speak English and understand British history and culture. Other analysts say that countries such as Spain, Italy, and Germany need to do more to encourage Muslim immigrants to become citizens.\nSome European governments are trying to encourage moderate Muslim political voices and promote a greater role for them. Commentators note, for example, that there are few Muslim representatives in European parliaments. In 2003, Paris established an elected French Council of the Muslim Faith, an official advisory body that acts as the Muslim community's representative in dealings with the French government. French and British officials are also looking at ways to foster \"homegrown imams\" to minister to the needs of their Muslim communities, rather than relying on foreign imams whom they claim are often unfamiliar with the West or beholden to foreign interests. The Netherlands has reportedly created an \"imam buddy system\" that links foreign imams with Dutch volunteers to promote a better understanding among these imams of Dutch culture and society. Others argue that greater focus should be placed on addressing the lack of jobs and educational opportunities for Muslims, as well as racism. They say that racial violence against Muslims is on the rise in some European countries, such as the Netherlands, but governments have failed to acknowledge the scale of the problem.\nSeveral analysts suggest that mainstreaming Muslims into European society would not necessarily translate into an embrace of European ideals; some even question whether Islam itself is compatible with European political principles and values. They point out, for example, that two British Muslim suicide bombers in Israel in April 2003 were from comfortable middle-class, Westernized suburbs. Some Muslim groups in Europe say that certain efforts toward integration, such as the French headscarf ban, are counterproductive and only serve to increase the sense of discrimination among Muslims. In the wake of the London bombings, the UK government is consulting with British Muslims on how to best tackle extremism. Some Muslim leaders argue that Muslim communities must be more vocal against extremism, and actively counter rather than tolerate radical preachers.\nEuropean governments have also sought to contain Islamist extremists and counter terrorists by tightening security measures and reforming immigration and asylum laws. UK and French security services have reportedly increased their monitoring of mosques; Germany has changed its laws to allow authorities to investigate religious groups; and France and Italy have expelled some Muslim clerics for hate crimes. Following the London attacks in 2005, the British government has sought to make it easier to exclude or deport foreign individuals who incite hatred. Also notable are European Union (EU) efforts to boost police and judicial cooperation, enhance intelligence-sharing, and strengthen external EU border controls. Security and border control services in new EU members in Central and Eastern Europe, although not quite as effective as their Western counterparts, are also improving as they seek to meet EU standards. In addition, the EU has been working to encourage good integration practices among its 27 member states and prevent radicalization.\nLaw enforcement challenges remain throughout Europe, as elsewhere. Long-standing traditions against intelligence-sharing, rivalries among the various local and national security services, and different national laws continue to impede more robust EU cooperation. For example, full implementation of the EU-wide arrest warrant has been slowed in Poland and Cyprus because of court rulings that found the warrant incompatible with constitutional bans on extraditing their own nationals. European governments are also struggling with balancing their efforts to curtail Islamist extremists against well-established civil liberty protections, strong privacy rights, and democratic ideals.\n\n\tImplications for the United States\n\nU.S. officials have expressed concerns since the 2001 terrorist attacks that Europe might be a launching point for future attacks on the United States and U.S. interests abroad. The Bush Administration and Members of Congress have welcomed European initiatives to curtail Islamist extremism and improve U.S.-EU counterterrorism cooperation in the hopes that such efforts will ultimately help root out terrorist cells in Europe and beyond. The United States and the EU have been placing increasing emphasis on cooperation in the areas of intelligence-sharing, border control, and transport security. Among other initiatives, the two sides have concluded agreements to improve container security and exchange airline passenger information. Nevertheless, some challenges remain; for example, differences persist in U.S.-EU data protection regimes and, at times, have complicated closer cooperation on travel security.\nSome terrorism experts and Members of Congress remain concerned about the U.S. Visa Waiver Program (VWP), despite steps taken to tighten passport requirements for participating countries. The VWP allows more than 15 million people a year short-term visa-free travel to the United States from 27 countries, most of which are in Europe. The VWP has become a sticking point in U.S.-EU relations; the EU would like the VWP to be extended to all EU members (currently 12 are excluded due to problems meeting U.S. immigration laws). Some Members of Congress oppose expanding or even continuing the VWP, noting that Islamist terrorists who hold European citizenship have entered the United States on the VWP (UK-born Richard Reid and French citizen Zacarias Moussaoui being two notable examples). Also, stolen passports from VWP countries are prized travel documents among terrorists, criminals, and immigration law violators, creating an additional risk. Other Members are more supportive of extending the VWP to new EU members, mostly in central and eastern Europe, given their roles as U.S. allies in NATO and in the fight against terrorism. Some experts also caution that eliminating or curtailing the VWP could impede transatlantic tourism and commerce.\nSome analysts contend that the presence of large Muslim communities in Europe may also be influencing the policy preferences of some European governments on contentious Middle East issues and contributing to U.S.-European divisions. They argue that Europe's growing Muslim population has made some European officials more cautious about supporting U.S. policies that risk inflaming their own \"Muslim streets.\" They suggest that this is one reason why countries such as France and Germany opposed the U.S.-led war in Iraq. Meanwhile, Europe's struggle with its own identity as it grapples with integrating Muslims into European society has called into question Turkey's long-term EU prospects. Washington has long advocated EU membership for Turkey, a country of 70 million Muslims, as a way to anchor this strategic ally firmly in the West and debunk the notion of a clash of civilizations between Islam and the West.","output":"Although the vast majority of Muslims in Europe are not involved in radical activities, Islamist extremists and vocal fringe communities that advocate terrorism exist and reportedly have provided cover for terrorist cells. Germany and Spain were identified as key logistical and planning bases for the September 11, 2001 attacks on the United States. The March 2004 terrorist bombings in Madrid have been attributed to an Al Qaeda-inspired group of North Africans. UK authorities have named four British Muslims as the perpetrators of the July 2005 terrorist attacks on London; in August 2006, British law enforcement arrested several British Muslims suspected of plotting to blow up airliners flying from the UK to the United States. This report provides an overview of Islamist extremism in Europe, possible terrorist links, European responses, and implications for the United States. It will be updated as needed. See also CRS Report RL31612, European Counterterrorist Efforts: Political Will and Diverse Responses in the First Year After September 11, by [author name scrubbed] (pdf), and CRS Report RL33166, Muslims in Europe: Integration in Selected Countries, by [author name scrubbed] et al."}
{"id":"gao_GAO-04-668","pid":"gao_GAO-04-668_0","input":"\tBackground\n\nFollowing the terrorist attacks of September 11, 2001, the United States  began military operations to combat terrorism both in the United States  and overseas. Operations to defend the United States from terrorist  attacks are known as Operation Noble Eagle. Overseas operations to  combat terrorism are known as Operation Enduring Freedom, which  takes place principally in Afghanistan, and Operation Iraqi Freedom,  which takes place in and around Iraq. Figure 1 shows the primary  locations where U.S. forces conducted operations in support of the war  in fiscal year 2003.\nTo support the war in fiscal year 2003, Congress appropriated $68.7 billion  to DOD: $6.1 billion in the Consolidated Appropriations Resolution, 2003,  and $62.6 billion in the Emergency Wartime Supplemental Appropriations  Act, 2003. While most of these funds were only available for expenditure  in fiscal year 2003, some could be expended in subsequent fiscal years.  Of the $68.7 billion appropriated for GWOT, almost $16 billion was  appropriated in the fiscal year 2003 Wartime Supplemental to a transfer  account called the Iraqi Freedom Fund. The Iraqi Freedom Fund is a  special account providing funds for additional expenses for ongoing  military operations in Iraq, and those operations authorized by P.L. 107-40  (Sept. 13, 2001), Authorization for Use of Military Force, and other  operations and related activities in support of the global war on terrorism.\nCongress has also appropriated funds for the reconstruction of Iraq and  Department of State and U.S. Agency for International Development  projects. We are reviewing the contracts involved in the reconstruction,  as well as the funding for other projects and will be issuing separate  reports on these issues.\n\n\tObligations for GWOT Operations\n\nAs of September 30, 2003, DOD reported obligating a total of over  $61 billion in fiscal year 2003 in support of the war. Among the operations  that comprised the war on terrorism, Operation Iraqi Freedom amounted  to about $39 billion or 64 percent of the total obligations, as shown in  figure 2. The obligations reported for Iraqi Freedom are probably  understated and the obligations reported for Operation Enduring Freedom  overstated because, according to DOD officials, the initial obligations  associated with the build up to Iraqi Freedom were charged to Enduring  Freedom. Officials in the Office of the Under Secretary of Defense  (Comptroller) reclassified reported obligations to the appropriate  operation after Iraqi Freedom began, based on anticipated and projected  GWOT operations.\nOf the overall reported amount obligated within DOD for GWOT during  fiscal year 2003, the Army reported the largest amount of obligations,  46 percent of the total, as shown in figure 3. (The Army had the largest  number of military personnel engaged in the war.) In addition to the  obligations reported by the other military services, about 13 percent of  DOD\u2019s GWOT obligations were reported by a total of 15 other DOD  organizations, such as the Defense Information Systems Agency and the  Defense Logistics Agency. Of these DOD organizations, the Defense  Logistics Agency reported the largest amount of obligations\u2014over  $3.6 billion.\nThe obligations reported for GWOT fall into three categories\u2014operation  and maintenance, military personnel, and investment. Operation and  maintenance account funds obligated in support of the war are used  for a variety of purposes, including transportation of personnel,  goods, and equipment; unit operating support costs; and intelligence,  communications, and logistics support. Military personnel funds obligated  in support of the war cover the pay and allowances of mobilized reservists  as well as special payments or allowances for all qualifying military  personnel both active and reserve, such as Imminent Danger Pay and  Family Separation Allowance. Investment funds obligated for the war are  used for procurement, military construction, and research, development,  test and evaluation. As shown in figure 4, GWOT obligations reported in  the operation and maintenance account amount to almost $44 billion or  71 percent of the total.\nThe Consolidated Department of Defense Terrorist Response Cost Report  displays obligations in all accounts by specific categories. As previously  cited, chapter 23 of the DOD Financial Management Regulations, which  governs how all DOD organizations report financial data for contingency  operations, defines these categories. Within the operation and  maintenance account, the operating support category had the largest  amount of reported obligations for fiscal year 2003\u2014over $32 billion or  74 percent of the total. This category, which includes obligations incurred  for such things as training, operational support, equipment maintenance,  and troop support, had the highest level of obligations, in part reflecting  the cost of using civilian contractors to provide housing, food, water, and  other services to over 180,000 troops deployed overseas in support of  GWOT. A large part of the operating support costs category\u201448 percent\u2014 is in two miscellaneous categories, other supplies and equipment  ($7 billion) and other services and miscellaneous contracts ($8.5 billion).\nMost of the remaining reported GWOT obligations, $15.6 billion or  26 percent, were in the military personnel accounts. Within the military  personnel account, the category reserve component called to active duty  had the highest level of reported obligations\u2014almost $9.3 billion or  59 percent of the total. This category captures the obligations reported for  the salaries paid to reservists mobilized for active duty. According to  service officials, more reservists were called to active duty than originally  estimated and remained on active duty longer than planned. As with  operation and maintenance obligations, there was also a large  miscellaneous category, other military personnel, which accounted for  about $3.8 billion, or 24 percent, of all military personnel obligations.\nIn discussing the results of our analysis with the Office of the Under  Secretary of Defense (Comptroller) and the military services, there was  recognition of the large amount of obligations captured in miscellaneous  categories. The Office of the Under Secretary of Defense (Comptroller) is  considering how best to provide more specific detail in future cost reports.\n\n\tFunding Adequacy for GWOT Varied by Service\n\nThe adequacy of funding available for fiscal year 2003 GWOT obligations  reported in military personnel and operation and maintenance accounts  varied by service. The funding available for the war consists of funds  directly appropriated to the military services for GWOT, the net transfer of  funds from the Iraqi Freedom Fund, and reprogrammed funds originally  appropriated to the services for peacetime operations.\nWithin the military personnel accounts, as shown in table 1, in fiscal year  2003 the Army, Navy, and Air Force reported more obligations in support  of the war than they received in funding for the war. To cover the shortfall  in GWOT funding, these services had to use funds appropriated for their  budgeted peacetime operations. Officials from each of these services  explained that the shortfall was a relatively small portion of their budgeted  peacetime military personnel account. For example, the Army\u2019s reported  shortfall of $155.2 million represents less than 1 percent of its total  peacetime appropriation. The Marine Corps, which had augmented its  GWOT military personnel appropriation with funds from its peacetime  military personnel account, ended the fiscal year with slightly less in  obligations than it had in available funding\u2014$1.8 million or less than  1 percent of its peacetime appropriation.\nWithin the operation and maintenance accounts, as shown in table 2, in  fiscal year 2003 the Army, Air Force, and Navy received funding that  exceeded their reported GWOT obligations. At the same time the Marine  Corps reported more GWOT obligations than it received in funding.\nIn discussing our analysis of the difference between GWOT obligations  and funding with the Army, Air Force, and Navy, we were told the  following.\nThe Army reported slightly more funding than obligations for the war.\nAt the end of fiscal year 2003, the Army reported obligations that initially  appeared to be more than $500 million less than the available funding.  However, as of January 2004, the Army has subsequently updated its  fiscal year 2003 reporting to reflect about $470 million in additional  reported obligations. According to Army officials, the Army had not  included in the September 30, 2003, consolidated cost report $494 million  in obligations reported to support the Coalition Provisional Authority in  Iraq. The Army received GWOT funding in fiscal year 2003 to support this  organization, but the obligations were not captured in the Army\u2019s  accounting system used to record most other Army obligations. The Army  also cancelled some obligations made before the end of the fiscal year,  resulting in a total adjustment to the fiscal year 2003 cost report of  $470 million. Thus the Army ended the year with about $30 million more in  funding than reported obligations.\nAir Force officials told us that the $176.6 million, which appeared to be  unobligated GWOT funding, was actually obligated late in the fiscal year.  According to the officials, that amount was obligated for flying operations  requirements that the Air Force decided were related to the war, but were  not reported as such.\nNavy officials told us that the apparent unobligated GWOT funds  ($299 million) were in fact obligated in support of the war but were  originally, and incorrectly, reported as obligations in support of budgeted  peacetime operations. These officials said that they would be updating  their reporting for obligations incurred in fiscal year 2003 to reflect an  additional $299 million in operation and maintenance obligations for the  war. At the same time, the Navy returned $198 million to the Iraqi Freedom  Fund that it believed was in excess of its operation and maintenance  requirements for the war. The available funding in table 2 was adjusted to  reflect the return of the $198 million. Returning these funds is in keeping  with recommendations we made in our September 2003 report discussed  above to monitor the obligation of funds in the services\u2019 operation and  maintenance accounts and ensure that all funds transferred to the services  that are not likely to be obligated by the end of the fiscal year are  transferred back to the Iraqi Freedom Fund.\nIn subsequent work we plan to review GWOT obligations to detail the  specific purposes for which funds were used and to determine whether the  service requirements for which funding was obligated were war-related.  The additional Air Force flying operations\u2019 requirements and the funds the  Navy recharacterized as being in support of the war will be included in  that review.\nWhile the Marine Corps obligated $72.5 million more for GWOT than it had  in funds at the end of fiscal year 2003, it, like the Navy, returned money to  the Iraqi Freedom Fund. At the end of fiscal year 2003, Marine Corps  officials believed that they could not obligate $152.2 million that had been  transferred to the Marine Corps\u2019 operation and maintenance account from  the Iraqi Freedom Fund before the end of the fiscal year and so transferred  it back to the fund. In retrospect, however, the Marines obligated more  than expected. According to Marine Corps officials, this shortfall was  covered by using normal peacetime operation and maintenance  appropriations that units deployed in support of GWOT were not going  to use.\nAs noted with the Army and Navy analyses, the services have reported  obligation updates to the Office of the Under Secretary of Defense  (Comptroller) for inclusion in the Defense Finance and Accounting  Service\u2019s Consolidated DOD Terrorist Response Cost report for fiscal year  2003. The Defense Finance and Accounting Service is issuing monthly  fiscal year 2003 update reports as the obligation data is updated, which  must be added to the report as of September 30, 2003, to determine the  total fiscal year 2003 obligations reported in support of GWOT.\n\n\tAgency Comments\n\nIn official oral comments on a draft of this report, officials from DOD\u2019s  Office of the Under Secretary of Defense (Comptroller) stated that the  department had no objections to the report. DOD also provided technical  comments and we have incorporated them as appropriate.\nWe are sending copies of this report to the Chairmen and Ranking  Minority Members of the House and Senate Budget Committees, the  Secretary of Defense, the Secretaries of the military services, and the  Director, Office of Management and Budget. We will also make copies  available to others on request. In addition, the report will available at no  charge on the GAO Web site at http:\/\/www.gao.gov.\nIf you or your staff has any questions, please contact me on (757) 552-8100  or by e-mail at curtinn@gao.gov. Major contributors to this report were  Steve Sternlieb, Ann Borseth, Madelon Savaides, Leo Sullivan, and John  Buehler.","output":"Why GAO Did This Study\n\nThe Global War on Terrorism--principally involving operations in Afghanistan and Iraq--was funded in fiscal year 2003 by Congress's appropriation of almost $69 billion. To assist Congress in its oversight of spending, GAO is undertaking a series of reviews relating to contingency operations in support of the Global War on Terrorism. In September 2003, GAO issued a report that discussed fiscal year 2003 obligations and funding for the war through June 2003. This report continues the review of fiscal year 2003 by analyzing obligations reported in support of the Global War on Terrorism and reviews whether the amount of funding received by the military services was adequate to cover DOD's obligations for the war from October 1, 2002, through September 30, 2003. GAO will also review the war's reported obligations and funding for fiscal year 2004.\n\nWhat GAO Found\n\nIn fiscal year 2003, DOD reported obligations of over $61 billion in support of the Global War on Terrorism. GAO's analysis of the obligation data showed that 64 percent of fiscal year 2003 obligations reported for the war on terrorism went for Operation Iraqi Freedom; among the DOD components, the Army had the most obligations (46 percent); and among appropriation accounts the operation and maintenance account had the highest level of reported obligations (71 percent). The adequacy of funding available for the Global War on Terrorism for fiscal year 2003 military personnel and operation and maintenance accounts varied by service. For military personnel, the Army, Navy, and Air Force ended the fiscal year with more reported obligations for the war than funding and had to cover the shortfalls with money appropriated for their budgeted peacetime personnel costs. For operation and maintenance accounts, the Army, Navy, and Air Force appeared to have more funding than reported obligations for the war. However, the Navy and Air Force have stated that the seeming excess funding ($299 million and $176.6 million respectively) were in support of the war on terrorism, but had not been recorded as such. Therefore, Navy and Air Force obligations exactly match funding. The Marine Corps used funds appropriated for its budgeted peacetime operation and maintenance activities to cover shortfalls in funding for the war."}
{"id":"gao_T-NSIAD-96-243","pid":"gao_T-NSIAD-96-243_0","input":"\tOverview\n\nthose sectors where USTR has negotiating authority because of some countries\u2019 expected opposition to further tariff reductions.\nAt Singapore, proposals are expected for WTO members to begin work on the next generation of trade issues. However, because these issues include areas heretofore outside the scope of detailed trade negotiations\u2014environmental protection, investment rules, competition policy, labor standards, and bribery and corruption\u2014it is unlikely members will reach consensus on the WTO\u2019s role. Of these issues, only environment is on the WTO agenda already, but members have not decided how to reconcile environmental concerns with trade objectives. USTR strongly supports discussing labor standards as part of the WTO agenda. USTR may begin to address bribery and corruption issues indirectly as it seeks to expand participation in the Agreement on Government Procurement. However, many other members are just as strongly opposed to including these two issues. On the other hand, the United States is not yet prepared to agree to a negotiating program for competition policy and would prefer discussions on investment policy to take place primarily in the Organization for Economic Cooperation and Development (OECD).\n\n\tGeneral Implementation Issues\n\nIn earlier testimony we noted that it will take time and resources to (1) completely build the WTO so that members can address all its new roles and responsibilities; (2) make members\u2019 national laws, regulations, and policies consistent with new commitments; (3) fulfill notification requirements and then analyze the new information; and (4) resolve differences about the meaning of the agreements and judge whether members have fulfilled their commitments. It is critical that USTR monitor implementation of the agreements to ensure that other WTO members are honoring their commitments and thus that the agreements\u2019 expected benefits are being realized. USTR and the Departments of Commerce and Agriculture have created specific units to try to monitor foreign government compliance with trade agreements, including those of the Uruguay Round.\n\n\t\tThe New Organization\n\ncreated some new bodies; however, these bodies address new areas of coverage, for example, the Councils for Trade in Services and for Trade-Related Aspects of Intellectual Property Rights. Other bodies, such as the WTO Committee on Antidumping Practices, were \u201creconstituted\u201d from previous GATT committees but were given new responsibilities by the Uruguay Round agreements and now have broader membership. The WTO Secretariat, headed by its Director General, facilitates the work of the members. The work of the bodies organized under the WTO structure is still undertaken by representatives of the approximately 123 member governments, rather than the Secretariat. Early meetings of some WTO committees were focused on establishing new working procedures and work agendas necessary to implement the Uruguay Round agreements.\n\n\t\tNotifications\n\nThe ministers will be judging the progress of members in implementing numerous agreements to date, based on information collected from the many notification requirements placed upon member governments. These notifications are aimed at increasing transparency about members\u2019 actions and laws and therefore encourage accountability. Notifications take many forms. For example, one provision requires members to file copies of their national legislation and regulations pertaining to antidumping measures. WTO committees began reviewing the notifications they received from member governments in 1995. The information provided allows members to identify general problems with implementing the terms of the agreements, as well as monitor each others\u2019 specific activities and, therefore, to enforce the agreements.\nLimitations in members\u2019 reporting may make it difficult for the ministers to assess progress in some areas. The WTO Director General noted some difficulties with members\u2019 fulfilling their notification requirements in his report in December 1995. Some foreign government and WTO Secretariat officials told us in 1995 that the notification requirements had placed a burden on them and that they had not foreseen the magnitude of information they would be obligated to provide. The WTO Secretariat estimated that the Uruguay Round agreements specified over 200 notification requirements. It also noted that many members were having problems understanding and fulfilling the requirements within the deadlines. While developing countries reportedly faced particular problems, even the United States missed some deadlines for filing information on subsidies and customs valuation laws.\nTo address concerns about notifications, WTO formed a working party in February 1995 to simplify, standardize, and consolidate the many notification obligations and procedures. This working party may make recommendations for changes for the ministers to consider.\n\n\t\tDispute Settlement\n\nThe WTO dispute settlement mechanism is intended to be a central element in providing security and predictability to this multilateral trading system. Through it, members have a system to resolve disputes that result from violations of WTO obligations or impairment of benefits from WTO agreements. The new dispute resolution mechanism incorporates several objectives that were particularly important to the United States\u2014time limits for each step in the dispute settlement process and elimination of a country\u2019s ability to block the adoption of resolutions from dispute settlement panel reports. The new Dispute Settlement Understanding established time limits for each of the four stages of a dispute: consultation, panel review, appeal, and implementation. Also, unless there is unanimous opposition in the WTO Dispute Settlement Body, the panel or appellate report is to be adopted. Further, the recommendations and rulings of the Dispute Settlement Body can neither add to or diminish the rights and obligations provided in the Uruguay Round agreements nor directly force members to change their laws or regulations. However, if members choose not to implement the recommendations and rulings, the Dispute Settlement Body may authorize trade retaliation.\nFrom January 1, 1995, to August 30, 1996, formal WTO dispute settlement procedures have been invoked in 53 instances. Most of the cases are still in progress\u201435 are either in the consultation phase, under panel review, or on appeal. Of the 18 closed cases, 16 have been settled or abandoned, and 2 have been closed after a final appeal.\nThe United States has availed itself of the dispute settlement mechanism more than any other member. The United States has initiated 17 cases on a variety of issues including patent protection in India, Portugal, and Pakistan; meat import restrictions in South Korea and the European Union (EU); and restrictions on the importation of magazines into Canada. There are currently four pending cases against actions or measures taken by the United States\u2014two involve import restraints concerning textile and apparel products, one relates to an antidumping investigation of tomatoes from Mexico, and the other concerns the Cuban Liberty and Democratic Solidarity Act of 1996.\nAs of the end of August 1996, dispute settlement panels have reached decisions involving five cases. The two closed cases, which were combined into a single panel, involved a challenge by Venezuela and Brazil to a U.S. Environmental Protection Agency regulation setting forth the methods by which importers of gasoline were to determine characteristics of gasoline imported and sold in the United States in 1990. The panel found that the regulation was inconsistent with a GATT 1994 provision concerning national treatment of imported products. On appeal, the dispute settlement Appellate Body modified the panel\u2019s report but upheld the panel\u2019s conclusion. The other three cases, also combined into one panel, were brought by the United States, Canada, and the EU against Japan\u2019s liquor tax. The panel found the Japanese tax to be inconsistent with GATT 1994, on national treatment grounds. Japan has filed an appeal, which is currently pending.\nIt is unclear to what extent the ministers at the WTO Singapore meeting will analyze the implementation of the new dispute settlement process and what criteria they would use to do so. USTR officials view this process as a success, in part because complaints can be resolved even before a panel hears the case. In addition, USTR has recently testified that the new mechanism is proving to be a very effective market-opening tool. However, it may be difficult to objectively evaluate the results of a dispute settlement process. We observed in our previous work on 5 years of dispute settlement under the U.S.-Canada Free Trade Agreement (CFTA)that it may take many years before a sufficiently large body of cases accrues to permit statistically significant observations about the process. In that report we focused on the possible effects of panelists\u2019 backgrounds, the types of U.S. agency decisions appealed, and the patterns of panel decision-making. We learned that any effort to evaluate the functioning of the dispute settlement process presents significant analytical challenges.\n\n\tImplementation of the Agreement on Textiles and Clothing\n\nexample, increase market access in key sectors and improve protection of intellectual property rights.\nUnder the Uruguay Round Agreement on Textiles and Clothing, textile quotas are to be phased out over a 10-year period beginning in January 1995. Because of the 10-year phase-out, the effects of the textiles agreement will not be fully realized until 2005, after which textile and apparel trade will be fully integrated into WTO and its disciplines (practices). Integration is to be accomplished by (1) completely eliminating quotas on selected products in four stages and (2) increasing quota growth rates on the remaining products at each of the first three stages. By 2005, all bilateral quotas maintained under the agreement on all WTO members are to be removed.\nDuring the first stage of product integration (1995 through 1997), virtually no quotas were removed by the United States and other major importing countries. The United States is the only major importing country to have published a list of products to be removed from quota for all three stages; other countries, such as the EU and Canada, have only published their integration plan for the first phase. Under the U.S. integration schedule, 89 percent of all U.S. apparel products under quota in 1990 and 67 percent of textile and apparel products combined will not be integrated into normal WTO rules until 2005. Importer and retailer representatives have expressed concern about the delay in lifting the majority of textile and apparel quotas until the end of the phase-out period. However, U.S. officials have pointed out that the Statement of Administrative Action accompanying the U.S. bill to implement the Uruguay Round agreements provided that \u201cintegration of the most sensitive products will be deferred until the end of the 10-year period.\u201d\nDuring the phase-out period, the safeguards provision of the textiles agreement permits a country to impose a new quota only when it determines that increased imports of a particular textile or apparel product are seriously damaging, or present an actual threat of serious damage to, its domestic industry. The agreement further provides that any quotas imposed during the phase-out period be reviewed by a newly created Textiles Monitoring Body (TMB) within WTO, which is to supervise the textile agreement\u2019s implementation. TMB consists of individuals from 10 countries, including the United States.\nThe United States and Brazil are the only WTO members thus far to have imposed new quotas on imports they found were harming their domestic industries under the agreement\u2019s safeguard procedures. In 1995, the United States issued 28 requests for consultations (or \u201ccalls\u201d) to impose quotas and has issued 2 calls thus far in 1996 to a total of 19 countries (11 WTO members and 8 nonmembers). Brazil has issued calls to four countries to date.\nAs of August 1996, TMB had reviewed the imposition of seven quotas (where no agreement was reached with the exporting country). All of these quotas had been imposed by the United States. TMB found that the threat of serious damage to domestic industry had been demonstrated in one case. In three cases, TMB found that the threat of serious damage had not been demonstrated, and the quotas were subsequently rescinded; in three other cases, TMB could not reach consensus. TMB has not published details about the reasons for its decisions. Three of the cases TMB reviewed were subsequently brought before the Dispute Settlement Body by the countries subject to the U.S. safeguard action. The United States rescinded one action, and the other two cases are currently pending. report on the textile agreement\u2019s implementation to the WTO General Council in early November.\n\n\tImplementation of Agricultural Commitments\n\nLiberalizing agricultural trade was a key U.S. objective during the Uruguay Round. The United States anticipated that better rules and disciplines on government policies in this area would foster a more market-oriented trading system and improve the competitive position of the U.S. agriculture sector. Therefore, monitoring other members\u2019 implementation of their Uruguay Round agricultural commitments is essential to securing anticipated U.S. gains.\nSeveral important issues are likely to be discussed at the ministerial meeting, as the reports of two WTO committees and one WTO working party focus on, or relate to, agricultural trade. First, the WTO Committee on Agriculture will report on implementation of the agriculture agreement, including any aspects needing additional attention or review. This Committee\u2019s report is expected to address two other issues: (1) a decision to review the impact of the agreement on net food-importing countries and (2) preparations necessary to resume the agreement\u2019s required negotiations in 1999. Second, the WTO Committee on Sanitary and Phytosanitary (SPS) Measures will report on implementation of the SPS agreement. Third, the WTO Working Party on State Trading Enterprises will report on its efforts to better document and understand the role of STEs in WTO.\n\n\t\tCommittee on Agriculture\n\nimplementation issue was discussed outside the Committee under the dispute settlement process, when the United States requested consultations with the EU to resolve its concerns about EU implementation of market access commitments for grain imports.\nIn addition to implementation issues, the Committee\u2019s report is expected to address its responsibility for monitoring WTO members\u2019 commitment to review levels of food aid available to net food-importing countries. This commitment recognized that least-developed and net food-importing developing countries might experience negative effects from Uruguay Round agricultural reform if it affected the availability of food supplies from external sources at reasonable terms and conditions. WTO members agreed to establish appropriate mechanisms to ensure that agricultural reform does not have an adverse impact on the provision of sufficient levels of food aid. The recent rise in global commodity prices and the near-record lows in international grain reserves have increased the cost of food imports for some countries. Some least-developed and net food-importing countries have already indicated they are concerned about the impact of agricultural reform on their countries, but U.S. officials do not believe the limited reforms implemented so far are responsible for shortages or price increases. Still, net food-importing countries expect action to be taken within the Committee to review food aid levels and establish a sufficient level of aid to meet legitimate needs. The Committee is considering whether and how such a review should be conducted and hopes to resolve this issue before the ministerial meeting. However, if resolution is not achieved within the Committee, the issue is likely to be discussed at the World Food Summit in November 1996 and again in Singapore. implementation of the agreement, preparing for negotiations to resume is also important.\n\n\t\tCommittee on SPS Measures\n\nThe second Committee report that will address agricultural issues is the Committee on SPS Measures. The SPS agreement recognizes that members have a right to adopt measures to protect human, animal, and plant life or health. However, it requires, among other things, that such measures be based on scientific principles and not act as disguised trade restrictions. The United States was a key supporter of this agreement, recognizing that the lack of sufficient disciplines on the use of SPS measures could undermine the intent of the agriculture agreement if members were allowed to replace tariffs and quotas with unscientific animal and plant health or food safety measures. The United States has signalled its intent to use WTO channels to challenge unscientific SPS measures. For example, through WTO consultations in 1995, the United States persuaded South Korea to modify its practice for determining product shelf-life, which was adversely affecting U.S. meat and other exports. Also, in May 1996, the United States requested a dispute settlement panel be convened to review the EU\u2019s long-standing ban on hormone-treated meat, which has substantially blocked U.S. beef imports since 1989.\n\n\t\tWorking Party on STEs\n\npotential to distort trade. This framework helps clarify that being sanctioned by the government does not necessarily mean that an STE is distorting trade; rather, a key factor is the presence of direct or indirect subsidies that can give an STE a greater potential to distort trade. We reported that another factor in evaluating the trade-distorting effect of STEs (or private commercial firms) is share of the world market.\nThe working party on STEs is developing an illustrative list of STE attributes and practices in WTO and continues to study the questionnaire used to collect information about them. The United States is working within the forum to develop a modified questionnaire that would help make STE activities more transparent. U.S. government and agricultural industry officials hope to negotiate additional disciplines on STEs when agricultural negotiations resume in 1999.\n\n\tOngoing Negotiations in Services and Market Access\n\nNegotiations in several service sectors and on market access for certain goods were left unfinished at the end of the Uruguay Round and may be discussed by ministers at Singapore. USTR has pursued trade liberalization and market access in these areas since the Uruguay Round, but in many cases the outcome of these efforts remains uncertain. For example, within the framework of the General Agreement on Trade in Services (GATS), negotiations covering the financial, telecommunications, and maritime service sectors have not yet resulted in final agreements. In addition, USTR hopes to achieve further market access through new tariff reductions for a variety of goods but has testified that considerably more work remains to build \u201cthe necessary international consensus\u201d for making such reductions. because U.S. negotiators, in consultation with the private sector, concluded that other members\u2019 offers to open their markets to U.S. financial services firms, especially those of certain developing countries, were insufficient to justify broader U.S. commitments (with no most-favored-nation exemption or other limitations). At the end of 1997, members, including the United States, will have an opportunity to modify or withdraw their commitments. Thus, the final outcome and impact of the financial services agreement are still uncertain. USTR has testified that negotiations for a financial services agreement are expected to resume in the first half of 1997, and the ministers may discuss this at Singapore.\nWTO members were also not able to reach agreement on a basic telecommunications services agreement by the original deadline of April 30, 1996, and negotiations were subsequently extended to a new deadline of February 15, 1997. The United States has noted that while some members made offers that matched that of the U.S. offer in terms of openness, many others did not, thus the United States would not accept the agreement. In addition, the United States has said that in order for the extended negotiations to succeed, \u201cmore and better\u201d offers must be made by members, including both developed and developing nations.\nSimilarly, negotiations for a multilateral maritime services agreement were unsuccessful and were suspended in June 1996 until the year 2000, when negotiations for all services sectors will be reopened. When suspending the negotiations, participating members agreed to refrain from applying new measures that would affect trade in this area during this time. The United States has said that other participating members to the negotiations did not offer \u201cto remove restrictions so as to approach current U.S. openness in this area.\u201d The United States did not submit an offer in maritime services because USTR believed that other countries were not serious about liberalization. spirits, nonferrous metals, oilseeds and oil products, and certain chemical and pharmaceutical products, but expects opposition in some of these areas from several major trading partners.\n\n\tEmerging Issues\n\nMembers are debating what work should be done by WTO on new issues related to international trade at Singapore. As tariff and nontariff barriers to trade are reduced, other areas (traditionally seen as domestic) have drawn attention as potential international trade barriers. These include (1) environmental protection, (2) investment rules, (3) competition policy, (4) labor standards, and (5) bribery and corruption issues. Although these are not traditionally discussed as trade policy topics, they reflect a broader concept of what some WTO members believe are factors affecting market access opportunities in a global economy. For example, some WTO members believe that enforcing certain environmental and labor standards can be a disguise for protectionist policies. Also, activities such as price-fixing, market sharing, and noncompetitive procurement practices can lead to market distortions and reduce access for foreign competitors. The WTO has begun to address some of these issues, but no consensus has been reached on the extent to which they should be dealt with in the WTO. Some of these negotiations in new areas could be quite controversial, based on the previous experience with including areas like agriculture and services in the Uruguay Round negotiating agenda.\n\n\t\tTrade and Environmental Protection\n\nOf the emerging issues, environment has developed the furthest within the WTO. At Marrakesh in 1994, members decided to establish a Committee on Trade and Environment. Trade and environment issues overlap because some government measures to balance economic growth with environmental concerns are perceived as protectionist and may conflict with WTO obligations. At the same time, some trade policies may impede the development of sound environmental policies. In the past, GATT dispute panels have ruled against measures that conflicted with national treatment principles or that appeared to apply to areas outside a country\u2019s sovereign jurisdiction. The United States believes that free trade and environmental protection policies can be mutually supportive and plans to convey this message at the Singapore ministerial meeting, in keeping with the 1992 United Nations Declaration in Rio de Janeiro.\nThe WTO Committee on Trade and Environment is to identify the relationship between trade and environmental measures and make appropriate recommendations within the context of open and equitable trade. The Committee is expected to present a report at Singapore, but it is unclear what the report will include because of the complex issues and divergent views. Members generally agree that promoting free trade and environmental protection is not inherently contradictory; however, they have not agreed on specific ways to address these issues. Several items are under discussion, including ecolabeling programs; the relationship between multilateral environmental agreements and the WTO; and the effect of environmental measures on market access, particularly in relation to developing countries.\nEcolabeling programs have received a great deal of attention by the Committee. Some members believe these programs act as trade barriers, and members have not reached an agreement about whether or not ecolabeling programs need greater transparency. USTR firmly believes that all forms of ecolabeling are subject to the WTO\u2019s Technical Barriers to Trade (TBT) Agreement, which requires transparency and public participation when applying product standards. Other members, however, have expressed doubts about whether all ecolabeling programs are covered by the TBT agreement. USTR anticipates the WTO Committee will need to discuss this and other issues after Singapore.\n\n\t\tTrade and Investment Rules\n\nspecific service sectors, including business services and construction and engineering services.\nCountries are debating in which forums to pursue further liberalization in investment. Therefore, any Singapore proposals to establish a work program for WTO on investment issues will have to take into account negotiations in other forums. Most notable is the OECD, whose members are working to establish a Multilateral Agreement on Investment in 1997 that would be open to both OECD and non-OECD members. Nevertheless, the EU and Canada favor discussing investment rules in the WTO because its membership is larger than the OECD. There is a wide divergence of views among other members; some lesser-developed members oppose negotiations in the WTO, according to USTR. On the other hand, the United States and other nations would like to continue focusing on the OECD negotiations rather than negotiating in the WTO, believing that (1) the OECD has the potential to achieve a higher standard of liberalization (that is, on a par with NAFTA and U.S. bilateral investment treaties) than the WTO could and (2) some WTO members are not ready for such an agreement. Still, the United States supports creating a modest work program to educate WTO members on these issues.\n\n\t\tTrade and Competition Policy\n\nNational competition or antitrust policies of other countries can affect opportunities and benefits for U.S. exporters and consumers. For example, price-fixing, market sharing, and other monopolistic business practices have been recognized as potential trade barriers. By distorting market competition, these practices can diminish market access opportunities, consumer choices, and other intended benefits of liberalized trade. Anticompetitive practices can also lead to trade disputes. For example, the United States has initiated two WTO dispute settlement proceedings against Japan in cases involving photographic films and paper and distribution services. before determining whether any sort of negotiating program in the WTO is appropriate. USTR has emphasized that the United States will not accept any initiative in the WTO that would threaten U.S. antitrust or antidumping laws. The United States has participated in creating guidelines and in undertaking studies of competition policy issues at the OECD, along with Japan and EU member states.\n\n\t\tTrade and Labor Standards\n\nWTO members are currently considering the role of labor standards in the international trade regime. The desire to link international trade and labor issues is not new, but labor issues have been the province of the International Labor Organization (ILO), a specialized agency of the United Nations created in 1919. ILO, whose purpose is to improve working conditions and living standards for workers throughout the world, provides a forum for consideration of various labor issues including the establishment of core labor standards, which currently vary from country to country.\nAt the conclusion of the Uruguay Round negotiations, several members, most notably the United States and some members of the EU, proposed that labor issues be formally brought into the world trading system. However, other WTO member countries in both the developed and the developing world have been concerned that mandated international labor standards may either inhibit their economic development or act as protectionist barriers to their exports. The United States, based on a provision of the Uruguay Round Agreements Act, recommended that the WTO establish a working party to examine the relationship between trade and internationally recognized worker rights. The U.S. proposal does not envision negotiations but seeks to begin discussions limited to how core labor standards and trade can be mutually supportive in promoting growth and development. Thus far, no consensus currently exists either on bringing labor issues into the WTO, or on developing potential linkages between the WTO and ILO, a possible first step.\n\n\t\tTrade and Bribery and Corruption\n\ntransparency in government procurement. Bribery and corruption increase the cost and risk of conducting business in foreign countries. The difference in the way that U.S. and foreign laws treat these activities can also reduce U.S. companies\u2019 access to foreign markets. For example, U.S. legislation passed in 1977 prohibits U.S. companies from engaging in bribery of foreign public officials. In contrast, some other countries do not have criminal penalties for engaging in the bribery of foreign public officials, and in some countries businesses are allowed to take tax deductions for bribery expenses. Other multilateral organizations have already taken steps to address bribery and corruption, with U.S. encouragement. For example, OECD members have agreed to criminalize the acceptance and payment of bribes. Members of the Organization of American States have entered into a treaty that would make this conduct criminal. The OECD has also recommended that member countries eliminate tax deductions for the payment of bribes. The Association of Southeast Asian Nations foreign ministers in a recent forum on the WTO agenda rejected the U.S. proposal to include corruption and other \u201csocial clauses\u201d that they did not consider trade related.\nThe United States is promoting efforts to reduce bribery by foreign companies and government officials by encouraging WTO members to sign the Agreement on Government Procurement. To date, only 22 industrialized countries, including the United States, have done so; and none of the least developed countries are signatories. The provisions of the new agreement, which went into effect in 20 countries on January 1, 1996, promote transparency in government procurement procedures and require that countries not discriminate against foreign or foreign-owned suppliers or otherwise allow practices that would preclude competitive procurement.\n\n\tAccession of New Members\n\nnegotiations with individual WTO members over tariff and market access commitments. After these negotiations are concluded, the working party submits a Protocol of Accession and a report to the Ministerial Conference for approval. Accession is approved by a two-thirds majority vote of WTO members.\nThe United States expects the Singapore ministerial meeting to address the broad range of accession applications\u2014rather than single out any particular application for attention. USTR reports there are 31 countries whose applications for accession have been accepted; active negotiations are under way on about 20 of them. Four nations have completed accession negotiations since the WTO entered into force.\nThe United States supports accession of countries capable of and willing to (1) undertake WTO obligations and (2) provide commercially viable market access commitments for goods and services to the WTO. The United States also uses the negotiations to address outstanding bilateral trade issues covered by the WTO. For example, USTR reports that Taiwan has made significant concessions in its bilateral negotiations with the United States over market access, services, and government procurement. Nevertheless, significant issues remain outstanding.\nThe accession of China to the WTO is an issue of intense U.S. interest. China gained observer status to the GATT in 1982 and requested accession to the GATT in 1986. The United States and other nations have insisted that China\u2019s accession be approved on the basis of China\u2019s willingness to make commercially viable commitments that provide greatly expanded market access and ensure compliance with WTO obligations. U.S.-China bilateral negotiations are ongoing, and a WTO working party meeting on China\u2019s accession is scheduled for October 1996.\nThis concludes my statement for the record. Thank you for permitting me to provide you with this information.\nThe first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent.\nU.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000  or by using fax number (301) 258-4066, or TDD (301) 413-0006.\nEach day, GAO issues a list of newly available reports and testimony.  To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone.  A recorded menu will provide information on how to obtain these lists.","output":"Why GAO Did This Study\n\nGAO discussed the implementation of the Uruguay Round agreements and the World Trade Organization's (WTO) operations in the context of the upcoming Singapore ministerial meeting.\n\nWhat GAO Found\n\nGAO noted that: (1) implementation of the Uruguay Round agreements is complex, and the Singapore meeting will provide WTO member countries with the opportunity to take stock of their implementation efforts; (2) limitations and variations in the amount of information reported by member countries has made it difficult for WTO committees and working groups to oversee implementation of the agreements and a new dispute settlement mechanism; (3) implementation of the WTO Agreement on Textiles and Clothing has been a major area of contention between exporting and importing countries; (4) the United States has many concerns regarding the implementation of commitments to liberalize agricultural trade, and has indicated that it will propose further agricultural reform negotiations; (5) it is not clear whether efforts to liberalize trade in the services sector will be successful, since WTO member countries have been unable to reach final agreements covering some sectors; and (6) it is expected that WTO members will begin work on the next generation of trade issues in such areas as environmental protection, investment rules, competition policy, labor standards, and bribery and corruption at the Singapore meeting."}
{"id":"gao_T-AIMD-99-102","pid":"gao_T-AIMD-99-102_0","input":"\tThe ALMRS\/ Modernization: A Brief History\n\nDuring the energy boom of the early 1980s, BLM found that it could not  handle the case processing workload associated with a growing number of  applications for oil and gas leases.  The bureau recognized that to keep up  with increased demand, it needed to automate its manual records and case  processing activities.  Therefore, in the mid-1980s, it began planning to  acquire an automated land and mineral case processing system.  At that  time, BLM estimated that the life-cycle cost of such a system would be  about $240 million.\nIn 1988 BLM expanded the scope of the system to include a land  information system (LIS).  The expanded system was to provide automated  information systems and geographic information systems technology  capabilities to support other land management functions, such as land use  and resource planning.  BLM combined the LIS with a project to modernize  the bureau's computer and telecommunications equipment, and estimated  the total life-cycle cost of this combined project to be $880 million.\nThe project was reduced in scope in 1989 to respond to concern about the  high cost and named the ALMRS\/Modernization.  The project consisted of  three major components\u2014the ALMRS IOC, a geographic coordinate  database, and the modernization of BLM's computer and  telecommunications infrastructure and rehost of selected management and  administrative systems.  Estimated life-cycle costs were $575 million (later  reduced to $403 million), and BLM planned to complete the entire project  by the end of fiscal year 1996.\nThe ALMRS IOC was to be the flagship of the ALMRS\/Modernization, and  was to replace various manual and ad hoc automated systems.  The bureau  designated the ALMRS IOC a critical system for (1) automating land and  mineral records, (2) supporting case processing activities, including leasing  oil and gas reserves and recording valid mining claims, and (3) providing  information for land and resource management activities, including timber  sales and grazing leases.  The system was expected to more efficiently  record, maintain, and retrieve land description, ownership, and use  information to support BLM, other federal programs, and interested  parties.  It was to do this by using the new computer and  telecommunications equipment that was deployed throughout the bureau,  integrating multiple databases into a single geographically referenced  database, shortening the time to complete case processing activities, and  automating costly manual records.\nDespite the promise of ALMRS IOC to significantly improve business  operations, repeated problems with its development have prevented  deployment.  For example, during a user evaluation test in May 1996,  problems were reported involving unacceptably slow system performance.   Subsequent testing in 1996 uncovered 204 high-priority software problems,  which delayed project completion by about a year.  In testing conducted in  November 1997, BLM encountered workstation failures and slowdowns  caused by insufficient workstation memory and by problems discovered in  two BLM-developed software applications.  Some of these problems had  been identified in earlier tests but had not been corrected.  Additional  testing uncovered software errors that resulted in missing, incorrect, and  incomplete data, and error files that contained accurate data.  As a result of  these problems, BLM postponed the Operational Assessment Test and  Evaluation (OAT&E) that had been scheduled for December 1997.  The  OAT&E was to determine whether ALMRS IOC was ready to be deployed to  the first state office.\nIn October 1998, the OAT&E was conducted and showed that ALMRS IOC  was not ready to be deployed because it did not meet requirements.  During  the test, users reported several problems, including that ALMRS IOC (1) did  not support BLM\u2019s business activities, (2) was too complex, and (3) significantly impeded worker productivity.  For example, one tester  reported that entering data for a $10 sale of a commodity, such as gravel,  required an hour of data entry using ALMRS IOC, whereas with the existing  system, the same transaction would have taken about 10 minutes.  Users  also reported that system response time problems were severe or  catastrophic at all test sites.  One user said \u201cIt is ridiculous to spend 2 or 3  hours to enter information in this system, when it takes 30 minutes to an  hour to process the information into the legacy system.\u201d  Finally, users  reported data converted from legacy databases were not accurate, and that  validation of the converted legacy data required inordinate effort and time.\nBecause these problems are significant, senior BLM officials have decided  that ALMRS IOC is not currently deployable.  According to BLM, it  obligated about $411 million on the ALMRS\/Modernization project between  fiscal years 1983 and 1998, of which more than $67 million was spent to  develop ALMRS IOC software.  The $67 million does not include ALMRS  IOC costs that are part of other cost categories, such as costs for work  performed from fiscal years 1983 through 1988, project management,  computer and telecommunications hardware and software, data  management, and systems operation and maintenance.  The reported  obligations associated with the major cost categories of the ALMRS\/ Modernization are summarized in table 1.\nSenior BLM officials told us that although ALMRS IOC is not currently  deployable, BLM has benefited from the ALMRS\/Modernization work.  BLM  has deployed about 6,000 workstations throughout the bureau, provided  office automation capabilities, and implemented a national  telecommunications network with electronic mail and internet access,  which has enhanced communications and enabled BLM to communicate  with other federal agencies.  BLM\u2019s view of the benefits received, however,  does not reflect the fact that it has not realized the significant business- related benefits and improvements ALMRS IOC was to provide.\n\n\tOur Reviews Have Shown Long-Standing Project Weaknesses\n\nMr. Chairman, since May 1995 we have reported many problems and risks  that threatened the successful development and deployment of the ALMRS\/ Modernization.  Our reports have discussed these issues, their causes, and  our recommended corrective actions.  BLM has been slow to implement  some of our recommendations and has not yet fully implemented others.   Following is a summary of the problems, causes, and associated  recommendations we have reported.\nBLM did not develop a system architecture or formulate a concept of  operations before designing and developing the ALMRS\/Modernization.   A system architecture describes the components of a system, their  interrelationships, and principles and guidelines governing their design  and evolution.  A concept of operations describes how an organization  would use planned information technology to perform its business  operations and accomplish its missions.  Designing and developing the  project without a system architecture and concept of operations  unnecessarily increased the risk that the ALMRS\/Modernization would  not meet the business and information needs of the bureau.\nBLM has never had a credible project schedule, reliable milestones, or a  critical path to manage the development and deployment of the ALMRS\/ Modernization.  As a result, BLM has not known with any certainty how  long it would take and, therefore, how much it would cost to complete  the ALMRS\/Modernization.  Because BLM has not implemented our  recommendation to establish a credible project schedule, the ALMRS\/ Modernization has been driven by self-imposed deadlines.  In trying to  meet those deadlines, BLM has deferred some tasks until after  completion of the project, and has not corrected all problems when it  found them because doing so would cause it to miss the self-imposed  project deadlines.\nBLM faced serious risks because it had not established a robust  configuration management program for the ALMRS\/Modernization.   Configuration management is essential to controlling the composition of  and changes to computer and network systems components and  documentation.  The lack of configuration management increased the  risks that system modifications could lead to undesirable consequences,  such as causing system failures, endangering system integrity,  increasing security risks, and degrading system performance.  In  response to our recommendation, BLM later developed a configuration  management plan and related policies and procedures for the ALMRS\/ Modernization.  We planned to review field office implementation of the  configuration management program after completion of the ALMRS  IOC; however, we have not done so because the system was not  deployed.\nBLM incurred serious risks because it had not established a security  plan or security architecture for the ALMRS\/Modernization.  The lack of  such security controls increased risks to the confidentiality, integrity,  and availability of stored and processed data.  BLM recently completed  work in response to our recommendation.  It performed a risk analysis,  developed a system security plan and architecture, identified  management and operational controls, and developed disaster and  recovery plan procedures.  As with configuration management, we  planned to review field office implementation of the security program  after completion of the ALMRS IOC, but have not done so because the  system was not deployed.\nBLM invited serious risks because it had not established transition plans  to guide the incorporation of ALMRS IOC into its daily operations.   Deploying a major information system that people will use to do their  jobs requires careful planning to avoid business and operational  problems.  Without transition plans, BLM increased the risk that using  ALMRS IOC would disrupt, rather than facilitate, its work processes and  ability to conduct land and mineral management business.  In response  to our recommendation, BLM developed transition plans; however, the  plans were not adequate.  They did not outline needed changes in  organizational roles, responsibilities, and interrelationships, or address  issues such as how state and subordinate offices would deal with oil and  gas, mining, and solid mineral business process changes that would  result from implementing ALMRS IOC.\nBLM faced serious risks because it had not established operations and  maintenance plans.  The lack of plans increased the risk that the bureau  would not meet its automation objectives or the daily needs of its  offices.  BLM developed operations and maintenance plans in response  to our recommendation.  We expected to review field office  implementation of the operations and maintenance plans after  completion of the ALMRS IOC; however, we have not done so because  the system was not deployed.\nBLM invited serious risks because it planned to stress test only the  ALMRS IOC component\u2014state and district offices, ALMRS IOC servers,  terminals, and workstations. This increased the risk that BLM would  deploy the ALMRS IOC nationwide without knowing whether the  ALMRS\/Modernization\u2014ALMRS IOC, office automation, e-mail,  administrative systems, and various departmental, state, and district  software applications in a networked environment\u2014would perform as  intended during peak workloads.  BLM agreed to fully stress test the  entire ALMRS\/Modernization before deploying the ALMRS IOC  component throughout the bureau.\nBLM did not develop a Year 2000 contingency plan to ensure that critical  legacy systems could operate after January 1, 2000, if the ALMRS IOC  could not be delivered in 1999.  We recommended that BLM develop a  Year 2000 contingency plan to ensure continued use of those critical  legacy systems ALMRS IOC was to replace.  BLM implemented this  recommendation and began executing the plan in 1998, when it became  clear that ALMRS IOC would not be fully implemented by the end of  1999.\n\n\tWhere BLM Should Go From Here\n\nAt this point, BLM has made an enormous investment in software that does  not meet its business needs.  At the same time, it has not adopted  information technology management practices required by recent  legislation or suggested by industry best practices.  Because of its large  investment, BLM should analyze ALMRS IOC to determine whether the  software can be cost-beneficially modified to meet the bureau\u2019s needs.  In  addition, to reduce the risk that future information technology efforts will  result in a similar outcome, BLM should assess its investment management  practices and its systems acquisition capabilities.  Until these assessments  and subsequent improvement actions are taken, BLM will not be  adequately prepared to undertake any sizable system acquisition.\n\n\t\tAnalysis of ALMRS IOC Software Is Needed\n\nWe believe that since BLM has invested over $67 million to develop the  ALMRS IOC software, the bureau should thoroughly analyze the software  to determine whether it can be modified to meet users\u2019 needs and at what  cost.  This analysis should be part of an overall effort to identify and assess  all viable alternatives, including (1) using or modifying ALMRS IOC  software, (2) modifying or evolving existing land and recordation systems,  (3) acquiring commercial, off-the-shelf software, or (4) developing new  systems.  The alternative analysis should clearly identify the risks, costs,  and benefits of each alternative, and should be performed only after BLM is  assured that it has fully verified its current business requirements.  In this  regard, senior BLM officials said they are performing an analysis to  determine where ALMRS IOC failed to meet users\u2019 expectations and critical  business requirements.\n\n\t\tAssessment of BLM\u2019s Information Technology Investment Management Practices Is Needed\n\nAccording to the acting land and resources information systems program  manager, BLM is beginning to develop plans for future information  technology modernization.  These plans are to identify alternatives to  deploying ALMRS IOC, and evaluate those alternatives based on cost,  functionality, and return on investment.  BLM also plans to document its  current and planned business processes and systems architectures as part  of this effort.\nWhile such planning is necessary, BLM also needs to assess its investment  management practices to help avoid future problems.  The Clinger-Cohen  Act of 1996 seeks to maximize the return on investments in information  systems by requiring agencies to institute sound capital investment  decision-making.  Under the act, agencies must design and implement a  process for maximizing the value and assessing and managing the risks of  information technology acquisitions.\nAn information technology investment process is an integrated approach  that provides for data-driven selection, control, and evaluation of  information technology investments.  The investment process is  comprised of three phases.  The first phase involves selecting investments  using quantitative and qualitative criteria for comparing and setting  priorities for information technology projects.  The second phase includes  monitoring and controlling selected projects through progress reviews at  key milestones to compare the expected costs, risks encountered, and  performance benefits realized to date.  These progress reviews are  essential for senior managers to decide whether to continue, accelerate,  modify, or terminate a selected project.  The third phase involves a  postimplementation review or evaluation of fully implemented projects to  compare actuals against estimates, assess performance, and identify areas  where future decision-making can be improved.\nAccording to senior BLM officials, the bureau has established an  Information Technology Investment Board to provide support for its capital  planning processes.  It intends to apply more rigorous, structured  processes to analyze its information technology investments and select,  control, and evaluate information technology investment alternatives.   Until such processes are fully in place, the bureau cannot be assured that  future investments will be properly selected, managed, and evaluated using  sound investment criteria to provide effective support for the bureau\u2019s  mission and goals.\nFurther, to ensure that information technology investment processes are  carried out adequately, the Clinger-Cohen Act also requires agencies to  assess the knowledge and skills of its executive and management staff to  meet agencies\u2019 information resources management requirements, and to  take steps to rectify any deficiencies.  The Software Engineering Institute  (SEI) has identified the need for organizations to focus on information  resources management capabilities.  Organizations should improve their  capabilities using a process to characterize the maturity of their workforce  practices, guide a program of workforce development, set priorities for  immediate actions, and establish a culture of software engineering  excellence.\nAccording to senior BLM officials, the bureau examined the kind of skills  that its field office computer specialists had, and identified the skills they  would need.  However, the officials recognize that this was not the same as  the more comprehensive assessment suggested by SEI.  Such assessments  are needed to better identify and manage information technology  investments.  Consequently, the bureau should evaluate and, where needed,  enhance the knowledge and skills of its staff to help ensure that the  investment management processes it puts in place can be effectively  carried out by its information resources management organization.\nFinally, the Clinger-Cohen Act requires agencies to develop, maintain, and  facilitate the implementation of a sound and integrated information  technology architecture.  An information technology architecture provides  a comprehensive blueprint that systematically details the breadth and  depth of an organization\u2019s mission-based mode of operation.  An  architecture provides details first in logical terms, such as defining  business functions, providing high-level descriptions of information  systems and their interrelationships, and specifying information flows; and  second in technical terms, such as specifying hardware, software, data,  communications, security, and performance characteristics.  By enforcing  an information technology architecture to guide and constrain a  modernization program, an agency can preclude inconsistent systems  design and development decisions, and the resulting suboptimal  performance and excess cost.\nAs I discussed earlier, BLM did not develop a system architecture before  designing and developing the ALMRS\/Modernization.  This is a key reason  why ALMRS IOC did not meet the bureau\u2019s business needs.  BLM still has  not developed an architecture that documents its business processes and  the technology and systems that support them.  BLM needs to develop an  information technology architecture to guide its future investment plans.\n\n\t\tBLM Needs to Assess Its Systems Acquisition Capabilities\n\nResearch by SEI has shown that defined and repeatable processes for  managing software acquisition are critical to an organization\u2019s ability to  consistently deliver high-quality information systems on time and within  budget.  These critical management processes include project planning,  requirements management, software project tracking and oversight,  software quality assurance, software configuration management, and  change control management.   To assist organizations in evaluating and  enhancing systems acquisition capabilities and processes, SEI has  developed models for conducting software process assessments and  software capability evaluations to determine the state of their capabilities  and identify areas requiring improvement.\nBLM also needs an independent assessment of its systems acquisition  capabilities, and must ensure that it uses sound systems acquisition  processes.  As I discussed earlier, BLM did not develop several key  management controls for the ALMRS\/Modernization.  BLM did not develop  a credible project schedule or develop adequate transition plans.  In  addition, the lack of a configuration management program, security plan  and architecture, and operations and maintenance plans further increased  BLM\u2019s risks.  These problems indicate the need for BLM to ensure that the  deficiencies in its systems acquisition capabilities and processes are  acknowledged and corrected.  Until such assessments are completed and  corrective action taken, BLM should not undertake any sizable systems  acquisition or development efforts.\nMr. Chairman, that concludes my statement.  I would be happy to respond  to any questions that you or other members of the Subcommittee may have  at this time.\nThe first copy of each GAO report and testimony is free. Additional copies are $2 each.  Orders should be sent to the  following address, accompanied by a check or money order made  out to the Superintendent of Documents, when necessary, VISA and  MasterCard credit cards are accepted, also.\nOrders for 100 or more copies to be mailed to a single address are  discounted 25 percent.\nU.S. General Accounting Office P.O. Box 37050 Washington, DC  20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537.\nEach day, GAO issues a list of newly available reports and  testimony.  To receive facsimile copies of the daily list or any list  from the past 30 days, please call (202) 512-6000 using a touchtone  phone.  A recorded menu will provide information on how to obtain  these lists.","output":"Why GAO Did This Study\n\nPursuant to a congressional request, GAO discussed the Bureau of Land Management's (BLM) Automated Land and Mineral Record System project, also known as the ALMRS\/Modernization, focusing on: (1) the history of the project; (2) the results of GAO's reviews, including the key reasons for problems; and (3) where GAO believes BLM should go from here.\n\nWhat GAO Found\n\nGAO noted that: (1) BLM spent over 15 years and estimates that it invested about $411 million planning and developing the ALMRS\/Modernization, only to have the major software component--known as the ALMRS Initial Operating Capacity (IOC)--fail; (2) as a result of that failure, the bureau decided not to deploy ALMRS IOC at this time; (3) GAO has previously reported on the significant problems and risks that BLM has encountered; (4) GAO has made many recommendations to reduce those risks; however, BLM has been slow to implement some recommendations and has not yet fully implemented others; (5) BLM now needs to determine whether it can salvage any of the more than $67-million reported investment in ALMRS IOC software, by analyzing the software to determine if it can be cost-beneficially modified to meet BLM's needs; and (6) in addition, to reduce the risk that future efforts will result in similar failures, BLM should assess its information technology investment practices and systems acquisition capabilities."}
{"id":"gao_GAO-09-85","pid":"gao_GAO-09-85_0","input":"\tBackground\n\nCertain characteristics of commercial trucks and buses make them  inherently vulnerable to terrorist attacks and therefore difficult to secure.  The commercial trucking and bus industries are open by design, with  multiple access points and terminals so that vehicles can move large  numbers of people and volumes of goods quickly. The openness of this  sector and the large numbers of riders and quantities of goods on vehicles  with access to metropolitan areas or tourist destinations also make them  both difficult to secure and attractive targets for terrorists because of the  potential for mass casualties and economic damage and disruption. In  addition, the multitude of private commercial truck and bus companies  and their diversity in size and cargo complicate efforts to develop security  measures and mitigation strategies that are appropriate for the entire  industry.\nBetween 1997 and 2008 there were 510 terrorist-related commercial truck  and bus bombing attacks worldwide, killing over 6,000 people, with 106  bombings occurring during 2007 alone, killing over 2,500 people. Of the  510 bombings since 1997, 364 have been bus bombings and 146 have been  truck bombings; 156 have been in Iraq and 354 have been in countries  other than Iraq. In 2007, the use of truck bombs as a terrorist tactic more  than tripled and resulted in 2072 deaths. While trucks were involved in  just 29 percent of the bombings since 1997, they accounted for 56 percent  of the deaths. Vehicle Borne Improvised Explosive Devices (VBIEDs) are  vehicles loaded with a range of explosive materials that are detonated  when they reach their target. VBIEDs can also be used to explode  flammable fuel trucks, and disperse toxic substances. Terrorists have used  a variety of trucks\u2014rental, refrigerator, cement, dump, sewerage, gasoline  tanker, trucks with chlorine and propane tanks, and fire engines\u2014to  attack a broad range of critical infrastructure, including police and military  facilities, playgrounds, childcare centers, hotels, and bridges. Worldwide,  commercial buses have also been attacked numerous times, including in  Israel, England, Iraq, the Philippines, Lebanon, Sri Lanka, India, Russia,  and Pakistan. In the United States, terrorists used a commercial truck  containing fertilizer-based explosives to attack the World Trade Center in  1993, killing 6 and injuring 1,000 people. Two years later, a similar attack  occurred at the Alfred P. Murrah Federal Building in Oklahoma City,  Oklahoma, killing 168 people and injuring more than 800. Terrorists have  also targeted overseas U.S. military personnel with commercial VBIEDs at  the Marine barracks in Lebanon (1983), Khobar Towers in Saudi Arabia  (1996), and at U.S. embassies in Kuwait (1983), Lebanon (1984), Kenya  (1998), and Tanzania (1998). Figure 2 charts the number of worldwide  bombings involving commercial truck or buses since the 1997. See  appendix II for more information on truck and bus bombing incidents.\n\n\t\tStakeholder Roles and Responsibilities\n\nDHS and DOT share responsibility for securing the commercial vehicle  sector. Prior to the terrorist attacks of September 11, 2001, DOT was the  primary federal entity involved in regulating commercial vehicles. In  response to September 11, 2001, Congress passed the Aviation and  Transportation Security Act (ATSA) of 2001, which created and conferred  upon TSA broad responsibility for securing all transportation sectors. In  2002, Congress passed the Homeland Security Act, which established DHS,  transferred TSA into DHS, and gave DHS responsibility for protecting the  nation from terrorism, including securing the nation\u2019s transportation  systems. Although TSA is the lead agency responsible for the security of  commercial vehicles, including those carrying hazardous materials, DOT  maintains a regulatory role with respect to hazardous materials.  Specifically, DOT continues to issue and enforce regulations governing the  safe transportation of hazardous materials. In addition, the Homeland  Security Act expanded DOT\u2019s responsibility to include ensuring the  security, as well as the safety, of the transportation of hazardous  materials. Accordingly, within DOT, PHMSA is responsible for  developing, implementing, and revising security plan requirements for  carriers of hazardous materials, while FMCSA inspectors enforce these  regulations through reviews of the content and implementation of these  security plans.\nIn 2004, based on a recommendation we made, DHS and DOT entered into  a memorandum of understanding (MOU) to delineate the agencies\u2019 roles  and responsibilities with respect to transportation security. In 2006, TSA  and PHMSA completed an annex to the MOU related to the transportation  of hazardous materials. This annex identifies TSA as the lead federal entity  for the security of the transportation of hazardous materials, and PHMSA  as responsible for promulgating and enforcing regulations and  administering a national program of safety and security related to the  transportation of hazardous materials. In addition, the 9\/11 Commission  Act requires that, by August 2008, DHS and DOT complete an annex to the  MOU that would govern the roles of the two agencies regarding the  security of commercial motor vehicles.\nState and local governments also play a key role in securing commercial  vehicles. States own, operate, and have law enforcement jurisdiction over  significant portions of the infrastructure\u2014including highways, tunnels,  and bridges\u2014that commercial vehicles use. Further, state and local  governments respond to emergencies involving commercial vehicles  which travel within and through their jurisdictions daily. Many states also  have departments of homeland security with firsthand knowledge of  hazardous materials shippers and routing, local smuggling operations, and  individuals and groups to be monitored for security reasons. Some states  also have fusion centers that collect relevant law enforcement and  intelligence information to coordinate the dissemination of alerts and  assist in emergency response. State transportation and law enforcement  officials also conduct vehicle safety inspections and compliance reviews,  sometimes in coordination with FMCSA.\nAlthough all levels of government are involved in the security of  commercial vehicles, primary responsibility for securing commercial  vehicles rests with the individual commercial vehicle companies  themselves. Truck and bus companies have responsibility for the security  of day-to-day operations. As part of these operations, they ensure that  company personnel, vehicles, and terminals---as well as all of the material  and passengers they transport----are secured. Faced with tight competition,  low margins, and, in some sectors, high driver turnover, some industry  officials that we interviewed stated that devoting resources to security has  remained a challenge. A variety of national organizations represent  commercial trucking and motor coach industry interests. Many of these  organizations disseminate pertinent security bulletin information from  DHS and DOT to their members. Some have also developed and provided  their members with security information and tools\u2014such as security  check lists and handbooks\u2014to meet members\u2019 security needs. See  appendix III for a list of the major industry associations representing the  truck and motor coach industries interviewed by GAO.\n\n\t\tLegislation and Regulations Governing the Security of Commercial Vehicles\n\nAlthough ATSA, passed in November 2001, includes numerous  requirements for TSA regarding securing commercial aviation, it does not  include any specific requirements related to the security of land  transportation sectors.  However, with regard to all sectors of  transportation, ATSA generally requires TSA to:  receive, assess, and distribute intelligence information related to  transportation security;    assess threats to transportation security and develop policies, strategies,  and plans for dealing with those threats, including coordinating  countermeasures with other federal organizations; and,    enforce security-related regulations and requirements.\nOther legislation, specifically the USA PATRIOT Act and the 9\/11  Commission Act, requires TSA to take specific actions to ensure the  security of commercial vehicles. The USA PATRIOT Act provides that a  state may not issue to any individual a license to transport hazardous  materials unless that individual is determined not to pose a security risk.  TSA regulations require that drivers who transport hazardous materials  undergo a security threat assessment that consists of an evaluation of a  driver\u2019s criminal history, immigration status, mental capacity, and  connections to terrorism to determine if the driver poses a security risk.  The 9\/11 Commission Act also requires that the Secretary of Homeland  Security, by August 2008, submit a report to Congress that includes, among  other things, a security risk assessment on the trucking industry, an  assessment of industry best practices to enhance security, and an  assessment of actions already taken by both public and private entities to  address identified security risks. The act also mandates that the Secretary  develop a tracking program for motor carrier shipments of hazardous  materials by February 2008. With regard to intercity buses, the act  requires that the Secretary issue regulations by February 2009 requiring  high-risk, over-the-road bus operators to conduct vulnerability  assessments and develop and implement security plans. The act further  mandates that the Secretary of Homeland Security issue regulations by  February 2008 requiring all over-the-road bus operators to develop and  implement security training programs for frontline employees, and that the  Secretary establish a security exercise program for over-the-road bus  transportation. The act also requires DOT to take specific actions related  to the security of commercial vehicles. For example, the Act requires that  the Secretary of Transportation, by August 2008, analyze the highway  routing of hazardous materials, and develop guidance to identify and  reduce safety and security risks.\nDOT\u2019s PHMSA has issued regulations intended to strengthen the security  of the transportation of hazardous materials. The regulations require  persons who transport or offer for transportation certain hazardous  materials to develop and implement security plans. Security plans must  assess the security risks associated with transporting these hazardous  materials and include measures to address those risks. At a minimum, the  plan must include measures to (1) confirm information provided by job  applicants hired for positions that involve access to and handling of  hazardous materials covered by the security plan, (2) respond to the  assessed risk that unauthorized persons may gain access to hazardous  materials, and (3) address the assessed risk associated with the shipment  of hazardous materials from origin to destination. The regulations also  require that all employees who directly affect hazardous materials  transportation safety receive training that provides awareness of security  risks associated with hazardous materials transportation and of methods  designed to enhance transportation security. Such training is also to  instruct employees on how to recognize and respond to possible security  threats. Additionally, each employee of a firm required to have a security  plan must be trained concerning the plan and its implementation.\nDHS funding for commercial vehicle security consists of a general  appropriation to TSA for its entire surface transportation security  program, which includes commercial vehicles and highway infrastructure,  rail and mass transit, and pipeline, as well as and appropriations to the  Federal Emergency Management Administration (FEMA) for truck and  bus security grant programs. Annual appropriations to TSA for surface  transportation security for fiscal years 2006 through 2009 are presented in  table 1.\nThe number of TSA full-time employees (FTEs) dedicated to highway and  motor carrier security\u2014which includes both commercial vehicles and  highway infrastructure\u2014has remained at about 19 FTEs annually since  fiscal year 2002.\n\n\t\tCommercial Trucking Industry\n\nTSA estimates that there are approximately 1.2 million commercial  trucking companies in the United States. Trucks transport the majority of  freight shipped in the United States: by tonnage, 65 percent of total  domestic freight; by revenue, 75 percent. According to TSA, 75 percent of  U.S. communities depend solely on trucking to transport commodities.  Trucks and buses have access to nearly 4 million miles of roadway in the  United States. Trucking companies range in size from a single truck to  several thousand trucks. According to DOT 2004 data, which are the most  current available, 87 percent of trucking companies operated 6 or fewer  trucks, while 96 percent operated 20 or fewer. DOT estimates that about  40,000 new commercial trucking companies enter the industry annually.  As of August 2008, nearly 11.9 million commercial trucks were registered  with DOT. Trucks come in a large variety of configurations and cargo body  types to perform a wide range of tasks. Some trucks are used for local  tasks such as construction, landscaping, or local package delivery, while  others are used for transporting cargo over-the-road or for long hauls. For  a more complete summary of DOT data on commercial trucking and bus  firms, trucks and buses, and drivers, see appendix V.\nThe trucking industry is diverse, involving several different sectors and  including for-hire and private fleets, truckload and less-than-truckload  carriers, bulk transport, hazardous materials, rental and leasing, and  others. For-hire firms are those for which trucking is their primary  business, while private fleets are generally used to support another  business activity, such as grocery chains and construction. According to a  2002 DOT survey, for-hire trucks represented 47 percent of the industry,  while private fleets represented 53 percent. While truckload carriers  move loads from point to point, less-than-truckload carriers pick up  smaller shipments and consolidate them at freight terminals. Bulk  transport firms move bulk commodities such as gasoline, cement and corn  syrup in large trailers specifically designed for each type of commodity.  Truck rental and leasing companies also are part of the commercial  trucking industry. Consumer rental companies rent trucks to walk-in  customers for short periods of time and represent 15 percent of the rental  and leasing industry. Commercial rental and leasing companies generally  lease trucks for a year or longer and account for the remaining 85 percent  of the rental and leasing industry.\nWith respect to the transportation of hazardous materials, of an estimated  1.2 million commercial vehicle firms, 60,682 are registered as hazardous  materials carriers, or about 5 percent of the commercial vehicle industry,  and 1,778,833 drivers are licensed to transport hazardous materials.  Hazardous materials are transported by truck almost 800,000 times a day,  and 94 percent of hazardous material shipments are by trucks, which  transport approximately 54 percent of hazardous materials volume (tons).  DOT PHMSA classifies hazardous materials under 9 different classes of  hazards. Most hazardous materials shipments by truck involve flammable  liquids such as gasoline (81.8 percent), followed by gases (8.4 percent) and  corrosive materials (4.4 percent). Class 6 toxic poisons include Toxic  Inhalation Hazards (TIH) but comprise only 0.2 percent of hazardous  materials transported by truck. The shipment of security sensitive  hazardous materials such as Toxic Inhalation Hazards is of particular  concern to TSA, although the agency estimates that they represent just  .000058 percent of the commercial vehicle industry. Eighty-one percent of  the Toxic Inhalation Hazards transported by truck is anhydrous ammonia  and 10 percent is chlorine.\n\n\t\tCommercial Bus Industry\n\nCommercial bus companies represent less than 1 percent of the  commercial vehicle industry, but according to TSA estimates, carry 775  million passengers annually. Intercity buses, or motor coaches, include  buses with regularly scheduled routes, as well as tour and charter bus  companies. In August 2008, DOT reported that there were 3,948 motor  coach carriers, with 75,285 buses. Of these carriers, fewer than 100 are  intercity bus companies, which transport passengers from city to city on  scheduled routes, while the remaining carriers operate tour and charter  buses. Most bus companies (95 percent) are small operators with fewer  than 25 buses. Intercity buses, or motor coaches, serve all large  metropolitan areas and travel in close proximity to some of the nation\u2019s  most visible and populated sites, such as sporting events and arenas,  major tourist attractions, and national landmarks. A few intercity bus  carriers also travel internationally to Canada and Mexico. According to a  study commissioned by DOT, the accessibility and open nature of the  motor coach industry make it difficult to protect these assets, and the level  of security afforded to the infrastructure of the motor coach industry is  relatively low compared to the commercial aviation sector, despite the fact  that the motor coach industry handles more passengers a year.\n\n\t\tRisk Management Approach to Guide Homeland Security Investments\n\nHSPD-7 directed the Secretary of DHS to establish uniform policies,  approaches, guidelines, and methodologies for integrating federal  infrastructure protection and risk management activities. Recognizing that  each sector possesses its own unique characteristics and risk landscape,  HSPD-7 designates Federal Government Sector-Specific Agencies (SSAs)  for each of the critical infrastructure sectors to work with DHS to improve  critical infrastructure security. On June 30, 2006, DHS released the  National Infrastructure Protection Plan (NIPP), which developed\u2014in  accordance with HSPD-7\u2014a risk-based framework for the development of  Sector-Specific (SSA) strategic plans. The NIPP defines roles and  responsibilities for security partners in carrying out critical infrastructure  and key resources protection activities through the application of risk  management principles. Figure 3 illustrates the several interrelated  activities of the risk management framework as defined by the NIPP,  including setting security goals and performance targets, identifying key  assets and sector information, and assessing risk information including  both general and specific threat information, potential vulnerabilities, and  the potential consequences of a successful terrorist attack. The NIPP  requires that federal agencies use this information to inform the selection  of risk-based priorities and continuous improvement of security strategies  and programs to protect people and critical infrastructure through the  reduction of risks from acts of terrorism.\nThe NIPP risk management framework consists of the following  interrelated activities:    Set security goals: Define specific outcomes, conditions, end points, or  performance targets that collectively constitute an effective protective  posture.  Identify assets, systems, networks, and functions: Develop an inventory of  the assets, systems, and networks that comprise the nation\u2019s critical  infrastructure, key resources, and critical functions. Collect information  pertinent to risk management that takes into account the fundamental  characteristics of each sector.\nAssess risks: Determine risk by combining potential direct and indirect  consequences of a terrorist attack or other hazards (including seasonal  changes in consequences, and dependencies and interdependencies  associated with each identified asset, system, or network), known  vulnerabilities to various potential attack vectors, and general or specific  threat information.\nPrioritize: Aggregate and analyze risk assessment results to develop a  comprehensive picture of asset, system, and network risk; establish  priorities based on risk; and determine protection and business continuity  initiatives that provide the greatest mitigation of risk.  Implement protective programs: Select sector-appropriate protective  actions or programs to reduce or manage the risk identified, and secure  the resources needed to address priorities.\nMeasure effectiveness: Use metrics and other evaluation procedures at the  national and sector levels to measure progress and assess the  effectiveness of the national Critical Infrastructure and Key Resources  protection program in improving protection, managing risk, and increasing  resiliency.\n\n\tTSA Has Begun Conducting Risk Assessments of the Commercial Vehicle Sector, but Has Not Completed These Efforts or Fully Used the Results to Support Its Security Strategy\n\nTSA has taken actions to assess the security risks associated with the  commercial vehicle sector, including assessing threats, initiating  vulnerability assessments, and developing best security practices, but  more work remains to fully assess the security risks of commercial trucks  and buses, and to ensure that this information is used to inform TSA\u2019s  security strategy. Although TSA has completed a variety of threat  assessments and is in the process of developing several threat scenarios  with likelihood estimates, its key annual threat assessments do not include  information about the likelihood of a terrorist attack method on a  particular asset, system or network, as required by the NIPP. However, in  September 2008, TSA reported that in response to the 9\/11 Commission  Act mandate that it submit a risk assessment report on commercial  trucking security TSA was planning to use threat scenarios with likelihood  assessments for highway and motor carriers. TSA has also cosponsored a  large number of vulnerability assessments through a pilot initiative in the  state of Missouri. However, TSA has made limited progress and has not  established a plan or time frame for conducting a vulnerability assessment  of the commercial vehicle sector nationwide. Moreover, TSA has not  determined how it will address the June 2006 recommendations of the  Missouri Pilot Program evaluation report regarding the ways in which  future vulnerability assessments can be strengthened. As a result, the  agency cannot ensure that its CSR efforts will fully identify the  vulnerabilities of the sector. Standards for internal controls in the federal  government require that findings and deficiencies reported in audits and  other reviews be promptly reviewed, resolved, and corrected within  established time frames.  In addition, TSA has not conducted assessments  of consequences of a terrorist attack on the commercial vehicle sector, or  developed a plan to conduct sectorwide consequence assessments. The  TSSP calls for a sectorwide approach and strategies to managing security  risks, and TSA has identified one of its strategic goals as conducting an  inventory of the security status of the nation\u2019s highway and motor carrier  systems. In addition, standard practices in program and project  management call for developing a road map, or a program plan, to achieve  programmatic results within a specified time frame or milestones. TSA has  not completed a sectorwide risk assessment of the commercial vehicle  sector or determined the extent to which additional risk assessment  efforts are needed, nor has it developed a plan or a time frame for doing  so, including an assessment of the resources required to support these  efforts. In addition, TSA has not fully used available information from its  ongoing risk assessments to develop and implement its security strategy.  As a result, TSA cannot be assured that its approach for securing the  commercial vehicle sector is aligned with the highest priority security  needs. Moreover, TSA has not completed a report as required by the 9\/11  Commission Act on various aspects of commercial vehicle security.\n\n\t\tTSA Developed Threat Assessments of the Commercial Vehicle Sector, but Generally Did Not Identify the Likelihood of Specific Threats as Required by the NIPP\n\nTSA has and continues to conduct threat assessments of the commercial  vehicle sector by reviewing known terrorist goals and capabilities, and is  in the process of strengthening its efforts by developing more specific  threat likelihood information to inform agency risk assessment efforts.  TSA\u2019s Office of Intelligence (OI) develops a variety of products identifying  the threats from terrorism, from annual threat assessments on each  transportation sector to weekly field intelligence summaries and daily  briefings. OI also disseminates additional threat and suspicious incident  information to key federal and nonfederal stakeholders as needed related  to the commercial vehicle sector. To date, these threat assessments have  found an increase in truck and bus terrorist incidents abroad and that  VBIEDs were the most likely tactic. TSA OI officials stated that they  continue to regard common VBIEDs as a greater threat than attacks using  hazardous materials such as chlorine. OI further reported that the July  2005 bus bombing in London demonstrated the capability and intent of  terrorists to bomb passenger buses in Western nations.\nWhile TSA\u2019s threat assessments provide detailed summaries of recent  attacks and incidents of interest, and are useful to TSA in informing its  strategy for securing commercial vehicles, they do not include information  on the likelihood of various types of threats. The NIPP requires that in the  context of terrorist risk assessments, the threat component of the analysis  be calculated based on the estimated likelihood of a terrorist attack  method on a particular asset, system, or network. The estimate of this  likelihood is to be based on an analysis of intent and capability of a  defined adversary, such as a terrorist group. However, TSA has not  included likelihood estimates in its annual threat assessments for the  highway and motor carrier sector. In 2006, TSA developed rankings of the  likelihood of various tactics\u2014such as attacks using VBIEDs, VBIED- assisted hazardous materials, and other threats\u2014for highway and  commercial vehicles. However, TSA subsequently excluded these  likelihood assessments in its 2008 annual threat assessment for the  highway sector and did not provide us with the rationale for this decision.  OI told us that it developed likelihood estimates for specific threat  scenarios used in the draft National Transportation Sector Risk  Assessment (NTSRA). NTSRA is being conducted by TSA to assess risks  across the entire U.S. transportation system and contains nine high-level  scenarios and threat likelihood estimates related to commercial vehicles.  Of these high-level scenarios, eight involve VBIEDs, and one involves  hazardous materials. OI rated the intent and capability of terrorists to  perform each threat scenario to provide their estimate of the relative  likelihood of each scenario. However, TSA officials could not identify  when the NTSRA will be finalized. In addition, in June 2008, OI reported  that it would provide likelihood assessments for threat scenarios that were  to be conducted in response to a mandate in the 9\/11 Commission Act that  DHS submit a risk assessment report on the commercial trucking sector.\nWhile more extensive threat scenarios are being developed for the  commercial vehicle sector, including likelihood estimates, TSA\u2019s annual  threat assessments do not include information on the likelihood of threat.  HMC officials stated that this lack of specific threat information continues  to challenge agency risk managers. Without more information on the  likelihood of the various threats, there is limited assurance that TSA is  focusing its efforts on the activities that pose the greatest threat. Officials  stated that they may incorporate likelihood estimates in the annual  highway and motor carrier threat assessments in the future, but did not  have specific plans to do so.\n\n\t\tTSA Has Begun to Conduct Industry Vulnerability Assessments of the Commercial Vehicle Sector, but Its Efforts Are in the Early Stages\n\nTSA has begun conducting vulnerability assessments of the commercial  vehicle sector, but its efforts are in the early stages. In addition, the agency  has not determined the extent to which additional vulnerability  assessments are needed, and does not have a strategy or time frame for  assessing sectorwide vulnerabilities. HSPD-7 requires each Sector-Specific  Agency to conduct or facilitate vulnerability assessments of its sector. In  addition, the NIPP states that DHS is responsible for ensuring that  comprehensive vulnerability assessments are performed for critical  infrastructure and key resources that are deemed nationally critical, and  the TSSP further emphasizes a sectorwide system-based approach to risk  management. To determine the vulnerability of commercial vehicles as  targets or as weapons to attack critical infrastructure in the United States,  TSA has begun conducting vulnerability assessments known as Corporate  Security Reviews (CSRs). TSA initiated the CSR program in November  2005 to: (1) develop best practices for securing the commercial vehicle  industry through discussions with carrier representatives and site visits to  carrier facilities; (2) collect and maintain data that will allow TSA HMC to  assess various aspects of security across the trucking and motor coach  industries through statistical analysis of survey data; (3) identify security  gaps and opportunities for improvement; (4) promote security awareness  and collaboration with the commercial vehicle industry; (5) provide  guidance to motor carriers on their relative level of risk exposure; and (6)  determine the costs and benefits of risk mitigation activities.\nAs of September 2008, TSA had conducted 100 CSRs of motor carriers,  including 15 motor coach companies, 20 school bus companies\/districts,  and 65 trucking companies. These CSRs were of large firms that were  identified by industry stakeholders as having the best security practices in  the industry and that agreed to participate in the CSRs on a voluntary  basis. TSA conducts these reviews by sending teams of two to four people  from TSA headquarters to a trucking or bus company, for one or two days,  to analyze the company security plan and mitigation procedures, and make  informal recommendations to strengthen security based on a draft of best  security practices TSA developed. At the conclusion of the CSRs, TSA  prepares summary reports of its findings and informal recommendations.  TSA also developed a draft best security practices in February 2006 for  trucking firms based on the results of early CSRs, as well as on TSA staff  expertise, industry stakeholder input, and best security practices from  other transportation sectors such as rail and pipeline, according to  officials.  These draft best practices include measures companies can  take to conduct threat, vulnerability, and consequence assessments. They  also provide guidance on developing a security plan and strengthening  personnel security, training, hazardous materials storage, physical security  countermeasures, cyber security, and emergency response exercises.  However, according to TSA officials, the agency has delayed issuing these  draft best practices in final form until it can complete and incorporate  public and industry comments on draft security guidance specifically for  carriers of hazardous materials. The 9\/11 Commission Act requires that  DHS, by August 2008, submit a report to Congress that includes, among  other things, an assessment of trucking industry best practices to enhance  security. TSA reported that as of September 2008, it had not finalized these  best practices, but they hoped to complete a template within 4 months.  Officials stated that they plan to develop a flexible list of best practices  that firms can adapt based on their line of work, size, and circumstances.\nTSA began a second CSR effort in April 2006 through a pilot project with  the state of Missouri which greatly expanded the number of firms  reviewed, and extended the reviews to smaller, more diverse firms.  Objectives of the pilot were to promote security awareness, collect  information on the security status of participating firms, and promote  public and private collaboration among federal, state, and private sector  stakeholders. TSA partnered with the State of Missouri, FMCSA\u2019s Motor  Carrier Safety Assistance Program, and the Commercial Vehicle Safety  Alliance (CVSA) to train Missouri state safety inspectors to conduct these  CSRs. DOT funded the CSRs and assisted Missouri in the selection of  firms to be reviewed and interviewed. The CSRs performed by TSA  headquarters staff were of large companies known to have more robust  security measures in place, while the Missouri CSRs were generally  conducted on small firms that are most common in the industry.  Reviewing the security practices of these small firms can require  inspectors to travel to remote locations all over the state. For example,  one Missouri CSR we attended assessed a small landscaping company with  12 trucks, while another CSR assessed an owner-operator with a single  truck in front of his house (fig. 4). Although these reviews remained  voluntary, they were conducted in conjunction with mandatory safety  reviews that Missouri inspectors routinely conduct on commercial vehicle  trucking and motor coach firms. Motor carriers were selected for Missouri  CSRs based on either their safety records as evaluated by FMCSA, or  because they were newly registered firms. TSA officials stated that  partnering with the state\u2019s safety inspections enabled TSA to review a  more diverse group of firms than it did during the original CSRs. Typically,  the Missouri pilot CSRs involved site visits with structured interviews  using a questionnaire based on TSA\u2019s draft best security practices, and  generally lasted less than an hour compared to one or two days as was the  case with the original CSRs. The Missouri CSR pilot concluded in February  2007; however, TSA has continued to partner with Missouri and FMCSA to  implement a permanent CSR program in the state. TSA told us that as of  September 2008, 3,420 CSRs had been completed in Missouri.\nIn September 2006, TSA awarded a contract to evaluate the extent to  which the Missouri CSR pilot program met its objectives, and whether the  firms reviewed had implemented effective security measures. The report  reviewed the 1,251 CSRs conducted by Missouri inspectors from April  2006 through February 2007, including 1,231 trucking companies (98.4  percent), 18 motor coach companies (1.4 percent), and 2 school bus  operators (0.2 percent). The evaluation reviewed each firm\u2019s responses to  the CSR questionnaire and assigned it an overall security score based on  the security measures the firm reported having in place that were  consistent with TSA\u2019s draft best security practices. The contractor  reported on the results of the study in June 2007 and concluded among  other things, that:  the interviewed carriers did not have extensive security procedures in  place;    small carriers and owner operators had implemented fewer security  measures than larger carriers; and    hazardous materials carriers identified by the contractor had implemented  most of the security measures on the TSA CSR questionnaire.\nThe evaluation report also found that while both motor coaches and  nonpassenger motor carriers had low scores, motor coaches scored  somewhat higher than nonpassenger motor carriers. The report concluded  that the program had achieved its objectives of promoting security  awareness, collecting information on the security status of participating  commercial vehicle firms, and promoting public and private sector  collaboration among federal, state, and private sector stakeholders.  However, the report also concluded that the Missouri sample was not  representative of the commercial vehicle industry in Missouri or of the  industry nationwide. The report further concluded that since the CSRs  were based on best practices developed for much larger firms, the CSR  data did not completely reflect overall security practices and capabilities  for small carriers. Missouri officials we interviewed concurred that the  CSR sample was not representative of Missouri firms since the majority of  carriers that do not encounter safety problems would not be included in  their CSR reviews. The evaluation report of the Missouri CSR pilot made a  number of recommendations to TSA to expand and improve the CSR  program. These recommendations included that TSA:  review and address CSR pilot program deficiencies;    develop a set of best practices and baseline security standards that is risk- based and appropriate for different sizes and types of firms;  improve the CSR questionnaire to make it more effective in capturing  security practices and vulnerabilities of both small and large carriers;    develop a deployment strategy to expand the Missouri pilot program to  other carriers and other states;    develop a statistically sound methodology for selecting companies for  CSRs as it evaluates the commercial vehicle industry nationwide by  conducting a random sample of motor carriers;    work with FMCSA to leverage each other\u2019s resources and possibly merge  security inspection programs; and    develop a CSR Web portal to provide a more tailored CSR questionnaire to  address different industry sector security needs.\nTwo years after these recommendations were made, TSA has taken limited  steps to implement them, although officials stated that they were  continuing to review the recommendations. As a result, the agency cannot  ensure that its CSR efforts will fully identify sector vulnerabilities.  Standards for internal controls in the federal government require that  findings and deficiencies reported in audits and other reviews be promptly  reviewed, resolved, and corrected within established time frames. The  Missouri evaluation report\u2019s recommendation that TSA develop a  statistically sound methodology for selecting companies to review was  consistent with TSA\u2019s original goal that CSRs collect data that enable  statistical analysis. In September 2008, TSA officials stated that they had  worked out agreements with Michigan and Colorado to begin conducting  CSRs in these states, beginning with training officers in October 2008.  However, TSA did not have a plan in place or time frame for assessing  industry-wide vulnerabilities. The lead official for risk assessment with  TSA HMC stated that the agency would like to conduct a vulnerability  assessment of a valid nationwide sample of the commercial vehicle  industry, but that it lacked the resources to do so. TSA officials further  stated that to further expand its CSR efforts, it has initiated a program to  train Federal Security Director  personnel (FSDs) at 3 airports to conduct  CSRs on commercial vehicles in the airports\u2019 surrounding areas. Officials  told us that FSDs had completed 5 CSRs during fiscal year 2008.\nWithout completing industry vulnerability assessments as required by  HSPD-7 and the NIPP, TSA cannot complete an overall assessment of the  industry security risks. For example, instead of assessing the  vulnerabilities of the entire commercial vehicle sector, at the direction of  TSA management, TSA HMC is currently focusing all of their CSR efforts  on the hazardous materials transportation sector. However, TSA\u2019s pilot  study on Missouri firms found that hazardous materials transportation  companies reviewed by the contractor performed much better than other  companies in terms of implementing security measures to mitigate  potential vulnerabilities.\n\n\t\tTSA Has Not Begun to Conduct Consequence Assessments of the Commercial Vehicle Sector\n\nTSA has collected some relevant information necessary for estimating the  impact of potential attacks involving the commercial vehicle sector, but  has not conducted consequence assessments of potential terrorist attacks  or leveraged the consequence assessment efforts of others. The DHS NIPP  defines consequence assessment as the worst reasonable adverse impact  of a successful terrorist attack. According to the NIPP, risk assessments  should include consequence assessments to measure the negative effects  on public health and safety, the economy, public confidence in  institutions, and the functioning of government that can be expected if an  asset, system, or network is damaged, destroyed, or disrupted by a  terrorist attack. The TSA\u2019s TSSP also requires that risk analysis include a  consideration of consequences. Terrorism involving commercial vehicles  can affect a broad range of targets, including not only trucks and buses,  but also freight and passengers, terminals, truck stops, and rest areas. In  addition to the commercial vehicle system being attacked, commercial  vehicles can be used to attack other assets. When used as VBIEDs with  explosives or fuel, for example, commercial vehicles can be used to target  highway, buildings, and other critical infrastructure. A powerful truck  bomb can destroy from a considerable distance. For example, Khobar  Towers was attacked from 80 feet away (fig. 5).\nTruck VBIED attacks can also target large numbers of people, as was the  case with the coordinated attack of several truck bombs in Northern Iraq  on August 14, 2007, that killed approximately 500 people, or to assassinate  individuals such the former Lebanese Prime Minister Rafik Hariri.  Worldwide, buses have been the target of bombings---some involving  suicide bombers---on numerous occasions, such as the attack on former  Prime Minister Benazir Bhutto at a mass rally in Pakistan.\nTSA officials stated that they cannot conduct consequence assessments of  the commercial vehicle sector because truck bombs can be used to attack  most of the nation\u2019s critical infrastructure. Accordingly, officials stated  that the number of potential consequences of terrorist attacks is too great  to practically assess. Although TSA has not conducted consequence  assessments of the commercial vehicle sector, the agency has acquired  data from the Bureau of Alcohol, Tobacco and Firearms (ATF) and the  U.S. Army on evacuation distances for various-sized shipments of  explosives and flammable substances, and PHMSA\u2019s Emergency Response  Guidebook for first responders to hazardous materials incidents that could  be applied to future consequence assessments. TSA officials  acknowledged that obtaining data on evacuation distances is only a first  step in conducting consequence assessments. Evacuation distance  provides one measure of the potential consequences of a terrorist attack  by defining the danger zone surrounding an attack by a particular type and  size of explosive or flammable materials. For example, according to U.S.  Army data, the building evacuation distance for such a worst case scenario  truck bomb would be a minimum of 1,570 feet, and the minimum outdoor  evacuation of people would be 7000 feet. Using another example, a fireball  from a fuel truck can threaten both structures and people; accordingly,  ATF guidance suggests a minimum evacuation distance of 6,500 feet. In  comparison, a tank truck of anhydrous ammonia, which represents 81  percent of Toxic Inhalation Hazard (TIH) shipments, has a smaller  recommended standoff distance of 2,112 feet, and the recommended  standoff distance for chlorine, which is the next most common form of  Toxic Inhalation Hazard, is 3,168 feet. However, other guidance, such as  the PHMSA\u2019s Emergency Response Guidebook, provides different data  based on initial isolation distances and much larger maximum nighttime  protective action distances. TSA reported that it is working with various  federal partners and industry stakeholders to establish a uniform and  scientific assessment of potential consequences of VBIEDs and the  discharge of TIH materials. Although TSA has not conducted consequence  assessments of the commercial vehicle sector, OI officials stated that, in  their judgment, the likely consequences of common VBIED attacks were  greater than VBIED attacks using TIH materials because attempts to date  to use VBIEDs to vaporize chlorine into a gaseous inhalation hazard have  been largely unsuccessful, have caused little damage, and resulted in few  casualties. On the other hand, according to officials, VBIEDs using a  number of different explosives and incendiary materials have repeatedly  been successfully used to kill people.\nTSA officials stated that the agency also has not leveraged DHS\u2019s ongoing  nationwide risk assessment efforts to obtain consequence information.  For example, recognizing that each sector of our country\u2019s critical  infrastructure possesses its own unique characteristics, operating models,  and risk landscape, pursuant to HSPD-7, the NIPP designates 18 critical  infrastructure sectors and the agencies responsible for each of the sectors  to work with DHS to implement a risk management framework for the  sector and develop protective programs. Each of the 18 sectors has issued  Sector Annual Reports (SARs) of their risk management activities,  including consequence assessments, which HMC could draw upon to  support the assessment of VBIED and hazardous materials consequences  for other critical infrastructure sectors. For example, the 2007 sector  annual reports identified the following for select sectors:  Commercial Nuclear Power Sector: The Department of Energy employs a  Comprehensive Review Program to analyze facilities that it considers  potential terrorist targets. The Nuclear Sector Annual Report indicated  that as of May 2007, reviews had been completed of the vulnerabilities and  potential consequences of an attack on 52 of 65 commercial nuclear  reactors.\nDams Sector: The 2007 Dams Sector Annual Report identified that all  security measures were in place at 152 of 254 Army Corps of Engineers  dams, and the Federal Energy Regulatory Commission reported having  completed risk assessments on its 1,200 most security-sensitive dams. The  report also called for improved blast-damage estimates for VBIEDs on  certain dams and levees that are potential targets for terrorist attacks.\nThe Chemical Sector: The 2007 Chemical Sector Annual Report, which  was based in part on industry risk assessments, identified that VBIEDs are  a particular concern because of their portability, size, and potential to  cause grave damage.\nIn addition, DHS\u2019s 2007 Strategic Homeland Infrastructure Risk  Assessment (SHIRA) assessed the highest risk scenarios targeting the  nation\u2019s 18 critical infrastructure\/key resources sectors, and highlighted  attack methods with cross-sector implications. The SHIRA used threat  assessments from the intelligence community and vulnerability and  consequence assessments from the SSAs to identify the attack methods  that pose the highest risk to the respective sectors. TSA HMC could use  the SHIRA data to identify which sectors are most at risk from VBIEDs  and hazardous materials and then coordinate with those SSAs on their  vulnerability and consequence assessment efforts. TSA HMC could also  use a variety of other relevant assessments to obtain consequence  information. These include the agency\u2019s Aviation Domain Risk Assessment  which also considers consequences for a wide range of attack scenarios  including VBIEDs, the Department of Energy\u2019s risk assessments of nuclear  weapons facilities, and the Nuclear Regulatory Commission\u2019s assessments  of commercial nuclear power plants. Similar information is also available  from the Federal Risk Assessment Working Group, a federal risk  assessment information clearinghouse that shares information about  completed and ongoing risk assessments through regular meetings and a  Web portal. TSA did not comment on why it has not developed a plan for  completing consequence assessments, or why it was not leveraging the  analysis of potential consequences included in these risk assessments.\n\n\t\tAn Incomplete Risk Assessment Impedes TSA\u2019s Ability to Identify Effective Risk Reduction Efforts\n\nAs discussed earlier in this report, TSA has identified one of its strategic  goals as taking an inventory of the security status of the nation\u2019s highway  and motor carrier systems, but it has not developed a plan or a time frame  for completing a risk assessment of the commercial vehicle sector. Based  on general guidance in the NIPP, the TSSP states that TSA\u2019s plan for risk  assessment should use a combination of both expert and field-level risk  assessment techniques to guide its risk management efforts. Expert risk  assessments are based on national risk priorities and strategic risk  objectives, scenario analyses and the expert judgment of agency officials,  national assessments, and annual threat assessments. Field-level risk  assessments include state and local assessments, and field inspections  such as TSA\u2019s CSRs and DOT Security Contact Reviews (SCRs). Expert  assessments and field assessments have the same goal of identifying  where the greatest risk mitigation measures are needed.\nAs previously discussed, TSA is conducting nine high-level scenarios  related to commercial vehicles, and has contracted to have more threat  scenarios conducted to assess commercial trucking security risks in  response to a mandate in the 9\/11 Commission Act. While these expert  assessments, if implemented effectively, should give TSA insights into the  security risks of the industry, they will likely provide limited information  on what sectors or companies are most at risk and what mitigation  practices are currently in place, unless they are further supported by field- level risk assessments consistent with the TSSP.\nAs stated previously, TSA is in the early stages of conducting CSRs and the  majority of CSRs have to date been conducted in a single state, Missouri.  Although TSA is working to expand both its threat scenarios and CSRs,  progress to date has been limited. TSA also has not reported on the scope  and method of risk assessments required for the commercial vehicle  sector. Specifically, it has not reported what mix of expert and field-level  risk assessments it intends to use and how it plans to integrate the two.\nStandard practices in program and project management include  developing a road map, or a program plan, to achieve programmatic  results within a specified time frame or milestones. TSA officials  recognize that the agency needs more complete and accurate risk  assessment information to inform its security strategy. However, TSA has  not developed a plan or a time frame for completing a risk assessment of  the commercial vehicle sector, including the level of resources required to  complete the assessment and the appropriate scope of the assessment  including determining the combination of threat scenarios and field-level  vulnerability assessments it intends to use.\nThe NIPP requires that it and the TSSP be reviewed and undergo periodic  interim updates as required, and reviewed and reissued every 3 years or  more frequently as needed and directed by the Secretary of Homeland  Security. Accordingly, the TSSP states that it will undergo periodic  updates and eventually align with the NIPP triennial update cycle. The  Highway Infrastructure and Motor Carrier Modal Annex also states that  the Government Coordination Council (GCC) and SCC are to submit  revisions to the annex on an annual basis, and the GCC and SCC are to  conduct a complete revision of the annex every 3 years. HMC began its  revision process by updating the TSSP Highway Infrastructure and  Motorcarrier Annex in 2008 to allow time for the revised strategy to be  reviewed by the GCC, SCC, and various working groups and will submit it  for review by the third quarter of 2009. The quality of this and future  revisions of the annex will depend in large measure on the progress of risk  assessments of the commercial vehicle sector and their utilization by TSA  managers to inform their risk mitigation efforts.\nHMC officials stated that without complete risk assessments, they were  directed by TSA and DHS leadership to base their strategy for securing the  commercial vehicle sector on an examination of the security risks posed  by the shipment of hazardous materials. However, agency officials could  not identify why TSA and DHS leadership made this distinction, and the  rationale for this directive is unclear. HMC officials also cited several  additional reasons for focusing their security efforts on commercial  vehicles transporting hazardous materials, including the professional  judgment of its staff in the motor carrier industry; risk assessments TSA  conducted for other transportation sectors, particularly rail; and legislative  requirements, in particular the USA PATRIOT Act. However, the  applicability of rail risk assessments to highways is unclear because  VBIEDs trucks can directly access and attack most buildings in the United  States, whereas rail cannot. Rail shipments also typically ship freight,  including Toxic Inhalation Hazards, in far larger quantities than can be  carried on a truck. Regarding congressional direction, the USA PATRIOT  Act required TSA to perform a background check for all applicants for an  endorsement of their commercial driver\u2019s licenses to allow them to carry  hazardous materials, but did not direct TSA to focus its commercial  vehicle security efforts on hazardous materials. Moreover, available risk  assessment information suggests alternatives or additions to the agency\u2019s  current focus on commercial vehicle transport of hazardous materials.  TSA OI officials have consistently reported that VBIEDs are a greater  threat to the United States than hazardous materials, including Toxic  Inhalation Hazards. In addition, the evaluation of the Missouri CSR found  that truck companies that transport hazardous materials stood out from  other truck companies as having implemented most of TSA\u2019s security  procedures, and concluded that hazardous materials transporting  companies were leaders related to the commercial vehicle sector. In  addition, in October 2007 DHS Secretary Chertoff stated that IEDs  remained a terrorist weapon of choice since they were easy to make,  difficult to defend against, and could cause untold destruction. TSA OI  officials stated that they continue to regard common VBIEDs as a greater  threat than attacks using hazardous materials such as chlorine. Evacuation  data also suggest that VBIEDs can have potentially broader impact than  trucks carrying many forms of Toxic Inhalation Hazards. Without an  existing strategy that is based on available risk assessment information,  TSA cannot be assured that its current approach, which is focused on  hazardous materials, is aligned with the highest priority security needs of  the commercial vehicle sector.\n\n\tGovernment and Industry Have Taken Actions to Strengthen the Security of Commercial Vehicles, but TSA Has Not Completely Assessed the Effectiveness of Its Actions\n\nKey government and industry stakeholders have taken actions to  strengthen the security of the commercial vehicles sector, but TSA has not  assessed the effectiveness of its actions. At the federal level, DHS and DOT  have implemented a number of programs designed to strengthen  commercial vehicle security, particularly programs for the protection of  hazardous materials. States, individually and collectively, through their  state transportation and law enforcement associations, have also worked  to strengthen the security of commercial vehicles. In addition, most of the  private truck and motor coach industry associations we contacted stated  that they were assisting their members in strengthening security by  providing those members with guidance on best practices. TSA also  contracted for an evaluation of the Missouri pilot CSRs that found the  industry security practices were not extensive, but noted that the sample  of firms in the pilot was not representative of the entire industry. Our site  visits to 26 commercial truck and bus companies found that most had  implemented basic security measures, including some form of personnel  security and background checks, terminal security, locks and access  controls, trailer seals, and communications and tracking equipment. TSA  has begun developing output-based performance measures to gauge  progress on achieving milestones and other program activities for its  security programs, but the agency has not developed measures and data to  monitor outcomes, that is, the extent to which these programs have  mitigated security risks and strengthened commercial vehicle security.  The TSSP identifies that performance measures of strategic goals and  objectives should be outcome-based, but notes that interim output  measures may be used during the early years of the program when  baseline data on the program\u2019s performance are being acquired. Without  more complete performance measures, TSA will be limited in assessing  the effectiveness of federal commercial vehicle security programs. TSA  officials agreed that opportunities exist to develop outcome-based  performance measures for its commercial vehicle security programs, and  stated that they would like to do so in the future.\n\n\t\tThe Federal Government, States, and Private Industry Have Taken Action to Enhance the Security of Commercial Vehicles\n\nA variety of federal programs have been implemented to enhance the  security of the commercial vehicle sector. Several of these programs have  been implemented by TSA and other DHS components, others by DOT,  and several jointly by DHS and DOT. Overall, these programs are designed  to assess commercial vehicle industry security risks, develop guidance on  how to prevent and deter attacks, improve security planning for an  effective response to a potential terrorist attack, enhance cost-effective  risk mitigation efforts, and support research on commercial vehicle  security technology. States, both individually and as members of  transportation alliances with other states, have expanded their activities to  secure the commercial vehicle sector as a part of broader homeland  security activities. In addition, many commercial vehicle companies  receive guidance on security awareness and best practices from industry  associations. According to TSA\u2019s pilot study of CSRs in Missouri, except  for firms transporting hazardous materials, most commercial vehicle  companies have implemented a limited number of security measures.\n\n\t\t\tDHS and DOT Security Programs\n\nIn addition to CSRs, TSA and other DHS components have a number of  programs underway designed to strengthen the security of commercial  vehicles: the Truck Security Grant Program (TSP), the Intercity Bus  Security Grant Program, Security Action Items (SAIs), and Hazardous  Materials Driver Background Check Program. The TSP provides grants  that fund programs to train and support drivers, commercial vehicle firms,  and other members of the commercial vehicle industry in how to detect  and report security threats, and how to avoid becoming a target of  terrorist activity. TSP is administered by DHS\u2019s Federal Emergency  Management Agency\u2019s Grant Programs Directorate. From fiscal years 2004  through 2008, the principal activity funded by the TSP was the American  Trucking Associations\u2019 Highway Watch Program, which provided drivers  with security awareness training and support. In May 2008, however, a  new grantee was selected. DHS also established an Intercity Bus Security  Grant Program to distribute grant money to eligible stakeholders for  protecting intercity bus systems and the traveling public from terrorism.  Current priorities focus on enhanced planning, passenger and baggage  screening programs, facility security enhancements, vehicle and driver  protection, and training and exercises. In addition, TSA is consulting with  industry stakeholders and PHMSA to develop SAIs, or voluntary security  practices and standards, intended to improve security for trucks carrying  security-sensitive hazardous materials. The SAIs are intended to allow TSA  to communicate the key elements of effective transportation security to  the industry as voluntary practices, and TSA will use CSRs to gauge  whether voluntary practices are sufficient or if regulation is needed. TSA  released its voluntary SAIs for hazardous materials carriers in June 2008.  For example, it recommended using team drivers for shipments of the  most security sensitive explosives, toxic inhalation hazards, poisons, and  radioactive materials.\nThe USA PATRIOT Act passed in October 2001 prohibited states from  issuing Hazardous Materials Endorsements (HME) for a commercial  driver\u2019s license to anyone not successfully completing a background  check. In response, DHS developed rules regarding how the background  checks will be conducted and implemented a hazardous materials driver  background check assessment program to determine whether a driver  poses a security risk. We have previously reported on the problem of  drivers who have job-hopped to circumvent the drug testing results  associated with background checks, including hazardous materials  drivers. As of October 2008, TSA had completed background checks for  990,961 out of approximately 2.7 million hazardous materials drivers, and  8,699 applicants have been denied HMEs since the beginning of the  program.\nIn addition to DHS, at the federal level, DOT has several commercial  vehicle security programs underway: Security Contact Reviews (SCR),  Security Sensitivity Visits (SSV), and the Hazardous Materials Safety  Permit Program. FMCSA conducts SCRs, or compliance reviews, of  commercial vehicle firms carrying hazardous materials. PHMSA  regulations require shippers and carriers of certain hazardous materials to  develop and implement security plans.  At a minimum, these plans must  address personnel, access, and enroute security. FMCSA SCRs review  company security plans as part of ongoing safety inspections. FMCSA also  conducts SSVs, or educational security discussions, with carriers of small  amounts of hazardous materials that do not require posting hazardous  materials placards on their trucks. As of September 2008, FMCSA had  conducted 7,802 SCRs and 13,411 SSVs since the inception of the  programs. Federal law also directed DOT to implement the Hazardous  Materials Safety Permit Program to produce a safe and secure  environment to transport certain types of hazardous materials. The  Hazardous Materials Safety Permit Program requires certain motor  carriers to maintain a security program and establish a system of enroute  communication.\nIn addition to CSRs, TSA and DOT also work collaboratively on several  projects involving the security of commercial vehicles, including FMCSA  and TSA research and development efforts for commercial vehicle security  technologies. Both FMCSA and TSA have also completed pilot studies of  tracking systems for commercial trucks carrying hazardous materials. For  example, FMCSA completed a study of existing technologies in December  2004 evaluating wireless communications systems, including global  positioning satellite tracking and other technologies that allow companies  to monitor the location of their trucks and buses. TSA is testing tracking  and identification systems, theft detection and alert systems, motor  vehicle disabling systems, and systems to prevent unauthorized operation  of trucks and unauthorized access to their cargos. The 9\/11 Commission  Act requires that DHS provide a report to Congress by August 2008, that  includes, among other things, assessments of (1) the economic impact that  security upgrades of trucks, truck equipment, or truck facilities may have  on the trucking industry, including independent owner-operators; (2)  ongoing research by public and private entities and the need for additional  research on truck security; and (3) the current status of secure truck  parking. TSA officials stated that they are working on developing this  report but have not completed it. The 9\/11 Commission Act also required  that DHS develop a tracking program for motor carrier shipments of  hazardous materials by February 2008. TSA officials reported that they  worked with DOT and implemented a program to facilitate truck tracking  in January 2008. However, TSA stated that while the 9\/11 Commission Act  mandated the tracking program and authorized $21 million over 3 years for  its activities, it was never implemented because no funds were  appropriated for the program.\nThe 9\/11 Commission Act also had a number of mandates regarding the  security of over-the-road buses, including that DHS issue regulations by  February 2008 requiring all over-the-road bus operators to develop and  implement security training programs for frontline employees, and that  DHS establish a security exercise program for over-the-road bus  transportation. The 9\/11 Commission Act further requires that DHS issue  regulations by February 2009 requiring high-risk over-the-road bus  operators to conduct vulnerability assessments and develop and  implement security plans. TSA officials stated that they were preparing a  Notice of Proposed Rulemaking that, if finalized, would require high-risk,  over-the-road bus operators to conduct vulnerability assessments, and  develop security plans and training plans.\n\n\t\t\tState Actions\n\nStates are responsible for securing highway infrastructure, including  highways, bridges, and tunnels, and for ensuring the security and safety of  these roadways. State officials work on security issues within their  individual states and with other states through several national  associations. State transportation officials\u2014 through the American  Association of State Highway and Transportation Officials (AASHTO)\u2014  and state law enforcement officials\u2014 through the Commercial Vehicle  Safety Alliance (CVSA)\u2014 have worked collectively to strengthen the  security of commercial vehicles and highway infrastructure through  various expert committees and the implementation of joint initiatives with  TSA and DOT. AASHTO formed a Special Committee on Transportation  Security that has sponsored highway and commercial vehicle security  research at the National Academies of Science. AASHTO also conducts  surveys of state DOT security efforts, priorities, and identified needs.  AASHTO\u2019s August 2007 survey found that many state departments of  transportation still needed basic training on integrating homeland security  considerations in the planning process; detecting, deterring, and mitigating  homeland security threats; and assessing transportation network  homeland security vulnerabilities and risks. CVSA\u2019s state law enforcement  members have also organized committees on Transportation Security,  Information Systems, Intelligent Transportation Systems, Hazardous  Materials, Passenger Carrier, and Training to pool and provide expertise to  promote best practices, new programs, and the consistent application of  regulations. For example, the purpose of the CVSA\u2019s Transportation  Security Committee is to enhance homeland security by providing a forum  to identify, develop, implement, and evaluate education, enforcement, and  information-sharing strategies for enhancing commercial motor vehicle  security. CVSA\u2019s Program Initiatives committee originated the idea of  conducting a CSR pilot in Missouri.\nWe interviewed transportation, law enforcement, and homeland security  officials responsible for commercial vehicle security from eight states to  determine the nature and extent of their security efforts. These officials  stated that they generally focused on law enforcement, protection of  highway infrastructure, conducting inspections of commercial vehicles,  and monitoring threats of all kinds. Officials in each state stated that they  understood the major transportation security risks in their state. For  example, officials from one state that has numerous chemical plants  expressed particular concern about the shipment of these chemicals,  while officials from another state with extensive military bases expressed  concern about shipments of nuclear weapons and waste. Officials from yet  another state with numerous explosives plants were more concerned  about the transportation of explosives. State and local authorities have  also created 58 fusion centers around the country to blend relevant law  enforcement and intelligence information analysis and coordinate federal,  state, and local security measures in order to reduce threats in local  communities. DHS analysts work with state and local authorities at fusion  centers to facilitate the two-way flow of information on all types of  hazards. DHS has provided staff and more than $254 million to state and  local governments to support these centers and facilitate the two-way flow  of information between DHS and the states. Although states have a  number of security efforts involving the commercial vehicle sector, none  of the state officials whom we interviewed (with the exception of those  from Missouri) reported conducting formal vulnerability assessments of  the commercial vehicle sector in their states.\n\n\t\t\tPrivate Sector Security Actions\n\nIndustry associations we interviewed were actively assisting their  members in strengthening the security of the commercial vehicle sector.\nWe met with 12 of the industry associations representing the commercial  vehicle industry, including trucking, motor coaches, shipping, and unions,  9 of which were members of TSA\u2019s SCC. TSA relies on the SCC and its  industry association members to facilitate communications between the  agency and the commercial vehicle industry, and to assist in the  development of sector strategies, plans, and policies. Eight of these  industry associations reported that they regularly provided federal  officials with their industry\u2019s perspective on proposed regulations and  legislation. Additionally, 8 of the 12 associations reported that they were  proactively providing security guidance to their members, which included  guidance on security best practices, security awareness, and security self- assessments. In addition, about a third of the associations we reviewed  reported providing training, security bulletins, and 24-hour hotlines for  their members. TSA supports several of these industry initiatives,  including working with trade associations to develop and distribute  security brochures for their members.\nAs discussed earlier in this report, the Missouri CSR Pilot evaluation  showed that firms carrying hazardous materials were complying with  regulations and implementing more security measures to mitigate their  risks than other commercial vehicle firms. In contrast, the study further  found that truck companies not transporting hazardous materials were  implementing few of TSA\u2019s best security practices. During our site visits to  20 truck and 6 bus companies, ranging in size from the nation\u2019s largest  commercial vehicle company with 27,453 trucks to an owner-operator  with a single truck, we found that most had some form of personnel  security procedures and background checks in place, as well as terminal  security, communications systems, and truck tracking systems. Overall,  the types of security practices among the commercial trucking companies  we visited were similar, but the prevalence and sophistication of these  practices varied. The range of security practices that companies were  using included requiring drivers to lock doors and inspect cargo; cargo  seals; driver background checks; vehicle tracking technology; terminal  fencing, cameras, and gates; access controls, such as employee  identification badges, sign-in and sign-out sheets, or electronic key cards;  en route security measures; and driver training. Large corporations and  small one-truck owner-operators generally used differently scaled security  approaches to the same problem. For example, while a cell phone can  suffice for the communications needs of a small operator, a large company  may invest in integrated communications and tracking technologies.  Conversely, where a large company may have a well-lit, gated terminal  monitored by security cameras and guards, a small operator may lock the  door of the vehicle and have a watch dog on the premises. In another  example, small, independent owner-operator firms may rely solely on  emergency responders such as 911 and state patrol hotlines, while larger  firms may have dispatchers and in-house security specialists on duty 24  hours a day.\n\n\t\tTSA Uses Performance Measures to Monitor Its Efforts in Securing Commercial Vehicles, but Lacks Effectiveness Measures for Key Security Programs\n\nTSA has begun developing measures that gauge the completion of its  program activities, but could improve its efforts by collecting data that  would measure the effectiveness of its programs in strengthening  commercial vehicle security. Performance measures are indicators,  statistics, or metrics used to gauge program performance. Output  measures summarize the direct products and services delivered by a  program, while outcome measures try to gauge the results of products and  services delivered by a program. TSA has begun developing and using  performance measures to assess the progress of commercial vehicle  security programs, but does not have outcome data to monitor how  effectively its programs are achieving their intended purpose, as suggested  by GPRA. The TSSP also states that performance measures of strategic  goals and objectives should be outcome-based, but notes that interim  output measures may be used during the early years of the program while  baseline data on the program\u2019s performance are being acquired. The TSSP  also requires that TSA form a Performance Measurement Joint Working  Group to recommend the appropriate mix of output and outcome  measures for agency programs, outcome monitoring techniques, and  standardize measures across transportation sectors. As of August 2008,  TSA had formed the transportation sectorwide working group, and  according to officials the group was instrumental in developing and  reporting on the transportation sector\u2019s core, programmatic, and  partnership metrics required by the NIPP. However, the joint  measurement group for the highway and motor carrier sector had not been  formed to develop outcome measures for commercial vehicle security  programs.\nCurrently, TSA HMC collects performance data on its own programs,  while other commercial vehicle security programs are monitored by other  DHS or DOT components. At our suggestion, TSA officials stated they plan  to work out an agreement with DOT to receive performance measurement  data for DOT security programs, stating that performance data for these  programs are important and necessary for an overall view of the impact of  federal security programs. TSA officials stated they would request that  TSA and DOT share performance measurement data for commercial  security programs as the DHS and DOT MOU is updated. The annex to  improve coordination and data sharing between TSA and PHMSA was  signed in October 2008. Table 2 summarizes the various federal  commercial vehicle security programs and the agency responsible for  administering the program and measuring its progress.\nTSA\u2019s HMC established output measures for all five of its commercial  vehicle security programs to assist the agency in gauging the performance  of these programs. As of September 30, 2008, TSA reported that it had  completed:    100 percent of the target goal of 24 CSRs per year,    100 percent of the SAI goal of developing voluntary guidelines to reduce  risk and enhance the security of high-risk hazardous materials,    52 percent of hazardous materials driver\u2019s license endorsement security  threat assessment background checks, and    100 percent of the work in developing a pilot Truck Tracking Center.\nOutput-based measures can be useful to TSA for program management  purposes, as they can identify whether programs are producing a desired  level of output and meeting established milestones. However, they do not  measure TSA\u2019s success in achieving the ultimate goal of enhancing the  security of the commercial vehicle sector. For example, while TSA tracks  the number of CSRs completed by its staff or as part of the Missouri CSR  program, it has not attempted to measure the effect these programs are  having. Missouri officials have suggested that a sample of firms that  participated in the CSR program should be revisited to determine the  extent to which their security-related practices improved after completing  a CSR. Such information could provide TSA with a measure of the  effectiveness of its key commercial vehicle security program. In January  2009, TSA stated that it was planning to conduct baseline and follow-on  CSRs on hazardous material transporters to measure changes in  preparedness.\nWe recognize that TSA faces challenges in developing outcome measures  to monitor and evaluate the effectiveness of its security programs that rely  on the participation of many public and private entities. In addition, it can  be difficult to develop performance measures to gauge the impact of a  program in deterring terrorism. Nonetheless, outcome measures of  programs designed to mitigate vulnerabilities and consequences are  possible. For example, the domain awareness of drivers could be  measured both before and after participating in the Trucking Security  Grant program.\nFurthermore, as we have previously reported, a focus on results as  envisioned by GPRA means that federal agencies are to look beyond their  organizational boundaries and coordinate with other agencies to ensure  that their efforts are aligned. The planning processes under GPRA provide  a means for agencies to ensure that their goals for crosscutting programs  complement those of other agencies; program strategies are mutually  reinforcing; and, as appropriate, common or complementary performance  measures are used. High-performing organizations use their performance  management systems to strengthen accountability for results, specifically  by placing greater emphasis on fostering the necessary collaboration both  within and across organizational boundaries to achieve results.\nTSA officials agreed that opportunities exist to develop outcome  performance measures for the agency\u2019s commercial vehicle security  programs, and stated that they would like to do so in the future. We  previously reported that DHS often lacked the performance information to  determine where to target program resources to improve performance, but  was taking steps to strengthen their performance measures. GAO is  currently working with DHS, including TSA, to provide input on the  department\u2019s performance measurement efforts based on our work at the  department.\n\n\tTSA Has Strengthened Efforts to Coordinate with Federal, State, and Industry Stakeholders Regarding the Security of the Commercial Vehicle Sector, but Further Actions Can Enhance Coordination\n\nWhile TSA has taken actions to improve coordination with federal, state,  and industry stakeholders to strengthen commercial vehicle security, more  can be done to ensure that these coordination efforts enhance security for  the sector. Leading practices for collaborating agencies that we have  previously identified offer suggestions for strengthening coordination with  other public and private sector stakeholders. These key practices include,  for example, defining common outcomes and complementary strategies;  agreeing on roles and responsibilities; leveraging stakeholder resources;  and developing mechanisms to monitor, evaluate, and report on the results  of the collaborative effort. DHS and DOT signed an agreement that  established broad areas of responsibility regarding the security of the  transportation network, as we previously recommended. TSA supported  the creation of an intergovernmental and industry council to gather  feedback and input about security planning, among other efforts. TSA has  made limited progress in leveraging FMCSA resources and resolving  potentially duplicative security inspections, but in October 2008 signed an  agreement to enhance coordination with FMCSA. Although TSA has  successfully leveraged resources in the State of Missouri to conduct CSR  vulnerability assessments, it has made limited progress in coordinating the  expansion of CSRs to other states. Some state and industry officials we  interviewed expressed concerns about TSA\u2019s coordination and  communication with the sector on developing a security strategy, and fully  defining roles and responsibilities for the industry. Since many owner  operators are hard to contact, some suggested that TSA enhance its Web  site to better communicate directly with the industry\u2019s many small  operators. Moreover, the Missouri CSR pilot evaluation similarly suggested  that TSA consider developing a two-way Web portal to allow firms to fill  out CSR questionnaires. TSA officials stated that they have taken steps to  interact with industry regarding the security of the sector, and have also  leveraged industry expertise to strengthen security. However, TSA has not  developed a means to monitor the effectiveness of its coordination actions  with this very large and diverse sector. Without enhanced coordination,  TSA will have difficulty expanding its vulnerability assessments to other  states.\n\n\t\tDHS and DOT Have Entered into Formal Agreements and Taken Other Actions to Enhance Coordination\n\nDHS and DOT have taken actions toward coordinating their efforts to  strengthen commercial vehicle security. In September 2004, DHS and DOT  signed a MOU that established broad areas of responsibility for each  department related to the security of the transportation sector, and  specified roles and responsibilities to strengthen their cooperation and  coordination. For instance, under the MOU, DOT recognized that DHS has  primary responsibility for transportation security while it plays a  supporting role, providing technical assistance and supporting DHS in the  implementation of its security policies as allowed by DOT statutory  authorities. Furthermore, the MOU states that DHS is to establish national  transportation security performance goals and, to the extent practicable,  appropriate security measures for each transportation sector to achieve an  integrated national transportation security system. The MOU responds to  our previous work which emphasized the need for greater coordination  between DOT and DHS on transportation security efforts and  recommended that the two departments establish an MOU to, among other  things, delineate the roles, responsibilities, and funding authorities of the  each department.\nIn August 2006, TSA and PHMSA signed an annex to the DHS and DOT  MOU, identifying their respective roles and responsibilities related to  research and development, training, outreach, risk assessments, and  technical assistance involving hazardous materials transportation security.  According to this agreement, the parties commit themselves to seeking  consensus on measures to reduce risk and minimize consequences of  emergencies, sharing information that may concern the interests of the  other party, and coordinating the development of transportation security- related guidelines. The annex further specified that TSA and PHMSA will,  among other things:    base security planning on risk, seek consensus concerning measures to  reduce risk, and coordinate in the development of standards, regulations,  guidelines, and directives;    coordinate on observations and recommended security measures;    explore opportunities for collaboration in inspection and enforcement    share information during an emergency.\nConsistent with this agreement, PHMSA and TSA worked together to  develop recommended security measures for hazardous materials carriers.\nAs we have previously identified, an effectively implemented leveraging of  stakeholder resources is a key practice for enhancing collaboration.  According to leading practices for collaborating agencies, such parties  bring different levels of resources and capacities to the collective effort;  therefore, the parties should identify the types of resources necessary to  initiate or sustain their collective effort, as well as assess each party\u2019s  relative strengths and limitations. In 2003, working with TSA, PHMSA  established a set of security plan requirements for hazardous materials  carriers that addressed the elements of en route security, unauthorized  access, and personnel security. TSA later expanded upon PHMSA\u2019s  requirements and, in consultation with PHMSA, drafted a set of voluntary  security standards, called Security Action Items (SAIs), specifying the  level of security suggested for each type of security-sensitive hazardous  materials, or hazardous materials transported by motor vehicles whose  potential consequences from an act of terrorism may result in detrimental  effects to the economy, communities, critical infrastructure, or individuals  of the United States. TSA reported that these SAIs were finalized in June  2008 and distributed to stakeholders. TSA further worked with PHMSA to  develop guidance on security-sensitive hazardous materials.\nTSA also established a GCC in April 2006 to monitor and evaluate the  results of federal highway and motor carrier security programs, as  required by the NIPP. We previously identified the need for collaborating  agencies to create a mechanism to monitor and evaluate their efforts and  to assist them in identifying areas for improvement. If implemented  effectively, reporting on these collaborative activities can help key  decision makers obtain feedback for improving both policy and  operational effectiveness. The GCC consists of federal agencies and  associations representing state and local transportation and law  enforcement officials, and motor vehicle administrators with  responsibilities directly related to commercial vehicle security. (For a  complete list of GCC members, see app. VI). The GCC is intended to  coordinate strategies, activities, and communications among its member  entities, and establish policies, guidelines, metrics, and performance  criteria. The highway sector GCC meets approximately once monthly,  and both FMCSA and PHMSA officials expressed general satisfaction with  the GCC.\n\n\t\tDHS and DOT Can Strengthen Efforts to Leverage Resources and Avoid Duplication of Effort\n\nAlthough DHS and DOT have established agreements and developed  complementary strategies to strengthen security of the commercial  vehicles sector, gaps remain that hamper their ability to more effectively  coordinate their efforts. Specifically, the two departments have not fully  agreed on a strategy to leverage resources and eliminate potential  duplication of effort and to share inspection information for monitoring  security programs.\nTSA and FMCSA have shared roles and responsibilities regarding the  enhancement of commercial vehicle security, but have different  capabilities and resources. TSA HMC has a staff allocation of 19 FTEs.  These staff are responsible for all aspects of commercial vehicle and  highway infrastructure security including developing best practices,  conducting risk assessments, and establishing policy. HMC is also  responsible for school bus security. FMCSA has 650 to 700 staff deployed  in the field nationwide to conduct inspections, enforce Federal Motor  Carrier safety regulations and hazardous materials transportation safety  and security regulations, and coordinate with state safety inspectors.  Moreover, TSA and FMCSA have similar inspection programs, both of  which are currently focused on hazardous materials transportation. As  discussed earlier in this report, TSA operates the CSR program designed to  review the security efforts and vulnerabilities of all types of commercial  vehicle firms, and FMCSA conducts security compliance inspections  (SCRs) of hazardous materials carriers.\nThe 9\/11 Commission Act requires that DOT consult with DHS to limit, to  the extent practicable, duplicative reviews of the hazardous materials  security plans.  TSA and FMCSA officials stated that they have discussed  how best to leverage FMCSA\u2019s ongoing inspections programs and the  feasibility of merging the two inspection programs. Officials reported that  their interactions to date have focused on how best to take advantage of  the similarities between these programs to more efficiently and effectively  use agency resources, reduce potentially duplicative efforts, and minimize  the burden on the industry. TSA officials stated that one obstacle to  merging the two programs is that hazardous materials transportation  companies are required to participate in FMCSA\u2019s SCRs because they are  subject to DOT\u2019s hazardous materials regulations, while TSA\u2019s CSRs are a  voluntary effort. However, both agencies\u2019 programs share voluntary and  mandatory aspects. For example, along with SCRs, FMCSA also conducts  Security Sensitivity Visits, which as discussed earlier in this report are  voluntary, educational security reviews of firms carrying small amounts of  hazardous materials. Moreover, TSA\u2019s Missouri pilot successfully  demonstrated that voluntary security reviews could be appended to  mandatory safety reviews, and that state safety inspectors could be trained  to conduct CSR security reviews. TSA officials further stated that the  agency\u2019s CSR reviews include a detailed assessment of the adequacy of  security plans, whereas FMCSA reviews are intended to ensure a firm\u2019s  compliance with its written security plan, but are not an assessment of its  adequacy. Another obstacle, according to TSA officials, is associated with  how the two agencies view their missions and resource sharing. TSA  believes utilizing FMCSA resources, infrastructure, and databases may be  cost effective. However, DOT officials told us that the primary role of  FMCSA\u2019s inspectors is safety rather than security. One industry  association we interviewed stated that they were working with FMCSA  and TSA to merge their commercial vehicle security programs because  association officials believed it would reduce duplication and be more  efficient for both government and industry. By leveraging resources with  FMCSA, TSA may be able to address other priorities, such as conducting  additional vulnerability assessments, improving security mitigation  programs beyond the hazardous materials sector, and addressing highway  infrastructure protection.\nTSA and FMCSA also do not have a process in place to share information  important to monitoring the results of security programs, consistent with  leading practices for collaborating agencies. For example, the agencies are  not comparing and contrasting their findings from commercial vehicle  security inspections. Both TSA and FMCSA concurred that they could  benefit from better sharing of information and have discussed developing  a unified database for storing and sharing information on CSR and SCRs.  Without a process in place to share information on the results of their  security programs, TSA will not have a complete picture of the  effectiveness of federal programs to secure the sector. FMCSA also  maintains other data and information that could potentially be useful to  TSA in its effort to understand and analyze the commercial trucking and  motor coach industries. For example, the Missouri CSR program selected  carriers with particularly bad safety records for review, but TSA does not  have general, direct access to these data. FMCSA also maintains the  Motor Carrier Management Information System (MCMIS) database of all  interstate, and some intrastate companies, and all carriers of hazardous  materials. Access to MCMIS data could assist TSA in addressing the NIPP  requirement that the agency develop an inventory of assets as a basis for  conducting vulnerability and consequence assessments. In addition, as  TSA expands its CSRs of hazardous materials transporters, DOT may  benefit from knowing which firms TSA has reviewed to avoid duplication  of effort.\nAlthough TSA and PHMSA have signed an annex detailing how they will  collaborate, TSA and FMCSA officials stated that they did not establish a  similar agreement because the agencies coordinated with each other well,  and an annex was not necessary. However, with enactment of the 9\/11  Commission Act, TSA and FMCSA were required to complete an annex by  August 2008 that defined the processes that will be used to promote  communications and efficiency, and avoid duplication of effort. An annex  to the MOU between TSA and FMCSA might help reduce possible  duplication of effort in inspection programs, as well as facilitate the  development of a process for sharing data to monitor program results. TSA  and FMCSA officials signed an annex to the MOU in October 2008.\nThe TSSP also requires that the GCC and the SCC create several joint  working groups for research and development, performance  measurement, intelligence, and risk. These groups are to improve  coordination and prioritization of TSA\u2019s research and development efforts,  address the inherent difficulties in measuring and assessing the  performance of security mitigation programs, develop sector-specific  metrics, and coordinate and integrate intelligence efforts. However, the  creation of these committees has been delayed, according to TSA officials.  Without promptly developing joint working groups, TSA increases the risk  that collaborative work and progress in these areas will be delayed. TSA  officials stated that as of September 2008, the Joint Working Groups for  Highway and Motor Carrier had not been officially approved.\n\n\t\tTSA Has Increased Vulnerability Assessments by Collaborating with the State of Missouri, but Has Not Developed a Plan to Expand the Approach to the Other States\n\nTSA has leveraged resources to enhance its capabilities to perform CSR  vulnerability assessments through collaboration with the state of Missouri,  and recently reached agreements with Michigan and Colorado to conduct  CSRs, but has faced challenges in expanding this collaborative effort to  other states. These state coordination challenges have the potential to  significantly delay progress in expanding vulnerability assessments to  other states. TSA officials stated that it was continuing to explore  opportunities to expand the CSR program from Missouri to other states,  and to leverage state field inspector and law enforcement resources.\nTSA also does not have a direct mechanism for coordinating its strategy  with the states related to commercial vehicle security planning, and some  state officials we spoke to expressed dissatisfaction with TSA\u2019s  coordination efforts. The agency relies on several GCC-member  associations that represent state and local transportation and law  enforcement officials to coordinate with states. However, all of these state  GCC stakeholders identified concerns about the adequacy of TSA  coordination efforts. For example, CVSA, which represents state law  enforcement officials at the GCC, stated that the GCC is not an effective  means of communication and coordination, and that direct  communication with the states was minimal. As a result, CVSA  transportation security officials stated that they were not fully informed  about TSA\u2019s risk management strategy. CVSA officials further stated, in  September 2008, that while coordination with TSA had improved after  TSA\u2019s staffing stabilized, they continued to be concerned that the federal  government was more engaged in helping states ensure safety rather than  security. They also questioned whether TSA had dedicated sufficient  resources to commercial vehicle security, or had the expertise to lead  federal efforts to expand vulnerability assessments nationwide. CVSA  officials stated that since DOT had the resources but not the authority to  oversee commercial vehicle security, it is difficult for either agency to  assist the states.\nAnother key association, AASHTO, which represents state transportation  officials at the GCC, stated that state security planners are given  insufficient attention and information by TSA and other DHS components  relating to security. Specifically, AASHTO officials stated that TSA had not  communicated its strategy or initiatives to secure commercial vehicles,  and that while AASHTO has tried to discuss what role the states play in  transportation security with DHS and TSA, neither has been responsive in  providing fully defined roles. Several officials we spoke with during our  interviews with state DOTs also expressed concerns regarding whether  the GCC is a sufficient mechanism for TSA to coordinate with the 50 states  and were also critical of TSA\u2019s leadership and communication related to  commercial vehicle security. For example, one state noted that TSA\u2019s slow  pace in providing guidance was causing it to delay the implementation of  its programs for fear such programs would conflict with TSA initiatives.  TSA officials stated that the agency had coordinated with states to the  extent possible with available resources\u2014having one staff member  responsible for federal, state, and industry coordination.\n\n\t\tTSA Has Worked to Strengthen Partnerships with the Commercial Vehicle Industry, but Stakeholders Identified Coordination Challenges, and the Effects of Existing Coordination Efforts Are Unknown\n\nTSA has made progress in involving industry in their strategy for  strengthening commercial vehicle security by supporting the formation of  an industry stakeholder council and through ongoing outreach efforts and  meetings with industry officials. However, as discussed earlier in this  report, industry officials we interviewed stated that they generally desired  greater communication with TSA. More specifically, the officials noted  that they did not fully understand TSA\u2019s strategy for securing the  commercial vehicle sector, or what roles and responsibilities the agency  expected from industry. Additionally, TSA does not have any measures of  the effectiveness of its efforts to coordinate with its many stakeholders,  which limits its ability to determine whether its ongoing efforts to  collaborate are appropriate and adequate for this very large and diverse  transportation sector. Without strengthening communication and  coordination with industry, TSA will not be able to fully leverage the  resources of its stakeholders. Four of the leading practices for  collaborating agencies we previously identified to help improve  coordination among federal agencies could also be applied to improve  federal collaboration with industry stakeholders\u2014defining a common  outcome and complementary strategies, agreeing on roles and  responsibilities, leveraging stakeholder resources, and monitoring results.\nTSA coordinates with the commercial vehicles sector through an industry  council and industry associations. To (1) overcome the challenge of  working in partnership with such a large and diverse group of  stakeholders, (2) understand the current security practices of these  industries, and (3) gather industry input and feedback, TSA supported the  creation of the Highway and Motor Carrier Sector Coordinating Council  (SCC) in June 2006. The SCC represents three private industry groups:  highway passenger and school bus carriers, highway freight carriers, and  highway infrastructure owners and builders, and facilitates  communications within the industry and between the industry and TSA.  According to members, its purpose is to represent a broad cross-section of  the industry, and there is no limit on the number of organizations that can  participate. As of September 2008, the SCC had convened eight times since  its first meeting in August 2006, and holds separate meetings to address  issues requiring a quick response. Apart from the SCC, TSA has also  collaborated with several industry trade associations to develop and  distribute security brochures and guides for their membership. For  example, TSA assisted the Truck Rental and Leasing Association in  developing its Security Awareness and Self-Assessment Guide.\nAlthough TSA has made progress in coordinating with industry  stakeholders, challenges remain. Specifically, SCC officials stated that the  council was dissatisfied with TSA\u2019s level of coordination with the SCC on  the development of a strategy for enhancing commercial vehicle security.  For example, the SCC leadership stated that the SCC was excluded from  key stages of drafting revisions to the initial TSSP annex. The TSSP states  that its initial goals and objectives would be developed by TSA, and be  informed by comments and suggestions from the SCC, and going forward  the TSSP annex states that the GCC and SCC are to prepare future  revisions of the TSA strategy in the TSSP annex. SCC officials said that  TSA did not consult with them regarding the development of key strategic  objectives, known as Strategic Risk Objectives, or the Highway and Motor  Carrier Annual Report regarding progress made and goals for the next  year. These officials stated that overall coordination was better on  trucking issues than for motor coach. Furthermore, industry and company  officials we interviewed also expressed concerns about TSA\u2019s  coordination efforts regarding its strategy Specifically, officials from 9 of  the 12 industry associations and 20 of the 26 truck and bus companies we  interviewed, some of whom were also members of the SCC, stated that  they were not familiar with TSA\u2019s strategy and\/or ongoing efforts to secure  the commercial vehicle sector, and that TSA could strengthen its  coordination with industry. Officials stated that in some cases, a lack of  information led industry associations to hesitate in implementing security  actions and dedicating resources to additional security measures that TSA  may determine are not necessary or identify other required measures that  must be implemented instead. Finally, SCC officials stated that TSA had  not explicitly defined roles and responsibilities for the committee, its  members, or the industry. Several industry association representatives  also expressed similar confusion over their responsibilities and roles in  securing the commercial vehicle sector. TSA officials stated that the SCC  was not consulted in the development of the Highway and Motorcarrier  Annex because TSA did not have enough time to include them. However,  the SCC disagreed stating that TSA had received an extension on when the  annex was due. TSA officials also said that they were not surprised by the  uncertainty about their strategy for securing the sector because TSA\u2019s  focus has been largely on developing security programs rather than  communicating its security strategy to industry. TSA officials stated that  going forward, they will work with the SCC as it revises the Highway and  Motor Carrier Annex to the TSSP. The SCC leadership stated that during  the revision to the latest HMC annual report, TSA was much more open to  SCC\u2019s input.\nOur previous work on effective interagency collaboration has  demonstrated that to achieve a common outcome, collaborating agencies  need to establish strategies that work in concert with those of their  partners or are joint in nature. Our prior work has further shown that  collaboration can be enhanced when parties work together to define and  agree on their respective roles and responsibilities, including how the  collaborative effort will be led. Responsibility for securing the commercial  vehicle sector involves collaboration between governmental and  nongovernmental entities that typically have not worked together before  on these issues. A fully defined outcome and strategy facilitates  overcoming significant differences in organizational missions, cultures,  and established ways of doing business. Without defining a common  outcome and strategy, individual organizations increase the risk of  developing strategies for securing the commercial vehicles industry that  differ and conflict rather than help organizations better align their  activities and resources to accomplish a common outcome. Fully defining  and clarifying respective roles and responsibilities will be important to  ensure that TSA and industry understand who will do what regarding  securing the commercial vehicle sector, and help to reconcile differing  perceptions of leadership that exist among stakeholders.\nSCC representatives stated that TSA has not maintained active  communication with the committee, resulting in missed opportunities to  take advantage of their potential contributions, including leveraging of  their expertise and resources. TSA officials stated that given the SCC\u2019s  recent establishment, it may be too soon to fairly assess the effectiveness  of their interactions with the council. Most companies we spoke with  stated that they rarely heard from TSA if at all, although they were  generally much more familiar with FMCSA with whom they have worked  for years. Some company officials suggested that TSA develop a direct  means of communicating with the industry, such as through e-mail or a  robust Web page. The Missouri Pilot Program Evaluation Report also  recommended that TSA develop a Web portal to improve coordination and  communication with the industry. The lack of communications and  coordination could limit the effectiveness of standards and measures  meant to enhance the security of commercial vehicles.\nTSA officials stated that the agency has conducted outreach with private  industry to, among other things, coordinate its overall strategy and roles  and responsibilities. According to officials, TSA has made numerous  resources available to private industry stakeholders through the Homeland  Security Information Network and more recently through TSA\u2019s Highway  and Motor Carrier Web site link. Additionally, TSA reported that officials  from the HMC are continually attending association conferences and  workshops to educate and share TSA\u2019s strategy, goals, and policies. To  further improve communications, TSA reported that it has conducted 14  monthly conference calls since 2007 with attendees varying from 10 to 20  stakeholder participants. TSA officials stated that, while minor issues  regarding specific lines of communication may have existed, in their  opinion, the general level of coordination with the industry has been  successful and that they were unaware of any significant private sector  stakeholder misunderstandings of the agency\u2019s security strategy, efforts,  or their own roles and responsibilities.\nWhile TSA\u2019s actions should help strengthen coordination with the  commercial vehicle industry, the extent of any effect of these efforts is  unknown because, according to TSA officials, the agency has not  developed an approach to evaluate the effectiveness of its coordination  efforts. Specifically, TSA does not have measures of how coordination  efforts such as its current Web site, its participation in conferences, its  efforts to coordinate with states, the GCC, and SCC result in a better  understanding of TSA strategy and definitions of roles and responsibilities  within the commercial vehicle sector. We have previously reported that  collaborative efforts can be enhanced and sustained when they include  mechanisms for monitoring and evaluation to assist stakeholders in  identifying areas for improvement. Without such an evaluation, TSA will  be hindered in determining whether its ongoing efforts to collaborate with  the commercial vehicle industry are appropriate and effective for  enhancing the security of this very large and diverse transportation sector.\n\n\tConclusions\n\nThe nature, size, and complexity of the nation\u2019s commercial vehicle sector  highlights the need for federal and state governments and the private  sector to work together to secure this transportation sector. The  importance of the nation\u2019s commercial trucking and motor coach  industries and concerns about their security, coupled with finite homeland  security resources, underscores the need for TSA to employ a risk  management approach to prioritize its security efforts so that an  appropriate balance between costs and security is obtained. TSA has taken  steps in implementing a risk management approach by assessing threats to  and from the commercial vehicle sector, conducting some vulnerability  assessments, and initiating the development of best practices to secure the  sector. Despite these achievements, much work remains to fully address  the security risks of commercial trucks and motor coaches, and to ensure  that this information is used to inform TSA\u2019s security strategy. TSA has not  yet completed annual threat assessments with estimations of the  likelihood of various threats or tactics, nor established a plan and a time  frame for completing vulnerability assessments of the commercial vehicle  industry and its diverse sectors and firms, to include considering the  recommendations of the Missouri Pilot Program Evaluation. TSA also has  not developed a plan to conduct consequence assessments, or leveraged  the consequence assessments of other sectors. Further, TSA has not  determined the extent to which additional risk assessments are needed, or  the resources needed to support these efforts. Although TSA is having  threat scenarios conducted to inform a preliminary risk assessment of the  industry, these assessments will likely provide limited information on what  sectors or companies are most at risk, and what mitigation practices are  currently in place, unless they are further supported by field-level risk  assessments, such as CSRs, consistent with the TSSP. As a result of not  having specific threat assessments or complete vulnerability and  consequence assessments, the agency is limited in its ability to determine  the most pressing security needs, and to use this information to guide its  security strategy. While working to develop complete risk assessments, it  is important that TSA assess and use available information as the basis for  its interim decisions. For example, information currently available from  existing threat, vulnerability, and consequence assessments suggest  alternatives or additions to the agency\u2019s current focus on commercial  vehicle transport of hazardous materials. TSA has recently begun the  process of revising its strategy for 2009 and beyond; however, without  completed risk assessments, its revised strategy may not be appropriately  targeted. Until TSA completes assessments of this very large and highly  diverse transportation sector, and uses this information to inform its  security strategy, it will be limited in its ability to assure Congress that  existing funds are being spent in the most efficient and effective manner.\nTSA has developed a range of programs to strengthen truck and bus  security, but has not developed outcome measures to assess how  effectively the programs have improved security. Without such  performance measures, TSA cannot monitor and evaluate whether or not  these programs are achieving results in enhancing commercial vehicle  security, nor communicate this progress to industry stakeholders,  Congress, policymakers, and taxpayers.\nWith 50 states and over a million diverse industry stakeholders, securing  commercial vehicles can pose considerable communication challenges  and lead to confusion about roles and responsibilities. Ultimately, the  security of the industry is maintained by the companies themselves, and if  TSA is to secure the sector it must do so by working with the industry.  Coordination and communications techniques that might work well in  other transportation sectors may be insufficient for the larger, more  complex commercial vehicle industry. TSA has taken steps to coordinate  with government and industry stakeholders, and has had some noteworthy  successes such as the Missouri CSR program. However, both industry and  state officials we interviewed stated that more needed to be done to  enhance federal leadership and better ensure that federal, state, and  industry actions and investments designed to enhance security are  properly focused and prioritized. TSA communicates with states primarily  through associations of state law enforcement and transportation officials  who participate in the GCC. However, opportunities exist for more  effective coordination with states to expand the Missouri CSR to other  states, and for TSA to leverage FMCSA\u2019s resources in conducting field  inspections. TSA could address industry concerns about communication  of its strategy, roles, and responsibilities, as well as better leverage  industry expertise, by working more collaboratively with industry  representatives and improving communication with the nation\u2019s many  small owner-operators and midsized firms. In addition, because TSA does  not monitor and measure the effectiveness of its coordination and  communications efforts, it cannot be sure that it is addressing stakeholder  concerns. By improving coordination with DOT, the states, and the  industry, TSA could build a solid foundation for strengthening the security  of the commercial vehicle sector.\n\n\tRecommendations for Executive Action\n\nTo assist the Transportation Security Administration in more fully  evaluating, selecting, and implementing commercial vehicle security risk  mitigation activities, and to help strengthen the security of commercial  vehicles in the United States and leverage the knowledge and practices  employed by key federal and nonfederal stakeholders, we recommend that  the Assistant Secretary for the Transportation Security Administration  take the following four actions:  1.  Establish a plan and a time frame for completing risk assessments of  the commercial vehicle sector, and use this information to support  future updates to the Transportation Sector Strategic Plan, to include  conducting:  to the extent feasible, assessments that include information about the  likelihood of a terrorist attack method on a particular asset, system, or  network as required by the National Infrastructure Protection Plan;  a vulnerability assessment of the commercial vehicle sector, including:    assessing the scope and method of assessments required to gauge  the sector\u2019s vulnerabilities;    considering the findings and recommendations of the Missouri pilot  evaluation report to strengthen future Corporate Security Reviews;  and    enhancing direct coordination with state governments to expand  the Transportation Security Administration\u2019s field inspection  Corporate Security Review capacities;    consequence assessments of the commercial vehicle sector, or  developing alternative strategies to assess potential consequences of  attacks, such as coordinating with other Sector-Specific Agencies to  leverage their consequence assessment efforts.  2.  In future updates to the Highway Infrastructure and Motor Carrier  Annex to the Transportation Sector Security Plan, clarify the basis for  the agency\u2019s security strategy of focusing on the transportation of  hazardous materials, the relative risk of vehicle-borne improvised  explosive devices to the sector, and, based on the relative risk of these  threats, any risk mitigation activities to be implemented to address  them.  3.  Develop outcome-based performance measures, to the extent possible,  to assess the effectiveness of federal programs to enhance the security  of the commercial vehicle sector.  4.  Establish a process to strengthen coordination with the commercial  vehicle industry, including ensuring that the roles and responsibilities  of industry and government are fully defined and clearly  communicated; new approaches to enhance communication are  considered; and monitoring and assessing the effectiveness of its  coordination efforts.\n\n\tAgency Comments and Our Evaluation\n\nWe provided a draft of this report to DHS and DOT for review and  comment. On January 15, 2009, DOT provided technical oral comments  which we incorporated as appropriate. On February 6, 2009, we received  written comments on the draft report from DHS, which are reproduced in  full in appendix II. DHS concurred with our findings and recommendations  and discussed efforts underway to address them.\nRegarding our recommendation that TSA establish a plan and a time frame  for completing risk assessments of the commercial vehicle sector, and use  this information to support future updates to the Transportation Sector  Strategic Plan, DHS concurred and stated that TSA is actively conducting  risk assessments of the major components of the commercial vehicle  sector as required by the Implementing Recommendations of the 9\/11  Commission Act of 2007, and provided a timetable for completing these  scenario-based risk assessments. According to TSA, these assessments  will examine specific scenarios involving the commercial vehicle sector  and will include information on the likelihood of a terrorist attack. We are  pleased that TSA is beginning to conduct risk scenario assessments on  various parts of the industry. However, we continue to believe that TSA  needs to expand its use of threat likelihood estimates to the extent  feasible. For example, we believe that TSA should address the feasibility  of annual sector threat assessments including likelihood estimates. TSA  also stated that it is planning to conduct annual field-level vulnerability  assessment CSRs on a statistically valid sample of hazardous materials  carriers. While we support these efforts, as we noted in the report carriers  transporting hazardous materials represent only a small fraction of the  industry. Therefore, we believe that TSA should also assess the scope and  method of its vulnerability assessments for the entire sector, beginning  with establishing the mix of expert scenarios and field assessments it  deems most appropriate. In response to our recommendation that TSA  conduct consequence assessments of the commercial vehicle sector or  develop alternative strategies to assess potential consequences of attacks  such as coordinating with other sector-specific agencies to leverage their  consequence assessment efforts, TSA concurred and stated that it will  examine consequence information based on the scenarios that have been  developed, consult with public and private sector subject matter experts,  and, when appropriate, consult with sector-specific agencies.\nDHS concurred with our recommendation that in future updates to the  Highway Infrastructure and Motor Carrier Annex to the Transportation  Sector Security Plan, they should clarify the basis for the agency\u2019s security  strategy of focusing on the transportation of hazardous materials, the  relative risk of vehicle-borne improvised explosive devices in the sector,  and, based on the relative risk of these threats, any risk mitigation  activities that should be implemented to address them. TSA stated that it  intends to include risk-based clarification of the security strategies in  future updates to the plan. According to TSA, for the past 2 years it has  focused primarily on the transportation of hazardous materials. However,  ongoing industry risk assessments and regulatory efforts may shift the  current strategies, and communicating these strategies in the annex to all  stakeholders will be critical to successful implementation of the plan. We  believe that these efforts will help strengthen TSA\u2019s strategy for securing  the sector. We further believe that it will be important for TSA to clarify  the basis for its strategy and any shift in that strategy based on  assessments of the relative risks.\nDHS concurred with our recommendation that TSA develop, to the extent  possible, outcome-based performance measures to assess the  effectiveness of federal programs to enhance the security of the  commercial vehicle sector. DHS stated that TSA recognizes the  importance of establishing outcome-based performance measures and  described ongoing efforts. TSA stated that it intends to conduct annual  CSRs on hazardous materials motor carriers to measure changes in  industry security. While these activities will help TSA strengthen its ability  to assess the effectiveness of ongoing security measures, we believe that  the impact of TSA\u2019s programs on the progress of the rest of the  commercial vehicle sector should be measured as well.\nDHS also concurred with our recommendation that TSA establish a  process to strengthen coordination with the commercial vehicle industry,  including ensuring that the roles and responsibilities of industry and  government are fully defined and clearly communicated; new approaches  to enhance communication are considered; and the effectiveness of its  coordination efforts are monitored and assessed. DHS noted that TSA  recognizes the importance of strong working relationships with both  industry and other government agencies, and that through its work with  coordination councils TSA has established a coordination process that  continues to mature and develop. Finally, DHS noted that these  coordination efforts are only 17 months old, hence performance  measurement processes continue to be refined. We believe that given the  size and complexity of the commercial vehicle sector, and the concerns  expressed by various stakeholders, new approaches to enhance  communication are important. As such, TSA should develop a process to  monitor and assess the effectiveness of its coordination efforts.\nAs agreed with your office, unless you publicly announce its contents  earlier, we plan no further distribution of this report until 30 days from the  date of this report. At that time, we will send copies of this report to the  Secretary of Homeland Security, the Secretary of the Department of  Transportation, and other interested parties. This report will also be  available at no charge on our Web site at http:\/\/www.gao.gov. Should you  or your staff have any questions concerning this report, please contact me  at (202) 512-3404 or berrickc@gao.gov. Contact points for our Offices of  Congressional Relations and Public Affairs may be found on the last page  of this report. Key contributors to this report are listed in appendix VIII.\n\nAppendix I: Objectives, Scope, and Methodology\n\nThe objectives of our review were to answer the following questions:   (1) To what extent has TSA assessed the security risks associated with  commercial vehicles and used this information to develop and implement  a security strategy? (2) What security actions have key government and  private sector stakeholders taken to mitigate identified risks to  commercial vehicle security, and to what extent has TSA measured the  effectiveness of its actions? (3) To what extent has TSA coordinated its  strategy and efforts for securing commercial vehicles with other federal  entities, states and private sector stakeholders?\n\n\tFederal Risk Assessment Activities\n\nTo review the extent to which the federal government has assessed  security risks associated with commercial vehicles and used this  information to develop and implement its security strategy, we analyzed  DHS and DOT strategic and security planning documents such as the  NIPP, the TSSP and its Highway and Motor Carrier Annex; performance  documents including annual reports such as DHS\u2019s 2008 Performance  Budget Overview and TSA HMC\u2019s Annual Reports and quarterly risk  reduction reports; and risk assessment documentation\u2014including  assessments of threat, vulnerability, and standoff and evacuation  distances. We interviewed officials from DHS National Protection and  Programs Directorate; TSA\u2019s Office of Highway and Motor Carriers, Office  of Risk Management and Strategic Planning, Office of Intelligence, and  Office of Cargo Policy; DOT\u2019s Office of Intelligence and Security; PHMSA\u2019s  Office of Hazardous Materials Safety; FMCSA\u2019s Office of Emergency  Preparedness and Security; and DOT\u2019s Bureau of Transportation Statistics.\nTo assess TSA\u2019s threat assessments, we analyzed its annual threat  assessments and other intelligence products, and met with officials of  TSA\u2019s Office of Intelligence. We also assessed documentation and  interviewed TSA\u2019s HMC officials regarding the agency\u2019s use of the threat  assessments for planning its vulnerability and consequence assessments.  We also met with TSA\u2019s Risk Management Division and reviewed its use of  estimates regarding the likelihood of certain types of specific threats for  high-level NTSRA scenarios, and more systematic use of threat scenarios  and likelihood estimates for the Aviation Domain Risk Assessment. To  evaluate TSA\u2019s vulnerability assessments, we reviewed TSA\u2019s draft best  practices, its vulnerability assessments known as Corporate Security  Reviews (CSRs), and CSR questionnaires and reports. We also met with  TSA HMC officials and interviewed officials from truck and bus companies  that had undergone CSRs. To assess TSA\u2019s CSR pilot program, we  attended two Missouri Pilot CSRs and analyzed the TSA-sponsored  evaluation report of the CSR pilot. At the conclusion of the two CSRs we  observed, we interviewed company officials about what they learned from  the CSR, how germane it was to their security needs, and how appropriate  TSA\u2019s suggested security measures were for their operating and business  environment. We also met with Missouri state department of  transportation and law enforcement officials and FMCSA field officers in  Missouri to discuss their experiences with implementing the pilot and  conducting CSRs. We also discussed the usefulness of the CSRs with  officials from 12 leading industry trade associations representing the  different sectors of the industry including, trucking companies, owner- operators, private truck companies, the bus industry, tank truck operators,  hazardous materials shippers, rental and leasing firms, and unions. To  review DOT\u2019s SCR inspections of hazardous material security plan  implementation, we reviewed the SCR questionnaire, gathered data from  agency Performance and Accountability Reports regarding their annual  progress, and met with DOT FMCSA\u2019s Office of Emergency Preparedness  and Security. We also analyzed FMCSA-sponsored vulnerability  assessment of the U.S. motor coach Industry. We also reviewed the  completeness of DOT MCMIS and BTS data on the population, or national  inventory, of commercial vehicle firms, trucks, and drivers, because to  determine industry vulnerabilities requires the development of a well- defined inventory or population of industry firms and assets. For more  information, see appendix V.\nTo evaluate TSA\u2019s consequence assessments, we analyzed DHS, DOD, and  ATF data about standoff distances for VBIED explosions, tanker fuel truck  fireballs, and TIH evacuation distances. We also interviewed officials from  TSA\u2019s HMC and DHS\u2019s National Protection and Programs Directorate  about their consequence assessment efforts. To explore the feasibility of  TSA leveraging the consequence efforts of other sectors, we also reviewed  the 17 Critical Infrastructure Sector Annual Reports for 2006 and 2007, and  the Strategic Homeland Infrastructure Risk Assessment report which  identifies the sectors most at risk from VBIEDs.\nTo determine how, if at all, TSA used its risk assessments to inform its  strategy for securing commercial vehicles, we reviewed its strategic plan,  the TSSP annex, annual reports, and other related documents. We also  interviewed HMC officials, and compared their actions to DHS risk  management guidance in the NIPP and TSSP. The quality of TSA\u2019s CSR  inspection data was previously assessed by the Missouri Pilot Evaluation.  We reviewed the pilot evaluation and concurred with its conclusion that  the Missouri sample was not representative of the commercial vehicle  industry in Missouri or of the industry nationwide. To evaluate the extent  to which TSA had a plan or a time frame to complete a comprehensive risk  assessment of the commercial vehicle sector, we used standard practices  in program and project management, which include developing a road map  or a program plan to achieve programmatic results within a specified time  frame or milestones. To evaluate TSA\u2019s progress in addressing the  Missouri CSR Pilot evaluation, we used GAO\u2019s standards for internal  controls in the federal government, which require that findings and  deficiencies reported in audits and other reviews be promptly reviewed,  resolved, and corrected within established time frames.\n\n\tGovernment and Private Sector Security Actions\n\nTo determine the actions the federal government and state and local  governments have taken to mitigate commercial vehicle security risks, and  the extent to which these actions are consistent with TSA\u2019s security  strategy, we reviewed documentation and interviewed officials from TSA\u2019s  Office of Highway and Motor Carrier and the Office of Cargo Policy; DOT  PHMSA\u2019s Office of Hazardous Materials Safety; FMCSA\u2019s Office of  Emergency Preparedness and Security; FHWA Transportation Security  Office; and the FTA Office of Safety and Security. We also interviewed  officials from eight states and conducted site visits to five. We selected  the states in a nonprobability sample based on their characteristics,  proximity to critical infrastructure and potential terrorist targets, such as  large population centers, and the amount of hazardous materials (in tons)  originating in the state. As a result, we cannot generalize the results to all  states. However, we believe that observations obtained from these visits  provided us with a greater understanding of the states\u2019 operations and  perspectives. We gathered information from each regarding their actions  to mitigate security risks, and any challenges they face in strengthening  security.\nTo identify industry actions taken to secure the commercial vehicle sector,  we analyzed TSA\u2019s draft best practices and Security Action Items, and  reviewed TSA CSR and FMCSA SCR and SSV inspection data. We also  interviewed officials from 12 industry associations that represent trucking  firms and truck drivers, truck manufacturers, truck rental and leasing  companies, hazardous materials shippers, and intercity and tour bus  companies to see what actions, if any, the association and its members  were taking. We also reviewed security guidance industry trade  associations had developed and provided to their members. To  supplement what federal and industry associations told us and to observe  industry operations firsthand, we also conducted site visits to 26  commercial truck and bus owner-operators. These companies were  selected by a nonprobability sample based on:    size, using the number of vehicles (tractors, or power units for trucking  companies, and buses for motor coach companies) as an indicator;    geographic location, noting the region\u2019s characteristics, proximity to  critical infrastructure and potential terrorist targets such as large  population centers, and the amount of hazardous materials (in tons)  originating in the state; and  type of operations, using the quantity of hazardous materials transported  as an indicator for trucking companies.\nBecause we used a nonprobability sample of owner-operators and states,  the information we obtained from these interviews and visits cannot be  generalized to all commercial vehicle companies. However, we believe  that observations obtained from these visits provided us with a greater  understanding of the industry\u2019s operations and perspectives. The 20  trucking companies we visited included hazardous materials carriers,  nonhazardous materials carriers, and carriers that transported both  hazardous materials and nonhazardous materials. The 6 motor coach  companies we visited included companies that offer intercity services, and  tour and charter services, as well as companies that do both. During our  site visits to bus and trucking companies, we interviewed officials and  inspected a range of security measures.\nTo assess how the effectiveness of federal programs to reduce risk was  being monitored, we analyzed DHS and DOT strategic planning and  budgeting documents and performance data and interviewed officials from  TSA\u2019s HMC, the Transportation Sector Network Management Business  Management Office, and the DHS Federal Emergency Management  Agency\u2019s (FEMA) Grants Program Directorate. To determine what  performance measurement data DOT had developed that TSA could  potentially use to monitor the progress of these commercial vehicle  security programs, we interviewed officials from FMCSA\u2019s Analysis  Division and Strategic Planning and Program Evaluation Division. We also  compared TSA\u2019s efforts to evaluate its programs with guidance on  performance measurement contained in the GPRA and the TSSP.\n\n\tCoordination and Collaboration Efforts\n\nTo review the extent to which the federal government has coordinated its  strategy for securing commercial vehicles internally and with private  sector stakeholders, we analyzed DHS\u2019s memorandum of understanding  with DOT and subsequent annex with PHMSA that identifies the roles and  responsibilities of DHS and DOT related to commercial vehicle and  hazardous materials transportation security. In addition, we reviewed  statutes related to DHS and DOT roles and responsibilities, as well as  regulations and associated comments provided during rulemaking  procedures for commercial vehicle security programs and requirements.  We also interviewed officials from TSA\u2019s Office of Intelligence, Risk  Management Division, the Office of Highway and Motor Carrier, and the  Office of Cargo Policy; and DOT\u2019s PHMSA and FMCSA to obtain  information on their current and planned efforts to secure commercial  vehicles, as well as their collaborative efforts across agencies and with the  private sector. We also interviewed members of the SCC and the private  firms we visited to obtain their views regarding the effectiveness of TSA\u2019s  coordination efforts, and discussed their views with TSA officials. Finally,  we compared TSA\u2019s efforts to collaborate and coordinate with  stakeholders to key practices that we had previously developed as leading  practices of collaborating agencies.\nWe conducted this performance audit from September 2006 through  February 2009 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives. (The methodology used to  gather our data on the incidents of truck and bus bombing is summarized  in app. II).\n\nAppendix II: Incidents of Truck and Bus Bombings from 1997 to 2008\n\nThis appendix provides information on the analysis we conducted to  determine the incidents of truck and bus bombings presented in this  report. It provides information on the methodology used to identify  incidents worldwide and the detailed results of our analysis.\n\n\tMethodology Used to Identify Bombing Incidents\n\nWe used open sources, such as press and wire service reports, to  determine the extent of bus and truck bombings. We first reviewed the  general strengths and weakness of different open-source databases and  consulted open source search experts. We reviewed eight databases and  chose to use four based on the breadth and completeness of their media  sources, years, and geographic coverage; whether they contained  sufficient detail to verify that the event was a truck or bus bombing; and  whether they allowed for independent verification of source information.  We also wanted databases that had, or enabled, control methods to ensure  minimization of false positives and duplicates, and standardized criteria  for incident inclusion.\nWe narrowed our selection of databases to the Open Source Center (OSC),  Nexis, Global Terrorism Database (GTD), and Dialog databases. OSC is  the official open-source clearinghouse for the U.S. government that  monitors, translates, and disseminates within the U.S. government openly  available news and information from non-U.S. media sources. It has state  of the art language translation capabilities, so articles are usually  translated into English by native-speaker linguists. Nexis, Major World  Newspapers provides access to 5 billion searchable documents from more  than 40,000 legal, news, and business sources. GTD is an open-source  database gathering information on terrorist incidents around the world  since 1970. We made limited use of the earlier, first version called GTD 1  and only for 1997 when we could corroborate the incidents it identified  with additional sources found in Nexis. Our primary database was the  more rigorous GTD2, which currently covers terrorism events from 1998  to 2004. GTD2 is based on the OSC and Nexis databases, which it  evaluated as the best general databases. GTD2 entries have to be based on  multiple independent open-source reports or a single \u201chighly credible\u201d  source. GTD2 has a configurable definition of terrorism that includes more  than one definition of the phenomenon; control methods in place to  ensure minimization of false positives; a standardized criteria for incident  inclusion that is documented in a formal and publicly available codebook;  and a ranking system for media sources. Dialog is an online database that  allows for an extensive search of a variety of databases and collections  using powerful search language. Dialog\u2019s ability to identify very specific  information made it an ideal second source to search for additional  documentation on known but not fully documented events.\nWe then explored the capabilities of these databases over time with a  small pilot, conducting searches on truck and bus bombings in one  individual year in each of three decades, specifically the years 1987, 1996,  and 2002, and explored which search terms and strategies produced the  best results for each database. We assessed the possible threats to validity  and confirmed that these were the pertinent issues with an open-source  terrorism data expert. Our analysis plan addressed a variety of threats to  validity and their mitigation:    False positives \u2013 Unclassified data on terrorist events are largely gathered  through open-source data, typically press reports. Since press reports may  not be the most reliable, we used several databases that use reputable  sources and decision rules for the inclusion of their entries. Entries we  accepted had to be based on a highly reliable source, or multiple sources.  Supporting articles had to directly confirm whether the incident was a  truck or bus bombing as well as the incident date, location, and the  number killed.\nHistory \u2013 Electronic search engines and archives have improved over time.\nTherefore, data across 25 years, since the 1983 Marine barracks bombing,  may not be comparable. Based on our pilot data, we only included  incidents from 1997, by which time both Nexis and GTD were well  developed and reliable.\nLanguage - All languages may not be equally covered. GTD uses the Open  Source Center which is based entirely on foreign sources and has strong  translation capabilities among its staff.\nSynonyms - Multiple English terms may be used for bus, truck and bomb  (e.g., bus vs. lorry). GTD uses extensive Boolean search terms with search  strings using hundreds of terms and synonyms. Nexis and Dialog enable  similar searches with wildcard strings. We applied GTD search strings to  Nexis and Dialog to cover more current events not yet included in GTD.\nGeography - Some areas (e.g. Africa) may not be covered as well.\nHowever, we looked for a very particular type of incident that was highly  likely to be the lead story where it occurred and picked up by the wires.\nDates -Reporting date vs. actual dates. Reporting dates on global time can  lead to confusion. GTD and OSC have date protocols to minimize date  error. Since our unit of analysis is years, this error was of little risk.\nBreaking reports vs. \u201cfinal\u201d reports - Initial reports usually have less  confirmation of the number killed. When conflicting reports cannot be  reconciled, we used the lower number of reported killed. GTD also uses  the lowest number.  Incidents in a military area may not be terrorism - The GTD makes a  distinction between combatants and noncombatants. We screened out  events involving active combatants. However, we included incidents  directed at civilians or other targets in active war zones such as Iraq and  Afghanistan.  Incident duplication \u2013 Using multiple sources could inadvertently lead to  incident duplication. GTD has a protocol to eliminate duplicates and Nexis  also enables electronic duplication vetting. In addition, duplications were  screened manually and the entire dataset was verified by independent  staff.\n\n\tSearch strategy\n\nWe originally hoped to list the incidents since the Beirut bombings of 1983,  but given the less rigorous methodology of GTD1, the limited archival  coverage of Nexis prior to 1996, and the limitations of other databases we  decided to drop 1983 through 1996. Due to the evolving coverage of these  databases, we had to employ three different search strategies to cover the  years from 1997 to 2007.\nTime period: 1997   Primary search database: Global Terrorism Database \u201cGTD1\u201d  Secondary search database: Nexis\u2019 Major World Newspapers  By 1997, Nexis sources were sufficiently developed and available online to  augment GTD1, which did not list supporting sources.\nTime period: 1998-2004   Primary search database: Global Terrorism Database \u201cGTD2\u201d  GTD2 incorporates OSC and Nexis in a systematic manner and additional  searches of these sources were not necessary.\nTime period: 2005-present  Primary search database: Nexis\u2019 Major World Newspapers  Secondary search database: Individual newswires database in Dialog  Third search database: Open Source Center  For our study we searched the GTD2 for attacks utilizing or against a  commercial vehicle, either truck, bus, or bus station or bus stand,  specifically with explosives (VBIEDs, IED\u2019s, suicide bomber(s), bombs,  grenades, roadside bombs, landmines, and rockets). When searching Nexis  we used the same search factors but with a Boolean search string. For  years in our study outside the GTD year range, we duplicated their search  and inclusion methodology. As a final check, we compared our results  with Department of State and Department of Defense terrorism lists and  timelines. We believe that these various steps successfully mitigated the  various threats to validity and enabled us to compile information on the  incidents of truck and bus bombings since 1997 with confidence.\nThe results of our search are summarized in figure 2 and detailed in table 3  below. Some additional trends are summarized in the figures below. Truck  and bus bombings are compared in figure 6, which shows that while bus  bombings have historically been more common, the incidence of truck  bombings has sharply increased since 2004 and peaked in 2007.\nFigure 7 summarizes how the sharp increase in bombing deaths in 2007  was due to the increase in truck bombings.\nWe only counted incidents involving noncombatants, but most of the sharp  rise in deaths in truck and bus bombings that occurred in 2007 was due to  bombings in Iraq.\n\nAppendix III: Commercial Vehicle Industry Trade Associations GAO Contacted\n\nAmerican Chemistry Council  (ACC)\nAmerican Federation of Labor and  Congress of Industrial  Organizations (AFL-CIO)\nAmerican Trucking Associations  (ATA)\nChlorine Institute (CI)\nInternational Brotherhood of  Teamsters (IBT)\nNational Private Truck Council  (NPTC)\nNational Tank Truck Carriers  (NTTC)\nOwner-Operator Independent  Drivers Association (OOIDA)\nTruck Manufacturers Association  (TMA)\nTruck Rental and Leasing  Association (TRALA)\nUnited Motorcoach Association  (UMA)\n\nAppendix IV: DHS and DOT Commercial Vehicle Security Programs Designed to Strengthen Commercial Vehicle Security\n\nIn addition to Corporate Security Reviews, TSA and DHS have four key  programs designed to strengthen the security of the commercial vehicle  industry. DOT also has four programs underway to strengthen commercial  vehicle security and TSA and DOT are working collaboratively on several  projects for securing commercial vehicles. Each of these programs and  projects are discussed below.\n\n\tDHS Security Programs\n\nTrucking Security Program: The Trucking Security Program (TSP)  provides grants that fund programs to train and support the members of  the commercial vehicle industry in how to detect and report security  threats, and how to avoid becoming a target for terrorist activity. TSP is  administered by the Federal Emergency Management Agency\u2019s Grant  Programs Directorate within DHS. As of May 2008, DHS has provided  nearly $78 million in TSP grants since 2003. Congress appropriated $16  million to fund this trucking security grant program for fiscal year 2008,  and $8 million for fiscal year 2009. For fiscal years 2004-2008 the principal  activity funded by the TSP was the American Trucking Associations\u2019  Highway Watch program to improve security awareness in the commercial  vehicle industry. In May 2008, however, a new grantee, the HMS Company  of Alexandria, Virginia was selected.\nSecurity Action Items (SAIs): TSA consulted with DOT and industry  stakeholders to develop SAIs, or voluntary security practices, intended to  improve security for trucks carrying security-sensitive hazardous  materials. TSA eventually plans to also develop SAIs for motor coaches  and school buses. According to TSA officials, the SAIs will allow TSA to  communicate the key elements of effective transportation security as  voluntary practices; TSA officials will use CSRs to gauge whether  voluntary practices are sufficient or if regulation is needed.\nHazardous Materials Driver Background Check Program: A  Hazardous Materials Endorsement (HME) authorizes an individual to  transport hazardous materials for commerce. The USA PATRIOT Act,  enacted in October 2001, prohibits states from issuing HMEs for a  commercial driver\u2019s license to applicants who have not successfully  completed background checks. In response, TSA implemented the  hazardous materials driver security threat assessment program which  evaluates the hazardous materials driver\u2019s criminal history, immigration  status, mental capacity, and connection with terrorism to determine  whether that driver poses a security risk.\nIntercity Bus Security Grant Program: This DHS program distributes  grant money to eligible stakeholders to protect intercity bus systems and  the traveling public from terrorism. Current priorities focus on enhanced  security planning, passenger and baggage screening programs, facility  security enhancements, vehicle and driver protection, as well as training  and exercises. A total of $11.5 million was appropriated for fiscal year 2008  and $12 million for fiscal year 2009. A total of $11.5 million was  appropriated for fiscal year 2008 and $12 million for fiscal year 2009.\n\n\tDOT Security Programs\n\nSecurity Plans and Training: DOT regulations require shippers and  carriers of certain hazardous materials to develop and implement security  plans.  The regulations permit a company to implement a security plan  tailored to its specific circumstances and operations. At a minimum, a  security plan must address personnel, access, and en route security. All  shippers and carriers must also ensure that employee training includes a  security awareness component. In response to an industry petition that  certain hazardous materials posing little or no security risk be removed  from the list of hazardous materials for which security plans are required,  DOT is reevaluating the security plan regulations.\nSecurity Contact Reviews (SCRs): Through its SCRs, FMCSA conducts  compliance reviews of the security plans for hazardous materials transport  required by DOT hazardous materials regulations. FMCSA conducts SCRs  on all hazardous materials motor carriers that transport placardable  amounts of hazardous materials. As of September, 2008, FMCSA had  conducted 7,802 SCRs since the inception of the programs.\nHazardous Materials Safety Permit Program: Federal law directed  FMCSA to implement the hazardous materials permit program to produce  a safe and secure environment to transport certain types of hazardous  materials. The program requires certain motor carriers to maintain a  security program and establish a system of enroute communication. This  program uses the SCRs to collect data on motor carrier ability to secure  hazardous materials.\nSensitive Security Visits (SSVs): FMCSA conducts SSVs as educational  security discussions with motor carriers that carry small amounts of  hazardous materials that do not require posting hazardous materials  placards on their trucks. These visits discuss best practices for hazardous  materials transportation and provide informal suggestions for  improvement. As of September, 2008, FMCSA had conducted 13,411 SSVs  since the inception of the programs.\n\n\tTSA and DOT Joint Security Programs\n\nTSA Missouri CSR Pilot: This pilot program conducts abbreviated CSRs  of trucking and motor coach companies using state inspectors. For more  details of the Missouri CSR program, see pages 26-31.\nFMCSA and TSA Truck Tracking Security Pilots: FMCSA and TSA  have concluded hazardous materials truck-tracking pilots. FMCSA  completed a study of existing technologies in December 2004, evaluating  wireless communications systems, including global positioning satellite  (GPS) tracking and other technologies that allow companies to monitor  the location of their trucks and buses. TSA also tested tracking and  identification systems, theft detection and alert systems, motor vehicle  disabling systems, and systems to prevent unauthorized operation of  trucks and unauthorized access to their cargos. The 9\/11 Commission Act  mandated that the Secretary develop a tracking program for motor carrier  shipments of hazardous materials by February 2008. TSA officials  reported that they worked with DOT to meet this mandate and completed  a program to facilitate truck tracking on January 10, 2008.\nHazardous Materials Research Involving Security Initiatives: DOT  and DHS sponsor research on emerging technology that could potentially  be used to enhance the safety and security of hazardous materials  transportation. This research involves evaluation of potential truck- disabling technologies, radiation detection devices, hazardous materials  routing, and software to assist in hazardous materials incident response.\nAdditional Programs: DHS and TSA also have a number of smaller  programs to augment motor carrier security and programs in the planning  stages. TSA has several projects on screening applicants for Commercial  Drivers Licenses (CDLs) and Hazardous Materials Endorsements on CDLs.  These include the Universal CDL Vetting Project, which will assess the  feasibility of implementing watch list checks of 9 million commercial  driver records. Through the Rental Truck Vetting Operational Study and  Analysis, TSA is assessing technologies to screen rental truck customers  against the DHS and FBI Watch List. To address the lack of security- related domain awareness, TSA and DHS also have developed several  projects: Federal Law Enforcement Training Center (FLETC) Roadside  Law Enforcement Transportation Security Awareness, and the Hazmat  Motor Carrier Security Self-Assessment Training Project which distributed  security self-assessment training on CDs to approximately 75,000  hazardous materials motor carriers and shippers. Through the Commercial  Truck Insurance Initiative, TSA is coordinating with insurance companies  to develop methods and measures to provide companies incentives to  improve security.\n\nAppendix V: DOT Data on the Commercial Vehicle Industry\n\nDOT maintains data on carriers and commercial vehicles registered with  DOT. However, the data on intrastate operations is incomplete and  unreliable because FMCSA does not have authority to regulate intrastate  operations that are not involved in the transport of hazardous materials.  Firms that operate exclusively within a single state do not have to register  with DOT unless they are in the 25 states that require all commercial  vehicles to register with DOT, or transport hazardous materials. This  means that DOT does not have data on approximately half the nation\u2019s  intrastate carriers. Second, firms frequently do not keep their registrations  current, and as a result the currency and accuracy of DOT\u2019s records are  not assured and many of its registrations are inactive. \u201cInactive\u201d means  that carriers had no inspections, crashes, enforcement actions, compliance  reviews, safety audits, or registration applications with DOT for 3 years.  DOT does not know which firms have gone out of business and which  have simply failed to maintain their registrations. These incomplete data  on the population of commercial vehicle firms will present some  additional challenges to TSA for conducting a truly representative sample  of industry assessments.\n\nAppendix VI: Highway and Motor Carrier GCC Membership List\n\nAppendix VII: Comments from the Department of Homeland Security\n\nAppendix VIII: GAO Contact and Staff Acknowledgments\n\n\tAcknowledgments\n\nGlenn Davis and Robert White, Assistant Directors, and Dan Rodriguez  and Jason Schwartz, Analysts-in-Charge worked with Cathleen Berrick to  manage this assignment. Gary Malavenda made significant contributions  to many aspects of the work. Tracey King provided legal and regulatory  support. Shamia Woods analyzed federal, state, and industry actions.  Jennifer Cooper analyzed TSA\u2019s cooperation efforts. Elizabeth Curda  provided assistance on performance measurement and collaboration.  Anish Bhatt and Joanna Berry helped in the design, methodology, and pilot  test of the incidents of bus and truck bombings. Colleen Candrl helped in  the design and conducted the searches on the incidents of bus and truck  bombings. Evan Gilman, Virginia Chanley, and Anna Maria Ortiz provided  additional design and methodological support.","output":"Why GAO Did This Study\n\nNumerous incidents around the world have highlighted the vulnerability of commercial vehicles to terrorist acts. Commercial vehicles include over 1 million highly diverse truck and intercity bus firms. Within the Department of Homeland Security (DHS), the Transportation Security Administration (TSA) has primary federal responsibility for ensuring the security of the commercial vehicle sector, while vehicle operators are responsible for implementing security measures for their firms. GAO was asked to examine: (1) the extent to which TSA has assessed security risks for commercial vehicles; (2) actions taken by key stakeholders to mitigate identified risks; and (3) TSA efforts to coordinate its security strategy with other federal, state, and private sector stakeholders. GAO reviewed TSA plans, assessments, and other documents; visited a nonrandom sample of 26 commercial truck and bus companies of varying sizes, locations, and types of operations; and interviewed TSA and other federal and state officials and industry representatives.\n\nWhat GAO Found\n\nTSA has taken actions to evaluate the security risks associated with the commercial vehicle sector, including assessing threats and initiating vulnerability assessments, but more work remains to fully gauge security risks. Risk assessment uses a combined analysis of threat, vulnerability, and consequence to estimate the likelihood of terrorist attacks and the severity of their impact. TSA conducted threat assessments of the commercial vehicle sector and has also cosponsored a vulnerability assessment pilot program in Missouri. However, TSA's threat assessments generally have not identified the likelihood of specific threats, as required by DHS policy. TSA has also not determined the scope, method, and time frame for completing vulnerability assessments of the commercial vehicle sector. In addition, TSA has not conducted consequence assessments, or leveraged the consequence assessments of other sectors. As a result of limitations with its threat, vulnerability, and consequence assessments, TSA cannot be sure that its approach for securing the commercial vehicle sector addresses the highest priority security needs. Moreover, TSA has not developed a plan or time frame to complete a risk assessment of the sector. Nor has TSA completed a report on commercial trucking security as required by the Implementing Recommendations of the 9\/11 Commission Act (9\/11 Commission Act). Key government and industry stakeholders have taken actions to strengthen the security of commercial vehicles, but TSA has not assessed the effectiveness of federal programs. TSA and the Department of Transportation (DOT) have implemented programs to strengthen security, particularly those emphasizing the protection of hazardous materials. States have also worked collaboratively to strengthen commercial vehicle security through their transportation and law enforcement officials' associations, and the establishment of fusion centers. TSA also has begun developing and using performance measures to monitor the progress of its program activities to secure the commercial vehicle sector, but has not developed measures to assess the effectiveness of these actions in mitigating security risks. Without such information, TSA will be limited in its ability to measure its success in enhancing commercial vehicle security. While TSA has also taken actions to improve coordination with federal, state, and industry stakeholders, more can be done to ensure that these coordination efforts enhance security for the sector. TSA signed joint agreements with DOT and supported the establishment of intergovernmental and industry councils to strengthen collaboration. TSA and DOT completed an agreement to avoid duplication of effort as required by the 9\/11 Commission Act. However, some state and industry officials GAO interviewed reported that TSA had not clearly defined stakeholder roles and responsibilities consistent with leading practices for collaborating agencies. TSA has not developed a means to monitor and assess the effectiveness of its coordination efforts. Without enhanced coordination with the states, TSA will have difficulty expanding its vulnerability assessments."}
{"id":"gao_GAO-10-133T","pid":"gao_GAO-10-133T_0","input":"\tOJJDP Established the Girls Study Group to Assess the Effectiveness of Girls\u2019 Delinquency Programs\n\nWith an overall goal of developing research that communities need to  make sound decisions about how best to prevent and reduce girls\u2019  delinquency, OJJDP established the Girls Study Group (Study Group) in  2004 under a $2.6 million multiyear cooperative agreement with a research  institute. OJJDP\u2019s objectives for the group, among others, included  identifying effective or promising programs, program elements, and  implementation principles (i.e., guidelines for developing programs).  Objectives also included developing program models to help inform  communities of what works in preventing or reducing girls\u2019 delinquency,  identifying gaps in girls\u2019 delinquency research and developing  recommendations for future research, and disseminating findings to the  girls\u2019 delinquency field about effective or promising programs. To meet  OJJDP\u2019s objectives, among other activities, the Study Group identified  studies of delinquency programs that specifically targeted girls by  reviewing over 1,000 documents in relevant research areas. These included  criminological and feminist explanations for girls\u2019 delinquency, patterns of  delinquency, and the justice system\u2019s response to girls\u2019 delinquency. As a  result, the group identified 61 programs that specifically targeted  preventing or responding to girls\u2019 delinquency. Then, the group assessed  the methodological quality of the studies of the programs that had been  evaluated using a set of criteria developed by DOJ\u2019s Office of Justice  Programs (OJP) called What Works to determine whether the studies  provided credible evidence that the programs were effective at preventing  or responding to girls\u2019 delinquency. The results of the group\u2019s assessment  are discussed in the following sections.\n\n\tOJJDP Efforts to Assess Program Effectiveness Were Consistent with Social Science Practices and Standards, and OJJDP Has Taken Action to Enhance Communication about the Study Group with External Stakeholders\n\nOJJDP\u2019s effort to assess girls\u2019 delinquency programs through the use of a  study group and the group\u2019s methods for assessing studies were consistent  with generally accepted social science research practices and standards.  In addition, OJJDP\u2019s efforts to involve practitioners in Study Group  activities and disseminate findings were also consistent with the internal  control standard to communicate with external stakeholders, such as  practitioners operating programs.\nAccording to OJJDP research and program officials, they formed the Study  Group rather than funding individual studies of programs because study  groups provide a cost-effective method of gaining an overview of the  available research in an issue area. As part of its work, the group  collected, reviewed, and analyzed the methodological quality of research  on girls\u2019 delinquency programs. The use of such a group, including its  review, is an acceptable approach for systematically identifying and  reviewing research conducted in a field of study. This review helped  consolidate the research and provide information to OJJDP for  determining evaluation priorities. Further, we reviewed the criteria the  group used to assess the studies and found that they adhere to generally  accepted social science standards for evaluation research. We also  generally concurred with the group\u2019s assessments of the programs based  on these criteria. According to the group\u2019s former principal investigator,  the Study Group decided to use OJP\u2019s What Works criteria to ensure that  its assessment of program effectiveness would be based on highly rigorous  evaluation standards, thus eliminating the potential that a program that  may do harm would be endorsed by the group. However, 8 of the 18  experts we interviewed said that the criteria created an unrealistically high  standard, which caused the group to overlook potentially promising  programs. OJJDP officials stated that despite such concerns, they  approved the group\u2019s use of the criteria because of the methodological  rigor of the framework and their goal for the group to identify effective  programs.\nIn accordance with the internal control standard to communicate with  external stakeholders, OJJDP sought to ensure a range of stakeholder  perspectives related to girls\u2019 delinquency by requiring that Study Group  members possess knowledge and experience with girls\u2019 delinquency and  demonstrate expertise in relevant social science disciplines. The initial  Study Group, which was convened by the research institute and approved  by OJJDP, included 12 academic researchers and 1 practitioner; someone  with experience implementing girls\u2019 delinquency programs. However, 11 of  the 18 experts we interviewed stated that this composition was  imbalanced in favor of academic researchers. In addition, 6 of the 11 said  that the composition led the group to focus its efforts on researching  theories of girls\u2019 delinquency rather than gathering and disseminating  actionable information for practitioners. According to OJJDP research  and program officials, they acted to address this issue by adding a second  practitioner as a member and involving two other practitioners in study  group activities. OJJDP officials stated that they plan to more fully involve  practitioners from the beginning when they organize study groups in the  future and to include practitioners in the remaining activities of the Study  Group, such as presenting successful girls\u2019 delinquency program practices  at a national conference. Also, in accordance with the internal control  standard, OJJDP and the Study Group have disseminated findings to the  research community, practitioners in the girls\u2019 delinquency field, and the  public through conference presentations, Web site postings, and published  bulletins. The group plans to issue a final report on all of its activities by  spring 2010.\n\n\tThe Study Group Found No Evidence of Effective Girls\u2019 Delinquency Programs; in Response OJJDP Plans to Assist Programs in Preparing for Evaluations but Could Strengthen Its Plans for Supporting Such Evaluations\n\nThe Study Group found that few girls\u2019 delinquency programs had been  studied and that the available studies lacked conclusive evidence of  effective programs; as a result, OJJDP plans to provide technical  assistance to help programs be better prepared for evaluations of their  effectiveness. However, OJJDP could better address its girls\u2019 delinquency  goals by more fully developing plans for supporting such evaluations.\nIn its review, the Study Group found that the majority of the girls\u2019  delinquency programs it identified\u201444 of the 61\u2014had not been studied by  researchers. For the 17 programs that had been studied, the Study Group  reported that none of the studies provided conclusive evidence with which  to determine whether the programs were effective at preventing or  reducing girls\u2019 delinquency. For example, according to the Study Group,  the studies provided insufficient evidence of the effectiveness of 11 of the  17 programs because, for instance, the studies involved research designs  that could not demonstrate whether any positive outcomes, such as  reduced delinquency, were due to program participation rather than other  factors. Based on the results of this review, the Study Group reported that  among other things, there is a need for additional, methodologically  rigorous evaluations of girls\u2019 delinquency programs; training and technical  assistance to help programs prepare for evaluations; and funding to  support girls\u2019 delinquency programs found to be promising.\nAccording to OJJDP officials, in response to the Study Group\u2019s finding  about the need to better prepare programs for evaluation, the office plans  to work with the group and use the remaining funding from the effort\u2014 approximately $300,000\u2014to provide a technical assistance workshop by  the end of October 2009. The workshop is intended to help approximately  10 girls\u2019 delinquency programs prepare for evaluation by providing  information about how evaluations are designed and conducted and how  to collect data that will be useful for program evaluators in assessing  outcomes, among other things. In addition, OJJDP officials stated that as a  result of the Study Group\u2019s findings, along with feedback they received  from members of the girls\u2019 delinquency field, OJJDP plans to issue a  solicitation in fiscal year 2010 for funding to support evaluations of girls\u2019  delinquency programs.\nOJJDP has also reported that the Study Group\u2019s findings are to provide a  foundation for moving ahead on a comprehensive program related to girls\u2019  delinquency. However, OJJDP has not developed a plan that is  documented, is shared with key stakeholders, and includes specific  funding requirements and commitments and time frames for meeting its  girls\u2019 delinquency goals. Standard practices for program and project  management state that specific desired outcomes or results should be  conceptualized, defined, and documented in the planning process as part  of a road map, along with the appropriate projects needed to achieve those  results, supporting resources, and milestones. In addition, government  internal control standards call for policies and procedures that establish  adequate communication with stakeholders as essential for achieving  desired program goals. According to OJJDP officials, they have not  developed a plan for meeting their girls\u2019 delinquency goals because the  office is in transition and is in the process of developing a plan for its  juvenile justice programs, but the office is taking steps to address its  girls\u2019 delinquency goals, for example, through the technical assistance  workshop. Developing a plan for girls\u2019 delinquency would help OJJDP to  demonstrate leadership to the girls\u2019 delinquency field by clearly  articulating the actions it intends to take to meet its goals and would also  help the office to ensure that the goals are met.\nIn our July report, we recommended that to help ensure that OJJDP meets  its goals to identify effective or promising girls\u2019 delinquency programs and  supports the development of program models, the Administrator of OJJDP  develop and document a plan that (1) articulates how the office intends to  respond to the findings of the Study Group, (2) includes time frames and  specific funding requirements and commitments, and (3) is shared with  key stakeholders. OJP agreed with our recommendation and outlined  efforts that OJJDP plans to undertake in response to these findings. For  example, OJJDP stated that it anticipates publishing its proposed juvenile  justice program plan, which is to include how it plans to address girls\u2019  delinquency issues, in the Federal Register to solicit public feedback and  comments, which will enable the office to publish a final plan in the  Federal Register by the end of the year (December 31, 2009).\nMr. Chairman, this concludes my statement. I would be pleased to respond  to any questions that you or other Members of the Subcommittee may  have.\n\n\tContacts and Acknowledgements\n\nFor questions about this statement, please contact Eileen R. Larence at  (202) 512-8777 or larencee@gao.gov. Contact points for our Offices of  Congressional Relations and Public Affairs may be found on the last page  of this statement. Individuals making key contributions to this statement  include Mary Catherine Hult, Assistant Director; Kevin Copping; and  Katherine Davis. Additionally, key contributors to our July 2009 report  include David Alexander, Elizabeth Blair, and Janet Temko.\nThis 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.","output":"Why GAO Did This Study\n\nThis testimony discusses issues related to girls' delinquency--a topic that has attracted the attention of federal, state, and local policymakers for more than a decade as girls have increasingly become involved in the juvenile justice system. For example, from 1995 through 2005, delinquency caseloads for girls in juvenile justice courts nationwide increased 15 percent while boys' caseloads decreased by 12 percent. More recently, in 2007, 29 percent of juvenile arrests--about 641,000 arrests--involved girls, who accounted for 17 percent of juvenile violent crime arrests and 35 percent of juvenile property crime arrests. Further, research on girls has highlighted that delinquent girls have higher rates of mental health problems than delinquent boys, receive fewer special services, and are more likely to abandon treatment programs. The Office of Juvenile Justice and Delinquency Prevention (OJJDP) is the Department of Justice (DOJ) office charged with providing national leadership, coordination, and resources to prevent and respond to juvenile delinquency and victimization. OJJDP supports states and communities in their efforts to develop and implement effective programs to, among other things, prevent delinquency and intervene after a juvenile has offended. For example, from fiscal years 2007 through 2009, Congress provided OJJDP almost $1.1 billion to use for grants to states, localities, and organizations for a variety of juvenile justice programs, including programs for girls. Also, in support of this mission, the office funds research and program evaluations related to a variety of juvenile justice issues. As programs have been developed at the state and local levels in recent years that specifically target preventing girls' delinquency or intervening after girls have become involved in the juvenile justice system, it is important that agencies providing grants and practitioners operating the programs have information about which of these programs are effective. In this way, agencies can help to ensure that limited federal, state, and local funds are well spent. In general, effectiveness is determined through program evaluations, which are systematic studies conducted to assess how well a program is working--that is, whether a program produced its intended effects. To help ensure that grant funds are being used effectively, you asked us to review OJJDP's efforts related to studying and promoting effective girls' delinquency programs. We issued a report on the results of that review on July 24, 2009. This testimony highlights findings from that report and addresses (1) efforts OJJDP has made to assess the effectiveness of girls' delinquency programs, (2) the extent to which these efforts are consistent with generally accepted social science standards and federal standards to communicate with stakeholders, and (3) the findings from OJJDP's efforts and how the office plans to address the findings. This statement is based on our July report and selected updates made in October 2009.\n\nWhat GAO Found\n\nWith an overall goal of developing research that communities need to make sound decisions about how best to prevent and reduce girls' delinquency, OJJDP established the Girls Study Group (Study Group) in 2004 under a $2.6 million multiyear cooperative agreement with a research institute. OJJDP's objectives for the group, among others, included identifying effective or promising programs, program elements, and implementation principles (i.e., guidelines for developing programs). Objectives also included developing program models to help inform communities of what works in preventing or reducing girls' delinquency, identifying gaps in girls' delinquency research and developing recommendations for future research, and disseminating findings to the girls' delinquency field about effective or promising programs. OJJDP's effort to assess girls' delinquency programs through the use of a study group and the group's methods for assessing studies were consistent with generally accepted social science research practices and standards. In addition, OJJDP's efforts to involve practitioners in Study Group activities and disseminate findings were also consistent with the internal control standard to communicate with external stakeholders, such as practitioners operating programs. The Study Group found that few girls' delinquency programs had been studied and that the available studies lacked conclusive evidence of effective programs; as a result, OJJDP plans to provide technical assistance to help programs be better prepared for evaluations of their effectiveness. However, OJJDP could better address its girls' delinquency goals by more fully developing plans for supporting such evaluations."}
{"id":"gao_GAO-01-749","pid":"gao_GAO-01-749_0","input":"\tBackground\n\nFor more than 30 years, federal law has provided comprehensive health coverage for low-income children through Medicaid. The children eligible for such care have made up a significant and growing portion of the nation\u2019s population, as eligibility for Medicaid benefits has expanded to cover increasing numbers of previously uninsured children. In 1998, Medicaid covered more than one-third of young children ages 0 through 5, and more than one-fourth of children under age 21 (see figure 1). The 21 million children covered by Medicaid that year composed slightly more than half of the 41 million people in the program while the $32 billion spent for their care was about 23 percent of the $142 billion spent on the program by the federal government and states.\nAn increasing number of children are also becoming eligible for EPSDT services, as federal policy designed to cover the growing number of uninsured children allows states to provide Medicaid services through the federally supported State Children\u2019s Health Insurance Program (SCHIP). To implement SCHIP, states have the option of expanding their Medicaid programs, developing separate SCHIP programs, or doing some combination of both. If a state elects Medicaid expansion, it must offer the same comprehensive benefit package, including EPSDT services, to SCHIP beneficiaries as it does to Medicaid beneficiaries. In 2000, more than 1 million children were enrolled in SCHIP Medicaid expansion programs and were therefore also eligible for EPSDT services.\n\n\t\tEPSDT Services Under Medicaid Are Comprehensive\n\nAlthough many coverage, eligibility, and administrative decisions are left to individual states, the federal government sets certain requirements for state Medicaid programs. Coverage of screening and necessary treatment for children is one of these requirements. EPSDT components are designed to target health conditions and problems for which growing children are at risk, including iron deficiency, obesity, lead poisoning, and dental disease. They are also intended to detect and correct conditions that can hinder a child\u2019s learning and development, such as vision and hearing problems. For many children, especially those with special needs because of disabilities or chronic conditions, EPSDT is an important help in identifying the need for essential medical and supportive services, and in making these services available.\nThe federally required EPSDT components that constitute an EPSDT \u201cscreen\u201d include a comprehensive health and developmental history, a comprehensive unclothed physical exam, appropriate immunizations, laboratory tests (including a blood lead-level assessment), and health education. Other required EPSDT services include   vision services, including diagnosis, treatment, and eyeglasses;   dental services, including relief of pain and infections, restoration, and   hearing services, including diagnosis, treatment, and hearing aids; and   services for other conditions discovered through screenings, regardless of whether these services are typically covered by the state\u2019s Medicaid plan for other beneficiaries.\nWhile state Medicaid programs must cover EPSDT, they have some flexibility in determining the frequency and timing of screens. States develop, in consultation with recognized medical and dental organizations, their own \u201cperiodicity schedules,\u201d which contain age-specific timetables that identify when physical examinations and certain laboratory tests and immunizations should occur. These tables vary somewhat from state to state. For example, the number of recommended EPSDT screens ranged from 15 to 29 across the five states we visited (see table 1).\n\n\t\tThe Growth of Medicaid Managed Care\n\nStates have increasingly turned to managed care as a way to deliver Medicaid services, including EPSDT. From 1991 to 1999, the proportion of all Medicaid beneficiaries enrolled in managed care\u2014either capitated or in primary care case management models\u2014rose from about 10 percent to about 56 percent. Only two states do not have at least some Medicaid beneficiaries in managed care plans.\nManaged care, with its emphasis on preventive and primary care, is philosophically an ideal model for delivering EPSDT-type services. Under a capitated managed care model, states contract with managed care plans, such as health maintenance organizations, and pay a fixed monthly fee per Medicaid enrollee (a capitated fee) to provide most medical services. This model, with its fixed prospective payment for a package of services, creates an incentive for plans to provide preventive and primary care to reduce the chance that beneficiaries will require more expensive treatment services in the future. However, capitated managed care can also create a financial incentive to underserve or deny beneficiaries access to needed care. Moreover, Medicaid beneficiaries required to enroll in managed care may find it difficult to seek alternative care if their plan providers fail to meet their needs. Because of the potential to underserve, states must build in safeguards and accountability measures, such as grievance and appeals processes, to ensure that beneficiaries receive appropriate care.\nThe Congress has given states greater flexibility in moving Medicaid beneficiaries into mandatory managed care plans. Before the Balanced Budget Act (BBA) of 1997, a state could require Medicaid beneficiaries to enroll in managed care only if it first obtained approval from HCFA to waive certain statutory provisions, such as the freedom to choose providers. Under HCFA waivers, states have implemented a variety of mandatory managed care programs, ranging from programs serving limited populations in just a few counties to state-wide programs covering all Medicaid beneficiaries, including children with special needs. The BBA gave states new flexibility in implementing mandatory Medicaid managed care programs, allowing them to implement programs through an amendment to their state Medicaid plan without first obtaining a HCFA waiver.\n\n\t\tStates Are Required to Report on the Delivery of EPSDT Services\n\nThe Omnibus Budget Reconciliation Act of 1989 (OBRA 89) made significant changes to improve the provision of EPSDT services to children in Medicaid. It required that the Secretary of HHS set state- specific annual goals for children\u2019s participation in EPSDT; mandated state-established periodicity schedules for screening in dental, vision, and hearing services; required blood lead assessments appropriate for age and risk factors; and imposed new reporting requirements.\nTo fulfill the state-specific goal requirement, in 1990 HCFA set a participation goal of 80 percent by 1995 for every state. To measure progress towards participation goals and in accordance with the OBRA 89 requirement that states report certain EPSDT statistics, HCFA required, starting in 1990, that states submit annual EPSDT reports (known as the form 416). The EPSDT report captures, by age group, the number of children who (1) received EPSDT health screens; (2) were referred for corrective treatment; (3) received dental treatment or preventive services; and (4) were enrolled in managed care plans. Since fiscal year 1999, states also are required to report the number of blood tests provided to screen children for lead poisoning.\n\n\t\tLegal Settlements Highlight Challenges in Many States\n\nLawsuits have been filed in many states alleging shortcomings in the provision of EPSDT services. According to information from the National Health Law Program, at least 28 states have been sued by beneficiaries or advocates since 1995 for failing to provide required access to EPSDT services. These lawsuits range from single-issue suits\u2014such as coverage of selected services including mental health services in Maine\u2014to alleged programwide failures and deficiencies in Texas, Tennessee, and Washington, D.C. In several instances, the outcomes, including court orders and settlements agreed to by both parties to remedy known concerns, illustrate the difficulties states have encountered in providing services and also suggest strategies to remedy established EPSDT deficiencies.\n\n\tLimited Available Data Indicate Many Children Do Not Receive EPSDT Services\n\nDespite statutory reporting requirements, reliable national data are not available on the extent to which children in Medicaid are receiving EPSDT services. However, a number of studies of limited scope indicate that many children in Medicaid are not receiving EPSDT services. These studies also show that several factors are at work in limiting the successful delivery of EPSDT services. Some factors are program-related, such as a lack of providers or systems to ensure access to covered services. Others are related to beneficiaries themselves, such as the beneficiaries\u2019 lack of awareness about the importance of preventive health care and about services covered, or their difficulty in maintaining continuity of care with one provider.\n\n\t\tReliable and Comprehensive National Data Do Not Exist\n\nHCFA\u2019s efforts to assemble reliable information about EPSDT participation in each state have so far been unsuccessful. State-reported data, upon which HCFA depends, are often not timely or accurate. For example, states were required to submit their fiscal year 1999 reports by April 1, 2000. As of January 2001, 15 states had not submitted their 1999 reports and another 15 states\u2019 reports had been returned by HCFA because they were deficient. HCFA and state officials acknowledge long-standing difficulties that states face in their efforts to collect complete and reliable data, which are used as the basis for the EPSDT reports. These difficulties continue despite HCFA\u2019s attempts to improve the reliability of state EPSDT reports by revising the report format and guidance.\nOne reason for the continued difficulty involves collecting data on EPSDT services provided under managed care. Under the more traditional fee-for- service approach, data on service delivery are often relatively easy to collect as part of the payment process because states pay providers for each service for which they bill the state. Under capitated managed care, however, states pay the managed care plan a prospective monthly per- enrollee fee that is not tied to the individual services provided. As a result, data on service utilization (often referred to as \u201cencounter data\u201d) are not necessarily captured. Instead, states have to rely on managed care plans to collect and report these data separately. Managed care plans, particularly those that also pay their participating providers on a capitated basis, often have difficulty collecting and reporting complete and accurate data.\nStates face continuing challenges in determining how to minimize the administrative burden on managed care plans and providers while still collecting information at the level needed to administer the program. For example, to facilitate the collection of EPSDT data, California uses a special EPSDT form for providers to use in documenting the components of EPSDT services provided. California\u2019s managed care contracts also call for managed care plans to collect the EPSDT forms from their providers and submit detailed encounter data to the state. However, the state has had difficulty enforcing these requirements across the several layers of contractors involved in its managed care delivery system. For example, in the Los Angeles area, the state contracts with two large managed care organizations that subcontract with multiple commercial and nonprofit health plans, such as Blue Cross, that further subcontract with a network of providers. Most of these contracts are on a capitated basis. State officials said that some of the health plans had difficulty collecting the required encounter data and that one plan had never submitted the required data. Also, they said that capitated providers of health plans had little incentive to fill out and submit the EPSDT form because their payments are not linked to it. The state\u2019s Medicaid agency has not imposed sanctions against noncompliant plans or providers, restrained in part by its reluctance to lose any providers given the shortage of providers willing to serve children in Medicaid.\nAlthough problems are more extensive with managed care data than with fee-for-service data, most of the states we visited had some difficulty obtaining complete and accurate data from fee-for-service providers as well. Florida illustrates the kinds of difficulties that can be encountered. Providers in Florida are required to use a specific EPSDT code and a claim form to document the components of EPSDT services they provide. However, according to state officials, providers often choose to use other codes instead. For example, providers may submit a claim under a comprehensive office-visit code for a new patient that pays a higher rate than an EPSDT screen or they may submit claims under other comprehensive office-visit codes that require less documentation.\nCompounding these difficulties are limitations in claims processing systems used by states for fee-for-service programs or by managed care plans. In Florida, for example, if a child receives laboratory work from one provider and the remaining components of a screening from another provider, some managed care plans\u2019 data systems do not combine the services to correctly reflect that a full screening for the child has been provided. Similarly, some states have problems tracking referrals and follow-up treatment services. This tracking difficulty may explain why, in HCFA\u2019s 1998 compilation of state reports, seven states reported that no children had been referred for corrective treatments.\n\n\t\tSome Studies Show Screening Rates Are Low\n\nWhile HCFA\u2019s data cannot present a reliable and comprehensive picture of the extent to which children in Medicaid receive EPSDT services, other studies indicate that many of these children are not receiving such services. These other studies have been narrow in scope, allowing analysts to overcome the kinds of problems that so far have thwarted attempts to gather comprehensive data. They have focused on specific EPSDT services or reviews of a sample of patients\u2019 medical records. For example, in recent years we have conducted reviews of screening rates for lead poisoning and dental care, basing our analysis primarily on data from national health surveys. Both studies found low screening rates for these specific services among low-income populations served by Medicaid. For lead poisoning, about 19 percent of children in Medicaid aged 1 through 5 were screened\u2014a serious concern, because these children are almost five times more likely than others to have a harmful blood lead level. The screening rate for potential dental problems was similar, with about 21 percent of low-income children aged 2 to 5 having had a dental visit in the previous year. Older children fared somewhat better, with 36 percent of low-income children aged 6 to 18 having had a dental visit within the previous year.\nStudies by others have shown similar results. A 1997 study by HHS\u2019 Office of Inspector General, which examined a sample of 338 children\u2019s medical records from 12 health plans in 10 states, estimated that only 28 percent of children enrolled in Medicaid managed care received all prescribed EPSDT screens and that 60 percent received no screens at all. In several states, organizations responsible for external quality review of the Medicaid program have conducted sample medical record reviews of children enrolled in fee-for-service programs as well as those in managed care, and they have found similar results. For example, a study by Minnesota\u2019s external quality review organization found that nearly half of the children in managed care plans whose files were reviewed had not visited a clinic in the previous year, and only 6 percent of those due for an EPSDT screen had received a comprehensive screen. A study in Washington State found that for the sampled files of children in managed care, 32 percent of infants (birth to 15 months) and 20 percent of children age 3 to 6 years received screenings for all aspects of EPSDT. The screening rates for children in fee-for-service care were also low\u20147 percent for infants and 24 percent for children age 3 to 6 years.\n\n\t\tSeveral Factors Contribute to Children Not Receiving Services\n\nStudies such as those cited above have collectively identified a number of reasons why many children in Medicaid are not receiving EPSDT services. Some of these reasons involve program-related matters, such as limited provider participation in Medicaid. For example, low provider participation in Medicaid has been noted as a particular problem in dental and mental health. Our earlier study found that a shortage of dentists willing to treat Medicaid patients was the major factor contributing to the low use of dental services. Similarly, a study by the Economic and Social Research Institute for the Kaiser Commission on Medicaid and the Uninsured found shortages of mental health and substance abuse professionals willing to treat Medicaid patients.\nOther program-related factors include inadequate methods for ensuring access to services. Our study of lead screening found problems with providers\u2019 missing opportunities to perform follow-up tests when children returned for other care. Lawsuits brought in a number of states have also highlighted such problems as inadequate systems for informing beneficiaries about the availability of EPSDT services and poor coordination by managed care plans and state agencies. Several advocacy groups we interviewed echoed concerns that states and managed care plans do not adequately inform beneficiaries about the broad scope of EPSDT services or about beneficiary appeal rights. These groups also questioned the adequacy of the provider networks for serving children in Medicaid.\nIn addition to these program-related factors, some beneficiary-related factors have also been found to limit screening services. For example, many Medicaid beneficiaries change eligibility status over short periods of time, and they may move frequently, making it more difficult to maintain continuity in their medical care. Researchers have also found that parents whose children are eligible to receive services under Medicaid tend to be less aware of the importance of preventive care than the general population. Those who try to obtain preventive care face other barriers. In our reports on oral health and screening for lead poisoning, we noted several other contributing factors, such as difficulty in getting time off from work, finding child care, arranging transportation to the provider, and overcoming language differences. These factors may contribute to a higher rate of broken appointments\u2014a major concern among providers, particularly dentists. An American Dental Association survey reported that about one-third of Medicaid patients failed to keep appointments. A 1999 study conducted for the Florida Medicaid agency found that the top three reasons given by survey respondents for missing pediatric appointments were not having a ride to the appointment, the child no longer being sick, and forgetting an appointment.\n\n\tStates Have Taken Action to Improve Data Reporting and Delivery of EPSDT Services\n\nThe five states we visited have implemented a variety of initiatives intended to improve the provision of EPSDT services to children in Medicaid, including those in managed care. The state and health plan efforts we identified fall into three general categories: (1) improving data; (2) better ensuring that plans deliver services; and (3) improving beneficiary outreach and education. Although in most cases states and health plans could not provide information on their specific impact, these initiatives represented efforts that state and plan officials cited as helping to better ensure that children receive EPSDT services.\n\n\t\tImproved Data Reporting\n\nThe five states we visited have taken a number of steps to improve the quality of the data they collect\u2014especially from managed care programs\u2014 to monitor the utilization of services and to compile EPSDT reports to HCFA. These steps have not yet solved the states\u2019 data and reporting problems; however, by moving toward more timely and reliable encounter data, states can better assess progress toward participation goals, identify specific plans or providers experiencing problems, and target corrective measures. As table 2 shows, these steps involve four main types of actions: requiring plans to submit detailed encounter data, validating those data, linking data with other sources, and reporting summary data in print or on the Internet. For example, to encourage health plans to report complete and accurate data, and to publicize comparative data, New York publishes summary statistics on individual plans on its health department Web site.\nThese states\u2019 experiences demonstrate that gathering complete and reliable encounter data is a long-term effort. Wisconsin, for example, worked collaboratively with capitated managed care plans for 4 years to formulate a uniform encounter data set and reporting system that all plans are required to use. Wisconsin\u2019s system did not become functional until May 2000 and has not yet produced its first report to HCFA. New York has required managed care plans to submit encounter data for the past 6 years, but state Medicaid officials said the first few years of data were unreliable. The data became more reliable around the fourth year, after state officials worked with health plans to improve their data collection and verification efforts.\n\n\t\tEnsuring Service Delivery\n\nStates have also put into action a number of initiatives to help ensure that managed care plans and health providers deliver screening and treatment services to children enrolled in Medicaid. The broad package of benefits offered under EPSDT can result in confusion and potential under-service if health plans and providers are not clearly informed of their responsibilities to provide EPSDT services. In California, for example, officials said some health plans were not performing screens according to the state\u2019s managed care periodicity schedule. Plan providers were confused, they said, because the state\u2019s Medicaid fee-for-service periodicity schedule called for fewer screens than its managed care periodicity schedule (15 compared to 27) and physicians often served both fee-for-service and managed care patients. In addition, a recent HCFA- sponsored study of Medicaid managed care contracts in more than three dozen states found that states often fail to spell out the full range of EPSDT services that plans are responsible for providing. The study concluded, among other things, that while states routinely expect managed care plans to provide the full range of EPSDT service obligations, they do not always explain in contracts what this means and may not require contractors to educate beneficiaries about the benefit package offered under EPSDT.\nTo better ensure EPSDT service delivery, the states we visited have taken action in several areas (see table 3). Some of these actions have involved states\u2019 laying out expectations for managed care plans or providers through extensive specification of responsibilities in contracts or provider education. Other actions have involved the monitoring of health plans, the use of incentives and sanctions for provision of services, and requirements for plans to coordinate care with public health departments. States have also increased reimbursement rates for EPSDT services. For example, in 1995, to encourage fee-for-service providers to screen more children, Florida more than doubled its reimbursement rate for a comprehensive EPSDT screen. The examples in table 3 represent a few of the promising actions these states and health plans have implemented.\n\n\t\tImproving Beneficiary Outreach and Education\n\nThe third area in which states have taken action is in educating and encouraging parents to better ensure that their children receive EPSDT services. Beneficiary outreach and education is typically a responsibility shared between the states and the health plans. At certain times in the process, the states may have primary responsibility for informing beneficiaries about covered services, such as when new beneficiaries are enrolled. Once a beneficiary is enrolled in a health plan, the state may require the plan to take measures to inform parents and families about covered services and how to access them. Officials from states and plans we visited reported a number of initiatives to better inform beneficiaries about EPSDT services (see table 4). These generally fell into four categories: designing clear and informative member handbooks, creating helpful and easy-to-understand materials to supplement member handbooks, developing programs to reach special populations such as children with disabilities, and conducting community outreach activities. For example, to encourage Medicaid beneficiaries, including those in managed care, to take advantage of preventive care, Florida mails reminder letters to families when their children are due for EPSDT screens.\nIn addition to these efforts in the five states we visited, children\u2019s advocates also informed us that several states have implemented initiatives as part of settlement agreements arising from EPSDT-related lawsuits. Settlement documents and court orders from selected EPSDT lawsuits contain information on a number of state initiatives to improve delivery of EPSDT services. For example, Pennsylvania established a series of 18 performance standards and health outcome measures and incorporated them into managed care contracts. Standards and interim targets were established for the percentage of children to receive immunizations and EPSDT screens, and measures were established for treatment and prevention of asthma, anemia, and lead poisoning. Appendix II contains further information on the basis for selected lawsuits and actions taken by states in response.\n\n\tHCFA Efforts to Ensure Children\u2019s Access to EPSDT Have Been Limited\n\nHCFA, now called CMS, is currently reevaluating how best to carry out its role in helping to ensure that children receive access to EPSDT services. In recent years, HCFA\u2019s efforts have focused largely on trying to improve the guidance to states about reporting the extent to which children are being screened. Attempts to improve reporting have been time-consuming, and progress has been slow. Because HCFA\u2019s focus has been mainly on improving the format and specificity of the state EPSDT reports, it has placed little emphasis on the extent to which states are improving the underlying data or meeting HCFA\u2019s EPSDT participation goals. At the regional office level, where much of the responsibility for working with states resides, a few offices have begun to help states identify problems and promote state progress in increasing children\u2019s use of services. However, because most regional offices have focused their resources on priorities other than EPSDT, these efforts have not been widespread. In January 2001, HCFA\u2019s central office proposed to regional offices and other stakeholders that the agency work more closely with states to improve both reporting and children\u2019s use of services, but a specific plan for how to do so has not yet been developed.\n\n\t\tHCFA Is Acting to Improve State Reports, but Progress in Improving the Underlying Data Is Slow\n\nRecognizing that progress in providing services is difficult to assess without good data as a starting point, HCFA has centered its monitoring efforts largely on revising the guidance and format in order to improve state EPSDT reports. These revisions were largely aimed at capturing more reliable and more consistent EPSDT information while minimizing the burden on states in completing the reports. For example, in 1999 HCFA changed the EPSDT report to, among other revisions, require new information on dental services and blood lead tests, and to add more precise definitions of certain required data elements. It also allowed states to use their own periodicity schedules to determine their participation and screening rates.\nWhile these revisions have changed the reporting requirements, they have done little to address the continuing difficulties states face in their efforts to gather reliable and complete data. As our review of the five states showed, these problems require determined efforts at the state level, and because of the complexities associated with collecting managed care encounter data, such efforts take considerable time to accomplish. In the meantime, these EPSDT reports do not provide an accurate or complete picture of most state EPSDT programs, nor do they allow for reasonable national estimates of EPSDT screening and participation rates or for meaningful comparisons between states.\nAlthough HCFA\u2019s efforts to improve data collection are important, by themselves they do not represent a strategy for helping states meet EPSDT goals. In part because HCFA acknowledges the limitations of the state EPSDT reports, the agency has done little to address how well states are doing in meeting the goal of providing EPSDT services to 80 percent of children enrolled in Medicaid. The existing reports show that most states are considerably below this goal. However, even if issues regarding data and reporting are adequately addressed, improved EPSDT reports, taken alone, will not provide HCFA with sufficient program detail to perform other oversight duties, such as helping states identify and correct specific problems or share information on lessons learned from other states and model state practices.\n\n\t\tStudies by Some Regional Offices Have Identified Areas for Improvement and Innovative Practices\n\nA few HCFA regional offices have conducted reviews of state EPSDT programs. HCFA regional officials reported to us that eight such studies have been completed since 1995. Four included EPSDT as one element of a broader review of a state\u2019s Medicaid managed care program; four focused exclusively on EPSDT. While these EPSDT and managed care assessments varied widely in their methodology and coverage of EPSDT issues, they have helped illuminate policy and process concerns and innovative practices of states. They have also identified needed actions to improve children\u2019s access to EPSDT care. For example: In Oklahoma, an EPSDT-focused study conducted jointly by HCFA\u2019s Dallas Regional Office and state Medicaid officials found several ways to increase screening and improve the quality of data submitted. The team found that providers relied on a review of a child\u2019s medical chart to determine whether an EPSDT screen was due\u2014a step they generally took only when an office visit occurred. As a result, children not visiting for other reasons were often not screened. The study recommended that the state establish a system to notify providers when children were due for screens. The study team also found that Medicaid provider knowledge of EPSDT services varied widely, and that many providers did not know about a monetary bonus the state offered to those providers who increased, to 60 percent or more, the proportion of eligible children who had EPSDT screens. To increase provider awareness, the study team recommended that the state annually include a discussion of EPSDT at provider education meetings. In California, an EPSDT-focused study conducted by HCFA\u2019s San Francisco Regional Office with the cooperation of state Medicaid officials found that families of children in Medicaid were not being effectively informed about the availability of services or how to gain access to them.\nState officials who responded to the report\u2019s findings acknowledged the need for a more cohesive effort to provide information about EPSDT services, and they indicated that the state would work to ensure that systems are in place to provide adequate information to families of children in Medicaid. The same HCFA study also singled out commendable practices including state efforts to coordinate care between Medicaid managed care plans and community health providers such as county mental health centers. In Michigan, a review of the state\u2019s Medicaid managed care program conducted by HCFA\u2019s Chicago Regional Office and others included an assessment of certain EPSDT policies and processes. These included EPSDT-covered services; processes and responsibilities for outreach, informing, and providing transportation services to beneficiaries; provider access and coordination; data reporting; and the achievement of screening goals. The review contained observations such as problems the state was having in collecting reliable data for the state EPSDT reports and differences in the usefulness of health plan member handbooks for describing how beneficiaries can obtain transportation services covered under EPSDT. Stated goals of the review were to gather information that would be useful in improving access and quality in the managed care program and to identify areas of innovation and best practices that could be shared with other states.\nWhile these assessments have helped those state programs that were reviewed and have identified best practices that might be applicable to other states, HCFA has reviewed only eight states since 1995 and has not established a mechanism for sharing lessons learned or innovative practices already in place among states. Since there is no HCFA requirement to periodically focus on and promote EPSDT on the state level, the decision to do so resides with management of each HCFA region. Most regions have not devoted resources to actively monitor or promote EPSDT. Some regional office staff cited other priority efforts, such as SCHIP, as diverting their resources. We found that regions typically have one staff person designated as EPSDT Coordinator, but with multiple responsibilities other than EPSDT.\n\n\t\tRecent HCFA Proposal Aims to Improve EPSDT Performance, but Specific Plan Is Not Yet Developed\n\nHCFA has recently begun to reevaluate the adequacy of its role in EPSDT. In a January 2001 letter to the agency\u2019s regional offices, HCFA\u2019s Director of the Center for Medicaid and State Operations introduced a proposal to broaden the agency\u2019s role in promoting state EPSDT activities. In the letter, the Director sought input to a proposal designed to assure children\u2019s access to services under the Medicaid program and to assist states in addressing problems in the collection and reporting of state EPSDT data.\nHCFA officials told us that the goal of the letter was to obtain stakeholder comments on what HCFA\u2019s focus and direction should be. As of April 2001, HCFA regional staff had reviewed and commented on the letter, as had representatives from the American Academy of Pediatrics, officials from HHS\u2019s Health Resources and Services Administration, and the Maternal and Child Health Technical Advisory Group (an advisory group made up of 6 to 10 state Medicaid directors). HCFA officials informed us that stakeholder reaction to the proposed initiative had generally been positive. The current chair of the Maternal and Child Health Technical Advisory Group told us that the general tone of the letter represents a collaborative, partnership approach that would provide for needed technical assistance while affording the flexibility needed for states to address conditions and impediments unique to each state.\nIt is too early to determine whether this initiative will move forward, what form it will take, or what might result from it. The agency has not yet established a plan or devoted resources to develop and implement this proposal. HCFA officials said that they were continuing to solicit comments and input from stakeholders to develop a plan and that decisions about resources and implementation would depend on guidance and direction on agency priorities.\n\n\tConclusions\n\nMore than a decade ago, the Congress passed legislative changes to help ensure that millions of low-income children under Medicaid have access to important health screening and treatment services. In the years since then, the Congress has placed even more emphasis on providing a health care safety net by expanding coverage to more and more children who do not have health insurance. This safety net, however, cannot be considered fully in place unless there are assurances that the covered health care services are actually provided. Unfortunately, reported data are unreliable and incomplete. They are inadequate for gauging Medicaid\u2019s success in providing screening, diagnostic, and treatment services to enrolled children. Particularly for children served by managed care plans\u2014a growing segment of the population\u2014current information does not allow a thorough assessment of progress. However, the available information indicates that many children are still not receiving health screening services. Recognizing this concern, some states are taking a more active role in identifying ways to reach the at-risk population served by Medicaid.\nHCFA, now called CMS, has recently indicated increased emphasis on EPSDT services and can build on these state efforts in several ways while still giving states the flexibility to administer the program. One way is to continue the important task of working with states to improve the reporting of information on service delivery. Many providers, plans, and states will need to improve their reporting in the long-term so that there will be a more accurate picture of how well they are doing in providing these services, especially in a capitated managed care environment. In the short-term, CMS can take action to obtain a better understanding of the many different state policies and practices so it can work collaboratively with states to improve data and reporting, monitor the provision of services, and better inform and reach beneficiaries. In its position of setting federal policy and assessing a broad array of state activities intended to help reach at-risk Medicaid children, CMS can help build on successful efforts by sharing successes among states and working with the many different agencies and parties to ensure a coordinated approach to this care. By signaling a broadening of its interest in state EPSDT efforts, the agency has taken a positive first step. An important next step is for CMS to develop a more specific plan and time frames for working with states to assess their efforts and results in providing services to children in Medicaid.\n\n\tRecommendations for Executive Action\n\nTo strengthen the federal role in ensuring the delivery of EPSDT services and to bring greater visibility to ways that states can better serve children in Medicaid, we recommend that the Administrator of CMS:   work with states to develop criteria and time frames for consistently assessing and improving EPSDT reporting and the provision of services, including requiring that states develop improvement plans as appropriate for achieving the EPSDT goal of providing health services to children in Medicaid; and   develop a mechanism for sharing information among states on successful state, plan, and provider practices for reaching children in Medicaid.\n\n\tAgency Comments\n\nWe obtained comments on a draft of this report from CMS and the five states we visited. CMS commented that, as noted in the draft report, the problem is complex and not subject to an easy resolution (CMS\u2019s comments are included in app. III). CMS agreed that more could be done to work with states to help ensure children\u2019s access to services and compliance with federal requirements and stated that the agency\u2019s regional offices are already starting to work with some states where problems exist. CMS partially agreed with our recommendation that it work with states to develop criteria and time frames for assessing and improving EPSDT reporting and the provision of services, including developing state-specific improvement plans for achieving EPSDT goals. While acknowledging the importance of working with states to improve the provision of services, CMS indicated that it was not certain that improvement plans for all states were necessary as part of this effort. Because of the unreliability of EPSDT reports, we believe that a more consistent assessment across all states is necessary to provide greater insight into states\u2019 progress in achieving EPSDT goals. Depending on the assessment outcomes, improvement plans may not be needed for every state. We have clarified our recommendation accordingly. CMS agreed with our recommendation that the agency do more to foster information sharing and cooperation among states to improve EPSDT. The agency indicated that, as a first step, it is planning several activities with states, foundations, and others to promote the value of EPSDT services. The agency also provided technical comments that we incorporated where appropriate.\nCalifornia and Connecticut reviewed our findings concerning their state programs and said they had no comments. Florida, New York, and Wisconsin provided technical comments, which we incorporated where appropriate. New York also commented that the draft did not acknowledge that compliance rates with screening requirements are uniformly low, even for children not in Medicaid, and stated that EPSDT expectations may not be realistic. While some available reports, such as our past work on lead and dental screening, do show low screening rates in the aggregate, these reports also show wide variations among states. Because available data are insufficient to gauge states\u2019 progress in providing EPSDT services, assessing whether the agency\u2019s 80 percent screening goal is realistic is difficult. We anticipate that once state EPSDT data are more reliable, CMS will be in a better position to reevaluate whether the annual screening goals that it set more than a decade ago are realistic and achievable. New York also commented that the shortfalls in the provision of recommended levels of preventive health services identified in the report apply to all children, not just those served by Medicaid. Rather than perform a comparative analysis of the provision of services for children in Medicaid versus others, this report focused on the provision of EPSDT services to children in Medicaid, which our past work, as well as the work of others, has shown to be an at-risk population. New York\u2019s comments are included in appendix IV.\nAs arranged with your offices, unless you release its contents earlier, we plan no further distribution of this report until 30 days after its issuance date. At that time, we will send copies to the Secretary of Health and Human Services; the Administrator of CMS; appropriate congressional committees; and other interested parties.\nIf you or your staff have any questions about this report, please contact me at (202) 512-7118. Other contacts and major contributors are included in appendix V.\n\nAppendix I: Profiles of the Five States Visited\n\nTo obtain information about efforts states were taking to improve EPSDT services, particularly within managed care, we visited five states. These states\u2014California, Connecticut, Florida, New York, and Wisconsin\u2014were selected to represent different regions of the country and because they had relatively high numbers of children in managed care or a reputation for having an innovative EPSDT program or both. These states differed greatly in the size of their Medicaid populations and the number of participating health plans. Table 5 contains background information on the states we visited.\n\nAppendix II: Examples of State Actions Resulting From EPSDT Legal Settlement Agreements\n\nLawsuits have been filed in at least 28 states alleging the states had failed to adequately provide EPSDT services. The seven cases summarized in table 6 were suggested by the National Health Law Program\u2019s Director of Legal Affairs and other EPSDT advocates as examples of states that have adopted innovative or promising EPSDT practices as a result of lawsuits. The following information reflects our review of relevant court documents in each of these cases and, in some instances, follow-up contacts with state officials to obtain further information about the state\u2019s efforts.\n\nAppendix III: Comments From the Centers for Medicare and Medicaid Services\n\nAppendix IV: Comments From the State of New York Department of Health\n\nAppendix V: GAO Contacts and Staff Acknowledgments\n\n\tGAO Contacts\n\n\tStaff Acknowledgments\n\nOther major contributors to this report were Matthew Byer, Bruce Greenstein, Sophia Ku, Behn Miller, and Stan Stenersen.","output":"Why GAO Did This Study\n\nThe Early and Periodic Screening, Diagnostic, and Treatment (EPSDT) Program calls for states to provide children and adolescents under age 21 with access to comprehensive, periodic evaluations of health, development, and nutritional status, as well as vision, hearing, and dental services. There is concern that state Medicaid programs are not doing an adequate job of screening children for medical conditions or providing treatment for the children who need it. There is also concern about how these services are faring under managed care plans. This report examines (1) the extent to which children in Medicaid are receiving EPSDT services, (2) efforts that selected states are taking to improve delivery of EPSDT services, particularly within managed care, and (3) federal government efforts to ensure that state Medicaid programs provide covered EPSDT services.\n\nWhat GAO Found\n\nGAO found that the extent to which children in Medicaid are receiving EPSDT services are not fully known, but the available evidence indicates that many are not receiving these services. A Department of Health and Human Services Office of Inspector General study found that less than one-half of enrolled children in their sample received any EPSDT screens. GAO found that states are taking actions to improve delivery of EPSDT services, particularly within managed care. These actions include linking several state databases, publishing statistics that compare performance, contracting with local health departments to coordinate care for children, and mailing reminder letters to parents. Federal efforts to ensure that children are receiving services have largely focused on changing the state reports so that they can collect reliable information about the extent of the EPSDT screening."}
{"id":"gao_GAO-16-513","pid":"gao_GAO-16-513_0","input":"\tBackground\n\nInformation security is a critical consideration for any agency that  depends on information systems and computer networks to carry out its  mission and is especially important for a federal agency such as FDA,  which collects, processes, and stores sensitive information on drugs and  other products pending approval; the safety of food, drug, and medical  products; and scientific research to inform regulatory decisions. While the  use of interconnected electronic information systems allows the agency to  accomplish its mission more quickly and effectively, this also exposes  FDA\u2019s information to threats from sources internal and external to the  agency. Internal threats can include errors, as well as fraudulent or  malevolent acts by employees or contractors working within the agency.  External threats include the ever-growing number of cyber-based attacks  that can come from a variety of sources, including hackers, criminals,  foreign nations, terrorists, and other adversarial groups.\nPotential cyber attackers have a variety of techniques at their disposal,  which can vastly enhance the reach and impact of their actions. For  example, these attackers do not need to be physically close to their  targets, their attacks can easily cross state and national borders, and they  can more readily preserve their anonymity. Additionally, advanced  persistent threats\u2014where an adversary that possesses sophisticated  levels of expertise and significant resources can use physical and cyber  methods to achieve its objectives\u2014pose increasing risks. Further, the  interconnectivity among information systems presents increasing  opportunities for such attacks.\nThis risk is highlighted by the rising number of reported security incidents  at federal agencies. Specifically, the number of incidents reported by  federal agencies to the United States Computer Emergency Readiness  Team (US-CERT) has increased dramatically in recent years. It rose  from 5,503 in fiscal year 2006 to 77,183 in fiscal year 2015.\nCompounding the growing number and types of threats are the  deficiencies in security controls on the information systems at federal  agencies. These weaknesses have resulted in vulnerabilities in systems  and information and continue to place assets at risk of inadvertent or  deliberate misuse; information at risk of unauthorized access,  modification, or destruction; and critical operations at risk of disruption.\nAccordingly, we have designated federal information security as a  government-wide high-risk area since 1997, and in 2003 expanded this  area to include computerized systems supporting the nation\u2019s critical  infrastructure. In February 2015, we further expanded this area to include  protecting the privacy of personal information that is collected,  maintained, and shared by both federal and nonfederal entities. In  September 2015, we reported that more than half of the 24 major federal  agencies continued to experience weakness in the controls intended to  preserve confidentiality\u2014preventing unauthorized access to information  and systems; integrity\u2014preventing unauthorized modification or  destruction of information, including access and configuration controls;  and availability\u2014ensuring timely and reliable access to and use of  information when needed, such as contingency planning controls.\nTo improve federal information security, the Federal Information Security  Modernization Act (FISMA) was enacted in 2014. The law is intended to  address the increasing sophistication of cybersecurity attacks, promote  the use of automated security tools with the ability to continuously monitor  and diagnose the security posture of federal agencies, and provide for  improved oversight of federal agencies\u2019 information security programs.  FISMA provides a comprehensive framework for ensuring the  effectiveness of information security controls over information resources  that support federal operations and assets.\nAmong other things, FISMA requires federal agencies to develop,  document, and implement an agency-wide information security program.  Agencies are to carry this out using a risk-based approach to information  security management. Such a program includes developing and  implementing cost-effective security policies, plans, and procedures;  assessing risk; providing specialized training; testing and evaluating the  effectiveness of controls; planning, implementing, evaluating, and  documenting remedial actions to address information security  deficiencies; and ensuring continuity of operations.\nFISMA also gives the National Institute of Standards and Technology  (NIST) responsibility for developing standards and guidelines that include  minimum information security requirements. To this end, NIST has issued  numerous publications to provide guidance for agencies in implementing  an information security program. These include, among others, the NIST  Federal Information Processing Standard (FIPS) 199, which provides  requirements for agencies to categorize their systems and information,  and NIST Special Publication (SP) 800-53, which provides guidance on  the selection and implementation of information security and privacy  controls for systems.\n\n\t\tFDA Is Responsible for Ensuring the Safety, Effectiveness, and Quality of Food and Medical Products\n\nFDA is a consumer protection agency with broad regulatory authority  charged with protecting public health by ensuring the safety,  effectiveness, and security of human veterinary drugs, biological  products, and medical devices; ensuring the safety of foods, cosmetics,  and radiation-emitting products; and regulating tobacco products.\nFDA\u2019s mission includes helping to speed innovations that make foods  safer and medicines and medical devices safer and more effective;  ensuring members of the public have accurate, science-based  information they need to use medicines, devices, and foods to improve  their health; regulating the manufacture, marketing, and distribution of  tobacco products and reducing tobacco use by minors; and addressing  the nation\u2019s counterterrorism capability by ensuring the security of the  supply of foods and medical products.\nFDA performs regulatory activities that include  reviewing and approving new drugs and certain medical products;  inspecting manufacturing facilities for compliance with regulations and  good manufacturing practices; and  conducting post-market surveillance of food, drug, and medical  products to ensure they are safe; tracking and identifying the source  of outbreaks of foodborne illnesses; and issuing recall notices and  safety alerts for products that threaten the public health.\nAccording to FDA, its fiscal year 2015 appropriation was $4.5 billion. The  agency is headed by a Commissioner and is staffed by more than 14,000  employees across the United States and around the world. FDA consists  of its Office of the Commissioner and four directorates that oversee the  agency\u2019s core functions. These directorates are the Office of Foods and  Veterinary Medicine, Office of Global Regulatory Operations and Policy,  Office of Medical Products and Tobacco, and Office of Operations. Within  these directorates are offices and centers that focus on core parts of the  agency\u2019s mission. Examples of these offices and centers are shown in  table 1.\n\n\t\tFDA Relies on Computer Systems to Support Its Mission\n\nFDA relies extensively on IT to fulfill its mission and support related  administrative needs. Among the more than 80 systems reported in its  FISMA inventory, the agency has systems dedicated to supporting its  product review and evaluation activities, regulatory compliance functions,  and product safety monitoring activities, as well as systems to support  administrative processes. All of these systems are supported by an IT  infrastructure that includes network components, critical servers, and data  centers.\nIn fiscal year 2015, the agency reported spending $585 million on IT, of  which approximately $12 million (or about 2 percent of the IT budget) was  for information security. This percentage is lower than the approximately  8 percent of their fiscal year 2015 IT spending that the 23 civilian  agencies covered by the Chief Financial Officers Act reportedly spent on  information security. For fiscal year 2016, FDA requested $640 million for  IT and $16 million for information security. In addition, FDA indicated that  real-time connectivity and access to data and information is essential for  its daily operations, as well as its interactions with the public and other  partners. These factors depend on high-quality, high-availability, and  high-performing data networks, server and application infrastructure,  communications services, simple and complex computer applications,  mobile workforce capabilities, and rapid and responsive service delivery.\nExamples of the processing activities that key FDA systems perform in  supporting of the agency\u2019s mission are listed below:\nSupport and facilitate post-market product safety surveillance of  human drugs, biologics, devices, and combination products. Provide a  data repository for collecting, storing, viewing, analyzing, reporting,  and tracking the receipt of adverse event data or medication errors.\nEstablish a single gateway or communications portal for accepting  electronic submissions or allowing authorized users to view or obtain  information. Examples of electronic submissions include industry- provided trade secrets, adverse event records, and a multitude of  different records related to FDA\u2019s regulatory oversight of regulated  products.\nProvide capabilities for regulatory scientific research, while also  supporting FDA\u2019s overall goals and objectives in areas where  information technology requires supercomputer-strength  computational power.\nSupport FDA\u2019s research and development activities.\nProvide a platform through which FDA organizations may disseminate  FDA-related information to interested parties, including the public,  health professionals, regulated industries, and the media. Provide  information about the various product areas that FDA regulates (food,  drugs, medical devices, cosmetics, etc.), timely advisories (e.g.,  anticipated disease outbreaks such as the Severe Acute Respiratory  Syndrome (SARS), buying medicines online, and LASIK surgery), and  other FDA activities. Provide links to related reference materials and  opportunities for consumers and industry to interact with the FDA.\nProvide basic network and security capabilities for the FDA enterprise.\nFacilitate receipt and review of electronic drug applications. This  function includes scans and checks of the validity of drug submissions  from industry and making them available for reviewers, as well as  providing file shares for storing successful submissions that are to be  reviewed.\nIn addition, FDA contractors support data centers and systems that  provide, among other things, the network infrastructure for the agency\u2019s  systems and its public website. The information handled by these  systems includes sensitive or confidential business information on drug  submissions and adverse event reports, among other types of  information.\nAccordingly, effective implementation of security controls is necessary to  protecting the confidentiality, integrity, and availability of FDA\u2019s  information and in preventing the occurrence or lowering the risks of  security breaches similar to one the agency experienced in 2013. During  that breach, an intruder gained unauthorized access to one FDA system\u2019s  user accounts and passwords. Effective controls can help ensure only  authorized users (people and processes) access information and systems  to lessen the chances of unauthorized disclosures of information,  improper changes or modifications to FDA\u2019s information and systems,  and system disruptions that could hamper the agency\u2019s ability to perform  its mission.\nTo improve the management of FDA\u2019s information systems security and  operations, the agency, in fiscal year 2015, consolidated its network and  security operations centers to reorganize the Systems Management  Center (SMC). According to FDA, the SMC is the central command and  control center and is intended to help establish real-time network  awareness to forecast, detect, alert, and report events such as security  incidents and facilitate the coordination requirements of its Office of  Information Management and Technology. In addition, the agency  reported that it established a cybersecurity task force to address short- and long-term concerns with protecting its network boundaries.\n\n\t\tInformation Security Responsibilities at FDA\n\nUnder FISMA, the Commissioner of FDA is responsible for ensuring the  confidentiality, integrity, and availability of the information and systems  that support the agency and its operations. FISMA also requires that the  agency head delegate to the chief information officer (CIO) the overall  responsibility for management of the agency\u2019s IT security program. At  FDA, the CIO is responsible for evaluating the overall mission  requirements for an IT system or application and ensuring that it complies  with FDA IT security policies, guidelines, and standards. The CIO is also  responsible for, among other things, ensuring effective implementation of FDA\u2019s IT Security Policy;  formally appointing a Chief Information Security Officer (CISO) and  ensuring that individual complies with FDA\u2019s IT security regulations  and guidelines; ensuring that IT security is included in management planning,  programming budgets, and the IT capital planning process; and ensuring that annual security reviews are conducted to include annual  review and update of security policies and reporting of IT systems to  the Office of Management and Budget (OMB).\nIn addition, FDA\u2019s IT Security Program is headed by the agency\u2019s CISO,  who is responsible for ensuring that adequate and appropriate controls  are applied to FDA systems for the protection of privacy, and to ensure  confidentiality, integrity, and availability, of information. The CISO is to  employ security policies and standards for FDA information systems  enterprise-wide in accordance with FDA, HHS, OMB, NIST, and other  federal security requirements. The CISO also provides guidance on IT  system security matters to the Information Systems Security Officers  (ISSO) in the center\/office they support.\nAt FDA, ISSOs are responsible for ensuring the implementation of  adequate system security for each system supporting a particular center  or office. Every center or office system is to have an ISSO assigned as  the point of contact for security. Among other things, FDA ISSOs\u2019  responsibilities include (1) ensuring that FDA systems are operated,  used, maintained, and disposed of in accordance with FDA\u2019s security  policies and procedures; (2) ensuring system security plans are  completed and maintained; (3) assisting with system authorization; (4)  responding to and reporting security incidents; (5) promoting security  awareness; and (6) ensuring media handling procedures are followed.\n\n\tSecurity Weaknesses Place Seven FDA Systems and Sensitive Data at Risk\n\nFDA has taken steps to safeguard its systems that receive, process, and  maintain sensitive data by, for example, implementing policies and  procedures for controlling access to and securely configuring those  systems. However, a significant number of weaknesses remain in  technical controls\u2014including access controls, change controls, and patch  management\u2014that jeopardize the confidentiality, integrity, and availability  of its systems. An underlying reason for these weaknesses is that FDA  had not yet fully implemented an agency-wide information security  program to provide reasonable assurance that controls were operating  effectively. These shortcomings put FDA systems at increased and  unnecessary risk of unauthorized access, use, or modification that could  disrupt its operations. To its credit, FDA, during the course of our work,  immediately resolved some of the weaknesses identified and provided  information on its proposed actions to address the underlying  weaknesses in controls.\n\n\t\tFDA Did Not Fully Implement Access Controls\n\nAccess controls are designed and implemented to provide reasonable  assurance that an agency\u2019s computerized information is reliable. Both  logical and physical access controls are intended to prevent, limit, and  detect unauthorized access to computing resources, programs,  information, and facilities. Access controls include those related to (1)  protection of system boundaries, (2) identification and authentication of  users, (3) authorization of access permissions, (4) encryption of sensitive  information, (5) audit and monitoring of system activity, and (6) physical  security of facilities.\nAs shown in table 2, weaknesses existed in each of these areas for the  systems we reviewed. In a separate report with limited distribution, we  describe these weaknesses in more detail, along with associated  recommendations.\nInadequate design or implementation of access controls increases the  risk of unauthorized disclosure, modification, and destruction of sensitive  information and disruption of service.\n\n\t\t\tFDA Did Not Always Adequately Protect Its Network Boundaries\n\nBoundary protection controls logical connectivity into and out of networks  and controls connectivity to and from devices connected to the network.  For example, multiple firewalls can be deployed to prevent both outsiders  and trusted insiders from gaining unauthorized access to systems, and  intrusion detection technologies can be deployed to defend against  attacks from the Internet. Unnecessary connectivity to an organization\u2019s  network increases not only the number of access paths that must be  managed and the complexity of the task, but also the risk of unauthorized  access in a shared environment.\nNIST recommends that agencies implement subnetworks to separate  publicly accessible system components from their internal networks.  NIST also states that agencies should provide adequate protection for  networks and employ information control policies and enforcement  mechanisms to control the flow of information between designated  sources and destinations within information systems. Similarly, NIST  recommends that organizations monitor and control communications at  information systems\u2019 external boundaries and at key internal boundaries  within a system.\nFDA did not always adequately ensure that its network boundaries were  sufficiently segregated. For example, the contractor supporting the  agency\u2019s public-facing website did not isolate the agency\u2019s network from  its own network and that of its other customers, which included non-FDA  customers. In addition, the contractor did not configure firewall rules to  restrict access into FDA\u2019s internal network.\nIn another example, FDA did not sufficiently restrict inbound connections  from one of its untrusted networks and isolate that network from its  internal network. The network was untrusted because the agency had not  developed and implemented risk management controls for the system.  As a result, it poses increased risks to other agency systems.\nFurther, as illustrated in the following examples, FDA did not always  implement other boundary controls.\nNetwork devices at the agency\u2019s field locations were not properly  configured and allowed all remote access protocols, such as the  unsecure telnet protocol.\nRouters at certain international locations were not configured to  restrict inbound management traffic from untrusted sites.\nHost-based firewalls for four key systems and some workstations  were not effectively configured to permit only necessary traffic and  provide protection from malicious activity.\nAs a result, sensitive public health, proprietary business, and personal  information maintained by the agency were at increased risk of  compromise due to inadequate separation of the service provider\u2019s  network from FDA\u2019s network, inadequate separation of the untrusted  network from the agency\u2019s network, and weaknesses in other boundary  controls.\n\n\t\t\tFDA Did Not Always Implement Controls for Identifying and Authenticating System Users\n\nA computer system must be able to identify and authenticate different  users so that activities on the system can be linked to a specific  individual. When an organization assigns a unique user account to a  specific user, the system is able to distinguish that user from another\u2014a  process called identification. The system must also establish the validity  of a user\u2019s claimed identity by requesting some kind of information, such  as a password, that is known only by the user\u2014a process known as  authentication. The combination of identification and authentication\u2014such  as a user account\/password combination\u2014provides the basis for  establishing individual accountability and for controlling access to the  system.\nNIST SP 800-53 recommends that password management controls  should be established for information systems that include minimum  password complexity requirements, password lifetime restrictions,  prohibitions on password reuse, and user accounts to be temporarily  locked out after a certain number of failed login attempts during a  specified period of time. Further, FDA password policy outlines  requirements consistent with this guidance.\nNIST also states that agencies can satisfy certain identification and  authentication requirements by complying with the requirements in  Homeland Security Presidential Directive 12 and using multifactor  authentication such as personal identity verification cards. Multifactor  authentication requires the use of two or more different factors to achieve  authentication. The factors are defined as something you know (e.g., a  password or a personal identification number); something you have (e.g.,  cryptographic identification device or token); or something you are (e.g.,  biometric).\nFDA implemented personal identity verification cards for multifactor  authentication; however, the agency did not always implement strong  password controls in accordance with its security policies and NIST  guidance on five of the seven systems we reviewed. For example, three  local accounts on a database server which contained certificates used to  encrypt industry partner submission packages had passwords that had  not been changed in more than 5 years. In addition, several service  accounts for servers with access to sensitive industry partner regulatory  submissions had passwords set to never expire. Further, a Windows  administrator\u2019s non-privileged account was unnecessarily elevated to a  privileged account by being part of an administrators group. These  accounts are used to administer users\u2019 logical access inside FDA  mission-critical systems that process confidential business information or  trade secrets such as that for drug submissions and adverse event  reporting. In another example, the password to a service account for  synchronizing user passwords was set to never expire and had not been  changed in the last 6 years.\nIn addition, FDA did not always implement password controls on certain  network devices. For example, password management settings were set  to default values on two network devices that delivered web applications  to FDA users. These default settings were for local accounts, including  web administrator and root accounts, and included minimum password  lengths set to six characters, with no requirements for password  complexity, maximum password lifetime days, password history, and  invalid attempts. In another example, a user account password for a  network management server that monitors and maintains a history of  network devices\u2019 hardware and software changes had not been changed  since January 6, 2011. Without implementing strong password  requirements, increased risk exists that passwords could be guessed,  permitting unauthorized access to FDA systems.\n\n\t\t\tFDA Users Had More Access to Information than Necessary for Official Duties\n\nAuthorization is the process of granting or denying access rights and  permissions to a protected resource, such as a network, a system, an  application, a function, or a file. For example, operating systems have  built-in authorization features such as permissions for files and folders.  Network devices, such as routers, have access control lists that can be  used to authorize a user who can access and perform certain actions on  the device. A key component of granting or denying access rights is the  concept of \u201cleast privilege.\u201d Least privilege is a basic principle for securing  computer resources and information. This principle means that a user is  granted only those access rights and permissions needed to perform  official duties. To improve authorization controls, the Federal CIO  instructed agencies, as part of the Cybersecurity Sprint, to tighten  policies and practices of privileged users. These steps included, for  example, minimizing the number of privileged users and limiting functions  that can be performed when using privileged accounts. To avoid  unintentionally authorizing user access to sensitive files and directories,  an agency must give careful consideration to its assignment of rights and  permissions.\nNIST Special Publication 800-53 recommends that agencies should grant  user accounts only those privileges required for the users to perform their  job functions. Additionally, FDA policy states that access to sensitive  information must be restricted and based on the concept of need-to-know.\nAlthough FDA has developed and documented access control  requirements based on least privilege and need-to-know principles, users  were granted excessive permissions that were not needed for their official  duties. These permissions enabled administrators and users who did not  need such permissions with the authority to read, and in some cases,  write and modify submissions that could contain sensitive or confidential  business information on drug submissions or adverse event reporting, as  illustrated below.\nForty-nine administrators and users with access to 392 production  servers had, by default, unnecessary access to file shares containing  industry submissions on adverse events.\nA group account allowed 753 users unneeded access to adverse  event data submissions.\nNinety-two desktop users, via a group account, had unauthenticated  access to one key system\u2019s file shares.\n4,534 users, which included regulatory reviewers and project  managers, had uncontrolled \u201cread access\u201d to file shares on the  system that handles sensitive regulatory drug and biologic product  submissions.\nAccording to FDA, the high number of users with access was necessary  due to the high volume of regulatory submissions reviewed daily, which  regularly exceeds 1,500 per day, and because staff must often access  multiple sponsor submissions in order to complete their regulatory review  in a timely manner.\nHowever, for the data we reviewed, only about 2,400 users per month  accessed these files, compared with the 4,534 users who were granted  access. Moreover, FDA did not restrict access to privileged users groups  by, for example, differentiating high-valued submission assets from low- valued ones, even though the system stored highly sensitive industry  trade secret information.\nIn addition, for this same system, FDA allowed 39 users in the  administration group and 104 users in the staff group to have read, write,  and modify privileges to the submission files. The server can be accessed  without a user interface and FDA does not have visibility of users\u2019 access  to the submission files on the server.\nAs a result, FDA was at increased risk that users could inadvertently or  deliberately modify these files and jeopardize the integrity of the  submitted information.\n\n\t\t\tFDA Did Not Always Encrypt Certain Sensitive Data\n\nCryptography underlies many of the mechanisms used to enforce the  confidentiality and integrity of critical and sensitive information.  Cryptographic tools help control access to information by making it  unintelligible to unauthorized users and by protecting the integrity of  transmitted or stored information. A basic element of cryptography is  encryption. Encryption is the conversion of data into a form, called a  cipher text, which cannot be easily understood. Encryption can be used to  provide basic data confidentiality and integrity by transforming plain text  into cipher text using a special value known as a key and a mathematical  process known as an algorithm. NIST SP 800-53 states that agencies  should use encryption to protect the confidentiality of remote access  sessions and they should encrypt sessions between host systems. The  NIST standard for an encryption algorithm is Federal Information  Processing Standard (FIPS) 140-2.\nFDA did not always ensure that sensitive data were effectively encrypted  when transmitted or stored. For example, 59 network devices we  reviewed had weak non-FIPS-compliant algorithms to encrypt user  passwords. In addition, a web server supporting the receipt of industry  submissions and a database server storing certificates to support secure  connections for receiving submissions used non-FIPS-compliant  algorithms to encrypt passwords. Furthermore, the web server\u2019s  password file was encrypted by an algorithm that was outdated and had  been withdrawn by NIST over 10 years ago.\nAs a result of using weak encryption algorithms, FDA is at increased risk  that user passwords may be easier to crack and used by unauthorized  individuals to gain access to systems and sensitive information.\n\n\t\t\tFDA Did Not Always Audit and Monitor Activity on Its Systems\n\nTo establish individual accountability, monitor compliance with security  policies, and investigate security violations, agencies need to determine  what, when, and by whom specific actions have been taken on a system.  Agencies can accomplish this by implementing system or security  software that provides an audit trail (a log of system activity) that is used  to determine the source of a transaction or attempted transaction and to  monitor a user\u2019s activities. Audit and monitoring, key components of risk  management, involve the regular collection, review, and analysis of  auditable events for indications of inappropriate or unusual activity, and  the appropriate investigation and reporting of such activity.\nAudit and monitoring controls can help security professionals routinely  assess computer security, perform investigations during and after an  attack, and even recognize an ongoing attack. Audit and monitoring  technologies include network- and host-based intrusion detection  systems, audit logging, security event correlation tools, and computer  forensics. NIST guidelines state that agencies should retain sufficient  audit logs to allow monitoring of key activities, provide support for after- the-fact investigation of security incidents, and meet agency information  retention requirements.\nFDA did not always implement and integrate auditing and monitoring for  the seven systems we reviewed. For example, the agency did not have  network monitoring visibility across its entire network. Specifically, it did  not monitor IT assets used by a contractor supporting the system that  provides the agency\u2019s Internet and public network. In addition, the agency  did not always audit or monitor system activity on IT assets for networks  supporting scientific research and high-performance computing.\nThe agency also did not always retain audit logs to allow monitoring of  key activities and provide support for after-the-fact investigation of  security incidents. To illustrate, databases supporting drug submissions  and adverse event reporting did not have logging enabled for monitoring  the use of special system privileges such as alter, create, and grant.\nFurther, FDA did not retain all records of evidence related to a 2013  security breach from an external attack on an FDA Internet application  that allowed the attacker to gain access to a backend database and  exfiltrate sensitive users account information. Specifically, it did not retain  digital forensics data related to the attack commands and the review of  dates and times of files and database entries relevant to data exfiltration  of users\u2019 account data. Such information could be useful in better  understanding what occurred and in preventing future occurrences.\nAs a result, FDA did not have information necessary for monitoring key  database activities and supporting after-the-fact investigations of security  incidents. In addition, the lack of evidence could prevent the agency from  determining what events occurred within its systems and networks, such  as lateral movements by an attacker that may occur from initial entry into  a network to network discovery, hosts targeting, and data exfiltration  activities to external systems.\n\n\t\t\tFDA Did Not Update Physical Security Policies or Conduct Reviews of Facilities\n\nPhysical security controls restrict physical access to computer resources  and protect them from intentional or unintentional loss or impairment.  Adequate physical security controls over computer resources (e.g.,  computer facilities, network devices such as routers and firewalls,  telecommunications equipment, and transmission lines) should be  established that are commensurate with the risks of physical damage or  access. NIST SP 800-53 recommends that agencies review and update  the current physical and environmental protection policy at an  organization-defined frequency and conduct an assessment of risks,  including the likelihood and magnitude of harm, to the information system  and information it processes, stores, or transmits.\nConsistent with federal guidance, FDA\u2019s Information System Security and  Privacy Guide states that physical and environmental protection policies  are to be reviewed and updated every 3 years. In addition, the agency\u2019s  policies for its facilities state that annual physical security reviews are to  be conducted. These reviews are to include, among other things,  reviewing security measures in effect to compensate for any  noncompliance with requirements, and corrective actions initiated or  planned to eliminate deficient conditions.\nWhile FDA developed and documented physical security policies for its  facilities, they had not been reviewed and updated for about 14 years. For  example, the physical security policy for its headquarters facilities was  dated February 2001, and the physical security policy for field activities  was dated October 2000. Neither of these policies had been reviewed  and updated since they were established, even though the agency\u2019s  policy requires this to occur every 3 years. In addition, the agency had not  conducted required annual physical security reviews of three of its data  center facilities. FDA only provided documentation to support that it had  reviewed one of them, which occurred in July 2013 and was not within the  annual requirement.\nAccording to FDA\u2019s CISO and a policy analyst, gaps in reviewing and  updating policies and procedures were due to personnel resource  constraints and a lack of a streamlined process to review policy and  procedures at the agency. As a result, FDA has diminished assurance  that its computing resources are protected from inadvertent or deliberate  misuse or damage.\n\n\t\tFDA Conducted Background Investigations, but Weaknesses in Other Controls Increased Risk\n\nIn addition to access controls, other important controls should be in place  to provide reasonable assurance that the confidentiality, integrity, and  availability of an agency\u2019s information is protected. These controls include  policies, procedures, and techniques for (1) implementing personnel  security, such as background investigations, (2) managing and  implementing system configurations, (3) effectively planning for system  contingencies, and (4) developing and implementing procedures for  disposing of media containing sensitive information. While FDA  conducted background investigations according to its policy, weaknesses  in other controls increased the risk of unauthorized use, disclosure,  modification, or loss of the FDA\u2019s mission-sensitive information.\n\n\t\t\tFDA Conducted Background Investigations for the Personnel Reviewed\n\nThe greatest harm or disruption to a system can often come from the  actions, both intentional and unintentional, of individuals. These  intentional and unintentional actions can be reduced through the  implementation of security controls over personnel. Background checks  should be done prior to an individual\u2019s authorization to access information  systems, and personnel in sensitive positions should be periodically  rescreened. Furthermore, FDA policy requires positions to be designated  by sensitivity and risk level, and describes requirements for conducting  background investigations for employees and contractors, including  periodic reinvestigations of individuals in positions of higher risk or  sensitivity.\nFDA conducted background investigations for the employees and  contractors we reviewed. Specifically, each of the 14 employees and  contractors we selected had up-to-date background investigations that  were consistent with the risk designation of their positions. As a result,  FDA reduced its risk that it has employed or contracted for individuals  with unsuitable backgrounds for accessing its systems.\n\n\t\t\tFDA Did Not Always Implement Controls for Configuration Management\n\nConfiguration management is an important control that involves the  identification and management of security features for all hardware and  software components of an information system at a given point and  systematically controls changes to that configuration during the system\u2019s  life cycle. Configuration management involves, among other things, (1)  verifying the correctness of the security settings in the operating systems,  applications, or computing and network devices and (2) obtaining  reasonable assurance that systems are configured and operating  securely and as intended. In addition, establishing controls over the  modification of information system components and related  documentation helps to prevent unauthorized changes and ensure that  only authorized systems and related program modifications are  implemented. This is accomplished by instituting policies, procedures,  and techniques that help make sure that all hardware, software, and  firmware programs and program modifications have been properly  authorized, tested, and approved.\nAccording to NIST SP 800-53, configuration management activities  should include documenting approved configuration-controlled changes to  information systems, retaining and reviewing records of the changes,  auditing those records, and coordinating and providing oversight for  configuration change control activities through a mechanism such as a  change control board. Patch management, a component of configuration  management, is important for mitigating the risks associated with known  software vulnerabilities. When a software vulnerability is discovered, the  software vendor may develop and distribute a patch or work-around to  mitigate the vulnerability. Without the patch, an attacker can exploit the  vulnerability to read, modify, or delete sensitive information; disrupt  operations; or launch attacks against other systems. Outdated and  unsupported software is more vulnerable to attack and exploitation  because vendors may no longer provide updates, including security  updates, to correct software flaws.\nFDA has developed, documented, and established policies and  procedures to manage configuration changes. In addition, for the systems  we reviewed, FDA officials demonstrated that system changes were first  requested, tracked, and approved at the system level prior to being  forwarded via an automated tool to FDA\u2019s change control board as  required by policy. However, FDA officials could not provide  documentation to demonstrate that emergency changes to software code  to remediate security vulnerabilities were tested, validated, and  documented in response to the 2013 breach of its Internet-facing web  application. Further, the agency did not always implement secure  configuration settings for its systems. For example:\nFDA did not appropriately configure 336 devices, which could prevent  proper identity enforcement of these network devices and could allow  unauthorized access to other networks and devices.\nFDA used out-of-date and unsupported software on servers storing  sensitive data on industry partner regulatory submissions for several  of the systems we reviewed. In addition, Windows file share servers  and other application servers on several systems we reviewed were  out of date and had reached end-of-life, in some cases for more than  4 years past the support date.\nTwo firewalls for managing contractors\u2019 access to FDA\u2019s network had  operating system versions that were close to end-of-life for support,  and FDA had no mitigation plans in place to manage this risk.\nSimilarly, FDA has developed, documented, and established a policy for  managing patches that includes time frames for applying patches based  on risk, and emergency and out-of-cycle patches within 48 hours of  discovery. However, FDA did not always document emergency changes  to software code on an application that supported its Internet services.  These changes were made in response to an external Internet attack that  resulted in a breach of the system\u2019s user account data.\nIn addition, software security updates and patches were not always  installed to address known security vulnerabilities, nor were they timely.  For example:\nFDA had not applied security updates and patches for network  devices, switches, firewalls, specialized network devices, and servers,  as well as contractor-operated network devices, in accordance with  NIST\u2019s Common Vulnerability Scoring System (CVSS) guidelines for  patching devices. CVSS prescribes that patches be installed within 30  days for critical or high-risk vulnerabilities, 60 days for moderate-risk  vulnerabilities, and 90 days for low-risk vulnerabilities. FDA\u2019s policy  also requires that they follow these patching time frames. However,  hundreds of these devices had not been updated with the latest  patches in over 3 years.\nThe agency had not patched 25 servers supporting its infrastructure.\nFor example, one sever had not been patched for 6 months, from  February to August of 2015.\nFDA had not applied critical security patches to 74 of 82 host virtual  servers supporting its infrastructure. In some cases these patches  contained major updates to fix multiple security vulnerabilities.\nVarious file share servers for three FDA systems we reviewed had not  been patched since 2009.\nWithout proper implementation of configuration management policies and  procedures and adequate security controls, FDA systems are susceptible  to many known vulnerabilities.\n\n\t\t\tFDA Did Not Always Plan for Contingencies\n\nLosing the capability to process, retrieve, and protect electronically  maintained information can significantly affect an agency\u2019s ability to  accomplish its mission. If contingency planning is inadequate, even  relatively minor interruptions can result in lost or incorrectly processed  data, which can cause financial losses, expensive recovery efforts, and  inaccurate or incomplete information. Contingency planning consists of  interim measures to recover information system services after a  disruption. Interim measures may include relocation of information  systems and operations to an alternate site, recovery of information  system functions using alternate equipment, or performance of  information system functions using manual methods.\nNIST SP 800-53 recommends that agencies establish a contingency  planning policy in the event of unplanned disruptions and provide  contingency training and exercises at an agency-defined frequency,  among other things. In addition, NIST SP 800-34 recommends that a test  plan should be designed and tested to examine applicable contingency  planning elements such as notification procedures and system recovery  on an alternate platform from backup media to validate the contingency  capability. Further, FDA policy also requires functional testing of its  contingency plans annually.\nConsistent with NIST guidelines, FDA\u2019s Information System Security and  Privacy Guide states that contingency planning policies are to be updated  every 3 years, while information system contingency plans are to be  reviewed annually. FDA\u2019s policy also requires that contingency plans be  tested on an annual basis.\nHowever, FDA did not follow its own requirements for updating and  reviewing contingency policy and plans. For example, FDA\u2019s contingency  planning policy was established in 2007 but was still marked as a draft  document and had yet to be reviewed and updated. Further, FDA did not  review, at least annually, the contingency plans for six of the seven  applications and general support systems that we reviewed during fiscal  year 2015 and had not developed and documented a contingency plan for  the seventh system.\nIn addition, FDA did not adequately test five of the six contingency plans  we reviewed. For example:\nFor two major applications, FDA conducted procedures to mitigate  system disruptions and documented those activities as tests.  However, the actions performed to mitigate disruptions were not  based on planned tests.\nA planned migration was conducted for a general support system to  transfer operations to a facility. However, this migration was not the  result of a planned contingency test.\nThe plans for two general support systems had not been tested since  2013. However, the tests did appropriately assess elements such as  notification procedures, and system recovery.\nFDA staff attributed these weaknesses to the lack of a streamlined  process for reviewing policies and procedures, and personnel resource  constraints such as the lack of contracted staff to support FDA  contingency planning and operations during an organizational transition.\nBy not finalizing its contingency planning policy and not annually  reviewing and testing contingency plans, FDA has reduced assurance  that it has implemented controls necessary for effectively continuing  operations in the event of a disruption.\n\n\t\t\tFDA Had Not Developed and Implemented Media Sanitization Procedures\n\nThe destruction of media and its disposal are key to ensuring the  confidentiality of information. Media can include magnetic tapes, optical  disks (such as compact disks), and hard drives. Agencies safeguard used  media to ensure that the information they contain is appropriately  controlled or disposed of. Media that is improperly disposed of can lead to  the inappropriate or inadvertent disclosure of an agency\u2019s sensitive  information or the personally identifiable information of its employees and  customers.\nNIST SP 800-53 recommends that agencies sanitize media prior to  disposal and employ sanitization mechanisms to ensure information  cannot be retrieved or reconstructed. FDA\u2019s policy for sanitizing  computer-related storage media, including server backup tapes, states  that techniques used to sanitize media can include degaussing, among  other things.\nHowever, FDA did not sanitize media backup tapes that were being  stockpiled for disposal. Specifically, for two data center locations, media  tapes were stored outside of servers and scheduled for sanitization, but  had yet to be sanitized and disposed of. At one of the two data centers,  we observed a number of older tapes, and FDA staff said these tapes  were awaiting disposal. Specifically, staff mentioned that the legacy tapes  held data from operations in prior location and were in a \u201cholding pattern\u201d  and tentatively scheduled for decommission. Similarly, FDA staff from the  second data center acknowledged that approximately 900 tapes were  also awaiting disposal and that these tapes contained older servers,  databases, and files resulting from a migration to updated servers tapes.\nAccording to the data center staff, the agency had not developed,  documented, and implemented a procedure for sanitizing media, but  planned to have a solution by October 2016. Until FDA fully implements a  process for media sanitization, the agency is at an increased risk that its  sensitive information may not be adequately protected.\n\n\t\tFDA Did Not Fully Implement Its Information Security Program, Limiting the Effectiveness of Information Security Controls\n\nA key reason for the weaknesses in controls over FDA\u2019s information and  information systems is that it has not yet fully implemented its agency- wide information security program to ensure that controls are effectively  established and maintained. If an agency does not fully implement its  program, security controls may be inadequate or inconsistently applied;  responsibilities may be unclear, misunderstood, or improperly  implemented; and organizational and system risks may not be assessed  and monitored properly. FISMA requires each agency to develop,  document, and implement an information security program that, among  other things, includes a periodic assessment of risk and magnitude of harm that could result  from the unauthorized access, use, disclosure, disruption,  modification, or destruction of information or information systems; policies and procedures that (1) are based on risk assessments, (2)  cost-effectively reduce information security risks to an acceptable  level, (3) ensure that information security is addressed throughout the  life cycle of each system, and (4) ensure compliance with applicable  requirements;  subordinate plans for providing adequate information security for  networks, facilities, and systems or a group of information systems, as  appropriate;  security awareness training to inform personnel of information security  risks and of their responsibilities in complying with agency policies  and procedures, as well as training personnel with significant security  responsibilities for information security; periodic testing and evaluation of the effectiveness of information  security policies, procedures, and practices, to be performed with a  frequency depending on risk, but no less than annually, and that  includes testing of management, operational, and technical controls  for every system identified in the agency\u2019s required inventory of major  information systems; a process for planning, implementing, evaluating, and documenting  remedial actions to address any deficiencies in information security  policies, procedures, or practices; and procedures for detecting, reporting, and responding to security  incidents.\nFDA has taken steps to implement an information security program and  manage information security risks for its major applications and general  support systems. However, key components of its information security  program have not been fully or consistently implemented.\n\n\t\t\tFDA Has Taken Steps to Assess Risks, but Some Practices Have Not Been Fully Implemented.\n\nAccording to NIST SP 800-30, risk is determined by identifying potential  threats to the organization and vulnerabilities in its systems, determining  the likelihood that a particular threat may exploit vulnerabilities, and  assessing the resulting impact on the organization\u2019s mission, including  the effect on sensitive and critical systems and data. Identifying and  assessing information security risks are essential to determining what  controls are required. Moreover, by increasing awareness of risks, these  assessments can generate support for the policies and controls that are  adopted in order to help ensure that the policies and controls operate as  intended.\nFDA policy requires that risk assessment results for its systems be  reviewed annually, and risk assessments be updated prior to issuing a  new authority to operate, whenever there are significant system  changes, or every 3 years. FDA\u2019s assessment of risk is conducted as part  of its security assessments.\nAlthough FDA assessed risk for six of the seven systems we reviewed, it  did not document the likelihood that a particular threat could exploit  system vulnerabilities. For example, FDA only identified information  system control weaknesses and vulnerabilities for six of the reviewed  systems, but did not determine the likelihood and impact of threats to  those systems. For the seventh system, FDA did not assess risk or issue  a formal authority to operate. Finally, two of the six risk assessments had  not been reviewed annually.\nDuring the course of our work, FDA completed the annual review of the  risk assessment for one of the two systems, and we have verified this  action. However, until FDA completes comprehensive risk assessments  and reviews them annually, the agency will have less assurance that it  has identified the necessary controls to protect its assets.\n\n\t\t\tPolicies and Procedures Were Not Always Complete or Had Not Been Reviewed in a Timely Manner\n\nA key element of an effective information security program is to develop,  document, and implement risk-based policies, procedures, and technical  standards that govern the security over an agency\u2019s computing  environment. Information security policy is essential to establishing roles,  responsibilities, and requirements necessary for implementing an  information security program. The supporting procedures provide the  information and guidance on implementing the policies. According to  NIST, an agency should develop policies and procedures for each of the  NIST families of security controls to facilitate the implementation of the  controls. Additionally, HHS and FDA policy require that policies be  reviewed every 3 years to ensure that they are sufficient and consistent  with federal requirements.\nFDA generally took steps to develop and document policies and  procedures for its information security program, but did not always  document them or ensure procedures were complete. For example, while  the agency has developed policies to cover 17 of 18 NIST control  families, it did not develop one for system maintenance. In addition, the  agency did not develop or document procedures for implementing  controls in 8 of the 18 control families. The 8 control families were Audit  and Accountability, Identification and Authentication, Maintenance, Media  Protection, Physical and Environmental Protection, Security Planning,  Systems Communication and Protection, and System Information and  Integrity. Of the procedures for 10 control families that FDA provided, 3  were complete. However, procedures for 7 families were incomplete and  did not include steps suggested by NIST. For example, procedures for  security awareness and training did not include procedures for covering  role-based training, and those for assessment and authorization did not  address continuous monitoring as recommended by NIST.\nFurther, FDA did not review its policies according to its own requirements.  Specifically, 11 of 18 NIST-recommended policies were not reviewed  within the agency-defined frequency of 3 years. For example, the  agency\u2019s personnel security policy was last reviewed in 1986. Policies for  other controls such as those for access controls, identification and  authentication, and incident response had not been reviewed in at least 7  years. FDA conducted an internal review in 2013 to identify the policies  that needed to be reviewed and updated, and had established a plan of  actions and milestones for updating them by November 2013. However,  the agency did not meet its own deadline for reviewing and updating 11 of  the 17 policies it had developed. According to FDA staff, the policies  had not been reviewed and updated because the process had been too  cumbersome and required a sign-off from a number of stakeholders.  FDA\u2019s CISO also stated that they had been understaffed, which led to a  large backlog of policies to be reviewed.\nHaving incomplete policies and procedures or not reviewing them  reduces FDA\u2019s assurance that roles and responsibilities have been  clearly assigned and understood and that personnel have the information  needed to implement its policies, which could lessen the agency\u2019s ability  to efficiently and effectively protect its information systems.\n\n\t\t\tFDA Developed System Security Plans for Six of Seven Reviewed Systems, but They Were Incomplete and Not Annually Reviewed\n\nFISMA requires that agencies develop and document system security  plans for all major federal information systems. This requirement should  be viewed as an essential part of planning adequate, cost-effective  security protection for a system. According to NIST, system security plans  should provide an overview of the security requirements of the system,  and document and describe the security controls and security control  enhancements in place or planned for meeting those requirements.  NIST also recommends that the plans be reviewed and approved by  authorizing officials or designated representatives. NIST states that plans  should be reviewed and updated at least annually to ensure that they  continue to reflect the correct information about the system such as  changes in system owners, interconnections, and authorization status,   among other things. Consistent with NIST, HHS and FDA policy  require FDA to review system security plans annually.\nFDA created security plans and generally documented controls for six of  the seven applications and general support systems we reviewed.  However, the agency did not always ensure that the plans were complete,  or that plans were reviewed. For example, FDA did not always fully  describe the extent to which controls were implemented for each of the  six system security plans we examined. Specifically, it did not document  76 of 83 NIST-required high-impact control enhancements in the  security plan for the high-impact system used in reporting adverse events.  In addition, the agency did not document the control descriptions for 171  of 262 security controls and control enhancements; specifically, the  description of the implementation of 171 security controls and  enhancements was left blank in the plan for the system supporting FDA\u2019s  infrastructure. The system has an important role in securing the agency\u2019s  other systems since 68 of those systems inherit their controls from it. FDA  also did not demonstrate that any of the six plans we reviewed were  approved or reviewed by authorizing or senior agency officials.\nAccording to an information system security officer, these shortfalls were  related to deficiencies in their security management tool and a lack of  resources. Officials stated that the tool that they used for entering  information into system security plans had software flaws, which did not  allow them to properly capture system security plan control descriptions;  officials stated that they plan to replace the tool but could not give a firm  timeline.\nUntil FDA develops and documents a plan for one system supporting its  research and updates system security plans to reflect current federal  control requirements, the agency lacks assurance that the appropriate  controls have been identified for the seven systems we reviewed and  increases the likelihood that the controls will not be fully implemented.\n\n\t\t\tFDA Provided Security Awareness Training but Did Not Always Track and Fully Train Users with Significant Security Responsibilities\n\nAccording to FISMA, an agency-wide information security program must  include security awareness training for agency personnel, contractors,  and other users of information systems that support the agency\u2019s  operations and assets. This training must cover (1) information security  risks associated with users\u2019 activities and (2) users\u2019 responsibilities in  complying with agency policies and procedures designed to reduce these  risks. FISMA also includes requirements for training personnel who have  significant responsibilities for information security. According to NIST,  agencies should also document and monitor individual information system  security training activities, including basic security awareness training and  specialized information system security training.\nConsistent with federal law and guidelines, FDA\u2019s Information System  Security and Privacy Control Parameters Guide states that the agency  should provide role\u2010based security\u2010related training to all personnel with  significant information security responsibilities. The agency\u2019s policy also  requires that employees with significant security responsibilities  participate in role-based training appropriate to their security role before  receiving access to the system, when required by system or role changes  and every 3 years thereafter.\nFDA tracked and provided security awareness training in fiscal years  2015 and 2016 to each of the 16 users we selected for review. The  agency tracks its user awareness training through a vendor-provided  web-based application. According to FDA, it previously provided  awareness training to about 98 percent of its users during fiscal year  2015.\nHowever, the agency did not always track role-based training for those  with significant security responsibilities. For example, FDA\u2019s tracking  system only identified 6 of the 16 individuals selected as having received  role-based training. According to FDA personnel, the resulting list was not  complete because the agency is re-engineering its process for tracking  compliance of specialized security training.\nIn addition, it did not fully provide role-based training to those with  significant security responsibilities. FDA demonstrated that 6 of the 16  individuals with significant security responsibilities we reviewed received  specialized IT training. FDA responded that the remaining 10 individuals  were not system administrators who required specialized training.\nHowever, 9 of the remaining 10 individuals had significant security  responsibilities, which included the deputy chief information security  officer and several information systems security officers.\nAccording to FDA staff, the agency is currently developing role-based  training courses for executives and contracting officer\u2019s representatives,  and will update its IT administrator module on or around October 1, 2016.  Until FDA implements procedures that provide reasonable assurance that  it tracks and provides role-based training to employees with significant  information security responsibilities, the agency will have less assurance  that staff have the adequate knowledge, skills, and abilities consistent  with their roles to protect the confidentiality, integrity, and availability of  the information.\n\n\t\t\tFDA Did Not Fully Test Controls or Monitor Them Effectively\n\nA key element of an information security program is to test and evaluate  policies, procedures, and controls to determine whether they are effective  and operating as intended. This type of oversight is a fundamental  element because it demonstrates management\u2019s commitment to the  security program, reminds employees of their roles and responsibilities,  and identifies areas of noncompliance and ineffectiveness. FISMA  requires that the frequency of tests and evaluations of management,  operational, and technical controls be based on risks and occur no less  than annually. OMB directs agencies to meet their FISMA-required  controls testing by drawing on security control assessment results that  include, but are not limited to, continuous monitoring activities. OMB also  requires agencies to develop and maintain an information system  continuous monitoring (ISCM) strategy and implement an ISCM program  in accordance with NIST guidelines. OMB required agencies to develop  their ISCM strategies by February 28, 2014.\nContinuous monitoring of security controls employed within or inherited by  the system is an important aspect of managing risk to information from  the operation and use of information systems. The objective of continuous  monitoring is to determine if the set of deployed security controls  continues to be effective over time in light of the inevitable changes that  occur to a system and within an agency. Such monitoring is intended to  assist in maintaining an ongoing awareness of information security,  vulnerabilities, and threats to support agency risk management decisions.  The monitoring of security controls using automated support tools can  help facilitate continuous monitoring.\nFDA has taken steps to monitor security controls through bi-weekly  vulnerability scanning using automated tools. The agency also conducted  annual assessments of its information systems. However, the agency did  not fully or annually assess controls for 2 of the 7 systems we reviewed.  To illustrate, FDA did not assess any of the security controls for a system  supporting its scientific research activities. For the other system, which  supports FDA\u2019s IT infrastructure, the agency had not conducted an  assessment since 2013, thus not meeting FISMA\u2019s requirement to assess  controls at least annually. Further, we found that FDA has not developed  and documented a continuous monitoring strategy for its information  systems. HHS\u2019s inspector general previously reported this weakness in  fiscal years 2013 and 2014.\nAccording to FDA staff, the agency plans to assess the infrastructure  system during fiscal year 2016 since the system was being restructured  during fiscal year 2015. In addition, the agency plans to implement a pilot  program for continuous monitoring in August 2016. Further, the agency  plans to implement the Department of Homeland Security\u2019s Continuous  Diagnostics and Mitigation tool in 2016 to improve continuous monitoring  of its IT assets. Until it fully tests controls for all systems and develops  and documents a continuous monitoring strategy, FDA has less  assurance that controls over its information and information systems are  in place and operating as intended.\n\n\t\t\tIdentified Security Weaknesses Were Not Always Remedied in a Timely Fashion or Based on Risk\n\nFISMA requires that agency-wide information security programs include a  process for planning, implementing, evaluating, and documenting  remedial actions to address any deficiencies in the information security  policies, procedures, and practices of the agency. Agencies should  establish procedures to reasonably ensure that all information security  control weaknesses, regardless of how or by whom they are identified,  are addressed through the agency\u2019s remediation processes. For each  identified control weakness, the agency is to develop and implement a  plan of actions and milestones (POA&M) based on findings from security  control assessments, security impact analyses, continuous monitoring of  activities, audit reports, and other sources. When considering appropriate  corrective actions to be taken, the agency should, to the extent possible,  consider the potential agency-wide implications and design appropriate  corrective actions to systemically address the deficiency.\nFDA\u2019s Plans of Action and Milestones Guide is generally consistent with  federal guidance, and the agency\u2019s guide specifically requires that high- risk weaknesses be corrected within 60 days.\nFDA had also generally developed and documented POA&Ms for  addressing security control weaknesses and made efforts to consider  agency-wide implications of security weaknesses. However, it did not  always complete remedial actions in a timely manner in accordance with  the agency\u2019s established deadlines or risk requirements. To illustrate, for  the seven major applications and general support systems we examined,  183 of 611 (roughly 30 percent) of the POA&Ms had not been remedied  by their scheduled completion date, 30 of which were identified as high  risk and not corrected within the agency-defined requirement of 60 days.  Of the 183 delayed POA&Ms, 102 had a scheduled completion date of  2013 or earlier. As a further example, FDA\u2019s remedial action plans listed  two high-risk weaknesses identified by its Office of Inspector General in  2006 and 2007, but FDA had not mitigated these weaknesses even  though the agency had planned completion dates in 2012.\nFDA personnel stated that they faced challenges in remediating POA&Ms  in a timely manner and based on risk. According to FDA personnel, there  was a large volume of open POA&Ms and insufficient resources, which  delayed addressing weaknesses in a timely manner: as of the first quarter  of 2015, FDA had 1,265 open POA&Ms. FDA staff also noted that risk is  considered in prioritizing remediation, but that other factors such as  available resources and business impacts are also considered. FDA  personnel stated that, because of the large number of open POA&Ms,  they will go after \u201clow-hanging fruit,\u201d favoring remediation of a larger  number of POA&Ms over concentrating on high-risk weaknesses.\nBy not resolving identified weaknesses in a timely manner, or in  accordance with its own policy, FDA faces an increased likelihood that  weaknesses, including high-risk vulnerabilities, will go uncorrected, be  exploited, and result in greater harm to agency systems and information.\n\n\t\t\tFDA Did Not Fully Implement Elements of Its Incident Response Program\n\nEven with strong information security controls, incidents can still occur.  Agencies can reduce the risks associated with these events by detecting  and promptly responding before significant damage is done. A key  element of an effective incident response program includes implementing  comprehensive policies, procedures, and controls in order to rapidly  detect incidents, minimize loss and destruction, mitigate the weaknesses  that were exploited, and restore computing services. NIST SP 800-53  recommends that agencies review and update their incident response  policy and procedures at an organization-defined frequency. NIST also  recommends that an organization coordinate its incident handling  activities with contingency planning activities so that during a severe  incident, the agency has actions in place to keep its business operational.  NIST further recommends that agencies implement lessons learned from  ongoing incident handling activities into incident response procedures,  training, and testing, and implements the resulting changes accordingly.\nWhile FDA has developed and documented an incident response policy,  the agency did not comply with its own policy of updating its incident  response policy every 3 years. The policy has not been updated since it  was created in January 2007.\nFurther, neither FDA\u2019s incident response policy nor its procedures require  or describe steps for coordinating incident response activities with  planning for contingencies or system disruptions. The agency also did not  update its incident response procedures using the results of lessons  learned from prior incident response table top exercises we examined.  For example, results from a 2012 table top exercise indicated that FDA  should better train its employees so that newer, less-experienced staff are  better able to respond to significant cyber incidents, and that FDA should  update its procedures to include training requirements. However, the  lessons learned were not incorporated into FDA\u2019s incident response  procedures. Without effective incident response practices in place, FDA  has reduced assurance that its systems and information are protected  and that it can respond to incidents.\nIn response to our findings, FDA staff mentioned that the agency is in the  process of incorporating lessons learned from incident handling activities  into its incident response procedures, training, and testing. In addition, the  agency stated that it is taking various steps to address incident response  based on our feedback from previous surveys and data requests. The  agency stated that it has discontinued its incident response standard  operating procedure and was developing a new one based on NIST SP  800-61. The agency\u2019s staff also mentioned that personnel will undergo  security training and that FDA is piloting various products to improve the  agency\u2019s overall security posture, including incident response. We have  not yet verified that the agency has implemented these actions, but such  actions could improve FDA\u2019s incident response capability.\n\n\tConclusions\n\nAlthough FDA has implemented numerous controls and taken steps  intended to protect its information and information systems, pervasive  control weaknesses continue to jeopardize the confidentiality, integrity,  and availability of its sensitive information. In fiscal year 2015, the agency  centralized the management and location of its network and security  operations with intended goals that include establishing real-time network  awareness and improved incident detection. The agency also  immediately resolved some of the weaknesses we identified during this  review. Nonetheless, significant weaknesses in controls for preventing or  limiting unauthorized access to its systems and information, as well as  weaknesses in other controls, such as those for ensuring that software  and hardware are updated and securely configured and that sensitive  media is disposed of, put FDA\u2019s systems at risk. This is significant  considering that these systems handle proprietary business data from  companies in multiple industries and sensitive public health data.\nAn underlying cause for many of these weaknesses is that FDA has not  fully implemented its agency-wide information security program, such as  developing and documenting appropriate policies and procedures,  ensuring security controls are tested effectively, remediating weaknesses  in a timely manner, and planning for contingencies or system disruptions  and effectively managing risks. The widespread weaknesses in technical  controls and the incomplete implementation of program elements suggest  that the agency has not made effective information security a high  enough priority. Until FDA implements these practices and controls, it will  have limited assurance that its information and information systems are  adequately protected against unauthorized access, disclosure,  modification, or loss.\n\n\tRecommendations for Executive Action\n\nTo effectively implement key elements of the Food and Drug  Administration\u2019s (FDA) information security program, we are  recommending that the Secretary of Health and Human Services direct  the Commissioner of FDA to implement the following 15  recommendations:  1.  Complete a risk assessment and authorization to operate for one FDA  system.  2.  Ensure that completed risk assessments for six systems reviewed  address the likelihood and impact of threats to FDA.  3.  Develop a policy for system maintenance.  4.  Develop procedures for the following 8 security control families: Audit  and Accountability, Identification and Authentication, Maintenance,  Media Protection, Physical and Environmental Protection, Security  Planning, Systems Communication and Protection, and System  Information and Integrity.  5.  Enhance procedures for the following 7 security control families:  Access Control, Awareness and Training, Security Assessment and  Authorization, Configuration Management, Program Management,  Personnel Security, and System and Services Acquisition.  6.  Review and update as needed per FDA\u2019s frequency, the policies for  the following 11 security control families: Access Control, Audit and  Accountability, Contingency Planning, Identification and  Authentication, Incident Response, Media Protection, Physical and  Environmental Protection, Security Planning, Personnel Security,  System and Services Acquisition, and System and Information  Integrity.  7.  Develop and document a security plan for one system supporting  FDA\u2019s scientific research.  8.  Update security plans to ensure the plans fully and accurately  document the controls selected and intended for protecting each of  the six systems.  9.  Review and approve security plans for the six systems reviewed at  least annually.  10. Implement a process to effectively monitor and track training for  personnel with significant security roles and responsibilities.  11. Ensure that personnel with significant security responsibilities receive  role-based training.  12. Test controls at least annually for the two systems that support FDA\u2019s  scientific research and IT infrastructure.  13. Implement remedial actions in accordance with FDA\u2019s prescribed time  frames or update milestones if actions are delayed.  14. Update FDA\u2019s incident response policy in accordance with agency  requirements.  15. Update incident response procedures to include (1) instructions for  coordinating incident response with contingency planning and (2)  lessons learned from incident response tests.\nWe are also making 166 technical recommendations in a separate report  with limited distribution. These recommendations address information  security weaknesses related to boundary protection, identification and  authentication, authorization, cryptography, physical security,  configuration management, and media protection.\n\n\tAgency Comments and Our Evaluation\n\nWe received written comments on a draft of this report from the  Department of Health and Human Services (HHS). In the comments  (reprinted in appendix II), the department stated that FDA concurred with  our recommendations, has begun implementing several of them, and is  actively working to address all the recommendations as quickly and  completely as possible. The department also stated that FDA has  acquired third-party expertise to assist in these efforts to immediately  address the recommendations in our report.\nThe department emphasized its commitment to protecting the public  health and proprietary business information at FDA, including by  implementing layered defenses and other compensating controls. HHS  further noted that FDA has not experienced a major cybersecurity-related  breach that exposed industry or public health information and that  information security remains a high priority at FDA. The department  added that since hiring its CIO in 2015, FDA has undertaken steps to  better ensure the prevention, detection, and correction of incidents. These  include the development of an IT strategic plan and the restructuring of  cybersecurity leadership, among other initiatives.\nIn addition, HHS noted that we did not identify an elevated risk of  exposure and\/or exfiltration of trade secret and\/or other sensitive  information. However, this does not accurately reflect the results of our  review. As stated in the report, we identified a significant number of  weaknesses in technical controls\u2014including access controls, change  controls, and patch management\u2014that jeopardize the confidentiality,  integrity, and availability of the seven moderate- and high-impact systems  we reviewed. Moreover, several of these weaknesses affected FDA\u2019s  general support systems, which are connected to numerous systems  beyond the ones we reviewed. As previously mentioned, these  weaknesses place the seven FDA systems, including those that receive,  process, and maintain sensitive industry and public health data, at  increased and unnecessary risk of unauthorized access, use, or  modification.\nThe department also made additional comments regarding our report and  methodology. In particular, it stated that our methodology did not use an  industry-standard approach to assessing risk, defined as the likelihood of  a given threat source exploiting a particular vulnerability and the resulting  significance of the impact of that adverse event on the organization, or  quantify this risk in our overall assessment. We did not perform a  comprehensive risk assessment of FDA\u2019s information systems and  information because that is FDA\u2019s responsibility, not ours. However, we  did consider the elements of risk to agency systems and information  during our review. For example, as stated in the report, in selecting the  seven systems we reviewed, we considered FDA\u2019s categorization of the  impact or magnitude of harm to the agency\u2019s operations, assets, and  individuals should the confidentiality, integrity, or availability of the  systems and the information they contain be compromised. Six of the  seven systems we selected were assigned a Federal Information  Processing Standard rating of moderate or high impact by FDA, indicating  that the loss of confidentiality, integrity, or availability of these systems or  the information they contain would have either a serious or  severe\/catastrophic impact on the organization. We also considered how  each control weakness, vulnerability, or program shortcoming we  identified could impair or diminish the effectiveness of a security control or  be exploited to facilitate unauthorized system activity. Our report identifies  numerous weaknesses and vulnerabilities along with their potential  impact if the vulnerabilities are exploited. It is also noteworthy that our  work determined that for the reviewed systems, FDA had not determined  the likelihood and impact of threats to those systems.\nHHS also stated that our report did not consider other FDA tools,  resources, and capabilities designed to prevent, detect, and correct  incidents, such as its ability to prevent or mitigate breaches like the one  that occurred in October 2013. We recognize that FDA has implemented  numerous security controls and key elements of its information security  program; however, the weaknesses we identified nevertheless pose  increased and unnecessary risk to its systems and information. For  example, as noted in our report, FDA had not updated its incident  response policy since 2007 or incorporated other key elements. Having a  complete and up-to-date incident response capability is essential to  ensuring that FDA staff have the knowledge and tools to effectively  respond to security incidents, such as breaches.\nFinally, the department stated that our report does not consistently or  clearly distinguish which of the systems reviewed contained sensitive  information and which do not. It noted, for example, that FDA\u2019s Scientific  Network is a research and development network that does not contain  trade secret information. However, as we noted in our report, FDA\u2019s  systems operate in an interconnected and networked environment, and  the agency had not ensured that the Scientific Network, for example, was  adequately isolated from other systems containing sensitive data, nor had  it developed and implemented risk management controls for this system.  These weaknesses could provide an attacker with a pathway from this  less-secure system to other systems containing sensitive public health or  proprietary business data. Such weaknesses therefore pose an increased  risk to the sensitive information FDA collects and maintains.\nAs agreed with your offices, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days from the  report date. At that time, we will send copies to relevant congressional  committees, the Secretary of Health and Human Services, the  Commissioner of FDA, and other interested parties. In addition, the report  will be available at no charge on the GAO website at http:\/\/www.gao.gov.\nIf you or your staff have any questions about this report please contact  Gregory C. Wilshusen at (202) 512-6244 or wilshuseng@gao.gov or Dr.  Nabajyoti Barkakati at (202) 512-4499 or barkakatin@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.\n\nAppendix I: Objective, Scope, and Methodology\n\nThe objective of our review was to evaluate the extent to which the Food  and Drug Administration (FDA) has implemented information security  controls to effectively protect the confidentiality, integrity, and availability  of its information on selected information systems.\nTo determine the effectiveness of the FDA\u2019s security controls, we gained  an understanding of the overall network environment, identified  interconnectivity and control points, and examined controls for the  agency\u2019s networks and facilities. We reviewed controls over the network  infrastructure and selected systems that processed confidential  commercial and proprietary business information. We performed our work  at FDA headquarters in Silver Spring, Maryland, and at several data  centers in Ashburn, Virginia, and Silver Spring, Maryland.\nWe selected a non-generalizable sample of seven systems for review  that (1) receive, transmit, and\/or process sensitive drug information; (2)  are essential to FDA\u2019s mission, support its business processes, and  contain or process sensitive proprietary business information; and (3)  were assigned a Federal Information Processing Standard rating of  moderate or high impact. These systems perform the following support  functions:\nSupport and facilitate post-market product safety surveillance of  human drugs, biologics, devices, and combination products. Provide a  data repository for collecting, storing, viewing, analyzing, reporting,  and tracking the receipt of adverse event data or medication errors.\nEstablish a single gateway or communications portal for accepting  electronic submissions or allowing authorized users to view or obtain  information. Examples of electronic submissions include industry- provided trade secrets, adverse event records, and a multitude of  different records related to FDA\u2019s regulatory oversight of regulated  products.\nProvide capabilities for regulatory scientific research, while also  supporting FDA\u2019s overall goals and objectives in areas where  information technology requires supercomputer-strength  computational power.\nSupport FDA\u2019s research and development activities.\nProvide a platform through which FDA organizations may disseminate  FDA-related information to interested parties, including the public,  health professionals, regulated industries, and the media. Provide  information about the various product areas that FDA regulates (food,  drugs, medical devices, cosmetics, etc.), timely advisories (e.g.,  anticipated disease outbreaks such as the Severe Acute Respiratory  Syndrome (SARS), buying medicines online, and LASIK surgery), and  other FDA activities. Provide links to related reference materials and  opportunities for consumers and industry to interact with the FDA.\nProvide basic network and security capabilities for the FDA enterprise.\nFacilitate receipt and review of electronic drug applications, to include  scans and checks of the validity of drug submissions from industry  and making them available for reviewers, as well as providing file  shares for storing successful submissions that are to be reviewed  To evaluate FDA\u2019s controls over its information systems, we used our  Federal Information System Controls Audit Manual, which contains  guidance for reviewing information system controls that affect the  confidentiality, integrity, and availability of computerized information;  National Institute of Standards and Technology (NIST) standards and  guidelines; Department of Health and Human Services guidelines; FDA  policies and procedures; and standards and guidelines from relevant  security and IT security organizations, such as the National Security  Agency and the Center for Internet Security, and the Interagency Security  Committee.  reviewed firewall configurations, among other things, to determine  whether system boundaries had been adequately protected;  reviewed the complexity and expiration of password settings to  determine if password management was being enforced; analyzed administrative users\u2019 system access permissions to  determine whether their authorizations exceeded that necessary to  perform their assigned duties; observed configurations for providing secure data transmissions  across the network to determine whether sensitive data were being  encrypted;  reviewed software security settings to determine if modifications of  sensitive or critical system resources had been monitored and logged; observed physical access controls to determine if computer facilities  and resources were being protected from espionage, sabotage,  damage, and theft; examined configuration settings and access controls for routers,  network management servers, switches, and firewalls;  inspected key servers and workstations to determine if critical patches  had been installed and\/or were up-to-date; examined contingency plans for seven systems to determine whether  those plans had been developed and tested;  reviewed media handling procedures to determine if equipment used  for clearing sensitive data had been tested to ensure correct  performance; and  reviewed personnel clearance procedures to determine whether staff  had been properly cleared prior to gaining access to sensitive  information or information systems.\nUsing the requirements identified by the Federal Information Security  Modernization Act of 2014 (FISMA), which establishes key elements for  an effective agency-wide information security program, and associated  NIST guidelines, Department of Health and Human Services and Food  and Drug Administration Requirements, we evaluated FDA\u2019s information  security program by  reviewing assessments of risk for six FDA systems to determine  whether threats and vulnerabilities were being identified; analyzing FDA policies, procedures, and practices to determine their  effectiveness in providing guidance to personnel responsible for  securing information and information systems; analyzing security plans for six systems to determine if those plans  had been documented and updated according to federal guidance; examining the security awareness training for employees and  contractors to determine whether they had received training according  to federal requirements; examining training records for personnel who have significant  responsibilities to determine whether they had received training  commensurate with those responsibilities; analyzing FDA\u2019s procedures and results for testing and evaluating  security controls to determine whether management, operational, and  technical controls for seven systems had been sufficiently tested at  least annually and based on risk;  reviewing FDA\u2019s implementation of continuous monitoring practices to  determine whether the agency had developed and implemented an  information system continuous monitoring strategy to manage its IT  assets and monitor the security configurations and vulnerabilities for  those assets; examining FDA\u2019s process to correct weaknesses and to determine  whether remedial action plans complied with federal guidance; and  reviewing FDA\u2019s implementation of incident response practices.\nTo determine the reliability of FDA\u2019s computer-processed data, we  evaluated the materiality of the data to our audit objective and assessed  the data by various means, including reviewing related documents,  interviewing knowledgeable agency officials, and reviewing internal  controls. Through a combination of methods, we concluded that the data  were sufficiently reliable for the purposes of our work.\nWe conducted this performance audit from February 2015 to August 2016  in accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objective.\n\nAppendix II: Comments from the Department of Health and Human Services\n\nAppendix III: GAO Contacts and Staff Acknowledgments\n\n\tGAO Contacts\n\n\tStaff Acknowledgments\n\nIn addition to the individuals named above, Gary Austin, West Coile, Larry  Crosland, and Chris Warweg (Assistant Directors); Vernetta Marquis  (Analyst in Charge); Alexander Anderegg, Angela Bell, Saar Dagani,  Angel Ip, Lee McCracken, Constantine Papanastasiou, Dwayne Staten,  and Michael Stevens made key contributions to this report.","output":"Why GAO Did This Study\n\nFDA has a demanding responsibility of ensuring the safety, effectiveness, and quality of food, drugs, and other consumer products. In carrying out its mission, FDA relies extensively on information technology systems to receive, process, and maintain sensitive industry and public health data, including proprietary business information such as industry drug submissions and reports of adverse reactions. Accordingly, effective information security controls are essential to ensure that the agency's systems and information are adequately protected from inadvertent or deliberate misuse, improper modification, unauthorized disclosure, or destruction.\nGAO was asked to examine security controls over key FDA information systems. GAO assessed the extent to which FDA had effectively implemented information security controls to protect the confidentiality, integrity, and availability of its information on seven information systems selected for review. To do this, GAO reviewed security policies, procedures, reports, and other documents; examined the agency's network infrastructure; tested controls for the seven systems; and interviewed FDA personnel.\n\nWhat GAO Found\n\nAlthough the Food and Drug Administration (FDA), an agency of the Department of Health and Human Services (HHS), has taken steps to safeguard the seven systems GAO reviewed, a significant number of security control weaknesses jeopardize the confidentiality, integrity, and availability of its information and systems. The agency did not fully or consistently implement access controls, which are intended to prevent, limit, and detect unauthorized access to computing resources. Specifically, FDA did not always (1) adequately protect the boundaries of its network, (2) consistently identify and authenticate system users, (3) limit users' access to only what was required to perform their duties, (4) encrypt sensitive data, (5) consistently audit and monitor system activity, and (6) conduct physical security reviews of its facilities. FDA conducted background investigations for personnel in sensitive positions, but weaknesses existed in other controls, such as those intended to manage the configurations of security features on and control changes to hardware and software; plan for contingencies, including systems disruptions and their recovery; and protect media such as tapes, disks, and hard drives to ensure information on them was \u201csanitized\u201d and could not be retrieved after they are disposed of. The table below shows the number of GAO-identified weaknesses and associated recommendations, by control area.\nThese control weaknesses existed, in part, because FDA had not fully implemented an agency-wide information security program, as required under the Federal Information Security Modernization Act of 2014 and the Federal Information Security Management Act of 2002. For example, FDA did not\nensure risk assessments for reviewed systems were comprehensive and addressed system threats,\nreview or update security policies and procedures in a timely manner,\ncomplete system security plans for all reviewed systems or review them to ensure that the appropriate controls were selected,\nensure that personnel with significant security responsibilities received training or that such training was effectively tracked,\nalways test security controls effectively and at least annually,\nalways ensure that identified security weaknesses were addressed in a timely manner, and\nfully implement procedures for responding to security incidents.\nUntil FDA rectifies these weaknesses, the public health and proprietary business information it maintains in these seven systems will remain at an elevated and unnecessary risk of unauthorized access, use, disclosure, alteration, and loss.\n\nWhat GAO Recommends\n\nGAO is making 15 recommendations to FDA to fully implement its agency-wide information security program. In a separate report with limited distribution, GAO is recommending that FDA take 166 specific actions to resolve weaknesses in information security controls. HHS stated in comments on a draft of this report that FDA concurred with GAO's recommendations and has begun implementing several of them."}
{"id":"gao_GAO-11-880T","pid":"gao_GAO-11-880T_0","input":"\tData Gaps Hinder Full Assessment of Families Being Assisted with TANF Funds\n\nThe number of families receiving welfare cash assistance fell significantly  after the creation of TANF, decreasing by almost 50 percent from a  monthly average of 3.2 million families in fiscal year 1997 to a low of 1.7  million families in fiscal year 2008 (see fig. 1). Several factors likely  contributed to this caseload decline, such as the strong economy of the  1990s, declines in the number of eligible families participating, concurrent  policy changes, and state implementation of TANF requirements,  including those related to work participation. However, since fiscal year  2008 and the beginning of the recent economic recession, the number of  families receiving TANF cash assistance has increased by 13 percent to  a monthly average of 1.9 million families in fiscal year 2010. Comparing  the types of families that receive TANF cash assistance, the number of  two-parent families increased at a faster rate than single-parent families  or child-only cases, in which only the children receive benefits, during this  time period.\nThe number of child-only cases has increased slightly from fiscal year  2000 to fiscal year 2008; however, these cases make up an increasing  proportion of the total number of families receiving cash assistance  because TANF cases with adults in the assistance unit have decreased  substantially. Specifically, the number of TANF child-only cases increased  from approximately 772,000 cases to approximately 815,000 cases, but  the number of families with adults receiving assistance decreased from  about 1.5 million to about 800,000 cases (fig. 2). As a result, the share of  child-only cases in the overall TANF caseload increased from about 35  percent to about half.\nThere are four main categories of \u201cchild-only\u201d cases in which the  caregiver (a parent or non-parent) does not receive TANF benefits: (1)  the parent is receiving Supplemental Security Income; (2) the parent is  a noncitizen or a recent legal immigrant; (3) the child is living with a  non-parent caregiver, often a relative; and (4) the parent has been  sanctioned and removed from the assistance unit for failing to comply  with program requirements, and the family\u2019s benefit has been  correspondingly reduced. Families receiving child-only assistance are  generally not subject to work requirements.\nBetween fiscal years 2000 and 2008, increases in two of the categories  were statistically significant: children living with parents who were  ineligible because they received SSI benefits and children living with  parents who were ineligible because of their immigration status. Cases in  which the parents were ineligible due to immigration status almost  doubled and increased from 11 percent of the TANF child-only caseload  in fiscal year 2000 to 19 percent in fiscal year 2008 (see fig. 3). This  increase of 8 percentage points is statistically significant and represents  an increase from about 83,000 in fiscal year 2000 to over 155,000 in  fiscal year 2008, with the greatest increase occurring in California.  However, in some cases, the relationship between the child and the adult  living in the family is not known. The number of these cases decreased  significantly over the same period, and it is possible that some of the  increase in cases with ineligible parents due to SSI receipt or immigration  status resulted from better identification of previously unknown  caregivers. However, given available data, we were unable to determine  how much of the increase was due to better reporting versus an actual  increase in the number of cases.\nBoth the composition of the overall TANF caseload, as well as the  composition of the TANF child-only caseload, varies by state. For  example, in December 2010, 10 percent of TANF cases in Idaho were  single-parent families, compared to almost 80 percent in Missouri. In both  of these states, child-only cases comprised the rest of their TANF  caseloads. Concerning the variation in child-only cases by state, almost  60 percent of TANF child-only cases in Tennessee included children  living with non-parent caregivers, compared to 31 percent in Texas,  according to state officials.\nAs the overall number of families receiving TANF cash assistance has  declined, so has state spending of TANF funds on cash assistance.  TANF expenditures for cash assistance declined from about 73 percent of  all expenditures in fiscal year 1997 to 30 percent in fiscal year 2009 (see  fig. 4) as states shifted spending to purposes other than cash assistance,  which is allowed under the law. States may use TANF funds to provide  cash assistance as well as a wide range of services that further the  program\u2019s goals, including child care and transportation assistance,  employment programs, and child welfare services. While some of this  spending, such as that for child care assistance, relates directly to helping  current and former TANF cash assistance recipients work and move  toward self-sufficiency, other spending is directed to a broader population  that did not ever receive TANF cash assistance.\nTracking the number of families receiving monthly cash assistance\u2014the  traditional welfare caseload\u2014no longer captures the full picture of families  being assisted with TANF funds. As states began providing a range of  services beyond cash assistance to other low-income families, data  collection efforts did not keep pace with the evolving program. Because  states are primarily required to report data to HHS on families receiving  TANF cash assistance but not other forms of assistance, gaps exist in the  information gathered at the federal level to understand who TANF funds  are serving and services provided, and to ensure state accountability. For  example, with the flexibility allowed under TANF, states have used a  significant portion of their TANF funds to augment their child care subsidy  programs. However, states are not required to report on all families  provided TANF-funded child care, leaving an incomplete picture of the  number of children receiving federally funded child care subsidies.  Overall, data on the total numbers of families served with TANF funds  and how states use TANF funds to help families and achieve program  goals in ways beyond their welfare-to-work programs is generally  unavailable. When we first reported on these data limitations to this  Subcommittee in 2002, we noted that state flexibility to use TANF funds  in creative ways to help low-income families has resulted in many families  being served who are not captured in the data reported to the federal  government. At that time, it was impossible to produce a full count of all  families served with TANF funds, and that data limitation continues today.\n\n\tNational Work Participation Rates Changed Little after DRA, and States\u2019 Rates Reflected Both Recipients\u2019 Work Participation and States\u2019 Policy Choices\n\nBecause job preparation and employment are key goals of TANF, one  of the federal measures of state TANF programs\u2019 performance is the  proportion of TANF cash assistance recipients engaged in allowable work  activities. Generally, states are held accountable for ensuring that at  least 50 percent of all families receiving TANF cash assistance participate  in one or more of the 12 specified work activities for an average of 30  hours per week. However, before DRA, concerns had been raised  about the consistency and comparability of states\u2019 work participation rates and the underlying data on TANF families participating in work activiti Although DRA was generally expected to strengthen TANF work  requirements and improve the reliability of work participation data and  program integrity by implementing federal definitions of work activities  and participation verification requirements, the proportion of families  receiving TANF cash assistance who participated in work activities for the  required number of hours each week changed little after DRA, as did the  types of work activities in which they most frequently participated.  Specifically, in fiscal years 2007 through 2009, from 29 to 30 percent of  TANF families participated in work activities for the required number of  hours, which is similar to the 31 to 34 percent of families who did so in  each year from fiscal years 2001 through 2006. Among families that met  their work requirements both before and after DRA, the majority  participated in unsubsidized employment. The next most frequent work  es. activities were job search and job readiness assistance, vocational  educational training, and work experience.\nAlthough fewer than 50 percent of all families receiving TANF cash  assistance participated in work activities for the required number of hours  both before and after DRA, many states have been able to meet their  work participation rate requirements because of various policy and  funding options allowed in federal law and regulations. Specifically,  factors that influenced states\u2019 work participation rates included not only  the number of families receiving TANF cash assistance who participated  in work activities, but also  1.  decreases in the number of families receiving TANF cash assistance,  2.  state spending on TANF-related services beyond what is required,  3.  state policies that allow working families to continue receiving TANF  4.  state policies that provide nonworking families cash assistance  outside of the TANF program.\nBeyond families\u2019 participation in the 12 work activities, the factor that  states have commonly relied on to help them meet their required work  participation rates is the caseload reduction credit. Specifically, decreases  in the numbers of families receiving TANF cash assistance over a  specified time period are accounted for in each state\u2019s caseload reduction  credit, which essentially then lowers the states\u2019 required work  participation rate from 50 percent. For example, if a state\u2019s caseload  decreases by 20 percent during the relevant time period, the state  receives a caseload reduction credit equal to 20 percentage points, which  results in the state work participation rate requirement being adjusted  from 50 to 30 percent. While state caseload declines have generally been  smaller after DRA because the act changed the base year for the  comparison from fiscal year 1995 to fiscal year 2005, many states are  still able to use caseload declines to help them lower their required work  participation rates. For example, in fiscal year 2009, 38 of the 45 states  that met their required work participation rates for all TANF families did so  in part because of their caseload declines (see fig.5).\nHowever, while states\u2019 caseload reduction credits before DRA were  based primarily on their caseload declines, after DRA, states\u2019 spending of  their own funds on TANF-related services also became a factor in some  states\u2019 credits. Specifically, states are required to spend a certain amount  of their funds every year in order to receive their federal TANF block  grants. However, if states spend in excess of the required amount, they  are allowed to correspondingly increase their caseload reduction  credits. In fiscal year 2009, 32 of the 45 states that met their required  work participation rates for all families receiving cash assistance claimed  state spending beyond what is required toward their caseload reduction  credits. In addition, 17 states would not have met their rates without  claiming these expenditures (see fig. 5). Among the states that needed  to rely on excess state spending to meet their work participation rates,  most relied on these expenditures to add between 1 and 20 percentage  points to their caseload reduction credit s (see fig. 6).\n\n\tConcluding Observations\n\nAs traditional cash assistance caseloads declined and states broadened  the types of services provided and the number of families served, existing  data collection efforts resulted in an incomplete picture of the TANF  program at the national level. In effect, there is little information on the  numbers of people served by TANF funds other than cash assistance and  no real measure of how services supported by TANF funds meet the  goals of welfare reform. This leaves the federal government with  underestimates of the numbers served and potentially understated results  from these funds.\nIn addition, as before DRA, states have continued to take advantage of  the various policy and funding options available to increase their TANF  work participation rates. As a result, while measuring work participation of  TANF recipients is key to understanding the success of state programs in  meeting one of the federal purposes of TANF, whether states met the  required work participation rates provides only a partial picture of state  TANF programs\u2019 effort and success in engaging recipients in work  activities. Although the DRA changes to TANF work requirements were  expected to strengthen the work participation rate as a performance  measure and move more families toward self-sufficiency, the proportion  of TANF recipients engaged in work activities remains unchanged. States\u2019  use of the modifications currently allowed in federal law and regulations,  as well as states\u2019 policy choices, have diminished the rate\u2019s usefulness as  the national performance measure for TANF, and shown it to be limited  as an incentive for states to engage more families in work.\nLack of complete information on how states use funds to aid families and  to measure work participation hinders decision makers in considering the  success of TANF and what trade-offs might be involved in any changes to  program requirements. In addressing these issues, care must to be taken  to ensure that data requirements are well thought out and do not present  an unreasonable burden on state programs.\nWe provided drafts of the reports we drew on for this testimony to HHS  for its review, and copies of the agency\u2019s written responses can be found  in the appendices of the relevant reports.  We also provided HHS a draft  of this testimony for technical comments on the new information on child- only TANF cases and updated TANF work participation data.  HHS had  no technical comments.\nChairman Davis and Ranking Member Doggett, and Members of the  Subcommittee, this concludes my statement. I would be pleased to  respond to any questions you may have.\n\n\tGAO Contacts and Acknowledgments\n\nFor questions about this statement, please contact Kay E. Brown at (202)  512-7215 or brownke@gao.gov. Contact points for our Offices of  Congressional Relations and Public Affairs may be found on the last page  of this statement. Individuals who made key contributions to this  statement include James Bennett, Rachel Frisk, Alex Galuten, Gale  Harris, Jean McSween, and Cathy Roark.\n\nAppendix I: How a State\u2019s Work Participation Rate Is Calculated When It Claims State Expenditures in Excess of Its Requirement\n\n\tFederal law allows states to apply for caseload reduction credits, which decrease their required work participation rates.\n\nThe state in this example would have its minimum work participation rate reduced to 26 percent for all TANF families.\n\nAppendix II: TANF Child-Only Caseload Estimates and 95 Percent Confidence Intervals","output":"Why GAO Did This Study\n\nThe Temporary Assistance for Needy Families (TANF) program, created in 1996, is one of the key federal funding streams provided to states to assist low-income families. A critical aspect of TANF has been its focus on employment and self-sufficiency, and the primary means to measure state efforts in this area has been TANF's work participation requirements. When the Deficit Reduction Act of 2005 (DRA) reauthorized TANF, it also made changes that were generally expected to strengthen these work requirements. Given the impending extension or reauthorization of TANF, this testimony primarily draws on previous GAO work to focus on (1) how the welfare caseload and related spending have changed since TANF was created and (2) how states have met work participation rates since DRA. To address these issues, in work conducted from August 2009 to May 2010, GAO analyzed state data reported to the Department of Health and Human Services (HHS); surveyed state TANF administrators in 50 states and the District of Columbia; conducted site visits to Florida, Ohio, and Oregon, selected to provide geographic diversity and variation in TANF program characteristics; and reviewed relevant federal laws, regulations, and research. In July 2011, GAO updated this work by analyzing state data reported to HHS since that time. In addition, GAO gathered information on caseload changes through its forthcoming work on TANF child-only cases.\n\nWhat GAO Found\n\nBetween fiscal years 1997 and 2008, the total number of families receiving welfare cash assistance decreased by almost 50 percent. At the same time, there have also been changes in the types of families receiving cash assistance. Specifically, child-only cases--in which the children alone receive benefits--increased from about 35 percent of the overall TANF caseload in 2000 to about half in 2008. As the number of families receiving TANF cash assistance declined, state spending shifted to support purposes other than cash assistance, which is allowed under the law. However, because states are primarily required to report data to HHS on families receiving cash assistance and not on families receiving other forms of aid funded by TANF, this shift in spending has left gaps in the information gathered at the federal level to understand who TANF funds are serving and ensure state accountability. Nationally, the proportion of TANF families who met their work requirements changed little after DRA was enacted, and many states have been able to meet their work participation rate requirements because of various policy and funding options allowed in federal law and regulations. Although federal law generally requires that a minimum of 50 percent of families receiving TANF cash assistance in each state participate in work activities, both before and after DRA, about one-third of TANF families nationwide met these requirements. Nonetheless, many states have been able to meet their required work participation rates because of policy and funding options. For example, states receive a caseload reduction credit, which generally decreases each state's required work participation rate by the same percentage that state caseloads decreased over a specified time period. States can further add to their credits, and decrease their required work rates, by spending their own funds on TANF-related services beyond the amount that is required to receive federal TANF funds. In fiscal year 2009, 7 states met their rates because 50 percent or more of their TANF families participated in work activities for the required number of hours. However, when states' caseload decreases and additional spending were included in the calculation of state caseload reduction credits, 38 other states were also able to meet their required work participation rates in that year."}
{"id":"gao_GAO-09-352","pid":"gao_GAO-09-352_0","input":"\tBackground\n\nCongress established the Military Housing Privatization Initiative in 1996  to ensure adequate military family housing was available when needed by  renovating existing inadequate housing and constructing new homes on  and around military bases more rapidly than was possible using traditional  funding and military construction methods. Under the initiative, Congress  provided DOD with a variety of authorities that may be used to obtain  private sector financing and expertise to repair, renovate, and construct  military family housing, including :    Real estate tools: The secretary of a military department may convey or  lease existing DOD property or facilities to developers for the purpose  of using that property to provide housing suitable for military  servicemembers.\nInvestment tools: The secretary of a military department may invest  limited amounts of appropriated funds in a developer carrying out a  project or projects for the acquisition or construction of housing units  suitable for use as military family housing.\nFinancial tools: The secretary of a military department may make  direct loans to a developer or may guarantee a loan made to a  developer if the proceeds of the loans are used to acquire or construct  houses suitable for use as military family housing.\nDOD may exercise one or any combination of military housing  privatization initiative authorities, which provides flexibility in the  structure and terms of the transactions with the private sector. This  flexibility has resulted in a number of different kinds of transaction  structures using different combinations of these authorities.\nIn a typical privatized military housing project, the developer is a limited  liability company or partnership which has been formed for the purpose of  acquiring debt, leasing land, and building and managing a specific project  or projects. The limited liability company is typically composed of one or  several private sector members, such as construction firms, real estate  managers, or other entities with expertise in housing construction and  renovation. In those cases where the secretary of a military department  has made an investment in the limited liability company, the department  may also be a member of the limited liability company. In a typical  privatized military housing project, a military department leases land to  a developer for a term of 50 years. The military department generally  conveys existing homes located on the leased land to the developer for the  duration of the lease. The developer is responsible for constructing new  homes or renovating existing houses and then leasing this housing, giving  preference to servicemembers and their families. Although the developers  enter into agreements to construct or renovate military housing, the  developer normally enters into various contracts with design builders and  subcontractors to carry out the actual construction and renovation.\n\n\t\tTypical Financing of Military Family Housing Privatization Projects\n\nIn addition to any government or private sector investment in the  developer, the majority of the project financing is obtained from financial  institutions in the form of construction loans or military housing bonds.  The developers issue military housing bonds in the private financial  markets to fund new home construction or renovation of existing homes,  with the servicemembers\u2019 basic allowance for housing serving as the  primary security for the funds obtained through bonds. Although the  servicemember\u2019s housing allowance is subject to the defense budget,  which is supported through annual appropriations, we were told most  bond investors believe it to be a highly reliable revenue stream given the  history of stable congressional funding of servicemembers\u2019 housing. In  addition, because developers issue military housing bonds in the financial  markets, several other financial entities are involved in the process of  obtaining bond financing of military family housing privatization projects,  as shown in figure 1.\nIn addition to the housing bond financing obtained through the financial  markets, the services can also provide some financing to the privatization  projects through other approaches. On one hand, the Army and Navy have  typically chosen to invest limited amounts of appropriated funds in  developers carrying out projects to renovate existing housing or construct  new housing for use by servicemembers and their families. On the other  hand, the Air Force has typically chosen to provide direct loans to  developers carrying out projects on Air Force installations. Generally, the  type of government financial involvement\u2014whether it be an investment   or direct loan\u2014determines the structure of the project\u2019s ownership. For  example, because the Army and Navy typically make investments in  developers, they may have a membership interest in the developer.  Although the private sector company that is the managing member of the  developer maintains day-to-day operational decision making and manages  the project, the Army and Navy enter into an operating agreement with the  managing member that describes the governance, terms, and structure of  the developer. The operating agreement will typically specify certain  major decisions that must be made with the consent of the government.  While these major decisions may differ from project to project, they often  include, for example, certain changes to the project scope including  changes in the number of houses in the project, the number of new homes  versus renovated homes in the project, and the project\u2019s financing such as  increases or decreases in the project\u2019s debt. Conversely, because the Air  Force does not generally make investments in the developer carrying out  the privatization projects but instead provides direct loans, it does not  generally become a member or partner of the developer and is not part of  the project ownership.\nDOD contributions, either in the form of cash investments or direct loans,  are often made to close gaps in construction funding that materialize when  the developer is unable to obtain adequate financing necessary for the  project size. Funding gaps occur when the estimated cost of the project  exceeds the amount the project can support, meaning that the developer  cannot obtain all the financing needed to build the project for the defense  installation or installations. To maintain the needed project size, DOD can  either provide a direct loan or an investment to the developer to bridge the  gap between the estimated project cost and the amount of money the  developer is able to obtain through the private financial markets, although  this also increases the amount of appropriated funds provided to the  project. DOD does not provide funds to cover the private developer\u2019s debt  payments associated with the project.\n\n\t\tDOD\u2019s Family Housing Policy and Basic Allowance for Housing\n\nDOD\u2019s policy is to rely on private sector housing in the local communities  near military installations as the primary source of family housing. As a  result, about two-thirds of all military families in the United States live in  local community housing and receive a cash housing allowance, known as  basic allowance for housing, to help defray the cost of renting or  purchasing a home. Each year, DOD sets the monthly basic allowance for  housing rates. This allowance is based on the median local monthly cost of  housing, including current market rents, utilities, and renter\u2019s insurance.  The allowance can fluctuate from year to year as demand in some housing  markets varies over time. The housing allowance is generally based on  servicemembers\u2019 pay grades and whether or not they have dependents.  Furthermore, while the housing allowance is calculated on the basis of the  housing rental market, servicemembers may choose to apply their  allowance toward purchasing a home, and are free to spend more or less  than their allowance on housing. Servicemembers are permitted to keep  any portion of their basic allowance for housing not spent on rent and  conversely will have to use other funds if their rents exceed their  allowance.\nThe basic allowance for housing rates has increased since 2000 as DOD  has implemented an initiative to reduce military servicemembers\u2019 out-of- pocket housing costs. However, in certain areas, higher housing allowance  rates may make it more feasible for military servicemembers to consider  off-base rental housing if the homes are deemed more desirable in the  community or the amount of the housing allowance exceeds the cost of  the rent, permitting the servicemember to keep the difference. Similarly,  higher housing allowances may prompt some off-installation housing  developers to directly compete with privatized housing at the installation  by building more housing to compete for servicemembers as tenants.  Thus, increased housing allowances and increased housing choices can  provide servicemembers and their families with more housing options and  potentially lead to lower rates of occupancy for privatized housing at an  installation. We reported in April 2006 that increases in housing  allowances have made it possible for more servicemembers to afford  private housing in the local market, thus reducing the need for privatized  housing at installations.\nWhen a servicemember chooses to live in a family housing privatization  project, the servicemember pays rent to the developer, often through the  establishment of an allotment. The rent is usually, but not always, equal to  the basic allowance for housing. In turn, the developer uses the rental  income to help pay for housing improvements, home maintenance and  property management expenses, and other costs such as utilities and the  developer\u2019s management fees. In addition, while privatized housing is  meant to be an attractive alternative for military servicemembers looking  for a place to live, DOD does not require servicemembers, other than  certain key personnel, to live on the installation and thus in military  privatized housing.\n\n\t\tDOD Conducts Oversight of the Housing Privatization Project\n\nWithin the Office of the Secretary of Defense, the Housing and  Competitive Sourcing Office, which reports to the Deputy Under Secretary  of Defense (Installations and Environment), provides policy and oversight  of the housing privatization program, although responsibility for  implementing the statutory authority granted under the Military Housing  Privatization Initiative is primarily with the military departments. To help  oversee the military housing privatization program and provide status  information on project performance, OSD prepares a report, known as the  Military Housing Privatization Initiative Program Evaluation Plan  Executive Report, and provides it to the four congressional defense  committees. This report, which is prepared semiannually for the periods  ending June 30 and December 31, compiles various financial and program  progress data submitted by the military services for each awarded  privatization project. It provides information on deal structures,  government costs, use of statutory authorities, program and financial  performance, home construction and renovation progress, occupancy  rates, and results of surveys on military servicemember\u2019s satisfaction with  privatized housing. The congressional defense committees and OSD use  this information to monitor the program\u2019s progress and conduct financial  and performance oversight.\nCurrently, the focus of the military housing privatization program and   OSD oversight is to ensure that all construction is completed on schedule  and within budget, projects are financially viable and address the changing  requirements of the military services, and servicemembers and their  families have access to adequate, affordable, well-maintained, and safe  housing. OSD credits housing privatization with greatly improving the  state of its housing for servicemembers and their families. Figures 2  through 4 show photographs of older and newly constructed privatized  housing at selected installations we visited.\n\n\tDOD Has Made Progress in Transferring Inadequate Family Housing to Developers Although Actual Replacement Will Take Several Years\n\nSince Congress authorized the Military Housing Privatization Initiative in  1996, DOD has made significant progress in transferring inadequate  military family housing from its inventory by privatizing these homes.  However, it will be several more years before developers are able to  replace or renovate all of the inadequate houses as expected because  developers cannot complete all needed construction and renovation at  once. Developers had replaced or renovated about 67 percent of the  inadequate privatized houses as of February 2009.\n\n\t\tDOD Has Made Progress in Transferring Inadequate Family Housing to Developers through Privatization\n\nDOD has made significant progress in transferring ownership of  inadequate family housing to developers who are to replace or renovate  them. Because DOD typically conveys the homes it owns on military  installations to the developer for the duration of the ground lease, such  homes are no longer accounted for on DOD\u2019s property inventory. At the  start of the housing privatization program in fiscal year 1996, DOD  identified approximately 180,000 inadequate houses based on specific  criteria established by each service. Since then, DOD has used  privatization as its primary means of removing inadequate houses because  it allows for more rapid demolition, replacement, and renovation of homes  than DOD has stated it could do on its own. According to DOD, as of  February 2009, it had privatized almost 188,000 houses and most of its  inadequate family housing had been transferred out of its inventory.  During the years 2009 through the end of 2012, DOD plans to privatize  about 31,000 more homes, as shown in table 1.\nIn addition, by the end of fiscal year 2009, DOD\u2019s data shows that it plans  to have privatized over 197,000 houses. At that point, according to DOD, it  will have transferred all of its inadequate family housing from its inventory  to developers.\n\n\t\tActual Replacement of Inadequate Houses by Developers Will Take Several More Years\n\nAlthough DOD has transferred most of its inadequate housing to  developers for the duration of the ground leases through privatization,  actual replacement of these homes through new construction or  renovation will take several more years. The lag occurs because  developers can not complete all needed construction at the same time.  According to DOD\u2019s best available data on construction progress, housing  developers had replaced or renovated about 67 percent of the inadequate  houses scheduled to be replaced or renovated. Importantly, since DOD  wants to transfer military family housing operations to the private sector  to the greatest extent possible, some privatization projects include the  transfer of houses that are adequate and need little or no renovation at the  time of transfer. At the time of our report, DOD\u2019s data show that out of  187,904 total homes privatized as of February 2009, 47,502, or 25 percent,  were in adequate condition and did not need replacement or renovation. In  contrast, 140,402 homes, or 75 percent, were in inadequate condition and  in need of replacement or renovation. As figure 5 shows, of the 75 percent  of privatized homes in inadequate condition, private developers have  replaced 93,854 of these homes, or 67 percent, with new construction or  renovation.\n\n\tAlthough a Majority of Privatization Projects Exceed DOD\u2019s Generally Expected Occupancy Rate, Certain Projects Are Not Meeting This Rate\n\nWhile the majority of DOD\u2019s privatization projects are exceeding DOD\u2019s  generally expected occupancy rate of 90 percent, each service has some  projects that are not meeting this rate. Our analysis of DOD\u2019s data as of  September 2008 shows that about 70 percent of DOD\u2019s privatization  projects had achieved the generally expected occupancy rate, while about  30 percent were below the generally expected rate. Although many of  these projects are only slightly below the 90 percent rate, occupancy is an  important factor in ensuring sufficient revenue generation since the  developers\u2019 rental receipts are used to fund additional construction, make  debt payments, invest in reserve accounts for future maintenance, and  provide management fees. When a servicemember chooses to live in a  family housing privatization project, the servicemember pays rent to the  developer, often through the establishment of an allotment. The rent is  usually, but not always, equal to the basic allowance for housing. In turn,  the developer uses the rental income to help pay for housing  improvements, home maintenance and property management expenses,  and other costs such as utilities and the developer\u2019s management fees.   The developer cannot raise or lower the dollar amount of the member\u2019s  basic allowance for housing, as DOD sets this rate each year.\n\n\t\tAbout a Third of Privatization Projects Are Not Maintaining Generally Expected Occupancy Rates\n\nWhile the majority of DOD\u2019s privatization projects are exceeding DOD\u2019s  generally expected occupancy rate of 90 percent, each service has some  projects that are not meeting this rate. As of September 2008, about   70 percent of DOD\u2019s privatization projects were maintaining the expected  occupancy, while about 30 percent of the projects were below the 90  percent occupancy rate. Specifically, occupancy was below the 90 percent  rate in 12 of the Air Force\u2019s 29 projects; 7 of the Army\u2019s 30 projects; and   3 of the Navy and Marine Corps\u2019 15 projects. This represents a decrease  in the percentage of projects with low occupancy rates we found at the  time of our 2006 report, at which time 36 percent of privatization projects  (16 out of 44) were below 90 percent. Table 2 lists the privatization  projects with occupancy rates under 90 percent as September 2008.\nAlthough many of these projects are only slightly below DOD\u2019s generally  expected occupancy rate, service officials told us they are still watching  the financial aspects of these projects closely since even slightly lower- than-expected occupancy rates can lead to insufficient revenue generation  to meet necessary project expenses. In such cases, DOD officials told us  that they would look more closely at other indicators of the project\u2019s  financial health such as operating income, home construction progress,  and the ability of the developer to continue to make debt payments and  pay operation and maintenance expenses.\nMany factors can contribute to each specific privatization project\u2019s  occupancy rate and these factors may vary from one location to another  and may be specific to the location. For example, off-installation housing  options in the surrounding community can influence whether military  servicemembers desire to live in the military privatized housing at their  base or elsewhere in the community. Specifically, the quality and  affordability of both off-base rentals and for-sale housing and the nature of  the off-installation communities where available housing exists are some  factors that can influence a servicemember\u2019s decision where to live while  stationed at a particular installation. In addition, other factors such as the  quality of the military privatized housing in comparison to the competing  housing options, the availability of certain amenities such as community  centers and swimming pools on the installation or in the off-installation  community, the location and quality of elementary and secondary schools,  commuting distances, and the quality of property management service  provided by the privatization project owner may influence a  servicemember\u2019s decision where to live. Some examples of the reasons for  below 90 percent occupancy at selected bases as of September 2008  follow:    At the Navy\u2019s New Orleans Complex, Louisiana, occupancy was 86  percent. According to the Navy, the primary reason for this occupancy  rate was military members moving away from Naval Air Station Joint  Reserve Base New Orleans as a result of base realignment and closure  actions.\nAt Fort Hamilton, New York, occupancy was 85 percent. Army officials  attribute this to last year\u2019s higher-than-anticipated 22 percent increase  in the basic allowance for housing, which according to the Army, has  made off-installation housing options more affordable for  servicemembers and their families.\nAt Fort Benning, Georgia, occupancy was 82 percent. According to  Army officials, extended deployments prompted some family members  left behind to vacate their on-installation privatized houses and move  to be closer to other family members.\nAt Fort Jackson, South Carolina, occupancy was 51 percent. This  project was awarded in August 2008 and much of the existing  inventory of houses transferred to the private developer was older and  had not yet been renovated, making the houses relatively less  attractive and marketable, according to Army officials. The Army  expects occupancy rates to increase considerably as the developer  replaces the older housing with newly constructed or renovated  homes.\n\n\t\tLower-than-Expected Occupancy Can Cause Financial Distress for Some Projects\n\nDue to lower-than-expected occupancy, some privatization projects are  generating insufficient revenue to meet income projections which, in some  cases, is affecting the developers\u2019 ability to fund construction, make debt  payments, and provide funds for future maintenance and recapitalization.  Developers generate revenue from the privatization project by renting out  privatized housing at the installation to tenants, giving preference to  servicemembers and their families. The member\u2019s basic allowance for  housing goes directly to the developers as rent, and the developer, in turn,  uses the allowance to help pay for housing improvements, home  maintenance and property management expenses, and other costs such as  utilities. The developer cannot raise or lower the member\u2019s basic  allowance for housing, given that DOD sets the basic allowance rates each  year. DOD determines these allowance rates based on the median local  monthly cost of housing, including current market rents, utilities, and  renter\u2019s insurance. The allowance can fluctuate from year to year as  demand in some housing markets varies over time. The relationship of  maintaining sufficient occupancy to generate needed revenue to maintain  the project\u2019s financial health is shown in figure 6.\nIf project occupancy is lower than the 90 percent generally expected rate,  then rents for the homes may not generate enough revenue to permit  completion of all planned construction. For example, lower-than-projected  occupancy (76 percent) at Scott Air Force Base, Illinois, was contributing  to an unexpected funding shortfall. The project only generated $14 million  of the projected $24.7 million in net operating income as of September  2008, resulting in an almost $11 million shortfall in funds needed to  complete home construction. According to the Air Force, the supply of  newly constructed homes and the growing number of available competing  rental properties in the community around Scott Air Force Base has  provided effective competition by providing military servicemembers and  their families with numerous off-installation housing alternatives. Thus,  the Scott Air Force privatization project was generating insufficient  revenue to cover its expenses at the time of our report.\nLower-than-expected occupancy can affect a developer\u2019s ability to  generate adequate revenue to meet income projections if rental receipts  are insufficient to meet the developer\u2019s obligations, which can undermine  the developer\u2019s ability to make required debt payments to repay the  construction bond. This situation can also undermine the developer\u2019s  ability to adequately maintain or modernize the homes when needed,  potentially leading to future deterioration of the homes and an increasing  inability to compete with off-base alternatives. For example, due to low  occupancy (87 percent) at the Wright-Patterson Air Force Base project in  Ohio, revenue was insufficient at the time of our review to fund project  obligations such as debt service and management fees, thus the Air Force  and developer agreed to pay these obligations with other project funds.  According to the Air Force, without continued increased occupancy, the  project is not expected to have sufficient funds to invest in and maintain  the quality of the housing inventory over the life of the 50-year lease.\nTo help minimize the negative financial impact of low occupancy and  maintain project revenue and financial viability, some developers have  begun renting houses to parties other than military families, such as  unaccompanied servicemembers, active National Guard and Reserve  personnel, military retirees, federal government civilians, and in some  projects, private civilians. For example, the occupancy rate for military  families has been considerably lower than expected for the last 5 years at  the Army Presidio of Monterey\/Naval Post Graduate School Monterey  project in California. As a result, the project has been renting to personnel  other than active-duty military servicemembers with families. About   22 percent of the tenants at the project were not active-duty  servicemembers with families as of August 2008. According to Army  officials, factors contributing to low occupancy for active-duty  servicemembers with families for this project included the poor condition  of existing housing that had not yet been renovated and significantly  higher-than-expected housing allowances, which have made it financially  possible for more military families to afford housing in the surrounding  community. These two factors have made it difficult for the project to  maintain an occupancy rate sufficient to generate enough revenue to cover  expenses. However, our analysis of DOD\u2019s June 2008 data shows that  programwide, 4.1 percent or nearly 5,950 privatized homes are rented by  parties other than active-duty servicemembers with families. About half of  these homes are rented by unaccompanied active-duty servicemembers  and active National Guard and Reserves members, while the other half are  rented by military retirees, federal government civilians, and civilians.\n\n\tSeveral Defense Initiatives Are Adding to the Challenge in Providing Affordable and Adequate Housing and the Services Are Taking Steps to Mitigate That Challenge\n\nSeveral ongoing defense force structure and infrastructure initiatives, such  as implementing base realignment and closure recommendations,  returning some military forces based overseas to defense installations in  the United States, converting Army units to modular brigade combat teams  under the Army modularity initiative, and increasing the size of the Army  and Marine Corps force structure, are collectively compounding the  challenge DOD faces in ensuring military servicemembers and their  families have affordable and adequate family housing. However, the  services have taken several steps to mitigate that challenge.\n\n\t\tDOD\u2019s Force Structure and Infrastructure Initiatives Are Increasing Family Housing Needs at Some Installations\n\nDOD\u2019s force structures and infrastructure initiatives are leading to  increasing family housing needs due to the relocation of servicemembers  and their families under:    Grow-the-Force: In January 2007, the President announced and  Congress approved a permanent increase in the Army end strength by  more than 74,000 soldiers and the Marine Corps\u2019 end strength by   27,000 Marines through the Grow-the-Force initiative over the next  several years.\nBase Realignment and Closure: Several Army installations will  experience growth due to implementation of the 2005 base realignment  and closure round. Under the 2005 round, DOD is implementing 182  recommendations which must be completed by the statutory deadline  of September 15, 2011. These recommendations encompass a large  number of realignments, prompting significant personnel movements  among installations.\nGlobal Defense Posture Realignment: DOD plans to realign its  overseas basing structure and reduce its overseas presence by  transferring about 70,000 servicemembers and civilian personnel from  overseas bases to bases in the United States by 2011.\nArmy Modularity: The Army is undergoing a major force restructuring  as it implements its force modularity, which entails converting units to  brigade combat teams. Many Army installations with housing  privatization projects either have received or are slated to receive one  or more of these brigade combat teams.\nCollectively, DOD\u2019s initiatives are affecting Army installations to a greater  degree than those of the other services and are generating increased  family housing requirements for certain installations that may be met with  privatized housing. For example, the privatized housing requirement at  Fort Bliss, Texas, has increased by about 600 houses from 6,332 houses to  6,946 houses. Fort Bliss officials are also working with El Paso city  officials to increase off-base residential housing in the local community to  meet the expected growth of military families stationed at Fort Bliss.  According to Army officials, because the Army\u2019s growth plans are  exceeding the pace at which military family housing will be made  available, it will be difficult to completely meet this need by the time  additional servicemembers and their families arrive.\n\n\t\tServices Have Taken Steps to Address the Impact of Various Defense Initiatives on Their Ability to Provide Adequate and Affordable Family Housing\n\nThe services have taken or plan to take certain steps to ensure that  adequate family housing exists for military servicemembers and their  families. The Army plans to invest more appropriated funds into some  privatized family housing projects at several installations expecting growth  in the numbers of military personnel. Specifically, the Army has provided  almost $600 million more to developers carrying out five projects to  provide additional project funding to meet the need for more homes. Army  officials told us that the additional funding will make it easier for these  developers to obtain additional financing as well. Table 3 displays the  installations at which Army is providing additional funds to developers  and the amount of the funds.\nDespite the additional funding to increase the availability of family  housing at certain installations, Army\u2019s growth plans may still exceed the  pace at which military family housing will be made available at some  installations. This, in turn, is prompting the Army to choose to invest more  appropriated funds into some privatization projects. Recently, the Army  has \u201cretrofitted\u201d a few military housing privatization projects after  financial closing and actual housing turnover to the developer. Section  2875 of Title 10, U.S. Code requires the secretary of a military department  to limit the investment in an \u201celigible entity\u201d to not more than 33 percent  cash, or 45 percent if land or facilities are all or part of the investment, of  the capital cost of the project or projects that the \u201celigible entity\u201d proposes  to carry out. DOD officials explained that when an already awarded  project that is being carried out by one developer is retrofitted with either  a new project or another already awarded project, the Army\u2019s total  investment in the developer carrying out the combined retrofitted projects  must stay below a certain percentage of the capital cost of both projects  combined, not a percentage of each project separately. However, had  those projects not been retrofitted, the amount of funds allocated towards  any one pre-retrofitted project may have exceeded the statutory  investment cap.\nArmy officials told us that this model has been used several times to  retrofit projects, and that they plan to continue to use this model in the  future. For example, the Army retrofitted a project located at Fort Sill,  Oklahoma, with an ongoing project located at Fort Meade, Maryland. As a  result of retrofitting these projects, the Army\u2019s total cumulative investment  in the developer carrying out the retrofitted Fort Sill\/Fort Meade projects  was 28.8 percent, well below the 45 percent statutory cap. However, the  Army\u2019s total investment towards the Fort Sill phase alone is 55.8 percent  of the capital costs of that phase, which would have exceeded the  allowable statutory investment cap had it not been retrofitted with the  Fort Meade project. Army officials stated that they intend to continue to  use this retrofitting model for future projects. For example, at Fort Bliss,  Texas, and White Sands Missile Range, New Mexico, the Army cannot  invest any more appropriated funds for the project after its fiscal year 2008  and 2009 investments of nearly $163 million because it will have reached  the statutory investment cap. Nonetheless, according to Army officials, the  $163 million will not be enough to ensure that adequate and affordable  housing is available given the planned growth in military personnel at  these two installations. Fort Bliss is expected to experience a gain of  about 38,000 military families from 2005 to 2012. Thus, the Army is  considering retrofitting the already awarded projects at Fort Bliss\/White  Sands Missile Range with one at West Point, New York, as a way to invest  more into the Fort Bliss project and still be in compliance with the  statutory investment cap. By retrofitting these two projects, the Army\u2019s  total cumulative investment in the retrofitted projects would remain below  the statutory investment cap. Army officials told us that the total  investment in the Fort Bliss phase may increase by about $77 million,  which if the projects were not retrofitted, this amount would exceed the  statutory investment cap. Thus, the service\u2019s overall percentage of  appropriated funds invested in carrying out the retrofitted projects  declines, while the actual amount of appropriated funds contributed  increases. Army officials stated they developed this approach as a way to  comply with the statutory investment caps while trying to ensure that  adequate and affordable military family housing is available when needed.  OSD stated that it had no reason to believe that Congress intended the  investment limitation to be more restrictive on projects retrofitted after  award than on projects combined prior to award. Accordingly, OSD  officials told us that the use of the retrofitting model represents the Army\u2019s  rational use of statutory authority to invest in projects structured to  optimize the use of private and public resources. The Army\u2019s retrofitting  practice, as described by Army and OSD officials, appears to be consistent  with Section 2875 of Title 10, U.S. Code.\nIn many cases, a developer is awarded a project that involves multiple  installations. Of the 94 projects awarded under the military housing  privatization initiative as of March 2009, approximately a third of these  projects have combined privatization efforts at multiple installations under  the ownership of one developer. The military services\u2019 investments in  developers owning combined projects have been within statutory  limitations, though the developer\u2019 allocations of funds to individual  installations may have exceeded 33 or 45 percent. Further, OSD officials  told us that in a handful of cases, the services have invested in developers  that were currently operating housing privatization projects and which  have retrofitted a new set of installations into their existing ownership  structures. However, they stated that the methodology for calculating the  investment limitation in such a retrofitted model is the same as that for  calculating the investment for projects that combine work at multiple  installations before award. Although DOD provides notification and  justification of its cash investments, and Army officials told us that they  have briefed some congressional staff members on Army\u2019s new practice of  retrofitting projects, DOD has not provided detailed information to  Congress about its use of the retrofitting model in its semiannual report.  We recognize the difficulty of the challenge DOD is facing and the  importance of providing adequate housing under compressed time and  investment constraints. Nevertheless, for Congress to maintain oversight  of the housing privatization program, the House Report accompanying the  Military Quality of Life and Veterans Affairs, and Related Agencies  Appropriations Bill of 2006 directed DOD to report on the status of each  privatization project underway, on a no less than semiannual basis.  DOD\u2019s most recent semiannual report to the congressional defense  committees did not include information on the retrofitting model.  Although several retrofitting efforts are currently underway, and DOD  officials have told us that they plan to retrofit additional projects in the  future, it is unclear whether DOD plans to include such information in  future semiannual reports. Including information about the changed status  of projects that have been retrofitted, as the congressional defense  committees have requested, would assist congressional oversight of the  program.\nCollectively, although these measures mean more appropriated funds will  be spent to meet family housing needs than originally anticipated when  military housing privatization projects were awarded, these funds are still  far less than anticipated when Congress authorized the Military Housing  Privatization Initiative. For example, at the inception of the program, DOD  expected that the ratio of private funds to DOD funds invested in the  initiative would be a minimum of 3 to 1\u2014meaning for every $3 of private  funds invested into these privatization deals, DOD would invest $1.  However, at the time of our review, the overall ratio was actually 9 to 1\u2014 meaning for every $9 of private funds invested, DOD had invested $1.  According to Army officials, even with the Army\u2019s approach of retrofitting  projects in order to invest more appropriated funds to meet new military  personnel growth demands at certain installations, the current 9 to 1  investment ratio is not expected to change substantially.\nDOD has also taken other measures to better ensure military  servicemembers and their families have adequate and affordable housing,  given increases in family housing requirements at certain growth  installations. For example, the Army is renovating some of its Section 801  Build-to-Lease housing even though the 20-year leases on these homes  are expiring. Officials at Fort Drum, New York, told us that although the  Army\u2019s remaining Section 801 leases are expected to expire in 2010, they  are nonetheless repairing some of their remaining Section 801 housing to  improve the condition of these homes for current and incoming junior  enlisted servicemembers to meet the current shortage of adequate housing  in the community surrounding Fort Drum. Further, in the President\u2019s  budget presentation to Congress, Army explained its intent to temporarily  use the domestic leasing program, if necessary, at five Army installations  that are expecting to grow in military end strength and have housing  privatization projects\u2014Fort Carson, Colorado; Fort Wainwright, Alaska;  Fort Drum, New York; Fort Bliss, Texas; and Fort Riley, Kansas. According  to the Army, the planned use of domestic leases at these installations will  continue until local housing markets, including privatized housing, are  adequate to keep pace with the Army\u2019s planned growth. The domestic  lease program is already being implemented at Fort Drum, New York.  Finally, at some locations the Army is extending the use of the temporary  lodging expense allowance. Specifically, Fort Drum officials told us they  received permission to extend temporary lodging expenses up to 60 days,  as opposed to the normal 30 days, to provide temporary housing at local  hotels for incoming military members while they search and make  arrangements for family housing.\n\n\tCurrent Turmoil in Financial Markets Has Reduced Available Construction Funding for Some Privatization Projects\n\nSeveral factors related to the current turmoil in the financial markets have  reduced available funds for home construction, resulting in a larger  proportion of renovations relative to new construction and reduced scope  and amenities at some military family housing privatization projects. First,  obtaining financing has become more expensive. Second, more funds now  need to be set aside to help ensure debt repayment. Third, lower return  rates are now occurring on invested funds.\n\n\t\tNewly Awarded Projects Have Less Funds Available for Construction Because Obtaining Financing Has Become More Expensive\n\nHigher interest rates have increased the costs that some developers had to  pay at the time of our review to obtain financing from newly obtained  bonds, thus reducing the funds available for construction. In such  circumstances the services have had to reduce the number of new homes  to be constructed in favor of doing more renovations, which are generally  less costly. For example, a representative with the Hunt Development  Group, which is developing the Army\u2019s Fort Lee project in Virginia, told us  that when the project went to financial closing, the amount of principal the  developer was eligible to borrow was reduced by $10 million because of  increased interest costs to obtain bond financing. As a result, the Army  authorized the developer to build 97 fewer new homes. The developer told  us that it probably could have borrowed an additional $10 million, but the  Army would not allow it to do so due to the potential long-term financial  strain it could put on the project. In doing so, the Army stated that they,  the underwriter, and the developer applied standard conservative  underwriting principles to the Fort Lee project financing to help ensure  long-term success of the project.\nAlthough higher interest rates have added to the cost of certain projects, in  one case the respective service was able to find additional sources of  income to offset increased interest costs in order to maintain the original  number of new homes. Specifically, according to Air Force officials, when  the developer of the Air Mobility Command West project (consisting of  Fairchild Air Force Base, Washington; Tinker Air Force Base, Oklahoma;  and Travis Air Force Base, California) went to financial closing in July  2008, the amount of principal the developer was eligible to borrow was  reduced by about $18.5 million because of an unanticipated increase in  interest costs. However, the Air Force did not reduce the number of new  homes to be built because, according to Air Force officials, they and the  developer were able to offset higher interest costs by reducing expenses  through the negotiation of tax relief from the local jurisdictions and by the  Air Force demolishing some houses using its own operation and  maintenance funds, although the demolition had the effect of increasing  the use of appropriated funds to complete the project.\n\n\t\tNewly Awarded Projects Have Less Funds Available for Construction Because Funds Now Need to be Set Aside to Help Ensure Debt Repayment\n\nDue to the credit rating downgrades of firms that insure bonds,  alternatives to cash funding are no longer available to satisfy debt service  reserve requirements which are causing developers to have to set aside  cash in reserves to help provide assurances that the project\u2019s debt will be  repaid in the event the developer cannot make debt payments. This in turn  is reducing the amount of funds available for construction, according to  defense officials. Traditionally, the services and housing privatization  developers have used bond insurance to obtain lower interest rates and to  make the bonds more marketable because of the added protection of  repayment the insurance provides. For a fee, bond insurers such as  American International Group (AIG), Municipal Bond Investors Assurance  (MBIA), or American Municipal Bond Assurance Corporation (AMBAC)  guarantee the timely payment of principal and interest on the bonds if the  privatization project cannot make debt payments. Central to the business  strategy of the bond insurers is the companies\u2019 triple-A credit ratings,  which help give the bonds they insure higher ratings. For privatization  projects, higher ratings on bonds reduce borrowing costs due to investors  offering lower interest rates, making the bonds more marketable because  principal and interest payments are guaranteed. However, because many  of the bond insurers have financial investments that have fallen in value,  with some tied to troubled subprime mortgages, credit rating agencies  have currently downgraded the credit ratings of these firms. As a result,  for some projects it is no longer cost effective to carry bond insurance  because it either does not result in lower interest rates or rates low  enough to cover the costs associated with the insurance. However, if a  developer does not purchase bond insurance for its project, then investors  normally require it to maintain cash in reserve for debt payments\u2014usually  enough to cover 6 to 12 months of debt payments\u2014making less money  available for construction. For example, both higher interest rates to  borrow funds and the requirement to cash fund the debt service reserve  due to the diminished value of bond insurance have impacted the Army\u2019s  Fort Jackson, South Carolina, privatization project. In this case, the Army  agreed to allow the developer to reduce the number of planned  renovations resulting in these homes receiving no work.\nAdditionally, because many developers for ongoing privatization projects  use bond insurance, the diminished value of bond insurance could cause  financial stress for these projects if investors require developers to set  aside cash reserves to provide greater assurance of repayment of the debt.  Although the services told us they believe bond investors will not require  ongoing projects to set aside cash for debt repayment of the current phase  of the project, Navy officials did say that investors could potentially use  this requirement as leverage when developers try to obtain financing for  additional phases of a project. That is, investors may require the developer  to set aside cash for debt repayment for projects already started or  completed as a condition for receiving funding for additional project  phases.\n\n\t\tNewly Awarded Projects Have Less Funds Available for Construction Because of Lower Return Rates on Invested Funds\n\nThe turmoil in the financial markets also has resulted in lower rates of  return on invested funds, leading to less earned interest on invested  project funds. Since developers use interest earnings to help finance  project construction (in addition to money borrowed in private capital  financial markets and military service-provided money), lower rates of  return on investment mean that the developers will have less funds  available to pay project expenses. As a consequence, the services have in  turn modified their construction plans for certain projects. In many cases,  developers invested project funds in long-term investments with financial  service firms and bond insurers that were considered relatively safe at the  time. Subsequently, however, these firms have suffered financial  difficulties and credit rating downgrades due to their investments in  subprime mortgages. Although we were told that investment agreements  between the projects and these firms usually have protection clauses  giving the project developer the right to withdraw funds due to rating  downgrades of the financial services firms, sometimes the funds have had  to be reinvested in other investment accounts with firms that are offering  lower rates of return, resulting in reduced investment income to the  developer. According to service officials, for some projects this is not an  issue because the investment agreement has a \u201cmake whole\u201d provision,  meaning the financial services firm in which the funds were invested is not  only obligated to return the invested funds to the project but also to pay  the project for the difference in potential interest earnings. However,  service officials said that some project investment agreements do not have  \u201cmake whole\u201d provisions\u2014 meaning the financial services firm in which  the funds were invested is only obligated to return the invested funds and  does not have to pay for the difference in potential interest earnings. As a  result, such projects receive less interest earnings.\nSince interest earnings is one of the sources of revenue that provide  income to the project to pay for operations, construction, and future  recapitalization, lower-than-anticipated interest earnings can affect the  financial health of a project, and in some projects, amenities such as  community centers could be eliminated. For example, the Air Force is  projecting a revenue shortfall for its Tri-Group family housing privatization  project comprised of Los Angeles Air Force Base, California; Peterson Air  Force Base, Colorado; and Schriever Air Force Base, Colorado, due to the  difference in return rates on invested funds. As a result, the Air Force is  negotiating with the developer a number of changes such as eliminating  two community centers and some new housing to offset the lower-than- anticipated investment earnings. Similarly, Navy officials told us that their  family housing privatization project in Hawaii could potentially have a   $25 million to $30 million revenue shortfall due to reduced rates of return  on investments; however, Navy does not anticipate reducing the amount of  new construction or amenities in the project. According to the Navy,  although project funds are now placed in more conservative but lower  yielding investments, decreases in interest earnings have thus far been  offset by project savings. Such changes in the size, mix of new  construction and renovations, or content of privatized military housing  projects could have an impact on the financial health of projects since  renovated homes might require increased maintenance and earlier  replacement as compared to newly constructed homes. Moreover, in some  circumstances, renovated homes, combined with fewer project amenities,  could make the houses less marketable if off-base housing from a  competing developer is seen as more desirable by servicemembers and  their families.\nCollectively, a decline in available construction funds caused by higher  interest rates, increased debt repayment reserve requirements, and lower  rates of return on invested funds could have an adverse impact on the  condition and amenities of military housing privatization projects, which  could in turn reduce occupancy, and ultimately threaten the financial  viability of those projects. Over the past few years several congressional  committees have indicated interest in the military housing privatization  program. Further, a House Conference Report directed DOD to include  data on developers\u2019 contributions to the recapitalization accounts of each  ongoing family housing privatization project in each semiannual report on  the privatization program, and the House Appropriations Committee has  directed DOD to provide a semiannual report summarizing the results of  DOD\u2019s military housing privatization initiative monitoring tool and giving  status reports on each privatization project underway. As more homes  are renovated rather than constructed anew, privatization projects with a  large number of renovations will require more recapitalization funds than  would otherwise have been the case given the effects of the current  turmoil in financial markets. However, information about the impact that  the recent turmoil in the financial markets is having on some projects and  the resulting effects on available funds for new construction as well as on  future recapitalization funds was not included in DOD\u2019s most recent  semiannual status report to the congressional defense committees in  January 2009. By including this information on housing privatization  projects in its semiannual report, DOD could provide Congress with a  more current view of the effects of the current financial market and  enhance congressional defense committees\u2019 ability to monitor the services\u2019  efforts to provide servicemember with quality housing over the life of each  project.\n\n\tConclusions\n\nDOD is implementing or is planning to implement several significant  initiatives, such as increasing the services\u2019 force structure by tens of  thousands of personnel, that will increase the number of military  servicemembers and their families who will need adequate and affordable  family housing. Although DOD is taking several measures to ensure  adequate housing exists at its installations, it still faces challenges that  could result in insufficient housing at some installations expecting  significant increases in military families over the next several years.  Including information about the changed status of retrofitted projects  would assist congressional oversight of the program.\nBy enacting the Military Housing Privatization Initiative, Congress  provided DOD with a variety of authorities to obtain private sector  financing as a way to eliminate its inventory of inadequate and poor  quality family housing. This initiative brings private sector financing,  business practices, and certain flexibility to help ensure that DOD can  provide housing to military families when needed. However, privatization  is essentially a business venture, and like any business, it carries inherent  risk. If the increase in renovated houses over new construction due to  turmoil in the financial markets continues to increase the demand for  recapitalization funds over the life of the project, developers may not be  able to sustain projects in a way that ensures adequate quality of life for  military servicemembers and their families. According to DOD, decent and  affordable housing is one of the most important factors in its ability to  retain a professional force and maintain readiness. Informing Congress  about the long-term financial health of recapitalization accounts for family  housing privatization projects will give it a more current view of the  services\u2019 efforts to provide servicemembers with quality housing over the  life of each project. Timely information on the effects of the current  financial markets on housing privatization projects\u2014such as in DOD\u2019s  semiannual status report on housing privatization program\u2014could, if  necessary, help congressional decision makers prevent a return to the  poor military housing conditions that led DOD to request congressional  authority to pursue the Military Housing Privatization Initiative over a  decade ago.\n\n\tRecommendations for Executive Action\n\nFor Congress to maintain oversight of the Military Housing Privatization  Initiative program, we recommend that the Secretary of Defense direct the  Under Secretary of Defense (Acquisition, Technology and Logistics) to  include, for each project that is retrofitted, an explanation of this practice  and information on DOD\u2019s total investment in the retrofitted project in its  semiannual status report to the congressional defense committees.\nTo better inform Congress about the financial market factors that could  affect the privatized military family housing program\u2019s financial health and  to enhance congressional oversight, we recommend that the Secretary of  Defense direct the Under Secretary of Defense (Acquisition, Technology  and Logistics) to include information in its semiannual report to the  congressional defense committees on the effects current conditions in the  financial markets are having on housing privatization projects.\n\n\tAgency Comments and Our Evaluation\n\nIn written comments on a draft of this report, DOD concurred with our  recommendations saying that including information on both the practice  of \u201cretrofitting\u2019 or \u201cintegrating\u201d projects and the effects current conditions  in the financial markets are having on privatization projects in the  Department\u2019s semiannual Program Evaluation Plan Report to Congress  would enhance Congressional oversight of the privatization program.  DOD\u2019s comments are reprinted in appendix II. DOD further provided  technical comments, which we incorporated as appropriate into this  report.\nWe are sending copies of this report to interested congressional  committees; the Secretary of Defense; the secretaries of the Army, Navy,  and Air Force; and the Commandant of the Marine Corps. In addition, the  report will be available at no charge on GAO\u2019s Web site at  http:\/\/www.gao.gov.\nIf you or your staff has any questions concerning this report, please  contact me on (202) 512-4523 or by e-mail at leporeb@gao.gov. Contact  points for our Offices of Congressional Relations and Public Affairs are on  the last page of this report. Key contributors to this report are listed in  appendix III.\n\nAppendix I: Scope and Methodology\n\nWe performed our work at the Office of the Secretary of Defense and the  offices of the Army, Navy, Marine Corps, and Air Force responsible for  implementing the housing privatization program. We reviewed relevant  documentation including the Department of Defense (DOD) and service  guidance on the implementation of the Military Housing Privatization  Initiative, project progress and performance reports developed by the  services, and prior GAO reports. We also interviewed officials at the Air  Force\u2019s Center for Engineering and the Environment in San Antonio,  Texas, which is designated as the Air Force\u2019s military family housing  privatization center of excellence. In each instance, we met with officials  cognizant of the program and reviewed applicable policies, procedures,  and documents. Further, we visited 13 selected military installations with  housing privatization projects to review project management at the local  level, examine project performance, and determine from installation  officials and private sector developers the challenges they face in  managing their military housing privatization projects. Table 4 lists the  installations we visited.\nTogether the installations contained 12 separate military housing  privatization projects, since Fort Bliss and White Sands Missile Range are  included in the same project. At each installation we spoke with service  officials managing the family housing privatization project. We also spoke  with representatives from the private sector developers in charge of  constructing and managing these projects. We chose these installations  because they contained already awarded projects, represented each of the  military services, and provided a balance of projects with and without  challenges. Additionally, we choose Fort Bliss, White Sands, and Camp  Pendleton as installations to visit because they are expected to experience  a significant influx of military servicemembers and their families due to  the planned implementation of DOD\u2019s Grow-the-Force initiative. Joint  Base McGuire-Dix-Lakehurst and Joint Base Lewis-McChord were selected  primarily because they are 2 of 12 joint bases established by the 2005 Base  Realignment and Closure round with Joint Base McGuire-Dix-Lakehurst  being managed by the Air Force and Joint Base Lewis-McChord being  managed by the Army. Our analysis of the 13 installations we visited  cannot be generalized to other military housing privatization projects.\nTo assess the progress of DOD\u2019s housing privatization efforts we obtained  and analyzed performance data on each of DOD\u2019s privatization projects.  Specifically, to determine the number of units privatized we obtained data  on the number of projects awarded from OSD\u2019s Web site and received  estimated data on the number of units expected to be privatized from the  services. We obtained construction and renovation data from OSD and the  services through February 2009. Although we did not independently  validate the construction or renovation data supplied by OSD and the  services, we did however compare this data to the data in OSD\u2019s  semiannual report to Congress and the services\u2019 program performance  reports. We also discussed with officials steps they have taken to ensure  reasonable adequacy of the data. As such, we determined the data to be  sufficiently reliable for the purposes of this report.\nTo assess occupancy rates, we interviewed DOD and service officials to  discuss project occupancy expectations, the factors that contribute to  lower-than-expected occupancy rates, the financial and other impacts that  result from lower-than-expected occupancy rates, and the responses  normally taken when occupancy is below expectations. We obtained,  reviewed, and analyzed project occupancy rates and trends for all  privatization projects awarded as of September 30, 2008, the last quarter  for which occupancy data from all three military departments were readily  available, and compared these data to occupancy expectations. We did not  collect data for two recently awarded Army projects\u2014Fort Sill, Oklahoma,  and Joint Base Lewis-McChord, Washington\u2014because data were not yet  available. Also, for the 12 projects at the installations we visited, we  reviewed project justification and budget documents to determine each  project\u2019s occupancy expectations and compared actual occupancy rates  with the expectations. When occupancy rates were below expectations,  we reviewed project performance reports and interviewed local officials to  determine the causes, consequences, and any actions taken or planned in  response.\nTo identify challenges to the military housing privatization program  stemming from DOD\u2019s recent force structure and infrastructure initiatives,  we conducted numerous interviews with OSD, the services, and  installation commanders. In these discussions we identified the challenges  officials said these initiatives were creating for them in providing sufficient  and affordable privatized housing and noted some measures they had  taken to mitigate those challenges. In addition, we collected and analyzed  the most recent housing market analyses for privatization projects on  installations expected to experience significant growth to determine the  extent to which family housing requirements were expected to increase.  Finally, we collected and analyzed relevant guidance and documentation  regarding the measures taken by the services to incorporate increased  requirements into their housing privatization projects, specifically the  retrofitting of already awarded projects by the Army. As such, we obtained  the legal views of the Office of the Secretary of Defense, Department of  the Army, and Department of the Navy regarding the implementation of  section 2875 of Title 10, U.S. Code.\nTo assess the effect the turmoil in the financial markets is having on  DOD\u2019s housing privatization portfolio, we interviewed officials from each  service and collected and analyzed internal service quarterly portfolio  summary reports and analyses. In addition, we interviewed representatives  from the Army and Air Force\u2019s real estate development consultants to  further understand the dynamics of the financial markets and how those  dynamics are affecting housing privatization projects. Service officials  identified some newly awarded projects that were more affected by  market turmoil than others. For those projects, we interviewed service  officials and consultant representatives to determine the causes,  consequences, and any actions taken or planned in response. We also  reviewed service and OSD project performance reports, such as the  semiannual program evaluation plan, to determine the extent to which  DOD is reporting impacts of the financial markets on its housing  privatization projects to Congress. Further, we attended a bond industry  conference on the financing of military housing privatization to learn the  views of the investment community regarding the impacts of the financial  market turmoil on housing privatization projects and obtained and  reviewed private sector financial analyses and reports regarding military  housing bonds and the current state of the financial markets.\nWe conducted this performance audit from April 2008 to April 2009 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 based  on our audit objectives. We believe that the evidence obtained provides a  reasonable basis for our findings based on our audit objectives.\n\nAppendix II: Comments from the Department of Defense\n\nAppendix III: GAO Contact and Staff Acknowledgments\n\n\tGAO Contact\n\n\tAcknowledgments\n\nIn addition to the individual named above, Laura Talbott (Assistant  Director), Shawn Arbogast, Steven Banovac, Susan Ditto, George Duncan,  Laurie Ellington, Katherine Lenane, Charles Perdue, Mathew Scire, and  Steven Westley made key contributions to this report.\n\nRelated GAO Products\n\nMilitary Housing: Management Issues Require Attention as the  Privatization Program Matures. GAO-06-438. Washington, D.C.: April 28,  2006.\nMilitary Housing: Further Improvements Needed in Requirements  Determination and Program Review. GAO-04-556. Washington, D.C.:   May 19, 2004.\nMilitary Housing: Better Reporting Needed on the Status of the  Privatization Program and the Costs of Its Consultants. GAO-04-111.  Washington, D.C.: October 9, 2003.\nMilitary Housing: Management Improvements Needed as the Pace of  Privatization Quickens. GAO-02-624. Washington, D.C.: June 21, 2002.\nMilitary Housing: DOD Needs to Address Long-Standing Requirements  Determination Problems. GAO-01-889. Washington, D.C.: August 3, 2001.\nMilitary Housing: Continued Concerns in Implementing the  Privatization Initiative. GAO\/NSIAD-00-71. Washington, D.C.: March 30,  2000.\nMilitary Housing: Privatization Off to a Slow Start and Continued  Management Attention Needed. GAO\/NSIAD-98-178. Washington, D.C.:  July 17, 1998.\n\n\tFinancial Markets\n\nTroubled Asset Relief Program: Status of Efforts to Address  Transparency and Accountability Issues. GAO-09-296. Washington, D.C.:  January 30, 2009.\nHigh Risk Series Update. GAO-09-271. Washington, D.C.: January 2009.\nFinancial Regulation: A Framework for Crafting and Assessing  Proposals to Modernize the Outdated U.S. Financial Regulatory System.  GAO-09-216. Washington, D.C.: January 8, 2009.\nTroubled Asset Relief Program: Additional Actions Needed to Better  Ensure Integrity, Accountability, and Transparency. GAO-09-266T.  Washington, D.C.: December 10, 2008.\nTroubled Asset Relief Program: Additional Actions Needed to Better  Ensure Integrity, Accountability, and Transparency. GAO-09-161.  Washington, D.C.: December 2, 2008.","output":"Why GAO Did This Study\n\nIn response to challenges the Department of Defense (DOD) was facing to repair, renovate, and construct military family housing, Congress enacted the Military Housing Privatization Initiative in 1996. The initiative enables DOD to leverage private sector resources to construct or renovate family housing. As of March 2009, DOD had awarded 94 projects and attracted over $22 billion in private financing. DOD plans to privatize 98 percent of its domestic family housing through 2012. Since GAO's last housing privatization report in 2006, major force structure initiatives have placed new demands on DOD for housing. GAO was asked to assess (1) the progress of DOD's housing privatization program, (2) the occupancy rates of the housing projects, (3) the impact of various force structure initiatives and DOD's efforts to mitigate any challenges, and (4) the effect of financial market turmoil on some projects. To perform this work, GAO visited 13 installations with privatization projects; analyzed project performance data; and interviewed DOD officials, real estate consultants, and private developers.\n\nWhat GAO Found\n\nDOD has made significant progress since 1996 to remove inadequate family housing from DOD's inventory by transferring these homes to developers, but it will be several more years before all of these inadequate houses are either replaced or renovated. Developers had replaced or renovated about 67 percent of the inadequate privatized housing as of February 2009. While about 70 percent of military housing privatization projects are exceeding DOD's expected occupancy rate of 90 percent, each service has some projects below this rate. Some privatization projects with occupancy rates below 90 percent are challenged to generate enough revenue to fund construction, make debt payments, and set aside funds for recapitalization, which could negatively affect the condition and attractiveness of privatized homes and make it harder to compete with other homes in the community. Base realignment and closure actions, overseas rebasing, Army modularity, and grow-the-force initiatives are challenging DOD's ability to provide family housing at some installations, and the services are taking steps to mitigate the challenge. Among other measures, Army developed an approach where an already awarded project is retrofitted with a new or another already awarded project. Once retrofitted, Army's total investment in the developer carrying out the projects must stay below a certain percentage of the capital costs of both projects combined, not a percentage of each project separately. This practice often results in DOD investing additional funds towards retrofitted projects. The House Appropriations Committee directed DOD to report on the status of each privatization project underway on a semiannual basis. However, DOD's most recent semiannual report did not include information on the retrofitting model it is using for certain projects. Including information on the changed status of privatized projects in DOD's report would assist congressional oversight of the program. Several factors related to turmoil in the financial markets have reduced available funds for project construction, resulting in more renovations relative to new construction and reduced amenities at some newly awarded projects. First, higher interest rates in bond financing have increased the cost of some projects. Second, due to the diminished value of bond insurance, developers are having to set aside project funds to increase assurances the debt is repaid but that reduces available funds for construction. Third, financial turmoil has resulted in lower rates of return on invested funds. Consequently, as more homes are renovated given effects of today's financial markets, more recapitalization funds could be required. In H.R. Conf. Rep. No. 110-424, the conference committee expressed interest in monitoring developers' contributions to recapitalization accounts in DOD's semiannual report. However, information these effects have had on housing privatization projects was not included in DOD's most recent report. By including this information in its semiannual report, DOD could provide defense committees with a more current view of the financial market effects on these privatized projects."}
{"id":"crs_R44962","pid":"crs_R44962_0","input":"\tIntroduction\n\nIn an increase over prior terms, the Supreme Court of the United States issued six opinions involving patent law during its October 2016 Term. These decisions addressed issues ranging from patent exhaustion, multicomponent products, and biosimilar patents to procedural issues like venue and the statute of limitations for infringement claims. The increase in patent cases heard by the High Court coincides with an apparent increase in patent litigation generally. As observed by Judge Kathleen O'Malley of the U.S. Court of Appeals for the Federal Circuit (Federal Circuit), the court that has exclusive jurisdiction over most appeals involving patents: \"While federal filings in complex civil cases in regional circuits have been down in recent years, the patent litigation business is booming. Indeed, patent filings in district courts have almost doubled from 2010\u2014when there were 3,301 patent actions filed\u2014to 2013, when ... there were 6,497 such cases instituted.\"\nThe increase in patent litigation may reflect a broader interest in patents generally. As Judge Timothy Dyk, also of the Federal Circuit, has written: \"[P]atent law has ... moved further into the mainstream. And the importance of intellectual property to the broader American economy has continued to grow, with an estimated 84% of the S&P 500 Market Value attributable to intangible assets in 2015.\" Another commentator has noted that \"patent law is indisputably more visible to lawyers and to the general public today than it was a decade or two ago. Stories about patent law, patent litigation, and even the Federal Circuit itself are regular fixtures of leading newspapers....\" Accordingly, an understanding of patent law and the cases issued during the Supreme Court's recently concluded October 2016 Term will likely be of interest to Congress.\nTo this end, this report begins with an overview of patent law. It then discusses the Supreme Court's role in the development of patent law generally before examining the Court's recent decisions in detail. Finally, the report closes with a preview of developments in patent law that are on the horizon, such as the continued viability of certain administrative proceedings related to the validity of patents, which is the subject of two cases scheduled to be heard during the Court's upcoming term, as well as patent reform activity in the legislative and executive arenas.\n\n\tOverview of Patent Law\n\nThe patent law regime in the United States is grounded in the U.S. Constitution itself; article I, section 8, clause 8 of the Constitution provides: \"The Congress Shall Have Power ... To promote the Progress of Science and useful Arts, by securing for limited Times to ... Inventors the exclusive Right to their respective ... Discoveries.\" Nonetheless, the rights associated with patents do not arise automatically. Rather, to obtain patent protection, the Patent Act of 1952 requires inventors to file a patent application with the PTO.\n\n\t\tRequirements for Obtaining a Patent\n\nA patent may be obtained by \"[w]hoever invents or discovers any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof,\" subject to the requirements of the Patent Act. A valid patent bestows upon its holder a time-limited \"franchise granting the right to exclude everyone from making, using or selling the patented invention without the permission of the patentee.\" This right to exclude is enforceable under the Patent Act, which states that anyone who \"makes, uses, offers to sell, or sells any patented invention, within the United States or imports into the United States any patented invention during the term of the patent ... infringes the patent\" unless authority to do so is secured from the patent holder.\nThe administrative process of applying for and acquiring a patent before the PTO is called \"patent prosecution.\" Once an inventor files a patent application, a patent examiner at the PTO will evaluate whether the application meets the requirements of the Patent Act and thus merits the award of a patent. Under the Act, the application must include a written \"specification.\" The specification must include:\na written description of the invention, and of the manner and process of making and using it, in such full, clear, concise, and exact terms as to enable any person skilled in the art [ ] to which it pertains, or with which it is most nearly connected, to make and use the same, and shall set forth the best mode contemplated by the inventor or joint inventor of carrying out the invention.\nIn other words, the Patent Act requires that a specification meet: (1) the written description requirement , which is met when a specification \"'reasonably conveys to those skilled in the art that the inventor had possession of the claimed subject matter as of the filing date'\" of the patent; (2) the enablement requirement , under which \"the specification ... must teach those skilled in the art how to make and use the full scope of the claimed invention without 'undue experimentation'\"; and (3) the best mode requirement , which requires that the specification demonstrates that \"the inventor possessed a best mode of practicing the claimed invention at the time of filing the patent application.\"\nThe Patent Act further requires that the specification \"conclude with one or more claims particularly pointing out and distinctly claiming the subject matter which the inventor or a joint inventor regards as the invention.\" Patent claims define the parameters of what an inventor considers his or her invention. As the Federal Circuit has noted:\nThe function of claims is (a) to point out what the invention is in such a way as to distinguish it from what was previously known ... and (b) to define the scope of protection afforded by the patent. In both of those aspects, claims are not technical descriptions of the disclosed inventions but are legal documents like the descriptions of lands by metes and bounds in a deed which define the area conveyed but do not describe the land .\nIn addition to examining a patent application for compliance with the statute's specification requirements, the patent examiner also determines whether a patent application meets several substantive standards of the Patent Act. Namely, to be patentable, an invention must be (1)\u00a0a \"process, machine, manufacture, or composition of matter\" that is (2)\u00a0novel, (3)\u00a0useful, and (4)\u00a0nonobvious. A corollary to the first requirement that \"specifies four independent categories of inventions or discoveries that are eligible for protection\" is that there is certain subject matter that is ineligible for patent protection; three specific examples of unpatentable subject matter that the Supreme Court has articulated are \"laws of nature, physical phenomena, and abstract ideas.\" As to novelty, the Act provides that a patent cannot be issued if \"the claimed invention was patented, described in a printed publication, or in public use, on sale, or otherwise available to the public before the effective filing date of the claimed invention.\" That is, the invention must be something new and different as compared to the so-called \"prior art,\" which are the existing references that disclose the state of the art, such as publications and other patents. As to usefulness or utility, the patent application must demonstrate that the \"claimed invention has a significant and presently available benefit to the public ... which is not so vague as to be meaningless.\" Finally, as to nonobviousness, the Act provides that \"[a] patent for a claimed invention may not be obtained ... if the differences between the claimed invention and the prior art are such that the claimed invention as a whole would have been obvious before the effective filing date of the claimed invention to a person having ordinary skill in the art to which the claimed invention pertains.\" In other words, \"a patent may be found invalid as obvious if 'there are a finite number of identified, predictable solutions, [and] a person of ordinary skill has good reason to pursue the known options within his or her technical grasp.'\"\n\n\t\tRights of Patent Holders\n\nWith some exceptions, a patent is generally granted \"for a term beginning on the date on which the patent issues and ending 20 years from the date on which the application for the patent was filed.\" Notably, once this period expires, others may use the invention without regard to the expired patent. During the term of a patent, however, anyone who \"makes, uses, offers to sell, or sells any patented invention, within the United States or imports into the United States any patented invention during the term of the patent ... infringes the patent\" unless authority to do so is secured from the patent holder. Patent rights, however, are not self-enforcing; rather, patent holders must initiate enforcement measures themselves, most commonly through litigation in federal court.\nAlthough issued patents are entitled to a presumption of validity, accused infringers may defend against infringement actions on several grounds, including: (1)\u00a0 noninfringement or the \"absence of liability for infringement\" in light of a valid license or that the patent claims, when properly construed, do not cover the allegedly infringing acts; (2)\u00a0 patent invalidity , that is, that a patent is invalid for failure to meet any of the statutory requirements discussed above; or (3)\u00a0 unenforceability , or that a patent is unenforceable due to, for example, inequitable conduct in obtaining the patent.\nThere are several remedies available to the patent holder in light of a finding of infringement, and the Supreme Court has taken an active role in defining these remedies over the past decade. First, infringers can be enjoined from further infringement. Until 2006, the Federal Circuit followed a \"'general rule that courts will issue permanent injunctions against patent infringement absent exceptional circumstances.'\" In eBay Inc. v. MercExchange, L.L.C. , however, the Supreme Court clarified that courts must follow the four-factor test used in other areas of law before issuing a permanent injunction, thus heightening the requirement for injunctions in patent cases. \nSecond, the Patent Act provides for damages \"adequate to compensate for the infringement, but in no event less than a reasonable royalty for the use made of the invention by the infringer.\" The Act further gives courts the discretion to \"increase the damages up to three times the amount found or assessed.\" In 2016, the Supreme Court clarified in Halo Electronics, Inc. v. Pulse Electronics, Inc. , that the award of such enhanced damages is \"designed as a 'punitive' or 'vindictive' sanction for egregious infringement behavior,\" such as \"willful infringement.\" Finally, attorney fees may be awarded to the prevailing party in \"exceptional cases.\" In 2014, the Supreme Court clarified in Octane Fitness, LLC v. Icon Health & Fitness Inc. , that an \"exceptional case\" is \"one that stands out from others with respect to the substantive strength of a party's litigating position (considering both the governing law and the facts of the case) or the unreasonable manner in which the case was litigated\" based on the \"totality of the circumstances.\"\n\n\t\tMajor Patent Legislation\n\nAs discussed below, patent reform appears to be of perennial interest to Congress, particularly over the last few decades. While a comprehensive history of legislative activity in the patent area is beyond the scope of this report, there are several key pieces of legislation enacted since the passage of the Patent Act of 1952 that merit mention.\nIn 1984, Congress passed the Drug Price Competition and Patent Term Restoration Act, commonly known as the Hatch-Waxman Act, which amended both patent law as well as food and drug law. The Hatch-Waxman Act included provisions intended to facilitate the marketing of generic pharmaceuticals, while incentivizing brand-name firms to innovate. For example, abrogating then-prevailing case law, the Act allowed potential generic drug manufacturers to obtain marketing approval from the Food and Drug Administration (FDA) on a patented drug by relying on the safety and efficacy data of an approved drug, while the patent holder, in turn, receives a period of regulatory exclusivity. In other words, the Act allowed generic manufacturers to commence work on a generic version of an approved drug during the life of the patent if the work complies with FDA regulations. In 2009, Congress enacted a related statute called the Biologics Price Competition and Innovation Act of 2009, which established procedures for \"biologics\"\u2014a category of medical preparations derived from a living organism\u2014that are found to be \"biosimilar\" or interchangeable with an FDA-approved biologic. Both of these laws are discussed in more detail below.\nThe most recent patent reform legislation, and perhaps the one that has made the most significant changes to patent law in the modern era, is the Leahy-Smith America Invent Act (AIA), signed into law in September 2011. Among the significant changes the AIA made to the patent system is the so-called \"first to file rule,\" under which the first inventor to file a patent application prevails when two or more persons independently develop the identical or similar invention at approximately the same time. This change brought the United States into conformity with all other patent-issuing countries, thereby arguably facilitating better cross-border cooperation in the patent arena. In addition, the AIA established assignee filing, which allows an inventor's employer or other entity to which patent rights are assigned to file patent applications, in contrast to the previous rule that the natural person or persons who developed an invention must file the patent application, even where the invention was developed in the inventor's capacity as an employee.\nPerhaps most significantly, as explained in more detailed in the following section, the AIA established or modified various administrative challenges to the validity of an issued patent before the PTO, including (1) post-grant review , which allows petitioners to challenge patent validity for failure to meet any of the Patent Act's patentability requirements for a patent, such as ineligible subject matter or lack of enablement; (2) inter partes review , which replaced the former inter partes reexamination system; (3) supplemental examination , which allows patent holders to request an examination to \"consider, reconsider, or correct information believed to be relevant to the patent\"; and (4) a transitional program for covered business method patents , which is a temporary program for a subset of patents involving certain \"covered business methods\" that operate similarly to post-grant reviews, but will only be available through September 2020 under a sunset provision in the AIA. \nWhile there have not been substantial changes made to patent law through legislation since the enactment of the AIA, as discussed below, there remains the possibility of future changes. As well, certain cases before the federal courts have the potential to invalidate some provisions of the AIA, such as those providing for inter partes review proceedings.\n\n\t\tAdministrative Proceedings Before the PTO\n\nAs is evident, in addition to patent prosecution, the PTO conducts other administrative review proceedings, including those provided for in the AIA. Most of these proceedings involve challenges to the validity of issued patents and may result in the revocation of a previously issued patent. Such proceedings play a central role in the country's patent system as a popular, \"less expensive and quicker alternative to litigation.\"\nA post-grant review, made available under the AIA, allows petitioners to challenge a patent's validity based on any ground of patentability, but must be filed within nine months of the date the patent was granted. After a petition for a post-grant review is filed, the patent holder has the opportunity to file a response arguing that the post-grant review should not be initiated. If such a review is initiated, however, the PTO's Patent Trial and Appeal Board (PTAB) will conduct a trial and issue a final written decision, which can be appealed to the federal courts.\nAlso created by the AIA, an inter partes review allows any person (other than the patent holder) to challenge a patent based on previously issued patents or printed publications (i.e., the prior art) on the basis of novelty and\/or nonobviousness. Such petitions may be filed at least nine months after a patent issues or a post-grant review concludes, whichever is later. As a result, a patent may be challenged administratively on any basis of patentability within nine months of the date it was granted through a post-grant review, after which it can be challenged on novelty and nonobviousness grounds through an inter partes review for the remainder of the patent's term. Both types of proceedings involve a trial-like procedure before a three-member panel, and include the use of witnesses, limited discovery, and a hearing prior to a decision on the merits.\nFinally, reexamination proceedings, which predate the enactment of AIA, allow any person, including the patent holder or the PTO Director, to cite prior art to challenge an issued patent on novelty or nonobviousness grounds. Unlike post-grant review and inter partes review proceedings, however, reexaminations effectively reopen prosecution of an issued patent and proceed on an ex parte basis (i.e., between the patent applicant and the PTO without participation by third parties). In addition, reexamination proceedings result in either (1) a certificate confirming the patentability of the patent, (2) the reissue of the patent with narrowed claims, or (3) a declaration of patent invalidity.\n\n\t\tProceedings Before the Federal Courts\n\nThe Federal Circuit has exclusive, nationwide jurisdiction over the majority of patent appeals, while the Supreme Court has discretionary authority to review cases decided by the Federal Circuit. The Federal Circuit also has jurisdiction over appeals involving veterans' claims, government contracts, federal taxation, claims under the Vaccines Act, grievance claims from federal employees, appeals involving international trade matters, among others. Notably, the Federal Circuit has \"no criminal jurisdiction, hear[s] few constitutional issues, and almost no cases involve state-law issues.\" This unique jurisdictional purview may be responsible for what one commentator has described as a view of the Federal Circuit, on the part of Supreme Court and the other circuit courts, \"as inhabiting a world apart.\" Some even view the Federal Circuit as a \"rogue\" court that is frequently reversed by the Supreme Court. However, although over the last decade the reversal rate for the Federal Circuit has been above the median of the circuit courts, it has been lower than five of its twelve sister circuits. Nonetheless, \"a perceived tension between the Supreme Court and [the Federal Circuit] by the bar and by the academy\" appears to exist, with some commentators questioning whether \"the Supreme Court understands patent law well enough to make the governing rules,\" and others criticizing the Federal Circuit as \"having a parochial attitude or a we know best attitude toward patent law.\"\nWith respect to its patent docket, the Federal Circuit's appeals originate from three main sources: the federal district courts, the PTO, and the U.S. International Trade Commission. Since the enactment of the AIA in 2011, however, there has been \"substantial growth\" in appeals coming from PTO proceedings: \"In 2000, cases from the [PTO] made up only 4% of [the Federal Circuit's] docket while in 2016 they were 33%. \" This trend demonstrates the significance of the PTO's administrative proceedings to the country's patent system.\nAs noted, the Supreme Court has taken an increasing number of cases involving patent law and other areas of intellectual property over the last decade, perhaps indicating the Court's heightened interest in patent law or recognition of its increased prominence in society as a whole. Ten years ago, Judge Dyk predicted that the Supreme Court would continue its trend of hearing more cases from the Federal Circuit involving substantive patent law, a prediction that is proving to hold true. Indeed, based on annual statistics on the Supreme Court published by the Harvard Law Review , from the October 2006 Term through the October 2015 Term \"the Supreme Court has taken an average of four [Federal Circuit] cases each term, representing 5.4% of the Court's merits cases. A large proportion of those cases have involved substantive patent law or related procedural issues.\" Because of this increase, one commentator has stated: \"No longer is the Federal Circuit 'the de facto Supreme Court of patents.'\"\nWhile the High Court is playing a larger role in the development of patent law by issuing an increased number of patent law opinions, the nature and extent of the Court's influence on patent law is the subject of some debate. Indeed, while Judge Dyk has asserted that \"[t]he Supreme Court's decisions have had a major impact on patent law [and] ... have involved important and foundational questions with enormous impacts on patent litigation,\" others contend that \"the sheer quantity of patent cases decided by the Supreme Court in recent years might make it seem as if the Court is serving as a percolating force in patent law by disrupting ossified doctrine and engaging in independent analyses of what the law should be.... But the key doctrines governing novelty, nonobviousness, and disclosure have remained relatively static.\" Nonetheless, the increased number of Supreme Court opinions involving patent law has evinced several trends.\nOne trend involves cases wherein the Court addresses a legal issue that is present in federal litigation generally, but appears to have been treated differently in the patent law context. Examples include eBay Inc. v. MercExchange, L.L.C. , addressing the test for issuing injunctions; MedImmune, Inc. v. Genentech, Inc. and Medtronic, Inc. v. Mirowski Family Ventures, LLC , addressing declaratory judgments; and Gunn v. Minton , addressing subject matter jurisdiction. A second trend involves an apparent effort on the part of the Court to harmonize patent law with other areas of federal law, such as copyright. Examples include Global-Tech Appliances, Inc. v. SEB S.A. , where the Court relied on the doctrine of willful blindness from criminal law to articulate the mental state requirement for induced patent infringement; Octane Fitness, LLC v. ICON Health & Fitness, Inc. , wherein the Court relied on case law interpreting the fee-shifting provision of the Copyright Act to determine the appropriate standard for awarding attorney fees under the Patent Act; and Commil USA, LLC v. Cisco Sys., Inc. , which drew upon knowledge requirements for civil and criminal liability to determine if liability for induced infringement is possible in the absence of actual knowledge. As shall be seen, further examples of the trends are evident in some of the Court's opinions issued during its October 2016 Term, as discussed below.\n\n\tPatent Cases of the Supreme Court's October 2016 Term\n\n\t\tCases Involving Procedural Issues\n\nThe Supreme Court issued two opinions involving procedural issues during its October 2016 Term that will affect when and where patent cases will be filed. Notably, in TC Heartland LLC v. Kraft Foods Group Brands LLC , the Court overruled long-standing Federal Circuit precedent with regard to venue rules in patent cases, holding \"that a domestic corporation 'resides' only in its State of incorporation for purposes of the patent venue statute.\" And in SCA Hygiene Products Aktiebolag v. First Quality Baby Products, LLC , the Court ruled that the equitable doctrine of laches, which protects against unreasonable, prejudicial delay in commencing suit, is not available in a patent infringement action filed within the Patent Act's statute of limitations.\n\n\t\t\tTC Heartland v. Kraft Foods Group Brands\n\nTC Heartland centered on the meaning of the patent venue statute, 28 U.S.C. \u00a7\u00a01400(b), which provides that \"[a]ny civil action for patent infringement may be brought in the judicial district where the defendant resides, or where the defendant has committed acts of infringement and has a regular and established place of business.\" Congress has amended the general venue statute twice, but has not amended the patent-specific statute, since the Court issued its 1957 opinion in Fourco Glass Co. v. Transmirra Products Corp. , which held that the patent-specific venue statute \"is the sole and exclusive provision controlling venue in patent infringement actions, and ... is not to be supplemented by ... [the general venue statute, 28 U.S.C.] \u00a7 1391(c).\" Nevertheless, after Congress amended the general venue statute in 1988 (but not the patent-specific statute), the Federal Circuit held in 1990 that this change also altered the patent-specific statute by reference.\nSpecifically, under the 1988 amendments, the general venue statute provided that, \"[f]or purposes of venue under this chapter , a defendant that is a corporation shall be deemed to reside in any judicial district in which it is subject to personal jurisdiction at the time the action is commenced.\" In VE Holding Corp. v. Johnson Gas Appliance Co. , the Federal Circuit held that through this amendment of the general venue statute, Congress also changed the meaning of \"resides\" in the patent-specific venue statute. Accordingly, in the time since VE Holding was issued, the Federal Circuit has followed the rule that venue in patent cases is proper anywhere a defendant is subject to personal jurisdiction. \nIn 2011, Congress enacted the current version of the general venue statute, again leaving the patent-specific statute unaltered. Similar to the 1988 version, the present general venue statute provides: \"Except as otherwise provided by law\" and \"[ f ] or all venue purposes ,\" a corporation \"shall be deemed to reside, if a defendant, in any judicial district in which such defendant is subject to the court's personal jurisdiction with respect to the civil action in question.\" The Federal Circuit considered this amendment in its opinion in TC Heartland , and reaffirmed its holding in VE Holding , \"reasoning that the 2011 amendments provided no basis to reconsider its prior decision.\"\nIn 2014, Kraft Foods, a corporation organized under Delaware law with its principal place of business in Illinois, sued TC Heartland, a company organized under Indiana law and headquartered in Indiana, for patent infringement in the federal district court for the District of Delaware. Although TC Heartland was not registered to conduct business in Delaware, and had no meaningful presence there, it had shipped a small amount of the allegedly infringing products into Delaware. Relying on VE Holding Corp. , the district court in Delaware dismissed TC Heartland's motion to dismiss the case or transfer venue to the district court for the Southern District of Indiana, and the Federal Circuit subsequently denied TC Heartland's petition for a writ of mandamus on the same grounds.\nIn a unanimous opinion for the Court, Justice Clarence Thomas reversed the Federal Circuit based on Fourco . In reversing, the Supreme Court stated: \"In Fourco, this Court definitively and unambiguously held that the word 'reside[nce]' in \u00a7\u00a01400(b) has a particular meaning as applied to domestic corporations: It refers only to the State of incorporation. Congress has not amended \u00a7\u00a01400(b) since Fourco, and neither party asks us to reconsider our holding in that case.\" Thus, the Court \"conclude[d] that the amendments to \u00a7 1391 [(i.e., the general venue statute)] did not modify the meaning of \u00a7 1400(b) [(i.e., the patent-specific venue statute)] as interpreted by Fourco . [The Court] therefore h[e]ld that a domestic corporation 'resides' only in its State of incorporation for purposes of the patent venue statute.\"\nThe practical effects of the Federal Circuit's ruling in VE Holdings were dramatic. In fact, although there are ninety-four federal district courts in the United States, a single district court, that of the Eastern District of Texas, received almost half (44%) of all patent cases filed in 2015. By way of comparison, the District of Delaware had the second largest number of patent cases at 9%, followed by the Central and North Districts of California with 5% and 4%, respectively. In addition, one judge in the Eastern District of Texas handled two-thirds of the district's patent cases, meaning a single judge was assigned to nearly one-third of all the country's patent cases. Commentators have suggested that the popularity of the Eastern District of Texas as a venue for patent cases post- VE Holdings cannot be attributed to \"geographical clustering of patent-intensive industries, as major technology hubs are located elsewhere,\" but is instead explained by \"the patentee-friendly reputation of the district, attracting litigation through favorable procedural and administrative practices in patent cases.\" Perhaps unsurprisingly, calls for venue reform in patent cases came from many corners, particularly in light of the attention the issue received in national media reporting, such as stories describing \"the empty Texas offices rented by patentees and the skating rink sponsored by Samsung just outside the courthouse to curry favor with local juries.\" The issue has also been the subject of legislative proposals, as recently as last year. The Supreme Court's decision in TC Heartland , however, arguably dissipates many of these concerns.\nAs to the immediate impact of the TC Heartland decision, since it was issued on May 22, 2017, patent complaints filed in July 2017 in the Eastern District of Texas decreased 43% compared to June 2017, which is a decrease of 83% compared to July 2016. And, conversely, the District Court for Delaware received the greatest number of patent complaints for two months in a row after the opinion was issued, twice as many when compared to the same time year ago. Similarly, patent filings in the District Court for Central California increased by more than a third after the opinion was issued. The long-term effects of TC Heartland , however, remain to be seen.\nOf note to Congress, in addition to a potential long-term geographic redistribution of patent cases among the federal district courts, commentators have also suggested that TC Heartland may curb cases filed by non-practicing entities, better known as \"patent trolls.\" Non-practicing entities are \"patent owners who do not actually practice the invention that is the subject of the patent.... Trolls are generally considered entities that purchase patents for the purpose of generating capital by enforcing them.\" Of the cases filed in the Eastern District of Texas in 2015 (which as noted constituted 44% of the country's patent filings), 95% were filed by non-practicing entities. Thus, the unavailability of that venue for the many patent cases that are filed against corporations that are not incorporated in that forum may disincentivize the filing of patent cases by non-practicing entities.\n\n\t\t\tSCA Hygiene Products Aktiebolag v. First Quality Baby Products\n\nAnother opinion involving a procedural issue, but arguably with potentially fewer ramifications, is the Court's opinion in SCA Hygiene Prod uct s Aktiebolag v. First Quality Baby Prod uct s , wherein the Court addressed \"the relationship between the equitable defense of laches and claims for damages that are brought within the time allowed by a statute of limitations.\" This was the subject of the Court's opinion three years earlier, in the context of the Copyright Act, in Petrella v. Metro-Goldwyn- Mayer, Inc. , wherein the Court concluded \"in face of a statute of limitations enacted by Congress, laches cannot be invoked to bar legal relief.\" In SCA Hygiene , the Court held that \" Petrella 's reasoning applies to a similar [statute of limitations] provision of the Patent Act,\" 35 U.S.C. \u00a7\u00a0286, and therefore \"[l]aches cannot be interposed as a defense against damages where the infringement occurred within the period prescribed by \u00a7\u00a0286.\" Thus, this opinion can be viewed as an example of one in which the Court harmonizes patent law with other areas of federal law, as discussed above.\nThe underlying suit began in October 2003 when SCA, a manufacturer of adult incontinence products, sent a letter to First Quality alleging that the company was making and selling infringing products. In response, First Quality informed SCA that one of First Quality's patents actually antedated SCA's patent, and therefore SCA's own patent was invalid. No further communication between the companies occurred until August 2010, when SCA filed a patent infringement action again First Quality. In the intervening period, SCA had initiated a reexamination proceeding before the PTO, and obtained a certificate confirming the validity of SCA's patent in light of First Quality's patent. First Quality moved to dismiss SCA's infringement action based on laches and equitable estoppel. In an en banc opinion, the Federal Circuit held that laches can defeat an infringement claim for damages even if it was filed within the Patent Act's six-year statute of limitations. The Supreme Court reversed based on its opinion in P e trella .\nOf possible interest to Congress, the Court in SCA Hygiene emphasized that:\nPetrella 's holding rested on ... separation-of-powers principles.... When Congress enacts a statute of limitations, it speaks directly to the issue of timeliness and provides a rule for determining whether a claim is timely enough to permit relief. The enactment of a statute of limitations necessarily reflects a congressional decision that the timeliness of covered claims is better judged on the basis of a generally hard and fast rule rather than the sort of case-specific judicial determination that occurs when a laches defense is asserted. Therefore, applying laches within a limitations period specified by Congress would give judges a \"legislation-overriding\" role that is beyond the Judiciary's power. As we stressed in Petrella , \"courts are not at liberty to jettison Congress' judgment on the timeliness of suit.\"\nAccordingly, in SCA Hygiene the High Court demonstrated that its prohibition on the use of laches as an equitable defense in cases claiming damages extends beyond the copyright context of Petrella , and may extend to arguably all statute of limitations enacted by Congress. Thus, the unavailability of laches is a consideration when such statutes are drafted.\nOne potential practical consequence of the Court's SCA Hygiene opinion, as described in Justice Stephen Breyer's dissenting opinion and by at least one commentator, is that patent holders may now wait until close to the expiration of the six-year limitations period to file infringement cases so that damages will have the maximum amount of time to accrue. As Justice Breyer observed, in the wake of SCA Hygiene , \"a patentee has considerable incentive to delay suit until the costs of switching\u2014and accordingly the settlement value of a claim\u2014are high. The practical consequences of such delay can be significant, as the facts of this case illustrate: First Quality invested hundreds of millions of dollars in its allegedly infringing technologies during the years that SCA waited to bring its suit.\" And, unlike the Patent Act, Justice Breyer points out that the Copyright Act \"has express provisions that mitigate the unfairness of a copyright holder waiting for decades to bring his lawsuit.\" This, according to Justice Breyer, is a difference between the patent and copyright regimes that should have prevented the majority from applying Petrella in the patent law arena. The extent to which this tactic will be used in future patent litigation of course remains to be seen.\n\n\t\tCases Involving Multicomponent Products\n\nIn another pair of cases heard during the Supreme Court's October 2016 Term, the Supreme Court dealt with issues related to patents on multicomponent inventions\u2014one in the context of determining infringement and another in the context of calculating damages.\n\n\t\t\tLife Technologies v. Promega\n\nSection 271(f)(1) of the Patent Act provides that anyone who supplies \"in or from the United States all or a substantial portion of the components of a patented invention, where such components are uncombined in whole or in part, in such manner as to actively induce the combination of such components outside of the United States in a manner that would infringe the patent if such combination occurred within the United States, shall be liable as an infringer.\" In Life Technologies v. Promega , the Supreme Court addressed \"whether the supply of a single component of a multicomponent invention is an infringing act under [this provision].\" The Court held that it does not, stating \"a single component does not constitute a substantial portion of the components that can give rise to liability under \u00a7\u00a0271(f)(1).\"\nLife Technologies involved a license for a patent on a toolkit for genetic testing. The toolkit covered by the patent contained five components, one of which was the enzyme Taq polymerase. Promega was the exclusive licensee of the patent and sublicensed it to Life Technologies, a manufacturer of genetic testing kits. Life Technologies manufactured all components of its toolkits in the United Kingdom, except for the Taq polymerase, which it made in the United States. The company then shipped the Taq polymerase to its United Kingdom facility, where it was combined with the other four components of the kit. Four years into this agreement, Promega sued Life Technologies on the grounds that it infringed the patent by selling the toolkits outside of the allowable fields of use in the license, which was limited to clinical and research markets. Because Life Technologies supplied the Taq polymerase from the United States to its United Kingdom manufacturing facilities, Promega alleged liability under \u00a7\u00a0271(f)(1).\nOn appeal to the Federal Circuit, the court held that \"there are circumstances in which a party may be liable under \u00a7\u00a0271(f)(1) for supplying or causing to be supplied a single component for combination outside the United States.\" Based on the facts of this case, the court concluded \"that substantial evidence supports the jury's verdict that LifeTech is liable for infringement under \u00a7 271(f)(1) for shipping the Taq polymerase component of its accused genetic testing kits to its United Kingdom facility.\" The Supreme Court disagreed.\nThe High Court started with what it considered a \"threshold determination\" as to \"whether \u00a7\u00a0271(f)(2)'s requirement of 'a substantial portion' of the components of a patented invention refers to a quantitative or qualitative measurement.\" Based on the text of the statute, the Court concluded that \"[t]he context in which 'substantial' appears in the statute ... points to a quantitative meaning here.\" Next, the Court addressed \"whether, as a matter of law, a single component can ever constitute a 'substantial portion' so as to trigger liability under \u00a7\u00a0271(f)(1),\" and concluded \"[t]he answer is no.\" Therefore, the Court held \"that \u00a7\u00a0271(f)(1) does not cover the supply of a single component of a multicomponent invention.\"\nThis case may appear to be limited to its facts, but arguably has consequences in a marketplace characterized by global supply chains, as well as for the presumption against extraterritoriality, under which this country's patent laws are said to only have force on U.S. soil. While the opinion does not discuss the presumption, it begins with the assertion that \"[t]his case concerns the intersection of international supply chains and federal patent law.\" One observer has noted that, despite not providing guidance on the presumption against extraterritoriality, to some extent the opinion delineates aspects of \"the risk that some parts of the [global supply] chain could be exposed to patent infringement liability.\" As another commentator put it, the Court's holding \"that a single component never qualifies as a substantial portion of the components\u2014tends to curb the extraterritorial effects of Section\u00a0271(f), and that result is sensible given that the baseline rule of U.S. patent law is still a principle of territoriality.\" Thus, this case is of particular interest to those who manufacture multicomponent products, such as smartphones\u2014the subject of the Court's other case involving multicomponent products this term\u2014outside of the United States.\n\n\t\t\tSamsung Electronics v. Apple\n\nIn a second case involving multicomponent products\u2014this time Apple's iPhone\u2014the Supreme Court was again called upon to interpret the Patent Act, this time to determine:\nwhether, in the case of a multicomponent product, the relevant \"article of manufacture\" must always be the end product sold to the consumer or whether it can also be a component of that product. Under the former interpretation, a patent holder will always be entitled to the infringer's total profit from the end product. Under the latter interpretation, a patent holder will sometimes be entitled to the infringer's total profit from a component of the end product.\nUnder \u00a7 289 of the Patent Act, anyone who manufactures or sells \"any article of manufacture to which [a patented] design or colorable imitation has been applied shall be liable to the owner to the extent of his total profit.\" In Samsung Electronics v. Apple , the Federal Circuit identified Samsung's entire smartphone as the \"article of manufacture\" for purposes of calculating damages under \u00a7\u00a0289 because \"[t]he innards of Samsung's smartphones were not sold separately from their shells as distinct articles of manufacture to ordinary purchasers.\" The Supreme Court disagreed.\nThe underlying infringement case involved three Apple design patents for its iPhone: \"the D618,677 patent, covering a black rectangular front face with rounded corners, the D593,087 patent, covering a rectangular front face with rounded corners and a raised rim, and the D604,305 patent, covering a grid of 16 colorful icons on a black screen.\" After Apple released the first generation of its iPhone in 2007, Samsung released a series of smartphones that resembled Apple's iPhone. A jury found Samsung's smartphones infringed the design patents and awarded Apple $399 million in damages, Samsung's entire profit from sales of the infringing smartphones, which the Federal Circuit upheld.\nIn reversing, the Supreme Court grounded its decision on its interpretation of the statutory term \"article of manufacture,\" which it found to be \"broad enough to encompass both a product sold to a consumer as well as a component of that product. A component of a product, no less than the product itself, is a thing made by hand or machine.\" In doing so, the Court found the Federal Circuit's reading of \"'article of manufacture' in \u00a7\u00a0289 to cover only an end product sold to a consumer gives too narrow a meaning to the phrase,\" but the Court remanded to the Federal Circuit to determine the relevant article of manufacture for the each of the design patents found to be infringed in this case. Resolution of that issue is ongoing.\nWhile this case was limited to the issue of damages in the context of Apple's design patents, it is but one of many patent cases between Apple and Samsung related to their smartphones. In fact, on June 26, 2017, the Supreme Court invited the Solicitor General to file a brief \"expressing the views of the United States\" on Samsung's petition for certiorari to review the Federal Circuit's decision in another Samsung Electronics v. Apple case. That case involves three Apple patents: one patent covering the iPhone's autocorrect function, one covering the iPhone's \"slide-to-unlock\" feature, and one covering the iPhone's \"quick links\" feature, which initiates certain actions when users click on certain data (e.g., starting an email message when a user clicks on an email address). In an en banc opinion, the Federal Circuit upheld a jury verdict that found Samsung infringed all three patents, thereby overturning a Federal Circuit panel decision that found the autocorrect and slide-to-unlock patents were invalid as obvious and the quick links patent was not infringed. Should the Court grant certiorari in this case, it could have implications for substantive patent law, in particular the patentability requirement of nonobviousness.\n\n\t\tCases with Implications for the Health Care Industry\n\nA final pair of patent cases decided by the Supreme Court during its October 2016 Term may have major implications for the pharmaceutical industry. According to the U.S. Department of Commerce, in 2015, pharmaceutical sales in the United States grossed $333 billion, comprising 1.9% of gross domestic product. While the U.S. pharmaceutical industry stands as one of the largest sectors of the economy, it is also among the most research and development (R&D) intensive\u2014the \"industry generally allocates 15\u201320 percent of revenues to R&D activities and invests over $50 billion on R&D annually.\" Furthermore, with only about a 10% chance of succeeding, moving an investigative drug through the costly and time-consuming Food and Drug Administration (FDA) approval process means the stakes for research-based pharmaceutical companies are high, necessitating a legal regime that encourages such companies to make the necessary investments to create new drug products. At the same time, the high costs of R&D have, in turn, led to correspondingly high costs to consumers for pharmaceutical products, requiring laws that encourage competition among drug manufacturers to drive down drug costs. These conflicting interests\u2014the interest in innovation and the interest in competition\u2014lie at the heart of the law regulating pharmaceuticals.\n\n\t\t\tThe Legal Landscape for Health Care Innovators\n\nIt is in this context that the Supreme Court issued two opinions this term at the intersection of patent and food and drug law, both of which raise issues of interest to Congress, as the Court gauges the proper balance Congress sought between innovation and competition in federal drug law. This section of the report will begin with a brief background on the legal landscape for health innovators, particularly, the patent regime and regulatory framework for medical products in the United States. Next, this section will cover the Supreme Court's decision in Impression Products v. Lexmark , a case centered on the patent exhaustion doctrine with implications across industries, particularly the pharmaceutical and medical device industries. Last, this section will cover the Supreme Court's decision in Sandoz v. Amgen , a case in which the Court interpreted certain statutory provisions in the Biologics Price Competition and Innovation Act (BPCIA), with the potential to affect the speed at which competition emerges for biologic products. \nAs noted, the U.S. patent law regime working in tandem with other statutorily prescribed protections\u2014in particular, those provided for under food and drug law\u2014has established a legal environment that aims to be hospitable to health innovation. Of note, the Hatch-Waxman Act, which was signed into law in 1984 with the congressional intent of striking a balance between fostering innovation and advancing consumer interests, encourages the manufacture of generic drug products by establishing the abbreviated regulatory scheme for approving generic drugs and providing a framework for resolving consequent patent disputes. Under federal law, in order for a new (i.e., \"pioneer\" or \"brand name\") drug to be marketed, a manufacturer must first obtain FDA approval of a new drug application (NDA). As a prerequisite to submitting an NDA, the manufacturer must conduct, or arrange to conduct, clinical studies designed to show that the drug is safe and effective for its intended use in accordance with section 505(d) of the Food, Drug, and Cosmetic Act (FD&C Act). Conversely, Hatch-Waxman's abbreviated pathway to approval for generic drugs created a new type of marketing application, the abbreviated new drug application (ANDA), which does not require clinical testing, but instead requires a third party or generic manufacturer to show that its drug formulation is a therapeutically equivalent copy of the brand name drug being marketed.\nSignificantly, Hatch-Waxman also amends the FD&C Act to provide for periods of time in which a new drug is the exclusive drug on the market. These periods of market exclusivity provided for under food and drug law are sometimes referred to as a type of \"regulatory exclusivity,\" which are in addition to and distinct from patent term exclusivity. That is to say, market exclusivity under food and drug law may still be in effect even if the drug is not under patent protection. More specifically, the Hatch-Waxman Act provides a five-year period of market exclusivity for new molecular entities and three years of market exclusivity for a new use or new formulation of previously approved drug products. To encourage the production of generic drugs, the Hatch-Waxman Act also created a 180-day exclusivity period for the first approved generic version of a brand-name drug product. Congress also provided additional market exclusivity under the Patent Act. In response to criticisms that the lengthy FDA approval process eroded the benefit of patent term market exclusivity, the Hatch-Waxman Act provided for \"patent term restoration,\" allotting additional time to the patent term of a pioneer drug in order to compensate the patent holder for the time lost during clinical trials and the FDA review process. \nMore recently, in 2010, as part of the Patient Protection and Affordable Care Act, Congress enacted the BPCIA for the stated purpose of \"balancing innovation and consumer interests.\" While there are important differences between the two statutes, like Hatch-Waxman, the BPCIA sought to achieve this goal through changes to food and drug as well as patent law. With respect to food and drug law, the BPCIA establishes an abbreviated pathway for regulatory approval of \"follow-on biologics\" or \"biosimilars\"\u2014lower-cost versions of biologics. A \"biological product\" or \"biologic\" is a medical product made from natural resources (human, animal, microorganism) used in the prevention, treatment, or cure of disease. The traditional route for FDA approval of a biological product for commercial marketing is through a biologics license. In order to obtain a license to market a biologic, a sponsor must complete a biologics licensing application (BLA), wherein the sponsor provides clinical data\u2014the results of a costly multi-phase clinical trial process\u2014demonstrating that the product is \"safe, pure, and potent.\" Under the BPCIA's abbreviated pathway, a biosimilar applicant filing an abbreviated biologics license application (aBLA) must, in order to receive approval, submit information sufficient to show that a product is \"biosimilar\" to or \"interchangeable\" with a previously approved biologic (i.e., \"reference product\") and rely upon \"publicly-available information regarding [FDA's] previous determination that the reference product is 'safe, pure, and potent.'\" In balancing innovation with competition, the BPCIA also provides for a 4-year and 12-year exclusivity period for a reference product wherein (1) an aBLA may not be submitted prior to the date that is 4 years after the date on which the reference product was first licensed and (2) approval of an aBLA may not be made effective until the date that is 12 years after the date on which the reference product was first licensed. With respect to patent law, the BPCIA creates a process, discussed in greater detail below, that endeavors to speed the litigation of patents, while protecting the innovator's patent rights.\n\n\t\t\tImpression Products v. Lexmark\n\nOn May 30, 2017, in a nearly unanimous decision, the Supreme Court reversed the Federal Circuit in a case respecting the doctrines of domestic and international patent exhaustion, holding in Impression Products v. Lexmark International that \"a patentee's decision to sell a product exhausts all of its patent rights in that item, regardless of any restrictions the patentee purports to impose or the location of the sale.\" Although the case arose out of a dispute over printer cartridges, the question at the heart of the dispute\u2014whether restrictions placed on the sale of a patented product are enforceable under patent law\u2014has significant implications across a number of industries, particularly the pharmaceutical and medical device industries.\nTo understand the Impression Products ruling, it is important to note several broad principles of patent law. In addition to providing a private right of action against anyone who, without authority from the patent holder, \"makes, uses, offers to sell, or sells any patented invention, within the United States or imports into the United States any patented invention during the term of the patent,\" Section 1498 of Title 28 provides an express statutory means by which a patent holder can recover compensation for infringement of a patent by the federal government. Specifically, the statute provides that whenever a patent \"is used or manufactured by or for the United States without license of the owner,\" the patent holder may bring an action in United States Court of Federal Claims to recover \"his reasonable and entire compensation for such use and manufacture.\" Patent holders also have certain ancillary rights, such as the right to license their patented products and the right to sell or license their patented products with restrictions, including via so-called \"Single Use\" provisions, through contractual agreements.\nThere is, however, a key limitation on the rights of patent holders called the doctrine of patent exhaustion. The common law \"exhaustion doctrine\" (also known as the \"first sale doctrine\") stands for the principle that once an authorized sale of a patented article occurs, the patent holder's exclusive rights to control the use and sale of that article under patent law are said to be \"exhausted,\" freeing the purchaser to use or resell the article without restraint. The basis for this principle, as articulated by the Supreme Court, is that \"[t]he purpose of the patent law is fulfilled with respect to any particular article when the patentee has received his reward ... by the sale of the article\"; once that \"purpose is realized the patent law affords no basis for restraining the use and enjoyment of the thing sold.\" It is important to note, however, that the patent exhaustion doctrine applies only to the particular item sold and does not otherwise free a buyer to replicate or reproduce the patented item into a new product. Prior to the Supreme Court's ruling in Impression Products , the Federal Circuit's prevailing precedent allowed patent holders to place post-sale use and resale restrictions on domestic sales without implicating the doctrine of patent exhaustion and exempted sales abroad from the first sale doctrine entirely. In other words, patent holders maintained the ability to (1) sue for infringement if restrictions placed on domestic sales were not observed and (2) recoup more than a single reward for the sale of a patented item if the first sale was made abroad. Impression Products explicitly overturned the Federal Circuit's precedent with respect to both issues, changing the legal landscape for patent holders.\nThe controversy at issue in Impression Products stems from certain practices of companies known as \"remanufacturers\" that violated restrictions Lexmark had placed on the sales of its patented printer cartridges. Consumers had two options when purchasing toner cartridges from Lexmark\u2014they could either buy the cartridge at full price with no restrictions, or they could buy the cartridge at a discount through Lexmark's \"Return Program.\" In order to receive the discounted price through the Return Program, however, customers had to sign a contract agreeing to use the cartridge only once and then return it to Lexmark. Despite these restrictions, remanufacturers would acquire the Lexmark cartridges, including those initially sold through the Return Program, refill them with toner, and sell them at a discounted rate. Remanufacturers also acquired Lexmark cartridges sold overseas, reimported them into the United States, and refilled and sold them along with the Return Program cartridges. \nLexmark sued a number of these remanufacturers, including Impression Products, for patent infringement with respect to two groups of cartridges: (1) those cartridges sold as part of the Return Program within the United States on the theory that the prohibited reuse and resale of these products infringed Lexmark's patents; and (2) all cartridges sold abroad that Impression Products imported into the United States on the theory that, because Lexmark never authorized the import of its cartridges, Impression Products infringed its patents by doing so. Impression Products moved to dismiss on the grounds that Lexmark's sales, both in the United States and abroad, exhausted all patent rights and freed Impression Products to refurbish, resell, and import products acquired overseas. The district court granted the motion with respect to the domestic Return Program sales, but denied the motion as to the cartridges sold abroad based on Federal Circuit precedent. On appeal, the Federal Circuit ruled in favor of Lexmark with respect to both groups of cartridges. \nThe Supreme Court's decision to reverse the Federal Circuit with respect to both domestic and international patent exhaustion appears to rest on the underlying principle that, \"when an item passes into commerce, it should not be shaded by a legal cloud on title as it moves through the marketplace.\" Referring to its 2013 ruling in Kirtsaeng v. John Wiley & Sons , a case involving copyright law, the Court noted that \"we have explained in the context of copyright law that exhaustion has an 'impeccable historic pedigree,' tracing its lineage back to the 'common law's refusal to permit restraints on the alienation of chattels.'\" In this manner, I mpression Pr oducts can be viewed as an example of one in which the Court harmonizes an aspect of patent law with other areas of federal law, as discussed above.\nThe Supreme Court reasoned that the Federal Circuit reached a different result because it \"got off on the wrong foot.\" The Court described the Federal Circuit's view that \"exhaustion must be understood as an interpretation of the patent infringement statute.\" The Federal Circuit, according to the Court, viewed exhaustion as not requiring a patentee to hand over the \"full bundle of rights\" every time it makes a sale, but rather allows a patentee to \"withhold a stick from the bundle, perhaps by restricting the purchaser's resale rights.\" The Court countered:\nThe misstep in [the Federal Circuit's] logic is that that the exhaustion doctrine is not a presumption about the authority that comes along with a sale; it is instead a limit on \"the scope of the patentee's rights.\" The right to use, sell, or import an item exists independently of the Patent Act. What a patent adds\u2014and grants exclusively to the patentee\u2014is a limited right to prevent others from engaging in those practices. Exhaustion extinguishes that exclusionary power. As a result, the sale transfers the right to use, sell, or import because those are rights that come along with ownership, and the buyer is free and clear of an infringement lawsuit because there is no exclusionary right left to enforce. \nWith respect to international patent exhaustion, commentators had, prior to this ruling, questioned Kirtsaeng 's application to international patent exhaustion, noting distinctions between copyright and patent law. Namely, unlike the first-sale doctrine in copyright law, commentators noted that patent exhaustion has not been codified, and patent rights have a territorial requirement restricting their reach to the United States. Likewise, in refusing to extend patent exhaustion extraterritorially, the Federal Circuit also emphasized distinctions between copyright and patent law, in particular the difference in breadth of scope. Specifically, while patent law affords the right to exclude others from use, copyright law does not. The Supreme Court, however, took another position. Noting that \"patent exhaustion, too, has its roots in the antipathy toward restraints on alienation,\" the Court stated that \"applying patent exhaustion to foreign sales is just as straightforward\" as applying the first sale doctrine to foreign sales of copyrighted works. To this end, the Court emphasized that \"nothing in the text or history of the Patent Act shows that Congress intended to confine that borderless common law principle to domestic sales. In fact, Congress has not altered patent exhaustion at all; it remains an unwritten limit on the scope of the patentee's monopoly.\"\nWhile the Supreme Court's decision in Impression Products suggests that patent law may not be used as a mechanism for enforcing restrictions on the sale of patented items, the Court clarified that such restrictions may remain enforceable under contract law:\nIf there were any lingering doubt that patent exhaustion applies even when a sale is subject to an express, otherwise lawful restriction, our recent decision in Quanta Computer, Inc. v. LG Electronics, Inc. , settled the matter ... without so much as mentioning the lawfulness of the contract, we held that the patentee could not bring an infringement suit because the \"authorized sale ... took its products outside the scope of the patent monopoly.\" Turning to the case at hand ... whatever rights Lexmark retained are a matter of the contracts with its purchasers, not the patent law. \nMoreover, in a passage that may be of particular importance for patentees that often license others to make and sell their patented products under certain conditions, the Court explained how a license of a patented product may implicate the exhaustion doctrine. The Court noted:\nA patentee can impose restrictions on licensees because a license does not implicate the same concerns about restraints on alienation of sale ... a license is not about passing title to product, it is about changing the contours of the patentee's monopoly: The patentee agrees not to exclude a licensee from making or selling the patented invention, expanding the club of authorized producers and sellers. Because the patentee is exchanging rights, not goods, it is free to relinquish only a portion of its bundle of patent protections.\nAt the same time, the Court emphasized that the ability to place restrictions on licenses did not provide a mechanism for circumventing patent exhaustion. The Court explained that \"so long as a licensee complies with the license when selling an item, the patentee has, in effect, authorized the sale,\" thereby exhausting the patent. The Court also reiterated that, in the event the purchaser did not comply with the restrictions, \"the only recourse for the licensee is through contract law, just as if the patentee itself sold the item with a restriction.\"\nContract law, however, offers significantly less protection for patent holders, as it reaches only as far as the parties in privity with the original contract. That is to say, once the patented item moves beyond the initial transaction, any restrictions made under the original contract will likely not be enforceable against new purchasers downstream. Contract law also provides less protection compared to patent law in terms of damages. As noted, the Patent Act provides for damages \"adequate to compensate for the infringement,\" and courts are granted the discretion to grant enhanced (i.e., treble) damages. By contrast, under contract law damages are more limited\u2014the injured party may recover damages to cover losses incurred by the breach, but treble damages are unavailable. With patent infringement no longer an available mechanism for enforcing post-sale restrictions, it is likely that many existing contracts will need to be renegotiated and that patent holders will be increasingly scrupulous in entering into future contracts, particularly with foreign parties.\nPrior to the Supreme Court's decision in Impression Products , Federal Circuit precedent regarding patent exhaustion provided significant protections for patent holders by allowing them to enforce post-sale restrictions through patent infringement actions and rejecting international patent exhaustion. This legal climate, along with an increasingly global market for medical products, provided fertile ground for what is now, as commentators have noted, an entrenched business practice\u2014the heavy use of restrictions on the domestic and international sales of patented products\u2014within the pharmaceutical and medical device industries. Thus, as reflected in the amici briefs filed prior to the Supreme Court's Impression Products ruling, the Court's conclusion that \"patent exhaustion is uniform and automatic\" may have significant implications for pharmaceutical and medical device companies. \nPharmaceutical companies have argued that changes to the legal landscape that limit patent rights would stifle innovation, ultimately hurting the public health. More particularly, the industry has long argued that patent and other regulatory exclusivities, like those provided for under the FD&C Act, are a means of recouping investments in research and development. The Supreme Court's ruling with respect to international patent exhaustion, in particular, has potentially significant implications for this industry. It is no secret that drugs are sold at different prices in different countries for a number of reasons\u2014including that drug prices in some markets are set not by the free market, but by the foreign government; patent rights are weaker under some foreign regimes, driving down prices; and, given disparities in global wealth, some foreign markets cannot support drugs at a revenue-generating cost. As such, there is concern among industry representatives that Impression Products ' extension of patent exhaustion to foreign sales could expand grey market sales\u2014that is, products bought and sold outside the manufacturer's authorized trading channels\u2014of medicines originally sold in foreign markets at lower prices. According to this view, an expansion of grey market sales may, in turn, upset the balance between innovation and patient access that Congress intended to strike through statutory and regulatory mechanisms. As examples of these mechanisms, U.S. patent law provides for U.S. market exclusivity and protection from infringement, while additional regulatory exclusivities for various categories of innovative medical products are provided for under laws implemented by FDA. In addition, FDA is authorized to enforce restrictions on the importation of medical products. In the views of at least one amicus brief, the expansion of grey market sales could result in limiting patient access to medications by limiting the incentive for innovation. \nThat said, given current regulatory restrictions on the importation of medical products, the law provides pharmaceutical companies with more protection than most other manufacturers with respect to the reimportation of goods sold abroad. Specifically, FD&C Act section 801(d)(1) prohibits anyone other than the manufacturer from reimporting drugs manufactured in the United States and sold abroad. Relying on this provision, one consumer advocacy group has argued that the statute \"effectively prevents large-scale parallel importation of drugs originating in the United States and thus renders the impacts predicted by [industry] unlikely.\" \nEconomic consequences may not be the only issues raised by the Supreme Court's decision scaling back a patentee's ability to enforce post-sale restrictions through patent infringement actions. In addition to economic concerns, the medical device industry argues that compromising the enforcement of restrictions on single-use devices (SUDs), which range in sophistication from compression sleeves to cardiac catheters, may pose public health risks. SUDs, which emerged in response to heightened awareness about the transmission of infectious diseases, are manufactured with the expectation that they will be discarded after one single use in one single patient. Because SUDs are not designed or constructed to be cleaned for subsequent use, some are made of materials that are unable to withstand necessary resterilization procedures.\nAs background, medical devices that are more complex and higher risk are typically required to obtain FDA approval prior to marketing through an application for premarket approval (PMA), which similar to an NDA, requires clinical testing to show a \"reasonable assurance of safety and effectiveness\" to market a device. Some less complex and lower-risk devices are eligible to instead obtain clearance for marketing through a 510(k) submission if the product is shown to be \"substantially equivalent\" to a predicate product (i.e., a device already on the market). FDA regulates the common cost-saving mechanism of reprocessing\u2014the collection of discarded medical devices for cleaning, repair, and resterilization in preparation for resale\u2014by requiring that manufacturers of reusable devices test and supply instructions for safe reprocessing and that reprocessors of SUDs demonstrate \"substantial equivalence\" in terms of safety and efficacy to the original manufactured product. Given that reprocessing is regulated by FDA, one may question whether post-sale restrictions are necessary to ensure safety with regard to SUDs. However, FDA itself has stated that \"[r]educing the risk of exposure to improperly reprocessed medical devices is a shared responsibility among various stakeholders ... [including] manufacturers.... \" Because SUDs are intended for use only once and may not\u2014at least in some instances\u2014be safely refurbished, manufacturers of SUDs, unlike manufacturers of reusable medical devices, are not, however, required to provide reprocessing instructions. Thus, the Medical Device Association argued in its amicus brief in Impression Products that \"if all post-sale restrictions are ineffective, medical device manufacturers will be unable to ensure compliance with the guidelines for safely reprocessing reusable devices.\" On the other hand, it seems unlikely that all single-use restrictions would be rendered entirely ineffective by the Supreme Court's decision on patent exhaustion, as FDA still requires reprocessors to demonstrate the safety and efficacy of a refurbished SUD. Furthermore, other laws, such as state tort law or consumer protection laws, could (subject to federal preemption limits) serve as a disincentive for a reprocessor's failure to heed a manufacturer's single-use restriction where reuse risks public safety. \nFinally, while Impression Products held that post-sale restrictions are not enforceable under patent law, it also clarified that contract law remains an appropriate vehicle for remedying such violations. As previously discussed, contract remedies extend only to parties in privity with the agreement, and with respect to concerns raised by the pharmaceutical industry, contract law cannot reach downstream sales where grey market transactions are likely to occur. Likewise, because many reprocessors are independent of the hospitals and health care facilities to which the devices were originally sold, there could be situations in which patent owners are without the requisite privity to base a breach of contract claim for violating post-sale restrictions on SUDs. While it remains to be seen how significant the Supreme Court's reversal of the Federal Circuit's position on patent exhaustion will be on the pharmaceutical and medical device industries, the myriad questions raised by the Impression Products decision implicate the recurrent theme of balancing innovation and competition and thus may be of interest to Congress and the subject of future legislative debate. \n\n\t\t\tSandoz v. Amgen\n\nAnother Supreme Court opinion issued this term with significant implications for consumers and pharmaceutical companies is Sandoz v. Amgen , issued on June 12, 2017. This case will potentially affect the speed at which competition emerges for many pharmaceutical products. Specifically, the Supreme Court considered opposing views on how to interpret key provisions in the BPCIA. \nAs noted above, in 2010, as part of the Patient Protection and Affordable Care Act, Congress enacted the BPCIA for the stated purpose of \"balancing innovation and consumer interests\" with the establishment of an abbreviated pathway for regulatory approval of biological products that are \"highly similar\" to or \"interchangeable\" with a previously approved FDA-licensed reference product (\"reference product\"). As part of this new abbreviated regulatory pathway for so-called \"biosimilars\" and particularly relevant to Sandoz , the BPCIA sets forth a complex patent-dispute resolution regime wherein the reference product owner can protect against potential infringements of any patents of products that are the subject of an aBLA. Thus, rather than waiting until commercial marketing to resolve disputes, the BPCIA facilitates litigation during the period preceding FDA approval. In doing so, the BPCIA \"enables the parties to bring infringement actions at certain points in the application process, even if the applicant has not yet committed an act that would traditionally constitute patent infringement ... [the BPCIA] provides that the mere submission of a biosimilar application constitutes an act of infringement.\" The Supreme Court has referred to this type of \"preapproval infringement\" as \"artificial infringement.\" \nMore specifically, by amending section 262 of the Public Health Service Act, the BPCIA establishes an elaborate process for patent dispute resolution, sometimes referred to as the \"patent dance.\" The \"dance\" generally involves an applicant and reference product sponsor (i.e., \"the sponsor\") participating in a series of informational exchanges regarding potential disputes over patent validity and infringement prior to marketing of the biosimilar. \nThe Disclosure Requirement : Of particular relevance to Sandoz , the initial requirement under the BPCIA's disclosure and negotiation procedures is that the applicant \"shall\" grant the reference product sponsor confidential access to its aBLA application and the manufacturing information regarding the biosimilar product no later than 20 days after FDA accepts the application for review. From this disclosure, the exchange continues: pursuant to section 262( l )(3), within 60 days of disclosure, the sponsor \"shall provide\" to the applicant \"a list of patents\" for which it believes it could assert an infringement claim if a person without a license made, used, offered to sell, sold, or imported \"the biological product that is the subject of the [biosimilar] application.\" At this time the sponsor also identifies any patents on the list that it would be willing to license. In turn, within 60 days of receiving the sponsor's list, the applicant may provide the sponsor with a list of patents that it believes are relevant, but were omitted from the sponsor's list. Next, the applicant \"shall provide\" to the sponsor the reasons why it could not be held liable for infringing those patents, for example because the patents are invalid, unenforceable, or not infringed. The applicant must also, if applicable, respond to the sponsor's offer to license particular patents. The sponsor then \"shall provide\" within 60 days responses to the applicant's arguments concerning infringement, enforcement, and validity, as to each relevant patent.\nThe Notice Requirement : In another relevant provision of the BPCIA, the law provides that the applicant \"shall\" give notice of commercial marketing to the reference product sponsor at least 180 days prior to commercial marketing. This notice provides the reference product sponsor a period of time to seek a preliminary injunction to enjoin infringing acts. Furthermore, either party may sue for declaratory relief, but the parties are barred from doing so prior to the applicant's notice of commercial marketing. \nTwo-Phased Litigation : The Supreme Court's decision in Sandoz v. Amgen describes these mechanics as \"channel[ing] the parties into two phases of patent litigation\": (1) upon disclosure of the application and manufacturing information, the parties collaborate to identify patents for immediate litigation; and (2)\u00a0upon notice of commercial marketing, the parties may litigate patents that were included on the section 262( l )(3) lists, but not litigated in the first phase. Thus, if the parties comply with the \"patent dance,\" they will have the opportunity to litigate any relevant patents prior to commercial marketing.\nRemedial Provisions : In order to encourage the parties to comply, the BPCIA also includes consequences for failing to do so. Two of these remedial provisions were of particular relevance in Sandoz . First, if the applicant fails to comply with the disclosure requirement, which effectively commences the two-phase litigation process, then the sponsor, but not the applicant, may immediately bring a declaratory action for infringement. Similarly, if the applicant fulfills the disclosure requirement, but fails to comply with the subsequent steps in the information exchange process, the applicant, but not the sponsor, may bring a declaratory judgment action with respect to any patent included on the sponsor's section 262( l )(3) list. In both instances, the BPCIA facilitates these actions by making it an artificial act of infringement to submit a biosimilar application with respect to any patent that could have been included on the section 262( l )(3) list.\nThe impetus behind the Sandoz litigation was Sandoz's first FDA approval under the BPCIA's new regulatory pathway for its product \"Zarxio,\" a biosimilar for the FDA-approved anti-infective biologic filgrastim, and the first biosimilar approved under the BPCIA. Amgen, the company that has produced and marketed filgrastim under the brand name \"Neupogen\" since 1991, filed suit in the Northern District of California for patent infringement under 42 U.S.C. \u00a7\u00a0262( l )(9)(c). Amgen also sought an injunction in an effort to forestall market entry of Zarxio with claims grounded in two alleged violations of the BPCIA\u2014Amgen claimed that Sandoz's failure to comply with the disclosure and negotiation procedures established by the BPCIA and its interpretation of a 180-day notice requirement both comprised actionable unlawful business practices under California law. \nWith regard to participation in the BPCIA's disclosure and negotiation procedures, both the district court and the Federal Circuit held that those procedures\u2014despite the use of the word \"shall\" in the statute\u2014were not a mandate on the applicant. Rather, the lower courts viewed the disclosure and negotiation procedures as an option that confers certain benefits, largely in the form of reduced patent infringement litigation risks, in exchange for expediency in getting the product to market. Furthermore, the Federal Circuit held that an injunction was unavailable as a remedy under federal law because \"42 U.S.C. section 262( l )(9)(C) and 35 U.S.C. 271(e) expressly provide the only remedies\" for violating the disclosure requirement, with neither authorizing a court to compel compliance. \nWhile the district court held that the 180-day notice provision should be interpreted to allow the applicant to give notice to the reference product sponsor prior to FDA approval of the aBLA, the Federal Circuit vacated that holding in a split decision, maintaining that in order for notice to be effective, it must be given after the biosimilar is licensed by FDA. The Federal Circuit's interpretation of the notice requirement would have functionally provided the reference product sponsor with an additional six months of market exclusivity because the applicant could only begin to sell the biosimilar product 180 days after the FDA ended the sponsor's exclusive right to sell the biologic. Notably, the Federal Circuit seemed to suggest that the 180-day notice requirement is mandatory only if the applicant chooses to forgo the patent dance, stating that \"where, as here, a[n] ... applicant completely fails to provide its aBLA and the required manufacturing information to the [reference product sponsor] by the statutory deadline, the [notice] requirement ... is mandatory.\" In other words, the Federal Circuit's interpretation of the \"shall\" language with regard to the 180-day notice provision seemed to transform a requirement into something more optional.\nThe Supreme Court addressed two questions arising from the dispute: (1)\u00a0whether the requirement that an applicant provide its application and manufacturing information to the manufacturer of the biologic is enforceable by injunction and (2) whether the applicant must give notice to the manufacturer after, rather than before, obtaining a license from the FDA for its biosimilar.\nWith respect to the first question, the Supreme Court explained that Sandoz's failure to disclose its application and manufacturing information did not amount to an act of \"artificial infringement\" remediable by injunctive relief under the BPCIA. The Court explained that the Federal Circuit erred in its apparent conclusion that noncompliance with section 262( l )(2)(A) (i.e., the disclosure requirement) is an \"element of the artificial act of infringement.\" Specifically, the Court noted that the Federal Circuit based its interpretation on the language in section 271(e)(2)(C)(ii), which states that \"[i]t shall be an act of infringement to submit[,] if the applicant for the application fails to provide the application and information [to the reference product sponsor].\" Rather, the Court held that such language \"merely assists in identifying which patents will be the subject of an artificial infringement suit. It does not define the act of artificial infringement itself.\" The Court reached this conclusion based on the structure of 271(e), which defines artificial infringement in two separate clauses\u2014once within the context of the list exchange process and once when an applicant fails to disclose its manufacturing information. The Court concluded that in both instances it is the act of submitting the application, rather than a failure to disclose information, that constituted the act of artificial infringement for which a remedy is provided under section 271(e)(4). Instead, the Court held that a separate provision under section 262 of the BPCIA provides a remedy for an applicant's failure to turn over its application and manufacturing information\u2014\"\u00a7262( l )(9)(C) authorizes the sponsor, but not the applicant, to bring an immediate declaratory judgement action\" for artificial infringement as defined in section 271(e)(2)(C)(ii). The Court also noted, \"\u00a7262( l )(9)(C) excludes all other federal remedies, including injunctive relief. Where, as here, 'a statute expressly provides a remedy, courts must be especially reluctant to provide additional remedies.'\" While concluding that an injunction was unavailable under federal law as a means of enforcing the disclosure requirement, the Court remanded the decision to the Federal Circuit to determine whether an injunction is available under California law. \nWith respect to the second question presented, the Court reasoned that the plain language of the statute, which requires a biosimilar applicant to provide notice to the reference product sponsor \"not later than 180 days before\" the date of first commercial marketing of the biosimilar product, does not require the notice to occur after FDA licenses the product. The Court explained:\nThe applicant must give \"notice\" at least 180 days \"before the date of commercial marketing.\" \"[C]ommercial marketing,\" in turn, must be \"of the biological product licensed under subsection (k).\" Because this latter phrase modifies \"commercial marketing\" rather than \"notice,\" \"commercial marketing\" is the point in time by which the biosimilar must be \"licensed.\" The statute's use of the word \"licensed\" merely reflects the fact that, on the \"date of first commercial marketing,\" the product must be \"licensed.\" Accordingly, the applicant may provide notice either before or after receiving FDA approval.\nIn support of this interpretation, the Court cited statutory context. Dismissing the lower court's position, the Court explained that, while section 262( l )(8)(A) contains a single timing requirement\u2014an applicant must provide notice 180 days prior to marketing\u2014\"[t]he Federal Circuit ... interpreted the provision to impose two timing requirements: The applicant must provide notice after the FDA licenses the biosimilar and at least 180 days before the applicant markets the biosimilar.\" The Supreme Court went on to explain that \"'[h]ad Congress intended to' impose two timing requirements in \u00a7262( l )(8)(A),\" it \"presumably\" would have structured those requirements parallel to the two timing requirements in the subparagraph that immediately follows. \nThe Supreme Court's decision in Sandoz has the potential to hasten the pace at which a biosimilar can reach the market by effectively making the \"patent dance\" optional. In other words, under Sandoz an applicant can choose not to engage in the disclosure and negotiation process with the reference product sponsor prior to marketing in exchange for assuming increased litigation risks. By refusing to adopt the Federal Circuit's interpretation of the BCPIA, the Supreme Court rejected an interpretation of the Act that would have effectively added 180 days of exclusivity for the sponsor. Legal and industry experts have been vocal in their reactions to the Court's decision\u2014some have questioned the meaningfulness of notice provided prior to approval, while others have suggested that the rejection of the availability of injunctive relief for enforcing a violation of the BPCIA effectively guts the protections Congress presumably sought to provide. There is also concern that by loosening the requirements of the BPCIA, the Court's decision may create more uncertainty for innovator companies, biosimilar companies, and ultimately the general public alike. For those who may question the outcome, Justice Breyer's concurrence offers an alternative\u2014in line with his comments during oral argument, he stated that \"if [FDA], after greater experience administering this statute, determines that a different interpretation would better serve the statute's objectives, it may well have authority to depart from, or to modify, today's interpretation.\" Whether or not FDA acts to address the implications of the Court's decision, Congress could, should it feel the Supreme Court's interpretation is not reflective of the policy decisions intended, amend the BPCIA to clarify its provisions.\n\n\tEmerging Issues in Patent Law\n\nIn addition to the effects of the patent decisions issued by the Supreme Court during its October 2016 Term, there are a number of patent-related issues on the horizon. Such issues stem from future Supreme Court cases to be heard during its next term; legislative proposals in Congress; and executive initiatives in the intellectual property area.\n\n\t\tViability of Inter Partes Review Proceedings\n\nAs noted, the PTO's inter partes review proceedings are one of the major patent reforms made by the AIA, but their continued availability is contingent on the judgment of the Supreme Court. Specifically, on June 12, 2017, the Supreme Court granted certiorari in Oil States Energy Services v. Greene's Energy Group on the sole question as to \"[w]hether inter partes review\u2014an adversarial process used by the [PTO] to analyze the validity of existing patents\u2014violates the Constitution by extinguishing private property rights through a non-Article III forum without a jury.\" While the Federal Circuit summarily dismissed the Oil States case (i.e., without a written opinion), it previously rejected a constitutional challenge to inter partes review proceedings in a written decision.\nSpecifically, in MCM Portfolio v. Hewlett-Packard , the Federal Circuit addressed whether inter partes review proceedings violate (1) Article III of the Constitution, by delegating issues to the PTO that must be adjudicated by a federal court, and (2) the Constitution's Seventh Amendment because there is no jury in PTO proceedings. Article III establishes the federal court system, providing that the \"judicial Power shall extend to all Cases, in Law and Equity, arising under ... the Laws of the United States,\" while the Seventh Amendment provides: \"In Suits at common law, where the value in controversy shall exceed twenty dollars, the right of trial by jury shall be preserved....\" In rejecting the constitutional challenge, the Federal Circuit reasoned that:\nThe patent right derives from an extensive federal regulatory scheme, and is created by federal law. Congress created the PTO, an executive agency with specific authority and expertise in the patent law, and saw powerful reasons to utilize the expertise of the PTO for an important public purpose\u2014to correct the agency's own errors in issuing patents in the first place.... There is notably no suggestion that Congress lacked authority to delegate to the PTO the power to issue patents in the first instance. It would be odd indeed if Congress could not authorize the PTO to reconsider its own decisions.\nThe Supreme Court denied certiorari in MCM Portfolio , while granting it in Oil States .\nIn its brief on the merits, filed on August 24, 2017, Oil States raises two main arguments. First, the company asserts that \"[i]nter partes review impermissibly transfers the responsibility for deciding common-law suits from Article III judges to administrative agency employees who are beholden to Executive Branch officials\u2014precisely the evil the Framers sought to avoid.\" Second, Oil States contends that \"[i]nter partes review impermissibly supplants juries as well as judges,\" in violation of the Seventh Amendment. Greene's Energy Group's brief on the merits is currently due on October 23, 2017, while Oil States' reply is due November 20, 2017.\nThere appears to be much anticipation as to the outcome of this case. One commentator has stated that \"[t]he Supreme Court's decision holds the potential to be one of the most significant patent decisions in decades.\" In deciding this case, the Supreme Court must determine whether a patent is a private property right , like real property, and therefore revocable only in an Article III tribunal, as opposed to a pub l ic right created by an administrative agency empowered to revoke that right. Notably, the Patent Act itself contains a provision stating \"patents shall have the attributes of personal property.\" If the Court were to find that patents are private property rights and hold that inter partes review proceedings are unconstitutional, there would be a cascade of consequences for the U.S. patent regime.\nAmong the possible consequences experts are currently discussing is the question of what will happen to patents that were invalidated in inter partes review proceedings. Since the proceedings began in 2012, the PTO has received approximately 7,000 petitions and, of the more than 1,500 final decisions it has issued, roughly 1,300 have invalidated at least some patent claims. One commentator has framed the question this way: \"'What happens to all those patents? Do they suddenly spring back to life?'\" \nRelatedly, as discussed above, is the fact that the PTO invalidates patents through other administrative proceedings, including reexamination proceedings, which have been available since the 1980s. In addition to the question of the fate of patents invalidated during inter partes review proceedings is that of those invalidated during reexamination. Further, if the Supreme Court rules that inter partes review proceedings are unconstitutional, this will call into question the constitutionality of the PTO's other revocation proceedings, including reexamination and post-grant reviews.\nFinally, should the Court hold that inter partes review proceedings are unconstitutional, the question of the impact on the caseload of the federal courts looms large. As noted, about 7,000 petitions for inter partes review proceedings have been filed in the last five years. While it is unlikely that all such petitions would amount to infringement complaints lodged in the federal courts, it seems likely that the elimination of PTO revocation proceedings will have a tangible effect on the dockets of the federal courts.\nNotably, as of the date of this report, the only other patent case scheduled to be heard during the Court's October 2017 Term also involves inter partes review proceedings. In SAS Institute v. Matal , the Court granted certiorari to answer the following question:\nDoes 35 U.S.C. \u00a7 318(a), which provides that the [PTAB] in an inter partes review \"shall issue a final written decision with respect to the patentability of any patent claim challenged by the petitioner,\" require that Board to issue a final written decision as to every claim challenged by the petitioner, or does it allow that Board to issue a final written decision with respect to the patentability of only some of the patent claims challenged by the petitioner, as the Federal Circuit held?\nUnder current PTO practice, a petitioner may challenge a patent \"on all or some of the challenged claims,\" and the PTO may institute a proceeding on a subset of the petition's challenged claims. Obviously, the challenge as to whether the PTO must address all patent claims challenged by a petitioner will become moot if the Court strikes down inter partes review proceedings as unconstitutional in Oil States . Standing alone, however, SAS Institute also has implications for the PTO because it has the potential to eliminate a practice of the agency that allows it to manage its workload by limiting the number of challenged claims it must analyze.\n\n\t\tLegislative and Executive Patent Law Activity\n\nAs noted, patent reform appears to be of perennial concern to Congress. For instance, prior to the enactment of the AIA in 2011, there were several years of legislative activity in this area. With regard to patent reform, issues that have received attention include, but are not limited to: (1)\u00a0remedies for patent infringement, including the availability of damages, injunctive relief, and attorney fees; (2) administrative proceedings before the PTO, such as those enacted in the AIA; (3) the issue of non-practicing entities (i.e., patent trolls); and (4) the high costs and burdens of patent litigation for U.S. businesses, and the costs that are passed on to consumers, particularly in the drug context.\nMost recently, in the 115 th Congress, the Support Technology and Research for Our Nation's Growth and Economic Resilience Patents Act (STRONGER Patents Act) of 2017 was introduced. The bill's stated purpose is \"to strengthen the position of the United States as the world's leading innovator by amending title 35 ... to protect the property rights of the inventors that grow the country's economy.\" The bill contains many provisions of the Support Technology and Research for Our Nation's Growth Patents Act of 2015 (STRONG Patents Act) of the 114 th Congress, as well as provisions from the Targeting Rogue and Opaque Letters Act of 2015 (TROL Act).\nAt center, the STRONGER Patent Act addresses the PTO's post-grant proceedings, with much of its provisions devoted to reforms of the inter partes review and post-grant review proceedings. For example, the bill would align the PTO's patent claim construction standard with that of the federal courts. The bill would also require that findings of patent invalidity by the PTO be proved by \"clear and convincing\" evidence, as they are in district court litigation. With regard to standing in PTO proceedings, the bill would limit potential petitioners to only those individuals and enterprises who have a demonstrated adverse relationship to the challenged patent to the exclusion of nonpracticing entities (i.e., patent trolls). In addition to provisions amending PTO administrative proceedings, Title II of the bill empowers the Federal Trade Commission to take certain enforcement actions against nonpracticing entities that send misleading patent-related demand letters.\nWhile addressing some of the concerns raised in the Oil States litigation with regard to inter partes review, as one observer has noted, the bill may modify or overturn the holdings of at least five intellectual property-related Supreme Court cases from the past decade, including eBay Inc. v. MercExchange , Microsoft Corp. v. AT&T Corp. , Global-Tech Appliances v. SEB SA , Akamai Techs. v. Limelight Networks , and Cuozzo Speed Techs . v. Lee . The future of the Bill remains to be seen, but it should be noted that similar patent reform legislation introduced in prior Congresses, such as the STRONG Patents Act of 2015, did not lead to enactment.\nFinally, on the executive front, the central policy pronouncement related to patents and intellectual property issued since President Donald Trump took office was the initiation of an investigation into China's intellectual property practices, including patent protection. On August 14, 2017, President Trump issued a presidential memorandum directing the United States Trade Representative (USTR) to \"determine ... whether to investigate any of China's laws, policies, practices, or actions that may be unreasonable or discriminatory and that may be harming American intellectual property rights, innovation, or technology development\" pursuant to section 301 of the Trade Act of 1974. The USTR initiated such an investigation on August 18, 2017, and is scheduled to convene a public hearing on October 10, 2017. While the investigation is in its early stages, it could result in remedial trade actions in response to a finding of unfair intellectual property practices, such as the suspension of trade agreement concessions or the imposition of duties or import quotas, among others.","output":"In an increase over prior terms, the Supreme Court of the United States issued six opinions involving patent law during its October 2016 Term. These decisions addressed issues ranging from patent exhaustion, multicomponent products, and biosimilar patents to procedural issues like venue and the statute of limitations for infringement claims. The growing number of Supreme Court opinions involving patent law over the past decade may also speak to the rising importance of intellectual property more broadly; a reported 84% of the S&P 500 Market Value in 2015 is ascribed to intangible assets. With this increased attention on patent law, an understanding of patent law and the cases issued during the High Court's recently concluded term will likely be of interest to Congress.\nThe patent law regime in the United States is grounded in the U.S. Constitution itself; article I, section 8, clause 8 of the Constitution provides: \"The Congress Shall Have Power ... To promote the Progress of Science and useful Arts, by securing for limited Times to ... Inventors the exclusive Right to their respective ... Discoveries.\" Nonetheless, the rights associated with patents do not arise automatically. Rather, to obtain patent protection, the Patent Act of 1952 requires inventors to apply with the U.S. Patent and Trademark Office (PTO).\nA patent may be obtained by \"[w]hoever invents or discovers any new and useful process, machine, manufacture, or composition of matter,\" subject to the requirements of the Patent Act. A valid patent bestows upon its holder the right to take action against anyone who \"makes, uses, offers to sell, or sells any patented invention, within the United States or imports into the United States any patented invention during the term of the patent,\" unless authority to do so is secured from the patent holder. In addition to examining patent applications, the PTO conducts other proceedings to determine the validity of issued patents, which can result in the revocation of previously issued patents. These proceedings play a central role in the country's patent system. Final decisions from the PTO are appealable to the U.S. Court of Appeals for the Federal Circuit, which has exclusive, nationwide jurisdiction over most patent appeals.\nWith the Supreme Court hearing an increasing number of cases involving patent law and other areas of intellectual property over the last decade, the Court is playing a larger role in the development of patent law. During its October 2016 Term, the Court issued two patent law opinions involving procedural issues that will affect when and where patent cases may be filed. In another pair of cases heard during the October 2016 Term, the High Court dealt with issues related to patents on multicomponent products\u2014one in the context of determining infringement and another in the context of calculating damages. A final pair of patent cases decided during the Term may have major implications for the pharmaceutical industry\u2014one addresses whether post-sale restrictions, commonly used in the pharmaceutical industry, are enforceable under patent law, and the other will likely affect the speed at which biosimilars come to market.\nIn addition to the effects of the Supreme Court's patent decisions issued during its October 2016 Term on patent law, there are a number of patent-related issues on the horizon. The constitutionality of one of the PTO's post-grant review proceedings has been called into question in a case that will be heard during the Court's upcoming October 2017 Term. In addition, with patent reform being of perennial concern to Congress, certain legislative proposals have the potential to alter various areas of patent law."}
{"id":"gao_RCED-99-3","pid":"gao_RCED-99-3_0","input":"\tBackground\n\nAlthough most of the Department of Energy\u2019s (DOE) real and personal property is under the control of its contractors, several DOE offices have the responsibility for managing this property. Overall, the office of Field Management is responsible for real property management and field oversight, and the office of Procurement and Assistance Management is responsible for personal property. In addition, the Office of Worker and Community Transition directs various efforts regarding the sale or disposition of surplus assets and compiles reports for the Congress on unneeded real and personal property and pilot projects relative to its overall responsibilities. In addition, DOE\u2019s program offices, such as the office of Defense Programs, are responsible for declaring property excess to their missions\u2019 needs. One program office, Environmental Management, is responsible for the cleanup of contaminated excess property before its disposal. DOE\u2019s field offices oversee the contractors\u2019 efforts to manage the property and maintain the property records.\nIn its fiscal year 1997 financial statements, DOE reported that it held property, plant, and equipment valued at $20.8 billion\u2014$12.0 billion of real property and $5.2 billion of personal property, with construction work in progress, natural resources, and software accounting for the remaining $3.6 billion. The property amounts include only those items costing $25,000 or more. Items that cost less than $25,000 are expensed for financial statement purposes; DOE contractors held an additional $3.4 billion of such personal property at the end of fiscal year 1997.\nIn DOE\u2019s fiscal year 1997 Federal Managers\u2019 Financial Integrity Act report accompanying its financial statements, the Department indicated that it had extensive inventories of real and personal property that is no longer necessary and that disposal of this property could save future storage, security, and maintenance costs. In addition, DOE reported problems with the management of personal property. For example, the Rocky Flats Field Office in Colorado identified problems that included a contractor\u2019s inadequate property records systems, incomplete inventory records, and requests made for new work space while comparable space at the site was being designated as excess. (See the bibliography for a list of GAO and Inspector General reports on DOE property management issues.)\n\n\tFederal Regulations Provide Guidelines for Real Property but DOE\u2019s Guidance Does Not Include Criteria for Determining When Personal Property Is Excess\n\nThe federal property management regulations specify that executive agencies should dispose of real and personal property that is excess to their needs and include guidelines for determining when real property is unneeded or underutilized. However, neither the federal regulations nor DOE\u2019s guidance includes similar specific guidelines for determining when personal property is excess. In the absence of criteria in the federal regulations, it is left up to each agency to develop guidelines. DOE implements the overall federal regulations for its real property and has issued supplemental regulations for managing personal property. However, DOE\u2019s regulations for personal property include no criteria for determining when property is excess.\n\n\t\tReal Property\n\nThe federal property management regulations for the utilization and disposal of real property state that each executive agency should survey the real property under its control at least annually to identify property that is not needed, is underutilized, or is not being put to optimum use. The regulations also include a list of 15 guidelines to be used by executive agencies in these annual reviews, including whether operating and maintenance costs are excessive compared with those of other similar facilities, whether all of the property is essential for program requirements, and whether federal use of the property would be justified if a rental charge equivalent to commercial rates were added to the program costs for the occupants. Federal agencies are to maintain their inventory of real property at the absolute minimum consistent with economical and efficient operations and promptly report to the General Services Administration any real property determined to be excess. The regulations then describe the disposal process to be used for any property determined to be excess. At many of DOE\u2019s facilities, the excess property is contaminated by radiation or other hazardous waste and must be cleaned up before the disposal process can begin.\nIn addition to the federal property management regulations, DOE\u2019s guidance on life cycle asset management requires the Department to use formal planning methods for real property, including a method to declare property excess. The guidance further defines \u201cexcess\u201d as physical assets that are not required for DOE\u2019s needs and for carrying out its missions but does not include any additional criteria for making that determination. According to officials in DOE\u2019s office of Field Management, the field and program offices are to use the guidelines in the federal property management regulations in their planning process and in determining when real property is excess to their needs.\n\n\t\tPersonal Property\n\nUnlike for real property, neither the federal property management regulations nor DOE\u2019s regulations and guidance include specific criteria for determining when personal property is excess. The federal property management regulations define excess personal property as that which is not required for an agency\u2019s needs and the discharge of its responsibilities. The regulations further state that when property is determined to no longer be required for the \u201cpurpose of the appropriation from which it was purchased or for the use to which it has been applied,\u201d an executive agency should reassign the property within its activities.\nDOE\u2019s supplemental property management regulations state that management practices are to ensure the best possible use of personal property and that supplies and equipment should generally be limited to those items essential for carrying out DOE\u2019s programs efficiently. DOE\u2019s regulations also state that DOE offices and designated contractors are responsible for continuously surveying property under their control to ensure maximum use and promptly identify property that is excess to their needs. In addition, for laboratory and research equipment, the regulations require a management walk-through of all operating and storage areas at least every 2 years to identify idle and unneeded personal property. Equipment identified as idle and unneeded is to be made available to others or listed as excess. However, there are no guidelines to be used in making these determinations.\nAfter property has been determined to be excess, the regulations state that the property must first be screened for reuse or transfer to others before offering it for sale to the public. Personal property is first screened for reuse within DOE, then for transfers to the Math and Science Education Gift Program (under Executive Order 12821) and to the Community Reuse Organizations\/Economic Development program (under P.L. 103-160). Subsequent steps include making property available to educational institutions such as colleges and universities under the Used Energy Related Laboratory Equipment Grant Program (P.L. 101-510) and to other federal agencies and state donation programs. Personal property that remains after the screening process can be sold to the public or discarded.\n\n\tDOE\u2019s Property Records Do Not Consistently Reflect When Property Is Excess\n\nDOE\u2019s recently revised guidance on property records requires contractors to record property already identified as excess. For real property, the information contained in the property records could be used to determine when additional real property may be excess. However, for personal property, without further guidance, these records will not provide information to help identify other personal property that is no longer needed.\n\n\t\tReal Property\n\nDOE currently maintains approximately 22,500 facilities, including buildings, production facilities, and other structures. Property records for these facilities are maintained in DOE\u2019s Facilities Information Management System and contain detailed information on each facility. The field offices are responsible for entering all data into the system, which was implemented as DOE\u2019s agencywide database. This database contains information such as the location, size, age, and acquisition cost of the property and the percentage of a facility being used. It also reflects building status as determined by the DOE field offices, such as operational, standby, or shutdown pending decontamination and decommissioning.\nIn July 1998, DOE added a new requirement to its real property records system by adding an \u201cexcess indicator\u201d to show whether a property has been determined to be excess. In addition, there is a new requirement to include \u201cdeferred maintenance\u201d costs for each facility, which are those costs necessary to restore a facility to its operating condition. Employing the federal property management guidelines, DOE field offices and program managers can use information in the database, such as the percentage of a facility being used and its deferred maintenance costs, to identify other facilities that may be excess.\n\n\t\tPersonal Property\n\nDOE\u2019s contractors hold approximately 95 percent of the Department\u2019s personal property. Of the approximately 744,000 items of personal property held by the contractors, about 89,000 items cost $25,000 or more; the remaining 655,000 items cost less than $25,000 each and are expensed for the purposes of DOE\u2019s financial statements. Contractors are required to maintain property control records for every accountable item of personal property and individual item records for each sensitive item (i.e., those items of personal property considered susceptible to being stolen, such as portable computers or portable power tools).\nA contractor\u2019s property records system must be approved by a DOE contracting office. DOE\u2019s May 1998 property management regulations specify the minimum requirements for a property records system. For example, the individual property record for each item should include such information as a description, acquisition cost, physical location, and the status of the item. Status is defined as \u201cactive,  storage, excess, etc.,\u201d but no further explanation of these terms is given. However, in the absence of criteria, the information in these records such as date of purchase and cost do not aid in determining what personal property is excess.\n\n\tWhile DOE Faces Challenges, Some Field and Program Offices Have Initiated Local Solutions\n\nAccording to DOE officials, the Department faces challenges in identifying and disposing of excess property. The challenges cited by DOE officials include a lack of funding for the decontamination and decommissioning of excess real property and the existence of few incentives for program and field offices to identify property as excess. Nevertheless, field and program offices have made some innovative efforts to dispose of excess real and personal property.\n\n\t\tChallenges in the Identification and Disposal of Excess Property\n\nIn January 1996, DOE issued a report on 10 categories of nuclear and nonnuclear materials in inventory, including uranium, lead, and chemicals.DOE reported that it had large quantities of the materials that no longer had clearly defined or immediate uses; if left unattended, much of the material could present environmental, safety, and health risks; and maintaining these materials in a safe condition cost millions of dollars annually, although the exact cost was unknown. Although this report specifically addressed materials, the Director of the Office of Policy Analysis, Environmental Management, told us that the concerns about the identification and disposal of excess materials should also be applied to real and personal property. Among the problems noted in the report were that (1) DOE lacks policies and criteria for determining when materials are excess to the Department\u2019s needs and (2) the function of declaring materials excess usually rests with program managers at DOE\u2019s sites, who have little or no incentive to address the problem and who lack the resources and funding to identify and dispose of excess materials. Similarly, other DOE officials with the Office of Contract and Resource Management and the office of Field Management told us that with real and personal property, the Department faces challenges because of a lack of funding and incentives.\nCleaning up excess facilities represents a funding challenge for DOE. Since the Department\u2019s Environmental Management program was created in 1989 to clean up and dispose of contaminated excess facilities, a backlog of over 10,000 facilities has developed. Because of funding concerns, Environmental Management stopped accepting new facilities about 2 years ago and has had to set cleanup priorities based on such criteria as relative risk. According to DOE\u2019s fiscal year 1997 financial report, the cleanup program for Environmental Management facilities and \u201clegacy\u201d wastes represents an unfunded liability of $141 billion. While the Environmental Management program seeks to complete its long-term cleanup strategy for those facilities, DOE anticipates that by the year 2006, up to another 1,500 facilities will be declared excess, almost half of them contaminated.\nAs with materials, program managers have little or no incentive to identify real and personal property as excess. According to DOE officials in the office of Procurement and Assistance Management and in the Defense Programs, Environmental Management, and Energy Research program offices, managers are reluctant to commit scarce program funding to identify excess property. Program managers do not see all of the costs associated with unneeded property because some of the costs to maintain and store unneeded property are included in overhead costs and are not separately identified. DOE estimates that for its largest Environmental Management sites, it is spending about 20 percent of its overall budget on maintenance and surveillance of facilities and infrastructure. However, without the program managers\u2019 knowing the actual costs to maintain their property, there is little incentive to spend the resources necessary to dispose of it. In addition, DOE noted that declaring property excess may require initiating costly programs to decontaminate or decommission the property. Funds for such programs are not generally available because mission or compliance requirements are funded first.\n\n\t\tExamples of Innovative Approaches to Identifying and Disposing of Excess Property\n\nInnovative approaches to the identification and disposal of excess property have been developed at the field and program office levels. Examples include requiring a contractor to reduce surplus property at a site, establishing a group to dispose of excess property and funding its efforts through the sale of that property, creating a computer-based system to facilitate the reuse of materials within DOE, and establishing pilot projects that sought to allow the proceeds from property sales to be retained to fund future disposal efforts.\nThe most recent contract for the management of the Hanford site in Washington State includes provisions for reducing the site\u2019s overall infrastructure to support its current missions and states that the contractor is expected to use innovative approaches to accomplish this objective. In addition, several of the contract\u2019s performance-based incentives required the contractor to increase the utilization of the space in its facilities; reduce inventory management costs, including carrying costs; and dispose of $50 million of excess personal property.\nThe contractor at the Hanford site established a group to dispose of excess property through donation programs, transfers to other sites or agencies, and public auctions and negotiated sales. In addition, this group opened a retail store that sells such items as surplus computers and office equipment to the public; sales at this store average $5,000 per week. The proceeds from the public auctions, negotiated sales, and retail store must cover the group\u2019s costs of operation; it receives no additional funding from DOE. Any proceeds that exceed the group\u2019s costs are returned to DOE.\nThe office of Energy Research has developed an innovative system to better reuse materials within DOE. Although the system currently covers only materials, program officials told us they plan to expand it to include a link to the personal property system. This computer-based system, called the Exchange, is accessible to DOE program personnel on the Internet. By sharing information about materials that are excess at various sites or needed by other sites, the Exchange allows materials to be reused more efficiently. For example, the Idaho Falls site needed sturdy packing boxes in Idaho to ship instruments for repair and calibration, and the Pantex site had about 250 excess boxes in Texas that met this need. The Idaho Falls site estimated that using the Exchange saved it about $50,000 over the cost of new boxes.\nAs part of its responsibility for the disposition of excess assets, the Office of Worker and Community Transition proposed six pilot projects for fiscal year 1998 to dispose of excess real and personal property. Under these pilot projects, DOE sought to overcome its funding constraints by asking for congressional approval to retain the proceeds generated by the pilot projects and to use them to fund further disposal efforts. These projects included the sale of heavy water at the Savannah River site in South Carolina; the sale of precious metals at Oak Ridge in Tennessee; the leasing of facilities at the Hanford and Savannah River sites; the sale of approximately 100,000 pieces of machinery, tools, and equipment at Rocky Flats in Colorado; and a program at Oak Ridge to refurbish and sell excess electronic equipment. Although DOE\u2019s request was denied, the conference report accompanying DOE\u2019s appropriations urged the Department to proceed with implementation under the current guidelines that allow DOE to retain proceeds from the sales and leases to the extent needed to cover the administrative costs associated with the sales or leases. DOE will evaluate these pilot projects at the end of the fiscal year and report the results to the Congress.\n\n\tAgency Comments\n\nWe sent a draft of this report to the Department of Energy for its review and comment. The Department\u2019s primary comments related to our characterization of the criteria for determining when personal property is no longer needed. DOE generally disagreed with our assessment of the extent to which criteria exist. The Department cited several references to regulations that it believes provide specific criteria for identifying unneeded personal property. However, these regulations are general in nature and do not provide any specific guidance similar to that found in the real property regulations. For example, one of the references cited by DOE states that equipment identified as idle and unneeded should be redeployed or declared excess, as appropriate. However, this does not provide program managers any guidance that defines when an item is to be classified as idle and unneeded. For real property, program managers have 15 guidelines to be used in their annual reviews to help determine when property is not needed, underutilized, or not put to its optimal use. Because the personal property regulations do not provide specific guidance to program managers, we therefore did not revise the report.\nDOE also noted that the cleanup of its excess facilities is actually broader in scope than reflected by the $141 billion in its annual report, which represented Environmental Management facilities and legacy wastes. Total environmental liabilities reported in the financial statements were $181 billion. Because our report addresses the environmental cleanup of real property, we did not revise it to reflect the broader environmental costs. DOE also noted a new effort to collect individual facility maintenance and deferred maintenance cost information at the headquarters level that is designed to enable program managers to identify costs to maintain their real property. We did not revise our report because this effort is just getting under way and is not to be completed until fiscal year 2000.\nDOE also offered several technical corrections that were incorporated. DOE\u2019s comments are included in appendix I.\n\n\tScope and Methodology\n\nTo determine what criteria DOE uses to guide the identification and disposal of excess property and whether DOE\u2019s property records reflect what is no longer needed to carry out its missions, we reviewed the federal property management regulations and DOE\u2019s property management regulations and guidance. In addition, we interviewed officials from DOE\u2019s offices of Worker and Community Transition, Procurement and Assistance Management, Field Management, Environmental Management, Energy Research, and Defense Programs, and we reviewed documentation provided by them. We also interviewed officials from DOE and contractor property management organizations at the Hanford site and reviewed their procedures.\nTo determine what challenges DOE encounters in identifying excess property and to identify innovative approaches being used to dispose of this property, we reviewed DOE\u2019s fiscal year 1997 Federal Managers\u2019 Financial Integrity Act report and supporting documentation, reports from DOE\u2019s Office of the Inspector General, and the January 1996 materials in inventory report. We interviewed officials from DOE\u2019s offices of Worker and Community Transition, Procurement and Assistance Management, Field Management, Environmental Management, Energy Research, and Defense Programs. We also interviewed officials from DOE and contractor property management organizations at the Hanford site and reviewed documentation they provided.\nWe performed our review from July 1998 through September 1998 in accordance with generally accepted government auditing standards.\nAs arranged with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days after the date of this letter. At that time, we will send copies to the Secretary of Energy. We will also make copies available to others on request.\nPlease call me at (202) 512-7106 if you or your staff have any further questions. Major contributors to this report were Jeffrey E. Heil, Carole J. Blackwell, and Kathleen A. Gilhooly.\n\nBibliography\n\n\tGeneral Accounting Office\n\nDepartment of Energy: Property Management Has Improved at DOE\u2019s Rocky Flats Site (GAO\/RCED-96-39, Dec. 28, 1995).\nEnergy Downsizing: Criteria for Community Assistance Needed (GAO\/RCED-96-36, Dec. 27, 1995).\nManaging DOE: Government Property Worth Millions of Dollars Is Missing (GAO\/T-RCED-94-309, Sept. 19, 1994).\nDepartment of Energy: Status of DOE\u2019s Property Management Program (GAO\/RCED-94-154FS, Apr. 7. 1994).\nDepartment of Energy: The Property Management System at the Rocky Flats Plant Is Inadequate (GAO\/RCED-94-77, Mar. 1, 1994).\n\n\tInspector General, Department of Energy\n\nThe U.S. Department of Energy\u2019s Facility Reuse at the Rocky Flats Environmental Technology Site (DOE\/IG-0425, Aug. 20, 1998).\nPersonal Property at the Oak Ridge Operations Office and the Office of Scientific and Technical Information (ER-B-98-07, Apr. 6, 1998).\nAudit of the Deactivation, Decontamination, and Disposal of Surplus Facilities at the Savannah River Site (ER-B-98-01, Oct. 23, 1997).\nAudit of the Use of Hanford Site Railroad System (WR-B-97-04, Mar. 20, 1997).\nAudit of the U.S. Department of Energy\u2019s Identification and Disposal of Nonessential Land (DOE\/IG-0399, Jan. 8, 1997).\nSpecial Audit Report on the Department of Energy\u2019s Arms and Military-Type Equipment (DOE\/IG-0385, Feb. 1996).\nAudit of Light Vehicle Fleet Management in the Department of Energy (DOE\/IG-0362, Dec. 1994).\nAudit of the Transfer of Government-Owned Property at the Mound and Pinellas Plants (DOE\/IG-0360, Nov. 1994).\nSummary Report on DOE\u2019s Management of Personal Property (DOE\/IG-0344, Mar. 1994).\nThe first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent.\nU.S. General Accounting Office P.O. Box 37050 Washington, DC  20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000  or by using fax number (202) 512-6061, or TDD (202) 512-2537.\nEach day, GAO issues a list of newly available reports and testimony.  To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone.  A recorded menu will provide information on how to obtain these lists.","output":"Why GAO Did This Study\n\nPursuant to a congressional request, GAO reviewed the Department of Energy's (DOE) efforts to identify and dispose of property that is excess to its needs, focusing on the: (1) criteria the Department uses to guide the identification and disposal of excess property; (2) extent to which the Department's property records reflect what is no longer needed to carry out its missions; and (3) challenges the Department believes exist in identifying excess property and the innovative approaches being used to dispose of this property.\n\nWhat GAO Found\n\nGAO noted that: (1) federal property management regulations include criteria to determine when real property is excess to an agency's needs; (2) however, neither federal property management regulations nor DOE's regulations and guidance include specific criteria to determine when personal property is no longer needed; (3) when property has been identified as excess, guidelines for the disposal process are well defined for both real and personal property; (4) DOE's property records do not consistently provide information that would help identify property that is no longer needed; (5) recent changes to DOE's regulations require that property records identify property that has already been determined to be excess; (6) in July 1998, DOE modified its real property records system to identify property that has been determined to be excess; (7) this system also provides additional information, such as the percentage of a facility currently in use, that could be used to identify other property that is no longer needed; (8) similarly, in May 1998, DOE revised its personal property management regulations to require that contractors' records include information on current usage, such as categorizing property as active, in storage, or excess; (9) however, these regulations do not provide criteria for determining when personal property should be placed in these categories; (10) DOE acknowledges problems with its identification and disposal of excess real and personal property; (11) Department officials cited, for example, a lack of funding for the environmental cleanup of the current inventory of excess real property and a lack of incentives to identify property as excess; (12) because the costs associated with the maintenance and storage of unneeded property are generally not separately identified, little incentive exists to spend the resources necessary to dispose of it; and (13) regardless of the problems, field and program offices have developed some innovative approaches to dispose of property, such as including a performance-based incentive in the site management contract to encourage the contractor operating the site to dispose of excess property during the fiscal year."}
{"id":"gao_AIMD-98-93","pid":"gao_AIMD-98-93_0","input":"\tBackground\n\nAs the principal component of the NAS, FAA\u2019s ATC system must operate continuously\u201424 hours a day, 365 days a year. Under federal law, FAA has primary responsibility for operating a common ATC system\u2014a vast network of radars; automated data processing, navigation, and communications equipment; and traffic control facilities. FAA meets this responsibility by providing such services as controlling takeoffs and landings and managing the flow of air traffic between airports. Users of FAA\u2019s services include the military, other government users, private pilots, and commercial aircraft operators.\nProjects in FAA\u2019s modernization program are primarily organized around seven functional areas\u2014automation, communications, facilities, navigation and landing, surveillance, weather, and mission support.\nOver the past 16 years, FAA\u2019s modernization projects have experienced substantial cost overruns, lengthy schedule delays, and significant performance shortfalls. To illustrate, the centerpiece of that modernization program\u2014the Advanced Automation System (AAS)\u2014was restructured in 1994 after estimated costs to develop the system tripled from $2.5 billion to $7.6 billion and delays in putting significantly less-than-promised system capabilities into operation were expected to run 8 years or more over original estimates.\n\n\tFAA Has Fielded Some Equipment but Key Projects Continue to Experience Cost and Schedule Problems\n\nThe Congress has appropriated over $25 billion for ATC modernization between fiscal years 1982 and 1998. FAA estimates that it plans to spend an additional $11 billion through fiscal year 2003 on projects in the modernization program.\nOf the over $25 billion appropriated to date, FAA has reported spending about $5.3 billion on 81 completed projects and $15.7 billion on about 130 ongoing projects. Of the remaining funds, FAA has reported spending about $2.8 billion on projects that have been cancelled or restructured and $1.6 billion for personnel-related expenses associated with systems acquisition. (See app. I for a list of completed projects.) FAA has fielded some equipment, most recently a new voice communications system. However, delays in other projects have caused the agency to implement costly interim projects. Furthermore, the agency is still having difficulties in acquiring new systems within agreed-to schedule and cost parameters.\n\n\t\tNew Equipment Is Being Fielded\n\nFAA has been fielding new ATC systems. For example, in February 1997, FAA commissioned the last of 21 Voice Switching and Control System (VSCS) units.  As one of the original projects in the 1983 modernization plan, the VSCS project encountered many difficulties during its early years. Since the project was restructured in 1992, FAA has been successful in completing the first phase of the project\u2014installing the equipment into existing en route controller workstations. The second phase is now underway\u2014making VSCS interface with the new display replacement equipment that is being installed in the en route centers.\nDuring the past year, FAA has commissioned 183 additional systems or units of systems. For example, FAA commissioned an additional 97 units for its Automated Surface Observing System, which brings the total of commissioned units to 230 out of 597 that are planned. (See app. II for details on the implementation status of 17 major ongoing modernization projects and app. III for data on changes in their cost and schedules.)\n\n\t\tDelays Have Led to Costly Interim Projects\n\nProblems with modernization projects have caused delays in replacing FAA\u2019s aging equipment, especially the automation equipment in the en route and terminal facilities. We found that FAA has added four interim projects\u2014three for the TRACONs and one for the en route centers\u2014reported to cost about $655 million\u2014to sustain and enhance current automated air traffic control equipment. FAA began its first program for the TRACONs in 1987 and expects to complete its third program in 2000. In general, these programs provide new displays and software and upgrade hardware and data-processing equipment to allow TRACONs to handle increased traffic. One program for the en route centers\u2014the Display Complex Channel Rehost\u2014was completed in 1997. Under this program, FAA transferred existing software from obsolete display channel computers to new more reliable and maintainable computers at five en route centers.\nThe cost for interim projects could go even higher if FAA decides to implement an interim solution to overcome hardware problems and resolve year 2000 date requirements with the Host computer system. FAA is assessing the Host computer\u2019s microcode\u2014low-level machine instructions used to service the main computer\u2014with a plan to resolve any identified year 2000 date issues, while at the same time preparing to purchase and implement new hardware\u2014Interim Host\u2014for each of its 20 en route centers before January 1, 2000. FAA expects to incur costs of about $160 million during fiscal years 1998 and 1999 for the Interim Host.\n\n\t\tMajor Acquisitions Continue to Face Delays and Cost Increases\n\nTwo key components of the modernization effort\u2014the Wide Area Augmentation System (WAAS) and the Standard Terminal Automation Replacement System (STARS)\u2014have encountered delays and cost increases.\nIn September 1997, FAA estimated total life cycle costs for WAAS at $2.4 billion ($900 million for facilities and equipment and $1.5 billion for operations). In January 1998, the estimate had increased by $600 million to $3 billion ($1 billion for facilities and equipment and $2 billion for operations). The increased costs for facilities and equipment are attributable to FAA\u2019s including previously overlooked costs for periodically updating WAAS\u2019 equipment. The revised cost estimate for operations and maintenance is largely attributable to higher than expected costs to lease geostationary satellites.\nIn developing WAAS, FAA has also encountered delays. When signing the original development contract with Wilcox Electric in August 1995, FAA planned for the initial system to be operational by December 1997. Because of concerns about the contractor\u2019s performance, however, FAA terminated the original contract and signed a development contract with Raytheon (formerly Hughes Aircraft) in October 1996 that called for the initial system to be operational by April 1999. The 16-month schedule slippage was caused by problems with the original contractor\u2019s performance, design changes, and increased software development.\nLast year, we reported that the implementation of STARS\u2014particularly at the three facilities targeted for operating the system before fiscal year 2000\u2014will likely be delayed if FAA and its contractor experience any difficulties in developing the software. These difficulties have materialized. In January 1998, FAA reported that more delays are likely because software requirements could increase to resolve air traffic controllers\u2019 dissatisfaction with the system\u2019s computer-human interface.\nFAA also reported an unexpected cost increase of $35 million for STARS during fiscal year 1998. It attributed the increase to such factors as adding resources to maintain the program\u2019s schedule and the effects of any design changes to address new computer-human interface concerns. Also, the estimated size of software development\u2014measured in source lines of code\u2014is now 50 percent larger than the original November 1996 estimate. FAA has requested a reprogramming of fiscal year 1998 funds to address this cost increase.\n\n\tFAA Has Begun to Implement Recommendations to Correct Root Causes of Modernization Problems\n\nOur reviews have identified some of the root causes of long-standing problems with FAA\u2019s modernization and have recommended solutions to them. Among the causes of these problems were the lack of a complete and enforced systems architecture, unreliable cost information, lack of mature software acquisition processes, and an organizational culture that did not always act in the agency\u2019s long-term best interest. While FAA has begun to implement many of our recommendations, it will need to stay focused on continued improvement.\n\n\t\tA Complete Systems Architecture Is Key to Guiding and Constraining ATC Modernization Investments\n\nFAA has proceeded to modernize its many ATC systems without the benefits of a complete systems architecture, or overall blueprint, to guide their development and evolution. In February 1997, we reported that FAA has been doing a good job of defining one piece of its architecture\u2014the logical architecture. That architecture describes FAA\u2019s concept of operations, business functions, high-level descriptions of information systems and their interrelationships, and information flows among systems. This high-level architecture will guide the modernization of FAA\u2019s ATC systems over the next 20 years. We identified shortcomings in two main areas. FAA\u2019s system modernization lacked a technical architecture and an effective enforcement mechanism.\nFAA generally agreed with the recommendation in our February 1997 report to develop a technical architecture and has begun the task. We will continue to monitor FAA\u2019s efforts. Also, to be effective, the architecture must be enforced consistently. FAA has no organizational entity responsible for enforcing architectural consistency. Until FAA defines and enforces a complete ATC systems architecture, the agency cannot ensure compatibility among its existing and future programs.\nWe also recommended in the February 1997 report that FAA develop a management structure for enforcing the architecture that is similar to the provisions of the Clinger-Cohen Act of 1996 for department-level Chief Information Officers (CIO). FAA disagrees with this recommendation because it believes that the current location of its CIO, within the research and acquisition line of business, is effective. We continue to believe that such a structure is necessary. FAA\u2019s CIO does not report directly to the Administrator and does not have organizational or budgetary authority over those who develop ATC systems or the units that operate and maintain them. Furthermore, the agency\u2019s long history of problems in managing information technology projects reflects weaknesses in its current structure.\n\n\t\tReliable Cost Information Is Needed to Effectively Manage Modernization Projects\n\nIn January 1997, we reported that FAA lacks reliable cost-estimating processes and cost-accounting practices needed to effectively manage investments in information technology, which leaves it at risk of making ill-informed decisions on critical multimillion, even billion, dollar air traffic control systems. Without reliable cost information, the likelihood of poor investment decisions is increased, not only when a project is initiated, but also throughout its life cycle. We recommended that FAA improve its cost-estimating processes and fully implement a cost-accounting system.\nOur recent review of the reliability of FAA\u2019s reported financial information and the possible program and budgetary effects of reported financial statement deficiencies again highlights the need for reliable cost information. The audit of FAA\u2019s 1996 financial statement disclosed many problems in reporting of operating materials and supplies and property and equipment. Many of these problems resulted from the lack of a reliable system for accumulating project cost accounting information. Although FAA has begun to institutionalize defined cost-estimating processes and to acquire a cost-accounting system, it will be awhile before FAA and other decisionmakers have accurate information to determine and control costs.\n\n\t\tA Mature Software Acquisition Capability Is Important to the Success of FAA\u2019s ATC Modernization Program\n\nIn March 1997, we reported that FAA\u2019s processes for acquiring software\u2014the most costly and complex component of ATC systems\u2014are ad hoc, sometimes chaotic, and not repeatable across projects. As a result, FAA is at great risk of acquiring software that does not perform as intended and is not delivered on time and within budget. Furthermore, FAA lacks an effective approach for improving its processes for acquiring software.\nIn the March 1997 report, we recommended that FAA improve its software acquisition capabilities by institutionalizing mature acquisition processes and reiterated our prior recommendation that FAA establish a management structure similar to the department-level CIOs to instill process discipline. FAA concurred with part of our recommendation and has initiated efforts to improve its software acquisition processes. These efforts, however, are not comprehensive, are not complete, and have not yet been implemented agencywide. Furthermore, FAA disagrees with our recommendation related to its management structure. Without establishing strong software acquisition processes and an effective management structure, FAA risks making the same mistakes it did on failed systems acquisition projects.\n\n\t\tContinued Management Attention Is Critical to Comprehensive Cultural Change\n\nIn August 1996, we reported that an underlying cause of FAA\u2019s ATC acquisition problems is its organizational culture\u2014the beliefs, the values, and the attitudes and expectations shared by an organization\u2019s members that affect their behavior and the behavior of the organization as a whole.We found that FAA\u2019s acquisitions were impaired when employees acted in ways that did not reflect a strong commitment to mission focus, accountability, coordination, and adaptability. We recommended that FAA develop a comprehensive strategy for cultural change that (1) addresses specific responsibilities and performance measures for all stakeholders throughout FAA and (2) provides the incentives needed to promote the desired behaviors and achieve agencywide cultural change.\nIn response to our recommendations, FAA issued a report outlining its overall strategy for changing its acquisition culture and describing its ongoing actions to influence organizational culture and improve its life cycle acquisition management processes. For example, the Acquisition and Research (ARA) organization has proposed restructuring its personnel system to tie pay to performance based on 15 measurable goals, each with its own performance plan. ARA\u2019s proposed personnel system is under consideration by the Administrator.\nIn our August 1996 report, we also noted that the Integrated Product Development System, based on integrated teams, was a major FAA initiative to address the shortcomings with its organizational culture. According to an ARA program official, FAA has 15 integrated product teams, the majority of which have approved plans. The official indicated that all team members have received training to prepare them for their roles and that ARA is developing a set of standards to measure the performance of the integrated teams. However, the official also acknowledged that FAA has had difficulty in gaining commitment to the integrated team concept throughout the agency because offices outside of ARA have been resistant to integrated teams.\nTo help overcome institutional cultural barriers, FAA and external stakeholders have been discussing the establishment of a special program office responsible for the acquisition of free flight systems. Although, the details of how such an office would operate have not been put forward, one option would be for this office to have its own budget and the authority to make certifications and regulations and to determine system requirements. Such an office could be viewed as the evolutionary successor to the integrated product team system. Another approach being considered by FAA is the establishment of a single NAS manager at the level of associate administrator to eliminate traditional \u201cstovepipes\u201d between the acquisition and air traffic organizations.\nAs FAA considers recommendations to create a new structure, we believe that it would be advantageous for FAA to implement our recommendation to create a management structure similar to the department-level CIO as called for in the Clinger-Cohen Act. Having an effective CIO, with the organizational and budgetary authority to implement and enforce a complete, agencywide systems architecture would go a long way towards eliminating traditional \u201cstovepipes\u201d between integrated product teams, as well as between the acquisition and air traffic organizations. Furthermore, the agency could gain valuable insight from the experiences of other organizations that have implemented similar structures. Regardless of future direction, FAA recognizes that considerable work is needed to modify behaviors and create comprehensive cultural change. A continued focus on cultural change initiatives will be critical in the years ahead.\n\n\tFAA Is Revising the Modernization Program and Implementing Acquisition Reform but Faces New Challenges\n\nWhile FAA is involving external and internal stakeholders in revising its approach to the modernization program, it will need to stay focused on implementing solutions to the root causes of past problems, ensure that all aspects of its acquisition management system are effectively implemented, and quickly address the looming crisis with the year 2000 date requirements.\n\n\t\tFAA Is Seeking Consensus From Stakeholders on an Achievable Modernization Program\n\nThe FAA Administrator has begun an outreach effort with the aviation community to build consensus on and seek commitment to the future direction of the agency\u2019s modernization program. Similar to our findings on the logical architecture, a review of this program by the NAS Modernization Task Force concluded that the architecture under development builds on the concept of operations for the NAS and identifies the programs needed to meet the needs of the user community. However, the task force found that the architecture is not realistic because of (1) an insufficient budget; (2) the preponderance of risks associated primarily with certifying and deploying new equipment and with users\u2019 cost to acquire equipment; and (3) unresolved institutional issues and a lack of user commitment.\nThe task force recommended a revised approach that would be less costly and would be focused more on providing near-term user benefits. Under this revised approach, FAA would (1) implement a set of core technologies to provide immediate user benefits; (2) modify the Flight 2000 initiative to address critical risk areas associated with key communications, navigation, and surveillance programs; and (3) proceed with implementing critical time-driven activities related to the Host computer and the year 2000 problems and with implementing such systems as STARS, surveillance radars, and en route displays to replace aging infrastructure.\nThe details on how FAA intends to implement the task force\u2019s recommendations are not yet known. However, from our discussions with task force officials, their practical effect would be that the development and the deployment of some current programs would be accelerated while others would be slowed down. Meanwhile, FAA would continue developing programs like STARS and the Display System Replacement and work to ensure that its computers recognize the year 2000. For example, under the revised approach, the WAAS program would be slowed down after Phase I, which is scheduled to provide initial satellite navigation capabilities by 1999, to enable FAA to resolve technical issues and explore how costs could be reduced. Further development would be subject to review and risk mitigation under the expanded Flight 2000 initiative.\nFAA faces both opportunities and challenges as it revises the modernization program. On the one hand, FAA has an opportunity to regain user confidence by delivering systems that benefit them. On the other hand, FAA is challenged to follow through with its investment management process improvements. We urge FAA to proceed cautiously as it attempts to expedite the deployment of key technologies to avoid repeating past practices, such as undue concern for schedules at the expense of disciplined systems development and careful, thorough testing. FAA will need to resist this temptation, as the results are typically systems that cost more than expected, are of low quality, and are late as well.\n\n\t\tFAA Will Need to Continue Improving Its Acquisition Management Process\n\nConcerned that burdensome procurement rules were a primary contributor to FAA\u2019s acquisition problems, the Congress exempted FAA from many procurement rules. In response, the agency implemented its Acquisition Management System (AMS) on April 1, 1996, to improve its acquisition of new technology.\nAMS is intended to provide high-level acquisition policy and guidance and to establish rigorous investment management practices. We are currently reviewing FAA\u2019s investment management approach, including its practices and processes for selecting, controlling, and evaluating projects, and expect to report later this year. As FAA continues to implement AMS and embarks on a revised modernization approach, it will need to establish baselines for individual projects and performance measurements to track key goals.\nUnder AMS, an acquisition project should have a baseline, which establishes the performance, life-cycle cost, schedule, and benefit boundaries within which the program is authorized to operate. Having an effective investment analysis capability is important in developing these baselines. In its May 1997 report on AMS, FAA noted that it has focused more attention on investment management analyses. The agency reported that it has established several investment analysis teams of individuals with expertise in such areas as cost estimating, market analysis, and risk assessment to help prepare program baselines to use in determining the best way to satisfy mission needs.\nAlthough FAA has begun efforts to establish new baselines for projects that were underway prior to AMS, program evaluation officials question the availability and the quality of operations and maintenance data that are being used to estimate life-cycle project costs. FAA\u2019s history of unplanned cost increases, most recently seen with its STARS and WAAS programs, coupled with past deficiencies in cost estimating processes and practices point to the need to use reliable and complete data to establish realistic baselines.\nAs for performance measurements, FAA does not have a unified effort underway to effectively measure progress toward achieving acquisition goals. FAA has established a goal to reduce the time to field systems by 50 percent and to reduce the cost of acquisitions by 20 percent during the first 3 years under AMS. FAA also plans to measure performance in such other critical areas as customer satisfaction and the quality of products and services. According to FAA\u2019s evaluation, while individual organizations are attempting to measure progress in meeting the two goals, a coordinated agencywide measurement effort is lacking.\nFAA\u2019s failure to field systems on time and within cost indicates the need for a comprehensive system of performance measurements that can help provide systematic feedback about accomplishments and progress in meeting mission objectives. The need for such measurements will become even more critical as FAA expedites the deployment of some projects.\nClearly identified performance measurements will help FAA, the Congress, and system users assess how well the agency achieves its goals.\n\n\t\tUrgent Action Needed to Ensure Computers Recognize the Year 2000\n\nOn January 1, 2000, computer systems worldwide could malfunction or produce inaccurate information simply because the century has changed. Unless corrected, such failures could have a costly, widespread impact. The problem is rooted in how dates are recorded and computed. For the past several decades, systems have typically used two digits to represent the year, such as \u201c97\u201d for 1997, to save electronic storage space and reduce operating costs. This practice, however, makes 2000 indistinguishable from 1900, and the ambiguity could cause systems to malfunction in unforeseen ways or to fail completely.\nFAA\u2019s challenge is great. Correcting this problem will be difficult and expensive, and must be done while such systems continue to operate. In less than 2 years, hundreds of computer systems that are critical to FAA\u2019s operations, such as monitoring and controlling air traffic, could fail to perform as needed unless proper date-related calculations can be made.\nFAA\u2019s progress in making its systems ready for the year 2000 has been too slow. We have reported that, at its current pace, it will not make it in time. The agency has been severely behind schedule in completing basic awareness and assessment activities\u2014critical first and second phases in an effective year 2000 program. For example, just this month FAA appointed a program manager who reports to the Administrator.\nDelays in completing the first two phases have left FAA little time for critical renovation, validation, and implementation activities\u2014the final three phases in an effective year 2000 program. With less than 2 years left, FAA is quickly running out of time, making contingency planning for continuity of operations even more critical.\nIf critical FAA systems are not year 2000 compliant and ready for reliable operation on January 1 of that year, the agency\u2019s capability in several areas\u2014including the monitoring and controlling of air traffic\u2014could be severely compromised. The potential serious consequences could include degraded safety, grounded or delayed flights, increased airline costs, and customer inconvenience. We have made a number of recommendations aimed at expediting the completion of overdue awareness and assessment activities.\nMr. Chairman, this concludes my statement. We will be happy to answer any questions from you or any Member of the Subcommittee.\n\nModernization Projects Completed Through August 1998\n\nAutomated Radar Terminal System (ARTS) IIIA Assembler (22-02)\nAdditional ARTS IIIA at FAA Technical Center (22-05)\nConsolidated Notice to Airmen System (23-03)\nVisual Flight Rules Air Traffic Control Tower Closures (22-14)\nAltitude Reporting Mode of Secondary Radar (Mode-C) (21-10)\nEnhanced Target Generator Displays (ARTS III) (22-03)\nNational Airspace Data Interchange Network IA (25-06)\nHazardous In Flight Weather Advisory Service (23-08) (continued)\nEn Route Automated Radar Tracking System Enhancements (21-04)\nSustain New York Terminal Radar Approach Control (TRACON) (22-18)\nNational Radio Communication System (26-14)\nDirect Access Radar Channel System (21-03)\nNational Airspace Data Interchange Network II (25-07)\nModernization of Unmanned FAA Buildings and Equipment (26-08)\nLarge Airport Cable Loop Systems (26-05)\nInterfacility Data Transfer System for Edwards Air Force Base Radar Approach Control (35-20)\nAcquisition of Flight Service Facilities (26-10) (continued)\nRadar Pedestal Vibration Analysis (44-43)\nLow-Level Wind Shear Alert System (23-12)\nBrite Radar Indicator Tower Equipment (22-16)\nNational Implementation of the \u201cImaging\u201d Aid for Dependent Converging Runway Approaches (62-24)\nIntegrated Communications Switching System (23-13)\nSystem Engineering and Integration Contract (26-13)\nNational Airspace Data Interchange Network II Continuation (35-07)\nInstrument Landing System and Visual Navaids Engineering and Sparing (44-24)\nOceanic Display and Planning System (21-05)\nIntegrated Communications Switching System Logistics Support (43-14)\nReplacement of Controllers Chairs (42-24)\nARTS IIIA-Expand 1 Capacity and Provide Mode C Intruder Capability (32-20) (continued)\nCivil Aviation Registry Modernization (56-24)\nPrecision Automated Tracking System (56-16)\nNational Airspace Integrated Logistic Support (56-58)\nLong Range Radar Radome Replacement (44-42)\nInstalled at en route centers to allow processing of existing air traffic control software on new equipment.\nProject comprised a variety of tower and terminal replacement and modernization projects. Project was continued in the Capital Investment Plan under projects 42-13 and 42-14.\nAlso known as the Radio Communications Link project, it was designed to convert aging \u201cspecial purpose\u201d Radar Microwave Link System into a \u201cgeneral purpose\u201d system for data, voice, and radar communications among en route centers and other major FAA facilities.\nProject was activated to sustain and upgrade air traffic control operations and acquire eight terminal radars awaiting the full implementation of the Advanced Automation System.\nProject comprised a variety of diverse support projects and has been continued in the Capital Investment Plan under Continued General Support (46-16).\n\nStatus of FAA\u2019s Major Modernization Projects\n\nOver the past decade, we have reported on FAA\u2019s progress in meeting schedule commitments for last-site implementation, which signals completion of the project. Prior to this year, we have used the dates from the 1983 NAS modernization plan. This year, after discussions with FAA officials, we are measuring FAA\u2019s progress against an interim date\u2014which in most cases represents the date of contract award or investment decision. We will continue to show the original date, but will only measure progress against the interim date.\n57 TDLS I57 TDLS IIStage 0: 21 Stage 1 and 2: 21 0 TDLS is the Tower Data Link Services. TDLS I (Predeparture Clearance\/Flight Data Input\/Output CRT\/Rank Emulation) has been commissioned at all 57 sites; TDLS II (Digital-Automatic Terminal Information Service) has been installed at all 57 sites and commissioned at 48 sites.\nThe first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent.\nU.S. General Accounting Office P.O. Box 37050 Washington, DC  20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000  or by using fax number (202) 512-6061, or TDD (202) 512-2537.\nEach day, GAO issues a list of newly available reports and testimony.  To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone.  A recorded menu will provide information on how to obtain these lists.","output":"Why GAO Did This Study\n\nPursuant to a congressional request, GAO discussed the Federal Aviation Administration's (FAA) program to modernize its National Airspace System (NAS), focusing on: (1) the status of key modernization projects; (2) FAA's actions to implement recommendations to correct modernization problems; and (3) the opportunities and challenges facing FAA as it embarks upon its new modernization approach.\n\nWhat GAO Found\n\nGAO noted that: (1) since 1982, Congress has appropriated over $25 billion to the modernization program; (2) while FAA has fielded some equipment, historically, the agency has experienced considerable difficulty in delivering systems with promised cost and schedule parameters; (3) as a result, FAA has been forced to implement costly interim projects; (4) meanwhile, two key systems--the Wide Area Augmentation System and the Standard Terminal Automation Replacement System--have encountered cost increases and schedule delays; (5) GAO's work has pinpointed the root causes of FAA's modernization problems and has recommended actions to overcome them; (6) most recently, GAO found shortcomings in the areas of systems architecture or the overall modernization blueprint, cost estimating and accounting, software acquisition, and organizational culture; (7) although FAA has begun to implement many of GAO's recommendations, sustained management attention is required to improve the management of the modernization program; (8) FAA is collaborating with and seeking commitment from users in developing a new approach to make the modernization less costly and to provide earlier user benefits; (9) the challenge for FAA is to have disciplined processes in place in order to deliver projects as promised; and (10) FAA will also need to quickly address the looming year 2000 computer crisis to ensure that critical air traffic control systems do not malfunction or produce inaccurate information simply because the date has changed."}